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 three wholly owned subsidiaries, eleven partnerships and a joint venture. At December 31, 1996 the Trust owned 86 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 doubled from 43 as of January 1, 1992 to 87 at December 31, 1996. During this five year period the Trust acquired 48 retail properties for approximately $414 million. Eleven of the seventeen acquisitions in 1996 were in California and two were in Florida, which are new markets for the Trust. During this same period four shopping centers were sold. Also during this period the Trust spent over $183 million to renovate, expand, improve and retenant its properties. All but four of the acquisitions were funded primarily by cash. Of the four properties not fully acquired by cash, one was acquired by means of capital and ground leases, one was acquired for common shares of the Trust and the assumption of a mortgage, one was acquired for cash and the assumption of a municipal bond issue and the fourth was acquired for cash with a minority investment by a third party. 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 86 retail properties, consisting of 57 shopping centers and 29 main street retail buildings, are located in 14 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; eleven are in Pennsylvania, primarily in the Philadelphia area; nine are in New Jersey; five are in Illinois; three are in Virginia; three are in Massachusetts; and there is one in each of the following states: California, Connecticut, Georgia, Michigan, New York, North Carolina and Tennessee. The main street retail buildings are located in California, Connecticut, Florida, Illinois, Massachusetts and New Jersey. No single property accounts for over 10% of the Trust's revenues.
The Trust has approximately 1,800 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 is seeking to increase its pace 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, 1996, 1995 and 1994, retail properties have contributed 96%, 96% and 95%, respectively of the Trust's total revenue.
The Trust amended its by-laws in 1996 to permit investments west of the Mississippi River. Investments are not required to be based on specific allocation by type of property. The extent to which the Trust might mortgage or otherwise finance investments varies with the investment involved and the economic climate.
The success of the Trust depends upon, among other factors, the trends of the economy, including interest rates, construction costs, retailing trends, income tax laws, increases or decreases in operating expenses, governmental regulations, population trends, zoning laws, legislation and the ability of the Trust to keep its properties leased at profitable levels. The Trust competes for tenants with other real estate owners and the Trust's properties account for only a small fraction of the retail space available for lease. The Trust competes for investment opportunities and debt and equity capital with individuals, partnerships, corporations, financial institutions, life insurance companies, pension funds, trust funds and other real estate investment trusts.
Investments in real property create a potential for environmental liability on the part of the current and previous owners of, or any mortgage lender on, such real property. If hazardous substances are discovered on or emanating from any
property, the owner or operator of the property may be held liable for costs and liabilities relating to such hazardous substances. Effective September 1, 1996 the Trust obtained environmental insurance on sixty of its properties. Subject to certain exclusions and deductibles, the insurance provides coverage for unidentified, pre-existing conditions and for future contamination caused by tenants and third parties.
The Trust's current policy is to 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 1996 and 1995 approximately $970,000 and $1.0 million, respectively, of which $540,000 and $796,000, respectively, was capitalized abatement costs, was spent on environmental matters. The Trust has budgeted approximately $3.0 million for 1997 for environmental matters, a majority of which is projected for asbestos abatement. (See Note 6 of Notes to Consolidated Financial Statements.)
Current Developments --------------------
In 1996 the Trust acquired $105.6 million of retail property. Three shopping centers were acquired: Saugus Plaza Shopping Center, located in metropolitan Boston, Massachusetts for $12.7 million in cash; Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania for $21.8 million in cash; and Escondido Promenade in suburban San Diego, California for $14.2 million in cash and the assumption of $9.4 million of municipal bonds. Fourteen retail buildings were acquired: two buildings in Winter Park, Florida for a cost of $6.8 million; two buildings in Greenwich, Connecticut for $12.7 million; and ten buildings, located in Pasadena, Santa Monica and San Diego, California, for cash of $17.6 million with minority interests contributing another $10.4 million.
During 1996 the Trust spent $42.2 million in renovating, expanding and retenanting its properties. These improvements included $11.5 million on the final tenant work and construction of an additional 30,000 square feet at Congressional Plaza, which includes the Trust's corporate offices; $4.7 million on the redevelopment and expansion of a portion of Bethesda Row; $3.9 million for the renovation of Brick Plaza in Brick, New Jersey; and $2.3 million to buy out below market leases. In addition the Trust invested $23.4 million in mortgage notes receivable, most of which are convertible into ownership interests in the properties by which they are secured.
The Trust initially funded the majority of its 1996 acquisitions, capital improvement projects and investments in mortgages with borrowings under its revolving credit facilities with four banks. Borrowings on these revolving credit facilities were then repaid from long term debt and equity issues. In August 1996 the Trust issued $50.0 million of 7.48% Debentures due August 15, 2026, netting approximately $49.8 million. In May
the Trust sold 1.8 million shares of beneficial interest ("shares") at $22 per share to an institutional investor, netting approximately $39.3 million. In December the Trust sold another 1.6 million shares to the public at $27 7/8 per share, netting $42.9 million. Another three million shares were sold to an institutional investor on February 4, 1997 for $28 per share, netting $83.9 million.
At December 31, 1996 the Trust had 205 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, 1996. 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 owns the controlling interest in this center. A minority owner has an interest in the profits of the center. (7) The Trust has a 1% general partnership interest and manages the partnership. A 99% interest was sold to a limited partner. (8) The Trust owns the general partnership interest in these buildings.
Apartments - ----------
The following table sets forth information concerning the Trust's apartment development as of December 31, 1996 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, 1996 was 7,573.
For the years ended December 31, 1996 and 1995, $.21 and $.43, 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 a significant portion of the Trust's net cash provided by operating activities is distributed to shareholders, capital outlays for property acquisitions, renovation projects and debt repayments require funding from borrowing or equity offerings.
Operating activities generated $65.6 million in 1996, $65.1 million in 1995 and $45.2 million in 1994 of which $52.1 million, $47.9 million and $44.0 million, respectively, was distributed to shareholders. Despite a $5.6 million increase in net income in 1996 over 1995 and a $3.4 million increase in non-cash charges such as depreciation in 1996 over 1995, net cash provided by operating activities increased only $500,000 because these increases to cash were offset by an increased usage of $8.5 million in 1996 over 1995 for other operating purposes, primarily increases in accounts receivable, prepaid expenses and decreases in accrued expenses. Cash generated from operating activities was $19.9 million greater in 1995 than in 1994. The increase of $2.6 million in net income and an increase of $4.4 million in non-cash charges such as depreciation were augmented by a decreased usage of $12.9 million in other operating activities, primarily due to increases in accounts payable and accrued expenses.
During the three year period 1994 through 1996, the Trust expended over $357 million in cash to acquire properties and to improve its properties. In addition, in 1996 the Trust invested $23.4 million in mortgage notes receivable, most of which are convertible into ownership interests in the properties by which they are secured. At December 31, 1996 the Trust had deposits of $23.4 million on real estate, primarily for the purchase in January 1997 of the fee interest on four properties which it held subject to capital leases. These expenditures were primarily funded from the proceeds of various debt and equity transactions.
The Trust is actively expanding its acquisition efforts. In 1996 the Trust amended its bylaws to permit investments west of the Mississippi River. The Trust acquired $105.6 million of retail property in 1996, comprised of three shopping centers and fourteen retail buildings. With certain of these purchases the Trust made its first acquisitions in Florida and California. On October 1, the Trust acquired Saugus Plaza Shopping Center, located in metropolitan Boston, Massachusetts for $12.7 million in cash. On October 29, 1996 Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania was purchased for a total cash cost of $21.8 million. On December 31, 1996 the Trust acquired the controlling interest in a Limited Liability Company formed to own Escondido Promenade in suburban San Diego, California for $14.2 million in cash. The $23.5 million center is encumbered by $9.4 million of municipal bonds. The bonds, which mature October 1, 2016, bear interest at a variable rate determined weekly to be the interest rate which would enable
the bonds to be remarketed at 100% of their principal amount. The bonds are redeemable on demand by the holders and if they cannot be resold, will be due. The other member of the Limited Liability Company, who is related to the developer of the property, has a minor interest in the profits of the company.
On February 28, 1996 the Trust purchased, for cash, two retail buildings in Winter Park, Florida for a cost of $6.8 million. In 1996 the Trust purchased two buildings in Greenwich, Connecticut, one for $3.2 million in cash on May 6 and another for $9.5 million in cash on June 4. On December 31, 1996 the Trust made an investment of $17.6 million for the general partnership interest in two partnerships (the "CIM partnerships"), one of which owns ten main street retail buildings and the other of which owns a purchase option on a street retail building. The ten buildings, valued at $28 million, are located in Pasadena, Santa Monica and San Diego, California. Nine of the ten buildings are scheduled to be renovated and retenanted. The Trust will contribute 90% of future capital costs. The limited partners who contributed $10.4 million to the partnerships will receive a cumulative return of $762,000 per year. All remaining income and cash available for distribution will be allocated 90% to the Trust and 10% to the minority partners until each receives a return of 10% on its deemed investment and then 60% to the Trust and 40% to the minority partner.
During 1996 the Trust invested $42.4 million in improvements to its properties; these improvements included: (1) $11.5 on the final tenant work and construction of an additional 30,000 square feet at Congressional Plaza, which includes the Trust's corporate offices; (2) $4.7 million on the redevelopment and expansion of a portion of Bethesda Row; (3) $3.9 million on the redevelopment of Brick Plaza which was begun in 1995; and (4) $2.3 million to buy out below market leases.
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 Finley Square Shopping Center in suburban Chicago, Illinois was purchased on April 27, 1995 for approximately $18.8 million in cash; Bristol Shopping Center in Bristol, Connecticut was purchased on September 22, 1995 for $19.6 million, by assuming a $11.3 million mortgage and by issuing common shares valued at $7.3 million with the balance in cash; Park & Shop Center in Washington, D.C. was purchased on December 1, 1995 for $11.2 million in cash; and on December 21, 1995 Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. The retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich, Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million; and 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 first phase of 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.
The majority of these acquisitions and improvements, as well as debt repayment requirements, were initially financed with borrowings under the Trust's revolving credit facilities. The Trust uses these credit facilities to fund acquisitions and other cash requirements until conditions are favorable for issuing equity or long term debt. In August 1996, the Trust amended these unsecured medium term revolving credit facilities, increasing the aggregate amount available from $130 million to $135 million, extending the maturity from three years to five years, and decreasing the interest rate from LIBOR (London Interbank Offered Rate) plus 75 to 100 basis points to LIBOR plus 75 basis points. The facilities require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth. At December 31, 1996, 1995 and 1994, $59.4 million, $40.1 million and $54.7 million, respectively, was borrowed under these facilities. The maximum amount borrowed under these facilities during 1996, 1995 and 1994 was $76.2 million, $66.8 million and $54.7 million, respectively. The weighted average interest rate on borrowings during 1996, 1995 and 1994 was 6.4%, 6.9%, and 5.6%, respectively.
Borrowings on these revolving credit facilities were repaid from a variety of long term debt and equity issues. In August 1996 the Trust issued $50.0 million of 7.48% Debentures due August 15, 2026, netting approximately $49.8 million. The debentures, which pay interest semiannually on February 15 and August 15, are redeemable at par at the option of the holders on August 15, 2008 and by the Trust at any time thereafter. On May 24, 1996 the Trust sold 1.8 million shares at $22 per share to an institutional investor, netting approximately $39.3 million. On December 13, 1996 the Trust sold another 1.6 million shares to the public at $27 7/8 per share, netting $42.9 million. Another three million shares were sold to an institutional investor on February 4, 1997 for $28 per share, netting $83.9 million.
