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 30,2002
Commission File No. 1-07533
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0782497
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
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(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 October 28, 2002
- ------------------------------ -------------------------------
Common Shares of Beneficial Interest 43,327,656
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 2002
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 (unaudited) and
December 31, 2001 (audited) 4
Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Operations (unaudited)
Three months ended September 30, 2002 and 2001 6
Consolidated Statements
of Shareholders' Equity (unaudited)
Nine months ended September 30, 2002 and 2001 7
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2002 and 2001 8
Notes to Financial Statements 9-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-39
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 40
Item 4. Controls and Procedures 41
PART II. OTHER INFORMATION 42
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to Vote to Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 43
2
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 2002
PART I. FINANCIAL INFORMATION
The following unaudited financial statements have been prepared
by management in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial
information and in conformity with rules and regulations of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do
not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included and the
information contained in these financial statements fairly presents,
in all material respects, the financial condition and results of
operations of Federal Realty Investment Trust ("the Trust"). The
results of operations for the three months and nine months ended
September 30, 2002, are not necessarily indicative of the results that
may be expected for the full year. These financial statements should
be read in conjunction with the our audited consolidated financial
statements and footnotes thereto, included in the Trust's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
3
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
(unaudited)
ASSETS (in thousands, except share data)
Real estate, at cost
Operating $1,850,345 $1,741,385
Development 404,195 321,986
Discontinued operations - 40,933
---------- ----------
2,254,540 2,104,304
Less accumulated depreciation and amortization (435,922) (395,767)
---------- ----------
1,818,618 1,708,537
Other Assets
Cash 24,652 17,563
Mortgage notes receivable 35,570 35,607
Accounts and notes receivable 10,874 15,483
Prepaid expenses and other assets, principally
property taxes and lease commissions 52,796 44,733
Tax deferred exchange escrows 55,204 6,006
Debt issue costs, net of accumulated amortization
of $5,872 and $4,840, respectively 5,820 6,952
---------- ----------
$2,003,534 $1,834,881
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $ 104,454 $ 100,293
Mortgages and construction loans payable 440,267 350,043
Notes payable 192,343 174,843
Accounts payable and accrued expenses 87,491 64,014
Dividends payable 24,239 21,664
Security deposits 6,429 6,026
Prepaid rents 11,935 10,400
Senior notes and debentures 385,000 410,000
5 1/4% Convertible subordinated debentures 75,000 75,289
Investors' interest in consolidated assets 29,987 33,018
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
8.5% Series B Cumulative Redeemable Preferred Shares, (stated at
liquidation preference $25 per share), 5,400,000 shares issued in 2001 135,000 135,000
Common shares of beneficial interest, $.01 par, 100,000,000 shares
authorized, 44,760,252 and 41,524,165 issued, respectively 448 417
Additional paid in capital 812,354 730,835
Accumulated dividends in excess of Trust net income (345,645) (322,428)
---------- ----------
702,157 643,824
Less: 1,459,719 and 1,452,926 common shares in treasury - at cost, respectively (28,154) (27,990)
Deferred compensation on restricted shares (12,321) (15,005)
Notes receivable from employee stock plans (8,420) (7,245)
Accumulated other comprehensive income (loss) (6,873) (4,293)
---------- ----------
646,389 589,291
---------- ----------
$2,003,534 $1,834,881
========== ==========
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,
2002 2001
-------- --------
(In thousands, except per share data)
Revenue
Rental income $214,242 $201,177
Interest and other income 3,762 5,275
Other property income 11,393 10,189
-------- --------
229,397 216,641
Expenses
Rental 49,288 45,114
Real estate taxes 23,078 20,541
Interest 45,313 52,360
Administrative 10,209 9,971
Restructuring expenses 8,489 -
Depreciation and amortization 47,826 43,561
-------- --------
184,203 171,547
-------- --------
Operating income before investors' share
of operations and discontinued operations 45,194 45,094
Investors' share of operations (3,357) (3,991)
-------- --------
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations 41,837 41,103
Income from operations of discontinued assets 1,217 2,581
-------- --------
Income before gain on sale of real estate net of
loss on abandoned developments held for sale 43,054 43,684
Gain on sale of real estate net of loss on abandoned developments held for sale 9,454 7,898
-------- --------
Net income 52,508 51,582
Dividends on preferred stock (14,568) (5,963)
-------- --------
Net income available for common shareholders $ 37,940 $ 45,619
======== ========
Earnings per common share, basic
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations $ 0.66 $ 0.90
Discontinued operations 0.03 0.07
Gain on sale of real estate net of loss on abandoned developments held for sale 0.23 0.20
-------- --------
$ 0.92 $ 1.17
======== ========
Weighted average number of common shares, basic 41,155 39,061
======== ========
Earnings per common share, diluted
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations $ 0.66 $ 0.90
Discontinued operations 0.03 0.06
Gain on sale of real estate net of loss on abandoned developments held for sale 0.22 0.20
-------- --------
$ 0.91 $ 1.16
======== ========
Weighted average number of common shares, diluted 42,421 40,136
======== ========
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,
2002 2001
------- -------
(In thousands, except per share data)
Revenue
Rental income $72,277 $68,179
Interest and other income 1,644 1,678
Other property income 4,412 4,292
------- -------
78,333 74,149
Expenses
Rental 17,471 15,254
Real estate taxes 7,891 7,284
Interest 13,540 17,680
Administrative 3,713 3,516
Depreciation and amortization 16,074 14,966
------- -------
58,689 58,700
------- -------
Operating income before investors' share
of operations and discontinued operations 19,644 15,449
Investors' share of operations (1,081) (1,185)
------- -------
Income before discontinued operations 18,563 14,264
Income (loss) from operations of discontinued assets (59) 918
------- -------
Net income 18,504 15,182
Dividends on preferred stock (4,856) (1,988)
------- -------
Net income available for common shareholders $13,648 $13,194
======= =======
Earnings per common share, basic
Income before discontinued operations $ 0.32 $ 0.31
Discontinued operations - 0.03
------- -------
$ 0.32 $ 0.34
======= =======
Weighted average number of common shares, basic 42,802 39,347
======= =======
Earnings per common share, diluted
Income before discontinued operations $ 0.31 $ 0.31
Discontinued operations - 0.02
------- -------
$ 0.31 $ 0.33
======= =======
Weighted average number of common shares, diluted 44,036 40,492
======= =======
The accompanying notes are an integral part of these consolidated statements.
6
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Nine months ended September 30,
2002 2001
---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except share data) Shares Amount Additional Shares Amount Additional
Paid-in Paid-in
Capital Capital
Common Shares of Beneficial Interest
Balance, beginning of year 41,524,165 $ 417 $730,835 40,910,972 $ 410 $723,078
Exercise of stock options 747,770 7 15,828 - - -
Shares issued to purchase partnership interest 2,907 - 77 328,116 3 6,759
Shares issued under dividend reinvestment plan 102,318 1 2,672 122,125 1 2,456
Performance and Restricted Shares granted, net
of Restricted Shares retired 98,092 - 2,377 103,723 1 2,026
Net proceeds from sale of shares 2,185,000 22 56,631 - - -
Shares issued to purchase operating partnership units 100,000 1 2,769 - - -
Accelerated vesting of options and restricted shares - - 1,165 - - -
---------- ---------- -------- ---------- ---------- --------
Balance, end of period 44,760,252 $ 448 $812,354 41,464,936 $ 415 $734,319
========== ========== ======== ========== ========== ========
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of year ($322,428) ($306,287)
Net income 52,508 51,582
Dividends declared to common shareholders (61,157) (56,607)
Dividends declared to preferred shareholders (14,568) (5,963)
---------- ----------
Balance, end of period ($345,645) ($317,275)
========== ==========
Common Shares of Beneficial Interest in Treasury
Balance, beginning of year (1,452,926) ($27,990) (1,441,594) ($27,753)
Performance and Restricted Shares forfeited (6,793) (164) (11,332) (237)
---------- ---------- ---------- ----------
Balance, end of period (1,459,719) ($28,154) (1,452,926) ($27,990)
========== ========== ========== ==========
Deferred Compensation on Restricted Shares
Balance, beginning of year (666,656) ($15,005) (735,875) ($17,254)
Performance and Restricted Shares issued,
net of forfeitures (73,821) (1,763) (61,369) (1,176)
Vesting of Performance and Restricted Shares 193,990 4,447 115,202 2,715
---------- ---------- ---------- ----------
Balance, end of period (546,487) ($12,321) (682,042) ($15,715)
========== ========== ========== ==========
Subscriptions receivable from employee stock plans
Balance, beginning of year (218,555) ($7,245) (242,638) ($6,734)
Subscription and tax loans issued (88,469) (2,612) (3,333) (937)
Subscription and tax loans paid 68,329 1,437 25,189 416
---------- ---------- ---------- ----------
Balance, end of period (238,695) ($8,420) (220,782) ($7,255)
========== ========== ========== ==========
Accumulated other comprehensive income (loss)
Balance, beginning of year ($4,293) -
Change due to recognizing gain on securities (4) -
Change in valuation on interest rate swap (1,076) -
Loss on interest rate hedge transaction (1,500) ($4,754)
---------- ----------
Balance, end of period ($6,873) ($4,754)
========== ==========
Comprehensive income
Net income $ 52,508 $ 51,582
Change due to recognizing gain on securities (4) -
Change in valuation on interest rate swap (1,076) -
Loss on interest rate hedge transaction (1,500) (4,754)
---------- ----------
Total comprehensive income $ 49,928 $ 46,828
========== ==========
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 September 30,
2002 2001
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net income $ 52,508 $ 51,582
Items not requiring cash outlays
Depreciation and amortization, including discontinued operations 48,104 44,110
Gain on sale of real estate (19,101) (7,898)
Loss on abandoned developments held for sale 9,647 -
Non-cash portion of restructuring expense 5,806 -
Other, net 2,975 2,549
Changes in assets and liabilities
Decrease in accounts receivable 4,609 185
Increase in prepaid expenses and other
assets before depreciation and amortization (12,067) (11,005)
Increase in operating accounts payable,
security deposits and prepaid rent 1,435 54
Increase in accrued expenses 2,948 8,684
-------- --------
Net cash provided by operating activities 96,864 88,261
INVESTING ACTIVITIES
Acquisition of real estate - (58,089)
Capital expenditures - development (149,373) (113,855)
Capital expenditures - other (31,794) (32,855)
Proceeds from sale of real estate 7,394 16,255
Repayment of mortgage notes receivable, net 5,655 3,377
-------- --------
Net cash used in investing activities (168,118) (185,167)
FINANCING ACTIVITIES
Borrowing of short-term debt, net 21,000 87,000
Proceeds from mortgage and construction financing, net of costs 90,607 105,667
Issuance of common shares, net of subscriptions receivable 70,161 (98)
Payments on mortgages, capital leases and notes payable (29,411) (31,273)
Dividends paid (71,229) (60,047)
(Decrease) in minority interest, net (2,785) (1,064)
-------- --------
Net cash provided by financing activities 78,343 100,185
-------- --------
Increase in cash 7,089 3,279
Cash at beginning of period 17,563 11,357
-------- --------
Cash at end of period $ 24,652 $ 14,636
======== ========
The accompanying notes are an integral part of these consolidated statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(unaudited)
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
The Trust is an equity real estate investment trust specializing in the
ownership, management, development and redevelopment of high quality retail and
mixed-use properties. The Trust operates its portfolio of properties in three
geographic operating regions: Northeast, Mid-Atlantic and West. As of September
30, 2002, the Trust owns or has an interest in 58 community and neighborhood
shopping centers comprising over 12 million square feet, primarily located in
densely populated and affluent communities throughout the Northeast and
Mid-Atlantic United States. In addition, the Trust owns 55 urban and retail
mixed-use properties comprising over 2 million square feet located in strategic
metropolitan markets across the United States and one apartment complex. The
Trust's properties were 95.5% leased at September 30, 2002.
