Forward-Looking Statements The following discussion should be read in conjunction with the consolidated interim financial statements and notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities and Exchange Commission (the "SEC") onFebruary 10, 2020 . Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations ofFederal Realty Investment Trust ("we" "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements: • risks that our tenants will not pay rent, may vacate early or may file for
bankruptcy or that we may be unable to renew leases or re-let space at
favorable rents as leases expire;
• risks that we may not be able to proceed with or obtain necessary approvals
for any redevelopment or renovation project, and that completion of anticipated or ongoing property redevelopment or renovation projects that we do pursue may cost more, take more time to complete or fail to perform as expected; 16
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• risk that we are investing a significant amount in ground-up development
projects that may be dependent on third parties to deliver critical aspects of certain projects, requires spending a substantial amount upfront in infrastructure, and assumes receipt of public funding which has been committed but not entirely funded;
• risks normally associated with the real estate industry, including risks that
occupancy levels at our properties and the amount of rent that we receive from our properties may be lower than expected, that new acquisitions may fail to perform as expected, that competition for acquisitions could result in increased prices for acquisitions, that costs associated with the periodic maintenance and repair or renovation of space, insurance and other operations may increase, that environmental issues may develop at our properties and result in unanticipated costs, and, because real estate is illiquid, that we may not be able to sell properties when appropriate;
• risks that our growth will be limited if we cannot obtain additional capital;
• risks of financing on terms which are acceptable to us, our ability to meet
existing financial covenants and the limitations imposed on our operations by those covenants, and the possibility of increases in interest rates that would result in increased interest expense;
• risks related to our status as a real estate investment trust, commonly
referred to as a REIT, for federal income tax purposes, such as the existence of complex tax regulations relating to our status as a REIT, the effect of future changes in REIT requirements as a result of new legislation, and the adverse consequences of the failure to qualify as a REIT;
• risks related to natural disasters, climate change and public health crises
(such as the outbreak and worldwide spread of COVID-19), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address them, may precipitate or materially exacerbate one or more of the above-mentioned risks, and may significantly disrupt or prevent us from operating our business in the ordinary course for an extended period. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make, including those in this Quarterly Report on Form 10-Q. You should carefully review the risks and the risk factors included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and under Part II, Item 1A in this Quarterly Report on Form 10-Q, before making any investments in us. 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 ofthe United States ,California , andSouth Florida . As ofSeptember 30, 2020 , 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 24.1 million square feet. In total, the real estate projects were 91.5% leased and 90.0% occupied atSeptember 30, 2020 . Impacts of COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. OurBoard of Trustees , as part of its risk oversight function, is regularly coordinating with management to assess the effects of the pandemic on our business and to determine appropriate courses of action to maintain the health and safety of our personnel, to strengthen our financial position and to adapt our business as appropriate. In response to the pandemic, we have taken a number of specific actions so far: • OnMarch 16, 2020 , we transitioned our work force to work remotely, canceled all non-essential business travel and have canceled company events, or are holding them remotely. As ofSeptember 30, 2020 , we have re-opened most of our offices with limited capacity following federal, state and local guidelines for phased re-openings, however, much of our workforce continues to work remotely.
• During
strengthen our financial position and maximize our liquidity. In total, we raised$1.1 billion via a$400.0 million term loan and the issuance of$700.0 million of senior unsecured notes. We also amended how certain covenants are calculated in our revolving credit facility to provide us more operating flexibility. As ofSeptember 30, 2020 , there is no outstanding balance on our$1.0 billion revolving credit facility and we have cash and cash equivalents of$863.3 million . Subsequent to quarter end, we raised an additional$400.0 million through the issuance of senior unsecured notes.
• Construction activity continues at all of our projects, including Assembly
Row andSantana West , where activities were paused as a result of government restrictions for a portion of the year. Overall, we are experiencing a slower pace of construction as well as elevated costs as we observe COVID-19 safety protocols at all sites, and a slower lease-up pace.
• Launched The Pick-Up, a curbside, contactless exchange which creates a
singular, reliable, centralized service that retailers and restaurants of all
sizes can take advantage of, particularly well-suited for small businesses.
The extent of the effects of COVID-19 on our business, results of operations, cash flows, and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See
Item 1A .
