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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED June 30, 2002
COMMISSION FILE NUMBER 1-12254
SAUL CENTERS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1833074
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7501 Wisconsin Ave, Suite 1500, Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (301) 986-6200
Number of shares of common stock, par value $0.01 per share
outstanding as of August 1, 2002: 14,970,000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
SAUL CENTERS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001.................................................... 4
(b) Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001......................................... 5
(c) Consolidated Statements of Stockholders' Equity as of
June 30, 2002 and December 31, 2001.................................. 6
(d) Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001......................................... 7
(e) Notes to Consolidated Financial Statements........................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Liquidity and Capital Resources...................................... 19
(b) Results of Operations
Three months ended June 30, 2002 compared to three months
ended June 30, 2001.................................................. 25
Six months ended June 30, 2002 compared to six months
ended June 30, 2001.................................................. 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 29
Item 2. Changes in Securities..................................................... 29
Item 3. Defaults Upon Senior Securities........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders....................... 29
Item 5. Other Information......................................................... 29
Item 6. Exhibits and Reports on Form 8-K.......................................... 29
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments necessary for the fair presentation of the
financial position and results of operations of Saul Centers, Inc. All such
adjustments are of a normal recurring nature. These consolidated financial
statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements of Saul Centers, Inc. for the year
ended December 31, 2001, which are included in its Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of
results to be expected for the year.
The consolidated balance sheet at December 31, 2001 has been derived from
the audited financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
-3-
Saul Centers, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------
Assets
Real estate investments
Land $ 84,540 $ 67,710
Buildings and equipment 389,316 385,936
--------- ---------
473,856 453,646
Accumulated depreciation (144,115) (136,928)
--------- ---------
329,741 316,718
Construction in progress 4,142 1,163
Cash and cash equivalents 982 1,805
Accounts receivable and accrued income, net 9,528 9,217
Prepaid expenses 12,550 12,514
Deferred debt costs, net 3,348 3,563
Other assets 3,197 1,423
--------- ---------
Total assets $ 363,488 $ 346,403
========= =========
Liabilities
Notes payable $ 363,017 $ 351,820
Accounts payable, accrued expenses and other liabilities 16,473 14,697
Deferred income 2,487 4,009
--------- ---------
Total liabilities 381,977 370,526
--------- ---------
Minority interests -- --
--------- ---------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,831,187 and 14,535,803 shares issued and
outstanding, respectively 148 145
Additional paid-in capital 70,898 64,564
Accumulated deficit (89,535) (88,832)
--------- ---------
Total stockholders' equity (deficit) (18,489) (24,123)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 363,488 $ 346,403
========= =========
The accompanying notes are an integral part of these statements.
-4-
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(Dollars in thousands, except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------
Revenue
Base rent $18,995 $17,470 $37,348 $34,755
Expense recoveries 3,005 2,711 6,110 5,511
Percentage rent 225 241 774 853
Other 568 497 1,752 1,036
------- ------- ------- -------
Total revenue 22,793 20,919 45,984 42,155
------- ------- ------- -------
Operating expenses
Property operating expenses 2,365 2,026 4,724 4,226
Provision for credit losses 116 136 271 281
Real estate taxes 1,972 1,759 3,970 3,556
Interest expense 6,163 6,196 12,422 12,547
Amortization of deferred debt expense 161 136 324 273
Depreciation and amortization 4,182 3,711 8,304 7,292
General and administrative 1,335 1,031 2,544 2,005
------- ------- ------- -------
Total operating expenses 16,294 14,995 32,559 30,180
------- ------- ------- -------
Operating income 6,499 5,924 13,425 11,975
Non-operating item
Gain on sale of property -- -- 1,426 --
------- ------- ------- -------
Income before minority interests 6,499 5,924 14,851 11,975
------- ------- ------- -------
Minority interests
Minority share of income (1,844) (1,587) (3,861) (3,221)
Distributions in excess of earnings (173) (430) (173) (813)
------- ------- ------- -------
Total minority interests (2,017) (2,017) (4,034) (4,034)
------- ------- ------- -------
Net income $ 4,482 $ 3,907 $10,817 $ 7,941
======= ======= ======= =======
Per share (basic and diluted)
Income before minority interests $ 0.33 $ 0.30 $ 0.75 $ 0.62
======= ======= ======= =======
Net income $ 0.30 $ 0.28 $ 0.73 $ 0.57
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
-5-
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Additional
Common Paid-in Accumulated
(Dollars in thousands, except per share amounts) Stock Capital Deficit Total
- ----------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Balance, December 31, 2001 $145 $64,564 $(88,832) $(24,123)
Issuance of 169,826 shares of
common stock 2 3,456 -- 3,458
Net income -- -- 6,335 6,335
Distributions payable ($.39 per share) -- -- (5,736) (5,736)
---- ------- -------- --------
Balance, March 31, 2002 147 68,020 (88,233) (20,066)
Issuance of 125,558 shares of
common stock 1 2,878 -- 2,879
Net income -- -- 4,482 4,482
Distributions payable ($.39 per share) -- -- (5,784) (5,784)
---- ------- -------- --------
Balance, June 30, 2002 $148 $70,898 $(89,535) $(18,489)
==== ======= ======== ========
The accompanying notes are an integral part of these statements.
-6-
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
-------------------
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,817 $ 7,941
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 4,034 4,034
Gain on sale of property (1,426) --
Depreciation and amortization 8,628 7,565
Provision for credit losses 271 281
Decrease in accounts receivable 844 3,573
Increase in prepaid expenses (1,153) (2,789)
Increase in other assets (1,774) (1,919)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 1,776 (616)
Increase (decrease) in deferred income (1,522) 506
Other (72) 15
-------- --------
Net cash provided by operating activities 20,423 18,591
-------- --------
Cash flows from investing activities:
Acquisitions of real estate investments (16,830) --
Additions to real estate investments (3,380) (7,539)
Additions to construction in progress (2,979) (5,699)
-------- --------
Net cash used in investing activities (23,189) (13,238)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable 24,900 16,778
Repayments on notes payable (13,703) (11,827)
Additions to deferred debt expense (37) --
Proceeds from the issuance of common stock 6,337 5,345
Distributions to common stockholders and holders
of convertible limited partnership units in
the Operating Partnership (15,554) (15,023)
-------- --------
Net cash provided by (used in) financing activities 1,943 (4,727)
-------- --------
Net increase (decrease) in cash (823) 626
Cash and cash equivalents, beginning of period 1,805 1,772
-------- --------
Cash and cash equivalents, end of period $ 982 $ 2,398
======== ========
The accompanying notes are an integral part of these statements.
