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: June 30, 1998 ------------------------------------- Commission File No. 17533 ------------------------- 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 July 31, 1998 - ---------------------------------- ---------------------------- Common Shares of Beneficial Interest 39,917,063 This report, including exhibits, contains 42 pages.
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q June 30, 1998 I N D E X PART I. FINANCIAL INFORMATION PAGE NO. Accountants' Report 4 Consolidated Balance Sheets 5 June 30, 1998 (unaudited) and December 31, 1997 (audited) Consolidated Statements of Operations (unaudited) Six months ended June 30, 1998 and 1997 6 Consolidated Statements of Operations (unaudited) Three months ended June 30, 1998 and 1997 7 Consolidated Statements of Shareholders' Equity (unaudited) Six months ended June 30, 1998 and 1997 8 Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 1998 and 1997 9 Notes to Financial Statements 10-13 Management's Discussion and Analysis of 14-21 Financial Condition and Results of Operations PART II. OTHER INFORMATION 22
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q June 30, 1998 PART I. FINANCIAL INFORMATION The following financial information is submitted in response to the requirements of Form 10-Q and does not purport to be financial statements prepared in accordance with generally accepted accounting principles since they do not include all disclosures which might be associated with such statements. In the opinion of management, such information includes all adjustments, consisting only of normal recurring accruals, necessary to a fair statement of the results for the interim periods presented. The balance sheet as of December 31, 1997 was audited by Grant Thornton LLP, independent public accountants, who expressed an unqualified opinion on it in their report dated February 5, 1998. All other financial information presented is unaudited but has been reviewed as of June 30, 1998 and for each of the six and three month periods ended June 30, 1998 and 1997 by Grant Thornton LLP whose report thereon appears on Page 4. All adjustments and disclosures proposed by them have been reflected in the data presented. 3
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 June 30, 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the six month periods ended June 30, 1998 and 1997, and the consolidated statements of operations for the three month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 5, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997 is stated fairly, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Grant Thornton LLP Washington, D.C. August 5, 1998 4
Federal Realty Investment Trust CONSOLIDATED BALANCE SHEETS (see accountants' review report) <TABLE> <CAPTION> June 30, December 31, 1998 1997 (unaudited) -------------- ------------- (in thousands) <S> <C> <C> ASSETS Investments Real estate, at cost $1,513,127 $1,453,639 Less accumulated depreciation and amortization (265,622) (247,497) ---------- ----------- 1,247,505 1,206,142 Mortgage notes receivable 34,883 38,360 ---------- ----------- 1,282,388 1,244,502 Other Assets Cash 13,554 17,043 Notes receivable - officers 1,060 1,190 Accounts receivable 16,651 17,604 Prepaid expenses and other assets, principally property taxes and lease commissions 34,878 32,128 Debt issue costs 3,147 4,106 ---------- ----------- $1,351,678 $1,316,573 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations under capital leases $122,573 $125,940 Mortgages payable 58,376 95,633 Notes payable 125,079 119,028 Accrued expenses 22,275 23,419 Accounts payable 5,200 7,093 Dividends payable 18,466 18,368 Security deposits 4,675 4,423 Prepaid rents 4,315 2,818 Senior notes 335,000 255,000 5 1/4% Convertible subordinated debentures 75,289 75,289 Investors' interest in consolidated assets 35,621 35,752 Commitments and contingencies - - Shareholders' equity 7.95% Series A Cumulative Redeemable Preferred Shares, liquidation preference $25 per share, 4,000,000 shares issued in 1997 100,000 100,000 Common shares of beneficial interest, no par or stated value, unlimited authorization, issued 39,922,154 and 39,200,201 shares, respectively 702,983 684,823 Accumulated dividends in excess of Trust net income (236,291) (222,709) ---------- ----------- 566,692 562,114 Less 58,419 and 52,386 common shares in treasury - at cost, respectively, deferred compensation and subscriptions receivable (21,883) (8,304) ---------- ----------- 544,809 553,810 ---------- ----------- $1,351,678 $1,316,573 ========== =========== </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> Six months ended June 30, 1998 1997 ------ ------ (In thousands, except per share data) <S> <C> <C> Revenue Rental income $ 106,608 $ 90,981 Interest and other income 2,935 2,948 Other property income 5,036 5,520 ----------- ----------- 114,579 99,449 Expenses Rental 23,269 21,005 Real estate taxes 11,217 9,466 Interest 26,097 23,988 Administrative 