<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 September 30, 1999
------------------
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
incorporation or organization) Number
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (301) 986-6200
--------------
Number of shares outstanding of each of the registrant's
classes of common stock, as of November 10, 1999:
Common Stock par value $0.01 per share: 13,333,506
---------------------------------------------------
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 _____
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<PAGE>
SAUL CENTERS, INC.
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
--------------------------------
(a) Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998............................................... 4
(b) Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998............... 5
(c) Consolidated Statements of Stockholders' Equity as of
September 30, 1999 and December 31, 1998........................ 6
(d) Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998............................... 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................................. 17
(b) Results of Operations
Three months ended September 30, 1999 compared to three months
ended September 30, 1998.......................................... 22
Nine months ended September 30, 1999 compared to nine months
ended September 30, 1998.......................................... 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 26
--------------------------------
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<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, 1998, 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>
September 30, December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real estate investments
Land $ 63,795 $ 64,339
Buildings and equipment 291,670 283,722
------------- --------------
355,465 348,061
Accumulated depreciation (109,838) (101,910)
------------- --------------
245,627 246,151
Construction in progress 22,665 4,506
Cash and cash equivalents 2,304 2,395
Accounts receivable and accrued income, net 7,186 6,347
Prepaid expenses 8,402 6,873
Deferred debt costs, net 3,304 3,604
Other assets 1,771 1,158
------------- --------------
Total assets $ 291,259 $ 271,034
============= ==============
Liabilities
Notes payable $ 302,511 $ 290,623
Accounts payable, accrued expenses and other liabilities 18,122 14,856
Deferred income 3,231 2,839
------------ --------------
Total liabilities 323,864 308,318
------------ --------------
Minority interests -- --
------------ --------------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 13,198,675 and 12,836,378 shares issued and
outstanding, respectively 132 129
Additional paid-in capital 42,755 31,967
Accumulated deficit (75,492) (69,380)
------------- --------------
Total stockholders' equity (deficit) (32,605) (37,284)
------------- --------------
Total liabilities and stockholders' equity $ 291,259 $ 271,034
============= ==============
</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 For the Nine
Months Months
Ended September Ended September
30, 30,
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Base rent $ 14,952 $ 14,044 $ 43,752 $ 41,505
Expense recoveries 2,529 2,625 7,410 7,339
Percentage rent 478 588 1,508 1,995
Other 450 393 1,723 1,644
---------- ----------- ----------- -----------
Total revenue 18,409 17,650 54,393 52,483
---------- ----------- ----------- -----------
Operating expenses
Property operating expenses 2,074 2,016 5,909 5,902
Provision for credit losses 57 123 182 275
Real estate taxes 1,476 1,577 4,636 4,563
Interest expense 5,636 5,696 16,734 16,972
Amortization of deferred debt expense 104 106 312 315
Depreciation and amortization 3,004 2,840 8,793 8,488
General and administrative 913 865 2,710 2,552
---------- ----------- ----------- -----------
Total operating expenses 13,264 13,223 39,276 39,067
---------- ----------- ----------- -----------
Operating income 5,145 4,427 15,117 13,416
Extraordinary item
Early extinguishment of debt -- (50) -- (50)
Cumulative effect of change in accounting method -- -- -- (771)
---------- ----------- ----------- -----------
Net income before minority interests 5,145 4,377 15,117 12,595
---------- ----------- ----------- -----------
Minority interests
Minority share of income (1,451) (1,177) (4,203) (3,338)
Distributions in excess of earnings (567) (650) (1,703) (2,029)
---------- ---------- ----------- -----------
Total minority interests (2,018) (1,827) (5,906) (5,367)
---------- ---------- ----------- -----------
Net income $ 3,127 $ 2,550 $ 9,211 $ 7,228
========== ========== =========== ===========
Net income per share (basic and dilutive)
Net income before minority interests $ 0.28 $ 0.26 $ 0.84 $ 0.74
========== ========= =========== ===========
Net income $ 0.24 $ 0.20 $ 0.71 $ 0.57
========== ========= =========== ===========
</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, 1997 $ 124 $ 20,447 $ (58,625) $ (38,054)
Issuance of 408,233 shares of
common stock 5 6,629 -- 6,634
Issuance of 405,532 convertible
limited partnership units in the
Operating Partnership -- 4,891 -- 4,891
Net income -- -- 9,129 9,129
Distributions ($1.17 per share) -- -- (14,899) (14,899)
Distributions payable ($.39 per share) -- -- (4,985) (4,985)
--------- --------- ------------ ------------
Balance, December 31, 1998 129 31,967 (69,380) (37,284)
Issuance of 121,090 shares of
common stock 1 1,702 -- 1,703
Issuance of 126,702 convertible
limited partnership units in the
Operating Partnership -- 1,782 -- 1,782
Net income -- -- 3,120 3,120
Distributions payable ($.39 per share) -- -- (5,075) (5,075)
--------- ---------- ----------- -----------
Balance, March 31, 1999 130 35,451 (71,335) (35,754)
Issuance of 117,361 shares of
common stock 1 1,791 -- 1,792
Issuance of 119,887 convertible
limited partnership units
Operating Partnership -- 1,831 -- 1,831
Net income -- -- 2,964 2,964
Distributions payable ($.39 per share) -- -- (5,100) (5,100)
--------- ---------- ------------ -----------
Balance, June 30, 1999 131 39,073 (73,471) (34,267)
Issuance of 123,846 shares of
common stock 1 1,804 -- 1,805
Issuance of 126,967 convertible
limited partnership units
Operating Partnership -- 1,878 -- 1,878
Net income -- -- 3,127 3,127
Distributions payable ($.39 per share) -- -- (5,148) (5,148)
--------- ---------- ------------ -----------
Balance, September 30, 1999 $132 $42,755 $(75,492) $(32,605)
========== =========== ============ ============
</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 Nine Months
Ended September 30,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,211 $ 7,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 5,906 5,367
Cumulative effect of change in
accounting method -- 771
Loss on early extinguishment of debt -- 50
Depreciation and amortization 9,105 8,803
Provision for credit losses 182 275
Increase in accounts receivable (1,021) (1,082)
Increase in prepaid expenses (2,394) (1,964)
Increase in other assets (613) (452)
Increase in accounts payable, accrued expenses and other liabilities 3,266 2,504
Increase in deferred income 392 294
Other, net -- (37)
---------- ----------
Net cash provided by operating activities 24,034 21,757
--------- ----------
Cash flows from investing activities:
Additions to real estate investments (7,948) (3,537)
Additions to construction in progress (17,615) (6,132)
---------- ----------
Net cash used in investing activities (25,563) (9,669)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 21,582 17,400
Repayments on notes payable (9,694) (16,718)
Additions to deferred debt expense (12) (200)
Proceeds from the issuance of common stock and
convertible limited partnership units in
