UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K For Fiscal Year Ended: December 31, 1997 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 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (301) 998-8100 -------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------- --------------------- Common Shares of Beneficial Interest New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange 7.95% Series A Cumulative Redeemable Preferred Shares New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 6.82% Medium-Term Notes 7.48% Senior Debentures 8 7/8% Senior Notes 8% Senior Notes 6 5/8% Senior Notes Subordinated Debt Securities* * None issued, registered pursuant to a shelf registration 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] At February 23, 1998, the aggregate market value of Common Shares of Beneficial Interest of Federal Realty Investment Trust held by nonaffiliates was $1.0 billion based upon the closing price of such Shares on the New York Stock Exchange. Indicate the number of shares outstanding of each of the issuer's classes of common stock. Class Outstanding at February 23, 1998 - ----- -------------------------------- Common Shares of Beneficial Interest 39,772,422
DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- PART III - -------- Portions of the Trust's Proxy Statement in connection with its Annual Meeting to be held on May 6, 1998 (hereinafter called "1998 Proxy Statement"). Specifically, the Sections entitled "Summary Compensation Table", "Employment Agreements", "Aggregated Option Exercises in 1997 and December 31, 1997 Option Values", "Retirement and Disability Plans", and "Compensation Committee Interlocks and Insider Participation", "Ownership of Shares by Trustees and Officers", and "Certain Transactions" appearing in the 1998 Proxy Statement are incorporated herein by reference. The Exhibit Index for this report is found on page 29. This report, including Exhibits, contains 323 pages. 2
PART I & II - ----------- Item 1. Business - ------- -------- Federal Realty Investment Trust is an owner, operator and redeveloper of retail properties. Founded in 1962 as a District of Columbia business trust of unlimited duration, the Trust is a self-administered equity real estate investment trust. The Trust consolidates the financial statements of various entities which it controls. At December 31, 1997 the Trust owned 101 retail properties and one apartment complex. The Trust operates in a manner intended to enable it to qualify as a real estate investment trust (REIT) under Sections 856- 860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, no provision for Federal income taxes is required. An important part of the Trust's strategy is to acquire older, well-located properties in prime, densely populated and affluent areas and to enhance their operating performance through a program of renovation, expansion, reconfiguration and retenanting. The Trust's traditional focus has been on community and neighborhood shopping centers that are anchored by supermarkets, drug stores or high volume, value oriented retailers that provide consumer necessities. Late in 1994 the Trust expanded this strategy to include retail buildings and shopping centers in prime established main street shopping areas. The Trust continually evaluates its properties for renovation, retenanting and expansion opportunities. Similarly, the Trust regularly reviews its portfolio and from time to time considers selling certain of its properties. For several years the Trust has been seeking sites in its core markets suitable for the construction of new retail properties. Several sites have been identified and beginning in 1998 the Trust is focusing considerable time and resources on ground up development. The Trust's portfolio of properties has grown from 42 as of January 1, 1993 to 102 at December 31, 1997. During this five year period the Trust acquired 65 retail properties for approximately $648 million. During this same period five shopping centers were sold. Also during this period the Trust spent over $224 million to renovate, expand, improve and retenant its properties. The majority of the acquisitions were funded with cash. Of the properties not fully acquired by cash, one was acquired by means of capital and ground leases, one was acquired for common shares of the Trust and the assumption of a mortgage, one was acquired for cash and the assumption of a municipal bond issue and the others were acquired for cash with minority investments by third parties. This growth was financed through borrowing and equity offerings, since each year the Trust has distributed all or the majority of its cash provided by operating activities to its shareholders. 3
The Trust's 101 retail properties, consisting of 56 shopping centers and 45 main street retail properties, are located in 14 states and the District of Columbia. Twenty-one of the properties are located in the Washington, D.C. metropolitan area; nineteen are in California; fourteen are in Connecticut; eleven are in Pennsylvania, primarily in the Philadelphia area; ten are in New Jersey; seven are in Illinois; three are in Virginia; four are in Massachusetts; six are in New York; two are in Florida; and there is one in each of the following states: Georgia, Michigan, North Carolina and Oregon. No single property accounts for over 10% of the Trust's revenues. The Trust has approximately 2,175 tenants, ranging from sole proprietors to major national retailers; no one tenant or corporate group of tenants accounts for 5% or more of revenue. The Trust's leases with these tenants are classified as operating leases and typically are structured to include minimum rents, percentage rents based on tenants' sales volumes and reimbursement of certain operating expenses and real estate taxes. The Trust continues to seek older, well-located shopping centers and retail buildings to acquire and then to enhance their revenue potential through a program of renovation, retenanting and remerchandising. The Trust has also located sites where it intends to develop new retail properties. During each of the years ended December 31, 1997, 1996 and 1995, retail properties have contributed 96% of the Trust's total revenue. The Trust amended its by-laws in 1996 to permit investments west of the Mississippi River. Investments are not required to be based on specific allocation by type of property. The extent to which the Trust might mortgage or otherwise finance investments varies with the investment involved and the economic climate. The success of the Trust depends upon, among other factors, the trends of the economy, including interest rates, construction costs, retailing trends, income tax laws, increases or decreases in operating expenses, governmental regulations, population trends, zoning laws, legislation and the ability of the Trust to keep its properties leased at profitable levels. The Trust competes for tenants with other real estate owners and the Trust's properties account for only a small fraction of the retail space available for lease. The Trust competes for investment opportunities and debt and equity capital with individuals, partnerships, corporations, financial institutions, life insurance companies, pension funds, trust funds and other real estate investment trusts. Investments in real property create a potential for environmental liability on the part of the current and previous owners of, or any mortgage lender on, such real property. If hazardous substances are discovered on or emanating from any property, the owner or operator of the property may be held liable for costs and liabilities relating to such hazardous substances. The Trust has environmental insurance on 65 of its properties. Subject to certain exclusions and deductibles, the 4
insurance provides coverage for unidentified, pre-existing conditions and for future contamination caused by tenants and third parties. The Trust's current policy is to require an environmental study on each property it seeks to acquire. On recent acquisitions, any substances identified prior to closing which present an immediate environmental hazard have been or are in the process of remediation. Costs related to the abatement of asbestos which increase the value of Trust properties are capitalized. Other costs are expensed. In 1997 and 1996 approximately $1.3 million and $970,000, respectively, of which $732,000 and $540,000, respectively, was capitalized abatement costs, was spent on environmental matters. The Trust has budgeted approximately $2.5 million for 1998 for environmental matters, a majority of which is projected for asbestos abatement. (See Note 5 of Notes to Consolidated Financial Statements.) Current Developments - -------------------- In 1997 the Trust acquired eighteen retail properties at a cost of $258.2 million. Five shopping centers were acquired: San Jose Town & Country Village in San Jose, California for $42.8 million which is to be developed into a main street project; Pike 7 Shopping Center in Tysons Corner, Virginia for $31.5 million; Magruder's and Courthouse Centers in Rockville, Maryland for a combined price of $12.6 million; and Peninsula Shopping Center in Palos Verdes, California for $43.5 million. Thirteen main street retail properties were acquired: six properties in California for approximately $40.2 million; five properties in New York for approximately $65.3 million; one property in Portland, Oregon for $15.7 million; and one property in Chicago, Illinois for $4.2 million. In addition the Trust invested $10.4 million in mortgage notes receivable, most of which are convertible into ownership interests in the properties by which they are secured. Other real estate transactions during 1997 included the purchase of land underlying four of its properties for approximately $14.4 million. The land had previously been leased. The Trust also purchased two tracts of land in Bethesda, Maryland for future development for approximately $6.6 million. During 1997 the Trust spent $50.3 million in renovating, expanding and retenanting its properties. These improvements included $9.4 million on the redevelopment of Wynnewood Shopping Center; $5.1 million on the second phase of the redevelopment of Brick Plaza; $4.5 million on the redevelopment of Troy Shoppping Center; $2.3 million on the redevelopment of Crossroads Shopping Center; and $3.1 million on the redevelopment of Gratiot Plaza. The Trust initially funded the majority of its 1997 acquisitions, capital improvement projects and investments in mortgages with borrowings under its revolving credit facilities. Borrowings on these revolving credit facilities were then repaid from long term debt and equity issues. On February 4, 1997 the Trust sold 3 million common shares to an institutional investor for $28 per share, netting $83.9 million. On July 29, 1997 the 5
Trust sold $40 million of 6.82% Medium Term Notes, netting $39.8 million. On October 6, 1997 the Trust issued 4 million 7.95% Series A Cumulative Redeemable Preferred Shares at $25 per share in a public offering, netting approximately $96.8 million. At December 31, 1997 the Trust had 221 full-time employees. 6
Item 2. Properties - ------------------ Retail Properties - ----------------- The following table sets forth information concerning each retail property in which the Trust owns an equity interest or has a leasehold interest as of December 31, 1997. Except as otherwise noted, retail properties are 100% owned in fee by the Trust. <TABLE> <CAPTION> Year Year Number of Occupancy (1) Principal Completed Acquired Square Feet Tenants Acres Overall/Economic Tenants ---------- --------- ----------- ------- ----- --------------- ---------------- <S> <C> <C> <C> <C> <C> <C> <C> Allwood 1958 1988 53,000 8 5 100% / 100% Grand Union Clifton, NJ 07013 (2) Mandee Shop Andorra 1953 1988 257,000 44 23 97% / 97% Acme Markets Philadelphia, PA 19128 (3) Andorra Theater Bala Cynwyd 1955 1993 279,000 27 22 98% / 98% Lord & Taylor Bala Cynwyd, PA 19004 Acme Markets Barracks Road 1958 1985 479,000 83 39 98% / 97% Harris Teeter Charlottesville, VA 22905 (3) Kroger Superfresh Bethesda Row 1945-1991 1993 276,000 71 8 99% / 99% Barnes and Noble Bethesda, MD 20814 (2) (6) Giant Food Giant Pharmacy Blue Star 1959 1988 392,000 32 55 98% / 97% Caldor Watchung, NJ 07060 (2) Shop Rite Toys R Us Brick Plaza 1958 1989 375,000 32 42 96% / 94% A&P Supermarket Brick Township, NJ 08723 (2) Sony Theatre Steinbach's Bristol 1959 1995 296,000 38 22 98% / 98% Bradlees Bristol, CT 06010 Super Stop & Shop TJ Maxx Brunswick 1957 1988 262,000 23 22 100% / 100% Caldor North Brunswick, NJ 08902 (2) Grand Union Schwartz Furniture Clifton 1959 1988 80,000 13 8 96% / 96% Acme Markets Clifton, NJ 07013 (2) Rickel Home Center </TABLE> 7
<TABLE> <CAPTION> Year Year Number of Occupancy (1) Principal Completed Acquired Square Feet(1) Tenants Acres Overall/Economic Tenants ---------- -------- ------------ ------- ----- ---------------- ----------------- <S> <C> <C> <C> <C> <C> <C> <C> Congressional Plaza 1965 1965 341,000 47 22 100% / 99% Buy Buy Baby Rockville, MD 20852 (4) Fresh Fields Tower Records Courthouse Center 1970 1997 38,000 12 1 98% / 98% Rockville Interiors Rockville, MD 20852 (5) Crossroads 1959 1993 173,000 25 15 99% / 99% Comp USA Highland Park, IL 60035 Gold Standard Liquors Golfsmith Dedham 1959 1993 251,000 33 18 90% / 90% Ames Dedham, MA 02026 Cherry & Webb Eastgate 1963 1986 159,000 31 17 100% / 99% Food Lion Chapel Hill, NC 27514 Southern Season Ellisburg Circle 1959 1992 255,000 35 27 100% / 99% Bed, Bath & Beyond Cherry Hill, NJ 08034 Ross Dress For Less Shop Rite Escondido Promenade Escondido, CA 92029 (7) 1987 1996 223,000 55 18 92% / 92% Toys R Us TJ Maxx Falls Plaza 1962 1967 63,000 11 6 100% / 100% Giant Food Falls Church, VA 22046 CVS Pharmacy Feasterville 1958 1980 104,000 9 12 94% / 94% Office Max Feasterville, PA 19047 Genuardi Markets Federal Plaza 1970 1989 242,000 38 18 97% / 97% Comp USA Rockville, MD 20852 TJ Maxx Finley Square 1974 1995 307,000 18 21 100% / 90% Bed, Bath & Beyond Downers Grove, IL 60515 Service Merchandise Flourtown 1957 1980 187,000 20 15 100% /100% K Mart Flourtown, PA 19031 Genuardi Markets Fresh Meadows 1949 1997 405,000 69 147 95% / 95% Cineplex Odeon Queens, NY 11365 Filene's K Mart </TABLE> 8
<TABLE> <CAPTION> Year Year Number of Occupancy (1) Principal Completed Acquired Square Feet(1) Tenants Acres Overall / Economic Tenants --------- -------- -------------- --------- ----- ------------------ -------------- <S> <C> <C> <C> <C> <C> <C> <C> Gaithersburg Square 1966 1993 204,000 35 17 94% / 81% Borders Books Gaithersburg, MD 20878 Bed, Bath & Beyond Garden Market 1958 1994 134,000 21 12 90% / 90% Dominick's Western Springs, IL 60558 Governor Plaza 1963 1985 252,000 22 26 99% / 99% Office Depot Glen Burnie, MD 21961 (3) Syms Gratiot Plaza 1964 1973 149,000 3 20 100% / 100% Bed, Bath and Roseville, MI 48066 Beyond, Drug Emporium Hamilton 1961 1988 185,000 14 18 100% / 100% Shop Rite Hamilton, NJ 08690 (2) Steven's Furniture A. C. Moore Huntington 1962 1988 274,000 11 21 99% / 96% Bed, Bath and Huntington, NY 11746 (2) Beyond, Service Merchandise, Toys R Us Idylwood Plaza 1991 1994 73,000 18 6 100% / 100% Super Crown Falls Church, VA 22030 Fresh Fields Lancaster 1958 1980 107,000 17 11 100% /100% Giant Eagle Lancaster, PA 17601 (2) A.C. Moore Langhorne Square 1966 1985 208,000 28 21 97% / 79% Drug Emporium Levittown, PA 19056 Marshalls Laurel Centre 1956 1986 384,000 52 26 86% / 86% Giant Food Laurel, MD 20707 Marshalls Toys R Us Lawrence Park 1972 1980 340,000 40 28 77% / 77% Acme Markets Broomall, PA 19008 (2) Rickel Home Center, TJ Maxx Loehmann's Plaza 1971 1983 242,000 52 18 98% / 97% Loehmann's Fairfax, VA 22042 (8) Dress Shop Linens N Things Magruder's Center 1955 1997 109,000 22 5 99% / 94% Magruder's Rockville, MD 20852 (5) Tuesday Morning </TABLE> 9
<TABLE> <CAPTION> Year Year Number of Occupancy (1) Completed Acquired Square Feet (1) Tenants Acres Overall / Economic ---------- --------- --------------- --------- ------ ------------------ <S> <C> <C> <C> <C> <C> <C> Mid-Pike Plaza 1963 1982 311,000 22 20 99% / 98% Rockville, MD 20852 (2) Northeast 1959 1983 302,000 39 19 98% / 98% Philadelphia, PA 19114 Northeast Plaza 1952 1986 446,000 46 44 73% / 72% Atlanta, GA 30329 North Lake Commons 1989 1994 123,000 22 13 95% / 95% Lake Zurich, IL 60047 Old Keene Mill 1968 1976 92,000 20 11 95% / 90% Springfield, VA 22152 Old Town Center 1962 1997 97,000 7 4 n/a Los Gatos, CA 95030 (7) (10) Pan Am 1979 1993 218,000 30 25 96% / 95% Fairfax, VA 22031 Park & Shop 1930 1995 50,000 11 1 97% / 97% Washington, DC 20036 Peninsula Center 1962 1997 295,000 70 24 94% / 94% Palos Verdes, CA 90274 Perring Plaza 1963 1985 437,000 16 27 100% / 99% Baltimore, MD 21134 (3) Pike 7 Plaza 1968 1997 163,000 27 13 100% / 100% Vienna, VA 22180 (5) 150 Post Street 1965 1997 95,000 29 0.3 98% / 96% San Francisco, CA 94108 Queen Anne Plaza 1967 1994 149,000 11 18 100% / 100% Norwell, MA 02061 <CAPTION> Principal Tenants ------------------------------ <S> <C> Mid-Pike Plaza Bally's Total Fitness Rockville, MD 20852 (2) Filene's Basement Toys R Us Northeast Burlington Coat Factory Philadelphia, PA 19114 Marshalls Northeast Plaza Publix Atlanta, GA 30329 Cinema 12 Mars Music North Lake Commons Dominick's Lake Zurich, IL 60047 Old Keene Mill Discount Pet Supermarket Springfield, VA 22152 Fresh Fields Old Town Center Los Gatos, CA 95030 (7) (10) Pan Am Micro Center Fairfax, VA 22031 Safeway MJ Designs Park & Shop Petco Washington, DC 20036 Pizzeria Uno Peninsula Center In Shape Palos Verdes, CA 90274 TJ Maxx Von's Pavilions Perring Plaza Burlington Coat Factory Baltimore, MD 21134 (3) Home Depot Metro Foods Pike 7 Plaza Staples Vienna, VA 22180 (5) TJ Maxx 150 Post Street Episode San Francisco, CA 94108 Williams - Sonoma Queen Anne Plaza TJ Maxx Norwell, MA 02061 Star Markets </TABLE> 10
<TABLE> <CAPTION> Year Year Square Feet Number of Occupancy (1) Principal Completed Acquired (1) Tenants Acres Overall/Economic Tenants ---------- --------- ------------ ------- ----- ---------------- ----------------- <S> <C> <C> <C> <C> <C> <C> <C> Quince Orchard 1975 1993 240,000 30 16 96% / 96% Circuit City Gaithersburg, MD 20877 (6) Dyncorp MJ Designs Rutgers 1973 1988 216,000 17 27 95% / 95% Edwards Super Food Franklin, N.J. 08873 (2) K Mart Saugus Plaza 1976 1996 171,000 7 19 100% / 100% K Mart Saugus, MA 01906 Super Stop & Shop Shirlington 1940 1995 361,000 44 16 98% / 98% Carlyle Grand Cafe Arlington, VA 22206 Cineplex Odeon Town & Country 1962 1997 320,000 97 39 76% / 76% AMC Theatre San Jose, CA 95128 (7) Courtesy Chevrolet Playland Troy 1966 1980 202,000 20 19 99% / 99% Comp USA Parsippany-Troy, NJ 07054 Pathmark Toys R Us Tysons Station 1954 1978 50,000 16 4 100% / 100% Linens N Things Falls Church, VA 22043 Uptown Shopping Center Various 1997 100,000 67 7 98% / 98% Elephant's Delicatessen Portland, OR 97210 Zupan's Markets West Falls 1960 1972 62,000 16 5 91% / 91% Staples Falls Church, VA 22046 Wildwood 1958 1969 85,000 35 13 100% / 100% CVS Pharmacy Bethesda, MD 20814 Sutton Place Gourmet Williamsburg 1961 1986 250,000 32 21 99% / 99% Food Lion Williamsburg, VA 23187 Peebles Rose's Willow Grove 1953 1984 227,000 30 14 98% / 98% Barnes and Noble Willow Grove, PA 19090 Marshalls Toys R Us The Shops at Willow Lawn 1957 1983 445,000 111 37 91% / 90% Cineplex Odeon Richmond, VA 23230 Leggett Stores Hannaford Brothers </TABLE> 11
