SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 1996
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Commission File No. 1-7533
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FEDERAL REALTY INVESTMENT TRUST
-------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia 52-0782497
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Hampden Lane, Suite 500, Bethesda, Maryland 20814
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(Address of principal executive offices) (Zip Code)
(301) 652-3360
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(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 August 6, 1996
- ----------------------------------- -----------------------------
Common Shares of Beneficial Interest 34,135,438
This report contains 21 pages.
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
June 30, 1996
I N D E X
PART I. FINANCIAL INFORMATION PAGE NO.
Accountants' Report 4
Consolidated Balance Sheets 5
June 30, 1996 (unaudited) and
December 31, 1995 (audited)
Consolidated Statements of Operations (unaudited)
Six months ended June 30, 1996 and 1995 6
Consolidated Statements of Operations (unaudited)
Three months ended June 30, 1996 and 1995 7
Consolidated Statements
of Shareholders' Equity (unaudited)
Six months ended June 30 1996 and 1995 8
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1996 and 1995 9
Notes to Financial Statements 10-13
Management's Discussion and Analysis of 14-20
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 21
2
FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q
June 30, 1996
PART I. FINANCIAL INFORMATION
The following financial information is submitted in response to
the requirements of Form 10-Q and does not purport to be financial
statements prepared in accordance with generally accepted accounting
principles since they do not include all disclosures which might be
associated with such statements. In the opinion of management, such
information includes all adjustments, consisting only of normal
recurring accruals, necessary to a fair statement of the results for
the interim periods presented.
The balance sheet as of December 31, 1995 was audited by Grant
Thornton LLP, independent public accountants, who expressed an
unqualified opinion on it in their report dated February 9, 1996. All
other financial information presented is unaudited but has been
reviewed as of June 30, 1996 and for each of the six months ended
June 30, 1996 and 1995 by Grant Thornton LLP whose report thereon
appears on Page 4. All adjustments and disclosures proposed by them
have been reflected in the data presented.
3
Accountants' Review Report
- --------------------------
Trustees and Shareholders
Federal Realty Investment Trust
We have reviewed the accompanying consolidated balance sheet of Federal Realty
Investment Trust as of June 30, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for the six month periods ended
June 30, 1996 and 1995, and the consolidated statements of operations for the
three month periods ended June 30, 1996 and 1995. These financial statements
are the responsibility of the Trust's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
February 9, 1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1995 is
stated fairly, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Grant Thornton LLP
Washington, D.C.
August 9, 1996
4
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
June 30 December 31,
1996 1995
---------- --------------
(Unaudited)
ASSETS (in thousands)
Investments
Real estate, at cost $1,047,226 $1,009,682
Less accumulated depreciation and amortization (206,813) (190,795)
---------- ----------
840,413 818,887
Mortgage notes receivable 23,327 13,561
---------- ----------
863,740 832,448
Other Assets
Cash 6,865 10,521
Investments 536 261
Notes receivable - officers 1,191 1,011
Accounts receivable 15,699 15,091
Prepaid expenses and other assets, principally
property taxes and lease commissions 22,289 22,987
Debt issue costs (net of accumulated amortization
of $4,117,000 and $3,918,000, respectively) 3,495 3,835
---------- ----------
$ 913,815 $ 886,154
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases 131,237 131,829
Mortgages payable 89,847 90,488
Notes payable 52,503 49,980
Accrued expenses 17,998 19,048
Accounts payable 7,210 8,571
Dividends payable 13,980 13,191
Security deposits 3,208 3,083
Prepaid rents 1,138 787
Senior notes 165,000 165,000
5 1/4% Convertible subordinated debentures 75,289 75,289
Investors' interest in consolidated assets 1,240 1,420
Commitments and contingencies - -
Shareholders' equity
Common shares of beneficial interest, no par
or stated value, unlimited authorization,
issued 34,159,159 and 32,221,670 shares,
respectively 550,752 508,870
Accumulated dividends in excess of Trust net income (187,104) (172,835)
---------- ----------
363,648 336,035
Less 62,386 and 61,328 common shares in treasury - at cost, respectively,
deferred compensation and subscriptions receivable (8,483) (8,567)
---------- ----------
355,165 327,468
---------- ----------
$ 913,815 $ 886,154
========== ==========
The accompanying notes are an integral part of these statements.
