Saul Centers, Inc. Reports Third Quarter 2019 Earnings

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Nov 07, 2019, 16:11 ET

BETHESDA, Md., Nov. 7, 2019 /PRNewswire/ -- Saul Centers, Inc. (NYSE: BFS), an equity real estate investment trust ("REIT"), announced its operating results for the quarter ended September 30, 2019 ("2019 Quarter"). Total revenue for the 2019 Quarter increased to $57.1 million from $56.9 million for the quarter ended September 30, 2018 ("2018 Quarter"). Net income decreased to $15.3 million for the 2019 Quarter from $16.7 million for the 2018 Quarter. Net income available to common stockholders decreased to $9.0 million ($0.39 per diluted share) for the 2019 Quarter from $10.2 million ($0.45 per diluted share) for the 2018 Quarter. Net income available to common stockholders decreased primarily due to (a) the impact of the operations of 7316 Wisconsin Avenue as the Company has completed the termination of leases to prepare for redevelopment ($1.1 million), (b) higher property operating expenses, exclusive of the impact of 7316 Wisconsin Avenue ($0.5 million) and (c) higher general and administrative expenses ($0.6 million) partially offset by (d) lower interest expense, net and amortization of deferred debt costs ($0.8 million), exclusive of the impact of 7316 Wisconsin Avenue.

Same property revenue increased $0.2 million (0.3%) and same property operating income decreased $0.5 million (1.2%) for the 2019 Quarter compared to the 2018 Quarter. We define same property revenue as total revenue minus the revenue of properties not in operation for the entirety of the comparable reporting periods. We define same property operating income as net income plus (a) interest expense, net and amortization of deferred debt costs, (b) depreciation and amortization of deferred leasing costs, (c) general and administrative expenses and (d) change in fair value of derivatives minus (e) gains on sale of property and (f) the results of properties which were not in operation for the entirety of the comparable periods. Shopping Center same property operating income for the 2019 Quarter totaled $32.3 million, a $0.2 million decrease from the 2018 Quarter. Mixed-Use same property operating income totaled $10.2 million, a $0.3 million decrease from the 2018 Quarter.

As of September 30, 2019, 94.8% of the commercial portfolio was leased (not including the residential portfolio), compared to 95.0% at September 30, 2018. On a same property basis, 94.8% of the commercial portfolio was leased as of September 30, 2019, compared to 95.2% at September 30, 2018. As of September 30, 2019, the residential portfolio was 97.9% leased compared to 95.7% at September 30, 2018.

For the nine months ended September 30, 2019 ("2019 Period"), total revenue increased to $174.9 million from $169.1 million for the nine months ended September 30, 2018 ("2018 Period"). Net income increased to $49.2 million for the 2019 Period from $47.6 million for the 2018 Period. Net income available to common stockholders increased to $29.8 million ($1.30 per diluted share) for the 2019 Period compared to $26.6 million ($1.19 per diluted share) for the 2018 Period. The increase in net income available to common stockholders was primarily due to (a) higher lease termination fees, exclusive of the impact of 7316 Wisconsin Avenue ($2.5 million), (b) extinguishment in 2018 of issuance costs upon redemption of preferred shares ($2.3 million), (c) lower interest expense, net and amortization of deferred debt costs, exclusive of the impact of 7316 Wisconsin Avenue ($2.3 million), and (d) higher same property operating income, exclusive of lease termination fees ($0.5 million) partially offset by (e) the impact of the operations of 7316 Wisconsin Avenue as the Company has completed the termination of leases to prepare for redevelopment ($1.8 million), (f) higher general and administrative expenses ($1.5 million) and (g) higher income attributable to non-controlling interests ($1.0 million).

Same property revenue increased $4.8 million (2.8%) and same property operating income increased $3.0 million (2.3%) for the 2019 Period, compared to the 2018 Period. Shopping Center same property operating income increased 2.8% and Mixed-Use same property operating income increased 1.0%. Shopping Center same property operating income increased primarily due to (a) lease termination fees ($2.4 million) and (b) an increase in base rent ($0.8 million). Mixed-Use same property operating income increased primarily due to higher base rent ($0.5 million).

