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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED March 31, 2003
Commission file number 1-12254
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SAUL CENTERS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1833074
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7501 Wisconsin Avenue, Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (301) 986-6200
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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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [X] No [_]
Number of shares of common stock, par value $0.01 per share outstanding as
of May 9, 2003: 15,575,000
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SAUL CENTERS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 ............................................ 4
(b) Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 ................................ 5
(c) Consolidated Statements of Stockholders' Equity (Deficit) as of
March 31, 2003 and December 31, 2002 .......................... 6
(d) Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 ................................ 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 March 31, 2003 compared to three months
ended March 31, 2002 ......................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 27
Item 4. Controls and Procedures .......................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 28
Item 2. Changes in Securities ............................................ 28
Item 3. Defaults Upon Senior Securities .................................. 28
Item 4. Submission of Matters to a Vote of Security Holders .............. 28
Item 5. Other Information ................................................ 28
Item 6. Exhibits and Reports on Form 8-K ................................. 28
-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, 2002, which are included in its Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of
results to be expected for the year.
-3-
[LETTERHEAD OF SAUL CENTERS, INC.]
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------------------------
(Unaudited)
Assets
Real estate investments
Land $ 90,469 $ 90,469
Buildings and equipment 408,628 405,153
Contruction in progress 10,985 8,292
------------ ------------
510,082 503,914
Accumulated depreciation (153,622) (150,286)
------------ ------------
356,460 353,628
Cash and cash equivalents 1,962 1,309
Accounts receivable and accrued income, net 10,682 12,505
Prepaid expenses 15,238 15,712
Deferred debt costs, net 4,467 4,125
Other assets 3,259 1,408
------------ ------------
Total assets $ 392,068 $ 388,687
============ ============
Liabilities
Notes payable $ 379,868 $ 380,743
Accounts payable, accrued expenses and
other liabilities 18,290 16,727
Deferred income 3,984 4,484
------------ ------------
Total liabilities 402,142 401,954
------------ ------------
Minority interests -- --
------------ ------------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000
shares authorized, 15,415,651 and
15,196,582 shares issued and outstanding,
respectively 154 152
Additional paid-in capital 83,826 79,131
Accumulated deficit (94,054) (92,550)
------------ ------------
Total stockholders' equity (deficit) (10,074) (13,267)
------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 392,068 $ 388,687
============ ============
The accompanying notes are an integral part of these statements.
-4-
[LETTERHEAD OF SAUL CENTERS, INC.]
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
(Dollars in thousands, except per share amounts) 2003 2002
- -------------------------------------------------------------------------------
Revenue
Base rent $ 19,051 $ 18,353
Expense recoveries 3,805 3,105
Percentage rent 449 549
Other 565 1,184
------------ ------------
Total revenue 23,870 23,191
------------ ------------
Operating expenses
Property operating expenses 3,029 2,359
Provision for credit losses 36 155
Real estate taxes 2,131 1,998
Interest expense 6,494 6,259
Amortization of deferred debt expense 198 163
Depreciation and amortization 4,042 4,122
General and administrative 1,401 1,209
------------ ------------
Total operating expenses 17,331 16,265
------------ ------------
Operating income 6,539 6,926
Non-operating item
Gain on sale of property -- 1,426
------------ ------------
Income before minority interests 6,539 8,352
------------ ------------
Minority interests
Minority share of income (1,648) (2,017)
Distributions in excess of earnings (372) --
------------ ------------
Total minority interests (2,020) (2,017)
------------ ------------
Net income $ 4,519 $ 6,335
============ ============
Per share amounts
Net income (basic) $ 0.29 $ 0.43
============ ============
Net income (fully diluted) $ 0.29 $ 0.43
============ ============
The accompanying notes are an integral part of these statements.
