SAUL CENTERS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) begins with the Company's primary business strategy to give the reader an overview of the goals of the Company's business. This is followed by a discussion of the critical accounting policies that the Company believes are important to understanding the assumptions and judgments incorporated in the Company's reported financial results. The next section, beginning on page 37, discusses the Company's results of operations for the past two years. Beginning on page 42, the Company provides an analysis of its liquidity and capital resources, including discussions of its cash flows, debt arrangements, sources of capital and financial commitments. Finally, on page 46, the Company discusses funds from operations, or FFO, which is a non-GAAP financial measure of performance of an equity REIT used by the REIT industry. The following discussion and analysis should be read in conjunction with "Item 6. Selected Financial Data," and the Consolidated Financial Statements and related footnotes included elsewhere in this Annual Report on Form 10-K. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled "Forward-Looking Statements." Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see "Item 1A. Risk Factors." Overview The Company's primary strategy is to continue to focus on diversification of its assets through development of transit-centric, residential mixed-use projects in theWashington, D.C. metropolitan area. The Company's operating strategy also includes improvement of the operating performance and internal growth of its Shopping Centers and will supplement its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers. 35
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The Company's primary strategy is to continue to focus on diversification of its assets through development of transit-centric, residential mixed-use projects in theWashington, D.C. metropolitan area. Construction of The Waycroft, a project with 491 apartment units and 60,000 square feet of retail space, is nearing substantial completion onNorth Glebe Road , within two blocks of theBallston Metro Station , inArlington, Virginia . The Company also has a development pipeline of zoned sites, either in its portfolio (some of which are currently shopping center operating properties) or under contract, 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 to red line Metro stations inMontgomery County, Maryland . The Company's operating strategy also includes improvement of the operating performance and internal growth of its Shopping Centers and will supplement its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers. It intends to selectively add free-standing pad site buildings within its Shopping Center portfolio, and replace underperforming tenants with tenants that generate strong traffic, generally anchor stores such as supermarkets, drug stores and fitness centers, as evidenced by the coming additions of a 69,000 square foot Giant Food at Seven Corners and a 36,000 square footLA Fitness atBroadlands Village . Exclusive of four pads under development withinAshbrook Marketplace , the Company currently has signed leases or leases under negotiation for 12 pad sites within its core portfolio. The pad sites are expected to be completed and operational by late 2021. 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. Economic conditions within the localWashington, DC metropolitan area have remained 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 a way to maximize our future performance. The Company's commercial leasing percentage, on a comparable property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, decreased to 95.1% atDecember 31, 2019 , from 95.7% atDecember 31, 2018 . 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 ofDecember 31, 2019 , amortizing fixed-rate mortgage debt with staggered maturities from 2020 to 2035 represented approximately 85.2% of the Company's notes payable, thus minimizing refinancing risk. The Company's variable-rate debt consists of$162.5 million outstanding under the credit facility. As ofDecember 31, 2019 , the Company has loan availability of approximately$237.3 million under its$325.0 million revolving credit facility. Although it is management's present intention to concentrate future acquisition and development activities on transit-centric, primarily residential mixed-use properties 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. 36
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Critical Accounting Policies The Company's consolidated 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. See Note 2 to the Consolidated Financial Statements in this report. The Company has identified the following policies that, due to estimates and assumptions inherent in those 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. 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 value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors in 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 value 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 value 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. 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. Results of Operations The following is a discussion of the components of revenue and expense for the entire Company. This section generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations"
Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended
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Revenue
(Dollars in thousands) Year ended December 31, Percentage Change
2019 from 2018 from
2019 2018 2017 2018 2017
Base rent $ 185,724 $ 184,684 $ 181,141 0.6 % 2.0 %
Expense recoveries 36,521 35,537 35,347 2.8 % 0.5 %
Percentage rent 910 994 1,458 (8.5 )% (31.8 )%
Other property revenue 1,423 1,204 1,145 18.2 % 5.2 %
Credit losses on operating lease
receivables (1,226 ) (685 ) (906 ) 79.0 % (24.4 )%
Rental revenue 223,352 221,734 218,185 0.7 % 1.6 %
Other revenue 8,173 5,485 8,114 49.0 % (32.4 )%
Total revenue $231,525 $227,219 $226,299 1.9 % 0.4 %
Base rent includes $(1.4) million and $(0.9) million , for the years 2019 and
2018, respectively, to recognize base rent on a straight-line basis. In
addition, base rent includes $1.4 million and $1.5 million for the years 2019
and 2018, respectively, to recognize income from the amortization of in-place
leases.
