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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File number 1-12254

 

SAUL CENTERS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland    52-1833074
(State or other jurisdiction of
incorporation or organization)
   (I.R.S. Employer Identification No.)

 

7501 Wisconsin Avenue, Suite 1500, Bethesda, Maryland    20814-6522
(Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code: (301) 986-6200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


  

Name of each exchange on which registered


Common Stock, Par Value $0.01 Per Share

   New York Stock Exchange
Depositary Shares each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock, Par Value, $0.01 Per Share    New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: N/A

 

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 ¨

 

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. ¨

 

The number of shares of Common Stock, $0.01 par value, outstanding as of March 11, 2005 was 16,501,000.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x    No ¨

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price of the registrant’s Common Stock on the New York Stock Exchange on June 30, 2004 was $320,855,000.

 



Table of Contents

 

TABLE OF CONTENTS

 

          Page
Numbers


     PART I     

Item 1.

  

Business

   3

Item 2.

  

Properties

   11

Item 3.

  

Legal Proceedings

   16

Item 4.

  

Submission of Matters to a Vote of Security Holders

   16
     PART II     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   16

Item 6.

  

Selected Financial Data

   18

Item 7.

  

Management’s Discussion and Analysis of Financial Condition And Results of Operations

   20

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   37

Item 8.

  

Financial Statements and Supplementary Data

   37

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   37

Item 9A.

  

Controls and Procedures

   37

Item 9B.

  

Other Information

   40
     PART III     

Item 10.

  

Directors and Executive Officers of the Registrant

   40

Item 11.

  

Executive Compensation

   40

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters

   41

Item 13.

  

Certain Relationships and Related Transactions

   41

Item 14.

  

Principal Accountant Fees and Services

   41
     PART IV     

Item 15.

  

Exhibits and Financial Statement Schedules

   41
     FINANCIAL STATEMENT SCHEDULE     

Schedule III.

  

Real Estate and Accumulated Depreciation

   F-29

 

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PART I

 

Item 1. Business

 

General

 

Saul Centers, Inc. (“Saul Centers”) was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 90% of its REIT taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company”. B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

 

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.

 

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, each of which is controlled by B. Francis Saul II and his family members (collectively, “The Saul Organization”). On August 26, 1993, members of The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships”, and collectively with the Operating Partnership, the “Partnerships”), shopping center and office properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. During 2004 and 2003, the Company developed and purchased several properties. In July 2003, the Company purchased Olde Forte Village, a grocery anchored neighborhood shopping center located in Fort Washington, Maryland. In November 2003, the Company purchased a land parcel located in Frederick, Maryland, upon which it developed a grocery anchored shopping center named Shops at Monocacy, completed during the fourth quarter of 2004. Also during the fourth quarter of 2003, the Company completed development of Broadlands Village, an in-line retail and retail pad, grocery anchored shopping center. The Company completed Broadlands Village II, a 30,000 square foot addition to the center during the fourth quarter of 2004. During 2004, the Company purchased a land parcel which it is currently developing into a 41,000 square foot retail/office property to be known as Kentlands Place, adjacent to its Kentlands Square shopping center. The Company also purchased a land parcel in Dumfries, Virginia, which it plans to develop into a grocery anchored shopping center to be known as Ashland Square. Also during 2004, the Company acquired four grocery anchored shopping centers; (1) Boca Valley Plaza, 121,000 square feet, located in Boca Raton, Florida, (2) Countryside, 142,000 square feet located in Loudoun County, Virginia (3) Cruse MarketPlace, 79,000 square feet, located in Forsyth County, Georgia, and (4) Briggs Chaney Plaza, 197,000 square feet, located in Silver Spring, Maryland. As of December 31, 2004, the Company’s properties (the “Current Portfolio Properties”) consisted of 35 shopping center operating properties (the “Shopping Centers”), five predominantly office operating properties (the “Office Properties”) and five development and/or redevelopment (non-operating) properties.

 

The Company established Saul QRS, Inc., a wholly owned subsidiary of Saul Centers, to facilitate the placement of collateralized mortgage debt. Saul QRS, Inc. was created to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties.

 

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The following diagram depicts the Company’s organizational and equity ownership structure, as of December 31, 2004.

 

LOGO

 

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, renovation, development and accounting duties for each property. The Partnerships provide each property with a fully integrated property management capability, with approximately 60 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. 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 specified in a written agreement and are reviewed annually by the Audit Committee of the Company’s Board of Directors.

 

The Company’s corporate headquarters lease commenced in March 2002 and is a sublease of office space from The Saul Organization at the Company’s share of the cost. A discussion of the lease terms are provided in Note 7, Long Term Lease Obligations, of the Notes to Consolidated Financial Statements.

 

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Principal Offices

 

The principal offices of the Company are located at 7501 Wisconsin Avenue, Suite 1500, Bethesda, Maryland 20814-6522, and the Company’s telephone number is (301) 986-6200. The Company’s internet web address is www.saulcenters.com.

 

Policies with Respect to Certain Activities

 

The following is a discussion of the Company’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been determined by the Board of Directors and, in general, may be amended or revised from time to time by the Board of Directors without a vote of the Company’s stockholders.

 

Operating Strategies

 

The Company’s primary operating strategy is to focus on its community and neighborhood shopping center business and to operate its properties to achieve both cash flow growth and capital appreciation. Community and neighborhood shopping centers typically provide reliable cash flow and steady long-term growth potential. Management intends to actively manage its property portfolio by engaging in strategic leasing activities, tenant selection, lease negotiation and shopping center expansion and reconfiguration. The Company seeks to optimize tenant mix by selecting tenants for its shopping centers that provide a broad spectrum of goods and services, consistent with the role of community and neighborhood shopping centers as the source for day-to-day necessities. Management believes that such a synergistic tenanting approach results in increased cash flow from existing tenants by providing the Shopping Centers with consistent traffic and a desirable mix of shoppers, resulting in increased sales and, therefore, increased cash flows.

 

Management believes there is 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 where possible 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 with the goal of increasing cash flow. In those circumstances in which leases are not otherwise expiring, management selectively attempts to increase cash flow through a variety of means, 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 undeveloped parcels within the centers which are suitable for development as free-standing retail facilities, such as restaurants, banks or auto centers. 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.

 

The Company will also seek growth opportunities in its Washington, DC metropolitan area office portfolio, primarily through development and redevelopment. Management also intends to negotiate lease renewals or to re-lease available space in the Office Properties, while considering the strategic balance of optimizing short-term cash flow and long-term asset value.

 

It is management’s intention to hold properties for long-term investment and to place strong emphasis on regular maintenance, periodic renovation and capital improvement. Management believes that such characteristics as cleanliness, lighting and security are particularly important in community and neighborhood shopping centers, which are frequently visited by shoppers during hours outside of the normal work-day. Management believes that the Shopping Centers and Office Properties generally are attractive and well maintained. The Shopping Centers and

 

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Office Properties will undergo expansion, renovation, reconfiguration and modernization from time to time when management believes that such action is warranted by opportunities or changes in the competitive environment of a property. Several of the Shopping Centers have been renovated recently. During 2004 and 2003, the Company was involved in development and/or redevelopment of twelve of its operating properties. The Company will continue its practice of expanding existing properties by undertaking new construction on outparcels suitable for development as free standing retail or office facilities.

 

Investment in Real Estate or Interests in Real Estate

 

The Company’s redevelopment and renovation objective is to selectively and opportunistically redevelop and renovate its properties, by replacing leases with below market rents with strong, traffic-generating anchor stores such as supermarkets and drug stores, as well as other desirable local, regional and national tenants. The Company’s strategy remains focused on continuing the operating performance and internal growth of its existing Shopping Centers, while enhancing this growth with selective retail redevelopments and renovations.

 

Management believes that attractive acquisition and development 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, as evidenced by; (1) the Company’s 2004 long-term fixed-rate mortgage financing activity and successful $100 million preferred stock offering in November 2003, (2) the Company’s ability to acquire properties or undeveloped land, either for cash or securities (including Operating Partnership interests in tax advantaged transactions), and (3) because of management’s experience in seeking out, identifying and evaluating potential acquisitions. In addition, management believes its shopping center expertise should permit it to optimize the performance of shopping centers once they have been acquired.

 

Management also believes that opportunities exist for investment in new office properties. It is management’s view that several of the office sub-markets in which the Company operates have very attractive supply/demand characteristics. The Company will continue to evaluate new office development and redevelopment as an integral part of its overall business plan.

 

In evaluating a particular redevelopment, renovation, acquisition, or development, management will consider a variety of factors, including (i) the location and accessibility of the property; (ii) the geographic area (with an emphasis on the Washington, DC/Baltimore metropolitan area) and demographic characteristics of the community, as well as the local real estate market, including potential for growth and potential regulatory impediments to development; (iii) the size of the property; (iv) the purchase price; (v) the non-financial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the “fit” of the property with the Company’s existing portfolio; (viii) the potential for, and current extent of, any environmental problems; (ix) the current and historical occupancy rates of the property or any comparable or competing properties in the same market; (x) the quality of construction and design and the current physical condition of the property; (xi) the financial and other characteristics of existing tenants and the terms of existing leases; and (xii) the potential for capital appreciation.

 

Although it is management’s present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers and office properties in the Washington, DC/Baltimore metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area.

 

The Company intends to engage in such future investment or development activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make the Company an investment company under the Investment Company Act of 1940, as amended. Equity investments in

 

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acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments.

 

Investments in Real Estate Mortgages

 

While the Company’s current portfolio of, and its business objectives emphasize, equity investments in commercial and neighborhood shopping centers and office properties, the Company may, at the discretion of the Board of Directors, invest in mortgages, participating or convertible mortgages, deeds of trust and other types of real estate interests consistent with its qualification as a REIT. However, the Company does not presently intend to invest in real estate mortgages.

 

Investments in Securities of or Interests in Persons Engaged in Real Estate Activities and Other Issues

 

Subject to the tests necessary for REIT qualification, the Company may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

 

Dispositions

 

The Company does not currently intend to dispose of any of its properties, although the Company reserves the right to do so if, based upon management’s periodic review of the Company’s portfolio, the Board of Directors determines that such action would be in the best interest of the Company’s stockholders. Any decision to dispose of a property will be made by the Board of Directors.

 

Capital Policies

 

As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggregate cash flow. Given the Company’s current debt level, it is management’s belief that the ratio of the Company’s debt to total asset value is below 50% as of December 31, 2004.

 

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 property 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 without shareholder approval and consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. 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.

 

The Company intends to finance future acquisitions and developments 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, proceeds from the Company’s Dividend Reinvestment and Stock Purchase Plan, proceeds from the sale of properties and private and public offerings of debt or equity securities. Borrowings may be at the 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.

 

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Other Policies

 

The Company has authority to offer equity or debt securities in exchange for property and to repurchase or otherwise acquire its common stock or other securities in the open market or otherwise, and may engage in such activities in the future. The Company expects, but is not obligated, to issue common stock to holders of units of the Partnership upon exercise of their redemption rights. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issues other than the Partnership and does not intend to do so. The Company has not made any loans to third parties, although the Company may in the future make loans to third parties.

 

Competition

 

As an owner of, or investor in, community and neighborhood shopping centers and office properties, the Company is subject to competition from an indeterminate number of companies in connection with the acquisition, development, ownership and leasing of similar properties. These investors include investors with access to significant capital, such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds.

 

With respect to acquisitions and developments, this competition may reduce properties available for acquisition or development or increase prices for raw land or developed properties of the type in which the Company invests. The Company faces competition in providing leases to prospective tenants and in re-letting space to current tenants upon expiration of their respective leases. If the Company’s tenants decide not to renew or extend their leases upon expiration, the Company may not be able to re-let the space. Even if the tenants do renew or the Company can re-let the space, the terms of renewal or re-letting, including the cost of required renovations, may be less favorable than current lease terms or than expectations for the space. This risk may be magnified if the properties owned by our competitors have lower occupancy rates than the Company’s properties. As a result, these competitors may be willing to make space available at lower prices than the space in the Current Portfolio Properties.

 

Management believes that success in the competition for ownership and leasing property 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 the Company’s 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 Current Portfolio Properties are also competitive factors.

 

Finally, retailers at our Shopping Centers face increasing competition from outlet stores, discount shopping clubs and other forms of marketing of goods, such as direct mail, internet marketing and telemarketing. This competition may reduce percentage rents payable to us and may contribute to lease defaults or insolvency of tenants.

 

Environmental Matters

 

The Current Portfolio Properties are subject to various laws and regulations relating to environmental and pollution controls. The impact 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.

 

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Employees

 

As of March 11, 2005, the Company employed approximately 60 persons, including six leasing officers. None of the Company’s employees are covered by collective bargaining agreements. Management believes that its relationship with employees is good.

 

Recent Developments

 

A significant contributor to the Company’s recent growth in its shopping center portfolio has been its program of development, redevelopment and land and operating property acquisition activities. Redevelopment activities reposition the Company’s centers to be competitive in the current retailing environment. These redevelopments typically include an update of the facade, site improvements and reconfiguring tenant spaces to accommodate tenant size requirements and merchandising evolution. During 2004, the Company acquired two development parcels. In addition to these 2004 land acquisitions, the Company previously acquired three land parcels which are currently under development. All five of the parcels are located in the Washington, DC metropolitan area. Also during 2004 and the first quarter of 2005, the Company acquired five operating grocery-anchored neighborhood shopping center properties.

 

2004 Land Acquisitions, Developments and Redevelopments

 

Olde Forte Village

 

In July 2003, the Company acquired Olde Forte Village, a 161,000 square foot neighborhood shopping center located in Fort Washington, Maryland. The center is anchored by a newly constructed 58,000 Safeway supermarket which opened in March 2003, relocating from a smaller store within the center. The center then contained approximately 50,000 square feet of vacant space, consisting primarily of the former Safeway space, which the Company redeveloped in 2004. This former anchor space and some adjoining space was reconfigured into new small shop space totaling approximately 33,000 square feet. The redeveloped center totals 142,000 square feet. The Company has substantially completed site improvements and small shop construction and renovation. Total redevelopment costs, including the initial property acquisition cost, were approximately $22 million. Olde Forte Village was 70% leased at December 31, 2004. A total of 25,000 square feet of the recently completed shop space remains available.

 

Broadlands Village

 

The Company purchased 24 acres of undeveloped land in the Broadlands section of the Dulles Technology Corridor of Loudoun County, Virginia in April 2002. Broadlands is a 1,500 acre planned community consisting of 3,500 residences, approximately half of which are constructed and currently occupied. In October 2003, the Company completed construction of the first phase of the Broadlands Village shopping center. The 58,000 square foot Safeway supermarket opened in October 2003 with a pad building and many in-line small shops also opening in the fourth quarter of 2003. The 105,000 square foot first phase is 100% leased. Construction of a 30,000 square foot second phase was substantially completed in November 2004. Total development costs of both phases, including the land acquisition, are expected to total approximately $22 million. The second phase was 96% leased at December 31, 2004. This second phase added a spacious landscaped courtyard and fountain to the center, and includes Original Steakhouse and Bonefish Grill, both quality restaurants, that recently opened.

 

Thruway

 

During the fourth quarter of 2003, the Company commenced a 15,725 square foot expansion of the Thruway shopping center located in Winston Salem, North Carolina. The new development includes replacing a former 6,100 square foot single-tenant pad building with a new multi-tenant building. Leases have been executed for 100% of the new space, including Ann Taylor Loft, JoS. A Banks Clothiers, Chico’s and Liz Claiborne. This $2.1 million expansion was completed in April 2004 with tenant openings beginning in March 2004.

 

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Shops at Monocacy

 

In November 2003, the Company acquired 13 acres of undeveloped land in Frederick, Maryland at the southeast corner of Maryland Route 26 and Monocacy Boulevard. Construction commenced in early December 2003 of a 107,000 square foot shopping center anchored by a 57,000 square foot Giant grocery store. Total development costs, including the land acquisition, are expected to be approximately $22.3 million upon completion of the final leasing. The center was substantially completed and Giant opened for business during October 2004. The property was 84% leased at December 31, 2004.

 

Kentlands Place

 

In January 2004, the Company purchased 3.4 acres of undeveloped land adjacent to its 109,000 square foot Kentlands Square shopping center in Gaithersburg, Maryland. The Company commenced construction of a 41,300 square foot retail/office property, comprised of 24,400 square feet of in-line retail space and 16,900 square feet of professional office suites, in April 2004. Development costs, including the land acquisition, are projected to total $7.8 million. The building was substantially completed in January 2005. The property was 39% leased at December 31, 2004 and 58% leased as of March 11, 2005. Additional tenant prospects have been identified and lease negotiations are proceeding for nearly all of the remaining space.

 

Ashland Square

 

On December 15, 2004, the Company acquired a 19.3 acre parcel of land in Dumfries, Prince William County, Virginia for a purchase price of $6.3 million. The Company has preliminary plans to develop the parcel into a grocery-anchored neighborhood shopping center. The Company is preparing a site plan for submission to Prince William County during the second quarter of 2005 and is marketing the project to grocers and other retail businesses.

 

2004 Operating Property Acquisitions

 

Boca Valley Plaza

 

The Company added Publix as one of its grocery tenants with the February 2004 acquisition of Boca Valley Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 square foot neighborhood shopping center on U.S. Highway 1 in South Florida. The center, constructed in 1988 was 91% leased at December 31, 2004 and is anchored by a 42,000 square foot Publix supermarket. The property was acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million mortgage.

 

Countryside

 

In mid-February 2004, the Company completed the acquisition of the 142,000 square foot Safeway anchored Countryside shopping center, its fourth neighborhood shopping center investment in Loudoun County, Virginia. The center was 95% leased at December 31, 2004 and was acquired for a purchase price of $29.7 million.

 

Cruse MarketPlace

 

On March 25, 2004, the Company completed the acquisition of the 79,000 square foot Publix anchored, Cruse MarketPlace located in Forsyth County, Georgia. Cruse MarketPlace was constructed in 2002 and was 97% leased at December 31, 2004. The center was purchased for $12.6 million, subject to the assumption of an $8.8 million mortgage.

 

Briggs Chaney Plaza

 

In April 2004, the Company acquired Briggs Chaney Plaza in Silver Spring, Maryland. Briggs Chaney Plaza is a 197,000 square foot neighborhood shopping center on Route 29 in Montgomery County, Maryland. The center, constructed in 1983, was 94% leased at December 31, 2004 and is anchored by a 45,000 square foot Safeway supermarket and a 28,000 square foot Ross Dress For Less. The property was acquired for $27.3 million. The Company has substantially completed interior construction on a portion of the vacant space totaling approximately 11,000 square feet of leasable area. The space was reconfigured into six small shops, with five currently leased.

 

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The Company is also finalizing plans for a substantial façade renovation of the shopping center, projected to be substantially completed in mid 2005.

 

2005 Property Acquisitions, Developments and Redevelopments

 

Palm Springs Center

 

On March 3, 2005, the Company acquired the 126,000 square foot Albertsons anchored, Palm Springs Center located in Altamonte Springs, Florida, near Orlando for a purchase price of $17.5 million. The property was approximately 98% leased at the date of acquisition.

 

The Glen

 

In February 2005, the Company commenced construction of a 22,000 square foot expansion building at The Glen shopping center in Prince William County, Virginia. The existing 120,000 square foot Safeway anchored center is 100% leased and this expansion will provide additional restaurants and small shop service space. Approximately 40% of the new space was pre-leased prior to the commencement of construction. Delivery of this building is projected in the fall of 2005, and development costs are estimated to total $4.5 million.

 

Item 2. Properties

 

Overview

 

The Company is the owner and operator of a real estate portfolio composed of 40 properties as of December 31, 2004, totaling approximately 7,200,000 square feet of gross leasable area (“GLA”) and located primarily in the Washington, DC/Baltimore metropolitan area. The portfolio is composed of 35 neighborhood and community Shopping Centers, and five predominantly Office Properties totaling approximately 6,000,000 and 1,200,000 square feet of GLA, respectively. A majority of the Shopping Centers are anchored by several major tenants. Twenty-four of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of December 31, 2004, no single property accounted for more than 7.8% of the total gross leasable area. Only two retail tenants, Giant Food (4.8%), a tenant at nine Shopping Centers and Safeway (2.9%), a tenant at six Shopping Centers and one office tenant, the United States Government (3.5%), a tenant at five properties, individually accounted for more than 2.5% of the Company’s total revenues for the year ended December 31, 2004.

