<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1998
--------------
COMMISSION FILE NUMBER 1-12254
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SAUL CENTERS, INC.
-----------------
(Exact name of registrant as specified in its charter)
Maryland 52-1833074
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (301) 986-6000
--------------
Number of shares outstanding of each of the registrant's
classes of common stock, as of May 12, 1998:
Common Stock par value $0.01 per share: 12,620,058
---------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
----- -----
<PAGE>
SAUL CENTERS, INC.
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
--------------------------------
(a) Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997......................................... 4
(b) Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997...................... 5
(c) Consolidated Statements of Stockholders' Equity as of
March 31, 1998 and December 31, 1997...................... 6
(d) Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997...................... 7
(e) Notes to Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
(a) Liquidity and Capital Resources........................... 15
(b) Results of Operations
Three months ended March 31, 1998 compared to three
months ended March 31, 1997............................... 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 21
---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K............................... 21
--------------------------------
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments necessary for fair presentation of the
financial position and results of operations of Saul Centers, Inc. All such
adjustments are of a normal recurring nature. These consolidated financial
statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements of Saul Centers, Inc. for the year
ended December 31, 1997, which are included in its Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of
results to be expected for the year.
3
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
=================================================================================================================
March 31, December 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate investments
Land $ 65,630 $ 65,630
Buildings and equipment 271,050 269,638
-------- --------
336,680 335,268
Accumulated depreciation (95,096) (92,615)
-------- --------
241,584 242,653
Construction in progress 1,768 974
Cash and cash equivalents 2,060 688
Accounts receivable and accrued income, net 6,484 6,190
Prepaid expenses 5,057 5,423
Deferred debt costs, net 3,765 3,853
Other assets 2,669 1,161
-------- --------
Total assets $263,387 $260,942
======== ========
LIABILITIES
Notes payable $285,693 $284,473
Accounts payable, accrued expenses and other liabilities 14,239 13,093
Deferred income 2,022 1,430
-------- --------
Total liabilities 301,954 298,996
-------- --------
MINORITY INTERESTS -- --
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,526,023 and 12,428,145 shares issued and
outstanding, respectively 125 124
Additional paid-in capital 22,037 20,447
Accumulated deficit (60,729) (58,625)
-------- --------
Total stockholders' equity (deficit) (38,567) (38,054)
-------- --------
Total liabilities and stockholders' equity $263,387 $260,942
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
============================================================================================================
For the Three Months
Ended March 31,
----------------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------------------------------------
REVENUE
<S> <C> <C>
Base rent $ 13,471 $ 12,601
Expense recoveries 2,320 2,312
Percentage rent 799 759
Other 553 890
Total revenue 17,143 16,562
------------------------ ------------------------
OPERATING EXPENSES
Property operating expenses 1,971 2,026
Provision for credit losses 40 43
Real estate taxes 1,422 1,514
Interest expense 5,604 4,820
Amortization of deferred debt expense 101 545
Depreciation and amortization 2,725 2,572
General and administrative 802 793
Total operating expenses 12,665 12,313
------------------------ ------------------------
NET INCOME BEFORE EXTRAORDINARY
ITEM AND MINORITY INTERESTS 4,478 4,249
Extraordinary item
Early extinguishment of debt -- (369)
------------------------ ------------------------
NET INCOME BEFORE MINORITY INTERESTS 4,478 3,880
------------------------ ------------------------
MINORITY INTERESTS
Minority share of income (1,164) (1,048)
Distributions in excess of earnings (549) (665)
Total minority interests (1,713) (1,713)
------------------------ ------------------------
NET INCOME $ 2,765 $ 2,167
======================== ========================
NET INCOME PER SHARE (BASIC)
Net income before extraordinary
item and minority interests $ 0.27 $ 0.26
Extraordinary item -- (0.03)
------------------------ ------------------------
