Item 1. Business ------- --------
Federal Realty Investment Trust is an owner, operator and redeveloper of retail properties. Founded in 1962 as a District of Columbia business trust of unlimited duration, the Trust is a self-administered equity real estate investment trust. The Trust consolidates the financial statements of one wholly owned subsidiary, eight partnerships and a joint venture. At December 31, 1995 the Trust owned 70 retail properties and one apartment complex.
The Trust operates in a manner intended to enable it to qualify as a real estate investment trust (REIT) under Sections 856- 860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, no provision for Federal income taxes is required.
An important part of the Trust's strategy is to acquire older, well- located properties in prime, densely populated and affluent areas and to enhance their operating performance through a program of renovation, expansion, reconfiguration and retenanting. The Trust's traditional focus has been on community and neighborhood shopping centers that are anchored by supermarkets, drug stores or high volume, value oriented retailers that provide consumer necessities. Late in 1994 the Trust expanded this strategy to include retail buildings and shopping centers in prime established main street shopping areas. The Trust continually evaluates its properties for renovation, retenanting and expansion opportunities. Similarly, the Trust regularly reviews its portfolio and from time to time considers selling certain of its properties.
The Trust's portfolio of properties has increased from 44 as of January 1, 1991 to 71 at December 31, 1995. During this five year period the Trust acquired 31 retail properties for approximately $305.3 million. Six of the acquisitions were in the Chicago, Illinois area and three were in the Boston, Massachusetts area, both of which are markets the Trust entered during the past five years. During this same period four shopping centers were sold. Also during this period the Trust spent over $145 million to renovate, expand, improve and retenant its properties. One of the retail properties acquired during the last five years was acquired by means of capital and ground leases, one was acquired for common shares of the Trust as well as the assumption of a mortgage and the remainder were acquired primarily for cash. This growth was financed through borrowing and equity offerings, since each year the Trust has distributed all or the majority of its cash provided by operating activities to its shareholders.
The Trust's 70 retail properties, consisting of 55 shopping centers and 15 main street retail buildings, are located in 13
states and the District of Columbia, primarily along the East Coast between the Boston metropolitan area and Richmond, Virginia. Nineteen of the shopping centers are located in the Washington, D.C. metropolitan area; ten are in Pennsylvania, primarily in the Philadelphia area; nine are in New Jersey; five are in Illinois; three are in Virginia; two are in Massachusetts; and there is one in each of the following states, Connecticut, Georgia, Louisiana, Michigan, New York, North Carolina and Tennessee. No single property accounts for over 10% of the Trust's revenues.
The Trust has over 1,700 tenants, ranging from sole proprietors to major national retailers; no one tenant or corporate group of tenants accounts for 5% or more of revenue. The Trust's leases with these tenants are classified as operating leases and typically are structured to include minimum rents, percentage rents based on tenants' sales volumes and reimbursement of certain operating expenses and real estate taxes.
The Trust intends to continue its strategy of acquiring older, well- located shopping centers and retail buildings and then enhancing their revenue potential through a program of renovation, retenanting and remerchandising. The Trust is also studying sites which are suitable for the development of new shopping centers. During the years ended December 31, 1995, 1994 and 1993, retail properties have contributed 96%, 95% and 94%, respectively of the Trust's total revenue.
The Trust is currently limited to investing east of the Mississippi River; to change this limitation requires Trustee approval. Investments are not required to be based on specific allocation by type of property. The extent to which the Trust might mortgage or otherwise finance investments varies with the investment involved and the economic climate.
The success of the Trust depends upon, among other factors, the trends of the economy, including interest rates, construction costs, retailing trends, income tax laws, increases or decreases in operating expenses, governmental regulations, population trends, zoning laws, legislation and the ability of the Trust to keep its properties leased at profitable levels. The Trust competes for tenants with other real estate owners and the Trust's properties account for only a small fraction of the retail space available for lease. The Trust competes for investment opportunities and debt and equity capital with individuals, partnerships, corporations, financial institutions, life insurance companies, pension funds, trust funds and other real estate investment trusts.
Investments in real property create a potential for environmental liability on the part of the current and previous owners of, or any mortgage lender on, such real property. If hazardous substances are discovered on or emanating from any property, the owner or operator of the property may be held liable for costs and liabilities relating to such hazardous substances. The Trust's current policy is to obtain an environmental study on each property it seeks to acquire. On recent acquisitions, any substances identified prior to closing
which present an immediate environmental hazard have been or are in the process of remediation. Costs related to the abatement of asbestos which increase the value of Trust properties are capitalized. Other costs are expensed. In 1995 approximately $1.0 million, of which $796,000 was capitalized abatement costs, was spent on environmental matters. The Trust has budgeted approximately $2.0 million for 1996 for environmental matters, a majority of which is projected for asbestos abatement. (See Note 6 of Notes to Consolidated Financial Statements.)
