2016 ANNUAL REPORT
to Shareholders
Saul Centers, Inc. is a self-managed, self-
administered equity Real Estate Investment
Trust (REIT) headquartered 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 9.5 million square
feet of leasable area and (b) three land and
development properties. Approximately 85% of the
Company’s property operating income is generated
by properties in the metropolitan Washington,
DC/Baltimore area.
TOTAL REVENUE
(In millions)
NET INCOME
Available to Common Stockholders
(In millions)
FUNDS FROM OPERATIONS
Available to Common Shareholders*
(In millions)
1
.
7
1
2
$
1
.
9
0
2
$
1
.
7
0
2
$
1
.
0
9
1
$
9
.
7
9
1
$
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
$35
$30
$25
$20
$15
$10
$5
$0
9
.
2
3
$
1
.
2
3
$
1
.
0
3
$
2
.
8
1
$
7
.
1
1
$
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
7
.
7
8
8 $
.
3
8
3 $
.
8
7
$
7
.
4
6
1 $
.
0
6
$
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
* Funds From Operations (FFO) is a non-GAAP financial measure. The term Common Shareholders means common stockholders and holders of
noncontrolling interests. See page 25 for a definition of FFO and reconciliation from Net Income.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Portfolio Composition BASED ON 2016 PROPERTY OPERATING INCOME
76.7%
Shopping Centers
23.3%
Mixed-Use
84.9%
Metropolitan
Washington, DC/
Baltimore area
15.1%
Rest of U.S.
Year ended December 31,
2016 2015 2014 2013 2012
Summary Financial Data
Total Revenue $ 217,070,000 $209,077,000 $ 207,092,000 $ 197,897,000 $ 190,092,000
Net Income Available to
Common Stockholders $ 32,904,000 $ 30,093,000 $ 32,102,000 $ 11,661,000 $ 18,234,000
FFO Available to Common
Shareholders $ 87,749,000 $ 83,815,000 $ 78,281,000 $ 64,684,000 $ 60,100,000
Weighted Average Common
Stock Outstanding (Diluted) 21,615,000 21,196,000 20,821,000 20,401,000 19,700,000
Weighted Average Common Stock
and Units Outstanding 28,990,000 28,449,000 27,977,000 27,330,000 26,614,000
Net Income Per Share Available to
Common Stockholders (Diluted) $ 1.52 $ 1.42 $ 1.54 $ 0.57 $ 0.93
FFO Per Share Available to Common
Shareholders (Diluted) $ 3.03 $ 2.95 $ 2.80 $ 2.37 $ 2.26
Common Dividend as a Percentage
of FFO 61% 57% 56% 61% 64%
Interest Expense Coveragea 3.29 x 3.24x 3.15 x 2.98 x 2.68x
Property Data
Number of Operating Propertiesb 55 56 56 56 57
Total Portfolio Square Feet 9,362,000 9,350,000 9,339,000 9,333,000 9,489,000
Shopping Center Square Feet 7,882,000 7,897,000 7,886,000 7,880,000 7,877,000
Mixed-Use Square Feet 1,480,000 1,453,000 1,453,000 1,453,000 1,612,000
Average Percentage Leasedc 95% 95% 94% 93% 91%
(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 2012, Ashland Square Phase II, New Market and Park Van Ness in 2013, 2014, and 2015, and Ashland
Square Phase II, New Market and N. Glebe Road in 2016) and does not include Burtonsville Town Square which was acquired in January 2017. Crosstown Business Center was sold
in December 2016.
(c) Average percentage leased includes commercial space only.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
1
Message to Shareholders
The leased percentage of our core neighborhood
shopping center portfolio has increased to
pre-recession levels, ending 2016 at 96%.
PARK VAN NESS, WASHINGTON, DC
Steadily improving economic factors continued to have a
positive impact on our retail and mixed-use property
operating performance during the past year. 2016 marked
the fifth consecutive year of growth in Funds From
Operations (FFO) and property operating income for our
Company. Our core neighborhood shopping center portfolio
of approximately 7.9 million square feet averaged over 95%
leased, ending 2016 at 96%. The overall leased percentage
of our mixed-use portfolio (excluding
residential space) was 91% as of year-end 2016.
In May 2016, the Company delivered Park
Van Ness, the second major project within
our urban Metro oriented, mixed-use
development platform. As of March 2017,
the street-level retail is 100% occupied and
the 271 apartments are over 81% leased.
With a low level of debt on our balance sheet,
we have sufficient capital available to fuel
the continued expansion of this mixed-use
portfolio. The Company’s next large-scale
mixed-use project to be developed is 750
N. Glebe Road, located in the Ballston
neighborhood of Arlington, Virginia, near
the Ballston Metro Station.
Development & Acquisition
Park Van Ness is located one block north of
the Van Ness Metro Station on Connecticut
Avenue in Northwest Washington, DC, with
the entire length of the site bordering the
picturesque Rock Creek Park. Previously
encumbered by an office building which the
Company had owned since the mid-1970s,
the site commenced redevelopment in
2013 as the next addition to our mixed-use
portfolio, and as a follow-up to our successful
2
SAUL CENTERS, INC. 2016 ANNUAL REPORT
delivery of Clarendon Center in late 2010. Our Van Ness
property was redeveloped into 271 luxury apartments and
9,000 square feet of complimentary street-level retail space.
Construction of Park Van Ness was completed in April 2016,
with the initial residents taking occupancy in May 2016. As of
March 2017, 10 months later, the residential units are over 81%
leased to tenants ranging from young professionals to retirees
seeking to downsize. The street-level retail space is 100%
leased. The 6,000 square foot Soapstone Market offers eat-in
casual dining and bar space combined with selections of
prepared foods, among many other gourmet grocery
offerings. The highly acclaimed Sfoglina pasta house restaurant
occupies 3,000 square feet. Sfo glina, the fourth Washington,
DC area restaurant by world renowned chef and restaurateur,
Fabio Trabocci, offers an indoor and outdoor fine dining
experience centered around a homemade pasta menu. We
expect Park Van Ness to be accretive to FFO during 2017 as
lease-up of this $93 million development is completed over
the coming months.
In June 2016, our 750 N. Glebe Road site in Ballston was
granted rezoning and final site plan approval by Arlington
County. Ballston is a very dynamic and walkable office, retail
and residential neighborhood in Northern Virginia. As one of
the last, large tracts of developable land within the Rosslyn-
Ballston Corridor, this 2.8 acre site was granted approval for
490 residential units and 62,000 square feet of street-level
retail space, marking a major milestone in the expansion of our
mixed-use portfolio. Construction plans and specifications are
currently being finalized, and we expect ground breaking to
occur during the second quarter of 2017.