Net income before minority interests $ 0.27 $ 0.23
======================== ========================
Net income $ 0.22 $ 0.18
======================== ========================
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
========================================================================================================
Additional
Common Paid-in Accumulated
(Dollars in thousands, except per share amounts) Stock Capital Deficit Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY (DEFICIT):
Balance, December 31, 1996 $ 121 $15,950 $(42,011) $(25,940)
Issuance of 275,374 shares of
common stock 3 4,497 -- 4,500
Net income -- -- 2,552 2,552
Distributions ($1.17 per share) -- -- (14,334) (14,334)
Distributions payable ($.39 per share) -- -- (4,832) (4,832)
------ ------- -------- --------
Balance, December 31, 1997 124 20,447 (58,625) (38,054)
Issuance of 97,878 shares of
common stock 1 1,590 -- 1,591
Net income -- -- 2,765 2,765
Distributions payable ($.39 per share) -- -- (4,869) (4,869)
------ ------- -------- --------
Balance, March 31, 1998 $ 125 $22,037 $(60,729) $(38,567)
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
=====================================================================================================================
For the Three Months
Ended March 31,
---------------------------------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,765 $ 2,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 1,713 1,713
Loss on early extinguishment of debt -- 369
Depreciation and amortization 2,826 3,117
Provision for credit losses 40 43
Decrease (increase) in accounts receivable (334) 1,200
Increase in prepaid expenses 122 265
Decrease (increase) in other assets (1,508) 781
Increase in accounts payable and other liabilities 1,146 837
Increase in deferred income 592 1,605
----------------------- ------------------------
Net cash provided by operating activities 7,362 12,097
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments (1,412) (1,151)
Additions to construction in progress (794) (2,920)
----------------------- ------------------------
Net cash used in investing activities (2,206) (4,071)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 4,500 43,500
Repayments on notes payable (3,280) (43,600)
Note prepayment fees -- (95)
Additions to deferred debt expense (13) (350)
Proceeds from the issuance of common stock 1,591 940
Distributions to common stockholders and
holders of convertible limited partnership
units in the Operating Partnership (6,582) (6,465)
----------------------- ------------------------
Net cash used in financing activities (3,784) (6,070)
----------------------- ------------------------
Net increase in cash 1,372 1,956
Cash, beginning of period 688 38
----------------------- ------------------------
Cash, end of period $ 2,060 $ 1,994
======================= ========================
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, FORMATION AND STRUCTURE
ORGANIZATION
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. The authorized capital stock of Saul
Centers consists of 30,000,000 shares of common stock, having a par value of
$0.01 per share and 1,000,000 shares of preferred stock. Each holder of common
stock is entitled to one vote for each share held. Saul Centers, together with
its wholly owned subsidiaries and the limited partnerships of which Saul Centers
or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". Saul Centers operates as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (a "REIT").
FORMATION AND STRUCTURE OF COMPANY
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, and purchased a land parcel which it
developed into a community shopping center. Therefore, as of March 31, 1998,
the Company's properties (the "Current Portfolio Properties") consisted of 30
operating shopping center properties (the "Shopping Centers") and three
predominantly office properties (the "Office Properties"). To facilitate the
placement of collateralized mortgage debt, the Company established Saul QRS,
Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of
Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul
Centers as the sole general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited partnership
interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II
Limited Partnership are held by the Operating Partnership as the sole limited
partner. Through this structure, the Company owns 100% of the Current
Portfolio Properties.
8
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company, which conducts all of its activities through its subsidiaries,
the Operating Partnership and Subsidiary Partnerships, engages in the ownership,
operation, management, leasing, acquisition, renovation, expansion, development
and financing of community and neighborhood shopping centers and office
properties, primarily in the Mid-Atlantic region.
A majority of the Shopping Centers are anchored by several major tenants.
