<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File number 1-12254
SAUL CENTERS, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1833074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6200
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
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COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
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Indicate by check mark whether 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 requirements for the past 90 days.
Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The number of shares of Common Stock, $0.01 par value, outstanding as of
February 19, 1999 was 12,956,670.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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PART I PAGE NUMBERS
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Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation F-18
</TABLE>
2
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PART I
ITEM 1. BUSINESS
General
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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". B. Francis Saul II serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers.
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, an office property and purchased a land
parcel which it developed into a neighborhood shopping center. The Company is
currently in the predevelopment and approval process of converting an under-
performing shopping center to an office/warehouse use. Therefore, as of
December 31, 1998, the Company's properties (the "Current Portfolio Properties")
consisted of 29 operating shopping center properties (the "Shopping Centers"), a
property planned to be converted to an office/warehouse facility (the
"Industrial Property") and four 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.
Saul Centers operates as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (a "REIT"). Saul Centers generally will not
be subject to federal income tax, provided it annually distributes at least 95 %
of its real estate investment trust taxable income to its stockholders and meets
certain organizational and other requirements. Saul Centers has made and
intends to continue to make regular quarterly distributions to its stockholders.
The Company's principal business activity is the ownership, management and
development of income-producing properties. The Company's long-term objectives
are to increase cash flow from operations and to maximize capital appreciation
of its real estate.
3
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Management of the Current Portfolio Properties
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The Partnerships manage the Current Portfolio Properties and will manage
any subsequently acquired properties. The Management of the properties includes
performing property management, leasing, design, renovation, development and
accounting duties for each property. The Partnerships provide each property
with a fully integrated property management capability, with approximately 50
employees and with an extensive and mature network of relationships with tenants
and potential tenants as well as with members of the brokerage and property
owners' communities. The Company currently does not, and does not intend to,
retain third party managers or provide management services to third parties.
The Company augments its property management capabilities by sharing with
The Saul Organization certain ancillary functions, at cost, such as computer and
payroll services, benefits administration and in-house legal services. The
company also shares insurance administration expenses on a pro rata basis with
The Saul Organization. The Saul Organization subleases office space to the
Company at its cost. Management believes that these arrangements result in
lower costs than could be obtained by contracting with third parties. These
arrangements permit the Company to capture greater economies of scale in
purchasing from third party vendors than would otherwise be available to the
Company alone and to capture internal economies of scale by avoiding payments
representing profits with respect to functions provided internally. The terms
of all sharing arrangements with The Saul Organization, including payments
related thereto, are reviewed periodically by the Audit Committee of the
Company's Board of Directors.
Principal Offices
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The principal offices of the Company are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and the Company's telephone number is (301)
986-6200.
Operating Strategies
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The Company's primary operating strategy is to focus on its community and
neighborhood shopping center business and to operate its properties to achieve
both cash flow growth and capital appreciation. Community and neighborhood
shopping centers typically provide reliable cash flow and steady long-term
growth potential. Management intends to actively manage its property portfolio
by engaging in strategic leasing activities, tenant selection, lease negotiation
and shopping center expansion and reconfiguration. The Company seeks to optimize
tenant mix by selecting tenants for its shopping centers that provide a broad
spectrum of goods and services, consistent with the role of community and
neighborhood shopping centers as the source for day-to-day necessities.
Management believes that such a synergistic tenanting approach results in
increased cash flow from existing tenants by providing the Shopping Centers with
consistent traffic and a desirable mix of shoppers, resulting in increased sales
and, therefore, increased cash flows.
Management believes there is significant potential for growth in cash flow
as existing leases for space in the Shopping Centers expire and are renewed, or
newly available or vacant space is leased. The Company intends to renegotiate
leases aggressively and seek new tenants for available space in order to
maximize this potential for increased cash flow. As leases expire, management
expects to revise rental rates, lease terms and conditions, relocate existing
tenants, reconfigure tenant spaces and introduce new tenants to increase cash
flow. In those circumstances in which leases are not otherwise expiring,
management intends to attempt to increase cash flow through a variety of means,
including renegotiating rents in exchange for additional renewal options or in
connection with renovations or relocations, recapturing leases with below market
rents and re-leasing at market rates, as well as replacing financially troubled
tenants. When possible, management also will seek to include scheduled
increases in base rent, as well as percentage rental provisions in its leases.
The Shopping Centers contain numerous undeveloped parcels within the
centers which are suitable for development as free-standing retail facilities,
such as restaurants, banks, auto centers or cinemas. Management will continue
to seek desirable tenants for facilities to be developed on these sites and to
develop and lease these sites in a manner that complements the Shopping Centers
in which they are located.
4
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The Company will also seek growth opportunities in its Washington, D.C.
metropolitan area office portfolio, primarily through development and
redevelopment. Management also intends to negotiate lease renewals or to re-
lease available space in the Office Properties, while considering the strategic
balance of optimizing short-term cash flow and long-term asset value .
It is management's intention to hold properties for long-term investment
and to place strong emphasis on regular maintenance, periodic renovation and
capital improvement. Management believes that such characteristics as
cleanliness, lighting and security are particularly important in community and
neighborhood shopping centers, which are frequently visited by shoppers during
hours outside of the normal work day. Management believes that the Shopping
Centers and Office Properties generally are attractive and well maintained. The
Shopping Centers and Office Properties will undergo expansion, renovation,
reconfiguration and modernization from time to time when management believes
that such action is warranted by opportunities or changes in the competitive
environment of a property. Several of the Shopping Centers have been renovated
recently. During 1997 and 1998, the Company was involved in predevelopment
and/or development of twelve of its properties. The Company will continue its
practice of expanding existing properties by undertaking new construction on
outparcels suitable for development as free standing retail or office
facilities.
Redevelopment, Renovations and Acquisitions
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The Company's redevelopment, renovation and acquisition objective is to
selectively and opportunistically redevelop and renovate its properties, by
replacing leases with below market rents with strong, traffic-generating anchor
stores such as supermarkets and drug stores, as well as other desirable local,
regional and national tenants. The Company's strategy remains focused on
continuing the operating performance and internal growth of its existing
Shopping Centers, while enhancing this growth with selective retail
redevelopments and renovations.
Management believes that attractive opportunities for investment in
existing and new shopping center properties will continue to be available.
Management believes that the Company will be well situated to take advantage of
these opportunities because of its access to capital markets, ability to acquire
properties either for cash or securities (including Operating Partnership
interests in tax advantaged transactions) and because of management's experience
in seeking out, identifying and evaluating potential acquisitions. In addition,
management believes its shopping center expertise should permit it to optimize
the performance of shopping centers once they have been acquired.
Management also believes that opportunities exist for investment in new
office properties. It is management's view that several of the office sub-
markets in which the Company operates have very attractive supply/demand
characteristics. The Company will continue to evaluate new office development
and redevelopment as an integral part of its overall business plan.
In evaluating a particular redevelopment, renovation, acquisition, or
development, management will consider a variety of factors, including (i) the
location and accessibility of the property; (ii) the geographic area (with an
emphasis on the Mid-Atlantic region) and demographic characteristics of the
community, as well as the local real estate market, including potential for
growth and potential regulatory impediments to development; (iii) the size of
the property; (iv) the purchase price; (v) the non-financial terms of the
proposed acquisition; (vi) the availability of funds or other consideration for
the proposed acquisition and the cost thereof; (vii) the "fit" of the property
with the Company's existing portfolio; (viii) the potential for, and current
extent of, any environmental problems; (ix) the current and historical occupancy
rates of the property or any comparable or competing properties in the same
market; (x) the quality of construction and design and the current physical
condition of the property; (xi) the financial and other characteristics of
existing tenants and the terms of existing leases; and (xii) the potential for
capital appreciation.
Although it is management's present intention to concentrate future
acquisition and development activities on community and neighborhood shopping
centers and office properties in the Mid-Atlantic region, the Company may, in
the future, also acquire other types of real estate in other regions of the
country.
5
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Capital Strategies
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As a general policy, the Company intends to maintain a ratio of its total
debt to total asset value of 50 % or less and to actively manage the Company's
leverage and debt expense on an ongoing basis in order to maintain prudent
coverage of fixed charges. Asset value is the aggregate fair market value of
the Current Portfolio Properties and any subsequently acquired properties as
reasonably determined by management by reference to the properties' aggregate
cash flow. Given the Company's current debt level, it is management's belief
that the ratio of the Company's total debt to asset value as of December 31,
1998 remains less than 50%.
The organizational documents of the Company do not limit the absolute
amount or percentage of indebtedness that it may incur. The Board of Directors
may, from time to time, reevaluate the Company's debt capitalization policy in
light of current economic conditions, relative costs of capital, market values
of the Company Portfolio, opportunities for acquisition, development or
expansion, and such other factors as the Board of Directors then deems relevant.
The Board of Directors may modify the Company's debt capitalization policy based
on such a reevaluation and consequently, may increase or decrease the Company's
debt ratio above or below 50 %. The Company selectively continues to refinance
or renegotiate the terms of its outstanding debt in order to achieve longer
maturities, and obtain generally more favorable loan terms, whenever management
determines the financing environment is favorable. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources --Borrowing Capacity."
The Company intends to finance future acquisitions and to make debt
repayments by utilizing the sources of capital then deemed to be most
advantageous. Such sources may include undistributed operating cash flow,
secured or unsecured bank and institutional borrowings, private and public
offerings of debt or equity securities, proceeds from the Company's Dividend
Reinvestment and Stock Purchase Plan, and proceeds from the sale of properties.
Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary
Partnerships' level and securities offerings may include (subject to certain
limitations) the issuance of Operating Partnership interests convertible into
Common Stock or other equity securities.
Competition
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As an owner of, or investor in, commercial real estate properties, the
Company is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent in part upon
the geographic location of the property, the tenant mix, the performance of
property managers, the amount of new construction in the area and the
maintenance and appearance of the property. Additional competitive factors
impacting upon retail and commercial properties include the ease of access to
the properties, the adequacy of related facilities such as parking, and the
demographic characteristics in the markets in which the properties compete.
Overall economic circumstances and trends and new properties in the vicinity of
each of the properties in the Current Portfolio Properties are also competitive
factors.
Environmental Matters
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The Current Portfolio Properties are subject to various laws and
regulations relating to environmental and pollution controls. The effect upon
the Company of the application of such laws and regulations either prospectively
or retrospectively is not expected to have a materially adverse effect on the
Company's property operations. As a matter of policy, the Company requires an
environmental study be performed with respect to a property that may be subject
to possible environmental hazards prior to its acquisition to ascertain that
there are no material environmental hazards associated with such property.
Employees
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As of February 20, 1999, the Company employed approximately 50 persons,
including six full-time leasing officers. None of the Company's employees are
covered by collective bargaining agreements. Management believes that its
relationship with employees is good.
6
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Current Developments
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A significant enhancement to the Company's sustained historical internal
growth in shopping centers has been its continuing program of renovation,
redevelopment and expansion activities. These development activities serve to
position the Company's centers as architecturally consistent with the times in
terms of facade image, site improvements and flexibility to accommodate tenant
size requirements and merchandising evolution.
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 Venture lease in the fourth quarter
of 1997. Construction and retenanting of the first three new spaces, a 41,000
square foot Bed, Bath and Beyond, an 8,000 square foot Lakeshore Learning, a
children's educational toy store and an 8,000 square foot BridesMart formal wear
retailer were completed in 1998. The Company is conducting negotiations with
prospective tenants for the remaining 38,000 square feet. The redevelopment
included a complete facade renovation of the 103,000 square foot building which
incorporates 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 has 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. Beacon Center's central
enclosed mall area was demolished and construction commenced on the Lowe's
store, scheduled to open in the summer of 1999. The center's other tenants
include anchors Giant Food, Marshalls and Office Depot, with a complement of
small shop space and restaurants. The 350,000 square feet Beacon Center is now
over 99% leased. In addition to the new home improvement store, 8,000 square
feet of new small shop space adjacent to Lowe's and Giant has been constructed
and is fully occupied.
