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, 2019 . 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
• 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 fiscalpolicies, 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 ended December 31, 2019 ), "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 ended December 31, 2019 ),
and "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" (Part I, Item 2 of this Form 10-Q).
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Impact of COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared a novel strain of coronavirus ("COVID-19") a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly. The actions taken by federal, state and local governments to mitigate the spread of COVID-19 by ordering closure of nonessential businesses and ordering residents to generally stay at home, and subsequent phased re-openings, have resulted in many of our tenants announcing mandated or temporary closures of their operations and/or requesting adjustments to their lease terms. Experts predict that the COVID-19 pandemic will trigger a period of global economic slowdown or a global recession. COVID-19 could have a material and adverse effect on or cause disruption to our business or financial condition, results from operations, cash flows and the market value and trading price of our securities. If the effects of COVID-19 result in continued deterioration of economic and market conditions, 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 remaining quarters in 2020 or future periods. As ofJune 30, 2020 , 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. While the Company's grocery stores, pharmacies, banks and home improvement stores generally remain open, restaurants, if open, are operating at limited capacity with many offering only delivery and curbside pick-up, and most health, beauty supply and services, fitness centers, and other non-essential businesses are in various phases of re-opening depending on location. As ofAugust 5, 2020 , approximately 80% of the Company's contractual base rent and operating expense and real estate tax recoveries for April, May andJune 2020 has been paid. Of the 20% unpaid, rent subject to executed deferral agreements totaled approximately$3.9 million , which represents 8% of total billings and 37% of the total unpaid balance for such period. The Company is generally not charging late fees or delinquent interest on these past due payments and, in many cases, additional rent deferral agreements are being negotiated to allow tenants temporary relief where needed. The deferral agreements being negotiated, generally, permit tenants to defer 30 to 90 days of rent, operating expense and real estate tax recovery payments until a later time in their lease term with repayment typically occurring over a 12-month period generally commencing in 2021. We expect that our rent collections will continue to be below our tenants' contractual rent obligations for so long as governmental orders require non-essential businesses to remain at limited capacity or closed and residents to stay at home. We will continue to accrue rental revenue during the deferral period. However, 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. Rent collections during the second quarter and rent relief requests to-date may not be indicative of collections or requests in any future period. The following is a summary of the Company's consolidated total rent collections for the second quarter and July rent billings, including minimum rent, operating expense recoveries, and real estate tax reimbursements as ofAugust 5, 2020 : 2020 Second Quarter •80% of 2020 Second Quarter total billings has been paid by our tenants (comprised of 82%, 78% and 79%, for April, May andJune 2020 , respectively.) ?74% of retail ?94% of office ?100% of residential ?Additionally, rent deferral agreements comprising approximately 8% of 2020 Second Quarter total billings have been executed (or 37% of the total unpaid balance, including 17% with anchor/national tenants). The executed deferrals typically cover three months of rent and are generally scheduled to be repaid during 2021 and 2022. As a condition to granted rent deferrals, we have sought and received extended lease terms, or waivers of certain adjacent use or common area restrictions. -22-