5
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(see accountants' review report)
(unaudited)
Six months ended June 30,
1996 1995
--------- ---------
(In thousands, except per share data)
Revenue
Rental income $80,660 $68,647
Interest 1,919 1,893
Other income 4,763 3,376
-------- -------
87,342 73,916
Expenses
Rental 21,717 16,219
Real estate taxes 7,969 6,985
Interest 22,288 18,716
Administrative 3,822 2,817
Depreciation and amortization 18,676 16,988
-------- -------
74,472 61,725
-------- -------
Operating income before investors' share
of operations and loss on real estate to be sold 12,870 12,191
Investors' share of operations 53 170
-------- -------
Income before loss on real estate to be sold 12,923 12,361
Loss on real estate to be sold - (535)
-------- -------
Net Income $12,923 $11,826
========= ========
Weighted Average Number of Common Shares 32,666 31,691
========= =======
Earnings per share
Income before loss on real estate to be sold $0.40 $0.39
Loss on real estate to be sold 0.00 (0.02)
-------- -------
$0.40 $0.37
========= ========
The accompanying notes are an integral part of these statements.
6
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
(see accountants' review report)
(unaudited)
Three months ended June 30,
1996 1995
------ ------
(In thousands, except per share data)
Revenue
Rental income $39,913 $34,240
Interest 1,056 887
Other income 2,601 1,862
-------- -------
43,570 36,989
Expenses
Rental 9,924 8,264
Real estate taxes 4,045 3,588
Interest 11,139 9,559
Administrative 2,136 1,390
Depreciation and amortization 9,344 8,619
-------- -------
36,588 31,420
-------- -------
Operating income before investors' share
of operations and loss on real estate to be sold
6,982 5,569
Investors' share of operations (85) 169
-------- -------
Income before loss on real estate to be sold 6,897 5,738
Loss on real estate to be sold - (535)
-------- -------
Net Income $ 6,897 $ 5,203
======== =======
Weighted Average Number of Common Shares 33,066 31,723
======== =======
Earnings per share
Income before loss on real estate to be sold
$ 0.21 $ 0.18
Loss on real estate to be sold 0.00 (0.02)
-------- --------
$ 0.21 $ 0.16
======== ========
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)
Six months ended June 30,
1996 1995
------------- ------------- ------------- -------------
(In thousands, except per share amounts) Shares Amount Shares Amount
Common Shares of Beneficial Interest
Balance, beginning of period 32,221,670 $508,870 31,669,434 $496,958
Net proceeds from sale of shares 1,818,182 39,327
Exercise of stock options 26,501 531 7,744 122
Shares issued under dividend reinvestment plan 92,806 2,024 96,754 2,024
---------- -------- ----------- --------
Balance, end of period 34,159,159 $550,752 31,773,932 $499,104
========== ======== =========== ========
Common Shares of Beneficial Interest
in Treasury, Deferred Compensation and
Subscriptions Receivable
Balance, beginning of period (500,095) (8,567) (539,188) (9,130)
Amortization of deferred compensation 30,250 482 32,875 547
Purchase of shares under share purchase plan 1,250 19
Purchase of treasury shares (1,058) (24)
Payment of (issuance of) stock option loans, net (19,834) (393) 7,028 45
--------- ------- -------- -------
Balance, end of period (489,487) (8,483) (499,285) (8,538)
========= ======= ======== =======
Allowance for Unrealized Loss on Marketable Securities
Balance, beginning of period $0 ($53)
Unrealized (loss ) recovery 0 42
----- -----
Balance, end of period $0 ($11)
===== =====
Accumulated Dividends in Excess of Trust Net Income
Balance, beginning of period ($172,835) ($144,553)
Net income 12,923 11,826
Dividends declared to shareholders (27,192) (25,035)
---------- ----------
Balance, end of period ($187,104) ($157,762)
========== ==========
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)
Six months ended June 30,
(In thousands) 1996 1995
---------- ----------