 

The Company’s Current Portfolio Properties primarily consists of seasoned properties that have been owned and managed by The Saul Organization for 20 years or more. The Company expects to hold its properties as long-term investments, and it has no maximum period for retention of any investment. It plans to selectively acquire additional income-producing properties and to expand, renovate, and improve its properties when circumstances warrant. See “Item 1. Business—Operating Strategies” and “Business—Capital Policies.”

 

The Shopping Centers

 

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. The 2004 average estimated population within a one and three-mile radius of the Shopping Centers is approximately 19,000 and 109,000, respectively. The 2004 average household income within the one and three-mile radius of the Shopping Centers is

 

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approximately $87,000 and $92,000, respectively, compared to a national average of $57,000. Because the Shopping Centers generally are located in highly developed areas, management believes that there is little likelihood that significant numbers of competing centers will be developed in the future.

 

The Shopping Centers range in size from 5,000 to 561,000 square feet of GLA, with seven in excess of 300,000 square feet, and an average of approximately 171,000 square feet. A majority of the Shopping Centers are anchored by several major tenants and other tenants offering primarily day-to-day necessities and services. Twenty-four of the 35 Shopping Centers are anchored by a grocery store.

 

The Office Properties

 

Four of the five Office Properties are located in the Washington, DC metropolitan area and contain an aggregate GLA of approximately 1,007,000 square feet, comprised of 920,000 and 87,000 square feet of office and retail space, respectively. The fifth office property is located in Tulsa, Oklahoma and contains GLA of 197,000 square feet. 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 Washington, DC area office properties compete for tenants in different commercial and geographic sub-markets of the metropolitan Washington, DC market and do not compete with one another.

 

Management believes that the Washington, DC 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. Management believes that the long-term stability of this market is attributable to the status of Washington, DC as the nation’s capital and to the presence of the Federal government, international agencies, and an expanding private sector job market. 601 Pennsylvania Avenue is a nine-story, 226,000 square foot Class A office building (with a small amount of street level retail space) built in 1986 and located in a prime location in downtown Washington, DC. Van Ness Square is a six-story, 156,000 square foot office/retail building which was redeveloped in 1990. Van Ness Square is located in a highly developed commercial area of Northwest Washington, DC which offers extensive retail and restaurant amenities. Washington Square at Old Town is a 235,000 square foot Class A mixed-use office/retail complex completed in 2000 and located on a two-acre site along Alexandria’s main street, North Washington Street, in historic Old Town Alexandria, Virginia. Avenel Business Park is a research park located in the suburban Maryland, I-270 biotech corridor. The business park consists of twelve one-story buildings built in six phases, completed in 1981, 1985, 1989, 1998, 1999 and 2000.

 

Crosstown Business Center is a 197,135 square foot flex office/warehouse property located in Tulsa, Oklahoma. The property is located in close proximity to Tulsa’s international airport and major roadways and has attracted tenants requiring light industrial and distribution facilities.

 

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The following table sets forth, at the dates indicated, certain information regarding the Current Portfolio Properties:

 

Saul Centers, Inc.

Schedule of Current Portfolio Properties

December 31, 2004

 

Property


   Location

   Leasable
Area
(Square
Feet)


   Year Developed or
Acquired
(Renovated)


  Land
Area
(Acres)


   Percentage
Leased


   

Anchor / Significant Tenants


              Dec-04

    Dec-03

   

Shopping Centers

                                   

Ashburn Village

   Ashburn, VA    211,327    1994 / 00 / 01/02   26.4    100 %   99 %   Giant Food, Ruby Tuesday, Blockbuster, Long & Foster

Beacon Center

   Alexandria,
VA
   352,915    1972 (1993/99)   32.3    97 %   100 %   Lowe’s, Giant Food, Office Depot, Outback Steakhouse, Marshalls, Hancock Fabrics, Party Depot, Panera Bread

Belvedere

   Baltimore,
MD
   54,941    1972   4.8    100 %   95 %   Food City, Family Dollar

Boca Valley Plaza

   Boca Raton,
FL
   121,269    2004   12.7    91 %   n / a     Publix, Blockbuster

Boulevard

   Fairfax, VA    56,350    1994 (1999)   5.0    100 %   100 %   Danker Furniture, Petco, Panera Bread, Party City

Briggs Chaney Plaza

   Silver
Spring, MD
   197,486    2004   18.2    94 %   n / a     Safeway, Ross Dress For Less, Chuck E Cheese, Family Dollar

Broadlands Village

   Loudoun
County, VA
   107,286    2003   16.0    100 %   100 %   Safeway

Broadlands Village II

   Loudoun
County, VA
   30,193    2004   2.5    93 %   n / a     Original Steakhouse, Bonefish Grill

Clarendon/Clarendon Station

   Arlington,
VA
   11,808    1973/1996   0.6    70 %   100 %    

Countryside

   Loudoun
County, VA
   141,696    2004   16.0    95 %   n / a     Safeway, CVS Pharmacy

Cruse MarketPlace

   Forsyth
County, GA
   78,686    2004   10.6    97 %   n / a     Publix

Flagship Center

   Rockville,
MD
   21,500    1972, 1989   0.5    100 %   100 %    

French Market

   Oklahoma
City, OK
   244,724    1974 (1984/98)   13.8    96 %   95 %   Burlington Coat Factory, Bed Bath & Beyond, Famous Footwear, Lakeshore Learning Center, BridesMart, Staples, Dollar Tree

Germantown

   Germantown,
MD
   27,241    1992   2.7    100 %   90 %    

Giant

   Baltimore,
MD
   70,040    1972 (1990)   5.0    100 %   100 %   Giant Food

The Glen

   Lake Ridge,
VA
   112,229    1994   14.7    98 %   93 %   Safeway Marketplace

Great Eastern

   District
Heights, MD
   254,448    1972 (1995)   23.9    99 %   99 %   Giant Food, Run N’ Shoot, Pep Boys, Big Lots

Hampshire Langley

   Takoma
Park, MD
   131,700    1972 (1979)   9.9    100 %   100 %   Safeway, Blockbuster

 

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Saul Centers, Inc.

Schedule of Current Portfolio Properties

December 31, 2004

 

Property


   Location

   Leasable
Area
(Square
Feet)


   Year
Developed
or Acquired
(Renovated)


  Land
Area
(Acres)


   Percentage
Leased


   

Anchor / Significant Tenants


              Dec-04

    Dec-03

   

Shopping Centers (continued)

                                   

Kentlands Square

   Gaithersburg,
MD
   114,381    2002   11.5    100 %   100 %   Lowe’s, Chipotle

Leesburg Pike

   Baileys
Crossroads, VA
   97,752    1966 (1982/95)   9.4    100 %   100 %   Party Depot, CVS Pharmacy, Kinko’s, Hollywood Video

Lexington Mall

   Lexington, KY    314,535    1974   30.0    58 %   58 %   Dillard’s

Lumberton Plaza

   Lumberton, NJ    193,044    1975 (1992/96)   23.3    98 %   97 %   SuperFresh, Rite Aid, Blockbuster, Ace Hardware

Shops at Monocacy

   Frederick, MD    107,000    2004   13.0    84 %   n /a     Giant Food, Panera Bread

Olde Forte Village

   Ft. Washington,
MD
   143,062    2003   16.0    70 %   67 %   Safeway, Blockbuster

Olney

   Olney, MD    53,765    1975(1990)   3.7    100 %   100 %   Rite Aid

Ravenwood

   Baltimore, MD    85,958    1972   8.0    98 %   98 %   Giant Food, Hollywood Video

Seven Corners

   Falls Church,
VA
   560,998    1973 (1994-7)   31.6    99 %   99 %   Home Depot, Shoppers Club, Michaels, Barnes & Noble, Ross Dress For Less, G Street Fabrics, Off-Broadway Shoes, The Room Store

Shops at Fairfax

   Fairfax, VA    68,743    1975 (1993/99)   6.7    100 %   100 %   Super H Mart, Blockbuster

Southdale

   Glen Burnie,
MD
   484,115    1972 (1986)   39.6    99 %   97 %   Giant Food, Home Depot, Circuit City, Michaels, Marshalls, PetSmart, Value City Furniture

Southside Plaza

   Richmond, VA    347,651    1972   32.8    86 %   95 %   CVS Pharmacy, Maxway, Citi Trends

South Dekalb Plaza

   Atlanta, GA    163,418    1976   14.6    97 %   100 %   MacFrugals, Pep Boys, The Emory Clinic, Maxway

Thruway

   Winston-
Salem, NC
   352,355    1972 (1997)   30.5    93 %   90 %   Harris Teeter, Fresh Market, Borders, Bed Bath & Beyond, Stein Mart, Eckerd, Blockbuster, JoS. A Banks, Bonefish Grill, Chico’s, Ann Taylor

Village Center

   Centreville, VA    143,109    1990   17.2    99 %   100 %   Giant Food, Tuesday Morning, Blockbuster

West Park

   Oklahoma City,
OK
   76,610    1975   11.2    54 %   72 %   Drapers Market, Family Dollar

White Oak

   Silver Spring,
MD
   480,156    1972 (1993)   28.5    99 %   100 %   Giant Food, Sears, Rite Aid, Blockbuster
         
      
  

 

   

Total Shopping Centers

        6,012,491        543.2    93.5 %   94.1 %    
         
      
  

 

   

 

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Table of Contents

 

Saul Centers, Inc.

Schedule of Current Portfolio Properties

December 31, 2004

 

Property


   Location

   Leasable
Area
(Square
Feet)


   Year
Developed
or Acquired
(Renovated)


  Land
Area
(Acres)


   Percentage
Leased


   

Anchor / Significant Tenants


              Dec-04

    Dec-03

   

Office Properties

                                   

Avenel Business Park

   Gaithersburg,
MD
   390,479    1981-2000   37.1    97 %   100 %   General Services Administration, VIRxSYS, Broadsoft, Arrow Financial, Quanta Systems, SeraCare Life Sciences, Panacos Pharmaceutical

Crosstown Business Center

   Tulsa, OK    197,135    1975 (2000)   22.4    93 %   93 %   Compass Group, Roxtec, Outdoor Innovations, Auto Panels Plus, Gofit, Freedom Express

601 Pennsylvania Ave

   Washington,
DC
   226,604    1973 (1986)   1.0    100 %   100 %   National Gallery of Art, American Assn. of Health Plans, Credit Union National Assn., Southern Company, HQ Global, Pharmaceutical Care Mgmt Assn, Freedom Forum, Capital Grille

Van Ness Square

   Washington,
DC
   156,493    1973 (1990)   1.2    91 %   87 %   Team Video Intl, Office Depot, Pier 1

Washington Square

   Alexandria,
VA
   234,775    1975 (2000)   2.0    95 %   93 %   Vanderweil Engineering, World Wide Retail Exch., EarthTech, Thales, Bank of America, Trader Joe’s, Kinko’s, Talbot’s, Blockbuster
         
      
  

 

   

Total Office Properties

        1,205,486        63.7    95.9 %   95.8 %    
         
      
  

 

   

Total Portfolio

        7,217,977        606.9    93.9 %   94.4 %    
         
      
  

 

   

Development Parcels

                                   

Broadlands III

   Loudoun
County, VA
        2002   5.5    Preparing architectural and engineering plans
for County approvals for retail expansion.

Kentlands Place

   Gaithersburg,
MD
        2004   3.4    41,300 square foot retail / office property, 39%
pre-leased. Operational 1st quarter 2005.

Clarendon Center

   Arlington,
VA
        2002   1.3    Pursuing zoning approvals from County.

Lansdowne

   Loudoun
County, VA
        2002   17.0    Preparing architectural and engineering plans
for County approvals for shopping center
development.

Ashland Square

   Dumfries,
VA
        2004   19.3    Preparing architectural and engineering plans
for County approvals for shopping center
development.
                  
                

Total Development Properties

                 46.5                 

 

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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, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Shares of Saul Centers common stock are listed on the New York Stock Exchange under the symbol “BFS”. The composite high and low closing sale prices for the shares of common stock as reported by the New York Stock Exchange for each quarter of 2004 and 2003 were as follows:

 

     Share Price

Period


   High

   Low

October 1, 2004 – December 31, 2004

   $ 39.25    $ 31.84

July 1, 2004 – September 30, 2004

   $ 33.25    $ 28.83

April 1, 2004 – June 30, 2004

   $ 32.41    $ 24.70

January 1, 2004 – March 31, 2004

   $ 30.55    $ 27.30

October 1, 2003 – December 31, 2003

   $ 29.04    $ 26.62

July 1, 2003 – September 30, 2003

   $ 27.95    $ 25.75

April 1, 2003 – June 30, 2003

   $ 26.55    $ 23.59

January 1, 2003 – March 31, 2003

   $ 24.10    $ 21.97

 

On March 11, 2005, the closing price was $32.82.

 

Holders

 

The approximate number of holders of record of the common stock was 390 as of March 11, 2005.

 

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Table of Contents

Dividends and Distributions

 

Under the Code, REIT’s are subject to numerous organizational and operating requirements, including the requirement to distribute at least 90% of REIT taxable income. The Company distributed amounts greater than the required amount in 2004 and 2003. Distributions by the Company to common stockholders and holders of limited partnership units in the Operating Partnership were $33,166,000 in 2004 and $32,257,000 in 2003. Distributions to preferred stockholders were $7,244,000 in 2004. No payments to preferred stockholders were made in 2003. See Notes to Financial Statements, No. 14, “Distributions.” The Company may or may not elect to distribute in excess of 90% of REIT taxable income in future years.

 

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, the adequacy of reserves and preferred dividends. 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. We are obligated to pay regular quarterly distributions to holders of depositary shares of Series A preferred stock at the rate of $2.00 per annum per depositary share, prior to distributions on the common stock.

 

The Company paid four quarterly distributions in the amount of $0.39 per common share, during each of the years ended December 31, 2004, 2003 and 2002, totaling $1.56 per common share for each of these years. The annual distribution amounts paid by the Company exceed the distribution amounts required for tax purposes. Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a stockholder as ordinary dividend income. Distributions in excess of current and accumulated earnings and profits will be treated as a nontaxable reduction of the stockholder’s basis in such stockholder’s shares, to the extent thereof, and thereafter as taxable gain. Distributions that are treated as a reduction of the stockholder’s basis in its shares will have the effect of deferring taxation until the sale of the stockholder’s shares. The Company has determined that 80.0% of the total $1.56 per common share paid in calendar year 2004 represents currently taxable dividend income to the stockholders, while the balance of 20.0% is considered return of capital. For the years 2003 and 2002, of the $1.56 per common share dividend paid in each year, 82.3% and 93.5%, was taxable dividend income and 17.7% and 6.5%, was considered return of capital, respectively. No assurance can be given regarding what portion, if any, of distributions in 2005 or subsequent years will constitute a return of capital for federal income tax purposes. All of the preferred stock dividends paid are considered ordinary dividend income.

 

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Issuer Repurchases of Equity Securities

 

Period


   (a) Total Number of
Shares Purchased


    (b) Average Price
Paid per Share


   (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)


   (d) Maximum
Number (or
Approximate Dollar
Value) of Shares that
May Yet Be
Purchased under
Plans or Programs (1)


October 1, 2004 – October 31, 2004

   —   (2)     —      —      —  

November 1, 2004 – November 30, 2004

   83,195 (3)   $ 34.44    —      —  

December 1, 2004 – December 31, 2004

   10,980 (3)   $ 37.45    —      —  

Total

   94,175     $ 34.79    —      —  

(1) The Company has no publicly announced plans or programs.

 

(2) Excludes 87,687 shares, acquired at a price of $31.53 per share, by B. Francis Saul II, the Company’s Chairman of the Board and Chief Executive Officer, and B.F. Saul Real Estate Investment Trust, B.F. Saul Company and Van Ness Square Corporation, for each of which Mr. Saul is either President or Chairman; B.F. Saul Property Company and Dearborn, L.L.C., which are wholly-owned subsidiaries of B.F. Saul Company and B.F. Saul Real Estate Investment Trust, respectively; and the B.F. Saul Company Employees’ Profit Sharing Retirement Trust, of which Mr. Saul is a trustee, through participation in the Company’s Dividend Reinvestment and Stock Purchase Plan.

 

(3) Represents shares purchased by B.F. Saul Real Estate Investment Trust in open market transactions.

 

Item 6. Selected Financial Data

 

The selected financial data of the Company contained herein has been derived from the consolidated financial statements of the Company. The data should be read in conjunction with “Item 7. 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.

 

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Table of Contents

Saul Centers, Inc.

 

SELECTED FINANCIAL DATA

(In thousands, except per share data)

 

     Years Ended December 31,

 
     2004

    2003

    2002

    2001

    2000

 

Operating Data:

                                        

Total revenue

   $ 112,842     $ 97,884     $ 93,963     $ 86,308     $ 79,029  

Operating expenses

     79,135       70,738       67,753       60,925       56,915  
    


 


 


 


 


Operating income

     33,707       27,146       26,210       25,383       22,114  

Non-operating income (loss) Gain on sale of property

     572       182       1,426       0       0  
    


 


 


 


 


Income before minority interests

     34,279       27,328       27,636       25,383       22,114  

Minority interests

     (8,105 )     (8,086 )     (8,070 )     (8,069 )     (8,069 )
    


 


 


 


 


Net income

     26,174       19,242       19,566       17,314       14,045  

Preferred dividends

     (8,000 )     (1,244 )     0       0       0  
    


 


 


 


 


Net income available to common stockholders

   $ 18,174     $ 17,998     $ 19,566     $ 17,314     $ 14,045  
    


 


 


 


 


Per Share Data (diluted):

                                        

Net income available to common stockholders

   $ 1.12     $ 1.15     $ 1.31     $ 1.22     $ 1.03  
    


 


 


 


 


Basic and Diluted Shares Outstanding

                                        

Weighted average common shares - basic

     16,154       15,591       14,865       14,210       13,623  

Effect of dilutive options

     57       17       22       0       0  
    


 


 


 


 


Weighted average common shares - diluted

     16,211       15,608       14,887       14,210       13,623  

Weighted average convertible limited partnership units

     5,194       5,182       5,172       5,172       5,172  
    


 


 


 


 


Weighted average common shares and fully converted limited partnership units - diluted

     21,405       20,790       20,059       19,382       18,795  
    


 


 


 


 


Dividends Paid:

                                        

Cash dividends to common stockholders (1)

   $ 25,061     $ 24,171     $ 23,030     $ 21,998     $ 21,117  
    


 


 


 


 


Cash dividends per share

   $ 1.56     $ 1.56     $ 1.56     $ 1.56     $ 1.56  
    


 


 


 


 


Balance Sheet Data:

                                        

Real Estate Investments (net of accumulated depreciation)

   $ 501,388     $ 387,292     $ 353,628     $ 317,881     $ 308,829  

Total assets

     583,396       471,616       388,687       346,403       334,450  

Total debt, including accrued interest

     455,925       359,051       382,619       353,554       344,686  

Preferred stock

     100,000       100,000       0       0       0  

Total stockholders’ equity (deficit)

     100,964       92,643       (13,267 )     (24,123 )     (31,155 )

Other Data

                                        

Cash flow provided by ( used in ):

                                        

Operating activities

   $ 50,711     $ 37,363     $ 36,369     $ 31,834     $ 32,781  

Investing activities

   $ (114,063 )   $ (49,121 )   $ (40,169 )   $ (21,800 )   $ (43,426 )

Financing activities

   $ 51,669     $ 55,693     $ 3,304     $ (10,001 )   $ 11,460  

Funds from operations (2)

                                        

Net income

   $ 26,174     $ 19,242     $ 19,566     $ 17,314     $ 14,045  

Minority Interests

     8,105       8,086       8,070       8,069       8,069  

Depreciation and amortization of real property

     21,324       17,838       17,821       14,758       13,534  

Gain on sale of property

     (572 )     (182 )     (1,426 )     0       0  
    


 


 


 


 


Funds from operations

     55,031       44,984       44,031       40,141       35,648  

Preferred dividends

     (8,000 )     (1,244 )     0       0       0  
    


 


 


 


 


Funds from operations available to common shareholders

   $ 47,031     $ 43,740     $ 44,031     $ 40,141     $ 35,648  
    


 


 


 


 



(1) For the years 2004, 2003, 2002, 2001 and 2000, shareholders reinvested $13,774, $13,349, $12,882, $11,976 and $7,984, in newly issued common stock by operation of the Company’s dividend reinvestment plan, respectively.

