Saul Centers, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $56.2 million | $53.2 million | $170.6 million | $162.9 million |
| Operating income | $14.4 million | $12.7 million | $46.2 million | $42.4 million |
| Net income attributable to common stockholders | $8.4 million | $7.1 million | $27.4 million | $24.5 million |
| Basic and diluted earnings per share | $0.38 | $0.33 | $1.25 | $1.14 |
| Dividends declared per common share | $0.51 | $0.47 | $1.53 | $1.41 |
Revenue increased 5.6% in the quarter and 4.8% year to date. Operating income margin, calculated from reported figures, was approximately 25.6% in Q3 2017 versus 23.9% in Q3 2016, and 27.1% versus 26.0% for the respective nine-month periods. Nine-month FFO available to common stockholders and noncontrolling interests was $71.3 million, up 7.1%; FFO per share and unit was $2.42 versus $2.30. FFO is a non-GAAP measure and is not cash flow.
Same-property revenue rose 4.2% in Q3 to $54.9 million and 0.5% for the nine-month period to $160.2 million. Same-property operating income increased 2.8% in Q3 to $40.9 million and 0.7% year to date to $122.6 million. The company attributed growth mainly to higher base rent; nine-month comparisons also benefited from lower credit-loss provisions.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $74.4 million, compared with $70.4 million in 2016. Investing used $99.5 million, primarily reflecting acquisitions, versus $44.7 million used in the prior period. Financing provided $26.1 million, compared with $25.8 million used in 2016.
- Cash and cash equivalents were $9.4 million at September 30, 2017. Total assets were $1.424 billion and total equity was $388.1 million.
- Debt principal totaled approximately $968.9 million: $865.7 million fixed-rate and $103.2 million variable-rate, including $89.0 million drawn on the revolving facility. The balance sheet presents debt net of deferred debt costs. Fixed-rate debt had a weighted-average rate of 5.38%.
- The $275 million unsecured revolving credit facility had $185.8 million available, excluding approximately $0.2 million committed for letters of credit, and matures June 23, 2018, with a conditional one-year extension option. The company reported compliance with its financial covenants.
- Management stated that debt to total asset value, using management’s fair-market-value basis, was below 50% and that available capital resources were sufficient for foreseeable liquidity needs. The filing lists $159.8 million of scheduled debt maturities and amortization in 2018, including $89.0 million on the revolving facility.
Material changes and operating developments
- The company acquired Burtonsville Town Square for $76.4 million in January; it was reported 100% leased and funded partly with a $40 million mortgage. The acquisition and Park Van Ness contributed to quarterly revenue growth.
- Park Van Ness, completed in 2016, was 93.7% leased by apartment units at quarter-end; its retail space was fully leased. The 750 N. Glebe Road development is planned for approximately 490 residential units and 62,000 square feet of retail, with estimated total cost of $275 million and expected substantial completion in early 2020. A $157 million construction-to-permanent loan was closed, and approximately 80% of the retail space was leased.
- Great Eastern Shopping Center was sold for $8.5 million in September. The company provided the buyer $1.28 million of second-trust financing; a $0.5 million gain was deferred until repayment.
- The company received a $3.6 million Safeway lease termination fee in Q1, recognized as revenue; management said this would be partly offset by approximately $1.6 million of lost rental revenue during 2017. A replacement Aldi lease was under construction.
- Kmart vacated its 104,000-square-foot Kentlands store in September. Its lease had generated approximately $1.3 million in annual revenue; the company expected to regain possession October 31 and reposition or re-lease the space. The termination triggers a guarantee of approximately $9.2 million on the related mortgage, subject to reduction under loan conditions.
Outlook, risks and contingencies
No numerical earnings or FFO guidance was provided. Management plans to pursue leasing, redevelopment, acquisitions and development selectively, with future projects potentially funded by operating cash, the credit line, construction or permanent financing, and debt or equity capital. It highlighted opportunities to increase cash flow through lease renewals, leasing available space and improving tenant mix.
Key risks include tenant nonpayment and reliance on anchor tenants, regional economic and retail conditions including online shopping, development execution and financing needs, interest-rate changes, debt refinancing and covenant requirements, real-estate operating costs and taxes, and REIT qualification. A one-percentage-point increase in rates on variable-rate debt would increase annual interest expense by approximately $1.0 million, based on quarter-end balances. Management reported no material litigation and no material change to previously disclosed risk factors. No material subsequent events were reported.
Important facts for investors to verify
- Progress on leasing and occupancy at Kentlands, the replacement Safeway space, Park Van Ness and 750 N. Glebe Road, and the impact on rent and operating income.
- Closing and terms of the planned $60 million refinancing for a mortgage scheduled to mature in 2018, and management of the revolving facility as it approaches maturity.
- Actual costs, funding, construction milestones and lease-up for the $275 million Glebe Road project, including the use and terms of its $157 million loan.
- Repayment of the Great Eastern buyer loan and recognition of the deferred gain, plus performance under the Kmart-related mortgage guarantee.
- Whether operating cash flow and recurring earnings support distributions: common dividends exceeded net income attributable to common stockholders in both reported periods; REIT distribution requirements and any use of external funding should be considered.