Current Developments --------------------
In 1995 the Trust purchased 20 retail properties. Finley Square Shopping Center in suburban Chicago, Illinois was purchased for approximately $18.8 million in cash; Bristol Shopping Center in Bristol, Connecticut was purchased for $19.6 million, by assuming a $11.3 million mortgage and by issuing common shares valued at $7.3 million with the balance in cash; Park & Shop Center in Washington, D.C. was purchased for $11.2 million in cash; and Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. Retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich,Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million; and a building contiguous to Bethesda Row in Bethesda, Maryland for $2.0 million. In addition, the Trust purchased a building abutting Flourtown Shopping Center, one of its existing centers, for $3.1 million.
The Trust continued its strategy of renovating, expanding and retenanting its centers in 1995, spending approximately $33.8 million. These improvements included an additional $3.8 million on the redevelopment of Congressional Plaza in Rockville, Maryland, $5.5 million to complete the redevelopment and retenanting of Gaithersburg Square in Gaithersburg, Maryland and $5.8 million for the renovation of Brick Plaza in Brick, New Jersey.
The Trust funded its 1995 acquisitions, capital improvement projects and major debt repayment requirements primarily through three issues of senior notes, totalling $165.0 million. The notes bear interest at rates ranging from 6.625% to 8.875% and mature from 2000 to 2005.
At December 31, 1995 the Trust had 195 full-time employees.
Item 2.
Item 2. Properties
Retail Properties - ----------------- The following table sets forth information concerning each retail property in which the Trust owns an equity interest or has a leasehold interest as of December 31, 1995. Except as otherwise noted, retail properties are 100% owned in fee by the Trust.
(1) Overall occupancy is expressed as a percentage of rentable square feet and includes square feet covered by leases for stores not yet opened. Economic occupancy is expressed as a percentage of rentable square feet, but only includes leases currently generating rental income.
(2) The Trust has a leasehold interest in this property.
(3) The Trust owns a 99.9% partnership interest in this center.
(4) The Trust owns a 49% equity interest in this center.
(5) The Trust owns this property subject to a ground lease.
(6) The Trust has a 1% general partnership interest and manages the partnership. A 99% interest was sold to a limited partner.
Apartments - ----------
The following table sets forth information concerning the Trust's apartment development as of December 31, 1995 which is 100% owned by the Trust in fee. This development is not subject to rent control.
Item 3.
Item 3. Legal Proceedings. ------ -----------------
None
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ------ ---------------------------------------------------
None
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder ------ ------------------------------------------------------------- Matters. -------
The number of holders of record for Federal Realty's common shares of beneficial interest at December 31, 1995 was 5,342.
For the years ended December 31, 1995 and 1994, $.43 and $.75, respectively, of dividends paid represented a return of capital.
Dividends declared per quarter during the last two fiscal years were as follows:
The Trust's common shares of beneficial interest are listed on the New York Stock Exchange.
Item 6.
Item 6. Selected Financial Data. -----------------------
In thousands, except per share data
(1) Determined in accordance with Financial Accounting Standards Board Statement No. 95.
(2) Defined as income before depreciation and amortization of real estate assets and before extraordinary items and significant nonrecurring events less gains on sale of real estate. Funds from operations differs from net cash provided by operating activities primarily because funds from operations does not include changes in operating assets and liabilities. Funds from operations is a supplemental measure of performance that does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity.
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.
Net cash provided by operating activities increased from $35.2 million in 1993 to $45.2 million in 1994 to $65.1 million in 1995. The major source of the $10.0 million increase from 1993 to 1994 was an increase in net income of $2.3 million and an increase of $4.4 million in depreciation and amortization. The $19.9 million increase from 1994 to 1995 resulted primarily from a $2.6 million increase in net income, a $5.1 million increase in depreciation and amortization and a $12.9 million increase in cash provided by changes in operating assets and liabilities. Dividends paid in cash were $38.1 million in 1993, $44.0 million in 1994 and $47.9 million in 1995.
In 1995 net cash provided by operating activities was comprised primarily of $23.1 million in net income increased by $34.9 million of depreciation and amortization and $6.1 million of cash provided by changes in operating assets and liabilities. In 1994 net cash provided by operating activities was primarily comprised of $20.5 million in net income increased by $29.8 million in depreciation and amortization and decreased by cash used for operating assets and liabilities of $6.8 million. In 1993 net cash provided by operating activities was comprised primarily of $18.1 million in net income increased by $25.4 million of depreciation and amortization and decreased by $6.4 million of cash used for operating assets and liabilities.
During the period 1993 through 1995, the Trust spent over $370 million to acquire properties and to improve its properties. These expenditures were primarily funded from the proceeds of various debt and equity transactions.