Eighteen of the 30 Shopping Centers are anchored by a grocery store and offer
primarily day-to-day necessities and services. As of December 1997, no single
shopping center accounted for more than 10.6% of the total shopping center
gross leasable area. Only one retail tenant, Giant Food at 6.5%, accounted for
more than 2.0% of total Company revenues. No other retail tenants represented
more than 2.0% of total revenues for the year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of Saul Centers, its subsidiaries, and the Operating Partnership
and Subsidiary Partnerships which are majority owned by Saul Centers. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REAL ESTATE INVESTMENT PROPERTIES
Real estate investment properties are stated at the lower of depreciated
cost or fair value less cost to sell. Management believes that these assets
have generally appreciated in value 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 these financial statements. These
financial statements are prepared in conformity with generally accepted
accounting principles, and accordingly, do not report the current value of the
Company's real estate assets. Real estate investment properties are reviewed
for potential impairment losses whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
sum of an individual property's undiscounted expected future cash flows is less
than its carrying amount, the Company's policy is to recognize an impairment
loss measured by the amount the depreciated cost of the property exceeds its
fair value. Fair value is calculated as the present value of expected future
cash flows.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially completed and
the assets are placed in service, their rental income, direct operating expenses
and depreciation are included in current operations. Expenditures for repairs
and maintenance are charged to operations as incurred.
9
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest expense capitalized during the three month periods ended March 31, 1998
and 1997, was $34,000 and $65,000, respectively.
A project is considered substantially complete and available for occupancy
upon completion of tenant improvements, but no later than one year from the
cessation of major construction activity. Substantially completed portions of a
project are accounted for as separate projects. Depreciation is calculated
using the straight-line method and estimated useful lives of 33 to 50 years for
buildings and up to 20 years for certain other improvements. Leasehold
improvements are amortized over the lives of the related leases using the
straight-line method.
ACCOUNTS RECEIVABLE AND ACCRUED INCOME
Accounts receivable primarily represent amounts currently due from tenants
in accordance with the terms of the respective leases. In addition, at March
31, 1998 accounts receivable included $1,656,000, representing minimum rental
income accrued on a straight-line basis to be paid by tenants over the terms of
the respective leases. Receivables are reviewed monthly and reserves are
created or set up when, in the opinion of management, collection of the
receivable is doubtful. Accounts receivable in the accompanying financial
statements are shown net of an allowance for doubtful accounts of $491,000 at
March 31, 1998.
DEFERRED DEBT COSTS
Deferred debt costs consist of financing fees and costs incurred to obtain
long-term financing. These fees and costs are being amortized over the terms of
the respective loans or agreements. Deferred debt costs in the accompanying
financial statements are shown net of accumulated amortization of $272,000 at
March 31, 1998.
REVENUE RECOGNITION
Rental and interest income is accrued as earned except when doubt exists as
to collectibility, in which case the accrual is discontinued. When rental
payments due under leases vary from a straight-line basis, because of free rent
periods or stepped increases (excluding those increases which approximate
inflationary increases), income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent property operating expenses to be billed to tenants, including common
area maintenance, real estate taxes and other recoverable costs. Expense
recoveries are recognized in the period the expenses are incurred. Generally,
additional rental income based on tenant's revenues ("percentage rent") is
accrued on the basis of the prior year's percentage rent, adjusted to give
effect to current sales data.
10
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INCOME TAXES
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ending December 31, 1993. A REIT generally will not be subject to federal income
taxation on that portion of its income that qualifies as REIT taxable income to
the extent that it distributes at least 95% of its REIT taxable income to
stockholders and complies with certain other requirements. Therefore, no
provision has been made for federal income taxes in the accompanying financial
statements.
PER SHARE DATA
Per share data is calculated in accordance with SFAS No. 128, "Earnings Per
Share. The Company has no dilutive securities, therefore, basic and diluted
earnings per share are identical. Net income before minority interests is
presented on a fully converted basis, that is, assuming the limited partners
exercise their right to convert their partnership ownership into shares of Saul
Centers, and is computed using weighted average shares of 16,887,113, and
16,586,962, shares for the quarters ended March 31, 1998 and 1997, respectively.
Per share data relating to net income after minority interests is computed on
the basis of 12,493,950, and 12,193,799, weighted average common shares for the
quarters ended March 31, 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassifications
have no impact on operating results previously reported.
MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization has a 26.1% limited partnership interest,
represented by 4,393,163 convertible limited partnership units, in the Operating
Partnership, as of March 31, 1998. These Convertible Limited Partnership Units
are convertible into shares of Saul Centers' common stock on a one-for-one
basis, provided the rights may not be exercised at any time that The Saul
Organization owns, directly or indirectly, in the aggregate more than 24.9% of
the outstanding equity securities of Saul Centers. The impact of The Saul
Organization's 26.1% limited partnership interest in the Operating Partnership
is reflected as minority interests in the accompanying financial statements.
11
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DIRECTORS DEFERRED COMPENSATION PLAN
A Deferred Compensation Plan was established by Saul Centers, effective
January 1, 1994, for the benefit of its directors and their beneficiaries. A
director may elect to defer all or part of his or her director's fees to be
earned subsequent to the election. A director has the option to have deferred
director's fees paid in cash, in shares of common stock or in a combination of
cash and shares of common stock. If the director elects to have the deferred
fees paid in stock, the number of shares allocated to the director is determined
based on the market value of the common stock on the day the deferred director's
fee was earned. The Company has registered 70,000 shares for use under the
plan, all of which were authorized at March 31, 1998. As of March 31, 1998,
42,186 shares had been credited to the directors' deferred fee accounts.
NEW ACCOUNTING PROUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for the reporting and display of comprehensive
income in the Company's financial statements. The Company adopted this standard
in the first quarter of 1998. The Company had no comprehensive income.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Adoption of the
new standard is required for the December 1998 financial statements. Because
SFAS 131 addresses only disclosure-related issues, its adoption will not have an
impact on the Company's financial condition or its results of operations.
3. CONSTRUCTION IN PROGRESS
Construction in progress includes the costs of redeveloping the French
Market shopping center and other predevelopment project costs. Development costs
include direct construction costs and indirect costs such as architectural,
engineering, construction management and carrying costs consisting of interest,
real estate taxes and insurance. Construction in progress balances as of March
31, 1998 are as follows:
12
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Construction in progress
------------------------
(in thousands) March 31, 1998 December 31, 1997
-------------- -----------------
French Market $1,384 $807
Beacon Center 289 153
Other 95 14
------ ----
Total $1,768 974
====== ====
4. NOTES PAYABLE
Notes payable totaled $285.7 million at March 31, 1998, of which $269.7
million (94.4%) was fixed rate debt and $16.0 million (5.6%) was floating rate
debt.
As of March 31, 1998, the Company had a $60 million unsecured revolving
credit facility with outstanding borrowings of $16.0 million and additional
borrowing availability of $44.0 million. The line required monthly interest
payments at a rate of LIBOR plus 1.5%.
As of March 31, 1998, the scheduled maturities of all debt for years ending
December 31, were as follows:
Debt Maturity Schedule
----------------------
(In thousands)
April 1 through December 31, 1998 $ 3,492
1999 5,163
2000 21,547
2001 5,949
2002 5,607
2003 6,079
Thereafter 237,856
--------
Total $285,693
========
5. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
These financial statements are prepared in conformity with generally
accepted accounting principles and accordingly do not report the current value
of the Company's real estate assets. The Shareholders' Equity reported on the
Consolidated Balance Sheets does not reflect any increase in the value resulting
from the difference between the current value and the net book value of the
Company's assets. Therefore Shareholder's Equity reported on the Consolidated
Balance Sheets does not reflect the market value of stockholders' investment in
the Company.
13
<PAGE>
The Consolidated Statement of Operations for the three months ended March
31, 1998 includes a charge for minority interests of $1,713,000 consisting of
$1,164,000 related to The Saul Organization's share of the net income for the
1998 quarter and $549,000 related to distributions to minority interests in
excess of allocated net income for the 1998 quarter. The charge for the three
month period ended March 31, 1997 of $1,713,000 consists of $1,048,000 related
to The Saul Organization's share of net income for the 1997 quarter, and
$665,000 related to distributions to minority interests in excess of allocated
net income for the 1997 quarter.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion is based primarily on the consolidated financial
statements of Saul Centers, Inc. ("Saul Centers" and, together with its wholly
owned subsidiaries and the limited partnerships of which it or one of its
wholly owned subsidiaries is the sole general partner, the "Company") as of
March 31, 1998 and for the three month period ended March 31, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's principal demands for liquidity are expected to be
distributions to its stockholders, debt service and loan repayments, 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
95% of its "real estate investment trust taxable income," as defined in the
Internal Revenue Code of 1986, as amended. The Company anticipates that
operating revenues will provide the funds necessary for operations, debt
service, distributions, and required recurring capital expenditures. Balloon
principal repayments are expected to be funded by refinancings.
