Saul Centers, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. The filing was signed November 7, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $57.1 million | $56.9 million | $174.9 million | $169.1 million |
| Net income | $15.3 million | $16.7 million | $49.2 million | $47.6 million |
| Net income available to common stockholders | $9.0 million | $10.2 million | $29.8 million | $26.6 million |
| Diluted earnings per common share | $0.39 | $0.45 | $1.30 | $1.19 |
| Common dividends declared per share | $0.53 | $0.52 | $1.59 | $1.56 |
| Net cash from operating activities | Not separately stated | Not separately stated | $82.1 million | $74.9 million |
| FFO available to common stockholders and noncontrolling interests | $24.1 million | $25.0 million | $75.2 million | $69.4 million |
| FFO per share/unit | $0.78 | $0.83 | $2.44 | $2.31 |
Q3 property operating income was $42.4 million, or approximately 74.4% of revenue, versus $43.1 million, or approximately 75.7%, a year earlier. Nine-month property operating income rose to $131.2 million from $127.8 million. The filing presents FFO as a non-GAAP measure and cautions it is not a substitute for GAAP earnings or operating cash flow.
Balance sheet, debt and liquidity
- At September 30, 2019, total assets were $1.647 billion, total liabilities $1.101 billion, and total equity $545.4 million. Cash and cash equivalents were $52.3 million, up from $14.6 million at year-end 2018.
- Debt principal was approximately $1.023 billion; its net carrying value was $1.015 billion. Approximately $948.1 million was fixed-rate and $75.0 million variable-rate. Fixed-rate debt had a weighted-average interest rate of 5.11%.
- The $325 million revolving facility had no outstanding balance and approximately $296.3 million available, subject to borrowing capacity and facility terms. The company reported compliance with its financial covenants.
- Management stated that debt to total asset value, measured using management’s estimate of property fair value, was below its 50% policy target. This is not the same as debt divided by GAAP book assets.
- Operating cash flow was $82.1 million; investing used $105.1 million, mainly for development and redevelopment; financing provided $60.6 million. Cash increased $37.7 million during the nine-month period.
- Debt maturities, including scheduled amortization, total $89.7 million in 2020, $39.3 million in 2021, $65.4 million in 2022 and $113.5 million in 2023.
Material changes and operating drivers
- Q3 revenue increased 0.2%, but net income fell 8.2% and common-stockholder net income fell 11.6%. Higher property operating costs, depreciation and general and administrative expenses more than offset modest revenue growth; lower interest expense partly offset those increases.
- Nine-month revenue rose 3.5%, net income 3.4%, and common-stockholder net income 11.8%. FFO increased 8.5%. Growth included higher base rent and lease termination fees; the 2018 comparison included a $2.3 million preferred issuance-cost extinguishment charge.
- Credit losses on operating lease receivables increased: $1.0 million for nine months versus $0.5 million in 2018. Management attributed the increase primarily to office and retail tenants, including a tenant at 7316 Wisconsin Avenue.
- Same-property commercial leasing was 94.8% at September 30, compared with 95.2% a year earlier. Residential leasing was 97.9%, versus 95.7%. Same-property revenue increased 2.8% for nine months, while same-property operating income increased 2.3%; lease termination fees contributed materially to the increases.
- On September 17 and 23, the company issued 4.4 million Series E preferred depositary shares, generating approximately $106.3 million net proceeds. It redeemed all 4.2 million Series C depositary shares on October 17, 2019. The filing says approximately $3.2 million of redemption-related costs would reduce fourth-quarter net income available to common stockholders.
Outlook, projects and risks
- The filing gives no specific earnings or revenue guidance. Management said available cash, operating cash flow and revolving-credit capacity were expected to meet liquidity needs for the foreseeable future. Planned development and acquisitions may require borrowings or additional external capital.
- The Glebe Road mixed-use project was expected to cost approximately $275 million, with $237.3 million incurred by quarter-end. Substantial completion was scheduled for spring 2020; approximately 88% of planned retail space was leased. A $157 million construction-to-permanent loan is intended to fund part of the project.
- Ashbrook Marketplace was under construction and approximately 84% pre-leased. At 7316 Wisconsin Avenue, the former office building was removed from service and transferred to construction in progress for a planned residential and retail redevelopment.
- On November 5, 2019, the company agreed to acquire the Trust’s Twinbrook property for 1,416,071 operating partnership units valued at $79.3 million. The transaction is related-party in nature and subject to escrow conditions. A local resident’s legal challenge to the development approval could delay or terminate the contribution transaction if resolved in the challenger’s favor. Planned Twinbrook development is subject to further approvals and permits.
- Management cited risks from tenant rent collections, anchor-tenant reliance, regional concentration, interest rates and financing, development execution, access to capital, real estate operating costs, and REIT qualification. Giant Food accounted for 4.7% of nine-month revenue. Management reported no material litigation other than ordinary-course matters, while the Twinbrook development challenge is described separately.
- President and COO J. Page Lansdale’s departure became effective September 30, 2019; he remained a director and consultant through year-end. B. Francis Saul II was appointed President effective October 1.
Important facts for investors to verify
- Whether higher lease termination fees and the resulting growth in same-property results and FFO are recurring or temporary.
- Tenant credit-loss trends, lease expirations and occupancy—particularly any impact from office tenants and significant grocery or anchor tenants.
- Development costs, leasing, completion schedules and financing for Glebe Road, Ashbrook Marketplace, 7316 Wisconsin Avenue and Twinbrook.
- The outcome and timing of the Twinbrook legal challenge, escrow releases and related-party transaction terms.
- Debt maturities, variable-rate exposure, covenant headroom and liquidity after the Series C redemption and its associated costs.
- The effect of preferred dividends, common distributions and any future equity or partnership-unit issuance on common-stockholder returns.