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July 2020 ?84% ofJuly 2020 total billings has been paid by our tenants. ?79% of retail ?94% of office ?99% of residential Additionally, rent deferral agreements comprising approximately 2% of July total billings have been executed (or 10% of the total unpaid balance, including 6% with anchor/national tenants). These deferrals are structured similarly to the second quarter deferrals. The Company strongly encouraged small business tenants to apply for Paycheck Protection Program loans, as available, under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The Company has information that many tenants applied for these loans and several tenants have communicated that loan proceeds are being received and have subsequently remitted rental payments. As ofJuly 31, 2020 , the Company had$53.4 million of cash and cash equivalents and borrowing availability of approximately$200.3 million under its unsecured revolving credit facility. The extent of the effects of COVID-19 on the Company's business, results of operations, cash flows, and growth prospects is highly 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 will help minimize interruptions to operations and will put the Company in the best position to participate in the recovery when the time comes. 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 impacts 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. The Company was able to transition all but a limited number of essential employees to remote work and does not anticipate any adverse impact on its ability to continue to operate its business. Transitioning to a largely remote workforce has not had any material adverse impact on the Company's financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. Currently, we have a limited number of employees coming into offices as needed. We have also made temporary changes to lower overhead expenses including salary reductions, a corporate hiring freeze, reduction of the company retirement plan match percentage, elimination of business travel and discretionary spending such as professional seminars. General The following discussion is based primarily on the consolidated financial statements of the Company as of and for the three and six months endedJune 30, 2020 . 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 supplementing its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers. The residential component of The Waycroft, a project with 491 apartment units and 60,000 square feet of retail space, onNorth Glebe Road , within two blocks of theBallston Metro Station , inArlington, Virginia was placed into service inApril 2020 . 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 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 theMarch 2020 addition of a 69,000 square foot Giant Food at Seven Corners and the June -23-
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2020 addition of a 36,000 square footLA Fitness atBroadlands Village and the coming addition of a 54,000 square foot 99 Ranch grocery store at Shops atFairfax . 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. Prior to the COVID-19 pandemic, economic conditions within the localWashington, DC metropolitan area had 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 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, decreased to 94.7% atJune 30, 2020 , from 95.2% atJune 30, 2019 . We expect the volume of lease renewals in 2020, and the rental rates at which leases renew, will be negatively impacted by the effects of COVID-19 when comparing executed retail leases to prior year leasing activity. 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 ofJune 30, 2020 , amortizing fixed-rate mortgage debt with staggered maturities from 2021 to 2035 represented approximately 78.9% of the Company's notes payable, thus minimizing refinancing risk. The Company's variable-rate debt consists of$249.5 million outstanding under the credit facility. As ofJune 30, 2020 , the Company has loan availability of approximately$150.3 million under its$325.0 million unsecured 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. 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 Waycroft, Clarendon Center andPark Van Ness apartments). For purposes of this table, annualized effective rent is annualized base rent minus amortized tenant improvements and amortized leasing commissions. The$0.60 per square foot decrease in base rent in the 2020 Period compared to the 2019 Period is primarily attributable to a 77,888 square foot increase in commercial space relating to completed developments projects. The space is fully leased, but rent has not yet commenced. Six months ended June 30, 2020 2019 2018 2017 2016 Base rent$ 19.58 $ 20.18 $ 20.27 $ 19.19 $ 18.68 Effective rent$ 17.88 $ 18.28 $ 18.35 $ 17.37 $ 16.87 Recent Developments From 2014 through 2016, in separate transactions, the Company purchased four adjacent properties onNorth Glebe Road inArlington, Virginia , for an aggregate$54.0 