In 1995 the Trust purchased 19 retail properties. The Trust also purchased a building abutting Flourtown Shopping Center, one of its existing centers, for $3.1 million. The 302,000 square foot Finley Square Shopping Center in suburban Chicago, Illinois was purchased on April 27, 1995 for approximately $18.8 million in cash; the 284,000 square foot Bristol Shopping Center in Bristol, Connecticut was purchased on September 22, 1995 for $19.6 million, by assuming a $11.3 million mortgage and by issuing common shares valued at $7.3 million with the balance in cash; the 47,000 square foot Park & Shop Center in Washington, D.C. was purchased on December 1, 1995 for $11.2 million in cash; and on December 21, 1995 the 349,000 square foot Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. The
retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich, Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million; and a building contiguous to Bethesda Row in Bethesda, Maryland for $2.0 million.
During 1995 $33.8 million was expended on improvements to Trust properties. These improvements included $3.8 million on the redevelopment of Congressional Plaza in Rockville, Maryland, $5.5 million to complete the redevelopment and retenanting of Gaithersburg Square in Gaithersburg, Maryland and $5.8 million for the renovation of Brick Plaza in Brick, New Jersey.
During 1994 the Trust purchased four shopping centers and one retail building, Idylwood Plaza in Falls Church, Virginia, North Lake Commons in Lake Zurich, Illinois, Garden Market Shopping Center in Western Springs, Illinois, Queen Anne Plaza in Norwell, Massachusetts and the Ship's Building in Westport, Connecticut. In addition, the Trust purchased a 3.9 acre parcel of land, on which there is a supermarket, which adjoins its Bala Cynwyd Shopping Center. These properties were acquired for a total cash investment of $48.3 million and a $1.1 million note.
During 1994, $42.3 million was expended on improvements to Trust properties. These improvements included $15.5 million on the renovation and expansion of Congressional Plaza in Rockville, Maryland, $4.1 million to complete the redevelopment of Ellisburg Circle Shopping Center in Cherry Hill, New Jersey, and $3.9 million to begin the redevelopment and retenanting of Gaithersburg Square Shopping Center in Gaithersburg, Maryland.
In 1993 the Trust spent $101.8 million to acquire six shopping centers (Gaithersburg Square and Quince Orchard Shopping Centers in Gaithersburg, Maryland, Pan Am Shopping Center in Fairfax, Virginia, Crossroads Shopping Center in Highland Park, Illinois, Bala Cynwyd Shopping Center in suburban Philadelphia, Pennsylvania, and Dedham Plaza in Dedham, Massachusetts), $6.2 million in connection with the long term lease of Bethesda Row in Bethesda, Maryland, and $34.3 million in improvements to its properties.
These acquisitions and improvements, as well as debt repayment requirements, were funded through a variety of equity and debt issues. During 1995 the Trust issued $165 million of senior notes: $100.0 million at 8 7/8% interest in January netting proceeds of approximately $98.9 million; $25.0 million at 8% interest in April, netting approximately $24.9 million; and $40.0 million at 6 5/8% interest in December, netting approximately $39.6 million. In January 1995 the Trust repaid a $22.5 million mortgage which had been borrowed in 1994 and a $1.1 million note issued in connection with the purchase of Queen Anne Plaza in 1994.
In order to protect itself against the risk that the general level of interest rates for senior notes would rise before the senior notes were priced in January 1995, the Trust entered into two interest rate hedge agreements in December 1994 on a total principal
amount of $75.0 million. The cost of the agreements, which terminated on January 20, 1995, was $21,000, which is being amortized into interest expense over the life of the notes.
In January 1995 in connection with the issuance of the $100.0 million of senior notes, the Trust executed a five year interest rate swap on $25.0 million, whereby the Trust swappped fixed interest payment obligations of 8.1% for a floating rate interest payment of three month LIBOR (London Interbank Offered Rate). The floating rate during the first quarter of 1995 was 6.2%. In May 1995 the swap was terminated and the Trust sold the swap for $1.5 million, which is being amortized as a deduction to interest expense over the remaining term.
In April 1994 the Trust raised net proceeds of $61.3 million from a public offering of 2.5 million common shares of beneficial interest ("shares"). In a concurrent offering of 840,000 shares to an institutional investor, the Trust raised net proceeds of $21.7 million. In April 1994 the Trust redeemed $39.8 million principal amount of its 5 1/4% convertible subordinated debentures due 2002 at a price equal to 120% of their principal amount or $47.8 million. In November 1994 the Trust spent $4.2 million to exercise the option to purchase the land at Northeast Shopping Center, $3.4 million of which had been recorded as a capital lease obligation.
