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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File number 1-12254
SAUL CENTERS, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1833074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
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COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form
10-K.
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The number of shares of Common Stock, $0.01 par value, outstanding as of
February 20, 1998 was 12,524,785.
TABLE OF CONTENTS
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PART I Page Numbers
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions............... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 22
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation................. F-18
2
PART I
ITEM 1. BUSINESS
General
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Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. The authorized capital stock of Saul
Centers consists of 30,000,000 shares of common stock, having a par value of
$0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common
stock is entitled to one vote for each share held. Saul Centers, together with
its wholly owned subsidiaries and the limited partnerships of which Saul Centers
or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". B. Francis Saul II serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers.
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, and purchased a land parcel which it
developed into a community shopping center. Therefore, as of December 31, 1997,
the Company's properties (the "Current Portfolio Properties") consisted of 30
operating shopping center properties (the "Shopping Centers") and three
predominantly office properties (the "Office Properties"). To facilitate the
placement of collateralized mortgage debt, the Company established Saul QRS,
Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of
Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul
Centers as the sole general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited partnership
interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II
Limited Partnership are held by the Operating Partnership as the sole limited
partner. Through this structure, the Company owns 100 percent of the Current
Portfolio Properties
Saul Centers operates as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (a "REIT"). Saul Centers generally will not
be subject to federal income tax, provided it annually distributes at least 95
percent of its real estate investment trust taxable income to its stockholders
and meets certain organizational and other requirements. Saul Centers has made
and intends to continue to make regular quarterly distributions to its
stockholders.
The Company's principal business activity is the ownership, management and
development of income-producing properties. The Company's long-term objectives
are to increase cash flow from operations and to maximize capital appreciation
of its real estate.
Management of the Current Portfolio Properties
- ----------------------------------------------
The Partnerships manage the Current Portfolio Properties and will manage
any subsequently acquired properties. The Management of the properties includes
performing property management, leasing, design,
3
renovation, development and accounting duties for each property. The
Partnerships provide each property with a fully integrated property management
capability, with approximately 100 employees and with an extensive and mature
network of relationships with tenants and potential tenants as well as with
members of the brokerage and property owners' communities. The Company
currently does not, and does not intend to, retain third party managers or
provide management services to third parties.
The Company augments its property management capabilities by sharing with
The Saul Organization certain ancillary functions, at cost, such as computer and
payroll services, benefits administration and in-house legal services. The
company also shares insurance administration expenses on a pro rata basis with
The Saul Organization. The Saul Organization subleases office space to the
Company at its cost. Management believes that these arrangements result in
lower costs than could be obtained by contracting with third parties. These
arrangements permit the Company to capture greater economies of scale in
purchasing from third party vendors than would otherwise be available to the
Company alone and to capture internal economies of scale by avoiding payments
representing profits with respect to functions provided internally. The terms
of all sharing arrangements with The Saul Organization, including payments
related thereto, are reviewed periodically by the Audit Committee of the
Company's Board of Directors.
Principal Offices
- -----------------
The principal offices of the Company are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and the Company's telephone number is (301)
986-6000.
Operating Strategies
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The Company's primary operating strategy is to focus on its community and
neighborhood shopping center business and to operate its properties to achieve
both cash flow growth and capital appreciation. Community and neighborhood
shopping centers typically provide reliable cash flow and steady long-term
growth potential. Management intends to actively manage its property portfolio
by engaging in strategic leasing activities, tenant selection, lease negotiation
and shopping center expansion and reconfiguration. The Company seeks to
optimize tenant mix by selecting tenants for its shopping centers that provide a
broad spectrum of goods and services, consistent with the role of community and
neighborhood shopping centers as the source for day-to-day necessities.
Management believes that such a synergistic tenanting approach results in
increased cash flow from existing tenants by providing the Shopping Centers with
consistent traffic and a desirable mix of shoppers, resulting in increased sales
and, therefore, increased percentage rents.
Management believes there is significant potential for growth in cash flow
as existing leases for space in the Shopping Centers expire and are renewed, or
newly available or vacant space is leased. The Company intends to renegotiate
leases aggressively and seek new tenants for available space in order to
maximize this potential for increased cash flow. As leases expire, management
expects to revise rental rates, lease terms and conditions, relocate existing
tenants, reconfigure tenant spaces and introduce new tenants to increase cash
flow. In those circumstances in which leases are not otherwise expiring,
management intends to attempt to increase cash flow through a variety of means,
including renegotiating rents in exchange for additional renewal options or in
connection with renovations or relocations, recapturing leases with below market
rents and re-leasing at market rates, as well as replacing financially troubled
tenants. When possible, management also will seek to include scheduled increases
in base rent, as well as percentage rental provisions in its leases.
The Shopping Centers contain numerous undeveloped parcels within the
centers which are suitable for development as free-standing retail facilities,
such as restaurants, banks, auto centers or cinemas. Management will continue
to seek desirable tenants for facilities to be developed on these sites and to
develop and lease these sites in a manner that complements the Shopping Centers
in which they are located.
4
Management intends to negotiate lease renewals or to re-lease available
space in the Office Properties, while considering the strategic balance of
optimizing short-term cash flow and long-term asset value.
It is management's intention to hold properties for long-term investment
and to place strong emphasis on regular maintenance, periodic renovation and
capital improvement. Management believes that such characteristics as
cleanliness, lighting and security are particularly important in community and
neighborhood shopping centers, which are frequently visited by shoppers during
hours outside of the normal work day. Management believes that the Shopping
Centers generally are attractive and well maintained. The Shopping Centers will
undergo expansion, renovation, reconfiguration and modernization from time to
time when management believes that such action is warranted by changes in the
competitive environment of a Shopping Center. Several of the Shopping Centers
have been renovated recently, and a major expansion and renovation was completed
during 1997 at the Company's largest retail property. The Company will continue
its practice of expanding existing properties by undertaking new construction on
outparcels suitable for development as free standing retail facilities.
Redevelopment, Renovations and Acquisitions
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The Company's redevelopment, renovation and acquisition objective is to
selectively and opportunistically redevelop and renovate its properties, by
replacing leases with below market rents with strong, traffic-generating anchor
stores such as supermarkets and drug stores, as well as other desirable local,
regional and national tenants. The Company's strategy remains focused on
continuing the operating performance and internal growth of its existing
Shopping Centers, while enhancing this growth with selective retail
redevelopments and renovations.
Management also believes that attractive opportunities for investment in
existing and new shopping center properties will continue to be available.
Management believes that the Company will be well situated to take advantage of
these opportunities because of its access to capital markets, ability to acquire
properties either for cash or securities (including Operating Partnership
interests in tax advantaged transactions) and because of management's experience
in seeking out, identifying and evaluating potential acquisitions. In addition,
management believes its shopping center expertise should permit it to optimize
the performance of shopping centers once they have been acquired.
In evaluating a particular redevelopment, renovation, acquisition, or
development, management will consider a variety of factors, including (i) the
location and accessibility of the property; (ii) the geographic area (with an
emphasis on the Mid-Atlantic region) and demographic characteristics of the
community, as well as the local real estate market, including potential for
growth and potential regulatory impediments to development; (iii) the size of
the property; (iv) the purchase price; (v) the non-financial terms of the
proposed acquisition; (vi) the availability of funds or other consideration for
the proposed acquisition and the cost thereof; (vii) the "fit" of the property
with the Company's existing portfolio; (viii) the potential for, and current
extent of, any environmental problems; (ix) the current and historical occupancy
rates of the property or any comparable or competing properties in the same
market; (x) the quality of construction and design and the current physical
condition of the property; (xi) the financial and other characteristics of
existing tenants and the terms of existing leases; and (xii) the potential for
capital appreciation.
Although it is management's present intention to concentrate future
acquisition and development activities on community and neighborhood shopping
centers in the Mid-Atlantic region, the Company may, in the future, also acquire
other types of real estate in other regions of the country.
Capital Strategies
- ------------------
As a general policy, the Company intends to maintain a ratio of its total
debt to total asset value of 50 percent or less and to actively manage the
Company's leverage and debt expense on an ongoing basis in order to maintain
prudent coverage of fixed charges. Asset value is the aggregate fair market
value of the Current Portfolio Properties and any subsequently acquired
properties as reasonably determined by management by
5
reference to the properties' aggregate cash flow. Given the Company's current
debt level, it is management's belief that the ratio of the Company's total debt
to asset value as of December 31, 1997 remains less than 50 percent.
The organizational documents of the Company do not limit the absolute
amount or percentage of indebtedness that it may incur. The Board of Directors
may, from time to time, reevaluate the Company's debt capitalization policy in
light of current economic conditions, relative costs of capital, market values
of the Company Portfolio, opportunities for acquisition, development or
expansion, and such other factors as the Board of Directors then deems relevant.
The Board of Directors may modify the Company's debt capitalization policy based
on such a reevaluation and consequently, may increase or decrease the Company's
debt ratio above or below 50 percent.
The Company selectively continues to refinance or renegotiate the terms of
its outstanding debt in order to achieve longer maturities, and obtain generally
more favorable loan terms, whenever management determines the financing
environment is favorable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources -
- -Borrowing Capacity."
The Company intends to finance future acquisitions and to make debt
repayments by utilizing the sources of capital then deemed to be most
advantageous. Such sources may include undistributed operating cash flow,
secured or unsecured bank and institutional borrowings, private and public
offerings of debt or equity securities, proceeds from the Company's Dividend
Reinvestment and Stock Purchase Plan, and proceeds from the sale of properties.
Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary
Partnerships' level and securities offerings may include (subject to certain
limitations) the issuance of Operating Partnership interests convertible into
Common Stock or other equity securities.
Competition
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As an owner of, or investor in, commercial real estate properties, the
Company is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent in part upon
the geographic location of the property, the tenant mix, the performance of
property managers, the amount of new construction in the area and the
maintenance and appearance of the property. Additional competitive factors
impacting upon retail and
6
commercial properties include the ease of access to the properties, the adequacy
of related facilities such as parking, and the demographic characteristics in
the markets in which the properties compete. Overall economic circumstances and
trends and new properties in the vicinity of each of the properties in the
Current Portfolio Properties are also competitive factors.
Environmental Matters
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The Current Portfolio Properties are subject to various laws and
regulations relating to environmental and pollution controls. The effect upon
the Company of the application of such laws and regulations either prospectively
or retrospectively is not expected to have a materially adverse effect on the
Company's property operations. As a matter of policy, the Company requires an
environmental study be performed with respect to a property that may be subject
to possible environmental hazards prior to its acquisition to ascertain that
there are no material environmental hazards associated with such property.
Employees
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As of February 20, 1998, the Company employed approximately 100 persons,
including six full-time leasing officers. None of the Company's employees are
covered by collective bargaining agreements. Management believes that its
relationship with employees is good.
Current Developments
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A significant enhancement to the Company's sustained historical internal
growth in shopping centers has been its continuing program of renovation and
expansion activities. These development activities serve to position the
Company's centers as architecturally consistent with the times in terms of
facade image, site improvements and flexibility to accommodate tenant size
requirements and merchandising evolution.
In February 1998, the Company commenced construction on a facade
renovation and retenanting of a 103,000 square foot anchor space at the 213,000
square foot French Market center in Oklahoma City, Oklahoma. The Company
successfully negotiated the termination of a below market Venture lease in the
fourth quarter of 1997. Construction of the first two new tenant spaces, a
40,000 square foot Bed, Bath and Beyond and an 8,000 square foot Lakeshore
Learning, a children's educational toy store, is projected to be completed in
late spring of 1998. The redevelopment will include a complete facade renovation
of the 103,000 square foot building to incorporate new anchor tenant
architectural features, new store fronts, tenant signage and decorative awnings.