Management anticipates that during the coming year the Company may: 1)
redevelop certain of the Shopping Centers, 2) develop additional freestanding
outparcels or expansions within certain of the Shopping Centers, 3) acquire
existing neighborhood and community shopping centers and/or office properties
and 4) develop new shopping center sites. Acquisition and development of
properties are undertaken only after careful analysis and review, and such
property is expected to provide long-term earnings and cash flow growth. During
the coming year, any developments, redevelopments, expansions or acquisitions
are expected to be funded with bank borrowings from the Company's credit line or
other external capital resources available to the Company.
The Company expects to fulfill its long range requirements for capital
resources in a variety of ways, including undistributed cash flow from
operations, secured or unsecured bank and institutional borrowings, private or
public offerings of debt or equity securities and proceeds from the sales of
properties. 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.
Management believes that the Company's current capital resources, including
approximately $44,000,000 of the Company's credit line which was available for
borrowing as
15
<PAGE>
of March 31, 1998, will be sufficient to meet its liquidity needs for the
foreseeable future.
Financial Information
- ---------------------
For the first quarter of 1998, the Company reported Funds From Operations
(FFO) of $7,203,000. This represents a 5.6% increase over the comparable 1997
period's FFO of $6,821,000. The following table represents a reconciliation
from net income before minority interests to FFO:
Funds From Operations Schedule
------------------------------
(In thousands)
For the Quarters Ended March 31,
1998 1997
---- ----
Net income before minority interests $4,478 $ 3,880
Add:
Depreciation and amortization of real property 2,725 2,572
Debt restructuring losses:
Write-off unamortized loan costs -- 369
------- -------
Funds From Operations $ 7,203 $ 6,821
======= =======
Cash Flow provided by (used in):
Operating activities $ 7,362 $12,097
Investing activities $(2,206) $(4,071)
Financing activities $(3,784) $(6,070)
FFO does not represent cash generated from operating activities in accordance
with generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs, which is disclosed in the 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, 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 supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. FFO may not be comparable to
similarly titled measures employed by other REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts, is calculated as net
income excluding gains or losses from debt restructuring and sales of property,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
16
<PAGE>
Capital Strategy and Financing Activity
- ---------------------------------------
The Company's capital strategy is to maintain a ratio of 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. Management believes that current total debt remains less than
50% of total asset value.
During 1997, the Company closed two long-term fixed rate mortgages, which
management believes enhance the balance sheet. The first was a $38.5 million
loan closed in January 1997, for a term of 16 years at a fixed interest rate of
7.88%, and a twenty-year principal amortization schedule. A balloon payment of
approximately $24.5 million will be due at maturity in January 2013. This loan
is secured by the 601 Pennsylvania Avenue office property. The proceeds of this
new loan were used to repay existing floating rate debt, which had a weighted
remaining term of less than 3 years and a weighted average interest rate of
LIBOR plus 2.05%, or 7.58% assuming the three month LIBOR rate effective as of
December 31, 1997.
In October 1997, the Company closed another loan in the amount of $147
million, for a 15-year term, at a fixed rate of 7.67%, and a twenty-five year
principal amortization schedule. A balloon payment of approximately $87.9
million will be due at maturity in October 2012. This loan is secured by nine
of the Company's retail properties. Also, in conjunction with the closing of
the loan, the Company closed a new three-year $60 million unsecured credit line,
which replaces the previous secured credit line. The interest rate floats at
1.375% to 1.625% over LIBOR, depending on certain covenant tests. As of March
31, 1998, outstanding borrowings total $16.0 million, leaving $44.0 million of
uncommitted credit availability. This availability provides the Company with
capital to pursue new redevelopment, renovation, and expansion opportunities
within its portfolio. The proceeds of these new loans were used to repay
existing floating rate debt, which had a remaining term of approximately 3.5
years. The Company now has fixed interest rates on approximately 94% of its
total debt outstanding, which now has a weighted remaining term of approximately
14 years. In connection with the refinancing, the Company sold all of its
remaining interest rate protection agreements.
