Saul Centers, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. 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 49 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial performance and position
- Revenue: $59.8 million, up 6.5% from $56.1 million. Rental revenue increased 3.3%; other revenue rose to $2.9 million from $1.1 million, primarily reflecting higher lease termination fees.
- Profit: Net income was $17.1 million, versus $14.9 million. Net income attributable to Saul Centers was $13.4 million, versus $12.6 million. Net income available to common stockholders was $10.5 million, or $0.46 per diluted share, compared with $6.9 million, or $0.31. The prior-year comparison included a $2.3 million charge for extinguished preferred issuance costs; Q1 2019 had no such charge.
- FFO: Funds from operations available to common stockholders and noncontrolling interests, a non-GAAP measure, increased 25.3% to $25.8 million from $20.6 million; FFO per share and unit was $0.84 versus $0.69.
- Property performance: Same-property revenue increased to $58.9 million from $56.1 million (about 4.9%); same-property operating income rose to $44.0 million from $42.1 million (about 4.4%). Company-reported same-property leasing was 95.7%, versus 94.1% a year earlier.
- Expenses: Total expenses increased 3.7% to $42.7 million. Property operating expenses rose 12.3%, including higher snow removal and repairs and leasing costs no longer capitalized under new lease accounting. Net interest expense declined 3.1% to $11.1 million.
- Cash flow: Operating activities provided $31.6 million, compared with $25.8 million. Investing used $23.4 million, largely for development; financing used $11.3 million. Cash decreased $3.1 million during the quarter to $11.5 million.
- Debt and liquidity: Debt principal was approximately $1.033 billion, including approximately $918.5 million fixed-rate and $115.0 million variable-rate debt. The company had $11.5 million cash and approximately $230.5 million available on its revolving credit facility. Management stated its debt-to-total-asset-value ratio was below 50%; the filing does not provide a precise ratio. Fixed-rate debt had a weighted-average rate of 5.14%.
- Equity and distributions: Total equity was $430.3 million at March 31, 2019, compared with $425.2 million at year-end 2018. Common dividends declared were $0.53 per share, versus $0.52 in Q1 2018.
Material changes from the prior-year quarter
- Revenue growth reflected higher termination fees (approximately $1.8 million), expense recoveries (approximately $1.0 million) and increased leased commercial space; lower base rent per square foot partly offset the increases.
- Same-property operating income growth was driven mainly by higher termination fees and base rent. Thus, part of reported growth came from termination fees, not solely recurring rent.
- Development investment increased: cash additions to development and redevelopment projects were $20.5 million, versus $13.2 million.
- Commercial portfolio occupancy was 95.2%, versus 94.1%; residential occupancy was 99.0%, versus 95.9%. Mixed-use commercial occupancy was 90.1%, compared with 92.5%.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management expects cash, operating cash flow and available credit to meet liquidity needs for the foreseeable future and plans to continue selective development, redevelopment and acquisition activity, subject to financing and market conditions.
- The 750 N. Glebe Road project is planned to include approximately 490 residential units and 60,000 square feet of retail, with substantial completion expected in early 2020. Estimated total cost is approximately $275 million; costs incurred through March 31 were approximately $189.2 million. A $157 million construction-to-permanent loan is expected to fund a portion of the project.
- Ashbrook Marketplace, an approximately 88,000-square-foot shopping center, was scheduled to open in early 2020; approximately 50% of planned space was pre-leased. The 7316 Wisconsin Avenue site is being planned for a mixed-use development of up to 365 apartments and 10,000 square feet of retail.
- Approximately 604,000 square feet of commercial leases remained unrenewed and scheduled to expire during the remainder of 2019. Their average base rent was $22.38 per square foot, versus estimated market rent of $22.30.
- Management cited risks including tenant nonpayment, reliance on anchor tenants, local-market and consumer-shopping changes, development execution and costs, access to capital, interest rates, refinancing and debt covenants, and REIT qualification. A one-percentage-point increase in rates on variable-rate debt would increase annual interest expense by approximately $1.2 million.
- The portfolio is geographically concentrated. Giant Food, present at ten shopping centers, contributed 4.6% of Q1 revenue. The Saul Organization has significant relationships with the company, including shared services and ownership of limited partnership units.
- The company reported covenant compliance, effective disclosure controls, no material litigation identified, and no material update to its previously reported risk factors. It adopted the new lease accounting standard on January 1, 2019; management reported no significant change to lessor accounting.
Important facts for investors to verify
- How much of revenue and same-property growth is repeatable after elevated lease termination fees?
- Renewal, occupancy and rent outcomes for the approximately 604,000 square feet of 2019 lease expirations.
- Glebe Road and Ashbrook project budgets, schedules, leasing progress and remaining funding needs.
- Debt maturities, variable-rate exposure, credit-facility availability and continued covenant compliance.
- Effects of regional concentration, anchor-tenant dependence and related-party relationships on operating and financing risks.
- Coverage of common and preferred distributions by recurring cash generation; reported earnings and FFO are not the same as cash available for distributions.