Reference should be made to the notes to financial statements included in
the Annual Report to shareholders for the year ended December 31, 2001 which
contain the accounting policies and other data of 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 2002 2001 2002 2001
Net income available for common shareholders - basic $37,940 $45,619 $13,648 $13,194
Income attributable to operating partnership units 777 1,049 263 289
------- ------- ------- -------
Net income available for common shareholders - diluted $38,717 $46,668 $13,911 $13,483
======= ======= ======= =======
Denominator
Denominator for basic EPS-
Weighted average shares 41,155 39,061 42,802 39,347
Effect of dilutive securities
Stock options and awards 410 170 437 240
Operating partnership units 856 905 797 905
------- ------- ------- -------
Denominator for diluted EPS 42,421 40,136 44,036 40,492
======= ======= ======= =======
Risk Management. The Trust enters into derivative contracts, which qualify as
cash flow hedges under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", in order to manage interest rate risk. Derivatives are not
purchased for speculation. During 2001, to hedge its exposure to interest rates
on its $125 million term loan, the Trust entered into interest rate swaps, which
fixed the LIBOR interest rate on the term loan at 5.27%. The current
9
interest rate on the term loan is LIBOR plus 95 basis points, thus fixing the
interest rate at 6.22% on notional amounts totaling $125 million. The Trust is
exposed to credit loss in the event of non-performance by the counterparties to
the interest rate protection agreement should interest rates exceed the cap.
However, management does not anticipate non-performance by the counterparties.
The counterparties have long-term debt ratings of A- or above by Standard and
Poor's Ratings Service ("S&P") and Aa2 or above by Moody's Investors Service
("Moody's"). Although the Trust's cap is not exchange traded, there are a number
of financial institutions which enter into these types of transactions as part
of their day-to-day activities. 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 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, 2002, a cumulative unrealized
loss of $5.4 million, 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 $4.5 million 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%.
In anticipation of a $150 million Senior Unsecured Note transaction on
August 1, 2002 the Trust entered into a treasury rate lock that fixed the
benchmark five year treasury rate at 3.472% through August 19, 2002. The rate
lock was documented as a cash flow hedge of a forecasted transaction and
designated as effective at the inception of the contract. On August 16, 2002 the
Trust priced the Senior Unsecured Notes with a scheduled closing date of August
21, 2002 and closed out the associated rate lock. Five year treasury rates
declined between the pricing period and the settlement of the hedge purchase;
therefore, to settle the rate lock, the Trust paid $1.5 million. Since the
postponement of the Note transaction, the $1.5 million loss continues to be
recorded as a component of other comprehensive income within stockholders'
equity on the balance sheet. On August 19, 2002 a fire at Santana Row, as more
fully described in Note B, destroyed approximately 50% of the residential units
in the project and because of the lack of information at that time regarding the
impact of the fire on Santana Row and on the Trust, the Trust did not proceed
with the Note transaction. As more clarity regarding the impact of the fire has
become available, the Trust believes it is probable that it
10
will seek to raise additional capital in the public debt markets before the end
of the year. If the Note transaction occurs as now anticipated, the hedge loss
will be amortized into interest expense over the life of the Notes. If the Trust
is unsuccessful in executing this transaction, the $1.5 million in other
comprehensive income will be reclassified into current earnings, as an expense,
in the fourth quarter of 2002.
Reclassifications. Certain components of rental income, other property income,
rental expense, real estate tax expense and depreciation and amortization
expense on the September 30, 2001 Statement of Operations for the three months
and nine months ended September 30, 2001 have been reclassified to Income from
operations of discontinued assets to assure comparability of all periods
presented. In addition, certain components of real estate, accounts and notes
receivable, tax deferred exchange escrows and notes receivable from employee
stock plans on the December 31, 2001 Balance Sheet and the September 30, 2001
Statement of Common Shareholders Equity have been reclassified to assure
comparability of all periods presented.
NOTE B - REAL ESTATE ASSETS AND ENCUMBRANCES
On February 1, 2002 the Trust received the minority partner's interest in
Santana Row in exchange for a $2.6 million investment in a partnership. A $5.9
million loan made by the Trust to the partnership on January 12, 2001 is due
January 12, 2003 and is secured by real property.
On April 11, 2002 the Trust sold the street retail property located at 252
Greenwich Avenue in Greenwich, Connecticut for $16.5 million resulting in a gain
of $7.0 million.
On April 30, 2002 the Trust sold three street retail properties, two in
Westport, Connecticut and one in Westfield, New Jersey, for $19.2 million
resulting in a gain of $6.9 million.
On June 6, 2002 the Trust sold the Uptown Shopping Center located in
Portland, Oregon for $20.8 million resulting in a gain of $4.5 million.
The proceeds from the sales of the four street retail properties and the
Uptown Shopping Center were deposited in escrow with a qualified intermediary
for purposes of executing tax-deferred property exchanges. On October 10, 2002
and October 28, 2002 proceeds of $16.1 million and $18.7 million, respectively,
previously held by the qualified intermediary from the April 2002 sales of the
street retail properties were released to the Trust as the Trust elected not to
acquire any of the previously identified exchange properties. The October 10,
2002 proceeds of $16.1 million were used to pay down the Santana Row
construction loan by $16.0 million. The October 28, 2002 proceeds of $18.7
million were used to pay down the Trust's syndicated credit facility.
11
On June 18, 2002 a partnership, in which a subsidiary of the Trust is the
general partner, sold the street retail property located at 6410 Hollywood
Boulevard in Hollywood, California for $2.3 million resulting in a gain of
$700,000. The proceeds from the sale were received by the partnership at
closing.
On August 19, 2002 a fire broke out at Building Seven in the Santana Row
project. Building Seven contained approximately 87,000 square feet of retail
space, approximately 1,000 parking spaces and 246 residential units. All but
eleven of the residential units in the building, which were originally scheduled
to open in early 2003, were destroyed. The retail units and parking structure
sustained water and smoke damage but were not structurally impaired. The opening
of these retail units, originally scheduled for September 2002, will be delayed
until early 2003. The damage related to the fire was limited almost entirely to
this single building. The Trust believes that it has adequate insurance coverage
to substantially cover its losses from the fire. The Trust estimates the
insurance claim to be in the range of $70 million to $90 million which includes
costs to clean-up, repair and rebuild as well as soft costs and lost rents. The
cause of the fire has yet to be determined but will not affect the Trust's
insurance claim. On October 22, 2002 a $20 million insurance reimbursement was
advanced by the insurance carrier bringing the total amount received to date to
$21 million. This advance, which is being held in escrow by the construction
lender, will be used to either fund the Building Seven clean-up and rebuilding
costs or pay down the construction loan, at the option of the Trust.
During the first nine months of 2002, the Trust loaned an additional
$1.5 million to an existing borrower with an interest rate of 10.0%. $14.4
million of notes were repaid to the Trust during the first nine months of 2002.
In addition, the Trust loaned $7.2 million to the unaffiliated hotel venture at
Santana Row. The loan bears interest at rates ranging from 12% to 15% and has a
ten year term. During the first five years interest is payable from cash flow,
if available. If cash flow is not sufficient to pay interest in full, the unpaid
amount will accrue and bear interest at the same rate as the principal.
