Item 1. Business - ------- --------
Federal Realty Investment Trust (the "Trust") is engaged in the ownership, management, development and redevelopment of prime 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 various entities which it controls. At December 31, 1998 the Trust owned 120 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. In addition, the Trust has various land parcels under its control for the purpose of developing multi-use projects that center around the retail component. The Trust believes that development is an important source of growth in the future.
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 grown from 49 as of January 1, 1994 to 121 at December 31, 1998. During this five year period the Trust acquired 77 retail properties for approximately $798 million. During this same period five shopping centers were sold. Also during this period the Trust spent over $297 million to develop, renovate, expand, improve and retenant its properties. Although the Trust usually purchases a 100% fee interest in its acquisitions, on occasion, it has entered into leases as a means of acquiring properties. In addition, the Trust has purchased certain properties in partnership with others. Certain of the partnerships, known as "downreits", are a means of allowing property owners to make a tax deferred contribution of their property in exchange for partnership units, which receive the same distributions as Trust common shares and may be convertible into common shares of the
Trust. The majority of acquisitions are funded with cash, but, on occasion, usually in connection with the partnerships, debt financing is used. Since a significant portion of cash provided by operating activities is distributed to common and preferred shareholders, capital outlays for acquisitions, developments and redevelopments require debt or equity funding.
The Trust's 120 retail properties are located in 16 states and the District of Columbia. Twenty-four of the properties are located in the Washington, D.C. metropolitan area; twenty-two are in California; fourteen are in Connecticut; eleven are in Pennsylvania, primarily in the Philadelphia area; ten are in New Jersey; ten are in Texas; seven are in Illinois; three are in Virginia; four are in Massachusetts; seven are in New York; two are in Florida; two are in Arizona; and there is one in each of the following states: Georgia, Michigan, North Carolina and Oregon. No single property accounts for over 10% of the Trust's revenues.
The Trust has traditionally operated its business as a single business segment. During the fourth quarter of 1998, however, the Trust completed a comprehensive restructuring program which, among other things, changed the Trust's operating structure from a functional hierarchy to an asset management model, where small, focused teams are responsible for a portfolio of assets. As a result the Trust has divided its portfolio of properties into three operating regions: the Northeast, Mid-Atlantic and West. Each region is operated under the direction of a chief operating officer, with dedicated leasing, property management and financial staff and operates largely autonomously with respect to day to day operating decisions. (See "Segment Results" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for a further discussion of the segments and their results.)
The Trust has approximately 2,290 tenants, ranging from sole proprietors to major national retailers; no one tenant or corporate group of tenants accounts for 3% 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 continues to seek older, well-located shopping centers and retail buildings to acquire, renovate, retenant and remerchandise, thereby enhancing their revenue potential. The Trust also continues to identify and secure additional sites for new development. During each of the years ended December 31, 1998, 1997 and 1996, retail properties have contributed 96% of the Trust's total revenue. The extent to which the Trust might mortgage or otherwise finance investments varies with the investment involved and the economic climate.
The success of the Trust depends upon, among other factors, the trends of the economy, including interest rates, construction costs, retailing trends, income tax laws, increases or decreases in operating expenses, governmental regulations, population
trends, zoning laws, legislation and the ability of the Trust to keep its properties leased at profitable levels. The Trust competes for tenants with other real estate owners and the Trust's properties account for only a small fraction of the retail space available for lease. The Trust competes for investment opportunities and debt and equity capital with individuals, partnerships, corporations, financial institutions, life insurance companies, pension funds, trust funds and other real estate investment trusts.
Investments in real property create a potential for environmental liability on the part of the current and previous owners of, or any mortgage lender on, such real property. If hazardous substances are discovered on or emanating from any property, the owner or operator of the property may be held liable for costs and liabilities relating to such hazardous substances. The Trust has environmental insurance on many 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 require an environmental study on each property it seeks to acquire. On recent acquisitions, any substances identified prior to closing which are required, by applicable laws, to be remediated have been or are in the process of investigation and remediation. Costs related to the abatement of asbestos which increase the value of Trust properties are capitalized. Other costs are expensed. In 1998 and 1997 approximately $616,000 and $1.3 million, respectively, of which $453,000 and $732,000, respectively, was capitalized abatement costs, was spent on environmental matters. The Trust has budgeted approximately $800,000 for 1999 for environmental matters, a majority of which is projected for asbestos abatement.
Current Developments - --------------------
In 1998 the Trust acquired real estate at a cost of $120.4 million, consisting primarily of four shopping centers and fifteen street retail properties. The Trust spent another $73.0 million in improvements to its properties, including $25.0 million on its predevelopment and development projects in Bethesda, Maryland; Los Gatos, California; San Jose, California; and Arlington, Virginia. The Trust invested $21.4 million in mortgage notes receivable with an average weighted stated interest rate of 10%. Mortgages on six properties,totaling $53.3 million, were paid upon their maturity in 1998.
The Trust utilized its unsecured line of credit to fund these acquisitions, capital expenditures and balloon debt repayments. Repayments on the line of credit were made from the issuance in December 1998 of a $125 million four year loan from five institutional lenders and from the issuance of $80.0 million of Medium-Term Notes in March 1998.
In September 1998 the Trust filed a $500 million shelf registration statement with the Securities and Exchange
Commission which allows for the issuance of debt securities, preferred shares and common shares.
At December 31, 1998 the Trust had 225 full-time employees.
The Trust, in its 1999 Proxy Statement, has proposed for shareholder consideration the reorganization of the Trust under the laws of the State of Maryland through an amendment and restatement of its declaration of trust.
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, 1998. 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) Represents the physical square feet of the property, which may exceed the rentable square feet used to express occupancy. (3) The Trust has a leasehold interest in this property (4) The Trust owns the general partnership interest in these buildings. (5) The Trust owns a 55.7% equity interest in this center. (6) The Trust owns this property in a "downreit" partnership. (7) The Trust has a 1% general partnership interest and manages the partnership. A 99% interest is held by a limited partner. (8) The Trust owns this property subject to a ground lease. (9) The Trust owns the controlling interest in this center. A minority owner has an interest in the profits of the center. (10) An additional 35,000 square feet is being developed. (11) Under development. (12) The Trust plans to develop these properties, most of which are currently vacant. (13) Occupancy is based on one occupied building. The other four buildings are under redevelopment. (14) Occupancy is based on two occupied buildings. (15) The Trust owns 100% of one building and an 85% partnership interest in the second property.
APARTMENTS - ---------- The following table sets forth information concerning the Trust's apartment development as of December 31, 1998 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. - ------ ---------------------------------------------------------------------
Market Quotations
The number of holders of record for Federal Realty's common shares of beneficial interest at December 31, 1998 was 7,051.
For the years ended December 31, 1998 and 1997, $.31 and $.19, respectively, of dividends paid on common shares represented a return of capital.
Dividends declared on common shares 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.
On March 11, 1999 the Trust entered into an Amended and Restated Rights Agreement with American Stock Transfer and Trust Company, pursuant to which (i)the expiration date of the Trust's shareholder rights plan was extended for an additional ten years to April 24, 2009, (ii)the beneficial ownership percentage at which a person becomes an "Acquiring Person" under the plan was reduced from 20% to 15%, and (iii)certain other amendments were made. A description of the shareholder rights plan, as amended, is included in the Form 8-A/A filed with the Securities and Exchange Commission on March 11, 1999.
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 available for common shareholders 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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - -------------
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Federal Realty Investment Trust (the "Trust"). Certain statements made in this report contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Trust to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions which will affect credit-worthiness of tenants, financing availability and cost, retailing trends and rental rates; risks of real estate development and acquisitions; governmental and environmental regulations; and competition with other real estate companies and technology.