OPERATING ACTIVITIES
Net income $12,923 $11,826
Adjustments to reconcile net income to net cash
provided by operations
Depreciation and amortization 18,676 16,988
Rent abatements in lieu of leasehold improvements,
net of tenant improvements retired 216 (918)
Imputed interest and amortization of debt cost 368 356
Amortization of deferred compensation and
forgiveness of officers' notes 249 265
Loss on real estate to be sold - 535
Changes in assets and liabilities
(Increase) decrease in accounts receivable (608) 3,718
Increase in prepaid expenses and other
assets before depreciation and amortization (998) (1,569)
(Decrease) increase in operating accounts payable,
security deposits and prepaid rent (946) 1,108
Increase (decrease) in accrued expenses, net of the premium
put on the 5 1/4% convertible subordinated debentures (778) 6,179
--------- --------
Net cash provided by operating activities 29,102 38,488
INVESTING ACTIVITIES
Acquisition of real estate (19,494) (56,759)
Capital expenditures (19,183) (17,820)
Net increase in notes receivable (9,954) (168)
Net (increase) decrease in temporary investments (275) 142
--------- --------
Net cash used in investing activities (48,906) (74,605)
FINANCING ACTIVITIES
Regular payments on mortgages, capital leases, and
notes payable (1,374) (1,087)
Balloon payments of mortgages and notes payable (3,000) (23,601)
Net increase (decrease) in lines of credit 5,621 (35,380)
Issuance of senior notes, net of costs - 123,761
Dividends paid (25,099) (23,625)
Issuance of shares of beneficial interest 40,180 772
Decrease in minority interest (180) (160)
--------- --------
Net cash provided by financing activities 16,148 40,680
--------- --------
Increase (decrease) in cash (3,656) 4,563
Cash at beginning of period 10,521 3,995
--------- --------
Cash at end of period $ 6,865 $ 8,558
========= ========
The accompanying notes are an integral part of these statements.
9
Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(see accountants' review report)
(unaudited)
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the notes to financial statements included in
the Annual Report to shareholders for the year ended December 31, 1995 which
contain the Trust's accounting policies and other data.
NOTE B - DIVIDENDS PAYABLE
On June 12, 1996 the Trustees declared a cash dividend of $.41 per share,
payable July 15, 1996 to shareholders of record June 28, 1996.
NOTE C - REAL ESTATE
On February 28, 1996 the Trust purchased, for cash, two retail buildings
totalling 28,446 square feet in Winter Park, Florida for a cost of $6.8 million.
On May 6, 1996 the Trust purchased a 14,712 square foot building in
Greenwich, Connecticut, for $3.2 million in cash. On June 4, 1996 the Trust
purchased a 21,954 square foot building in Greenwich, Connecticut for $9.5
million in cash. In connection with the purchase of these two buildings, the
Trust paid $80,500 in commissions to a company that is wholly owned by the
brother of the Trust's president.
NOTE D - MORTGAGE NOTES RECEIVABLE
On April 22, 1996 the Trust made a $9.2 million convertible participating
loan to a partnership, secured by retail properties in Manayunk, Pennsylvania.
The loan bears interest at 10% plus additional interest based upon the gross
income of the secured properties. In addition, upon sale of the properties, the
Trust will share in the appreciation of the properties. From and after April
2006, which date may be extended to April 2008, the Trust has the option to
convert the loan into a partnership interest.
In 1995 the Trust issued a mortgage for up to $900,000 to a partnership
with common ownership to the partnership above. During 1996 the Trust loaned the
partnership $514,000 on this mortgage for a total outstanding of $893,000. The
loan, which is due November 1997, is secured by properties in Manayunk,
10
Pennsylvania and requires monthly interest payments at the greater of prime plus
2% or 10%.