 

(2) Funds From Operations (FFO) is a non-GAAP financial measure. For a definition of FFO, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds From Operations.”

 

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Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) begins with the Company’s primary business strategy to give the reader an overview of the goals of the Company’s business. This is followed by a discussion of the critical accounting policies that the Company believes are important to understanding the assumptions and judgments incorporated in the Company’s reported financial results. The next section, beginning on page 24, discusses the Company’s results of operations for the past two years. Beginning on page 27, the Company provides an analysis of its liquidity and capital resources, including discussions of its cash flows, debt arrangements, sources of capital and financial commitments. Finally, on page 35, the Company discusses funds from operations, or FFO, which is a relative non-GAAP financial measure of performance of an equity REIT used by the REIT industry.

 

The MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and notes thereto appearing in Item 8 of this report and the subsection captioned “Forward-Looking Statements” below. Historical results set forth in Selected Financial Information, the Financial Statements and Supplemental Data included in Item 6 and Item 8 and this section should not be taken as indicative of the Company’s future operations.

 

Overview

 

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.

 

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. Management believes there is 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 where possible 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 with the goal of increasing cash flow. In those circumstances in which leases are not otherwise expiring, management selectively attempts to increase cash flow through a variety of means, 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 Company’s redevelopment and renovation objective is to selectively and opportunistically redevelop and renovate its properties, by replacing leases with below market rents with strong, traffic-generating anchor stores such as supermarkets and drug stores, as well as other desirable local, regional and national tenants. The Company’s strategy remains focused on continuing the operating performance and internal growth of its existing Shopping Centers, while enhancing this growth with selective retail redevelopments and renovations.

 

Management believes that attractive acquisition and development opportunities for investment in existing and new shopping center properties will continue to be available from time to time. Management believes that the Company’s capital structure will enable it to take advantage of these opportunities as they arise. In addition, management believes its shopping center expertise should permit it to optimize the performance of shopping centers once they have been acquired.

 

Management also believes that opportunities may arise for investment in new office properties. It is management’s view that several of the office sub-markets in which the Company operates have attractive supply/demand characteristics. The Company will continue to evaluate new office development and redevelopment as an integral part of its overall business plan.

 

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Although it is management’s present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers and office properties in the Washington, DC/Baltimore metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area. In February 2004, the Company acquired a 121,000 square foot neighborhood shopping center in Boca Raton, Florida anchored by Publix, the dominant grocer in South Florida. In March 2004 the Company acquired another Publix anchored center, the 79,000 square foot Cruse MarketPlace, located in a suburb of Atlanta, Georgia. In March 2005 the Company acquired the 126,000 square foot Albertson’s anchored neighborhood shopping center, Palm Springs Center, located in a suburb of Orlando, Florida.

 

Critical Accounting Policies

 

The Company’s accounting policies are in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the Company’s financial statements and the reported amounts of revenue and expenses during the reporting periods. If judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of the financial statements. Below is a discussion of accounting policies which the Company considers critical in that they may require judgment in their application or require estimates about matters which are inherently uncertain. Additional discussion of accounting policies which the Company considers significant, including further discussion of the critical accounting policies described below, can be found in the notes to the Consolidated Financial Statements.

 

Real Estate Investments

 

Real estate investment properties are stated at historic cost basis less depreciation. Management believes that these assets have generally appreciated in value and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in these financial statements. Because these financial statements are prepared in conformity with GAAP, they do not report the current value of the Company’s real estate assets. The purchase price of real estate assets acquired is allocated between land, building and in-place acquired leases based on the relative fair values of the components at the date of acquisition. Buildings are depreciated on a straight-line basis over their estimated useful lives of 35 to 50 years. Intangibles associated with acquired in-place leases are amortized over the remaining base lease terms.

 

If there is an event or change in circumstance that indicates an impairment in the value of a real estate investment property, the Company assesses an impairment in value by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. If such carrying amount is greater than the estimated projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value.

 

When incurred, the Company capitalizes the cost of improvements that extend the useful life of property and equipment and all repair and maintenance expenditures are expensed.

 

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Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is substantially complete and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations.

 

In the initial rental operations of development projects, a project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements. Leasehold improvements are amortized over the lives of the related leases using the straight-line method.

 

Lease Acquisition Costs

 

Certain initial direct costs incurred by the Company in negotiating and consummating successful leases are capitalized and amortized over the initial base term of the leases. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly related to time spent performing leasing related activities. Such activities include evaluating prospective tenants’ financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing transactions.

 

Revenue Recognition

 

Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis throughout the initial term of the lease. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues, known as percentage rent, is accrued when a tenant reports sales that exceed a specified breakpoint.

 

Allowance for Doubtful Accounts - Current and Deferred Receivables

 

Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. In addition to rents due currently, accounts receivable include amounts representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. Reserves are established with a charge to income for tenants whose rent payment history or financial condition casts doubt upon the tenant’s ability to perform under its lease obligations.

 

Legal Contingencies

 

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on the financial position or the results of operations. Once it has been determined that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

 

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Results of Operations

 

Revenue

 

     For the year ended December 31,

   Percentage
Change


 
(dollars in thousands)    2004

   2003

   2002

   2004 to
2003


    2003 to
2002


 

Revenue

                                 

Base rent

   $ 91,125    $ 78,167    $ 75,699    16.6 %   3.3 %

Expense recoveries

     16,712      14,438      12,680    15.8 %   13.9 %

Percentage rent

     1,635      1,695      1,850    (3.5 %)   (8.4 %)

Other

     3,370      3,584      3,734    (6.0 %)   (4.0 %)
    

  

  

            

Total

   $ 112,842    $ 97,884    $ 93,963    15.3 %   4.2 %
    

  

  

            

 

Total revenues increased 15.3% for the 2004 year compared to 2003 primarily due to the contribution of operating revenue from three development properties and five acquisition properties placed in service during 2004 or 2003. The developments Broadlands Village II and Shops at Monocacy were placed in service in 2004 and Broadlands Village in 2003. The acquisition properties Boca Valley Plaza, Countryside, Cruse MarketPlace and Briggs Chaney Plaza were acquired in 2004 and Olde Forte Village was acquired in 2003 (the “Development and Acquisition Properties”). The Development and Acquisition Properties contributed $10,888,000 or 73% of the increase in revenues. The Company’s 601 Pennsylvania Avenue office property was fully leased during 2004 and contributed $2,267,000 or 15% of the year’s revenue improvement. A discussion of the components of revenue follows.

 

Base rent. The $12,958,000 increase in base rent for 2004 versus 2003 was primarily attributable (69% or approximately $8,958,000) to leases in effect at the Development and Acquisition Properties. The lease-up of space at 601 Pennsylvania Avenue (15% or approximately $1,886,000) and contractual rent increases at other Properties substantially accounted for the balance of the increase.

 

The increase in base rent for 2003 versus 2002 was primarily attributable to leases in effect at properties acquired and developed in 2003 and 2002: Ashburn Village IV, Kentlands Square and Olde Forte Village (approximately $1,890,000), the continued lease-up of space at Washington Square (approximately $1,200,000), and releasing space at several other properties at rental rates higher than expiring rental rates. This increase was partially offset by an approximately $1,920,000 decrease in base rent at 601 Pennsylvania Avenue resulting from the departure of a major tenant whose lease expired during the first quarter of 2003. The major tenant was also paying higher rent under the terms of a short-term lease extension during the prior year, increasing the magnitude of the variance between periods. By December 31, 2003, the former tenant’s space was re-leased and 601 Pennsylvania Avenue was 100% leased.

 

Expense recoveries. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. The Development and Acquisition Properties provided the majority (81% or approximately $1,849,000) of the 2004 versus 2003 increase of $2,274,000 in expense recovery income. The office properties 601 Pennsylvania Avenue and Van Ness Square were the other large contributors (together, 20% or approximately $457,000).

 

The increase in expense recoveries for 2003 versus 2002 was primarily attributable to income resulting from billings to tenants for their share of increased snow removal expenses during 2003 (25% of increase) and the commencement of operations at the newly acquired and developed properties (28% of increase).

 

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Percentage rent. Percentage rent is rental income calculated on the portion of a tenant’s revenues that exceed a specified breakpoint. Percentage rent decreased $60,000 for 2004 versus 2003 due to a change in major tenant’s sales reporting procedures. In years prior to 2004, the tenant voluntarily provided interim sales reports upon which the Company had based its calculations. The tenant has indicated that going forward, it will only provide required annual sales reports per the terms of its lease agreement. Accounting rules prohibit the accrual of percentage rent until the tenant actually reports sales. Therefore the tenant’s sales reporting change impacts only the timing of when the Company recognizes percentage rent. The Company expects to recognize percentage rent for this tenant during the second quarter of years 2005 and beyond.

 

The decrease in percentage rent for 2003 versus 2002 was primarily attributable to reduced sales reported by the grocery store and a pad building tenant at Beacon Center (27% of decrease) and a drug store tenant at each of Southside (27% of decrease) and Thruway (20% of decrease) paying higher minimum rent in lieu of percentage rent.

 

Other income. Other income consists primarily of parking income at three of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases and interest income from the investment of cash balances. The $214,000 decrease in other income for 2004 versus 2003 resulted primarily from a $619,000 decrease in lease termination fees from $1,286,000 in 2003 to $667,000 in 2004, which was partially offset by an increase in parking income at the Office Properties of $178,000 and an increase in cash investment income of $166,000 in 2004.

 

The decrease in other income for 2003 versus 2002 resulted primarily from a $365,000 decrease in lease termination payments compared to the prior year due to several large lease termination fees received in 2002.

 

Operating Expenses

 

     For the year ended December 31,

   Percentage
Change


 
(dollars in thousands)    2004

   2003

   2002

   2004 to
2003


    2003 to
2002


 

Operating expenses:

                                 

Property operating expenses

   $ 12,070    $ 11,363    $ 10,115    6.2 %   12.3 %

Provision for credit losses

     488      171      421    185.4 %   (59.4 )%

Real estate taxes

     9,789      8,580      8,021    14.1 %   7.0 %

Interest expense and amortization of deferred debt

     27,022      26,573      25,838    1.7 %   2.8 %

Depreciation and amortization

     21,324      17,838      17,821    19.5 %   0.1 %

General and administrative

     8,442      6,213      5,537    35.9 %   12.2 %
    

  

  

            

Total

   $ 79,135    $ 70,738    $ 67,753    11.9 %   4.4 %
    

  

  

            

 

Property operating expenses. Property operating expenses consist primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses. Property operating expenses increased $707,000 for 2004 versus 2003. The Development and Acquisition Properties accounted for a $1,024,000 increase in property operating expenses during 2004 which was offset by an approximately $591,000 decrease in snow removal expenses at the remainder of the property portfolio due to 2003’s unseasonably severe winter weather primarily in the Mid-Atlantic region.

 

The increase in property operating expenses for 2003 versus 2002 resulted primarily from an increase in snow removal expense of $650,000 due to unseasonably severe winter weather primarily in the Mid-Atlantic region. The Company also paid increased property insurance premiums of approximately $190,000 during 2003. In addition, approximately $130,000 of the increase resulted from the settlement of a dispute with a former tenant at Crosstown Business Park and related legal expenses.

 

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Provision for credit losses. The provision for credit losses increased $317,000 for 2004 versus 2003 primarily due to 2003’s absence of any significant tenant bankruptcy or collection difficulties. The 2004 provision for credit loss includes a $155,000 provision for an anchor tenant at Great Eastern Plaza, a $113,000 provision for a former tenant at Leesburg Pike Plaza, and a $55,000 provision for a tenant at Seven Corners Center.

 

The provision for credit losses decreased for 2003 versus 2002 primarily due to the absence of any significant tenant bankruptcy or collection difficulties in 2003 as compared to 2002 when the Company established reserves for two office tenants in bankruptcy and a reserve for a rent dispute with another office tenant.

 

Real estate taxes. The $1,209,000 increase in real estate taxes for 2004 versus 2003 was primarily attributable to the commencement of operations at the Development and Acquisition Properties (79% or approximately $958,000).

 

The increase in real estate taxes for 2003 versus 2002 was primarily attributable to the commencement of operations at the newly acquired and developed properties (40% of increase) and increased real estate taxes assessed at 601 Pennsylvania Avenue (30% of increase).

 

Interest expense and amortization of deferred debt. Of the $449,000 increase from 2004 versus 2003, $322,000 resulted from increased interest expense and $127,000 resulted from increased amortization of deferred debt expense. Interest expense increased in 2004 versus 2003 due to an increase in average outstanding borrowings of approximately $22,645,000 ($1,608,000 interest expense increase) and an increase in the weighted average interest rate of 12 basis points ($501,000 interest expense increase), reflecting the Company’s repayment of all of its short-term line of credit borrowings with proceeds from new 15-year fixed rate mortgages. As a result of the 2004 financing activity, the allocation of the Company’s average floating rate notes payable balances as a percentage of total indebtedness decreased from 12% in 2003 to 1% in 2004. The increase in interest expense resulting from the new financings was more than offset by an increase in interest capitalized on costs of construction and development work. During 2004 and 2003, $3,227,000 and $1,382,000, was capitalized, respectively ($1,845,000 interest expense decrease).

 

The $735,000 increase in interest expense and amortization of deferred debt for 2003 versus 2002 resulted primarily from the placement of a new $42.5 million, 15 year, 6.01% fixed rate mortgage replacing Washington Square’s construction loan which charged interest at a variable rate averaging 3.5% during the prior year. The increase was partially offset by interest expense savings from lower interest rates on the Company’s variable rate debt and the repayment of amounts borrowed under the revolving credit agreement in November 2003 using proceeds from the preferred stock offering. Amortization of deferred debt expense increased $76,000 in 2003 versus 2002 primarily as a result of the full year’s amortization of additional loan costs in 2003 associated with refinancing the Company’s revolving credit agreement during the third quarter of 2002.

 

Depreciation and amortization. The increase in depreciation and amortization expense of $3,486,000 resulted primarily from the Development and Acquisition Properties placed in service during 2003 and 2004.

 

Depreciation and amortization expense was virtually unchanged from 2002 to 2003. The Company recorded new depreciation expense on developments and acquisitions placed in service during 2002 and 2003, which was offset by a $1,311,000 charge-off recorded in 2002, resulting from assets retired based upon a comprehensive review of real estate asset records and the Company’s revision of the assets’ estimated useful lives.

 

General and administrative. General and administrative expense consists of payroll, administrative and other overhead expenses. The $2,229,000 increase in general and administrative expense for 2004 versus 2003 was attributable to increased payroll, retirement and employment expenses (47% or $1,040,000) primarily resulting from staffing for the Company’s acquisitions department and a non-recurring retirement payment to a former executive officer. In addition, accounting fees and other administrative expenses, incurred to comply with new

 

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Sarbanes-Oxley documentation and compliance requirements, increased 28% or $614,000, and the expensing of officer and director stock options increased 6.7% or $150,000.

 

The increase in general and administrative expense for 2003 versus 2002 was primarily attributable to increased payroll and employment expenses (57% of increase). Approximately one-half of the increased payroll expense resulted from staffing for the Company’s evaluation of property acquisitions. The increase in general and administrative expense resulted also from increased corporate insurance premiums (17% of increase) and increased data processing expenses (14% of increase).

 

Gain on Sale of Property

 

The Company recognized a gain on the sale of real estate of $572,000 in 2004, $182,000 in 2003 and $1,426,000 in 2002. The 2004 gain resulted from the State of Maryland’s condemnation and taking of a small strip of unimproved land for a road widening project at White Oak shopping center. The 2003 gain resulted from the State of Maryland’s condemnation and purchase of a piece of vacant land at Avenel Business Park for improvement of an interchange on I-270, adjacent to the property. The 2002 gain resulted from the 1999 District of Columbia’s condemnation and purchase of the Company’s Park Road property as part of an assemblage of parcels for a neighborhood revitalization project. The Company disputed the original purchase price awarded by the District. The 2002 gain represents additional net proceeds the Company was awarded upon settlement of the dispute.

 

Impact of Inflation

 

Inflation has remained relatively low and has had a minimal impact on the operating performance of the Company’s portfolio; however, substantially all of the Company’s leases contain provisions designed to mitigate the adverse impact of inflation on the Company’s results of operations. These provisions include upward periodic adjustments in base rent due from tenants, usually based on a stipulated increase and to a lesser extent on a factor of the change in the consumer price index, commonly referred to as the CPI.

 

Substantially all of the Company’s properties are leased to tenants under long-term, triple-net leases. Triple-net leases tend to reduce the Company’s exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on the Company’s tenants if increases in their operating expenses exceed increases in their revenue.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $33,561,000 and $45,244,000 at December 31, 2004 and 2003, respectively. The changes in cash and cash equivalents during the years ended December 31, 2004 and 2003 were attributable to operating, investing and financing activities, as described below.

 

     Year Ended December 31,

 
(dollars in thousands)    2004

    2003

 

Cash provided by operating activities

   $ 50,711     $ 37,363  

Cash used in investing activities

     (114,063 )     (49,121 )

Cash provided by financing activities

     51,669       55,693  
    


 


Increase (decrease) in cash

   $ (11,683 )   $ 43,935  
    


 


 

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Operating Activities

 

Cash provided by operating activities increased $13,348,000 to $50,711,000 for the year ended December 31, 2004 compared to $37,363,000 for the year ended December 31, 2003 primarily reflecting increased operating income of the Development and Acquisition Properties. Cash provided by operating activities represents, in each year, cash received primarily from rental income, plus other income, less property operating expenses, normal recurring general and administrative expenses and interest payments on debt outstanding.

 

Investing Activities

 

Cash used in investing activities increased $64,942,000 to $114,063,000 for the year ended December 31, 2004 compared to $49,121,000 for the year ended December 31, 2003 and primarily reflects the acquisition of properties (Boca Valley Plaza, Briggs Chaney Plaza, Countryside, Cruse MarketPlace and the Kentlands Place and Ashland Square land parcels in 2004 and the Shops at Monocacy land parcel, and Olde Forte Village in 2003), the construction of new shopping center properties (Broadlands Village II, Shops at Monocacy, Kentlands Place and Olde Forte Village redevelopment in 2004 and Broadlands Village shopping center in 2003), tenant improvements and construction in progress during those years.

 

Financing Activities

 

Cash provided by financing activities for the years ended December 31, 2004 and 2003, was $51,669,000 and $55,693,000, respectively. Cash provided by financing activities for the year ended December 31, 2004 primarily reflects:

 

    $94,800,000 of proceeds received from mortgage notes payable incurred during the year; and

 

    $15,422,000 of proceeds received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options, and from the issuance of convertible limited partnership interests in the Operating Partnership;

 

which was partially offset by:

 

    the repayment of borrowings on mortgage notes payable totaling $16,427,000;

 

    distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $33,166,000;

 

    distributions made to preferred stockholders during the year totaling $7,244,000; and

 

    payments of $1,716,000 for financing costs of six mortgage loans during 2004.

 

The Company also temporarily borrowed and subsequently repaid $33,000,000 on its revolving credit facility during 2004.

