SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 1996 ------------------------------------------ Commission File No. 1-7533 -------------------------- FEDERAL REALTY INVESTMENT TRUST ------------------------------- (Exact name of registrant as specified in its charter) 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) (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 November 5,1996 - ------------------------------------ ------------------------------ Common Shares of Beneficial Interest 34,181,194 This report including exhibits, contains 40 pages.
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q September 30, 1996 I N D E X PART I. FINANCIAL INFORMATION PAGE NO. Accountants' Report 4 Consolidated Balance Sheets 5 September 30, 1996 (unaudited) and December 31, 1995 (audited) Consolidated Statements of Operations (unaudited) Nine months ended September 30, 1996 and 1995 6 Consolidated Statements of Operations (unaudited) Three months ended September 30, 1996 and 1995 7 Consolidated Statements of Shareholders' Equity (unaudited) Nine months ended September 30 1996 and 1995 8 Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 1996 and 1995 9 Notes to Financial Statements 10-13 Management's Discussion and Analysis of 14-20 Financial Condition and Results of Operations PART II. OTHER INFORMATION 21-40 2
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q September 30, 1996 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, 1995 was audited by Grant Thornton LLP, independent public accountants, who expressed an unqualified opinion on it in their report dated February 9, 1996. All other financial information presented is unaudited but has been reviewed as of September 30, 1996 and for each of the nine months ended September 30, 1996 and 1995 by Grant Thornton LLP whose report thereon appears on Page 4. All adjustments and disclosures proposed by them have been reflected in the data presented. 3
Accountants' Review Report - -------------------------- Trustees and Shareholders Federal Realty Investment Trust We have reviewed the accompanying consolidated balance sheet of Federal Realty Investment Trust as of September 30, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the nine month periods ended September 30, 1996 and 1995, and the consolidated statements of operations for the three month periods ended September 30, 1996 and 1995. 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, 1995 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 9, 1996, 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, 1995 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. November 4, 1996 4
Federal Realty Investment Trust CONSOLIDATED BALANCE SHEETS (see accountants' review report) <TABLE> <CAPTION> September December 31, 1996 1995 --------------- ---------------- (unaudited) ASSETS (in thousands) <S> <C> <C> Investments Real estate, at cost $1,058,525 $1,009,682 Less accumulated depreciation and amortization (215,267) (190,795) -------- -------- 843,258 818,887 Mortgage notes receivable 26,975 13,561 -------- -------- 870,233 832,448 Other Assets Cash 9,071 10,521 Investments 595 261 Notes receivable - officers 1,187 1,011 Accounts receivable 15,727 15,091 Prepaid expenses and other assets, principally property taxes and lease commissions 28,234 22,987 Debt issue costs (net of accumulated amortization of $1,910,000 and $1,376,000, respectively) 3,550 3,835 -------- -------- $928,597 $886,154 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations under capital leases $130,930 $131,829 Mortgages payable 89,515 90,488 Notes payable 18,880 49,980 Accrued expenses 17,716 19,048 Accounts payable 9,646 8,571 Dividends payable 14,343 13,191 Security deposits 3,225 3,083 Prepaid rents 2,585 787 Senior notes and debentures 215,000 165,000 5 1/4% Convertible subordinated debentures 75,289 75,289 Investors' interest in consolidated assets 1,380 1,420 Commitments and contingencies - - Shareholders' equity Common shares of beneficial interest, no par or stated value, unlimited authorization, issued 34,211,280 and 32,221,670 shares, respectively 551,912 508,870 Accumulated dividends in excess of Trust net income (193,324) (172,835) -------- -------- 358,588 336,035 Less 62,386 and 61,328 common shares in treasury - at cost, respectively, deferred compensation and subscriptions receivable (8,500) (8,567) -------- -------- 350,088 327,468 -------- -------- $928,597 $886,154 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 5
