Saul Centers, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report. Saul Centers is a REIT focused on owning, managing and developing neighborhood and community shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region.
Business context and portfolio
- At year-end, the portfolio comprised 50 shopping centers and six mixed-use properties, totaling approximately 9.3 million square feet, plus three non-operating development properties.
- Same-property portfolio leasing was 94.4%, up from 93.9% at year-end 2013; shopping-center leasing was 95.0% and mixed-use leasing was 90.8%.
- The company acquired five properties in 2014 for an aggregate purchase price of approximately $68.0 million and sold Giant Center for $7.5 million.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $207.1 million | $197.9 million |
| Operating income | $51.9 million | $35.3 million |
| Net income | $58.0 million | $34.8 million |
| Net income attributable to Saul Centers | $46.9 million | $30.9 million |
| Net income available to common stockholders | $32.1 million | $11.7 million |
| Diluted earnings per common share | $1.54 | $0.57 |
| Funds from operations (FFO), available to common shareholders | $78.3 million; $2.80 per share | $64.7 million; $2.37 per share |
| Cash from operating activities | $86.6 million | $73.5 million |
| Cash and cash equivalents at year-end | $12.1 million | $17.3 million |
| Notes payable | $857.4 million | $820.1 million |
Revenue rose 4.6%; same-property revenue increased $8.3 million to $204.9 million. Base rent, leased space, expense recoveries and tenant-related settlements contributed to growth. The reported increase in net income also reflected a $6.1 million gain on the Giant Center sale and lower depreciation expense than in 2013. FFO is a non-GAAP measure and should not be treated as cash available for distribution.
Investing activities used $83.6 million, primarily for acquisitions, capital expenditures and development. Financing activities used $8.1 million. At year-end, $784.8 million of notes payable was fixed-rate and $72.6 million was variable-rate; management said approximately 91.5% of notes payable was amortizing fixed-rate debt. The $275 million unsecured revolver had $43.0 million outstanding and approximately $231.6 million available. Management estimated debt to asset value was below its 50% policy threshold; the company was in compliance with credit-facility covenants.
Common distributions were $1.56 per share for 2014, up from $1.44 in 2013. The company also paid $13.5 million in preferred distributions. REIT status generally requires distribution of at least 90% of taxable income.
Material changes and unusual items
- Same-property operating income increased $6.5 million to $155.7 million, partly offset by $2.2 million of higher property operating expenses.
- 2014 operating expenses fell 4.6%, mainly because 2013 included approximately $8.0 million of additional depreciation associated with the planned redevelopment of Van Ness Square and higher Park Van Ness predevelopment costs. 2014 also included $0.5 million of predevelopment expense.
- The company issued $39.3 million of Series C preferred stock and used the proceeds to redeem the remaining Series A preferred stock. Series C carries a 6.875% annual dividend rate.
- Winter weather drove approximately $2.0 million of snow-removal costs in the first quarter; approximately 60% was recoverable from tenants.
- Fourth-quarter revenue was $51.3 million versus $50.1 million a year earlier. Diluted common EPS was $0.25 versus $0.33; the filing does not provide a clear standalone explanation for the quarter-over-quarter year comparison.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management planned to continue leasing, redevelopment and selective acquisitions, but said near-term acquisition opportunities were uncertain amid limited availability and elevated property pricing.
- Park Van Ness was under construction: a 271-unit residential project with approximately 9,000 square feet of retail, expected to be completed in the first quarter of 2016. Estimated cost was approximately $93 million, excluding land and predevelopment expense; a $71.6 million construction-to-permanent loan will fund part of the project. Costs incurred through year-end were approximately $27 million.
- Management cited local government spending and budget issues as a source of elevated vacancies and pressure on rental-rate growth. Key exposures include tenant financial health and renewals, retail competition, concentration in the Washington-area market, interest rates and refinancing, development execution, and REIT qualification.
- Related-party governance merits attention: members of the Saul Organization held significant influence, and shared services and headquarters rent were charged to the company. The filing reports $7.4 million of shared-service charges in 2014.
- Routine litigation was not expected by management to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Reconcile the 2014 earnings improvement with the Giant Center gain, depreciation changes and other nonrecurring items; assess underlying operating and FFO trends.
- Review the debt maturity schedule, variable-rate exposure, refinancing completed March 3, 2015, and continued covenant compliance.
- Monitor Park Van Ness construction cost, financing, completion timing and lease-up, as well as redevelopment plans for Rockville Pike and North Glebe Road holdings.
- Assess lease expirations, occupancy and tenant concentration, including Giant Food’s 4.5% share and Safeway’s 2.5% share of 2014 revenue.
- Consider whether distributions are supported by recurring cash flows and review the terms and cost of preferred equity and related-party arrangements.