5,836 4,594 Depreciation and amortization 21,972 20,528 ----------- ----------- 88,391 79,581 ----------- ----------- Operating income before investors' share of operations and gain on sale of real estate 26,188 19,868 Investors' share of operations (1,531) (581) ----------- ----------- Income before gain on sale of real estate 24,657 19,287 Gain on sale of real estate - 7,034 ----------- ----------- Net Income $ 24,657 $ 26,321 Dividends on preferred stock (3,975) - ----------- ----------- Net income available for common shareholders $ 20,682 $ 26,321 =========== =========== Earnings per common share, basic Income before gain on sale of real estate $ 0.53 $ 0.51 Gain on sale of real estate - 0.18 ----------- ----------- $ 0.53 $ 0.69 =========== =========== Weighted average number of common shares, basic 39,057 38,126 =========== =========== Earnings per common share, diluted Income before gain on sale of real estate $ 0.53 $ 0.50 Gain on sale of real estate - 0.18 ----------- ----------- $ 0.53 $ 0.68 =========== =========== Weighted average number of common shares, diluted 39,896 38,616 =========== =========== </TABLE> The accompanying notes are an integral part of these statements. 6
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Three months ended June 30, 1998 1997 ---- ---- (In thousands, except per share data) <S> <C> <C> Revenue Rental income $54,127 $47,061 Interest and other income 1,341 1,448 Other property income 2,934 2,293 ------- ------- 58,402 50,802 Expenses Rental 11,347 10,789 Real estate taxes 5,745 4,892 Interest 13,404 11,999 Administrative 3,995 2,493 Depreciation and amortization 11,203 10,404 ------- ------- 45,694 40,577 ------- ------- Operating income before investors' share of operations and gain on sale of real estate 12,708 10,225 Investors' share of operations (745) (249) ------- ------- Income before gain on sale of real estate 11,963 9,976 Gain on sale of real estate - 7,034 ------- ------- Net Income $11,963 $17,010 Dividends on preferred stock (1,987) - ------- ------- Net income available for common shareholders $ 9,976 $17,010 ------- ------- Earnings per common share, basic Income before gain on sale of real estate $ 0.26 $ 0.26 Gain on sale of real estate - 0.18 ------- ------- $ 0.26 $ 0.44 ------- ------- Weighted average number of common shares, basic 39,122 38,754 ------- ------- Earnings per common share, diluted Income before gain on sale of real estate $ 0.25 $ 0.25 Gain on sale of real estate 0.00 0.18 ------- ------- $ 0.25 $ 0.43 ======= ======= Weighted average number of common shares, diluted 39,900 39,200 ======= ======= </TABLE> The accompanying notes are an integral part of these statements. 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (see accountants' review report) (unaudited) <TABLE> <CAPTION> Six months ended June 30, 1998 1997 ------------- ------------- ------------- ------------- (In thousands, except per share amounts) Shares Amount Shares Amount <S> <C> <C> <C> <C> Common Shares of Beneficial Interest Balance, beginning of period 39,200,201 $ 684,823 35,948,044 $ 597,917 Net proceeds from sale of shares - - 3,000,000 83,925 Exercise of stock options 130,905 2,798 66,468 1,401 Shares issued under dividend reinvestment plan 76,993 1,927 74,838 2,009 Performance and Restricted Shares granted 514,055 13,435 22,000 621 ------------- ------------- ------------- ------------- Balance, end of period 39,922,154 $ 702,983 39,111,350 $ 685,873 ============= ============= ============= ============= Common Shares of Beneficial Interest in Treasury, Deferred Compensation and Subscriptions Receivable Balance, beginning of period (457,111) ($8,304) (480,948) ($8,332) Amortization of deferred compensation 47,093 875 30,125 480 Performance and Restricted Shares granted (549,055) (14,084) (22,000) (621) Purchase of shares under share purchase plan 50,521 764 16,753 236 Purchase of treasury shares, net of reissuance (6,033) (353) - - Increase in stock option loans, net (32,937) (781) (10,500) (223) ------------- ------------- ------------- ------------- Balance, end of period (947,522) ($21,883) (466,570) ($8,460) ============= ============= ============= ============= Accumulated Dividends in Excess of Trust Net Income Balance, beginning of period ($222,709) ($200,700) Net income 24,657 26,321 Dividends declared to shareholders (38,239) (32,782) ------------- ------------- Balance, end of period ($236,291) ($207,161) ============= ============= </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> Six months ended June 30, (In thousands) 1998 1997 ------------- -------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 24,657 $ 26,321 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 21,972 20,527 Rent abatements in lieu of leasehold improvements, net of tenant improvements retired (1,044) (526) Imputed interest and amortization of debt cost 384 326 Amortization of deferred compensation and forgiveness of officers' notes 1,074 344 Gain on sale of real estate (7,034) Changes in assets and liabilities Decrease (increase) in accounts receivable 953 (584) Increase in prepaid expenses and other assets before depreciation and amortization (3,436) (3,303) Increase (decrease) in operating accounts payable, security deposits and prepaid rent 1,528 (666) Decrease in accrued expenses (1,314) (2,155) ------------ ------------- Net cash provided by operating activities 44,774 33,250 INVESTING ACTIVITIES Acquisition of real estate (29,013) (103,269) Capital expenditures (26,913) (23,571) Application of deposit on real estate - 23,447 Net increase in notes receivable (5,305) (10,250) ------------ ------------ Net cash used in investing activities (61,231) (113,643) FINANCING ACTIVITIES Regular payments on mortgages, capital leases, and notes payable (1,204) (992) Balloon payment on mortgages (36,607) - Increase in short-term debt, net 6,209 33,695 Issuance of senior notes, net of costs 79,540 - Dividends paid (36,845) (30,149) Issuance of shares of beneficial interest 2,742 86,044 (Decrease) increase in minority interest (867) 250 ----------- ------------- Net cash provided by financing activities 12,968 88,848 ----------- ------------- Increase (decrease) in cash (3,489) 8,455 Cash at beginning of period 17,043 11,041 ----------- ------------ Cash at end of period $ 13,554 $ 19,496 =========== ============ </TABLE> The accompanying notes are an integral part of these statements. 9
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (see accountants' review report) (unaudited) NOTE A - ACCOUNTING POLICIES AND OTHER DATA Reference should be made to the notes to financial statements included in the Annual Report to shareholders for the year ended December 31, 1997 which contain the Trust's accounting policies and other data. The following table sets forth the reconciliation between basic and diluted EPS: <TABLE> <CAPTION> Six months Three months 1998 1997 1998 1997 <S> <C> <C> <C> <C> NUMERATOR Net income available for common shareholders - basic $20,682 $26,321 $ 9,976 $17,010 Income attributable to operating partnership units 414 - 207 - ------- ------- ------- ------- Net income available for common shareholders - diluted $21,096 $26,321 $10,183 $17,010 DENOMINATOR Denominator for basic EPS- weighted average shares 39,057 38,126 39,122 38,754 Effect of dilutive securities Stock options and awards 358 490 297 446 Operating partnership units 481 - 481 - ------- ------- ------- ------- Denominator for diluted EPS 39,896 38,616 39,900 39,200 </TABLE> On March 19, 1998 the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on issue #97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires that the internal costs of preacquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred, whereas the internal costs of preacquisition activities directly identifiable with the acquisition of a nonoperating or to be developed property should be capitalized as part of the cost of the acquisition. The Trust has traditionally capitalized internal preacquisition costs of both operating and nonoperating properties as a component of the acquisition price. Consequently, as a result of the adoption of this EITF in the second quarter of 1998, the Trust's general and administrative expense has increased by approximately $900,000. The effect of the EITF on general and administrative expenses each quarter will depend on the acquisition effort spent on acquiring operating properties versus development properties. 10
NOTE B - REAL ESTATE AND ENCUMBRANCES During February and March 1998 the Trust purchased seven properties in San Antonio, Texas for $10.7 million in cash. An additional two properties were purchased during the second quarter of 1998 for $3.5 million in cash. These properties, located on Houston Street near San Antonio's River Walk, are currently vacant and will be redeveloped, retenanted and remerchandised. On February 3, 1998 the Trust purchased a retail building in close proximity to its other properties in Santa Monica, California for $2.0 million in cash. During the first half of 1998 the Trust spent $2.0 million in cash to purchase two properties and to secure a long term ground lease on a third property in Bethesda, Maryland; all three properties are adjacent to the Trust's Bethesda Row property and were purchased in order to allow for future expansion. On May 7, 1998 the Trust acquired two main street retail properties in Tempe, Arizona. The Trust acquired one property for $5.2 million in cash. The Trust acquired, for $4.6 million in cash, an eighty-five percent interest in a partnership which owns the second property which is valued at $5.4 million. On June 30, 1998 the Trust, for $8.5 million, terminated the capital lease on Lawrence Park Shopping Center and purchased the fee interest in the property upon the maturity of a note of $8.5 million which the Trust had loaned to the seller in January 1997. On January 14, 1998 the Trust increased by $2.3 million, extended and refinanced mortgage loans which had been made on retail