While we view development/redevelopment to be our
organic growth engine into the future, maintaining our core
shopping center operation is vital to the Company’s success.
We remain active in identifying and pursuing viable
opportunities that are complementary to our existing shopping
center operations. As such, in January 2017, we acquired
Burtonsville Town Square, a well located grocery anchored
neighborhood shopping center in Burtonsville, Maryland.
The 121,000 square foot center, constructed in 2011, is located
just outside of the Washington, DC Beltway along Route 29 in
Montgomery County, Maryland, proximate to our White Oak
PARK VAN NESS, WASHINGTON, DC
GLEBE ROAD,
ARLINGTON, VA
(Artist Rendering)
BURTONSVILLE TOWN SQUARE,
BURTONSVILLE, MD
SAUL CENTERS, INC. 2016 ANNUAL REPORT
3
Message to Shareholders
and Briggs Chaney Plaza shopping centers.
In addition to the purchase of Burtonsville Town
Burtonsville Town Square is fully occupied and has a
Square, we were able to enhance the value of our
value-add component in its by-right expansion
existing portfolio by purchasing the fee interest in two
potential of up to 18,000 square feet of additional retail
of our three properties that were subject to underlying
space. Burtonsville Town Square was purchased for
ground leases. The two shopping centers, Beacon
$75 million with a very attractive $40 million, 15-year
Center and Southdale, are two of our top five centers
mortgage at a 3.39% fixed interest rate. With the
(by property operating income). In addition, both
addition of this Giant anchored center, this strategic
centers have significant master planned future
acquisition nicely complements our existing 31 grocery
development potential. In total, for $37.5 million,
anchored core shopping center portfolio.
we secured the fee interest in 73 acres of land
ASHBURN VILLAGE,
ASHBURN, VA
underlying these two centers, allowing us to maintain
full control over these two assets with a combined
market value of approximately $180 million. While
these two transactions are not FFO accretive in the
short term, they are integral to our long term vision for
efficient capital allocation and maximization of future
value enhancement.
2016 FINANCIAL RESULTS
Total revenue increased to $217.1 million
in 2016 from $209.1 million in 2015,
and operating income increased to
$55.7 million from $52.9 million. Net
income available to common stockholders
was $32.9 million in 2016 compared to
$30.1 million in 2015. During 2016, overall same
property revenue increased by 3.0% and same
property operating income increased by 3.3%.
Same property results exclude the results of
properties not in operation for the entirety
of the comparable reporting periods.
4
SAUL CENTERS, INC. 2016 ANNUAL REPORT
SOUTHDALE,
GLEN BURNIE, MD
LANSDOWNE TOWN CENTER,
LEESBURG, VA
The same property operating
income increase of $5.2 million
was positively impacted by
• higher base rent of $3.4 million
(exclusive of the effect of the lease
termination mentioned below), and
• increased other revenue of $1.6 million,
primarily due to the net impact of a lease
termination at 11503 Rockville Pike.
FFO available to common shareholders (after
deducting preferred stock dividends) increased by
4.7% to $87.7 million ($3.03 per diluted share)
in 2016 from $83.8 million ($2.95 per diluted share)
in 2015. This increase is primarily attributable to
• higher overall property operating income
($4.8 million), exclusive of the impact of Park
Van Ness, and
• lower interest and amortization of debt expense
($1.3 million), exclusive of the impact of Park
Van Ness,
partially offset by
• the adverse impact of the initial operations of
Park Van Ness ($1.1 million), and
• higher general and administrative expenses
($1.1 million).
Concurrent with the opening of Park Van Ness in May,
interest, real estate taxes and all other costs associated
with the property began to be charged to expense
while revenue continues to grow in accordance with
occupancy. As a result, FFO for 2016 was adversely
impacted by $1.1 million, while the three month
period ended December 31, 2016 was adversely
impacted by only $0.2 million.
Our 2016 same shopping center property
operating income grew by 3.0% and same
store rental rate increases over expiring
rents on 1.1 million square feet of space
were 3.0%.
SHOPPING CENTER HIGHLIGHTS
In spite of continuing challenges within the retail
industry, the overall shopping center leasing
percentage was 96% at December 31, 2016, and the
Company’s core shopping center business enjoyed
another year of positive operating results. While
internet retail continues to experience rapid market
share increases in the soft goods and electronics
segments, our focus on in-fill grocery anchored,
service-oriented neighborhood shopping centers has
continued to be generally resilient against these market
forces. Our 2016 same shopping center property
operating income grew by 3.0% and same store rental
rate increases over expiring rents on 1.1 million square
feet of space were 3.0%, down slightly from the 4.5%
increases in 2015. We renewed 76% of our shopping
center tenants in 2016, as measured by annualized
expiring base rents, representing an increase over our
average of 74% over the past three years. Small shops
are in-line tenants of less than 10,000 square feet.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
5
5
Message to Shareholders
Although these small shops comprise only 31% of the
During 2016, two of our seven Safeway anchors, Briggs
total shopping center square footage, they generate
Chaney and Broadlands Village, ceased operations.
approximately 50% of our shopping center annualized
With Safeway responsible for the remaining lease
base rent. At December 31, 2016, our small shop
liability, the financial impact on these two centers has
leasing percentage was 90.4%.
been minimal, as both leases have remained current
WESTVIEW VILLAGE, FREDERICK, MD
THRUWAY,
WINSTON-SALEM, NC
6
SAUL CENTERS, INC. 2016 ANNUAL REPORT
with rent payments. Since Safeway vacated, the Briggs
Chaney Plaza center has continued to operate at over
98% leased. Nine months after Safeway’s closing, we
are pleased to have Global Foods, a regional grocer
with six locations in the Washington, DC metropolitan
area, opening later this month. While Safeway ceased
operations at Broadlands Village in Loudoun County,
Virginia in April 2016, the center remains 100% leased.
We have recently terminated the Safeway lease and
executed a lease with Aldi Food Market to replace a
portion of the former store, in accordance with Aldi’s
prototypical 20,000 square foot store size. Aldi is
expected to open in late 2017. We continue to actively
market the balance of the former Safeway space.
