Saul Centers, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative periods ended June 30, 2022. Saul Centers is a REIT that owns and operates shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. At quarter-end, its portfolio included 50 shopping centers, seven mixed-use properties and four non-operating land or development properties.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $63.7 million | $60.3 million | $126.8 million | $122.4 million |
| Net income | $17.2 million | $17.0 million | $34.9 million | $34.5 million |
| Net income available to common stockholders | $10.4 million | $10.2 million | $21.1 million | $20.8 million |
| Basic and diluted EPS | $0.43 | $0.43 | $0.88 | $0.87 |
| Same-property operating income | $47.3 million | $45.5 million | $94.0 million | $90.7 million |
| FFO available to common stockholders and noncontrolling interests | $26.5 million | $26.6 million | $53.4 million | $53.6 million |
Revenue increased 5.7% in Q2 and 3.5% for the half year. Same-property operating income rose 3.9% and 3.7%, respectively. FFO declined 0.3% in Q2 and 0.4% for the half year; management attributed the pressure principally to higher interest expense. Quarterly common EPS was unchanged year over year.
For the first six months, operating cash flow was $68.7 million, compared with $66.5 million. Investing used $99.4 million, primarily for development, versus $51.9 million a year earlier. Financing provided $28.9 million, compared with $18.0 million used in 2022. Cash declined $1.8 million during the period to $11.5 million.
Debt, liquidity and capital
- Principal debt was approximately $1.312 billion at June 30, 2023, up from $1.24 billion at year-end 2022. Balance-sheet debt, net of deferred costs, included $951.5 million of notes, $217.3 million drawn on the revolving facility, $99.5 million on the term loan and $25.8 million on the construction loan.
- Approximately $1.09 billion was fixed-rate or hedged debt; $219.0 million was unhedged variable-rate debt. A one-percentage-point rate increase on the unhedged balance would raise annual interest expense by an estimated $2.2 million.
- The $425 million revolving facility matures in August 2025, with a conditional one-year extension; the $100 million term loan matures in February 2027. At quarter-end, $165.3 million was available and undrawn. The company reported compliance with its financial covenants.
- Net interest expense and deferred debt-cost amortization rose 17.4% in Q2 and 14.4% for the half year, mainly because of higher rates and average debt, partly offset by increased capitalized interest.
- Quarterly common distributions were $0.59 per share. The company states that it expects to meet short-term liquidity needs, other than acquisitions and development, through operations, available cash and its credit line.
Operating changes and outlook
- Q2 revenue growth reflected higher commercial and residential base rent, expense recoveries and lease termination fees. Q2 total expenses rose 7.4%, including higher property operating costs and interest expense. For the first half, expenses increased 4.5%.
- Commercial portfolio occupancy was 94.0% at June 30, versus 92.6% a year earlier; residential occupancy was 99.2%, versus 98.1%. Leases covering approximately 234,500 square feet were signed but not yet occupied, representing estimated additional annualized base rent of $5.8 million after contractual concessions.
- Twinbrook Quarter Phase I includes 450 apartments, an 80,000-square-foot Wegmans and small-shop retail; the office tower is not currently being built. Estimated project cost, excluding capitalized interest, is $331.5 million. Initial delivery is anticipated in late 2024. The company had drawn $25.8 million, net of debt costs, on a related $145 million construction-to-permanent loan.
- Hampden House is planned for up to 366 apartments and 10,100 square feet of retail. Estimated cost, excluding capitalized interest, is $246.4 million; construction is expected to finish in 2025. The related $133 million construction-to-permanent loan had not yet been drawn.
- Management’s strategy emphasizes transit-oriented mixed-use development, grocery-anchored centers, selective redevelopment and leasing improvements. No numerical earnings or FFO guidance was provided.
- As of July 31, the company had collected 99.1% of contractual base rent and recoveries due for Q2. It reported $9.366 million of historical deferred rent, of which $8.464 million had been collected, $310,000 written off net and $33,000 unpaid; collections may not predict future results.
Risks, contingencies and notable items
The company cited risks from tenant rent-paying capacity, anchor-tenant reliance, interest rates and refinancing, access to capital, development execution, inflation, consumer demand, real estate taxes and its geographic concentration. Inflation could raise unreimbursed operating and development costs or affect retail tenants. Management reported no impairment-triggering events or impairment charges at June 30, but warned future economic or property-specific changes could result in impairment. It reported no material litigation and no material subsequent events. Related-party arrangements with the Saul Organization include shared services and a headquarters sublease; management says the terms are reviewed by the Audit Committee.
Important facts for investors to verify
- Progress, total costs, financing draws and delivery schedules for Twinbrook Quarter and Hampden House.
- Debt maturities and available revolver capacity, particularly the 2025 facility maturity and exposure to unhedged floating rates.
- Whether improved leasing and signed-but-unoccupied space convert into rent and sustained occupancy.
- Rent collections, deferred-rent recoveries, tenant credit quality and any emerging impairment indicators.
- Whether rental growth can offset higher interest, insurance, payroll, maintenance and other property costs, including the effect on FFO and distributions.