 

Cash provided by financing activities for the year ended December 31, 2003 primarily reflects:

 

    $93,134,000 of proceeds received from mortgage notes payable incurred during the year;

 

    amounts borrowed from the revolving credit facility totaling $35,000,000;

 

    $96,327,000 of proceeds from the issuance of $100,000,000 Series A 8% Cumulative Redeemable Preferred Stock after netting issuance costs of $3,673,000; and

 

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    $16,018,000 of proceeds received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options, and from the issuance of convertible limited partnership interests in the Operating Partnership;

 

which was partially offset by:

 

    the repayment of borrowings on mortgage notes payable totaling $69,879,000;

 

    the repayment of amounts borrowed from the revolving credit facility totaling $81,750,000;

 

    distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $32,257,000; and

 

    payments of $900,000 for financing costs of three mortgage loans during 2003.

 

Liquidity Requirements

 

Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit.

 

Long-term liquidity requirements consisted primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for property acquisitions and developments. Management anticipates that during the coming year the Company may: i) redevelop certain of the Current Portfolio Properties, ii) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, iii) acquire existing neighborhood and community shopping centers and/or office properties, and iv) develop new shopping center or office sites. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, developments, expansions or acquisitions are expected to be funded with available cash, bank borrowings from the Company’s credit line, construction and permanent financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or equity capital resources available to the Company and proceeds from the sale 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. The availability and terms of any such financing will depend upon market and other conditions.

 

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Table of Contents

Contractual Payment Obligations

 

As of December 31, 2004, the Company had unfunded contractual payment obligations of approximately $15.3 million, excluding operating obligations, due within the next 12 months. The table below specifies the total contractual payment obligations as of December 31, 2004.

 

(in thousands)    Payments Due By Period

Contractual Obligations    Total

   Less than
1 Year


   1-3 Years

   4-5 Years

   After 5 Years

Notes Payable

   $ 453,646    $ 11,349    $ 34,653    $ 29,466    $ 378,178

Operating Leases (1)

     11,757      164      328      328      10,937

Corporate Headquarters Lease (1)

     5,077      646      1,350      1,432      1,649

Development Obligations

     3,173      3,173      —        —        —  
    

  

  

  

  

Total Contractual Cash Obligations

   $ 473,653    $ 15,332    $ 36,331    $ 31,226    $ 390,764
    

  

  

  

  

 

(1) See Note 7 to Consolidated Financial Statements. Corporate Headquarters Lease amounts represent an allocation to the Company based upon employees’ time dedicated to the Company’s business as specified in the Shared Services Agreement. Future amounts are subject to change as the number of employees, employed by each of the parties to the lease, fluctuate.

 

Management believes that the Company’s capital resources, which at December 31, 2004 included cash balances of $33.6 million and borrowing availability of $125 million on its revolving line of credit ($80 million for general corporate use and $45 million for qualified future acquisitions), will be sufficient to meet its liquidity needs for the foreseeable future.

 

Preferred Stock Issue

 

On July 16, 2003, the Company filed a shelf registration statement (the “Shelf Registration Statement”) with the SEC relating to the future offering of up to an aggregate of $100 million of preferred stock and depositary shares. On November 5, 2003 the Company sold 3,500,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock. The underwriters exercised an over-allotment option, purchasing an additional 500,000 depositary shares on November 26, 2003.

 

The depositary shares may be redeemed, in whole or in part, at the $25.00 liquidation preference at the Company’s option on or after November 5, 2008. The depositary shares pay an annual dividend of $2.00 per depositary share, equivalent to 8% of the $25.00 liquidation preference. The first dividend, paid on January 15, 2004 was for less than a full quarter and covered the period from November 5 through December 31, 2003. The Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

 

Dividend Reinvestments

 

In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to allow its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the

 

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Company. The Company issued 497,282 and 552,170 shares under the Plan at a weighted average discounted price of $27.70 and $24.18 per share during the years ended December 31, 2004 and 2003, respectively.

 

Additionally, the Operating Partnership issued 11,557 and 12,440 limited partnership units under a dividend reinvestment plan mirroring the Plan at a weighted average discounted price of $27.70 and $24.18 per unit during the years ended December 31, 2004 and 2003, respectively.

 

Capital Strategy and Financing Activity

 

As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggregate cash flow. Given the Company’s current debt level, it is management’s belief that the ratio of the Company’s debt to total asset value was below 50% as of December 31, 2004.

 

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 property 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 without shareholder approval and consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. 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. The following is a summary of notes payable as of December 31, 2004 and 2003:

 

Notes Payable

 

(Dollars in thousands)    December 31,

   Interest Rate
*


    Scheduled
Maturity *


   2004

    2003

    

Fixed Rate Mortgages:

   $ 129,883  (a)   $ 132,859    7.67 %   Oct 2012
       94,794  (b)     98,103    8.00 %   Dec 2011
       47,375  (c)     29,800    5.88 %   Jan 2019
       41,324  (d)     41,982    6.01 %   Feb 2018
       33,138  (e)     34,017    7.88 %   Jan 2013
       21,185  (f)     —      5.62 %   Jul 2019
       20,906  (g)     —      5.79 %   Sep 2019
       18,750  (h)     —      5.22 %   Jan 2020
       15,335  (i)     —      5.76 %   May 2019
       13,057  (j)     13,375    8.33 %   Jun 2015
       9,200  (k)     —      6.82 %   Apr 2007
       8,699  (l)     —      5.77 %   Jul 2013
       —    (m)     7,112           
    


 

  

 

Total Fixed Rate

     453,646       357,248    7.03 %   9.9 Years
    


 

  

 

Variable Rate Loan:

                         

Line of Credit

     —    (n)     —      LIBOR plus
1.625%
 
 
  Aug 2005
    


 

  

 

Total Variable Rate

     —         —      —       —  
    


 

  

 

Total Notes Payable

   $ 453,646     $ 357,248    7.03 %   9.9 Years
    


 

  

 

 

* Interest rate and scheduled maturity data presented as of December 31, 2004. Totals computed using weighted averages.

 

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(a) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25 year amortization schedule and a balloon payment of $96,784,000 at loan maturity. Principal of $2,976,000 was amortized during 2004.

 

(b) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowing rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23 year amortization schedule and a balloon payment of $63,153,000 at loan maturity. Principal of $3,309,000 was amortized during 2004.

 

(c) The loan, consisting of two notes dated December 2003 and two notes dated February and December 2004, is currently collateralized by four shopping centers, Broadlands Village (Phases I & II), The Glen and Kentlands Square, and requires equal monthly principal and interest payments of $306,000 (beginning February 1, 2005; prior to that date, payments totaled $256,000 per month) based upon a 25 year amortization schedule and a balloon payment of $28,255,000 at loan maturity. Principal of $625,000 was amortized during 2004.

 

(d) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5 year amortization schedule and a balloon payment of $27,872,000 at loan maturity. Principal of $658,000 was amortized during 2004.

 

(e) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25 year amortization schedule and a balloon payment of $22,808,000 at loan maturity. Principal of $879,000 was amortized during 2004.

 

(f) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25 year amortization schedule and a balloon payment of $12,231,000 at loan maturity. Principal of $165,000 was amortized during 2004.

 

(g) The loan is collateralized by Briggs Chaney and requires equal monthly principal and interest payments of $133,000 based upon a 25 year amortization schedule and a balloon payment of $12,134,000 at loan maturity. Principal of $94,000 was amortized during 2004.

 

(h) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25 year amortization schedule and a balloon payment of $10,522,000 at loan maturity. Payments commenced February 2005.

 

(i) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25 year amortization schedule and a balloon payment of $8,942,000 at loan maturity. Principal of $165,000 was amortized during 2004.

 

(j) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22 year amortization schedule and a balloon payment of $7,577,000 at loan maturity. Principal of $318,000 was amortized during 2004.

 

(k) The loan is collateralized by Boca Valley Plaza and requires monthly interest only payments of $52,000. A balloon payment of $9,200,000 is due at loan maturity.

 

(l) The loan is collateralized by Cruse MarketPlace and requires equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a balloon payment of $6,797,000 at loan maturity. Principal of $126,000 was amortized during 2004.

 

(m) The $7,112,000 loan was collateralized by Kentlands Square and was repaid and retired at maturity in February 2004 using proceeds provided by a $10,200,000 increase to the loan described in (c) above.

 

(n)

The loan is an unsecured revolving credit facility totaling $125,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered

 

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properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. There were no outstanding borrowings as of December 31, 2004. Monthly payments, if applicable, are interest only and will vary depending upon the amount outstanding and the applicable interest rate for any given month. On January 28, 2005 the Company executed a new $150,000,000 unsecured revolving credit facility to replace the $125,000,000 line. The new line has a three-year term and provides for an additional one-year extension at the Company’s option, subject to the Company’s satisfaction of certain conditions. (see Note 14. Subsequent Events).

 

The December 31, 2004 and 2003 depreciation adjusted cost of properties collateralizing the mortgage notes payable totaled $420,320,000 and $295,506,000, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants. As of December 31, 2004, the material covenants required the Company, on a consolidated basis, to:

 

    limit the amount of debt so as to maintain a gross asset value in excess of liabilities of at least $250 million;

 

    limit the amount of debt as a percentage of gross asset value (leverage ratio) to less than 60%;

 

    limit the amount of debt so that interest coverage will exceed 2.1 to 1 on a trailing four quarter basis; and

 

    limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.6 to 1.

 

As of December 31, 2004, the Company was in compliance with all such covenants.

 

During 2004 the Company completed new financings and refinanced several existing mortgage loans to take advantage of favorable financing terms available to the Company. In addition, the Company assumed two mortgages securing real estate properties acquired by the Company during 2004. In February the Company refinanced Kentlands Square with a new $10.2 million fixed-rate 15 year mortgage and assumed a $9.2 million mortgage with the acquisition of Boca Valley Plaza. In March, the Company assumed an $8.8 million mortgage with the acquisition of Cruse MarketPlace. In April 2004, the Company placed a new $15.5 million fixed-rate 15 year mortgage secured by Olde Forte Plaza, acquired in July 2003. In July 2004, the Company placed a new $21.35 million fixed-rate 15 year mortgage secured by Countryside, acquired in February 2004. In August 2004, the Company placed a new $21million fixed-rate 15 year mortgage secured by Briggs Chaney Plaza, acquired in April 2004. In December 2004, the Company placed a new $18.75 million fixed-rate 15 year mortgage secured by Shops at Monocacy, a development placed in service during the fourth quarter of 2004. Also in December 2004, the Company placed a new $8 million fixed-rate 14 year mortgage secured by Broadlands Village and Broadlands Village II, a development placed in service during the fourth quarter of 2004.

 

On January 28, 2005 the Company executed a $150 million unsecured revolving credit facility, an expansion of the $125 million agreement in place as of December 31, 2004. The facility is intended to provide working capital and funds for acquisitions, certain developments and redevelopments. The line has a three-year term and provides for an additional one-year extension at the Company’s option, subject to the Company’s satisfaction of certain conditions. Until January 27, 2007, certain or all of the lenders may, upon request by the Company and payment of certain fees, increase the revolving credit facility by up to $50,000,000. Letters of credit may be issued under the revolving credit facility. The facility requires monthly interest payments, if applicable, at a rate of LIBOR plus a spread of 1.40% to 1.625% (determined by certain leverage tests) or upon the bank’s reference rate at the Company’s option. Loan availability under the facility is determined by operating income from the

 

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Company’s existing unencumbered properties. Based upon the revised terms of the facility, the unencumbered properties support line availability of $86,500,000, of which $2,100,000 has been issued under a letter of credit, leaving $84,400,000 available for working capital uses. An additional $63,500,000 is available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions. No funds have yet been borrowed from the facility.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Funds From Operations

 

In 2004, the Company reported Funds From Operations (FFO)1 available to common shareholders (common stockholders and limited partner unitholders) of $47,031,000 representing a 7.5% increase over 2003 FFO available to common shareholders of $43,740,000. The following table presents a reconciliation from net income to FFO available to common shareholders for the periods indicated:

 

     For the Year Ended December 31,

(dollars in thousands)    2004

    2003

    2002

    2001

   2000

Net income

   $ 26,174     $ 19,242     $ 19,566     $ 17,314    $ 14,045

Subtract:

                                     

Gain on sale of property

     (572 )     (182 )     (1,426 )     —        —  

Add:

                                     

Minority interests

     8,105       8,086       8,070       8,069      8,069

Depreciation and amortization of real property

     21,324       17,838       17,821       14,758      13,534
    


 


 


 

  

FFO

     55,031       44,984       44,031       40,141      35,648

Preferred dividends

     (8,000 )     (1,244 )     —         —        —  
    


 


 


 

  

FFO available to common shareholders

   $ 47,031     $ 43,740     $ 44,031     $ 40,141    $ 35,648
    


 


 


 

  

Average shares and units used to compute FFO per share

     21,405       20,790       20,059       19,382      18,795

1 FFO is a widely accepted non-GAAP financial measure of operating performance for REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net income, computed in accordance with GAAP, plus minority interests, extraordinary items and real estate depreciation and amortization, excluding gains or losses from property sales. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, 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.

 

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Acquisitions, Redevelopments and Renovations

 

Management anticipates that during the coming year the Company may: i) redevelop certain of the Current Portfolio Properties, ii) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, iii) acquire existing neighborhood and community shopping centers and/or office properties, and iv) develop new shopping center or office sites. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital resources available to the Company.

 

The Company has been selectively involved in acquisition, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and office development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to take advantage of redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its recent activities at Olde Forte Village, Broadlands Village, Thruway and The Glen. The following describes the acquisitions, redevelopments and renovations which affected the Company’s results of operations in 2003 and 2004.

 

Olde Forte Village

 

In July 2003, the Company acquired Olde Forte Village, a 161,000 square foot neighborhood shopping center located in Fort Washington, Maryland. The center is anchored by a newly constructed 58,000 Safeway supermarket which opened in March 2003, relocating from a smaller store within the center. The center then contained approximately 50,000 square feet of vacant space, consisting primarily of the former Safeway space, which the Company redeveloped in 2004. This former anchor space and some adjoining space was reconfigured into new small shop space totaling approximately 33,000 square feet. The redeveloped center totals 142,000 square feet. The Company has substantially completed site improvements and small shop construction and renovation. Total redevelopment costs, including the initial property acquisition cost, were approximately $22 million. Olde Forte Village was 70% leased at December 31, 2004. A total of 25,000 square feet of the recently completed shop space remains available.

 

Broadlands Village

 

The Company purchased 24 acres of undeveloped land in the Broadlands section of the Dulles Technology Corridor of Loudoun County, Virginia in April 2002. Broadlands is a 1,500 acre planned community consisting of 3,500 residences, approximately half of which are constructed and currently occupied. In October 2003, the Company completed construction of the first phase of the Broadlands Village shopping center. The 58,000 square foot Safeway supermarket opened in October 2003 with a pad building and many in-line small shops also opening in the fourth quarter of 2003. The 105,000 square foot first phase is 100% leased. Construction of a 30,000 square foot second phase was substantially completed in November 2004. Total development costs of both phases, including the land acquisition are expected to total approximately $22 million. The second phase was 96% leased at December 31, 2004. This second phase added a spacious landscaped courtyard and fountain to the center, and includes Original Steakhouse and Bonefish Grill, both quality restaurants, recently opened.

 

Thruway

 

During the fourth quarter of 2003, the Company commenced a 15,725 square foot expansion of the Thruway shopping center located in Winston Salem, North Carolina. The new development includes replacing a former 6,100 square foot single-tenant pad building with a new multi-tenant building. Leases have been executed for 100% of the new space, including Ann Taylor Loft, JoS. A Banks Clothiers, Chico’s and Liz Claiborne. This $2.1 million expansion was completed in April 2004 with tenant openings beginning in March 2004.

 

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Shops at Monocacy

 

In November 2003, the Company acquired 13 acres of undeveloped land in Frederick, Maryland at the southeast corner of Maryland Route 26 and Monocacy Boulevard. Construction commenced in early December 2003 of a 107,000 square foot shopping center anchored by a 57,000 square foot Giant grocery store. Total development costs, including the land acquisition, are expected to be approximately $22.3 million upon completion of the final leasing. The center was substantially completed and Giant opened for business during October 2004. The property was 84% leased at December 31, 2004.

 

Kentlands Place

 

In January 2004, the Company purchased 3.4 acres of undeveloped land adjacent to its 109,000 square foot Kentlands Square shopping center in Gaithersburg, Maryland. The Company commenced construction of a 41,300 square foot retail/office property, comprised of 24,400 square feet of in-line retail space and 16,900 square feet of professional office suites, in April 2004. Development costs, including the land acquisition, are projected to total $7.8 million. The building was substantially completed in January 2005. The property was 39% leased at December 31, 2004 and 58% leased as of March 11, 2005. Additional tenant prospects have been identified and lease negotiations are proceeding for nearly all of the remaining space.

 

Boca Valley Plaza

 

The Company added Publix as one of its grocery tenants with the February 2004 acquisition of Boca Valley Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 square foot neighborhood shopping center on U.S. Highway 1 in South Florida. The center, constructed in 1988 was 91% leased at December 31, 2004 and is anchored by a 42,000 square foot Publix supermarket. The property was acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million mortgage.

 

Countryside

 

In mid-February 2004, the Company completed the acquisition of the 142,000 square foot Safeway anchored Countryside shopping center, its fourth neighborhood shopping center investment in Loudoun County, Virginia. The center was 95% leased at December 31, 2004 and was acquired for a purchase price of $29.7 million.

 

Cruse MarketPlace

 

On March 25, 2004, the Company completed the acquisition of the 79,000 square foot Publix anchored, Cruse MarketPlace located in Forsyth County, Georgia. Cruse MarketPlace was constructed in 2002 and was 97% leased at December 31, 2004. The center was purchased for $12.6 million, subject to the assumption of an $8.8 million mortgage.

 

Briggs Chaney Plaza

 

In April 2004, the Company acquired Briggs Chaney Plaza in Silver Spring, Maryland. Briggs Chaney Plaza is a 197,000 square foot neighborhood shopping center on Route 29 in Montgomery County, Maryland. The center, constructed in 1983, was 94% leased at December 31, 2004 and is anchored by a 45,000 square foot Safeway supermarket and a 28,000 square foot Ross Dress For Less. The property was acquired for $27.3 million. The Company has substantially completed interior construction on a portion of the vacant space totaling approximately 11,000 square feet of leasable area. The space was reconfigured into six small shops, with five currently leased. The Company is also finalizing plans for a substantial façade renovation of the shopping center, projected to be substantially completed in mid 2005.

 

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Portfolio Leasing Status

 

The following chart sets forth certain information regarding our properties for the periods indicated.

 

     Total Properties

   Total Square Footage

   Percent Leased

 

As of December 31,


   Shopping
Centers


   Office

   Shopping
Centers


   Office

   Shopping
Centers


    Office

 

2004

   35    5    6,012,000    1,205,000    93.5 %   95.9 %

2003

   31    5    5,328,000    1,204,000    94.1 %   95.8 %

2002

   29    5    5,069,000    1,203,000    93.9 %   92.9 %

 

The comparative decrease in the year end 2004 leasing percentage is largely attributable to the departure of a 39,000 square foot local grocer at Southside Plaza in suburban Richmond, Virginia. The improvement in the portfolio’s leasing percentage in 2003 compared to 2002 resulted primarily from improved leasing in the Office Properties at 601 Pennsylvania Avenue, Washington Square and Avenel Business Park.

 

Forward-Looking Statements

 

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as “believe”, “expect” and “may”.

 

Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those given in the forward-looking statements as a result of changes in factors which include among others, the following:

 

    risks that the Company’s tenants will not pay rent;

 

    risks related to the Company’s reliance on shopping center “anchor” tenants and other significant tenants;

 

    risks related to the Company’s substantial relationships with members of The Saul Organization;

 

    risks of financing, such as increases in interest rates, restrictions imposed by the Company’s debt, the Company’s ability to meet existing financial covenants and the Company’s ability to consummate planned and additional financings on acceptable terms;

 

    risks related to the Company’s development activities;

 

    risks that the Company’s growth will be limited if the Company cannot obtain additional capital;

 

    risks that planned and additional acquisitions or redevelopments may not be consummated, or if they are consummated, that they will not perform as expected;

 

    risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks; and

 

    risks related to the Company’s status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to the Company’s status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company’s results of operations. The Company does not enter into financial instruments for trading purposes.