NOTE C - MORTGAGES AND CONSTRUCTION LOANS PAYABLE, NOTES PAYABLE AND OTHER LONG
TERM DEBT
At September 30, 2002 there was $65.0 million borrowed under the Trust's
$300 million syndicated credit facility. The maximum amount drawn during the
first nine months of 2002 was $100.0 million. The weighted average interest rate
on borrowings for the nine months ended September 30, 2002 was 2.7%. 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, 2002 the Trust was in compliance with all loan covenants.
On April 22, 2002 the Trust's $25 million, 8% Senior Notes were paid off
through borrowings on the Trust's syndicated credit
12
facility. In addition, the Trust's $289,000, 5.25% Convertible Subordinated
Debentures were paid off on April 29, 2002 and the $3.4 million note issued in
connection with a land purchase in Portland, Oregon was paid off on June 18,
2002.
At September 30, 2002 there was $151.3 million borrowed under the
construction loan for the Santana Row development 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 certain operating
and other conditions. The interest rate on the loan will decrease to LIBOR plus
187.5 basis points then to LIBOR plus 162.5 basis points upon achievement of
certain leasing, occupancy and net operating income hurdles. There is no
assurance that these conditions and hurdles will be met. 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. At
September 30, 2002 the Trust was in compliance with all loan covenants. As of
October 28, 2002 there was $159.4 million borrowed under the construction loan,
reflecting additional loan draws of $24.1 million and the loan pay down of $16.0
million. As a result of the fire at Santana Row, the construction lender has the
option to halt funding on the construction loan. The Trust has had discussions
with the lender and the Trust has agreed to fund the Building Seven clean-up and
rebuilding costs from its syndicated credit facility and from insurance proceeds
and has agreed with the lender to fund all other Phase 1 costs of the project
through the construction loan. The lender has funded two draw requests since the
fire totalling $24.1 million and a third draw request is anticipated to be
funded by the end of October 2002.
At September 30, 2002 there was $24.4 million borrowed under the
construction loan for the Trust's Woodmont East development in Bethesda,
Maryland. The loan, which has a current floating interest rate of LIBOR plus 120
basis points, was extended for one year and now matures August 29, 2003 with one
additional one-year extension option. No principal payments are due until
maturity. The property secures the construction loan facility.
As a result of the fire at Santana Row both Moody's and S&P placed the
Trust's credit rating under review. On October 3, 2002 Moody's confirmed its
Baa2 senior unsecured debt rating for the Trust and concurrently changed its
rating outlook to negative from stable. On October 9, 2002 S&P affirmed its BBB
corporate credit rating with an outlook of stable.
NOTE D - SHAREHOLDERS' EQUITY
During the first nine months of 2002, options for 427,500 shares at prices
ranging from $25.16 to $27.15 per share, fair market value at the dates of
award, were awarded to certain officers, employees and Trustees of the Trust.
The options vest over periods ranging from six months to three years.
13
On June 12, 2002 the Trust issued 2.2 million common shares at $25.98 per
share netting $56.6 million, after all expenses of the offering.
NOTE E - INTEREST EXPENSE
The Trust incurred interest totaling $64.7 million during the first nine
months of 2002 and $65.1 million during the first nine months of 2001 of which
$19.4 million and $12.7 million, respectively, was capitalized in connection
with development projects. Interest paid was $61.0 million in the first nine
months of 2002 and $56.8 million in the first nine months of 2001.
NOTE F - 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. The original contractor filed a
counterclaim against the Trust and the residential developer. On May 9, 2002 the
Trust and the residential developer entered into a settlement agreement with the
original contractor in which a full settlement, totaling $5 million payable to
the Trust and the residential developer, was reached for all claims and
counterclaims between the parties involved. On June 7, 2002 the original
contractor paid into an escrow account the agreed upon settlement amount. This
settlement was distributed, $3 million to the Trust, which offset the Trust's
cost of the development, and $2 million to the residential developer, in July
2002.
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.
The Trust is currently committed to invest approximately $8.0 million in
six restaurant joint ventures in lieu of tenant allowances. The Trust will
participate in profits, losses and cash flow in accordance with the terms of
each individual venture but does not manage or otherwise control day to day
operations of each venture. As of September 30, 2002 the Trust has invested $4.1
million; $2.8 million of which has been capitalized and $1.3 million of which
has been expensed in 2002 to reflect the Trust's estimate of the permanent
impairment of its investment in two of these ventures
14
due principally to declining economic conditions. The Trust anticipates
investing the remaining commitment of $3.9 million by the end of the first
quarter of 2003.
Under the terms of the Congressional Plaza partnership agreement, from and
after January 1, 1986 Rockville Plaza Company ("RPC"), an unaffiliated third
party, has the right to require the Trust and the two other minority partners to
purchase from half to all of RPC'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 $27.5 million. In conjunction with a
redevelopment currently taking place at the property, the Trust has agreed to
acquire an additional 7.5% interest in Congressional Plaza from RPC in exchange
for funding approximately $7 million of RPC's share of the redevelopment cost.
This funding will take place through 2002 and the transaction will be completed
in 2003.
Under the terms of various other partnerships which own shopping center
properties with a cost of approximately $71 million, the partners may exchange
their 796,773 operating units for cash or the same number of common shares of
the Trust, at the option of the Trust. During the second quarter of 2002 the
Trust issued 100,000 common shares of the Trust valued at $2.8 million in
exchange for 100,000 operating units and cash of $205,000 in exchange for an
additional 7,816 operating units.
Under the terms of four other partnerships which own street retail
properties in southern California with a cost of approximately $61 million, if
certain leasing and revenue levels are obtained for the properties owned by the
partnerships, the other 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 two of the partnerships, a limited
number of common shares of the Trust at the election of the other partners. In
certain of these partnerships, if the other partners do not redeem their
interest, the Trust may choose to purchase the limited partnership interests
upon the same terms.
NOTE G - COMPONENTS OF RENTAL INCOME
The components of rental income for the periods ended September 30 are as
follows (in thousands):
Nine months Three months
2002 2001 2002 2001
-------- -------- -------- --------
Retail Properties
Minimum rents $174,358 $161,654 $ 58,948 $ 55,011
Cost reimbursements 33,984 33,310 11,791 11,500
Percentage rents 3,526 4,006 729 922
Apartments 2,374 2,207 809 746
-------- -------- -------- --------
$214,242 $201,177 $ 72,277 $ 68,179
======== ======== ======== ========
15
NOTE H - RESTRUCTURING EXPENSE
On February 28, 2002 the Trust adopted a new business plan which returns
the Trust's primary focus to its traditional business of acquiring and
redeveloping community and neighborhood shopping centers that are anchored by
supermarkets, drug stores, or high volume, value oriented retailers that provide
consumer necessities. The Trust will complete Bethesda Row, Pentagon Row and
Santana Row but does not plan to develop any new large-scale, mixed-use,
ground-up development projects. Rather, the Trust will seek to acquire income
producing centers and may seek opportunities to develop ground-up grocery
anchored shopping centers, all in and around the Trust's existing markets, and
will identify and execute redevelopment opportunities in its existing portfolio.
Concurrent with the adoption of the business plan, the Trust adopted a
management succession plan and restructured its management team.
In connection with this change in business plan the Trust recorded a charge
of $18.2 million. This charge included a reserve for a restructuring charge of
$8.5 million made up of $6.9 million of severance and other compensation costs
for several senior officers of the Trust related to the management
restructuring, as well as the write-off of $1.6 million of the Trust's
development costs. All charges against the reserve, totaling $8.5 million, were
expended during the first nine months of 2002. An additional component of the
restructuring charge is an impairment loss of $9.7 million representing the
estimated loss on the abandonment of development projects held for sale,
primarily the Tanasbourne development project located in Portland, Oregon,
thereby adjusting the value of these assets to their estimated fair value. The
Trust is marketing these properties, components of the Trust's Western region,
for sale. The carrying value of these properties as of September 30, 2002,
classified on the Trust's consolidated balance sheet as real estate under
development, is $8.5 million.
NOTE I - DISCONTINUED OPERATIONS
During the second quarter of 2002 the Trust sold six properties for a
combined gain of $19.1 million. The net income from these properties, reported
as income from operations of discontinued assets in accordance with Financial
Accounting Standard No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was $1.2 million and $2.6 million for the nine months ended
September 30, 2002 and 2001, respectively. The net income (loss) for the three
months ended September 30, 2002 and 2001 was ($59,000) and $918,000,
respectively. Four of these properties were components of the Trust's Northeast
region and two were components of the Trust's Western region.
NOTE J - RELATED PARTY TRANSACTIONS
The Chairman and CEO of the Trust, Steven J. Guttman, has an ownership
interest in three retailers at Santana Row. The leases were negotiated at arms
length at market terms. Mr Guttman will not be involved in the store's day to
day operations.