Total revenue increased 1.9% in 2019 compared to 2018 as described below.
Base rent
The $1.0 million increase in base rent in 2019 compared to 2018 was attributable
to (a) a 110,187 square foot increase in leased space ($2.2 million ) and (b)
higher residential base rent ($0.7 million ), partially offset by (c) a $0.22 per
square foot decrease in base rent ($1.8 million ).
Expense recoveries
Expense recovery income increased $1.0 million in 2019 compared to 2018
primarily due to an increase in recoverable property operating expenses, largely
repairs and maintenance and snow removal.
Credit losses on operating lease receivables
Credit losses increased $0.5 million in 2019 compared to 2018 primarily due to
two office tenants.
Other revenue
Other revenue increased $2.7 million in 2019 compared to 2018 primarily due to
higher lease termination fees.
Operating expenses
(Dollars in thousands) Year ended December 31, Percentage Change
2019 from 2018 from
2019 2018 2017 2018 2017
Property operating expenses $ 29,946 $ 28,202 $ 27,689 6.2 % 1.9 %
Real estate taxes 27,987 27,376 26,997 2.2 % 1.4 %
Interest expense, net and amortization
of deferred debt costs 41,834 44,768 47,145 (6.6 )% (5.0 )%
Depreciation and amortization of
deferred leasing costs 46,333 45,861 45,694 1.0 % 0.4 %
General and administrative 20,793 18,459 18,176 12.6 % 1.6 %
Total expenses $ 166,893 $ 164,666 $ 165,701 1.4 % (0.6 )%
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Total expenses increased 1.4% in 2019 compared to 2018 as described below. Property operating expenses Property operating expenses increased$1.7 million in 2019 compared to 2018 primarily due to (a) higher repairs and maintenance expenses throughout the portfolio ($0.3 million ), (b) higher snow removal costs ($0.3 million ), and (c) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.7 million ). Real estate taxes Real estate taxes increased$0.6 million in 2019 compared to 2018 primarily due to increased tax assessments at601 Pennsylvania Avenue and Clarendon Center ($0.4 million ). Interest expense, net and amortization of deferred debt costs Interest expense and amortization of deferred debt costs decreased by$2.9 million in 2019 compared to 2018 primarily due to increased capitalized interest ($5.3 million ), partially offset by higher interest incurred due to higher outstanding debt balances ($2.4 million ). Depreciation and amortization Depreciation and amortization of deferred leasing costs increased by$0.5 million in 2019 compared to 2018 primarily due to the write off of the remaining assets at7316 Wisconsin Avenue when the property was moved to development ($0.6 million ). General and administrative General and administrative costs increased$2.3 million in 2019 compared to 2018 primarily due to higher compensation and benefits expense related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($1.5 million ). 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 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 operating income of properties which 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. 39
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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 revenue and
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.
The tables below provide reconciliations of property revenue and property
operating income under GAAP to same property revenue and same property operating
income for the indicated periods. The same property results include 49 Shopping
Centers and six Mixed-Use properties for each period.
