Federal Realty Investment Trust — Form 10-Q Summary
Reporting-period note: The request identifies 2009 Q2, but the supplied filing is for the quarter and six months ended June 30, 2010. Comparisons below are against 2009.
Business context and period
Federal Realty is an equity REIT focused on owning, managing and redeveloping retail and mixed-use properties, primarily in the Mid-Atlantic, Northeast and California. At June 30, 2010, it owned or controlled 84 predominantly retail projects totaling about 18.2 million square feet. The portfolio was 94.2% leased and 93.4% occupied. An unconsolidated 30%-owned joint venture held seven additional retail properties.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $133.8 million | $130.3 million | $272.3 million | $261.4 million |
| Operating income | $56.2 million | $55.4 million | $115.1 million | $89.6 million |
| Income from continuing operations | $31.0 million | $29.3 million | $61.5 million | $40.2 million |
| Net income attributable to the Trust | $31.1 million | $28.4 million | $60.3 million | $38.9 million |
| Diluted EPS | $0.50 | $0.48 | $0.98 | $0.65 |
| FFO per diluted share, a non-GAAP measure | $0.98 | $0.97 | $1.92 | $1.61 |
Rental income rose 3.3% in both the quarter and first half. Property operating income increased 3.2% in Q2 and 4.3% in the first half; property operating margin was approximately 69.8% and 68.6%, respectively. Six-month FFO excluding the litigation provision was $1.92 per diluted share versus $1.95 in 2009.
Six-month operating cash flow was $129.3 million, down from $146.2 million. Investing activities used $61.9 million; financing activities used $179.2 million. Cash fell to $23.6 million from $135.4 million at year-end 2009, mainly reflecting debt repayment and related financing activity.
At June 30, total debt and capital lease obligations were approximately $1.697 billion. The Trust had no revolver borrowings against its $300 million facility, extended to July 27, 2011, and reported compliance with debt covenants. There were no scheduled debt maturities before 2011. Shareholders’ equity totaled $1.194 billion. Common dividends declared were $1.32 per share for the first half.
Material changes versus prior period
- Q2 revenue and operating income grew modestly; management attributed rental growth to same-center cost reimbursements, higher new and renewal rents, temporary tenants and improved redevelopment occupancy.
- First-half net income and EPS rose substantially, but the comparison benefits from a $20.6 million litigation-related provision recorded in 2009. FFO excluding that provision was lower year over year.
- In March 2010, the Trust issued $150 million of 5.90% senior notes due 2020 and used proceeds plus cash on hand to repay its remaining $250 million term loan. The payoff caused a $2.8 million early-extinguishment charge.
- Cash from operations declined, while capital investment was lower; investing outflows also included funding for a new Boston joint venture and mortgage lending.
Outlook, risks and unusual items
- Management described growth plans centered on redevelopment, acquisitions and same-center performance, without giving specific earnings or FFO guidance. It expected redevelopment projects with projected costs of about $29 million to stabilize in 2010 and $57 million in 2011.
- For Assembly Square, the Trust expected to invest $10 million to $30 million in 2010, net of expected public funding. It received $10 million of public funding for infrastructure work and said future development would be structured to mitigate risk.
- Management warned that tenant sales weakness, bankruptcies, early vacancies, rent relief requests and difficulty reletting space could pressure rents, occupancy, reimbursements and bad-debt expense. It also cited redevelopment execution, capital access, interest rates, financing covenants and REIT qualification risks.
- A Santana Row contractor-related lawsuit remained under appeal; the Trust accrued $16.4 million, and enforcement of the judgment was stayed pending appeal. Oral arguments were expected in late 2010.
- In a separate dispute, a court ordered Vornado to sell the land under Pentagon Row to the Trust and Post Properties for a combined net price of about $14.7 million. Vornado appealed; the judgment was stayed.
- Norwalk, Connecticut mortgage loans totaling about $18.7 million were in default and on non-accrual, with foreclosure proceedings filed. A July agreement required repayment by September 30, 2010, potentially extended to December 30; otherwise the Trust could receive deeds in lieu of foreclosure.
- Other items included a $1.0 million contractor settlement gain related to Santana Row and a $0.4 million condemnation gain. Management said results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q2 2010, not Q2 2009.
- Assess recurring operating growth separately from litigation-related comparison effects and property-sale or settlement gains; review FFO and its non-GAAP reconciliations.
- Monitor occupancy, tenant credit and leasing trends, as well as the timing, cost and stabilization of redevelopment projects.
- Track 2011 maturities and refinancing needs, available revolver capacity, covenant compliance and liquidity after the term-loan repayment.
- Follow the Santana Row and Pentagon Row appeals and the Norwalk loan repayment or foreclosure outcome.