properties in Philadelphia, Pennsylvania. The new loan, which is available for up to $25 million, bears interest at 10%, and is due May 1, 2021, totalled $5.3 million at June 30, 1998. From and after May 2006, which date may be extended to April 2008, the Trust has the option to convert the loan into a partnership interest in the properties. In June 1998 the Trust made a loan of $2.5 million, which matures July 1, 2001 and is secured by a property in Studio City, California. The loan earns interest at 10% and participates in certain revenues and appreciation of the property. On June 1, 1998 the Trust paid off mortgages totalling $36.6 million on Barracks Road, Falls Plaza, Old Keene Mill, and West Falls Shopping Centers. NOTE C - NOTES PAYABLE 11
In December 1997 the Trust replaced its unsecured medium term revolving credit facilities with four banks with a five-year syndicated line, thereby increasing the aggregate amount available from $135 million to $300 million. The syndicated line bears interest at LIBOR plus 65 basis points, requires fees and has covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. At June 30, 1998 there was $121 million borrowed under this facility. The maximum drawn during the first half of 1998 was $136 million. The weighted average interest rate on borrowings for the six months ended June 30, 1998 was 6.2%. NOTE D - INTEREST EXPENSE The Trust incurred interest expense totaling $28.9 million during the first six months of 1998 and $25.2 million during the first six months of 1997, of which $2.8 million and $1.2 million, respectively, was capitalized. Interest paid was $27.3 million in the first six months of 1998 and $24.8 million in the first six months of 1997. NOTE E - COMMITMENTS AND CONTINGENCIES The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the other partners, the Trust would be required to purchase the 99% limited partnership interest at Loehmann's Plaza at its then fair market value and an 18.75% interest at Congressional Plaza at its then fair market value. Under the terms of certain other partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net operating income. The purchase price may be paid in cash or common stock of the Trust at the election of the limited partners. If the limited partners do not redeem their interest, the Trust may choose to purchase the limited partnership interests upon the same terms. Under the terms of another partnership, the partners may exchange their 481,378 operating units into cash or common shares of the Trust, at the option of the Trust. The Trust is currently working to resolve the potential impact of the year 2000 on the processing of information by the Trust's computerized information systems as well as the potential impact on the operations of its real estate properties by computerized components of its buildings' operating systems. Based on current 12
information, costs of addressing and solving potential problems are not expected to have a material adverse impact on the Trust's financial condition. NOTE F - COMPONENTS OF RENTAL INCOME The components of rental income for the periods ended June 30 are as follows: Six months Three months 1998 1997 1998 1997 Retail properties Minimum rents $85,627 $71,226 $43,383 $36,756 Cost reimbursements 16,918 16,258 8,925 8,639 Percentage rents 2,786 2,259 1,181 1,049 Apartments 1,277 1,238 638 617 ------- ------- ------- ------- $106,608 $90,981 $54,127 $47,061 NOTE G - SUBSEQUENT EVENTS On July 31, 1998 the Trust paid off a $6.3 million mortgage on Loehmann's Plaza. On August 3, 1998 the Trust paid off a $10.7 million mortgage on Bristol Shopping Center. The payoff of these mortgages was funded by borrowings on the Trust's line of credit. On July 10, 1998 the Trust, through a 90% owned partnership, purchased another property on Third Street Promenade in Santa Monica. The cost of the property was $6.6 million in cash, of which the Trust contributed 90%. On July 22, 1998 the Trust acquired a pad site adjacent to North Lake Commons for $1 million in cash. On August 5, 1998 the Trust purchased the Hauppauge Shopping Center in Hauppauge, New York for a cash purchase price of $25 million. 13
FEDERAL REALTY INVESTMENT TRUST FORM 10-Q JUNE 30, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. Portions of this discussion include certain forward-looking statements about the Trust's and management's intentions and expectations. Although these intentions and expectations are based upon reasonable assumptions, many factors, such as general economic conditions, local and national real estate conditions, increases in interest rates and operating costs, may cause actual results to differ materially from current expectations. LIQUIDITY AND CAPITAL RESOURCES Federal Realty meets its liquidity requirements through net cash provided by operating activities, long term borrowing through debt offerings and mortgages, medium and short term borrowing under revolving credit facilities, and equity offerings. Because a significant portion