The Company announced on March 23, 1998 that it will purchase, through
its operating partnership, a newly constructed, 100% leased office/flex building
adjacent to its Avenel Business Park in Gaithersburg, Maryland. The building
contains 46,335 square feet of net leasable area, which will increase the
Company's Avenel Business Park by 16%, to 332,000 square feet. The purchase
price is $5,600,000, to include $3,657,000 in debt assumption, with the balance
to be paid through the issuance of new units in Saul Centers' operating
partnership. The seller is a company which is an existing limited partner in the
operating partnership. The initial cash yield on the purchase price, after
deducting capital reserves and a market vacancy factor, is 10.3%. all of the
property's leases provide for contractual annual rental increases which will
further enhance this attractive return. Closing is expected on April 1, 1998.
The Company also continues to take advantage of retail
redevelopment, renovation and expansion opportunities within the portfolio, as
demonstrated by its redevelopment activities at Seven Corners, recently
completed facade renovation at Thruway and an expansion of the Leesburg Pike
shopping center. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Redevelopment, Renovation and
Acquisitions."
7
Financial Information
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In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on
a fully converted basis. This represents a 10.0 percent increase over 1996 FFO
of $25,122,000. The following table represents a reconciliation from net income
before minority interests to FFO:
For the Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
- ---------------------- --------- --------- ---------
Net income before minority interests $ 9,406 $ 12,703 $ 13,213
Depreciation and amortization of real property 10,642 10,860 10,425
Debt restructuring losses:
Disposition of interest rate protection agreements 4,392 972 ---
Write-off of unamortized loan costs 3,197 587 998
-------- -------- --------
Funds From Operations $ 27,637 $ 25,122 $ 24,636
======== ======== ========
Cash Flow provided by (used in):
Operating activities $ 28,936 $ 29,677 $ 25,055
Investing activities $(16,094) $ (8,035) $(20,992)
Financing activities $(12,192) $(22,278) $ (4,416)
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, which is disclosed in the
Consolidated Statements of Cash Flows for the applicable periods. There are no
material legal or functional restrictions on the use of FFO. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Management considers FFO a supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. FFO may not be comparable to
similarly titled measures employed by other REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts, is calculated using net
income excluding gains or losses from debt restructuring, sales of property,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
ITEM 2. PROPERTIES
Overview
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The Company is the owner and operator of a real estate portfolio of 33
properties totaling approximately 5.8 million square feet of gross leasable area
("GLA") located primarily in the Washington, D.C./Baltimore metropolitan area.
The portfolio is composed of 30 neighborhood and community Shopping Centers and
three Office Properties totaling approximately 5.1 and 0.7 million square feet
of GLA, respectively. With the exception of four Shopping Center properties
purchased or developed during the past three years, the Company Portfolio
consists of seasoned properties that had been owned and managed by The Saul
Organization for 15 years or more. The Company expects to hold its properties as
long-term investments, although it has no maximum period for retention of any
investment. It plans to selectively acquire additional income-producing
properties and to expand, renovate, and improve its properties when
circumstances warrant. See "Business--Operating Strategies" and "Business--
Capital Strategies."
8
The Shopping Centers
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Community and neighborhood shopping centers typically are anchored by one
or more supermarkets, discount department stores or drug stores. These anchors
offer day-to-day necessities rather than apparel and luxury goods and,
therefore, generate consistent local traffic. By contrast, regional malls
generally are larger and typically are anchored by one or more full-service
department stores.
The Shopping Centers (typically) are seasoned community and neighborhood
shopping centers located in well established, highly developed, densely
populated, middle and upper income areas. Based upon census data, the average
estimated population within a three- and five-mile radius of the Shopping
Centers is approximately 110,000 and 260,000, respectively. The average
household income within a three and five-mile radius of the Shopping Centers is
$59,000 and $60,000, respectively, compared to a national average of $51,000.
Because the Shopping Centers generally are located in highly developed areas,
management believes that there is little likelihood that any significant numbers
of competing centers will be developed in the future.
The Shopping Centers range in size from 4,900 to 545,800 square feet of
GLA, with six in excess of 300,000 square feet, and a weighted average of
approximately 171,000 square feet. A majority of the Shopping Centers are
anchored by several major tenants. Eighteen of the 30 Shopping Centers are
anchored by a grocery store, and offer primarily day-to-day necessities and
services. As of February 1998, no single Shopping Center accounted for more
than 11.0 percent of the total Shopping Center GLA. Only one Shopping Center
tenant, Giant Food, accounted for more than 2.0 percent of the Company's total
revenues for the year ending December 31, 1997 and only three Shopping Center
tenants, Giant Food, Best Buy, and Chevy Chase Bank, F.S.B., individually
accounted for more than 1.5 percent of total revenues for this period.
The Office Properties
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The three Office Properties are all located in the Washington, D.C.
metropolitan area and contain an aggregate GLA of approximately 671,000 square
feet, composed of 638,000 and 33,000 square feet of office and retail space,
respectively. The Office Properties represent three distinct styles of
facilities, are located in differing commercial environments with distinctive
demographic characteristics, and are geographically removed from one another.
As a consequence, management believes that the Office Properties compete for
tenants in different commercial and geographic sub-markets of the metropolitan
Washington, D.C. market and do not compete with one another.
601 Pennsylvania Ave. is a nine-story, Class A office building (with a
small amount of street level retail space) built in 1986 and located in a prime
downtown location. Van Ness Square is a six-story office/retail building
rebuilt in 1990. Van Ness Square is located in a highly developed commercial
area of Northwest Washington, D.C. which offers extensive retail and restaurant
amenities. Management believes that the Washington, D.C. office market is one
of the strongest and most stable leasing markets in the nation, with relatively
low vacancy rates in comparison to other major metropolitan areas. Despite
continuing announcements of government downsizing, management believes that the
long-term stability of this market is attributable to the status of Washington,
D.C. as the nation's capital and to the presence of the federal government,
international agencies, and an expanding private sector job market throughout
the metropolitan area.
Avenel Business Park is a research park located in a Maryland suburb of
Washington, D.C. and consists of eight one-story buildings built in three phases
in 1981, 1985 and 1989. Management believes that, due to its desirable
location, the high quality of the property and the relative scarcity of research
and development space in its immediate area, Avenel should continue to attract
and retain desirable tenants in the future.
The following table sets forth, at the dates indicated, certain information
regarding the Current Portfolio Properties:
9
SAUL CENTERS, INC.
SCHEDULE OF CURRENT PORTFOLIO PROPERTIES
DECEMBER 31, 1997
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants
- ------------------ -------------- -------- ----------- ----- -------- -------- ---------------------------------------------
SHOPPING CENTERS
- ----------------
Ashburn Village Ashburn, VA 108,204 1994 12.7 95% 100% Giant Food, Blockbuster
Beacon Mall Alexandria, VA 290,845 1972(1993) 32.3 69% 73% Giant Food, Office Depot, Outback Steakhouse,
Marshalls, Sneaker Stadium, Hollywood Video
Belvedere Baltimore, MD 54,941 1972 4.8 100% 100% Giant Food, Rite Aid
Boulevard Fairfax, VA 56,578 1994 5.0 100% 100% Danker Furniture, Petco
Clarendon Arlington, VA 6,940 1973 0.5 100% 100%
Clarendon Station Arlington, VA 4,868 1996 0.1 100% 100%
Crosstown Tulsa, OK 197,135 1975 26.4 20% 29%
Flagship Center Rockville, MD 21,500 1972,1989 0.5 100% 100%
French Market Oklahoma City, OK 213,658 1974(1984) 13.8 62% 94% Bed Bath & Beyond, Lakeshore Learning Center,
Fleming Food, Furr's Cafetaria
Germantown Germantown, MD 26,241 1992 2.7 92% 93%
Giant Baltimore, MD 70,040 1972(1990) 5.0 100% 100% Giant Food
The Glen Lake Ridge, VA 112,639 1994 14.7 100% 95% Safeway Marketplace, CVS Pharmacy
Great Eastern District Heights, MD 255,448 1972(1995) 23.9 89% 90% Giant Food, Caldor, Pep Boys
Hampshire Langley Langley Park, MD 134,425 1972(1979) 9.9 100% 100% Safeway, McCrory
Leesburg Pike Baileys Crossrds, VA 97,888 1966(1982/95) 9.4 100% 100% Zany Brainy, CVS Pharmacy, Hollywood Video
Lexington Mall Lexington, KY 315,551 1974 30.0 88% 95% McAlpin's, Dawahares of Lexington, Rite Aid
Lumberton Plaza Lumberton, NJ 189,729 1975(1992/96) 23.3 89% 82% Super Fresh, Rite Aid, Blockbuster, Mandee
North Washington Alexandria, VA 41,500 1973 2.0 100% 100% Mastercraft Interiors
Olney Olney, MD 53,765 1975(1990) 3.7 92% 83% Rite Aid
Park Rd. Washington, DC 106,650 1973(1993) 1.7 100% 100% Woolworth
Ravenwood Baltimore, MD 87,750 1972 8.0 100% 100% Giant Food
10
SAUL CENTERS, INC.
SCHEDULE OF CURRENT PORTFOLIO PROPERTIES
DECEMBER 31, 1997
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants
- ------------------ -------------- --------- ----------- ----- -------- -------- ---------------------------------------------
SHOPPING CENTERS (CONTINUED)
- ---------------------------
Seven Corners Falls Church, VA 545,061 1973(1994-7) 31.6 92% 88% Home Depot, Shoppers Club, Best Buy,
Michaels, Barnes & Noble, Ross Dress For
Less, Centex Life Solutions
Shops at Fairfax Fairfax, VA 64,580 1975(1992-3) 6.7 65% 54% Office Depot, Hollywood Video
Southdale Glen Burnie, MD 475,099 1972(1986) 39.6 99% 98% Giant Food, Hechinger, Circuit City,
Kids R Us, Michaels, Marshalls, PetSmart,
Value City Furniture
Southside Plaza Richmond, VA 352,516 1972 32.8 92% 97% CVS Pharmacy, Nick's Supermarket
Sunshine City Atlanta, GA 195,653 1976 14.6 88% 98% Bolton Furniture, MacFrugals, Pep Boys,
The Emory Clinic
Thruway Winston-Salem, NC 339,564 1972 30.5 96% 94% Stein Mart, Reading China & Glass,
Harris Teeter, Fresh Market,
Blockbuster, Bocock-Stroud, Houlihan's
Village Center Centreville, VA 142,881 1990 17.2 87% 84% Giant Food
West Park Oklhamoa City, OK 107,895 1975 11.2 66% 69% Homeland Stores, Treasury Drug
White Oak Silver Spring, MD 480,156 1972(1993) 28.5 100% 99% Giant Food, Sears, Rite Aid, Blockbuster
--------- ----- -------- --------
Total Shopping Centers 5,149,700 443.1 88% 90%
--------- ----- -------- --------
COMMERCIAL PROPERTIES
- ---------------------
Avenel Business Park Gaithersburg, MD 285,218 1981/85/89 28.2 99% 86% Oncor, Inc., Quanta Systems, General
Services Administration
601 Pennsylvania Washington, DC 225,153 1973(1986) 1.0 100% 100% General Services Administration,
Capital Grille
Van Ness Square Washington, DC 161,058 1973(1990) 1.2 88% 77% United Mine Workers Pension Trust,
Office Depot, Pier 1
--------- ----- -------- --------
Total Commercial Properties 671,429 30.4 97% 89%
--------- ----- -------- --------
TOTAL PORTFOLIO 5,821,129 SF 473.5 89.0% 89.6%
--------- ----- -------- --------
11
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in litigation,
including litigation arising out of the collection of rents, the enforcement or
defense of the priority of its security interests, and the continued development
and marketing of certain of its real estate properties. In the opinion of
management, litigation that is currently pending should not have a material
adverse impact on the financial condition or future operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
Saul Centers completed the Offerings on August 26, 1993. Shares of Common
Stock were sold at an initial offering price of $20 per share and the net
offering proceeds were used to acquire general partnership interests in the
Operating Partnership and Subsidiary Partnerships, which hold the Portfolio
Properties and the Management Functions. The shares are listed on the New York
Stock Exchange under the symbol "BFS". The high and low sales prices for the
Common Stock shares for each quarter of 1996 and 1997 were as follows:
Period Share Price
------ -----------
High Low
-------- --------
January 1, 1997 -- March 31, 1997 $17 3/8 $15 1/2
April 1, 1997 -- June 30, 1997 $17 1/4 $15 1/8
July 1, 1997 -- September 30, 1997 $19 1/8 $16 3/16
October 1, 1997 -- December 31, 1997 $19 3/8 $16 1/4
January 1, 1996 -- March 31, 1996 $16 1/4 $13 7/8
April 1, 1996 -- June 30, 1996 $14 7/8 $13
July 1, 1996 -- September 30, 1996 $14 1/4 $12 5/8
October 1, 1996 -- December 31, 1996 $16 $13 1/2
Holders
- -------
The approximate number of holders of record of the Common Stock was 550 as
of February 20, 1998.
