Saul Centers, Inc. — 2014 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparative periods ended September 30, 2013. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end, it operated 50 shopping centers and six mixed-use properties, plus three non-operating development properties. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $50.6 | $49.8 | $155.8 | $147.8 |
| Operating income | $12.5 | $12.0 | $39.6 | $23.1 |
| Net income | $12.5 | $11.5 | $45.7 | $22.7 |
| Net income attributable to common stockholders | $6.9 | $6.2 | $26.8 | $5.0 |
| Diluted earnings per common share | $0.33 | $0.30 | $1.29 | $0.24 |
| FFO available to common shareholders | $19.5 | $18.8 | $60.7 | $46.0 |
| FFO per diluted share and unit | $0.70 | $0.69 | $2.18 | $1.69 |
- Revenue and property operations: Q3 same-property revenue rose 0.9% to $50.0 million and same-property operating income rose 0.8% to $38.0 million. For the nine months, same-property revenue increased 5.3% to $154.4 million and same-property operating income increased 5.4% to $117.4 million. These are company-defined non-GAAP measures.
- Cash flow: Nine-month cash from operations was $66.1 million, versus $48.4 million a year earlier. Investing used $63.2 million, compared with $20.1 million; financing used $7.2 million, compared with $28.8 million. Cash declined $4.3 million during the 2014 period to $13.0 million at September 30.
- Debt and liquidity: Total debt was approximately $846.5 million, including $786.7 million fixed-rate and $59.8 million variable-rate debt. The company reported $244.6 million available under its $275 million unsecured revolving facility, with $30.0 million drawn. Fixed-rate debt had a 5.67% weighted-average rate. Management stated its debt-to-total-asset-value ratio was below 50%, using management’s estimate of property value. The company reported compliance with credit-facility covenants.
- Balance sheet and distributions: Total assets were $1,258.5 million and total stockholders’ equity was $339.3 million at September 30. Common dividends declared were $0.40 per share for Q3 and $1.20 for the nine-month period, compared with $0.36 and $1.08, respectively, in 2013.
Changes versus the prior comparable period
- Q3 revenue increased 1.7%; nine-month revenue increased 5.5%. Growth reflected higher rents and leased space, with nine-month recoveries also benefiting from snow-removal costs billed to tenants.
- Nine-month common-stockholder income and EPS increased substantially. The comparison includes a $6.1 million gain on the 2014 sale of Giant Center, while 2013 included a $5.2 million preferred-stock redemption charge against common income. Lower 2014 depreciation also contributed: 2013 included an $8.0 million charge related to the shortened remaining useful life of the Van Ness Square building.
- Nine-month FFO available to common shareholders increased 32.1%. Management cited higher property operating income, Seven Corners lease-termination and bankruptcy-collection items, lower predevelopment expense, and lower preferred dividends; higher general and administrative costs partly offset the increase.
- Operating cash flow improved, partly due to the Seven Corners items and higher property operating income. Investing outflows increased, principally reflecting property acquisitions and development spending.
- Commercial portfolio occupancy was 94.8% at September 30, 2014, up from 94.2% a year earlier; same-property occupancy was 94.7%, versus 94.2%.
Outlook, risks, and unusual items
- Outlook: No specific earnings or revenue guidance was provided. Management expects available cash, operating cash flow, and the revolving facility to meet foreseeable liquidity needs. It expects to continue selective acquisitions, redevelopment, and development, subject to opportunity and financing conditions.
- Development: Park Van Ness, a 271-unit residential project with approximately 9,000 square feet of retail, was projected for completion by late 2015. Estimated cost excluding land and predevelopment expense was approximately $93 million; a $71.6 million construction-to-permanent loan was available, with $1.9 million drawn at quarter-end.
- Transactions: The company acquired a $40 million Arlington property with redevelopment potential. It sold Giant Center for $7.5 million and recorded a $6.1 million gain. The $11 million Olney Center sale-leaseback was accounted for as secured financing; the company continues to operate and manage the property under a 20-year lease.
- Operating and market risks: Management cited federal spending and budget uncertainty, elevated vacancy in some local submarkets, cautious retailer expansion, tenant credit and anchor-tenant dependence, weather-related operating costs, interest rates, refinancing and covenant risks, and development and capital-access risks. The portfolio is geographically concentrated in the Washington, D.C./Baltimore area.
- Unusual expenses and items: First-quarter snow removal cost approximately $2.0 million, about 60% expected to be billable to tenants; nine-month property operating costs included a $1.7 million year-over-year increase in snow removal. The company recorded $1.1 million of severance expense, of which approximately $0.8 million remained payable. No real estate impairment was recorded.
- Contingencies and controls: Management reported no material litigation or threatened material litigation and no material risk-factor updates. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported nine-month earnings and FFO growth is recurring versus attributable to the Giant Center gain, Seven Corners settlement and lease-termination items, and prior-year one-time depreciation and redemption charges.
- Leasing progress and tenant demand, particularly the 312,634 square feet of commercial space scheduled to expire in the final three months of 2014; reported average base rent for that space was $19.38 per square foot versus estimated market rent of $18.92.
- Park Van Ness construction progress, remaining funding needs, projected completion timing, and eventual lease-up and cash flow.
- Debt maturities, variable-rate exposure, revolving-facility availability, covenant headroom, and the assumptions behind management’s estimated debt-to-asset-value ratio.
- Whether snow-related costs are recovered from tenants as expected, and the durability of occupancy and rent gains amid regional economic and retailer uncertainty.
- Potential effects of related-party arrangements with the Saul Organization, including shared-services charges and other disclosed relationships.