Saul Centers, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $51.7m | $52.3m | $103.8m | $105.2m |
| Operating income | $12.9m | $14.4m | $25.6m | $27.1m |
| Net income | $12.9m | $20.5m | $25.6m | $33.2m |
| Net income attributable to common stockholders | $7.3m | $12.8m | $14.4m | $19.9m |
| Diluted EPS | $0.35 | $0.62 | $0.68 | $0.96 |
| Operating cash flow | — | — | $48.5m | $42.7m |
Q2 operating margin was approximately 25.0%, versus 27.6% a year earlier; first-half operating margin was approximately 24.7%, versus 25.8%. Common dividends declared were $0.43 per share in Q2 and $0.86 for the first half, compared with $0.40 and $0.80, respectively, in 2014.
- FFO: First-half FFO available to common shareholders was $40.7m, down 1.3%; FFO per share and unit was $1.43 versus $1.48. FFO is a non-GAAP measure, not cash flow.
- Balance sheet and debt: Total assets were $1.278bn and total equity $345.8m at June 30. Debt totaled approximately $853.4m, including $816.4m fixed-rate and $37.0m variable-rate debt. Cash was $11.7m.
- Liquidity: Approximately $252.6m was available under the $275m revolving facility, with $22m drawn. Management said available cash and borrowing capacity should meet foreseeable liquidity needs; the company reported compliance with its financial covenants.
- Cash flows: First-half investing cash use was $25.5m, principally reflecting $17.7m of development and redevelopment spending. Financing cash use was $23.3m, and cash declined $0.4m during the period.
Changes and operating trends
- Revenue fell 1.1% in Q2 and 1.4% in the first half. The principal comparison effects were a 2014 bankruptcy settlement and collection ($1.6m) and, for the first half, the net effect of a 2014 lease termination ($1.2m). Higher base rent and leased space partly offset the declines.
- Same-property revenue declined 2.0% in Q2 and 2.2% in the first half. Same-property operating income declined 4.1% and 4.3%, respectively, with higher nonrecoverable taxes and credit-loss provisions among the factors.
- Net income comparisons were also affected by a $6.1m property-sale gain recorded in 2014; the 2015 first-half gain was only $11,000.
- Same-property commercial leasing was 94.9% at June 30, up from 94.2% a year earlier. The full commercial portfolio was 95.0% leased. Approximately 402,129 square feet of commercial leases remained scheduled to expire in the second half of 2015.
- Property operating expenses were broadly stable, while credit-loss provisions rose to $0.4m in Q2 and $0.7m in the first half. General and administrative expense declined year over year in the first half, partly because 2014 included $1.1m of severance accruals.
Outlook, risks and unusual items
- No quantitative earnings or FFO guidance was provided. Management expects to continue developing Park Van Ness, with completion projected for Q1 2016. Total project cost excluding land and predevelopment expense was estimated at approximately $93m; $48.4m had been incurred by June 30, including $17.5m funded by the construction loan.
- Management cited continued vacancy and rental-rate pressure in some local submarkets, federal spending and budget uncertainty, cautious retailer expansion, and winter weather impacts. Key broader risks include tenant nonpayment, reliance on anchor tenants, financing and interest rates, development execution, access to capital, real-estate market conditions, and maintaining REIT qualification.
- A rent dispute with an office tenant was in litigation and was identified as the primary reason for higher credit-loss provisions. Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material legal proceedings.
- Two Germantown buildings’ estimated remaining useful lives were reduced to six months effective May 1, 2015, increasing Q2 depreciation by approximately $0.2m. A CVS redevelopment at Germantown was expected to begin demolition in Q4 2015, with operations expected in 2016.
- The $45.6m interest-rate swap fixes the rate on associated debt at 5.83% through July 2020. A one-percentage-point increase in rates on variable-rate debt outstanding at quarter-end would raise annual interest expense by an estimated $0.37m.
Important facts for investors to verify
- Progress, final costs, financing and lease-up prospects for Park Van Ness relative to the projected Q1 2016 completion.
- Resolution and recoverability of the office-tenant rent dispute and whether credit-loss provisions remain elevated.
- Renewal, occupancy and rent outcomes for the 402,129 square feet of leases scheduled to expire in the second half of 2015.
- Debt maturities and refinancing needs, variable-rate exposure, covenant headroom and continued availability of the revolver.
- Whether operating cash flow and FFO can support common and preferred distributions alongside development and capital spending.
- The filing’s forward-looking statements and management assessments are subject to material uncertainty; interim results are not necessarily indicative of full-year results.