<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: June 30, 1999
------------------------------------
Commission File No. 17533
-------------------------
FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0782497
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 998-8100
- --------------------------------------------------------------------------------
(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 July 26, 1999
- ------------------------------------ -------------------------------------
Common Shares of Beneficial Interest 40,304,982
This report contains 24 pages.
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FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
June 30, 1999
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets
June 30, 1999 (unaudited) and
December 31, 1998 (audited) 4
Consolidated Statements of Operations (unaudited)
Six months ended June 30, 1999 and 1998 5
Consolidated Statements of Operations (unaudited)
Three months ended June 30, 1999 and 1998 6
Consolidated Statements
of Shareholders' Equity (unaudited)
Six months ended June 30, 1999 and 1998 7
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1999 and 1998 8
Notes to Financial Statements 9-13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-23
PART II. OTHER INFORMATION 24
2
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FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
June 30, 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.
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Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
---------------- ----------------
ASSETS (in thousands)
<S> <C> <C>
Investments
Real estate, at cost $1,701,981 $1,642,136
Less accumulated depreciation and amortization (308,580) (286,053)
---------- ----------
1,393,401 1,356,083
Mortgage notes receivable 56,451 51,154
---------- ----------
1,449,852 1,407,237
Other Assets
Cash 11,853 17,230
Accounts and notes receivable 14,923 17,873
Prepaid expenses and other assets, principally
property taxes and lease commissions 35,243 38,502
Debt issue costs 3,026 3,475
---------- ----------
$1,514,897 $1,484,317
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $ 122,219 $ 122,401
Mortgages payable 50,819 51,079
Notes payable 308,840 263,159
Accounts payable and accrued expenses 32,308 34,073
Dividends payable 19,037 18,972
Security deposits 5,116 5,214
Prepaid rents 4,703 3,641
Senior notes 335,000 335,000
5 1/4% Convertible subordinated debentures 75,289 75,289
Investors' interest in consolidated assets 46,976 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 40,327,397 and 40,139,675 shares,
respectively 711,877 707,724
Accumulated dividends in excess of Trust net income (274,201) (255,211)
---------- ----------
537,676 552,513
Less 58,419 and 59,425 common shares in treasury - at cost, respectively
deferred compensation and subscriptions receivable (23,086) (22,566)
---------- ----------
514,590 529,947
---------- ----------
$1,514,897 $1,484,317
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
-------- --------
<S> <C> <C>
(In thousands, except per share data)
Revenue
Rental income $119,107 $106,608
Interest and other income 3,844 2,935
Other property income 4,827 5,036
-------- --------
127,778 114,579
Expenses
Rental 26,104 23,269
Real estate taxes 11,867 11,217
Interest 30,518 26,097
Administrative 5,414 5,836
Depreciation and amortization 24,932 21,972
-------- --------
98,835 88,391
-------- --------
Operating income before investors' share
of operations and loss on sale of real estate 28,943 26,188
Investors' share of operations (1,524) (1,531)
-------- ---------
Income before loss on sale of real estate 27,419 24,657
Estimated loss on sale of real estate (7,050) -
-------- --------
Net Income $ 20,369 $ 24,657
Dividends on preferred stock (3,975) (3,975)
-------- --------
Net income available for common shareholders $ 16,394 $ 20,682
======== ========
Earnings per common share, basic
Income before loss on sale of real estate $ 0.59 $ 0.53
Loss on sale of real estate (0.18) -
-------- -------
$ 0.41 $ 0.53
======== =======
Weighted average number of common shares, basic 39,489 39,057
======== =======
Earnings per common share, diluted
Income before loss on sale of real estate $ 0.58 $ 0.52
Loss on sale of real estate (0.17) -
-------- -------
$ 0.41 $ 0.52
======== =======
Weighted average number of common shares, diluted 40,613 39,896
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
(In thousands, except per share data)
Revenue
Rental income $59,674 $54,127
Interest and other income 1,966 1,341
Other property income 2,555 2,934
----------- -------------
64,195 58,402
Expenses
Rental 12,456 11,347
Real estate taxes 5,855 5,745
Interest 15,385 13,404
Administrative 3,160 3,995
Depreciation and amortization 12,651 11,203
----------- -----------
49,507 45,694
----------- -----------
Operating income before investors' share
of operations and loss on sale of real estate 14,688 12,708
Investors' share of operations (823) (745)
----------- ----------
