Business context and reporting period
Saul Centers, Inc. is a REIT focused on owning, operating, leasing, acquiring and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. This unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. At quarter-end, the portfolio included 50 shopping centers, seven mixed-use properties and two non-operating development properties. Dollar amounts below are in millions unless noted.
Financial performance, cash flow and liquidity
| Metric | Q1 2013 | Q1 2012 or comparator |
|---|---|---|
| Revenue | $49.2 | $47.0; up 4.7% |
| Operating income | $3.4 | $9.3 |
| Net income | $3.4 | $9.3 |
| Net income (loss) attributable to common stockholders | $(4.6) | $4.1 |
| Diluted EPS attributable to common stockholders | $(0.23) | $0.21 |
| Operating cash flow | $15.7 | $19.7 |
| FFO available to common shareholders | $10.2 | $15.3 |
Revenue growth reflected higher base rent, including contributions from recently developed and acquired properties and broader portfolio rent increases. Same-property revenue rose 3.2% to $48.4 million and same-property operating income rose 4.5% to $36.5 million. Total operating expenses increased 21.6% to $45.8 million, largely because depreciation and amortization increased $6.6 million and $2.3 million of predevelopment expense was recorded. The filing attributes about $6.0 million of additional depreciation to shortening Van Ness Square’s estimated remaining useful life to four months. Interest expense and debt-cost amortization declined 8.0% to $11.7 million; the average cost of debt fell to 5.57% from 5.98%.
The common-stockholder loss includes a $5.2 million preferred-stock redemption charge and $4.4 million of preferred dividends. Management reported that FFO available to common shareholders, excluding the redemption charge and $2.3 million of Van Ness predevelopment costs, would have been $17.7 million, or $0.65 per share. FFO is a non-GAAP measure and is not equivalent to cash flow or GAAP earnings.
Cash and cash equivalents were $8.5 million at March 31, 2013, down from $12.1 million at December 31, 2012. Total assets were $1,194.3 million and total liabilities were $894.9 million. Outstanding debt was approximately $828.0 million: $772.4 million fixed-rate and $55.6 million variable-rate. The company had $25.0 million drawn on its $175.0 million revolving facility and approximately $149.6 million available, with a further $0.4 million committed for letters of credit. Management said available capital resources were sufficient for foreseeable liquidity needs and reported compliance with credit-facility covenants. Scheduled debt maturities and amortization total $21.8 million for April–December 2013, $33.9 million in 2014 and $75.6 million in 2016.
Material changes and notable items
- Leasing was 91.5% across the commercial portfolio, compared with 90.9% a year earlier. Same-property leasing was 91.6%, unchanged; excluding Van Ness Square, it was 92.9% versus 92.2%.
- New and renewed commercial leases covered 341,530 square feet in Q1 2013. Average base rent was $16.69 per square foot, versus $17.17 for expiring leases; in Q1 2012, the respective rates were $18.57 and $17.89. The filing cautions that executed leases may not become occupied or produce contractual rent.
- In February, the company issued Series C preferred depositary shares, receiving net proceeds of approximately $135.2 million, at a 6.875% annual dividend rate. In March, it redeemed 60% of Series A and all Series B preferred stock. The remaining Series A rate is 8%; Series C is redeemable at the company’s option beginning in February 2018.
- Two loans were refinanced with variable-rate three-year loans: $15.6 million secured by Metro Pike Center and $15.0 million secured by Northrock. A new $18.0 million, 15-year fixed-rate mortgage on Hampshire Langley bears interest at 4.04%. On April 10, 2013, the company repaid the $6.9 million balance of the only fixed-rate loan scheduled to mature in 2013.
- Van Ness Square was expected to become vacant around April 30, 2013, following lease terminations. The company intends a primarily residential redevelopment with street-level retail, subject to governmental approvals and permits.
Outlook, commentary and risks
Management’s strategy is to grow cash flow and property value through leasing, tenant mix improvements, selective redevelopment and acquisitions. The company anticipated continuing work on the Van Ness Square and adjacent 4469 Connecticut Avenue redevelopment and said it may pursue other renovations, expansions and acquisitions. No quantified earnings or revenue guidance was provided; timing and plans remain subject to approvals, market conditions and financing availability.
Management cited elevated vacancies relative to pre-recession levels and retailer caution. Key disclosed risks include tenant nonpayment or bankruptcy, reliance on anchor and significant tenants, local economic and real-estate conditions, interest rates and refinancing, debt covenants, development execution, access to capital, related-party relationships and maintaining REIT qualification. Giant Food and Safeway accounted for 5.1% and 2.8% of Q1 revenue, respectively. The portfolio’s geographic concentration also exposes the company to conditions in the Washington, D.C./Baltimore region.
The company reported no material litigation, no material updates to the risk factors in its 2012 Form 10-K, and no material off-balance-sheet arrangements. Management stated that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Van Ness Square redevelopment receives approvals on schedule, and the total remaining termination, demolition and predevelopment costs.
- Whether leasing and rent trends improve, particularly at Van Ness Square and in mixed-use properties; assess actual occupancy and rent collections against executed-lease data.
- Debt maturities, variable-rate exposure, facility availability and ongoing covenant compliance, including the effect of any future borrowing.
- The effect of preferred-stock redemptions and the new Series C dividend on cash available to common shareholders; reconcile reported FFO with recurring performance.
- Tenant concentration and regional exposure, including the financial condition of major anchors and the company’s ability to maintain occupancy and rental rates.