million . The Company has substantially completed construction of The Waycroft, a project with 491 apartment units and 60,000 square feet of retail space on 2.8 acres of land, and apartment occupancy commenced inApril 2020 . The total cost of the project, including acquisition of land, is expected to be approximately$275.0 million , plus approximately$19.0 million of capitalized interest. A portion of the cost is being financed with a$157.0 million construction-to-permanent loan. Including approximately$18.9 million of capitalized interest and costs of$3.7 million which are accrued and unpaid, costs incurred throughJune 30, 2020 total approximately$273.2 million , of which$136.2 million has been financed by the loan. Leases have been executed for a 41,500 square foot Target and 12,600 square feet -24-
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of retail shop space, resulting in approximately 90% of the planned retail space being leased. Target is scheduled to begin operating inAugust 2020 . An additional 5,900 square feet of retail space is expected to be operational during the second half of 2020. Applications have been received for 217 residential leases, totaling approximately 44.2% of the available units, with 189 units occupied as ofAugust 5, 2020 . Albertson's/Safeway is currently a tenant at seven of the Company's shopping centers, two locations of which are subleased to other grocers. InFebruary 2017 , the Company terminated the lease with Albertson's/Safeway atBroadlands Village . The Company executed a lease withAldi Food Market for 20,000 square feet of this space, which opened inNovember 2017 , and has executed a lease withLA Fitness for substantially all of the remaining space.LA Fitness opened for business onJune 16, 2020 . In the fourth quarter of 2018, the Company substantially completed construction of the shell of a 16,000 square foot small shop expansion atBurtonsville Town Square and construction of interior improvements for the final two tenants are underway. Delivery of the first leased tenant spaces occurred in late 2018, and tenant openings began in the first quarter of 2019. The total development cost was$5.7 million . Leases have been executed for all of the space. In addition, a lease has been executed withTaco Bell , which commenced construction inJanuary 2020 of a free-standing building on a pad site within the property and is expected to commence operations during the third quarter of 2020. InMay 2018 , the Company acquired from theSaul Trust , in exchange for 176,680 limited partnership units, approximately 13.7 acres of land located at the intersection ofAshburn Village Boulevard andRussell Branch Parkway inAshburn, Virginia . The Company has substantially completed construction ofAshbrook Marketplace , an approximately 86,000 square foot neighborhood shopping center. A 29,000 square foot Lidl grocery store opened inNovember 2019 , and the shopping center is 100% leased. The first small shop opened for business inApril 2020 , and the remaining tenants are scheduled to open throughout 2020, subject to the removal of COVID-19 occupancy restrictions. All four pad sites have been leased and are in various stages of construction or obtaining permit approvals. The Company may be obligated to issue additional limited partnership units to theSaul Trust in the second quarter of 2021. As ofJune 30, 2020 , the Company estimates this obligation to range in value from$3.5 million to$4.0 million , based on projected net operating income ofAshbrook Marketplace for the 12 months endingMay 31, 2021 . InSeptember 2018 , the Company purchased for$35.5 million , plus$0.7 million of acquisition costs, an office building and the underlying ground located at7316 Wisconsin Avenue inBethesda, Maryland . InDecember 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. EffectiveSeptember 1, 2019 , the asset was removed from service and transferred to construction in progress. The Company is currently performing interior demolition in preparation for future development. The timing of construction will depend on issuance of final building permits and market conditions. OnNovember 5, 2019 , the Company entered into an agreement (the "Contribution Agreement") to acquire from theSaul Trust , approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at theTwinbrook Metro Station inRockville, Maryland (the "Contributed Property"). In exchange for the Contributed Property, the Company will issue to theSaul Trust 1,416,071 limited partnership units at an agreed upon value of$56.00 per unit, representing an aggregate value of$79.3 million for the Contributed Property. Deed to the Contributed Property and the units were placed in escrow until certain conditions of the Contribution Agreement are satisfied. 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 meetings and a hearing before the planning commission is scheduled for the third quarter of 2020. 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. -25-