-7-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Formation and Structure
Organization
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. Saul Centers operates as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). Saul Centers generally will not be subject to federal income tax,
provided it annually distributes at least 90% of its REIT 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. 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", and collectively
with the Operating Partnership, the "Partnerships"), shopping center and office
properties, and the management functions related to the transferred properties.
Since its formation, the Company has purchased and developed additional
properties. The Company is currently developing Ashburn Village IV, an in-line
retail and retail pad expansion to the Ashburn Village shopping center. The
Company recently completed development of Ashburn Village III, Washington Square
at Old Town and Crosstown Business Center. As of June 30, 2002, the Company's
properties (the "Current Portfolio Properties") consisted of 27 operating
shopping center properties and Ashburn Village IV (the "Shopping Centers"), 5
predominantly office operating properties (the "Office Properties") and two
properties acquired in 2002 for future development and redevelopment.
To facilitate the placement of collateralized mortgage debt, the Company
established Saul QRS, Inc. a wholly owned subsidiary of Saul Centers. Saul QRS,
Inc. was created to succeed to the interest of Saul Centers as the sole general
partner of Saul Subsidiary I Limited Partnership. The remaining limited
partnership interests in Saul Subsidiary I Limited Partnership and Saul
Subsidiary II Limited Partnership are held by the Operating Partnership as the
sole limited partner. Through this structure, the Company owns 100% of the
Current Portfolio Properties.
-8-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies
Nature of Operations
The Company, which conducts all of its activities through its subsidiaries,
the Operating Partnership and Subsidiary Partnerships, engages in the ownership,
operation, management, leasing, acquisition, renovation, expansion, development
and financing of community and neighborhood shopping centers and office
properties, primarily in the Mid-Atlantic region. The Company's long-term
objectives are to increase cash flow from operations and to maximize capital
appreciation of its real estate.
Because the properties are located primarily in the Washington DC/Baltimore
metropolitan area, the Company is subject to a concentration of credit risk
related to these properties. A majority of the Shopping Centers are anchored by
several major tenants. Seventeen of the Shopping Centers are anchored by a
grocery store and offer primarily day-to-day necessities and services. As of
December 31, 2001, no single Shopping Center accounted for more than 11.5% of
the total Shopping Center gross leasable area. Only one retail tenant, Giant
Food, at 6.2%, accounted for more than 2.1% of the Company's 2001 total
revenues. No office tenant other than the United States Government, at 9.7%,
accounted for more than 1.1% of 2001 total revenues.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include
the accounts of Saul Centers, its subsidiaries, and the Operating Partnership
and Subsidiary Partnerships which are majority owned by Saul Centers. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Real Estate Investment Properties
These financial statements are prepared in conformity with generally
accepted accounting principles, and accordingly, do not report the current value
of the Company's real estate assets. Real estate investment properties are
stated at the lower of depreciated cost or fair value less cost to sell.
Management believes that these assets have generally appreciated in value and,
accordingly, the aggregate current value exceeds their aggregate net book value
and also exceeds the value of the Company's liabilities as reported in these
financial statements. Real estate investment properties are reviewed for
potential impairment losses whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of an
individual property's undiscounted expected future cash flows is less than its
carrying amount, the Company's policy is to recognize an impairment loss
measured by the amount the depreciated cost of the property exceeds its fair
value. Fair value is calculated as the present value of expected future cash
flows.
-9-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Interest, real estate taxes and other carrying costs are capitalized on
projects under development and construction. Interest expense capitalized during
the six month periods ended June 30, 2002 and 2001, was $200,000 and $961,000,
respectively. Once construction is substantially completed and the assets are
placed in service, their rental income, direct operating expenses and
depreciation are included in current operations. Expenditures for repairs and
maintenance are charged to operations as incurred.
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 include minimum rental income accrued on a straight-line basis to be
paid by tenants over the terms of their respective leases. Straight line rent
receivables at June 30, 2002 and December 31, 2001, of $5,327,000 and
$4,675,000, respectively, are presented after netting deductions of $800,000 and
$644,000, respectively, for tenants whose rent payment history or financial
condition cast doubt upon the tenant's ability to perform under its lease
obligations. Receivables are reviewed monthly and reserves are established when,
in the opinion of management, collection of the receivable is doubtful. Accounts
receivable in the accompanying financial statements are shown net of an
allowance for doubtful accounts of $778,000 and $559,000, at June 30, 2002 and
December 31, 2001, respectively.
Lease Acquisition Costs
Certain initial direct costs incurred by the Company in negotiating and
consummating a successful lease are capitalized and amortized over the initial
base term of the lease. These costs, totaling $11,073,000 and $10,419,000, are
included in prepaid expenses, net of accumulated amortization of $5,049,000 and
$4,465,000, at June 30, 2002 and December 31, 2001, respectively. Capitalized
leasing costs consist of commissions paid to third party leasing agents as well
as internal direct costs such as employee compensation and payroll related
fringe benefits directly associated with time spent in leasing related
activities. Such activities include analyzing the prospective tenant's financial
condition, evaluating and recording guarantees, collateral and other security
arrangements, negotiating lease terms, preparing lease documents and closing the
transaction.
-10-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Deferred Debt Costs
Deferred debt costs consist of financing fees and costs incurred to obtain
long-term financing. These fees and costs are being amortized over the terms of
the respective loans or agreements. Deferred debt costs in the accompanying
financial statements are shown net of accumulated amortization of $2,220,000 and
$1,968,000, at June 30, 2002 and December 31, 2001, respectively.
Revenue Recognition
Rental and interest income are accrued as earned except when doubt exists
as to collectibility, in which case the accrual is discontinued. When rental
payments due under leases vary from a straight-line basis because of free rent
periods or stepped increases, income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent a portion of property operating expenses billed to the tenants,
including common area maintenance, real estate taxes and other recoverable
costs. Expense recoveries are recognized in the period when the expenses are
incurred. Rental income based on a tenant's revenues ("percentage rent") is
accrued when a tenant reports sales that exceed a specified breakpoint.