Same property revenue
(in thousands) Year ended December 31,
2019 2018
Total revenue $ 231,525 $ 227,219
Less: Acquisitions, dispositions and development
properties (1,209 ) (973 )
Total same property revenue $ 230,316 $ 226,246
Shopping centers $ 167,834 $ 164,344
Mixed-Use properties 62,482 61,902
Total same property revenue $ 230,316 $ 226,246
Total Shopping Center revenue $ 167,888 $ 164,344
Less: Shopping Center acquisitions, dispositions
and development properties (54 ) -
Total same Shopping Center revenue$ 167,834 $
164,344
Total Mixed-Use property revenue$ 63,637 $
62,875
Less: Mixed-Use acquisitions, dispositions and development properties (1,155 ) (973 ) Total same Mixed-Use revenue$ 62,482 $
61,902
The$4.1 million increase in same property revenue for 2019 compared to 2018 was primarily due to (a) higher other revenue ($2.4 million ), (b) a 63,023 square foot increase in leased space ($1.3 million ), and (c) higher expense recovery income ($1.0 million ), partially offset by (d) an$0.11 per square foot decrease in base rent ($0.9 million ). 40
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Same property operating income
Year Ended December 31,
(In thousands) 2019 2018
Net income 64,196 63,059
Add: Interest expense, net and
amortization of deferred debt costs 41,834 44,768
Add: Depreciation and amortization of
deferred leasing costs 46,333 45,861
Add: General and administrative 20,793 18,459
Add: Change in fair value of
derivatives 436 3
Less: Gain on sale of property - (509 )
Property operating income 173,592 171,641
Add (Less): Acquisitions, dispositions
and development properties (568 ) (727 )
Total same property operating income
Shopping Centers$ 131,720 $ 129,701 Mixed-Use properties 41,304 41,213
Total same property operating income
Shopping Center operating income$ 131,769 $ 129,701 Less: Shopping Center acquisitions, dispositions and development properties (49 ) - Total same Shopping Center operating income$ 131,720 $ 129,701 Mixed-Use property operating income$ 41,823 $ 41,940 Add (Less): Mixed-Use acquisitions, dispositions and development properties (519 ) (727 ) Total same Mixed-Use property operating income$ 41,304 $ 41,213 Same property operating income increased$2.1 million for 2019 compared to 2018 due primarily to (a) higher other revenue ($2.4 million ) and (b) a 63,023 square foot increase in leased space ($1.3 million ), partially offset by (c) an$0.11 per square foot decrease in base rent ($0.9 million ) and (d) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.7 million ). Impact of Inflation Inflation has remained relatively low during 2019 and 2018. The impact of rising operating expenses due to inflation on the operating performance of the Company's portfolio would have been mitigated by terms in substantially all of the Company's leases, which contain provisions designed to increase revenues to offset the adverse impact of inflation on the Company's results of operations. These provisions include upward periodic adjustments in base rent due from tenants, usually based on a stipulated increase, and, to a lesser extent, on the change in the consumer price index, commonly referred to as the CPI. In addition, substantially all of the Company's properties are leased to tenants under long-term leases, which provide for reimbursement of operating expenses by tenants. These leases tend to reduce the Company's exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on the Company's tenants if increases in their operating expenses exceed increases in their revenue. 41
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Liquidity and Capital Resources Cash and cash equivalents were$13.9 million and$14.6 million atDecember 31, 2019 and 2018, respectively. The changes in cash and cash equivalents during the years endedDecember 31, 2019 and 2018 were attributable to operating, investing and financing activities, as described below. (in thousands) Year EndedDecember 31, 2019 2018
Net cash provided by operating activities
(135,663 ) (128,650 )
Net cash provided by financing activities 19,607 21,981
Increase (decrease) in cash and cash equivalents
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$7.0 million increase in cash used in investing activities is primarily due to (a) development expenditures, primarily related to The Waycroft ($37.5 million ) and (b) increased additions to real estate investments throughout the portfolio ($9.0 million ) partially offset by (c) lower acquisitions of real estate investments ($40.8 million ). Financing Activities Net cash provided by financing activities represents (a) cash received from loan proceeds and issuance of common stock, preferred stock and limited partnership units minus (b) 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. 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. Long-term liquidity requirements consist primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for property acquisitions and developments. The Company is developing a primarily residential project with street-level retail at750 N. Glebe Road inArlington, Virginia . The total cost of the project, including acquisition of land, is expected to be approximately$275.0 million . The Company had incurred costs totaling$255.4 million as ofDecember 31, 2019 . The remaining cost will be funded by a$157.0 million construction-to-permanent loan. The Company may also redevelop certain of theCurrent Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. 42
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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 coming year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank borrowings from the Company's credit line, construction and permanent financing, proceeds from the operation of the Company's dividend reinvestment plan 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, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in theOperating Partnership which can be converted into shares ofSaul Centers common stock. The availability and terms of any such financing will depend upon market and other conditions. Management believes that the Company's capital resources, which atDecember 31, 2019 included cash balances of approximately$13.9 million and borrowing availability of approximately$237.3 million on its unsecured revolving credit facility, will be sufficient to meet its liquidity needs for the foreseeable future. Contractual Payment Obligations As ofDecember 31, 2019 , the Company had unfunded contractual payment obligations of approximately$116.1 million , excluding operating obligations, due within the next 12 months. The table below shows the total contractual payment obligations as ofDecember 31, 2019 . Payments Due By Period More Than 1 More Than 3 One Year or and up to 3 and up to After 5 (Dollars in thousands) Less Years 5 Years Years Total Notes Payable: Interest$ 46,166 $ 85,156 $ 72,305 $ 162,323 $ 365,950 Scheduled Principal 28,421 58,670 58,762 125,809 271,662 Balloon Payments 16,074 135,014 150,874 527,297 829,259 Subtotal 90,661 278,840 281,941 815,429 1,466,871 Corporate Headquarters Lease (1) 901 1,883 - - 2,784 Development and Predevelopment Obligations 14,785 1,973 - - 16,758 Tenant Improvements 9,729 4,513 - - 14,242
Total Contractual Obligations
(1) See Note 7 to Consolidated Financial Statements. Corporate Headquarters
Lease amounts represent an allocation to the Company based upon employees'
time dedicated to the Company's business as specified in the Shared
Services Agreement. Future amounts are subject to change as the number of
employees employed by each of the parties to the lease fluctuates.