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, 1996 1995 ----------- ---------- (In thousands, except per share data) <S> <C> <C> Revenue Rental income $121,555 $104,557 Interest 3,148 3,049 Other income 6,976 5,283 -------- -------- 131,679 112,889 Expenses Rental 30,510 25,059 Real estate taxes 12,111 10,704 Interest 33,559 28,814 Administrative 6,074 4,483 Depreciation and amortization 28,125 25,815 -------- -------- 110,379 94,875 -------- -------- Operating income before investors' share of operations and loss on sale of real estate 21,300 18,014 Investors' share of operations (254) 275 -------- -------- Income before loss on sale of real estate 21,046 18,289 Loss on sale of real estate - (545) -------- -------- Net Income $21,046 $17,744 ======== ======== Weighted Average Number of Common Shares 33,193 31,744 ======== ======== Earnings per share Income before loss on sale of real estate $0.63 $0.58 Loss on sale of real estate 0.00 (0.02) -------- -------- $0.63 $0.56 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 6
<TABLE> <CAPTION> Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS (see accountants' review report) (unaudited) Three months ended September 30, 1996 1995 <S> -------------- ------------- (In thousands, except per share data) <C> <C> Revenue Rental income $40,895 $35,910 Interest 1,229 1,156 Other income 2,213 1,907 -------------- -------------- 44,337 38,973 Expenses Rental 8,793 8,840 Real estate taxes 4,142 3,719 Interest 11,271 10,098 Administrative 2,252 1,666 Depreciation and amortization 9,449 8,827 -------------- ------------- 35,907 33,150 -------------- ------------- Operating income before investors' share of operations and loss on sale of real estate 8,430 5,823 Investors' share of operations (307) 105 -------------- ------------- Income before loss on sale of real estate 8,123 5,928 Loss on sale of real estate - (10) ------------- ------------- Net Income $8,123 $5,918 ============= ============= Weighted Average Number of Common Shares 34,236 31,850 ============= ============= Earnings per share Income before loss on sale of real estate $0.24 $0.19 Loss on sale of real estate 0.00 (0.00) ------------- -------------- $0.24 $0.19 ============= ============== </TABLE> The accompanying notes are an integral part of these statements. 7
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, 1996 1995 ------------- ----------- ------------ ---------- (In thousands, except per share amounts) Shares Amount Shares Amount <S> <C> <C> <C> <C> Common Shares of Beneficial Interest Balance, beginning of period 32,221,670 $508,870 31,669,434 $496,958 Net proceeds from sale of shares 1,818,182 39,327 - - Shares issued to purchase shopping center - - 337,527 $7,341 Exercise of stock options 31,501 635 19,244 359 Shares issued under dividend reinvestment plan 139,927 3,080 148,585 3,157 ---------- -------- ---------- -------- Balance, end of period 34,211,280 $551,912 32,174,790 $507,815 ========== ======== ========== ======== Common Shares of Beneficial Interest in Treasury, Deferred Compensation and Subscriptions Receivable Balance, beginning of period (500,095) ($8,567) (539,188) ($9,130) Amortization of deferred compensation 30,250 482 34,250 568 Purchase of shares under share purchase plan 1,250 19 - - Purchase of treasury shares (1,058) (24) (1,128) (25) Payment of (issuance of) stock option loans, net (20,667) (410) 5,682 17 -------- ------- -------- ------- Balance, end of period (490,320) ($8,500) (500,384) ($8,570) ======== ======= ======== ======= Allowance for Unrealized Loss on Marketable Securities Balance, beginning of period $0 ($53) Unrealized (loss) recovery 0 53 ------ ---- Balance, end of period $0 $0 ====== ==== Accumulated Dividends in Excess of Trust Net Income Balance, beginning of period ($172,835) ($144,553) Net income 21,046 17,744 Dividends declared to shareholders (41,535) (38,201) --------- --------- Balance, end of period ($193,324) ($165,010) ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 8
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF CASH FLOWS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, (In thousands) 1996 1995 ----------------- ------------------ <S> <C> <C> OPERATING ACTIVITIES Net income $21,046 $17,744 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 28,125 25,815 Rent abatements in lieu of leasehold improvements, net of tenant improvements retired 200 (1,098) Imputed interest and amortization of debt cost 531 543 Amortization of deferred compensation and forgiveness of officers' notes 373 399 Loss on sale of real estate - 545 Other 104 90 Changes in assets and liabilities (Increase) decrease in accounts receivable (636) 2,706 Increase in prepaid expenses and other assets before depreciation and amortization (7,760) (5,576) Increase in operating accounts payable security deposits and prepaid rent 1,964 812 Increase (decrease) in accrued expenses (1,165) 5,369 -------- -------- Net cash provided by operating activities 42,782 47,349 INVESTING ACTIVITIES Acquisition of real estate (19,494) (67,851) Capital expenditure (29,638) (26,026) Proceeds