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| 8-K - 8-K - SAUL CENTERS, INC. | form8k-2016annualmeetingan.htm |
We have prepared a brief slide show to review the company’s recent operating performance and to highlight our portfolio growth and resulting returns delivered to shareholders over our 23 years as a public REIT. 1
Just this past week, we received our certificate of occupancy from the District of Columbia for our Park Van Ness development. The building is comprised of 271 luxury apartments and 9,000 square feet of street level retail. We are conveniently located on Connecticut Ave. just north of the Van Ness Metro Station and bordering Rock Creek Park. 2
Park Van Ness rises 11 stories above the park, providing residents breathtaking views and access to the park. Park Van Ness offers residents a combination of urban convenience and walkability, with below street‐level structured parking, a 24 hour concierge, and amenities including a community room, landscaped courtyards, a state of the art fitness room and a rooftop pool and sun deck. Park Van Ness’s two street‐level retail tenants are Soapstone Market, a 6,000 square foot specialty grocery and gourmet market and Sfoglina, an Italian fine dining establishment by Fabio Trabocchi, one of Washington, DC’s top chefs. 3
The 271 apartment units consist of a mix of 1 to 3 bedroom units, with over 60% having views of Rock Creek Park. Our first tenants moved in this week and a total of 42 leases have been signed, and rents are meeting expectations. Over the past few years, demand for well located , well priced residential rental product has been very strong. However, growth in apartment project construction and new supply has put pressure on rental rate growth. The pipeline of future apartment projects indicates fewer construction starts than in recent years, which should allow demand to catch up to supply, ultimately resulting in rent growth. This rent growth will be faster at properties near mass transit, such as our apartment projects at Park Van Ness and our Clarendon Center apartments. 4
Park Van Ness is Saul Centers’ second major urban Metro oriented development project, following our successful Clarendon Center delivered in 2010. Prior to Clarendon Center, our office/mixed‐use portfolio totaled 1.2 million square feet and 23% of our cash flow. With the addition of Park Van Ness, this portion of our portfolio will grow to 1.7 million square feet and account for over 25% of our cash flow. 5
Since hitting a low of 16% during 2010/2011 our office leasing percentage has shown continued improvement. The average percentage leased in our 5 commercial projects has exceeded 91% since 2014, and as of the first quarter of 2016 has improved to 91.8%, the highest it has been since 2008. While the overall office market vacancy rates are still elevated, weak (but improving) demand for office space continues to keep office rental rates under pressure. 6
Looking beyond the Park Van Ness development, we have assembled sites adjacent to three Metro stations – Glebe Road in Northern Virginia and White Flint and Twinbrook in Montgomery County, Maryland on the Rockville Pike corridor. These 3 sites contain 21 acres, and have development potential of up to 3,000 apartments, 220,000 square feet of street level retail, and 475,000 square feet of office space. Our development and construction schedules will be determined by the site and building plan approval process, and market conditions. 7
Pre‐development activities continue at our premier location at the intersection of N. Glebe Road and Wilson Boulevard, our recently acquired land near the Ballston Metro Station in Arlington, Virginia. Final zoning and site plan hearings are expected in early Summer 2016 for a mixed‐use building comprised of 475 luxury apartments and over 60,000 square feet of street‐level retail space. 8
While overall portfolio size has grown, our property type and geographic focus have remained consistent since inception. Over 77% of our 2015 property operating income was generated by community and neighborhood shopping centers, compared to 73% at our formation in 1993. Approximately 85% of our 2015 property operating income was generated from the metropolitan Washington, DC market, up from 79% in 1993. Given that our development pipeline is concentrated in the Washington, DC metropolitan area, we expect this trend to continue. 9
Since the three down years in 2009 through 2011, our retail same property operating income has grown an average of 4.0% annually during the four year period 2012 through 2015. Excluding the impact of a lease termination fee received from Staples in the first quarter 2016, same property operating income grew 2.5%. 10
The primary driver of operating income growth during the four year period 2012 through 2015 has been improved leasing percentage. Our retail leasing percentage averaged 95.4% for 2015 and 95.8% for the most recent quarter of 2016, continuing a growth trend since 2011. Successful leasing of small shop space has been a large contributor to our overall retail leasing percentage improvement. 11
We define small shops as in‐line spaces of less than 10,000 square feet. Down from the peak of 94% in 2006, small shop leasing improved from a low of 83.7% in 2011 to current levels above 91% since 2014. Rental income of small shops is an important contributor to cash flow growth. While small shops comprised only 30% of our retail square footage, they contributed 48% of our retail annual base rent in 2015. 12
Another important contributor to property operating income growth is the percentage of tenants renewing their leases. Higher renewal percentage minimizes cash flow downtime which occurs during re‐tenanting of space. The percentage of retail tenants renewing leases, as measured by expiring base rents, was 74% in 2015, consistent with the average of the previous three years, and significantly better than the low of 60% in 2011. 13
