SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: March 31,1999 ------------------------------------- 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 April 23, 1999 - ------------------------------------ ----------------------------- Common Shares of Beneficial Interest 40,260,090 This report, including exhibits, contains 47 pages.
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q March 31, 1999 I N D E X PART I. FINANCIAL INFORMATION PAGE NO. Accountants' Report 4 Consolidated Balance Sheets March 31, 1999 (unaudited) and December 31, 1998 (audited) 5 Consolidated Statements of Operations (unaudited) Three months ended March 31, 1999 and 1998 6 Consolidated Statements of Shareholders' Equity (unaudited) Three months ended March 31, 1999 and 1998 7 Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 1999 and 1998 8 Notes to Financial Statements 9-12 Management's Discussion and Analysis of 13-19 Financial Condition and Results of Operations PART II. OTHER INFORMATION 20 2
FEDERAL REALTY INVESTMENT TRUST S.E.C. FORM 10-Q March 31, 1999 PART I. FINANCIAL INFORMATION The following financial information is submitted in response to the requirements of Form 10-Q and does not purport to be financial statements prepared in accordance with generally accepted accounting principles since they do not include all disclosures which might be associated with such statements. In the opinion of management, such information includes all adjustments, consisting only of normal recurring accruals, necessary to a fair statement of the results for the interim periods presented. The balance sheet as of December 31, 1998 was audited by Grant Thornton LLP, independent public accountants, who expressed an unqualified opinion on it in their report dated February 8, 1999. All other financial information presented is unaudited but has been reviewed as of March 31, 1999 and for each of the three month periods ended March 31, 1999 and 1998 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 March 31, 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the three month periods ended March 31, 1999 and 1998. 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, 1998 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 8, 1999, 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, 1998 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. April 27, 1999 4
Federal Realty Investment Trust CONSOLIDATED BALANCE SHEETS (see accountants' review report) <TABLE> <CAPTION> March 31, December 31, 1999 1998 (unaudited) ------------- ------------- ASSETS (in thousands) <S> <C> <C> Investments Real estate, at cost $1,676,270 $1,642,136 Less accumulated depreciation and amortization (297,221) (286,053) --------- ----------- 1,379,049 1,356,083 Mortgage notes receivable 55,551 51,154 ---------- --------- 1,434,600 1,407,237 Other Assets Cash 12,547 17,230 Accounts and notes receivable 17,492 17,873 Prepaid expenses and other assets, principally property taxes and lease commissions 35,202 38,502 Debt issue costs 3,255 3,475 --------- ----------- $1,503,096 $1,484,317 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations under capital leases $122,311 $122,401 Mortgages payable 50,951 51,079 Notes payable 291,875 263,159 Accounts payable and accrued expenses 26,610 34,073 Dividends payable 18,999 18,972 Security deposits 5,182 5,214 Prepaid rents 4,799 3,641 Senior notes 335,000 335,000 5 1/4% Convertible subordinated debentures 75,289 75,289 Investors' interest in consolidated assets 46,788 45,542 Commitments and contingencies Shareholders' equity 7.95% Series A Cumulative Redeemable Preferred Shares, liquidation preference $25 per share, 4,000,000 shares issued in 1997 100,000 100,000 Common shares of beneficial interest, no par or stated value, unlimited authorization, issued 40,227,691 and 40,139,675 shares, respectively 709,742 707,724 Accumulated dividends in excess of Trust net income (261,317) (255,211) --------- ----------- 548,425 552,513 Less 58,419 and 59,425 common shares in treasury - at cost, respectively, deferred compensation and subscriptions receivable (23,133) (22,566) --------- ----------- 525,292 529,947 ---------- ---------- $1,503,096 $1,484,317 ========== ========== </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> Three months ended March 31, 1999 1998 --------- --------- <S> <C> <C> (In thousands, except per share data) Revenue Rental income $59,433 $52,481 Other property income 2,272 2,102 Interest income 1,878 1,594 ------- ------- 63,583 56,177 Expenses Rental 13,648 11,922 Real estate taxes 6,012 5,472 Interest 15,133 12,693 Administrative 2,254 1,841 Depreciation and amortization 12,281 10,769 ------- ------- 49,328 42,697 ------- ------- Operating income before investors' share of operations 14,255 13,480 Investors' share of operations (701) (786) ------- ------- Net Income $13,554 $12,694 Dividends on preferred stock (1,988) (1,988) -------- ------- Net income available for common shareholders $11,566 $10,706 ======== ======= Earnings per common share, basic $0.29 $0.27 ======= ======== Weighted average number of common shares, basic 39,435 38,949 ======= ======== Earnings per common share, diluted $0.29 $0.27 ======= ======== Weighted average number of common shares, diluted 40,545 39,870 ======= ======== </TABLE> The accompanying notes are an integral part of these statements. 6