During 1995 the Trust issued $165 million of senior notes: $100.0 million at 8 7/8% interest in January, netting proceeds of approximately $98.9 million; $25.0 million at 8% interest in April, netting approximately $24.9 million; and $40.0 million at 6 5/8% interest in December, netting approximately $39.6 million. In January 1995 the Trust repaid a $22.5 million mortgage which had been borrowed in 1994 and a $1.1 million note issued in connection with the purchase of Queen Anne Plaza in 1994.
In order to minimize the risk of changes in interest rates, in connection with certain of these debt issues the Trust entered into interest rate hedge agreements. All agreements have been terminated and the cost or gain on the hedges is being recognized as a component of interest expense over the life of the financing.
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.
The Trust has budgeted $44.0 million for capital improvements to its properties in 1997. These improvements include: (1) $6.0 million for the next phase of the redevelopment and expansion of Brick Plaza; (2) $6.1 million to renovate and retenant Troy Shopping Center; (3) $4.1 million to renovate Feasterville Shopping Center; and (4) $3.5 million to complete the renovation and expansion of a portion of Bethesda Row.
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 is seeking to increase its pace of acquisitions, 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 Trust's 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 Trust has retained an environmental consultant to investigate contamination at a center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. At this time, the Trust has not determined what the range of remediation costs might be, but does not believe that the costs will have a material effect upon the Trust's financial condition. The Trust has also identified chlorinated solvent contamination at another property. The contamination appears to be linked to the current and/or previous dry cleaner. The Trust intends to look to the responsible parties for any remediation effort. Evaluation of this situation is preliminary and it is impossible, at this time, to estimate the range of remediation costs, if any.
The Trust reserved $2.0 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. During the fourth quarter of 1996, the reserve was reduced to $200,000 with a corresponding reduction in the basis of land at the shopping center. The Trust estimates that $200,000 is the cost to monitor the contaminant concentrations in groundwater for ten years, thereby satisfying regulatory requirements, to the best of the Trust's knowledge.
Pursuant to the provisions of the respective partnership agreements, in the event of the exercise of put options by the other partners, the Trust would be required to purchase the 99% limited partnership interest at Loehmann's Plaza at its then fair market value and a 22.5% interest at Congressional Plaza at its then fair market value.
Under the terms of the CIM partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net operating income. The purchase price may be paid in cash or common shares of the Trust, at the election of the limited partners. If the limited partners do not redeem their interest, the Trust may choose to purchase the limited partnership interests upon the same terms.
Recently unfavorable trends in the retail environment have led to a number of retail bankruptcies. A further weakening of the retail environment, additional bankruptcies and further retail consolidations 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 due to the quality of the Trust's properties there will continue to be demand for its retail space.
Results of Operations ---------------------
Net income and funds from operations have been affected by the Trust's recent acquisition, redevelopment and financing activities. The Trust has historically reported its funds from operations in addition to its net income and net cash provided by operating activities. Funds from operations is a supplemental measure of real estate companies' operating performance which excludes historical cost depreciation, since real estate values have historically risen and fallen with market conditions rather than over time. The National Association of Real Estate Investment Trusts (NAREIT) defines funds from operations as follows: income before depreciation and amortization of real estate assets and before extraordinary items and significant non- recurring events less gains on sale of real estate. Funds from operations does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. Rather, funds from operations has been adopted by real estate investment trusts to provide a consistent measure of operating performance in the industry.
The reconciliation of net income to funds from operations 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 and real estate taxes. Many leases also contain a percentage rent clause which calls for additional rents based on tenant sales, so that at a given sales volume, if prices increase, so does rental income. These features in the Trust leases reduce the Trust's exposure to higher costs caused by inflation, although inflation has not been significant in recent years.
Rental income, which consists of minimum rent, percentage rent, and cost recoveries, increased 11.5% in 1995 to $142.8 million from $128.1 million in 1994 and 15.4% in 1996 to $164.9 million. If centers acquired and sold in 1994, 1995 and 1996 are excluded, rental income increased 4.3% from 1994 to 1995 and 6.6% from 1995 to 1996.
Minimum rents increased 14% in 1995 to $113.9 million from $99.9 million in 1994 and 15.5% in 1996 to $131.5 million. If
centers acquired and sold in 1994, 1995 and 1996 are excluded, minimum rents increased 6.7% from 1994 to 1995 and 6.2% from 1995 to 1996. Fifty percent of the increase in minimum rent in 1996 was from Congressional Plaza, Brick Plaza and Gaithersburg Square, which have been redeveloped and retenanted. Thirty- four percent of the increase in minimum rent in 1995 was from Congressional Plaza.
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 increased 6.2% from 1994 to 1995 and 9.7% from 1995 to 1996. Forty-nine percent of the increase from 1994 to 1995 was attributable to Congressional Plaza as its occupancy increased after being vacated for renovation. Sixty-four percent of the increase in 1996 was attributable to Congressional Plaza, Brick Plaza and Gaithersburg Square. CAM recovery on the portfolio, adjusted to remove the effect of properties purchased in 1994, 1995 and 1996, was $13.2 million in 1994, $11.5 million in 1995 and $13.2 million in 1996. These fluctuations correspond to fluctuations in CAM expenses, primarily snow removal and related repairs which were high in 1994 and 1996 due to heavy snowfalls in those years.
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 1994 to 1996 were due primarily 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. The increase from 1995 to 1996 was due to lease termination fees.
Rental expenses went from $35.8 million in 1994 to $35.1 million in 1995 to $40.7 million in 1996, which represents 26.8% of property income (rental income plus other property income) in 1994, 23.4% in 1995 and 23.3% in 1996. If rental expenses are adjusted to remove the effect of properties purchased and sold in 1994, 1995 and 1996, rental expenses ranged from $35.1 million in 1994 to $32.6 million in 1995 to $35.3 million in 1996. The primary reason for the decrease from 1994 to 1995 was a decrease in snow removal and other related expenses, such as roof and parking lot repairs. The increase from 1995 to 1996 was caused by an increase in snow related expenses and by an increase in the write-off of tenant work and lease commissions, often connected with tenants whose leases were terminated. Real estate taxes have ranged from 9.0% of property income in 1994 to 9.6% in 1995 to 9.4% in 1996. The lower percentage 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 increased slightly over 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. Increases in interest income due to the issuance of
$14.3 million in mortgage notes receivable in 1996 were offset by decreases in interest on investments in marketable securities which the Trust sold in 1995. 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 value in prior years.
Interest expense increased to $45.6 million in 1996 from $39.3 million in 1995, due to interest on the $50 million of senior debentures issued in 1996 and the $165 million of senior notes issued in 1995, due to interest from increased usage of the revolving credit facilities and due to interest on the mortgage assumed upon the purchase of Bristol Shopping Center. Interest expense increased from $31.5 million in 1994 to $39.3 million in 1995, primarily due to interest on the three issues of senior notes in 1995. The ratio of earnings to fixed charges was 1.59x, 1.55x and 1.61x in 1996, 1995 and 1994, respectively. The ratio of funds from operations to fixed charges was 2.35x, 2.35x, and 2.52x in 1996, 1995 and 1994, respectively.
Administrative expenses have increased as the Trust has grown and as it has accelerated its acquisition and development efforts. Administrative expenses as a percentage of total income, however, were fairly constant, at 5.1%, 4.7% and 4.8%, in 1996, 1995 and 1994, respectively. The $1.8 million increase from 1995 to 1996 was primarily due to the write-off of costs associated with unconsummated acquisition and development efforts and due to costs related to the move of the Trust's corporate office. 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.
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 which was under redevelopment in 1995.
Income before loss on sale of real estate and extraordinary item increased from $20.5 million in 1994 to $23.7 million in 1995 to $28.7 million in 1996, reflecting not only the contribution to net income from the Trust's acquisitions but also the contribution from improved operating results of the core portfolio.
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 1996 the Trust sold Town & Country Plaza in Hammond, Louisiana for $4.9 million, resulting in a loss of $12,000. In 1995 the Trust sold North City Plaza for $1.8 million resulting in a loss on sale of $545,000.
As a result of the foregoing items, net income rose from $20.5 million in 1994 to $23.1 million in 1995 to $28.7 million in 1996.
The Trust intends to increase its pace of acquisitions in 1997. 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 consolidations. 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 due to the quality of the Trust's properties there will continue to be demand for its retail space.
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 ------------------------------------
The Executive Officers in 1996 were:
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 1997 Proxy Statement is incorporated herein by reference thereto.
Item 11. Executive Compensation. -------- -----------------------
The sections entitled "Summary Compensation Table" and "Aggregated Option Exercises in 1996 and December 31, 1996 Option Values" of the 1997 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 1997 Proxy Statement is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions. -------- -----------------------------------------------
The section entitled "Certain Transactions" of the 1997 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, 1996 and 1995
Consolidated Statements of Operations - years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements (Including Selected Quarterly Data) -
(a) 2. Financial Statement Schedules -----------------------------
Schedule III - Summary of Real Estate and Accumulated Depreciation.......................... -
Schedule IV - Mortgage Loans on Real Estate ............................................... -
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 portions of Item 6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference thereto.
(4) (i) Specimen Share of Beneficial Interest, filed with the Commission on November 23, 1982 as Exhibit 4 to the Trust's Registration Statement on Form S-2 (file No. 2-80524), is incorporated herein by reference thereto.
(ii) 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 Trusts's 7.48% Debentures due August 15, 2026, the Trust's 8 7/8% Senior Notes due January 15, 2000, the Trust's 8% Notes due April 21, 2002 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.
(vii) Dividend Reinvestment and Share Purchase Plan, dated November 3, 1995, filed with the Commission on Form S-3 on November 3, 1995 (File No. 33-63955) is incorporated herein by reference thereto.
(9) Voting Trust Agreement...............................*
(10) (i) Consultancy Agreement with Samuel J. Gorlitz, as amended, filed with the Commission as Exhibit 10 (v) to the Trust's Annual Report on Form 10-K for the year ended December 31, 1983, is incorporated herein by reference thereto.
(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.
The following are filed as exhibits hereto:
(xxxvii) Non-Exclusive Brokerage Agreement between Federal Realty Investment Trust, Street Retail, Inc., Westport Realty Advisors, Inc. and Jack Alan Guttman, dated December 3, 1996.
(xxxviii) Second and Third Amendments dated as of August 1, 1996 to the Credit Agreement dated as of September 30, 1994 between Federal Realty Investment Trust and First Union National Bank of Virginia.
(xxxvix) Third Amendment to Revolving Credit Agreement between Federal Realty Investment Trust and Corestates Bank dated July 1, 1996.
(xl) Third Amendment to Revolving Credit Agreement as of August 7, 1996 by and between Federal Realty Investment Trust and Signet Bank.
(xli) Fourth Amendment to Credit Agreement as of August 9, 1996 by and between Federal Realty Investment Trust and Mellon Bank.
(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 15, 1996, was filed in response to Item 7.
Item 7.(c)99
A Form 8-K, dated December 10, 1996 was filed in response to Item 5.
--------- * Not applicable. + For Edgar filing only.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
Date: February 18, 1997 By:/s/ Steven J. Guttman --------------------------- Steven J. Guttman President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Trustees and Shareholders Federal Realty Investment Trust
We have audited the accompanying consolidated balance sheets of Federal Realty Investment Trust as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Realty Investment Trust as of December 31, 1996 and 1995 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Grant Thornton LLP Washington, D.C. February 5, 1997
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these statements.
