SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: September 30, 2001
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Commission File No. 1-07533
-------------------------
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0782497
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301)998-8100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No_____.
-----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 2001
------------------------------ -------------------------------
Common Shares of Beneficial Interest 40,042,937
This report, including exhibits, contains 31 pages.
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 2001
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets
September 30, 2001 (unaudited) and
December 31, 2000 (audited) 4
Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 2001 and 2000 5
Consolidated Statements of Operations (unaudited)
Three months ended September 30, 2001 and 2000 6
Consolidated Statements
of Shareholders' Equity (unaudited)
Nine months ended September 30, 2001 and 2000 7
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2001 and 2000 8
Notes to Financial Statements 9-16
Management's Discussion and Analysis of 17-30
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 31
2
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 2001
PART I. FINANCIAL INFORMATION
The following financial information is submitted in response to
the requirements of Form 10-Q and does not purport to be financial
statements prepared in accordance with generally accepted accounting
principles since they do not include all disclosures which might be
associated with such statements. In the opinion of management, such
information includes all adjustments, consisting only of normal
recurring accruals, necessary to present a fair statement of the
results for the interim periods presented.
3
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
(unaudited)
ASSETS (in thousands)
Real estate, at cost
Operating $ 1,778,561 $ 1,679,289
Development 286,841 175,624
----------- -----------
2,065,402 1,854,913
Less accumulated depreciation and amortization (386,381) (351,258)
----------- -----------
1,679,021 1,503,655
Other Assets
Cash 14,636 11,357
Mortgage notes receivable 35,505 47,360
Accounts and notes receivable 13,718 13,092
Prepaid expenses and other assets, principally
property taxes and lease commissions 44,747 38,140
Debt issue costs, net of accumulated amortization
of $4,452 and $3,982, respectively 7,323 7,475
----------- -----------
$ 1,794,950 $ 1,621,079
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $ 100,264 $ 121,611
Mortgages and construction loans payable 310,399 218,541
Notes payable 295,884 209,005
Accounts payable and accrued expenses 68,985 36,810
Dividends payable 20,531 19,892
Security deposits 5,943 5,537
Prepaid rents 7,910 8,819
Senior notes and debentures 410,000 410,000
5 1/4% Convertible subordinated debentures 75,289 75,289
Investors' interest in consolidated assets 34,939 47,921
Commitments and contingencies
Shareholders' equity
Preferred stock, authorized 15,000,000 shares, $.01 par
7.95% Series A Cumulative Redeemable Preferred Shares, (stated at
liquidation preference $25 per share), 4,000,000 shares issued in 1997 100,000 100,000
Common shares of beneficial interest, $.01 par , 100,000,000 shares
authorized, 41,464,936 and 40,910,972 issued, respectively 415 410
Additional paid in capital 734,319 723,078
Accumulated dividends in excess of Trust net income (317,275) (306,287)
----------- -----------
517,459 517,201
Less: 1,452,926 and 1,441,594 common shares in treasury - at cost, respectively (27,990) (27,753)
Deferred compensation on restricted shares (15,715) (17,254)
Notes receivable from employee stock plans (4,194) (4,540)
Other comprehensive income (loss) (4,754) -
----------- -----------
464,806 467,654
----------- -----------
$ 1,794,950 $ 1,621,079
=========== ===========
The accompanying notes are an integral part of these consolidated statements
4
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine months ended September 30,
2001 2000
--------- ---------
(In thousands, except per share data)
Revenue
Rental income $ 205,137 $ 192,584
Interest and other income 5,275 5,759
Other property income 10,213 8,148
--------- ---------
220,625 206,491
Expenses
Rental 45,632 41,057
Real estate taxes 20,877 19,720
Interest 52,360 49,521
Administrative 9,971 9,035
Depreciation and amortization 44,110 39,433
--------- ---------
172,950 158,766
--------- ---------
Operating income before investors' share
of operations 47,675 47,725
Investors' share of operations (3,991) (4,772)
--------- ---------
Income before gain on sale of real estate 43,684 42,953
Gain on sale of real estate 7,898 3,681
--------- ---------
Net income 51,582 46,634
Dividends on preferred stock (5,963) (5,963)
--------- ---------
Net income available for common shareholders $ 45,619 $ 40,671
--------- ---------
Earnings per common share, basic
Income before gain on sale of real estate $ 0.97 $ 0.95
Gain on sale of real estate 0.20 0.10
--------- ---------
$ 1.17 $ 1.05
========= =========
Weighted average number of common shares, basic 39,061 38,812
--------- ---------
Earnings per common share, diluted
Income before gain on sale of real estate $ 0.96 $ 0.95
Gain on sale of real estate 0.20 0.09
--------- ---------
$ 1.16 $ 1.04
========= =========
Weighted average number of common shares, diluted 40,136 39,949
========= =========
The accompanying notes are an integral part of these consolidated statements.
5
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended September 30,
2001 2000
-------- --------
(In thousands, except per share data)
Revenue
Rental income $ 69,543 $ 64,101
Interest and other income 1,678 1,797
Other property income 4,303 2,683
-------- --------
75,524 68,581
Expenses
Rental 15,410 13,015
Real estate taxes 7,398 6,741
Interest 17,680 15,992
Administrative 3,516 3,245
Depreciation and amortization 15,153 13,440
-------- --------
59,157 52,433
-------- --------
Operating income before investors' share
of operations 16,367 16,148
Investors' share of operations (1,185) (1,727)
-------- --------
Net income 15,182 14,421
Dividends on preferred stock (1,988) (1,988)
-------- --------
Net income available for common shareholders $ 13,194 $ 12,433
======== ========
Earnings per common share, basic $ 0.34 $ 0.32
======== ========
Weighted average number of common shares, basic 39,347 38,695
======== ========
Earnings per common share, diluted $ 0.33 $ 0.32
======== ========
Weighted average number of common shares, diluted 40,492 39,774
======== ========
The accompanying notes are an integral part of these consolidated statements.