of the Trust's net cash provided by operating activities is distributed to shareholders, capital outlays for property acquisitions, renovation projects and debt repayments require funding from borrowing or equity offerings. Net cash provided by operating activities increased to $44.8 million in the first half of 1998 from $33.3 million in the first half of 1997 due to improved operating results from the core portfolio and due to the contributions from recently acquired and redeveloped properties. Distributions to shareholders in the first six months of 1998 totalled $36.8 million compared to 1997's $30.1 million. During the first half of 1998, the Trust invested $29.0 million in cash to acquire real estate assets, $26.9 million to improve its properties and $5.3 million in mortgage notes receivable. The Trust purchased nine properties in San Antonio, Texas for $14.2 million in cash. These properties, located on Houston Street near San Antonio's River Walk, are currently vacant and will be redeveloped, retenanted and remerchandised. The Trust purchased a retail building in close proximity to its other properties in Santa Monica, California for $2.0 million in cash. The Trust acquired for another $2.0 million in cash two properties and a long term ground lease on a third property adjacent to its Bethesda Row property in order to allow for future expansion. In May 1998 the Trust purchased a main street retail property in Tempe, Arizona and an eighty- five percent interest in a partnership, which owns a second property in Tempe valued at $5.4 million, for $5.2 million and $4.6 million, respectively. On July 10, 1998 the Trust, through a 90% owned partnership, purchased another property on Third Street Promenade in Santa Monica. The cost of the property was $6.6 million in cash, of which the Trust contributed 90%. On July 22, 1998 the Trust acquired a pad site adjacent to North Lake Commons for $1 million in cash. On August 5, 1998 the Trust purchased the Hauppauge Shopping Center in Hauppauge, New York for a cash purchase price of $25 million. 14
On July 31, 1998 and August 3, 1998 the Trust paid balloon mortgage obligations, totalling $16.9 million. Improvements to Trust properties during the first half of 1998 included $3.4 million on the renovation of Gratiot Plaza; $2.9 million on the redevelopment of Old Town Center in Los Gatos, California; $2.4 million on predevelopment work at San Jose Town & Country Village Shopping Center; $2.4 million on the expansion of the Falls and West Falls Shopping Centers in suburban Washington, D.C.; $1.9 million on the retenanting of Finley Shopping Center in suburban Chicago; $1.1 million on the renovation of Feasterville Shopping Center in Pennsylvania; and $1.5 million on renovations of main street retail properties in Santa Monica and Pasadena, California. On January 14, 1998 the Trust increased by $2.3 million, extended and refinanced mortgage loans which had been made on retail properties in Philadelphia, Pennsylvania. The new loan, which is available for up to $25 million, bears interest at 10%, and is due May 1, 2021, totalled $5.3 million at June 30, 1998. From and after May 2006, which date may be extended to April 2008, the Trust has the option to convert the loan into a partnership interest in the properties. In June 1998 the Trust made a mortgage loan of $2.5 million on a property in Studio City, California. The loan, which matures July 1, 2001, earns interest at 10% and participates in certain revenues and appreciation of the property. In December 1997 the Trust replaced its unsecured medium term revolving credit facilities with four banks with a five-year syndicated line, thereby increasing the aggregate amount available from $135 million to $300 million. The Trust uses borrowings on the credit facility to fund its acquisitions, improvements, and debt repayment requirements, until issuing equity or long term debt. The syndicated line bears interest at LIBOR plus 65 basis points, requires fees and has covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. At June 30, 1998 there was $121 million borrowed under this facility. The maximum drawn during the first half of 1998 was $136 million and the weighted average interest rate on borrowings for the six months was 6.2%. On March 5, 1998 the Trust issued $39.5 million of 6.74% Medium-Term Notes due 2004, netting approximately $39.3 million, and $40.5 million of 6.99% Medium-Term Notes due 2006, netting approximately $40.2 million. The notes pay interest semi-annually on March 30 and September 30. In anticipation of this transaction, on January 13, 1998 the Trust purchased a Treasury Yield Hedge (notional amount of $50 million) to minimize the risk of changes in interest rates. The hedge was terminated on March 5, 1998 at a gain of $1.1 million which will be recognized as a reduction in interest expense over the lives of the notes. Proceeds from this issuance were used to reduce borrowings on the credit facility. 15
