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: March 31,1999
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Commission File No. 17533
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FEDERAL REALTY INVESTMENT TRUST
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(Exact name of registrant as specified in its charter)
District of Columbia 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 April 23, 1999
- ------------------------------------ -----------------------------
Common Shares of Beneficial Interest 40,260,090
This report, including exhibits, contains 47 pages.
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
March 31, 1999
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
Accountants' Report 4
Consolidated Balance Sheets
March 31, 1999 (unaudited) and
December 31, 1998 (audited) 5
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1999 and 1998 6
Consolidated Statements
of Shareholders' Equity (unaudited)
Three months ended March 31, 1999 and 1998 7
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1999 and 1998 8
Notes to Financial Statements 9-12
Management's Discussion and Analysis of 13-19
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 20
2
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
March 31, 1999
PART I. FINANCIAL INFORMATION
The following financial information is submitted in response to
the requirements of Form 10-Q and does not purport to be financial
statements prepared in accordance with generally accepted accounting
principles since they do not include all disclosures which might be
associated with such statements. In the opinion of management, such
information includes all adjustments, consisting only of normal
recurring accruals, necessary to a fair statement of the results for
the interim periods presented.
The balance sheet as of December 31, 1998 was audited by Grant
Thornton LLP, independent public accountants, who expressed an
unqualified opinion on it in their report dated February 8, 1999. All
other financial information presented is unaudited but has been
reviewed as of March 31, 1999 and for each of the three month periods
ended March 31, 1999 and 1998 by Grant Thornton LLP whose report
thereon appears on Page 4. All adjustments and disclosures proposed by
them have been reflected in the data presented.
3
Accountants' Review Report
- --------------------------
Trustees and Shareholders
Federal Realty Investment Trust
We have reviewed the accompanying consolidated balance sheet of Federal Realty
Investment Trust as of March 31, 1999 and the related consolidated statements of
operations, shareholders' equity and cash flows for the three month periods
ended March 31, 1999 and 1998. These financial statements are the
responsibility of the Trust's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
February 8, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998 is
stated fairly, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Grant Thornton LLP
Washington, D.C.
April 27, 1999
4
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
(see accountants' review report)
March 31, December 31,
1999 1998
(unaudited)
------------- -------------
ASSETS (in thousands)
Investments
Real estate, at cost $1,676,270 $1,642,136
Less accumulated depreciation and amortization (297,221) (286,053)
--------- -----------
1,379,049 1,356,083
Mortgage notes receivable 55,551 51,154
---------- ---------
1,434,600 1,407,237
Other Assets
Cash 12,547 17,230
Accounts and notes receivable 17,492 17,873
Prepaid expenses and other assets, principally
property taxes and lease commissions 35,202 38,502
Debt issue costs 3,255 3,475
--------- -----------
$1,503,096 $1,484,317
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $122,311 $122,401
Mortgages payable 50,951 51,079
Notes payable 291,875 263,159
Accounts payable and accrued expenses 26,610 34,073
Dividends payable 18,999 18,972
Security deposits 5,182 5,214
Prepaid rents 4,799 3,641
Senior notes 335,000 335,000
5 1/4% Convertible subordinated debentures 75,289 75,289
Investors' interest in consolidated assets 46,788 45,542
Commitments and contingencies
Shareholders' equity
7.95% Series A Cumulative Redeemable Preferred Shares, liquidation
preference $25 per share, 4,000,000 shares issued in 1997 100,000 100,000
Common shares of beneficial interest, no par
or stated value, unlimited authorization,
issued 40,227,691 and 40,139,675 shares,
respectively 709,742 707,724
Accumulated dividends in excess of Trust net income (261,317) (255,211)
--------- -----------
548,425 552,513
Less 58,419 and 59,425 common shares in treasury - at cost, respectively,
deferred compensation and subscriptions receivable (23,133) (22,566)
--------- -----------
525,292 529,947
---------- ----------
$1,503,096 $1,484,317
========== ==========
The accompanying notes are an integral part of these statements.
