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Annual Report
to Shareholders
Investment Trust (REIT) headquartered
Saul Centers, Inc. is a self-managed, self-administered equity
Real Estate
in
Bethesda, Maryland. Saul Centers operates and manages a
real estate portfolio comprised of 59 properties including (a)
56 community and neighborhood shopping centers and
mixed-use properties with approximately 9.3 million square
feet of leasable area and (b) three land and development
properties. Approximately 85% of the Company’s property
operating
in the
metropolitan Washington, DC/Baltimore area.
is generated by properties
income
Ashburn Village, Ashburn, VA
TOTAL REVENUE
(In millions)
NET INCOME
Available to Common Stockholders
(In millions)
FUNDS FROM OPERATIONS
Available to Common Shareholders*
(In millions)
* Funds From Operations (FFO) is a non-GAAP financial measure. The term Common Shareholders means common stockholders and noncontrolling
interests. See page 25 for a definition of FFO and reconciliation from Net Income.
ii
SAUL CENTERS, INC.
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Portfolio Composition BASED ON 2015 PROPERTY OPERATING INCOME
77.3%
Shopping Centers
22.7%
Mixed-Use
84.5%
Metropolitan
Washington, DC/
Baltimore area
15.5%
Rest of U.S.
Year ended December 31,
2015 2014 2013 2012 2011
Summary Financial Data
Total Revenue $209,077,000 $ 207,092,000 $ 197,897,000 $ 190,092,000 $ 173,878,000
Net Income Available to
Common Stockholders $ 30,093,000 $ 32,102,000 $ 11,661,000 $ 18,234,000 $ 11,593,000
FFO Available to Common
Shareholders $ 83,815,000 $ 78,281,000 $ 64,684,000 $ 60,100,000 $ 50,309,000
Weighted Average Common
Stock Outstanding (Diluted) 21,196,000 20,821,000 20,401,000 19,700,000 18,949,000
Weighted Average Common Stock
and Units Outstanding 28,449,000 27,977,000 27,330,000 26,614,000 24,740,000
Net Income Per Share Available to
Common Stockholders (Diluted) $ 1.42 $ 1.54 $ 0.57 $ 0.93 $ 0.61
FFO Per Share Available to Common
Shareholders (Diluted) $ 2.95 $ 2.80 $ 2.37 $ 2.26 $ 2.03
Common Dividend as a Percentage
of FFO 57% 56% 61% 64% 71%
Interest Expense Coveragea 3.24 x 3.15x 2.98 x 2.68 x 2.62x
Property Data
Number of Operating Propertiesb 56 56 56 57 58
Total Portfolio Square Feet 9,350,000 9,339,000 9,333,000 9,489,000 9,543,000
Shopping Center Square Feet 7,897,000 7,886,000 7,880,000 7,877,000 7,933,000
Mixed-Use Square Feet 1,453,000 1,453,000 1,453,000 1,612,000 1,610,000
Average Percentage Leasedc 95% 94% 93% 91% 90%
(a) Interest expense coverage equals (i) operating income before the sum of interest expense and amortization of deferred debt costs, predevelopment expenses,
acquisition related costs, and depreciation and amortization of deferred leasing costs divided by (ii) interest expense.
(b) Excludes development parcels (Ashland Square Phase II and New Market in 2011 and 2012 and Ashland Square Phase II, New Market and Park Van Ness in
2013, 2014 and 2015).
(c) Average percentage leased for 2015, 2014, 2013, 2012 and 2011 excludes Clarendon Center residential, which averaged 98%, 98%, 98%, 98% and 97%
leased, respectively.
2015 ANNUAL REPORT
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Message
to Shareholders
Clarendon Center, Arlington, VA
FFO PER SHARE HAS
GROWN AT A
COMPOUNDED ANNUAL
9.8% OVER THE FOUR
YEARS SINCE 2011.
Hunt Club Corners, Apopka, FL
2015 was the fourth consecutive year of improved Funds From
Operations (FFO), portfolio occupancy, and same property
operating income since the lows of 2011. FFO per share has grown
at a compounded annual 9.8% as the average leasing percentage
grew from 90% to 95% and same property operating income
increased by an annual average of 2.5% over this period. We
this same property growth with selective
supplemented
acquisitions and developments, improving total property operating
income by 22% from $129. 0 million in 2011 to $157.9 million in
2015. During this period, we invested $284 million to acquire new
properties funded primarily by internally generated cash and a
$120 million increase in debt, excluding the current outstanding
balance on our Park Van Ness construction loan. Attractive loan
pricing for refinancings and acquisition debt held interest expense
and deferred debt costs at $45 million, flat from 2011 levels. As a
result, interest expense coverage has improved from 2.62x in 2011
to 3.24x in 2015 and leverage, as measured by debt to total
capitalization, decreased from 35.2% entering 2011 to 34.8% at
December 31, 2015.
Village Center, Centreville, VA
Great Falls Center, Great Falls, VA
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2015 FINANCIAL RESULTS
Total revenue increased to $209.1 million in 2015 from
$207.1 million in 2014, and operating income increased to
$52.9 million from $51.9 million. Net income available to
common stockholders was $30.1 million in 2015 compared
to $32.1 million in 2014, decreasing as a result of a $6.1
million gain on property sale in 2014.
During 2015, overall same property revenue increased 0.4%
and same property operating income decreased 0.5%.
Same property results exclude the results of properties not in
operation for the entirety of the comparable reporting periods.
Same property operating income was positively impacted by
• higher shopping center base rent of $2.8 million, and
• higher shopping center property operating expense and
real estate tax recoveries of $0.5 million,
offset by
• lower other revenue of $1.3 million, primarily due to
higher 2014 lease termination fees,
• a $1.6 million 2014 bankruptcy collection from a former
tenant at Seven Corners, and
• higher mixed-use property operating expenses and
real estate taxes, net of expense recoveries, totaling
$1.4 million.
FFO available to common shareholders (after deducting
preferred stock dividends) increased 7.1% to $83.8 million
($2.95 per diluted share) in 2015 from $78.3 million ($2.80
per diluted share) in 2014. FFO increased primarily as a result
of (a) higher overall property operating income ($2.0
million), exclusive of the below Seven Corners item, (b) lower
preferred stock redemption costs ($1.5 million), (c) lower
preferred stock dividends ($1.0 million), (d) lower interest
expense ($0.9 million), (e) lower acquisition related costs
($0.9 million), and (f) lower general and administrative
expenses ($0.6 million), partially offset by (g) the 2014
bankruptcy settlement and collection related to a former
tenant at Seven Corners ($1.6 million).
2015 ANNUAL REPORT
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Message
to Shareholders
Palm Springs Center, Altamonte Springs, FL
SHOPPING CENTER SAME
PROPERTY OPERATING
INCOME HAS GROWN AT
AN AVERAGE ANNUAL RATE
OF 2.9% SINCE 2011.
SHOPPING CENTER HIGHLIGHTS
Solid 2015 shopping center financial results were driven by
successful leasing activities. A total of 236 new and renewal retail
leases were executed in 2015, compared to an average of 225 per
year over the five preceding years. During 2015, the percentage of
leased retail space improved to 95.4% from 95.0% and significantly
increased from 92.9% at year-end 2010. Overall leasing percentage
has improved largely due to increases in small shop leasing. Small
shops, defined as in-line spaces less than 10,000 square feet,
currently total approximately 2.4 million square feet of the shopping
center portfolio. Although small shops comprise only 30% of our
retail square footage, they contribute 48% of our monthly base rent.
Small shop leasing has improved from 84% entering 2011, our low
point, to 91.2% as of December 31, 2015. Our peak of 94% was
achieved in pre-recession 2006, indicating there remains room for
improvement looking into 2016.
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Clarendon Center, Arlington, VA
SAUL CENTERS, INC.
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Coutryside Marketplace, Sterling , VA
Lumberton Plaza, Lumberton, NJ
MIXED-USE PERFORMANCE
Broadlands Village, Ashburn, VA
On a same space basis, rental rate changes
compared to expiring rents on new and renewal
leases decreased during the recession, beginning
in 2009. Rental rates decreased an average of 5%
from 2009 through 2011, and turned positive in
2012. Rental rate growth averaged 2% annually
during the period 2012 through 2014, and further
improved to a healthy 4.5% on 1.5 million square
feet of new and renewal leases in 2015.
The percentage of retail tenants renewing leases,
as measured by expiring base rents, was 74% in
2015, consistent with the average of the previous
three years, and significantly better than the low of
60% in 2011. All of these factors contributed to our
shopping center same property operating income
growth averaging 2.9% per year since 2011.
is
in
located
Our mixed-use portfolio consists of 244 apartments
and 1.3 million square feet of commercial space. A
total of 1.1 million square feet of the commercial
space
the Washington, DC
metropolitan area, 1.0 million of which is office
space, with the balance being retail. Mixed-use
property operating income in 2015 was 23% of
total property operating income. The office
markets have experienced very weak demand
since the 2008 recession, and our buildings have
experienced an unprecedented period of elevated
vacancy and rental rate roll-down. From 2011
through 2015, our commercial mixed-use space
averaged 89% leased, and same space new and
renewal rental rates declined an average of 7%
compared to expiring rents. The decreased rents
resulted in a 1% average annual decline in same
property operating income over this period.
Current commercial mixed-use leasing percentage
is 91.0%, but demand continues to be weak.
Mitigating the impact of the soft office leasing
environment, only 83,500 square feet of our
Washington, DC metropolitan area space was
vacant at December 31, 2015, and a total of only
95,000 square feet of space in this market is
scheduled to expire over the next 24 months.
2015 ANNUAL REPORT
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Park Van Ness, Washington, DC
Message
to Shareholders
There are indications that the Washington, DC
metropolitan area office leasing market may improve.
Recent 2015 defense budget
increases and
improved job growth of over 65,000 in 2015,
compared to approximately 30,000 in 2014, should
provide a better environment for increased office
demand.
Education, healthcare and other
professional service sectors are also expected to
generate increased office space demand.
DEVELOPMENT &
PRE-DEVELOPMENT
In April 2016, we will deliver our Park Van Ness
development, comprised of 271 luxury apartment
units and approximately 9,000 square feet of street-
level retail, conveniently located on Connecticut
Avenue at the Van Ness Metro Station. Park Van Ness
offers a combination of urban convenience and
exceptional views of Rock Creek Park, with amenities
including a fitness center, roof-top pool, and spacious
community room. Residential tenants will be attracted
by the two street-level retail tenants, Soapstone
Market, a 6,000 square foot speciality grocery and
gourmet market and Sfoglina, an Italian fine dining
establishment by one of Washington, DC’s best chefs.
This $93 million development will be Saul Centers’
second urban Metro oriented project, following the
highly
successful Clarendon Center project
completed in late 2010. The 244 apartments at
Clarendon Center have averaged over 98% leased
since lease-up was completed in mid-2011.
Pre-development activities continue at our premiere
location at the intersection of N. Glebe Road and
Wilson Boulevard, our recently acquired land near
the Ballston Metro Station in Arlington, Virginia.
Zoning and site plan approvals are underway for a
mixed-use building comprised of 475
luxury
apartments and over 60,000 square feet of street-
level retail space. We also continue to work on
approvals for mixed-use developments at the White
Flint and Twinbrook Metro Stations in Montgomery
County, Maryland. These projects will provide up to
2.8 million square feet of space, with construction to
be phased as market conditions are deemed
favorable. A timetable for these future construction
starts has yet to be determined, but these projects
are expected to substantially enhance our core
property cash flow growth over the next 10 years and
beyond.
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SAUL CENTERS, INC.
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Severna Park Marketplace, Severna Park, MD
Seven Corners, Falls Church, VA
BALANCE SHEET
We enter 2016 with a leverage ratio of 34.8%,
as measured by debt to total capitalization. This
prudent leverage, when combined with unused
line capacity of approximately $245
credit
million and
flow,
internally generated cash
provides capacity to fuel future acquisition and
development growth.
Since 2011, our dividend has increased from $1.44
per share to an annualized $1.88 per share, based
on our most recently declared dividend, a
compounded annual increase of 6.9% over the
past 4 years. Despite these increases, our
dividend to FFO payout ratio has remained steady
at a conservative level of approximately 60%.
When combining this dividend increase with the
stock price appreciation, we are very proud that
since our inception in August 1993, our common
stock has generated a compounded annual total
return of 11.1%.
While current local and global political and
economic conditions continue to be challenging
and volatile, we believe our local metropolitan
Washington, DC real estate operating and
development focus will serve our shareholders
well. We are confident that, through the continued
efforts of our
loyal and dedicated staff of
professionals, Saul Centers will produce growth
in cash flow from its core assets, supplemented
by portfolio additions
successful
development.
through
For the Board
B. Francis Saul II
March 14, 2016
2015 ANNUAL REPORT
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As of December 31, 2015, 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 85% of the
portfolio’s gross leasable area.
PORTFO LIO PROPERTIES
GROSS LEASABLE
PROPERTY/LOCATION SQUARE FEET
GROSS LEASABLE
PROPERTY/LOCATION SQUARE FEET
Shopping Centers
Ashburn Village, Ashburn, VA 221,585
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 174,734
Countryside Marketplace, Sterling, VA 138,229
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 18,982
726/730/750 N. Glebe Rd., Arlington, VA 23,688
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 96,341
Kentlands Square I, Gaithersburg, MD 114,381
Kentlands Square II, Gaithersburg, MD 246,965
Kentlands Place, Gaithersburg, MD 40,697
Lansdowne Town Center, Leesburg, VA 189,422
Leesburg Pike Plaza, Baileys Crossroads, VA 97,752
Lumberton Plaza, Lumberton, NJ 192,718
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
Olney, Olney, MD 53,765
Orchard Park, Dunwoody, GA 87,365
Palm Springs Center, Altamonte Springs, FL 126,446
Ravenwood, Baltimore, MD 93,328
11503 Rockville Pk / 5541 Nicholson Ln, Rockville, MD 40,249
1500/1580/1582/1584 Rockville Pike, Rockville, MD 110,128
Seabreeze Plaza, Palm Harbor, FL 146,673
Marketplace at Sea Colony, Bethany Beach, DE 21,677
Seven Corners, Falls Church, VA 573,481
Severna Park Marketplace, Severna Park, MD 254,174
Shops at Fairfax, Fairfax, VA 68,762
Smallwood Village Center, Waldorf, MD 174,749
Southdale, Glen Burnie, MD 484,035
Southside Plaza, Richmond, VA 371,761
South Dekalb Plaza, Atlanta, GA 163,418
Thruway, Winston-Salem, NC 362,456
Village Center, Centreville, VA 146,032
Westview Village, Frederick, MD 97,145
White Oak, Silver Spring, MD 480,676
TOTAL SHOPPING CENTERS 7,896,499
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 comprising 188,671 square feet)
Crosstown Business Center, Tulsa, OK 197,127
601 Pennsylvania Ave., Washington, DC 227,021
Washington Square, Alexandria, VA 236,376
TOTAL MIXED-USE PROPERTIES 1,453,159
TOTAL PORTFOLIO 9,349,658
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SAUL CENTERS, INC.
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FINANCIAL SECTION TABLE OF CONTENTS
Selected Financial Data .........................................Page 10
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations ......................................Pages 11-29
Quantitative and Qualitative Disclosures
About Market Risk................................................Page 29
Management’s Report on Internal Control Over
Financial Reporting...............................................Page 29
Report of Independent Registered
Public Accounting Firm .........................................Page 30
Report of Independent Registered Public
Accounting Firm on Internal Control Over
Financial Reporting ...............................................Page 31
Consolidated Balance Sheets ................................Page 32
Consolidated Statements of Operations..................Page 33
Consolidated Statements of
Comprehensive Income........................................Page 34
Consolidated Statements of
Stockholders’ Equity ............................................Page 35
Consolidated Statements of Cash Flows..................Page 36
Notes to Consolidated Financial Statements......Pages 37-58
2015 ANNUAL REPORT
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SELECTED FINANCIAL DATA
(In thousands, except per share data) Years Ended December 31,
2015 2014 2013 2012 2011
Operating Data:
Total revenue $ 209,077 $ 207,092 $ 197,897 $ 190,092 $ 173,878
Total operating expenses 156,147 155,163 162,628 154,996 142,442
Operating income 52,930 51,929 35,269 35,096 31,436
Non-operating income:
Change in fair value of derivatives (10) (10) (7) 36 (1,332)
Loss on early extinguishment of debt — — (497) — —
Gain on sale of property 11 6,069 — — —
Gain on casualty settlements — — 77 219 245
Income from continuing operations 52,931 57,988 34,842 35,351 30,349
Discontinued operations — — — 4,429 (55)
Net income 52,931 57,988 34,842 39,780 30,294
Income attibutable to the noncontrolling interests (10,463) (11,045) (3,970) (6,406) (3,561)
Net income attributable to Saul Centers, Inc. 42,468 46,943 30,872 33,374 26,733
Preferred stock redemption — (1,480) (5,228) — —
Preferred dividends (12,375) (13,361) (13,983) (15,140) (15,140)
Net income available to common stockholders $ 30,093 $ 32,102 $ 11,661 $ 18,234 $ 11,593
Per Share Data (diluted):
Net income available to common stockholders:
Continuing operations $ 1.42 $ 1.54 $ 0.57 $ 0.70 $ 0.61
Discontinued operations — — — 0.23 —
Total $ 1.42 $ 1.54 $ 0.57 $ 0.93 $ 0.61
Basic and diluted shares outstanding:
Weighted average common shares - basic 21,127 20,772 20,364 19,649 18,889
Effect of dilutive options 69 49 37 51 60
Weighted average common shares - diluted 21,196 20,821 20,401 19,700 18,949
Weighted average convertible limited partnership units 7,253 7,156 6,929 6,914 5,791
Weighted average common shares and fully
converted limited partnership units - diluted 28,449 27,977 27,330 26,614 24,740
Dividends Paid:
Cash dividends to common stockholders (1) $ 35,645 $ 32,346 $ 29,205 28,135 $ 27,062
Cash dividends per share $ 1.69 $ 1.56 $ 1.44 $ 1.44 $ 1.44
Balance Sheet Data:
Real estate investments (net of accumulated depreciation) $ 1,197,340 $ 1,163,542 $ 1,094,776 $ 1,112,763 $ 1,091,448
Total assets 1,304,145 1,266,987 1,198,675 1,207,309 1,192,569
Total debt, including accrued interest 878,389 860,601 823,328 831,121 835,459
Preferred stock 180,000 180,000 180,000 179,328 179,328
Total stockholders’ equity 353,727 339,257 315,126 307,289 293,206
Other Data:
Cash flow provided by (used in):
Operating activities $ 88,896 $ 86,568 $ 73,527 $ 78,423 $ 55,669
Investing activities (69,587) (83,589) (26,034) (46,873) (201,500)
Financing activities (21,434) (8,148) (42,329) (31,740) 145,186
Funds from operations (2):
Net income 52,931 57,988 34,842 39,780 30,294
Real property depreciation and amortization 43,270 41,203 49,130 40,112 35,298
Real property depreciation - discontinued operations — — — 77 102
Gain on property dispositions and casualty settlements (11) (6,069) (77) (4,729) (245)
Funds from operations 96,190 93,122 83,895 75,240 65,449
Preferred stock redemption — (1,480) (5,228) — —
Preferred dividends (12,375) (13,361) (13,983) (15,140) (15,140)
Funds from operations available to common shareholders $ 83,815 $ 78,281 $ 64,684 $ 60,100 $ 50,309
(1) During 2015, 2014, 2013, 2012, and 2011, shareholders reinvested $10.6 million, $9.3 million, $20.7 million, $23.1 million and $19.8 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.”