Income Taxes
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under the Code, 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 90% 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
consolidated financial statements.
Per Share Data
Per share data is calculated in accordance with SFAS No. 128, "Earnings Per
Share." Employee stock options are the Company's only dilutive securities. Five
executive officers have been granted 180,000 unexercised stock options. The
options are currently dilutive because the average share price of the Company's
common stock exceeds the $20.00 exercise price. The options were not dilutive
during the prior year's quarter or six month period. The treasury share method
was used to measure the effect of the dilution. Net income before minority
interests is presented on a fully converted basis, as if the limited partners
had exercised their right to convert their partnership ownership into shares of
Saul Centers. Per share data for net income (after minority interests) is
computed using weighted average shares of common stock.
-11-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Weighted Average Shares Outstanding June 30,
(In thousands) Quarter ended Six months ended
---------------- ----------------
2002 2001 2002 2001
------- ------ ------- ------
Basic
Common Stock 14,789 14,116 14,719 14,036
Fully Converted 19,962 19,288 19,892 19,208
Fully Diluted
Common Stock 14,815 14,116 14,739 14,036
Fully Converted 19,987 19,288 19,912 19,208
Average Share Price $ 23.27 * $ 22.50 *
* The option exercise price exceeded the average share price for these
periods.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassifications
have no impact on operating results previously reported.
Minority Interests - Holders of Convertible Limited Partner Units in the
Operating Partnership
The Saul Organization has a 25.9% limited partnership interest, represented
by 5,172,000 convertible limited partnership units in the Operating Partnership,
as of June 30, 2002. These Convertible Limited Partnership Units are convertible
into shares of Saul Centers' common stock on a one-for-one basis. The impact of
The Saul Organization's 25.9% limited partnership interest in the Operating
Partnership is reflected as minority interests in the accompanying consolidated
financial statements.
Deferred Compensation and Stock Plan for Directors
Saul Centers has established a Deferred Compensation and Stock Plan for
Directors (the "Plan") for the benefit of its directors and their beneficiaries.
A director may elect to defer all or part of his or her director's fees and has
the option to have the fees paid in cash, in shares of common stock or in a
combination of cash and shares of common stock upon termination from the Board.
If the director elects to have fees paid in stock, the number of shares
allocated to the director is determined by the market price of the common stock
on the day the fee is earned. As of June 30, 2002, 170,000 shares were
authorized and registered for use under the Plan, and 121,000 shares had been
credited to the directors' deferred fee accounts.
Beginning in 1999, pursuant to the Plan, 100 shares of the Company's common
stock are
-12-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
awarded annually as additional compensation to each director serving on the
Board of Directors as of the record date for the Annual Meeting of Stockholders.
The shares are issued on the date of the Annual Meeting, their issuance may not
be deferred and transfer of the shares is restricted for a period of twelve
months following the date of issue.
3. Construction In Progress
Construction in progress includes the costs of active development projects
and other predevelopment project costs. Development costs include direct
construction costs and indirect costs such as architectural, engineering,
construction management and carrying costs consisting of interest, real estate
taxes and insurance. Construction in progress balances as of June 30, 2002 and
December 31, 2001 are as follows:
Construction in Progress
(In thousands)
June 30, December 31,
2002 2001
-------- ------------
Ashburn Village IV ............................... $4,142 $1,163
====== ======
4. Notes Payable
Notes payable totaled $363,017,000 at June 30, 2002, of which $290,275,000
(80.0%) was fixed rate debt and $72,742,000 (20.0%) was floating rate debt. At
June 30, 2002, the Company had a $70,000,000 unsecured revolving credit facility
with outstanding borrowings of $34,400,000 and borrowing availability of
$35,600,000. The facility requires monthly interest payments either at a rate of
LIBOR plus a spread of 1.625% to 1.875% (determined by certain debt service
coverage and leverage tests) or at the bank's reference rate depending upon the
Company's option. The facility matures in July 2003. The Company also had
borrowed $38,342,000 of a $42,000,000 construction loan secured by Washington
Square at June 30, 2002. The facility required monthly interest payments at a
rate of LIBOR plus 1.70% until July 2002 when the rate was reduced to LIBOR plus
1.45% because the Company exceeded certain leasing requirements at Washington
Square.
Notes payable totaled $351,820,000 at December 31, 2001, of which
$293,478,000 (83.4%), was fixed rate debt and $58,342,000 (16.6%) was floating
rate debt. Outstanding borrowings on the $70,000,000 unsecured revolving credit
facility were $20,000,000 at December 31, 2001, with borrowing availability of
$50,000,000.
At June 30, 2002, the scheduled maturities of all debt for years ending
December 31, were as follows:
-13-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Debt Maturity Schedule
(In thousands)
July 1 through December 31, 2002 ................................ $ 3,296
2003 ............................................................ 79,780
2004 ............................................................ 16,876
2005 ............................................................ 7,970
2006 ............................................................ 8,635
2007 ............................................................ 9,357
Thereafter ...................................................... 237,103
--------
Total ........................................................... $363,017
========
5. Shareholders' Equity (Deficit) and Minority Interests
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles and, accordingly, do
not report the current value of the Company's real estate assets. The
Shareholders' Equity (Deficit) reported on the Consolidated Balance Sheets does
not reflect any increase in value resulting from the difference between the
current value and the net book value of the Company's assets. Therefore,
Shareholders' Equity (Deficit) reported on the Consolidated Balance Sheets does
not reflect the market value of stockholders' investment in the Company.
The Consolidated Statement of Operations for the six months ended June 30,
2002 includes a charge for minority interests of $4,034,000 consisting of
$3,861,000 related to The Saul Organization's share of the net income for such
period and $173,000 related to distributions to minority interests in excess of
allocated net income for that period. The charge for the six months ended June
30, 2001 of $4,034,000 consists of $3,221,000 related to The Saul Organization's
share of net income for such period, and $813,000 related to distributions to
minority interests in excess of allocated net income for that period.
-14-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
6. Business Segments
The Company has two reportable business segments: Shopping Centers and
Office Properties. The accounting policies for the segments presented below are
the same as those described in the summary of significant accounting policies
(see Note 2). The Company evaluates performance based upon net operating income
for properties in each segment.
