Saul Centers, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end, its portfolio included 50 shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Total revenue | $58.5 million | $56.9 million; up 2.7% |
| Operating income | $17.4 million | $16.4 million |
| Net income attributable to Saul Centers | $13.7 million | $12.9 million |
| Net income attributable to common stockholders | $10.6 million; $0.49 per diluted share | $9.9 million; $0.46 per diluted share |
| Common dividend declared per share | $0.51 | $0.47 |
| FFO available to common stockholders and noncontrolling interests | $25.6 million; $0.87 per share/unit | $24.3 million; $0.85 per share/unit; FFO up 5.4% |
| Same-property revenue | $55.8 million | $56.4 million; down $0.7 million |
| Same-property operating income | $43.1 million | $42.3 million; up $0.8 million |
| Cash from operations | $31.6 million | $31.3 million |
Operating margin was approximately 29.7%, versus 28.8% in Q1 2016. Same-property revenue declined about 1.2%, while same-property operating income rose about 1.9%. These same-property measures and FFO are non-GAAP measures and may not be comparable with other REITs.
At March 31, 2017, cash was $9.7 million, total assets were $1.42 billion and total liabilities were $1.04 billion. Debt principal was approximately $977.1 million: $878.7 million fixed-rate and $98.4 million variable-rate. The company reported approximately $190.6 million available on its $275 million unsecured revolving facility and compliance with its financial covenants. Fixed-rate debt had a weighted-average interest rate of 5.39%. The company’s stated debt-to-total-asset-value ratio was below its 50% policy threshold, based on management’s estimated property values.
Operating cash flow was nearly unchanged year over year. Investing used $87.3 million, principally for the $76.4 million Burtonsville Town Square acquisition; financing provided $57.1 million, including new mortgage and revolver borrowings. Cash increased $1.3 million during the quarter.
Material changes and notable items
- Total revenue increased primarily from Park Van Ness and the January acquisition of Burtonsville Town Square, partly offset by lower expense recoveries.
- Property operating expenses fell 16.8%, largely because snow removal costs declined from the severe winter in Q1 2016. Real estate taxes rose 11.1%; interest expense and debt-cost amortization rose 7.0%, partly reflecting acquisition financing and lower capitalized interest.
- Burtonsville Town Square was acquired for $76.4 million, including acquisition costs, and was reported 100% leased. It was partly financed with a $40 million, 15-year fixed-rate mortgage at 3.39%.
- The company recognized a termination fee related to the Broadlands Safeway lease. The filing’s MD&A states $3.6 million, while a financial-statement note refers to a $3.0 million termination fee from Albertson’s/Safeway. Management expected the termination fee to be partly offset by approximately $1.6 million of lost rental revenue during 2017. Aldi leased 20,000 square feet and was expected to open in late 2017; the remaining space was being marketed.
- Same-property leasing was 95.5%, unchanged year over year. Park Van Ness retail space was fully leased; as of May 1, 2017, 251 of 271 apartments had leases signed and 230 were occupied.
Outlook, risks and contingencies
No quantitative earnings or FFO guidance was provided. Management said cash, operating cash flow and revolving-credit availability were expected to meet liquidity needs for the foreseeable future. It planned to continue selective acquisitions, redevelopment and development, with funding expected from cash, credit-line borrowings, construction or permanent financing, the dividend reinvestment plan and other capital sources.
The planned 750 N. Glebe Road project is expected to cost approximately $275 million, including land, and comprise about 490 residential units and 62,000 square feet of retail. Permits were pending for excavation work expected to begin in Q2 2017. Debt maturities include $153.3 million in 2018, including $84 million outstanding under the revolving facility, which matures June 23, 2018, with a conditional one-year extension option.
Key risks identified include tenant nonpayment and dependence on anchor tenants, interest-rate and refinancing exposure, access to capital, development and acquisition execution, real-estate market and operating-cost changes, online-shopping competition, geographic concentration, related-party relationships and maintaining REIT tax status. A one-percentage-point increase in rates on variable-rate debt would increase annual interest expense by approximately $984,000. Management reported no material litigation, no material update to the prior annual report’s risk factors, and no subsequent events requiring disclosure. Disclosure controls were deemed effective.
Important facts for investors to verify
- Reconcile the Broadlands/Safeway termination-fee disclosures: $3.6 million in MD&A versus $3.0 million in the note, and assess the expected replacement-tenant timing and rental-income impact.
- Track 2018 refinancing needs, including the revolving facility maturity, and confirm the status of its extension and refinancing plans.
- Monitor leasing and occupancy at Park Van Ness and progress, permits, costs and financing for the Glebe Road development.
- Assess whether dividend distributions remain supported by recurring cash flow; the $0.51 quarterly common dividend exceeded reported common EPS of $0.49.
- Evaluate the company’s interest-rate sensitivity, debt covenant headroom and concentration in the Washington, D.C./Baltimore market.