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (see accountants' review report) (unaudited) <TABLE> <CAPTION> Three months ended March 31, 1999 1998 ----------- ---------- ------------ --------- (In thousands, except per share amounts) Shares Amount Shares Amount <S> <C> <C> <C> <C> Common Shares of Beneficial Interest Balance, beginning of period 40,139,675 $707,724 39,200,201 $684,823 Exercise of stock options - - 95,365 2,051 Shares issued under dividend reinvestment plan 37,362 873 39,803 1,003 Performance and Restricted Shares granted, net of retirements 50,654 1,145 514,055 13,369 ----------- --------- ---------- -------- Balance, end of period 40,227,691 $709,742 39,849,424 $701,246 =========== ======== ========== ========= Common Shares of Beneficial Interest in Treasury, Deferred Compensation and Subscriptions Receivable Balance, beginning of period (979,446) ($22,566) (457,111) ($8,304) Amortization of deferred compensation 24,833 470 36,937 679 Performance and Restricted Shares granted, net of retirements (45,654) (1,039) (539,055) (13,830) Purchase of shares under share purchase plan - - 6,250 94 Reissuance of treasury shares - - 25,000 462 Decrease (increase) in stock option loans, net 88 2 (65,069) (1,408) --------- --------- -------- --------- Balance, end of period (1,000,179) ($23,133) (993,048) ($22,307) ========== ========= ======= ======= Accumulated Dividends in Excess of Trust Net Income Balance, beginning of period $255,211 ($222,709) Net income (13,554) 12,694 Dividends declared to shareholders 19,660 (19,111) --------- -------- Balance, end of period $261,317 ($229,126) ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 7
Federal Realty Investment Trust CONSOLIDATED STATEMENTS OF CASH FLOWS (see accountants' review report) (unaudited) <TABLE> <CAPTION> Three months ended March 31, 1999 1998 -------------- -------------- (In thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $13,554 $12,694 Items not requiring cash outlays Depreciation and amortization 12,281 10,769 Other, net 497 191 Changes in assets and liabilities Decrease in accounts and notes receivable 381 1,400 Decrease (Increase) in prepaid expenses and other assets before depreciation and amortization 2,325 (3,653) Increase (decrease) in operating accounts payable, security deposits and prepaid rent (1,016) 5,037 Decrease in accrued expenses (5,719) (5,126) -------- -------- Net cash provided by operating activities 22,303 21,312 INVESTING ACTIVITIES Acquisition of real estate (15,260) (13,592) Capital expenditures (16,366) (15,251) Issuance of mortgage notes receivable, net (4,397) (2,543) -------- -------- Net cash used in investing activities (36,023) (31,386) FINANCING ACTIVITIES Borrowing (repayment) of short-term debt, net 28,852 (51,790) Issuance of senior notes, net of costs - 79,540 Issuance of common shares 343 1,093 Payments on mortgages, capital leases, and notes payable (354) (701) Dividends paid (18,995) (18,383) Decrease in minority interest (809) (838) -------- -------- Net cash provided by financing activities 9,037 8,921 -------- -------- Decrease in cash (4,683) (1,153) Cash at beginning of period 17,230 17,043 -------- -------- Cash at end of period $12,547 $15,890 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 8
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (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, 1998 which contain the Trust's accounting policies and other data. The following table sets forth the reconciliation between basic and diluted EPS: <TABLE> <CAPTION> Three months ending March 31, Numerator 1999 1998 <S> <C> <C> Net income available for common shareholders-basic $11,566 $10,706 Income attributable to operating partnership units 264 207 Net income available for common ------- ------ shareholders-diluted $11,830 $10,913 ======= ======= Denominator Denominator for basic EPS- weighted average shares 39,435 38,949 Effect of dilutive securities Stock options and awards 230 440 Operating partnership units 880 481 ------- ------- Denominator for diluted EPS 40,545 39,870 ======= ======= </TABLE> NOTE B - REAL ESTATE ASSETS AND ENCUMBRANCES Real estate acquisitions during the first quarter of 1999 were as follows (in thousands, except for square footage): Total Cash Leasable Property Cost Portion Sq. Footage - ----------------------------------------------------------------------- Galaxy Bldg, Hollywood, CA (1) $16,940 $15,260 120,000 (1)The Trust acquired a 90% economic interest in the Galaxy Building. In addition, the Trust invested $4.4 million in mortgage notes receivable with an average weighted interest rate of 10% during the first quarter of 1999. 9
