Federal Realty Investment Trust — Form 10-Q Summary
Period note: The request metadata says 2013 Q3, but the supplied filing is for the quarter ended September 30, 2014, with comparisons to 2013. The interim financial statements are unaudited.
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, 2014, it operated 89 predominantly retail projects totaling approximately 20.1 million square feet; its portfolio was 95.6% leased and 94.7% occupied. A 30%-owned joint venture held six additional retail properties.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $170.9 million | $159.0 million | $509.7 million | $473.6 million |
| Operating income | $67.6 million | $64.7 million | $199.4 million | $190.7 million |
| Income from continuing operations | $44.6 million | $39.4 million | $130.6 million | $108.2 million |
| Net income attributable to the Trust | $47.1 million | $62.1 million | $129.4 million | $134.2 million |
| Diluted EPS | $0.69 | $0.94 | $1.91 | $2.04 |
| FFO available to common shareholders per diluted share | $1.23 | $1.16 | $3.66 | $3.38 |
- Revenue rose 7.5% for the quarter and 7.6% for the nine-month period. Nine-month property operating income increased 5.3% to $351.0 million; property expenses grew faster than revenue, increasing 13.1%.
- Lower interest expense supported continuing-operations income: nine-month interest expense declined 13.1% to $69.8 million, principally reflecting lower average borrowing rates and increased capitalized interest.
- Net income and EPS comparisons were affected by property-sale gains: 2013 included $23.9 million of discontinued-operation gains and $5.0 million of other real estate sale gains; 2014 included a $4.4 million share of a joint-venture sale gain. FFO per diluted share increased year over year.
- Nine-month operating cash flow was $241.8 million, versus $226.7 million. Investing used $280.9 million, mainly for development, redevelopment, and leasing; financing used $25.9 million. Cash fell to $23.9 million from $88.9 million at year-end 2013.
- At September 30, total assets were $4.48 billion and total liabilities were $2.71 billion. Debt and capital lease obligations totaled approximately $2.36 billion, including $630.3 million of mortgages, $301.6 million of notes payable, $1.36 billion of senior notes and debentures, and $71.7 million of capital leases.
- Liquidity included $23.9 million cash and a $600 million revolving credit facility with $11 million drawn. The company reported compliance with debt covenants. The term loan spread over LIBOR was reduced from 1.30% to 0.90%; swaps effectively fixed its rate at 2.62%.
Material changes, outlook, and risks
- The Trust acquired controlling interests in The Grove at Shrewsbury and Brook 35 for a gross value of $161 million, assuming mortgage debt and issuing downREIT units as part of the funding. It agreed to acquire one noncontrolling holder’s interest in The Grove in 2015; another holder may require a purchase at fair market value beginning in 2017.
- Development investment increased: nine-month development and redevelopment capital spending was $236.8 million. Assembly Row and Pike & Rose remained under construction. Management expected 2014 redevelopment projects with approximately $89 million in projected costs to stabilize, and 2015 projects with approximately $153 million in projected costs to stabilize.
- Assembly Row Phase I was expected to stabilize in 2015, with total expected costs of $190–$200 million; $180 million had been incurred. Pike & Rose Phase I was expected to stabilize in 2015–2016, with estimated costs of $245–$255 million; $201 million had been incurred. These are project expectations, not company-wide earnings guidance.
- Management described tenant demand and leasing conditions as encouraging, while cautioning that trends may not continue. Comparable-space leases signed in the first nine months generated average rent increases of 15% on a cash basis and 28% on a straight-line basis; signed leases may take time to commence and tenants may not take possession or pay as agreed.
- Key exposures include tenant defaults or vacancies, redevelopment cost and schedule overruns, dependence on third parties and public funding for development, access to capital, interest rates, local economic conditions, and REIT qualification. Management said no material changes had occurred in previously disclosed risk factors.
- The filing reported no legal proceedings it considered reportable and no material adverse effect expected from existing legal matters, while noting litigation uncertainties. The joint venture has a buy-sell provision that could require a sale of the Trust’s interest or funding to acquire the partner’s interest.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2014, not Q3 2013.
- Review same-center operating trends and the effects of higher property expenses, taxes, and winter-related costs on margins.
- Track leasing and occupancy, including whether signed rent increases convert to collected rent and occupied space.
- Assess development budgets, remaining commitments, stabilization assumptions, and exposure to third-party delivery and public funding.
- Review scheduled debt maturities, refinancing needs, covenant headroom, and the continuing availability of capital markets and ATM equity capacity.
- Consider noncontrolling-interest purchase obligations and the potential funding impact of joint-venture provisions.