6
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(unaudited)
Nine months ended September 30,
2001 2000
------------------------------------ ---------------------------------------
(In thousands, except share data) Shares Amount Additional Shares Amount Additional
Paid-in Capital Paid-in Capital
Common Shares of Beneficial Interest
Balance, beginning of year 40,910,972 $ 410 $723,078 40,418,766 $ 404 $713,354
Exercise of stock options - - - 67,684 1 1,398
Shares issued to purchase partnership interests 328,116 3 6,759 - - -
Shares issued under dividend reinvestment plan 122,125 1 2,456 113,185 1 2,339
Performance and Restricted Shares granted, net
of Restricted Shares retired 103,723 1 2,026 267,385 3 5,123
---------- ---------- -------- ---------- ---------- --------
Balance, end of period 41,464,936 $ 415 $734,319 40,867,020 $ 409 $722,214
========== ========== ======== ========== ========== ========
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of year ($306,287) ($286,348)
Net income 51,582 46,634
Dividends declared to common shareholders (56,608) (53,945)
Dividends declared to preferred shareholders (5,962) (5,962)
---------- ----------
Balance, end of period ($317,275) ($299,621)
========== ==========
Common Shares of Beneficial Interest in Treasury
Balance, beginning of year (1,441,594) ($27,753) (217,644) ($4,334)
Performance and Restricted Shares forfeited (11,332) (237) (22,789) (470)
Purchase of treasury shares - - (1,185,400) (22,632)
---------- ---------- ---------- ----------
Balance, end of period (1,452,926) ($27,990) (1,425,833) ($27,436)
========== ========== ========== ==========
Deferred Compensation on Restricted Shares
Balance, beginning of year (735,875) ($17,254) (599,427) ($15,219)
Performance and Restricted Shares issued,
net of forfeitures (61,369) (1,176) (223,771) (4,256)
Vesting of Performance and Restricted Shares 115,202 2,715 82,323 2,116
---------- ---------- ---------- ----------
Balance, end of period (682,042) ($15,715) (740,875) ($17,359)
========== ========== ========== ==========
Subscriptions receivable from employee stock plans
Balance, beginning of year (242,638) ($4,540) (317,606) ($6,030)
Subscription loans issued (3,333) (70) (5,500) (115)
Subscription loans paid 25,189 416 70,699 1,453
---------- ---------- ---------- ----------
Balance, end of period (220,782) ($4,194) (252,407) ($4,692)
========== ========== ========== ==========
Accumulated other comprehensive income (loss)
Balance, beginning of year - -
Change in valuation on interest rate swap ($4,754) -
---------- ----------
Balance, end of period ($4,754) $ 0
========== ==========
Other comprehensive income
Net income $ 51,582 -
Change in valuation on interest rate swap (4,754) -
---------- ----------
Total other comprehensive income $ 46,828 $ 0
========== ==========
The accompanying notes are an integral part of these consolidated statements.
7
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended Sptember 30,
2001 2000
-------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 51,582 $ 46,634
Items not requiring cash outlays
Depreciation and amortization 44,110 39,433
(Gain) on sale of real estate (7,898) (3,681)
Other, net 2,549 1,486
Changes in assets and liabilities
(Increase) decrease in accounts receivable (682) 2,545
(Increase) in prepaid expenses and other
assets before depreciation and amortization (11,005) (6,277)
Increase in operating accounts payable,
security deposits and prepaid rent 54 2,529
Increase in accrued expenses 8,684 2,082
-------------------------------
Net cash provided by operating activities 87,394 84,751
INVESTING ACTIVITIES
Acquisition of real estate (58,089) (23,093)
Capital expenditures - development (113,855) (49,109)
Capital expenditures - other (32,855) (49,354)
Proceeds from sale of real estate 16,255 47,157
Repayments of mortgage notes receivable, net 3,377 2,187
-------------------------------
Net cash used in investing activities (185,167) (72,212)
FINANCING ACTIVITIES
Borrowing of short-term debt, net 87,000 155,700
Proceeds from mortgage and construction financing, net of costs 105,667 12,747
Maturity of senior notes -- (100,000)
Issuance of common shares 769 3,238
Common shares repurchased -- (22,632)
Payments on mortgages, capital leases and notes payable (31,273) (1,863)
Dividends paid (60,047) (57,588)
(Decrease) in minority interest, net (1,064) (153)
-------------------------------
Net cash provided by (used in) financing activities 101,052 (10,551)
-------------------------------
Increase in cash 3,279 1,988
Cash at beginning of period 11,357 11,738
-------------------------------
Cash at end of period $ 14,636 $ 13,726
===============================
The accompanying notes are an integral part of these consolidated statements.
8
Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the notes to financial statements included in
the Annual Report to shareholders for the year ended December 31, 2000 which
contain the accounting policies and other data of Federal Realty Investment
Trust (the "Trust").
The following table sets forth the reconciliation between basic and diluted
EPS:
Nine months ending Three months ending
September 30, September 30,
Numerator 2001 2000 2001 2000
Net income available for common
shareholders - basic $45,619 $40,671 $13,194 $12,433
Income attributable to operating partnership
units 1,049 1,022 289 278
------- ------- ------- -------
Net income available for common
shareholders - diluted $46,668 $41,693 $13,483 $12,711
======= ======= ======= =======
Denominator
Denominator for basic EPS-
Weighted average shares 39,061 38,812 39,347 38,695
Effect of diluted securities
Stock options and awards 170 160 240 157
Operating partnership units 905 977 905 922
------- ------- ------- -------
Denominator for diluted EPS 40,136 39,949 40,492 39,774
======= ======= ======= =======
Risk Management. Upon adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001, the Trust had no
derivatives and thus there was no transition adjustment upon adoption. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposure to certain risks. The Trust enters into
derivative contracts, which qualify as cash flow hedges, in order to manage
interest rate risk. Derivatives are not purchased for speculation. During the
first nine months of 2001, the Trust entered into interest rate swaps, which
fixed the interest rate at 6.22% on notional amounts totaling $125 million to
hedge its exposure to increasing interest rates on its variable rate $125
million term loan. The interest rate swaps mature concurrently with the $125
million term loan on December 19, 2003. The swaps were documented as cash flow
hedges and designated as effective at inception of the swap contract.
Consequently, the unrealized gain or loss upon measuring the swaps at their fair
value is recorded as a
9
component of other comprehensive income within stockholders' equity and either a
derivative instrument asset or liability is recorded on the balance sheet. At
September 30, 2001, an expense of $4,754,000, representing the difference
between the current market value and the 6.22% fixed interest rate on the swap,
was recorded in other comprehensive income with a corresponding derivative
liability on the balance sheet. Interest expense of approximately $2,153,000
will be reclassified from other comprehensive income into current earnings over
the next twelve months to bring the effective interest rate up to 6.22%.
Certain components of real estate, mortgages and construction loans
payable and notes payable on the December 31, 2000 Balance Sheet have been
reclassified to conform to current period reporting classifications.
NOTE B - REAL ESTATE ASSETS
On February 16, 2001 the Trust bought the fee interest underlying the
capital lease obligation of $21.4 million, thereby terminating the capital
lease, on Brick Plaza in Brick, New Jersey for a purchase price of $28 million.
A mortgage note receivable of $3.2 million owed to the Trust by the lessor and a
$3 million security deposit on the capital lease were credited to the purchase
price, resulting in a cash outlay of approximately $21.5 million.
On March 1, 2001 the limited partners in two partnerships, owning
street retail properties in southern California, exercised their rights under
the partnership agreements and put their interests to the Trust. The Trust
purchased their interests for $18.1 million, $11.4 million in cash, which was
paid at closing, and the balance in common shares of the Trust. 328,116 shares
valued at $6.7 million were issued to the limited partners on June 19, 2001. The
Trust estimates that an additional $1.2 million to $1.5 million will be owed to
the limited partners upon completion of certain leasing transactions.
