Saul Centers, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. The portfolio included 49 shopping centers, six mixed-use properties and three non-operating development properties.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $56.5 million | $58.5 million; down 3.4% |
| Operating income / net income | $14.9 million | $17.4 million |
| Net income attributable to Saul Centers | $12.6 million | $13.7 million |
| Net income available to common stockholders | $6.9 million; $0.31 per diluted share | $10.6 million; $0.49 per diluted share |
| Common dividend declared | $0.52 per share | $0.51 per share |
| Funds from operations (FFO) available to common stockholders and noncontrolling interests | $20.6 million; $0.69 per share/unit | $25.6 million; $0.87 per share/unit; down 19.7% |
| Net cash provided by operating activities | $25.8 million | $31.6 million |
| Net cash used in investing activities | $16.7 million | $87.3 million |
| Cash and cash equivalents | $9.0 million at March 31 | $10.9 million at December 31, 2017 |
| Debt principal | $973.0 million | $965.5 million at December 31, 2017 |
| Revolving facility availability | $217.8 million | $15.0 million outstanding under the revolver |
| Leasing | 94.1% of commercial portfolio leased; 95.9% of residential portfolio leased | 94.0% same-property commercial leasing, versus 95.6% a year earlier; residential 91.8% a year earlier |
Results and changes versus prior year
- Revenue fell $2.0 million. The principal drivers were the prior-year Broadlands Safeway termination-fee revenue and the effects of the Safeway and Kmart lease terminations, as well as the sale of Great Eastern. Higher base rents, residential rents and expense recoveries partly offset the declines.
- Same-property revenue was $55.2 million, down $1.9 million; same-property operating income was $41.1 million, down $2.8 million. The filing attributes the declines largely to the Broadlands and Kentlands tenant departures, with higher property expenses and taxes also weighing on operating income.
- Operating expenses increased 1.1% to $41.5 million. Property operating expenses rose 7.1%, primarily due to higher snow-removal costs; interest expense and debt-cost amortization fell 2.8%, mainly because more interest was capitalized.
- Common-stockholder earnings included a $2.3 million charge for extinguished issuance costs on preferred-share redemption. The company issued $72.6 million of net proceeds from Series D preferred stock and used the proceeds, together with cash, to redeem $75.0 million of Series C preferred stock. The transaction lowered the preferred dividend rate from 6.875% to 6.125% on the refinanced amount, but Q1 included a 30-day overlap in preferred dividends.
- Operating cash flow decreased to $25.8 million. Investing outflows were much lower than in 2017, when the company acquired Burtonsville Town Square; Q1 2018 investing outflows primarily reflected development and redevelopment spending.
Debt, liquidity and capital projects
- At March 31, principal debt was approximately $973.0 million: $883.0 million fixed-rate and $90.0 million variable-rate. The company reported a 5.25% weighted-average rate on fixed-rate debt. A one-percentage-point increase in rates on variable debt would increase annual interest expense by approximately $0.9 million.
- In January, the company replaced its credit facility with a $325.0 million revolving line and a $75.0 million term loan. The revolver matures in 2022, with a possible one-year extension; the term loan matures in 2023. The company reported compliance with all material financial covenants at quarter-end.
- Management said cash of approximately $9.0 million and revolver availability of approximately $217.8 million were sufficient for foreseeable liquidity needs. The company’s stated policy is to keep debt to total asset value at or below 50%; management estimated the ratio was below 50% at quarter-end.
- The 750 N. Glebe Road mixed-use development is expected to cost approximately $275 million, with substantial completion scheduled for early 2020. Approximately $98.8 million had been invested by March 31; management expected to invest a further $19.2 million during the remainder of 2018. About 84% of the retail space was leased.
- Management anticipated closing on the 7316 Wisconsin Avenue property by January 12, 2019, for $35.5 million plus approximately $0.7 million in acquisition costs. The $3.5 million earnest-money deposit was at risk. The site has potential for residential and retail development.
Outlook, commentary and risks
Management’s strategy is to grow cash flow through leasing, rent increases, tenant-mix optimization, selective redevelopment and mixed-use development. It stated that future acquisitions and projects would be pursued selectively and may be financed with cash, bank borrowings, construction financing, DRIP proceeds or other external capital. No specific earnings or revenue guidance was provided.
Management cited risks from tenant nonpayment and reliance on anchor tenants, interest rates and financing availability, development execution, access to capital, local economic conditions, changes in shopping behavior, real estate taxes and operating costs, and maintaining REIT qualification. It noted continued monitoring of online-versus-in-store shopping and federal policy effects on the regional real estate market. The company reported no material litigation, no material changes to previously disclosed risk factors, and no subsequent events requiring disclosure.
The filing states that disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether occupancy and leasing recover, particularly at Broadlands and Kentlands, and whether vacant space is re-leased on acceptable terms.
- Progress, remaining funding needs, leasing and delivery schedule for the Glebe Road project, and the closing and development assumptions for 7316 Wisconsin Avenue and Ashbrook Marketplace.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to the revolving facility as development spending proceeds.
- The collectability and repayment timing of the $1.28 million Great Eastern buyer note; the related $0.5 million gain remains deferred until repayment.
- How common distributions are supported by recurring cash flow and FFO, noting Q1 common earnings per share of $0.31 versus a declared dividend of $0.52 per share and FFO per share/unit of $0.69.
- Potential effects of tenant concentration, local economic conditions, and changes in retail demand on rents, occupancy and property values.