Saul Centers, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Dollar figures below are in millions unless noted. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end its portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $48.8 | $47.4 | $98.0 | $94.4 |
| Operating income | $7.7 | $9.6 | $11.1 | $18.9 |
| Net income | $7.8 | $9.6 | $11.2 | $18.9 |
| Net income attributable to common stockholders | $3.4 | $4.3 | $(1.2) | $8.4 |
| Common EPS, basic and diluted | $0.17 | $0.22 | $(0.06) | $0.43 |
| Operating cash flow | Not presented quarterly | $34.0 | $48.1 |
Q2 revenue increased 3.0%, while operating income fell 19.7%; operating margin was approximately 15.8%, versus 20.3% a year earlier. For the first half, revenue rose 3.9%, but operating income declined 41.3%. The first-half common-stockholder loss included a $5.2 million preferred-stock redemption charge. FFO available to common shareholders was $17.0 million in Q2 and $27.2 million for the first half; first-half FFO declined 12.0% year over year, to $1.00 per share and unit from $1.17. FFO is a non-GAAP measure and is not a substitute for operating cash flow.
At June 30, total assets were $1,191.6 million, total liabilities $888.8 million, and stockholders’ equity $302.8 million. Cash was $12.9 million. Debt totaled $826.2 million: $795.8 million fixed-rate and $30.4 million variable-rate. No borrowings were outstanding on the $175 million revolving facility; approximately $166.7 million was available. Management reported compliance with all facility covenants. Debt to total asset value, as estimated by management using property value, was below its 50% policy target.
Material changes and unusual items
- Same-property revenue increased 3.2% in Q2 and 3.7% for the first half; same-property operating income rose 3.0% and 4.1%, respectively. Same-property occupancy was 93.8%, up from 92.8% a year earlier. The total commercial portfolio was 93.6% leased, versus 91.1%.
- Base rent growth reflected leasing at Clarendon Center and Westview, 2012 acquisitions, anchor-space leasing and increases across the portfolio, partly offset by vacating Van Ness Square for redevelopment.
- Depreciation and leasing-cost amortization increased to $28.8 million for the first half from $19.5 million. A shortened estimated remaining useful life for the Van Ness Square building drove approximately $8.0 million of additional depreciation.
- Predevelopment expense was $3.6 million for the first half, primarily Van Ness Square lease-termination costs. The property is vacant; management plans a primarily residential redevelopment with street-level retail.
- In March, the company redeemed 60% of its Series A and all Series B preferred stock. It issued Series C preferred shares in February, receiving approximately $135.2 million net proceeds, and used proceeds alongside other financing activity in its capital transactions.
- First-half operating cash flow declined to $34.0 million, primarily due to timing-related changes in other assets, payables and deferred income. Investing outflows were $11.4 million, including $7.3 million for real estate investment additions and $4.1 million for development and redevelopment.
Outlook, risks and contingencies
Management expects to continue Van Ness Square and adjacent-property redevelopment activities and may pursue selective portfolio redevelopment, expansions or acquisitions. It expects to fund potential activity through available cash, the revolving facility, construction or permanent financing, the dividend reinvestment plan, or other debt or equity capital. No quantified earnings or revenue guidance is provided. Management stated that available cash and revolving-credit capacity should meet liquidity needs for the foreseeable future.
Management expects about $1 million of additional Van Ness Square predevelopment expense in the third and fourth quarters, subject to the timing of demolition and governmental approvals and permits. Risks cited include tenant nonpayment or failure, reliance on anchor tenants, local economic weakness and vacancies, interest-rate and refinancing exposure, development execution, access to capital, real-estate operating risks, and maintaining REIT qualification. The portfolio is geographically concentrated; Giant Food and Safeway accounted for 4.9% and 2.7% of first-half revenue, respectively. Routine legal matters were not expected to have a material adverse effect; the filing reports no material litigation or material updates to previously disclosed risk factors. Disclosure controls were concluded effective as of June 30, 2013.
Key facts for investors to verify
- Whether Van Ness Square approvals, demolition timing, projected costs and redevelopment plans change.
- Whether leasing and occupancy gains persist, particularly at anchor-tenant spaces and mixed-use properties.
- How the large year-over-year depreciation increase and Van Ness predevelopment costs affect reported earnings and FFO.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to the $166.7 million of reported revolver availability.
- The effect of preferred-stock redemptions and the new Series C dividend burden on common-stockholder returns and distributions.
- Whether reported occupancy and FFO trends translate into sustainable cash generation; first-half operating cash flow was down year over year.