2017 ANNUAL REPORT • FORM 10-K & PROXY STATEMENT
DEAR
SHAREHOLDERS,
What does the future of retail-based
commercial real estate look like in a world
where generational living and spending
habits and technological advancement are
changing at an unprecedented rate? The
uncertainty of a clear answer to that
question along with other structural and
cyclical considerations has resulted in the
second consecutive year of a negative total
return to shareholders (-3.6% and -0.2% in
2017 and 2016, respectively) and the start
of 2018 in the same way. The fact that over
that period, we’ve handily outperformed the
Bloomberg REIT Shopping Center Index of
which we are a component, is of little
consolation. We fully understand that our
mission is to execute a business plan that
creates value for our shareholders and, while
we think that we’ve done that in a myriad of
ways that I’ll enumerate below, it’s certainly
not obvious based on stock price
performance over the last two plus years.
FE DERAL REA LTY | ANNUAL RE P O RT 2 0 1 7 (cid:2)
Much of the uncertainty is understandable as news of
expansion by “new economy” companies like Amazon
and Apple, along with growth in internet sales and
retailer bankruptcies (particularly apparel based),
dominate the business news cycle day in and day out.
Combine that with rising interest rates and the
irrefutable fact that the United States is in fact, “over
retailed” and that at least some portion of retail based
real estate in the country is no longer relevant or
adequate to address this environment, and pressure on
retail-based real estate stocks makes perfect sense.
But by how much and how are these very different
companies differentiated? There may be no older
maxim than “real estate is local” and the time tested
agreement that the three most important things in real
estate investing are “location, location, location”. Let
me add one more consideration: it is hard to believe
that history and track record in real estate investment
doesn’t matter in looking at future opportunities.
It is in this context that Federal Realty reported results
in 2017 that are the highest we’ve ever reported in our
55 year history. Record revenues of $857 million,
record funds from operations (FFO) per share in
accordance with the industry (NAREIT) definition of
$5.74 per diluted share(1), record earnings per share
of $3.97, and record dividends per share to common
shareholders of $3.96. You might recall that we have
reported “record” results before. That’s because
Federal Realty is the only publicly traded shopping
center company to grow FFO per share by NAREIT’s
definition each and every year since the beginning of
this real estate cycle in 2010, making each year a
record. The only one. We are also the only REIT in
any segment to have increased our dividend rate per
share each and every year for the last 50 (since 1967).
The only one. How can this be and why are we
different?
Location matters more today than it ever has. We’ve
built the company around this premise since our
founding and have done nothing but improve upon it
over the years. Dense population centers with
sufficient household affluence and significant barriers
to entry are critical to long term rent growth potential.
In 2017, we’ve added to our sector leading portfolio in
Chicago, Northern California and Southern California
with our largest transaction a strategic investment that
allows us to participate in one of the fastest growing
and most underserved demographics in the country. In
August 2017, Federal Realty entered into a $370
million joint venture with Primestor, the California
based owner and developer of shopping centers
serving the burgeoning Latino community in extremely
densely populated areas of Los Angeles. Retail real
estate value is best created in places where demand
exceeds supply and with only 6.6 square feet of
shopping center product per capita and, on average,
over 300,000 people in the three miles surrounding
these properties, there is far less supply than the
national average, far more people than the national
average and few, if any, competing properties in these
incredibly dense trade areas surrounding these
centers. Our west coast operation has grown by 50%
in the last five years and the Primestor joint venture has
broadened our reach and the possibilities that come
with that reach.
Our vision for the future certainly includes our
longstanding belief that experience, customer service
and sense of place matters everywhere we do
business but nowhere is it more evident than in our
mixed use developments at Assembly Row, Pike &
Rose and Santana Row. With 20 plus years of mixed
use development and operating experience (Bethesda
Row began in the mid 1990’s), we sit at the
intersection of traditional retailing and experience
based spending and have seen the evolution of
consumer behavioral changes and preferences for
some time. The way we have acted on it can best be
seen in the diversity of our income stream. A full 17%
of Federal Realty’s minimum rent comes from rents
from residential and office tenants, not retail and often
part of one of our mixed use communities that provides
those tenants with the amenities and lifestyle they find
so attractive. Consider that those residential and office
buildings in our mixed use communities, excluding of
course those currently under construction, are over
95% leased and that the pace of the current lease up
of the buildings under construction is exceeding our
expectations. Consider that 9% of our minimum rent
comes from discount apparel based tenants, 9% from
full service restaurants, 8% from fitness, health and
beauty, 6% from entertainment and 5% from limited
service restaurants. It might surprise you to know that
only 9% comes from full price apparel and only 8%
comes from grocers. The diversity of the sources of our
rental income is unique and positions us well for the
changing environment.
The ability to tap opportunities like Primestor and
developments like Assembly Row and Pike & Rose
wouldn’t be possible without a fortress balance sheet
made stronger every year by a relentless focus on the
reality that commercial real estate is a cyclical business
and that a strong, low leveraged balance sheet is
critical to both consistency and stability as well as
lower capital costs through those cycles. In other
words, a long term vision for our real estate assets has
to be matched to a long term vision for the
capitalization of those assets. As one of only four
REITS carrying an “A-“ or better rating from both
Moody’s and Standard & Poor’s, we have one of the
lowest costs of debt capital among all REITS, a critical
advantage in real estate value creation and an effective
tool for reducing development risk. In 2017, we further
strengthened our class leading balance sheet with the
issuance of $150 million of redeemable preferred
stock at a permanent cost of 5% annually, one of the
lowest coupons ever issued by a REIT and certainly
the lowest among shopping center companies. We
also redeemed $150 million worth of 5.9% notes due
in 2020 with the issuance of $175 million senior
unsecured notes at an effective rate of 3.323% in
December 2017, prior to the Fed’s Rate actions to
date in 2018. Our focus on the long term is evidenced
in everything we do. There’s simply no other
explanation for a common share dividend increase
each and every year since 1967.
As with most things, a definitive answer to the question
raised in the first sentence of this letter isn’t possible,
but our philosophical and practical approach to it is.
The retail real estate companies who will thrive in the
years to come will be those who have positioned
themselves to this point, for their assets to be the real
estate of choice for the widest possible selection of
tenants. Not a narrow, limiting business plan but a
broader, wider funnel in select markets. It seems to us
that in order to best position ourselves for that
outcome, location matters more today than it ever has
and we stack up better than anybody on that front. In
addition, assets need to be in flexible formats that can
be improved upon through profitable reinvestment.
That’s harder than it sounds, because in many retail
based properties in the United States, the new
revenue that will be generated after redevelopment just
isn’t enough to justify the investment. Hence, once
again, location matters more today than it ever has.
And finally, that truly enhancing the experience, the
place making, the tenant lineup, at those places is both
critical and harder than is immediately apparent. Our
Board of Trustees (from left to right)
Joseph S. Vassalluzzo Non-Executive Chairman, Federal Realty Investment Trust, Non-Executive Chairman, Office Depot, Inc. |
Warren M. Thompson President and Chairman, Thompson Hospitality Corporation | Elizabeth I. Holland Chief Executive Officer,
Abbell Associates | Jon E. Bortz Chairman, Chief Executive Officer and President, Pebblebrook Hotel Trust | Gail P. Steinel Owner,
Executive Advisors | David W. Faeder Managing Partner, Fountain Square Properties | Donald C. Wood President and Chief Executive
Officer, Federal Realty Investment Trust
FE DERAL REA LTY | ANNUAL RE P O RT 2 0 1 7 (cid:2)
20 plus years of learning, refining and perfecting that
experience through our mixed use and core shopping
center expertise, positions us particularly well.
Basically, we’ve differentiated our business plan based
on four critical and long term tenets:
1.
The 55 year accumulation of the best real estate
locations we can find in 8 major markets on both
coasts.
2. Real estate development and operating skillsets,
beyond just skillsets aimed at one specific
format, that allow us to consider the highest and
best use of that real estate in our vision for what
it needs to be and the ability to act on that vision.
3. Real estate leasing skillsets, beyond just skillsets
aimed at one specific format, that allow us to
diversify our income stream in ways that give us
the flexibility to adjust to changing trends.
4. A “right side of the balance sheet” philosophy
that is always consistent with the long term
vision for the assets on the left side. The lower
cost of capital that results from this decades
long set of financing principles significantly
reduces the risks inherent in a real estate
operating and development platform.
Everything that Federal Realty is doing today, even if it
moderates growth in the short term, is meant to be able to
act on this necessary long term philosophy. The fact that
we are doing it while still growing earnings and cash flow,
as we have through this entire cycle beginning in 2010, is
a true testament to the quality of our real estate and the
vision and execution competencies of this experienced,
proven real estate team.
On behalf of our Board of Trustees and our entire team, I
thank you for your support of Federal Realty to date and
look forward to being an important part of your investment
portfolio for years to come.
Respectfully,
DONALD C. WOOD
President & Chief Executive Officer
(1) FFO is a supplemental non-GAAP financial measure of real estate companies’ operating performance — see discussion of calculation
and reconciliation in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
Form 10-K.
INDUSTRY-LEADING
CONSISTENCY
$4.00*
$0.12*
1967
*Annualized Dividends
2017
REAL ESTATE ASSETS
(at cost, in millions)
(as of December 31)
$7,635
RENTAL INCOME
(in millions)
$6,759
$6,064
$5,609
$5,149
$4,780
$841
$787
$728
$666
$620
$580
PROPERTY
OPERATING INCOME(1)
(in millions)
$585
$548
$511
$474
$447
$427
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
2016
2012
2013
2014
2015
2016
2017
2016
Note: (1) See discussion of calculation in Item 6 “Selected Financial Data” in our Form 10-K.
FE DERAL REA LTY | ANNUAL RE P O RT 2 0 1 7 (cid:2)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-07533
FEDERAL REALTY INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Declaration of Trust)
Maryland
(State of Organization)
1626 East Jefferson Street, Rockville, Maryland
(Address of Principal Executive Offices)
52-0782497
(IRS Employer Identification No.)
20852
(Zip Code)
(301) 998-8100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares of Beneficial Interest, $.01 par value per share, with associated
Common Share Purchase Rights
Depository Shares, each representing 1/1000 of a share of 5.00% Series C
Cumulative Redeemable Preferred Stock, $.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange On Which Registered
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has elected not use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the Registrant's common shares held by non-affiliates of the Registrant, based upon the closing sales price of the
Registrant's common shares on June 30, 2017 was $9.1 billion.
Yes
No
The number of Registrant’s common shares outstanding on February 8, 2018 was 73,192,726.
FEDERAL REALTY INVESTMENT TRUST
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2017
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission for the Registrant’s 2017
annual meeting of shareholders to be held in May 2018 will be incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Business...........................................................................................................................................................
Risk Factors .....................................................................................................................................................
Unresolved Staff Comments............................................................................................................................
Properties.........................................................................................................................................................
Legal Proceedings ...........................................................................................................................................
Mine Safety Disclosures..................................................................................................................................
Market for Our Common Equity and Related Shareholder Matters and Issuer Purchases of Equity
Securities .........................................................................................................................................................
Selected Financial Data ...................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations..........................
Quantitative and Qualitative Disclosures about Market Risk .........................................................................
Financial Statements and Supplementary Data ...............................................................................................
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure .........................
Controls and Procedures..................................................................................................................................
Other Information............................................................................................................................................
Trustees, Executive Officers and Corporate Governance................................................................................
Executive Compensation .................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .......
Certain Relationships and Related Transactions, and Trustee Independence..................................................
Principal Accountant Fees and Services..........................................................................................................
3
7
16
16
24
25
26
28
30
51
51
52
52
52
53
53
53
53
53
Exhibits and Financial Statement Schedules...................................................................................................
Form 10-K Summary
53
57
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES .........................................................................................................................................................................
58
2
PART I
ITEM 1. BUSINESS
References to “we,” “us,” “our” or the “Trust” refer to Federal Realty Investment Trust and our business and operations
conducted through our directly or indirectly owned subsidiaries.
General
We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of high
quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected
metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, as well as in California and South Florida.
As of December 31, 2017, we owned or had a majority interest in community and neighborhood shopping centers and mixed-
use properties which are operated as 104 predominantly retail real estate projects comprising approximately 24.2 million square
feet. In total, the real estate projects were 95.3% leased and 93.9% occupied at December 31, 2017. We have paid quarterly
dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for
50 consecutive years.
We were founded in 1962 as a REIT under the laws of the District of Columbia and re-formed as a REIT in the state of
Maryland in 1999. We operate in a manner intended to qualify as a REIT for tax purposes pursuant to provisions of the Internal
Revenue Code of 1986, as amended (the “Code”). Our principal executive offices are located at 1626 East Jefferson Street,
Rockville, Maryland 20852. Our telephone number is (301) 998-8100. Our website address is www.federalrealty.com. The
information contained on our website is not a part of this report and is not incorporated herein by reference.
Business Objectives and Strategies
Our primary business objective is to own, manage, acquire and redevelop a portfolio of high quality retail focused properties
that will:
•
•
•
•
provide increasing cash flow for distribution to shareholders;
generate higher internal growth than the shopping center industry over the long term;
provide potential for capital appreciation; and
protect investor capital.
Our portfolio includes, and we continue to acquire and redevelop, high quality retail in many formats ranging from regional,
community and neighborhood shopping centers that often are anchored by grocery stores to mixed-use properties that are
typically centered around a retail component but also include office, residential and/or hotel components.
Operating Strategies
Our core operating strategy is to actively manage our properties to maximize rents and maintain occupancy levels by attracting
and retaining a strong and diverse base of tenants and replacing less relevant, weaker, underperforming tenants with stronger
ones. Our properties are generally located in some of the most densely populated and affluent areas of the country. These strong
demographics help our tenants generate higher sales, which has enabled us to maintain higher occupancy rates, charge higher
rental rates, and maintain steady rent growth, all of which increase the value of our portfolio. Our operating strategies also
include:
•
increasing rental rates through the renewal of expiring leases or the leasing of space to new tenants at higher rental
rates while limiting vacancy and down-time;
• maintaining a diversified tenant base, thereby limiting exposure to any one tenant’s financial or operating difficulties;
• monitoring the merchandising mix of our tenant base to achieve a balance of strong national and regional tenants with
local specialty tenants;
• minimizing overhead and operating costs;
• monitoring the physical appearance of our properties and the construction quality, condition and design of the
buildings and other improvements located on our properties to maximize our ability to attract customers and thereby
generate higher rents and occupancy rates;
developing local and regional market expertise in order to capitalize on market and retailing trends;
leveraging the contacts and experience of our management team to build and maintain long-term relationships with
tenants;
•
•
3
•
•
providing exceptional customer service; and
creating an experience at many of our properties that is identifiable, unique and serves the surrounding communities to
help insulate these properties and the tenants at these properties from the impact of on-line retailing.
Investing Strategies
Our investment strategy is to deploy capital at risk-adjusted rates of return that exceed our long-term weighted average cost of
capital in projects that have potential for future income growth and increased value. Our investments primarily fall into one of
the following four categories:
•
•
•
•
renovating, expanding, reconfiguring and/or retenanting our existing properties to take advantage of under-utilized
land or existing square footage to increase revenue;
renovating or expanding tenant spaces for tenants capable of producing higher sales, and therefore, paying higher
rents;
acquiring quality retail and mixed-use properties located in densely populated and/or affluent areas where barriers to
entry for further development are high, and that have possibilities for enhancing operating performance and creating
value through renovation, expansion, reconfiguration and/or retenanting; and
developing the retail portions of mixed-use properties and developing or otherwise investing in non-retail portions of
mixed-use properties we already own in order to capitalize on the overall value created in these properties.
Investment Criteria
When we evaluate potential redevelopment, retenanting, expansion, acquisition and development opportunities, we consider
such factors as:
•
•
•
•
•
•
•
•
•
•
the expected returns in relation to our short and long-term cost of capital as well as the anticipated risk we will face in
achieving the expected returns;
the anticipated growth rate of operating income generated by the property;
the ability to increase the long-term value of the property through redevelopment and retenanting;
the tenant mix at the property, tenant sales performance and the creditworthiness of those tenants;
the geographic area in which the property is located, including the population density, household incomes, education
levels, as well as the population and income trends in that geographic area;
competitive conditions in the vicinity of the property, including gross leasable area (GLA) per capita, competition for
tenants and the ability of others to create competing properties through redevelopment, new construction or
renovation;
access to and visibility of the property from existing roadways and the potential for new, widened or realigned,
roadways within the property’s trade area, which may affect access and commuting and shopping patterns;
the level and success of our existing investments in the market area;
the current market value of the land, buildings and other improvements and the potential for increasing those market
values; and
the physical condition of the land, buildings and other improvements, including the structural and environmental
condition.
Financing Strategies
Our financing strategies are designed to enable us to maintain an investment grade balance sheet while retaining sufficient
flexibility to fund our operating and investing activities in the most cost-efficient way possible. Our financing strategies
include:
• maintaining a prudent level of overall leverage and an appropriate pool of unencumbered properties that is sufficient
to support our unsecured borrowings;
• managing our exposure to variable-rate debt;
• maintaining an available line of credit to fund operating and investing needs on a short-term basis;
•
taking advantage of market opportunities to refinance existing debt, reduce interest costs and manage our debt
maturity schedule so that a significant portion of our debt relative to our size does not mature in any one year;
selling properties that have limited growth potential or are not a strategic fit within our overall portfolio and
redeploying the proceeds to redevelop, renovate, retenant and/or expand our existing properties, acquire new
properties or reduce debt; and
utilizing the most advantageous long-term source of capital available to us to finance redevelopment and acquisition
opportunities, which may include:
•
•
the sale of our equity or debt securities through public offerings, including our at-the-market ("ATM") equity
program in which we may from time to time offer and sell common shares, or private placements,
the incurrence of indebtedness through unsecured or secured borrowings,
4
the issuance of operating partnership units in a new or existing “downREIT partnership” that is controlled
and consolidated by us (generally operating partnership units in a “downREIT” partnership are issued in
exchange for a tax deferred contribution of property; these units receive the same distributions as our
common shares and the holders of these units have the right to exchange their units for cash or the same
number of our common shares, at our option), or
the use of joint venture arrangements.
Employees
At February 8, 2018, we had 311 full-time employees and 15 part-time employees. None of our employees are represented by a
collective bargaining unit. We believe that our relationship with our employees is good.
Tax Status
We elected to be taxed as a REIT under the federal income tax laws when we filed our 1962 tax return. As a REIT, we are
generally not subject to federal income tax on taxable income that we distribute to our shareholders. Under the Code, REITs are
subject to numerous organizational and operational requirements, including the requirement to generally distribute at least 90%
of taxable income each year. We will be subject to federal income tax on our taxable income (including any applicable
alternative minimum tax) at regular corporate rates if we fail to qualify as a REIT for tax purposes in any taxable year, or to the
extent we distribute less than 100% of our taxable income. We will also generally not qualify for treatment as a REIT for
federal income tax purposes for four years following the year during which qualification is lost. Even if we qualify as a REIT
for federal income tax purposes, we may be subject to certain state and local income and franchise taxes and to federal income
and excise taxes on our undistributed taxable income.
We have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, which we refer to as a TRS. In general, a TRS
may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Code. A
TRS is subject to federal and state income taxes. Our TRS activities have not been material.
Governmental Regulations Affecting Our Properties
We and our properties are subject to a variety of federal, state and local environmental, health, safety and similar laws,
including without limitation:
•
•
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•
the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, which we refer
to as CERCLA;
the Resource Conservation & Recovery Act;
the Federal Clean Water Act;
the Federal Clean Air Act;
the Toxic Substances Control Act;
the Occupational Safety & Health Act; and
the Americans with Disabilities Act.
The application of these laws to a specific property that we own depends on a variety of property-specific circumstances,
including the current and former uses of the property, the building materials used at the property and the physical layout of the
property. Under certain environmental laws, principally CERCLA, we, as the owner or operator of properties currently or
previously owned, may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing
materials, or petroleum product releases at the property. We may also be held liable to a governmental entity or third parties for
property damage and for investigation and clean up costs incurred in connection with the contamination, whether or not we
knew of, or were responsible for, such contamination. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection with the contamination. As the owner or operator
of real estate, we also may be liable under common law to third parties for damages and injuries resulting from environmental
contamination emanating from the real estate. Such costs or liabilities could exceed the value of the affected real estate. The
presence of contamination or the failure to remediate contamination may adversely affect our ability to sell or lease real estate
or to borrow using the real estate as collateral.
Neither existing environmental, health, safety and similar laws nor the costs of our compliance with these laws has had a
material adverse effect on our financial condition or results of operations, and management does not believe they will in the
future. In addition, we have not incurred, and do not expect to incur, any material costs or liabilities due to environmental
contamination at properties we currently own or have owned in the past. However, we cannot predict the impact of new or
changed laws or regulations on properties we currently own or may acquire in the future. We have no current plans for
substantial capital expenditures with respect to compliance with environmental, health, safety and similar laws and we carry
environmental insurance which covers a number of environmental risks for most of our properties.
5
Competition
Numerous commercial developers and real estate companies compete with us with respect to the leasing and the acquisition of
properties. Some of these competitors may possess greater capital resources than we do, although we do not believe that any
single competitor or group of competitors in any of the primary markets where our properties are located are dominant in that
market. This competition may:
•
•
•
•
reduce the number of properties available for acquisition;
increase the cost of properties available for acquisition;
interfere with our ability to attract and retain tenants, leading to increased vacancy rates and/or reduced rents; and
adversely affect our ability to minimize expenses of operation.
Retailers at our properties also face increasing competition from online retailers, outlet stores, discount shopping clubs,
superstores, and other forms of sales and marketing of goods and services, such as direct mail. This competition could
contribute to lease defaults and insolvency of tenants.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) are available free of charge through the Investors section of our website at www.federalrealty.com as soon as reasonably
practicable after we electronically file the material with, or furnish the material to, the Securities and Exchange Commission, or
the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics applicable to our Chief Executive Officer
and senior financial officers, Whistleblower Policy, organizational documents and the charters of our audit committee,
compensation committee and nominating and corporate governance committee are all available in the Corporate Governance
section of the Investors section of our website.
Amendments to the Code of Ethics or Code of Business Conduct or waivers that apply to any of our executive officers or our
senior financial officers will be disclosed in that section of our website as well.
You may obtain a printed copy of any of the foregoing materials from us by writing to us at Investor Relations, Federal Realty
Investment Trust, 1626 East Jefferson Street, Rockville, Maryland 20852.
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ITEM 1A. RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. Also, documents that
we “incorporate by reference” into this Annual Report on Form 10-K, including documents that we subsequently file with the
SEC will contain forward-looking statements. When we refer to forward-looking statements or information, sometimes we use
words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and
“continues.” In particular, the below risk factors describe forward-looking information. The risk factors describe risks that may
affect these statements but are not all-inclusive, particularly with respect to possible future events. Many things can happen that
can cause actual results to be different from those we describe. These factors include, but are not limited to the following:
Revenue from our properties may be reduced or limited if the retail operations of our tenants are not successful.
Revenue from our properties depends primarily on the ability of our tenants to pay the full amount of rent and other charges
due under their leases on a timely basis. Some of our leases provide for the payment, in addition to base rent, of additional rent
above the base amount according to a specified percentage of the gross sales generated by the tenants and generally provide for
reimbursement of real estate taxes and expenses of operating the property. Economic and/or competitive conditions may impact
the success of our tenants’ retail operations and therefore the amount of rent and expense reimbursements we receive from our
tenants. While demand for our retail spaces has been sufficient to increase occupancy, there can be no assurance that this will
continue. Any reduction in our tenants' abilities to pay base rent, percentage rent, or other charges on a timely basis, including
the filing by any of our tenants for bankruptcy protection, will adversely affect our financial condition and results of operations.
In the event of default by a tenant, we may experience delays and unexpected costs in enforcing our rights as landlord under
lease terms, which may also adversely affect our financial condition and results of operations.
Our net income depends on the success and continued presence of our “anchor” tenants.
Our net income could be adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency, of any
anchor store or anchor tenant. Anchor tenants generally occupy large amounts of square footage, pay a significant portion of the
total rents at a property and contribute to the success of other tenants by drawing significant numbers of customers to a
property. The closing of one or more anchor stores at a property could adversely affect that property and result in lease
terminations by, or reductions in rent from, other tenants whose leases may permit termination or rent reduction in those
circumstances or whose own operations may suffer as a result. We have been experiencing higher levels of anchor vacancy and
expect this will persist over the next few years while we are actively releasing vacant space, and in some cases, redeveloping
the shopping center. As of December 31, 2017, our anchor tenant space is 98.1% leased and 96.5% occupied. We also have seen
an overall decrease in the number of tenants available to fill anchor spaces. Therefore, tenant demand for certain of our anchor
spaces may decrease and as a result, we may see an increase in vacancy and/or a decrease in rents for those spaces that could
have a negative impact to our net income.
We may be unable to collect balances due from tenants that file for bankruptcy protection.
If a tenant or lease guarantor files for bankruptcy, we may not be able to collect all pre-petition amounts owed by that party. In
addition, a tenant that files for bankruptcy protection may terminate our lease in which event we would have a general
unsecured claim that would likely be for less than the full amount owed to us for the remainder of the lease term, which could
adversely affect our financial condition and results of operations.
We may experience difficulty or delay in renewing leases or re-leasing space.
We derive most of our revenue directly or indirectly from rent received from our tenants. We are subject to the risks that, upon
expiration or termination of leases, whether by their terms, as a result of a tenant bankruptcy, general economic conditions or
otherwise, leases for space in our properties may not be renewed, space may not be re-leased, or the terms of renewal or re-
lease, including the cost of required renovations or concessions to tenants, may be less favorable than current lease terms and
may include decreases in rental rates. As a result, our net income could be reduced.
The amount of debt we have and the restrictions imposed by that debt could adversely affect our business and financial
condition.
As of December 31, 2017, we had approximately $3.3 billion of debt outstanding. Of that outstanding debt, approximately
$491.6 million was secured by all or a portion of 13 of our real estate projects and approximately $71.6 million represented
capital lease obligations on four of our properties. As of December 31, 2017, 98.8% of our debt is fixed rate, which includes all
of our property secured debt, our unsecured senior notes, our capital lease obligations, and our $275.0 million term loan, as the
rate is effectively fixed by two interest rate swap agreements. Our organizational documents do not limit the level or amount of
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debt that we may incur. The amount of our debt outstanding from time to time could have important consequences to our
shareholders. For example, it could:
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing
funds available for operations, property acquisitions, redevelopments and other appropriate business opportunities that
may arise in the future;
limit our ability to make distributions on our outstanding common shares and preferred shares;
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require us to dedicate increased amounts of our cash flow from operations to payments on debt upon refinancing or on
our variable rate, unhedged debt, if interest rates rise;
limit our flexibility in planning for, or reacting to, changes in our business and the factors that affect the profitability of
our business;
limit our ability to obtain any additional debt or equity financing we may need in the future for working capital, debt
refinancing, capital expenditures, acquisitions, redevelopments or other general corporate purposes or to obtain such
financing on favorable terms; and/or
limit our flexibility in conducting our business, which may place us at a disadvantage compared to competitors with
less debt or debt with less restrictive terms.
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Our ability to make scheduled principal payments of, to pay interest on, or to refinance our indebtedness will depend primarily
on our future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond our
control. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future
to service our debt or meet our other cash needs. If we are unable to generate this cash flow from our business, we may be
required to refinance all or a portion of our existing debt, sell assets or obtain additional financing to meet our debt obligations
and other cash needs, including the payment of dividends required to maintain our status as a real estate investment trust. We
cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms that we would
find acceptable.
We are obligated to comply with financial and other covenants pursuant to our debt obligations that could restrict our
operating activities, and the failure to comply with such covenants could result in defaults that accelerate payment
under our debt agreements.
Our revolving credit facility, term loan and certain series of notes include financial covenants that may limit our operating
activities in the future. We are also required to comply with additional covenants that include, among other things, provisions:
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relating to the maintenance of property securing a mortgage;
restricting our ability to pledge assets or create liens;
restricting our ability to incur additional debt;
restricting our ability to amend or modify existing leases at properties securing a mortgage;
restricting our ability to enter into transactions with affiliates; and
restricting our ability to consolidate, merge or sell all or substantially all of our assets.
As of December 31, 2017, we were in compliance with all of our default related financial covenants. If we were to breach any
of our default related debt covenants, including the covenants listed above, and did not cure the breach within any applicable
cure period, our lenders could require us to repay the debt immediately, and, if the debt is secured, could immediately begin
proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes,
term loan and our revolving credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can
put us in default and require immediate repayment of their debt if we breach and fail to cure a default under certain of our other
debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our
results of operations, our ability to meet our obligations and the market value of our shares.
Adverse changes in our credit rating could affect our borrowing capacity and borrowing terms
Our credit worthiness is rated by nationally recognized credit rating agencies. The credit ratings assigned are based on our
operating performance, liquidity and leverage ratios, financial condition and prospects, and other factors viewed by the credit
rating agencies as relevant to our industry and the economic outlook in general. Our credit rating can affect the amount of
capital we access, as well as the terms of certain existing and future financing we obtain. Since we depend on debt financing to
fund the growth of our business, an adverse change in our credit rating, including actual changes in outlook, or even the
initiation of review of our credit rating that could result in an adverse change, could have a material adverse effect on us.
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Our development activities have inherent risks.
The ground-up development of improvements on real property, as opposed to the renovation and redevelopment of existing
improvements, presents substantial risks. We generally do not look to acquire raw land for future development; however, we do
intend to complete the development and construction of future phases of projects we already own, such as Assembly Row in
Somerville, Massachusetts and Pike & Rose in North Bethesda, Maryland. We may undertake development of these and other
projects on our own or bring in third parties if it is justifiable on a risk-adjusted return basis. We may also choose to delay
completion of a project if market conditions do not allow an appropriate return. If conditions arise and we are not able or decide
not to complete a project or if the expected cash flows of our project do not exceed the book value, an impairment of the project
may be required. If additional phases of any of our existing projects or if any new projects are not successful, it may adversely
affect our financial condition and results of operations.
During 2017, construction continued on the development of Phase II at both Assembly Row and Pike & Rose, with portions of
both projects opening during 2017. At Santana Row, we continue our on-going redevelopment efforts, including construction of
an eight story 284,000 square foot office building, which will include an additional 29,000 square feet of retail space and 1,300
parking spaces. A further discussion of these projects, expected costs, and current status can be found in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in the "Outlook" subsection.
In addition to the risks associated with real estate investment in general, as described elsewhere and the specific risks above,
the risks associated with our remaining development activities include:
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contractor changes may delay the completion of development projects and increase overall costs;
significant time lag between commencement and stabilization subjects us to greater risks due to fluctuations in the
general economy;
delivery of residential product (both rental units and for sale condominium units) into uncertain residential
environments may result in lower rents or sale prices than underwritten or longer time periods to reach economic
stabilization;
substantial amount of our investment is related to infrastructure, the value of which may be negatively impacted if we
do not complete subsequent phases;
failure or inability to obtain construction or permanent financing on favorable terms;
failure or inability to obtain public funding from governmental agencies to fund infrastructure projects, including
public funding in connection with our development at Assembly Row;
expenditure of money and time on projects that may never be completed;
failure or inability of partners to perform on hotel joint ventures;
the third-party developer of office or other buildings may not deliver or may encounter delays in delivering space as
planned;
difficulty securing key anchor or other tenants may impact occupancy rates and projected revenue;
inability to achieve projected rental rates or anticipated pace of lease-up;
higher than estimated construction or operating costs, including labor and material costs; and
possible delay in completion of a project because of a number of factors, including weather, labor disruptions,
construction delays or delays in receipt of zoning or other regulatory approvals, acts of terror or other acts of violence,
or acts of God (such as fires, earthquakes or floods).
Redevelopments and acquisitions may fail to perform as expected.
Our investment strategy includes the redevelopment and acquisition of high quality, retail focused properties in densely
populated areas with high average household incomes and significant barriers to adding competitive retail supply. The
redevelopment and acquisition of properties entail risks that include the following, any of which could adversely affect our
results of operations and our ability to meet our obligations:
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our estimate of the costs to improve, reposition or redevelop a property may prove to be too low, or the time we
estimate to complete the improvement, repositioning or redevelopment may be too short. As a result, the property may
fail to achieve the returns we have projected, either temporarily or for a longer time;
we may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the
properties we identify;
we may not be able to integrate an acquisition into our existing operations successfully;
properties we redevelop or acquire may fail to achieve the occupancy or rental rates we project, within the time frames
we project, at the time we make the decision to invest, which may result in the properties’ failure to achieve the returns
we projected;
our pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or
identify necessary repairs until after the property is acquired, which could significantly increase our total acquisition
costs or decrease cash flow from the property; and
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our investigation of a property or building prior to our acquisition, and any representations we may receive from the
seller of such building or property, may fail to reveal various liabilities, which could reduce the cash flow from the
property or increase our acquisition cost.
Our ability to grow will be limited if we cannot obtain additional capital.
Our growth strategy is focused on the redevelopment of properties we already own and the acquisition of additional properties.
We believe that it will be difficult to fund our expected growth with cash from operating activities because, in addition to other
requirements, we are generally required to distribute to our shareholders at least 90% of our taxable income each year to
continue to qualify as a REIT for federal income tax purposes. As a result, we must rely primarily upon the availability of debt
or equity capital, which may or may not be available on favorable terms or at all. Debt could include the sale of debt securities
and mortgage loans from third parties. If economic conditions and conditions in the capital markets are not favorable at the
time we need to raise capital, we may need to obtain capital on less favorable terms. Additionally, we cannot guarantee that
additional financing, refinancing or other capital will be available in the amounts we desire or on favorable terms. Our access to
debt or equity capital depends on a number of factors, including the market’s perception of our growth potential and risk
profile, our ability to pay dividends, and our current and potential future earnings. Depending on the outcome of these factors
as well as the impact of the economic environment, we could experience delay or difficulty in implementing our growth
strategy on satisfactory terms, or be unable to implement this strategy.
Rising interest rates could adversely affect our cash flow and the market price of our outstanding debt and preferred
shares.
Of our approximately $3.3 billion of debt outstanding as of December 31, 2017, approximately $316.0 million bears interest at
variable rates, of which $275.0 million is effectively fixed at 2.62% through two interest rate swap agreements. We have an
$800.0 million revolving credit facility, on which $41.0 million is outstanding at December 31, 2017, that bears interest at
LIBOR plus 82.5 basis points. We may borrow additional funds at variable interest rates in the future. Increases in interest rates
would increase the interest expense on our variable rate debt and reduce our cash flow, which could adversely affect our ability
to service our debt and meet our other obligations and also could reduce the amount we are able to distribute to our
shareholders. We may enter into hedging arrangements or other transactions for all or a portion of our variable rate debt to limit
our exposure to rising interest rates. However, the amounts we are required to pay under the term loan and any other variable
rate debt to which hedging or similar arrangements relate may increase in the event of non-performance by the counterparties to
any of our hedging arrangements. In addition, an increase in market interest rates may lead purchasers of our debt securities
and preferred shares to demand a higher annual yield, which could adversely affect the market price of our outstanding debt
securities and preferred shares and the cost and/or timing of refinancing or issuing additional debt securities or preferred shares.
The market value of our debt and equity securities is subject to various factors that may cause significant fluctuations
or volatility.
As with other publicly traded securities, the market price of our debt and equity securities depends on various factors, which
may change from time to time and/or may be unrelated to our financial condition, operating performance or prospects that may
cause significant fluctuations or volatility in such prices. These factors include, among others:
general economic and financial market conditions;
level and trend of interest rates;
our ability to access the capital markets to raise additional capital;
the issuance of additional equity or debt securities;
changes in our funds from operations (“FFO”) or earnings estimates;
changes in our debt or analyst ratings;
our financial condition and performance;
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• market perception of our business compared to other REITs; and
• market perception of REITs, in general, compared to other investment alternatives.
Loss of our key management could adversely affect performance and the value of our common shares.
We are dependent on the efforts of our key management. Although we believe qualified replacements could be found for any
departures of key executives, the loss of their services could adversely affect our performance and the value of our common
shares.
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Our performance and value are subject to general risks associated with the real estate industry.
Our economic performance and the value of our real estate assets, and, consequently, the value of our investments, are subject
to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and
capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. As a real
estate company, we are susceptible to the following real estate industry risks:
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economic downturns in general, or in the areas where our properties are located;
adverse changes in local real estate market conditions, such as an oversupply or reduction in demand;
changes in tenant preferences that reduce the attractiveness of our properties to tenants;
zoning or regulatory restrictions;
decreases in market rental rates;
weather conditions that may increase or decrease energy costs and other weather-related expenses;
costs associated with the need to periodically repair, renovate and re-lease space; and
increases in the cost of adequate maintenance, insurance and other operating costs, including real estate taxes,
associated with one or more properties, which may occur even when circumstances such as market factors and
competition cause a reduction in revenues from one or more properties, although real estate taxes typically do not
increase upon a reduction in such revenues.
Each of these risks could result in decreases in market rental rates and increases in vacancy rates, which could adversely affect
our financial condition and results of operation.
Many real estate costs are fixed, even if income from our properties decreases.
Our financial results depend primarily on leasing space in our properties to tenants on terms favorable to us. Costs associated
with real estate investment, such as real estate taxes, insurance and maintenance costs, generally are not reduced even when a
property is not fully occupied, rental rates decrease, or other circumstances cause a reduction in income from the property. As a
result, cash flow from the operations of our properties may be reduced if a tenant does not pay its rent or we are unable to rent
our properties on favorable terms. Under those circumstances, we might not be able to enforce our rights as landlord without
delays and may incur substantial legal costs. Additionally, new properties that we may acquire or redevelop may not produce
any significant revenue immediately, and the cash flow from existing operations may be insufficient to pay the operating
expenses and debt service associated with such new properties until they are fully occupied.
Competition may limit our ability to purchase new properties and generate sufficient income from tenants.
Numerous commercial developers and real estate companies compete with us in seeking tenants for our existing properties and
properties for acquisition. This competition may:
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reduce properties available for acquisition;
increase the cost of properties available for acquisition;
reduce rents payable to us;
interfere with our ability to attract and retain tenants;
lead to increased vacancy rates at our properties; and
adversely affect our ability to minimize expenses of operation.
Retailers at our properties also face increasing competition from online retailers, outlet stores, discount shopping clubs and
other forms of sales and marketing of goods, such as direct mail. This competition could contribute to lease defaults and
insolvency of tenants. If we are unable to continue to attract appropriate retail tenants to our properties, or to purchase new
properties in our geographic markets, it could materially affect our ability to generate net income, service our debt and make
distributions to our shareholders.
We may be unable to sell properties when appropriate because real estate investments are illiquid.
Real estate investments generally cannot be sold quickly. In addition, there are some limitations under federal income tax laws
applicable to real estate and to REITs in particular that may limit our ability to sell our assets. We may not be able to alter our
portfolio promptly in response to changes in economic or other conditions including being unable to sell a property at a return
we believe is appropriate due to the economic environment. Our inability to respond quickly to adverse changes in the
performance of our investments could have an adverse effect on our ability to meet our obligations and make distributions to
our shareholders.
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Our insurance coverage on our properties may be inadequate.
We currently carry comprehensive insurance on all of our properties, including insurance for liability, fire, flood, earthquake,
environmental matters, rental loss and acts of terrorism. All of these policies contain coverage limitations. We believe these
coverages are of the types and amounts customarily obtained for or by an owner of similar types of real property assets located
in the areas where our properties are located. We intend to obtain similar insurance coverage on subsequently acquired
properties.
The availability of insurance coverage may decrease and the prices for insurance may increase as a consequence of significant
losses incurred by the insurance industry and other factors outside our control. As a result, we may be unable to renew or
duplicate our current insurance coverage in adequate amounts or at reasonable prices. In addition, insurance companies may no
longer offer coverage against certain types of losses, such as losses due to terrorist acts and toxic mold, or, if offered, the
expense of obtaining these types of insurance may not be justified. We therefore may cease to have insurance coverage against
certain types of losses and/or there may be decreases in the limits of insurance available. If an uninsured loss or a loss in excess
of our insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the
anticipated future revenue from the property, but still remain obligated for any mortgage debt or other financial obligations
related to the property. We cannot guarantee that material losses in excess of insurance proceeds will not occur in the future. If
any of our properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result
in large expenses to repair or rebuild the property. Also, due to inflation, changes in codes and ordinances, environmental
considerations and other factors, it may not be feasible to use insurance proceeds to replace a building after it has been
damaged or destroyed. Further, we may be unable to collect insurance proceeds if our insurers are unable to pay or contest a
claim. Events such as these could adversely affect our results of operations and our ability to meet our obligations, including
distributions to our shareholders.
We may have limited flexibility in dealing with our jointly owned investments.
Our organizational documents do not limit the amount of funds that we may invest in properties and assets owned jointly with
other persons or entities. As of December 31, 2017, we held 16 predominantly retail real estate projects jointly with other
persons in addition to properties owned in a “downREIT” structure. Additionally, we have entered into joint venture
agreements related to the hotel component of Phase II of our Pike & Rose and Assembly Row development projects. We may
make additional joint investments in the future. Our existing and future joint investments may subject us to special risks,
including the possibility that our partners or co-investors might become bankrupt, that those partners or co-investors might
have economic or other business interests or goals which are unlike or incompatible with our business interests or goals, that
those partners or co-investors might be in a position to take action contrary to our suggestions or instructions, or in opposition
to our policies or objectives, and that disputes may develop with our joint venture partners over decisions affecting the property
or the joint venture, which may result in litigation or arbitration or some other form of dispute resolution. Although as of
December 31, 2017, we held the controlling interests in all of our existing co-investments (except the hotel investments
discussed above and the investment in the La Alameda shopping center acquired in 2017), we generally must obtain the consent
of the co-investor or meet defined criteria to sell or to finance these properties. Joint ownership gives a third party the
opportunity to influence the return we can achieve on some of our investments and may adversely affect our ability to make
distributions to our shareholders. We may also be liable for the actions of our co-investors.
Environmental laws and regulations could reduce the value or profitability of our properties.
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and
regulations relating to hazardous materials, environmental protection and human health and safety. Under various federal, state
and local laws, ordinances and regulations, we and our tenants may be required to investigate and clean up certain hazardous or
toxic substances released on or in properties we own or operate, and also may be required to pay other costs relating to
hazardous or toxic substances. This liability may be imposed without regard to whether we or our tenants knew about the
release of these types of substances or were responsible for their release. The presence of contamination or the failure to
properly remediate contamination at any of our properties may adversely affect our ability to sell or lease those properties or to
borrow funds by using those properties as collateral. The costs or liabilities could exceed the value of the affected real estate.
We are not aware of any environmental condition with respect to any of our properties that management believes would have a
material adverse effect on our business, assets or results of operations taken as a whole. The uses of any of our properties prior
to our acquisition of the property and the building materials used at the property are among the property-specific factors that
will affect how the environmental laws are applied to our properties. If we are subject to any material environmental liabilities,
the liabilities could adversely affect our results of operations and our ability to meet our obligations.
We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws
or regulations will be administered or interpreted or what environmental conditions may be found to exist on the properties in
the future. Compliance with existing and new laws and regulations may require us or our tenants to spend funds to remedy
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environmental problems. Our tenants, like many of their competitors, have incurred, and will continue to incur, capital and
operating expenditures and other costs associated with complying with these laws and regulations, which will adversely affect
their potential profitability.
Generally, our tenants must comply with environmental laws and meet remediation requirements. Our leases typically impose
obligations on our tenants to indemnify us from any compliance costs we may incur as a result of the environmental conditions
on the property caused by the tenant. If a lease does not require compliance or if a tenant fails to or cannot comply, we could be
forced to pay these costs. If not addressed, environmental conditions could impair our ability to sell or re-lease the affected
properties in the future or result in lower sales prices or rent payments.
The Americans with Disabilities Act of 1990 could require us to take remedial steps with respect to existing or newly
acquired properties.
Our existing properties, as well as properties we may acquire, as commercial facilities, are required to comply with Title III of
the Americans with Disabilities Act of 1990. Investigation of a property may reveal non-compliance with this Act. The
requirements of this Act, or of other federal, state or local laws or regulations, also may change in the future and restrict further
renovations of our properties with respect to access for disabled persons. Future compliance with this Act may require
expensive changes to the properties.
