Saul Centers, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are in U.S. dollars; financial-statement figures are shown in millions unless stated otherwise. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. Its portfolio comprised 51 operating shopping centers, seven mixed-use properties and two non-operating development properties.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $47.5 | $42.8 | $94.6 | $84.5 |
| Operating income | $9.6 | $8.2 | $18.9 | $16.5 |
| Net income | $9.6 | $7.1 | $18.9 | $15.5 |
| Net income attributable to Saul Centers | $8.1 | $6.4 | $15.9 | $13.7 |
| Net income available to common shareholders | $4.3 | $2.6 | $8.4 | $6.1 |
| Basic and diluted EPS | $0.22 | $0.14 | $0.43 | $0.33 |
| FFO available to common shareholders | $15.6 | $11.6 | $30.9 | $24.5 |
Revenue increased 11.1% in Q2 and 12.0% for the first half, principally from properties acquired or developed in 2011, which contributed approximately $4.4 million and $10.2 million of revenue, respectively. The reported operating margin was approximately 20.2% in Q2 (19.2% prior year) and 20.0% for the first half (19.5% prior year). FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
- Expenses and margins: Q2 operating expenses rose 9.6%, less than revenue growth. For the first half they rose 11.3%; higher property taxes, interest and depreciation were partly offset by lower property operating costs and credit-loss provisions. Real estate income (segment rental revenue less property-level expenses) was $35.7 million in Q2 and $70.9 million for the first half.
- Cash flow: First-half operating cash flow was $48.1 million, versus $26.9 million in 2011. Investing activities used $7.3 million, versus $25.1 million, reflecting much lower development spending. Financing activities used $15.9 million, compared with $6.4 million provided in the prior period. Cash increased $24.9 million to $37.3 million.
- Debt and liquidity: Debt was $833.1 million at June 30, including $818.1 million fixed-rate and $15.0 million variable-rate debt. Cash was $37.3 million; approximately $174.8 million remained available on the $175 million revolving facility, with no revolver borrowings outstanding. Management said debt to total asset value was below 50% and all facility covenants were met. Scheduled debt payments, including amortization, total $89.5 million in 2013, including $70.1 million in balloon payments.
- Equity and distributions: Common dividends declared were $0.36 per share for Q2 and $0.72 for the first half, unchanged from 2011. First-half common, preferred and noncontrolling-interest distributions were $13.9 million, $7.6 million and $5.0 million, respectively. Common shares outstanding were 19.6 million at June 30; 19.8 million were outstanding July 31.
Material changes and operating developments
- Same-center commercial occupancy increased to 90.7% from 90.2% a year earlier. Overall commercial occupancy was 91.1%; shopping centers were 92.4% leased and mixed-use commercial space 83.8%. Clarendon Center apartments were 99.2% leased.
- Acquisition and development activity in 2011 expanded the portfolio and drove much of the revenue growth. Q2 costs also increased: interest expense and deferred debt-cost amortization rose 12.5%, real estate taxes 18.9%, and depreciation and leasing-cost amortization 15.3% year over year.
- In April, the company refinanced debt secured by Seven Corners with a $73 million, 15-year mortgage at a fixed 5.84% rate, repaying $63 million of existing debt and providing approximately $10 million in cash. It also borrowed an additional $10.5 million secured by White Oak in connection with a collateral substitution.
- Common stock issuance generated $11.5 million during the first half, primarily through the dividend reinvestment plan and related plans, and option exercises.
Outlook, commentary and risks
- No specific earnings or FFO guidance was provided. Management expects to fund ordinary short-term needs through operating cash flow, available cash and the credit line; future acquisitions and development may use credit-line borrowings, construction or permanent financing, DRIP proceeds, or other capital.
- Management reported modest improvement in retail sales and leasing activity, but said rents remained under pressure, vacancies remained above pre-recession levels, retailers were cautious about expansion, and office demand had slowed amid uncertainty about federal spending. Acquisitions were described as uncertain given limited quality supply and elevated prices.
- Management was considering development of certain outparcels during the rest of 2012; other redevelopment or expansion activity was possible but not currently planned. Ashland Square pad projects were expected to be completed in Q4 2012 at an estimated company cost of approximately $3.7 million.
- A hail storm damaged the French Market roof during Q2. Repair costs were not yet estimable; management expected insurance coverage subject to a $50,000 deductible. The company anticipated assessing damage and any related gain in Q3. Tenants remained open.
- After quarter end, the company sold West Park for $2.0 million on July 25. The property was 11.7% leased at June 30; management expected to recognize an approximately $1.0 million gain in Q3.
- Principal risks include tenant nonpayment and reliance on anchor tenants, regional economic and real-estate concentration, interest rates and refinancing, development and leasing execution, access to capital, related-party relationships, and continued qualification as a REIT. Management reported no material litigation, no material risk-factor updates, and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Track leasing, rents and tenant credit, particularly the effect of new properties on reported growth versus same-center performance and exposure to major anchors.
- Review the 2013 debt maturities, refinancing plans, covenant headroom, and the company’s stated leverage measure, which uses management-estimated property asset value.
- Confirm the French Market repair costs, insurance proceeds and accounting treatment, and the realized West Park sale gain.
- Reconcile derivative fair-value disclosures: the notes report swap fair value of approximately $6.1 million, while the market-risk discussion reports aggregate swap fair value of approximately $4.7 million.
- Assess common and preferred distributions against recurring cash generation and capital needs; FFO is a non-GAAP measure and does not represent cash available for distributions.