In connection with the buyout of the minority partner at Santana Row in
a transaction being structured as a tax-free exchange the Trust made an
investment in an office building for $8.5 million. Upon consummation of the
exchange, the Trust will receive the minority interest in Santana Row and $5.9
million in cash in exchange for the building.
On April 27, 2001 the Trust sold the Williamsburg Shopping Center in
Williamsburg, Virginia for $16.7 million resulting in a gain of $7.9 million.
The proceeds from the sale were held by a qualified intermediary until the
execution of a tax-free exchange for Friendship Center.
On September 21, 2001 the Trust purchased Friendship Center, a 119,000
square foot street retail property in Washington, D.C. for $33.4 million. The
purchase price was funded from the proceeds from the sale of Williamsburg
Shopping Center and a $17.0 million mortgage loan.
10
NOTE C - MORTGAGE NOTES RECEIVABLE
The Trust made additional loans of $823,000 on properties located in
Manayunk, Pennsylvania to existing borrowers with an average weighted interest
rate of 10.0%. During the first nine months of 2001 $4.2 million of notes
secured by properties located in Philadelphia, Pennsylvania were repaid to the
Trust.
NOTE D - MORTGAGES AND NOTES PAYABLE
At September 30, 2001 there was $165.0 million borrowed under the
Trust's syndicated credit facility. The maximum drawn during the first nine
months of 2001 was $183.5 million. The weighted average interest rate on
borrowings for the nine months ended September 30, 2001 was 5.3%. The facility
requires fees and has various covenants including the maintenance of a minimum
shareholders' equity and a maximum ratio of debt to net worth. At September 30,
2001 the Trust is in compliance with all loan covenants.
At September 30, 2001 there was $22.4 million borrowed under the
construction loan for the Trust's Woodmont East development in Bethesda,
Maryland. The loan, which has a floating interest rate of LIBOR plus 120 to 150
basis points, depending on occupancy levels, matures August 29, 2002 with two
one-year extension options. No principal payments are due until maturity. The
property secures the construction loan facility.
On April 12, 2001 the Trust obtained a $33 million mortgage loan
secured by Brick Plaza in Brick, New Jersey. The mortgage, which bears interest
at 7.415%, matures November 15, 2015. The loan provides for interest only
payments for the initial 29 months, then monthly principal and interest payments
based on a twenty-seven year amortization schedule until the maturity date. The
proceeds from the mortgage loan were used to fund the purchase of the fee
interest of Brick Plaza (see Note B).
On April 17, 2001 the Trust closed on a $295 million construction loan
for Santana Row in San Jose, California. The loan, which initially bears
interest at LIBOR plus 212.5 basis points, matures April 16, 2004 with two
one-year extension options, subject to obtaining certain operating targets. The
interest rate will decrease to LIBOR plus 187.5 basis points and then to LIBOR
plus 162.5 basis points upon the achievement of certain leasing, occupancy and
net operating income hurdles. The construction loan requires fees and has
various covenants including the maintenance of a minimum
11
shareholders' equity and a maximum ratio of debt to gross asset value. The
initial funding of the construction loan took place on August 23, 2001 when the
equity and pre-leasing requirements were met. As of September 30, 2001, $23.0
million was borrowed under the loan. As of October 31, 2001, $43.0 million was
borrowed under the loan.
On May 3, 2001 the Trust refinanced the mortgage loan secured by
Federal Plaza in Rockville, Maryland. The new $36.5 million mortgage loan bears
interest at 6.75% and matures on June 1, 2011. The loan provides for monthly
principal and interest payments of $236,700 based on a thirty year amortization
schedule until the maturity date. The proceeds from the refinancing were first
used to payoff the outstanding mortgage balance on the property of $26.5
million. The remaining proceeds were used to pay down on the Trust's syndicated
credit facility.
On August 30, 2001 the Trust refinanced the mortgage loan secured by
Tyson's Station in Falls Church, Virginia. The new $7.0 million mortgage bears
interest at 7.4% and matures on September 1, 2011. The loan provides for monthly
principal and interest payments of $51,300 based on a twenty-five year
amortization schedule until the maturity date. The proceeds from the refinancing
were first used to payoff the outstanding mortgage balance on the property of
$3.9 million. The remaining proceeds were used to pay down on the Trust's
syndicated credit facility.
In connection with the purchase of Friendship Center in Washington,
D.C. on September 21, 2001 the Trust placed a $17.0 million mortgage on the
property. The loan, which bears interest at LIBOR plus 135 basis points, matures
September 22, 2003 with three one-year extension options. The loan provides for
interest only payments through maturity.
NOTE E - SHAREHOLDERS' EQUITY
During the first nine months of 2001, options for 417,500 shares at
prices ranging from $19.60 to $19.93 per share, fair market value at the dates
of award, were awarded to certain employees and Trustees of the Trust. The
options vest over three years.
NOTE F - INTEREST EXPENSE
The Trust incurred interest expense totaling $65.1 million during the
first nine months of 2001 and $58.5 million during the first nine months of 2000
of which $12.7 million and $9.0 million, respectively, was capitalized in
connection with development projects. Interest paid was $56.8 million in the
first nine months of 2001 and $56.7 million in the first nine months of 2000.
12
NOTE G - COMMITMENTS AND CONTINGENCIES
Pentagon Row is a mixed-use project with the retail component being
developed by the Trust and the residential component being developed by an
unrelated developer. In October 2000 the general contractor on the project was
replaced by the Trust and the residential developer, because of schedule delays
and other events that caused the Trust and the residential developer to conclude
that the original contractor was either unable or unwilling to comply with its
contractual obligations. The Trust and the residential developer filed suit
against the original contractor to recover damages that are being incurred as a
result of defaults under the contract. Though not quantifiable until the project
is completed, the combined damage claim is estimated to be in excess of $40.0
million. The original contractor filed a counter-claim against the Trust and the
residential developer for damages of $7 million plus interest, attorneys' fees
and litigation costs. The Trust believes that the counterclaim is generally
without merit and that the outcome of the counterclaim will not have a material
adverse effect on its financial condition, results of operations or on the
project. Work continues under the direction of the new general contractor. Due
to the delay and other costs associated with the change in the general
contractor the estimated total cost of the project is now $87 million, with an
estimated stabilized return on total cost of approximately 9%, if there is no
significant recovery of damages from the original general contractor. The cost
of prosecuting this lawsuit, currently estimated at $1.0 million to $1.5
million, will flow through earnings as it is incurred.
In addition, the Trust is involved in various lawsuits and
environmental matters arising in the normal course of business. Management
believes that such matters will not have a material effect on the financial
condition or results of operations of the Trust.
Under the terms of the Congressional Plaza partnership agreement, from
and after January 1, 1986, Rockville Plaza Company, an unaffiliated third party,
has the right to require the Trust and the two other minority partners to
purchase from half to all of Rockville Plaza Company's 37.5% interest in
Congressional Plaza at the interest's then-current fair market value. Based on
management's current estimate of fair market value, the Trust's estimated
liability upon exercise of the put option is approximately $27 million.