The revenues generated by our tenants could be negatively affected by various federal, state and local laws to which
they are subject.
We and our tenants are subject to a wide range of federal, state and local laws and regulations, such as local licensing
requirements, consumer protection laws and state and local fire, life-safety and similar requirements that affect the use of the
properties. The leases typically require that each tenant comply with all laws and regulations. Failure to comply could result in
fines by governmental authorities, awards of damages to private litigants, or restrictions on the ability to conduct business on
such properties. Non-compliance of this sort could reduce our revenues from a tenant, could require us to pay penalties or fines
relating to any non-compliance, and could adversely affect our ability to sell or lease a property.
Failure to qualify as a REIT for federal income tax purposes would cause us to be taxed as a corporation, which would
substantially reduce funds available for payment of distributions.
We believe that we are organized and qualified as a REIT for federal income tax purposes and currently intend to operate in a
manner that will allow us to continue to qualify as a REIT under the Code. However, we cannot assure you that we will remain
qualified as such in the future.
Qualification as a REIT involves the application of highly technical and complex Code provisions and applicable income tax
regulations that have been issued under the Code. Certain facts and circumstances not entirely within our control may affect our
ability to qualify as a REIT. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be
derived from qualifying rents and certain other income. Satisfying this requirement could be difficult, for example, if defaults
by tenants were to reduce the amount of income from qualifying rents. As a REIT, we must generally make annual distributions
to shareholders of at least 90% of our taxable income. In addition, new legislation, new regulations, new administrative
interpretations or new court decisions may significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Any modification in the tax treatment of REITs could have a significant
adverse impact to our net income.
If we fail to qualify as a REIT:
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we would not be allowed a deduction for distributions to shareholders in computing taxable income;
we would be subject to federal income tax at regular corporate rates;
we could be subject to the federal alternative minimum tax;
unless we are entitled to relief under specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified;
we could be required to pay significant income taxes, which would substantially reduce the funds available for
investment or for distribution to our shareholders for each year in which we failed or were not permitted to qualify;
and
we would no longer be required by law to make any distributions to our shareholders.
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We may be required to incur additional debt to qualify as a REIT.
As a REIT, we must generally make annual distributions to shareholders of at least 90% of our taxable income. We are subject
to income tax on amounts of undistributed taxable income and net capital gain. In addition, we would be subject to a 4% excise
tax if we fail to distribute sufficient income to meet a minimum distribution test based on our ordinary income, capital gain and
aggregate undistributed income from prior years. We intend to make distributions to shareholders to comply with the Code’s
distribution provisions and to avoid federal income and excise tax. We may need to borrow funds to meet our distribution
requirements because:
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our income may not be matched by our related expenses at the time the income is considered received for purposes of
determining taxable income; and
non-deductible capital expenditures, creation of reserves, or debt service requirements may reduce available cash but
not taxable income.
In these circumstances, we might have to borrow funds on terms we might otherwise find unfavorable and we may have to
borrow funds even if our management believes the market conditions make borrowing financially unattractive. Current tax law
also allows us to pay a portion of our distributions in shares instead of cash.
To maintain our status as a REIT, we limit the amount of shares any one shareholder can own.
The Code imposes certain limitations on the ownership of the stock of a REIT. For example, not more than 50% in value of our
outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code)
during the last half of any taxable year. To protect our REIT status, our declaration of trust prohibits any one shareholder from
owning (actually or constructively) more than 9.8% in value of the outstanding common shares or of any class or series of
outstanding preferred shares. The constructive ownership rules are complex. Shares of our capital stock owned, actually or
constructively, by a group of related individuals and/or entities may be treated as constructively owned by one of those
individuals or entities. As a result, the acquisition of less than 9.8% in value of the outstanding common shares and/or a class or
series of preferred shares (or the acquisition of an interest in an entity that owns common shares or preferred shares) by an
individual or entity could cause that individual or entity (or another) to own constructively more than 9.8% in value of the
outstanding capital stock. If that happened, either the transfer of ownership would be void or the shares would be transferred to
a charitable trust and then sold to someone who can own those shares without violating the 9.8% ownership limit.
The Board of Trustees may waive these restrictions on a case-by-case basis. In addition, the Board of Trustees and two-thirds of
our shareholders eligible to vote at a shareholder meeting may remove these restrictions if they determine it is no longer in our
best interests to attempt to qualify, or to continue to qualify, as a REIT. The 9.8% ownership restrictions may delay, defer or
prevent a transaction or a change of our control that might involve a premium price for the common shares or otherwise be in
the shareholders’ best interest.
U.S. federal tax reform legislation now and in the future could affect REITs, both positively and negatively, in ways that
are difficult to anticipate.
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), signed into law on December 22, 2017, represents sweeping tax
reform legislation that makes significant changes to corporate and individual tax rates and the calculation of taxes. While we
currently do not expect the 2017 Tax Act will have a significant direct impact on us, it may impact us indirectly as our tenants
and the jurisdictions in which we do business as well as the overall investment thesis for REITs may be impacted both
positively and negatively in ways that are difficult to predict. Additionally, the overall impact of the 2017 Tax Act depends on
future interpretations and regulations that may be issued by federal tax authorities, as well as changes in state and local taxation
in response to the 2017 Tax Act, and it is possible that such future interpretations, regulations and other changes could
adversely impact us.
We cannot assure you we will continue to pay dividends at historical rates.
Our ability to continue to pay dividends on our common shares at historical rates or to increase our common share dividend
rate, and our ability to pay preferred share dividends and service our debt securities, will depend on a number of factors,
including, among others, the following:
•
•
•
•
our financial condition and results of future operations;
the performance of lease terms by tenants;
the terms of our loan covenants; and
our ability to acquire, finance, develop or redevelop and lease additional properties at attractive rates.
If we do not maintain or increase the dividend on our common shares, it could have an adverse effect on the market price of our
common shares and other securities. Any preferred shares we may offer in the future may have a fixed dividend rate that would
14
not increase with any increases in the dividend rate of our common shares. Conversely, payment of dividends on our common
shares may be subject to payment in full of the dividends on any preferred shares and payment of interest on any debt securities
we may offer.
Certain tax and anti-takeover provisions of our declaration of trust and bylaws may inhibit a change of our control.
Certain provisions contained in our declaration of trust and bylaws and the Maryland General Corporation Law, as applicable to
Maryland REITs, may discourage a third party from making a tender offer or acquisition proposal to us. If this were to happen,
it could delay, deter or prevent a change in control or the removal of existing management. These provisions also may delay or
prevent the shareholders from receiving a premium for their common shares over then-prevailing market prices. These
provisions include:
•
•
•
•
•
•
the REIT ownership limit described above;
authorization of the issuance of our preferred shares with powers, preferences or rights to be determined by the Board
of Trustees;
special meetings of our shareholders may be called only by the chairman of the board, the chief executive officer, the
president, by one-third of the trustees or by shareholders possessing no less than 25% of all the votes entitled to be
cast at the meeting;
the Board of Trustees, without a shareholder vote, can classify or reclassify unissued shares of beneficial interest,
including the reclassification of common shares into preferred shares and vice-versa;
a two-thirds shareholder vote is required to approve some amendments to the declaration of trust; and
advance-notice requirements for proposals to be presented at shareholder meetings.
In addition, if we elect to be governed by it in the future, the Maryland Control Share Acquisition Law could delay or prevent a
change in control. Under Maryland law, unless a REIT elects not to be subject to this law, “control shares” acquired in a
“control share acquisition” have no voting rights except to the extent approved by shareholders by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares owned by the acquirer and by officers or trustees who are employees of
the REIT. “Control shares” are voting shares that would entitle the acquirer to exercise voting power in electing trustees within
specified ranges of voting power. A “control share acquisition” means the acquisition of control shares, with some exceptions.
Our bylaws state that the Maryland control share acquisition law will not apply to any acquisition by any person of our
common shares. This bylaw provision may be repealed, in whole or in part, at any time, whether before or after an acquisition
of control shares, by a vote of a majority of the shareholders entitled to vote, and, upon such repeal, may, to the extent provided
by any successor bylaw, apply to any prior or subsequent control share acquisition.
We may amend or revise our business policies without your approval.
Our Board of Trustees may amend or revise our operating policies without shareholder approval. Our investment, financing and
borrowing policies and policies with respect to all other activities, such as growth, debt, capitalization and operations, are
determined by the Board of Trustees. The Board of Trustees may amend or revise these policies at any time and from time to
time at its discretion. A change in these policies could adversely affect our financial condition and results of operations, and the
market price of our securities.
The current business plan adopted by our Board of Trustees focuses on our investment in high quality retail based properties
that are typically neighborhood and community shopping centers or mixed-use properties, principally through redevelopments
and acquisitions. If this business plan is not successful, it could have a material adverse effect on our financial condition and
results of operations.
Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make,
including those in this Annual Report on Form 10-K. Except as may be required by law, we make no promise to update any of
the forward-looking statements as a result of new information, future events or otherwise. You should carefully review the
above risks and the risk factors.
Natural disasters and severe weather conditions could have an adverse impact on our cash flow and operating results.
Changing weather patterns and climatic conditions, such as global warming, may have added to the unpredictability and
frequency of natural disasters and severe weather conditions and created additional uncertainty as to future trends and
exposures. Our operations are located in areas that are subject to natural disasters and severe weather conditions such as
hurricanes, earthquakes, droughts, snow storms, floods and fires. The occurrence of natural disasters or severe weather
conditions can delay new development projects, increase investment costs to repair or replace damaged properties, increase
operation costs, increase future property insurance costs, and negatively impact the tenant demand for lease space. If insurance
15
is unavailable to us or is unavailable on acceptable terms, or if our insurance is not adequate to cover business interruption or
losses from these events, our earnings, liquidity or capital resources could be adversely affected.
We face risks relating to cybersecurity attacks that could cause loss of confidential information and other business
disruptions.
We rely extensively on computer systems to process transactions and manage our business, and our business is at risk from and
may be impacted by cybersecurity attacks. These could include attempts to gain unauthorized access to our data and computer
systems. Attacks can be both individual and/or highly organized attempts organized by very sophisticated hacking
organizations. We employ a number of measures to prevent, detect and mitigate these threats, which include password
encryption, frequent password change events, firewall detection systems, anti-virus software in-place, frequent backups, a
redundant data system for core applications and annual penetration testing; however, there is no guarantee such efforts will be
successful in preventing a cyber attack. A cybersecurity attack could compromise the confidential information of our
employees, tenants and vendors. A successful attack could disrupt and otherwise adversely affect our business operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
General
As of December 31, 2017, we owned or had a majority ownership interest in community and neighborhood shopping centers
and mixed-used properties which are operated as 104 predominantly retail real estate projects comprising approximately 24.2
million square feet. These properties are located primarily in densely populated and affluent communities in strategic
metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, California, and South Florida. No single
property accounted for over 10% of our 2017 total revenue. We believe that our properties are adequately covered by
commercial general liability, fire, flood, earthquake, terrorism and business interruption insurance provided by reputable
companies, with commercially reasonable exclusions, deductibles and limits.
Tenant Diversification
As of December 31, 2017, we had approximately 3,000 leases, with tenants ranging from sole proprietors to major national and
international retailers. No one tenant or affiliated group of tenants accounted for more than 2.9% of our annualized base rent as
of December 31, 2017. As a result of our tenant diversification, we believe our exposure to any one bankruptcy filing in the
retail sector has not been and will not be significant, however, multiple filings by a number of retailers could have a significant
impact.
16
Geographic Diversification
Our 104 real estate projects are located in 12 states and the District of Columbia. The following table shows the number of
projects, the gross leasable area (“GLA”) of commercial space and the percentage of total portfolio gross leasable area of
commercial space in each state as of December 31, 2017.
State
California
Maryland
Virginia
Pennsylvania(1)
Massachusetts
New Jersey
Florida
New York
Illinois
Connecticut
Michigan
District of Columbia
North Carolina
Total
Number of
Projects
Gross Leasable
Area
(In square feet)
Percentage
of Gross
Leasable
Area
21
21
16
10
9
6
4
6
4
3
1
2
1
104
5,442,000
4,562,000
3,738,000
2,316,000
2,101,000
1,722,000
1,339,000
1,248,000
797,000
397,000
217,000
168,000
159,000
24,206,000
22.5 %
18.8 %
15.4 %
9.6 %
8.7 %
7.1 %
5.5 %
5.2 %
3.3 %
1.6 %
0.9 %
0.7 %
0.7 %
100.0%
(1) Additionally, we own two participating mortgages totaling approximately $30.4 million secured by multiple buildings
in Manayunk, Pennsylvania.
Leases, Lease Terms and Lease Expirations
Our leases are classified as operating leases and typically are structured to require the monthly payment of minimum rents in
advance, subject to periodic increases during the term of the lease, percentage rents based on the level of sales achieved by
tenants, and reimbursement of a majority of on-site operating expenses and real estate taxes. These features in our leases
generally reduce our exposure to higher costs and allow us to participate in improved tenant sales.
Commercial property leases generally range from three to ten years; however, certain leases, primarily with anchor tenants,
may be longer. Many of our leases contain tenant options that enable the tenant to extend the term of the lease at expiration at
pre-established rental rates that often include fixed rent increases, consumer price index adjustments or other market rate
adjustments from the prior base rent. Leases on residential units are generally for a period of one year or less and, in 2017,
represented approximately 6.9% of total rental income.
17
The following table sets forth the schedule of lease expirations for our commercial leases in place as of December 31, 2017
for each of the 10 years beginning with 2018 and after 2027 in the aggregate assuming that none of the tenants exercise future
renewal options. Annualized base rents reflect in-place contractual rents as of December 31, 2017.
Year of Lease Expiration
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Total
Leased
Square
Footage
Expiring
1,849,000
3,042,000
2,339,000
2,601,000
3,045,000
1,958,000
1,523,000
1,346,000
921,000
1,183,000
2,861,000
22,668,000
Percentage of
Leased Square
Footage
Expiring
Annualized
Base Rent
Represented by
Expiring Leases
47,382,000
8% $
73,854,000
13%
62,409,000
10%
76,900,000
12%
77,417,000
13%
54,840,000
9%
40,296,000
7%
39,245,000
6%
30,520,000
4%
44,532,000
5%
13%
62,388,000
100% $ 609,783,000
Percentage of
Annualized
Base Rent
Represented by
Expiring Leases
8%
12%
10%
13%
13%
9%
7%
6%
5%
7%
10%
100%
During 2017, we signed leases for a total of 1,793,000 square feet of retail space including 1,622,000 square feet of comparable
space leases (leases for which there was a prior tenant) at an average rental increase of 13% on a cash basis and 26% on a
straight-line basis. New leases for comparable spaces were signed for 773,000 square feet at an average rental increase of 19%
on a cash basis and 32% on a straight-line basis. Renewals for comparable spaces were signed for 848,000 square feet at an
average rental increase of 9% on a cash basis and 21% on a straight-line basis. Tenant improvements and incentives for
comparable spaces were $36.00 per square foot, of which, $62.11 per square foot was for new leases and $12.18 per square foot
was for renewals in 2017.
During 2016, we signed leases for a total of 1,688,000 square feet of retail space including 1,473,000 square feet of comparable
space leases (leases for which there was a prior tenant) at an average rental increase of 13% on a cash basis and 26% on a
straight-line basis. New leases for comparable spaces were signed for 543,000 square feet at an average rental increase of 24%
on a cash basis and 40% on a straight-line basis. Renewals for comparable spaces were signed for 930,000 square feet at an
average rental increase of 7% on a cash basis and 17% on a straight-line basis. Tenant improvements and incentives for
comparable spaces were $31.00 per square foot, of which, $66.47 per square foot was for new leases and $10.28 was for
renewal leases in 2016.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions
reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring
leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum
rent and in some instances, projections of first lease year percentage rent, to be paid on the new lease. In atypical
circumstances, management may exercise judgment as to how to most effectively reflect the comparability of spaces reported
in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current
market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed,
capital investment made in the space and the specific lease structure.
The leases signed in 2017 generally become effective over the following two years though some may not become effective until
2020 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants
for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However,
these increases do provide information about the tenant/landlord relationship and the potential increase we may achieve in
rental income over time.
Historically, we have executed comparable space leases for 1.2 to 1.6 million square feet of retail space each year and expect
the volume for 2018 will be in line with our historical averages with overall positive increases in rental income. However,
changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we
can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if at all.
18
Retail and Residential Properties
The following table sets forth information concerning all real estate projects in which we owned an equity interest, had a
leasehold interest, or otherwise controlled and are consolidated as of December 31, 2017. Except as otherwise noted, we are the
sole owner of our retail real estate projects. Principal tenants are the largest tenants in the project based on square feet leased or
are tenants important to a project’s success due to their ability to attract retail customers.
Property, City, State, Zip Code
California
Azalea
South Gate, CA 90280(5)(8)
Year
Completed
Year
Acquired
Square
Feet(1) /
Apartment
Units
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
2014
2017
222,000
$27.43
100%
Bell Gardens
Bell Gardens, CA 90201(4)(5)(8)
1990, 2003,
2006
2017
330,000
$20.37
100%
Colorado Blvd
Pasadena, CA 91103(4)
Crow Canyon Commons
San Ramon, CA 94583
1905-1988
1996/1998
69,000
$45.04
100%
1980, 1998,
2006
2005/2007
241,000
$28.16
94%
East Bay Bridge
Emeryville & Oakland, CA 94608
1994-2001,
2011, 2012
2012
439,000
$18.42
100%
1987
1996/2010
299,000
$25.29
99%
Escondido Promenade
Escondido, CA 92029(5)
Fourth Street
Berkeley, CA 94710(5)
Hastings Ranch Plaza
Pasadena, CA 91107(4)
Hermosa Avenue
Hermosa Beach, CA 90254
Hollywood Blvd
Hollywood, CA 90028
1948, 1975
2017
71,000
$28.14
1958, 1984,
2006, 2007
2017
273,000
$7.21
1922
1997
23,000
1929, 1991
1999
180,000
Kings Court
Los Gatos, CA 95032(4)(6)
La Alameda
Walnut Park, CA 90255(4)(7)(8)
1960
2008
1998
2017
80,000
245,000
Old Town Center
Los Gatos, CA 95030
Olivo at Mission Hills
Mission Hills, CA 91345(5)
Plaza Del Sol
South El Monte, CA 91733(5)(8)
Plaza El Segundo / The Point
El Segundo, CA 90245(5)(8)
1962, 1998
1997
98,000
$41.40
99%
2017
2017
105,000
$30.05
100%
2009
2017
48,000
2006-2007,
2016
2011/2013
495,000
55%
98%
81%
91%
100%
94%
$49.18
$30.01
$32.55
$24.96
$23.01
$44.71
$14.33
$13.74
100%
95%
99%
97%
Plaza Pacoima
Pacoima, CA 91331(5)
San Antonio Center
Mountain View, CA 94040(4)(6)
2010
1958,
1964-1965,
1974-1975,
1995-1997
2017
2015
204,000
376,000
19
Principal Tenant(s)
Marshalls
Ross Dress for Less
Ulta
CVS
Food4Less
Marshalls
Ross Dress for Less
Petco
Pottery Barn
Banana Republic
Sprouts
Orchard Supply Hardware
Rite Aid
Total Wine & More
Pak-N-Save
Home Depot
Target
Nordstrom Rack
TJ Maxx
Dick's Sporting Goods
Ross Dress For Less
Toys R Us
CB2
Ingram Book Group
Marshalls
HomeGoods
CVS
Sears
Marshalls
DSW
L.A. Fitness
La La Land
Lunardi's Supermarket
CVS
Marshalls
Ross Dress For Less
CVS
Petco
Anthropologie
Banana Republic
GAP
Target
24 Hour Fitness
Fallas Stores
Marshalls
Whole Foods
Anthropologie
Home Goods
Dick's Sporting Goods
Multiple Restaurants
Costco
Best Buy
Trader Joe's
Wal-mart
Kohl's
24 Hour Fitness
Property, City, State, Zip Code
Santana Row
San Jose, CA 95128(4)
Year
Completed
2002, 2009,
2016
Year
Acquired
1997
Square
Feet(1) /
Apartment
Units
885,000
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
$52.42
98%
2003-2006,
2011, 2014
1973
1997/2012
662 units
2017
148,000
1888-2000
1996-2000
209,000
N/A
$14.56
$79.66
97%
91%
98%
1960-1966
2004
647,000
$17.78
99%
Principal Tenant(s)
Crate & Barrel
H&M
Container Store
Multiple Restaurants
Food4Less
CVS
Banana Republic
Old Navy
J. Crew
Abercrombie & Fitch
Walmart Neighborhood Market
Target
Nordstrom Rack
Nike Factory
Burlington
1959
1995
266,000
1920-2009
2013
1968
1995
95,000
36,000
$13.97
$28.47
97%
96%
Stop & Shop
TJ Maxx
Stop & Shop
Equinox
$70.15
100%
Saks Fifth Avenue
1998
2001
119,000
$29.71
100%
Marshalls
Nordstrom Rack
DSW
Maggiano's
1930
1995
49,000
$45.02
88%
Petco
Santana Row Residential
San Jose, CA 95128
Sylmar Towne Center
Sylmar, CA 91342(5)(8)
Third Street Promenade
Santa Monica, CA 90401
Westgate Center
San Jose, CA 95129
Connecticut
Bristol Plaza
Bristol, CT 06010
Darien
Darien, CT 06820
Greenwich Avenue
Greenwich Avenue, CT 06830
District of Columbia
Friendship Center
Washington, DC 20015
Sam's Park & Shop
Washington, DC 20008
Florida
CocoWalk
Coconut Grove, FL 33133(5)(11)
1990/1994,
1922-1973
2015-2017
194,000
$32.78
74%
Del Mar Village
Boca Raton, FL 33433
1982, 1994
& 2007
2008/2014
196,000
The Shops at Sunset Place
South Miami, FL 33143(5)(8)
1999
2015
523,000
$16.43
$20.17
91%
77%
Tower Shops
Davie, FL 33324
Illinois
Crossroads
Highland Park, IL 60035
Finley Square
Downers Grove, IL 60515
Garden Market
Western Springs, IL 60558
Riverpoint Center
Chicago, IL 60614
Maryland
1989, 2017
2011/2014
426,000
$23.45
98%
1959
1993
168,000
$23.12
99%
1974
1995
278,000
$15.70
87%
1958
1994
140,000
$13.26
100%
1989, 2012
2017
211,000
$22.38
96%
Bethesda Row
Bethesda, MD 20814(4)
1945-1991
2001, 2008
1993-2006/
2008/2010
534,000
$51.05
96%
Bethesda Row Residential
Bethesda, MD 20814
2008
1993
180 units
N/A
97%
Gap
Cinepolis Theaters
Youfit Health Club
Winn Dixie
CVS
AMC
L.A. Fitness
Barnes & Noble
Restoration Hardware Outlet
Trader Joe's
TJ Maxx
Ross Dress for Less
Best Buy
DSW
L.A. Fitness
Binny's
Guitar Center
Bed, Bath & Beyond
Buy Buy Baby
Petsmart
Portillo's
Mariano's Fresh Market
Walgreens
Jewel Osco
Marshalls
Old Navy
Giant Food
Apple
Equinox
Multiple Restaurants
20
Property, City, State, Zip Code
Congressional Plaza
Rockville, MD 20852(5)
Congressional Plaza Residential
Rockville, MD 20852(5)
Courthouse Center
Rockville, MD 20852
Federal Plaza
Rockville, MD 20852
Free State Shopping Center
Bowie, MD 20715
Gaithersburg Square
Gaithersburg, MD 20878
Governor Plaza
Glen Burnie, MD 21961
Laurel
Laurel, MD 20707
Year
Completed
Year
Acquired
1965
1965
Square
Feet(1) /
Apartment
Units
325,000
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
$41.07
98%
2003, 2016
1965
194 units
N/A
1975
1970
1997
1989
36,000
249,000
$23.08
$36.50
99%
66%
99%
1970
2007
264,000
$17.57
92%
1966
1993
207,000
$27.98
96%
1963
1985
242,000
$19.44
98%
1956
1986
389,000
$22.54
87%
Montrose Crossing
Rockville, MD 20852(5)(8)
1960-1979,
1996, 2011
2011/2013
364,000
$30.33
94%
Perring Plaza
Baltimore, MD 21134
1963
1985
396,000
$14.63
100%
Pike & Rose
North Bethesda, MD 20852(10)
1963, 2014
1982/2007/
2012
402,000
$36.81
98%
Pike & Rose Residential
North Bethesda, MD 20852(10)
Plaza Del Mercado
Silver Spring, MD 20906
Quince Orchard
Gaithersburg, MD 20877(4)
Rockville Town Square
Rockville, MD 20852(4)
Rollingwood Apartments
Silver Spring, MD 20910(8)
THE AVENUE at White Marsh
Baltimore, MD 21236(6)(8)
The Shoppes at Nottingham Square
Baltimore, MD 21236
Towson Residential (Flats @703)
Baltimore, MD 21236
White Marsh Other
Baltimore, MD 21236
White Marsh Plaza
Baltimore, MD 21236
Wildwood
Bethesda, MD 20814
2014, 2016
1982/2007
690 units
N/A
1969
2004
117,000
$30.30
93%
93%
1975
1993
267,000
$23.21
96%
2006-2007
2006/2007
187,000
$27.93
94%
1960
1997
1971
2007
282 units
315,000
2005-2006
2007
32,000
2017
1985
1987
1958
2007
2007
2007
1969
4,000
105 units
69,000
80,000
83,000
21
N/A
$23.87
$50.29
$71.41
N/A
$30.32
96%
100%
100%
100%
55%
97%
$22.31
98%
Giant Food
$99.04
98%
Balducci's
CVS
Principal Tenant(s)
The Fresh Market
Buy Buy Baby
Saks Fifth Avenue Off 5th
Container Store
Last Call Studio by Neiman
Marcus
Trader Joe's
TJ Maxx
Micro Center
Ross Dress for Less
Giant Food
TJ Maxx
Ross Dress For Less
Office Depot
Bed, Bath & Beyond
Ross Dress For Less
Ashley Furniture HomeStore
Aldi
Dick's Sporting Goods
A.C. Moore
Giant Food
Marshalls
L.A. Fitness
Giant Food
Marshalls
Old Navy
Barnes & Noble
Bob's Discount Furniture
Shoppers Food Warehouse
Home Depot
Micro Center
Burlington
iPic Theater
Porsche
H&M
REI
Pinstripes
Multiple Restaurants
Aldi
CVS
L.A. Fitness
Aldi
HomeGoods
L.A. Fitness
Staples
Dawson's Market
CVS
Gold's Gym
Multiple Restaurants
AMC
Ulta
Old Navy
Barnes & Noble
Property, City, State, Zip Code
Year
Completed
Year
Acquired
Square
Feet(1) /
Apartment
Units
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
Principal Tenant(s)
Massachusetts
Assembly Row/
Assembly Square Marketplace
Somerville, MA 02145(10)
Assembly Row Residential
Somerville, MA 02145(10)
Atlantic Plaza
North Reading, MA 01864
Campus Plaza
Bridgewater, MA 02324
Chelsea Commons
Chelsea, MA 02150(8)
Chelsea Commons Residential
Chelsea, MA 02150
Dedham Plaza
Dedham, MA 02026
Linden Square
Wellesley, MA 02481
North Dartmouth
North Dartmouth, MA 02747
Queen Anne Plaza
Norwell, MA 02061
Saugus Plaza
Saugus, MA 01906
Michigan
Gratiot Plaza
Roseville, MI 48066
New Jersey
Brick Plaza
Brick Township, NJ 08723(4)
Brook 35
Sea Grit, NJ 08750(5)(6)(8)
Ellisburg
Cherry Hill, NJ 08034
Mercer Mall
Lawrenceville, NJ 08648(4)
2005, 2014
2005-2011/
2013
810,000
$24.97
99%
2017
2005-2011
141 units
N/A
94%
Trader Joe's
TJ Maxx
AMC
LEGOLAND Discovery Center
Multiple Restaurants & Outlets
123,000
$16.43
96%
Stop & Shop
1960
1970
2004
2004
116,000
1962-1969,
2008
2006-2008
222,000
$16.13
$12.32
2013
2008
56 units
N/A
1959
1993/2016
241,000
1960, 2008
2006
223,000
$16.75
$48.82
98%
99%
91%
96%
96%
Roche Bros.
Burlington
Home Depot
Planet Fitness
Star Market
Planet Fitness
Roche Bros.
CVS
2004
1967
2006
1994
48,000
$15.31
100%
Stop & Shop
149,000
$17.77
100%
1976
1996
169,000
$12.24
100%
1964
1973
217,000
$12.15
100%
1958
1989
422,000
$21.40
77%
1986, 2004
2014
98,000
$36.09
99%
1959
1992
268,000
$16.35
93%
1975
2003/2017
530,000
$24.71
98%
The Grove at Shrewsbury
Shrewsbury, NJ 07702(5)(6)(8)
1988, 1993
& 2007
2014
193,000
$46.49
98%
Troy
Parsippany-Troy, NJ 07054
New York
Fresh Meadows
Queens, NY 11365
Greenlawn Plaza
Greenlawn, NY 11743
Hauppauge
Hauppauge, NY 11788
1966
1980
211,000
$22.45
99%
1949
1997
404,000
$32.35
99%
1975, 2004
2006
106,000
$18.07
96%
1963
1998
134,000
$28.72
100%
22
Big Y Foods
TJ Maxx
HomeGoods
Super Stop & Shop
Kmart
Kroger
Bed, Bath & Beyond
Best Buy
DSW
AMC
Barnes & Noble
Ulta
DSW
Banana Republic
Gap
Coach
Williams-Sonoma
Whole Foods
Buy Buy Baby
Stein Mart
Shop Rite
TJ Maxx
Nordstrom Rack
Bed, Bath & Beyond
REI
Lululemon
Anthropologie
Pottery Barn
Williams-Sonoma
L.A. Fitness
Michaels
Island of Gold
AMC
Kohl's
Michaels
Greenlawn Farms
Tuesday Morning
Shop Rite
A.C. Moore
Property, City, State, Zip Code
Huntington
Huntington, NY 11746
Year
Completed
Year
Acquired
1962
1988/2007/
2015
Square
Feet(1) /
Apartment
Units
279,000
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
$25.36
99%
Principal Tenant(s)
Nordstrom Rack
Bed, Bath & Beyond
Buy Buy Baby
Michaels
Huntington Square
East Northport, NY 11731(4)
Melville Mall
Huntington, NY 11747(4)
North Carolina
Eastgate Crossing
Chapel Hill, NC 27514
Pennsylvania
Andorra
Philadelphia, PA 19128
Bala Cynwyd
Bala Cynwyd, PA 19004
Flourtown
Flourtown, PA 19031
Lancaster
Lancaster, PA 17601(4)
Langhorne Square
Levittown, PA 19056
Lawrence Park
Broomall, PA 19008
Northeast
Philadelphia, PA 19114
Town Center of New Britain
New Britain, PA 18901
Willow Grove
Willow Grove, PA 19090
Wynnewood
Wynnewood, PA 19096
Virginia
29th Place
Charlottesville, VA 22091(8)
Barcoft Plaza
Falls Church, VA 22041
Barracks Road
Charlottesville, VA 22905
Falls Plaza
Falls Church, VA 22046
Graham Park Plaza
Fairfax, VA 22042
1980, 2007
2010
74,000
$27.96
85%
Barnes & Noble
1974
2006
251,000
$26.14
95%
1963
1986
159,000
$26.94
95%
1953
1988
264,000
$14.82
89%
1955
1993
294,000
$24.84
100%
1957
1958
1966
1980
1980
1985
156,000
127,000
227,000
$22.05
$18.41
$16.90
99%
98%
98%
1972
1980
374,000
$20.85
97%
1959
1983
288,000
$13.68
85%
1969
2006
124,000
$10.07
1953
1984
211,000
$19.28
90%
96%
1948
1996
251,000
$27.83
100%
1975-2001
2007
169,000
$18.25
97%
Uncle Giuseppe's Marketplace
Marshalls
Dick's Sporting Goods
Field & Stream
Macy's Backstage
Trader Joe's
Ulta
Stein Mart
Petco
Acme Markets
Kohl's
L.A. Fitness
Staples
Acme Markets
Lord & Taylor
Michaels
L.A. Fitness
Giant Food
Movie Tavern
Giant Food
Michaels
Redner's Warehouse Mkts.
Marshalls
Planet Fitness
Acme Markets
TJ Maxx
HomeGoods
Barnes & Noble
Marshalls
Burlington
Ulta
A.C. Moore
Giant Food
Rite Aid
Dollar Tree
Marshalls
HomeGoods
Barnes & Noble
Giant Food
Bed, Bath & Beyond
Old Navy
DSW
HomeGoods
DSW
Stein Mart
Staples
1963, 1972,
1990, &
2000
2006/2007/
2016
115,000
$24.18
90%
Harris Teeter
1958
1985
498,000
$27.37
98%
1960-1962
1967/1972
144,000
$35.09
94%
1971
1983
260,000
$26.40
89%
23
Harris Teeter
Kroger
Anthropologie
Nike
Bed, Bath & Beyond
Old Navy
Giant Food
CVS
Staples
Giant Food
CVS
Stein Mart
Property, City, State, Zip Code
Idylwood Plaza
Falls Church, VA 22030
Leesburg Plaza
Leesburg, VA 20176
Year
Completed
Year
Acquired
1991
1967
1994
1998
Square
Feet(1) /
Apartment
Units
73,000
Average Rent
Per Square
Foot(2)
Percentage
Leased(3)
Principal Tenant(s)
$47.24
95%
Whole Foods
236,000
$22.80
93%
Mount Vernon/South Valley/
7770 Richmond Hwy
Alexandria, VA 22306(4)(6)
1966,
1972,1987
& 2001
2003/2006
570,000
$17.91
95%
Giant Food
Petsmart
Gold's Gym
Office Depot
Shoppers Food Warehouse
TJ Maxx
Home Depot
Bed, Bath & Beyond
Results Fitness
Whole Foods
Walgreens
Planet Fitness
Safeway
Micro Center
CVS
Michaels
Harris Teeter
TJ Maxx
Bed, Bath & Beyond
DSW
TJ Maxx
DSW
Crunch Fitness
Staples
L.A. Mart
Talbots
Total Wine & More
Harris Teeter
AMC
Carlyle Grand Café
Kroger
Old Navy
Ross Dress For Less
Gold's Gym
DSW
1968
1976
92,000
$39.08
97%
1979
1993
227,000
$25.37
100%
2001-2002
1998/2010
299,000
$36.25
87%
1968
1997/2015
164,000
$46.10
100%
1960
1998
112,000
$25.73
88%
1954
1940,
2006-2009
1978
1995
50,000
$46.32
87%
Trader Joe's
266,000
$38.57
90%
1957
1983
463,000
$19.61
99%
24,206,000
2,310 units
$26.90
95%
94%
Old Keene Mill
Springfield, VA 22152
Pan Am
Fairfax, VA 22031
Pentagon Row
Arlington, VA 22202
Pike 7 Plaza
Vienna, VA 22180
Tower Shopping Center
Springfield, VA 22150
Tyson's Station
Falls Church, VA 22043
Village at Shirlington
Arlington, VA 22206(4)
Willow Lawn
Richmond, VA 23230
Total All Regions—Retail(9)
Total All Regions—Residential
_____________________
(1) Represents the GLA of the commercial portion of the property. Some of our properties include office space which is included in this square footage.
(2) Average base rent is calculated as the aggregate, annualized in-place contractual (defined as cash basis excluding rent abatements) minimum rent for
all occupied spaces divided by the aggregate GLA of all occupied spaces.
(3) Percentage leased is expressed as a percentage of rentable commercial square feet occupied or subject to a lease. Residential percentage leased is
expressed as a percentage of units occupied or subject to a lease.
(4) All or a portion of this property is owned pursuant to a ground lease.
(5) We own the controlling interest in this center.
(6) We own all or a portion of this property in a “downREIT” partnership, of which a wholly owned subsidiary of the Trust is the sole general partner,
with third party partners holding operating partnership units.
(7) We own a noncontrolling interest in this property.
(8) All or a portion of this property is encumbered by a mortgage loan.
(9) Aggregate information is calculated on a GLA weighted-average basis, excluding our La Alameda property, which is unconsolidated.
(10) Portion of property is currently under development. See further discussion in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(11) This property includes partial interests in five buildings in addition to our initial acquisition.
ITEM 3. LEGAL PROCEEDINGS
In November 2016, we were included as a defendant in a class action lawsuit, in the circuit court for Montgomery County,
Maryland, related to predatory towing by a third party company we had retained to provide towing services at several of our
properties in Montgomery County, Maryland. We, individually and collectively with other members of the more than 500
property owner defendant class, have undertaken numerous legal actions to challenge property owner liability in this case,
including challenging the certification of the class as a matter of law; however, all of these legal actions have been
unsuccessful. Given the costs and risks of continuing litigation on this matter, we elected to participate in a settlement for
which our share is approximately $0.4 million. We expect that this settlement amount will be reimbursed by insurance. The
24
settlement did not cover liability for certain tows that were included in the lawsuit that the defendant class believes cannot be
pursued because of the statute of limitations. Accordingly, we do not believe we should have any additional liability for these
remaining tows; however, if we are unsuccessful in dismissing these tows from the litigation, our liability would be
approximately $0.2 million, assuming payment on the same terms as the settlement.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common shares trade on the New York Stock Exchange under the symbol “FRT.” Listed below are the high and low sales
prices of our common shares as reported on the New York Stock Exchange and the dividends declared for each of the periods
indicated.
2017.......................................................................................................................
Fourth quarter................................................................................................. $
Third quarter .................................................................................................. $
Second quarter ............................................................................................... $
First quarter.................................................................................................... $
2016.......................................................................................................................
Fourth quarter................................................................................................. $
Third quarter .................................................................................................. $
Second quarter ............................................................................................... $
First quarter.................................................................................................... $
On February 8, 2018, there were 2,568 holders of record of our common shares.
Price Per Share
High
Low
Dividends
Declared
Per Share
134.52
135.59
138.12
145.80
148.74
170.35
165.55
158.96
$
$
$
$
$
$
$
$
119.37
122.60
120.50
126.02
136.98
153.93
149.75
144.82
$
$
$
$
$
$
$
$
1.000
1.000
0.980
0.980
0.980
0.980
0.940
0.940
Our ongoing operations generally will not be subject to federal income taxes as long as we maintain our REIT status and
distribute to shareholders at least 100% of our taxable income. Under the Code, REITs are subject to numerous organizational
and operational requirements, including the requirement to generally distribute at least 90% of taxable income.
Future distributions will be at the discretion of our Board of Trustees and will depend on our actual net income available for
common shareholders, financial condition, capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees deems relevant. We have paid quarterly dividends to our
shareholders continuously since our founding in 1962 and have increased our regular annual dividend rate for 50 consecutive
years.
Our total annual dividends paid per common share for 2017 and 2016 were $3.94 per share and $3.80 per share, respectively.
The annual dividend amounts are different from dividends as calculated for federal income tax purposes. Distributions to the
extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a
shareholder as ordinary dividend income. Distributions in excess of current and accumulated earnings and profits will be
treated as a nontaxable reduction of the shareholder’s basis in such shareholder’s shares, to the extent thereof, and thereafter as
taxable capital gain. Distributions that are treated as a reduction of the shareholder’s basis in its shares will have the effect of
increasing the amount of gain, or reducing the amount of loss, recognized upon the sale of the shareholder’s shares. No
assurances can be given regarding what portion, if any, of distributions in 2018 or subsequent years will constitute a return of
capital for federal income tax purposes. During a year in which a REIT earns a net long-term capital gain, the REIT can elect
under Section 857(b)(3) of the Code to designate a portion of dividends paid to shareholders as capital gain dividends. If this
election is made, then the capital gain dividends are generally taxable to the shareholder as long-term capital gains.
The following table reflects the income tax status of distributions per share paid to common shareholders:
Ordinary dividend........................................................................................................................... $
Capital gain.....................................................................................................................................
$
Year Ended
December 31,
2017
2016
3.940
—
3.940
$
$
3.800
—
3.800
Distributions on our 5.417% Series 1 Cumulative Convertible Preferred Shares were paid at the rate of $1.354 per share per
annum commencing on the issuance date of March 8, 2007. Distributions on our 5.0% Series C Cumulative Redeemable
Preferred Shares (which were issued September 29, 2017) were declared at the rate of $1.25 per depository share per annum,
26
and the first payment date was January 16, 2018. We do not believe that the preferential rights available to the holders of our
preferred shares or the financial covenants contained in our debt agreements had or will have an adverse effect on our ability to
pay dividends in the normal course of business to our common shareholders or to distribute amounts necessary to maintain our
qualification as a REIT.
Total Stockholder Return Performance
The following performance graph compares the cumulative total shareholder return on Federal Realty's common shares with
the S&P 500 Index and the index of equity real estate investment trusts prepared by the National Association of Real Estate
Investment Trusts ("NAREIT") for the five fiscal years commencing December 31, 2012, and ending December 31, 2017,
assuming an investment of $100 and the reinvestment of all dividends into additional common shares during the holding
period. Equity real estate investment trusts are defined as those that derive more than 75% of their income from equity
investments in real estate assets. The FTSE NAREIT Equity REIT Total Return Index includes all tax qualified real estate
investment trusts listed on the NYSE, NYSE MKT, or the NASDAQ National Market. Stock performance for the past five
years is not necessarily indicative of future results.
Recent Sales of Unregistered Shares
Under the terms of various operating partnership agreements of certain of our affiliated limited partnerships, the interest of
limited partners in those limited partnerships may be redeemed, subject to certain conditions, for cash or an equivalent number
of our common shares, at our option. During the three months ended December 31, 2017, there were no redemptions of
operating partnership units. Any other equity securities sold by us during 2017 that were not registered have been previously
reported in a Quarterly Report on Form 10-Q.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During 2017, 2,293 restricted common shares were forfeited by former employees.
From time to time, we could be deemed to have repurchased shares as a result of shares withheld for tax purposes upon a stock
compensation related vesting event.
27
ITEM 6. SELECTED FINANCIAL DATA
The following table includes certain financial information on a consolidated historical basis. You should read this section in
conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item
8. Financial Statements and Supplementary Data.”
Operating Data:
Rental income
Property operating income(1)
Operating income
Year Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except per share data and ratios)
$ 841,461
$ 786,583
$ 727,812
$ 666,322
$ 620,089
$ 584,619
$ 547,979
$ 510,595
$ 474,167
$ 446,959
$ 332,288
$ 320,995
$ 300,154
$ 271,037
$ 254,161
Income from continuing operations
$ 219,948
$ 226,425
$ 190,094
$ 167,888
$ 137,811
Gain on sale of real estate and change in control of
interests, net
Net income
$
77,922
$
32,458
$
28,330
$
4,401
$
28,855
$ 297,870
$ 258,883
$ 218,424
$ 172,289
$ 167,608
Net cash provided by operating activities
Net income available for common shareholders
$ 287,456
$ 459,177
Net cash used in investing activities
$ (836,802)
Net cash provided by (used in) financing activities $ 369,445
Earnings per common share, basic:
$ 249,369
$ 423,705
$ (590,221)
$ 168,838
$ 209,678
$ 369,046
$ (353,763)
$ (42,188)
$ 163,994
$ 349,465
$ (396,150)
5,709
$
$ 162,140
$ 316,340
$ (345,198)
80,797
$
Net income available to common shareholders
Weighted average number of common shares,
basic
Earnings per common share, diluted:
Net income available to common shareholders
Weighted average number of common shares,
diluted
Dividends declared per common share
Other Data:
Funds from operations available to common
shareholders(2)
EBITDA(3)
Adjusted EBITDA(3)
Ratio of EBITDA to combined fixed charges and
preferred share dividends(3)(4)
Ratio of Adjusted EBITDA to combined fixed
charges and preferred share dividends(3)(4)
$
$
$
3.97 $
3.51 $
3.04 $
2.42 $
2.47
72,117
70,877
68,797
67,322
65,331
3.97 $
3.50 $
3.03 $
2.41 $
2.46
72,233
71,049
68,981
67,492
65,483
3.96 $
3.84 $
3.62 $
3.30 $
3.02
$ 419,977
$ 406,359
$ 352,857
$ 327,597
$ 289,938
$ 627,656
$ 547,088
$ 504,696
$ 447,495
$ 446,555
$ 548,311
$ 514,630
$ 476,366
$ 443,094
$ 417,700
4.4 x
4.8 x
3.9 x
3.5 x
3.9 x
4.5 x
3.6 x
3.5 x
3.3
3.1
2017
2016
2015
2014
2013
As of December 31,
(In thousands)
Balance Sheet Data:
Real estate, at cost
Total assets
Total debt
Total shareholders’ equity
Number of common shares outstanding
$ 7,635,061
$ 6,275,755
$ 3,284,766
$ 2,391,514
73,091
$ 6,759,073
$ 5,423,279
$ 2,798,452
$ 2,075,835
71,996
$ 6,064,406
$ 4,896,559
$ 2,627,216
$ 1,781,931
69,493
$ 5,608,998
$ 4,534,237
$ 2,397,043
$ 1,692,556
68,606
$ 5,149,463
$ 4,208,727
$ 2,311,294
$ 1,471,297
66,701
(1) Property operating income is a non-GAAP measure that consists of rental income, other property income and mortgage
interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of
property operations and we consider it to be a significant measure. Property operating income should not be considered an
alternative measure of operating results or cash flow from operations as determined in accordance with GAAP.