Shopping Office Corporate Consolidated
(Dollars in thousands) Centers Properties and Other Totals
-------- ---------- --------- ------------
Quarter ended June 30, 2002
---------------------------
Real estate rental operations:
Revenues........................................... $ 14,626 $ 8,146 $ 21 $ 22,793
Expenses........................................... (2,708) (1,745) -- (4,453)
-------- -------- ------- --------
Income from real estate............................... 11,918 6,401 21 18,340
Interest expense & amortization of debt expense.... -- -- (6,324) (6,324)
General and administrative......................... -- -- (1,335) (1,335)
-------- -------- ------- --------
Subtotal.............................................. 11,918 6,401 (7,638) 10,681
Depreciation and amortization...................... (2,486) (1,696) -- (4,182)
Minority interests................................. -- -- (2,017) (2,017)
-------- -------- ------- --------
Net income............................................ $ 9,432 $ 4,705 $(9,655) $ 4,482
======== ======== ======= ========
Capital investment.................................... $ 3,318 $ 12,553 $ 5 $ 15,876
======== ======== ======= ========
Total assets.......................................... $199,066 $134,817 $29,605 $363,488
======== ======== ======= ========
Quarter ended June 30, 2001
---------------------------
Real estate rental operations:
Revenues........................................... $ 14,177 $ 6,701 $ 41 $ 20,919
Expenses........................................... (2,637) (1,284) -- (3,921)
-------- -------- ------- --------
Income from real estate............................... 11,540 5,417 41 (16,998)
Interest expense & amortization of debt expense.... -- -- (6,332) (6,332)
General and administrative......................... -- -- (1,031) (1,031)
-------- -------- ------- --------
Subtotal.............................................. 11,540 5,417 (7,322) 9,635
Depreciation and amortization...................... (2,520) (1,191) -- (3,711)
Minority interests................................. -- -- (2,017) (2,017)
-------- -------- ------- --------
Net income............................................ $ 9,020 $ 4,226 $(9,339) $ 3,907
======== ======== ======= ========
Capital investment.................................... $ 3,399 $ 2,684 $ -- $ 6,083
======== ======== ======= ========
Total assets.......................................... $194,579 $121,020 $25,989 $341,588
======== ======== ======= ========
-15-
Shopping Office Corporate Consolidated
(Dollars in thousand) Centers Properties and Other Totals
-------- ---------- --------- ------------
Six months ended June 30, 2002
------------------------------
Real estate rental operations:
Revenues........................................... $ 30,144 $ 15,805 $ 35 $ 45,984
Expenses........................................... (5,238) (3,727) -- (8,965)
-------- -------- -------- --------
Income from real estate............................... 24,906 12,078 35 37,019
Interest expense & amortization of debt expense.... -- -- (12,746) (12,746)
General and administrative......................... -- -- (2,544) (2,544)
-------- -------- -------- --------
Subtotal.............................................. 24,906 12,078 (15,255) 21,729
Depreciation and amortization...................... (4,999) (3,305) -- (8,304)
Gain on Sale of Property.......................... 1,426 -- -- 1,426
Minority interests................................. -- -- (4,034) (4,034)
-------- -------- -------- --------
Net income............................................ $ 21,333 $ 8,773 $(19,289) $ 10,817
======== ======== ======== ========
Capital investment.................................... $ 10,046 $ 13,138 $ 5 $ 23,189
======== ======== ======== ========
Total assets.......................................... $199,066 $134,817 $ 29,605 $363,488
======== ======== ======== ========
Six months ended June 30, 2001
------------------------------
Real estate rental operations:
Revenues........................................... $ 28,746 $ 13,322 $ 87 $ 42,155
Expenses........................................... (5,280) (2,783) -- (8,063)
-------- -------- -------- --------
Income from real estate............................... 23,466 10,539 87 34,092
Interest expense & amortization of debt costs...... -- -- (12,820) (12,820)
General and administrative......................... -- -- (2,005) (2,005)
-------- -------- -------- --------
Subtotal.............................................. 23,446 10,539 (14,738) 19,267
Depreciation and amortization...................... (4,967) (2,325) -- (7,292)
Minority interests................................. -- -- (4,034) (4,034)
-------- -------- -------- --------
Net income............................................ $ 18,499 $ 8,214 $(18,772) $ 7,941
======== ======== ======== ========
Capital investment.................................... $ 5,462 $ 7,777 $ -- $ 13,239
======== ======== ======== ========
Total assets.......................................... $194,579 $121,020 $ 25,989 $341,588
======== ======== ======== ========
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section should be read in conjunction with the consolidated financial
statements of the Company and the accompanying notes in "Item 1. Financial
Statements" of this report. Historical results and percentage relationships set
forth in Item 1 and this section should not be taken as indicative of future
operations of the Company. Capitalized terms used but not otherwise defined in
this section, have the meanings given to them in Item 1 of this Form 10-Q. This
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements are generally characterized
by terms such as "believe", "expect" and "may".
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those given in the forward-looking
statements as a result of changes in factors which include among others, the
following: general economic and business conditions, which will, among other
things, affect demand for retail and office space; demand for retail goods;
availability and credit worthiness of the prospective tenants; lease rents and
the terms and availability of financing; adverse changes in the real estate
markets including, among other things, competition with other companies and
technology, risks of real estate development and acquisition, governmental
actions and initiatives, debt refinancing risk, conflicts of interests,
maintenance of REIT status and environmental/safety requirements.
General
The following discussion is based primarily on the consolidated financial
statements of the Company, as of June 30, 2002 and for the three and six month
periods ended June 30, 2002.
Critical Accounting Policies
The Company's accounting policies are in conformity with generally accepted
accounting principles in the United States ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to use judgment
in the application of accounting policies, including making estimates and
assumptions. These judgments affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the Company's financial statements and the reported amounts of revenue and
expenses during the reporting periods. If judgment or interpretation of the
facts and circumstances relating to various transactions had been different, it
is possible that different accounting policies would have been applied resulting
in a different presentation of the financial statements. Below is a discussion
of accounting policies which the Company considers critical in that they may
require judgment in their application or require estimates about matters which
are inherently uncertain. Additional discussion of accounting policies which the
Company considers significant, including further discussion of the critical
accounting policies described below, can be found in the accompanying notes in
"Item 1. Financial Statements" of this report.