The Trust is engaged in the ownership, management, development and redevelopment of prime retail properties for the purpose of increasing funds from operations per share and enhancing shareholder value. At December 31, 1998 the Trust owned 120 retail properties.
Liquidity and Capital Resources - -------------------------------
The Trust meets its liquidity requirements through net cash provided by operating activities, along with traditional debt and equity funding alternatives available to it. A significant portion of cash provided by operating activities is distributed to common and preferred shareholders in the form of dividends. Accordingly, capital outlays for property acquisitions, major renovation and development projects and balloon debt repayments require debt or equity funding. On occasion, asset sales provide an additional source of capital.
Net cash provided by operating activities was $90.4 million in 1998, $72.2 million in 1997, and $65.6 million in 1996 of which $74.3 million, $62.6 million, and $52.1 million, respectively, was distributed to shareholders. Contributions from newly acquired properties and from retenanted and redeveloped properties, as more fully described below, were the primary sources of these increases.
Net cash used in investing activities was $187.6 million in 1998, $279.3 million in 1997 and $161.8 million in 1996. The Trust acquired properties totaling $120.4 million in 1998, $275.2 million in 1997 and $105.6 million in 1996 requiring cash outlays of $92.9 million, $251.4 million and $85.8 million in 1998, 1997 and 1996, respectively. During these same three years the Trust expended an additional $73.0 million, $50.3 million and $42.4 million, respectively, in capital improvements to its properties, of which $25.0 million related to new development in 1998 (1997 and 1996 amounts related to new development were insignificant). The Trust invested $21.4 million, $10.4 million and $14.4 million in 1998, 1997, and 1996, respectively, in mortgage notes receivable, with an average weighted stated interest rate of 10%, 9% and 9%, respectively. Certain of these mortgages also participate in the
gross revenues and appreciation and are convertible into ownership interests in the properties by which they are secured. Cash of $9.4 million in 1997 and $4.7 million in 1996 was received from the sale of properties in accordance with the Trust's policy of disposing of properties that no longer meet its long-term investment objectives.
Real estate acquisitions during 1998 were as follows (in thousands, except for square footage):
1)The Trust acquired these properties in partnership with third parties, whose partnership units, valued at $3.5 million and $6.4 million, respectively, may be converted into shares of the Trust. 2)The Trust placed a $9.9 million mortgage on this property. 3)The Trust acquired a leasehold interest in this property. 4)The Trust plans to develop these properties on Houston Street, most of which are currently vacant. 5)The Trust owns 100% of one property and an 85% partnership interest in the second property 6)The Trust acquired a 90% partnership interest in these properties.
The minority owners in Leesburg and Kings Court shopping centers may exchange their 138,000 and 260,163 partnership units, respectively, into the same number of common shares of the Trust or cash, at the Trust's option, after September 15, 2000 and August 24, 1999, respectively. A $9.9 million mortgage was placed on Leesburg Plaza which bears interest at 6.51%, requires interest only payments until October 2005 and is due September 1, 2008.
Approximately $25.0 million was invested in 1998 in predevelopment and development projects in Bethesda, Maryland; Los Gatos, California; San Jose, California; and in Arlington, Virginia. Other major capital expenditures include $4.7 million on the renovation of Gratiot Plaza, $4.9 million on the renovation of Feasterville shopping center, $3.3 million on the renovation of Falls Plaza, and $3.1 million on the retenanting of Finley shopping
center.
Net cash provided by financing activities, before dividend payments, was $171.7 million in 1998, $275.8 million in 1997 and $148.8 million in 1996. The Trust utilized its unsecured lines of credit to fund acquisitions, capital expenditures and balloon debt repayments.
In December 1997 the Trust replaced its unsecured medium-term revolving credit facilities with four banks with a five-year syndicated credit facility, thereby increasing the aggregate amount available from $135 million to $300 million and decreasing the interest rate from LIBOR plus 75 basis points to LIBOR plus 65 basis points. As did prior credit facilities, the syndicated facility requires fees and has various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth. At December 31, 1998, 1997 and 1996, $134.1 million, $114.8 million, and $59.4 million, respectively, was borrowed under these facilities. The maximum amount borrowed during 1998, 1997 and 1996 was $259.1 million, $114.8 million, and $76.2 million, respectively. The weighted average interest rate on borrowings during 1998, 1997 and 1996 was 6.1%, 6.5%, and 6.4%, respectively. Repayments on the credit facilities were made from the following debt and equity issuances.
In December 1998 the Trust obtained a four-year loan of $125 million from five institutional lenders. The loan, which bears interest at LIBOR plus 75 basis points, 6.3% at December 31, 1998, requires fees and has the same covenants as the syndicated credit facility. Proceeds were used to repay amounts drawn on the syndicated credit facility.
On March 5, 1998 the Trust issued $39.5 million of 6.74% Medium-Term Notes due 2004, netting approximately $39.3 million, and $40.5 million of 6.99% Medium- Term Notes due 2006, netting approximately $40.2 million. The notes pay interest semi-annually on March 30 and September 30.
In order to minimize the risk of changes in interest rates, from time to time in connection with the issuance of certain debt issues the Trust will enter into interest rate hedge agreements. In anticipation of the March 1998 Medium-Term Note issuance, the Trust purchased a Treasury Yield Hedge (notional amount of $50 million) on January 13, 1998 which was terminated on March 5, 1998 at a gain of $1.1 million. The gain is being recognized as a reduction in interest expense over the terms of the notes. There were no open hedge agreements at December 31, 1998.
On February 4, 1997 the Trust sold three million common shares to an institutional investor for $28 per share, netting $83.9 million. On July 29, 1997 the Trust sold $40 million of 6.82% Medium-Term Notes, netting approximately $39.8 million. On October 6, 1997 the Trust issued four million 7.95% Series A Cumulative Redeemable Preferred Shares at $25 per share in a public offering, netting approximately $96.8 million.
Capital requirements in 1999 will depend on acquisition opportunities, new development efforts, improvements and
redevelopments on existing properties, and tenant work and allowances. Initial funding for such projects is expected to be provided under the line of credit facility.
The Trust'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 of the Trust's $100 million 8 7/8% Senior Notes in January 2000.
The Trust will need additional capital in order to fund acquisitions, expansions, developments and refinancings. Sources of this funding may be additional debt, additional equity, proceeds from the sale of properties and the issuance of operating partnership units. The timing and choice of capital sources will depend on the cost and availability of that capital, among other things. In September 1998 the Trust filed a $500 million shelf registration statement with the Securities and Exchange Commission which allows for the issuance of debt securities, preferred shares and common shares. The Trust believes, based on past experience, that access to the capital needed to execute its business plan will be available to it.
Contingencies - -------------
The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust.
Pursuant to the provisions of the 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 an 18.75% interest at Congressional Plaza at its then fair market value.
Under the terms of certain partnerships, if certain leasing and revenue levels are obtained for the properties, 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. Under the terms of other partnerships, the partners may exchange their 879,541 operating partnership units into cash or the same number of common shares of the Trust, at the option of the Trust.
The Trust has reviewed the software and hardware systems used internally to operate its business, in order to assess their ability to handle the "Year 2000 Issue" which generally refers to the inability of systems hardware and software to correctly identify two-digit references to specific calendar years, beginning with 2000. The Year 2000 Issue may affect the Trust directly by impairing its internal data-based operations or processing and indirectly by impairing its suppliers' and tenants' data-based operations or processing. The Trust has identified and evaluated
the Year 2000 compliance of its internal systems; the Trust believes that the remediation of all accounting systems and other systems of high priority is complete. The Trust will endeavor to remediate the remaining internal systems throughout 1999.