28
The reconciliation of operating income to property operating income is as follows:
Operating income
General and administrative
Depreciation and amortization
Property operating income
2017
2016
2015
2014
2013
$ 332,288
36,281
216,050
$ 584,619
$ 320,995
33,399
193,585
$ 547,979
(In thousands)
$ 300,154
35,645
174,796
$ 510,595
$ 271,037
32,316
170,814
$ 474,167
$
$
254,161
31,970
160,828
446,959
(2) Funds from operations ("FFO") is a supplemental non-GAAP financial measure of real estate companies’ operating
performances. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net
income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding
extraordinary items and gains on the sale of real estate. We compute FFO in accordance with the NAREIT definition, and
we have historically reported our FFO available for common shareholders in addition to our net income.
We consider FFO available for common shareholders a meaningful, additional measure of operating performance primarily
because it excludes the assumption that the value of the real estate assets diminishes predictably over time, as implied by
the historical cost convention of GAAP and the recording of depreciation. We use FFO primarily as one of several means
of assessing our operating performance in comparison with other REITs. Comparison of our presentation of FFO to
similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application
of the NAREIT definition used by such REITs. Additional information regarding our calculation of FFO is contained in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The reconciliation of net income to FFO available for common shareholders is as follows:
Net income
Net income attributable to noncontrolling interests
$ 297,870
(7,956)
$ 258,883
(8,973)
(In thousands)
$ 218,424
(8,205)
$ 172,289
(7,754)
$ 167,608
(4,927)
2017
2016
2015
2014
2013
Gain on sale of real estate and change in control of
interests, net
Depreciation and amortization of real estate assets
Amortization of initial direct costs of leases
Funds from operations
Dividends on preferred shares
Income attributable to operating partnership units
Income attributable to unvested shares
Funds from operations available for common
shareholders
(77,632)
188,719
19,124
420,125
(1,917)
3,143
(1,374)
(31,133)
169,198
16,875
404,850
(541)
3,145
(1,095)
(28,330)
154,232
15,026
351,147
(541)
3,398
(1,147)
(4,401)
154,060
12,391
326,585
(541)
3,027
(1,474)
(28,855)
146,377
10,694
290,897
(541)
888
(1,306)
$ 419,977
$ 406,359
$ 352,857
$ 327,597
$ 289,938
(3) EBITDA is a non-GAAP measure as calculated in the table below. Adjusted EBITDA is a non-GAAP measure that means
net income or loss plus net interest expense, income taxes, depreciation and amortization, gain or loss on sale of real estate
and impairments of real estate if any. Adjusted EBITDA is presented because it approximates a key performance measure
in our debt covenants, but it should not be considered an alternative measure of operating results or cash flow from
operations as determined in accordance with GAAP. Adjusted EBITDA as presented may not be comparable to other
similarly titled measures used by other REITs.
The reconciliation of net income to EBITDA and adjusted EBITDA for the periods presented is as follows:
29
Net income
Depreciation and amortization
Interest expense
Early extinguishment of debt
Provision for income tax
Other interest income
EBITDA
Gain on sale of real estate and change in control of
interests
Adjusted EBITDA
2017
2016
2015
2014
2013
$ 297,870
216,050
100,125
12,273
1,813
(475)
627,656
$ 258,883
193,585
94,994
—
—
(374)
547,088
(In thousands)
$ 218,424
174,796
92,553
19,072
—
(149)
504,696
$
$ 172,289
170,814
93,941
10,545
—
(94)
447,495
167,608
161,099
104,977
13,304
—
(433)
446,555
(79,345)
$ 548,311
(32,458)
$ 514,630
(28,330)
$ 476,366
(4,401)
$ 443,094
$
(28,855)
417,700
(4) Fixed charges consist of interest on borrowed funds (including capitalized interest), amortization of debt discount/
premiums and debt costs, costs related to the early extinguishment of debt, and the portion of rent expense representing an
interest factor. Excluding the $12.3 million, $19.1 million, $10.5 million, and $13.3 million early extinguishment of debt
charge from fixed charges in 2017, 2015, 2014, and 2013, respectively, the ratio of EBITDA and adjusted EBITDA to
combined fixed charges and preferred share dividends is 4.8x and 4.2x, respectively, for 2017, 4.5x and 4.3x, respectively,
for 2015, 3.9x and 3.8x, respectively, for 2014, and 3.7x and 3.4x, respectively for 2013.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Certain statements in this section or elsewhere in this report may be deemed “forward-looking statements”. See “Item 1A. Risk
Factors” in this report for important information regarding these forward-looking statements and certain risk and uncertainties
that may affect us. The following discussion should be read in conjunction with the consolidated financial statements and notes
thereto appearing in “Item 8. Financial Statements and Supplementary Data” of this report.
Overview
We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of high
quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected
metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, California, and South Florida. As of
December 31, 2017, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use
properties which are operated as 104 predominantly retail real estate projects comprising approximately 24.2 million square
feet. In total, the real estate projects were 95.3% leased and 93.9% occupied at December 31, 2017. We have paid quarterly
dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for
50 consecutive years.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America, referred to as “GAAP”, requires management to make estimates and assumptions that in certain circumstances affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These
estimates are prepared using management’s best judgment, after considering past and current events and economic conditions.
In addition, information relied upon by management in preparing such estimates includes internally generated financial and
operating information, external market information, when available, and when necessary, information obtained from
consultations with third party experts. Actual results could differ from these estimates. A discussion of possible risks which may
affect these estimates is included in “Item 1A. Risk Factors” of this report. Management considers an accounting estimate to be
critical if changes in the estimate could have a material impact on our consolidated results of operations or financial condition.
Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements; however, the
most critical accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore,
may result in actual amounts that differ from estimates, are as follows:
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Revenue Recognition and Accounts Receivable
Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed escalations which occur at
specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the
space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit,
collection and other business risk. Percentage rents, which represent additional rents based upon the level of sales achieved by
certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved
and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over
the periods in which the related expenditures are incurred. For a tenant to terminate its lease agreement prior to the end of the
agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has
relinquished control of the space are generally recognized on the termination date. When a lease is terminated early but the
tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly
over the remaining term of the modified lease agreement.
Current accounts receivable from tenants primarily relate to contractual minimum rent and percentage rent as well as real estate
tax and other cost reimbursements. Accounts receivable from straight-line rent is typically longer term in nature and relates to
the cumulative amount by which straight-line rental income recorded to date exceeds cash rents billed to date under the
contractual lease agreement.
We make estimates of the collectability of our current accounts receivable and straight-line rents receivable which requires
significant judgment by management. The collectability of receivables is affected by numerous factors including current
economic conditions, bankruptcies, and the ability of the tenant to perform under the terms of their lease agreement. While we
make estimates of potentially uncollectible amounts and provide an allowance for them through bad debt expense, actual
collectability could differ from those estimates which could affect our net income. With respect to the allowance for current
uncollectible tenant receivables, we assess the collectability of outstanding receivables by evaluating such factors as nature and
age of the receivable, past history and current financial condition of the specific tenant including our assessment of the tenant’s
ability to meet its contractual lease obligations, and the status of any pending disputes or lease negotiations with the tenant. At
December 31, 2017 and 2016, our allowance for doubtful accounts was $11.8 million and $11.9 million, respectively.
Historically, we have recognized bad debt expense between 0.3% and 1.3% of rental income and it was 0.3% in 2017. A change
in the estimate of collectability of a receivable would result in a change to our allowance for doubtful accounts and
correspondingly bad debt expense and net income. For example, in the event our estimates were not accurate and we were
required to increase our allowance by 1% of rental income, our bad debt expense would have increased and our net income
would have decreased by $8.4 million.
Due to the nature of the accounts receivable from straight-line rents, the collection period of these amounts typically extends
beyond one year. Our experience relative to unbilled straight-line rents is that a portion of the amounts otherwise recognizable
as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and
other factors. Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk
may result in the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably
assured. If our evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably collectible than
previously estimated and realized, the additional straight-line rental income is recognized as revenue. If our evaluation of tenant
credit risk changes indicating a portion of realized straight-line rental income is no longer collectible, a reserve and bad debt
expense is recorded. At December 31, 2017 and 2016, accounts receivable includes approximately $93.1 million and $80.6
million, respectively, related to straight-line rents. Correspondingly, these estimates of collectability have a direct impact on our
net income.
We are currently under construction on 221 condominium units at our Assembly Row and Pike & Rose properties. Gains or
losses on the sale of these condominium units are recognized in accordance with the provisions of ASC Topic 360-20,
“Property, Plant and Equipment – Real Estate Sales.” We account for contracted condominium sales under the percentage-of
completion method, based on an evaluation of the criteria specified in ASC Topic 360-20 including: the legal commitment of
the purchaser in the real estate contract, whether the construction of the project is beyond a preliminary phase, whether
sufficient units have been contracted to ensure the project will not revert to a rental project, the ability to reasonably estimate
the aggregate project sale proceeds and aggregate project costs, and the determination that the buyer has made an adequate
initial and continuing cash investment under the contract. When the percentage-of-completion criteria have not been met, no
profit is recognized. The application of these criteria can be complex and requires us to make assumptions. The timing of
revenue recognition related to these condominium sales will be impacted by the January 1, 2018 adoption of ASU 2014-09
"Revenue from Contracts with Customers." See "Recent Accounting Pronouncements," in Note 2 to the consolidated financial
statements for further discussion regarding the changes.
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Real Estate
The nature of our business as an owner, redeveloper and operator of retail shopping centers and mixed-use properties means
that we invest significant amounts of capital. Depreciation and maintenance costs relating to our properties constitute
substantial costs for us as well as the industry as a whole. We capitalize real estate investments and depreciate them on a
straight-line basis in accordance with GAAP and consistent with industry standards based on our best estimates of the assets’
physical and economic useful lives. We periodically review the estimated lives of our assets and implement changes, as
necessary, to these estimates and, therefore, to our depreciation rates. These reviews may take into account such factors as the
historical retirement and replacement of our assets, expected redevelopments, and general economic and real estate factors.
Certain events, such as unforeseen competition or changes in customer shopping habits, could substantially alter our
assumptions regarding our ability to realize the expected return on investment in the property and therefore reduce the
economic life of the asset and affect the amount of depreciation expense to be charged against both the current and future
revenues. These assessments have a direct impact on our net income. The longer the economic useful life, the lower the
depreciation expense will be for that asset in a fiscal period, which in turn will increase our net income. Similarly, having a
shorter economic useful life would increase the depreciation for a fiscal period and decrease our net income.
Land, buildings and real estate under development are recorded at cost. We calculate depreciation using the straight-line
method with useful lives ranging generally from 35 years to a maximum of 50 years on buildings and major improvements.
Maintenance and repair costs are charged to operations as incurred. Tenant work and other major improvements, which
improve or extend the life of the asset, are capitalized and depreciated over the life of the lease or the estimated useful life of
the improvements, whichever is shorter. Minor improvements, furniture and equipment are capitalized and depreciated over
useful lives ranging from 2 to 20 years.
Capitalized costs associated with leases are depreciated or amortized over the base term of the lease. Unamortized leasing costs
are charged to expense if the applicable tenant vacates before the expiration of its lease. Undepreciated tenant work is written-
off if the applicable tenant vacates and the tenant work is replaced or has no future value. Additionally, we make estimates as to
the probability of certain development and redevelopment projects being completed. If we determine the redevelopment is no
longer probable of completion, we immediately expense all capitalized costs which are not recoverable.
Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet
placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon
completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially
complete and ready for its intended use upon completion of tenant improvements, but no later than one year from completion of
major construction activity. We make judgments as to the time period over which to capitalize such costs and these assumptions
have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for
capitalizing interest is extended, more interest is capitalized, thereby decreasing interest expense and increasing net income
during that period.
Certain external and internal costs directly related to the development, redevelopment and leasing of real estate, including pre-
construction costs, real estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved,
are capitalized. We capitalized external and internal costs related to both development and redevelopment activities of $410
million and $8 million, respectively, for 2017 and $420 million and $9 million, respectively, for 2016. We capitalized external
and internal costs related to other property improvements of $74 million and $3 million, respectively, for 2017 and $61 million
and $3 million, respectively, for 2016. We capitalized external and internal costs related to leasing activities of $11 million and
$6 million, respectively, for 2017 and $13 million and $6 million, respectively, for 2016. The amount of capitalized internal
costs for salaries and related benefits for development and redevelopment activities, other property improvements, and leasing
activities were $7 million, $3 million, and $6 million, for 2017 and $8 million, $2 million, and $6 million for 2016. Total
capitalized costs were $512 million and $511 million for 2017 and 2016, respectively.
When applicable, as lessee, we classify our leases of land and building as operating or capital leases. We are required to use
judgment and make estimates in determining the lease term, the estimated economic life of the property and the interest rate to
be used in determining whether or not the lease meets the qualification of a capital lease and is recorded as an asset.
Real Estate Acquisitions
Upon acquisition of operating real estate properties, we estimate the fair value of assets and liabilities acquired including land,
building, improvements, leasing costs, intangibles such as in-place leases, assumed debt, and current assets and liabilities, if
any. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. We utilize methods similar
to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The value allocated to in-
place leases is amortized over the related lease term and reflected as rental income in the statement of operations. We consider
qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below market renewal option and
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include such renewal options in the calculation of in-place lease value when we consider these to be bargain renewal options. If
the value of below market lease intangibles includes renewal option periods, we include such renewal periods in the
amortization period utilized. If a tenant vacates its space prior to contractual termination of its lease, the unamortized balance of
any in-place lease value is written off to rental income.
Long-Lived Assets and Impairment
There are estimates and assumptions made by management in preparing the consolidated financial statements for which the
actual results will be determined over long periods of time. This includes the recoverability of long-lived assets, including our
properties that have been acquired or redeveloped and our investment in certain joint ventures. Management’s evaluation of
impairment includes review for possible indicators of impairment as well as, in certain circumstances, undiscounted and
discounted cash flow analysis. Since most of our investments in real estate are wholly-owned or controlled assets which are
held for use, a property with impairment indicators is first tested for impairment by comparing the undiscounted cash flows,
including residual value, to the current net book value of the property. If the undiscounted cash flows are less than the net book
value, the property is written down to expected fair value.
The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows
including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for
space by tenants and rental rates over long periods. Because our properties typically have a long life, the assumptions used to
estimate the future recoverability of book value requires significant management judgment. Actual results could be
significantly different from the estimates. These estimates have a direct impact on net income, because recording an impairment
charge results in a negative adjustment to net income.
Contingencies
We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business.
Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these
matters. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably
estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate
within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the
range is accrued. Any difference between our estimate of a potential loss and the actual outcome would result in an increase or
decrease to net income.
Self-Insurance
We are self-insured for general liability costs up to predetermined retained amounts per claim, and we believe that we maintain
adequate accruals to cover our retained liability. We currently do not maintain third party stop-loss insurance policies to cover
liability costs in excess of predetermined retained amounts. Our accrual for self-insurance liability is determined by
management and is based on claims filed and an estimate of claims projected to be incurred but not yet reported. Management
considers a number of factors, including third-party actuarial analysis, previous experience in our portfolio, and future increases
in costs of claims, when making these determinations. If our liability costs differ from these accruals, it will increase or
decrease our net income.
Recently Adopted and Recently Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements.
2017 Property Acquisitions and Dispositions
On February 1, 2017, we acquired a leasehold interest in Hastings Ranch Plaza, a 274,000 square foot shopping center in
Pasadena, California for $29.5 million. The land is subject to a long-term ground lease that expires on April 30, 2054.
Approximately $21.5 million of assets acquired were allocated to lease intangibles and included within other assets.
Approximately $15.2 million of net assets acquired were allocated to lease liabilities and included in other liabilities.
On March 31, 2017, we acquired the fee interest in Riverpoint Center, a 211,000 square foot shopping center in the Lincoln
Park neighborhood of Chicago, Illinois for $107.0 million. Approximately $1.0 million and $12.3 million of net assets acquired
were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively.
We leased three parcels of land at our Assembly Row property to two ground lessees. Both lessees exercised purchase options
under the related ground leases. The sale transaction related to the purchase option on one of our ground leases was completed
on April 4, 2017 for a sales price of $36.0 million. On June 28, 2017, the sale transactions related to the purchase options on
our other two ground lease parcels were completed for a total sales price of $17.3 million. The net gain recognized in
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connection with these transactions was approximately $15.4 million. At December 31, 2016, the total cost basis of the related
land was $33.9 million and is included in "assets held for sale" on our consolidated balance sheet.
On May 19, 2017, we acquired the fee interest in a 71,000 square foot, mixed-use property located in Berkeley, California
based on a gross value of $23.9 million. The acquisition was completed through a newly formed entity for which we own a
90% controlling interest. Approximately $0.8 million and $0.3 million of net assets acquired were allocated to other assets for
"above market leases," and other liabilities for "below market leases," respectively. Additionally, approximately $2.4 million
was allocated to noncontrolling interests.
On August 2, 2017, we acquired an approximately 90% interest in a joint venture that owns six shopping centers in Los
Angeles County, California based on a gross value of $357 million, including the assumption of $79.4 million of mortgage
debt. Approximately $7.8 million of assets acquired were allocated to lease intangibles and included within other assets.
Approximately $36.2 million of net assets acquired were allocated to lease liabilities and included in other liabilities.
Additionally, approximately $30.6 million was allocated to noncontrolling interests. That joint venture also acquired a 24.5%
interest in La Alameda, a shopping center in Walnut Park, California for $19.8 million. The property has $41.0 million of
mortgage debt, of which the joint venture's share is approximately $10 million. Additional information on the properties is
listed below:
Property
City/State
Azalea
Bell Gardens
La Alameda
Olivo at Mission Hills (1)
Plaza Del Sol
Plaza Pacoima
Sylmar Towne Center
South Gate, CA
Bell Gardens, CA
Walnut Park, CA
Mission Hills, CA
South El Monte, CA
Pacoima, CA
Sylmar, CA
GLA
(in square feet)
222,000
330,000
245,000
155,000
48,000
204,000
148,000
1,352,000
(1) Property is currently being redeveloped. GLA reflects approximate square footage once the property is open and operating.
On August 25, 2017, we sold our property located at 150 Post Street in San Francisco, California for a sales price of $69.3
million, resulting in a gain of $45.2 million.
On September 25, 2017, we sold our North Lake Commons property in Lake Zurich, Illinois for a sales price of $15.6 million,
resulting in a gain of $4.9 million.
On December 28, 2017, we sold a parcel of land at our Bethesda Row property in Bethesda, Maryland for a sales price of $8.5
million, resulting in a gain of $6.5 million.
For the year ended December 31, 2017, we recognized a $5.4 million gain, net of $1.4 million of income taxes, related to the
sale of condominiums at our Assembly Row property based on the percentage-of-completion method. In connection with
recording the gain, we recognized a receivable of $67.1 million as of December 31, 2017. The closing of the Assembly Row
condominium sales is expected to commence in 2018. As of December 31, 2017, no gain has been recognized for contracted
condominium sales at Pike & Rose, as not all of the criteria necessary for profit recognition have been met.
2017 Significant Debt and Equity Transactions
On June 5, 2017 we refinanced the $175.0 million mortgage loan on Plaza El Segundo at a face amount of $125.0 million and
repaid the remaining $50.0 million at par. The new mortgage loan bears interest at 3.83% and matures on June 5, 2027.
On June 23, 2017, we issued $400.0 million aggregate principal amount of fixed rate senior unsecured notes in two separate
series. We issued $300.0 million of 3.25% notes that mature on July 15, 2027, which were offered at 99.083% of the principal
amount, with a yield to maturity of 3.358%. Additionally, we issued $100.0 million of 4.50% notes due December 1, 2044. The
4.50% notes were offered at 105.760% of the principal amount, with a yield to maturity of 4.143%, and have the same terms
and are of the same series as the senior notes first issued on November 14, 2014. Our net proceeds from the June note offering
after net issuance premium, underwriting fees and other costs was approximately $399.5 million.
In connection with the acquisition of six shopping centers in Los Angeles County, California on August 2, 2017 (as further
discussed in Note 3), we assumed mortgage loans with a face amount of $79.4 million and a fair value of $80.1 million. The
mortgage loans are secured by the individual properties with the following contractual terms:
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Sylmar Towne Center
$
Plaza Del Sol
Azalea
Bell Gardens
Principal
(in millions)
Stated Interest Rate
Maturity Date
17.5
8.6
40.0
13.3
5.39%
June 6, 2021
5.23% December 1, 2021
3.73% November 1, 2025
4.06%
August 1, 2026
On August 31, 2017, we refinanced the $41.8 million mortgage loan on The Grove at Shrewsbury (East) at a face amount of
$43.6 million. The new mortgage loan bears interest at 3.77% and matures on September 1, 2027.
On September 29, 2017, we issued 6,000,000 Depository Shares, each representing 1/1000th of a 5.0% Series C Cumulative
Redeemable Preferred Share, par value $0.01 per share ("Series C Preferred Shares"), at the liquidation preference of $25.00
per depository share (or $25,000 per Series C Preferred share) in an underwritten public offering. The Series C Preferred Shares
accrue dividends at a rate of 5.0% of the $25,000 liquidation preference per year and are redeemable at our option on or after
September 29, 2022. Additionally, they are not convertible and holders of these shares generally have no voting rights, unless
we fail to pay dividends for six or more quarters. The net proceeds after underwriting fees and other costs were approximately
$145.0 million.
On December 21, 2017, we issued $175.0 million aggregate principal amount of 3.25% senior unsecured notes due July 15,
2027. The notes have the same terms and are of the same series as the $300.0 million senior notes issued on June 23, 2017. The
notes were offered at 99.404% of the principal amount, with a yield to maturity of 3.323%. Our net proceeds from the
December note offering after net issuance premium, underwriting fees and other costs were approximately $172.5 million. The
proceeds were used on December 31, 2017 to repay our $150.0 million 5.90% notes prior to the original maturity date of
April 1, 2020. The redemption price of $164.1 million included a make-whole premium of $11.9 million and accrued but
unpaid interest of $2.2 million. The make-whole premium is included in "early extinguishment of debt" in 2017.
On November 4, 2016, we replaced our existing at-the-market (“ATM”) equity program with a new ATM equity program in
which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We
intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline,
repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three months
ended December 31, 2017, we issued 501,120 common shares at a weighted average price per share of $132.22 for net cash
proceeds of $65.6 million and paid $0.7 million in commissions and less than $0.1 million in additional offering expenses
related to the sales of these common shares. For the year ended December 31, 2017, we issued 826,517 common shares at a
weighted average price per share of $132.56 for net cash proceeds of $108.3 million and paid $1.1 million in commissions and
$0.2 million in additional offering expenses related to the sales of these common shares. As of December 31, 2017, we had the
capacity to issue up to $261.3 million in common shares under our ATM equity program.
Outlook
We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:
•
•
•
growth in our same-center portfolio,
growth in our portfolio from property development and redevelopments, and
expansion of our portfolio through property acquisitions.
Our same-center growth is primarily driven by increases in rental rates on new leases and lease renewals, changes in portfolio
occupancy, and the redevelopment of those assets. Over the long-term, the infill nature and strong demographics of our
properties provide a strategic advantage allowing us to maintain relatively high occupancy and generally increase rental rates.
We continue to see strong levels of interest from prospective tenants for our retail spaces; however, the time it takes to complete
new lease deals is longer, as tenants have become more selective and more deliberate in their decision-making process. We
have also experienced extended periods of time for some government agencies to process permits and inspections further
delaying rent commencement on newly leased spaces. Additionally, we have seen an overall decrease in the number of tenants
available to fill anchor spaces, and have seen an uptick in the number of retail tenants closing early and/or filing for bankruptcy.
We believe the locations and nature of our centers and diverse tenant base partially mitigates any potential negative changes in
the economic environment. However, any significant reduction in our tenants' abilities to pay base rent, percentage rent or other
charges, will adversely affect our financial condition and results of operations. We seek to maintain a mix of strong national,
regional, and local retailers. At December 31, 2017, no single tenant accounted for more than 2.9% of annualized base rent.
Our properties are located primarily in densely populated and/or affluent areas with high barriers to entry which allow us to
take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion,
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reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities. We
currently have redevelopment projects underway with a projected cost of approximately $155 million that we expect to
stabilize in the next several years.
We continue our ongoing redevelopment efforts at Santana Row and are under construction on an eight story 284,000 square
foot office building which will include an additional 29,000 square feet of retail space and 1,300 parking spaces. The building
is expected to cost between $205 and $215 million and to be delivered in 2019. After current phases, we have approximately 4
acres remaining for further redevelopment and entitlements in place for an additional 395 residential units and 321,000 square
feet of commercial space. Additionally, we control 12 acres of land adjacent to Santana Row.
We continue to invest in our long-term multi-phased mixed-use development projects at Assembly Row in Somerville,
Massachusetts and Pike & Rose in North Bethesda, Maryland which we expect to be involved in over the coming years.
Construction of Phase II of Assembly Row which will include 161,000 square feet of retail space, 447 residential units, and a
158 room boutique hotel (which will be owned and operated by a joint venture in which we are a partner) is underway. Total
expected costs range from $280 million to $295 million and remaining delivery is expected in 2018. Approximately 49,000
square feet of retail space in Phase II has opened in 2017, and in September, the first tenants moved into the new residential
building. Phase II will also include 122 for-sale condominium units with an expected total cost of $74 million to $79 million.
Additionally, as part of the second phase, we entered into a ground lease agreement with Partners HealthCare to bring 741,500
square feet of office space to Assembly Row. The ground lease agreement included a purchase option, which was exercised and
the related sale closed on April 4, 2017.
Construction of Phase II of Pike & Rose is also underway. Phase II will include approximately 216,000 square feet of retail
space, 272 residential units, and a 177 room boutique hotel. Approximately 151,000 square feet of retail space in Phase II has
opened in 2017, and in August, the first tenants moved into the new residential building. Total expected costs range from $200
million to $207 million and remaining delivery is expected in 2018. The hotel will be owned and operated by a joint venture in
which we are a partner. Phase II will also include 99 for-sale condominium units with an expected cost of $53 million to $58
million.
We invested $273 million in Assembly Row and Pike & Rose in 2017 and expect to invest between $75 million and $100
million in Assembly Row and Pike & Rose in 2018.
The development of future phases of Assembly Row, Pike & Rose and Santana Row will be pursued opportunistically based
on, among other things, market conditions, tenant demand, and our evaluation of whether those phases will generate an
appropriate financial return.
We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long-term
growth opportunities. Initially, some of our acquisitions do not contribute significantly to earnings growth; however, we believe
they provide long-term re-leasing growth, redevelopment opportunities, and other strategic opportunities. Any growth from
acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial
hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both
the price that must be paid to acquire a property, as well as our ability to economically finance the property acquisition.
Generally, our acquisitions are initially financed by available cash and/or borrowings under our revolving credit facility which
may be repaid later with funds raised through the issuance of new equity or new long-term debt. We may also finance our
acquisitions through the issuance of common shares, preferred shares, or downREIT units as well as through assumed
mortgages.
At December 31, 2017, the leasable square feet in our properties was 95.3% leased and 93.9% occupied. The leased rate is
higher than the occupied rate due to leased spaces that are being redeveloped or improved or that are awaiting permits and,
therefore, are not yet ready to be occupied. Our occupancy and leased rates are subject to variability over time due to factors
including acquisitions, the timing of the start and stabilization of our redevelopment projects, lease expirations and tenant
closings and bankruptcies.
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Same-Center
Throughout this section, we have provided certain information on a “same-center” basis. Information provided on a same-
center basis includes the results of properties that we owned and operated for the entirety of both periods being compared
except for properties for which significant redevelopment or expansion occurred during either of the periods being compared.
For the year ended December 31, 2017 and the comparison of 2017 and 2016, all or a portion of 78 properties were considered
same-center and 15 properties were considered redevelopment or expansion. For the year ended December 31, 2017, one
property was moved from acquisition to same-center, two properties were removed from same-center as they were sold during
2017, and four properties or portions of properties were moved from redevelopment to same-center, compared to the
designations as of December 31, 2016. For the year ended December 31, 2016 and the comparison of 2016 and 2015, all or a
portion of 76 properties were considered same-center and 17 properties were considered redevelopment or expansion. For the
year ended December 31, 2016, three properties or portions of properties were moved from same-center to redevelopment and
one property was moved from redevelopment to same-center, compared to the designations as of December 31, 2015. While
there is judgment surrounding changes in designations, we typically move redevelopment properties to same-center once they
have stabilized, which is typically considered 95% occupancy or when the growth expected from the redevelopment has been
included in the comparable periods. We typically remove properties from same center when the redevelopment has or is
expected to have a significant impact to property operating income within the calendar year. Acquisitions are moved to same-
center once we have owned the property for the entirety of comparable periods and the property is not under significant
redevelopment or expansion.
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YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016
2017
2016
Dollars
%
Change
Rental income
Other property income
Mortgage interest income
Total property revenue
Rental expenses
Real estate taxes
Total property expenses
Property operating income (1)
General and administrative expense
Depreciation and amortization
Operating income
Other interest income
(Loss) income from real estate partnerships
Interest expense
Early extinguishment of debt
Total other, net
Income from continuing operations
$
841,461
(Dollar amounts in thousands)
$
786,583
$
54,878
12,825
3,062
857,348
164,890
107,839
272,729
584,619
(36,281)
(216,050)
332,288
475
(417)
(100,125)
(12,273)
(112,340)
219,948
77,922
297,870
(7,956)
289,914
$
11,015
3,993
801,591
158,326
95,286
253,612
547,979
(33,399)
(193,585)
320,995
374
50
(94,994)
—
(94,570)
226,425
32,458
258,883
(8,973)
249,910
$
1,810
(931)
55,757
6,564
12,553
19,117
36,640
(2,882)
(22,465)
11,293
101
(467)
(5,131)
(12,273)
(17,770)
(6,477)
45,464
38,987
1,017
40,004
7.0 %
16.4 %
(23.3)%
7.0 %
4.1 %
13.2 %
7.5 %
6.7 %
8.6 %
11.6 %
3.5 %
27.0 %
(934.0)%
5.4 %
100.0 %
18.8 %
(2.9)%
140.1 %
15.1 %
(11.3)%
16.0 %
Gain on sale of real estate and change in control of interests, net
Net income
Net income attributable to noncontrolling interests
Net income attributable to the Trust
$
(1) Property operating income is a non-GAAP financial measure. See Item 6. Selected Financial Data for further discussion.
Property Revenues
Total property revenue increased $55.8 million, or 7.0%, to $857.3 million in 2017 compared to $801.6 million in 2016. The
percentage occupied at our shopping centers was 93.9% at December 31, 2017 compared to 93.3% at December 31, 2016.
Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income
increased $54.9 million, or 7.0%, to $841.5 million in 2017 compared to $786.6 million in 2016 due primarily to the following:
•
•
•
•
•
an increase of $22.0 million from acquisitions, primarily related to the six shopping centers acquired in
Los Angeles County, California, Riverpoint Center, and Hastings Ranch Plaza,
an increase of $16.6 million at redevelopment properties due to the opening of our new office building
at Santana Row in late 2016, the lease-up of three of our retail redevelopments, and the lease-up of the
new residential building at Congressional Plaza, partially offset by lower occupancy at two of our retail
properties in Florida in the beginning stages of redevelopment,
an increase of $8.0 million at same-center properties due primarily to higher rental rates of
approximately $6.0 million, higher recoveries of $3.4 million primarily the result of higher real estate
tax assessments, partially offset by lower average occupancy of approximately $1.2 million,
an increase of $6.1 million from Assembly Row and Pike & Rose due primarily to the lease-up of
residential units and the opening of the second phase of retail during the second half of 2017, and
an increase of $3.2 million from the acquisition of six previously unconsolidated Clarion joint venture
properties in January 2016,
38
partially offset by
•
a decrease of $0.9 million from the sale of our 150 Post Street and North Lake Commons properties in
August and September 2017, respectively.
Other Property Income
Other property income increased $1.8 million, or 16.4%, to $12.8 million in 2017 compared to $11.0 million in 2016. Included
in other property income are items, which, although recurring, inherently tend to fluctuate more than rental income from period
to period, such as lease termination fees. This increase is primarily related to higher lease termination fees.
Mortgage Interest Income
Mortgage interest income decreased $0.9 million, or 23.3%, to $3.1 million in 2017 compared to $4.0 million in 2016. This
decrease is primarily related to a mortgage note receivable that was repaid in 2016.
Property Expenses
Total property expenses increased $19.1 million, or 7.5%, to $272.7 million in 2017 compared to $253.6 million in 2016.
Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $6.6 million, or 4.1%, to $164.9 million in 2017 compared to $158.3 million in 2016. This increase
is primarily due to the following:
•
•
an increase of $4.7 million from acquisitions, primarily related to six shopping centers in Los Angeles
County, California, Hastings Ranch Plaza, and Riverpoint Center, and
an increase of $2.1 million from Assembly Row and Pike & Rose due primarily to the opening of Phase
II residential units during the second half of 2017.
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental
income plus other property income decreased to 19.3% for the year ended December 31, 2017 from 19.9% for the year ended
December 31, 2016.
Real Estate Taxes
Real estate tax expense increased $12.6 million, or 13.2% to $107.8 million in 2017 compared to $95.3 million in 2016 due
primarily to the following:
•
•
•
•
an increase of $4.4 million at same-center properties primarily due to higher assessments,
an increase of $4.2 million from acquisitions, primarily related to six shopping centers in Los Angeles
County, California, Riverpoint Center, and Hastings Ranch Plaza,
an increase of $3.0 million from redevelopment properties, primarily related to our new office building
at Santana Row and other reassessments on our redevelopments, and
an increase of $0.9 million related to Assembly Row and Pike & Rose.
Property Operating Income
Property operating income increased $36.6 million, or 6.7%, to $584.6 million in 2017 compared to $548.0 million in 2016.
This increase is primarily due to growth in earnings at redevelopment and same-center properties, 2017 acquisitions, Assembly
Row and Pike & Rose (primarily the lease-up of residential units at Pike & Rose, the opening of the second phase of retail at
Pike & Rose, and higher lease termination fees), and the acquisition of the six previously unconsolidated Clarion joint venture
properties in January 2016.
Other Operating Expenses
General and Administrative Expense
General and administrative expense increased $2.9 million, or 8.6%, to $36.3 million in 2017 from $33.4 million in 2016. This
increase is primarily due to higher personnel related costs.
39
Depreciation and Amortization
Depreciation and amortization expense increased $22.5 million, or 11.6%, to $216.1 million in 2017 from $193.6 million in
2016. This increase is primarily due to 2017 acquisitions, redevelopment properties (largely the new office building at Santana
Row), Assembly Row and Pike & Rose, and same-center properties.
Operating Income
Operating income increased $11.3 million, or 3.5%, to $332.3 million in 2017 compared to $321.0 million in 2016. This
increase is primarily due to growth in earnings at redevelopment and same-center properties, our 2017 acquisitions, Assembly
Row and Pike & Rose, and the acquisition of the six previously unconsolidated Clarion joint venture properties in January
2016, partially offset by higher personnel related costs.
Other
Interest Expense
Interest expense increased $5.1 million, or 5.4%, to $100.1 million in 2017 compared to $95.0 million in 2016. This increase is
due primarily to the following:
•
an increase of $16.1 million due to higher borrowings primarily attributable to the $300 million 3.25% senior
notes and the $100 million reopening of the 4.5% senior notes both issued in June 2017, the 3.625% senior
notes issued in July 2016, and higher weighted average borrowings on our revolving credit facility,
partially offset by
•
•
an increase of $7.5 million in capitalized interest, and
a decrease of $3.5 million due to a lower overall weighted average borrowing rate.
Gross interest costs were $125.7 million and $113.0 million in 2017 and 2016, respectively. Capitalized interest was $25.6
million and $18.0 million in 2017 and 2016, respectively.
Early Extinguishment of Debt
The $12.3 million early extinguishment of debt charge in 2017 relates to the make-whole premium paid as part of the early
redemption of our 5.90% senior notes on December 31, 2017 and the related write-off of the unamortized discount and debt
fees.
Gain on Sale of Real Estate and Change in Control of Interests, Net
The $77.9 million gain on sale of real estate and change in control of interests, net for the year ended December 31, 2017 is
primarily due to the following:
• $45.2 million gain related to the sale of our 150 Post Street property in August 2017,
• $15.4 million gain related to the sale of three ground lease parcels at our Assembly Row property in Somerville,
Massachusetts,
• $6.5 million gain related to the sale of a parcel of land at our Bethesda Row property in December 2017,
• $5.4 million net percentage-of-completion gain, related to residential condominium units under binding contract
at our Assembly Row property, and
• $4.9 million gain related to the sale of our North Lake Commons property in September 2017.
The $32.5 million gain on sale of real estate and change in control of interests for the year ended December 31, 2016 is
primarily due to the following:
• $25.7 million gain related to our obtaining control of six properties when we acquired Clarion’s 70% interest in
the partnership that owned those properties. The properties were previously accounted for under the equity
method of accounting. We consolidated these assets effective January 13, 2016, and consequently recognized a
gain on obtaining the controlling interest,
• $4.9 million gain related to the reversal of the unused portion of the warranty reserve for condominium units at
Santana Row, as the statutorily mandated latent construction defect period ended in third quarter 2016, and
• $1.8 million gain related to the sale of a building in Coconut Grove, Florida. Our share of the gain, net of
noncontrolling interests, was $0.5 million.
40
YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015
2016
2015
Dollars
%
Change
(Dollar amounts in thousands)
$
727,812
$
Rental income................................................................................... $
Other property income .....................................................................
Mortgage interest income.................................................................
Total property revenue ..............................................................
Rental expenses ................................................................................
Real estate taxes ...............................................................................
Total property expenses.............................................................
Property operating income (1).................................................................
General and administrative expenses ...............................................
Depreciation and amortization .........................................................
Operating income .............................................................................
Other interest income .......................................................................
Income from real estate partnerships ...............................................
Interest expense ................................................................................
Early extinguishment of debt ...........................................................
Total other, net...........................................................................
Income from continuing operations .................................................
Gain on sale of real estate ................................................................
Net income ................................................................................
Net income attributable to noncontrolling interests .........................
Net income attributable to the Trust ................................................. $
786,583
11,015
3,993
801,591
158,326
95,286
253,612
547,979
(33,399)
(193,585)
320,995
374
50
(94,994)
—
(94,570)
226,425
32,458
258,883
(8,973)
249,910
11,810
4,390
744,012
147,593
85,824
233,417
510,595
(35,645)
(174,796)
300,154
149
1,416
(92,553)
(19,072)
(110,060)
190,094
28,330
218,424
(8,205)
210,219
$
$
58,771
(795)
(397)
57,579
10,733
9,462
20,195
37,384
2,246
(18,789)
20,841
225
(1,366)
(2,441)
19,072
15,490
36,331
4,128
40,459
(768)
39,691
8.1 %
(6.7)%
(9.0)%
7.7 %
7.3 %
11.0 %
8.7 %
7.3 %
(6.3)%
10.7 %
6.9 %
151.0 %
(96.5)%
2.6 %
(100.0)%
(14.1)%
19.1 %
14.6 %
18.5 %
9.4 %
18.9 %
(1) Property operating income is a non-GAAP financial measure. See Item 6. Selected Financial Data for further discussion.
Property Revenues
Total property revenue increased $57.6 million, or 7.7%, to $801.6 million in 2016 compared to $744.0 million in 2015. The
percentage occupied at our shopping centers was 93.3% at December 31, 2016 compared to 93.5% at December 31, 2015.
Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income
increased $58.8 million, or 8.1%, to $786.6 million in 2016 compared to $727.8 million in 2015 due primarily to the following:
•
•
•
•
•
an increase of $16.9 million attributable to properties acquired in 2015 and 2016,
an increase of $15.3 million from the acquisition of the six previously unconsolidated Clarion joint
venture properties in January 2016,
an increase of $11.7 million from Assembly Row and Pike & Rose as portions of both projects opened
in 2015 and early 2016,
an increase of $10.6 million at redevelopment properties due primarily to the lease-up of The Point at
Plaza El Segundo, as well as six of our other retail redevelopments, and the opening of the new office
building at Santana Row, partially offset by lower occupancy as we start redeveloping centers, and
an increase of $9.5 million at same-center properties due primarily to higher rental rates of
approximately $12.8 million, higher recoveries of $1.8 million primarily the net result of higher real
estate tax expense offset by lower snow removal expense, partially offset by lower average occupancy
of approximately $4.7 million,
partially offset by,
41
•
a decrease of $4.8 million due to the sale of our Houston Street and Courtyard Shops properties in April
2015 and November 2015, respectively.
Other Property Income
Other property income decreased $0.8 million, or 6.7%, to $11.0 million in 2016 compared to $11.8 million in 2015. The
decrease is primarily due to a decrease in fee income as we no longer earn fees on the former Clarion joint venture properties.
Property Expenses
Total property expenses increased $20.2 million, or 8.7%, to $253.6 million in 2016 compared to $233.4 million in 2015.
Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $10.7 million, or 7.3%, to $158.3 million in 2016 compared to $147.6 million in 2015. This increase
is primarily due to the following:
•
•
•
•
an increase of $6.1 million related to properties acquired in 2015 and 2016,
an increase of $3.2 million from the acquisition of the six previously unconsolidated Clarion joint
venture properties in January 2016,
an increase of $2.0 million related to Assembly Row and Pike & Rose, as portions of both projects
opened in 2015 and early 2016,
an increase of $2.0 million at redevelopment properties,
partially offset by
•
•
a decrease of $1.9 million in repairs and maintenance expenses at same-center properties primarily due
to lower snow removal costs, and
a decrease of $1.1 million due to the sale of our Houston Street and Courtyard Shops properties in April
2015 and November 2015, respectively.
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental
income plus other property income increased to 19.9% for the year ended December 31, 2016 from 20.0% for the year ended
December 31, 2015.
Real Estate Taxes
Real estate tax expense increased $9.5 million, or 11.0% to $95.3 million in 2016 compared to $85.8 million in 2015 due
primarily to the following:
•
•
•
•
•
an increase of $4.2 million at same-center properties due to higher assessments,
an increase of $2.2 million from properties acquired in 2015 and 2016,
an increase of $1.9 million due to the acquisition of the six previously unconsolidated Clarion joint
venture properties in January 2016,
an increase of $1.1 million from redevelopment properties, and
an increase of $0.8 million related to Assembly Row and Pike & Rose,
partially offset by
•
a decrease of $0.8 million due to the sale of our Houston Street and Courtyard Shops properties in April
2015 and November 2015, respectively.
Property Operating Income
Property operating income increased $37.4 million, or 7.3%, to $548.0 million in 2016 compared to $510.6 million in 2015.
