Saul Centers, Inc. — 2018 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2018 (with fourth-quarter results also presented), Saul Centers operated as a REIT focused on owning, managing and developing community and neighborhood shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. At year-end, the portfolio comprised 49 shopping centers, seven mixed-use properties and four non-operating development properties, with about 9.3 million square feet of operating space.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue, including other revenue | $228.2 million | $227.3 million |
| Property operating income | $171.6 million | $171.6 million |
| Property operating income margin | 75.3% | 75.5% |
| Operating income | $62.6 million | $60.6 million |
| Net income | $63.1 million | $60.7 million |
| Net income available to common stockholders | $36.0 million | $35.9 million |
| Diluted earnings per common share | $1.60 | $1.63 |
| FFO available to common stockholders and noncontrolling interests (non-GAAP) | $93.8 million; $3.11 per share/unit | $94.0 million; $3.18 per share/unit |
| Cash from operating activities | $110.3 million | $103.5 million |
| Cash and cash equivalents at year-end | $14.6 million | $10.9 million |
Commercial occupancy on a comparable-property basis rose to 95.7% from 94.3%. Total portfolio occupancy was 95.5% at year-end. Common distributions increased to $2.08 per share from $2.04.
Material changes and notable items
- Revenue increased 0.4%; base rent growth and higher residential rent were partly offset by lower leased space, reduced percentage rent and the absence of prior-year Broadlands and Kentlands Square II lease termination revenue.
- Same-property revenue rose about $0.3 million, but same-property operating income fell about $0.7 million, reflecting lease termination impacts, lower occupied space, lower percentage rent and higher net property expenses, partly offset by rent increases and residential growth.
- Net income available to common shareholders was nearly flat, while diluted EPS declined from $1.63 to $1.60. The 2018 result included a $2.3 million charge for extinguished issuance costs related to preferred-share redemption.
- The Company issued $72.6 million net proceeds of 6.125% Series D preferred shares and used the proceeds, with cash on hand, to redeem $75.0 million of Series C preferred shares carrying a 6.875% dividend rate.
- Investment spending increased: cash used in investing activities was $128.7 million, including $76.3 million for development, $40.8 million for acquisitions and $12.9 million for capital expenditures and tenant improvements.
Debt, liquidity and capital commitments
Gross debt principal was $1.032 billion at year-end, versus $965.5 million a year earlier. It included $910.2 million of fixed-rate debt (weighted average rate 5.18%) and $122.0 million of variable-rate debt. Management estimated debt to asset value below its general 50% policy target. The Company reported $190.7 million of availability under its $325 million revolving facility, alongside $14.6 million of cash. It was in compliance with stated credit-facility covenants.
Operating cash flow increased $6.9 million year over year. Financing cash flow was $22.0 million, while investing cash flow was negative $128.7 million. Contractual obligations totaled $1.473 billion, including $209.7 million due within one year; the latter includes development obligations, tenant improvements and debt payments and is not solely debt maturity.
Outlook, risks and contingencies
- Management planned continued work on the approximately $275 million North Glebe Road project: about 490 apartments and 60,000 square feet of retail, targeted for substantial completion in early 2020. Approximately $157 million of construction-to-permanent financing is associated with the project; about $73.4 million of investment was expected in 2019.
- Ashbrook Marketplace, an approximately 88,000-square-foot shopping center, began site work in late 2018 and was scheduled to open in early 2020. It was about 44% pre-leased at year-end. Management also cited planned Lansdowne pad development of about $4 million.
- Management described acquisition opportunities as uncertain amid limited quality inventory and elevated pricing, while stating that it would continue evaluating acquisitions, developments and redevelopments. No numerical earnings or FFO guidance was provided in the filing text.
- Key risks include retail tenant health and e-commerce competition, lease renewals and occupancy, development cost and schedule overruns, interest-rate exposure, refinancing and covenant risk, and geographic concentration: more than 85% of property operating income came from the Washington, D.C./Baltimore area. Giant Food was the largest shopping-center anchor and represented 4.7% of total revenue.
- Related-party governance merits attention: the Saul Organization has significant ownership and influence, shared services and headquarters arrangements generated $8.4 million in charges in 2018, and the Company disclosed potential conflicts of interest. Management said ordinary-course litigation was not expected to materially affect results; no material environmental issue was identified.
Most important facts for investors to verify
- Whether comparable occupancy, leasing spreads and same-property operating income continue to develop as reported, especially given the 2018 decline in same-property operating income.
- North Glebe Road’s remaining cost, financing draw schedule, leasing progress and delivery timing, and Ashbrook’s pre-leasing and opening milestones.
- Debt maturities, availability and covenants, including the sensitivity of floating-rate debt; a 1% rate increase was estimated to add about $1.2 million to annual interest expense.
- Coverage of common distributions by recurring cash generation and FFO, noting that FFO is non-GAAP and is not equivalent to operating cash flow.
- Related-party service costs, governance safeguards and any additional limited partnership units issuable to the Saul Trust under the Ashbrook arrangement.