The Trust is contractually obligated on contracts of approximately $16.3 million for redevelopment and tenant improvements and is committed under leases for up to an additional $7.4 million in tenant work and general improvements to its properties. In addition to these committed amounts, the Trust has budgeted an additional $25 million for the remainder of 1998 for improvements to its properties. These committed and budgeted improvements include the redevelopment of Old Town Center, the renovation and retenanting of certain of the San Diego and Santa Monica main street retail properties, the renovation of Feasterville Shopping Center, the completion of the renovation and expansion of Gratiot Plaza and the redevelopment of a portion of Bethesda Row. These expenditures will be funded with the revolving credit facilities pending their long term financing with either equity or debt. The Trust plans to acquire additional retail properties and, in addition, has located sites where it intends to build new retail properties. The Trust will need additional capital in order to fund these acquisitions, expansions, developments and refinancings. Sources of this funding may be additional debt and additional equity. The timing and choice between additional debt or equity will depend upon many factors, including the market price for the Trust's shares, interest rates and the Trust's ratio of debt to net worth. The Trust believes, based on past experience, that it has the access to the capital markets needed to raise this capital. CONTINGENCIES The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the other partners, the Trust would be required to purchase the 99% limited partnership interest at Loehmann's Plaza at its then fair market value and an 18.75% interest at Congressional Plaza at its then fair market value. Under the terms of certain other partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net operating income. The purchase price may be paid in cash or common stock of the Trust at the election of the limited partners. If the limited partners do not redeem their interest, the Trust may choose to purchase the limited partnership interests upon the same terms. Under the terms of another partnership, the partners may 16
exchange their 481,378 operating units into cash or common shares of the Trust, at the option of the Trust. The Trust is currently working to resolve the potential impact of the year 2000 on the processing of information by the Trust's computerized information systems as well as the potential impact on the operations of its real estate properties by computerized components of its buildings' operating systems. Based on current information, costs of addressing and solving potential problems are not expected to have a material adverse impact on the Trust's financial position. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Net income and funds from operations have been affected by the Trust's recent acquisition, redevelopment and financing activities. The Trust has historically reported its funds from operations in addition to its net income and net cash provided by operating activities. Funds from operations is a supplemental measure of real estate companies' operating performance which excludes historical cost depreciation, since real estate values have historically risen and fallen with market conditions rather than over time. Funds from operations is defined by The National Association of Real Estate Investment Trusts ("NAREIT") as follows: income available for common shareholders before depreciation and amortization of real estate assets and before extraordinary items and significant non-recurring events less gains on sale of real estate. The Trust complies with this definition. Funds from operations does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. Rather, funds from operations has been adopted by real estate investment trusts to provide a consistent supplemental measure of operating performance in the industry. The reconciliation of net income to funds from operations for the six months ended June 30 is as follows: <TABLE> <CAPTION> 1998 1997 (in thousands) <S> <C> <C> Net income available for common shareholders $20,682 $26,321 Less: gain on sale of real estate - (7,034) Plus: depreciation and amortization of real estate assets 19,906 18,418 amortization of initial direct costs of leases 1,181 1,148 income attributable to operating partnership units 414 - ------- ------- Funds from operations, diluted $42,183 $38,853 ======= ======= </TABLE> 17