the Operating Partnership 10,791 8,211
Distributions to common stockholders and holders
of convertible limited partnership units in
the Operating Partnership (21,229) (20,084)
---------- ----------
Net cash provided by (used in) financing activities 1,438 (11,391)
---------- ----------
Net increase (decrease) in cash (91) 697
Cash, beginning of period 2,395 688
---------- ----------
Cash, end of period $ 2,304 $ 1,385
========== ==========
</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. As of September 30,
1999, 13,198,675 shares of common stock are issued and outstanding; no shares
of preferred stock have been issued. 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") shopping center
and office properties, and the management functions related to the transferred
properties. Since its formation, the Company has purchased and developed
additional properties. The Company is currently developing a Class A mixed-use
office/retail complex on the site of a former shopping center property (the
"Development Property") and repositioning an under-performing shopping center to
an industrial / warehouse use (the "Industrial Property"). Therefore, as of
September 30, 1999, the Company's properties (the "Current Portfolio
Properties") consisted of 28 operating shopping center properties (the "Shopping
Centers"), the Industrial Property and five predominantly office properties and
the Development Property (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 29 Shopping Centers are anchored by a grocery store and offer
primarily day-to-day necessities and services. As of December 1998, no single
shopping center accounted for more than 11.4% of the total shopping center gross
leasable area. Only one retail tenant, Giant Food at 7.1%, accounted for more
than 1.7% of the Company's 1998 total revenues. No office tenant other than the
United States General Service Administration, at 10.4%, accounted for more than
1.8% of 1998 total revenues.
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
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
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. 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 development and construction. Interest expense capitalized
during the nine month periods ended September 30, 1999 and 1998, was $607,000
and $133,000, respectively. Once construction is
-9-
<PAGE>
SAUL CENTERS, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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.
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
September 30, 1999 and December 31, 1998, accounts receivable included
$1,657,000 and $1,443,000, respectively, 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
established 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 and $657,000, at
September 30, 1999 and December 31, 1998, respectively.
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 $902,000 at
September 30, 1999.
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, income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent a portion of property operating expenses billed to the tenants,
including common area maintenance, real estate taxes and other recoverable
costs. Expense recoveries are recognized in the period when the expenses are
incurred. Rental income based on a tenant's revenues ("percentage rent") is
accrued when a tenant reports sales that exceed a specified breakpoint.
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<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, as if the limited partners had exercised
their right to convert their partnership ownership into shares of Saul Centers,
and is computed using weighted average shares of 18,288,000 and 17,342,000, for
the quarters and 18,043,000 and 17,124,000 for the nine month periods ended
September 30, 1999 and 1998, respectively. The per share impact of extraordinary
item, early extinguishment of debt is less than $.01 for the quarter and nine
month period ended September 30, 1998. The per share impact of the cumulative
effect of change in accounting method is $.05 for the nine month period ended
September 30, 1998. Per share data relating to net income after minority
interests is computed using weighted average shares of 13,158,000 and
12,691,000, for the quarters and 13,037,000 and 12,592,000 for the nine month
periods ended September 30, 1999 and 1998, 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 28.2% limited partnership interest, represented
by 5,172,000 convertible limited partnership units in the Operating Partnership,
as of September 30, 1999. These Convertible Limited Partnership Units are
convertible into shares of Saul Centers' common stock on a one-for-one basis.
The impact of The Saul Organization's 28.2% 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)
Deferred Compensation and Stock Plan for Directors
Saul Centers has established a Deferred Compensation and Stock Plan for
Directors (the "Plan"), 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 and has the option to have the fees paid in cash, in shares of
common stock or in a combination of cash and shares of common stock upon
termination from the Board. If the director elects to have fees paid in stock,
the number of shares allocated to the director is determined by the market price
of the common stock on the day the fee is earned. As of September 30, 1999,
120,000 shares were authorized and registered for use under the Plan, and 68,000
shares had been credited to the directors' deferred fee accounts.
Beginning in 1999, pursuant to the Plan, 100 shares of the Company's common
stock are awarded annually as additional compensation to each director serving
on the Board of Directors as of the record date for the Annual Meeting of
Stockholders. The shares are issued on the date of the Annual Meeting, their
issuance may not be deferred and transfer of the shares is restricted for a
period of twelve months following the date of issue.
New Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 during the nine month period ended September 30, 1999.
In September 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 establishes standards for related disclosures about
products and services, geographic areas, and major customers. Disclosures
required by this new standard are presented in Note 6.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. The Company doesn't own
derivative instruments nor does it engage in hedging activities, and therefore
expects that SFAS 133 will not have an impact on the Company's financial
condition or its results of operations.
-12-
<PAGE>
SAUL CENTERS, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Change In Accounting Method
On May 21, 1998, the EITF discussed Issue 98-9 "Accounting for Contingent
Rent In Interim Financial Periods" and reached a consensus that lessors should
defer the accounting recognition of contingent rent, such as percentage rent,
until the specific tenant sales breakpoint is achieved. The Company's prior
accounting method, which was permitted under generally accepted accounting
principles, recognized percentage rent when a tenant's achievement of its sales
breakpoint was considered probable. This EITF consensus was implemented
retroactively to January 1, 1998, as a change in accounting method. The new
accounting method is not expected to materially affect the amount of percentage
rent income reported on an annual basis, but is expected to have an impact on
the recognition of percentage rent income reported on a quarterly basis by
increasing revenues the Company reports in the first and fourth quarters and
decreasing revenues reported in the second and third quarters. The change in
accounting method has no impact on the Company's cash flows.