-5-
[LETTERHEAD OF 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, 2002 $ 152 $ 79,131 $ (92,550) $ (13,267)
Issuance of 219,069 shares of
common stock 2 4,695 -- 4,697
Net income -- -- 4,519 4,519
Distributions payable ($.39 per share) -- -- (6,023) (6,023)
----------- ----------- ----------- -----------
Balance, March 31, 2003 $ 154 $ 83,826 $ (94,054) $ (10,074)
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-6-
[LETTERHEAD OF SAUL CENTERS, INC.]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,519 $ 6,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 2,020 2,017
Gain on sale of property -- (1,426)
Depreciation and amortization 4,240 4,285
Provision for credit losses 36 155
Decrease in accounts receivable 361 1,165
Decrease (increase) in prepaid expenses (232) (657)
(Increase) in other assets (1,851) (1,196)
Increase in accounts payable, accrued
expenses and other liabilities 1,477 407
(Decrease) in deferred income (500) (1,478)
------------ ------------
Net cash provided by operating activities 10,070 9,607
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property 1,426 --
Additions to real estate investments (3,475) (6,435)
Additions to construction in progress (2,693) (878)
------------ ------------
Net cash used in investing activities (4,742) (7,313)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 50,677 10,500
Repayments on notes payable (51,554) (7,622)
Additions to deferred debt expense (540) (37)
Proceeds from the issuance of common stock and
convertible limited partnership units in
the Operating Partnership 4,697 3,458
Distributions to common stockholders and holders
of convertible limited partnership units in
the Operating Partnership (7,955) (7,753)
------------ ------------
Net cash used in financing activities (4,675) (1,454)
------------ ------------
Net increase in cash 653 840
Cash, beginning of period 1,309 1,805
------------ ------------
Cash, end of period $ 1,962 $ 2,645
============ ============
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 Broadlands Village, a grocery
anchored shopping center in Loudoun County. The Company recently completed
development of Ashburn Village III and IV, in-line retail and retail pad
expansions to the Ashburn Village shopping center; Washington Square at Old
Town, a Class A mixed-use office/retail complex in Alexandria, Virginia; and
Crosstown Business Center, an office/warehouse redevelopment located in Tulsa,
Oklahoma. In June 2002 the Company purchased Clarendon Center for future
redevelopment. In September 2002, the Company purchased 109,642 square feet of
retail space known as Kentlands Square. In November 2002 the Company purchased a
19 acre parcel of land in the Lansdowne community in Loudoun County, Virginia.
The Company plans to develop the Lansdowne parcel into a grocery anchored
neighborhood and community shopping center. As of December 31, 2002, the
Company's properties (the "Current Portfolio Properties") consisted of 29
operating shopping center properties (the "Shopping Centers"), five
predominantly office operating properties (the "Office Properties") and three
development and/or redevelopment properties.
The Company established Saul QRS, Inc., a wholly owned subsidiary of Saul
Centers, to facilitate the placement of collateralized mortgage debt. 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 Washington DC/Baltimore metropolitan area. 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 March 31, 2002, no single property accounted for more than 8.9%
of the total gross leasable area. Only one retail tenant, Giant Food, at 5.6%,
accounted for more than 1.9% of the Company's first quarter 2003 total revenues.
No office tenant other than the United States Government, at 3.7%, accounted for
more than 1.4% of first quarter 2003 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 accounting
principles generally accepted in the United States, 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
-9-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
an impairment loss measured by the amount the depreciated cost of the property
exceeds its fair value. Fair value is calculated as the present value of
expected future cash flows.
Interest, real estate taxes and other carrying costs are capitalized on
projects under development and construction. Interest expense capitalized during
the three month periods ended March 31, 2003 and 2002, was $244,000 and $34,000,
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. 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 $498,000 and $681,000, at March 31, 2003 and December 31, 2002,
respectively.
In addition to rents due currently, accounts receivable include $6,598,000
and $6,262,000, at March 31, 2003 and December 31, 2002, respectively,
representing minimum rental income accrued on a straight-line basis to be paid
by tenants over the remaining term of their respective leases. These amounts are
presented after netting allowances of $649,000 and $693,000, respectively, for
tenants whose rent payment history or financial condition cast doubt upon the
tenant's ability to perform under its lease obligations.
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 are included in prepaid expenses and total
$13,099,000 and $12,140,000, net of accumulated amortization of $5,898,000 and
$5,259,000, as of March 31, 2003 and December 31, 2002, 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 related to time spent performing
leasing related activities. Such activities include evaluating the prospective
tenant's financial condition, evaluating and recording guarantees,
-10-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
collateral and other security arrangements, negotiating lease terms, preparing
lease documents and closing the transaction.
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 totaled $4,467,000 and
$4,125,000, and are presented net of accumulated amortization of $2,825,000 and
$2,693,000, at March 31, 2003 and December 31, 2002, 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 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 ended 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." Per share data for net income (basic and diluted) is computed using
weighted average shares of common stock. Convertible limited partnership units
and employee stock options are the Company's potentially dilutive securities.