-17-
Valuation of Real Estate Investments
Real estate investment properties are stated at historic cost basis less
depreciation. 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. Because these financial statements are
prepared in conformity with accounting principles generally accepted in the
United States, they do not report the current value of the Company's real estate
assets.
If there is an event or change in circumstance that indicates an impairment
in the value of a real estate investment property, the Company assesses an
impairment in value by making a comparison of the current and projected
operating cash flows of the property over its remaining useful life, on an
undiscounted basis, to the carrying amount of that property. If such carrying
amount is greater than the estimated projected cash flows, the Company would
recognize an impairment loss equivalent to an amount required to adjust the
carrying amount to its estimated fair market value.
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.
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.
Lease Acquisition Costs
Certain initial direct costs incurred by the Company in negotiating and
consummating a successful lease are capitalized and amortized over the initial
base term of the lease. Capitalized leasing costs consists of commissions paid
to third party leasing agents as well as internal direct costs such as employee
compensation and payroll related fringe benefits directly associated with time
spent in leasing related activities. Such activities include analyzing the
prospective tenant's financial condition, evaluating and recording guarantees,
collateral and other security arrangements, negotiating lease terms, preparing
lease documents and closing the transactions.
Revenue Recognition
Rental and interest income are accrued as earned except when doubt exists
as to collectibility, in which case the accrual is discontinued. When rental
payments due under
-18-
leases vary from a straight-line basis because of free rent periods or scheduled
rent increases, income is recognized on a straight-line basis throughout the
initial term of the lease. Expense recoveries represent a portion of property
operating expenses billed to the tenants, including common area maintenance,
real estate taxes and other recoverable costs. Expense recoveries are recognized
in the period when the expenses are incurred. Rental income based on a tenant's
revenues, known as percentage rent, is accrued when a tenant reports sales that
exceed a specified breakpoint.
Legal Contingencies
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. Once it has been determined that a loss is probable to occur, the
estimated amount of the loss is recorded in the financial statements. Both the
amount of the loss and the point at which its occurrence is considered probable
can be difficult to determine. While the resolution of these matters cannot be
predicted with certainty, the Company believes the final outcome of such matters
will not have a material adverse effect on the financial position or the results
of operations.
Liquidity and Capital Resources
Cash and cash equivalents were $1.0 million and $2.4 million at June 30,
2002 and 2001, respectively. The Company's cash flow is affected by its
operating, investing and financing activities, as described below.
Operating Activities
Cash provided by operating activities for the six month periods ended June
30, 2002 and 2001 was $20.4 million and $18.6 million, respectively, and
represents, in each year, cash received primarily from rental income, plus other
income, less normal recurring general and administrative expenses and interest
payments on debt outstanding.
Investing Activities
Cash used in investing activities for the six month periods ended June 30,
2002 and 2001 was $23.2 million and $13.2 million, respectively, and primarily
reflects the acquisition of properties and construction in progress during
those periods.
Financing Activities
Cash provided by financing activities for the six month period ended June
30, 2002 was $1.9 million and cash used by financing activities for the six
month period ended June 30, 2001 was $4.7 million. Cash provided by financing
activities for the six month period ended June 30, 2002 primarily reflects:
-19-
.. $24.9 million of proceeds received from notes payable during the period;
and
.. $6.3 million of proceeds received from the issuance of common stock and
convertible limited partnership units in the Operating Partnership by
dividend reinvestment programs;
which was partially offset by:
.. the repayment of borrowings on our notes payable totaling $13.7 million;
and
.. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the year
totaling $15.6 million.
Cash used by financing activities for the six month period ended June 30, 2001
primarily reflects:
.. $16.8 million of proceeds received from notes payable incurred during the
period; and
.. $5.3 million of proceeds received from the issuance of common stock and
convertible limited partnership units in the Operating Partnership pursuant
to dividend reinvestment programs.
which was partially offset by:
.. the repayment of borrowings on our notes payable totaling $11.8 million;
.. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the period
totaling $15.0 million.
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
90% (95% for the tax years prior to January 1, 2001) of its "real estate
investment trust taxable income," as defined in the Code. 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: i)
redevelop certain of the Shopping Centers, ii) develop additional freestanding
outparcels or expansions within certain of the Shopping Centers, iii) acquire
existing neighborhood and community shopping centers and/or office properties,
and iv) 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 properties are expected to provide
long-
-20-
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.
As of June 30, 2002, the scheduled maturities of all debt for years ended
December 31, are as follows:
Debt Maturity Schedule
(In thousands)
July 1 through December 31, 2002 .................................. $ 3,296
2003 .............................................................. 79,780
2004 .............................................................. 16,876
2005 .............................................................. 7,970
2006 .............................................................. 8,635
2007 .............................................................. 9,357
Thereafter ........................................................ 237,103
--------
Total ............................................................. $363,017
========
Management believes that the Company's current capital resources, including
approximately $35,600,000 of the Company's revolving line of credit, which was
available for borrowing as of June 30, 2002, will be sufficient to meet its
liquidity needs for the foreseeable future.
Dividend Reinvestment and Stock Purchase Plan
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 commissions, service charges
or other expenses. All expenses of the Plan are paid by the Company. The Company
issued 285,000 and 293,000 shares under the Plan at weighted average discounted
prices of $21.46 per share and $17.58 per share, during the six month periods
ended June 30, 2002 and 2001, respectively.
-21-
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.
Management believes that the Company's current capital resources, which
include the Company's credit line of which $33,500,000 was available for
borrowing as of August 9, 2002, will be sufficient to meet its liquidity needs
for the foreseeable future. At August 9, 2002, the Company had fixed interest
rates on approximately 79.4% of its total debt outstanding. The fixed rate debt
had a weighted average remaining term of approximately 9.7 years.