In April 1993, 2.8 million shares were issued in a public offering, netting proceeds of $72.8 million. In December 1993 another 220,000 shares were issued for $5.4 million in a private placement in connection with the long term lease of Bethesda Row. The Trust called its 8 3/4% convertible subordinated debentures and its 8.65% Senior Notes for redemption in 1993. The Trust redeemed $173,000 principal amount of the 8 3/4% debentures at a price of $1017.50 per debenture on March 15; the balance of the debentures that had been outstanding or $2.2 million were converted into shares. The senior notes were redeemed on May 14, at a price of $1010 for a total redemption price of $50.5 million. In October 1993 the Trust issued $75.0 million of 5 1/4% convertible subordinated debentures, realizing cash proceeds of approximately $73.0 million. The debentures, which mature in 2003, are convertible into shares at $36 per share.
At December 31, 1995 and 1994 the Trust had $130 million of unsecured medium term revolving credit facilities with four banks. The facilities require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. The Trust uses these facilities to fund acquisitions and other cash requirements until conditions are favorable for issuing equity or long term debt. At December 31, 1995 there was $40.1 million drawn under these facilities; the maximum amount borrowed under these facilities during 1995 was $66.8 million. Amounts advanced under these facilities bear interest at LIBOR plus 75 - 100 basis points; the weighted average interest rate on borrowings during 1995 was 6.9%. At December 31, 1994 there was $54.7 million drawn under these facilities, which was the maximum drawn during 1994. The weighted average interest rate on borrowings during 1994 was 5.6%.
At December 1993 the Trust had $70.0 million of unsecured medium term revolving credit facilities with three banks. The
maximum drawn under these facilities in 1993 was $64.1 million and at December 31, 1993, there was $24.4 million outstanding. The weighted average interest rate on borrowing during 1993 was 4.2%.
The Trust has budgeted $48.0 million for capital improvements to its properties in 1996. These improvements include: (1) $12.0 million at Congressional Plaza whose renovation has been expanded to include the construction of an additional 30,000 square feet of space; (2) $6.7 million to renovate and expand a portion of Bethesda Row; (3) $5.6 million to retenant and renovate a portion of Troy Shopping Center; and (4) $2.1 million to complete the retenanting of Brick Plaza.
The Trust's long term debt has varying maturity dates and in a number of instances includes balloon payments or other contractual provisions that could require significant repayments during a particular period. The next significant maturity is approximately $53.5 million of mortgage obligations which are due in 1998.
The Trust intends to continue to acquire existing retail properties, both shopping centers and main street retail buildings. In addition, the Trust is searching for site acquisitions 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 between additional debt or equity 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 -------------
The State of New Jersey Division of Taxation assessed the Trust $364,000 in taxes, penalty and interest for the years 1985 through 1990, since the State disallowed the dividends paid deduction in computing New Jersey taxable income. The Trust protested this assessment since the Trust believed that it was entitled to the deduction. The case was dismissed in December 1995 in favor of the Trust.
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 dry cleaner 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 cleanup 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, 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.
On September 22, 1995 the Trust purchased the Bristol Shopping Center in Bristol, Connecticut. Pursuant to an agreement executed at closing, 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.
The Trust reserved $2.25 million at closing in 1993 for environmental issues principally 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. During the third quarter of 1995 the reserve was reduced by $269,000 with a corresponding reduction in the basis of land at one shopping center since the environmental issue there was resolved.
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.
Results of Operations ---------------------
Net income and funds from operations have been affected by the Trust's recent acquisition 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 was historically defined as income before depreciation and amortization and extraordinary items less gains on sale of real estate. The National Association of Real Estate Investment Trusts (NAREIT)
issued a white paper during 1995, which has amended the definition 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 is complying with this new definition and has consequently restated funds from operations for prior periods. 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 is as follows:
The Trust's retail leases generally provide for minimum rents, with periodic increases. Most retail tenants pay a majority of on-site operating expenses. Many leases also contain a percentage rent clause which calls for additional rents based on tenant sales, so that at a given sales volume, if prices increase, so does rental income. These features in the Trust leases reduce the Trust's exposure to higher costs caused by inflation, although inflation has not been significant in recent years.
Rental income, which consists of minimum rent, percentage rent, and cost recoveries, increased 20.9% from $105.9 million in 1993 to $128.1 million in 1994 and 11.5% in 1995 to $142.8 million. If centers acquired and sold in 1993, 1994 and 1995 are excluded, rental income increased 6.1% from 1993 to 1994 and 3.6% from 1994 to 1995.
Minimum rents increased 19.4% in 1994 to $99.9 million from $83.6 million in 1993 and 14% in 1995 to $113.9 million. If centers acquired and sold in 1993, 1994 and 1995 are excluded, minimum rents increased 4.3% from 1993 to 1994 and 6.2% from 1994 to 1995. Thirty-four percent of the increase in minimum rent in 1995 was from Congressional Plaza whose occupancy has increased since its redevelopment was substantially completed in late 1994.