16
NOTE K - 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, 2002 Northeast Atlantic West Other Total
- ----------------------------------------------------------------------------------------------------------
Rental income $ 88,459 $100,728 $ 25,055 $ 214,242
Other income 4,357 5,479 1,557 11,393
Interest income -
mortgage notes 2,621 - 1,571 4,192
Rental expense (16,231) (22,391) (10,666) (49,288)
Real estate tax (11,942) (8,860) (2,276) (23,078)
-------- -------- -------- ----------
Net operating income 67,264 74,956 15,241 157,461
Interest and other
income (expense) $ (430) (430)
Interest expense (45,313) (45,313)
Administrative expense (10,209) (10,209)
Restructuring expense (8,489) (8,489)
Depreciation and
Amortization (20,826) (20,229) (6,157) (614) (47,826)
-------- -------- -------- --------- ----------
Income before
investors' share
of operations and
discontinued operations $ 46,438 $ 54,727 $ 9,084 ($65,055) $ 45,194
======== ======== ======== ========= ==========
Capital expenditures $ 8,506 $ 23,896 $179,185 $ 211,587
======== ======== ======== ==========
Real estate assets $745,794 $817,283 $691,463 $2,254,540
======== ======== ======== ==========
Nine months ended Mid-
September 30, 2001 Northeast Atlantic West Other Total
- ----------------------------------------------------------------------------------------------------------
Rental income $ 86,651 $ 90,408 $ 24,118 $ 201,177
Other income 4,115 4,343 1,731 10,189
Interest income -
mortgage notes 3,003 -- 520 3,523
Rental expense (17,984) (19,379) (7,751) (45,114)
Real estate tax (11,486) (7,206) (1,849) (20,541)
-------- -------- -------- ----------
Net operating income 64,299 68,166 16,769 149,234
Interest and other income $ 1,752 1,752
Interest expense (52,360) (52,360)
Administrative expense (9,971) (9,971)
Depreciation and
Amortization (20,177) (17,586) (5,092) (706) (43,561)
-------- -------- -------- --------- ----------
Income before
investors' share
of operations and
discontinued operations $ 44,122 $ 50,580 $ 11,677 ($61,285) $ 45,094
======== ======== ======== ========= ==========
Capital expenditures $ 11,756 $ 76,775 $136,155 $ 224,686
======== ======== ======== ==========
Real estate assets $765,507 $783,089 $516,806 $2,065,402
======== ======== ======== ==========
17
Three months ended Mid-
September 30, 2002 Northeast Atlantic West Other Total
- ----------------------------------------------------------------------------------------------------------
Rental income $ 29,479 $ 34,515 $ 8,283 $ 72,277
Other income 1,644 2,300 468 4,412
Interest income -
mortgage notes 711 -- 643 1,354
Rental expense (5,268) (7,761) (4,442) (17,471)
Real estate tax (4,067) (3,056) (768) (7,891)
----------- ----------- ----------- -----------
Net operating income 22,499 25,998 4,184 52,681
Interest and other
income $ 290 290
Interest expense (13,540) (13,540)
Administrative expense (3,713) (3,713)
Depreciation and
Amortization (6,896) (6,877) (2,107) (194) (16,074)
----------- ----------- ----------- ----------- -----------
Income before
investors' share
of operations and
discontinued operations $ 15,603 $ 19,121 $ 2,077 ($ 17,157) $ 19,644
=========== =========== =========== =========== ===========
Capital expenditures $ 1,471 $ 5,149 $ 67,713 $ 74,333
=========== =========== =========== ===========
Real estate assets $ 745,794 $ 817,283 $ 691,463 $ 2,254,540
=========== =========== =========== ===========
Three months ended Mid-
September 30, 2001 Northeast Atlantic West Other Total
- ----------------------------------------------------------------------------------------------------------
Rental income $ 29,661 $ 30,025 $ 8,493 $ 68,179
Other income 1,917 1,702 673 4,292
Interest income -
mortgage notes 903 -- 14 917
Rental expense (5,617) (6,875) (2,762) (15,254)
Real estate tax (4,063) (2,598) (623) (7,284)
----------- ----------- ----------- -----------
Net operating income 22,801 22,254 5,795 50,850
Interest and other income $ 761 761
Interest expense (17,680) (17,680)
Administrative expense (3,516) (3,516)
Depreciation and
Amortization (6,816) (5,904) (1,980) (266) (14,966)
----------- ----------- ----------- ----------- -----------
Income before
investors' share
operations and
discontinued operations $ 15,985 $ 16,350 $ 3,815 ($ 20,701) $ 15,449
=========== =========== =========== =========== ===========
Capital expenditures $ 2,651 $ 45,690 $ 36,242 $ 84,583
=========== =========== =========== ===========
Real estate assets $ 765,507 $ 783,089 $ 516,806 $ 2,065,402
=========== =========== =========== ===========
There are no transactions between geographic areas.
18
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
September 30, 2002
Item 2. 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"). This Quarterly Report on Form 10-Q contains
"forward-looking statements", within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Also, documents that the Trust subsequently files with the Securities and
Exchange Commission (the "SEC") will contain forward-looking statements.
The statements made herein are not all inclusive, particularly with respect
to possible future events, and should be read together with other filings
made by the Trust under the Securities Act and the Exchange Act. Including
the risks and other risk factors contained in the Trust's Form 10-K for the
fiscal year ended December 31, 2001. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements 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 rules 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, real estate projects and
technology.
We identify forward-looking statements by using words or
19
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.
OVERVIEW
The Trust is an equity real estate investment trust specializing in the
ownership, management, development and redevelopment of high quality retail and
mixed-use properties. The Trust operates its portfolio of properties in three
geographic operating regions: Northeast, Mid-Atlantic and West. As of September
30, 2002, the Trust owns or has an interest in 58 community and neighborhood
shopping centers comprising over 12 million square feet, primarily located in
densely populated and affluent communities throughout the Northeast and
Mid-Atlantic United States. In addition, the Trust owns 55 urban and retail
mixed-use properties comprising over 2 million square feet located in strategic
metropolitan markets across the United States and one apartment complex. The
Trust's properties were 95.5% leased at September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Federal Realty meets its liquidity requirements through net cash provided
by operating activities, along with 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, substantial capital outlays for property acquisitions, major
renovation and development projects and balloon debt repayments generally
require debt or equity funding. Proceeds from the sale of selected assets
provides an additional source of capital. From 1998 until November 2001, the
Trust relied primarily on debt to fund these capital needs, and accordingly,
debt as a percentage of total capitalization steadily increased over that
period. In November 2001 the Trust issued $135 million of preferred stock and in
June 2002 the Trust issued 2.2 million common shares at $25.98 per share,
netting $56.6 million, after all expenses of the offering and debt as a
percentage of total capitalization has therefore decreased. In the future, the
Trust will look to common, preferred and joint-venture equity in addition to
debt and property dispositions to fund capital needs.
Net cash provided by operating activities was $96.9 million in the first
nine months of 2002 and $88.3 million in the first nine months of 2001 of which
$71.2 million and $60.0 million, respectively, was distributed to shareholders.
As more fully described below, contributions from newly acquired, retenanted,
redeveloped and development properties, such as Pentagon Row, were the primary
sources of this increase.
20
Net cash used in investing activities was $168.1 million during the first
nine months of 2002 and $185.2 million during the first nine months of 2001. No
real estate was acquired in the first nine months of 2002. Cash outlays to
acquire real estate in the first nine months of 2001 totaled $58.1 million.
During these two periods, the Trust expended an additional $181.2 million and
$146.7 million, respectively, in capital improvements to its properties. The
Trust invested $8.7 million during the first nine months of 2002 and $823,000
during the first nine months of 2001 in mortgage notes receivable with an
average weighted interest rate of 11.7% and 10%, respectively. $14.4 million and
$4.2 million of notes receivable were repaid during the first nine months of
2002 and 2001, respectively.
On February 1, 2002 the Trust received the minority partner's interest in
Santana Row in exchange for a $2.6 million investment in a partnership. A $5.9
million loan made by the Trust to the partnership on January 12, 2001 is due
January 12, 2003.
On April 11, 2002 the Trust sold the street retail property located at 252
Greenwich Avenue in Greenwich, Connecticut for $16.5 million resulting in a gain
of $7.0 million.
On April 30, 2002 the Trust sold three street retail properties, two in
Westport, Connecticut and one in Westfield, New Jersey, for $19.2 million
resulting in a gain of $6.9 million.
On June 6, 2002 the Trust sold the Uptown Shopping Center located in
Portland, Oregon for $20.8 million resulting in a gain of $4.5 million.
The proceeds from the sales of the four street retail properties and the
Uptown Shopping Center were deposited in escrow with a qualified intermediary
for purposes of executing tax-deferred property exchanges. On October 10, 2002
and October 28, 2002 proceeds of $16.1 million and $18.7 million, respectively,
previously held by the qualified intermediary from the April 2002 sales of the
street retail properties were released to the Trust as the Trust elected not to
acquire any of the previously identified exchange properties. The October 10,
2002 proceeds of $16.1 million were used to pay down the Santana Row
construction loan by $16.0 million. The October 28, 2002 proceeds of $18.7
million were used to pay down the Trust's syndicated credit facility.
On June 18, 2002 a partnership, in which a subsidiary of the Trust is the
general partner, sold the street retail property located at 6410 Hollywood
Boulevard in Hollywood, California for $2.3 million resulting in a gain of
$700,000. The proceeds from the sale were received by the partnership at
closing. In addition, on June 20, 2002 the proceeds of $6 million previously
held by a qualified intermediary from the 2001 sale of the street retail
property located at 101 East Oak Street in Chicago, Illinois were released to
the Trust.
21
Of the $181.2 million spent in the first nine months of 2002 on the Trust's
existing real estate portfolio, approximately $149.4 million was invested in
development projects in San Jose, California and in Arlington, Virginia. The
remaining $31.8 million of capital expenditures relates to improvements to
common areas, tenant work and various redevelopments including the Congressional
Apartments in Rockville, Maryland, the completion of tenant work at the Trust's
Woodmont East development in Bethesda, Maryland and the redevelopment of retail
buildings in San Antonio, Texas.