The Company commenced another significant redevelopment during 1998 when it
signed a lease with SuperFresh for a new 53,000 square foot grocery store at the
Shops at Fairfax, located in Fairfax, Virginia. A portion of the shopping
center which includes a small enclosed mall was demolished to allow SuperFresh
to occupy a new building, with construction projected to be completed in the
fall of 1999. An additional 7,500 square feet of shop space will be constructed
adjacent to the supermarket. The facade of the adjacent Boulevard shopping
center, also owned by the Company, is being renovated and modernized. This
renovation was driven by a new 12,000 square foot lease with Party City, which
replaced a previous lease with below market rents. Redevelopment plans also
include new landscaping and a more efficient parking scheme, which should
enhance the property as a desirable neighborhood shopping center.
Office development and acquisition activities were an integral part of the
Company's focus during 1998, and substantial efforts in this area will continue
throughout 1999. In February 1999, the Company announced that it will develop a
new 230,000 square foot Class A mixed-use office / retail complex on North
Washington Street in historic Old Town Alexandria in Northern Virginia. This
project will be developed on Alexandria's main street, on a 2 acre site which
the Company owns, formerly the location of a 41,500 square foot Mastercraft
furniture store. Construction commenced in February, with delivery of the
project scheduled for 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
the latest computerized energy management system. The street level will have
45,000 square feet of retail space. Office space will total 185,000 square
feet, with the top floor containing walk-out terraces.
On April 1, 1998, the Company purchased, through its operating partnership,
a newly constructed, 100% leased office / flex building (Avenel IV) located
adjacent to its Avenel Business Park (Phases I-III) in Gaithersburg, Maryland.
Avenel IV contains 46,227 square feet of net leasable area, which increased the
Company's Avenel Business Park by 16%, to 332,000 square feet. An independent
appraisal determined the purchase price of $5,600,000. The seller is a member of
The Saul Organization and is an existing limited partner in the operating
partnership.
7
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In July 1998, the Company began development of approximately 27,000 square
feet of additional office / flex space at Avenel Business Park on excess land
that it owns. Construction of this new project (Avenel V) was substantially
completed during January 1999. Approximately 25% of the space is leased, while
leases are in negotiation for a substantial portion of the remaining newly
developed space. Excluding this new development, Avenel Business Park (Phases
I-IV) is currently over 94% leased.
Financial Information
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In 1998, the Company reported Funds From Operations (FFO) of $29,768,000 on
a fully converted basis. This represents a 7.7% increase over 1997 FFO of
$27,637,000. The FFO increase resulted primarily from increased base rents from
stabilizing redevelopments and decreases in operating expenses resulting from
aggressive asset management. The following table represents a reconciliation
from net income before minority interests to FFO:
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Dollars in thousands) 1998 1997 1996
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<S> <C> <C> <C>
Net income before minority interests $ 16,369 $ 9,406 $ 12,703
Add:
Depreciation and amortization of real property 12,578 10,642 10,860
Debt restructuring losses:
Disposition of interest rate protection agreements - 4,392 972
Write-off of unamortized loan costs 50 3,197 587
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28,997 27,637 25,122
Retroactive impact of change in accounting method/1/ 771 - -
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Funds From Operations/2/ $ 29,768 $ 27,637 $ 25,122
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/1/ Retroactive to January 1, 1998, the Company began recognition of percentage
rental income in accordance with a new accounting pronouncement.
/2/ 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. 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.
8
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Cash flow from operating activities, financing activities and investing
activities are as follows:
<TABLE>
<CAPTION>
Cash Flow provided by (used in):
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(Dollars in thousands) For the Years Ended December 31,
1998 1997 1996
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<S> <C> <C> <C>
Operating activities $ 29,686 $ 28,936 $ 29,677
Investing activities -14,776 -16,094 -8,035
Financing activities -13,203 -12,192 -22,278
</TABLE>
ITEM 2. PROPERTIES
Overview
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The Company is the owner and operator of a real estate portfolio of 34
properties totaling approximately 5.9 million square feet of gross leasable area
("GLA") located primarily in the Washington, D.C./Baltimore metropolitan area.
The portfolio is composed of 29 neighborhood and community Shopping Centers,
four Office Properties and one Industrial Property, totaling approximately 5.0,
0.7 and 0.2 million square feet of GLA, respectively. With the exception of
four Shopping Center properties and one Office Property purchased or developed
during the past four years, the Company Portfolio consists of seasoned
properties that have been owned and managed by The Saul Organization for 15
years or more. The Company expects to hold its properties as long-term
investments, and it has no maximum period for retention of any investment. It
plans to selectively acquire additional income-producing properties and to
expand, renovate, and improve its properties when circumstances warrant. See
"Business--Operating Strategies" and "Business--Capital Strategies."
The Shopping Centers
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Community and neighborhood shopping centers typically are anchored by one
or more supermarkets, discount department stores or drug stores. These anchors
offer day-to-day necessities rather than apparel and luxury goods and,
therefore, generate consistent local traffic. By contrast, regional malls
generally are larger and typically are anchored by one or more full-service
department stores.
The Shopping Centers (typically) are seasoned community and neighborhood
shopping centers located in well established, highly developed, densely
populated, middle and upper income areas. Based upon census data, the average
estimated population within a three- and five-mile radius of the Shopping
Centers is approximately 110,000 and 256,000, respectively. The average
household income within a three and five-mile radius of the Shopping Centers is
$59,000 and $60,000, respectively, compared to a national average of $51,000.
Because the Shopping Centers generally are located in highly developed areas,
management believes that there is little likelihood that any significant numbers
of competing centers will be developed in the future.
The Shopping Centers range in size from 5,000 to 568,000 square feet of
GLA, with seven in excess of 300,000 square feet, and a weighted average of
approximately 172,000 square feet. 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 February 1999, no single Shopping Center accounted for more
than 11.5 % of the total Shopping Center GLA. Only the United States General
Services Administration and one Shopping Center tenant, Giant Food, individually
accounted for more than 2.0 % of the Company's total revenues for the year
ending December 31, 1998.
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The Office Properties
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The four Office Properties are all located in the Washington, D.C.
metropolitan area and contain an aggregate GLA of approximately 714,000 square
feet, composed of 673,000 and 41,000 square feet of office and retail space,
respectively. The Office Properties represent three distinct styles of
facilities, are located in differing commercial environments with distinctive
demographic characteristics, and are geographically removed from one another.
As a consequence, management believes that the Office Properties compete for
tenants in different commercial and geographic sub-markets of the metropolitan
Washington, D.C. market and do not compete with one another.
601 Pennsylvania Ave. is a nine-story, Class A office building (with a
small amount of street level retail space) built in 1986 and located in a prime
downtown location. Van Ness Square is a six-story office/retail building
rebuilt in 1990. Van Ness Square is located in a highly developed commercial
area of Northwest Washington, D.C. which offers extensive retail and restaurant
amenities. Management believes that the Washington, D.C. office market is one
of the strongest and most stable leasing markets in the nation, with relatively
low vacancy rates in comparison to other major metropolitan areas. It believes
that the long-term stability of this market is attributable to the status of
Washington, D.C. as the nation's capital and to the presence of the federal
government, international agencies, and an expanding private sector job market.
Avenel Business Park (Phases I-III) is a research park located in a Maryland
suburb of Washington, D.C. On April 1 1998, the Company purchased Avenel IV,
a newly constructed and 100% leased office / flex building located adjacent to
Avenel Phases I-III. Two additional buildings (Avenel V) were completed in
January 1999. The combined business park consists of eleven one-story buildings
built in five phases which were completed in 1981, 1985, 1989, 1998 and 1999.
Management believes that, due to its desirable location, the high quality of
the property and the relative scarcity of research and development space in
its immediate area, Avenel should continue to attract and retain desirable
tenants in the future.
The Industrial Property
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The Industrial Property, Crosstown Business Center, is a 197,135 square
foot warehouse and flex office complex located in Tulsa, Oklahoma. The Company
is capitalizing on the property's close proximity to Tulsa's international
airport and complimentary facilities by converting the former strip shopping
center into a use more suitable to the property's location and physical layout.
The following table sets forth, at the dates indicated, certain information
regarding the Current Portfolio Properties:
10
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Saul Centers, Inc
Schedule of Current Portfolio Properties
December 31, 1998
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area
Property Location Feet) (Renovated) (Acres)
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<S> <C> <C> <C> <C>
Shopping Centers
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Ashburn Village Ashburn, VA 108,204 1994 12.7
Beacon Center (a) Alexandria, VA 355,736 1972 (1993/1998) 32.3
Belvedere Baltimore, MD 54,941 1972 4.8
Boulevard Fairfax, VA 56,578 1994 5.0
Clarendon Arlington, VA 6,940 1973 0.5
Clarendon Station Arlington, VA 4,868 1996 0.1
Flagship Center Rockville, MD 21,500 1972, 1989 0.5
French Market Oklahoma City, OK 211,668 1974 (1984/98) 13.8
Germantown Germantown, MD 26,241 1992 2.7
Giant Baltimore, MD 70,040 1972 (1990) 5.0
The Glen Lake Ridge, VA 112,639 1994 14.7
Great Eastern District Heights, MD 255,448 1972 (1995) 23.9
Hampshire Langley Langley Park, MD 134,425 1972 (1979) 9.9
Leesburg Pike Baileys Crossroads, VA 97,888 1966 (1982/95) 9.4
Lexington Mall Lexington, KY 315,747 1974 30.0
Lumberton Lumberton, NJ 189,898 1975 (1992/96) 23.3
North Washington Alexandria, VA 41,500 1973 2.0
Olney Olney, MD 53,765 1975 (1990) 3.7
Park Road Center Washington, DC 106,650 1973 (1993) 1.7
Ravenwood Baltimore, MD 87,750 1972 8.0
Seven Corners Falls Church, VA 567,994 1973 (1994-7) 31.6
Shops at Fairfax (a) Fairfax, VA 60,703 1975 (1993/1998) 6.7
<CAPTION>
Percentage Leased
Property Dec-98 Dec-97 Anchor / Significant Tenants
-------------------- --------- --------- ----------------------------------------------------------------
<S> <C> <C> <C>
Shopping Centers
- ----------------
Ashburn Village 100% 95% Giant Food, Blockbuster
Beacon Center 100% 69% Lowe's, Giant Food, Office Depot, Outback Steakhouse, Marshalls,
Just For Feet, Hollywood Video, Hancock Fabrics
Belvedere 100% 100% Food King
Boulevard 92% 100% Danker Furniture, Petco, Party City
Clarendon 100% 100%
Clarendon Station 78% 100%
Flagship Center 100% 100%
French Market 65% 62% Bed Bath & Beyond, Lakeshore Learning Center, Fleming Food, Furr's
Cafeteria, BridesMart
Germantown 100% 92%
Giant 100% 100% Giant Food
The Glen 97% 100% Safeway Marketplace, CVS Pharmacy
Great Eastern 96% 89% Giant Food, Pep Boys, Big Lots, Run N' Shoot
Hampshire Langley 100% 100% Safeway, McCrory
Leesburg Pike 93% 100% Zany Brainy, CVS Pharmacy, Hollywood Video
Lexington Mall 91% 88% Dillard's, Dawahares of Lexington, Fashion Shops, Rite Aid
Lumberton 89% 89% SuperFresh, Rite Aid, Blockbuster, Mandee
North Washington 100% 100% Mastercraft Interiors
Olney 94% 92% Rite Aid
Park Road Center 100% 100%
Ravenwood 100% 100% Giant Food
Seven Corners 100% 92% Home Depot, Shoppers Club, Best Buy, Michaels, Barnes & Noble,
Ross Dress For Less, Centex Life Solutions, G Street Fabrics
Shops at Fairfax 100% 65% SuperFresh
</TABLE>
11
<PAGE>
Saul Centers, Inc
Schedule of Current Portfolio Properties
December 31, 1998
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area
Property Location Feet) (Renovated) (Acres)
----------------------- -------------------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Shopping Centers (continued)
- -----------------------------
Southdale Glen Burnie, MD 479,749 1972 (1986) 39.6
Southside Plaza Richmond, VA 352,964 1972 32.8
Sunshine City Atlanta, GA 167,591 1976 14.6
Thruway Winston-Salem, NC 345,194 1972 (1997) 30.5
Village Center Centreville, VA 142,881 1990 17.2
West Park Oklahoma City, OK 77,810 1975 11.2
White Oak Silver Spring, MD 480,156 1972 (1993) 28.4
--------------- ------------
Total Shopping Centers 4,989,468 416.5
--------------- ------------
Office Properties
- -----------------
Avenel I-III Gaithersburg, MD 285,218 1981/85/89 28.2
Avenel IV Gaithersburg, MD 46,227 (b) 1998 3.2
601 Pennsylvania Ave Washington, DC 225,153 1973 (1986) 1.0
Van Ness Square Washington, DC 157,697 1973 (1990) 1.2
--------------- ------------
Total Office Properties 714,295 33.6
--------------- ------------
Industrial Property
- -------------------
--------------- ------------
Crosstown (c) Tulsa, OK 197,135 1975 21.5
--------------- ------------
Total Portfolio 5,900,898 SF 471.6
=============== ============
<CAPTION>
Percentage Leased
Property Dec-1998 Dec-1997 Anchor / Significant Tenants
--------------- -------- ------- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Shopping Centers (continued)
- ----------------------------
Southdale 100% 99% Giant Food, Hechinger, Circuit City, Kids R Us, Michaels, Marshalls, PetSmart,
Value City Furniture
Southside Plaza 92% 92% CVS Pharmacy, Community Pride Supermarket, Maxway
Sunshine City 9.5% 88% Bolton Furniture, MacFrugals, Pep Boys, The Emory Clinic
Thruway 9.5% 96% Stein Mart, Harris Teeter, Fresh Market, Eckerd Drugs, Houlihan's, Borders
Books, Zany Brainy, Blockbuster, Bocock-Stroud
Village Center 91% 87% Giant Food
West Park 74% 66% Homeland Stores
White Oak 100% 100% Giant Food, Sears, Rite Aid, Blockbuster
-------- -------
Total Shopping Centers 95% 91%
-------- -------
Office Properties
- ------------------
Avenel I-III 91% 99% Quanta Systems, General Services Administration
Avenel IV 100% 0% Boston Biomedica, MicroAge
601 Pennsylvania Ave 100% 100% General Services Administration, Capital Grille
Van Ness Square 96% 88% United Mine Workers Pension Trust, Office Depot, Pier 1
-------- -------
Total Office Properties 95% 97%
-------- -------
Industrial Property
- -------------------
-------- -------
Crosstown 2% 20%
-------- -------
Total Portfolio 92% 89%
======== =======
</TABLE>
(a) Property is being redeveloped. Leasable area and percentage
leased includes space leased and under development.