MIXED-USE HIGHLIGHTS
As of December 31, 2016, our mixed-use portfolio
consisted of 515 apartments and 1.1 million square
feet of commercial space. Our core office leasing
percentage was 91%, with only 32,000 square feet of
space expiring in 2017. Clarendon Center and 601
Pennsylvania Avenue, our two largest income
generating office properties, represented 64%
of our total mix-use property operating income
during 2016. These two assets were 99% leased as of
December 31, 2016. The 244 apartments at Clarendon
Center averaged 97.1% leased through 2016, with
newly executed leases averaging 3.4% higher rents
than the expiring rents.
BALANCE SHEET HIGHLIGHTS
As we enter 2017 with no maturing debt in the current
year, we are well positioned for the future. Our fixed-
rate debt maturities are staggered from 2018 through
2034, with no more than $60 million maturing during
any one of those years. Our $275 million revolving
credit line has $84 million drawn as of February 28,
2017, leaving over $190 million of capital available to
fund our development pipeline. With a prudent
CRANBERRY SQUARE,
WESTMINSTER, MD
leverage ratio of 30% (debt to total capitalization),
Utilizing predominantly fixed-rate debt with 25-year
adequate borrowing capacity remains to fund our
amortization periods and staggering our debt
near-term development activity and fund other
maturities, we have minimized the effects of potentially
strategic growth opportunities that may arise.
volatile market conditions and risks. We feel that real
Over the past 5 years, we have increased our dividend
from $1.44 in 2011, to the current annualized rate of
$2.04, representing a 7.2% compounded annual
growth rate. Our dividend payout ratio (dividends
divided by FFO) during 2016 remained at a
conservative level of approximately 61%. The
Company’s stock closed at $66.61 per share on
December 31, 2016, resulting in total capitalization of
$3.0 billion. When combining our dividend growth
with our stock price appreciation, we are pleased that,
since inception, the performance of our common
stock has yielded our investors a 12% compounded
annual return.
While we anticipate future interest rate increases
by the Federal Reserve, as well as challenging local
and global political conditions, we have adequately
positioned our balance sheet to minimize exposure
to negative pressures and unknown market risks.
estate fundamentals within our core operating markets
remain solid, as demand continues to outpace supply,
across our well-positioned properties. U.S. consumer
outlook remains high, which should continue to
drive demand for retail, residential and office space.
The conservative nature of our current portfolio and
our inherent development pipeline should allow
for continued positive operating results and organic
growth that will continue to provide attractive
returns to our shareholders. We extend our thanks and
appreciation to our committed and conscientious
team of leasing, development and management
professionals and to the shareholders who have
invested with us over the past years.
For the Board,
B. Francis Saul II
March 8, 2017
SAUL CENTERS, INC. 2016 ANNUAL REPORT
7
Portfo lio Properties
As of December 31, 2016, 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 over 75% of the
portfolio’s gross leasable area.
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 194,258
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 246,148
Germantown, Germantown, MD 18,982
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 105,882
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
8
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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 173,341
Southdale, Glen Burnie, MD 484,035
Southside Plaza, Richmond, VA 371,761
South Dekalb Plaza, Atlanta, GA 163,418
Thruway, Winston-Salem, NC 366,693
Village Center, Centreville, VA 146,032
Westview Village, Frederick, MD 97,858
White Oak, Silver Spring, MD 480,676
TOTAL SHOPPING CENTERS 7,882,054
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)
Park Van Ness, Washington, DC 223,447
(includes 271 apartments comprising 214,600 square feet)
601 Pennsylvania Ave., Washington, DC 227,021
Washington Square, Alexandria, VA 236,376
TOTAL MIXED-USE PROPERTIES 1,479,479
TOTAL PORTFOLIO 9,361,533
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 37-59
SAUL CENTERS, INC. 2016 ANNUAL REPORT
9
Selected Financial Data
(In thousands, except per share data) Years Ended December 31,
2016 2015 2014 2013 2012
Operating Data:
Total revenue $ 217,070 $ 209,077 $ 207,092 $ 197,897 $ 190,092
Total operating expenses 161,357 156,147 155,163 162,628 154,996
Operating income 55,713 52,930 51,929 35,269 35,096
Non-operating income:
Change in fair value of derivatives (6) (10) (10) (7) 36
Loss on early extinguishment of debt — — — (497) —
Gain on sales of properties 1,013 11 6,069 — —
Gain on casualty settlements — — — 77 219
Income from continuing operations 56,720 52,931 57,988 34,842 35,351
Discontinued operations — — — — 4,429
Net income 56,720 52,931 57,988 34,842 39,780
Income attibutable to the noncontrolling interests (11,441) (10,463) (11,045) (3,970) (6,406)
Net income attributable to Saul Centers, Inc. 45,279 42,468 46,943 30,872 33,374
Preferred stock redemption — — (1,480) (5,228) —
Preferred dividends (12,375) (12,375) (13,361) (13,983) (15,140)
Net income available to common stockholders $ 32,904 $ 30,093 $ 32,102 $ 11,661 $ 18,234
Per Share Data (diluted):
Net income available to common stockholders:
Continuing operations $ 1.52 $ 1.42 $ 1.54 $ 0.57 $ 0.70
Discontinued operations — — — — 0.23
Total $ 1.52 $ 1.42 $ 1.54 $ 0.57 $ 0.93
Basic and diluted shares outstanding:
Weighted average common shares - basic 21,505 21,127 20,772 20,364 19,649
Effect of dilutive options 110 69 49 37 51
Weighted average common shares - diluted 21,615 21,196 20,821 20,401 19,700
Weighted average convertible limited partnership units 7,375 7,253 7,156 6,929 6,914
Weighted average common shares and fully
converted limited partnership units - diluted 28,990 28,449 27,977 27,330 26,614
Dividends Paid:
Cash dividends to common stockholders (1) $ 39,472 $ 35,645 $ 32,346 $ 29,205 28,135
Cash dividends per share $ 1.84 $ 1.69 $ 1.56 $ 1.44 $ 1.44
Balance Sheet Data:
Real estate investments (net of accumulated depreciation) $ 1,242,534 $ 1,197,340 $ 1,163,542 $ 1,094,776 $ 1,112,763
Total assets 1,343,025 1,295,408 1,257,113 1,189,000 1,199,596
Total debt, including accrued interest 903,709 869,652 850,727 813,653 823,408
Preferred stock 180,000 180,000 180,000 180,000 179,328
Total stockholders’ equity 373,249 353,727 339,257 315,126 307,289
Other Data:
Cash flow provided by (used in):
Operating activities $ 89,090 $ 88,896 $ 86,568 $ 73,527 $ 78,423
Investing activities (86,274) (69,587) (83,589) (26,034) (46,873)
Financing activities (4,497) (21,434) (8,148) (42,329) (31,740)
Funds from operations (2):
Net income 56,720 52,931 57,988 34,842 39,780
Real property depreciation and amortization 44,417 43,270 41,203 49,130 40,112
Real property depreciation - discontinued operations — — — — 77
Gain on property dispositions and casualty settlements (1,013) (11) (6,069) (77) (4,729)
Funds from operations 100,124 96,190 93,122 83,895 75,240
Preferred stock redemption — — (1,480) (5,228) —
Preferred dividends (12,375) (12,375) (13,361) (13,983) (15,140)
Funds from operations available to common shareholders
and noncontrolling interests $ 87,749 $ 83,815 $ 78,281 $ 64,684 $ 60,100
(1) During 2016, 2015, 2014, 2013, and 2012, shareholders reinvested $10.3 million, $10.6 million, $9.3 million, $20.7 million and $23.1 million, respectively, in newly issued common
(2)
stock through the Company’s dividend reinvestment plan.