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
Federal Realty Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Realty Investment Trust invests in income-producing real estate properties. Traditionally it focused on community and neighborhood shopping centers, but beginning in late 1994 the Trust expanded its investments to main street retail properties, retail buildings and shopping centers in densely developed urban and suburban areas. The Trust's leases with tenants are classified as operating leases and rental income is recognized on an accrual basis over the terms of the related leases.
The Trust uses the straight-line method in providing for depreciation. Estimated useful lives range from three to 25 years on apartment buildings and improvements, and from three to 35 years on retail properties and improvements. Maintenance and repair costs are charged to operations as incurred. Major improvements are capitalized. The gain or loss resulting from the sale of properties is included in net income at the time of sale. The Trust has adopted FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". The Trust does not hold any assets that meet the impairment criteria of FAS 121.
The Trust capitalizes certain costs directly related to the acquisition, improvement and leasing of real estate including applicable salaries and other related costs. The capitalized costs associated with unsuccessful acquisitions are charged to operations when that determination is made. The capitalized costs associated with improvements and leasing are depreciated or amortized over the life of the improvement and lease, respectively.
Costs related to the issuance of debt instruments are capitalized and are amortized as interest expense over the life of the related issue using the interest method. Upon conversion or in the event of redemption, applicable unamortized costs are charged to shareholders' equity or to operations, respectively.
The Trust operates in a manner intended to enable it to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code (the "Code"). Under those sections, a trust which distributes at least 95% of its real estate trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, no provision for Federal income taxes is required.
The Trust consolidates the financial statements of three wholly owned subsidiaries, eleven partnerships, and a joint venture which are controlled by the Trust. The equity interests of other investors are reflected as investors' interest in
consolidated assets. All significant intercompany transactions and balances are eliminated.
The Trust defines cash as cash on hand, demand deposits with financial institutions and short term liquid investments with an initial maturity under three months. Cash balances may exceed insurable amounts.
The Trust occasionally enters into derivative contracts with terms up to 90 days prior to a scheduled financing or refinancing in order to minimize the risk of changes in interest rates. The cost or gain on these transactions is recognized as a component of interest expense over the life of the financing.
Earnings per share are computed using the weighted average number of shares outstanding during the respective periods, including options. Options are accounted for in accordance with APB 25, whereby if options are priced at fair market value or above at the date of grant, no compensation expense is recognized.
Inherent in the preparation of the Trust's financial statements are certain estimates. These estimates are prepared using management's best judgment, after considering past and current events.
NOTE 1: REAL ESTATE AND ENCUMBRANCES
A summary of the Trust's properties at December 31, 1996 is as follows:
The Trust's 86 retail properties are located in 14 states and the District of Columbia, primarily along the East Coast between the Boston metropolitan area and Richmond, Virginia. There are approximately 1,800 tenants providing a wide range of retail products and services. These tenants range from sole proprietorships to national retailers; no one tenant or corporate group of tenants account for 5% or more of revenue.
In 1996 the Trust acquired $105.6 million of retail property, comprised of three shopping centers and fourteen retail buildings. With certain of these purchases the Trust made its first acquisitions in Florida and California.
On October 1, 1996 the Trust acquired Saugus Plaza Shopping Center, located in the metropolitan Boston, Massachusetts area, for a total cash cost of $12.7 million. On October 29, 1996 Wynnewood Shopping Center in suburban Philadelphia, Pennsylvania was purchased for a total cash cost of $21.8 million. On December 31, 1996 the Trust acquired the controlling interest in a Limited Liability Company formed to own Escondido Promenade in suburban San Diego, California for $14.2 million in cash. The $23.5 million center is encumbered by $9.4 million of municipal bonds. The bonds, which mature October 1, 2016, bear interest at a variable rate determined weekly to be the interest rate which would enable the bonds to be remarketed at 100% of their principal amount. The bonds are redeemable on demand by the holders and if they cannot be resold, will be due. The other member of the Limited Liability Company, who is related to the developer of the property, has a minor interest in the profits of the property.
On February 28, 1996 the Trust purchased, for cash, two retail buildings in Winter Park, Florida for a cost of $6.8 million. In 1996 the Trust purchased two buildings in Greenwich, Connecticut, one for $3.2 million in cash on May 6 and another for $9.5 million in cash on June 4. On December 31, 1996 the Trust made an investment of $17.6 million for the general partnership interest in two partnerships (the "CIM partnerships"), one of which owns ten street retail buildings and the other of which owns a purchase option on a street retail building. The ten buildings, valued at $28 million, are located in Pasadena, Santa Monica and San Diego, California. Nine of the ten buildings are scheduled to be renovated and retenanted. The Trust will contribute 90% of future capital costs. The limited partners who contributed $10.4 million to the partnerships will receive a cumulative return of $762,000 per year. All remaining income and cash available for distribution will be allocated 90% to the Trust and 10% to the minority partner until each receives a return of 10% on its deemed investment and then 60% to the Trust and 40% to the minority partner.
The Trust purchased 19 retail properties during 1995 for a total cost of $120.6 million. The Trust also purchased a building abutting Flourtown Shopping Center, one of its existing centers, for $3.1 million. Finley Square Shopping Center in suburban Chicago was purchased on April 27, 1995 for $18.8 million in cash; Bristol Shopping Center in Bristol, Connecticut was purchased on September 22, 1995 for $19.6 million, by assuming a $11.3 million mortgage and by issuing 337,527 common shares valued at $7.3 million with the balance in cash; Park & Shop Center in Washington, D.C. was purchased on December 1, 1995 for $11.2 million in cash; and on December 21, 1995 Shirlington Shopping Center in Arlington, Virginia was purchased for $23.5 million in cash. The retail building acquisitions during 1995 were as follows: seven buildings in West Hartford, Connecticut for $15.3 million; two buildings in Greenwich, Connecticut for $14.9 million; one building in Westport, Connecticut for $5.7 million; one building in Brookline, Massachusetts for $3.8 million; one building in Westfield, New Jersey for $2.2 million; two buildings in Evanston, Illinois for $3.6 million and one building in Bethesda, Maryland, for $2.0 million.
In connection with certain of these purchases in 1996 and 1995, brokerage commissions of $172,000 and $671,000, respectively, were incurred to a company that is owned by a brother of the Trust's president. These commissions were paid pursuant to a brokerage contract on terms comparable to terms contained in contracts which the Trust has with brokers providing similar services in other geographic areas.
On December 31, 1996 the Trust sold Town and Country Shopping Center in Hammond, Louisiana for $4.9 million, resulting in a loss of $12,000.
On August 1, 1995 the Trust sold North City Shopping Center in New Castle, Pennsylvania for $1.8 million, resulting in a loss of $545,000.
The Trust purchased four shopping centers in 1994. Idylwood Plaza in Falls Church, Virginia was purchased for $14.3 million in cash; North Lake Commons in Lake Zurich, Illinois was purchased for $10.9 million in cash; Garden Market Shopping Center in Western Springs, Illinois was purchased for $7.6 million in cash; and Queen Anne Plaza in Norwell, Massachusetts was purchased for $10.7 million in cash and a $1.1 million note which was paid in January 1995. In addition the Trust purchased a 3.9 acre parcel of land underlying a supermarket which adjoins its Bala Cynwyd Shopping Center for cash of $1.1 million and a retail building in Westport, Connecticut for cash of $3.8 million.
On April 22, 1996 the Trust made a $9.2 million convertible participating loan to a partnership, secured by retail properties in Philadelphia, Pennsylvania. The loan bears interest at 10% plus additional interest based upon the gross income of the secured properties. In addition, upon sale of the properties, the Trust will share in the appreciation of the properties. From and after April 2006, which date may be extended to April 2008, the Trust has the option to convert the loan into a partnership interest in the properties. In 1995 and 1996 the Trust made additional loans, totalling $1.8 million, secured by properties in Philadelphia, to partnerships with common ownership to the partnership above. One loan bears interest at the greater of prime plus 2% or 10% and the other bears interest at 5%. Both loans are due in November 1997.
On July 2, 1996 the Trust was granted a purchase option on a parcel of 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.
The Trust held two other mortgage loans at December 31, 1996, 1995 and 1994. The notes, which total approximately $13.2 million, bear interest at 10% and were issued in connection with the acquisition of Trust properties.
In January 1994 a $22.5 million one year mortgage was placed on Northeast Plaza in Atlanta, Georgia. The mortgage, which bore interest at LIBOR (London Interbank Offered Rate), plus 100 to 150 basis points was repaid in January 1995.
At December 31, 1996 the Trust had contracted to purchase the fee interest in Shillington, Troy and Feasterville Shopping Centers in January 1997 for $1.8 million, $5.5 million and $2.1 million, respectively. The Trust had also contracted to purchase the fee interest in Lawrence Park Shopping Center in June 1998 for $8.5 million. In connection with the purchase agreement for Lawrence Park, the Trust, in January 1997, lent the seller $8.8 million at 8% which is due in June 1998. Future minimum lease payments due for Lawrence Park are $847,000 in 1997 and $438,000 in 1998 of which $346,000 and $158,00, respectively represent interest. These properties are subject to capital lease obligations of $7.6 million at December 31, 1996.
In November 1994 the Trust exercised an option to purchase the ground underlying the Northeast Shopping Center in Philadelphia, Pennsylvania for $4.2 million, $3.4 million of which had been recorded as a capital lease obligation.
Mortgages payable and capital lease obligations are due in installments over various terms extending to 2060 with actual or imputed interest rates ranging from 7.9% to 11.25%. Certain of the mortgage and capital lease obligations require additional interest payments based upon property performance.
Aggregate mortgage principal payments due during the next five years are $1.4 million, $54.5 million, $532,000, $583,000, and $30.7, respectively.
Future minimum lease payments and their present value for property under capital leases as of December 31, 1996, excluding the four leases to be purchased in 1997 and 1998, are as follows:
Leasing Arrangements --------------------
The Trust's leases with retail property and apartment tenants are classified as operating leases. Leases on apartments are generally for a period of one year, whereas retail property leases generally range from three to 10 years and usually provide for contingent rentals based on sales and sharing of certain operating costs.
The components of rental income are as follows:
The components of rental expense are as follows:
Minimum future retail property rentals on noncancelable operating leases as of December 31, 1996 are as follows:
NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------
The following disclosure of estimated fair value was determined by the Trust, using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimates of fair value. The estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.
The Trust estimates the fair value of its financial instruments using the following methods and assumptions: (1) quoted market prices, when available, are used to estimate the fair value of investments in marketable debt and equity securities; (2) quoted market prices are used to estimate the fair value of the Trust's marketable convertible subordinated debentures; (3) discounted cash flow analyses are used to
estimate the fair value of long term notes receivable and payable, using the Trust's estimate of current interest rates for similar notes; (4) carrying amounts in the balance sheet approximate fair value for cash and short term borrowings. Notes receivable from officers are excluded from fair value estimation since they have been issued in connection with employee stock ownership programs.
NOTE 3. NOTES PAYABLE ---------------------
At December 31, 1996 and 1995 the Trust had notes payable of $66.1 million and $50.0 million, respectively. Of these balances, $59.4 million in 1996 and $40.1 million in 1995 were issued under the Trust's revolving credit facilities.
The remaining balance of notes payable was issued in connection with the acquisition, leasing or renovation of properties. A $2.5 million noninterest bearing note was issued in September 1995 in connection with a lease transaction at Barracks Road. The due date of this note has been extended from December 1996 to July 15, 1997. A note, with a balance of $1.3 million at December 31, 1996 and $1.4 million at December 31, 1995, was issued in connection with the buy out of a tenant at Queen Anne Plaza in January 1995. The noninterest bearing note of $2.2 million, due in annual installments of $200,000 for eleven years, was recorded at its discounted value using an interest rate of 8 7/8%.
