Saul Centers, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio comprised 50 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial performance and position
- Revenue: Q2 revenue was $60.0 million, up 12.7% from $53.2 million. First-half revenue was $118.7 million, up 7.8% from $110.2 million.
- Earnings: Q2 net income was $16.1 million versus $10.2 million; net income available to common stockholders was $9.9 million, or $0.42 per diluted share, versus $5.5 million, or $0.24. First-half net income was $28.9 million versus $27.0 million; common-stockholder income was $17.4 million, or $0.74 per diluted share, versus $16.0 million, or $0.69.
- Property performance: First-half same-property revenue increased 1.6% to $111.6 million and same-property operating income increased 0.9% to $83.5 million. Q2 same-property operating income rose 14.9% to $45.3 million. These are non-GAAP measures.
- FFO: First-half FFO available to common stockholders and noncontrolling interests was $48.7 million, up 7.5%; diluted FFO per share and unit was $1.50 versus $1.45. FFO is a non-GAAP measure and is not cash flow from operations.
- Cash flow: First-half operating cash flow was $66.6 million versus $41.7 million; investing cash outflow was $27.5 million versus $38.9 million; financing cash outflow was $51.1 million versus $49.7 million. Cash declined $12.0 million during the first half to $14.9 million.
- Debt and liquidity: Debt principal totaled approximately $1.141 billion at June 30, including $957.1 million fixed-rate and $184.0 million variable-rate debt. The balance-sheet carrying amount of debt was $1.133 billion. The company reported $215.8 million of revolver availability at June 30; at July 31, it reported $10.1 million cash and $203.8 million of availability. It was compliant with credit-facility financial covenants.
- Margins: The filing does not provide a headline operating-margin measure. First-half property operating income was $87.6 million on revenue of $118.7 million; GAAP net income was $28.9 million.
Material changes versus comparable periods
- Revenue growth reflected higher occupancy at The Waycroft and Ashbrook Marketplace, increased percentage rent, and lower credit losses as tenant operations improved. First-half credit losses on operating lease receivables were $1.0 million, compared with $2.3 million a year earlier.
- First-half expenses rose 8.0% to $89.8 million, including higher property operating costs, depreciation and interest. Interest expense rose 9.4% for the half, principally because less interest was capitalized after The Waycroft opened; Twinbrook development interest partially offset that effect.
- Commercial portfolio occupancy fell to 92.5% from 94.7% a year earlier. Residential occupancy rose to 98.4% from 67.7%, largely reflecting The Waycroft’s lease-up.
- Real estate investment carrying value increased to $1.628 billion from $1.517 billion at year-end 2020, with construction in progress increasing to $184.5 million from $69.5 million. Total equity rose to $529.5 million from $427.5 million, partly reflecting property contributions and partnership-unit issuances.
Outlook, risks and unusual items
- No numerical earnings or FFO guidance is provided. Management expects to continue transit-oriented mixed-use development, shopping-center improvements and selective redevelopment, subject to financing, permitting and market conditions.
- COVID-19 remains a material uncertainty. As of July 31, tenants had paid 98% of Q2 billings and 94% of July billings. Of $3.2 million of deferred rents that had come due by June 30, $3.1 million had been collected. Management cautioned that future collections and tenant credit losses are uncertain.
- COVID-19-affected tenant categories generated approximately 20% of base rent. Risks include tenant defaults or additional concessions, weaker leasing, development and refinancing risks, interest-rate movements, and the company’s geographic and anchor-tenant concentration. Grocery, pharmacy, bank and home-improvement tenants generally remained open.
- No impairment charges were recorded, and management reported no identified impairment-triggering events as of June 30; future impairment charges remain possible. The company reported no material litigation and no material off-balance-sheet arrangements.
- Twinbrook Quarter activity included contributions and property acquisitions in exchange for partnership units, including 1.416 million units held in escrow. The planned Phase I includes an 80,000-square-foot Wegmans, 450 apartments and a 230,000-square-foot office building; construction timing depends on permits, contingencies, financing and market conditions. The site-plan appeal was resolved in the company’s favor.
Important facts for investors to verify
- Track rent collections, deferred-rent repayments, tenant credit losses and leasing occupancy as pandemic-related effects evolve.
- Review debt maturities, variable-rate exposure, revolver capacity and covenant headroom; $145.5 million of balloon payments are scheduled for 2022, including $109.0 million outstanding under the revolver.
- Assess Twinbrook and other development costs, funding plans, approvals and schedules, as well as The Waycroft’s retail lease-up.
- Monitor same-property results separately from growth attributable to newly opened or developed properties, and reconcile FFO with GAAP earnings and operating cash flow.
- Consider the company’s regional concentration, Giant Food’s 5.5% share of first-half revenue, related-party relationships, and the effect of dividends and distributions on liquidity.