 

The Company is exposed to interest rate fluctuations primarily as a result of its variable rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. As of December 31, 2004, the Company had no variable rate indebtedness. Interest rate fluctuations affect the fair value of the Company’s fixed rate debt instruments. As of December 31, 2004, the Company had fixed rate indebtedness totaling $453,646,000 with a weighted average interest rate of 7.03%. If interest rates on the Company’s fixed rate debt instruments at December 31, 2004 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $26,491,000.

 

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 Registered Public Accounting Firm – Ernst & Young LLP
F-2   (a)    Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting – Ernst & Young LLP
F-3   (b)    Consolidated Balance Sheets - December 31, 2004 and 2003
F-4   (c)    Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002.
F-5   (d)    Consolidated Statements of Stockholders’ Equity (Deficit)- Years ended December 31, 2004, 2003 and 2002.
F-6   (e)    Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002.
F-7   (f)    Notes to Consolidated Financial Statements (Selected unaudited quarterly financial data disclosed in Note 15).

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Quarterly Assessment.

 

The Company carried out an assessment as of December 31, 2004 of the effectiveness of the design and operation of its disclosure controls and procedures and its internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer as appropriate. Rules adopted by the SEC require that the Company present the conclusions of the Company’s Chairman and Chief Executive Officer and its Senior Vice President-Chief Financial Officer, Secretary and Treasurer about the effectiveness of the Company’s disclosure controls and

 

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procedures and the conclusions of the Company’s management about the effectiveness of its internal control over financial reporting as of the end of the period covered by this Annual Report on Form 10-K.

 

CEO and CFO Certifications.

 

Included as Exhibits 31 to this Annual Report on Form 10-K are forms of “Certification” of the Company’s Chairman and Chief Executive Officer and its Senior Vice President-Chief Financial Officer, Secretary and Treasurer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

 

Disclosure Controls and Procedures and Internal Control over Financial Reporting.

 

Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Internal control over financial reporting is a process designed by, or under the supervision of the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management or the Company’s Board of Directors; and

 

    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements.

 

Limitations on the Effectiveness of Controls.

 

Management, including the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer, does not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no assessment of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

 

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The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Scope of the Assessments.

 

The assessment by the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer of the Company’s disclosure controls and procedures and the assessment by the Company’s management of the Company’s internal control over financial reporting included a review of procedures and discussions with the Company’s Disclosure Committee and others in the Company. In the course of the assessments, management sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. The evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting is done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in the Company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.

 

The Company’s internal control over financial reporting is also evaluated on an ongoing basis by management, other personnel in the Company’s Accounting department and the Company’s internal audit function. Management’s annual assessment of the Company’s internal control over financial reporting is audited by the Company’s independent registered public accounting firm. We consider the results of these various assessment activities as we monitor the Company’s disclosure controls and procedures and internal control over financial reporting and when deciding to make modifications as necessary. Management’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including improvements and corrections) as conditions warrant. Among other matters, management sought in its assessment to determine whether there were any “material weaknesses” in the Company’s internal control over financial reporting, or whether management had identified any acts of fraud involving senior management, management, or other personnel who have a significant role in the Company’s internal control over financial reporting. This information was important both for the assessment generally and because the Section 302 certifications require that the Company’s Chairman and Chief Executive Officer and its Senior Vice President-Chief Financial Officer, Secretary and Treasurer disclose that information, along with any “significant deficiencies,” to the Audit Committee of the Company’s Board of Directors and to the Company’s independent auditors and to report on related matters in this section of the Annual Report on Form 10-K. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “material weakness” is defined as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

 

Assessment of Effectiveness of Disclosure Controls and Procedures

 

Based upon the assessments, the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer have concluded that as of December 31, 2004 the Company’s disclosure controls and procedures were effective.

 

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Assessment of Effectiveness of Internal Control Over Financial Reporting.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. Based upon the assessments, the Company’s management has concluded that as of December 31, 2004 the Company’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, which appears on page F-2 of this Annual Report on Form 10-K.

 

Changes in Internal Control Over Financial Reporting.

 

During the three months ended December 31, 2004, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control for financial reporting.

 

Item 9B. Other Information

 

None.

 

PART III

 

Certain information that Part III requires will be filed in a definitive proxy statement with the SEC pursuant to Regulation 14A for the annual meeting of stockholders to be held on May 6, 2005 (the “Proxy Statement”) not later than 120 days after the end of the year covered by this Report, and certain information to be included therein is incorporated herein by reference. Only those sections or pages of the Proxy Statement which specifically address the items set forth herein are incorporated by reference.

 

The Company’s Chairman and Chief Executive Officer, Senior Vice President-Chief Financial Officer, Treasure and Secretary, Vice President and Chief Accounting Officer are governed by the Company’s code of ethics. The code of ethics is available on the Company’s website at www.saulcenters.com.

 

Item 10. Directors and Executive Officers of the Registrant

 

The information this Item requires is incorporated by reference to the information under the captions “Election of Directors,” “Corporate Governance – Code of Ethics,” and “Corporate Governance - Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement to be filed with the SEC for its annual shareholders’ meeting to be held on May 6, 2005.

 

Item 11. Executive Compensation

 

The information this Item requires is incorporated by reference to the information under the captions “Corporate Governance – Compensation of Directors,” “Report of the Compensation Committee,” “Executive Compensation” and “Performance Graph” of the Proxy Statement.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The information this Item requires is incorporated by reference to the information under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” of the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions

 

The information this Item requires is incorporated by reference to the information under the caption “Certain Relationships and Transactions” of the Proxy Statement.

 

Item 14. Principal Accountant Fees and Services

 

The information this Item requires is incorporated by reference to the information contained in the Proxy Statement under the caption “2004 and 2003 Audit Firm Fee Summary” and the caption “Audit Committee Report” of the Proxy Statement.

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

  (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 Registered Public Accounting Firm – Ernst & Young LLP

 

  (a) Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting – Ernst & Young LLP

 

  (b) Consolidated Balance Sheets - December 31, 2004 and 2003

 

  (c) Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002

 

  (d) Consolidated Statements of Stockholders’ Equity (Deficit) - Years ended December 31, 2004, 2003 and 2002

 

  (e) Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002

 

  (f) Notes to Consolidated Financial Statements

 

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  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) 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.

 

  3. Exhibits

 

  (a) First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on August 23, 1993 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. Articles of Amendment to the First Amended and Restated Articles of Incorporation of Saul Centers, Inc., filed with the Maryland Department of Assessments and Taxation on May 28, 2004 and filed as Exhibit 3.(a) of the June 30, 2004 Quarterly Report of the Company is hereby incorporated by reference.

 

  (b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at and after August 24, 1993 and as of August 26, 1993 and filed as Exhibit 3(b) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 3.(b) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

 

  (c) Articles Supplementary to First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on November 4, 2003 and filed as Exhibit 2 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

 

  4.        (a) Deposit Agreement, dated November 5, 2003, among the Company, Continental Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and filed as Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

 

  (b) Form specimen of receipt representing the depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and included as part of Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

 

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  10.        (a)   First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to Registration Statement No. 33-64562 is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, and the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 1997 Quarterly Report of the Company is hereby incorporated by reference. The Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 4.(c) to Registration Statement No. 333-41436, is hereby incorporated by reference. The Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the September 30, 2003 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. The Seventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the December 31, 2003 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

 

  (b) First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

 

  (c) First Amended and Restated Agreement of Limited Partnership of Saul II Subsidiary Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership filed as Exhibit 10.(c) of the June 30, 2001 Quarterly Report of the Company is hereby incorporated by reference.

 

  (d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference.

 

  (e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to Registration Statement No. 33-64562 is hereby incorporated by reference.

 

  (f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.

 

  (g) Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference.

 

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  (h) 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.

 

  (i) 2004 Saul Centers, Inc. Deferred Compensation Plan for Directors and filed as Exhibit 3.(a) of the June 30, 2004 Quarterly Report of the Company is hereby incorporated by reference

 

  (j) 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.

 

  (k) 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.

 

  (l) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I Limited Partnership, as Borrower and Nomura Asset Capital Corporation, as Lender, is as filed as Exhibit 10.(p) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

 

  (m) Revolving Credit Agreement dated as of August 30, 2002 by and between Saul Holdings Limited Partnership as Borrower; U.S. Bank National Association, as administrative agent and sole lead arranger; Wells Fargo Bank, National Association, as syndication agent, and U.S. Bank National Association, Wells Fargo Bank, National Association, Comerica Bank, Southtrust Bank, KeyBank National Association as Lenders, as filed as Exhibit 10.(n) of the September 30, 2002 Quarterly Report of the Company, is hereby incorporated by reference.

 

  (n) Guaranty dated as of August 30, 2002 by and between Saul Centers, Inc. as Guarantor and U.S. Bank National Association, as administrative agent and sole lead arranger for itself and other financial institutions, the Lenders, as filed as Exhibit 10.(p) of the September 30, 2002 Quarterly Report of the Company, is hereby incorporated by reference.

 

  (o) Amended and Restated Promissory Note dated January 13, 2003 by and between Saul Holdings Limited Partnership as Borrower and Metropolitan Life Insurance Company as lender, as filed as Exhibit 10.(p) of the 2002 Annual Report of the Company, is hereby incorporated by reference.

 

  (p) Revolving Credit Agreement, dated as of January 28, 2005, by and among Saul Holdings Limited Partnership as Borrower; U.S. Bank National Association, as Administrative Agent and Sole Lead Arranger; Wells Fargo Bank, National Association, as Syndication Agent; and U.S. Bank National Association, Wells Fargo Bank, National Association, Compass Bank, Sovereign Bank and First Horizon Bank, as Lenders, as filed as Exhibit 10.(q) of the Current Report of the Company on Form 8-K filed with the Commission on February 9, 2005, is hereby incorporated by reference

 

  (q)

Guaranty, dated as of February 1, 2005, by and between Saul Centers, Inc., as Guarantor, and U.S. Bank National Association, as Administrative Agent and Sole Lead Arranger

 

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for itself and other financial institutions as Lenders, as filed as Exhibit 10.(r) of the Current Report of the Company on Form 8-K filed with the Commission on February 9, 2005, is hereby incorporated by reference

 

  (r) The Saul Centers, Inc. 2004 Stock Plan, as filed as Annex A to the Proxy Statement of the Company for its 2004 Annual Meeting of Stockholders, is hereby incorporated by reference.

 

  (s) Form of Director Stock Option Agreements, as filed as Exhibit 10.(j) of the September 30, 2004 Quarterly Report of the Company, is hereby incorporated by reference.

 

  (t) Form of Officer Stock Option Grant Agreements, as filed as Exhibit 10.(k) of the September 30, 2004 Quarterly Report of the Company, is hereby incorporated by reference.

 

  21. Subsidiaries of Saul Centers, Inc. is filed herewith.

 

  23. Consent of Ernst & Young LLP, Independent Public Accountants is filed herewith.

 

  24. Power of Attorney (included on signature page).

 

  31. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer are filed herewith.

 

  32. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer are filed herewith.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SAUL CENTERS, INC.

(Registrant)

 

Date:    March 15, 2005

      /s/ B. Francis Saul II
       

B. Francis Saul II

Chairman of the Board of Directors

& Chief Executive Officer (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons in the capacities indicated. Each person whose signature appears below hereby constitutes and appoints each of B. Francis Saul II, B. Francis Saul III and Scott V. Schneider as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this Report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof.

 

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Date: March 15, 2005

      /s/ B. Francis Saul III
        B. Francis Saul III, President and Director

Date: March 15, 2005

      /s/ Philip D. Caraci
        Philip D. Caraci, Vice Chairman

Date: March 15, 2005

      /s/ Scott V. Schneider
        Scott V. Schneider, Senior Vice President, Treasurer and Secretary (Principal Financial Officer)

Date: March 15, 2005

      /s/ Kenneth D. Shoop
        Kenneth D. Shoop, Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date:

        
        John E. Chapoton, Director

Date:

        
        Gilbert M. Grosvenor, Director

Date:

        
        Philip C. Jackson Jr., Director

Date: March 15, 2005

      /s/ David B. Kay
        David B. Kay, Director

Date: March 15, 2005

      /s/ General Paul X. Kelley
        General Paul X. Kelley, Director

Date: March 15, 2005

      /s/ Charles R. Longsworth
        Charles R. Longsworth, Director

Date: March 15, 2005

      /s/ Patrick F. Noonan
        Patrick F. Noonan, Director

Date: March 15, 2005

      /s/ James W. Symington
        James W. Symington, Director

Date:

        
        John R. Whitmore, Director

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Saul Centers, Inc.

 

We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial position of Saul Centers, Inc. at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Saul Centers, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an unqualified opinion thereon.

 

Ernst & Young LLP

McLean, Virginia

March 10, 2005

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Board of Directors and Stockholders

Saul Centers, Inc.

 

We have audited management’s assessment, included in the Assessment of Effectiveness of Internal Control over Financial Reporting section of Item 9A. Controls and Procedures of this Annual Report on Form 10K, that Saul Centers, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Saul Centers, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Saul Centers, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Saul Centers, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Saul Centers, Inc. as of December 31, 2004 and 2003, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004 of Saul Centers, Inc. and our report dated March 10, 2005 expressed an unqualified opinion thereon.

 

Ernst & Young LLP

McLean, Virginia

March 10, 2005

 

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Saul Centers, Inc.

 

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands,

except per share amounts)


   December 31,
2004


    December 31,
2003


 

Assets

                

Real estate investments

                

Land

   $ 119,029     $ 82,256  

Buildings and equipment

     521,161       436,371  

Construction in progress

     42,618       33,488  
    


 


       682,808       552,115  

Accumulated depreciation

     (181,420 )     (164,823 )
    


 


       501,388       387,292  

Cash and cash equivalents

     33,561       45,244  

Accounts receivable and accrued income, net

     20,654       14,642  

Leasing costs, net

     17,745       15,344  

Prepaid expenses

     2,421       2,609  

Deferred debt costs, net

     5,011       4,224  

Other assets

     2,616       2,261  
    


 


Total assets

   $ 583,396     $ 471,616  
    


 


Liabilities

                

Mortgage notes payable

   $ 453,646     $ 357,248  

Dividends and distributions payable

     10,424       9,454  

Accounts payable, accrued expenses and other liabilities

     12,318       7,793  

Deferred income

     6,044       4,478  
    


 


Total liabilities

     482,432       378,973  
    


 


Stockholders’ equity

                

Series A Cumulative Redeemable Preferred stock, 1,000,000 shares authorized and 40,000 shares issued and outstanding

     100,000       100,000  

Common stock, par value $0.01 per share, 30,000,000 shares authorized, 16,399,442 and 15,861,234 shares issued and outstanding, respectively

     164       159  

Additional paid-in capital

     106,886       91,469  

Accumulated deficit

     (106,086 )     (98,985 )
    


 


Total stockholders’ equity

     100,964       92,643  
    


 


Total liabilities and stockholders’ equity

   $ 583,396     $ 471,616  
    


 


 

The accompanying notes are an integral part of these statements

 

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Saul Centers, Inc.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For The Year Ended December 31,

 

(Dollars in thousands,

except per share amounts)


   2004

    2003

    2002

 

Revenue

                        

Base rent

   $ 91,125     $ 78,167     $ 75,699  

Expense recoveries

     16,712       14,438       12,680  

Percentage rent

     1,635       1,695       1,850  

Other

     3,370       3,584       3,734  
    


 


 


Total revenue

     112,842       97,884       93,963  
    


 


 


Operating expenses

                        

Property operating expenses

     12,070       11,363       10,115  

Provision for credit losses

     488       171       421  

Real estate taxes

     9,789       8,580       8,021  

Interest expense and amortization of deferred debt

     27,022       26,573       25,838  

Depreciation and amortization

     21,324       17,838       17,821  

General and administrative

     8,442       6,213       5,537  
    


 


 


Total operating expenses

     79,135       70,738       67,753  
    


 


 


Operating income before minority interests and gain on sale of property

     33,707       27,146       26,210  

Non-operating item
Gain on sale of property

     572       182       1,426  
    


 


 


Income before minority interests

     34,279       27,328       27,636  
    


 


 


Minority interests

                        

Minority share of income

     (6,386 )     (6,495 )     (7,130 )

Distributions in excess of earnings

     (1,719 )     (1,591 )     (940 )
    


 


 


Total minority interests

     (8,105 )     (8,086 )     (8,070 )
    


 


 


Net income

     26,174       19,242       19,566  

Preferred dividends

     (8,000 )     (1,244 )     —    
    


 


 


Net income available to common stockholders

   $ 18,174     $ 17,998     $ 19,566  
    


 


 


Per share net income available to common stockholders

                        

Basic

   $ 1.13     $ 1.15     $ 1.32  
    


 


 


Diluted

   $ 1.12     $ 1.15     $ 1.31  
    


 


 


Distributions declared per common share outstanding

   $ 1.56     $ 1.56     $ 1.56  
    


 


 


 

The accompanying notes are an integral part of these statements

 

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Saul Centers, Inc.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

(Dollars in thousands,

except per share amounts)


   Preferred
Stock


   Common
Stock


   Additional
Paid-in
Capital


    Accumulated
Deficit


    Total

 

Stockholders’ equity (deficit):

                                      

Balance, December 31, 2001

   $ —      $ 145    $ 64,564     $ (88,832 )   $ (24,123 )

Issuance of 660,779 shares of common stock:

                                      

556,872 shares due to dividend reinvestment plan

     —        6      12,469       —         12,475  

103,907 shares due to employee stock options and directors deferred stock plan

     —        1      2,098       —         2,099  

Net income

     —        —        —         19,566       19,566  

Common stock distributions

                           (17,360 )     (17,360 )

Distributions payable common stock ($.39 per share)

                           (5,924 )     (5,924 )
    

  

  


 


 


Balance, December 31, 2002

     —        152      79,131       (92,550 )     (13,267 )

Issuance of 664,651 shares of common stock:

                                      

552,170 shares due to dividend reinvestment plan

     —        6      13,697       —         13,703  

112,481 shares due to employee stock options and directors deferred stock plan

     —        1      2,314       —         2,315  

Issuance of 40,000 shares of preferred stock

     100,000      —        (3,673 )     —         96,327  

Net income

     —        —        —         19,242       19,242  

Distributions payable preferred stock ($31.00 per share)

     —        —        —         (1,244 )     (1,244 )

Common stock distributions

     —        —        —         (18,247 )     (18,247 )

Distributions payable common stock ($.39 per share)

                           (6,186 )     (6,186 )
    

  

  


 


 


Balance, December 31, 2003

     100,000      159      91,469       (98,985 )     92,643  

Issuance of 538,208 shares of common stock:

                                      

497,282 shares due to dividend reinvestment plan

     —        5      14,077               14,082  

40,928 shares due to employee stock options and directors deferred stock plan

     —        —        1,340               1,340  

Net income

     —        —        —         26,174       26,174  

Preferred stock distributions

     —        —        —         (6,000 )     (6,000 )

Distributions payable preferred stock ($50.00 per share)

     —        —        —         (2,000 )     (2,000 )

Common stock distributions

     —        —        —         (18,879 )     (18,879 )

Distributions payable common stock ($.39 per share)

     —        —        —         (6,396 )     (6,396 )
    

  

  


 


 


Balance, December 31, 2004

   $ 100,000    $ 164    $ 106,886     $ (106,086 )   $ 100,964  
    

  

  


 


 


 

The accompanying notes are an integral part of these statements.

