<PAGE>
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, 1998
------------------------------------------
Commission File No. 17533
-------------------------
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
District of Columbia 52-0782497
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
- ----------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 998-8100
----------------------------------------------------
(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.
<TABLE>
<CAPTION>
Class Outstanding at October 28, 1998
- ------------------------------------ -------------------------------
<S> <C>
Common Shares of Beneficial Interest 40,037,919
</TABLE>
This report contains 25 pages.
<PAGE>
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 1998
I N D E X
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Accountants' Report 4
Consolidated Balance Sheets
September 30, 1998 (unaudited) and
December 31, 1997 (audited) 5
Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 1998 and 1997 6
Consolidated Statements of Operations (unaudited)
Three months ended September 30, 1998 and 1997 7
Consolidated Statements
of Shareholders' Equity (unaudited)
Nine months ended September 30, 1998 and 1997 8
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998 and 1997 9
Notes to Financial Statements 10-14
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-23
PART II. OTHER INFORMATION 24
</TABLE>
2
<PAGE>
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
September 30, 1998
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, 1997 was audited by Grant
Thornton LLP, independent public accountants, who expressed an
unqualified opinion on it in their report dated February 5, 1998. All
other financial information presented is unaudited but has been
reviewed as of September 30, 1998 and for each of the nine and three
month periods ended September 30, 1998 and 1997 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
<PAGE>
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 September 30, 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for the nine month
periods ended September 30, 1998 and 1997, and the consolidated statements of
operations for the three month periods ended September 30, 1998 and 1997. 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, 1997 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 5, 1998, 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, 1997 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.
October 27, 1998
4
<PAGE>
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
(see accountants' review report)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
------------- -------------
ASSETS (in thousands)
<S> <C> <C>
Investments
Real estate, at cost $1,616,271 $1,453,639
Less accumulated depreciation and amortization (275,054) (247,497)
---------- ----------
1,341,217 1,206,142
Mortgage notes receivable 47,059 38,360
---------- ----------
1,388,276 1,244,502
Other Assets
Cash 9,952 17,043
Notes receivable - officers 1,108 1,190
Accounts receivable 18,320 17,604
Prepaid expenses and other assets, principally
property taxes and lease commissions 36,690 32,128
Debt issue costs 2,961 4,106
---------- ----------
$1,457,307 $1,316,573
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $ 122,488 $ 125,940
Mortgages payable 51,205 95,633
Notes payable 234,846 119,028
Accrued expenses 24,076 23,419
Accounts payable 5,391 7,093
Dividends payable 18,926 18,368
Security deposits 5,490 4,423
Prepaid rents 3,349 2,818
Senior notes 335,000 255,000
5 1/4% Convertible subordinated debentures 75,289 75,289
Investors' interest in consolidated assets 46,219 35,752
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 40,061,303 and 39,200,201 shares,
respectively 706,051 684,823
Accumulated dividends in excess of Trust net income (248,359) (222,709)
---------- ----------
557,692 562,114
Less 58,419 and 52,386 common shares in treasury - at cost,
respectively,deferred compensation and subscriptions receivable (22,664) (8,304)
---------- ----------
535,028 553,810
---------- ----------
$1,457,307 $1,316,573
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(see accountants' review report)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
--------- --------
(In thousands, except per share data)
<S> <C> <C>
Revenue
Rental income $162,041 $137,090
Other property income 7,613 7,512
Interest and other income 3,928 4,660
-------- --------
173,582 149,262
Expenses
Rental 35,274 31,196
Real estate taxes 17,275 14,402
Interest 39,736 35,952
Administrative 8,736 6,562
Depreciation and amortization 33,384 30,853
-------- --------
134,405 118,965
-------- --------
39,177 30,297
Provision for restructuring (4,665) -
-------- --------
Operating income before investors' share
of operations and gain on sale of real estate 34,512 30,297
Investors' share of operations (2,335) (862)
-------- --------
Income before gain on sale of real estate 32,177 29,435
Gain on sale of real estate - 6,375
-------- --------
Net Income $ 32,177 $ 35,810
Dividends on preferred stock (5,963) -
-------- --------
Net income available for common shareholders $ 26,214 $ 35,810
======== ========
Earnings per common share, basic
Income before gain on sale of real estate $ 0.67 $ 0.77
Gain on sale of real estate - 0.16
-------- --------
$ 0.67 $ 0.93
======== ========
Weighted average number of common shares, basic 39,115 38,352
======== ========
Earnings per common share, diluted