Cost reimbursements consist of tenant reimbursements of real estate taxes (real estate tax recovery) and common area maintenance expenses (CAM recovery). After removing the effect of properties purchased and sold during the past three years, real estate tax recovery has remained fairly constant, with the largest fluctuation
being at Congressional Plaza. Recovery was down in 1994 from 1993 as the center was vacated for renovation and recovery was up in 1995 compared to 1994 as the center was leased following the renovation. CAM recovery on the portfolio, adjusted to remove the effect of properties purchased in 1993, 1994 and 1995, was $8.4 million in 1993, $11.7 million in 1994 and $10.0 million in 1995. These fluctuations correspond to fluctuations in CAM expenses, primarily snow removal, landscaping and security which were up in 1994 as compared to 1993, but which decreased in 1995.
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. The increases from 1993 to 1995 were due in part to the acquisition of new properties and in part to the fluctuating nature of the income. Major increases in 1995 over 1994 resulted from lease termination fees, an unexpected recovery from a bankrupt tenant, merchant association dues and a commission on telephone services.
Rental expenses went from $26.5 million in 1993 to $35.8 million in 1994 to $35.1 million in 1995, which represents 23.8% of property income (rental income plus other property income) in 1993, 26.8% in 1994 and 23.3% in 1995. The components of rental expense with the greatest percentage increase in 1994 were repairs and maintenance and ground rent. Snow removal expense, a component of repairs and maintenance, increased from $910,000 in 1993 to over $2.4 million in 1994 because of new properties and because of increased expense on the core portfolio resulting from the harsh weather conditions during 1994. Ground rent increased $2.1 million in 1994 over 1993 because of the acquisition of Bethesda Row on December 31, 1993, a large part of which is ground leased. In 1995 the greatest percentage changes were decreases in repairs and maintenance and in maintenance and security payroll costs. Snow removal expense decreased to $1.3 million despite the acquisition of new properties and there has been a decrease in payroll costs as the Trust has taken measures to control these costs. If rental expenses are adjusted to remove the effect of properties purchased in 1993, 1994 and 1995, rental expenses ranged from $24.9 million in 1993 to $27.2 million in 1994 to $24.5 million in 1995. Real estate taxes have ranged from 9.3% of rental income in 1993 to 9.0% in 1994 to 9.6% in 1995. The decline in 1994 was primarily due to Congressional Plaza, which received a refund of prior year taxes in 1994.
Depreciation and amortization expenses have increased because of the recent acquisitions and also because of the depreciation on recent tenant work and property improvements.
Interest income has remained relatively constant in each of the past three years. The Trust's major sources of interest income are on its mortgage notes receivable, its notes to officers, and its available cash balances. Included in interest income in 1995 is the effect of the sale in December 1995 of the Trust's investment in Olympia and York Senior First Mortgage Notes and other real estate investment trusts, both of which were written down to market in prior years.
Interest expense increased to $39.3 million in 1995 from $31.5 million in 1994, primarily due to interest on the three issues of senior notes in 1995. Interest expense was relatively constant in 1994 and 1993, $31.5 million and $31.6 million, respectively. Decreases in interest expense in 1994 from the repayment of several mortgages, an issue of senior notes and an issue of convertible subordinated debentures was offset by increases due to an issuance of convertible subordinated debentures, the interest portion of the capital lease at Bethesda Row and increased usage of the revolving credit facilities. The ratio of earnings to fixed charges was 1.55x, 1.61X and 1.5X in 1995, 1994 and 1993, respectively. The ratio of funds from operations to fixed charges was 2.35x, 2.52x, and 2.27x in 1995, 1994 and 1993, respectively.
While administrative expenses are increasing as the Trust grows and as it seeks acquisition and development opportunities, administrative expenses as a percentage of total income have remained relatively constant, at 4.7%, 4.8% and 4.1%, in 1995, 1994 and 1993, respectively. The major components of the increase in 1995 over 1994 were in payroll and in costs related to a business combination that the Trust decided not to pursue. The major component of the increase in 1994 over 1993 was an increase in costs connected with the review and analysis of potential property acquisitions which were not purchased.
Other charges consisted of three nonrecurring items in 1994, a $758,000 write off of a mortgage note receivable and accrued interest thereon, an unrealized loss of $449,000 on an investment in common shares of another real estate investment trust and a $152,000 recovery of a legal settlement paid in 1987. During 1995 the Trust sold its investments in common shares of other real estate investment trusts.
Investors' share of operations represents the minority interest in Congressional Plaza, Loehmann's Plaza and North City Plaza. In 1995 minority net losses at Loehmann's and North City exceeded the minority net income at Congressional Plaza.
Income before loss on sale of real estate and extraordinary item increased from $16.1 million in 1993 to $20.5 million in 1994 to $23.7 million in 1995, reflecting increased revenues from the Trust's acquisitions and from improved operating results of the core portfolio.
Loss or gain on the sale of real estate is dependent on the extent and timing of sales. The Trust regularly reviews its portfolio and does from time to time sell properties. In 1995 the Trust sold North City Plaza for $1.8 million resulting in a loss on sale of $545,000.
