Business context and reporting period
Saul Centers, Inc. is a REIT focused on owning, operating, leasing and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. At quarter-end, the portfolio included 50 operating shopping centers, seven mixed-use properties (one held for sale) and two non-operating development properties.
Financial performance
Amounts below are in millions, except per-share data. The filing does not provide a clear consolidated profit-margin figure.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $52.7 | $51.7 | $109.6 | $103.8 |
| Operating income | $13.3 | $12.9 | $29.6 | $25.6 |
| Net income | $13.2 | $12.9 | $29.6 | $25.6 |
| Net income attributable to common stockholders | $7.5 | $7.3 | $17.4 | $14.4 |
| Basic and diluted EPS | $0.35 | $0.35 | $0.81 | $0.68 |
| FFO available to common stockholders and noncontrolling interests (non-GAAP) | $21.0 | $20.6 | $45.3 | $40.7 |
| FFO per share and unit (non-GAAP) | $0.73 | $0.73 | $1.57 | $1.43 |
- Six-month operating cash flow was $53.5 million, versus $48.5 million. Investing cash use was $26.4 million and financing cash use was $26.1 million; cash increased $1.0 million to $11.0 million.
- At June 30, total assets were $1,295.5 million and total liabilities were $929.0 million. Debt principal was approximately $864.9 million: $838.2 million fixed-rate and $26.7 million variable-rate. Fixed-rate debt carried a 5.51% weighted-average rate.
- The $275 million unsecured revolving facility had $12 million outstanding and approximately $262.6 million available, subject to borrowing conditions. The company reported compliance with its financial covenants.
- Common dividends declared were $0.47 per share in Q2 and $0.94 for the first half, versus $0.43 and $0.86 in the respective 2015 periods. The Series C preferred stock carries a 6.875% annual dividend.
Material changes versus prior periods
- Q2 revenue rose 1.9%, operating income 2.5%, and net income attributable to common stockholders 3.2%; EPS was unchanged at $0.35. For the first half, revenue rose 5.6%, operating income 15.7%, common-attributable net income 20.6%, and FFO 11.4%.
- Same-property revenue increased $1.0 million in Q2 and $5.8 million in the first half. Same-property operating income increased $1.3 million and $5.5 million, respectively. Management attributed growth chiefly to higher base rents; first-half comparisons also benefited from a $3.0 million lease termination fee at 11503 Rockville Pike, partly offset by lost rent.
- First-half “other” revenue increased $3.1 million, primarily reflecting that termination fee. It is an unusual, nonrecurring item; management expected it to be partly offset by approximately $1.0 million of lost rent over the balance of 2016.
- Debt principal declined from approximately $875.2 million at year-end 2015 to $864.9 million at June 30, 2016. Operating cash flow improved year over year. First-half property additions and development/redevelopment spending totaled $26.4 million.
Outlook, management commentary and risks
- No quantitative earnings or revenue guidance is provided. Management expects to fund ordinary short-term needs with operating cash flow, available cash and the credit line, and believes capital resources are sufficient for foreseeable liquidity needs.
- Park Van Ness was recently completed: its 9,000 square feet of retail were fully leased, while as of July 31, 130 of 271 apartments had executed leases and 83 were occupied. Estimated project cost, excluding land and predevelopment costs, was approximately $93 million; approximately $4.8 million remained to complete at June 30, expected to be funded from the construction loan.
- Two Safeway stores closed during Q2 at Broadlands Village and Briggs Chaney Plaza; their leases remained in force. The company was discussing future options with the tenant and other retailers. Overall commercial portfolio leasing was 94.9%, and same-property leasing was 95.1%, at June 30.
- Management cited continued vacancy and rent-growth pressure in some local submarkets, cautious retailer expansion, and federal spending uncertainty. Principal risks include tenant nonpayment and anchor-tenant reliance, geographic concentration, development execution, access to capital, interest rates and refinancing, real-estate operating conditions, and REIT qualification.
- In August, after quarter-end, the company bought a property for $7.0 million plus $0.2 million acquisition costs near its Glebe Road holdings. Zoning and site plan approval had been received for a potential 490-unit residential and 62,000-square-foot retail development; no construction timetable was committed.
- Management reported no material litigation, no material subsequent events requiring disclosure, and effective disclosure controls as of June 30. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How quickly Park Van Ness apartment leasing and occupancy progress, and whether completion costs remain within estimates.
- The impact of the two Safeway closures and the timing and economics of replacement tenants.
- How much recurring earnings growth remains after excluding the 11503 Rockville Pike termination fee.
- Debt maturities, variable-rate exposure, credit-line availability and covenant headroom; the $262.6 million availability is subject to facility terms.
- Whether rent growth, occupancy and collections offset rising taxes, credit-loss provisions and other property costs in this geographically concentrated portfolio.
- The sustainability of distributions relative to FFO and operating cash flow, noting FFO is a non-GAAP measure and not cash available for distribution.