from sale of real estate - 1,782 Net increase in notes receivable (13,602) (218) Net increase in temporary investments (334) (56) -------- -------- Net cash used in investing activities (63,068) (92,369) FINANCING ACTIVITIES Regular payments on mortgages, capital leases, and notes payable (2,045) (1,665) Balloon payments of mortgages and notes payable (3,000) (23,601) Net change in lines of credit (27,970) (18,825) Issuance of senior notes, net of costs 49,751 123,761 Dividends paid (38,411) (35,463) Issuance of shares of beneficial interest 40,551 1,336 Decrease in minority interest (40) (1,087) -------- -------- Net cash provided by financing activities 18,836 44,456 -------- -------- Increase (decrease) in cash (1,450) (564) Cash at beginning of period 10,521 3,995 -------- -------- Cash at end of period 9,071 3,431 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 9
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (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, 1995 which contain the Trust's accounting policies and other data. NOTE B - DIVIDENDS PAYABLE On September 11, 1996 the Trustees declared a cash dividend of $.42 per share, payable October 15, 1996 to shareholders of record September 26, 1996. NOTE C - REAL ESTATE On February 28, 1996 the Trust purchased, for cash, two retail buildings totalling 28,446 square feet in Winter Park, Florida for a cost of $6.8 million. On May 6, 1996 the Trust purchased a 14,712 square foot building in Greenwich, Connecticut, for $3.2 million in cash. On June 4, 1996 the Trust purchased a 21,954 square foot building in Greenwich, Connecticut for $9.5 million in cash. On October 1, 1996 the Trust acquired Saugus Plaza Shopping Center, located in the metropolitan Boston, Massachusetts area, for a cash purchase price of $12.2 million. On October 29, 1996 the Trust purchased Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania for $20.9 million in cash. In connection with the Connecticut and Massachusetts acquisitions, The Trust paid $170,000 in commissions to a company owned by the brother of the Trust's president. NOTE D - MORTGAGE NOTES RECEIVABLE On April 22, 1996 the Trust made a $9.2 million convertible participating loan to a partnership, secured by retail properties in Manayunk, Pennsylvania. The loan bears interest at 10% plus additional interest based upon the gross income of the secured properties. In addition, upon sale of the properties, the Trust will share in the appreciation of the properties. From and after April 2006, which date may be extended to April 2008, the Trust has the option to convert the loan into a partnership interest. 10
In 1995 the Trust issued a mortgage for up to $900,000 to a partnership with common ownership to the partnership above. During 1996 the Trust loaned the partnership $514,000 on this mortgage for a total outstanding of $893,000. The loan, which is due November 1997, is secured by properties in Manayunk, Pennsylvania and requires monthly interest payments at the greater of prime plus 2% or 10%. On July 2, 1996 the Trust was granted a purchase option on a parcel of land in Bethesda, Maryland in exchange for a refundable deposit of $50,000 and a $3.6 million loan secured by the land. The loan requires monthly payments of interest at 9% until March 31, 1997 and 9.5% thereafter. The Note is due on the earlier of the exercise of the purchase option or March 31, 1998. NOTE E - NOTES PAYABLE In August 1996 the Trust amended its unsecured medium term revolving credit facilities with four banks, increasing the aggregate amount available from $130 million to $135 million, extending the maturity from three years to five, and decreasing the interest rate from LIBOR plus 75 to 100 basis points to LIBOR plus 75 basis points. The facilities require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. At September 30, 1996 there was $12.1 million borrowed under these credit facilities. The maximum drawn during the first nine months of 1996 was $76.2 million. The weighted average interest rate on borrowings for the nine months ended September 30, 1996 was 6.5%. In June 1996 the Trust repaid a $3 million note which had been issued in connection with the purchase of Federal Plaza in 1989. NOTE F - SENIOR NOTES AND DEBENTURES On August 16, 1996 the Trust issued $50.0 million of 7.48% Debentures due August 15, 2026, netting approximately $49.8 million after adjusting for underwriting discounts and other costs. The debentures, which were issued at a price of 99.96%, pay interest semiannually on February 15 and August 15. The debentures are redeemable at par at the option of the holders on August 15, 2008 and by the Trust at any time thereafter. NOTE G - SHAREHOLDERS' EQUITY On May 24, 1996 the Trust sold 1.8 million shares at $22 per share, netting $39.3 million. During the first nine months of 1996, 31,501 shares were issued at prices ranging from $18.00 a share to $20.875 a share as the result of the exercise of stock options. The Trust accepted notes of $410,000 from certain of its officers and 11
