Saul Centers, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Saul Centers is a REIT focused on owning, operating, leasing and developing shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore area. Its portfolio included 50 shopping centers, seven mixed-use properties and four non-operating development properties.
Financial results and key metrics
- Revenue: $63.0 million, up 1.5% from $62.1 million. Rental revenue was $61.8 million. Base rent increased 3.3% to $51.4 million; lower expense recoveries partially offset the increase.
- Profit: Net income was $17.7 million, versus $17.5 million. Net income attributable to Saul Centers was $13.5 million; net income available to common stockholders was $10.7 million, or $0.45 per diluted share, versus $10.6 million, or $0.44.
- Property performance: Same-property revenue rose to $63.0 million from $62.1 million. Same-property operating income, a non-GAAP measure, increased 3.5% to $46.8 million. FFO available to common stockholders and noncontrolling interests was $26.9 million, down 0.5%; diluted FFO per share and unit was $0.79 versus $0.80.
- Expenses: Total expenses increased 1.6% to $45.4 million. Interest expense, net and debt-cost amortization rose 11.5% to $11.8 million, reflecting higher rates and average debt balances, partly offset by increased capitalized interest. Property operating expense fell 7.9%, mainly due to lower snow-removal and repair costs; general and administrative expense rose 10.5%.
- Cash flow: Operating cash flow was $36.1 million, down from $40.0 million. Investing used $43.2 million, versus $16.8 million, primarily due to increased development spending. Financing provided $5.6 million, compared with $25.4 million used in the prior-year quarter. Cash declined $1.5 million to $11.8 million.
- Debt and liquidity: Debt principal totaled approximately $1.267 billion at quarter-end, versus $1.24 billion at year-end 2022. About $1.07 billion was fixed-rate and $194.0 million was unhedged variable-rate debt; $100 million of variable-rate debt was effectively fixed through swaps. The company reported $188.6 million available under its credit facility and compliance with its financial covenants. Management stated its debt-to-total-asset-value ratio was below its 50% policy target.
- Balance sheet: Total assets were $1.868 billion and total equity was $515.8 million at March 31, 2023. Carrying values of notes payable and revolving and term facilities were approximately $1.251 billion combined.
Material changes and operating developments
- Commercial portfolio occupancy was 93.9%, up from 92.5% a year earlier; residential occupancy was 98.2%, up from 96.8%. Approximately 258,000 square feet of leased commercial space was not yet occupied; those leases are expected to add about $6.3 million in annualized base rent upon occupancy and after contractual concessions.
- Development and redevelopment investment increased: cash additions to development projects were $38.1 million, versus $14.2 million. Construction in progress rose to $365.6 million from $319.7 million.
- Twinbrook Quarter Phase I is expected to cost approximately $331.5 million, with initial delivery anticipated in late 2024. Hampden House is expected to cost approximately $246.4 million, with completion expected during 2025. These are management estimates and timelines, not guarantees.
- In March, the company closed a $15.3 million, 10-year, non-recourse mortgage at a fixed 6.07% rate, using proceeds to repay an existing mortgage and reduce credit-facility borrowings.
Outlook, risks and other notable items
- The filing provides no specific earnings or revenue guidance. Management expects to fund ordinary short-term needs with operating cash flow, available cash and the credit facility; future development, acquisition and redevelopment funding may also use construction or permanent financing and external capital.
- Management’s strategy emphasizes transit-oriented residential mixed-use development, grocery-anchored shopping centers, pad-site additions and selective redevelopment. The development pipeline includes entitled sites with potential for up to 3,700 apartment units and 975,000 square feet of retail and office space.
- Interest-rate exposure remains material: management estimated that a one-percentage-point increase in rates on quarter-end unhedged variable debt would raise annual interest expense by approximately $1.9 million. Inflation could also raise unreimbursed costs, affect tenant demand and increase development costs.
- Tenant collections for contractual base rent and expense and tax recoveries due in Q1 were approximately 99% as of April 30, 2023. Of $9.366 million in total deferred rent, $8.234 million had been collected, $349,000 written off and $41,000 remained unpaid as of the dates specified in the filing. Management cautioned that future collections and losses remain uncertain.
- Key risks include tenant credit and anchor-tenant reliance, concentration in the Washington, D.C./Baltimore region, interest rates and refinancing, development execution and cost, access to capital, inflation and REIT qualification. Giant Food, present at 11 shopping centers, accounted for 4.9% of Q1 revenue. The company reported no material litigation and no impairment charges; it said future impairment charges cannot be ruled out.
- The filing reports related-party relationships with the Saul Organization, including shared services, headquarters sublease and insurance commissions. Management states that shared-service terms are reviewed by the Audit Committee.
Important facts for investors to verify
- Track Twinbrook Quarter and Hampden House budgets, financing, construction progress and delivery dates.
- Monitor variable-rate exposure, credit-facility availability, covenant headroom and upcoming debt maturities, particularly in 2025–2027.
- Check tenant collections, deferred-rent recoveries, occupancy and the conversion of leased-but-unoccupied space into rent.
- Assess development spending and funding needs against operating cash flow, distributions and access to debt or equity capital.
- Review regional and tenant concentration, as well as related-party service and transaction disclosures.