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Risk Factors. However, we believe the actions we are taking will help minimize
interruptions to our operations and will put us in the best position to
participate in the resulting economic recovery. Management and our
Business Continuity We were able to transition all but a limited number of essential employees to remote work and do not anticipate any adverse impact on our ability to continue to operate our business. Transitioning to a largely remote workforce has not had any material adverse impact on our financial reporting systems, our internal controls or disclosure controls and procedures. As government mandated closures and restrictions are gradually lifted through phased re-openings, we are following local, state and federal governments guidelines and limiting the number of employees coming into our offices as well as implementing health and safety guidelines. In addition, we are following the proper guidelines to ensure that property employees are visiting properties only as necessary to ensure that the properties with businesses that are open and operating are able to conduct business and serve their communities. At this time, we have not laid off, furloughed, or terminated any employee in response to COVID-19, nor have we modified the compensation of any employee. The Compensation Committee of ourBoard of Trustees may reevaluate the performance goals and other aspects of the compensation arrangements of our executive officers later in 2020 as more information about the effects of COVID-19 become known. Critical Accounting Policies See "Revenue Recognition and Accounts Receivable" in Note 2 to the consolidated financial statements for further discussion related to the FASB's issuance of interpretive guidance relating to the accounting for lease concessions provided as a result of the COVID-19 pandemic. There have been no significant changes to the critical accounting policies disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K . 2020 Property Acquisitions, Disposition, and Impairment OnJanuary 10, 2020 , we acquired a 49,000 square foot shopping center inFairfax, Virginia for$22.3 million . This property is adjacent to, and will be operated as part of our Fairfax Junction property. This purchase price was paid with a combination of cash and the issuance of 163,322 downREIT operating partnership units. Approximately$0.5 million and$0.4 million of net assets acquired were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively. OnFebruary 12, 2020 , we acquired two buildings totaling 12,000 square feet inHoboken, New Jersey for$14.3 million , including the assumption of$8.9 million of mortgage debt. This acquisition is in addition to the 37 buildings previously acquired, and was completed through the joint venture that was formed in 2019, for which we own a 90% interest. Less than$0.1 million and approximately$3.3 million of net assets acquired were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively. OnApril 21, 2020 , we sold a building inPasadena, California for$16.1 million , which resulted in a gain of$11.7 million . OnSeptember 1, 2020 , the$60.6 million non-recourse mortgage loan on The Shops atSunset Place matured. The mortgage was not repaid and thus the lender declared the loan in default. We are an approximately 90% owner in the partnership that owns the property, and we consolidate the partnership as we are the primary beneficiary of this VIE. While we continue to evaluate our long-term plans for the property, taking into account current market conditions and prospective development and redevelopment returns, as well as the impact of COVID-19 on the revenue prospects for the property, we currently believe it is unlikely we will move forward with the planned redevelopment or repay the mortgage loan at the current balance, and thus, do not expect we will be long-term holders of this asset. While we continue to engage in negotiations with the lender, we expect our exit from the property would either be achieved through a short term extension of the loan and an orderly sales process commencing in 2021, or potentially, the lender taking control of the asset. Given these current expectations, we have recorded an impairment charge of$57.2 million during the three and nine months endedSeptember 30, 2020 . The fair value estimate used to determine the impairment charge was determined by market comparable data and discounted cash flow analyses. The cash flows utilized in such analyses are comprised of unobservable inputs which include forecasted rental revenue and expenses based upon market conditions and future expectations. The capitalization rates and discount rates utilized in such analyses are based upon unobservable rates that we believe to be within a reasonable range of current market rates for the property. Based on these inputs, we have determined that the$57 million estimated valuation of the property is classified within Level 3 of the fair value hierarchy. 18
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2020 Debt and Equity Transactions In connection with the two buildings we acquired inHoboken, New Jersey onFebruary 12, 2020 , we assumed two mortgage loans with a net face amount of$8.9 million and a fair value of$9.0 million . The mortgage loans bear interest at 4.00% and mature onJuly 27, 2027 . InMarch 2020 , in order to strengthen our financial position and balance sheet, to maximize our liquidity, and to provide maximum financial flexibility to continue our business initiatives as the effects of COVID-19 continue to evolve, we borrowed$990.0 million under our revolving credit facility, representing a draw-down of almost the entirety of our$1.0 billion revolving credit facility. This amount was subsequently repaid when we entered into a$400.0 million unsecured term loan onMay 6, 2020 and issued$700.0 million of fixed rate unsecured senior notes onMay 11, 2020 . The unsecured term loan matures onMay 6, 2021 , plus one twelve month extension at our option, and bears interest at LIBOR plus 135 basis