employees in connection with the issuance of 20,667 of these shares. On February 16, 1996, 58,681 options at $21.125 per share were granted to employees of the Trust. An option for 20,000 shares at $21 per share was granted to an employee upon commencement of his employment. On May 2, 1996 each of the trustees, other than the president, was awarded 2,500 options at $21.625 per share. NOTE H - INTEREST EXPENSE The Trust incurred interest expense totaling $34.2 million during the first nine months of 1996 and $29.5 million during the first nine months of 1995, of which $690,000 and $672,000, respectively, were capitalized. Interest paid was $33.4 million in the first nine months of 1996 and $23.8 million in the first nine months of 1995. The ratio of earnings to fixed charges was 1.55x for the first nine months of 1996 and 1.58x for the comparable period in 1995. The ratio of funds from operations to fixed charges was 2.27x for the first nine months of 1996 and 2.39x for the first nine months of 1995. NOTE I - COMMITMENTS AND CONTINGENCIES As previously reported, certain of the Trust's shopping centers have some environmental contamination. The Trust has installed a system to remediate contamination from a dry cleaning spill at Eastgate Shopping Center in Chapel Hill, North Carolina. Estimates to remediate the spill range from $300,000 to $500,000. The Trust has entered into an agreement with two previous owners of the shopping center to share the costs of the remediation. In 1993 the Trust recorded a liability of $120,000 as its estimated share of the clean up costs. The Trust has retained an environmental consultant to investigate the contamination at a shopping center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. At this time, the Trust has not determined what the range of remediation costs might be. The Trust has also identified chlorinated solvent contamination at another property. The contamination appears to be linked to the current and/or previous dry cleaner. The Trust intends to look to the responsible parties for any remediation effort. Evaluation of this situation is preliminary and it is impossible, at this time, to estimate the range of remediation costs, if any. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the 12
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 a 22.5% interest at Congressional Plaza at its then fair market value. At September 30, 1996 in connection with certain redevelopment projects and tenant improvements, the Trust is contractually obligated on contracts of approximately $6.3 million. At September 30, 1996 the Trust is also obligated under leases with tenants to provide up to an additional $8.4 million for improvements. NOTE J - COMPONENTS OF RENTAL INCOME The components of rental income for the nine months ended September 30 are as follows: <TABLE> <CAPTION> 1996 1995 (in thousands) <S> <C> <C> Retail properties Minimum rents $95,899 $81,644 Cost reimbursements 20,876 17,813 Percentage rents 2,942 3,262 Apartments 1,838 1,838 -------- -------- $121,555 $104,557 ======== ======== </TABLE> 13
FORM 10-Q September 30, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, renovation projects and debt repayments require additional funding from borrowing or equity offerings. Operating activities during the first nine months of 1996 generated $42.8 million, of which $38.4 million was distributed to shareholders. During the first nine months of 1995, $47.3 million was generated from operating activities, of which $35.5 million was distributed to shareholders. Despite a $3.3 million increase in net income in 1996 over 1995 and a $3.0 million increase in non-cash charges such as depreciation in 1996 over the same period in 1995, less cash was generated from operating activites in the first nine months of 1996 than the first nine months of 1995 because these increases to cash were offset by an increased usage of $10.9 million in 1996 over 1995 for other operating purposes, primarily increases in accounts receivable and prepaid expenses and decreases in accrued expenses. During the first nine months of 1996 the Trust purchased four retail properties; in February the Trust purchased two retail buildings in Winter Park, Florida for $6.8 million in cash, in May the Trust purchased a retail building in Greenwich, Connecticut for $3.2 million in cash and in June the Trust purchased another retail building in Greenwich for $9.5 million in cash. During the first nine months of 1996 another $29.6 million was spent on tenant work and improvements to Trust properties; these improvements included: (1) $2.5 million on the redevelopment of Brick Plaza which was begun in 1995; (2) $2.2 million to buy out below market leases; (3) $9.7 million on the final tenant work and construction of an additional 30,000 square feet at Congressional Plaza, which includes the Trust's corporate offices; and (4) $2.9 million to begin the redevelopment and expansion of a portion of Bethesda Row. During the first nine months of 1996 the Trust made three mortgage loans. Two of the loans are secured by retail property 14