<TABLE> <CAPTION> Year Year Number of Occupancy (1) Completed Acquired Square Feet (1) Tenants Acres Overall / Economic ---------- --------- ------------ ------- ------ ------------------- <S> <C> <C> <C> <C> <C> <C> Wynnewood 1948 1996 260,000 19 16 85% / 85% Wynnewood, PA 19096 Land for Development - -------------------- Woodmont East 1997 1 1 Bethesda, MD 20814 4929 Bethesda Avenue 1997 3750sf Bethesda, MD 20814 Retail buildings - ---------------- Thirteen buildings in CT 1900-1991 1994- 1996 231,000 94 98% / 98% Seven buildings in Santa Monica, CA (9) 1888 - 1995 1996 - 1997 125,000 24 (11) 100% / 100% Five buildings in San Diego, CA (9) 1888 - 1995 1996 - 1997 65,000 1 (12) n/a Two buildings in CA (9) 1922 1996 - 1997 21,000 9 (13) 96% / 96% Two buildings in FL 1920 1996 28,000 10 100% / 100% One building in MA 1930 1995 12,000 8 100% / 100% Four buildings in NY (9) 1937 - 1987 1997 86,000 22 95% / 93% One building in NJ 1940 1995 11,000 2 100% / 100% Three buildings in IL 1920-1927 1995 - 1997 24,000 4 86% / 86% <CAPTION> Principal Tenants ----------------- <S> <C> Wynnewood Bed, Bath and Beyond Wynnewood, PA 19096 Food Fare Land for Development - -------------------- Woodmont East Bethesda, MD 20814 4929 Bethesda Avenue Bethesda, MD 20814 Retail buildings - ---------------- Thirteen buildings in CT Barney's Eddie Bauer Saks Fifth Avenue Seven buildings in Santa Monica, CA (9) Five buildings in San Diego, CA (9) Two buildings in CA (9) Two buildings in FL Express One building in MA Four buildings in NY (9) Midway Theatre One building in NJ Legg Mason Three buildings in IL Foodstuffs Gianni Versace </TABLE> (1) Overall occupancy is expressed as a percentage of rentable square feet and includes square feet covered by leases for stores not yet opened. Economic occupancy is expressed as a percentage of rentable square feet, but only includes leases currently generating rental income. (2) The Trust has a leasehold interest in this property. (3) The Trust owns a 99.9% partnership interest in this center. (4) The Trust owns a 55.7% equity interest in this center. (5) The Trust owns this property in a "downreit" partnership. (6) The Trust owns this property subject to a ground lease. (7) The Trust owns the controlling interest in this center. A minority owner has an interest in the profits of the center. (8) The Trust has a 1% general partnership interest and manages the partnership. A 99% interest was sold to a limited partner. (9) The Trust owns the general partnership interest in these buildings. (10) The property is currently under redevelopment (11) Occupancy is based on four occupied buildings. The other three buildings are under redevelopment. (12) All buildings are under redevelopment. (13) Occupancy is based on one occupied building. The other building is under redevelopment. 12
Apartments - ---------- The following table sets forth information concerning the Trust's apartment development as of December 31, 1997 which is 100% owned by the Trust in fee. This development is not subject to rent control. <TABLE> <CAPTION> Year Year Property Completed Acquired Acres 1-BR 2-BR 3-BR Total Occupancy - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rollingwood 1960 1971 14 58 163 61 282 99% Silver Spring, MD 9 three-story buildings </TABLE> 13
Apartments - ---------- The following table sets forth information concerning the Trust's apartment development as of December 31, 1997 which is 100% owned by the Trust in fee. This development is not subject to rent control. <TABLE> <CAPTION> Year Year Property Completed Acquired Acres 1-BR 2-BR 3-BR Total Occupancy - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rollingwood 1960 1971 14 58 163 61 282 99% Silver Spring, MD 9 three-story buildings </TABLE> 13
Item 3. Legal Proceedings. - ------ ----------------- None Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- None Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ --------------------------------------------------------------------- Market Quotations <TABLE> <CAPTION> Dividends Quarter ended High Low Paid ------------- ---- --- --------- <S> <C> <C> <C> December 31, 1997 $27 11/16 $ 25 $.43 September 30, 1997 27 1/4 24 9/16 .42 June 30, 1997 28 25 1/8 .42 March 31, 1997 28 3/4 25 3/4 .42 December 31, 1996 $28 3/4 $ 22 5/8 $.42 September 30, 1996 25 21 3/4 .41 June 30, 1996 23 1/8 20 1/2 .41 March 31, 1996 23 1/8 20 1/4 .41 </TABLE> The number of holders of record for Federal Realty's common shares of beneficial interest at December 31, 1997 was 7,505. For the years ended December 31, 1997 and 1996, $.19 and $.21, respectively, of dividends paid on common shares represented a return of capital. Dividends declared on common shares per quarter during the last two fiscal years were as follows: <TABLE> <CAPTION> Quarter Ended 1997 1996 ------------- ---- ---- <S> <C> <C> March 31 $.42 $.41 June 30 .42 .41 September 30 .43 .42 December 31 .43 .42 </TABLE> The Trust's common shares of beneficial interest are listed on the New York Stock Exchange. 14
Item 6. Selected Financial Data. ----------------------- In thousands, except per share data <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 OPERATING DATA - ------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Rental Income $188,529 $164,887 $142,841 $128,133 $105,948 Income before gain on sale of real estate and extra- ordinary item 40,129 28,754 23,655 20,466 16,114 Gain (loss) on sale of real estate 6,375 (12) (545) --- --- Extraordinary item - gain (loss) on early extinguishment of debt ---- --- --- --- 2,016 Net income 46,504 28,742 23,110 20,466 18,130 Net income available for common shareholders 44,627 28,742 23,110 20,466 18,130 Net cash provided by operating activities (1) 72,170 65,648 65,117 45,199 35,183 Dividends declared on common shares 66,636 56,607 51,392 48,196 42,021 Weighted average number of common shares outstanding: basic 38,475 33,175 31,481 30,267 26,559 diluted 38,988 33,573 31,860 30,679 27,009 PER SHARE: Earnings per common share: basic 1.16 .87 .73 .68 .68 diluted 1.14 .86 .72 .67 .67 Dividends declared per common share 1.70 1.66 1.61 1.57 1.55 OTHER DATA - ------------------------------------------------------------------------- Funds from Operations (2) 79,733 65,254 57,034 50,404 40,824 </TABLE> 15
<TABLE> <CAPTION> BALANCE SHEET DATA - -------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Real estate at cost $1,453,639 $1,147,865 $1,009,682 $852,722 $758,088 Total assets 1,316,573 1,035,306 886,154 751,804 689,803 Mortgage and capital lease obligations 221,573 229,189 222,317 235,705 218,545 Notes payable 119,028 66,106 49,980 61,883 30,519 Senior notes 255,000 215,000 165,000 --- --- Convertible subordinated debentures 75,289 75,289 75,289 75,289 115,167 Redeemable preferred shares 100,000 --- --- --- --- Shareholders' equity 553,810 388,885 327,468 343,222 283,059 Number of common shares outstanding 39,148 35,886 32,160 31,609 28,018 </TABLE> (1) Determined in accordance with Financial Accounting Standards Board Statement No. 95. (2) Defined as income available for common shareholders before depreciation and amortization of real estate assets and before extraordinary items and significant nonrecurring events less gains on sale of real estate. Funds from operations differs from net cash provided by operating activities primarily because funds from operations does not include changes in operating assets and liabilities. Funds from operations is a supplemental measure of performance that does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. 16
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 funding from borrowing or equity offerings. Operating activities generated $72.2 million in 1997, $65.6 million in 1996 and $65.1 million in 1995 of which $62.6 million, $52.1 million, and $47.9 million, respectively, was distributed to shareholders. Net cash provided by operating activities increased from $65.6 million in 1996 to $72.2 million in 1997, principally due to an $11.4 million increase in income before gain on sale of real estate and a $3.2 million increase in depreciation and amortization offset by a $7.2 million increase in cash used for operating activities such as accounts receivable, prepaid expenses and accounts payable. Net cash provided by operating activities increased from $65.1 million in 1995 to $65.6 million in 1996, due principally to a $5.6 million increase in net income and a $3.4 million increase in depreciation and amortization offset by an $8.5 million increase in cash used for operating activities such as accounts receivable and prepaid expenses. During the three year period 1995 through 1997, the Trust expended over $568 million in cash to acquire properties and to improve its properties. In addition, during the same period the Trust invested approximately $25 million in mortgage notes receivable, many of which are convertible into ownership interests in the properties by which they are secured. These expenditures were primarily funded from the proceeds of various debt and equity transactions. Over the past three years, the Trust expanded its acquisition efforts by entering new geographic markets, primarily on the West Coast, by entering new product markets with its acquisition of main street retail properties in addition to shopping centers, and by increasing the volume of acquisitions. In 1997 the Trust acquired thirteen main street retail properties and five shopping centers at an initial cost of $258.2 million. On January 22, 1997 the Trust purchased a 5,000 square foot retail building in Chicago, Illinois for cash of $4.2 million. On March 31, 1997 one of two partnerships, formed to purchase property in California, purchased a 15,000 square foot building in Santa Monica, California for $4.0 million and the other purchased a 20,000 square foot building in San Diego, California for $850,000. On September 17, 1997 the latter partnership purchased a second building in Hermosa Beach, California for approximately $1.5 million in cash. On April 17, 1997 a partnership, which the Trust had organized in December 1996, exercised its purchase option on a retail building in Santa Monica, California. The total cost, including the buyout of the existing tenant, was $7.1 million. In accordance with the provisions of the 17
three partnership agreements, the Trust contributed 90% of the purchase costs to the partnerships with the other 10% being contributed by the minority partners. In 1997 two limited liability companies, 90% owned by the Trust, were formed to acquire property in New York. On August 28, 1997, one of the companies acquired three buildings in Forest Hills, New York for approximately $12.6 million. On December 16, 1997 the other company purchased a fourth building in Forest Hills for $3.4 million. The Trust contributed 90% of the acquisiton costs in cash to the limited liability companies. On September 26, 1997 the Trust purchased the Uptown Shopping Center in Portland, Oregon which consists of 72,000 square feet of retail space and 47 apartment units for $15.7 million. The Trust funded the acquisition of Uptown with proceeds from the sale of other properties. On October 22, 1997 a limited liability company organized by the Trust acquired the Old Town Center in Los Gatos, California for approximately $6.2 million. The property is currently under development. The Trust contributed all but $400,000 of the purchase price and will contribute all amounts necessary to fund the development. The minority partner has an interest in the profits of the property after the Trust receives a stated return on its investment in the property. On October 23, 1997 the Trust purchased, for $20.5 million, a 109,000 square foot mixed use retail and office building located at 150 Post Street in San Francisco, California. On December 5, 1997 the Trust purchased the retail portion of the Fresh Meadows complex in Queens, New York for $49.3 million. The 417,000 square foot retail component consists of main street retail shops and two neighborhood strip shopping centers. On March 5, 1997 the Trust, through a limited liability company organized by the Trust, purchased the 320,000 square foot San Jose Town & Country Village Shopping Center in San Jose, California for $42.8 million in cash. Plans call for the current shopping center to be demolished to allow the site to be developed into a main street property. The other member of the limited liability company has a minor interest in the profits. On March 31, 1997 the 159,000 square foot Pike 7 Shopping Center in Tysons Corner, Virginia was purchased for $31.5 million by a partnership formed to own the center. The Trust contributed $30.9 million to the partnership which was used to pay off existing debt on the center. The other partners contributed the shopping center and its existing debt in exchange for partnership units valued at $495,000 which are exchangeable, at the option of the Trust, for cash or 18,074 common shares of the Trust. On December 17, 1997 a limited partnership, Federal Realty Partners L.P., organized by the Trust acquired the Magruder's Center and the Courthouse Center, both located in Rockville, Maryland, for $12.6 million. The seller contributed the properties to the limited partnership and received 481,378 partnership units valued at $12.3 million and the Trust contributed $400,000 in cash. The partnership units are exchangeable, at the option of the Trust, for cash or common shares of the Trust. On December 29, 1997 the Trust purchased the 295,000 square foot Peninsula Shopping Center located in the Los Angeles, California suburb of Palos Verdes for a cash purchase price of $43.5 million. 18
The Trust made several other real estate acquisitions in 1997. On January 6, the Trust purchased the fee interest in Shillington, Troy and Feasterville Shopping Centers for $1.9 million, $5.7 million and $2.2 million, respectively. The Trust also contracted to purchase the fee interest in Lawrence Park Shopping Center in June 1998 for $8.5 million. In connection with the purchase agreement for Lawrence Park, the Trust, in January 1997, lent the seller $8.4 million at 8% which is due in June 1998. The Trust previously held these properties under capital leases. On February 24, 1997 the Trust purchased a 16 acre tract of land underlying part of the Shops at Willow Lawn for $4.6 million in cash. On June 3, 1997 the Trust exercised its purchase option on a parcel of land adjacent to its Bethesda Row property in Bethesda, Maryland for $5.8 million in cash. The land will be used for future development. In connection with the purchase, a $3.6 million mortgage which the Trust had made to the seller in 1996 was repaid. On July 16, 1997 the Trust purchased a 3,750 square foot parcel of land in Bethesda, Maryland for approximately $800,000. The land, on which there is a vacant retail building, was purchased in order to allow future expansion of the Trust's Bethesda Row property. Proceeds from the sale of other Trust properties were used to fund the acquisition of the two Bethesda purchases. In 1997 the Trust invested $50.3 million in improvements to its properties; these improvements included: (1) $9.4 million for the redevelopment of Wynnewood Shopping Center; (2) $5.1 million for the second phase of the redevelopment of Brick Plaza; (3) $4.5 million for the redevelopment of Troy Shopping Center; (4) $2.3 million for the redevelopment of Crossroads Shopping Center; and (5) $3.1 million for the redevelopment of Gratiot Plaza. On April 24, 1997 the Trust purchased Terranomics Retail Services, a property management and brokerage company, for approximately $2.0 million, to provide it with leasing and property management services on the west coast. In 1996 the Trust acquired $105.6 million of retail property, comprised of three shopping centers and fourteen retail buildings. On October 1, the Trust acquired Saugus Plaza Shopping Center, located in metropolitan Boston, Massachusetts for $12.7 million in cash. On October 29, 1996 Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania was purchased for a total cash cost of $21.8 million. On December 31, 1996 the Trust acquired the controlling interest in a Limited Liability Company formed to own Escondido Promenade in suburban San Diego, California for $14.2 million in cash. The $23.5 million center is encumbered by $9.4 million of municipal bonds. The bonds, which mature October 1, 2016, bear interest at a variable rate determined weekly to be the interest rate which would enable the bonds to be remarketed at 100% of their principal amount. The bonds are redeemable on demand by the holders and if they cannot be resold, will be due. The other member of the Limited Liability Company, who is related to the developer of the property, has a minor interest in the profits of the company. On February 28, 1996 the Trust purchased, for cash, two retail buildings in Winter Park, Florida for a cost of $6.8 million. In 19