Income before loss on sale of real estate 13,865 11,963
Estimated loss on sale of real estate (7,050) -
----------- ----------
Net Income $ 6,815 $11,963
Dividends on preferred stock (1,987) (1,987)
----------- -----------
Net income available for common shareholders $ 4,828 $ 9,976
=========== ===========
Earnings per common share, basic
Income before loss on sale of real estate $ 0.30 $ 0.26
Loss on sale of real estate (0.18) -
----------- -----------
$ 0.12 $ 0.26
============ ===========
Weighted average number of common shares, basic 39,543 39,122
============ ===========
Earnings per common share, diluted
Income before loss on sale of real estate $ 0.29 $ 0.25
Loss on sale of real estate (0.17) -
----------- -----------
$ 0.12 $ 0.25
============ ===========
Weighted average number of common shares, diluted 40,682 39,900
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999
----------- -----------
(In thousands, except per share amounts) Shares Amount
<S> <C> <C>
Common Shares of Beneficial Interest
Balance, beginning of period 40,139,675 $707,724
Exercise of stock options 49,917 1,044
Shares issued under dividend reinvestment plan 77,151 1,735
Performance and Restricted Shares granted, net of retirements 60,654 1,374
------------ ----------
Balance, end of period 40,327,397 $711,877
============ ==========
Common Shares of Beneficial Interest
in Treasury, Deferred Compensation and
Subscriptions Receivable
Balance, beginning of period (979,446) ($22,566)
Amortization of deferred compensation 28,738 571
Performance and Restricted Shares granted, net of retirements (45,654) (1,039)
Purchase of shares under share purchase plan 9,000 136
Reissuance of treasury shares - -
Decrease (increase) in stock option loans, net (8,995) (188)
----------- ----------
Balance, end of period (996,357) ($23,086)
=========== ==========
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of period ($255,211)
Net income 20,369
Dividends declared to shareholders (39,359)
----------
Balance, end of period ($274,201)
==========
</TABLE>
The accompanying notes are an integral part of these statements.
7
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Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
--------------- ---------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20,369 $24,657
Items not requiring cash outlays
Depreciation and amortization 24,932 21,972
Estimated loss on sale of real estate 7,050
Other, net 1,419 414
Changes in assets and liabilities
Decrease in accounts and notes receivable 2,950 752
Decrease (Increase) in prepaid expenses and other
assets before depreciation and amortization 895 (3,436)
Increase (decrease) in operating accounts payable,
security deposits and prepaid rent (2,850) 1,528
Increase (decrease) in accrued expenses 761 (1,314)
--------------- ---------------
Net cash provided by operating activities 55,526 44,573
INVESTING ACTIVITIES
Acquisition of real estate (22,736) (29,013)
Capital expenditures (40,239) (26,913)
Issuance of mortgage notes receivable, net (5,297) (5,104)
--------------- ---------------
Net cash used in investing activities (68,272) (61,030)
FINANCING ACTIVITIES
Borrowing (repayment) of short-term debt, net 45,853 6,209
Issuance of senior notes, net of costs - 79,540
Issuance of common shares 1,743 2,742
Payments on mortgages, capital leases, and
notes payable (614) (37,811)
Dividends paid (38,031) (36,845)
Decrease in minority interest (1,582) (867)
--------------- ---------------
Net cash provided by financing activities 7,369 12,968
--------------- ---------------
Decrease in cash (5,377) (3,489)
Cash at beginning of period 17,230 17,043
--------------- ---------------
Cash at end of period $11,853 $13,554
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
8
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Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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:
Six months ending Three months ending
June 30, June 30,
Numerator 1999 1998 1999 1998
Net income available for common
shareholders - basic $16,394 $20,682 $ 4,828 $ 9,976
Income attributable to operating
partnership units 361 414 97 207
------- ------- ------- -------
Net income available for common
shareholders - diluted $16,755 $21,096 $ 4,925 $10,183
------- ------- ======= =======
Denominator
Denominator for basic EPS-
weighted average shares 39,489 39,057 39,543 39,122
Effect of dilutive securities
Stock options and awards 244 358 259 297
Operating partnership units 880 481 880 481
------ ------ ------- ------
Denominator for diluted EPS 40,613 39,896 40,682 39,900
====== ====== ======= ======
NOTE B - REAL ESTATE ACQUISITIONS AND DISPOSALS
During the first six months of 1999, the Trust acquired a ninety percent
interest in two buildings in Hollywood, California. The Trust invested $15.3
million in cash in the $16.9 million Galaxy Building and $7.5 million in cash in
the $8.3 million building adjacent to the Galaxy Building. The buildings have
120,000 and 64,0000 leasable square feet, respectively.
