SAUL CENTERS, INC. This section should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes in "Item 1. Financial Statements" of this report and the more detailed information contained in the Company's Form 10-K for the year endedDecember 31, 2021 . Historical results and percentage relationships set forth in Item 1 and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section have the meanings given to them in Item 1 of this Form 10-Q. Forward-Looking Statements Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "plans," "intends," "estimates," "anticipates," "expects," "believes" or similar expressions in this Form 10-Q. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements: •challenging domestic and global credit markets and their effect on discretionary spending; •the ability of our tenants to pay rent; •our reliance on shopping center "anchor" tenants and other significant tenants; •our substantial relationships with members of theSaul Organization ; •risks of financing, such as increases in interest rates, restrictions imposed by our debt, our ability to meet existing financial covenants and our ability to consummate planned and additional financings on acceptable terms; •our development activities; •our access to additional capital; •our ability to successfully complete additional acquisitions, developments or redevelopments, or if they are completed, whether such acquisitions, developments or redevelopments perform as expected; •risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks; •risks related to our status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to our status as a REIT, the effect of future changes to REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT; and •an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period. Additional information related to these risks and uncertainties are included in "Risk Factors" (Part I, Item 1A of this Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 ), "Quantitative and Qualitative Disclosures about Market Risk" (Part I, Item 3 of this Form 10-Q and Part II, Item 7A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 ), and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" (Part I, Item 2 of this Form 10-Q). -23- -------------------------------------------------------------------------------- Table of Content s Impact of COVID-19 If the effects of COVID-19 result in continued deterioration of economic and market conditions, including supply chain issues, or if the Company's expected holding period for assets changes, subsequent tests for impairment could result in impairment charges in the future. The Company can provide no assurance that material impairment charges with respect to the Company's investment properties will not occur during the remainder of 2022 or future periods. As ofSeptember 30, 2022 , we have not identified any impairment triggering events, including the impact of COVID-19 and corresponding tenant requests for rent relief. Therefore, under applicable GAAP guidance, no impairment charges have been recorded. However, we have yet to see the long-term effects of COVID-19 and the extent to which it may impact our tenants in the future. Indications of a tenant's inability to continue as a going concern, changes in our view or strategy relative to a tenant's business or industry as a result of COVID-19, or changes in our long-term hold strategies, could be indicative of an impairment triggering event. Accordingly, the Company will continue to monitor circumstances and events in future periods to determine whether impairment charges are warranted.
As of
Although the Company is and will continue to be actively engaged in collection efforts related to uncollected rent, and the Company will continue to work with certain tenants who have requested rent deferrals, the Company can provide no assurance that such efforts or our efforts in future periods will be successful. Deferral agreements executed with certain tenants as a result of business disruption that occurred at the onset of the COVID-19 pandemic generally deferred 30 to 90 days of rent, operating expense and real estate tax recovery payments until a later time in the lease term with repayment typically occurring over a 12-month period generally commencing in 2021. We continued to accrue rental revenue during the deferral period. The following is a summary of the Company's executed rent deferral agreements and repayments as ofOctober 31, 2022 , with the exception of amounts due, which are as ofSeptember 30, 2022 . Rent Deferral Agreements and Repayments (In thousands) Collection Original Percentage (based Original Rent Due Rent Repayment Amount Amount Amount on payments By Quarter Amount Repayment Year Amount Due Written Off Amount Unpaid Collected currently due) 2020 First Quarter$ 67 2020$ 347 $ 347 $ 44 $ -$ 303 87 % 2020 Second Quarter 6,329 2021 5,734 5,734 206 11 5,516 96 % 2020 Third Quarter 1,518 2022 2,034 1,894 60 34 1,793 95 % 2020 Fourth Quarter 437 2023 757 4 2021 First Quarter 278 2024 309 4 2021 Second Quarter 309 2025 66 2021 Third Quarter 324 2026 27 2021 Fourth Quarter 81 Thereafter 92 2022 First Quarter 23 Total$ 9,366 $ 7,975 $ 318 $ 45$ 7,612 95 % 2022 Second Quarter - 2022 Third Quarter - October 2022 - Total$ 9,366 -24-
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The extent of the effects of COVID-19 on the Company's business, results of operations, cash flows, and growth prospects remain uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See Item 1A. Risk Factors. However, we believe the actions we have taken and are continuing to take have helped minimize interruptions to operations and will put the Company in the best position as the economic recovery continues. Management and the Board of Directors will continue to actively monitor the effects of the pandemic, including governmental directives in the jurisdictions in which we operate and the recommendations of public health authorities, and will, as needed, take further measures to adapt the Company's business in the best interests of our stockholders and personnel. The extent to which COVID-19 continues to impact our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the actions taken to contain the outbreak or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others. We anticipate that some tenants eventually will not be able to pay amounts due and we will incur losses against our rent receivables. The extent and timing of the recognition of such losses will depend on future developments, which are highly uncertain and cannot be predicted. Management considers reserves established as ofSeptember 30, 2022 , against such potential losses to be reasonable and adequate. Rent collections during the third quarter and rent relief requests to-date may not be indicative of collections or requests in any future period. General
The following discussion is based primarily on the consolidated financial
