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, 2020 . Historical results and percentage relationships set forth in Item 1 and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section have the meanings given to them in Item 1 of this Form 10-Q. Forward-Looking Statements Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "plans," "intends," "estimates," "anticipates," "expects," "believes" or similar expressions in this Form 10-Q. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements: •challenging domestic and global credit markets and their effect on discretionary spending; •the ability of our tenants to pay rent; •our reliance on shopping center "anchor" tenants and other significant tenants; •our substantial relationships with members of theSaul Organization ; •risks of financing, such as increases in interest rates, restrictions imposed by our debt, our ability to meet existing financial covenants and our ability to consummate planned and additional financings on acceptable terms; •our development activities; •our access to additional capital; •our ability to successfully complete additional acquisitions, developments or redevelopments, or if they are completed, whether such acquisitions, developments or redevelopments perform as expected; •risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks; •risks related to our status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to our status as a REIT, the effect of future changes to REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT; and •an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period. Additional information related to these risks and uncertainties are included in "Risk Factors" (Part I, Item 1A of this Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 ), "Quantitative and Qualitative Disclosures about Market Risk" (Part I, Item 3 of this Form 10-Q and Part II, Item 7A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 ), and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" (Part I, Item 2 of this Form 10-Q). -19- -------------------------------------------------------------------------------- Table of Contents 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 remainder of 2020 or future periods. As ofMarch 31, 2021 , 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 store, pharmacy, bank and home improvement store tenants generally remain open, restaurants are operating with limited indoor seating, supplemented with delivery and curbside pick-up, and most health, beauty supply and services, fitness centers, and other non-essential businesses are re-opening with limited customer capacity depending on location. As ofMay 4, 2021 , payments by tenants of contractual base rent and operating expense and real estate tax recoveries totaled approximately 96% for the first quarter. The Company is generally not charging late fees or delinquent interest on past due payments and, in many cases, rent deferral agreements have been negotiated to allow tenants temporary relief where needed. The deferral agreements, 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 first quarter 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 executed rent deferral agreements and repayment dates as ofMay 4, 2021 . (In thousands) Original Rent Due Original Rent Repayment Repayment Amount Amount Collection Percentage By Quarter Amount Year Amount Due Collected (prior to (based on payments deferral) (after deferral) currently due) 2020 First Quarter$ 66 2020 $ 331$ 331 $ 317 96 % 2020 Second Quarter 6,270 2021 5,806 1,921 1,751 91 % 2020 Third Quarter 1,464 2022 1,585 2020 Fourth Quarter 317 2023 354 2021 First Quarter 99 2024 111 April 2021 4 2025 17 Total$ 8,220 Thereafter 16 Total $ 8,220$ 2,252 $ 2,068 92 % -20-
-------------------------------------------------------------------------------- Table of Contents The following is a summary of the Company's consolidated total collections of the first quarter andApril 2021 rent billings, including minimum rent, operating expense recoveries, and real estate tax reimbursements, as ofMay 4, 2021 : 2021 first quarter •96% of 2021 first quarter total billings has been paid by our tenants. ?95% of retail ?97% of office ?99% of residential ?Additionally, rent deferral agreements comprising approximately 0.2% of 2021 first quarter total billings have been executed (or 5% of the total unpaid balance) none of which are with anchor/national tenants. The executed deferrals typically cover three months of rent and are generally scheduled to be paid during 2021 and 2022. As a condition to granted rent deferrals, we have sought, and in some cases received, extended lease terms, or waivers of certain adjacent use or common area restrictions.April 2021 ?93% ofApril 2021 total billings has been paid by our tenants. ?91% of retail ?94% of office ?99% of residential ?Additionally, rent deferral agreements comprising less than 0.1% of April total billings have been executed, none of which are with anchor/national tenants. These deferrals are structured similarly to the first quarter deferrals. Although the Company is and will continue to be actively engaged in rent collection efforts related to uncollected rent, and the Company will continue to work with certain tenantswho have requested rent deferrals, the Company can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. 