A third contributor to improving property operating income is the growth in rental rates. On a same space basis, retail rental rate increases over expiring rents averaged approximately 10% during the three years leading up to the economic downturn. After 3 years of rental rate declines from 2009 to 2011, retail rents have since increased an annual average of 2.5%. These still low, yet positive, rent increases largely result from improved leasing percentage and successful tenants as measured by their stable reported tenant sales. 14
The three tenant spaces pictured here are currently under construction and provide a good example of how we add value to our core portfolio with opportunistic investments. A formerly under performing approximately 48,000 square foot anchor space at Southdale is being reconfigured to accommodate Mercy Personal Physicians and several smaller complimentary spaces. On the right, we have converted an unoccupied, low rent paying pad site to a new Silver Diner at Westview Village. Pictured below right, we have demolished several underperforming shop spaces to be replaced by a higher rent paying lease with CVS Pharmacy at Germantown. In total, recent small projects similar to these that are underway this year or planned for 2017, totaling just under $10 million in capital invested, will yield incremental returns of over 12% and be accretive to FFO by $0.04 per share. 15
Our portfolio’s diverse retail tenant base minimizes the Company’s exposure to any one tenant’s credit. Our top 10 retail tenants comprise only 18.4% of total revenue. Only Giant Food and Safeway individually accounted for more than 2.5% of our total revenue last year. 16
As we discussed at last year’s meeting, we had six Radio Shack locations as they worked through their bankruptcy, with annual base rents representing 0.3% of total base rent. Four of these six leases were transferred to a partnership owned by Sprint and General Wireless. The new owner has continued operating these four stores under a co‐branded Sprint‐Radio Shack format. The other two locations have been re‐leased, at rents 8% higher than what Radio Shack was paying. Staples and Office Depot had announced a merger early last year, which was later not allowed by the FTC. As of this time last year, we had five of these stores, contributing 1.3% of total base rent. We have just negotiated and received a termination fee from our Staples store in Rockville, and are in final negotiations to re‐tenant that store. Our four Staples/Office Depot locations now only represent 0.7% of total base rent. 17
Safeway, currently our 2nd largest tenant by SF and % of total revenue, will close 2 of their 9 stores in our portfolio: Broadlands Village in Ashburn, Virginia just closed at the end of April, and Briggs Chaney Plaza in Silver Spring, Maryland will close at the end of May. Leases at these two locations continue to be in full force and effect. We are in discussions with Safeway and other retailers as we seek new tenants at these locations. We expect only modest net operating income weakness stemming from a few co‐tenancy rent reductions in the near term. Both of these centers are over 97% leased. 18
FFO has continued to improve, since dropping to a low during the recession of $2.03 per share in 2011, reaching $2.95 per share in 2015. This is the company’s fourth consecutive year of FFO growth, with 2015 up 5.4% per share from 2014. After four years of $1.44 per share dividend pay‐out from 2010 to 2014, we raised the dividend by 7.5% in April 2015. We again increased the dividend in April 2016, by 9.3%, to the current annualized rate of $1.84 per share. 19
Our dividend payout ratio has dropped steadily from 70.9% of FFO in 2011, to under 60% over the past two years. This conservative payout policy allows us to retain operating cash flow to fund portions of our planned future acquisition, redevelopment and development activities. 20
Over 95% of our total debt is fixed rate, non‐recourse debt. A favorable rate environment over the past 5 years has allowed us to reduce our weighted average interest rate to 5.4%, from 6.7% at the beginning of 2010. Maturities are staggered through 2034 – the silver bars represent the current value of the debt at the year of maturity. More importantly, with scheduled principal amortization reducing debt annually, the green bars show debt balances at maturity, with only 1 year over $100 million. This laddered maturity greatly minimizes our risk associated with debt markets in the future. 21
Beginning in 1993, we were a company of 29 properties containing 5.3 million square feet of retail and office space. As a result of core property redevelopment, supplemented with acquisitions and new developments and with the latest addition of Park Van Ness, we now have 57 operating properties with approximately 9.5 million square feet. Property operating income of $43 million in 1994 has increased to nearly $158 million in 2015, a 6.1% compounded annual growth rate over our 23 year history. 22
We began in 1993 with a $500 million total capitalization, split evenly between debt and equity – 50% leveraged. Currently, as of March 2016, our total capitalization is approximately $2.6 billion and, with $873 million of debt, our leverage has decreased to 33.5%. Throughout this period, a long‐term holder of our stock since our August 1993 IPO has received an 11.1% compounded annual total return, including both dividends and price appreciation. 23
We remain committed to, and confident in, the long‐term growth prospects for our retail and mixed‐use properties. Our balance sheet is strong, and we are prepared for new opportunities moving forward. I now welcome any questions you may have. Adjournment (after questions) 24
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