statements of the Company as of and for the three and nine months ended
Overview
The Company's primary strategy is to continue to focus on diversification of its assets through development of transit-oriented, residential mixed-use projects in theWashington, D.C. metropolitan area. The Company's operating strategy also includes improvement of the operating performance of its assets, internal growth of its Shopping Centers through the addition of pad sites, and supplementing its development pipeline with selective redevelopment and renovations of its core Shopping Centers. The Company has a pipeline of entitled sites in its portfolio, some of which are currently shopping center operating properties, for development of up to 3,700 apartment units and 975,000 square feet of retail and office space. All such sites are located adjacent toWashington Metropolitan Area Transit Authority ("WMATA") red line Metro stations inMontgomery County, Maryland . The Company intends to selectively add free-standing pad site buildings within its Shopping Center portfolio and replace underperforming tenants with tenants that generate strong traffic, including anchor stores such as supermarkets and drug stores. The Company has executed leases or leases are under negotiation for ten more pad sites. In recent years, there has been a limited amount of quality properties for sale and pricing of those properties has escalated. Accordingly, management believes acquisition opportunities for investment in existing and new shopping center and mixed-use properties in the near future is uncertain. Nevertheless, because of the Company's conservative capital structure, including its cash and capacity under its revolving credit facility, management believes that the Company is positioned to take advantage of additional investment opportunities as attractive properties are identified and market conditions improve. (See "Item 1. Business - Capital Policies".) It is management's view that several of the sub-markets in which the Company operates have, or are expected to have in the future, attractive supply/demand characteristics. The Company will continue to evaluate acquisition, development and redevelopment as integral parts of its overall business plan. Prior to the COVID-19 pandemic, economic conditions within the localWashington, DC metropolitan area were relatively stable. Issues facing the Federal government relating to taxation, spending and interest rate policy will likely continue to impact the office, retail and residential real estate markets over the coming years. Because the majority of the Company's property operating income is produced by our Shopping Centers, we continually monitor the implications of government policy changes, as well as shifts in consumer demand between on-line and in-store shopping, on future shopping center construction and retailer store expansion plans. Based on our observations, we continue to adapt our marketing and merchandising strategies in ways to maximize our future performance. The Company's commercial leasing percentage, on a same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, increased to 93.0% atSeptember 30, 2022 , from 92.5% atSeptember 30, 2021 . The Company maintains a ratio of total debt to total asset value of under 50%, which allows the Company to obtain additional secured borrowings if necessary. As ofSeptember 30, 2022 , including the$100.0 million hedged variable-rate debt, total fixed-rate debt with staggered maturities from 2023 to 2041 represented approximately 89.4% of the Company's notes payable, thus mitigating refinancing risk. The Company's unhedged variable-rate debt consists of$128.0 million outstanding -25-
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under the Credit Facility. As of
Although it is management's present intention to concentrate future acquisition and development activities on transit-centric, residential mixed-use properties and grocery-anchored shopping centers in theWashington, D.C. /Baltimore metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. The Company plans to continue to diversify in terms of property types, locations, size and market, and it does not set any limit on the amount or percentage of assets that may be invested in any one property or any one geographic area. The following table sets forth average annualized base rent per square foot and average annualized effective rent per square foot for the Company's Commercial properties (all properties except for the apartments within The Waycroft, Clarendon Center andPark Van Ness properties). For purposes of this table, annualized effective rent is annualized base rent minus amortized tenant improvements and amortized leasing commissions. Commercial Rents per Square Foot Nine Months Ended September 30, 2022 2021 Base rent $ 20.52$ 20.59 Effective rent $ 18.91$ 18.87 Recent Developments The Company is developing Twinbrook Quarter Phase I ("Phase I") located inRockville, Maryland . Phase I includes an 80,000 square foot Wegmans, approximately 25,000 square feet of small shop space, 450 apartments and a 230,000 square foot office building. The office tower portion of Phase I will not be constructed at this time. In connection with the development of the residential and retail portions of Phase I, we must also invest in infrastructure and other items that will support both Phase I and other portions of the development ofTwinbrook Quarter . The total cost of the project is expected to be approximately$331.5 million , of which$271.4 million is related to the development of the residential and retail portions of Phase I and$60.1 million is related to infrastructure and other items. A portion of the project will be financed by a$145.0 million construction-to-permanent loan. Below grade concrete and framing are complete. Concrete is being poured at the fourth level above ground. Initial delivery of Phase I is anticipated in late 2024. The development potential of all phases of the entire 18.4 acreTwinbrook Quarter site totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space. The Company is developingHampden House , a project located in downtownBethesda, Maryland that will include up to 366 apartment units and 10,100 square feet of retail space. The total cost of the project is expected to be approximately$246.4 million , a portion of which will be financed by a$133.0 million construction-to-permanent loan. Demolition has been completed and excavation is in process. Construction is expected to be completed during 2025.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"), which requires management to make certain estimates and assumptions that affect the reporting of financial position and results of operations. If judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of the financial statements. The Company has identified the following policies that, due to estimates and assumptions inherent in these policies, involve a relatively high degree of judgment and complexity.