NOTE C - NOTES PAYABLE At March 31, 1999 there was $163.0 million borrowed under the Trust's syndicated credit facility, which also represents the maximum drawn during the quarter. The weighted average interest rate on borrowings for the three months ended March 31, 1999 was 5.8%. The facility requires fees and has various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth. NOTE D - REORGANIZATION EXPENSES At September 30, 1998 the Trust recorded a $4.7 million charge related to a comprehensive restructuring program, the implementation of which was begun during the fourth quarter of 1998. As of March 31, 1999 cash payments of $2.3 million had been made against the reserve with most of the remaining cash expected to be paid during the remainder of 1999. NOTE E - SHAREHOLDERS' EQUITY On February 22, 1999, options for 705,000 shares at a price of $21 1/16 per share, fair value at the date of award, were awarded to officers and certain employees. The options vest evenly over three years. NOTE F - INTEREST EXPENSE The Trust incurred interest expense totaling $16.3 million during the first three months of 1999 and $14.0 million during the first three months of 1998, of which $1.2 million and $1.3 million, respectively, was capitalized in connection with development projects. Interest paid was $18.8 million in the first three months of 1999 and $16.1 million in the first three months of 1998. NOTE G - COMMITMENTS AND CONTINGENCIES The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust. Pursuant to the provisions of the partnership agreement, in the event of the exercise of put options by another partner, the Trust would be required to purchase an 18.75% interest of Congressional Plaza at its then fair market value. On January 1, 1999 the Loehmann's Plaza Limited Partnership Agreement was amended to extend the partnership to December 31, 2000 and to delete the put and call options. Under the terms of certain other partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net 10
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 other partnerships, the partners may exchange their 879,541 operating units into cash or the same number of common shares of the Trust, at the option of the Trust. The Trust has reviewed the software and hardware systems used internally to operate its business, in order to assess their ability to handle the "Year 2000 Issue" which generally refers to the inability of systems hardware and software to correctly identify two-digit references to specific calendar years, beginning with 2000. The Year 2000 Issue can affect the Trust directly by impairing its internal data-based operations or processing and indirectly by impairing its suppliers' and tenants' data-based operations or processing. The Trust has identified and evaluated the Year 2000 compliance of its internal systems; the Trust believes that the remediation of all accounting systems and other systems of high priority is complete. The Trust is endeavoring to remediate the remaining internal systems. The Trust is currently requesting information from its major banks, tenants, suppliers and manufacturers of computerized components of its real estate properties to determine their Year 2000 compliance. Based on costs spent to date and projections of future costs, costs of addressing and solving potential internal problems are not expected to have a material adverse impact on the Trust's financial condition. NOTE H - COMPONENTS OF RENTAL INCOME The components of rental income for the periods ended March 31 are as follows (in thousands): <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Retail properties Minimum rents $48,134 $42,244 Cost reimbursements 9,199 7,993 Percentage rents 1,426 1,605 Apartments 674 639 ------- ------- $59,433 $52,481 ======= ======= </TABLE> NOTE I - SEGMENT INFORMATION During the fourth quarter of 1998 the Trust completed a comprehensive restructuring program, which, among other things, divided its portfolio of properties into three geographic operating regions: Northeast, Mid-Atlantic and West. In 1999 there was a minor reorganization of the regions which moved the Illinois and Michigan properties to the Northeast region from the Western region. A summary of the Trust's operations by geographic region is presented below (in thousands): 11