1996 the Trust purchased two buildings in Greenwich, Connecticut, one for $3.2 million in cash on May 6 and another for $9.5 million in cash on June 4. On December 31, 1996 the Trust made an investment of $17.6 million for the general partnership interest in two partnerships, one of which owns ten main street retail buildings and the other of which owned a purchase option on a street retail building. The ten buildings, valued at $28 million, are located in Pasadena, Santa Monica and San Diego, California. Nine of the ten buildings are scheduled to be renovated and retenanted. The Trust is contributing 90% of future capital costs. The limited partners who contributed $10.4 million to the partnerships will receive a cumulative return of $762,000 per year. All remaining income and cash available for distribution will be allocated 90% to the Trust and 10% to the minority partners until each receives a return of 10% on its deemed investment and then 60% to the Trust and 40% to the minority partner. During 1996 the Trust invested $42.4 million in improvements to its properties; these improvements included: (1) $11.5 on the final tenant work and construction of an additional 30,000 square feet at Congressional Plaza, which includes the Trust's corporate offices; (2) $4.7 million on the redevelopment and expansion of a portion of Bethesda Row; (3) $3.9 million on the redevelopment of Brick Plaza which was begun in 1995; and (4) $2.3 million to buy out below market leases. The Trust purchased 19 retail properties during 1995 for a total cost of $120.6 million. The Trust also purchased a building abutting Flourtown Shopping Center, one of its existing centers, for $3.1 million. Finley Square Shopping Center in suburban Chicago was purchased on April 27, 1995 for $18.8 million in cash; Bristol Shopping Center in Bristol, Connecticut was purchased on September 22, 1995 for $19.6 million, by assuming a $11.3 million mortgage and by issuing 337,527 common shares valued at $7.3 million with the balance in cash; Park & Shop Center in Washington, D.C. was purchased on December 1, 1995 for $11.2 million in cash; and on December 21, 1995 Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. The retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich, Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million and one building in Bethesda, Maryland, for $2.0 million. During 1995, $33.8 million was expended on improvements to Trust properties. These improvements included: (1)$3.8 million on the redevelopment of Congressional Plaza in Rockville, Maryland; (2)$5.5 million to complete the redevelopment and retenanting of Gaithersburg Square in Gaithersburg, Maryland; and (3)$5.8 million for the first phase of the renovation of Brick Plaza in Brick, New Jersey. The majority of these acquisitions and improvements, as well as debt repayment requirements, were initially financed with borrowings under the Trust's revolving credit facilities. The Trust uses these credit facilities to fund acquisitions and other cash requirements 20
until conditions are favorable for issuing equity or long term debt. 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 and decreasing the interest rate from LIBOR plus 75 basis points to LIBOR plus 65 basis points. The sydicated line, as did the prior credit facilities, requires fees and has various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth. At December 31, 1997, 1996 and 1995, $114.8 million, $59.4 million and $40.1 million, respectively, was borrowed under these facilities. The maximum amount borrowed under these facilities during 1997, 1996 and 1995 was $114.8 million, $76.2 million and $66.8 million, respectively. The weighted average interest rate on borrowings during 1997, 1996 and 1995 was 6.5%, 6.4%, and 6.9%, respectively. Borrowings on these revolving credit facilities were repaid from a variety of long term debt and equity issues. On February 4, 1997 the Trust sold 3 million common shares to an institutional investor for $28 per share, netting $83.9 million. On July 29, 1997 the Trust sold $40 million of 6.82% Medium Term Notes, netting approximately $39.8 million. On October 6, 1997 the Trust issued 4 million 7.95% Series A Cumulative Redeemable Preferred Shares at $25 per share in a public offering, netting approximately $96.8 million. 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. On May 24, 1996 the Trust sold 1.8 million shares at $22 per share to an institutional investor, netting approximately $39.3 million. On December 13, 1996 the Trust sold another 1.6 million shares to the public at $27 7/8 per share, netting $42.9 million. During 1995 the Trust issued $165 million of senior notes: $100.0 million at 8 7/8% interest in January, netting proceeds of approximately $98.9 million; $25.0 million at 8% interest in April, netting approximately $24.9 million; and $40.0 million at 6 5/8% interest in December, netting approximately $39.6 million. In January 1995 the Trust repaid a $22.5 million mortgage which had been borrowed in 1994 and a $1.1 million note issued in connection with the purchase of Queen Anne Plaza in 1994. In order to minimize the risk of changes in interest rates, in connection with certain debt issues the Trust enters into interest rate hedge agreements. The cost or gain on the hedges is recognized as a component of interest expense over the life of the financing. There were no open agreements at December 31, 1997, but in January 1998 the Trust purchased a Treasury Yield Hedge (notional amount of $50 million) in anticipation of a planned refinancing. The agreement terminates on March 11, 1998. The Trust has budgeted approximately $75.0 million for capital improvements to its properties in 1998. These improvements include: (1) $12.0 million for the redevelopment of Old Town Center; (2) $9.7 million to renovate and retenant certain of the San Diego and Santa Monica main street retail properties; (3) $6.7 million to 21
renovate Feasterville Shopping Center; and (4) $4.1 million to complete the renovation and expansion of Gratiot Plaza. The Trust's long term debt has varying maturity dates and in a number of instances includes balloon payments or other contractual provisions that could require significant repayments during a particular period. Balloon mortgage obligations of $53.5 million are due in 1998. The Trust plans to acquire additional shopping centers and main street retail buildings. Additionally, the Trust has located sites in its core markets 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. On March 10, 1998 the Trust issued $80 million of Medium Term Notes; $39.5 million at 6.74% interest due in 2004 and $40.5 million at 6.99% due in 2006. Contingencies - ------------- As previously reported, certain of the Trust's shopping centers have some environmental contamination. The Trust has retained an environmental consultant to investigate contamination at a shopping center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. Although the Trust is still investigating the chlorinated solvent contamination in response to NJDEP directives, information collected to date indicates that remediation of this contamination is not likely to have a material effect upon the Trust's financial condition. 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. On December 4, 1997 the Trust purchased the retail portion of a mixed use property located in Queens, New York. Environmental studies performed prior to the acquisition identified petroleum and solvent contamination in the soil and groundwater at various locations at the property. Additional investigation as to the nature and extent of contamination is required at this property. Although the seller states that it is not responsible for this investigation or remediation, the Trust disagrees and intends to pursue the seller to enforce its obligations with respect to contamination at the property. At this time, the Trust is unable to determine what impact, if any, this situation will have on the Trust's financial condition. 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 22
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 partnerships, if certain leasing and revenue levels are obtained for the properties, 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 shares 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 partnership 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 preliminary information, costs of addressing and solving potential problems are not expected to have a material adverse impact on the Trust's financial position. However, if the Trust's vendors are unable to resolve certain processing issues surrounding services and parts supplied to the Trust's properties, there could be a financial risk. The Trust is making plans to resolve its significant year 2000 issues in a timely manner. 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 which excludes historical cost depreciation, since real estate values have historically risen and fallen with market conditions rather than over time. 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. 23
The reconciliation of net income to funds from operations is as follows: <TABLE> <CAPTION> Year ended December 31, (in thousands) <S> <C> <C> <C> 1997 1996 1995 Net income available for common shareholders $44,627 $28,742 $23,110 Depreciation and amortization of real estate assets 37,281 34,128 30,986 Amortization of initial direct costs of leases 2,249 2,372 2,393 (Gain) loss on sale of real estate and non-recurring items (4,424) 12 545 ------- ------- ------- Funds from operations for $79,733 $65,254 $57,034 common shareholders ======= ======= ======= </TABLE> The Trust's retail leases generally provide for minimum rents with periodic increases. Most retail tenants pay a majority of on-site operating expenses and real estate taxes. Many leases also contain a percentage rent clause which calls for additional rents based on tenant sales, so that at a given sales volume, if prices increase, so does rental income. These features in the Trust leases reduce the Trust's exposure to higher costs caused by inflation, although inflation has not been significant in recent years. 1997 VS. 1996 Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 14.3% in 1997 to $188.5 million from $164.9 million in 1996. If properties acquired and sold in 1996 and 1997 are excluded, rental income increased 4.8%. Minimum rents increased 13.8% in 1997 from $131.5 million in 1996 to $149.6 million in 1997. If properties acquired and sold in 1996 and 1997 are excluded, minimum rents increased 3.9%. Thirty-nine percent of the increase in minimum rent in 1997 was from Brick Plaza, Congressional Plaza and Bethesda Row, all of which have recently been redeveloped and retenanted. Cost reimbursements consist of tenant reimbursements of real estate taxes (real estate tax recovery) and common area maintenance expenses (CAM recovery). After removing the effect of properties acquired and sold in 1996 and 1997, real estate tax recovery increased 6%, principally due to reassessments on recently renovated and purchased properties. CAM recovery, excluding 1996 and 1997 acquisitions and dispositions, increased 14% from 1996 to 1997, principally due to increased recovery from properties recently purchased or under redevelopment in 1996. 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 income was down slightly in 1997 from 1996 and if properties acquired and sold in 1996 and 1997 were excluded, other income was down $1.5 million, principally due to a decrease in lease termination fees. 24
Rental expenses rose from $40.7 million in 1996 to $42.8 million in 1997 which represents 21.6% of property income (rental income plus other property income) in 1997 and 23.3% in 1996. If rental expenses are adjusted to remove the effect of properties purchased and sold in 1996 and 1997, rental expenses decreased from $38.9 million in 1996 to $38.1 million in 1997. The primary reason for the decrease from 1996 to 1997 was a decrease in snow removal and other related expenses, such as roof and parking lot repairs. Real estate taxes, which increased from $16.4 million in 1996 to $19.5 million in 1997 primarily due to properties acquired but also due to increased assessments on recent renovations, remained fairly constant as a percentage of property income, 9.8% in 1997 and 9.4% in 1996. Depreciation and amortization expenses have increased because of the recent acquisitions and also because of the depreciation on recent tenant work and property improvements. Interest income increased from $4.4 million in 1996 to $6.0 million in 1997, primarily because of interest on the mortgage notes receivable issued in 1996 and 1997. Interest expense rose to $47.3 million in 1997 from $45.6 million in 1996, due to interest on the $50 million of senior debentures issued in August 1996, due to interest on the $40 million of medium term notes issued in August 1997, and due to interest from increased usage of the revolving credit facilities, partially offset by an increase in interest capitalized on development projects. The ratio of earnings to combined fixed charges and preferred dividends was 1.64x in 1997; there were no preferred dividends in 1996. The ratio of earnings to fixed charges was 1.70x in 1997 and 1.59x in 1996. The ratio of funds from operations to fixed charges was 2.47x in 1997 and 2.35x in 1996. Administrative expenses have increased from $9.1 million in 1996 to $9.8 million in 1997 primarily due to increased personnel costs as the Trust has grown and as it has accelerated its acquisition and development efforts. Administrative expenses as a percentage of total income, however, have dropped from 5.1% in 1996 to 4.8% in 1997. In 1997 the Trust incurred $2.0 million of nonrecurring costs associated with a reorganization of its executive management. During the fourth quarter of 1997, the Trust's chief financial officer ("CFO"), resigned from the Trust in order to pursue other interests. Cecily Ward, the Trust's controller for over ten years, has temporarily assumed the CFO's responsibilities while the Trust seeks a new chief financial officer. On December 31, 1997 the employment agreement of the Trust's senior vice-president of acquisitions terminated. Nathan Fishkin, the Trust's senior vice president, real estate, who has been with the Trust for over ten years, has assumed these responsibilities. Hal A. Vasvari, the Trust's chief operating officer, will be leaving the Trust during the first half of 1998 to pursue other interests. Howard Biel, who has over twenty years in the real estate development, leasing and management fields, joined the Trust on January 2, 1998 and is assuming the responsibilities previously handled by Mr. Vasvari. 25
Investors' share of operations represents the minority interest in the income of certain properties. The increase from $394,000 in 1996 to $1.3 million in 1997 is primarily due to the fact that since 1995 the Trust has acquired some properties in partnership with others. Income before gain or loss on sale of real estate increased from $28.8 million in 1996 to $40.1 million in 1997, reflecting not only the contribution to net income from the Trust's acquisitions but also the contribution from improved operating results of the core portfolio. Loss or gain on the sale of real estate is dependent on the extent and timing of sales. The Trust regularly reviews its portfolio and does from time to time sell properties. In May 1997 the Trust sold Town & Country Shopping Center in Springfield, Illinois for $7.5 million, resulting in a gain of $5.3 million and Shillington Shopping Center in Shillington, Pennsylvania for $4.6 million, resulting in a gain of $1.7 million. On September 25, 1997 the Trust sold Brainerd Village Shopping Center in Chattanooga, Tennessee for $10.2 million, resulting in a loss of $659,000. In 1996 the Trust sold Town & Country Plaza in Hammond, Louisiana for $4.9 million, resulting in a loss of $12,000. As a result of the foregoing items, net income rose from $28.7 million in 1996 to $46.5 million in 1997. Net income available for common shareholders was $44.6 million in 1997 after net income was adjusted for a $1.9 million dividend on the $100 million of 7.95% Series A Culmulative Redeemable Preferred Shares issued on October 6, 1997. The Trust intends to continue acquiring retail properties in 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 planning to focus considerable time and resources in the future on development, with the belief that such new development, although not having a positive effect on net income and funds from operations in the very near future, will have a positive impact in the longer term. The growth of the 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 1997. However, a weakening of the retail environment could adversely impact the Trust, by increasing vacancies and by 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 retail space. 26
1996 VS. 1995 Rental income increased 15.4% in 1996 to $164.9 million from $142.8 million in 1995. If centers acquired and sold in 1995 and 1996 are excluded, rental income increased 6.6% from 1995 to 1996. Minimum rents increased 15.5% in 1996 to $131.5 million from $113.9 million in 1995. If centers acquired and sold in 1995 and 1996 are excluded, minimum rents increased 6.1%. Almost half of the increase in minimum rent was from Congressional Plaza, Brick Plaza and Gaithersburg Square, which have been redeveloped and retenanted. Cost reimbursements consist of tenant reimbursements of real estate taxes and common area maintenance expenses. After removing the effect of properties acquired and sold in 1995 and 1996, real estate tax recovery increased 10.3%. Over half of the increase from 1995 to 1996 was attributable to Congressional Plaza, Brick Plaza and Gaithersburg Square. CAM recovery on the portfolio, adjusted to remove the effect of properties acquired and sold in 1995 and 1996, increased from $12.0 million in 1995 to $13.9 million in 1996, corresponding to increases in CAM expenses in 1996 over 1995, primarily snow removal and related repairs. Other property income, which includes items which tend to fluctuate from period to period, increased from $7.4 million in 1995 to $9.8 million in 1996. The increase was due primarily to an increase in lease termination fees. Rental expenses increased from $35.1 million in 1995 to $40.7 million in 1996, which represents 23.4% of property income in 1995 and 23.3% in 1996. If rental expenses are adjusted to remove the effect of properties acquired and sold in 1995 and 1996, rental expenses increased $2.3 million or 6.8% due to an increase in snow related expenses and an increase in the write-off of tenant work and lease commissions, often connected with tenants whose leases were terminated. Real estate taxes, while increasing with acquisitions, remained fairly constant as a percentage of property income, 9.6% in 1995 and 9.4% in 1996. Depreciation and amortization expenses have increased because of the recent acquisitions and also because of the depreciation on recent tenant work and property improvements. Interest income increased slightly from $4.1 million in 1995 to $4.4 million in 1996. Increases in interest income in 1996 from the issuance of $14.3 million in mortgage notes receivable in 1996 were offset by decreases in interest on investments in marketable securities which were sold in 1995. Interest expense increased from $39.3 million in 1995 to $45.6 million in 1996, due to interest on the $50 million of senior debentures issued in 1996 and the $165 million of senior notes issued in 1995, due to interest from increased usage of the revolving credit facilities and due to interest on the mortgage assumed upon the purchase of Bristol Shopping Center. The ratio of earnings to fixed charges was 1.59x in 1996 and 1.55x in 1995. The ratio of funds from operations to fixed charges was 2.35x in both 1996 and 1995. Administrative expenses increased from $7.3 million in 1995 or 4.9% of property income, to $9.1 million in 1996 or 5.2% of property income, as the Trust grew and accelerated its acquisition and development efforts. The $1.8 million increase from 1995 to 1996 27