Real Estate Investments
Real estate investment properties are stated at historic cost less depreciation.
Although the Company intends to own its real estate investment properties over a
long term, from time to time it will evaluate its market position, market
conditions, and other factors and may elect to sell properties that do not
conform to the Company's investment profile. Management believes that the
Company's real estate assets have generally appreciated in value since their
acquisition or development and, accordingly, the aggregate current value exceeds
their aggregate net book value and also exceeds the value of the Company's
liabilities as reported in the financial statements. Because the financial
statements are prepared in conformity with GAAP, they do not report the current
value of the Company's real estate investment properties.
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If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying amount of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors when identifying impairment indicators including recurring operating losses, significant decreases in occupancy, and significant adverse changes in market conditions, legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying amount is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management's projections, the valuation could be negatively or positively affected.
Accounts Receivable, Accrued Income, and Allowance for Doubtful Accounts
Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of their respective leases. Individual leases are assessed for collectability and, upon the determination that the collection of rents is not probable, accrued rent and accounts receivable are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is determined to be probable. We also assess whether operating lease receivables, at the portfolio level, are appropriately valued based upon an analysis of balances outstanding, effects of tenant bankruptcies, historical levels of bad debt and current economic trends. Additionally, because of the uncertainties related to the impact of the COVID-19 pandemic, our assessment also takes into consideration the types of business conducted by tenants and current discussions with the tenants, as well as recent rent collection experience. Evaluating and estimating uncollectable lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to management at the time of evaluation. Actual results could differ from these estimates.
Legal Contingencies
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business, which are generally covered by insurance. While the
resolution of these matters cannot be predicted with certainty, the Company
believes the final outcome of current matters will not have a material adverse
effect on its financial position or the results of operations. Upon
determination that a loss is probable to occur, the estimated amount of the loss
is recorded in the financial statements. Both the amount of the loss and the
point at which its occurrence is considered probable can be difficult to
determine.
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Results of Operations
Three months ended
Net income for the 2022 Quarter decreased to$15.5 million from$16.9 million for the 2021 Quarter. Significant changes in revenue and expenses are discussed below. Revenue Three Months Ended September 30, 2021 to 2022 Change (Dollars in thousands) 2022 2021 Amount Percent Base rent$ 50,233 $ 49,829 $ 404 0.8 % Expense recoveries 8,930 8,488 442 5.2 % Percentage rent 265 208 57 27.4 % Other property revenue 454 384 70 18.2 % Credit recoveries on operating lease receivables, net 69 149 (80) (53.7) % Rental revenue 59,951 59,058 893 1.5 % Other revenue 1,136 1,198 (62) (5.2) % Total revenue$ 61,087 $ 60,256 $ 831 1.4 % Base rent includes$(0.4) million and$0.3 million for the 2022 Quarter and 2021 Quarter, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes$0.3 million for the 2022 Quarter and 2021 Quarter to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.
Total revenue increased 1.4% in the 2022 Quarter compared to the 2021 Quarter, as described below.
Base Rent. The
Expense recoveries. The
Expenses
Three Months Ended September
30, 2021 to 2022 Change
(Dollars in thousands) 2022 2021 Amount Percent
Property operating expenses $ 8,995 $ 8,210 $ 785 9.6 %
Real estate taxes 7,078 7,154 (76) (1.1) %Interest expense, net and amortization of deferred debt costs
11,103 10,914 189 1.7 %
Depreciation and amortization of lease costs 12,195 12,467 (272) (2.2) %
General and administrative 5,555 4,626 929 20.1 %
Loss on early extinguishment of debt 648 - 648 NM
Total expenses $ 45,574 $ 43,371 $ 2,203 5.1 %
NM - Not Meaningful
Total expenses increased 5.1% in the 2022 Quarter compared to the 2021 Quarter, as described below.
