Saul Centers, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio included 50 shopping centers, seven mixed-use properties and three non-operating development properties.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Total revenue | $56.8 | $57.1 | $166.9 | $174.9 |
| Net income | $11.6 | $15.3 | $38.6 | $49.2 |
| Net income available to common stockholders | $6.6 | $9.0 | $22.6 | $29.8 |
| Basic and diluted earnings per share | $0.28 | $0.39 | $0.97 | $1.30 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $56.8 | $82.1 |
| FFO available to common stockholders and noncontrolling interests | $22.5 | $24.1 | $67.8 | $75.2 |
| FFO per share and unit | $0.72 | $0.78 | $2.17 | $2.44 |
For the nine-month period, same-property revenue declined 5.8% to $163.8 million and same-property operating income declined 5.8% to $123.1 million. These are non-GAAP measures. Credit losses on operating lease receivables were $4.2 million for the period, compared with $1.0 million a year earlier. Total expenses rose 2.0% to $128.3 million, including higher interest and depreciation costs following The Waycroft’s opening.
Financial position, debt and liquidity
- At September 30, 2020, total assets were $1.681 billion, total liabilities $1.250 billion and total equity $431.6 million. Cash and cash equivalents were $54.3 million.
- Debt principal was approximately $1.186 billion: $986.0 million fixed-rate and $199.5 million variable-rate. Fixed-rate debt had a weighted-average interest rate of 4.94%; a one-percentage-point increase in variable rates would increase annual interest expense by approximately $2.0 million.
- The $325 million revolving facility had $124.5 million drawn and approximately $200.3 million available at quarter-end. The company reported compliance with its financial covenants. Management’s stated policy is to keep debt to asset value at or below 50%; its estimate was below that level.
- Operating cash flow was $56.8 million; investing activities used $48.4 million and financing activities provided $32.0 million. Cash increased $40.4 million over the nine months. Operating cash flow was lower year over year, while investing outflows declined largely because development spending fell.
- Dividends and distributions remained a significant cash requirement. The company stated it expects to meet short-term needs through operating cash, available cash and its credit line, while maintaining REIT distribution requirements.
Material changes and operating developments
- Nine-month revenue fell 4.6%, while net income available to common stockholders fell 24.2%. Lower lease termination fees and parking revenue, COVID-related credit-loss reserves and lower expense recoveries were key pressures.
- New operations at The Waycroft and Ashbrook Marketplace supported base rent, but The Waycroft’s opening also shifted costs from capitalization to expense. The Waycroft includes 491 apartments and 60,000 square feet of retail; 258 apartments were occupied as of November 3, 2020.
- Commercial portfolio occupancy was 94.0% at September 30, versus 94.8% a year earlier; same-property commercial occupancy was 93.9%. Residential occupancy was 73.9%, affected by newly available Waycroft units.
- The company placed $284.7 million of assets in service during the nine months, mainly related to The Waycroft and Ashbrook Marketplace. It also closed two 15-year fixed-rate mortgages totaling $52.1 million, using proceeds to reduce revolver borrowings.
Outlook, risks and contingencies
- COVID-19 caused closures and operating restrictions for tenants, rent relief requests and uncertainty about collections, tenant solvency, future cash flows and property values. Management warned that future impairment charges could occur; none were recorded through September 30.
- As of November 3, tenants had paid 83% of second-quarter billings and 91% of third-quarter billings. October collections were 90% as of that date. Executed deferrals totaled $7.1 million, generally repayable in 2021 and later. These collection results do not assure future payments.
- Management expected near-term operating cash flow to decline while tenants remained affected. No quantitative earnings or FFO guidance was provided. Management cited cash and revolver availability as sufficient liquidity to address operating needs as pandemic effects evolved.
- Approximately 39% of base rent came from tenant categories significantly affected by closures or distancing measures. Other risks include regional concentration, tenant and anchor dependence, refinancing and interest-rate exposure, development execution, capital access and REIT qualification.
- The Twinbrook Quarter site plan is subject to an ongoing appeal; development timing depends on contingencies, permits and market conditions. The company reported no material litigation and no material subsequent events requiring disclosure.
Important facts for investors to verify
- Subsequent rent collections, tenant defaults and repayment performance on the $7.1 million of executed deferrals.
- Changes in credit-loss reserves and receivable collectability, including whether COVID-related pressures lead to impairment charges.
- Liquidity, revolver availability, covenant headroom, debt maturities and refinancing terms.
- Lease-up, occupancy and operating contribution from The Waycroft and other recently completed developments.
- Effects of lower lease termination and parking income, expiring leases, and rental-rate trends on same-property performance and distributions.