was primarily due to the write-off of costs associated with unconsummated acquisition and development efforts and due to costs related to the move of the Trust's corporate office. Investors' share of operations represented the minority interest in income of three properties during 1995 and 1996. In 1995 minority losses at two properties exceeded the minority net income at Congressional Plaza which was under development in 1995. Income before loss on real estate increased from $23.7 million in 1995 to $28.7 million in 1996, reflecting not only the contribution to net income from the Trust's acquisitions but also the contribution from improved operating results of the core portfolio. In 1996 the Trust sold Town & Country Plaza in Hammond, Lousiana for $4.9 million, resulting in a loss of $12,000 while in 1995 the Trust sold North City Plaza for $1.8 million resulting in a loss of $545,000. As a result of the foregoing items, net income rose from $23.1 million in 1995 to $28.7 million in 1996. Item 8. Financial Statements and Supplementary Data. - --------------------------------------------------- Included in Item 14. Item 9. Disagreements on Accounting and Financial Disclosure. - ------------------------------------------------------------ None. 28
Part III -------- Item 10.Directors and Executive Officers of the Registrant. --------------------------------------------------- Executive Officers of the Registrant ------------------------------------ The Executive Officers in 1997 were: <TABLE> <CAPTION> Name Age Position with Trust ---- --- ------------------- <S> <C> <C> Steven J. Guttman 51 President and Chief Executive Officer and Trustee Ron D. Kaplan 34 Senior Vice President-Capital Markets, Chief Investment Officer Catherine R. Mack 53 Vice President-General Counsel and Secretary Mary Jane Morrow 45 Senior Vice President-Finance and (resigned as of Treasurer October 31, 1997) Hal A. Vasvari 54 Executive Vice President and Chief Operating Officer Cecily A. Ward 51 Vice President-Controller </TABLE> Steven J. Guttman has been the Trust's President and Chief Executive Officer since April 1980. Mr. Guttman has been associated with the Trust since 1972, became Chief Operating Officer in 1975 and became a Managing Trustee in 1979. Ron D. Kaplan joined the Trust in November 1992 as Vice President-Capital Markets. Mr. Kaplan was formerly a Vice President of Salomon Brothers Inc where he was responsible for capital raising and financial advisory services for public and private real estate companies. While at Salomon Brothers which he joined in 1985, he participated in two of the Trust's debt offerings. Catherine R. Mack came to the Trust in January 1985 as General Counsel and became a Vice President in February 1986. Before joining the Trust, Ms. Mack was an Assistant United States Attorney for the District of Columbia and, prior to that, an attorney with Fried, Frank, Harris, Shriver and Jacobson in Washington, D.C. where she represented several local real estate entities. She has practiced law since 1974. Mary Jane Morrow joined the Trust in January 1987 as Vice President-Finance and Treasurer. Before joining Federal Realty, Ms. 29
Morrow was a Partner with Grant Thornton LLP, the Trust's independent accountants. On October 31, 1997 Ms. Morrow resigned to pursue other interests. Hal A. Vasvari joined Federal Realty Management, Inc., the Trust's former managing agent, in August 1985 as Executive Vice President. In January 1989, Mr. Vasvari became Executive Vice President-Management of the Trust. In December 1994, Mr. Vasvari was appointed Chief Operating Officer. Prior to August 1985, he was director of leasing for Kravco Co., a developer of shopping malls and shopping centers. In 1998 Mr. Vasvari will leave the Trust to pursue other interests. Cecily A. Ward joined the Trust in April 1987 as Controller. Prior to joining the Trust, Ms. Ward, a certified public accountant, was with Grant Thornton LLP, the Trust's independent accountants. The schedule identifying Trustees under the caption "Election of Trustees" of the 1998 Proxy Statement is incorporated herein by reference thereto. Item 11. Executive Compensation. - -------- ----------------------- The sections entitled "Summary Compensation Table" and "Aggregated Option Exercises in 1997 and December 31, 1997 Option Values" of the 1998 Proxy Statement are incorporated herein by reference thereto. Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- --------------------------------------------------------------- The section entitled "Ownership of Shares by Trustees and Officers" of the 1998 Proxy Statement is incorporated herein by reference thereto. Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------- The section entitled "Certain Transactions" of the 1998 Proxy Statement is incorporated herein by reference thereto. 30
Part IV ------- <TABLE> <CAPTION> Item 14. Exhibits, Financial Statement Page No. - -------- ----------------------------- -------- Schedules, and Reports on ------------------------- Form 8-K -------- <S> <C> (a) 1. Financial Statements -------------------- Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets- December 31, 1997 and 1996 F-3 Consolidated Statements of Operations - years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity - years ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows - years ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements (Including Selected Quarterly Data) F-7 - F24 (a) 2. Financial Statement Schedules ----------------------------- Schedule III - Summary of Real Estate and Accumulated Depreciation..................... F25 - F28 Schedule IV - Mortgage Loans on Real Estate .......................................... F29 - F30 Report of Independent Certified Public Accountants................................... F31 </TABLE> 31
(a) 3. Exhibits -------- (3) (i) The Trust's Third Amended and Restated Declaration of Trust dated May 24, 1984, filed with the Commission on July 5, 1984 as Exhibit 4 to the Trust's Registration Statement on Form S-2 (file No. 2-92057) is incorporated herein by reference thereto. (ii) Bylaws of the Trust, filed with the Commission as an exhibit to the Trust's Current Report on Form 8-K dated February 20, 1985, as most recently amended and filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference thereto. (4) (i) Specimen Share of Beneficial Interest, filed with the Commission on November 23, 1982 as Exhibit 4 to the Trust's Registration Statement on Form S-2 (file No. 2-80524), is incorporated herein by reference thereto. (ii) Statement of Designation for Shares, filed on Form 8-K with the Commission on October 3, 1997, is incorporated herein by reference thereto. (iii) The 5 1/4% Convertible Subordinated Debenture due 2002 as described in Amendment No. 1 to Form S-3 (File No. 33-15264), filed with the Commission on August 4, 1987 is incorporated herein by reference thereto. (iv) Shareholder Rights Plan, dated April 13, 1989, filed with the Commission as an exhibit to the Trust's Current Report on Form 8- K, dated April 13, 1989, is incorporated herein by reference thereto. (v) Indenture dated December 13, 1993, related to the Trust's 7.48% Debentures due August 15, 2026, the Trust's 8 7/8% Senior Notes due January 15, 2000, the Trust's 8% Notes due April 21, 2002, the Trust's 6 5/8% Notes due 2005, and the Trust's 6.82% Medium Term Notes due August 1, 2027 filed with the commission on December 13, 1993 as exhibit 4 (a) to the Trust's Registration Statement on Form S-3, (File No. 33-51029) is incorporated herein by reference thereto. (vi) Dividend Reinvestment and Share Purchase Plan, dated November 3, 1995, filed with the Commission on Form S-3 on November 3, 1995 (File No. 33-63955) is incorporated herein by reference thereto. (9) Voting Trust Agreement...............................* (10) (i) Consultancy Agreement with Samuel J. Gorlitz, as amended, filed with the Commission as Exhibit 10 (v) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1983, is incorporated herein by reference thereto. 32
(ii) The Trust's 1983 Stock Option Plan adopted May 12, 1983, filed with the Commission as Exhibit 10 (vi) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1983, is incorporated herein by reference. (iii) Deferred Compensation Agreement with Steven J. Guttman dated December 13, 1978, filed with the Commission as Exhibit 10 (iv) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1980 is incorporated herein by reference thereto. The following documents, filed with the Commission as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1985, are incorporated herein by reference thereto. (iv) The Trust's 1985 Non-Qualified Stock Option Plan, adopted on September 13, 1985 The following documents, filed with the Commission as portions of Exhibit 10, to the Trust's Annual Report on Form 10-K for the year ended December 31, 1980, have been modified as noted below, and are incorporated herein by reference thereto. (v) Consultancy Agreement with Daniel M. Lyons dated February 22, 1980, as amended (modified as of December 1, 1983, to provide for an annual cost of living increase, not to exceed 10%). The following documents filed as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1988 are incorporated herein by reference thereto: (vi) The 1988 Share Bonus Plan. (vii) Amendment No. 3 to Consultancy Agreement with Samuel J. Gorlitz. The following documents filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 are incorporated herein by reference thereto; (viii) Executive Agreement between the Trust and Catherine R. Mack, dated April 13, 1989. (ix) Executive Agreement between the Trust and Mary Jane Morrow, dated April 13, 1989. (x) Executive Agreement between the Trust and Hal A. Vasvari, dated April 13, 1989. (xi) Employment Agreement between the Trust and Catherine R. Mack, dated April 13, 1989. 33
(xii) The 1991 Share Purchase Plan, dated January 31, 1991, filed with the Commission as a portion of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1990 is incorporated herein by reference thereto. (xiii) Amendment No. 4 to Consultancy Agreement with Samuel J. Gorlitz, filed with the Commission as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference thereto. (xiv) Employment and Relocation Agreement between the Trust and Ron D. Kaplan, dated September 30, 1992, filed as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference thereto. (xv) Amendment dated October 1, 1992, to Voting Trust Agreement dated as of March 3, 1989 by and between I. Wolford Berman and Dennis L. Berman filed as an exhibit to the Trust's Annual Report on Form 10- K for the year ended December 31, 1992 is incorporated herein by reference thereto. (xvi) Federal Realty Investment Trust Amended and Restated 1993 Long-Term Incentive Plan, as amended on October 6, 1997, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, are incorporated herein by reference thereto. The following documents, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 are incorporated herein by reference thereto: (xvii) Revolving Credit Agreement dated as of September 1, 1993 among Federal Realty Investment Trust and Corestates Bank. (xviii) Credit Agreement dated as of August 25, 1993 between Federal Realty Investment Trust and First Union National Bank of Virginia. (xix) Revolving Credit Agreement dated as of June 22, 1993 between Federal Realty Investment Trust and Signet Bank/Maryland. (xx) Consulting Agreement between Misner Development and Federal Realty Investment Trust. (xxi) Fiscal Agency Agreement dated as of October 28, 1993 between Federal Realty Investment Trust and Citibank, N.A. (xxii) Credit Agreement dated as of February 11, 1994 between Federal Realty Investment Trust and Mellon Bank as filed as an exhibit to the Trust's Annual Report on Form 34
10-K for the year ended December 31, 1993 is incorporated herein by reference thereto. (xxiii) Other Share Award and Purchase Note between Federal Realty Investment Trust and Ron D. Kaplan, dated January 1, 1994, filed with the Commission as a portion of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 is incorporated herein by reference thereto. (xxiv) Amended and Restated 1983 Stock Option Plan of Federal Realty Investment Trust and 1985 Non-Qualified Stock Option Plan of Federal Realty Investment Trust, filed with the Commission on August 17, 1994 on Form S-8, (File No. 33-55111) is incorporated herein by reference thereto. The following documents, filed with the Commission as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1994, are incorporated herein by reference thereto: (xxv) Form of Severance Agreement between Federal Realty Investment Trust and Certain of its Officers dated December 31, 1994. (xxvi) Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and First Union National Bank of Virginia. (xxvii) Second Amendment to Revolving Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and Corestates Bank. (xxviii) First Amendment to Credit Agreement dated September 30, 1994 between Federal Realty Investment Trust and Mellon Bank. (xxix) First Amendment to Revolving Credit Agreement dated September 30, 1994 between Federal Realty Investment Trust and Signet Bank/Maryland. (xxx) Exclusive Brokerage Agreement between Street Retail Inc. and Westport Advisors Corporation filed as an exhibit to the Trust's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 is incorporated herein by reference thereto. The following documents, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 are incorporated herein by reference thereto: (xxxi) Non-Exclusive Brokerage Agreement between Federal Realty Investment Trust and Westport Advisors Corporation and Jack Alan Guttman dated August 20, 1995. (xxxii) Exclusive Brokerage Agreement between Street Retail, Inc. and Westport Advisors Corporation and Jack 35
Alan Guttman dated August 20, 1995. The following documents, filed with the Commission as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1996, are incorporated herein by reference thereto: (xxxiii) Non-Exclusive Brokerage Agreement between Federal Realty Investment Trust, Street Retail, Inc., Westport Realty Advisors, Inc. and Jack Alan Guttman, dated December 3, 1996. (xxxiv) Second and Third Amendments dated as of August 1, 1996 to the Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and First Union National Bank of Virginia. (xxxv) Third Amendment to Revolving Credit Agreement between Federal Realty Investment Trust and Corestates Bank dated July 1, 1996. (xxxvi) Third Amendment to Revolving Credit Agreement as of August 7, 1996 by and between Federal Realty Investment Trust and Signet Bank. (xxxvii) Fourth Amendment to Credit Agreement as of August 9, 1996 by and between Federal Realty Investment Trust and Mellon Bank. The following are filed as exhibits hereto: (xxxviii) Credit Agreement Dated as of December 19, 1997 by and among Federal Realty Investment Trust, as Borrower, The Financial Institutions Party Hereto and Their Assignees Under Section 13.5.(a), as Lenders, Corestates Bank, N.A., as Syndication Agent, First Union National Bank, as Administrative Agent and as Arranger, and Wells Fargo Bank, as Documentation Agent and as Co-Arranger. (xxxix) Performance Share Award Agreement between Federal Realty Investment Trust and Steven J. Guttman, as of January 1, 1998. (xl) Form of Amended and Restated Restricted Share Award Agreements between Federal Realty Investment Trust and Steven J. Guttman for the years 1998 through 2002. (xli) Performance Share Award Agreements between Federal Realty Investment Trust and Ron D. Kaplan, as of January 1, 1998. (xlii) Restricted Share Award Agreements between Federal Realty Investment Trust and Ron D. Kaplan, as of January 1, 1998. (xliii) Amended and Restated Employment Agreement between the Trust and Steven J. Guttman as of March 6, 1998. 36
(xliv) Amended and Restated Executive Agreement between the Trust and Steven J. Guttman as of March 6, 1998. (xlv) Executive Agreement between the Trust and Ron D. Kaplan as of March 6, 1998. (xlvi) Amended and Restated Severance Agreement between the Trust and Ron D. Kaplan as of March 6, 1998. (xlvii) Severance Agreement between the Trust and Catherine R. Mack as of March 6, 1998. (11) Statement regarding computation of per share earnings.........................................* (12) Statements regarding computation of ratios.......* (13) Annual Report to Shareholders, Form 10Q or quarterly report to shareholders...........................* (18) Letter regarding change in accounting principles.......................................* (19) Report furnished to security holders.............* (21) Subsidiaries of the registrant.................... (xxxvii) Articles of Incorporation of Street Retail, Inc. filed with the Commission as a portion of Exhibit 21 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference thereto. (xxxviii) By-Laws of Street Retail, Inc. filed with the Commission as a portion of Exhibit 21 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference thereto. (22) Published report regarding matters submitted to vote of security holders.........................* (23) Consent of Grant Thornton LLP.................... (24) Power of attorney................................* (27) Financial Data Schedule..........................+ (99) Additional exhibits..............................* 37
(b) Reports on Form 8-K Filed during the Last Quarter ------------------------------------------------- A Form 8-K, dated September 30, 1997, was filed in response to Item 5. A Form 8-K, dated March 5, 1997, was filed in response to Item 5. A Form 8-K, dated October 3, 1997, was filed in response to Item 7.(c)99. _________ * Not applicable. + For Edgar filing only. 38
SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 (d) 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 Date: March 11, 1998 By:Steven J. Guttman ----------------- Steven J. Guttman President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date - ---------- ----- ---- President and Trustee (Chief Steven J. Guttman Executive Officer) March 11, 1998 - ------------------------- --------------------- Steven J. Guttman Vice-President and Controller (Principal Cecily A. Ward Accounting Officer) March 11, 1998 - ------------------------- --------------------- Cecily A. Ward Dennis L. Berman Trustee March 11, 1998 - ------------------------- --------------------- Dennis L. Berman Kenneth D. Brody Trustee March 11, 1998 - ------------------------- --------------------- Kenneth D. Brody A. Cornet de Ways Ruart Trustee March 11, 1998 - ------------------------- --------------------- A. Cornet de Ways Ruart Samuel J. Gorlitz Trustee March 11, 1998 - ------------------------- --------------------- Samuel J. Gorlitz Kristin Gamble Trustee March 11, 1998 - ------------------------- --------------------- Kristin Gamble Walter F. Loeb Trustee March 11, 1998 - ------------------------- --------------------- Walter F. Loeb Donald H. Misner Trustee March 11, 1998 - ------------------------- --------------------- Donald H. Misner Mark S. Ordan Trustee March 11, 1998 - ------------------------- --------------------- Mark S. Ordan George L. Perry Trustee March 11, 1998 - ------------------------- --------------------- George L. Perry 39