Dividends
- ---------
Saul Centers was formed on June 10, 1993 and from that time through August
27, 1993, distributions were not paid to stockholders. Subsequent to its
initial public offering, the Company has declared and paid regular quarterly
distributions to its stockholders. The first distribution, in the amount of
$0.15 per share for the partial quarter ended September 30, 1993, was paid on
October 29, 1993 to stockholders of record as of October 15, 1993. This initial
amount was based upon a full quarterly distribution of $0.39 per share. The
Company paid four quarterly distributions in the amount of $0.39 per share,
during each of the years ended December 31, 1997, 1996, 1995 and 1994, totaling
$1.56 per share for each of these years, or an annual yield of 8.5 percent based
on the closing price of the Common Stock on the New York Stock Exchange as of
February 20, 1998. The Company has determined that 50.2 percent of the total
$1.56 per share paid in calendar year 1997 represents currently taxable dividend
income to the stockholders.
12
The Company's estimate of cash flow available for distributions is believed
to be based on reasonable assumptions and represents a reasonable basis for
setting distributions. However, the actual results of operations of the Company
will be affected by a variety of factors, including actual rental revenue,
operating expenses of the Company, interest expense, general economic
conditions, federal, state and local taxes (if any), unanticipated capital
expenditures, and the adequacy of reserves. While the Company intends to
continue paying regular quarterly distributions, any future payments will be
determined solely by the Board of Directors and will depend on a number of
factors, including cash flow of the Company, its financial condition and capital
requirements, the annual distribution requirements required to maintain its
status as a REIT under the Code, and such other factors as the Board of
Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company contained herein has been
derived from the consolidated and combined financial statements of the Company
and The Saul Organization. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
report. The historical selected financial data have been derived from audited
financial statements for all periods.
13
Saul Centers, Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Predecessor
to Saul
Saul Centers, Inc. Centers, Inc.
------------------------------------------------------ ----------
August 27, January 1,
through through
Years Ended December 31, December 31, August 26,
1997 1996 1995 1994 1993 1993
-------- -------- --------- -------- ------------ ----------
OPERATING DATA:
- ---------------
Total Revenue....................................... $ 67,717 $ 64,023 $ 61,469 $ 57,397 $ 18,519 $ 34,472
-------- -------- --------- -------- -------- --------
Operating expenses.................................. 50,722 49,761 47,258 42,787 13,594 39,744
Operating Income.................................... 16,995 14,262 14,211 14,610 4,925 (5,272)
Non-operating income
Sale of interest rate protection agreements....... (4,392) (972) -- -- -- --
-------- -------- --------- -------- -------- --------
Net income (loss) before extraordinary item
and minority interest............................. 12,603 13,290 14,211 14,610 4,925 (5,272)
Extraordinary item:
Early extinguishment of debt...................... (3,197) (587) (998) (3,341) (3,519) --
-------- -------- --------- -------- -------- --------
Net income (loss) before minority interests......... 9,406 12,703 13,213 11,269 1,406 (5,272)
Minority Interests.................................. (6,854) (6,852) (6,852) (4,274) (380) --
-------- -------- --------- -------- -------- --------
Net income (loss)................................... $ 2,552 $ 5,851 $ 6,361 $ 6,995 $ 1,026 $ (5,272)
======== ======== ========= ======== ======== ========
PER SHARE DATA:
- ---------------
Net income (loss) before extraordinary
item and minority interests....................... $ 0.76 $ 0.81 $ 0.87 $ 0.90 $ 0.30
Net income.......................................... $ 0.21 $ 0.49 $ 0.54 $ 0.59 $ 0.09
Weighted average shares outstanding: NO
Fully converted................................... 16,690 16,424 16,285 16,272 16,272
======== ======== ========= ======== ========
Common stock...................................... 12,297 12,031 11,892 11,879 11,879 COMMON
======== ======== ========= ======== ========
DIVIDENDS PAID:
- --------------- SHARES
Cash dividends to common stockholders...........(1) $ 19,063 $ 18,669 $ 18,531 $ 18,531 $ 1,782
======== ======== ========= ======== ========
Cash dividends per share.......................... $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 0.15
======== ======== ========= ======== ========
OUTSTANDING
BALANCE SHEET DATA:
- -------------------
Income-producing properties
(before accumulated depreciation)................. $335,268 $329,664 $ 321,662 $300,404 $263,519
Total assets........................................ 260,942 263,495 269,407 259,041 213,365
Total debt, including accrued interest.............. 273,731 273,731 273,979 248,681 192,199
OTHER DATA:
- -----------
Funds from operations (2)
Net income before minority interests.............. $ 9,406 $ 12,703 $ 13,213 $ 11,269
Depreciation and amortization of real property.... 10,642 10,860 10,425 9,582
Debt restructuring losses:
Disposition of interest rate protection
agreements.................................... 4,392 972 -- --
Write-off of unamortized loan costs............. 3,197 587 998 3,341
-------- -------- --------- --------
Funds from operations............................... $ 27,637 $ 25,122 $ 24,636 $ 24,192
======== ======== ========= ========
Cash flows provided by (used in):
Operating activities.............................. $ 28,936 $ 29,677 $ 25,055 $ 23,811
Investing activities.............................. $(16,094) $ (8,035) $ (20,992) $(43,487)
Financing activities.............................. $(12,192) $(22,278) $ (4,416) $ 17,948
- --------------------
(1) By operation of the Company's dividend reinvestment plan, $4,305 and $3,378,
was reinvested in newly issued common stock during 1997 and 1996,
respectively.
(2) Funds From Operations (FFO) does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs, which is
disclosed in the Consolidated Statements of Cash Flows for the applicable
periods. There are no material legal or functional restrictions on the use
of FFO. FFO should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity. Management considers FFO a
supplemental measure of operating performance and along with cash flow from
operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs.
FFO may not be comparable to similarly titled measures employed by other
REITs. FFO, as defined by the National Association of Real Estate Investment
Trusts (NAREIT), represents net income excluding gains or losses from debt
restructuring, sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion is based on the consolidated financial statements
of the Company as of December 31, 1997 and for the year ended December 31, 1997.
Prior year data is based on the Company's consolidated financial statements as
of December 31, 1996 and 1995 and for the years ended December 31, 1996 and
1995.
Liquidity and Capital Resources
- -------------------------------
The Company's principal demands for liquidity are expected to be
distributions to its stockholders, debt service and loan repayments, expansion
and renovation of the Current Portfolio Properties and selective acquisition and
development of additional properties. In order to qualify as a REIT for federal
income tax purposes, the Company must distribute to its stockholders at least 95
percent of its "real estate investment trust taxable income," as defined in the
Internal Revenue Code of 1986, as amended. The Company anticipates that
operating revenues will provide the funds necessary for operations, debt
service, distributions, and required recurring capital expenditures. Balloon
principal repayments are expected to be funded by refinancings.
Management anticipates that during the coming year the Company may: 1)
redevelop certain of the Shopping Centers, 2) develop additional freestanding
outparcels or expansions within certain of the Shopping Centers, 3) acquire
existing neighborhood and community shopping centers and/or office properties
and 4) develop new shopping center sites. Acquisition and development of
properties are undertaken only after careful analysis and review, and such
property is expected to provide long-term earnings and cash flow growth. During
the coming year, any developments, expansions or acquisitions are expected to be
funded with bank borrowings from the Company's credit line or other external
capital resources available to the Company.
The Company expects to fulfill its long range requirements for capital
resources in a variety of ways, including undistributed cash flow from
operations, secured or unsecured bank and institutional borrowings, private or
public offerings of debt or equity securities and proceeds from the sales of
properties. Borrowings may be at the Saul Centers, Operating Partnership or
Subsidiary Partnership level, and securities offerings may include (subject to
certain limitations) the issuance of additional limited partnership interests in
the Operating Partnership which can be converted into shares of Saul Centers
common stock.
Management believes that the Company's current capital resources, including
approximately $46,500,000 of the Company's credit line which was available for
borrowing as of December 31, 1997, will be sufficient to meet its liquidity
needs for the foreseeable future.
15
Financial Information
- ---------------------
In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on
a fully converted basis. This represents a 10.0 percent increase over 1996 FFO
of $25,122,000. The following table represents a reconciliation from net income
before minority interests to FFO:
For the Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
- ---------------------- --------- --------- ---------
Net income before minority interests $ 9,406 $ 12,703 $ 13,213
Depreciation and amortization of real property 10,642 10,860 10,425
Debt restructuring losses:
Disposition of interest rate protection agreements 4,392 972 ---
Write-off of unamortized loan costs 3,197 587 998
-------- -------- --------
Funds From Operations $ 27,637 $ 25,122 $ 24,636
======== ======== ========
Cash Flow provided by (used in):
Operating activities $ 28,936 $ 29,677 $ 25,055
Investing activities $(16,094) $ (8,035) $(20,992)
Financing activities $(12,192) $(22,278) $ (4,416)
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, which is disclosed in the
Consolidated Statements of Cash Flows for the applicable periods. There are no
material legal or functional restrictions on the use of FFO. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Management considers FFO a supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. FFO may not be comparable to
similarly titled measures employed by other REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts, is calculated using net
income excluding gains or losses from debt restructuring, sales of property,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
Capital Strategy and Financing Activity
- ---------------------------------------
The Company's capital strategy is to maintain a ratio of total debt to
total asset value of 50 percent 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 percent of total asset value.
During 1997, the Company closed two long-term fixed rate mortgages, which
management believes enhance the balance sheet. The first was a $38.5 million
loan closed in January 1997, for a term of 16 years at a fixed interest rate of
7.88 percent, and a twenty-year principal amortization schedule. A balloon
payment of approximately $24.5 million will be due at maturity in January 2013.
This loan is secured by the 601 Pennsylvania Avenue office property. The
proceeds of this new loan were used to repay existing floating rate debt, which
had a weighted remaining term of less than 3 years and a weighted average
interest rate of LIBOR plus 2.05 percent, or 7.58 percent assuming the three
month LIBOR rate effective as of December 31, 1997.
