Federal Realty Investment Trust — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The request metadata labels the period “2014 Q4,” but the filing is the 2015 annual report; it also provides unaudited fourth-quarter comparisons.
Business context
Federal Realty is an equity REIT focused on owning, managing, acquiring and redeveloping retail and mixed-use properties in dense, affluent U.S. markets. At year-end it owned or controlled 90 projects totaling approximately 21.4 million square feet. The portfolio was 94.3% leased and 93.5% occupied; occupancy was down from 94.7% at year-end 2014. No tenant represented more than 2.9% of annualized base rent.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total property revenue | $744.0 million | $686.1 million | +8.4% |
| Rental income | $727.8 million | $666.3 million | +9.2% |
| Property operating income (non-GAAP) | $510.6 million | $474.2 million | +7.7% |
| Income from continuing operations | $190.1 million | $167.9 million | +13.2% |
| Net income attributable to the Trust | $210.2 million | $164.5 million | +27.8% |
| Diluted EPS | $3.03 | $2.41 | +25.7% |
| FFO per diluted share (non-GAAP) | $5.05 | $4.79 | +5.4% |
| Cash from operating activities | $359.8 million | $346.1 million | +4.0% |
Property operating income was approximately 68.6% of property revenue, compared with 69.1% in 2014. Property expenses rose 10.1%, faster than revenue, including a 12.2% increase in real estate taxes. Rental expenses equaled 20.0% of rental income plus other property income, versus 19.9% in 2014.
Net income growth included $28.3 million of gains on real estate sales, compared with $4.4 million in 2014. The 2015 gains arose from sales of Houston Street and Courtyard Shops. The company also recorded $19.1 million of early debt-extinguishment charges, mainly the make-whole premium on redeemed 6.20% notes.
Investing activities used $353.8 million, primarily for development, redevelopment, acquisitions and property improvements. Financing activities used $33.0 million. Year-end cash was $21.0 million, down from $48.0 million. Total debt and capital-lease obligations were $2.64 billion, versus $2.41 billion at year-end 2014; approximately 97.6% of debt was fixed-rate or effectively fixed. The $600 million revolving credit facility had $53.5 million drawn, leaving $546.5 million available, subject to its terms. The Trust reported compliance with debt covenants.
Debt transactions included issuing $450 million of senior notes, repaying $200 million of 6.20% notes and paying off $147 million of mortgages carrying a weighted-average 7.9% rate. Interest expense declined 1.5% to $92.6 million, despite higher borrowings. The Trust declared $3.62 per common share in 2015 and paid $3.55; it reported 48 consecutive years of annual dividend increases.
Material changes and notable quarterly data
- Revenue growth reflected contributions from Assembly Row and Pike & Rose as phases opened, 2015 and 2014 acquisitions, and same-center rent growth. Same-center rental income rose approximately $15.7 million.
- 2015 acquisitions included San Antonio Center, CocoWalk and The Shops at Sunset Place. The Trust sold Houston Street and Courtyard Shops.
- Fourth-quarter 2015 revenue was $192.5 million versus $176.4 million in fourth-quarter 2014. Net income was $70.0 million versus $37.3 million, with the 2015 quarter including the $16.8 million Courtyard Shops sale gain.
- On January 13, 2016, the Trust acquired Clarion’s 70% interest in a six-property joint venture for $153.7 million, including $130 million cash and assumption of $34.4 million in mortgage debt; the properties were to be consolidated thereafter.
Outlook, risks and contingencies
Management described tenant demand and operating conditions as encouraging, while cautioning that conditions may not continue. It expected 2016 redevelopment projects to stabilize with projected costs of approximately $154 million. Planned 2016 investment was $100–$125 million at Assembly Row and $105–$130 million at Pike & Rose. Phase II construction was underway at both sites; management expected Phase I stabilization at each in 2016. The Santana Row office building, fully leased to Splunk, was expected to cost $110–$115 million and stabilize in 2017. No company-wide earnings or FFO guidance is provided in the supplied filing text.
Management believed operating cash flow, cash on hand, the ATM equity program, revolving credit and capital-market access would support operations and planned investment. It noted that deteriorating markets could lead it to delay projects, limit acquisitions, reduce expenditures or reassess dividends. Key risks include tenant distress or bankruptcy, anchor-space demand and lease renewals, online retail competition, lower occupancy or rents, development cost overruns and delays, financing access, rising rates, property insurance and environmental exposures, cybersecurity, and REIT qualification.
Contractual obligations totaled $4.45 billion, including debt and lease payments, development commitments and operating obligations. Potential additional commitments include partnership put options, notably an estimated $78–$82 million purchase obligation relating to a Congressional Plaza interest if exercised. A $11.7 million mortgage receivable had matured and was in default; foreclosure proceedings had begun, and management said collateral value supported its carrying amount. The filing reported no legal proceedings expected to have a material adverse effect, while noting ordinary-course litigation and self-insured liability exposure.
Important facts for investors to verify
- Reconcile reported earnings growth with property-sale gains and the $19.1 million early-extinguishment charge; assess recurring FFO and its non-GAAP limitations.
- Track occupancy, leasing spreads and leasing costs: occupancy declined year over year, while 2015 comparable-space rents increased 17% on a cash basis; signed leases may take time to commence.
- Monitor 2016–2019 development spending, lease-up, stabilization and financing needs at Assembly Row, Pike & Rose and Santana Row.
- Review debt maturities, covenant headroom, variable-rate exposure and the effects of the January 2016 joint-venture buyout on consolidated debt and liquidity.
- Confirm dividend coverage using cash flow and future capital needs; declared and paid annual dividends differ, and future distributions are at the board’s discretion.
- Assess the status and recovery of the defaulted mortgage receivable and the possible timing and cost of partnership put options.