3. Construction In Progress
Construction in progress includes the costs of active development projects
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 September 30, 1999
and December 31, 1998 are as follows:
Construction in Progress
------------------------
(In thousands) September 30, 1999 December 31, 1998
------------------ -----------------
<TABLE>
<S> <C> <C>
North Washington
St....................... $ 10,201 -
Shops at Fairfax......... 6,276 $ 702
Avenel Business Park V...... 3,906 2,800
French Market............... 1,985 949
Other....................... 297 55
------- -------
Total....................... $ 22,665 $ 4,506
======== =======
</TABLE>
4. Notes Payable
Notes payable totaled $302.5 million at September 30, 1999, of which $268.4
million (88.7%) was fixed rate debt and $34.1 million (11.3%) was floating rate
debt. At September 30, 1999, the Company had a $60 million unsecured revolving
credit facility with outstanding borrowings of $28.0 million and additional
borrowing availability of $32.0 million. The facility requires monthly interest
payments at a rate of LIBOR plus 1.5%.
Notes payable totaled $290.6 million at December 31,1998, of which $272.6
million (93.8%) was fixed rate debt and $18.0 million (6.2%) was floating rate
debt. Outstanding borrowings on
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<PAGE>
SAUL CENTERS, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
the $60 million unsecured revolving credit facility were $18.0 at December
31,1998, with additional borrowing availability of $42.0 million.
At September 30, 1999, the Company had borrowed $6.1 million of a $38.0
million construction loan secured by the new North Washington Street development
in Alexandria, Virginia. The facility requires monthly interest payments at a
rate of LIBOR plus 1.9%.
At September 30, 1999, the scheduled maturities of all debt for years
ending December 31, were as follows:
Debt Maturity Schedule
----------------------
(In thousands)
<TABLE>
<S> <C>
October 1 through December 31, 1999......... $ 1,071
2000........................................ 33,615
2001........................................ 6,074
2002........................................ 11,884
2003........................................ 6,232
2004........................................ 15,999
Thereafter.................................. 227,636
-------
Total....................................... $302,511
========
</TABLE>
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, Shareholders' Equity reported on the Consolidated
Balance Sheets does not reflect the market value of stockholders' investment in
the Company.
The Consolidated Statement of Operations for the nine months ended
September 30, 1999 includes a charge for minority interests of $5,906,000
consisting of $4,203,000 related to The Saul Organization's share of the net
income for the 1999 period and $1,703,000 related to distributions to minority
interests in excess of allocated net income for the 1999 period. The charge for
the nine month period ended September 30, 1998 of $5,367,000 consists of
$3,338,000 related to The Saul Organization's share of net income for the 1998
period, and $2,029,000 related to distributions to minority interests in excess
of allocated net income for the 1998 period.
-14-
<PAGE>
SAUL CENTERS, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
6. Business Segments
The Company has two reportable business segments: shopping centers and
office properties. The accounting policies for the segments presented
below are the same as those described in the summary of significant
accounting policies (see Note 2). The Company evaluates performance based
upon net operating income for properties in each segment.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Dollars thousands) Shopping Office Corporate Consolidated
Centers Properties and Other (1) Totals
---------- ------------ ----------- ------------
- -----------------------------------
| Quarter ended September 30, 1999|
- -----------------------------------
Real estate rental operations:
Revenues........................................... $ 13,444 $ 4,941 $ 24 $ 18,409
Expenses........................................... (2,362) (1,242) (3) (3,607)
---------- --------- ---------- -----------
Income from real estate.............................. 11,082 3,699 21 14,802
Interest expense & amortization of debt costs..... (5,740) (5,740)
General and administrative........................ (913) (913)
---------- --------- ----------- -----------
Subtotal............................................. 11,082 3,699 (6,632) 8,149
Depreciation and amortization..................... (2,095) (887) (22) (3,004)
Minority interests................................ (2,018) (2,018)
---------- --------- ----------- -----------
Net income........................................... $ 8,987 $ 2,812 $ (8,672) $ 3,127
========== ========= =========== ===========
Capital investment................................... $ 10,304 $ 1,016 $ 312 $ 11,632
========== ========= =========== ===========
Total assets......................................... $ 195,283 $ 70,559 $ 25,417 $ 291,259
- -----------------------------------
| Quarter ended September 30, 1998|
- -----------------------------------
Real estate rental operations:
Revenues........................................... $ 13,085 $ 4,525 $ 40 $ 17,650
Expenses........................................... (2,352) (1,300) (64) (3,716)
------------ ---------- ----------- ------------
Income from real estate.............................. 10,733 3,225 (24) 13,934
Interest expense & amortization of debt costs...... (5,802) (5,802)
General and administrative......................... (865) (865)
------------ ---------- ----------- ------------
Subtotal............................................. 10,733 3,225 (6,691) 7,267
Depreciation and amortization...................... (1,973) (848) (19) (2,840)
Early extinguishment of debt....................... (50) (50)
Minority interests................................. (1,827) (1,827)
----------- ---------- ----------- ------------
Net income........................................... $ 8,760 $ 2,377 $ (8,587) $ 2,550
----------- ---------- ----------- ------------
Capital investment................................... $ 4,257 $ 1,048 $ 53 $ 5,358
=========== ========== =========== ============
Total assets......................................... $ 177,033 $ 69,997 $ 2,006 $ 249,036
=========== ========== =========== ============
(1) Includes the Industrial Property, Crosstown.
The United States Government provided 10.6% of total
revenues for the quarter ended September 30, 1999.
