Saul Centers, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter results included. Saul Centers is a REIT focused on owning, operating, managing and developing neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Business context and portfolio
- At year-end, the portfolio comprised 49 shopping centers and six mixed-use properties, with approximately 9.4 million square feet of gross leasable area, plus three non-operating development properties.
- Comparable portfolio commercial occupancy was 95.4%, up from 95.0% at year-end 2015. Shopping-center occupancy was 96.0%; mixed-use commercial occupancy was 91.0%.
- Park Van Ness, a 271-unit residential development with about 9,000 square feet of retail, was completed in 2016. As of March 1, 2017, 217 apartments were leased and 205 occupied; its retail space was fully leased.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $217.1 million | $209.1 million | +3.8% |
| Operating income | $55.7 million | $52.9 million | +5.3% |
| Net income | $56.7 million | $52.9 million | +7.2% |
| Net income available to common stockholders | $32.9 million | $30.1 million | +9.3% |
| Diluted net income per common share | $1.52 | $1.42 | +$0.10 |
| FFO available to common stockholders and noncontrolling interests | $87.7 million | $83.8 million | +4.7% |
| FFO per share and unit | $3.03 | $2.95 | +$0.08 |
| Cash from operating activities | $89.1 million | $88.9 million | +$0.2 million |
Operating margin was approximately 25.7% of revenue, compared with 25.3% in 2015. The filing reports total operating expenses of $161.4 million, including $45.7 million of interest expense and debt-cost amortization, $44.4 million of depreciation and leasing-cost amortization, and $17.5 million of general and administrative expense. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Revenue growth reflected higher base rents, residential rent from Park Van Ness, increased expense recoveries and a $3.0 million lease termination fee at 11503 Rockville Pike. Same-property revenue rose $6.2 million to $213.4 million; same-property operating income increased $5.2 million to $162.0 million.
- Revenue from percentage rent declined 14.2% to $1.4 million. The provision for credit losses rose 63.3% to $1.5 million, primarily related to one shopping-center tenant.
- Park Van Ness’s initial operations reduced 2016 FFO by approximately $1.1 million.
Debt, liquidity and distributions
- Year-end debt principal was $907.8 million, versus $875.2 million in 2015. Fixed-rate debt was $844.3 million, with a 5.48% weighted-average rate and 8.5-year weighted-average maturity; variable-rate debt was $63.5 million. Management said debt to its cash-flow-based estimate of asset value was below its 50% policy limit.
- Cash and cash equivalents were $8.3 million, down from $10.0 million. The $275 million unsecured revolving facility had $49.0 million drawn and approximately $225.6 million available. The facility matures in June 2018, with a conditional one-year extension option.
- Investing used $86.3 million, including $27.2 million for development and redevelopment and $48.3 million for acquisitions. Financing used $4.5 million. Management expected operating cash flow, available cash and the credit line to meet foreseeable obligations; contractual obligations totaled $949.8 million, including $37.9 million due within one year.
- Common dividends were $1.84 per share in 2016, up from $1.69 in 2015; preferred distributions were $12.4 million. The company stated it intended to continue regular quarterly distributions, but future payments are subject to Board determination and operating and capital needs.
Material changes, outlook and risks
- In December 2016, Saul Centers sold Crosstown Business Center for $5.4 million and recorded a $1.0 million gain. In January 2017, it acquired the fully leased, 121,000-square-foot Burtonsville Town Square for $76.3 million, funded partly with a new $40 million mortgage and the credit facility.
- Management described near-term acquisition opportunities as uncertain given limited quality offerings and elevated pricing. It planned to continue evaluating acquisitions and development, including the North Glebe Road project, but construction timing there remained uncertain. No numerical earnings or FFO guidance was provided.
- Safeway closed stores at Broadlands Village and Briggs Chaney Plaza in 2016. Replacement-grocer arrangements were in progress; Aldi was expected to occupy part of the Broadlands space in late 2017. A separate $3.6 million Broadlands lease termination fee received in February 2017 was expected to be recognized in first-quarter 2017 revenue, partly offset by lost rent.
- Key risks include retail tenant failures and lease rollover, competition from online and other retail channels, local-market concentration, interest-rate and refinancing exposure, development cost and lease-up uncertainty, and dependence on access to capital. Giant Food represented 4.3% of 2016 revenue; Capital One Bank 2.8%; and Albertson’s/Safeway 2.6%.
- Related-party governance merits attention: the Saul Organization held a 25.7% limited-partnership interest, and shared-service billings were $7.5 million in 2016. Management reported compliance with debt covenants. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether Park Van Ness apartment occupancy and rental performance continue to improve, and whether remaining lease-up costs or operating losses exceed expectations.
- Progress and financing plans for North Glebe Road and other redevelopment projects, including construction timing, total costs and projected returns.
- Tenant replacement and leasing outcomes at the former Safeway spaces, and the actual 2017 effect of the lease termination fees and lost rent.
- Upcoming debt maturities, refinancing terms, revolver availability and compliance with financial covenants, particularly as floating rates change.
- Dividend coverage and growth relative to FFO, operating cash flow, required capital spending and REIT distribution requirements.
- Related-party allocations and transactions, and the effect of significant Saul Organization ownership on decisions affecting other stockholders.