5
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(see accountants' review report)
(unaudited)
Three months ended March 31,
1999 1998
--------- ---------
(In thousands, except per share data)
Revenue
Rental income $59,433 $52,481
Other property income 2,272 2,102
Interest income 1,878 1,594
------- -------
63,583 56,177
Expenses
Rental 13,648 11,922
Real estate taxes 6,012 5,472
Interest 15,133 12,693
Administrative 2,254 1,841
Depreciation and amortization 12,281 10,769
------- -------
49,328 42,697
------- -------
Operating income before investors' share
of operations 14,255 13,480
Investors' share of operations (701) (786)
------- -------
Net Income $13,554 $12,694
Dividends on preferred stock (1,988) (1,988)
-------- -------
Net income available for common shareholders $11,566 $10,706
======== =======
Earnings per common share, basic $0.29 $0.27
======= ========
Weighted average number of common shares, basic 39,435 38,949
======= ========
Earnings per common share, diluted $0.29 $0.27
======= ========
Weighted average number of common shares, diluted 40,545 39,870
======= ========
The accompanying notes are an integral part of these statements.
6
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(see accountants' review report)
(unaudited)
Three months ended March 31,
1999 1998
----------- ---------- ------------ ---------
(In thousands, except per share amounts) Shares Amount Shares Amount
Common Shares of Beneficial Interest
Balance, beginning of period 40,139,675 $707,724 39,200,201 $684,823
Exercise of stock options - - 95,365 2,051
Shares issued under dividend reinvestment plan 37,362 873 39,803 1,003
Performance and Restricted Shares granted, net of retirements 50,654 1,145 514,055 13,369
----------- --------- ---------- --------
Balance, end of period 40,227,691 $709,742 39,849,424 $701,246
=========== ======== ========== =========
Common Shares of Beneficial Interest
in Treasury, Deferred Compensation and
Subscriptions Receivable
Balance, beginning of period (979,446) ($22,566) (457,111) ($8,304)
Amortization of deferred compensation 24,833 470 36,937 679
Performance and Restricted Shares granted, net of retirements (45,654) (1,039) (539,055) (13,830)
Purchase of shares under share purchase plan - - 6,250 94
Reissuance of treasury shares - - 25,000 462
Decrease (increase) in stock option loans, net 88 2 (65,069) (1,408)
--------- --------- -------- ---------
Balance, end of period (1,000,179) ($23,133) (993,048) ($22,307)
========== ========= ======= =======
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of period $255,211 ($222,709)
Net income (13,554) 12,694
Dividends declared to shareholders 19,660 (19,111)
--------- --------
Balance, end of period $261,317 ($229,126)
========= =========
The accompanying notes are an integral part of these statements.
7
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
(see accountants' review report)
(unaudited)
Three months ended March 31,
1999 1998
-------------- --------------
(In thousands)
OPERATING ACTIVITIES
Net income $13,554 $12,694
Items not requiring cash outlays
Depreciation and amortization 12,281 10,769
Other, net 497 191
Changes in assets and liabilities
Decrease in accounts and notes receivable 381 1,400
Decrease (Increase) in prepaid expenses and other
assets before depreciation and amortization 2,325 (3,653)
Increase (decrease) in operating accounts payable,
security deposits and prepaid rent (1,016) 5,037
Decrease in accrued expenses (5,719) (5,126)
-------- --------
Net cash provided by operating activities 22,303 21,312
INVESTING ACTIVITIES
Acquisition of real estate (15,260) (13,592)
Capital expenditures (16,366) (15,251)
Issuance of mortgage notes receivable, net (4,397) (2,543)
-------- --------
Net cash used in investing activities (36,023) (31,386)
FINANCING ACTIVITIES
Borrowing (repayment) of short-term debt, net 28,852 (51,790)
Issuance of senior notes, net of costs - 79,540
Issuance of common shares 343 1,093
Payments on mortgages, capital leases, and
notes payable (354) (701)
Dividends paid (18,995) (18,383)
Decrease in minority interest (809) (838)
-------- --------
Net cash provided by financing activities 9,037 8,921
-------- --------
Decrease in cash (4,683) (1,153)
Cash at beginning of period 17,230 17,043
-------- --------
Cash at end of period $12,547 $15,890
======== ========
The accompanying notes are an integral part of these statements.
8
Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(see accountants' review report)
(unaudited)
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the notes to financial statements included in
the Annual Report to shareholders for the year ended December 31, 1998 which
contain the Trust's accounting policies and other data.