FINANCIAL STATEMENTS AND SCHEDULES F1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Trustees and Shareholders Federal Realty Investment Trust We have audited the accompanying consolidated balance sheets of Federal Realty Investment Trust as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Realty Investment Trust as of December 31, 1997 and 1996 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Grant Thornton LLP Washington, D.C. February 5, 1998 F2
Federal Realty Investment Trust CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, December 31, 1997 1996 ------------- ------------- (in thousands) <S> <C> <C> ASSETS Investments Real estate, at cost $1,453,639 $1,147,865 Less accumulated depreciation and amortization (247,497) (223,553) ---------- ---------- 1,206,142 924,312 Mortgage notes receivable 38,360 27,913 ---------- ---------- 1,244,502 952,225 Other Assets Cash 17,043 11,041 Notes receivable - officers 1,190 1,183 Accounts receivable 17,604 16,111 Prepaid expenses and other assets, principally deposits on real estate, property taxes and lease commissions 32,128 51,374 Debt issue costs 4,106 3,372 ---------- ---------- $1,316,573 $1,035,306 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations under capital leases $125,940 $130,613 Mortgages payable 95,633 98,576 Notes payable 119,028 66,106 Accrued expenses 23,419 20,405 Accounts payable 7,093 6,783 Dividends payable 18,368 15,072 Security deposits 4,423 3,515 Prepaid rents 2,818 3,801 Senior notes and debentures 255,000 215,000 5 1/4% Convertible subordinated debentures 75,289 75,289 Investors' interest in consolidated assets 35,752 11,261 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 - Common shares of beneficial interest, no par or stated value, unlimited authorization, issued 39,200,201 and 35,948,044 shares, respectively 684,823 597,917 Accumulated dividends in excess of Trust net income (222,709) (200,700) ---------- ---------- 562,114 397,217 Less 52,386 and 62,386 common shares in treasury - at cost, respectively, deferred compensation and subscriptions receivable (8,304) (8,332) ---------- ---------- 553,810 388,885 ---------- ---------- $1,316,573 $1,035,306 ========== ========== </TABLE> The accompanying notes are an integral part of these statements. F-3
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Year ended December 31, 1997 1996 1995 --------- --------- --------- (In thousands, except per share data) <S> <C> <C> <C> Revenue Rental income $188,529 $164,887 $142,841 Interest and other income 6,037 4,352 4,113 Other property income 9,705 9,816 7,435 --------- --------- --------- 204,271 179,055 154,389 Expenses Rental 42,844 40,687 35,093 Real estate taxes 19,525 16,411 14,471 Interest 47,288 45,555 39,268 Administrative 9,793 9,100 7,305 Other charges 1,951 - - Depreciation and amortization 41,399 38,154 34,901 --------- --------- --------- 162,800 149,907 131,038 --------- --------- --------- Operating income before investors' share of operations and gain (loss) on sale of real estate 41,471 29,148 23,351 Investors' share of operations (1,342) (394) 304 --------- --------- --------- Income before gain (loss) on sale of real estate 40,129 28,754 23,655 Gain (loss) on sale of real estate 6,375 (12) (545) --------- --------- --------- Net income 46,504 28,742 23,110 Dividends on preferred stock (1,877) - - --------- --------- --------- Net income available for common shareholders $44,627 $28,742 $23,110 ========= ========= ========= Earnings per common share, basic Income before gain (loss) on sale of real estate $0.99 $0.87 $0.75 Gain (loss) on sale of real estate 0.17 - (0.02) --------- --------- --------- $1.16 $0.87 $0.73 ========= ========= ========= Weighted average number of common shares, basic 38,475 33,175 31,481 ========= ========= ========= Earnings per common share, diluted Income before gain (loss) on sale of real estate $0.98 $0.86 $0.74 Gain (loss) on sale of real estate 0.16 - (0.02) --------- --------- --------- $1.14 $0.86 $0.72 ========= ========= ========= Weighted average number of common shares, diluted 38,988 33,573 31,860 ========= ========= ========= </TABLE> F-4
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Year ended December 31, 1997 1996 1995 ----------- --------- ---------- --------- ---------- ---------- (In thousands, except share amounts) Shares Amount Shares Amount Shares Amount <S> <C> <C> <C> <C> <C> <C> Common Shares of Beneficial Interest Balance, beginning of year 35,948,044 $597,917 32,221,670 $508,870 31,669,434 $496,958 Exercise of stock options 76,184 1,604 126,918 2,705 20,744 390 Shares issued under dividend reinvestment plan 153,973 4,115 181,274 4,057 193,965 4,181 Shares granted under bonus plan 22,000 686 - - Shares issued to purchase shopping center - - - - 337,527 7,341 Net proceeds from sale of shares 3,000,000 83,925 3,418,182 82,285 - - Cost of 7.95% Series A Cumulative Preferred Shares (3,424) - - - - ----------- --------- ---------- -------- ---------- --------- Balance, end of year 39,200,201 $684,823 35,948,044 $597,917 32,221,670 $508,870 =========== ========= ========== ======== ========== ========= 7.95% Series A Cumulative Redeemable Preferred Shares Balance, beginning of year - $ - Gross proceeds from sale of shares 4,000,000 100,000 ----------- --------- Balance, end of year 4,000,000 $100,000 =========== ========= Common Shares of Beneficial Interest in Treasury, Deferred Compensation and Subscriptions Receivable Balance, beginning of year (480,948) ($8,332) (500,095) ($8,567) (539,188) ($9,130) Amortization of deferred compensation 30,125 480 30,250 482 32,875 547 Deferred compensation under bonus plan (22,000) (621) - - - - Net (increase) decrease in stock option loans (14,166) (299) (10,167) (242) 5,971 20 Reissuance (purchase) of treasury shares 10,000 184 (2,186) (24) (1,128) (25) Purchase under share purchase plan 19,878 284 1,250 19 1,375 21 ----------- --------- ---------- -------- ---------- --------- Balance, end of year (457,111) ($8,304) (480,948) ($8,332) (500,095) ($8,567) =========== ========= ========== ======== ========== ========= Accumulated Dividends in Excess of Trust Net Income Balance, beginning of year ($200,700) ($172,835) ($144,553) Net income 46,504 28,742 23,110 Dividends declared to common shareholders (66,636) (56,607) (51,392) Dividends declared to preferred shareholders (1,877) - - --------- -------- --------- Balance, end of year ($222,709) ($200,700) ($172,835) ========= ======== ========= </TABLE> The accompanying notes are an integral part of these statements. F-5
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31, (In thousands) 1997 1996 1995 ----------- ----------- ----------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $46,504 $28,742 $23,110 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 41,399 38,153 34,900 Rent abatements in lieu of leasehold improvements, net of tenant improvements retired (930) (121) (951) Imputed interest and amortization of debt cost 672 696 731 Amortization of deferred compensation and forgiveness of officers' notes 984 496 531 (Gain) loss on sale of real estate (6,375) 12 545 Payment of trustees' fees in shares 92 104 136 Changes in assets and liabilities Decrease (increase) in accounts receivable (1,493) (1,020) 932 Increase in prepaid expenses and other assets before depreciation and amortization (11,263) (7,665) (4,768) Increase (decrease) in operating accounts payable, security deposits and prepaid rent (287) 3,133 1,453 Increase in accrued expenses 2,867 3,118 8,498 ---------- ---------- ---------- Net cash provided by operating activities 72,170 65,648 65,117 INVESTING ACTIVITIES Acquisition of real estate (251,351) (85,792) (105,096) Capital expenditures (50,349) (42,356) (33,829) Decrease (increase) in deposit on purchase of real estate 23,447 (23,401) - Issuance of mortgage notes receivable, net (10,447) (14,352) (383) Issuance of notes receivable - officers, net (7) (188) (215) Proceeds from sale of real estate 9,364 4,680 1,782 Net (increase) decrease in temporary investments (410) 3,381 ---------- ---------- ---------- Net cash used in investing activities (279,343) (161,819) (134,360) FINANCING ACTIVITIES Regular payments on mortgages, capital leases and notes payable (2,212) (2,735) (2,289) Balloon payments on mortgages and capital leases, including prepayment fees (1,500) (3,000) (23,601) Borrowing (repayment) of short-term debt, net 55,391 19,290 (14,635) Issuance of senior notes, net of costs 39,750 49,749 163,384 Dividends paid (62,621) (52,084) (47,918) Issuance of common shares 86,893 86,054 1,682 Issuance of preferred shares 96,576 Increase (decrease) in minority interest 898 (583) (854) ---------- ---------- ---------- Net cash provided by financing activities 213,175 96,691 75,769 ---------- ---------- ---------- Increase (decrease) in cash 6,002 520 6,526 Cash at beginning of year 11,041 10,521 3,995 ---------- --------- ---------- Cash at end of year $17,043 $11,041 $10,521 ========== ========= ========== </TABLE> The accompanying notes are an integral part of these statements. F-6
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996, and 1995 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Federal Realty Investment Trust invests in income-producing real estate properties. Traditionally it focused on community and neighborhood shopping centers, but beginning in late 1994 the Trust expanded its investments to main street retail properties, retail buildings and shopping centers in densely developed urban and suburban areas. The Trust's leases with tenants are classified as operating leases and rental income is recognized on an accrual basis over the terms of the related leases. The Trust uses the straight-line method in providing for depreciation. Estimated useful lives range from three to 25 years on apartment buildings and improvements, and from three to 35 years on retail properties and improvements. Maintenance and repair costs are charged to operations as incurred. Major improvements are capitalized. The gain or loss resulting from the sale of properties is included in net income at the time of sale. The Trust has adopted FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". The Trust does not hold any assets that meet the impairment criteria of FAS 121. The Trust capitalizes certain costs directly related to the acquisition, improvement and leasing of real estate including applicable salaries and other related costs. The capitalized costs associated with unsuccessful acquisitions are charged to operations when that determination is made. The capitalized costs associated with improvements and leasing are depreciated or amortized over the life of the improvement and lease, respectively. Costs related to the issuance of debt instruments are capitalized and are amortized as interest expense over the life of the related issue using the interest method. Upon conversion or in the event of redemption, applicable unamortized costs are charged to shareholders' equity or to operations, respectively. The Trust operates in a manner intended to enable it to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code (the "Code"). Under those sections, a trust which distributes at least 95% of its real estate trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, no provision for Federal income taxes is required. The Trust consolidates the financial statements of five wholly owned corporate subsidiaries, one other corporation, eighteen partnerships, and a joint venture. The equity interests of other investors are reflected as investors' interest in F7
consolidated assets. All significant intercompany transactions and balances are eliminated. The Trust defines cash as cash on hand, demand deposits with financial institutions and short term liquid investments with an initial maturity under three months. Cash balances may exceed insurable amounts. The Trust occasionally enters into derivative contracts prior to a scheduled financing or refinancing in order to minimize the risk of changes in interest rates. The derivative contracts are designated as hedges when acquired. The cost or gain on these transactions is recognized as a component of interest expense over the life of the financing. The Trust does not use derivative financial instruments for trading or speculative purposes. There were no open derivative contracts at December 31, 1997. In 1997 the Financial Accounting Standards Board issued Financial Accounting Standards No. 128 - "Earnings Per Share". Statement 128 replaces the presentation of primary and fully diluted earnings per share ("EPS") pursuant to Accounting Principles Board Opinion No. 15 with the presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares and then shared in the earnings of the Trust. Options are accounted for in accordance with APB 25, whereby if options are priced at fair market value or above at the date of grant, no compensation expense is recognized. The following table sets forth the reconciliation between basic and diluted EPS: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Numerator - --------- Net income available for common shareholders - basic $44,627 $28,742 $23,110 Income attributable to operating partnership units 32 ------- ------- ------- Net income available for common shareholders - diluted $44,659 $28,742 $23,110 Denominator - ----------- Denominator for basic EPS- weighted average shares 38,475 33,175 31,481 Effect of dilutive securities Stock options and awards 494 398 379 Operating partnership units 19 ------- ------- ------- Denominator for diluted EPS 38,988 33,573 31,860 </TABLE> Inherent in the preparation of the Trust's financial statements are certain estimates. These estimates are prepared F8
using management's best judgment, after considering past and current events. In 1997 the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 131-"Disclosures about Segments of an Enterprise and Related Information" which established standards for reporting information about operating segments. In 1997 the Financial Accounting Standards Board also issued statement of Financial Accounting Standards No. 130-"Reporting Comprehensive Income" which established standards for reporting and displaying comprehensive income and its components. The Trust is required to adopt these two standards with its December 31, 1998 financial statements. The Trust will be analyzing both standards during 1998 to determine what disclosures will be required. NOTE 1: REAL ESTATE AND ENCUMBRANCES A summary of the Trust's properties at December 31, 1997 is as follows: <TABLE> <CAPTION> Accumulated depreciation and Cost amortization Encumbrances ---- ------------ ------------ <S> <C> <C> <C> (in thousands) Retail properties $1,241,087 $186,195 $ 95,633 Retail properties under capital leases 205,979 56,356 125,940 Apartments 6,573 4,946 - ---------- -------- -------- $1,453,639 $247,497 $221,573 ========== ======== ======== </TABLE> The Trust's 101 retail properties are located in 14 states and the District of Columbia. There are approximately 2,175 tenants providing a wide range of retail products and services. These tenants range from sole proprietorships to national retailers; no one tenant or corporate group of tenants account for 5% or more of revenue. In 1997 the Trust acquired thirteen main street retail properties and five shopping centers at an initial cost of $258.2 million. On January 22, 1997 the Trust purchased a 5,000 square foot retail building in Chicago, Illinois for cash of $4.2 million. On March 31, 1997 two partnerships were formed to purchase property in California. One of the partnerships purchased a 15,000 square foot building in Santa Monica, California for $4.0 million and the other purchased a 20,000 square foot building in San Diego, California for $850,000. On September 17, 1997 the latter partnership purchased a second building in Hermosa Beach, California for approximately $1.5 million in cash. On April 17, 1997 a partnership which the Trust had organized in December 1996 exercised its purchase option on a retail building in Santa Monica, California. The total cost, including the buyout of the existing tenant, was $7.1 million. In accordance with the provisions of the three partnership agreements, the Trust contributed 90% of the purchase costs to F9
the partnerships with the other 10% being contributed by the minority interests. On August 28, 1997, a limited liability company, of which the Trust owns 90%, acquired three buildings in Forest Hills, New York for approximately $12.6 million. On December 16, 1997 another limited liability company, of which the Trust owns 90%, purchased a fourth building in Forest Hills for $3.4 million. The Trust contributed 90% of the acquisition costs in cash to the limited liability companies. Commissions of $291,000 were paid to a company owned by a brother of the Trust's president in connection with these acquisitions. On September 26, 1997 the Trust purchased the Uptown Shopping Center in Portland, Oregon which consists of 72,000 square feet of retail space and 47 apartment units for $15.7 million. The Trust funded the acquisition of Uptown with proceeds from the sale of other properties. On October 22, 1997 a limited liability company organized by the Trust acquired the Old Town Center in Los Gatos, California for approximately $6.2 million. The property is currently under development. The Trust contributed all but $400,000 of the purchase price and will contribute all amounts necessary to fund the development. The minority partner has an interest in the profits of the property after the Trust receives a stated return on its investment in the property. On October 23, 1997 the Trust purchased, for $20.5 million, a 109,000 square foot mixed use retail and office building located at 150 Post Street in San Francisco, California. On December 5, 1997 the Trust purchased the retail portion of the Fresh Meadows complex in Queens, New York for $49.3 million. The 417,000 square foot retail component consists of main street retail shops and two neighborhood strip shopping centers. On March 5, 1997 the Trust, through a limited liability company organized by the Trust, purchased the 320,000 square foot San Jose Town & Country Village Shopping Center in San Jose, California for $42.8 million in cash. Plans call for the current shopping center to be demolished to allow the site to be developed into a main street property. The other member of the limited liability company has a minor interest in the profits. On March 31, 1997 the 159,000 square foot Pike 7 Shopping Center in Tysons Corner, Virginia was purchased for $31.5 million by a partnership formed to own the center. The Trust contributed $30.9 million to the partnership which was used to pay off existing debt on the center. The other partners contributed the shopping center and its existing debt in exchange for partnership units valued at $495,000 which are exchangeable, at the option of the Trust, for cash or 18,074 common shares of the Trust. On December 17, 1997 a limited partnership, Federal Realty Partners L.P., organized by the Trust acquired the Magruder's Center and the Courthouse Center, both located in Rockville, Maryland, for $12.6 million. The seller contributed the properties to the limited partnership and received 481,378 partnership units valued at $12.3 million and the Trust contributed $400,000 in cash. The partnership units are exchangeable, at the option of the Trust, for cash or common shares of the Trust. On December 29, 1997 the Trust purchased F10
