Federal Realty Investment Trust — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2012, and compares the three and nine months ended September 30, 2012 with the corresponding 2011 periods. This conflicts with the request metadata stating 2011 Q3; the filing itself identifies 2012 Q3.
Business context
Federal Realty is an equity REIT focused on owning, operating and redeveloping retail and mixed-use properties in affluent, densely populated markets, primarily in the Mid-Atlantic, Northeast and California. At September 30, 2012, it owned or held a majority interest in 87 projects comprising approximately 19.1 million square feet; its portfolio was 95.1% leased and 94.2% occupied. Its 30%-owned joint venture held seven properties and was 88.5% leased and 88.3% occupied.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $157.8 million, up 14.6% from $137.7 million | $451.7 million, up 9.7% from $411.6 million |
| Property operating income | $110.8 million, up 15.4% | $319.0 million, up 12.2% |
| Income from continuing operations | $39.7 million, up 18.3% | $105.5 million, up 6.2% |
| Net income attributable to the Trust | $38.6 million, down 17.9% from $47.1 million | $114.2 million, up 1.1% from $113.0 million |
| Diluted EPS | $0.60, versus $0.74 | $1.77, versus $1.80 |
| FFO available to common shareholders per diluted share | $1.12, versus $1.01 | $3.20, versus $3.02 |
Quarterly revenue growth reflected acquisitions, same-center gains and redevelopment activity. Occupancy rose to 94.2% from 92.2% a year earlier. Higher property costs grew more slowly than revenue over the nine-month period; rental expenses were 18.5% of rental income plus other property income, versus 19.9% in 2011. Interest expense increased 17.9% for the nine months, principally due to debt associated with 2011 acquisitions and higher borrowings.
The decline in quarterly net income and EPS versus 2011 mainly reflects the absence of the prior-year $14.8 million gain on the sale of Feasterville Shopping Center. Nine-month 2012 results included an $11.9 million gain recognized on the 2011 sale of the Newbury Street partnership portfolio. FFO is a supplemental non-GAAP measure, not a substitute for GAAP earnings or operating cash flow.
Cash flow, balance sheet and financing
- For the first nine months of 2012, operating cash flow was $209.2 million, compared with $173.0 million in 2011; investing cash outflow was $143.4 million, versus $101.3 million; financing provided $14.2 million, versus $65.4 million used.
- Cash and cash equivalents were $147.7 million at September 30, 2012, up from $67.8 million at December 31, 2011. The $400 million revolving credit facility had no balance outstanding, and the company reported covenant compliance.
- Total debt and capital lease obligations were $2.178 billion. Balance-sheet liabilities included $730.6 million of mortgages, $299.6 million of notes payable, $1.076 billion of senior notes and debentures, and $71.7 million of capital leases.
- The Trust repaid $175 million of 6.00% senior notes at maturity in July and issued $250 million of 3.00% senior notes due 2022, receiving approximately $244.8 million net. Its $275 million term loan was effectively fixed at 3.17% through interest-rate swaps.
- Common dividends declared were $2.110 per share for the nine months. The company raised $89.1 million net through its ATM equity program during that period and had $230.9 million of remaining capacity at September 30.
- After quarter-end, on October 22, 2012, the company repaid the Mount Vernon mortgage at par for $10.2 million.
Outlook, management commentary and risks
- Management described tenant and leasing conditions as improving but remained cautiously optimistic. It cited lower tenant bankruptcies than in prior years, while noting that some tenants remained pressured by economic conditions. No single tenant represented more than 3.1% of annualized base rent.
- For comparable retail space leases signed in Q3, average rent increased 11% on a cash basis and 25% on a straight-line basis. For the first nine months, the respective increases were 13% and 24%. Management cautioned that signed leases may commence later, tenants may not take possession or pay all contractual rent, and future rent increases are not assured.
- Management expected higher 2012 capital investment than in 2011 and approximately $400 million over three years for current phases of Assembly Row, Pike & Rose and Santana Row. Related contractual obligations were approximately $108 million at September 30. Management said it could delay projects or limit acquisitions if market conditions deteriorate.
- Projects include Assembly Row, with first-phase stabilization expected in 2015; Pike & Rose Phase I, expected to stabilize in 2015/2016; and a 212-unit Santana Row residential building, expected to stabilize in 2014. Future phases are subject to market conditions, returns and financing arrangements.
- The Trust stated that operating cash flow, cash, its ATM program, revolver and capital-market access should be sufficient for operations, debt service and capital expenditures. Risks include tenant defaults or vacancies, redevelopment delays or cost overruns, dependence on third parties and public funding for development, access to capital, interest rates, debt covenants and REIT qualification.
- Two interest-rate swaps had a $13.2 million fair-value liability; the company expected approximately $4.2 million to be reclassified as an increase to interest expense over the next 12 months. It reported no hedge ineffectiveness affecting earnings. Management did not believe existing litigation would materially adversely affect financial position or operating trends; Part II reports no legal proceedings.
- James M. Taylor became CFO on August 15, 2012, succeeding Andrew Blocher. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm the intended reporting year: the filing is for Q3 2012, notwithstanding the request metadata’s Q3 2011 label.
- Assess recurring operating growth separately from acquisition contributions, fluctuating lease-termination fees and the partnership sale gain; compare GAAP EPS with FFO.
- Review debt maturities, refinancing needs, leverage and covenant headroom, including the October 2012 Mount Vernon repayment and upcoming maturities.
- Monitor occupancy, lease commencements and rent collections against signed leasing spreads, plus tenant bankruptcies and bad debt.
- Track development spending, the $108 million of project contractual obligations, public-funding assumptions and the expected returns and timing of major projects.
- Evaluate dividend coverage and future equity issuance needs alongside the ATM program’s remaining capacity and planned capital spending.