points based on our current credit rating. Our net proceeds from this transaction after underwriting fees and other costs were$398.7 million . The$700.0 million of unsecured senior notes issued inMay 2020 comprise a$300.0 million reopening of our 3.95% senior notes maturing onJanuary 15, 2024 and a$400.0 million issuance of 3.50% senior notes maturing onJune 1, 2030 . The 3.95% senior notes were offered at 103.257% of the principal amount with a yield to maturity of 2.944%, and have the same terms and are of the same series as the$300.0 million senior notes issued onDecember 9, 2013 . The 3.50% senior notes were offered at 98.911% of the principal amount with a yield to maturity of 3.630%. Our net proceeds from these transactions after the net issuance premium, underwriting fees, and other costs were$700.1 million . OnOctober 13, 2020 , we issued$400.0 million of fixed rate senior unsecured notes that mature onFebruary 15, 2026 and bear interest at 1.25%. The notes were offered at 99.339% of the principal amount with a yield to maturity of 1.379%. The net proceeds of these notes, or "green bonds," will be allocated to the financing and refinancing of recently completed and future eligible green projects, which includes (i) investments in acquisitions of buildings; (ii) building developments or redevelopments; (iii) renovations in existing buildings; and (iv) tenant improvement projects, in each case that we have received, or expected to receive, in the three years prior to the issuance of the notes or during the term of the notes, a LEED silver, Gold, or Platinum certification (or environmentally equivalent successor standards). Net proceeds allocated to previously incurred costs associated with eligible green projects will be available for repayment of indebtedness. We have an at-the-market ("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. As ofSeptember 30, 2020 , we had the capacity to issue up to$128.3 million in common shares under our ATM equity program. Capitalized Costs 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 certain external and internal costs related to both development and redevelopment activities of$311 million and$7 million , respectively, for the nine months endedSeptember 30, 2020 , and$266 million and$6 million , respectively, for the nine months endedSeptember 30, 2019 . We capitalized external and internal costs related to other property improvements of$44 million and$2 million , respectively, for the nine months endedSeptember 30, 2020 , and$49 million and$2 million for the nine months endedSeptember 30, 2019 . We capitalized external and internal costs related to leasing activities of$8 million and$2 million , respectively, for the nine months endedSeptember 30, 2020 , and$17 million and$2 million , respectively, for the nine months endedSeptember 30, 2019 . 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 ,$2 million , and$2 million , respectively, for the nine months endedSeptember 30, 2020 and$6 million ,$2 million , and$2 million , respectively for the nine months endedSeptember 30, 2019 . Total capitalized costs were$374 million and$342 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Recently Adopted Accounting Pronouncements See Note 2 to the consolidated financial statements. Outlook Our long-term growth strategy is focused on growth in earnings, funds from operations, and cash flows primarily through a combination of the following: 19
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• growth in our comparable property portfolio,
• growth in our portfolio from property developments and redevelopments, and
• expansion of our portfolio through property acquisitions.
While the ongoing COVID-19 pandemic is impacting us in the short-term, our
long-term focus has not changed. See our 10-K filed on
The actions taken by federal, state and local governments to mitigate the spread
of COVID-19, initially by ordering closures of non-essential businesses and
ordering residents to generally stay at home, and subsequent phased re-openings,
as well as the general concern over the spread of COVID-19, have resulted in
many of our tenants temporarily or even permanently closing their businesses,
and for some, it has impacted their ability to pay rent. As of
We continue to have several development projects in process, albeit at a slower pace due to COVID-19 related restrictions, being delivered as follows: • In the 1st quarter of 2020, we delivered the fully leased eight story, 301,000 square foot office building atSantana Row . • The first phase of construction on the 12 acres of land that we control across fromSantana Row includes an eight story 376,000 square foot office building, with over 1,700 parking spaces. The building is expected to cost between$250 million and$270 million with openings beginning in 2022. • Phase III ofAssembly Row includes 277,000 square feet of office space (of which, 150,000 square feet is pre-leased), 56,000 square feet of retail space, 500 residential units, and over 800 additional parking spaces. The expected costs for Phase III are between$465 million and$485 million and is projected to open beginning in 2021. •At Pike & Rose , we have continued construction on a 212,000 square foot office building (which includes 4,000 square feet of ground floor retail space), and includes over 600 additional parking spaces. The building is expected to cost between$128 million and$135 million . AtSeptember 30, 2020 , approximately 61,000 square feet of office space has been delivered, of which approximately 45,000 square feet is our new corporate headquarters. • Throughout the portfolio, we currently have redevelopment projects underway with a projected total cost of approximately$312 million that we expect to stabilize over the next several years.
The above includes our best estimates based on information currently known,
however, the completion of construction, final costs, and the timing of openings
will be dependent upon the duration of governmental restrictions and the
duration and severity of the economic impacts of COVID-19.
