SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: September 30, 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 20852-4041 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (301) 998-8100 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 24, 1997 - -------------------------------------------------------------------------------- Common Shares of Beneficial Interest 39,133,115 This report contains 54 pages, including exhibits.
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q September 30, 1997 I N D E X <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PAGE NO. <S> <C> <C> Accountants' Report 4 Consolidated Balance Sheets 5 September 30, 1997 (unaudited) and December 31, 1996 (audited) Consolidated Statements of Operations (unaudited) 6 Nine months ended September 30, 1997 and 1996 Consolidated Statements of Operations (unaudited) 7 Three months ended September 30, 1997 and 1996 Consolidated Statements 8 of Shareholders' Equity (unaudited) Nine months ended September 30, 1997 and 1996 Consolidated Statements of Cash Flows (unaudited) 9 Nine months ended September 30, 1997 and 1996 Notes to Financial Statements 10-15 Management's Discussion and Analysis of 16-25 Financial Condition and Results of Operations PART II. OTHER INFORMATION 26 </TABLE> 2
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q September 30, 1997 PART I. FINANCIAL INFORMATION The following financial information is submitted in response to the requirements of Form 10-Q and does not purport to be financial statements prepared in accordance with generally accepted accounting principles since they do not include all disclosures which might be associated with such statements. In the opinion of management, such information includes all adjustments, consisting only of normal recurring accruals, necessary to a fair statement of the results for the interim periods presented. The balance sheet as of December 31, 1996 was audited by Grant Thornton LLP, independent public accountants, who expressed an unqualified opinion on it in their report dated February 5, 1997. All other financial information presented is unaudited but has been reviewed as of September 30, 1997 and for each of the nine month periods ended September 30, 1997 and 1996 by Grant Thornton LLP whose report thereon appears on Page 4. All adjustments and disclosures proposed by them have been reflected in the data presented. 3
Accountants' Review Report - -------------------------- Trustees and Shareholders Federal Realty Investment Trust We have reviewed the accompanying consolidated balance sheet of Federal Realty Investment Trust as of September 30, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the nine month periods ended September 30, 1997 and 1996, and the consolidated statements of operations for the three month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 5, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996 is stated fairly, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Grant Thornton LLP Washington, D.C. October 28, 1997 4
Federal Realty Investment Trust CONSOLIDATED BALANCE SHEETS (see accountants' review report) <TABLE> <CAPTION> September 30, December 31, 1997 1996 (unaudited) ----------------- ----------------- <S> <C> <C> ASSETS (in thousands) Investments Real estate, at cost $1,299,321 $1,147,865 Less accumulated depreciation and amortization (238,815) (223,553) ----------------- ----------------- 1,060,506 924,312 Mortgage notes receivable 38,256 27,913 ----------------- ----------------- 1,098,762 952,225 Other Assets Cash 4,687 11,041 Notes receivable - officers 1,190 1,183 Accounts receivable 15,923 16,111 Prepaid expenses and other assets 32,207 51,374 Debt issue costs 3,535 3,372 ----------------- ----------------- $1,156,304 $1,035,306 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations under capital leases $ 126,153 $ 130,613 Mortgages payable 96,007 98,576 Notes payable 69,555 66,106 Accrued expenses 17,838 20,405 Accounts payable 7,104 6,783 Dividends payable 16,811 15,072 Security deposits 3,859 3,515 Prepaid rents 3,137 3,801 Senior notes 255,000 215,000 5 1/4% Convertible subordinated debentures 75,289 75,289 Investors' interest in consolidated assets 21,246 11,261 Commitments and contingencies - - Shareholders' equity Common shares of beneficial interest, no par or stated value, unlimited authorization, issued 39,167,656 and 35,948,044 shares, respectively 687,324 597,917 Accumulated dividends in excess of Trust net income (214,483) (200,700) ----------------- ----------------- 472,841 397,217 Less 62,386 common shares in treasury - at cost, deferred compensation and subscriptions receivable (8,536) (8,332) ----------------- ----------------- 464,305 388,885 ----------------- ----------------- $1,156,304 $1,035,306 ================= ================= </TABLE> The accompanying notes are an integral part of these statements. 5