The Trust is currently requesting information from its major banks, tenants, suppliers and manufacturers of computerized components of its real estate properties to determine their Year 2000 compliance. Based on costs spent to date and projections of future costs, costs of addressing and solving potential internal problems are not expected to have a material adverse impact on the Trust's financial condition.
Results of Operations - ---------------------
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. The National Association of Real Estate Investment Trusts (NAREIT) defines funds from operations as follows: income available for common shareholders before depreciation and amortization of real estate assets and before extraordinary items and significant non-recurring events less gains on sale of real estate. Funds from operations does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. Rather, funds from operations has been adopted by real estate investment trusts to provide a consistent measure of operating performance in the industry.
The reconciliation of net income to funds from operations is as follows (in thousands):
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. These features in the Trust leases reduce
the Trust's exposure to higher costs caused by inflation and allow it to participate in improved tenant sales.
Consolidated Results - --------------------
1998 vs. 1997
Rental income, which consists of minimum rent, percentage rent and cost recoveries, increased 18% or $33.7 million from $188.5 million in 1997 to $222.2 million in 1998. If properties acquired and sold in 1998 and 1997 are excluded, rental income increased 5%, due primarily to the favorable impact of redeveloped and retenanted centers and to higher percentage rent.
Other property income includes items which, although recurring, tend to fluctuate from period to period, such as utility reimbursements, telephone income, merchant association dues, late fees, and temporary tenant income. Also included are less regularly recurring items, such as lease termination fees. Other income increased 6.6% from 1997 to $10.3 million in 1998 due to contributions from the 1998 and 1997 acquisitions, which were partly offset by a $1.3 million decrease in lease termination fees.
Rental expenses increased 16% from 1997 to $49.5 million in 1998, due to the 1998 and 1997 acquisitions. If rental expenses are adjusted for properties acquired and sold in 1998 and 1997, rental expenses are constant at $40.6 million. Decreases in environmental expenses and common area expenses such as snow removal were offset by increases in bad debt expense which had been unusually low in 1997 due to the recovery in 1997 of amounts written off in prior years.
Real estate taxes increased 19% from 1997 to $23.3 million in 1998, due to the 1998 and 1997 acquisitions. If real estate taxes are adjusted for properties acquired and sold in 1998 and 1997, real estate taxes increased 5% due primarily to increased taxes on recently redeveloped properties.
Depreciation and amortization expenses increased 11% from 1997 to $46.0 million in 1998 reflecting the impact of properties acquired in 1998 and 1997 and of recent tenant work and property improvements.
In 1998 the Trust incurred interest expense of $60.2 million, of which $5.1 million was capitalized, as compared to 1997's $50.9 million, of which $3.6 million was capitalized. The increase in interest expense reflects the additional debt issued to fund the Trust's approximately $200 million of real estate investments made in 1998. The weighted average interest rate was 8% in 1998 compared with 8.5% in 1997. The ratio of earnings to combined fixed charges and preferred dividends was 1.46x in 1998 and 1.64x in 1997. The ratio of earnings to fixed charges was 1.65x in 1998 and 1.70x in 1997. The ratio of funds from operations to combined fixed charges and preferred dividends was 2.46x in 1998 and 2.50x in 1997.
Administrative expenses in 1998 reflect the adoption of the Emerging Issues Task Force ("EITF") Issue 97-11, which requires the expensing of internal costs of acquisition activities beginning in late March 1998. Prior to this date, such costs were capitalized as
a component of the basis of the acquired asset. The increase in administrative expenses from $9.8 million in 1997 to $11.8 million in 1998 is substantially due to its adoption. Administrative expenses for the fourth quarter of 1998, however, have decreased approximately 5% from the fourth quarter of 1997 as the benefits of the Trust's 1998 reorganization program are beginning to be realized.
Reorganization expenses of $4.7 million in 1998 represent a one time charge recorded in the third quarter related to a comprehensive restructuring program. The charge included a provision for employee severance and related costs, office closing and downsizing expenses, as well as legal and consulting fees related to the restructuring program. The Trust's workforce was reduced by approximately 15% including several vice presidents and other senior personnel. The foundation of the restructuring effort focused on a change in the Trust's operating model from a functional hierarchy to an asset management discipline where small focused teams are responsible for and compensated based on the operating performance of a portfolio of assets. In addition, the restructuring effort included a significant downsizing of the Trust's acquisition department, in response to changing market conditions and business emphasis. In 1997 the Trust incurred $2.0 million of costs associated with severance and other expenses related to changes in the Trust's executive management.
Investors' share of operations represents the minority interest in the income of certain properties. The increase from $1.3 million in 1997 to $3.1 million in 1998 is primarily due to the income attributable to the operating partnership units issued upon the acquisition of Courthouse, Magruder's, Kings Court and Leesburg Plaza shopping centers in late 1997 and 1998 and due to the minority partners' share of the increased earnings in Congressional Plaza.
As a result of the foregoing items, net income before gain on sale of real estate increased from $40.1 million in 1997 to $45.0 million in 1998, reflecting not only the contribution to net income from the Trust's acquisitions, but also the contribution from improved results of the core portfolio. Net income, including gain on sale of real estate, decreased from $46.5 million in 1997 to $45.0 million in 1998. In 1997 three shopping centers were sold at a net gain of $6.4 million. Net income available for common shareholders decreased from $44.6 million in 1997 to $37.0 million in 1998, due to a full year of preferred dividends in 1998 of $8.0 million compared with a partial year in 1997 of $1.9 million since the $100 million of 7.95% Series A Cumulative Redeemable Preferred Shares were issued in October 1997.
The Trust expects growth in net income in 1999 both from contributions of acquisitions and from contributions of its core portfolio, primarily the properties undergoing redevelopment and retenanting. However, growth of net income from the core portfolio is, in part, dependent on controlling expenses, some of which are beyond the complete control of the Trust, such as snow removal and trends in the retailing environment. The Trust currently expects that demand for its retail space should remain at levels similar to those in 1998. A weakening of the retail environment could, however, adversely impact the Trust by increasing vacancies and
decreasing rents. In past weak retail and real estate environments, the Trust has been able to replace weak and bankrupt tenants with stronger tenants; management believes that due to the quality of the Trust's properties there will continue to be demand for its space. Growth in net income is also dependent on interest rates and controlling administrative costs. If interest rates increase, net income, as well as the ultimate cost of the Trust's development projects will be negatively impacted due to the variable interest rates on the Trust's revolving credit facilities. The Trust is aggressively managing its administrative expenses through its reorganization efforts.
1997 vs. 1996
Rental income increased 14.3% or $23.6 million from $164.9 million in 1996 to $188.5 million in 1997. If properties acquired and sold in 1996 and 1997 are excluded, rental income increased 4.8%, due primarily to the favorable impact of redeveloped and retenanted centers.
Other property income decreased 1% from 1996 to $9.7 million in 1997. Contributions from the 1997 and 1996 acquisitions were offset by a decrease in lease termination fees from 1996 to 1997.
Rental expenses increased 5% from 1996 to $42.8 million in 1997, due to the 1997 and 1996 acquisitions. If rental expenses are adjusted to remove the effect of properties purchased and sold in 1997 and 1996, rental expenses decreased 2% due primarily to decreases in snow removal and other related expenses, such as roof and parking lot repairs. Real estate taxes increased 19% from 1996 to $19.5 million in 1997, primarily due to properties acquired but also due to increased assessments on recent renovations.
