Saul Centers, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. At quarter-end its portfolio included 50 shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance and position
- Revenue: Q2 revenue was $55.9 million, up 6.1% from $52.7 million; first-half revenue was $114.4 million, up 4.3% from $109.6 million. Q2 growth primarily reflected Park Van Ness and the Burtonsville Town Square acquisition. First-half base rent rose, while expense recoveries declined.
- Profit: Q2 net income was $14.4 million versus $13.2 million; income attributable to common stockholders was $8.4 million versus $7.5 million, or $0.38 versus $0.35 per diluted share. First-half common-stockholder income was $19.0 million versus $17.4 million, or $0.87 versus $0.81 per share.
- Operating performance: First-half FFO available to common stockholders and noncontrolling interests increased 7.4% to $48.6 million; FFO per share and unit was $1.66 versus $1.57. Same-property revenue was nearly flat: $52.6 million in Q2, up from $52.2 million, and $108.4 million for the first half, slightly below $108.6 million. Same-property operating income was $40.1 million in Q2, essentially unchanged, and $83.2 million for the first half, up from $82.4 million.
- Cash flow and investment: First-half operating cash flow was $57.7 million versus $53.5 million. Investing used $94.5 million, mainly reflecting $79.5 million of property acquisitions, including Burtonsville. Financing provided $40.9 million; cash increased $4.1 million to $12.4 million.
- Debt and liquidity: Debt principal totaled $970.7 million at June 30, versus $907.8 million at year-end; $872.4 million was fixed-rate and $98.3 million variable-rate. The company reported $190.6 million available on its $275 million revolving facility, which matures in June 2018 and has a one-year extension option subject to conditions. Management said capital resources were sufficient for foreseeable liquidity needs and reported compliance with credit covenants.
- Margins and distributions: Operating income was $14.4 million in Q2 and $31.8 million for the first half. Operating margin, calculated as operating income divided by revenue, was approximately 25.8% and 27.8%, respectively, versus 25.1% and 27.0% in 2016. Common dividends declared were $0.51 per share in Q2 and $1.02 for the first half, compared with $0.47 and $0.94 a year earlier.
Material changes and notable items
- Burtonsville Town Square was acquired in January for $76.4 million, funded partly with a $40 million fixed-rate mortgage. The property was reported 100% leased.
- Q2 same-property occupancy was 94.2%, down from 95.5% a year earlier; portfolio commercial occupancy was 94.3%, versus 94.9%. Management attributed pressure in part to tenant lease terminations and space availability.
- A $3.6 million Safeway lease termination fee was recognized in Q1 2017. Management said it would be partly offset by approximately $1.6 million of lost rental revenue during 2017. Aldi was expected to open in the former Broadlands Safeway space in late 2017.
- Kmart planned to close its 104,000-square-foot Kentlands store by October 31, 2017; its lease generated approximately $1.3 million in annual revenue. A 113,000-square-foot No Excuse Workout lease was terminated after prolonged nonpayment; rent had been fully reserved, and the termination reduced reported leasing percentage by 1.2%.
- At Park Van Ness, 260 of 271 apartments (95.9%) were leased at quarter-end. At 750 N. Glebe Road, construction was underway on a planned residential and retail project; Target and other leases brought approximately 80% of its retail space under lease.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management expects to pursue leasing, redevelopment, acquisitions and development selectively, with future funding potentially from operations, cash, the revolver, construction or permanent financing, and equity or partnership-unit issuance. The approximately $275 million 750 N. Glebe Road project was expected to be partly financed by a proposed $157 million construction-to-permanent loan, subject to customary closing conditions.
Management cited risks including tenant nonpayment and reliance on anchor tenants, interest-rate and refinancing exposure, access to capital, development execution, regional economic conditions, changing consumer shopping behavior, real-estate operating costs, and REIT qualification. Variable-rate debt of $98.3 million would incur approximately $983,000 of additional annual interest expense for a 1 percentage-point rate increase, based on quarter-end balances. The company reported no material litigation, no material update to its prior-year risk factors, and effective disclosure controls.
Important facts for investors to verify
- Progress on the 750 N. Glebe Road financing, construction budget, schedule and leasing; the proposed loan was not yet reported as closed.
- Re-leasing and revenue impact from the Kmart and Safeway spaces, and the effect of lower same-property occupancy.
- Revolver extension or refinancing plans ahead of its June 2018 maturity and other scheduled debt maturities, including 2018 balloon payments.
- Whether reported FFO and cash flow support distributions and planned capital spending as acquisition and development needs continue.
- Exposure to the Washington, D.C./Baltimore region, major tenants and related-party arrangements with the Saul Organization.