Business Context and Reporting Period
Company: Saul Centers, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2009
Business Overview: Saul Centers is a Real Estate Investment Trust (REIT) focused on the ownership, management, and development of community and neighborhood shopping centers and office properties, primarily in the Washington, D.C./Baltimore metropolitan area. As of September 30, 2009, the portfolio consisted of 47 operating shopping centers, 5 office properties, and 4 development/land properties.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total Revenue | $40,273 | $40,947 | $119,378 | $119,774 |
| Net Income (GAAP) | $11,349 | $11,264 | $31,813 | $34,717 |
| Net Income Attributable to Common | $5,822 | $5,736 | $15,712 | $19,212 |
| Funds From Operations (FFO) to Common | $14,648 | $15,966 | $41,666 | $47,263 |
| Cash Flow from Operations | N/A | N/A | $50,375 | $57,309 |
| Total Debt Outstanding | $617,928 | N/A | N/A | N/A |
| Cash and Cash Equivalents | $14,297 | N/A | N/A | N/A |
| Dividends Declared (Common) | $0.36/share | $0.47/share | $1.14/share | $1.41/share |
Note: FFO is a non-GAAP measure defined by NAREIT as net income plus depreciation and amortization, excluding gains/losses on dispositions.
Material Changes vs. Prior Period
- Revenue: Total revenue decreased 1.6% in Q3 2009 and 0.3% for the nine months ended September 30, 2009, compared to the prior year. Declines in core property occupancy and base rent were partially offset by revenue from new development properties (Northrock and Westview Village).
- Occupancy: Overall portfolio leasing percentage declined to 91.8% at September 30, 2009, from 94.2% at December 31, 2008, and 94.7% at September 30, 2008. Significant vacancies occurred at Southdale (Circuit City closure) and Broadlands Village.
- Expenses: Operating expenses decreased 2.6% in Q3 2009, driven primarily by a 16.5% reduction in depreciation and amortization due to asset retirements from the Smallwood Village Center redevelopment. General and administrative expenses increased 16.8% due to one-time severance costs and abandoned acquisition costs.
- Debt Refinancing: The Company refinanced four mortgage loans in May and June 2009, replacing $48.1 million in debt maturing in 2011 with $85.0 million in new 15-year fixed-rate debt. This resulted in a $1.66 million loss on early extinguishment of debt recorded in the nine-month period.
- Dividends: Common dividends per share were reduced from $0.47 in Q3 2008 to $0.36 in Q3 2009.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the national economic downturn has negatively affected retail and office markets in the Washington, D.C. area, leading to increased vacancies and tenant bankruptcies. Despite this, the Company maintains a conservative capital structure with a debt-to-total-assets ratio under 50% and 92% of debt fixed-rate.
Liquidity and Capital Resources:
- Cash Position: Cash and cash equivalents totaled $14.3 million as of September 30, 2009.
- Credit Facility: The Company has a $150 million unsecured revolving credit facility. As of September 30, 2009, there were no outstanding borrowings, with approximately $149.8 million available.
- Debt Maturities: Significant debt maturities are scheduled for 2011 ($85.4 million) and 2012 ($112.8 million), including construction loans for Clarendon Center and Northrock.
Risks and Contingencies:
- Economic Conditions: Continued stress in local economies may lead to further tenant bankruptcies and decreased rental rates.
- Concentration Risk: The portfolio is concentrated in the Washington, D.C./Baltimore area. Major tenants include Giant Food (4.5% of revenue), Safeway (3.4%), and Chevy Chase Bank (2.7%).
- Development Risk: The Company is heavily invested in development projects (Clarendon Center, Northrock, Westview Village) which face execution and leasing risks.
Investor Verification Checklist
- Occupancy Trends: Verify the current leasing status of the 147,000 square feet of vacant space, particularly the anchor space at Seven Corners and the Circuit City vacancy at Southdale.
- Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, specifically the fixed charge coverage ratio (1.4x) and leverage ratio (60%), given the economic downturn.
- Development Progress: Assess the leasing velocity and construction timelines for the Clarendon Center, Northrock, and Westview Village projects, which represent significant capital commitments.
- Dividend Sustainability: Evaluate the ability to maintain the current dividend rate of $0.36 per quarter given the 11.8% year-over-year decline in FFO available to common shareholders for the nine-month period.
- Refinancing Costs: Review the impact of the $1.66 million loss on debt extinguishment and the terms of the new $85 million mortgage debt on future interest expense.