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, 1997 1996 -------------- -------------- (In thousands, except per share data) <S> <C> <C> Revenue Rental income $137,090 $121,555 Interest 4,660 3,148 Other income 7,512 6,976 -------------- -------------- 149,262 131,679 Expenses Rental 31,196 30,510 Real estate taxes 14,402 12,111 Interest 35,952 33,559 Administrative 6,562 6,074 Depreciation and amortization 30,853 28,125 -------------- -------------- 118,965 110,379 -------------- -------------- Operating income before investors' share of operations and gain on sale of real estate 30,297 21,300 Investors' share of operations (862) (254) -------------- -------------- Income before gain on sale of real estate 29,435 21,046 Gain on sale of real estate 6,375 - -------------- -------------- Net Income $ 35,810 $ 21,046 ============== ============== Weighted Average Number of Common Shares 38,838 33,193 ============== ============== Earnings per share Income before gain on sale of real estate $0.76 $0.63 Gain on sale of real estate 0.16 - -------------- -------------- $0.92 $0.63 ============== ============== </TABLE> The accompanying notes are an integral part of these statements. 6
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF OPERATIONS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Three months ended September 30, 1997 1996 ----------- ---------- <S> <C> <C> (In thousands, except per share data) Revenue Rental income $46,109 $40,895 Interest 1,712 1,229 Other income 1,992 2,213 ----------- ---------- 49,813 44,337 Expenses Rental 10,191 8,793 Real estate taxes 4,936 4,142 Interest 11,964 11,271 Administrative 1,968 2,252 Depreciation and amortization 10,325 9,449 ----------- ---------- 39,384 35,907 ----------- ---------- Operating income before investors' share of operations and gain on sale of real estate 10,429 8,430 Investors' share of operations (281) (307) ----------- ---------- Income before gain on sale of real estate 10,148 8,123 Loss on sale of real estate (659) - ----------- ---------- Net Income $9,489 $8,123 =========== ========== Weighted Average Number of Common Shares 39,242 34,236 =========== ========== Earnings per share Income before gain on sale of real estate $0.26 $0.24 Loss on sale of real estate (0.02) - ----------- ---------- $0.24 $0.24 =========== ========== </TABLE> The accompanying notes are an integral part of these statements. 7
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, 1997 1996 ------------ ------------ ------------ ------------ (In thousands, except per share amounts) Shares Amount Shares Amount <S> <C> <C> <C> <C> Common Shares of Beneficial Interest Balance, beginning of period 35,948,044 $ 597,917 32,221,670 $ 508,870 Net proceeds from sale of shares 3,000,000 83,925 1,818,182 $ 39,327 Exercise of stock options 71,184 1,499 31,501 635 Shares issued under dividend reinvestment plan 116,428 3,112 139,927 3,080 Shares granted under bonus plan 32,000 871 - - ------------ ------------ ------------ ------------ Balance, end of period 39,167,656 $ 687,324 34,211,280 $ 551,912 ============ ============ ============ ============ Common Shares of Beneficial Interest in Treasury, Deferred Compensation and Subscriptions Receivable Balance, beginning of period (480,948) ($8,332) (500,095) ($8,567) Amortization of deferred compensation 30,125 480 30,250 482 Deferred compensation under bonus plan (22,000) (621) Purchase of shares under share purchase plan 16,753 236 1,250 19 Purchase of treasury shares - - (1,058) (24) Increase in stock option loans, net of repayments (14,166) (299) (20,667) (410) ------------ ------------ ------------ ------------ Balance, end of period (470,236) ($8,536) (490,320) ($8,500) ============ ============ ============ ============ Accumulated Dividends in Excess of Trust Net Income Balance, beginning of period ($200,700) ($172,835) Net income 35,810 21,046 Dividends declared to shareholders (49,593) (41,535) ------------ ------------ Balance, end of period ($214,483) ($193,324) ============ ============ </TABLE> The accompanying notes are an integral part of these statements. 8
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF CASH FLOWS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Nine months ended September 30, (In thousands) 1997 1996 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES Net income $35,810 $21,046 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 30,853 28,125 Rent abatements in lieu of leasehold improvements, net of tenant improvements retired (815) 200 Imputed interest and amortization of debt cost 496 531 Amortization of deferred compensation, forgiveness of officers' notes and other non cash items 857 477 Gain on sale of real estate (6,375) - Changes in assets and liabilities Decrease (increase) in accounts receivable 188 (636) Increase in prepaid expenses and other assets before depreciation and amortization (9,769) (8,094) Increase (decrease) in operating accounts payable, security deposits and prepaid rent (535) 1,964 Decrease in accrued expenses (2,556) (1,165) ------------- ------------- Net cash provided by operating activities 48,154 42,448 INVESTING ACTIVITIES Acquisition of real estate (126,349) (19,494) Capital expenditures (33,206) (29,638) Proceeds from sale of real estate 9,364 - Application of deposit on real estate 23,447 - Net increase in notes receivable (10,350) (13,602) ------------- ------------- Net cash used in investing activities (137,094) (62,734) FINANCING ACTIVITIES Regular payments on mortgages, capital leases, and notes payable (1,593) (2,045) Balloon payment on note and mortgage payable (1,500) (3,000) Borrowing (repayment) of short-term debt, net 5,886 (27,970) Issuance of senior notes, net of costs 39,750 49,751 Dividends paid (45,909) (38,411) Issuance of shares of beneficial interest 86,436 40,551 Increase in minority interest (484) (40) ------------- ------------- Net cash provided by financing activities 82,586 18,836 ------------- ------------- Decrease in cash (6,354) (1,450) Cash at beginning of period 11,041 10,521 ------------- ------------- Cash at end of period $ 4,687 $ 9,071 ============= ============= </TABLE> The accompanying notes are an integral part of these statements. 9