Depreciation and amortization expenses increased 9% from 1996 to $46.0 million in 1997 reflecting the impact of properties acquired in 1997 and 1996 and of recent tenant work and property improvements.
Interest income increased 39% from 1996 to $6.0 million in 1997, due to the issuance of $10.4 million and $14.4 million, respectively, of mortgage notes receivable in 1997 and 1996. In 1997 the Trust incurred interest expense of $50.9 million, of which $3.6 million was capitalized, as compared to 1996's $46.4 million of which $871,000 was capitalized. The increase in interest expense reflects the additional debt issued to help fund the Trust's approximately $316 million of real estate investments made in 1997. The ratio of earnings to combined fixed charges and preferred dividends was 1.64x in 1997; there were no preferred dividends in 1996. The ratio of earnings to fixed charges was 1.70x in 1997 and 1.59x in 1996. The ratio of funds from operations to combined fixed charges and preferred dividends was 2.50x in 1997; there were no preferred dividends in 1996.
Administrative expenses increased 8% from 1996 to $9.8 million in 1997 primarily due to increased personnel costs as the Trust grew and as it accelerated its acquisition and development efforts in 1997. Administrative expenses as a percentage of total income, however, dropped from 5.1% in 1996 to 4.8% in 1997.
In 1997 the Trust incurred $2.0 million of costs associated with severance and other expenses related to changes in the Trust's executive management.
Investors' share of operations represents the minority interest in the income of certain properties. The increase from $394,000 in 1996 to $1.3 million in 1997 is primarily due to the acquisition since 1995 of several properties in partnership with third parties.
As a result of the foregoing items, net income before gain on sale of real estate increased from $28.8 million in 1996 to $40.1 million in 1997, 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. Net income, including gain on sale of real estate, increased from $28.7 million in 1996 to $46.5 million in 1997. In 1997 three shopping centers were sold at a net gain of $6.4 million and in 1996 one shopping center was sold at a loss of $12,000. Net income available for common shareholders was $44.6 million in 1997 after net income was adjusted for a $1.9 million dividend on the $100 million of 7.95% Series A Cumulative Redeemable Preferred Shares issued on October 6, 1997.
Segment Results - ---------------
The Trust has traditionally operated its business as a single business segment. During the fourth quarter of 1998, however, the Trust completed a comprehensive restructuring program which, among other things, changed the Trust's operating structure from a functional hierarchy to an asset management model, where small focused teams are responsible for a portfolio of assets. As a result the Trust has divided its portfolio of properties into three geographic operating regions: Northeast, Mid-Atlantic and West. Each region is operated under the direction of a chief operating officer, with dedicated leasing, property management and financial staff and operates largely autonomously with respect to day to day operating decisions. Incentive compensation, throughout the regional teams, is tied to the net operating income of the respective portfolios.
Historical operating results for the three regions are as follows (in thousands):
The Northeast
The Northeast region is comprised of forty-five assets, 762 tenants and 6.3 million square feet. Assets in this region extend from suburban Philadelphia north to New York and its suburbs and further into New England. A significant portion of this portfolio has been held by the Trust for many years although acquisitions, redevelopment and retenanting remain major components to the current and future performance of the region. Several redevelopment projects are currently underway which are expected to add to revenues and net operating income in 1999 and future years.
When comparing 1998 with 1997, rental income increased 16% from $70.4 million in 1997 to $82.0 million in 1998. Excluding properties acquired and sold in 1998 and 1997, rental income increased 3.5%, driven by increases at the recently redeveloped and retenanted Brick, Troy and Wynnewood shopping centers.
Net operating income increased 15% from $50.9 million in 1997 to $58.4 million in 1998. Excluding properties acquired and sold in 1998 and 1997, net operating income increased 5.2%, primarily due to increases at the recently redeveloped and retenanted Brick, Troy and Wynnewood shopping centers.
When comparing 1997 with 1996, rental income increased 10.5% from $63.7 million in 1996 to $70.4 million in 1997. Excluding properties acquired and sold in 1997 and 1996, rental income increased 3.9%, primarily due to increases from the first phase of the redevelopment of Brick shopping center and from increases at Willow Grove shopping center.
Net operating income increased 13% from $45.0 million in 1996 to $50.9 million in 1997. Excluding properties acquired and sold in 1997 and 1996, net operating income increased 4%.
The Mid-Atlantic
The Mid-Atlantic region is comprised of thirty-two assets, 1,020 tenants and 6.3 million square feet. Assets in this region extend from Baltimore south to metropolitan Washington D.C. and
further south through Virginia, Georgia, and Florida. As with the Northeast region, a significant portion of this portfolio has been held by the Trust for many years although acquisitions, redevelopment and retenanting remain major components to its current and future performance. No significant redevelopment projects are currently underway in this region as several have recently been completed. Two of the Trust's major new development projects, Pentagon Row and additional phases in Bethesda, will be managed by this regional operating team upon their completion.
When comparing 1998 with 1997, rental income increased 7.1% from $96.8 million in 1997 to $103.7 million in 1998. Excluding properties acquired and sold in 1998 and 1997, rental income increased 3.9%, in large part due to increases at Bethesda Row and new anchors at Barracks Road and Mid-Pike Plaza shopping centers.
Net operating income increased 6.7% from $71.3 million in 1997 to $76.1 million in 1998. Excluding properties acquired and sold in 1998 and 1997, net operating income increased 3.4%.
When comparing 1997 with 1996, rental income increased 6.4% from $91.0 million in 1996 to $96.8 million in 1997. Excluding properties acquired and sold in 1997 and 1996, rental income increased 1.8%.
Net operating income increased 7.8% from $66.1 million in 1996 to $71.3 million in 1997. Excluding properties acquired and sold in 1997 and 1996, net operating income increased 2.1%.
The West
The Western region is comprised of forty-four assets, 508 tenants and 2.7 million square feet. Assets in this region extend from the Mid-West to the West Coast. Unlike the Northeast and Mid-Atlantic regions, this portfolio is relatively new to the Trust and is part of a deliberate expansion west over the past several years. This region is the fastest growing at the Trust and such major new development projects as San Jose and San Antonio will be managed by this regional operating team upon their completion. Several redevelopment projects are currently underway, particularly in Southern California, which are expected to add to revenues and net operating income in 1999 and future years.
When comparing 1998 with 1997, rental income increased 72% from $21.3 million in 1997 to $36.5 million in 1998, reflecting the Trust's expansion in this region. Excluding properties acquired and sold, rental income increased 22%. Fifteen percent of the increase was driven by the recent redevelopment and retenanting of three shopping centers, Gratiot, Crossroads, and Finley and seven percent was attributable to the balance of the region's portfolio.
Net operating income increased 85% from $13.7 million in 1997 to $25.3 million in 1998. Excluding properties acquired and sold, net operating income increased 32% from $9.5 million in 1997 to $12.6 million in 1998. This increase resulted from the redevelopment and retenanting of Gratiot, Crossroads and Finley shopping centers and the retenanting of two of the Trust's California street retail properties.
When comparing 1997 with 1996, rental income increased 109% from $10.2 million in 1996 to $21.3 million in 1997. Excluding properties acquired and sold in 1997 and 1996, rental income increased 6%.