For all periods presented, the convertible limited partnership units are
anti-dilutive. The options are currently dilutive because the average share
price of the Company's common stock exceeds the $20.00 exercise price. Five
executive officers have been granted 180,000 stock options, of which 34,601 and
93,210 shares remained unexercised as of March 31, 2003 and December 31, 2002,
respectively. The treasury share method was used to measure the effect of the
dilution.
-11-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Basic and Diluted Shares Outstanding
- ------------------------------------
(In thousands) March 31
----------------------------
2003 2002
------------ ------------
Weighted average common shares
outstanding - Basic ................... 15,330 14,649
Effect of dilutive options ............. 9 14
------------ ------------
Weighted average common shares
outstanding - Diluted ................. 15,339 14,663
============ ============
Average Share Price .................... $ 22.94 $ 21.68
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 25.2% limited partnership interest, represented
by 5,179,000 convertible limited partnership units in the Operating Partnership,
as of March 31, 2003. 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
beneficially owns, directly or indirectly, in the aggregate more than 24.9% of
the outstanding equity securities of Saul Centers. The limited partnership units
were not convertible as of March 31, 2003 because the Saul Organization owned in
excess of 24.9% of the Company's equity securities. The impact of The Saul
Organization's 25.2% limited partnership interest in the Operating Partnership
is reflected as minority interests in the accompanying consolidated financial
statements. Fully converted partnership units and diluted weighted average
shares outstanding for the quarters ended March 31, 2003 and 2002, were
20,516,000 and 19,835,000, respectively.
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
-12-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, 2003, 170,000 shares were
authorized and registered for use under the Plan, and 135,000 shares had been
credited to the directors' deferred fee accounts.
Beginning in 1999, pursuant to the Plan, 100 shares of the Company's common
stock are awarded annually as additional compensation to each director serving
on the Board of Directors as of the record date for the Annual Meeting of
Stockholders. The shares are issued on the date of the Annual Meeting, their
issuance may not be deferred and transfer of the shares is restricted for a
period of twelve months following the date of issue.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Direct Guarantees of Indebtedness of
Others." FIN 45 outlines the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees. It states
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of its obligation. Saul Centers has guaranteed
portions of its Partnership debt obligations, all of which are presented on the
consolidated financial statements as mortgage notes payable. Saul Centers has
guaranteed $54,416,000 of the notes payable which are recourse loans made by the
Operating Partnership as of March 31, 2003. The balance of the mortgage notes
payable totaling $325,451,000 are non-recourse, however, as is customary when
obtaining long term non-course financing, Saul Centers has agreed to assume
certain obligations should they arise specific to individual mortgages. No
additional liabilities were recognized as a result of the adoption of FIN 45,
and the Company does not expect the adoption of FIN 45 to have a material impact
on its financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 outlines additional disclosure
requirements and alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
Company has not made a voluntary change to the fair value based method and the
adoption of SFAS No. 148 would not have a material impact upon the consolidated
financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which changes the guidelines for consolidation of and
disclosure related to unconsolidated entities, if those unconsolidated entities
qualify as variable interest entities, as defined in FIN 46. The Company does
not have any unconsolidated entities or variable interest entities and therefore
the adoption of FIN 46 will not have an impact upon the consolidated financial
statements.
-13-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
3. Construction In Progress
Construction in progress includes the land acquisition costs,
predevelopment costs, and development costs of active projects. Predevelopment
costs associated with these active projects include closing costs, legal, zoning
and permitting costs and other project carrying costs incurred prior to the
commencement of construction. Development costs include direct construction
costs and indirect costs incurred subsequent to the start of construction such
as architectural, engineering, construction management and carrying costs
consisting of interest, real estate taxes and insurance. Construction in
progress balances as of March 31, 2003 and December 31, 2002 are as follows:
Construction in Progress
- -------------------------------
(In thousands)
March 31, December 31,
2003 2002
---------- ------------
Broadlands Village ............ $ 8,418 $ 6,192
Other ......................... 2,567 2,100
---------- ------------
Total ......................... $ 10,985 $ 8,292
========== ============
4. Notes Payable
Notes payable totaled $379,868,000 at March 31, 2003, of which $335,188,000
(88.2%) was fixed rate debt and $44,680,000 (11.8%) was floating rate debt. At
March 31, 2003, the Company had a $125,000,000 unsecured revolving credit
facility with outstanding borrowings of $41,000,000, interest calculated using
LIBOR plus 1.625%. Loan availability is determined by operating income from the
Company's unencumbered properties, which, as of March 31, 2003 allowed the
Company to borrow an additional $34,000,000 for general corporate use. An
additional $50,000,000 is available for funding working capital and operating
property acquisitions supported by the unencumbered properties' internal cash
flow growth and operating income of future acquisitions. During 2002, the
Company committed to replace its $42,000,000 construction loan used to finance
the building of Washington Square at Old Town with a $42,500,000 permanent
mortgage. The new permanent financing, closed in January 2003, matures in 15
years and requires monthly principal and interest payments based upon a 27.5
year amortization period and 6.01% interest rate. In March 2003, the Company
executed a $15,000,000 loan to finance the construction of Broadlands Village
shopping center. The loan matures in March 2005 and charges monthly interest at
a rate of LIBOR plus 1.7%. At March 31, 2003, a balance of $3,680,000 was
outstanding on the loan.