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to understanding
the assumptions and
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 impor-
tant
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 17, the
Company provides an analysis of its liquidity and capital resources,
including discussions of its cash flows, debt arrangements,
sources of capital and financial commitments. Finally, on page 25,
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 32. 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, man-
agement 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 com-
munity and neighborhood shopping center business and to
operate its properties to achieve both cash flow growth and cap-
ital appreciation. Management believes there is potential for long
term growth in cash flow as existing leases for space in the Shop-
ping 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, man-
agement 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 selectively attempts to in-
crease cash flow through a variety of means, or in connection with
renovations or relocations, recapturing leases with below market
rents and re-leasing at market rates, as well as replacing financially
troubled tenants. When possible, management also will seek to
include scheduled increases in base rent, as well as percentage
rental provisions, in its leases.
The Company’s redevelopment and renovation objective is to se-
lectively and opportunistically redevelop and renovate its
properties, by replacing below-market-rent leases with strong,
traffic-generating anchor stores such as supermarkets and drug
stores, as well as other desirable local, regional and national ten-
ants. The Company’s strategy remains focused on continuing the
operating performance and internal growth of its existing Shop-
ping Centers, while enhancing this growth with selective
acquisitions, redevelopments and renovations.
In 2014, in separate transactions, the Company purchased three
properties, with approximately 57,400 square feet of retail space,
for an aggregate $25.2 million. The three properties are adjacent
to an existing property on the east side of Rockville Pike near the
Twinbrook Metro station. Combined, the four properties total 10.3
acres and are zoned for up to 1.2 million 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 com-
mencement of construction.
The Company owns properties on the east and west sides of
Rockville Pike near the White Flint Metro station which combined
total 7.6 acres which are zoned for a development potential of up
to 1.6 million square feet of mixed-use space. The Company is ac-
tively engaged in a plan for redevelopment but has not committed
to any timetable for commencement of construction.
During 2013, the Company completed negotiation of lease ter-
mination agreements with the tenants of Van Ness Square. Costs
incurred related to those termination arrangements were amor-
tized to expense using the straight-line method over the remaining
terms of the leases, are included in “Predevelopment Expenses”
in the Consolidated Statements of Operations, and totaled $3.3
million in 2013. The Company is in the process of developing a
primarily residential project with street-level retail. In connection
with the demolition of the existing structure, approximately
$580,000 and $503,000 of predevelopment expenses were rec-
ognized in 2013 and 2014, respectively.
In 2014, in separate transactions, the Company purchased two ad-
jacent properties, with approximately 18,900 square feet of retail
space, on North Glebe Road in Arlington, Virginia, for an aggre-
gate $42.8 million. In September 2015, the Company purchased
an additional property on North Glebe Road, which is adjacent to
the two properties acquired in 2014, for $4.0 million. Combined,
the properties total 2.5 acres and are zoned for up to 550,000
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.
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In light of the limited amount of quality properties for sale and the
escalated pricing of properties that the Company has been pre-
sented with or has inquired about over the past year, management
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, manage-
ment believes that the Company is positioned to take advantage
of additional investment opportunities as attractive properties are
located and market conditions improve. 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/de-
mand characteristics. 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 market,
which began in 2008, the effects on the office and retail markets
in the metropolitan Washington, D.C. area, where the majority of
the Company’s properties are located, were initially less severe
than in many other areas of the country. Even though economic
conditions in the local economies, where the majority of the Com-
pany’s properties are located, have improved over recent years,
issues facing the Federal government relating to spending cuts
and budget policies have resulted in continued elevated vacancy
rates in many sub-markets, thus pressuring rental rate growth.
While overall consumer confidence appears to have improved, re-
tailers continue to be cautious about new store openings.
However, the Company’s overall leasing percentage, on a com-
parative same property basis, which excludes the impact of
properties not in operation for the entirety of the comparable pe-
riods, continues to improve and increased to 94.7% at December
31, 2015, from 94.4% at December 31, 2014.
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 Decem-
ber 31, 2015, amortizing fixed-rate mortgage debt with staggered
maturities from 2018 to 2034 represented approximately 95.1%
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 Metro Pike Center and $28.0 million out-
standing under the unsecured revolving line of credit. As of
December 31, 2015, the Company has loan availability of approx-
imately $246.6 million under its $275.0 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
Washington, D.C./Baltimore metropolitan area and the southeast-
ern 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 di-
versify 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 Consolidated
Financial Statements in this report. The Company has identified
the following policies that, due to estimates and assumptions in-
herent 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 period. The
Company determines the fair value of above and below market in-
tangibles 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 considera-
tion 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
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
income and accreted as additional lease revenue over the remain-
ing contractual lease period. If the fair value of the below market
lease intangible includes fair value associated with a renewal op-
tion, such amounts are not accreted until the renewal option is
exercised. If the renewal option is not exercised the value is rec-
ognized 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 fore-
gone rents associated with the lease-up period and carrying costs
associated with the lease-up period. Intangible assets associated
with at-market in-place leases are amortized as additional expense
over the remaining contractual lease term. To the extent customer
relationship intangibles are present in an acquisition, the fair value
of the intangibles are amortized over the life of the customer rela-
tionship. 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 build-
ing may be determined based only on existing leases and not
include estimated cash flows related to future leases.
including recurring operating
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 in identifying impairment in-
dicators
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 remaining useful life, on an undiscounted basis, to the
carrying value of that property. The Company assesses its undis-
counted projected cash
flows based upon estimated
capitalization rates, historic operating results and market condi-
tions that may affect the property. If the carrying value is greater
than the undiscounted projected cash flows, the Company
would recognize an impairment loss equivalent to an amount re-
quired to adjust the carrying amount to its then estimated fair
value. The fair value of any property is sensitive to the actual re-
sults of any of the aforementioned estimated factors, either
individually or taken as a whole. Should the actual results differ
from management’s projections, the valuation could be nega-
tively 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 in-
curred. Leasehold improvements expenditures are capitalized
when certain criteria are met, including when we supervise con-
struction 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
depreciation 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 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.
DEFERRED LEASING COSTS
Certain initial direct costs incurred by the Company in negotiat-
ing 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 compen-
sation and payroll-related fringe benefits directly related to time
spent performing successful leasing-related activities. Such ac-
tivities
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 asso-
ciated with acquisition properties.
include evaluating prospective
tenants’
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 be-
cause of free rent periods or scheduled rent increases, income is
recognized on a straight-line basis throughout the term of the
lease. Expense recoveries represent a portion of property oper-
ating expenses billed to tenants, including common area
maintenance, real estate taxes and other recoverable costs. Ex-
pense recoveries are recognized in the period when the
expenses are incurred. Rental income based on a tenant’s rev-
enue, known as percentage rent, is accrued when a tenant
reports sales that exceed a specified breakpoint specified in the
lease agreement.
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 representing
minimum rental income accrued on a straight-line basis to be paid
by tenants over the remaining term of their respective leases. Re-
serves are established with a charge to income for tenants whose
rent payment history or financial condition casts doubt upon the ten-
ant’s ability to perform under its lease obligations.
LEGAL CONTINGENCIES
The Company is subject to various legal proceedings and claims
that arise in the ordinary course of business, which are generally
covered by insurance. While the resolution of these matters cannot
be predicted with certainty, the Company believes the final out-
come 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 same property operating income are
non-GAAP financial measures of performance and improve the
comparability of these measures by excluding the results of prop-
erties which were not in operation for the entirety of the
comparable reporting periods.
We define same property revenue as total revenue minus the sum
of interest income and revenue of properties not in operation for
the entirety of the comparable reporting periods, and we define
same property operating income as net income plus the sum of
interest expense and amortization of deferred debt costs, depre-
ciation and amortization, general and administrative expense, loss
on the early extinguishment of debt (if any), predevelopment ex-
pense and acquisition related costs, minus the sum of interest
income, the change in the fair value of derivatives, gains on prop-
erty dispositions (if any) and the results of properties which were
not in operation for the entirety of the comparable periods.
Other REITs may use different methodologies for calculating same
property revenue and same property operating income. Accord-
ingly, our same property revenue and same property operating
income may not be comparable to those of other REITs.
Same property revenue and same property operating income are
used by management to evaluate and compare the operating per-
formance of our properties, and to determine trends in earnings,
because these measures are not affected by the cost of our funding,
the impact of depreciation and amortization expenses, gains or
losses from the acquisition and sale of operating real estate assets,
general and administrative expenses or other gains and losses that
relate to ownership of our properties. We believe the exclusion of
these items from revenue and operating income is useful because
the resulting measures capture the actual revenue generated and
actual expenses incurred by operating our properties.
Same property revenue and same property operating income are
measures of the operating performance of our properties but do
not measure our performance as a whole. Such measures are
therefore not substitutes for total revenue, net income or operating
income as computed in accordance with GAAP.
The tables below provide reconciliations of total revenue and op-
erating income under GAAP to same property revenue and
operating income for the indicated periods. The same property
results include 49 Shopping Centers and six Mixed-Use properties
for each period.
SAME PROPERTY REVENUE
Year ended December 31,
(In thousands) 2015 2014
Total revenue $ 209,077 $ 207,092
Less: Interest income (51) (75)
Less: Acquisitions, dispositions
and development properties (2,572) (1,320)
Total same property revenue $ 206,454 $ 205,697
Shopping centers $ 153,538 $ 153,065
Mixed-Use properties 52,916 52,632
Total same property revenue $ 206,454 $ 205,697
The $0.8 million increase in same property revenue for 2015 com-
pared to 2014 was primarily due to (a) a $0.23 per square foot
increase in base rent ($2.0 million), (b) a 48,863 square foot in-
crease in leased space ($0.9 million), and (c) increased expense
recovery income ($0.8 million), partially offset by (d) the 2014
bankruptcy settlement and collection related to a former tenant at
Seven Corners ($1.6 million) and (e) the 2014 impact of a lease ter-
mination fee at Seven Corners ($1.9 million).
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAME PROPERTY OPERATING INCOME
Year Ended December 31,
(In thousands) 2015 2014
Net income $ 52,931 $ 57,988
Add: Interest expense and amortization of deferred debt costs 45,165 46,034
Add: General and administrative 16,353 16,961
Add: Depreciation and amortization of deferred leasing costs 43,270 41,203
Add: Predevelopment expenses 132 503
Add: Acquisition related costs 84 949
Add: Change in fair value of derivatives 10 10
Less: Gains on property dispositions (11) (6,069)
Less: Interest income (51) (75)
Property operating income 157,883 157,504
Less: Acquisitions, dispositions & development property (2,274) (1,122)
Total same property operating income $ 155,609 $ 156,382
Shopping centers $ 119,959 $ 119,482
Mixed-Use properties 35,650 36,900
Total same property operating income $ 155,609 $ 156,382
Same property operating income decreased $0.8 million for 2015
compared to 2014 due primarily to (a) the 2014 bankruptcy set-
tlement and collection related to a former tenant at Seven Corners
($1.6 million), (b) higher real estate taxes ($1.2 million), and (c) a
2014 lease termination fee at Seven Corners ($1.9 million) partially
offset by (d) a $0.23 per square foot increase in base rent ($2.0
million), (e) a 48,863 square foot increase in leased space ($0.9
million) and (f) increased expense recovery income ($0.8 million).
The following is a discussion of the components of revenue and
expense for the entire Company.
REVENUE
Year ended December 31, Percentage Change
(Dollars in thousands) 2015 2014 2013 2015 from 2014 2014 from 2013
Base rent $ 168,303 $ 164,599 $ 159,898 2.3% 2.9 %
Expense recoveries 32,911 32,132 30,949 2.4% 3.8 %
Percentage rent 1,608 1,492 1,575 7.8% (5.3)%
Other 6,255 8,869 5,475 (29.5)% 62.0 %
Total revenue $ 209,077 $ 207,092 $ 197,897 1.0% 4.6 %
Base rent includes $2.4 million, $2.0 million and $3.0 million, for
the years 2015, 2014, and 2013, respectively, to recognize base
rent on a straight-line basis. In addition, base rent includes $1.8
million, $1.9 million and $1.7 million, for the years 2015, 2014,
and 2013, respectively, to recognize income from the amortization
of in-place leases.
Total revenue increased 1.0% in 2015 compared to 2014 primarily
due to (a) a $0.45 per square foot increase in base rent ($3.9 mil-
lion) and (b) higher expense recoveries ($0.8 million) partially
offset by (c) a 2014 bankruptcy settlement and collection related
to a former tenant at Seven Corners ($1.6 million), (d) a 2014 lease
termination fee at Seven Corners ($1.9 million), and (e) a 6,586
square foot decrease in leased space ($0.1 million). Total revenue
increased 4.6% in 2014 compared to 2013 primarily due to (a) a
$0.43 per square foot increase in base rent ($3.7 million), (b) a
107,062 square foot increase in leased space ($1.9 million), (c)
higher expense recoveries ($1.2 million), (d) a 2014 bankruptcy
settlement and collection related to a former tenant at Seven Cor-
ners ($1.6 million) and (e) the impact of a 2014 lease termination
at Seven Corners ($0.7 million). A discussion of the components
of revenue follows.
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASE RENT
The $3.7 million increase in base rent in 2015 compared to 2014
was attributable to (a) a $0.45 per square foot increase in base rent
($3.9 million) partially offset by (b) a 6,586 square foot decrease
in leased space ($0.1 million). The $4.7 million increase in base
rent in 2014 compared to 2013 was attributable to (a) a $0.30 per
square foot increase in base rent ($2.6 million) and (b) a 107,062
square foot increase in leased space ($1.9 million).
EXPENSE RECOVERIES
Expense recovery income increased $0.8 million in 2015 com-
pared to 2014 primarily due to higher real estate tax expense.
Expense recovery income increased $1.2 million in 2014 com-
pared to 2013 primarily due to higher snow removal costs incurred
in early 2014.
OTHER REVENUE
Other revenue decreased $2.6 million in 2015 compared to 2014
and increased $3.4 million in 2014 compared to 2013 due prima-
rily to (a) the 2014 bankruptcy settlement and collection related to
a former tenant at Seven Corners ($1.6 million) and (b) a 2014 lease
termination fee at Seven Corners ($1.9 million).
OPERATING EXPENSES
Year ended December 31, Percentage Change
(In thousands) 2015 2014 2013 2015 from 2014 2014 from 2013
Property operating expenses $ 26,565 $ 26,479 $ 24,559 0.3% 7.8 %
Provision for credit losses 915 680 968 34.6% (29.8)%
Real estate taxes 23,663 22,354 22,415 5.9% (0.3)%
Interest expense and amortization
of deferred debt costs 45,165 46,034 46,589 (1.9)% (1.2)%
Depreciation and amortization of
deferred leasing costs 43,270 41,203 49,130 5.0% (16.1)%
General and administrative 16,353 16,961 14,951 (3.6)% 13.4 %
Acquisition related costs 84 949 106 (91.1)% 795.3 %
Predevelopment expenses 132 503 3,910 (73.8)% (87.1)%
Total operating expenses $ 156,147 $ 155,163 $ 162,628 0.6% (4.6)%
Total operating expenses increased 0.6% in 2015 compared to
2014. Total operating expenses decreased 4.6% in 2014 com-
pared to 2013 primarily due to $8.0 million of additional
depreciation expense recorded in 2013 and $3.4 million of lower
predevelopment expenses related to Park Van Ness partially offset
by $1.9 million of higher property operating expenses caused by
snow removal costs in early 2014.
PROPERTY OPERATING EXPENSES
Property operating expenses increased $0.1 million in 2015 com-
pared to 2014. Property operating expenses increased $1.9
million in 2014 compared to 2013 primarily due to a $1.5 million
increase in 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
$235,000 increase in 2015 compared to 2014 as well as the
$288,000 decrease in 2014 compared to 2013 reflect general sta-
bility in the retail economy and lack of significant bankruptcy losses
among the Company’s various tenants.
REAL ESTATE TAXES
Real estate taxes increased $1.3 million in 2015 compared to 2014
primarily due to a $0.5 million increase at 601 Pennsylvania Av-
enue, a $0.3 million increase at Clarendon Center and small
increases throughout the remainder of the portfolio. Real estate
taxes decreased $61,000 in 2014 compared to 2013.