Funds from operations ("FFO") available to common stockholders and noncontrolling interests (after deducting preferred stock dividends) was $24.1 million ($0.78 per diluted share) in the 2019 Quarter compared to $25.0 million ($0.83 per diluted share) in the 2018 Quarter. FFO is a non-GAAP supplemental earnings measure which the Company considers meaningful in measuring its operating performance. A reconciliation of net income to FFO is attached to this press release. The decrease in FFO available to common stockholders and noncontrolling interests was primarily due to (a) higher general and administrative expenses ($0.6 million), (b) lower property operating income, exclusive of the impact of the operations of 7316 Wisconsin Avenue ($0.5 million), (c) the impact of the operations of 7316 Wisconsin Avenue as the Company has completed the termination of leases to prepare for redevelopment ($0.3 million), and (d) higher preferred stock dividends ($0.3 million), partially offset by (e) lower interest expense, net and amortization of deferred debt costs, exclusive of the impact of 7316 Wisconsin Avenue ($0.8 million).

FFO available to common stockholders and noncontrolling interests (after deducting preferred stock dividends and the impact of preferred stock redemptions) increased 8.5% to $75.2 million ($2.44 per diluted share) in the 2019 Period from $69.4 million ($2.31 per diluted share) in the 2018 Period. FFO available to common stockholders and noncontrolling interests increased primarily due to (a) higher lease termination fees in the core portfolio ($2.5 million), (b) extinguishment in 2018 of issuance costs upon redemption of preferred shares ($2.3 million), (c) higher base rent in the core portfolio ($1.3 million) and (d) lower preferred stock dividends ($0.2 million) partially offset by (e) the impact of the operations of 7316 Wisconsin Avenue as the Company has completed the termination of leases to prepare for redevelopment ($0.5 million).

Saul Centers, Inc. is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland, which currently operates and manages a real estate portfolio of 60 properties which includes (a) 49 community and neighborhood shopping centers and six mixed-use properties with approximately 9.2 million square feet of leasable area and (b) five land and development properties. Approximately 85% of the Saul Centers' property operating income is generated by properties in the metropolitan Washington, DC/Baltimore area.

Safe Harbor Statement

Certain matters discussed within this press release may be deemed to be forward-looking statements within the meaning of the federal securities laws. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. These factors include, but are not limited to, the risk factors described in our Annual Report on Form 10-K filed on February 26, 2019, and include the following: (i) general adverse economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on favorable terms to the Company, (iv) the Company's ability to raise capital by selling its assets, (v) changes in governmental laws and regulations and management's ability to estimate the impact of such changes, (vi) the level and volatility of interest rates and management's ability to estimate the impact thereof, (vii) the availability of suitable acquisition, disposition, development and redevelopment opportunities, and risks related to acquisitions not performing in accordance with our expectations, (viii) increases in operating costs, (ix) changes in the dividend policy for the Company's common and preferred stock and the Company's ability to pay dividends at current levels, (x) the reduction in the Company's income in the event of multiple lease terminations by tenants or a failure by multiple tenants to occupy their premises in a shopping center, (xi) impairment charges, and (xii) unanticipated changes in the Company's intention or ability to prepay certain debt prior to maturity. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make, including those in this press release. Except as may be required by law, we make no promise to update any of the forward-looking statements as a result of new information, future events or otherwise. You should carefully review the risks and risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019.

Saul Centers, Inc.
Consolidated Balance Sheets
(In thousands)

	September 30, 2019		December 31, 2018
	*(Unaudited)*
Assets
Real estate investments
Land	$	450,256	$	488,918
Buildings and equipment	1,284,315		1,273,275
Construction in progress	317,798		185,972
	2,052,369		1,948,165
Accumulated depreciation	(553,829)		(525,518)
	1,498,540		1,422,647
Cash and cash equivalents	52,269		14,578
Accounts receivable and accrued income, net	55,207		53,876
Deferred leasing costs, net	24,947		28,083
Prepaid expenses, net	9,357		5,175
Other assets	6,444		3,130
Total assets	$	1,646,764	$	1,527,489

Liabilities
Notes payable	$	846,525	$	880,271
Term loan facility payable	74,666		74,591
Revolving credit facility payable	—		45,329
Construction loan payable	93,537		21,655
Dividends and distributions payable	19,634		19,153
Accounts payable, accrued expenses and other liabilities	39,741		32,419
Deferred income	27,224		28,851
Total liabilities	1,101,327		1,102,269

