Saul Centers, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. This unaudited filing covers the three and nine months ended September 30, 2018. The portfolio included 49 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Property revenue | $57.0m | $56.2m | $169.6m | $170.6m |
| Property operating income | $43.1m | $41.9m | $127.8m | $129.3m |
| Net income | $16.7m | $14.4m | $47.6m | $46.2m |
| Net income available to common stockholders | $10.2m | $8.4m | $26.6m | $27.4m |
| Diluted earnings per common share | $0.45 | $0.38 | $1.19 | $1.25 |
| FFO per share, including noncontrolling interests | $0.83 | $0.77 | $2.31 | $2.42 |
Q3 property operating income margin was approximately 75.5%, versus 74.6% a year earlier; nine-month margin was approximately 75.3%, versus 75.8%. Nine-month FFO available to common stockholders and noncontrolling interests was $69.4m, down 2.7%.
Cash flow and liquidity. For the first nine months, operating cash flow was $74.9m, investing cash outflow was $96.3m and financing cash inflow was $20.3m; cash declined $1.1m to $9.8m. Cash distributions to common stockholders were $34.6m. At September 30, principal debt was approximately $1.023bn, comprising $870.9m fixed-rate and $152.0m variable-rate debt. The company reported $161.1m available on its $325m revolving facility and compliance with its financial covenants. A one-percentage-point increase in rates on variable debt would increase annual interest expense by an estimated $1.5m.
Total assets were $1.506bn and total equity was $416.8m at September 30, 2018. Common dividends declared were $0.52 per share for Q3 and $1.56 per share year to date, compared with nine-month GAAP EPS of $1.19 and FFO per share of $2.31.
Material changes versus prior comparable periods
- Q3 property revenue rose 1.4% and property operating income rose 2.7%. Higher base rent and lower property operating costs supported the quarter; leased commercial area was lower by about 105,100 square feet.
- Nine-month property revenue fell 0.6% and property operating income fell 1.2%. Higher base rent was offset by lower termination-fee revenue, reduced leased space and the effects of the Safeway and Kmart lease terminations. Same-property operating income declined $1.5m.
- Nine-month common earnings declined despite higher consolidated net income, in part because $2.328m of preferred-share issuance costs were charged upon redemption. This item also reduced reported FFO available to common stockholders and noncontrolling interests.
- The company issued $72.4m net proceeds of 6.125% Series D preferred stock and used proceeds and cash on hand to redeem $75.0m of 6.875% Series C preferred stock. It also replaced its credit facility with a $400m facility, including a $325m revolver and $75m term loan.
- Commercial portfolio occupancy was 95.0%, versus 95.5% a year earlier; same-property occupancy was 95.2%, versus 95.5%. Residential occupancy was 95.7%, versus 95.0%.
Outlook, management commentary, risks and unusual items
- No quantitative earnings or FFO guidance was provided. Management expects available cash, operating cash flow and borrowing capacity to meet liquidity needs for the foreseeable future, while noting that acquisitions and development may require additional financing.
- The 750 N. Glebe Road project is planned for about 490 apartments and 60,000 square feet of retail, with substantial completion expected in early 2020. Estimated total cost is $275m; $136.8m had been incurred by September 30. About 84% of planned retail space was leased.
- Ashbrook Marketplace, an approximately 88,000-square-foot shopping center, was about 44% pre-leased; site work was projected to begin in November 2018, subject to permits, with opening expected in early 2020. The company may issue additional partnership units to the related-party Trust after stabilization.
- Management cited risks from tenant rent collection and reliance on anchor tenants, regional economic and consumer-shopping trends, development execution, interest rates, refinancing and access to capital, real estate operating costs, and REIT qualification. Giant Food and Capital One generated 4.8% and 2.7% of nine-month revenue, respectively.
- After quarter-end, the company closed a $32m, 15-year fixed-rate mortgage at 4.41% on Broadlands; proceeds refinanced existing mortgages and reduced revolver borrowings. Management reported no material subsequent events requiring disclosure, and no material litigation or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether occupancy, tenant retention and leasing at spaces formerly occupied by Safeway and Kmart recover as planned, and the effect on same-property income.
- Progress, remaining funding needs, leasing and completion timing for Glebe Road, Ashbrook Marketplace and other development projects.
- Debt maturities and refinancing needs, variable-rate exposure, revolver availability, covenant headroom and the impact of interest-rate changes.
- Coverage and sustainability of common and preferred distributions, considering GAAP earnings, FFO, capital spending and financing needs.
- Related-party arrangements and potential additional partnership-unit issuance, along with concentration in the Washington, D.C./Baltimore market and significant tenants.