Federal Realty Investment Trust — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended September 30, 2010, not 2009 Q3 as stated in the request metadata. It was signed November 3, 2010. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
Federal Realty is a retail and mixed-use equity REIT. At September 30, 2010, it owned or held a majority interest in 85 predominantly retail projects totaling approximately 18.2 million square feet. Its portfolio was 93.9% leased and 93.3% occupied. Its 30%-owned joint venture held seven projects totaling approximately 1.0 million square feet, at 91.3% leased and 90.8% occupied.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $134.1 million | $131.0 million | $406.4 million | $392.4 million |
| Operating income | $56.2 million | $57.7 million | $171.3 million | $147.2 million |
| Net income attributable to the Trust | $29.6 million | $27.4 million | $90.0 million | $66.3 million |
| Net income available to common shareholders | $29.5 million | $27.3 million | $89.6 million | $65.9 million |
| Diluted EPS | $0.48 | $0.45 | $1.45 | $1.10 |
| FFO available to common shareholders per diluted share | $0.95 | $0.92 | $2.87 | $2.53 |
FFO excluding the Santana Row litigation provision was $0.95 per diluted share for Q3 and $2.88 for the nine months, versus $0.92 and $2.88, respectively, in 2009. FFO is a non-GAAP measure and is not equivalent to operating cash flow or liquidity.
Q3 property operating income was $91.7 million, down 0.5% year over year, as property expenses rose 9.1% while property revenue increased 2.3%. For the nine months, property operating income rose 2.7% to $278.4 million. Rental expenses were 20.5% of rental income plus other property income for the nine months, compared with 20.1% in 2009. The filing attributes revenue growth mainly to same-center rent and cost reimbursements; higher operating costs included snow removal, repairs, demolition, and taxes.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $179.7 million, versus $194.2 million in 2009. Investing cash outflow was $111.3 million; financing cash outflow was $194.6 million. Cash declined by $126.2 million to $9.2 million.
- At September 30, total assets were $3.127 billion, total liabilities $1.940 billion, and total shareholders’ equity $1.187 billion. Debt and capital lease obligations totaled approximately $1.721 billion.
- Debt included $532.1 million of mortgages, $47.9 million of notes payable, and $1.080 billion of senior notes and debentures. The Trust had $27 million drawn on its $300 million revolving credit facility, which matures July 27, 2011.
- In March 2010, the Trust issued $150 million of 5.90% senior notes due 2020 and repaid its remaining $250 million term loan. The early payoff resulted in a $2.8 million write-off of unamortized debt fees. The Trust reported compliance with its debt covenants and no scheduled debt maturities before 2011, although scheduled 2011 principal repayments total $151.7 million.
- Common dividends declared for the first nine months were $1.990 per share, versus $1.960 in 2009. The Trust states that it expects operating cash flow, cash on hand, and its revolving facility to fund operations and capital expenditures; it anticipates obtaining at least similar commitments under a replacement credit facility.
Changes, outlook and material items
- Nine-month net income attributable to the Trust increased 35.6%, with continuing-operations income up 34.1%. A major comparison factor was the $21.1 million litigation provision recorded in the first nine months of 2009, compared with $0.3 million in 2010. Q3 operating income nevertheless declined year over year.
- The Trust acquired the leasehold interest in Huntington Square, New York, for $17.6 million in August. It also formed an 85%-owned equity-method venture with Taurus, which acquired two Boston buildings for $17.5 million; Federal Realty contributed $7.8 million and provided an $8.8 million loan.
- Management expects redevelopment projects with projected costs of approximately $28 million in 2010 and $57 million in 2011 to stabilize. It expects to invest $15–$20 million in Assembly Row development in 2010, net of expected public funding, and described possible future development structures intended to mitigate risk. No specific full-year earnings or FFO guidance is provided in the text.
- Management said economic weakness could pressure tenant sales, rent collection, occupancy, leasing and bad-debt expense; tenants had sought rent relief, vacated early, or filed for bankruptcy. It noted that occupancy may fluctuate and that rent concessions could affect results over lease terms.
- Two significant legal matters remain unresolved. A Santana Row-related judgment is under appeal; the Trust accrued $16.4 million, and enforcement is stayed during the appeal. Separately, a court ordered Vornado to sell land under Pentagon Row to Federal Realty and Post Properties for a combined net price of approximately $14.7 million; Vornado appealed, and the judgment is stayed.
- Mortgage loans associated with a Norwalk, Connecticut shopping center and adjacent building were in default, with foreclosure proceedings filed; the loans were on non-accrual status. A non-binding letter of intent contemplated repayment of their full carrying amount in December 2010, but the outcome was not assured.
- After quarter-end, the CEO received restricted stock valued at approximately $5 million and his base salary and target incentive compensation were increased. The filing reports effective disclosure controls and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2010, despite the request metadata identifying 2009 Q3.
- Track 2011 refinancing and maturity exposure, including the revolving facility’s July 2011 maturity and scheduled principal repayments.
- Monitor occupancy, tenant credit and leasing trends, property expense growth, and whether redevelopment spending produces expected stabilization and returns.
- Follow developments in the Santana Row appeal, the Pentagon Row appeal, and the defaulted Norwalk mortgage loans.
- Assess liquidity and dividend coverage using operating cash flow and capital needs; the filing cautions that FFO is not a liquidity measure.