Saul Centers, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Saul Centers is a REIT focused on owning, operating, leasing and developing community and neighborhood shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. This unaudited filing covers the quarter and six months ended June 30, 2019.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $58.1 million | $56.1 million | $117.9 million | $112.2 million |
| Net income | $16.8 million | $15.9 million | $33.8 million | $30.8 million |
| Net income available to common stockholders | $10.3 million | $9.6 million | $20.8 million | $16.4 million |
| Basic and diluted earnings per common share | $0.45 | $0.43 | $0.91 | $0.74 |
| Cash from operating activities | Not separately reported for the quarter | $63.8 million | $53.7 million | |
| Funds from operations available to common stockholders and noncontrolling interests | Q2: $25.3 million; $0.82 per share | $51.1 million; $1.66 per share | $44.4 million; $1.48 per share |
Q2 property operating income was $44.2 million, or approximately 76.0% of revenue, versus $42.6 million, or 75.9%, a year earlier. For the six-month periods, it was $88.8 million, or approximately 75.3% of revenue, versus $84.7 million, or 75.5%. These derived ratios are before interest, depreciation and general and administrative costs, and are not GAAP operating margins.
Common dividends declared were $0.53 per share in Q2 and $1.06 for the six-month period, compared with $0.52 and $1.04, respectively, in 2018. At June 30, cash was $9.3 million, total assets were $1.57 billion and total equity was $436.6 million. Net cash used in investing was $68.6 million, principally reflecting $60.7 million of development and redevelopment spending; net cash used in financing was $0.5 million.
Material changes versus prior comparable periods
- Revenue increased 3.7% in Q2 and 5.1% in the first half. Management attributed growth to increased leased space and residential rent, expense recoveries and higher lease termination fees.
- Common-stockholder earnings for the first half rose to $20.8 million from $16.4 million. The comparison includes a $2.3 million charge in 2018 for extinguished issuance costs upon preferred-share redemption; preferred dividends were also lower in 2019.
- First-half FFO available to common stockholders and noncontrolling interests increased 15.2%. Management cited higher lease termination fees and base rent, income from recently acquired properties, lower preferred dividends and the prior-year preferred-share redemption charge.
- Same-property revenue rose 3.3% in Q2 and 4.1% for the first half; same-property operating income increased 3.9% and 4.1%, respectively. Lease termination fees were a significant contributor.
- Total principal debt was approximately $1.055 billion at June 30, 2019, versus approximately $1.032 billion at December 31, 2018. Cash declined by $5.3 million from year-end; operating cash flow increased year over year.
Debt, liquidity, outlook and risks
Debt included approximately $932.3 million of fixed-rate and $123.0 million of variable-rate borrowings. Fixed-rate debt had a weighted-average rate of 5.12%; a one-percentage-point increase in variable rates would raise annual interest expense by approximately $1.2 million. The company reported $253.0 million available under its $325.0 million revolving facility and compliance with its financial covenants. Management expects available cash, operating cash flow and credit availability to meet foreseeable liquidity needs; no specific earnings or revenue guidance was provided.
The company is developing the Glebe Road mixed-use project in Arlington, with expected total cost of approximately $275 million and substantial completion scheduled for early 2020. Costs incurred through June 30 were approximately $215.6 million. Ashbrook Marketplace was scheduled to open in early 2020 and was approximately 58% pre-leased. Management also reported leasing progress at other projects and a July 2019 planning approval for a proposed mixed-use development at 7316 Wisconsin Avenue.
Same-property commercial leasing was 95.2%, compared with 94.0% a year earlier; total commercial leasing was 94.7%. Management cited regional economic and federal policy conditions, tenant rent-payment and anchor-tenant dependence, online-to-store retail shifts, interest rates and financing access, development execution, real-estate operating costs, and REIT qualification as risks. Giant Food represented 4.7% of first-half revenue. The company reported no material litigation, no material risk-factor updates, and no subsequent events requiring disclosure. Disclosure controls were considered effective as of June 30, 2019.
Important facts for investors to verify
- How much reported revenue and same-property growth depends on lease termination fees, and whether those gains recur.
- Leasing, delivery timing, remaining costs and financing for Glebe Road and Ashbrook Marketplace, including any additional partnership units owed to the Saul Organization.
- Debt maturities, variable-rate exposure, credit-facility availability and covenant headroom as development spending continues.
- Dividend coverage using recurring cash flow and FFO; FFO is a non-GAAP measure and is not equivalent to cash available for distributions.
- Tenant concentration, local-market exposure and related-party arrangements with the Saul Organization.