Saul Centers, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio included 50 shopping centers, seven mixed-use properties and four non-operating land and development properties.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $63.8 million | $61.1 million | $190.5 million | $183.5 million |
| Net income | $16.7 million | $15.5 million | $51.6 million | $50.0 million |
| Net income attributable to Saul Centers, Inc. | $12.8 million | $12.0 million | $39.5 million | $38.3 million |
| Net income available to common stockholders | $10.0 million | $9.2 million | $31.1 million | $29.9 million |
| Basic and diluted EPS | $0.42 | $0.38 | $1.29 | $1.25 |
| Same-property operating income (non-GAAP) | $46.4 million | $45.0 million | $140.4 million | $135.7 million |
| FFO available to common stockholders and noncontrolling interests (non-GAAP) | $26.0 million | $24.9 million | $79.4 million | $78.5 million |
Cash flow, debt and liquidity
- Nine-month operating cash flow was $85.0 million, down from $92.0 million. Investing cash use rose to $147.3 million from $84.5 million, principally reflecting $128.7 million of development spending. Financing provided $55.5 million, versus $11.8 million used in the prior-year period. Cash ended at $6.6 million.
- At September 30, principal debt was approximately $1.36 billion: $1.11 billion fixed-rate (including $100 million effectively fixed by swaps) and $251 million unhedged variable-rate. Net carrying debt was $1.343 billion. Weighted average remaining debt term was 7.4 years.
- The $525 million credit facility had $351.0 million outstanding and approximately $110.5 million available, subject to borrowing conditions; the company reported compliance with its financial covenants. The revolver matures in 2025, with a possible one-year extension, and the term loan matures in 2027.
- Interest expense, net and debt-cost amortization increased 13.5% for the nine-month period, to $36.5 million. A one-percentage-point change in rates on unhedged variable debt would change annual interest expense by approximately $2.5 million.
Material changes and operating trends
- Q3 revenue increased 4.4%; nine-month revenue increased 3.8%. Growth chiefly reflected higher commercial and residential base rent and expense recoveries. Nine-month net income rose 3.1%.
- Nine-month property operating expenses rose 5.1%, real estate taxes 4.3%, and interest expense 13.5%. Higher interest rates and average debt drove much of the financing-cost increase; capitalized interest on developments partly offset it.
- Same-property operating income increased 3.1% in Q3 and 3.5% for the nine-month period. Management reported same-property commercial leasing of 94.2%, up from 93.0% a year earlier; residential leasing was 97.5%.
- As of October 31, 2023, the company had collected 98.8% of Q3 contractual base rent and operating expense and real estate tax recoveries due.
Outlook, projects and risks
- No numerical earnings or revenue guidance was provided. Management described continued emphasis on grocery-anchored shopping centers and transit-oriented mixed-use development, while noting that acquisition opportunities may remain challenging.
- Twinbrook Quarter Phase I is expected to include 450 apartments, an 80,000-square-foot Wegmans and approximately 25,000 square feet of small-shop space; the office tower is not currently being built. Estimated project cost, excluding capitalized interest, is $331.5 million, of which $241.3 million had been invested. Initial delivery is anticipated in late 2024. A $145 million construction-to-permanent loan had a $50.8 million net balance at quarter-end.
- Hampden House is planned for up to 366 apartments and 10,100 square feet of retail space. Estimated cost is $246.4 million, with $113.1 million invested; construction completion is expected in 2025. Its $133 million construction-to-permanent loan had not yet been drawn.
- Key risks include regional concentration, tenant rent-paying capacity and reliance on anchor tenants, higher interest rates and refinancing, development execution and funding, inflation, real estate market conditions, and REIT qualification. No impairment charges were recorded, but management said future impairments remain possible. Management reported no material litigation and no material update to previously disclosed risk factors.
- The company pays regular quarterly distributions and must generally distribute at least 90% of REIT taxable income to maintain REIT status. Common distributions were $0.59 per share per quarter during the period; preferred stock dividends also continued.
Investor facts to verify
- Development budgets, remaining funding needs, construction progress and delivery timing for Twinbrook Quarter and Hampden House.
- Debt maturities and refinancing options, available credit-facility capacity, covenant headroom and exposure to variable interest rates.
- Whether rent collections and leasing gains continue, including occupancy of leased but not yet occupied space; those leases were expected to add about $5.7 million of annualized base rent upon occupancy.
- Whether cost inflation, tenant credit deterioration or changing property-market assumptions lead to impairment charges or weaker cash flows.
- Reconcile reported GAAP earnings and operating cash flow with non-GAAP FFO and same-property operating income when assessing dividend coverage and liquidity.