<TABLE> <CAPTION> Three months ended North Mid March 31, 1999 East Atlantic West Other Total - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Rental income $ 24,858 $ 27,462 $ 7,113 $ 59,433 Other income 1,169 811 292 2,272 Rental expense (5,813) (5,934) (1,901) (13,648) Real estate tax (3,087) (2,169) (756) (6,012) -------- -------- ----------- ---------- Net operating income 17,127 20,170 4,748 42,045 Interest income 1,878 1,878 Interest expense (15,133) (15,133) Administrative expense (2,254) (2,254) Depreciation and amortization (5,438) (5,694) (918) (231) (12,281) -------- -------- ----------- ------- ---------- Income before investors' share of operations $ 11,689 $ 14,476 $ 3,830 (15,740) $ 14,255 ======== ======== =========== ======= ========== Capital expenditures $ 2,095 $ 7,437 $ 25,020 $ 34,552 ======== ======== =========== ========== Real estate assets $686,177 $684,154 $ 305,939 $1,676,270 ======== ======== =========== ========== Three months ended North Mid March 31, 1998 East Atlantic West Other Total - ------------------------------------------------------------------------------------------------- Rental income $ 22,160 $ 25,139 $ 5,182 $ 52,481 Other income 1,140 748 214 2,102 Rental expense (5,194) (5,501) (1,227) (11,922) Real estate tax (3,023) (1,935) (514) (5,472) -------- -------- ----------- ---------- Net operating income 15,083 18,451 3,655 37,189 Interest income 1,594 1,594 Interest expense (12,693) (12,693) Administrative expense (1,841) (1,841) Depreciation and amortization (4,659) (5,433) (437) (240) (10,769) -------- -------- ----------- ------- ---------- Income before investors' share of operations $ 10,424 $ 13,018 $ 3,218 (13,180) $ 13,480 ======== ======== =========== ======= ========== Capital expenditures $ 5,775 $ 6,598 $ 17,196 $ 29,569 ======== ======== =========== ========== Real estate assets $635,599 $624,028 $ 221,759 $1,481,386 ======== ======== =========== ========== </TABLE> There are no transactions between geographic areas. 12
FEDERAL REALTY INVESTMENT TRUST FORM 10-Q March 31, 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Certain statements made in this report contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Trust to be materially different from the results of operations or plans expressed or implied by such forward- looking statements. Such factors include, among others, general economic and business conditions which will affect credit-worthiness of tenants, financing availability and cost, retailing trends and rental rates; risks of real estate development and acquisitions; governmental and environmental regulations; and competition with other real estate companies and technology. Portions of this discussion include certain forward-looking statements about the Trust's and management's intentions and expectations. Although these intentions and expectations are based upon reasonable assumptions, many factors, such as general economic conditions, local and national real estate conditions, increases in interest rates and operating costs, may cause actual results to differ materially from current expectations. LIQUIDITY AND CAPITAL RESOURCES Federal Realty meets its liquidity requirements through net cash provided by operating activities, along with traditional debt and equity funding alternatives available to it. A significant portion of cash provided by operating activities is distributed to common and preferred shareholders in the form of dividends. Accordingly, capital outlays for property acquisitions, major renovation and development projects and balloon debt repayments require debt or equity funding. Net cash provided by operating activities was $22.3 million in the first quarter of 1999 and $21.3 million in the first quarter of 1998 of which $19.0 million and $18.4 million, respectively, was distributed to shareholders. Contributions from newly acquired properties and from retenanted and redeveloped properties, as more fully described below, were the primary sources of these increases. Net cash used in investing activities was $36.0 million during the first quarter of 1999 and $31.4 million during the first quarter of 1998. The Trust purchased real estate totaling $16.9 million in the first quarter of 1999 and $13.6 million in the first quarter of 13