Redevelopment, Renovations and Acquisitions
- -------------------------------------------
The Company has been selectively involved in redevelopment, renovation and
acquisition activities. It continues to evaluate land parcels for retail
development and potential acquisitions of operating properties for opportunities
to enhance operating income and cash flow growth. The Company also continues to
take advantage of retail redevelopment, renovation and expansion opportunities
within the portfolio, as demonstrated by its redevelopment activities at French
Market and Beacon Center.
17
<PAGE>
In February 1998, the Company commenced construction on a facade renovation
and retenanting of a 103,000 square foot anchor space at the 213,000 square foot
French Market center in Oklahoma City, Oklahoma. The Company successfully
negotiated the termination of a below market lease in the fourth quarter of
1997. Construction of the first two new tenant spaces, a 40,000 square foot
Bed, Bath and Beyond and an 8,000 square foot Lakeshore Learning, a children's
educational toy store, is projected to be completed in May 1998. The
redevelopment includes a complete facade renovation of the 103,000 square foot
building to incorporate new anchor tenant architectural features, new
storefronts, tenant signage and decorative awnings.
The Company has signed a lease with Lowe's Companies for a new 148,000
square foot home improvement superstore and garden center at the Beacon Center
in Alexandria, Virginia. The lease will have an initial term of twenty years.
The area leased by Lowe's consists of approximately 100,000 square feet of
existing space and 48,000 square feet of new building area. The enclosed mall
area will be demolished, and the Lowe's store will be a newly constructed
building, scheduled for opening in mid-1999. The center's other anchor tenants
include Giant, Marshalls and Office Depot, with a complement of small shop space
and restaurants. With Lowe's, the 350,000 square feet Beacon Center is now over
97% leased. In addition to the new home improvement store, 8,000 square feet of
new small shop space will be constructed adjacent to Lowe's and Giant.
Construction of this shop space is projected to commence in late spring, with
scheduled completion in the fall of 1998.
On April 1, 1998, the Company purchased, through its operating partnership,
a newly constructed, 100% leased office/flex building adjacent to its Avenel
Business Park in Gaithersburg, Maryland. The building contains 46,227 square
feet of net leasable area, which will increase the Company's Avenel Business
Park by 16%, to 332,000 square feet. The purchase price was $5,600,000, which
included $3,657,000 in debt assumption, with the balance paid through the
issuance of 105,922 new units in Saul Centers' operating partnership. The
seller is a member of The Saul Organization and is an existing limited partner
in the operating partnership.
Portfolio Leasing Status
- ------------------------
At March 31, 1998, the portfolio consisted of thirty Shopping Centers and
three Office Properties located in seven states and the District of Columbia.
At March 31, 1998, 89.2% of the Company's 5.9 million square feet of leasable
space was leased to tenants, as compared to 89.1% at March 31, 1997. The
shopping center portfolio was 88.6% leased at both March 31, 1998 and 1997.
The Office Properties were 94.0% leased at March 31, 1998 compared to 90.6% as
of March 31, 1997.
18
<PAGE>
RESULTS OF OPERATIONS
The following discussion compares the results of the Company for the three
month periods ended March 31, 1998 and 1997, respectively. This information
should be read in conjunction with the accompanying consolidated financial
statements and the notes related thereto. These financial statements include
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the interim
periods presented.
Expense recoveries were $2,320,000 for the 1998 Quarter compared to
$2,312,000 for the comparable 1997 Quarter, representing an increase of $8,000
(0.3%).