Property operating expenses. The$0.8 million increase in property operating expenses in the 2022 Quarter compared to the 2021 Quarter is primarily attributable to (a) higher repairs and maintenance expenses across the portfolio of$0.4 million , (b) increased payroll costs of$0.1 million and (c) increased parking expenses of$0.1 million . General and Administrative. General and administrative expenses increased 20.1% in the 2022 Quarter primarily due to (a) fees paid to third-parties related to the early refinance of loans at Beacon Center and Seven Corners Center totaling$0.5 million and (b) increased salaries and benefits of$0.3 million . -28-
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Loss on early extinguishment of debt. Loss on early extinguishment of debt
increased by
Nine months ended
Net income for the 2022 Period increased to$50.0 million from$45.8 million for the 2021 Period. Significant changes in revenue and expenses are discussed below. Revenue Nine Months Ended September 30, 2021 to 2022 Change (Dollars in thousands) 2022 2021 Amount Percent Base rent$ 150,070 $ 147,877 $ 2,193 1.5 % Expense recoveries 26,723 26,235 488 1.9 % Percentage rent 1,489 1,294 195 15.1 % Other property revenue 1,463 1,030 433 42.0 % Credit recoveries (losses) on operating lease receivables, net 20 (802) 822 NM Rental revenue 179,765 175,634 4,131 2.4 % Other revenue 3,759 3,351 408 12.2 % Total revenue$ 183,524 $ 178,985 $ 4,539 2.5 % NM - Not Meaningful Base rent includes$(0.5) million and$1.8 million for the 2022 Period and the 2021 Period, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes$1.0 million for the 2022 Period and 2021 Period to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.
Total revenue increased 2.5% in the 2022 Period compared to the 2021 Period, as described below.
Base Rent. The
Expense recoveries. The$0.5 million increase in the 2022 Period compared to the 2021 Period is primarily attributable to an increase in recoverable property operating expenses. Other property revenue. The$0.4 million increase in the 2022 Period compared to the 2021 Period is primarily attributable to (a) higher late fee and interest charges of$0.2 million and (b) higher residential move-in fees of$0.1 million .
Credit Recoveries (Losses) on Operating Lease Receivables, net. Credit
recoveries (losses) on operating lease receivables, net for the 2022 Period
decreased
Other Revenue. Other revenue increased$0.4 million primarily due to (a) higher parking revenue of$0.6 million , partially offset by (b) lower lease termination fees of$0.2 million . -29-
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Expenses
Nine Months Ended
September 30, 2021 to 2022 Change
(Dollars in thousands) 2022 2021 Amount Percent
Property operating expenses $ 26,174 $ 24,420 $ 1,754 7.2 %
Real estate taxes 21,652 22,121 (469) (2.1) %
Interest expense, net and amortization of deferred debt costs
32,162 34,559 (2,397) (6.9) %
Depreciation and amortization of deferred leasing
costs 36,899 37,852 (953) (2.5) %
General and administrative 15,988 14,234 1,754 12.3 %
Loss on early extinguishment of debt 648 - 648 NM
Total expenses $ 133,523 $ 133,186 $ 337 0.3 %
NM - Not Meaningful
Total expenses increased 0.3% in the 2022 Period compared to the 2021 Period, as described below.
Property Operating Expenses. Property operating expenses increased 7.2% in the 2022 Period primarily due to (a) increased repair and maintenance costs throughout the portfolio of$0.8 million , (b) increased utility costs of$0.2 million , (c) increased payroll costs of$0.2 million , (d) increased parking costs of$0.2 million and (e) increased real estate tax appeal fees of$0.2 million . Interest Expense, net and Amortization of Deferred Debt Costs. Interest expense, net and amortization of deferred debt costs decreased 6.9% in the 2022 Period primarily due to (a) higher capitalized interest of$2.9 million , which was largely driven by the Twinbrook development project and (b) lower interest incurred as a result of lower weighted average interest rates of$0.2 million , partially offset by (c) higher interest incurred as a result of higher average debt outstanding of$0.7 million . General and Administrative. General and administrative expenses increased 12.3% in the 2022 Period primarily due to (a) increased salaries and benefits of$0.8 million , (b) fees paid to third-parties related to the early refinance of loans at Beacon Center and Seven Corners Center totaling$0.5 million , and (c) increased recruiting costs of$0.3 million .
Loss on early extinguishment of debt. Loss on early extinguishment of debt
increased by
Same property revenue and same property operating income
Same property revenue and same property operating income are non-GAAP financial measures of performance and improve the comparability of these measures by excluding the results of properties which were not in operation for the entirety of the comparable reporting periods. We define same property revenue as total revenue minus the revenue of properties not in operation for the entirety of the comparable reporting periods, and 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 lease costs, (c) general and administrative expenses, (d) change in fair value of derivatives, and (e) loss on the early extinguishment of debt minus (f) gains on property dispositions and (g) the operating income of properties that were not in operation for the entirety of the comparable periods.
