Saul Centers, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Saul Centers is a REIT focused on owning, operating and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio comprised 50 shopping centers, six mixed-use properties and four non-operating development properties.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $56.9 million | $59.8 million | Down 4.7% |
| Net income | $16.8 million | $17.1 million | Down 1.5% |
| Net income attributable to Saul Centers | $13.3 million | $13.4 million | Down 1.4% |
| Net income available to common stockholders | $10.5 million | $10.5 million | Nearly unchanged |
| Basic and diluted EPS | $0.45 | $0.46 | Down $0.01 |
| Operating cash flow | $26.1 million | $31.6 million | Down $5.6 million |
| Investing cash flow | $(21.6) million | $(23.4) million | Cash used for investment |
| Financing cash flow | $13.6 million | $(11.3) million | Improved year over year |
- Revenue and operating performance: Rental revenue declined 2.4%, while other revenue fell 48.2%, primarily reflecting lower lease termination fees. Same-property revenue was $56.8 million, down about $2.0 million; same-property operating income was $42.7 million, down about $1.3 million. Company-reported FFO available to common stockholders and noncontrolling interests was $25.3 million, down 1.8%; FFO per share and unit was $0.81 versus $0.84.
- Expenses and margins: Total expenses declined 6.0% to $40.1 million, mainly due to lower snow-removal costs and lower net interest expense. Net income as a share of revenue was approximately 29.6%, compared with 28.6% in Q1 2019. The filing does not present a conventional gross-margin measure.
- Cash and investment: Cash and equivalents were $31.9 million at March 31, versus $13.9 million at year-end 2019. The quarter’s $18.0 million cash increase reflected financing inflows, including $40 million of revolving-facility proceeds, partly offset by debt repayments, distributions and property investment. Additions to real estate and development projects totaled $21.6 million.
- Debt: Gross principal debt was approximately $1.128 billion: $928.9 million fixed-rate and $199.5 million variable-rate. The balance sheet reported debt carrying value of approximately $1.119 billion, net of deferred debt costs. The company said its debt-to-total-asset-value ratio was below its 50% policy threshold, based on management’s asset-value estimate. It was in compliance with credit-facility covenants at quarter-end.
- Liquidity: At March 31, approximately $200.3 million was available under the revolving credit facility. After drawing $50 million on April 1, the company reported April 30 cash of $61.9 million and revolving-facility availability of approximately $150.3 million. The filing reports no clear standalone current-ratio or working-capital measure.
Material changes and operating developments
- Compared with Q1 2019, rental revenue fell $1.4 million and other revenue fell $1.4 million. Base rent declined modestly; expense recoveries declined mainly because of lower recoverable snow-removal costs. Property operating expenses also decreased, primarily from lower snow-removal costs.
- Net interest expense declined 13.3%, principally because more interest was capitalized to development projects; interest incurred itself was slightly higher.
- Same-property commercial occupancy was 95.3%, compared with 95.7% a year earlier. Residential occupancy was 96.7%, versus 99.0%. Commercial portfolio leasing was 95.3% on a total-portfolio basis.
- The Waycroft development was substantially complete; apartment occupancy began in April 2020. Total project cost was expected to be approximately $275 million plus about $19 million of capitalized interest. Approximately 90% of planned retail space was leased, while 18 residential units were occupied as of May 5.
- Construction in progress totaled $345.9 million, including $267.6 million for The Waycroft. Other major projects include 7316 Wisconsin Avenue and Ashbrook Marketplace.
Outlook, risks and contingencies
- COVID-19: Management warned of potentially material adverse effects on operations, cash flows, tenant rent payments, financing access and securities values. It expected negative effects to be greater in Q2 2020 than in Q1. Many nonessential tenants had closed or curtailed operations; grocery stores, pharmacies, banks and home-improvement stores generally remained open.
- As of May 5, approximately 32% of April contractual base rent and operating expense and real-estate-tax recoveries remained unpaid, excluding approximately $355,600 subject to executed deferral agreements. The company was negotiating additional deferrals, generally for 30–90 days with repayment typically over 12 months beginning in 2021. It continued to accrue rental revenue during deferral periods but anticipated some tenants would not pay amounts due and that losses on receivables could result.
- About 33% of base rent came from trade categories significantly affected by closures or social-distancing measures, including restaurants, beauty services, apparel, fitness and other businesses. The timing and extent of the pandemic’s effects were described as highly uncertain.
- Management expected to meet near-term liquidity needs through operations, cash and credit availability, while noting a short-term decline in operating cash flow was expected. The company’s REIT status requires distribution of at least 90% of REIT taxable income, excluding net capital gains.
- No numerical earnings guidance was provided. Management’s stated strategy remained focused on transit-oriented residential mixed-use development, selective redevelopment and shopping-center operations. Future development timing and spending depend on approvals, market conditions and financing availability.
- Debt maturities include approximately $190.6 million in 2022, including $124.5 million outstanding on the revolving facility. A 1-percentage-point increase in rates on quarter-end variable-rate debt would increase annual interest expense by an estimated $2.0 million.
- The filing reported no material litigation and no material off-balance-sheet arrangements. It identified ordinary-course legal matters but said management did not expect them to have a material adverse effect.
Important facts for investors to verify
- Subsequent rent collections, tenant defaults, concessions and the ultimate collectability of receivables as pandemic-related restrictions and reopening conditions change.
- Actual operating cash flow, FFO and occupancy trends in subsequent quarters, given the expected greater COVID-19 impact in Q2 and the decline in residential occupancy.
- Liquidity and covenant headroom after the $71 million of revolving-facility draws made in March and April, along with the company’s ability to refinance upcoming maturities.
- Development costs, financing and leasing progress for The Waycroft and other projects, including approvals and conditions for the proposed Twinbrook Quarter transaction and development.
- Future distributions and capital needs, particularly in light of REIT distribution requirements, tenant payment shortfalls and continuing development commitments.