This increase is primarily due to growth in earnings at same-center and redevelopment properties, the acquisition of the six
previously unconsolidated Clarion joint venture properties in January 2016, portions of Assembly Row and Pike & Rose
opening in 2015 and early 2016, and properties acquired in 2015, partially offset by the sale of our Houston Street and
Courtyard Shops properties in April 2015 and November 2015, respectively.
42
Other Operating Expense
General and Administrative Expense
General and administrative expense decreased $2.2 million, or 6.3%, to $33.4 million in 2016 from $35.6 million in 2015. This
increase is primarily due to lower transaction costs, partially offset by higher personnel related costs.
Depreciation and Amortization
Depreciation and amortization expense increased $18.8 million, or 10.7%, to $193.6 million in 2016 from $174.8 million in
2015. This increase is due primarily to the acquisition of the six previously unconsolidated Clarion joint venture properties in
January 2016, Assembly Row and Pike & Rose, depreciation on redevelopment related assets, and properties acquired in 2015.
Operating Income
Operating income increased $20.8 million, or 6.9%, to $321.0 million in 2016 compared to $300.2 million in 2015. This
increase is primarily due to properties acquired in 2015, portions of Assembly Row and Pike & Rose opening in 2015 and early
2016, growth in earnings at redevelopment and same-center properties, and the acquisition of the six previously unconsolidated
Clarion joint venture properties in January 2016, partially offset by the sale of our Houston Street and Courtyard Shops
properties in April 2015 and November 2015, respectively.
Other
Interest Expense
Interest expense increased $2.4 million, or 2.6%, to $95.0 million in 2016 compared to $92.6 million in 2015. This increase is
due primarily to an increase of $8.6 million due to higher borrowings, partially offset by a decrease of $6.2 million due to a
lower overall weighted average borrowing rate.
Gross interest costs were $113.0 million and $110.7 million in 2016 and 2015, respectively. Capitalized interest was $18.0
million and $18.1 million in 2016 and 2015, respectively.
Early Extinguishment of Debt
The $19.1 million early extinguishment of debt in 2015 relates to the make-whole premium paid as part of the early redemption
of our 6.20% senior notes in the second quarter of 2015, partially offset by the related net write-off of unamortized premium
and debt fees.
Gain on sale of Real Estate
The $32.5 million gain on sale of real estate and change in control of interests is primarily the result of our obtaining control of
six properties when we acquired Clarion’s 70% interest in the partnership that owned those properties (see discussion in Note 3
to the consolidated financial statements). The properties were previously accounted for under the equity method of accounting.
We consolidated these assets effective January 13, 2016, and consequently recognized a gain of $25.7 million upon obtaining
the controlling interest. 2016 also included a $1.8 million gain related to the May 2016 sale of a building in Coconut Grove,
Florida by an unconsolidated joint venture (our share of the gain, net of noncontrolling interests, was $0.5 million) and a $4.9
million gain due to the reversal of the warranty reserve for condominium units at Santana Row, as the statutorily mandated
latent construction defect period ended in third quarter 2016 and no further claims were filed.
The $28.3 million gain on sale of real estate for 2015 is due to the sale of our Houston Street property in April 2015 and the
sale of our Courtyard Shops property in November 2015.
Liquidity and Capital Resources
Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations. The cash
generated from operations is primarily paid to our common and preferred shareholders in the form of dividends. As a REIT, we
must generally make annual distributions to shareholders of at least 90% of our taxable income.
Our short-term liquidity requirements consist primarily of normal recurring operating expenses, obligations under our capital
and operating leases, regular debt service requirements (including debt service relating to additional or replacement debt, as
well as scheduled debt maturities), recurring expenditures, non-recurring expenditures (such as tenant improvements and
redevelopments) and dividends to common and preferred shareholders. Our long-term capital requirements consist primarily of
maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.
43
We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service
coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. In the short and long
term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, joint
venture relationships relating to existing properties or new acquisitions, and property dispositions that are consistent with this
conservative structure.
At December 31, 2017, we had cash and cash equivalents of $15.2 million and $41.0 million outstanding on our $800.0 million
unsecured revolving credit facility which matures on April 20, 2020, subject to two six-month extensions at our option. In
addition, we have an option (subject to bank approval) to increase the credit facility through an accordion feature to $1.5
billion. Our $275.0 million unsecured term loan that matures on November 21, 2018, subject to a one-year extension at our
option, also has an option (subject to bank approval) to increase the term loan through an accordion feature to $350.0 million.
As of December 31, 2017, we had the capacity to issue up to $261.3 million in common shares under our ATM equity program.
For 2017, the maximum amount of borrowings outstanding under our revolving credit facility was $344.0 million, the weighted
average amount of borrowings outstanding was $147.5 million and the weighted average interest rate, before amortization of
debt fees, was 1.9%. During 2017, we raised $716.9 million of net proceeds through three separate public offerings for a total
of $575.0 million of senior unsecured notes with a weighted average coupon of 3.47% and term of 13 years and $150.0 million
of 5.0% preferred shares in addition to $108.3 million raised under our ATM equity program. During 2018, we have only $10.5
million of debt maturing, in addition to our unsecured term loan mentioned above. We currently believe that cash flows from
operations, cash on hand, our ATM equity program, our revolving credit facility and our general ability to access the capital
markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures.
Our overall capital requirements during 2018 will depend upon acquisition opportunities, the level of improvements and
redevelopments on existing properties and the timing and cost of development of Assembly Row, Pike & Rose and future
phases of Santana Row. While the amount of future expenditures will depend on numerous factors, we expect to see a reduced
level of capital investments in our properties under development and redevelopment compared to 2017, which is the result of
completing construction on Phase II at both Assembly Row and Pike & Rose in 2018. With respect to other capital investments
related to our existing properties, we expect to incur levels consistent with prior years. Our capital investments will be funded
on a short-term basis with cash flow from operations, cash on hand and/or our revolving credit facility, and on a long-term
basis, with long-term debt or equity including shares issued under our ATM equity program. If necessary, we may access the
debt or equity capital markets to finance significant acquisitions. Given our past ability to access the capital markets, we expect
debt or equity to be available to us. Although there is no intent at this time, if market conditions deteriorate, we may also delay
the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating
expenditures, or re-evaluate our dividend policy.
In addition to conditions in the capital markets which could affect our ability to access those markets, the following factors
could affect our ability to meet our liquidity requirements:
•
•
restrictions in our debt instruments or preferred shares may limit us from incurring debt or issuing
equity at all, or on acceptable terms under then-prevailing market conditions; and
we may be unable to service additional or replacement debt due to increases in interest rates or a decline
in our operating performance.
Summary of Cash Flows
Year Ended December 31,
2017
2016
(In thousands)
Cash provided by operating activities............................................................................................ $
Cash used in investing activities ....................................................................................................
Cash provided by financing activities............................................................................................
(Decrease) increase in cash and cash equivalents..........................................................................
Cash and cash equivalents, beginning of year ...............................................................................
Cash and cash equivalents, end of year ......................................................................................... $
459,177
(836,802)
369,445
(8,180)
23,368
15,188
$
$
423,705
(590,221)
168,838
2,322
21,046
23,368
Net cash provided by operating activities increased $35.5 million to $459.2 million during 2017 from $423.7 million during
2016. The increase was primarily attributable to higher net income before certain non-cash items, and the timing of payments
related to operating costs.
44
Net cash used in investing activities increased $246.6 million to $836.8 million during 2017 from $590.2 million during 2016.
The increase was primarily attributable to:
•
•
•
a $293.7 million increase in acquisitions of real estate, primarily due to the August 2017 acquisition of
six shopping centers in Los Angeles County, California,
a $80.0 million net increase in capital expenditures and leasing costs as we continue to invest in Pike &
Rose, Assembly Row, Santana Row, and other current redevelopments, and
a $13.3 million decrease in cash flows from mortgage notes receivable primarily due to the payoff of an
$11.7 million note receivable in September 2016,
partially offset by
•
$136.1 million in net proceeds primarily from the sale of our property at 150 Post Street, three land
parcels at Assembly Row, North Lake Commons, and a land parcel at our Bethesda Row property in
2017.
Net cash provided by financing activities increased $200.6 million to $369.4 million during 2017 from $168.8 million during
2016. The increase was primarily attributable to:
•
•
•
•
•
$572.1 million net proceeds from the June 2017 issuance of $300.0 million and the December 2017
issuance of $175.0 million of 3.25% senior unsecured notes that mature on July 15, 2027 and $100.0
million of 4.50% notes that mature on December 1, 2044, compared to $241.8 million in net proceeds
from the issuance of 3.625% senior notes in July 2016,
$145.0 million in net proceeds from the September 29, 2017 issuance of 6,000 Series C Preferred
Shares,
$41.0 million of borrowings on our revolving credit facility in 2017 as compared to $56.9 million of
repayments in 2016,
a $12.8 million increase in contributions from noncontrolling interests primarily due to contributions to
fund the $50.0 million partial repayment of the Plaza El Segundo mortgage loan, and
an $8.9 million decrease in distributions to and redemptions of noncontrolling interests primarily due to
the 2016 acquisition of the 10% noncontrolling interest of a partnership which owns a project in
Southern California,
partially offset by
•
•
•
a $210.5 million decrease in net proceeds from the issuance of common shares primarily due to our
March 2016 issuance of 1.0 million common shares at $149.43 per share in an underwritten public
offering, and 1.2 million common shares under our ATM equity program at a weighted average price of
$152.92 during 2016, compared to 0.8 million common shares under our ATM equity program at a
weighted average price of $132.56 during 2017,
the December 2017 redemption of $150.0 million of senior notes with a make-whole premium of $11.9
million, and
a $15.3 million increase in dividends paid to shareholders due to an increase in the dividend rate and a
higher number of shares outstanding.
45
Contractual Commitments
The following table provides a summary of our fixed, noncancelable obligations as of December 31, 2017:
Commitments Due by Period
Total
Less Than
1 Year
1-3 Years
3-5 Years
After 5
Years
30,825
Fixed rate debt (principal and interest)(1) ......... $ 4,632,932
Fixed and variable rate debt - our share of
unconsolidated real estate partnerships
(principal and interest) .......................................
Capital lease obligations (principal and
interest) ..............................................................
Variable rate debt (principal only)(2).................
Operating leases .................................................
Real estate commitments
Development, redevelopment, and capital
326,631
improvement obligations ...................................
58,490
Contractual operating obligations ......................
Total contractual obligations.............................. $ 5,540,644
171,435
41,000
211,831
67,500
$
407,626
(In thousands)
305,997
$
$
838,746
$ 3,080,563
752
20,610
9,463
—
5,800
—
4,583
—
11,600
41,000
9,486
—
11,610
—
9,630
—
142,425
—
188,132
67,500
263,610
28,013
710,384
$
63,021
24,997
476,711
$
—
5,480
874,929
—
—
$ 3,478,620
$
_____________________
(1) Fixed rate debt includes our $275.0 million term loan as the rate is effectively fixed by two interest rate swap
agreements.
(2) Variable rate debt includes our revolving credit facility, which currently has $41.0 million outstanding and bears
interest at LIBOR plus 0.825%.
In addition to the amounts set forth in the table above and other liquidity requirements previously discussed, the following
potential commitments exist:
(a) Under the terms of the Congressional Plaza partnership agreement, a minority partner has the right to require us and
the other minority partner to purchase its 26.63% interest in Congressional Plaza at the interest’s then-current fair market value.
If the other minority partner defaults in their obligation, we must purchase the full interest. Based on management’s current
estimate of fair market value as of December 31, 2017, our estimated liability upon exercise of the put option would range from
approximately $81 million to $85 million.
(b) Under the terms of various other partnership agreements, the partners have the right to exchange their operating
partnership units for cash or the same number of our common shares, at our option. As of December 31, 2017, a total of
787,962 operating partnership units are outstanding.
(c) The other member in Montrose Crossing has the right to require us to purchase all of its 10.1% interest in Montrose
Crossing at the interest's then-current fair market value. If the other member fails to exercise its put option, we have the right to
purchase its interest on or after December 27, 2021 at fair market value. Based on management’s current estimate of fair
market value as of December 31, 2017, our estimated maximum liability upon exercise of the put option would range from
approximately $12 million to $13 million.
(d) Two of the members in Plaza El Segundo have the right to require us to purchase their 10.0% and 11.8% ownership
interests at the interests' then-current fair market value. If the members fail to exercise their put options, we have the right to
purchase each of their interests on or after December 30, 2026 at fair market value. Based on management’s current estimate of
fair market value as of December 31, 2017, our estimated maximum liability upon exercise of the put option would range from
approximately $26 million to $29 million.
(e) Effective January 1, 2017, the other member in The Grove at Shrewsbury and Brook 35 has the right to require us to
purchase all of its approximately 4.8% interest in The Grove at Shrewsbury and approximately 8.8% interest in Brook 35 at the
interests' then-current fair market value. Based on management's current estimate of fair market value as of December 31,
2017, our estimated maximum liability upon exercise of the put option would range from $9 million to $10 million.
(f) At December 31, 2017, we had letters of credit outstanding of approximately $1.3 million.
46
Off-Balance Sheet Arrangements
Other than the items disclosed in the Contractual Commitments Table, we have no off-balance sheet arrangements as of
December 31, 2017 that are reasonably likely to have a current or future material effect on our financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.
47
Debt Financing Arrangements
The following is a summary of our total debt outstanding as of December 31, 2017:
Description of Debt
Mortgages payable
Secured fixed rate
The Grove at Shrewsbury (West)............................
Rollingwood Apartments.........................................
The Shops at Sunset Place.......................................
29th Place ................................................................
Sylmar Towne Center..............................................
Plaza Del Sol ...........................................................
THE AVENUE at White Marsh...............................
Montrose Crossing ..................................................
Azalea......................................................................
Bell Gardens............................................................
Plaza El Segundo.....................................................
The Grove at Shrewsbury (East) .............................
Brook 35..................................................................
Chelsea ....................................................................
Subtotal ...........................................................
Net unamortized premium and debt
issuance costs .............................................
Total mortgages payable..................................
Notes payable
Unsecured fixed rate
Term Loan (1)..........................................................
Various.....................................................................
Unsecured variable rate
Revolving credit facility (2) ....................................
Subtotal ...........................................................
Net unamortized debt issuance costs .........
Total notes payable..........................................
Senior notes and debentures
Unsecured fixed rate
2.55% notes .............................................................
3.00% notes .............................................................
2.75% notes .............................................................
3.95% notes .............................................................
7.48% debentures ....................................................
3.25% notes .............................................................
6.82% medium term notes.......................................
4.50% notes .............................................................
3.625% notes ...........................................................
Subtotal ...........................................................
Net unamortized discount and debt
issuance costs .............................................
Total senior notes and debentures ...................
Capital lease obligations
Various ...............................................................
Total debt and capital lease obligations
_____________________
Original
Debt
Issued
Principal Balance as
of December 31,
2017
(Dollars in thousands)
Stated Interest Rate
as of December 31,
2017
Maturity Date
Acquired
24,050
Acquired
Acquired
Acquired
Acquired
52,705
80,000
Acquired
Acquired
125,000
43,600
11,500
Acquired
275,000
7,239
800,000
250,000
250,000
275,000
300,000
50,000
475,000
40,000
550,000
250,000
$
$
6.38%
5.54%
5.62%
5.91%
5.39%
5.23%
3.35%
4.20%
3.73%
4.06%
3.83%
3.77%
4.65%
5.36%
March 1, 2018
May 1, 2019
September 1, 2020
January 31, 2021
June 6, 2021
December 1, 2021
January 1, 2022
January 10, 2022
November 1, 2025
August 1, 2026
June 5, 2027
September 1, 2027
July 1, 2029
January 15, 2031
10,545
20,820
66,603
4,341
17,362
8,579
52,705
71,054
40,000
13,184
125,000
43,600
11,500
6,268
491,561
(56)
491,505
275,000
4,819
LIBOR + 0.90%
November 21, 2018
11.31% Various through 2028
41,000
320,819
(554)
320,265
250,000
250,000
275,000
300,000
29,200
475,000
40,000
550,000
250,000
2,419,200
(17,760)
2,401,440
71,556
3,284,766
LIBOR + 0.825%
April 20, 2020
2.55%
3.00%
2.75%
3.95%
7.48%
3.25%
6.82%
4.50%
3.625%
January 15, 2021
August 1, 2022
June 1, 2023
January 15, 2024
August 15, 2026
July 15, 2027
August 1, 2027
December 1, 2044
August 1, 2046
Various Various through 2106
1)
2)
We entered into two interest rate swap agreements that fix the LIBOR portion of the interest rate on the term loan at
1.72%. The spread on the term loan is 90 basis points resulting in a fixed rate of 2.62%.
The maximum amount drawn under our revolving credit facility during 2017 was $344.0 million and the weighted
average effective interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was
1.9%.
48
Our revolving credit facility, term loan and other debt agreements include financial and other covenants that may limit our
operating activities in the future. As of December 31, 2017, we were in compliance with all of the financial and other covenants
related to our revolving credit facility, term loan, and senior notes. Additionally, as of December 31, 2017, we were in
compliance with all of the financial and other covenants that could trigger loan default on our mortgage loans. If we were to
breach any of these financial and other covenants and did not cure the breach within an applicable cure period, our lenders
could require us to repay the debt immediately and, if the debt is secured, could immediately begin proceedings to take
possession of the property securing the loan. Many of our debt arrangements, including our public notes, term loan and our
revolving credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can put us in default
and require immediate repayment of their debt if we breach and fail to cure a default under certain of our other debt obligations.
As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of
operations, our ability to meet our obligations and the market value of our shares. Our organizational documents do not limit
the level or amount of debt that we may incur.
The following is a summary of our scheduled principal repayments as of December 31, 2017:
2018
2019
2020
2021
2022
Thereafter
Unsecured
Secured
Capital Lease
Total
$
275,506 (1) $
(In thousands)
16,228
$
563
41,624 (2)
250,694
250,771
1,920,861
25,820
65,539
30,541
117,018
236,415
41
42
46
51
56
$
291,775
26,425
107,209
281,286
367,845
71,320
2,228,596
$ 2,740,019
$
491,561
$
71,556
$ 3,303,136 (3)
_____________________
1)
2)
3)
Our $275.0 million unsecured term loan matures on November 21, 2018, subject to a one-year extension at our option.
Our $800.0 million revolving credit facility matures on April 20, 2020, subject to two six-month extensions at our
option. As of December 31, 2017, there was $41.0 million outstanding under this credit facility.
The total debt maturities differs from the total reported on the consolidated balance sheet due to the unamortized net
premium/(discount) and debt issuance costs on mortgage loans, notes payable, and senior notes as of December 31,
2017.
Interest Rate Hedging
We may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest rate swaps
to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the
issuance of debt. We enter into derivative instruments that qualify as cash flow hedges and do not enter into derivative
instruments for speculative purposes.
The interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value
of the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income (loss) which is
included in accumulated other comprehensive income (loss) on our consolidated balance sheet and our consolidated statement
of shareholders' equity. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt
instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate.
In addition, we evaluate the default risk of the counterparty by monitoring the credit worthiness of the counterparty which
includes reviewing debt ratings and financial performance. However, management does not anticipate non-performance by the
counterparty. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate
swaps associated with our cash flow hedges is recognized in earnings in the period affected.
As of December 31, 2017, we are party to two interest rate swap agreements that effectively fixed the rate on the term loan at
2.62%. Both swaps were designated and qualified as cash flow hedges and were recorded at fair value. Hedge ineffectiveness
has not impacted earnings in 2017, 2016 and 2015, and we do not anticipate it will have a significant effect in the future.
49
REIT Qualification
We intend to maintain our qualification as a REIT under Section 856(c) of the Code. As a REIT, we generally will not be
subject to corporate federal income taxes on income we distribute to our shareholders as long as we satisfy certain technical
requirements of the Code, including the requirement to distribute at least 90% of our taxable income to our shareholders.
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies’ operating
performance. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income,
computed in accordance with U.S. GAAP, plus real estate related depreciation and amortization and excluding extraordinary
items and gains and losses on the sale of real estate, and impairment write-downs of depreciable real estate. We compute FFO
in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in
addition to our net income and net cash provided by operating activities. It should be noted that FFO:
•
•
•
does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO,
generally reflects all cash effects of transactions and other events in the determination of net income);
should not be considered an alternative to net income as an indication of our performance; and
is not necessarily indicative of cash flow as a measure of liquidity or ability to fund cash needs,
including the payment of dividends.
We consider FFO available for common shareholders a meaningful, additional measure of operating performance primarily
because it excludes the assumption that the value of the real estate assets diminishes predictably over time, as implied by the
historical cost convention of GAAP and the recording of depreciation. We use FFO primarily as one of several means of
assessing our operating performance in comparison with other REITs. Comparison of our presentation of FFO to similarly titled
measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT
definition used by such REITs.
An increase or decrease in FFO available for common shareholders does not necessarily result in an increase or decrease in
aggregate distributions because our Board of Trustees is not required to increase distributions on a quarterly basis unless
necessary for us to maintain REIT status. However, we must distribute at least 90% of our taxable income to remain qualified
as a REIT. Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders although
not necessarily on a proportionate basis.
The reconciliation of net income to FFO available for common shareholders is as follows:
Year Ended December 31,
2017
2016
2015
Net income ................................................................................................................... $
Net income attributable to noncontrolling interests .....................................................
Gain on sale of real estate and change in control of interests, net ...............................
Depreciation and amortization of real estate assets .....................................................
Amortization of initial direct costs of leases ................................................................
Funds from operations ..........................................................................................
Dividends on preferred shares (1) ................................................................................
Income attributable to operating partnership units.......................................................
Income attributable to unvested shares ........................................................................
Funds from operations available for common shareholders (2)............................ $
Weighted average number of common shares, diluted (1)...........................................
$
(In thousands, except per share data)
297,870
(7,956)
(77,632)
188,719
258,883
(8,973)
(31,133)
169,198
218,424
(8,205)
(28,330)
154,232
$
19,124
420,125
(1,917)
3,143
(1,374)
419,977
73,122
$
16,875
404,850
(541)
3,145
(1,095)
406,359
71,869
$
15,026
351,147
(541)
3,398
(1,147)
352,857
69,920
Funds from operations available for common shareholders, per diluted share (2) ...... $
5.74
$
5.65
$
5.05
_____________________
(1)
For the year ended December 31, 2017, dividends on our Series 1 preferred stock are not deducted in the calculation of
FFO available to common shareholders, as the related shares are dilutive and included in "weighted average common
shares, diluted." The weighted average common shares used to compute FFO per diluted common share also includes
50
operating partnership units that were excluded from the computation of diluted EPS. Conversion of these operating
partnership units is dilutive in the computation of FFO per diluted common share but is anti-dilutive for the
computation of diluted EPS for the periods presented.
(2)
If the $12.3 million and the $19.1 million early extinguishment of debt charge incurred in 2017 and 2015, respectively,
was excluded, our FFO available for common shareholders for 2017 and 2015 would have been $432.2 million and
$371.9 million, respectively, and FFO available for common shareholders, per diluted share would have been $5.91
and $5.32, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our use of financial instruments, such as debt instruments, subjects us to market risk which may affect our future earnings and
cash flows, as well as the fair value of our assets. Market risk generally refers to the risk of loss from changes in interest rates
and market prices. We manage our market risk by attempting to match anticipated inflow of cash from our operating, investing
and financing activities with anticipated outflow of cash to fund debt payments, dividends to common and preferred
shareholders, investments, capital expenditures and other cash requirements.
We may enter into certain types of derivative financial instruments to further reduce interest rate risk. We use interest rate
protection and swap agreements, for example, to convert some of our variable rate debt to a fixed-rate basis or to hedge
anticipated financing transactions. We use derivatives for hedging purposes rather than speculation and do not enter into
financial instruments for trading purposes. As of December 31, 2017, we were party to two interest rate swap agreements that
effectively fix the rate on the $275.0 million term loan at 2.62%.
Interest Rate Risk
The following discusses the effect of hypothetical changes in market rates of interest on interest expense for our variable rate
debt and on the fair value of our total outstanding debt, including our fixed-rate debt. Interest rate risk amounts were
determined by considering the impact of hypothetical interest rates on our debt. Quoted market prices were used to estimate the
fair value of our marketable senior notes and debentures and discounted cash flow analysis is generally used to estimate the fair
value of our mortgages and notes payable. Considerable judgment is necessary to estimate the fair value of financial
instruments. This analysis does not purport to take into account all of the factors that may affect our debt, such as the effect that
a changing interest rate environment could have on the overall level of economic activity or the action that our management
might take to reduce our exposure to the change. This analysis assumes no change in our financial structure.
Fixed Interest Rate Debt
The majority of our outstanding debt obligations (maturing at various times through 2046 or, with respect to capital lease
obligations through 2106) have fixed interest rates which limit the risk of fluctuating interest rates. However, interest rate
fluctuations may affect the fair value of our fixed rate debt instruments. At December 31, 2017, we had $3.2 billion of fixed-
rate debt outstanding, including our $275.0 million term loan as the rate is effectively fixed by two interest rate swap
agreements; we also had capital lease obligations of $71.6 million. If market interest rates used to calculate the fair value on our
fixed-rate debt instruments at December 31, 2017 had been 1.0% higher, the fair value of those debt instruments on that date
would have decreased by approximately $239.4 million. If market interest rates used to calculate the fair value on our fixed-rate
debt instruments at December 31, 2017 had been 1.0% lower, the fair value of those debt instruments on that date would have
increased by approximately $276.4 million.
Variable Interest Rate Debt
Generally, we believe that our primary interest rate risk is due to fluctuations in interest rates on our variable rate debt. At
December 31, 2017, we had $41.0 million of variable rate debt outstanding. Based upon this amount of variable rate debt and
the specific terms, if market interest rates increased 1.0%, our annual interest expense woud increase by approximately $0.4
million with a corresponding decrease in our net income and cash flows for the year. Conversely, if market rates decreased
1.0%, our annual interest expense would decrease by approximately $0.4 million with a corresponding increase in our net
income and cash flows for the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data are included as a separate section of this Annual Report on Form
10-K commencing on page F-1 and are incorporated herein by reference.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls and Procedures
The Trust maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) that are designed to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Trust’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated,
can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, with the participation of the Trust’s Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of December 31, 2017. Based on
that evaluation, the Trust’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, the
Trust’s disclosure controls and procedures were effective at a reasonable assurance level.
Internal Control over Financial Reporting
The Trust’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or
under the supervision of, the Trust’s principal executive and principal financial officers and effected by our Board of Trustees,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of
America (GAAP) and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and
disposition of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of management and our Trustees; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of any of our assets in circumstances that could have a material adverse effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2017. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework (2013). Based on that assessment and criteria, management concluded that the Trust's
internal control over financial reporting was effective as of December 31, 2017.
Grant Thornton LLP, the independent registered public accounting firm that audited the Trust's consolidated financial
statements included in this Annual Report on Form 10-K, has issued an attestation report on the Trust's internal control over
financial reporting, which appears on page F-2 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our fourth fiscal quarter of 2017 that materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
52
PART III
Certain information required in Part III is omitted from this Report but is incorporated herein by reference from our Proxy
Statement for the 2018 Annual Meeting of Shareholders (as amended or supplemented, the “Proxy Statement”).
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The tables and narrative in the Proxy Statement identifying our Trustees and Board committees under the caption “Election of
Trustees” and “Corporate Governance”, the sections of the Proxy Statement entitled “Executive Officers” and “Section 16(a)
Beneficial Ownership Reporting Compliance” and other information included in the Proxy Statement required by this Item 10
are incorporated herein by reference.
We have adopted a Code of Ethics, which is applicable to our Chief Executive Officer and senior financial officers. The Code
of Ethics is available in the Corporate Governance section of the Investors section of our website at www.federalrealty.com.
ITEM 11. EXECUTIVE COMPENSATION
The sections of the Proxy Statement entitled “Summary Compensation Table,” “Compensation Committee Interlocks and
Insider Participation,” “Compensation Committee Report,” “Trustee Compensation” and “Compensation Discussion and
Analysis” and other information included in the Proxy Statement required by this Item 11 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The sections of the Proxy Statement entitled “Share Ownership” and “Equity Compensation Plan Information” and other
information included in the Proxy Statement required by this Item 12 are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND TRUSTEE INDEPENDENCE
The sections of the Proxy Statement entitled “Certain Relationship and Related Transactions” and “Independence of Trustees”
and other information included in the Proxy Statement required by this Item 13 are incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The sections of the Proxy Statement entitled “Ratification of Independent Registered Public Accounting Firm” and
“Relationship with Independent Registered Public Accounting Firm” and other information included in the Proxy Statement
required by this Item 14 are incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Our consolidated financial statements and notes thereto, together with Reports of Independent Registered Public Accounting
Firm are included as a separate section of this Annual Report on Form 10-K commencing on page F-1.
(2) Financial Statement Schedules
Our financial statement schedules are included in a separate section of this Annual Report on Form 10-K commencing on
page F-31.
(3) Exhibits
(b) The following documents are filed as exhibits are filed as part of, or incorporated by reference info, this report:
53
EXHIBIT INDEX
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description
Declaration of Trust of Federal Realty Investment Trust dated May 5, 1999 as amended by the Articles of
Amendment of Declaration of Trust of Federal Realty Investment Trust dated May 6, 2004, as corrected by the
Certificate of Correction of Articles of Amendment of Declaration of Trust of Federal Realty Investment Trust
dated June 17, 2004, as amended by the Articles of Amendment of Declaration of Trust of Federal Realty
Investment Trust dated May 6, 2009 (previously filed as Exhibit 3.1 to the Trust’s Registration Statement on Form
S-3 (File No. 333-160009) and incorporated herein by reference)
Amended and Restated Bylaws of Federal Realty Investment Trust dated February 12, 2003, as amended
October 29, 2003, May 5, 2004, February 17, 2006, May 6, 2009, and November 2, 2016 (previously files a
Exhibit 3.2 to the Trust's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 1-07533)
and incorporated herein by reference)
Specimen Common Share certificate (previously filed as Exhibit 4(i) to the Trust’s Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 1-07533) and incorporated herein by reference)
Articles Supplementary relating to the 5.417% Series 1 Cumulative Convertible Preferred Shares of Beneficial
Interest (previously filed as Exhibit 4.1 to the Trust’s Current Report on Form 8-K filed on March 13, 2007, (File
No. 1-07533) and incorporated herein by reference)
** Indenture dated December 1, 1993 related to the Trust’s 7.48% Debentures due August 15, 2026; and 6.82%
Medium Term Notes due August 1, 2027; (previously filed 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), filed on December 13, 1993 and
incorporated herein by reference)
** Indenture dated September 1, 1998 related to the Trust’s 5.90% Notes due 2020; 3.00% Notes due 2022; 2.75%
Notes due 2023; 3.95% Notes due 2024; 4.50% Notes due 2044; 2.55% Notes due 2021; 3.625% Notes due 2046;
3.25% Notes due 2027 (previously filed as Exhibit 4(a) to the Trust’s Registration Statement on Form S-3 (File
No. 333-63619) filed on September 17, 1998 and incorporated herein by reference)
Articles Supplementary relating to the 5.000% Series C Cumulative Redeemable Preferred Shares of Beneficial
Interest (previously filed as Exhibit 3.2 to the Trust's Registration Statement on Form 8-A (File No. 1-07533), filed
on September 29, 2017 and incorporated herein by reference)
Deposit Agreement, dated as of September 29, 2017, by and among Federal Realty Investment Trust, American
Stock Transfer and Trust Company, LLC, as Depository, and all holders from time to time of Receipt (previously
filed as Exhibit 4.1 to the Trust's Registration Statement on Form 8-A (File No. 1-07533), filed on September 29,
2017 and incorporated herein by reference)
Specimen certificate relating to the 5.000% Series C Cumulative Redeemable Preferred Shares of Beneficial
Interest (previously filed as Exhibit 4.3 to the Trust's Registration Statement on Form 8-A (File No. 1-07533), filed
on September 29, 2017 and incorporated herein by reference)
* Severance Agreement between the Trust and Donald C. Wood dated February 22, 1999 (previously filed as a
portion of Exhibit 10 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No.
1-07533) (the "1999 1Q Form 10-Q") and incorporated herein by reference)
* Executive Agreement between Federal Realty Investment Trust and Donald C. Wood dated February 22, 1999
(previously filed as a portion of Exhibit 10 to the 1999 1Q Form 10-Q and incorporated herein by reference)
* Amendment to Executive Agreement between Federal Realty Investment Trust and Donald C. Wood dated
February 16, 2005 (previously filed as Exhibit 10.12 to the Trust’s Annual Report on Form 10-K for the year ended
December 31, 2004 (File No. 1-07533) (the “2004 Form 10-K”) and incorporated herein by reference)
2001 Long-Term Incentive Plan (previously filed as Exhibit 99.1 to the Trust’s S-8 Registration Number
333-60364 filed on May 7, 2001 and incorporated herein by reference)
* Health Coverage Continuation Agreement between Federal Realty Investment Trust and Donald C. Wood dated
February 16, 2005 (previously filed as Exhibit 10.26 to the 2004 Form 10-K and incorporated herein by reference)
* Severance Agreement between the Trust and Dawn M. Becker dated April 19, 2000 (previously filed as Exhibit
10.26 to the Trust’s 2005 2Q Form 10-Q and incorporated herein by reference)
* Amendment to Severance Agreement between the Trust and Dawn M. Becker dated February 16, 2005
(previously filed as Exhibit 10.27 to the 2004 Form 10-K and incorporated herein by reference)
54
Exhibit
No.
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Description
Form of Restricted Share Award Agreement for awards made under the Trust’s 2003 Long-Term Incentive Award
Program for shares issued out of 2001 Long-Term Incentive Plan (previously filed as Exhibit 10.28 to the 2004
Form 10-K and incorporated herein by reference)
Form of Restricted Share Award Agreement for long term vesting and retention awards for shares issued out of the
2010 Plan (previously filed as Exhibit 10.35 to the Trust's Annual Report on Form 10-K for the year ended
December 31, 2010 (File No. 1-07533) (the "2010 Form 10-K") and incorporated herein by reference)
Form of Option Award Agreement for awards made under the Trust’s 2003 Long-Term Incentive Award Program
for shares issued out of the 2001 Long-Term Incentive Plan (previously filed as Exhibit 10.32 to the 2005 Form 10-
K and incorporated herein by reference)
Amended and Restated 2001 Long-Term Incentive Plan (previously filed as Exhibit 10.34 to the Trust’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 1-07533) and incorporated herein by
reference)
* Amendment to Severance Agreement between the Trust and Donald C. Wood dated January 1, 2009 (previously
filed as Exhibit 10.26 to the Trust’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No.
1-07533) (“the 2008 Form 10-K”) and incorporated herein by reference)
* Second Amendment to Executive Agreement between the Trust and Donald C. Wood dated January 1, 2009
(previously filed as Exhibit 10.27 to the Trust’s 2008 Form 10-K and incorporated herein by reference)
* Amendment to Health Coverage Continuation Agreement between the Trust and Donald C. Wood dated January
1, 2009 (previously filed as Exhibit 10.28 to the Trust’s 2008 Form 10-K and incorporated herein by reference)
* Second Amendment to Severance Agreement between the Trust and Dawn M. Becker dated January 1, 2009
(previously filed as Exhibit 10.30 to the Trust’s 2008 Form 10-K and incorporated herein by reference)
2010 Performance Incentive Plan (previously filed as Appendix A to the Trust’s Definitive Proxy Statement for the
2010 Annual Meeting of Shareholders (File No. 01-07533) and incorporated herein by reference)
Amendment to 2010 Performance Incentive Plan (“the 2010 Plan”) (previously filed as Appendix A to the Trust’s
Proxy Statement for the 2010 Annual Meeting of Shareholders (File No. 01-07533) and incorporated herein by
reference)
* Restricted Share Award Agreement between the Trust and Donald C. Wood dated October 12, 2010 (previously
filed as Exhibit 10.36 to the Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File
No. 01-07533) and incorporated herein by reference)
Form of Restricted Share Award Agreement for awards made under the Trust’s Long-Term Incentive Award
Program and the Trust’s Annual Incentive Bonus Program and basic awards with annual vesting for shares issued
out of the 2010 Plan (previously filed as Exhibit 10.34 to the Trust’s 2010 Form 10-K (File No. 1-07533) and
incorporated herein by reference)
Form of Option Award Agreement for awards made under the Trust’s Long-Term Incentive Award Program for
shares issued out of the 2010 Plan (previously filed as Exhibit 10.38 to the Trust’s 2010 Form 10-K (File No.
1-07533) and incorporated herein by reference)
Form of Option Award Agreement for front loaded awards made under the Trust’s Long-Term Incentive Award
Program for shares issued out of the 2010 Plan (previously filed as Exhibit 10.39 to the Trust’s 2010 Form 10-K
(File No. 1-07533) and incorporated herein by reference)
Form of Option Award Agreement for basic options awarded out of the 2010 Plan (previously filed as Exhibit
10.40 to the Trust’s 2010 Form 10-K (File No. 1-07533) and incorporated herein by reference)
Form of Restricted Share Award Agreement, dated as of February 10, 2011, between the Trust and Dawn M.
Becker (previously filed as Exhibit 10.41 to the Trust’s 2010 Form 10-K (File No. 1-07533) and incorporated
herein by reference)
Credit Agreement dated as of July 7, 2011, by and among the Trust, as Borrower, the financial institutions party
thereto and their permitted assignees under Section 12.6., as Lenders, Wells Fargo Bank, National Association, as
Administrative Agent, PNC Bank, National Association, as Syndication Agent, Wells Fargo Securities, LLC, as a
Lead Arranger and Book Manager, and PNC Capital Markets LLC, as a Lead Arranger and Book Manager
(previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K (File No. 1-07533), filed on July 11,
2011 and incorporated herein by reference)
55
Exhibit
No.
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
21.1
23.1
31.1
31.2
32.1
32.2
101
Description
Term Loan Agreement dated as of November 22, 2011, by and among the Trust, as Borrower, the financial
institutions party thereto and their permitted assignees under Section 12.6., as Lenders, PNC Bank, National
Association, as Administrative Agent, Capital One, N.A., Syndication Agent, PNC Capital Markets, LLC, as a
Lead Arranger and Book Manager, and Capital One, N.A., as a Lead Arranger and Book Manager (previously filed
as Exhibit 10.1 to the Trust's Current Report on Form 8-K (File No. 1-07533), filed on November 28, 2011 and
incorporated herein by reference)
Revised Form of Restricted Share Award Agreement for front loaded awards made under the Trust’s Long-Term
Incentive Award Program for shares issued out of the 2010 Plan (previously filed as Exhibit 10.35 to the Trust's
Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-07533) (the "2012 Form 10-K")
and incorporated herein by reference)
Revised Form of Restricted Share Award Agreement for long-term vesting and retention awards made under the
Trust’s Long-Term Incentive Award Program for shares issued out of the 2010 Plan (previously filed as Exhibit
10.36 to the Trust's 2012 Form 10-K (File No. 1-07533) and incorporated herein by reference)
Revised Form of Performance Share Award Agreement for shares awarded out of the 2010 Plan (previously filed
as Exhibit 10.37 to the Trust's 2012 Form 10-K (File No. 1-07533) and incorporated herein by reference)
Revised Form of Restricted Share Award Agreement for awards made under the Trust’s Long-Term Incentive
Award Program and the Trust’s Annual Incentive Bonus Program and basic awards with annual vesting for shares
issued out of the 2010 Plan (previously filed as Exhibit 10.38 to the Trust's 2012 Form 10-K (File No. 1-07533)
and incorporated herein by reference)
First Amendment to the Credit Agreement, dated as of April 22, 2013, by and among Federal Realty Investment
Trust, each of the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent
(previously filed as Exhibit 10.1 to the Trust's Current Report on Form 8-K (File No. 1-07533), filed on April 26,
2013 and incorporated herein by reference)
First Amendment to the Term Loan Agreement, dated as of April 22, 2013, by and among Federal Realty
Investment Trust, each of the Lenders party thereto, and PNC Bank, National Association, as Administrative Agent
(previously filed as Exhibit 10.40 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31,
2013 (File No. 1-07533) and incorporated herein by reference
Second Amendment to Term Loan Agreement, dated as of August 28, 2014, by and among Federal Realty
Investment Trust, each of the Lenders party thereto, and PNC Bank, National Association, as Administrative Agent
(previously filed as Exhibit 10.1 to the Trust's Current Report on Form 8-K (File No. 1-07533), filed on September
2, 2014 and incorporated herein by reference)
Second Amendment to Credit Agreement, dated as of April 20, 2016, by and among Federal Realty Investment
Trust, each of the Lenders party thereto, and PNC Bank, National Association, as Administrative Agent (previously
filed as Exhibit 10.1 to the Trust's Current Report on Form 8K (File No. 1-07533), filed on April 26, 2016 and
incorporated herein by reference)
Third Amendment to Term Loan Agreement, dated as of April 20, 2016, by and among Federal Realty Investment
Trust, each of the Lenders party thereto, and PNC Bank, National Association, as Administrative Agent (previously
filed as Exhibit 10.1 to the Trust's Current Report on Form 8-K (File No. 1-07533), filed on April 26, 2016 and
incorporated herein by reference)
Severance Agreement between the Trust and Daniel Guglielmone dated August 15, 2016 (previously filed as
Exhibit 10.36 to the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No.
1-07533 and incorporated herein by reference)
Subsidiaries of Federal Realty Investment Trust (filed herewith)
Consent of Grant Thornton LLP (filed herewith)
Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith)
Rule 13a-14(a) Certification of Chief Financial Officer (filed herewith)
Section 1350 Certification of Chief Executive Officer (filed herewith)
Section 1350 Certification of Chief Financial Officer (filed herewith)
The following materials from Federal Realty Investment Trust’s Annual Report on Form 10-K for the year ended
December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Balance
Sheets, (2) the Consolidated Statements of Comprehensive Income, (3) the Consolidated Statement of
Shareholders’ Equity, (4) the Consolidated Statements of Cash Flows, and (5) Notes to Consolidated Financial
Statements that have been detail tagged.
_____________________
56
* Management contract or compensatory plan required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
** Pursuant to Regulation S-K Item 601(b)(4)(iii), the Trust by this filing agrees, upon request, to furnish to the Securities and
Exchange Commission a copy of other instruments defining the rights of holders of long-term debt of the Trust.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized this February 13, 2018.
Federal Realty Investment Trust
By:
/S/ DONALD C. WOOD
Donald C. Wood
President, Chief Executive Officer and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacity and on the dates indicated. Each person whose signature
appears below hereby constitutes and appoints each of Donald C. Wood and Dawn M. Becker as his or her attorney-in-fact and
agent, with full power of substitution and resubstitution for him or her in any and all capacities, to sign any or all amendments
to this Report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-
in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection
with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his or her substitutes may do
or cause to be done by virtue hereof.
Signature
Title
Date
/S/ DONALD C. WOOD
Donald C. Wood
President, Chief Executive Officer and
February 13, 2018
Trustee (Principal Executive Officer)
/S/ DANIEL GUGLIELMONE
Daniel Guglielmone
/S/ JOSEPH S. VASSALLUZZO
Joseph S. Vassalluzzo
/S/ JON E. BORTZ
Jon E. Bortz
/S/ DAVID W. FAEDER
David W. Faeder
/S/ ELIZABETH I. HOLLAND
Elizabeth I. Holland
/S/ GAIL P. STEINEL
Gail P. Steinel
/S/ WARREN M. THOMPSON
Warren M. Thompson
Executive Vice President-Chief Financial
February 13, 2018
Officer and Treasurer (Principal
Financial and Accounting Officer)
Non-Executive Chairman
February 13, 2018
February 13, 2018
February 13, 2018
February 13, 2018
February 13, 2018
February 13, 2018
Trustee
Trustee
Trustee
Trustee
Trustee
58
Item 8 and Item 15(a)(1) and (2)
Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm..................................................................................
Report of Independent Registered Public Accounting Firm..................................................................................
Consolidated Balance Sheets .................................................................................................................................
Consolidated Statements of Comprehensive Income ............................................................................................
Consolidated Statement of Shareholders’ Equity ..................................................................................................
Consolidated Statements of Cash Flows................................................................................................................
Notes to Consolidated Financial Statements..........................................................................................................