Income before gain on sale of real estate $ 0.67 $ 0.76
Gain on sale of real estate - 0.16
-------- --------
$ 0.67 $ 0.92
======== ========
Weighted average number of common shares, diluted 39,953 38,821
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(see accountants' review report)
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
------- -------
(In thousands, except per share data)
<S> <C> <C>
Revenue
Rental income $55,433 $46,109
Other property income 2,577 1,992
Interest and other income 993 1,712
------- -------
59,003 49,813
Expenses
Rental 12,005 10,191
Real estate taxes 6,058 4,936
Interest 13,639 11,964
Administrative 2,900 1,968
Depreciation and amortization 11,412 10,325
------- -------
46,014 39,384
------- -------
12,989 10,429
Provision for restructuring (4,665) -
------- -------
Operating income before investors' share
of operations and loss on sale of real estate 8,324 10,429
Investors' share of operations (804) (281)
------- -------
Income before loss on sale of real estate 7,520 10,148
Loss on sale of real estate - (659)
------- -------
Net Income $ 7,520 $ 9,489
Dividends on preferred stock (1,988) -
------- -------
Net income available for common shareholders $ 5,532 $ 9,489
======= =======
Earnings per common share, basic
Income before loss on sale of real estate $ 0.14 $ 0.26
Loss on sale of real estate - (0.02)
------- -------
$ 0.14 $ 0.24
======= =======
Weighted average number of common shares, basic 39,233 38,801
======= =======
Earnings per common share, diluted
Income before loss on sale of real estate $ 0.14 $ 0.26
Loss on sale of real estate 0.00 (0.02)
------- -------
$ 0.14 $ 0.24
======= =======
Weighted average number of common shares, diluted 40,067 39,225
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(see accountants' review report)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
----------------------- --------------------------
(In thousands, except per share amounts) Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Common Shares of Beneficial Interest
Balance, beginning of period 39,200,201 $ 684,823 35,948,044 $ 597,917
Net proceeds from sale of shares - 3,000,000 83,925
Exercise of stock options 199,073 4,221 71,184 1,499
Shares issued under dividend reinvestment plan 120,974 2,976 116,428 3,112
Performance and Restricted Shares granted 541,055 14,031 32,000 871
---------- --------- ---------- ---------
Balance, end of period 40,061,303 $ 706,051 39,167,656 $ 687,324
========== ========= ========== =========
Common Shares of Beneficial Interest
in Treasury, Deferred Compensation and
Subscriptions Receivable
Balance, beginning of period (457,111) $ (8,304) (480,948) $ (8,332)
Amortization of deferred compensation 49,046 925 30,125 480
Performance and Restricted Shares granted (576,055) (14,680) (22,000) (621)
Purchase of shares under share purchase plan 50,521 764 16,753 236
Purchase of treasury shares, net of reissuance (6,033) (353) -
Increase in stock option loans, net (44,266) (1,016) (14,166) (299)
---------- --------- ---------- ---------
Balance, end of period (983,898) $ (22,664) (470,236) $ (8,536)
========== ========= ========== =========
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of period $(222,709) $(200,700)
Net income 32,177 35,810
Dividends declared to shareholders (57,827) (49,593)
--------- ---------
Balance, end of period $(248,359) $(214,483)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
(see accountants' review report)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 32,177 $ 35,810
Adjustments to reconcile net income to net cash
provided by operations
Depreciation and amortization 33,384 30,853
Rent abatements in lieu of leasehold improvements,
net of tenant improvements retired (1,311) (815)
Imputed interest and amortization of debt cost 562 496
Amortization of deferred compensation, forgiveness of
officers' notes and other non cash items 1,902 857
Gain on sale of real estate (6,375)
Changes in assets and liabilities
Decrease (increase) in accounts receivable (716) 188
Increase in prepaid expenses and other
assets before depreciation and amortization (6,147) (9,769)
Increase (decrease) in operating accounts payable,
security deposits and prepaid rent 1,954 (535)
Decrease in accrued expenses (164) (2,556)
--------- ---------
Net cash provided by operating activities 61,641 48,154
INVESTING ACTIVITIES
Acquisition of real estate (92,946) (126,349)
Capital expenditures and development (46,309) (33,206)
Proceeds from sale of real estate 9,364
Application of deposit on real estate 23,447
Net increase in notes receivable (17,529) (10,350)
--------- ---------
Net cash used in investing activities (156,784) (137,094)
FINANCING ACTIVITIES
Regular payments on mortgages, capital leases, and
notes payable (1,466) (1,593)
Balloon payment on note and mortgages payable (53,534) (1,500)
Borrowing of short-term debt, net 116,009 5,886
Issuance of senior notes, net of costs 79,540 39,750
Dividends paid (55,342) (45,909)
Issuance of shares of beneficial interest 4,229 86,436
Increase in minority interest (1,384) (484)
--------- ---------
Net cash provided by financing activities 88,052 82,586
--------- ---------
Decrease in cash (7,091) (6,354)
Cash at beginning of period 17,043 11,041
--------- ---------
Cash at end of period $ 9,952 $ 4,687
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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, 1997 which contain
the Trust's accounting policies and other data.