Other REITs may use different methodologies for calculating same property revenue and same property operating income. Accordingly, our same property revenue and same property operating income may not be comparable to those of other REITs.
Same property revenue and same property operating income are used by management
to evaluate and compare the operating performance of our properties, and to
determine trends in earnings, because these measures are not affected by the
cost of our 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 our properties. We believe the exclusion of these items from property revenue
and property operating income is useful because the resulting measures capture
the actual revenue generated and actual expenses incurred by operating our
properties.
Same property revenue and same property operating income are measures of the
operating performance of our properties but do not measure our performance as a
whole. Such measures are therefore not substitutes for total revenue, net income
or operating income as computed in accordance with GAAP.
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The tables below provide reconciliations of total property revenue and property
operating income under GAAP to same property revenue and operating income for
the indicated periods. No properties were excluded for same property results for
the 2022 Quarter or the 2022 Period.
Same property revenue
(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Total revenue $ 61,087 $ 60,256 $ 183,524 $ 178,985
Less: Acquisitions, dispositions and
development properties - - - -
Total same property revenue $ 61,087 $ 60,256 $ 183,524 $ 178,985
Shopping Centers $ 42,478 $ 42,485 $ 128,615 $ 126,935
Mixed-Use properties 18,609 17,771 54,909 52,050
Total same property revenue $ 61,087 $ 60,256 $ 183,524 $ 178,985
Total Shopping Center revenue $ 42,478 $ 42,485 $ 128,615 $ 126,935
Less: Shopping Center acquisitions,
dispositions and development properties - - - -
Total same Shopping Center revenue $ 42,478 $
42,485
Total Mixed-Use property revenue$ 18,609 $ 17,771 $ 54,909 $ 52,050 Less: Mixed-Use acquisitions, dispositions and development properties - - - - Total same Mixed-Use revenue$ 18,609 $ 17,771 $ 54,909 $ 52,050 The$0.8 million increase in same property revenue for the 2022 Quarter compared to the 2021 Quarter was primarily due to (a) higher base rent of$0.4 million and (b) higher expense recoveries of$0.4 million . The$4.5 million increase in same property revenue for the 2022 Period compared to the 2021 Period was primarily due to (a) higher base rent of$2.3 million , (b) lower credit losses on operating lease receivables, net of$0.7 million , (c) higher parking income of$0.6 million , (d) higher expense recoveries of$0.5 million and (d) higher other property revenue of$0.4 million . -31- -------------------------------------------------------------------------------- Table of Content s Same property operating income Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Net income$ 15,513 $ 16,885 50,001$ 45,799 Add: Interest expense, net and amortization of deferred debt costs 11,103 10,914 32,162 34,559 Add: Depreciation and amortization of lease costs 12,195 12,467 36,899 37,852 Add: General and administrative 5,555 4,626 15,988 14,234 Add: Loss on early extinguishment of debt 648 - 648 - Property operating income 45,014 44,892 135,698 132,444 Less: Acquisitions, dispositions and development properties - - - - Total same property operating income$ 45,014 $ 44,892 $ 135,698 $ 132,444 Shopping Centers$ 33,652 $ 33,845 $ 101,513 $ 99,848 Mixed-Use properties 11,362 11,047 34,185 32,596 Total same property operating income$ 45,014 $ 44,892 $ 135,698 $ 132,444
Shopping Center operating income
101,513 $ 99,848
Less: Shopping Center
acquisitions, dispositions and
development properties - - - -
Total same Shopping Center
operating income $ 33,652 $ 33,845 $
101,513
Mixed-Use property operating income$ 11,362 $ 11,047 $ 34,185 $ 32,596 Less: Mixed-Use acquisitions, dispositions and development properties - - - - Total same Mixed-Use property operating income$ 11,362 $ 11,047 $
34,185
Same property operating income increased$0.1 million , or 0.3%, for the 2022 Quarter compared to the 2021 Quarter. Shopping Center same property operating income for the 2022 Quarter totaled$33.7 million , a$0.2 million decrease from the 2021 Quarter. Mixed-Use same property operating income totaled$11.4 million , a$0.3 million increase from the 2021 Quarter. Same property operating income increased$3.3 million , or 2.5%, for the 2022 Period, compared to the 2021 Period. Shopping Center same property operating income increased$1.7 million , or 1.7%, and Mixed-Use same property operating income increased$1.6 million , or 4.9%. Shopping Center same property operating income increased primarily due to (a) higher base rent of$0.8 million , (b) lower credit losses on operating lease receivables and corresponding reserves, net of$0.6 million and (c) higher percentage rent of$0.2 million . Mixed-Use same property operating income increased primarily due to (a) higher base rent of$1.5 million , (b) higher parking income, net of expenses of$0.4 million , (c) higher other property revenue of$0.2 million , (d) lower credit losses on operating lease receivables and corresponding reserves, net of$0.1 million , partially offset by (e) lower recovery income, net of expenses of$0.8 million .