In 1993 the Trust had a net gain of $2.0 million on the early extinguishment of debt, resulting from a gain on the extinguishment of one mortgage offset by losses on the redemption of an issue of senior notes, an issue of convertible subordinated debentures and two other mortgages.
As a result of the foregoing items, net income rose from $18.1 million in 1993 to $20.5 million in 1994 to $23.1 million in 1995.
The Trust intends to continue to acquire properties in 1996. If successful in so doing, these acquisitions should contribute to growth in rental income and expenses and, thereby, net income. The growth of the core portfolio, however, 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. Recently there have been a number of retailer bankruptcies and others are anticipated. These bankruptcies and a further weakening of the retail environment could adversely impact the Trust, by increasing vacancies and by decreasing rents. In past weak retail and real estate environments, the Trust has been able to replace weak and bankrupt tenants with stronger tenants; management believes that the quality of the Trust's properties will continue to generate demand for its retail space.
Impact of New Accounting Standards ----------------------------------
In October 1995 the Financial Accounting Standards Board (FASB) issued FASB 123, "Accounting for Stock-Based Compensation". This standard will be effective for 1996 financial statements and requires that stock based compensation be accounted for on the fair value method described in FASB 123, or on the intrinsic value based method of APB 25, whereby if options are priced at fair market value or above on the date of grant, there is no compensation expense of the options to the Trust. If APB 25 is used, proforma net income and earnings per share must be disclosed as if the fair value based method had been applied. The Trust intends to continue accounting for its employee stock option plan under APB 25 and therefore the only effect on the Trust's financial statements will be the proforma disclosure.
Item 8. Financial Statements and Supplementary Data. ---------------------------------------------------
Included in Item 14.
Item 9. Disagreements on Accounting and Financial Disclosure. ------------------------------------------------------------
None.
Part III --------
Item 10. Directors and Executive Officers of the Registrant. ---------------------------------------------------
Executive Officers of the Registrant ------------------------------------
Steven J. Guttman has been the Trust's President and Chief Executive Officer since April 1980. Mr. Guttman has been associated with the Trust since 1972, became Chief Operating Officer in 1975 and became a Managing Trustee in 1979.
Ron D. Kaplan joined the Trust in November 1992 as Vice President-Capital Markets. Mr. Kaplan was formerly a Vice President of Salomon Brothers Inc where he was responsible for capital raising and financial advisory services for public and private real estate companies. While at Salomon Brothers which he joined in 1987, he participated in two of the Trust's debt offerings.
Catherine R. Mack came to the Trust in January 1985 as General Counsel and became a Vice President in February 1986. Before joining the Trust, Ms. Mack was an Assistant United States Attorney for the District of Columbia and, prior to that, an attorney with Fried, Frank, Harris, Shriver and Jacobson in Washington, D.C. where she represented several local real estate entities. She has practiced law since 1974.
Mary Jane Morrow joined the Trust in January 1987 as Vice President-Finance and Treasurer. Before joining Federal Realty, Ms.
Morrow was a Partner with Grant Thornton LLP, the Trust's independent accountants. She was with Grant Thornton LLP for over 10 years and has extensive experience in real estate and accounting.
Hal A. Vasvari joined Federal Realty Management, Inc., the Trust's former managing agent, in August 1985 as Executive Vice President. In January 1989, Mr. Vasvari became Executive Vice President-Management of the Trust. In December 1994, Mr. Vasvari was appointed Chief Operating Officer. Prior to August 1985, he was director of leasing for Kravco Co., a developer of shopping malls and shopping centers.
Cecily A. Ward joined the Trust in April 1987 as Controller. Prior to joining the Trust, Ms. Ward, a certified public accountant, was with Grant Thornton LLP, the Trust's independent accountants.
Robert S. Wennett joined the Trust's acquisitions department in April 1986. Prior to joining the Trust, Mr. Wennett was an associate with Chemical Realty Corporation in New York where he was involved in real estate financing for corporate clients.
The schedule identifying Trustees under the caption "Election of Trustees" of the 1996 Proxy Statement is incorporated herein by reference thereto.
Item 11. Executive Compensation. -------- -----------------------
The sections entitled "Summary Compensation Table" and "Aggregated Option Exercises in 1995 and December 31, 1995 Option Values" of the 1996 Proxy Statement are incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management. -------- ---------------------------------------------------------------
The section entitled "Ownership of Shares by Trustees and Officers" of the 1996 Proxy Statement is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions. -------- -----------------------------------------------
The section entitled "Certain Transactions" of the 1996 Proxy Statement is incorporated herein by reference thereto.