-14-
Saul Centers, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Notes payable totaled $380,743,000 at December 31, 2002, of which
$294,619,000 (77.4%), was fixed rate debt and $86,124,000 (22.6%) was floating
rate debt. Outstanding borrowings on the $125,000,000 unsecured revolving credit
facility were $46,750,000 at December 31, 2002, with additional borrowing
availability of $30,250,000 for general corporate use and $48,000,000 available
for funding working capital and operating property acquisitions supported by the
unencumbered properties' internal cash flow growth and operating income of
future acquisitions.
At March 31, 2003, the scheduled maturities of all debt, including
scheduled principal amortization, for years ending December 31, were as follows:
Debt Maturity Schedule
- ----------------------
(In thousands)
April 1 through December 31, 2003........ $ 6,154
2004..................................... 24,645
2005..................................... 53,348
2006..................................... 9,376
2007..................................... 10,144
2008..................................... 10,947
Thereafter............................... 265,254
------------
Total.................................... $ 379,868
============
5. Stockholders' 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
Stockholders' Equity (Deficit) reported on the Consolidated Balance Sheets does
not reflect any increase in the value resulting from the difference between the
current value and the net book value of the Company's assets. Therefore,
Stockholders' 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 three months ended March
31, 2003 includes a charge for minority interests of $2,020,000, consisting of
$1,694,000 related to The Saul Organization's share of net income for the
quarter, and $326,000 related to distributions to minority interests in excess
of allocated net income for the quarter. The charge for the three months ended
March 31, 2002 of $2,017,000 consists entirely of The Saul Organization's share
of net income for that quarter.
-15-
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.
(Dollars in thousands) Shopping Office Corporate Consolida-
Centers Properties and Other ted Totals
---------- ---------- ---------- ----------
Quarter ended March 31, 2003
Real estate rental operations:
Revenues ........................ $ 15,991 $ 7,861 $ 18 $ 23,870
Expenses ........................ (3,428) (1,768) -- (5,196)
---------- ---------- ---------- ----------
Income from real estate ............ 12,563 6,093 18 18,674
Interest expense & amortization
of debt expense ................ -- -- (6,692) (6,692)
General and administrative ...... -- -- (1,401) (1,401)
---------- ---------- ---------- ----------
Subtotal ........................... 12,563 6,093 (8,075) 10,581
Depreciation and amortization ... (2,333) (1,709) -- (4,042)
Minority interests .............. -- -- (2,020) (2,020)
---------- ---------- ---------- ----------
Net income ......................... $ 11,954 $ 4,015 $ (9,634) $ 4,519
========== ========== ========== ==========
Capital investment ................. $ 3,284 $ 2,884 $ -- $ 6,168
========== ========== ========== ==========
Total assets ....................... $ 216,846 $ 137,048 $ 38,174 $ 392,068
========== ========== ========== ==========
Quarter ended March 31, 2002
Real estate rental operations:
Revenues ........................ $ 15,518 $ 7,659 $ 14 $ 23,191
Expenses ........................ (2,530) (1,982) -- (4,512)
---------- ---------- ---------- ----------
Income from real estate ............ 12,988 5,677 14 18,679
Interest expense & amortization
of debt expense ................ -- -- (6,422) (6,422)
General and administrative ...... -- -- (1,209) (1,209)
---------- ---------- ---------- ----------
Subtotal ........................... 12,988 5,677 (7,617) 11,048
Depreciation and amortization ... (2,513) (1,609) -- (4,122)
Gain on Sale of Property ........ 1,426 -- -- 1,426
Minority interests .............. -- -- (2,017) (2,017)
---------- ---------- ---------- ----------
Net income ......................... $ 11,954 $ 4,015 $ (9,634) $ 6,335
========== ========== ========== ==========
Capital investment ................. $ 6,728 $ 585 $ -- $ 7,313
========== ========== ========== ==========
Total assets ....................... $ 197,894 $ 123,728 $ 30,645 $ 352,267
========== ========== ========== ==========
-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 March 31, 2003 and for the three month period
ended March 31, 2003.
