Saul Centers, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. Its portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance and liquidity
Unless stated otherwise, amounts are in millions of dollars.
- Revenue: $52.1, down 1.6% from $52.9. Base rent rose 2.3% to $41.5; other revenue fell $1.7, primarily because Q1 2014 included a $1.5 lease termination fee.
- Income: Operating income was $12.7, roughly flat year over year. Net income was $12.7 versus $12.7; net income attributable to common stockholders was $7.1 versus $7.1. Basic and diluted earnings per share were $0.34 in both periods. The common dividend declared increased to $0.43 per share from $0.40.
- Margins: Operating income was approximately 24.4% of revenue; net income approximately 24.3%. These are simple calculations from reported figures.
- FFO: FFO available to common shareholders was $20.0, up 1.7%; FFO per share was $0.71, unchanged. FFO is a non-GAAP measure and is not operating cash flow.
- Cash flow: Operating cash flow was $23.2 versus $23.9. Investing used $10.6, principally for development and property investment; financing used $12.6. Cash declined by $8,000 during the quarter to $12.1.
- Debt and liquidity: Total debt was approximately $852.9 at March 31, including $797.4 fixed-rate and $55.5 variable-rate debt. The $275.0 revolving facility had $26.0 drawn and approximately $248.6 available, subject to borrowing conditions. The company reported compliance with its financial covenants. Management said debt-to-asset value was below its 50% policy threshold.
- Balance sheet: Total assets were $1,270.6 and total liabilities $927.6. Stockholders’ equity, including noncontrolling interests, was $343.0. Debt maturities and scheduled amortization totaled $17.6 for the remainder of 2015 and $53.0 in 2016.
Material changes versus Q1 2014
- Same-property revenue declined to $51.5 from $52.7, and same-property operating income declined to $37.8 from $39.6. Management attributed the declines mainly to the prior-year lease termination fee, higher real estate taxes in the mixed-use portfolio and lower parking revenue; higher base rent and leased space partly offset these effects.
- Total operating expenses decreased 2.1% to $39.4. Lower general and administrative expense, including the absence of $1.1 of severance expense accrued in Q1 2014, and no predevelopment expense offset increased real estate taxes and depreciation.
- Same-property commercial occupancy improved to 94.4% from 94.3%. Portfolio commercial leasing was 94.5%; mixed-use occupancy rose to 92.2% from 90.7%, while shopping-center occupancy was 94.8% in both periods.
- Development investment increased: additions to development and redevelopment projects were $7.0 versus $2.7. Park Van Ness construction-in-progress costs reached $35.5.
Outlook, commentary and risks
- Park Van Ness, a 271-unit residential project with about 9,000 square feet of retail, was projected for completion in Q1 2016. Estimated cost excluding land and predevelopment expenses was approximately $93.0; a $71.6 construction-to-permanent loan will partially finance it.
- Management expects to fund ordinary short-term needs through operating cash flow, available cash and the credit line. Future acquisitions, redevelopment and development may be funded through cash, borrowings, construction financing, the dividend reinvestment plan or other external capital; no specific earnings guidance was provided.
- Management cited continued pressure on rental growth from elevated vacancies in some local submarkets and retailer caution. Winter weather affected customer shopping; snow removal cost $1.6 in Q1 2015, about 60% of which was or would be billed to tenants.
- Interest-rate exposure remains relevant: a one-percentage-point increase on variable-rate debt outstanding at quarter-end would increase annual interest expense by an estimated $0.6. A $45.6 interest-rate swap effectively fixed the rate on corresponding debt at 5.83% through July 2020.
- On April 1, 2015, after quarter-end, the company refinanced Northrock with a $16.0, 15-year fixed-rate mortgage at 3.99%. The filing reported no material subsequent events requiring disclosure.
- Risks include tenant nonpayment and reliance on anchor tenants, regional and real-estate market concentration, financing and interest-rate conditions, development execution, access to capital, REIT qualification and related-party relationships. Management reported no material litigation and no material update to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether same-property revenue and operating income stabilize after the nonrecurrence of the prior-year lease termination fee, and whether real-estate tax pressure persists.
- Park Van Ness construction progress, remaining funding needs, leasing and delivery against the Q1 2016 target.
- Debt maturities, variable-rate exposure, facility availability and continued covenant compliance.
- Lease expirations: 582,646 square feet remained unrenewed among 2015 expirations as of March 31; estimated market base rent was $16.75 per square foot versus $16.66 for those leases. Review actual renewals and concessions as they are reported.
- Related-party arrangements with the Saul Organization, including shared services and other transactions, and their ongoing terms.