 

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Saul Centers, Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For The Year Ended December 31,

 

(Dollars in thousands)


   2004

    2003

    2002

 

Cash flows from operating activities:

                        

Net income

   $ 26,174     $ 19,242     $ 19,566  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Gain on sale of property

     (572 )     (182 )     (1,426 )

Minority interests

     8,105       8,086       8,070  

Depreciation and amortization

     21,324       17,838       17,821  

Amortization of deferred debt

     929       801       725  

Provision for credit losses

     488       171       421  

Increase in accounts receivable and accrued income

     (6,500 )     (2,308 )     (3,709 )

Increase in leasing costs

     (2,266 )     (2,303 )     (848 )

Decrease (increase) in prepaid expenses

     188       (3,250 )     (6,458 )

(Increase) decrease in other assets

     (355 )     171       15  

Increase (decrease) in accounts payable, accrued expenses and other liabilities

     1,630       (897 )     1,717  

Increase (decrease) in deferred income

     1,566       (6 )     475  
    


 


 


Net cash provided by operating activities

     50,711       37,363       36,369  
    


 


 


Cash flows from investing activities:

                        

Acquisitions of real estate investments, net*

     (79,105 )     (26,375 )     (29,226 )

Additions to real estate investments

     (6,425 )     (7,709 )     (3,382 )

Additions to development and redevelopment activities

     (29,366 )     (15,317 )     (8,987 )

Proceeds from sale of asset

     833       280       1,426  
    


 


 


Net cash used in investing activities

     (114,063 )     (49,121 )     (40,169 )
    


 


 


Cash flows from financing activities:

                        

Proceeds from mortgage notes payable

     94,800       93,134       991  

Repayments on mortgage notes payable

     (16,427 )     (69,879 )     (6,624 )

Proceeds from revolving credit facility

     33,000       35,000       44,750  

Repayments on revolving credit facility

     (33,000 )     (81,750 )     (18,000 )

Additions to deferred debt expense

     (1,716 )     (900 )     (1,287 )

Proceeds from the issuance of preferred stock, net of issuance costs

     —         96,327       —    

Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership

     15,422       16,018       14,574  

Distributions to preferred stockholders

     (7,244 )     —         —    

Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership

     (33,166 )     (32,257 )     (31,100 )
    


 


 


Net cash provided by financing activities

     51,669       55,693       3,304  
    


 


 


Net (decrease) increase in cash and cash equivalents

     (11,683 )     43,935       (496 )

Cash and cash equivalents, beginning of year

     45,244       1,309       1,805  
    


 


 


Cash and cash equivalents, end of year

   $ 33,561     $ 45,244     $ 1,309  
    


 


 


Supplemental disclosures of cash flow information:

                        
    


 


 


Cash paid for interest

   $ 28,682     $ 26,878     $ 25,637  
    


 


 


 

* Supplemental discussion of non-cash investing and financing activities:

 

The $79,105,000 shown as 2004 real estate acquisitions does not include $18,025,000 in total assumed mortgages for 2 of the properties acquired as the assumption of these mortgages was a non-cash acquisition cost. On February 13, 2004 the Company purchased Boca Valley Plaza for an acquisition cost of $17,678,000 and assumed a mortgage in the amount of $9,200,000 with the balance being paid in cash. On March 25, 2004 the Company purchased Cruse MarketPlace for an acquisition cost of $12,897,000 and assumed a mortgage of $8,825,000 with the balance being paid in cash. For 2002 the $29,226,000 figure does not include $7,806,000 in an assumed mortgage of an acquisition cost of $14,300,000 on September 8, 2002 of the Company's Kentlands property with the balance being paid in cash.

 

The accompanying notes are an integral part of these statements.

 

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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. Saul Centers operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 90% of its REIT taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company”. B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

 

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, each of which is controlled by B. Francis Saul II and his family members (collectively, “The Saul Organization”). On August 26, 1993, members of The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships”, and collectively with the Operating Partnership, the “Partnerships”), shopping center and office properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. During 2004 and 2003, the Company developed and purchased several properties. In July 2003 the Company purchased Olde Forte Village, a grocery anchored neighborhood shopping center located in Fort Washington, Maryland. In November 2003 The Company purchased a land parcel located in Frederick, Maryland, upon which it developed a grocery anchored shopping center named Shops at Monocacy, completed during the fourth quarter of 2004. Also during the fourth quarter of 2003, the Company completed development of Broadlands Village Phase I, an in-line retail and retail pad, grocery anchored shopping center. The Company completed Phase II, a 30,000 square foot addition to the center during the fourth quarter of 2004. During 2004, the Company purchased a land parcel which it is currently developing into a 41,000 square foot retail/office property to be known as Kentlands Place, adjacent to its Kentlands Square shopping center. The Company also purchased a land parcel in Dumfries, Virginia, which it plans to develop into a grocery anchored shopping center to be known as Ashland Square. Also during 2004, the Company acquired four grocery anchored shopping centers; (1) Boca Valley Plaza, 121,000 square feet, located in Boca Raton, Florida, (2) Countryside, 142,000 square feet located in Loudoun County, Virginia (3) Cruse MarketPlace, 79,000 square feet, located in Forsyth County, Georgia, and (4) Briggs Chaney Plaza, 197,000 square feet, located in Silver Spring, Maryland. As of December 31, 2004, the Company’s properties (the “Current Portfolio Properties”) consisted of 35 shopping center operating properties (the “Shopping Centers”), five predominantly office operating properties (the “Office Properties”) and five development and/or redevelopment (non-operating) properties.

 

The Company established Saul QRS, Inc., a wholly owned subsidiary of Saul Centers, to facilitate the placement of collateralized mortgage debt. Saul QRS, Inc. was created to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties.

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

Basis of Presentation

 

The accompanying financial statements of the Company have been presented on the historical cost basis of The Saul Organization because of affiliated ownership and common management and because the assets and liabilities were the subject of a business combination with the Operating Partnership, the Subsidiary Partnerships and Saul Centers, all newly formed entities with no prior operations.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Washington, DC/Baltimore metropolitan area. Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by several major tenants. Twenty-four of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of December 31, 2004, no single property accounted for more than 7.8% of the total gross leasable area. Only two retail tenants, Giant Food (4.8%), a tenant at nine Shopping Centers and Safeway (2.9%), a tenant at six Shopping Centers and one office tenant, the United States Government (3.5%), a tenant at five properties, individually accounted for more than 2.5% of the Company’s total revenues for the year ended December 31, 2004.

 

Principles of Consolidation

 

The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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

 

The Company purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases and customer relationships in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In the case of below market leases, the Company considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional lease expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer relationship.

 

Real estate investment properties are reviewed for potential impairment losses quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an event or change in circumstance indicating the potential for an impairment in the value of a real estate investment property, the Company’s policy is to assess potential impairment in value by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. If such carrying amount is in excess of the estimated projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. The Company has not recognized an impairment loss in 2004, 2003 or 2002 on any of its real estate.

 

Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Once construction is substantially completed and the assets are placed in service, their rental income, real estate tax expense, property operating expenses (consisting of payroll, repairs and maintenance, utilities, insurance and other property related expenses) and depreciation are included in current operations. Property operating expenses are charged to operations as incurred. Repairs and maintenance expense totaled $4,927,000, $4,943,000 and $3,852,000, for 2004, 2003 and 2002, respectively, and is included in operating expenses in the accompanying consolidated financial statements. Interest expense capitalized totaled $3,227,000, $1,382,000 and $548,000, for 2004, 2003 and 2002, 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 35 to 50 years for base buildings and up to 20 years for certain other improvements. Depreciation expense for the years ended December 31, 2004, 2002 and 2001 was $17,061,000, $14,649,000 and $15,526,000, respectively. Leasehold improvements are amortized, over the shorter of the lives of the related leases or the useful life of the improvement, using the straight-line method.

 

Lease Acquisition Costs

 

Certain initial direct costs incurred by the Company in negotiating and consummating a successful lease are capitalized and amortized over the initial base term of the lease. These costs total $17,745,000 and $15,344,000, net of accumulated amortization of $9,461,000 and $6,671,000, as of December 31, 2004 and 2003, respectively. Amortization expense, included in depreciation and amortization in the consolidated statements of operations, totaled $4,263,000, $3,189,000 and $2,295,000, for the years ended December 31, 2004, 2003 and 2002, respectively. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly related to time spent performing leasing related activities. Such activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. The carrying amount of costs are written-off to expense if the applicable lease is terminated prior to expiration of the initial lease term.

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

Construction in Progress

 

Construction in progress includes preconstruction costs and development costs of active projects. Preconstruction costs associated with these active projects include legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of December 31, 2004 and 2003 are as follows:

 

Construction in Progress

 

(In thousands)

 

     December 31,

     2004

   2003

Clarendon Center

   $ 14,976    $ 13,209

Shops at Monocacy

     —        9,818

Broadlands Village II

     —        1,151

Broadlands Village III

     1,660      1,527

Lansdowne Town Square

     6,872      6,138

Ashland Square

     6,411      —  

Kentlands Place

     5,905      —  

Olde Forte Village

     4,755      116

Briggs Chaney Plaza

     660      —  

Other

     1,379      1,529
    

  

Total

   $ 42,618    $ 33,488
    

  

 

Accounts Receivable and Accrued Income

 

Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying consolidated financial statements are shown net of an allowance for doubtful accounts of $1,125, 000 and $881,000, at December 31, 2004 and 2003, respectively.

 

Allowance for Doubtful Accounts

 

(In thousands)

 

     For the Year Ended December 31,

 
     2004

    2003

 

Beginning Balance

   $ 881     $ 1,001  

Provision for Credit Losses

     488       171  

Charge-offs

     (244 )     (291 )
    


 


Ending Balance

   $ 1,125     $ 881  
    


 


 

In addition to rents due currently, accounts receivable include $12,101,000 and $9,370,000, at December 31, 2004 and 2003, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. These amounts are presented after netting allowances of

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

$237,000 and $548,000, respectively, for tenants whose rent payment history or financial condition cast doubt upon the tenant’s ability to perform under its lease obligations.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term investments. Short-term investments are highly liquid investments that are both readily convertible to cash and so near their maturity that they present insignificant risk of changes in value arising from interest rate fluctuations. Short-term investments include money market accounts and other investments which generally mature within three months, measured from the acquisition date.

 

Deferred Debt Costs

 

Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the revolving line of credit. These fees and costs are being amortized over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $5,011,000 and $4,224,000, net of accumulated amortization of $4,229,000 and $3,300,000, at December 31, 2004 and 2003, respectively.

 

Deferred Income

 

Deferred income consists of payments received from tenants prior to the time they are earned and recognized by the Company as revenue. These payments include prepayment of the following month’s rent, prepayment of real estate taxes when the taxing jurisdiction has a fiscal year differing from the calendar year reimbursements specified in the lease agreement and advance payments by tenants for tenant construction work provided by the Company.

 

Revenue Recognition

 

Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis in accordance with accounting principles generally accepted in the United States. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint.

 

Income Taxes

 

The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under 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 90% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

 

Stock Based Employee Compensation, Deferred Compensation and Stock Plan for Directors

 

Effective January 2003, the Company adopted the fair value method to value and account for employee stock options using the prospective transition method specified under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company had no options eligible for valuation prior to the grant of options in 2003 and 2004. The fair value of the 2003 and 2004 options was determined at the time of each award

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

using the Black-Scholes model, a widely used method for valuing stock based employee compensation, and the following assumptions: (1) Expected Volatility. Because Saul Centers common stock is thinly traded, with average daily trading volume averaging less than 50,000 shares (since the Company’s inception), expected volatility is determined using the entire trading history of the Company’s common stock (month-end closing prices since its inception), (2) Average Expected Term. The options are assumed to be outstanding for a term calculated as the period of time from grant until the midpoint between the full vesting date and expiration date, (3) Expected Dividend Yield. This rate is a value management determines after considering the Company’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s market yield at the grant date, and (4) Risk-free Interest Rate. This rate is based upon the market yields of US Treasury obligations with maturities corresponding to the average expected term of the options at the grant date. The Company recognizes the value of options granted, ratably over the vesting period, as compensation expense included in general and administrative expenses.

 

The Company established a stock option plan in 1993 (the “1993 Plan”) for the purpose of attracting and retaining executive officers and other key personnel. The 1993 Plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares were made available under the 1993 Plan. The 1993 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. On May 23, 2003, the Compensation Committee granted options to purchase a total of 220,000 shares (80,000 shares from incentive stock options and 140,000 shares from nonqualified stock options) to six Company officers (the “2003 Options”). Following the grant of the 2003 Options, no shares were available for issuance under the 1993 Plan. The 2003 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment.

 

At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan (the “2004 Plan”) for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 Plan provides for grants of options to purchase up to 500,000 shares of common stock as well as grants of up to 100,000 shares of common stock to directors. The 2004 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.

 

Effective April 26, 2004, the Compensation Committee granted options to purchase a total of 152,500 shares (27,500 shares of incentive stock options and 125,000 shares of nonqualified stock options) to eleven Company officers (122,500 options) and to the twelve Company directors (30,000 options), (combined, the “2004 Options”). The officers’ 2004 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The directors’ options are exercisable immediately. (See Note 10. Stock Option Plan)

 

Pursuant to the 2004 Plan, the Compensation Committee established a Deferred Compensation Plan for Directors (the “Plan”) for the benefit of its directors and their beneficiaries. The Plan replaces the Company’s previous Deferred Compensation and Stock Plan for Directors. A director may elect to defer all or part of his or her director’s fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the market price of the common stock on the quarter’s last trading day to determine the number of shares to be allocated to the director. As of December 31, 2004, 168,000 shares had been credited to the directors’ deferred fee accounts.

 

The Compensation Committee has also approved an annual award of shares of the Company’s common stock as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are awarded as of each Annual Meeting of Shareholders, and their issuance may not be deferred. Each director was issued 200, 100 and 100 shares, for the years ended December 31,

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

2004, 2003 and 2002, respectively. The shares were valued at the closing stock price on the dates the shares were awarded and included in general and administrative expenses in the total amounts of $71,000, $29,000 and $25,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Minority Interests

 

Saul Centers, Inc. is the sole general partner of the Operating Partnership, owning 75.9% interest as of December 31, 2004. Minority interests in the Operating Partnership are comprised of limited partnership units owned by The Saul Organization. Minority interests are increased for earnings allocated to limited partnership units and decreased for distributions. Amounts distributed in excess of the limited partners’ share of earnings also increase minority interests, are expensed in the respective period and are classified in the income statement as Distributions in excess of earnings.

 

Per Share Data

 

Per share data is calculated in accordance with SFAS No. 128, “Earnings Per Share.” Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the convertible limited partnership units are anti-dilutive. For the years ended December 31, 2004, 2003 and 2002 the options are dilutive because the average share price of the Company’s common stock exceeded the exercise prices. The treasury share method was used to measure the effect of the dilution.

 

Basic and Diluted Shares Outstanding

 

(In thousands)    December 31

     2004

   2003

   2002

Weighted average common shares outstanding – Basic

     16,154      15,591      14,865

Effect of dilutive options

     57      17      22
    

  

  

Weighted average common shares outstanding – Diluted

     16,211      15,608      14,887
    

  

  

Average Share Price

   $ 30.66    $ 25.77    $ 22.90

 

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.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” FAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recorded as an expense based on their fair values. The grant-date fair value of employee share options and similar instruments will be estimated using an option-pricing model adjusted for any unique characteristics of a particular instrument. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The Company already values stock option awards using the fair value method and expenses the option value over the vesting period of the options. We believe the adoption of FAS No. 123R will not have a material impact upon the Company’s financial statements.

 

3. REAL ESTATE ACQUIRED

 

Boca Valley Plaza

 

On February 13, 2004, the Company acquired Boca Valley Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 square foot neighborhood shopping center on U.S. Highway 1 in South Florida. The center, constructed in 1988, is 91% leased and anchored by a 42,000 square foot Publix supermarket. The property was

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million mortgage (See Note 5. Mortgage Notes Payable). The mortgage assumption was treated as a non-cash acquisition in the Statement of Cash Flows.

 

Countryside

 

On February 17, 2004, the Company completed the acquisition of the 142,000 square foot Safeway-anchored Countryside shopping center, its fourth neighborhood shopping center investment in Loudoun County, Virginia. The center is 95% leased and was acquired for a purchase price of $29.7 million.

 

Cruse MarketPlace

 

On March 25, 2004, the Company completed the acquisition of the 79,000 square foot Publix-anchored, Cruse MarketPlace located in Forsyth County, Georgia. Cruse MarketPlace was constructed in 2002 and is 97% leased. The center was purchased for $12.6 million subject to the assumption of an $8.8 million mortgage (See Note 5. Mortgage Notes Payable). The mortgage assumption was treated as a non-cash acquisition in the Statement of Cash Flows.

 

Briggs Chaney Plaza

 

On April 23, 2004, the Company completed the acquisition of the 197,000 square foot Safeway-anchored Briggs Chaney Plaza shopping center located in Silver Spring, Maryland. The center is 94% leased and was acquired for a purchase price of $27.3 million.

 

Ashland Square

 

On December 15, 2004, the Company acquired a 19.3 acre parcel of land in Dumfries, Prince William County, Virginia for a purchase price of $6.3 million. The Company has preliminary plans to develop the parcel into a grocery-anchored neighborhood shopping center.

 

The Company accounted for the acquisition of the operating properties, Boca Valley Plaza, Countryside, Cruse MarketPlace and Briggs Chaney, using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” The Company allocates the purchase price to various components, such as land, buildings and intangibles related to in-place leases and customer relationships, if applicable, as described in Note 2. Significant Accounting Policies-Real Estate Investment Properties. Of the combined $89,299,000 total cost of the operating property acquisitions in 2004 and $26,375,000 in 2003, of which both amounts include the properties’ purchase price and closing costs, a total of $4,403,000 and $901,000, was allocated as lease intangible assets and included in lease acquisition costs at December 31, 2004 and December 31, 2003, respectively. Each year’s lease intangible assets are being amortized over the remaining periods of the leases acquired, a weighted average term of 9 and 17 years, for 2004 and 2003, respectively. The value of below market leases totaled $1,094,000 and $65,000, are being amortized over a weighted average term of 14 and 3 years for 2004 and 2003, respectively, and are included in deferred income. The value of above market leases totaled $497,000 and $41,000, are being amortized over a weighted average term of 5 and 6 years for 2004 and 2003, respectively, and are included as a deferred asset in accounts receivable.

 

As of December 31, 2004 and 2003, the gross carrying amount of lease intangible assets included in lease acquisition costs was $5,598,000 and $1,196,000, respectively, and accumulated amortization was $1,584,000 and $128,000 respectively. Total amortization of these assets was $1,456,000 and $128,000, for the years ended December 31, 2004 and 2003, respectively. As of December 31, 2004 and 2003, the gross carrying amount of below market lease intangible assets included in deferred income was $1,159,000 and $65,000, respectively, and accumulated amortization was $148,000 and $12,000 respectively. Total amortization of these assets was $136,000 and $12,000, for the years ended December 31, 2004 and 2003, respectively. As of December 31, 2004 and 2003, the gross carrying amount of above market lease intangible assets included in accounts receivable was $538,000 and $41,000, respectively, and accumulated amortization was $142,000 and 5,000 respectively. Total amortization of these assets was $137,000 and $5,000, for the years ended December 31, 2004 and 2003, respectively.

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

Amortization of Intangible Assets Related to In-place Leases:

 

($ in thousands)    Lease
acquisition
costs


    Above
market
leases


    Below
market
leases


   Total

 

2005

   $ (1,134 )   $ (139 )   $ 155    $ (1,118 )

2006

     (870 )     (92 )     123      (839 )

2007

     (609 )     (66 )     92      (583 )

2008

     (397 )     (54 )     74      (377 )

2009

     (227 )     (27 )     68      (186 )

Thereafter

     (777 )     (18 )     499      (296 )
    


 


 

  


Total

   $ (4,014 )   $ (396 )   $ 1,011    $ (3,399 )
    


 


 

  


 

The results of operations of the acquired properties are included in the consolidated statements of operations as of the acquisition date. The following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the years ended December 31, 2004 and 2003, respectively, as if the above described operating property acquisitions had occurred on January 1, 2004 and 2003, respectively. The unaudited pro-forma information does not purport to be indicative of the results that actually would have occurred if the combinations had been in effect for the years ended December 31, 2004 and 2003, respectively.