Page No.
Financial Statement Schedules
Schedule III—Summary of Real Estate and Accumulated Depreciation ..............................................................
Schedule IV—Mortgage Loans on Real Estate .....................................................................................................
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-31
F-39
All other schedules have been omitted either because the information is not applicable, not material, or is disclosed in our
consolidated financial statements and related notes.
F-1
Report of Independent Registered Public Accounting Firm
Trustees and Shareholders
Federal Realty Investment Trust
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Federal Realty Investment Trust (a Maryland real estate
investment trust) and Subsidiaries (collectively, the "Trust") as of December 31, 2017, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). In our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Trust as of and for the year ended December 31, 2017, and our report
dated February 13, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management's Evaluation of
Disclosure Controls and Procedures. Our responsibility is to express an opinion on the Trust’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
New York, New York
February 13, 2018
F-2
Report of Independent Registered Public Accounting Firm
Trustees and Shareholders
Federal Realty Investment Trust
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Federal Realty Investment Trust (a Maryland real estate
investment trust) and Subsidiaries (collectively, the "Trust") as of December 31, 2017 and 2016, and the related consolidated
statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2017, and the related notes and schedules (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Trust as of December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Trust’s internal control over financial reporting as of December 31, 2017, based on criteria established in the
2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 13, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the
Trust’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Trust’s auditor since 2002.
New York, New York
February 13, 2018
F-3
Federal Realty Investment Trust
Consolidated Balance Sheets
ASSETS
Real estate, at cost
Operating (including $1,639,486 and $1,211,605 of consolidated variable interest
entities, respectively)
Construction-in-progress (including $43,393 and $15,313 of consolidated variable
interest entities, respectively)
Assets held for sale
Less accumulated depreciation and amortization (including $247,410 and $209,239 of
consolidated variable interest entities, respectively)
Net real estate
Cash and cash equivalents
Accounts and notes receivable
Mortgage notes receivable, net
Investment in real estate partnerships
Prepaid expenses and other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Mortgages payable (including $460,372 and $439,120 of consolidated variable interest
entities, respectively)
Capital lease obligations
Notes payable
Senior notes and debentures
Accounts payable and accrued expenses
Dividends payable
Security deposits payable
Other liabilities and deferred credits
Total liabilities
Commitments and contingencies (Note 7)
Redeemable noncontrolling interests
Shareholders’ equity
December 31,
2017
2016
(In thousands, except share and
per share data)
$ 6,950,188
$ 6,125,957
684,873
—
599,260
33,856
7,635,061
6,759,073
(1,876,544)
5,758,517
15,188
209,877
30,429
23,941
237,803
$ 6,275,755
(1,729,234)
5,029,839
23,368
116,749
29,904
14,864
208,555
$ 5,423,279
$
491,505
71,556
320,265
2,401,440
196,332
75,931
16,667
169,388
3,743,084
$
471,117
71,590
279,151
1,976,594
201,756
71,440
16,285
115,817
3,203,750
141,157
143,694
Preferred shares, authorized 15,000,000 shares, $.01 par:
5.0% Series C Cumulative Redeemable Preferred Shares, (stated at liquidation
preference $25,000 per share), 6,000 and 0 shares issued and outstanding, respectively
5.417% Series 1 Cumulative Convertible Preferred Shares, (stated at liquidation
preference $25 per share), 399,896 shares issued and outstanding
150,000
—
9,997
9,997
Common shares of beneficial interest, $.01 par, 100,000,000 shares authorized,
73,090,877 and 71,995,897 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated dividends in excess of net income
Accumulated other comprehensive income (loss)
Total shareholders’ equity of the Trust
Noncontrolling interests
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
733
2,855,321
(749,367)
22
2,266,706
124,808
2,391,514
$ 6,275,755
722
2,718,325
(749,734)
(2,577)
1,976,733
99,102
2,075,835
$ 5,423,279
The accompanying notes are an integral part of these consolidated statements.
F-4
Federal Realty Investment Trust
Consolidated Statements of Comprehensive Income
REVENUE
Rental income
Other property income
Mortgage interest income
Total revenue
EXPENSES
Rental expenses
Real estate taxes
General and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
Other interest income
Interest expense
Early extinguishment of debt
(Loss) income from real estate partnerships
INCOME FROM CONTINUING OPERATIONS
Gain on sale of real estate and change in control of interests, net
NET INCOME
Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO THE TRUST
Dividends on preferred shares
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS
EARNINGS PER COMMON SHARE, BASIC
Net income available for common shareholders
Weighted average number of common shares, basic
EARNINGS PER COMMON SHARE, DILUTED
Net income available for common shareholders
Weighted average number of common shares, diluted
NET INCOME
Other comprehensive income (loss) - change in value of interest rate swaps
COMPREHENSIVE INCOME
Comprehensive income attributable to noncontrolling interests
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE TRUST
Year Ended December 31,
2017
2016
2015
(In thousands, except per share data)
$
$
$
841,461
12,825
3,062
857,348
786,583
11,015
3,993
801,591
727,812
11,810
4,390
744,012
164,890
107,839
36,281
216,050
525,060
332,288
475
(100,125)
(12,273)
(417)
219,948
77,922
297,870
(7,956)
289,914
(2,458)
287,456
3.97
72,117
3.97
72,233
297,870
2,599
300,469
(7,956)
292,513
$
$
$
$
$
$
$
$
$
$
158,326
95,286
33,399
193,585
480,596
320,995
374
(94,994)
—
50
226,425
32,458
258,883
(8,973)
249,910
(541)
249,369
3.51
70,877
3.50
71,049
258,883
1,533
260,416
(8,973)
251,443
$
$
$
$
$
147,593
85,824
35,645
174,796
443,858
300,154
149
(92,553)
(19,072)
1,416
190,094
28,330
218,424
(8,205)
210,219
(541)
209,678
3.04
68,797
3.03
68,981
218,424
(595)
217,829
(8,205)
209,624
The accompanying notes are an integral part of these consolidated statements.
F-5
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Federal Realty Investment Trust
Consolidated Statements of Cash Flows
Year Ended December 31,
2017
2016
2015
(In thousands)
OPERATING ACTIVITIES
Net income ................................................................................................................. $ 297,870
Adjustments to reconcile net income to net cash provided by operating activities:
$ 258,883
$ 218,424
Depreciation and amortization............................................................................
Gain on sale of real estate and change in control of interests, net......................
Early extinguishment of debt..............................................................................
Loss (income) from real estate partnerships.......................................................
Other, net ............................................................................................................
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable, net .................................................
Increase in prepaid expenses and other assets ....................................................
Increase (decrease) in accounts payable and accrued expenses .........................
Increase (decrease) in security deposits and other liabilities..............................
Net cash provided by operating activities..................................................................
INVESTING ACTIVITIES
Acquisition of real estate ...........................................................................................
Capital expenditures - development and redevelopment ...........................................
Capital expenditures - other .......................................................................................
Proceeds from sale of real estate and real estate partnership interests ......................
Investment in real estate partnerships ........................................................................
Distribution from real estate partnership in excess of earnings.................................
Leasing costs..............................................................................................................
(Issuance) repayment of mortgage and other notes receivable, net ...........................
Net cash used in investing activities ..........................................................................
216,050
(77,922)
12,273
417
(2,674)
2,059
(3,346)
14,242
208
459,177
(436,652)
(441,984)
(76,952)
136,055
(696)
1,729
(16,656)
(1,646)
(836,802)
193,585
(32,458)
—
(50)
474
1,868
(3,753)
7,159
(2,003)
423,705
(142,958)
(379,720)
(57,560)
—
(7,220)
3,910
(18,299)
11,626
(590,221)
174,796
(28,330)
19,072
(1,416)
(29)
(9,200)
(6,695)
(1,305)
3,729
369,046
(154,313)
(236,437)
(46,096)
97,422
(2,802)
512
(22,382)
10,333
(353,763)
FINANCING ACTIVITIES
Net borrowings (repayment) under revolving credit facility, net of costs .................
Issuance of senior notes, net of costs .........................................................................
Redemption and retirement of senior notes ...............................................................
Repayment of mortgages, capital leases, and notes payable .....................................
Issuance of common shares, net of costs ...................................................................
Issuance of preferred shares, net of costs...................................................................
Dividends paid to common and preferred shareholders ............................................
Shares withheld for employee taxes ..........................................................................
Contributions from noncontrolling interests..............................................................
Distributions to and redemptions of noncontrolling interests....................................
Net cash provided by (used in) financing activities...................................................
(Decrease) increase in cash and cash equivalents .............................................................
Cash and cash equivalents at beginning of year................................................................
Cash and cash equivalents at end of year.......................................................................... $
41,000
572,134
(161,930)
(56,328)
118,583
144,991
(282,995)
(4,229)
13,449
(15,230)
369,445
(8,180)
23,368
15,188
$
The accompanying notes are an integral part of these consolidated statements.
F-7
(56,916)
241,795
53,500
456,151
— (219,228)
(181,315)
110,855
—
(243,314)
(9,211)
—
(9,626)
(42,188)
(26,905)
47,951
21,046
(49,559)
329,103
—
(267,694)
(4,451)
662
(24,102)
168,838
2,322
21,046
23,368
$
Federal Realty Investment Trust
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
NOTE 1—BUSINESS AND ORGANIZATION
Federal Realty Investment Trust (the “Trust”) is an equity real estate investment trust (“REIT”) specializing in the ownership,
management, and redevelopment of retail and mixed-use properties. Our properties are located primarily in densely populated
and affluent communities in strategically selected metropolitan markets in the Mid-Atlantic and Northeast regions of the United
States, California, and South Florida. As of December 31, 2017, we owned or had a majority interest in community and
neighborhood shopping centers and mixed-use properties which are operated as 104 predominantly retail real estate projects.
We operate in a manner intended to enable us to qualify as a REIT for federal income tax purposes. A REIT that distributes at
least 90% of its taxable income to its shareholders each year and meets certain other conditions is not taxed on that portion of
its taxable income which is distributed to its shareholders.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of the Trust, its corporate subsidiaries, and all entities in which the
Trust has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). The
equity interests of other investors are reflected as noncontrolling interests or redeemable noncontrolling interests. All
significant intercompany transactions and balances are eliminated in consolidation. We account for our interests in joint
ventures, which we do not control, using the equity method of accounting. Certain 2016 and 2015 amounts have been
reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America, referred to as “GAAP,” requires management to make estimates and assumptions that in certain circumstances affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These
estimates are prepared using management’s best judgment, after considering past, current and expected events and economic
conditions. Actual results could differ from these estimates.
Revenue Recognition and Accounts Receivable
Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed escalations which occur at
specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the
space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit,
collection and other business risk. Percentage rents, which represent additional rents based upon the level of sales achieved by
certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved
and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over
the periods in which the related expenditures are incurred. For a tenant to terminate its lease agreement prior to the end of the
agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has
relinquished control of the space are generally recognized on the termination date. When a lease is terminated early but the
tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly
over the remaining term of the modified lease agreement.
We make estimates of the collectability of our accounts receivable related to minimum rents, straight-line rents, expense
reimbursements and other revenue. Accounts receivable is carried net of this allowance for doubtful accounts. Our
determination as to the collectability of accounts receivable and correspondingly, the adequacy of this allowance, is based
primarily upon evaluations of individual receivables, current economic conditions, historical experience and other relevant
factors. The allowance for doubtful accounts is increased or decreased through bad debt expense. Accounts receivable are
written-off when they are deemed to be uncollectible and we are no longer actively pursuing collection. At December 31, 2017
and 2016, our allowance for doubtful accounts was $11.8 million and $11.9 million, respectively.
In some cases, primarily relating to straight-line rents, the collection of accounts receivable extends beyond one year. Our
experience relative to unbilled straight-line rents is that a portion of the amounts otherwise recognizable as revenue is never
billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors.
Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in
F-8
the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably assured. If our
evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably collectible than previously estimated
and realized, the additional straight-line rental income is recognized as revenue. If our evaluation of tenant credit risk changes
indicating a portion of realized straight-line rental income is no longer collectible, a reserve and bad debt expense is recorded.
At December 31, 2017 and 2016, accounts receivable include approximately $93.1 million and $80.6 million, respectively,
related to straight-line rents.
We are currently under construction on 221 condominium units at our Assembly Row and Pike & Rose properties. Gains or
losses on the sale of these condominium units are recognized in accordance with the provisions of ASC Topic 360-20,
“Property, Plant and Equipment – Real Estate Sales.” We account for contracted condominium sales under the percentage-of
completion method, based on an evaluation of the criteria specified in ASC Topic 360-20 including: the legal commitment of
the purchaser in the real estate contract, whether the construction of the project is beyond a preliminary phase, whether
sufficient units have been contracted to ensure the project will not revert to a rental project, the ability to reasonably estimate
the aggregate project sale proceeds and aggregate project costs, and the determination that the buyer has made an adequate
initial and continuing cash investment under the contract. When the percentage-of-completion criteria have not been met, no
profit is recognized. The application of these criteria can be complex and requires us to make assumptions. See "Recent
Accounting Pronouncements," for discussion of change in timing of revenue recognition with the adoption of ASU 2014-09 on
January 1, 2018.
Real Estate
Land, buildings and improvements are recorded at cost. Depreciation is computed using the straight-line method. Estimated
useful lives range generally from 35 years to a maximum of 50 years on buildings and major improvements. Minor
improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from 2 to 20 years.
Maintenance and repairs that do not improve or extend the useful lives of the related assets are charged to operations as
incurred. Tenant improvements are capitalized and depreciated over the life of the related lease or their estimated useful life,
whichever is shorter. If a tenant vacates its space prior to contractual termination of its lease, the undepreciated balance of any
tenant improvements are written off if they are replaced or have no future value. In 2017, 2016 and 2015, real estate
depreciation expense was $193.3 million, $173.2 million and $156.5 million, respectively, including amounts from real estate
sold and assets under capital lease obligations.
Sales of real estate are recognized only when sufficient down payments have been obtained, possession and other attributes of
ownership have been transferred to the buyer and we have no significant continuing involvement. The application of these
criteria can be complex and requires us to make assumptions. We believe these criteria were met for all real estate sold during
the periods presented.
Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair
values, replacement cost and/or appraised values. When we acquire operating real estate properties, the purchase price is
allocated to land, building, improvements, leasing costs, intangibles such as in-place leases, assumed debt, if any, and to current
assets and liabilities acquired, if any. The value allocated to in-place leases is amortized over the related lease term and
reflected as rental income in the consolidated statements of comprehensive income. We consider qualitative and quantitative
factors in evaluating the likelihood of a tenant exercising a below market renewal option and include such renewal options in
the calculation of in-place lease value when we consider these to be bargain renewal options. If the value of below market lease
intangibles includes renewal option periods, we include such renewal periods in the amortization period utilized. If a tenant
vacates its space prior to contractual termination of its lease, the unamortized balance of any in-place lease value is written off
to rental income.
Transaction costs related to asset acquisitions, such as broker fees, transfer taxes, legal, accounting, valuation, and other
professional and consulting fees, are capitalized as part of the acquisition cost. The acquisition of an operating shopping center
typically qualifies as an asset acquisition. See "Recent Accounting Pronouncements" for further discussion.
When applicable, as lessee, we classify our leases of land and building as operating or capital leases. We are required to use
judgment and make estimates in determining the lease term, the estimated economic life of the property and the interest rate to
be used in determining whether or not the lease meets the qualification of a capital lease and is recorded as an asset.
We capitalize certain costs related to the development and redevelopment of real estate including pre-construction costs, real
estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved. Additionally, we
capitalize interest costs related to development and redevelopment activities. Capitalization of these costs begin when the
activities and related expenditures commence and cease when the project is substantially complete and ready for its intended
use at which time the project is placed in service and depreciation commences. Additionally, we make estimates as to the
F-9
probability of certain development and redevelopment projects being completed. If we determine the development or
redevelopment is no longer probable of completion, we expense all capitalized costs which are not recoverable.
We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the
expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to
fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell.
Cash and Cash Equivalents
We define cash and cash equivalents as cash on hand, demand deposits with financial institutions and short term liquid
investments with an initial maturity, when purchased, under three months. Cash balances in individual banks may exceed the
federally insured limit by the Federal Deposit Insurance Corporation (the “FDIC”). At December 31, 2017, we had $19.6
million in excess of the FDIC insured limit.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist primarily of lease costs, prepaid property taxes and acquired above market leases.
Capitalized lease costs are direct costs incurred which were essential to originate a lease and would not have been incurred had
the leasing transaction not taken place and include third party commissions and salaries and related costs of personnel directly
related to time spent obtaining a lease. Capitalized lease costs are amortized over the life of the related lease. If a tenant vacates
its space prior to the contractual termination of its lease, the unamortized balance of any previously capitalized lease costs are
written off.
Debt Issuance Costs
Costs related to the issuance of debt instruments are deferred and are amortized as interest expense over the estimated life of
the related issue using the straight-line method which approximates the effective interest method. If a debt instrument is paid
off prior to its original maturity date, the unamortized balance of debt issuance costs are written off to interest expense or, if
significant, included in “early extinguishment of debt.” Debt issuance costs related to our revolving credit facility are classified
as an asset and are included in "prepaid expenses and other assets" in our consolidated balance sheets. All other debt issuance
costs are presented as a direct deduction from the carrying amount of the debt liability.
Derivative Instruments
At times, we may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest
rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising
prior to the issuance of debt. We enter into derivative instruments that qualify as cash flow hedges and do not enter into
derivative instruments for speculative purposes.
The interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value
of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive loss and is
subsequently reclassified into interest expense as interest is incurred on the related variable rate debt; within the next twelve
months, we expect to reclassify less than an estimated $0.1 million as an increase to interest expense. Our cash flow hedges
become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional
amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the
counterparty by monitoring the credit worthiness of the counterparty. When ineffectiveness exists, the ineffective portion of
changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period
affected. Hedge ineffectiveness did not impact earnings in 2017, 2016 or 2015, and we do not anticipate it will have a
significant effect in the future.
See Note 6 for additional disclosures relating to our two existing interest rate swap agreements.
Mortgage Notes Receivable
We have made certain mortgage loans that, because of their nature, qualify as loan receivables. At the time the loans were
made, we did not intend for the arrangement to be anything other than a financing and did not contemplate a real estate
investment. We evaluate each investment to determine whether the loan arrangement qualifies as a loan, joint venture or real
estate investment and the appropriate accounting thereon. Such determination affects our balance sheet classification of these
investments and the recognition of interest income derived therefrom. We receive additional interest, however, we never
receive in excess of 50% of the residual profit in the project, and because the borrower has either a substantial investment in the
F-10
project or has guaranteed all or a portion of our loan (or a combination thereof), the loans qualify for loan accounting. The
amounts under these arrangements are presented as mortgage notes receivable at December 31, 2017 and 2016.
Mortgage notes receivable are recorded at cost, net of any valuation adjustments. Interest income is accrued as earned.
Mortgage notes receivable are considered past due based on the contractual terms of the note agreement. On a quarterly basis,
we evaluate the collectability of each mortgage note receivable based on various factors which may include payment history,
expected fair value of the collateral securing the loan, internal and external credit information and/or economic trends. A loan is
considered impaired when, based upon current information and events, it is probable that we will be unable to collect all
amounts due under the existing contractual terms. When a loan is considered impaired, the amount of the loss accrual is
calculated by comparing the carrying amount of the mortgage note receivable to the present value of expected future cash
flows. Since our loans are collateralized by a first mortgage, the loans have risk characteristics similar to the risks in owning
commercial real estate.
At December 31, 2017 and 2016, we had two mortgage notes receivable, with aggregate carrying amounts of $30.4 million and
$29.9 million, respectively, with a weighted average interest rate of 10.0% and 9.9%, respectively, which were secured by first
mortgages on retail buildings.
Share Based Compensation
We grant share based compensation awards to employees and trustees typically in the form of restricted common shares,
common shares, and options. We measure share based compensation expense based on the grant date fair value of the award
and recognize the expense ratably over the requisite service period, which is typically the vesting period. See Note 12 for
further discussion regarding our share based compensation plans and policies. Effective January 1, 2017, we adopted ASU
2016-09, "Compensation-Stock Compensation," which impacts accounting for forfeitures and the classification for shares
withheld for employee taxes on the Statement of Cash Flows. See "Recent Accounting Pronouncements" for further discussion.
Variable Interest Entities
Certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have the characteristics of a controlling financial
interest qualify as VIEs. VIEs are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE
has both the power to direct the activities that most significantly impact economic performance of the VIE and the obligation to
absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We have 17 entities that meet the criteria of a VIE in which we hold a variable interest. For each of these entities we control the
significant operating decisions and consequently have the power to direct the activities that most significantly impact the
economic performance of the entities. As we also have the obligation to absorb the majority of the losses and/or the right to
receive a majority of the benefits for each of these entities, all are consolidated in our financial statements. Net real estate assets
and mortgage payables related to variable interest entities included in our consolidated balance sheets were approximately $1.4
billion and $460.4 million, respectively, as of December 31, 2017, and $1.0 billion and $439.1 million, respectively, as of
December 31, 2016.
In addition, our equity method investments in the Pike & Rose hotel joint venture and the La Alameda shopping center are also
considered variable interests in a VIE. As we do not control the activities that most significantly impact the
economic performance of the joint ventures, we are not the primary beneficiary and do not consolidate. As of December 31,
2017 and 2016 our investment in the joint ventures and maximum exposure to loss was $23.9 million and $13.5 million,
respectively.
We have also evaluated our mortgage notes receivable investments and determined that the entities obligated under the
mortgage notes are not VIEs. Our equity method investments and mortgage notes receivable balances are presented separately
in our consolidated balance sheets.
Redeemable Noncontrolling Interests
We have certain noncontrolling interests that are redeemable for cash upon the occurrence of an event that is not solely in our
control and therefore are classified outside of permanent equity. We adjust the carrying amounts of these noncontrolling
interests that are currently redeemable to redemption value at the balance sheet date. Adjustments to the carrying amount to
reflect changes in redemption value are recorded as adjustments to additional paid-in capital in shareholders' equity. These
amounts are classified within the mezzanine section of the consolidated balance sheets.
F-11
The following table provides a rollforward of the redeemable noncontrolling interests:
Beginning balance.............................................................................................................................. $
Contributions.................................................................................................................................
Net income ....................................................................................................................................
Distributions & Redemptions........................................................................................................
Change in redemption value .........................................................................................................
Ending balance................................................................................................................................... $
Year Ended
December 31,
2017
2016
(In thousands)
143,694
$
137,316
11,109
3,874
(6,914)
(10,606)
141,157
—
2,713
(16,426)
20,091
$
143,694
On January 12, 2017, we exercised our purchase option on non-controlling interests in San Antonio Center for $2.6 million of
cash and 44,195 of downREIT operating partnership units.
On February 12, 2016, we acquired the 10% noncontrolling interest in the partnership that owns our Hollywood Blvd project
for $13.0 million, bringing our ownership interest to 100%.
Income Taxes
We operate in a manner intended to enable us to qualify as a REIT for federal income tax purposes. A REIT that distributes at
least 90% of its taxable income to its shareholders each year and meets certain other conditions is not taxed on that portion of
its taxable income which is distributed to its shareholders. Therefore, federal income taxes on our taxable income have been
and are generally expected to be immaterial. We are obligated to pay state taxes, generally consisting of franchise or gross
receipts taxes in certain states. Such state taxes also have not been material.
We have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, which we refer to as a TRS. In general, a TRS
may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal
Revenue Code of 1986, as amended (the “Code”). A TRS is subject to federal and state income taxes. Our TRS activities have
not been material.
With few exceptions, we are no longer subject to U.S. federal, state, and local tax examinations by tax authorities for years
before 2013. As of December 31, 2017 and 2016, we had no material unrecognized tax benefits. While we currently have no
material unrecognized tax benefits, as a policy, we recognize penalties and interest accrued related to unrecognized tax benefits
as income tax expense.
Segment Information
Our primary business is the ownership, management, and redevelopment of retail and mixed-use properties. We review
operating and financial information for each property on an individual basis and therefore, each property represents an
individual operating segment. We evaluate financial performance using property operating income, which consists of rental
income, other property income and mortgage interest income, less rental expenses and real estate taxes. No individual property
constitutes more than 10% of our revenues or property operating income and we have no operations outside of the United
States of America. Therefore, we have aggregated our properties into one reportable segment as the properties share similar
long-term economic characteristics and have other similarities including the fact that they are operated using consistent
business strategies, are typically located in major metropolitan areas, and have similar tenant mixes.
F-12
Description
Date of
Adoption
Effect on the financial statements or
significant matters
Recent Accounting Pronouncements
Standard
Recently adopted:
ASU 2016-09, March
2016, Compensation-
Stock Compensation
(Topic 718):
Improvements to
Employee Share-
Based Payment
Accounting
ASU 2017-01, January
2017, Business
Combinations (Topic
805): Clarifying the
Definition of a
Business
January
2017
January
2017
This ASU simplifies the accounting for share-
based payment transactions, including a
policy election option with respect to
accounting for forfeitures either as they occur
or estimating forfeitures (as was previously
required), as well as increasing the amount an
employer can withhold to cover income taxes
on equity awards. Additionally, it requires the
cash paid to a taxing authority when shares
are withheld to pay employee taxes to be
classified as a "financing activity" rather than
an "operating activity," as was done
previously on the Statement of Cash Flows.
This ASU changes the definition of a business
to exclude acquisitions where substantially all
of the fair value of the assets acquired are
concentrated in a single identifiable asset or a
group of similar identifiable assets. Given this
change in definition, we believe most of our
shopping center acquisitions will no longer be
considered business combinations, but rather
asset acquisitions.
Adopted Subsequent to December 31, 2017:
ASU 2016-15, August
2016, Statement of
Cash Flows (Topic
230): Classification of
Certain Cash Receipts
and Cash Payments
This ASU provides classification guidance for
eight specific topics including debt
extinguishment costs, contingent
consideration payments made after a business
combination, and distributions received from
equity method investees.
ASU 2016-18,
November 2016,
Statement of Cash
Flows (Topic 203) -
Restricted Cash
This ASU requires that the statement of cash
flows explain the change during the period in
the total of cash, cash equivalents, and
amounts generally described as restricted cash
or cash equivalents. Amounts generally
described as restricted cash and equivalents
should be included with cash and cash
equivalents when reconciling the beginning
and end of period total amounts on the
statement of cash flows.
January
2018
January
2018
F-13
The adoption of this standard
resulted in accounting for forfeitures
as they occur, and we have recorded
the cumulative impact on the
adoption date as a $0.1 million
adjustment to additional paid-in
capital and accumulated dividends in
excess of net income. The amounts
reclassified from "operating
activities" to "financing activities"
for shares withheld for employee
taxes was $4.5 million and $9.2
million, respectively, for 2016 and
2015.
The largest impact of this standard is
that transaction costs are capitalized
for asset acquisitions rather than
expensed when they are considered
business combinations.
Based on acquisitions in the last
several years, transaction costs for a
single shopping center acquisition
have typically ranged from $0.2
million to $2.4 million with
significantly higher transaction costs
expected for an acquisition of a
larger portfolio. We are applying the
new guidance prospectively. Our
acquisitions during the year ended
December 31, 2017 (further
discussed in Note 3) qualified as
asset acquisitions and consequently,
all transaction costs were capitalized
after the adoption date.
This standard will require
classification changes, however, it is
not expected to have a significant
impact to our consolidated financial
statements.
This standard will require
reclassification of certain restricted
cash amounts on the consolidated
statement of cash flows, but is not
expected to have a significant impact
to our consolidated financial
statements.
Date of
Adoption
January
2018
Effect on the financial statements or
significant matters
Currently, gains on contracted
condominium sales are recognized
using the percentage-of-completion
method, with the gain recognized
once certain criteria have been met
in advance of legal closing (see
further discussion in the "Revenue
Recognition" section of Note 2 to
the consolidated financial
statements). Under the new
guidance, condominium sale gains
will be recognized as the
condominium units are legally sold,
which will typically be upon closing.
The reversal of the gain will be
recognized through equity, and will
be reflected in accumulated
dividends in excess of net income.
Most of our revenue is accounted for
under the leasing standard, and
therefore is not subject to this
standard.
With the exception of condominium
sales, the adoption of the standard
will not have a significant impact on
our consolidated financial
statements.
We will implement the new revenue
recognition guidance retrospectively
with the cumulative effect
recognized in accumulated dividends
in excess of net income at the date of
initial application.
Standard
Revenue from
Contracts with
Customers (Topic 606)
and related updates:
ASU 2014-09, May
2014, Revenue from
Contracts with
Customers
ASU 2015-14,
August 2015,
Revenue from
Contracts with
Customers: Deferral
of the Effective Date
ASU 2016-08,
March 2016,
Revenue from
Contracts with
Customers:
Principal versus
Agent
Considerations
ASU 2016-10, April
2016, Revenue from
Contracts with
Customers:
Identifying
Performance
Obligations and
Licensing
ASU 2016-12, May
2016, Revenue from
Contracts with
Customers:
Narrow-Scope
Improvements and
Practical Expedients
ASU 2016-20,
December 2016,
Revenue from
Contracts with
Customers:
Technical
Corrections and
Improvements
Description
In May 2014, the the FASB issued ASU
2014-09, "Revenue from Contracts with
Customers." ASU 2014-09 as amended and
interpreted by ASU 2015-14, ASU 2016-08,
ASU 2016-10, ASU 2016-12, and ASU
2016-20, supersedes nearly all existing
revenue recognition guidance under GAAP
and replaces it with a core revenue
recognition principle, that an entity will
recognize revenue when it transfers control of
promised goods or services to customers in an
amount that reflects the consideration to
which the entity expects to be entitled in
exchange for those goods or services, and
creates a five-step model for revenue
recognition in accordance with this principle.
ASU 2014-09 also requires new disclosures in
both interim and annual reporting periods.
The guidance in ASU 2014-09 does not apply
to contracts within the scope of ASC 840,
Leases.
ASU 2016-08 clarifies how to identify the
unit of accounting for the principal versus
agent evaluation, how to apply the control
principle to certain types of arrangements,
such as service transactions, and reframed the
indicators in the guidance to focus on
evidence that an entity is acting as a principal
rather than as an agent.
ASU 2016-10 clarifies the existing guidance
on identifying performance obligations and
licensing implementation.
ASU 2016-12 adds practical expedients
related to the transition for contract
modifications and further defines a completed
contract, clarifies the objective of the
collectability assessment and how revenue is
recognized if collectability is not probable,
and when non-cash considerations should be
measured.
ASU 2016-20 corrects or improves guidance
in thirteen narrowly focused aspects of the
guidance.
The standard allows for either "full
retrospective" adoption, meaning the standard
is applied to all of the periods presented, or
"modified retrospective" adoption, meaning
the cumulative impact of applying the
standard is recognized in accumulated
dividends in excess of net income on the date
of application.
F-14
Standard
ASU 2017-05,
February 2017, Other
Income - Gains and
Losses from the
Recognition of
Nonfinancial Assets
(Subtopic 610-20):
Clarifying the Scope
of Asset Derecognition
Guidance and
Accounting for Partial
Sales of Nonfinancial
Assets
Description
This ASU clarifies that ASC 610-20 applies to
all nonfinancial assets (including real estate)
for which the counterparty is not a customer
and also clarifies that all businesses are
derecognized using the deconsolidation
guidance. Additionally, it defines an
insubstance nonfinancial asset as a financial
asset that is promised to a counterparty in a
contract in which substantially all of the fair
value of the assets promised in the contract is
concentrated in nonfinancial assets, which
excludes cash or cash equivalents and
liabilities.
Date of
Adoption
January
2018
Effect on the financial statements or
significant matters
The new guidance is expected to
impact the gain recognized when a
real estate asset is sold to a non-
customer and a noncontrolling
interest is retained.
Based on our historical transactions,
this standard is not expected to have
a significant impact to our
consolidated financial statements.
Under the current guidance, a partial sale is
recognized and carryover basis is used for the
retained interest, however, the new guidance
eliminates the use of carryover basis and
generally requires a full gain to be recognized
for prospective disposals of nonfinancial
assets.
The ASU clarifies when changes to the terms
or conditions of a share-based payment award
must be accounted for as modifications.
Under the new guidance, an entity will not
apply modification accounting if the awards'
fair value, vesting conditions, and the
classification of the award as equity or a
liability are the same immediately before and
after the change. The new guidance is applied
prospectively to awards granted or modified
after the adoption date.
This ASU significantly changes the
accounting for leases by requiring lessees to
recognize assets and liabilities for leases
greater than 12 months on their balance
sheet. The lessor model stays substantially the
same; however, there were modifications to
conform lessor accounting with the lessee
model, eliminate real estate specific guidance,
further define certain lease and non-lease
components, and change the definition of
initial direct costs of leases requiring
significantly more leasing related costs to be
expensed upfront.
This ASU changes the impairment model for
most financial assets and certain other
instruments, requiring the use of an "expected
credit loss" model and adding more disclosure
requirements.
ASU 2017-09, May
2017, Compensation-
Stock Compensation
(Topic 718): Scope of
Modification
Accoutning
Not Yet Adopted:
ASU 2016-02,
February 2016, Leases
(Topic 842)
ASU 2016-13, June
2016, Financial
Instruments - Credit
Losses (Topic 326)
January
2018
This standard is not expected to have
a significant impact to our
consolidated financial statements.
January
2019
We are currently assessing the
impact of this standard to our
consolidated financial statements.
January
2020
We are currently assessing the
impact of this standard to our
consolidated financial statements.
F-15
Consolidated Statements of Cash Flows—Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows:
SUPPLEMENTAL DISCLOSURES:
Total interest costs incurred
Interest capitalized
Interest expense
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Mortgage loans refinanced
Mortgage loans assumed with acquisition
DownREIT operating partnership units issued with acquisition
DownREIT operating partnership units redeemed for common shares
Shares issued under dividend reinvestment plan
Year Ended December 31,
2017
2016
2015
(In thousands)
$
$
$
$
$
$
$
$
$
125,684
(25,559)
100,125
105,201
352
166,823
79,401
5,918
2,569
2,017
$
$
$
$
$
$
$
$
$
113,016
(18,022)
94,994
90,185
296
$
$
$
$
— $
110,675
(18,122)
92,553
116,335
274
—
34,385
$
89,516
— $
$
18,679
2,017
$
7,742
4,114
1,977
Capitalized lease costs are direct costs incurred which were essential to originate a lease and would not have been incurred had
the leasing transaction not taken place. These costs include third party commissions and salaries and personnel costs related to
obtaining a lease. Capitalized lease costs are amortized over the initial term of the related lease which generally ranges from
three to ten years. We view these lease costs as part of the up-front initial investment we made in order to generate a long-term
cash inflow and therefore, we classify cash outflows related to leasing costs as an investing activity in our consolidated
statements of cash flows.
NOTE 3—REAL ESTATE
A summary of our real estate investments and related encumbrances is as follows:
December 31, 2017
Retail and mixed-use properties ...................................................
Retail properties under capital leases ...........................................
Residential ....................................................................................
December 31, 2016
Retail and mixed-use properties ...................................................
Retail properties under capital leases ...........................................
Residential ....................................................................................
Cost
Accumulated
Depreciation and
Amortization
(In thousands)
Encumbrances
$
$
$
$
7,500,929
123,346
10,786
7,635,061
6,621,170
127,359
10,544
6,759,073
$
$
$
$
(1,821,046) $
(46,140)
(9,358)
(1,876,544) $
(1,677,938) $
(42,308)
(8,988)
(1,729,234) $
470,720
71,556
20,785
563,061
449,896
71,590
21,221
542,707
Retail and mixed-use properties includes the residential portion of Assembly Row, Bethesda Row, Chelsea Commons,
Congressional Plaza, Pike & Rose, Santana Row, and Towson Residential (Flats @ 703). The residential property investment is
our investment in Rollingwood Apartments.
2017 Property Acquisitions and Dispositions
On February 1, 2017, we acquired a leasehold interest in Hastings Ranch Plaza, a 274,000 square foot shopping center in
Pasadena, California for $29.5 million. The land is subject to a long-term ground lease that expires on April 30, 2054.
Approximately $21.5 million of assets acquired were allocated to lease intangibles and included within other assets.
Approximately $15.2 million of net assets acquired were allocated to lease liabilities and included in other liabilities.
F-16
On March 31, 2017, we acquired the fee interest in Riverpoint Center, a 211,000 square foot shopping center in the Lincoln
Park neighborhood of Chicago, Illinois for $107.0 million. Approximately $1.0 million and $12.3 million of net assets acquired
were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively.
We leased three parcels of land at our Assembly Row property to two ground lessees. Both lessees exercised purchase options
under the related ground leases. The sale transaction related to the purchase option on one of our ground leases was completed
on April 4, 2017 for a sales price of $36.0 million. On June 28, 2017, the sale transactions related to the purchase options on
our other two ground lease parcels were completed for a total sales price of $17.3 million. The net gain recognized in
connection with these transactions was approximately $15.4 million. At December 31, 2016, the total cost basis of the related
land was $33.9 million and is included in "assets held for sale" on our consolidated balance sheet.
On May 19, 2017, we acquired the fee interest in a 71,000 square foot, mixed-use property located in Berkeley, California
based on a gross value of $23.9 million. The acquisition was completed through a newly formed entity for which we own a
90% controlling interest. Approximately $0.8 million and $0.3 million of net assets acquired were allocated to other assets for
"above market leases" and other liabilities for "below market leases," respectively, and approximately $2.4 million was
allocated to noncontrolling interests.
On August 2, 2017, we acquired an approximately 90% interest in a joint venture that owns six shopping centers in Los
Angeles County, California based on a gross value of $357 million, including the assumption of $79.4 million of mortgage
debt. Approximately $7.8 million of assets acquired were allocated to lease intangibles and included within other assets,
approximately $36.2 million of net assets acquired were allocated to lease liabilities and included in other liabilities, and
approximately $30.6 million was allocated to noncontrolling interests. That joint venture also acquired a 24.5% interest in La
Alameda, a shopping center in Walnut Park, California for $19.8 million. The property has $41.0 million of mortgage debt, of
which the joint venture's share is approximately $10 million. Additional information on the properties is listed below:
Property
City/State
Azalea
Bell Gardens
La Alameda
Olivo at Mission Hills (1)
Plaza Del Sol
Plaza Pacoima
Sylmar Towne Center
South Gate, CA
Bell Gardens, CA
Walnut Park, CA
Mission Hills, CA
South El Monte, CA
Pacoima, CA
Sylmar, CA
GLA
(in square feet)
222,000
330,000
245,000
155,000
48,000
204,000
148,000
1,352,000
(1) Property is currently being redeveloped. GLA reflects approximate square footage once the property is open and operating.
The following unaudited pro forma financial data includes the total revenues, operating expenses (including approximately
$11.5 million and $11.4 million of depreciation and amortization expense for the years ended December 31, 2017 and 2016,
respectively), and interest expense/financing costs related to the properties acquired on August 2, 2017 as if they had occurred
on January 1, 2016. The pro forma financial information is presented for informational purposes only and may not be indicative
of what actual results of income would have been, nor does it represent the results of income for future periods.
Total revenue
Net income available for common shareholders
Year Ended December 31,
2017
2016
(in millions) (unaudited)
$
$
872.9
284.6
826.6
244.3
On August 25, 2017, we sold our property located at 150 Post Street in San Francisco, California for a sales price of $69.3
million, resulting in a gain of $45.2 million.
On September 25, 2017, we sold our North Lake Commons property in Lake Zurich, Illinois for a sales price of $15.6 million,
resulting in a gain of $4.9 million.
On December 28, 2017, we sold a parcel of land at our Bethesda Row property in Bethesda, Maryland for a sales price of $8.5
million, resulting in a gain of $6.5 million.
F-17
For the year ended December 31, 2017, we recognized a $5.4 million gain, net of $1.4 million of income taxes, related to the
sale of condominiums at our Assembly Row property based on the percentage-of-completion method. In connection with
recording the gain, we recognized a receivable of $67.1 million as of December 31, 2017. The closing of the Assembly Row
condominium sales is expected to commence in 2018. As of December 31, 2017, no gain has been recognized for contracted
condominium sales at Pike & Rose, as not all of the criteria necessary for profit recognition have been met.
2016 Property Acquisitions and Disposition
On January 13, 2016, we acquired our partner's 70% interest in our joint venture arrangement (the "Partnership") with affiliates
of a discretionary fund created and advised by Clarion Partners ("Clarion") for $153.7 million, which included the payment of
$130.0 million of cash and the assumption of mortgage loans totaling $34.4 million. As a result of the transaction, we gained
control of the six underlying properties, and effective January 13, 2016, have consolidated the properties. We also recognized a
gain on acquisition of the controlling interest of $25.7 million related to the difference between the carrying value and fair
value of the previously held equity interest. Approximately $7.3 million and $4.9 million of net assets acquired were allocated
to other assets for "above market leases," and other liabilities for "below market leases," respectively. We incurred $0.2 million
of acquisition costs, of which $0.1 million were incurred in 2016, and included in "general and administrative expenses" on the
consolidated statements of comprehensive income in 2016 and 2015.
On May 12, 2016, an unconsolidated joint venture that we hold an interest in sold a building in Coconut Grove, Florida. Our
share of the gain, net of noncontrolling interests, was $0.5 million.
On July 26, 2016, we acquired an additional building in the Coconut Grove neighborhood of Miami, Florida for $5.9 million
through our CocoWalk LLC entity. We incurred $0.2 million in acquisition costs which are included in "general and
administrative expenses" in 2016.
On November 7, 2016, we acquired a building adjacent to our Barcroft Plaza property for $5.3 million, and incurred $0.1
million of acquisition costs which are included in "general and administrative expenses" in 2016.