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 related to time spent
performing leasing related activities. Such activities include evaluating 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.
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 scheduled rent increases,
-18-
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. 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. 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.
Liquidity and Capital Resources
Cash and cash equivalents were $2.0 million and $2.6 million at March 31,
2003 and 2002, 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 quarters ended March 31, 2003
and 2002 was $10.1 million and $9.6 million, respectively, and represents, in
each year, cash received primarily from rental income, plus other income, less
normal recurring property operating expenses, general and administrative
expenses and interest payments on debt outstanding.
Investing Activities
Cash used in investing activities for the quarters ended March 31, 2003 and
2002 was $4.7 million and $7.3 million, respectively, and primarily reflects
improvements to existing real estate investments, construction in progress and
proceeds from sales of properties, if any, during those quarters.
Financing Activities
Cash used in financing activities for the quarters ended March 31, 2003 and
2002 was $4.7 million and $1.5 million, respectively. Cash used in financing
activities for the quarter ended March 31, 2003 primarily reflects:
.. $50.7 million of proceeds received from notes payable during the quarter;
and
-19-
.. $4.7 million of proceeds received from the issuance of common stock and
convertible limited partnership units in the Operating Partnership by
dividend reinvestment programs and the exercise of employee stock options;
which was partially offset by:
.. the repayment of borrowings on our notes payable totaling $51.6 million;
and
.. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the quarter
totaling $8.0 million.
Cash used by financing activities for the quarter ended March 31, 2002 primarily
reflects:
.. $10.5 million of proceeds received from notes payable incurred during the
year; and
.. $3.5 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 $7.6 million;
.. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the quarter
totaling $7.8 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% 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-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.
-20-
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 March 31, 2003, the scheduled maturities of all debt, including
scheduled principal amortization, for years ended December 31, are as follows:
Debt Maturity Schedule
- ----------------------
(In thousands)
April 1 through December 31, 2003........ $ 6,154
2004..................................... 24,645
2005..................................... 53,348
2006..................................... 9,376
2007..................................... 10,144
2008..................................... 10,947
Thereafter............................... 265,254
------------
Total.................................... $ 379,868
============
Management believes that the Company's capital resources, including
approximately $34,000,000 for general corporate use and $50,000,000 for
qualified future acquisitions provided by the Company's revolving line of
credit, which was available for borrowing as of March 31, 2003, 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 156,413 and 165,390 shares under the Plan at discounted prices of $21.49
per share and $20.39 per share, during the quarters ended March 31, 2003 and
2002, respectively.
Additionally, the Operating Partnership issued 3,412 limited partnership
units under a dividend reinvestment plan mirroring the Plan at a weighted
average discounted price of $21.49 per unit during the quarter ended March 31,
2003.
-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 $34,000,000 was available for general
corporate use and $50,000,000 for qualified future acquisitions as of March 31,
2003, will be sufficient to meet its liquidity needs for the foreseeable future.
At March 31, 2003, the Company had fixed interest rates on approximately 88.2%
of its total debt outstanding. The fixed rate debt had a weighted average
remaining term of approximately 10 years.
