Federal Realty Investment Trust — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The request metadata says “2017 Q4,” but the supplied filing is the 2018 annual report, with comparative 2017 results.
Business context and portfolio
Federal Realty is an equity REIT focused on owning, managing and redeveloping retail and mixed-use properties in affluent, densely populated U.S. markets. At year-end 2018, it owned or held majority interests in 104 projects totaling about 24.1 million square feet; the portfolio was 94.6% leased and 93.6% occupied. It reported 51 consecutive years of common-dividend increases.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total property revenue | $915.4 million | $857.3 million | +6.8% |
| Property operating income (non-GAAP) | $627.6 million | $584.6 million | +7.3% |
| Operating income | $349.7 million | $332.3 million | +5.2% |
| Income from continuing operations | $237.1 million | $219.9 million | +7.8% |
| Net income | $249.0 million | $297.9 million | -16.4% |
| Net income available to common shareholders | $233.9 million | $287.5 million | -18.6% |
| Diluted earnings per common share | $3.18 | $3.97 | -19.9% |
| FFO available to common shareholders (non-GAAP) | $461.8 million; $6.23 per diluted share | $420.0 million; $5.74 per diluted share | +10.0% total; +8.5% per share |
| Cash from operating activities | $516.7 million | $458.8 million | +12.6% |
| Total debt and capital lease obligations | $3.229 billion | $3.285 billion | -1.7% |
Approximate operating margin was 38.2% of total revenue in 2018, compared with 38.8% in 2017. Property operating income was about 68.6% of revenue, versus 68.2% in 2017. Debt was 91.5% fixed rate; $275 million was variable rate. The $800 million revolving credit facility had no balance outstanding at year-end. Cash and cash equivalents were $64.1 million; cash, cash equivalents and restricted cash totaled $108.3 million. EBITDAre to combined fixed charges and preferred dividends was 4.2x, up from 3.9x.
Common dividends declared were $4.04 per share in 2018 versus $3.96 in 2017; dividends paid were $4.02 and $3.94, respectively. Cash dividends paid to common and preferred shareholders totaled $301.2 million.
Material changes versus 2017
- Revenue growth reflected 2017 acquisitions, the opening and lease-up of development phases at Assembly Row and Pike & Rose, and comparable-property rental growth. Comparable-property rental income rose primarily from higher rents and occupancy.
- Net income fell despite higher operating income because 2017 included $77.9 million in net real estate sale gains, compared with $11.9 million in 2018. The 2017 comparison also included a $12.3 million early debt-extinguishment charge; no such charge was recorded in 2018.
- Interest expense increased 10.0% to $110.2 million, mainly because less interest was capitalized and borrowings were higher, partly offset by a lower average borrowing rate.
- Operating cash flow increased, while investing cash outflow narrowed substantially to $192.2 million from $837.9 million, primarily because 2017 included much greater acquisition spending. Financing changed from $369.4 million provided in 2017 to $241.3 million used in 2018.
- Leasing spreads remained positive: comparable-space leases signed in 2018 had average increases of 12% on a cash basis and 23% on a straight-line basis. This was below 2017’s 13% and 26%, respectively; new-lease spreads rose while renewal spreads declined.
Outlook, commentary and risks
- Management expected 2019 comparable leasing volume to be within its historical range, with overall positive rental-income increases, while noting no assurance that rents would continue to rise.
- Management projected approximately $210 million of redevelopment projects to stabilize over the next several years and expected to invest $175 million–$200 million in Assembly Row and Pike & Rose in 2019. Timing and further phases depend on market conditions, tenant demand and expected returns.
- Major projects include Santana Row’s office building, expected to cost $205 million–$215 million and be delivered in 2019, with the office space fully pre-leased; Assembly Row Phase III, estimated at $465 million–$485 million and projected to begin opening in 2022; and a Pike & Rose office building estimated at $128 million–$135 million, projected to begin opening in 2021.
- Management said leasing decisions are taking longer, permitting and inspections have delayed rent commencement, anchor-space demand has weakened, and some retailers are closing early or filing for bankruptcy. Online retail competition, tenant credit, lease renewals, occupancy and anchor closures are key operating risks.
- About $301.4 million of principal was scheduled to mature in 2019 as of year-end, including a $20.3 million mortgage repaid on January 31, 2019. The $275 million term loan matured in November 2019. Management believed operating cash flow, cash, ATM equity issuance, the revolver and capital-market access would be sufficient for operations and planned investment.
- Contractual development, redevelopment and capital-improvement obligations totaled $568.2 million, including $428.1 million due in less than one year. Put rights over certain joint-venture interests could create additional purchase obligations; estimated values for the disclosed interests range from approximately $9 million to $83 million individually.
- Other notable exposures include interest-rate sensitivity, development cost and lease-up risks, potential tenant defaults, environmental and severe-weather risks, insurance limitations, joint-venture constraints and cyberattacks. A 1 percentage-point increase in rates was estimated to raise annual interest expense by about $2.8 million on year-end variable-rate debt.
- The 2018 adoption of revenue-recognition guidance changed condominium gain timing to legal sale. Adoption of lease-accounting guidance in January 2019 was expected to add approximately $75 million of lessee right-of-use assets and lease liabilities, before specified adjustments, primarily for ground leases.
- The towing class-action settlement cost the Trust approximately $0.4 million and was reimbursed by insurance. Management believed any remaining exposure was less than $0.1 million. The independent auditor issued unqualified opinions on the financial statements and internal controls; management reported effective controls.
Most important facts for investors to verify
- Reconcile the filing’s 2018 gains and prior-year real-estate sale gains when assessing the decline in GAAP net income and EPS; compare FFO alongside GAAP results.
- Track occupancy, anchor leasing, tenant bankruptcies and the conversion of signed leasing spreads into collected rent and cash flow.
- Review 2019 debt refinancing and maturity execution, liquidity availability, covenant compliance and the cost or dilution of future ATM equity issuance.
- Monitor project budgets, remaining commitments, pre-leasing, delivery dates and stabilization for Santana Row, Assembly Row and Pike & Rose.
- Assess dividend coverage using operating cash flow and recurring capital needs, while distinguishing declared dividends from cash paid and taxable distributions.
- Verify potential joint-venture put obligations, condominium closings and the timing and conditions for recognizing the Jordan Downs tax-credit proceeds.