Federal Realty Investment Trust: Q3 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Federal Realty Investment Trust is an equity REIT specializing in the ownership, management, and redevelopment of retail and mixed-use properties, primarily in the Mid-Atlantic, Northeast, and California. As of the reporting date, the Trust owned or had a majority interest in 84 properties comprising approximately 18.2 million square feet, with an occupancy rate of 93.1% and a leased rate of 94.2%.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $130.99 million | $392.41 million |
| Net Income (Trust) | $27.43 million | $66.33 million |
| Net Income Available for Common Shareholders | $27.30 million | $65.93 million |
| Earnings Per Share (Diluted) | $0.45 | $1.10 |
| Funds From Operations (FFO) per Diluted Share | $0.92 | $2.53 |
| Cash and Cash Equivalents | $408.43 million (as of Sep 30, 2009) | |
| Total Debt and Capital Lease Obligations | $2.04 billion (as of Sep 30, 2009) | |
| Operating Cash Flow (9 months) | $194.20 million |
Material Changes vs. Prior Period
- Net Income Decline: Net income attributable to the Trust decreased 26.1% for the quarter and 30.9% for the nine-month period compared to 2008. This decline is primarily driven by a $21.1 million litigation provision recorded in the nine-month period related to a breach of contract lawsuit regarding a parcel adjacent to Santana Row.
- Property Operating Income Growth: Despite the litigation charge, Property Operating Income increased 3.0% for the quarter and 2.5% for the nine-month period, driven by growth in redevelopment properties and acquisitions from 2008.
- Revenue Trends: Total revenue was relatively flat for the quarter (-0.5%) but increased 1.5% for the nine-month period. Rental income increased 2.2% year-over-year for the nine months, offset by a 22.9% decrease in other property income due to lower lease termination fees.
- Interest Expense: Interest expense increased 19.2% for the quarter and 7.4% for the nine months, reflecting higher borrowings from refinancing activities and the issuance of new senior notes in August 2009.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The Trust significantly strengthened its liquidity position, increasing cash and cash equivalents from $15.2 million to $408.4 million. This was achieved through a $372 million term loan refinancing, $163.1 million in new mortgage loans, a $150 million senior note issuance, and a $110 million common equity offering in August 2009.
- Outlook: Management expects growth through same-center portfolio improvements, redevelopments, and acquisitions. However, the current economic environment poses risks regarding tenant bankruptcies, rent relief requests, and potential increases in vacancy rates.
- Material Contingency (Litigation): A significant risk remains the ongoing appeal of the Santana Row litigation. While a final judgment of $15.9 million was issued in June 2009, the Trust has accrued $21.4 million and continues to vigorously defend the position, asserting no liability. The appeal process is expected to take over a year.
- Debt Maturities: Approximately $124 million of debt was scheduled to mature in the remainder of 2009, though the Trust has refinanced ahead of these maturities to ensure flexibility.
Investor Verification Checklist
- Verify the status and potential outcome of the Santana Row litigation appeal, as the $21.4 million accrual significantly impacts current earnings.
- Review the occupancy and leased rates (93.1% and 94.2% respectively) to assess the impact of the economic downturn on future rental income stability.
- Confirm the utilization of the $408 million cash balance to determine if proceeds will be used for acquisitions, debt reduction, or redevelopment as stated in management's outlook.
- Monitor interest rate exposure on the $381.4 million of variable-rate debt, particularly the $372 million term loan tied to LIBOR.
- Assess the impact of the new accounting standards adopted in 2009 regarding business combinations and noncontrolling interests on future financial reporting.