Equity
Preferred stock, 1,000,000 shares authorized:
Series C Cumulative Redeemable, 42,000 shares issued and outstanding	105,000		105,000
Series D Cumulative Redeemable, 30,000 shares issued and outstanding	75,000		75,000
Series E Cumulative Redeemable, 44,000 and 0 shares issued and outstanding, respectively	110,000		—
Common stock, $0.01 par value, 40,000,000 shares authorized, 23,116,013 and 22,739,207 shares issued and outstanding, respectively	231		227
Additional paid-in capital	401,395		384,533
Distributions in excess of accumulated earnings	(215,334)		(208,593)
Accumulated other comprehensive loss	(343)		(255)
Total Saul Centers, Inc. equity	475,949		355,912
Noncontrolling interests	69,488		69,308
Total equity	545,437		425,220
Total liabilities and equity	$	1,646,764	$	1,527,489

Saul Centers, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	(unaudited)				(unaudited)
Rental revenue	$	55,487	$	55,733	$	168,242	$	165,693
Other	1,565		1,177		6,701		3,407
Total revenue	57,052		56,910		174,943		169,100
Expenses
Property operating expenses	7,525		6,910		22,641		20,766
Real estate taxes	7,114		6,937		21,081		20,559
Interest expense, net and amortization of deferred debt costs	10,325		10,974		32,185		33,568
Depreciation and amortization of deferred leasing costs	12,018		11,256		35,185		33,956
General and administrative	4,742		4,141		14,696		13,208
Total expenses	41,724		40,218		125,788		122,057
Change in fair value of derivatives	—		10		—		(2)
Gain on sale of property	—		—		—		509
Net Income	15,328		16,702		49,155		47,550
Noncontrolling interests
Income attributable to noncontrolling interests	(3,102)		(3,547)		(10,250)		(9,265)
Net income attributable to Saul Centers, Inc.	12,226		13,155		38,905		38,285
Extinguishment of issuance costs upon redemption of preferred shares	—		—		—		(2,328)
Preferred stock dividends	(3,210)		(2,953)		(9,116)		(9,309)
Net income available to common stockholders	$	9,016	$	10,202	$	29,789	$	26,648
Per share net income available to common stockholders
Basic and diluted	$	0.39	$	0.45	$	1.30	$	1.19
Dividends declared per common share outstanding	$	0.53	$	0.52	$	1.59	$	1.56

Reconciliation of net income to FFO available to common stockholders and noncontrolling interests (1)
	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share amounts)	2019		2018		2019		2018
	(unaudited)				(unaudited)
Net income	$	15,328	$	16,702	$	49,155	$	47,550
Subtract:
Gain on sale of property	—		—		—		(509)
Add:
Real estate depreciation and amortization	12,018		11,256		35,185		33,956
FFO	27,346		27,958		84,340		80,997
Subtract:
Extinguishment of issuance costs upon redemption of preferred shares	—		—		—		(2,328)
Preferred stock dividends	(3,210)		(2,953)		(9,116)		(9,309)
FFO available to common stockholders and noncontrolling interests	$	24,136	$	25,005	$	75,224	$	69,360
Weighted average shares:
Diluted weighted average common stock	23,121		22,501		22,993		22,336
Convertible limited partnership units	7,869		7,808		7,852		7,700
Average shares and units used to compute FFO per share	30,990		30,309		30,845		30,036
FFO per share available to common stockholders and noncontrolling interests	$	0.78	$	0.83	$	2.44	$	2.31

(1)

The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an
equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined
by NAREIT as net income, computed in accordance with GAAP, plus real estate depreciation and amortization, and excluding impairment charges on real
estate assets and gains or losses from real estate dispositions. FFO does not represent cash generated from operating activities in accordance with GAAP
and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company's Consolidated Statements of Cash Flows for the
applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income,
its most directly comparable GAAP measure, as an indicator of the Company's operating performance, or as an alternative to cash flows as a measure of
liquidity. Management considers FFO a meaningful supplemental measure of operating performance because it primarily excludes the assumption that the
value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what the Company believes occurs with its assets,
and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other
REITs.