In October 1997, the Company closed another loan in the amount of $147
million, for a 15-year term, at a fixed rate of 7.67 percent, and a twenty-five
year principal amortization schedule. A balloon payment of approximately $87.9
million will be due at maturity in October 2012. This loan is secured by nine
of the Company's retail properties. Also, in conjunction with the closing of
the loan, the Company closed a new three-
16
year $60 million unsecured credit line, which replaces the previous secured
credit line. The interest rate floats at 1.375 percent to 1.625 percent over
LIBOR, depending on certain covenant tests. As of February 20, 1998,
outstanding borrowings total $18 million, leaving $42 million of uncommitted
credit availability. This availability provides the Company with capital to
pursue new redevelopment, renovation, and expansion opportunities within its
portfolio. The proceeds of these new loans were used to repay existing floating
rate debt, which had a remaining term of approximately 3.5 years. The Company
now has fixed interest rates on approximately 94 percent of its total debt
outstanding, which now has a weighted remaining term of approximately 14 years.
In connection with the refinancing, the Company sold all of its remaining
interest rate protection agreements.
Redevelopment, Renovations and Acquisitions
- -------------------------------------------
The Company has been selectively involved in redevelopment, renovation and
acquisition activities. It continues to evaluate land parcels for retail
development and potential acquisitions of operating properties for
opportunities to enhance operating income and cash flow growth. The Company also
continues to take advantage of retail redevelopment, renovation and expansion
opportunities within the portfolio, as demonstrated by its redevelopment
activities at Seven Corners, recently completed facade renovation at Thruway and
an expansion of the Leesburg Pike shopping center.
The newly constructed 127,000 square foot Home Depot and 70,000 square foot
Shoppers Club stores at Seven Corners shopping center, the Company's 545,000
square foot community shopping center in Falls Church, Virginia, opened during
the third quarter of 1997. The opening of Home Depot and Shoppers Club
substantially completes the Company's redevelopment of Seven Corners from an
enclosed mall to an updated community strip center. The redevelopment effort
added 145,000 square feet of new retail area.
During the second quarter, Centex Life Solutions executed a lease for a
31,000 square foot health concepts superstore and Michaels Stores signed a lease
for a 21,000 square foot arts and crafts store at Seven Corners. Saul Centers
had recently recaptured the space leased by Michaels and received a termination
fee from Petstuff, which had closed their store subsequent to merging with
PetSmart. Centex leased and substantially renovated the interior and exterior
of the former F&M Distributors drug store space. These two new anchor tenants
recently opened their stores.
In August 1997, the Company substantially completed construction on a
facade renovation of its Harris Teeter and Stein Mart anchored 340,000 square
foot, Thruway shopping center located in Winston-Salem, North Carolina.
Construction includes a 40-foot clock tower, a new tenant sign band, colonial
style anchor tenant features, new lighting and a complete facade upgrade.
Leesburg Pike is a 98,000 square foot shopping center, where a facade
renovation was completed in 1995. Construction was subsequently completed as of
June 1997 on a 13,000 square foot expansion of in-line shop space for new retail
uses. The expansion is 100 percent leased and occupied by tenants including
Hollywood Video and Men's Wearhouse.
Portfolio Leasing Status
- ------------------------
At December 31, 1997, the portfolio consisted of thirty Shopping Centers
and three Office Properties located in seven states and the District of
Columbia. The Office Properties consist of one office property and one
office/retail property, both located in the District of Columbia, and one
research park located in a Maryland suburb of Washington, DC.
At December 31, 1997, 89.0 percent of the Company's 5.8 million square feet
of leasable space was leased to tenants, as compared to 89.6 percent at December
31, 1996. The shopping center portfolio was 87.9 percent leased at December 31,
1997 versus 89.8 percent as of December 31, 1996. The Office Properties were
96.8 percent leased at December 31, 1997 compared to 88.5 percent as of December
31, 1996. The overall reduction in the year-end 1997 leasing percentage was
primarily caused by the Company's termination of a major
17
retail lease for redevelopment, offset in part by improved leasing activity at
the Company's Avenel Business Park and Van Ness Square office properties. The
decline in the 1997 shopping center portfolio leasing percentage resulted
primarily from the Company's redevelopment activities at its French Market
property. In order to redevelop its French Market center in Oklahoma City, the
Company acquired the lease of a 103,000 square foot tenant, of which only 49,000
square feet was leased as of year end. The annual rent committed under the
49,000 square feet of new leases exceeds that of the former tenant's entire
space. Lease negotiations for the remaining space are in progress.
Results of Operations
- ---------------------
The following discussion compares the results of the Company for the year
ended December 31, 1997 with the year ended December 31, 1996, and compares the
year ended December 31, 1996 with the year ended December 31, 1995. This
information should be read in conjunction with the accompanying consolidated
financial statements and the notes related thereto.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Base rent increased to $51,779,000 in 1997 from $49,814,000 in 1996,
representing a $1,965,000 (3.9 percent) increase. The increase in base rent
resulted primarily from increased rents received at the redeveloped Seven
Corners, Leesburg Pike and Thruway shopping centers, and to a lesser extent,
increased shopping center minimum rents at several properties due to improved
leasing and generally higher rents on lease renewals.
Expense recoveries increased to $9,479,000 in 1997 from $9,301,000 in 1996,
representing an increase of $178,000 (1.9 percent). The increase in expense
recoveries resulted primarily from real estate tax recovered from tenants at the
recently redeveloped Seven Corners center.
Percentage rent was $2,948,000 in 1997, compared to $2,924,000 in 1996,
representing an increase of $24,000 (0.8%). This increase resulted from
generally improved reported sales throughout the portfolio.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $3,511,000 in 1997, compared to $1,984,000 in
1996, representing an increase of $1,527,000 (77.0%). The increase in other
income resulted from two large lease termination payments.
As a consequence of the foregoing the 1997 total revenues of $67,717,000
represented an increase of $3,694,000 (5.8 percent) over total revenues of
$64,023,000 in 1996.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, increased $6,000 (0.1 percent) to
$8,075,000 in 1997 from $8,069,000 in 1996.
The provision for credit losses was $505,000 in 1997 compared to $457,000
in 1996, representing an increase of $48,000 (10.5 percent) . The increase
resulted primarily from the provision required for a shopping center tenant
which vacated its space prior to lease expiration.
Real estate taxes were $6,084,000 in 1997 compared to $5,914,000 in 1996,
representing an increase of $170,000 (2.9 percent). This increase was generally
attributable to increased tax assessments at the Company's shopping center
properties, particularly its redeveloped Seven Corners and Leesburg Pike
shopping centers.
Interest expense was $20,308,000 in 1997 compared to $18,509,000 in 1996,
representing an increase of $1,799,000 (9.7 percent). The increase is primarily
attributable to higher interest rates resulting from the Company's refinancing
and conversion of approximately $263 million of its mortgage debt from floating
rate loans to longer term, fixed-rate loans during the period November 1996
through October 1997.
18
Amortization of deferred debt expense decreased $1,128,000 (39.5 percent)
to $1,729,000 in 1997 from $2,857,000 in 1996. The decrease in the 1997 year's
expense resulted from the elimination of amortization on interest rate
protection agreements with notional values of $162.8 million and $87.0 million,
sold during the fourth quarters of 1997 and 1996, respectively, and reduced loan
cost amortization because new fixed rate debt costs are being amortized over a
longer term than the floating rate debt costs they replaced.
Depreciation and amortization expense decreased $218,000 (2.0 percent) from
$10,860,000 in 1996 to $10,642,000 in 1997. The decrease resulted primarily
from a non-recurring write-off of tenant improvement costs in 1996 upon the
early termination of tenant leases.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,379,000 in 1997
compared to $3,095,000 in 1996, representing an increase of $284,000 (9.2
percent). The increase in 1997 expenses resulted from generally higher
personnel expenses.
Non-operating item, sales of interest rate protection agreements, resulted
in losses of $4,392,000 and $972,000, in 1997 and 1996, respectively, due to
the write-off of unamortized costs in excess of sale proceeds received when the
Company sold a portion of its interest rate protection agreements.
Extraordinary item, early extinguishment of debt, losses were $3,197,000
and $587,000, in 1997 and 1996, respectively. The losses in each period
resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Base rent increased to $49,814,000 in 1996 from $47,673,000 in 1995,
representing a $2,141,000 (4.5 percent) increase. The increase in base rent
resulted primarily from increased rents received at the redeveloped Seven
Corners and Great Eastern shopping centers, and to a lesser extent, increased
shopping center minimum rents at several properties due to improved leasing and
generally higher rents on lease renewals.
Expense recoveries increased to $9,301,000 in 1996 from $8,770,000 in 1995,
representing an increase of $531,000 (6.1 percent). The increase in expense
recoveries resulted primarily from improved leasing levels at the recently
redeveloped Seven Corners, Great Eastern and Leesburg Pike shopping centers.
Percentage rent was $2,924,000 in 1996, compared to $2,782,000 in 1995,
representing an increase of $142,000 (5.1%). This increase resulted from
generally improved reported sales throughout the portfolio.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $1,984,000 in 1996, compared to $2,244,000 in
1995, representing a decrease of $260,000 (11.6%). The decline in other income
resulted largely from a decline in lease termination payments.
As a consequence of the foregoing, the 1996 total revenues of $64,023,000
represented an increase of $2,554,000 (4.2 percent) over total revenues of
$61,469,000 in 1995.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, decreased $71,000 (0.9 percent) to
$8,069,000 in 1996 from $8,140,000 in 1995.
The provision for credit losses was $457,000 in 1996 compared to $404,000
in 1995, representing an increase of $53,000 (13.1 percent) . The increase
resulted primarily from the provision required for a shopping center tenant
which vacated its space prior to lease expiration.
19
Real estates taxes were $5,914,000 in 1996 compared to $5,427,000 in 1995,
representing an increase of $487,000 (9.0 percent). This was largely
attributable to the increased tax assessment resulting from the redevelopment
work put in place by the Company during the past two years.
Interest expense was $18,509,000 in 1996 compared to $17,639,000 in 1995,
representing an increase of $870,000 (4.9 percent). This increase is primarily
attributed to an approximately $14.6 million increase in average loan balances
resulting largely from the Company's acquisition and redevelopment activities.
Amortization of deferred debt expense increased $389,000 (15.8 percent) to
$2,857,000 in 1996 from $2,468,000 in 1995. This increase was primarily due to
an increased level of amortization arising from the November 1995 restructuring
of the Company's revolving credit agreement.
Depreciation and amortization expense increased $435,000 (4.2 percent) from
$10,425,000 in 1995 to $10,860,000 in 1996. This increase was due to the
redevelopment of the Seven Corners and Leesburg Pike shopping centers.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,095,000 in 1996
compared to $2,984,000 in 1995, representing an increase of $111,000 (3.7
percent).
Non-operating item, sales of interest rate protection agreements, resulted
in a loss of $972,000 in 1996 due to the write-off of unamortized costs in
excess of sale proceeds received when the Company sold a portion of its interest
rate protection agreements. The agreements sold had a notional value of $87.0
million, and were sold subsequent to the November 1996 closing of a $77.0
million fixed rate mortgage. No sale occurred in 1995.
Extraordinary item, early extinguishment of debt, decreased from a loss of
$998,000 in 1995 to a loss of $587,000 in 1996. The losses in each period
resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
Other
- -----
The Company has evaluated its information technology systems to ensure
compliance with the requirements to process transactions in the year 2000. The
Company's primary internal information systems are fully compliant new systems.