INTEREST AND AMORTIZATION OF DEFERRED
DEBT COSTS
Interest expense decreased $0.9 million in 2015 compared to
2014 primarily due to a $1.5 million increase in the amount of in-
terest capitalized. Interest expense decreased $0.6 million in
2014 compared to 2013 primarily due to a $0.5 million increase
in the amount of interest capitalized.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of deferred leasing costs increased
by $2.1 million in 2015 compared to 2014 primarily due to (a) ad-
ditional depreciation expense on a portion of the buildings at
Germantown as a result of the reduction of their useful lives to six
months effective May 2015 ($0.7 million) and (b) incremental de-
preciation expense on buildings purchased in 2014 and 2015
($0.6 million). Depreciation and amortization of deferred leasing
costs decreased $7.9 million in 2014 compared to 2013 primarily
due to $8.0 million of additional depreciation expense in 2013 on
the building at the former Van Ness Square as a result of the reduc-
tion of its useful life to four months effective January 1, 2013.
GENERAL AND ADMINISTRATIVE
General and administrative costs decreased $0.6 million in 2015
compared to 2014 and increased $2.0 million in 2014 compared
to 2013 primarily due to the accrual in 2014 of $1.1 million of sev-
erance costs.
ACQUISITION RELATED COSTS
Acquisition related costs in 2015 totaling approximately $0.1 mil-
lion relate to the purchase of 726 N. Glebe Road. Acquisition
related costs in 2014 totaling approximately $0.9 million relate to
the purchase of 1580, 1582 and 1584 Rockville Pike and 730 and
750 N. Glebe Road. Acquisition related costs in 2013 totaling ap-
proximately $0.1 million 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.
PREDEVELOPMENT EXPENSES
Predevelopment expenses in 2015 include lease termination costs
and demolition costs which are related to development projects
and do not meet the criteria to be capitalized. Predevelopment
expenses in 2014 and 2013 represent costs, primarily lease termi-
nation and demolition costs, incurred with the repositioning and
redevelopment of Van Ness Square.
GAIN ON CASUALTY SETTLEMENT
Gain on casualty settlement in 2013 reflects insurance proceeds re-
ceived in excess of the carrying value of assets damaged during a
hail storm at French Market in 2012. The insurance proceeds 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 payment of $9.5 million at maturity. Proceeds were used to
pay off the $13.5 million remaining balance of existing debt se-
cured by Seabreeze Plaza which was scheduled to mature in May
2014 and the Company incurred $497,000 of related debt extin-
guishment costs.
GAIN ON SALES OF PROPERTIES
Gain on sale of property in 2014 resulted from the April 2014 sale
of Giant Center shopping center.
IMPACT OF INFLATION
Inflation has remained relatively low during 2015 and 2014. The
impact of rising operating expenses due to inflation on the oper-
ating performance of the Company’s portfolio would have been
mitigated by terms in substantially all of the Company’s leases
which contain provisions designed to increase revenues to offset
the adverse impact of inflation on the Company’s results of oper-
ations. 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
impact on the Company’s tenants if increases in their operating ex-
penses exceed increases in their revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $10.0 million and $12.1 million at
December 31, 2015 and 2014, respectively. The changes in cash
and cash equivalents during the years ended December 31, 2015
and 2014 were attributable to operating, investing and financing
activities, as described below.
Year Ended December 31,
(In thousands) 2015 2014
Net cash provided by
operating activities $ 88,896 $ 86,568
Net cash used in
investing activities (69,587) (83,589)
Net cash used in
financing activities (21,434) (8,148)
Decrease in cash
and cash equivalents $ (2,125) $ (5,169)
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used in financing activities for the year ended December
31, 2014 primarily reflects:
• repayments of $47.0 million on the revolving credit facility;
• preferred stock redemption payments totaling $40.0 million;
• the repayment of mortgage notes payable totaling $22.1 mil-
lion;
• distributions to common stockholders totaling $32.3 million;
• distributions to holders of convertible limited partnership units
in the Operating Partnership totaling $11.1 million;
• distributions to preferred stockholders totaling $13.5 million;
and
• payments of $1.3 million for financing costs of new mortgage
loans;
which was partially offset by:
• proceeds of $39.3 million received from the sale of Series C
preferred stock;
• proceeds of $90.0 million from revolving credit facility;
• proceeds of $8.9 million from the issuance of limited partner-
ship units in the Operating Partnership under the divided
reinvestment program;
• proceeds of $15.6 million received from the issuance of com-
mon stock under the dividend reinvestment program and from
the exercise of stock options; and
• proceeds of $5.4 million from construction loan draws.
LIQUIDITY REQUIREMENTS
Short-term liquidity requirements consist primarily of normal recur-
ring operating expenses and capital expenditures, debt service
requirements (including debt service relating to additional and re-
placement debt), distributions to common and preferred
stockholders, distributions to unit holders and amounts required
for expansion and renovation of the Current Portfolio Properties
and selective acquisition and development of additional proper-
ties. 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.
OPERATING ACTIVITIES
Net cash provided by operating activities increased $2.3 million
to $88.9 million for the year ended December 31, 2015 compared
to $86.6 million for the year ended December 31, 2014. Net cash
provided by operating activities represents, in each year, cash re-
ceived primarily from rental income, plus other income, less
property operating expenses, normal recurring general and ad-
ministrative expenses and interest payments on debt outstanding.
INVESTING ACTIVITIES
Net cash used in investing activities decreased $14.0 million to
$69.6 million for the year ended December 31, 2015 from $83.6
million for the year ended December 31, 2014. Investing activities
in 2015 primarily reflect tenant improvements and capital expen-
ditures ($18.9 million), the Company's development activities
($45.9 million) and the acquisition of various retail real estate as-
sets ($4.9 million). Net cash used in investing activities increased
$57.6 million to $83.6 million for the year ended December 31,
2014 from $26.0 million for the year ended December 31, 2013.
Investing activities in 2014 primarily reflect (a) tenant improve-
ments and capital expenditures ($15.0 million), (b) the Company's
development activities ($17.8 million) and (c) the acquisition of var-
ious retail real estate assets ($57.5 million).
FINANCING ACTIVITIES
Net cash used in financing activities was $21.4 million and $8.1 million
for the years ended December 31, 2015 and 2014, respectively. Net
cash used in financing activities in 2015 primarily reflects:
• the repayment of mortgage notes payable totaling $53.0 mil-
lion;
• the repayment of amounts borrowed under the revolving credit
facility totaling $35.0 million;
• distributions to common stockholders totaling $35.6 million;
• distributions to holders of convertible limited partnership units
in the Operating Partnership totaling $12.2 million;
• distributions made to preferred stockholders totaling $12.4 mil-
lion; and
• payments of $0.3 million for financing costs of mortgage notes
payable;
which was partially offset by:
• proceeds of $20.0 million received from revolving credit facility
draws;
• proceeds of $5.7 million from the issuance of limited partner-
ship units in the Operating Partnership under the dividend
reinvestment program;
• proceeds of $15.6 million from the issuance of common stock
under the dividend reinvestment program, directors deferred
plan and the exercise of stock options; and
• proceeds of $39.8 million received from construction loan
draws.
18
SAUL CENTERS, INC.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Company is developing Park Van Ness, a pri-
marily 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
is being funded with a $71.6 million construction-to-permanent
loan and the remainder will be funded with the Company's work-
ing 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 avail-
able cash, bank borrowings from the Company’s credit line,
construction and permanent financing, proceeds from the opera-
tion of the Company’s dividend reinvestment plan or other
external debt or equity capital resources 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 addi-
tional limited partnership interests in the Operating Partnership
which can be converted into shares of Saul Centers common
stock. The availability and terms of any such financing will depend
upon market and other conditions.
CONTRACTUAL PAYMENT OBLIGATIONS
As of December 31, 2015, the Company had unfunded contrac-
tual payment obligations of approximately $49.0 million,
excluding operating obligations, due within the next 12 months.
The table below shows the total contractual payment obligations
as of December 31, 2015.
Payments Due By Period
(Dollars in thousands) One Year or Less 2 - 3 Years 4 - 5 Years After 5 Years Total
CONTRACTUAL PAYMENT OBLIGATIONS
Notes Payable:
Interest $ 4,030 $ 7,042 $ 5,513 $ 12,280 $ 28,865
Scheduled Principal 24,655 51,701 46,509 127,678 250,543
Balloon Payments — 70,178 121,956 432,565 624,699
Subtotal 28,685 128,921 173,978 572,523 904,107
Ground Leases (1) 176 351 359 9,005 9,891
Corporate Headquarters Lease (1) 789 132 — — 921
Development Obligations 12,310 3,554 — — 15,864
Tenant Improvements 7,021 — 278 — 7,299
Total Contractual Obligations $ 48,981 $ 132,958 $ 174,615 $ 581,528 $ 938,082
(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, 2015,
included cash balances of $10.0 million and borrowing availability
of approximately $246.6 million on its revolving line of credit, will
be sufficient to meet its contractual obligations for the foreseeable
future.
2015 ANNUAL REPORT
19
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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. In December 2014, the Company redeemed the
remaining outstanding Series A Stock.
In February 2013, the Company sold, in an underwritten public of-
fering, 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 matu-
rity, is not subject to any sinking fund or mandatory redemption
and is not convertible into any other securities of the Company ex-
cept 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.
In November 2014, the Company sold, in an underwritten public
offering, 1.6 million depositary shares of the Series C Stock (the
"Additional Series C Stock"). The Company received proceeds of
approximately $39.3 million from the offering and used the pro-
ceeds to redeem its outstanding Series A Stock. The Additional
Series C Stock represents a new issuance of additional depositary
shares representing shares of Series C Stock.
DIVIDEND REINVESTMENTS
In December 1995, the Company established a Dividend Rein-
vestment 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 193,678 and 190,177 shares
under the Plan at a weighted average discounted price of $52.93
and $46.85 per share during the years ended December 31, 2015
and 2014, respectively. The Company issued 107,037 and
196,183 limited partnership units under the Plan at a weighted av-
erage price of $53.00 and $45.25 per unit during the years ended
December 31, 2015 and 2014, respectively. The Company also
credited 7,534 and 7,461 shares to directors pursuant to the rein-
vestment of dividends specified by the Directors’ Deferred
Compensation Plan at a weighted average discounted price of
$53.01 and $47.08 per share, during the years ended December
31, 2015 and 2014, respectively.
CAPITAL STRATEGY AND
FINANCING ACTIVITY
As a general policy, the Company intends to maintain a ratio of its
total debt to total asset value of 50% or less and to actively manage
the Company’s leverage and debt expense on an ongoing basis
in order to maintain prudent coverage of fixed charges. Asset
value is the aggregate fair market value of the Current Portfolio
Properties and any subsequently acquired properties as reason-
ably determined by management by reference to the properties’
aggregate cash flow. Given the Company’s current debt level, it
is management’s belief that the ratio of the Company’s debt to
total asset value was below 50% as of December 31, 2015.
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 Com-
pany’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 Com-
pany’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 Com-
pany selectively continues to refinance or renegotiate the terms of
its outstanding debt in order to achieve longer maturities, and ob-
tain generally more favorable loan terms, whenever management
determines the financing environment is favorable.
20
SAUL CENTERS, INC.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTES PAYABLE
Year Ended December 31, Interest Scheduled
(Dollars in thousands) 2015 2014 Rate* Maturity*
Fixed rate mortgages: $ — (a) $ 15,399 7.45% Jun-2015
30,778 (b) 32,049 6.01% Feb-2018
33,766 (c) 35,398 5.88% Jan-2019
10,928 (d) 11,454 5.76% May-2019
15,098 (e) 15,819 5.62% Jul-2019
15,064 (f) 15,761 5.79% Sep-2019
13,387 (g) 14,014 5.22% Jan-2020
10,587 (h) 10,881 5.60% May-2020
9,127 (i) 9,535 5.30% Jun-2020
40,360 (j) 41,441 5.83% Jul-2020
8,025 (k) 8,346 5.81% Feb-2021
5,959 (l) 6,100 6.01% Aug-2021
34,420 (m) 35,222 5.62% Jun-2022
10,492 (n) 10,718 6.08% Sep-2022
11,365 (o) 11,587 6.43% Apr-2023
14,177 (p) 14,909 6.28% Feb-2024
16,348 (q) 16,750 7.35% Jun-2024
14,197 (r) 14,535 7.60% Jun-2024
25,088 (s) 25,639 7.02% Jul-2024
29,714 (t) 30,429 7.45% Jul-2024
29,564 (u) 30,253 7.30% Jan-2025
15,360 (v) 15,735 6.18% Jan-2026
112,299 (w) 115,291 5.31% Apr-2026
34,133 (x) 35,125 4.30% Oct-2026
38,842 (y) 39,932 4.53% Nov-2026
18,150 (z) 18,645 4.70% Dec-2026
67,850 (aa) 69,397 5.84% May-2027
16,826 (bb) 17,281 4.04% Apr-2028
31,844 (cc) 33,140 3.51% Jun-2028
17,011 (dd) 17,462 3.99% Sep-2028
29,444 (ee) — 3.69% Mar-2030
15,748 (ff) — 3.99% Apr-2030
45,208 (gg) 5,391 4.88% Sep-2032
11,282 (hh) 11,119 8.00% Apr-2034
Total fixed rate 832,441 784,757 5.53% 9.2 Years
Variable rate loans:
28,000 (ii) 43,000 LIBOR + 1.45% Jun-2018
— (jj) 14,525 LIBOR + 1.65% Feb-2016
14,801 (kk) 15,106 LIBOR + 1.65% Feb-2017
Total variable rate 42,801 72,631 LIBOR + 1.94% 2.0 Years
Total notes payable $ 875,242 $ 857,388 5.35% 8.9 Years
* Interest rate and scheduled maturity data presented as of December 31, 2015. Totals computed using weighted averages.
2015 ANNUAL REPORT
21
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
22
The loan was collateralized by Shops at Fairfax and Boulevard shopping cen-
ters and required 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 was due at loan maturity. In 2015 the loan
was repaid in full and replaced with a new $30.0 million loan. See (ee) below.
The loan is collateralized by Washington Square and requires equal monthly
principal and interest payments of $264,000 based upon a 27.5-year amor-
tization schedule and a final payment of $28.0 million at loan maturity.
Principal of $1.3 million was amortized during 2015.
The loan is collateralized by three shopping centers, Broadlands Village, The
Glen and Kentlands Square I, and requires equal monthly principal and inter-
est payments of $306,000 based upon a 25-year amortization schedule and
a final payment of $28.4 million at loan maturity. Principal of $1.6 million was
amortized during 2015.
The loan is collateralized by Olde Forte Village and requires equal monthly
principal and interest payments of $98,000 based upon a 25-year amortiza-
tion schedule and a final payment of $9.0 million at loan maturity. Principal
of $526,000 was amortized during 2015.
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 maturity. Principal of
$721,000 was amortized during 2015.
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 $697,000 was amortized during 2015.
The loan is collateralized by Shops at Monocacy and requires equal monthly
principal and interest payments of $112,000 based upon a 25-year amorti-
zation schedule and a final payment of $10.6 million at loan maturity. Principal
of $627,000 was amortized during 2015.
The loan is collateralized by Boca Valley Plaza and requires equal monthly
principal and interest payments of $75,000 based upon a 30-year amortiza-
tion schedule and a final payment of $9.1 million at loan maturity. Principal of
$294,000 was amortized during 2015.
The loan is collateralized by Palm Springs Center and requires equal monthly
principal and interest payments of $75,000 based upon a 25-year amortiza-
tion schedule and a final payment of $7.1 million at loan maturity. Principal of
$408,000 was amortized during 2015.
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 in-
terest-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 $1,081,000 was amortized dur-
ing 2015.
The loan is collateralized by Jamestown Place and requires equal monthly
principal and interest payments of $66,000 based upon a 25-year amortiza-
tion schedule and a final payment of $6.1 million at loan maturity. Principal of
$321,000 was amortized during 2015.
The loan is collateralized by Hunt Club Corners and requires equal monthly
principal and interest payments of $42,000 based upon a 30-year amortiza-
tion schedule and a final payment of $5.0 million, at loan maturity. Principal
of $141,000 was amortized during 2015.
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
$802,000 was amortized during 2015.
The loan is collateralized by Orchard Park and requires equal monthly princi-
pal and interest payments of $73,000 based upon a 30-year amortization
schedule and a final payment of $8.6 million at loan maturity. Principal of
$226,000 was amortized during 2015.
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
(w)
(x)
(y)
(z)
The loan is collateralized by BJ’s Wholesale and requires equal monthly prin-
cipal and interest payments of $80,000 based upon a 30-year amortization
schedule and a final payment of $9.3 million at loan maturity. Principal of
$222,000 was amortized during 2015.
The loan is collateralized by Great Falls shopping center. The loan consists of
three notes which require equal monthly principal and interest payments of
$138,000 based upon a weighted average 26-year amortization schedule
and a final payment of $6.3 million at maturity. Principal of $732,000 was
amortized during 2015.
The loan is collateralized by Leesburg Pike and requires equal monthly prin-
cipal and interest payments of $135,000 based upon a 25-year amortization
schedule and a final payment of $11.5 million at loan maturity. Principal of
$402,000 was amortized during 2015.
The loan is collateralized by Village Center and requires equal monthly prin-
cipal and interest payments of $119,000 based upon a 25-year amortization
schedule and a final payment of $10.1 million at loan maturity. Principal of
$338,000 was amortized during 2015.
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 amor-
tization 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 collateral and borrowed an additional
$10.5 million. Principal of $551,000 was amortized during 2015.
The loan is collateralized by Avenel Business Park and requires equal monthly
principal and interest payments of $246,000 based upon a 25-year amorti-
zation schedule and a final payment of $20.9 million at loan maturity. Principal
of $715,000 was amortized during 2015.
The loan is collateralized by Ashburn Village and requires equal monthly prin-
cipal 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
$689,000 was amortized during 2015.
The loan is collateralized by Ravenwood and requires equal monthly principal
and interest payments of $111,000 based upon a 25-year amortization sched-
ule and a final payment of $10.1 million at loan maturity. Principal of $375,000
was amortized during 2015.
The loan is collateralized by Clarendon Center and requires equal monthly
principal and interest payments of $753,000 based upon a 25-year amorti-
zation schedule and a final payment of $70.5 million at loan maturity. Principal
of $3.0 million was amortized during 2015.
