Saul Centers(BFS) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Saul Centers, Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Cash Flows, and detailed notes, highlighting the impact of COVID-19 Consolidated Balance Sheets As of June 30, 2020, total assets increased to $1.687 billion from $1.618 billion at year-end 2019, primarily due to an increase in cash and cash equivalents, while total liabilities rose to $1.248 billion from $1.175 billion, largely driven by increased borrowings on the revolving credit facility Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,686,636 | $1,618,340 | | Cash and cash equivalents | $66,457 | $13,905 | | Real estate investments, net | $1,527,068 | $1,518,123 | | Total Liabilities | $1,248,350 | $1,174,984 | | Notes payable | $791,534 | $821,503 | | Revolving credit facility payable | $173,642 | $86,371 | | Total Equity | $438,286 | $443,356 | Consolidated Statements of Operations For the three months ended June 30, 2020, total revenue decreased to $53.2 million from $58.1 million, leading to a drop in net income to $10.2 million from $16.8 million, reflecting the impact of COVID-19 on rental revenue and an increase in credit losses Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $53,220 | $58,141 | $110,163 | $117,891 | | Total Expenses | $43,012 | $41,391 | $83,126 | $84,064 | | Net Income | $10,208 | $16,750 | $27,037 | $33,827 | | Net income available to common stockholders | $5,530 | $10,279 | $15,996 | $20,773 | | Basic and diluted EPS | $0.24 | $0.45 | $0.69 | $0.91 | Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash from operating activities decreased to $41.7 million from $63.8 million, mainly due to lower net income and unfavorable changes in accounts receivable, resulting in a net increase in cash of $52.6 million Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $41,749 | $63,832 | | Net cash used in investing activities | ($38,927) | ($68,599) | | Net cash provided by (used in) financing activities | $49,730 | ($549) | | Net increase (decrease) in cash | $52,552 | ($5,316) | Notes to Consolidated Financial Statements These notes detail the company's REIT organization, property portfolio, accounting policies, COVID-19 impact on rent, development projects, debt structure, equity, related party transactions, and segment performance - The company operates as a REIT, engaging in ownership, operation, and development of 50 shopping centers and seven mixed-use properties, primarily in the Washington, DC/Baltimore metropolitan area[23] - Due to the COVID-19 pandemic, the company has granted rent deferrals and other lease concessions, electing not to apply lease modification accounting for these concessions, instead accruing rent and monitoring collectability[37] - As of August 5, 2020, approximately 80% of contractual base rent and recoveries for Q2 2020 had been paid, with executed rent deferral agreements representing an additional 8% of total billings for the quarter[88][89] Business Segment Revenue (in thousands) | Segment | Q2 2020 Revenue | Q2 2019 Revenue | H1 2020 Revenue | H1 2019 Revenue | | :--- | :--- | :--- | :--- | :--- | | Shopping Centers | $38,329 | $42,259 | $79,900 | $85,417 | | Mixed-Use Properties | $14,891 | $15,882 | $30,263 | $32,474 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of COVID-19 on operations, detailing declines in revenue and FFO due to credit losses, and outlines the company's development strategy and liquidity position - The company's primary strategy is to diversify assets through the development of transit-centric, residential mixed-use projects in the Washington, D.C. area, such as The Waycroft, which was placed into service in April 2020[106] - As of August 5, 2020, rent collections for Q2 2020 stood at 80% of total billings, with an additional 8% covered by deferral agreements, and July 2020 collections were at 84%[98][100] Funds From Operations (FFO) Reconciliation (in thousands, except per share) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $10,208 | $16,750 | $27,037 | $33,827 | | Real estate depreciation and amortization | $12,600 | $11,524 | $23,881 | $23,167 | | FFO | $22,808 | $28,274 | $50,918 | $56,994 | | FFO per share | $0.64 | $0.82 | $1.45 | $1.66 | Critical Accounting Policies Management identifies key accounting policies requiring significant judgment, including the valuation of real estate investments and impairment assessments, and the policy for recording legal contingencies - Real estate investments are stated at historic cost, with impairment