</TABLE>
-15-
<PAGE>
SAUL CENTERS, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Dollars thousands) Shopping Office Corporate Consolidated
Centers Properties and other (1) Totals
- --------------------------------------- ----------- --------------- ------------ ----------------
| Nine months ended September 30, 1999|
- --------------------------------------
Real estate rental operations:
Revenues........................................... $ 40,133 $ 14,188 $ 72 $ 54,393
Expenses........................................... (7,238) (3,484) (5) (10,727)
----------- ----------- ----------- ------------
Income from real estate.............................. 32,895 10,704 67 43,666
Interest expense & amortization of debt costs...... (17,046) (17,046)
General and administrative......................... (2,710) (2,710)
----------- ------------ ----------- ------------
Subtotal............................................. 32,895 10,704 (19,689) 23,910
Depreciation and amortization...................... (6,104) (2,623) (66) (8,793)
Minority interests................................... (5,906) (5,906)
---------- ------------ ------------ -------------
Net income........................................... $ 26,791 $ 8,081 $ (25,661) $ 9,211
========== ============ ============ =============
Capital investment................................... $ 22,301 $ 2,764 $ 498 $ 25,563
========== ============ ============ =============
Total assets......................................... $ 195,283 $ 70,559 $ 25,417 $ 291,259
========== ============ ============ =============
- ---------------------------------------
| Nine months ended September 30, 1998|
- ---------------------------------------
Real estate rental operations:
Revenues........................................... $ 38,974 $ 13,406 $ 103 $ 52,483
Expenses........................................... (7,087) (3,513) (140) (10,740)
----------- ------------ ----------- -------------
Income from real estate.............................. 31,887 9,893 (37) 41,743
Interest expense & amortization of debt costs...... (17,287) (17,287)
General and administrative......................... (2,552) (2,552)
----------- ------------- ----------- -------------
Subtotal............................................. 31,887 9,893 (19,876) 21,904
Depreciation and amortization...................... (5,803) (2,607) (78) (8,488)
Early extinguishment of debt....................... (50) (50)
Cumulative effect of accounting method change...... (771) (771)
Minority interests................................. (5,367) (5,367)
----------- ------------- ----------- -------------
Net income........................................... $ 26,084 $ 7,286 $ (26,142) $ 7,228
=========== ============= =========== =============
Capital investment................................... $ 7,497 $ 2,017 $ 155 $ 9,669
=========== ============= =========== ============
Total assets......................................... $ 177,033 $ 69,997 $ 2,006 $ 249,036
(1) Includes the Industrial Property, Crosstown.
The United States Government provided 10.5% of total
revenues for the nine months ended September 30, 1999.
</TABLE>
-16-
<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
September 30, 1999 and for the three and nine month periods ended September 30,
1999.
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,
renovation, and redevelopment 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 current 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 or office sites. Acquisition and development
of properties are undertaken only after careful analysis and review, and
management's determination that such property is expected to provide long-term
earnings and cash flow growth. During the current year, any developments,
redevelopments, 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 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, which
include the Company's credit line of which $32,050,000 was available for
borrowing as of September 30, 1999, will be sufficient to meet its liquidity
needs for the foreseeable future.
-17-
<PAGE>
Financial Information
- ---------------------
For the third quarter of 1999, the Company reported Funds From Operations
("FFO") of $8,149,000. This represents an 12.1% increase over the comparable
1998 period's FFO of $7,267,000. FFO is presented on a fully converted basis
and as the most widely accepted measure of operating performance for REITs is
defined as net income before extraordinary and nonrecurring items and before
real estate depreciation and amortization. The following table represents a
reconciliation from net income before minority interests to FFO:
Funds From Operations Schedule
- ------------------------------
(In thousands) For the Three Months Ended September 30,
----------------------------------------
1999 1998
---- ----
<TABLE>
<S> <C> <C>
Net income before minority
interests................................. $5,145 $4,377
Add:
Depreciation and amortization of real
property............................ 3,004 2,840
Extraordinary and nonrecurring items:
Early extinguishment of
debt............................. - 50
------ ------
Funds From Operations...................... $8,149 $7,267
====== ======
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income before minority
interests................................. $15,117 $12,595
Add:
Depreciation and amortization of real
property................................ 8,793 8,488
Extraordinary and nonrecurring items:
Early extinguishment of
debt................................. - 50
Change in accounting
method............................... - 771
------- -------
Funds From Operations..................... $23,910 $21,904
======= =======
</TABLE>
FFO, as defined by the National Association of Real Estate Investment
Trusts, is net income excluding gains or losses from debt restructuring, sales
of property, and adjustments for unconsolidated partnerships and joint ventures,
plus depreciation and amortization. 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
-18-
<PAGE>
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.
Cash flow from operating activities, financing activities and investing
activities for the nine months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Cash Flow provided by (used in):
- --------------------------------
(In thousands)
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities.............. $ 24,034 $ 21,757
Investing activities.............. -25,563 -9,669
Financing activities.............. 1,438 -11,391
</TABLE>
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.
In January 1999, the Company closed a $38 million construction loan, which
it anticipates will substantially fund the development costs associated with the
230,000 square foot North Washington Street mixed-use office/retail complex,
located in Old Town Alexandria, Virginia. The loan has an initial three-year
term with an interest rate of LIBOR plus 1.90%, which will decline as leasing of
the office and retail space proceeds. At October 31, 1999, outstanding
borrowings on this construction loan totaled $7.9 million.
At October 31, 1999, outstanding borrowings on the Company's $60 million
unsecured credit line totaled $34.2 million, leaving $25.8 million of credit
availability. The Company has fixed interest rates on approximately 86% of its
total debt outstanding, which now has a weighted remaining term of approximately
11 years.
-19-
<PAGE>
Redevelopment, Renovations and Acquisitions
- -------------------------------------------
The Company has been selectively involved in redevelopment, renovation and
acquisition activities. It continues to evaluate land parcels for retail and
office 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 redevelopment, renovation and expansion
opportunities within the portfolio, as demonstrated by its activities at Beacon
Center, Shops at Fairfax, Ashburn, Avenel, North Washington Street and Crosstown
Business Center.
The Company has completed redevelopment of the Beacon Center, located along
U.S. Route 1 in Alexandria, Virginia. Beacon Center's central enclosed mall
area was demolished and construction of a 148,000 square foot Lowe's home
improvement and garden center store was completed during the third quarter of
this year. Lowe's celebrated their grand opening during the first week in
November. Adjacent to the new home improvement store, 8,000 square feet of new
small shop space was constructed in late 1998 and is fully occupied.
The Company recently completed another significant redevelopment during
1999 with the opening of a 53,000 square foot SuperFresh grocery store at the
Shops at Fairfax, located in Fairfax, Virginia. A small enclosed mall comprising
a portion of the shopping center was demolished and replaced by the new
SuperFresh building and an additional 7,500 square feet of small shop space.
SuperFresh opened for business in late September. The adjacent small shops are
100% leased with substantially all projected to open by year-end. The facade of
the adjacent Boulevard shopping center, also owned by the Company, was renovated
and modernized. This renovation features a new 12,000 square foot Party City
store and a 4,200 square foot Fitness Warehouse. The Boulevard redevelopment
complements the new construction at Shops at Fairfax and positions the combined
properties as an attractive neighborhood center.