Under the terms of seven other partnership agreements, if certain
leasing and revenue levels are obtained for the properties owned by the
partnerships, the limited partners may require the Trust to purchase their
partnership interests at a formula price based upon net operating income. The
purchase price may be paid in cash, or for four of the partnerships, a limited
number of common shares of the Trust at the election of the limited partners. In
certain of the partnerships, if the limited partners do not redeem their
interest, the Trust may choose to purchase the limited partnership interests
upon the same terms.
Under the terms of other partnerships, the partners may exchange their
904,589 operating units for cash or exchange into the same number of common
shares of the Trust, at the option of the Trust.
13
NOTE H - COMPONENTS OF RENTAL INCOME
The components of rental income for the periods ended September 30 are
as follows (in thousands):
Nine months Three months
2001 2000 2001 2000
---- ---- ---- ----
Retail Properties
Minimum rents $164,924 $155,181 $ 56,135 $ 51,134
Cost reimbursements 33,857 31,075 11,692 11,112
Percentage rents 4,149 4,253 970 1,156
Apartments 2,207 2,075 746 699
-------- -------- -------- --------
$205,137 $192,584 $ 69,543 $ 64,101
======== ======== ======== ========
14
NOTE I - SEGMENT INFORMATION
The Trust operates its portfolio of properties in three geographic
operating regions: Northeast, Mid-Atlantic and West.
A summary of the Trust's operations by geographic region is presented below
(in thousands):
Nine months ended Mid-
September 30, 2001 Northeast Atlantic West Other Total
-------------------------------------------------------------------------------------------------------------------------
Rental income $ 88,838 $ 90,408 $ 25,891 $ 205,137
Other income 4,123 4,343 1,747 10,213
Rental expense (18,074) (19,379) (8,179) (45,632)
Real estate tax (11,669) (7,206) (2,002) (20,877)
-------- -------- -------- ----------
Net operating income 63,218 68,166 17,457 148,841
Interest income $ 5,275 5,275
Interest expense (52,360) (52,360)
Administrative expense (9,971) (9,971)
Depreciation and
Amortization (20,520) (17,586) (5,298) (706) (44,110)
-------- -------- -------- --------- ----------
Income before investors'
share of operations $ 42,698 $ 50,580 $ 12,159 ($57,762) $ 47,675
======== ======== ======== ========= ==========
Capital expenditures $ 11,756 $ 76,775 $136,155 $ 224,686
======== ======== ======== ==========
Real estate assets $765,507 $783,089 $516,806 $2,065,402
======== ======== ======== ==========
Nine months ended Mid-
September 30, 2000 Northeast Atlantic West Other Total
--------------------------------------------------------------------------------------------------------------------------
Rental income $ 83,991 $ 83,956 $ 24,637 $ 192,584
Other income 3,082 2,954 2,112 8,148
Rental expense (17,057) (17,939) (6,061) (41,057)
Real estate tax (10,741) (6,762) (2,217) (19,720)
--------- -------- -------- ----------
Net operating income 59,275 62,209 18,471 139,955
Interest income $ 5,759 5,759
Interest expense (49,521) (49,521)
Administrative expense (9,035) (9,035)
Depreciation and
Amortization (18,702) (16,140) (3,880) (711) (39,433)
--------- -------- -------- --------- ----------
Income before investors' share
of operations $ 40,573 $ 46,069 $ 14,591 ($53,508) $ 47,725
========= ======== ======== ========= ==========
Capital expenditures $ 32,706 $ 39,322 $ 58,910 $ 130,938
========= ======== ======== ==========
Real estate assets $ 748,136 $699,666 $356,384 $1,804,186
========= ======== ======== ==========
15
Three months ended Mid-
September 30, 2001 Northeast Atlantic West Other Total
------------------------------------------------------------------------------------------------------------------------------
Rental income $ 30,399 $ 30,025 $ 9,119 $ 69,543
Other income 1,920 1,702 681 4,303
Rental expense (5,651) (6,875) (2,884) (15,410)
Real estate tax (4,129) (2,598) (671) (7,398)
-------- -------- -------- ----------
Net operating income 22,539 22,254 6,245 51,038
Interest income $ 1,678 1,678
Interest expense (17,680) (17,680)
Administrative expense (3,516) (3,516)
Depreciation and Amortization (6,930) (5,904) (2,053) (266) (15,153)
-------- -------- -------- --------- ----------
Income before investors' share
of operations $ 15,609 $ 16,350 $ 4,192 ($19,784) $ 16,367
======== ======== ======== ========= ==========
Capital expenditures $ 2,651 $ 45,690 $ 36,242 $ 84,583
======== ======== ======== ==========
Real estate assets $765,507 $783,089 $516,806 $2,065,402
======== ======== ======== ==========
Three months ended Mid-
September 30, 2000 Northeast Atlantic West Other Total
------------------------------------------------------------------------------------------------------------------------------
Rental income $ 28,937 $ 28,146 $ 7,018 $ 64,101
Other income 1,088 846 749 2,683
Rental expense (5,294) (5,811) (1,910) (13,015)
Real estate tax (3,709) (2,410) (622) (6,741)
-------- -------- -------- ----------
Net operating income 21,022 20,771 5,235 47,028
Interest income $ 1,797 1,797
Interest expense (15,992) (15,992)
Administrative expense (3,245) (3,245)
Depreciation and Amortization (6,440) (5,485) (1,290) (225) (13,440)
-------- -------- -------- --------- ----------
Income before investors' share
of operations $ 14,582 $ 15,286 $ 3,945 ($17,665) $ 16,148
======== ======== ======== ========= ==========
Capital expenditures $ 7,722 $ 17,663 $ 17,932 $ 43,317
======== ======== ======== ==========
Real estate assets $748,136 $699,666 $356,384 $1,804,186
======== ======== ======== ==========
There are no transactions between geographic areas.
16
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
September 30, 2001
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of Federal Realty Investment
Trust (the "Trust"). The Trust and its representatives may from time to time
make written or oral statements that are "forward-looking", within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievement's of the Trust to be
materially different from the results of operations or plans expressed or
implied by such forward-looking statements. Such factors include, among others,
. changes in our business strategy;
. general economic and business conditions which will affect the credit
worthiness of tenants;
. financing availability and cost;
. retailing trends and rental rates;
. risks of real estate development and acquisitions, including the risk that
potential acquisitions or development projects may not perform in accordance
with expectations;
. our ability to satisfy the complex rules in order to qualify for taxation as a
REIT for federal income tax purposes and to operate effectively within the
limitations imposed by these rules;
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and changes in laws and
regulations or the interpretation thereof; and
. competition with other real estate companies and technology.
We identify forward-looking statements by using words or phrases such as
"anticipate", "believe", "estimate", "expect", "intend", "may be", "objective",
"plan", "predict", "project", and "will be" and similar words or phrases, or the
negatives thereof or other similar variations thereof or comparable terminology.
We undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
17
LIQUIDITY AND CAPITAL RESOURCES
Federal Realty meets its liquidity requirements through net cash provided
by operating activities, along with traditional debt and equity funding
alternatives available to it. A significant portion of cash provided by
operating activities is distributed to common and preferred shareholders in the
form of dividends. Accordingly, capital outlays for property acquisitions, major
renovation and development projects and balloon debt repayments require debt or
equity funding. At times, proceeds from the sale of selected assets may also
provide an additional source of capital. Since 1988, the Trust has relied
primarily on debt to fund these capital needs, and accordingly, debt as a
percentage of total capitalization has steadily increased over that period. In
the future, the Trust will look to common, preferred or joint-venture equity in
addition to debt to fund longer term growth needs.
Net cash provided by operating activities was $87.4 million in the first
nine months of 2001 and $84.8 million in the first nine months of 2000 of which
$60.0 million and $57.6 million, respectively, was distributed to shareholders.
Contributions from retenanted and redeveloped properties, as well as, increased
lease termination fees, as more fully described below, were the primary sources
of these increases.
Net cash used in investing activities was $185.2 million during the first
nine months of 2001 and $72.2 million during the first nine months of 2000. Cash
outlays for acquiring real estate totaled $58.1 million in the first nine months
of 2001 and $23.1 million in the first nine months of 2000. During these two
periods, the Trust expended an additional $146.7 million and $98.5 million,
respectively, in capital improvements to its properties. The Trust invested
$823,000 during the first nine months of 2001 and $3.7 million during the first
nine months of 2000 in mortgage notes receivable with an average weighted
interest rate of 10%. During the first nine months of 2001 and 2000,
respectively, $4.2 million and $5.9 million of mortgage notes receivable were
repaid. Cash of $16.3 million in the first nine months of 2001 and $47.2 million
in the first nine months of 2000 was received from the sale of properties.
On February 16, 2001 the Trust bought the fee interest underlying the
capital lease obligation of $21.4 million, thereby terminating the capital
lease, on Brick Plaza in Brick, New Jersey for a purchase price of $28 million.
A mortgage note receivable of $3.2 million owed to the Trust by the lessor and a
$3 million security deposit on the capital lease were credited to the purchase
price, resulting in a cash outlay of approximately $21.5 million.
On March 1, 2001 the limited partners in two partnerships, owning street
retail properties in southern California, exercised their rights under the
partnership agreements and put their interests to the Trust. The Trust purchased
their interests for $18.1 million, $11.4 million in cash, which was paid at
closing, and the balance in common shares of the Trust. 328,116 shares valued at
$6.7 million were issued to the limited partners on June 19, 2001. The Trust
estimates that an additional $1.2 million to $1.5 million will be owed to the
limited partners upon completion of certain leasing transactions.
18
In connection with the buyout of the minority partner at Santana Row in a
transaction being structured as a tax-free exchange the Trust made an equity
investment of $2.6 million and a loan of $5.9 million to a partnership which
purchased a building for $8.5 million. Upon consummation of the exchange, the
Trust will receive the minority interest in Santana Row and repayment of its
$5.9 million loan in exchange for its $2.6 million investment in the building.
On April 27, 2001 the Trust sold the Williamsburg Shopping Center in
Williamsburg, Virginia for $16.7 million resulting in a gain of $7.9 million.
The proceeds from the sale were held by a qualified intermediary until the
execution of a tax-free exchange for Friendship Center.
On September 21, 2001 the Trust purchased Friendship Center, a 119,000
square foot street retail property in Washington, D.C. for $33.4 million. The
purchase price was funded from the proceeds from the sale of Williamsburg
Shopping Center and a $17.0 million mortgage loan.
Of the $146.7 million spent in the first nine months of 2001 on the Trust's
existing real estate portfolio, approximately $113.9 million was invested in
development projects in Bethesda, Maryland; San Jose, California; and in
Arlington, Virginia. The remaining $32.8 million of capital expenditures relates
to improvements to common areas, tenant work and various redevelopments,
including the office expansion and retenanting of Willow Lawn Shopping Center,
the renovation of Brunswick Shopping Center, the redevelopment of retail
buildings in San Antonio, Texas and the redevelopment and retenanting of certain
of the Trust's California street retail buildings.
Net cash provided by financing activities, before dividend payments, was
$161.1 million in the first nine months of 2001 and $47.0 million in the first
nine months of 2000. In most cases, the Trust utilizes its unsecured line of
credit to fund acquisitions and capital expenditures prior to obtaining
permanent financing for these expenditures. At September 30, 2001 there was
$165.0 million borrowed under this syndicated credit facility. The maximum drawn
during the first nine months of 2001 was $183.5 million. The weighted average
interest rate on borrowings for the nine months ended September 30, 2001 was
5.3%. The facility requires fees and has various covenants including the
maintenance of a minimum shareholders' equity and a maximum ratio of debt to net
worth. At September 30, 2001 the Trust is in compliance with all loan covenants.
19
On April 12, 2001 the Trust obtained a $33 million mortgage loan secured by
Brick Plaza in Brick, New Jersey. On May 3, 2001 the Trust refinanced the $26.5
million mortgage loan secured by Federal Plaza in Rockville, Maryland by placing
a new $36.5 million mortgage loan on the property. On August 30, 2001 the Trust
refinanced the $3.9 million mortgage loan secured by Tyson's Station in Falls
Church, Virginia by placing a new $7.0 million mortgage on the property. In
connection with the purchase of Friendship Center in Washington, D.C. on
September 21, 2001 the Trust placed a $17.0 million mortgage on the property.
Capital requirements for the remainder of 2001 will depend on the rate of
build-out on the Trust's current developments and the level of improvements and
redevelopments on existing properties. Current requirements for the remainder
of 2001 for these projects are approximately $55 million. The Trust's unsecured
line of credit and the $290 million Santana Row construction loan will be
available to fund these needs.
Longer term, the Trust will need additional capital in order to fund
acquisitions, expansions and any new developments, including future phases of
Santana Row, and to refinance its maturing debt. In light of the current
economic climate, the Trust is assessing its development pipeline and any new
development initiatives will be conservatively underwritten before any work is
commenced. Sources of this future funding may be additional debt, both secured
and unsecured, additional equity and joint venture relationships.
Santana Row
For the balance of 2001 and 2002, the Trust's single largest capital use is
the development of Santana Row, a multi-phase mixed-use project being built on
42 acres in San Jose, California in the heart of Silicon Valley. The project
will consist of residential, retail and hotel components, creating a community
with the feel of an urban district. Phase 1 of the project, includes Santana
Row, the "1,500 foot long main street" and nine buildings which will contain
approximately 538,000 square feet of retail space, 501 residential units, a
214 room hotel and the supporting infrastructure. Eight buildings comprising
440,000 square feet of retail space, are expected to be completed during the
third quarter of 2002 with the ninth being completed twelve to eighteen months
later. The total cost of Phase 1 is expected to be approximately $475 million.