(b) An additional 27,000 square feet of space at Avenel was under
construction as of December 31, 1998.
(c) Shopping center conversion - currently in approval and
pre-development.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in litigation,
including litigation arising out of the collection of rents, the enforcement or
defense of the priority of its security interests, and the continued development
and marketing of certain of its real estate properties. In the opinion of
management, litigation that is currently pending should not have a material
adverse impact on the financial condition or future operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
Saul Centers completed the Offerings on August 26, 1993. Shares of Common
Stock were sold at an initial offering price of $20 per share and the net
offering proceeds were used to acquire general partnership interests in the
Operating Partnership and Subsidiary Partnerships, which hold the Portfolio
Properties and the Management Functions. The shares are listed on the New York
Stock Exchange under the symbol "BFS". The high and low sales prices for the
Common Stock shares for each quarter of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Period Share Price
------ -----------
High Low
---- ---
<S> <C> <C>
October 1, 1998 - December 31, 1998 $ 16 3/4 $ 15 3/8
July 1, 1998 - September 30, 1998 $ 18 3/16 $ 15 3/16
April 1, 1998 - June 30, 1998 $ 18 15/16 $ 17 3/16
January 1, 1998 - March 31, 1998 $ 18 15/16 $ 17 3/8
October 1, 1997 - December 31, 1997 $ 19 3/8 $ 16 1/4
July 1, 1997 - September 30, 1997 $ 19 1/8 $ 16 3/16
April 1, 1997 - June 30, 1997 $ 17 1/4 $ 15 1/8
January 1, 1997 - March 31, 1997 $ 17 3/8 $ 15 1/2
</TABLE>
On February 19, 1999 the closing price was 15 1/8.
Holders
- -------
The approximate number of holders of record of the Common Stock was 550 as
of February 19, 1999.
13
<PAGE>
Dividends
- ---------
Saul Centers was formed on June 10, 1993 and from that time through August
27, 1993, distributions were not paid to stockholders. Subsequent to its
initial public offering, the Company has declared and paid regular quarterly
distributions to its stockholders. The first distribution, in the amount of
$0.15 per share for the partial quarter ended September 30, 1993, was paid on
October 29, 1993 to stockholders of record as of October 15, 1993. This initial
amount was based upon a full quarterly distribution of $0.39 per share. The
Company paid four quarterly distributions in the amount of $0.39 per share,
during each of the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
totaling $1.56 per share for each of these years, or an annual yield of 10.4%
based on the closing price of the Common Stock on the New York Stock Exchange as
of February 20, 1999. The Company has determined that 74.23% of the total $1.56
per share paid in calendar year 1998 represents currently taxable dividend
income to the stockholders.
The Company's estimate of cash flow available for distributions is believed
to be based on reasonable assumptions and represents a reasonable basis for
setting distributions. However, the actual results of operations of the Company
will be affected by a variety of factors, including actual rental revenue,
operating expenses of the Company, interest expense, general economic
conditions, federal, state and local taxes (if any), unanticipated capital
expenditures, and the adequacy of reserves. While the Company intends to
continue paying regular quarterly distributions, any future payments will be
determined solely by the Board of Directors and will depend on a number of
factors, including cash flow of the Company, its financial condition and capital
requirements, the annual distribution requirements required to maintain its
status as a REIT under the Code, and such other factors as the Board of
Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company contained herein has been
derived from the consolidated and combined financial statements of the Company
and The Saul Organization. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
report. The historical selected financial data have been derived from audited
financial statements for all periods.
14
<PAGE>
Saul Centers, Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data:
- --------------
Total revenue.......................................................... $ 70,583 $ 67,717 $ 64,023 $ 61,469 $ 57,397
Operating expenses..................................................... 53,393 50,722 49,761 47,258 42,787
--------- --------- --------- --------- ---------
Operating income....................................................... 17,190 16,995 14,262 14,211 14,610
Non-operating income (loss)
Change in accounting method......................................... (771)
Sale of interest rate protection agreements......................... - (4,392) (972) - -
--------- --------- --------- --------- ---------
Net income before extraordinary item and minority interests............ 16,419 12,603 13,290 14,211 14,610
Extraordinary item: Early extinguishment of debt....................... (50) (3,197) (587) (998) (3,341)
--------- --------- --------- --------- ---------
Net income before minority interests................................... 16,369 9,406 12,703 13,213 11,269
Minority interests..................................................... (7,240) (6,854) (6,852) (6,852) (4,274)
--------- --------- --------- --------- ---------
Net income............................................................. $ 9,129 $ 2,552 $ 5,851 $ 6,361 $ 6,995
========= ========= ========= ========= =========
Per Share Data:
- --------------
Net income before extraordinary item and minority interests............ $ 0.95 $ 0.76 $ 0.81 $ 0.87 $ 0.90
========= ========= ========= ========= =========
Net income............................................................. $ 0.72 $ 0.21 $ 0.49 $ 0.54 $ 0.59
========= ========= ========= ========= =========
Weighted average shares outstanding:
Fully converted..................................................... 17,233 16,690 16,424 16,285 16,272
========= ========= ========= ========= =========
Common stock........................................................ 12,644 12,297 12,031 11,892 11,879
========= ========= ========= ========= =========
Dividends Paid:
- --------------
Cash dividends to common
stockholders (1)................................................. $ 19,621 $ 19,063 $ 18,669 $ 18,531 $ 18,531
========= ========= ========= ========= =========
Cash dividends per share............................................ $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 1.56
========= ========= ========= ========= =========
Balance Sheet Data:
- ------------------
Income-producing properties
(net of accumulated depreciation)................................... $ 246,151 $ 242,653 $ 234,699 $ 229,425 $ 217,360
Total assets........................................................... 271,034 260,942 263,495 269,407 259,041
Total debt, including accrued interest................................. 291,576 286,072 273,731 273,979 248,681
Total stockholders' equity (deficit)................................... (37,284) (38,054) (26,361) (16,735) (4,564)
Other Data
- ----------
Funds from operations (2)
Net income before minority interests................................ $ 16,369 $ 9,406 $ 12,703 $ 13,213 $ 11,269
Depreciation and amortization of real property...................... 12,578 10,642 10,860 10,425 9,582
Change in accounting method......................................... 771 - - - -
Debt restructuring losses:
Sale of interest rate protection agreements...................... - 4,392 972 - -
Early extinguishment of debt..................................... 50 3,197 587 998 3,341
--------- --------- --------- --------- ---------
Funds from operations.................................................. $ 29,768 $ 27,637 $ 25,122 $ 24,636 $ 24,192
========= ========= ========= ========= =========
Cash flow provided by (used in):
Operating activities................................................ $ 29,686 $ 28,936 $ 29,677 $ 25,055 $ 23,811
Investing activities................................................ $(14,776) $ (16,094) $ (8,035) $ (20,992) $ (43,487)
Financing activities................................................ $(13,203) $ (12,192) $ (22,278) $ (4,416) $ 17,948
====================================================================================================================================
</TABLE>
(1) By operation of the Company's dividend reinvestment plan, $6,364, $4,305
and $3,378, was reinvested in newly issued common stock during 1998,
1997 and 1996, respectively.
(2) Funds From Operations (FFO) as defined by the National Association of
Real Estate Investment Trusts (NAREIT), represents net income excluding
gains or losses from debt restructuring, sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. 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 cash needs. FFO may not be
comparable to similarly titled measures employed by other REITs.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion is based on the consolidated financial statements
of the Company as of December 31, 1998 and for the year ended December 31, 1998.
Prior year data is based on the Company's consolidated financial statements as
of December 31, 1997 and 1996 and for the years ended December 31, 1997 and
1996.
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 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 coming year, any developments,
expansions or acquisitions are expected to be funded with bank borrowings from
the Company's credit line, construction financing, proceeds from the operation
of the Company's dividend reinvestment plan or other external capital resources
available to the Company.
The Company 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 $42,000,000 of the Company's credit line which was available for
borrowing as of December 31, 1998, will be sufficient to meet its liquidity
needs for the foreseeable future.
16
<PAGE>
Financial Information
- ---------------------
In 1998, the Company reported Funds From Operations (FFO) of $29,768,000 on
a fully converted basis. This represents a 7.7% increase over 1997 FFO of
$27,637,000. The following table represents a reconciliation from net income
before minority interests to FFO:
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Dollars in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Net income before minority interests $16,369 $ 9,406 $12,703
Add:
Depreciation and amortization of real property 12,578 10,642 10,860
Debt restructuring losses:
Disposition of interest rate protection agreements - 4,392 972
Write-off of unamortized loan costs 50 3,197 587
------- ------- -------
28,997 27,637 25,122
Retroactive impact of change in accounting method/1/ 771 - -
------- ------- -------
Funds From Operations/2/ $29,768 $27,637 $25,122
======= ======= =======
</TABLE>
Cash flow from operating activities, financing activities and investing
activities are as follows:
<TABLE>
<CAPTION>
Cash Flow provided by (used in):
- -------------------------------
(Dollars in thousands) For the Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities 29,686 $ 28,936 $ 29,677
Investing activities -14,776 -16,094 -8,035
Financing activities -13,203 -12,192 -22,278
</TABLE>
____________________
/1/ Retroactive to January 1, 1998, the Company began recognition of percentage
rental income in accordance with a new accounting pronouncement.