Dividend Reinvestments InDecember 1995 , the Company established a Dividend Reinvestment Plan (the "Plan") to allow 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 Plan 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 Plan are paid by the Company. The Company issued 425,956 and 566,435 shares under the Plan at a weighted average discounted price of$52.27 and$50.31 per share during the years endedDecember 31, 2019 and 2018, respectively. The Company issued 60,936 and 107,433 limited partnership units under the Plan at a weighted average price of$52.99 and$50.56 per unit during the years endedDecember 31, 2019 and 2018, respectively. The Company also credited 4,506 and 6,493 shares to directors pursuant to the reinvestment of dividends specified by the Directors' Deferred Compensation Plan at a weighted average discounted price of$52.28 and$50.28 per share, during the years endedDecember 31, 2019 and 2018, respectively. 43
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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 ofDecember 31, 2019 . 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 policy in light of current economic conditions, relative costs of capital, market values of the Company 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 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 continues to refinance or renegotiate the terms of its outstanding debt in order to extend maturities and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable. The Company's financing activity is described within note 5 to the Consolidated Financial Statements. The following is a summary of notes payable as ofDecember 31, 2019 and 2018. 44
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Table of Contents Notes Payable Year Ended December 31, Interest Scheduled (Dollars in thousands) 2019 2018 Rate* Maturity* Fixed rate mortgages: Olde Forte Village $ -$ 9,159 5.76 % May-2019 Countryside Marketplace - 12,676 5.62 % Jul-2019 Briggs Chaney Marketplace - 12,714 5.79 % Sep-2019 Shops at Monocacy - 11,295 5.22 % Jan-2020 Boca Valley Plaza 9,234 9,601 5.60 % May-2020 Palm Springs Center 7,262 7,766 5.30 % Jun-2020 Thruway - 36,711 5.83 % Jul-2020 Jamestown Place 6,539 6,943 5.81 % Feb-2021 Hunt Club Corners 5,300 5,480 6.01 % Aug-2021 Lansdowne Town Center 30,719 31,723 5.62 % Jun-2022 Orchard Park 9,441 9,728 6.08 % Sep-2022 BJ's Wholesale Club 10,323 10,609 6.43 % Apr-2023 Great Falls Center 10,774 11,702 6.28 % Feb-2024 Leesburg Pike Center 14,414 14,952 7.35 % Jun-2024 Village Center 12,555 13,013 7.60 % Jun-2024 White Oak 22,475 23,198 7.45 % Jul-2024 Avenel Business Park 26,260 27,222 7.02 % Jul-2024 Ashburn Village 26,245 27,168 7.30 % Jan-2025 Ravenwood 13,606 14,086 6.18 % Jan-2026 Clarendon Center 98,611 102,310 5.31 % Apr-2026 Severna Park Marketplace 29,710 30,888 4.30 % Oct-2026 Kentlands Square II 33,952 35,258 4.53 % Nov-2026 Cranberry Square 15,917 16,515 4.70 % Dec-2026 Seven Corners 60,677 62,630 5.84 % May-2027 Hampshire-Langley 14,810 15,345 4.04 % Apr-2028 Beacon Center 36,206 38,120 3.51 % Jun-2028 Seabreeze Plaza 15,019 15,547 3.99 % Sep-2028 Shops at Fairfax / Boulevard 26,205 27,060 3.69 % Mar-2030 Northrock 14,085 14,526 3.99 % Apr-2030 Burtonsville Town Square 36,975 38,076 3.39 % Feb-2032 Park Van Ness 68,095 69,691 4.88 % Sep-2032 Washington Square 56,990 58,523 3.75 % Dec-2032 Broadlands Village 31,221 31,941 4.41 % Nov-2033 The Glen 22,448 22,900 4.69 % Jan-2034 Olde Forte Village 21,702 - 4.65 % Feb-2034 Olney 11,952 11,781 8.00 % Apr-2034 Shops at Monocacy 28,500 - 4.14 % Dec-2034 The Waycroft 110,199 23,332 4.67 % Sep-2035 Total fixed rate 938,421 910,189 5.04 % 9.3 Years Variable rate loans: Revolving credit facility 87,500 47,000 LIBOR + 1.35 % Jan-2022 Term loan facility 75,000 75,000 LIBOR + 1.30 % Jan-2023 Total variable rate 162,500 122,000 3.09 % 2.5 Years Total notes payable$ 1,100,921 $ 1,032,189 4.75 % 8.3 Years * Interest rate and scheduled maturity data presented as ofDecember 31, 2019 . Totals computed using weighted averages. 45