Liquidity and Capital Resources
Cash and cash equivalents totaled
Nine Months Ended September 30,
(In thousands) 2022 2021
Net cash provided by operating activities $ 92,009 $ 89,019
Net cash used in investing activities (84,509) (38,788)
Net cash used in financing activities (11,803)
(65,170)
Net decrease in cash and cash equivalents$ (4,303)
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Operating Activities
Net cash provided by operating activities represents cash received primarily from rental revenue, plus other revenue, less property operating expenses, leasing costs, normal recurring general and administrative expenses and interest payments on debt outstanding. Investing Activities Net cash used in investing activities includes property acquisitions, developments, redevelopments, tenant improvements and other property capital expenditures. The$45.7 million increase in cash used in investing activities is primarily due to (a) increased development expenditures of$55.0 million , partially offset by (b) decreased acquisitions of real estate investments of$9.0 million and (c) decreased additions to real estate investments throughout the portfolio of$0.2 million .
Financing Activities
Net cash used in financing activities represents (a) cash used to repay and curtail loans, redeem preferred stock and pay dividends and distributions to holders of common stock, preferred stock and limited partnership units minus (b) cash received from loan proceeds and issuance of common stock, preferred stock and limited partnership units. See note 5 to the consolidated financial statements for a discussion of financing activity.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders, and amounts required for expansion and renovation of theCurrent Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its "real estate investment trust taxable income," as defined in the Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit. The Company is developing Twinbrook Quarter Phase I ("Phase I") located inRockville, Maryland . Phase I includes an 80,000 square foot Wegmans, approximately 25,000 square feet of small shop space, 450 apartments and a 230,000 square foot office building. The office tower portion of Phase I will not be constructed at this time. In connection with the development of the residential and retail portions of Phase I, we must also invest in infrastructure and other items that will support both Phase I and other portions of the development ofTwinbrook Quarter . The total cost of the project is expected to be approximately$331.5 million , of which$271.4 million is related to the development of the residential and retail portions of Phase I and$60.1 million is related to infrastructure and other items. A portion of the project will be financed by a$145.0 million construction-to-permanent loan. Below grade concrete and framing are complete. Concrete is being poured at the fourth level above ground. Initial delivery of Phase I is anticipated in late 2024. The development potential of all phases of the entire 18.4 acreTwinbrook Quarter site totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space. The Company is developingHampden House , a project located in downtownBethesda, Maryland that will include up to 366 apartment units and 10,100 square feet of retail space. The total cost of the project is expected to be approximately$246.4 million , a portion of which will be financed by a$133.0 million construction-to-permanent loan. Demolition has been completed and excavation is in process. Construction is expected to be completed during 2025.
Long-term liquidity requirements consist primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. The Company anticipates that long-term liquidity requirements will also include amounts required for property acquisitions and developments.
The Company may also redevelop certain of theCurrent Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management's determination that such properties are expected to provide long-term earnings and cash flow growth. During the remainder of the year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank borrowings from the Company's Credit Facility, construction and permanent financing, proceeds from the operation of the Company's Dividend Reinvestment Plan ("DRIP") or other external debt or equity capital resources available to the Company. Any future borrowings may be at theSaul Centers ,Operating Partnership orSubsidiary Partnership level. The availability and terms of any such financing will depend upon market and other conditions. -33-
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Dividend Reinvestments
The Company has a DRIP that allows its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The DRIP provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the DRIP are paid by the Company. The Company issued 126,213 and 224,706 shares under the DRIP at a weighted average discounted price of$49.39 and$37.41 per share, during the nine months endedSeptember 30, 2022 and 2021, respectively. The Company issued 26,659 and 47,312 limited partnership units under the DRIP at a weighted average price of$49.81 and$37.94 per unit during the nine months endedSeptember 30, 2022 and 2021, respectively. The Company also credited 4,046 and 4,939 shares to directors pursuant to the reinvestment of dividends specified by the Directors' Deferred Compensation Plan at a weighted average discounted price of$49.81 and$37.52 per share, during the nine months endedSeptember 30, 2022 and 2021, respectively.
