FEDERAL REALTY INVESTMENT TRUST quarterly report, Q1 FY2013

Federal Realty Investment Trust — Form 10-Q Summary

Period and source: The filing text covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013. This conflicts with the request metadata, which says 2013 Q1; the filing’s stated reporting period is 2014 Q1.

Business context

Federal Realty is an equity REIT focused on retail and mixed-use properties in the Mid-Atlantic, Northeast, and California. At March 31, 2014, it owned or controlled 89 predominantly retail projects totaling approximately 19.8 million square feet. The portfolio was 95.6% leased and 94.7% occupied. Its 30%-owned joint venture held seven retail properties; those properties were 84.5% leased and 82.3% occupied.

Financial performance

Metric	Q1 2014	Q1 2013	Change
Total revenue	$170.8 million	$157.1 million	Up 8.7%
Rental income	$166.2 million	$152.6 million	Up 8.9%
Operating income	$63.4 million	$62.5 million	Up 1.5%
Income from continuing operations	$40.5 million	$35.4 million	Up 14.4%
Net income attributable to the Trust	$38.8 million	$34.6 million	Up 12.0%
Diluted EPS	$0.57	$0.53	Up $0.04
FFO available for common shareholders per diluted share	$1.21	$1.14	Up $0.07
Cash from operating activities	$79.2 million	$67.7 million	Up $11.5 million

Property operating income was $115.0 million, up 4.5%. As a share of property revenue, it was approximately 67.3%, compared with 70.0% in Q1 2013; higher property costs, particularly snow removal and utilities during a harsh winter, weighed on the ratio. Rental expenses were 21.9% of rental income plus other property income, versus 18.9% a year earlier. Interest expense declined 15.6% to $23.1 million, reflecting lower average borrowing rates and increased capitalized interest, partly offset by higher borrowings.

Balance sheet, debt, and liquidity

Total assets were $4.41 billion at March 31, 2014, versus $4.22 billion at December 31, 2013. Cash and cash equivalents were $75.7 million.
Mortgages, notes payable, and senior notes and debentures totaled approximately $2.32 billion at carrying value; capital lease obligations were another $71.7 million. The filing reports total debt and lease obligations of approximately $2.39 billion.
The $600 million unsecured revolving credit facility had no balance outstanding at quarter-end. The Trust also had a $275 million term loan, effectively fixed at 3.02% through interest-rate swaps. It reported compliance with all debt covenants.
Operating cash flow was $79.2 million; investing activities used $88.0 million, mainly for development and redevelopment; financing activities used $4.4 million. Cash decreased $13.2 million during the quarter.
Common and preferred dividends paid were $51.7 million. Common dividends declared and paid were $0.78 per share, compared with $0.73 in Q1 2013.
During the quarter, the Trust issued shares through its ATM program for $50.2 million in net proceeds. At quarter-end, it had up to $249.3 million of remaining ATM capacity.

Material changes and notable items

Effective January 1, 2014, the Trust acquired a controlling interest in The Grove at Shrewsbury and Brook 35 for a gross value of $161 million, with an approximately 84% economic interest. It assumed mortgage debt with a face amount of $68.3 million and incurred $0.9 million of acquisition costs in Q1.
Rental income growth reflected $7.8 million of same-center increases, including higher recovery income and rents; $4.5 million from properties acquired in 2014 and 2013; and $1.9 million from redevelopment properties.
Development and redevelopment capital expenditures rose substantially. Cash used in investing increased by $42.4 million year over year, primarily due to a $41.1 million increase in capital investments, especially at Assembly Row and Pike & Rose.
Q1 2013 included $0.4 million of income from discontinued operations; Q1 2014 did not. The Trust adopted new discontinued-operations guidance effective January 1, 2014, with no current-quarter impact; most future individual property sales are expected to remain in continuing operations.
Shareholders’ equity increased to $1.57 billion from $1.47 billion, including a rise in noncontrolling interests associated with contributions related to the acquired properties.

Outlook, risks, and contingencies

Management was cautiously optimistic about tenant and leasing trends, while noting tenant downsizing and bankruptcies. No single tenant represented more than 3.3% of annualized base rent.
For comparable retail space leases signed in Q1, rents increased on average 18% on a cash basis and 29% on a straight-line basis. Management expected 2014 leasing volume to be in line with historical averages and overall positive rent increases, but cautioned that signed leases may not commence or tenants may not pay in full.
Management expected approximately $97 million of redevelopment projects to stabilize in 2014. Santana Row’s 212-unit residential building was expected to be completed by mid-2014 and stabilize in 2014, at an estimated total cost of approximately $75 million. Assembly Row Phase I was expected to open in 2014 and stabilize in 2015; expected cost was $190–$200 million. Pike & Rose Phase I was expected to begin opening in 2014, with stabilization in 2015–2016; expected cost was $245–$255 million.
The Trust expected to invest $65–$85 million in Assembly Row and $90–$120 million in Pike & Rose during 2014, net of expected public funding for Assembly Row, and approximately $170 million in the current phases of both projects over the next 18 months.
Management expected cash flows, cash on hand, ATM proceeds, revolving credit availability, and capital-market access to fund operations, debt service, and capital expenditures. It identified financing access, covenant restrictions, rising interest rates, tenant credit and occupancy, redevelopment execution and cost, public funding, and general economic conditions as risks.
Only $41 million of debt was scheduled to mature during the remainder of 2014, but Brook 35’s $11.5 million mortgage matured July 1, 2014. Total scheduled 2014 principal repayments were approximately $50.1 million.
Two swaps covered $275 million of term-loan principal; their fair-value liability was $2.0 million. The Trust expected $4.2 million to be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12 months. A 1% increase in rates was estimated to raise annual interest expense by approximately $0.1 million on variable-rate debt.
Legal proceedings were reported as none in Part II; the filing separately notes ordinary-course litigation and other matters, which management did not believe would materially adversely affect financial position or operating trends. No material changes to previously reported risk factors were identified.

Investor verification priorities

Confirm the reporting-period mismatch: the supplied metadata says 2013 Q1, while the filing itself is for Q1 2014.
Track whether occupancy and leasing gains translate into realized rental income, and assess the effect of tenant failures or lease commencements being delayed.
Monitor property expense growth, especially recurring operating costs after the unusually severe winter and higher snow-removal costs.
Review development budgets, timing, leasing and stabilization progress, and the availability and timing of committed public funding.
Assess refinancing of near-term property-level maturities and the Trust’s leverage, covenant headroom, and reliance on equity or debt-market access.
Verify the final purchase-price allocation and future redemption obligations associated with The Grove at Shrewsbury and Brook 35.
Distinguish GAAP earnings and operating cash flow from FFO, a supplemental non-GAAP measure that the filing says is not a substitute for cash flow or liquidity.