The development of future phases of
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Lease Rollovers For the third quarter of 2020, we signed leases for a total of 481,000 square feet of retail space including 472,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental decrease of 1% on a cash basis. New leases for comparable spaces were signed for 165,000 square feet at an average rental decrease of 2% on a cash basis. Renewals for comparable spaces were signed for 307,000 square feet at an average rental decrease of 1% on a cash basis. Tenant improvements and incentives for comparable spaces were$34.50 per square foot, of which,$93.67 per square foot was for new leases and$2.76 per square foot was for renewals for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , we signed leases for a total of 1,287,000 square feet of retail space including 1,216,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 3% on a cash basis. New leases for comparable spaces were signed for 439,000 square feet at an average rental increase of 8% on a cash basis. Renewals for comparable spaces were signed for 777,000 square feet at an average rental increase of 1% on a cash basis. Tenant improvements and incentives for comparable spaces were$32.49 per square foot, of which,$85.06 per square foot was for new leases and$2.82 per square foot was for renewals for the nine months endedSeptember 30, 2020 . Historically, we have executed comparable space leases for 1.3 to 1.9 million square feet of retail space each year. While we are on pace for a similar volume of deals in 2020, we expect some rental rates to be negatively impacted by the COVID-19 pandemic, which we started experiencing in the third quarter 2020. The rental increases associated with comparable spaces generally include all leases signed for retail space 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. Tenant improvements and incentives include the total dollars committed for the improvement (fit out) of a space as it relates to a specific lease and, except for redevelopments, may also include base building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as inducement to sign a lease that do not represent building improvements. Costs related to redevelopments requires judgment by management in determining what reflects base building costs and thus, is not included in the "tenant improvements and incentives" amount. The leases signed in 2020 generally become effective over the following two years though some may not become effective until 2023 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.Comparable Properties Throughout this section, we have provided certain information on a "comparable property" basis. Information provided on a comparable property basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties that are currently under development or are being repositioned for significant redevelopment and investment. For the three and nine months endedSeptember 30, 2020 , all or a portion of 98 and 97 properties, respectively, were considered comparable properties and eight properties were considered non-comparable properties. For the nine months endedSeptember 30, 2020 , two properties and two portions of properties were moved from non-comparable properties to comparable properties, one property was moved from comparable properties to non-comparable properties, one property was moved from acquisitions to non-comparable properties, and one portion of a property was removed from comparable properties, as it was sold, compared to the designations for the year endedDecember 31, 2019 . While there is judgment surrounding changes in designations, we typically move non-comparable properties to comparable properties once they have stabilized, which is typically considered 90% physical occupancy or when the growth expected from the redevelopment has been included in the comparable periods. We typically remove properties from comparable properties when the repositioning of the asset has commenced and has or is expected to have a significant impact to property operating income within the calendar year. Acquisitions are moved to comparable properties once we have owned the property for the entirety of comparable periods and the property is not under development or being repositioned for significant redevelopment and investment. 21
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Table of Contents RESULTS OF OPERATIONS - THREE MONTHS ENDEDSEPTEMBER 30, 2020 AND 2019 Change 2020 2019 Dollars % (Dollar amounts in thousands) Rental income$ 207,410 $ 233,212 $ (25,802 ) (11.1 )% Mortgage interest income 787 735 52 7.1 % Total property revenue 208,197 233,947 (25,750 ) (11.0 )% Rental expenses 41,832 54,484 (12,652 ) (23.2 )% Real estate taxes 30,520 29,030 1,490 5.1 % Total property expenses 72,352 83,514 (11,162 ) (13.4 )% Property operating income (1) 135,845 150,433 (14,588 ) (9.7 )%
General and administrative expense (9,308 ) (11,060 ) 1,752 (15.8 )% Depreciation and amortization
(65,631 ) (59,648 ) (5,983 ) 10.0 % Impairment charge (57,218 ) - (57,218 ) 100.0 % Gain on sale of real estate, net of tax - 14,293 (14,293 ) (100.0 )% Operating income 3,688 94,018 (90,330 ) (96.1 )% Other interest income 538 389 149 38.3 % Interest expense (36,228 ) (27,052 ) (9,176 ) 33.9 % Loss from partnerships (1,621 ) (249 ) (1,372 ) 551.0 % Total other, net (37,311 ) (26,912 ) (10,399 ) 38.6 % Net (loss) income (33,623 ) 67,106 (100,729 ) (150.1 )% Net loss (income) attributable to noncontrolling interests 5,334 (1,641 ) 6,975 (425.0 )% Net (loss) income attributable to the Trust$ (28,289 ) $ 65,465 $ (93,754 ) (143.2 )%