The following table sets forth the reconciliation between basic and diluted
EPS:
<TABLE>
<CAPTION>
Nine months Three months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NUMERATOR
Net income available for common
shareholders - basic $26,214 $35,810 $ 5,532 $ 9,489
Income attributable to operating
partnership units 682 - 268 -
------- ------- ------- -------
Net income available for common
shareholders - diluted $26,896 $35,810 $ 5,800 $ 9,489
DENOMINATOR
Denominator for basic EPS-
weighted average shares 39,115 38,352 39,233 38,801
Effect of dilutive securities
Stock options and awards 314 469 225 424
Operating partnership units 524 - 609 -
------- ------- ------- -------
Denominator for diluted EPS 39,953 38,821 40,067 39,225
</TABLE>
On March 19, 1998 the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus opinion on issue #97-11,
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions"
which requires that the internal costs of preacquisition activities incurred in
connection with the acquisition of an operating property be expensed as
incurred, whereas the internal costs of preacquisition activities directly
identifiable with the acquisition of a nonoperating or to be developed property
should be capitalized as part of the cost of the acquisition. The Trust has
traditionally capitalized internal preacquisition costs of both operating and
nonoperating properties as a component of the acquisition price. As a result of
the adoption of this EITF in the second quarter of 1998, the Trust's general and
administrative expense has increased by approximately $1.5 million: $900,000 in
the second quarter and $600,000 in the third quarter. The effect of the EITF on
general and administrative expenses each quarter will depend on the acquisition
effort spent on acquiring operating properties versus development properties.
10
<PAGE>
NOTE B - REAL ESTATE AND ENCUMBRANCES
During the first nine months of 1998 the Trust purchased ten properties in San
Antonio, Texas for $14.2 million in cash. These properties, located on Houston
Street near San Antonio's River Walk, are currently vacant and will be
redeveloped, retenanted and remerchandised.
The Trust has expanded its street retail holdings in the Los Angeles area by
acquiring a retail building on Third Street Promenade in Santa Monica in
February 1998 for $2.0 million in cash and by purchasing during the third
quarter for cash a 90% interest in a $6.6 million building on Third Street and a
90% interest in a $6.4 million building in Pasadena, California. The Trust also
secured property for future expansion of its Bethesda Row project in Bethesda,
Maryland during the first nine months of 1998 by expending $2.0 million in cash
to purchase two properties and to secure a long term ground lease on a third
property. Other street retail acquisitions include the purchase on May 7, 1998
of a property for $5.2 million in cash in Tempe, Arizona and the purchase, for
cash of $4.6 million, of an eighty-five percent interest in a second property in
Tempe which is valued at $5.4 million.
During the third quarter of 1998 the Trust acquired four shopping centers and
a parcel adjacent to one of its existing centers. In August 1998 the Trust
purchased Hauppauge Shopping Center on Long Island, New York for cash of
$24.1 million and Tower Shopping Center in Springfield, Virginia for
$17.7 million in cash. In addition, the Trust acquired a leasehold interest in
Kings Court Shopping Center in Los Gatos, California, for $10.7 million, paid
with cash of $4.3 million and 260,163 partnership units in a downreit
partnership. In September 1998 the Trust acquired the $18.9 million Leesburg
Plaza in Leesburg, Virginia for 138,000 partnership units in a partnership which
owns the center, cash of $5.6 million and a $9.9 million mortgage, bearing
interest at 6.51%. The mortgage requires payments of interest only through
October 2005 and is due September 1, 2008. Cash of $1.0 million was spent to
purchase a building adjacent to Northlake Shopping Center in suburban Chicago.
The Trust made a number of investments in mortgages during 1998. On
January 14, 1998 the Trust consolidated, increased, extended and refinanced
mortgage loans which had been made on retail properties in Philadelphia,
Pennsylvania. Through September 1998, an additional $3.9 million has been issued
under the new loan bearing interest at 10%, due May 1, 2021. From and after May
2006, the Trust has the option to convert the loan into a partnership interest
in the properties.
11
<PAGE>
In June 1998 the Trust made a loan of $2.5 million, which matures July 1, 2001
and is secured by a property in Studio City, California. The loan earns
interest at 10% and participates in certain revenues and appreciation of the
property. In September 1998 the Trust made loans totaling $10.4 million. The
loans are secured by property, bear interest at 10% and have a two year term.
On June 30, 1998 the Trust, for $8.5 million, terminated the capital lease on
Lawrence Park Shopping Center and purchased the fee interest in the property
upon the maturity of a note of $8.5 million which the Trust had loaned to the
seller in January 1997.
On June 1, 1998 the Trust paid off mortgages totaling $36.6 million on
Barracks Road, Falls Plaza, Old Keene Mill, and West Falls Shopping Centers.