Part IV -------
Item 14. Exhibits, Financial Statement Page No. -------- ----------------------------- -------- Schedules, and Reports on ------------------------- Form 8-K --------
(a) 1. Financial Statements --------------------
Report of Independent Certified Public Accountants
Consolidated Balance Sheets- December 31, 1995 and 1994
Consolidated Statements of Operations - years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements (Including Selected Quarterly Data) -
(a) 2. Financial Statement Schedules -----------------------------
Schedule III - Summary of Real Estate and Accumulated Depreciation.............F21 -
Schedule IV - Mortgage Loans on Real Estate ..................................F25 -
Report of Independent Certified Public Accountants...........................
(a) 3. Exhibits --------
(3) (i) The Trust's Third Amended and Restated Declaration of Trust dated May 24, 1984, filed with the Commission on July 5, 1984 as Exhibit 4 to the Trust's Registration Statement on Form S-2 (file No. 2-92057) is incorporated herein by reference thereto.
(ii) Bylaws of the Trust, filed with the Commission as an exhibit to the Trust's Current Report on Form 8-K dated February 20, 1985, as most recently amended and filed with the Commission as an exhibit to the Trust's Current Report on Form 8-K dated November 30, 1994, is incorporated herein by reference thereto.
(4) (i) Specimen Share of Beneficial Interest, filed with the Commission on November 23, 1982 as Exhibit 4 to the Trust's Registration Statement on Form S-2 (file No. 2-80524), is incorporated herein by reference thereto.
(ii) Indenture dated March 15, 1985, relating to the Trust's 8 3/4% Convertible Subordinated Debentures Due 2010, filed with the Commission on March 1, 1985 as Exhibit 4 (a) (2) to the Trust's Registration Statement on Form S-2 (File No. 2-96136) is incorporated herein by reference thereto.
(iii) Indenture dated April 1, 1986, relating to the Trust's 8.65% Senior Notes due 1996, filed with the commission on March 27, 1986 as exhibit 4 (a) 1 to the Trust's Registration Statement on Form S-3, (File No. 33-3934) is incorporated herein by reference thereto.
(iv) The 5 1/4% Convertible Subordinated Debenture due 2002 as described in Amendment No. 1 to Form S-3 (File No. 33-15264), filed with the Commission on August 4, 1987 is incorporated herein by reference thereto.
(v) Shareholder Rights Plan, dated April 13, 1989, filed with the Commission as an exhibit to the Trust's Current Report on Form 8-K, dated April 13, 1989, is incorporated herein by reference thereto.
(vi) Indenture dated December 13, 1993, related to the Trust's 8 7/8% Senior Notes due January 15, 2000, the Trust's 8% Notes due April 21, 2002 and the Trust's 6 5/8% Notes due 2005, filed with the commission on December 13, 1993 as exhibit 4 (a) to the Trust's Registration Statement on Form S-3, (File No. 33-51029) is incorporated herein by reference thereto.
( 9) Voting Trust Agreement..................................*
(10) (i) Consultancy Agreement with Samuel J. Gorlitz, as amended, filed with the Commission as Exhibit 10 (v) to the Trust's Annual Report on Form 10-K for the year ended
December 31, 1983, is incorporated herein by reference thereto.
(ii) The Trust's 1983 Stock Option Plan adopted May 12, 1983, filed with the Commission as Exhibit 10 (vi) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1983, is incorporated herein by reference.
(iii) Deferred Compensation Agreement with Steven J. Guttman dated December 13, 1978, filed with the Commission as Exhibit 10 (iv) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1980 is incorporated herein by reference thereto.
The following documents, filed with the Commission as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1985, are incorporated herein by reference thereto.
(iv) The Trust's 1985 Non-Qualified Stock Option Plan, adopted on September 13, 1985
The following documents, filed with the Commission as portions of Exhibit 10, to the Trust's Annual Report on Form 10-K for the year ended December 31, 1980, have been modified as noted below, and are incorporated herein by reference thereto.
(v) Consultancy Agreement with Daniel M. Lyons dated February 22, 1980, as amended (modified as of December l, 1983, to provide for an annual cost of living increase, not to exceed 10%).
The following documents filed as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1988 are incorporated herein by reference thereto:
(vi) The 1988 Share Bonus Plan.
(vii) Amendment No. 3 to Consultancy Agreement with Samuel J. Gorlitz.
The following documents filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 are incorporated herein by reference thereto;
(viii) Executive Agreement between the Trust and Steven J. Guttman, dated April 13, 1989.
(ix) Executive Agreement between the Trust and Catherine R. Mack, dated April 13, 1989.
(x) Executive Agreement between the Trust and Mary Jane Morrow, dated April 13, 1989.
(xi) Executive Agreement between the Trust and Hal A. Vasvari, dated April 13, 1989.
(xii) Employment Agreement between the Trust and Steven J. Guttman, dated April 13, 1989.
(xiii) Employment Agreement between the Trust and Catherine R. Mack, dated April 13, 1989.