In addition, the Trust invested $5.5 million in mortgage notes receivable
with an average weighted interest rate of 10% during the first six months of
1999.
During the second quarter of 1999, the Trust recorded a $7.1 million
charge, representing the estimated loss on a potential sale of certain assets,
principally Northeast Plaza in Atlanta, Georgia, thereby valuing the assets at
their estimated fair value less estimated costs to sell. The Trust is in sale
negotiations on this
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448,000 square foot shopping center which is currently 66% occupied.
NOTE C - NOTES PAYABLE
At June 30, 1999 there was $180.0 million borrowed under the Trust's
syndicated credit facility, which also represents the maximum drawn during the
first two quarters. The weighted average interest rate on borrowings for the six
months ended June 30, 1999 was 5.7%. 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.
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 June 30, 1999 cash payments of $2.9
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 $33.3 million during the first
six months of 1999 and $28.9 million during the first six months of 1998, of
which $2.8 million and $2.8 million, respectively, was capitalized in connection
with development projects. Interest paid was $33.2 million in the first six
months of 1999 and $27.3 million in the first six 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 Congressional Plaza partnership
agreement, in the event of the exercise of put options by another partner, the
Trust would be required to purchase a 37.5% 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
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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. In certain of these partnerships, if the limited
partners do not redeem their interest, the Trust may choose to purchase the
limited partnership interest 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; however, testing is still ongoing. In addition,
the Trust has requested information concerning and reviewed the equipment at its
properties, including the use of embedded chips in machinery. Based on the
review and since the Trust primarily owns shopping centers and street retail
buildings with limited use of technology, the Trust believes it is year 2000
compliant.
The Trust has requested information from its major banks, tenants, and
suppliers to determine their Year 2000 compliance in order to assess the
possibility of any major year 2000 risk to the Trust related to these parties'
Year 2000 noncompliance. Based on their responses, the Trust does not believe
there is any material risk to the Trust in these areas.
The Trust is developing, with the aid of an outside consultant, a
contingency plan for its critical internal systems, which is to be completed by
the end of the third quarter. Costs spent to date and projections of future
costs are not expected to exceed $75,000.
