Saul Centers, Inc. — Q3 2013 Form 10-Q
Business context and period. The REIT owns, operates, leases, acquires and redevelops shopping centers and mixed-use properties, primarily in the Washington, D.C./Baltimore region. This filing covers the quarter and nine months ended September 30, 2013; financial statements are unaudited. At quarter-end, the portfolio included 50 operating shopping centers, six mixed-use properties and three non-operating development properties.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $49.8 million, up 4.9% from $47.4 million | $147.8 million, up 4.2% from $141.8 million |
| Operating income | $12.1 million, versus $8.2 million | $23.2 million, versus $27.1 million |
| Net income | $11.5 million, versus $9.4 million | $22.7 million, versus $28.3 million |
| Net income attributable to common stockholders | $6.2 million; $0.30 per diluted share, versus $4.2 million; $0.21 | $5.0 million; $0.24 per diluted share, versus $12.5 million; $0.64 |
| Net cash from operating activities | $48.4 million for nine months, versus $59.0 million | |
| FFO available to common shareholders | $18.8 million; $0.69 per share and unit, versus $14.6 million; $0.55 | $46.0 million, up 1.1%; $1.69 per share and unit, versus $45.5 million; $1.71 |
Quarterly total-revenue growth was driven mainly by higher base rent. Same-property revenue and operating income rose 5.1% in the quarter and 4.2% and 4.4%, respectively, for the nine-month period. The quarter’s operating margin was approximately 24.2%, versus 17.2%; the nine-month margin was approximately 15.7%, versus 19.1%.
Nine-month operating income declined despite revenue growth, primarily because depreciation and leasing-cost amortization increased $9.6 million and predevelopment expenses rose $1.8 million. The depreciation increase included $8.0 million related to Van Ness Square after its estimated remaining useful life was shortened to four months effective January 1, 2013. Common-stockholder earnings also reflected a $5.2 million preferred-stock redemption charge. FFO is a non-GAAP supplemental measure and is not a substitute for GAAP income or cash flow.
Balance sheet, cash flow and capital
- At September 30, 2013, total assets were $1.199 billion, total liabilities $890.6 million and total stockholders’ equity $308.6 million. Cash was $11.7 million, compared with $12.1 million at year-end 2012.
- Debt was $825.4 million, including $795.1 million fixed-rate and $30.3 million variable-rate debt. The company reported no revolver borrowings and approximately $168.4 million available under its $175 million unsecured facility; $628,000 was committed for letters of credit.
- Operating cash flow of $48.4 million was below the prior-year $59.0 million, which management attributed largely to timing of rent collections and vendor payments. Investing used $20.1 million; financing used $28.8 million. Cash decreased $0.4 million during the period.
- Management stated that debt was below 50% of total asset value, based on its estimate of portfolio fair market value, and that it was in compliance with the revolver’s financial covenants. The filing does not provide a directly comparable debt-to-book-assets ratio as its stated leverage measure.
- Common dividends declared were $0.36 per share for the quarter and $1.08 per share year to date. As a REIT, the company is generally required to distribute at least 90% of REIT taxable income, subject to applicable requirements.
Material changes and notable items
- Portfolio leasing improved: same-property commercial leasing was 94.3% at quarter-end versus 92.7% a year earlier. Overall commercial portfolio leasing was 94.2%, versus 91.6%.
- The company issued $135.2 million net of costs in Series C preferred stock at a 6.875% dividend rate, redeemed all $79.3 million of Series B preferred stock and partially redeemed $60.0 million of Series A. Series A remaining shares carry an 8% dividend rate.
- Mortgage financing activity included new fixed-rate, 15-year loans for Hampshire Langley, Beacon Center and Seabreeze Plaza at 4.04%, 3.51% and 3.99%, respectively. Debt maturities including scheduled amortization total $52.4 million in 2016 and $52.6 million in 2018; the filing lists $630.2 million thereafter.
- In October 2013, demolition began at Van Ness Square, now planned as Park Van Ness: a 271-unit residential project with street-level retail. Estimated cost is approximately $93 million, excluding land and predevelopment costs. A $71.6 million, 4.88% construction-to-permanent loan closed in October; it is recourse during construction and may become non-recourse after completion, lease-up and satisfaction of coverage requirements. Completion was projected for late 2015.
- No real estate impairment losses were recorded in the first nine months of 2013 or 2012. Management reported no material litigation and no material update to the prior-year risk factors. Disclosure controls were judged effective; no material change in internal control was reported.
Outlook, risks and contingencies
Management’s strategy is to grow cash flow through leasing, tenant mix optimization, selective renovation and redevelopment, and acquisitions. It provided no quantified earnings or FFO guidance. Management expected available cash, operating cash flow and borrowing capacity to meet foreseeable liquidity needs; project spending and any further acquisitions or redevelopment may require revolver borrowings or external capital.
Key risks cited include tenant nonpayment or bankruptcy, vacancies and rental-rate pressure, dependence on anchor and significant tenants, regional economic and property-market conditions, interest rates and refinancing, debt covenant compliance, access to capital, development execution and costs, real estate taxes and expenses, and continued REIT qualification. The portfolio’s geographic concentration in the Washington, D.C./Baltimore area and relationships with the Saul Organization are additional considerations. A 1 percentage-point increase in rates on quarter-end variable-rate debt would increase annual interest expense by approximately $303,000, based on reported balances.
Important facts for investors to verify
- Whether Park Van Ness remains on budget and schedule, and whether construction, lease-up and debt-service conditions permit the planned loan conversion.
- Whether leasing gains translate into collected rent and sustained same-property cash flow, particularly given tenant and regional concentration risks.
- How the $5.2 million preferred redemption charge, preferred dividend burden and Series C issuance affect common-stockholder returns and FFO per share.
- Debt maturities, variable-rate exposure, covenant headroom and available revolver capacity as redevelopment funding needs increase.
- The assumptions behind the company’s estimated property values and stated debt-to-asset-value ratio; real estate carrying values are historical cost less depreciation, not current market values.