Saul Centers, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 13, 2013. This is an annual report, not a quarterly filing. Dollar figures below are in U.S. dollars.
Business context
Saul Centers is a REIT focused on owning, managing and developing neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At year-end it reported 50 shopping centers, seven mixed-use properties and two non-operating development parcels, totaling approximately 9.5 million square feet of operating space.
Financial performance and condition
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total revenue | $190.1 million | $173.9 million | +9.3% |
| Operating income | $36.2 million | $34.0 million | +6.6% |
| Operating margin | 19.1% | 19.5% | Down 0.4 percentage points |
| Net income | $39.8 million | $30.3 million | +31.3% |
| Net income available to common shareholders | $18.2 million | $11.6 million | +57.3% |
| Diluted earnings per common share | $0.93 | $0.61 | Up $0.32 |
| FFO available to common shareholders | $60.1 million | $50.3 million | +19.5% |
| FFO per share and unit | $2.26 | $2.03 | +11.3% |
| Cash from operating activities | $78.4 million | $55.7 million | +40.8% |
FFO is a non-GAAP measure; the company cautions that it is not equivalent to operating cash flow or cash available for distributions. FY2012 net income included $4.5 million in gains on property sales, while FY2011 had no property-sale gain. The filing reports no impairment charges for 2012, 2011 or 2010.
Revenue growth primarily reflected a full year of contribution from Clarendon Center and the three shopping centers acquired in 2011, together contributing $14.5 million of 2012 revenue. Same-property revenue rose 0.9% and same-property operating income rose 1.6% year over year. Operating expenses increased 10.0%, including higher real estate taxes, interest and depreciation, and $2.7 million of Van Ness Square predevelopment expense.
At December 31, 2012, total assets were $1.207 billion, total liabilities $900.0 million, and total stockholders’ equity $307.3 million. Notes payable totaled $827.8 million ($774.9 million fixed-rate and $52.9 million variable-rate); the selected financial data separately reports total debt including accrued interest of $831.1 million. The weighted-average rate on notes payable was 5.77%, with a 9.7-year weighted-average maturity. Management said debt to its internally estimated asset value was below its 50% policy limit; this is not a book-value leverage ratio.
Cash and cash equivalents were $12.1 million. Approximately $136.8 million was available under the $175 million unsecured revolver. The company reported compliance with its credit-facility covenants at year-end. Contractual obligations totaled $1.237 billion, including $110.6 million due within one year; this schedule includes future debt interest and principal, leases and development obligations.
Material changes and operating trends
- Comparable same-property portfolio leasing increased to 91.9% from 90.7%; the reported year-end portfolio leased percentage was 91.7%. Shopping-center occupancy improved, while mixed-use occupancy was affected by Van Ness Square lease terminations.
- Average shopping-center rent on leased space rose to $17.96 per square foot from $17.31. For 2012 new and renewed leases, base rent was $16.39 per square foot versus $16.30 on expiring leases; management notes executed leases do not necessarily translate into realized rent.
- The company acquired 1500 Rockville Pike for $23.0 million and 5541 Nicholson Lane for $12.2 million, intending to consider redevelopment but without committing to plans or timing. It sold West Park and Belvedere for a combined $6.0 million and recognized $4.5 million in gains.
- Common distributions remained $1.44 per share for 2012, unchanged from 2011 and 2010. Of the 2012 common distribution, 66% was treated as taxable dividend income and 34% as return of capital for tax purposes.
- FY2012 fourth-quarter revenue was $48.3 million versus $46.8 million in Q4 2011. Common earnings per diluted share were $0.29 versus $0.19; Q4 2012 included the $4.5 million property-sale gains.
Outlook, risks and unusual items
Management described retail sales and leasing activity as modestly improved, but said rents remained under pressure, vacancies remained above pre-recession levels, and office demand slowed amid uncertainty about federal spending. It did not provide numerical earnings or revenue guidance. Management expects to pursue selective acquisitions, redevelopment and expansion, with future funding potentially from operating cash, the revolver, construction or permanent loans, the dividend reinvestment plan, or other capital markets activity.
- Van Ness Square was expected to become vacant around April 30, 2013 for a contemplated primarily residential project with street-level retail. The timing and project remain subject to government approvals; approximately $3.3 million of further lease-termination expense was expected in the first half of 2013, with additional predevelopment costs possible.
- After year-end, the company issued $134.8 million net proceeds from 6.875% Series C preferred shares, redeemed 60% of Series A preferred shares on March 2, 2013, and announced redemption of all Series B shares for March 15, 2013. The offering proceeds were intended to fund these preferred-stock redemptions.
- Two loans maturing in 2013 were refinanced in February 2013. Management expected to repay the remaining $6.8 million balance of another loan at or before its July 2013 maturity.
- Interest-rate sensitivity: a 1 percentage-point increase on year-end variable-rate debt would raise annual interest expense by an estimated $529,000. A 1 percentage-point increase in rates would reduce the estimated fair value of fixed-rate debt by about $44.9 million.
- Key risks include tenant defaults or anchor closures, lease rollover and re-leasing costs, local economic and federal spending weakness, refinancing and interest-rate exposure, development and occupancy risks, restrictive debt covenants, REIT qualification, and related-party governance. The Saul Organization’s substantial ownership and shared services may create conflicts; shared-service charges were $6.0 million in 2012. Management said pending ordinary-course litigation was not expected to have a material adverse effect.
Ernst & Young LLP issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2012.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and assess how much of FY2012 common earnings growth depended on property-sale gains.
- Review the debt maturity schedule, variable-rate exposure, post-year-end refinancing terms and preferred-stock redemption funding and costs.
- Track comparable occupancy, mixed-use leasing, rent spreads, lease expirations and tenant concentration, particularly Giant Food’s 5.0% of revenue.
- Assess the costs, approvals, timing and expected returns of the Van Ness Square and Rockville Pike redevelopment plans, which were not fully committed.
- Evaluate distribution coverage and sustainability, including the distinction between taxable dividend income and return of capital and the priority of preferred dividends.