NOTE E - NOTES PAYABLE
The Trust has $130 million of unsecured medium term revolving credit
facilities with four banks. The facilities, which bear interest at LIBOR plus
75 to 100 basis points, require fees and have covenants requiring a minimum
shareholders' equity and a maximum ratio of debt to net worth. At June 30, 1996
there was $45.7 million borrowed under these credit facilities. The maximum
drawn during the first six months of 1996 was $76.2 million. The weighted
average interest rate on borrowings for the six months ended June 30, 1996 was
6.5%.
In June 1996 the Trust repaid a $3 million note which had been issued in
connection with the purchase of Federal Plaza in 1989.
NOTE E - SHAREHOLDERS' EQUITY
On May 24, 1996 the Trust sold 1.8 million shares at $22 per share, netting
$39.3 million. The proceeds were used to repay borrowings on the Trust's
revolving credit facilities.
During the first six months of 1996, 26,501 shares were issued at prices
ranging from $18.00 a share to $20.875 a share as the result of the exercise of
stock options. The Trust accepted notes of $393,000 from certain of its
officers and employees in connection with the issuance of 19,834 of these
shares.
On February 16, 1996, 58,681 options at $21.125 per share were granted to
employees of the Trust. An option for 20,000 shares at $21 per share was granted
to an employee upon commencement of his employment.
On May 2, 1996 each of the trustees, other than the president, was awarded
2,500 options at $21.625 per share.
NOTE F - INTEREST EXPENSE
The Trust incurred interest expense totaling $22.8 million during the first
six months of 1996 and $19.1 million during the first six months of 1995, of
which $465,000 and $390,000, respectively, were capitalized. Interest paid was
$22.6 million in the first six months of 1996 and $13.0 million in the first six
months of 1995.
The ratio of earnings to fixed charges was 1.53x for the first six months
of 1996 and 1.61x for the comparable period in 1995. The ratio of funds from
operations to fixed charges was
11
2.30x for the first six months of 1996 and 2.43x for the first six months of
1995.
NOTE G - COMMITMENTS AND CONTINGENCIES
As previously reported, certain of the Trust's shopping centers have
some environmental contamination. The North Carolina Department of the
Environment, Health and Natural Resources ("DEHNR") issued a Notice of Violation
("NOV") against a former drycleaner tenant at Eastgate Shopping Center in Chapel
Hill, North Carolina concerning a spill at the shopping center. As owner of
the shopping center, the Trust was named in and received a copy of the NOV.
Estimates to remediate the spill range from $300,000 to $500,000. The Trust has
entered into an agreement with two previous owners of the shopping center to
share the costs to assess and remediate. In 1993 the Trust recorded a liability
of $120,000 as its estimated share of the clean up costs.
In 1992 contaminants at levels in excess of New Jersey cleanup standards
were identified at a shopping center in New Jersey. The Trust has retained an
environmental consultant to investigate the contamination. The Trust is also
evaluating whether it has insurance coverage for this matter. At this time, the
Trust has not determined what the range of remediation costs might be. The Trust
has also identified chlorinated solvent contamination at another property. The
contamination appears to be linked to the current and/or previous dry cleaner.
The Trust intends to look to the responsible parties for any remediation effort.
Evaluation of this situation is preliminary and it is impossible, at this time,
to estimate the range of remediation costs, if any.
The Trust reserved approximately $2 million at closing in 1993 for
environmental issues associated with Gaithersburg Square Shopping Center.
Pursuant to an indemnity agreement entered into with the seller at closing, the
Trust agreed to take certain actions with respect to identified chlorinated
solvent contamination. The seller indemnified the Trust for certain third party
claims and government requirements related to contamination at adjacent
properties.
In connection with the purchase of Bristol Shopping Center in 1995, the
Trust agreed to perform all remedial measures necessary to obtain a final letter
of compliance from the Connecticut Commissioner of Environmental Protection with
respect to certain identified soil and ground water contamination associated
with a former dry cleaning operation. The seller established an escrow account
at closing of $187,500 to cover such remedial measures and has indemnified the
Trust in connection with the identified contamination.