A 10% note, payable in equal monthly installments with a final maturity in 2013, issued in connection with the renovation of Perring Plaza had a balance of $2.9 million in 1996 and 1995. A $3 million note issued in connection with the acquisition of Federal Plaza, bearing interest at 11%, was paid in 1996.
In August 1996 the Trust amended its unsecured medium term revolving credit facilities with four banks, increasing the aggregate amount available from $130 million to $135 million, extending the maturity from three years to five, and decreasing the interest rate from LIBOR plus 75 to 100 basis points to LIBOR plus 75 basis points. The facilities require fees and have covenants requiring a minimum shareholders' equity and a maximum ratio of debt to net worth.
The maximum drawn under these facilities during 1996, 1995 and 1994 was $76.2 million, $66.8 million, and $54.7 million, respectively. In 1996, 1995 and 1994 the weighted average interest rate on borrowings was 6.4%, 6.9% and 5.6%, respectively, and the average amount outstanding was $47.2 million, $26.7 million and $26.3 million, respectively.
NOTE 4. DIVIDENDS -----------------
On November 20, 1996 the Trustees declared a quarterly cash dividend of $.42 per share, payable January 15, 1997 to shareholders of record January 2, 1997. For the years ended December 31, 1996, 1995 and 1994, $.21, $.43 and $.75 of dividends paid per share, respectively, represented a return of capital.
NOTE 5. COMMITMENTS AND CONTINGENCIES -------------------------------------
Pursuant to the provisions of the Loehmann's Plaza Limited Partnership Agreement, on or after September 1, 1995 the limited partner may require the Trust to purchase his interest in the Partnership at its then fair market value.
The Congressional Plaza Shopping Center Joint Venture Agreement provides that upon six months advance notice the Trust can be required to purchase its pro rata share of one venturer's 22.5% or greater joint venture interest for a purchase price based on the appraised fair market value of the shopping center, but no less than the percentage of joint venture interest being sold multiplied by the difference between $17.5 million and the remaining principal balance of any liabilities of the Joint Venture.
Under the terms of the CIM partnerships, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the limited partners may require the Trust to purchase their partnership interests at a formula price based upon net operating income. The purchase price may be paid in cash or common stock of the Trust at the election of the limited partners. If the limited partners do not redeem their interest, the Trust may choose to purchase the limited partnership interests upon the same terms.
As previously reported, certain of the Trust's shopping centers have some environmental contamination. The Trust has retained an environmental consultant to investigate contamination at a shopping center in New Jersey. The Trust is evaluating whether it has insurance coverage for this matter. At this time, the Trust has not determined what the range of remediation costs might be, but does not believe that the costs will have a material effect upon the Trust's financial condition. The Trust has also identified chlorinated solvent contamination at another property. The contamination appears to be linked to the current and/or previous dry cleaner. The Trust intends to look to the responsible parties for any remediation effort. Evaluation of this situation is preliminary and it is impossible, at this time, to estimate the range of remediation costs, if any.
The Trust reserved approximately $2.0 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. During the fourth quarter of 1996, the reserve was reduced to $200,000 with a corresponding reduction in the basis of land at the shopping center. The Trust estimates that $200,000 is the cost to monitor contaminant concentrations in groundwater for ten years, thereby satisfying regulatory requirements, to the best of the Trust's knowledge.
A nonqualified deferred compensation plan for Trust officers was established in 1994. The plan allows the officers to defer future income until the earlier of age 65 or termination of employment with the Trust. As of December 31, 1996, the Trust is liable to participants for approximately $671,000 under this plan. Although this is an unfunded plan, the Trust has purchased certain investments with which to match this obligation.
The Trust has entered into agreements with certain key employees whereby if these employees voluntarily or involuntarily leave the employment of the Trust within six months after a "change of control" (defined as control of 35% or more of outstanding shares) of the Trust, they will be entitled to a lump sum cash payment equal to one to three times their annual salary as of the date of termination and have their health and welfare benefits and executive privileges continued for a period of one to three years. In the event of a change of control, the Trust also agreed that all restrictions on the exercise or receipt of any stock options and stock grants shall lapse upon termination of employment and that all shares owned at termination shall be redeemed by the Trust at a formula price.
The Trust had previously entered into employment agreements with its President and certain other key employees for terms of up to three years, which automatically renewed at the end of each month unless either party notified the other that it elected not to extend the term. During 1994 the Trust offered certain of the employees covered under these agreements, other than the President, a severance agreement in lieu of the employment agreement. Two employees retained their employment agreements, which agreements now have a fixed declining term. The severance agreement prescribes that, among other things, if the employee is terminated without cause, he/she is entitled to salary for up to 18 months and benefits for up to nine months.
As of December 31, 1996 in connection with the renovation of certain shopping centers, the Trust has contractual obligations of $3.2 million. In addition the Trust is contractually obligated under leases to provide up to $10.1 million in building and tenant improvements.
The Trust is obligated under ground lease agreements on several shopping centers requiring minimum annual payments as follows:
NOTE 6. 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES ---------------------------------------------------
In October 1993 the Trust issued $75.0 million of 5 1/4% convertible subordinated debentures, realizing cash proceeds of approximately $73.0 million. The debentures were not registered under the Securities Act of 1933, and were not publicly distributed within the United States. The debentures, which mature in 2003, are convertible into shares of beneficial interest at $36 per share. The debentures are redeemable by the Trust, in whole, at any time after October 28, 1998 at 100% of the principal amount plus accrued interest.
At December 1996 and 1995 the Trust had outstanding $289,000 of 5 1/4% convertible subordinated debentures due 2002. The debentures which are convertible into shares of beneficial interest at $30.625 were not registered under the Securities Act of 1933 and were not publicly distributed within the United States. In April 1994, $39.8 million of the debentures were redeemed at a price equal to 120% of their principal amount or $47.8 million, in accordance with a premium put. A principal amount of $53,000 of these debentures was converted into 1,729 shares in 1994.
NOTE 7. SENIOR NOTES AND DEBENTURES -----------------------------------
On August 16, 1996 the Trust issued $50.0 million of 7.48% Debentures due August 15, 2026, netting approximately $49.8 million after adjusting for underwriting discounts and other costs. The debentures, which were issued at a price of 99.96%, pay interest semiannually on February 15, and August 15. The debentures are redeemable at par at the option of the holders on August 15, 2008 and by the Trust at any time thereafter.
On January 19, 1995 the Trust issued $100.0 million of 8 7/8% Notes, due January 15, 2000. The notes, which were issued at a price of 99.815%, pay interest semi-annually on January 15 and July 15 and are not redeemable prior to maturity. After deducting the underwriting discount and other costs, the Trust netted approximately $98.9 million. In January 1995 the Trust executed a five year interest rate swap on $25.0 million, whereby the Trust swapped fixed interest payment obligations of 8.1% for a floating rate interest payment of three month LIBOR. The floating rate during the first quarter of 1995 was 6.2%. In May 1995 the swap was terminated and the Trust sold the swap for $1.5 million, which is being amortized as a deduction to interest expense over the remaining term.
On April 21, 1995 the Trust issued $25.0 million of senior notes, netting $24.9 million after deducting discounts and costs. The notes, which are due April 21, 2002 and bear interest at 8%, payable semiannually on April 21 and October 21, were issued at a price of 99.683%.
On December 8, 1995 the Trust issued an additional $40.0 million of senior notes, netting $39.6 million after deducting costs. The notes, which mature on December 1, 2005 and bear interest at 6 5/8%, payable June 1 and December 1, were issued at a price of 99.3%.
NOTE 8. SHAREHOLDERS' EQUITY ----------------------------
On May 24, 1996 the Trust sold, to an institutional investor, 1.8 million shares of beneficial interest ("shares") at $22 per share, netting $39.3 million. On December 13, 1996 the Trust sold another 1.6 million shares to the public at $27 7/8 per share, netting $42.9 million.
In September 1995 the Trust issued 337,527 shares of beneficial interest valued at $7.3 million in partial consideration for the purchase of Bristol Shopping Center.
In April 1994 the Trust raised net proceeds of $61.3 million from a public offering of 2.5 million shares of beneficial interest. In a concurrent offering of 840,000 shares to an institutional investor, the Trust raised net proceeds of $21.7 million.
The Trust has a Dividend Reinvestment Plan, whereby shareholders may use their dividends to purchase shares. In 1996, 1995, and 1994, 181,274 shares, 193,965 shares, and 162,466 shares, respectively, were issued under the Plan.
On January 1, 1994 under the terms of the 1993 Long Term Incentive Plan, an officer of the Trust purchased 40,000 common shares at $25 per share with the assistance of a $1.0 million loan from the Trust. The loan, which has a term of 12 years, bears interest at 6.24%. Forgiveness of up to 75% of the loan is subject to the future performance of the Trust. One eighth of the loan was forgiven on January 31, 1995; another one sixteenth was forgiven on each of January 31, 1996 and 1997 as certain performance criteria of the Trust were met.
In January 1991 the Trustees adopted the Federal Realty Investment Trust Share Purchase Plan. Under the terms of this plan, officers and certain employees of the Trust purchased 446,000 common shares at $15.125 per share with the assistance of loans of $6.7 million from the Trust. Originally, the Plan called for one sixteenth of the loan to be forgiven each year for eight years, as long as the participant was still employed by the Trust. The loans for all participants, but two, were modified in 1994 to extend the term an additional four years and to tie forgiveness in 1995 and thereafter to certain performance criteria of the Trust. One sixteenth of the loan was forgiven in 1995 and 1996. The Trust has loaned participants $1.1 million to pay the taxes due in connection with the plan. The purchase
loans and the tax loans bear interest at 9.39%. The shares purchased under the plan may not be sold, pledged or assigned until both the purchase and tax loans are satisfied and the term has expired.
In connection with a restricted share grant, the Trust accepted from its President a noninterest bearing note for $210,000. One installment of $105,000 was paid on the note in 1992 and the second installment is due April 15, 2001. This loan, tax loans issued in connection with 108,000 shares granted to officers and key employees under the terms of the 1988 Share Bonus Plan, the last $16,000 of which were forgiven in 1996, and the tax loans issued under the Share Purchase Plan are recorded as notes receivable -officers.
At December 31, 1996, 1995 and 1994, respectively, the Trust had 62,386 shares, 61,328 shares and 60,200 shares in treasury at a cost of $1.2 million, $1.2 million, and $1.1 million, respectively.
On April 13, 1989, the Trustees adopted a Shareholder Rights Plan (the Plan). Under the Plan, one right was issued for each outstanding share of common stock held as of April 24, 1989, and a right will be attached to each share issued in the future. The rights are exercisable into common shares upon the occurrence of certain events, including acquisition by a person or group of certain levels of beneficial ownership or a tender offer by such a person or group. The rights are redeemable by the Trust for $.01 and expire on April 24, 1999.
NOTE 9. STOCK OPTION PLAN -------------------------
The 1993 Long Term Incentive Plan ("Plan") authorized the grant of options and other stock based awards for up to 6.0 million shares. Options granted under the plan have ten year terms and vest in one to three years. Under the Plan, on each annual meeting date during the term of the plan, each nonemployee Trustee will be awarded 2,500 options. Accordingly, on each of May 2, 1996, May 10, 1995 and May 4, 1994, 22,500, 20,000 and 20,000 options, respectively, were awarded to nonemployee Trustees. In 1996, 81,181 options at $21 to $21 5/8 per share were granted to employees of the Trust. On February 15, 1995, 719,000 stock options at $20.75 per share were granted to employees of the Trust.
