Saul Centers Inc.
Annual Report 2013

Plain-text annual report

2013 Annual Report SAUL CENTERS, INC. IS A SELF-MANAGED, SELF-ADMINISTERED EQUITY REAL ESTATE INVESTMENT TRUST (REIT) HEADQUAR- TERED IN BETHESDA, MARYLAND. SAUL CENTERS CURRENTLY OPERATES AND MANAGES A REAL ESTATE PORTFOLIO COMPRISED OF 59 PROPERTIES WHICH INCLUDES (A) 56 COMMUNITY AND NEIGH- BORHOOD SHOPPING CENTERS AND MIXED-USE PROPERTIES WITH APPROXIMATELY 9.3 MILLION SQUARE FEET OF LEASABLE AREA AND (B) THREE LAND AND DEVELOPMENT PROPERTIES. OVER 85% OF THE COMPANY’S PROPERTY OPERATING INCOME IS GENERATED BY PROPERTIES IN THE METROPOLI- TAN WASHINGTON, DC/BALTIMORE AREA. TOTAL REVENUE (In millions) $197.9 $190.1 $173.9 $160.5 $163.1 $200 $175 $150 $125 $100 $75 $50 $25 NET INCOME Available to Common Stockholders (In millions) FUNDS FROM OPERATIONS* Available to Common Shareholders (In millions) $21.6 $21.6 $18.2 $11.6 $11.7 $30 $25 $20 $15 $10 $5 $70 $60 $56.0 $64.7 $60.1 $50.6 $50.3 $50 $40 $30 $20 $10 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 * Funds From Operations (FFO) is a non-GAAP financial measure. See page 24 for a definition of FFO and reconciliation from Net Income. PORTFOLIO COMPOSITION Based on 2013 Property Operating Income 75.6% Shopping Centers 24.4% Mixed-Use 85.3% Metropolitan Washington, DC/ Baltimore area 14.7% Rest of U.S. Year ended December 31, 2013 2012 2011 2010 2009 Summary Financial Data Total Revenue $197,897,000 $ 190,092,000 $173,878,000 $163,108,000 $ 160,539,000 Net Income Available to Common Stockholders $ 11,661,000 $ 18,234,000 $ 11,593,000 $ 21,623,000 $ 21,573,000 FFO Available to Common Shareholders $ 64,684,000 $ 60,100,000 $ 50,309,000 $ 50,556,000 $ 56,025,000 Weighted Average Common Stock Outstanding (Diluted) 20,401,000 19,700,000 18,949,000 18,377,000 17,943,000 Weighted Average Shares and Units Outstanding 27,330,000 26,614,000 24,740,000 23,793,000 23,359,000 Net Income Per Share Available to Common Stockholders (Diluted) $ 0.57 $ 0.93 $ 0.61 $ 1.18 $ 1.20 FFO Per Share Available to Common Shareholders (Diluted) $ 2.37 $ 2.26 $ 2.03 $ 2.12 $ 2.40 Common Dividend as a Percentage of FFO 61% 64% 71% 68% 63% Interest Expense Coveragea 2.98 2.68 2.62 3.22 3.28 Property Data Number of Operating Propertiesb 56 57 58 55 52 Total Portfolio Square Feet 9,333,000 9,489,000 9,543,000 8,901,000 8,424,000 Shopping Center Square Feet 7,880,000 7,877,000 7,933,000 7,293,000 7,218,000 Mixed-Use Square Feet 1,453,000 1,612,000 1,610,000 1,608,000 1,206,000 Average Percentage Leasedc 92% 91% 90% 91% 92% (a) Interest expense coverage is defined as operating income before the sum of interest expense and amortization of deferred debt, predevelopment expenses, acquisition related costs, and depreciation and amortization of deferred leasing costs, divided by interest expense. (b) Excludes development parcels (Ashland Square Phase II and New Market, 2009 – 2012 and Ashland Square Phase II, New Market and Park Van Ness in 2013). (c) Average percentage leased for 2013, 2012 and 2011 excludes Clarendon Center residential, which averaged 98%, 98% and 97% leased, respectively. 2013 ANNUAL REPORT 1 MESSAGE to shareholders MESSAGE to shareholders Park Van Ness (artist’s rendering), Washington, DC August 2013 marked our 20th anniversary as a public REIT. Since our 1993 initial public offering, through expansion and redevelopment of our core properties and selective acquisitions and new developments, our portfolio has grown from 29 operating properties with 5.3 million square feet of leasable area to 56 operating properties with 9.3 million square feet of leasable area. In addition, several of our recent acquisitions, on a com- bined basis, are zoned for up to 2.4 million square feet of mixed-use development. Due largely to this portfolio growth and our core property cash flow growth, our total capitalization increased from $500 million in 1993 to $2.3 billion as of December 31, 2013. Our total return to share- holders, including both dividends and share price appreciation, has averaged 11.5% compounded annually over these 20 years. Though we have been expanding our mixed-use, mass- transit oriented holdings through land assemblage and development, our core business continues to be neigh- borhood and community shopping centers. In 2013, over 75% of our property operating income was produced by our shopping center portfolio. During the past year, slow and steady economic improvement allowed us to increase portfolio leasing percentage and property operating income, even as federal austerity continued to hinder economic growth in and around the Washington, DC region. We executed 287 new or renewed leases, the most ever in a single year for our company, comprising 1.5 million square feet of commercial space. Entering 2014, our properties are 93.9% leased, up from a low of 90.2% during the recent recession. Development & Redevelopment In early 2013, the last office and retail tenants vacated our 159,000 square foot Van Ness Square office/retail building, clearing the way for the redevelopment of the site with a 224,000 square foot apartment/retail building. This new project, named Park Van Ness, has a prestigious and con- venient Connecticut Avenue location just north of the Van Ness Metro station, as well as a Rock Creek Park setting typical of a quiet suburb. The new building will include 271 luxury apartments and 9,000 square feet of street-level retail. The project will include underground parking and amenities, including a community room, a fitness center, landscaped courtyards, and a rooftop pool and deck. 2 SAUL CENTERS, INC. Development site, Twinbrook Metro, Rockville, MD Ashburn Village, Ashburn, VA Demolition of the existing building is complete and new construction is underway with completion scheduled in late 2015. The total development costs are estimated to be $93 million. While there are many new residential projects underway in the Washington, DC metropolitan area, high barriers to entry have limited new supply in the Connecticut Avenue and Upper Northwest, Washington, DC corridor. Additionally, we continue to assemble acreage in the area surrounding Montgomery County’s Twinbrook Metro sta- tion along the east side of Rockville Pike at Congressional Lane. In January 2014, we closed on a 1.2 acre site with a 12,000 square foot CVS pharmacy. When combined with our adjacent 1500 Rockville Pike, we have 7.9 acres of land zoned for up to 900,000 square feet of mixed-use, transit-oriented development. One Metro stop to the south, at White Flint, we acquired a total of 7.6 acres on both sides of Rockville Pike between 2010 and 2012. These sites have a combined mixed-use development potential of up to 1.5 million square feet. The properties currently contain one- and two-story retail buildings that produce an acceptable return on our land investment while we are engaged in the plan approval and permitting process. implementing this 10-plus year The timetable for development pipeline along Rockville Pike at the Twinbrook and White Flint Metro stations will be deter- mined by the plan approval process and market conditions. Balance Sheet Highlights In 2013, we took advantage of the attractive capital markets environment through several transactions. In February 2013, we issued $140 million of Series C perpetual preferred stock with a coupon of 6-7/8%. The proceeds of this offering were used to redeem all $80 million of our 9% Series B and $60 million of our 8% Series A preferred shares. As a result, our weighted average cost of preferred equity was reduced to 7.1% from 8.4%, an annual savings of $2.3 million. During 2013, we completed $71.0 million of 15-year, fixed-rate property financings at a weighted average interest rate of 3.77%, plus an additional $30.6 million of 3-year financings at LIBOR plus 1.65%. With these financings, we reduced our weighted average cost of debt by 30 basis points, to 5.54% from 5.84%. Finally, in October 2013 we closed on a $71.6 million construction- to-permanent loan for Park Van Ness which has an 18.8-year term and bears interest at a fixed-rate of 4.88%. Draws under the loan will begin in the spring of 2014 and continue as construction progresses. Debt maturities over the next five years total only $72 million. At December 31, 2013, our interest expense cov- erage was a comfortable 2.98 times, and our leverage was a modest 35% debt to total capitalization. There are no outstanding borrowings under our $175 million credit line, and we have additional borrowing capacity with one of our most valuable assets, 601 Pennsylvania Avenue, held free and clear of debt. All these factors combine to give us over $250 million of borrowing capacity to fund our future development activities. 2013 ANNUAL REPORT 3 Harris Teeter, Lansdowne Town Center, Leesburg, VA Beacon Center, Alexandria, VA Kentlands Square II, Gaithersburg, MD Hunt Club Corners, Apopka, FL 4 SAUL CENTERS, INC. 2013 Financial Results As we moved further into the current economic recovery cycle, 2013 brought us a continuation of improved Funds From Operations (FFO), increased same property leasing per- centage, and growth in property operating income. Total revenue increased to $197.9 million in 2013 from $190.1 million in 2012, and operating income increased to $35.3 million from $35.1 million in 2012. Net income available to common stock- holders was $11.7 million in 2013 compared to $18.2 million in 2012. While the commencement of our Park Van Ness development and our successful preferred stock offering are significant long-term positive events, they had a short term negative impact on 2013 operating income and net income. Excluding the impact of Park Van Ness’ depreciation and pre- development expenses and preferred stock redemption charges, net income available to common stockholders in 2013 would have been $4.2 million higher than in 2012. During 2013, overall same property revenue increased 4.2% and same property operating income increased 4.4%. Same prop- erty comparisons exclude the results of properties not in operation for the entirety of the comparable reporting periods. Shopping center income increased 3.6% and mixed-use same property operating income increased 7.0%. Shopping center results benefitted pri- marily from higher revenue as a result of an 89,000 square foot increase in leased space. Clarendon Center office space leasing was the primary contributor to the mixed-use improvement. same property operating FFO available to common shareholders (after deducting pre- ferred stock dividends and redemption charges) increased 7.6% to $64.7 million ($2.37 per share) from $60.1 million ($2.26 per share) in 2012. The increase was a result of: • property operating income increases of $7.2 million; • lower interest expense of $3.0 million; and • $1.2 million of lower preferred stock dividends. The combined impact was partially offset by preferred stock redemption charges totaling $5.2 million. Southdale, Glen Burnie, MD Shopping Center Performance The positive post-recession retail operating trend we ex- perienced in 2012 continued in 2013. While our 2012 portfolio performance was highlighted by the re-leasing of over 150,000 square feet of anchor tenant space vacated during the downturn, our 2013 leasing percentage and property operating income growth were driven by im- provement from small shops. At year end 2012, small shop space comprised approximately 2.5 million retail square feet, which was 86.9% leased. Leasing improved by 71,000 square feet over the past year, to 89.8% at year end 2013. Our pre-recession high for small shop leasing was over 94.0%, indicating that we have additional growth potential within our core shopping centers. Shopping center rental rate increases on expiring leases have also shown signs of rebounding. For the three years from 2006 through 2008, same space rental rates im- proved an average of 10.3%. The recessionary period from 2009 to 2011 saw rents in our portfolio decline an average of 4.8%. Since then, same space new and renewal rents increased 1.6% in 2012 and 0.1% in 2013, stabilizing, but still below earlier highs. One of the best indicators of the strength of our shopping center locations and tenants is the percentage of tenants who renew their leases at expiration. Over the past five years, from 2008 through 2012, tenants representing an average of 68% of our expiring base rents renewed their leases, with a high of 74% in 2009. During 2013, tenants representing over 78% of expiring base rents renewed. The high renewal rate is significant because high tenant reten- tion results in a continuation of rental income without re-leasing expenses and revenue down time. In turn, this contributes to improved same center property operating income, as we saw in 2013. Our core growth is supplemented by selected shopping center renovations and pad site expansions. By example, 2014 results are expected to be positively impacted by the 2013 acquisition of a 7,000 square foot pad building adjacent to our Kentlands shopping center which has been leased to an upscale restaurant tenant. We also expect increased leasing at Countryside shopping center follow- ing site upgrades constructed during 2013 which improved access, visibility, and parking convenience, three critical ingredients to the success of retailers. The grocery business continues to be very competitive throughout the country. With continued challenges from discounters such as Target and Wal-Mart, and grocery superstores like Wegman’s, grocery sales within our port- folio have been relatively flat over the past five years. Sales volumes for the 25 grocery stores that have been in our centers for the past five years are only 2% higher than 2013 ANNUAL REPORT 5 601 Pennsylvania Avenue, Washington, DC 2009 levels. Despite the slow sales growth, sales volumes are healthy. For our 31 grocers that reported sales in 2013, overall sales averaged $491 per square foot, and ten of these stores reported sales in excess of $600 per square foot. due to office tenant occupancy and escalating residential rents, contributed another $1.9 million to FFO in 2013. Fully leased and occupied by mid-2013, this significant mixed- use, transit-oriented development is now our largest asset as measured by property operating income. Our 37 core Washington, DC/Baltimore metropolitan area centers, which produce over 80% of our shopping center property operating income, are supported by three-mile surrounding population counts averaging 101,000 and household incomes averaging $114,000. These well located in-fill shopping centers are positioned for sustained growth in the future. Mixed-Use Performance During 2013, despite very slow office demand in most of the Washington, DC submarkets, our mixed-use portfolio leasing percentage improved to 90.5% from 87.7% in 2012. Our Clarendon Center mixed-use project continued its strong performance. Since its completion in late 2010, Clarendon Center added $1.0 million to FFO in 2012 and, Significant 2014 lease expirations at 601 Pennsylvania Avenue were successfully renewed during 2013 and early this year. This building had five tenant leases, representing 125,000 square feet of office space, or 55% of the building square footage, scheduled to expire in 2014. All five have been renewed and the weighted average lease term is 8.8 years. Additionally, we are currently upgrading and mod- ernizing the building common areas, including the lobby, fitness center and elevators. This combined effort will well-situate the building, the second largest asset in our portfolio as measured by property operating income, in the current softness of the office market. Our four Washington, DC area mixed-use projects should remain stable over the next two years. Only 111,000 square feet of leases, or 10% of the total square footage, are scheduled to expire in 2014 and 2015. 6 SAUL CENTERS, INC. Thruway, Winston-Salem, NC Our increased leasing percentage and growth in property operating income were the primary drivers behind our Board’s recent decision to increase our quarterly common stock dividend by 11.1%, to $0.40/share from $0.36/share. We believe there is still room for growth within our core shopping center portfolio as overall market occupancy rates improve due to the limited new supply of centers under development. Our development pipeline, beginning with the Park Van Ness apartments, our Montgomery County transit-oriented sites, and other opportunistic acquisitions or developments which we continue to pursue, should enhance our core operating performance for the foresee- able future. We extend our appreciation to our dedicated team of professionals and our loyal shareholders who have supported our efforts over the past 20 years. For the Board B. Francis Saul II March 10, 2014 Clarendon Center, Arlington, VA 2013 ANNUAL REPORT 7 As of December 31, 2013, Saul Centers’ portfolio properties were located in Virginia, Maryland, Washington, DC, North Carolina, Delaware, Florida, Georgia, New Jersey and Oklahoma. Properties in the metropolitan Washington, DC/ Baltimore area represent 75% of the portfolio’s gross leasable area. PORTFO LIO PROPERTIES GROSS LEASABLE PROPERTY/LOCATION SQUARE FEET Shopping Centers ASHBURN VILLAGE, ASHBURN, VA 221,273 ASHLAND SQUARE PHASE I, DUMFRIES, VA 23,120 BEACON CENTER, ALEXANDRIA, VA 358,071 BJ’S WHOLESALE CLUB, ALEXANDRIA, VA 115,660 BOCA VALLEY PLAZA, BOCA RATON, FL 121,269 BOULEVARD, FAIRFAX, VA 49,140 BRIGGS CHANEY MARKETPLACE, SILVER SPRING, MD 194,347 BROADLANDS VILLAGE, ASHBURN, VA 159,734 COUNTRYSIDE MARKETPLACE, STERLING, VA 137,662 CRANBERRY SQUARE, WESTMINSTER, MD 141,450 CRUSE MARKETPLACE, CUMMING, GA 78,686 FLAGSHIP CENTER, ROCKVILLE, MD 21,500 FRENCH MARKET, OKLAHOMA CITY, OK 244,718 GERMANTOWN, GERMANTOWN, MD 27,241 GIANT, MILFORD MILL, MD 70,040 THE GLEN, WOODBRIDGE, VA 136,440 GREAT EASTERN, DISTRICT HEIGHTS, MD 255,398 GREAT FALLS CENTER, GREAT FALLS, VA 91,666 HAMPSHIRE LANGLEY, TAKOMA PARK, MD 131,700 HUNT CLUB CORNERS, APOPKA, FL 101,522 JAMESTOWN PLACE, ALTAMONTE SPRINGS, FL 96,372 KENTLANDS SQUARE I, GAITHERSBURG, MD 114,381 KENTLANDS SQUARE II, GAITHERSBURG, MD 247,783 KENTLANDS PLACE, GAITHERSBURG, MD 40,648 LANSDOWNE TOWN CENTER, LEESBURG, VA 189,422 LEESBURG PIKE PLAZA, BAILEYS CROSSROADS, VA 97,752 LUMBERTON PLAZA, LUMBERTON, NJ 193,084 METRO PIKE CENTER, ROCKVILLE, MD 67,488 SHOPS AT MONOCACY, FREDERICK, MD 109,144 NORTHROCK, WARRENTON, VA 99,789 OLDE FORTE VILLAGE, FT. WASHINGTON, MD 143,577 8 SAUL CENTERS, INC. GROSS LEASABLE PROPERTY/LOCATION SQUARE FEET OLNEY, OLNEY, MD 53,765 ORCHARD PARK, DUNWOODY, GA 87,885 PALM SPRINGS CENTER, ALTAMONTE SPRINGS, FL 126,446 RAVENWOOD, BALTIMORE, MD 93,328 11503 ROCKVILLE PK / 5541 NICHOLSON LN, ROCKVILLE, MD 40,249 1500 ROCKVILLE PIKE, ROCKVILLE, MD 52,681 SEABREEZE PLAZA, PALM HARBOR, FL 146,673 MARKETPLACE AT SEA COLONY, BETHANY BEACH, DE 21,677 SEVEN CORNERS, FALLS CHURCH, VA 574,831 SEVERNA PARK MARKETPLACE, SEVERNA PARK, MD 254,174 SHOPS AT FAIRFAX, FAIRFAX, VA 68,762 SMALLWOOD VILLAGE CENTER, WALDORF, MD 174,518 SOUTHDALE, GLEN BURNIE, MD 484,115 SOUTHSIDE PLAZA, RICHMOND, VA 371,761 SOUTH DEKALB PLAZA, ATLANTA, GA 163,418 THRUWAY, WINSTON-SALEM, NC 362,056 VILLAGE CENTER, CENTREVILLE, VA 146,032 WESTVIEW VILLAGE, FREDERICK, MD 97,145 WHITE OAK, SILVER SPRING, MD 480,676 TOTAL SHOPPING CENTERS 7,880,269 Mixed-Use Properties AVENEL BUSINESS PARK, GAITHERSBURG, MD 390,683 CLARENDON CENTER – NORTH, ARLINGTON, VA 108,387 CLARENDON CENTER – SOUTH, ARLINGTON, VA 293,565 (INCLUDES 244 APARTMENTS AT 188,671 SQUARE FEET) CROSSTOWN BUSINESS CENTER, TULSA, OK 197,127 601 PENNSYLVANIA AVE., WASHINGTON, DC 226,604 WASHINGTON SQUARE, ALEXANDRIA, VA 236,376 TOTAL MIXED-USE PROPERTIES 1,452,742 TOTAL PORTFOLIO 9,333,011 FINANCIAL SECTION TABLE OF CONTENTS Selected Financial Data Page 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations Pages 11-27 Quantitative and Qualitative Disclosures About Market Risk Management’s Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Page 27 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Notes to Consolidated Financial Statements Pages 35-56 2013 ANNUAL REPORT 9 SELECTED FINANCIAL DATA (In thousands, except per share data) Years Ended December 31, 2013 2012 2011 2010 2009 Operating Data: Total revenue $ 197,897 $ 190,092 $ 173,878 $ 163,108 $ 160,539 Total operating expenses 162,628 154,996 142,442 120,300 115,177 Operating income 35,269 35,096 31,436 42,808 45,362 Non-operating income: Change in fair value of derivatives (7) 36 (1,332) – – Loss on early extinguishment of debt (497) – – (5,405) (2,210) Gain on casualty settlements 77 219 245 2,475 329 Income from continuing operations 34,842 35,351 30,349 39,878 43,481 Discontinued operations – 4,429 (55) 3,307 (251) Net income 34,842 39,780 30,294 43,185 43,230 Income attibutable to the noncontrolling interest (3,970) (6,406) (3,561) (6,422) (6,517) Net income attributable to Saul Centers, Inc. 30,872 33,374 26,733 36,763 36,713 Preferred stock redemption (5,228) – – – – Preferred dividends (13,983) (15,140) (15,140) (15,140) (15,140) Net income available to common stockholders $ 11,661 $ 18,234 $ 11,593 $ 21,623 $ 21,573 Per Share Data (diluted): Net income (loss) available to common stockholders: Continuing operations $ 0.57 $ 0.70 $ 0.61 $ 1.00 $ 1.21 Discontinued operations – 0.23 – 0.18 (0.01) Total $ 0.57 $ 0.93 $ 0.61 $ 1.18 $ 1.20 Basic and diluted shares outstanding: Weighted average common shares - basic 20,364 19,649 18,889 18,267 17,904 Effect of dilutive options 37 51 60 110 39 Weighted average common shares - diluted 20,401 19,700 18,949 18,377 17,943 Weighted average convertible limited partnership units 6,929 6,914 5,791 5,416 5,416 Weighted average common shares and fully converted limited partnership units - diluted 27,330 26,614 24,740 23,793 23,359 Dividends Paid: Cash dividends to common stockholders (1) $ 29,205 28,135 $ 27,062 $ 26,186 $ 27,358 Cash dividends per share $ 1.44 $ 1.44 $ 1.44 $ 1.44 $ 1.50 Balance Sheet Data: Real estate investments (net of accumulated depreciation) $ 1,094,776 $ 1,112,763 $ 1,091,448 $ 927,250 $ 834,914 Total assets 1,198,675 1,207,309 1,192,569 1,013,888 925,574 Total debt, including accrued interest 823,328 831,121 835,459 713,997 639,405 Preferred stock 180,000 179,328 179,328 179,328 179,328 Total stockholders’ equity 315,126 307,289 293,206 239,813 226,063 Other Data: Cash flow provided by (used in): Operating activities $ 73,527 $ 78,423 $ 55,669 $ 62,887 $ 68,344 Investing activities $ (26,034) $ (46,873) $ (201,500) $ (98,239) $ (80,469) Financing activities $ (42,329) $ (31,740) $ 145,186 $ 27,713 $ 19,726 Funds from operations (2): Net income $ 34,842 $ 39,780 $ 30,294 $ 43,185 $ 43,230 Real property depreciation and amortization 49,130 40,112 35,298 28,379 28,061 Real property depreciation - discontinued operations – 77 102 198 203 Gain on property dispositions and casualty settlements (77) (4,729) (245) (6,066) (329) Funds from operations 83,895 75,240 65,449 65,696 71,165 Preferred stock redemption (5,228) – – – – Preferred dividends (13,983) (15,140) (15,140) (15,140) (15,140) Funds from operations available to common shareholders $ 64,684 $ 60,100 $ 50,309 $ 50,556 $ 56,025 (1) During 2013, 2012, 2011, 2010, and 2009, shareholders reinvested $20.7 million, $23.1 million, $19.8 million, $16.7 million and $4.1 million, respectively, in newly issued common stock through the Company’s dividend reinvestment plan. (2) Funds from operations (FFO) is a non-GAAP financial measure and is defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds From Operations.” 10 SAUL CENTERS, INC. 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 14, discusses the Company’s results of operations for the past two years. Beginning on page 16, the Company provides an analysis of its liquidity and capital resources, including discussions of its cash flows, debt arrangements, sources of capital and finan- cial commitments. Finally, on page 24, the Company discusses funds from operations, or FFO, which is a 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, including the consolidated financial state- ments and notes thereto beginning on page 30. Historical results set forth in Selected Financial Information and the Consolidated Financial Statements 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 investments. 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 long term growth in cash flow as existing leases for space in the Shopping Center and Mixed-Use Properties 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 optimize the mix of uses to improve foot traffic through the Shopping Centers. 