in Manayunk, Pennsylvania; a $9.2 million 25 year loan which bears base interest at 10% and which is convertible into a partnership interest in the secured properties and a $514,000 loan due November 1997 which bears interest at the greater of prime plus 2% or 10%. In July 1996 the Trust was granted a purchase option on land in Bethesda, Maryland in exchange for a refundable deposit of $50,000 and a $3.6 million loan secured by the land. The loan, which requires monthly payments of interest at 9% until March 31, 1997 and 9.5% thereafter, is due on the earlier of the exercise of the purchase option or March 31, 1998. In June 1996 the Trust repaid a $3 million note which had been issued in connection with the purchase of Federal Plaza in 1989. These expenditures were initially financed with borrowings under the Trust's revolving credit facilities with four banks. In August 1996, the Trust amended these unsecured medium-term revolving credit facilities, increasing the aggregate amount available from $130 million to $135 million, extending the maturity from three years to five, and decreasing the interest rate from LIBOR plus 75 to 100 basis points to LIBOR plus 75 basis points. The facilities, which require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth, are used to fund acquisitions and other cash requirements until conditions are favorable for issuing equity or long term debt. At September 30, 1996 the Trust had $12.1 million borrowed under these facilities. The maximum amount borrowed under these facilities during the first nine months of 1996 was $76.2 million. The weighted average interest rate on borrowings during the nine months ended September 30, 1996 was 6.5%. In August 1996 the Trust issued $50.0 million of 7.48% Debentures due August 15, 2026, netting approximately $49.8 million. The debentures, which pay interest semiannually on February 15 and August 15, are redeemable at par at the option of the holders on August 15, 2008 and by the Trust at any time thereafter. The proceeds were used to repay amounts drawn on the revolving credit facilities. On May 24, 1996 the Trust sold 1.8 million shares at $22 per share, netting $39.3 million. These proceeds were used to repay borrowings on the Trust's revolving credit facilities. The Trust is contractually obligated on contracts of approximately $6.3 million for redevelopment and tenant improvements and is committed under leases for up to an additional $8.4 million in tenant work. These committed improvements include the completion of a 30,000 square foot expansion at Congressional Plaza, the completion of a renovation and expansion of a portion of Bethesda Row, a reconstruction of a portion of Crossroads Shopping Center, and a retenanting and 15
renovation of a portion of Troy Shopping Center. These expenditures will be funded with the revolving credit facilities pending their long term financing with either equity or debt. The Trust is continuing to seek acquisition and development opportunities in its core markets, and, in addition, is looking for acquisition and development opportunities in new markets. Therefore, the Trust has amended its bylaws to permit investments west of the Mississippi River. The Trust has entered into a nonbinding letter of intent to form a joint venture for the purpose of acquiring and redeveloping main street retail buildings in California, Oregon and Washington. The Trust is also actively seeking to acquire shopping centers on the west coast. In addition, the Trust continues to look for sites in its core markets to permit the Trust to build new shopping centers. The Trust will need additional capital in order to fund these acquisitions, expansions and refinancings. Sources of this funding may be proceeds from the sale of existing properties, additional debt and additional equity. The timing and choice between additional debt or equity financing will depend upon many factors, including the market price for the Trust's shares, interest rates and the ratio of debt to net worth. The Trust believes that it will be able to raise this capital as needed, based on its past success in so doing. CONTINGENCIES As previously reported, certain of the Trust's shopping centers have some environmental contamination. The