NOTE 4—ACQUIRED IN-PLACE LEASES
Acquired lease assets are included in prepaid expenses and other assets and comprise above market leases where we are the
lessor and below market leases where we are the lessee. Acquired lease liabilities are included in other liabilities and deferred
credits and comprise below market leases where we are the lessor and above market leases where we are the lessee. The
following is a summary of our acquired lease assets and liabilities:
Above market leases, lessor
Below market leases, lessee
Total
Below market leases, lessor
Above market leases, lessee
Total
December 31, 2017
December 31, 2016
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
$
$
$
$
52,393
34,604
86,997
$
$
(193,085) $
(9,084)
(202,169) $
(in thousands)
(31,406) $
(1,705)
(33,111) $
56,716
560
57,276
$
$
45,327
13,237
58,564
$
$
(138,253) $
(2,796)
(141,049) $
(28,085)
(924)
(29,009)
48,928
271
49,199
F-18
The value allocated to in-place leases where we are the lessor is amortized over the related lease term and reflected as
additional rental income for below market leases or a reduction of rental income for above market leases in the consolidated
statements of comprehensive income. The related amortization of in-place leases where we are the lessee is reflected as
additional rental expense for below market leases or a reduction of rental expenses for above market leases in the consolidated
statements of comprehensive income. The following is a summary of acquired lease amortization:
Amortization of above market leases, lessor
Amortization of below market leases, lessor
Net increase in rental income
Amortization of below market leases, lessee
Amortization of above market leases, lessee
Net increase in rental expense
Year Ended December 31,
2017
2016
(in thousands)
2015
$
$
$
$
(6,005) $
10,726
4,721
$
781
(290)
491
$
$
(6,726) $
8,551
1,825
$
255
(135)
120
$
$
(4,425)
7,130
2,705
255
(135)
120
The following is a summary of the remaining weighted average amortization period for our acquired lease assets and acquired
lease liabilities:
Above market leases, lessor
Below market leases, lessee
Below market leases, lessor
Above market leases, lessee
December 31, 2017
4.7 years
41.6 years
19.8 years
16.9 years
The amortization for acquired in-place leases during the next five years and thereafter, assuming no early lease terminations, is
as follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Acquired Lease
Assets
Acquired Lease
Liabilities
(In thousands)
$
$
5,810
3,829
3,182
2,804
2,381
35,880
53,886
$
$
9,990
9,488
8,494
7,869
7,484
101,568
144,893
F-19
NOTE 5—DEBT
The following is a summary of our total debt outstanding as of December 31, 2017 and 2016:
Principal Balance as of
December 31,
2017
2016
(Dollars in thousands)
Stated Interest
Rate as of
December 31, 2017
Stated Maturity Date
as of
December 31, 2017
6.38%
5.54%
5.62%
5.91%
5.39%
5.23%
3.35%
4.20%
3.73%
4.06%
3.83%
3.77%
4.65%
5.36%
March 1, 2018
May 1, 2019
September 1, 2020
January 31, 2021
June 6, 2021
December 1, 2021
January 1, 2022
January 10, 2022
November 1, 2025
August 1, 2026
June 5, 2027
September 1, 2027
July 1, 2029
January 15, 2031
$
10,792
21,283
68,634
4,553
—
—
52,705
72,726
—
—
175,000
42,536
11,500
6,576
466,305
4,812
471,117
275,000
LIBOR + 0.90%
— LIBOR + 0.825%
November 21, 2018
April 20, 2020
11.31% Various through 2028
Description of Debt
Mortgages payable
The Grove at Shrewsbury (West)
Rollingwood Apartments
The Shops at Sunset Place
29th Place
Sylmar Towne Center
Plaza Del Sol
THE AVENUE at White Marsh
Montrose Crossing
Azalea
Bell Gardens
Plaza El Segundo
The Grove at Shrewsbury (East)
Brook 35
Chelsea
Subtotal
Net unamortized premium and debt issuance
costs
Total mortgages payable
Notes payable
Term loan
Revolving credit facility
Various
Subtotal
Net unamortized debt issuance costs
Total notes payable
Senior notes and debentures
5.90% notes
2.55% notes
3.00% notes
2.75% notes
3.95% notes
7.48% debentures
3.25% notes
6.82% medium term notes
4.50% notes
3.625% notes
Subtotal
$
10,545
20,820
66,603
4,341
17,362
8,579
52,705
71,054
40,000
13,184
125,000
43,600
11,500
6,268
491,561
(56)
491,505
275,000
41,000
4,819
320,819
(554)
320,265
—
250,000
250,000
275,000
300,000
29,200
475,000
40,000
550,000
250,000
2,419,200
5,247
280,247
(1,096)
279,151
150,000
250,000
250,000
275,000
300,000
29,200
—
40,000
450,000
250,000
1,994,200
Net unamortized discount and debt issuance
costs
Total senior notes and debentures
Capital lease obligations
Various
Total debt and capital lease obligations
(17,760)
2,401,440
(17,606)
1,976,594
71,556
$ 3,284,766
71,590
$ 2,798,452
On June 5, 2017 we refinanced the $175.0 million mortgage loan on Plaza El Segundo at a face amount of $125.0 million and
repaid the remaining $50.0 million at par. The new mortgage loan bears interest at 3.83% and matures on June 5, 2027.
On June 23, 2017, we issued $400.0 million aggregate principal amount of fixed rate senior unsecured notes in two separate
series. We issued $300.0 million of 3.25% notes that mature on July 15, 2027, which were offered at 99.083% of the principal
amount, with a yield to maturity of 3.358%. Additionally, we issued $100.0 million of 4.50% notes due December 1, 2044. The
4.50% notes were offered at 105.760% of the principal amount, with a yield to maturity of 4.143%, and have the same terms
and are of the same series as the senior notes first issued on November 14, 2014. Our net proceeds from the June note offering
after net issuance premium, underwriting fees and other costs was approximately $399.5 million.
F-20
5.90%
2.55%
3.00%
2.75%
3.95%
7.48%
3.25%
6.82%
4.50%
3.625%
April 1, 2020
January 15, 2021
August 1, 2022
June 1, 2023
January 15, 2024
August 15, 2026
July 15, 2027
August 1, 2027
December 1, 2044
August 1, 2046
Various Various through 2106
In connection with the acquisition of six shopping centers in Los Angeles County, California on August 2, 2017 (as further
discussed in Note 3), we assumed mortgage loans with a face amount of $79.4 million and a fair value of $80.1 million. The
mortgage loans are secured by the individual properties with the following contractual terms:
Sylmar Towne Center
$
Plaza Del Sol
Azalea
Bell Gardens
Principal
(in millions)
Stated Interest Rate
Maturity Date
17.5
8.6
40.0
13.3
5.39%
June 6, 2021
5.23% December 1, 2021
3.73% November 1, 2025
4.06%
August 1, 2026
On August 31, 2017, we refinanced the $41.8 million mortgage loan on The Grove at Shrewsbury (East) at a face amount of
$43.6 million. The new mortgage loan bears interest at 3.77% and matures on September 1, 2027.
On December 21, 2017, we issued $175.0 million aggregate principal amount of 3.25% senior unsecured notes due July 15,
2027. The notes have the same terms and are of the same series as the $300.0 million senior notes issued on June 23, 2017. The
notes were offered at 99.404% of the principal amount, with a yield to maturity of 3.323%. Our net proceeds from the
December note offering after issuance discount, underwriting fees and other costs were approximately $172.5 million. The
proceeds were used on December 31, 2017 to repay our $150.0 million 5.90% notes prior to the original maturity date of
April 1, 2020. The redemption price of $164.1 million included a make-whole premium of $11.9 million and accrued but
unpaid interest of $2.2 million. The make-whole premium is included in "early extinguishment of debt" in 2017.
During 2017, 2016 and 2015, the maximum amount of borrowings outstanding under our $800.0 million revolving credit
facility was $344.0 million, $251.5 million and $324.0 million, respectively. The weighted average amount of borrowings
outstanding was $147.5 million, $77.3 million and $109.7 million, respectively, and the weighted average interest rate, before
amortization of debt fees, was 1.9%, 1.3% and 1.1%, respectively. The revolving credit facility requires an annual facility fee of
$1.0 million. At December 31, 2017, our revolving credit facility had $41.0 million outstanding, and had no balance
outstanding at December 31, 2016.
Our revolving credit facility, term loan, and certain notes require us to comply with various financial covenants, including the
maintenance of minimum shareholders’ equity and debt coverage ratios and a maximum ratio of debt to net worth. As of
December 31, 2017, we were in compliance with all default related debt covenants.
Scheduled principal payments on mortgages payable, notes payable, senior notes and debentures as of December 31, 2017 are
as follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Mortgages
Payable
Notes
Payable
Senior Notes and
Debentures
Total
Principal
(In thousands)
$
$
16,228
25,820
65,539
30,541
117,018
236,415
491,561
$
275,506 (1)
$
— $
291,734
563
41,624 (2)
694
771
1,661
—
—
250,000
250,000
26,383
107,163
281,235
367,789
1,919,200
2,157,276
$
320,819
$
2,419,200
$
3,231,580
(3)
_____________________
(1) Our $275.0 million unsecured term loan matures on November 21, 2018, subject to a one-year extension at our option.
(2) Our $800.0 million revolving credit facility matures on April 20, 2020, subject to two six-month extensions at our
option. As of December 31, 2017, there was $41.0 million outstanding under this credit facility.
(3) The total debt maturities differ from the total reported on the consolidated balance sheet as of December 31, 2017 due
to the unamortized premium/(discount) and debt issuance costs on mortgage loans, notes payable, and senior notes.
F-21
Future minimum lease payments and their present value for property under capital leases as of December 31, 2017, are as
follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Less amount representing interest
Present value
(In thousands)
$
$
5,800
5,800
5,800
5,800
5,810
142,425
171,435
(99,879)
71,556
NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an
orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:
1.
2.
3.
Level 1 Inputs—quoted prices in active markets for identical assets or liabilities
Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 Inputs—prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is
significant to the fair value measurement.
Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. The fair value of our
mortgages payable, notes payable and senior notes and debentures is sensitive to fluctuations in interest rates. Quoted market
prices (Level 1) were used to estimate the fair value of our marketable senior notes and debentures and discounted cash flow
analysis (Level 2) is generally used to estimate the fair value of our mortgages and notes payable. Considerable judgment is
necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily
indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying
amount and fair value of our mortgages payable, notes payable and senior notes and debentures is as follows:
December 31, 2017
December 31, 2016
Carrying
Value
Fair Value
Carrying
Value
Fair Value
(In thousands)
Mortgages and notes payable ...................................................... $
811,770
Senior notes and debentures ........................................................ $ 2,401,440
$
824,419
$
750,268
$
760,260
$ 2,498,445
$ 1,976,594
$ 2,015,973
As of December 31, 2017, we have two interest rate swap agreements with a notional amount of $275.0 million that are
measured at fair value on a recurring basis. The interest rate swap agreements fix the variable portion of our $275.0 million
term loan at 1.72% through November 1, 2018. The fair values of the interest rate swap agreements are based on the estimated
amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing
models and interest rate related observable inputs. The fair value of our swaps at December 31, 2017 was an asset of less than
$0.1 million and is included in "prepaid expenses and other assets" on our consolidated balance sheets, and at December 31,
2016 was a liability of $2.6 million, and is included in "accounts payable and accrued expenses." The value of our interest rate
swaps increased $2.6 million and $1.5 million (including $1.8 million and $3.5 million respectively, reclassified from other
comprehensive income/(loss) to earnings) for 2017 and 2016, respectively. These changes in value are included in
F-22
"accumulated other comprehensive income (loss)." A summary of our financial assets/(liabilities) that are measured at fair
value on a recurring basis, by level within the fair value hierarchy is as follows:
December 31, 2017
December 31, 2016
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In thousands)
Interest rate swaps .................... $
— $
22
$
— $
22
$
— $ (2,577) $
— $
(2,577)
NOTE 7—COMMITMENTS AND CONTINGENCIES
We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business.
Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these
matters.
We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable
and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss
is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any
other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. Other than as
described below, we do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could
have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject
to inherent uncertainties. Also under our leases, tenants are typically obligated to indemnify us from and against all liabilities,
costs and expenses imposed upon or asserted against us (1) as owner of the properties due to certain matters relating to the
operation of the properties by the tenant, and (2) where appropriate, due to certain matters relating to the ownership of the
properties prior to their acquisition by us.
In November 2016, we were included as a defendant in a class action lawsuit, in the circuit court for Montgomery County,
Maryland, related to predatory towing by a third party company we had retained to provide towing services at several of our
properties in Montgomery County, Maryland. We, individually and collectively with other members of the more than 500
property owner defendant class, have undertaken numerous legal actions to challenge property owner liability in this case,
including challenging the certification of the class as a matter of law; however, all of these legal actions have been
unsuccessful. Given the costs and risks of continuing litigation on this matter, we elected to participate in a settlement for
which our share is approximately $0.4 million. We expect that this settlement amount will be reimbursed by insurance. The
settlement did not cover liability for certain tows that were included in the lawsuit that the defendant class believes cannot be
pursued because of the statute of limitations. Accordingly, we do not believe we should have any additional liability for these
remaining tows; however, if we are unsuccessful in dismissing these tows from the litigation, our liability would be
approximately $0.2 million assuming payment on the same terms as the settlement.
We are self-insured for general liability costs up to predetermined retained amounts per claim, and we believe that we maintain
adequate accruals to cover our retained liability. We currently do not maintain third party stop-loss insurance policies to cover
liability costs in excess of predetermined retained amounts. Our accrual for self-insurance liability is determined by
management and is based on claims filed and an estimate of claims incurred but not yet reported. Management considers a
number of factors, including third-party actuarial analysis, previous experience in our portfolio, and future increases in costs of
claims, when making these determinations. If our liability costs exceed these accruals, it will reduce our net income.
We reserve for estimated losses, if any, associated with warranties given to a buyer at the time real estate is sold or other
potential liabilities relating to that sale, taking any insurance policies into account. These warranties may extend up to ten years
and require significant judgment. If changes in facts and circumstances indicate that warranty reserves are understated, we will
accrue additional reserves at such time a liability has been incurred and the costs can be reasonably estimated. Warranty
reserves are released once the legal liability period has expired or all related work has been substantially completed. During
2016, the legal liability period relating to our latent defect warranty on condominiums sold at Santana Row expired. Upon
expiration, we released the remaining $4.9 million warranty reserve which is included in "gain on sale of real estate and change
in control of interests" in the consolidated statement of comprehensive income for the year ended December 31, 2016.
At December 31, 2017 and 2016, our reserves for general liability costs were $3.3 million and $2.8 million, respectively, and
are included in “accounts payable and accrued expenses” in our consolidated balance sheets. Any potential losses which exceed
our estimates would result in a decrease in our net income. During 2017 and 2016, we made payments from these reserves of
$1.4 million and $2.0 million, respectively. Although we consider the reserve to be adequate, there can be no assurance that the
reserve will prove to be adequate over-time to cover losses due to the difference between the assumptions used to estimate the
reserve and actual losses.
F-23
At December 31, 2017, we had letters of credit outstanding of approximately $1.3 million.
As of December 31, 2017 in connection with capital improvement, development, and redevelopment projects, the Trust has
contractual obligations of approximately $326.6 million.
We are obligated under ground lease agreements on several shopping centers requiring minimum annual payments as follows,
as of December 31, 2017:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
(In thousands)
$
$
4,583
4,737
4,749
4,757
4,873
188,132
211,831
A master lease for Mercer Mall includes a fixed purchase price option for $55 million in 2023. If we fail to exercise our
purchase option, the owner of Mercer Mall has a put option which would require us to purchase Mercer Mall for $60 million in
2025.
Under the terms of the Congressional Plaza partnership agreement, a minority partner has the right to require us and the other
minority partner to purchase its 26.63% interest in Congressional Plaza at the interest’s then-current fair market value. If the
other minority partner defaults in their obligation, we must purchase the full interest. Based on management’s current estimate
of fair market value as of December 31, 2017, our estimated maximum liability upon exercise of the put option would range
from approximately $81 million to $85 million.
A master lease for Melville Mall includes a fixed purchase price option in 2021 for $5 million. If we fail to exercise our
purchase option, the owner of Melville Mall has a put option which would require us to purchase Melville Mall in 2023 for $5
million.
The other member in Montrose Crossing has the right to require us to purchase all of its 10.1% interest in Montrose Crossing at
the interest's then-current fair market value. If the other member fails to exercise its put option, we have the right to purchase its
interest on or after December 27, 2021 at fair market value. Based on management’s current estimate of fair market value as of
December 31, 2017, our estimated maximum liability upon exercise of the put option would range from approximately $12
million to $13 million.
Two of the members in Plaza El Segundo have the right to require us to purchase their 10.0% and 11.8% ownership interests at
the interests' then-current fair market value. If the members fail to exercise their put options, we have the right to purchase each
of their interests on or after December 30, 2026 at fair market value. Based on management’s current estimate of fair market
value as of December 31, 2017, our estimated maximum liability upon exercise of the put option would range from
approximately $26 million to $29 million.
Effective January 1, 2017, the other member in The Grove at Shrewsbury and Brook 35 has the right to require us to purchase
all of its approximately 4.8% interest in The Grove at Shrewsbury and approximately 8.8% interest in Brook 35 at the interests'
then-current fair market value. Based on management's current estimate of fair market value as of December 31, 2017, our
estimated maximum liability upon exercise of the put option would range from $9 million to $10 million.
Under the terms of certain partnership agreements, the partners have the right to exchange their operating partnership units for
cash or the same number of our common shares, at our option. A total of 787,962 downREIT operating partnership units are
outstanding which have a total fair value of $104.6 million, based on our closing stock price on December 31, 2017.
NOTE 8—SHAREHOLDERS’ EQUITY
We have a Dividend Reinvestment Plan (the “Plan”), whereby shareholders may use their dividends and optional cash
payments to purchase shares. In 2017, 2016 and 2015, 17,911 shares, 15,619 shares and 16,524 shares, respectively, were
issued under the Plan.
On September 29, 2017, we issued 6,000,000 Depository Shares, each representing 1/1000th interest of 5.0% Series C
Cumulative Redeemable Preferred Share, par value $0.01 per share ("Series C Preferred Shares"), at the liquidation preference
of $25.00 per depository share (or $25,000 per Series C Preferred share) in an underwritten public offering. The Series C
F-24
Preferred Shares accrue dividends at a rate of 5.0% of the $25,000 liquidation preference per year and are redeemable at our
option on or after September 29, 2022. Additionally, they are not convertible and holders of these shares generally have no
voting rights, unless we fail to pay dividends for six or more quarters. The net proceeds after underwriting fees and other costs
were approximately $145.0 million.
As of December 31, 2017, 2016, and 2015, we had 399,896 shares of 5.417% Series 1 Cumulative Convertible Preferred
Shares (“Series 1 Preferred Shares”) outstanding that have a liquidation preference of $25 per share and par value $0.01 per
share. The Series 1 Preferred Shares accrue dividends at a rate of 5.417% per year and are convertible at any time by the
holders to our common shares at a conversion rate of $104.69 per share. The Series 1 Preferred Shares are also convertible
under certain circumstances at our election. The holders of the Series 1 Preferred Shares have no voting rights.
On November 4, 2016, we replaced our existing at-the-market (“ATM”) equity program with a new ATM equity program in
which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We
intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline,
repay amounts of outstanding under our revolving credit facility and/or for general corporate purposes. For the year ended
December 31, 2017, we issued 826,517 common shares at a weighted average price per share of $132.56 for net cash proceeds
of $108.3 million and paid $1.1 million in commissions and $0.2 million in additional offering expenses related to the sales of
these common shares. For the year ended December 31, 2016, we issued 1,156,571 common shares at a weighted average price
per share of $152.92 for net cash proceeds of $174.8 million and paid $1.8 million in commissions and $0.2 million in
additional offering expenses related to the sales of these common shares. As of December 31, 2017, we had the capacity to
issue up to $261.3 million in common shares under our ATM equity program.
NOTE 9—DIVIDENDS
The following table provides a summary of dividends declared and paid per share:
Year Ended December 31,
2017
2016
2015
Declared
Common shares...................................................................... $ 3.960
5.417% Series 1 Cumulative Convertible Preferred shares ... $ 1.354
5.0% Series C Cumulative Redeemable Preferred shares (1) $ 0.368
Paid
$ 3.940
Declared
$ 3.840
Paid
$ 3.800
Declared
$ 3.620
Paid
$ 3.550
$ 1.354
$ 1.354
$ 1.354
$ 1.354
$ 1.354
$ — $ — $ — $ — $ —
(1) Amount represents dividends per depository share, each representing 1/1000th of a share.
A summary of the income tax status of dividends per share paid is as follows:
Common shares
Ordinary dividend
Capital gain
5.417% Series 1 Cumulative Convertible Preferred shares
Ordinary dividend
Capital gain
Year Ended December 31,
2017
2016
2015
$
$
$
$
3.940
—
3.940
1.354
—
1.354
$
$
$
$
3.800
—
3.800
1.354
—
1.354
$
$
$
$
3.515
0.035
3.550
1.340
0.014
1.354
On November 1, 2017, the Trustees declared a quarterly cash dividend of $1.00 per common share, payable January 16, 2018 to
common shareholders of record on January 2, 2018.
F-25
NOTE 10—OPERATING LEASES
At December 31, 2017, our 104 predominantly retail shopping center and mixed-use properties are located in 12 states and the
District of Columbia. There are approximately 3,000 leases with 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 accounts for
more than 2.9% of annualized base rent.
Our leases with commercial property and residential tenants are classified as operating leases. Commercial property leases
generally range from three to ten years (certain leases with anchor tenants may be longer), and in addition to minimum rents,
may provide for percentage rents based on the tenant’s level of sales achieved and cost recoveries for the tenant’s share of
certain operating costs. Leases on apartments are generally for a period of 1 year or less.
As of December 31, 2017, minimum future commercial property rentals from noncancelable operating leases, before any
reserve for uncollectible amounts and assuming no early lease terminations, at our operating properties are as follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
NOTE 11—COMPONENTS OF RENTAL INCOME AND EXPENSE
The principal components of rental income are as follows:
Minimum rents
Retail and commercial
Residential
Cost reimbursement
Percentage rent
Other
Total rental income
Minimum rents include the following:
Straight-line rents
Net amortization of above and below market leases
(In thousands)
$
593,461
537,822
474,369
401,869
328,302
1,402,509
$ 3,738,332
Year Ended December 31,
2017
2016
2015
(In thousands)
$
585,178
$
549,552
$
509,825
55,416
171,528
11,148
18,191
49,465
158,042
10,977
18,547
42,797
148,110
11,911
15,169
$
841,461
$
786,583
$
727,812
Year Ended December 31,
2017
2016
2015
(In millions)
$
$
12.9
4.7
$
$
8.1
1.8
$
$
7.6
2.7
F-26
The principal components of rental expenses are as follows:
Repairs and maintenance
Utilities
Management fees and costs
Payroll
Marketing
Insurance
Ground rent
Bad debt expense
Other operating
Total rental expenses
Year Ended December 31,
2017
2016
2015
67,996
25,763
22,297
14,922
9,007
7,762
3,826
2,591
10,726
164,890
(In thousands)
64,942
$
24,968
20,823
13,832
8,520
7,758
2,561
2,375
12,547
158,326
$
$
$
$
$
62,420
23,003
18,639
12,673
9,046
7,875
2,540
1,168
10,229
147,593
NOTE 12—SHARE-BASED COMPENSATION PLANS
A summary of share-based compensation expense included in net income is as follows:
Grants of common shares and options
Capitalized share-based compensation
Share-based compensation expense
Year Ended December 31,
2017
2016
2015
(In thousands)
$
$
12,371
(1,385)
10,986
$
$
11,227
(1,310)
9,917
$
$
12,074
(868)
11,206
As of December 31, 2017, we have grants outstanding under two share-based compensation plans. In May 2010, our
shareholders approved the 2010 Performance Incentive Plan, as amended (the "2010 Plan”), which authorized the grant of share
options, common shares and other share-based awards for up to 2,450,000 common shares of beneficial interest. Our 2001
Long Term Incentive Plan (the “2001 Plan”), which expired in May 2010, authorized the grant of share options, common shares
and other share-based awards of 3,250,000 common shares of beneficial interest.
Option awards under both plans are required to have an exercise price at least equal to the closing trading price of our common
shares on the date of grant. Options and restricted share awards under these plans generally vest over three to seven years and
option awards typically have a ten-year contractual term. We pay dividends on unvested shares. Certain options and share
awards provide for accelerated vesting if there is a change in control. Additionally, the vesting on certain option and share
awards can accelerate in part or in full upon retirement based on the age of the retiree or upon termination without cause.
The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities,
term, dividend yields, employee exercises and estimated forfeitures are primarily based on historical data. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of each share award is determined
based on the closing trading price of our common shares on the grant date. No options were granted in 2017 and 2015.
The following table provides a summary of the weighted-average assumption used to value options granted in 2016:
Volatility
Expected dividend yield
Expected term (in years)
Risk free interest rate
18.8%
2.8%
6.0
1.5%
F-27
The following table provides a summary of option activity for 2017:
Outstanding at December 31, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Shares
Under
Option
259,119
—
(152,634)
—
106,485
105,939
$
$
$
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
(In years)
(In thousands)
56.66
—
65.37
—
44.18
43.62
1.2
1.1
$
$
9,451
9,451
The weighted-average grant-date fair value of options granted in 2016 was $19.52 per share. The total cash received from
options exercised during 2017, 2016 and 2015 was $10.0 million, $4.5 million and $2.0 million, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $10.7 million, $4.2 million and $2.1
million, respectively.
The following table provides a summary of restricted share activity for 2017:
Unvested at December 31, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
Shares
Weighted-Average
Grant-Date Fair
Value
$
217,353
109,815
(87,704)
(2,293)
237,171
142.70
139.31
131.55
142.09
The weighted-average grant-date fair value of stock awarded in 2017, 2016 and 2015 was $139.31, $152.70 and $141.08,
respectively. The total vesting-date fair value of shares vested during the year ended December 31, 2017, 2016 and 2015, was
$12.5 million, $13.8 million and $26.1 million, respectively.
As of December 31, 2017, there was $17.6 million of total unrecognized compensation cost related to unvested share-based
compensation arrangements (i.e. options and unvested shares) granted under our plans. This cost is expected to be recognized
over the next 6.4 years with a weighted-average period of 2.2 years.
Subsequent to December 31, 2017, common shares were awarded under various compensation plans as follows:
Date
January 2, 2018
February 7, 2018
February 7, 2018
Award
Vesting Term
Beneficiary
5,416 Shares
92,552 Restricted shares
488 Options
Immediate
3-4 years
5 years
Trustees
Officers and key employees
Officers and key employees
NOTE 13—SAVINGS AND RETIREMENT PLANS
We have a savings and retirement plan in accordance with the provisions of Section 401(k) of the Code. Generally, employees
can elect, at their discretion, to contribute a portion of their compensation up to a maximum of $18,000 for 2017, 2016, and
2015. Under the plan, we contribute 50% of each employee’s elective deferrals up to 5% of eligible earnings. In addition, we
may make discretionary contributions within the limits of deductibility set forth by the Code. Our full-time employees are
immediately eligible to become plan participants. Employees are eligible to receive matching contributions immediately on
their participation; however, these matching payments will not vest until their third anniversary of employment. Our expense
for the years ended December 31, 2017, 2016 and 2015 was approximately $632,000, $602,000 and $504,000, respectively.
A non-qualified deferred compensation plan for our officers and certain other employees was established in 1994 that allows
the participants to defer a portion of their income. As of December 31, 2017 and 2016, we are liable to participants for
approximately $12.8 million and $10.5 million, respectively, under this plan. Although this is an unfunded plan, we have
purchased certain investments to match this obligation. Our obligation under this plan and the related investments are both
included in the accompanying consolidated financial statements.
F-28
NOTE 14—EARNINGS PER SHARE
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation
methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends
declared and participation rights in undistributed earnings. For 2017, 2016, and 2015 we had 0.2 million weighted average
unvested shares outstanding, which are considered participating securities. Therefore, we have allocated our earnings for basic
and diluted EPS between common shares and unvested shares; the portion of earnings allocated to the unvested shares is
reflected as “earnings allocated to unvested shares” in the reconciliation below.
In the dilutive EPS calculation, dilutive stock options were calculated using the treasury stock method consistent with prior
periods. There were 682 anti-dilutive stock options in 2017, and no anti-dilutive stock options in 2016 or 2015. The
conversions of downREIT operating partnership units and 5.417% Series 1 Cumulative Convertible Preferred Shares are anti-
dilutive for all periods presented and accordingly, have been excluded from the weighted average common shares used to
compute diluted EPS.
Year Ended December 31,
2017
2016
2015
(In thousands, except per share data)
NUMERATOR
Income from continuing operations .................................................................................. $ 219,948
Less: Preferred share dividends ........................................................................................
(2,458)
(7,666)
(942)
208,882
Income from continuing operations available for common shareholders.........................
Less: Income from continuing operations attributable to noncontrolling interests...........
Less: Earnings allocated to unvested shares .....................................................................
Gain on sale of real estate and change in control of interests, net ....................................
77,632
Net income available for common shareholders, basic and diluted.................................. $ 286,514
DENOMINATOR
$ 226,425
(541)
(7,648)
(702)
217,534
$ 190,094
(541)
(8,205)
(797)
180,551
31,133
28,330
$ 248,667
$ 208,881
Weighted average common shares outstanding—basic ....................................................
72,117
70,877
68,797
Effect of dilutive securities:
Stock options..............................................................................................................
Weighted average common shares outstanding—diluted .................................................
116
72,233
172
71,049
184
68,981
EARNINGS PER COMMON SHARE, BASIC
Net income available for common shareholders........................................................ $
3.97
EARNINGS PER COMMON SHARE, DILUTED
Net income available for common shareholders........................................................ $
3.97
Income from continuing operations attributable to the Trust............................................ $ 212,282
$
$
3.51
3.50
$
$
3.04
3.03
$ 218,777
$ 181,889
F-29
NOTE 15—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
2017
Revenue
Operating income
Net income(1)
Net income attributable to the Trust(1)
Net income available for common shareholders(1)
Earnings per common share—basic(1)
Earnings per common share—diluted(1)
2016
Revenue
Operating income
Net income(2)
Net income attributable to the Trust(2)
Net income available for common shareholders(2)
Earnings per common share—basic(2)
Earnings per common share—diluted(2)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
207,389
81,544
58,070
56,190
56,055
0.78
0.78
$
$
$
$
$
$
$
208,049
83,090
78,133
76,291
76,156
1.05
1.05
$
$
$
$
$
$
$
217,953
84,497
108,882
106,777
106,600
1.47
1.47
First
Quarter
Second
Quarter
Third
Quarter
(In thousands, except per share data)
198,344
76,922
79,063
76,955
76,820
1.10
1.10
$
$
$
$
$
$
$
197,981
80,135
58,898
55,941
55,806
0.79
0.78
$
$
$
$
$
$
$
201,157
80,461
61,198
58,977
58,841
0.82
0.82
$
$
$
$
$
$
$
$
$
$
$
$
$
$
223,957
83,157
52,785
50,656
48,645
0.67
0.67
Fourth
Quarter
204,109
83,477
59,724
58,037
57,902
0.81
0.80
(1)
(2)
Second quarter 2017 includes a $15.4 million gain related to the sale of three ground lease parcels at our Assembly
Row property in Somerville, Massachusetts. Third quarter 2017 includes a $50.8 million gain on sale of real estate
from our 150 Post Street and North Lake Commons properties. Fourth quarter 2017 includes a $6.5 million gain
related to the sale of a parcel of land at our Bethesda Row property. Additionally, second, third, and fourth quarter
2017 include net percentage-of-completion gains of $3.3 million, $0.6 million, and $1.5 million, respectively, related
to condominiums under binding contract at our Assembly Row property. All of these transactions are further discussed
in Note 3. Fourth quarter 2017 includes a $12.3 million early extinguishment of debt charge as further discussed in
Note 5.
First quarter 2016 includes a $25.7 million gain on change in control of interests from our Clarion Partners acquisition
as further discussed in Note 3. Third quarter 2016 includes a $4.9 million gain on sale from the reversal of our
warranty reserve on condominiums sold at Santana Row as further discussed in Note 7.
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F-36
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE III
SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
Three Years Ended December 31, 2017
Reconciliation of Total Cost
(in thousands)
Balance, December 31, 2014.................................................................................................................................... $ 5,608,998
Additions during period
Acquisitions ....................................................................................................................................................
Improvements .................................................................................................................................................
Deduction during period—dispositions and retirements of property ..................................................................
Balance, December 31, 2015....................................................................................................................................
Additions during period
Acquisitions ....................................................................................................................................................
Improvements .................................................................................................................................................
Deduction during period—dispositions and retirements of property ..................................................................
Balance, December 31, 2016....................................................................................................................................
291,726
281,471
(117,789)
6,064,406
229,296
483,932
(18,561)
6,759,073
Additions during period
Acquisitions ....................................................................................................................................................
Improvements .................................................................................................................................................
Deduction during period—dispositions and retirements of property ..................................................................
555,476
492,541
(172,029)
Balance, December 31, 2017 (1) .............................................................................................................................. $ 7,635,061
_____________________
(1) For Federal tax purposes, the aggregate cost basis is approximately $6.7 billion as of December 31, 2017.
F-37
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE III
SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
Three Years Ended December 31, 2017
Reconciliation of Accumulated Depreciation and Amortization
(in thousands)
Additions during period—depreciation and amortization expense
Deductions during period—dispositions and retirements of property ................................................................
Balance, December 31, 2015....................................................................................................................................
Additions during period—depreciation and amortization expense .....................................................................
Deductions during period—dispositions and retirements of property ................................................................
Balance, December 31, 2014.................................................................................................................................... $ 1,467,050
156,513
(49,522)
1,574,041
173,244
(18,051)
1,729,234
193,340
(46,030)
Balance, December 31, 2017.................................................................................................................................... $ 1,876,544
Additions during period—depreciation and amortization expense .....................................................................
Deductions during period—dispositions and retirements of property ................................................................
Balance, December 31, 2016
F-38
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
Year Ended December 31, 2017
(Dollars in thousands)
Column A
Column B
Column C
Column D
Column E
Column F
Column G
Column H
Description of Lien
Mortgage on
retail buildings in
Philadelphia, PA
Mortgage on retail
buildings in
Philadelphia, PA
May 2021
Interest Rate Maturity Date
8% or 10%
based on
timing of
draws, plus
participation
10% plus
participation
May 2021
Prior
Liens
$ —
Face Amount
of Mortgages
$ 21,179
Carrying
Amount
of Mortgages(1)
(2)
$ 21,179
Principal
Amount
of Loans
Subject to
delinquent
Principal
or Interest
—
$
—
9,250
9,250
—
Periodic Payment
Terms
Interest only
monthly; balloon
payment due
at maturity
Interest only
monthly;
balloon
payment due
at maturity
_____________________
(1) For Federal tax purposes, the aggregate tax basis is approximately $30.4 million as of December 31, 2017.
(2) This mortgage is available for up to $25.0 million.
$ —
$ 30,429
$ 30,429
$
—
F-39
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE - CONTINUED
Three Years Ended December 31, 2017
Reconciliation of Carrying Amount
(in thousands)
Balance, December 31, 2014.................................................................................................................................... $
50,988
Additions during period:
Issuance of loans.............................................................................................................................................
368
Deductions during period:
Collection and satisfaction of loans................................................................................................................
Amortization of discount ................................................................................................................................
Balance, December 31, 2015....................................................................................................................................
Deductions during period:
Collection and satisfaction of loans................................................................................................................
Balance, December 31, 2016....................................................................................................................................
Additions during period:
Issuance of loans.............................................................................................................................................
Balance, December 31, 2017.................................................................................................................................... $
(10,692)
954
41,618
(11,714)
29,904
525
30,429
F-40
I, Donald C. Wood, certify that:
CERTIFICATION
Exhibit 31.1
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Federal Realty Investment Trust;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5)
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of trustees (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
February 13, 2018
/s/ Donald C. Wood
Donald C. Wood,
President, Chief Executive Officer and Trustee
(Principal Executive Officer)
I, Daniel Guglielmone, certify that:
CERTIFICATION
Exhibit 31.2
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Federal Realty Investment Trust;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5)
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of trustees (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
February 13, 2018
/s/ Daniel Guglielmone
Daniel Guglielmone,
Executive Vice President -
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
The undersigned, Donald C. Wood, the President and Chief Executive Officer of Federal Realty Investment Trust (the
“Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the
Company’s Annual Report on Form 10-K for the period ended December 31, 2017 (the “Report”). The undersigned hereby
certifies, to the best of his knowledge, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
February 13, 2018
/s/ Donald C. Wood
Donald C. Wood,
President, Chief Executive Officer and Trustee
(Principal Executive Officer)
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
The undersigned, Daniel Guglielmone, the Executive Vice President and Chief Financial Officer and Treasurer of Federal
Realty Investment Trust (the “Company”), has executed this certification in connection with the filing with the Securities and
Exchange Commission of the Company’s Annual Report on Form 10-K for the period ended December 31, 2017 (the
“Report”). The undersigned hereby certifies, to the best of his knowledge, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
February 13, 2018
/s/ Daniel Guglielmone
Daniel Guglielmone,
Executive Vice President -
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
March 23, 2018
Dear Shareholder:
Please accept this invitation to attend our 2018 Annual Meeting of Shareholders on Wednesday, May 2, 2018 at 10:00 a.m.
This year’s meeting will be held at AMP by Strathmore located at our Pike & Rose property, 11810 Grand Park Avenue, North
Bethesda, Maryland.
The attached notice of the 2018 Annual Meeting of Shareholders and proxy statement provide important information about
the annual meeting and the business to be conducted at the meeting. In addition, management will provide a review of 2017
operating results and discuss the outlook for the future. After the formal presentation, our Trustees and management will be
available to answer any questions you may have.
Your vote is important to us. We urge you to read this proxy statement carefully. Whether or not you plan to attend the
annual meeting in person, we urge you to vote promptly through the internet, by telephone or by mail.
Thank you for your continued support and we look forward to seeing you on May 2.
Sincerely,
Joseph S. Vassalluzzo
Non-Executive Chairman of the Board
Donald C. Wood
President and Chief Executive Officer
1626 East Jefferson Street, Rockville, Maryland 20852
NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS
DATE:
TIME:
PLACE:
RECORD DATE:
ITEMS OF BUSINESS
For the Trustees:
Wednesday, May 2, 2018
10:00 a.m. local time
AMP by Strathmore, 11810 Grand Park Avenue, North Bethesda, Maryland
March 14, 2018
Election of 7 Trustees to serve until our 2019 Annual Meeting of Shareholders
•
• Advisory vote approving the compensation of our named executive officers
• Ratification of the appointment of Grant Thornton LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2018
Dawn M. Becker
Executive Vice President—General Counsel and Secretary
March 23, 2018
HOW TO VOTE
Your vote is important to us. You are eligible to vote and receive notice of the meeting if you were a registered owner of
record of our common shares of beneficial interest (“Shares”) at the close of business on the record date of March 14, 2018.
A majority of the Shares entitled to vote at the Annual Meeting must be present in person or by proxy for us to proceed with
the Annual Meeting.
If you own your Shares directly with our transfer agent, American Stock Transfer and Trust, LLC, you are a registered
shareholder and can vote either in person at the Annual Meeting or by proxy without attending the Annual Meeting through
one of the following methods:
By Internet
By Telephone
By Mail
Visit www.voteproxy.com. You will need the control
number on your Notice of Internet Availability,
proxy card or voting instruction form. Votes must
be submitted by 11:59pm EDT to be counted for the
meeting.
Call 1-800-Proxies (1-800-776-9437). You will
need the control number on your Notice of
Internet Availability, proxy card or voting
instruction form. Votes must be submitted by
11:59pm EDT to be counted for the meeting.
You can vote my marking, signing and dating your
proxy card.
You may revoke your proxy at any time before it is voted at the Annual Meeting by notifying the secretary in writing,
submitting a proxy dated later than your original proxy, or attending the Annual Meeting and voting in person.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR OUR ANNUAL MEETING. Our 2018 Proxy
Statement and 2017 Annual Report to Shareholders, which includes our Annual Report on Form 10-K for the year ended
December 31, 2017, are available at www.federalrealty.com.
TABLE OF CONTENTS
About Federal Realty
Annual Meeting Information
Notice of Electronic Availability of Proxy Materials
Corporate Governance Information
Corporate Governance Practices
Board Leadership Structure
Independence of Trustees
Board Meetings
Board Committees
Risk Management Oversight
Compensation Risk Assessment
Communications with the Board
Certain Relationships and Related Transactions
Review and Approval of Related Party Transactions
Related Party Transactions
Trustee Information
Proposal 1—Election of Trustees
Nominees
Qualifications and Characteristics of Trustees
Process for Selecting Trustees
Process for Shareholders to Recommend Trustee Nominees
Trustee Compensation
Executive Officer and Compensation Information
Executive Officers
Proposal 2—Advisory Vote on the Compensation of our Named Executive Officers
Compensation Discussion and Analysis
2017 Performance Highlights
2017 Compensation Highlights
2017 Compensation and Compensation Components
Annual Compensation
Fixed Compensation—Base Salary
At Risk Compensation
Annual Bonus Plan
Long-Term Incentive Award Program
2017 Total Compensation
Other Benefits
Other Compensation Considerations
Equity Ownership
Risk Assessment
Timing of Equity Grants
Termination and Change-in-Control Arrangements
Deductibility of Executive Compensation in Excess of $1.0 Million
Compensation Committee Report
Summary Compensation Table
Grants of Plan-Based Awards Table
Outstanding Equity Awards at Fiscal Year-End Table
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Option Exercises and Stock Vested Table
Non-Qualified Deferred Compensation Table
Potential Payments on Termination of Employment and Change-in-Control
Compensation Committee Interlocks and Insider Participation
CEO Pay Ratio
Equity Compensation Plan Information
Audit Information
Proposal 3—Non-Binding Ratification of Independent Registered Public Accounting Firm
Audit Committee Report
Independent Auditor’s Fees
Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
Ownership Information
Ownership of Principal Shareholders
Ownership of Trustees and Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
General Information
Annual Meeting and Voting
Solicitation of Proxies, Shareholder Proposals and Other Matters
Appendix A—Funds From Operations
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ABOUT FEDERAL REALTY
Federal Realty Investment Trust is a recognized leader in the ownership, operation and redevelopment of high-quality retail
based real estate located primarily in major coastal markets from Washington, D.C. to Boston as well as San Francisco and
Los Angeles. Founded in 1962, our mission is to deliver long term, sustainable growth through investing in densely populated,
affluent communities where retail demand exceeds supply. Our expertise includes creating urban, mixed-use neighborhoods
like Santana Row in San Jose, California, Pike & Rose in North Bethesda, Maryland and Assembly Row in Somerville,
Massachusetts. These unique and vibrant environments combine shopping, dining,
living and working and provide a
destination experience that serves the needs of the broader surrounding community. Federal Realty’s 104 properties include
approximately 3,000 tenants, in approximately 24 million square feet, and over 2,300 residential units.
Throughout this proxy statement, we use the terms “Federal”, “Company”, “Trust”, “we”, “our” and “us” to refer to Federal
Realty Investment Trust.
ANNUAL MEETING INFORMATION
We are providing these proxy materials in connection with the 2018 Annual Meeting of the Shareholders of the Trust. These
materials will assist you in voting your Shares by providing information on matters that will be presented at the Annual
Meeting.
Meeting Date:
Meeting Time:
Meeting Location:
Record Date:
Wednesday, May 2, 2018
10:00 a.m. local time
AMP by Strathmore, 11810 Grand Park Avenue, North Bethesda, Maryland
March 14, 2018
The following matters are being presented for a vote at the 2018 Annual Meeting of Shareholders:
Proposal
Board
Recommendation
Vote Required
For Approval
Election of 7 Trustees to serve until our 2019 annual meeting
FOR each nominee
Majority of votes cast
Advisory vote on the compensation of our named executive officers
Ratification of the appointment of Grant Thornton LLP as our auditors
FOR
FOR
Majority of votes cast
Majority of votes cast
NOTICE OF ELECTRONIC AVAILABILITY OF PROXY MATERIALS
We are furnishing proxy materials including this proxy statement and our 2017 Annual Report to Shareholders, which
includes our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”), to each shareholder by
providing access to such documents on the Internet instead of mailing printed copies unless you previously requested to
receive these materials by mail or e-mail. On or about March 23, 2018, we mailed to our shareholders who have not
previously requested to receive these materials by mail or e-mail a “Notice of Internet Availability of Proxy Materials”
(“Notice”) containing instructions on how to access and review this proxy statement and our Annual Report and how to
submit your vote on the Internet or by telephone. You cannot vote by marking the Notice and returning it. If you received the
Notice by mail, you will not automatically receive a printed copy of our proxy materials or Annual Report unless you follow
the instructions for requesting these materials included in the Notice.
CORPORATE GOVERNANCE INFORMATION
The Board is responsible for providing governance and oversight of the strategy, operations and management of the Trust on
behalf of our shareholders. The Board has adopted the following key documents that form the governance framework for the
Trust. Each of these documents is periodically reviewed and updated to comply with current regulatory and governance
requirements.
Corporate Governance Guidelines
•
Code of Business Conduct
•
Code of Ethics for Senior Financial Officers
•
•
Committee Charters
• Declaration of Trust
These documents are available under the Investors/Corporate Governance section of our website at www.federalrealty.com.
Printed copies of these documents are also available free of charge upon written request to our Investor Relations
Department at 1626 East Jefferson Street, Rockville, Maryland 20852.
CORPORATE GOVERNANCE PRACTICES
The Trust has a history of strong corporate governance and is committed to practices and policies that best serve the
interests of our shareholders. Our practices and policies include, among other things, the following:
Governance Practice:
Explanation:
Annual Election of Trustees
All of our Trustee positions are elected annually
Shareholder Approval Required to
Classify Board
We have opted out of the provision of Maryland law that allows companies to
amend their Bylaws without shareholder approval to adopt a classified board
Majority Vote Standard for Trustee
Elections
In uncontested elections, each of our Trustees must receive a majority of votes cast
to be elected to the Board
No Shareholders Rights Plan
We do not have a poison pill
Independent Board
All of our Trustees are independent other than our CEO. Our governance guidelines
preclude us from having more than 1 non-independent Trustee
Independent Board Committees
All committees of our Board are made up entirely of independent Trustees
Non-Executive Chairman
We have an independent, Non-Executive Chairman of the Board
Robust Annual Board Self-Assessment The Nominating Committee conducts an annual evaluation of the Board and of each
individual trustee through written surveys as well as individual discussions with
each Trustee to elicit and deliver feedback
Equity Ownership Requirements for
Trustees and Senior Executives
Our named executive officers are required to hold equity with a value of least 3
times base and annual bonus for our CEO and 2.5 times for each of our other
named executive officers. Our Trustees are required to hold equity with a value of
at least 5 times the cash portion of their annual retainer. Officers and Trustees have
5 years after joining the Trust to meet these requirements.
