Business context and reporting period
Period clarification: The supplied filing is Federal Realty Investment Trust’s Form 10-K for the fiscal year ended December 31, 2017, filed February 13, 2018—not a 2016 Q4 filing. The summary below reflects the 2017 fiscal year and compares it primarily with 2016.
Federal Realty is an equity REIT focused on retail and mixed-use properties in dense, affluent U.S. markets. At year-end it owned or had a majority interest in 104 projects totaling approximately 24.2 million square feet. The portfolio was 95.3% leased and 93.9% occupied. No property represented more than 10% of 2017 revenue, and no tenant represented more than 2.9% of annualized base rent.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total property revenue | $857.3 million | $801.6 million | +7.0% |
| Rental income | $841.5 million | $786.6 million | +7.0% |
| Property operating income (non-GAAP) | $584.6 million | $548.0 million | +6.7% |
| Operating income | $332.3 million | $321.0 million | +3.5% |
| Income from continuing operations | $219.9 million | $226.4 million | -2.9% |
| Net income | $297.9 million | $258.9 million | +15.1% |
| Net income available to common shareholders | $287.5 million | $249.4 million | +15.3% |
| Diluted EPS | $3.97 | $3.50 | +13.4% |
| FFO available to common shareholders (non-GAAP) | $420.0 million; $5.74 per diluted share | $406.4 million; $5.65 per diluted share | +3.4% total; +1.6% per share |
Net income benefited from $77.9 million of net gains on real estate sales and changes in control of interests, versus $32.5 million in 2016. A $12.3 million early debt-extinguishment charge reduced 2017 results. Excluding that charge, management reported FFO of $432.2 million, or $5.91 per diluted share.
Net cash provided by operating activities was $459.2 million, up from $423.7 million. Investing activities used $836.8 million, principally reflecting acquisitions and development/redevelopment spending; financing activities provided $369.4 million. Year-end cash was $15.2 million.
Total debt and capital lease obligations were $3.285 billion, up from $2.798 billion. Approximately 98.8% of debt was fixed-rate, including a $275 million term loan effectively fixed at 2.62% by swaps. The $800 million revolving facility had $41 million drawn at year-end; the company also reported $15.2 million cash. Total shareholders’ equity was $2.392 billion. EBITDA / combined fixed charges and preferred dividends was 4.4x; adjusted EBITDA coverage was 3.9x. The company reported compliance with its debt covenants.
Common dividends declared were $3.96 per share for 2017, compared with $3.84 in 2016; the Trust reported 50 consecutive years of annual dividend increases.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, redevelopment lease-up, same-center rent increases and openings at Assembly Row and Pike & Rose. Same-center rental income rose about $8.0 million; occupancy was 93.9%, versus 93.3% at the end of 2016.
- Property operating income increased 6.7%, while operating income grew 3.5%. Depreciation and amortization rose 11.6% to $216.1 million, and interest expense rose 5.4% to $100.1 million.
- Acquisitions included Riverpoint Center, Hastings Ranch Plaza and an approximately 90% interest in a joint venture owning six Los Angeles County shopping centers. Property sales included 150 Post Street, North Lake Commons and land parcels at Assembly Row and Bethesda Row.
- Debt increased by approximately $486 million. The Trust issued senior notes and Series C preferred shares, used ATM common-share issuance, and redeemed $150 million of 5.90% notes early, incurring the $12.3 million charge.
- 2017 comparable-space leasing produced average rent increases of 13% on a cash basis and 26% on a straight-line basis. New comparable leases achieved 19% cash increases and renewals 9%, compared with 2016 increases of 24% and 7%, respectively.
Outlook, commentary, risks and unusual items
Management expected 2018 leasing volume to be in line with historical levels, generally 1.2–1.6 million square feet annually, with positive rental-income increases. It cautioned that tenant decisions and government permitting were taking longer, anchor-tenant demand had weakened, and more retailers were closing early or filing for bankruptcy. No specific earnings or FFO guidance is provided in the supplied filing text.
Management expected to invest $75–$100 million in 2018 at Assembly Row and Pike & Rose, with reduced development and redevelopment investment overall as Phase II construction at both projects neared completion. The Santana Row office building was expected to cost $205–$215 million and be delivered in 2019. These are project estimates, not guaranteed outcomes.
Key risks include tenant and anchor defaults or vacancies, lease rollover and re-leasing costs, online retail competition, development cost and schedule overruns, capital-market access, interest rates, debt maturities and covenants, and natural disasters, environmental liabilities and cybersecurity events. Management stated that capital resources and market access were expected to be adequate for operations, debt service and capital spending, but noted it could delay projects, limit acquisitions, reduce spending or reassess dividends if conditions deteriorated.
Unusual items included the $77.9 million net real estate/control-change gains, the $12.3 million early debt-extinguishment charge, and a $5.4 million gain recognized on contracted Assembly Row condominium sales using percentage-of-completion accounting. The Trust recorded a $67.1 million receivable related to those condominium sales; closings were expected to begin in 2018. It said adoption of the new revenue standard in 2018 would generally defer condominium sale gains until legal closing. A towing-related class-action settlement was approximately $0.4 million, which the Trust expected insurance to reimburse; potential additional exposure was estimated at about $0.2 million if certain claims remained actionable.
Important facts for investors to verify
- Confirm the intended period: the provided 10-K covers fiscal 2017, although the request metadata says 2016 Q4.
- Review FFO and EPS quality, separating recurring property operations from property-sale gains and the debt-extinguishment charge.
- Track occupancy, anchor-space leasing, lease renewals, tenant improvement costs and whether signed leases commence and pay as expected.
- Assess the financing plan for the $275 million term loan maturing in 2018, debt growth, refinancing costs and available revolver capacity.
- Monitor project budgets, remaining commitments and delivery/lease-up at Assembly Row, Pike & Rose and Santana Row, including condominium closings and the revenue-recognition transition.
- Evaluate dividend coverage and potential liquidity demands from development commitments, partnership put options and other contractual obligations.