Funds from operations (FFO) is a non-GAAP financial measure and is defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds
From Operations.”
10
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) begins with the Company’s primary
business strategy to give the reader an overview of the goals of
the Company’s business. This is followed by a discussion of the
critical accounting policies that the Company believes are
important to understanding the assumptions and judgments in-
corporated in the Company’s reported financial results. The next
section, beginning on page 15, discusses the Company’s results
of operations for the past two years. Beginning on page 18, 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 in-
tends 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
selectively and opportunistically redevelop and renovate its prop-
erties, 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 2016, the Company completed development of Park Van Ness,
a 271-unit residential project with approximately 9,000 square feet
of street-level retail, below street-level structured parking, and
amenities including a community room, landscaped courtyards,
a fitness room, a wi-fi lounge/business center, and a rooftop pool
and deck. The structure comprises 11 levels, five of which on the
east side are below street level. Because of the change in grade
from the street eastward to Rock Creek Park, apartments on all 11
levels have park or city views. The street level retail space is 100%
leased to a grocery/gourmet food market and an upscale Italian
restaurant. As of March 1, 2017, leases have been executed for
217 apartments (80.1%) and 205 apartments were occupied. The
total cost of the project, excluding predevelopment expense and
land, which the Company has owned, was approximately $93.0
million, a portion of which was financed with a $71.6 million con-
struction-to-permanent loan. Costs incurred through December
31, 2016, total approximately $92.9 million, of which $70.1 million
has been financed by the loan.
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.
In January 2016, the Company terminated a 16,500 square foot
lease at 11503 Rockville Pike and received a $3.0 million lease ter-
mination fee which was recognized as revenue in the first quarter.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
11
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The space was previously occupied by an office supply store that
had vacated in mid 2014 and the lease was scheduled to expire
in 2019. The termination fee revenue was partially offset by the
loss of approximately $1.1 million in rental revenue over the remain-
der of 2016. The Company has executed a lease with a
replacement tenant, with occupancy and rent commencement
projected to be Spring 2017. While the Company continues to
plan for a mixed-use development at this site and its neighboring
Metro Pike Center, the initial phases of this development are ex-
pected to be on the west side of Rockville Pike at Metro Pike
Center. The Company has not committed to any timetable for
commencement of construction.
From 2014 through 2016, in separate transactions, the Company
purchased four adjacent properties, with approximately 23,700
square feet of retail space, on North Glebe Road in Arlington, Vir-
ginia, for an aggregate $54.0 million. Combined, the properties
total 2.8 acres. Effective August 1, 2016, the Company's proper-
ties at Glebe Road were vacant and removed from service. The
Company previously received zoning and site plan approval from
Arlington County, Virginia for the development of approximately
490 residential units and 62,000 square feet of retail space. Util-
ities have been disconnected, plans and specifications are in
process, interest, real estate taxes and other costs related to de-
velopment are being capitalized and the assets were reclassified
to construction in progress in the Consolidated Balance Sheets.
The demolition of the existing structures is expected to commence
in the Spring of 2017, pending the issuance of the demolition per-
mit. Commencement of construction remains uncertain and
dependent on completion of plans and specifications and award
of a general contractor.
Albertson's/Safeway, a tenant at nine of the Company's shopping
centers, closed two Safeway stores located at the Company's
properties during the June 2016 quarter. The stores that closed
were located in Broadlands Village, Loudoun County, Virginia and
Briggs Chaney Plaza, Montgomery County, Maryland. The lease
at Briggs Chaney remains in full force and effect and Albertson’s/
Safeway has executed a sublease with a replacement grocer,
Global Foods, for the space and Global Foods is expected to
commence operations in the second quarter of 2017. The
Company terminated the lease with Albertson's/Safeway at
Broadlands and has executed a lease with Aldi Food Market for
20,000 square feet of this space which is expected to open in late
2017. We continue to actively market the balance of the former
Safeway space.
In January 2017, the Company purchased for $76.3 million, includ-
ing acquisition costs, Burtonsville Town Square, a 121,000 square
foot shopping center located in Burtonsville, Maryland. Bur-
tonsville Town Square is 100% leased and anchored by Giant
Food and CVS Pharmacy. It has expansion development potential
of up to 18,000 square feet of additional retail space. The pur-
chase was funded with a new $40.0 million mortgage loan and
through the Company's credit line facility.
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
identified and market conditions improve. (See “Item 1. Business
- Capital Policies”). It is management’s view that several of the sub-
markets in which the Company operates have, or are expected to
have in the future, attractive supply/demand characteristics. The
Company will continue to evaluate acquisition, development and
redevelopment as integral parts of its overall business plan.
The recent period of economic expansion has now run in excess
of five years. While economic conditions within the local Wash-
ington, DC metropolitan area have remained relatively stable,
issues facing the Federal government relating to taxation, spend-
ing and interest rate policy will likely impact the office, retail and
residential real estate markets over the coming years. Because the
majority of the Company’s property operating income is produced
by our shopping centers, we continually monitor the implications
of government policy changes, as well as shifts in consumer de-
mand between on-line and in-store shopping, on future shopping
center construction and retailer store expansion plans. Based on
our observations, we continue to adapt our marketing and mer-
chandising strategies in a way to maximize our future performance.