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 goals of increasing occupancy, improving overall retail sales, and ultimately increasing cash flow as economic conditions improve. In those circumstances in which leases are not otherwise expiring, management selec- tively 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, man- agement 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 prop- erties, by replacing leases that have 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 re- tail redevelopments and renovations. During the fourth quarter of 2012, the Company acquired two properties along the Rockville Pike corridor of Rockville, Maryland, one of which is adjacent to one of the Company’s existing prop- erties. In December 2012, the Company purchased for $23.0 million, including acquisition costs, approximately 52,700 square feet of retail space located on the east side of Rockville Pike near the Twinbrook Metro station. The property is zoned for up to 745,000 square feet of rentable mixed-use space. The Company is actively engaged in a plan for redevelopment but has not com- mitted to any timetable for commencement of construction. In December 2012, the Company purchased for $12.2 million, including acquisition costs, approximately 20,100 square feet of retail space, located on the east side of Rockville Pike near the White Flint Metro station and adjacent to 11503 Rockville Pike, which was purchased in 2010. The property, when combined with 11503 Rockville Pike, will provide zoning for up to 720,000 square feet of rentable mixed-use space. When combining these two properties with our Metro Pike shopping center on the west side of Rockville Pike, the Company's holdings at White Flint total 7.6 acres which are zoned for a development potential of up to 1.5 million square feet of mixed-use space. The Company is actively engaged in a plan for redevelopment but has not committed to any timetable for commencement of construction. In 2011, the Company acquired three Giant Food-anchored shopping centers located in the Maryland suburbs of the Wash- ington, D.C./Baltimore metropolitan area. The three centers, Kentlands Square II, Severna Park MarketPlace and Cranberry Square, total 636,000 square feet of leasable area. The $170.9 mil- lion purchase price, including acquisition costs, was financed with (1) $98.0 million of debt secured by the properties; (2) approxi- mately $17.1 million in cash and borrowings from the Company’s revolving credit facility; and (3) $55.8 million from the issuance of equity to a related party. In light of the limited amount of quality properties for sale and the escalated pricing of properties that the Company has been presented with or has inquired about over the past year, manage- ment believes acquisition opportunities for investment in existing and new Shopping Center and Mixed-Use Properties in the near future is uncertain. Because of its conservative capital structure, including its cash and capacity under its revolving credit facility, management believes that the Company is positioned to take ad- vantage of additional investment opportunities as attractive properties are located and market conditions improve. (See “Item 2013 ANNUAL REPORT 11 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1. Business - Capital Policies”). It is management’s view that several of the sub-markets in which the Company operates have, or are expected to have in the future, attractive supply/demand charac- teristics. The Company will continue to evaluate acquisition, development and redevelopment as integral parts of its overall business plan. During the most recent downturn in the national real estate mar- ket, the effects on the office and retail markets in the metropolitan Washington, DC area, where the majority of the Company’s properties are located, initially were generally less se- vere than in many other areas of the country. However, continued economic uncertainty in the local economies where the Com- pany’s properties are located resulting from issues facing the Federal government relating to spending cuts and budget policies may lead to increased tenant bankruptcies, increased vacancies and decreased rental rates. While overall consumer confidence appears to have improved, retailers continue to be cautious about capital allocation when implementing store expansion. Vacancies continue to remain ele- vated in certain submarkets compared to pre-recession levels; however, the Company’s overall leasing percentage on a compar- ative same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, at De- cember 31, 2013 increased to 93.9% from 92.6% at December 31, 2012, an increase in leased space of approximately 123,100 square feet, primarily caused by the leasing of 70,800 square feet of small shop space in the Shopping Centers and improved leasing at Avenel Business Park. Because of the Company’s conservative capital structure, its liq- uidity has not been significantly affected by the recent turmoil in the credit markets. The Company maintains a ratio of total debt to total asset value of under 50%, which allows the Company to obtain additional secured borrowings if necessary. As of December 31, 2013, amortizing fixed-rate mortgage debt with staggered ma- turities from 2015 to 2032 represented approximately 96.3% of the Company’s notes payable, thus minimizing refinancing risk. The Company’s variable-rate debt consists of a $14.8 million bank term loan secured by the Northrock shopping center and a $15.4 million bank term loan secured by the Metro Pike Center. As of December 31, 2013, the Company has loan availability of approximately $164.2 million under its $175.0 million unsecured revolving line of credit. Although it is management’s present intention to concentrate fu- ture acquisition and development activities on community and neighborhood shopping centers and office properties in the Wash- ington, DC/Baltimore metropolitan area and the southeastern region of the United States, 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 diver- sify 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. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which requires management to make cer- tain estimates and assumptions that affect the reporting of financial position and results of operations. See Note 2 to the Con- solidated Financial Statements in this report. The Company has identified the following policies that, due to estimates and as- sumptions inherent in those policies, involve a relatively high degree of judgment and complexity. REAL ESTATE INVESTMENTS Real estate investment properties are stated at historic cost less depreciation. Although the Company intends to own its real estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the Com- pany’s investment profile. Management believes that the Company’s real estate assets have generally appreciated in value since their acquisition or development and, accordingly, the ag- gregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in the financial statements. Because the financial statements are pre- pared in conformity with GAAP, they do not report the current value of the Company’s real estate investment properties. The Company purchases real estate investment properties from time to time and records assets acquired and liabilities assumed, including land, buildings, and intangibles related to in-place leases and customer relationships based on their fair values. The fair value of buildings generally is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates and considers the present value of all cash flows expected to be generated by the property including an initial lease up pe- riod. 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 in-place lease relative to market terms for similar leases at acquisition taking into con- sideration the remaining contractual lease period, renewal periods, and the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and accreted as additional lease revenue over the remaining contractual lease period. If the fair value of the below market lease intangible includes fair value associated with a renewal option, such amounts are not accreted until the renewal option is exercised. If the renewal option is not exercised the value is recognized at that time. 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 asso- ciated with at-market in-place leases are amortized as additional 12 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 cus- tomer relationship. From time to time the Company may purchase a property for future development purposes. The property may be improved with an existing structure that would be demolished as part of the development. In such cases, the fair value of the building may be determined based only on existing leases and not include estimated cash flows related to future leases. If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors in identifying impairment indicators includ- ing recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its re- maining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted pro- jected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impair- ment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The fair value of any prop- erty is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valu- ation could be negatively or positively affected. When incurred, the Company capitalizes the cost of improve- ments that extend the useful life of property and equipment. All repair and maintenance expenditures are expensed when incurred. Leasehold improvements expenditures are capitalized when cer- tain criteria are met, including when we supervise construction and will own the improvement. Tenant improvements we own are depreciated over the life of the respective lease or the estimated useful life of the improvements, whichever is shorter. Interest, real estate taxes, development-related salary costs 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 de- preciation associated with such properties are included in current operations. Commercial development projects are substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Residential development projects are considered substantially complete and available for occupancy upon receipt of the certificate of occupancy from the appropriate licensing authority. 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 gener- ally between 35 and 50 years for base buildings, or a shorter period if management determines that the building has a shorter useful life, and up to 20 years for certain other improvements. DEFERRED LEASING COSTS Certain initial direct costs incurred by the Company in negotiating and consummating successful commercial leases are capitalized and amortized over the term of the leases. Deferred 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 successful leasing-related activities. Such activities include evaluat- ing prospective tenants’ financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing transactions. In addition, deferred leasing costs include amounts attributed to in- place leases associated with acquisition properties. REVENUE RECOGNITION Rental and interest income are accrued as earned except when doubt exists as to collectability, in which case the accrual is dis- continued. Recognition of rental income commences when control of the space has been given to the tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recog- nized on a straight-line basis throughout the term of the lease. Expense recoveries represent a portion of property operating ex- penses 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 revenue, known as percentage rent, is accrued when a tenant reports sales that exceed a specified break- point specified in the lease agreement. ALLOWANCE FOR DOUBTFUL ACCOUNTS - CURRENT AND DEFERRED RECEIVABLES Accounts receivable primarily represent amounts accrued and un- paid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. Re- ceivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of man- agement, collection of the receivable is doubtful. In addition to rents due currently, accounts receivable include amounts repre- senting 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. 2013 Annual REPORT 13 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LEGAL CONTINGENCIES The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters can- not be predicted with certainty, the Company believes the final outcome of current matters will not have a material adverse effect on its 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. RESULTS OF OPERATIONS Same property revenue and operating income were $194.4 million and $147.3 million, respectively, in 2013 representing increases of $7.8 million (4.2%) and $6.2 million (4.4%) over 2012. Same property comparisons for 2013 and 2012 include 49 Shopping Centers and six Mixed-Use Properties which were in operation for the entirety of 2013 and 2012. Same property revenue and operating income were $160.1 million and $119.7 million, respectively, in 2012 representing decreases of $1.5 million (0.9%) and $1.9 million (1.6%) compared to 2011. Same property comparisons for 2012 and 2011 include 46 Shopping Cen- ters and five Mixed-Use Properties which were in operation for the entirety of 2012 and 2011. The following is a discussion of the components of revenue and expense for the entire Company. REVENUE For the year ended December 31, Percentage Change (Dollars in thousands) 2013 2012 2011 2013 from 2012 2012 from 2011 Base rent $ 159,898 $ 152,777 $ 138,486 4.7% 10.3% Expense recoveries 30,949 30,391 28,368 1.8% 7.1% Percentage rent 1,575 1,545 1,503 1.9% 2.8% Other 5,475 5,379 5,521 1.8% (2.6)% Total revenue $ 197,897 $ 190,092 $ 173,878 4.1% 9.3% Base rent includes $3,035, $3,796, and $3,694, for the years 2013, 2012, and 2011, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $1,692, $1,495, and $1,119, for the years 2013, 2012, and 2011, respectively, to recognize income from the amortization of in-place leases. EXPENSE RECOVERIES Expense recovery income increased $0.6 million in 2013 compared to 2012. Expense recovery income increased $2.0 million in 2012 compared to 2011 primarily due to $1.7 million of increased expense recovery income generated by the New 2011 Properties. OTHER REVENUE Other revenue increased $0.1 million in 2013 compared to 2012. The decline in other revenue in 2012 compared to 2011 is primarily due to the collection in 2011 of $325,000 of past due rents from a former tenant, partially offset by increased parking income at the Mixed-Use Properties. Total revenue increased 4.1% in 2013 compared to 2012 primarily due to $7.1 million of higher base rent (a) generated by properties acquired or developed in 2012 (the "New 2012 Properties") ($2.3 million) and (b) increases throughout the portfolio ($6.6 million) partially offset by (c) Van Ness Square ($2.0 million). Total revenue increased 9.3% in 2012 compared to 2011 primarily due to $14.5 million of aggregate revenue generated by Clarendon Center and the three Shopping Center Properties acquired in 2011 (collectively, the “New 2011 Properties”). A discussion of the components of revenue follows. BASE RENT The $7.1 million increase in base rent in 2013 compared to 2012 was attributable to (a) the New 2012 Properties ($2.3 million) and (b) in- creases throughout the portfolio ($6.6 million) partially offset by (c) Van Ness Square ($2.0 million). The $14.3 million increase in base rent in 2012 compared to 2011 was attributable to $12.4 million of increased base rent generated by the New 2011 Properties and $2.3 million of increased base rent in the remainder of the portfolio. 14 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING EXPENSES For the year ended December 31, Percentage Change (Dollars in thousands) 2013 2012 2011 2013 from 2012 2012 from 2011 Property operating expenses $ 24,559 $ 23,794 $ 24,715 3.2% (3.7)% Provision for credit losses 968 1,151 1,880 (15.9)% (38.8)% Real estate taxes 22,415 22,325 18,435 0.4% 21.1% Interest expense and amortization of deferred debt costs 46,589 49,544 45,324 (6.0)% 9.3% Depreciation and amortization of deferred leasing costs 49,130 40,112 35,298 22.5% 13.6% General and administrative 14,951 14,274 14,256 4.7% 0.1% Acquisition related costs 106 1,129 2,534 (90.6)% (55.4)% Predevelopment expenses 3,910 2,667 – 46.6% – Total operating expenses $ 162,628 $ 154,996 $ 142,442 4.9% 8.8% Total operating expenses increased 4.9% in 2013 compared to 2012 primarily due to $8.0 million of additional depreciation expense and $1.2 million of higher predevelopment expenses related to the redevelopment of Park Van Ness. Total operating expenses in- creased 8.8% in 2012 compared to 2011 primarily due to increased real estate taxes, interest expense, depreciation expense and pre- development expense. PROPERTY OPERATING EXPENSES Property operating expenses increased $765,000 in 2013 compared to 2012. Property operating expenses decreased $921,000 in 2012 compared to 2011 primarily due to lower snow removal costs. PROVISION FOR CREDIT LOSSES The provision for credit losses represents the Company’s estimate of amounts owed by tenants that may not be collectible. The $183,000 decrease in 2013 compared to 2012 as well as the $729,000 decrease in 2012 compared to 2011 reflects a general im- provement in the retail economy and lack of significant bankruptcy losses among the Company’s various tenants. REAL ESTATE TAXES Real estate taxes increased $90,000 in 2013 compared to 2012. The $3.9 million increase in real estate taxes in 2012 compared to 2011 is comprised of increased property taxes charged by the District of Columbia and taxes related to the New 2011 Properties. INTEREST AND AMORTIZATION OF DEFERRED DEBT Interest expense decreased $3.0 million in 2013 compared to 2012 primarily due to a 30 basis point decrease in the average cost of debt to 5.54% from 5.84%. Interest expense increased $4.2 million in 2012 compared to 2011 primarily due to approximately $4.1 mil- lion of interest related to $67.2 million of higher average debt balances and $1.9 million of reduced capitalized interest, partially offset by $2.1 million of lower interest resulting from lower average cost of debt. DEPRECIATION AND AMORTIZATION Depreciation and amortization of deferred leasing costs increased by $9.0 million in 2013 compared to 2012 primarily due to $8.0 mil- lion of additional depreciation expense on the building at the former Van Ness Square as a result of the reduction of its useful life to four months effective January 1, 2013. Depreciation and amortization of deferred leasing costs increased $4.8 million in 2012 compared to 2011 primarily due to the New 2011 Properties. GENERAL AND ADMINISTRATIVE General and administrative costs increased $677,000 in 2013 com- pared to 2012 primarily due to (a) increased consulting expense ($495,000) and (b) increased stock option expense ($245,000). ACQUISITION RELATED COSTS Acquisition related costs in 2013 totaling approximately $106,000 relate to the purchase of a retail pad with a 7,100 square foot restaurant located in Gaithersburg, Maryland which is contiguous with and an expansion of the Company's other Kentlands assets. Acquisition related costs in 2012 totaling approximately $1.1 million related to the December 2012 purchases of 1500 Rockville Pike and 5541 Nicholson Lane. Acquisition related costs in 2011 totaling approximately $2.5 million related to the Company’s September 23, 2011, purchase of Kent- lands Square II, Severna Park MarketPlace and Cranberry Square and the February 17, 2011 purchase of a 3,000 square foot retail property located adjacent to the Company’s Van Ness Square in Washington, DC. PREDEVELOPMENT EXPENSES Predevelopment expenses represent costs, primarily lease termi- nation and demolition costs, incurred with the repositioning and redevelopment of Van Ness Square. 2013 Annual REPORT 15 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GAIN ON CASUALTY SETTLEMENT Gain on casualty settlement in 2013 and 2012 reflect insurance proceeds received in excess of the carrying value of assets damaged during a hail storm at French Market in 2012. Gain on casualty set- tlement in 2011 reflects insurance proceeds received in excess of the carrying value of assets damaged during a severe hail storm at French Market in May 2010. In each instance, the insurance pro- ceeds funded substantially all of the restoration of the damaged property. LOSS ON EARLY EXTINGUISHMENT OF DEBT On September 4, 2013, the Company closed on a 15-year, non- recourse $18.0 million mortgage loan secured by Seabreeze Plaza. The loan matures in 2028, bears interest at a fixed rate of 3.99%, requires monthly principal and interest payments totaling $94,900 based on a 25-year amortization schedule and requires a final pay- ment of $9.5 million at maturity. Proceeds were used to pay off the $13.5 million remaining balance of existing debt secured by Seabreeze Plaza which was scheduled to mature in May 2014 and the Company incurred $497,000 of related debt extinguishment costs. GAIN ON SALE OF PROPERTY Gain on sales of properties in 2012 resulted from the July 2012 sale of West Park shopping center and the December 2012 sale of the Belvedere shopping center. IMPACT OF INFLATION Inflation has remained relatively low during 2013 and 2012. The im- pact of rising operating expenses due to inflation on the operating performance of the Company’s portfolio would have been miti- gated by terms in substantially all of the Company’s leases which contain provisions designed to increase revenues to offset the ad- verse 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. In addition, substantially all of the Company’s properties are leased to tenants under long-term leases, which provide for reim- bursement of operating expenses by tenants. These leases tend to reduce the Company’s exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse im- pact 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 $17.3 million and $12.1 million at December 31, 2013 and 2012, respectively. The changes in cash and cash equivalents during the years ended December 31, 2013 and 2012 were attributable to operating, investing and financing activ- ities, as described below. Year Ended December 31, (Dollars in thousands) 2013 2012 Net cash provided by operating activities $ 73,527 $ 78,423 Net cash used in investing activities (26,034) (46,873) Net cash used in financing activities (42,329) (31,740) Increase (decrease) in cash and cash equivalents $ 5,164 $ (190 ) OPERATING ACTIVITIES Net cash provided by operating activities decreased $4.9 million to $73.5 million for the year ended December 31, 2013 compared to $78.4 million for the year ended December 31, 2012. Net 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 admin- istrative expenses and interest payments on debt outstanding. INVESTING ACTIVITIES Net cash used in investing activities decreased $20.8 million to $26.0 million for the year ended December 31, 2013 from $46.9 mil- lion for the year ended December 31, 2012. Investing activities in 2013 primarily reflect tenant improvements and capital expendi- tures ($14.0 million), the Company's development activities ($7.3 million) and the acquisition of a retail pad in Gaithersburg, Maryland ($5.1 million). Net cash used in investing activities decreased $154.6 million to $46.9 million for the year ended December 31, 2012 from $201.5 million for the year ended December 31, 2011. Investing activities in 2012 primarily reflect (a) the purchases of 1500 Rockville Pike and 5541 Nicholson Lane (b) tenant improvements and capital expenditures and (c) Clarendon Center and Ashland Square Phase I development costs partially offset by (d) proceeds from the sales of West Park and Belvedere and (e) proceeds from casualty settlement. Tenant improvement and property capital expenditures totaled $14.0 million and $12.7 million for 2013 and 2012, respectively. 