NOTE H - COMPONENTS OF RENTAL INCOME
The components of rental income for the periods ended June 30 are as
follows (in thousands):
Six months Three months
1999 1998 1999 1998
-------- -------- -------- --------
Retail properties
Minimum rents $ 96,718 $ 85,627 $ 48,584 $ 43,383
Cost reimbursements 18,534 16,918 9,335 8,925
Percentage rents 2,526 2,786 1,100 1,181
Apartments 1,329 1,277 655 638
-------- -------- -------- --------
$119,107 $106,608 $ 59,674 $ 54,127
======== ======== ======== ========
11
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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):
<TABLE>
<CAPTION>
Six months ended North Mid
June 30, 1999 East Atlantic West Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental income $ 49,910 $ 54,513 $ 14,684 $ 119,107
Other income 2,550 1,564 713 4,827
Rental expense (10,676) (11,838) (3,590) (26,104)
Real estate tax (6,014) (4,395) (1,458) (11,867)
-------- -------- --------- ----------
Net operating income 35,770 39,844 10,349 85,963
Interest income 3,844 3,844
Interest expense (30,518) (30,518)
Administrative expense (5,414) (5,414)
Depreciation and
amortization (11,074) (11,523) (1,886) ( 449) (24,932)
-------- -------- --------- -------- ----------
Income before investors'
share of operations $ 24,696 $ 28,321 $ 8,463 (32,537) $ 28,943
======== ======== ========= ======== ==========
Capital expenditures $ 13,167 $ 11,600 $ 42,932 $ 67,699
======== ======== ========= ==========
Real estate assets $696,786 $681,344 $ 323,851 $1,701,981
======== ======== ========= ==========
<CAPTION>
Six months ended North Mid
June 30, 1998 East Atlantic West Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental income $ 45,407 $ 50,070 $ 11,131 $ 106,608
Other income 2,794 1,777 465 5,036
Rental expense (9,756) (10,873) (2,640) (23,269)
Real estate tax (6,048) (4,044) (1,125) (11,217)
-------- -------- --------- ----------
Net operating income 32,397 36,930 7,831 77,158
Interest income 2,935 2,935
Interest expense (26,097) (26,097)
Administrative expense (5,836) (5,836)
Depreciation and
amortization (9,502) (10,748) (1,013) (709) (21,972)
-------- -------- --------- -------- ----------
Income before investors'
share of operations $ 22,895 $ 26,182 $ 6,818 (29,707) $ 26,188
======== ======== ========= ======== ==========
Capital expenditures $ 15,810 $ 10,873 $ 35,145 $ 61,828
======== ======== ========= ==========
Real estate assets $645,443 $627,977 $ 239,707 $1,513,127
======== ======== ========= ==========
<CAPTION>
Three months ended North Mid
June 30, 1999 East Atlantic West Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental income $ 25,052 $ 27,051 $ 7,571 $ 59,674
Other income 1,381 753 421 2,555
Rental expense (4,863) (5,904) (1,689) (12,456)
Real estate tax (2,927) (2,226) (702) (5,855)
-------- -------- --------- ----------
Net operating income 18,643 19,674 5,601 43,918
Interest income 1,966 1,966
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest expense (15,385) (15,385)
Administrative expense (3,160) (3,160)
Depreciation and
amortization (5,636) (5,829) (968) (218) (12,651)
-------- -------- --------- -------- ----------
Income before investors'
share of operations $ 13,007 $ 13,845 $ 4,633 (16,797) $ 14,688
======== ======== ========= ======== ==========
Capital expenditures $ 11,072 4,163 $ 17,912 $ 33,147
======== ======== ========= ==========
Real estate assets $696,786 $681,344 $ 323,851 $1,701,981
======== ======== ========= ==========
<CAPTION>
Three months ended North Mid
June 30, 1998 East Atlantic West Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental income $ 23,247 $ 24,931 $ 5,949 $ 54,127
Other income 1,654 1,029 251 2,934
Rental expense (4,562) (5,372) (1,413) (11,347)
Real estate tax (3,025) (2,109) (611) (5,745)
-------- -------- --------- ----------
Net operating income 17,314 18,479 4,176 39,969
Interest income 1,341 1,341
Interest expense (13,404) (13,404)
Administrative expense (3,995) (3,995)
Depreciation and
amortization (4,843) (5,315) (576) (469) (11,203)
-------- -------- --------- -------- ----------
Income before investors'
share of operations $ 12,471 $ 13,164 $ 3,600 (16,527) $ 12,708
======== ======== ========= ======== ==========
Capital expenditures $ 10,035 $ 4,275 $ 17,949 $ 32,259
======== ======== ========= ==========
Real estate assets $645,443 $627,977 $ 239,707 $1,513,127
======== ======== ========= ==========
</TABLE>
There are no transactions between geographic areas.