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 ofApril 30, 2021 , the Company had$10.0 million of cash and cash equivalents and borrowing availability of approximately$212.8 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. -21- -------------------------------------------------------------------------------- Table of Contents General The following discussion is based primarily on the consolidated financial statements of the Company as of and for the three months endedMarch 31, 2021 . 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 pipeline of zoned sites in its portfolio, some of which are currently shopping center operating properties, for development of up to 3,700 apartment units and 975,000 square feet of retail and office space. All such sites are located adjacent 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. The Company has seven new pad site tenants, including three at our newly developedAshbrook Marketplace shopping center, that began paying rent in 2020. Annualized rent from these seven pad sites totals approximately$1.1 million . Additionally, the Company has executed leases or leases are under negotiation for ten more pad sites, tenants of five of which are expected to begin paying rent in 2021. The annualized rent from these ten pad sites is expected to total approximately$1.6 million . 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 92.2% atMarch 31, 2021 , from 96.3% atMarch 31, 2020 . We expect the volume of lease renewals in 2021, 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 ofMarch 31, 2021 , amortizing fixed-rate mortgage debt with staggered maturities from 2021 to 2035 represented approximately 84.4% of the Company's notes payable, thus minimizing refinancing risk. The Company's variable-rate debt consists of$179.0 million outstanding under the credit facility. As ofMarch 31, 2021 , the Company has availability of approximately$220.8 million under its$325.0 million unsecured revolving credit facility. -22- -------------------------------------------------------------------------------- Table of Contents Although it is management's present intention to concentrate future acquisition and development activities on transit-centric, primarily residential mixed-use properties in theWashington, D.C. /Baltimore metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. The Company plans to continue to diversify in terms of property types, locations, size and market, and it does not set any limit on the amount or percentage of assets that may be invested in any one property or any one geographic area. The following table sets forth average annualized base rent per square foot and average annualized effective rent per square foot for the Company's Commercial properties (all properties except for The Waycroft, Clarendon Center andPark Van Ness apartments). For purposes of this table, annualized effective rent is annualized base rent minus amortized tenant improvements and amortized leasing commissions. Three months ended March 31, 2021 2020 2019 2018 2017 Base rent$ 20.54 $ 19.83 $ 20.08 $ 20.26 $ 18.91 Effective rent$ 18.79 $ 18.14 $ 18.14 $ 18.33 $ 17.12 Recent Developments The Company 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 located onNorth Glebe Road inArlington, Virginia , and apartment occupancy commenced inApril 2020 . The total cost of the project, including acquisition of land, is expected to be approximately$279.0 million . A portion of the cost is being financed with a$157.0 million construction-to-permanent loan. Including approximately$19.1 million of capitalized interest, costs incurred throughMarch 31, 2021 total approximately$277.7 million , of which$148.0 million has been financed by the loan. Leases have been executed for a 41,500 square foot Target and 12,600 square feet of retail shop space, resulting in approximately 90% of the planned retail space being leased. Target began operating inAugust 2020 and 2,400 square feet of retail space became operational during the third quarter of 2020. Applications have been received for 485 residential leases, approximately 99% of the available units, with 478 units occupied as ofMay 4, 2021 . InMay 2018 , the Company acquired from the 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 all tenants, except one 3,231 square foot shop tenant and the free standing and under construction Bourbon restaurant, were open and paying rent as ofFebruary 23, 2021 . The Company may be obligated to issue additional limited partnership units to the Trust in the second quarter of 2021. As ofMarch 31, 2021 , the Company estimates this obligation to range in value from$3.0 million to$3.3 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, known