In October 1999, the Company purchased land located within the 1,580 acre
community of Ashburn Village in Loudoun County, Virginia, adjacent to its
108,000 square foot Ashburn Village neighborhood shopping center at a price of
$1,438,000. The land will be developed into a 32,000 square foot in-line
expansion to the existing shopping center, containing approximately 18,000
square feet of retail space and 14,000 square feet of professional office
suites. Several free-standing retail buildings will also be included in this
phase of the development. Leases for approximately 14,000 square feet have been
signed with several other spaces under negotiation. Construction began during
the first week of November, with substantial completion scheduled for the spring
of 2000.
Office development and acquisition activities have been an integral part of
the Company's focus during 1999 and will continue into 2000. In July 1998, the
Company began development of approximately 27,000 square feet of additional
office / flex space at Avenel Business Park. Construction of this new project
(Avenel V) was substantially completed during January 1999. Approximately 78% of
the space is leased, and negotiations continue for the remaining space.
Including this new development, Avenel Business Park is approximately 95%
leased.
-20-
<PAGE>
In February 1999, the Company announced the development of a new 230,000
square foot Class A mixed-use office / retail complex along North Washington
Street in historic Old Town Alexandria in Northern Virginia. The project is well
located on a two-acre site along Alexandria's main street. Demolition of the
Company's existing 41,500 square foot building, formerly leased to Mastercraft
furniture, was completed in March 1999. Construction of the underground parking
deck has been substantially completed, and concrete work on the first and
second floors of the office buildings is continuing. Base building construction
is scheduled to be completed by the summer of 2000. Two twin four-story
buildings will feature a brick and cast stone exterior facade with a glass
curtain wall overlooking a spacious courtyard. Amenities will include 3-story
atrium lobbies, a fitness center, concierge service, a 600 space parking
structure and a computerized energy management system. The street level will
have 45,000 square feet of retail space, of which 19,000 square feet is leased
with substantially all of the balance under negotiation. The Company is
marketing the 185,000 square feet of office space to corporate users,
professionals and trade associations.
During late 1998, the Company obtained the necessary approvals to convert
an under-performing shopping center located on a 27 acre parcel in Tulsa,
Oklahoma, into an industrial/warehouse use, in order to capitalize on the
property's proximity to interstate highways and the Tulsa International Airport.
Crosstown Business Center is being redeveloped to provide approximately 200,000
square feet of predominantly warehouse space. The Company is completing the
facade and interior build-out for an 18,000 square foot space, with occupancy to
commence November 1999. The Company is negotiating with several prospects to
lease substantial portions of the remaining space.
Portfolio Leasing Status
- ------------------------
At September 30, 1999, the portfolio consisted of twenty-nine Shopping
Centers, four Office Properties and one Industrial Property, all of which are
located in seven states and the District of Columbia. The Office Properties
consist of one office property and one office/retail property, both located in
the District of Columbia, and two properties in a research park located in a
Maryland suburb of Washington, D.C.
At September 30, 1999, 91.4% of the Company's 5.9 million square feet of
leasable space was leased to tenants, as compared to 90.0% at September 30,
1998. The shopping center portfolio was 94.0% leased at September 30, 1999
versus 92.6% as of September 30, 1998. The Office Properties were 96.3% leased
at September 30, 1999 and September 30, 1998. Excluding the 200,000 square foot
warehouse redevelopment which is currently 9% leased, 94.3% of the portfolio was
leased. The improvement was primarily impacted by the Company's successful
leasing of the former Caldor space at Great Eastern.
-21-
<PAGE>
Results of Operations
- ---------------------
The following discussion compares the results of the Company for the three
month and nine month periods ended September 30, 1999 and 1998, 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.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
- ------------------------------------------------------------------------------
30, 1998
- --------
Revenues for the three month period ended September 30, 1999 (the "1999
Quarter"), totaled $18,409,000 compared to $17,650,000 for the comparable
quarter in 1998 (the "1998 Quarter"), an increase of $759,000 (4.3%).
Base rent was $14,952,000 for the 1999 Quarter, compared to $14,044,000 for
the 1998 Quarter, representing an increase of $908,000 (6.5%). The increase in
base rent resulted primarily from new leases in effect at recently redeveloped
shopping centers (French Market, Seven Corners, Beacon Center, Thruway and
Boulevard), leases rolling-over to higher rents in the Office Properties and the
rollover of two anchor tenant leases into higher paying base rent in lieu of
percentage rent at White Oak and Giant shopping centers. The increase in base
rent was diminished in part by the temporary absence of rental income on space
being redeveloped at North Washington and Shops at Fairfax developments.
Expense recoveries were $2,529,000 for the 1999 Quarter compared to
$2,625,000 for the comparable 1998 Quarter, representing a decrease of $96,000
(3.7%).
Percentage rent was $478,000 in the 1999 Quarter, compared to $588,000 in
the 1998 Quarter a decrease of $110,000 (18.7%). The decrease in percentage rent
resulted primarily from the rollover of two anchor tenant leases into higher
paying base rent in lieu of percentage rent at White Oak and Giant shopping
centers.
Other income, which primarily consists of parking income, kiosk and
temporary leasing, and fees associated with early termination of leases, was
$450,000 in the 1999 Quarter, compared to $393,000 in the 1998 Quarter,
representing an increase of $57,000 (14.5%). The increase in other income
resulted primarily from the collection of three shopping center lease
termination fees.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$58,000 (2.9%) to $2,074,000 in the 1999 Quarter from $2,016,000 in the 1998
Quarter.
The provision for credit losses decreased $66,000 (53.7%) to $57,000 in the
1999 Quarter from $123,000 in the 1998 Quarter. The credit loss decrease
resulted from lower credit loss activity in the 1999 Quarter compared to the
1998 Quarter when a tenant at Avenel Business Park filed for bankruptcy
protection.
-22-
<PAGE>
Real estate taxes decreased $101,000 (6.4%) to $1,476,000 in the 1999
Quarter from $1,577,000 in the 1998 Quarter. Decreased real estate tax expense
was reported at several of the Company's shopping centers redeveloped during
1999.
Interest expense decreased $60,000 (1.1%) to $5,636,000 for the 1999
Quarter from $5,696,000 reported for the 1998 Quarter.
Amortization of deferred debt expense decreased $2,000 (1.9%) to $104,000
in the 1999 Quarter from $106,000 in the 1998 Quarter.
