Federal Realty Investment Trust — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2018, not 2017 Q3 as stated in the request metadata. Financial amounts below are in U.S. dollars; “nine months” means the nine months ended September 30.
Business context and reporting period
Federal Realty is an equity REIT focused on owning, managing, and redeveloping retail and mixed-use properties. At September 30, 2018, it owned or held a majority interest in 105 predominantly retail projects comprising approximately 24.3 million square feet. The portfolio was 94.8% leased and 93.7% occupied. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $229.8 million | $218.0 million | $680.1 million | $633.4 million |
| Operating income | $90.3 million | $84.5 million | $266.4 million | $249.1 million |
| Income from continuing operations | $61.1 million | $58.1 million | $182.2 million | $175.1 million |
| Net income attributable to the Trust | $62.6 million | $106.8 million | $187.4 million | $239.3 million |
| Basic EPS | $0.82 | $1.47 | $2.47 | $3.31 |
| FFO available to common shareholders per diluted share | $1.58 | $1.50 | $4.66 | $4.45 |
For the nine months, net cash provided by operating activities was $364.7 million, capital expenditures for development, redevelopment, and other property work totaled $268.2 million, and dividends paid to common and preferred shareholders totaled $224.3 million. Cash, cash equivalents, and restricted cash were $94.8 million at period-end, including $52.9 million of restricted cash.
At September 30, 2018, total debt and capital lease obligations, net, were approximately $3.257 billion. Cash and cash equivalents were $41.9 million, and $26.5 million was drawn on the $800 million revolving credit facility. The Trust reported compliance with its debt covenants. The common dividend declared for the first nine months was $3.02 per share.
Material changes versus the prior comparable period
- Nine-month revenue rose 7.4%, while operating income increased 6.9% and FFO per diluted share increased 4.7%.
- Nine-month net income attributable to the Trust fell 21.7%, principally reflecting lower real estate sale gains: $10.4 million in 2018 versus $69.9 million in 2017. Q3 net income attributable to the Trust declined 41.4%, also largely due to the prior-year quarter’s much larger property-sale gains.
- Property operating income increased 7.6% for the nine-month period. Growth reflected comparable-property rent and occupancy, acquisitions, lease-up and openings at Assembly Row and Pike & Rose, partly offset by dispositions.
- Interest expense increased 11.0% for the nine months, mainly due to higher borrowings and reduced capitalization of interest; depreciation and amortization increased 11.0% as properties were placed in service and acquired.
- Operating cash flow increased $25.2 million year over year. Investing cash outflow narrowed substantially, reflecting fewer acquisitions and lower development spending than in 2017. Financing cash flow shifted from $368.1 million provided in 2017 to $183.3 million used in 2018, in part because 2017 included major debt and preferred-share issuances.
Outlook, management commentary, risks, and unusual items
- Management gave no specific full-year earnings or FFO guidance in the supplied filing. It expected reduced development and redevelopment investment as Phase II work at Assembly Row and Pike & Rose neared completion; other property investment was expected to be consistent with prior years.
- Projects include approximately $208 million of redevelopment work expected to stabilize over the next several years. The Santana Row office project was expected to cost $205–$215 million, deliver in 2019, and was 100% pre-leased. Management expected to invest $70–$85 million at Assembly Row and Pike & Rose in 2018.
- Management reported continued tenant interest but longer leasing decisions, permitting delays, fewer prospective anchor tenants, and more early tenant closures or bankruptcies. It noted that tenant payment or occupancy deterioration could adversely affect results. Q3 comparable-space leases achieved average rental increases of 6% on a cash basis and 18% on a straight-line basis; the filing cautions these signed leases may not all commence or generate contractual rent.
- Jordan Downs Plaza was formed as a development joint venture, with the Trust holding approximately 91%. The project received $13.9 million from a bank in connection with New Markets Tax Credits; the proceeds and related costs were deferred, with net cash expected to be recognized as revenue after the seven-year compliance period. The Trust also reported $39.7 million of development cash held in escrow.
- The Trust contributed hotel-related assets valued at $44.0 million to its Assembly Row hotel joint venture and received $38.0 million. It sold a Chelsea Commons residential building for $15.0 million, recognizing a $3.1 million gain. Condominium sales generated $128.1 million of net proceeds and a $7.3 million gain for the nine months.
- Adoption of revenue-recognition guidance changed the timing of condominium-sale gains to legal closing; $5.4 million of previously recorded gains, net of tax, was reversed through opening accumulated dividends in excess of net income. The Trust also identified future balance-sheet recognition of obligations and right-of-use assets for 14 ground leases under the lease standard scheduled for adoption in January 2019; some leasing costs previously capitalized would be expensed.
- Two interest-rate swaps fixing the $275 million term loan at 2.62% were due to expire in November 2018. After expiry, a 1 percentage-point rate increase was estimated to add approximately $2.8 million to annual interest expense. The Trust highlighted tenant, redevelopment, capital access, interest-rate, covenant, environmental, and REIT-qualification risks.
- Management said it believed available cash, operating cash flows, the ATM equity program, revolving credit facility, and capital-market access would fund operations and planned requirements. The $400 million ATM program had $321.7 million of remaining capacity at quarter-end; $77.4 million of net proceeds had been raised in the first nine months.
Most important facts for investors to verify
- Confirm the intended reporting period: the filing itself covers Q3 2018, despite the request metadata specifying 2017 Q3.
- Assess recurring operating growth separately from gains on property and condominium sales; compare GAAP net income with FFO and operating cash flow.
- Track occupancy, comparable-property rent growth, lease commencements, anchor-space leasing, tenant closures, and redevelopment-related rent delays.
- Review debt maturities, covenant headroom, refinancing needs, and borrowing costs after the term-loan swaps expired; distinguish unrestricted cash from restricted cash.
- Monitor development costs, expected delivery dates and leasing, particularly Santana Row, Assembly Row, Pike & Rose, and Jordan Downs Plaza, as well as the deferred New Markets Tax Credit proceeds.
- Verify the impact of the January 2019 lease-accounting adoption and whether ATM share issuance, dividends, and capital spending affect per-share growth and liquidity.