Funds From Operations
For the first quarter of 2003, the Company reported Funds From Operations
("FFO") of $10,581,000. This represents a 4.2% decrease over the comparable 2002
period's FFO of $11,048,000. FFO is a widely accepted non-GAAP financial measure
of operating performance for REITs. FFO is presented by the Company on a fully
converted basis, and is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as net income (computed in accordance with GAAP),
plus real estate depreciation and amortization , minority interests and
extraordinary items, and excluding gains from property sales. FFO does not
represent cash generated from operating activities in accordance with GAAP and
is not necessarily indicative of cash available to fund cash needs, which is
disclosed in the Consolidated Statements of Cash Flows for the applicable
periods. 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 meaningful
supplemental measure of operating performance because it primarily excludes the
assumption that the value of real estate diminishes predictably over time and
because industry analysts have accepted it as a performance measure. The
Company's presentation of FFO using the NAREIT definition, may not be comparable
to similarly titled measures employed by other REITs. The following table
represents a reconciliation from net income to FFO:
-22-
Funds From Operations Schedule
- ------------------------------
(Amounts in thousands)
For the Three Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
Net income ...................................... $ 4,519 $ 6,335
Subtract:
Gain on Sale of Property .................. -- -1,426
Add:
Minority interests ........................ 2,020 2,017
Depreciation and amortization of
real property ............................ 4,042 4,122
------------ ------------
Funds From Operations ........................... $ 10,581 $ 11,048
============ ============
Average Shares and Units Used to Compute
FFO per Share .. ............................... 20,516 19,835
============ ============
Acquisitions, Redevelopments and Renovations
The Company has been selectively involved in acquisition, redevelopment and
renovation activities. It continues to evaluate the acquisition of land parcels
for retail and office development and 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 recent activities at
Washington Square and Ashburn Village.
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 has commenced the initial phase of construction
totaling 112,000 square feet of retail space. Additionally, the Company has
recently executed a grocery anchor lease with Safeway for a 58,000 square foot
supermarket, and the first phase is 68% pre-leased.
In June 2002, the Company purchased Clarendon Center, located in Arlington,
Virginia. Clarendon Center 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 has contracted architects and land use
professionals to commence the planning phase of the site's redevelopment.
-23-
In September 2002, the Company acquired a 109,625 square foot neighborhood
retail center located within the Kentlands development in Gaithersburg,
Maryland. The property, constructed in 1993, is anchored by a 102,250 square
foot Lowe's home improvement store and is part of Kentlands Square, a shopping
center exceeding 350,000 square feet of retail space. The Kentlands Square
property is fully leased and includes an additional 6,000 square feet of retail
development potential. The property was acquired for $14.3 million, subject to
the assumption of a $7.8 million mortgage. The Kentlands Square shopping center
is contained within the 352 acre Kentlands development, home to approximately
5,000 residents living in 1,500 units. The Kentlands community features a mix of
upscale and colonial design townhouses, apartments, cottages and larger single
family residences set along pedestrian friendly tree lined streets. Kentlands'
neighborhoods include amenities such as green spaces, lakes and recreational,
community and civic buildings.
In November 2002, the Company purchased approximately 19 acres of
undeveloped land located within the Lansdowne community in Loudoun County,
Virginia. The land is zoned to accommodate approximately 150,000 square feet of
neighborhood and community retail development.
During 2002, 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 was
completed in 2001 while the lease-up and build-out of the remaining office
tenant areas occurred throughout 2002. As of March 31, 2003, 90% of the
235,000 square feet of tenant space was leased: the 46,000 square feet of street
level retail space was 100% leased and the 189,000 square feet of office space
was 85% leased.
During 2002, the Company completed construction of the final phase of its
Ashburn Village shopping center. In 1994, Saul Centers purchased the original
12.7 acre parcel of vacant land located within the 1,580 acre community of
Ashburn Village in Loudoun County, Virginia. The Company subsequently acquired
an adjacent 6.6 acres in 1999 and 7.1 acres in 2000. The Company has
successfully developed the site into an attractive 211,000 square foot
neighborhood shopping center anchored by a 67,000 square foot Giant Food store.
The first phase of the development comprised of 108,000 square feet commenced
operations in the fall of 1994. Ashburn Village phase II was a 49,000 square
foot in-line and pad expansion which commenced operations during the third
quarter of 2000. During the summer of 2001, the Company completed the
development of Ashburn Village III, consisting of an additional 29,000 square
feet of in-line and pad retail space. Ashburn Village phases I, II and III are
100% leased. The Company commenced construction on Ashburn Village IV, during
the fourth quarter of 2001. This final phase consisting of 25,000 square feet of
retail space was completed during the summer of 2002 and is 92% leased.
-24-
Portfolio Leasing Status
At March 31, 2003, the operating portfolio consisted of 29 Shopping Centers
and 5 predominantly Office Properties, all of which are located in 7 states and
the District of Columbia.