/2/ 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. 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.
17
<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.
In April 1998, the Company purchased, through its operating partnership,
46,227 square feet of office/flex space known as Avenel IV. The $5,600,000
purchase price consisted of $3,657,000 in variable rate debt assumption, with
the balance paid through the issuance of 105,922 new units in Saul Centers'
operating partnership. In September 1998, the Company closed a $6.4 million
permanent loan to repay the variable rate debt assumed with the April 1998
acquisition previously described, and to finance the development of the 27,000
square foot Avenel V. The new loan term is 13 years, maturing in December 2011,
and requires monthly principal and interest payments based on a 25 year
amortization schedule and a rate of 7.09%. This loan is a part of a cross-
collateralized mortgage pool totaling $79.5 million at December 31, 1998. See
"Notes to Consolidated Financial Statements, Note 4-Notes Payable".
In January 1999, the Company closed a $38 million construction loan, which
is anticipated to fully fund the development costs associated with the 230,000
square foot mixed-use office/retail complex which the Company is constructing
in Old Town Alexandria, Virginia. The loan has an initial three year term with
an interest rate of LIBOR plus 1.90%, with the spread over LIBOR declining as
leasing of the office and retail space proceeds.
As of February 20, 1998, outstanding borrowings on the Company's $60
million unsecured credit line totalled $18 million, leaving $42 million of
credit availability. The Company has fixed interest rates on approximately 93 %
of its total debt outstanding, which now has a weighted remaining term of over
12 years.
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 French
Market, Beacon Center, Shops at Fairfax, Avenel, and North Washington Street.
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 had successfully
negotiated the termination of a below market Venture lease in the fourth quarter
of 1997. Construction and retenanting of the first three new spaces, a 41,000
square foot Bed, Bath and Beyond, an 8,000 square foot Lakeshore Learning, a
children's educational toy store and an 8,000 square foot BridesMart formal wear
retailer were completed in 1998. The Company is conducting negotiations with
prospective tenants for the remaining 38,000 square feet. The redevelopment
included a complete facade renovation of the 103,000 square foot building which
incorporates 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 has 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. Beacon Center's central
enclosed mall area was demolished and construction has commenced on the Lowe's
store, which is scheduled to open in the summer of 1999. The center's other
tenants include anchors Giant Food, Marshalls and Office Depot, with a
complement of small shop space and restaurants. The 356,000 square feet Beacon
Center is now over 99% leased. In addition to the new home improvement store,
8,000 square feet of new small shop space adjacent to Lowe's and Giant has been
constructed and is fully occupied.
18
<PAGE>
The Company commenced another significant redevelopment during 1998 when it
signed a lease with SuperFresh for a new 53,000 square foot grocery store at the
Shops at Fairfax, located in Fairfax, Virginia. A portion of the shopping
center which includes a small enclosed mall was demolished to allow SuperFresh
to occupy a new building, with construction projected to be completed in the
fall of 1999. An additional 7,500 square feet of shop space will be constructed
adjacent to the supermarket. The facade of the adjacent Boulevard shopping
center, also owned by the Company, is being renovated and modernized. This
renovation was driven by a new 12,000 square foot lease with Party City, which
replaced a previous lease with below market rents. Redevelopment plans also
include new landscaping and a more efficient parking scheme, which should
enhance the property as a desirable neighborhood shopping center.
Office development and acquisition activities were an integral part of the
Company's focus during 1998, and substantial efforts in this area will continue
throughout 1999. In February 1999, the Company announced that it will develop 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, commenced in February 1999. Construction is
scheduled for completion 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
the latest computerized energy management system. The street level will have
45,000 square feet of retail space. Office space totals 185,000 square feet,
with the top floor containing walk-out terraces.
On April 1, 1998, the Company purchased, through its operating partnership,
a newly constructed, 100% leased office / flex building (Avenel IV) located
adjacent to its Avenel Business Park (Phases I-III) in Gaithersburg, Maryland.
Avenel IV contains 46,227 square feet of net leasable area, which increased the
Company's Avenel Business Park by 16%, to 332,000 square feet. An independent
appraisal determined the purchase price of $5,600,000. The seller is a member of
The Saul Organization and is an existing limited partner in the operating
partnership.
In July 1998, the Company began development of approximately 27,000 square
feet of additional office / flex space at Avenel Business Park on excess land
that it owns. Construction of this new project (Avenel V) was substantially
completed during January 1999. Approximately 46% of the space is leased, while
leases are in negotiation for a portion of the remaining newly developed space.
Including this new development, Avenel Business Park is currently over 93%
leased.
Portfolio Leasing Status
- ------------------------
At December 31, 1998, 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 one research park located in a Maryland suburb of
Washington, D.C.
At December 31, 1998, 92.1% of the Company's 5.9 million square feet of
leasable space was leased to tenants, as compared to 89.0% at December 31,
1997. The shopping center portfolio was 95.2% leased at December 31, 1998
versus 90.6% as of December 31, 1997. The Office Properties were 95.4% leased
at December 31, 1998 compared to 96.8% as of December 31, 1997. The overall
improvement in the year-end 1998 leasing percentage was primarily caused by the
Company's successful leasing at recently renovated shopping centers: Seven
Corners, Great Eastern and Beacon Center.
19
<PAGE>
Results of Operations
- ---------------------
The following discussion compares the results of the Company for the year
ended December 31, 1998 with the year ended December 31, 1997, and compares the
year ended December 31, 1997 with the year ended December 31, 1996. This
information should be read in conjunction with the accompanying consolidated
financial statements and the notes related thereto.
Years Ended December 31, 1998 and 1997
- --------------------------------------
Base rent increased to $55,542,000 in 1998 from $51,779,000 in 1997,
representing a $3,763,000 (7.3%) increase. The increase in base rent resulted
primarily from improved occupancy at the redeveloped Seven Corners and Beacon
Center, increased minimum rents on lease rollover from three tenants previously
paying percentage rent, and to a lesser extent, generally higher rents on lease
renewals.
Expense recoveries increased to $9,911,000 in 1998 from $9,479,000 in 1997,
representing an increase of $432,000 (4.6%). The equal increases in common
area maintenance expense recoveries and real estate tax expense recovery
occurred due to improved occupancy primarily at Seven Corners and the addition
of the Avenel IV property to the Company's portfolio during 1998.
Percentage rent was $2,755,000 in 1998, compared to $2,948,000 in 1997,
representing a decrease of $193,000 (6.5%). This decrease resulted primarily
from the rollover of three leases into higher paying base rent in lieu of
percentage rent.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $2,375,000 in 1998, compared to $3,511,000 in
1997, representing a decrease of $1,136,000 (32.4%). The decrease in other
income resulted from two large lease termination payments collected from former
tenants at Seven Corners and Beacon Center in 1997.
As a consequence of the foregoing, the 1998 total revenues of $70,583,000
represented an increase of $2,866,000 (4.2%) over 1997 total revenues of
$67,717,000.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, decreased $245,000 (3.0%) to
$7,830,000 in 1998 from $8,075,000 in 1997.
The provision for credit losses was $418,000 in 1998 compared to $505,000
in 1997, representing a decrease of $87,000 (17.2%). The decrease resulted
from fewer uncollectible rent receivables resulting from tenants vacating their
space prior to lease expiration.
Real estate taxes were $6,128,000 in 1998 compared to $6,084,000 in 1997,
representing an increase of $44,000 (0.7%).
Interest expense was $22,627,000 in 1998 compared to $20,308,000 in 1997,
representing an increase of $2,319,000 (11.4%). This increase is primarily
attributable to higher interest rates resulting from the Company's October 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.
New debt associated with the acquisition of Avenel IV in April 1998 also added
approximately $210,000 to interest expense in 1998.
Amortization of deferred debt expense decreased $1,310,000 (75.8%) to
$419,000 in 1998 from $1,729,000 in 1997. The decrease in the 1998 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 amortization because new debt costs related to the October
1997 refinancings are being amortized over a longer term than the prior debt
costs.
20
<PAGE>
Depreciation and amortization expense increased $1,936,000 (18.2 %) from
$10,642,000 in 1997 to $12,578,000 in 1998. The increase resulted from the non-
recurring write-off of unamortized tenant improvement costs due to the early
termination of tenant leases at Beacon Center and Shops At Fairfax
redevelopments and increased recurring expense related to new assets placed in
service during 1998 and the latter half of 1997 .
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,393,000 in 1998
compared to $3,379,000 in 1997, representing an increase of $14,000 (0.4 %).
Non-operating item, sales of interest rate protection agreements, resulted
in a loss of $4,392,000 in 1997 due to the write-off of unamortized costs in
excess of sale proceeds received when the Company sold its remaining interest
rate protection agreements. No such sales occurred in 1998.
Extraordinary item, early extinguishment of debt, resulted in losses of
$50,000 and $3,197,000, in 1998 and 1997, respectively. The losses in each
period resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Base rent increased to $51,779,000 in 1997 from $49,814,000 in 1996,
representing a $1,965,000 (3.9 %) increase. The increase in base rent resulted
primarily from increased rents received at the redeveloped Seven Corners,
Leesburg Pike and Thruway shopping centers, and to a lesser extent, increased
shopping center rents at several properties due to improved leasing and
generally higher rents on lease renewals.
Expense recoveries increased to $9,479,000 in 1997 from $9,301,000 in 1996,
representing an increase of $178,000 (1.9 %). The increase in expense
recoveries resulted primarily from real estate tax recovered from tenants at the
recently redeveloped Seven Corners center.
Percentage rent was $2,948,000 in 1997, compared to $2,924,000 in 1996,
representing an increase of $24,000 (0.8%). This increase resulted from
generally improved reported sales throughout the portfolio.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $3,511,000 in 1997, compared to $1,984,000 in
1996, representing an increase of $1,527,000 (77.0%). The increase in other
income resulted from two large lease termination payments.
As a consequence of the foregoing the 1997 total revenues of $67,717,000
represented an increase of $3,694,000 (5.8 %) over total revenues of $64,023,000
in 1996.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, increased $6,000 (0.1 %) to $8,075,000
in 1997 from $8,069,000 in 1996.
The provision for credit losses was $505,000 in 1997 compared to $457,000
in 1996, representing an increase of $48,000 (10.5 %) . The increase resulted
primarily from the provision required for a shopping center tenant which vacated
its space prior to lease expiration.
Real estate taxes were $6,084,000 in 1997 compared to $5,914,000 in 1996,
representing an increase of $170,000 (2.9 %). This increase was generally
attributable to increased tax assessments at the Company's shopping center
properties, particularly its redeveloped Seven Corners and Leesburg Pike
shopping centers.
21
<PAGE>
Interest expense was $20,308,000 in 1997 compared to $18,509,000 in 1996,
representing an increase of $1,799,000 (9.7 %). The increase is primarily
attributable to higher interest rates resulting from the Company's refinancing
and conversion of approximately $263 million of its mortgage debt from floating
rate loans to longer term, fixed-rate loans during the period November 1996
through October 1997.
Amortization of deferred debt expense decreased $1,128,000 (39.5 %) to
$1,729,000 in 1997 from $2,857,000 in 1996. The decrease in the 1997 year's
expense resulted from the elimination of amortization on interest rate
protection agreements with notional values of $162.8 million and $87.0 million,
sold during the fourth quarters of 1997 and 1996, respectively, and reduced loan
cost amortization because new debt costs are being amortized over a longer term
than prior debt costs.