Net operating income increased 110% from $6.5 million in 1996 to $13.7 million in 1997. Excluding properties acquired and sold in 1997 and 1996, net operating income increased 4.8%.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - --------------------------------------------------------------------
The Trust's primary financial market risk is the fluctuation in interest rates. At December 31, 1998, the Trust had $268.5 million of variable rate debt. Based upon this balance of variable debt, if interest rates increased 1%, the Trust's earnings and cash flows would decrease by $2.7 million. If interest rates decreased 1%, the Trust's earnings and cash flows would increase by $2.7 million. The Trust believes that the change in the fair value of its financial instruments resulting from a forseeable fluctuation in interest rates would be immaterial to its total assets and total liabilities.
Item 8.
Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------
Included in Item 14.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. - ------------------------------------------------------------
None.
Part III --------
Item 10.
Item 10.Directors and Executive Officers of the Registrant. ---------------------------------------------------
Executive Officers of the Registrant ------------------------------------
The Executive Officers in 1998 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.
Howard S. Biel joined the Trust in January 1998 as Senior Vice President- Managing Director of Development. From 1991 through 1997, Mr. Biel was Regional Partner for Faison where he was responsible for the development of over one million square feet of retail and entertainment space in the Mid-Atlantic and Northeast regions. From 1986 through 1990, Mr. Biel was Executive Vice President for Western Development Corporation (now the Mills Corporation) where he oversaw the development and management of over seven million square feet of value oriented super-regional shopping malls. From 1979 through 1985, he was Senior Vice President for Development at the Edward J. DeBartolo Corporation where he was
responsible for the planning and development of ten regional malls and several urban mixed-use projects.
Nathan P. Fishkin served as Senior Vice President, Acquisitions from January 1998 through November 2, 1998, at which time he became a consultant for the Trust. Mr. Fishkin joined the Trust in 1985 as an acquisition officer. In 1987, he became Vice President, Special Projects, overseeing all anchor and specialty tenant leasing and in 1997, he became Senior Vice President, Real Estate. Prior to joining the Trust, Mr. Fishkin practiced law for twelve years.
Nancy J. Herman became the Trust's Vice President, General Counsel and Secretary on December 21, 1998. In this position, Ms. Herman has overall responsibility for the Trust's legal affairs. Ms. Herman joined the Trust in 1990 as a staff attorney. Since that time, she has had responsibility for managing legal issues related to environmental matters, intellectual property and computers, insurance and other legal matters. Prior to joining the Trust in 1990, Ms. Herman practiced real estate law at Hogan & Hartson.
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 1985, 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. Ms. Mack resigned effective December 21, 1998; under the terms of Ms. Mack's severance agreement with the Trust, upon her voluntary resignation, she will act in a legal advisory position to the Trust for a two-year period.
Donald C. Wood joined the Trust in May 1998 as Senior Vice President, Chief Financial Officer. Prior to joining the Trust, Mr. Wood was Senior Vice- President and Chief Financial Officer for Caesars World, Inc., a wholly-owned subsidiary of ITT Corporation, where he was responsible for all aspects of finance throughout the company including strategic planning, process re- engineering, capital allocation and financial analysis. Prior to joining ITT in 1990, Mr. Wood was employed at Arthur Andersen & Co. from 1982 where he served in numerous positions including audit manager.
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.
The schedule identifying Trustees under the caption "Election of Trustees" of the 1999 Proxy Statement is incorporated herein by reference thereto.
Item 11.
Item 11. Executive Compensation. - -------- -----------------------
The sections entitled "Summary Compensation Table" and "Aggregated Option Exercises in 1998 and December 31, 1998 Option Values" of the 1999 Proxy Statement are incorporated herein by reference thereto.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- ---------------------------------------------------------------
The section entitled "Ownership of Shares by Trustees and Officers" of the 1999 Proxy Statement is incorporated herein by reference thereto.
Item 13.
Item 13. Certain Relationships and Related Transactions. - -------- -----------------------------------------------
The section entitled "Certain Transactions" of the 1999 Proxy Statement is incorporated herein by reference thereto.
Part IV -------
Item 14.
Item 14. Exhibits, Financial Statement - -------- ----------------------------- Schedules, and Reports on ------------------------- Form 8-K --------
(a) 1. Financial Statements --------------------
Report of Independent Certified Public Accountants
Consolidated Balance Sheets- December 31, 1998 and 1997
Consolidated Statements of Operations - years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity - years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - years ended December 31, 1998, 1997 and 1996
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 June 30, 1998, 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) Statement of Designation for Shares, filed on Form 8-K with the Commission on October 3, 1997, is incorporated herein by reference thereto.
(iii) 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.
(iv) Amended and Restated Rights Agreement, dated March 11, 1999, between the Trust and American Stock Transfer & Trust Company, filed as an exhibit to the Trust's Form 8-A/A filed with the Commission on March 11, 1999, is incorporated herein by reference thereto.
(v) Indenture dated December 13, 1993, related to the Trust's 7.48% Debentures due August 15, 2026; 8 7/8% Senior Notes due January 15, 2000; 8% Notes due April 21, 2002; 6 5/8% Notes due 2005; 6.82% Medium Term Notes due August 1, 2027; 6.74% Medium Term Notes due March 10, 2004; and 6.99% Medium Term Notes due March 10, 2006, 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) and amended on Form S-3 (File No. 33-63687, effective December 4, 1995 is incorporated herein by reference thereto) is incorporated herein by reference thereto.
(vi) Indenture dated September 1, 1998 filed as exhibit 4(a) to the Trust's Registration Statement on Form S-3 (File No. 333-63619) 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.
(iv) The Trust's 1985 Non-Qualified Stock Option Plan, adopted on September 13, 1985, 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, 1985 is incorporated herein by reference thereto.
(v) Amendment No. 3 to Consultancy Agreement with Samuel J. Gorlitz, filed as a portion of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1988 is incorporated herein by reference thereto.
(vi) 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.
(vii) 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.
(viii) 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.
(ix) 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.
(x) Federal Realty Investment Trust Amended and Restated 1993 Long- Term Incentive Plan, as amended on October 6, 1997, 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, 1997, 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:
(xi) Consulting Agreement between Misner Development and Federal Realty Investment Trust.
(xii) Fiscal Agency Agreement dated as of October 28, 1993 between Federal Realty Investment Trust and Citibank, N.A.
(xiii) 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 there to.
(xiv) 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.
(xv) Form of Severance Agreement between Federal Realty Investment Trust and Certain of its Officers dated December 31, 1994, 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, 1994, is incorporated herein by reference thereto.
The following 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, 1997, are incorporated herein by reference thereto:
(xvi) Credit Agreement Dated as of December 19, 1997 by and among Federal Realty Investment Trust, as Borrower, The Financial Institutions Party Hereto and Their Assignees Under Section 13.5.(a), as Lenders, Corestates Bank, N.A., as Syndication Agent, First Union National Bank, as Administrative Agent and as Arranger, and Wells Fargo Bank, as Documentation Agent and as Co-Arranger.
(xvii) Performance Share Award Agreement between Federal Realty Investment Trust and Steven J. Guttman, as of January 1, 1998.
(xviii) Form of Amended and Restated Restricted Share Award Agreements between Federal Realty Investment Trust and Steven J. Guttman for the years 1998 through 2002.
(xix) Performance Share Award Agreements between Federal Realty Investment Trust and Ron D. Kaplan, as of January 1, 1998.
(xx) Restricted Share Award Agreements between Federal Realty Investment Trust and Ron D. Kaplan, as of
January 1, 1998.
(xxi) Amended and Restated Employment Agreement between the Trust and Steven J. Guttman as of March 6, 1998.
(xxii) Amended and Restated Executive Agreement between the Trust and Steven J. Guttman as of March 6, 1998.