13
<PAGE>
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
June 30, 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 $55.5 million in the first
half of 1999 and $44.6 million in the first half of 1998 of which $38.0 million
and $36.8 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 $68.3 million during the first
half of 1999 and $61.0 million during the first half of 1998. The Trust
purchased real estate totaling $25.2 million in the first half of 1999 and $38.2
million in the first half of 1998,
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requiring cash outlays of $22.7 million and $29.0 million, respectively. During
these two periods, the Trust expended an additional $40.2 million and $26.9
million, respectively, in capital improvements to its properties. The Trust
invested $5.3 million during the first half of 1999 and $5.1 million during the
first half of 1998 in mortgage notes receivable with an average weighted
interest rate of 10%.
During the first six months of 1999, the Trust acquired a ninety percent
interest in two buildings in Hollywood, California. The Trust invested $15.3
million in cash in the $16.9 million Galaxy Building and $7.5 million in cash in
the $8.3 million building adjacent to the Galaxy Building. The buildings have
120,000 and 64,000 leasable square feet, respectively.
Approximately $19.7 million was invested during the first half 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
$45.4 million in the first half of 1999 and $49.8 million in the first half of
1998. The Trust utilized its unsecured line of credit to fund acquisitions and
capital expenditures in 1999. At June 30, 1999 there was $180.0 million borrowed
under this syndicated credit facility, which also represents the maximum drawn
during the first six months of the year. The weighted average interest rate on
borrowings for the six months ended June 30, 1999 was 5.7%. 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.
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 or through
possible joint venture relationships.
The Trust will need additional capital in order to fund acquisitions,
expansions, developments and upcoming debt maturities, particularly its $100
million of 8.875% Notes due January 15, 2000. Sources of this funding may be
additional debt, additional equity, proceeds from the sale of properties,
joint venture relationships, 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.
CONTINGENCIES
The Trust is involved in various lawsuits and environmental
15
<PAGE>
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 Congressional Plaza partnership
agreement, in the event of the exercise of put options by another partner, the
Trust would be required to purchase a 37.5% 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. In certain of these partnerships, if the limited partners do not
redeem their interest, the Trust may choose to purchase the limited partnership
interests upon the same terms. Under the terms of other partnerships, the
partners may exchange their 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; however, testing is still ongoing. In addition,
the Trust has requested information concerning and reviewed the equipment at its
properties, including the use of embedded chips in machinery. Based on the
review and since the Trust primarily owns shopping centers and street retail
buildings with limited use of technology, the Trust believes it is year 2000
compliant.
The Trust has requested information from its major banks, tenants, and
suppliers to determine their Year 2000 compliance in order to assess the
possibility of any major year 2000 risk to the Trust related to these parties'
Year 2000 noncompliance. Based on their responses, the Trust does not believe
there is any material risk to the Trust in these areas.
The Trust is developing, with the aid of an outside consultant, a
contingency plan for its critical internal systems, which is to be completed by
the end of the third quarter. Costs spent to date and projections of future
costs are not expected to exceed $75,000.
16
<PAGE>
RESULTS OF OPERATIONS
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. 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 is as follows:
Six months ending Three months ending
June 30, June 30,
1999 1998 1999 1998
Net income available for common
shareholders - basic $16,394 $20,682 $ 4,828 $ 9,976
Estimated loss on real estate
to be sold 7,050 - 7,050 -
Depreciation and amortization of
real estate assets 22,617 19,906 11,489 10,168
Amortization of initial direct
costs of leases 1,460 1,181 742 588
Income attributable to operating
partnership units 361 414 97 207
------- ------- ------- -------
Net income available for common
shareholders - diluted $47,882 $42,183 $24,206 $20,939
======= ======= ======= =======
SIX MONTHS ENDED JUNE 30, 1999 and 1998
Consolidated Results
- --------------------
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 12% from $106.6 million in the first half of 1998 to
$119.1 million in the first half of 1999. If properties acquired in 1999 and
1998 are excluded, rental income increased 5%, 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 decreased 4.2% from $5.0 million in the first six
months of 1998 to $4.8 million in the first six months of 1999. Increases in
temporary tenant income, an area identified by the Trust as one with additional
growth
17
<PAGE>
opportunity, were outweighed by decreases in telephone income and decreases in
marketing dues, as the Trust discontinued marketing funds at certain shopping
centers in 1999.