(1) Property operating income is a non-GAAP measure that consists of rental
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. Property Revenues Total property revenue decreased$25.8 million , or 11.0%, to$208.2 million in the three months endedSeptember 30, 2020 compared to$233.9 million in the three months endedSeptember 30, 2019 . The percentage occupied at our shopping centers was 90.0% atSeptember 30, 2020 compared to 92.8% atSeptember 30, 2019 . The most significant driver of the decrease in property revenues is the impact of COVID-19, as many of our tenants were forced to temporarily or in some cases permanently close their businesses resulting in changes in our collectibility estimates and in some cases rent abatement. 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, and is net of collectibility related adjustments. Rental income decreased$25.8 million , or 11.1%, to$207.4 million in the three months endedSeptember 30, 2020 compared to$233.2 million in the three months endedSeptember 30, 2019 due primarily to the following: • higher collectibility related adjustments across all properties of$27.9 million primarily the result of COVID-19 impacts. This includes the write-off of$1.7 million of straight-line rent receivables primarily related to tenantswho were changed to a cash basis of revenue recognition during the quarter endedSeptember 30, 2020 , • a decrease of$5.8 million from comparable properties primarily related to lower average occupancy of approximately$5.4 million , lower recoveries of$2.2 million primarily the result of lower utilities and repairs and maintenance costs,$2.0 million of lower parking income and percentage rent, primarily due to the impacts from COVID-19 related closures, partially offset by$3.2 million of higher lease termination fees and higher rental rates of approximately$1.1 million , and
• a decrease of
partially offset by,
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• an increase of$5.3 million from acquisitions ofHoboken during the second half of 2019 and early 2020 andGeorgetowne Shopping Center inNovember 2019 , and • an increase of$4.2 million from non-comparable properties primarily driven by the opening of our new office building atSantana Row in early 2020, partially offset by$0.8 million related to lower parking income primarily due to the impacts from COVID-19 related closures. Property Expenses Total property expenses decreased$11.2 million , or 13.4%, to$72.4 million in the three months endedSeptember 30, 2020 compared to$83.5 million in the three months endedSeptember 30, 2019 . Changes in the components of property expenses are discussed below. Rental Expenses Rental expenses decreased$12.7 million , or 23.2%, to$41.8 million in the three months endedSeptember 30, 2020 compared to$54.5 million in the three months endedSeptember 30, 2019 . This decrease is primarily due to the following: • an$11.9 million charge in 2019 related to the buyout of a lease atAssembly Square Marketplace , • a decrease of$2.2 million from comparable properties due primarily to lower utilities and repairs and maintenance costs primarily driven by the impact of COVID-19, and
• a decrease of
partially offset by, • an increase of$0.7 million from acquisitions ofHoboken during the second half of 2019 and early 2020 andGeorgetowne Shopping Center inNovember 2019 . As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income decreased to 20.2% in the three months endedSeptember 30, 2020 from 23.4% in the three months endedSeptember 30, 2019 . Real Estate Taxes Real estate tax expense increased$1.5 million , or 5.1%, to$30.5 million in the three months endedSeptember 30, 2020 compared to$29.0 million in the three months endedSeptember 30, 2019 . This increase is primarily due to$0.9 million from the acquisitions ofHoboken during the second half of 2019 and early 2020 andGeorgetowne Shopping Center inNovember 2019 , and$0.7 million from non-comparable properties due primarily to the opening of our new office building atSantana Row in early 2020. Property Operating Income Property operating income decreased$14.6 million , or 9.7%, to$135.8 million in the three months endedSeptember 30, 2020 compared to$150.4 million in the three months endedSeptember 30, 2019 . This decrease is primarily due to the impact of COVID-19, which resulted in higher collectibility related adjustments, lower parking income, and lower percentage rent; and property sales, partially offset by the prior year charge related to the buyout of a lease atAssembly Square Marketplace , property acquisitions, and the opening of our new office building atSantana Row in early 2020. Other Operating General and Administrative General and administrative expense decreased$1.8 million , or 15.8%, to$9.3 million in the three months endedSeptember 30, 2020 from$11.1 million in the three months endedSeptember 30, 2019 . This decrease is due primarily to lower personnel related costs. Depreciation and Amortization Depreciation and amortization expense increased$6.0 million , or 10.0%, to$65.6 million in the three months endedSeptember 30, 2020 from$59.6 million in the three months endedSeptember 30, 2019 . This increase is due primarily to the write off of lease related assets for vacating tenants, acquisitions ofHoboken during the second half of 2019 and early 2020 andGeorgetowne Shopping Center inNovember 2019 , and the opening of our new office building atSantana Row in early 2020, partially offset by property sales. Impairment Charge The$57.2 million impairment charge for the three months endedSeptember 30, 2020 relates to The Shops atSunset Place . See Note 2 to the consolidated financial statements for further discussion. 23
