Saul Centers, Inc. — Q2 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2018. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. Its portfolio included 49 shopping centers, six mixed-use properties and four non-operating development properties.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total property revenue | $56.2 million | $55.9 million | $112.6 million | $114.4 million |
| Property operating income | $42.6 million | $42.5 million | $84.7 million | $87.4 million |
| Net income | $15.9 million | $14.4 million | $30.8 million | $31.8 million |
| Net income available to common stockholders | $9.6 million | $8.4 million | $16.4 million | $19.0 million |
| Diluted EPS available to common stockholders | $0.43 | $0.38 | $0.74 | $0.87 |
| Common dividends declared per share | $0.52 | $0.51 | $1.04 | $1.02 |
- Cash flow: Six-month operating cash flow was $53.7 million, versus $57.7 million. Investing used $37.0 million, compared with $94.5 million, reflecting lower acquisition spending partly offset by increased development investment. Financing used $21.2 million, versus $40.9 million provided in the prior-year period. Cash ended the period at $6.4 million, down from $10.9 million at year-end 2017.
- FFO: Six-month FFO available to common stockholders and noncontrolling interests was $44.4 million, down 8.8% from $48.6 million; FFO per share and unit was $1.48 versus $1.66. Q2 FFO available was $23.8 million versus $23.0 million.
- Balance sheet and debt: Total assets were $1.446 billion and total equity $406.3 million at June 30. Debt principal was approximately $975.5 million: $875.5 million fixed-rate and $100.0 million variable-rate. Cash was $6.4 million; the company reported approximately $208.9 million available on its $325 million revolving facility. Management said debt-to-total-asset value was below its 50% policy threshold and the company was compliant with facility covenants.
- Interest and liquidity: Six-month interest expense and deferred debt-cost amortization was $22.8 million, down from $23.8 million, mainly due to more capitalized interest. A one-percentage-point increase in variable borrowing rates would add an estimated $1.0 million to annual interest expense at period-end balances.
Changes versus prior comparable periods
- Q2 property revenue increased 0.6% (management reported total revenue, including other revenue, up 0.7%); property operating income was nearly flat. Six-month property revenue declined 1.5% and property operating income fell 3.1%.
- The six-month revenue decline chiefly reflected lower termination-fee revenue than in 2017. Base rent rose 2.0%, but was offset by the reduction in other property revenue and lower percentage rent. Same-property revenue declined $1.2 million and same-property operating income declined $2.7 million.
- Management attributed lower same-property results principally to the loss of revenue following the Safeway lease termination at Broadlands and Kmart departure at Kentlands. Q2 common-stockholder income improved, but six-month common income and FFO were lower, including a $2.3 million charge for extinguished issuance costs on preferred-stock redemption.
- Same-property commercial leasing was 94.0% at June 30, compared with 95.6% a year earlier; residential leasing was 98.6%, compared with 96.7%.
Outlook, management commentary and risks
- Management said existing cash, operating cash flow and credit availability should meet foreseeable liquidity needs, excluding additional acquisitions and developments. No numerical earnings or FFO guidance was provided.
- The 750 N. Glebe Road project is planned for approximately 490 residential units and 60,000 square feet of retail, with total cost estimated at $275 million and substantial completion targeted for early 2020. Approximately 84% of planned retail space was leased. Ashbrook Marketplace was in planning, with 37% of planned space pre-leased; construction was projected to start in late 2018 subject to permits, with opening targeted for early 2020.
- The company expected to close by January 12, 2019 on a Bethesda office-property acquisition for $35.5 million plus approximately $0.7 million in costs, funded from the revolving facility; the $3.5 million earnest-money deposit was at risk.
- Key disclosed risks include tenant nonpayment and dependence on anchor tenants, changes in shopping patterns, development execution and financing, interest-rate movements, refinancing and covenant risk, regional economic and real-estate conditions, and REIT qualification. The portfolio is geographically concentrated; Giant Food and Capital One accounted for 4.8% and 2.7% of six-month revenue, respectively.
- Management reported no material litigation, no material updates to the prior annual report’s risk factors, and no material subsequent events. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the 8.8% six-month FFO decline and the common-stockholder earnings decline, separating recurring operating trends from the preferred-redemption charge and prior-period termination-fee comparison.
- Track same-property revenue, operating income and commercial occupancy, particularly the re-leasing of the former Kmart space and remaining Broadlands space.
- Review project budgets, construction progress, leasing and permitting for Glebe Road and Ashbrook, and confirm the timing and funding of the Wisconsin Avenue acquisition.
- Assess debt maturities, variable-rate exposure, available revolver capacity and compliance with credit covenants; consider the company’s stated interest-rate sensitivity.
- Compare declared common distributions with recurring cash generation and FFO, noting that GAAP EPS and FFO are not cash-flow measures.