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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. 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 including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the projected cash flows of the property over its remaining useful life, on an undiscounted basis, are compared 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, an impairment loss is recognized 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. -26-
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Table of Contents Results of Operations Three months endedJune 30, 2020 (the "2020 Quarter") compared to the three months endedJune 30, 2019 (the "2019 Quarter") Revenue Three months ended June 30, 2019 to 2020 Change (Dollars in thousands) 2020 2019 Amount Percent Base rent$ 45,504 $ 46,874 $ (1,370 ) (2.9 )% Expense recoveries 8,186 8,677 (491 ) (5.7 )% Percentage rent 145 330 (185 ) (56.1 )% Other property revenue 338 390 (52 ) (13.3 )% Credit losses on operating lease receivables (2,171 ) (318 ) (1,853 ) 582.7 % Rental revenue 52,002 55,953 (3,951 ) (7.1 )% Other revenue 1,218 2,188 (970 ) (44.3 )% Total revenue$ 53,220 $ 58,141 $ (4,921 ) (8.5 )% Base rent includes$(557,000) and$4,300 for the 2020 Quarter and 2019 Quarter, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes$349,700 and$367,500 , for the 2020 Quarter and 2019 Quarter, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties. Total revenue decreased 8.5% in the 2020 Quarter compared to the 2019 Quarter, as described below. Base Rent. The$1.4 million decrease in base rent in the 2020 Quarter compared to the 2019 Quarter is primarily attributable to lower straight-line rental income across the Shopping Center portfolio ($1.2 million ). Expense Recoveries. Expense recoveries decreased 5.7% in the 2020 Quarter compared to the 2019 Quarter primarily due to a decrease in recoverable property operating expenses. Credit Losses on Operating Lease Receivables. Credit losses on operating lease receivables for the 2020 Quarter increased$1.9 million from the 2019 Quarter. The increase is primarily due to increased reserves across the Shopping Center portfolio as a result of the impact of COVID-19 on tenant operations. Other Revenue. Other revenue decreased$1.0 million primarily due to lower parking income ($0.5 million ) and lower lease termination fees ($0.4 million ). Expenses Three months ended June 30, 2019 to 2020 Change (Dollars in thousands) 2020 2019 Amount Percent Property operating expenses$ 6,410 $ 7,115 $ (705 ) (9.9 )% Real estate taxes 7,351 6,819 532 7.8 % Interest expense, net and amortization of deferred debt costs 12,019 10,793 1,226 11.4 % Depreciation and amortization of deferred leasing costs 12,600 11,524 1,076 9.3 % General and administrative 4,632 5,140 (508 ) (9.9 )% Total expenses$ 43,012 $ 41,391 $ 1,621 3.9 % Total expenses increased 3.9% in the 2020 Quarter compared to the 2019 Quarter, as described below. The Waycroft mixed-use development opened inApril 2020 and, concurrent with the opening, interest, real estate taxes and all other costs -27-
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associated with the residential portion of the property, including depreciation, began to be charged to expense, while revenue continues to grow as occupancy increases (collectively,$4.9 million ). Property Operating Expenses. Property operating expenses decreased 9.9% in the 2020 Quarter primarily due to the deferral of non-essential property expenses in response to the impact of COVID-19. The Company continues to complete emergency repairs and handle life and safety issues as needed. Real Estate Taxes. Real estate taxes increased 7.8% in the 2020 Quarter primarily due to the substantial completion of The Waycroft ($0.3 million ) and cessation of capitalization of those taxes. Interest Expense, net and Amortization of Deferred Debt Costs. Interest expense, net and amortization of deferred debt costs increased 11.4% in the 2020 Quarter primarily due to the opening of The Waycroft inApril 2020 ($2.6 million ), partially offset by an increase in capitalized interest related to7316 Wisconsin Avenue ($0.6 million ). Depreciation and Amortization of Deferred Leasing Costs. Depreciation and amortization increased 9.3% in the 2020 Quarter primarily due to The Waycroft being placed in service, as noted