1998, requiring cash outlays of $15.3 million and $13.6 million, respectively. During these two periods, the Trust expended an additional $16.4 million and $15.3 million, respectively, in capital improvements to its properties. The Trust invested $4.4 million during the first quarter of 1999 and $2.5 million during the first quarter of 1998 in mortgage notes receivable with an average weighted interest rate of 10%. Real estate acquisitions during the first quarter of 1999 were as follows (in thousands, except for square footage): Total Cash Leasable Property Cost Portion Sq. Footage - ------------------------------------------------------------------- Galaxy Bldg, Hollywood, CA (1) $16,940 $15,260 120,000 (1)The Trust acquired a 90% economic interest in the Galaxy Building. Approximately $9.7 million was invested during the first quarter of 1999 in predevelopment and development projects in Bethesda, Maryland; Los Gatos, California; San Antonio, Texas; and Arlington, Virginia. Furthermore, the Trust is devoting considerable time and internal resources to identify additional development opportunities. Net cash provided by financing activities, before dividend payments, was $28.0 million in the first quarter of 1999 and $27.3 million in the first quarter of 1998. The Trust utilized its unsecured line of credit to fund acquisitions and capital expenditures in 1999. At March 31, 1999 there was $163.0 million borrowed under this syndicated credit facility, which also represents the maximum drawn during the quarter. The weighted average interest rate on borrowings for the three months ended March 31, 1999 was 5.8%. The facility requires fees and has various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth. Capital requirements for the remainder of 1999 will depend on acquisition opportunities, new development efforts, improvements and redevelopments on existing properties, and tenant work and allowances. Initial funding for such projects is expected to be provided under the line of credit facility. The Trust will need additional capital in order to fund acquisitions, expansions, developments and refinancings. Sources of this funding may be additional debt, additional equity, proceeds from the sale of properties and the issuance of operating partnership units. The timing and choice of capital sources will depend on the cost and availability of that capital, among other things. The Trust believes, based on past experience, that access to the capital needed to execute its business plan will be available to it. 14
CONTINGENCIES The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust. Pursuant to the provisions of the partnership agreement, in the event of the exercise of put options by another partner, the Trust would be required to purchase an 18.75% interest of Congressional Plaza at its then fair market value. On January 1, 1999 the Loehmann's Plaza Limited Partnership Agreement was amended to extend the partnership to December 31, 2000 and to delete the put and call options. Under the terms of certain other partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net operating income. The purchase price may be paid in cash or common stock of the Trust at the election of the limited partners. If the limited partners do not redeem their interest, the Trust may choose to purchase the limited partnership interests upon the same terms. Under the terms of other partnerships, the partners may exchange their 879,541 operating units into cash or the same number of common shares of the Trust, at the option of the Trust. The Trust has reviewed the software and hardware systems used internally to operate its business, in order to assess their ability to handle the "Year 2000 Issue" which generally refers to the inability of systems hardware and software to correctly identify two-digit references to specific calendar years, beginning with 2000. The Year 2000 Issue can affect the Trust directly by impairing its internal data-based operations or processing and indirectly by impairing its suppliers' and tenants' data-based operations or processing. The Trust has identified and evaluated the Year 2000 compliance of its internal systems; the Trust believes that the remediation of all accounting systems and other systems of high priority is complete. The Trust is endeavoring to remediate the remaining internal systems. The Trust is currently requesting information from its major banks, tenants, suppliers and manufacturers of computerized components of its real estate properties to determine their Year 2000 compliance. Based on costs spent to date and projections of future costs, costs of addressing and solving potential internal problems are not expected to have a material adverse impact on the Trust's financial condition. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Net income and funds from operations have been affected by the Trust's recent acquisition, redevelopment and financing activities. 15
