Saul Centers, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was signed March 4, 2016. Saul Centers is a REIT focused on owning, managing, and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area.
Business context and portfolio
At year-end, the portfolio included 50 shopping centers and six mixed-use properties, totaling approximately 9.3 million square feet, plus three development properties. One mixed-use property was classified as held for sale. Grocery-anchored centers are central to the portfolio; 31 shopping centers had grocery anchors. Giant Food was the largest anchor tenant, contributing 4.4% of 2015 revenue.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $209.1 million | $207.1 million |
| Operating income | $52.9 million | $51.9 million |
| Net income | $52.9 million | $58.0 million |
| Net income available to common stockholders | $30.1 million; $1.42 diluted per share | $32.1 million; $1.54 diluted per share |
| Funds from operations (FFO), available to common stockholders and noncontrolling interests | $83.8 million; $2.95 per share/unit | $78.3 million; $2.80 per share/unit |
| Cash provided by operating activities | $88.9 million | $86.6 million |
| Cash and cash equivalents at year-end | $10.0 million | $12.1 million |
Revenue increased 1.0%; operating income increased about 1.9%, and the operating margin was approximately 25.3%, versus 25.1%. FFO available to common holders and noncontrolling interests rose 7.1%. Same-property revenue grew $0.8 million (about 0.4%), while same-property operating income declined $0.8 million (about 0.5%). These FFO and same-property measures are non-GAAP measures and may not be comparable with other companies’ measures.
Net income declined primarily because 2014 included a $6.1 million gain on the sale of Giant Center; 2015 recorded only an $11,000 property-sale gain. Common distributions were $1.69 per share in 2015, up from $1.56; preferred distributions were $12.4 million. The company states it distributed more than the REIT minimum in both 2015 and 2014.
Investing activities used $69.6 million, including $45.9 million for development and redevelopment and $18.9 million for property improvements and capital expenditures. Financing activities used $21.4 million. Real estate investments, net of depreciation, were $1.197 billion; total assets were $1.304 billion and stockholders’ equity was $353.7 million.
Debt and capital structure
Notes payable totaled $875.2 million at December 31, 2015, compared with $857.4 million a year earlier; the selected financial data reports total debt, including accrued interest, of $878.4 million. Fixed-rate debt was $832.4 million, with a 5.53% weighted-average rate and a weighted-average term of 9.2 years; variable-rate debt was $42.8 million. Approximately $246.6 million was available under the $275 million revolving credit facility, with $28.0 million drawn. The company reported compliance with its credit covenants and a debt-to-asset-value ratio below its stated 50% policy target. It had $48.981 million in contractual obligations due within one year, including scheduled debt principal, development obligations, and tenant improvements.
Material changes, outlook, and risks
- Occupancy and rents: Same-property overall leasing improved to 94.7% from 94.4%; year-end portfolio occupancy was 94.8%. Average annualized base rent per square foot increased to $18.52 from $18.07. Management cited federal spending and budget issues as contributing to elevated vacancies in some local submarkets and pressure on rental growth.
- Development: Park Van Ness, a 271-unit residential project with approximately 9,000 square feet of retail, was expected to be substantially complete early in Q2 2016. Estimated project cost was approximately $93 million, excluding land and predevelopment costs; $77.2 million had been incurred by year-end, with $45.2 million financed through construction-loan draws. The retail space was fully leased. The filing provides no committed timetable for redevelopment at the Rockville Pike or North Glebe Road sites.
- Subsequent event: In January 2016, a tenant lease was terminated in exchange for a $3.0 million fee, expected to be recognized as first-quarter revenue. Management anticipated about $1.0 million of lost rental revenue over the remainder of 2016 and was negotiating with a replacement tenant.
- Capital allocation: Management described near-term acquisition opportunities as uncertain given limited availability and high pricing, but said the company could pursue attractive investments using cash, credit capacity, and other financing. There is no quantified earnings or FFO guidance in the supplied filing text.
- Principal risks: Tenant defaults, lease renewal and vacancy risk, retail competition, concentration in the Washington-area economy, development cost and completion risk, interest-rate exposure, refinancing and covenant risk, and potential limits on access to capital. The Saul Organization has significant influence; related-party shared-service charges were $8.2 million in 2015. Management said pending ordinary-course litigation was not expected to have a material adverse effect. The company reported no material environmental condition known to management.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control were effective as of year-end.
Important facts for investors to verify
- Whether Park Van Ness was completed on schedule and within the stated cost estimate, and its subsequent residential lease-up and cash contribution.
- Debt maturity and refinancing exposure, including the 2018 revolving-facility maturity, variable-rate borrowings, and the company’s actual leverage under its cash-flow-based asset-value measure.
- Occupancy, rent growth, tenant credit quality, and lease expirations; shopping-center leases representing 10.9% of leasable area were scheduled to expire in 2016.
- The status and sale proceeds of Crosstown Business Center, classified as held for sale at year-end, and any redevelopment plans without committed start dates.
- Dividend coverage and sustainability, considering FFO, operating cash flow, development spending, preferred dividends, and future capital needs.
- Related-party governance, shared-service allocations, Saul Organization influence, and potential conflicts in property, financing, and development decisions.