the 295,000 square foot Peninsula Shopping Center located in the Los Angeles, California suburb of Palos Verdes at a cash purchase price of $43.5 million. The Trust made several other real estate acquisitions in 1997. On January 6, the Trust purchased the fee interest in Shillington, Troy and Feasterville Shopping Centers for $1.9 million, $5.7 million and $2.2 million, respectively. The Trust also contracted to purchase the fee interest in Lawrence Park Shopping Center in June 1998 for $8.5 million. In connection with the purchase agreement for Lawrence Park, the Trust, in January 1997, lent the seller $8.8 million at 8% which is due in June 1998. The Trust previously held these properties under capital leases. On February 24, 1997 the Trust purchased a 16 acre tract of land underlying part of the Shops at Willow Lawn for $4.6 million in cash. On June 3, 1997 the Trust exercised its purchase option on a parcel of land adjacent to its Bethesda Row property in Bethesda, Maryland for $5.8 million in cash. The land will be used for future development. In connection with the purchase, a $3.6 million mortgage which the Trust had made to the seller in 1996 was repaid. On July 16, 1997 the Trust purchased a 3,750 square foot parcel of land in Bethesda, Maryland for approximately $800,000. The land, on which there is a vacant retail building, was purchased in order to allow future expansion of the Trust's Bethesda Row property. Proceeds from the sale of other Trust properties were used to fund the acquisition of the two Bethesda purchases. In 1996 the Trust acquired $105.6 million of retail property, comprised of three shopping centers and fourteen retail buildings. On October 1, 1996 the Trust acquired Saugus Plaza Shopping Center, located in the metropolitan Boston, Massachusetts area, for a total cash cost of $12.7 million. On October 29, 1996 Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania was purchased for a total cash cost of $21.8 million. On December 31, 1996 the Trust acquired the controlling interest in a Limited Liability Company formed to own Escondido Promenade in suburban San Diego, California for $14.2 million in cash. The $23.5 million center is encumbered by $9.4 million of municipal bonds. The bonds, which mature October 1, 2016, bear interest at a variable rate determined weekly to be the interest rate which would enable the bonds to be remarketed at 100% of their principal amount. The bonds are redeemable on demand by the holders and if they cannot be resold, will be due. The other member of the Limited Liability Company, who is related to the developer of the property, has a minor interest in the profits of the property. On February 28, 1996 the Trust purchased, for cash, two retail buildings in Winter Park, Florida for a cost of $6.8 million. In 1996 the Trust purchased two buildings in Greenwich, Connecticut, one for $3.2 million in cash on May 6 and another for $9.5 million in cash on June 4. On December 31, 1996 the Trust made an investment of $17.6 million for the general partnership interest in two partnerships, one of which owns ten street retail buildings and the other of which owned a purchase option on a street retail building. The ten buildings, valued at $28 million, are located in Pasadena, Santa Monica and San Diego, F11
California. Nine of the ten buildings are scheduled to be renovated and retenanted. The Trust is contributing 90% of future capital costs. The limited partners who contributed $10.4 million to the partnerships will receive a cumulative return of $762,000 per year. All remaining income and cash available for distribution will be allocated 90% to the Trust and 10% to the minority partner until each receives a return of 10% on its deemed investment and then 60% to the Trust and 40% to the minority partner. The Trust purchased 19 retail properties during 1995 for a total cost of $120.6 million. The Trust also purchased a building abutting Flourtown Shopping Center, one of its existing centers, for $3.1 million. Finley Square Shopping Center in suburban Chicago was purchased on April 27, 1995 for $18.8 million in cash; Bristol Shopping Center in Bristol, Connecticut was purchased on September 22, 1995 for $19.6 million, by assuming a $11.3 million mortgage and by issuing 337,527 common shares valued at $7.3 million with the balance in cash; Park & Shop Center in Washington, D.C. was purchased on December 1, 1995 for $11.2 million in cash; and on December 21, 1995 Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. The retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich, Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million and one building in Bethesda, Maryland, for $2.0 million. In connection with certain of these purchases in 1996 and 1995, brokerage commissions of $172,000 and $671,000, respectively, were incurred to a company that is owned by a brother of the Trust's president. On May 13, 1997 the Trust sold Town & Country Shopping Center in Springfield, Illinois for $7.5 million, resulting in a gain of $5.3 million. On May 30, 1997 Shillington Shopping Center in Shillington, Pennsylvania was sold for $4.6 million, resulting in a gain of $1.7 million. As previously stated, the proceeds from these sales were used to fund the acqusition of two plots of land in Bethesda, Maryland and of Uptown Shopping Center in Portland, Oregon. On September 25, 1997 the Trust sold Brainerd Village Shopping Center in Chattanooga, Tennessee for $10.2 million, resulting in a loss of $659,000. On December 31, 1996 the Trust sold Town and Country Shopping Center in Hammond, Louisiana for $4.9 million, resulting in a loss of $12,000. On August 1, 1995 the Trust sold North City Shopping Center in New Castle, Pennsylvania for $1.8 million, resulting in a loss of $545,000. On April 17, 1997 the Trust made a $3.9 million loan to certain of its partners. The loan with a balance of $4.2 million at December 31, 1997 is secured by property in Santa Monica, F12
California, earns interest at 10% and participates in certain revenues and appreciation of the property. The loan matures on May 1, 2007. On April 22, 1996 the Trust made a $9.2 million convertible participating loan to a partnership, secured by retail properties in Philadelphia, 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 in the properties. From 1995 to 1997 the Trust made additional loans, totaling $3.0 million, secured by properties in Philadelphia, to partnerships with common ownership to the partnership above. One loan bears interest at 5% and the others at the greater of prime plus 2% or 10%. The loans, which were originally due in November 1997, were extended and refinanced on January 14, 1998. The new loan, which is available for up to $25 million, bears interest at 10% and is due May 1, 2021. 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. The Trust held two other mortgage loans at December 31, 1997, 1996 and 1995. The notes, which total approximately $13.2 million, bear interest at 10% and were issued in connection with the acquisition of Trust properties. Mortgages payable and capital lease obligations are due in installments over various terms extending to 2001 and 2060, respectively, with actual or imputed interest rates ranging from 7.9% to 11.25%. Certain of the mortgage and capital lease obligations require additional interest payments based upon property performance. On September 30, 1997 the Trust repaid a $1.5 million mortgage on Northeast Shopping Center in Philadelphia, Pennsylvania. Aggregate mortgage principal payments due during the next four years are $54.5 million, $532,000, $583,000, and $30.7 million, respectively. Future minimum lease payments and their present value for property under capital leases as of December 31, 1997, are as follows: <TABLE> <CAPTION> Year ending December 31, (in thousands) <S> <C> 1998 $ 11,737 1999 11,299 2000 11,736 2001 11,736 2002 11,528 Thereafter 526,207 -------- 584,243 Less amount representing interest (458,303) -------- Present value $ 125,940 ======== </TABLE> Leasing Arrangements - -------------------- F13
The Trust's leases with retail property and apartment tenants are classified as operating leases. Leases on apartments are generally for a period of one year, whereas retail property leases generally range from three to 10 years and usually provide for contingent rentals based on sales and sharing of certain operating costs. The components of rental income are as follows: <TABLE> <CAPTION> (in thousands) Year ended December 31, 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Retail properties Minimum rents $147,147 $129,077 $111,454 Cost reimbursements 34,089 28,805 23,961 Percentage rent 4,801 4,550 4,977 Apartments - rents 2,492 2,455 2,449 -------- -------- -------- $188,529 $164,887 $142,841 ======== ======== ======== </TABLE> The components of rental expense are as follows: <TABLE> <CAPTION> (in thousands) Year ended December 31, 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Management fees and costs $ 8,452 $ 7,264 $ 5,707 Repairs and maintenance 12,634 11,865 8,140 Utilities 5,957 5,350 4,936 Payroll - properties 3,432 3,032 3,230 Ground rent 2,602 2,851 2,852 Insurance 2,227 2,183 2,281 Other operating 7,540 8,142 7,947 -------- -------- -------- $ 42,844 $ 40,687 $ 35,093 ======== ======== ======== </TABLE> Minimum future retail property rentals on noncancelable operating leases as of December 31, 1997 are as follows: <TABLE> <CAPTION> Year ending December 31, (in thousands) <S> <C> 1998 $ 162,415 1999 149,405 2000 134,142 2001 117,651 2002 99,827 Thereafter 489,684 ---------- $1,153,124 ========== </TABLE> NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS - ------------------------------------------- The following disclosure of estimated fair value was determined by the Trust, using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimates of fair value. The estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. F14
The Trust estimates the fair value of its financial instruments using the following methods and assumptions: (1) quoted market prices, when available, are used to estimate the fair value of investments in marketable debt and equity securities; (2) quoted market prices are used to estimate the fair value of the Trust's marketable convertible subordinated debentures; (3) discounted cash flow analyses are used to estimate the fair value of long term notes receivable and payable, using the Trust's estimate of current interest rates for similar notes; (4) carrying amounts in the balance sheet approximate fair value for cash and short term borrowings. Notes receivable from officers are excluded from fair value estimation since they have been issued in connection with employee stock ownership programs. <TABLE> <CAPTION> December 31, 1997 December 31, 1996 (in thousands) Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- <S> <C> <C> <C> <C> Cash & equivalents $ 17,043 $ 17,043 $ 11,041 $ 11,041 Investments 1,304 1,304 671 671 Mortgage notes receivable 38,360 39,864 27,913 28,945 Mortgages and notes payable 214,692 218,194 164,682 168,276 Convertible debentures 75,289 70,772 75,289 68,889 Senior notes 255,000 264,291 215,000 221,635 </TABLE> NOTE 3. NOTES PAYABLE - --------------------- At December 31, 1997 and 1996 the Trust had notes payable of $119.0 million and $66.1 million, respectively. Of these balances, $114.8 million in 1997 and $59.4 million in 1996 were issued under the Trust's revolving credit facilities. The remaining balance of notes payable was issued in connection with the acquisition, leasing or renovation of properties. A $2.5 million non-interest bearing note issued in September 1995 in connection with a lease transaction at Barracks Road was repaid in 1997. A note, with a balance of $1.2 million at December 31, 1997 and $1.3 million at December 31, 1996, was issued in connection with the buy out of a tenant at Queen Anne Plaza in January 1995. The non-interest bearing note of $2.2 million, due in annual installments of $200,000 for eleven years, was recorded at its discounted value using an interest rate of 8 7/8%. A 10% note, payable in equal monthly installments with a final maturity in 2013, issued in connection with the renovation of Perring Plaza had a balance of $2.8 million in 1997 and $2.9 million in 1996. A $3.0 million note issued in connection with the acquisition of Federal Plaza was paid in 1996. 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 F15
available from $135 million to $300 million and decreasing the interest rate from LIBOR plus 75 basis points to LIBOR plus 65 basis points. The syndicated line requires fees and has various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth. The maximum drawn under these facilities during 1997, 1996 and 1995 was $114.8 million, $76.2 million and $66.8 million, respectively. In 1997, 1996 and 1995 the weighted average interest rate on borrowings was 6.5%,6.4% and 6.9%, respectively, and the average amount outstanding was $59.9 million, $47.2 million and $26.7 million, respectively. NOTE 4. DIVIDENDS - ----------------- On November 24, 1997 the Trustees declared a quarterly cash dividend of $.43 per common share, payable January 15, 1998 to common shareholders of record January 2, 1998. For the years ended December 31, 1997, 1996 and 1995, $.19, $.21, and $.43 of dividends paid per common share, respectively, represented a return of capital. On November 24, 1997 the Trustees declared a quarterly cash dividend of $.49688 per share on its Series A Cumulative Redeemable Preferred Shares, payable on February 2, 1998 to shareholders of record on January 15, 1998. NOTE 5. COMMITMENTS AND CONTINGENCIES - ------------------------------------- Pursuant to the provisions of the Loehmann's Plaza Limited Partnership Agreement, on or after September 1, 1995 the limited partner may require the Trust to purchase his interest in the Partnership at its then fair market value. The Congressional Plaza Shopping Center Joint Venture Agreement provides that upon six months advance notice the Trust can be required to purchase its pro rata share of one venturer's 18.75% or greater joint venture interest for a purchase price based on the appraised fair market value of the shopping center, but no less than the percentage of joint venture interest being sold multiplied by the difference between $17.5 million and the remaining principal balance of any liabilities of the Joint Venture. Under the terms of certain 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 partnership units into cash or common shares of the Trust, at the option of the Trust. F16
As previously reported, certain of the Trust's shopping centers have some environmental contamination. The Trust has retained an environmental consultant to investigate contamination at a shopping center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. Although the Trust is still investigating the chlorinated solvent contamination in response to NJDEP directives, information collected to date indicates that remediation of this contamination is not likely to have a material effect upon the Trust's financial condition. 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. On December 4, 1997 the Trust purchased the retail portion of a mixed use property located in Queens, New York. Environmental studies performed prior to the acquisition identified petroleum and solvent contamination in the soil and groundwater at various locations at the property. Additional investigation as to the nature and extent of contamination is required at this property. Although the seller states that it is not responsible for this investigation or remediation, the Trust disagrees and intends to pursue the seller to enforce its obligations with respect to contamination at the property. At this time, the Trust is unable to determine what impact, if any, this situation will have on the Trust's financial condition. A nonqualified deferred compensation plan for Trust officers was established in 1994. The plan allows the officers to defer future income until the earlier of age 65 or termination of employment with the Trust. As of December 31, 1997, the Trust is liable to participants for approximately $1.3 million under this plan. Although this is an unfunded plan, the Trust has purchased certain investments with which to match this obligation. The Trust has entered into agreements with certain key employees whereby if these employees voluntarily or involuntarily leave the employment of the Trust within six months after a "change of control" (defined as control of 35% or more of outstanding shares) of the Trust, they will be entitled to a lump sum cash payment equal to one to three times their annual salary as of the date of termination and have their health and welfare benefits and executive privileges continued for a period of one to three years. In the event of a change of control, the Trust also agreed that all restrictions on the exercise or receipt of any stock options and stock grants shall lapse upon termination of employment and that all shares owned at termination shall be redeemed by the Trust at a formula price. As of December 31, 1997 in connection with the renovation of certain shopping centers, the Trust has contractual obligations of $13.1 million and $774,000 of letters of credit outstanding. F17