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 $992,000 was amortized during 2015.
The loan is collateralized by Kentlands Square II and requires equal monthly
principal and interest payments of $240,000 based upon a 25-year amorti-
zation schedule and a final payment of $23.1 million at loan maturity. Principal
of $1,090,000 was amortized during 2015.
The loan is collateralized by Cranberry Square and requires equal monthly
principal and interest payments of $113,000 based upon a 25-year amorti-
zation schedule and a final payment of $10.9 million at loan maturity. Principal
of $495,000 was amortized during 2015.
(aa) The loan in the original amount of $73.0 million closed in May 2012, is col-
lateralized 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. Principal of $1.5 million
was amortized during 2015.
(bb) The loan is collateralized by Hampshire Langley and requires equal monthly
principal and interest payments of $95,400 based upon a 25-year amortiza-
tion schedule and a final payment of $9.5 million at loan maturity. Principal
of $455,000 was amortized in 2015.
SAUL CENTERS, INC.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(cc) The loan is collateralized by Beacon Center and requires equal monthly prin-
cipal and interest payments of $203,200 based upon a 20-year amortization
schedule and a final payment of $11.4 million at loan maturity. Principal of
$1,296,000 was amortized in 2015.
(dd) The loan is collateralized by Seabreeze Plaza and requires equal monthly prin-
cipal 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
$451,000 was amortized in 2015.
(ee) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers
and requires equal monthly principal and interest payments totaling
$153,300 based upon a 25-year amortization schedule and a final payment
of $15.5 million at maturity. Principal of $556,000 was amortized in 2015.
(ff) The loan is collateralized by Northrock and requires equal monthly principal
and interest payments totaling $84,400 based upon a 25-year amortization
schedule and a final payment of $8.4 million at maturity. Principal of
$252,000 was amortized in 2015.
(gg) The loan is a $71.6 million construction-to-permanent facility that is collater-
alized 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 to-
taling $413,500 will be required based upon a 25-year amortization
schedule. A final payment of $39.6 million will be due at maturity.
(ii)
(hh) The Company entered into a sale-leaseback transaction with its Olney prop-
erty and is accounting for that transaction as a secured financing. The
arrangement requires monthly payments of $60,400 which increased by
1.5% on May 1, 2015, and every May 1 thereafter. The arrangement provides
for a final payment of $14.7 million and has an implicit interest rate of 8.0%.
Negative amortization in 2015 totaled $163,000.
The loan is a $275.0 million unsecured revolving credit facility. Interest ac-
crues at a rate equal to the sum of one-month LIBOR plus a spread of 145
basis points. The line may be extended at the Company’s option for one year
with payment of a fee of 0.15%. Monthly payments, if required, are interest
only and vary depending upon the amount outstanding and the applicable
interest rate for any given month.
The loan was collateralized by Northrock and required monthly principal and
interest payments of approximately $47,000 and a final payment of $14.2
million at maturity. In 2015, the loan was repaid in full and replaced with a
new $16.0 million loan. See (ff) above.
(jj)
(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 $305,000 was amortized during 2015.
The carrying value of properties collateralizing the mortgage notes
payable totaled $856.8 million and $895.5 million as of December
31, 2015 and 2014, respectively. The Company’s credit facility re-
quires the Company and its subsidiaries to maintain certain financial
covenants, which are summarized below. As of December 31,
2015, the Company was in compliance with all such covenants:
• maintain tangible net worth, as defined in the loan agree-
ment, of at least $542.1 million plus 80% of the Company’s
net equity proceeds received after March 2014;
•
•
•
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 cover-
age); and
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).
2015 FINANCING ACTIVITY
On March 3, 2015, the Company closed on a 15-year, $30.0 mil-
lion non-recourse mortgage loan secured by Boulevard and Shops
at Fairfax shopping centers in Fairfax, Virginia. The loan matures
in 2030, bears interest at a fixed rate of 3.69%, requires monthly
principal and interest payments totaling $153,300 based on a 25-
year amortization schedule and a final payment of $15.5 million at
maturity. Proceeds of the loan were used to repay in full the exist-
ing 7.45% mortgage in the amount of $15.2 million, which was
scheduled to mature in June 2015 and to pay down outstanding
balances under the revolving credit facility.
On April 1, 2015, the Company closed on a 15-year, non-recourse
$16.0 million mortgage loan secured by Northrock. The loan ma-
tures in 2030, bears interest at a fixed rate of 3.99%, requires
monthly principal and interest payments totaling $84,400 based
on a 25-year amortization schedule and requires a final payment
of $8.4 million at maturity. Proceeds of the loan were used to
repay in full the $14.5 million remaining balance of existing debt
secured by Northrock.
2015 ANNUAL REPORT
23
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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-re-
course $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-
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 payment of $9.5 million at maturity. Proceeds were used to
pay off the $13.5 million remaining balance of existing debt se-
cured by Seabreeze Plaza which was scheduled to mature in May
2014 and the Company incurred $497,000 of related debt extin-
guishment costs.
On October 25, 2013 the Company closed on a $71.6 million
construction-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
Centers and accrued interest will be funded by the loan. Follow-
ing the completion of construction and lease-up, and upon
achieving certain 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.
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.
2014 FINANCING ACTIVITY
On June 24, 2014, the Company amended and restated its revolv-
ing credit facility. The unsecured revolving credit facility, which
can be used for working capital, property acquisitions, develop-
ment projects or letters of credit was increased to $275.0 million.
The revolving credit facility matures on June 23, 2018, and may be
extended by the Company for one additional year subject to the
Company’s satisfaction of certain conditions. Saul Centers and cer-
tain consolidated subsidiaries of the Operating Partnership have
guaranteed the payment obligations of the Operating Partnership
under the revolving credit facility. Letters of credit may be issued
under the revolving credit facility. 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 145 basis points to 200 basis points.
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 2017, 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 one additional year. Proceeds were used to
pay-off the $15.9 million remaining balance of existing debt se-
cured 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 was origi-
nally scheduled to mature in 2016 and was refinanced in 2015.
The loan bore interest at a variable rate equal to the sum of one-
month LIBOR and 165 basis points, required monthly principal and
interest payments based on a 25-year amortization schedule and
required a final payment of $14.2 million at maturity. Proceeds
were used to pay-off the $15.0 million remaining balance of exist-
ing debt secured by Northrock.
On March 19, 2013, the Company closed on a 15-year, non-re-
course $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.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUNDS FROM OPERATIONS
In 2015, the Company reported Funds From Operations ("FFO")1 available to common stockholders and noncontrolling interests of
$83.8 million, a 7.1% increase from 2014 FFO available to common stockholders and noncontrolling interests of $78.3 million. The fol-
lowing table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the
periods indicated.
Year ended December 31,
(Dollars in thousands except per share amounts) 2015 2014 2013 2012 2011
Net income $ 52,931 $ 57,988 $ 34,842 $ 39,780 $ 30,294
Subtract:
Gains on sales of properties (11) (6,069) — (4,510) —
Gain on casualty settlement — — (77) (219) (245)
Add:
Real estate depreciation –
discontinued operations — — — 77 102
Real estate depreciation and amortization 43,270 41,203 49,130 40,112 35,298
FFO 96,190 93,122 83,895 75,240 65,449
Subtract:
Preferred dividends (12,375) (13,361) (13,983) (15,140) (15,140)
Preferred stock redemption — (1,480) (5,228) — —
FFO available to common stockholders
and noncontrolling interests $ 83,815 $ 78,281 $ 64,684 $ 60,100 $ 50,309
Average shares and units used to
compute FFO per share 28,449 27,977 27,330 26,614 24,740
FFO per share $ 2.95 $ 2.80 $ 2.37 $ 2.26 $ 2.03
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 alter-
native 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.
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 may develop additional freestanding outparcels
or expansions within certain of the Shopping Centers. Although
not currently planned, it is possible that the Company may rede-
velop additional Current Portfolio Properties and may develop
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, any developments, expan-
sions 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.
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 significant acquisitions, developments, redevelopments
and renovations which affected the Company’s financial position
and results of operations in 2015, 2014, and 2013.
1500, 1580, 1582 AND 1584 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 Twin-
brook Metro station.
In January 2014, the Company purchased for $8.0 million a single-
tenant retail property with a 12,100 square foot CVS Pharmacy
located at 1580 Rockville Pike in Rockville, Maryland, and incurred
acquisition costs of $0.2 million.
In April 2014, the Company purchased for $11.0 million a single-
tenant retail property with a 40,700 square foot furniture store
located at 1582 Rockville Pike in Rockville, Maryland, and incurred
acquisition costs totaling approximately $0.2 million. Concur-
rently with the purchase, the Company sold to the same party, for
$11.0 million, the 53,765 square foot Olney Center located in
Olney, Maryland.
In December 2014, the Company purchased for $6.2 million a sin-
gle-tenant retail property with a 4,600 square foot restaurant
located at 1584 Rockville Pike in Rockville, Maryland, and incurred
acquisition costs totaling approximately $0.2 million.
The properties at 1580, 1582 and 1584 Rockville Pike are contigu-
ous with and an expansion of the Company’s assets at 1500
Rockville Pike. When combined with 1500 Rockville Pike, the four
properties comprise 10.3 acres which are zoned for development
potential of up to 1.2 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.
OLNEY
Simultaneously with the sale of Olney Center, the Company en-
tered into a lease of the property with the buyer and the Company
continues to operate and manage the property. The lease term is
20 years and the Company has the option to purchase the prop-
erty for $14.6 million at the end of the lease term. The purchaser
has the right to sell the property to the Company at any time from
and after April 2016 at a price equal to $11.0 million increased by
1.5% annually beginning January 1, 2015 and continuing each Jan-
uary thereafter. The Company has accounted for this transaction
as a secured financing.
5541 NICHOLSON LANE AND
11503 ROCKVILLE PIKE
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 331,000 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 1.6 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.
WESTVIEW PAD
In February 2015, the Company purchased for $0.9 million, in-
cluding acquisition costs, a 1.1 acre retail pad site in Frederick,
Maryland, which is contiguous with and an expansion of the Com-
pany's other Westview asset.
726, 730, 750 N. GLEBE ROAD
In August 2014, the Company purchased for $40.0 million a sin-
gle-tenant retail property with a 16,900 square foot automobile
dealership located at 750 N. Glebe Road in Arlington, Virginia,
and incurred acquisition costs of $0.4 million. In December 2014,
the Company purchased for $2.8 million an adjacent single-tenant
retail property with a 2,000 square foot store, and incurred acqui-
sition costs of $40,400. In September 2015, the Company
purchased an additional property on North Glebe Road, which is
adjacent to the two properties acquired in 2014, for $4.0 million.
The properties comprise 2.5 acres of land which is zoned for de-
velopment potential of up to 550,000 square feet of mixed-use
space. The Company is actively engaged in a plan for redevelop-
ment but has not committed to any timetable for commencement
of construction.
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPERTY SALES
GIANT CENTER
In April 2014, the Company sold for $7.5 million the 70,040
square foot Giant Center located in Milford Mill, Maryland and rec-
ognized a $6.1 million gain. As of March 31, 2014, the carrying
amounts of the associated assets and liabilities were $0.5 million
and $0.1 million, respectively. There was no debt on the property.
PARK VAN NESS
The Company continues to develop Park Van Ness, a 271-unit res-
idential project with approximately 9,000 square feet of
street-level retail, below street-level structured parking, and ameni-
ties including a community room, landscaped courtyards, a fitness
room and a rooftop pool and deck. Construction is projected to
be substantially completed early in the second quarter of 2016.
The structure comprises 11 levels, five of which are below street
level. Interior finishes are nearing completion and site work is
being finalized. The street level retail space is 100% leased to a
grocery/gourmet food market and an upscale Italian restaurant.
The total cost of the project, excluding predevelopment expense
and land (which the Company has owned), is expected to be ap-
proximately $93.0 million, a portion of which is being financed
with a $71.6 million construction-to-permanent loan. Costs in-
curred through December 31, 2015, total approximately $77.2
million, of which $45.2 million has been financed by the loan.
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
2015 50 6 7,896,499 1,453,159 95.4% 91.0%
2014 50 6 7,886,304 1,453,159 95.0% 90.8%
2013 50 6 7,880,269 1,452,742 94.5% 90.5%
The 2015 Shopping Center leasing percentage includes one
property acquired in 2015. There is no change in 2015 in the prop-
erties that comprise the Mixed-Use leasing percentage. The
Clarendon Center residential component was 99.2% leased at De-
cember 31, 2015. On a same property basis, which excludes the
impact of properties not in operation for the entirety of the com-
parable periods, the Shopping Center leasing percentage
increased to 95.3% from 95.0%. and the Mixed-Use leasing per-
centage increased to 91.0% from 90.8%. The overall portfolio
leasing percentage, on a comparative same property basis, in-
creased to 94.7% at December 31, 2015 from 94.4% at
December 31, 2014.
The 2014 Shopping Center leasing percentage includes the five
properties acquired in 2014 and excludes the Giant Center, which
was sold in 2014. There is no change in 2014 in the properties
that comprise the Mixed-Use leasing percentage. The Clarendon
Center residential component was 95.9% leased at December 31,
2014. On a same property basis, which excludes the impact of
properties not in operation for the entirety of the comparable pe-
riods, the Shopping Center leasing percentage increased to
95.0% from 94.5%. and the Mixed-Use leasing percentage in-
creased to 90.8% from 90.5%. The overall portfolio leasing
percentage, on a comparative same property basis, increased to
94.4% at December 31, 2014 from 93.9% at December 31, 2013.
2015 ANNUAL REPORT
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 redeveloped. The Clarendon Center residential compo-
nent was 99.2% leased at December 31, 2013. On a same
property basis, Shopping Center leasing percentages increased
to 94.5% from 93.4% and Mixed-Use leasing percentages in-
creased to 90.5% from 87.7%. The overall portfolio lease
percentage, 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 re-
sulted from improved leasing of small shop space (spaces totaling
10,000 square feet or less) throughout the portfolio. The 2013
Mixed-Use percentage 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 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 ex-
pected 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.
SELECTED LEASING DATA
Base Rent per Square Foot
Number New/Renewed Expiring
Year ended December 31, Square Feet of Leases Leases Leases
2015 1,583,310 259 $ 15.15 $ 14.82
2014 1,224,700 276 18.60 18.26
2013 1,471,000 276 19.56 19.75
Additional information about commercial leasing activity during
the three months ended December 31, 2015, is set forth below.
The below information includes leases for space which had not
been previously leased during the period of the Company's own-
ership, either a result of acquisition or development.
COMMERCIAL LEASING ACTIVITY
New Leases Renewed Leases
Number of leases 15 38
Square feet 28,435 113,347
Per square foot average
annualized:
During 2015, the Company entered into 222 new or renewed
apartment leases. The monthly rent per square foot for these
leases was unchanged at $3.45. During 2014, the Company en-
tered into 234 new or renewed apartment leases. The monthly
rent per square foot for these leases increased to $3.46 from
$3.37. During 2013, the Company entered into 228 new or re-
newed apartment leases. The monthly rent per square foot for
these leases increased to $3.37 from $3.24.
As of December 31, 2015, 1,035,195 square feet of Commercial
space was subject to leases scheduled to expire in 2016. Below
is information about existing and estimated market base rents per
square foot for that space.
Base rent $ 25.16 $ 26.34
Tenant improvements (3.00) (0.34)
Leasing costs (0.37) ––
Rent concessions (0.32) ––
Effective rents $ 21.47 $ 26.00
EXPIRING LEASES
Total
Square feet 1,035,195
Average base rent per square foot $ 15.32
Estimated market base rent per square foot $ 15.38
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Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is exposed to interest rate fluctuations which will af-
fect the amount of interest expense of its variable rate debt and
the fair value of its fixed rate debt. As of December 31, 2015, the
Company had variable rate indebtedness totaling $42.8 million.
If the interest rates on the Company’s variable rate debt instru-
ments outstanding at December 31, 2015 had been one percent
higher, our annual interest expense relating to these debt instru-
ments would have increased by $428,010, based on those
balances. As of December 31, 2015, the Company had fixed-rate
indebtedness totaling $832.4 million with a weighted average in-
terest rate of 5.53%. If interest rates on the Company’s fixed-rate
debt instruments at December 31, 2015 had been one percent
higher, the fair value of those debt instruments on that date would
have decreased by approximately $43.3 million.
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 mort-
gage debt. The swap agreement was effective July 1, 2010,
terminates 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, 2015 was approximately $2.9 million and is re-
flected in accounts payable, accrued expenses and other liabilities
in the consolidated balance sheet.
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 (2013 Framework) to assess the effec-
tiveness of the Company’s internal control over financial
reporting. Based upon the assessments, the Company’s
management has concluded that, as of December 31, 2015,
the Company’s internal control over financial reporting was ef-
fective. The Company’s
independent registered public
accounting firm has issued a report on the effectiveness of the
Company’s internal control over financial reporting, which
appears on page 31 in this Annual Report.
2015 ANNUAL REPORT
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The 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, 2015 and 2014, and the
related consolidated statements of operations, comprehensive in-
come, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2015. These financial
statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial state-
ments 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 ob-
tain 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, 2015 and 2014, and the con-
solidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2015, 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 De-
cember 31, 2015, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Spon-
soring Organizations of the Treadway Commission (2013
framework) and our report dated March 4, 2016 expressed an un-
qualified opinion thereon.
Ernst & Young LLP
McLean, Virginia
March 4, 2016
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
on Internal Control Over Financial Reporting
are recorded as necessary to permit preparation of financial state-
ments in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of manage-
ment and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unautho-
rized 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, projec-
tions 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 re-
spects, effective internal control over financial reporting as of
December 31, 2015, 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, 2015 and 2014 and the related consolidated statements of op-
erations, comprehensive income, stockholders’ equity, and cash
flows for each of the three years in the period ended December
31, 2015 of Saul Centers, Inc. and our report dated March 4, 2016
expressed an unqualified opinion thereon.
