Saul Centers, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited interim financial statements. 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 48 operating shopping centers, seven mixed-use properties and two non-operating development properties. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $42.8 | $40.1 | $84.5 | $83.7 |
| Operating income | $8.2 | $10.7 | $16.5 | $23.4 |
| Net income | $7.1 | $6.2 | $15.5 | $18.8 |
| Net income available to common stockholders | $2.6 | $1.9 | $6.1 | $8.7 |
| Common diluted EPS | $0.14 | $0.10 | $0.33 | $0.47 |
| FFO available to common shareholders | $11.6 | $9.8 | $24.5 | $25.6 |
| Net cash provided by operating activities | Not presented quarterly | $26.9 | $35.2 |
Q2 operating margin was approximately 19.2%, compared with 26.8% a year earlier; the six-month margin was approximately 19.5%, versus 27.9%. FFO rose 19.1% in Q2 but declined 4.4% for the first half. FFO is a non-GAAP measure and is not equivalent to operating cash flow.
At June 30, 2011, total assets were $1,032.0, cash and equivalents $21.1, and total stockholders’ equity $241.8. Debt was $732.9, comprising $717.7 of fixed-rate and $15.2 of variable-rate debt. The fixed-rate debt’s weighted-average interest rate was 6.26%. The company had no borrowings on its $150 million revolving credit facility, which was fully available; it matures June 30, 2012, with a conditional one-year extension option. Common dividends declared were $0.36 per share for the quarter and $0.72 for the half year; preferred dividends totaled $7.6 for the half year.
Material changes versus the prior comparable periods
- Q2 revenue increased 6.7%, primarily from Clarendon Center and properties acquired in 2010; the increase was partly offset by lower occupancy and revenue at mixed-use properties.
- First-half revenue increased 1.0%, as development and acquisition revenue was partly offset by weaker mixed-use property revenue, lower expense recoveries, and the absence of $1.9 million of prior-year rent and damages collected in a tenant dispute.
- Expenses grew faster than revenue: total expenses increased 17.9% in Q2 and 12.7% for the first half. Higher interest and depreciation related chiefly to properties placed in service; credit-loss provisions also rose materially.
- First-half operating cash flow fell to $26.9 million from $35.2 million. Investing outflows were $25.1 million, versus $40.6 million, while financing provided $6.4 million, versus $13.7 million.
- Debt rose from $711.4 million at December 31, 2010 to $732.9 million at June 30, 2011. The company issued a $125 million, 15-year fixed-rate Clarendon Center mortgage at 5.31%, using proceeds in part to repay construction debt.
- Same-property commercial leasing was 90.2%, down from 91.9% a year earlier. The overall commercial portfolio was 89.8% leased; Clarendon Center apartments were fully leased at June 30.
Outlook, risks and unusual items
- No numerical earnings or FFO guidance was provided. Management expected to continue Clarendon Center development and evaluate selective acquisitions, redevelopment and expansion. It characterized near-term acquisition opportunities as uncertain given limited quality supply and elevated pricing.
- Management said available cash and the undrawn credit line were expected to meet liquidity needs for the foreseeable future. It also cited a debt-to-asset-value ratio below its 50% target, though that asset value is management-estimated rather than a GAAP balance-sheet measure.
- Debt maturities include $81.5 million in 2012 and $85.6 million in 2013, including balloon payments. The company had applied for and rate-locked a proposed $73 million, 15-year Seven Corners mortgage expected to close in early 2012, intended to refinance debt due in October 2012; closing remained subject to requirements.
- Q2 included a $1.2 million loss from derivative fair-value declines after hedge accounting was discontinued for one swap, and a $0.2 million casualty settlement gain. The first half included $74,000 of acquisition-related costs. The prior-year comparison included a $4.5 million loss on early extinguishment of debt.
- Management identified tenant rent-payment and bankruptcy risk, reliance on anchor tenants, vacancies and local economic weakness, financing and interest-rate risks, development execution, and dependence on Saul Organization relationships. Blockbuster had rejected two leases; Borders announced liquidation; Superfresh closed one store and rejected its lease. The company reported no material litigation and no material update to the prior annual report’s risk factors.
- Interest-rate sensitivity: a one-percentage-point increase would raise annual interest expense on variable-rate debt by approximately $152,000; the estimated fair value of fixed-rate debt would decline by approximately $35.7 million. The company reported compliance with revolving-credit covenants and effective disclosure controls.
Important facts for investors to verify
- Clarendon Center’s leasing, remaining construction costs and ability to achieve the leasing and debt-service benchmarks that would remove the company’s $27.6 million mortgage guarantee.
- Tenant credit exposure and leasing trends, particularly the effects of the named tenant bankruptcies and the decline in portfolio occupancy.
- Refinancing progress for the October 2012 debt maturity, including completion and terms of the proposed Seven Corners loan and the revolver’s 2012 maturity or extension.
- Whether operating cash flow, FFO and distributions remain sustainable as interest, credit-loss provisions and property costs change.
- The company’s regional and anchor-tenant concentration, related-party arrangements, and management’s estimates used to assess property values and debt-to-asset levels.