Federal Realty Investment Trust — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. Although the request metadata references 2009 Q4, this filing reports FY 2010; it also includes fourth-quarter 2010 results. Amounts below are U.S. dollars unless otherwise indicated.
Business context
Federal Realty is an equity REIT focused on owning, managing, acquiring, and redeveloping retail and mixed-use properties in densely populated, relatively affluent U.S. markets. At year-end it owned or controlled 85 predominantly retail projects totaling approximately 18.3 million square feet; its portfolio was 93.9% leased and 93.2% occupied. A 30%-owned joint venture held seven additional projects totaling about 1.0 million square feet. No tenant represented more than 2.6% of annualized base rent, and no property contributed more than 10% of 2010 revenue.
Key financial results
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Total revenue | $544.7 million | $530.5 million | Up 2.7% |
| Rental income | $525.5 million | $512.7 million | Up 2.5% |
| Property operating income | $374.5 million | $363.8 million | Up 3.0%; approximately 68.8% of total revenue |
| Income from continuing operations | $127.1 million | $102.4 million | Up 24.2% |
| Net income attributable to the Trust | $122.8 million | $98.3 million | Up 24.9% |
| Net income available to common shareholders | $122.2 million | $97.8 million | Up 25.0% |
| Diluted EPS | $1.98 | $1.63 | Continuing-operations diluted EPS was $1.96 vs. $1.60 |
| FFO available to common shareholders | $239.2 million; $3.88 per diluted share | $211.1 million; $3.51 per diluted share | Up 13.3% in total; non-GAAP measure |
| Cash from operations | $256.7 million | $256.8 million | Essentially unchanged |
Operating performance benefited from same-center rental growth, redevelopment properties, and lower interest expense. Property expenses rose 2.0%, slower than property revenue growth of 2.7%. The Trust reported $2.8 million of early debt-extinguishment expense and $0.3 million of litigation provision in 2010, compared with a $16.4 million litigation provision in 2009. Management also presents FFO excluding litigation provision: $239.5 million, or $3.88 per diluted share, in 2010, versus $227.4 million, or $3.78 per diluted share, in 2009.
Fourth quarter 2010: Revenue was $138.7 million, operating income $59.2 million, net income $34.3 million, and diluted EPS $0.53. Fourth-quarter 2009 revenue was $138.4 million and diluted EPS was $0.52; net income was $33.4 million. The filing notes that quarterly 2009 and fourth-quarter 2010 results include litigation-accrual adjustments.
Cash, debt, liquidity, and distributions
- Cash and cash equivalents were $15.8 million at December 31, 2010, down from $135.4 million a year earlier. Investing activities used $187.1 million and financing activities used $189.2 million in 2010.
- Debt and capital lease obligations totaled approximately $1.77 billion at year-end, compared with $1.79 billion in 2009. The Trust reported $1.8 billion of debt outstanding in its risk disclosures. About 95% of debt, including secured debt and capital leases, was fixed rate; $86.4 million was variable rate and unhedged. No hedging instruments were outstanding.
- The $300 million unsecured revolving credit facility had $77.0 million drawn and matured July 27, 2011. The Trust said it was working to refinance the facility and expected at least similar commitments, but at a higher rate. It expected operating cash flows, cash on hand, and the facility to cover operations, debt maturities, the litigation settlement, and recurring capital expenditures.
- The debt-maturity table shows approximately $201.5 million due in 2011, including the $77 million revolver balance; the narrative separately cites approximately $112.3 million of 2011 mortgage and senior-note maturities. The filing’s stated amounts should be reconciled.
- Interest expense declined to $101.9 million from $108.8 million. A 1 percentage-point increase in market rates was estimated to raise annual interest expense by about $0.9 million on year-end variable-rate debt.
- Common dividends declared were $2.66 per share for 2010 and $2.62 for 2009; dividends paid were $2.65 and $2.61, respectively. The Trust reported 43 consecutive years of annual dividend increases. The board retains discretion over future distributions.
Material changes, outlook, and risks
- Portfolio and capital activity: 2010 acquisitions included Huntington Square, an Escondido parcel, and fee interests at Pentagon Row and Bethesda Row; listed purchase prices totaled $46.7 million. The Trust issued $150 million of 5.90% senior notes due 2020 and repaid its remaining $250 million term loan. In January 2011 it acquired Tower Shops for a net purchase price of about $66.1 million, including an assumed $41 million mortgage.
- Redevelopment and development: Projects with approximately $27 million of costs stabilized in 2010. Management expected projects with projected costs of about $48 million and $50 million to stabilize in 2011 and 2012, respectively. Assembly Row is a long-term development opportunity; management expected to spend $10 million to $30 million there in 2011, net of anticipated public funding. Its plans depend in part on infrastructure, government approvals, and public funding.
- Tenant conditions: Management reported tenant sales weakness, early departures, bankruptcies, rent-relief requests, and payment delays since 2008. It saw some improvement in tenant conditions and leasing interest late in 2010, but cautioned that those signs might not continue. Occupancy and rent growth remain exposed to tenant credit, lease renewals, vacancy, and economic conditions.
- Material contingency: A court ruling affirmed in February 2011 a judgment against the Trust relating to land adjacent to Santana Row. The Trust accrued $16.2 million at year-end and expected payment in the first quarter of 2011.
- Other credit and development exposures: Certain Norwalk mortgage loans were in default and foreclosure proceedings had begun. The Trust was negotiating repayment or modification; the loans were on non-accrual status, and the related properties were consolidated. Assembly Row could be delayed or impaired if adequate public funding or approvals are not secured.
- Other risks: Debt covenants and cross-default provisions, refinancing and capital-market access, interest rates, retail competition, property operating costs, environmental and insurance exposures, joint-venture partner consent, and REIT qualification and distribution requirements may affect results and liquidity. Management reported compliance with financial covenants at year-end.
- Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2010; the auditor issued unqualified opinions on the financial statements and internal controls.
The filing does not provide a specific earnings or FFO forecast. Its outlook is conditional on redevelopment and acquisition opportunities, leasing, tenant performance, financing availability, and market conditions.
Important facts for investors to verify
- Reconcile the 2011 maturity disclosures: the debt schedule reports about $201.5 million due, while narrative disclosures cite about $112.3 million of debt maturities apart from the revolving facility.
- Track refinancing of the $300 million revolver, which matured in July 2011, and the cost and terms of any replacement facility.
- Assess the sustainability of occupancy, same-center rent growth, and tenant collections; review the rise in the doubtful-account allowance to $18.7 million from $16.1 million.
- Monitor actual spending, public funding, approvals, and leasing progress at Assembly Row, alongside the projected 2011–2012 redevelopment stabilization costs.
- Confirm payment and final disposition of the Santana Row litigation accrual, and the outcome of the defaulted Norwalk loans.
- Evaluate dividend coverage in light of cash flow, capital spending, REIT distribution requirements, and the board’s discretion; FFO is a non-GAAP measure and is not equivalent to operating cash flow.