16 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCING ACTIVITIES Net cash used in financing activities was $42.3 million and $31.7 mil- lion for the years ended December 31, 2013 and 2012, respectively. Net cash used in financing activities in 2013 primarily reflects: • preferred stock redemption payments totaling $139.3 million; • the repayment of mortgage notes payable totaling $71.3 million; • the repayment of amounts borrowed under the revolving credit facility totaling $180.0 million; • distributions to common stockholders totaling $29.2 million; • distributions to holders of convertible limited partnership units in the Operating Partnership totaling $10.0 million; • distributions made to preferred stockholders totaling $14.6 mil- lion; and • payments of $3.2 million for financing costs of mortgage notes payable which was partially offset by: • proceeds of $101.6 million received from mortgage notes payable; • proceeds of $135.2 million received from the sale of Series C pre- ferred stock; • proceeds of $142.0 million received from revolving credit facility draws; • proceeds of $4.1 million from the issuance of limited partnership units in the Operating Partnership under the dividend reinvest- ment program; and • proceeds of $22.3 million from the issuance of common stock under the dividend reinvestment program, directors deferred plan and the exercise of stock options. Net cash used in financing activities for the year ended December 31, 2012 primarily reflects: • the repayment of mortgage notes payable totaling $117.6 million; • distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $38.1 million; • distributions made to preferred stockholders during the year totaling $15.1 million; • repayments of $8.0 million on the revolving credit facility; and • payments of $2.2 million for financing costs of new mortgage loans; which was partially offset by: • proceeds received from one new and one modified mortgage notes payable totaling $83.5 million; • proceeds of $38.0 million from the revolving credit facility; and • $27.8 million of proceeds received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options. LIQUIDITY REQUIREMENTS Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt serv- ice requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stock- holders, 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 op- erations, available cash and its existing line of credit. Long-term liquidity requirements consist 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. In October 2013, the Company entered into an arrangement with a general contractor and intends to develop Park Van Ness, a primarily residential project with street-level retail. The total cost of the project, excluding predevelopment expense and land costs, is expected to be approximately $93.0 million, a portion of which will be funded with a $71.6 million construction- to-permanent loan that closed in October 2013 and the remainder will be funded with the Company's working capital, including its existing line of credit. The Company may also redevelop certain of the Current Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. 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 fi- nancing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or equity capital re- sources available to the Company. Any future borrowings may be at the Saul Centers, Operating Part- nership 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 mar- ket and other conditions. 2013 Annual REPORT 17 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACTUAL PAYMENT OBLIGATIONS As of December 31, 2013, the Company had unfunded contractual payment obligations of approximately $101.2 million, excluding operating obligations, due within the next 12 months. The table below shows the total contractual payment obligations as of December 31, 2013. CONTRACTUAL PAYMENT OBLIGATIONS Payments Due By Period (Dollars in thousands) One Year or Less 2-3 Years 4-5 Years After 5 Years Total Notes Payable: Interest $ 44,181 $ 82,986 $ 75,729 $ 167,876 $ 370,772 Scheduled Principal 22,191 46,452 49,377 154,901 272,921 Balloon Payments – 44,008 27,872 475,267 547,147 Subtotal 66,372 173,446 152,978 798,044 1,190,840 Ground Leases (1) 176 352 351 9,364 10,243 Corporate Headquarters Lease (1) 859 1,796 153 – 2,808 Development Obligations 26,073 38,220 – – 64,293 Tenant Improvements 7,730 – 278 – 8,008 Total Contractual Obligations $ 101,210 $ 213,814 $ 153,760 $ 807,408 $ 1,276,192 (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 fluctuates. Management believes that the Company’s cash flow from opera- tions and its capital resources, which at December 31, 2013 included cash balances of $17.3 million and borrowing availability of approx- imately $164.2 million on its revolving line of credit, will be sufficient to meet its contractual obligations for the foreseeable future. 18 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PREFERRED STOCK ISSUES In March 2013, the Company redeemed 60% of its then-outstand- ing 8% Series A Cumulative Redeemable Preferred Stock (the “Series A Stock”) and all of its 9% Series B Cumulative Redeemable Preferred Stock. The Company has outstanding 1.6 million depositary shares, each representing 1/100th of a share of Series A Stock. The depositary shares may be redeemed at the Company’s option, in whole or in part from time to time, at the $25.00 liquidation preference plus accrued but unpaid dividends. The depositary shares pay an annual dividend of $2.00 per share, equivalent to 8% of the $25.00 liqui- dation preference. The Series A 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 div- idends for six or more quarters (whether or not declared or consecutive) and in certain other events. In February 2013, the Company sold, in an underwritten public offering, 5.6 million depositary shares, each representing 1/100th of a share of 6.875% Series C Cumulative Redeemable Preferred Stock (the "Series C Stock"), providing net cash proceeds of ap- proximately $135.2 million. The depositary shares may be redeemed at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid dividends on or after February 12, 2018. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The first dividend was paid on April 15, 2013 and covered the period from February 12, 2013 through March 31, 2013. The Series C 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 except in connection with certain changes of control or delisting events. 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 Reinvest- ment Plan (the “Plan”) to allow its common stockholders and holders of limited partnership interests an opportunity to buy ad- ditional 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 mar- ket price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Company issued 468,014 and 586,838 shares under the Plan at a weighted average discounted price of $43.52 and $38.85 per share during the years ended December 31, 2013 and 2012, respectively. The Company issued 88,309 limited partner- ship units under the Plan at a weighted average price of $46.93 per unit during the year ended December 31, 2013. No limited part- nership units were issued under the Plan during 2012. The Company also credited 7,148 and 8,551 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ De- ferred Compensation Plan at a weighted average discounted price of $43.92 and $38.76 per share, during the years ended December 31, 2013 and 2012, 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 man- age 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 Proper- ties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggre- gate 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, 2013. 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 de- termines the financing environment is favorable. 2013 Annual REPORT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a summary of notes payable as of December 31, 2013 and 2012: NOTES PAYABLE December 31, Interest Scheduled (Dollars in thousands) 2013 2012 Rate * Maturity * Fixed rate mortgages: $ — (a) $ 15,750 — (b) 6,936 — (c) 13,875 16,128 (d) 16,798 7.45% Jun-2015 33,246 (e) 34,373 6.01% Feb-2018 36,937 (f) 38,388 5.88% Jan-2019 11,949 (g) 12,418 5.76% May-2019 16,501 (h) 17,145 5.62% Jul-2019 16,419 (i) 17,040 5.79% Sep-2019 14,610 (j) 15,176 5.22% Jan-2020 11,159 (k) 11,421 5.60% May-2020 9,921 (l) 10,288 5.30% Jun-2020 42,462 (m) 43,424 5.83% Jul-2020 8,649 (n) 8,934 5.81% Feb-2021 6,233 (o) 6,359 6.01% Aug-2021 35,981 (p) 36,699 5.62% Jun-2022 10,930 (q) 11,129 6.08% Sep-2022 11,795 (r) 11,989 6.43% Apr-2023 15,598 (s) 16,247 6.28% Feb-2024 17,123 (t) 17,469 7.35% Jun-2024 14,849 (u) 15,140 7.60% Jun-2024 26,153 (v) 26,635 7.02% Jul-2024 31,093 (w) 31,709 7.45% Jul-2024 30,894 (x) 31,490 7.30% Jan-2025 16,087 (y) 16,419 6.18% Jan-2026 118,128 (z) 120,822 5.31% Apr-2026 36,075 (aa) 36,986 4.30% Oct-2026 40,974 (bb) 41,970 4.53% Nov-2026 19,118 (cc) 19,569 4.70% Dec-2026 70,856 (dd) 72,233 5.84% May-2027 17,718 (ee) — 4.04% Apr-2028 34,391 (ff) — 3.51% Jun-2028 17,895 (gg) — 3.99% Sep-2028 — (hh) — 4.88% Sep-2032 Total fixed rate 789,872 774,831 5.67% 10.1 Years Variable rate loans: — (ii) 38,000 LIBOR + 1.60% May-2016 14,802 (jj) 14,945 LIBOR + 1.65% Feb-2016 15,394 (kk) — LIBOR + 1.65% Feb-2016 Total variable rate 30,196 52,945 LIBOR + 1.65% 2.2 Years Total notes payable $ 820,068 $ 827,776 5.53% 9.8 Years * Interest rate and scheduled maturity data presented as of December 31, 2013. Totals computed using weighted averages. 20 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) The loan, together with a corresponding interest-rate swap, was col- lateralized by Metro Pike Center. On a combined basis, the loan and the swap required interest only payments of $86,000 based upon a 25- year amortization schedule and a final payment of $15.6 million at loan maturity. The loan was repaid in full and the swap was termi- nated in 2013. (c) (d) (b) The loan was collateralized by Cruse MarketPlace and required equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a final payment of $6.8 million at loan maturity. The loan was repaid in full in 2013. The loan was collateralized by Seabreeze Plaza and required equal monthly principal and interest payments totaling $102,000 based upon a weighted average 26-year amortization schedule and a final payment of $13.3 million at loan maturity. The loan was repaid in full in 2013. The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires equal monthly principal and interest payments totaling $156,000 based upon a weighted average 23-year amortization schedule and a final payment of $15.2 million at loan maturity. Principal of $670,000 was amortized during 2013. 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 final payment of $28.0 million at loan maturity. Principal of $1.1 million was amortized during 2013. The loan is collateralized by three shopping centers, Broadlands Village, The Glen and Kentlands Square I, and requires equal monthly principal and interest payments of $306,000 based upon a 25-year amortization schedule and a final payment of $28.4 million at loan maturity. Princi- pal of $1.5 million was amortized during 2013. 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 final payment of $9.0 million at loan maturity. Principal of $469,000 was amortized during 2013. (g) (e) (f) (i) (j) (h) 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 final payment of $12.3 million at loan ma- turity. Principal of $644,000 was amortized during 2013. The loan is collateralized by Briggs Chaney MarketPlace and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12.2 million at loan maturity. Principal of $621,000 was amortized during 2013. 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 final payment of $10.6 million at loan maturity. Principal of $566,000 was amortized during 2013. The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30- year amortization schedule and a final payment of $9.1 million at loan maturity. Principal of $262,000 was amortized during 2013. The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25- year amortization schedule and a final payment of $7.1 million at loan maturity. Principal of $367,000 was amortized during 2013. (k) (l) (m) The loan and a corresponding interest-rate swap closed on June 29, 2010 and are collateralized by Thruway. On a combined basis, the loan and the interest-rate swap require equal monthly principal and interest payments of $289,000 based upon a 25-year amortization schedule and a final payment of $34.8 million at loan maturity. Principal of $962,000 was amortized during 2013. (n) The loan is collateralized by Jamestown Place and requires equal monthly principal and interest payments of $66,000 based upon a 25- year amortization schedule and a final payment of $6.1 million at loan maturity. Principal of $285,000 was amortized during 2013. (o) (p) (q) (r) (s) (t) The loan is collateralized by Hunt Club Corners and requires equal monthly principal and interest payments of $42,000 based upon a 30- year amortization schedule and a final payment of $5.0 million, at loan maturity. Principal of $126,000 was amortized during 2013. The loan is collateralized by Lansdowne Town Center and requires monthly principal and interest payments of $230,000 based on a 30- year amortization schedule and a final payment of $28.2 million at loan maturity. Principal of $718,000 was amortized during 2013. The loan is collateralized by Orchard Park and requires equal monthly principal and interest payments of $73,000 based upon a 30-year amortization schedule and a final payment of $8.6 million at loan ma- turity. Principal of $199,000 was amortized during 2013. The loan is collateralized by BJ’s Wholesale and requires equal monthly principal and interest payments of $80,000 based upon a 30-year amortization schedule and a final payment of $9.3 million at loan ma- turity. Principal of $194,000 was amortized during 2013. The loan is collateralized by Great Falls shopping center. The loan con- sists of three notes which require equal monthly principal and interest payments of $138,000 based upon a weighted average 26-year amor- tization schedule and a final payment of $6.3 million at maturity. Principal of $649,000 was amortized during 2013. The loan is collateralized by Leesburg Pike and requires equal monthly principal and interest payments of $135,000 based upon a 25-year amortization schedule and a final payment of $11.5 million at loan ma- turity. Principal of $346,000 was amortized during 2013. (v) (u) The loan is collateralized by Village Center and requires equal monthly principal and interest payments of $119,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan ma- turity. Principal of $291,000 was amortized during 2013. The loan is collateralized by White Oak and requires equal monthly principal and interest payments of $193,000 based upon a 24.4 year weighted amortization schedule and a final payment of $18.5 million at loan maturity. The loan was previously collateralized by Van Ness Square. During 2012, the Company substituted White Oak as the col- lateral and borrowed an additional $10.5 million. Principal of $482,000 was amortized during 2013. (z) (x) (y) (w) The loan is collateralized by Avenel Business Park and requires equal monthly principal and interest payments of $246,000 based upon a 25-year amortization schedule and a final payment of $20.9 million at loan maturity. Principal of $616,000 was amortized during 2013. The loan is collateralized by Ashburn Village and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $20.5 million at loan maturity. Principal of $596,000 was amortized during 2013. The loan is collateralized by Ravenwood and requires equal monthly principal and interest payments of $111,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan ma- turity. Principal of $332,000 was amortized during 2013. The loan is collateralized by Clarendon Center and requires equal monthly principal and interest payments of $753,000 based upon a 25- year amortization schedule and a final payment of $70.5 million at loan maturity. Principal of $2.7 million was amortized during 2013. (aa) The loan is collateralized by Severna Park MarketPlace and requires equal monthly principal and interest payments of $207,000 based upon a 25-year amortization schedule and a final payment of $20.3 million at loan maturity. Principal of $911,000 was amortized during 2013. (bb) The loan is collateralized by Kentlands Square II and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $23.1 million at loan maturity. Principal of $996,000 was amortized during 2013. (cc) The loan is collateralized by Cranberry Square and requires equal monthly principal and interest payments of $113,000 based upon a 25- year amortization schedule and a final payment of $10.9 million at loan maturity. Principal of $451,000 was amortized during 2013. 2013 Annual REPORT 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dd) The loan in the original amount of $73.0 million closed in May 2012, is collateralized by Seven Corners and requires equal monthly principal and interest payments of $463,200 based upon a 25-year amortization schedule and a final payment of $42.3 million at loan maturity. Princi- pal of $1.4 million was amortized during 2013. (ee) The loan is collateralized by Hampshire Langley and requires equal monthly principal and interest payments of $95,400 based upon a 25- year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $282,000 was amortized in 2013. (ff) The loan is collateralized by Beacon Center and requires equal monthly principal and interest payments of $203,200 based upon a 20-year amortization schedule and a final payment of $11.4 million at loan ma- turity. Principal of $609,000 was amortized in 2013. (gg) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $94,900 based upon a 25- year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $105,000 was amortized in 2013. The carrying value of properties collateralizing the mortgage notes payable totaled $907.2 million and $916.1 million as of December 31, 2013 and 2012, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain certain fi- nancial covenants, which are summarized below. As of December 31, 2013, the Company was in compliance with all such covenants: • maintain tangible net worth, as defined in the loan agreement, of at least $503.3 million plus 80% of the Company’s net equity proceeds received after May 2012; • limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio); • limit the amount of debt so that interest coverage will exceed 2.0x on a trailing four-quarter basis (interest expense coverage); • limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.3x on a trailing four-quarter basis (fixed charge coverage); and • limit the amount of variable rate debt and debt with initial loan terms of less than five years to no more than 40% of total debt. 2013 FINANCING ACTIVITY On February 27, 2013, the Company closed on a three-year $15.6 million mortgage loan secured by Metro Pike Center. The loan ma- tures in 2016, bears interest at a variable rate equal to the sum of one-month LIBOR and 165 basis points, requires monthly principal and interest payments based on a 25-year amortization schedule and requires a final payment of $14.8 million at maturity. The loan may be extended for up to two years. Proceeds were used to pay- off the $15.9 million remaining balance of existing debt secured by Metro Pike Center, and to extinguish the related swap agreement. (hh) The loan is a $71.6 million construction-to-permanent facility that is collateralized by and will finance a portion of the construction costs of Park Van Ness. During the construction period, interest will be funded by the loan. After conversion to a permanent loan, monthly principal and interest payments totaling $413,500 will be required based upon a 25-year amortization schedule. A final payment of $39.6 million will be due at maturity. The loan is a $175.0 million unsecured revolving credit facility. Interest accrues at a rate equal to the sum of one-month LIBOR and 160 basis points. The line may be extended at the Company’s option for one year with payment of a fee of 0.20%. Monthly payments, if required, are in- terest only and vary depending upon the amount outstanding and the applicable interest rate for any given month. (ii) (jj) The loan is collateralized by Northrock and requires monthly principal and interest payments of approximately $47,000 and a final payment of approximately $14.2 million at maturity. Principal of $143,000 was amortized during 2013. (kk) The loan is collateralized by Metro Pike Center and requires monthly principal and interest payments of approximately $48,000 and a final payment of $14.8 million at loan maturity. Principal of $206,000 was amortized during 2013. On February 27, 2013, the Company closed on a three-year $15.0 million mortgage loan secured by Northrock. The loan matures in 2016, bears interest at a variable rate equal to the sum of one- month LIBOR and 165 basis points, requires monthly principal and interest payments based on a 25-year amortization schedule and requires a final payment of $14.2 million at maturity. The loan may be extended for up to two years. Proceeds were used to pay-off the $15.0 million remaining balance of existing debt secured by Northrock. On March 19, 2013, the Company closed on a 15-year, non-recourse $18.0 million mortgage loan secured by Hampshire Langley. The loan matures in 2028, bears interest at a fixed rate of 4.04%, re- quires monthly principal and interest payments totaling $95,400 based on a 25-year amortization schedule and requires a final pay- ment of $9.5 million at maturity. On April 10, 2013, the Company paid in full the $6.9 million remain- ing balance on the mortgage loan secured by Cruse Marketplace. On May 28, 2013, the Company closed on a 15-year, non-recourse $35.0 million mortgage loan secured by Beacon Center. The loan matures in 2028, bears interest at a fixed rate of 3.51%, requires monthly principal and interest payments totaling $203,200 based on a 20-year amortization schedule and requires a final payment of $11.4 million at maturity. On September 4, 2013, the Company closed on a 15-year, non-re- course $18.0 million mortgage loan secured by Seabreeze Plaza. The loan matures in 2028, bears interest at a fixed rate of 3.99%, requires monthly principal and interest payments totaling $94,900 based on a 25-year amortization schedule and requires a final payment of $9.5 million at maturity. Proceeds were used to pay off the $13.5 million remaining balance of existing debt secured by Seabreeze Plaza which was scheduled to mature in May 2014 and the Com- pany incurred $497,000 of related debt extinguishment costs. 22 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 25, 2013 the Company closed on a $71.6 million con- struction-to-permanent loan which will partially finance the construction of Park Van Ness. The loan bears interest at 4.88% and during the construction period it will be fully recourse to Saul Cen- ters and accrued interest will be funded by the loan. Following the completion of construction and lease-up, and upon achieving cer- tain debt service coverage requirements, the loan will convert to a non-recourse, permanent mortgage at the same interest rate, with principal amortization computed based on a 25-year schedule. 2012 FINANCING ACTIVITY On April 11, 2012, the Company closed on a 15-year non-recourse mortgage loan in the amount of $73.0 million secured by Seven Corners shopping center. The loan matures in May 2027, bears in- terest at a fixed rate of 5.84%, requires equal monthly principal and interest payments totaling $463,226 based upon a 25-year amortization schedule and a final payment of $42.5 million at ma- turity. Proceeds from the loan were used to pay-off the $63.0 million remaining balance of existing debt secured by Seven Cor- ners and six other Shopping Center properties, which was scheduled to mature in October 2012, and to provide cash of ap- proximately $10 million. On April 26, 2012, the Company substituted the White Oak shop- ping center for Van Ness Square as collateral for one of its existing mortgage loans which will allow the Company to analyze the fea- sibility of repositioning Van Ness Square. The terms of the original loan, including its 8.11% interest rate, are unchanged and, in con- junction with the collateral substitution, the Company borrowed an additional $10.5 million, also secured by White Oak. The new borrowing requires equal monthly payments based upon a fixed 4.90% interest rate and 25-year amortization schedule, and will mature in July 2024, coterminously with the original loan. The con- solidated loan requires equal monthly payments based upon a blended fixed interest rate of 7.0% and will require a final payment of $18.5 million at maturity. On May 21, 2012, the Company replaced its existing unsecured revolving credit facility with a new $175.0 million facility that expires on May 20, 2016. The facility, which provides working capital and funds for acquisitions, certain developments, redevel- opments and letters of credit, may be extended for one year, at the Company’s option, subject to the satisfaction of certain conditions. Loans under the facility bear interest at a rate equal to the sum of one-month LIBOR and a margin, based on the Com- pany’s leverage ratio, ranging from 160 basis points to 250 basis points. Based on the leverage ratio of December 31, 2012, the margin was 190 basis points. 