 

Pro-Forma Consolidated Condensed Statements of Operations

 

(in thousands, except per share data, unaudited)

 

     Year ended December 31,

     2004

   2003

Total revenue

   $ 114,540    $ 106,304

Net income available to common shareholders

   $ 18,325    $ 18,947

Net income per common share – basic

   $ 1.13    $ 1.22

Net income per common share – diluted

   $ 1.13    $ 1.21

 

4. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP

 

The Saul Organization has a 24.1% limited partnership interest, represented by 5,199,000 convertible limited partnership units, in the Operating Partnership, as of December 31, 2004. These convertible limited partnership units are convertible into shares of Saul Centers’ common stock, at the option of the unitholders, on a one-for-one basis, provided the rights may not be exercised at any time that The Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 24.9% of the outstanding equity securities of Saul Centers. The limited partnership units were not convertible as of December 31, 2004 because the Saul Organization owned in excess of 24.9% of the Company’s equity securities. The impact of The Saul Organization’s 24.1% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the years ended December 31, 2004, 2003 and 2002, were 21,405,000, 20,790,000 and 20,059,000, respectively.

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

5. MORTGAGE NOTES PAYABLE, REVOLVING CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS

 

Notes payable totaled $453,646,000 at December 31, 2004, all of which was fixed rate debt. At the prior year’s end, notes payable totaled $357,248,000, all of which was fixed rate debt. At December 31, 2004, the Company had a $125 million unsecured revolving credit facility with no outstanding borrowings. The facility was due to mature August 2005 and required monthly interest payments, if applicable, at a rate of LIBOR plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. On January 28, 2005 the Company replaced the line and with a new three-year $150 million unsecured revolving credit facility. (See Note 14. Subsequent Events.) Loan availability is determined by operating income from the Company’s unencumbered properties, which, as of December 31, 2004 supported line availability of $80,000,000, of which $2,100,000 had been issued under a letter of credit, leaving $77,900,000 available for working capital uses. An additional $45,000,000 was available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions.

 

Saul Centers has guaranteed portions of two mortgage notes payable totaling $7,464,000, the amount of which are considered recourse obligations to Saul Centers as of December 31, 2004. The guarantees are expected to be released upon the completion of improvements and achievement of specified leasing thresholds at these recently developed and acquired properties. Saul Centers is also a guarantor of the revolving credit facility. The operating partnership issued a letter of credit from the revolving credit facility in the amount of $2,100,000 related to a non-recourse mortgage note to ensure completion of construction at the recently developed Shops at Monocacy. The balance of the mortgage notes payable totaling $446,182,000 are non-recourse.

 

During 2004 the Company completed new financings and refinanced several existing mortgage loans to take advantage of favorable financing terms available to the Company. In addition, the Company assumed two mortgages securing real estate properties acquired by the Company during 2004. In February the Company refinanced Kentlands Square with a new $10.2 million fixed-rate 15 year mortgage and assumed a $9.2 million mortgage with the acquisition of Boca Valley Plaza. In March, the Company assumed an $8.8 million mortgage with the acquisition of Cruse MarketPlace. In April 2004, the Company obtained a new $15.5 million fixed-rate 15 year mortgage secured by Olde Forte Plaza, acquired in July 2003. In July 2004, the Company obtained a new $21.35 million fixed-rate 15 year mortgage secured by Countryside, acquired in February 2004. In August 2004, the Company obtained a new $21 million fixed-rate 15 year mortgage secured by Briggs Chaney Plaza, acquired in April 2004. In December 2004, the Company obtained a new $18.75 million fixed-rate 15 year mortgage secured by Shops at Monocacy, a development placed in service during the fourth quarter of 2004. Also in December 2004, the Company obtained a new $8 million fixed-rate 14 year mortgage secured by Broadlands Village and Broadlands Village II, a development placed in service during the fourth quarter of 2004.

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

The following is a summary of notes payable as of December 31, 2004 and 2003:

 

Notes Payable

 

(Dollars in thousands)    December 31,

  

Interest

Rate *


   

Scheduled

Maturity *


     2004

    2003

    

Fixed Rate Mortgages:

   $ 129,883 (a)   $ 132,859    7.67 %   Oct 2012
       94,794 (b)     98,103    8.00 %   Dec 2011
       47,375 (c)     29,800    5.88 %   Jan 2019
       41,324 (d)     41,982    6.01 %   Feb 2018
       33,138 (e)     34,017    7.88 %   Jan 2013
       21,185 (f)     —      5.62 %   Jul 2019
       20,906 (g)     —      5.79 %   Sep 2019
       18,750 (h)     —      5.22 %   Jan 2020
       15,335 (i)     —      5.76 %   May 2019
       13,057 (j)     13,375    8.33 %   Jun 2015
       9,200 (k)     —      6.82 %   Apr 2007
       8,699 (l)     —      5.77 %   Jul 2013
       —   (m)     7,112           
    


 

  

 

Total Fixed Rate

     453,646       357,248    7.03 %   9.9 Years
    


 

  

 

Variable Rate Loan:

                         

Line of Credit

     —   (n)     —      LIBOR plus
1.625
 
%
  Aug 2005
    


 

  

 

Total Variable Rate

     —         —      —       —  
    


 

  

 

Total Notes Payable

   $ 453,646     $ 357,248    7.03 %   9.9 Years
    


 

  

 

 

*Interest rate and scheduled maturity data presented as of December 31, 2004. Totals computed using weighted averages.

 

(a) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25 year amortization schedule and a balloon payment of $96,784,000 at loan maturity. Principal of $2,976,000 was amortized during 2004.

 

(b) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowing rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23 year amortization schedule and a balloon payment of $63,153,000 at loan maturity. Principal of $3,309,000 was amortized during 2004.

 

(c) The loan, consisting of two notes dated December 2003 and two notes dated February and December 2004, is currently collateralized by four shopping centers, Broadlands Village (Phases I & II), The Glen and Kentlands Square, and requires equal monthly principal and interest payments of $306,000 (beginning February 1, 2005; prior to that date, payments totaled $256,000 per month) based upon a 25 year amortization schedule and a balloon payment of $28,255,000 at loan maturity. Principal of $625,000 was amortized during 2004.

 

(d) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5 year amortization schedule and a balloon payment of $27,872,000 at loan maturity. Principal of $658,000 was amortized during 2004.

 

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SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

(e) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25 year amortization schedule and a balloon payment of $22,808,000 at loan maturity. Principal of $879,000 was amortized during 2004.

 

(f) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25 year amortization schedule and a balloon payment of $12,231,000 at loan maturity. Principal of $165,000 was amortized during 2004.

 

(g) The loan is collateralized by Briggs Chaney and requires equal monthly principal and interest payments of $133,000 based upon a 25 year amortization schedule and a balloon payment of $12,134,000 at loan maturity. Principal of $94,000 was amortized during 2004.

 

(h) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25 year amortization schedule and a balloon payment of $10,522,000 at loan maturity. Payments commenced February 2005.

 

(i) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25 year amortization schedule and a balloon payment of $8,942,000 at loan maturity. Principal of $165,000 was amortized during 2004.

 

(j) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22 year amortization schedule and a balloon payment of $7,577,000 at loan maturity. Principal of $318,000 was amortized during 2004.

 

(k) The loan is collateralized by Boca Valley Plaza and requires monthly interest only payments of $52,000. A balloon payment of $9,200,000 is due at loan maturity.

 

(l) The loan is collateralized by Cruse MarketPlace and requires equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a balloon payment of $6,797,000 at loan maturity. Principal of $126,000 was amortized during 2004.

 

(m) The $7,112,000 loan was collateralized by Kentlands Square and was repaid and retired at maturity in February 2004 using proceeds provided by a $10,200,000 increase to the loan described in (c) above.

 

(n) The loan is an unsecured revolving credit facility totaling $125,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. There were no outstanding borrowings as of December 31, 2004. Monthly payments, if applicable, are interest only and will vary depending upon the amount outstanding and the applicable interest rate for any given month. On January 28, 2005 the Company executed a new $150,000,000 unsecured revolving credit facility to replace the $125,000,000 line. The new line has a three-year term and provides for an additional one-year extension at the Company’s option, subject to the Company’s satisfaction of certain conditions. (see Note 14. Subsequent Events).

 

The December 31, 2004 and 2003 depreciation adjusted cost of properties collateralizing the mortgage notes payable totaled $420,320,000 and $295,506,000, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants. As of December 31, 2004, the material covenants required the Company, on a consolidated basis, to:

 

    limit the amount of debt so as to maintain a gross asset value in excess of liabilities of at least $250 million;

 

    limit the amount of debt as a percentage of gross asset value (leverage ratio) to less than 60%;

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

    limit the amount of debt so that interest coverage will exceed 2.1 to 1 on a trailing four quarter basis; and

 

    limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.6 to 1.

 

As of December 31, 2004, the Company was in compliance with all such covenants.

 

Notes payable at December 31, 2004 and 2003, totaling $163,022,000 and $166,876,000, respectively, are guaranteed by members of The Saul Organization. As of December 31, 2004, the scheduled maturities of all debt including scheduled principal amortization for years ended December 31, are as follows:

 

Debt Maturity Schedule

      
(In thousands)     

2005

   $ 11,349

2006

     12,259

2007

     22,394

2008

     14,176

2009

     15,290

Thereafter

     378,178
    

Total

   $ 453,646
    

 

Interest Expense and Amortization of Deferred Debt Costs

                        
(In thousands)                         
     Year ended December 31,

 
     2004

    2003

    2002

 

Interest incurred

   $ 29,320     $ 27,154     $ 25,661  

Amortization of deferred debt costs

     929       801       725  

Capitalized interest

     (3,227 )     (1,382 )     (548 )
    


 


 


Total

   $ 27,022     $ 26,573     $ 25,838  
    


 


 


 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

6. LEASE AGREEMENTS

 

Lease income includes primarily base rent arising from noncancelable commercial leases. Base rent (including straight-lined rent) for the years ended December 31, 2004, 2003 and 2002, amounted to $91,125,000, $78,167,000 and $75,699,000, respectively. Future contractual payments under noncancelable leases for years ended December 31, are as follows:

 

Future Contractual Payments

      
(In thousands)       

2005

   $ 92,181

2006

     85,272

2007

     77,803

2008

     67,674

2009

     56,309

Thereafter

     290,213
    

Total

   $ 669,452
    

 

The majority of the leases also provide for rental increases and expense recoveries based on fixed annual increases or increases in the Consumer Price Index and increases in operating expenses. The expense recoveries 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, 2004, 2003 and 2002 amounted to $16,712,000, $14,438,000 and $12,680,000, 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 $1,635,000, $1,695,000 and $1,850,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

 

7. LONG-TERM LEASE OBLIGATIONS

 

Certain properties are subject to noncancelable long-term leases which apply to land underlying the Shopping Centers. Certain of the leases provide for periodic adjustments of the base 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 consolidated financial statements is minimum ground rent expense of $164,000 for each of the years ended December 31, 2004, 2003 and 2002, respectively. The future minimum rental commitments under these ground leases are as follows:

 

Ground Lease Rental Commitments

             
(In thousands)              
     Annually
2005-2009


   Total
Thereafter


Beacon Center

   $ 53    $ 3,130

Olney

     51      4,322

Southdale

     60      3,485
    

  

Total

   $ 164    $ 10,937
    

  

 

In addition to the above, Flagship Center consists of two developed out parcels 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. Countryside Shopping Center was acquired in February, 2004. Because of certain land use considerations, approximately 0.54 of the 16 acres acquired is held under a 99-year ground lease. The lease requires the Company to pay minimum rent of one dollar per year as well as its pro-rata share of the real estate taxes.

 

The Company’s corporate headquarters lease, which commenced in March 2002, is leased by a member of The Saul Organization. The 10-year lease provides for base rent escalated at 3% per year, with payment of a pro-rata share of operating expenses over a base year amount. The Company and The Saul Organization entered into a Shared Services Agreement whereby each party pays an allocation of total rental payments on a percentage proportionate to the number of employees employed by each party. The Company’s rent payments for the years

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

ended December 31, 2004, 2003 and 2002 were $621,000, $569,000 and $547,000, respectively. Expenses arising from the lease are included in general and administrative expense (see Note 9 – Related Party Transactions).

 

8. STOCKHOLDERS’ EQUITY (DEFICIT) AND MINORITY INTERESTS

 

The consolidated statement of operations for the year ended December 31, 2004 includes a charge for minority interests of $8,105,000, consisting of $6,386,000 related to The Saul Organization’s share of the net income for the year and $1,719,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 2003 of $8,086,000, consisting of $6,495,000 related to The Saul Organization’s share of the net income for the year and $1,591,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 2002 of $8,070,000, consisting of $7,130,000 related to The Saul Organization’s share of the net income for the year and $940,000 related to distributions to minority interests in excess of allocated net income for the year.

 

On July 16, 2003, the Company filed a shelf registration statement (the “Shelf Registration Statement”) with the SEC relating to the future offering of up to an aggregate of $100 million of preferred stock and depositary shares. On November 5, 2003 the Company sold 3,500,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock. The underwriters exercised an over-allotment option, purchasing an additional 500,000 depositary shares on November 26, 2003.

 

The depositary shares may be redeemed, in whole or in part, at the $25.00 liquidation preference at the Company’s option on or after November 5, 2008. The depositary shares will pay an annual dividend of $2.00 per share, equivalent to 8% of the $25.00 liquidation preference. The first dividend, paid on January 15, 2004 was for less than a full quarter and covered the period from November 5 through December 31, 2003. The Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

 

9. RELATED PARTY TRANSACTIONS

 

Chevy Chase Bank, an affiliate of The Saul Organization, leases space in 14 of the Company’s properties. Total rental income from Chevy Chase Bank amounted to $1,733,000, $1,495,000 and $1,368,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

 

The Company utilizes Chevy Chase Bank for its various checking accounts and as of December 31, 2004 had $32.9 million deposited in cash and short-term investment accounts.

 

The Chairman and Chief Executive Officer, the President and the Chief Accounting Officer of the Company are also officers of various members of The Saul Organization and their management time is shared with The Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors.

 

The Company participates in a multiemployer profit sharing retirement plan with other entities within The Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Beginning January 1, 2002, only employer contributions are made to the plan. Each participant who is entitled to be credited with at least one hour of service on or after January 1, 2002, shall be 100% vested in his or her employer contribution account and no portion of such account shall be forfeitable. Employer contributions, included in general and administrative expense or property operating expenses in the consolidated statements of operations, at

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

the discretionary amount of up to six percent of the employee’s cash compensation, subject to certain limits, were $269,000, $199,000 and $155,000 for 2004, 2003 and 2002, respectively. There are no past service costs associated with the plan since it is of the defined-contribution type.

 

The Company also participates in a multiemployer nonqualified deferred plan with entities in The Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. The plan, which can be modified or discontinued at any time, requires participating employees to defer 2% of their compensation over a specified amount. For the years ending December 31, 2004, 2003 and 2002, the Company is required to contribute three times the amount deferred by employees. The Company’s expense, included in general and administrative expense, totaled $650,000, $31,000, and $8,000 for the years ended December 31, 2004, 2003 and 2002, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $452,000 and $92,000 at December 31, 2004 and 2003 respectively, and is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.

 

The Company has entered into a shared services agreement (the “Agreement”) with The Saul Organization that provides for the sharing of certain personnel and ancillary functions such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is provided for in the Agreement and is based upon estimates of usage or time incurred, as applicable. Senior management has determined that the final allocations of shared costs are reasonable. The terms of the Agreement and the payments made there under are reviewed annually by the Audit Committee of the Board of Directors, which consists entirely of independent directors. Billings by The Saul Organization for the Company’s share of these ancillary costs and expenses for the years ended December 31, 2004, 2003 and 2002, which included rental payments for the Company’s headquarters lease (see Note 7. Long Term Lease Obligations), totaled $3,139,000, $2,628,000 and $2,574,000, respectively. The amounts are expensed when billed and are primarily reported as general and administrative expenses in these consolidated financial statements. As of December 31, 2004 and 2003, accounts payable, accrued expenses and other liabilities included $259,000 and $247,000, respectively, represent billings due to The Saul Organization for the Company’s share of these ancillary costs and expenses.

 

On January 23, 2004 the Company purchased a 3.4 acre site, adjacent to the Company’s Kentlands Square property, from a subsidiary of Chevy Chase Bank for $1,425,000. The Company is developing this property into a 41,000 square foot retail/office property known as Kentlands Place. The purchase price of the property was determined by the average of two independent third party appraisals which were contracted, one on behalf of the Company and one on behalf of the Bank.

 

10. STOCK OPTION PLAN

 

The Company established a stock option plan in 1993 (the “1993 Plan”) for the purpose of attracting and retaining executive officers and other key personnel. The 1993 Plan provided for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares were made available under the 1993 Plan. The 1993 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.

 

During 1993 and 1994, the Compensation Committee granted options to purchase a total of 180,000 shares (90,000 shares from incentive stock options and 90,000 shares from nonqualified stock options) to five Company officers. The options vested 25% per year over four years, had an exercise price of $20 per share and a term of ten years, subject to earlier expiration upon termination of employment. No compensation expense was recognized as a result of these grants. As of December 31, 2004, no 1993 and 1994 options remained unexercised.

 

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Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

On May 23, 2003, the Compensation Committee granted options to purchase a total of 220,000 shares (80,000 shares from incentive stock options and 140,000 shares from nonqualified stock options) to six Company officers (the “2003 Options”). The 2003 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The exercise price of $24.91 was the market trading price of the Company’s common stock at the time of the award. As a result of the 2003 Options grant, no further shares were available under the 1993 Plan.

 

At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan (the “2004 Plan”) for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 Plan provides for grants of options to purchase up to 500,000 shares of common stock as well as grants of up to 100,000 shares of common stock to directors. The 2004 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.

 

Effective April 26, 2004, the Compensation Committee granted options to purchase a total of 152,500 shares (27,500 shares of incentive stock options and 125,000 shares of nonqualified stock options) to eleven Company officers and to the twelve Company directors (the “2004 Options”). The officers’ 2004 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The directors’ options are exercisable immediately. The exercise price of $25.78 was the market trading price of the Company’s common stock at the time of the award. The table below summarizes the status of the 2003 and 2004 Option grants and the value of the options expensed and included in general and administrative expense in the Consolidated Statements of Operations:

 

Stock Options

 

     Officers

    Directors

    Total

Grant date

     05/23/2003       04/26/2004       04/26/2004        

Total grant

     220,000       122,500       30,000       372,500

Vested

     55,000       —         30,000       85,000

Exercised

     20,000       —         —         20,000

Remaining unexercised

     200,000       122,500       30,000       352,500

Exercise price

   $ 24.91     $ 25.78     $ 25.78        

Volatility

     0.175       0.183       0.183        

Expected life (years)

     7.0       7.0       5.0        

Assumed yield

     7.00 %     5.75 %     5.75 %      

Risk-free rate

     4.00 %     4.05 %     3.57 %      

Total value

   $ 332,200     $ 292,775     $ 66,600     $ 691,575

Expensed in 2003

     50,000       —         —         50,000

Expensed in 2004

     83,000       50,000       66,600       199,600

To be expensed (2005-07)

     199,200       242,775       —         441,975

 

F-23


Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

The table below summarizes the option activity for the years 2004, 2003 and 2002:

 

     2004

   2003

   2002

     Shares

    Wtd Avg
Exercise
Price


   Shares

    Wtd Avg
Exercise
Price


   Shares

    Wtd Avg
Exercise
Price


Outstanding at January 1

   220,000     $ 24.91    93,210     $ 20.00    180,000     $ 20.00

Granted

   152,500       25.78    220,000       24.91    —         —  

Exercised

   (20,000 )     24.91    (93,210 )     20.00    (86,790 )     20.00

Expired/Forfeited

   —         —      —         —      —         —  

Outstanding December 31

   352,500       25.29    220,000       24.91    93,210       20.00

Exercisable at December 31

   65,000       25.31    —         —      93,210       20.00

 

11. NON-OPERATING ITEMS

 

Gain on Sale of Property

 

The gain on sale of property of $572,000 in 2004 represents the Company’s share of the gain recognized as a result of a condemnation of a portion of land at the Company’s White Oak shopping center for road improvements. The gain on sale of property of $182,000 in 2003 represents the gain recognized as a result of a condemnation of a portion of land at the Company’s Avenel Business Park property for improvement of an interchange on I-270, adjacent to the property. The gain on sale of property of $1,426,000 in 2002 represents the final proceeds received upon appeal of the District of Columbia’s purchase of the Company’s Park Road property as part of an assemblage of parcels for a neighborhood revitalization project.