Reconciliation of revenue to same property revenue (2)

(in thousands)	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(unaudited)				(unaudited)
Total revenue	$	57,052	$	56,910	$	174,943	$	169,100
Less: Acquisitions, dispositions and development properties	(72)		(82)		(1,155)		(82)
Total same property revenue	$	56,980	$	56,828	$	173,788	$	169,018

Shopping Centers	$	41,313	$	41,091	$	126,730	$	122,770
Mixed-Use properties	15,667		15,737		47,058		46,248
Total same property revenue	$	56,980	$	56,828	$	173,788	$	169,018

Total Shopping Center revenue	$	41,313	$	41,091	$	126,730	$	122,770
Less: Shopping Center acquisitions, dispositions and development properties	—		—		—		—
Total same Shopping Center revenue	$	41,313	$	41,091	$	126,730	$	122,770

Total Mixed-Use property revenue	$	15,739	$	15,819	$	48,213	$	46,330
Less: Mixed-Use acquisitions, dispositions and development properties	(72)		(82)		(1,155)		(82)
Total same Mixed-Use property revenue	$	15,667	$	15,737	$	47,058	$	46,248

(2)

Same property revenue is a non-GAAP financial measure of performance that improves the comparability of reporting periods by excluding the results of
properties that were not in operation for the entirety of the comparable reporting periods. Same property revenue adjusts property revenue by subtracting
the revenue of properties not in operation for the entirety of the comparable reporting periods. Same property revenue is a measure of the operating
performance of the Company's properties but does not measure the Company's performance as a whole. Same property revenue should not be considered
as an alternative to total revenue, its most directly comparable GAAP measure, as an indicator of the Company's operating performance. Management
considers same property revenue a meaningful supplemental measure of operating performance because it is not affected by the cost of the Company's
funding, the impact of depreciation and amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and
administrative expenses or other gains and losses that relate to ownership of the Company's properties. Management believes the exclusion of these items
from same property revenue is useful because the resulting measure captures the actual revenue generated and actual expenses incurred by operating the
Company's properties. Other REITs may use different methodologies for calculating same property revenue. Accordingly, the Company's same property
revenue may not be comparable to those of other REITs.

Reconciliation of net income to same property operating income (3)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
	(unaudited)				(unaudited)
Net income	$	15,328	$	16,702	$	49,155	$	47,550
Add: Interest expense, net and amortization of deferred debt costs	10,325		10,974		32,185		33,568
Add: Depreciation and amortization of deferred leasing costs	12,018		11,256		35,185		33,956
Add: General and administrative	4,742		4,141		14,696		13,208
Add: Change in fair value of derivatives	—		(10)		—		2
Less: Gain on sale of property	—		—		—		(509)
Property operating income	42,413		43,063		131,221		127,775
Add (Less): Acquisitions, dispositions and development properties	97		(52)		(519)		(52)
Total same property operating income	$	42,510	$	43,011	$	130,702	$	127,723

Shopping Centers	$	32,339	$	32,517	$	99,516	$	96,839
Mixed-Use properties	10,171		10,494		31,186		30,884
Total same property operating income	$	42,510	$	43,011	$	130,702	$	127,723

Shopping Center operating income	$	32,339	$	32,517	$	99,516	$	96,839
Less: Shopping Center acquisitions, dispositions and development properties	—		—		—		—
Total same Shopping Center operating income	$	32,339	$	32,517	$	99,516	$	96,839

Mixed-Use property operating income	$	10,074	$	10,546	$	31,705	$	30,936
Add (Less): Mixed-Use acquisitions, dispositions and development properties	97		(52)		(519)		(52)
Total same Mixed-Use property operating income	$	10,171	$	10,494	$	31,186	$	30,884

(3)

Same property operating income is a non-GAAP financial measure of performance that improves the comparability of reporting periods by excluding the
results of properties that were not in operation for the entirety of the comparable reporting periods. Same property operating income adjusts property
operating income by subtracting the results of properties that were not in operation for the entirety of the comparable periods. Same property operating
income is a measure of the operating performance of the Company's properties but does not measure the Company's performance as a whole. Same
property operating income should not be considered as an alternative to property operating income, its most directly comparable GAAP measure, as an
indicator of the Company's operating performance. Management considers same property operating income a meaningful supplemental measure of
operating performance because it is not affected by the cost of the Company's funding, the impact of depreciation and amortization expenses, gains or
losses from the acquisition and sale of operating real estate assets, general and administrative expenses or other gains and losses that relate to ownership of
the Company's properties. Management believes the exclusion of these items from property operating income is useful because the resulting measure
captures the actual revenue generated and actual expenses incurred by operating the Company's properties. Other REITs may use different methodologies
for calculating same property operating income. Accordingly, same property operating income may not be comparable to those of other REITs.

SOURCE Saul Centers, Inc.