The option price to acquire shares under the 1993 Plan and previous plans is required to be at least the fair market value at the date of grant. As a result of the exercise of options, the Trust had outstanding from its officers and employees notes for $2.2 million at December 31, 1996 and $1.9 million at December 31, 1995. The notes issued under the 1993 plan bear interest at the dividend rate on the date of exercise divided by the purchase price of such shares. The notes issued under the previous plans bear interest at the lesser of (i) the Trust's borrowing rate or (ii) the current indicated annual dividend rate on the shares acquired pursuant to the option, divided by the purchase price of such shares. The notes are collateralized by
the shares and are with recourse. The loans have a term extending to the employee's or officer's retirement date.
FAS Statement No. 123, "Accounting for Stock-Based Compensation" requires pro forma information regarding net income and earnings per share as if the Trust accounted for its stock options under the fair value method of that Statement. The fair value for options issued in 1996 and 1995 has been estimated as $120,000 and $1.4 million, respectively, as of the date of grant, using a binomial model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.7% and 7.3%; volatility factors of the expected market price of the Trust's shares of 19% and 19%; and a weighted average expected life of the option of 5.6 years and 6.3 years.
Because option valuation models require the input of highly subjective assumptions, such as the expected stock price volatility, and because changes in these subjective input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options are amortized to expense over the options' vesting period. The pro forma information is as follows:
A summary of the Trust's stock option activity for the years ended December 31, is as follows:
At December 31, 1996 and 1995, options for 942,270 shares and 609,300 shares, respectively, were exercisable. The average remaining contractual life of options outstanding at December 31, 1996 and 1995 was 7.1 years and 7.8 years, respectively. The weighted average grant date fair value per option for options
granted in 1996 and 1995 was $1.47 and $1.83, respectively. The exercise price of options outstanding at December 31, 1996 ranged from $17.25 per share to $26.00 per share.
NOTE 10. SAVINGS AND RETIREMENT PLAN ------------------------------------
The Trust has a savings and retirement plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Employees' contributions range, at the discretion of each employee, from 1% to 17% of compensation up to a maximum of $9,500. Under the plan, the Trust, out of its current net income, contributes 50% of each employee's first 5% of contributions. In addition, the Trust may make discretionary contributions within the limits of deductibility set forth by the Code. Employees of the Trust, who work over 1,000 hours annually, are eligible to become plan participants. The Trust's expense for the years ended December 31, 1996, 1995 and 1994 was $179,000, $158,000 and $147,000, respectively. In 1996 and 1995 the Trust recorded a liability for an additional contribution of 1.5% and 1% of salary, respectively, for all nonofficer employees who are eligible for the 401(k) plan. In addition, 1.5% of salary in 1996 and 1% of salary in 1995 was accrued for all eligible nonofficer employees as a bonus.
NOTE 11. INTEREST EXPENSE -------------------------
The Trust incurred interest expense totaling $46.4 million, $40.2 million and $31.8 million, in 1996, 1995 and 1994, respectively, of which $871,000, $975,000, and $348,000, respectively, was capitalized. Interest paid was $44.2 million in 1996, $33.4 million in 1995, and $39.9 million in 1994 which included $8.0 million of the premium on the 5 1/4% convertible subordinated debentures which were redeemed in April 1994.
NOTE 12. SUBSEQUENT EVENTS --------------------------
On January 31, 1997, 22,000 restricted shares were granted to an officer and two employees of the Trust. The shares vest over three years.
On January 6, 1997 as described in Footnote 1, the Trust purchased the fee interest on three shopping centers and exercised an option to purchase the fee on another shopping center. The Trust previously held these properties under a capital lease. On January 22, 1997 the Trust purchased a retail building in Chicago, Illinois for cash of $4.2 million.
On February 4, 1997 the Trust sold 3.0 million shares to an institutional investor for $28 per share, netting $83.9 million.
NOTE 13. QUARTERLY DATA (UNAUDITED) -----------------------------------
The following summary represents the results of operations for each quarter in 1996 and 1995:
(in thousands, except per share amounts)
(1) Income before loss on sale of real estate was $5.7 million or $.18 per share.
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED Three Years Ended December 31, 1996
Reconciliation of Total Cost --------------------------------------
(A) For Federal tax purposes, the aggregate cost basis is approximately $1,032,519,000 as of December 31, 1996.
F- 24
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED Three Years Ended December 31, 1996
F- 25
FEDERAL REALTY INVESTMENT TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE Year Ended December 31, 1996
1) For Federal tax purposes, the aggregate tax basis is approximately $27,913,000 as of December 31, 1996. No payments are delinquent on these mortgages. 2) This mortgage is extendable for up to 45 years with interest increasing to a maximum of 11%. 3) This mortgage is available for up to $4,020,000. At December 31, 1995, $3,182,000 was outstanding. 4) This mortgage is available for up to $900,000. At December 31, 1995, $379,000 was outstanding. 5) This mortgage is available for up to $950,000.
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE - CONTINUED
F- 27
Report of Independent Certified Public Accountants -------------------------------------------------- on Supplemental Information ---------------------------
Trustees and Shareholders Federal Realty Investment Trust
In connection with our audit of the consolidated financial statements of Federal Realty Investment Trust referred to in our report dated February 5, 1997 which is included in this Form 10-K, we have also audited Schedules III and IV as of December 31, 1996 and for each of the three years then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
Grant Thornton LLP Washington, D.C. February 5, 1997
NON-EXCLUSIVE BROKERAGE AGREEMENT ---------------------------------
This Agreement is made and entered into on this third day of December, 1996 by and between Federal Realty Investment Trust, an unincorporated business trust organized under the business laws of the District of Columbia and Street Retail, Inc., a Maryland corporation (collectively, "Client"), and Westport Realty Advisors, Inc. and Jack Alan Guttman (collectively, "Broker").
In consideration of the mutual covenants set forth in this Agreement, the parties agree as follows:
1. This Agreement replaces the Exclusive Brokerage Agreement by and between Client and Broker dated August 20, 1995 ("Prior Agreement") in its entirety. As of August 21, 1996, the Prior Agreement is terminated and its terms and provisions, including Section 6, but excluding Section 7, thereof, are null and void.
2. Client hereby appoints Broker as its non-exclusive real estate broker for the purchase of urban retail buildings and traditional "strip" shopping centers and shopping malls (collectively, "Properties") located in Massachusetts, Connecticut, New York and New Jersey (collectively, "Broker Area"). Broker shall perform the duties of a real estate broker; specifically, Broker shall conduct searches for Properties which fit the criteria established by Client and assist Client with all aspects of the due diligence process in order to enable Client to evaluate the desirability and feasibility of acquiring such Properties or any interest therein; such assistance shall include collecting and providing Client with market information such as demographics, information on competing Properties, comparable rentals and sales and assistance in the appraisal and underwriting of the Properties. Client shall have a right of first refusal, which refusal must be in writing, on all Properties identified or located by Broker in Broker's Area before Broker can identify, offer or show such Properties to any other potential purchaser. Client must respond to Broker indicating interest in pursuing or not pursuing such Properties within 14 days of receipt of Broker's identification of such Properties. Client's indication of interest in such Properties shall not bind Client in any way to purchase such Properties, and no Commission (as that term is defined herein) shall be paid to Broker unless the conditions precedent to the payment of a Commission set forth in Section 6 hereof have been met. Client shall notify Broker if it later determines not to continue investigating the possibility of a purchase of any such Properties. Following such notification of refusal, Broker may identify, offer or show any such Properties to any other potential purchaser.
3. Broker represents and warrants that:
a) Broker will act in accordance with the highest professional standards of the industry and in compliance with all applicable laws, regulations, codes, ordinances and orders.
Non-Exclusive Brokerage Agreement
b) There are no obligations, commitments, or impediments of any kind that will limit or prevent the Broker's performance of its services and obligations pursuant to this Agreement.
c) The Broker is duly licensed as a real estate broker in the States of Massachusetts, Connecticut, New York and New Jersey.
d) Broker will perform its services in a professional manner and in the most expeditious and economical manner consistent with the interest of Client.
e) Broker is an independent contractor and not an employee of Client.
f) Broker solely represents Client in any transaction pursuant to this Agreement and must disclose Broker's sole representation of Client to all third parties contacted in connection with this Agreement.
g) Broker shall NOT disclose to any prospective seller or anyone else information obtained within the confidentiality and trust of the fiduciary relationship with Client, nor disclose to the prospective seller or anyone else information similarly obtained from Client without the consent of Client.
h) Broker shall NOT receive any fees, commissions or other remuneration other than the Commission (as hereinafter defined) from any seller, broker or any other source in connection with any property purchased by Client pursuant to this Agreement
4. Broker's authority is limited to performing the services in accordance with the terms of this Agreement. Broker does not have any authority to enter into or execute any agreement for or on behalf of Client. No written proposals, offers or other information concerning Client shall be distributed without Client's prior written consent, which may be withheld in Client's sole and absolute discretion. Client shall have the right to specify Broker's degree of involvement, if any, with respect to any negotiation of any contract of sale ("Contract of Sale"). Broker acknowledges that entering into a Contract of Sale involves negotiation of complex provisions and issues, including business, tax and operational issues and liabilities relating to a property, and that Client, therefore, expressly reserves the right to reject any and all proposals for a Contract of Sale and to approve any and all terms and conditions of any proposed Contract of Sale as Client sees fit, in Client's sole and absolute discretion.
5. The term of this Agreement ("Term") shall commence on August 21, 1996 and end at midnight on August 21, 1997, unless sooner terminated in accordance with the provisions of this
Non-Exclusive Brokerage Agreement
Agreement.
6. For transactions less than $10,000,001, Client shall pay Broker a commission (the "Commission") equal to:
(i) 2.25% of the portion of the aggregate gross sales price ("Purchase Price") of the Properties acquired subject to this Agreement up to $2,000,000;
(ii) 1.75% of the portion of the Purchase Price exceeding $2,000,000 up to $5,000,000;
(iii) 1.50% of the portion of the Purchase Price exceeding $5,000,000 up to $10,000,000.
For transactions exceeding $10,000,000, Client shall pay Broker a commission (The "Commission") equal to:
(i) 1.25% of the portion of the Purchase Price up to $15,000,000;
(ii) 1.00% of the portion of the Purchase Price exceeding $15,000,000 up to $20,000,000;
(iii) .75% of the portion of the Purchase Price exceeding $20,000,000 up to $30,000,000;
(iv) .50% of the portion of the Purchase Price exceeding $30,000,000 up to $75,000,000;
(v) .25% of the portion of the Purchase Price exceeding $75,000,000.
Notwithstanding anything to the contrary contained in this Agreement, the following shall be conditions precedent to Client's obligation to pay the Commission:
a) The execution and delivery by Client and seller of a Contract of Sale for one or more Properties acceptable in form and substance to Client, in Client's sole and absolute discretion; and
b) The actual closing of the sale, including Client's payment of all monies due at closing, and transfer of title, or other evidence of ownership, to Client.
Non-Exclusive Brokerage Agreement
Failure of either of these conditions shall preclude any claim for a Commission by Broker. In no event shall Broker ever receive any fees, commissions, or other remuneration from any seller, broker or other person or entity in connection with properties purchased by Client pursuant to this Agreement.