Funds from operations increased 9% to $42.2 million in the first half of 1998 from $38.9 million in the first half of 1997. Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 17% from $91.0 million in the first half of 1997 to $106.6 million in the first half of 1998. If properties purchased and sold in 1997 and 1998 are excluded, rental income increased 5%. The majority of the increase is attributable to retail properties which have recently been renovated and retenanted. Minimum rent increased 20% from $72.5 million in the first half of 1997 to $86.9 million in the first half of 1998. Excluding properties purchased and sold in 1997 and 1998, minimum rent increased 7%. The majority of the increase is attributable to retail properties which have recently been renovated and retenanted, including Troy, Wynnewood, Brick, Finley, Crossroads and Bethesda Row Shopping Centers. Cost reimbursements consist of tenant reimbursements of real estate taxes (real estate tax recovery) and common area maintenance expenses (CAM recovery). Cost reimbursements increased 4% from $16.3 million during the first half of 1997 to $16.9 million during the first half of 1998. Excluding properties purchased and sold in 1997 and 1998, cost reimbursements decreased from $15.5 million in 1997 to $14.7 million in 1998. Real estate tax recovery on the core portfolio increased in line with increases in taxes, while CAM recovery decreased on the core portfolio as CAM expenses, mainly snow removal decreased. Other property income includes items which, although recurring, tend to fluctuate from period to period, such as utility reimbursements, telephone income, merchant association dues, late fees and temporary tenant income. It also includes nonrecurring items such as lease termination fees. Other property income decreased from $5.5 million during the first half of 1997 to $5.0 million during the first half of 1998. If other income is adjusted to remove the effect of properties sold and acquired in 1997 and 1998, other income decreased $1.1 million, primarily due to a decrease in lease termination fees from $1.8 million in 1997 to $370,000 in 1998. Rental expenses have increased 11% in the first half of 1998 from the first half of 1997, to $23.3 million from $21.0 million. If centers acquired and sold during 1997 and 1998 are excluded, rental expenses decreased 4%, refecting the decrease in CAM expenses. Real estate taxes have increased from $9.5 million during the first half of 1997 to $11.2 million during the first half of 1998, due to the recent acquisitions. Depreciation and amortization in the first half of 1998 was 7% greater than in the first half of 1997. Excluding the effect from the 1997 and 1998 acquisitions, 18
depreciation and amortization increased 5% due to depreciation on recent tenant work and property improvements. Interest expense increased from $24.0 million during the first half of 1997 to $26.1 million during the first half of 1998, due to interest expense on the Medium Term Notes issued in 1997 and 1998 and increased interest from greater usage on the line of credit, partially offset by an increase in interest capitalized, and decreases in mortgage and participation interest. The ratio of earnings to combined fixed charges and preferred dividends was 1.43x for the first half of 1998; there were no preferred dividends in the first half of 1997. The ratio of earnings to fixed charges was 1.6x and 1.7x during the first half of 1998 and 1997, respectively. The ratio of funds from operations to fixed charges was 2.34x for the first half of 1998 and 2.47x for the first half of 1997. Administrative expenses have increased from $4.6 million during the first half of 1997 to $5.8 million during the first half of 1998, primarily due to the expensing of internal costs of acquisition activities during the second quarter of 1998 in accordance with EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" and due to increased expenses of unsuccessful acquisition and development efforts during the second quarter. Investors' share of operations increased from $581,000 to $1.5 million from the first six months of 1997 to the comparable period in 1998, primarily because of the Trust's partners share of the increased earnings in Congressional Plaza and the Trust's partners share of the earnings in the December 1997 acquisition of Courthouse and Magruder's shopping centers. As a result of the foregoing items, net income before gain on sale of real estate increased from $19.3 million during the first half of 1997 to $24.7 million during the first half of 1998. Net income available for common shareholders before gain on sale of real estate was $20.7 million in the first half of 1998 after deducting a $4.0 million dividend on the $100 million of 7.95% Series A Cumulative Redeemable Preferred Shares issued in October 1997 and $19.3 million in 1997. Net income was $24.7 million in 1998 and $26.3 million in 1997 which had a $7.0 million gain on sale of real estate. The Trust intends to continue acquiring retail properties during the remainder of 1998. If successful in so doing, these acquisitions should contribute to growth in rental income and expenses and, thereby, net income. However, the competitive market for properties may adversely impact the Trust's ability to acquire properties or the price at which they can be acquired. In response to this increasingly competitive environment, the Trust is focusing considerable time and resources now and in the future on development, with the belief that such new development, although 19