During August 1998 the Trust paid off mortgages totaling $16.9 million on
Loehmann's Plaza and Bristol Plaza.
NOTE C - NOTES PAYABLE
In December 1997 the Trust replaced its unsecured medium term revolving credit
facilities with four banks with a five-year syndicated line, thereby increasing
the aggregate amount available from $135 million to $300 million. The
syndicated line bears interest at LIBOR plus 65 basis points, requires fees and
has covenants requiring a minimum shareholders' equity and a maximum ratio of
debt to net worth. At September 30, 1998 there was $230.8 million borrowed
under this facility, which also represents the maximum drawn during the first
nine months of 1998. The weighted average interest rate on borrowings for the
nine months ended September 30, 1998 was 6.2%.
NOTE D - INTEREST EXPENSE
The Trust incurred interest expense totaling $44.0 million during the first
nine months of 1998 and $38.1 million during the first nine months of 1997, of
which $4.2 million and $2.1 million, respectively, was capitalized. Interest
paid was $45.7 million in the first nine months of 1998 and $38.6 million in the
first nine months of 1997.
NOTE E - 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 respective partnership agreements, in the
event of the exercise of put options by the other partners, the Trust would be
required to purchase the 99% limited partnership interest at Loehmann's Plaza at
its then fair
12
<PAGE>
market value and an 18.75% interest at Congressional Plaza at its then fair
market value.
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 common shares of the Trust, at the option of the Trust.
The Trust is currently working to resolve the potential impact of the year
2000 on the processing of information by the Trust's computerized information
systems as well as the potential impact on the operations of its real estate
properties by computerized components of its buildings' operating systems.
Based on information collected to date, the Trust believes that its internal
information technology systems can correctly process information in the year
2000. The Trust is currently requesting information from its banks, suppliers
and the manufacturers of computerized components of its real estate properties
to determine their year 2000 compliance. Based on current information, costs of
addressing and solving potential problems are not expected to have a material
adverse impact on the Trust's financial condition.
NOTE F - PROVISION FOR RESTRUCTURING
At September 30, 1998 the Trust recorded a $4.7 million one time charge
related to a comprehensive restructuring program that is expected to be fully
implemented by December 31, 1998. The charge includes a provision for employee
severance and related costs, office closing and downsizing expenses, as well as
legal and consulting fees related to the restructuring program. The Trust's
workforce was reduced by approximately 15% including several vice presidents and
other senior personnel. The foundation of the restructuring effort focused on a
change in the Trust's operating model from a functional hierarchy to an asset
management discipline where small focused teams are responsible for and
compensated based on the operating performance of a portfolio of assets. In
addition, the restructuring effort included a significant downsizing of the
Trust's acquisition department, in response to changing market conditions.
13
<PAGE>
NOTE G - COMPONENTS OF RENTAL INCOME
The components of rental income for the periods ended September 30 are as
follows:
<TABLE>
<CAPTION>
Nine months Three months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Retail properties
Minimum rents $131,069 $108,403 $45,442 $37,177
Cost reimbursements 25,138 23,750 8,220 7,492
Percentage rents 3,909 3,073 1,123 814
Apartments 1,925 1,864 648 626
-------- -------- ------- -------
$162,041 $137,090 $55,433 $46,109
======== ======== ======= =======
</TABLE>
14
<PAGE>
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
SEPTEMBER 30, 1998
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. 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, long term borrowing through debt offerings and mortgages,
medium and short term borrowing under revolving credit facilities, and equity
offerings. Because a significant portion of the Trust's net cash provided by
operating activities is distributed to shareholders, capital outlays for
property acquisitions, development and renovation projects and debt repayments
require funding from borrowing or equity offerings.
Net cash provided by operating activities increased to $61.6 million in the
first nine months of 1998 from $48.2 million in the comparable period of 1997
due to improved operating results from the core portfolio, contributions from
recently acquired and redeveloped properties and lower expenditures of cash for
operating activities. Cash distributions to shareholders in the first nine
months of 1998 totaled $55.3 million compared to 1997's $45.9 million.
During the first nine months of 1998, the Trust invested $92.9 million in cash
to acquire real estate assets, $46.3 million to develop, redevelop and improve
its properties, and $17.3 million to invest in mortgage notes receivable.