The following table sets forth the reconciliation between basic and diluted
EPS:
Three months ending
March 31,
Numerator 1999 1998
Net income available for common
shareholders-basic $11,566 $10,706
Income attributable to operating
partnership units 264 207
Net income available for common ------- ------
shareholders-diluted $11,830 $10,913
======= =======
Denominator
Denominator for basic EPS-
weighted average shares 39,435 38,949
Effect of dilutive securities
Stock options and awards 230 440
Operating partnership units 880 481
------- -------
Denominator for diluted EPS 40,545 39,870
======= =======
NOTE B - REAL ESTATE ASSETS AND ENCUMBRANCES
Real estate acquisitions during the first quarter of 1999 were as follows
(in thousands, except for square footage):
Total Cash Leasable
Property Cost Portion Sq. Footage
- -----------------------------------------------------------------------
Galaxy Bldg, Hollywood, CA (1) $16,940 $15,260 120,000
(1)The Trust acquired a 90% economic interest in the Galaxy
Building.
In addition, the Trust invested $4.4 million in mortgage notes receivable with
an average weighted interest rate of 10% during the first quarter of 1999.
9
NOTE C - NOTES PAYABLE
At March 31, 1999 there was $163.0 million borrowed under the Trust's
syndicated credit facility, which also represents the maximum drawn during the
quarter. The weighted average interest rate on borrowings for the three months
ended March 31, 1999 was 5.8%. 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.
NOTE D - REORGANIZATION EXPENSES
At September 30, 1998 the Trust recorded a $4.7 million charge related to a
comprehensive restructuring program, the implementation of which was begun
during the fourth quarter of 1998. As of March 31, 1999 cash payments of $2.3
million had been made against the reserve with most of the remaining cash
expected to be paid during the remainder of 1999.
NOTE E - SHAREHOLDERS' EQUITY
On February 22, 1999, options for 705,000 shares at a price of $21 1/16 per
share, fair value at the date of award, were awarded to officers and certain
employees. The options vest evenly over three years.
NOTE F - INTEREST EXPENSE
The Trust incurred interest expense totaling $16.3 million during the first
three months of 1999 and $14.0 million during the first three months of 1998, of
which $1.2 million and $1.3 million, respectively, was capitalized in connection
with development projects. Interest paid was $18.8 million in the first three
months of 1999 and $16.1 million in the first three months of 1998.
NOTE G - COMMITMENTS AND CONTINGENCIES
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.
Pursuant to the provisions of the partnership agreement, in the event of
the exercise of put options by another partner, the Trust would be required to
purchase an 18.75% interest of Congressional Plaza at its then fair market
value. On January 1, 1999 the Loehmann's Plaza Limited Partnership Agreement was
amended to extend the partnership to December 31, 2000 and to delete the put and
call options.
Under the terms of certain other partnerships, if certain leasing and
revenue levels are obtained for the properties owned by the partnerships, the
limited partners may require the Trust to purchase their partnership interests
at a formula price based upon net
10
operating income. The purchase price may be paid in cash or common stock of the
Trust at the election of the limited partners. If the limited partners do not
redeem their interest, the Trust may choose to purchase the limited partnership
interests upon the same terms. Under the terms of other partnerships, the
partners may exchange their 879,541 operating units into cash or the same number
of common shares of the Trust, at the option of the Trust.
The Trust has reviewed the software and hardware systems used internally to
operate its business, in order to assess their ability to handle the "Year 2000
Issue" which generally refers to the inability of systems hardware and software
to correctly identify two-digit references to specific calendar years, beginning
with 2000. The Year 2000 Issue can affect the Trust directly by impairing its
internal data-based operations or processing and indirectly by impairing its
suppliers' and tenants' data-based operations or processing. The Trust has
identified and evaluated the Year 2000 compliance of its internal systems; the
Trust believes that the remediation of all accounting systems and other systems
of high priority is complete. The Trust is endeavoring to remediate the
remaining internal systems.
The Trust is currently requesting information from its major banks,
tenants, suppliers and manufacturers of computerized components of its real
estate properties to determine their Year 2000 compliance. Based on costs spent
to date and projections of future costs, costs of addressing and solving
potential internal problems are not expected to have a material adverse impact
on the Trust's financial condition.