Rental expenses increased 12% from $23.3 million in the first half of 1998
to $26.1 million in the first half of 1999. If rental expenses are adjusted for
properties acquired in 1999 and 1998, rental expenses increased 6% from $23.2
million in 1998 to $24.6 million in 1999. There was a decrease in marketing
expenses consistent with the decrease in marketing dues, but this decrease was
outweighed by increases in snow removal costs and the write off of tenant work
and lease costs associated with several stores operated by a bankrupt tenant.
Real estate taxes increased 6% from $11.2 million in the first half of 1998
to $11.9 million in the first half of 1999. If real estate taxes are adjusted
for properties acquired in 1999 and 1998, real estate taxes remained constant.
Increased taxes on recently redeveloped properties were offset by a refund
resulting from the reassessment of a 1997 acquisition.
Depreciation and amortization expenses increased 13% from $22.0 million in
the first half of 1998 to $24.9 million in the first half of 1999 reflecting the
impact of property acquisitions and recent tenant work and property
improvements.
During the first six months 1999 the Trust incurred interest expense of
$33.3 million, of which $2.8 million was capitalized, as compared to 1998's
$28.9 million of which $2.8 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 1.54x and 1.54x for the first half of 1999 and 1998,
respectively. The ratio of earnings to fixed charges was 1.7x and 1.7x during
the first half of 1999 and 1998, respectively. The ratio of funds from
operations to combined fixed charges and preferred dividends was 2.1x for the
first half of 1999 and 2.1x for the first half of 1998.
Administrative expenses decreased from $5.8 million in the first half of
1998 to $5.4 million in the first half of 1999,due to cost reductions resulting
from the 1998 comprehensive restructuring of the Trust which were larger than
the impact 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.
During the second quarter of 1999, the Trust recorded a $7.1 million
charge, representing the estimated loss on a potential sale of certain assets,
principally Northeast Plaza in Atlanta, Georgia, thereby valuing the assets at
their estimated fair value less estimated costs to sell. The Trust is in active
negotiations for the sale of Northeast Plaza which, if successful, would have
the effect of
18
<PAGE>
increasing portfolio wide occupancy by 100 basis points to nearly 96%.
As a result of the foregoing items, net income before estimated loss on
real estate to be sold increased from $24.7 million in the first half of 1998 to
$27.4 million in the first half of 1999, while net income decreased from $24.7
million during the first half of 1998 to $20.4 million during the first half of
1999 and net income available for common shareholders decreased from $20.7
million to $16.4 million.
The Trust expects growth in net income before loss on sale of real estate
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 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 six months ended June 30,
1999 1998
- ----------------------------------------------------------------
Rental income
Northeast $ 49,910 $ 45,407
Mid-Atlantic 54,513 50,070
West 14,684 11,131
-------- --------
Total $119,107 $106,608
======== ========
19
<PAGE>
Net operating income
Northeast $ 35,770 $ 32,397
Mid-Atlantic 39,844 36,930
West 10,349 7,831
-------- --------
$ 85,963 $ 77,158
======== ========
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 half of 1999 with 1998, rental income increased
10% from $45.4 million in 1998 to $49.9 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 6.5%, primarily due to
increases at recently redeveloped and retenanted shopping centers, such as
Brick, Finley, Gratiot, Feasterville, and Wynnewood.
Net operating income increased 10% from $32.4 million in 1998 to $35.8
million in 1999. Excluding properties acquired since January 1, 1998, net
operating income increased 6.5%, primarily due to increases at the recently
redeveloped and retenanted shopping 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 half of 1999 with 1998, rental income increased 9%
from $50.1 million in 1998 to $54.5 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 4%, due in part to new
anchor leases at several centers.