The majority of the Company's internal information systems are fully compliant
new systems. In the event that any of the Company's significant tenants or
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's operations may be affected. The Company does not anticipate any
material impact on its results from operations or its financial condition as a
result of any Year 2000 compliance issues.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its consolidated subsidiaries
are included in this report on the pages indicated, and are incorporated herein
by reference:
Page
- ----
F-1 (a) Report of Independent Public Accountants
F-2 (b) Consolidated Balance Sheets - December 31, 1997 and 1996
F-3 (c) Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995.
F-4 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and
1995.
F-5 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.
F-6 (f) Notes to Consolidated Financial Statements
The selected quarterly financial data included in Note 15 of The Notes to
Consolidated Financial Statements referred to above are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
The information required under Items 10, 11, 12, and 13 is contained in
pages 3 through 14, inclusive, of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held April 17, 1998, and is hereby incorporated
herein by reference. The Company's Proxy Statement was filed within 120 days
after the close of the Company's fiscal year in accordance with General
Instruction G(3) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
--------------------
The following financial statements of the Company and their
consolidated subsidiaries are incorporated by reference in Part II, Item 8.
(a) Report of Independent Public Accountants
(b) Consolidated Balance Sheets - December 31, 1997 and 1996
(c) Consolidated Statements of Operations - Years ended December 31,
1997, 1996 and 1995
(d) Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
(e) Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
2. Financial Statement Schedule and Supplementary Data
---------------------------------------------------
(a) Selected Quarterly Financial Data for the Company are incorporated
by reference in Part II, Item 8
(b) Report of Independent Public Accountants on the Schedule (included
in Report of Independent Public Accountants on the Financial Statements)
(c) Schedule of the Company:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
22
3. Exhibits
--------
3. (a) First Amended and Restated Articles of Incorporation of Saul
Centers, Inc. filed with the Maryland Department of Assessments and
Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the 1993
Annual Report of the Company on Form 10-K is hereby incorporated by
reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3 (b) of the 1993 Annual Report of the Company on Form 10-K
is hereby incorporated by reference.
10. (a) First Amended and Restated Agreement of Limited Partnership of Saul
Holdings Limited Partnership filed as Exhibit No. 10.1 to
Registration Statement No. 33-64562 is hereby incorporated by
reference. The First Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, and the Third Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings Limited
Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by reference. The Fourth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Holdings Limited Partnership filed as Exhibit
10.(a) of the March 31, 1997 Quarterly Report of the Company is
hereby incorporated by reference.
(b) First Amended and Restated Agreement of Limited Partnership of Saul
Subsidiary I Limited Partnership and Amendment No. 1 thereto filed
as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby
incorporated by reference. The Second Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership, the Third Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership and the Fourth Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership is filed herewith.
(c) First Amended and Restated Agreement of Limited Partnership of Saul
II Subsidiary Partnership and Amendment No. 1 thereto filed as
Exhibit 10.3 to Registration Statement No. 33-64562 are hereby
incorporated by reference.
(d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration
Statement No. 33-64562 is hereby incorporated by reference.
(e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(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.
23
(j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase
Plan as filed with the Securities and Exchange Commission as File
No. 33-80291 is hereby incorporated by reference.
(k) Deferred Compensation Plan for Directors dated as of December 13,
1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by reference.
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated as
of June 9, 1994 by and between Saul Holdings Limited Partnership and
Ameribanc Savings Bank, FSB as filed as Exhibit 10.(t) of the 1995
Annual Report of the Company on Form 10-K is hereby incorporated by
reference.
(m) Deed of Trust Note dated as of January 22, 1996 by and between Saul
Holdings Limited Partnership and Clarendon Station Limited
Partnership, filed as Exhibit 10.(s) of the March 31, 1997 Quarterly
Report of the Company, is hereby incorporated by reference.
(n) Loan Agreement dated as of November 7, 1996 by and among Saul
Holdings Limited Partnership, Saul Subsidiary II Limited Partnership
and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc.,
filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of
the Company, is hereby incorporated by reference.
(o) Promissory Note dated as of January 10, 1997 by and between Saul
Subsidiary II Limited Partnership and The Northwestern Mutual Life
Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997
Quarterly Report of the Company, is hereby incorporated by
reference.
(p) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I
Limited Partnership, as Borrower and Nomura Asset Capital
Corporation, as Lender, is filed herewith
(q) Revolving Credit Agreement dated as of October 1, 1997 by and
between Saul Holdings Limited Partnership and Saul Subsidiary II
Limited Partnership, as Borrower and U.S. Bank National
Association, as agent, is filed herewith.
23 Consent of Certified Public Accountants
27 Financial Data Schedule
Reports on Form 8-K.
--------------------
None.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SAUL CENTERS, INC.
(Registrant)
Date:
------------------------------------------------------
Date:
------------------------------------------------------
B. Francis Saul II
Chairman of the Board of Directors
& Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1998 /s/ Philip D. Caraci
------------------------------------------------------
Philip D. Caraci, President and Director
Date: March 31, 1998 /s/ B. Francis Saul III
------------------------------------------------------
B. Francis Saul III, Vice President and Director
Date: March 31, 1998 /s/ Scott V. Schneider
------------------------------------------------------
Scott V. Schneider, Vice President and
Secretary (Principal Financial and Accounting Officer)
Date: March 31, 1998 /s/ Gilbert M. Grosvenor
------------------------------------------------------
Gilbert M. Grosvenor, Director
Date: March 31, 1998 /s/ General Paul X. Kelley
------------------------------------------------------
General Paul X. Kelley, Director
Date: March 31, 1998 /s/ Charles R. Longsworth
------------------------------------------------------
Charles R. Longsworth, Director
Date: March 31, 1998 /s/ Patrick F. Noonan
------------------------------------------------------
Patrick F. Noonan, Director
Date: March 31, 1998 /s/ Mr. Mark Sullivan III
------------------------------------------------------
Mark Sullivan III, Director
Date: March 31, 1998 /s/ James W. Symington
------------------------------------------------------
James W. Symington, Director
Date: March 31, 1998 /s/ John R. Whitmore
------------------------------------------------------
John R. Whitmore, Director
25
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Saul Centers, Inc.:
We have audited the accompanying consolidated balance sheets of Saul Centers,
Inc., (a Maryland corporation) and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years ended December 31, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Saul Centers, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997, 1996 and 1995 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole, Schedule III "Real Estate and Accumulated
Depreciation", appearing on pages F-18 and F-19, is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. The schedule has been subjected
to the auditing procedures applied in our audit of the basic financial
statements and in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 6, 1998
F-1
SAUL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
Real estate investments
Land $ 65,630 $ 65,604
Buildings and equipment 269,638 264,060
--------------------- --------------------
335,268 329,664
Accumulated depreciation (92,615) (94,965)
--------------------- --------------------
242,653 234,699
Construction in progress 974 1,508
Cash and cash equivalents 688 38
Accounts receivable and accrued income, net 6,190 7,446
Prepaid expenses 5,423 4,808
Deferred debt costs, net 3,853 11,287
Other assets 1,161 3,709
--------------------- --------------------
Total assets $ 260,942 $ 263,495
===================== ====================
LIABILITIES
Notes payable $ 284,473 $ 273,261
Accounts payable, accrued expenses and other liabilities 13,093 14,733
Deferred income 1,430 1,441
--------------------- --------------------
Total liabilities 298,996 289,435
--------------------- --------------------
MINORITY INTERESTS -- --
--------------------- --------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,428,145 and 12,152,771 shares issued and
outstanding, respectively 124 121
Additional paid-in capital 20,447 15,950
Accumulated deficit (58,625) (42,011)
--------------------- --------------------
Total stockholders' equity (deficit) (38,054) (25,940)
--------------------- --------------------
Total liabilities and stockholders' equity $ 260,942 $ 263,495
===================== ====================
The accompanying notes are an integral part of these statements.
F-2
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
REVENUE
Base rent $ 51,779 $ 49,814 $ 47,673
Expense recoveries 9,479 9,301 8,770
Percentage rent 2,948 2,924 2,782
Other 3,511 1,984 2,244
--------------------- --------------------- --------------------
Total revenue 67,717 64,023 61,469
--------------------- --------------------- --------------------
OPERATING EXPENSES
Property operating expenses 8,075 8,069 7,911
Provision for credit losses 505 457 404
Real estate taxes 6,084 5,914 5,427
Interest expense 20,308 18,509 17,639
Amortization of deferred debt expense 1,729 2,857 2,468
Depreciation and amortization 10,642 10,860 10,425
General and administrative 3,379 3,095 2,984
--------------------- --------------------- --------------------
Total operating expenses 50,722 49,761 47,258
--------------------- --------------------- --------------------
OPERATING INCOME 16,995 14,262 14,211
Non-operating item
Sales of interest rate protection agreements (4,392) (972) --
--------------------- --------------------- --------------------
NET INCOME BEFORE EXTRAORDINARY
ITEM AND MINORITY INTERESTS 12,603 13,290 14,211
Extraordinary item
Early extinguishment of debt (3,197) (587) (998)
--------------------- --------------------- --------------------
NET INCOME BEFORE MINORITY INTERESTS 9,406 12,703 13,213
--------------------- --------------------- --------------------
MINORITY INTERESTS
Minority share of income (2,483) (3,430) (3,568)
Distributions in excess of earnings (4,371) (3,422) (3,284)
--------------------- --------------------- --------------------
Total minority interests (6,854) (6,852) (6,852)
--------------------- --------------------- --------------------
NET INCOME $ 2,552 $ 5,851 $ 6,361
===================== ===================== ====================
NET INCOME PER SHARE (BASIC)
Net income before extraordinary
item and minority interests $ 0.76 $ 0.81 $ 0.87
Extraordinary item (0.19) (0.04) (0.06)
--------------------- --------------------- --------------------
Net income before minority interests $ 0.57 $ 0.77 $ 0.81
===================== ===================== ====================
Net income $ 0.21 $ 0.49 $ 0.54
===================== ===================== ====================
The accompanying notes are an integral part of these statements.
F-3
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN ACCUMULATED
(Dollars in thousands, except per share amounts) STOCK CAPITAL DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
BALANCE, DECEMBER 31, 1994 $ 119 $ 12,371 $ (16,926) $ (4,436)
Issuance of 8,913 shares of
common stock -- 140 -- 140
Net income -- -- 6,361 6,361
Distributions ($1.17 per share) -- -- (13,899) (13,899)
Distributions payable ($.39 per share) -- -- (4,633) (4,633)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1995 119 12,511 (29,097) (16,467)
Issuance of 257,454 shares of
common stock 2 3,439 -- 3,441
Net income -- -- 5,851 5,851
Distributions ($1.17 per share) -- -- (14,036) (14,036)
Distributions payable ($.39 per share) -- -- (4,729) (4,729)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1996 121 15,950 (42,011) (25,940)
Issuance of 275,374 shares of
common stock 3 4,497 -- 4,500
Net income -- -- 2,552 2,552
Distributions ($1.17 per share) -- -- (14,334) (14,334)
Distributions payable ($.39 per share) -- -- (4,832) (4,832)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1997 $ 124 $ 20,447 $ (58,625) $ (38,054)
================= ===================== ===================== ====================
The accompanying notes are an integral part of these statements.