Three Months Ended March 31, 1998 compared to Three Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Base rent was $13,471,000 for the three month period ended March 31, 1998
(the "1998 Quarter"), compared to $12,601,000 for the comparable quarter in 1997
(the "1997 Quarter"), representing an increase of $870,000 (6.9%). The increase
in base rent resulted primarily from new leases placed in service at Seven
Corners, Leesburg Pike, Avenel and Van Ness Square for the 1998 Quarter that
were not present during the 1997 Quarter. Base rent also increased at Thruway
where tenants pay contractual rent increases as a result of the Company's recent
facade renovation.
Expense recoveries were $2,320,000 for the 1998 Quarter compared to
$2,312,000 for the comparable 1997 Quarter, representing an increase of
$8,000 (0.3%).
Percentage rent was $799,000 in the 1998 Quarter, compared to $759,000 in
the 1997 Quarter, representing an increase of $40,000 (5.3%).
Other income, which primarily consists of parking income, kiosk and
temporary leasing, and fees associated with early termination of leases, was
$553,000 in the 1998 Quarter, compared to $890,000 in the 1997 Quarter,
representing a decrease of $337,000 (37.9%). The decrease in other income
resulted primarily from lease termination payments collected at Seven Corners
and Beacon Center during the 1997 Quarter.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses decreased
$55,000 (2.7%) to $1,971,000 in the 1998 Quarter from $2,026,000 in the 1997
Quarter. The expense decrease resulted primarily from higher legal expenses
associated with collections of several tenant receivables during the 1997
quarter.
The provision for credit losses decreased $3,000 (7.0%) to $40,000 in the
1998 Quarter from $43,000 in the 1997 Quarter.
Real estate taxes decreased $92,000 (6.1%) to $1,422,000 in the 1998
Quarter from $1,514,000 in the 1997 Quarter. The expense decrease resulted from
tax credits received upon
19
<PAGE>
the successful appeal of prior year property tax assessments primarily at two of
the Company's redevelopment properties.
Interest expense of $5,604,000 for the 1998 Quarter represented an increase
of $784,000 (16.3%) over $4,820,000 reported for the 1997 Quarter. This
increase is primarily attributable to higher interest rates resulting from the
Company's October 1, 1997 refinancing and conversion of approximately $147.0
million of its mortgage debt from interest rate capped floating rate loans to
longer term, fixed rate loans.
Amortization of deferred debt expense decreased $444,000 (81.5%) to
$101,000 in the 1998 Quarter from $545,000 in the 1997 Quarter. The decrease in
the 1998 Quarter's expense resulted from the elimination of amortization on
interest rate protection agreements with notional values of $162.8 million sold
during the fourth quarter of 1997, and reduced loan cost amortization because
new debt costs related to the October 1, 1997 refinancings are being amortized
over a longer term than the debt costs they replaced.
Depreciation and amortization expense increased $153,000 (5.9%) from
$2,572,000 in the 1997 Quarter to $2,725,000 in the 1998 Quarter, primarily as a
result of depreciation attributable to recently completed redevelopments and
renovations.
General and administrative expense, which consists of payroll,
administrative and other overhead expense, was $802,000 for the 1998 Quarter, an
increase of $9,000 (1.1%) over the 1997 Quarter.
Extraordinary item, loss on early extinguishment of debt, was $369,000 for
the 1997 Quarter, resulting from the write-off of unamortized loan costs when
the Company refinanced a portion of its loan portfolio in January 1997. No such
item occurred during the 1998 Quarter.
OTHER
The Company has evaluated its information technology systems to ensure
compliance with the requirements to process transactions in the year 2000. The
Company's primary internal information systems are fully compliant new systems.
In the event that any of the Company's significant tenants or suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's operations
may be affected. The Company does not anticipate any material impact on its
results from operations or its financial condition as a result of any Year 2000
compliance issues.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 17, 1998, the Company held its Annual Meeting of Stockholders, at
which Messrs. Kelley, Longsworth, Noonan and B. Francis Saul III were reelected
to the Board of Directors, each receiving in excess of 94% of the votes of the
approximately 12.5 million shares outstanding and eligible to vote at the
meeting. The terms of the remaining Board members did not expire as of the
April 17, 1998 meeting and such individuals continue as directors of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
Financial Data Schedule
Schedule of Portfolio Properties
Reports on Form 8-K
-------------------
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAUL CENTERS, INC.