asHampden House (formerly7316 Wisconsin Avenue ), for the development of up to 366 apartment units and 10,300 square feet of retail space. InJune 2020 , theMontgomery County Planning Commission unanimously approved the Company's amended site plan. Design and construction documents are being prepared. Approval from theWashington Metropolitan Area Transit Authority was received in 2020 and the approval fromMaryland Transit Administration is in process and is expected to be received by the fourth quarter of 2021. EffectiveSeptember 1, 2019 , the asset was removed from service and transferred to construction in progress. The Company has completed interior demolition in preparation for future development. The timing of construction will depend on issuance of final building permits and market conditions. -23- -------------------------------------------------------------------------------- Table of Contents OnNovember 5, 2019 , the Company entered into a Contribution Agreement to acquire the Contributed Property from the Trust. The Contributed Property is immediately adjacent to approximately 10.3 acres owned by the Company. In exchange for the Contributed Property, the Company will issue to the Trust 1,416,071 limited partnership units in theOperating Partnership . Title to the Contributed Property and the units were placed in escrow until certain conditions of the Contribution Agreement were satisfied. OnMarch 5, 2021 , the Company entered into an amendment to the Contribution Agreement in which it and the Trust agreed to release to the Company from escrow the deed and assignment of the leasehold interest of the Contributed Property, as of that date, and reimburse the Trust for certain expenses pursuant to the Contribution Agreement. The units will remain in escrow until the conditions of the Contribution Agreement, as amended, are satisfied.Saul Centers and certain consolidated subsidiaries of theOperating Partnership have guaranteed the payment obligations of theOperating Partnership under the credit facility. OnApril 30, 2021 , theOperating Partnership became the guarantor of the ground lease related toTwinbrook Quarter . The Company has acquired title to the property earlier than originally contemplated in order to have complete control over the final aspects of predevelopment, project bidding, contractor selection and lender discussions in support of Phase I. This control will also assure the preservation of the Wegmans lease and its value to this site and, as importantly, to the Company's adjacent holdings. The full project plan for redevelopment of a major mixed-use project spanning both the Company's property and the Contributed Property was finalized in 2019 and rights to develop the project extend for a thirty-year term to 2049. A site plan allowing for development of a planned Phase I within the Contributed Property, which includes an 80,000 square foot Wegmans, adjacent small shop space, 450 apartments and a 230,000 square foot office building, was approved by theCity of Rockville inAugust 2020 . The approval of the site plan was unanimous, however, it has been appealed by a local resident, but such appeal is not a technical or actual prohibition on moving forward with development. The phasing of these improvements and the timing of construction will depend on removal of contingencies, favorable resolution of the site plan appeal, building permit approval and market conditions. The development potential of the entire 18.4 acreTwinbrook Quarter site totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space. EffectiveMarch 31, 2021 ,Scott V. Schneider retired as the Company's Chief Financial Officer.Mr. Schneider will continue to serve the Company as a consultant. EffectiveApril 1, 2021 ,Carlos L. Heard was appointed the Company's Chief Financial Officer.Mr. Heard has served as Senior Vice President, Acquisitions and Development,B. F. Saul Company and Affiliates from 2019 to present; Vice President, Acquisitions and Development from 2013 to 2018; and Vice President, Acquisitions and Finance from 2010 to 2012. Prior to joining theB. F. Saul Company and Affiliates,Mr. Heard was Group Vice President of Capital Markets andCommercial Real Estate atChevy Chase Bank , where he worked from 1998 to 2009. EffectiveMay 7, 2021 ,D. Todd Pearson was appointed the Company's President and Chief Operating Officer. The Company's former President, B. F. Saul II,who served in that position sinceOctober 2019 , will continue to serve the Company as Chairman of the Board and Chief Executive Officer. 