At March 31, 2003, 93.0% of the Company's 6,300,000 square feet of space
was leased to tenants, as compared to 94.2% at March 31, 2002. The shopping
center portfolio was 94.0% leased at March 31, 2003 compared to 94.6% at March
31, 2002. The Office Properties were 88.9% leased at March 31, 2003 compared to
92.5% as of March 31, 2002. The decline in the 2003 quarter's leasing
percentages compared to the prior year's quarter resulted primarily from the
expiration of leases at Lexington Mall where the Company is positioning the
property for redevelopment and the first quarter of 2003 expiration of a major
tenant at 601 Pennsylvania Avenue.
Results of Operations
The following discussion compares the results of the Company for the
three-month periods ended March 31, 2003 and 2002, 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 March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues for the three-month period ended March 31, 2003 (the "2003
Quarter"), totaled $23,870,000 compared to $23,191,000 for the comparable
quarter in 2002 (the "2002 Quarter"), an increase of $679,000 (2.9%).
Base rent income was $19,051,000 for the 2003 Quarter, compared to
$18,353,000 for the 2002 Quarter, representing an increase of $698,000 (3.8%).
Approximately $425,000 of the increase in base rent resulted from leases in
effect at recently acquired and developed properties: Ashburn Village IV and
Kentland Square. The continued lease-up of space at Washington Square also
provided approximately $480,000 of increased base rent. The base rent increases
were partially offset by a $200,000 decrease in base rent at 601 Pennsylvania
Avenue resulting from the expiration of a major tenant's lease during the 2003
Quarter.
Expense recoveries were $3,805,000 for the 2003 Quarter compared to
$3,105,000 for the comparable 2002 Quarter, representing an increase of $700,000
(22.5%). Approximately 60% of the increase in expense recovery income resulted
from billings to tenants for their share of increased snow removal expenses
during the 2003 Quarter, while the balance of the increase in expense recoveries
resulted from the commencement of operations at the newly developed and
redeveloped properties.
Percentage rent was $449,000 in the 2003 Quarter, compared to $549,000 in
the 2002 Quarter, a decrease of $100,000 (18.2%). Two properties were primarily
responsible for the decrease in percentage rent. Approximately 30% of the
percentage rent decrease occurred at
-25-
Lexington Mall where the Company is positioning the mall for redevelopment.
Another 30% of the decrease occurred at Thruway where a drug store renewed its
lease at a higher minimum rent in lieu of percentage rent.
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 $565,000 in the 2003 Quarter, compared to
$1,184,000 in the 2002 Quarter, representing a decrease of $619,000 (52.3%). The
decrease in other income primarily resulted from a $610,000 decrease in lease
termination payments compared to the prior year, approximately half of which was
recognized at Washington Square and the other half at Lexington Mall.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$670,000 (28.4%) to $3,029,000 in the 2003 Quarter from $2,359,000 in the 2002
Quarter. Unseasonably severe winter weather primarily in the Mid-Atlantic region
resulted in snow removal expense in excess of $700,000 in the 2003 Quarter
compared to $50,000 during the 2002 Quarter. The Company also paid increased
property insurance premiums during the 2003 Quarter.
The provision for credit losses decreased $119,000 (76.8%) to $36,000 in
the 2003 Quarter from $155,000 in the 2002 Quarter. The credit loss decrease
resulted primarily due to the absence of any significant tenant bankruptcy or
collection difficulties in the 2003 Quarter as compared to the 2002 Quarter when
the Company established reserves for two office tenants in bankruptcy.
Real estate taxes increased $133,000 (6.7%) to $2,131,000 in the 2003
Quarter from $1,998,000 in the 2002 Quarter. Approximately 50% of the increase
in real estate tax expense in the 2003 Quarter resulted from real estate taxes
paid at 601 Pennsylvania Avenue, while thirty-five percent of the increase
resulted from taxes paid at the recently acquired Kentlands Square.
Interest expense increased $235,000 (3.8%) to $6,494,000 for the 2003
Quarter from $6,259,000 reported for the 2002 Quarter. The increase resulted
from the placement of a new $42.5 million, fifteen year, 6.01% fixed rate
mortgage replacing Washington Square's variable rate construction loan.
Amortization of deferred debt expense increased $35,000 (21.5%) to $198,000
for the 2003 Quarter compared to $163,000 for the 2002 Quarter. The increase
resulted from the amortization of additional loan costs associated with
refinancing the Company's unsecured line of credit during the third quarter of
2002.
Depreciation and amortization expense decreased $80,000 (1.9%) from
$4,122,000 in the 2002 Quarter to $4,042,000 in the 2003 Quarter.