Depreciation and amortization expense decreased $218,000 (2.0 %) from
$10,860,000 in 1996 to $10,642,000 in 1997. The decrease resulted primarily
from a non-recurring write-off of tenant improvement costs in 1996 upon the
early termination of tenant leases.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,379,000 in 1997
compared to $3,095,000 in 1996, representing an increase of $284,000 (9.2 %).
The increase in 1997 expenses resulted from generally higher personnel expenses.
Non-operating item, sales of interest rate protection agreements, resulted
in losses of $4,392,000 and $972,000, in 1997 and 1996, respectively, due to
the write-off of unamortized costs in excess of sale proceeds received when the
Company sold a portion of its interest rate protection agreements.
Extraordinary item, early extinguishment of debt, resulted in losses of
$3,197,000 and $587,000, in 1997 and 1996, respectively. The losses in each
period resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
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. Management expects repairs and
replacements required to make it's non-IT systems year 2000 compliant will cost
less than $100,000 and will be completed prior to July 1999.
22
<PAGE>
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 wide
spread; 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. These
reminders will be sent twice again later in 1999. The Company's leases contain
provisions empowering it to take certain actions to enforce it's 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its consolidated
subsidiaries are included in this report on the pages indicated, and are
incorporated herein by reference:
Page
- ----
F-1 (a) Report of Independent Public Accountants
F-2 (b) Consolidated Balance Sheets - December 31, 1998 and 1997
F-3 (c) Consolidated Statements of Operations - Years ended December 31,
1998, 1997 and 1996.
F-4 (d) Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996.
F-5 (e) Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996.
F-6 (f) Notes to Consolidated Financial Statements
The selected quarterly financial data included in Note 15 of The Notes
to Consolidated Financial Statements referred to above are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
The information required under Items 10, 11, 12, and 13 is contained in
pages 3 through 14, inclusive, of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held April 23, 1999, and is hereby incorporated
herein by reference. The Company's Proxy Statement was filed within 120 days
after the close of the Company's fiscal year in accordance with General
Instruction G(3) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
--------------------
The following financial statements of the Company and their
consolidated subsidiaries are incorporated by reference in
Part II, Item 8.
(a) Report of Independent Public Accountants
(b) Consolidated Balance Sheets - December 31, 1998 and 1997
(c) Consolidated Statements of Operations - Years ended December
31, 1998, 1997 and 1996
(d) Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996
(e) Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997 and 1996
(f) Notes to Consolidated Financial Statements
2. Financial Statement Schedule and Supplementary Data
---------------------------------------------------
(a) Selected Quarterly Financial Data for the Company are
incorporated by reference in Part II, Item 8
(b) Report of Independent Public Accountants on the Schedule
(included in Report of Independent Public Accountants on the
Financial Statements)
(c) Schedule of the Company:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
24
<PAGE>
3. 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 is 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 is hereby incorporated by reference. The First Amendment
to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership, the
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 is 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 is 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 March 31, 1997
Quarterly Report of the Company is hereby incorporated by
reference.
(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 is
hereby incorporated by reference.
(c) First Amended and Restated Agreement of Limited Partnership of
Saul II Subsidiary 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.
25
<PAGE>
(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 is hereby incorporated by reference.
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated
as of June 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 March 31, 1997
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 March 31, 1997
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 March 31,
1997 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, is as 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, is as filed as Exhibit 10.(q) of the 1997
Annual Report of the Company on Form 10-K is hereby incorporated
by reference.
23. Consent of Certified Public Accountants
27. Financial Data Schedule
Reports on Form 8-K.
--------------------
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 18, 1999 /s/ B. Francis Saul II
-- ----------------------
B. Francis Saul II
Chairman of the Board of Directors
& Chief Executive Officer
(Principal Executive Officer)
Date: March 18, 1999 /s/ Philip D. Caraci
-- --------------------
Philip D. Caraci, President and
Director
Date: March 18, 1999 /s/ B. Francis Saul III
-- -----------------------
B. Francis Saul III, Senior Vice
President and Director
Date: March 18, 1999 /s/ Scott V. Schneider
-- ----------------------
Scott V. Schneider, Senior Vice
President and Secretary (Principal
Financial and Accounting Officer)
Date: March 18, 1999 /s/ Gilbert M. Grosvenor
-- -----------------------
Gilbert M. Grosvenor, Director
Date: March 18, 1999 /s/ Philip C. Jackson Jr.
-- -------------------------
Philip C. Jackson Jr., Director
Date: March 18, 1999 /s/ General Paul X. Kelley
-- --------------------------
General Paul X. Kelley, Director
Date: March 18, 1999 /s/ Charles R. Longsworth
-- -------------------------
Charles R. Longsworth, Director
Date: March 18, 1999 /s/ Patrick F. Noonan
-- ---------------------
Patrick F. Noonan, Director
Date: March 18, 1999 /s/ Mr. Mark Sullivan III
-- -------------------------
Mark Sullivan III, Director
Date: March 18, 1999 /s/ James W. Symington
-- ----------------------
James W. Symington, Director
Date: March 18, 1999 /s/ John R. Whitmore
-- --------------------
John R. Whitmore, Director
27
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Saul Centers, Inc.:
We have audited the accompanying consolidated balance sheets of Saul
Centers, Inc. (a Maryland corporation) and subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for the three years ended December 31, 1998, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Saul Centers, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years ended December 31,
1998, 1997 and 1996 in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, effective June 30,
1998, the Company changed its method of accounting for percentage rent.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule III "Real Estate and Accumulated
Depreciation", appearing on pages F-18 and F-19, is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. The schedule has been subjected
to the auditing procedures applied in our audit of the basic financial
statements and in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 8, 1999
F-1
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================================================
December 31,
-------------------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real estate investments
Land $ 64,339 $ 65,630
Buildings and equipment 283,722 269,638
-------------- -------------
348,061 335,268
Accumulated depreciation (101,910) (92,615)
-------------- -------------
246,151 242,653
Construction in progress 4,506 974
Cash and cash equivalents 2,395 688
Accounts receivable and accrued income, net 6,347 6,190
Prepaid expenses 6,873 5,423
Deferred debt costs, net 3,604 3,853
Other assets 1,158 1,161
-------------- -------------
Total assets $ 271,034 $ 260,942
============== =============
Liabilities
Notes payable $ 290,623 $ 284,473
Accounts payable, accrued expenses and other liabilities 14,856 13,093
Deferred income 2,839 1,430
-------------- -------------
Total liabilities 308,318 298,996
-------------- -------------
Minority interests -- --
-------------- -------------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,836,378 and 12,428,145 shares issued and
outstanding, respectively 129 124
Additional paid-in capital 31,967 20,447
Accumulated deficit (69,380) (58,625)
-------------- -------------
Total stockholders' equity (deficit) (37,284) (38,054)
-------------- -------------
Total liabilities and stockholders' equity $ 271,034 $ 260,942
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
====================================================================================================================
For the Years Ended December 31,
-----------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Base rent $ 55,542 $ 51,779 $ 49,814
Expense recoveries 9,911 9,479 9,301
Percentage rent 2,755 2,948 2,924
Other 2,375 3,511 1,984
------------- ------------ -------------
Total revenue 70,583 67,717 64,023
------------- ------------ -------------
Operating expenses
Property operating expenses 7,830 8,075 8,069
Provision for credit losses 418 505 457
Real estate taxes 6,128 6,084 5,914
Interest expense 22,627 20,308 18,509
Amortization of deferred debt expense 419 1,729 2,857
Depreciation and amortization 12,578 10,642 10,860
General and administrative 3,393 3,379 3,095
------------- ------------ -------------
Total operating expenses 53,393 50,722 49,761
------------- ------------ -------------
Operating income 17,190 16,995 14,262
Non-operating item
Sales of interest rate protection agreements -- (4,392) (972)
------------- ------------ -------------
Net income before extraordinary item,
cumulative effect of change in
accounting method and minority
interests 17,190 12,603 13,290
Extraordinary item
Early extinguishment of debt (50) (3,197) (587)
Cumulative effect of change in
accounting method (771) -- --
------------- ------------ -------------
Net income before minority interests 16,369 9,406 12,703
------------- ------------ -------------
Minority interests
Minority share of income (4,354) (2,483) (3,430)
Distributions in excess of earnings (2,886) (4,371) (3,422)
------------- ------------ -------------
Total minority interests (7,240) (6,854) (6,852)
------------- ------------ -------------
Net income $ 9,129 $ 2,552 $ 5,851
============= ============ =============
Net income per share (basic and dilutive)
Net income before extraordinary item,
cumulative effect of change in
accounting method and minority
interests $ 1.00 $ 0.76 $ 0.81
Extraordinary item -- (0.19) (0.04)
Cumulative effect of change in
accounting method (0.05) -- --
------------- ------------ -------------
Net income before minority interests $ 0.95 $ 0.57 $ 0.77
============= ============ =============
Net income $ 0.72 $ 0.21 $ 0.49
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 1995 119 2,511 (29,097) (16,467)
Issuance of 257,454 shares of
common stock 2 3,439 -- 3,441
Net income -- -- 5,851 5,851
Distributions ($1.17 per share) -- -- (14,036) (14,036)
Distributions payable ($.39 per share) -- -- (4,729) (4,729)
------------- -------------- -------------- ---------------
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 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)
============= ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Saul Centers, Inc.
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
=============================================================================================================================
For the Years Ended December 31,
----------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,129 $ 2,552 $ 5,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 7,240 6,854 6,852
Loss on sale of interest rate protection agreements -- 4,392 972
Cumulative effect of change in
accounting method 771 -- --
Loss on early extinguishment of debt 50 3,197 587
Depreciation and amortization 12,997 12,371 13,717
Provision for credit losses 418 505 457
Increase in accounts receivable (1,346) (406) (45)
Increase in prepaid expenses (2,742) (1,426) (1,136)
Decrease (increase) in other assets 3 2,548 (961)
Increase (decrease) in accounts payable and other liabilities 1,763 (1,640) 3,019
Increase (decrease) in deferred income 1,409 (11) 364
Other, net (6) -- --
------------- ------------- ---------------
Net cash provided by operating activities 29,686 28,936 29,677
------------- ------------- ---------------
Cash flows from investing activities:
Additions to real estate investments (6,607) (4,377) (4,469)
Additions to construction in progress (8,169) (11,717) (3,566)
------------- ------------- ---------------
Net cash used in investing activities (14,776) (16,094) (8,035)
------------- ------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 20,900 223,600 98,620
Repayments on notes payable (18,407) (212,388) (98,442)
Proceeds from sale of interest rate protection agreements -- 1,370 681
Note prepayment fees -- (95) --
Additions to deferred debt expense (220) (3,159) (961)
Proceeds from the issuance of common stock
and convertible limited partnership units
in the Operating Partnership 11,648 4,500 3,441
Distributions to common stockholders and
holders of convertible limited partnership
units in the Operating Partnership (27,124) (26,020) (25,617)
------------- ------------- ---------------
Net cash used in financing activities (13,203) (12,192) (22,278)
------------- ------------- ---------------
Net increase (decrease) in cash 1,707 650 (636)
Cash, beginning of year 688 38 674
------------- ------------- ---------------
Cash, end of year $ 2,395 $ 688 $ 38
============= ============= ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest net of amount capitalized $ 22,575 $ 19,804 $ 18,829
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION
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 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, an office property and a
land parcel which it developed into a neighborhood shopping center. The Company
is currently in the predevelopment and approval process of converting a shopping
center to an industrial / warehouse use. Therefore, as of December 31, 1998,
the Company's properties (the "Current Portfolio Properties") consisted of 29
operating shopping center properties (the "Shopping Centers"), a property
planned to be converted to an industrial / warehouse facility (the "Industrial
Property") and four 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.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been presented on
the historical cost basis of The Saul Organization because of affiliated
ownership and common management and because the assets and liabilities were the
subject of a business combination with the Operating Partnership, the Subsidiary
Partnerships and Saul Centers, all newly formed entities with no prior
operations.