Depreciation and amortization expense increased $164,000 (5.8%) from
$2,840,000 in the 1998 Quarter to $3,004,000 in the 1999 Quarter.
General and administrative expense, which consists of payroll,
administrative and other overhead expense, was $913,000 for the 1999 Quarter, an
increase of $48,000 (5.5%) over the 1998 Quarter. The increase in 1999 expenses
compared to 1998 resulted primarily from increases in payroll related expenses.
Nine months Ended September 30, 1999 Compared to Nine months Ended September 30,
- --------------------------------------------------------------------------------
1998
- ----
Revenues for the nine month period ended September 30, 1999 (the "1999
Period"), totaled $54,393,000 compared to $52,483,000 for the comparable period
in 1998 (the "1998 Period") an increase of $1,910,000 (3.6%).
Base rent was $43,752,000 for the 1999 Period, compared to $41,505,000 for
the 1998 Period, representing an increase of $2,247,000 (5.4%). The increase in
base rent resulted primarily from new leases in effect at recently redeveloped
shopping centers (French Market, Seven Corners, Beacon Center and Thruway),
leases rolling-over to higher rents in the Office Properties and the rollover of
three anchor tenant leases into higher paying base rent in lieu of percentage
rent at White Oak, Ravenwood and Giant shopping centers. The increase in base
rent was diminished in part by the temporary absence of rental income on space
being redeveloped at North Washington and Shops at Fairfax developments.
Expense recoveries were $7,410,000 for the 1999 Period compared to
$7,339,000 for the comparable 1998 Period, representing an increase of $71,000
(1.0%).
Percentage rent was $1,508,000 in the 1999 Period, compared to $1,995,000
in the 1998 Period, a decrease of $487,000 (24.4%). The decrease in percentage
rent resulted primarily from the rollover of three anchor tenant leases into
higher paying base rent in lieu of percentage rent at White Oak, Ravenwood and
Giant shopping centers.
Other income, which primarily consists of parking income, kiosk and
temporary leasing, and fees associated with early termination of leases, was
$1,723,000 in the 1999 Period, compared to $1,644,000 in the 1998 Period,
representing an increase of $79,000 (4.8%).
-23-
<PAGE>
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$7,000 (0.1%) to $5,909,000 in the 1999 Period from $5,902,000 in the 1998
Period.
The provision for credit losses decreased $93,000 (33.8%) to $182,000 in
the 1999 Period from $275,000 in the 1998 Period. The credit loss decrease
resulted from lower credit loss activity in the 1999 Period compared to the 1998
Period, when a tenant at Avenel Business Park filed for bankruptcy protection.
Real estate taxes increased $73,000 (1.6%) to $4,636,000 in the 1999 Period
from $4,563,000 in the 1998 Period. The credit loss decrease resulted from
lower credit loss activity in the 1999 Period compared to the 1998 Period, when
a tenant at Avenel Business Park filed for bankruptcy protection.
Interest expense of $16,734,000 for the 1999 Period represented a decrease
of $238,000 (1.4%) from $16,972,000 reported for the 1998 Period.
Amortization of deferred debt expense decreased $3,000 (1.0%) to $312,000
in the 1999 Period from $315,000 in the 1998 Period.
Depreciation and amortization expense increased $305,000 (3.6%) from
$8,488,000 in the 1998 Period to $8,793,000 in the 1999 Period.
General and administrative expense, which consists of payroll,
administrative and other overhead expense, was $2,710,000 for the 1999 Period,
an increase of $158,000 (6.2%) over the 1998 Period. The increase in 1999
expenses compared to 1998 resulted from increases in payroll and state income
tax expenses.
Year 2000 Issue
- ---------------
The year 2000 issue relates to whether computer systems will properly
recognize date sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
year 2000 issue relates to whether non-Information Technology (IT) systems that
depend upon embedded electronic technology will recognize the year 2000.
Systems that do not properly recognize such information could generate erroneous
information or fail.
In 1995, the Company contracted to replace virtually all of its management
information and accounting systems and install a local area network (LAN). One
of the selection criteria of the new software and hardware was that they be
fully year 2000 compliant. The new LAN and management and accounting
information systems have been installed . Therefore, the Company's management
information and accounting systems are fully year 2000 compliant. As a result
of its efforts, the Company does not expect to incur any additional expense for
its information systems related to the year 2000 issue.
The Company's property management staff has conducted a comprehensive
review of its non-IT systems at its shopping centers and office buildings to
determine whether any computer hardware and software in mechanical systems (i.e.
escalators, elevators, security, heating, ventilating and air conditioning
systems, etc.) are not year 2000 compliant. Work has
-24-
<PAGE>
commenced on repairs and replacements required to make the Company's non-IT
systems year 2000 compliant. The costs were less than $100,000 and work was
substantially completed in July 1999.
The Company believes there is risk that its operations may be affected by
vendors and tenants who are unable to perform as contracted due to their own
year 2000 exposure. It is very difficult to identify "the most reasonably
likely worst case scenario" at this time. The Company's potential exposure is
widespread; however there is no known or expected major direct exposure. The
Company believes that the most likely worst case exposure is at this indirect
level where vendors and tenants fail to perform their obligations to the
Company. For example, the Company believes it is possible that certain tenants'
information systems may fail, which may delay the payment of rents. To help
minimize this risk, the Company sent a letter to each tenant prior to January 1,
1999 advising the tenant that rent payments due January 1, 2000 must be paid on
time. A second reminder was sent in September and a final letter will be sent
in December 1999. The Company's leases contain provisions empowering it to take
certain actions to enforce its right to the timely payment of rent, regardless
of the tenant's year 2000 exposure. While it is not possible at this time to
determine the likely impact of these potential problems, the Company will
continue to evaluate these areas and develop contingency plans, as appropriate.
Related Party Transactions
- --------------------------
The Company acquired a 6.58 acre parcel of land at a cash purchase price of
$1,438,000 in October 1999, from a subsidiary of Chevy Chase Bank, F.S.B., a
member of The Saul Organization. An expansion to the Ashburn Village shopping
center will be developed on this parcel of land. The Company believes that the
price paid to the seller was fair and was comparable to the price that would
have been obtained from an unrelated third party. The Company also signed a
contract with the seller to purchase an additional 7.4 acre parcel of land at
Ashburn Village. The price to be paid will be determined based on the timing of
the closing, which may not be later than December 2001.
