Saul Centers, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are to the corresponding 2010 periods. Amounts are in millions of dollars unless stated otherwise. Saul Centers is a REIT focused on shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $42.878 | $39.551 | $127.390 | $123.251 |
| Operating income | $8.656 | $10.411 | $25.168 | $33.769 |
| Net income | $6.000 | $15.503 | $21.479 | $34.315 |
| Net income available to common stockholders | $1.719 | $9.046 | $7.856 | $17.702 |
| FFO available to common shareholders | $10.727 | $13.488 | $35.234 | $39.120 |
- Revenue increased 8.4% in Q3 and 3.4% year to date, mainly as Clarendon Center and acquired properties contributed rental income. Operating expenses rose faster—17.4% in Q3 and 14.2% year to date—led by higher interest and depreciation costs.
- Operating margin was approximately 20.2% in Q3 2011 versus 26.3% in Q3 2010, and 19.8% for the nine-month period versus 27.4%. Common-stockholder net income fell substantially; the 2010 comparison included a $3.591 million property-sale gain in discontinued operations and a $1.700 million casualty-settlement gain, while 2011 included acquisition costs and derivative losses.
- FFO, a non-GAAP measure, declined 20.4% in Q3 and 9.9% year to date. Management attributed the decreases primarily to acquisition-related costs ($2.439 million in Q3; $2.513 million year to date) and, year to date, a $1.374 million noncash derivative fair-value decrease.
- Cash from operations was $40.138 million for the first nine months, down from $43.328 million. Investing used $196.863 million, largely for acquisitions and development; financing provided $155.204 million. Cash and equivalents were $11.447 million at September 30.
- Total assets were $1.197 billion and total liabilities $904.581 million. Debt totaled $834.018 million: $750.872 million fixed-rate and $83.146 million variable-rate. The company reported $122 million available on its $150 million revolving facility, with $8 million drawn; it said it was in compliance with facility covenants.
- The board-declared common dividend was $0.36 per share for the quarter, unchanged from 2010. Preferred dividends were $3.785 million for the quarter.
Material changes versus prior period
- In September, the company acquired three grocery-anchored centers—Kentlands Square II, Severna Park MarketPlace and Cranberry Square—for a combined $168.5 million purchase price, plus acquisition costs. Together they comprised approximately 635,000 square feet and were 98% leased. The company also acquired a small Washington, D.C. retail property earlier in 2011.
- Acquisitions and Clarendon Center helped lift base rent, but operating costs increased as properties entered service and financing expanded. Interest expense and deferred debt-cost amortization rose 28.1% in Q3 and 24.6% year to date.
- Same-center portfolio leasing was 89.2% at September 30, down from 92.0% a year earlier. Overall commercial portfolio leasing was 89.7%; Clarendon Center apartments were fully leased.
- Debt increased from approximately $711.4 million at December 31, 2010 to $834.0 million. Acquisition financing included $55.8 million raised through common shares and operating-partnership units and $60 million of short-term bridge loans.
Outlook, risks and unusual items
- No numerical earnings or FFO guidance is provided. Management expects to fund ordinary near-term needs from operating cash, available cash and the credit line; future acquisitions and development may require debt or equity financing. Management characterized near-term acquisition opportunities as uncertain and said it would pursue selective investments and development.
- Management cited ongoing tenant and leasing pressures, including bankruptcies or closures involving Blockbuster, Borders, SuperFresh and Syms, as well as elevated vacancies and economic weakness. Reported risks also include anchor-tenant dependence, local-market concentration, access to capital, interest rates, refinancing, development execution, real-estate operating risks and maintaining REIT qualification.
- The debt schedule showed $150.334 million of maturities and scheduled amortization in 2012, including $60 million of bridge loans and the $8 million revolver balance. After quarter-end, a $43 million permanent loan closed to repay the Kentlands bridge borrowing; a $20 million Cranberry Square permanent-loan commitment was expected to repay the remaining bridge borrowing. The revolver matures June 30, 2012, with a conditional one-year extension option.
- In September, the company closed a $38 million fixed-rate, 15-year loan at 4.30% for Severna Park MarketPlace. A $125 million, 15-year Clarendon Center loan at 5.31% had closed in March. Management stated its debt-to-estimated-asset-value ratio was below 50%; this is a management estimate, not a GAAP measure.
- The filing describes an interest-rate-swap hedge-accounting error, deemed immaterial by management. It states 2010 Q3 net income had been overstated by $3.3 million and 2010 full-year net income understated by $549,000; the company changed its hedge accounting treatment in 2011. The filing also reports no material litigation or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether occupancy and tenant credit quality recover, particularly following disclosed retailer bankruptcies and closures.
- Execution and leasing progress at Clarendon Center and the acquired properties, and whether these assets generate returns sufficient to offset acquisition, interest and depreciation costs.
- Completion of the Cranberry Square refinancing and management of the 2012 debt maturities and revolving-facility renewal.
- Cash generation and FFO trends, while distinguishing reported FFO from GAAP earnings and cash available for distributions.
- The hedge-accounting error’s treatment in comparative financial statements and any implications for reported earnings or comprehensive income.