 

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Statement of Financial Accounting Standards No. 107, “Disclosure about Fair Value of Financial Instruments,” requires disclosure about the fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. Based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, the fair value of the fixed rate notes payable is in excess of the $453,646,000 and $357,248,000 carrying value at December 31, 2004 and 2003, respectively. Management estimates that the fair value of these fixed rate notes payable, assuming long term interest rates of approximately 5.5% and 6.0%, would be approximately $474,993,000 and $386,300,000, as of December 31, 2004 and 2003, respectively.

 

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 the aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties.

 

F-24


Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

14. DISTRIBUTIONS

 

In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Operating Partnership also maintains a similar dividend reinvestment plan that mirrors the Plan, which allows limited partnership interests the opportunity to buy additional limited partnership units.

 

Company declared and paid common stock distributions of $1.56 per share during 2004, 2003 and 2002 and paid preferred stock dividends of $1.811 per depositary share during 2004. No preferred stock dividends were paid during 2003 and 2002. For the common stock dividends paid, $1.248, $1.284 and $1.458 per share, represented ordinary dividend income and $0.312, $0.276 and $0.102 per share, represented return of capital to the shareholders for the years 2004, 2003 and 2002, respectively. All of the preferred stock dividends paid are considered ordinary dividend income. The following summarizes distributions paid during the years ended December 31, 2004, 2003 and 2002, and includes activity in the Plan as well as limited partnership units issued from the reinvestment of unit distributions:

 

     Total Distributions to

   Dividend Reinvestments

     Preferred
Stockholders


   Common
Stockholders


   Limited
Partnership
Unitholders


  

Common

Stock Shs

Issued


  

Units

Issued


  

Discounted

Share Price


     (in thousands)    (in thousands)    (in thousands)               

Distributions during 2004

                                     

October 31

   $ 2,000    $ 6,342    $ 2,028    116,006    2,590    $ 31.53

July 31

     2,000      6,296      2,027    117,334    2,769      29.10

April 30

     2,000      6,236      2,026    140,253    3,270      24.25

January 31

     1,244      6,187      2,024    123,689    2,928      26.69
    

  

  

  
  
      
     $ 7,244    $ 25,061    $ 8,105    497,282    11,557       
    

  

  

  
  
      

Distributions during 2003

                                     

October 31

   $ —      $ 6,135    $ 2,023    129,319    2,919    $ 26.38

July 31

     —        6,088      2,023    126,862    2,847      26.67

April 30

     —        6,021      2,020    139,576    3,262      22.88

January 31

     —        5,927      2,020    156,413    3,412      21.49
    

  

  

  
  
      
     $ —      $ 24,171    $ 8,086    552,170    12,440       
    

  

  

  
  
      

Distributions during 2002

                                     

October 31

   $ —      $ 5,839    $ 2,019    136,107    3,110    $ 23.18

July 31

     —        5,785      2,017    135,603    —        22.94

April 30

     —        5,736      2,017    119,772    —        22.94

January 31

     —        5,670      2,017    165,390    —        20.39
    

  

  

  
  
      
     $ —      $ 23,030    $ 8,070    556,872    3,110       
    

  

  

  
  
      

 

In December 2004, 2003 and 2002, the Board of Directors of the Company authorized a distribution of $0.39 per common share payable in January 2005, 2004 and 2003, to holders of record on January 17, 2005, January 16, 2004 and January 17, 2003, respectively. As a result, $6,396,000, $6,187,000 and $5,927,000, were paid to common shareholders on January 31, 2005, January 30, 2004 and January 31, 2003, respectively. Also, $2,028,000, $2,024,000 and $2,020,000,

 

F-25


Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

were paid to limited partnership unitholders on January 31, 2005, January 30, 2004 and January 31, 2003 ($0.39 per Operating Partnership unit), respectively. The Board of Directors authorized preferred stock dividends of $0.50 and $0.31 per depositary share, to holders of record on January 3, 2005 and January 2, 2004, respectively. As a result, $2,000,000 and $1,244,000, were paid to preferred shareholders on January 14, 2005 and January 15, 2004, respectively. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock and preferred stock dividends and minority interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements.

 

15. INTERIM RESULTS (Unaudited)

 

The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2004 and 2003.

 

(In thousands, except per share amounts)     
     2004

     1st Quarter

   2nd Quarter

   3rd Quarter

    4th Quarter

Revenue

   $ 26,341    $ 27,888    $ 29,044     $ 29,569

Operating income before minority interests and gain on sale of property

     8,329      8,329      8,793       8,256

Net income

     6,305      6,286      7,355 (a)     6,228

Net income available to common shareholders

     4,305      4,286      5,355       4,228

Net income available to common shareholders per share (basic & diluted)(b)

     0.27      0.27      0.33       0.26

 

(a) Includes $572 gain on land condemnation at White Oak.

 

(b) The sum of the quarterly net income per common share-diluted, $1.13, differs from the annual net income per common share-diluted, $1.12, due to rounding.

 

     2003

 
     1st Quarter

   2nd Quarter

   3rd Quarter

   4th Quarter

 

Revenue

   $ 23,870    $ 23,226    $ 24,659    $ 26,129  

Operating income before minority interests and gain on sale of property

     6,539      6,016      7,035      7,556  

Net income

     4,519      3,996      5,012      5,715 (c)

Net income available to common shareholders

     4,519      3,996      5,012      4,471  

Net income available to common shareholders per share (basic & diluted)

     0.29      0.26      0.32      0.28  

 

(c) Includes $182 gain on land condemnation at Avenel Business Park.

 

F-26


Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

16. BUSINESS SEGMENTS

 

The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance based upon income from real estate for the combined properties in each segment.

 

(In thousands)    Shopping
Centers


    Office
Properties


    Corporate
and Other


    Consolidated
Totals


 

2004

                                

Real estate rental operations:

                                

Revenue

   $ 77,906     $ 34,679     $ 257     $ 112,842  

Expenses

     (14,226 )     (8,121 )     —         (22,347 )
    


 


 


 


Income from real estate

     63,680       26,558       257       90,495  

Interest expense & amortization of debt costs

     —         —         (27,022 )     (27,022 )

General and administrative

     —         —         (8,442 )     (8,442 )
    


 


 


 


Subtotal

     63,680       26,558       (35,207 )     55,031  

Depreciation and amortization

     (13,758 )     (7,566 )     —         (21,324 )

Gain on property sale

     572       —         —         572  

Minority interests

     —         —         (8,105 )     (8,105 )
    


 


 


 


Net income

   $ 50,494     $ 18,992     $ (43,312 )   $ 26,174  
    


 


 


 


Capital investment

   $ 109,637     $ 4,426     $ —       $ 114,063  
    


 


 


 


Total assets

   $ 394,674     $ 138,273     $ 50,449     $ 583,396  
    


 


 


 


2003

                                

Real estate rental operations:

                                

Revenue

   $ 66,070     $ 31,722     $ 92     $ 97,884  

Expenses

     (12,274 )     (7,840 )     —         (20,114 )
    


 


 


 


Income from real estate

     53,796       23,882       92       77,770  

Interest expense & amortization of debt costs

     —         —         (26,573 )     (26,573 )

General and administrative

     —         —         (6,213 )     (6,213 )
    


 


 


 


Subtotal

     53,796       23,882       (32,694 )     44,984  

Depreciation and amortization

     (10,429 )     (7,409 )     —         (17,838 )

Gain on property sale

     —         182       —         182  

Minority interests

     —         —         (8,086 )     (8,086 )
    


 


 


 


Net income

   $ 43,367     $ 16,655     $ (40,780 )   $ 19,242  
    


 


 


 


Capital investment

   $ 42,999     $ 6,122     $ —       $ 49,121  
    


 


 


 


Total assets

   $ 271,565     $ 138,862     $ 61,189     $ 471,616  
    


 


 


 


2002

                                

Real estate rental operations:

                                

Revenue

   $ 61,597     $ 32,261     $ 105     $ 93,963  

Expenses

     (10,675 )     (7,882 )     —         (18,557 )
    


 


 


 


Income from real estate

     50,922       24,379       105       75,406  

Interest expense & amortization of debt costs

     —         —         (25,838 )     (25,838 )

General and administrative

     —         —         (5,537 )     (5,537 )
    


 


 


 


Subtotal

     50,922       24,379       (31,270 )     44,031  

Depreciation and amortization

     (11,295 )     (6,526 )     —         (17,821 )

Gain on property sale

     1,426       —         —         1,426  

Minority interests

     —         —         (8,070 )     (8,070 )
    


 


 


 


Net income

   $ 41,053     $ 17,853     $ (39,340 )   $ 19,566  
    


 


 


 


Capital investment

   $ 23,785     $ 4,850     $ 11,534     $ 40,169  
    


 


 


 


Total assets

   $ 237,990     $ 135,477     $ 15,220     $ 388,687  
    


 


 


 


 

F-27


Table of Contents

SAUL CENTERS, INC.

Notes to Consolidated Financial Statements

 

17. SUBSEQUENT EVENTS

 

On January 28, 2005 the Company executed a $150 million unsecured revolving credit facility, an expansion of the $125 million agreement in place as of December 31, 2004. The facility is intended to provide working capital and funds for acquisitions, certain developments and redevelopments. The line has a three-year term and provides for an additional one-year extension at the Company’s option, subject to the Company’s satisfaction of certain conditions. Until January 27, 2007, certain or all of the lenders may, upon request by the Company and payment of certain fees, increase the revolving credit facility line by up to $50,000,000. Letters of credit may be issued under the revolving credit facility. The facility requires monthly interest payments, if applicable, at a rate of LIBOR plus a spread of 1.40% to 1.625% (determined by certain leverage tests) or upon the bank’s reference rate at the Company’s option.

 

Loan availability under the facility is determined by operating income from the Company’s existing unencumbered properties. Based upon the revised terms of the facility, the unencumbered properties support line availability of $86,500,000, of which $2,100,000 has been issued under a letter of credit, leaving $84,400,000 available for working capital uses. An additional $63,500,000 is available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions. No funds have yet been borrowed from the facility.

 

On March 3, 2005 the Company acquired the 126,000 square foot Albertsons anchored, Palm Springs Center located in Altamonte Springs, Florida, near Orlando, for a purchase price of $17.5 million. The Company paid the property’s purchase price using available cash balances. The property was approximately 98% leased at the date of acquisition.

 

F-28


Table of Contents

Schedule III

 

SAUL CENTERS, INC.

Real Estate and Accumulated Depreciation

December 31, 2004

(Dollars in Thousands)

 

     Initial
Basis


   Costs
Capitalized
Subsequent
to
Acquisition


   Basis at Close of Period

   Accumulated
Depreciation


   Book
Value


   Related
Debt


   Date of
Construction


   Date
Acquired


   Buildings and
Improvements
Depreciable
Lives in Years


         Land

   Buildings and
Improvements


   Leasehold
Interests


   Total

                 

Shopping Centers

                                                                             

Ashburn Village, Ashburn, VA

   $ 11,431    $ 16,040    $ 6,764    $ 20,707    $ —      $ 27,471    $ 3,880    $ 23,591    $ 25,893    1994 & 2000-2    3/94    40

Beacon Center, Alexandria, VA

     1,493      15,162      —        15,561      1,094      16,655      7,612      9,043      —      1960 & 1974    1/72    40 & 50

Belvedere, Baltimore, MD

     932      873      263      1,542      —        1,805      1,154      651      2,442    1958    1/72    40

Boca Valley Plaza, Boca Raton, FL

     16,720      4      5,735      10,989      —        16,724      228      16,496      9,200    1988    2/04    40

Boulevard, Fairfax, VA

     4,883      1,529      3,687      2,725      —        6,412      676      5,736      5,238    1969    4/94    40

Briggs Chaney Plaza, Silver Spring, MD

     27,037      661      9,864      17,834      —        27,698      286      27,412      20,906    1983    4/04    40

Broadlands Village I, Loudoun County, VA

     3,550      12,362      3,533      12,379      —        15,912      427      15,485      17,164    2002-3    3/02    40

Broadlands Village II, Loudoun County, VA

     552      5,047      552      5,047             5,599      25      5,574      8,000    2004    3/02    50

Clarendon, Arlington, VA

     385      423      636      172      —        808      49      759      —      1949    7/73    40

Clarendon Station, Arlington, VA

     834      46      425      455      —        880      112      768      —      1949    1/96    40

Countryside, Sterling, VA

     28,912      34      7,532      21,414      —        28,946      445      28,501      21,185    1986    2/04    40

Cruse MarketPlace, Cumming, GA

     12,226      0      3,920      8,306      —        12,226      156      12,070      8,699    2002    3/04    40

Flagship Center, Rockville, MD

     160      9      169      —        —        169      —        169      —      1972    1/72    —  

French Market, Oklahoma City, OK

     5,781      9,768      1,118      14,431      —        15,549      6,091      9,458      —      1972 & 2001    3/74    50

Germantown, Germantown, MD

     3,576      407      2,034      1,949      —        3,983      736      3,247      —      1990    8/93    40

Giant, Baltimore, MD

     998      515      422      1,091      —        1,513      733      780      2,468    1959    1/72    40

The Glen, Lake Ridge, VA

     12,918      2,084      5,300      9,702      —        15,002      2,381      12,621      12,147    1993    6/94    40

Great Eastern, District Heights., MD

     3,472      9,419      2,264      10,627      —        12,891      4,526      8,365      10,598    1958 & 1960    1/72    40

Hampshire Langley, Langley Park, MD

     3,159      2,829      1,856      4,132      —        5,988      2,704      3,284      9,715    1960    1/72    40

Kentlands, Gaithersburg, MD

     14,379      96      5,006      9,469      —        14,475      527      13,948      10,064    2002    9/02    40

Leesburg Pike, Baileys Crossroads, VA

     2,418      5,562      1,132      6,848      —        7,980      4,347      3,633      10,117    1965    2/66    40

Lexington Mall, Lexington, KY

     4,868      5,996      2,111      8,753      —        10,864      5,317      5,547      —      1971 & 1974    3/74    50

Lumberton Plaza, Lumberton, NJ

     4,400      9,108      950      12,558      —        13,508      8,031      5,477      7,137    1975    12/75    40

Shops at Monocacy, Frederick, MD

     9,541      12,516      9,260      12,797      —        22,057      55      22,002      18,750    2003-4    11/03    50

Olde Forte Village, Ft. Washington, MD

     15,933      4,980      5,409      15,504      —        20,913      377      20,536      15,335    1980-1987    07/03    40

Olney, Olney, MD

     1,884      1,409      —        3,293      —        3,293      2,239      1,054      —      1972    11/75    40

Ravenwood, Baltimore, MD

     1,245      2,096      703      2,638      —        3,341      1,083      2,258      6,260    1959    1/72    40

Seven Corners, Falls Church, VA

     4,848      39,466      4,913      39,401      —        44,314      16,417      27,897      42,394    1956    7/73    40

Shops at Fairfax, Fairfax, VA

     2,708      9,196      992      10,912      —        11,904      3,572      8,332      7,819    1975 & 2001    6/75    50

Southdale, Glen Burnie, MD

     3,650      16,553      —        19,581      622      20,203      13,862      6,341      —      1962 & 1987    1/72    40

Southside Plaza, Richmond, VA

     6,728      4,696      1,878      9,546      —        11,424      6,989      4,435      9,378    1958    1/72    40

South Dekalb Plaza, Atlanta, GA

     2,474      2,753      703      4,524      —        5,227      3,366      1,861      —      1970    2/76    40

Thruway, Winston-Salem, NC

     4,778      16,480      5,496      15,657      105      21,258      7,245      14,013      24,236    1955 & 1965    5/72    40

Village Center, Centreville, VA

     16,502      785      7,851      9,436      —        17,287      3,163      14,124      7,960    1990    8/93    40

West Park, Oklahoma City, OK

     1,883      711      485      2,109      —        2,594      1,220      1,374      —      1974    9/75    50

White Oak, Silver Spring, MD

     6,277      3,888      4,665      5,500      —        10,165      3,945      6,220      22,392    1958 & 1967    1/72    40
    

  

  

  

  

  

  

  

  

              

Total Shopping Centers

     243,535      213,503      107,628      347,589      1,821      457,038      113,976      343,062      335,497               
    

  

  

  

  

  

  

  

  

              

Office Properties

                                                                             

Avenel Business Park, Gaithersburg, MD

     21,459      20,868      3,756      38,571      —        42,327      18,784      23,543      29,699    1984,1986,    12/84, 8/85,    35 & 40
                                                                    1990, 1998    2/86, 4/98     
                                                                    & 2000    & 10/2000     

Crosstown Business Center, Tulsa, OK

     3,454      5,526      604      8,376      —        8,980      3,700      5,280      —      1974    10/75    40

601 Pennsylvania Ave., Washington DC

     5,479      55,548      5,667      55,360      —        61,027      25,324      35,703      33,138    1986    7/73    35

Van Ness Square, Washington, DC

     812      27,897      831      27,878      —        28,709      15,141      13,568      13,988    1990    7/73    35

Washington Square, Alexandria VA

     2,034      46,526      544      48,016      —        48,560      4,495      44,065      41,324    1952 & 2001    7/73    50
    

  

  

  

  

  

  

  

  

              

Total Office Properties

     33,238      156,365      11,402      178,201      —        189,603      67,444      122,159      118,149               
    

  

  

  

  

  

  

  

  

              

Development Land

                                                                             

Broadlands Village III, Loudoun County, VA

     1,214      446      1,214      446             1,660      —        1,660      —           3/02     

Clarendon Center, Arlington, VA

     11,534      3,785      11,534      3,785      —        15,319      —        15,319      —           4/02     

Lansdowne, Loudoun County, VA

     5,526      1,346      5,526      1,346      —        6,872      —        6,872                11/02     

Kentlands Place, Gaithersburg, MD

     1,425      4,480      1,425      4,480      —        5,905      —        5,905                1/04     

Ashland Square, Dumfries, VA

     6,411      —        6,411      —        —        6,411      —        6,411                12/04     
    

  

  

  

  

  

  

  

  

              
       26,110      10,057      26,110      10,057      —        36,167      —        36,167      —                 
    

  

  

  

  

  

  

  

  

              

Total

   $ 302,883    $ 379,925    $ 145,140    $ 535,847    $ 1,821    $ 682,808    $ 181,420    $ 501,388    $ 453,646               
    

  

  

  

  

  

  

  

  

              

 

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Table of Contents

Schedule III

 

SAUL CENTERS, INC.

Real Estate and Accumulated Depreciation

December 31, 2004

 

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    35 - 50 years
Building components    10 - 20 years
Tenant improvements    The greater 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 $548,000,000 at December 31, 2004. Depreciation and amortization are provided on the straight-line method 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, 2004 are summarized as follows.

 

(In thousands)


   2004

    2003

    2002

 

Total real estate investments:

                        

Balance, beginning of year

   $ 552,115     $ 503,914     $ 454,809  

Acquisitions

     92,733       25,474       28,871  

Improvements

     38,546       22,822       20,234  

Sales

     (122 )     (95 )     —    

Retirements

     (464 )     —         —    
    


 


 


Balance, end of year

   $ 682,808     $ 552,115     $ 503,914  
    


 


 


Total accumulated depreciation:

                        

Balance, beginning of year

   $ 164,823     $ 150,286     $ 136,928  

Depreciation expense

     17,061       14,649       15,526  

Sales

     —         —         —    

Retirements

     (464 )     (112 )     (2,168 )
    


 


 


Balance, end of year

   $ 181,420     $ 164,823     $ 150,286  
    


 


 


 

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