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (see accountants' review report) (unaudited) NOTE A - ACCOUNTING POLICIES AND OTHER DATA Reference should be made to the notes to financial statements included in the Annual Report to shareholders for the year ended December 31, 1996 which contain the Trust's accounting policies and other data. The Financial Accounting Standards Board has issued SFAS 128, "Earnings Per Share" which will be effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 requires that public companies present basic and diluted earnings per share, which are computed differently than the currently used primary and fully diluted earnings per share. The most significant difference in the computation for the Trust is the exclusion of the effect of dilutive stock options from the computation of basic earnings per share. Since the effect of dilutive stock options is less than half a cent, basic and diluted earnings per share are essentially equal to each other and to the primary earnings per share as currently presented. NOTE B - DIVIDENDS PAYABLE On September 11, 1997 the Trustees declared a cash dividend of $.43 per common share, payable October 15, 1997 to shareholders of record September 25, 1997. NOTE C - REAL ESTATE On January 6, 1997 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, in January 1997 the Trust lent the seller $8.8 million at 8% interest 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 10
used for future development. In connection with the purchase, a $3.6 million mortgage which the Trust had made to the seller 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. The Trust made seven main street retail and two shopping center acquisitions during the first nine months of 1997. 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 Street Retail West II, a partnership which was 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 costs to the partnerships with the other 10% being contributed by the minority interests. On August 28, 1997 the Trust, through a limited liability company of which the Trust owns 90%, acquired three buildings in Forest Hills, New York for approximately $12.6 million. The Trust contributed 90% of the acquisition cost in cash. A commission of $222,500 was paid to a company owned by a brother of the Trust's president in connection with this acquisition. On September 26, 1997 the Trust purchased a 72,006 square foot main street retail project, known as "Uptown" which also has a 47 unit residential component in Portland, Oregon for approximately $15.7 million. On March 5, 1997 the Trust, through a Limited Liability Company ("the LLC") 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. The other member of the LLC 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. 11
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. The cash from these transactions was deposited with an escrow agent to be used for future acquisitions, in order to structure the sales as tax free exchanges for tax purposes. The funds were used in the acquisition of the two plots of land in Bethesda, Maryland described above and of Uptown 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. NOTE D - MORTGAGE NOTES RECEIVABLE On April 17, 1997 the Trust loaned the minority partners in Street Retail West II $3.9 million. The loan is secured by property in Santa Monica, earns interest at 10% and participates in certain revenues and appreciation of the property. NOTE E - OTHER ASSETS 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. NOTE F - MORTGAGES AND NOTES PAYABLE On September 30, 1997 the Trust paid the $1.5 million liability on Northeast Shopping Center which had been classified as a mortgage note payable. The Trust has $135 million of unsecured medium term revolving credit facilities with four banks. The facilities, which bear interest at LIBOR plus 75 basis points, require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. At September 30, 1997 there was $65.3 million borrowed under these credit facilities. The maximum drawn during the first nine months of 1997 was $93.1 million. The weighted average interest rate on borrowings for the nine months ended September 30, 1997 was 6.4%. A $2.5 million note issued in connection with a lease at Barracks Road was retired during the first six months of 1997. 12