assessed if events suggest the carrying value may not be recoverable, based on undiscounted projected cash flows[126][127] - Legal contingencies are recorded as a loss when the loss is deemed probable and the amount can be reasonably estimated[128] Results of Operations Operating results declined significantly due to COVID-19, with Q2 2020 total revenue falling 8.5% year-over-year, driven by a $1.9 million increase in credit losses on operating leases, impacting same property revenue and operating income Revenue Comparison: Q2 2020 vs Q2 2019 (in thousands) | Revenue Component | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Base rent | $45,504 | $46,874 | ($1,370) | (2.9)% | | Credit losses | ($2,171) | ($318) | ($1,853) | 582.7% | | Total revenue | $53,220 | $58,141 | ($4,921) | (8.5)% | Expense Comparison: Q2 2020 vs Q2 2019 (in thousands) | Expense Component | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Property operating expenses | $6,410 | $7,115 | ($705) | (9.9)% | | Interest expense, net | $12,019 | $10,793 | $1,226 | 11.4% | | Total expenses | $43,012 | $41,391 | $1,621 | 3.9% | - Same property revenue decreased by $5.3 million (9.1%) in Q2 2020 compared to Q2 2019, and by $7.3 million (6.3%) for the six-month period, primarily due to higher credit losses, lower expense recoveries, and reduced lease termination and parking income[155][156] Liquidity and Capital Resources The company's liquidity position remains strong with $66.5 million in cash and $150.3 million available under its revolving credit facility, which management believes is sufficient to meet short-term and long-term requirements, while maintaining a debt-to-asset ratio below 50% - As of June 30, 2020, the company had $66.5 million in cash and cash equivalents and approximately $150.3 million available under its $325.0 million revolving credit facility[160][174] - During the six months ended June 30, 2020, the company borrowed an additional $71.0 million under its revolving credit facility to enhance liquidity in response to the COVID-19 pandemic[51] - The company maintains a general policy to keep its total debt to total asset value ratio at 50% or less and was in compliance with all debt covenants as of June 30, 2020[172][176] - Subsequent to the quarter's end, in July 2020, the company closed on two non-recourse mortgage loans totaling $52.1 million, with proceeds used to pay down the revolving credit facility[176][177] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation, with $249.5 million in variable-rate debt, where a one-percentage-point increase in interest rates would increase annual interest expense by approximately $2.5 million - The company is exposed to interest rate risk on its $249.5 million of variable-rate debt[194] - A hypothetical 1% increase in interest rates would increase annual interest expense by $2.5 million on the variable-rate debt outstanding at June 30, 2020[194] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[197] - No material changes were made to the company's internal control over financial reporting during the second quarter of 2020[197] PART II. OTHER INFORMATION Legal Proceedings The company reported no material legal proceedings - None[199] Risk Factors The primary risk factor update highlights the material adverse effects of the COVID-19 pandemic, including potential business disruption, tenant solvency issues, and reduced cash flows, particularly impacting vulnerable tenant sectors - The COVID-19 pandemic is identified as a significant risk factor that could materially and adversely affect the company's business, financial condition, and results of operations[200][201] - Approximately 39% of the company's base rent is generated from tenants in industries significantly impacted by COVID-19 restrictions, including restaurants (16%), beauty services (6%), and apparel (5%)[202] Unregistered Sales of Equity Securities and Use of Proceeds The company's Chairman, CEO, and President, B. Francis Saul II, and affiliated entities acquired 2,498 shares of common stock at $32.22 per share through the Dividend Reinvestment and Stock Purchase Plan for the April 30, 2020 dividend distribution - B. Francis Saul II and affiliated entities acquired 2,498 shares of common stock via the Dividend Reinvestment Plan[204] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications, a schedule of portfolio properties, and financial statements formatted in XBRL - Filed exhibits include CEO/CFO certifications, a schedule of portfolio properties, and XBRL data files[206][207]