-25-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
3. (a) First Amended and Restated Articles of Incorporation of
Saul Centers, Inc. filed with the Maryland Department of
Assessments and Taxation on August 23, 1994 and filed as Exhibit
3.(a) of the 1993 Annual Report of the Company on Form 10-K are
hereby incorporated by reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3.(b) of the 1993 Annual Report of the Company on Form
10-K are hereby incorporated by reference. The First Amendment
to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership, the Second
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership, the Third
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership and the
Fourth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Saul Subsidiary I Limited Partnership as
filed as Exhibit 3.(b) of the 1997 Annual Report of the Company
on Form 10-K are hereby incorporated by reference.
10. (a) First Amended and Restated Agreement of Limited Partnership
of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to
Registration Statement No. 33-64562 is hereby incorporated by
reference. The First Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings
Limited Partnership, and the Third Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Holdings
Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual
Report of the Company on Form 10-K are hereby incorporated by
reference. The Fourth Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings
Limited Partnership filed as Exhibit 10.(a) of the June 30, 1998
Quarterly Report of the Company is hereby incorporated by
reference.
-26-
<PAGE>
(b) First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto
filed as Exhibit 10.2 to Registration Statement No. 33-64562 are
hereby incorporated by reference. The Second Amendment to the
First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership, the Third Amendment to the
First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership and the Fourth Amendment to
the First Amended and Restated Agreement of Limited Partnership
of Saul Subsidiary I Limited Partnership as filed as Exhibit
10.(b) of the 1997 Annual Report of the Company on Form 10-K are
hereby incorporated by reference.
(c) First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary II Limited Partnership and Amendment No. 1
thereto filed as Exhibit 10.3 to Registration Statement No. 33-
64562 are hereby incorporated by reference.
(d) Property Conveyance Agreement filed as Exhibit 10.4 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(e) Management Functions Conveyance Agreement filed as Exhibit 10.5
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(g) Exclusivity and Right of First Refusal Agreement filed as Exhibit
10.7 to Registration Statement No. 33-64562 is hereby
incorporated by reference.
(h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(i) Agreement of Assumption dated as of August 26, 1993 executed by
Saul Holdings Limited Partnership and filed as Exhibit 10. (i) of
the 1993 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
(j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase
Plan as filed with the Securities and Exchange Commission as File
No. 33-80291 is hereby incorporated by reference.
(k) Deferred Compensation Plan for Directors dated as of December 13,
1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the
Company on Form 10-K, as amended and restated by the Deferred
Compensation and Stock Plan for Directors, dated as of March 18,
1999, filed as Exhibit 10.(k) of the March 31, 1999 Quarterly
Report of the Company, is hereby incorporated by reference.
-27-
<PAGE>
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated
as of September 9, 1994 by and between Saul Holdings Limited
Partnership and Ameribanc Savings Bank, FSB as filed as Exhibit
10.(t) of the 1995 Annual Report of the Company on Form 10-K is
hereby incorporated by reference.
(m) Deed of Trust Note dated as of January 22, 1996 by and between
Saul Holdings Limited Partnership and Clarendon Station Limited
Partnership, filed as Exhibit 10.(s) of the June 30, 1998
Quarterly Report of the Company, is hereby incorporated by
reference.
(n) Loan Agreement dated as of November 7, 1996 by and among Saul
Holdings Limited Partnership, Saul Subsidiary II Limited
Partnership and PFL Life Insurance Company, c/o AEGON USA Realty
Advisors, Inc., filed as Exhibit 10.(t) of the June 30, 1998
Quarterly Report of the Company, is hereby incorporated by
reference.
(o) Promissory Note dated as of January 10, 1997 by and between Saul
Subsidiary II Limited Partnership and The Northwestern Mutual
Life Insurance Company, filed as Exhibit 10.(z) of the June 30,
1998 Quarterly Report of the Company, is hereby incorporated by
reference.
(p) Loan Agreement dated as of October 1, 1997 between Saul
Subsidiary I Limited Partnership as Borrower and Nomura Asset
Capital Corporation as Lender filed as Exhibit 10.(p) of the 1997
Annual Report of the Company on Form 10-K is hereby incorporated
by reference.
(q) Revolving Credit Agreement dated as of October 1, 1997 by and
between Saul Holdings Limited Partnership and Saul Subsidiary II
Limited Partnership as Borrower and U.S. Bank National
Association as agent filed as Exhibit 10.(q) of the 1997 Annual
Report of the Company on Form 10-K is hereby incorporated by
reference.
(r) Construction Loan Agreement dated as of January 11, 1999 by and
between Saul Holdings Limited Partnership and Saul Centers, Inc.
as Borrower and Wells Fargo Bank National Association as Lender
filed as Exhibit 10.(r) of the March 31, 1999 Quarterly Report of
the Company on Form 10-Q is hereby incorporated by reference.
(s) Promissory Note dated as of January 11, 1999 by and between Saul
Holdings Limited Partnership and Saul Centers, Inc. as Borrower
and Wells Fargo Bank National Association as Lender filed as
Exhibit 10.(s) of the March 31, 1999 Quarterly Report of the
Company on Form 10-Q is hereby incorporated by reference.
-28-
<PAGE>
27. Financial Data Schedule
99. Schedule of Portfolio Properties
Reports on Form 8-K
-------------------
None.
-29-
<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: November 10, 1999 /s/ Philip D. Caraci
------------------ --------------------------------------
Philip D. Caraci, President
Date: November 10, 1999 /s/ Scott V. Schneider
------------------ --------------------------------------
Scott V. Schneider
Senior Vice President, Chief Financial Officer
-30-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosures contained in Form 10-Q for the
period ended September 30, 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,304
<SECURITIES> 0
<RECEIVABLES> 7,186
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 355,465
<DEPRECIATION> 109,838
<TOTAL-ASSETS> 291,259
<CURRENT-LIABILITIES> 0
<BONDS> 302,511
0
0
<COMMON> 132
<OTHER-SE> (32,737)
<TOTAL-LIABILITY-AND-EQUITY> 291,259
<SALES> 0
<TOTAL-REVENUES> 54,393
<CGS> 0
<TOTAL-COSTS> 14,702
<OTHER-EXPENSES> 4,636
<LOSS-PROVISION> 182
<INTEREST-EXPENSE> 17,046
<INCOME-PRETAX> 15,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,211
<EPS-BASIC> 0.71
<EPS-DILUTED> 0.71
</TABLE>
<PAGE>
Saul Centers, Inc.