Ernst & Young LLP
McLean, Virginia
March 4, 2016
The 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, 2015, based on criteria established
in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Saul Centers, Inc.’s management
is responsible for maintaining effective internal control over finan-
cial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying As-
sessment of Effectiveness of Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Com-
pany’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 ob-
tain 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 effective-
ness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circum-
stances. 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 ac-
counting 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
2015 ANNUAL REPORT
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CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Dollars in thousands, except per share amounts) 2015 2014
Assets
Real estate investments
Land $ 424,837 $ 420,622
Buildings and equipment 1,114,357 1,109,276
Construction in progress 83,516 30,261
1,622,710 1,560,159
Accumulated depreciation (425,370) (396,617)
1,197,340 1,163,542
Cash and cash equivalents 10,003 12,128
Accounts receivable and accrued income, net 51,076 46,784
Deferred leasing costs, net 26,919 26,928
Prepaid expenses, net 4,663 4,093
Deferred debt costs, net 8,737 9,874
Other assets 5,407 3,638
Total assets $ 1,304,145 $ 1,266,987
Liabilities
Mortgage notes payable $ 802,034 $ 808,997
Revolving credit facility payable 28,000 43,000
Construction loan payable 45,208 5,391
Dividends and distributions payable 15,380 14,352
Accounts payable, accrued expenses and other liabilities 27,687 23,537
Deferred income 32,109 32,453
Total liabilities 950,418 927,730
Stockholders' equity
Preferred stock, 1,000,000 shares authorized:
Series C Cumulative Redeemable, 72,000 shares issued and outstanding 180,000 180,000
Common stock, $0.01 par value, 30,000,000 shares authorized,
21,266,239 and 20,947,141 shares issued and outstanding, respectively 213 209
Additional paid-in capital 305,008 287,995
Accumulated deficit (180,091) (173,774)
Accumulated other comprehensive loss (1,802) (1,894)
Total Saul Centers, Inc. stockholders' equity 303,328 292,536
Noncontrolling interests 50,399 46,721
Total stockholders' equity 353,727 339,257
Total liabilities and stockholders' equity $ 1,304,145 $ 1,266,987
The Notes to Financial Statements are an integral part of these statements.
32
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CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended December 31,
(Dollars in thousands, except per share amounts) 2015 2014 2013
Revenue
Base rent $ 168,303 $ 164,599 $ 159,898
Expense recoveries 32,911 32,132 30,949
Percentage rent 1,608 1,492 1,575
Other 6,255 8,869 5,475
Total revenue 209,077 207,092 197,897
Operating expenses
Property operating expenses 26,565 26,479 24,559
Provision for credit losses 915 680 968
Real estate taxes 23,663 22,354 22,415
Interest expense and amortization of deferred debt costs 45,165 46,034 46,589
Depreciation and amortization of deferred leasing costs 43,270 41,203 49,130
General and administrative 16,353 16,961 14,951
Acquisition related costs 84 949 106
Predevelopment expenses 132 503 3,910
Total operating expenses 156,147 155,163 162,628
Operating income 52,930 51,929 35,269
Change in fair value of derivatives (10) (10) (7)
Loss on early extinguishment of debt — — (497)
Gains on sales of properties 11 6,069 —
Gain on casualty settlement — — 77
Net Income 52,931 57,988 34,842
Income attributable to noncontrolling interests (10,463) (11,045) (3,970)
Net income attributable to Saul Centers, Inc. 42,468 46,943 30,872
Preferred stock redemption — (1,480) (5,228)
Preferred dividends (12,375) (13,361) (13,983)
Net income available to common stockholders $ 30,093 $ 32,102 $ 11,661
Per share net income available to common stockholders
Basic $ 1.42 $ 1.55 $ 0.57
Diluted $ 1.42 $ 1.54 $ 0.57
The Notes to Financial Statements are an integral part of these statements.
2015 ANNUAL REPORT
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Year Ended December 31,
(Dollars in thousands) 2015 2014 2013
Net income $ 52,931 $ 57,988 $ 34,842
Other comprehensive income
Unrealized gain (loss) on cash flow hedge 124 (675) 2,897
Total comprehensive income 53,055 57,313 37,739
Comprehensive income attributable to noncontrolling interests (10,495) (10,874) (4,706)
Total comprehensive income attributable to Saul Centers, Inc. 42,560 46,439 33,033
Preferred stock redemption — (1,480) (5,228)
Preferred dividends (12,375) (13,361) (13,983)
Total comprehensive income available to common stockholders $ 30,185 $ 31,598 $ 13,822
The Notes to Financial Statements are an integral part of these statements.
34
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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. Interests Total
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 preferred stock 140,000 — (4,807) — — 135,193 — 135,193
Partial redemption of 24,000 shares of Series A preferred stock (60,000) — 2,212 (2,216) — (60,004) — (60,004)
Full redemption of 31,731 shares of Series B preferred stock (79,328) — 3,007 (3,012) — (79,333) — (79,333)
Issuance of common stock:
475,162 shares pursuant to dividend reinvestment plan — 5 20,667 — — 20,672 — 20,672
56,002 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 pursuant to dividend
reinvestment plan — — — — — — 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
Issuance of 16,000 shares of Series C preferred stock 40,000 — (740) — — 39,260 — 39,260
Redemption of 16,000 shares of Series A preferred stock (40,000) — 1,475 (1,475) — (40,000) — (40,000)
Issuance of common stock:
197,638 shares pursuant to dividend reinvestment plan — 2 9,262 — — 9,264 — 9,264
172,887 shares due to exercise of employee stock options and
issuance of directors' deferred stock — 1 7,570 — — 7,571 — 7,571
Issuance of 196,183 partnership units pursuant to dividend
reinvestment plan — — — — — — 8,877 8,877
Net income — — — 46,943 — 46,943 11,045 57,988
Change in unrealized loss on cash flow hedge — — — — (502) (502) (173) (675)
Preferred stock distributions:
Series A — — — (3,049) — (3,049) — (3,049)
Series C — — — (7,219) — (7,219) — (7,219)
Common stock distributions — — — (24,937) — (24,937) (8,597) (33,534)
Distributions payable preferred stock:
Series C, $42.97 per share — — — (3,094) — (3,094) — (3,094)
Distributions payable common stock ($0.40/share) and
distributions payable partnership units ($0.40/unit) — — — (8,379) — (8,379) (2,879) (11,258)
Balance, December 31, 2014 $ 180,000 $ 209 $ 287,995 $ (173,774) $ (1,894) $ 292,536 $ 46,721 $ 339,257
Issuance of common stock:
201,212 shares pursuant to dividend reinvestment plan — 3 10,647 — — 10,650 — 10,650
117,886 shares due to exercise of employee stock options
and issuance of directors' deferred stock — 1 6,366 — — 6,367 — 6,367
Issuance of 107,037 partnership units pursuant to dividend
reinvestment plan — — — — — — 5,673 5,673
Net income — — — 42,468 — 42,468 10,463 52,931
Change in unrealized loss on cash flow hedge — — — — 92 92 32 124
Series C preferred stock distributions — — — (9,282) — (9,282) — (9,282)
Common stock distributions — — — (27,265) — (27,265) (9,349) (36,614)
Distributions payable on Series C preferred stock, $42.97 per share — — — (3,093) — (3,093) — (3,093)
Distributions payable common stock ($0.43/share) and
partnership units ($0.43/unit) — — — (9,145) — (9,145) (3,141) (12,286)
Balance, December 31, 2015 $ 180,000 $ 213 $ 305,008 $ (180,091) $ (1,802) $ 303,328 $ 50,399 $ 353,727
The Notes to Financial Statements are an integral part of these statements.
2015 ANNUAL REPORT
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
(Dollars in thousands) 2015 2014 2013
Cash flows from operating activities:
Net income $ 52,931 $ 57,988 $ 34,842
Adjustments to reconcile net income to net cash provided by operating activities:
Change in fair value of derivatives 10 10 7
Gains on sales of properties (11) (6,069) —
Gain on casualty settlement — — (77)
Depreciation and amortization of deferred leasing costs 43,270 41,203 49,130
Amortization of deferred debt costs 1,433 1,327 1,257
Non cash compensation costs of stock grants and options 1,434 1,240 1,145
Provision for credit losses 915 680 968
Increase in accounts receivable and accrued income (5,207) (3,320) (3,669)
Additions to deferred leasing costs (5,563) (4,048) (5,876)
Increase in prepaid expenses (570) (60) (152)
(Increase) decrease in other assets 1,535 (694) 353
Increase (decrease) in accounts payable, accrued expenses and other liabilities (937) 1,149 (3,286)
Decrease in deferred income (344) (2,838) (1,115)
Net cash provided by operating activities 88,896 86,568 73,527
Cash flows from investing activities:
Acquisitions of real estate investments (1) (4,894) (57,494) (5,124)
Additions to real estate investments (18,855) (14,986) (13,999)
Additions to development and redevelopment projects (45,870) (17,788) (7,316)
Proceeds from sale of properties 32 6,679 —
Proceeds from casualty settlement — — 405
Net cash used in investing activities (69,587) (83,589) (26,034)
Cash flows from financing activities:
Proceeds from mortgage notes payable (1) 46,000 — 101,600
Repayments on mortgage notes payable (52,963) (22,071) (71,308)
Proceeds from construction loans payable 39,817 5,391 —
Proceeds from revolving credit facility 20,000 90,000 142,000
Repayments on revolving credit facility (35,000) (47,000) (180,000)
Additions to deferred debt costs (296) (1,264) (3,219)
Proceeds from the issuance of:
Common stock 15,583 15,596 22,292
Partnership units 5,673 8,877 4,144
Series C preferred stock — 39,260 135,221
Preferred stock redemption payments:
Series A preferred — (40,000) (60,000)
Series B preferred — — (79,328)
Preferred stock redemption costs — — (9)
Distributions to:
Series A preferred stockholders — (3,849) (5,213)
Series B preferred stockholders — — (3,253)
Series C preferred stockholders (12,375) (9,625) (6,095)
Common stockholders (35,645) (32,346) (29,205)
Noncontrolling interests (12,228) (11,117) (9,956)
Net cash used in financing activities (21,434) (8,148) (42,329)
Net increase (decrease) in cash and cash equivalents (2,125) (5,169) 5,164
Cash and cash equivalents, beginning of year 12,128 17,297 12,133
Cash and cash equivalents, end of year $ 10,003 $ 12,128 $ 17,297
Supplemental disclosure of cash flow information:
Cash paid for interest $ 45,965 $ 45,443 $ 45,743
(1) The 2014 acquisition of real estate and proceeds from notes payable each exclude $11,000 in connection with the sale and leaseback of the Company's Olney property.
The Notes to Financial Statements are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 significant properties acquired, developed and/or disposed of by the Company since January 1, 2013.
Year of Acquisition/
Name of Property Location Type Development/ Disposal
ACQUISITIONS
1580 Rockville Pike Rockville, Maryland Shopping Center January 2014
1582 Rockville Pike Rockville, Maryland Shopping Center April 2014
750 N. Glebe Road Arlington, Virginia Shopping Center August 2014
730 N. Glebe Road Arlington, Virginia Shopping Center December 2014
1584 Rockville Pike Rockville, Maryland Shopping Center December 2014
726 N. Glebe Road Arlington, Virginia Shopping Center September 2015
DEVELOPMENTS
Park Van Ness Washington, DC Mixed-Use 2013-2015
DISPOSITIONS
Giant Center Milford Mill, Maryland Shopping Center April 2014
As of December 31, 2015, the Company’s properties (the “Current
Portfolio Properties”) consisted of 50 shopping center properties
(the “Shopping Centers”), six mixed-use properties, one of which
was designated as held for sale, which are comprised of office,
retail and multi-family residential uses (the “Mixed-Use Properties”)
and three (non-operating) development properties.
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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
Operating Partnership, the Subsidiary Partnerships and Saul Cen-
ters, 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, ac-
quisition, 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, 2015,
31 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 (4.4%), a tenant at nine Shopping Centers, and
Albertson's/Safeway (2.7%), a tenant at nine Shopping Centers,
individually accounted for 2.5% or more of the Company’s total
revenue for the year ended December 31, 2015.
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 account-
ing 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 disclosure of con-
tingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the re-
porting period. Actual results could differ from those estimates.
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
expected 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 cir-
cumstances, 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 fore-
gone rents associated with the lease-up period and carrying costs
associated with the lease-up period. Intangible assets associated
with at-market in-place leases are amortized as additional expense
over the remaining contractual lease term. To the extent customer
relationship 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred leasing costs in the Consolidated Statements of Opera-
tions, for the years ended December 31, 2015, 2014, and 2013,
was $37.7 million, $35.9 million, and $43.2 million, respectively.
Repairs and maintenance expense totaled $11.6 million, $11.9 mil-
lion, and $10.3 million for 2015, 2014, and 2013, respectively, and
is included in property operating expenses 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 ac-
quired lease. Leasing related activities include evaluating the
prospective tenant’s financial condition, evaluating and recording
guarantees, collateral and other security arrangements, negotiat-
ing lease terms, preparing lease documents and closing the
transaction. 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 $26.9 mil-
lion and $26.9 million, net of accumulated amortization of
approximately $26.6 million and $21.6 million, as of December
31, 2015 and 2014, respectively. Amortization expense, which is
included in Depreciation and amortization of deferred leasing
costs in the Consolidated Statements of Operations, totaled ap-
proximately $5.6 million, $5.3 million, and $5.9 million, for the
years ended December 31, 2015, 2014, and 2013, 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. The follow-
ing table shows the components of construction in progress.
December 31,
(In thousands) 2015 2014
Park Van Ness $ 77,245 $ 26,998
Other 6,271 3,263
Total $ 83,516 $ 30,261
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 car-
rying 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 management’s pro-
jections, the valuation could be negatively or positively affected.
The Company did not recognize an impairment loss on any of its
real estate in 2015, 2014, or 2013.
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
totaled $2.2 million, $0.7 million, and $0.2 million during 2015,
2014, and 2013, respectively. Commercial development projects
are considered substantially complete and available for occupancy
upon completion of tenant improvements, but no later than one
year from the cessation of major construction activity. Multi-family
residential development projects are considered substantially
complete and available for occupancy upon receipt of the certifi-
cate 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 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, which is included in Depreciation and amortization of
2015 ANNUAL REPORT
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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 established
with a charge to current period operations when, in the opinion
of management, collection of the receivable is doubtful. Accounts
receivable in the accompanying consolidated financial statements
are shown net of an allowance for doubtful accounts of $1.3 million
and $0.7 million, at December 31, 2015 and 2014, respectively.
Year ended December 31,
(In thousands) 2015 2014 2013
Beginning Balance $ 677 $ 572 $ 1,208
Provision for Credit Losses 915 680 968
Charge-offs (329) (575) (1,604)
Ending Balance $1,263 $ 677 $ 572
In addition to rents due currently, accounts receivable also includes
$41.4 million and $38.7 million, at December 31, 2015 and 2014,
respectively, net of allowance for doubtful accounts totaling $0.5
million and $0.3 million, respectively, representing minimum rental
income accrued on a straight-line basis to be paid by tenants over
the remaining term of their respective leases.
ASSETS HELD FOR SALE
The Company considers properties to be assets held for sale when
all of the following criteria are met:
• management commits to a plan to sell a property;
• it is unlikely that the disposal plan will be significantly modified or
discontinued;
• the property is available for immediate sale in its present
condition;
• actions required to complete the sale of the property have been
initiated;
• sale of the property is probable and the Company expects the
completed sale will occur within one year; and
• the property is actively being marketed for sale at a price that is
reasonable given its current market value.
The Company must make a determination as to the point in time
that it is probable that a sale will be consummated, which gener-
ally occurs when an executed sales contract has no contingencies
and the prospective buyer has significant funds at risk to ensure
performance. Upon designation as an asset held for sale, the
Company records the carrying value of each property at the lower
of its carrying value or its estimated fair value, less estimated costs
to sell, and ceases depreciation. As of December 31, 2015, the
Company has classified as held-for-sale one operating property,
comprising 197,127 square feet of gross leasable area. The book
value of this property, which is included in Other Assets, was $3.4
million, net of accumulated depreciation of $7.0 million, which
does not exceed its estimated fair value, less costs to sell, and lia-
bilities were $0.2 million. Fair value was determined based on a
third party appraisal.
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 Decem-
ber 31, 2015 are held in non-interest bearing accounts at various
banks. From time to time the Company may maintain deposits
with financial institutions in amounts in excess of federally insured
limits. The Company has not experienced any losses on such de-
posits 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 $8.7 million and $9.9 million, net of accumulated
amortization of $6.2 million and $5.9 million at December 31,
2015 and 2014, respectively.
DEFERRED INCOME
Deferred income consists of payments received from tenants prior
to the time they are earned and recognized by the Company as
revenue, 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. De-
rivative financial instruments are carried at fair value as either assets
or liabilities on the consolidated balance sheets. For those deriva-
tive 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 continue
to qualify for hedge accounting. The effective portion of any gain
or loss on the hedge instruments is reported as a component of ac-
cumulated other comprehensive income (loss) and recognized 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in fair value of a derivative instrument is immediately 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.
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 rev-
enue (“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, pro-
vided that distributions to its stockholders equal or exceed its REIT
taxable 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, 2015, the Company had no material unrec-
ognized 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 bene-
fits, if any, as general and administrative expense. No penalties
and interest have been accrued in years 2015, 2014, and 2013.
The tax basis of the Company’s real estate investments was ap-
proximately $1.1 billion and $1.2 billion as of December 31, 2015
and 2014, respectively. With few exceptions, the Company is no
longer subject to U.S. federal, state, and local tax examinations by
tax authorities for years before 2012.
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 determined by management after considering the Com-
pany’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 corre-
sponding to the average expected term of the options at the grant
date. The Company amortizes the value of options granted ratably
over the vesting period and includes the amounts as compensa-
tion in general 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, di-
rectors and other key personnel (the "Stock Plan"). Pursuant to the
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 Compen-
sation 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 sep-
aration 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, 2015,
the directors’ deferred fee accounts comprise 241,949 shares.