Net cash provided by financing activities, before dividend payments, was
$149.6 million in the first nine months of 2002 and $160.2 million in the first
nine months of 2001. During the first nine months of 2002 the Trust borrowed
$89.3 million and $1.3 million on its Santana Row and Woodmont East construction
loans, respectively. The $56.6 million of proceeds from a 2.2 million share
common stock offering in June 2002 were used to pay down on the Trust's
syndicated credit facility, which the Trust uses to fund many capital needs
prior to obtaining longer term financing. Maturities of $25 million of 8% Senior
Notes, $289,000 of 5.25% Convertible Subordinated Debentures and a $3.4 million
note were paid during the first nine months of 2002. At September 30, 2002 there
was $65.0 million borrowed under this credit facility. The maximum amount drawn
during the first nine months of 2002 was $100.0 million. The weighted average
interest rate on borrowings for the nine months ended September 30, 2002 was
2.7%. 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. As of October 28, 2002 there was $63.0 million borrowed under the credit
facility.
As a result of the fire at Santana Row both Moody's Investors Service
("Moody's") and Standard & Poor's Ratings Service ("S&P") placed the Trust's
credit rating under review. On October 3, 2002 Moody's confirmed its Baa2 senior
unsecured debt rating for the Trust and concurrently changed its rating outlook
to negative from stable. On October 9, 2002 S&P affirmed its BBB corporate
credit rating with an outlook of stable.
Capital requirements for the remainder of 2002 will depend upon acquisition
opportunities, the rate of completion of Santana Row and the level of
improvements and redevelopments on existing properties. The Trust's credit
facility, with $235 million available at September 30, 2002, and the $120
million remaining on the Santana Row construction loan, after the $16 million
pay down on October 10, 2002 reduced the loan availability to $279 million, are
anticipated to be sufficient to fund the Trust's acquisition, development and
redevelopment needs through the end of 2002. In addition, the Trust currently
has $20 million, after the $35 million receipt of proceeds from the 2002 sales
of the four street retail properties, being held in escrow by a qualified
intermediary for purposes of executing tax-deferred property exchanges,
available to fund acquisition activity.
22
Longer term, the Trust will need additional capital in order to fund
acquisitions, expansions and redevelopments and to refinance its maturing debt.
Sources of this funding may be additional debt, both secured and unsecured,
additional equity and joint venture relationships. In addition, the Trust may
sell or exchange certain of its properties as a source of funding.
Santana Row
In 2002, the Trust's single largest capital need 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.
On August 19, 2002 a fire broke out at Building Seven in the Santana Row
project. Building Seven contained approximately 87,000 square feet of retail
space, approximately 1,000 parking spaces and 246 residential units. All but
eleven of the residential units in the building, which were originally scheduled
to open in early 2003, were destroyed. The retail units and parking structure
sustained water and smoke damage but were not structurally impaired. The opening
of these retail units, originally scheduled for September 2002, will be delayed
until early 2003. The damage related to the fire was limited almost entirely to
this single building. The Trust believes that it has adequate insurance coverage
to substantially cover its losses from the fire. The Trust estimates the
insurance claim to be in the range of $70 million to $90 million which includes
costs to clean-up, repair and rebuild as well as soft costs and lost rents. The
cause of the fire has yet to be determined but will not affect the Trust's
insurance claim. On October 22, 2002 a $20 million insurance reimbursement was
advanced by the insurance carrier bringing the total amount received to date to
$21 million. This advance, which is being held in escrow by the construction
lender, will be used to either fund the Building Seven clean-up and rebuilding
costs or pay down the construction loan, at the option of the Trust.
As a result of the fire and the resulting delay in the opening of the
project from September 19, 2002 the Trust has redefined Phase 1 of the Santana
Row project. The redefined Phase 1 of the project includes Santana Row, the
"1,500 foot long main street" and eight buildings which will contain
approximately 445,000 square feet of retail space, 255 residential units, a 214
room hotel and the supporting infrastructure. The first building, containing
40,000 square feet and occupied by Crate & Barrel, opened on June 27, 2002.
Seven buildings comprising approximately 400,000 square feet of retail space are
expected to be substantially completed during the fourth quarter of 2002 with a
rescheduled opening date of November 7, 2002. The Trust estimates the total cost
of the redefined Phase 1 to be approximately $445 million, net of insurance
proceeds. As of September 30, 2002, the Trust has incurred costs of $396 million
including the purchase of the land, costs associated with the Building Seven
fire and related cleanup, before any insurance reimbursements, and costs for
future phases of the project. The Trust estimates that it will spend
approximately $68 million, before insurance reimbursements, in the fourth
23
quarter of 2002 relating to the first phase of the project.
The Trust is evaluating its Building Seven residential options and
alternatives taking into account costs incurred to date, costs to rebuild and
market conditions. The Trust believes that it will be able to rebuild an
economically viable residential component for Building Seven.
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 certain
operating and other conditions. The interest rate on the loan 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.
There is no assurance that these conditions and hurdles will be met. 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. As of September 30, 2002, $151.3 million was borrowed under
the loan. As of October 28, 2002 there was $159.4 million borrowed under the
construction loan, reflecting additional loan draws of $24.1 million less the
loan pay down of $16.0 million, which reduced the loan availability from $295
million to $279 million. As a result of the fire at Santana Row, the
construction lender has the option to halt funding on the construction loan. The
Trust has had discussions with the lender and the Trust has agreed to fund the
Building Seven clean-up and rebuilding costs from its syndicated credit facility
and from insurance proceeds and has agreed with the lender to fund all other
Phase 1 costs of the project through the construction loan. The lender has
funded two draw requests since the fire totalling $24.1 million and a third draw
request is anticipated to be funded by the end of October 2002.
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, 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 determined the scope of future phases of Santana Row and
will not do so until the success of Phase 1 and future demand for rental space
is determined. However, as Phase 1 utilizes only part of the retail and
residential entitlements of the property, and as Phase 1 contains infrastructure
for future phases, the Trust expects to identify and execute economically viable
additional phases to the project.
24
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. The original contractor filed a
counterclaim against the Trust and the residential developer. On May 9, 2002 the
Trust and the residential developer entered into a settlement agreement with the
original contractor in which a full settlement, totaling $5 million payable to
the Trust and the residential developer, was reached for all claims and
counterclaims between the parties involved. On June 7, 2002 the original
contractor paid into an escrow account the agreed upon settlement amount. This
settlement was distributed, $3 million to the Trust, which offset the Trust's
cost of the development, and $2 million to the residential developer, in July
2002.
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.
The Trust is currently committed to invest approximately $8.0 million in
six restaurant joint ventures in lieu of tenant allowances. The Trust will
participate in profits, losses and cash flow in accordance with the terms of
each individual venture but does not manage to otherwise control day to day
operations of each venture. As of September 30, 2002 the Trust has invested $4.1
million; $2.8 million of which has been capitalized and $1.3 million of which
has been expensed in 2002 to reflect the Trust's estimate of the permanent
impairment of its investment in two of these ventures due principally to
declining economic conditions. The Trust anticipates investing the remaining
commitment of $3.9 million by the end of the first quarter of 2003.
Under the terms of the Congressional Plaza partnership agreement, from and
after January 1, 1986 Rockville Plaza Company ("RPC"), an unaffiliated third
party, has the right to require the Trust and the two other minority partners to
purchase from half to all of RPC'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 $27.5 million. In conjunction with a
redevelopment currently taking place at the property, the Trust has agreed to
acquire an additional 7.5% interest in Congressional Plaza from RPC in exchange
for funding approximately $7 million of RPC's share of the redevelopment cost.
This funding will take place through 2002 and the transaction will be completed
in 2003.
25
Under the terms of various other partnerships which own shopping center
properties with a cost of approximately $71 million, the partners may exchange
their 796,773 operating units for cash or the same number of common shares of
the Trust, at the option of the Trust. During the second quarter of 2002 the
Trust issued 100,000 common shares of the Trust valued at $2.8 million in
exchange for 100,000 operating units and cash of $205,000 in exchange for an
additional 7,816 operating units.
Under the terms of four other partnerships which own street retail
properties in southern California with a cost of approximately $61 million, if
certain leasing and revenue levels are obtained for the properties owned by the
partnerships, the other 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 two of the partnerships, a limited
number of common shares of the Trust at the election of the other partners. In
certain of these partnerships, if the other partners do not redeem their
interest, the Trust may choose to purchase the limited partnership interests
upon the same terms.
RESULTS OF OPERATIONS
The Trust has historically reported its funds from operations ("FFO") in
addition to its net income and net cash provided by operating activities. FFO is
a supplemental measure of real estate companies' operating performance. The
National Association of Real Estate Investment Trusts ("NAREIT") defines FFO 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. NAREIT developed FFO as a relative measure of performance
and liquidity of an equity REIT in order to recognize that the value of
income-producing real estate historically has not depreciated on the basis
determined under GAAP. FFO does not represent cash flows from operating
activities in accordance with GAAP (which, unlike FFO, generally reflects all
cash effects of transactions and other events in the determination of net
income) and should not be considered an alternative to net income as an
indication of the Trust's performance or to cash flow as a measure of liquidity
or ability to pay dividends. The Trust considers FFO a meaningful, additional
measure of operating performance because it primarily excludes the assumption
that the value of the real estate assets diminishes predictably over time, and
because industry analysts have accepted it as a performance measure. Comparison
of the Trust's presentation of FFO to similarly titled measures for other REITs
may not necessarily be meaningful due to possible differences in the application
of the NAREIT definition used by such REITs.