NOTE H - COMPONENTS OF RENTAL INCOME
The components of rental income for the periods ended March 31 are as
follows (in thousands):
1999 1998
---- ----
Retail properties
Minimum rents $48,134 $42,244
Cost reimbursements 9,199 7,993
Percentage rents 1,426 1,605
Apartments 674 639
------- -------
$59,433 $52,481
======= =======
NOTE I - SEGMENT INFORMATION
During the fourth quarter of 1998 the Trust completed a comprehensive
restructuring program, which, among other things, divided its portfolio of
properties into three geographic operating regions: Northeast, Mid-Atlantic and
West. In 1999 there was a minor reorganization of the regions which moved the
Illinois and Michigan properties to the Northeast region from the Western
region.
A summary of the Trust's operations by geographic region is presented below
(in thousands):
11
Three months ended North Mid
March 31, 1999 East Atlantic West Other Total
- -------------------------------------------------------------------------------------------------
Rental income $ 24,858 $ 27,462 $ 7,113 $ 59,433
Other income 1,169 811 292 2,272
Rental expense (5,813) (5,934) (1,901) (13,648)
Real estate tax (3,087) (2,169) (756) (6,012)
-------- -------- ----------- ----------
Net operating income 17,127 20,170 4,748 42,045
Interest income 1,878 1,878
Interest expense (15,133) (15,133)
Administrative expense (2,254) (2,254)
Depreciation and
amortization (5,438) (5,694) (918) (231) (12,281)
-------- -------- ----------- ------- ----------
Income before investors'
share of operations $ 11,689 $ 14,476 $ 3,830 (15,740) $ 14,255
======== ======== =========== ======= ==========
Capital expenditures $ 2,095 $ 7,437 $ 25,020 $ 34,552
======== ======== =========== ==========
Real estate assets $686,177 $684,154 $ 305,939 $1,676,270
======== ======== =========== ==========
Three months ended North Mid
March 31, 1998 East Atlantic West Other Total
- -------------------------------------------------------------------------------------------------
Rental income $ 22,160 $ 25,139 $ 5,182 $ 52,481
Other income 1,140 748 214 2,102
Rental expense (5,194) (5,501) (1,227) (11,922)
Real estate tax (3,023) (1,935) (514) (5,472)
-------- -------- ----------- ----------
Net operating income 15,083 18,451 3,655 37,189
Interest income 1,594 1,594
Interest expense (12,693) (12,693)
Administrative expense (1,841) (1,841)
Depreciation and
amortization (4,659) (5,433) (437) (240) (10,769)
-------- -------- ----------- ------- ----------
Income before investors'
share of operations $ 10,424 $ 13,018 $ 3,218 (13,180) $ 13,480
======== ======== =========== ======= ==========
Capital expenditures $ 5,775 $ 6,598 $ 17,196 $ 29,569
======== ======== =========== ==========
Real estate assets $635,599 $624,028 $ 221,759 $1,481,386
======== ======== =========== ==========
There are no transactions between geographic areas.
12
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
March 31, 1999
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. Certain statements made in this report
contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause actual
results, performance or 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, general economic and
business conditions which will affect credit-worthiness of tenants, financing
availability and cost, retailing trends and rental rates; risks of real estate
development and acquisitions; governmental and environmental regulations; and
competition with other real estate companies and technology. Portions of this
discussion include certain forward-looking statements about the Trust's and
management's intentions and expectations. Although these intentions and
expectations are based upon reasonable assumptions, many factors, such as
general economic conditions, local and national real estate conditions,
increases in interest rates and operating costs, may cause actual results to
differ materially from current expectations.
LIQUIDITY AND CAPITAL RESOURCES
Federal Realty meets its liquidity requirements through net cash provided by
operating activities, along with traditional debt and equity funding
alternatives available to it. A significant portion of cash provided by
operating activities is distributed to common and preferred shareholders in the
form of dividends. Accordingly, capital outlays for property acquisitions,
major renovation and development projects and balloon debt repayments require
debt or equity funding.
Net cash provided by operating activities was $22.3 million in the first
quarter of 1999 and $21.3 million in the first quarter of 1998 of which $19.0
million and $18.4 million, respectively, was distributed to shareholders.