(xxiii) Executive Agreement between the Trust and Ron D.Kaplan as of March 6, 1998.
(xxiv) Amended and Restated Severance Agreement between the Trust and Ron D. Kaplan as of March 6, 1998.
(xxv) Severance Agreement between the Trust and Catherine R. Mack as of March 6, 1998.
The following are filed as exhibits hereto:
(xxvi) Federal Realty Investment Trust Amended and Restated 1993 Long- Term Incentive Plan, as amended on May 6, 1998, and filed with the Trust's 1998 Proxy Statement.
(xxvii) Term Loan Agreement, dated as of December 22, 1998 by and among Federal Realty Investment Trust, as Borrower, the Financial Institutions Party Thereto and Their Assignees Under Section 13.5.(d), as Lenders, Commerzbank Aktiengesellschaft, New York Branch as Syndication Agent, PNC, National Association, as Administrative Agent and Fleet National Bank as documentation agent.
(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 October 28, 1998, 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: March 19, 1999 By: 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.
Signatures Title Date - ---------- ----- ----
President and Trustee (Chief Steven J. Guttman Executive Officer) March 19, 1999 - ------------------------- -------------- Steven J. Guttman
Senior Vice-President, Finance and Treasurer Donald C. Wood (Chief Financial Officer) March 19, 1999 - ------------------------- -------------- Donald C. Wood
Vice-President and Controller (Principal Cecily A. Ward Accounting Officer) March 19, 1999 - ------------------------- -------------- Cecily A. Ward
Dennis L. Berman Trustee March 19, 1999 - ------------------------- -------------- Dennis L. Berman
Kenneth D. Brody Trustee March 19, 1999 - ------------------------- -------------- Kenneth D. Brody
A. Cornet de Ways Ruart Trustee March 19, 1999 - ------------------------- -------------- A. Cornet de Ways Ruart
Trustee March 19, 1999 - ------------------------- -------------- Samuel J. Gorlitz
Kristin Gamble Trustee March 19, 1999 - ------------------------- -------------- Kristin Gamble
Walter F. Loeb Trustee March 19, 1999 - ------------------------- -------------- Walter F. Loeb
Mark S. Ordan Trustee March 19, 1999 - ------------------------- -------------- Mark S. Ordan
George L. Perry Trustee March 19, 1999 - ------------------------ -------------- George L. Perry
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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
Grant Thornton LLP Washington, D.C. February 8, 1999
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
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, 1998, 1997, and 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Realty Investment Trust (the "Trust") invests in income-producing retail real estate, primarily community and neighborhood shopping centers and main street retail properties, retail buildings and shopping centers in densely developed urban and suburban areas. In addition, the Trust has various land parcels under its control for the purpose of developing multi-use projects that center around the retail component.
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 consolidated financial statements of the Trust include the accounts of the Trust, its wholly owned corporate subsidiaries, several corporations where the Trust has a majority ownership, numerous partnerships and a joint venture. The equity interests of other investors are reflected as investors' interest in consolidated assets. All significant intercompany transactions and balances are eliminated.
Revenue Recognition. The Trust's leases with tenants are classified as operating leases. Minimum rents are recognized on an accrual basis over the terms of the related leases with appropriate valuation adjustments recorded to consider credit and other business risk. Percentage rents, which represent additional rents based on tenant sales, are recognized at the end of the lease year or other period in which tenant sales volumes have been reached and the percentage rents are due. Real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the expenditures occurred.
Real Estate. 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 external and internal costs
directly related to the development, redevelopment and leasing of real estate including applicable salaries and other related costs. The capitalized costs associated with developments, redevelopments and leasing are depreciated or amortized over the life of the improvement and lease, respectively. Through March 1998, the Trust also capitalized internal costs of preacquisition activities incurred in connection with the acquisition of an operating property. On March 19, 1998 the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on issue #97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires that the internal costs of preacquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred. Consequently, the Trust has been expensing these costs since March 1998.
Interest costs on developments and major redevelopments are capitalized as part of the development and redevelopment.
Debt Issue Costs. 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.
Cash and Cash Equivalents. 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.
Risk Management. The Trust occasionally enters into derivative contracts prior to a scheduled financing or refinancing in order to minimize the risk of changes in interest rates. The derivative contracts are designated as hedges when acquired. The cost or gain on these transactions is recognized as a component of interest expense over the life of the financing. The Trust does not use derivative financial instruments for trading or speculative purposes. There were no open derivative contracts at December 31, 1998 or 1997.
Use of Estimates. 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.
Earnings Per Share. In 1997 the Financial Accounting Standards Board issued Financial Accounting Standards No. 128 - "Earnings Per Share". Statement 128 replaces the presentation of primary and fully diluted earnings per share ("EPS") pursuant to Accounting Principles Board Opinion No. 15 with the presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares and then shared in the
earnings of the Trust.
The following table sets forth the reconciliation between basic and diluted EPS (in thousands):
Stock 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.
NOTE 1: REAL ESTATE AND ENCUMBRANCES
A summary of the Trust's properties at December 31, 1998 and 1997 is as follows (in thousands):
Real estate acquisitions during 1998 were as follows (in thousands, except for quare footage):
1)The Trust acquired these properties in partnership with third parties, whose partnership units, valued at $3.5 million and $6.4 million, respectively, may be converted into shares of the Trust.
2)The Trust placed a $9.9 million mortgage on this property.
3)The Trust acquired a leasehold interest in this property.
4)The Trust plans to develop these properties on Houston Street, most of which are currently vacant.
5)The Trust owns 100% of one property and an 85% partnership interest in the second property.
6)The Trust acquired a 90% partnership interest in these properties.
The minority owners in Leesburg and Kings Court shopping centers may exchange their 138,000 and 260,163 partnership units, respectively, into the same number of common shares of the Trust or cash, at the Trust's option, after September 15, 2000 and August 24, 1999, respectively. A $9.9 million mortgage was placed on Leesburg Plaza which bears interest at 6.51%, requires interest only payments until October 2005 and is due September 1, 2008.
Approximately $25.0 million was invested in 1998 in predevelopment and development projects in Bethesda, Maryland; Los Gatos, California; San Jose, California; and in Arlington, Virginia. Other major capital expenditures include $4.7 million on the renovation of Gratiot Plaza, $4.9 million on the renovation of Feasterville shopping center, $3.3 million on the renovation of Falls Plaza, and $3.1 million on the retenanting of Finley shopping center.
The Trust's 120 retail properties at December 31, 1998 are located in 16 states and the District of Columbia. There are approximately 2,290 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 3% or more of revenue.
Mortgage notes receivable of $51.2 million are due over various terms from January 2000 to May 2021 and have an average weighted interest rate of 10%. Under the terms of certain of these mortgages, the Trust will receive additional interest based upon the gross income of the secured properties and upon sale of the properties, the Trust will share in the appreciation of the properties.
On May 13, 1997 the Trust sold Town & Country Shopping Center in Springfield, Illinois for $7.5 million, resulting in a gain of $5.3 million. On May 30, 1997 Shillington Shopping Center in Shillington, Pennsylvania was sold for $4.6 million, resulting in a gain of $1.7 million. On September 25, 1997 the Trust sold Brainerd Village Shopping Center in Chattanooga, Tennessee for $10.2 million, resulting in a loss of $659,000.
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.