The Compensation Committee has also approved an annual
award of shares of the Company’s common stock as additional
compensation to each director serving on the Board of Directors
as of the record date for the Annual Meeting of Stockholders. The
shares are awarded as of each Annual Meeting of Shareholders,
and their issuance may not be deferred. Each director was issued
200 shares for each of the years ended December 31, 2015, 2014,
and 2013. 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 $143,000,
$112,900, and $124,400, for the years ended December 31,
2015, 2014, and 2013, respectively.
NONCONTROLLING INTEREST
Saul Centers is the sole general partner of the Operating Partner-
ship, owning a 74.2% common interest as of December 31, 2015.
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.
2015 ANNUAL REPORT
41
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PER SHARE DATA
Per share data for net income (basic and diluted) is computed
using weighted average shares of common stock. Convertible lim-
ited partnership units and employee stock options are the
Company’s potentially dilutive securities. For all periods pre-
sented, the convertible limited partnership units are anti-dilutive.
The treasury stock method was used to measure the effect of the
dilution.
BASIC AND DILUTED SHARES OUTSTANDING
December 31,
(Shares in thousands) 2015 2014 2013
Weighted average common
shares outstanding - Basic 21,127 20,772 20,364
Effect of dilutive options 69 49 37
Weighted average common
shares outstanding - Diluted 21,196 20,821 20,401
Average share price $ 53.38 $ 49.09 $ 45.44
Non-dilutive options 111 107 113
Years non-dilutive options
were issued 2007 2007 2007
and 2015 and 2008 and 2008
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-08, “Pre-
sentation of Financial Statements (Topic 205) and Property Plant
and Equipment (Topic 360)” (“ASU 2014-08”). ASU 2014-08
changes the requirements for reporting discontinued operations
such that disposals of components of an entity will be reported in
discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations. ASU
2014-08 also requires additional disclosures about discontinued
operations. ASU 2014-08 is effective for annual periods beginning
after December 15, 2014, and interim periods within those years
and early adoption is permitted. The Company retrospectively
adopted ASU 2014-08 on April 15, 2014. The adoption of ASU
2014-08 did not have a material impact on the Company’s financial
condition or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 will
replace most existing revenue recognition guidance and will re-
quire an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or serv-
ices to customers. ASU 2014-09 is effective for annual periods
beginning after December 15, 2016, and interim periods within
those years and early adoption is not permitted. ASU 2014-09
must be applied retrospectively by either restating prior periods
or by recognizing the cumulative effect as of the first date of appli-
cation. We have not yet selected a transition method and are
evaluating the impact that ASU 2014-09 will have on our consoli-
dated financial statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Im-
putation of Interest” (“ASU 2015-03”). ASU 2015-03 simplifies the
presentation of debt issuance costs and will require an entity to
deduct transaction costs from the carrying value of the related fi-
nancial liability and not record those transaction costs as a separate
asset. Recognition and measurement guidance for debt issuance
costs are not affected by ASU 2015-03. ASU 2015-03 is effective
for annual periods beginning after December 15, 2015, and in-
terim periods within those years, and must be applied
retrospectively by adjusting the balance sheet of each individual
period presented. Adoption of ASU 2015-03 is not expected to
have a material effect on our consolidated financial statements and
related disclosures.
In February 2016, the FASB issued ASU 2016-02, ‘‘Leases’’ (“ASU
2016-02”). ASU 2016-02 amends the existing accounting stan-
dards for lease accounting, including requiring lessees to
recognize most leases on their balance sheets and making tar-
geted changes to lessor accounting. ASU 2016-02 is effective for
annual periods beginning after December 15, 2018, interim peri-
ods within those years, and requires a modified retrospective
transition approach for all leases existing at the date of initial ap-
plication, with an option to use certain practical expedients for
those existing leases. We are evaluating the impact that ASU
2016-02 will have on our consolidated financial statements and
related disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years to conform
to the presentation used for year ended December 31, 2015.
42
SAUL CENTERS, INC.
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3. REAL ESTATE ACQUIRED
1580, 1582 AND 1584 ROCKVILLE PIKE
In January 2014, the Company purchased for $8.0 million 1580
Rockville Pike and incurred acquisition costs of $0.2 million. In
April 2014, the Company purchased for $11.0 million 1582
Rockville Pike and incurred acquisition costs of $0.2 million. In De-
cember 2014, the company purchased for $6.2 million 1584
Rockville Pike and incurred acquisition costs of $0.2 million. These
retail properties are contiguous with each other and the Com-
pany's property at 1500 Rockville Pike and are located in Rockville,
Maryland.
726, 730 AND 750 N. GLEBE ROAD
In August 2014, the Company purchased for $40.0 million, 750
N. Glebe Road and incurred acquisition costs of $0.4 million. In
December 2014, the Company purchased for $2.8 million 730 N.
Glebe Road and incurred acquisition costs of $40,400. In Septem-
ber 2015, the Company purchased for $4.0 million 726 N. Glebe
Road and incurred acquisition costs of $0.1 million. These retail
properties are contiguous and are located in Arlington, Virginia.
KENTLANDS PAD
In August 2013, the Company purchased for $4.3 million, a retail
pad with a 7,100 square foot 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
$0.1 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
WESTVIEW PAD
In February 2015, the Company purchased for $0.9 million includ-
ing acquisition costs, a 1.1 acre retail pad site in Frederick,
Maryland, which is contiguous with and an expansion of the Com-
pany's other Westview 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 2015, the Company purchased one property at a cost of
$4.0 million and incurred acquisition costs of $0.1 million. Of the
total purchase price, $3.9 million was allocated to land and $0.1
million was allocated to building. No amounts were allocated to
in-place, above-market or below-market leases.
During 2014, the Company purchased five properties at an aggre-
gate cost of $68.0 million, and incurred acquisition costs of $0.9
million. The purchase prices were allocated to the assets acquired
and liabilities assumed based on their fair value as shown in the
following table.
PURCHASE PRICE ALLOCATION OF ACQUISITIONS
(In thousands)
Land
Buildings
In-place Leases
Above-Market Rent
Below-Market Rent
1580
Rockville Pike
1582
Rockville Pike
750 N.
Glebe Road
730 N.
Glebe Road
1584
Rockville Pike
Total
$ 9,600
$ 9,742
$ 38,224
$ 2,683
$ 5,798
$ 66,047
2,200
828
1,327
78
440
4,873
513
849
449
39
249
2,099
—
—
—
—
—
—
(4,313)
(419)
—
—
(337)
(5,069)
Total Purchase Price
$ 8,000
$ 11,000
$ 40,000
$ 2,800
$ 6,150
$ 67,950
2015 ANNUAL REPORT
43
472872_SC.qxp_472872_SC 3/14/16 10:31 AM Page 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2013, the Company purchased two properties at a cost of
$5.1 million and incurred acquisition costs of $106,000. Of the
total purchase price, $2.0 million was allocated to buildings and
$3.1 million was allocated to land. No amounts were allocated to
in-place, above-market, or below-market leases.
The gross carrying amount of lease intangible assets included in
deferred leasing costs as of December 31, 2015 and 2014 was
$24.0 million and $24.0 million, respectively, and accumulated
amortization was $19.2 million and $18.0 million, respectively.
Amortization expense totaled $1.3 million, $1.3 million and $2.0
million, for the years ended December 31, 2015, 2014, and 2013,
respectively. The gross carrying amount of below-market lease in-
tangible liabilities included in deferred income as of December
31, 2015 and 2014 was $29.9 million and $29.9 million, respec-
tively, and accumulated amortization was $13.7 million and $11.9
million, respectively. Accretion income totaled $1.8 million, $1.9
million, and $1.7 million, for the years ended December 31, 2015,
2014, and 2013, respectively. The gross carrying amount of above
market lease intangible assets included in accounts receivable as
of December 31, 2015 and 2014 was $1.0 million and $1.0 million,
respectively, and accumulated amortization was $998,200 and
$996,700, respectively. Amortization expense totaled $2,000,
$23,000 and $45,000, for the years ended December 31, 2015,
2014 and 2013, respectively.
As of December 31, 2015, scheduled amortization of intangible
assets and deferred income related to in-place leases is as follows:
AMORTIZATION OF INTANGIBLE ASSETS
AND DEFERRED INCOME RELATED
TO IN-PLACE LEASES
Lease Above- Below-
acquisition market market
(In thousands) costs leases leases
2016 $ 988 $ 2 $ 1,719
2017 796 1 1,697
2018 737 1 1,615
2019 550 — 1,478
2020 417 — 1,397
Thereafter 1,322 — 8,236
Total $ 4,810 $ 4 $ 16,142
4. NONCONTROLLING INTEREST -
HOLDERS OF CONVERTIBLE LIMITED
PARTNERSHIP UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization holds a 25.8% limited partnership interest
in the Operating Partnership represented by 7,305,758 limited
partnership units, as of December 31, 2015. The units are convert-
ible into shares of Saul Centers’ common stock, at the option of
the unit holder, on a one-for-one basis provided that, in accor-
dance with the Saul Centers, Inc. Articles of Incorporation, the
rights may not be exercised at any time that the Saul Organization
beneficially owns, directly or indirectly, in the aggregate more than
39.9% of the value of the outstanding common stock and pre-
ferred stock of Saul Centers (the “Equity Securities”). As of
December 31, 2015, 1,040,000 units were eligible for conversion.
The impact of the Saul Organization’s 25.8% limited partnership
interest in the Operating Partnership is reflected as Noncontrolling
Interests in the accompanying consolidated financial statements.
Fully converted partnership units and diluted weighted average
shares outstanding for the years ended December 31, 2015,
2014, and 2013, were 28,449,400,
27,977,500, and
27,330,100, respectively.
5. MORTGAGE NOTES PAYABLE,
REVOLVING CREDIT FACILITY, INTEREST
EXPENSE AND AMORTIZATION OF
DEFERRED DEBT COSTS
At December 31, 2015, outstanding debt totaled $875.2 million,
of which $832.4 million was fixed rate debt and $42.8 million was
variable rate debt. The Company’s outstanding debt totaled
$857.4 million at December 31, 2014, of which $784.8 million
was fixed rate debt and $72.6 million was variable rate debt. At
December 31, 2015, the Company had a $275.0 million unse-
cured revolving credit facility, which can be used for working
capital, property acquisitions or development projects. The re-
volving credit facility matures on June 23, 2018, and may be
extended by the Company for one additional year subject to the
Company’s satisfaction of certain conditions. Saul Centers and cer-
tain consolidated subsidiaries of the Operating Partnership have
guaranteed the payment obligations of the Operating Partnership
under the revolving credit facility. Letters of credit may be issued
under the revolving credit facility. On December 31, 2015, based
on the value of the Company's unencumbered properties,
approximately $246.6 million was available under the line, $28.0
million was outstanding and approximately $448,000 was
44
SAUL CENTERS, INC.
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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 145 basis points to 200 basis points. As of December
31, 2015, the margin was 145 basis points.
Saul Centers is a guarantor of the revolving credit facility, of which
the Operating Partnership is the borrower, the Metro Pike Center
bank loan (approximately $7.8 million of the $14.8 million out-
standing at December 31, 2015) and all of the Park Van Ness
construction-to-permanent loan. All other notes payable are non-
recourse.
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 2017, 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 one additional year. Proceeds were used to
pay-off the $15.9 million remaining balance of existing debt se-
cured 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 was origi-
nally scheduled to mature in 2016 and was refinanced in 2015.
The loan bore interest at a variable rate equal to the sum of one-
month LIBOR and 165 basis points, required monthly principal and
interest payments based on a 25-year amortization schedule and
required a final payment of $14.2 million at maturity. Proceeds
were used to pay-off the $15.0 million remaining balance of exist-
ing debt secured by Northrock.
On March 19, 2013, the Company closed on a 15-year, non-re-
course $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
remaining balance on the mortgage loan secured by Cruse Mar-
ketplace.
On May 28, 2013, the Company closed on a 15-year, non-re-
course $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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 payment of $9.5 million at maturity. Proceeds were used to
pay off the $13.5 million remaining balance of existing debt se-
cured by Seabreeze Plaza which was scheduled to mature in May
2014 and the Company incurred $497,000 of related debt extin-
guishment costs.
On October 25, 2013 the Company closed on a $71.6 million
construction-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
Centers and accrued interest will be funded by the loan. Follow-
ing the completion of construction and lease-up, and upon
achieving certain 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 June 24, 2014, the Company amended and restated its revolv-
ing credit facility. The Company unsecured revolving credit facility,
which can be used for working capital, property acquisitions, de-
velopment projects or letters of credit was increased to $275.0
million. The revolving credit facility matures on June 23, 2018, and
may be extended by the Company for one additional year subject
to the Company’s satisfaction of certain conditions. Saul Centers
and certain consolidated subsidiaries of the Operating Partnership
have guaranteed the payment obligations of the Operating Part-
nership under the revolving credit facility. Letters of credit may be
issued under the revolving credit facility. 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 145 basis points to 200 basis points.
On March 3, 2015, the Company closed on a 15-year, non-re-
course $30.0 million mortgage loan secured by Shops at Fairfax
and Boulevard. The loan matures in 2030, bears interest at a fixed
rate of 3.69%, requires monthly principal and interest payments
totaling $153,300 based on a 25-year amortization schedule and
requires a final payment of $15.5 million at maturity. Proceeds
were used to repay in full the $15.2 million remaining balance of
existing debt secured by Shops at Fairfax and Boulevard and to
reduce outstanding borrowings under the revolving credit facility.
On April 1, 2015, the Company closed on a 15-year, non-recourse
$16.0 million mortgage loan secured by Northrock. The loan
matures in 2030, bears interest at a fixed rate of 3.99%, requires
monthly principal and interest payments totaling $84,400
based on a 25-year amortization schedule and requires a final pay-
ment of $8.4 million at maturity. Proceeds were used to repay in
full the $14.5 million remaining balance of existing debt secured
by Northrock.
2015 ANNUAL REPORT
45
472872_SC.qxp_472872_SC 3/14/16 10:31 AM Page 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of notes payable as of December 31, 2015 and 2014:
NOTES PAYABLE
Year Ended December 31, Interest Scheduled
(Dollars in thousands) 2015 2014 Rate* Maturity*
Fixed rate mortgages: $ — (a) $ 15,399 7.45% Jun-2015
30,778 (b) 32,049 6.01% Feb-2018
33,766 (c) 35,398 5.88% Jan-2019
10,928 (d) 11,454 5.76% May-2019
15,098 (e) 15,819 5.62% Jul-2019
15,064 (f) 15,761 5.79% Sep-2019
13,387 (g) 14,014 5.22% Jan-2020
10,587 (h) 10,881 5.60% May-2020
9,127 (i) 9,535 5.30% Jun-2020
40,360 (j) 41,441 5.83% Jul-2020
8,025 (k) 8,346 5.81% Feb-2021
5,959 (l) 6,100 6.01% Aug-2021
34,420 (m) 35,222 5.62% Jun-2022
10,492 (n) 10,718 6.08% Sep-2022
11,365 (o) 11,587 6.43% Apr-2023
14,177 (p) 14,909 6.28% Feb-2024
16,348 (q) 16,750 7.35% Jun-2024
14,197 (r) 14,535 7.60% Jun-2024
25,088 (s) 25,639 7.02% Jul-2024
29,714 (t) 30,429 7.45% Jul-2024
29,564 (u) 30,253 7.30% Jan-2025
15,360 (v) 15,735 6.18% Jan-2026
112,299 (w) 115,291 5.31% Apr-2026
34,133 (x) 35,125 4.30% Oct-2026
38,842 (y) 39,932 4.53% Nov-2026
18,150 (z) 18,645 4.70% Dec-2026
67,850 (aa) 69,397 5.84% May-2027
16,826 (bb) 17,281 4.04% Apr-2028
31,844 (cc) 33,140 3.51% Jun-2028
17,011 (dd) 17,462 3.99% Sep-2028
29,444 (ee) — 3.69% Mar-2030
15,748 (ff) — 3.99% Apr-2030
45,208 (gg) 5,391 4.88% Sep-2032
11,282 (hh) 11,119 8.00% Apr-2034
Total fixed rate 832,441 784,757 5.53% 9.2 Years
Variable rate loans:
28,000 (ii) 43,000 LIBOR + 1.45% Jun-2018
— (jj) 14,525 LIBOR + 1.65% Feb-2016
14,801 (kk) 15,106 LIBOR + 1.65% Feb-2017
Total variable rate $ 42,801 $ 72,631 LIBOR + 1.94% 2.0 Years
Total notes payable $ 875,242 $ 857,388 5.35% 8.9 Years
* Interest rate and scheduled maturity data presented as of December 31, 2015. Totals computed using weighted averages.
46
SAUL CENTERS, INC.
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(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
The loan was collateralized by Shops at Fairfax and Boulevard shopping cen-
ters and required 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 was due at loan maturity. In 2015 the loan
was repaid in full and replaced with a new $30.0 million loan. See (ee) below.
The loan is collateralized by Washington Square and requires equal monthly
principal and interest payments of $264,000 based upon a 27.5-year amor-
tization schedule and a final payment of $28.0 million at loan maturity.
Principal of $1.3 million was amortized during 2015.
The loan is collateralized by three shopping centers, Broadlands Village, The
Glen and Kentlands Square I, and requires equal monthly principal and inter-
est payments of $306,000 based upon a 25-year amortization schedule and
a final payment of $28.4 million at loan maturity. Principal of $1.6 million was
amortized during 2015.
The loan is collateralized by Olde Forte Village and requires equal monthly
principal and interest payments of $98,000 based upon a 25-year amortiza-
tion schedule and a final payment of $9.0 million at loan maturity. Principal
of $526,000 was amortized during 2015.
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 maturity. Principal of
$721,000 was amortized during 2015.
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 $697,000 was amortized during 2015.
The loan is collateralized by Shops at Monocacy and requires equal monthly
principal and interest payments of $112,000 based upon a 25-year amorti-
zation schedule and a final payment of $10.6 million at loan maturity. Principal
of $627,000 was amortized during 2015.
The loan is collateralized by Boca Valley Plaza and requires equal monthly
principal and interest payments of $75,000 based upon a 30-year amortiza-
tion schedule and a final payment of $9.1 million at loan maturity. Principal of
$294,000 was amortized during 2015.