26
The reconciliation of net income to funds from operations is as follows:
Nine months ending Three months ending
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net income available for common shareholders - basic $ 37,940 $ 45,619 $ 13,648 $ 13,194
(Gain)on sale of real estate net of loss on
abandoned developments held for sale (9,454) (7,898) -- --
Depreciation and amortization of real estate
assets 43,672 40,139 14,614 13,764
Amortization of initial direct costs of leases 3,546 3,015 1,175 1,039
Income attributable to operating partnership units 777 1,049 263 289
-------- -------- -------- --------
Funds from operations for common shareholders $ 76,481 $ 81,924 $ 29,700 $ 28,286
======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001
Consolidated Results
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 6.5% from $201.2 million in the first nine months of 2001
to $214.2 million in the first nine months of 2002. On a same center basis,
rental income increased 3.7%, due primarily to the favorable impact of
redeveloped and retenanted centers, as well as increases associated with lease
rollovers. Same center basis for the nine months ended September 30, 2002
excludes Williamsburg Shopping Center in Williamsburg, Virginia, 101 E. Oak
Street in Chicago, Illinois and 70/10 Austin Street in Forest Hills, New York
which were sold in 2001, Friendship Center in Washington, D.C. which was
purchased on September 21, 2001, the office building located at 580 Market
Street in San Francisco, California which was exchanged for the minority
partner's interest in Santana Row and properties under development in 2001 and
2002, including Pentagon Row in Arlington, Virginia and Santana Row in San Jose,
California. Same center basis, as defined above, includes properties which have
been redeveloped or expanded. Same center rental income, excluding the
contribution from property redevelopments and expansions, increased 3.0%.
Other property income includes items, which although recurring, tend to
fluctuate more than rental income from period to period, such as utility
reimbursements, telephone income, merchant association dues, late fees, lease
termination fees and temporary tenant income. Other property income increased
11.8% from $10.2 million in the first nine months of 2001 to $11.4 million in
the first nine months of 2002 due to increases in lease termination fees,
utility reimbursements and the income earned, including a one-time $800,000
perpetual easement payment from a residential developer that
27
has commenced development on an adjacent site, at the Pentagon Row project which
began phasing into service in the second quarter of 2001. On a same center
basis, other property income remained constant at $9.4 million in each period.
Interest and other income includes interest earned on mortgage notes
receivable, overnight cash investments, including tax-deferred exchange escrow
deposits, as well as a provision for estimated losses related to various
unconsolidated restaurant joint ventures. This provision of $1.3 million
represents the Trust's best estimate of the diminution of value of these
investments which the Trust believes to be permanent based upon the current
economic climate surrounding these ventures. Interest and other income decreased
$1.5 million from $5.3 million in 2001 to $3.8 million in 2002 due to these
joint venture costs.
Rental expenses increased 9.3% from $45.1 million in the first nine months
of 2001 to $49.3 million in the first nine months of 2002. Expenses for the
Pentagon Row project and pre-opening and marketing expenses at Santana Row were
the major causes of this increase. As a result of the pre-opening and marketing
expenses at Santana Row, rental expense as a percentage of property income,
rental income plus other property income, increased slightly from 21.3% in 2001
to 21.8% in 2002. On a same center basis, rental expenses decreased 3.5% from
$43.0 million in 2001 to $41.5 million in 2002, primarily due to decreased snow
removal costs and lower bad debt in 2002. Same center rental expense, excluding
the effect of property redevelopments and expansions, decreased 4.5%.
Real estate taxes increased 12.4% from $20.5 million in the first nine
months of 2001 to $23.1 million in the first nine months of 2002. On a same
center basis, real estate taxes increased 9.9% due primarily to increased taxes
on recently redeveloped properties and overall increases in tax assessments.
Same center real estate taxes, excluding the effect of property redevelopments
and expansions, increased 8.8%.
Depreciation and amortization expenses increased 9.8% from $43.6 million in
the first nine months of 2001 to $47.8 million in the first nine months of 2002
reflecting the impact of recent new developments, tenant improvements and
property redevelopments which were placed in service throughout 2001 and the
first nine months of 2002.
During the first nine months of 2002 the Trust incurred interest of $64.7
million, of which $19.4 million was capitalized, as compared to 2001's $65.1
million of which $12.7 million was capitalized. The modest decrease in interest
expense is a result of lower interest expense on the Trust's syndicated credit
facility, reflecting the pay-down on the credit facility with the proceeds from
the November 2001 preferred stock offering and the June 2002 common stock
offering, as well as lower interest rates on the Trust's variable rate debt
offset by the additional construction debt issued to fund
28
the Trust's capital improvement programs. The ratio of earnings to combined
fixed charges (consisting of interest on borrowed funds, including capitalized
interest, amortization of debt discount and expenses and the portion of rent
expense representing an interest factor) and preferred dividends was 1.11x and
1.35x for the first nine months of 2002 and 2001, respectively. The ratio of
earnings to fixed charges was 1.36x and 1.47x during the first nine months of
2002 and 2001, respectively. The ratio of earnings before interest, income
taxes, depreciation and amortization ("EBITDA") to combined fixed charges and
preferred dividends was 1.69x for the first nine months of 2002 and 1.93x for
the first nine months of 2001. Excluding the one-time restructuring charge of
$8.5 million in the first quarter of 2002, the Trust's ratio of earnings to
combined fixed charges and preferred dividends was 1.22x and 1.35x for the first
nine months of 2002 and 2001, respectively; the ratio of earnings to fixed
charges was 1.49x and 1.47x during the first nine months of 2002 and 2001,
respectively; and the ratio of EBITDA to combined fixed charges and preferred
dividends was 1.80x for the first nine months of 2002 and 1.93x for the first
nine months of 2001.
Administrative expenses increased 2.4% from $10.0 million for the nine
months ended September 30, 2001 to $10.2 million for the nine months ended
September 30, 2002. Administrative expenses as a percentage of revenue decreased
from 4.6% in the first nine months of 2001 to 4.5% in the first nine months of
2002.
On February 28, 2002 the Trust adopted a new business plan which returns
the Trust's primary focus to its traditional business of acquiring and
redeveloping community and neighborhood shopping centers that are anchored by
supermarkets, drug stores, or high volume, value oriented retailers that provide
consumer necessities. The Trust will complete Bethesda Row, Pentagon Row and
Santana Row but does not plan to develop any new large-scale, mixed-use,
ground-up development projects. Rather, the Trust will seek to acquire income
producing centers and may seek opportunities to develop ground-up grocery
anchored shopping centers, all in and around the Trust's existing markets, and
will identify and execute redevelopment opportunities in its existing portfolio.
Concurrent with the adoption of the business plan, the Trust adopted a
management succession plan and restructured its management team.
In connection with this change in business plan the Trust recorded a charge
of $18.2 million. This charge included a reserve for a restructuring charge of
$8.5 million made up of $6.9 million of severance and other compensation costs
for several senior officers of the Trust related to the management
restructuring, as well as the write-off of $1.6 million of the Trust's
development costs. All charges against the reserve, totaling $8.5 million, were
expended during the first nine months of 2002. An additional component of the
restructuring charge is an impairment loss of $9.7 million representing the
estimated loss on the abandonment of development projects held for sale,
primarily the Tanasbourne development project located in Portland, Oregon,
thereby adjusting the value of these
29
assets to their estimated fair value. The Trust is marketing these properties,
components of the Trust's Western region, for sale. The current carrying value
of these properties as of September 30, 2002, classified on the Trust's
consolidated balance sheet as real estate under development, is $8.5 million.
During the second quarter of 2002 the Trust sold six street retail
properties for a combined gain of $19.1 million. Four of these properties were
components of the Trust's Northeast region and two were components of the
Trust's Western region. The gain on sale of real estate during the nine months
ended September 30, 2002 was offset by the impairment loss of $9.7 million on
the abandonment of developments held for sale.
During the second quarter of 2001 the Trust sold the Williamsburg Shopping
Center in Williamsburg, Virginia for $16.7 million resulting in a gain of $7.9
million.
Investors' share of operations represents the minority interest in the
income of certain properties. The $600,000 decrease from $4.0 million for the
first nine months of 2001 to $3.4 million for the first nine months of 2002 is
due to the Trust's 2001 purchase of the minority interest in nine street retail
buildings in southern California and three street retail buildings in Forest
Hills, New York and the operating unit holders share of the first quarter 2002
loss.
The net income from the six properties sold in 2002, reported as income
from operations of discontinued assets, was $1.2 million and $2.6 million for
the nine months ended September 30, 2002 and 2001, respectively.
As a result of the foregoing items, income before gain on sale of real
estate net of loss on abandoned developments held for sale and discontinued
operations increased from $41.1 million during the first nine months of 2001 to
$41.8 million during the first nine months of 2002, while net income increased
from $51.6 million during the first nine months of 2001 to $52.5 million during
the first nine months of 2002. Net income available for common shareholders
decreased from $45.6 million during the first nine months of 2001 to a $37.9
million during the first nine months of 2002, as a result of the forgoing items
and as a result of an increase of $8.6 million in preferred dividends on the
8.5% preferred shares issued in November 2001.
Growth in net income and funds from operations during the remainder of 2002
will be primarily dependent on contributions from the core portfolio. Growth of
net income from the core portfolio is, in part, dependent on the general
economy, 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. The current weakening
of the retail and overall economic environment could adversely impact
30
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. The Trust's properties were 95.5% leased at September 30, 2002 and 95.8%
leased at September 30, 2001.
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 scheduled opening in November, 2002 and additional depreciation and interest
expense as the project is phased into operations will have a dilutive effect on
2002 and 2003 earnings.
Growth in net income is also dependent on the amount of the Trust's
leverage and interest rates. The Trust's leverage is increasing as it finances
its development projects. 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 and redevelopment projects, will
be negatively impacted. Net income available for common shareholders' and funds
from operations will also be reduced by the November 2001 issuance of the 8.5%
Series B Cumulative Redeemable Preferred Shares.
