Saul Centers, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Saul Centers is a REIT focused on community and neighborhood shopping centers and mixed-use properties, primarily in the Washington, DC/Baltimore area. Its portfolio comprised 50 operating shopping centers, seven mixed-use properties and two non-operating development properties.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $47.5 million | $42.9 million | $142.2 million | $127.4 million |
| Operating income | $8.1 million | $8.7 million | $27.0 million | $25.2 million |
| Net income | $9.4 million | $6.0 million | $28.3 million | $21.5 million |
| Net income available to common stockholders | $4.2 million | $1.7 million | $12.5 million | $7.9 million |
| Basic and diluted EPS | $0.21 | $0.09 | $0.64 | $0.42 |
| FFO available to common shareholders | $14.6 million | $10.7 million | $45.5 million | $35.2 million |
Revenue rose 10.9% in Q3 and 11.6% year to date, primarily from Clarendon Center and three shopping centers acquired in 2011. Operating income declined in Q3 as expenses grew faster than revenue, including higher taxes, interest and depreciation. Nine-month operating income increased. FFO, a non-GAAP REIT performance measure and not a substitute for operating cash flow, increased 36.2% in Q3 and 29.1% year to date.
- Margins and costs: Q3 operating expenses were $39.4 million versus $34.2 million; the filing does not provide a single reported operating-margin measure. Q3 interest expense and deferred debt-cost amortization rose 9.5% to $12.3 million. Nine-month interest expense and amortization rose 15.1% to $37.7 million.
- Cash flow: Nine-month operating cash flow was $59.0 million versus $40.1 million. Investing used $9.7 million versus $196.9 million, reflecting prior-year acquisitions and development spending. Financing used $28.1 million versus $155.2 million provided in the prior-year period. Cash increased $21.2 million to $33.5 million.
- Balance sheet and debt: Total assets were $1.20 billion and total liabilities $901.5 million at September 30. Debt totaled $828.0 million, including $813.0 million fixed-rate and $15.0 million variable-rate. Fixed-rate debt had a 5.88% weighted average rate. The company reported no revolver borrowings and approximately $171.8 million available under its $175 million facility; $224,000 was committed for letters of credit.
- Debt service and liquidity: Management estimated debt below 50% of total asset value and reported compliance with credit-facility covenants. Scheduled debt payments, including amortization, total $89.5 million in 2013, including $70.1 million in balloon payments. On October 1, 2012, the company repaid a $23.4 million mortgage using cash.
- Distributions and equity: Common dividends declared were $0.36 per share in Q3 and $1.08 for the nine-month period, unchanged from 2011. The company issued 478,030 common shares during the nine months, mainly through its dividend reinvestment plan.
Material changes and operating trends
- Same-property commercial leasing increased to 91.1% from 89.9%; total commercial portfolio leasing was 91.6% versus 89.7%. Shopping centers were 93.0% leased and mixed-use commercial space 84.0% leased. Clarendon Center apartments were fully leased.
- Credit-loss provisions declined year over year, reflecting prior-period defaults and bankruptcies of major tenants. Real estate taxes increased, including higher District of Columbia taxes and taxes on the newer properties.
- The company sold the 77,000-square-foot West Park center for $2.0 million and recorded a $1.1 million gain; management said the sale was not material to results or cash flows.
- Q3 and nine-month net income included a $1.1 million property-sale gain and a $219,000 casualty-settlement gain. Results also included $1.87 million of predevelopment costs related primarily to lease terminations at Van Ness Square. No acquisition-related costs were reported in 2012, compared with $2.4 million in Q3 2011 and $2.5 million year to date.
Outlook, commentary and risks
- Management described modest improvement in retail sales and leasing, but said rents remained under pressure, vacancies were still elevated versus pre-recession levels, retailers remained cautious about expansion, and office-space demand had slowed amid uncertainty about federal spending.
- Van Ness Square repositioning remains under evaluation; the company has not committed to a definitive plan and expects additional predevelopment costs. Management may pursue freestanding outparcels, redevelopment, expansion or acquisitions, subject to review and financing conditions. No earnings or revenue guidance was provided.
- An $18 million non-recourse Hampshire-Langley mortgage commitment, at 4.04% with a 15-year term, was expected to close in Q4 subject to customary conditions.
- French Market sustained hail damage; estimated repairs of approximately $1.9 million were expected to be covered by insurance, subject to a $50,000 deductible. Tenants remained open.
- Key risks include tenant rent collection, reliance on anchor and significant tenants, geographic concentration, financing costs and covenants, access to capital, development and leasing execution, and REIT qualification. Giant Food and Safeway represented 5.0% and 2.7% of nine-month revenue, respectively. Management said routine legal matters were not expected to have a material adverse effect; no material risk-factor updates were reported.
- B. Francis Saul III resigned as president and director effective September 4, 2012; Thomas H. McCormick became president and COO and J. Page Lansdale became EVP—Real Estate. Saul III entered a consulting agreement at $60,000 per month, terminable by the company at any time, with a term of up to two years.
Important facts for investors to verify
- Reconcile revolver availability: the notes report approximately $171.8 million available, while one MD&A passage cites approximately $174.8 million.
- Review 2013 balloon maturities, refinancing plans and the cash impact of the October 1 repayment of the $23.4 million mortgage.
- Assess whether improved occupancy and acquisition-related revenue translate into recurring same-property growth, given rent pressure and higher taxes, interest and depreciation.
- Track Van Ness Square decisions and future predevelopment costs, as well as completion and leasing progress at development properties.
- Evaluate FFO alongside GAAP earnings and cash flows, and consider dilution from share issuance and convertible partnership units.
- Review related-party arrangements and the Saul Organization’s role, including the consulting agreement, shared services and affiliated-party interests.