The loan is collateralized by Palm Springs Center and requires equal monthly
principal and interest payments of $75,000 based upon a 25-year amortiza-
tion schedule and a final payment of $7.1 million at loan maturity. Principal of
$408,000 was amortized during 2015.
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 in-
terest-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 $1,081,000 was amortized dur-
ing 2015.
The loan is collateralized by Jamestown Place and requires equal monthly
principal and interest payments of $66,000 based upon a 25-year amortiza-
tion schedule and a final payment of $6.1 million at loan maturity. Principal of
$321,000 was amortized during 2015.
The loan is collateralized by Hunt Club Corners and requires equal monthly
principal and interest payments of $42,000 based upon a 30-year amortiza-
tion schedule and a final payment of $5.0 million, at loan maturity. Principal
of $141,000 was amortized during 2015.
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
$802,000 was amortized during 2015.
The loan is collateralized by Orchard Park and requires equal monthly princi-
pal and interest payments of $73,000 based upon a 30-year amortization
schedule and a final payment of $8.6 million at loan maturity. Principal of
$226,000 was amortized during 2015.
The loan is collateralized by BJ’s Wholesale and requires equal monthly prin-
cipal and interest payments of $80,000 based upon a 30-year amortization
schedule and a final payment of $9.3 million at loan maturity. Principal of
$222,000 was amortized during 2015.
The loan is collateralized by Great Falls shopping center. The loan consists of
three notes which require equal monthly principal and interest payments of
$138,000 based upon a weighted average 26-year amortization schedule
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q)
(r)
(s)
(t)
(u)
(v)
(w)
(x)
(y)
(z)
and a final payment of $6.3 million at maturity. Principal of $732,000 was
amortized during 2015.
The loan is collateralized by Leesburg Pike and requires equal monthly prin-
cipal and interest payments of $135,000 based upon a 25-year amortization
schedule and a final payment of $11.5 million at loan maturity. Principal of
$402,000 was amortized during 2015.
The loan is collateralized by Village Center and requires equal monthly prin-
cipal and interest payments of $119,000 based upon a 25-year amortization
schedule and a final payment of $10.1 million at loan maturity. Principal of
$338,000 was amortized during 2015.
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 amor-
tization 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 collateral and borrowed an additional
$10.5 million. Principal of $551,000 was amortized during 2015.
The loan is collateralized by Avenel Business Park and requires equal monthly
principal and interest payments of $246,000 based upon a 25-year amorti-
zation schedule and a final payment of $20.9 million at loan maturity. Principal
of $715,000 was amortized during 2015.
The loan is collateralized by Ashburn Village and requires equal monthly prin-
cipal 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
$689,000 was amortized during 2015.
The loan is collateralized by Ravenwood and requires equal monthly principal
and interest payments of $111,000 based upon a 25-year amortization sched-
ule and a final payment of $10.1 million at loan maturity. Principal of $375,000
was amortized during 2015.
The loan is collateralized by Clarendon Center and requires equal monthly
principal and interest payments of $753,000 based upon a 25-year amorti-
zation schedule and a final payment of $70.5 million at loan maturity. Principal
of $3.0 million was amortized during 2015.
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 $992,000 was amortized during 2015.
The loan is collateralized by Kentlands Square II and requires equal monthly
principal and interest payments of $240,000 based upon a 25-year amorti-
zation schedule and a final payment of $23.1 million at loan maturity. Principal
of $1,090,000 was amortized during 2015.
The loan is collateralized by Cranberry Square and requires equal monthly
principal and interest payments of $113,000 based upon a 25-year amorti-
zation schedule and a final payment of $10.9 million at loan maturity. Principal
of $495,000 was amortized during 2015.
(aa) The loan in the original amount of $73.0 million closed in May 2012, is col-
lateralized 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. Principal of $1.5 million
was amortized during 2015.
(bb) The loan is collateralized by Hampshire Langley and requires equal monthly
principal and interest payments of $95,400 based upon a 25-year amortiza-
tion schedule and a final payment of $9.5 million at loan maturity. Principal
of $455,000 was amortized in 2015.
(cc) The loan is collateralized by Beacon Center and requires equal monthly prin-
cipal and interest payments of $203,200 based upon a 20-year amortization
schedule and a final payment of $11.4 million at loan maturity. Pr incipal of
$1,296,000 was amortized in 2015.
(dd) The loan is collateralized by Seabreeze Plaza and requires equal monthly prin-
cipal 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
$451,000 was amortized in 2015.
(ee) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers
and requires equal monthly principal and interest payments totaling
$153,300 based upon a 25-year amortization schedule and a final payment
of $15.5 million at maturity. Principal of $556,000 was amortized in 2015.
2015 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ff) The loan is collateralized by Northrock and requires equal monthly principal
and interest payments totaling $84,400 based upon a 25-year amortization
schedule and a final payment of $8.4 million at maturity. Principal of
$252,000 was amortized in 2015.
(gg) The loan is a $71.6 million construction-to-permanent facility that is collater-
alized 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 to-
taling $413,500 will be required based upon a 25-year amortization
schedule. A final payment of $39.6 million will be due at maturity.
(hh) The Company entered into a sale-leaseback transaction with its Olney prop-
erty and is accounting for that transaction as a secured financing. The
arrangement requires monthly payments of $60,400 which increased by
1.5% on May 1, 2015, and every May 1 thereafter. The arrangement provides
for a final payment of $14.7 million and has an implicit interest rate of 8.0%.
Negative amortization in 2015 totaled $163,000.
The carrying value of the properties collateralizing the mortgage
notes payable totaled $856.8 million and $895.5 million, as of
December 31, 2015 and 2014, 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, 2015.
•
• maintain tangible net worth, as defined in the loan agree-
ment, of at least $542.1 million plus 80% of the Company’s
net equity proceeds received after March 2014;
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 cover-
age); and
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).
•
•
Mortgage notes payable at each of December 31, 2015 and 2014,
totaling $51.0 million, are guaranteed by members of the Saul Or-
ganization. As of December 31, 2015, the scheduled maturities
of all debt including scheduled principal amortization for years
ended December 31 are as follows:
DEBT MATURITY SCHEDULE
Scheduled
Balloon Principal
(In thousands) Payments Amortization Total
2016 $ — $ 24,655 $ 24,655
2017 14,430 25,798 40,228
2018 55,748 (a) 25,903 81,651
2019 60,793 24,616 85,409
2020 61,163 21,893 83,056
Thereafter 432,565 127,678 560,243
$ 624,699 $ 250,543 $ 875,242
(a) Includes $28.0 million outstanding under the line of credit.
(ii)
(jj)
The loan is a $275.0 million unsecured revolving credit facility. Interest ac-
crues at a rate equal to the sum of one-month LIBOR plus a spread of 145
basis points. The line may be extended at the Company’s option for one year
with payment of a fee of 0.15%. Monthly payments, if required, are interest
only and vary depending upon the amount outstanding and the applicable
interest rate for any given month.
The loan was collateralized by Northrock and required monthly principal and
interest payments of approximately $47,000 and a final payment of $14.2
million at maturity. In 2015, the loan was repaid in full and replaced with a
new $16.0 million loan. See (ff) above.
(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 $305,000 was amortized during 2015.
The components of interest expense are set forth below.
INTEREST EXPENSE
Year ended December 31,
(In thousands) 2015 2014 2013
Interest incurred $ 45,898 $ 45,396 $ 45,502
Amortization of
deferred debt costs 1,433 1,327 1,257
Capitalized interest (2,166) (689) (170)
Total $ 45,165 $ 46,034 $ 46,589
Deferred debt costs capitalized during the years ending Decem-
ber 31, 2015, 2014 and 2013 totaled $0.3 million, $1.3 million
and $3.2 million, 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, 2015, 2014, and 2013, amounted to
$168.3 million, $164.6 million, and $159.9 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 RENT PAYMENTS
(In thousands)
2016 $ 154,983
2017 140,786
2018 122,922
2019 100,845
2020 80,559
Thereafter 273,328
Total $ 873,423
48
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 2015, 2014, and 2013, amounted to $32.9 million,
$32.1 million, and $30.9 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 $1.6 million, for the
years ended December 31, 2015, 2014, and 2013, respectively.
7. LONG-TERM LEASE OBLIGATIONS
Certain properties are subject to noncancelable long-term leases
which apply to land underlying the Shopping Centers. Certain of
the leases provide for periodic adjustments of the base annual rent
and require the payment of real estate taxes on the underlying
land. The leases will expire between 2058 and 2068. Reflected
in the accompanying consolidated financial statements is mini-
mum ground rent expense of $176,000, $176,000, and
$176,000, for the years ended December 31, 2015, 2014, and
2013, respectively. The future minimum rental commitments under
these ground leases are as follows:
LONG-TERM LEASE OBLIGATIONS
Year ending December 31,
(In thousands) 2016 2017 2018 2019 2020 Thereafter Total
Beacon Center $ 60 $ 60 $ 60 $ 60 $ 60 $ 2,482 $ 2,782
Olney 56 56 56 57 62 3,697 3,984
Southdale 60 60 60 60 60 2,825 3,125
Total $ 176 $ 176 $ 176 $ 177 $ 182 $ 9,004 $ 9,891
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
operating expenses over a base year amount. The Company and
the Saul Organization entered into a Shared Services Agreement
whereby each party pays an allocation of total rental payments
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, 2015, 2014, and 2013 was $904,900,
$840,800, and $850,600, respectively. Expenses arising from the
lease are included in general and administrative expense (see Note
9 – Related Party Transactions).
8. STOCKHOLDERS’ EQUITY AND
NONCONTROLLING INTEREST
The Consolidated Statements of Operations for the years ended
December 31, 2015, 2014, and 2013 reflect noncontrolling inter-
est of $10.5 million, $11.0 million, and $4.0 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 Cu-
mulative 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,
equivalent 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 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
60% of its then-outstanding Series A Stock. In December 2014,
the Company redeemed the remaining outstanding Series A
Stock. Costs associated with the redemptions were charged
against accumulated deficit in the respective periods.
2015 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2008, the Company sold 3,173,115 depositary shares,
each representing 1/100th of a share of 9% Series B Cumulative
Redeemable 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 ("Series C Stock"), and received net cash pro-
ceeds of approximately $135.2 million. The depositary shares may
be redeemed on or after February 12, 2018 at the Company’s op-
tion, in whole or in part, at the $25.00 liquidation preference plus
accrued but unpaid dividends. The depositary shares pay an an-
nual 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 matu-
rity, is not subject to any sinking fund or mandatory redemption
and is not convertible into any other securities of the Company ex-
cept 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. On November 12, 2014,
the Company sold, in an underwritten public offering, 1.6 million
depositary shares of Series C Stock and received net cash pro-
ceeds of approximately $39.3 million (the "Additional Series C
Stock"). The terms of Additional Series C Stock are identical to the
Series C Stock.
9. RELATED PARTY TRANSACTIONS
The Chairman and Chief Executive Officer, the President and Chief
Operating Officer, the Executive Vice President-Chief Legal and
Administrative Officer and the Senior Vice President-Chief
Accounting Officer of the Company are also officers of various
members of the Saul Organization and their management time is
shared with the Saul Organization. Their annual compensation is
fixed by the Compensation Committee of the Board of Directors,
with the exception of the Senior Vice President-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 enti-
ties 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 $400,000, $379,000, and $369,000, for
2015, 2014, and 2013, respectively. All amounts deferred by em-
ployees and contributed by the Company are fully vested.
The Company also participates in a multiemployer nonqualified de-
ferred 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, 2015, 2014, and 2013, the
Company contributed three times the amount deferred by employ-
ees. The Company’s expense, included in general and administrative
expense, totaled $224,900, $192,800, and $191,300, for
the years ended December 31, 2015, 2014, and 2013, re-
spectively. All amounts deferred by employees and the
Company are fully vested. The cumulative unfunded lia-
bility under this plan was $1.8 million and $1.8 million, at
December 31, 2015 and 2014, respectively, and is in-
cluded in accounts payable, accrued expenses and other
liabilities in the consolidated balance sheets.
The Company has entered into a shared services agreement (the
“Agreement”) with the Saul Organization that provides for the
sharing of certain personnel and ancillary functions such as com-
puter hardware, software, and support services and certain direct
and indirect administrative personnel. The method for determin-
ing 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, 2015, 2014, and
2013, which included rental expense for the Company’s head-
quarters lease (see Note 7. Long Term Lease Obligations), totaled
$8.2 million, $7.4 million, and $6.3 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 December 31, 2015 and 2014, accounts payable, accrued
expenses and other liabilities included $655,000 and $543,000,
respectively, representing billings due to the Saul Organization for
the Company’s share of these ancillary costs and expenses.
50
SAUL CENTERS, INC.
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The Company has entered into a shared third-party predevelop-
ment cost agreement with the B. F. Saul Real Estate Investment
Trust, a member of the Saul Organization (the “Predevelopment
Agreement”). The Predevelopment Agreement, which expired
on December 31, 2015 and was extended to December 31, 2016,
relates to the sharing of third-party predevelopment costs incurred
in connection with the planning of the future redevelopment of
certain adjacent real estate assets in the Twinbrook area of
Rockville, Maryland. The costs will be billed by the third-parties
on a pro rata basis based on the acreage owned by each entity
and neither party is obligated to advance funds to the other.
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 insur-
ance program. Such commissions and fees amounted to
approximately $443,500, $427,300, and $447,300, for the years
ended December 31, 2015, 2014, and 2013, respectively.
Effective as of September 4, 2012, the Company entered into a con-
sulting agreement with B. F. Saul III, one of the Company’s former
presidents, whereby Mr. Saul III provided certain consulting services
to the Company as an independent contractor and was paid at a
rate of $60,000 per month. The consulting agreement included
certain noncompete, nonsolicitation and nondisclosure covenants,
and expired in September 2014. During 2014 and 2013 such con-
sulting fees totaled $495,000 and $720,000, 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.
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, di-
rectors 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 exer-
cise price of $40.35 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 2006 Options to be $143,400. Because the directors’ op-
tions 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
options to purchase 165,000 shares (27,560 incentive stock op-
tions and 137,440 nonqualified stock options) to thirteen
Company officers and twelve Company Directors (the “2007 op-
tions”), which expire on April 26, 2017. The officers’ 2007 Options
vest 25% per year over four years and are subject to early expira-
tion upon termination 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 mil-
lion, 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 recognized as compensation expense monthly dur-
ing the four years the options vested.
Effective April 25, 2008, the Compensation Committee granted
options to purchase 30,000 shares (all nonqualified stock options)
to twelve Company directors (the “2008 Options”), which were
immediately exercisable and expire on April 24, 2018. The exer-
cise 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’ op-
tions vested immediately, 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
options to purchase 32,500 shares (all nonqualified stock options)
to thirteen Company directors (the “2009 Options”), which were
immediately exercisable and expire on April 23, 2019. The exer-
cise 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’ op-
tions vested immediately, the entire $222,950 was expensed as
of the date of grant. No options were granted to the Company’s
officers in 2009.
2015 ANNUAL REPORT
51
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
immediately 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’ op-
tions vested immediately, 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
options to purchase 195,000 shares (65,300 incentive stock op-
tions and 129,700 nonqualified stock options) to fifteen Company
officers 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 termination 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 as-
signed 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 recognized as compensation ex-
pense 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 ter-
mination 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
determined the total fair value of the 2012 Options to be $1.7 mil-
lion, of which $1.4 million and $257,250 were assigned to the
officer options and director options, respectively. Because the di-
rectors’ options vested immediately, the entire $257,250 was
expensed as of the date of grant. The expense for the officers’ op-
tions is being recognized as compensation expense monthly
during the four years the options vest.
Effective May 10, 2013, the Compensation Committee granted
options to purchase 237,500 shares (35,592 incentive stock op-
tions and 201,908 nonqualified stock options) to fifteen Company
officers and fourteen Company Directors (the "2013 options"),
which expire on May 9, 2023. The officers' 2013 Options vest
25% per year over four years and are subject to early expiration
upon termination 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 million, of which $1.3 million and $0.3 million were as-
signed to the officer options and director options, respectively.
Because the directors' 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.
Effective May 9, 2014, the Compensation Committee granted op-
tions to purchase 200,000 shares (29,300 incentive stock options
and 170,700 nonqualified stock options) to eighteen Company
officers and twelve Company Directors (the “2014 options”),
which expire on May 8, 2024. The officers’ 2014 Options vest
25% per year over four years and are subject to early expiration
upon termination of employment. The directors’ 2014 Options
were immediately exercisable. The exercise price of $47.03 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 2014 Options to
be $1.3 million, of which $1.2 million and $109,500 were as-
signed to the officer options and director options, respectively.
Because the directors’ options vested immediately, the entire
$109,500 was expensed as of the date of grant. The expense for
the officers’ options is being recognized as compensation ex-
pense monthly during the four years the options vest.
Effective May 8, 2015, the Compensation Committee granted op-
tions to purchase 225,000 shares (33,690 incentive stock options
and 191,310 nonqualified stock options) to 19 Company officers
and 14 Company Directors (the “2015 options”), which expire on
May 7, 2025. The officers’ 2015 Options vest 25% per year over
four years and are subject to early expiration upon termination of
employment. The directors’ 2015 Options were immediately ex-
ercisable. The exercise price of $51.07 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 2015 Options to be $1.6 million, of which
$1.4 million and $125,300 were assigned to the officer options
and director options, respectively. Because the directors’ options
vested immediately, the entire $125,300 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.
52
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, 2014 and 2013.