Mortgages payable and capital lease obligations are due in installments over various terms extending to 2016 and 2060, respectively, with interest rates ranging from 6.1% to 11.25%. Certain of the mortgage and capital lease obligations require additional interest payments based upon property performance. In 1998 the Trust paid off maturing mortgages totaling $53.5 million on Barracks Road, Falls Plaza, Falls Plaza-East, Old Keene Mill, Loehmann's Plaza and Bristol Plaza. In 1997 the Trust repaid a $1.5 million mortgage on Northeast Shopping Center in Philadelphia, Pennsylvania.
Aggregate mortgage principal payments due during the next three years are $532,000, $583,000, and $30.7 million, respectively. There are no further mortgage principal payments due until 2005 when principal payments begin on the Leesburg mortgage.
Future minimum lease payments and their present value for property under capital leases as of December 31, 1998, are as follows (in thousands):
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 (in thousands):
The components of rental expense are as follows (in thousands):
Minimum future retail property rentals on noncancelable operating leases as of December 31, 1998 are as follows (in thousands):
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 - ---------------------
The Trust's notes consist of the following (in thousands):
In December 1997 the Trust replaced its unsecured medium term revolving credit facilities with four banks with a five year syndicated credit facility, thereby increasing the aggregate amount available from $135 million to $300 million and decreasing the interest rate from LIBOR plus 75 basis points to LIBOR plus 65 basis points. The syndicated facility requires fees and has
various covenants including the maintenance of a minimum shareholders' equity and a maximum ratio of debt to net worth.
In December 1998 the Trust obtained a four year loan of $125 million from five institutional lenders. The loan, which bears interest at LIBOR plus 75 basis points, requires fees and has the same covenants as the syndicated credit facility.
The maximum drawn under these facilities during 1998, 1997 and 1996 was $259.1 million, $114.8 million and $76.2 million, respectively. In 1998, 1997 and 1996 the weighted average interest rate on borrowings was 6.1%, 6.5% and 6.4%, respectively, and the average amount outstanding was $163.6 million, $59.9 million and $47.2 million, respectively.
NOTE 4. DIVIDENDS - -----------------
On November 17, 1998 the Trustees declared a quarterly cash dividend of $.44 per common share, payable January 15, 1999 to common shareholders of record January 4, 1999. For the years ended December 31, 1998, 1997 and 1996, $.31, $.19, and $.21 of dividends paid per common share, respectively, represented a return of capital.
On November 17, 1998 the Trustees declared a quarterly cash dividend of $.49687 per share on its Series A Cumulative Redeemable Preferred Shares, payable on February 1, 1999 to shareholders of record on January 15, 1999.
NOTE 5. COMMITMENTS AND CONTINGENCIES - -------------------------------------
The Trust is involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on the financial condition or results of operations of the Trust.
Pursuant to the provisions of the 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 an 18.75% interest at Congressional Plaza at its then fair market value.
Under the terms of certain partnerships, if certain leasing and revenue levels are obtained for the properties, 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. Under the terms of other partnerships, the partners may exchange their 879,541 operating partnership units into cash or the same number of common shares of the Trust, at the option of the Trust.
As of December 31, 1998 in connection with the renovation of certain shopping centers, the Trust has contractual obligations of $14.7 million and $251,000 of letters of credit outstanding. In addition the Trust is contractually obligated under leases to provide up to $6.1 million in building and tenant improvements.
The Trust is obligated under ground lease agreements on several shopping centers requiring minimum annual payments as follows (in thousands):
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 1998 and 1997 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.
NOTE 7. SENIOR NOTES AND DEBENTURES - ----------------------------------- Unsecured senior notes and debentures at December 31, 1998 and 1997 consist of the following (in thousands):
The loan agreements contain various covenants, including limitations on the amount of debt and minimum debt service coverage ratios. The Trust is in compliance with all covenants.
In anticipation of the March 1998 Medium-Term Note issuance, on January 13, 1998 the Trust purchased a Treasury Yield Hedge (notional amount of $50 million) to minimize the risk of changes in interest rates. The hedge was terminated on March 5, 1998 at a gain of $1.1 million which is being recognized as a reduction in interest expense over the term of the notes. There were no open hedge agreements at December 31, 1998 or 1997.
In September 1998 the Trust filed a $500 million shelf registration statement with the Securities and Exchange Commission which allows the issuance of debt securities, preferred shares and common shares. There have been no drawdowns under the shelf registration.
NOTE 8. SHAREHOLDERS' EQUITY - ----------------------------
On February 4, 1997 the Trust sold three million common shares to an institutional investor for $28 per share, netting $83.9 million.
On October 6, 1997 the Trust issued four million 7.95% Series A Cumulative Redeemable Preferred Shares at $25 per share in a public offering, realizing cash proceeds of approximately $96.6 million after costs of $3.4 million. The Series A Preferred Shares are not redeemable prior to October 6, 2002. On or after that date, the Preferred Shares may be redeemed, in whole or in part, at the option of the Trust, at a redemption price of $25 per share plus all accrued and unpaid dividends. The redemption price is payable solely out of proceeds from the sale of other capital shares of the Trust. Dividends on the Preferred Shares will be payable quarterly in arrears on the last day of January, April, July and October.
On May 24, 1996 the Trust sold, to an institutional investor, 1.8 million common shares at $22 per share, netting $39.3 million. On December 13, 1996 the Trust sold another 1.6 million common shares to the public at $27 7/8 per share, netting $42.9 million.
The Trust has a Dividend Reinvestment Plan, whereby shareholders may use their dividends and make optional cash payments to purchase shares. In 1998, 1997, and 1996, 167,511 shares, 153,973 shares, and 181,274 shares, respectively, were issued under the Plan.
In 1998, 576,055 common shares, of which 35,000 were issued from treasury shares, were awarded to the Trust's president and certain other officers under various programs designed to directly link a significant portion of their long term compensation to the prosperity of the Trust and its shareholders. Ten thousand shares
vested upon award, 491,055 shares vest over terms from 5 to 13 years, and 75,000 shares vest upon the obtainment of certain performance criteria.
On January 31, 1997, 22,000 restricted shares were granted to an officer and two employees of the Trust. The shares vest over three years. On September 26, 1997, 10,000 restricted common shares were granted to an officer; the shares, which were fully vested upon grant, were issued from treasury shares.
In January 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 and a current balance of $687,500, 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 and an additional one sixteenth has been forgiven each January 31 since then as certain performance criteria of the Trust were met. The Trust has loaned the officer $125,000 to pay taxes due in connection with the plan.
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 has been forgiven during each year of the plan. At December 31, 1998 the Trust has outstanding loans to participants of $3.0 million; $2.2 million of purchase loans and $824,000 of loans with which 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, without the consent of the Compensation Committee of the Board of Trustees.
In connection with a restricted share grant, the Trust accepted from its President a noninterest bearing note of $105,000 which is due April 15, 2001. In connection with restricted share grants made in 1998 to the Chief Investment Officer, the Trust accepted interest bearing notes of $93,000, which are due eight years from issuance.
At December 31, 1998, 1997 and 1996, respectively, the Trust had 59,425 common shares, 52,386 common shares and 62,386 common shares in treasury, at a cost of $1.4 million, $1.0 million, and $1.2 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.
NOTE 9. STOCK OPTION PLAN - -------------------------
The 1993 Long Term Incentive Plan ("Plan") has been amended to authorize the grant of options and other stock based awards for up to 5.5 million shares. Options granted under the Plan have ten year terms and vest in one to five years. Under the Plan, on each annual meeting date during the term of the Plan, each nonemployee Trustee will be awarded 2,500 options.