2011 FINANCING ACTIVITY On March 23, 2011, the Company closed on a 15-year non-recourse mortgage loan in the amount of $125.0 million, secured by Claren- don Center. The loan matures April 5, 2026, bears interest at a fixed rate of 5.31%, requires equal monthly principal and interest pay- ments of $753,000, based upon a 25-year amortization schedule, and requires a final principal payment of approximately $70.8 mil- lion at maturity. Proceeds from the loan were used to repay $104.2 million outstanding on the Clarendon Center construction loan. On September 23, 2011, the Company closed on a 15-year non-re- course mortgage loan in the amount of $38.0 million, secured by Severna Park MarketPlace. The loan matures October 1, 2026, bears interest at a fixed rate of 4.30%, requires equal monthly principal and interest payments of $207,000, based upon a 25-year amorti- zation schedule, and requires a final principal payment of approximately $20.4 million at maturity. Proceeds from the loan were used to purchase Severna Park MarketPlace. Also on September 23, 2011, the Company closed on two six-month bridge financing loans in the total amount of $60.0 mil- lion, secured by Kentlands Square II and Cranberry Square. Proceeds from the loans were used to purchase Kentlands Square II and Cranberry Square. On October 5, 2011, the Company closed on a new 15-year non- recourse mortgage loan in the amount of $43.0 million, secured by Kentlands Square II. The loan matures November 5, 2026, bears an interest at a fixed rate of 4.53%, requires equal monthly principal and interest payments of $240,000, based upon a 25-year principal amortization, and requires a final principal payment of approxi- mately $23.3 million at maturity. Proceeds from the loan were used to repay the $40.0 million bridge financing used to acquire Kentlands Square II. On November 6, 2011, the Company closed on a new 15-year non-recourse mortgage loan in the amount of $20.0 million, secured by Cranberry Square. The loan matures December 1, 2026, bears interest at a fixed rate of 4.70%, requires equal monthly prin- cipal and interest payments of $113,000, based upon a 25-year principal amortization, and requires a final principal payment of approximately $11.0 million at maturity. Proceeds from the loan were used to repay the $20.0 million bridge financing used to acquire Cranberry Square. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements that are rea- sonably likely to have a current or future material effect on the Company’s financial condition, revenue or expenses, results of op- erations, liquidity, capital expenditures or capital resources. 2013 Annual REPORT 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUNDS FROM OPERATIONS In 2013, the Company reported Funds From Operations (FFO)1 avail- able to common shareholders (common stockholders and limited partner unitholders) of $64.7 million, a 7.6% increase from 2012 FFO available to common shareholders of $60.1 million. The following table presents a reconciliation from net income to FFO available to common shareholders for the periods indicated: FUNDS FROM OPERATIONS For the Year Ended December 31, (Dollars in thousands) 2013 2012 2011 2010 2009 Net income $ 34,842 $ 39,780 $ 30,294 $ 43,185 $ 43,230 Subtract: Gain on property sales – (4,510) – (3,591) – Gain on casualty settlement (77) (219) (245) (2,475) (329) Add: Real estate depreciation – discontinued operations – 77 102 198 203 Real estate depreciation and amortization 49,130 40,112 35,298 28,379 28,061 FFO 83,895 75,240 65,449 65,696 71,165 Subtract: Preferred dividends (13,983) (15,140) (15,140) (15,140) (15,140) Preferred stock redemption (5,228) – – – – FFO available to common shareholders $ 64,684 $ 60,100 $ 50,309 $ 50,556 $ 56,025 Average shares and units used to compute FFO per share 27,330 26,614 24,740 23,793 23,359 FFP per share $ 2.37 $ 2.26 $ 2.03 $ 2.12 $ 2.40 1 The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT as net income, computed in accordance with GAAP, plus real estate depreciation and amortization, and excluding extraordinary items, impairment charges on depreciable real estate assets and gains or losses from property dispositions. 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 Company’s 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 meaningful supplemental measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what we believe occurs with our assets, and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other REITs. ACQUISITIONS, REDEVELOPMENTS AND RENOVATIONS Management anticipates that during the coming year the Com- pany will continue activities related to the redevelopment of Van Ness Square and the adjacent 4469 Connecticut Avenue and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Although not currently planned, it is possible that the Company may redevelop additional Current Portfolio Properties and may develop expansions within certain of the Shopping Centers. Acquisition and development of prop- erties 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 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. 24 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has been selectively involved in acquisition, devel- opment, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and office devel- opment and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The following describes the acquisitions, developments, redevelopments and renovations which affected the Company’s financial position and results of operations in 2013, 2012, and 2011. 1500 ROCKVILLE PIKE In December 2012, the Company purchased for $23.0 million, in- cluding acquisition costs, approximately 52,700 square feet of retail space located on the east side of Rockville Pike near the Twinbrook Metro station. The property is zoned for up to 745,000 square feet of rentable mixed-use space. The Company is actively engaged in a plan for redevelopment but has not committed to any timetable for commencement of construction. 5541 NICHOLSON LANE In December 2012, the Company purchased for $12.2 million, in- cluding acquisition costs, approximately 20,100 square feet of retail space, located on the east side of Rockville Pike near the White Flint Metro station and adjacent to 11503 Rockville Pike, which was purchased in 2010. The property, when combined with 11503 Rockville Pike, will provide zoning for up to 720,000 square feet of mixed-use space. When combining these two properties with our Metro Pike Center on the west side of Rockville Pike, the Company's holdings at White Flint total 7.6 acres which are zoned for a development potential of up to 1.5 million square feet of mixed-use space. The Company is actively engaged in a plan for redevelopment but has not committed to any timetable for com- mencement of construction. PARK VAN NESS (FORMERLY VAN NESS SQUARE) The Company has entered into an arrangement with a general con- tractor and intends to develop a 271-unit residential project with approximately 9,000 square feet of street-level retail, below street-level structured parking, and amenities including a commu- nity room, landscaped courtyards, a fitness room and a rooftop pool and deck. During the fourth quarter of 2013, demolition of the existing structure commenced. In connection with such dem- olition, approximately $580,000 of predevelopment expenses were recognized in 2013 and approximately $510,000 of additional predevelopment expenses will be recognized as demolition pro- gresses and is completed in the first quarter of 2014. Construction is projected to be completed by late 2015. The total cost of the project, excluding predevelopment expense and land (which the Company has owned), is expected to be approximately $93.0 mil- lion, a portion of which will be financed with a recently-closed construction-to-permanent loan. ASHLAND SQUARE PHASE I On December 15, 2004, the Company purchased for $6.3 million, a 19.3 acre parcel of land in Manassas, Prince William County, Virginia. The Company has an approved site plan to develop a grocery-an- chored neighborhood shopping center totaling approximately 160,000 square feet. Capital One Bank operates a branch on the site and the Company previously executed a lease with CVS. Dur- ing 2012, the Company completed the site work for two pads, constructed a 6,500 square foot building that is leased to a restau- rant and CVS constructed a 13,000 square foot pharmacy building. Both facilities are open for business, and the cost to the Company was approximately $3.0 million. The balance of the center is being marketed to grocers and other retail businesses, with a develop- ment timetable yet to be finalized. KENTLANDS SQUARE II In September 2011, the Company purchased for $74.5 million Kent- lands Square II, and incurred acquisition costs of $1.1 million. Kentlands Square II is a 241,000 square foot neighborhood shop- ping center located in Gaithersburg, Maryland, in Montgomery County, the state’s most populous and affluent county. The center is anchored by a 61,000 square foot Giant Food supermarket and a 104,000 square foot Kmart. The property is adjacent to the Company’s Kentlands Square I, which is anchored by Lowe’s Home Improvement, and Kentlands Place. SEVERNA PARK MARKETPLACE In September 2011, the Company purchased for $61.0 million Severna Park MarketPlace, and incurred acquisition costs of $0.8 million. Severna Park MarketPlace is a 254,000 square foot neigh- borhood shopping center located in Severna Park, Maryland, in Anne Arundel County. The center is anchored by a 63,000 square foot Giant Food supermarket and a 92,000 square foot Kohl’s. CRANBERRY SQUARE In September 2011, the Company purchased for $33.0 million Cran- berry Square, and incurred acquisition costs of $0.5 million. Cranberry Square is a 141,000 square foot neighborhood shopping center located in Westminster, Maryland, in Carroll County which is anchored by a 56,000 square foot Giant Food supermarket and a 24,000 square foot Staples. 2013 Annual REPORT 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROPERTY SALES WEST PARK In July 2012, the Company sold for $2.0 million the 77,000 square foot West Park shopping center in Oklahoma City, Oklahoma and recorded a $1.1 million gain. As of June 30, 2012, the carrying amounts of the associated assets and liabilities were $1.0 million and $207,000, respectively. There was no debt associated with the property. BELVEDERE In December 2012, the Company sold for $4.0 million, the 54,900 square foot Belvedere shopping center in Baltimore, Mary- land and recorded a $3.4 million gain. As of September 30, 2012, the carrying amounts of the associated assets and liabilities were $488,000 and $22,000, respectively. There was no debt associated with the property. PORTFOLIO LEASING STATUS The following chart sets forth certain information regarding commercial leases at our properties for the periods indicated. Total Properties Total Square Footage Percentage Leased As of December 31, Shopping Centers Mixed-Use Shopping Centers Mixed-Use Shopping Centers Mixed-Use 2013 50 6 7,880,269 1,452,742 94.5% 90.5% 2012 50 7 7,877,200 1,612,200 93.4% 82.8% 2011 51 7 7,930,000 1,610,400 90.8% 85.8% There were no changes from the prior year in the properties that comprise the 2013 Shopping Centers percentage leased. The 2013 Mixed-Use percentage leased excludes Park Van Ness, which was taken out of service in March 2013 and is currently being redevel- oped. The Clarendon Center residential component was 99.2% leased at December 31, 2013. On a same property basis, which ex- cludes the impact of properties not in operation for the entirety of the comparable periods, Shopping Center leasing percentages increased to 94.5% from 93.4% and Mixed-Use leasing percentages increased to 90.5% from 87.7%. The overall portfolio lease per- centage, on a comparative same property basis, ended the year at 93.9%, an increase from 92.6% at year end 2012. The 2013 Shopping Centers percentage leased was impacted by a net increase of 88,600 square feet, 70,800 square feet of which resulted from im- proved leasing of small shop space (spaces totaling 10,000 square feet or less) throughout the portfolio. The 2013 Mixed-Use per- centage leased was impacted by a net increase of 34,500 square feet, the majority of which resulted from improved leasing at Avenel Business Park. The 2012 Shopping Centers percentage leased include 1500 Rockville Pike and 5541 Nicholson Lane, which were acquired in December 2012, and exclude West Park and Belvedere, which were sold during 2012. The 2012 Mixed-Use percentage leased includes Clarendon Center commercial area, which was 97.9% leased at De- cember 31, 2012. The Clarendon Center residential component was 100% leased at December 31, 2012. On a same property basis, Shop- ping Centers percentage leased increased to 93.5% from 91.6% and Mixed-Use percentage leased decreased to 82.5% from 85.8%. The overall portfolio percentage leased, on a comparative same center basis, ended the year at 91.9%, an increase from 90.7% at year end 2011. The 2012 Shopping Center percentage leased was impacted by a net increase of approximately 151,000 square feet of leased space, the majority of which resulted from the leasing of space vacated by major tenants during 2011. The 2012 Mixed-Use per- centage leased was adversely impacted by a net decrease of approximately 44,000 square feet of leased space, the majority of which resulted from the early termination of leases at Van Ness Square in preparation for redevelopment. The 2011 Shopping Centers leased percentage include three cen- ters acquired September 23, 2011, Kentlands Square II (100% leased), Severna Park MarketPlace (100% leased) and Cranberry Square (91% leased). The 2011 Mixed-Use leased percentage includes the Clarendon Center commercial area, which was 92.4% leased at De- cember 31, 2011. The Clarendon Center residential component was 100% leased at December 31, 2011. On a same property basis, the Shopping Centers percentage leased decreased to 90.2% from 92.0% and the Mixed-Use percentage leased decreased to 84.9% from 85.5%. The overall portfolio percentage leased, on a compar- ative same center basis, ended 2011 at 89.4%, a decrease from 91.1% at year end 2010. The 2011 Mixed-Use percentage leased was ad- versely impacted by a net decrease of approximately 140,000 square feet of leased space, of which approximately 98,000 square feet was caused by the Syms, SuperFresh and Borders Books bank- ruptcies and the balance resulting from the early lease termination of a local grocer. 26 SAUL CENTERS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows selected data for leases executed in the indicated periods. The information is based on executed leases without adjustment for the timing of occupancy, tenant defaults, or landlord concessions. The base rent for an expiring lease is the annualized contractual base rent, on a cash basis, as of the expira- tion date of the lease. The base rent for a new or renewed lease is the annualized contractual base rent, on a cash basis, as of the expected rent commencement date. Because tenants that execute leases may not ultimately take possession of their space or pay all of their contractual rent, the changes presented in the table pro- vide information only about trends in market rental rates. The actual changes in rental income received by the Company may be different. Year Ended December 31, 2013 2012 2011 Square Feet 1,471,000 1,579,000 1,178,000 Number of Leases 276 256 245 Base Rent per Square Foot New/Renewed Leases $ 19.56 16.39 15.21 $ Expiring Leases 19.75 16.30 16.41 During 2013, the Company entered into 228 new or renewed apart- ment leases. The monthly rent per square foot for these leases increased to $3.37 from $3.24. During 2012, the Company entered into 216 new or renewed apartment leases. The monthly rent per square foot for these leases increased to $3.31 from $3.11. 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 fluc- tuations 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 may, where appropriate, employ derivative instru- ments, such as interest rate swaps, to mitigate the risk of interest rate fluctuations. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. On June 29, 2010, the Company entered into an interest rate swap agreement with a $45.6 million notional amount to manage the interest rate risk associated with $45.6 million of variable-rate mortgage debt. The swap agreement was effective July 1, 2010, ter- minates on July 1, 2020 and effectively fixes the interest rate on the mortgage debt at 5.83%. The aggregate fair value of the swap at December 31, 2013 was approximately $2.7 million and is re- flected in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet. The Company is exposed to interest rate fluctuations which will affect the amount of interest expense of its variable rate debt and the fair value of its fixed rate debt. As of December 31, 2013, the Company had variable rate indebtedness totaling $30.2 million. If the interest rates on the Company’s variable rate debt instruments outstanding at December 31, 2013 had been one percent higher, our annual interest expense relating to these debt instruments would have increased by $301,960, based on those balances. As of December 31, 2013, the Company had fixed-rate indebtedness to- taling $789.9 million with a weighted average interest rate of 5.67%. If interest rates on the Company’s fixed-rate debt instruments at December 31, 2013 had been one percent higher, the fair value of those debt instruments on that date would have decreased by ap- proximately $48.1 million. MANAGEMENT’S REPORT on Internal Control Over Financial Reporting ASSESSMENT OF EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting. Manage- ment used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992 Framework) to assess the effec- tiveness of the Company’s internal control over financial reporting. Based upon the assessments, the Company’s man- agement has concluded that, as of December 31, 2013, the Com- pany’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s in- ternal control over financial reporting, which appears on page 29 in this Annual Report. 2013 Annual REPORT 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of Saul Centers, Inc. We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Saul Centers, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 10, 2014 expressed an unqualified opinion thereon. Ernst & Young LLP McLean, Virginia March 10, 2014 28 SAUL CENTERS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM on Internal Control Over Financial Reporting Board of Directors and Stockholders of Saul Centers, Inc. We have audited Saul Centers, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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 included in the accompanying Assessment of Effectiveness of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Saul Centers, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, 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, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Saul Centers, Inc. and our report dated March 10, 2014 expressed an unqualified opinion thereon. Ernst & Young LLP McLean, Virginia March 10, 2014 2013 ANNUAL REPORT 29 CONSOLIDATED BALANCE SHEETS December 31, December 31, (Dollars in thousands, except per share amounts) 2013 2012 Assets Real estate investments Land $ 354,967 $ 353,890 Buildings and equipment 1,094,605 1,109,911 Construction in progress 9,867 2,267 1,459,439 1,466,068 Accumulated depreciation (364,663) (353,305) 1,094,776 1,112,763 Cash and cash equivalents 17,297 12,133 Accounts receivable and accrued income, net 43,884 41,406 Deferred leasing costs, net 26,052 26,102 Prepaid expenses, net 4,047 3,895 Deferred debt costs, net 9,675 7,713 Other assets 2,944 3,297 Total assets $ 1,198,675 $ 1,207,309 Liabilities Mortgage notes payable $ 820,068 $ 789,776 Revolving credit facility payable – 38,000 Dividends and distributions payable 13,135 13,490 Accounts payable, accrued expenses and other liabilities 20,141 27,434 Deferred income 30,205 31,320 Total liabilities 883,549 900,020 Stockholders' equity Preferred stock, 1,000,000 shares authorized: Series A Cumulative Redeemable, 16,000 and 40,000 shares issued and outstanding, respectively 40,000 100,000 Series B Cumulative Redeemable, 31,731 shares issued and outstanding in 2012 – 79,328 Series C Cumulative Redeemable, 56,000 shares issued and outstanding in 2013 140,000 – Common stock, $0.01 par value, 30,000,000 shares authorized, 20,576,616 and 20,045,542 shares issued and outstanding, respectively 206 201 Additional paid-in capital 270,428 246,557 Accumulated deficit (172,564) (154,830) Accumulated other comprehensive loss (1,392) (3,553) Total Saul Centers, Inc. stockholders' equity 276,678 267,703 Noncontrolling interest 38,448 39,586 Total stockholders' equity 315,126 307,289 Total liabilities and stockholders' equity $ 1,198,675 $ 1,207,309 The Notes to Financial Statements are an integral part of these statements. 30 SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For The Year Ended December 31, (Dollars in thousands, except per share amounts) 2013 2012 2011 Revenue Base rent $ 159,898 $ 152,777 $ 138,486 Expense recoveries 30,949 30,391 28,368 Percentage rent 1,575 1,545 1,503 Other 5,475 5,379 5,521 Total revenue 197,897 190,092 173,878 Operating expenses Property operating expenses 24,559 23,794 24,715 Provision for credit losses 968 1,151 1,880 Real estate taxes 22,415 22,325 18,435 Interest expense and amortization of deferred debt costs 46,589 49,544 45,324 Depreciation and amortization of deferred leasing costs 49,130 40,112 35,298 General and administrative 14,951 14,274 14,256 Acquisition related costs 106 1,129 2,534 Predevelopment expenses 3,910 2,667 – Total operating expenses 162,628 154,996 142,442 Operating income 35,269 35,096 31,436 Change in fair value of derivatives (7) 36 (1,332) Loss on early extinguishment of debt (497) – – Gain on casualty settlement 77 219 245 Income from continuing operations 34,842 35,351 30,349 Discontinued Operations Loss from operations of properties sold – (81) (55) Gain on sales of properties – 4,510 – Income (loss) from discontinued operations – 4,429 (55) Net income 34,842 39,780 30,294 Noncontrolling interest Income from continuing operations attributable to noncontrolling interests (3,970) (5,693) (3,561) Income from discontinued operations attributable to noncontrolling interests – (713) – Income attibutable to noncontrolling interests (3,970) (6,406) (3,561) Net income attributable to Saul Centers, Inc. 30,872 33,374 26,733 Preferred stock redemption (5,228) – – Preferred dividends (13,983) (15,140) (15,140) Net income available to common stockholders $ 11,661 $ 18,234 $ 11,593 Per share net income available to common stockholders Basic and diluted: Continuing operations $ 0.57 $ 0.70 $ 0.61 Discontinued operations – 0.23 – $ 0.57 $ 0.93 $ 0.61 The Notes to Financial Statements are an integral part of these statements. 2013 ANNUAL REPORT 31 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Year Ended December 31, (Dollars in thousands) 2013 2012 2011 Net income $ 34,842 $ 39,780 $ 30,294 Other comprehensive income Unrealized gain (loss) on cash flow hedge 2,897 (932) (3,195) Total comprehensive income 37,739 38,848 27,099 Comprehensive income (loss) attributable to noncontrolling interests (4,706) (6,164) (2,811) Total comprehensive income attributable to Saul Centers, Inc. 33,033 32,684 24,288 Preferred stock redemption (5,228) – – Preferred dividends (13,983) (15,140) (15,140) Total comprehensive income available to common stockholders $ 13,822 $ 17,544 $ 9,148 The Notes to Financial Statements are an integral part of these statements. 