NOTE G - SENIOR NOTES 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. NOTE H - SHAREHOLDERS' EQUITY On February 4, 1997 the Trust sold 3 million common shares to an institutional investor for $28 per share, netting $83.9 million. During the first six months of 1997, 66,468 common shares were issued at prices ranging from $20.50 a share to $24.125 a share from the exercise of stock options. The Trust accepted notes of $264,000 from certain of its officers and employees in connection with the issuance of 12,500 of these shares and a note for $41,000 was repaid. On January 31, 1997, 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 shares were granted to an officer. During the first nine months of 1997, 1.5 million options at prices ranging from $24.9375 per share to $27.125 per share were granted to certain officers, employees, affiliates and consultants to the Trust. NOTE I - INTEREST EXPENSE The Trust incurred interest expense totaling $38.1 million during the first nine months of 1997 and $34.2 million during the first nine months of 1996, of which $2.1 million and $690,000, respectively, were capitalized. Interest paid was $38.6 million in the first nine months of 1997 and $33.4 million in the first nine months of 1996. NOTE J - COMMITMENTS AND CONTINGENCIES On October 1, 1997 the Trust entered into an agreement with a third party to acquire an interest in an 147 acre property in Queens, New York. Upon the purchase, the Trust will take title to a portion of the retail component of the property and will control the remaining retail component with the other party controlling the residential component. In connection with this transaction, the Trust made a $3.8 million nonrefundable deposit. Environmental contamination exists at the site and further 13
investigation concerning the extent of contamination and likely remedial costs is required. 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. At this time, the Trust has not determined what the range of remediation costs might be, but does not believe that the costs will 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. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the other partners, the Trust would be required to purchase the 99% limited partnership interest at Loehmann's Plaza at its then fair market value and a 22.5% 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 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. At September 30, 1997 in connection with certain redevelopment projects and tenant improvements, the Trust is contractually obligated on contracts of approximately $6.9 million. At September 30, 1997 the Trust is also obligated under leases with tenants to provide up to an additional $4.9 million for improvements. 14
NOTE K - COMPONENTS OF RENTAL INCOME The components of rental income for the nine months ended September 30 are as follows: <TABLE> <CAPTION> 1997 1996 (in thousands) <S> <C> <C> Retail properties Minimum rents $108,403 $ 95,899 Cost reimbursements 23,750 20,876 Percentage rents 3,073 2,942 Apartments 1,864 1,838 -------- -------- $137,090 $121,555 ======== ======== </TABLE> NOTE L - SUBSEQUENT EVENTS 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. 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. The net proceeds of $96.8 million were used primarily to repay debt on the Trust's revolving credit facilities. Dividends on the Preferred Shares will be payable quarterly in arrears on the last day of January, April, July and October. On October 6, 1997 the Trust declared a prorated quarterly cash dividend of $.13802 per preferred share, payable October 31, 1997 to shareholders of record on October 15, 1997. On October 22, 1997 a Limited Liability Company ("Old Town LLC") organized by the Trust acquired the Old Town Center in Los Gatos, California for approximately $6.2 million in cash. The property is currently being redeveloped. The Trust contributed all but $400,000 of the purchase price to the Old Town LLC and will contribute all amounts necessary to fund the redevelopment. The minority partners have an interest in the profits of the property after the Trust receives a stated return on its deemed investment in the property. On October 23, 1997 the Trust purchased a mixed use retail and office building in San Francisco for $20.5 million in cash. 15
FEDERAL REALTY INVESTMENT TRUST FORM 10-Q September 30, 1997 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. Net cash provided by operating activities increased from $42.4 million in the first nine months of 1996 to $48.1 million in the comparable period of 1997. The $5.7 million increase resulted primarily from the positive cash effects of an $8.4 million increase in income before gain on sale of real estate and a $2.7 million increase in depreciation and amortization offset by a $4.7 million increase in cash used for operating activities such as accounts receivable, prepaid expenses, accounts payable and accrued expenses. Dividends paid in cash were $45.9 million in 1997 and $38.4 million in 1996. During the first nine months of 1997, the Trust invested $126.3 million of cash to acquire real estate assets, $33.2 million to improve its properties and $13.7 million in mortgage notes receivable. On January 6, 1997 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, in January 1997 the Trust lent the seller $8.8 million at 8% interest 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 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 16