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 -24- -------------------------------------------------------------------------------- Table of Contents property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors when identifying impairment indicators including recurring operating losses, significant decreases in occupancy, and significant adverse changes in market conditions, legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying 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. Accounts Receivable, Accrued Income, and Allowance for Doubtful Accounts Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of their respective leases. Individual leases are assessed for collectability and, upon the determination that the collection of rents is not probable, accrued rent and accounts receivable are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is determined to be probable. We also assess whether operating lease receivables, at the portfolio level, are appropriately valued based upon an analysis of balances outstanding, effects of tenant bankruptcies, historical levels of bad debt and current economic trends. Additionally, because of the uncertainties related to the impact of the COVID-19 pandemic, our assessment also takes into consideration the types of business conducted by tenants and current discussions with the tenants, as well as recent rent collection experience. Evaluating and estimating uncollectable lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to management at the time of evaluation. Actual results could differ from these estimates. Legal Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of current matters will not have a material adverse effect on its financial position or the results of operations. Upon determination that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine. Results of Operations Three months endedMarch 31, 2021 (the "2021 Quarter") compared to the three months endedMarch 31, 2020 (the "2020 Quarter") Revenue Three months ended March 31, 2020 to 2021 Change (Dollars in thousands) 2021 2020 Amount Percent Base rent$ 48,659 $ 46,348 $ 2,311 5.0 % Expense recoveries 9,411 8,616 795 9.2 % Percentage rent 599 290 309 106.6 % Other property revenue 298 291 7 2.4 % Credit losses on operating lease receivables (1,211) (130) (1,081) 831.5 % Rental revenue 57,756 55,415 2,341 4.2 % Other revenue 968 1,528 (560) (36.6) % Total revenue$ 58,724 $ 56,943 $ 1,781 3.1 % Base rent includes$835,600 and$356,400 for the 2021 Quarter and 2020 Quarter, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes$346,900 and$352,900 , for the 2021 Quarter and 2020 Quarter, -25-
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Table of Contents respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.
Total revenue increased 3.1% in the 2021 Quarter compared to the 2020 Quarter, as described below. Base Rent. The$2.3 million increase in base rent in the 2021 Quarter compared to the 2020 Quarter is primarily attributable to the commencement of operations of The Waycroft inApril 2020 ($2.9 million ). Expense Recoveries. Expense recoveries increased 9.2% in the 2021 Quarter compared to the 2020 Quarter primarily due to an increase in recoverable property operating expenses. Percentage Rent. The 106.6% increase in percentage rent in the 2021 Quarter compared to the 2020 Quarter is primarily attributable to increased sales reported by anchor tenants at multiple Shopping Centers. Credit Losses on Operating Lease Receivables. Credit losses on operating lease receivables for the 2021 Quarter increased$1.1 million from the 2020 Quarter. The increase is primarily due to increased reserves across the portfolio as a result of the impact of COVID-19 on tenant operations. Other Revenue. Other revenue decreased$0.6 million primarily due to lower lease termination fees ($0.3 million ) and lower parking income ($0.2 million ). Expenses Three months ended March 31, 2020 to 2021 Change (Dollars in thousands) 2021 2020 Amount Percent Property operating expenses$ 8,686 $ 7,036 $ 1,650 23.5 % Real estate taxes 7,829 7,153 676 9.5 %
Interest expense, net and amortization of deferred debt costs
11,988 9,594 2,394 25.0 %
Depreciation and amortization of lease costs 12,748 11,281 1,467 13.0 %
General and administrative 4,678 5,050 (372) (7.4) %
Total expenses $ 45,929 $ 40,114 $ 5,815 14.5 %
Total expenses increased 14.5% in the 2021 Quarter compared to the 2020 Quarter,
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
(collectively, $5.1 million ), began to be charged to expense, while revenue
continues to grow as occupancy increases.
Property Operating Expenses. Property operating expenses increased 23.5% in the
2021 Quarter primarily due to (a) higher snow removal costs ($1.3 million ), (b)
the substantial completion of The Waycroft in April 2020 ($1.0 million ),
partially offset by (c) lower overall property operating expenses, exclusive of
The Waycroft ($0.6 million ).
Real Estate Taxes. Real estate taxes increased 9.5% in the 2021 Quarter
primarily due to the substantial completion of The Waycroft in April 2020 ($0.5
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 25.0% in the 2021 Quarter
primarily due to lower capitalized interest as a result of the opening of The
Waycroft in April 2020 ($2.0 million ).
Depreciation and Amortization of Lease Costs. Depreciation and amortization
increased 13.0% in the 2021 Quarter primarily due to The Waycroft being placed
in service in April 2020 ($1.7 million ).