When comparing the first half of 1999 with 1998, net operating income
increased 8% from $36.9 million in 1998 to $39.8 million in 1999. Excluding
properties acquired since January 1, 1998, net operating income increased 3%.
The West
- --------
The Western region is comprised of thirty-eight assets, located from Texas
to the West Coast.
When comparing the first half of 1999 with 1998, rental income increased
32% from $11.1 million in 1998 to $14.7 million in 1999. Excluding properties
acquired since January 1, 1998, rental income increased 7.6%, primarily due to
increases from recently redeveloped properties in the Los Angeles, California
area.
When comparing the first half of 1999 with 1998, net operating
20
<PAGE>
income increased 32% from $7.8 million in 1998 to $10.3 million in 1999.
Excluding properties acquired since January 1, 1998, net operating income
increased 4%, primarily due to increases from the recently redeveloped
properties in the Los Angeles area.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 and 1998
Consolidated Results
- --------------------
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 10% from $54.1 million in the second quarter of 1998 to
$59.7 million in the second quarter of 1999. If properties acquired in 1999 and
1998 are excluded, rental income increased 4%, 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 decreased 13% from $2.9 million in the second
quarter of 1998 to $2.6 million in the second quarter of 1999. Increases in
temporary tenant income, an area identified by the Trust as one with additional
growth opportunity, were outweighed by decreases in telephone income, lease
termination fees and decreases in marketing dues, as the Trust discontinued
marketing funds at certain shopping centers in 1999.
Rental expenses increased 10% from $11.3 million in the second quarter of
1998 to $12.5 million in the second quarter of 1999. If rental expenses are
adjusted for properties acquired in 1999 and 1998, rental expenses increased
2.5% from $11.3 million in 1998 to $11.6 million in 1999. There was a decrease
in marketing expenses consistent with the decrease in marketing dues, but this
decrease was outweighed by the write off of tenant work and lease costs
associated with eleven stores operated by a bankrupt tenant.
Real estate taxes increased 2% from $5.7 million in the second quarter of
1998 to $5.9 million in the second quarter of 1999. If real estate taxes are
adjusted for properties acquired in 1999 and 1998, real estate taxes decreased.
Increased taxes on recently redeveloped properties were offset by a refund
resulting from the reassessment of a 1997 acquisition.
Depreciation and amortization expenses increased 13% from $11.2 million in
the second quarter of 1998 to $12.7 million in the second quarter of 1999
reflecting the impact of property acquisitions and recent tenant work and
property improvements.
During the second quarter of 1999 the Trust incurred interest expense of
$17.0 million, of which $1.6 million was capitalized, as compared to 1998's
$14.9 million of which $1.5 million was capitalized. The increase in interest
expense reflects the additional debt issued to fund the Trust's aquisition and
capital improvement programs.
21
<PAGE>
During the second quarter of 1999, the Trust recorded a $7.1 million
charge, representing the estimated loss on a potential sale of certain assets,
principally Northeast Plaza in Atlanta, Georgia, thereby valuing the assets at
their estimated fair value less estimated costs to sell. The Trust is in active
negotiation for the sale of Northeast Plaza which, if successful, would have
the effect of increasing portfolio wide occupancy by 100 basis points to nearly
96%.
Administrative expenses decreased from $4.0 million in the second quarter
of 1998 to $3.2 million in the second quarter of 1999, resulting from the
benefits of the 1998 comprehensive restructuring of the Trust.
As a result of the foregoing items, net income before estimated loss on
real estate to be sold increased from $12.0 million in the second quarter of
1998 to $13.9 million in the second quarter of 1999, while net income decreased
from $12.0 million during the second quarter of 1998 to $6.8 million during the
second quarter of 1999 and net income available for common shareholders
decreased from $10.0 million to $4.8 million.