Funds From Operations
For the second quarter of 2002, the Company reported Funds From Operations
("FFO") of $10,681,000. This represents a 10.9% increase over the comparable
2001 period's FFO of $9,635,000. For the six month period ended June 30, 2002,
the Company reported FFO of $21,729,000 representing a 12.8% increase over the
comparable 2001 period's FFO of $19,267,000. FFO is presented on a fully
converted basis and as a widely accepted measure of operating performance for
REITs is defined as net income before extraordinary items, gains and losses on
property sales and before real estate depreciation and amortization. The
following table represents a reconciliation from net income before minority
interests to FFO:
Funds From Operations Schedule
(Amounts in thousands)
Three Months Ended June 30,
---------------------------
2002 2001
------- -------
Net income before minority interests ....................... $ 6,499 $ 5,924
Subtract:
Gain on Sale of Property ............................. -- --
Add:
Depreciation and amortization of real property ....... 4,182 3,711
------- -------
Funds From Operations ...................................... $10,681 $ 9,635
======= =======
Average Shares and Units Used to Compute FFO per Share ..... 19,987 19,288
======= =======
-22-
Funds From Operations Schedule
(Amounts in thousands)
Six Months Ended June 30,
-------------------------
2002 2001
------- -------
Net income before minority interests ....................... $14,851 $11,975
Subtract:
Gain on Sale of Property ............................. -1,426 --
Add:
Depreciation and amortization of real property ....... 8,304 7,292
------- -------
Funds From Operations ...................................... $21,729 $19,267
======= =======
Average Shares and Units Used to Compute FFO per Share ..... 19,912 19,208
======= =======
FFO, as defined by the National Association of Real Estate Investment
Trusts, presented on a fully converted basis and a widely accepted measure of
operating performance for real estate investment trusts, is defined as net
income before gains or losses from property sales, extraordinary items, and
before real estate depreciation and amortization. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows
for the applicable periods. There are no material legal or functional
restrictions on the use of FFO. FFO should not be considered as an alternative
to net income as an indicator of the Company's operating performance, or as an
alternative to cash flows as a measure of liquidity. Management considers FFO a
supplemental measure of operating performance and along with cash flow from
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.
Redevelopment, Renovations and Acquisitions
The Company has selectively engaged 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 in 2001 at
Washington Square, Ashburn Village and Crosstown Business Center.
-23-
During 2001, the Company continued the development of Washington Square at
Old Town, a new Class A mixed-use office/retail complex along North Washington
Street in historic Old Town Alexandria in Northern Virginia. The project totals
235,000 square feet of leasable area and is well located on a two-acre site
along Alexandria's main street. The project consists of two identical buildings
separated by a landscaped brick courtyard. Base building construction has been
completed. The build-out of office tenant areas continues. As of August 9, 2002,
the Company has signed leases on 89% of the 235,000 square feet of tenant space:
the 46,000 square feet of street level retail space is 98% leased and the
189,000 square feet of office space is 86% leased.
During late 1999, the Company purchased land located within the 1,580 acre
community of Ashburn Village in Loudoun County, Virginia, adjacent to its
108,000 square foot Ashburn Village neighborhood shopping center. The land was
developed into Ashburn Village II, a 40,200 square foot in-line and pad
expansion to the existing shopping center, containing 23,600 square feet of
retail space and 16,600 square feet of professional office suites. Ashburn
Village II commenced operations during the third quarter of 2000. In August
2000, the Company purchased an additional 7.1 acres of land adjacent to Ashburn
Village II for $1,579,000. During 2001, the Company completed the development of
4.0 acres of the land known as Ashburn Village III, consisting of a fully leased
28,000 square foot in-line and pad expansion to the retail area of the existing
shopping center. The Company commenced construction on the remaining 3.1 acres
known as Ashburn Village IV, during the fourth quarter of 2001. This phase
consists of 25,000 square feet of retail space and two pad sites and completes
the development of Ashburn Village. Leases have been signed for 63% of this new
Ashburn Village IV shop space as of June 30, 2002. Completion is scheduled for
the third quarter of 2002.
The conversion and redevelopment of the former Tulsa, Oklahoma shopping
center to an office/warehouse facility named Crosstown Business Center continued
throughout 2001, with substantial completion during the first quarter of 2002.
Twelve tenants lease 93% of the facility as of June 30, 2002.
In April 2002, the Company purchased 24 acres of undeveloped land in the
Broadlands section of the Dulles Technology Corridor. The site is located
adjacent to the Claiborne Parkway exit (Exit 5) of the Dulles Greenway, in
Loudoun County, Virginia. The Dulles Greenway is the "gateway to Loudoun
County," a 14-mile extension of the Dulles Toll Road, connecting Washington
Dulles International Airport with historic Leesburg, Virginia. Broadlands is a
1,500 acre planned community consisting of 3,500 residences, approximately half
of which are constructed and currently occupied. The land is zoned to
accommodate approximately 225,000 square feet of neighborhood and community
retail development. The Company is preparing drawings for the initial phase of
construction totaling 112,000 square feet of retail space and is moving forward
to obtain site plan approvals from Loudoun County. Additionally the Company has
recently executed a grocery anchor lease with Safeway for a 59,000 square foot
supermarket.
In June 2002, the Company purchased 3030 Clarendon Boulevard, located in
Arlington, Virginia. 3030 Clarendon is a 1.25 acre site with an existing and
primarily vacant 70,000 square foot office building with surface parking for 104
cars. It is located directly across the street from the Company's Clarendon and
Clarendon Station properties. The Company is analyzing its options for a
proposed redevelopment of the site.
-24-
Portfolio Leasing Status
At June 30, 2002, the operating portfolio consisted of 28 Shopping Centers
and 5 predominantly Office Properties, all of which are located in 7 states and
the District of Columbia.
At June 30, 2002, 94.2% of the Company's 6,200,000 square feet of space was
leased to tenants, as compared to 93.4% at June 30, 2001. The Shopping Center
portfolio was 94.2% leased at June 30, 2002 compared to 94.9% at June 30, 2001.
The Office Properties were 94.2% leased at June 30, 2002 compared to 87.2% as of
June 30, 2001. The overall improvement in the 2002 quarter's leasing percentage
compared to the prior year's quarter resulted primarily from the lease-up of
Crosstown Business Center from 78.0% to 93.4%, and Washington Square from 55.9%
to 88.7%, at June 30, 2001 and June 30, 2002, respectively.
Results of Operations
The following discussion compares the results of the Company for the
three-month periods ended June 30, 2002 and 2001, respectively. This information
should be read in conjunction with the accompanying consolidated financial
statements and the notes related thereto. These financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the interim
periods presented.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues for the three-month period ended June 30, 2002 (the "2002
Quarter") totaled $22,793,000 compared to $20,919,000 for the comparable quarter
in 2001 (the "2001 Quarter"), an increase of $1,874,000 (9.0%).