(Dollars in thousands, except per share data)
STOCK OPTIONS ISSUED TO DIRECTORS
Grant date
Total grant
Vested
Exercised
Forfeited
Exercisable at
December 31, 2015
5/1/2006
4/27/2007
4/25/2008
4/24/2009
5/7/2010
5/13/2011
5/4/2012
5/10/2013
5/9/2014
5/9/2015
30,000
30,000
30,000
32,500
32,500
32,500
35,000
35,000
30,000
35,000
30,000
30,000
30,000
32,500
32,500
32,500
35,000
35,000
30,000
35,000
20,000
5,000
7,500
22,500
15,000
15,000
15,000
12,500
7,500
5,000
2,500
7,500
7,500
—
2,500
2,500
—
—
—
—
7,500
17,500
15,000
10,000
15,000
15,000
20,000
22,500
22,500
30,000
Remaining unexercised
7,500
17,500
15,000
10,000
15,000
15,000
20,000
22,500
22,500
30,000
Exercise price
Volatility
$ 40.35
$ 54.17
$ 50.15
$ 32.68
$ 38.76
$ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
0.206
0.225
0.237
0.344
0.369
0.358
0.348
0.333
0.173
0.166
Expected life (years)
9.0
8.0
7.0
6.0
5.0
5.0
5.0
5.0
5.0
5.0
Assumed yield
Risk-free rate
Gross value at
grant date
Expensed in
previous years
Expensed in 2013
Expensed in 2014
Expensed in 2015
Future expense
Grant date
Total grant
Vested
Exercised
Forfeited
Exercisable at
December 31, 2015
5.93%
4.39%
4.09%
4.54%
4.23%
4.16%
4.61%
4.53%
4.48%
4.54%
5.11%
4.65%
3.49%
2.19%
2.17%
1.86%
0.78%
0.82%
1.63%
1.50%
$ 144
$ 285
$ 255
$ 223
$ 288
$ 297
$ 257
$ 278
$ 110
$125
144
285
255
223
288
297
257
—
—
—
—
—
—
—
—
—
—
278
—
—
—
—
—
—
—
—
—
—
110
—
—
—
—
—
—
—
—
—
—
125
—
—
—
—
—
—
—
—
—
—
STOCK OPTIONS ISSUED TO OFFICERS AND GRAND TOTALS
4/27/2007
5/13/2011
5/4/2012
5/10/2013
5/9/2014
5/8/2015
Subtotals
135,000
162,500
242,500
202,500
170,000
190,000
1,102,500
67,500
118,750
81,875
91,250
42,500
—
401,875
14,097
58,754
40,625
24,375
3,125
—
140,976
67,500
43,750
135,000
30,000
—
—
276,250
53,403
59,996
41,250
68,875
39,375
—
260,899
Remaining unexercised
53,403
59,996
68,875
148,125
166,875
190,000
685,274
Exercise price
Volatility
$ 54.17
$ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
0.233
0.330
0.315
0.304
0.306
0.298
Expected life (years)
6.5
8.0
8.0
8.0
7.0
7.0
Assumed yield
Risk-free rate
Gross value at
grant date
4.13%
4.81%
5.28%
5.12%
4.89%
4.94%
4.61%
2.75%
1.49%
1.49%
2.17%
1.89%
$ 1,339
$ 1,367
$ 1,518
$ 1,401
$ 1,350
$ 1,585
$ 8,560
Estimated forfeitures
62
368
890
280
169
142
1,911
Subtotals
322,500
322,500
125,000
22,500
175,000
175,000
$ 2,262
1,749
278
110
125
—
Grand
Totals
1,425,000
724,375
265,976
298,750
435,899
860,274
$ 10,822
1,911
Expensed in
previous years
1,277
457
105
—
—
—
1,839
3,588
Expensed in 2013
—
236
157
209
—
—
602
Expensed in 2014
—
217
157
284
197
—
855
Expensed in 2015
—
89
157
269
295
240
1,050
Future expense
—
—
52
359
689
1,202
2,302
Weighted average term of remaining future expense 2.7 years
2015 ANNUAL REPORT
880
965
1,176
2,302
53
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the option activity for the years 2015, 2014 and 2013
OPTION ACTIVITY
2015 2014 2013
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding at January 1 748,208 $ 44.79 753,625 $ 42.55 570,840 $ 41.04
Granted 225,000 51.07 200,000 47.03 237,500 44.42
Exercised (112,934) 43.67 (167,917) 37.71 (49,715) 33.15
Expired/Forfeited –– –– (37,500) 43.56 (5,000) 52.16
Outstanding December 31 860,274 46.58 748,208 44.79 753,625 42.55
Exercisable at December 31 435,899 45.33 380,708 44.85 413,000 42.42
The intrinsic value of options exercised in 2015, 2014, and 2013,
was $1.5 million, $2.0 million and $0.6 million, respectively. The
intrinsic value of options outstanding and exercisable at year end
2015 was $4.2 million and $2.8 million, respectively. The intrinsic
value measures the difference between the options’ exercise price
and the closing share price quoted by the New York Stock Ex-
change as of the date of measurement. The date of exercise was the
measurement date for shares exercised during the period. At De-
cember 31, 2015, the final trading day of calendar 2015, the closing
price of $51.27 per share was used for the calculation of aggregate
intrinsic value of options outstanding and exercisable at that date.
At December 31, 2015, 70,903 options issued in 2007 had an ex-
ercise price in excess of the market closing price and therefore had
no intrinsic value. The weighted average remaining contractual life
of the Company’s exercisable and outstanding options at Decem-
ber 31, 2015 are 5.7 and 7.1 years, respectively.
11. NON-OPERATING ITEMS
Gain on casualty settlement in 2013 reflects insurance proceeds re-
ceived in excess of the carrying value of assets damaged during a
hail storm at French Market in 2012. The insurance proceeds
funded substantially all of the restoration of the damaged property.
to the carrying value of $892.9 million and $784.8 million at De-
cember 31, 2015 and 2014, respectively. 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
interest-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.
SWAPS FAIR VALUE
Year ended December 31,
(In thousands) 2015 2014 2013
Increase (decrease)
in fair value:
Recognized in earnings $ (10) $ (10) $ (7)
Recognized in other
comprehensive income 124 (675) 2,897
Total 114 $ (685) $2,890
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 cur-
rently available to the Company for fixed rate financing, and
assuming long term interest rates of approximately 3.75% and
3.65%, would be approximately $832.4 million and $886.4 mil-
lion as of December 31, 2015 and 2014, respectively, compared
The Company carries its interest rate swaps at fair value. The Com-
pany has determined the majority of the inputs used to value its
derivative fall within Level 2 of the fair value hierarchy with the ex-
ception of the impact of counter-party risk, which was determined
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 models which con-
tain 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,
54
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015, the fair value of the interest-rate swap was approximately
$2.9 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 Consolidated 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 Rein-
vestment and Stock Purchase Plan (the “Plan”), to allow its
stockholders and holders of limited partnership interests an op-
portunity 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 broker-
age commissions, service charges or other expenses. All
expenses of the Plan are paid by the Company. The Operating
Partnership also maintains a similar dividend reinvestment plan that
mirrors the Plan, which allows holders of limited partnership inter-
ests the opportunity to buy either additional limited partnership
units or common stock shares of the Company.
The Company paid common stock distributions of $1.69 per share
in 2015 and $1.56 per share during 2014 and $1.44 per share dur-
ing 2013, Series A preferred stock dividends of $2.41 per
depositary share during 2014 and $2.00 per depositary share in
2013, Series B preferred stock dividends of $0.99 per depository
share during 2013, and Series C preferred stock dividends of
$1.72 per depositary share during each of 2015 and 2014 and
$1.09 per depositary share during 2013. Of the common stock
dividends paid, $1.69 per share, $1.56 per share, and $0.96 per
share, represented ordinary dividend income in 2015, 2014, and
2013, respectively, and $0.48 per share represented return of cap-
ital to the shareholders in 2013. All of the preferred stock
dividends paid were considered ordinary dividend income.
The following summarizes distributions paid during the years
ended December 31, 2015, 2014, and 2013, and includes activity
in the Plan as well as limited partnership units issued from the rein-
vestment of unit distributions:
Total Distributions to Dividend Reinvestments
Limited Common Limiited 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 2015
October 31 $ 3,094 $ 9,106 $ 3,129 47,313 $ 55.73 28,936 $ 55.73
July 31 3,094 9,081 3,115 56,003 50.30 32,041 50.30
April 30 3,094 9,055 3,104 54,921 50.21 25,264 50.21
January 31 3,093 8,403 2,880 42,975 56.74 20,796 56.74
Total 2015 $ 12,375 $ 35,645 $ 12,228 201,212 107,037
Distributions during 2014
October 31 $ 3,856 $ 8,348 $ 2,879 40,142 $ 52.71
July 31 3,206 8,314 2,879 57,696 46.79
April 30 3,206 8,269 2,838 60,212 44.14 104,831 $ 44.77
January 31 3,206 7,415 2,521 39,588 45.15 91,352 45.80
Total 2014 $ 13,474 $ 32,346 $ 11,117 197,638 196,183
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
2015 ANNUAL REPORT
55
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2015, the Board of Directors of the Company author-
ized a distribution of $0.43 per common share payable in January
2016, to holders of record on January 15, 2016. As a result, $9.1
million was paid to common shareholders on January 29, 2016.
Also, $3.1 million was paid to limited partnership unitholders on
January 29, 2016 ($0.43 per Operating Partnership unit). The
Board of Directors authorized preferred stock dividends of
$0.4297 per Series C depositary share to holders of record on Jan-
uary 7, 2016. As a result, $3.1 million was paid to preferred share-
holders on January 15, 2016. These amounts are reflected as a
reduction of stockholders’ equity in the case of common stock and
preferred stock dividends and noncontrolling interests deductions
in the case of limited partner distributions and are included in
dividends and distributions payable
in the accompanying
consolidated financial statements.
15. INTERIM RESULTS (UNAUDITED)
The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2015 and 2014.
(In thousands, except per share amounts) 2015
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Revenue $ 52,088 $ 51,711 $ 52,376 $ 52,902
Operating income before loss on early extinguishment
of debt, gain on casualty settlement, and
noncontrolling interests 12,687 12,922 13,238 14,083
Gain on sales of properties — 11 — —
Net income attributable to Saul Centers, Inc. 10,207 10,396 10,615 11,250
Net income available to common stockholders 7,113 7,302 7,522 8,156
Net income available to common stockholders
per diluted share 0.33 0.35 0.36 0.38
2014
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Revenue $ 52,947 $ 52,286 $ 50,595 $ 51,264
Operating income before loss on early extinguishment
of debt, gain on casualty settlement, and
noncontrolling interests 12,713 14,423 12,479 12,314
Gain on sales of properties — 6,069 — —
Net income attributable to Saul Centers, Inc. 10,287 16,054 10,106 10,496
Net income available to common stockholders 7,081 12,847 6,900 5,274
Net income available to common stockholders
per diluted share 0.34 0.62 0.33 0.25
56
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 sig-
nificant 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 ex-
penses related to tenant rent, reimbursements and operating ex-
penses. Although services are provided to a range of tenants, the
types of services provided to them are similar within each seg-
ment. The properties in each portfolio have similar economic
characteristics and the nature of the products and services pro-
vided 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 2015
presentation.
Shopping Mixed-Use Corporate and Consolidated
(In thousands) Centers Properties Other Totals
As of or for the year ended December 31, 2015
Real estate rental operations:
Revenue $ 156,110 $ 52,916 $ 51 $ 209,077
Expenses (33,877) (17,266) — (51,143)
Income from real estate 122,233 35,650 51 157,934
Interest expense and amortization of deferred debt costs — — (45,165) (45,165)
General and administrative — — (16,353) (16,353)
Subtotal 122,233 35,650 (61,467) 96,416
Depreciation and amortization of deferred leasing costs (30,171) (13,099) — (43,270)
Acquisition related costs (84) — — (84)
Predevelopment expenses (57) (75) — (132)
Change in fair value of derivatives — — (10) (10)
Gain on sale of property 11 — — 11
Net income (loss) $ 91,932 $ 22,476 $ (61,477) $ 52,931
Capital investment $ 17,159 $ 52,460 $ — $ 69,619
Total assets $ 936,542 $ 356,400 $ 11,203 $ 1,304,145
As of or for the year ended December 31, 2014
Real estate rental operations:
Revenue $ 154,385 $ 52,632 $ 75 $ 207,092
Expenses (33,781) (15,732) — (49,513)
Income from real estate 120,604 36,900 75 157,579
Interest expense and amortization of deferred debt costs — — (46,034) (46,034)
General and administrative — — (16,961) (16,961)
Subtotal 120,604 36,900 (62,920) 94,584
Depreciation and amortization of deferred leasing costs (28,082) (13,121) — (41,203)
Acquisition related costs (949) — — (949)
Predevelopment expenses — (503) — (503)
Change in fair value of derivatives — — (10) (10)
Gain on sale of property 6,069 — — 6,069
Net income (loss) $ 97,642 $ 23,276 $ (62,930) $ 57,988
Capital investment $ 66,508 $ 23,760 $ — $ 90,268
Total assets $ 946,819 $ 307,901 $ 12,267 $ 1,266,987
2015 ANNUAL REPORT
57
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shopping Mixed-Use Corporate and Consolidated
(In thousands) Centers Properties 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
17. SUBSEQUENT EVENTS
The Company has reviewed operating activities for the period sub-
sequent to December 31, 2015 and prior to the date that financial
settlements are issued, March 4, 2016, and determined there are
no subsequent events that are required to be disclosed.
58
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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 div-
idends 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 reinvestment
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 dis-
tribute at least 90% of REIT taxable income. The Company
distributed more than the required amount in 2015 and 2014.
Distributions by the Company to common stockholders and
holders of limited partnership units in the Operating Partnership
were $47.9 million and $43.5 million in 2015 and 2014, respec-
tively. Distributions to preferred stockholders were $12.4 million
and $13.5 million in 2015 and 2014, respectively. See Notes to
Consolidated 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 repre-
sents 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 rev-
enue, operating expenses of the Company, interest expense,
general economic conditions, federal, state and local taxes (if
any), unanticipated capital expenditures, the adequacy of re-
serves and preferred dividends. While the Company intends to
continue paying regular quarterly distributions, any future pay-
ments will be determined solely by the Board of Directors and
will depend on a number of factors, including cash flow of the
Company, its financial condition and capital requirements, the
annual distribution amounts required to maintain its status as a
REIT under the Code, and such other factors as the Board of Di-
rectors deems relevant. We are obligated to pay regular
quarterly distributions to holders of depositary shares, prior to
distributions on the common stock.
The Company paid four quarterly distributions totaling $1.69,
$1.56 and $1.44 per common share during 2015, 2014 and
2013, respectively. The annual distribution amounts paid by the
Company exceeded the distribution amounts required for tax
purposes. Distributions to the extent of our current and accumu-
lated 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. All of the 2015 and 2014 common dividends
were treated as taxable dividends. Of the $1.44 per common
share dividend paid in 2013, 67% was treated as a taxable divi-
dend and 33% was treated as a return of capital. No assurance
can be given regarding what portion, if any, of distributions in
2016 or subsequent 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.
2015 ANNUAL REPORT
59
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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 Company’s shares of common stock were reported by the New York Stock Exchange for each quarter
of 2015 and 2014 as follows:
COMMON STOCK PRICES
Period Share Price
High Low
October 1, 2015 – December 31, 2015 $ 58.87 $ 51.27
July 1, 2015 – September 30, 2015 $ 52.90 $ 47.65
April 1, 2015 – June 30, 205 $ 56.93 $ 49.19
January 1, 2015– March 31, 2015 $ 60.30 $ 53.52
October 1, 2014 – December 31, 2014 $ 58.56 $ 46.83
July 1, 2014 – September 30, 2014 $ 50.35 $ 45.98
April 1, 2014 – June 30, 2014 $ 50.53 $ 45.51
January 1, 2014 – March 31, 2014 $ 48.20 $ 45.06
On March 1, 2016, the closing price was $49.83 per share.
The approximate number of holders of record of the common stock was 196 as of March 1, 2016.
60
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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 reinvestment 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, 2011.
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
$200
$150
$100
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
Dec, 31, 2015
Dec. 31, 2010
Dec. 31, 2011 Dec. 31, 2012 Dec. 31, 2013
Dec. 31, 2014 Dec. 31, 2015
Saul Centers
S&P 500
Russell 2000
NAREIT Equity
$100
$100
$100
$100
$77.51
$97.05
$111.70
$138.25
$127.88
$102.11
$118.45
$156.82
$178.28
$180.75
$95.82
$111.49
$154.78
$162.35
$155.18
$108.29
$127.85
$131.01
$170.49
$175.94
2015 ANNUAL REPORT
61
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SAUL CENTERS CORPORATE INFORMATION
DIRECTORS
EXECUTIVE OFFICERS
B. Francis Saul II
Chairman and Chief Executive Officer
J. Page Lansdale
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
Patrick F. Noonan
Founder/Chairman Emeritus,
The Conservation Fund
H. Gregory Platts
Senior Vice President and
Treasurer, Emeritus,
National Geographic Society
Andrew M. Saul II
Chief Executive Officer
Genovation Cars
B. Francis Saul II
Chairman and Chief
Executive Officer
J. Page Lansdale
President and Chief
Operating Officer
Christine N. Kearns
Executive Vice President – Chief
Legal and Administrative Officer
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, Retail Leasing
Steven N. Corey
Senior Vice President, Office Leasing
John F. Collich
Senior Vice President,
Acquisitions and Development
Donald A. Hachey
Senior Vice President, Construction
Mark Sullivan III
Financial and Legal Consultant
Charles W. Sherren, Jr.
Senior Vice President, Management
The Honorable James W. Symington
Of Counsel, O’Connor and Hannan,
Attorneys at Law
Benjamin Underwood
Vice President, Residential
John R. Whitmore
Financial Consultant
62
SAUL CENTERS, INC.
COUNSEL
Pillsbury Winthrop
Shaw Pittman LLP
Washington, DC 20036
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.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
Commission on Form 10-K, which
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 2015, 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
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Annual Meeting of Stockholders
The Annual Meeting of Stockholders will be
held at 11:00 a.m., local time, on May 6, 2016,
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.)
2015 ANNUAL REPORT
63
472872_SC.qxp_472872_SC 3/14/16 10:32 AM Page 64
7501 Wisconsin Avenue, Suite 1500E
Bethesda, MD 20814-6522
Phone: (301) 986-6200
Website: www.saulcenters.com