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AtDecember 31, 2019 , the Company had a$400.0 million credit facility comprised of a$325.0 million revolving facility and a$75.0 million term loan. As ofDecember 31, 2019 , the applicable spread for borrowings is 135 basis points under the revolving credit facility and 130 basis points under the term loan.Saul Centers and certain consolidated subsidiaries of theOperating Partnership have guaranteed the payment obligations of theOperating Partnership under the credit facility. Letters of credit may be issued under the revolving credit facility. As ofDecember 31, 2019 , based on the value of the Company's unencumbered properties, approximately$237.3 million was available under the revolving credit facility,$87.5 million was outstanding and approximately$185,000 was committed for letters of credit. The Company's credit facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. As ofDecember 31, 2019 , the Company was in compliance with all such covenants: • 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
OnSeptember 17, 2019 ,Saul Centers sold, in an underwritten public offering, 4.0 million depositary shares, each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock (the "Series E Stock"), providing net cash proceeds of approximately$96.8 million . The depositary shares may be redeemed in whole or in part, on or afterSeptember 17, 2024 , at the$25.00 liquidation preference, plus accrued but unpaid dividends to but not including the redemption date. The depositary shares pay an annual dividend of$1.50 per share, equivalent to 6.000% of the$25.00 liquidation preference. The Series E Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. OnSeptember 23, 2019 ,Saul Centers sold, as a result of the exercise by the underwriters of their over-allotment option, an additional 0.4 million depositary shares of Series E Stock, providing net cash proceeds of approximately$9.5 million . OnOctober 17, 2019 , the Company used the proceeds from the Series E Stock offering to redeem the outstanding 4.2 million depositary shares of its Series C Stock, including all accumulated and unpaid distributions to, but not including the redemption date. In the fourth quarter, approximately$3.2 million of costs associated with the redemption were charged against Net income available to common stockholders. 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 In 2019, the Company reported Funds From Operations ("FFO")1 available to common stockholders and noncontrolling interests of$95.1 million , a 1.3% increase from 2018 FFO available to common stockholders and noncontrolling interests of$93.8 million . The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated: 46
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Year ended December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Net income $ 64,196 $ 63,059 $ 60,668 $ 56,720 $ 52,931
Subtract:
Gains on sales of properties - (509 ) - (1,013 ) (11 )
Add:
Real estate depreciation and
amortization 46,333 45,861 45,694 44,417 43,270
FFO 110,529 108,411 106,362 100,124 96,190
Subtract:
Preferred stock dividends (12,235 ) (12,262 ) (12,375 ) (12,375 ) (12,375 )
Extinguishment of issuance costs
upon redemption of preferred shares (3,235 ) (2,328 ) - - -
FFO available to common stockholders
and noncontrolling interests $ 95,059 $ 93,821 $ 93,987 $ 87,749 $ 83,815
Average shares and units used to
compute FFO per share 30,913 30,156 29,511 28,990 28,449
FFO per share $ 3.08 $ 3.11 $ 3.18 $ 3.03 $ 2.95
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 depreciable real estate assets
and gains or losses from property 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 we believe occurs with our 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.
Acquisitions and Redevelopments
Management anticipates that during the coming year, the Company will complete
its development activities at The Waycroft, may redevelop certain of the Current
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 coming year, any
developments, expansions or acquisitions are expected to be funded with bank
borrowings from the Company's credit line, 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.
