FEDERAL REALTY INVESTMENT TRUST quarterly report, Q2 FY2011

Business context and reporting period

Federal Realty Investment Trust is a retail and mixed-use property REIT. The filing itself is a Form 10-Q for the quarter ended June 30, 2012; this differs from the request metadata, which specifies 2011 Q2. At quarter-end, the Trust owned or controlled 87 predominantly retail projects totaling approximately 19.2 million square feet; its portfolio was 94.2% leased and 93.4% occupied.

Financial performance and position

Unless otherwise noted, amounts are in U.S. dollars. Income-statement and cash-flow figures below are for the three or six months ended June 30, as indicated.

Property operating income was $104.1 million in Q2, up 8.9%; its share of total revenue was approximately 70.6%, compared with 70.1% a year earlier. For the first six months, property operating income rose 10.5% to $208.2 million, approximately 70.9% of revenue versus 68.8% in 2011. These are calculated ratios, not separately reported margins.

For the six months, net cash provided by operating activities was $149.9 million, investing cash outflow was $73.3 million, and financing cash outflow was $61.6 million. Cash increased $15.0 million to $82.8 million. The cash-flow statement reports six-month amounts; the MD&A summary table’s “three months” heading appears inconsistent with those figures.

At June 30, total assets were $3.681 billion, total liabilities $2.333 billion, and shareholders’ equity $1.266 billion. Reported mortgages, notes, senior notes and debentures totaled approximately $2.039 billion; capital lease obligations were $71.7 million, bringing debt and lease obligations to $2.110 billion. The $400 million revolving facility had no borrowings, and the Trust reported compliance with debt covenants. Cash plus undrawn revolver capacity provided substantial stated liquidity, though the filing does not give a single consolidated liquidity ratio.

Material changes versus the prior comparable period

• Q2 revenue rose 8.3%, chiefly reflecting 2011 property acquisitions; rental income increased 6.6%. Occupancy improved to 93.4% from 92.7% a year earlier.
• Q2 operating income increased, but continuing-operations income was nearly flat at $33.6 million. Interest expense rose 20.2% and depreciation and amortization rose 10.4%, partly offsetting property-level growth.
• Q2 net income and diluted EPS declined from 2011, when results included discontinued operations and gains related to a VIE deconsolidation and property sale. First-half net income rose 12.9%, including an $11.9 million gain recognized on the sale of the Newbury Street Partnership portfolio; first-half diluted EPS was $1.18 versus $1.05.
• First-half operating cash flow increased $31.2 million year over year, partly because 2011 included payment of a $16.2 million final judgment. Development and redevelopment capital spending also increased.
• Common shares issued under the ATM program generated $37.0 million net proceeds in the first half. The Trust had up to $283.7 million of capacity remaining at June 30 under its replacement $300 million program.

Outlook, commentary, risks and unusual items

• Management was cautiously optimistic about improved tenant and leasing trends but noted that some tenants remained under economic pressure or filed for bankruptcy. It expected modest short-term occupancy changes and viewed occupancy and rent increases as longer-term same-center growth drivers.
• Comparable-space leases signed in Q2 covered 356,000 square feet and carried average rent increases of 11% on a cash basis and 21% on a straight-line basis. Management cautioned that lease commencement, tenant possession and rent collection are uncertain, and that signed leases may not translate fully into future income.
• For 2012, the Trust expected approximately $55 million of redevelopment projects to stabilize; infrastructure investment at Assembly Row of $25–$35 million, net of expected public funding; and $45–$55 million of investment in Phase I of Pike & Rose. Assembly Row and Pike & Rose phases were expected to stabilize in 2015 and 2015/2016, respectively. Future phases would proceed subject to market conditions, returns and risk-mitigation opportunities.
• Management believed operating cash flow, cash, ATM proceeds, the revolver and capital-market access would fund operations, debt service and capital expenditures. It warned that market deterioration could lead to delayed projects, fewer acquisitions, reduced spending or reassessment of dividends.
• After quarter-end, the Trust repaid $175 million of 6.00% senior notes on July 16, 2012, and issued $250 million of 3.00% senior notes due 2022 on July 19, receiving approximately $244.7 million net proceeds.
• The $275 million term loan was effectively fixed at 3.17% through swaps. Swap fair value was a $10.4 million liability; the Trust expected $3.9 million to be reclassified as additional interest expense over the next 12 months. A 1% increase in rates was estimated to reduce annual income and cash flow by about $0.1 million on the $9.4 million of variable-rate debt outstanding at quarter-end.
• Risks include tenant nonpayment or bankruptcy, leasing and occupancy weakness, redevelopment cost or timing overruns, dependence on third parties and committed but not fully funded public support, access to capital, interest rates, covenant compliance and maintaining REIT status. Management said existing litigation was not expected to have a material adverse effect; Part II reported no legal proceedings. No material changes to previously disclosed risk factors were reported.
• The CFO transition was announced after quarter-end: James M. Taylor was expected to succeed Andrew Blocher on August 15, 2012.

Important facts for investors to verify

• Confirm the intended reporting period: the supplied filing is for Q2 2012, not Q2 2011.
• Assess how much revenue and operating-income growth came from acquisitions versus same-center performance, given the filing’s attribution to 2011 acquisitions and differing same-center trends.
• Track whether leasing spreads, occupancy and signed leases convert into occupied space and collected rent; Q2 leasing spreads are not a guarantee of future results.
• Review funding, returns and delivery risks for Assembly Row and Pike & Rose, including public funding and third-party execution dependencies.
• Monitor upcoming maturities, refinancing costs, covenant headroom and the effect of ATM share issuance on dilution; the July refinancing occurred after quarter-end.
• Distinguish recurring operating performance from the $11.9 million partnership-sale gain and compare GAAP earnings with FFO, which the Trust identifies as a non-GAAP measure.