Saul Centers, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. 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 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $61.1 million | $60.3 million | $183.5 million | $179.0 million |
| Net income | $15.5 million | $16.9 million | $50.0 million | $45.8 million |
| Net income available to common stockholders | $9.2 million | $10.3 million | $29.9 million | $27.8 million |
| Basic and diluted EPS | $0.38 | $0.44 | $1.25 | $1.17 |
| Net cash from operating activities | — | — | $92.0 million | $89.0 million |
| Net cash used in investing activities | — | — | $84.5 million | $38.8 million |
| Net cash used in financing activities | — | — | $11.8 million | $65.2 million |
At September 30, 2022, cash was $10.3 million, total assets were $1.81 billion, and total equity was $528.3 million. Debt principal was approximately $1.21 billion ($1.19 billion net carrying amount): approximately $1.1 billion was fixed-rate, including $100 million hedged, and $128 million was floating and unhedged. The company reported $248.8 million available under its credit facility and compliance with its financial covenants.
For the nine-month period, same-property revenue increased 2.5% to $183.5 million and same-property operating income increased 2.5% to $135.7 million. FFO available to common stockholders and noncontrolling interests was $78.5 million, up 4.3%; diluted FFO per share and unit was $2.31 versus $2.29. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Changes versus comparable periods
- Revenue rose 1.4% in Q3 and 2.5% for the nine months. Management cited higher base rent, expense recoveries and, year to date, improved collections of previously reserved rents. The Waycroft was a primary contributor to base-rent growth.
- Q3 net income fell to $15.5 million from $16.9 million, and common-stockholder EPS declined to $0.38 from $0.44. Higher property operating and general and administrative costs, plus $0.6 million of debt-extinguishment losses, more than offset revenue growth.
- Nine-month net income increased to $50.0 million. Total expenses were nearly flat: lower interest expense and depreciation partly offset higher property operating and general and administrative expenses and debt-extinguishment costs.
- Operating cash flow increased $3.0 million year over year, while investing cash outflow more than doubled, chiefly reflecting a $55.0 million increase in development spending. Cash declined $4.3 million during the 2022 nine-month period.
Outlook, developments and risks
- No quantified earnings or FFO guidance was provided. Management expects to fund ordinary operating needs, debt service and distributions through operating cash flow, available cash and credit capacity; future development and acquisition funding may also use construction financing, the credit facility, the dividend reinvestment plan or other capital.
- Twinbrook Quarter Phase I is expected to cost approximately $331.5 million, with initial delivery anticipated in late 2024; a $145.0 million construction-to-permanent loan is planned to fund part of the project. Hampden House is expected to cost approximately $246.4 million, with completion expected in 2025 and a $133.0 million construction-to-permanent loan as partial financing.
- During Q3, the company refinanced four shopping centers, generating $88.0 million of additional liquidity net of repayments, penalties and closing costs. New fixed-rate mortgages included rates of 3.91%–5.05%. Two swaps effective October 3, 2022 fixed SOFR on $100 million of variable-rate debt at 2.96% and 2.91%; the credit facility also transitioned from LIBOR to SOFR.
- Management reported 99% collection of Q3 contractual base rent and recoveries as of October 31, 2022. Of rent deferrals due by September 30, approximately 95% had been collected; $0.3 million of previously deferred rent had been written off. Management cautioned that future tenant collections and impairment outcomes remain uncertain.
- Commercial occupancy was 93.0%, up from 92.5% a year earlier; residential occupancy was 97.2%, down from 97.8%. About 331,000 square feet of leased commercial space was not yet occupied, with an estimated $5.8 million of annualized base rent expected after occupancy and contractual concessions.
- Key risks include tenant credit and anchor-tenant dependence, concentration in the Washington, D.C./Baltimore area, interest rates and refinancing, inflation and development costs, access to capital, and the potential effects of economic conditions or a pandemic. Giant Food represented 5.2% of nine-month revenue. Management reported no material litigation, no impairment charges, and no material updates to previously disclosed risk factors.
Important facts for investors to verify
- Whether planned construction costs, financing and delivery timing for Twinbrook Quarter and Hampden House remain on track.
- How the $128 million of unhedged floating-rate debt, SOFR borrowing costs and future maturities affect interest expense and liquidity.
- Whether occupancy and the expected rent from leased-but-unoccupied commercial space convert into collected revenue.
- Tenant collection trends, deferred-rent recoverability and any new indicators requiring real estate impairment testing.
- Development spending, distributions and refinancing proceeds relative to operating cash flow and remaining credit-facility availability.