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Gain on Sale of Real Estate, Net of Tax The$14.3 million gain on sale of real estate, net of tax for the three months endedSeptember 30, 2019 is due primarily to the sale of one property. Operating Income Operating income decreased$90.3 million , or 96.1%, to$3.7 million in the three months endedSeptember 30, 2020 compared to$94.0 million in the three months endedSeptember 30, 2019 . This decrease is primarily due to the impairment charge related to The Shops atSunset Place , the impacts of COVID-19, which resulted in higher collectibility related adjustments, lower parking income, and lower percentage rent; a lower net gain on the sale of real estate compared to prior year; and the write off of lease related assets for vacating tenants; partially offset by the prior year charge related to the buyout of a lease atAssembly Square Marketplace ; property acquisitions, the opening of our new office building atSantana Row in early 2020; and lower personnel related costs. Other Interest Expense Interest expense increased$9.2 million , or 33.9%, to$36.2 million in the three months endedSeptember 30, 2020 compared to$27.1 million in the three months endedSeptember 30, 2019 . This increase is due primarily to the following: • an increase of$6.2 million from higher borrowings in response to the COVID-19 pandemic (see further discussion in "2020 Debt and Equity Transactions" in Item 2 of the Quarterly Report), and • an increase of$3.8 million due to higher weighted average borrowings primarily from the additional$100 million issuance of our 3.20% notes inAugust 2019 , and$106.9 million of mortgage loans associated with ourHoboken acquisitions, partially offset by, • an increase of$0.6 million in capitalized interest, primarily attributable to the development of Phase III ofAssembly Row , and • a decrease of$0.3 million due to a lower overall weighted average borrowing rate. Gross interest costs were$42.1 million and$32.3 million in the three months endedSeptember 30, 2020 and 2019, respectively. Capitalized interest was$5.8 million and$5.3 million for the three months endedSeptember 30, 2020 and 2019, respectively. Loss from partnerships Loss from partnerships increased$1.4 million to$1.6 million in the three months endedSeptember 30, 2020 compared to$0.2 million in the three months endedSeptember 30, 2019 . This increase is primarily due to our share of losses from our hotel investments atAssembly Row and Pike & Rose, largely the result of COVID-19 related reductions in travel. Net loss (income) attributable to noncontrolling interests Net loss (income) attributable to noncontrolling interests decreased$7.0 million to a loss of$5.3 million in the three months endedSeptember 30, 2020 compared to income of$1.6 million in the three months endedSeptember 30, 2019 . The decrease is primarily attributable to The Shops atSunset Place impairment charge. 24
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Table of Contents RESULTS OF OPERATIONS - NINE MONTHS ENDEDSEPTEMBER 30, 2020 AND 2019 Change 2020 2019 Dollars % (Dollar amounts in thousands) Rental income$ 613,687 $ 694,435 $ (80,748 ) (11.6 )% Mortgage interest income 2,294 2,204 90 4.1 % Total property revenue 615,981 696,639 (80,658 ) (11.6 )% Rental expenses 122,561 140,182 (17,621 ) (12.6 )% Real estate taxes 90,183 81,883 8,300 10.1 % Total property expenses 212,744 222,065 (9,321 ) (4.2 )% Property operating income (1) 403,237 474,574 (71,337 ) (15.0 )%
General and administrative expense (29,373 ) (32,047 ) 2,674 (8.3 )% Depreciation and amortization
(190,603 ) (178,327 ) (12,276 ) 6.9 % Impairment charge (57,218 ) - (57,218 ) 100.0 % Gain on sale of real estate, net of tax 11,682 30,490 (18,808 ) (61.7 )% Operating income 137,725 294,690 (156,965 ) (53.3 )% Other interest income 1,355 755 600 79.5 % Interest expense (98,746 ) (82,567 ) (16,179 ) 19.6 % Loss from partnerships (6,657 ) (1,302 ) (5,355 ) 411.3 % Total other, net (104,048 ) (83,114 ) (20,934 ) 25.2 % Net income 33,677 211,576 (177,899 ) (84.1 )% Net loss (income) attributable to noncontrolling interests 3,304 (5,065 ) 8,369 (165.2 )%
Net income attributable to the Trust
(1) Property operating income is a non-GAAP measure that consists of rental
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. Property Revenues Total property revenue decreased$80.7 million , or 11.6%, to$616.0 million in the nine months endedSeptember 30, 2020 compared to$696.6 million in the nine months endedSeptember 30, 2019 . The percentage occupied at our shopping centers was 90.0% atSeptember 30, 2020 compared to 92.8% atSeptember 30, 2019 . The most significant driver of the decrease in property revenue is the impact of COVID-19, as some of our tenants were forced to temporarily or in some cases permanently close their businesses resulting in changes in our collectibility estimates and in some cases rent abatement. 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, and is net of collectibility related adjustments. Rental income decreased$80.7 million , or 11.6%, to$613.7 million in the nine months endedSeptember 30, 2020 compared to$694.4 million in the nine months endedSeptember 30, 2019 due primarily to the following: • higher collectibility related adjustments across all properties of$84.4 million primarily the result of COVID-19 impacts. This includes the write-off of$11.2 million of straight-line rent receivables primarily related to tenantswho were changed to a cash basis of revenue recognition during the nine months endedSeptember 30, 2020 , • a decrease of$13.8 million from comparable properties due primarily to lower average occupancy of approximately$11.8 million , lower parking income and percentage rent of$4.4 million primarily due to the impacts from COVID-19 related closures, lower recoveries of$3.6 million primarily the result of lower snow removal expense and utilities, and lower legal fee income of$0.6 million , partially offset by higher rental rates of approximately$9.2 million , and
