Business context and reporting period
Federal Realty Investment Trust is an equity REIT focused on owning, managing and redeveloping retail and mixed-use properties. The supplied filing is a Form 10-Q for the quarter ended March 31, 2018—not Q1 2017 as stated in the request metadata. At quarter-end, the Trust operated 104 predominantly retail projects comprising approximately 24.2 million square feet; properties were 94.8% leased and 93.3% occupied.
Financial performance and position
- Total revenue increased 8.7% to $225.4 million from $207.4 million. Rental income rose 7.9% to $220.6 million.
- Property operating income, a non-GAAP measure, increased 7.8% to $152.2 million; its margin on total revenue was approximately 67.5%, compared with 68.1% in Q1 2017. Operating income rose 5.6% to $86.1 million.
- Net income attributable to the Trust increased 9.0% to $61.2 million. Diluted EPS was $0.81 versus $0.78. FFO available for common shareholders, a non-GAAP measure, was $112.4 million, or $1.52 per diluted share, versus $105.8 million, or $1.45.
- Net cash provided by operations was $124.2 million, essentially unchanged from $123.9 million. Investing used $46.2 million, versus $279.3 million; financing used $29.5 million, versus providing $154.0 million. Cash, cash equivalents and restricted cash totaled $73.7 million at quarter-end.
- Total debt and capital lease obligations were approximately $3.34 billion; cash and cash equivalents were $64.4 million. The $800 million revolving facility had $103 million drawn and matures in 2020. A $275 million term loan matures in November 2018, with an extension option. The Trust reported compliance with its debt covenants.
- Common dividends declared and paid were $1.00 per share for the quarter, up from $0.98 a year earlier.
Material changes versus Q1 2017
- Revenue growth reflected acquisitions, higher comparable-property rents and occupancy, and openings at Assembly Row and Pike & Rose. Comparable-property occupancy improved from 93.1% to 93.3%.
- Property expenses rose 10.6% to $73.2 million, faster than revenue, including higher real estate taxes. Depreciation and amortization increased 13.1% to $58.1 million.
- Interest expense increased 10.2% to $26.2 million, primarily due to higher borrowings following senior-note issuances, partly offset by a lower average borrowing rate.
- Cash used in investing fell substantially, reflecting no real estate acquisitions in the quarter, condominium sale proceeds, and lower development and redevelopment spending than in the prior-year period.
Outlook, commentary and risks
- Management cited strong prospective tenant interest but said lease decisions are taking longer, permitting delays are extending rent commencement, anchor-tenant availability has declined, and more retailers are closing early or filing for bankruptcy. No single tenant represented more than 2.9% of annualized base rent.
- Management expected reduced development and redevelopment investment as Phase II construction at Assembly Row and Pike & Rose neared completion. It expected to invest $75 million to $100 million at those two projects in 2018. Ongoing projects include Santana Row, where an office building was expected to be delivered in 2019, and projects at Assembly Row and Pike & Rose with remaining delivery expected through 2018.
- Q1 comparable retail leases covered 403,000 square feet and achieved average rent increases of 22% on a cash basis and 31% on a straight-line basis. Management cautioned that signed leases may not commence as expected or produce all contractual rent.
- Management believed operating cash flow, cash, its revolving facility, ATM equity program and capital-market access would fund operations and planned needs. It noted that deteriorating markets could lead it to delay projects, limit acquisitions, reduce operating expenditures or reconsider dividend policy.
- Interest-rate sensitivity: a 1 percentage-point increase in rates on the $103 million variable-rate revolving balance would increase annual interest expense by approximately $1.0 million. The Trust had two swaps fixing the term loan’s effective rate at 2.62% through November 2018.
- Legal proceedings were described as ordinary-course matters; management did not believe their ultimate outcome would materially adversely affect financial position or operating trends. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the intended period: the supplied filing reports Q1 2018, although the request identifies Q1 2017.
- Review the November 2018 term-loan maturity, extension conditions, refinancing plans and subsequent debt activity.
- Assess whether leasing delays, tenant closures, occupancy and property-tax increases affect rent growth and operating margins.
- Track completion costs, timing, leasing and expected returns for the major redevelopment and mixed-use projects.
- Consider the non-GAAP definitions and reconciliations for property operating income and FFO, and distinguish condominium-sale gains from recurring operations.