The Trust purchased ten properties in San Antonio, Texas for $14.2 million in
cash. These properties, located on Houston Street near San Antonio's River
Walk, are currently vacant and will be redeveloped, retenanted and
remerchandised. The Trust expanded its street retail holdings in the Los
Angeles area by acquiring a retail building on Third Street Promenade in Santa
Monica in
15
<PAGE>
February 1998 for $2.0 million in cash and by purchasing during the third
quarter for cash a 90% interest in a $6.6 million building on Third Street and a
90% interest in a $6.4 million building in Pasadena, California. The Trust also
secured property for future expansion of its Bethesda Row project in Bethesda,
Maryland during the first nine months of 1998 by expending $2.0 million in cash
to purchase two properties and to secure a long term ground lease on a third
property. Other street retail acquisitions include the purchase on May 7, 1998
of a property for $5.2 million in cash in Tempe, Arizona and the purchase, for
cash of $4.6 million, of an eighty-five percent interest in a second property in
Tempe which is valued at $5.4 million.
During the third quarter of 1998 the Trust purchased four shopping centers and
a parcel adjacent to one of its existing centers. In August 1998 the Trust
purchased Hauppauge Shopping Center on Long Island, New York for cash of
$24.1 million and Tower Shopping Center in Springfield, Virginia for
$17.7 million in cash. In addition, the Trust acquired a leasehold interest in
Kings Court Shopping Center in Los Gatos, California, for $10.7 million, paid
with cash of $4.3 million and 260,163 partnership units in a downreit
partnership. In September 1998 the Trust acquired the $18.9 million Leesburg
Plaza in Leesburg, Virginia for 138,000 partnership units in a partnership which
owns the center, cash of $5.6 million and a $9.9 million mortgage, bearing
interest at 6.51%. The mortgage requires payments of interest only through
October 2005 and is due September 1, 2008. Cash of $1.0 million was spent to
purchase a building adjacent to Northlake Shopping Center in suburban Chicago.
Improvements to Trust properties during the first nine months of 1998 included
$3.6 million on the renovation of Gratiot Plaza; $6.3 million on the
redevelopment of Old Town Center in Los Gatos, California; $4.0 million on
predevelopment work at San Jose Town & Country Village Shopping Center;
$2.8 million on predevelopment work at Pentagon Town City in Arlington,
Virginia; $2.9 million on further development and redevelopment at Bethesda Row;
$3.2 million on the expansion of the Falls and West Falls Shopping Centers in
suburban Washington, D.C.; $1.9 million on the retenanting of Finley Shopping
Center in suburban Chicago; $1.8 million on the renovation of Feasterville
Shopping Center in Pennsylvania; and $2.5 million on renovations of main street
retail properties in Santa Monica and Pasadena, California.
The Trust made a number of investments in mortgages during 1998. On
January 14, 1998 the Trust consolidated, increased, extended and refinanced
mortgage loans which had been made on retail properties in Philadelphia,
Pennsylvania. Through September 1998, an additional $3.9 million has been issued
under the new loan, bearing interest at 10%, due May 1, 2021. From and after May
2006, the Trust has the option to convert the loan into a partnership interest
in the properties.
16
<PAGE>
In June 1998 the Trust made a loan of $2.5 million, which matures July 1, 2001
and is secured by a property in Studio City, California. The loan earns
interest at 10% and participates in certain revenues and appreciation of the
property. In September 1998 the Trust made loans totaling $10.4 million. The
loans are secured by property, bear interest at 10% and have a two year term.
On June 1, 1998 the Trust paid off mortgages totaling $36.6 million on
Barracks Road, Falls Plaza, Old Keene Mill, and West Falls Shopping Centers.
During August 1998 the Trust paid off mortgages totaling $16.9 million on
Loehmann's Plaza and Bristol Plaza.
These acquisitions, investments and debt replacements were financed initially
under the Trust's revolving credit facility. In December 1997 the Trust replaced
its unsecured medium term revolving credit facilities with four banks with a
five-year syndicated line, thereby increasing the aggregate amount available
from $135 million to $300 million. The Trust uses borrowings on the credit
facility to fund its acquisitions, improvements, and debt repayment
requirements, until issuing equity or long term debt. The syndicated line bears
interest at LIBOR plus 65 basis points, requires fees and has covenants
requiring a minimum shareholders' equity and a maximum ratio of debt to net
worth. At September 30, 1998 there was $230.8 million borrowed under this
facility. The maximum drawn during the first nine months of 1998 was
$230.8 million and the weighted average interest rate on borrowings for
the nine months was 6.2%.
On March 5, 1998 the Trust issued $39.5 million of 6.74% Medium-Term Notes due
2004, netting approximately $39.3 million, and $40.5 million of 6.99% Medium-
Term Notes due 2006, netting approximately $40.2 million. The notes pay
interest semi-annually on March 30 and September 30. In anticipation of this
transaction, on January 13, 1998 the Trust purchased a Treasury Yield Hedge
(notional amount of $50 million) to minimize the risk of changes in interest
rates. The hedge was terminated on March 5, 1998 at a gain of $1.1 million
which will be recognized as a reduction in interest expense over the lives of
the notes. Proceeds from this issuance were used to reduce borrowings on the
credit facility. The Trust has no derivative contracts that are open at
September 30, 1998.