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 June 30,
1999 1998
- --------------------------------------------------------------------------------
Rental income
Northeast $25,052 $23,247
Mid-Atlantic 27,051 24,931
West 7,571 5,949
------- -------
Total $59,674 $54,127
======= =======
Net operating income
Northeast $18,643 $17,314
Mid-Atlantic 19,674 18,479
West 5,601 4,176
------- -------
$43,918 $39,969
======= =======
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.
22
<PAGE>
When comparing the second quarter of 1999 with 1998, rental income
increased 8% from $23.2 million in 1998 to $25.1 million in 1999. Excluding
properties acquired since January 1, 1998, rental income increased 4.5%,
primarily due to increases at recently redeveloped and retenanted shopping
centers, such as Brick, Finley, Gratiot, Feasterville, and Wynnewood.
Net operating income increased 8% from $17.3 million in 1998 to $18.6
million in 1999. Excluding properties acquired since January 1, 1998, net
operating income increased 4%, primarily due to increases at the recently
redeveloped and retenanted shopping 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 second quarter of 1999 with 1998, rental income
increased 8.5% from $24.9 million in 1998 to $27.1 million in 1999. Excluding
properties acquired since January 1, 1998, rental income increased 3.5%, due in
part to new anchor leases at several centers.
When comparing the second quarter of 1999 with 1998, net operating income
increased 6.5% from $18.5 million in 1998 to $19.7 million in 1999. Excluding
properties acquired since January 1, 1998, net operating income increased 2%.
The West
- --------
The Western region is comprised of thirty-eight assets, located from Texas
to the West Coast.
When comparing the second quarter of 1999 with 1998, rental income
increased 27% from $6.0 million in 1998 to $7.6 million in 1999. Excluding
properties acquired since January 1, 1998, rental income decreased 1.5%;
increases from recently redeveloped properties in the Los Angeles, California
area were outweighed by a decrease at Town & Country Plaza in San Jose, whose
occupancy is declining as the center is being vacated in preparation for its
razing and subsequent new development.
When comparing the second quarter of 1999 with 1998, net operating income
increased 34% from $4.2 million in 1998 to $5.6 million in 1999. Excluding
properties acquired since January 1, 1998, net operating income increased 2%,
primarily due to increases from the recently redeveloped properties in the Los
Angeles area.
23
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
At the 1999 Annual Meeting of Shareholders on May 5, 1999 the Shareholders
elected two trustees to serve for the ensuing three years and the Shareholders
approved the reorganization of the Trust under the laws of the State of Maryland
through an amendment and restatement of the declaration of trust. Holders of
34.3 million shares voted for and holders of 255,000 shares voted against both
trustees. Holders of 28.8 million shares voted for the reorganization, holders
of 1.1 million shares voted against the reorganization and holders of 365,000
shares abstained.
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 March 31, 1999, was filed on April 28, 1999 in
response to Item 5.
A Form 8-K, dated May 10, 1999, was filed on May 10, 1999 in response
to Item 4.
A Form 8-K, dated May 25, 1999, was filed on May 25, 1999 in response
to Item 5 and Item 7.
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)
July 29, 1999 Steven J. Guttman
-----------------
Steven J. Guttman, President
(Chief Executive Officer)
July 29, 1999 Cecily A. Ward
--------------
Cecily A. Ward, Controller
(Principal Accounting Officer)
24
<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 June 30,
1999 and the related consolidated statement of operations for the six months
ended June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,853
<SECURITIES> 0
<RECEIVABLES> 14,923
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,701,981
<DEPRECIATION> (308,580)
<TOTAL-ASSETS> 1,514,897
<CURRENT-LIABILITIES> 0
<BONDS> 892,167
0
100,000
<COMMON> 711,877
<OTHER-SE> (297,287)
<TOTAL-LIABILITY-AND-EQUITY> 1,514,897
<SALES> 0
<TOTAL-REVENUES> 123,934
<CGS> 0
<TOTAL-COSTS> 37,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,518
<INCOME-PRETAX> 16,394
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,394
<EPS-BASIC> .41
<EPS-DILUTED> .41
</TABLE>