order to allow future expansion of the Trust's Bethesda Row property. The Trust made seven main street retail and two shopping centers acquisitions during the first nine months of 1997. 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, Street Retail West II, a partnership which was 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 partnership agreements, the Trust contributed 90% of the cost of these buildings to the partnerships with the other 10% being contributed by the minority interests. Also, on April 17, 1997 the Trust loaned the minority partners in Street Retail West II $3.9 million. The loan is secured by property in Santa Monica, earns interest at 10% and participates in certain revenues and appreciation of the property. On August 28, 1997 the Trust, through a limited liability company of which the Trust owns 90%, acquired three buildings in Forest Hills, New York for approximately $12.6 million. The Trust contributed 90% of the acquisition cost in cash. A commission of $222,500 was paid to a company owned by a brother of the Trust's president in connection with this acquisition. On September 26, 1997 the Trust purchased a 72,006 square foot main street retail project, known as "Uptown" which also has a 47 unit residential component in Portland, Oregon for approximately $15.7 million. On March 5, 1997 the Trust, through a Limited Liability Company ("the LLC") 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. The other member of the LLC 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. 17
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. The cash from these transactions was deposited with an escrow agent to be used for future acquisitions, in order to structure the sales as tax free exchanges for tax purposes. The funds were used in the acquisition in 1997 of the two plots of land in Bethesda, Maryland and of Uptown 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. Improvements to Trust properties during the first nine months of 1997 included $4.7 million for the second phase of the redevelopment of Brick Plaza, $7.2 million for the redevelopment of Wynnewood Shopping Center, $4.5 on the redevelopment of Troy Shopping Center, $1.4 million to begin the redevelopment of Gratiot Plaza in Roseville, Michigan and $6.5 million in tenant work. 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. On October 22, 1997 a Limited Liability Company ("Old Town LLC") organized by the Trust acquired the Old Town Center in Los Gatos, California for approximately $6.2 million in cash. The property is currently being redeveloped. The Trust contributed all but $400,000 of the purchase price to the Old Town LLC and will contribute all amounts necessary to fund the redevelopment. The minority partners have an interest in the profits of the property after the Trust receives a stated return on its deemed investment in the property. On October 23, 1997 the Trust purchased a mixed use retail and office building in San Francisco for $20.5 million in cash. The Trust has $135.0 million of unsecured medium-term revolving credit facilities with four banks. The facilities, which require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth, are used to fund acquisitions and other cash requirements until conditions are favorable for issuing equity or long term debt. At September 30, 1997 the Trust had borrowed $65.3 million under these facilities. The maximum amount borrowed under these facilities in 1997 was $93.1 million. Amounts advanced under these facilities bear interest at LIBOR plus 75 basis points; the weighted average interest rate on borrowings during the first nine months of 1997 was 6.4%. 18
On February 4, 1997 the Trust sold 3 million common shares to an institutional investor for $28 per share, netting $83.9 million. Proceeds from this offering were used primarily to repay amounts borrowed on the revolving credit facilities. On July 29, 1997 the Trust sold $40 million of 6.82% Medium Term Notes. Proceeds were used to repay amounts borrowed on the revolving credit facilities. 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. The net proceeds of $96.8 million were used primarily to repay amounts borrowed on the revolving credit facilities. The Trust is contractually obligated on contracts of approximately $6.9 million for redevelopment and tenant improvements and is committed under leases for up to an additional $4.9 million in tenant work and general improvements to its properties. These committed improvements include the completion of the renovation and retenanting of Troy Shopping Center, the continuation of the renovation and retenanting of Wynnewood Shopping Center, the renovation of Gratiot Plaza in Roseville, Michigan and the first phase of the renovation of Falls Plaza. These expenditures will be funded with the revolving credit facilities pending their long term financing with either equity or debt. The Trust plans additional acquisitions of retail properties, both shopping center and main street retail buildings, during the remainder of 1997. In addition, the Trust has identified a limited number of sites in its core markets for the development of new shopping centers. The Trust will need additional capital in order to fund these acquisitions, expansions and refinancings. Sources of this funding may be additional debt, additional equity or proceeds from the sale of existing properties. The timing and choice between additional debt or equity financing will depend upon many factors, including the market price for the Trust's shares, interest rates and the ratio of debt to net worth. The Trust believes that it will be able to raise this capital as needed, based on its past success in so doing. CONTINGENCIES On October 1, 1997 the Trust entered into an agreement with a third party to acquire an interest in an 147 acre property in Queens, New York. Upon the purchase, the Trust will take title to a portion of the retail component of the property and will control the remaining retail component with the other party controlling the residential component. In connection with this transaction, the Trust made a $3.8 million nonrefundable deposit. 19