Contributions from newly acquired properties and from retenanted and
redeveloped properties, as more fully described below, were the primary sources
of these increases.
Net cash used in investing activities was $36.0 million during the first
quarter of 1999 and $31.4 million during the first quarter of 1998. The Trust
purchased real estate totaling $16.9 million in the first quarter of 1999 and
$13.6 million in the first quarter of
13
1998, requiring cash outlays of $15.3 million and $13.6 million, respectively.
During these two periods, the Trust expended an additional $16.4 million and
$15.3 million, respectively, in capital improvements to its properties. The
Trust invested $4.4 million during the first quarter of 1999 and $2.5 million
during the first quarter of 1998 in mortgage notes receivable with an average
weighted interest rate of 10%.
Real estate acquisitions during the first quarter of 1999 were as follows (in
thousands, except for square footage):
Total Cash Leasable
Property Cost Portion Sq. Footage
- -------------------------------------------------------------------
Galaxy Bldg, Hollywood, CA (1) $16,940 $15,260 120,000
(1)The Trust acquired a 90% economic interest in the Galaxy
Building.
Approximately $9.7 million was invested during the first quarter of 1999 in
predevelopment and development projects in Bethesda, Maryland; Los Gatos,
California; San Antonio, Texas; and Arlington, Virginia. Furthermore, the Trust
is devoting considerable time and internal resources to identify additional
development opportunities.
Net cash provided by financing activities, before dividend payments, was $28.0
million in the first quarter of 1999 and $27.3 million in the first quarter of
1998. The Trust utilized its unsecured line of credit to fund acquisitions and
capital expenditures in 1999. At March 31, 1999 there was $163.0 million
borrowed under this syndicated credit facility, which also represents the
maximum drawn during the quarter. The weighted average interest rate on
borrowings for the three months ended March 31, 1999 was 5.8%. 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.
Capital requirements for the remainder of 1999 will depend on acquisition
opportunities, new development efforts, improvements and redevelopments on
existing properties, and tenant work and allowances. Initial funding for such
projects is expected to be provided under the line of credit facility.
The Trust will need additional capital in order to fund acquisitions,
expansions, developments and refinancings. Sources of this funding may be
additional debt, additional equity, proceeds from the sale of properties and the
issuance of operating partnership units. The timing and choice of capital
sources will depend on the cost and availability of that capital, among other
things. The Trust believes, based on past experience, that access to the
capital needed to execute its business plan will be available to it.
14
CONTINGENCIES
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.
Pursuant to the provisions of the partnership agreement, in the event of the
exercise of put options by another partner, the Trust would be required to
purchase an 18.75% interest of Congressional Plaza at its then fair market
value. On January 1, 1999 the Loehmann's Plaza Limited Partnership Agreement
was amended to extend the partnership to December 31, 2000 and to delete the put
and call options.
Under the terms of certain other partnerships, if certain leasing and revenue
levels are obtained for the properties owned by the partnerships, the limited
partners may require the Trust to purchase their partnership interests at a
formula price based upon net operating income. The purchase price may be paid
in cash or common stock of the Trust at the election of the limited partners. If
the limited partners do not redeem their interest, the Trust may choose to
purchase the limited partnership interests upon the same terms. Under the terms
of other partnerships, the partners may exchange their 879,541 operating units
into cash or the same number of common shares of the Trust, at the option of the
Trust.
The Trust has reviewed the software and hardware systems used internally to
operate its business, in order to assess their ability to handle the "Year 2000
Issue" which generally refers to the inability of systems hardware and software
to correctly identify two-digit references to specific calendar years, beginning
with 2000. The Year 2000 Issue can affect the Trust directly by impairing its
internal data-based operations or processing and indirectly by impairing its
suppliers' and tenants' data-based operations or processing. The Trust has
identified and evaluated the Year 2000 compliance of its internal systems; the
Trust believes that the remediation of all accounting systems and other systems
of high priority is complete. The Trust is endeavoring to remediate the
remaining internal systems.