32 SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Accumulated Additional Other Preferred Common Paid-in Accumulated Comprehensive Total Saul Noncontrolling (Dollars in thousands,except per share amounts) Stock Stock Capital Deficit (Loss) Centers, Inc. Interest Total Balance, December 31, 2010 $ 179,328 $ 186 $189,787 $(128,926) $ (419) $239,956 $ (143) $239,813 Issuance of 734,786 shares of common stock: 186,968 restricted shares – 2 6,159 – – 6,161 – 6,161 498,248 shares pursuant to dividend reinvestment plan – 3 19,751 – – 19,754 – 19,754 49,570 shares due to exercise of employee stock options and issuance of directors’ deferred stock – 2 2,132 – – 2,134 – 2,134 Issuance of 1,497,814 partnership units – – – – – – 49,589 49,589 Net income – – – 26,733 – 26,733 3,561 30,294 Change in unrealized loss on cash flow hedge – – – – (2,444) (2,444) (751) (3,195) Preferred stock distributions: Series A – – – (6,000) – (6,000) – (6,000) Series B – – – (5,355) – (5,355) – (5,355) Common stock distributions – – – (20,381) – (20,381) (6,389) (26,770) Distributions payable preferred stock: Series A, $50.00 per share – – – (2,000 ) – (2,000) – (2,000) Series B, $56.25 per share – – – (1,785) – (1,785) – (1,785) Distributions payable common stock ($0.36/share) and distributions payable partnership units ($0.36/unit) – – – (6,945) – (6,945) (2,489) (9,434) Balance, December 31, 2011 179,328 193 217,829 (144,659) (2,863) 249,828 43,378 293,206 Issuance of 753,607 shares of common stock: 595,388 shares pursuant to dividend reinvestment plan – 6 23,124 – – 23,130 – 23,130 158,219 shares due to exercise of employee stock options and issuance of directors’ deferred stock – 2 5,604 – – 5,606 – 5,606 Net income – – – 33,374 – 33,374 6,406 39,780 Change in unrealized loss on cash flow hedge – – – – (690) (690) (242) (932) Preferred stock distributions: Series A – – – (6,000) – (6,000) – (6,000) Series B – – – (5,355) – (5,355) – (5,355) Common stock distributions – – – (21,189) – (21,189) (7,467) (28,656) Distributions payable preferred stock: Series A, $50.00 per share – – – (2,000 ) – (2,000) – (2,000) Series B, $56.25 per share – – – (1,785) – (1,785) – (1,785) Distributions payable common stock ($0.36/share) and distributions payable partnership units ($0.36/unit) – – – (7,216) – (7,216) (2,489) (9,705) Balance, December 31, 2012 179,328 201 246,557 (154,830) (3,553) 267,703 39,586 307,289 Issuance of 56,000 shares of Series C Cumulative preferred stock 140,000 – (4,807) – – 135,193 – 135,193 Partial redemption of 24,000 shares of Series A Cumulative preferred stock (60,000) – 2,212 (2,216) – (60,004) – (60,004) Full redemption of 31,731 shares of Series B Cumulative preferred stock (79,328) – 3,007 (3,012) – (79,333) – (79,333) Issuance of 531,164 shares of common stock: 475,161 shares pursuant to dividend reinvestment plan – 5 20,667 – – 20,672 – 20,672 56,003 shares due to exercise of employee stock options and issuance of directors' deferred stock – – 2,792 – – 2,792 – 2,792 Issuance of 88,309 partnership units – – – – – – 4,144 4,144 Net income – – – 30,872 – 30,872 3,970 34,842 Change in unrealized loss on cash flow hedge – – – – 2,161 2,161 736 2,897 Preferred stock distributions: Series A – – – (3,213) – (3,213) – (3,213) Series B – – – (1,468) – (1,468) – (1,468) Series C – – – (6,095) – (6,095) – (6,095) Common stock dis tributions – – – (21,988) – (21,988) (7,467) (29,455) Distributions payable preferred stock: Series A, $50.00 per share – – – (800) – (800) – (800) Series C, $42.97 per share – – – (2,406) – (2,406) – (2,406) Distributions payable common stock ($0.36/share) and distributions payable partnership units ($0.36/unit) – – – (7,408) – (7,408) (2,521) (9,929) Balance, December 31, 2013 $180,000 $206 $270,428 $(172,564) $(1,392) $276,678 $38,448 $315,126 The Notes to Financial Statements are an integral part of these statements. 2013 ANNUAL REPORT 33 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, (Dollars in thousands) 2013 2012 2011 Cash flows from operating activities: Net income $ 34,842 $ 39,780 $ 30,294 Adjustments to reconcile net income to net cash provided by operating activities: Change in fair value of derivatives 7 (36) 1,332 Gain on sale of property, discontinued operations – (4,510) — Gain on casualty settlement, continuing operations (77) (219) (245) Depreciation and amortization of deferred leasing costs 49,130 40,189 35,400 Amortization of deferred debt costs 1,257 1,576 1,547 Non cash compensation costs of stock grants and options 1,145 952 948 Provision for credit losses 968 1,151 1,883 (Increase) decrease in accounts receivable and accrued income (3,669) (3,240) (5,291) Additions to deferred leasing costs (5,876) (5,362) (6,257) (Increase) decrease in prepaid expenses (152) (54) (844) (Increase) decrease in other assets 353 9,573 (3,668) Increase (decrease) in accounts payable, accrued expenses and other liabilities (3,286) (930) 1,478 Decrease in deferred income (1,115) (447) (908) Net cash provided by operating activities 73,527 78,423 55,669 Cash flows from investing activities: Acquisitions of real estate investments (5,124) (34,050) (170,100) Additions to real estate investments (13,999) (12,680) (11,624) Additions to development and redevelopment projects (7,316) (7,913) (20,780) Proceeds from sale of properties – 5,818 – Proceeds from casualty settlement 405 1,952 1,004 Net cash used in investing activities (26,034) (46,873) (201,500) Cash flows from financing activities: Proceeds from mortgage notes payable 101,600 83,500 286,000 Repayments on mortgage notes payable (71,308) (117,595) (82,685) Proceeds from construction loans payable – – 13,410 Repayments on construction loans payable – – (104,243) Proceeds from revolving credit facility 142,000 38,000 16,000 Repayments on revolving credit facility (180,000) (8,000) (8,000) Additions to deferred debt costs (3,219) (2,199) (1,445) Proceeds from the issuance of: Common stock 22,292 27,784 27,101 Partnership units 4,144 – 49,589 Series C preferred stock 135,221 – – Preferred stock redemption payments: Series A preferred (60,000) – – Series B preferred (79,328) – – Preferred stock redemption costs (9) – – Distributions to: Series A preferred stockholders (5,213) (8,000) (8,000) Series B preferred stockholders (3,253) (7,140) (7,140) Series C preferred stockholders (6,095) – – Common stockholders (29,205) (28,135) (27,062) Noncontrolling interest (9,956) (9,955) (8,339) Net cash provided by (used in) financing activities (42,329) (31,740) 145,186 Net increase (decrease) in cash and cash equivalents 5,164 (190) (645) Cash and cash equivalents, beginning of year 12,133 12,323 12,968 Cash and cash equivalents, end of year $ 17,297 $ 12,133 $ 12,323 Supplemental disclosure of cash flow information: Cash paid for interest $ 45,743 $ 48,302 $ 42,948 The Notes to Financial Statements are an integral part of these statements. 34 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and certain other affiliated entities, each of which is controlled by B. Francis Saul II and his family members (collectively, the “Saul Organiza- tion”). 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 mixed-used properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. 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 In- ternal Revenue Code of 1986, as amended (the “Code”). The Company is required to annually distribute at least 90% of its REIT taxable income (excluding net capital gains) to its stockholders and meet certain organizational and other requirements. Saul Cen- ters 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 following table lists the properties acquired, developed and/or disposed of by the Company since January 1, 2011. Name of Property Location Type Year of Acquisition/ Development/Disposal ACQUISITIONS 4469 Connecticut Avenue Kentlands Square II Severna Park MarketPlace Cranberry Square 1500 Rockville Pike 5541 Nicholson Lane DEVELOPMENTS Clarendon Center North Clarendon Center South DISPOSITIONS West Park Belvedere Washington, DC Gaithersburg, Maryland Severna Park, Maryland Westminster, Maryland Rockville, Maryland Rockville, Maryland Shopping Center Shopping Center Shopping Center Shopping Center Shopping Center Shopping Center Arlington, VA Arlington, VA Mixed-Use Mixed-Use February 2011 September 2011 September 2011 September 2011 December 2012 December 2012 2010/2011 2010/2011 Oklahoma City, Oklahoma Baltimore, Maryland Shopping Center Shopping Center July 2012 December 2012 As of December 31, 2013, the Company’s properties (the “Current Portfolio Properties”) consisted of 50 shopping center properties (the “Shopping Centers”), six mixed-use properties which are comprised of office, retail and multi-family residential uses (the “Mixed-Use Properties”) and three (non-operating) development properties. 2013 ANNUAL REPORT 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying financial statements are presented on the his- torical 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 Op- erating 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 sub- sidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acqui- sition, renovation, expansion, development and financing of community and neighborhood shopping centers and mixed-used properties, primarily in the Washington, DC/Baltimore metropol- itan area. Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, a disproportionate economic downturn in the local economy would have a greater negative impact on our overall financial performance than on the overall financial performance of a company with a portfolio that is more geographically diverse. A majority of the Shopping Centers are anchored by several major tenants. As of December 31, 2013, 32 of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. Two retail ten- ants, Giant Food (4.8%), a tenant at ten Shopping Centers, and Safeway (2.6%), a tenant at eight Shopping Centers, individually ac- counted for more than 2.5% of the Company’s total revenue for the year ended December 31, 2013. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Saul Centers, its subsidiaries, and the Operating Part- nership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transac- tions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with ac- counting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and dis- closure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and ex- penses during the reporting period. Actual results could differ from those estimates. 36 SAUL CENTERS, INC. REAL ESTATE INVESTMENT PROPERTIES The Company purchases real estate investment properties from time to time and records assets acquired and liabilities assumed, including land, buildings, and intangibles related to in-place leases and customer relationships, based on their fair values. The fair value of buildings generally is determined as if the buildings were vacant upon acquisition and then subsequently leased at market rental rates and considers the present value of all cash flows ex- pected to be generated by the property including an initial lease up period. From time to time the Company may purchase a prop- erty for future development purposes. The property may be improved with an existing structure that would be demolished as part of the development. In such cases, the fair value of the build- ing may be determined based only on existing leases and not include estimated cash flows related to future leases. In certain circumstances, such as if the building is vacant and the Company intends to demolish the building in the near term, the entire pur- chase price will be allocated to land. The Company determines the fair value of above and below mar- ket 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 taking into consideration the remaining contractual lease period, renewal periods, and the like- lihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred in- come and accreted as additional lease revenue over the remaining contractual lease period. If the fair value of the below market lease intangible includes fair value associated with a renewal option, such amounts are not accreted until the renewal option is exer- cised. If the renewal option is not exercised the value is recognized at that time. The fair value of above market lease in- tangibles 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 asso- ciated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional expense over the remaining contractual lease term. To the extent customer re- lationship intangibles are present in an acquisition, the fair values of the intangibles are amortized over the lives of the customer re- lationships. The Company has never recorded a customer relationship intangible asset. Acquisition-related transaction costs are either (a) expensed as incurred when related to business com- binations or (b) capitalized to land and/or building when related to asset acquisitions. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If there is an event or change in circumstance that indicates a po- tential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, signif- icant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capi- talization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, the Company would rec- ognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from manage- ment’s projections, the valuation could be negatively or positively affected. The Company did not recognize an impairment loss on any of its real estate in 2013, 2012, or 2011. Interest, real estate taxes, development related salary costs and other carrying costs are capitalized on projects under develop- ment and construction. Once construction is substantially completed and the assets are placed in service, their rental in- come, real estate tax expense, property operating expenses (consisting of payroll, repairs and maintenance, utilities, insurance and other property related expenses) and depreciation are in- cluded in current operations. Property operating expenses are charged to operations as incurred. Interest expense capitalized to- taled $170,000, $42,300, and $1.9 million during 2013, 2012, and 2011, respectively. Commercial development projects are considered substantially complete and available for occupancy upon comple- tion of tenant improvements, but no later than one year from the cessation of major construction activity. Multi-family residential development projects are considered substantially complete and available for occupancy upon receipt of the certificate of occu- pancy from the appropriate licensing authority. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and es- timated useful lives of generally between 35 and 50 years for base buildings, or a shorter period if management determines that the building has a shorter useful life, and up to 20 years for certain other improvements that extend the useful lives. Leasehold im- provements expenditures are capitalized when certain criteria are met, including when the Company supervises construction and will own the improvements. Tenant 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. Depreciation expense and amortization of leasehold improvements, which is in- cluded in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, for the years ended December 31, 2013, 2012, and 2011, was $43.2 million, $34.6 million, and $30.6 million, respectively. Repairs and maintenance expense totaled $10.3 million, $9.9 million, and $10.9 million for 2013, 2012, and 2011, respectively, and is included in property operating ex- penses in the accompanying consolidated financial statements. DEFERRED LEASING COSTS Deferred leasing costs consist of commissions paid to third-party leasing agents, internal direct costs such as employee compensa- tion and payroll-related fringe benefits directly related to time spent performing leasing-related activities for successful commer- cial leases and amounts attributed to in place leases associated with acquired properties and are amortized, using the straight-line method, over the term of the lease or the remaining term of an acquired lease. Leasing related 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 transac- tion. Unamortized deferred costs are charged to expense if the applicable lease is terminated prior to expiration of the initial lease term. Collectively, deferred leasing costs totaled $26.1 million and $26.1 million, net of accumulated amortization of approximately $16.6 million and $16.2 million, as of December 31, 2013 and 2012, respectively. Amortization expense, which is included in Depreci- ation and amortization of deferred leasing costs in the Consolidated Statements of Operations, totaled approximately $5.9 million, $5.5 million, and $4.7 million, for the years ended De- cember 31, 2013, 2012, and 2011, respectively. CONSTRUCTION IN PROGRESS Construction in progress includes preconstruction and develop- ment costs of active projects. Preconstruction costs include legal, zoning and permitting costs and other project carrying costs in- curred 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, en- gineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress totaled $9.9 million, of which $7.9 million relates to Park Van Ness, and $2.3 million, respectively, as of December 31, 2013 and 2012. 2013 ANNUAL REPORT 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTS RECEIVABLE AND ACCRUED INCOME Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are estab- lished 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 $0.6 million and $1.2 million, at December 31, 2013 and 2012, respectively. ALLOWANCE FOR DOUBTFUL ACCOUNTS For the Year Ended December 31, (In thousands) 2013 2012 2011 Beginning Balance $ 1,208 $ 671 $ 898 Provision for Credit Losses 968 1,160 1,883 Charge-offs (1,604) (623) (2,110) Ending Balance $ 572 $ 1,208 $ 671 In addition to rents due currently, accounts receivable also in- cludes $37.2 million and $34.4 million, at December 31, 2013 and 2012, respectively, net of allowance for doubtful accounts totaling $0.5 million and $92,000, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term investments. Short- term investments include money market accounts and other investments which generally mature within three months, meas- ured from the acquisition date, and/or are readily convertible to cash. Substantially all of the Company’s cash balances at December 31, 2013 are held in non-interest bearing accounts at various banks. From time to time the Company may maintain deposits with fi- nancial institutions in amounts in excess of federally insured limits. The Company has not experienced any losses on such deposits and believes it is not exposed to any significant credit risk on those deposits. 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 on a straight- line basis over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $9.7 million and $7.7 million, net of accumulated amortization of $4.5 million and $3.8 million at December 31, 2013 and 2012, respectively. 38 SAUL CENTERS, INC. DEFERRED INCOME Deferred income consists of payments received from tenants prior to the time they are earned and recognized by the Company as revenue, including tenant prepayment of rent for future periods, real estate taxes when the taxing jurisdiction has a fiscal year dif- fering from the calendar year reimbursements specified in the lease agreement and tenant construction work provided by the Company. In addition, deferred income includes the fair value of certain below market leases. DERIVATIVE FINANCIAL INSTRUMENTS The Company may, when appropriate, employ derivative instru- ments, such as interest-rate swaps, to mitigate the risk of interest rate fluctuations. The Company does not enter into derivative or other financial instruments for trading or speculative purposes. Derivative financial instruments are carried at fair value as either assets or liabilities on the consolidated balance sheets. For those derivative instruments that qualify, the Company may designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge or a cash flow hedge. Derivative instruments that are designated as a hedge are evaluated to ensure they con- tinue to qualify for hedge accounting. The effective portion of any gain or loss on the hedge instruments is reported as a component of accumulated other comprehensive income (loss) and recog- nized in earnings within the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a derivative instrument is immedi- ately recognized in earnings. For derivative instruments that do not meet the criteria for hedge accounting, or that qualify and are not designated, changes in fair value are immediately recognized in earnings. DISCONTINUED OPERATIONS During 2012, the Company sold its West Park and Belvedere prop- erties for $2.0 million and $4.0 million and recognized gains of $1.1 million and $3.4 million, respectively. The results of operations of West Park and Belvedere for the years ended December 31, 2012 and 2011 are included in the statements of operations as “Loss from operations of properties sold.” The Company has no other discon- tinued operations. REVENUE RECOGNITION Rental and interest income are accrued as earned except when doubt exists as to collectability, in which case the accrual is dis- continued. Recognition of rental income commences when control of the space has been given to the tenant. 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. Expense recoveries represent a portion of property operating expenses billed to the tenants, including com- mon area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period in which the expenses are incurred. Rental income based on a tenant’s revenue (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint, pursuant to the terms of their respective leases. INCOME TAXES The Company made an election to be treated, and intends to con- tinue operating so as to qualify, as a REIT under the Code, commencing with its taxable year ended December 31, 1993. A REIT generally will not be subject to federal income taxation, provided that distributions to its stockholders equal or exceed its REIT tax- able income and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. As of December 31, 2013, the Company had no material unrecog- nized tax benefits and there exist no potentially significant unrecognized tax benefits which are reasonably expected to occur within the next twelve months. The Company recognizes penalties and interest accrued related to unrecognized tax benefits, if any, as general and administrative expense. No penalties and interest have been accrued in years 2013, 2012, and 2011. The tax basis of the Company’s real estate investments was approximately $1.1 bil- lion as of each of December 31, 2013 and 2012. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations by tax authorities for years before 2007. STOCK BASED EMPLOYEE COMPENSATION, DEFERRED COMPENSATION AND STOCK PLAN FOR DIRECTORS The Company uses the fair value method to value and account for employee stock options. The fair value of options granted is de- termined at the time of each award using the Black-Scholes model, a widely used method for valuing stock based employee compen- sation, and the following assumptions: (1) Expected Volatility determined using the most recent trading history of the Com- pany’s common stock (month-end closing prices) corresponding to the average expected term of the options; (2) Average Expected Term of the options is based on prior exercise history, scheduled vesting and the expiration date; (3) Expected Dividend Yield de- termined by management 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) a Risk-free Interest Rate 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 Com- pany amortizes the value of options granted ratably over the vesting period and includes the amounts as compensation in gen- eral and administrative expenses. The Company has a stock plan, which was originally approved in 2004, amended in 2008 and 2013 and which expires in 2023, for the purpose of attracting and retaining executive officers, direc- tors and other key personnel (the "Stock Plan"). Pursuant to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Plan, the Compensation Committee established a Deferred Compensation Plan for Directors for the benefit of its directors and their beneficiaries, which replaced a previous Deferred Com- pensation and Stock Plan for Directors. A director may make an annual election 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 separation 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 common stock’s closing market price on the first trading day of the following quarter to determine the number of shares to be allocated to the director. As of December 31, 2013, the directors’ deferred fee accounts comprise 226,996 shares. The Compensation Committee has also approved an annual award of shares of the Company’s common stock as additional compen- sation 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 shares for each of the years ended December 31, 2013, 2012, and 2011. 