The Trust is contractually obligated on contracts of approximately
$15.2 million for redevelopment and tenant improvements and is committed under
leases for up to an additional $7.9 million in tenant work and general
improvements to its properties. These committed and budgeted improvements
include the redevelopment of Old Town Center, the renovation and retenanting of
certain of the Santa Monica main street retail properties, the completion of the
renovation and expansion of Gratiot Plaza and the redevelopment of a portion of
Bethesda Row. Additionally, the
17
<PAGE>
Trust is in the planning stage in the development of several new retail
properties. These expenditures will be funded with the revolving credit
facilities pending their long term financing with either equity or debt.
The Trust plans to continue to acquire additional retail properties, although
at a slower pace than over the past few years and, in addition, continues to
seek sites on which to build new retail properties. The Trust will need
additional capital in order to fund these acquisitions, expansions, developments
and refinancings. Sources of this funding may be proceeds from the sale of
selected properties, additional debt and additional equity. The timing and
choice between these funding sources will depend upon many factors, including
the market price for the Trust's shares, interest rates, the availability of
debt financing, and the Trust's ratio of debt to net worth. The Trust believes,
based on past experience, that it has the access to the capital markets needed
to raise this capital.
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 respective partnership agreements, in the
event of the exercise of put options by the other partners, the Trust would be
required to purchase the 99% limited partnership interest at Loehmann's Plaza at
its then fair market value and an 18.75% interest at Congressional Plaza at its
then fair market value.
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 common shares of the Trust, at the option of the Trust.
The Trust is currently working to resolve the potential impact of the year
2000 on the processing of information by the Trust's computerized information
systems as well as the potential impact on the operations of its real estate
properties by computerized components of its buildings' operating systems.
Based on information collected to date, the Trust believes that its internal
information technology systems can correctly process information
18
<PAGE>
in the year 2000. The Trust is currently requesting information from its banks,
suppliers and the manufacturers of computerized components of its real estate
properties to determine their year 2000 compliance. Based on current
information, costs of addressing and solving potential problems are not expected
to have a material adverse impact on the Trust's financial condition.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income and funds from operations have been affected by the Trust's recent
acquisition, redevelopment and financing activities. The Trust has historically
reported its funds from operations in addition to its net income and net cash
provided by operating activities. Funds from operations is a supplemental
measure of real estate companies' operating performance which excludes
historical cost depreciation, since real estate values have historically risen
and fallen with market conditions rather than over time. Funds from operations
is defined by The National Association of Real Estate Investment Trusts
("NAREIT") 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.
The Trust complies with this definition. 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 supplemental
measure of operating performance in the industry.
The reconciliation of net income to funds from operations for the nine months
ended September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Net income available for common
Shareholders $26,214 $35,810
Less: gain on sale of real estate - (6,375)
Plus: nonrecurring charge 4,665 -
Plus: depreciation and amortization
of real estate assets 30,229 27,734
amortization of initial direct
costs of leases 1,827 1,693
income attributable to operating
partnership units 682 -
------- -------
Funds from operations, diluted $63,617 $58,862
======= =======
</TABLE>
Funds from operations increased 8% to $63.6 million in the first nine months
of 1998 from $58.9 million in the comparable period of 1997.
19
<PAGE>
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 18% from $137.1 million in the first nine months of 1997
to $162.0 million in the first nine months of 1998. If properties purchased and
sold in 1997 and 1998 are excluded, rental income increased 6%. The increase is
primarily attributable to retail properties which have recently been renovated
and retenanted.
Minimum rent increased 21% from $108.4 million in 1997 to $131.1 million in
1998. Excluding properties purchased and sold in 1997 and 1998, minimum rent
increased 8%. The majority of the increase is attributable to retail properties
which have recently been renovated and retenanted, including Troy, Wynnewood,
Brick, Finley, Crossroads and Bethesda Row Shopping Centers.
Cost reimbursements consist of tenant reimbursements of real estate taxes
(real estate tax recovery) and common area maintenance expenses (CAM recovery).
Cost reimbursements increased 6% from $23.8 during 1997 to $25.1 million during
1998. Excluding properties purchased and sold in 1997 and 1998, cost
reimbursements increased approximately 1%. Real estate tax recovery on the core
portfolio increased in line with increases in taxes, while CAM recovery
decreased on the core portfolio as CAM expenses, mainly snow removal,
decreased.
Other property income includes items which, although recurring, tend to
fluctuate from period to period, such as utility reimbursements, telephone
income, merchant association dues, late fees and temporary tenant income. It
also includes nonrecurring items such as lease termination fees. Other property
income remained relatively flat at $7.6 million in 1998 versus $7.5 million in
1997. If other income is adjusted to remove the effect of properties sold and
acquired in 1997 and 1998, other income decreased approximately $1.0 million,
primarily due to a decrease in lease termination fees from $2.0 million in 1997
to $578,000 in 1998.