Except following the occurrence of an Event of Default as described in Section 9, it is further understood that the Commission shall be paid to Broker if, (i) within One Hundred Eighty (180) days after the expiration or termination of the Term, Client enters into a Contract of Sale for one or more Properties presented by Broker during the Term and named in a written list ("List") delivered to Client by Broker within ten (10) days following the expiration of the Term or the date of termination of this Agreement ("Period End"), provided that, no more than five (5) Properties are included on the List, Broker is actively engaged in negotiating the purchase by Client of each Property included on the List, all Properties included on the List shall be agreed to by Client (which agreement shall not be unreasonably withheld) and the owner of each Property included on the List shall provide a letter to Client by the Period End indicating active interest in selling such Property to Client, (ii) such purchase is ultimately consummated, and (iii) the two conditions precedent to Client's obligation to pay the Commission, as set forth above, have been met. Broker's Commission shall be the sole compensation paid to Broker and Broker shall not be entitled to reimbursement for any expenses or any other sums Broker incurs related to or involving the performance of the services. The Commission shall be paid to Broker at closing and Client hereby authorizes the attorney or title company conducting the closing to disburse the Commission to Broker at such closing. The Commission shall be payable if the transfer or sale is structured as a cash sale, like-kind exchange, partial sale, joint venture, newly formed partnership or transfer of stock.
7. In no event shall Client be responsible to pay any persons or entities, other than Broker, any commissions or other remuneration of any kind in connection with this Agreement or by virtue of their association with Broker. Further, Client shall not be obligated to see to the application of the Commission, if any, due under this Agreement or the payment of any other remuneration for the benefit of any persons or entities other than Broker and no other persons or entity shall be a third party beneficiary of this Agreement. Broker shall be solely responsible for the direct payment of any commissions or other remuneration of any kind due to other persons or entities claiming entitlement to a share of the Commission or any other remuneration under this Agreement or by virtue of their association with Broker. Broker hereby agrees to indemnify and hold Client harmless from and against any and all claims, demands, obligations, liabilities, losses and damages (including, without limitation, attorney's fees of counsel selected by Client) arising directly or indirectly out of or in connection with any claim for commissions or other remuneration of any kind for any person or entity claiming by, through or under Broker or relating in any way to this Agreement, or Broker's actions or failure to act pursuant to this Agreement; it being understood and agreed that Client's liability hereunder shall be limited to
Non-Exclusive Brokerage Agreement
the payment to Broker of the Commission, if any, owed under the Agreement. In the event any claims, demands, obligations, liabilities, losses and/or damages arise in connection with any claim for commissions, fees or other remuneration, Client may, in its sole and absolute discretion, withhold Commissions otherwise payable to Broker pending final resolution and may offset against such Commissions any such claims, demands obligations, liabilities, losses and or damages. This provision shall survive any termination of this Agreement.
8. Broker shall obtain, pay for and keep in force at all times during the performance of work pursuant to this Agreement, the following insurance coverage placed with insurance companies having an A.M. Best rating of A VI or better:
Comprehensive General Liability Insurance, with limit of not less than one million dollars ($1,000,000) per occurrence, or Commercial General Liability -- Insurance with limits of not less than one million dollars ($1,000,000) per occurrence and two million dollars ($2,000,000) aggregate. Client shall be added as an additional insured. The policy shall provide such additional insured with a thirty (30) day notice of cancellation, non-renewal or material change. Any certificates of insurance furnished in accordance with this Agreement shall specify who has been added as an additional insured and shall state that the policy has been amended to provide the thirty (30) day advance notice.
Professional Liability Insurance with a limit of not less than one million dollars ($1,000,000). Contractor may meet the limits of liability indicated by means of the use of an umbrella liability policy. Any general liability policy must be written on an occurrence basis. Owner shall be furnished with certificates evidencing that all such insurance specified herein is in force prior to commencement of services provided pursuant to this Agreement.
9. This Agreement may be terminated by either party upon thirty (30) days' written notice. In the event of termination by either party, Broker shall be entitled to receive only that Commission which it has earned pursuant to and in accordance with Section 6 of this Agreement and Client shall have no further obligations or liabilities hereunder.
10. Broker's failure or refusal to perform or observe any obligation, covenant, or condition of this Agreement shall constitute an Event of Default. Should an Event of Default occur, Client may, at its option, terminate this Agreement without affecting any other remedy which it may have at law or in equity. Such termination shall be effective immediately upon Broker's receipt of written notice from Client. In such event, Broker shall be entitled to receive only that Commission which it has already earned pursuant to and in accordance with Section 6 of this Agreement, less any and all damages, losses, claims, costs and expenses incurred or suffered by Client as a result of Broker's failure or refusal to perform and Client shall have no further
Non-Exclusive Brokerage Agreement
obligations or liabilities hereunder. Broker will not be entitled to receive any Commissions on properties that are purchased by Client, unless the purchase agreement is fully executed before the date of occurrence of an Event of Default and the conditions precedent to the Client's obligation to pay a Commission set forth in Section 6 have been met.
11. Client, its directors, employees, officers, agents and shareholders shall not be personally liable under this Agreement and Broker hereby agrees to look solely to Client's property, real, personal or otherwise, tangible or intangible, for payment of any claim hereunder. A similar limitation on liability shall be inserted in each document executed by Client (if any) pursuant to this Agreement.
12. Whenever any demand, request, approval consent or notice ("Notice") shall or may be given by one party to the other, Notice shall be addressed to the parties at their respective addresses as set forth below and delivered by (i) hand, (ii) facsimile, (iii) a nationally recognized overnight express courier, or (iv) registered or certified mail return receipt requested. The date of actual receipt shall be deemed the date of service of Notice. In the event an addressee refuses to accept delivery, however, then Notice shall be deemed to have been served on either (i) the date hand delivery is refused, (ii) the next business day in the case of delivery by overnight courier, or (iii) three (3) business days after mailing the notice in the case of registered or certified mail. Either party may, at any time, change its Notice address by giving the other party Notice, in accordance with the above, stating the change and setting forth the new address.
Client: Ron D. Kaplan Vice President, Capital Markets Federal Realty Investment Trust 1626 East Jefferson Street Rockville, Maryland 20852-4041
and
Robert S. Wennett Senior Vice President, Acquisitions Federal Realty Investment Trust 1626 East Jefferson Street Rockville, Maryland 20852-4041
with a copy to:
Non-Exclusive Brokerage Agreement
Street Retail, Inc. 1626 East Jefferson Street Rockville, Maryland 20852-4041 Attn: Secretary
Broker: Westport Realty Advisors, Inc. 35 Prospect Road Westport, Connecticut 06880 Attn: Jack Alan Guttman, President
13. This Agreement contains the entire agreement between Client and Broker, supersedes any prior agreements or understandings, and no oral statements or prior written matter not specifically incorporated in this Agreement shall be of any force and effect. No variation, modification, or changes of this Agreement shall be binding on either party to the Agreement unless set forth in a document executed by these parties or a duly authorized agent, officer, or representative hereof.
14. Neither Client nor Broker shall file or record any instrument or document relative to this Agreement in any public records except as may be required by the federal securities laws.
15. Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between the Client and the Broker.
16. For Connecticut transactions, this Agreement shall be subject to Section 46a-64 of the Connecticut General Statutes, as amended, and governed by and construed in accordance with the laws of the State of Connecticut.
17. The heirs, transferees, successors, and assigns of the parties hereof shall be duly bound by the provisions hereof, provided Broker may not assign or otherwise transfer its right or obligation hereunder.
18. The terms of the Agreement shall be governed by and construed in accordance with the laws of the State of Maryland.
19. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above stated.
Non-Exclusive Brokerage Agreement
and year first above stated.
CLIENT:
FEDERAL REALTY INVESTMENT TRUST
By: Ron D. Kaplan -------------------------------- Ron D. Kaplan Vice President, Capital Markets
By: Robert S. Wennet -------------------------------- Robert S. Wennett Senior Vice President, Acquisitions
BROKER:
WESTPORT REALTY ADVISORS, INC.
By: Jack Alan Guttman -------------------------------- Jack Alan Guttman President
JACK ALAN GUTTMAN
Jack Alan Guttman ------------------------------------
SECOND AMENDMENT dated as of August 1, 1996
to the
CREDIT AGREEMENT dated as of September 30, 1994
between
FEDERAL REALTY INVESTMENT TRUST
and
FIRST UNION NATIONAL BANK OF VIRGINIA
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of August 1, 1996 and is between FEDERAL REALTY INVESTMENT TRUST, a District of Columbia unincorporated business trust (the "Borrower"), and FIRST UNION NATIONAL BANK OF VIRGINIA, a national banking association (the "Bank").
RECITALS
WHEREAS, the Borrower and the Bank are parties to a Credit Agreement dated as of September 30, 1994, as amended by a First amendment to Credit Agreement, dated as of April 30, 1996, (as so amended, the "Credit Agreement") pursuant to which the Bank has established in favor of the Borrower a $50,000,000 unsecured line of credit; and
WHEREAS, the Borrower has requested that the Credit Agreement be amended to extend the maturity date of the line of credit from August 1, 1998 to August 1, 2000; and
WHEREAS, the Bank is willing to amend the Credit Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. Terms used herein and not defined which are ----------- defined in the Credit Agreement shall have for the purposes hereof the respective meanings set forth therein.
Section 2. Amendment to Section 1.1 of the Credit Agreement. Section ------------------------------------------------ 1.1 of the Credit Agreement is amended by substituting "August 1, 2000" for "August 1, 1998" in clause (i) of the definition of "Termination Date" (which amendment extends the maturity date of the Line of Credit Commitment from August 1, 1998 to August 1, 2000).
Section 3. Amendment to Section 2.13 of the Credit Agreement. Section ------------------------------------------------- 2.13 of the Credit Agreement is amended by substituting "August 1, 1998" for "August 1, 1996" in the sixth line of such section (which amendment extends the date on or before which the borrower is prohibited from reducing or terminating the Line of Credit Commitment from August 1, 1996 to August 1, 1998).
Section 4. Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Bank that (i) the execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action, (ii) this Amendment constitutes the valid, binding and enforceable obligation of the Borrower (subject, as to enforceability, to the exceptions set forth in Section 5.3 of the Credit Agreement), (iii) the Borrower has no defense, right of set-off or counterclaim of any nature in connection with its obligations under the Credit Agreement, (iv) the representations and warranties of the Borrower set forth in the Credit Agreement are true and correct as of the date of this
Amendment as if made as of the date of this Amendment (unless such representations and warranties specifically relate to an earlier date and except to the extent that the Borrower has notified the Bank in writing to the contrary and such notice has been accepted by the Bank) and (v) no Default has occurred and is continuing.
Section 5. Costs and Expenses. The Borrower agrees to pay all costs ------------------ and expenses incurred by the Bank in connection with the preparation, execution and delivery of this Amendment and any note, document or instrument delivered in connection herewith, including the reasonable fees and expenses of counsel for the Bank.
Section 6. Effectiveness. This Amendment shall become effective as ------------- of the date (the "Amendment Effective Date") on which the Bank shall have received (i) a copy of this Amendment duly executed by an authorized officer of the Borrower and (ii) the original of a promissory note substantially in the form of Exhibit A hereto (the "Note") executed by an authorized officer of the Borrower (which promissory note shall replace the promissory note dated April 30, 1996 made by the Borrower in favor of the Bank in the maximum principal amount of $50,000,000). On the Amendment Effective Date the Credit Agreement shall be automatically amended as set forth herein. On and after the Amendment Effective Date, the rights and obligations of the Borrower and the Bank with respect to the period prior to the Amendment Effective Date shall continue to be governed by the provisions of the Credit Agreement.
