Saul Centers, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts below are USD unless noted. 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 operating shopping centers, seven mixed-use properties and three non-operating development properties.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $53.2m | $52.4m | $162.9m | $156.2m |
| Operating income | $12.7m | $13.2m | $42.4m | $38.8m |
| Net income | $12.7m | $13.2m | $42.3m | $38.8m |
| Net income attributable to common stockholders | $7.1m | $7.5m | $24.5m | $21.9m |
| Diluted EPS | $0.33 | $0.36 | $1.14 | $1.04 |
| Common dividends declared per share | $0.47 | $0.43 | $1.41 | $1.29 |
- Revenue and margins: Revenue rose 1.6% in Q3 and 4.3% year to date. Operating margin, calculated as operating income divided by revenue, was approximately 23.9% in Q3 2016 versus 25.3% a year earlier, and 26.0% year to date versus 24.9%.
- Same-property results: Same-property revenue increased 0.4% in Q3 to $52.4m and 3.9% year to date to $161.4m. Same-property operating income rose 1.1% in Q3 to $39.7m and 5.1% year to date to $122.3m.
- FFO: Nine-month FFO available to common stockholders and noncontrolling interests was $66.5m, up 7.4%; FFO per share and unit was $2.30 versus $2.18. Q3 FFO per share and unit was $0.73 versus $0.75. FFO is a non-GAAP measure and is not operating cash flow.
- Cash flow: Nine-month operating cash flow was $70.4m, compared with $64.7m. Investing used $44.7m versus $49.9m; financing used $25.8m versus $18.1m. Cash declined $0.2m during the 2016 period to $9.8m.
- Balance sheet and debt: Total assets were $1.31bn and total stockholders’ equity was $370.0m at September 30, 2016. Debt principal was approximately $875.0m: $837.4m fixed-rate and $37.6m variable-rate. Fixed-rate debt had a 5.51% weighted-average rate. The company reported approximately $251.6m available on its $275m revolving credit facility and compliance with its financial covenants.
Material changes and operating developments
- Q3 revenue growth was principally driven by Park Van Ness; higher base rent and expense recoveries were partly offset by lower percentage rent and other income. Year-to-date revenue also benefited from a $3.0m lease-termination fee recognized in Q1 at 11503 Rockville Pike.
- Year-to-date common-stockholder net income improved despite lower Q3 net income. The lease-termination fee and higher property income contributed to the year-to-date comparison; the fee is unusual and not recurring rent.
- Q3 operating expenses rose 3.5%, including higher Park Van Ness costs, property taxes, interest and depreciation. Year-to-date operating expenses increased 2.7%. Interest expense was up 0.8% year to date.
- Commercial portfolio occupancy was 94.7% at September 30, 2016, compared with 94.8% a year earlier. Park Van Ness retail was fully leased; as of October 31, 185 of 271 apartments were leased and 165 occupied. The project’s estimated remaining cost was about $2.9m.
- Two Safeway stores closed during Q2 at Broadlands Village and Briggs Chaney Plaza, although their leases remained in force; the company was pursuing future-use options. Glebe Road properties were taken out of service in August for a planned development of approximately 490 residential units and 62,000 square feet of retail; construction timing depends on approvals and permits.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expects to fund ordinary short-term needs through operating cash flow, cash and the credit line, and believes resources are sufficient for foreseeable liquidity needs. Planned activity includes completing Park Van Ness, continuing Glebe Road redevelopment work, and evaluating acquisitions and other redevelopment opportunities.
- After quarter-end, the company agreed to acquire Burtonsville Town Square for $75m plus approximately $1.3m of acquisition costs. A $5m earnest-money deposit is at risk; management expected to close by January 31, 2017, financing about $40m with a new mortgage and the remainder through the revolver.
- The company also agreed to acquire Loudoun County land from a Saul Organization affiliate for an initial $8.8m in early 2018, to be paid in limited partnership units; additional units may be required after development stabilization.
- Key disclosed risks include tenant credit and reliance on anchor tenants, regional economic and retail conditions, interest-rate and refinancing exposure, covenant restrictions, access to capital, development and acquisition execution, property operating costs, REIT qualification, and related-party relationships. The company noted local vacancy and rental-rate pressures and cautious retailer expansion.
- Management reported no material litigation or material updates to the prior annual report’s risk factors. The filing states there were no material off-balance-sheet arrangements and no impairment losses on real estate in the nine-month periods presented.
Most important facts for investors to verify
- Whether Park Van Ness apartment leasing and occupancy improve as the project stabilizes, and whether final costs remain near estimates.
- Progress and timing of Glebe Road approvals, demolition and redevelopment, plus plans for the closed Safeway locations.
- Completion, financing and expected returns of the Burtonsville acquisition; the $5m deposit is at risk pending closing.
- Debt maturities and refinancing needs, variable-rate exposure, revolver availability, and continued covenant compliance.
- How much year-to-date earnings growth depends on the nonrecurring lease-termination fee, and whether same-property rent and occupancy trends persist.
- Related-party transactions and the proposed land acquisition from the Saul Organization, including the ultimate number and value of partnership units issued.