31
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,
2002 2001
- --------------------------------------------------------------------------------
Rental income
Northeast $ 88,459 $ 86,651
Mid-Atlantic 100,728 90,408
West 25,055 24,118
-------- --------
Total $214,242 $201,177
======== ========
For the nine months ended September 30,
2002 2001
- --------------------------------------------------------------------------------
Net operating income, including interest income on mortgage notes receivable
Northeast $ 67,264 $ 64,299
Mid-Atlantic 74,956 68,166
West 15,241 16,769
-------- --------
$157,461 $149,234
======== ========
The Northeast
The Northeast region is comprised of forty-eight 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 2002 with 2001, rental income
increased 2.1% from $86.7 million in 2001 to $88.5 million in 2002. On a same
center basis, excluding 101 E. Oak Street and 70/10 Austin Street which were
sold in 2001, rental income increased 3.1% from $85.8 million in 2001 to $88.5
million in 2002, due to increases at recently redeveloped and retenanted
shopping centers such as Bala Cynwyd, Brunswick, Dedham, Fresh Meadows and
Wynnewood as well as increases associated with lease rollovers. Same center
rental income, excluding the contribution from property redevelopments and
expansions, increased 2.8%.
Net operating income, including interest income on mortgage notes
receivable, increased 4.6% from $64.3 million in 2001 to $67.3
32
million in 2002. On a same center basis, as defined above, net operating income
increased 6.6% from $62.6 million in 2001 to $66.8 million in 2002, primarily
due to increases at the recently redeveloped and retenanted shopping centers,
lease rollovers and significantly lower common area maintenance costs,
specifically snow removal costs. Same center net operating income, excluding the
contribution from property redevelopments and expansions, increased 6.4%.
The Mid-Atlantic
The Mid-Atlantic region is comprised of thirty-two assets, including
Pentagon Row, which was substantially completed in 2002, 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 2002 with 2001, rental income
increased 11.4% from $90.4 million in 2001 to $100.7 million in 2002. On a same
center basis, excluding Williamsburg Shopping Center which was sold in 2001,
Friendship Center which was purchased in 2001 and Pentagon Row which is being
phased into service throughout 2001 and 2002, rental income increased 3.2%, due
primarily to successful retenanting at several shopping centers and street
retail properties, as well as the increased rental income from the Trust's
Woodmont East project in Bethesda, Maryland which was open and occupied for a
full nine months in 2002. These increases were offset by higher vacancy levels
at three of the region's shopping centers. There were no significant
contributions from redevelopments or expansions in this region during the nine
months ended September 30 2002 and 2001.
When comparing the first nine months of 2002 with 2001, net operating
income increased 10.0% from $68.2 million in 2001 to $75.0 million in 2002. On
the same center basis as defined above, net operating income increased 2.6%,
with the increased rental income offset by increased real estate taxes.
The West
The Western region is comprised of thirty-four assets, including Santana
Row, which is currently under development, extending from Texas to the West
Coast.
When comparing the first nine months of 2002 with 2001 on a same center
basis, which excludes 580 Market Street which was exchanged for the minority
partner's interest in Santana Row and Santana Row, which is currently under
development, rental income increased 7.4% from $23.3 million in 2001 to $25.0
million in 2002, due to increases from the recently redeveloped and retenanted
properties in the Los Angeles area, San Francisco and Los Gatos, California as
well as increases associated with lease rollovers. Same center rental income,
excluding the contribution from redevelopments and expansions, increased 4.4%.
On an overall basis,
33
rental income increased 3.9%, from $24.1 million in 2001 to $25.1 million in
2002.
On a same center basis as defined above, net operating income, including
interest income on mortgage notes receivable, increased 8.8% from $16.7 million
in 2001 to $18.2 million in 2002, due primarily to increases from the recently
redeveloped and retenanted properties in the Los Angeles area, San Francisco and
Los Gatos, California and higher participating interest income on mortgage notes
receivable. Same center net operating income, excluding the contribution from
redevelopments and expansions, increased 7.8%. Overall net operating income
decreased from $16.8 million in 2001 to $15.2 million in 2002, reflecting the
above mentioned increases offset by the marketing, leasing and start-up costs
associated with Santana Row.
34
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Consolidated Results
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 6.0% from $68.2 million in the third quarter of 2001 to
$72.3 million in the third quarter of 2002. On a same center basis, rental
income increased 3.1%, due primarily to the favorable impact of redeveloped and
retenanted centers, as well as, increases associated with lease rollovers. Same
center basis, in the third quarter of 2002, excludes Williamsburg Shopping
Center in Williamsburg, Virginia, 101 E. Oak Street in Chicago, Illinois and
70/10 Austin Street in Forest Hills, New York which were sold in 2001,
Friendship Center in Washington, D.C. which was purchased on September 21, 2001,
the office building located at 580 Market Street in San Francisco, California
which was exchanged for the minority partner's interest in Santana Row and
properties under development in 2001 and 2002, including Pentagon Row in
Arlington, Virginia and Santana Row in San Jose, California. Same center basis,
as defined above, includes properties which have been redeveloped or expanded.
Same center rental income, excluding the contribution from property
redevelopments and expansions, increased 2.9%.
Other property income includes items, which although recurring, tend to
fluctuate more than rental income from period to period, such as utility
reimbursements, telephone income, merchant association dues, late fees, lease
termination fees and temporary tenant income. Other property income increased
2.8% from $4.3 million in the third quarter 2001 to $4.4 million in the third
quarter of 2002 due to the income earned, including a one-time $800,000
perpetual easement payment from a residential developer that has commenced
development on an adjacent site, at the Pentagon Row project which began phasing
into service in the second quarter of 2001. The increases associated with
Pentagon Row were offset by lower lease termination fees, utility reimbursements
and parking income. On a same center basis, other property income decreased
$500,000 or 13.9% as a result of the decreases mentioned above.
Interest and other income includes interest earned on mortgage notes
receivable and overnight cash investments, including tax-deferred exchange
escrow deposits. Interest and other income remained constant at $1.7 million in
2001 and 2002.
Rental expenses increased 14.5% from $15.3 million in the third quarter of
2001 to $17.5 million in the third quarter of 2002. Expenses for the Pentagon
Row project and pre-opening and marketing expenses at Santana Row were the major
causes of this increase. As a result of the pre-opening and marketing expenses
at Santana Row in 2002, rental expense as a percentage of property income,
rental income plus other property income, increased from 21.1% in 2001 to 22.8%
in 2002. On a same center basis, rental expenses increased 3.3% from $14.0
million in 2001 to $14.5 million in 2002, primarily due to increased utility and
insurance costs in 2002. Same center rental
35
expense, excluding the effect of property redevelopments and expansions,
increased 1.8%.
Real estate taxes increased 8.3% from $7.3 million in the third quarter of
2001 to $7.9 million in the third quarter of 2002. On a same center basis, real
estate taxes increased 6.6% due primarily to increased taxes on recently
redeveloped properties and overall increases in tax assessments. Same center
real estate taxes, excluding the effect of property redevelopments and
expansions, increased 5.8%.
Depreciation and amortization expenses increased 7.4% from $15.0 million in
the third quarter of 2001 to $16.1 million in the third quarter of 2002
reflecting the impact of recent new developments, tenant improvements and
property redevelopments which were placed in service throughout 2001 and the
first nine months of 2002.
During the third quarter of 2002 the Trust incurred interest of $21.5
million, of which $8.0 million was capitalized, as compared to 2001's $22.5
million of which $4.8 million was capitalized. The decrease in interest expense
is a result of lower interest expense on the Trust's syndicated credit facility,
reflecting the pay-down on the credit facility with the proceeds from the
November 2001 preferred stock offering and the June 2002 common stock offering,
as well as lower interest rates on the Trust's variable rate debt offset by the
additional construction debt issued to fund the Trust's capital improvement
programs.
Administrative expenses, while increasing from $3.5 million in the third
quarter of 2001 to $3.7 million in the third quarter of 2002 remained at 4.7% of
revenue.
Investors' share of operations represents the minority interest in the
income of certain properties. The $100,000 decrease from $1.2 million in the
third quarter of 2001 to $1.1 million in the third quarter of 2002 is due to the
Trust's 2001 purchase of the minority interest in nine street retail buildings
in southern California and three street retail buildings in Forest Hills, New
York.
During the second quarter of 2002 the Trust sold six properties. The net
income (loss) from these properties, reported as income from operations of
discontinued assets, was ($59,000) and $918,000 for the three months ended
September 30, 2002 and 2001, respectively.
As a result of the foregoing items, income before discontinued operations
increased from $14.3 million during the third quarter of 2001 to $18.6 million
during the third quarter of 2002, while net income increased from $15.2 million
during the third quarter of 2001 to $18.5 million during the third quarter of
2002. Net income available for common shareholders increased from $13.2 million
during the third quarter of 2001 to $13.6 million during the third quarter of
2002, as a result of the forgoing items, offset by the increase of $2.9 million
in preferred dividends on the 8.5% preferred shares
36
issued in November 2001.
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,
2002 2001
- -------------------------------------------------------------------------------
Rental income
Northeast $29,479 $29,661
Mid-Atlantic 34,515 30,025
West 8,283 8,493
------- -------
Total $72,277 $68,179
======= =======
For the three months ended September 30,
2002 2001
- -------------------------------------------------------------------------------
Net operating income, including interest income on mortgage notes receivable
Northeast $22,499 $22,801
Mid-Atlantic 25,998 22,254
West 4,184 5,795
------- -------
$52,681 $50,850
======= =======
The Northeast
The Northeast region is comprised of forty-eight 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 2002 with 2001, rental income decreased
approximately $200,000 from $29.7 million in 2001 to $29.5 million in 2002 due
to lower cost reimbursements at three shopping center properties and higher
vacancy at one shopping center property. On a same center basis, excluding 101
E. Oak Street and 70/10 Austin Street which were sold in 2001, rental income
increased $100,000 from $29.4 million in 2001 to $29.5 million in 2002,
primarily due to increases at recently redeveloped and retenanted
37
shopping centers such as Dedham, Ellisburg and Fresh Meadows as well
as increases associated with lease rollovers offset by lower cost reimbursements
and vacancies. Same center rental income, excluding the contribution from
property redevelopments and expansions, increased approximately $200,000.