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 1998, no single Shopping Center
accounted for more than 11.4 % of the total Shopping
F-6
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially complete and
the assets are placed in service, rental income, direct operating expenses, and
depreciation associated with such properties are included in current operations.
Expenditures for repairs and maintenance are charged to operations as incurred.
Repairs and maintenance expense totaled $2,616,000, $2,479,000 and $2,730,000,
for calendar years 1998, 1997, and 1996, respectively, and is included in
operating expenses in the accompanying financial statements. Interest expense
capitalized totaled $215,000, $297,000 and $384,000, for calendar years 1998,
1997 and 1996, respectively.
In the initial rental operations of development projects, 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, accounts
receivable included $1,442,848, $1,663,000 and $1,913,000, at December 31, 1998,
1997 and 1996, respectively, representing minimum rental income accrued on a
straight-line basis to be paid by tenants over the term of the respective
leases. Receivables are reviewed monthly and reserves are established with a
charge to current period operations 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 $657,000, $506,000 and $427,000, at December 31, 1998, 1997 and
1996, respectively.
F-7
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Doubtful Accounts
-------------------------------
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance........................ $ 506 $ 427 $ 169
Provision for Credit Losses.............. 418 505 457
Charge-offs.............................. -267 -426 -199
----- ----- -----
Ending Balance .......................... $ 657 $ 506 $ 427
===== ===== =====
</TABLE>
DEFERRED DEBT COSTS
Deferred debt costs consists of fees and costs incurred to obtain long-term
financing and interest rate protection agreements. 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 $589,000, $171,000 and $6,240,000, at December 31, 1998, 1997
and 1996, respectively.
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 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 the expenses are incurred. Additional
rental income based on tenant's revenues ("percentage rent") is accrued at the
time a tenant reports sales exceeding a specified breakpoint .
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. As of December 31, 1998 and 1997, the total tax basis of the
Company's assets was $296,658,000 and $288,082,000, and the tax basis of the
liabilities was $298,280,000 and $293,223,000, respectively.
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.
Before the beginning of any calendar year, a director may elect to defer all or
part of his or her director's fees to be earned in that year and the following
years. 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.
Deferred compensation of $180,550, $144,500 and $118,950, has been reported in
the Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996, respectively. The Company has registered 70,000 shares for use
under the plan. As of December 31, 1998, 54,185 shares had been credited to the
directors' deferred fee accounts.
F-8
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In June 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 year ended December 31, 1998 .
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 established standards for related disclosures
about products and services, geographic areas, and major customers. Disclosures
required by this new standard are presented in Note 16.
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.
CHANGE IN ACCOUNTING METHOD
On May 21, 1998, the Emerging Issues Task Force ("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 did not affect the amount of
percentage rent income reported on an annual basis, but did impact the
recognition of percentage rent income reported on an interim basis by increasing
revenues the Company reported 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. As a result of adoption of
EITF Issue 98-9, the Company recorded a $771,000 charge for the cumulative
effect of change in accounting method, which is included in the consolidated
statement of operations for the year ended December 31, 1998.
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 December 31, 1998
and 1997 are as follows:
Construction in Progress
------------------------
(In thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Avenel V ............................. $ 2,800 $ -
French Market ......................... 949 807
Shops At Fairfax ...................... 702 -
Other development costs ............... 55 167
------- ------
Ending Balance ........................ $ 4,506 $ 974
======= ======
</TABLE>
F-9
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and short-term investments with
maturities of three months or less.
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 17,233,047, 16,690,417
and 16,423,984, shares for the years ended December 31, 1998, 1997 and 1996,
respectively. Per share data relating to net income after minority interests is
computed on the basis of 12,643,639, 12,297,254 and 12,030,821, weighted average
common shares for the years ended December 31, 1998, 1997 and 1996,
respectively.
3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN
THE OPERATING PARTNERSHIP
The Saul Organization has a 27.2% limited partnership interest, represented
by 4,798,695 convertible limited partnership units, in the Operating
Partnership, as of December 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 27.2% limited partnership interest in the Operating Partnership
is reflected as minority interests in the accompanying financial statements.
4. NOTES PAYABLE
DECEMBER 31, 1998
The Company assumed a $3.7 million loan when it acquired Avenel IV on April
1, 1998. In September 1998, the Company closed a $6.4 million permanent fixed
rate loan to replace the variable rate loan assumed on the acquisition of Avenel
IV. The balance of the loan, $2.7 million, was used to fund construction of the
new Avenel V development. The new loan term is 13 years and requires monthly
principal and interest payments based upon a 25 year amortization schedule and
an interest rate of 7.09%. Borrowings totaled $18.0 million on the Company's
$60.0 million unsecured revolving credit facility at December 31, 1998, leaving
$42.0 million available for future use. Notes payable totaled $290.6 million at
December 31, 1998, as follows:
<TABLE>
<CAPTION>
Notes Payable Principal Interest Scheduled
-------------
(In thousands) Outstanding Rate Maturity
----------- ---- ---------
<S> <C> <C> <C>
Mortgage Notes Payable $ 144,814 (a) 7.67% Fixed Oct. 2012
79,464 (b) 8.52% Fixed Dec. 2011
37,515 (c) 7.88% Fixed Jan. 2013
10,629 (d) 7.25% Fixed May 2004
201 8.00% Fixed Jan. 2000
----------
Subtotal 272,623
Revolving Credit Facility 18,000 (e) 6.82% Variable Sep. 2000
----------
Total Notes Payable $ 290,623
==========
</TABLE>
F-10
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The loan is collateralized by nine shopping centers.
(b) The loan is collateralized by Avenel Business Park, Van Ness Square and
four shopping centers - Ashburn Village, Leesburg Pike, Lumberton Plaza and
Village Center. The loan was amended during 1998 to include new borrowings
of $6.4 million at a rate of 7.09%. Avenel IV and Avenel V (under
construction at year-end 1998) were added as collateral. The 8.52% blended
interest rate is the weighted average of the initial loan rate and the
additional borrowings rate.
(c) The loan is collateralized by 601 Pennsylvania Avenue.
(d) For the final five years of the term of the loan, beginning in June 1999,
the interest rate is fixed at the 1-year Treasury Securities rate effective
March 16, 1999 plus 2.00 %. The loan is collateralized by The Glen
shopping center.
(e) The facility is a revolving credit facility totaling $60.0 million.
Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate
plus a spread of 1.375 % to 1.625 % (determined by certain debt service
coverage and leverage tests) or upon the bank's reference rate plus 1/2 %
at the Company's option. The line may be extended one year with payment of
a fee of 1/4 % at the Company's option. The interest rate in effect on
December 31, 1998 was based on a weighted average LIBOR of 5.32 % and
spread of 1.5 %.
Notes payable balances outstanding at December 31, 1998 have a weighted
average remaining term of 12.5 years, and a weighted average interest rate of
7.84 %. Of the $290.6 million total debt at December 31, 1998, $272.6 million
was fixed rate (93.8 % of the total notes payable) and $18.0 million was
variable rate (6.2 % of the total notes payable). The December 31, 1998
depreciated cost of properties collateralizing the mortgage notes payable
totaled $192.0 million.
Notes payable of $272.4 million at December 31, 1998 require monthly
installments of principal and interest, with principal amortization on schedules
averaging approximately 20 years. The $0.2 million note requires monthly
interest and an annual principal payment of $0.1 million. The remaining notes
payable totaling $18.0 million at December 31, 1998 require monthly installments
of interest only. Notes payable at December 31, 1998 totaling $211.0 million
are guaranteed by members of The Saul Organization.
As of December 31, 1998, the scheduled maturities of all debt for years
ended December 31, are as follows:
<TABLE>
<CAPTION>
Debt Maturity Schedule
----------------------
(In thousands)
<S> <C>
1999............. $ 5,256
2000............. 23,648
2001............. 6,057
2002............. 5,735
2003............. 6,215
Thereafter....... 243,712
----------
$ 290,623
==========
</TABLE>
DECEMBER 31, 1997
During 1997 the Company repaid a total of $185.5 million of variable rate
mortgage notes which were outstanding at December 31, 1996, with the net
proceeds of a $147.0 million 15-year fixed rate mortgage note and a $38.5
million 16-year fixed rate mortgage note. The $44.0 million secured revolving
credit facility in effect at December 31, 1996 was replaced with a $60.0 million
unsecured revolving credit facility during 1997. Notes payable totaled $284.5
million at December 31, 1997.
F-11
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable balances outstanding at December 31, 1997 had a weighted
average remaining term of 13.7 years, and a weighted average interest rate of
7.90 %. Of the $284.5 million total debt at December 31, 1997, $271.0 million
was fixed rate (95.3 % of the total notes payable) and $13.5 million was
variable rate (4.7 % of the total notes payable). The December 31, 1997
depreciated cost of properties collateralizing the mortgage notes payable
totaled $192.7 million. Notes payable of $270.7 million at December 31, 1997
required monthly installments of principal and interest, with principal
amortization on schedules averaging approximately 20 years. The $0.3 million
note required monthly interest and an annual principal payment of $0.1 million.
The remaining notes payable totaling $13.5 million at December 31, 1997 required
monthly installments of interest only. Notes payable at December 31, 1997
totaling $209.1 million were guaranteed by members of The Saul Organization.
5. LEASE AGREEMENTS
Lease income includes primarily base rent arising from noncancellable
commercial leases. Base rent for the years ended December 31, 1998, 1997 and
1996, amounted to $55,542,000, $51,779,000 and $49,814,000, respectively.
Future base rent under noncancellable leases for years ended December 31, are as
follows:
<TABLE>
<CAPTION>
Future Base Rental Income
-------------------------
(In thousands)
<S> <C>
1999........... $ 55,984
2000........... 50,574
2001........... 45,356
2002........... 38,343
2003........... 31,287
Thereafter..... 261,869
---------
$ 483,413
=========
</TABLE>
The majority of the leases also provide for rental increases and expense
recoveries based on increases in the Consumer Price Index or increases in
operating expenses, or both. These increases generally are payable in equal
installments throughout the year based on estimates, with adjustments made in
the succeeding year. Expense recoveries for the years ended December 31, 1998,
1997 and 1996 amounted to $9,911,000, $9,479,000 and $9,301,000, respectively.
In addition, certain retail leases provide for percentage rent based on sales in
excess of the minimum specified in the tenant's lease. Percentage rent amounted
to $2,755,000, $2,948,000 and $2,924,000, for the years ended December 31, 1998,
1997 and 1996, respectively.
6. LONG-TERM LEASE OBLIGATIONS
Certain properties are subject to noncancellable long-term leases which
apply to land underlying the Shopping Centers. Certain of the leases provide for
periodic adjustments of the basic annual rent and require the payment of real
estate taxes on the underlying land. The leases will expire between 2058 and
2068. Reflected in the accompanying financial statements is minimum ground rent
expense of $152,000 for each of the years ended December 31, 1998, 1997, and
1996. The minimum future rental commitments under these ground leases are as
follows:
<TABLE>
<CAPTION>
Ground Lease Rental Commitments
-------------------------------
(In thousands)
Annual Rent Total
1999 2000-2003 Thereafter
----- ---------- ----------
<S> <C> <C> <C>
Beacon Center..................... $ 47 $ 47 $ 3,466
Olney............................. 47 50 4,625
Southdale......................... 60 60 3,365
------ ------ ---------
Totals............................ $ 154 $ 157 $ 11,456
====== ====== =========
</TABLE>
F-12
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Flagship Center consists of two developed outparcels that are
part of a larger adjacent community shopping center formerly owned by The Saul
Organization and sold to an affiliate of a tenant in 1991. The Company has a 90-
year ground leasehold interest which commenced in September 1991 with a minimum
rent of one dollar per year.
7. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
The Consolidated Statement of Operations for the year ended December 31,
1998 includes a charge for minority interests of $7,240,000, consisting of
$4,354,000 related to The Saul Organization's share of the net income for the
year and $2,886,000 related to distributions to minority interests in excess of
allocated net income for the year. The charge for the year ended December 31,
1997 of $6,854,000 consists of $2,483,000 related to The Saul Organization's
share of net income for the year and $4,371,000 related to distributions to
minority interests in excess of allocated net income for the year. The charge
for the year ended December 31, 1996 of $6,852,000 consists of $3,430,000
related to The Saul Organization's share of the net income for the year and
$3,422,000 related to distributions to minority interests in excess of allocated
net income for the year.
8. RELATED-PARTY TRANSACTIONS
In April 1998, the Company purchased, through its operating partnership, a
46,227 square foot office/flex property known as Avenel IV. The $5,600,000
purchase price consisted of $3,657,000 in variable rate debt assumption, with
the balance paid through the issuance of 105,922 new units in Saul Centers'
operating partnership. The seller was a member of The Saul Organization.
Chevy Chase Bank leases space in twelve of the properties. Total rental
income from Chevy Chase Bank amounted to $1,192,000, $1,181,000 and $1,063,000,
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Chairman and Chief Executive Officer, the President and a Senior Vice
President of the Company are officers of The Saul Organization but devote a
substantial amount of time to the management of the Company. The annual
compensation for these officers is fixed by the Compensation Committee of the
Board of Directors.
The Company shares with The Saul Organization on a prorata basis certain
ancillary functions such as computer and payroll services and insurance expense
based on management's estimate of usage or time incurred, as applicable. Also,
The Saul Organization subleases office space to the Company. The terms of all
such arrangements with The Saul Organization, including payments related
thereto, are periodically reviewed by the Audit Committee of the Board of
Directors. Included in general and administrative expense for the years ended
December 31, 1998, 1997 and 1996, are charges totaling $1,685,000, $1,624,000
and $1,229,000, related to shared services, of which $1,480,000, $1,436,000 and
$1,073,000, was paid during the years ended December 31, 1998, 1997 and 1996,
respectively.
F-13
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK OPTION PLAN
The Company has established a stock option plan for the purpose of
attracting and retaining executive officers and other key personnel. The plan
provides for grants of options to purchase a specified number of shares of
common stock. A total of 400,000 shares are available under the plan. The plan
authorizes the Compensation Committee of the Board of Directors to grant options
at an exercise price which may not be less than the market value of the common
stock on the date the option is granted.
The Compensation Committee has granted options to purchase a total of
180,000 shares (90,000 shares from incentive stock options and 90,000 shares
from nonqualified stock options) to five Company officers. The options vested
25 % per year over four years, have an exercise price of $20 per share and a
term of ten years, subject to earlier expiration upon termination of employment.
A total of 170,000 of the options expire September 23, 2003 and 10,000 expire
September 24, 2004. As of December 31, 1998, all 180,000 of the options were
fully vested. No compensation expense has been recognized as a result of these
grants.
10. NON-OPERATING ITEM - SALES OF INTEREST RATE PROTECTION AGREEMENTS
The Company sold a portion of its interest rate protection agreements with
a notional value of $87 million in November 1996 and all of the remaining
agreements with a notional value of $162.8 million in October 1997. The sales
resulted in the write-off of unamortized costs in excess of the proceeds
received totaling $4,392,000 and $972,000, for the years ended December 31, 1997
and 1996, respectively.
11. EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
The consolidated statements of operations for the years ending December 31,
1998, 1997 and 1996, include $50,000, $3,197,000 and $587,000, respectively,
related to the write-off of deferred financing costs on loans that were prepaid.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure about fair value for all
financial instruments. The carrying values of cash, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value. Based on interest rates currently available to the Company, the carrying
value of the variable rate credit line payable is a reasonable estimation of
fair value, because the debt bears interest based on short-term interest rates.
Based upon management's estimate of borrowing rates and loan terms currently
available to the Company for fixed rate financing in the amount of the total
notes payable, the fair value is not materially different from its carrying
value.
13. COMMITMENTS AND CONTINGENCIES
Neither the Company nor the Current Portfolio Properties are subject to any
material litigation, nor, to management's knowledge, is any material litigation
currently threatened against the Company, other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items, individually or in aggregate, will not
have a material adverse impact on the Company or the Current Portfolio
Properties.
F-14
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. DISTRIBUTIONS
In December 1995, the Company established a Dividend Reinvestment and Stock
Purchase Plan (the "Plan"), to allow its stockholders and holders of limited
partnership interests an opportunity to buy additional shares of Common Stock by
reinvesting all or a portion of their dividends or distributions. The Plan
provides for investing in newly issued shares of Common Stock at a 3 % discount
from market price without payment of any brokerage commission, service charges
or other expenses. All expenses of the Plan are paid by the Company. The
January 31, 1996 dividend was the initial dividend payment date when the
Company's stockholders and holders of limited partnership interests could
participate in the Plan.
Of the distributions paid during 1998, $1.16 per share represented ordinary
dividend income and $0.40 per share represented return of capital to the
shareholders. The following summarizes distributions paid during the years
ended December 31, 1998, 1997 and 1996, including activity in the Plan:
<TABLE>
<CAPTION>
Total Distributions to Dividend Reinvestment Plan
---------------------- --------------------------
Common Limited Partner Common Units Discounted
Stockholders Unitholders Issued Issued Share Price
------------ --------------- ------ ------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Distributions during 1998
-------------------------
January 30 $ 4,848 $ 1,713 94,304 - $ 16.19
April 30 4,886 1,755 90,856 80,733 17.40
July 29 4,923 1,786 101,739 106,010 16.01
October 30 4,964 1,827 105,756 112,867 15.40
-------- -------- ------- -------
$ 19,621 $ 7,081 392,655 299,610
======== ======== ======= =======
Distributions during 1997
-------------------------
January 31 $ 4,740 $ 1,713 58,728 - $ 16.01
April 30 4,764 1,713 68,913 - 15.16
July 31 4,792 1,715 63,291 - 16.98
October 31 4,818 1,713 72,901 - 17.10
-------- -------- -------
$ 19,114 $ 6,854 263,833
======== ======== =======
Distributions during 1996
-------------------------
January 31 $ 4,640 $ 1,713 56,050 - $ 14.19
April 30 4,663 1,713 58,980 - 13.94
July 31 4,687 1,713 67,421 - 12.61
October 31 4,714 1,713 64,154 - 14.19
-------- -------- -------
$ 18,704 $ 6,852 246,605
======== ======== =======
</TABLE>
In December 1998, 1997 and 1996, the Board of Directors of the Company
authorized a distribution of $0.39 per share payable in January 1999, 1998 and
1997, to holders of record on January 15, 1999, January 16, 1998 and January 17,
1997, respectively. As a result, $5,007,000, $4,832,000 and $4,729,000 was paid
to common shareholders on January 29, 1999, January 30, 1998, and January 31,
1997, respectively. Also, $1,871,000, $1,713,000 and $1,713,000 was paid to
limited partnership unitholders on January 29, 1999, January 30, 1998 and
January 31, 1997 ($0.39 per Operating Partnership unit), respectively. These
amounts are reflected as a reduction of stockholders' equity and are included in
accounts payable in the accompanying financial statements.
F-15
<PAGE>
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
15. INTERIM RESULTS (UNAUDITED)
The following summary presents the results of operations of the Company
for the quarterly periods of years 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands, except Three Months Ended
--------------------------------------------------------------
per share amounts)
12/31/98 09/30/98 06/30/98 03/31/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 18,100 $ 17,650 $ 17,505 $ 17,143
------------ ------------ ------------ ------------
Net income before extraordinary item
and minority interests 3,774 4,427 4,326 4,478
Extraordinary item-Early extinguishment of debt -- (50) -- --
Minority interests (1,873) (1,827) (1,827) (1,713)
------------ ------------ ------------ ------------
Net income $ 1,901 $ 2,550 $ 2,499 $ 2,765
============ ============ ============ ============
Per Share Data:
Net income before extraordinary item
and minority interests $ 0.21 $ 0.26 $ 0.25 $ 0.27
============ ============ ============ ============
Net income $ 0.15 $ 0.20 $ 0.20 $ 0.22
============ ============ ============ ============
<CAPTION>
12/31/97 09/30/97 06/30/97 03/31/97
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 17,386 $ 17,145 $ 16,624 $ 16,562
------------ ------------ ------------ ------------
Net income before extraordinary item
and minority interests (238) 4,381 4,211 4,249
Extraordinary item-Early extinguishment of debt (2,828) -- -- (369)
Minority interests (1,713) (1,715) (1,713) (1,713)
------------ ------------ ------------ ------------
Net income $ (4,779) $ 2,666 $ 2,498 $ 2,167
============ ============ ============ ============
Per Share Data:
Net income before extraordinary item
and minority interests $ (0.01) $ 0.26 $ 0.25 $ 0.26
============ ============ ============ ============
Net income $ (0.39) $ 0.22 $ 0.20 $ 0.18
============ ============ ============ ============
</TABLE>
In June 1998, the Company adopted a new accounting method as
directed by the Emerging Issues Task Force (EITF) Issue 98-9
"Accounting for Contingent Rent In Interim Financial Periods" which
reallocated the amount of annual percentage rent income recognized in
its quarterly reports. (See Note 2, Summary of Significant Accounting
Policies-Change In Accounting Method.)
The Company adopted the new accounting method during the second
quarter of 1998, retroactive to January 1, 1998. The Company reported
revenues and net income, of $34,833,000 and $4,678,000, respectively,
for the six months ended June 30, 1998. The six month results included
additional percentage rent income of $185,000 and the cumulative effect
of change in accounting method of ($771,000), which would have been
reported in the first quarter had the accounting method been then
adopted. The 1998 second, third and fourth quarter interim results
presented above reflect application of the new accounting method. The
1998 first quarter and 1997 interim results do not reflect the
allocation of percentage rent income earned in accordance with the new
accounting method and therefore are not comparable with the 1998
results. The application of the change in accounting method had no
impact on the Company's cash flows nor the amount of revenues reported
for the years ended December 31, 1998 and 1997.
F - 16
<PAGE>
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
16. Business Segments
The company has two reportable business segments: Shopping Centers and
Office Properties. The accounting policies of the segments presented
below are the same as those described in the summary of significant
accounting policies (see Note 1). The Company evaluates performance
based upon income from real estate for the combined properties in each
segment.