F-4
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,552 $ 5,851 $ 6,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 6,854 6,852 6,852
Loss on sale of interest rate protection agreements 4,392 972 --
Loss on early extinguishment of debt 3,197 587 998
Depreciation and amortization 12,371 13,717 12,893
Provision for credit losses 505 457 404
Decrease (increase) in accounts receivable (406) (45) 41
Increase in prepaid expenses (1,426) (1,136) (2,273)
Decrease (increase) in other assets 2,548 (961) 1,250
Increase (decrease) in accounts payable and other
liabilities (1,640) 3,019 (745)
Increase (decrease) in deferred income (11) 364 (726)
--------------------- --------------------- --------------------
Net cash provided by operating activities 28,936 29,677 25,055
--------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments (4,377) (4,469) (4,852)
Additions to construction in progress (11,717) (3,566) (16,140)
--------------------- --------------------- --------------------
Net cash used in investing activities (16,094) (8,035) (20,992)
--------------------- --------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 223,600 98,620 114,000
Repayments on notes payable (212,388) (98,442) (89,568)
Proceeds from sale of interest rate protection agreements 1,370 681 --
Note prepayment fees (95) -- --
Additions to deferred debt expense (3,159) (961) (3,604)
Proceeds from the issuance of common stock 4,500 3,441 140
Distributions to common stockholders and
holders of convertible limited partnership
units in the Operating Partnership (26,020) (25,617) (25,384)
--------------------- --------------------- --------------------
Net cash used in financing activities (12,192) (22,278) (4,416)
--------------------- --------------------- --------------------
Net increase (decrease) in cash 650 (636) (353)
Cash, beginning of year 38 674 1,027
===================== ===================== ====================
Cash, end of year $ 688 $ 38 $ 674
===================== ===================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest net of amount capitalized $ 19,804 $ 18,829 $ 17,465
The accompanying notes are an integral part of these statements.
F-5
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION
ORGANIZATION
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. The authorized capital stock of Saul
Centers consists of 30,000,000 shares of common stock, having a par value of
$0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common
stock is entitled to one vote for each share held. Saul Centers, together with
its wholly owned subsidiaries and the limited partnerships of which Saul Centers
or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". Saul Centers operates as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (a "REIT").
FORMATION AND STRUCTURE OF COMPANY
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, and purchased a land parcel which it
developed into a community shopping center. Therefore, as of December 31, 1997,
the Company's properties (the "Current Portfolio Properties") consisted of 30
operating shopping center properties (the "Shopping Centers") and three
predominantly office properties (the "Office Properties"). To facilitate the
placement of collateralized mortgage debt, the Company established Saul QRS,
Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of
Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul
Centers as the sole general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited partnership
interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II
Limited Partnership are held by the Operating Partnership as the sole limited
partner. Through this structure, the Company owns 100 percent of the Current
Portfolio Properties.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been presented on
the historical cost basis of The Saul Organization because of affiliated
ownership and common management and because the assets and liabilities were the
subject of a business combination with the Operating Partnership, the Subsidiary
Partnerships and Saul Centers, all newly formed entities with no prior
operations.
F-6
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company, which conducts all of its activities through its subsidiaries,
the Operating Partnership and Subsidiary Partnerships, engages in the ownership,
operation, management, leasing, acquisition, renovation, expansion, development
and financing of community and neighborhood shopping centers and office
properties, primarily in the Mid-Atlantic region.
A majority of the Shopping Centers are anchored by several major tenants.
Eighteen of the 30 Shopping Centers are anchored by a grocery store and offer
primarily day-to-day necessities and services. As of December 1997, no single
Shopping Center accounted for more than 10.6 percent of the total Shopping
Center gross leasable area. Only Giant Food, at 6.5 percent of the Company's
1997 total revenues, accounted for more than 2.5 percent of revenues. Only two
other retail tenants represented more than 2.0 percent of total revenues for the
year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of Saul Centers, its subsidiaries, and the Operating Partnership
and Subsidiary Partnerships which are majority owned by Saul Centers. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REAL ESTATE INVESTMENT PROPERTIES
Real estate investment properties are stated at the lower of depreciated
cost or fair value less cost to sell. Management believes that these assets have
generally appreciated in value and, accordingly, the aggregate current value
exceeds their aggregate net book value and also exceeds the value of the
Company's liabilities as reported in these financial statements. These
financial statements are prepared in conformity with generally accepted
accounting principles, and accordingly, do not report the current value of the
Company's real estate assets.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially complete and
the assets are placed in service, rental income, direct operating expenses, and
depreciation associated with such properties are included in current operations.
Expenditures for repairs and maintenance are charged to operations as incurred.
Repairs and maintenance expense totaled $2,479,000, $2,730,000 and $2,600,000,
for calendar years 1997, 1996, and 1995, respectively, and is included in
operating expenses in the accompanying financial statements. Interest expense
capitalized totaled $297,000, $384,000 and $525,000, for calendar years 1997,
1996 and 1995, respectively.
In the initial rental operations of development projects, a project is
considered substantially complete and available for occupancy upon completion of
tenant improvements, but no later than one year from the cessation of major
construction activity. Substantially completed portions of a project are
accounted for as separate projects. Depreciation is calculated using the
straight-line method and estimated useful lives of 33 to 50 years for buildings
and up to 20 years for certain other improvements. Leasehold improvements are
amortized over the lives of the related leases using the straight-line method.
F-7
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE AND ACCRUED INCOME
Accounts receivable primarily represent amounts currently due from tenants
in accordance with the terms of the respective leases. In addition, accounts
receivable included $1,663,000, $1,913,000 and $2,158,000, at December 31,
1997, 1996 and 1995, respectively, representing minimum rental income accrued on
a straight-line basis to be paid by tenants over the term of the respective
leases. Receivables are reviewed monthly and reserves are established with a
charge to current period operations when, in the opinion of management,
collection of the receivable is doubtful. Accounts receivable in the
accompanying financial statements are shown net of an allowance for doubtful
accounts of $506,000, $427,000 and $169,000, at December 31, 1997, 1996 and
1995, respectively.
Allowance for Doubtful Accounts
---------------------------------
(In thousands)
For the Years
Ended December 31
1997 1996 1995
------ ------ ------
Beginning Balance............... $ 427 $ 169 $ 280
Provision for Credit Losses..... 505 457 404
Charge-offs..................... (426) (199) (515)
----- ----- -----
Ending Balance.................. $ 506 $ 427 $ 169
===== ===== =====
DEFERRED DEBT COSTS
Deferred debt costs consists of fees and costs incurred to obtain long-term
financing and interest rate protection agreements. These fees and costs are
being amortized over the terms of the respective loans or agreements. Deferred
debt costs in the accompanying financial statements are shown net of accumulated
amortization of $171,000, $6,240,000 and $5,000,000, at December 31, 1997, 1996
and 1995, 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 (excluding those increases which approximate
inflationary increases), income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent property operating expenses billed to the tenants, including common
area maintenance, real estate taxes and other recoverable costs. Expense
recoveries are recognized in the period the expenses are incurred. Generally,
additional rental income based on tenant's revenues ("percentage rent") is
accrued on the basis of the prior year's percentage rent, adjusted to give
effect to current sales data.
INCOME TAXES
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ending December 31, 1993. A REIT generally will not be subject to federal
income taxation on that portion of its income that qualifies as REIT taxable
income to the extent that it distributes at least 95 percent of its REIT taxable
income to stockholders and complies with certain other requirements. Therefore,
no provision has been made for federal income taxes in the accompanying
financial statements. As of December 31, 1997 and 1996, the total tax basis of
the Company's assets was $276,754,000 and $276,975,000, and the tax basis of the
liabilities was $298,223,000 and $288,938,000, respectively.
F-8
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS' DEFERRED COMPENSATION PLAN
A Deferred Compensation Plan was established by Saul Centers, effective
January 1, 1994, for the benefit of its directors and their beneficiaries.
Before the beginning of any calendar year, a director may elect to defer all or
part of his or her director's fees to be earned in that year and the following
years. A director has the option to have deferred director's fees paid in cash,
in shares of common stock or in a combination of cash and shares of common
stock. If the director elects to have the deferred fees paid in stock, the
number of shares allocated to the director is determined based on the market
value of the common stock on the day the deferred director's fee was earned.
Deferred compensation of $144,500, $118,950, and $120,950 has been reported in
the Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995, respectively. The Company has registered 70,000 shares for use
under the plan, of which 40,000 were authorized at December 31, 1997. As of
December 31, 1997, 38,607 shares had been credited to the directors' deferred
fee accounts.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 121 required that an impairment loss be recognized when the carrying
amount of an asset exceeds the sum of the estimated future cash flows
(undiscounted) of the asset. The standard was implemented in 1996 and, in the
opinion of management, no such impairment loss reductions are required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. The Company adopted SFAS No. 123 in 1996 utilizing the
method which provides for pro-forma disclosure of the impact of stock-based
compensation.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
establishes new standards for computing, presenting and disclosing earnings per
share. The standard was implemented in 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for the reporting and display of comprehensive
income in the Company's financial statements. Adoption of the new standard is
required for the year 1998. Because SFAS 130 address only disclosure-related
issues, its adoption will not have an impact on the Company's financial
condition or its results of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Adoption of the
new standard is required for the 1998. Because SFAS 131 addresses only
disclosure-related issues, its adoption will not have an impact on the Company's
financial condition or its results of operations.
CONSTRUCTION IN PROGRESS
Construction in progress includes the costs of redeveloping the French
Market shopping center and other predevelopment project costs. Development costs
include direct construction costs and indirect costs such as architectural,
engineering, construction management and carrying costs consisting of interest,
real estate taxes and
F-9
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance. Construction in progress balances as of December 31, 1997 are as
follows:
Construction in Progress
- ------------------------
(In thousands)
French Market.................. $807
Other development costs........ 167
----
Total $974
====
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and short-term investments with
maturities of three months or less.
PER SHARE DATA
Per share data is calculated in accordance with SFAS No. 128, "Earnings Per
Share". The Company has no dilative securities, therefore, basic and diluted
earnings per share are identical. Net income before minority interests is
presented on a fully converted basis, that is, assuming the limited partners
exercise their right to convert their partnership ownership into shares of Saul
Centers and is computed using weighted average shares of 16,690,417, 16,423,984
and 16,284,666, shares for the years ended December 31, 1997, 1996 and 1995,
respectively. Per share data relating to net income after minority interests is
computed on the basis of 12,297,254, 12,030,821 and 11,891,503, weighted average
common shares for the years ended December 31, 1997, 1996 and 1995,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassifications
have no impact on operating results previously reported.
3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization has a 26.2 percent limited partnership interest,
represented by 4,393,163 convertible limited partnership units, in the Operating
Partnership, as of December 31, 1997. These Convertible Limited Partnership
Units are convertible into shares of Saul Centers' common stock on a one-for-one
basis, provided the rights may not be exercised at any time that The Saul
Organization owns, directly or indirectly, in the aggregate more than 24.9
percent of the outstanding equity securities of Saul Centers. The impact of the
Saul Organization's 26.2 percent limited partnership interest in the Operating
Partnership is reflected as minority interests in the accompanying financial
statements.
4. NOTES PAYABLE
DECEMBER 31, 1997
During 1997 the Company repaid a total of $185.5 million of variable rate
mortgage notes which were outstanding at December 31, 1996, with the net
proceeds of a $147.0 million 15-year fixed rate mortgage note and
F-10
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a $38.5 million 16-year fixed rate mortgage note. The $44.0 million secured
revolving credit facility in effect at December 31, 1996 was replaced with a
$60.0 million unsecured revolving credit facility during 1997. Notes payable
totaled $284.5 million at December 31, 1997, as follows:
Notes Payable Principal Interest Scheduled
---------------
(In thousands) Outstanding Rate Maturity
----------------------------- -------------- --------- ---------
Fixed Rate
Mortgage Notes Payable $ 146,705 (a) 7.67% 10/2012
75,105 (b) 8.64% 12/2011
38,064 (c) 7.88% 1/2013
10,798 (d) 7.00% 5/2004
301 8.00% 1/2000
--------------
Subtotal 270,973
Variable Rate
Revolving Credit Facility 13,500 (e) 7.36% 9/2000
--------------
Total Notes Payable $ 284,473
==============
(a) The loan is collateralized by nine shopping centers.