• a decrease of
partially offset by,
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• an increase of$15.7 million from acquisitions ofHoboken during the second half of 2019 and early 2020,Georgetowne Shopping Center inNovember 2019 , and • an increase of$10.0 million from non comparable properties driven by the opening of our new office building atSantana Row in early 2020, partially offset by$2.1 million related to lower parking income primarily due to the impacts from COVID-19 related closures. Property Expenses Total property expenses decreased$9.3 million , or 4.2%, to$212.7 million in the nine months endedSeptember 30, 2020 compared to$222.1 million in the nine months endedSeptember 30, 2019 . Changes in the components of property expenses are discussed below. Rental Expenses Rental expenses decreased$17.6 million , or 12.6%, to$122.6 million in the nine months endedSeptember 30, 2020 compared to$140.2 million in the nine months endedSeptember 30, 2019 due primarily to the following: • an$11.9 million charge in 2019 related to the buyout of a lease atAssembly Square Marketplace , • a decrease of$8.7 million from comparable properties due to lower snow removal expense and lower utilities, repairs and maintenance, and management fees primarily driven by the impact of COVID-19, and
• a decrease of
partially offset by, • a increase of$2.3 million from acquisitions ofHoboken during the second half of 2019 and early 2020, andGeorgetowne Shopping Center inNovember 2019 . As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income decreased to 20.0% in the nine months endedSeptember 30, 2020 from 20.2% in the nine months endedSeptember 30, 2019 . Real Estate Taxes Real estate tax expense increased$8.3 million , or 10.1%, to$90.2 million in the nine months endedSeptember 30, 2020 compared to$81.9 million in the nine months endedSeptember 30, 2019 . This increase is primarily due to the following: • an increase of$4.9 million from comparable properties primarily due to higher current year assessments, and tax refunds recorded in 2019 from a multi-year appeal and reassessment at three of our properties, • an increase of$2.5 million from acquisitions ofHoboken during the second half of 2019 and early 2020 andGeorgetowne Shopping Center inNovember 2019 , and • an increase of$1.6 million from non-comparable properties due primarily to the opening of our new office building atSantana Row in early 2020, partially offset by, • a decrease of$0.7 million from our property sales. Property Operating Income Property operating income decreased$71.3 million , or 15.0%, to$403.2 million in the nine months endedSeptember 30, 2020 compared to$474.6 million in the nine months endedSeptember 30, 2019 . This decrease is primarily due to the impact of COVID-19, which resulted in higher collectibility related adjustments, lower percentage rent, and lower parking income; as well as higher real estate assessments and prior year tax refunds and the impact of property sales, partially offset by the prior year charge related to the buyout of a lease atAssembly Square Marketplace , property acquisitions, and the opening of our new office building atSantana Row in early 2020. Other Operating General and Administrative General and administrative expense decreased$2.7 million , or 8.3%, to$29.4 million in the nine months endedSeptember 30, 2020 from$32.0 million in the nine months endedSeptember 30, 2019 . This decrease is due primarily to lower personnel related costs and COVID-19 impacts including office closures and cancellations of all non-essential business travel and company events. 26
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Depreciation and Amortization Depreciation and amortization expense increased$12.3 million , or 6.9%, to$190.6 million in the nine months endedSeptember 30, 2020 from$178.3 million in the nine months endedSeptember 30, 2019 . This increase is due primarily to property acquisitions, the opening of our new office building atSantana Row in early 2020, and the write off of lease related assets for vacating tenants, partially offset by property sales. Impairment Charge The$57.2 million impairment charge for the nine months endedSeptember 30, 2020 relates to The Shops atSunset Place . See Note 2 to the consolidated financial statements for further discussion. Gain on Sale of Real Estate, Net of Tax The$11.7 million gain on sale of real estate, net of tax for the nine months endedSeptember 30, 2020 is due to the sale of a building inPasadena, California . The$30.5 million gain on sale of real estate, net of tax for the nine months endedSeptember 30, 2019 is due to the sale of two properties and one land parcel. Operating Income Operating income decreased$157.0 million , or 53.3%, to$137.7 million in the nine months endedSeptember 30, 2020 compared to$294.7 million in the nine months endedSeptember 30, 2019 . This decrease is