In addition the Trust is contractually obligated under leases to provide up to $8.6 million in building and tenant improvements. The Trust is obligated under ground lease agreements on several shopping centers requiring minimum annual payments as follows: <TABLE> <CAPTION> (in thousands) <S> <C> 1998 $ 2,562 1999 2,570 2000 2,575 2001 2,575 2002 2,575 Thereafter 146,866 -------- $159,723 ======== </TABLE> NOTE 6. 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES - --------------------------------------------------- In October 1993 the Trust issued $75.0 million of 5 1/4% convertible subordinated debentures, realizing cash proceeds of approximately $73.0 million. The debentures were not registered under the Securities Act of 1933, and were not publicly distributed within the United States. The debentures, which mature in 2003, are convertible into shares of beneficial interest at $36 per share. The debentures are redeemable by the Trust, in whole, at any time after October 28, 1998 at 100% of the principal amount plus accrued interest. At December 1997 and 1996 the Trust had outstanding $289,000 of 5 1/4% convertible subordinated debentures due 2002. The debentures which are convertible into shares of beneficial interest at $30.625 were not registered under the Securities Act of 1933 and were not publicly distributed within the United States. NOTE 7. SENIOR NOTES AND DEBENTURES - ----------------------------------- On August 1, 1997 the Trust issued $40 million of 6.82% Medium-Term Notes, netting approximately $39.8 million. The notes, which pay interest semi- annually on February 1 and August 1, are due August 1, 2027, but may be redeemed, at par, at the option of the holders on August 1, 2007. In order to minimize the risk of a change in interest rate prior to completing the transaction, the Trust entered into a forward rate agreement costing $157,000 which is being recognized as a component of interest expense over the life of the notes. 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. On January 19, 1995 the Trust issued $100.0 million of 8 7/8% Notes, due January 15, 2000. The notes, which were issued at a price of 99.815%, pay interest semi-annually on January 15 F18
and July 15 and are not redeemable prior to maturity. After deducting the underwriting discount and other costs, the Trust netted approximately $98.9 million. In January 1995 the Trust executed a five year interest rate swap on $25.0 million, whereby the Trust swapped fixed interest payment obligations of 8.1% for a floating rate interest payment of three month LIBOR. The floating rate during the first quarter of 1995 was 6.2%. In May 1995 the swap was terminated and the Trust sold the swap for $1.5 million, which is being amortized as a deduction to interest expense over the remaining term. On April 21, 1995 the Trust issued $25.0 million of senior notes, netting $24.9 million after deducting discounts and costs. The notes, which are due April 21, 2002 and bear interest at 8%, payable semiannually on April 21 and October 21, were issued at a price of 99.683%. On December 8, 1995 the Trust issued an additional $40.0 million of senior notes, netting $39.6 million after deducting costs. The notes, which mature on December 1, 2005 and bear interest at 6 5/8%, payable June 1 and December 1, were issued at a price of 99.3%. NOTE 8. SHAREHOLDERS' EQUITY - ---------------------------- On February 4, 1997 the Trust sold three million common shares to an institutional investor for $28 per share, netting $83.9 million. On October 6, 1997 the Trust issued four million 7.95% Series A Cumulative Redeemable Preferred Shares at $25 per share in a public offering, realizing cash proceeds of approximately $96.6 million after costs of $3.4 million. The Series A Preferred Shares are not redeemable prior to October 6, 2002. On or after that date, the Preferred Shares may be redeemed, in whole or in part, at the option of the Trust, at a redemption price of $25 per share plus all accrued and unpaid dividends. The redemption price is payable solely out of proceeds from the sale of other capital shares of the Trust. Dividends on the Preferred Shares will be payable quarterly in arrears on the last day of January, April, July and October. On May 24, 1996 the Trust sold, to an institutional investor, 1.8 million shares of beneficial interest ("shares") at $22 per share, netting $39.3 million. On December 13, 1996 the Trust sold another 1.6 million shares to the public at $27 7/8 per share, netting $42.9 million. In September 1995 the Trust issued 337,527 shares of beneficial interest valued at $7.3 million in partial consideration for the purchase of Bristol Shopping Center. The Trust has a Dividend Reinvestment Plan, whereby shareholders may use their dividends and make optional cash payments to purchase shares. In 1997, 1996, and 1995, 153,973 shares, 181,274 shares, and 193,965 shares, respectively, were issued under the Plan. F19
On January 31, 1997 under the terms of the 1993 Long Term Incentive Plan, 22,000 restricted shares were granted to an officer and two employees of the Trust. The shares vest over three years. On September 26, 1997, 10,000 restricted common shares were granted to an officer; the shares, which were fully vested upon grant, were issued from treasury shares. In January 1994 under the terms of the 1993 Long Term Incentive Plan, an officer of the Trust purchased 40,000 common shares at $25 per share with the assistance of a $1.0 million loan from the Trust. The loan, which has a term of 12 years, bears interest at 6.24%. Forgiveness of up to 75% of the loan is subject to the future performance of the Trust. One eighth of the loan was forgiven on January 31, 1995 and an additional one sixteenth has been forgiven each January 31 since then as certain performance criteria of the Trust were met. The Trust has loaned the officer $100,000 to pay taxes due in connection with the plan. In January 1991 the Trustees adopted the Federal Realty Investment Trust Share Purchase Plan. Under the terms of this plan, officers and certain employees of the Trust purchased 446,000 common shares at $15.125 per share with the assistance of loans of $6.7 million from the Trust. Originally, the Plan called for one sixteenth of the loan to be forgiven each year for eight years, as long as the participant was still employed by the Trust. The loans for all participants, but two, were modified in 1994 to extend the term an additional four years and to tie forgiveness in 1995 and thereafter to certain performance criteria of the Trust. One sixteenth of the loan has been forgiven during each year of the plan. The Trust has loaned participants $985,000 to pay the taxes due in connection with the plan. The purchase loans and the tax loans bear interest at 9.39%. The shares purchased under the plan may not be sold, pledged or assigned until both the purchase and tax loans are satisfied and the term has expired, without the consent of the Compensation Committee of the Board of Trustees. In connection with a restricted share grant, the Trust accepted from its President a noninterest bearing note for $210,000. One installment of $105,000 was paid on the note in 1992 and the second installment is due April 15, 2001. This loan and the tax loans issued under the two Share Purchase Plans are recorded as notes receivable - officers. At December 31, 1997, 1996 and 1995, respectively, the Trust had 52,386 common shares, 62,386 common shares and 61,328 common shares in treasury, at a cost of $1.0 million, $1.2 million, and $1.2 million, respectively. On April 13, 1989, the Trustees adopted a Shareholder Rights Plan (the Plan). Under the Plan, one right was issued for each outstanding share of common stock held as of April 24, 1989, and a right will be attached to each share issued in the future. The rights are exercisable into common shares upon the occurrence of certain events, including acquisition by a person or group of certain levels of beneficial ownership or a tender offer by such F20
a person or group. The rights are redeemable by the Trust for $.01 and expire on April 24, 1999. NOTE 9. STOCK OPTION PLAN - ------------------------- The 1993 Long Term Incentive Plan ("Plan") has been amended to authorize the grant of options and other stock based awards for up to four million shares. Options granted under the plan have ten year terms and vest in one to five years. Under the Plan, on each annual meeting date during the term of the plan, each nonemployee Trustee will be awarded 2,500 options. Accordingly, on each of May 7, 1997, May 2, 1996 and May 10, 1995, 22,500, 22,500, and 20,000 options, respectively, were awarded to nonemployee Trustees. In 1997 1.6 million options at prices ranging from $24.94 to $27.75 were granted to certain officers, employees, affiliates and consultants to the Trust. In 1996, 81,181 options at $21 to $21.63 per share were granted to employees of the Trust. On February 15, 1995, 719,000 stock options at $20.75 per share were granted to employees of the Trust. The option price to acquire shares under the 1993 Plan and previous plans is required to be at least the fair market value at the date of grant. As a result of the exercise of options, the Trust had outstanding from its officers and employees notes for $2.5 million and $2.2 million at December 31, 1997 and 1996, respectively. The notes issued under the 1993 plan bear interest at the dividend rate on the date of exercise divided by the purchase price of such shares. The notes issued under the previous plans bear interest at the lesser of (i) the Trust's borrowing rate or (ii) the current indicated annual dividend rate on the shares acquired pursuant to the option, divided by the purchase price of such shares. The notes are collateralized by the shares and are with recourse. The loans have a term extending to the employee's or officer's retirement date. FAS Statement No. 123, "Accounting for Stock-Based Compensation" requires pro forma information regarding net income and earnings per share as if the Trust accounted for its stock options under the fair value method of that Statement. The fair value for options issued in 1997, 1996, and 1995 has been estimated as $4.0 million, $120,000 and $1.4 million, respectively, as of the date of grant, using a binomial model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.5%, 5.7% and 7.3%; volatility factors of the expected market price of the Trust's shares of 19%, 19% and 19%; and a weighted average expected life of the option of 6.6 years, 5.6 years and 6.3 years. Because option valuation models require the input of highly subjective assumptions, such as the expected stock price volatility, and because changes in these subjective input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of the fair value of its stock options. F21
For purposes of pro forma disclosures, the estimated fair value of the options are amortized to expense over the options' vesting period. The pro forma information is as follows: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> (in thousands except for earnings per share) Pro forma net income $ 45,214 $ 28,241 $ 22,692 Pro forma earnings per share, basic $1.13 $ .85 $ .72 Pro forma earnings per share, diluted $1.11 $ .84 $ .71 </TABLE> A summary of the Trust's stock option activity for the years ended December 31, is as follows: <TABLE> <CAPTION> Shares available Options Weighted-Average for future Outstanding Option Price ----------- ------------ option grants ------------- <S> <C> <C> <C> Beginning of the year 5,441,000 824,126 $ 24.875 Options granted (759,000) 759,000 20.784 Options exercised - (20,744) 18.79 Options expired (47,750) 23.31 --------- --------- December 31, 1995 4,682,000 1,514,632 22.71 Options granted (81,181) 81,181 21.21 Options exercised --- (126,918) 21.31 Options expired 33,666 (35,166) 22.47 --------- --------- December 31, 1996 4,634,485 1,433,729 22.737 Amend plan (2,000,000) - Options granted (1,611,500) 1,611,500 26.43 Options exercised --- (75,884) 21.05 Options expired 119,003 (121,003) 25.99 --------- --------- December 31, 1997 1,141,988 2,848,342 24.73 ========= ========= </TABLE> At December 31, 1997 and 1996, options for 1.2 million shares and 942,270 shares, respectively, were exercisable. The average remaining contractual life of options outstanding at December 31, 1997 and 1996 was 7.9 years and 7.1 years, respectively. The weighted average grant date fair value per option for options granted in 1997 and 1996 was $2.68 and $1.47, respectively. The exercise price of options outstanding at December 31, 1997 ranged from $17.25 per share to $27.75 per share. NOTE 10. SAVINGS AND RETIREMENT PLAN - ------------------------------------ The Trust has a savings and retirement plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Employees' contributions range, at the discretion of each employee, from 1% to 17% of compensation up to a maximum of $9,500. Under the plan, the Trust, out of its current net income, contributes 50% of each employee's first 5% of contributions. In addition, the Trust may make discretionary contributions within the limits of deductibility set forth by the Code. Employees of the Trust, who work over 1,000 hours annually, are eligible to become plan participants. The Trust's expense for the years ended December 31, 1997, 1996 and 1995 was $210,000, $179,000 and $158,000 respectively. In 1996 and 1995 the Trust recorded a liability for an additional contribution of F22
1.5% and 1% of salary, respectively, for all nonofficer employees who are eligible for the 401(k) plan. In addition, 1.5% of salary in 1996 and 1% of salary in 1995 was accrued for all eligible nonofficer employees as a bonus. NOTE 11. INTEREST EXPENSE - ------------------------- The Trust incurred interest expense totaling $50.9 million, $46.4 million and $40.2 million in 1997, 1996 and 1995 respectively, of which $3.6 million, $871,000 and $975,000, respectively, was capitalized. Interest paid was $49.4 million in 1997,$44.2 million in 1996 and $33.4 million in 1995. NOTE 12. SUBSEQUENT EVENTS - -------------------------- On January 1, 1998, 300,000 and 62,500 common shares, respectively, were awarded to the Trust's president and chief investment officer in a program designed to directly link a significant portion of these executives' long term compensation to the prosperity of the Trust and its shareholders. The shares vest over 13 years, but accelerated vesting over an eight year period is possible if the Trust meets certain performance criteria. In order to further link his compensation with the prosperity of the shareholders, the president elected under another agreement to accept stock in lieu of cash for both his 1997 bonus and his 1998 salary. As a result on January 1, 1998, 24,534 common shares were awarded to the president in lieu of his 1998 cash salary and on January 26, 1998, 14,521 common shares were issued in lieu of his 1997 bonus. The shares vest at the end of five years if the president is still employed by the Trust. An additional 62,500 common shares were granted to the chief investment officer on January 1, 1998; these shares vest over eight years. On January 26, 1998 a third officer was awarded 75,000 restricted common shares which will vest as the Trust meets certain performance criteria. On January 2, 1998, 200,000 options were awarded to an officer of the Trust at a price of $25.875. The options vest at the rate of 50,000 shares at the end of years two through five. On January 26, 1998, 796,000 options, vesting over three years, were granted to certain officers and employees at a price of $25.1875. On February 3, 1998 the Trust purchased a 3,000 square foot main street retail building in Santa Monica, California for $2.0 million in cash. On January 13, 1998 the Trust purchased a Treasury Yield Hedge (notional amount of $50 million) in anticipation of a planned refinancing. Under this agreement, if the 10-Year Treasury Note rate on the maturity date of March 11, 1998 exceeds 5.445%, the Trust will receive the differential; if the 10-Year Treasury Note rate at maturity is less than 5.445%, the Trust will pay the differential. F23
NOTE 13. QUARTERLY DATA (UNAUDITED) - ----------------------------------- The following summary represents the results of operations for each quarter in 1997 and 1996: <TABLE> <CAPTION> (in thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter <S> <C> <C> <C> <C> 1997 Revenue $48,647 $50,802 $49,813 $55,009 Net income available for common shares 9,311 17,010 (1) 9,489 (2) 8,817 Earnings per common share -basic $ .25 $ .44 $ .24 $ .23 Earnings per common share -diluted .24 .44 .24 .22 1996 Revenue $43,772 $43,570 $44,337 $47,376 Net income available for common shares 6,026 6,897 8,123 7,696 Earnings per common share -basic $ .19 .21 .24 .23 Earnings per common share -diluted .19 .21 .24 .22 </TABLE> (1) Income before gain on sale of real estate was $10.0 million or $.26 per common share, both basic and diluted. (2) Income before loss on sale of real estate was $10.1 million or $.26 per common share, both basic and diluted. F24
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 <TABLE> <CAPTION> COLUMN A COLUMN B COLUMN C COLUMN D - --------------------------------------------------------------------------------------------------------------------------- Initial cost to company Cost Capitalized Building and Subsequent to Descriptions Encumbrance Land Improvements Acquisition - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> ALLWOOD (New Jersey) $3,557,000 $ $3,920,000 $230,000 ANDORRA (Pennsylvania) 2,432,000 12,346,000 2,688,000 BALA CYNWYD (Pennsylvania) 3,565,000 14,466,000 2,091,000 BARRACKS ROAD (Virginia) 21,022,000 4,363,000 16,459,000 12,226,000 BETHESDA ROW (Maryland) 12,576,000 459,000 20,409,000 8,261,000 BLUESTAR (New Jersey) 27,145,000 29,922,000 2,308,000 BRICK PLAZA (New Jersey) 21,362,000 24,715,000 21,737,000 BRISTOL (Connecticut) 10,794,000 3,856,000 15,959,000 402,000 BRUNSWICK (New Jersey) 11,300,000 12,456,000 1,778,000 CALIFORNIA RETAIL BUILDINGS SANTA MONICA (7) 14,322,000 9,756,000 9,946,000 SAN DIEGO (5) 3,844,000 1,352,000 658,000 150 POST STREET (SAN FRANCISCO) 11,685,000 9,181,000 OTHER (2) 3,964,000 387,000 1,464,000 CLIFTON (New Jersey) 3,307,000 3,646,000 443,000 CONGRESSIONAL PLAZA (Maryland) 2,793,000 7,424,000 35,171,000 CONNECTICUT RETAIL BUILDINGS (13) 25,061,000 27,739,000 1,791,000 CROSSROADS (Illinois) 4,635,000 11,611,000 4,314,000 COURTHOUSE CENTER (Maryland) 1,750,000 1,869,000 DEDHAM PLAZA (Massachusetts) 12,369,000 12,918,000 910,000 EASTGATE (North Carolina) 1,608,000 5,775,000 4,419,000 ESCONDIDO PROMENADE (California) 9,400,000 11,505,000 12,147,000 231,000 ELLISBURG CIRCLE (New Jersey) 4,028,000 11,309,000 9,781,000 FALLS PLAZA (Virginia) 4,180,000 530,000 735,000 3,207,000 FEASTERVILLE (Pennsylvania) 1,431,000 1,600,000 3,056,000 FEDERAL PLAZA (Maryland) 28,059,000 10,216,000 17,895,000 31,065,000 FINLEY SQUARE (Illinois) 9,252,000 9,544,000 2,810,000 FLORIDA RETAIL BUILDINGS (2) 5,206,000 1,631,000 16,000 FLOURTOWN (Pennsylvania) 1,345,000 3,943,000 2,629,000 FRESH MEADOWS (New York) 24,625,000 25,255,000 GAITHERSBURG SQUARE (Maryland) 7,701,000 5,271,000 8,645,000 GARDEN MARKET (Illinois) 2,677,000 4,829,000 654,000 GOVERNOR PLAZA (Maryland) 2,068,000 4,905,000 10,015,000 GRATIOT PLAZA (Michigan) 525,000 1,601,000 6,065,000 HAMILTON (New Jersey) 4,903,000 5,405,000 1,998,000 HUNTINGTON (New York) 14,522,000 16,008,000 4,337,000 IDYLWOOD PLAZA (Virginia) 4,308,000 10,026,000 566,000 ILLINOIS RETAIL BUILDINGS (3) 2,694,000 2,325,000 3,224,000 LANCASTER (Pennsylvania) 934,000 2,103,000 2,552,000 LANGHORNE SQUARE (Pennsylvania) 720,000 2,974,000 8,326,000 LAUREL (Maryland) 7,458,000 22,525,000 13,470,000 LAWRENCE PARK (Pennsylvania) 3,203,000 17,000 7,160,000 7,172,000 LOEHMANN'S PLAZA (Virginia) 6,324,000 1,237,000 15,096,000 5,319,000 MAGRUDERS (Maryland) 4,554,000 4,859,000 MASSACHUSETTS RETAIL BLDG (1) 1,873,000 1,884,000 170,000 MID PIKE PLAZA (Maryland) 10,041,000 10,335,000 5,310,000 NEW JERSEY RETAIL BUILDING (1) 737,000 1,466,000 1,056,000 NEW YORK RETAIL BUILDINGS (4) 7,541,000 7,912,000 838,000 NORTHEAST (Pennsylvania) 1,152,000 10,596,000 8,889,000 NORTHEAST PLAZA (Georgia) 6,930,000 26,236,000 5,451,000