above ($1.5 million ). General and Administrative. General and administrative expenses decreased 9.9% in the 2020 Quarter primarily due to reduced overhead expenses including salary reductions, a corporate hiring freeze, elimination of business travel and discretionary spending such as professional seminars. Six months endedJune 30, 2020 (the "2020 Period") compared to the six months endedJune 30, 2019 (the "2019 Period") Revenue Six Months Ended June 30, 2019 to 2020 Change (Dollars in thousands) 2020 2019 Amount Percent Base rent$ 91,852 $ 93,485 $ (1,633 ) (1.7 )% Expense recoveries 16,802 18,489 (1,687 ) (9.1 )% Percentage rent 435 613 (178 ) (29.0 )% Other property revenue 629 725 (96 ) (13.2 )% Credit losses on operating lease receivables (2,300 ) (556 ) (1,744 ) 313.7 % Rental revenue 107,418 112,756 (5,338 ) (4.7 )% Other revenue 2,745 5,135 (2,390 ) (46.5 )% Total revenue$ 110,163 $ 117,891 $ (7,728 ) (6.6 )% Base rent includes$(200,600) and$(211,600) for the 2020 Period and the 2019 Period, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes$702,600 and$727,600 for the 2020 Period and the 2019 Period, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties. Total revenue decreased 6.6% in the 2020 Period compared to the 2019 Period, as described below. Base Rent. The$1.6 million decrease in base rent in the 2020 Period compared to 2019 Period is primarily attributable to (a) lower straight-line rental income across the Shopping Center portfolio ($1.0 million ) and (b) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchors at Seven Corners, which opened inMarch 2020 , and at Shops atFairfax , projected to open in the third quarter of 2020 (collectively,$0.5 million ). Expense Recoveries. Expense recoveries decreased 9.1% in the 2020 Period primarily due to a decrease in recoverable property operating expenses, largely repairs and maintenance and snow removal. Credit Losses on Operating Lease Receivables. Credit losses on operating lease receivables for the 2020 Period represents 2.09% of the Company's revenue, an increase from 0.47% for the 2019 Period. The increase is primarily due to increased reserves across the Shopping Center portfolio as a result of the impact of COVID-19 on tenant operations. Other Revenue. Other revenue decreased$2.4 million primarily due to lower lease termination fees ($1.7 million ) and lower parking income ($0.7 million ). -28-
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Expenses
Six Months Ended
June 30, 2019 to 2020 Change
(Dollars in thousands) 2020 2019 Amount Percent
Property operating expenses $ 13,446 $ 15,116 $ (1,670 ) (11.0 )%
Real estate taxes 14,504 13,967 537 3.8 %
Interest expense, net and
amortization of deferred debt costs 21,613 21,860 (247 ) (1.1 )%
Depreciation and amortization of
deferred leasing costs 23,881 23,167 714 3.1 %
General and administrative 9,682 9,954 (272 ) (2.7 )%
Total expenses $ 83,126 $ 84,064 $ (938 ) (1.1 )%
Total expenses decreased 1.1% in the 2020 Period compared to the 2019 Period, as
described below. The Waycroft mixed-use development opened in April 2020 and,
concurrent with the opening, interest, real estate taxes and all other costs
associated with the residential portion of the property, including depreciation,
began to be charged to expense, while revenue continues to grow as occupancy
increases (collectively, $4.9 million ).
Property Operating Expenses. Property operating expenses decreased 11.0% in the
2020 Period primarily due to the deferral of non-essential property expenses in
response to the impact of COVID-19. The Company continues to complete emergency
repairs and handle life and safety issues as needed.
Real Estate Taxes. Real estate taxes increased 3.8% in the 2020 Period primarily
due to the substantial completion of The Waycroft ($0.3 million ) and cessation
of capitalization of those taxes.
Depreciation and Amortization of Deferred Leasing Costs. The increase in
depreciation and amortization to $23.9 million in the 2020 Period from $23.2
million in the 2019 Period was primarily due to The Waycroft being placed in
service ($1.5 million ), partially offset by 7316 Wisconsin Avenue , which was
taken out of service in the third quarter of 2019 ($0.5 million ).
General and Administrative. General and administrative expenses decreased 2.7%
primarily due to reduced overhead expenses including salary reductions, a
corporate hiring freeze, elimination of business travel and discretionary
spending such as professional seminars.
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 property dispositions
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.
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.