(Registrant)
Date: May 12, 1998 /s/ Philip D. Caraci
------------ --------------------
Philip D. Caraci, President
Date: May 12, 1998 /s/ Scott V. Schneider
------------ ----------------------
Scott V. Schneider
Senior Vice President, Chief Financial Officer
<PAGE>
SAUL CENTERS, INC.
SCHEDULE OF CURRENT PORTFOLIO PROPERTIES
MARCH 31, 1998
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet (Renovated) (Acres) Mar-1998 Mar-1997 Anchor/Significant Tenants
- ----------------------- ---------------------- --------- -------------- ------- -------- -------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS
- ----------------
Ashburn Village Ashburn, VA 108,204 1994 12.7 98% 100% Giant Food, Blockbuster
Beacon Center Alexandria, VA 350,022 1972 (1993) 32.3 97% 69% Lowe's, Giant Food, Office
Depot, Outback Steakhouse,
Marshall's, Sneaker
Stadium, Hollywood Video
Belvedere Baltimore, MD 54,941 1972 4.8 100% 100% Food King, Rite Aid
Boulevard Fairfax, VA 56,578 1994 5.0 100% 100% Danker Furniture, Petco
Clarendon Arlington, VA 6,940 1973 0.5 100% 100%
Clarendon Station Arlington, VA 4,868 1996 0.1 55% 100%
Crosstown Tulsa, OK 197,135 1975 21.5 7% 27%
Flagship Center Rockville, MD 21,500 1972, 1989 0.5 100% 100%
French Market Oklahoma City, OK 213,658 1974 (1984/98) 13.8 63% 92% Bed Bath & Beyond,
Lakeshore Learning Center,
Fleming Food, Furr's
Cafeteria
Germantown Germantown, MD 26,241 1992 2.7 100% 97%
Giant Baltimore, MD 70,040 1972 (1990) 5.0 100% 100% Giant Food
The Glen Lake Ridge, VA 112,639 1994 14.7 100% 100% Safeway Marketplace, CVS
Pharmacy
Great Eastern District Heights, MD 255,448 1972 (1995) 23.9 89% 90% Giant Food, Caldor,
Pep Boys
Hampshire Langley Langley Park, MD 134,425 1972 (1979) 9.9 99% 94% Safeway, McCrory
Leesburg Pike Baileys Crossroads, VA 97,888 1966 (1982/95) 9.4 96% 100% Zany Brainy, CVS Pharmacy,
Hollywood Video
Lexington Mall Lexington, KY 315,711 1974 30.0 86% 97% McAlpin's, Dawahares of
Lexington, Rite Aid
Lumberton Lumberton, NJ 189,898 1975 (1992/96) 23.3 88% 83% Super Fresh, Rite Aid,
Blockbuster, Mandee
North Washington Alexandria, VA 41,500 1973 2.0 100% 100% Mastercraft Interiors
Olney Olney, MD 53,765 1975 (1990) 3.7 91% 82% Rite Aid
Park Road Center Washington, DC 106,650 1973 (1993) 1.7 100% 100%
Ravenwood Baltimore, MD 87,750 1972 8.0 100% 100% Giant Food
EXHIBIT
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the three
months ended March 31, 1998 of Saul Centers, Inc. and is qualified in its
entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2060
<SECURITIES> 0
<RECEIVABLES> 6484
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 336,680
<DEPRECIATION> 95,096
<TOTAL-ASSETS> 263,387
<CURRENT-LIABILITIES> 0
<BONDS> 285,693
0
0
<COMMON> 125
<OTHER-SE> (38,692)
<TOTAL-LIABILITY-AND-EQUITY> 263,387
<SALES> 0
<TOTAL-REVENUES> 17,143
<CGS> 0
<TOTAL-COSTS> 4,696
<OTHER-EXPENSES> 1,422
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 5,705
<INCOME-PRETAX> 4,478
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,765
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