The Trust has historically reported its funds from operations in addition to its net income and net cash provided by operating activities. Funds from operations is a supplemental measure of real estate companies' operating performance. The National Association of Real Estate Investment Trusts ("NAREIT") defines funds from operations as follows: income available for common shareholders before depreciation and amortization of real estate assets and before extraordinary items and significant non-recurring events less gains on sale of real estate. Funds from operations does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. Rather, funds from operations has been adopted by real estate investment trusts to provide a consistent measure of operating performance in the industry. The reconciliation of net income to funds from operations for the three months ended March 31 is as follows: <TABLE> <CAPTION> 1999 1998 ------- ------- (in thousands) <S> <C> <C> Net income available for common shareholders $11,566 $10,706 Depreciation and amortization of real estate assets 11,128 9,738 Amortization of initial direct costs of leases 718 593 Income attributable to operating partnership units 264 207 Funds from operations for common ------- ------- shareholders $23,676 $21,244 ======= ======= </TABLE> Consolidated Results - -------------------- Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 13% from $52.5 million in the first quarter of 1998 to $59.4 million in the first quarter of 1999. If properties acquired in 1999 and 1998 are excluded, rental income increased 7%, due primarily to the favorable impact of redeveloped and retenanted centers. Other property income includes items such as utility reimbursements, telephone income, merchant association dues, late fees and temporary tenant income. Other property income increased 8% from $2.1 million in 1998 to $2.3 million in 1999 due primarily to an increase in temporary tenant income, an area identified by the Trust as one with additional growth opportunity. Rental expenses increased 14% from $11.9 million in the first quarter of 1998 to $13.6 million in the first quarter of 1999. If rental expenses are adjusted for properties acquired in 1999 and 1998, rental expenses increased 9% from $11.9 million in 1998 to $13.0 million in 1999, primarily due to increased snow removal costs in 1999. 16
Real estate taxes increased 10% from the first quarter of 1998 to $6.0 million in the first quarter of 1999. If real estate taxes are adjusted for properties acquired in 1999 and 1998, real estate taxes increased 5% due primarily to increased taxes on recently redeveloped properties. Depreciation and amortization expenses increased 14% from the first quarter of 1998 to $12.3 million in the first quarter of 1999 reflecting the impact of property acquisitions and recent tenant work and property improvements. During the first quarter of 1999 the Trust incurred interest expense of $16.3 million, of which $1.2 million was capitalized, as compared to 1998's $14.0 million of which $1.3 million was capitalized. The increase in interest expense reflects the additional debt issued to fund the Trust's acquisition and capital improvement programs. The ratio of earnings to combined fixed charges and preferred dividends was 1.53x and 1.58x for the first quarter of 1999 and 1998, respectively. The ratio of earnings to fixed charges was 1.7x and 1.8x during the first quarter of 1999 and 1998, respectively. The ratio of funds from operations to combined fixed charges and preferred dividends was 2.0x for the first quarter of 1999 and 2.1x for the first quarter of 1998. Administrative expenses in the first quarter of 1999 reflect the adoption of the Emerging Issues Task Force ("EITF") Issue 97-11, which required the expensing of internal costs of acquisition activities beginning in late March 1998. Prior to this date, such costs were capitalized as a component of the basis of the acquired asset. The increase in administrative expenses from $1.8 million in the first quarter of 1998 to $2.3 million in the first quarter of 1999 is primarily due to the adoption of this EITF and to the filling of certain executive positions which were vacant during the first quarter of 1998. As a result of the foregoing items, net income increased from $12.7 million during the first quarter of 1998 to $13.6 million during the first quarter of 1999 and net income available for common shareholders increased from $10.7 million to $11.6 million. The Trust expects growth in net income and funds from operations during the remainder of 1999 both from contributions of its recent acquisitions and from contributions of its core portfolio, primarily the properties undergoing redevelopment and retenanting. However, growth of net income from the core portfolio is, in part, dependent on controlling expenses, some of which are beyond the complete control of the Trust, such as snow removal and trends in the retailing environment. The Trust currently expects that demand for its retail space should remain at levels similar to those in 1998. A weakening of the retail environment could, however, adversely impact the Trust by increasing vacancies and decreasing rents. In past weak retail and real estate environments, the Trust has been able to replace weak and bankrupt tenants with stronger tenants; management believes that due 17
