FEDERAL REALTY INVESTMENT TRUST annual report, FY2015

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Federal Realty Investment Trust — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The request metadata identifies “2015 Q4,” but the supplied filing is the 2016 annual report; it also reports quarterly results, including fourth-quarter 2016 revenue of $204.1 million and diluted EPS of $0.80.

Business context

Federal Realty is an equity REIT focused on retail and mixed-use properties in affluent, densely populated U.S. markets. At year-end it owned or controlled 96 projects totaling approximately 22.6 million square feet; the portfolio was 94.4% leased and 93.3% occupied. No tenant represented more than 3.1% of annualized base rent. The Trust reported 49 consecutive years of annual dividend increases.

Key financial metrics

  • Revenue: $801.6 million, up 7.7% from $744.0 million in 2015. Rental income rose 8.1% to $786.6 million.
  • Profit: Operating income was $321.0 million, up 6.9%; net income attributable to the Trust was $249.9 million, up 18.9%. Diluted EPS was $3.50 versus $3.03; continuing-operations diluted EPS was $3.06 versus $2.62.
  • Funds from operations: FFO available to common shareholders was $406.4 million, or $5.65 per diluted share, compared with $352.9 million, or $5.05 per share, in 2015. FFO is a non-GAAP measure and is not cash flow or a measure of liquidity.
  • Cash flow: Operating cash flow was $419.3 million, up from $359.8 million. Investing activities used $590.2 million, principally reflecting development, redevelopment and other capital investment. Financing activities provided $173.3 million. Year-end cash was $23.4 million.
  • Property operating margin: Property operating income was $548.0 million, 68.4% of total property revenue, versus $510.6 million, 68.6%, in 2015. The filing defines property operating income as a non-GAAP measure.
  • Debt and liquidity: Debt and capital lease obligations totaled $2.80 billion. The $800 million revolving credit facility had no year-end balance; the Trust also had $370.9 million of remaining ATM equity capacity. All debt was fixed-rate or effectively fixed by swaps at year-end, and the Trust reported compliance with its financial covenants.
  • Dividends: Common dividends declared were $3.84 per share in 2016 versus $3.62 in 2015; cash dividends paid were $3.80 versus $3.55.

Material changes versus 2015

  • Revenue growth reflected acquisitions, consolidation of six Clarion joint-venture properties, openings at Assembly Row and Pike & Rose, redevelopment lease-up, and same-center rent growth. Same-center rental income benefited from higher rents, partly offset by lower average occupancy.
  • Property operating income grew 7.3%; property expenses increased 8.7%, including an 11.0% rise in real estate taxes. Year-end occupancy declined to 93.3% from 93.5%.
  • Net income growth included a $25.7 million gain when the Trust acquired Clarion’s 70% interest and gained control of six properties, plus a $4.9 million warranty-reserve reversal. 2015 included $19.1 million of early debt-extinguishment expense, which did not recur in 2016.
  • Operating cash flow increased, while investing outflows rose substantially with higher development and redevelopment spending and lower property-sale proceeds.
  • The Trust issued common shares through an offering and its ATM program, and issued $250 million of 3.625% senior notes due 2046. It enlarged its revolving facility from $600 million to $800 million and extended its maturity to 2020.

Outlook, commentary and risks

  • Management expected 2017 comparable-space leasing volume to be near historical levels, with overall positive rental-income increases, while cautioning that lease outcomes can vary. It noted longer tenant decision cycles, permit and inspection delays, and fewer tenants available for anchor spaces.
  • Approximately $188 million of redevelopment projects were underway and expected to stabilize over the next several years. Management expected 2017 investment of $140–$165 million at Assembly Row and $105–$130 million at Pike & Rose, net of public funding where applicable to Assembly Row. Phase II projects were generally expected to deliver in 2017/2018; the next Santana Row office building was expected to deliver in 2019 at an estimated cost of $205–$215 million.
  • Management believed operating cash flow, cash, ATM capacity, the revolver and capital-market access would fund operations, debt service and capital spending. It cited $216.7 million of debt maturities in 2017 and reserved the possibility of delaying projects, limiting acquisitions or revisiting dividend policy if market conditions deteriorated. No formal earnings or FFO guidance is provided in the supplied filing text.
  • Key risks include tenant failures and anchor vacancies, lease renewal and reletting costs, online retail competition, development cost and schedule overruns, capital-market access, interest-rate and refinancing exposure, environmental and weather events, insurance limitations, cybersecurity, REIT qualification, and covenant or credit-rating deterioration.
  • Contingency: The Trust was included in a defendant class in a Maryland predatory-towing case tied to a third-party contractor. It estimated potential loss from $0 to an undetermined share of a $22 million judgment and said it was pursuing legal remedies.
  • Other unusual items: Potential partnership put obligations include an estimated $89–$93 million for Congressional Plaza, $21–$24 million for Plaza El Segundo, and smaller amounts for other interests. These are contingent on exercise and fair market value. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion.

Important facts for investors to verify

  • Reconcile the supplied request’s 2015 Q4 label with the filing’s actual 2016 fiscal-year reporting period and compare fourth-quarter results with the correct prior-year quarter.
  • Assess how much earnings and EPS growth came from recurring property operations versus the Clarion control-change gain, warranty reversal and absence of 2015 debt-extinguishment costs.
  • Track occupancy, anchor-space leasing, same-center rental growth and the pace at which signed leases become occupied and rent-paying.
  • Review project budgets, remaining commitments, delivery timelines, lease-up and expected returns for Assembly Row, Pike & Rose and Santana Row.
  • Examine 2017 maturities, refinancing plans, leverage and the potential dilution and funding implications of further ATM share issuance.
  • Monitor the towing litigation, partnership put rights and other contractual commitments for changes in exposure or cash requirements.
  • Compare dividend coverage using operating cash flow and FFO while accounting for capital spending, debt service and REIT distribution requirements.