Capital Strategy and Financing Activity
As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of theCurrent Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties' aggregate cash flow. Given the Company's current debt level, it is management's belief that the ratio of the Company's debt to total asset value was below 50% as ofSeptember 30, 2022 . The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company's debt/capitalization strategy in light of current economic conditions, relative costs of capital, market values of the Company's property portfolio, opportunities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company's debt/capitalization policy based on such a reevaluation without shareholder approval and consequently, may increase or decrease the Company's debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable. AtSeptember 30, 2022 , the Company had a$525.0 million Credit Facility comprised of a$425.0 million revolving credit facility and a$100.0 million term loan. The revolving credit facility matures onAugust 29, 2025 , which may be extended by the Company for one additional year, subject to satisfaction of certain conditions. The term loan matures onFebruary 26, 2027 , and may not be extended. ThroughOctober 2, 2022 , interest accrues at a rate of LIBOR plus an applicable spread, which is determined by certain leverage tests. EffectiveOctober 3, 2022 , in conjunction with the execution of the First Amendment to the Credit Facility, interest accrues at a rate of SOFR plus 10 basis points plus an applicable spread, which is determined by certain leverage tests. As ofSeptember 30, 2022 , the applicable spread for borrowings was 140 basis points related to the revolving credit facility and 135 basis points related to the term loan. Letters of credit may be issued under the Credit Facility. OnSeptember 30, 2022 , based on the value of the Company's unencumbered properties, approximately$248.8 million was available under the Credit Facility,$228.0 million was outstanding and approximately$185,000 was committed for letters of credit. OnAugust 23, 2022 , the Company entered into two floating-to-fixed interest rate swap agreements to manage the interest rate risk associated with$100.0 million of its variable-rate debt. The effective date of each swap agreement isOctober 3, 2022 and each has a$50.0 million notional amount. One agreement terminates onOctober 1, 2027 and effectively fixes SOFR at 2.96%. The other agreement terminates onOctober 1, 2030 and effectively fixes SOFR at 2.91%. Because the interest-rate swaps effectively fix SOFR for$100.0 million of variable-rate debt, unless otherwise indicated,$100.0 million of variable-rate debt will be treated as fixed-rate debt for disclosure purposes as ofSeptember 30, 2022 . The Company has designated the agreements as cash flow hedges for accounting purposes. During the third quarter of 2022, the Company completed early refinancings of four shopping centers, which provided$88.0 million of additional liquidity net of repayment of the existing mortgage loans, associated prepayment penalties and closing costs. The net proceeds from the refinancings were used to curtail the revolving portion of the Credit Facility. As a result of the early refinancings and the interest rate swaps,$128.0 million , or 10.6%, of our outstanding debt atSeptember 30, 2022 , was floating and unhedged. -34-
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The facility requires the Company and its subsidiaries to maintain compliance with certain financial covenants. The material covenants require the Company, on a consolidated basis, to:
•limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio);
•limit the amount of debt so that interest coverage will exceed 2.0x on a trailing four-quarter basis (interest expense coverage); and
•limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage).
As of
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company's financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Funds From Operations Funds From Operations (FFO)1 available to common stockholders and noncontrolling interests for the 2022 Quarter totaled$24.9 million , a decrease of 6.2% compared to the 2021 Quarter. FFO available to common stockholders and noncontrolling interests decreased primarily due to (a) higher general and administrative expenses of$0.9 million , or$0.03 per basic and diluted share, (b) loss on early extinguishment of debt of$0.6 million , or$0.02 per basic and diluted share, (c) lower recovery income, net of expenses of$0.3 million , or$0.01 per basic and diluted share, and (d) higher interest expense, net and amortization of deferred debt costs of$0.2 million , or$0.01 per basic and diluted share, partially offset by (e) higher base rent across the portfolio of$0.4 million , or$0.01 per basic and diluted share. FFO available to common stockholders and noncontrolling interests for the 2022 Period totaled$78.5 million , an increase of 4.3% compared to the 2021 Period. FFO available to common stockholders and noncontrolling interests increased primarily due to (a) lower interest expense, net and amortization of deferred debt costs of$2.4 million , or$0.07 per basic and diluted share, (b) higher base rent of$2.3 million , or$0.07 per basic and diluted share, (c) lower credit losses on operating lease receivables and corresponding reserves, net of$0.7 million , or$0.02 per basic and diluted share, partially offset by (d) higher general and administrative expenses of$1.8 million , or$0.05 per basic and diluted share, and (e) loss on early extinguishment of debt of$0.6 million , or$0.02 per basic and diluted share.