not having a positive effect on net income and funds from operations in the very near future, will have a positive impact in the longer term. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AND 1997 Funds from operations increased five percent from $19.9 million in the second quarter of 1997 to $20.9 million in the second quarter of 1998. Rental income increased 15% from $47.1 million in 1997 to $54.1 million in 1998. Excluding properties acquired and sold in 1997 and 1998, rental income increased 4%, in large part due to the contribution from retail properties recently renovated and retenanted. Minimum rent increased 18% from $37.4 million in the second quarter of 1997 to $44.0 million in the second quarter of 1998 due primarily to the impact of 1997 acquisitions. On a same property basis, minimum rent increased 7% due primarily to the recently renovated and retenanted properties. Cost reimbursements, a component of rental income, increased 3% in the second quarter of 1998 over the comparable period of 1997, substantially due to the impact of properties acquired in 1997 and 1998. Other property income increased from $2.3 million in the second quarter of 1997 to $2.9 million in the second quarter of 1998. The major component of this increase was a national telephone contract of $405,000. Rental expenses have increased 5% from $10.8 million in the second quarter of 1997 to $11.3 million in the second quarter of 1998. On a same property basis, rental expenses were down 10%, reflecting a decrease in snow, repair, environmental and leasing costs. Real estate taxes increased 17% from 1997 to 1998, but on a same property basis increased 7%, primarily reflecting increased assessments on recently renovated centers. Depreciation and amortization expense increased 8% due to depreciation expense on the recent acquisitions and renovations. Interest expense increased from $12.0 million in the second quarter of 1997 to $13.4 million in the comparable period of 1998, primarily reflecting the interest on the issuance of $120 million of medium term notes, partially offset by lower mortgage interest expense as mortgages were paid during the second quarter of 1998. General and administrative expenses have increased from $2.5 million in the second quarter of 1997 to $4.0 million in the second quarter of 1998, primarily due to the expensing of internal costs of acquisition activities during the second quarter of 1998 in 20
accordance with EITF 97-11 and due to increased expenses of unsuccessful acquisition and development efforts during the second quarter. Investor's share of operations increased from $249,000 in the second quarter of 1997 to $745,000 in 1998, primarily because of the Trust's partners' share of the increased earnings in Congressional Plaza and the Trust's partners share of the earnings in the December 1997 acquisition of Courthouse and Magruder's shopping centers. As a result of the foregoing items, net income before gain on sale of real estate increased from $10.0 million in the second quarter of 1997 to $12.0 million in the second quarter of 1998. Net income available for common shareholders (before gain on sale of real estate) was $10.0 million in the second quarter of 1998 after deducting a $2.0 million dividend on the $100 million of 7.95% Series A Cumulative Redeemable Preferred Shares issued in October 1997 and $10.0 million in the second quarter of 1997 as well. Net income was $12.0 million in the second quarter of 1998 compared to 1997's $17.0 million which had a $7.0 million gain on sale of real estate. 21
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders At the 1998 Annual Meeting of Shareholders on May 6, 1998 the Shareholders elected two trustees to serve for the ensuing three years and the Shareholders approved the Amendment to the Amended and Restated 1993 Long-Term Incentive Plan ("Amended Plan") and the Shareholders approved a stock option award to the Chief Executive Officer. Holders of 33.5 million shares voted for both of the trustees and holders of 362,000 shares voted against both of the trustees. Holders of 25.6 million shares voted for the Amended Plan and holders of 7.9 million shares voted against the Amended Plan. Holders of 30.9 million shares voted to approve the stock option award to the Chief Executive Officer and holders of 2.5 million shares voted against approval. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits (3)(ii) Bylaws of Federal Realty Investment Trust as last amended on May 6, 1998 24-42 (27) Financial Data Schedules.......................Edgar filing only (B) Reports on Form 8-K A Form 8-K, dated March 31, 1998, was filed on May 11, 1998 in response to Item 7.(c). 22
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) August 12, 1998 Steven J. Guttman ----------------- Steven J. Guttman, President (Chief Executive Officer) August 12, 1998 Cecily A. Ward -------------- Cecily A. Ward, Controller (Principal Accounting Officer) 23