Business context and reporting period
Saul Centers, Inc. is a REIT focused on owning, operating, leasing and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same quarter of 2015. Its portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $56.9 | $52.1 | +9.3% |
| Operating income | $16.4 | $12.7 | +29.1% |
| Net income | $16.4 | $12.7 | +29.1% |
| Net income attributable to common stockholders | $9.9 | $7.1 | +38.5% |
| Diluted earnings per common share | $0.46 | $0.34 | +$0.12 |
| Operating cash flow | $31.3 | $23.2 | +34.9% |
| Cash and cash equivalents at period end | $15.4 | $12.1 | +$3.3 |
- Operating margin was approximately 28.8%, versus 24.4% a year earlier. Growth included a $3.0 million lease termination fee recognized as revenue.
- Same-property revenue increased 9.2% to $56.6 million; same-property operating income rose 11.1% to $42.4 million. Both are non-GAAP measures defined by the company.
- FFO available to common stockholders and noncontrolling interests, a non-GAAP REIT measure, was $24.3 million, up 21.4%; FFO per share and unit was $0.85 versus $0.71.
- Capital investment was $13.0 million, including $9.7 million of development and redevelopment spending. Investing cash outflow was $13.8 million; financing cash outflow was $12.1 million.
- Common dividends declared were $0.47 per share, versus common-stockholder EPS of $0.46. Preferred dividends were $3.1 million for the quarter.
Debt, liquidity and balance sheet
- At March 31, total debt principal was approximately $873.6 million: $835.9 million fixed-rate and $37.7 million variable-rate. Fixed-rate debt had a weighted average interest rate of 5.52%. Balance-sheet notes payable were $790.3 million, with $21.8 million on the revolving facility and $53.0 million in construction loans; reported carrying values differ from principal amounts.
- The $275.0 million unsecured revolving facility had $23.0 million outstanding and approximately $251.6 million available, subject to borrowing conditions. The facility matures in June 2018, with a conditional one-year extension option. The company reported compliance with its financial covenants.
- Total assets were $1.302 billion, total liabilities $943.6 million and total equity $358.0 million. Management said cash and available revolver capacity were sufficient for foreseeable liquidity needs.
- Scheduled debt maturities and amortization total $18.6 million for April–December 2016, $40.2 million in 2017 and $76.7 million in 2018; the 2018 amount includes $23.0 million outstanding under the revolver.
- A one-percentage-point increase in rates on variable-rate debt would increase annual interest expense by an estimated $377,000 based on quarter-end balances.
Material changes, outlook and risks
- Revenue growth reflected the termination of a lease at 11503 Rockville Pike, higher expense recoveries and base rents, and increased average leased space. The $3.0 million termination fee is partly offset by approximately $1.0 million of lost rental revenue over the rest of 2016. The company was negotiating with a replacement tenant.
- Same-property occupancy was 95.2% at quarter-end, versus 94.4% a year earlier. Two Safeway stores at company properties were announced for closure by May 31, 2016; the leases remained in force, and the company was discussing options with the tenant and other retailers.
- Park Van Ness, a 271-unit residential project with street-level retail, had received its certificate of occupancy in late April; the first resident moved in May 2. As of May 4, 42 apartment leases had been executed, and retail space was fully leased. Estimated project cost, excluding land and predevelopment expense, was $93.0 million; $86.1 million had been incurred by March 31, with an estimated $6.9 million to complete, expected to be funded by the construction-to-permanent loan.
- Winter weather increased snow-removal costs to approximately $2.3 million from $1.6 million a year earlier; about 60% was expected to be billed to tenants. Credit-loss provision rose to $432,000 from $246,000, primarily because of a tenant with cash-flow difficulties whose receivable was fully reserved.
- Management’s strategy emphasizes existing-portfolio leasing and selective redevelopment, renovation, acquisitions and development. No quantified earnings or FFO guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include regional and property-type concentration, tenant and anchor-tenant credit and closures, rent collection, interest rates and refinancing, access to capital, development execution, real-estate operating conditions, and continued REIT qualification. Management reported no material litigation, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of the reported revenue and earnings growth is recurring after excluding the $3.0 million lease termination fee, and whether a replacement tenant is secured.
- Progress leasing Park Van Ness apartments, remaining project costs and loan funding, and the project’s contribution to operating results.
- Whether the two Safeway stores close as announced, how lease obligations are addressed, and the resulting occupancy and tenant-replacement costs.
- Upcoming debt maturities, revolver availability and covenant headroom, variable-rate exposure, and the company’s ability to sustain distributions while funding capital needs.
- Tenant credit trends and lease renewals: 882,264 square feet of commercial space scheduled to expire during the remainder of 2016 had not renewed as of March 31.