(b) The loan is collateralized by Avenel Business Park, Van Ness Square and
four shopping centers - Ashburn Village, Leesburg Pike, Lumberton Plaza and
Village Center.
(c) The loan is collateralized by 601 Pennsylvania Avenue.
(d) The stated interest rate of 7.00 percent increases by 0.25 percent in June
1998. For the final five years of the term of the loan, beginning in June
1999, the interest rate is fixed at the then current 5-year Treasury
Securities rate plus 2.00 percent. The loan is collateralized by The Glen
shopping center.
(e) The facility is a revolving credit facility totaling $60.0 million.
Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate
plus a spread of 1.375 percent to 1.625 percent (determined by certain debt
service coverage and leverage tests) or upon the bank's reference rate plus
1/2 percent at the Company's option. The line may be extended one year with
payment of a fee of 1/4 percent at the company's option. The interest rate
in effect on December 31, 1997 was based on a 30 Day LIBOR of 5.86 percent
and spread of 1.5 percent.
The mortgages outstanding at December 31, 1997 have a weighted average
remaining term of 13.7 years, and a weighted average interest rate of 7.90
percent. Of the $284.5 million total debt at December 31, 1997, $271.0 million
was fixed rate (95.3 percent of the total notes payable) and $13.5 million was
variable rate (4.7 percent of the total notes payable). The December 31, 1997
depreciated cost of properties collateralizing the mortgage notes payable
totaled $192.7 million.
Notes payable of $270.7 million at December 31, 1997 require monthly
installments of principal and interest, with principal amortization on schedules
averaging approximately 20 years. The $0.3 million note requires monthly
interest and an annual principal payment of $0.1 million. The remaining notes
payable totaling $13.5 million at December 31, 1997, require monthly
installments of interest only. Notes payable at December 31, 1997 totaling
$209.1 million are guaranteed by members of The Saul Organization.
F-11
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, the scheduled maturities of all debt for years
ended December 31, are as follows:
Debt Maturity Schedule
----------------------
(In thousands)
1998............. $ 4,774
1999............. 5,163
2000............. 19,047
2001............. 5,949
2002............. 5,607
Thereafter....... 243,933
--------
$284,473
========
DECEMBER 31, 1996
During 1996, the Company repaid a total of $76.6 million of variable rate
mortgage notes which were outstanding at December 31, 1995, with the net
proceeds of a $77.0 million 15-year fixed rate mortgage note. The revolving
credit facility in the amount of $100.1 million at December 31, 1995 was reduced
to $44.0 million during 1996, as a result of this fixed rate financing.
The mortgages outstanding at December 31, 1996 had a weighted average
remaining term of 7.2 years, and a December 31, 1996 weighted average interest
rate of 7.26 percent. A total of $185.0 million was variable rate (67.7 percent
of the total notes payable) and $88.3 million was fixed rate (32.3 percent of
the total notes payable). Notes payable of $115.0 million at December 31, 1996
required monthly installments of principal and interest, with principal
amortization on schedules averaging approximately 20 years. A $10.9 million note
required monthly installments of interest only through June 1997, with monthly
principal and interest thereafter. The remaining notes payable totaling $147.4
million at December 31, 1996, required monthly installments of interest only.
Notes payable at December 31, 1996 totaling $195.9 million were guaranteed by
members of The Saul Organization.
INTEREST RATE PROTECTION
As of December 31, 1996, the Company held interest rate protection agreements
with a total notional value of $162.8 million to limit the Company's exposure to
increases in interest rates on its variable rate debt. All of the interest rate
protection agreements were sold for cash proceeds of $1.465 million on October
1, 1997. The Company is exposed to interest rate risk on its line of credit
balance outstanding of $13.5 million at December 31, 1997. Income earned by
the operation of the interest rate protection agreements for the years ended
December 31, 1997, 1996 and 1995 was $499,000, $516,000 and $1,637,000,
respectively, and was reported as an offset to interest expense.
F-12
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASE AGREEMENTS
Lease income includes primarily base rent arising from noncancellable
commercial leases. Base rent for the years ended December 31, 1997, 1996, and
1995 amounted to $51,779,000, $49,814,000 and $47,673,000, respectively. Future
base rentals under noncancellable leases for years ended December 31, are as
follows:
Future Base Rental Income
-------------------------
(In thousands)
1998............. $ 51,205
1999............. 44,775
2000............. 39,507
2001............. 34,233
2002............. 28,089
Thereafter....... 200,397
--------
$398,206
========
The majority of the leases also provide for rental increases and expense
recoveries based on increases in the Consumer Price Index or increases in
operating expenses, or both. These increases generally are payable in equal
installments throughout the year based on estimates, with adjustments made in
the succeeding year. Expense recoveries for the years ended December 31, 1997,
1996 and 1995 amounted to $9,479,000, $9,301,000 and $8,770,000, respectively.
In addition, certain retail leases provide for percentage rent based on sales in
excess of the minimum specified in the tenant's lease. Percentage rent amounted
to $2,948,000, $2,924,000, and $2,782,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
6. LONG-TERM LEASE OBLIGATIONS
Certain properties are subject to noncancellable long-term leases which
apply principally to land underlying the Shopping Centers. Certain of the
leases provide for periodic adjustments of the basic annual rent and require the
payment of real estate taxes on the underlying land. The leases will expire
between 2058 and 2068. Reflected in the accompanying financial statements is
minimum ground rent expense of $152,000 for each of the years ended December 31,
1997, 1996, and 1995. The minimum future rental commitments under these ground
leases are as follows:
Ground Lease Rental Commitments
---------------------------------
(In thousands)
Annual Total
1998-2002 Thereafter
--------- ----------
Beacon Center................... $ 47 $3,512
Olney........................... 45 4,691
Southdale....................... 60 3,425
------- ------
$ 152 $11,628
======= =======
The Company's Flagship Center consists of two developed outparcels that are
part of a larger adjacent community shopping center formerly owned by The Saul
Organization and sold to an affiliate of a tenant in 1991. The Company has a 90-
year ground leasehold interest which commenced in September 1991 with a minimum
rent of one dollar per year.
F-13
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
The Consolidated Statement of Operations for the year ended December 31,
1997 includes a charge for minority interests of $6,854,000, consisting of
$2,483,000 related to The Saul Organization's share of the net income for the
year and $4,371,000 related to distributions to minority interests in excess of
allocated net income for the year. The charge for the year ended December 31,
1996 of $6,852,000, consists of $3,430,000 related to The Saul Organization's
share of net income for the year and $3,422,000 related to distributions to
minority interests in excess of allocated net income for the year. The charge
for the year ended December 31, 1995 of $6,852,000 consists of $3,568,000
related to The Saul Organization's share of the net income for the year and
$3,284,000 related to distributions to minority interests in excess of allocated
net income for the year.
8. RELATED-PARTY TRANSACTIONS
Chevy Chase Bank, F.S.B. leases space in twelve of the properties. Total
rental income from Chevy Chase Bank, F.S.B. amounted to $1,181,000, $1,063,000
and $964,000, for the years ended December 31, 1997, 1996, and 1995,
respectively.
The Chairman and Chief Executive Officer, the President and a Vice
President of the Company remain officers of The Saul Organization and devote a
substantial amount of time to the management of the Company. The annual
compensation for these officers is fixed by the Compensation Committee of the
Board of Directors for each year.
The Company shares with The Saul Organization on a prorata basis certain
ancillary functions such as computer and payroll services and insurance expense
based on management's estimate of usage or time incurred, as applicable. Also,
The Saul Organization subleases office space to the Company. The terms of all
such arrangements with The Saul Organization, including payments related
thereto, are periodically reviewed by the Audit Committee of the Board of
Directors. Included in general and administrative expense for the years ended
December 31, 1997, 1996 and 1995, are charges totaling $1,624,000, $1,229,000
and $1,112,000, related to shared services, of which $1,436,000, $1,073,000 and
$975,000, was paid during the years ended December 31, 1997, 1996 and 1995,
respectively.
9. STOCK OPTION PLAN
The Company has established a stock option plan for the purpose of
attracting and retaining executive officers and other key personnel. The plan
provides for grants of options to purchase a specified number of shares of
common stock. A total of 400,000 shares are available under the plan. The plan
authorizes the Compensation Committee of the Board of Directors to grant options
at an exercise price which may not be less than the market value of the common
stock on the date the option is granted.
The Compensation Committee has granted options to purchase a total of
180,000 shares (90,000 shares from incentive stock options and 90,000 shares
from nonqualified stock options) to five Company officers. The options vested
25 percent per year over four years, have an exercise price of $20 per share and
a term of ten years, subject to earlier expiration upon termination of
employment. A total of 170,000 of the options expire September 23, 2003 and
10,000 expire September 24, 2004. As of December 31, 1997, all 180,000 of the
options are fully vested. No compensation expense has been recognized as a
result of these grants.
F-14
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NON-OPERATING ITEM - SALES OF INTEREST RATE PROTECTION AGREEMENTS
The Company sold a portion of its interest rate protection agreements with
a notional value of $87 million in November 1996 and all of the remaining
agreements with a notional value of $162.8 million on October 1, 1997. The
sales resulted in the $4,392,000 and $972,000, write-off of the unamortized
costs in excess of the proceeds received for the years ended December 31, 1997
and 1996, respectively.
11. EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
The consolidated statements of operations for the years ending December 31,
1997, 1996 and 1995 include $3,197,000, $587,000 and $998,000, respectively,
related to the repayment of debt associated with mortgage refinancings. These
amounts consist of the write-off of associated deferred financing costs.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure about fair value for all
financial instruments. The carrying values of cash, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value. Based on interest rates currently available to the Company, the carrying
value of the variable rate credit line payable is a reasonable estimation of
fair value, because the debt bears interest based on short-term interest rates.
Based upon management's estimate of borrowing rates and loan terms currently
available to the Company for fixed rate financing in the amount of the total
notes payable, the fair value is not materially different from its carrying
value.
13. COMMITMENTS AND CONTINGENCIES
Neither the Company nor the Current Portfolio Properties are subject to any
material litigation, nor, to management's knowledge, is any material litigation
currently threatened against the Company, other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items, individually or in aggregate, will not
have a material adverse impact on the Company or the Current Portfolio
Properties.
14. DISTRIBUTIONS
In December 1995, the Company established a Dividend Reinvestment and Stock
Purchase Plan (the "Plan"), to allow its stockholders and holders of limited
partnership interests an opportunity to buy additional shares of Common Stock by
reinvesting all or a portion of their dividends or distributions. The Plan
provides for investing in newly issued shares of Common Stock at a 3 percent
discount from market price without payment of any brokerage commission, service
charges or other expenses. All expenses of the Plan will be paid for by the
Company. The January 31, 1996 dividend was the initial dividend payment date
under which the Company's stockholders and holders of limited partnership
interests could participate in the Plan.
Of the distributions paid during 1997, $0.78 per share represented ordinary
dividend income and $0.78 per share represented return of capital to the
shareholders. The following summarizes distributions paid during the years
ending December 31, 1997 and December 31, 1996, including activity in the Plan:
F-15
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Distributions to Dividend Reinvestment Plan
---------------------------- --------------------------
Common Limit Partner Shares Discounted
Stockholders Unitholders Issued Share Price
------------ -------------- ------ ------------------
(In thousands)
Distributions during 1997
- -----------------------------
January 31 $ 4,729 $1,713 58,728 $16.01
April 30 4,752 1,713 68,913 15.16
July 31 4,779 1,715 63,291 16.98
October 31 4,803 1,713 72,901 17.10
------- ------
$19,063 $6,854
======= ======
Distributions during 1996
- -----------------------------
January 31 $ 4,633 $1,713 56,050 $14.19
April 30 4,654 1,713 58,980 13.94
July 31 4,678 1,713 67,421 12.61
October 31 4,704 1,713 64,154 14.19
------- ------
$18,669 $6,852
======= ======
For the year ending December 31, 1995, the Company paid quarterly
distributions totaling $6,346,000 ($0.39 per share) per quarter consisting of
$4,633,000 and $1,713,000 related to common stockholders and limited partnership
unitholders, respectively. For the year ending December 31, 1995, a total of
$25,384,000 ($1.56 per share) was paid, consisting of $18,532,000 and $6,852,000
related to common stockholders and limited partnership unitholders,
respectively.