Schedule of Current Portfolio Properties
September 30, 1999
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) (Acres) Sep-1999 Sep-1998 Anchor/Significant Tenants
------------- -------------- --------- -------------- ------- -------- -------- ---------------------------
Shopping Centers
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ashburn Village Ashburn, VA 108,204 1994 12.7 100% 98% Giant Food, Blockbuster
Beacon Center Alexandria, VA 355,659 1972 (1993/98) 32.3 100% 100% Lowe's, Giant Food, Office
Depot, Outback Steakhouse,
Marshalls, Just For Feet,
Hollywood Video, Hancock
Fabrics
Belvedere Baltimore, MD 54,941 1972 4.8 86% 100% Food King, McCrory
Boulevard Fairfax, VA 56,350 1994 5.0 100% 71% Danker Furniture, Petco,
Party City
Clarendon Arlington, VA 6,940 1973 0.5 100% 100%
Clarendon Station Arlington, VA 4,868 1996 0.1 100% 78%
Flagship Center Rockville, MD 21,500 1972, 1989 0.5 100% 100%
French Market Oklahoma City, OK 213,545 1974 (1984/98) 13.8 79% 63% Bed Bath & Beyond, Lakeshore
Learning Center, Fleming Food,
Furr's Cafeteria, BridesMart,
Staples
Germantown Germantown, MD 26,241 1992 2.7 97% 100%
Giant Baltimore, MD 70,040 1972 (1990) 5.0 100% 100% Giant Food
The Glen Lake Ridge, VA 112,639 1994 14.7 97% 97% Safeway Marketplace, CVS
Pharmacy
Great Eastern District Heights, MD 255,448 1972 (1995) 23.9 98% 52% Giant Food, Pep Boys,
Big Lots, Run N' Shoot
Hampshire Langley Langley Park, MD 134,425 1972 (1979) 9.9 100% 99% Safeway, McCrory
Leesburg Pike Baileys Crossroads, VA 97,880 1966 (1982/95) 9.4 100% 100% Zany Brainy, CVS Pharmacy,
Hollywood Video
Lexington Mall Lexington, KY 315,747 1974 30.0 86% 91% Dillard's, Dawahares of
Lexington, Fashion Shops,
Rite Aid
Lumberton Lumberton, NJ 189,898 1975 (1992/96) 23.3 91% 88% SuperFresh, Rite Aid,
Blockbuster, Mandee
Olney Olney, MD 53,765 1975 (1990) 3.7 99% 94% Rite Aid
Park Road Center Washington, DC 106,650 1973 (1993) 1.7 97% 100%
Ravenwood Baltimore, MD 87,750 1972 8.0 100% 100% Giant Food, Hollywood Video
Seven Corners Falls Church, VA 560,998 1973 (1994-7) 31.6 100% 98% Home Depot, Shoppers Club,
Best Buy, Michaels, Barnes &
Noble, Ross Dress For Less, G
Street Fabr ics, Champs
Shops at Fairfax/(a)/ Fairfax, VA 68,463 1975 (1993/98) 6.7 100% 98% SuperFresh, Blockbuster
Southdale Glen Burnie, MD 483,874 1972 (1986) 39.6 96% 100% Giant Food, Hechinger, Circuit
City, Kids R Us, Michaels,
Marshalls, PetSmart, Value
City Furnit
</TABLE>
Exhibit
<PAGE>
Saul Centers, Inc.
Schedule of Current Portfolio Properties
September 30, 1999
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) (Acres) Sep-1999 Sep-1998 Anchor/Significant Tenants
------------- -------------- --------- -------------- ------- -------- -------- --------------------------
Shopping Centers (continued)
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Southside Plaza Richmond, VA 352,964 1972 32.8 90% 90% CVS Pharmacy, Community
Pride Supermarket, Maxway
South Dekalb Plaza Atlanta, GA 176,762 1976 14.6 81% 97% MacFrugals, Pep Boys,
The Emory Clinic
Thruway Winston-Salem, NC 345,534 1972 (1997) 30.5 95% 95% Bed, Bath & Beyond, Stein
Mart, Harris Teeter, Fresh
Market, Eckerd Drugs,
Houlihan's, Borders Books,
Zany Brainy, Blockbuster
Village Center Centreville, VA 142,881 1990 17.2 97% 91% Giant Food, Tuesday Morning
West Park Oklahoma City, OK 77,810 1975 11.2 58% 90% Homeland Stores, Family
Dollar
White Oak Silver Spring, MD 480,156 1972 (1993) 28.5 100% 100% Giant Food, Sears, Rite
---------- -------- ----- ------ Aid, Blockbuster
Total Shopping 4,961,932 414.5 95% 93%
Centers ----------- ------- ----- -----
Office Properties
- -----------------
Avenel I-III Gaithersburg, MD 284,705 1981/85/89 28.2 95% 95% Quanta Systems, General
Services Administration,
GeneL ogic
Avenel IV Gaithersburg, MD 46,227 1998 3.2 100% - Boston Biomedica, MicroAge
Avenel V Gaithersburg, MD 27,667 1999 2.0 78% -
601 Pennsylvania Ave Washington, DC 225,223 1973 (1986) 1.0 100% 100% General Services
Administration, Capital
Grille
Van Ness Square Washington, DC 156,182 1973 (1990) 1.2 96% 93% United Mine Workers
Pension Trust, Office
Depot, Pier 1
Total Office 740,004 35.6 96% 96%
Properties -------- ------ ----- -----
Industrial Property
- -------------------
Crosstown/(b)/ Tulsa, OK 197,135 1975 21.5 9% 2%
---------- ------ ------ -----
Development Property
- ---------------------
North Washington/(c)/ Alexandria, VA 1973 2.0 100%
Total Portfolio 5,899,071 SF 471.6 92% 90%
========= ====== ===== =====
</TABLE>
(a) Property is being redeveloped. Leasable area and percentage leased includes
space leased and under development.
(b) Currently under construction to convert former shopping center to
warehouse use.
(c) Construction of a 230,000 square foot class A mixed-use office/retail
project is due to be completed summer 2000.
Exhibit