General and Administrative. General and administrative expenses decreased 7.4%
in the 2021 Quarter primarily due to reduced overhead expenses including a
corporate hiring freeze and reduction of business travel and discretionary
spending such as professional seminars.
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Table of Contents
Same property revenue and same property operating income
Same property revenue and same property operating income are non-GAAP financial
measures of performance and improve the comparability of these measures by
excluding the results of properties which were not in operation for the entirety
of the comparable reporting periods.
We define same property revenue as total revenue minus the revenue of properties
not in operation for the entirety of the comparable reporting periods, and we
define same property operating income as net income plus (a) interest expense,
net and amortization of deferred debt costs, (b) depreciation and amortization
of lease costs, (c) general and administrative expenses, 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.
Same property revenue and same property operating income are measures of the
operating performance of our properties but do not measure our performance as a
whole. Such measures are therefore not substitutes for total revenue, net income
or operating income as computed in accordance with GAAP.
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Table of Contents
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 months ended
March 31, 2021 and 2020 include 50 Shopping Centers and six Mixed-Use
properties.
Same property revenue
(in thousands) Three months ended March 31,
2021 2020
Total revenue $ 58,724 $ 56,943
Less: Acquisitions, dispositions and development
properties (3,173) -
Total same property revenue $ 55,551 $ 56,943
Shopping Centers $ 42,444 $ 41,571
Mixed-Use properties 13,107 15,372
Total same property revenue $ 55,551 $ 56,943
Total Shopping Center revenue $
42,444
- -
Total same Shopping Center revenue $
42,444
Total Mixed-Use property revenue$ 16,280 $ 15,372 Less: Mixed-Use acquisitions, dispositions and development properties (3,173) - Total same Mixed-Use revenue $
13,107
The$1.4 million decrease in same property revenue for the 2021 Quarter compared to the 2020 Quarter, was primarily due to (a) lower base rent across the Mixed-Use portfolio ($1.2 million ), (b) higher credit losses on operating lease receivables and corresponding reserves (collectively,$1.0 million ), (b) lower parking income ($0.3 million ), (c) lower lease termination fees ($0.3 million ), partially offset by (d) higher expense recoveries due to increased recoverable expenses ($0.7 million ) and (e) higher base rent from Shopping Centers, primarily due to the stabilization ofAshbrook Marketplace ($0.5 million ) and the lease expiration and re-leasing of the grocery anchor at Shops atFairfax , which opened inAugust 2020 ($0.3 million ). -28- -------------------------------------------------------------------------------- Table of Contents Same property operating income Three Months Ended March 31, (In thousands) 2021 2020 Net income$ 12,795 $ 16,829
Add: Interest expense, net and amortization of
deferred debt costs 11,988
9,594
Add: Depreciation and amortization of lease costs 12,748
11,281
Add: General and administrative 4,678
5,050
Property operating income 42,209
42,754
Less: Acquisitions, dispositions and development
properties (1,676) - Total same property operating income$ 40,533 $ 42,754 Shopping Centers$ 32,367 $ 32,649 Mixed-Use properties 8,166 10,105 Total same property operating income$ 40,533
Shopping Center operating income$ 32,367
Less: Shopping Center acquisitions, dispositions and
development properties - - Total same Shopping Center operating income$ 32,367
Mixed-Use property operating income $ 9,842
Less: Mixed-Use acquisitions, dispositions and
development properties (1,676) -
Total same Mixed-Use property operating income $ 8,166
10,105
The$2.2 million decrease in same property operating income in the 2021 Quarter compared to the 2020 Quarter was primarily due to (a) lower base rent across the Mixed-Use portfolio ($1.2 million ) and (b) higher credit losses on operating lease receivables and corresponding reserves (collectively,$1.0 million ). Liquidity and Capital Resources Cash and cash equivalents totaled$14.6 million and$31.9 million atMarch 31, 2021 and 2020, respectively. The Company's cash flow is affected by its operating, investing and financing activities, as described below. Three Months Ended March 31, (In thousands) 2021 2020 Net cash provided by operating activities $ 34,778$ 26,050 Net cash used in investing activities (18,918) (21,588) Net cash provided by (used in) financing activities (28,162) 13,568 Increase (decrease) in cash and cash equivalents $
(12,302)
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 (see "Impact of COVID-19").