<TABLE>
<CAPTION>
(Dollars in thousands) Shopping Office Corporate Consolidated
Centers Properties and Other Totals
--------------------------------------------------------------- --------- ------------ ----------- ------------
1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate rental operations:
Revenues.................................................. $ 52,595 $ 17,871 $ 117 $ 70,583
Expenses.................................................. (9,523) (4,723) (130) (14,376)
--------- ------------ ----------- ------------
Income from real estate...................................... 43,072 13,148 (13) 56,207
Interest expense & amortization of debt costs............. (23,046) (23,046)
General and administrative................................ (3,393) (3,393)
--------- ------------ ----------- ------------
Subtotal..................................................... 43,072 13,148 (26,452) 29,768
Depreciation and amortization............................. (8,758) (3,694) (126) (12,578)
Early extinguishment of debt.............................. (50) (50)
Cumulative effect of accounting method change............. (771) (771)
Minority interests........................................ (7,240) (7,240)
--------- ------------ ----------- ------------
Net income................................................... $ 34,314 $ 9,454 $ (34,639) $ 9,129
========= ============ =========== ============
Annual capital investment.................................... $ 11,807 $ 2,892 $ 77 $ 14,776
========= ============ =========== ============
Total assets................................................. $ 178,459 $ 70,182 $ 22,393 $ 271,034
========= ============ =========== ============
---------------------------------------------------------------
1997
---------------------------------------------------------------
Real estate rental operations:
Revenues.................................................. $ 51,096 $ 16,302 $ 319 $ 67,717
Expenses.................................................. (9,771) (4,691) (202) (14,664)
--------- ------------ ----------- ------------
Income from real estate...................................... 41,325 11,611 117 53,053
Interest expense & amortization of debt costs............. (22,037) (22,037)
General and administrative................................ (3,379) (3,379)
--------- ------------ ----------- ------------
Subtotal..................................................... 41,325 11,611 (25,299) 27,637
Depreciation and amortization............................. (7,144) (3,373) (125) (10,642)
Sale of interest rate protection agreements............... (4,392) (4,392)
Early extinguishment of debt.............................. (3,197) (3,197)
Minority interests........................................ (6,854) (6,854)
--------- ------------ ----------- ------------
Net income.................................................. 34,181 $ 8,238 $ (39,867) $ 2,552
========= ============ =========== ============
Annual capital investment................................... $ 15,240 $ 849 $ 5 $ 16,094
========= ============ =========== ============
Total assets................................................ $ 174,556 $ 67,016 $ 19,370 $ 260,942
========= ============ =========== ============
--------------------------------------------------------------
1996
--------------------------------------------------------------
Real estate rental operations:
Revenues................................................. $ 47,596 $ 16,021 $ 406 $ 64,023
Expenses................................................. (9,872) (4,323) (245) (14,440)
--------- ------------ ----------- ------------
Income from real estate..................................... 37,724 11,698 161 49,583
Interest expense & amortization of debt costs............ (21,366) (21,366)
General and administrative............................... (3,095) (3,095)
--------- ------------ ----------- ------------
Subtotal.................................................... 37,724 11,698 (24,300) 25,122
Depreciation and amortization............................ (7,134) (3,600) (126) (10,860)
Sale of interest rate protection agreements.............. (972) (972)
Early extinguishment of debt............................. (587) (587)
Minority interests....................................... (6,852) (6,852)
--------- ------------ ----------- ------------
Net income.................................................. $ 30,590 $ 8,098 $ (32,837) $ 5,851
========= ============ =========== ============
Annual capital investment................................... $ 7,451 $ 436 $ 148 $ 8,035
========= ============ =========== ============
Total assets................................................ $ 164,727 $ 69,308 $ 29,460 $ 263,495
========= ============ =========== ============
</TABLE>
F-17
<PAGE>
Schedule III
SAUL CENTERS, INC.
Real Estate and Accumulated Depreciation
December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Costs
Capitalized Basis at Close of Period
---------------------------------------------
Subsequent Buildings
Initial to and Leasehold
Basis Acquisition Land Improvements Interests
----------------- --------------- ----------------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Shopping Centers
Ashburn Village, Ashburn, VA $ 11,431 $ 404 $ 3,738 $ 8,097 $ --
Beacon Center, Alexandria, VA 1,493 13,707 -- 14,106 1,094
Belvedere, Baltimore, MD 932 456 263 1,125 --
Boulevard, Fairfax, VA 4,883 44 3,687 1,240 --
Clarendon, Arlington, VA 385 395 635 145 --
Clarendon Station, Arlington, VA 834 24 425 433 --
Flagship Center, Rockville, MD 160 9 169 -- --
French Market, Oklahoma City, OK 5,781 2,788 1,118 7,451 --
Germantown, Germantown, MD 3,576 287 2,034 1,829 --
Giant, Baltimore, MD 998 262 422 838 --
The Glen, Lake Ridge, VA 12,918 265 5,300 7,883 --
Great Eastern, District Heights., MD 3,472 8,908 2,264 10,116 --
Hampshire Langley, Langley Park, MD 3,159 1,600 1,856 2,903 --
Leesburg Pike, Baileys Crossroads, VA 2,418 4,914 1,132 6,200 --
Lexington Mall, Lexington, KY 4,868 5,668 2,111 8,425 --
Lumberton Plaza, Lumberton, NJ 4,400 7,453 950 10,903 --
North Washington, Alexandria, VA 2,034 (712) 544 778 --
Olney, Olney, MD 1,884 884 -- 2,768 --
Park Rd., Washington, DC 942 215 1,011 146 --
Ravenwood, Baltimore, MD 1,245 721 703 1,263 --
Seven Corners, Falls Church, VA 4,848 37,985 4,913 37,920 --
Shops at Fairfax, Fairfax, VA 2,708 3,090 992 4,806 --
Southdale, Glen Burnie, MD 3,650 14,876 -- 17,904 622
Southside Plaza, Richmond, VA 6,728 3,274 1,878 8,124 --
Sunshine City, Atlanta, GA 2,474 1,792 703 3,563 --
Thruway, Winston-Salem, NC 4,778 8,995 5,464 8,204 105
Village Center, Centreville, VA 16,502 602 7,851 9,253 --
West Park, Oklahoma City, OK 1,883 528 485 1,926 --
White Oak, Silver Spring, MD 6,277 3,422 4,787 4,912 --
----------------- --------------- ----------------- ----------------- ---------
Total Shopping Centers 117,661 122,856 55,435 183,261 1,821
----------------- --------------- ----------------- ----------------- ---------
Commercial Properties
Avenel Business Park, Gaithersburg, MD 21,459 6,299 1,802 25,956 --
601 Pennsylvania Ave., Washington DC 5,479 43,994 5,667 43,806 --
Van Ness Square, Washington, DC 812 25,648 831 25,629 --
----------------- --------------- ----------------- ----------------- ---------
Total Commercial Properties 27,750 75,941 8,300 95,391 --
----------------- --------------- ----------------- ----------------- ---------
Industrial Property
Crosstown, Tulsa, OK 3,454 399 604 3,249 --
---------------------------------------------------------------------------------
Total $ 148,865 $ 199,196 $ 64,339 $ 281,901 $ 1,821
=================================================================================
<CAPTION>
Buildings
Basis at Close of Period and
--------------------------------------------------
Improvements
Accumulated Related Date of Date Depreciable
Total Depreciation Debt Construction Acquired Lives in Years
--------------- --------------- ------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shopping Centers
Ashburn Village, Ashburn, VA $ 11,835 $ 954 $ 12,291 1994 3/94 40
Beacon Center, Alexandria, VA 15,200 4,934 3,428 1960 & 1974 1/72 40 & 50
Belvedere, Baltimore, MD 1,388 669 2,719 1958 1/72 40
Boulevard, Fairfax, VA 4,927 149 738 1969 4/94 40
Clarendon, Arlington, VA 780 32 153 1949 7/73 33
Clarendon Station, Arlington, VA 858 32 201 1949 1/96 40
Flagship Center, Rockville, MD 169 -- 254 -- 1/72 --
French Market, Oklahoma City, OK 8,569 2,796 1,064 1972 3/74 50
Germantown, Germantown, MD 3,863 317 557 1990 8/93 40
Giant, Baltimore, MD 1,260 556 2,758 1959 1/72 40
The Glen, Lake Ridge, VA 13,183 956 10,629 1993 6/94 40
Great Eastern, District Heights., MD 12,380 2,055 11,822 1958 & 1960 1/72 40
Hampshire Langley, Langley Park, MD 4,759 1,549 10,827 1960 1/72 40
Leesburg Pike, Baileys Crossroads, VA 7,332 2,441 12,372 1965 2/66 40
Lexington Mall, Lexington, KY 10,536 4,140 3,668 1971 & 1974 3/74 50
Lumberton Plaza, Lumberton, NJ 11,853 5,283 8,729 1975 12/75 40
North Washington, Alexandria, VA 1,322 142 474 1952 7/73 33
Olney, Olney, MD 2,768 1,477 1,219 1972 11/75 40
Park Rd., Washington, DC 1,157 35 473 1950 7/73 30
Ravenwood, Baltimore, MD 1,966 569 6,980 1959 1/72 40
Seven Corners, Falls Church, VA 42,833 8,340 47,251 1956 7/73 33
Shops at Fairfax, Fairfax, VA 5,798 1,809 848 1975 6/75 50
Southdale, Glen Burnie, MD 18,526 9,343 3,859 1962 & 1987 1/72 40
Southside Plaza, Richmond, VA 10,002 4,776 10,463 1958 1/72 40
Sunshine City, Atlanta, GA 4,266 2,031 1,212 1970 2/76 40
Thruway, Winston-Salem, NC 13,773 3,546 27,028 1955 & 1965 5/72 40
Village Center, Centreville, VA 17,104 1,410 9,735 1990 8/93 40
West Park, Oklahoma City, OK 2,411 852 52 1974 9/75 50
White Oak, Silver Spring, MD 9,699 2,516 24,967 1958 & 1967 1/72 40
--------------- --------------- -------------
Total Shopping Centers 240,517 63,709 216,771
--------------- --------------- -------------
Commercial Properties
Avenel Business Park, Gaithersburg, MD 27,758 9,646 27,282 1984, 1986 12/84, 8/85 35 & 40
1990 &1998 2/86 & 4/98
601 Pennsylvania Ave., Washington DC 49,473 16,740 37,515 1986 7/73 35
Van Ness Square, Washington, DC 26,460 9,923 9,055 1990 7/73 35
--------------- --------------- -------------
Total Commercial Properties 103,691 36,309 73,852
--------------- --------------- -------------
Industrial Property
Crosstown, Tulsa, OK 3,853 1,892 -- 1974 10/75 40
--------------------------------------------------
Total $ 348,061 $ 101,910 $ 290,623
==================================================
</TABLE>
F-18
<PAGE>
SCHEDULE III
SAUL CENTERS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
Depreciation and amortization related to the real estate investments reflected
in the statements of operations is calculated over the estimated useful lives of
the assets as follows:
Base building 33 - 50 years
Building components 20 years
Tenant improvements The lesser of the term of the lease or
the useful life of the improvements
The aggregate remaining net basis of the real estate investments for federal
income tax purposes was approximately $268,445,000 at December 31, 1998.
Depreciation and amortization are provided on the declining balance and
straight-line methods over the estimated useful lives of the assets.
The changes in total real estate investments and related accumulated
depreciation for each of the years in the three year period ended December 31,
1998 are summarized as follows.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ----------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Total real estate investments:
Balance, beginning of year $ 335,268 $ 329,664 $ 321,662
Improvements 14,784 17,785 15,177
Retirements 1,991 12,181 7,175
------------ ------------ ------------
Balance, end of year $ 348,061 $ 335,268 $ 329,664
============ ============ ============
Total accumulated depreciation:
Balance, beginning of year $ 92,615 $ 94,965 $ 92,237
Depreciation expense 10,409 9,797 10,860
Retirements 1,114 12,147 8,132
------------ ------------ ------------
Balance, end of year $ 101,910 $ 92,615 $ 94,965
============ ============ ============
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in the Company's December 31, 1998 Form 10-K into the
previously filed Registration Statement File No. 33-80291.
Arthur Andersen LLP
Washington, D.C.
February 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIALL
STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN FORM 10-K FOR THE YEAR
ENDED DECEMBER 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,395
<SECURITIES> 0
<RECEIVABLES> 6,347
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 340,861
<DEPRECIATION> 101,910
<TOTAL-ASSETS> 271,034
<CURRENT-LIABILITIES> 0
<BONDS> 290,623
0
0
<COMMON> 129
<OTHER-SE> (37,413)
<TOTAL-LIABILITY-AND-EQUITY> 271,034
<SALES> 0
<TOTAL-REVENUES> 70,583
<CGS> 0
<TOTAL-COSTS> 20,408
<OTHER-EXPENSES> 6,128
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 23,046
<INCOME-PRETAX> 17,190
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,190
<DISCONTINUED> 0
<EXTRAORDINARY> (50)
<CHANGES> (771)
<NET-INCOME> 9,129
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