Trust has installed a system to remediate contamination from a dry cleaning spill at Eastgate Shopping Center in Chapel Hill, North Carolina. Estimates to remediate the spill range from $300,000 to $500,000. The Trust has entered into an agreement with two previous owners of the shopping center to share the costs of the remediation. In 1993 the Trust recorded a liability of $120,000 as its estimated share of the clean up costs. The Trust has retained an environmental consultant to investigate the contamination at a shopping center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. At this time, the Trust has not determined what the range of remediation costs might be. The Trust has also identified chlorinated solvent contamination at another property. The contamination appears to be linked to the current and/or previous dry cleaner. The Trust intends to look to the responsible parties for any remediation effort. Evaluation of this situation is preliminary and it is impossible, at this time, to estimate the range of remediation costs, if any. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the 16
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 a 22.5% interest at Congressional Plaza at its then fair market value. Recently the unfavorable trends in the retail environment have led to a number of retail bankruptcies. A further weakening of the retail environment and additional bankruptcies could adversely impact the Trust, by increasing vacancies and decreasing rents. In past difficult retail and real estate environments, the Trust has been able to replace weak and bankrupt tenants with stronger tenants; management believes that the quality of the Trust's properties will continue to generate demand for its retail space. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 The Trust has historically reported its funds from operations in addition to its net income. 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 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> 1996 1995 (in thousands) <S> <C> <C> Net income $21,046 $17,744 Plus: depreciation and amortization of real estate assets 25,156 22,890 amortization of initial direct costs of leases 1,777 1,795 loss on sale of real estate - 545 ------- ------- Funds from operations $47,979 $42,974 ======= ======= </TABLE> Funds from operations increased 12% to $48.0 million for the nine months ended September 30, 1996 from $43.0 million for the nine months ended September 30, 1995. 17
Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 16.3% from $104.6 million in the first nine months of 1995 to $121.6 million in the first nine months of 1996. If properties purchased and sold in 1995 and 1996 are excluded, rental income increased 6.7%. Minimum rent increased 17.1% from $83.5 million in the first nine months of 1995 to $97.7 million in the first nine months of 1996. Excluding properties purchased and sold in 1995 and 1996, minimum rent increased 6.7%. Forty-six percent of the increase results from rent increases at Brick Plaza, Gaithersburg Square and Congressional Plaza, all of which have recently been renovated and retenanted. Cost reimbursements consist of tenant reimbursements of real estate taxes (real estate tax recovery) and common area maintenance expenses (CAM recovery). Cost reimbursements increased 17% from $17.8 million during the first nine months of 1995 to $20.9 million during the first nine months of 1996. The increase was due to the recent acquisitions, the partial recovery of increased CAM expenses, primarily snow removal, and an acceleration of billing CAM capital items from once at year end to monthly. Other property income includes items which tend to fluctuate from period to period, such as utility reimbursements, telephone income, merchant association dues, lease termination fees, late fees and temporary tenant income. Other property income increased from $5.3 million during the first nine months of 1995 to $7.0 million during the first nine months of 1996, primarily due to increases in lease termination fees. Rental expenses have increased 22% in the first nine months of 1996 over the first nine months of 1995, to $30.5 million from $25.1 million. If centers acquired and sold during 1995 and 1996 are excluded, rental expenses increased 11%, due to increased snow removal costs incurred during this winter's heavy snowfalls and due to a loss resulting from the decision to demolish a portion of Crossroads Shopping Center to allow for construction of new space. Real estate taxes have increased from $10.7 million during the first nine months of 1995 to $12.1 million during the first nine months of 1996; $965,000 of the increase was due to taxes on the 1995 and 1996 acquisitions. Depreciation and amortization in the first nine months of 1996 was 9% greater than in the first nine months of 1995. Excluding the effect from the 1995 and 1996 acquisitions, depreciation and amortization increased 4%, primarily due to increases attributable to Brick Plaza, Gaithersburg Square and Congressional Plaza, all of which have recently been or are being redeveloped. 18
