Saul Centers, Inc. — Q1 2012 Form 10-Q
Business context and period. The REIT owns, operates, leases, acquires and develops shopping centers and mixed-use properties, principally in the Washington, D.C./Baltimore region. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. At quarter-end, the portfolio included 51 operating shopping centers, seven mixed-use properties and two non-operating development properties.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Total revenue | $47.1 million | $41.7 million; up 12.9% |
| Operating income | $9.3 million | $8.3 million |
| Net income | $9.3 million | $8.3 million |
| Net income attributable to Saul Centers | $7.9 million | $7.3 million |
| Net income available to common stockholders | $4.1 million; $0.21 per diluted share | $3.5 million; $0.19 per diluted share |
| Common dividend declared per share | $0.36 | $0.36 |
| Operating cash flow | $19.7 million | $12.0 million |
| FFO available to common shareholders | $15.3 million | $12.9 million; up 19.0% |
Operating margin was approximately 19.8%, compared with 19.9% in Q1 2011. At March 31, total assets were $1.19 billion, total liabilities $889.9 million and total equity $295.6 million. Debt was approximately $822.3 million, comprising $803.2 million fixed-rate and $19.1 million variable-rate debt. Cash was $11.0 million; $145.8 million was available under the $150 million revolving credit facility, with $4.0 million drawn. Management estimated debt to total asset value below 50% and reported compliance with the facility’s covenants.
Changes and operating drivers
- Revenue growth was primarily attributable to Clarendon Center and three shopping centers acquired in 2011, which together contributed $5.8 million of revenue. Portfolio leasing was 90.9% at March 31, 2012, versus 89.6% a year earlier; same-property leasing rose to 90.4% from 90.2%.
- Total operating expenses increased 13.1%. Higher real estate taxes, interest expense and depreciation—largely associated with the newer properties—were partly offset by lower property operating expenses and credit-loss provisions.
- Interest expense and deferred debt-cost amortization rose 24.1% to $12.8 million, reflecting primarily the new properties. Real estate taxes rose 30.4%, in part due to higher District of Columbia tax rates and the new properties.
- Operating cash flow increased, while investing outflows fell to $3.9 million from $14.7 million, principally because the prior-year period included substantial Clarendon Center development spending. Financing activities used $17.2 million, compared with $22.9 million provided in Q1 2011, when major debt financing and construction-loan activity occurred.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management described modest improvement in retail sales and leasing activity but said rents remained under pressure; office-space demand slowed amid uncertainty about federal spending. Management said acquisitions were uncertain given limited quality offerings and elevated pricing, while selective development, redevelopment and outparcel projects remained under consideration.
- Management expected liquidity to be sufficient for foreseeable needs, supported by operating cash flow, cash and the credit facility. The facility was scheduled to mature June 30, 2012, with a conditional one-year extension option.
- After quarter-end, the company refinanced a $63 million debt balance scheduled to mature in October 2012 with a $73 million, 15-year fixed-rate mortgage at 5.84%, providing approximately $10 million of cash. It also borrowed an additional $10.5 million against White Oak and substituted that property as collateral to permit analysis of repositioning Van Ness Square.
- Debt maturities included $82.1 million of scheduled principal and balloon payments from April through December 2012, including the revolving-credit balance; the subsequent refinancing addressed the specified October balloon. Fixed-rate debt had a weighted average rate of 6.04%. A 1 percentage-point increase in variable rates was estimated to add about $200,000 in annual interest expense.
- Key risks include tenant nonpayment and reliance on anchor tenants, regional concentration, refinancing and interest-rate exposure, access to capital, development and leasing execution, related-party relationships, and maintaining REIT qualification. Giant Food and Safeway represented 5.0% and 2.9% of quarterly revenue, respectively.
- The company reported no material litigation, no material updates to previously disclosed risk factors, and no impairment loss in the quarter. Management concluded disclosure controls were effective at the reasonable assurance level.
Investor verification priorities
- Verify the terms, use of proceeds and impact on maturities of the April 2012 Seven Corners refinancing and the White Oak borrowing/collateral substitution.
- Review the June 30, 2012 revolver maturity, extension conditions, covenant headroom and the remaining 2012–2013 balloon maturities.
- Assess occupancy, leasing and rent trends, particularly the leasing progress at Clarendon Center, Westview Village and Northrock and the expected fall 2012 occupancy of Burlington Coat Factory at Seven Corners.
- Evaluate whether reported FFO growth and operating cash flow support dividends and capital requirements; FFO is a non-GAAP measure and is not cash available for distribution.
- Consider the concentration of properties and tenants in the Washington, D.C./Baltimore region and the company’s relationships with The Saul Organization.