Prohibition on Hedging and Pledging Our Trustees and all employees are prohibited from hedging or pledging our Shares
BOARD LEADERSHIP STRUCTURE
Our Board has been directed by a Non-Executive Chairman of the Board since 2003. The Board believes that having its own
leadership separate from our Chief Executive Officer provides the Board with an effective way to ensure that it is fully
informed and has the opportunity to fully debate all important issues as necessary to fulfill its oversight responsibilities and
hold management accountable for the performance of the Trust. This also allows our Chief Executive Officer to focus his time
on running our day-to-day business. Our Non-Executive Chairman presides at all meetings of the Board and helps to set the
agendas for Board meetings.
2
INDEPENDENCE OF TRUSTEES
The Board reviews on an ongoing basis all relationships between us and each Trustee to determine whether each Trustee is
independent or otherwise has any relationship to the Trust that could adversely affect the Trustee’s ability to exercise
independent judgment. This review also determines whether each Trustee satisfies the independence requirements of the
New York Stock Exchange (“NYSE”), the Securities and Exchange Commission (“SEC”), our Corporate Governance Guidelines
and other applicable rules and regulations and whether we are in compliance with our Bylaws which provide that no more
than one of our Trustees can fail to qualify as independent. Our Corporate Governance Guidelines include a standard that a
Trustee’s position as a director, officer or owner of a company with which we do business does not constitute a material
relationship so long as payments made by that company do not account for more than five percent (5%) of our gross
revenues or more than ten percent (10%) of the gross revenues of that company.
The Board, on recommendation of the Nominating and Corporate Governance Committee, considered all relevant facts and
circumstances and determined that all Trustees other than Mr. Wood, our Chief Executive Officer, are independent for
purposes of Board and committee service under the standards of the NYSE, the SEC, our Corporate Governance Guidelines
and applicable law. In making the independence determination, the Nominating and Corporate Governance Committee and
the Board considered the following:
• Mr. Bortz – occasional usage by Trust employees for business purposes of hotels owned by Pebblebrook Hotel Trust.
Mr. Bortz is the CEO of Pebblebrook Hotel Trust.
• Mr. Faeder – a 1-year lease of space at a Trust property by an entity in which Mr. Faeder is a partner. That lease
expired in January 2017.
• Mr. Thompson – the items described in “Certain Relationships and Related Transactions” section below.
• Mr. Vassalluzzo – five leases between Office Depot, Inc. and the Trust. Mr. Vassalluzzo is the Non-Executive Chairman
of the Board of Office Depot, Inc.
BOARD MEETINGS
The Board of Trustees holds regularly scheduled in-person meetings and if needed, will also act through telephonic meetings,
action by written consent and other communications with management. During 2017, the Board of Trustees held four
in-person meetings and the non-management, independent Trustees held an executive session at each of those meetings.
Mr. Vassalluzzo, the Non-Executive Chairman of the Board, presided over all Board meetings as well as all executive sessions
of the non-management Trustees. The Non-Executive Chairman of the Board is expected to preside over all future Board
meetings and executive sessions of non-management Trustees.
Each of the Trustees attended 100% of the meetings of the Board as well as 100% of all committee meetings, including
committees on which the Trustee did not serve during 2017. It is the Trust’s policy for all Trustees to attend our annual
meeting of shareholders absent exceptional cause. All Trustees attended our 2017 Annual Meeting of Shareholders.
3
BOARD COMMITTEES
The Board has three standing committees – the Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee. Each committee operates under a written charter which is available in the Investors
section of our website at www.federalrealty.com. Each committee member meets the independence, experience and, with
respect to the Audit Committee, the financial literacy requirements, of the NYSE, the SEC and our Corporate Governance
Guidelines. Information about each of these committees is included in the chart below:
Committee/Membership
Primary Responsibilities
Audit Committee:
Gail P. Steinel(1)
Jon E. Bortz
David W. Faeder(2)
Warren M. Thompson
Compensation Committee:
David W. Faeder(1)
Kristin Gamble(3)
Elizabeth I. Holland(3)
Gail P. Steinel
Joseph Vassalluzzo
Selecting our independent auditor and approving and overseeing its work
•
• Overseeing our financial reporting, including reviewing results with
management and our independent auditor
• Overseeing our internal systems of accounting and controls
• Overseeing financial, cybersecurity and similar risks
• Reviewing and recommending compensation for our senior officers
• Administering and making awards under our long-term incentive award plans
• Administering other benefit programs of the Trust
Nominating and Corporate Governance Committee:
Warren M. Thompson(1)
Jon E. Bortz
Kristin Gamble(3)
Elizabeth I. Holland(3)
Joseph S. Vassalluzzo
• Recommending individuals to stand for election to the Board
• Making recommendations regarding committee memberships
• Overseeing our corporate governance policies and procedures, including
Board and Trustee evaluations
# of 2017
Meetings
4
2
2
(1) Committee chairperson
(2) Financial expert
(3) Ms. Gamble served on these committees from January 1, 2017 until she retired from the Board on May 2, 2017.
Ms. Holland began her service on these committees on May 2, 2017.
RISK MANAGEMENT OVERSIGHT
The Board is responsible for overseeing enterprise level risk of the Trust and does so directly as well as through its committees.
As part of carrying out its risk oversight responsibilities, the entire Board regularly receives updates from management on the
continued viability of our business plan, market conditions, capital position, and our business results and specifically reviews
potential business risks from time to time. The Board reviews that information together with our quarterly and annual financial
statements and operating results and short and long-term business prospects to assess the risks that we may encounter and to
establish appropriate direction to avoid or minimize the potential impact of the identified risks. Some of the details that are
discussed as part of the Board’s review of potential risks facing us include, without limitation:
•
•
•
•
•
•
•
•
the impact of market conditions on our business;
operational risks such as the ability of our tenants to be successful and the ability to grow the company through
increasing rents and redeveloping our properties;
liquidity and credit risks, including our ability to access capital to run and grow our business and our overall cost of
capital and the impact on our profitability;
investment risks from acquisitions and our development and redevelopment projects;
regulatory risks that may impact our profitability;
risks relating to our status as a real estate investment trust;
cybersecurity risks; and
general risks inherent in the real estate industry.
4
COMPENSATION RISK ASSESSMENT
In February 2018, our Compensation Committee reviewed our compensation policies and practices for all of our employees
to determine whether any of such policies or programs created any risk that is reasonably likely to have a material adverse
effect on the Trust. Based on that review, the Committee does not believe that our compensation programs encourage
unnecessary or excessive risk taking. Specifically, the compensation of more than 96% of our corporate employees is based
on corporate performance objectives. For the approximately, 4% of our employees who earn compensation by completing
leasing transactions or closing acquisitions, they cannot complete any deals without first obtaining approvals from either the
Board and/or one or more members of senior management whose compensation is tied to corporate performance.
COMMUNICATIONS WITH THE BOARD
Any shareholder or other interested party may communicate with the Board or any Trustee by sending the communication to
the Trust’s corporate offices at 1626 East Jefferson Street, Rockville, MD 20852 in care of the Trust’s Secretary. All
communications should identify the party to whom it is being sent, and any communication which indicates it is for the Board
of Trustees or fails to identify a particular Trustee will be deemed to be a communication intended for the Trust’s
Non-Executive Chairman of the Board. The Trust’s Secretary will promptly forward to the appropriate Trustee all
communications she receives for the Board or any individual Trustee which relate to the Trust’s business, operations,
financial condition, management, employees or similar matters. The Trust’s Secretary will not forward to any Trustee any
advertising, solicitation or similar materials.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Review and Approval of Related Party Transactions
Our Code of Business Conduct requires that our Trustees and all of our employees deal with the Trust on an arms-length
basis in any related party transaction. All transactions between us and any of our Trustees, our named executive officers or
other vice presidents, or entity in which any of them has an ownership interest must be approved in advance by the Audit
Committee. Audit Committee approval is not required for us to enter into a lease with an entity in which any of our Trustees
is a director, employee or owner so long as the lease is entered into in the ordinary course of business and is negotiated at
arms-length and on market terms.
Related Party Transactions
Mr. Thompson, one of our Trustees, serves as the President and Chairman of the Board of Directors of Thompson Hospitality
Corporation (“THC”). THC leases from us approximately 11,000 square feet for two restaurant locations. Those leases were
negotiated at arms’ length, reflecting market conditions at the time they were negotiated, and are scheduled to expire on
June 30, 2020 and December 31, 2021, subject to a tenant extension option. We anticipate receiving approximately $750,000
in rent and other related charges in 2018 from these two locations. In addition, during 2017 we had in place a partnership
with THC pursuant to which our partnership leased a restaurant location from us in one of our properties. We owned 80% of
the partnership and THC owned the remaining 20% of the partnership and acted as the manager of the restaurant and the
partnership. The terms and structure of the partnership were negotiated at arms-length and reflected terms, structures and
conditions consistent with other restaurant investments we have made. In 2017, we made the decision collectively with THC
to terminate the partnership as well as the lease. This decision was based on the operating performance of the restaurant
and not as a result of any disagreements between us and THC. We have finalized the dissolution of the partnership and
termination of the lease and have already entered into a lease for the space with a new, unrelated restaurant tenant. The
Board reviewed these relationships with Mr. Thompson and determined that Mr. Thompson met all
independence
requirements for his service as a Trustee during 2017 as described in the “Independence of Trustees” section above.
None of our named executive officers had or has any indebtedness to the Trust or any relationship with the Trust other than
as an employee and shareholder. Employment and change-in-control arrangements between the Trust and the named
executive officers are described in the “Potential Payments on Termination of Employment and Change-in-Control” section
below.
5
TRUSTEE INFORMATION
PROPOSAL 1 – ELECTION OF TRUSTEES
Our Board of Trustees currently has seven Trustees, all of whom have been nominated to stand for election at the 2018
Annual Meeting. All trustees elected at the meeting will hold office until the 2019 Annual Meeting of Shareholders and until
their successors have been duly elected and qualified. You are entitled to cast one vote per Share for each of the seven
named individuals. Proxies may not be voted for more than seven individuals. Our Bylaws provide that in uncontested
elections such as this one, a nominee must receive a majority of votes cast in order to be elected. An “abstention” or “broker
non-vote” will have no effect on the outcome of the vote for this proposal.
The Board recommends that you vote “FOR” each of the nominees.
NOMINEES
The Nominating and Corporate Governance Committee is responsible for identifying individuals who are qualified candidates
to serve on our Board. The committee has identified the following seven individuals to stand for election at our 2018 Annual
Meeting of Shareholders. Each of these nominees is currently a member of our Board.
Jon E. Bortz
Age: 61
Trustee since: 2005
Independent
Business Experience:
•
•
President, Chief Executive Officer and Chairman of the
Board of Pebblebrook Hotel Trust (2009 – present)
Various positions with LaSalle Hotel Properties including
President, Chief Executive Officer, Trustee and Chairman
of the Board (1998 – 2009)
Committees:
• Audit
• Nominating and Corporate Governance
Public Company Boards
• Pebblebrook Hotel Trust (2009 – present)
Specific Qualifications and Skills:
Mr. Bortz brings to the Board public company, REIT and real estate experience. His experience as chief executive officer of
LaSalle Hotel Properties and Pebblebrook Hotel Trust provide a valuable perspective for running a public real estate
company while his real estate experience at Jones Lang LaSalle provides fundamental real estate experience critical to our
core business.
6
David W. Faeder
Age: 61
Trustee since: 2003
Independent
Business Experience:
• Managing Partner of
Fountain Square Properties
•
(2003 – present)
Various positions with Sunrise Senior Living, Inc. including
Vice Chairman-President and Executive Vice President-
Chief Financial Officer (1993 to 2003)
Board Committees:
• Audit
• Compensation (Chair)
Public Company Boards:
• Arlington Asset Investment Corp. (2013 – present)
Specific Qualifications and Skills:
Mr. Faeder provides public company experience, accounting experience and real estate investing acumen to the Board,
having previously served as the president and chief financial officer of Sunrise Senior Living and as an active private real
estate investor.
Elizabeth I. Holland
Age: 52
Trustee since: 2017
Independent
Business Experience:
•
•
Chief Executive Officer of Abbell Credit Corporation and
Abbell Associates, LLC (1997 – present)
Board of Trustees of
the International Council of
Shopping Centers (from 2004-2010 and 2015 to present),
Chairman of the Board of Trustees (2016 – 2017) and Vice
Chairman of the Board of Trustees (2015 – 2016)
Board Committees:
• Compensation
• Nominating and Corporate Governance
Public Company Boards:
• VICI Properties, Inc. (2017 – present)
Specific Qualifications and Skills:
Ms. Holland brings to the Board a deep understanding of owning and investing in retail real estate from her experience as
a private investor. Her insights into issues affecting many of our tenants learned from her experience as Chairman of the
International Council of Shopping Centers also provides a valuable perspective for the Board to understand the Trust’s
business.
7
Gail P. Steinel
Age: 61
Trustee since: 2006
Independent
Business Experience:
• Owner of Executive Advisors (2007 – present)
•
President
Vice
of
BearingPoint,
Inc.
Executive
(2002 – 2007)
• Global Managing Partner of Management and Technology
Consulting Practice for Arthur Andersen (1984 – 2002)
Board Committees:
• Audit (Chair)
• Compensation
Public Company Boards:
• MTS Systems Corporation (2009 – present)
Specific Qualifications and Skills:
Ms. Steinel has over 25 years of auditing and consulting experience that provides the Board with valuable accounting and
financial expertise, as well as a helpful perspective on leadership and on managing risk and systems operations.
Warren M. Thompson
Age: 58
Trustee since: 2007
Independent
Business Experience:
•
President and Chairman of Thompson Hospitality
Corporation since founding the company in October 1992
(1992 – present)
Board Committees:
• Audit
• Nominating and Corporate Governance (Chair)
Specific Qualifications and Skills:
Mr. Thompson’s experience running restaurants owned by Thompson Hospitality provides the Board and management
with a unique perspective that is shared by a large percentage of the Trust’s retail tenants.
8
Joseph S. Vassalluzzo
Age: 70
Trustee since: 2002
Non-Executive Chairman
Independent
Business Experience:
• Non-Executive Chairman of the Board of Office Depot,
Inc. (2017 – present)
• Non-Executive Chairman of the Board of Federal Realty
•
Investment Trust (from 2006 to present)
Various positions including Vice Chairman with Staples,
Inc. (1989 – 2005)
Board Committees:
• Compensation
• Nominating and Corporate Governance
Public Company Boards:
• Office Depot, Inc. (2013 – present)
•
•
Life Time Fitness, Inc. (2006 – 2015)
IParty Corp. (2004 to 2013)
Specific Qualifications and Skills:
Mr. Vassalluzzo’s extensive background in retail and real estate as a result of having served as an executive with Staples,
including his responsibility for expanding Staples real estate presence, as well as his current and prior service on the
boards of a number of retailers provides the board and management with retail and retail real estate expertise that is
essential to our core business.
Donald C. Wood
Age: 57
Trustee since: 2003
CEO
Business Experience:
•
President and Chief Executive Officer of Federal Realty
Investment Trust (2003 – present)
Various other position including Chief Financial Officer
and Chief Operating Officer (1998 – 2003)
Chairman of the Board of the National Association of Real
Estate Investment Trusts (2011 – 2012)
Board of Governors of
Shopping Centers (2010 – present)
the International Council of
•
•
•
Board Committees
• None
Public Company Boards:
• Quality Care Properties, Inc. (2016 – present)
• Post Properties, Inc. (2011 – 2016)
Specific Qualifications and Skills:
Mr. Wood’s tenure with the Trust and his responsibilities as chief executive officer provides the Board with familiarity and
details on all aspects of the operation of the Trust.
9
QUALIFICATIONS AND CHARACTERISTICS OF TRUSTEES
In determining who should stand for election as a Trustee, the Nominating and Corporate Governance Committee tries to
ensure that the Board is composed of individuals whose backgrounds, skills and experiences, when taken together, will
provide the Board with the range of skills and expertise to be able to effectively guide and oversee our strategy, operations
and management. At a minimum, candidates should have the ability to exercise judgment in fulfilling his/her responsibilities,
a professional background that would enable him/her to understand our business, public company, real estate, retail and/or
other financial experience and a history of honesty, integrity and fair dealing with third parties. The skills and experience of
the Trustees in areas we consider critical to our business are described in detail in the biographies above and summarized
below:
Qualifications/Skills of Nominees
Business/Executive Leadership
REIT/Public Company
Investment/Financial/Accounting
Real Estate
Retailing Industry
Operational Management
Risk Oversight/Management
Bortz
Š
Š
Š
Š
Š
Š
Faeder Holland
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Steinel
Š
Thompson
Š
Š
Š
Š
Š
Š
Š
Š
Š
Vassalluzzo Wood
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
The Nominating and Corporate Governance Committee also seeks geographic, age, gender and ethnic diversity on the Board.
Although the Board has not adopted any specific policies on diversity, the Committee and the Board believe that diversity is a
factor to be considered that is consistent with the goal of creating a Board that best serves the needs of the Trust and our
shareholders. Our nominees reflect the Board’s efforts and commitment to diversity with two women and one African
American included in that group.
PROCESS FOR SELECTING TRUSTEES
In considering nominees to stand for election at the Annual Meeting, the Board and the Committee evaluate each person’s
background, qualifications and attributes to serve as a Trustee based on the criteria described above and for incumbent
Trustees, their years of experience working together on the Board and the deep knowledge of the Trust they have developed
as a result of such service on the Board. This is especially important in our company where real estate decisions and strategy
often take years to develop and require a full understanding of history in setting strategies and making decisions. The Board
and the committee also consider each incumbent Trustee’s contributions to the effectiveness of the Board and its
committees based on the in-depth individual trustee evaluations completed each year for each Board member by each other
Board member.
To identify, recruit and evaluate qualified new candidates for the Board, the Board first looks to individuals known to current
Board members through business and other relationships. If the Board is not able to identify qualified candidates in that way,
the services of a professional search firm would be used. Ms. Holland was identified by Board members through her
participation and leadership position in the International Council of Shopping Centers, a key industry organization for the
Trust’s business. Prior to her nomination, Ms. Holland met separately with and was evaluated by our Non-Executive
Chairman, the Chair of the Nominating and Corporate Governance Committee, our CEO as well as other Board members. It
was only after this process was complete that Ms. Holland was nominated for the Board.
PROCESS FOR SHAREHOLDERS TO RECOMMEND TRUSTEE NOMINEES
Shareholders may propose a candidate to be nominated for election to the Board by following the procedures outlined in our
Bylaws, a copy of which can be obtained by sending a written request to Investor Relations at 1626 East Jefferson Street,
Rockville, Maryland 20852. If you want to recommend a nominee, you can submit a written recommendation in accordance
with our Bylaws that includes the name, qualifications and other pertinent information about the nominee to the Trust’s
Secretary at our Rockville office. Any recommendation for a nominee to be considered at our 2019 Annual Meeting must be
submitted no later than November 23, 2018.
10
TRUSTEE COMPENSATION
Our non-employee Trustees receive the following compensation for their service on the Board:
Compensation Element
Form of Payment
Amount
Non-Executive Chairman Annual Retainer
Non-Executive Chairman Annual Retainer
Non-Employee Trustee Annual Retainer
Non-Employee Trustee Annual Retainer
Committee Chair Fees
Cash
Shares
Cash
Shares
Cash
Equity Ownership Guidelines
$106,000
$159,000 (fully vested on grant date)
$76,000
$114,000 (fully vested on grant date)
$20,000 for Audit Committee
$10,000 for Compensation Committee
$10,000 for Nominating Committee
Trustees are required to maintain ownership of
Trust stock having a value equal to 5 times the
amount of the annual cash retainer. This
requirement must be met within 5 years after
joining the Board
As of December 31, 2017, all Trustees then serving on the Board complied with the required level of stock ownership with
the exception of Ms. Holland, who joined the Board in February 2017 and is expected to satisfy the requirement within the
5-year time frame.
In addition to the annual retainer described above, Mr. Vassalluzzo receives administrative support for both Trust business
and personal use from our regional office in Wynnewood, Pennsylvania. There were no additional fees paid or services
provided to any Trustee for service on any of the Board committees or for attendance at any Board or committee meetings
other than those described above.
Total compensation awarded to Trustees for service in 2017 was as follows:
Name
Jon E. Bortz
David W. Faeder
Kristin Gamble(2)
Elizabeth I. Holland(3)
Gail P. Steinel
Warren M. Thompson
Joseph S. Vassalluzzo(4)
Total
Annual Retainer
Paid in Cash
Paid in Shares(1)
Committee
Chair Fees
All Other
Compensation
$ 76,000
$ 76,000
$ 63,507
$ 69,545
$ 76,000
$ 76,000
$106,000
$543,052
$114,000
$114,000
$
—
$104,500
$114,000
$114,000
$159,000
$719,500
$
—
$10,000
$
$
—
—
$20,000
$10,000
$
—
$40,000
$ —
$ —
$ —
$ —
$ —
$ —
$7,500
$7,500
Total
$ 190,000
$ 200,000
$
63,507
$ 174,045
$ 210,000
$ 200,000
$ 272,500
$1,310,052
(1) Shares were issued on January 2, 2018 with the number of Shares received by each Trustee determined by dividing the
amount to be paid in Shares by $132.81, the closing price of our Shares on the NYSE on December 29, 2017, the last
business day prior to the date the Shares were issued.
(2) Pro-rated for partial year of service through retirement from the Board on May 2, 2017.
(3) Pro-rated for partial year of service beginning February 1, 2017.
(4) Estimated value of the administrative services. We do not believe there is any incremental cost to us of providing this
administrative support.
11
EXECUTIVE OFFICER AND COMPENSATION INFORMATION
EXECUTIVE OFFICERS
Our named executive officers (“NEOs”) are:
Name
Donald C. Wood
Daniel Guglielmone
Dawn M. Becker
Age
Position
57
51
54
President and Chief Executive Officer
Executive Vice President – Chief Financial Officer and Treasurer
Executive Vice President – General Counsel and Secretary
Donald C. Wood, Information for Mr. Wood is provided above in “Proposal 1 – Election of Trustees.”
Daniel Guglielmone, Executive Vice President – Chief Financial Officer and Treasurer of the Trust (since August 2016) with
responsibility for overseeing the Trust’s capital markets, financial reporting, investor relations, corporate communications
and East Coast acquisitions; Senior Vice President-Acquisitions & Capital Markets of Vornado Realty Trust (2003 – 2016);
Director of the real estate and lodging group of Salomon Smith Barney / Citigroup (1993 – 2003) and the retail division of
Douglas Elliman Commercial Real Estate (1989 to 1992).
Dawn M. Becker, Executive Vice President – General Counsel and Secretary (since April 2002) with responsibility for
overseeing various of the Trust’s corporate functions including the Trust’s Legal, Human Resources and Information
Technology Departments; and prior to that time, various officer positions with the Trust,
including Executive Vice
President – Managing Director Mixed Use Operations (2015 – 2016), Executive Vice President – Chief Operating Officer
(2010 – 2015) and Vice President – Real Estate and Finance Counsel (2000 – 2002).
12
PROPOSAL 2 – ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
You are being asked to approve on an advisory basis the compensation of our NEOs as described in the Compensation
Discussion and Analysis (“CD&A”), the Summary Compensation Table, the supplemental tables and the disclosure narratives
that follow. This is an opportunity to express your opinion regarding the decisions made by the Compensation Committee on
the compensation of our NEOs for 2017; however, it will not affect any compensation already paid or awarded for 2017 and
will not be binding on the Compensation Committee, the Board or the Trust. The Board and our Compensation Committee
value the opinions of our shareholders and will review the results of this vote and take those results into consideration in
addressing future compensation policies and decisions.
As described in more detail below, our compensation packages include base salaries, annual cash incentive compensation,
long-term equity incentives and other market appropriate benefits and perquisites. We believe our compensation programs
and policies are appropriate and effective in retaining and motivating our NEOs to achieve superior results for our
shareholders and that it aligns those individuals with your interests as our shareholders. A few highlights of our
compensation programs are:
• A significant portion of our NEOs’ compensation is directly linked to our performance and the creation of long-term
shareholder value through long-term incentive awards. The value of these awards is only recognized over a 6-year
period that includes a 3-year performance period, an award date, plus a minimum 3-year vesting period after the award
date.
The compensation of our NEOs is strongly tied to our performance and to the performance of the individual. The annual
incentive compensation is only paid if we achieve our annual FFO (see definition below in Compensation Discussion and
Analysis) per share objective and long-term incentives are earned on the basis of our absolute and relative total
shareholder returns as well as our return on invested capital.
•
• We have an appropriate balance of pay between short-term and long-term objectives.
• Our NEOs are incentivized to act in the best long-term interests of the Trust through stock ownership guidelines.
• We have no perquisites for our NEOs that are not widely available to other employees other than as described in the
CD&A and the “Potential Payments on Termination of Employment and Change-in Control” section below.
The affirmative vote of a majority of votes cast at the Annual Meeting, in person or by proxy, is required to approve this
proposal. An “abstention” or “broker non-vote” will have no effect on the outcome of the vote for this proposal.
The Board recommends that you vote “FOR” this proposal on the compensation of our NEOs for 2017.
The text of the resolution if Proposal 2 is passed is:
RESOLVED, that the shareholders of the Trust hereby approve, on an advisory basis, the compensation of our NEOs as
described in the CD&A, the Summary Compensation Table, the supplemental tables and the narrative disclosures
accompanying these materials as required by Item 402 of Regulation S-K.
13
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis describes the Trust’s compensation programs and compensation decisions for our
NEOs for 2017.
2017 Performance Highlights
The Trust’s business plan of delivering long-term sustainable growth through investment in high quality, retail based
properties located primarily in major coastal US markets resulted in record levels of performance in 2017 including total
revenue, operating income and funds from operations (“FFO”)1 per share. These record level results were achieved despite
the headwinds from significant levels of retailer failures and store closures in 2017.
$857
$802
7 . 7 % C A G R
$744
$332
$321
6 . 9 % C A G R
$300
6 . 8 % C A G R
$5.65
$5.74
$686
$637
$271
$254
$5.05
$4.79
$4.41
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Total Revenue (in millions)
Operating Income (in millions)
FFO Per Share (diluted)
The sustained long-term growth in these and other financial metrics reflects the Trust’s disciplined approach to investing in
and operating its assets and provided the foundation for 2017 to have marked the 50th consecutive year that the Trust
increased its common dividend to shareholders, a milestone achieved by a small percentage of other US public companies
and by no other real estate investment trust.
5 0 y e a r C A G R 7 %
$0.12
1967
$4.00
2017
The ability to achieve these results during such uncertain times for any business that is tied to the retail industry was only
possible because of the creation and execution of the long-term business plan developed by our Board of Trustees and
management team focused on generating increasing streams of cash flow and the creation of long-term value for our
shareholders during all kinds of economic cycles. Some of the key components of that business plan include:
•
•
Income diversification so that no one retailer accounts for more than approximately 3% of our income in any given
year
Income diversification through investment in retail and office uses in mixed-use environments that benefit from a
strong retail base
Investing and reinvesting in those locations where demand for retail exceeds supply
•
•
Investing in those retailers who we believe have the best chance of adapting to changing trends for long-term success
• Managing the balance sheet for the long-term including raising capital opportunistically when market conditions are
favorable despite short-term dilution
1
FFO is a supplemental non-GAAP financial measure of a real estate company’s operating performance. We follow the
definition of FFO provided by the National Association of Real Estate Investment Trusts (“NAREIT”) which is included on
Appendix A along with a reconciliation of net income to FFO available for common shareholders.
14
Part of the Trust’s long-term focused business plan includes its ongoing environmental, workplace and social initiatives. Since
2012, the Trust has invested more than $1.2 billion in building construction that has been certified as green by the United
States Green Building Council and other similar groups. During that same time period, we’ve also invested nearly $35 million
dollars in 22 active production solar photovoltaic systems with an additional $12 million dollars currently being invested in
10 more solar photovoltaic systems expected to be placed into service in 2018. In total, these 32 solar systems are projected
to generate nearly 18.5 kWH of electricity on an annualized basis, offsetting nearly 30 million pounds of CO2 which is the
equivalent of providing all electricity needs for more than 2,000 households for one year.
In 2017, the Trust again
participated in the Global Real Estate Sustainability benchmark report and achieved 4 Green Stars with an overall score of 78.
In addition to the direct investment in sustainable development, social impact is pursued through innovative partnerships
such as Up Top Acres where existing green roof infrastructure at properties is being farmed and producing vegetables used
by restaurants in those properties, reflecting the Trust’s commitment to enhancing the communities in which we do
business. 2017 marked the 10th consecutive year that the Trust received the Alliance for Workplace Excellence Seal of
Approval for both Overall Workplace Excellence and Health and Wellness as well as the 7th consecutive year of receiving the
Workplace Excellence Seal of Approval for ECO Leadership. The company also expanded its charitable giving in 2017 by
creating a program for employees to donate vacation days which the Trust converted to cash that was donated to help the
victims of the 2017 hurricanes in addition to its other ongoing programs. We take our social responsibility seriously.
2017 Compensation Highlights
Significant portions of the total pay for our NEOs is variable incentive pay tied to shareholder returns and operational
performance. Despite delivering record financial results in 2017, our three-year total return to shareholders on an absolute
basis fell below our minimum acceptable level and our three-year total shareholder return relative to the other shopping
center REITs in the Bloomberg REIT Shopping Center Index (“BBRESHOP”) was not as strong as it was in previous years. As a
result, and even taking into account exceeding targeted performance on our annual operating goals, the total pay earned by
our CEO in 2017 was lower than total pay earned by our CEO in 2016 by nearly 19%. This result is a reflection of the
effectiveness of the design of our compensation programs to reward executives when we create value for our shareholders
and not to reward our executives when we do not create value. Some specific decisions and results impacting 2017
compensation for our NEOs include:
• No base pay increase for our CEO
• No change in the target compensation levels for our CEO’s performance based compensation
Payout under our annual bonus plan of 110.71% of target versus 100.00% of target in 2016
•
Payout under our long-term incentive plan of 93.75% of target in 2017 versus 146.29% of target in 2016
•
At each of our Annual Shareholder Meetings for the past three years, we have received at least 94% approval for our
advisory say-on-pay vote. We believe this strong level of support reflects a high degree of shareholder confidence that our
compensation plans are rewarding our executives appropriately and as a result, no changes were made to the basic plan
design in 2017.
15
2017 Compensation and Compensation Components
We provide our NEOs with three primary components of compensation, each of which serves a unique purpose in
compensating and rewarding our NEOs and creates alignment between our NEOs and our shareholders. Those primary
compensation elements include base salary, annual cash bonus and long-term equity incentives.
Type and Form of Pay
Objectives
Fixed
Base Salary
Annual Bonus
At Risk Pay Tied
to Performance
Long-Term Equity Incentive
Compensates executives for carrying out the duties of the job
Recognizes individual experience, skills and performance
Provides value to attract and retain talented executives
Incentivizes accomplishment of annual business objectives
Aligns interests of executives with our shareholders
Provides value to attract and retain talented executives
Incentivizes accomplishment of long-term business objectives
critical to delivering shareholder value
Aligns interests of executives with our shareholders
Promotes executives’ ownership in the company
Provides value to attract and retain talented executives
We also provide various health and welfare related benefits to our NEOs that are generally the same as provided to all of our
employees. These benefits are competitive with those offered by companies that we compete with for talent and provide
another tool that allows us to attract and retain talented executives.
16
Annual Compensation
Annual compensation for our NEOs is paid in both cash and restricted stock with a significant portion at risk and contingent
on achieving either annual or longer term performance goals. The total potential compensation for our named executive
officers is established based on the scope of his/her individual responsibilities and contributions to our performance taking
into account competitive market compensation paid for similar positions. Our Compensation Committee determines
appropriate levels of total compensation for our NEOs by applying their individual understanding, experiences and judgments
in the national marketplace of senior level real estate positions and related industry pay in both public and private
companies that may compete for our executives while also considering the relative importance of various positions at the
Trust given our business plan and organization compared with the business plans of our major competitors. The
Compensation Committee also consults compensation surveys prepared for NAREIT (“NAREIT Surveys”) to confirm its
assessment of appropriate market compensation for our NEOs, reviewing the information reported for each position by the
126 real estate investment trusts (“REITs”) that participated in the latest survey as well as by the approximately 28 retail
focused REITs that participated in that survey. An individual compensation package is then created for each NEO using a
combination of base salary, annual cash bonus and long-term equity incentives to provide the appropriate level of potential
total annual compensation and the right balance of fixed versus at-risk compensation. For our CEO, approximately 87% of his
total compensation earned for 2017 was at-risk and earned based on the level of attainment of our performance goals.
Approximately 69% of the total compensation earned for 2017 by our NEOs other than the CEO was at risk.
2017 CEO Compensation Mix
2017 Other NEO Compensation Mix
Base Salary
(fixed)
13%
Annual
Cash Bonus
22%
Restricted Stock
(Long-term
equity incen(cid:2)ve)
65%
o r m a nce Linked
87% “At-Ri s k ” P e
r f
Restricted Stock
(Long-term
equity incen(cid:2)ve)
45%
Base Salary
(fixed)
30%
Annual
Cash Bonus
25%
6
9
% “At-Risk” Perfor m a n c
e L i n k e d
Fixed Compensation – Base Salary
Base salary is the only fixed component of the compensation paid to our NEOs. Because base salaries are just one component
of total pay, we do not target base salaries to any specific level but do confirm that the base salaries for our NEOs are within
market parameters using the NAREIT Survey and market knowledge. All base salary decisions for our NEOs are made at the
first Compensation Committee meeting of the year and take effect on January 1 of that year. In 2017, neither Mr. Wood nor
Ms. Becker received an increase in base salary. Mr. Guglielmone’s base salary was increased in January 2017 in accordance
with the compensation package approved by the Compensation Committee when Mr. Guglielmone was hired in August
2016.
17
At Risk Compensation
A significant portion of the compensation of our NEOs is provided under our Annual Bonus Plan and Long-Term Incentive
Award Plan both of which are at risk forms of compensation where the amount ultimately earned and paid is dependent on
whether the company achieves short-term and longer-term performance objectives set by the Compensation Committee.
The performance metrics and target pay for each of these plans is set forth below:
Incentive Pay Element
Performance Metric
Achievement Hurdles
Annual Bonus
(annual cash incentive)
FFO Per Share
3 Year TSR Relative to BBRESHOP
(accounts for 50% of the total award)
Long-Term Incentive Plan
(long-term restricted shares)
3 Year Absolute TSR (annualized)
(accounts for 25% of the total award)
3 Year Return on Invested Capital
(accounts for 25% of the total award)
75% Payout:
$5.82 FFO/share
100% Payout: $5.88 FFO/share
125% Payout: $5.95 FFO/share
Threshold:
40th Percentile
Target:
Stretch:
60th Percentile
80th Percentile
Threshold:
8% annualized return
Target:
Stretch:
10% annualized return
12% annualized return
Threshold:
7.50% return
Target:
Stretch:
7.75% return
8.00% return
Annual Bonus Plan
The Annual Bonus Plan is an annual cash incentive program with payment under the plan contingent on the Trust’s achieving
FFO per share within a range set by the Compensation Committee for that year. The Compensation Committee sets that
range to reflect acceptable to exceptional levels of performance in light of our business objectives for the year after a
thorough review and discussion of our budget and investor expectations for the year. The Compensation Committee believes
that FFO per share is the appropriate measure to use for an annual program because it reflects the impacts of operational
decisions, capital allocation decisions and balance sheet management for that year.
Target bonus payouts for our NEOs are set as a percentage of the NEO’s base salary with the target at 150% of base salary for
our CEO and at 75% of base salary for our other NEOs. Our NEOs can earn between 75% to 125% of their annual bonus target
depending on where actual FFO per share for the year falls within the range set by the Compensation Committee. The bonus
targets for our NEOs as a percentage of base salary were not changed in 2017. The Compensation Committee then
determines the final payout to each NEO after evaluating his/her individual performance. The 2017 Annual Bonus calculation
for each of our NEOs is set forth below.
Annual Bonus
Plan
2017 Plan
Final Calculation
NEO Bonus targets
Determined
FFO/share Range
Established
Final Payout
Calculated
Wood = 150% of base
Becker = 75% of base
Guglielmone = 75% of base
Wood = $1,425,000
Becker = $337,500
Guglielmone = $356,250
125% Payout: $5.95 FFO/sh
100% Payout: $5.88 FFO/sh
75% Payout: $5.82 FFO/sh
110.71% payout: $5.91 FFO/share
Final Payout to each NEO
Wood = $1,577,618
Becker = $373,646
Guglielmone = $394,404
In 2017, we reported FFO per share of $5.74 which included a charge of approximately $0.17 per share for early prepayment
in December 2017 of higher rate debt due in 2020. The decision to repay that debt prior to its maturity date was made in
December 2017 in order to opportunistically take advantage of favorable interest rates before the expected rate increases
that occurred in 2018. Had bonus payouts been determined on the basis of reported FFO per share, no payments would have
been made under our annual bonus plan for 2017. The Compensation Committee, however, determined that such a result
18
would not be appropriate and could potentially discourage management from making sound, long-term financing decisions
in the future. Accordingly, the Compensation Committee determined that it would be appropriate and in the best interest of
the Trust’s shareholders to exclude that prepayment charge from the calculation of FFO per share for bonus purposes
resulting in FFO per share for bonus purposes of $5.91 and a bonus payout of 110.71% of target. The $5.91 of FFO per share
used for bonus purposes included the impact of all of the additional
interest and other charges associated with the
opportunistic capital raise completed in December 2017 other than the prepayment premium mentioned above. Based on
their individual contributions to the Trust in 2017, the Compensation Committee awarded each of our NEOs the full annual
bonus for which he/she was eligible.
The Annual Bonus plan for our NEOs is the same bonus plan that covers nearly 95% of our employees. The NEOs and
approximately 80 other participants in the Annual Bonus plan have the option to receive up to 25% of the final bonus payout
in the form of Shares that vest equally over three years with accelerated vesting on death, disability, change in control and
termination without cause. In consideration of the extended payment period for this portion of the bonus already earned,
the employee receives Shares valued at 120% of the portion of the Annual Bonus he/she elected to receive in Shares. For
2017, Mr. Wood elected to receive 25% of his bonus in Shares and our other NEOs elected to receive all of their annual bonus
in cash. The cash portion of the 2017 annual bonuses is reflected in the “Non-Equity Incentive Plan Compensation” column in
the Summary Compensation Table in this proxy statement. The portion Annual Bonus paid in Shares will be included in the
“Stock Awards” column in the Summary Compensation Table and the Grants of Plan-Based Awards Table in next year’s proxy
statement.
Long-Term Incentive Award Program
The largest portion of compensation for our NEOs comes from our equity based Long-Term Incentive Award Program. This
program aligns the interests of our NEOs with shareholders by incentivizing our NEOs to identify and accomplish longer-term
business objectives that generate value through stock price appreciation and dividend growth over a minimum 6-year time
horizon comprised of a 3-year performance period followed by a minimum of a 3-year vesting period for shares and a 5-year
vesting period for options.
Performance Period
2016
2017
2015
Award Made
2018
Shares
Op(cid:2)ons
2019
2020
Ves(cid:2)ng Period
2021
2022
2023
Awards under this program are made in the form of restricted shares with time based vesting over a three year period;
however, each NEO can elect to take up to 50% of his/her award in the form of options which vest over five years. The
Compensation Committee believes that allowing NEOs to choose to receive a portion of his/her award in the form of options
provides value to the NEO that outweighs any diminution in retention value from the granting of options in lieu of Shares.
Each of our NEOs chose to receive the full value of his her 2017 LTIAP award in Shares. Dividends are paid on all Shares issued
under the LTIAP.
The amount of LTIAP awards is determined based on how well the Trust performs on three performance metrics:
(a)
Total shareholder return relative to the Bloomberg REIT Shopping Center index (“BBRESHOP”). Performance on this
metric accounts for 50% of the total LTIAP award. The relative shareholder return metric reflects how well we have
performed for our shareholders as compared to other companies facing the same general market dynamics. The
Compensation Committee determined that the BBRESHOP is the best index to use given that it is an industry index made up
of primarily companies that own and operate open are shopping centers whose businesses are most closely aligned with
ours. Total shareholder return takes into account both stock price appreciation and dividends assuming all dividends are
reinvested.
(b)
Absolute total shareholder return. Performance on this metric accounts for 25% of the total LTIAP award and reflects
whether we have actually created value and delivered acceptable returns to our shareholders over the 3-year performance
period. Total shareholder return takes into account both stock price appreciation and dividends assuming all dividends are
reinvested.
(c)
Return on invested capital. Performance on this metric accounts for 25% of the total LTIAP award. Return on invested
capital reflects how effectively we have allocated our shareholders’ capital during that time and incentivizes our executives
to make sound, long-term investment decisions that will generate strong future returns to our shareholders.
Performance Period Award Made Vesting Period 2015 2016 2017 2018 2019 2020 2021 2022 2023 Shares Options
19
The target levels of payout for each of our NEOs in 2017 remain unchanged from prior years. Mr. Wood and Ms. Becker can earn
an award equal to 50% of target for performance at the threshold level and an award of 150% of target for performance at the
stretch level. Mr. Guglielmone can earn an award equal to 67% of target for threshold level performance and 133% of target for
stretch level performance. Payout levels are interpolated for results falling between threshold, target and stretch levels.
The levels of performance and target payout percentages for the LTIAP awards for each of our NEOs and the performance
actually achieved on each metric for the three year period from January 1, 2015 through December 31, 2017 are set forth in
the chart below:
Rela(cid:2)ve Total Return (50%)
Absolute Total Return (25%)
Return on Invested Capital (25%)
LTIAP Performance Period 2015-2017
Payout as % of
Target
Return
Payout as % of
Target
Return
Payout as % of
Target
Percen(cid:2)le
100th
Actual
8.30%
80th
150%
133%
Actual
65th
12%
150%
133%
8.00%
150%
133%
60th
100%
100%
10%
100%
100%
7.75%
100%
100%
40th
Below
40th
50%
67%
8%
50%
67%
0%
CEO/GC
0%
CFO
Below
8%
0%
CEO/GC
0%
CFO
Actual
2.60%
7.50%
50%
67%
Below
7.50%
0%
CEO/GC
0%
CFO
Based on the results achieved, the LTIAP awards for Mr. Wood (CEO) and Ms. Becker (GC) were paid at 93.75% of target and
the award for Mr. Guglielmone (CFO) was paid at 87.50% of his target award. The Compensation Committee has the
discretion to increase or decrease the award for each executive by up to 20% to in order to account for personal
performance but did not adjust the awards for any of our NEOs for the performance period ending in 2017. The number of
Shares actually awarded to each of our NEOs under the LTIAP is determined by dividing the amount of the award by the
closing price of our stock on the NYSE on the date the awards are made. There is no amount included for 2017 in the
Summary Compensation Table or Grants of Plan-Based Awards Table in this proxy statement for LTIAP awards earned for the
2015-2017 performance period. The LTIAP awards reflected for 2017 in the Summary Compensation Table and the Grants of
Plan-Based Awards Table for our named executive officers in this proxy statement relate to awards made in February 2017
for the 3-year performance period ending December 31, 2016.
