Saul Centers, Inc. — FY2011 Form 10-K
Reporting period: Year ended December 31, 2011; the filing also reports fourth-quarter results. Saul Centers is a REIT that owns, manages and develops neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. Its portfolio included 51 shopping centers and seven mixed-use properties, totaling approximately 9.5 million square feet.
Financial and operating performance
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $174.4 million | $163.5 million | Up 6.6%; acquisitions and Clarendon Center contributed, while core-property revenue declined. |
| Operating income | $33.9 million | $43.8 million | Down 22.6%; expenses rose faster than revenue. |
| Net income | $30.3 million | $43.2 million | Down 29.8%. |
| Net income available to common stockholders | $11.6 million; $0.61 diluted per share | $21.6 million; $1.18 diluted per share | Down 46.4% in dollars. |
| Funds from operations (FFO) available to common shareholders | $50.3 million | $50.6 million | Down 0.5%; non-GAAP measure. |
| Cash from operating activities | $55.7 million | $62.9 million | Down $7.2 million. |
| Cash and cash equivalents | $12.3 million | $13.0 million | At year-end. |
| Total debt | $831.9 million | $711.4 million | Up $120.5 million; 97% of notes payable was fixed-rate. |
Base rent increased 9.8% to $138.9 million, principally reflecting acquired and newly operating properties. Operating expenses increased 17.3% to $140.4 million. Interest expense and deferred debt-cost amortization rose 30.1% to $45.5 million, and depreciation and amortization rose 24.3% to $35.4 million, mainly as Clarendon Center and acquisitions entered service. Credit-loss provision increased to $1.9 million from $1.3 million.
For Q4 2011, revenue was $46.9 million versus $40.3 million in Q4 2010. Net income available to common shareholders was $3.7 million, or $0.19 diluted per share, versus $3.9 million, or $0.22 per share.
Liquidity, debt and distributions
- The $150 million unsecured revolving facility had $8.0 million drawn and approximately $141.8 million available at year-end; it matured June 30, 2012, with a one-year extension option subject to conditions.
- Management said debt-to-estimated-asset value was below its 50% policy limit, but the filing does not provide a clear exact ratio. All reported credit-facility covenants were met at December 31, 2011.
- Debt maturities, including scheduled amortization, totaled $91.7 million in 2012 and $87.9 million in 2013. Management reported a refinancing commitment for the company’s only 2012 fixed-rate debt maturity, scheduled for October. The company also expected to refinance Clarendon Center’s construction loan with permanent financing as commercially practical.
- Contractual obligations totaled $1.23 billion, including $148.6 million due within one year; this table includes scheduled debt interest and principal, balloon payments, leases and development obligations.
- Common distributions were $1.44 per share in 2011, unchanged from 2010; preferred distributions totaled $15.1 million. Half of the 2011 common distribution was treated as taxable dividend income and half as return of capital. Management intended to continue quarterly distributions, but future amounts remain subject to Board determination and financial conditions.
Material changes, outlook and risks
- The company acquired Kentlands Square II, Severna Park MarketPlace and Cranberry Square for a combined purchase price of approximately $170.9 million including acquisition costs. It funded the purchases with mortgages, bridge financing, cash and credit-facility borrowings, and $55.8 million of equity issued to a related party. The centers totaled about 636,000 square feet and were approximately 98% leased.
- Same-center portfolio leasing fell to 89.4% from 91.1%. Tenant bankruptcies and closures—including Syms, SuperFresh and Borders—contributed to vacancies; 61,000 square feet of four affected spaces had been leased by March 1, 2012.
- Clarendon Center was substantially completed and moving into operation. At year-end, 92.4% of its combined commercial space and 243 of 244 apartments were leased. Management anticipated selective redevelopment, outparcel development and continued work on construction-in-progress projects, subject to investment review and available financing. It gave no specific earnings or revenue guidance.
- Unusual 2011 items included $2.5 million of acquisition-related costs, a $1.3 million loss from a derivative fair-value decrease and a $0.2 million casualty-settlement gain. The company reported no real-estate impairment losses in 2011, 2010 or 2009. In 2010, it recorded a $3.6 million gain on the sale of Lexington property and $5.4 million of debt-extinguishment losses.
- Key risks include tenant financial distress and leasing weakness, local economic concentration, refinancing and interest-rate exposure, development and lease-up risk, and competition. Related-party considerations are significant: the Saul Organization has substantial ownership and board influence, received equity in the 2011 property acquisitions, and provides shared services. The company reported $6.1 million of shared-service charges in 2011 and said it had not obtained a third-party appraisal of those services.
- Management and Ernst & Young reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Management said pending ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether leasing and occupancy recover, particularly at same-center properties and at underleased developments such as Westview Village and Northrock.
- Execution and terms of the 2012 refinancing commitment, the revolving-facility extension, and the planned permanent financing for Clarendon Center.
- Cash flow available after debt service, capital spending and preferred distributions; assess FFO alongside GAAP income and operating cash flow.
- Performance and financing of the 2011 acquisitions, including the related-party equity issuance and potential conflicts of interest.
- Common and preferred distribution coverage, given lower common earnings per share and the company’s REIT distribution requirements.