The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated:
Three Months Ended
2022 2021 2022 2021
Net income $ 15,513 $ 16,885 $ 50,001 $ 45,799
Add:
Real estate depreciation and amortization 12,195 12,467 36,899 37,852
FFO 27,708 29,352 86,900 83,651
Subtract:
Preferred stock dividends (2,798) (2,798) (8,395) (8,395)
FFO available to common stockholders and
noncontrolling interests $ 24,910 $ 26,554 $ 78,505 $ 75,256
Weighted average shares and units:
Basic 33,295 32,237 33,238 31,774
Diluted (2) 34,005 33,656 33,957 32,877
Basic FFO per share available to common
stockholders and noncontrolling interests $ 0.75 $ 0.82 $ 2.36 $ 2.37
Diluted FFO per share available to common
stockholders and noncontrolling interests $ 0.73 $ 0.79 $ 2.31 $ 2.29
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1The 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. 2 BeginningMarch 5, 2021 , fully diluted shares and units includes 1,416,071 limited partnership units held in escrow related to the contribution ofTwinbrook Quarter . Half of the units held in escrow were released onOctober 18, 2021 . The remaining units held in escrow are scheduled to be released onOctober 18, 2023 .
Acquisitions and Redevelopments
Management anticipates that during the remainder of the year, the Company will continue the build out of the remaining retail spaces at The Waycroft. The Company may redevelop certain of theCurrent Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management's determination that such properties are expected to provide long-term earnings and cash flow growth. During the remainder of the year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company's Credit Facility, construction financing, proceeds from the operation of the Company's dividend reinvestment plan or other external capital resources available to the Company.
The Company has been selectively involved in acquisition, development, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and mixed-use development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to analyze redevelopment, renovation and expansion opportunities within the portfolio.
Portfolio Leasing Status
The following chart sets forth certain information regarding Commercial leases at our properties.
Total Properties Total Square Footage Percent Leased Shopping Shopping Shopping Centers Mixed-Use Centers Mixed-Use Centers Mixed-Use September 30, 2022 50 7 7,874,130 1,136,885 94.5 % 83.1 % September 30, 2021 50 7 7,872,002 1,136,937 93.6 % 85.0 % As ofSeptember 30, 2022 , 93.0% of the Commercial portfolio was leased, compared to 92.5%September 30, 2021 . On a same property basis, 93.0% of the Commercial portfolio was leased, compared to 92.5% atSeptember 30, 2021 . Included in the 93.0% of space leased as ofSeptember 30, 2022 , is approximately 331,000 square feet of space, representing 3.7% of total commercial square footage, that has not been occupied by the tenant. Collectively, these leases are expected to produce approximately$5.8 million of additional annualized base rent, an average of$17.62 per square foot, upon tenant occupancy and following any contractual rent concessions. -36-
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The following table shows selected data for leases executed in the indicated
periods. The information is based on executed leases without adjustment for the
timing of occupancy, tenant defaults, or landlord concessions. The base rent for
an expiring lease is the annualized contractual base rent, on a cash basis, as
of the expiration date of the lease. The base rent for a new or renewed lease is
the annualized contractual base rent, on a cash basis, as of the expected rent
commencement date. Because tenants that execute leases may not ultimately take
possession of their space or pay all of their contractual rent, the changes
presented in the table provide information only about trends in market rental
rates. The actual changes in rental income received by the Company may be
different.
Commercial Property Leasing Activity Average Base Rent per Square Foot
Number New/Renewed Expiring
Three Months Ended September 30 , Square Feet of Leases Leases Leases
Shopping
Shopping Centers Mixed-Use Shopping Centers Mixed-Use Shopping Centers Mixed-Use Centers Mixed-Use
2022 415,845 23,904 94 3 $ 23.44 $ 27.64 $ 21.80 $ 30.40
2021 231,008 11,164 55 4 19.15 51.45 19.19 57.36
Additional information about the leasing activity during the three months ended
September 30, 2022 is set forth below. The below information includes leases for
space which had not been previously leased during the period of the Company's
ownership, either a result of acquisition or development.
Commercial Property Leasing Activity
New First Generation/Development Renewed
Leases Leases Leases
Number of leases 25 - 72
Square feet 98,427 - 341,322
Per square foot average
annualized:
Base rent $ 27.09 $ - $ 22.69
Tenant improvements (4.61) - (0.16)
Leasing costs (1.05) - -
Rent concessions (0.66) - -
Effective rents $ 20.77 $ - $ 22.53
As of December 31, 2021 , 843,842 square feet of Commercial space was subject to
leases scheduled to expire in 2022. Of those leases, as of September 30, 2022 ,
leases representing 246,902 square feet of Commercial space have not yet renewed
and are scheduled to expire over the next three months. Below is information
about existing and estimated market base rents per square foot for that space.
Expiring Commercial Property Leases Total
Square feet 246,902
Average base rent per square foot $ 28.54
Estimated market base rent per square foot $ 28.02 As of
Residential Property Leasing Activity Average Rent per Square Foot
Three Months Ended September
30, Number of leases New/Renewed Leases Expiring Leases
2022 338 $ 3.49 $ 3.22
2021 331 3.38 3.30
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