In September 2018 , the Company purchased for $35.5 million , plus $0.7 million of
acquisition costs, an office building and the underlying ground located at
7316 Wisconsin Avenue in Bethesda, Maryland . In December
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2018, the Company purchased for$4.5 million , including acquisition costs, an interest in an adjacent parcel of land and retail building. The purchase price was funded through the Company's revolving credit facility. The Company has completed development plans for the combined property for the development of up to 366 apartment units and 10,300 square feet of retail space. InJuly 2019 , theMontgomery County Planning Commission unanimously approved the Company's site plan. Design and construction documents are being prepared and a site plan amendment has been submitted incorporating final design parameters. Additional approvals from theWashington Metropolitan Area Transit Authority and theMaryland Transit Administration are in process and are expected to be received by the fourth quarter of 2020. The Company has executed lease termination agreements with the final office tenants and, effectiveSeptember 1, 2019 , the asset was removed from service and transferred to construction in progress. The Company, as contract purchaser, has filed with theCity of Rockville a site plan for Phase I of theTwinbrook Quarter development and is conducting community hearings and awaiting design review committee comments on its plan. The plan includes an 80,000 square foot Wegmans grocery store, 29,000 square feet of retail shop space, 460 residential units and 237,000 square feet of office space. The phasing of these improvements and the timing of construction will depend on removal of contingencies, final site plan approval, building permit approval and market conditions. The total development potential of this 8.1 acre site, when combined with the Company's adjacent 10.3 acre site, totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space. Portfolio Leasing Status The following chart sets forth certain information regarding commercial leases at our properties for the periods indicated. This section generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 filed onFebruary 26, 2019 .Total Properties Total Square
Footage Percentage Leased
Shopping Shopping Shopping
As of December 31, Centers Mixed-Use Centers Mixed-Use Centers Mixed-Use 2019 50 6 7,855,275 1,076,837 95.5 % 91.6 % 2018 49 7 7,750,271 1,146,438 96.0 % 92.3 % The residential components of Clarendon Center andPark Van Ness were 95.5% and 97.0% leased, respectively, atDecember 31, 2019 . The residential components of Clarendon Center andPark Van Ness were 99.6% and 97.0% leased, respectively, atDecember 31, 2018 . On a same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, the Shopping Center leasing percentage decreased to 95.6% from 96.0% and the Mixed-Use leasing percentage decreased to 91.6% from 93.6%. The overall portfolio leasing percentage, on a comparative same property basis, decreased to 95.1% atDecember 31, 2019 from 95.7% atDecember 31, 2018 . 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. 48
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Base Rent per Square Foot
Number New/Renewed Expiring
Year ended December 31, Square Feet of Leases Leases Leases
2019 1,471,429 255 $ 18.24 $ 18.39
2018 1,555,620 281 19.52 19.26
Certain of the Company's operating properties are planned for redevelopment,
including its properties at Twinbrook and White Flint. Prior to the commencement
of redevelopment, the Company continues to operate the properties. However, in
order to provide the greatest amount of flexibility, the Company generally
enters into leases with shorter terms at these "pre-development" properties. The
shorter-term leases require less capital, but also yield lower rents. The impact
of these leases with shorter terms and lower rents can impact the averages shown
for all leasing activity. During 2019, the Company entered into six new or
renewed leases, for 53,400 square feet of retail space, at pre-development
properties that have shorter terms and lower rents than typical market
conditions would suggest. Excluding these leases, the base rent on the 249 new
or renewed leases on a same space basis would have been $18.26 per square foot
compared to $18.10 per square foot for expiring leases.
Additional information about commercial leasing activity during the three months
ended December 31, 2019 , 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 as a result of acquisition or development.
New First Generation/Development Renewed
Leases Leases Leases
Number of leases 13 6 53
Square feet 54,300 11,381 430,858
Per square foot average
annualized:
Base rent $ 32.01 $ 43.12 $ 12.84
Tenant improvements (4.82 ) (9.70 ) (1.19 )
Leasing costs (0.38 ) (1.60 ) (0.10 )
Rent concessions (0.63 ) (0.31 ) (0.30 )
Effective rents $ 26.18 $ 31.51 $ 11.25
During 2019, the Company entered into 431 new or renewed apartment leases. The
monthly rent per square foot for these leases increased to $3.53 from $3.45 .
During 2018, the Company entered into 465 new or renewed apartment leases. The
monthly rent per square foot for these leases was unchanged at $3.44 .
As of December 31, 2019 , 746,234 square feet of Commercial space was subject to
leases scheduled to expire in 2020. Below is information about existing and
estimated market base rents per square foot for that space.
Expiring Leases: Total
Square feet 746,234
Average base rent per square foot $ 22.29 Estimated market base rent per square foot
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