The Company’s strong underlying fundamentals have resulted in
a commercial leasing percentage, on a comparable property
basis, which excludes the impact of properties not in operation
for the entirety of the comparable periods, which continues to im-
prove and increased to 95.4% at December 31, 2016, from 95.0%
at December 31, 2015.
12
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2016, amortizing fixed-rate mortgage debt with
staggered maturities from 2018 to 2034 represented approxi-
mately 93.0% of the Company’s notes payable, thus minimizing
refinancing risk. The Company’s variable-rate debt consists of a
$14.5 million bank term loan secured by the Metro Pike Center
and $49.0 million outstanding under the unsecured revolving
line of credit. As of December 31, 2016, the Company has loan
availability of approximately $225.6 million under its $275.0 mil-
lion 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, DC metropolitan area, the Company may, in the fu-
ture, also acquire other types of real estate in other areas of the
country as opportunities present themselves. While the Com-
pany may diversify in terms of property locations, size and market,
the Company does not set any limit on the amount or percentage
of Company assets that may be invested in any one property or
any one geographic area.
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 certain 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 inherent in those policies, involve a relatively high
degree of judgment and complexity.
REAL ESTATE INVESTMENTS
Real estate investment properties are stated at historic cost less
depreciation. Although the Company intends to own its real es-
tate investment properties over a long term, from time to time it
will evaluate its market position, market conditions, and other fac-
tors and may elect to sell properties that do not conform to the
Company’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 ex-
pected to be generated by the property including an initial lease
up period. The Company determines the fair value of above and
below market intangibles associated with in-place leases by as-
sessing the net effective rent and remaining term of the in-place
lease relative to market terms for similar leases at acquisition tak-
ing into consideration 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 compo-
nent is recorded as deferred income and accreted as additional
lease revenue over the remaining contractual lease period. If the
fair value of the below market lease intangible includes fair value
associated with a renewal option, such amounts are not accreted
until the renewal option is exercised. If the renewal option is not
exercised the value is recognized at that time. The fair value of
above market lease intangibles is recorded as a deferred asset
and is amortized as a reduction of lease revenue over the remain-
ing contractual lease term. The Company determines the fair
value of at-market in-place leases considering the cost of acquir-
ing similar leases, the foregone rents associated with the lease-up
period and carrying costs associated with the lease-up period.
Intangible assets associated with at-market in-place leases are
amortized as additional expense over the remaining contractual
lease term. To the extent customer relationship intangibles are
present in an acquisition, the fair value of the intangibles are
amortized over the life of the customer relationship. From time
to time the Company may purchase a property for future devel-
opment purposes. The property may be improved with an
existing structure that would be demolished as part of the devel-
opment. In such cases, the fair value of the building may be
determined based only on existing leases and not include esti-
mated cash flows related to future leases.
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-
losses, significant
dicators
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-
flows based upon estimated
counted projected cash
including recurring operating
SAUL CENTERS, INC. 2016 ANNUAL REPORT
13
REVENUE RECOGNITION
Rental and interest income are accrued as earned except when
doubt exists as to collectability, in which case the accrual is dis-
continued. Recognition of rental income commences when
control of the space has been given to the tenant. When rental
payments due under leases vary from a straight-line basis because
of free rent periods or scheduled rent increases, income is recog-
nized on a straight-line basis throughout the term of the lease.
Expense recoveries represent a portion of property operating ex-
penses billed to tenants, including common area maintenance,
real estate taxes and other recoverable costs. Expense recoveries
are recognized in the period when the expenses are incurred.
Rental income based on a tenant’s revenue, known as percentage
rent, is accrued when a tenant reports sales that exceed a specified
breakpoint specified in the lease agreement.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -–
CURRENT AND DEFERRED RECEIVABLES
Accounts receivable primarily represent amounts accrued and un-
paid from tenants in accordance with the terms of the respective
leases, subject to the Company’s revenue recognition policy. Re-
ceivables are reviewed monthly and reserves are established with a
charge to current period operations when, in the opinion of man-
agement, collection of the receivable is doubtful. In addition to
rents due currently, accounts receivable include amounts represent-
ing minimum rental income accrued on a straight-line basis to be
paid by tenants over the remaining term of their respective leases.
Reserves are established with a charge to income for tenants whose
rent payment history or financial condition casts doubt upon the 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 can-
not be predicted with certainty, the Company believes the final
outcome of current matters will not have a material adverse effect
on its financial position or the results of operations. Upon deter-
mination 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.
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
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.
Upon substantial completion of construction, the assets are placed
in service, rental income, direct operating expenses, and depreci-
ation associated with such properties are included in current
operations. Commercial development projects are substantially
complete and available for occupancy upon completion of tenant
improvements, but no later than one year from the cessation of
major construction activity. Residential development projects are
considered substantially complete and available for occupancy
upon receipt of the certificate of occupancy from the appropriate
licensing authority. Substantially completed portions of a project
are accounted for as separate projects. Depreciation is calculated
using the straight-line method and estimated useful lives of gener-
ally between 35 and 50 years for base buildings, or a shorter period
if management determines that the building has a shorter useful
life, and up to 20 years for certain other improvements.
DEFERRED LEASING COSTS
Certain initial direct costs incurred by the Company in negotiating
and consummating successful commercial leases are capitalized
and amortized over the term of the leases. Deferred leasing costs
consist of commissions paid to third-party leasing agents as well as
internal direct costs such as employee compensation and payroll-
related fringe benefits directly related to time spent performing
successful leasing-related activities. Such activities include evalu-
ating prospective tenants’ financial condition, evaluating and
recording guarantees, collateral and other security arrangements,
negotiating lease terms, preparing lease documents and closing
transactions. In addition, deferred leasing costs include amounts
attributed to in-place leases associated with acquisition properties.
14
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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.
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 following tables provide reconciliations of total revenue and
operating income under GAAP to same property revenue and
operating income for the indicated periods. The same property
results include 49 Shopping Centers and five Mixed-Use
properties for each period.