(xiv) Executive Agreement between the Trust and Robert S. Wennett, dated April 13 ,1989, modified January 1, 1990, filed with the Commission as a portion of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1989 is incorporated herein by reference thereto.
(xv) The 1991 Share Purchase Plan, dated January 31, 1991, filed with the Commission as a portion of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1990 is incorporated herein by reference thereto.
(xvi) Employment Agreement between the Trust and Robert S. Wennett, dated January 1, 1992, filed with the Commission as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1991 is incorporated herein by reference thereto.
(xvii) Amendment No. 4 to Consultancy Agreement with Samuel J. Gorlitz, filed with the Commission as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference thereto.
(xviii) Employment and Relocation Agreement between the Trust and Ron D. Kaplan, dated September 30, 1992, filed as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference thereto.
(xix) Amendment dated October 1, 1992, to Voting Trust Agreement dated as of March 3, 1989 by and between I. Wolford Berman and Dennis L. Berman filed as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference thereto.
(xx) 1993 Long-Term Incentive Plan and Certified Resolution Re: Amendment to 1993 Long-Term Incentive Plan, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, are incorporated herein by reference thereto.
The following documents, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 are incorporated herein by reference thereto:
(xxi) Revolving Credit Agreement dated as of September 1, 1993 among Federal Realty Investment Trust and Corestates Bank.
(xxii) Credit Agreement dated as of August 25, 1993 between Federal Realty Investment Trust and First Union National Bank of Virginia.
(xxiii) Revolving Credit Agreement dated as of June 22, 1993 between Federal Realty Investment Trust and Signet Bank/Maryland.
(xxiv) Consulting Agreement between Misner Development and Federal Realty Investment Trust.
(xxv) Fiscal Agency Agreement dated as of October 28, 1993 between Federal Realty Investment Trust and Citibank, N.A.
(xxvi) Credit Agreement dated as of February 11, 1994 between Federal Realty Investment Trust and Mellon Bank as filed as an exhibit to the Trust's Annual Report on Form 10-K for the year ended December 31, 1993 is incorporated herein by reference thereto.
(xxvii) Other Share Award and Purchase Note between Federal Realty Investment Trust and Ron D. Kaplan, dated January 1, 1994, filed with the Commission as a portion of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 is incorporated herein by reference thereto.
(xxviii) Amended and Restated 1983 Stock Option Plan of Federal Realty Investment Trust and 1985 Non-Qualified Stock Option Plan of Federal Realty Investment Trust, filed with the Commission on August 17, 1994 on Form S-8, (File No. 33-55111) is incorporated herein by reference thereto.
The following documents, filed with the Commission as portions of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1994, are incorporated herein by reference thereto.
(xxix) Form of Severance Agreement between Federal Realty Investment Trust and Certain of its Officers dated December 31, 1994.
(xxx) Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and First Union National Bank of Virginia.
(xxxi) Second Amendment to Revolving Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and Corestates Bank.
(xxxii) First Amendment to Credit Agreement dated September 30, 1994 between Federal Realty Investment Trust and Mellon Bank.
(xxxiii) First Amendment to Revolving Credit Agreement dated September 30, 1994 between Federal Realty Investment Trust and Signet Bank/Maryland.
(xxxiv) Exclusive Brokerage Agreement between Street Retail Inc. and Westport Advisors Corporation filed as an exhibit to the Trust's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 is incorporated herein by reference thereto.
The following documents, filed with the Commission as portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 are incorporated herein by reference thereto:
(xxxv) Non-Exclusive Brokerage Agreement between Federal Realty Investment Trust and Westport Advisors Corporation and Jack Alan Guttman dated August 20, 1995.
(xxxvi) Exclusive Brokerage Agreement between Street Retail, Inc. and Westport Advisors Corporation and Jack Alan Guttman dated August 20, 1995.
(11) Statement regarding computation of per share earnings.........................................*
(12) Statements regarding computation of ratios.......*
(13) Annual Report to Shareholders, Form 10Q or quarterly report to shareholders.....................................*
(18) Letter regarding change in accounting principles.......................................*
(19) Report furnished to security holders.............*
(21) Subsidiaries of the registrant.................... (xxxvii) Articles of Incorporation of Street Retail, Inc. filed with the Commission as a portion of Exhibit 21 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference thereto.
(xxxviii) By-Laws of Street Retail, Inc. filed with the Commission as a portion of Exhibit 21 to the Trust's Annual Report on Form 10-K for the year ended December 31 1994 is incorporated herein by reference thereto.
(22) Published report regarding matters submitted to vote of security holders.........................*
(23) Consent of Grant Thornton LLP....................
(24) Power of attorney................................*
(27) Financial Data Schedule..........................+
(99) Additional exhibits..............................*
(b) Reports on Form 8-K Filed during the Last Quarter -------------------------------------------------
A Form 8-K, dated November 17, 1995, was filed in response to Item 7.