primarily due to the impact of COVID-19, which resulted in higher collectibility related adjustments, lower percentage rent, and lower parking income; the impairment charge related to The Shops atSunset Place ; a lower net gain on the sale of real estate; higher real estate assessments and prior year tax refunds; and the impact of property sales, partially offset by the prior charge related to the buyout of a lease atAssembly Square Marketplace ; property acquisitions; the opening of our new office building atSantana Row in early 2020; and lower personnel related costs, largely due to the impact of COVID-19. Other Interest Expense Interest expense increased$16.2 million , or 19.6%, to$98.7 million in the nine months endedSeptember 30, 2020 compared to$82.6 million in the nine months endedSeptember 30, 2019 . This increase is due primarily to the following: • an increase of$13.7 million from higher borrowings in response to the COVID-19 pandemic (see further discussion in "2020 Debt and Equity Transactions" in Item 2 of the Quarterly Report), and • an increase of$8.8 million due to higher weighted average borrowings primarily from the$400 million issuance of our 3.20% notes in 2019, and$106.9 million of mortgage loans associated with ourHoboken acquisitions, partially offset by, • a decrease of$3.6 million due to a lower overall weighted average borrowing rate, and • an increase of$2.8 million in capitalized interest, primarily attributable to the development of Phase III ofAssembly Row and Pike & Rose. Gross interest costs were$116.0 million and$97.1 million in the nine months endedSeptember 30, 2020 and 2019, respectively. Capitalized interest was$17.3 million and$14.5 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Loss from partnerships Loss from partnerships increased$5.4 million to$6.7 million in the nine months endedSeptember 30, 2020 compared to$1.3 million in the nine months endedSeptember 30, 2019 . This increase is primarily due to our share of losses from our hotel investments atAssembly Row and Pike & Rose, largely the result of COVID-19 related reductions in travel. Net loss (income) attributable to noncontrolling interests Net loss (income) attributable to noncontrolling interests decreased$8.4 million to a loss of$3.3 million in the nine months endedSeptember 30, 2020 compared to income of$5.1 million in the nine months endedSeptember 30, 2019 . The decrease is primarily attributable to The Shops atSunset Place impairment charge. 27
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Liquidity and Capital Resources
Due to the nature of our business and strategy, we typically generate
significant amounts of cash from operations which is largely paid to our common
and preferred shareholders in the form of dividends because as a REIT, we are
generally required to make annual distributions to shareholders of at least 90%
of our taxable income. Remaining cash flow from operations after dividend
payments is used to fund recurring and non-recurring capital projects (such as
tenant improvements and redevelopments), and regular debt service requirements
(including debt service relating to additional or replacement debt, as well as
scheduled debt maturities). We maintain a
We are currently experiencing lower levels of cash from operations due to lower
rent collections from tenants impacted by the COVID-19 pandemic (see further
discussion under the "Outlook" section of this Item 2). While the overall
economic impacts of the pandemic are unknown, we have taken multiple steps
during the last several months to strengthen our financial position, maximize
liquidity, and to provide maximum flexibility during these uncertain times. In
For the nine months endedSeptember 30, 2020 , our weighted average borrowing rate on the revolving credit facility, before amortization of debt fees, was 1.5%. As ofSeptember 30, 2020 , we had the capacity to issue up to$128.3 million in common shares under our ATM equity program. Over the next 12 months, we have$269.7 million of debt maturing, excluding our$400.0 million term loan, which may be extended for an additional twelve months at our option, and the$60.6 million mortgage loan at The Shops atSunset Place , which is currently in default (see Note 4 to the consolidated financial statements for additional information). Additionally, our overall capital requirements for the remainder of 2020 will depend upon the nature of government mandated closures and restrictions and the overall economic impact of COVID-19, as well as general timing of our redevelopment and development activities. During the second quarter 2020, we were able to restart all construction related activities, and consequently have seen higher levels of capital investments during the third quarter after some construction related activities were halted for a portion of the first and second quarter, as a result of COVID-19 related closures. We expect this increase of capital to continue for the remainder of the year, absent further requirements to halt construction activities. We believe that the cash on our balance sheet together with rents we collect as well as our$1.0 billion revolving credit facility will allow us to continue to operate our business in the near-term. Given our recent ability to access the capital markets, we also expect debt or equity to be available to us. We may also further 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.
While the COVID-19 pandemic has negatively impacted our business during the
quarter ended
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