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 $3.4 million and $2.5 million at December 31, 1998 and 1997, respectively. 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 1998, 1997, and 1996 has been estimated as $2.6 million, $4.0 million, and $120,000, respectively, as of the date of grant, using a binomial model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.7%, 6.5%, and 5.7%; volatility factors of the expected market price of the Trust's shares of 19%, 19% and 19%; and a weighted average expected life of the option of 6.3 years, 6.6 years, and 5.6 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 (in thousands except for earnings per share):
A summary of the Trust's stock option activity for the years ended December 31, is as follows:
At December 31, 1998 and 1997, options for 1.5 million and 1.2 million shares, respectively, were exercisable. The average remaining contractual life of options outstanding at December 31, 1998 and 1997 was 7.1 years and 7.9 years, respectively. The weighted average grant date fair value per option for options granted in 1998 and 1997 was $2.00 and $2.68, respectively. The exercise price of options outstanding at December 31, 1998 ranged from $17.25 per share to $27.13 per share.
NOTE 10. SAVINGS AND RETIREMENT PLANS - -------------------------------------
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 $10,000. 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, 1998, 1997 and 1996 was $218,000, $210,000 and $179,000, respectively. In 1996 the Trust recorded a liability for an additional contribution of 1.5% of salary for all nonofficer employees who were eligible for the 401(k) plan. In addition, 1.5% of salary in 1996 was accrued for all eligible nonofficer employees as a bonus.
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, 1998, the Trust is liable to participants for approximately $1.7 million under this plan. Although this is an unfunded plan, the Trust has purchased certain investments with which to match this obligation.
NOTE 11. INTEREST EXPENSE - -------------------------
The Trust incurred interest expense totaling $60.2 million, $50.9 million and $46.4 million in 1998, 1997 and 1996, respectively, of which $5.1 million, $3.6 million, and $871,000, respectively, was capitalized. Interest paid was $57.8 million in 1998, $49.4 million in 1997, and $44.2 million in 1996.
NOTE 12. REORGANIZATION EXPENSES - --------------------------------
At September 30, 1998 the Trust recorded a $4.7 million charge related to a comprehensive restructuring program that was implemented during the fourth quarter of 1998. The charge included a provision for employee severance and related costs, office closing and downsizing expenses, as well as legal and consulting fees related to the restructuring program. The Trust's workforce was reduced by approximately 15% including several vice presidents and other senior personnel. The foundation of the restructuring effort focused on a change in the Trust's operating model from a functional hierarchy to an asset management discipline where small focused teams are responsible for and compensated based on the operating performance of a portfolio of assets. In addition, the restructuring effort included a significant downsizing of the Trust's acquisition department, in response to changing market conditions and business emphasis. Cash payments against the reserve totalled $1.5 million through December 31, 1998 with the remaining cash expected to be paid in 1999.
NOTE 13. Year 2000 Readiness - ----------------------------
The Trust has reviewed the software and hardware systems used internally to operate its business, in order to assess their ability to handle the "Year 2000 Issue" which generally refers to the inability of systems hardware and software to correctly identify two-digit references to specific calendar years, beginning with 2000. The Year 2000 Issue can affect the Trust directly by impairing its internal data-based
operations or processing and indirectly by impairing its suppliers' and tenants' data-based operations or processing. The Trust has identified and evaluated the Year 2000 compliance of its internal systems; the Trust believes that the remediation of all accounting systems and other systems of high priority is complete. The Trust will endeavor to remediate the remaining internal systems throughout 1999.
The Trust is currently requesting information from its major banks, tenants, suppliers and manufacturers of computerized components of its real estate properties to determine their Year 2000 compliance. Based on costs spent to date and projections of future costs, costs of addressing and solving potential internal problems are not expected to have a material adverse impact on the Trust's financial condition.
NOTE 14. SUBSEQUENT EVENTS - --------------------------
Under a Restricted Share Agreement designed to link his compensation with the prosperity of the shareholders, the Trust's President elected to accept stock in lieu of cash for both his 1998 bonus and his 1999 salary. As a result, on January 1, 1999, 26,741 common shares were awarded to the president in lieu of his 1999 cash salary. Additional shares will be issued when his 1998 bonus is determined. The shares vest at the end of five years if the president is still employed by the Trust.
NOTE 15. SEGMENT INFORMATION - ----------------------------
The Trust has traditionally operated its business as a single business segment. During the fourth quarter of 1998, however, the Trust completed a comprehensive restructuring program which, among other things, changed the Trust's operating structure from a functional hierarchy to an asset management model, where small focused teams are responsible for a portfolio of assets. As a result the Trust has divided its portfolio of properties into three geographic operating regions: Northeast, Mid-Atlantic and West. Each region is operated under the direction of a chief operating officer, with dedicated leasing, property management and financial staff and operates largely autonomously with respect to day to day operating decisions.
A summary of the Trust's operations by geographic region is presented below (in thousands):
There are no transactions between geographic areas.
NOTE 16. QUARTERLY DATA (UNAUDITED) - ----------------------------------
The following summary represents the results of operations for each quarter in 1998 and 1997 (in thousands, except per share amounts):
(1)Net income includes a $4.7 million charge for reorganization expenses. (2)Income before gain on sale of real estate was $10.0 million or $.26 per common share, both basic and diluted. (3)Income before loss on sale of real estate was $10.1 million or $.26 per common share, both basic and diluted. (4)Net income includes a $2.0 million charge for reorganization expenses.
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
FEDERAL REALTY INVESTMENT TRUST SCHEDULE II SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED THREE YEARS ENDED DECEMBER 31, 1998
RECONCILIATION OF TOTAL COST ------------------------------------------------
(A) For Federal tax purposes, the aggregate cost basis is approximately $ 1,472,000,000 as of December 31, 1998.
FEDERAL REALTY INVESTMENT TRUST SCHEDULE III SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED THREE YEARS ENDED DECEMBER 31, 1998
RECONCILIATION OF ACCUMULATED DEPRECIATION AND AMORTIZATION -----------------------------------------------------------------
Balance, January 1, 1996 $190,795,000
Additions during period Depreciation and amortization expense 34,803,000 Deductions during period - disposition of property and miscellaneous retirements (2,045,000) ---------------
Balance, December 31, 1996 223,553,000 Additions during period Depreciation and amortization expense 38,053,000 Deductions during period - disposition of property and miscellaneous retirements (14,109,000) ---------------
Balance, December 31, 1997 247,497,000 Additions during period Depreciation and amortization expense 42,542,000 Deductions during period - disposition of property and miscellaneous retirements (3,986,000) ---------------
Balance, December 31, 1998 $286,053,000 ===============
FEDERAL REALTY INVESTMENT TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE YEAR ENDED DECEMBER 31, 1998
1) For Federal tax purposes, the aggregate tax basis is approximately $51,154,000 as of December 31, 1998. 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, 1997, $3,208,000 was outstanding. 3) This mortgage is available for up to $25,000,000.
FEDERAL REALTY INVESTMENT TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE - CONTINUED THREE YEARS ENDED DECEMBER 31, 1998
RECONCILIATION OF CARRYING AMOUNT ---------------------------------------------
Balance, January 1, 1996 $13,561,000
Additions during period Increase in existing loan 25,000 Issuance of loan 14,327,000 --------------
Balance, December 31, 1996 27,913,000
Additions during period Issuance of loan 14,072,000 Deductions during period Collection of loan (3,625,000) --------------
Balance, December 31, 1997 38,360,000
Additions during period Issuance of loans 21,375,000 Deductions during period Collection of loan (8,581,000) --------------
Balance, December 31, 1998 $51,154,000 ==============
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 8, 1999 which is included in this Form 10-K, we have also audited Schedules III and IV as of December 31, 1998 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 8, 1999