Federal Realty Investment Trust — Form 10-Q Summary
Period and filing: The supplied filing covers the quarter ended June 30, 2018, and was signed August 1, 2018. The request metadata says “2017 Q2”; that does not match the filing, which compares 2018 results with 2017.
Business context
Federal Realty is an equity REIT focused on retail and mixed-use properties in the Mid-Atlantic, Northeast, California, and South Florida. At June 30, 2018, it operated 105 predominantly retail projects comprising approximately 24.3 million square feet; properties were 95.0% leased and 93.7% occupied.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $224.9 million | $208.0 million | $450.3 million | $415.4 million |
| Operating income | $89.9 million | $83.1 million | $176.0 million | $164.6 million |
| Income from continuing operations | $61.6 million | $59.1 million | $121.2 million | $117.0 million |
| Net income attributable to the Trust | $63.6 million | $76.3 million | $124.8 million | $132.5 million |
| Common diluted EPS | $0.84 | $1.05 | $1.65 | $1.83 |
| FFO per diluted common share | $1.55 | $1.49 | $3.08 | $2.94 |
| Operating cash flow | — | — | $263.1 million | $238.7 million |
Q2 revenue grew 8.1%, while operating income rose 8.2%. For the first half, revenue increased 8.4% and operating income 6.9%. Property operating income, a company-reported non-GAAP measure, rose 8.5% in Q2 and 8.2% for the first half. Gains on real estate sales were lower year over year: $4.0 million in Q2 and $7.3 million for the first half, versus $19.0 million and $19.2 million, respectively, in 2017. This contributed to lower reported net income and EPS despite higher continuing-operations income and FFO.
At June 30, total assets were $6.30 billion, total liabilities $3.77 billion, and shareholders’ equity $2.39 billion. Cash and cash equivalents were $56.1 million; restricted cash was $52.8 million, for $109.0 million of cash, cash equivalents, and restricted cash. Total debt and capital lease obligations were reported at $3.32 billion. The $800 million revolving credit facility had $89.0 million drawn, and the company reported compliance with debt covenants. Its $275 million term loan was due November 2018, with a one-year extension option; the revolver matures in April 2020, with two six-month extension options.
First-half investing cash use was $78.7 million, compared with $386.7 million in 2017, reflecting lower acquisitions and development spending and higher condominium-sale proceeds. Financing used $100.7 million, compared with $221.1 million provided in 2017, when senior notes were issued. Common-share dividends declared and paid were $2.00 per share for the first half, versus $1.96 a year earlier.
Material changes and operating developments
- Rental income increased 7.9% in both Q2 and the first half. Growth reflected acquisitions, comparable-property rent and occupancy gains, and openings at Assembly Row and Pike & Rose, partly offset by prior-year property sales.
- Comparable retail leases signed in Q2 had average rent increases of 10% on a cash basis and 20% straight-line; first-half increases were 15% and 25%, respectively. Lease commencement can lag signing, and some tenants may not take possession or pay contractual rent.
- Federal Realty formed a joint venture for Jordan Downs Plaza, a planned approximately 113,000-square-foot grocery-anchored center in Los Angeles County. The Trust owns approximately 91%; $34.4 million had been invested by quarter-end.
- The Trust sold 159 condominium units at Assembly Row and Pike & Rose during the first half, generating $121.4 million of net proceeds and a $7.3 million gain.
- A new at-the-market equity program authorizes up to $400 million of common-share sales. The Trust had sold shares for $24.6 million net proceeds and retained $375 million of issuance capacity at June 30.
Outlook, risks, and unusual items
No specific full-year earnings or FFO guidance is provided. Management expects reduced development and redevelopment investment as Phase II work at Assembly Row and Pike & Rose is completed, while anticipating continued spending on existing properties. It expects to invest $75 million to $100 million at those two projects in 2018. Current redevelopment projects have an estimated total cost of approximately $195 million; the Santana Row office building under construction is expected to cost $205 million to $215 million and be delivered in 2019.
Management cited strong tenant interest but longer lease negotiations, slower permitting and inspections, fewer prospective anchor tenants, and more early retail closures and bankruptcies. Tenant rent-paying capacity, occupancy, redevelopment execution and costs, access to capital, interest rates, and local economic conditions remain key risks. Management stated that current operating cash flow, cash, the ATM program, the revolver, and capital-market access are expected to fund operations and capital needs; it may defer projects or limit acquisitions if market conditions deteriorate.
Adoption of the new revenue standard changed condominium gain recognition from percentage-of-completion to legal closing. The transition reversed $5.4 million of previously recorded 2017 condominium gains through opening accumulated dividends in excess of net income; other adoption effects were described as not significant. The Jordan Downs New Markets Tax Credit proceeds are deferred until tax benefits are delivered without recapture risk, expected after the seven-year compliance period. The filing reports no material developments in legal proceedings, no material risk-factor changes, and effective disclosure controls.
Investor verification priorities
- Confirm the intended reporting period: the source is Q2 2018, not Q2 2017.
- Review the bridge from revenue and operating-income growth to lower year-over-year net income and EPS, including the reduced real-estate sale gains and preferred dividends.
- Assess upcoming refinancing needs, especially the $275 million term loan due November 2018, and available revolver capacity and ATM issuance.
- Track occupancy, lease commencement, tenant bankruptcies and closures, and whether signed rent increases convert into collected rental income.
- Monitor development costs, delivery timing, condominium closings, and the Jordan Downs tax-credit and escrow arrangements.