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 $124,400, $110,000, and $109,000, for the years ended December 31, 2013, 2012, and 2011, respectively. NONCONTROLLING INTEREST Saul Centers is the sole general partner of the Operating Partner- ship, owning a 74.6% common interest as of December 31, 2013. Noncontrolling interest in the Operating Partnership is comprised of limited partnership units owned by the Saul Organization. Non- controlling interest reflected on the accompanying consolidated balance sheets is increased for earnings allocated to limited part- nership interests and distributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interest reflected on the consolidated statements of operations represents earnings allocated to limited partnership interests held by the Saul Organization. PER SHARE DATA 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 con- vertible limited partnership units are anti-dilutive. For the years ended December 31, 2013, 2012, and 2011, options totaling 112,500, 117,500, and 427,500, respectively, are not dilutive because the av- erage share price of the Company’s common stock was less than the exercise prices. The treasury stock method was used to meas- ure the effect of the dilution. 2013 ANNUAL REPORT 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIC AND DILUTED SHARES OUTSTANDING December 31 (In thousands) 2013 2012 2011 Weighted average common shares outstanding – Basic 20,364 19,649 18,889 Effect of dilutive options 37 51 60 Weighted average common shares outstanding – Diluted 20,401 19,700 18,949 Average Share Price $ 45.44 $ 40.94 $ 39.39 LEGAL CONTINGENCIES The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. Upon determination that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior years to conform to the presentation used for the three-months and year ended De- cember 31, 2013. Acquisition related costs for 2012 and 2011 are now presented as a component of operating expenses in the ac- companying Consolidated Statements of Operations. 3. REAL ESTATE ACQUIRED 4469 CONNECTICUT AVENUE In February 2011, the Company purchased for $1.6 million 4469 Connecticut Avenue, a vacant one space retail property, located adjacent to Van Ness Square in northwest Washington, DC and in- curred acquisition costs of $74,000. KENTLANDS SQUARE II In September 2011, the Company purchased for $74.5 million Kent- lands Square II, a retail property located adjacent to the Company’s Kentlands Square I and Kentlands Place shopping centers in Gaithers- burg, Maryland, and incurred acquisition costs of $1.1 million. SEVERNA PARK MARKETPLACE In September 2011, the Company purchased for $61.0 million Sev- erna Park MarketPlace, a retail property located in Severna Park, Maryland, and incurred acquisition costs of $0.8 million. CRANBERRY SQUARE In September 2011, the Company purchased for $33.0 million Cran- berry Square, a retail property located in Westminster, Maryland, and incurred acquisition costs of $0.5 million. 40 SAUL CENTERS, INC. 1500 ROCKVILLE PIKE In December 2012, the Company purchased for $22.4 million 1500 Rockville Pike, a retail property located in Rockville, Maryland, and incurred acquisition costs of $0.6 million. 5541 NICHOLSON LANE In December 2012, the Company purchased for $11.7 million 5541 Nicholson Lane, a retail property located in Rockville, Maryland, and incurred acquisition costs of $0.5 million. KENTLANDS PAD In August 2013, the Company purchased for $4.3 million, a retail pad with a 7,100 square feet restaurant located in Gaithersburg, Maryland, which is contiguous with and an expansion of the Com- pany's other Kentlands assets, and incurred acquisition costs of $106,000. HUNT CLUB PAD In December 2013, the Company purchased for $0.8 million, in- cluding acquisition costs, a retail pad with a 5,500 square foot vacant building located in Apopka, Florida, which is contiguous with and an expansion of the Company's other Hunt Club asset. ALLOCATION OF PURCHASE PRICE OF REAL ESTATE ACQUIRED The Company allocates the purchase price of real estate invest- ment properties to various components, such as land, buildings and intangibles related to in-place leases and customer relation- ships, based on their fair values. See Note 2. Summary of Significant Accounting Policies-Real Estate Investment Properties. During 2013, the Company purchased one property at a cost of $4.3 million and incurred acquisition costs of $106,000. Of the total purchase price, $2.0 million was allocated to buildings and $2.3 million was allocated to land. No amounts were allocated to in-place, above-market, or below-market leases. During 2012, the Company purchased two properties at an aggre- gate cost of $34.1 million and incurred acquisition costs of $1.1 million. Of the total purchase price, $3.8 million was allocated to buildings, $30.4 million was allocated to land, and $0.5 million was allocated to in-place leases and $0.7 million was allocated to below market leases which is included in deferred income and is being accreted to income over the lives of the underlying leases, which is approximately 3.1 years. During 2011, the Company purchased four properties at an aggre- gate cost of $170.1 million, and incurred acquisition costs of $2.5 million. Of the total purchase price, $5.5 million was allocated to below market leases which is included in deferred income and is being accreted to income over the lives of the underlying leases, or approximately 10.9 years, and $28,000 was allocated to above market leases, which is included as a deferred asset in accounts receivable and is being amortized against income over the lives of the underlying leases, which is approximately 4.1 years. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The allocation of the purchase prices for Severna Park MarketPlace, Kentlands Square II, and Cranberry Square to the acquired assets and liabilities based on their fair values was as follows: As of December 31, 2013, scheduled amortization of intangible assets and deferred income related to in place leases is as follows: Severna Three Kentlands Park Cranberry Property (In thousands) Square II MarketPlace Square Total Land $ 20,500 $ 12,700 $ 6,700 $ 39,900 Buildings 51,973 50,554 24,878 127,405 In-Place Leases 2,697 2,433 1,499 6,629 Above Market Rents 6 4 18 28 Below Market Rents (676) (4,691) (95) (5,462) Total Purchase Price $ 74,500 $ 61,000 $ 33,000 $168,500 The gross carrying amount of lease intangible assets included in deferred leasing costs as of December 31, 2013 and 2012 was $21.9 million and $21.9 million, respectively, and accumulated amortiza- tion was $16.7 million and $14.7 million, respectively. Amortization expense totaled $2.0 million, $2.0 million and $1.3 million, for the years ended December 31, 2013, 2012, and 2011, respectively. The gross carrying amount of below market lease intangible liabilities included in deferred income as of December 31, 2013 and 2012 was $24.8 million and $24.8 million, respectively, and accumulated amortization was $10.0 million and $8.3 million, respectively. Ac- cretion income totaled $1.7 million, $1.6 million, and $1.2 million, for the years ended December 31, 2013, 2012, and 2011, respectively. The gross carrying amount of above market lease intangible assets included in accounts receivable as of December 31, 2013 and 2012 was $1.0 million and $1.0 million, respectively, and accumulated amortization was $974,100 and $929,100, respectively. Amortization expense totaled $45,000, $60,000 and $62,000, for the years ended December 31, 2013, 2012 and 2011, respectively. AMORTIZATION OF INTANGIBLE ASSETS AND DEFERRED INCOME RELATED TO IN-PLACE LEASES Lease Above Below acquisition market market (In thousands) costs leases leases 2014 $ 1,066 $ 21 $ 1,458 2015 721 3 1,203 2016 566 1 1,095 2017 517 1 1,072 2018 480 1 1,044 Thereafter 1,926 – 8,893 Total $ 5,276 $ 28 $ 14,765 4. NONCONTROLLING INTEREST - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP The Saul Organization holds a 25.4% limited partnership interest in the Operating Partnership represented by 7,002,538 limited part- nership units, as of December 31, 2013. The units are convertible into shares of Saul Centers’ common stock, at the option of the unit holder, on a one-for-one basis provided that, in accordance with the Saul Centers, Inc. Articles of Incorporation, the rights may not be exercised at any time that the Saul Organization benefi- cially owns, directly or indirectly, in the aggregate more than 39.9% of the value of the outstanding common stock and preferred stock of Saul Centers (the “Equity Securities”). As of December 31, 2013, 720,000 units were eligible for conversion. The impact of the Saul Organization’s 25.4% limited partnership interest in the Operating Partnership is reflected as Noncontrolling Interest in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the years ended December 31, 2013, 2012, and 2011, were 27,330,100, 26,613,900, and 24,739,700, respectively. 2013 ANNUAL REPORT 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. MORTGAGE NOTES PAYABLE, REVOLVING CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS At December 31, 2013, outstanding debt totaled $820.1 million, of which $789.9 million was fixed rate debt and $30.2 million was vari- able rate debt. The Company’s outstanding debt totaled $827.8 million at December 31, 2012, of which $774.8 million was fixed rate debt and $53.0 million was variable rate debt. At December 31, 2013, the Company had a $175.0 million unsecured revolving credit fa- cility, which can be used for working capital, property acquisitions or development projects. The revolving credit facility matures on May 20, 2016, and may be extended by the Company for one ad- ditional year subject to the Company’s satisfaction of certain conditions. Saul Centers and certain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obliga- tions of the Operating Partnership under the revolving credit facility. Letters of credit may be issued under the revolving credit facility. On December 31, 2013, based on the value of the Com- pany's unencumbered properties, approximately $164.2 million was available under the line, no borrowings were outstanding and ap- proximately $628,229 was committed for letters of credit. The interest rate under the facility is variable and equals the sum of one-month LIBOR and a margin that is based on the Company’s leverage ratio and which can range from 160 basis points to 250 basis points. As of December 31, 2013, the margin was 160 basis points. Saul Centers is a guarantor of the revolving credit facility, of which the Operating Partnership is the borrower. Saul Centers is also the guarantor of 50% of the Northrock bank term loan (approximately $7.4 million of the $14.8 million outstanding at December 31, 2013) and the Metro Pike Center bank loan (approximately $7.7 million of the $15.4 million outstanding at December 31, 2013). The fixed- rate notes payable are all non-recourse. On March 23, 2011, the Company closed on a 15-year non-recourse mortgage loan in the amount of $125.0 million, secured by Claren- don Center. The loan matures in 2026, bears interest at a fixed rate of 5.31%, requires equal monthly principal and interest payments of $753,000, based upon a 25-year principal amortization, and requires a final principal payment of approximately $70.5 million at maturity. Proceeds from the loan were used to repay $104.2 mil- lion outstanding on the Clarendon Center construction loan. On September 23, 2011, the Company closed on a 15-year non-re- course mortgage loan in the amount of $38.0 million, secured by Severna Park MarketPlace. The loan matures in 2026, bears interest at a fixed rate of 4.30%, requires equal monthly principal and in- terest payments of $207,000, based upon a 25-year principal amortization, and requires a final principal payment of approxi- mately $20.3 million at maturity. Proceeds from the loan were used to purchase Severna Park MarketPlace. Also on September 23, 2011, the Company closed on two six- month bridge financing loans in the total amount of $60.0 million, secured by Kentlands Square II and Cranberry Square. Proceeds from the loans were used to purchase Kentlands Square II and Cranberry Square. On October 5, 2011, the Company closed on a new 15-year non- recourse mortgage loan in the amount of $43.0 million, secured by Kentlands Square II. The loan matures in 2026, bears interest at a fixed rate of 4.53%, requires equal monthly principal and interest payments of $240,000, based upon a 25-year principal amortiza- tion, and requires a final principal payment of approximately $23.1 million at maturity. Proceeds from the loan were used to repay the $40.0 million bridge financing used to acquire Kentlands Square II. On November 6, 2011, the Company closed on a new 15-year non- recourse mortgage loan in the amount of $20.0 million, secured by Cranberry Square. The loan matures in 2026, bears interest at a fixed rate of 4.70%, requires equal monthly principal and interest payments of $113,000, based upon a 25-year principal amortization, and requires a final principal payment of approximately $10.9 mil- lion at maturity. Proceeds from the loan were used to repay the $20.0 million bridge financing used to acquire Cranberry Square. On April 11, 2012, the Company closed on a 15-year non-recourse mortgage loan in the amount of $73.0 million secured by Seven Corners shopping center. The loan matures in 2027, bears interest at a fixed rate of 5.84%, requires equal monthly principal and in- terest payments totaling $463,200 based upon a 25-year amortization schedule and a final payment of $42.3 million at ma- turity. Proceeds from the loan were used to pay-off the $63 million remaining balance of existing debt secured by Seven Corners and six other shopping center properties, and to provide cash of ap- proximately $10 million. 42 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On March 19, 2013, the Company closed on a 15-year, non-recourse $18.0 million mortgage loan secured by Hampshire Langley. The loan matures in 2028, bears interest at a fixed rate of 4.04%, requires monthly principal and interest payments totaling $95,400 based on a 25-year amortization schedule and requires a final payment of $9.5 million at maturity. On April 10, 2013, the Company paid in full the $6.9 million remain- ing balance on the mortgage loan secured by Cruse Marketplace. On May 28, 2013, the Company closed on a 15-year, non-recourse $35.0 million mortgage loan secured by Beacon Center. The loan matures in 2028, bears interest at a fixed rate of 3.51%, requires monthly principal and interest payments totaling $203,200 based on a 20-year amortization schedule and requires a final payment of $11.4 million at maturity. On September 4, 2013, the Company closed on a 15-year, non-re- course $18.0 million mortgage loan secured by Seabreeze Plaza. The loan matures in 2028, bears interest at a fixed rate of 3.99%, requires monthly principal and interest payments totaling $94,900 based on a 25-year amortization schedule and requires a final payment of $9.5 million at maturity. Proceeds were used to pay off the $13.5 million remaining balance of existing debt secured by Seabreeze Plaza which was scheduled to mature in May 2014 and the Com- pany incurred $497,000 of related debt extinguishment costs. On October 25, 2013 the Company closed on a $71.6 million con- struction-to-permanent loan which will partially finance the construction of Park Van Ness. The loan bears interest at 4.88% and during the construction period it will be fully recourse to Saul Cen- ters and accrued interest will be funded by the loan. Following the completion of construction and lease-up, and upon achieving cer- tain debt service coverage requirements, the loan will convert to a non-recourse, permanent mortgage at the same interest rate, with principal amortization computed based on a 25-year schedule. On April 26, 2012, the Company substituted the White Oak shop- ping center for Van Ness Square as collateral for one of its existing mortgage loans. The terms of the original loan, including its 8.11% interest rate, are unchanged and, in conjunction with the collateral substitution, the Company borrowed an additional $10.5 million, also secured by White Oak. The new borrowing requires equal monthly payments based upon a fixed 4.90% interest rate and 25- year amortization schedule, and will mature in 2024, coterminously with the original loan. The consolidated loan re- quires equal monthly payments based upon a blended fixed interest rate of 7.0% and will require a final payment of $18.5 mil- lion at maturity. On May 21, 2012, the Company replaced its existing unsecured revolving credit facility with a new $175.0 million facility that ex- pires on May 20, 2016. The facility, which provides working capital and funds for acquisitions, certain developments, redevelopments and letters of credit, may be extended for one year, at the Com- pany’s option, subject to the satisfaction of certain conditions. Loans under the facility bear interest at a rate equal to the sum of one-month LIBOR and a margin, based on the Company’s leverage ratio, ranging from 160 basis points to 250 basis points. Based on the leverage ratio of December 31, 2013, the margin was 160 basis points. On February 27, 2013, the Company closed on a three-year $15.6 million mortgage loan secured by Metro Pike Center. The loan ma- tures in 2016, bears interest at a variable rate equal to the sum of one-month LIBOR and 165 basis points, requires monthly principal and interest payments based on a 25-year amortization schedule and requires a final payment of $14.8 million at maturity. The loan may be extended for up to two years. Proceeds were used to pay- off the $15.9 million remaining balance of existing debt secured by Metro Pike Center, and to extinguish the related swap agreement. On February 27, 2013, the Company closed on a three-year $15.0 million mortgage loan secured by Northrock. The loan matures in 2016, bears interest at a variable rate equal to the sum of one- month LIBOR and 165 basis points, requires monthly principal and interest payments based on a 25-year amortization schedule and requires a final payment of $14.2 million at maturity. The loan may be extended for up to two years. Proceeds were used to pay-off the $15.0 million remaining balance of existing debt secured by Northrock. 2013 ANNUAL REPORT 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of notes payable as of December 31, 2013 and 2012: NOTES PAYABLE December 31, Interest Scheduled (Dollars in thousands) 2013 2012 Rate * Maturity * Fixed rate mortgages: $ — (a) $ 15,750 — (b) 6,936 — (c) 13,875 16,128 (d) 16,798 7.45% Jun-2015 33,246 (e) 34,373 6.01% Feb-2018 36,937 (f) 38,388 5.88% Jan-2019 11,949 (g) 12,418 5.76% May-2019 16,501 (h) 17,145 5.62% Jul-2019 16,419 (i) 17,040 5.79% Sep-2019 14,610 (j) 15,176 5.22% Jan-2020 11,159 (k) 11,421 5.60% May-2020 9,921 (l) 10,288 5.30% Jun-2020 42,462 (m) 43,424 5.83% Jul-2020 8,649 (n) 8,934 5.81% Feb-2021 6,233 (o) 6,359 6.01% Aug-2021 35,981 (p) 36,699 5.62% Jun-2022 10,930 (q) 11,129 6.08% Sep-2022 11,795 (r) 11,989 6.43% Apr-2023 15,598 (s) 16,247 6.28% Feb-2024 17,123 (t) 17,469 7.35% Jun-2024 14,849 (u) 15,140 7.60% Jun-2024 26,153 (v) 26,635 7.02% Jul-2024 31,093 (w) 31,709 7.45% Jul-2024 30,894 (x) 31,490 7.30% Jan-2025 16,087 (y) 16,419 6.18% Jan-2026 118,128 (z) 120,822 5.31% Apr-2026 36,075 (aa) 36,986 4.30% Oct-2026 40,974 (bb) 41,970 4.53% Nov-2026 19,118 (cc) 19,569 4.70% Dec-2026 70,856 (dd) 72,233 5.84% May-2027 17,718 (ee) — 4.04% Apr-2028 34,391 (ff) — 3.51% Jun-2028 17,895 (gg) — 3.99% Sep-2028 — (hh) — 4.88% Sep-2032 Total fixed rate 789,872 774,831 5.67% 10.1 Years Variable rate loans: — (ii) 38,000 LIBOR + 1.60% May-2016 14,802 (jj) 14,945 LIBOR + 1.65% Feb-2016 15,394 (kk) — LIBOR + 1.65% Feb-2016 Total variable rate 30,196 52,945 LIBOR + 1.65% 2.2 Years Total notes payable $ 820,068 $ 827,776 5.53% 9.8 Years * Interest rate and scheduled maturity data presented as of December 31, 2013. Totals computed using weighted averages. 44 SAUL CENTERS, INC. (a) The loan, together with a corresponding interest-rate swap, was col- lateralized by Metro Pike Center. On a combined basis, the loan and the swap required interest only payments of $86,000 based upon a 25- year amortization schedule and a final payment of $15.6 million at loan maturity. The loan was repaid in full and the swap was termi- nated in 2013. (c) (d) (b) The loan was collateralized by Cruse MarketPlace and required equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a final payment of $6.8 million at loan maturity. The loan was repaid in full in 2013. The loan was collateralized by Seabreeze Plaza and required equal monthly principal and interest payments totaling $102,000 based upon a weighted average 26-year amortization schedule and a final payment of $13.3 million at loan maturity. The loan was repaid in full in 2013. The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires equal monthly principal and interest payments totaling $156,000 based upon a weighted average 23-year amortization schedule and a final payment of $15.2 million at loan maturity. Principal of $670,000 was amortized during 2013. 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 final payment of $28.0 million at loan maturity. Principal of $1.1 million was amortized during 2013. The loan is collateralized by three shopping centers, Broadlands Village, The Glen and Kentlands Square I, and requires equal monthly principal and interest payments of $306,000 based upon a 25-year amortization schedule and a final payment of $28.4 million at loan maturity. Princi- pal of $1.5 million was amortized during 2013. 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 final payment of $9.0 million at loan maturity. Principal of $469,000 was amortized during 2013. (g) (e) (f) (i) (j) (h) 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 final payment of $12.3 million at loan ma- turity. Principal of $644,000 was amortized during 2013. The loan is collateralized by Briggs Chaney MarketPlace and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12.2 million at loan maturity. Principal of $621,000 was amortized during 2013. 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 final payment of $10.6 million at loan maturity. Principal of $566,000 was amortized during 2013. The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30- year amortization schedule and a final payment of $9.1 million at loan maturity. Principal of $262,000 was amortized during 2013. The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25- year amortization schedule and a final payment of $7.1 million at loan maturity. Principal of $367,000 was amortized during 2013. (k) (l) (m) The loan and a corresponding interest-rate swap closed on June 29, 2010 and are collateralized by Thruway. On a combined basis, the loan and the interest-rate swap require equal monthly principal and interest payments of $289,000 based upon a 25-year amortization schedule and a final payment of $34.8 million at loan maturity. Principal of $962,000 was amortized during 2013. (n) The loan is collateralized by Jamestown Place and requires equal monthly principal and interest payments of $66,000 based upon a 25- year amortization schedule and a final payment of $6.1 million at loan maturity. Principal of $285,000 was amortized during 2013. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (o) (p) (q) (r) (s) (t) The loan is collateralized by Hunt Club Corners and requires equal monthly principal and interest payments of $42,000 based upon a 30- year amortization schedule and a final payment of $5.0 million, at loan maturity. Principal of $126,000 was amortized during 2013. The loan is collateralized by Lansdowne Town Center and requires monthly principal and interest payments of $230,000 based on a 30- year amortization schedule and a final payment of $28.2 million at loan maturity. Principal of $718,000 was amortized during 2013. The loan is collateralized by Orchard Park and requires equal monthly principal and interest payments of $73,000 based upon a 30-year amortization schedule and a final payment of $8.6 million at loan ma- turity. Principal of $199,000 was amortized during 2013. The loan is collateralized by BJ’s Wholesale and requires equal monthly principal and interest payments of $80,000 based upon a 30-year amortization schedule and a final payment of $9.3 million at loan ma- turity. Principal of $194,000 was amortized during 2013. The loan is collateralized by Great Falls shopping center. The loan con- sists of three notes which require equal monthly principal and interest payments of $138,000 based upon a weighted average 26-year amor- tization schedule and a final payment of $6.3 million at maturity. Principal of $649,000 was amortized during 2013. The loan is collateralized by Leesburg Pike and requires equal monthly principal and interest payments of $135,000 based upon a 25-year amortization schedule and a final payment of $11.5 million at loan ma- turity. Principal of $346,000 was amortized during 2013. (v) (u) The loan is collateralized by Village Center and requires equal monthly principal and interest payments of $119,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan ma- turity. Principal of $291,000 was amortized during 2013. The loan is collateralized by White Oak and requires equal monthly principal and interest payments of $193,000 based upon a 24.4 year weighted amortization schedule and a final payment of $18.5 million at loan maturity. The loan was previously collateralized by Van Ness Square. During 2012, the Company substituted White Oak as the col- lateral and borrowed an additional $10.5 million. Principal of $482,000 was amortized during 2013. (z) (x) (y) (w) The loan is collateralized by Avenel Business Park and requires equal monthly principal and interest payments of $246,000 based upon a 25-year amortization schedule and a final payment of $20.9 million at loan maturity. Principal of $616,000 was amortized during 2013. The loan is collateralized by Ashburn Village and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $20.5 million at loan maturity. Principal of $596,000 was amortized during 2013. The loan is collateralized by Ravenwood and requires equal monthly principal and interest payments of $111,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan ma- turity. Principal of $332,000 was amortized during 2013. The loan is collateralized by Clarendon Center and requires equal monthly principal and interest payments of $753,000 based upon a 25- year amortization schedule and a final payment of $70.5 million at loan maturity. Principal of $2.7 million was amortized during 2013. (aa) The loan is collateralized by Severna Park MarketPlace and requires equal monthly principal and interest payments of $207,000 based upon a 25-year amortization schedule and a final payment of $20.3 million at loan maturity. Principal of $911,000 was amortized during 2013. (bb) The loan is collateralized by Kentlands Square II and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $23.1 million at loan maturity. Principal of $996,000 was amortized during 2013. (cc) The loan is collateralized by Cranberry Square and requires equal monthly principal and interest payments of $113,000 based upon a 25- year amortization schedule and a final payment of $10.9 million at loan maturity. Principal of $451,000 was amortized during 2013. 2013 ANNUAL REPORT 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dd) The loan in the original amount of $73.0 million closed in May 2012, is collateralized by Seven Corners and requires equal monthly principal and interest payments of $463,200 based upon a 25-year amortization schedule and a final payment of $42.3 million at loan maturity. Princi- pal of $1.4 million was amortized during 2013. (ee) The loan is collateralized by Hampshire Langley and requires equal monthly principal and interest payments of $95,400 based upon a 25- year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $282,000 was amortized in 2013. (ff) The loan is collateralized by Beacon Center and requires equal monthly principal and interest payments of $203,200 based upon a 20-year amortization schedule and a final payment of $11.4 million at loan ma- turity. Principal of $609,000 was amortized in 2013. (gg) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $94,900 based upon a 25- year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $105,000 was amortized in 2013. The carrying value of the properties collateralizing the mortgage notes payable totaled $907.2 million and $916.1 million, as of De- cember 31, 2013 and 2012, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain cer- tain financial covenants, which are summarized below. The Company was in compliance as of December 31, 2013. • maintain tangible net worth, as defined in the loan agreement, of at least $503.3 million plus 80% of the Company’s net equity pro- ceeds received after May 2012. • limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio); • limit the amount of debt so that interest coverage will exceed 2.0 x on a trailing four-quarter basis (interest expense coverage); • limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.3x on a trailing four-quarter basis (fixed charge coverage); and • limit the amount of variable rate debt and debt with initial loan terms of less than 5 years to no more than 40% of total debt. Mortgage notes payable at each of December 31, 2013 and 2012, to- taling $51.0 million, are guaranteed by members of the Saul Organization. As of December 31, 2013, the scheduled maturities of all debt including scheduled principal amortization for years ended December 31 are as follows: 46 SAUL CENTERS, INC. (hh) The loan is a $71.6 million construction-to-permanent facility that is collateralized by and will finance a portion of the construction costs of Park Van Ness. During the construction period, interest will be funded by the loan. After conversion to a permanent loan, monthly principal and interest payments totaling $413,500 will be required based upon a 25-year amortization schedule. A final payment of $39.6 million will be due at maturity. The loan is a $175.0 million unsecured revolving credit facility. Interest accrues at a rate equal to the sum of one-month LIBOR and 160 basis points. The line may be extended at the Company’s option for one year with payment of a fee of 0.20%. Monthly payments, if required, are in- terest only and vary depending upon the amount outstanding and the applicable interest rate for any given month. (ii) (jj) The loan is collateralized by Northrock and requires monthly principal and interest payments of approximately $47,000 and a final payment of approximately $14.2 million at maturity. Principal of $143,000 was amortized during 2013. (kk) The loan is collateralized by Metro Pike Center and requires monthly principal and interest payments of approximately $48,000 and a final payment of $14.8 million at loan maturity. Principal of $206,000 was amortized during 2013. DEBT MATURITY SCHEDULE (In thousands) Scheduled Balloon Principal Payments Amortization Total 2014 $ – $ 22,191 $ 22,191 2015 15,077 23,008 38,085 2016 28,931 23,444 52,375 2017 – 24,681 24,681 2018 27,872 24,696 52,568 Thereafter 475,267 154,901 630,168 $ 547,147 $ 272,921 $ 820,068 The components of interest expense are set forth below. INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS Year ended December 31, (In thousands) 2013 2012 2011 Interest incurred $ 45,502 $ 48,010 $ 45,673 Amortization of deferred debt costs 1,257 1,576 1,547 Capitalized interest (170) (42) (1,896) Total $ 46,589 $ 49,544 $ 45,324 Deferred debt costs capitalized during the years ending December 31, 2013, 2012 and 2011 totaled $3.2 million, $2.2 million and $1.4 million, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The majority of the leases provide for rental increases and expense recoveries based on fixed annual increases or increases in the Con- sumer 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 De- cember 31, 2013, 2012, and 2011, amounted to $30.9 million, $30.4 million, and $28.4 million, 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 $1.6 million, $1.5 million, and $1.5 million, for the years ended December 31, 2013, 2012, and 2011, respectively. 6. LEASE AGREEMENTS Lease income includes primarily base rent arising from noncance- lable leases. Base rent (including straight-line rent) for the years ended December 31, 2013, 2012, and 2011, amounted to $159.9 mil- lion, $152.8 million, and $138.5 million, respectively. Future contractual payments under noncancelable leases for years ended December 31 (which exclude the effect of straight-line rents), are as follows: FUTURE CONTRACTUAL PAYMENTS (In thousands) 2014 $ 149,101 2015 131,724 2016 114,123 2017 95,157 2018 77,542 Thereafter 306,980 $ 874,627 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 mini- mum ground rent expense of $176,000, $176,000, and $173,000, for the years ended December 31, 2013, 2012, and 2011, respectively. The future minimum rental commitments under these ground leases are as follows: Year ending December 31, GROUND LEASE RENTAL COMMITMENTS (In thousands) 2014 2015 2016 2017 2018 Thereafter Total Beacon Center $ 60 $ 60 $ 60 $ 60 $ 60 $ 2,601 $ 2,901 Olney 56 56 56 56 56 3,817 4,097 Southdale 60 60 60 60 60 2,945 3,245 Total $ 176 $ 176 $ 176 $ 176 $ 176 $ 9,363 $ 10,243 In addition to the above, Flagship Center consists of two devel- oped 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 3.4% of the underlying land 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 space is leased by a mem- ber of the Saul Organization. The lease commenced in March 2002 was extended in 2012 for five years, and provides for base rent increases of 3% per year, with payment of a pro-rata share of op- erating 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 based on a percentage proportionate to the number of employees employed by each party. The Company’s rent expense for the years ended December 31, 2013, 2012, and 2011 was $850,600, $850,000, and $945,000, respectively. Expenses arising from the lease are included in general and administrative expense (see Note 9 – Related Party Transactions). 2013 ANNUAL REPORT 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST The Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011 reflect noncontrolling interest of $4.0 million, $6.4 million, and $3.6 million, respectively, representing the Saul Organization’s share of the net income for the year. In November 2003, the Company sold 4,000,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumu- lative Redeemable Preferred Stock (the "Series A Stock"). The depositary shares are redeemable, in whole or in part at the Com- pany’s option, from time to time, at $25.00 per share. The depositary shares pay an annual dividend of $2.00 per share, equiv- alent to 8% of the $25.00 per share liquidation preference. 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 deposi- tary 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. In March 2013, the Company redeemed 60% of its then-outstanding Series A Stock. Costs associated with the re- demption were charged against accumulated deficit. In March 2008, the Company sold 3,173,115 depositary shares, each representing 1/100th of a share of 9% Series B Cumulative Re- deemable Preferred Stock (the "Series B Stock"). The depositary shares may be redeemed at the Company’s option, on or after March 15, 2013, in whole or in part, at $25.00 per share. The de- positary shares pay an annual dividend of $2.25 per share, equivalent to 9% of the $25.00 per share liquidation preference. The Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convert- ible 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. In March 2013, the Company redeemed all of its Series B Stock. Costs associated with the redemption were charged against accumulated deficit. On February 12, 2013, the Company sold, in an underwritten public offering, 5.6 million depositary shares, each representing 1/100th of a share of 6.875% Series C Cumulative Redeemable Preferred Stock, and received net cash proceeds of approximately $135.2 million. The depositary shares may be redeemed on or after February 12, 2018 at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid dividends. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The first dividend was paid on April 15, 2013 and covered the period from February 12, 2013 through March 31, 2013. The Series C 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 except in connection with certain changes of control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay divi- dends for six or more quarters (whether or not declared or consecutive) and in certain other events. In September 2011, in connection with the acquisition of three shop- ping centers, the Company and the Operating Partnership issued to members of the Saul Organization 186,968 shares of the Company’s common stock, par value $0.01 per share (“Shares”) and 1,497,814 units of limited partnership interests in the Operating Partnership (“Units”) with an aggregate value of $55.8 million. The price of the Shares and Units was equal to the average closing prices of the Company’s com- mon stock listed on the New York Stock Exchange for the five trading days ending with the trading day immediately preceding the date of closing of the property acquisition. 9. RELATED PARTY TRANSACTIONS The Chairman and Chief Executive Officer, the President, the Ex- ecutive Vice President-Real Estate and the Senior Vice President-Chief Accounting Officer of the Company are also offi- cers of various members of the Saul Organization and their management time is shared with the Saul Organization. Their an- nual compensation is fixed by the Compensation Committee of the Board of Directors, with the exception of the Senior Vice Pres- ident-Chief Accounting Officer whose share of annual compensation allocated to the Company is determined by the shared services agreement (described below). The Company participates in a multiemployer 401K plan with en- tities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Company contributions, which are included in general and admin- istrative expense or property operating expenses in the consolidated statements of operations, at the discretionary amount of up to six percent of the employee’s cash compensation, subject to certain limits, were $369,000, $379,000, and $378,000, for 2013, 2012, and 2011, respectively. All amounts deferred by em- ployees and contributed by the Company are fully vested. The Company also participates in a multiemployer nonqualified deferred compensation plan with entities in the Saul Organization which covers those full-time employees who meet the require- ments as specified in the plan. According to the plan, which can be modified or discontinued at any time, participating employees defer 2% of their compensation in excess of a specified amount. For the years ended December 31, 2013, 2012, and 2011, the Com- pany contributed three times the amount deferred by employees. The Company’s expense, included in general and administrative expense, totaled $191,300, $238,000, and $231,000, for the years ended December 31, 2013, 2012, and 2011, respectively. All amounts deferred by employees and the Company are fully vested. The cu- mulative unfunded liability under this plan was $1.6 million and $2.2 million, at December 31, 2013 and 2012, respectively, and is in- cluded in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets. 48 SAUL CENTERS, INC. 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 com- puter 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 head count, estimates of usage or estimates of 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 thereunder are re- viewed 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, 2013, 2012, and 2011, which included rental expense for the Company’s head- quarters lease (see Note 7. Long Term Lease Obligations), totaled $6.3 million, $6.0 million, and $6.1 million, respectively. The amounts are expensed when incurred and are primarily reported as general and administrative expenses or capitalized to specific development projects in these consolidated financial statements. As of each of December 31, 2013 and 2012, accounts payable, ac- included $499,000, crued expenses and other representing billings due to the Saul Organization for the Com- pany’s share of these ancillary costs and expenses. liabilities The B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the B. F. Saul Company and a member of the Saul Organization, is a general insurance agency that receives commissions and counter- signature fees in connection with the Company’s insurance program. Such commissions and fees amounted to approximately $447,300, $372,000, and $341,000, for the years ended December 31, 2013, 2012, and 2011, respectively. Effective as of September 4, 2012, the Company entered into a consulting agreement with B. F. Saul III, the Company’s former pres- ident, whereby Mr. Saul III will provide certain consulting services to the Company as an independent contractor. Under the consult- ing agreement, Mr. Saul III will be paid at a rate of $60,000 per month. The consulting agreement includes certain noncompete, nonsolicitation and nondisclosure covenants, and has a term of up to two years, although the consulting agreement is terminable by the Company at any time. During 2013 and 2012, such consulting fees totaled $720,000 and $225,000, respectively. 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 provides for grants of op- tions to purchase up to 400,000 shares of common stock. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan for the purpose of attracting and retaining executive officers, direc- tors and other key personnel. The 2004 stock plan was subsequently amended by the Company’s stockholders at the 2008 Annual Meeting and further amended at the 2013 Annual Meeting (the “Amended 2004 Plan”). The Amended 2004 Plan, which terminates in 2023, provides for grants of options to pur- chase up to 2,000,000 shares of common stock as well as grants of up to 200,000 shares of common stock to directors. The Amended 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 152,500 shares (27,500 incentive stock options and 125,000 shares of nonqualified stock options) to eleven Com- pany officers and to the twelve Company directors (the “2004 Options”), which expire on April 25, 2014. The officers’ 2004 Op- tions vested 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ op- tions were immediately exercisable. The exercise price of $25.78 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2004 Options to be $359,375, of which $292,775 and $66,600 were the values as- signed to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $66,600 was expensed as of the date of grant. The expense of the officers’ options was recognized as compensation expense monthly during the four years the options vested. Effective May 6, 2005, the Compensation Committee granted options to purchase 162,500 shares (35,500 incentive stock options and 127,000 nonqualified stock options) to twelve Company officers and to twelve Company directors (the “2005 Options”), which expire on May 5, 2015. The officers’ 2005 Options vested 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ options were im- mediately exercisable. The exercise price of $33.22 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2005 Options to be $484,500, of which $413,400 and $71,100 were the values assigned to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $71,100 was expensed as of the date of grant. The expense of the officers’ op- tions was recognized as compensation expense monthly during the four years the options vested. Effective May 1, 2006, the Compensation Committee granted op- tions to purchase 30,000 shares (all nonqualified stock options) to twelve Company directors (the “2006 Options”), which were immediately exercisable and expire on April 30, 2016. The exercise price of $40.35 per share was the closing market price of the 2013 ANNUAL REPORT 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2006 Options to be $143,400. Because the directors’ options vested immediately, the entire $143,400 was expensed as of the date of grant. No options were granted to the Company’s officers in 2006. Effective April 27, 2007, the Compensation Committee granted op- tions to purchase 165,000 shares (27,560 incentive stock options and 137,440 nonqualified stock options) to thirteen Company of- ficers and twelve Company Directors (the “2007 options”), which expire on April 26, 2017. The officers’ 2007 Options vest 25% per year over four years and are subject to early expiration upon ter- mination of employment. The directors’ options were immediately exercisable. The exercise price of $54.17 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2007 Options to be $1.5 million, of which $1.3 million and $285,300 were the values assigned to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $285,300 was expensed as of the date of grant. The expense for the officers’ options was rec- ognized as compensation expense monthly during the four years the options vested. Effective April 25, 2008, the Compensation Committee granted op- tions to purchase 30,000 shares (all nonqualified stock options) to twelve Company directors (the “2008 Options”), which were imme- diately exercisable and expire on April 24, 2018. The exercise price of $50.15 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2008 Options to be $254,700. Because the directors’ options vest imme- diately, the entire $254,700 was expensed as of the date of grant. No options were granted to the Company’s officers in 2008. Effective April 24, 2009, the Compensation Committee granted op- tions to purchase 32,500 shares (all nonqualified stock options) to thirteen Company directors (the “2009 Options”), which were im- mediately exercisable and expire on April 23, 2019. The exercise price of $32.68 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2009 Options to be $222,950. Because the directors’ options vested im- mediately, the entire $222,950 was expensed as of the date of grant. No options were granted to the Company’s officers in 2009. Effective May 7, 2010, the Compensation Committee granted op- tions to purchase 32,500 shares (all nonqualified stock options) to thirteen Company directors (the “2010 Options”), which were im- mediately exercisable and expire on May 6, 2020. The exercise price of $38.76 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2010 Options to be $287,950. Because the directors’ options vested im- mediately, the entire $287,950 was expensed as of the date of grant. No options were granted to the Company’s officers in 2010. Effective May 13, 2011, the Compensation Committee granted op- tions to purchase 195,000 shares (65,300 incentive stock options and 129,700 nonqualified stock options) to fifteen Company offi- cers and thirteen Company Directors (the “2011 options”), which expire on May 12, 2021. The officers’ 2011 Options vest 25% per year over four years and are subject to early expiration upon termina- tion of employment. The directors’ 2011 options were immediately exercisable. The exercise price of $41.82 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2011 Options to be $1.6 million, of which $1.3 million and $297,375 were assigned to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $297,375 was expensed as of the date of grant. The expense for the officers’ options is being rec- ognized as compensation expense monthly during the four years the options vest. Effective May 4, 2012, the Compensation Committee granted op- tions to purchase 277,500 shares (26,157 incentive stock options and 251,343 nonqualified stock options) to fifteen Company offi- cers and fourteen Company Directors (the “2012 options”), which expire on May 3, 2022. The officers’ 2012 Options vest 25% per year over four years and are subject to early expiration upon termina- tion of employment. The directors’ 2012 Options were immediately exercisable. The exercise price of $39.29 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company de- termined the total fair value of the 2012 Options to be $1.7 million, of which $1.4 million and $244,388 were assigned to the officer op- tions and director options, respectively. Because the directors’ options vested immediately, the entire $244,388 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective May 10, 2013, the Compensation Committee granted op- tions to purchase 237,500 shares (35,592 incentive stock options and 201,908 nonqualified stock options) to fifteen Company offi- cers and fourteen Company Directors (the "2013 options"), which expire on May 10, 2023. The officers' 2013 Options vest 25% per year over four years and are subject to early expiration upon ter- mination of employment. The directors' 2013 options were immediately exercisable. The exercise price of $44.42 per share was the closing market price of the Company's common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2013 Options to be $1.5 mil- lion, of which $1.3 million and $0.3 million were assigned to the officer options and director options, respectively. Because the di- rectors' options vested immediately, the entire $0.3 million was expensed as of the date of grant. The expense for the officers' options is being recognized as compensation expense monthly during the four years the option was vested. 