Section 7. Integration; Confirmation. On and after the amended ------------------------- Effective Date, each reference in the Credit Agreement to "this Agreement," "herein," "hereunder" or words of similar import, and each reference in any note or other document delivered in connection with the Credit Agreement to the "Credit Agreement," shall be deemed to be a reference to the Credit Agreement as amended by this Amendment, and the Credit Agreement as so amended shall be read as a single, integrated document. Except as amended by this Amendment, all other terms and provisions of the Credit Agreement shall continue in full force and effect and unchanged and are hereby confirmed in all respects.
Section 9. Counterparts. This Amendment may be signed in any number of ------------ counterparts, each of which shall be an original, all of which taken together shall constitute a single integrated agreement with the same effect as if the signatures thereto and hereto were upon the same instrument.
Section 10. Governing Law. This Amendment and the Note shall be ------------- deemed to be contracts made under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written.
FEDERAL REALTY INVESTMENT TRUST
By Ron D. Kaplan -------------------------------- Ron D. Kaplan Vice President - Capital Markets
4800 Hampden Lane, Suite 500 Bethesda, Maryland 20814 Attention: Legal Department
FIRST UNION NATIONAL BANK OF VIRGINIA
By William A. Richardson -------------------------------- William A. Richardson Vice President
1970 Chain Bridge Road McLean, Virginia 22102-4099
THIRD AMENDMENT dated as of August 8, 1996
to the
CREDIT AGREEMENT dated as of September 30, 1994
between
FEDERAL REALTY INVESTMENT TRUST
and
FIRST UNION NATIONAL BANK OF VIRGINIA
THIRD AMENDMENT TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of August 8, 1996 and is between FEDERAL REALTY INVESTMENT TRUST, a District of Columbia unincorporated business trust (the "Borrower"), and FIRST UNION NATIONAL BANK OF VIRGINIA, a national banking association (the "Bank").
RECITALS
WHEREAS, the Borrower and the Bank are parties to a Credit Agreement dated as of September 30, 1994, as amended by a First amendment to Credit Agreement, dated as of April 30, 1996, and a Second Amendment to Credit Agreement dated as of August 1, 1996, (as so amended, the "Credit Agreement") pursuant to which the Bank has established in favor of the Borrower a $50,000,000 unsecured line of credit; and
WHEREAS, the Borrower has requested that the Credit Agreement be amended to extend the maturity date of the line of credit from August 1, 2000 to August 1, 2001; and
WHEREAS, the Bank is willing to amend the Credit Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. Terms used herein and not defined which are ----------- defined in the Credit Agreement shall have for the purposes hereof the respective meanings set forth therein.
Section 2. Amendment to Section 1.1 of the Credit Agreement. Section 1.1 ------------------------------------------------ of the Credit Agreement is amended by substituting "August 1, 2001" for "August 1, 2000" in clause (i) of the definition of "Termination Date" (which amendment extends the maturity date of the Line of Credit Commitment from August 1, 2000 to August 1, 2001).
Section 3. Amendment to Section 2.13 of the Credit Agreement. Section ------------------------------------------------- 2.13 of the Credit Agreement is amended by substituting "August 1, 1999" for "August 1, 1998" in the sixth line of such section (which amendment extends the date on or before which the borrower is prohibited from reducing or terminating the Line of Credit Commitment from August 1, 1998 to August 1, 1999).
Section 4. Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Bank that (i) the execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action, (ii) this Amendment constitutes the valid, binding and enforceable obligation of the Borrower (subject, as to enforceability, to the exceptions set forth in Section 5.3 of the Credit Agreement), (iii) the Borrower has no defense, right of set-off or counterclaim of any nature in connection with its obligations under the Credit Agreement, (iv) the representations and warranties of the
Borrower set forth in the Credit Agreement are true and correct as of the date of this Amendment as if made as of the date of this Amendment (unless such representations and warranties specifically relate to an earlier date and except to the extent that the Borrower has notified the Bank in writing to the contrary and such notice has been accepted by the Bank) and (v) no Default has occurred and is continuing.
Section 5. Costs and Expenses. The Borrower agrees to pay all costs and ------------------ expenses incurred by the Bank in connection with the preparation, execution and delivery of this Amendment and any note, document or instrument delivered in connection herewith, including the reasonable fees and expenses of counsel for the Bank.
Section 6. Effectiveness. This Amendment shall become effective as of the ------------- date (the "Amendment Effective Date") on which the Bank shall have received (i) a copy of this Amendment duly executed by an authorized officer of the Borrower and (ii) the original of a promissory note substantially in the form of Exhibit a hereto (the "Note") executed by an authorized officer of the Borrower (which promissory note shall replace the promissory note date August 1, 1996 made by the Borrower in favor of the Bank in the maximum principal amount of $50,000,000). On the Amendment Effective Date the Credit Agreement shall be automatically amended as set forth herein. On and after the Amendment Effective Date, the rights and obligations of the Borrower and the Bank with respect to the period prior to the Amendment Effective Date shall continue to be governed by the provisions of the Credit Agreement.
Section 7. Integration; Confirmation. On and after the amended Effective ------------------------- Date, each reference in the Credit Agreement to "this Agreement," "herein," "hereunder" or words of similar import, and each reference in any note or other document delivered in connection with the Credit Agreement to the "Credit Agreement," shall be deemed to be a reference to the Credit Agreement as amended by this Amendment, and the Credit Agreement as so amended shall be read as a single, integrated document. Except as amended by this Amendment, all other terms sand provisions of the Credit Agreement shall continue in full force and effect and unchanged and are hereby confirmed in all respects.
Section 9. Counterparts. This Amendment may be signed in any number of ------------ counterparts, each of which shall be an original, all of which taken together shall constitute a single integrated agreement with the same effect as if the signatures thereto and hereto were upon the same instrument.
Section 10. Governing Law. This Amendment and the Note shall be deemed to ------------- be contracts made under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written.
FEDERAL REALTY INVESTMENT TRUST
By Ron D. Kaplan -------------------------------- Ron D. Kaplan Vice President - Capital Markets
4800 Hampden Lane, Suite 500 Bethesda, Maryland 20814 Attention: Legal Department
FIRST UNION NATIONAL BANK OF VIRGINIA
By William A. Richardson -------------------------------- William A. Richardson Vice President
1970 Chain Bridge Road McLean, Virginia 22102-4099
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT ---------------------------------------------
This Third Amendment to Revolving Credit Agreement ("this Third Amendment"), is made the 1st day of July, 1996, by and between FEDERAL REALTY INVESTMENT TRUST, an unincorporated business trust organized under the laws of the District of Columbia ("Borrower"), having an office at 4800 Hampden Lane, Suite 500, Bethesda, Maryland 20814, and CORESTATES BANK, N.A., a national banking association ("Bank"), having an office at FC1-8-10-67, 10th floor, Widener Building 1339 Chestnut Street, Philadelphia, Pennsylvania 19107.
Background ----------
A. Borrower and Bank are parties to a Revolving Credit Agreement dated as of September 1, 1993, as amended by a First Amendment to Revolving Credit Agreement dated January 31, 1994, and a Second Amendment to Revolving Credit Agreement dated September 30, 1994 (as so amended, the "Revolving Credit Agreement"). All capitalized terms used but not specifically defined herein have the meanings defined in the Revolving Credit Agreement.
B. Borrower has requested Bank to modify the rate of interest payable on Loans and to extend the commitment Termination Date.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Borrower and Bank agree as follows:
1. Henceforth, the Commitment Termination Date shall be the date that is five (5) years after the date of this Third Amendment.
2. Henceforth, the term "LIBOR Spread" shall mean three quarters of one percent per annum (that is, 75 "basis points").
3. Section 5.07(d) of the Revolving Credit Agreement is hereby deleted and the following is inserted in its place: "(d) Recourse Mortgage Debt in accordance with Section 5.04 (a)".
4. Henceforth, the term "Core Region" shall include Chicago, Illinois.
5. Section 6.15 of the Revolving Credit Agreement is hereby deleted and the following is inserted in its place:
"Assets. At least fifty percent (50%) of the assets of the Borrower, on a ------ Consolidated basis, shall at all times consist of retail properties and/or residential apartment buildings."
6. Except as specifically modified hereby, the Revolving Credit Agreement remains in full force and effect, in accordance with its terms. Borrower hereby ratifies and confirms all of Borrower's obligations to Bank under the Revolving Credit Agreement and represents to, and agrees with, Bank that Borrower has no defense, set-off or counterclaim to or against any of Borrower's obligations under the Revolving Credit Agreement.
IN WITNESS WHEREOF, Borrower and Bank have executed this Third Amendment as of the day and year first above written.
FEDERAL REALTY INVESTMENT TRUST
Rebecca Dawes By: Ron D. Kaplan - -------------------- -------------------------------- Witness Ron D. Kaplan, Vice President - Capital Markets
CORESTATES BANK, N.A.
By: Glenn W. Gallagher -------------------------------- Glenn W. Gallagher, Vice President
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
This THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Third Amendment") is entered into as of the 7th day of August, 1996, by and between FEDERAL REALTY INVESTMENT TRUST, a District of Columbia unincorporated business trust (the "Borrower"), and SIGNET BANK, a Virginia Corporation, a successor by merger dated October 31, 1995 to Signet Bank/Maryland.
PREFACE
Reference is made to the Revolving Credit Agreement dated as of June 22, 1993 between the Borrower and the Bank, as amended by the First Amendment to Revolving Credit Agreement dated as of September 30, 1994 (as amended, the "Credit Agreement"), and as further amended by the Second Amendment to Revolving Credit Agreement dated as of October 23, 1995 (as amended the "Credit Amendment"). Except as otherwise provided, capitalized terms used herein and not defined herein shall have the meanings set forth in the Credit Agreement.
The Borrower has requested that the Credit Agreement be amended as hereinafter provided to extend the Termination Date and to modify certain other terms contained in the Credit Agreement. The Bank is willing to agree to such requests, subject to the terms and conditions contained herein.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Amendments to the Credit Agreement. The Credit Agreement is hereby amended as follows:
(a) Section 2.1 (a) of the Credit Agreement is amended by deleting the number "$30,000,000" in the fifth line and inserting in lieu thereof the number "25,000,000".
(b) Section 2.1 (b) of the Credit Agreement is hereby amended by deleting the date "July 1, 1998" in the first line of such subsection and inserting in lieu thereof the date "July 1, 2001".
(c) Section 2.3 (a) (vi) is amended by deleting the existing Section 2.3 (a) (vi) and inserting in lieu thereof the following:
"The Applicable Margin means the applicable margin set forth in the table below used in calculating the interest rate applicable to Prime
Rate Loans and Euro-Dollar Loans which shall vary from time to time in accordance with the borrower's long-term unsecured debt ratings. The Applicable Margin to be used in calculating the interest rate applicable to different Loans shall vary from time to time in accordance with Borrower's then applicable (x) Moody's debt rating and (y) S&P debt rating as the case may be. The applicable debt ratings and the Applicable Margin are set forth in the following table:
S&P means Standard & Poor's Ratings Group and its successors and Moody's means Moody's Investors Service, Inc. and its successors. In the event the Borrower receives ratings from S&P and Moody's that are not equivalent, the most recent rating in which S&P and Moody's had equivalent ratings will be used to determine the applicable margin.
(d) Section 3.1 (b) of the Credit Agreement is amended by deleting the existing Section 3.1 (b) and inserting in lieu thereof the following:
"For the period from the date hereof to but not including the Termination Date, the Borrower shall pay to the Bank a fee at a rate in accordance with Borrower's then applicable (x) Moody's debt rating, and (y) S&P debt rating as the case may be, on the average unused portion of the Commitment, such fee shall be payable in arrears on the first day of January, April, July, and October of each year, and on the Termination Date. The applicable rating and annual fee are set forth in the table below:
In the event the Borrower receives ratings from S&P and Moody's that
are not equivalent, the most recent rating in which S&P and Moody's had equivalent ratings will be used to determine the Annual Fee.