Rental expenses have increased 13% in 1998 over 1997, to $35.3 million from
$31.2 million. If centers acquired and sold during 1997 and 1998 are excluded,
rental expenses decreased slightly over 1%, reflecting the decrease in CAM
expenses offset in part by an increase in bad debt since in 1997 there was a
recovery of approximately $650,000 of amounts due from former bankrupt tenants.
Real estate taxes have increased from $14.4 million during 1997 to $17.3
million during 1998, primarily due to the recent acquisitions. Depreciation and
amortization in 1998 was 9% greater than in 1997. Excluding the effect from the
1997 and 1998 acquisitions, depreciation and amortization increased 4% due to
depreciation on recent tenant work and property improvements.
20
<PAGE>
Interest expense increased from $36.0 million during 1997 to $39.7 million
during 1998, due to interest expense on the Medium Term Notes issued in 1997
and 1998 and increased interest from greater usage on the line of credit,
partially offset by an increase in interest capitalized, and decreases in
mortgage and participation interest. The ratio of earnings to combined fixed
charges and preferred dividends was 1.43x for the first nine months of 1998;
there were no preferred dividends in the first nine months of 1997. The ratio
of earnings to fixed charges was 1.6x and 1.7x during the first nine months of
1998 and 1997, respectively. The ratio of funds from operations to fixed
charges was 2.2x for the first nine months of 1998 and 2.5x for the first nine
months of 1997.
Administrative expenses have increased from $6.6 million during 1997 to $8.7
million during 1998, primarily due to the expensing of internal costs of
acquisition activities during the second and third quarter of 1998 in accordance
with EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property
Acquisitions".
At September 30, 1998 the Trust recorded a $4.7 million one time charge
related to a comprehensive restructuring program that is expected to be fully
implemented by December 31, 1998. The charge includes a provision for employee
severance and related costs, office closing and downsizing expenses, as well as
legal and consulting fees related to the restructuring program. The Trust's
workforce was reduced by approximately 15% including several vice presidents and
other senior personnel. The foundation of the restructuring effort focused on a
change in the Trust's operating model from a functional hierarchy to an asset
management discipline where small focused teams are responsible for and
compensated based on the operating performance of a portfolio of assets. In
addition, the restructuring effort included a significant downsizing of the
Trust's acquisition department, in response to changing market conditions.
Investors' share of operations increased from $862,000 to $2.3 million from
the first nine months of 1997 to the comparable period in 1998, primarily
because of the Trust's partners share of the increased earnings in Congressional
Plaza and the Trust's partners share of the earnings in the December 1997
acquisition of Courthouse and Magruder's shopping centers and in the 1998
acquisition of Kings Court and Leesburg Plaza.
As a result of the foregoing items, net income before gain on sale of real
estate increased from $29.4 million during 1997 to $32.2 million during 1998.
Net income available for common shareholders before gain on sale of real estate
was $26.2 million in 1998 after deducting a $6.0 million dividend on the $100
million of 7.95% Series A Cumulative Redeemable Preferred Shares issued in
October 1997 and the restructuring charge of $4.7 million as
21
<PAGE>
compared to 1997's $29.4 million. Net income was $32.2 million in 1998 and $35.8
million in 1997 which had a $6.3 million gain on sale of real estate.
The Trust is slowing its pace of acquisitions in response to the competitive
market for properties and the tight financing environment. However, the Trust
plans to continue to focus considerable time and resources on development, with
the belief that such new development, although not having a positive effect on
net income and funds from operations in the very near future, will have a
positive impact in the longer term.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Funds from operations increased seven percent from $20.0 million in the third
quarter of 1997 to $21.4 million in the third quarter of 1998.
Rental income increased 20% from $46.1 million in 1997 to $55.4 million in
1998. Excluding properties acquired and sold in 1997 and 1998, rental income
increased 8%, primarily due to the contribution from retail properties recently
renovated and retenanted.
Minimum rent increased 22% from $37.8 million in the third quarter of 1997 to
$46.1 million in the third quarter of 1998 due primarily to the impact of 1997
acquisitions. On a same property basis, minimum rent increased 9% due primarily
to the recently renovated and retenanted properties.
Cost reimbursements, a component of rental income, increased 10% in the third
quarter of 1998 over the comparable period of 1997, substantially due to the
impact of properties acquired in 1997 and 1998.
Other property income increased from $2.0 million in the third quarter of 1997
to $2.6 million in the third quarter of 1998, primarily due to the impact of
properties acquired in 1997 and 1998.