The Trust is currently requesting information from its major banks, tenants,
suppliers and manufacturers of computerized components of its real estate
properties to determine their Year 2000 compliance. Based on costs spent to date
and projections of future costs, costs of addressing and solving potential
internal problems are not expected to have a material adverse impact on the
Trust's financial condition.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net income and funds from operations have been affected by the Trust's recent
acquisition, redevelopment and financing activities.
15
The Trust has historically reported its funds from operations in addition to its
net income and net cash provided by operating activities. Funds from operations
is a supplemental measure of real estate companies' operating performance. The
National Association of Real Estate Investment Trusts ("NAREIT") defines funds
from operations as follows: income available for common shareholders before
depreciation and amortization of real estate assets and before extraordinary
items and significant non-recurring events less gains on sale of real estate.
Funds from operations does not replace net income as a measure of performance or
net cash provided by operating activities as a measure of liquidity. Rather,
funds from operations has been adopted by real estate investment trusts to
provide a consistent measure of operating performance in the industry.
The reconciliation of net income to funds from operations for the three months
ended March 31 is as follows:
1999 1998
------- -------
(in thousands)
Net income available for common
shareholders $11,566 $10,706
Depreciation and amortization
of real estate assets 11,128 9,738
Amortization of initial direct
costs of leases 718 593
Income attributable to operating
partnership units 264 207
Funds from operations for common ------- -------
shareholders $23,676 $21,244
======= =======
Consolidated Results
- --------------------
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 13% from $52.5 million in the first quarter of 1998 to
$59.4 million in the first quarter of 1999. If properties acquired in 1999 and
1998 are excluded, rental income increased 7%, due primarily to the favorable
impact of redeveloped and retenanted centers.
Other property income includes items such as utility reimbursements, telephone
income, merchant association dues, late fees and temporary tenant income.
Other property income increased 8% from $2.1 million in 1998 to $2.3 million in
1999 due primarily to an increase in temporary tenant income, an area identified
by the Trust as one with additional growth opportunity.
Rental expenses increased 14% from $11.9 million in the first quarter of 1998
to $13.6 million in the first quarter of 1999. If rental expenses are adjusted
for properties acquired in 1999 and 1998, rental expenses increased 9% from
$11.9 million in 1998 to $13.0 million in 1999, primarily due to increased snow
removal costs in 1999.
16
Real estate taxes increased 10% from the first quarter of 1998 to $6.0 million
in the first quarter of 1999. If real estate taxes are adjusted for properties
acquired in 1999 and 1998, real estate taxes increased 5% due primarily to
increased taxes on recently redeveloped properties.
Depreciation and amortization expenses increased 14% from the first quarter of
1998 to $12.3 million in the first quarter of 1999 reflecting the impact of
property acquisitions and recent tenant work and property improvements.
During the first quarter of 1999 the Trust incurred interest expense of $16.3
million, of which $1.2 million was capitalized, as compared to 1998's $14.0
million of which $1.3 million was capitalized. The increase in interest expense
reflects the additional debt issued to fund the Trust's acquisition and capital
improvement programs. The ratio of earnings to combined fixed charges and
preferred dividends was 1.53x and 1.58x for the first quarter of 1999 and 1998,
respectively. The ratio of earnings to fixed charges was 1.7x and 1.8x during
the first quarter of 1999 and 1998, respectively. The ratio of funds from
operations to combined fixed charges and preferred dividends was 2.0x for the
first quarter of 1999 and 2.1x for the first quarter of 1998.
Administrative expenses in the first quarter of 1999 reflect the adoption of
the Emerging Issues Task Force ("EITF") Issue 97-11, which required the
expensing of internal costs of acquisition activities beginning in late March
1998. Prior to this date, such costs were capitalized as a component of the
basis of the acquired asset. The increase in administrative expenses from $1.8
million in the first quarter of 1998 to $2.3 million in the first quarter of
1999 is primarily due to the adoption of this EITF and to the filling of certain
executive positions which were vacant during the first quarter of 1998.
As a result of the foregoing items, net income increased from $12.7 million
during the first quarter of 1998 to $13.6 million during the first quarter of
1999 and net income available for common shareholders increased from $10.7
million to $11.6 million.