SAME PROPERTY REVENUE
Year ended December 31,
(In thousands) 2016 2015
Total revenue $ 217,070 $ 209,077
Less: Interest income (51) (51)
Less: Acquisitions, dispositions
and development properties (3,664) (1,835)
Total same property revenue $ 213,355 $ 207,191
Shopping centers $ 159,744 $ 155,081
Mixed-Use properties 53,611 52,110
Total same property revenue $ 213,355 $ 207,191
The $6.2 million increase in same property revenue for 2016
compared to 2015 was primarily due to (a) a $0.30 per square foot
increase in base rent ($2.6 million), exclusive of the impact of a
lease termination at 11503 Rockville Pike, (b) the impact of a lease
termination at 11503 Rockville Pike ($1.9 million), (c) increased
expense recovery income ($1.4 million), and (d) a 32,855 square
foot increase in leased space ($0.6 million), exclusive of the impact
of a lease termination at 11503 Rockville Pike.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
15
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAME PROPERTY OPERATING INCOME
Year Ended December 31,
(In thousands) 2016 2015
Net income $ 56,720 $ 52,931
Add: Interest expense and amortization of deferred debt costs 45,683 45,165
Add: General and administrative 17,496 16,353
Add: Depreciation and amortization of deferred leasing costs 44,417 43,270
Add: Predevelopment expenses — 132
Add: Acquisition related costs 60 84
Add: Change in fair value of derivatives 6 10
Less: Gains on property dispositions (1,013) (1 1)
Less: Interest income (51) (51)
Property operating income 163,318 157,883
Less: Acquisitions, dispositions & development property (1,314) (1,115)
Total same property operating income $ 162,004 $ 156,768
Shopping centers $ 124,917 $ 121,321
Mixed-Use properties 37,087 35,447
Total same property operating income $ 162,004 $ 156,768
Same property operating income increased $5.2 million for 2016
compared to 2015 due primarily to (a) a $0.30 per square foot in-
crease in base rent ($2.6 million), exclusive of the impact of a lease
termination at 11503 Rockville Pike, (b) the impact of a lease termi-
nation at 11503 Rockville Pike ($1.9 million), (c) increased expense
recovery income ($1.4 million), and (d) a 32,855 square foot
increase in leased space ($0.6 million) partially offset by (e) higher
real estate taxes ($0.7 million) and (f) higher provision for credit
losses ($0.6 million), exclusive of the impact of a lease termination
at 11503 Rockville Pike.
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) 2016 2015 2014 2016 from 2015 2015 from 2014
Base rent $ 172,381 $ 168,303 $ 164,599 2.4 % 2.3 %
Expense recoveries 34,269 32,911 32,132 4.1 % 2.4 %
Percentage rent 1,379 1,608 1,492 (14.2) % 7.8 %
Other 9,041 6,255 8,869 44.5 % (29.5)%
Total revenue $ 217,070 $ 209,077 $ 207,092 3.8 % 1.0 %
16
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Base rent includes $1.8 million, $2.4 million and $2.0 million, for
the years 2016, 2015, and 2014, respectively, to recognize base
rent on a straight-line basis. In addition, base rent includes $1.8
million, $1.8 million and $1.9 million, for the years 2016, 2015,
and 2014, respectively, to recognize income from the amortization
of in-place leases.
Total revenue increased 3.8% in 2016 compared to 2015 primarily
due to (a) a $0.34 per square foot increase in base rent ($3.0 mil-
lion), exclusive of the impact of a lease termination at 11503
Rockville Pike, (b) higher residential base rent ($2.3 million), (c) the
impact of a lease termination at 11503 Rockville Pike ($1.9 million),
and (d) higher expense recoveries ($1.4 million) partially offset by
(e) a 5,550 square foot decrease in leased space ($0.1 million), ex-
clusive of the impact of a lease termination at 11503 Rockville Pike.
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) the impact
of a 2014 lease termination at Seven Corners ($1.9 million), and
(e) a 6,586 square foot decrease in leased space ($0.1 million). A
discussion of the components of revenue follows.
BASE RENT
The $4.1 million increase in base rent in 2016 compared to 2015
was attributable to (a) a $0.21 per square foot increase in base rent
($1.8 million) and (b) higher residential base rent ($2.3 million) par-
tially offset by (c) a 5,550 square foot decrease in leased space
($0.1 million). The $3.7 million increase in base rent in 2015 com-
pared 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).
EXPENSE RECOVERIES
Expense recovery income increased $1.4 million in 2016 com-
pared to 2015 primarily due to higher property operating
expenses and real estate tax expense. Expense recovery income
increased $0.8 million in 2015 compared to 2014 primarily due
to higher real estate tax expense.
OTHER REVENUE
Other revenue increased $2.8 million in 2016 compared to 2015
due to a $3.0 million lease termination fee at 11503 Rockville Pike.
Other revenue decreased $2.6 million in 2015 compared to 2014
due primarily 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).
Year ended December 31, Percentage Change
(Dollars in thousands) 2016 2015 2014 2016 from 2015 2015 from 2014
OPERATING EXPENSES
Property operating expenses $ 27,527 $ 26,565 $ 26,479 3.6% 0.3%
Provision for credit losses 1,494 915 680 63.3% 34.6%
Real estate taxes 24,680 23,663 22,354 4.3% 5.9%
Interest expense and amortization
of deferred debt costs 45,683 45,165 46,034 1.1% (1.9)%
Depreciation and amortization of
deferred leasing costs 44,417 43,270 41,203 2.7% 5.0%
General and administrative 17,496 16,353 16,961 7.0% (3.6)%
Acquisition related costs 60 84 949 (28.6)% (91.1)%
Predevelopment expenses — 132 503 (100.0)% (73.8)%
Total operating expenses $ 161,357 $ 156,147 $ 155,163 3.3% 0.6%
Total operating expenses increased 3.3% in 2016 compared to 2015. Total operating expenses increased 0.6% in 2015 compared to 2014.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
17
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPERTY OPERATING EXPENSES
Property operating expenses increased $1.0 million in 2016 com-
pared to 2015. Property operating expenses increased $0.1
million in 2015 compared to 2014.
GAIN ON SALES OF PROPERTIES
Gain on sale of property in 2016 resulted from the December 2016
sale of Crosstown Business Center. 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 2016 and 2015. 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 $8.3 million and $10.0 million at
December 31, 2016 and 2015, respectively. The changes in cash
and cash equivalents during the years ended December 31, 2016
and 2015 were attributable to operating, investing and financing
activities, as described below.
Year Ended December 31,
(In thousands) 2016 2015
Net cash provided by
operating activities $ 89,090 $ 88,896
Net cash used in
investing activities (86,274) (69,587)
Net cash used in
financing activities (4,497) (21,434)
Decrease in cash
and cash equivalents $ (1,681) $ (2,125)
PROVISION FOR CREDIT LOSSES
The provision for credit losses represents the Company’s estimate
of amounts owed by tenants that may not be collectible and was
0.69%, 0.44%, and 0.33% for 2016, 2015, and 2014, respectively.