LTIAP Performance Period 2015-2017 Relative Total Return (50%) Absolute Total Return (25%) Return on Invested Capital (25%) Payout as % of Target Payout as % of Target Payout as % of Target Percentile Return Return 100th 80th 150% 133% Actual 65th 60th 100% 100% 40th 50% 67% Below 40th 0% 0% 12% 150% 133% 10% 100% 100% 8% 50% 67% Actual 2.60% Below 8% 0% 0% 8.00% 150% 133% Actual 8.30% 7.75% 100% 100% 7.50% 50% 67% Below 7.50% 0% 0% CEO/GC CFO CEO/GC CFO CEO/GC CFO
20
2017 Total Compensation
The following chart sets out the compensation earned by each of our named executive officers for 2017 based on company
and individual performance for the 1 and 3-year periods ending December 31, 2017:
Compensation Component
Donald C. Wood
Daniel Guglielmone
Dawn M. Becker
$
950,000
$
475,000
$
450,000
Base Salary
Target Bonus
Actual 2017 Bonus
LTIAP
Threshold
Target
Stretch
Actual 2017 LTIAP
Total 2017 Comp
150% of base
$
1,577,618
2,500,000
5,000,000
7,500,000
4,687,500
$
$
$
$
$
75% of base
75% of base
$
$
$
394,404
600,000
900,000
$ 1,200,000
$
787,500
$
$
$
$
$
373,646
300,000
600,000
900,000
562,500
7,215,118
$ 1,656,904
$ 1,386,146
The amounts set forth above for the annual performance bonus and performance based, long-term equity program differ
from the amounts shown for 2017 in the Summary Compensation Table because the chart above reflects the amount earned
for the year while the Summary Compensation Table reflects these amounts in the year in which they are paid regardless of
the time period during which those amounts were earned. We believe the chart above is helpful because it allows the actual
compensation earned for 2017 to be understood in the context of the Trust’s financial and other performance for the
performance periods ending in 2017.
Other Benefits
We provide other health and welfare benefits to our NEOs on the same basis as we provide those benefits to all employees.
In addition to those benefits, we provide to Mr. Wood, his spouse and his dependents continuation of health coverage after
Mr. Wood’s termination upon death, disability, retirement, change in control or otherwise (other than a termination with
cause or resignation). This coverage will continue as to Mr. Wood and his spouse until their death, or with respect to his
spouse until divorce, if earlier, and coverage continues for three of Mr. Wood’s children until that child is no longer a
dependent as defined under Section 106 of the Internal Revenue Code and as to one of the children, until death. We are
required to provide coverage of at least the same level as provided to Mr. Wood and his family at the time of his termination
and such coverage will be secondary to certain other coverages that may be available to Mr. Wood and his family. This
agreement has been in place and remained unchanged since 2008.
Other Compensation Considerations
Equity Ownership: Each of our NEOs is required to maintain a level of ownership of equity in the company equal to 3
times the sum of base salary and annual bonus for Mr. Wood and 2.5 times the sum of base salary and annual bonus for
each of Mr. Guglielmone and Ms. Becker. Both Mr. Wood and Ms. Becker were in compliance with the equity ownership
requirement as of December 31, 2017. Mr. Guglielmone who joined the Trust in August 2016 was not in compliance
with the requirements as of December 31, 2017; however, is in compliance as of the date of this proxy statement.
Risk Assessment: As described in the “Risk Management Oversight” section, we have concluded that our compensation
programs do not encourage excessive or unnecessary risk taking.
Timing of Equity Grants: Equity awards to our employees under our Annual Bonus Plan and LTIAP described above are
made at the first Compensation Committee meeting of the year which generally occurs before we release year-end
financial results for the prior fiscal year. We have no policy that times the granting of equity awards relative to the
release of material non-public information. Equity awards to new hires are generally made on the first day on which the
employee starts work and equity awards to employees who are promoted generally are made on the day on which the
promotion has been fully approved. All of our options are awarded at the closing price of our Shares on the NYSE on the
21
date the award is made. The Compensation Committee has never re-priced options, granted options with an exercise
price that is less than the closing price on the NYSE on the date of the grant or granted options which are priced on a
date other than the grant date. Equity awards for our NEOs for the 3-year performance period ending on December 31,
2017 were made at the Compensation Committee’s meeting on February 7, 2018 based on the closing price of our
Shares on the NYSE on that date.
Termination and Change-in-Control Arrangements: We have agreements in place with each of our NEOs providing for
various payments and benefits to be made to them if there is a change in control or their employment with us is
terminated for certain reasons. The circumstances in which payments may be made and the potential amounts of those
payments are described in more detail
in the “Potential Payments on Termination of Employment and
Change-in-Control” section below. We believe that the payments provided for in these agreements are reasonable and
appropriate as part of the total compensation packages available for our NEOs.
Deductibility of Executive Compensation in Excess of $1.0 Million: For tax years ending on or prior to December 31,
2017, Section 162(m) of the Internal Revenue Code generally prohibited any publicly held corporation from taking a
federal income tax deduction for compensation in excess of $1 million in any taxable year paid to an executive officer
who is named in the Summary Compensation Table. An exception was made for qualified performance-based
compensation, among other things. Although the Compensation Committee considered the impact of Section 162(m) in
structuring compensation programs, the Committee’s primary focus was on creating programs that addressed the needs
and objectives of the company regardless of the impact of Section 162(m). As a result, the Compensation Committee
made awards and structured programs that were non-deductible under Section 162(m).
The Tax Cuts and Jobs Act of 2017 modified Section 162(m) to, among other things, modify who is subject to the
$1 million deduction limit and to eliminate the exception for performance based pay from the $1 million deduction limit
starting with tax years ending after December 31, 2017. We do not anticipate these changes to Section 162(m) to have a
material
impact on us. We do not anticipate anyone other than our three NEOs being subject to the $1 million
deduction limit and we anticipate our taxable income to only increase modestly on an annual basis as a result of the loss
of the performance based compensation deduction. To maintain our status as a real estate investment trust, we are
required to distribute at least 90% of our taxable income to our shareholders in the form of dividends. The modest
increase in taxable income resulting from the change in Section 162(m) will be taken into account as our Board
determines the amount of dividend to be paid to our shareholders in tax years ending after December 31, 2017.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board has reviewed and discussed the CD&A required by Item 402(b) of Regulation S-K
with management and, based on such review and discussions, the Compensation Committee recommended to the Board
that the CD&A be included in this Proxy Statement.
Submitted by:
David W. Faeder, Chairman
Elizabeth I. Holland
Gail P. Steinel
Joseph S. Vassalluzzo
22
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation earned by each of our NEOs for the fiscal years ended December 31,
2017, 2016 and 2015, in accordance with current SEC rules. The Summary Compensation Table below does not include the
value of the Shares issued to our NEOs on February 7, 2018 for the performance period ending December 31, 2017. The value
of those Shares will appear in next year’s proxy statement in the Grants of Plan-Based Awards Table as well as the “Stock
Awards” column of the Summary Compensation Table.
Name and Principal Position
Year
Salary(1)
Bonus
Stock
Awards(2)
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
Donald C. Wood, President and Chief
Executive
Officer (PEO)
Daniel Guglielmone, Executive Vice
President-Chief
Financial Officer and Treasurer (PFO)(5)
Dawn M. Becker, Executive Vice
President-General
Counsel and Secretary
2017 $950,000 $
— $6,927,569
$1,183,213
$17,000
$9,077,782
2016 $950,000 $
— $7,462,223
$1,068,750
$15,767
$9,496,740
2015 $850,000 $
— $3,462,159
$1,155,437
$15,435
$5,483,031
2017 $475,000 $250,000 $ 899,958
$ 394,404
$38,701
$2,058,064
2016 $164,423 $
— $1,500,080
$ 337,500
$20,802
$2,022,805
2015 $
— $
— $
—
$
—
$
—
$
—
2017 $450,000 $
— $ 979,017
$ 373,646
$11,073
$1,813,737
2016 $450,000 $
— $ 798,719
$ 253,125
$10,307
$1,512,151
2015 $450,000 $
— $ 565,500
$ 407,801
$10,384
$1,433,685
(1) Amounts shown in the Salary column include all amounts deferred at the election of the NEOs into our non-qualified
deferred compensation plan.
(2) Amounts shown in the Stock Awards column reflect the aggregate grant date fair value of the awards calculated in
accordance with FASB ASC Topic 718 for the fiscal years ended December 31, 2017, 2016 and 2015. For a discussion of
the valuation of these awards, please refer to Note 12 in the notes to our consolidated financial statements in our
Annual Report on Form 10-K filed on February 13, 2018.
(3) Amounts shown in this column represent only the cash portion paid under our Annual Bonus Plan and include amounts
deferred by our NEOs into our non-qualified deferred compensation plan. Mr. Wood received 75% of his Annual Bonus
in cash for each of 2017, 2016 and 2015. Ms. Becker received 100% of her bonus in cash for 2017 and 2015 and 75% in
cash for 2016. Mr. Guglielmone received 100% of his Annual Bonus in cash for 2017 and 2016. The remaining amounts
earned under the Annual Bonus Plan in 2017, 2016 and 2015 were paid in Shares in an amount equal to 120% of the
cash value in consideration of a 3-year vesting schedule.
(4) The amounts shown in this column for the last fiscal year include: (a) payments for group term life insurance, long-term
disability insurance and supplement life insurance of $10,250 for Mr. Wood, $2,932 for Mr. Guglielmone and $3,324 for
Ms. Becker; (b) contributions to our 401(k) plan of $6,750 for each of our NEOs; and (c) for Mr. Guglielmone, $29,019 as
the rental value of a temporary apartment we provided to him for one year as part of his initial hiring compensation
package.
(5) The bonus is a portion of the cash hiring bonus agreed to as part of Mr. Guglielmone’s initial hiring compensation
package.
23
GRANTS OF PLAN-BASED AWARDS TABLE
The following Share awards were made in 2017, all of which were earned based on the 1-year or 3-year performance period
ending December 31, 2016. Awards made in 2018 to the NEOs under our Annual Bonus Plan and long-term incentive plan for
the 1-year and 3-year performance periods ending December 31, 2017 will be reported in the Grants of Plan-Based Awards
Table in next year’s proxy statement.
Name
Donald C. Wood
Daniel Guglielmone
Dawn M. Becker
Grant
Date
2/7/2017(1)
2/7/2017(2)
2/7/2017(2)
2/7/2017(1)
2/7/2017(2)
All Other Stock Awards:
Number of Shares of
Stock or Units(3)
3,061
46,535
6,443
725
6,284
Grant Date
Fair Value(4)
$ 427,560
$6,500,009
$ 899,958
$ 101,268
$ 877,749
Issued under our Annual Bonus Plan. These Shares vest equally over 3 years.
Issued under our LTIAP. These Shares vest equally over 3 years.
(1)
(2)
(3) Dividends are paid on all Shares issued at the same rate and time as paid to all other holders of our Shares as declared
by our Board from time to time.
(4) Represents the grant date fair value of Share awards as computed in accordance with FASB ASC Topic 718. The grant
date fair value for these Share awards was based on the closing price of the Trust’s Shares on the grant date.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table sets forth information about outstanding equity awards held on December 31, 2017 by our NEOs:
Option Awards
Stock Awards
Name
Donald C. Wood
Daniel Guglielmone
Dawn M. Becker
Option
Exercise
Price
Option
Expiration
Date
$43.48
2/17/2019
Number of
Securities
Underlying
Unexercised
Options
Exercisable
104,788
0
0
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
0
0
0
Number of
Shares or
Units of
Stock That
Have Not
Vested
3,061(1)
46,535(1)
2,023(2)
30,633(2)
1,083(3)
7,027(3)
6,443(1)
2,089(4)
5,371(5)
725(1)
6,284(1)
3,495(2)
271(3)
1,054(3)
Market Value
of Shares or
Units of
Stock That
Have Not
Vested(6)
$ 406,531
$6,180,313
$ 268,675
$4,068,369
$ 143,833
$ 933,256
$ 855,695
$ 277,440
$ 713,323
$
96,287
$ 834,578
$ 464,171
$
35,992
$ 139,982
(1) One-third of these Shares vested on February 12, 2018 and the remaining Shares will vest on February 12, 2019 and
2020.
(2) One-half of these Shares vested on February 12, 2018 and the remaining Shares will vest on February 12, 2019.
(3) These shares vested on February 12, 2018.
24
(4) One-third of these Shares vested on August 15, 2017 and the remaining Shares will vest on August 15, 2018 and 2019.
(5) One-seventh of these Shares vested on August 15, 2017 and the remaining Shares will vest equally on August 15 of each
of 2018 through 2023.
(6) The market value of outstanding unvested Shares is based on $132.81, the closing price of our Shares on the NYSE on
December 29, 2017.
OPTION EXERCISES AND STOCK VESTED TABLE
The following table includes certain information with respect to options exercised in 2017 by each of our NEOs and Shares
that vested during 2017.
Name
Donald C. Wood
Daniel Guglielmone
Dawn M. Becker
Option Awards
Stock Awards
Number of Shares
Acquired on Exercise
124,507
0
26,627
Value
Realized
on Exercise(1)
$9,021,283
$
—
$1,545,694
Number of Shares
Acquired on Vesting
43,446
1,939
7,323
Value
Realized
on Vesting(2)
$6,211,040
$ 250,655
$1,046,896
(1) The value realized is based on the difference between the price at which the Shares were sold and the exercise price of
the option.
(2) The value realized is based on the closing price of a Share on the date of the Share vesting.
NON-QUALIFIED DEFERRED COMPENSATION TABLE
We maintain a non-qualified deferred compensation plan that is open to participation by 34 members of our management
team, including our NEOs. Each participant can elect to defer up to 100% of his or her base salary and cash payment under
our Annual Bonus Plan with deferral elections made in December of each year for amounts to be earned in the following
year. A number of widely available investment options are made available to each plan participant who then decides how to
allocate amounts deferred among those investment options. The amount earned by plan participants on their deferrals is
calculated by our third party plan administrator as if the amounts deferred had actually been invested in the investment
options selected by each participant. We do not make any contributions to the deferred compensation plan for any individual
nor do we guaranty any rate of return on amounts deferred. Amounts deferred into the plan, including amounts earned on
the deferrals, are generally payable to the participant shortly after he or she retires or is otherwise no longer employed by
us; however, there are a few other alternatives where amounts may be paid to a participant sooner. The amounts deferred
by Ms. Becker and Mr. Wood into the plan in 2017, the earnings on plan investments in 2017 and aggregate withdrawals and
distributions made in 2017 are described below. Mr. Guglielmone does not participate in our deferred compensation plan.
Name
Donald C. Wood
Dawn M. Becker
Executive
Contributions in
Last Fiscal Year(1)
Registrant
Contributions in
Last Fiscal Year
Aggregate
Earnings in
Last Fiscal Year
Aggregate
Withdrawals /
Distributions
Aggregate
Balance at
Last Fiscal Year-End
$250,000
$ 45,000
$
$
—
—
$954,058
$251,820
$
$
—
—
$5,961,156
$1,530,856
(1) All amounts in this column are included in either the “Salary” or “Non-Equity Incentive Plan Compensation” column of
the Summary Compensation Table for 2017.
POTENTIAL PAYMENTS ON TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
We have entered into severance agreements with each of our NEOs that require us to make certain payments and provide
certain benefits to them in the event of a termination of employment or change in control of the Trust. Regardless of the
reason for an NEO’s termination of employment, he or she will be entitled to receive upon termination all accrued but
unused vacation pay and a distribution of any amounts in our non-qualified deferred compensation plan as described in the
“2017 Non-Qualified Deferred Compensation” section above. No NEO is entitled to receive a new award under the Annual
Bonus Plan or the LTIAP for the year in which the termination occurs. The agreements with each of our NEOs contain
25
provisions restricting the executive from engaging in competing behavior and soliciting and/or hiring our employees for a
period of time after termination. The payments that will be made to a NEO on termination vary depending on the reason for
termination and may be conditioned on the signing of a release in favor of the Trust.
The amount of compensation payable to each of our NEOs under various termination scenarios is reflected below assuming
that the separation of service was effective on December 31, 2017:
Cash
Payment(1)
Medical
Benefits(2)
Accelerated
Equity(3)
Other
Benefits(4)
Excise Tax
Gross-Up
Total
Donald C. Wood
Death
Disability
TWOC
$
— $2,095,000
$12,000,977
$1,358,701
$2,662,160
$12,000,977
$
$
—
—
$3,791,426
$2,719,120
$12,000,977
$ 60,250
Termination for Cause
$ 475,000
$
20,080
$
— $
—
N/A
N/A
N/A
N/A
$14,095,977
$16,021,838
$18,571,774
$
495,080
$7,582,853
$2,809,481
$12,000,977
$167,165
$ —
$22,560,475
CIC(5)
Daniel Guglielmone
Death
Disability
TWOC
CIC(5)
Dawn M. Becker
Death
Disability
TWOC
Termination for Cause
CIC(5)
$
— $
— $ 1,846,457
$ 403,128
$ 869,404
$
$
32,843
$ 1,846,457
32,843
$ 1,846,457
$ 60,250
$
$
—
—
Termination for Cause
$
— $
— $
— $
—
$1,738,809
$
65,686
$ 1,846,457
$ 90,375
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 1,846,457
$ 2,282,428
$ 2,808,955
$
—
$ 3,741,327
$ 1,571,009
$ 1,966,026
$ 2,499,730
$
232,113
$
— $
— $ 1,571,009
$
$
—
—
14,226
$ 1,571,009
10,670
$ 1,571,009
$ 60,250
7,113
$
— $
—
$ 380,790
$ 857,801
$ 225,000
$1,715,602
$
$
$
$
28,453
$ 1,571,009
$ 90,375
$ —
$ 3,405,439
(1) For disability, payments are for 1 year in an amount equal to the difference between then current salary and the
amount of any payments received under any disability policy we maintained plus a tax gross-up on non-tax exempt
payments. The estimated tax gross-ups included in these amounts are $636,701 for Mr. Wood, $156,128 for
Mr. Guglielmone and $158,790 for Ms. Becker. For termination without cause (“TWOC”), payment are 1.5 times the
highest annual base salary and annual bonus paid during the prior 3-year period for Mr. Wood and 1.0 times that
amount for Mr. Guglielmone and Ms. Becker. For termination for cause, the payments equal 1 month of base salary for
each year of employment greater than 5 years, capped at a total of 6 months. For change in control (“CIC”), the
payments equal 3.0 times the highest annual base salary and annual bonus paid during the prior 3-year period for
Mr. Wood and 2.0 times that amount for Mr. Guglielmone and Ms. Becker.
(2) Amounts in this column represent our estimate of the COBRA equivalent to provide the same benefits as being provided
to each NEO at December 31, 2017 for a period of: (a) 1 year in the event of death or disability for each of our NEOs;
(b) 6 months for Mr. Wood and Ms. Becker on a termination with cause; (c) 9 months for Mr. Wood and Ms. Becker and
12 months for Mr. Guglielmone on a TWOC; and (d) 3 years for Mr. Wood and 2 years for Mr. Guglielmone and
Ms. Becker on a CIC. These estimates were determined by us with input from our health insurance broker and health
coverage insurer to confirm that our estimate was consistent with the market cost of providing a stand-alone health
insurance program with similar coverage. Because our health insurance program includes a self-insured retention, we
use the COBRA equivalent as a reasonable estimate of the potential costs for these benefits. For Mr. Wood, this column
also includes the following estimated costs (calculated in accordance with Generally Accepted Accounting Principles)
pursuant to the Health Continuation Coverage Agreement with Mr. Wood: $2,095,000 in the event of death; $2,622,000
in the event of disability; and $2,689,000 in the event of termination without cause and change in control.
(3) All unvested Shares and options held by our NEOs will vest in the event of death, disability, TWOC or CIC. Amounts in
this column were calculated by multiplying the number of unvested Shares and options that vest on the occurrence of
the specified event as of December 31, 2017 by the value for each Share and option determined in accordance with the
26
FASB ASC Topic 718. Each NEO or NEO beneficiary has 2 years after the NEO’s death or disability and 1 year after a
TWOC or CIC to exercise any outstanding options, subject to the terms of the applicable option agreement.
(4) Amounts in this column are estimated costs for the following: (a) a full-time administrative assistant and outplacement
assistance for a period of 6 months in the event of a TWOC for each of our NEOs and for a period of 12 months for
Mr. Wood and 9 months for Mr. Guglielmone and Ms. Becker in the event of a CIC; and (b) use of a company vehicle for
three years for Mr. Wood in the event of a CIC should he choose to use that benefit.
(5) Under our 2010 Plan, a CIC is deemed to have occurred when a person acquires a 20% interest in us, or our current
Trustees, or those subsequently approved by our current Trustees, constitute less than 2/3 of our Board. Upon a CIC, each
NEO is entitled to receive payments and benefits so long as he or she (a) is terminated from employment by the Trust other
than for cause or leaves for good reason within 2 years after the change of control or (b) as to Mr. Wood and Ms. Becker
only, he or she voluntarily leaves employment within the 30 day window following the 1-year anniversary of the CIC.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. Faeder, Ms. Holland, Ms. Steinel and Mr. Vassalluzzo. There are no
Compensation Committee interlocks and no member of the Compensation Committee serves, or has in the past served, as an
employee or officer of the Trust.
CEO PAY RATIO
Our compensation and benefit programs are substantially similar throughout the company and are designed to reward all
employees who contribute to our success with a total compensation package that is competitive in the marketplace for each
employee’s position and performance. We are required to calculate and disclose the compensation of our median paid
employee as well as the ratio of the total compensation of our median paid employee to the compensation paid to our CEO.
To determine our median paid employee, we used our employee population as of December 31, 2017, excluding our CEO,
which included 318 full-time and part-time employees ranging from executive vice presidents to landscapers and
maintenance technicians. We identified our median paid employee using annual base pay plus annual bonus at target levels
plus overtime actually paid, the combination of which we believe most closely approximates the total annual direct
compensation of our employees. For purposes of the calculation, base pay was annualized for the 46 employees who started
with us in 2017. No other adjustments were made. The actual total annual compensation of our Chief Executive Officer and
median paid employee was calculated in accordance with the requirements of the Summary Compensation Table included in
this proxy statement. Based on this methodology, we have determined that the total annual compensation paid to our Chief
Executive Officer in 2017 was $9,077,782 and the total annual compensation paid to our median paid employee in 2017 was
$101,598 resulting in a ratio of 89:1.
We calculated our pay ratio in accordance with SEC rules; however, those rules allow companies discretion in methodologies
used to identify the median paid employee and the compensation used to determine the median paid employee. As a result,
this ratio is unique to our company. Other companies may make their determinations differently and as a result, the ratio
may not be comparable across companies. We believe our ratio is a reasonable estimate. Our ratio is very heavily influenced
by what employees/services we choose to provide through employees as opposed to through third parties who are not taken
into account in the calculation of the pay ratio.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2017 regarding our equity compensation plans, all of which
were approved by our shareholders.
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(1)
(Column A)
Weighted average exercise
price of outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance
(excluding securities
reflected in Column A(2)
Equity compensation plans approved by security holders
106,485
Equity compensation plans not approved by security
holders
Total
—
106,485
$44.18
—
$44.18
1,602,719
—
1,602,719
(1) Consists of Shares authorized for issuance under our 2001 Plan and our 2010 Plan.
(2) Consists entirely of Shares authorized for issuance under our 2010 Plan.
27
AUDIT INFORMATION
PROPOSAL 3 – NON-BINDING RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Shareholders are being asked to ratify in a non-binding vote the selection of Grant Thornton, LLP (“GT”) as our independent
registered public accounting firm for the fiscal year ending December 31, 2018. Although shareholder ratification of GT is not
required by our governance documents; the Board is submitting the selection of GT to shareholders to solicit shareholder
views on our selection of GT as our independent registered public accounting firm. GT has served in this role since 2002 and
the Board believes it is in the best interests of the Trust and our shareholders for GT to continue in this role. If the selection
of GT is not ratified, the Audit Committee may reconsider whether to retain GT. Even if the selection of GT is ratified, the
Audit Committee may change the appointment of GT at any time if it determines such a change would be in the best
interests of the Trust and our shareholders.
A representative of GT will be present at the Annual Meeting and will have the opportunity to answer appropriate questions
from shareholders.
The affirmative vote of a majority of votes cast at the Annual Meeting, in person or by proxy, is required to approve this
proposal. An “abstention” or “broker non-vote” will have no effect on the outcome of the vote for this proposal.
The Board recommends that you vote “FOR” the non-binding ratification of the appointment of GT as our
independent registered public accounting firm for 2018.
28
AUDIT COMMITTEE REPORT
The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or
incorporated by reference into any other Trust filing under the Securities Act of 1933 or the Exchange Act, except to the extent
the Trust specifically incorporates this Report by reference therein.
The Audit Committee is made up entirely of trustees who meet all independence requirements under the SEC and NYSE and
have the requisite financial competence to serve on the Audit Committee. The Audit Committee meets at least quarterly and
operates pursuant to a written charter that is reviewed at least every three years. That charter can be accessed under the
Investors section of our website at www.federalrealty.com. In 2017, the Audit Committee met four times and each meeting
included an executive session with the Trust’s independent registered public accounting firm and no members of
management present.
The Audit Committee is directly responsible for the appointment, retention and oversight of GT, the independent registered
public accounting firm retained to audit the Trust’s financial statements, and also oversees management, including its
internal audit firm, in their performance of its financial functions. Specifically, management is responsible for the financial
reporting process, including the system of internal controls, for the preparation of consolidated financial statements in
accordance with generally accepted accounting principles in the United States (“GAAP”) and for reporting on internal control
over financial reporting. Management uses Pricewaterhouse Coopers, LLC (“PwC”) to provide its internal audit function,
including oversight of the ongoing testing of the effectiveness of our internal controls. GT is responsible for auditing the
consolidated financial statements of the Trust and expressing an opinion on the financial statements and the effectiveness of
internal control over financial reporting.
During 2017, as part of its oversight function, the Audit Committee:
➢ Reviewed and discussed with management and GT, individually and collectively, all annual and quarterly financial
statements and operating results prior to their issuance;
➢ Discussed with GT matters required to be discussed pursuant to applicable audit standards,
including the
reasonableness of judgments and the clarity and completeness of financial disclosures;
➢ Reviewed and discussed with GT and PwC, individually and collectively, the ongoing assessment and testing of the
Trust’s systems of internal controls and procedures;
➢ Discussed with GT matters relating to GT’s independence from the Trust and received written confirmation from GT
that GT is not aware of any relationships, that in their professional judgment may impair their independence; and;
➢ Monitored the non-audit services provided by GT to ensure that performance of such services did not adversely
impact GT’s independence.
Based on the Audit Committee’s reviews and discussions with GT, PwC and management, the Audit Committee
recommended to the Board of Trustees that the Board approve the inclusion of our audited financial statements in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for filing with the SEC.
Submitted by the Audit Committee:
Gail P. Steinel, Chairperson
Jon E. Bortz
David W. Faeder
Warren M. Thompson
29
INDEPENDENT AUDITOR’S FEES
The following table sets forth the fees for services rendered by GT for the years ended December 31, 2017 and 2016:
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees
Total Fees
2017
2016
$ 906,750
$652,808
$ 133,875
$ 61,950
$ 239,980
$255,791
$
— $
—
$1,280,605
$970,549
(1) Audit fees include all fees and expenses for services in connection with: (a) the audit of our financial statements
included in our annual reports on Form 10-K; (b) Sarbanes-Oxley Section 404 relating to our annual audit; (c) the review
of the financial statements included in our quarterly reports on Form 10-Q; and (d) consents and comfort letters issued
in connection with debt offerings and common share offerings.
(2) Audit-related fees primarily include the audit of our employee benefit plan, which are paid by the plan and not the
Trust, and certain property level audits.
(3) $233,400 and $246,070 of the amounts shown for 2017 and 2016, respectively, relate solely to tax compliance and
preparation, including the preparation of original and amended tax returns and refund claims and tax payment planning.
These figures do not include $6,645 in 2016 we paid to GT as our 30% share of the cost of tax return preparation for our
joint venture with affiliates of a discretionary fund created and advised by Clarion Partners. On January 13, 2016, we
acquired the Clarion Partners interest in the joint venture arrangement. The remaining amounts relate to requested tax
research, none of which research related to tax shelters.
PROCEDURES FOR AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES
As required by its charter, the Audit Committee is responsible for reviewing and approving in advance all audit and
permissible non-audit services to be provided by GT to the Trust. The Audit Committee approves such services only after
concluding that the provision of these services would not affect the independence of GT. The Audit Committee approved all
audit services provided by GT in 2017 and has pre-approved GT providing the following permissible non-audit services in
2018 up to specified maximum amounts that are consistent with prior years:
➢ Issuance of comfort letters and consent for capital markets transactions
➢ Tax planning and other consultation for purposes of structuring investment or financing opportunities as well as
consultation associated with financial reporting matters
➢ Issuance of audit opinions related to acquisition audits required under Rule 3-14 of Regulation S-X (if any)
➢ Limited review of the Trust’s letter to the State of California Department of Environmental Quality
30
OWNERSHIP INFORMATION
OWNERSHIP OF PRINCIPAL SHAREHOLDERS
Based upon our records and the information reported in filings with the SEC, the following were beneficial owners of more
than 5% of our Shares as of March 14, 2018:
Name and Address
of Beneficial Owner
The Vanguard Group, Inc.(2)
100 Vanguard Blvd.
Malvern, PA 19355
BlackRock, Inc.(3)
55 East 52nd Street
New York, NY 10055
State Street Corporation(4)
State Street Financial Center, One Lincoln Street
Boston, MA 02111
Vanguard Specialized Funds – Vanguard REIT Index Fund(5)
100 Vanguard Blvd.
Malvern, PA 19355
JPMorgan Chase & Co.(6)
270 Park Avenue
New York, NY 10017
Amount and Nature
of Beneficial Ownership
Percentage of Our
Outstanding Shares(1)
12,575,705
17.2%
7,899,850
10.8%
6,242,324
4,605,432
3,785,397
8.5%
6.3%
5.2%
(4)
(3)
(2)
(1) The percentage of outstanding Shares is calculated by taking the number of Shares stated in the Schedule 13G or 13G/A,
as applicable, filed with the SEC divided by 73,186,370, the total number of Shares outstanding on March 14, 2018.
Information based on a Schedule 13G/A filed with the SEC on February 9, 2018 by The Vanguard Group which states The
Vanguard Group, an investment advisor, has sole voting power over 189,034 Shares, shared voting power over 113,832
Shares, sole dispositive power over 12,362,260 Shares and shared dispositive power over 213,445 Shares.
Information based on a Schedule 13G/A filed with the SEC on January 19, 2018 by BlackRock, Inc., which states
BlackRock, Inc., a parent holding company, has sole voting power over 7,141,098 Shares and sole dispositive power over
7,899,850 Shares.
Information based on a Schedule 13G filed with the SEC on February 14, 2018 by State Street Corporation, which states
that State Street Corporation, a parent holding company, has shared voting and dispositive power over 6,242,324
Shares.
Information based on a Schedule 13G/A filed with the SEC on February 2, 2018 by Vanguard Specialized Funds –
Vanguard REIT Index Fund which states that Vanguard Specialized Funds – Vanguard REIT Index Fund, an investment
company registered under Section 8 of the Investment Company Act of 1940, has sole voting power over 4,605,432
Shares.
Information based on a Schedule 13G filed with the SEC on January 10, 2018 by JPMorgan Chase & Co. which states that
JPMorgan Chase & Co., a parent holding company, has sole voting power over 3,306,021 Shares, sole dispositive power
over 3,771,226 Shares and shared dispositive power over 14,075 Shares.
(6)
(5)
31
OWNERSHIP OF TRUSTEES AND EXECUTIVE OFFICERS
The table below reflects beneficial ownership of our Trustees and NEOs as of March 14, 2018 determined in accordance with
Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless noted in the footnotes following
the table, each Trustee and NEO has sole voting and investment power as to all Shares listed.
Name and Address of Beneficial Owner(1)
Common
Unvested
Restricted
Shares
Options Currently
Exercisable or
Exercisable Within
60 Days
Dawn M. Becker
Jon E. Bortz(3)
David W. Faeder
Daniel Guglielmone
Elizabeth I. Holland
Gail P. Steinel
Warren M. Thompson
Joseph S. Vassalluzzo
Donald C. Wood(4)
115,043
11,472
9,659
9,316
3,217
787
9,112
9,191
21,198
0
0
18,828
0
0
0
0
0
0
0
0
0
0
0
0
284,529
95,744
104,788
Total Shares
Beneficially
Owned
126,515
9,659
9,316
22,045
787
9,112
9,191
21,198
485,061
Trustees, trustee nominees and executive officers as a group
(9 individuals)
462,052
126,044
104,788
692,884
Percentage of
Outstanding
Shares
Owned(2)
*
*
*
*
*
*
*
*
*
*
Less than 1%
*
(1) The address of each beneficial owner is 1626 East Jefferson Street, Rockville, MD 20852.
(2) The percentage of outstanding Shares owned is calculated by taking the number of Shares reflected in the column titled
“Total Shares Beneficially Owned” divided by 73,186,370, the total number of Shares outstanding on March 14, 2018,
plus the number of options for such person or group reflected in the column titled “Options Currently Exercisable or
Exercisable Within 60 Days.”
(3) Voting and investment power is shared with Mr. Bortz’ wife.
(4)
Includes 53,879 Shares owned by Mr. Wood’s wife.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our Trustees, executive officers and any persons who beneficially own more than 10% of our Shares are required by
Section 16(a) of the Exchange Act to file reports of initial ownership and changes of ownership of our Shares with the SEC and
with the NYSE. To our best knowledge, based solely on review of copies of such reports furnished to us and written
representations that no other reports were required, the required filings of all such Trustees and executive officers were filed
timely during 2017.
32
GENERAL INFORMATION
Annual Meeting and Voting
You are receiving these materials because you owned our Shares as of March 14, 2018, the record date established by our
Board of Trustees (“Board”) for our Annual Meeting. Everyone who owned our Shares as of this date, whether directly as a
registered shareholder or indirectly through a broker or other nominee, is entitled to vote at the Annual Meeting. We had
73,186,370 Shares outstanding on March 14, 2018. A majority of the Shares entitled to vote at the Annual Meeting must be
present in person or by proxy for us to proceed with the Annual Meeting.
If you own your Shares directly with our transfer agent, American Stock Transfer and Trust, LLC, you are a registered
shareholder and can vote either in person at the Annual Meeting or by proxy without attending the Annual Meeting through
one of the following methods:
By Internet
By Telephone
By Mail
Visit www.voteproxy.com. You will need the control
number on your Notice of Internet Availability,
proxy card or voting instruction form. Votes must
be submitted by 11:59pm EDT to be counted for the
meeting.
Call 1-800-Proxies (1-800-776-9437). You will
need the control number on your Notice of
Internet Availability, proxy card or voting
instruction form. Votes must be submitted by
11:59pm EDT to be counted for the meeting.
You can vote my marking, signing and dating
your proxy card.
For those of you holding your Shares indirectly in an account at a bank, brokerage firm, broker-dealer or nominee, you are a
beneficial owner of Shares held in “street name”. You will receive all proxy materials directly from your bank, brokerage firm,
broker-dealer or nominee and you must either direct them as to how to vote your Shares or obtain from them a proxy to
vote at the Annual Meeting. Please refer to the notice of internet availability of proxy materials or the voter instruction form
used by your bank, brokerage firm, broker-dealer or nominee for specific instructions on methods of voting. If you fail to give
your bank, brokerage firm, broker-dealer or nominee specific instructions on how to vote your Shares with respect to Items 1
and 2, your vote will NOT be counted for those matters. It is important for every shareholder’s vote to be counted on these
matters so we encourage you to provide your bank, brokerage firm, broker-dealer or nominee with voting instructions. If you
fail to give your bank, brokerage firm, broker-dealer or nominee specific instructions on how to vote your Shares on Item 3,
your bank, brokerage firm, broker-dealer or nominee will generally be able to vote on Item 3 as he, she or it determines.
If you do not vote your Shares, your Shares will not be counted and we may not be able to hold the Annual Meeting. We
encourage you to vote by proxy using one of the methods described above even if you plan to attend the Annual Meeting in
person so that we will know as soon as possible whether enough votes will be present.
In the future, if you own your Shares directly and would like to receive proxy materials by email, you may register to do so at
www.astfinancial.com in which case you will receive an email containing links to our proxy materials. If you own Shares
through a bank, brokerage firm, broker-dealer or other similar nominee and want to receive proxy materials via email, you
must contact your bank, brokerage firm, broker-dealer or other similar nominee for instructions. Your election to receive
your proxy materials by email delivery will remain in effect for all future annual meetings until you revoke it.
Shareholders can access this Proxy Statement, our Annual Report and our other filings with the SEC on the Investors page of
our website at www.federalrealty.com. A copy of our Annual Report, including the financial statements and financial
statement schedules (“Form 10-K”) is being provided to shareholders along with this Proxy Statement. The Form 10-K
includes certain exhibits, which we will provide to you only upon request addressed to Investor Relations at 1626 East
Jefferson Street, Rockville, Maryland 20852. The request must be accompanied by payment of a fee to cover our reasonable
expenses for copying and mailing the Form 10-K. If you elected to receive our shareholder materials via the Internet or email,
you may request paper copies, without charge, by written request addressed to the address set forth above.
The SEC’s rules permit us to deliver a single Notice or single set of Annual Meeting materials to one address shared by two or
more of our shareholders unless we have received contrary instructions from shareholders. This procedure, referred to as
“householding”, reduces the volume of duplicate information shareholders receive and can result in significant savings on
mailing and printing costs. To take advantage of this opportunity, only one Notice, Proxy Statement and Annual Report is
33
being delivered to multiple shareholders who share a single address, unless any shareholder residing at that address gave
contrary instructions. If any shareholder sharing an address with another shareholder wants to receive a separate copy of
this Proxy Statement and the Annual Report or wishes to receive a separate proxy statement and annual report in the future,
or receives multiple copies of the proxy statement and Annual Report and wishes to receive a single copy, the shareholder
should provide such instructions by calling our Investor Relations Department at (800) 937-5449, by writing to Investor
Relations at 1626 East Jefferson Street, Rockville, Maryland 20852, or by sending an e-mail to Investor Relations at
IR@federalrealty.com.
Questions regarding the Notice, voting or email delivery should be directed to our Investor Relations Department at
(800) 937-5449 or by email at IR@federalrealty.com.
SOLICITATION OF PROXIES, SHAREHOLDER PROPOSALS AND OTHER MATTERS
The Board of Trustees is soliciting your proxy to vote on matters that will be presented at our Annual Meeting and the cost of
this solicitation of proxies will be borne by us. We may solicit proxies through the mail, Internet, in person and by telephone
or facsimile, and may request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting
materials to the beneficial owners of Shares and reimburse them for their reasonable expenses. We may also hire a proxy
solicitation firm at a standard industry compensation rate. The Trustees know of no other business to be presented at the
Annual Meeting. If other matters properly come before the meeting, the persons named as proxies will vote on them in their
discretion.
Proposals of shareholders intended to be presented at the 2019 Annual Meeting of Shareholders, including nominations for
persons for election to the Board of Trustees, must be received by us no later than November 23, 2018 to be considered for
inclusion in our proxy statement and form of proxy relating to such meeting.
You are urged to vote either by telephone (1-800-PROXIES or 1-800-776-9437) or on the Internet (www.voteproxy.com) by
following the instructions on your Notice. For those of you who have elected email delivery, please follow the instructions for
voting provided in the email. If you elect to receive your proxy materials by mail, please make sure to complete, sign, date
and return your proxy card promptly to make certain your Shares will be voted at the Annual Meeting.
For the Trustees,
Dawn M. Becker
Executive Vice President – General
Counsel and Secretary
YOUR PROXY IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
PLEASE SUBMIT IT TODAY.
34
APPENDIX A – FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income, computed in
accordance with U.S. GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and
gains and losses on the sale of real estate, and impairment write-downs of depreciable real estate. We compute FFO in
accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in
addition to our net income and net cash provided by operating activities. We consider FFO available for common
shareholders a meaningful, additional measure of operating performance primarily because it excludes the assumption that
the value of the real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and
the recording of depreciation. We use FFO primarily as one of several means of assessing our operating performance in
comparison with other REITs.
The reconciliation of net income to FFO available for common shareholders is as follows:
Net income
Year Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except per share data)
$297,870
$258,883
$218,424
$172,289
$167,608
Net income attributable to noncontrolling interests
(7,956)
(8,973)
(8,205)
(7,754)
(4,927)
Gain on sale of real estate and change in control of interests, net
(77,632)
(31,133)
(28,330)
(4,401)
(28,855)
Depreciation and amortization of real estate assets
188,719
169,198
154,232
154,060
146,377
Amortization of initial direct costs of leases
19,124
16,875
15,026
12,391
10,694
Funds from operations
Dividends on preferred shares(1)
420,125
404,850
351,147
326,585
290,897
(1,917)
(541)
(541)
(541)
(541)
888
Income attributable to operating partnership units
3,143
3,145
3,398
3,027
Income attributable to unvested shares
(1,374)
(1,095)
(1,147)
(1,474)
(1,306)
Funds from operations available for common shareholders(2)
$419,977
$406,359
$352,857
$327,597
$289,938
Weighted average number of common shares, diluted(1)
73,122
71,869
69,920
68,410
65,778
Funds from operations available for common shareholders, per
diluted share(2)
$
5.74
$
5.65
$
5.05
$
4.79
$
4.41
(1) For the year ended December 31, 2017, dividends on our Series 1 preferred stock are not deducted in the calculation of
FFO available to common shareholders, as the related shares are dilutive and included in “weighted average common
shares, diluted.” The weighted average common shares used to compute FFO per diluted common share also includes
operating partnership units that were excluded from the computation of diluted EPS. Conversion of these operating
partnership units is dilutive in the computation of FFO per diluted common share but is anti-dilutive for the computation
of diluted EPS for the periods presented.
If the $12.3 million early extinguishment of debt charge incurred in 2017 was excluded, our FFO available for common
shareholders would have been $432.2 million and FFO available for common shareholders, per diluted share would have
been $5.91.
(2)
35
CORPORATE
INFORMATION
CORPORATE OFFICE
1626 East Jefferson Street
Rockville, MD 20852-4041
301.998.8100
ANNUAL MEETING
Federal Realty Investment Trust will hold its Annual Shareholder
Meeting at 10 a.m. on May 2, 2018, at AMP by Strathmore,
11810 Grand Park Avenue, North Bethesda, MD.
CORPORATE COUNSEL
CORPORATE GOVERNANCE
Pillsbury Winthrop Shaw Pittman LLP
Washington, DC
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Grant Thornton LLP
New York, NY
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
718.921.8124
800.937.5449
www.astfinancial.com
COMMON STOCK LISTING
New York Stock Exchange
Symbol: FRT
MEMBERSHIPS
International Council of Shopping Centers
National Association of Real Estate Investment Trusts
Urban Land Institute
The Trust’s Corporate Governance Guidelines and the charters
for the Audit Committee, the Compensation Committee, and the
Nominating and Corporate Governance Committee are available
in the Investors section of our website at www.federalrealty.com.
AUTOMATIC CASH INVESTMENT AND
DIRECT DEPOSIT
Federal Realty offers automatic cash investment, the option to
automatically withdraw funds from a checking/savings or other
bank account to purchase additional shares of FRT on the 1st
and 15th of each month. Federal Realty also offers shareholders
the option to directly deposit their dividends. To sign up for
automatic cash investment or direct deposit, please call
800.937.5449 or visit www.astfinancial.com.
INTERNET
www.federalrealty.com
Visitors to the site can search for and download Securities and
Exchange Commission filings, review Federal Realty’s Dividend
Reinvestment Plan, obtain current stock quotes, read recent
press releases, and see a listing of our properties and the
properties’ respective websites. Printed materials and email news
alerts can also be requested.
INVESTOR RELATIONS CONTACT
You may communicate directly with Federal Realty’s Investor
Relations department via telephone at 800.658.8980 or by email
at IR@federalrealty.com.
FE DERAL REA LTY | ANNUAL RE P O RT 2 0 1 7 (cid:2)
LOCATIONS
CORPORATE HEADQUARTERS
1626 E Jefferson Street
Rockville, MD 20852
301.998.8100
REGIONAL OFFICES
Boston
450 Artisan Way
Suite 320
Somerville, MA 02145
617.684.1500
Los Angeles
860 South Sepulveda Boulevard
Suite 105
El Segundo, CA 90245
310.414.5280
Philadelphia
50 E Wynnewood Road
Suite 200
Wynnewood, PA 19096
610.896.5870
San Jose
356 Santana Row
Suite 1005
San Jose, CA 95128
408.551.4600