As of September 30, 2001, the Trust has incurred costs of $202 million
including the purchase of the land; the Trust estimates that it will spend
approximately $36.6 million in the last three months of 2001 and most of the
balance of the cost in 2002 to complete the first phase of the project.
20
On April 17, 2001, the Trust closed on a $295 million construction loan.
The loan, which initially bears interest at LIBOR plus 212.5 basis points,
matures April 16, 2004 with two one-year extension options, subject to obtaining
certain operating targets. The interest rate will decrease to LIBOR plus 187.5
basis points then to LIBOR plus 162.5 basis points upon the achievement of
certain leasing, occupancy and net operating income hurdles. The construction
loan requires fees and has various covenants including the maintenance of a
minimum shareholders' equity and a maximum ratio of debt to gross asset value.
The initial funding of the construction loan took place on August 23, 2001 when
the equity and pre-leasing requirements were met. As of September 30, 2001,
$23.0 million was borrowed under the loan. As of October 31, 2001, $43.0 million
was borrowed under the loan.
The success of Santana Row will depend on many factors which cannot be
assured and are not entirely within the Trust's control. These factors include
among others, the demand for retail and residential space and at what prices,
the ability to construct the current and later phases at reasonable prices, the
cost of operations, including utilities and insurance, the availability and cost
of capital and the general economy, particularly in the Silicon Valley.
The Trust has not finalized the cost and scope for future phases of Santana
Row and will not do so until the success of Phase 1 and future demand for rental
space can be determined. However, as Phase 1 utilizes only part of the retail
and residential entitlements of the property and as Phase 1 contains
infrastructure for further phases, the Trust expects to identify and execute
economically viable additional phases to the project.
CONTINGENCIES
Pentagon Row is a mixed-use project with the retail component being
developed by the Trust and the residential component being developed by an
unrelated developer. In October 2000 the general contractor on the project was
replaced by the Trust and the residential developer, because of schedule delays
and other events that caused the Trust and the residential developer to conclude
that the original contractor was either unable or unwilling to comply with its
contractual obligations. The Trust and the residential developer filed suit
against the original contractor to recover damages that are being incurred as a
result of defaults under the contract. Though not quantifiable until the project
is completed, the combined damage claim is estimated to be in excess of $40.0
million. The original contractor filed a counter-claim against the Trust and the
residential developer for damages of $7 million plus interest, attorneys' fees
and litigation costs. The Trust believes that the counterclaim is generally
without merit and that the outcome of the counterclaim will not have a material
adverse effect on its financial condition, results of operations or on the
project. Work continues under the direction of the new general contractor. Due
to the delay and other costs associated with the change in the general
contractor the estimated total cost of
21
the project is now $87 million, with an estimated stabilized return on total
cost of approximately 9%, if there is no significant recovery of damages from
the original general contractor. The cost of prosecuting this lawsuit, currently
estimated at $1.0 million to $1.5 million, will flow through earnings as it is
incurred.
In addition, the Trust is involved in various lawsuits and environmental
matters arising in the normal course of business. Management believes that such
matters will not have a material effect on the financial condition or results of
operations of the Trust.
Under the terms of the Congressional Plaza partnership agreement, from and
after January 1, 1986 Rockville Plaza Company, an unaffiliated third party, has
the right to require the Trust and the two other minority partners to purchase
from half to all of Rockville Plaza Company's 37.5% interest in Congressional
Plaza at the interest's then-current fair market value. Based on management's
current estimate of fair market value, the Trust's estimated liability upon
exercise of the put option is approximately $27 million.
Under the terms of seven other partnership agreements, if certain leasing
and revenue levels are obtained for the properties owned by the partnerships,
the limited partners may require the Trust to purchase their partnership
interests at a formula price based upon net operating income. The purchase price
may be paid in cash, or for four of the partnerships, a limited number of common
shares of the Trust at the election of the limited partners. In certain of the
partnerships, if the limited partners do not redeem their interest, the Trust
may choose to purchase the limited partnership interests upon the same terms.
Under the terms of other partnerships, the partners may exchange their
904,589 operating units for cash or exchange into the same number of common
shares of the Trust, at the option of the Trust.
RESULTS OF OPERATIONS
---------------------
Net income and funds from operations have been affected by the Trust's
recent acquisition, development, redevelopment and financing activities. The
Trust has historically reported its funds from operations in addition to its net
income and net cash provided by operating activities. Funds from operations is a
supplemental measure of real estate companies' operating performance. The
National Association of Real Estate Investment Trusts ("NAREIT") defines funds
from operations as follows: income available for common shareholders before
depreciation and amortization of real estate assets and before extraordinary
items less gains on sale of real estate. Funds from operations does not replace
net income as a measure of performance or net cash provided by operating
activities as a measure of liquidity. Rather, funds from operations has been
adopted by real estate investment trusts to provide a consistent measure of
operating performance in the industry. Nevertheless, funds from operations, as
presented by the Trust, may not be comparable to funds from operations as
presented by other real estate investment trusts.
22
The reconciliation of net income to funds from operations is as follows:
Nine months ending Three months ending
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income available for common $ 45,619 $ 40,671 $ 13,194 $ 12,433
shareholders - basic
(Gain) on sale of (7,898) (3,681) _ _
real estate
Depreciation and amortization of 40,139 35,852 13,764 12,229
real estate assets
Amortization of initial direct 3,015 2,597 1,039 897
costs of leases
Income attributable to operating 1,049 1,022 289 278
partnership units -------- -------- -------- --------
Funds from operations for common
shareholders $ 81,924 $ 76,461 $ 28,286 $ 25,837
======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
Consolidated Results
--------------------
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 6.5% from $192.6 million in the first nine months of 2000
to $205.1 million in the first nine months of 2001. On a same center basis,
rental income increased 6.7%, due primarily to the favorable impact of
redeveloped and retenanted centers, as well as, increases associated with lease
rollovers and increased cost recoveries. Same center basis, in 2001 excludes
Williamsburg Shopping Center in Williamsburg, Virginia and Peninsula Shopping
Center in Palos Verdes, California, which were sold on April 27, 2001 and June
30, 2000, respectively, as well as, properties acquired and properties under
development in 2000 and 2001, including Woodmont East in Bethesda, Maryland,
Pentagon Row in Arlington, Virginia, 214 Wilshire Boulevard in Santa Monica,
California and Town & Country Shopping Center in San Jose, California.
Other property income includes items, which although recurring, tend to
fluctuate from period to period, such as utility reimbursements, telephone
income, merchant association dues, late fees and temporary tenant income. Also
included are less regularly recurring items, such as lease termination fees.
Other property income increased 25.3% from $8.1 million in the first nine months
of 2000 to $10.2 million in the first nine months of 2001 due primarily to
increases in lease termination fees of $1.0 million and parking income. On a
same center basis, other property income increased 17.7%.