Rental expenses have increased 18% from $10.2 million in the third quarter of
1997 to $12.0 million in the third quarter of 1998, primarily due to the impact
of properties acquired in 1997 and 1998. Real estate taxes increased 23% from
1997 to 1998, but on a same property basis increased 4%, primarily reflecting
increased assessments on recently renovated centers. Depreciation and
amortization expense increased 11% due to depreciation expense on the recent
acquisitions and renovations.
Interest expense increased from $12.0 million in the third quarter of 1997 to
$13.6 million in the comparable period of 1998,
22
<PAGE>
primarily reflecting the interest on greater usage on the revolving credit
facility and on the issuance of $80 million of medium term notes in the first
quarter of 1998, partially offset by lower mortgage interest expense as
mortgages were paid during the second and third quarter of 1998.
General and administrative expenses have increased from $2.0 million in the
third quarter of 1997 to $2.9 million in the third quarter of 1998, primarily
due to the expensing of internal costs of acquisition activities during the
third quarter of 1998 in accordance with EITF 97-11 and due to increased payroll
costs associated with establishing the Trust's development team.
At September 30, 1998 the Trust recorded a $4.7 million one time charge
related to a comprehensive restructuring program that is expected to be fully
implemented by December 31, 1998. The charge includes a provision for employee
severance and related costs, office closing and downsizing expenses, as well as
legal and consulting fees related to the restructuring program. The Trust's
workforce was reduced by approximately 15% including several vice presidents and
other senior personnel. The foundation of the restructuring effort focused on a
change in the Trust's operating model from a functional hierarchy to an asset
management discipline where small focused teams are responsible for and
compensated based on the operating performance of a portfolio of assets. In
addition, the restructuring effort included a significant downsizing of the
Trust's acquisition department, in response to changing market conditions.
Investor's share of operations increased from $281,000 in the third quarter of
1997 to $804,000 in 1998, primarily because of the Trust's partners share of the
earnings in the December 1997 acquisition of Courthouse and Magruder's shopping
centers and the 1998 acquisition of Kings Court and Leesburg Plaza shopping
centers.
As a result of the foregoing items, primarily the restructuring charge of $4.7
million, net income before loss on sale of real estate decreased from $10.1
million in the third quarter of 1997 to $7.5 million in the third quarter of
1998. Net income available for common shareholders (before loss on sale of real
estate) was $5.5 million in the third quarter of 1998 after deducting a $2.0
million dividend on the $100 million of 7.95% Series A Cumulative Redeemable
Preferred Shares issued in October 1997 as compared to 1997's $10.1 million.
Net income was $7.5 million in the third quarter of 1998 compared to 1997's $9.5
million which had a $659,000 loss on sale of real estate.
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedules Edgar
filing only
(B) Reports on Form 8-K
A Form 8-K, dated June 30, 1998, was filed on August 6, 1998 in
response to Item 5.
24
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Registrant)
November 10, 1998 Steven J. Guttman
-----------------
Steven J. Guttman, President
(Chief Executive Officer)
November 10, 1998 Cecily A. Ward
--------------
Cecily A. Ward, Controller
(Principal Accounting Officer)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of Federal Realty Investment Trust as of
September 30, 1997 and the Related consolidated statement of operations for the
nine months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements. It has been amended for the restatement
of earnings per share calculated under SFAS 128.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,687
<SECURITIES> 0
<RECEIVABLES> 15,923
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,299,321
<DEPRECIATION> (238,815)
<TOTAL-ASSETS> 1,156,304
<CURRENT-LIABILITIES> 0
<BONDS> 622,004
0
0
<COMMON> 687,324
<OTHER-SE> (223,019)
<TOTAL-LIABILITY-AND-EQUITY> 1,156,304
<SALES> 0
<TOTAL-REVENUES> 144,602
<CGS> 0
<TOTAL-COSTS> 45,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,952
<INCOME-PRETAX> 35,810
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,810
<EPS-PRIMARY> .93
<EPS-DILUTED> .92
<FN>
<F1>Current assets and current liabilities are not listed since Federal Realty
does not prepare a classified balance sheet.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of Federal Realty Investment Trust as of
September 30, 1998 and the related consolidated statement of operations for the
nine months ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,952
<SECURITIES> 0
<RECEIVABLES> 18,320
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,616,271
<DEPRECIATION> (275,054)
<TOTAL-ASSETS> 1,457,307
<CURRENT-LIABILITIES> 0
<BONDS> 818,828
0
100,000
<COMMON> 706,051
<OTHER-SE> (271,023)
<TOTAL-LIABILITY-AND-EQUITY> 1,457,307
<SALES> 0
<TOTAL-REVENUES> 169,654
<CGS> 0
<TOTAL-COSTS> 52,549
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,736
<INCOME-PRETAX> 26,214
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,214
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<FN>
<F1>Current assets and current liabilities are not listed since Federal Realty
does not prepare a classified balance sheet.
</FN>
</TABLE>
