Saul Centers, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Saul Centers is a REIT focused on owning, operating, acquiring, and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end, its portfolio included 50 operating shopping centers, six mixed-use properties, and three non-operating development properties. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $52.9 million | $49.2 million; up 7.6% |
| Operating income | $12.7 million | $3.4 million |
| Operating margin | Approximately 24.0% | Approximately 6.9% |
| Net income attributable to Saul Centers | $10.3 million | $5.0 million |
| Net income (loss) attributable to common stockholders | $7.1 million; $0.34 per diluted share | Loss of $4.6 million; loss of $0.23 per diluted share |
| FFO available to common shareholders, a non-GAAP measure | $19.7 million; $0.71 per share | $10.2 million; $0.37 per share |
| Net cash provided by operating activities | $23.9 million | $15.7 million |
| Cash and cash equivalents | $15.4 million at March 31 | $17.3 million at December 31, 2013 |
| Total debt | $814.6 million | $820.1 million at December 31, 2013 |
| Common dividend declared | $0.40 per share | $0.36 per share |
Quarter-end total assets were $1.205 billion, total liabilities $884.2 million, and total stockholders’ equity $320.4 million. Operating cash flow exceeded investing outflows of $13.9 million and financing outflows of $12.0 million; cash declined by $1.9 million during the quarter. The $175 million unsecured revolving facility had no outstanding balance at quarter-end, approximately $172 million available, and $628,000 committed for letters of credit. The company reported compliance with its credit covenants.
Material changes versus Q1 2013
- Revenue increased $3.8 million. Same-property revenue rose 8.3% to $52.8 million, and same-property operating income increased 6.9% to $39.6 million.
- Expense recoveries increased 15.4%, while base rent rose 2.1%. Revenue included a $1.5 million lease-termination impact at Seven Corners; higher snow-removal costs also increased tenant recoveries.
- Total operating expenses fell 12.1%, mainly because depreciation was $6.2 million lower and predevelopment expense was $1.8 million lower. The prior-year depreciation included approximately $6.0 million related to the Van Ness Square building’s shortened remaining useful life. These items materially affect the year-over-year operating-income comparison.
- Property operating expenses rose 27.5%, largely due to snow removal: costs were approximately $2.0 million versus $0.3 million a year earlier. General and administrative expense rose 37.5%, including approximately $1.1 million of severance expense.
- Common-stockholder results improved in part because Q1 2013 included a $5.2 million preferred-stock redemption charge. FFO available to common shareholders increased 93.8%; FFO is supplemental and is not a substitute for GAAP income or operating cash flow.
- Leasing improved: same-property leasing was 94.3% at March 31, versus 92.8% a year earlier. New and renewed commercial leases signed during the quarter averaged $23.84 per square foot, compared with $23.04 for expiring leases; actual rent outcomes may differ from executed-lease data.
Outlook, commentary, risks, and unusual items
- Management expects to fund ordinary short-term liquidity needs with operating cash, available cash, and the credit line, and stated that resources were sufficient for foreseeable liquidity needs. The company intends generally to keep debt below 50% of total asset value; this is management’s estimate based on property value, not a reported GAAP ratio.
- Park Van Ness is planned as a 271-unit residential development with approximately 9,000 square feet of street-level retail. Construction was projected to finish by late 2015. Estimated project cost is approximately $93 million, excluding land and predevelopment costs; a $71.6 million construction-to-permanent loan was available but undrawn at March 31.
- Management cited heavy Mid-Atlantic snowfall as a drag on shopping activity and a source of higher costs. It also warned that federal spending and budget issues, local economic stress, and severe weather could contribute to tenant bankruptcies, vacancies, or lower rents. Other stated risks include tenant and anchor-tenant reliance, interest rates and refinancing, development execution, access to capital, real-estate market conditions, and REIT qualification.
- Fixed-rate debt was approximately $784.6 million, with a 5.67% weighted-average interest rate; variable-rate debt was approximately $30.0 million. A one-percentage-point rise in rates would increase annual interest expense on variable debt by about $301,000. Approximately 96.3% of notes payable was described as amortizing fixed-rate debt with staggered maturities from 2015 to 2028. Scheduled debt payments and amortization total $16.8 million for April–December 2014 and $38.1 million for 2015.
- President and COO Thomas H. McCormick resigned effective April 11, 2014, without a reported disagreement. A separation agreement provides for aggregate severance of $1.075 million over two years; the board was evaluating a replacement. The CEO and Executive Vice President–Real Estate were to manage day-to-day operations in the interim.
- After quarter-end, the company acquired 1582 Rockville Pike for $11.0 million and transferred Olney Center to the seller for the same amount, then leased and continued operating Olney under a 20-year lease; management expected secured-financing accounting. On April 29, it sold Giant Center for $7.5 million. The filing also reports a $7.5 million book value adjustment context for that property: at March 31, associated assets were $0.5 million and liabilities $0.1 million.
- Management reported no material litigation or material update to the prior annual report’s risk factors. Disclosure controls were considered effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of the revenue and FFO improvement reflects recurring property performance versus the lease-termination item, lower prior-year depreciation, and the prior-year preferred-stock redemption charge.
- Whether elevated snow and other property costs are recoverable from tenants, and whether leasing gains translate into collected rent and sustained occupancy.
- Park Van Ness’s cost, financing draw schedule, construction progress, leasing assumptions, and projected completion timing.
- Debt maturity and refinancing needs, variable-rate exposure, covenant headroom, and continued access to the revolving credit facility and other capital.
- The final accounting and operating implications of the post-quarter Rockville Pike/Olney transaction and Giant Center sale, as well as the impact of the executive departure and severance.