Rental expenses increased 11.1% from $41.1 million in the first nine months
of 2000 to $45.6 million in the first nine months of 2001. Increased leasing and
marketing costs associated with the Trust's development projects, as well as,
operating costs associated
23
with the Woodmont East development were a major component of this overall
increase. While on a same center basis, rental expenses increased 6.7% from
$39.5 million in 2000 to $42.1 million in 2001, primarily due to increased snow
removal and property management costs in 2001, rental expense as a percentage of
property income, rental income plus other property income, remained constant in
both periods at 21%.
Real estate taxes increased 5.9% from $19.7 million in the first nine
months of 2000 to $20.9 million in the first nine months of 2001. On a same
center basis, real estate taxes increased 7.8% due primarily to increased taxes
on recently redeveloped properties.
Depreciation and amortization expenses increased 11.9% from $39.4 million
in the first nine months of 2000 to $44.1 million in the first nine months of
2001 reflecting the impact of recent new development, tenant work and property
redevelopments.
During the first nine months of 2001 the Trust incurred interest expense of
$65.1 million, of which $12.7 million was capitalized, as compared to 2000's
$58.5 million, of which $9.0 million was capitalized. The increase in interest
expense reflects the additional debt issued to fund the Trust's acquisitions and
capital improvement programs. To mitigate its exposure to increases in variable
interest rates, the Trust has entered into interest rate swaps on its $125
million term loan which locks the interest rate on this loan at 6.22%. The ratio
of earnings to combined fixed charges and preferred dividends was 1.35x and
1.43x for the first nine months of 2001 and 2000, respectively. The ratio of
earnings to fixed charges was 1.5x and 1.6x during the first nine months of 2001
and 2000, respectively. The ratio of funds from operations to combined fixed
charges and preferred dividends was 2.0x in both the first nine months of 2001
and 2000.
Administrative expenses as a percentage of revenue remained fairly constant
at 4.4% and 4.5% of revenue in 2000 and 2001, respectively.
On April 27, 2001 the Trust sold the Williamsburg Shopping Center in
Williamsburg, Virginia for $16.7 million resulting in a gain of $7.9 million. In
the second quarter of 2000 the Trust sold the 296,000 square foot Peninsula
Shopping Center located in Palos Verdes, California for $48.6 million resulting
in a gain of $3.7 million.
As a result of the foregoing items, net income before gain on the sale of
real estate increased from $43.0 million in the first nine months of 2000 to
$43.7 million in the first nine months of 2001, while net income increased from
$46.6 million during the first nine months of 2000 to $51.6 million during the
first nine months of 2001 and net income available for common shareholders
increased from $40.7 million to $45.6 million.
24
Growth in 2002 will continue to be primarily dependent on contributions
from the core portfolio. Growth of net income from the core portfolio is, in
part, dependent on the financial health of the Trust's tenants and on
controlling expenses, some of which are beyond the complete control of the
Trust, such as snow removal, insurance and real estate tax assessments and the
general economy. The current weakening of the retail and overall economic
environment could adversely impact the Trust by increasing vacancies and
decreasing rents. In past weak retail and real estate environments, however,
the Trust has been able to replace weak and bankrupt tenants with stronger
tenants; management believes that due to the quality of the Trust's properties
there will continue to be demand for its space. Growth in the core portfolio
however, will be offset by expenses at Santana Row. Leasing, marketing and
pre-opening expenses at Santana Row prior to its opening in August 2002 and
additional depreciation and interest expense as the project is phased into
operations will have a dilutive effect on 2002 earnings.
Growth in net income is also dependent on the amount of leverage and
interest rates. The Trust's leverage is increasing as it finances its
development pipeline. In addition, to the extent variable-rate debt is unhedged,
the Trust will continue to have exposure to changes in market interest rates. If
interest rates increase, net income and funds from operations, as well as the
ultimate cost of the Trust's development projects will be negatively impacted.
Segment Results
---------------
The Trust operates its portfolio of properties in three geographic
operating regions: Northeast, Mid-Atlantic and West.
Historical operating results for the three regions are as follows (in
thousands):
For the nine months ended September 30,
2001 2000
--------------------------------------------------------------------------------
Rental income
Northeast $ 88,838 $ 83,991
Mid-Atlantic 90,408 83,956
West 25,891 24,637
-------- --------
Total $205,137 $192,584
======== ========
Net operating income
Northeast $ 63,218 $ 59,275
Mid-Atlantic 68,166 62,209
West 17,457 18,471
-------- --------
Total $148,841 $139,955
======== ========
25
The Northeast
-------------
The Northeast region is comprised of fifty-four assets, extending from
suburban Philadelphia north through New York and its suburbs into New England
and west to Illinois and Michigan.
When comparing the first nine months of 2001 with 2000, rental income, on
an overall and same center basis, increased 5.8% from $84.0 million in 2000 to
$88.8 million in 2001, primarily due to increases at recently redeveloped and
retenanted shopping centers and street retail properties, such as Greenlawn,
Blue Star, Brunswick, Fresh Meadows, and Austin Street.
Net operating income increased 6.7% from $59.3 million in 2000 to $63.2
million in 2001, primarily due to increases at the recently redeveloped and
retenanted shopping centers and street retail properties, as well as, increased
lease termination fees of $890,000 in 2001 over 2000's $265,000.
The Mid-Atlantic
----------------
The Mid-Atlantic region is comprised of thirty-two assets, including
Pentagon Row, which is currently under development, extending from Baltimore
south to metropolitan Washington, D.C. and further south through Virginia and
North Carolina into Florida.
When comparing the first nine months of 2001 with 2000, rental income
increased 7.7% from $84.0 million in 2000 to $90.4 million in 2001 reflecting
the contribution from the recently completed Woodmont East project in Bethesda,
Maryland. On a same center basis, excluding Williamsburg Shopping Center in
Williamsburg, Virginia which was sold on April 27, 2001, the recently developed
Woodmont East project in Bethesda, Maryland, Pentagon Row in Arlington, Virginia
and Friendship Center which was acquired on September 21, 2001 rental income
increased 4.7%.
When comparing the first nine months of 2001 with 2000, net operating
income increased 9.6% from $62.2 million in 2000 to $68.2 million in 2001. On a
same center basis as defined above, net operating income increased 6.1%.
The West
--------
The Western region is comprised of thirty-seven assets, including Santana
Row, which is currently under development, extending from Texas to the West
Coast.
When comparing the first nine months of 2001 with 2000, on a same center
basis, which excludes properties acquired and sold in 2001 and 2000 and Santana
Row, which is currently under development, rental income increased 18.0% from
$20.7 million in 2000 to $24.5 million in 2001, due primarily to increases from
recently redeveloped and retenanted properties in Los Angeles, San Francisco
26
and Los Gatos, California. On an overall basis, which includes the impact of the
sale of Peninsula Shopping Center on June 30, 2000, rental income increased
5.1%, from $24.6 million in the first nine months of 2000 to $25.9 million in
the first nine months of 2001.