In December 1997, 1996 and 1995, the Board of Directors of the Company
authorized a distribution of $0.39 per share payable in January 1998, 1997 and
1996, to holders of record on January 16, 1998, January 17, 1997 and January 17,
1996, respectively. As a result, $4,832,000, $4,729,000 and $4,633,000 was paid
to common shareholders on January 30, 1998, January 31, 1997, and January 31,
1996 and $1,713,000 was paid to limited partnership unitholders on January 30,
1998, January 31, 1997 and January 31, 1996 ($0.39 per Operating Partnership
unit), respectively. These amounts are reflected as a reduction of
stockholders' equity and are included in accounts payable in the accompanying
financial statements.
F-16
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INTERIM RESULTS (UNAUDITED)
The following summary represents the results of operations of the Company
for the interim periods from January 1, 1996 through December 31, 1997.
(In thousands, except Three Months Ended
per share amounts) ----------------------------------------------------------
12/31/1997 09/30/1997 06/30/1997 03/31/1997
---------- ---------- ---------- ----------
Revenues $ 17,386 $ 17,145 $ 16,624 $ 16,562
---------- ---------- ---------- ----------
Net income before extraordinary item
and minority interests (238) 4,381 4,211 4,249
Extraordinary Item:
Early extinguishment of debt (2,828) -- -- (369)
Minority interests (1,713) (1,715) (1,713) (1,713)
---------- ---------- ---------- ----------
Net Income $ (4,779) $ 2,666 $ 2,498 $ 2,167
========== ========== ========== ==========
Per Share Data:
Net income before extraordinary item
and minority interests $ (0.01) $ 0.26 $ 0.25 $ 0.26
Net Income $ (0.39) $ 0.22 $ 0.20 $ 0.18
(In thousands, except Three Months Ended
per share amounts) ----------------------------------------------------------
12/31/1996 09/30/1996 06/30/1996 03/31/1996
---------- ---------- ---------- ----------
Revenues $ 16,439 $ 16,131 $ 15,820 $ 15,633
---------- ---------- ---------- ----------
Net income before extraordinary item
and minority interests 2,553 4,115 3,223 3,399
Extraordinary Item:
Early extinguishment of debt (587) -- -- --
Minority interests (1,713) (1,713) (1,713) (1,713)
---------- ---------- ---------- ----------
Net Income $ 253 $ 2,402 $ 1,510 $ 1,686
========== ========== ========== ==========
Per Share Data:
Net income before extraordinary item
and minority interests $ 0.15 $ 0.25 $ 0.20 $ 0.21
Net Income $ 0.02 $ 0.20 $ 0.13 $ 0.14
F-17
SCHEDULE III
SAUL CENTERS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
------------------------------------------------------------
Subsequent Buildings
Initial to and Leasehold
Basis Acquisition Land Improvements Interests Total
-------------- --------------- -------------- -------------- --------------- --------------
SHOPPING CENTERS
Ashburn Village, Ashburn, VA $ 11,431 $ 359 $ 3,738 $ 8,052 $ -- $ 11,790
Beacon Center, Alexandria, VA 1,493 10,155 -- 10,554 1,094 11,648
Belvedere, Baltimore, MD 932 442 263 1,111 -- 1,374
Boulevard, Fairfax, VA 4,883 22 3,687 1,218 -- 4,905
Clarendon, Arlington, VA 385 351 635 101 -- 736
Clarendon Station, Arlington, VA 834 16 425 425 -- 850
Crosstown, Tulsa, OK 3,454 417 604 3,267 -- 3,871
Flagship Center, Rockville, MD 160 9 169 -- -- 169
French Market, Oklahoma City, OK 5,781 796 1,118 5,459 -- 6,577
Germantown, Germantown, MD 3,576 284 2,034 1,826 -- 3,860
Giant, Baltimore, MD 998 263 422 839 -- 1,261
The Glen, Lake Ridge, VA 12,918 265 5,300 7,883 -- 13,183
Great Eastern, District Heights., MD 3,472 7,980 2,264 9,188 -- 11,452
Hampshire Langley, Langley Park, MD 3,159 1,643 1,856 2,946 -- 4,802
Leesburg Pike, Baileys Crossroads, VA 2,418 4,772 1,132 6,058 -- 7,190
Lexington Mall, Lexington, KY 4,868 5,644 2,111 8,401 -- 10,512
Lumberton Plaza, Lumberton, NJ 4,400 7,337 950 10,787 -- 11,737
North Washington, Alexandria, VA 2,034 (1,169) 544 321 -- 865
Olney, Olney, MD 1,884 872 -- 2,756 -- 2,756
Park Rd., Washington, DC 942 215 1,011 146 -- 1,157
Ravenwood, Baltimore, MD 1,245 653 703 1,195 -- 1,898
Seven Corners, Falls Church, VA 4,848 36,913 4,913 36,848 -- 41,761
Shops at Fairfax, Fairfax, VA 2,708 3,384 992 5,100 -- 6,092
Southdale, Glen Burnie, MD 3,650 14,702 -- 17,730 622 18,352
Southside Plaza, Richmond, VA 6,728 3,015 1,878 7,865 -- 9,743
Sunshine City, Atlanta, GA 2,474 1,792 703 3,563 -- 4,266
Thruway, Winston-Salem, NC 4,778 8,360 5,464 7,569 105 13,138
Village Center, Centreville, VA 16,502 538 7,851 9,189 -- 17,040
West Park, Oklahoma City, OK 1,883 507 485 1,905 -- 2,390
White Oak, Silver Spring, MD 6,277 3,364 4,787 4,854 -- 9,641
-------------- --------------- -------------- -------------- --------------- --------------
Total Shopping Centers 121,115 113,901 56,039 177,156 1,821 235,016
-------------- --------------- -------------- -------------- --------------- --------------
COMMERCIAL PROPERTIES
Avenel Business Park, Gaithersburg, MD 21,459 3,573 3,093 21,939 -- 25,032
601 Pennsylvania Ave., Washington DC 5,479 43,492 5,667 43,304 -- 48,971
Van Ness Square, Washington, DC 812 25,437 831 25,418 -- 26,249
-------------- --------------- -------------- -------------- --------------- --------------
Total Commercial Properties 27,750 72,502 9,591 90,661 -- 100,252
-------------- --------------- -------------- -------------- --------------- --------------
Total $ 148,865 $ 186,403 $ 65,630 $ 267,817 $ 1,821 $ 335,268
============== =============== ============== ============== =============== ==============
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Depreciation Debt Construction Acquired Lives in Years
--------------- -------------- --------------- -------------- ---------------
SHOPPING CENTERS
Ashburn Village, Ashburn, VA $ 723 $ 12,451 1994 3/94 40
Beacon Mall, Alexandria, VA 4,891 2,571 1960 & 1974 1/72 40 & 50
Belvedere, Baltimore, MD 621 2,754 1958 1/72 40
Boulevard, Fairfax, VA 113 554 1969 4/94 40
Clarendon, Arlington, VA 29 115 1949 7/73 33
Clarendon Station, Arlington, VA 20 301 1949 1/96 40
Crosstown, Tulsa, OK 1,816 -- 1974 10/75 40
Flagship Center, Rockville, MD -- 190 -- 1/72 --
French Market, Oklahoma City, OK 2,647 798 1972 3/74 50
Germantown, Germantown, MD 253 418 1990 8/93 40
Giant, Baltimore, MD 528 2,794 1959 1/72 40
The Glen, Lake Ridge, VA 730 10,798 1993 6/94 40
Great Eastern, District Heights., MD 1,811 11,976 1958 & 1960 1/72 40
Hampshire Langley, Langley Park, MD 1,449 10,968 1960 1/72 40
Leesburg Pike, Baileys Crossroads, VA 2,141 12,648 1965 2/66 40
Lexington Mall, Lexington, KY 3,974 2,751 1971 & 1974 3/74 50
Lumberton Plaza, Lumberton, NJ 4,759 8,922 1975 12/75 40
North Washington, Alexandria, VA 130 356 1952 7/73 33
Olney, Olney, MD 1,378 914 1972 11/75 40
Park Rd., Washington, DC 28 355 1950 7/73 30
Ravenwood, Baltimore, MD 513 7,071 1959 1/72 40
Seven Corners, Falls Church, VA 6,819 47,869 1956 7/73 33
Shops at Fairfax, Fairfax, VA 1,738 636 1975 6/75 50
Southdale, Glen Burnie, MD 8,548 2,894 1962 & 1987 1/72 40
Southside Plaza, Richmond, VA 4,458 10,599 1958 1/72 40
Sunshine City, Atlanta, GA 1,882 909 1970 2/76 40
Thruway, Winston-Salem, NC 3,182 27,381 1955 & 1965 5/72 40
Village Center, Centreville, VA 1,102 9,951 1990 8/93 40
West Park, Oklahoma City, OK 805 39 1974 9/75 50
White Oak, Silver Spring, MD 2,291 25,293 1958 & 1967 1/72 40
--------------- --------------
Total Shopping Centers 59,379 215,276
--------------- --------------
COMMERCIAL PROPERTIES
Avenel Business Park, Gaithersburg, MD 8,810 21,324 1984, 1986 12/84, 8/85 35 & 40
& 1990 & 2/86
601 Pennsylvania Ave., Washington DC 15,424 38,065 1986 7/73 35
Van Ness Square, Washington, DC 9,002 9,808 1990 7/73 35
--------------- --------------
Total Commercial Properties 33,236 69,197
--------------- --------------
Total $ 92,615 $ 284,473
=============== ==============
F-18
SCHEDULE III
SAUL CENTERS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
Depreciation and amortization related to the real estate investments reflected
in the statements of operations is calculated over the estimated useful lives of
the assets as follows:
Base building 33 - 50 years
Building components 20 years
Tenant improvements The lesser of the term of the lease or the
useful life of the improvements
The aggregate remaining net basis of the real estate investments for federal
income tax purposes was approximately $263,079,423 at December 31, 1997.
Depreciation and amortization are provided on the declining balance and
straight-line methods over the estimated useful lives of the assets.
The changes in total real estate investments and related accumulated
depreciation for each of the years in the three year period ended December 31,
1997 are summarized as follows.
(In thousands) 1997 1996 1995
- --------------------------------------------------- ----------------- ----------------- ------------------
Total real estate investments:
Balance, beginning of year $ 329,664 $ 321,662 $ 300,404
Improvements 17,785 15,177 21,762
Retirements 12,181 7,175 504
----------------- ----------------- ------------------
Balance, end of year $ 335,268 $ 329,664 $ 321,662
================= ================= ==================
Total accumulated depreciation:
Balance, beginning of year $ 94,965 $ 92,237 $ 83,044
Depreciation expense 9,797 10,860 9,583
Retirements 12,147 8,132 390
----------------- ----------------- ------------------
Balance, end of year $ 92,615 $ 94,965 $ 92,237
================= ================= ==================
- --------------------------------------------------------------------------------------------------------------------
F-19