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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 total property revenue and property operating income under GAAP to same property revenue and operating income for the indicated periods. The same property results for the three and six months endedJune 30, 2020 and 2019 include 49 Shopping Centers and six Mixed-Use properties. Same property revenue (in thousands) Three months endedJune 30 ,
Six months ended
2020 2019 2020 2019
Total revenue $ 53,220 $ 58,141 $ 110,163 $ 117,891
Less: Acquisitions, dispositions and
development properties (570 ) (194 ) (700 ) (1,083 )
Total same property revenue $ 52,650 $ 57,947 $ 109,463 $ 116,808
Shopping Centers $ 38,058 $ 42,259 $ 79,499 $ 85,417
Mixed-Use properties 14,592 15,688 29,964 31,391
Total same property revenue $ 52,650 $ 57,947 Total Shopping Center revenue$ 38,329 $ 42,259 $ 79,900 $ 85,417 Less: Shopping Center acquisitions, dispositions and development properties (271 ) - (401 ) -
Total same Shopping Center revenue
Total Mixed-Use property revenue
$ 30,263 $ 32,474 Less: Mixed-Use acquisitions, dispositions and development properties (299 ) (194 ) (299 ) (1,083 ) Total same Mixed-Use revenue$ 14,592 $ 15,688
The$5.3 million decrease in same property revenue for the 2020 Quarter compared to the 2019 Quarter, was primarily due to (a) higher credit losses on operating lease receivables and corresponding reserves (collectively,$2.8 million ), (b) lower expense recoveries due to decreased recoverable expenses ($0.5 million ), (c) lower parking income ($0.5 million ), (d) lower lease termination fees ($0.4 million ), (e) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchor at Shops atFairfax , which is projected to open in the third quarter of 2020 ($0.3 million ) and (f) lower percentage rent ($0.2 million ). The$7.3 million decrease in same property revenue for the 2020 Period, compared to the 2019 Period, was primarily due to (a) higher credit losses on operating lease receivables and corresponding reserves (collectively,$2.7 million ), (b) lower expense recoveries due to decreased recoverable expenses ($1.7 million ), (c) lower lease termination fees ($1.1 million ), (d) lower parking income ($0.6 million ), (e) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchors at Seven Corners, which opened inMarch 2020 , and at Shops atFairfax , which is projected to open in the third quarter of 2020 (collectively,$0.5 million ) and (f) lower percentage rent ($0.2 million ). -30-
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Same property operating income
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Net income $ 10,208 $ 16,750 $ 27,037 $ 33,827
Add: Interest expense, net and
amortization of deferred debt costs 12,019 10,793 21,613 21,860
Add: Depreciation and amortization of
deferred leasing costs 12,600 11,524 23,881 23,167
Add: General and administrative 4,632 5,140 9,682 9,954
Property operating income 39,459 44,207 82,213 88,808
Add (Less): Acquisitions,
dispositions and development
properties 363 12 258 (617 )
Total same property operating income
$ 82,471 $ 88,191 Shopping Centers$ 29,762 $ 33,707 $ 62,306 $ 67,177 Mixed-Use properties 10,060 10,512 20,165 21,014
Total same property operating income
Shopping Center operating income
$ 62,614 $ 67,177 Less: Shopping Center acquisitions, dispositions and development properties (203 ) - (308 ) - Total same Shopping Center operating income$ 29,762 $ 33,707
Mixed-Use property operating income
$ 19,599 $ 21,631 Add (Less): Mixed-Use acquisitions, dispositions and development properties 566 12 566 (617 ) Total same Mixed-Use property operating income$ 10,060 $ 10,512
The$4.4 million decrease in same property operating income in the 2020 Quarter compared to the 2019 Quarter was primarily due to (a) higher credit losses on operating lease receivables and corresponding reserves (collectively,$2.8 million ), (b) lower lease termination fees ($0.4 million ), (c) lower expense recoveries, net of recoverable expenses ($0.4 million ), (d) lower parking income, net of parking expenses ($0.3 million ), (e) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchor at Shops atFairfax , which is projected to open in the third quarter of 2020 ($0.3 million ) and (f) lower percentage rent ($0.2 million ). The$5.7 million decrease in same property operating income in the 2020 Period compared to the 2019 Period was primarily due to (a) higher credit losses on operating lease receivables and corresponding reserves (collectively,$2.7 million ), (b) lower lease termination fees ($1.1 million ), (c) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchors at Seven Corners, which opened inMarch 2020 , and at Shops atFairfax , which is projected to open in the third quarter of 2020 (collectively,$0.5 million ), (d) lower parking income, net of parking expenses ($0.4 million ) and (e) lower percentage rent ($0.2 million ). Liquidity and Capital Resources Cash and cash equivalents totaled$66.5 million and$9.3 million atJune 30, 2020 and 2019, respectively. The Company's cash flow is affected by its operating, investing and financing activities, as described below. Six Months EndedJune 30 , (In thousands) 2020
2019
Net cash provided by operating activities$ 41,749 $
63,832
Net cash used in investing activities (38,927 ) (68,599 ) Net cash provided by (used in) financing activities 49,730 (549 ) Increase (decrease) in cash and cash equivalents$ 52,552 $ (5,316 ) -31-