Net operating income, including interest income on mortgage notes
receivable, decreased 1.3% from $22.8 million in 2001 to $22.5 million in 2002
due primarily to lower rental income, as stated above, and lower mortgage note
interest as a $10 million mortgage note was paid off in July 2002. On a same
center basis, as defined above, net operating income increased 1.1% from $22.3
million in 2001 to $22.5 million in 2002, due to increases at the recently
redeveloped and retenanted shopping centers offset by lower cost reimbursements,
vacancies and lower mortgage note interest. Same center net operating income,
excluding the contribution from property redevelopments and expansions,
increased 1.5%.
The Mid-Atlantic
The Mid-Atlantic region is comprised of thirty-two assets, including
Pentagon Row, which was substantially completed in 2002, 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 2002 with 2001, rental income increased
15.0% from $30.0 million in 2001 to $34.5 million in 2002. On a same center
basis, excluding Williamsburg Shopping Center which was sold in 2001, Friendship
Center which was purchased in 2001 and Pentagon Row which is being phased into
service throughout 2001 and 2002, rental income increased 6.5% from $29.6
million in 2001 to $31.5 million in 2002 due primarily to successful retenanting
at several shopping centers and street retail properties. There were no
significant contributions from redevelopments or expansions in this region
during the three months ended September 30, 2002 and 2001.
When comparing the third quarter of 2002 with 2001, net operating income
increased 16.8% from $22.3 million in 2001 to $26.0 million in 2002. On the same
center basis, as defined above, net operating income increased 6.6% from $21.9
million in 2001 to $23.4 million in 2002 due to increased rental income.
The West
The Western region is comprised of thirty-four assets, including Santana
Row, which is currently under development, extending from Texas to the West
Coast.
When comparing the third quarter of 2002 with 2001 on a same center basis,
which excludes 580 Market Street which was exchanged for the minority partner's
interest in Santana Row and Santana Row,
38
which is currently under development, rental income increased approximately
$100,000 from $8.2 million in 2001 to $8.3 million in 2002, due primarily to
successful retenanting at two street retail properties. The increase in rental
income in the third quarter of 2002 was offset by retroactive rental income
adjustments of approximately $142,000 recorded in the third quarter of 2001 at
one street retail property. There were no significant contributions from
redevelopments or expansions in this region in the three months ended September
30, 2002 and 2001. On an overall basis, rental income decreased 2.5%, from $8.5
million in 2001 to $8.3 million in 2002.
On a same center basis, as defined above, net operating income, including
interest income on mortgage notes receivable, decreased 10.9% from $6.2 million
in 2001 to $5.6 million in 2002. The increase in rental income was offset by
higher operating costs and lower parking and storage revenue. Same center net
operating income, excluding the contribution from redevelopments and expansions,
decreased 7.4%. Overall net operating income decreased 27.8% from $5.8 million
in 2001 to $4.2 million in 2002, reflecting the above mentioned decreases in
addition to the marketing, leasing and start-up costs associated with Santana
Row.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust's use of financial instruments, such as debt instruments, subject
the Trust to market risk which may affect the Trust's future earnings and cash
flows as well as the fair value of its assets. Market risk generally refers to
the risk of loss from changes in interest rates and market prices. The Trust
manages its market risk by attempting to match anticipated inflow of cash from
its operating, investing and financing activities with anticipated outflow of
cash to fund debt payments, dividends to common and preferred shareholders,
investments, capital expenditures and other cash requirements. The Trust also
enters into derivative financial instruments such as interest rate swaps to
mitigate its interest rate risk on a related financial instrument or to
effectively lock the interest rate on a portion of its variable rate debt.
The following discussion of market risk is based solely on hypothetical
changes in interest rates related to the Trust's variable rate debt. This
discussion does not purport to take into account all of the factors that may
affect the financial instruments discussed in this section.
Interest Rate Risk
The Trust's interest rate risk is most sensitive to fluctuations in
interest rates on its variable rate debt. At September 30, 2002, the Trust had
$115.9 million of variable rate debt, not including the $151.3 million Santana
Row variable rate construction loan of which the majority of the interest is
capitalized to the development project. Based upon this balance of variable
operating debt, if interest rates increased 1%, the Trust's earnings and cash
flows would decrease by approximately $1.2 million. If interest rates decreased
1%, the Trust's earnings and cash flows would increase by approximately $1.2
million. The Trust believes that the change in the fair value of its financial
instruments resulting from a foreseeable fluctuation in interest rates would be
immaterial to its total assets and total liabilities.
Cash Flow Hedges
The Trust uses derivative financial instruments to convert a portion of its
variable rate debt to fixed rate debt and to manage its fixed to variable rate
debt ratio. A description of these derivative financial instruments is contained
in Note A to the Notes to Consolidated Financial Statements contained in "Item
1. Financial Statements" and is incorporated by reference into this Item 3.
40
ITEM 4. CONTROLS AND PROCEDURES
The Trust maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Trust's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Trust's management, including its Chairman and Chief
Executive Officer, its President and Chief Operating Officer and its Senior Vice
President and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c) promulgated under the Exchange Act.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Trust carried out an
evaluation, under the supervision and with the participation of the Trust's
management, including its Chairman and Chief Executive Officer, its President
and Chief Operating Officer and its Senior Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Trust's
disclosure controls and procedures. Based on the foregoing, the Trust's Chairman
and Chief Executive Officer, its President and Chief Operating Officer and its
Senior Vice President and Chief Financial Officer concluded that the Trust's
disclosure controls and procedures were effective.
There have been no significant changes in the Trust's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date the Trust completed its evaluation.
41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote to Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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 as amended, filed with the Commission on June
6, 2002 as an exhibit to the Trust's Registration Statement on Form 8-A/A is
incorporated herein by reference thereto.
(10)(i) Amendment to Promissory Notes dated May 31, 2002 between Federal
Realty Investment Trust and Steven J. Guttman.
(ii) Amendment to Stock Option Agreements dated August 15, 2002
between Federal Realty Investment Trust and Dawn M. Becker.
(iii) Amendment to Stock Option Agreement dated August 15, 2002
between Federal Realty Investment Trust and Jeffrey S. Berkes.
(B) Reports on Form 8-K
A Form 8-K, dated June 30, 2002 was filed on August 12, 2002 in response to
Item 5.
A Form 8-K, dated September 4, 2002 was filed on September 4, 2002 in
response to Item 5.
42
SIGNATURES
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
-------------------------------
October 30, 2002 /s/ Steven J. Guttman
----------------------
Steven J. Guttman, Chairman, Chief
Executive Officer and Trustee
(Principal Executive Officer)
October 30, 2002 /s/ Larry E. Finger
-------------------
Larry E. Finger, Senior Vice President
and Chief Financial Officer(Principal
Accounting Officer)
43
CERTIFICATION
I, Steven J. Guttman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal Realty
Investment Trust;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trustees (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
44
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: October 30, 2002 /s/ Steven J. Guttman
---------------- ----------------------
NAME: Steven J. Guttman
TITLE: Chairman and Chief Executive
Officer
45
CERTIFICATION
I, Donald C. Wood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal Realty
Investment Trust;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trustees (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
46
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: October 30, 2002 /s/ Donald C. Wood
----------------- ------------------
NAME: Donald C. Wood
TITLE: President and Chief Operating
Officer
47
CERTIFICATION
I, Larry E. Finger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal Realty
Investment Trust;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trustees (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
48
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: October 30, 2002 /s/ Larry E. Finger
---------------- ----------------
NAME: Larry E. Finger
TITLE: Senior Vice President
and Chief Financial
Officer
49
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Steven J. Guttman, the Chairman and Chief Executive Officer of
Federal Realty Investment Trust (the "Company"), has executed this certification
in connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the period ending September 30, 2002
(the "Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: October 30, 2002 /s/ Steven J. Guttman
---------------- ----------------------
Name: Steven J. Guttman
Title: Chairman and Chief Executive
Officer
50
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Donald C. Wood, the President and Chief Operating Officer of
Federal Realty Investment Trust (the "Company"), has executed this certification
in connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the period ending September 30,
2002, (the "Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: October 30, 2002 /s/ Donald C. Wood
---------------- -------------------
Name: Donald C. Wood
Title: President and Chief Operating
Officer
51
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Larry E. Finger, the Senior Vice President and Chief Financial
Officer of Federal Realty Investment Trust (the "Company"), has executed this
certification in connection with the filing with the Securities and Exchange
Commission of the Company's Quarterly Report on Form 10-Q for the period ending
September 30, 2002 (the "Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: October 30, 2002 /s/ Larry E. Finger
--------------------- --------------------
Name: Larry E. Finger
Title: Senior Vice President and Chief
Financial Officer
52
EXHIBIT INDEX
(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 as amended, filed with the Commission on
June 6, 2002 as an exhibit to the Trust's Registration Statement on Form 8-A/A
is incorporated herein by reference thereto.
(10)(i) Amendment to Promissory Notes dated May 31, 2002 between Federal
Realty Investment Trust and Steven J. Guttman.
(ii) Amendment to Stock Option Agreements dated August 15, 2002
between Federal Realty Investment Trust and Dawn M. Becker.
(iii) Amendment to Stock Option Agreement dated August 15, 2002 between
Federal Realty Investment Trust and Jeffrey S. Berkes.
53