On a same center basis as defined above, net operating income increased
12.9% from $15.9 million in 2000 to $18.0 million in 2001. Overall net operating
income decreased 5.5%, again reflecting the sale of Peninsula Shopping Center
and the marketing and leasing costs associated with the Santana Row development.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
Consolidated Results
--------------------
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 8.5% from $64.1 million in the third quarter of 2000 to
$69.5 million in the third quarter of 2001. On a same center basis, rental
income increased 6.2%, due primarily to the favorable impact of redeveloped and
retenanted centers, as well as, increases associated with lease rollovers and
increased cost recoveries.
Other property income includes items, which although recurring, tend to
fluctuate from period to period, such as utility reimbursements, telephone
income, merchant association dues, late fees and temporary tenant income. Also
included are less regularly recurring items, such as lease termination fees.
Other property income increased 60.4% from $2.7 million in the third quarter of
2000 to $4.3 million in the third quarter of 2001 due primarily to increases in
lease termination fees, parking income and utility reimbursements. On a same
center basis, other property income increased 39.9%.
Rental expenses increased from $13.0 million in the third quarter of 2000
or 19.5% of property income, rental income plus other property income, to $15.4
million, or 20.9% of property income, in the third quarter of 2001. Increased
leasing and marketing costs associated with the Trust's development projects, as
well as, operating costs associated with the Woodmont East development,
contributed to this overall increase. On a same center basis, rental expenses
increased 8.0% from $12.8 million in 2000 to $13.8 million in 2001 due primarily
to increased maintenance, property management costs and bad debt.
Real estate taxes increased 9.7% from $6.7 million in the third quarter of
2000 to $7.4 million in the third quarter of 2001. On a same center basis, real
estate taxes increased 8.1% due primarily to increased taxes on recently
redeveloped properties.
27
Depreciation and amortization expenses increased 12.7% from $13.4 million
in the third quarter of 2000 to $15.2 million in the third quarter of 2001
reflecting the impact of recent new development, tenant work and property
redevelopments.
During the third quarter of 2001 the Trust incurred interest expense of
$22.5 million, of which $4.8 million was capitalized, as compared to 2000's
$19.8 million, of which $3.8 million was capitalized. The increase in interest
expense reflects the additional debt issued to fund the Trust's capital
improvement programs.
Administrative expenses increased from $3.2 million in the third quarter of
2000 to $3.5 million in the third quarter of 2001 or 4.7% of revenue in both
periods.
As a result of the foregoing items, net income increased from $14.4 million
during the third quarter of 2000 to $15.2 million during the third quarter of
2001 and net income available for common shareholders increased from $12.4
million to $13.2 million.
Segment Results
---------------
The Trust operates its portfolio of properties in three geographic
operating regions: Northeast, Mid-Atlantic and West.
Historical operating results for the three regions are as follows (in
thousands):
For the three months ended September 30,
2001 2000
--------------------------------------------------------------------------------
Rental income
Northeast $30,399 $28,937
Mid-Atlantic 30,025 28,146
West 9,119 7,018
------- -------
Total $69,543 $64,101
======= =======
Net operating income
Northeast $22,539 $21,022
Mid-Atlantic 22,254 20,771
West 6,245 5,235
------- -------
Total $51,038 $47,028
======= =======
28
The Northeast
-------------
The Northeast region is comprised of fifty-four assets, extending from
suburban Philadelphia north through New York and its suburbs into New England
and west to Illinois and Michigan.
When comparing the third quarter of 2001 with 2000, rental income, on an
overall and same center basis, increased 5.0% from $28.9 million in 2000 to
$30.4 million in 2001, primarily due to increases at recently redeveloped and
retenanted shopping centers and street retail properties, such as Greenlawn,
Blue Star, Brunswick, Fresh Meadows and Austin Street.
Net operating income increased 7.2% from $21.0 million in 2000 to $22.5
million in 2001, primarily due to increases at the recently redeveloped and
retenanted shopping centers and street retail properties, as well as, increased
lease termination fees of $554,000 in 2001 over 2000's $150,000.
The Mid-Atlantic
----------------
The Mid-Atlantic region is comprised of thirty-two assets, including
Pentagon Row, which is currently under development, extending from Baltimore
south to metropolitan Washington, D.C. and further south through Virginia and
North Carolina into Florida.
When comparing the third quarter of 2001 with 2000, rental income increased
6.7% from $28.1 million in 2000 to $30.0 million in 2001 reflecting the
contribution from the recently completed Woodmont East project in Bethesda,
Maryland. On a same center basis, excluding Williamsburg Shopping Center in
Williamsburg, Virginia which was sold on April 27, 2001, the recently developed
Woodmont East project in Bethesda, Maryland, Pentagon Row in Arlington Virginia
and the newly purchased Friendship Center in Washington, D.C. rental income
increased 2.9%.
When comparing the third quarter of 2001 with 2000, net operating income
increased 7.1% from $20.8 million in 2000 to $22.3 million in 2001. On a same
center basis as defined above, net operating income increased 3.2%.
The West
--------
The Western region is comprised of thirty-seven assets, including Santana
Row, which is currently under development, extending from Texas to the West
Coast.
When comparing the third quarter of 2001 with 2000 on a same center basis,
which excludes properties acquired and sold in 2001 and 2000 and Santana Row,
which is currently under development, rental income increased $1.6 million from
$7.0 million in 2000 to $8.6 million in 2001 due primarily to increases from the
recently
29
redeveloped and retenanted properties in Los Angeles and San Francisco,
California. On an overall basis rental income increased $2.1 million from $7.0
million in 2000 to $9.1 million in 2001.
When comparing the third quarter of 2001 with 2000, net operating income,
on a same center basis as defined above, increased $1.2 million from $5.3
million in 2000 to $6.5 million in 2001. Overall net operating income increased
$1.0 million, since it also includes marketing and leasing costs associated with
the Santana Row development.
30
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(3) (i) Declaration of Trust of Federal Realty Investment Trust dated May
5, 1999 filed with the Commission on May 25, 1999 as an exhibit to the
Trust's Current Report on Form 8-K is incorporated herein by reference
thereto.
(ii) Bylaws of the Trust dated May 5, 1999 filed with the Commission
on May 25, 1999 as an exhibit to the Trust's Current Report on Form 8-K is
incorporated herein by reference thereto.
(B) Reports on Form 8-K
A Form 8-K, dated June 30, 2001 was filed on July 30, 2001 in response to
Item 5.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Registrant)
November 1, 2001 /s/ Steven J. Guttman
----------------------
Steven J. Guttman, Chairman of the
Board, Chief Executive Officer and
Trustee (Chief Executive Officer)
November 1, 2001 /s/ Cecily A. Ward
-------------------
Cecily A. Ward, Chief Financial Officer
(Principal Accounting Officer)
31