12
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.
At June 30, 1996 in connection with certain redevelopment projects and
tenant improvements, the Trust is contractually obligated on contracts of
approximately $7.5 million. At June 30, 1996 the Trust is also obligated under
leases with tenants to provide up to an additional $13.8 million for
improvements.
NOTE H - COMPONENTS OF RENTAL INCOME
The components of rental income for the six months ended June 30 are as
follows:
1996 1995
(in thousands)
Retail properties
Minimum rents $63,551 $53,847
Cost reimbursements 13,521 10,946
Percentage rents 2,366 2,630
Apartments 1,222 1,224
------- -------
$80,660 $68,647
======= =======
NOTE I - SUBSEQUENT EVENTS
On July 2, 1996 the Trust was granted a purchase option on land in
Bethesda, Maryland in exchange for a refundable deposit of $50,000 and a $3.6
million loan secured by the land. The loan requires monthly payments of
interest at 9% until March 31, 1997 and 9.5% thereafter. The Note is due on the
earlier of the exercise of the purchase option or March 31, 1998.
13
FEDERAL REALTY INVESTMENT TRUST
FORM 10-Q
June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Federal Realty meets its liquidity requirements through net cash provided
by operating activities, long term borrowing through debt offerings and
mortgages, medium and short term borrowing under revolving credit facilities,
and equity offerings. Because all or 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 during the first six months of 1996 generated $29.1
million, of which $25.1 million was distributed to shareholders. During the
first six months of 1995, $38.5 million was generated from operating activities,
of which $23.6 million was distributed to shareholders. Less cash was generated
from operating activities in the first six months of 1996 than the first six
months of 1995 despite the $1.1 million increase in net income in 1996 and the
$1.7 million increase in depreciation in 1996 because of $12.2 million more
being used in 1996 for other operating uses of cash than in 1995, primarily
changes in accounts receivable and accrued expenses. In 1995, $3.7 million was
generated from a decrease in accounts receivable and $6.2 million was generated
from an increase in accrued expenses, primarily interest on the senior notes,
whereas in 1996 accounts receivable increased $608,000 and accrued expenses
decreased $778,000.
During the first six months of 1996 the Trust purchased four retail
properties; in February the Trust purchased two retail buildings in Winter Park,
Florida for $6.8 million in cash, in May the Trust purchased a retail building
in Greenwich, Connecticut for $3.2 million in cash and in June the Trust
purchased another retail building in Greenwich for $9.5 million in cash. During
the first six months of 1996 another $19.2 million was spent on tenant work and
improvements to Trust properties; these improvements included: (1) $1.4 million
on the redevelopment of Brick Plaza which was begun in 1995; (2) $2.2 million to
buy out below market leases; (3) $4.5 million to begin the construction of an
additional 30,000 square feet at Congressional Plaza; and (4) $2.0 million to
begin the redevelopment and expansion of a portion of Bethesda Row.
14
During the first six months of 1996 the Trust made two mortgage loans,
secured by retail property in Manayunk, Pennsylvania; a $9.2 million 25 year
loan which bears base interest at 10% and which is convertible into a
partnership interest in the secured properties and a $514,000 loan due November
1997 which bears interest at the greater of prime plus 2% or 10%.
In June 1996 the Trust repaid a $3 million note which had been issued in
connection with the purchase of Federal Plaza in 1989.
These expenditures were primarily financed with borrowings under revolving
credit facilities. The Trust has available $130.0 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 June 30, 1996 the Trust had $45.7 million borrowed under these
facilities. The maximum amount borrowed under these facilities during the first
six months of 1996 was $76.2 million. Amounts advanced under these facilities
bear interest at LIBOR plus 75 - 100 basis points; the weighted average interest
rate on borrowings during the six months ended June 30, 1996 was 6.5%.