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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. We currently expect a short term decrease in cash provided by operating activities because our tenants are impacted by the COVID-19 pandemic and, while contractually obligated, some have not paid April, May orJune 2020 rent (see "Impact of COVID-19"). Investing Activities Net cash used in investing activities includes property acquisitions, developments, redevelopments, tenant improvements and other property capital expenditures. The$29.7 million decrease in cash used in investing activities is primarily due to (a) lower development expenditures ($32.6 million ) partially offset by (b) increased additions to real estate investments throughout the portfolio ($2.9 million ). Financing Activities Net cash provided by (or used in) 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 has substantially completed construction of 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$273.2 million as ofJune 30, 2020 . The remaining cost will be funded by a$157.0 million construction-to-permanent loan, which closed in 2017. 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 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 atJune 30, 2020 included cash balances of approximately$66.5 million and borrowing availability of approximately$150.3 million on its unsecured revolving credit facility, will be sufficient to meet its liquidity needs for the foreseeable future. With cash balances of over$53.4 million and borrowing capacity of approximately$200.3 million onJuly 31, 2020 , the Company believes that it has sufficient liquidity and flexibility to meet the needs of the Company's operations as the effects of the COVID-19 pandemic continue to evolve. 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 -32-
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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 93,590 and 217,882 shares under the DRIP at a weighted average discounted price of$46.70 and$51.33 per share, during the six months endedJune 30, 2020 and 2019, respectively. The Company issued 15,101 and 33,783 limited partnership units under the DRIP at a weighted average price of$49.40 and$52.06 per unit during the six months endedJune 30, 2020 and 2019, respectively. The Company also credited 3,015 and 2,269 shares to directors pursuant to the reinvestment of dividends specified by the Directors' Deferred Compensation Plan at a weighted average discounted price of$38.71 and$51.33 per share, during the six months endedJune 30, 2020 and 2019, 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 ofJune 30, 2020 . 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. AtJune 30, 2020 , 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 ofJune 30, 2020 , the applicable spread for borrowings was 140 basis points under the revolving credit facility and 135 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 ofJune 30, 2020 , based on the value of the Company's unencumbered properties, approximately$150.3 million was available under the revolving credit facility,$174.5 million was outstanding and approximately$185,000 was committed for letters of credit. 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 ofJune 30, 2020 , the Company was in compliance with all such covenants. OnJuly 14, 2020 , the Company closed on a 15-year, non-recourse$22.1 million mortgage loan secured byAshbrook Marketplace . The loan matures in 2035, bears interest at a fixed rate of 3.80%, requires monthly principal and interest payments of$114,226 based on a 25-year amortization schedule and requires a final payment of$11.5 million at maturity. The proceeds from the loan were used to pay down the revolving credit facility. OnJuly 24, 2020 , the Company closed on a 15-year, non-recourse$30.0 million mortgage loan secured byKentlands Place , Kentlands Square I and Kentlands Pad. The loan matures in 2035, bears interest at a fixed rate of 3.43%, requires monthly principal and interest payments of$149,064 based on a 25-year amortization schedule and requires a final payment of$15.3 million at maturity. The proceeds from the loan were used to pay down the revolving credit facility. -33-
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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 2020 Period, totaled$45.3 million , a decrease of 11.3% compared to the 2019 Period. FFO available to common stockholders and noncontrolling interests decreased primarily due to (a) initial operations of The Waycroft ($3.2 million ), (b) higher credit losses on operating lease receivables and corresponding reserves (collectively,$2.7 million ), (c) lower lease termination fees ($1.7 million ) and (d) lower base rent, primarily due to the lease expiration and re-leasing of the grocery anchors at Seven Corners, which opened inMarch 2020 , and at Shops atFairfax , which is projected to open in the third quarter of 2020 (collectively,$0.5 million ), partially offset by (e) lower interest incurred due to lower average interest rates during the period, exclusive of the impact of The Waycroft ($1.8 million ) and (f) higher capitalized interest for7316 Wisconsin Avenue ($1.1 million ). The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated:
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