to the quality of the Trust's properties there will continue to be demand for its space. Growth in net income is also dependent on interest rates and controlling administrative costs. If interest rates increase, net income and funds from operations, as well as the ultimate cost of the Trust's development projects will be negatively impacted due to the variable interest rates on the Trust's revolving credit facilities. The Trust is aggressively managing its administrative expenses through its reorganization efforts. Segment Results - --------------- During the fourth quarter of 1998 the Trust completed a comprehensive restructuring program, which, among other things, divided its portfolio of properties into three geographic operating regions: Northeast, Mid-Atlantic and West. In 1999 there was a minor reorganization of the regions which moved the Illinois and Michigan properties to the Northeast region from the Western region. Historical operating results for the three regions are as follows (in thousands): <TABLE> <CAPTION> For the three months ended March 31, 1999 1998 - ----------------------------------------------------------- <S> <C> <C> Rental income Northeast $24,858 $22,160 Mid-Atlantic 27,462 25,139 West 7,113 5,182 ------- ------- Total $59,433 $52,481 ======= ======= Net operating income Northeast $17,127 $15,083 Mid-Atlantic 20,170 18,451 West 4,748 3,655 ------- ------- $42,045 $37,189 ======= ======= </TABLE> The Northeast The Northeast region is comprised of fifty-three assets, extending from suburban Philadelphia north through New York and its suburbs into New England and west to Illinois and Michigan. When comparing the first quarter of 1999 with 1998, rental income increased 12% from $22.2 million in 1998 to $24.9 million in 1999. Excluding properties acquired since January 1, 1998, rental income increased 9%, primarily due to increases at recently redeveloped and retenanted shopping centers, such as Brick, Finley, Gratiot, Feasterville, and Wynnewood. Net operating income increased 14% from $15.1 million in 1998 to $17.1 million in 1999. Excluding properties acquired since January 1, 1998, net operating income increased 10%, primarily due to increases at the recently redeveloped and retenanted shopping 18
centers. The Mid-Atlantic - ---------------- The Mid-Atlantic region is comprised of thirty-two assets, located from Baltimore south to metropolitan Washington, D.C. and further south through Virginia, Georgia, and Florida. When comparing the first quarter of 1999 with 1998, rental income increased 9% from $25.1 million in 1998 to $27.5 million in 1999. Excluding properties acquired since January 1, 1998, rental income increased 4.5%, due in part to new anchor leases at several centers. When comparing the first quarter of 1999 with 1998, net operating income increased 9% from $18.5 million in 1998 to $20.2 million in 1999. Excluding properties acquired since January 1, 1998, net operating income increased 4.6%. The West - -------- The Western region is comprised of thirty-seven assets, located from Texas to the West Coast. When comparing the first quarter of 1999 with 1998, rental income increased 37% from $5.2 million in 1998 to $7.1 million in 1999. Excluding properties acquired since January 1, 1998, rental income increased 13%, primarily due to increases from recently redeveloped properties in the Los Angeles, California area. When comparing the first quarter of 1999 with 1998, net operating income increased 30% from $3.7 million in 1998 to $4.7 million in 1999. Excluding properties acquired since January 1, 1998, net operating income increased 6%, primarily due to increases from the recently redeveloped properties in the Los Angeles area. 19
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (A) Exhibits pp. 22-47 (10)(i) Severance Agreement between Federal Realty Investment Trust and Donald C. Wood, dated February 22, 1999. (ii) Executive Agreement between Federal Realty Investment Trust and Donald C. Wood, dated February 22, 1999. (27) Financial Data Schedules Edgar filing only (B) Reports on Form 8-K A Form 8-K, dated December 31, 1998, was filed on February 11, 1999 in response to Item 5. 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) April 28, 1999 Steven J. Guttman ----------------- Steven J. Guttman, President (Chief Executive Officer) April 28, 1999 Cecily A. Ward -------------- Cecily A. Ward, Controller (Principal Accounting Officer) 20