(e) Section 3 of the Credit Agreement is amended by adding a new section 3.6 to read as follows:
"3.6 Reduction of Commitment. The Borrower shall have the right at any time from time to time upon five (5) Business Days prior written notice to the Bank to reduce by $1,000,000 or an integral multiple of $1,000,000 in excess thereof or terminate entirely the unborrowed portion of the then Commitment. Upon the effective date of any such reduction or termination, the Borrower shall pay to the Bank the full amount of any fees then accrued on the reduction. No reduction or termination of the Commitment may be reinstated."
(f) Section 7.15 (a) of the Credit Agreement (as amended by Section 1(j) of the First Amendment) is amended by deleting the phrase "retail shopping centers" in the tenth line and inserting in lieu thereof the phrase "retail properties".
(g) Section 7.15 (b) of the Credit Agreement is amended by deleting the number "5%" in the seventh line and inserting in lieu thereof the number "10%".
2. Representations and Warranties. The Borrower and the undersigned hereby certify that (i) each of the representations and warranties made in or in connection with the Credit Agreement and this Third Amendment are true and correct (except to the extent the Borrower has previously notified the Bank to the contrary) as of the date hereof; (ii) no Default or Event of Default has occurred and is continuing or will occur as a result of this Third Amendment or the transactions contemplated hereby; and (iii) the execution and delivery of this Third Amendment and the performance of the Borrower's obligations under the Credit Agreement, as amended hereby, have been approved by all necessary action of the Borrower and the officer executing this Third Amendment has been duly authorized to execute and deliver this Third Amendment on behalf of the Borrower.
3. Conditions to Amendment. The effectiveness of the agreement of the Bank to this Third Amendment is subject to the satisfaction of the following conditions precedent:
a. The Bank shall have received the following, all of which must be in a form and substance satisfactory tot he Bank and in its sole discretion:
(i) this Third Amendment, duly executed by the Borrower and the Bank;
(ii) a Third Amended Revolving Credit Note, in the form Attached hereof as Exhibit A (the "Third Amended Revolving Credit Note"), duly executed by the Borrower;
(iii)written confirmation from the Borrower that it has executed agreements with First Union National Bank of Virginia ("First Union"), Corestates Bank, N.A. ("Corestates"), and Mellon Bank, N.A. ("Mellon") which amend their respective credit agreements for a term and rate similar to that of the Bank.
b. All representations and warranties made in or in connection with the Credit Agreement and this Third Amendment shall be true, correct and complete (except to the extent the Borrower has previously notified the Bank to the contrary) on and as of the date hereof.
c. No Default or Event of Default under the Credit Agreement shall have occurred and be continuing or will occur as a result of this Third Amendment or the transactions contemplated hereby.
4. No Claims or Defenses. The Borrower acknowledges and agrees that its obligations under the Credit Agreement, as amended hereby, are its valid obligations and, as of the date hereof, there are no claims, setoffs or defenses to the payment or performance by the Borrower of such obligations, and that the Bank may enforce the payment and performance of such obligations as set forth in the Credit Agreement, as amended hereby, and the Third Amended Revolving Credit Note.
5. Counterpart Execution. This Third Amendment may be executed in any number of counterparts, and by the different parties on different counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument. In making proof of this agreement it shall only be necessary to account for and produce one such counterpart.
6. Entire Agreement. From and after the effectiveness of this Third Amendment, the Credit Agreement (as amended hereby) and the Third Amended Revolving Credit Note constitute the entire understanding of the parties with respect to the subject matter thereof and any prior agreements, whether written or oral, or contemporaneous oral agreements, with respect there to are superseded hereby.
7. Governing Law. The Credit Agreement, this Third Amendment and the Third Amended Revolving Credit Note, and the rights and duties of the parties hereto and thereto, including matters of construction, validity and performance, shall be governed and determined in accordance with the laws of the state of Maryland without giving effect to the choice of laws thereof.
9. References to the Credit Agreement and the Note. Except as herein specifically amended the Credit Agreement shall remain in full force and effect in accordance with its terms. From and after the effectiveness hereof, whenever reference is made in any agreement (including without limitation the Credit Agreement), note, certificate, noticed document, letter or conversation to the Credit Agreement or to the Note, such reference shall, without more, be deemed to refer to the Credit Agreement, as amended hereby, or to the Third Amended Revolving Credit Note, as applicable.
IN WITNESS WHEREOF of the parties hereto have executed this Third Amendment as of the date first written above.
FEDERAL REALTY INVESTMENT TRUST
By: Ron Kaplan ------------------------------- Name: Ron Kaplan ------------------------------- Title:Vice President -------------------------------
SIGNET BANK, a Virginia corporation, a successor by merger dated October 31, 1995 to Signet Bank/Maryland
By: John A. Schissel ------------------------------- Name: John A. Schissel ------------------------------- Title:Vice President -------------------------------
Attachments
Exhibit A -- Form of Amended Revolving Credit Note
FOURTH AMENDMENT TO CREDIT AGREEMENT ------------------------------------
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made this 9th day of August, 1996 by and between FEDERAL REALTY INVESTMENT TRUST, a District of Columbia unincorporated business trust (the "Borrower"), and MELLON BANK, N.A., a national banking association (the "Bank").
Background ----------
A. Reference is made to the Credit Agreement dated as of February 11, 1994 by and between the Borrower and the Bank, as amended by a First Amendment to Credit Agreement dated as of September 30, 1994, a Second Amendment to Credit Agreement dated as of March 17, 1995 and a Third amendment to Credit Agreement dated as of June 8, 1995 (collectively, the "Original Agreement") pursuant to which the Bank extended to the Borrower a revolving credit facility in the maximum amount of $20,000,000. Capitalized terms used herein and not otherwise defined herein shall have the meaning provided in the Original Agreement.
B. The Borrower has requested that the Bank increase the maximum amount of the revolving credit facility from $20,000,000 to $30,000,000, extend the termination date from April 30, 1998 to July 1, 2001 and make certain other changes as set forth herein.
C. Bank has agreed to make such changes subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. The Original Agreement is hereby amended as follows:
a. The definition of "Available Amount" appearing in Section 1.1 of the Original Agreement is hereby deleted in its entirety and substituted with the following:
"'Available Amount' means, as of any date, $30,000,000 minus the aggregate unpaid principal amount of Advances outstanding on such date."
b. The definition of "Termination Date" appearing in Section 1.1 of the Original Agreement is hereby deleted in its entirety and substituted with the following:
"'Termination Date' means the latter of (i) July 1, 2001 or (ii) the date to which the Line of Credit Period has been extended pursuant to Section 2.10."
c. Section 2.4(b) of the Original Agreement is hereby deleted in its entirety and substituted with the following:
"If the Borrower elects that an Advance shall bear interest at the Euro-Dollar-Based Rate, such Advance shall bear interest on the outstanding principal amount thereof, for each day during the applicable Interest Period, at a rate per annum equal to the sum of .75% plus the applicable Adjusted London Interbank Offered Rate. All such interest shall be payable on the first day of each month."
d. Section 2.10 is hereby deleted in its entirety and substituted with the following:
"The Bank shall review the Line of Credit Commitment on or before July 1, each year, commencing July 1, 1997 and may, in its
sole and absolute discretion, extend the Line of Credit Period from time to time for an additional one year period. If the Bank wishes to so extend the Line of Credit Period, it must send written notice thereof to Borrower on or before July 1 of each year commencing July 1, 1997. The Bank shall have the unconditional right not to extend the Line of Credit Period, notwithstanding that no Event of Default exists. In the event that Bank fails to send the extension notice described in this Section, the Bank shall be deemed to have not extended the Line of Credit Period."
e. Section 5.2 of the Original Agreement is hereby deleted in its entirety and hereby substituted with the following:
"Minimum Shareholders' Equity. The Borrower will not permit ---------------------------- Shareholders' Equity to be less than $300,000,000 as of the last day of any calendar quarter."
f. Section 5.4 of the Original Agreement is hereby deleted in its entirety and substituted with the following:
"Minimum Funds from Operations. The Borrower will not permit ----------------------------- Funds From Operations to be less than the greater of (i) in any fiscal year, 90% of the Funds From Operations for the immediately prior fiscal year and (ii) $30,000,000 in the aggregate for any period of four consecutive calendar quarters."
g. Section 5.5 of the Original Agreement is hereby deleted in its entirety and substituted with the following:
"Limitation on Dividends. The Borrower will not during any four ----------------------- consecutive calendar quarters pay dividends which exceed an amount equal to the sum of (i) 100% of the Funds From Operations for such four quarter period and (ii) $5,000,000. The foregoing covenant w\shall be determined on a quarterly basis."
h. The form of Note attached as Exhibit A to the Original Agreement, as amended and restated, is hereby amended and restated to read in its entirety as set forth in the Amended and Restated Note attached as Exhibit A --------- of this Amendment (the "Amended and Restated Note").
2. From and after the date hereof, all references in the Original Agreement to the Note shall be to the Amended and Restated Note in the form attached hereto as Exhibit A and executed in connection with this Amendment, so --------- as to extend the provisions of the Original Agreement, as modified by this Amendment, to the Amended and Restated Note.
3. The Borrower hereby certifies that, as of the date hereof:
a. Except as previously disclosed by the Borrower in writing to Bank, each of the representations and warranties contained in the Original Agreement, as modified by this Amendment are true and correct;
b. Except as previously disclosed by the Borrower in wiring to Bank, the Borrower is in compliance with all of the terms, covenants and conditions contained in the Original Agreement, as provided by this Amendment, including, without limitation, all of the financial covenants; and
c. There exists no Default or Event of Default under the Original Agreement.
4. All of the terms, conditions, provisions and covenants in the Original Agreement, the Note or any documents executed in connection with any of the foregoing shall remain unaltered and in full force and effect except as modified by this Amendment.
5. This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
6. Each and every one of the terms and provisions of this Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Bank and their respective successors and assigns.
7. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which all constitute but one and the same instrument.
8. Until the Bank receives (a) resolutions from the Borrower, in form reasonably satisfactory to the Bank, authorizing the execution and delivery of this Amendment and the Amended and Restated Note, (b) an opinion of counsel to the Borrower, in form reasonably satisfactory to the Bank, (c) a Secretary's Certificate, (d) a Good Standing Certificate and (e) a Certificate of Incumbency, the provisions of this Amendment increasing the maximum account of the revolving credit facility from $20,000,000 to $30,000,000 shall be of no force or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written.
FEDERAL REALTY INVESTMENT TRUST
By: Ron D. Kaplan -------------------------------- Ron D. Kaplan Vice President-Capital Markets
MELLON BANK, N.A.
By: Frederick A. Felter -------------------------------- Frederick A. Felter Vice President
Exhibit 23
Consent of Independent Accountants ----------------------------------
We have issued our reports dated February 5, 1997 accompanying the consolidated financial statements and schedules included in the Annual Report of Federal Realty Investment Trust on Form 10K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Federal Realty Investment Trust on Form S-3 (File No. 33-63687, effective December 4, 1995, which pursuant to Rule 429 of the Securities and Exchange Act of 1934 constitutes a post-effective amendment to Registration Statement No. 33-51029 effective December 13, 1993; File No. 33-63955, effective November 3, 1995; and File No. 33-15264, effective August 4, 1987).
Grant Thornton LLP Washington, D.C. February 18, 1997