On May 24, 1996 the Trust sold 1.8 million shares at $22 per share, netting
$39.3 million. These proceeds were used to repay borrowings on the Trust's
revolving credit facilities.
The Trust is contractually obligated on contracts of approximately $7.5
million for redevelopment and tenant improvements and is committed under leases
for up to an additional $13.8 million in tenant work. In addition to these
committed amounts, the Trust has budgeted an additional $7 million for
the remainder of 1996 for improvements to its properties. These committed and
budgeted improvements include a 30,000 square foot expansion at Congressional
Plaza, a renovation and expansion of a portion of Bethesda Row, a reconstruction
of a portion of Crossroads Shopping Center, and a retenanting and renovation of
a portion of Troy Shopping Center. These expenditures will be funded with the
revolving credit facilities pending their long term financing with either equity
or debt.
The Trust continues to seek to acquire existing retail properties. In
addition, the Trust is searching for sites in its core markets to permit the
Trust to build new shopping centers.
The Trust will need additional capital in order to fund these acquisitions,
expansions and refinancings. Sources of this funding may be proceeds from the
sale of existing properties, additional debt and additional equity. The timing
and choice
15
between additional debt or equity financing will depend upon many factors,
including the market price for the Trust's shares, interest rates and the ratio
of debt to net worth. The Trust believes that it will be able to raise this
capital as needed, based on its past success in so doing.
CONTINGENCIES
As previously reported, certain of the Trust's shopping centers have some
environmental contamination. The North Carolina Department of the Environment,
Health and Natural Resources ("DEHNR") issued a Notice of Violation ("NOV")
against a former drycleaner tenant at Eastgate Shopping Center in Chapel Hill,
North Carolina concerning a spill at the shopping center. As owner of the
shopping center, the Trust was named in and received a copy of the NOV.
Estimates to remediate the spill range from $300,000 to $500,000. The Trust has
entered into an agreement with two previous owners of the shopping center to
share the costs to assess and remediate. In 1993 the Trust recorded a liability
of $120,000 as its estimated share of the clean up costs.
In 1992 contaminants at levels in excess of New Jersey cleanup standards
were identified at a shopping center in New Jersey. The Trust has retained an
environmental consultant to investigate the contamination. The Trust is also
evaluating whether it has insurance coverage for this matter. At this time, the
Trust has not determined what the range of remediation costs might be. The Trust
has also identified chlorinated solvent contamination at another property. The
contamination appears to be linked to the current and/or previous dry cleaner.
The Trust intends to look to the responsible parties for any remediation effort.
Evaluation of this situation is preliminary and it is impossible, at this time,
to estimate the range of remediation costs, if any.
The Trust reserved approximately $2 million at closing in 1993 for
environmental issues associated with Gaithersburg Square Shopping Center.
Pursuant to an indemnity agreement entered into with the seller at closing, the
Trust agreed to take certain actions with respect to identified chlorinated
solvent contamination. The seller indemnified the Trust of certain third party
claims and government requirements related to contamination at adjacent
properties.
In connection with the purchase of Bristol Shopping Center in 1995, the
Trust agreed to perform all remedial measures necessary to obtain a final letter
of compliance from the Connecticut Commissioner of Environmental Protection with
respect to certain identified soil and ground water contamination associated
with a former dry cleaning operation. The seller established an escrow account
at closing of $187,500 to cover
16
such remedial measures and has indemnified the Trust in connection with the
identified contamination.
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.
Recently the unfavorable trends in the retail environment have led to a
number of retail bankruptcies. A further weakening of the retail environment
and additional bankruptcies could adversely impact the Trust, by increasing
vacancies and decreasing rents. In past difficult retail and real estate
environments, the Trust has been able to replace weak and bankrupt tenants with
stronger tenants; management believes that the quality of the Trust's
properties will continue to generate demand for its retail space.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The Trust has historically reported its funds from operations in addition
to its net income. Funds from operations is a supplemental measure of real
estate companies' operating performance which excludes historical cost
depreciation, since real estate values have historically risen and fallen with
market conditions rather than over time. Funds from operations is defined by The
National Association of Real Estate Investment Trusts ("NAREIT") as follows:
income before depreciation and amortization of real estate assets and before
extraordinary items and significant non-recurring events less gains on sale of
real estate. The Trust complies with this definition. Funds from operations does
not replace net income as a measure of performance or net cash provided by
operating activities as a measure of liquidity. Rather, funds from operations
has been adopted by real estate investment trusts to provide a consistent
supplemental measure of operating performance in the industry.