50 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the amount and activity of each grant, the total value and variables used in the computation and the amount expensed and included in general and administrative expense in the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011: STOCK OPTIONS ISSUED TO DIRECTORS Grant date Total grant Vested Exercised Forfeited Exercisable at December 31, 2013 Remaining unexercised Exercise price Volatility Expected life (years) Assumed yield Risk-free rate Total value at grant date Forfeited options Expensed in previous years Expensed in 2011 Expensed in 2012 Expensed in 2013 Future expense 4/26/2004 5/6/2005 5/1/2006 4/27/2007 4/25/2008 4/24/2009 5/7/2010 5/13/2011 5/4/2012 5/10/2013 Subtotals 30,000 30,000 25,000 – 5,000 5,000 $ 25.78 $ 0.183 5.0 5.75% 3.57% 30,000 30,000 22,500 – 7,500 7,500 33.22 0.198 10.0 30,000 30,000 5,000 2,500 22,500 22,500 40.35 0.206 9.0 $ 30,000 30,000 – 7,500 22,500 22,500 54.17 0.225 8.0 $ 30,000 30,000 – 7,500 22,500 22,500 50.15 0.237 7.0 $ 32,500 32,500 17,500 – 15,000 15,000 32.68 0.344 6.0 $ 32,500 32,500 5,000 2,500 25,000 25,000 38.76 0.369 5.0 $ 32,500 32,500 5,000 2,500 25,000 25,000 41.82 0.358 5.0 $ 35,000 35,000 5,000 – 30,000 30,000 39.29 0.348 5.0 $ 35,000 35,000 2,500 – 32,500 32,500 44.42 0.333 5.0 $ 6.91% 4.28% 5.93% 5.11% 4.39% 4.65% 4.09% 3.49% 4.54% 2.19% 4.23% 2.17% 4.16% 1.86% 4.61% 0.78% 4.53% 0.82% 317,500 317,500 87,500 22,500 207,500 207,500 $ 66,600 $ 71,100 $ 143,400 $ 285,300 $ 254,700 $ 222,950 $ 287,950 $ 297,375 $ 244,388 $ 262,946 $ 2,136,709 – – – – – – – 66,600 71,100 143,400 285,300 254,700 222,950 287,950 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 297,375 – – – – – – 244,388 – – – – – – 262,946 – – 1,332,000 297,375 244,388 262,946 – STOCK OPTIONS ISSUED TO OFFICERS AND GRAND TOTALS Grant date Total grant Vested Exercised Forfeited Exercisable at December 31, 2013 Remaining unexercised Exercise price Volatility Expected life (years) Assumed yield $ Risk-free rate 04/26/2004 05/06/2005 04/27/2007 05/13/2011 5/4/2012 5/10/2013 Subtotals Grand Totals 122,500 115,000 103,750 7,500 11,250 11,250 25.78 0.183 7.0 5.75% 4.05% 132,500 118,750 69,500 13,750 $ $ 49,250 49,250 33.22 0.207 8.0 6.37% 4.15% 135,000 67,500 – 67,500 67,500 67,500 54.17 0.233 6.5 162,500 67,500 16,250 41,250 51,250 105,000 41.82 0.330 8.0 $ 242,500 28,125 1,875 130,000 26,250 110,625 39.29 0.315 8.0 202,500 – – – – $ 202,500 44.42 0.304 8.0 $ 4.13% 4.61% 4.81% 2.75% 5.28% 1.49% 5.12% 1.49% 997,500 396,875 191,375 260,000 205,500 546,125 1,315,000 714,375 278,875 282,500 413,000 753,625 Total value at grant date Forfeited options Expensed in previous years Expensed in 2011 Expensed in 2012 Expensed in 2013 Future expense Remaining weighted average term of future expense $ 292,775 $ 413,400 $ 1,258,848 $ 1,277,794 $ 1,442,148 $ 1,254,164 $ 5,939,129 $ 8,075,838 17,925 35,100 – 252,300 813,800 274,850 378,300 – – – – – – – – – 186,347 270,391 235,350 333,406 – – 104,724 157,083 366,541 1,153,957 104,891 – – – 2.8 years – – – – 209,027 1,045,137 1,119,125 1,119,125 1,807,107 3,139,107 291,238 375,115 601,460 588,613 619,503 864,406 1,745,084 1,745,084 2013 ANNUAL REPORT 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below summarizes the option activity for the years 2013, 2012, and 2011: 2013 2012 2011 Wtd Avg Wtd Avg Wtd Avg Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at January 1 570,840 $ 41.04 674,585 $ 40.40 532,881 $ 39.12 Granted 237,500 44.42 277,500 39.29 195,000 41.82 Exercised (49,715) 33.15 (149,995) 31.03 (40,796) 29.03 Expired/Forfeited (50,00) 52.16 (231,250) 43.56 (12,500) 45.05 Outstanding December 31 753,625 42.55 570,840 41.04 674,585 40.40 Exercisable at December 31 413,000 42.42 377,715 41.41 512,085 39.96 The intrinsic value of options exercised in 2013, 2012, and 2011, was $0.6 million, $1.6 million, and $0.7 million, respectively. The intrinsic value of options outstanding and exercisable at year end 2013 was $4.5 million and $2.8 million, respectively. The intrinsic value meas- ures the difference between the options’ exercise price and the closing share price quoted by the New York Stock Exchange as of the date of measurement. The date of exercise was the measure- ment date for shares exercised during the period. At December 31, 2013, the final trading day of calendar 2013, the closing price of $47.73 per share was used for the calculation of aggregate intrinsic value of options outstanding and exercisable at that date. Options having an exercise price in excess of the December 31, 2013 closing price have no intrinsic value. The weighted average remaining con- tractual life of the Company’s exercisable and outstanding options at December 31, 2013 are 5.1 and 6.8 years, respectively. 11. NON-OPERATING ITEMS Gain on casualty settlement in 2013 and 2012 reflect insurance pro- ceeds received in excess of the carrying value of assets damaged during a hail storm at French Market in 2012. Gain on casualty set- tlement in 2011 reflects the excess of insurance proceeds over the carrying value of assets damaged during a severe hail storm at French Market. The insurance proceeds funded substantially all of the restoration of the damaged property. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receiv- able, accounts payable and accrued expenses are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed-rate payment terms was determined using Level 3 data in a discounted cash flow approach, which is based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, and assuming long term interest rates of approximately 4.85% and 4.00%, would be approximately $828.7 million and $848.1 million, as of December 31, 2013 and 2012, respectively, compared to the carrying value of $789.9 million and $774.8 million at December 31, 2013 and 2012, re- spectively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt. Effective June 30, 2011, the Company determined that one of its in- terest-rate swap arrangements was a highly effective hedge of the cash flows under one of its variable-rate mortgage loans and des- ignated the swap as a cash flow hedge of that mortgage. The swap is carried at fair value with changes in fair value recognized either in income or comprehensive income depending on the effective- ness of the swap. The following chart summarizes the changes in fair value of the Company’s swaps for the indicated periods. Year Ended December 31, (In thousands) Increase (decrease) 2013 2012 2011 in fair value: Recognized in earnings $ (7) $ 36 $(1,332) Recognized in other comprehensive income 2,897 (932) (3,195) Total $ 2,890 $ (896) $(4,527) The Company carries its interest rate swaps at fair value. The Company has determined the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was deter- mined using Level 3 inputs and are not significant. Derivative instruments are classified within Level 2 of the fair value hierarchy because their values are determined using third-party pricing mod- els which contain inputs that are derived from observable market data. Where possible, the values produced by the pricing models are verified by the market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measure of volatility, and correlations of such inputs. The swap agreement terminates on July 1, 2020. As of December 31, 52 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2013, the fair value of the interest-rate swap was approximately $2.7 million and is included in “Accounts payable, accrued expenses and other liabilities” in the consolidated balance sheets. The decrease in value from inception of the swap designated as a cash flow hedge is reflected in “Other Comprehensive Income” in the Con- solidated Statements of Comprehensive Income. 13. COMMITMENTS AND CONTINGENCIES Neither the Company nor the Current Portfolio Properties are sub- ject 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 ad- verse impact on the Company or the Current Portfolio Properties. 14. DISTRIBUTIONS In December 1995, the Company established a Dividend Reinvest- ment 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 al- lows holders of limited partnership interests the opportunity to buy either additional limited partnership units or common stock shares of the Company. The Company paid common stock distributions of $1.44 per share, during each of 2013, 2012, and 2011, and Series A preferred stock div- idends of $2.00 per depositary share during each of 2013, 2012 and 2011, Series B preferred stock dividends of $0.99, $2.25 and $2.25 per share during 2013, 2012 and 2011, respectively, and Series C preferred stock dividends of $1.09 per depositary share during 2013. Of the common stock dividends paid, $0.96 per share, $0.95 per share, and $0.72 per share, represented ordinary dividend income and $0.48 per share, $0.49 per share, and $0.72 per share represented return of capital to the shareholders. All of the preferred stock dividends paid were considered ordinary dividend income. The following summarizes distributions paid during the years ended December 31, 2013, 2012, and 2011, and includes activity in the Plan as well as limited partnership units issued from the reinvestment of unit distributions: Total Distributions to Dividend Reinvestments Limited Common Limited Average (Dollars in thousands, Preferred Common Partnership Stock Shares Discounted Partnership Unit except per share amounts) Stockholders Stockholders Unitholders Issued Share Price Units Issued Price Distributions during 2013 October 31 $ 3,206 $ 7,388 $ 2,489 48,836 $ 46.27 88,309 $ 46.93 July 31 3,206 7,327 2,489 138,019 45.21 April 30 4,364 7,272 2,489 142,839 42.85 January 31 3,785 7,218 2,489 145,468 41.67 Total 2013 $ 14,561 $ 29,205 $ 9,956 475,162 88,309 Distributions during 2012 October 31 $ 3,785 $ 7,120 $ 2,489 141,960 $ 42.23 July 31 3,785 7,063 2,489 144,881 40.43 April 30 3,785 7,005 2,489 145,118 38.93 January 31 3,785 6,947 2,489 163,429 34.44 Total 2012 $ 15,140 $ 28,135 $ 9,956 595,388 Distributions during 2011 October 31 $ 3,785 $ 6,867 $ 2,489 160,589 $ 34.82 July 31 3,785 6,772 1,950 125,973 38.30 April 30 3,785 6,730 1,950 111,592 42.49 January 31 3,785 6,693 1,950 100,094 45.92 Total 2011 $ 15,140 $ 27,062 $ 8,339 498,248 2013 ANNUAL REPORT 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2013, the Board of Directors of the Company author- ized a distribution of $0.36 per common share payable in January 2014, to holders of record on January 17, 2014. As a result, $7.4 million was paid to common shareholders on January 31, 2014. Also, $2.5 million was paid to limited partnership unitholders on January 31, 2014 ($0.36 per Operating Partnership unit). The Board of Directors authorized preferred stock dividends of $0.50 per Series A deposi- tary share, to holders of record on January 7, 2014 and $0.4297 per Series C depositary share to holders of record on January 7, 2014. 15. INTERIM RESULTS (UNAUDITED) As a result, $3.2 million was paid to preferred shareholders on Jan- uary 15, 2014. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock and preferred stock dividends and noncontrolling interest deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements. The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2013 and 2012. (In thousands, except per share amounts) 2013 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 49,186 $ 48,809 $ 49,756 $ 50,146 Operating income before loss on early extinguishment of debt, gain on casualty settlement, discontinued operations and noncontrolling interest 3,388 7,711 11,959 12,211 Net income attributable to Saul Centers, Inc. 4,984 6,594 9,398 9,896 Net income (loss) available to common shareholders (4,608) 3,387 6,192 6,690 Net income (loss) available to common shareholders per diluted share (0.23) 0.17 0.30 0.33 2012 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 46,989 $ 47,373 $ 47,443 $ 48,287 Operating income before loss on early extinguishment of debt, gain on casualty settlement, discontinued operations and noncontrolling interest 9,318 9,598 8,160 8,020 Gain on sales of properties – – 1,057 3,453 Net income attributable to Saul Centers, Inc. 7,864 8,079 7,948 9,483 Net income available to common shareholders 4,079 4,294 4,163 5,698 Net income available to common shareholders per diluted share 0.21 0.22 0.21 0.29 54 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. BUSINESS SEGMENTS The Company has two reportable business segments: Shopping Centers and Mixed-Use Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income and cash flows from real estate for the combined properties in each segment. All of our properties within each segment generate similar types of revenues and expenses related to tenant rent, reimbursements and operating expenses. Although services are provided to a range of tenants, the types of services provided to them are similar within each segment. The properties in each portfolio have similar economic characteristics and the nature of the products and services provided to our tenants and the method to distribute such services are consistent throughout the portfolio. Certain reclassifications have been made to prior year information to conform to the 2013 presentation. Shopping Mixed-Use Corporate Consolidated (In thousands) Centers Properties and Other Totals As of or for the year ended December 31, 2013 Real estate rental operations: Revenue $ 145,219 $ 52,609 $ 69 $ 197,897 Expenses (30,729) (17,213) — (47,942) Income from real estate 114,490 35,396 69 149,955 Interest expense and amortization of deferred debt costs — — (46,589) (46,589) General and administrative — — (14,951) (14,951) Subtotal 114,490 35,396 (61,471) 88,415 Depreciation and amortization of deferred leasing costs (27,340) (21,790) — (49,130) Acquisition related costs (106) — — (106) Predevelopment expenses — (3,910) — (3,910) Change in fair value of derivatives — — (7) (7) Loss on early extinguishment of debt — — (497) (497) Gain on casualty settlement 77 — — 77 Net income (loss) $ 87,121 $ 9,696 $ (61,975) $ 34,842 Capital investment $ 18,232 $ 8,207 $ — $ 26,439 Total assets $ 888,109 $ 293,512 $ 17,054 $ 1,198,675 As of or for the year ended December 31, 2012 Real estate rental operations: Revenue $ 137,647 $ 52,309 $ 136 $ 190,092 Expenses (30,139) (17,131) — (47,270) Income from real estate 107,508 35,178 136 142,822 Interest expense and amortization of deferred debt costs — — (49,544) (49,544) General and administrative — — (14,274) (14,274) Subtotal 107,508 35,178 (63,682) 79,004 Depreciation and amortization of deferred leasing costs (25,667) (14,445) — (40,112) Acquisition related costs (1,129) — — (1,129) Predevelopment expenses — (2,667) — (2,667) Change in fair value of derivatives — — 36 36 Gain on sales of properties 4,510 — — 4,510 Loss from operations of property sold (81) — — (81) Gain on casualty settlement 219 — — 219 Net income (loss) $ 85,360 $ 18,066 $ (63,646) $ 39,780 Capital investment $ 46,353 $ 8,290 $ — $ 54,643 Total assets $ 894,027 $ 301,355 $ 11,927 $ 1,207,309 2013 ANNUAL REPORT 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. BUSINESS SEGMENTS (CONTINUED) Shopping Mixed-Use Corporate Consolidated (In thousands) Centers Properties and Other Totals As of or for the year ended December 31, 2011 Real estate rental operations: Revenue $ 127,767 $ 46,035 $ 76 $ 173,878 Expenses (30,372) (14,658) — (45,030) Income from real estate 97,395 31,377 76 128,848 Interest expense and amortization of deferred debt costs — — (45,324) (45,324) General and administrative — — (14,256) (14,256) Subtotal 97,395 31,377 (59,504) 69,268 Depreciation and amortization of deferred leasing costs (23,077) (12,221) — (35,298) Acquisition related costs (2,534) — — (2,534) Change in fair value of derivatives — — (1,332) (1,332) Gain on casualty settlement 245 — — 245 Loss from operations of property sold (55) — — (55) Net income (loss) $ 71,974 $ 19,156 $ (60,836) $ 30,294 Capital investment $ 177,958 $ 24,546 $ — $ 202,504 Total assets $ 871,409 $ 308,053 $ 13,107 $ 1,192,569 17. SUBSEQUENT EVENTS In February 2014, the Company terminated a 50,000 square foot lease at the Seven Corners shopping center and received a lease termination fee of $1.85 million which will be recognized as revenue in the first quarter. The space was previously occupied by a furni- ture store that had vacated during 2013 and the lease was scheduled to expire in early 2016. A short term lease for the entire space has been executed with another furniture store while the Company is working on re-tenanting the space under a long term lease. 56 SAUL CENTERS, INC. DIVIDEND REINVESTMENT PLAN AND DISTRIBUTIONS DIVIDEND REINVESTMENT PLAN Saul Centers, Inc. offers a dividend reinvestment plan which enables its shareholders to automatically invest some of or all dividends in additional shares. The plan provides shareholders with a convenient and cost-free way to increase their investment in Saul Centers. Shares purchased under the dividend reinvest- ment plan are issued at a 3% discount from the average price of the stock on the dividend payment date. The Plan’s prospectus is available for review in the Shareholders Information section of the Company’s web site. To receive more information please call the plan administrator at (800) 509-5586 and request to speak with a service represen- tative or write: Continental Stock Transfer and Trust Company Saul Centers, Inc. Attention: Dividend Reinvestment Plan 17 Battery Place New York, NY 10004 DIVIDENDS AND DISTRIBUTIONS Under the Code, REITs are subject to numerous organizational and operating requirements, including the requirement to distrib- ute at least 90% of REIT taxable income. The Company distributed amounts greater than the required amount in 2013 and 2012. Distributions by the Company to common stockholders and holders of limited partnership units in the Operating Partnership were $39.2 million and $38.1 million in 2013 and 2012, respectively. Distributions to preferred stockholders were $14.6 million and $15.1 million in 2013 and 2012, respectively. See Notes to Consoli- dated 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 but not limited to 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 distribu- tion amounts 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, 60% of which was redeemed on March 2, 2013, at the rate of $2.00 per annum per depositary share, and to holders of depositary shares of Series C preferred stock at the rate of $1.71875 per annum per depositary share beginning February 12, 2013, prior to distributions on the common stock. The Company paid four quarterly distributions totaling $1.44 per common share during each of the years in the three-year period ended December 31, 2013. The annual distribution amounts paid by the Company exceed the distribution amounts required for tax purposes. Distributions to the extent of our current and ac- cumulated 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 earn- ings 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 stock- holder’s shares. Of the $1.44 per common share dividend paid in 2013, 67% was treated as a taxable dividend and 33% was treated as a return of capital. Of the $1.44 per common share dividend paid in 2012, 66% was treated as a taxable dividend income and 34% was treated as a return of capital. Of the $1.44 per common share dividend paid in 2011, 50% was taxable dividend income and 50% was considered return of capital. No assurance can be given regarding what portion, if any, of distributions in 2014 or subse- quent years will constitute a return of capital for federal income tax purposes. All of the preferred stock dividends paid are treated as ordinary dividend income. 2013 ANNUAL REPORT 57 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 were reported by the New York Stock Exchange for each quarter of 2013 and 2012 as follows: COMMON STOCK PRICES Period Share Price High Low October 1, 2013 – December 31, 2013 $49.19 $45.86 July 1, 2013 – September 30, 2013 $48.49 $43.10 April 1, 2013 – June 30, 2013 $47.83 $42.66 January 1, 2013– March 31, 2013 $44.94 $41.43 October 1, 2012 – December 31, 2012 $45.34 $40.81 July 1, 2012 – September 30, 2012 $45.83 $40.59 April 1, 2012 – June 30, 2012 $43.32 $39.01 January 1, 2012 – March 31, 2012 $40.62 $33.44 On March 3, 2014, the closing price was $46.33 per share. The approximate number of holders of record of the common stock was 210 as of March 3, 2014. 58 SAUL CENTERS, INC. PERFORMANCE GRAPH Rules promulgated under the Exchange Act require the Company to present a graph comparing the cumulative total stockholder return on its Common Stock with the cumulative total stockholder return of (i) a broad equity market index, and (ii) a published industry index or peer group. The following graph compares the cumulative total stockholder return of the Company’s common stock, based on the market price of the common stock and assuming rein- vestment of dividends, with the National Association of Real Estate Investment Trust Equity Index (“NAREIT Equity”), the S&P 500 Index (“S&P 500”) and the Russell 2000 Index (“Russell 2000”). The graph assumes the investment of $100 on January 1, 2009. COMPARISON OF CUMULATIVE TOTAL RETURN d e t s e v n I 0 0 1 $ n r u t e R l a t o T $250 $200 $150 $100 Jan. 1, 2009 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2011 Dec. 31, 2012 Dec. 31, 2013 Jan. 1, 2009 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2011 Dec. 31, 2012 Dec. 31, 2013 Saul Centers S&P 500 Russell 2000 NAREIT Equity $100 $100 $100 $100 $87 $126 $127 $128 $131 $146 $161 $164 $101 $149 $155 $177 $127 $172 $180 $209 $146 $228 $250 $215 2013 ANNUAL REPORT 59 SAUL CENTERS CORPORATE INFORMATION DIRECTORS B. Francis Saul II Chairman and Chief Executive Officer EXECUTIVE OFFICERS B. Francis Saul II Chairman and Chief Executive Officer Thomas H. McCormick President and Chief Operating Officer Thomas H. McCormick President and Chief Operating Officer Philip D. Caraci Vice Chairman The Honorable John E. Chapoton Partner, Brown Investment Advisory George P. Clancy, Jr. Executive Vice President, Emeritus Chevy Chase Bank Gilbert M. Grosvenor Chairman Emeritus of the Board of Trustees, National Geographic Society Philip C. Jackson, Jr. Adjunct Professor Emeritus, Birmingham-Southern College Charles R. Longsworth Chairman Emeritus, Colonial Williamsburg Foundation Patrick F. Noonan Founder/Chairman Emeritus, The Conservation Fund H. Gregory Platts Senior Vice President and Treasurer, Emeritus, National Geographic Society Mark Sullivan III Financial and Legal Consultant The Honorable James W. Symington Of Counsel, O’Connor and Hannan, Attorneys at Law John R. Whitmore Financial Consultant J. Page Lansdale Executive Vice President, Real Estate Scott V. Schneider Senior Vice President, Chief Financial Officer, Treasurer and Secretary Debra Stencel Senior Vice President and General Counsel Joel A. Friedman Senior Vice President, Chief Accounting Officer Christopher H. Netter Senior Vice President, Leasing John F. Collich Senior Vice President, Acquisitions and Development Charles W. Sherren, Jr. Senior Vice President, Management COUNSEL Pillsbury Winthrop Shaw Pittman LLP Washington, DC 20037 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst and Young LLP McLean, Virginia 22102 WEB SITE www.saulcenters.com EXCHANGE LISTING New York Stock Exchange (NYSE) Symbol: Common Stock: BFS Preferred Stock: BFS.PrA BFS.PrC TRANSFER AGENT Continental Stock Transfer and Trust Company 17 Battery Place New York, NY 10004 (800) 509-5586 INVESTOR RELATIONS A copy of the Saul Centers, Inc. annual report to the Securities and Exchange 10-K, which Commission on Form includes as exhibits the Chief Executive Officer and Chief Financial Officer Certifications required by Section 302 of the Sarbanes-Oxley Act, may be printed from the Company’s web site or obtained at no cost to stockholders by writing to the address below or calling (301) 986-6016. In 2013, the Company filed with the NYSE the Certification of its Chief Executive Officer confirming that he was not aware of any violation by the Company of the NYSE’s corporate governance listing standards. HEADQUARTERS 7501 Wisconsin Ave. Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 60 60 SAUL CENTERS, INC. SAUL CENTERS, INC. Great Falls Center (recently renovated), Great Falls, VA Annual Meeting of Stockholders The Annual Meeting of Stockholders will be held at 11:00 a.m., local time, on May 9, 2014, at the Hyatt Regency Bethesda, One Bethesda Metro Center, Bethesda, MD (at the southwest corner of the Wisconsin Avenue and Old Georgetown Road intersection, adjacent to the Bethesda Metro Stop on the Metro Red Line.) 2013 ANNUAL REPORT 61 7501 Wisconsin Avenue, Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com 

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