Base rent income was $18,995,000 for the 2002 Quarter compared to
$17,470,000 for the 2001 Quarter, representing an increase of $1,525,000 (8.7%).
Approximately 40% of the increase in base rent resulted from new leases in
effect at recently developed and redeveloped properties: Washington Square,
Ashburn Village III, Crosstown Business Center and French Market. Approximately
30% of the increase resulted from a major tenant paying higher rent under the
terms of a short-term lease extension at 601 Pennsylvania Avenue. The balance of
the base rent increase resulted from releasing property space in the remaining
Current Portfolio Properties, at rental rates higher than expiring rents.
Expense recoveries were $3,005,000 for the 2002 Quarter compared to
$2,711,000 for the comparable 2001 Quarter, representing an increase of $294,000
(10.8%). Of the increase in expense recovery income, approximately 33% resulted
from the commencement of operations at the recently developed and redeveloped
properties, while the balance of the increase in expense recoveries resulted
from improved occupancy and increases in recoverable property tax expense.
-25-
Percentage rent was $225,000 in the 2002 Quarter compared to $241,000 in
the 2001 Quarter, a decrease of $16,000 (6.6%). The percentage rent decrease
occurred primarily at French Market where a restaurant tenant reported lower
sales revenue compared to the previous year.
Other income, which consists primarily of parking income at three of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $568,000 in the 2002 Quarter, compared to
$497,000 in the 2001 Quarter, representing an increase of $71,000 (14.3%). The
increase in other income resulted primarily from a $56,000 increase in parking
income due to the lease-up of office space at Washington Square.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$339,000 (16.7%) to $2,365,000 in the 2002 Quarter from $2,026,000 in the 2001
Quarter. Approximately half of the property operating expense increase resulted
from the commencement of operations at Washington Square.
The provision for credit losses decreased $20,000 (14.7%) to $116,000 in
the 2002 Quarter from $136,000 in the 2001 Quarter. The prior year's quarter
included a provision for rents in dispute with a former tenant at Park Road,
which was sold to the District of Columbia.
Real estate taxes increased $213,000 (12.1%) to $1,972,000 in the 2002
Quarter from $1,759,000 in the 2001 Quarter. Thirty percent of the increase in
real estate tax expense in the 2002 Quarter resulted from the commencement of
operations at Washington Square, while another 30% resulted from increased taxes
at the Company's two Washington, DC office properties. The balance of the real
estate tax increase resulted from a 5% increase in real estate taxes throughout
the remaining Current Portfolio Properties.
Interest expense decreased $33,000 (0.5%) to $6,163,000 for the 2002
Quarter from $6,196,000 reported for the 2001 Quarter. The decrease resulted
from lower interest rates primarily on the Company's variable rate debt.
Amortization of deferred debt expense increased $25,000 (18.4%) to $161,000
for the 2002 Quarter compared to $136,000 for the 2001 Quarter. The increase
resulted from the amortization of additional loan costs associated with
extending the maturity of the Washington Square construction loan to January
2003.
Depreciation and amortization expense increased $471,000 (12.7%) from
$3,711,000 in the 2001 Quarter to $4,182,000 in the 2002 Quarter, reflecting
increased depreciation expense on developments and acquisitions placed in
service during the past twelve months.
General and administrative expense, which consists of payroll,
administrative and other overhead expenses, was $1,335,000 for the 2002 Quarter,
an increase of $304,000 (29.5%) over the 2001 Quarter. The increase in 2002
expenses resulted primarily from increased corporate office rent and to a lesser
extent the write-off of abandoned property acquisition costs.
-26-
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues for the six-month period ended June 30, 2002 (the "2002 Period")
totaled $45,984,000 compared to $42,155,000 for the comparable period in 2001
(the "2001 Period"), an increase of $3,829,000 (9.1%).
Base rent income was $37,348,000 for the 2002 Period compared to
$34,755,000 for the 2001 Period, representing an increase of $2,593,000 (7.5%).
Approximately half of the increase in base rent resulted from new leases in
effect at recently developed and redeveloped properties: Washington Square,
Ashburn Village III, Crosstown Business Center and French Market. Approximately
20% of the increase resulted from a major tenant paying higher rent under the
terms of a short-term lease extension at 601 Pennsylvania Avenue. The balance of
the base rent increase resulted from releasing property space in the remaining
Current Portfolio Properties at rental rates higher than expiring rents.
Expense recoveries were $6,110,000 for the 2002 Period compared to
$5,511,000 for the comparable 2001 Period, representing an increase of $599,000
(10.9%). Of the increase in expense recovery income, 33% resulted from the
commencement of operations at the newly developed and redeveloped properties,
while the balance of the increase in expense recoveries resulted from improved
occupancy and increases in recoverable property tax expense.
Percentage rent was $774,000 in the 2002 Period, compared to $853,000 in
the 2001 Period, a decrease of $79,000 (9.3%). Approximately one half of the
percentage rent decrease occurred at Lexington Mall where the Company is
positioning the mall for redevelopment.
Other income, which consists primarily of parking income at three of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $1,752,000 in the 2002 Period, compared to
$1,036,000 in the 2001 Period, representing an increase of $716,000 (69.1%). The
increase in other income resulted primarily from a $612,000 increase in lease
termination payments compared to the prior year, approximately half of which was
recognized at Washington Square, and a $98,000 increase in parking income due to
the lease-up of office space at Washington Square.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$498,000 (11.8%) to $4,724,000 in the 2002 Period from $4,226,000 in the 2001
Period. Approximately 60% of the property operating expense increase resulted
from the commencement of operations at Washington Square.
The provision for credit losses decreased $10,000 (3.6%) to $271,000 in the
2002 Period from $281,000 in the 2001 Period.
Real estate taxes increased $414,000 (11.6%) to $3,970,000 in the 2002
Period from $3,556,000 in the 2001 Period. Thirty-five percent of the increase
in real estate tax expense in the 2002 Period resulted from the commencement of
operations at Washington Square, while 40% resulted from increased taxes at the
Company's two Washington, DC office properties.
-27-
Interest expense decreased $125,000 (1.0%) to $12,422,000 for the 2002
Period from $12,547,000 reported for the 2001 Period. The decrease resulted from
lower interest rates primarily on the Company's variable rate debt.
