Business context and reporting period
Saul Centers, Inc. is a REIT focused on owning, operating, leasing, acquiring and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. This unaudited Form 10-Q covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $52.3 | $48.8 | $105.2 | $98.0 |
| Operating income | $14.4 | $7.7 | $27.1 | $11.1 |
| Net income | $20.5 | $7.8 | $33.2 | $11.2 |
| Net income (loss) attributable to common stockholders | $12.8 | $3.4 | $19.9 | $(1.2) |
| FFO available to common shareholders | $21.5 | $17.0 | $41.2 | $27.2 |
| FFO per share available to common shareholders | $0.77 | $0.63 | $1.48 | $1.00 |
Same-property revenue was $51.8 million in Q2 and $104.4 million for the first half, up 6.7% and 7.5%, respectively. Same-property operating income, a non-GAAP measure, rose 8.5% in Q2 to $40.0 million and 7.7% in the first half to $79.5 million. Its margin was approximately 77.3% versus 76.0% in Q2 and 76.1% versus 76.0% for the first half. Common dividends declared were $0.40 per share for Q2 and $0.80 for the first half.
First-half operating cash flow was $42.7 million, versus $34.0 million; investing cash outflow was $15.2 million, versus $11.4 million; financing cash outflow was $23.0 million, versus $21.9 million. Cash increased $4.5 million to $21.8 million.
At June 30, total notes payable were $820.1 million, including $790.2 million fixed-rate and $29.9 million variable-rate debt. The weighted-average rate on fixed-rate debt was 5.67%. The $275 million unsecured revolving facility had no borrowings outstanding and approximately $274.4 million available, net of letters of credit. Stockholders’ equity was $336.7 million; total assets were $1.227 billion. Management reported compliance with facility covenants and estimated debt to total asset value below 50%.
Material changes versus prior periods
- Revenue growth reflected higher base rents and leased space, increased expense recoveries, and a $1.6 million bankruptcy settlement and collection tied to a former Seven Corners tenant. First-half revenue also included a $1.2 million impact from a lease termination at Seven Corners.
- Q2 net income included a $6.1 million gain from the April sale of Giant Center for $7.5 million. The property sale and lower depreciation materially affected comparisons; lower depreciation chiefly reflected an unusual $8.0 million charge recorded in 2013 related to Van Ness Square.
- First-half operating expenses declined 10.1%, primarily due to lower depreciation and predevelopment costs, partly offset by $1.7 million higher snow-removal costs. General and administrative expense rose 18.7%, including $1.1 million of accrued severance expense.
- First-half common-stockholder results improved in part because 2013 included a $5.2 million preferred-stock redemption charge. FFO available to common shareholders rose 51.6%, also reflecting higher property operating income, lower predevelopment costs and lower preferred dividends.
- Portfolio leasing improved: same-property commercial occupancy was 94.2% at June 30, 2014, versus 93.6% a year earlier. Base rent and effective rent per square foot for the commercial portfolio were $18.03 and $16.42, respectively, compared with $17.67 and $15.77.
Outlook, management commentary and risks
No numeric full-year earnings or revenue guidance is provided. Management expects to fund ordinary liquidity needs from operations, available cash and the credit line, and may use borrowings, construction financing, DRIP proceeds or other capital for future acquisitions and development. Management stated that existing cash and revolving-credit availability should meet liquidity needs for the foreseeable future.
Park Van Ness is a 271-unit residential project with approximately 9,000 square feet of retail. Completion was projected for late 2015; estimated cost was approximately $93 million, excluding land and predevelopment costs. A $71.6 million construction-to-permanent loan was available, with no amount drawn at June 30. The company continued evaluating redevelopment opportunities, including the Rockville Pike properties, but had not set a construction timetable for that redevelopment.
Notable transactions included the $11 million purchase of 1582 Rockville Pike and the concurrent $11 million sale of Olney Center. Saul Centers leased Olney back for 20 years and accounts for the transaction as secured financing; the purchaser has a call right beginning in April 2016, and the company has an option to repurchase at lease end.
Risks highlighted include tenant nonpayment and bankruptcies, reliance on anchor tenants, concentration in the D.C./Baltimore region, economic and federal-government spending pressures, weather-related operating costs, interest rates and refinancing, debt covenants, development execution, access to capital, REIT qualification and related-party relationships. The company reported no material litigation, no material changes to previously disclosed risk factors, no material subsequent events and effective disclosure controls.
Important facts for investors to verify
- How much reported earnings and FFO growth came from recurring leasing and operations versus the Giant Center gain, Seven Corners settlement and other period-specific items.
- Whether improved occupancy and rental rates continue, and how the 468,891 square feet of commercial leases still scheduled to expire during the second half of 2014 are renewed or re-leased.
- Park Van Ness construction progress, total cost, financing drawdown and delivery timing, as well as the economics and timing of any Rockville Pike redevelopment.
- Debt maturities and refinancing exposure, variable-rate sensitivity, covenant headroom and the company’s stated leverage estimate, which uses management-determined asset values.
- The sustainability of distributions relative to cash flow and FFO; FFO is a non-GAAP measure and is not equivalent to cash generated from operations.
- Terms and potential obligations arising from the Olney sale-leaseback and the company’s related-party arrangements.