Saul Centers, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. Saul Centers is a REIT focused on neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Business context
At year-end, the portfolio comprised 50 shopping centers, six mixed-use properties and four non-operating development properties, totaling approximately 9.3 million square feet of operating gross leasable area. Portfolio leasing was 95.0%; same-property commercial leasing was 95.1%, down from 95.7% a year earlier. Management’s strategy emphasizes transit-oriented residential mixed-use development, shopping-center operating growth, and selective redevelopment.
Financial performance and condition
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $231.5 million | $227.2 million | +1.9% |
| Net income | $64.2 million | $63.1 million | +1.8% |
| Net income available to common stockholders | $36.3 million | $36.0 million | +0.8% |
| Diluted earnings per share | $1.57 | $1.60 | −1.9% |
| Funds from operations (FFO), available to common stockholders and noncontrolling interests | $95.1 million | $93.8 million | +1.3% |
| FFO per share | $3.08 | $3.11 | −1.0% |
| Operating cash flow | $115.4 million | $110.3 million | +4.6% |
| Cash and cash equivalents at year-end | $13.9 million | $14.6 million | −$0.7 million |
| Total debt principal | $1.10 billion | $1.03 billion | +6.7% |
GAAP net margin was approximately 27.7% in 2019, versus 27.8% in 2018. Rental revenue rose 0.7%; other revenue increased 49.0%, largely from higher lease termination fees. Same-property revenue grew $4.1 million and same-property operating income grew $2.1 million. Property operating expenses increased 6.2%, while net interest expense declined 6.6%, helped by higher capitalized interest.
Investing activities used $135.7 million, principally for development and property improvements; financing activities provided $19.6 million. Common dividends were $2.12 per share, up from $2.08. The company reported total assets of $1.62 billion and total equity of $443.4 million.
Debt included $938.4 million of fixed-rate debt at a 5.04% weighted-average rate and $162.5 million of variable-rate debt. Management said debt was below its general 50%-of-asset-value policy threshold. Approximately $237.3 million remained available on the $325 million revolving facility; the company reported compliance with its debt covenants.
Material changes and unusual items
- Net income available to common stockholders included $3.2 million of costs from redeeming Series C preferred shares. Series E preferred shares were issued, with net proceeds of approximately $106.3 million, and used to redeem Series C; Series D and E preferred stock remained outstanding.
- The company’s total debt increased year over year, including higher revolving-facility and construction-loan balances. Fixed-rate mortgages represented approximately 85.2% of notes payable, with staggered maturities.
- The Waycroft, a 491-apartment, 60,000-square-foot retail project, had incurred approximately $255.4 million in costs by year-end; total project cost was estimated at $275 million plus capitalized interest. Apartment occupancy was projected to begin in Q2 2020.
- In November 2019, the company agreed to acquire Twinbrook-area land from the Saul Trust for 1,416,071 partnership units valued at an aggregate $79.3 million, subject to conditions. The related development plan remained subject to approvals and market conditions.
- J. Page Lansdale resigned as president and COO effective September 30, 2019, remained a director and consultant, and was succeeded as president by B. Francis Saul II. The filing stated the resignation was not due to disagreement.
Outlook, risks and contingencies
Management expected to complete The Waycroft and pursue selected redevelopment, outparcel and expansion projects. It described acquisitions as uncertain because quality properties were limited and prices had risen; no specific earnings or FFO guidance was provided. Management believed cash and credit availability would meet liquidity needs for the foreseeable future.
Key disclosed risks include the portfolio’s geographic concentration (approximately 85% of property operating income from the Washington, D.C./Baltimore area), retail competition and tenant credit, anchor-tenant dependence, lease expirations, development cost and lease-up risk, access to capital, interest-rate and LIBOR transition risk, and debt covenant/refinancing exposure. The Saul Organization’s significant ownership, related-party arrangements and influence over company decisions may create conflicts; shared-service charges were $8.4 million in 2019. Management said routine litigation was not expected to have a material adverse effect and reported no known material environmental condition. The auditor issued an unqualified opinion and reported no critical audit matters; management and the auditor concluded internal control over financial reporting was effective.
For 2019 Q4, revenue was $56.6 million versus $58.1 million in Q4 2018; net income available to common stockholders was $6.5 million versus $9.3 million, and diluted EPS was $0.27 versus $0.41. The preferred-share redemption costs affected the annual common-stockholder result, but the filing does not provide a quarter-specific allocation of those costs.
Investor verification priorities
- Confirm current occupancy, rent collections, tenant credit exposure and leasing progress, particularly against the 2020–2024 shopping-center lease expirations.
- Track The Waycroft’s completion, lease-up, final cost, loan conversion and operating contribution against management’s estimates.
- Review the Twinbrook contribution’s closing conditions, related-party valuation and required development approvals.
- Monitor debt maturities, variable-rate exposure, revolver availability and covenant headroom; verify the company’s asset-value leverage measure and assumptions.
- Assess dividend coverage and the impact of preferred dividends, issuance/redemption costs and continuing share issuance through the reinvestment plan.
- Review related-party governance and costs, including Saul Organization ownership, shared services, insurance commissions and the Twinbrook transaction.