Amortization of deferred debt expense increased $51,000 (18.7%) to $324,000
for the 2002 Period compared to $273,000 for the 2001 Period. The increase
resulted from the amortization of additional loan costs associated with
extending the maturity of the Washington Square construction loan to January
2003.
Depreciation and amortization expense increased $1,012,000 (13.9%) from
$8,304,000 in the 2001 Period to $7,292,000 in the 2002 Period, reflecting
increased depreciation expense on developments and acquisitions placed in
service during the past twelve months.
General and administrative expense, which consists of payroll,
administrative and other overhead expenses, was $2,544,000 for the 2002 Period,
an increase of $539,000 (26.9%) over the 2001 Period. Forty percent of the
expense increase in 2002 compared to 2001 resulted from increased corporate
office rent, while another 40% resulted from the write-off of abandoned property
acquisition costs and increased payroll and legal expense.
The Company recognized a gain on the sale of real estate of $1,426,000 in
the 2002 Period. There were no property sale gains reported in 2001. In 1999,
the District of Columbia condemned and purchased the Company's Park Road
property as part of an assemblage of parcels for a neighborhood revitalization
project. The Company disputed the original purchase price awarded by the
District. The gain represents additional net proceeds the Company received upon
settlement of the dispute.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates. Interest rate fluctuations are
monitored by management as an integral part of the Company's overall risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results of
operations. The Company does not enter into financial instruments for trading
purposes.
The Company is exposed to interest rate fluctuations primarily as a result
of its variable rate debt used to finance the Company's development and
acquisition activities and for general corporate purposes. As of June 30, 2002,
the Company had variable rate indebtedness totaling $72,742,000. Interest rate
fluctuations will affect the Company's annual interest expense on its variable
rate debt. If the interest rate on the Company's variable rate debt outstanding
at June 30, 2002 had been one percent higher, its annual interest expense
relating to these debt instruments would have increased by $727,000. Interest
rate fluctuations will also affect the fair value of the Company's fixed rate
debt instruments. As of June 30, 2002, the Company had fixed rate indebtedness
totaling $290,275,000. If interest rates on the Company's fixed rate debt
instruments at June 30, 2002 had been one percent higher, the fair value of
those debt instruments on that date would have decreased by approximately
$18,248,000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
3. (a) First Amended and Restated Articles of Incorporation of Saul
Centers, Inc. filed with the Maryland Department of Assessments
and Taxation on August 23, 1993 and filed as Exhibit 3.(a) of the
1993 Annual Report of the Company on Form 10-K are hereby
incorporated by reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3.(b) of the 1993 Annual Report of the Company on Form
10-K are hereby incorporated by reference. The First Amendment to
the First Amended and Restated Agreement of Limited Partnership
of Saul Subsidiary I Limited Partnership, the Second Amendment to
the First Amended and Restated Agreement of Limited Partnership
of Saul Subsidiary I Limited Partnership, the Third Amendment to
the First Amended and Restated Agreement of Limited Partnership
of Saul Subsidiary I Limited Partnership and the Fourth Amendment
to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership as filed as
Exhibit 3.(b) of the 1997 Annual Report of the Company on Form
10-K are hereby incorporated by reference.
-29-
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. The Fifth Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership filed as Exhibit 4.(c) to Registration Statement No.
333-41436 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 are
hereby incorporated by reference.
(c) First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary II Limited Partnership and Amendment No. 1
thereto filed as Exhibit 10.3 to Registration Statement No.
33-64562 are hereby incorporated by reference. The Second
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary II Limited Partnership filed as
Exhibit 10.(c) of the June 30, 2001 Quarterly Report of the
Company is 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.
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(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) Deferred Compensation Plan for Directors dated as of December 13,
1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the
Company on Form 10-K, as amended and restated by the Deferred
Compensation and Stock Plan for Directors, dated as of March 18,
1999, filed as Exhibit 10.(k) of the March 31, 1999 Quarterly
Report of the Company on Form 10-Q, as amended and restated by
the Deferred Compensation and Stock Plan for Directors dated as
of April 27, 2001 filed as Exhibit 99 to the Registration
Statement No. 333-59962, is hereby incorporated by reference.
(k) 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.
(l) 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.
(m) Loan Agreement dated as of October 1, 1997 between Saul
Subsidiary I Limited Partnership as Borrower and Nomura Asset
Capital Corporation as Lender filed as Exhibit 10.(p) of the 1997
Annual Report of the Company on Form 10-K is hereby incorporated
by reference.
(n) 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, as filed as Exhibit 10.(q) of the 1997
Annual Report of the Company on Form 10-K, as amended by the
First Amendment to Revolving Credit Agreement dated as of July
18, 2000, as filed as Exhibit 10.(q) of the September 30, 2000
Quarterly Report of the Company, is hereby incorporated by
reference.
-31-
(o) Promissory Note dated as of November 30, 1999 by and between Saul
Holdings Limited Partnership as Borrower and Wells Fargo Bank
National Association as Lender filed as Exhibit 10.(r) of the
1999 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
99. Schedule of Portfolio Properties
Reports on Form 8-K
-------------------
On June 25, 2002 the Company filed Form 8-K announcing the change
in its independent auditors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAUL CENTERS, INC.
(Registrant)
Date: August 14, 2002 /s/ Philip D. Caraci
---------------------------------------
Philip D. Caraci, President
Date: August 14, 2002 /s/ Scott V. Schneider
---------------------------------------
Scott V. Schneider
Senior Vice President, Chief Financial
Officer
-33-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, B. Francis Saul II, the Chairman and Chief Executive Officer of
Saul Centers, Inc. (the "Company"), has executed this certification in
connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the period ending June 30, 2002 (the
"Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2002 /s/ B. Francis Saul II
---------------- -------------------------------------------
Name: B. Francis Saul II
Title: Chairman & Chief Executive Officer
-34-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Scott V. Schneider, the Chief Financial Officer of Saul
Centers, Inc. (the "Company"), has executed this certification in connection
with the filing with the Securities and Exchange Commission of the Company's
Quarterly Report on Form 10-Q for the period ending June 30, 2002 (the
"Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2002 /s/ Scott V. Schneider
---------------- -------------------------------------------
Name: Scott V. Schneider
Title: Senior Vice President,
Chief Financial Officer, Secretary &
Treasurer
-35-