General and administrative expense, which consists of payroll,
administrative and other overhead expenses, was $1,401,000 for the 2003 Quarter,
an increase of $192,000 (15.9%) over the 2002 Quarter. The increase in 2003
expenses compared to 2002 resulted in part from increased office rent (25%),
increased corporate insurance premiums (20%), payroll (20%) and the write-off of
abandoned acquisition costs (20%).
-26-
The Company recognized a gain on the sale of real estate of $1,426,000 in
the 2002 Quarter. There were no gains reported in the 2003 Quarter. 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 March 31, 2003,
the Company had variable rate indebtedness totaling $44,679,000. 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 instruments
outstanding at March 31, 2003 had been one percent higher, our annual interest
expense relating to these debt instruments would have increased by $447,000,
based on those balances. Interest rate fluctuations will also affect the fair
value of the Company's fixed rate debt instruments. As of March 31, 2003, the
Company had fixed rate indebtedness totaling $335,188,000. If interest rates on
the Company's fixed rate debt instruments at March 31, 2003 had been one percent
higher, the fair value of those debt instruments on that date would have
decreased by approximately $19,664,000.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chairman and Chief Executive Officer
and its Senior Vice President, Chief Financial Officer, Secretary and Treasurer,
as appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
-27-
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chairman and Chief Executive Officer and its Senior
Vice President, Chief Financial Officer, Secretary and Treasurer, and its Chief
Accounting Officer of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chairman and Chief Executive Officer, its Senior Vice President, Chief
Financial Officer, Secretary and Treasurer and its Chief Accounting Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
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, 1994 and filed as Exhibit 3.(a) of the
1993 Annual Report of the Company on Form 10-K are hereby
incorporated by reference.
-28-
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3.(b) of the 1993 Annual Report of the Company on Form
10-K are hereby incorporated by reference. The First Amendment to
the First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership, the Second Amendment to the
First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership, the Third Amendment to the
First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership and the Fourth Amendment to
the First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership as filed as Exhibit 3.(b) of
the 1997 Annual Report of the Company on Form 10-K are hereby
incorporated by reference.
10. (a) First Amended and Restated Agreement of Limited Partnership of
Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to
Registration Statement No. 33-64562 is hereby incorporated by
reference. The First Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings Limited
Partnership, and the Third Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings Limited
Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of
the Company on Form 10-K 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
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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.
(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 and Stock Plan for Directors, dated as of
March 18, 1999, filed as Exhibit 10.(k) of the March 31, 1999
Quarterly Report of the Company, is hereby incorporated by
reference.
(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 August 30, 2002 by and
between Saul Holdings Limited Partnership as Borrower; U.S. Bank
National Association, as administrative agent and sole lead
arranger; Wells Fargo Bank, National Association, as syndication
agent, and U.S. Bank National
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Association, Wells Fargo Bank, National Association, Comerica
Bank, Southtrust Bank, KeyBank National Association as Lenders, as
filed as Exhibit 10.(n) of the September 30, 2002 Quarterly Report
of the Company, is hereby incorporated by reference.
(o) Guaranty dated as of August 30, 2002 by and between Saul Centers,
Inc. as Guarantor and U.S. Bank National Association, as
administrative agent and sole lead arranger for itself and other
financial institutions, the Lenders, as filed as Exhibit 10.(p) of
the September 30, 2002 Quarterly Report of the Company, is hereby
incorporated by reference.
(p) Amended and Restated Promissory Note dated January 13, 2003 by and
between Saul Holdings Limited Partnership as Borrower and
Metropolitan Life Insurance Company as lender, as filed as Exhibit
10.(p) of the December 31, 2002 Annual Report of the Company on
Form 10-K, is hereby incorporated by reference.
99. (a) Schedule of Portfolio Properties
(b) Section 1350 Certifications of the Chief Executive Officer and the
Chief Financial Officers.
Reports on Form 8-K
-------------------
None.
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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: May 14, 2003 By: /s/ B. Francis Saul III
------------------------------
B. Francis Saul III,
President
Date: May 14, 2003 By: /s/ Scott V. Schneider
------------------------------
Scott V. Schneider
Senior Vice President,
Chief Financial Officer
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CERTIFICATIONS
I, B. Francis Saul II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Saul Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ B. Francis Saul II
- -------------------------------------
B. Francis Saul II
Chairman and Chief Executive Officer
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CERTIFICATIONS
I, Scott V. Schneider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Saul Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
e) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Scott V. Schneider
- -------------------------------------
Scott V. Schneider
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
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