Saul Centers, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. Its portfolio included 50 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $60.3 million | $60.0 million | $122.4 million | $118.7 million |
| Net income | $17.0 million | $16.1 million | $34.5 million | $28.9 million |
| Net income available to common stockholders | $10.2 million | $9.9 million | $20.8 million | $17.4 million |
| Basic and diluted EPS | $0.43 | $0.42 | $0.87 | $0.74 |
| Operating cash flow | Not presented by quarter | $66.5 million | $66.7 million |
- Six-month revenue rose 3.1%, led by higher base rent, percentage rent and parking revenue; rental revenue increased 2.8%. Q2 revenue grew 0.5%.
- Six-month expenses declined 2.1% to $87.9 million, as lower interest expense and depreciation more than offset higher property operating and general and administrative costs. Six-month interest expense, net and deferred debt-cost amortization fell 10.9% to $21.1 million.
- Same-property operating income, a non-GAAP measure, increased 0.3% in Q2 and 3.6% for the six-month period. Six-month FFO available to common stockholders and noncontrolling interests was $53.6 million, up 10.0%; diluted FFO per share was $1.58 versus $1.50.
- Operating cash flow was nearly unchanged year over year. Investing used $51.9 million, mainly for development, versus $27.5 million in the prior period. Financing used $18.0 million. Cash declined $3.4 million during the first half to $11.2 million.
- At June 30, total debt principal was approximately $1.175 billion: $895.5 million fixed-rate and $280.0 million variable-rate. Debt carrying value, net of deferred costs, was approximately $1.165 billion. The company reported $200.4 million available under its credit facility and compliance with facility covenants.
- Total assets were $1.782 billion and total equity was $530.0 million. Common distributions were $0.59 per share in Q2; preferred dividends continued at stated rates.
Material changes and operating developments
- Revenue growth reflected higher base rent, including $1.4 million of first-half growth from The Waycroft, and improved collections of previously reserved rents. First-half credit-loss expense on operating lease receivables was lower by $0.9 million year over year.
- Property operating expenses rose 6.0% for the first half, primarily from higher repair and maintenance costs. General and administrative costs rose 8.6%, primarily due to salaries and benefits.
- Commercial portfolio occupancy was 92.6%, compared with 92.5% a year earlier; shopping center occupancy was 94.1% and mixed-use commercial occupancy was 82.6%. Residential occupancy was 98.1%, versus 98.4%.
- Construction in progress increased to $260.1 million from $205.9 million at year-end 2021. Twinbrook Quarter Phase I is expected to cost approximately $331.5 million, with initial delivery anticipated in late 2024. Hampden House is expected to cost approximately $246.4 million and is expected to be completed in 2025.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management expects to fund ongoing development, capital needs and potential acquisitions through operating cash, available cash, credit-facility borrowings, construction or permanent financing, the dividend reinvestment plan and other capital sources.
- On August 4, 2022, the company closed a $25.3 million, 15-year fixed-rate mortgage at 4.14% secured by Village Center. Proceeds refinanced an existing mortgage and reduced revolver borrowings; a $0.4 million prepayment penalty was incurred.
- Variable-rate debt exposes the company to rising rates: a one-percentage-point increase would raise annual interest expense by an estimated $2.8 million based on June 30 balances. Management also cited inflation, tenant rent-paying capacity, retail demand, development costs, refinancing and concentrated regional exposure as risks.
- As of July 31, tenants had paid approximately 99% of Q2 contractual base rent and recoveries. Of $9.1 million in historical rent deferrals, $6.9 million of amounts then due had been collected. Management cautioned that future collections and tenant losses remain uncertain; no impairment charges were recorded at June 30.
- The company reported no material litigation, no material updates to previously disclosed risk factors, and effective disclosure controls. It noted related-party shared services with the Saul Organization and concentration of ownership and management relationships.
Key facts for investors to verify
- Progress, remaining cost and financing of Twinbrook Quarter and Hampden House, including delivery schedules and leasing.
- Credit-facility availability, covenant headroom, debt maturities and exposure to variable interest rates.
- Tenant collections, deferred-rent recoveries, credit-loss reserves and any future impairment indicators.
- Occupancy and rent trends, particularly mixed-use commercial leasing and leases scheduled to expire in the second half of 2022.
- Coverage of distributions by recurring cash generation; FFO is a non-GAAP measure and is not equivalent to operating cash flow.