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Investing Activities
Net cash used in investing activities includes property acquisitions,
developments, redevelopments, tenant improvements and other property capital
expenditures. The $2.7 million decrease in cash used in investing activities is
primarily due to (a) lower development expenditures ($8.6 million ) and (b)
decreased additions to real estate investments throughout the portfolio ($2.4
million ), partially offset by (c) an increase in acquisitions of real estate
investments ($8.4 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 the Current
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. The Company
anticipates that long-term liquidity requirements will also include amounts
required for property acquisitions and developments. The Company is in the early
stages of the development of Phase I of the Twinbrook Quarter , a project that
includes an 80,000 square foot Wegmans, adjacent small shop space, 450
apartments and a 230,000 square foot office building in Rockville, Maryland . The
Company is in the process of evaluating financing options for the project. Costs
incurred are currently funded through working capital, including the Company's
existing line of credit. The Company may also 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, 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 the Saul
Centers , Operating Partnership or Subsidiary Partnership level, and securities
offerings may include (subject to certain limitations) the issuance of
additional limited partnership interests in the Operating Partnership which can
be converted into shares of Saul 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 at April 30,
2021 included cash balances of approximately $10.0 million and borrowing
availability of approximately $212.8 million on its unsecured revolving credit
facility, provide 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 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 94,231 and 82,783 shares under the DRIP at a weighted average
discounted price of $29.50 and $48.59 per share, during the three months ended
March 31, 2021 and 2020, respectively. The Company issued 19,493 and 15,101
limited partnership units under the DRIP at a weighted average price of $29.83
and $49.40 per unit during the three months ended March 31, 2021 and 2020,
respectively. The Company also credited 2,037 and 1,195 shares to directors
pursuant to the reinvestment of dividends specified by the Directors' Deferred
Compensation Plan at a weighted average discounted price of $29.50 and $48.59
per share, during the three months ended March 31, 2021 and 2020, respectively.
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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 the
Current 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 of
March 31, 2021 .
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.
At March 31, 2021 , 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 of
March 31, 2021 , 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 the Operating Partnership have
guaranteed the payment obligations of the Operating Partnership under the credit
facility. Letters of credit may be issued under the revolving credit facility.
As of March 31, 2021 , based on the value of the Company's unencumbered
properties, approximately $220.8 million was available under the revolving
credit facility, $104.0 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 of March 31, 2021 , the Company was in compliance with all such covenants.
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.
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Funds From Operations
Funds From Operations (FFO)1 available to common stockholders and noncontrolling
interests for the 2021 Quarter, totaled $22.7 million , a decrease of 10.1%
compared to the 2020 Quarter. FFO available to common stockholders and
noncontrolling interests decreased primarily due to (a) higher credit losses on
operating lease receivables and corresponding reserves (collectively,
$1.0 million ), (b) lower base rent, exclusive of The Waycroft ($0.6 million ),
(c) lower lease termination fees ($0.3 million ) and (d) initial operations of
The Waycroft ($0.3 million ).