The increases in 2016 and 2015 relate primarily to a single shop-
ping center tenant.
REAL ESTATE TAXES
Real estate taxes increased $1.0 million in 2016 compared to 2015
primarily due to (a) Park Van Ness ($0.3 million) and (b) small in-
creases at various properties throughout the portfolio. Real estate
taxes increased $1.3 million in 2015 compared to 2014 primarily
due to a $0.5 million increase at 601 Pennsylvania Avenue, a $0.3
million increase at Clarendon Center and small increases through-
out the remainder of the portfolio.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of deferred leasing costs increased
by $1.1 million in 2016 compared to 2015 primarily due to (a) Park
Van Ness ($1.8 million) partially offset by (b) lower expense at Ger-
mantown ($0.7 million). Depreciation and amortization of
deferred leasing costs increased $2.1 million in 2015 compared
to 2014 primarily due to (a) additional 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 depreciation expense on buildings purchased
in 2014 and 2015 ($0.6 million).
GENERAL AND ADMINISTRATIVE
General and administrative costs increased $1.1 million in 2016
compared to 2015 primarily due to (a) increased salary and benefit
expense ($1.0 million) and (b) increased stock option expense
($0.2 million). General and administrative costs decreased $0.6
million in 2015 compared to 2014 primarily due to the accrual in
2014 of $1.1 million of severance costs.
ACQUISITION RELATED COSTS
Acquisition related costs in 2016 totaling approximately $0.1 mil-
lion relate to the purchase of a retail pad site adjacent to the
Company's existing Thruway Shopping Center. Acquisition re-
lated costs in 2015 totaling approximately $0.1 million 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.
PREDEVELOPMENT EXPENSES
Predevelopment expenses include lease termination costs and
demolition costs which are related to development projects and
do not meet the criteria to be capitalized.
18
SAUL CENTERS, INC. 2016 ANNUAL REPORT
OPERATING ACTIVITIES
Net cash provided by operating activities increased $0.2 million
to $89.1 million for the year ended December 31, 2016 compared
to $88.9 million for the year ended December 31, 2015. 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 increased $16.7 million to
$86.3 million for the year ended December 31, 2016 from $69.6
million for the year ended December 31, 2015. Investing activities
in 2016 primarily reflect tenant improvements and capital expen-
ditures ($15.6 million), the Company's development activities
($27.2 million) and the acquisition of various retail real estate assets
($48.3 million). 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 (a) tenant improve-
ments and capital expenditures ($18.9 million), (b) the Company's
development activities ($45.9 million) and (c) the acquisition of
various retail real estate assets ($4.9 million).
FINANCING ACTIVITIES
Net cash used in financing activities was $4.5 million and $21.4 million
for the years ended December 31, 2016 and 2015, respectively. Net
cash used in financing activities in 2016 primarily reflects:
• the repayment of mortgage notes payable totaling $24.7 mil-
lion;
• the repayment of amounts borrowed under the revolving credit
facility totaling $57.5 million;
• distributions to common stockholders totaling $39.5 million;
• distributions to holders of convertible limited partnership units
in the Operating Partnership totaling $13.5 million;
• distributions made to preferred stockholders totaling $12.4 mil-
lion; and
• payments of $0.1 million for financing costs of mortgage notes
payable;
which was partially offset by:
• proceeds of $78.5 million received from revolving credit facility
draws;
• proceeds of $6.9 million from the issuance of limited partner-
ship units in the Operating Partnership under the dividend
reinvestment program;
• proceeds of $21.6 million from the issuance of common stock
under the dividend reinvestment program, directors deferred
plan and from the exercise of stock options; and
• proceeds of $24.9 million received from construction loan
draws.
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used in financing activities for the year ended December
31, 2015 primarily reflects:
• repayments of $35.0 million on the revolving credit facility;
• the repayment of mortgage notes payable totaling $53.0 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 new mortgage
loans;
which was partially offset by:
• proceeds of $20.0 million received from revolving credit facility;
• 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 received from the issuance of com-
mon stock under the dividend reinvestment program and from
the exercise of stock options; and
• proceeds of $39.8 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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
19
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 in the early stages of the devel-
opment of a primarily residential project with street-level retail at
750 N. Glebe Road in Arlington, Virginia. The cost of this project,
which has not been determined, is expected to be funded
through debt financing and working capital, including the Com-
pany's existing line of credit. The Company may also redevelop
certain of the Current Portfolio Properties and may develop addi-
tional 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, ex-
pansions or acquisitions are expected to be funded with available
cash, bank borrowings from the Company’s credit line, construc-
tion and permanent financing, proceeds from the operation of the
Company’s dividend reinvestment plan or other external debt or
equity capital resources available to the Company. Any future bor-
rowings may be at the Saul Centers, Operating Partnership or
Subsidiary Partnership level, and securities offerings may include
(subject to certain limitations) the issuance of additional limited
partnership interests in the Operating Partnership which can be
converted into shares of Saul Centers common stock. The avail-
ability and terms of any such financing will depend upon market
and other conditions.
CONTRACTUAL PAYMENT OBLIGATIONS
As of December 31, 2016, the Company had unfunded contrac-
tual payment obligations of approximately $37.9 million,
excluding operating obligations, due within the next 12 months.
The table below shows the total contractual payment obligations
as of December 31, 2016.
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 $ 3,835 $ 6,657 $ 5,235 $ 11,027 $ 26,754
Scheduled Principal 26,418 51,431 44,190 109,761 231,800
Balloon Payments — 151,658 72,175 452,142 675,975
Subtotal 30,253 209,746 121,600 572,930 934,529
Ground Leases (1) 56 113 124 3,636 3,929
Corporate Headquarters Lease (1) 136 — — — 136
Development Obligations 1,528 1,964 — — 3,492
Tenant Improvements 5,878 1,797 — — 7,675
Total Contractual Obligations $ 37,851 $ 213,620 $ 121,724 $ 576,566 $ 949,761
(1) See Note 7 to Consolidated Financial Statements. Corporate Headquarters Lease amounts represent an allocation to the Company based upon em-
ployees’ 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 operations
and its capital resources, which at December 31, 2016, included
cash balances of $8.3 million and borrowing availability of approxi-
mately $225.6 million on its revolving line of credit, will be sufficient
to meet its contractual obligations for the foreseeable future.
