Saul Centers, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end, its portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $52.4 million | $50.6 million | $156.2 million | $155.8 million |
| Operating income | $13.2 million | $12.5 million | $38.8 million | $39.6 million |
| Net income | $13.2 million | $12.5 million | $38.8 million | $45.7 million |
| Net income attributable to common stockholders | $7.5 million; $0.36/share | $6.9 million; $0.33/share | $21.9 million; $1.04/share | $26.8 million; $1.29/share |
| Operating cash flow | Not stated separately | Not stated separately | $64.7 million | $66.1 million |
| FFO available to common stockholders and noncontrolling interests | $21.3 million; $0.75/share | $19.5 million; $0.70/share | $61.9 million; $2.18/share | $60.7 million; $2.18/share |
Quarterly revenue rose 3.5%, supported by higher base rent, expense recoveries and other revenue. Nine-month revenue was nearly flat; prior-year bankruptcy-related collections and lease termination income contributed to the decline in other revenue. Nine-month net income fell mainly because the 2014 period included a $6.1 million property-sale gain. Same-property operating income increased $0.8 million in Q3 but decreased $2.6 million for the nine-month period, reflecting prior-year one-time revenue, higher taxes and credit-loss provisions, partly offset by rent and leased-space growth.
Common dividends declared were $0.43 per share in Q3 2015 versus $0.40 in Q3 2014, and $1.29 for the nine months versus $1.20. FFO is a non-GAAP measure and is not equivalent to cash available for distribution.
Balance sheet, debt and liquidity
- At September 30, 2015, total assets were $1.297 billion, total liabilities $949.0 million and total equity $348.0 million. Cash and cash equivalents were $8.9 million, down from $12.1 million at December 31, 2014.
- Total debt was approximately $869.4 million: $824.5 million fixed-rate and $44.9 million variable-rate. The fixed-rate debt weighted-average interest rate was 5.54%. Debt maturities, including scheduled amortization, totaled $39.1 million in 2016 and $83.7 million in 2018; the 2018 amount includes $30.0 million drawn on the revolver.
- The $275 million unsecured revolving facility had $30.0 million outstanding and approximately $244.6 million available, with about $448,000 committed for letters of credit. The company reported compliance with all facility covenants.
- Nine-month investing cash outflow was $49.9 million, including $31.7 million for development and redevelopment. Financing cash outflow was $18.1 million; net cash decreased $3.2 million.
- Management said available cash and revolver capacity should meet liquidity needs for the foreseeable future. It targets debt below 50% of management-estimated asset value; this is not a GAAP balance-sheet valuation.
Operations, outlook and risks
- Same-property revenue increased 3.1% in Q3 and declined 0.5% for the nine months. Same-property portfolio leasing was 94.8%, unchanged year over year; shopping centers were 95.4% leased and mixed-use properties 91.1%.
- Park Van Ness, a 271-unit residential project with about 9,000 square feet of retail, was expected to be completed in late Q1 2016. Estimated project cost, excluding land and predevelopment expense, was approximately $93 million; $63.5 million had been incurred by September 30, with $29.5 million estimated to complete. A $71.6 million construction-to-permanent loan is available, of which $31.4 million was drawn.
- Management described selective redevelopment and leasing as priorities and cited continued pressure on rental growth from elevated vacancies in some local submarkets and cautious retailer expansion. No specific earnings or FFO guidance was provided.
- Credit-loss provisions rose to $1.3 million for the nine months from $0.5 million a year earlier, primarily because of a rent dispute with an office tenant in litigation. Management stated the matter was not expected to have a material adverse effect; routine legal proceedings were also reported.
- Key risks include regional concentration, dependence on anchor and significant tenants, tenant nonpayment, development execution and funding, refinancing and interest-rate exposure, REIT qualification, and related-party relationships. A one-percentage-point increase in variable rates would raise annual interest expense by approximately $449,000, based on quarter-end balances.
Most important facts to verify
- Progress, leasing and remaining financing for Park Van Ness, including whether completion remains on schedule.
- Resolution and collectability of the disputed office-tenant rent and the adequacy of credit-loss reserves.
- Leasing trends, upcoming expirations and rent growth, particularly in mixed-use properties and weaker local submarkets.
- Debt maturities, variable-rate exposure, revolver availability and continued covenant compliance.
- Dividend coverage using operating cash flow and FFO, while accounting for capital spending and REIT distribution requirements.