Saul Centers, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Saul Centers is a REIT focused on owning, managing, and developing neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At year-end, its portfolio comprised 49 shopping centers, six mixed-use properties, and three non-operating development properties.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $227.3 million | $217.1 million | +4.7% |
| Operating income | $60.6 million | $55.7 million | +8.8% |
| Net income | $60.7 million | $56.7 million | +7.0% |
| Net income available to common stockholders | $35.9 million; $1.63 diluted share | $32.9 million; $1.52 diluted share | +9.0% in income |
| Operating margin | 26.7% | 25.7% | +1.0 percentage point |
| Funds from operations (FFO), available to common stockholders and noncontrolling interests | $94.0 million; $3.18 per share/unit | $87.7 million; $3.03 per share/unit | +7.1% in FFO |
| Cash from operating activities | $103.5 million | $89.1 million | +16.1% |
| Cash and cash equivalents at year-end | $10.9 million | $8.3 million | +$2.6 million |
FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow. The filing does not provide a clear standalone cash-flow margin metric.
Fourth quarter: Revenue was $56.7 million, compared with $54.2 million in Q4 2016. Net income available to common stockholders was $8.5 million versus $8.4 million, and diluted earnings per share were $0.38 in both quarters.
Debt and liquidity: Principal debt outstanding was $965.5 million at year-end, comprising $890.4 million fixed-rate debt and $75.1 million variable-rate debt; the balance-sheet debt carrying value was $958.6 million, net of deferred debt costs. Weighted-average interest rates were 5.25% on fixed-rate debt and 2.86% on variable-rate debt. Cash plus approximately $213.8 million available on the then-existing $275 million revolving facility supported liquidity. The company reported compliance with its debt covenants and a debt-to-asset-value ratio below its policy ceiling of 50%; the ratio itself is not stated. Contractual obligations due within one year totaled approximately $228.8 million, including debt payments and development obligations.
Common dividends rose to $2.04 per share from $1.84 in 2016. Total distributions to common stockholders and operating partnership unit holders were $59.8 million; preferred distributions were $12.4 million. Of the 2017 common dividend, 83.3% was treated as taxable dividend income and 16.7% as return of capital.
Material changes versus 2016
- Same-property revenue increased 0.9% to $213.5 million; same-property operating income rose 0.7% to $162.6 million. Higher rents and expense recoveries were partly offset by higher real estate taxes and lower other income.
- Portfolio commercial leasing on a comparable-property basis fell to 94.2% from 95.5%. Shopping center occupancy weakened, including after Kmart vacated 104,000 square feet at Kentlands Square II; that property was 57% leased at year-end, versus 100% in 2016.
- Revenue growth included the contribution from Burtonsville Town Square, acquired for $76.4 million in January 2017, and higher residential rents. Broadlands Safeway lease termination generated a $3.6 million fee recognized in 2017; a $3.0 million termination fee at 11503 Rockville Pike had boosted 2016 revenue.
- The company sold Great Eastern Shopping Center for $8.5 million. It deferred recognition of a $0.5 million gain until repayment of seller financing provided to the buyer.
- Investing cash outflow increased to $113.3 million, largely reflecting $79.5 million of acquisitions and $22.8 million of development and redevelopment spending.
Outlook, risks, and notable items
- Development: The 750 N. Glebe Road project is planned to deliver approximately 490 residential units and 60,000 square feet of retail, with substantial completion expected in early 2020. Total cost, including land, is estimated at $275 million; a $157 million construction-to-permanent loan will partially fund it. Approximately 84% of planned retail space was leased. Management expected to invest about $34.5 million more in the project during 2018.
- Near-term plans: Management expected a 16,000-square-foot expansion at Burtonsville Town Square, with approximately $5.7 million estimated development cost and delivery targeted for late 2018. Acquisition opportunities were described as uncertain amid limited quality supply and elevated pricing; no formal earnings or FFO guidance is provided.
- Post-year-end financing: In January 2018, the company replaced its expiring credit agreement with a $400 million facility: a $325 million revolver maturing in 2022, with a possible one-year extension, and a $75 million term loan maturing in 2023. Also in January, it raised approximately $72.6 million net through Series D preferred shares; those proceeds and cash on hand were used in February to redeem $75 million liquidation preference of Series C preferred shares.
- Key risks: Approximately 85% of property operating income came from the Washington, D.C./Baltimore region, exposing results to local economic conditions. Other risks include tenant failures and lease-up, retail competition from online shopping, interest-rate exposure, refinancing and balloon maturities, development cost and schedule overruns, REIT qualification, and reliance on access to external capital.
- Governance and contingencies: The Saul Organization has significant influence and provides shared services; 2017 charges for shared services, including headquarters rent, were $8.1 million. Management cited potential related-party conflicts. Routine litigation was not expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether occupancy stabilizes after the comparable-property decline, particularly at Kentlands Square II and other spaces affected by tenant closures.
- Actual leasing, costs, financing draws, and delivery progress for 750 N. Glebe Road and the Burtonsville expansion.
- Debt maturity and refinancing exposure, covenant headroom, variable-rate sensitivity, and liquidity under the replacement credit facility.
- Cash generation and distribution coverage, including the relationship between operating cash flow, capital spending, debt service, and common and preferred dividends.
- Related-party service allocations and governance safeguards, as well as the effect of the portfolio’s regional concentration and retail-sector risks.