Interest expense increased from $28.8 million during the first nine months of 1995 to $33.6 million during the first nine months of 1996, primarily due to interest expense on the $165 million of senior notes issued during 1995, due to interest on the 7.48% debentures issued August 1996, due to the mortgage on Bristol Plaza which was purchased in September 1995 and due to increased interest on the revolving credit facilities due to higher average outstanding balances in 1996 than in 1995. The ratio of earnings to fixed charges was 1.55x for the first nine months of 1996 and 1.58x for the comparable period in 1995. The ratio of funds from operations to fixed charges was 2.27x for the first nine months of 1996 and 2.39x for the first nine months of 1995. Administrative expenses as a percentage of total revenue have increased from 4.0% in 1995 to 4.6% in 1996, primarily because of the write off of costs associated with unconsummated acquisitions and developments and because of costs associated with the relocation of the Trust's headquarters. In 1995 the Trust had a $545,000 loss on the sale of North City Plaza. As a result of the foregoing items, net income increased from $17.8 million during the first nine months of 1995 to $21.0 million during the first nine months of 1996. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 Funds from operations increased 19.5% to $17.2 million in the third quarter of 1996 from $14.4 million in the third quarter of 1995. Rental income increased 14% from $35.9 million in the third quarter of 1995 to $40.9 million in 1996. If properties purchased and sold in 1995 and 1996 are excluded, rental income increased 6%. Seventy-three percent of this increase is attributable to Brick Plaza, Gaithersburg and Congressional Plaza, all of which have recently been redeveloped and retenanted. Minimum rent, a component of rental income, increased 16% from $28.4 million in the third quarter of 1995 to $33.0 million in the third quarter of 1996. If properties purchased and sold in 1995 and 1996 are excluded, minimum rent increased 7%. Forty-eight percent of this increase is attributable to Brick Plaza, Gaithersburg, and Congressional Plaza. Cost reimbursements, another component of rental income, increased 7% from $6.9 million in the third quarter of 1995 to $7.4 million in the third quarter of 1996. The increase is primarily due to the 1995 and 1996 acquisitions, but also to an 19
acceleration of billing CAM capital items from once at year end to monthly. Other property income has increased 16% from $1.9 million in the third quarter of 1995 to $2.2 million in the third quarter of 1996, primarily due to lease termination fees. Rental expenses have decreased slightly , despite the acquisition of new properties, from the third quarter of 1995 to the third quarter of 1996, due to decreases in bad debt and shopping center maintenance costs. Real estate taxes have increased primarily due to the acquisition of new properties. Interest expense has increased to $11.3 million in the third quarter of 1996 from $10.1 million in the third quarter of 1995 due to interest on the 6.625% Senior Notes issued in December 1995, the 7.48% Debentures issued in August 1996 and the mortgage on the Bristol Shopping Center. Administrative expenses have increased due to increases in payroll expense and due to costs associated with the relocation of the Trust's corporate office. Depreciation and amortization expense was 7% greater during the third quarter of 1996 as compared to the third quarter of 1995, due to the 1995 and 1996 acquisitions and increased depreciation on Brick Plaza, Gaithersburg Square and Congressional Plaza. As a result of the foregoing items, net income increased from $5.9 million in the third quarter of 1995 to $8.1 million in the third quarter of 1996. 20
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (A) Exhibits (3)(ii) Bylaws of Federal Realty Investment Trust, amended September 11, 1996. 23-40 (27) Financial Data Schedule....................................Edgar filing only (B) Reports on Form 8-K A Form 8-K, dated August 19, 1996, was filed in response to Item 7.(c) 21
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) Date: November 6, 1996 Steven J. Guttman --------------------- -------------------------- Steven J. Guttman, President (Chief Executive Officer) Date: November 6, 1996 Cecily A. Ward --------------------- --------------------------- Cecily A. Ward, Vice President (Principal Accounting Officer) 22