The reconciliation of net income to funds from operations for the six
months ended June 30 is as follows:
1996 1995
(in thousands)
Net income $12,923 $11,826
Plus: depreciation and amortization
of real estate assets 16,697 15,051
amortization of initial direct
costs of leases 1,185 1,195
loss on sale and nonrecurring
items - 535
------- -------
Funds from operations $30,805 $28,607
======= =======
17
Funds from operations increased 8% to $30.8 million for the six months
ended June 30, 1996 from $28.6 million for the six months ended June 30, 1995.
Rental income, which consists of minimum rent, percentage rent and cost
recoveries, increased 17% from $68.6 million in the first six months of 1995 to
$80.7 million in the first six months of 1996. If properties purchased and sold
in 1995 and 1996 are excluded, rental income increased 7%.
Minimum rent increased 17% from $55.1 million in the first six months of
1995 to $64.8 million in the first six months of 1996. Excluding properties
purchased and sold in 1995 and 1996, minimum rent increased 6.5%. Forty-six
percent of the increase results from rent increases at Brick Plaza, Gaithersburg
Square and Congressional Plaza, all of which have recently been renovated and
retenanted.
Cost reimbursements consist of tenant reimbursements of real estate taxes
(real estate tax recovery) and common area maintenance expenses (CAM recovery).
Cost reimbursements increased 24% from $10.9 million during the first six months
of 1995 to $13.5 million during the first six months of 1996. The increase was
due to the recent acquisitions, the partial recovery of increased CAM expenses,
primarily snow removal, and an acceleration of billing CAM capital items from
once at year end to monthly.
Other property income includes items which tend to fluctuate from period to
period, such as utility reimbursements, telephone income, merchant association
dues, lease termination fees, late fees and temporary tenant income. Other
property income increased from $3.4 million during the first six months of 1995
to $4.8 million during the first six months of 1996, primarily due to increases
in lease termination fees.
Rental expenses have increased 34% in the first six months of 1996 over the
first six months of 1995, to $21.7 million from $16.2 million. If centers
acquired and sold during 1995 and 1996 are excluded, rental expenses increased
22%, due to increased snow removal costs incurred during this winter's heavy
snowfalls and due to a loss resulting from the decision to demolish a portion of
Crossroads Shopping Center to allow for construction of new space.
Real estate taxes have increased from $7.0 million during the first six
months of 1995 to $8.0 million during the first six months of 1996; $656,000 of
the increase was due to taxes on the 1995 and 1996 acquisitions. Depreciation
and amortization in the first six months of 1996 was 10% greater than in the
first six months of 1995. Excluding the effect from the 1995 and 1996
acquisitions, depreciation and amortization increased 5%,
18
primarily due to increases attributable to Brick Plaza, Gaithersburg Square and
Congressional Plaza.
Interest expense increased from $18.7 million during the first six months
of 1995 to $22.3 million during the first six months of 1996, primarily due to
interest expense on the $165 million of senior notes issued during 1995 and due
to increased interest on the revolving credit facilities due to larger average
outstanding balances in 1996 than in 1995. The ratio of earnings to fixed
charges was 1.53x for the first six months of 1996 and 1.61x for the
comparable period in 1995. The ratio of funds from operations to fixed charges
was 2.30x for the first six months of 1996 and 2.43x for the first six months of
1995.
Administrative expenses as a percentage of total revenue have increased
from 3.8% in 1995 to 4.4% in 1996, primarily because of the write off of costs
associated with unconsummated acquisitions and developments.
