Saul Centers, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Business context and portfolio
- At year-end, the portfolio comprised 50 shopping centers and seven mixed-use properties, totaling approximately 9.8 million square feet, plus four non-operating development properties.
- Commercial occupancy on a comparable-property basis was 93.2%, up from 92.0% in 2021; residential occupancy was 97.2%, versus 97.1%.
- Management’s strategy centers on transit-oriented residential mixed-use development, shopping-center leasing and operating improvements, and selective redevelopment.
Financial and operating results
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $245.9 million | $239.2 million | Up 2.8% |
| Net income | $65.4 million | $61.6 million | Up 6.1% |
| Net income available to common stockholders | $39.0 million | $37.2 million | Up 4.9% |
| Diluted earnings per common share | $1.63 | $1.57 | Up 3.8% |
| Net cash from operating activities | $121.2 million | $118.4 million | Up $2.7 million |
| Net cash used in investing activities | $116.9 million | $55.9 million | Use increased $61.0 million |
| Net cash used in financing activities | $5.6 million | $74.8 million | Use decreased $69.2 million |
| Cash and cash equivalents at year-end | $13.3 million | $14.6 million | Down $1.3 million |
- Base rent rose 1.6% to $201.2 million; rental revenue increased 2.7% to $240.8 million. Property operating expenses rose 9.3% to $35.9 million, while total expenses increased 1.6% to $180.5 million.
- Same-property operating income, a non-GAAP measure, was $181.3 million, compared with $177.6 million. Shopping-center same-property operating income rose 0.9%; mixed-use rose 5.7%.
- FFO available to common stockholders and noncontrolling interests increased 2.4% to $103.2 million. Diluted FFO per share and units was $3.04, unchanged; basic FFO per share and units declined to $3.10 from $3.14.
Debt, liquidity and distributions
- Debt principal totaled $1.239 billion at year-end, compared with $1.155 billion in 2021. Approximately $1.075 billion was fixed-rate, including $100 million of variable-rate debt hedged with swaps; $164 million remained unhedged variable-rate debt. Weighted-average debt interest rate was 4.91%.
- Approximately $212.1 million was available under the $525 million credit facility. Management estimated debt-to-asset value below its 50% policy limit; the company reported compliance with its credit-facility covenants.
- A 1 percentage-point increase in rates on year-end unhedged variable debt would increase annual interest expense by approximately $1.6 million, based on disclosed balances.
- Operating cash flow increased to $121.2 million. Development and redevelopment spending rose substantially, with $101.1 million of cash outflow for those projects in 2022 versus $25.9 million in 2021.
- Common distributions were $2.32 per share for 2022, up from $2.16 in 2021. Management intends to continue regular quarterly distributions, but future amounts are at the board’s discretion and subject to cash flow, capital needs, debt terms and REIT requirements.
Material changes, outlook and unusual items
- Revenue growth reflected higher rents, lower vacancy and concessions at The Waycroft, and improved collections of previously reserved receivables. Property operating expense increases included repairs and maintenance, employee costs and utilities.
- Interest expense, net, declined 3.3% to $43.9 million, partly because more interest was capitalized to Twinbrook Quarter and Hampden House. Interest incurred before capitalization increased as average debt balances rose.
- The company refinanced several property loans and entered into two swaps covering $100 million of variable-rate debt. It recorded $0.6 million of loss on early debt extinguishment; a $5.9 million prepayment penalty on the Beacon Center/Seven Corners refinancing was deferred and will be amortized over the loan term.
- Twinbrook Quarter Phase I, including 450 apartments, retail space and an 80,000-square-foot Wegmans, has an estimated total project cost of $331.5 million, partly financed by a $145 million construction-to-permanent loan. Initial delivery is anticipated in late 2024; the office tower is not currently being built.
- Hampden House is planned for up to 366 apartments and 10,100 square feet of retail, with estimated cost of $246.4 million and partial financing from a $133 million construction-to-permanent loan. Completion is expected in 2025.
- Management reported that fourth-quarter 2022 contractual base rent and operating-expense and tax recoveries were 98.6% collected as of January 31, 2023. It cautioned that future collections and rent relief requests may differ and expects some tenants may ultimately be unable to pay.
- No impairment charges were recorded in 2022, and management reported no identified impairment-triggering events at year-end. Future impairment remains possible if economic conditions, tenant credit or property outlooks deteriorate. The filing provides no formal earnings or FFO guidance.
Principal risks and contingencies
- Geographic concentration: more than 85% of property operating income was generated in the Washington, D.C./Baltimore area. Giant Food was the largest shopping-center anchor tenant and accounted for 5.1% of 2022 total revenue.
- Retail tenant performance, anchor departures, lease renewals, tenant credit and competition from online and other retailers could pressure occupancy, rents and collections. Office demand may also be affected by telecommuting trends.
- Development risks include cost inflation, delays, financing availability, and slower-than-planned lease-up or delivery.
- Interest-rate, refinancing, covenant and capital-access risks remain relevant. The credit facility uses SOFR following the transition from LIBOR; management notes that SOFR may have different cost and volatility characteristics.
- Related-party relationships with the Saul Organization include shared services, leases and significant ownership influence. Shared-service charges, including headquarters rent, totaled $9.6 million in 2022; the filing states the company has not obtained a third-party appraisal of those services.
- Routine litigation was not expected by management to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls and reported no critical audit matters.
Important facts for investors to verify
- Whether development budgets, financing and delivery schedules for Twinbrook Quarter and Hampden House remain achievable.
- Debt maturities, refinancing plans, covenant headroom and the effective cost of unhedged variable-rate debt.
- Trends in tenant collections, receivable reserves, occupancy and leasing at mixed-use and office properties.
- The effect of upcoming lease expirations, including 11.7% of shopping-center leasable area scheduled to expire in 2023, and the terms achieved on renewals or re-leasing.
- Related-party allocations and governance safeguards, including the Saul Organization’s influence and shared-service arrangements.
- Future distribution coverage and the distinction between FFO and cash available for distributions; FFO is a non-GAAP measure and is not equivalent to operating cash flow.