Environmental contamination exists at the site and further investigation concerning the extent of contamination and likely remedial costs is required. 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. At this time, the Trust has not determined what the range of remediation costs might be, but does not believe that the costs will 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. Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the other partners, the Trust would be required to purchase the 99% limited partnership interest at Loehmann's Plaza at its then fair market value and a 22.5% 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 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. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Net income and funds from operations have been affected by the Trust's recent acquisition, redevelopment and financing activities. The Trust has historically reported its funds from operations in addition to its net income and net cash provided by operating activities. Funds from operations is a supplemental measure of real estate companies' operating performance which excludes historical cost depreciation, since real estate values have historically risen and fallen with market conditions rather than over time. Funds from operations is defined by The National Association of Real Estate Investment Trusts ("NAREIT") in a white paper issued during 1995, as follows: income before depreciation and amortization of real estate assets and before extraordinary items and significant non-recurring events less 20
gains on sale of real estate. The Trust complies with this definition. Funds from operations does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. Rather, funds from operations has been adopted by real estate investment trusts to provide a consistent supplemental measure of operating performance in the industry. The reconciliation of net income to funds from operations for the nine months ended September 30 is as follows: <TABLE> <CAPTION> 1997 1996 (in thousands) <S> <C> <C> Net income $35,810 $21,046 Plus: depreciation and amortization of real estate assets 27,734 25,156 amortization of initial direct costs of leases 1,693 1,777 Less: gain on sale of real estate (6,375) - ------- ------- Funds from operations $58,862 $47,979 ======= ======= </TABLE> Funds from operations increased 23% to $58.9 million in the first nine months of 1997 from $48.0 million in the first nine months of 1996. Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 13% from $121.6 million in the first nine months of 1996 to $137.1 million in the comparable period of 1997. If properties purchased and sold in 1996 and 1997 are excluded, rental income increased 4%. Minimum rent increased 13% from $97.7 million in the first nine months of 1996 to $110.3 million in the first nine months of 1997. Excluding properties purchased and sold in 1996 and 1997, minimum rent increased 4%. Cost reimbursements consist of tenant reimbursements of real estate taxes (real estate tax recovery) and common area maintenance expenses (CAM recovery). Cost reimbursements increased 14% from $20.9 million during the first nine months of 1996 to $23.8 million during the first nine months of 1997. Excluding properties purchased and sold in 1996 and 1997, cost reimbursements increased from $20.3 million to $21.5 million. Cost reimbursements have increased due to increases in recoverable expenses and due to increased recovery from properties under redevelopment in 1996 such as Congressional Plaza, Brick Plaza and Bethesda Row. Other property income includes items which tend to fluctuate from period to period, such as utility reimbursements, telephone 21
income, merchant association dues, lease termination fees, late fees and temporary tenant income. Other property income increased from $7.0 million during the first nine months of 1996 to $7.5 million during the same period of 1997. Interest income increased from $3.1 million in the first nine months of 1996 to $4.7 million in the same period of 1997 primarily because of interest on notes receivable issued in 1996 and 1997. Rental expenses increased 2% in the first nine months of 1997 from the first nine months of 1996, to $31.2 million from $30.5 million. If centers acquired and sold during 1996 and 1997 are excluded, rental expenses decreased 5%, primarily due to decreased snow removal costs on the east coast in 1997 as compared to 1996 and due to lower bad debt expense. Real estate taxes have increased from $12.1 million during the first nine months of 1996 to $14.4 million during the first nine months of 