The Trust expects growth in net income and funds from operations during the
remainder of 1999 both from contributions of its recent acquisitions and from
contributions of its core portfolio, primarily the properties undergoing
redevelopment and retenanting. However, growth of net income from the core
portfolio is, in part, dependent on controlling expenses, some of which are
beyond the complete control of the Trust, such as snow removal and trends in the
retailing environment. The Trust currently expects that demand for its retail
space should remain at levels similar to those in 1998. A weakening of the
retail environment could, however, adversely impact the Trust by increasing
vacancies and decreasing rents. In past weak retail and real estate
environments, the Trust has been able to replace weak and bankrupt tenants with
stronger tenants; management believes that due
17
to the quality of the Trust's properties there will continue to be demand for
its space. Growth in net income is also dependent on interest rates and
controlling administrative costs. If interest rates increase, net income and
funds from operations, as well as the ultimate cost of the Trust's development
projects will be negatively impacted due to the variable interest rates on the
Trust's revolving credit facilities. The Trust is aggressively managing its
administrative expenses through its reorganization efforts.
Segment Results
- ---------------
During the fourth quarter of 1998 the Trust completed a comprehensive
restructuring program, which, among other things, divided its portfolio of
properties into three geographic operating regions: Northeast, Mid-Atlantic and
West. In 1999 there was a minor reorganization of the regions which moved the
Illinois and Michigan properties to the Northeast region from the Western
region.
Historical operating results for the three regions are as follows (in
thousands):
For the three months ended March 31,
1999 1998
- -----------------------------------------------------------
Rental income
Northeast $24,858 $22,160
Mid-Atlantic 27,462 25,139
West 7,113 5,182
------- -------
Total $59,433 $52,481
======= =======
Net operating income
Northeast $17,127 $15,083
Mid-Atlantic 20,170 18,451
West 4,748 3,655
------- -------
$42,045 $37,189
======= =======
The Northeast
The Northeast region is comprised of fifty-three 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 quarter of 1999 with 1998, rental income increased
12% from $22.2 million in 1998 to $24.9 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 9%, primarily due to
increases at recently redeveloped and retenanted shopping centers, such as
Brick, Finley, Gratiot, Feasterville, and Wynnewood.
Net operating income increased 14% from $15.1 million in 1998 to $17.1 million
in 1999. Excluding properties acquired since January 1, 1998, net operating
income increased 10%, primarily due to increases at the recently redeveloped and
retenanted shopping
18
centers.
The Mid-Atlantic
- ----------------
The Mid-Atlantic region is comprised of thirty-two assets, located from
Baltimore south to metropolitan Washington, D.C. and further south through
Virginia, Georgia, and Florida.
When comparing the first quarter of 1999 with 1998, rental income increased 9%
from $25.1 million in 1998 to $27.5 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 4.5%, due in part to new
anchor leases at several centers.
When comparing the first quarter of 1999 with 1998, net operating income
increased 9% from $18.5 million in 1998 to $20.2 million in 1999. Excluding
properties acquired since January 1, 1998, net operating income increased 4.6%.
The West
- --------
The Western region is comprised of thirty-seven assets, located from Texas to
the West Coast.
When comparing the first quarter of 1999 with 1998, rental income increased
37% from $5.2 million in 1998 to $7.1 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 13%, primarily due to
increases from recently redeveloped properties in the Los Angeles, California
area.
When comparing the first quarter of 1999 with 1998, net operating income
increased 30% from $3.7 million in 1998 to $4.7 million in 1999. Excluding
properties acquired since January 1, 1998, net operating income increased 6%,
primarily due to increases from the recently redeveloped properties in the Los
Angeles area.
19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits pp. 22-47
(10)(i) Severance Agreement between Federal Realty Investment
Trust and Donald C. Wood, dated February 22, 1999.
(ii) Executive Agreement between Federal Realty Investment
Trust and Donald C. Wood, dated February 22, 1999.
(27) Financial Data Schedules Edgar filing only
(B) Reports on Form 8-K
A Form 8-K, dated December 31, 1998, was filed on February 11, 1999 in
response to Item 5.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Registrant)
April 28, 1999 Steven J. Guttman
-----------------
Steven J. Guttman, President
(Chief Executive Officer)
April 28, 1999 Cecily A. Ward
--------------
Cecily A. Ward, Controller
(Principal Accounting Officer)
20