The following table presents a reconciliation from net income to FFO available
to common stockholders and noncontrolling interests for the periods indicated:
Three Months Ended March 31,
(In thousands, except per share amounts) 2021 2020
Net income $ 12,795 $ 16,829
Add:
Real estate depreciation and amortization 12,748 11,281
FFO 25,543 28,110
Subtract:
Preferred stock dividends (2,798) (2,798)
FFO available to common stockholders and noncontrolling interests
$ 22,745 $ 25,312 Weighted average shares and units: Basic 31,493 31,192 Diluted (2) 31,965 31,196
Basic FFO per share available to common stockholders and noncontrolling interests
$ 0.72 $ 0.81 Diluted FFO per share available to common stockholders and noncontrolling interests
$ 0.71 $ 0.81
1 The National Association of Real Estate Investment Trusts (NAREIT) developed
FFO as a relative non-GAAP financial measure of performance of an equity REIT in
order to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. FFO is defined by NAREIT as net
income, computed in accordance with GAAP, plus real estate depreciation and
amortization, and excluding impairment charges on real estate assets and gains
or losses from real estate dispositions. FFO does not represent cash generated
from operating activities in accordance with GAAP and is not necessarily
indicative of cash available to fund cash needs, which is disclosed in the
Company's Consolidated Statements of Cash Flows for the applicable periods.
There are no material legal or functional restrictions on the use of FFO. FFO
should not be considered as an alternative to net income, its most directly
comparable GAAP measure, as an indicator of the Company's operating performance,
or as an alternative to cash flows as a measure of liquidity. Management
considers FFO a meaningful supplemental measure of operating performance because
it primarily excludes the assumption that the value of the real estate assets
diminishes predictably over time (i.e. depreciation), which is contrary to what
the Company believes occurs with its assets, and because industry analysts have
accepted it as a performance measure. FFO may not be comparable to similarly
titled measures employed by other REITs.
2 Beginning March 5, 2021 , fully diluted shares and units includes 1,416,071
limited partnership units that are currently held in escrow related to the
contribution of Twinbrook Quarter by the Saul Trust . The units will remain in
escrow until the conditions of the Contribution Agreement, as amended, are
satisfied.
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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.
Portfolio Leasing Status
The following chart sets forth certain information regarding Commercial leases
at our properties.
Total Properties Total Square Footage
Percent Leased
Shopping Shopping Shopping
Centers Mixed-Use Centers Mixed-Use Centers Mixed-Use
March 31, 2021 50 7 7,876,455 1,136,937 93.1 % 86.0 %
March 31, 2020 50 6 7,872,035 1,076,837 95.8 % 92.3 %
As of March 31, 2021 , 92.2% of the Commercial portfolio was leased, compared to
95.3% March 31, 2020 . On a same property basis, 92.2% of the Commercial
portfolio was leased, compared to 96.3% at March 31, 2020 . As of March 31, 2021 ,
the Residential portfolio was 96.9% leased compared to 96.7% at March 31, 2020 .
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.
Average Base Rent per Square Foot
Square Number New/Renewed Expiring
Three months ended March 31, Feet of Leases Leases Leases
2021 270,004 61 $ 18.29 $ 20.00
2020 427,692 64 34.41 35.54
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Additional information about the 2021 leasing activity is set forth below. The
below information includes leases for space which had not been previously leased
during the period of the Company's ownership, either a result of acquisition or
development.
New Renewed
Leases Leases
Number of leases 16 46
Square feet 42,135 236,471
Per square foot average annualized:
Base rent $ 19.07 $ 17.54
Tenant improvements (2.34) (0.43)
Leasing costs (0.68) (0.04)
Rent concessions (0.65) (0.15)
Effective rents $ 15.40 $ 16.92
During the three months ended March 31, 2021 , on a same property basis, the
Company entered into 130 new or renewed apartment leases. The average monthly
rent per square foot decreased to $3.18 from $3.53 . During the three months
ended March 31, 2020 , the Company entered into 97 new or renewed apartment
leases. The average monthly rent per square foot increased to $3.54 from $3.51 .
As of December 31, 2020 , 889,250 square feet of Commercial space was subject to
leases scheduled to expire in 2021. Of those leases, as of March 31, 2021 ,
leases representing 674,346 square feet of Commercial space have not yet renewed
and are scheduled to expire over the next three months. Below is information
about existing and estimated market base rents per square foot for that space.
Expiring Leases: Total
Square feet 674,346
Average base rent per square foot $ 23.89
Estimated market base rent per square foot $ 22.68 © Edgar Online, source