1997, primarily due to taxes on the 1996 and 1997 acquisitions. Depreciation and amortization in the first nine months of 1997 was 10% greater than in the first nine months of 1996. Excluding the effect from the 1996 and 1997 acquisitions, depreciation and amortization increased 5% due to depreciation on recent tenant work and property improvements. Interest expense increased from $33.6 million during the first nine months of 1996 to $36.0 million during the first nine months of 1997, primarily due to interest expense on the debt issued in August 1996 and 1997 and increased interest on greater usage of the revolving credit facilities, partially offset by an increase in interest capitalized on development projects. The ratio of earnings to fixed charges was 1.70x for the first nine months of 1997 and 1.55x for the comparable period of 1996. The ratio of funds from operations to fixed charges was 2.46x for the first nine months of 1997 and 2.27x for the comparable period of 1996. Administrative expenses increased from $6.1 million during the first nine months of 1996 to $6.6 million during the first nine months of 1997, primarily due to increased personnel costs as the Trust is expanding and increased state income taxes. 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. 22
As a result of the foregoing items, net income increased from $21.0 million during the first nine months of 1996 to $35.8 million during the first nine months of 1997. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Funds from operations increased 16% from $17.2 million in the third quarter of 1996 to $20.0 million in the third quarter of 1997. Rental income of $46.1 million in the third quarter of 1997 was 13% higher than the $40.9 million in the third quarter of 1996. If properties purchased and sold in 1996 and 1997 are excluded, rental income increased 3% to $40.9 million from $39.7 million. Minimum rent, a component of rental income, increased 15% from $33.0 million in the third quarter of 1996 to $37.8 million in the third quarter of 1997. Excluding properties purchased and sold in 1996 and 1997, minimum rent increased 5.1%. Cost recoveries, another component of rental income, remained fairly constant, increasing from $7.4 million in the third quarter of 1996 to $7.5 million in the third quarter of 1997. Excluding properties purchased and sold in 1996 and 1997, cost recoveries decreased from $7.2 million in the third quarter of 1996 to $6.8 million in the third quarter of 1997. Rental expenses increased 16% from $8.8 million in the third quarter of 1996 to $10.2 million in the third quarter of 1997. Excluding properties purchased and sold in 1996 and 1997, rental expenses rose 7%. Real estate taxes increased due to the 1996 and 1997 acquisitions and due to increased assessments at several centers. Depreciation and amortization expense increased 10% from the third quarter of 1996 to the third quarter of 1997. Approximately 50% of the increase is attributable to properties purchased in 1996 and 1997 with the balance of the increase being attributable to recent renovations and additions. Interest expense increased from $11.3 million in the third quarter of 1996 to $12.0 million in the third quarter of 1997, primarily due to interest expense on the debt issued in August 1996 and 1997 and to increased usage of the lines of credit, partially offset by an increase in interest capitalized on development projects. Administrative expenses decreased from $2.3 million in the third quarter of 1996 to $2.0 million in the third quarter of 1997 primarily due to expenses related to the Trust's relocation to its new offices during the latter part of 1996. 23
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 As a result of the foregoing items, net income increased from $8.1 million during the third quarter of 1996 to $9.5 million during the third quarter of 1997. During the past few years, there have been a number of retailer consolidations. These consolidations and 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 tenants who leave or go bankrupt with stronger tenants. Management believes that due to the quality of the Trust's properties there will be continued demand for its retail space. 24
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (A) Exhibits (27) Financial Data Schedule.......................Edgar filing only (99) Federal Realty Investment Trust Amended and Restated 1993 Long-Term Incentive Plan, as amended on October 6, 1997.....................27-52 (B) Reports on Form 8-K A Form 8-K, dated July 30, 1997, was filed in response to Item 7.(c). A Form 8-K, dated August 1, 1997, was filed in response to Item 5. A Form 8-K, dated October 1, 1997, was filed in response to Item 5 and Item 7.(c). (C) Consent of Grant Thornton LLP............................53 (D) Awareness Letter of Grant Thornton LLP...................54 25
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEDERAL REALTY INVESTMENT TRUST ------------------------------- (Registrant) Date: October 29, 1997 Steven J. Guttman --------------------- ------------------------------ Steven J. Guttman, President (Chief Executive Officer) Date: October 29, 1997 Cecily A. Ward --------------------- ------------------------------- Cecily A. Ward (Principal Accounting Officer) 26