As a result of the foregoing items, net income increased from $11.8 million
during the first six months of 1995 to $12.9 million during the first six months
of 1996.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Funds from operations increased 13% to $15.8 million in the second quarter
of 1996 from $14.0 million in the second quarter of 1995.
Rental income increased 17% from $34.2 million in the second quarter of
1995 to $40.0 million in 1996. If properties purchased and sold in 1995 and
1996 are excluded, rental income increased 6%. Fifty-nine percent of this
increase is attributable to Brick Plaza, Gaithersburg and Congressional Plaza,
all of which have recently been redeveloped and retenanted.
Minimum rent, a component of rental income, increased 18% from $27.9
million in the second quarter of 1995 to $32.8 million in the second quarter of
1996. If properties purchased and sold in 1995 and 1996 are excluded, minimum
rent increased 7%. Fifty-seven percent of this increase is attributable to
Brick Plaza, Gaithersburg, and Congressional Plaza.
Cost reimbursements, another component of rental income, increased 15% from
$5.3 million in the second quarter of 1995 to $6.1 million in the second quarter
of 1996. The increase is primarily due to the 1995 and 1996 acquisitions, but
also to an acceleration of billing CAM capital items from once at year end to
monthly.
19
Other property income has increased 37% from $1.9 million in the second
quarter of 1995 to $2.6 million in the second quarter of 1996, primarily due to
lease termination fees.
Rental expenses for the second quarter have increased 20% from $8.3 million
in 1995 to $9.9 million in 1996. Excluding properties purchased and sold in
1995 and 1996, rental expenses increased 10%. The major source of this increase
was the loss resulting from the decision to demolish a portion of Crossroads
Shopping Center to allow for the construction of new space.
Real estate taxes increased from the second quarter of 1995 to the second
quarter of 1996 because of the recent acquisitions and because of increased
assessments at several centers.
Interest expense increased from $9.6 million during the second quarter of
1995 to $11.1 million during the second quarter of 1996 primarily due to
increased usage of the revolving credit facilities and due to the interest on
$65 million of senior notes issued during the second and fourth quarters of
1995.
Administrative expenses have increased due to the write off of costs
related to unconsummated acquisitions and developments.
Depreciation and amortization expense was 8% greater during the second
quarter of 1996 as compared to the second quarter of 1995. Excluding the
depreciation on properties purchased and sold in 1995 and 1996, depreciation
increased 3%, primarily due to increases attributable to Brick Plaza,
Gaithersburg Square and Congressional Plaza.
In the second quarter of 1995 the Trust recorded a $535,000 loss, resulting
from the write down of North City Plaza to its fair value less costs to sell,
since it was being prepared for sale.
As a result of the foregoing items, net income increased from $5.2 million
in the second quarter of 1995 to $6.9 million in the second quarter of 1996.
20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
At the 1996 Annual Meeting of Shareholders on May 2, 1996 the Shareholders
elected four trustees to serve for the ensuing three years. Holders of 23.2
million shares voted for each of the four trustees. Holders of under 100,000
shares voted against each of the four trustees.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule.......................Edgar filing only
(B) Reports on Form 8-K
A Form 8-K, dated May 17, 1996, was filed in response to Item 7.(c)
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: August 12, 1996 Steven J. Guttman
-------------------- --------------------------
Steven J. Guttman, President
(Chief Executive Officer)
Date: August 12, 1996 Cecily A. Ward
-------------------- ---------------------------
Cecily A. Ward, Vice President
(Principal Accounting Officer)
21
5
1,000
6-MOS
DEC-31-1996
JUN-30-1996
$6,865
536
16,890
0
0
0
1,047,226
(206,813)
913,815
0
513,876
0
0
550,752
(195,587)
913,815
0
85,423
0
29,686
0
0
22,288
12,923
0
0
0
0
0
12,923
.40
0
Current assets and current liabilities are not listed since Federal
Realty does not prepare a classified balance sheet.