<CAPTION> COLUMN A COLUMN E COLUMN F - --------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period Accumulated Building and Depreciation and Descriptions Land Improvements Total Amortization - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> ALLWOOD (New Jersey) $ $4,150,000 $4,150,000 $1,109,000 ANDORRA (Pennsylvania) 2,432,000 15,034,000 17,466,000 4,233,000 BALA CYNWYD (Pennsylvania) 3,565,000 16,557,000 20,122,000 2,182,000 BARRACKS ROAD (Virginia) 4,363,000 28,685,000 33,048,000 11,958,000 BETHESDA ROW (Maryland) 459,000 28,670,000 29,129,000 2,650,000 BLUESTAR (New Jersey) 32,230,000 32,230,000 8,299,000 BRICK PLAZA (New Jersey) 46,452,000 46,452,000 8,344,000 BRISTOL (Connecticut) 3,856,000 16,361,000 20,217,000 1,043,000 BRUNSWICK (New Jersey) 14,234,000 14,234,000 3,826,000 CALIFORNIA RETAIL BUILDINGS SANTA MONICA (7) 14,322,000 19,702,000 34,024,000 346,000 SAN DIEGO (5) 3,844,000 2,010,000 5,854,000 150 POST STREET (SAN FRANCISCO) 11,685,000 9,181,000 20,866,000 42,000 OTHER (2) 3,964,000 1,851,000 5,815,000 2,000 CLIFTON (New Jersey) 4,089,000 4,089,000 995,000 CONGRESSIONAL PLAZA (Maryland) 2,793,000 42,595,000 45,388,000 11,729,000 CONNECTICUT RETAIL BUILDINGS (13) 25,061,000 29,530,000 54,591,000 1,873,000 CROSSROADS (Illinois) 4,635,000 15,925,000 20,560,000 1,762,000 COURTHOUSE CENTER (Maryland) 1,750,000 1,869,000 3,619,000 DEDHAM PLAZA (Massachusetts) 12,369,000 13,828,000 26,197,000 1,681,000 EASTGATE (North Carolina) 1,608,000 10,194,000 11,802,000 4,317,000 ESCONDIDO PROMENADE (California) 11,505,000 12,378,000 23,883,000 344,000 ELLISBURG CIRCLE (New Jersey) 4,028,000 21,090,000 25,118,000 4,523,000 FALLS PLAZA (Virginia) 530,000 3,942,000 4,472,000 1,637,000 FEASTERVILLE (Pennsylvania) 1,431,000 4,656,000 6,087,000 3,082,000 FEDERAL PLAZA (Maryland) 10,216,000 48,960,000 59,176,000 10,358,000 FINLEY SQUARE (Illinois) 9,252,000 12,354,000 21,606,000 1,150,000 FLORIDA RETAIL BUILDINGS (2) 5,206,000 1,647,000 6,853,000 83,000 FLOURTOWN (Pennsylvania) 1,345,000 6,572,000 7,917,000 1,765,000 FRESH MEADOWS (New York) 24,625,000 25,255,000 49,880,000 GAITHERSBURG SQUARE (Maryland) 6,012,000 15,605,000 21,617,000 2,121,000 GARDEN MARKET (Illinois) 2,677,000 5,483,000 8,160,000 576,000 GOVERNOR PLAZA (Maryland) 2,068,000 14,920,000 16,988,000 6,619,000 GRATIOT PLAZA (Michigan) 525,000 7,666,000 8,191,000 1,805,000 HAMILTON (New Jersey) 7,403,000 7,403,000 2,316,000 HUNTINGTON (New York) 20,345,000 20,345,000 5,384,000 IDYLWOOD PLAZA (Virginia) 4,308,000 10,592,000 14,900,000 1,184,000 ILLINOIS RETAIL BUILDINGS (3) 2,694,000 5,549,000 8,243,000 217,000 LANCASTER (Pennsylvania) 4,655,000 4,655,000 3,164,000 LANGHORNE SQUARE (Pennsylvania) 720,000 11,300,000 12,020,000 4,077,000 LAUREL (Maryland) 7,458,000 35,995,000 43,453,000 11,799,000 LAWRENCE PARK (Pennsylvania) 17,000 14,332,000 14,349,000 9,755,000 LOEHMANN'S PLAZA (Virginia) 1,248,000 20,404,000 21,652,000 8,992,000 MAGRUDERS (Maryland) 4,554,000 4,859,000 9,413,000 MASSACHUSETTS RETAIL BLDG (1) 1,873,000 2,054,000 3,927,000 140,000 MID PIKE PLAZA (Maryland) 15,645,000 15,645,000 6,823,000 NEW JERSEY RETAIL BUILDING (1) 737,000 2,522,000 3,259,000 87,000 NEW YORK RETAIL BUILDINGS (4) 7,541,000 8,750,000 16,291,000 55,000 NORTHEAST (Pennsylvania) 1,153,000 19,484,000 20,637,000 6,880,000 NORTHEAST PLAZA (Georgia) 6,933,000 31,684,000 38,617,000 11,561,000 <CAPTION> COLUMN A COLUMN G COLUMN H COLUMN I - -------------------------------------- - ------------------------------------- Life on which Date depreciation in latest of Date income statements Descriptions Construction Acquired is computed - -------------------------------------- - ------------------------------------- <S> <C> <C> <C> ALLWOOD (New Jersey) 1958 12/12/88 35 years ANDORRA (Pennsylvania) 1953 01/12/88 35 years BALA CYNWYD (Pennsylvania) 1955 09/22/93 35 years BARRACKS ROAD (Virginia) 1958 12/31/85 35 years BETHESDA ROW (Maryland) 1945-1991 12/31/93 35 years BLUESTAR (New Jersey) 1959 12/12/88 35 years BRICK PLAZA (New Jersey) 1958 12/28/89 35 years BRISTOL (Connecticut) 1959 9/22/95 35 years BRUNSWICK (New Jersey) 1957 12/12/88 35 years CALIFORNIA RETAIL BUILDINGS SANTA MONICA (7) 1888-1995 1996-1997 35 years SAN DIEGO (5) 1888-1995 1996-1997 35 years 150 POST STREET (SAN FRANCISCO) 1908 10/23/97 35 years OTHER (2) var 1996-1997 35 years CLIFTON (New Jersey) 1959 12/12/88 35 years CONGRESSIONAL PLAZA (Maryland) 1965 04/01/85 20 years CONNECTICUT RETAIL BUILDINGS (13) 1900-1991 1994-1996 35 years CROSSROADS (Illinois) 1959 07/18/93 35 years COURTHOUSE CENTER (Maryland) 1975 12/17/97 35 years DEDHAM PLAZA (Massachusetts) 1959 12/31/93 35 years EASTGATE (North Carolina) 1963 12/18/86 35 years ESCONDIDO PROMENADE (California) 1987 12/31/96 35 years ELLISBURG CIRCLE (New Jersey) 1959 10/16/92 35 years FALLS PLAZA (Virginia) 1962 09/30/67 22 3/4 years FEASTERVILLE (Pennsylvania) 1958 07/23/80 20 years FEDERAL PLAZA (Maryland) 1970 08/29/89 35 years FINLEY SQUARE (Illinois) 1974 04/27/95 35 years FLORIDA RETAIL BUILDINGS (2) 1920 02/28/96 35 years FLOURTOWN (Pennsylvania) 1957 04/25/80 35 years FRESH MEADOWS (New York) 1946-1949 12/05/97 35 years GAITHERSBURG SQUARE (Maryland) 1966 04/22/93 35 years GARDEN MARKET (Illinois) 1958 07/28/94 35 years GOVERNOR PLAZA (Maryland) 1963 10/01/85 35 years GRATIOT PLAZA (Michigan) 1964 03/29/73 25 3/4 years HAMILTON (New Jersey) 1961 12/12/88 35 years HUNTINGTON (New York) 1962 12/12/88 35 years IDYLWOOD PLAZA (Virginia) 1991 04/15/94 35 years ILLINOIS RETAIL BUILDINGS (3) 1900-1927 1995-1997 35 years LANCASTER (Pennsylvania) 1958 04/24/80 22 years LANGHORNE SQUARE (Pennsylvania) 1966 01/31/85 35 years LAUREL (Maryland) 1956 08/15/86 35 years LAWRENCE PARK (Pennsylvania) 1972 07/23/80 22 years LOEHMANN'S PLAZA (Virginia) 1971 07/21/83 35 years MAGRUDERS (Maryland) 1955 12/17/97 35 years MASSACHUSETTS RETAIL BLDG (1) 1930 09/07/95 35 years MID PIKE PLAZA (Maryland) 1963 05/18/82 35 years NEW JERSEY RETAIL BUILDING (1) 1940 08/16/95 35 years NEW YORK RETAIL BUILDINGS (4) 1937-1987 12/16/97 35 years NORTHEAST (Pennsylvania) 1959 08/30/83 35 years NORTHEAST PLAZA (Georgia) 1952 12/31/86 35 years </TABLE> F-25
<TABLE> <CAPTION> COLUMN A COLUMN B COLUMN C COLUMN D - --------------------------------------------------------------------------------------------------------------------------- Initial cost to company Cost Capitalized Building and Subsequent to Descriptions Encumbrance Land Improvements Acquisition - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NORTH LAKE COMMONS (Illinois) 2,529,000 8,604,000 448,000 OLD KEENE MILL (Virginia) 6,852,000 638,000 998,000 2,891,000 OLD TOWN CENTER (California) 3,420,000 2,765,000 2,270,000 PAN AM SHOPPING CENTER (Virginia) 8,694,000 12,929,000 2,481,000 PARK & SHOP (District of Columbia) 4,840,000 6,319,000 446,000 PENINSULA (California) 20,880,000 23,288,000 PERRING PLAZA (Maryland) 2,800,000 6,461,000 14,252,000 PIKE 7 (Virginia) 9,709,000 22,799,000 QUEEN ANNE PLAZA (Massachusetts) 3,319,000 8,457,000 2,380,000 QUINCE ORCHARD PLAZA (Maryland) 3,197,000 7,949,000 5,266,000 ROLLINGWOOD APTS. (Maryland) 552,000 2,246,000 3,775,000 RUTGERS (New Jersey) 13,090,000 14,429,000 865,000 SAUGUS (Massachusetts) 4,383,000 8,291,000 208,000 SHIRLINGTON (Virginia) 9,761,000 14,808,000 1,954,000 TOWN & COUNTRY (California) 41,606,000 1,161,000 2,629,000 TROY (New Jersey) 3,126,000 5,193,000 11,487,000 TYSONS STATION (Virginia) 4,206,000 388,000 453,000 2,511,000 UPTOWN (Oregon) 10,257,000 5,846,000 WESTFALLS (Virginia) 4,796,000 538,000 535,000 2,081,000 WILDWOOD (Maryland) 9,111,000 1,061,000 5,118,000 WILLIAMSBURG (Virginia) 2,758,000 7,160,000 3,213,000 WILLOW GROVE (Pennsylvania) 1,600,000 6,643,000 18,340,000 WILLOW LAWN (Virginia) 3,192,000 7,723,000 44,401,000 WYNNEWOOD (Pennsylvania) 8,055,000 13,759,000 9,594,000 LAND FOR DEVELOPMENT WOODMONT EAST 5,804,000 552,000 4900 BETHESDA 833,000 - --------------------------------------------------------------------------------------------------------------------- TOTALS $221,573,000 $379,026,000 $679,762,000 $394,851,000 ============ ============ ============ ============ <CAPTION> COLUMN E COLUMN F ------------------------------------------------------------------------------------- Gross amount at which carried at close of period Accumulated Building and Depreciation and Land Improvements Total Amortization ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NORTH LAKE COMMONS (Illinois) 2,529,000 9,052,000 11,581,000 968,000 OLD KEENE MILL (Virginia) 638,000 3,889,000 4,527,000 2,129,000 OLD TOWN CENTER (California) 3,420,000 5,035,000 8,455,000 5,000 PAN AM SHOPPING CENTER (Virginia) 8,694,000 15,410,000 24,104,000 3,023,000 PARK & SHOP (District of Columbia) 4,840,000 6,765,000 11,605,000 378,000 PENINSULA (California) 20,880,000 23,288,000 44,168,000 PERRING PLAZA (Maryland) 2,800,000 20,713,000 23,513,000 6,892,000 PIKE 7 (Virginia) 9,709,000 22,799,000 32,508,000 474,000 QUEEN ANNE PLAZA (Massachusetts) 3,319,000 10,837,000 14,156,000 1,275,000 QUINCE ORCHARD PLAZA (Maryland) 2,928,000 13,484,000 16,412,000 2,534,000 ROLLINGWOOD APTS. (Maryland) 572,000 6,001,000 6,573,000 4,946,000 RUTGERS (New Jersey) 15,294,000 15,294,000 3,853,000 SAUGUS (Massachusetts) 4,383,000 8,499,000 12,882,000 244,000 SHIRLINGTON (Virginia) 9,816,000 16,707,000 26,523,000 926,000 TOWN & COUNTRY (California) 41,606,000 3,790,000 45,396,000 217,000 TROY (New Jersey) 3,126,000 16,680,000 19,806,000 6,729,000 TYSONS STATION (Virginia) 475,000 2,877,000 3,352,000 2,468,000 UPTOWN (Oregon) 10,257,000 5,846,000 16,103,000 39,000 WESTFALLS (Virginia) 559,000 2,595,000 3,154,000 2,124,000 WILDWOOD (Maryland) 9,111,000 6,179,000 15,290,000 5,014,000 WILLIAMSBURG (Virginia) 2,758,000 10,373,000 13,131,000 3,842,000 WILLOW GROVE (Pennsylvania) 1,600,000 24,983,000 26,583,000 8,353,000 WILLOW LAWN (Virginia) 7,790,000 47,526,000 55,316,000 17,714,000 WYNNEWOOD (Pennsylvania) 8,055,000 23,353,000 31,408,000 462,000 LAND FOR DEVELOPMENT WOODMONT EAST 5,804,000 552,000 6,356,000 4900 BETHESDA 833,000 833,000 - --------------------------------------------------------------------------------------------------------------------- TOTALS $381,864,000 $1,071,775,000 $1,453,639,000 $247,497,000 ============ ============== ============== ============ <CAPTION> COLUMN G COLUMN H COLUMN I - ------------- -------------------- Life on which Date depreciation in latest of Date income statements Construction Acquired is computed - ------------- -------------------- <S> <C> <C> <C> NORTH LAKE COMMONS (Illinois) 1989 04/27/94 35 years OLD KEENE MILL (Virginia) 1968 06/15/76 33 1/3 years OLD TOWN CENTER (California) 1997-1998 10/22/97 35 years PAN AM SHOPPING CENTER (Virginia) 1979 02/05/93 35 years PARK & SHOP (District of Columbia) 1930 12/01/95 35 years PENINSULA (California) 1960 12/19/97 35 years PERRING PLAZA (Maryland) 1963 10/01/85 35 years PIKE 7 (Virginia) 1968 03/31/97 35 years QUEEN ANNE PLAZA (Massachusetts) 1967 12/23/94 35 years QUINCE ORCHARD PLAZA (Maryland) 1975 04/22/93 35 years ROLLINGWOOD APTS. (Maryland) 1960 01/15/71 25 years RUTGERS (New Jersey) 1973 12/12/88 35 years SAUGUS (Massachusetts) 1976 10/01/96 35 years SHIRLINGTON (Virginia) 1940 12/21/95 35 years TOWN & COUNTRY (California) 1960-1962 03/05/97 35 years TROY (New Jersey) 1966 07/23/80 22 years TYSONS STATION (Virginia) 1954 01/17/78 17 years UPTOWN (Oregon) 1913-1959 09/26/97 35 years WESTFALLS (Virginia) 1960 10/06/72 25 years WILDWOOD (Maryland) 1958 05/05/69 33 1/3 years WILLIAMSBURG (Virginia) 1961 04/30/86 35 years WILLOW GROVE (Pennsylvania) 1953 11/20/84 35 years WILLOW LAWN (Virginia) 1957 12/05/83 35 years WYNNEWOOD (Pennsylvania) 1948 10/29/96 35 years LAND FOR DEVELOPMENT WOODMONT EAST 06/03/97 4900 BETHESDA 07/16/97 - ---------------------------------- TOTALS </TABLE> F-26
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED THREE YEARS ENDED DECEMBER 31, 1997 RECONCILIATION OF TOTAL COST ----------------------------------- <TABLE> <S> <C> Balance, January 1, 1995 $ 852,722,000 Additions during period Acquisitions 123,722,000 Improvements 38,001,000 Deduction during period - disposition of property and miscellaneous retirements (4,763,000) ---------- Balance, December 31, 1995 1,009,682,000 Additions during period Acquisitions 105,616,000 Improvements 42,257,000 Deduction during period - disposition of property and miscellaneous retirements (9,690,000) ---------- Balance, December 31, 1996 1,147,865,000 Additions during period Acquisitions 275,207,000 Improvements 59,969,000 Deduction during period - disposition of property and miscellaneous retirements (29,402,000) ----------- Balance, December 31, 1997 $1,453,639,000 -------------- </TABLE> (A) For Federal tax purposes, the aggregate cost basis is approximately $1,295,694.000 as of December 31, 1997. F- 27
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION-CONTINUED THREE YEARS ENDED DECEMBER 31, 1997 RECONCILIATION OF ACCUMULATED DEPRECIATION AND AMORTIZATION ------------------------------------------------------------------- <TABLE> <S> <C> Balance, January 1, 1995 $160,636,000 Additions during period Depreciation and amortization expense 31,550,000 Deductions during period - disposition of property and miscellaneous retirements (1,391,000) ------------- Balance, December 31, 1995 190,795,000 Additions during period Depreciation and amortization expense 34,803,000 Deductions during period - disposition of property and miscellaneous retirements (2,045,000) ------------- Balance, December 31, 1996 223,553,000 Additions during period Depreciation and amortization expense 38,053,000 Deductions during period - disposition of property and miscellaneous retirements (14,109,000) ------------- Balance, December 31, 1997 $247,497,000 ============= </TABLE> F-28
FEDERAL REALTY INVESTMENT TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE Year Ended December 31, 1997 <TABLE> <CAPTION> Column A Column B Column C Column D Column E Column F Column G - ------------------- --------------- --------------- ------------------ ----------- ------------ ------------ Carrying Periodic Payment Face Amount Amount of Description of Lien Interest Rate Maturity Date Terms Prior Liens of Mortgages Mortgages (1) - ------------------- --------------- --------------- ------------------ ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Leasehold mortgage 10% December 2003 Interest only --- 10,000,000 10,000,000 -2 on shopping monthly; $10,000,000 center in New Jersey balloon payment December 2003 Mortgage on 10% January 1999 Interest only --- 4,020,000 3,208,000 -3 shopping center monthly; balloon in New Jersey payment January 1999 Mortgage on retail Greater of prime plus December 1997 Interest only 2,033,000 2,033,000 buildings in Philadelphia 2% or 10% monthly; balloon payment December 1997 Mortgage on retail buildings in Philadelphia 5% December 1997 Interest only monthly; 950,000 954,000 balloon payment due Dec-97 Mortgage on shopping center in Pennsylvania 8% June 1998 Monthly payment of 8,759,000 8,581,000 principal and interest; balloon payment of $8.5 million June 1998 Mortgage on shopping center in Illinois none May 1999 Balloon at maturity 175,000 175,000 Mortgage on retail 10% plus participation May 2021 Interest only; balloon 9,250,000 9,250,000 buildings in Philadelphia due at maturity Mortgage on land in 10% plus participation May 2007 None. Balloon and 3,883,000 4,159,000 Santa Monica, California accrued interest due at plus accrued maturity interest -------- ------------- ------------- --- $39,070,000 $38,360,000 ======== ============= ============= </TABLE> 1) For Federal tax purposes, the aggregate tax basis is approximately $38,360,000 as of December 31, 1997. No payments are delinquent on these mortgages. 2) This mortgage is extendable for up to 45 years with interest increasing to a maximum of 11%. 3) This mortgage is available for up to $4,020,000. At December 31, 1996, $3,208,000 was outstanding. F-29
FEDERAL REALTY INVESTMENT TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE-CONTINUED THREE YEARS ENDED DECEMBER 31, 1997 RECONCILIATION OF CARRYING AMOUNT --------------------------------------- <TABLE> <S> <C> Balance, January 1, 1995 $13,178,000 Additions during period Increase in existing loan 4,000 Issuance of loan 379,000 ----------- Balance, December 31, 1995 13,561,000 Additions during period Increase in existing loan 25,000 Issuance of loan 14,327,000 ----------- Balance, December 31, 1996 27,913,000 Additions during period Issuance of loans 14,072,000 Deductions during period Collection of loan (3,625,000) ----------- Balance, December 31, 1997 $38,360,000 =========== </TABLE> F-30
Report of Independent Certified Public Accountants - -------------------------------------------------- on Supplemental Information - --------------------------- Trustees and Shareholders Federal Realty Investment Trust In connection with our audit of the consolidated financial statements of Federal Realty Investment Trust referred to in our report dated February 5, 1998 which is included in this Form 10-K, we have also audited Schedules III and IV as of December 31, 1997 and for each of the three years then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP Washington, D.C. February 5, 1998 F31