20
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PREFERRED STOCK ISSUES
In December 2014, the Company redeemed the remaining out-
standing shares of its 8% Series A Cumulative Redeemable
Preferred 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 178,787 and 193,678 shares
under the Plan at a weighted average discounted price of $55.19
and $52.93 per share during the years ended December 31, 2016
and 2015, respectively. The Company issued 124,758 and
107,037 limited partnership units under the Plan at a weighted av-
erage price of $55.39 and $53.00 per unit during the years ended
December 31, 2016 and 2015, respectively. The Company also
credited 8,010 and 7,534 shares to directors pursuant to the rein-
vestment of dividends specified by the Directors’ Deferred
Compensation Plan at a weighted average discounted price of
$55.42 and $53.01 per share, during the years ended December
31, 2016 and 2015, 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, 2016.
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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
21
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a summary of notes payable as of December 31, 2016 and 2015.
NOTES PAYABLE
Year Ended December 31, Interest Scheduled
(Dollars in thousands) 2016 2015 Rate* Maturity*
Fixed rate mortgages: $ 29,428 (a) $ 30,778 6.01% Feb-2018
32,036 (b) 33,766 5.88% Jan-2019
10,372 (c) 10,928 5.76% May-2019
14,335 (d) 15,098 5.62% Jul-2019
14,325 (e) 15,064 5.79% Sep-2019
12,725 (f) 13,387 5.22% Jan-2020
10,277 (g) 10,587 5.60% May-2020
8,697 (h) 9,127 5.30% Jun-2020
39,213 (i) 40,360 5.83% Jul-2020
7,685 (j) 8,025 5.81% Feb-2021
5,808 (k) 5,959 6.01% Aug-2021
33,571 (l) 34,420 5.62% Jun-2022
10,253 (m) 10,492 6.08% Sep-2022
11,129 (n) 11,365 6.43% Apr-2023
13,401 (o) 14,177 6.28% Feb-2024
15,917 (p) 16,348 7.35% Jun-2024
13,832 (q) 14,197 7.60% Jun-2024
24,504 (r) 25,088 7.02% Jul-2024
28,945 (s) 29,714 7.45% Jul-2024
28,822 (t) 29,564 7.30% Jan-2025
14,961 (u) 15,360 6.18% Jan-2026
109,144 (v) 112,299 5.31% Apr-2026
33,097 (w) 34,133 4.30% Oct-2026
37,701 (x) 38,842 4.53% Nov-2026
17,630 (y) 18,150 4.70% Dec-2026
66,210 (z) 67,850 5.84% May-2027
16,352 (aa) 16,826 4.04% Apr-2028
41,753 (bb) 31,844 3.51% Jun-2028
16,543 (cc) 17,011 3.99% Sep-2028
28,679 (dd) 29,444 3.69% Mar-2030
15,357 (ee) 15,748 3.99% Apr-2030
70,144 (ff) 45,208 4.88% Sep-2032
11,446 (gg) 11,282 8.00% Apr-2034
Total fixed rate 844,292 832,441 5.48% 8.5 Years
Variable rate loans:
49,000 (hh) 28,000 LIBOR + 1.45% Jun-2018
14,482 (ii) 14,801 LIBOR + 1.65% Feb-2018
Total variable rate 63,482 42,801 2.22% 1.3 Years
Total notes payable $ 907,774 $ 875,242 5.25% 8.0 Years
* Interest rate and scheduled maturity data presented as of December 31, 2016. Totals computed using weighted averages. Amounts shown are
principal amounts and have not been reduced by any deferred debt issuance costs.
22
SAUL CENTERS, INC. 2016 ANNUAL REPORT
(a) The loan is collateralized by Washington Square and requires equal monthly
principal and interest payments of $264,000 based upon a 27.5-year amorti-
zation schedule and a final payment of $28.0 million at loan maturity. Principal
of $1.4 million was amortized during 2016.
(b) The loan is collateralized by three shopping centers, Broadlands Village, The
Glen and Kentlands Square I, and requires equal monthly principal and interest
payments of $306,000 based upon a 25-year amortization schedule and a
final payment of $28.4 million at loan maturity. Principal of $1.7 million was
amortized during 2016.
(c) 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
$556,000 was amortized during 2016.
(d) The loan is collateralized by Countryside and requires equal monthly principal
and interest payments of $133,000 based upon a 25-year amortization sched-
ule and a final payment of $12.3 million at loan maturity. Principal of $763,000
was amortized during 2016.
(e) 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 $739,000 was amortized during 2016.
(f) The loan is collateralized by Shops at Monocacy and requires equal monthly
principal and interest payments of $112,000 based upon a 25-year amortiza-
tion schedule and a final payment of $10.6 million at loan maturity. Principal
of $662,000 was amortized during 2016.
(g) The loan is collateralized by Boca Valley Plaza and requires equal monthly prin-
cipal and interest payments of $75,000 based upon a 30-year amortization
schedule and a final payment of $9.1 million at loan maturity. Principal of
$310,000 was amortized during 2016.
(h) 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
$430,000 was amortized during 2016.
(i) The loan and a corresponding interest-rate swap closed on June 29, 2010 and
are collateralized by Thruway. On a combined basis, the loan and the interest-
rate swap require equal monthly principal and interest payments of $289,000
based upon a 25-year amortization schedule and a final payment of $34.8 mil-
lion at loan maturity. Principal of $1,147,000 was amortized during 2016.
(j) The loan is collateralized by Jamestown Place and requires equal monthly prin-
cipal and interest payments of $66,000 based upon a 25-year amortization
schedule and a final payment of $6.1 million at loan maturity. Principal of
$340,000 was amortized during 2016.
(k) 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 $151,000 was amortized during 2016.
(l) 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
$849,000 was amortized during 2016.
(m) The loan is collateralized by Orchard Park and requires equal monthly principal
and interest payments of $73,000 based upon a 30-year amortization sched-
ule and a final payment of $8.6 million at loan maturity. Principal of $239,000
was amortized during 2016.
(n) 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
$236,000 was amortized during 2016.
(o) 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 $776,000 was amortized
during 2016.
(p) The loan is collateralized by Leesburg Pike and requires equal monthly princi-
pal and interest payments of $135,000 based upon a 25-year amortization
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
schedule and a final payment of $11.5 million at loan maturity. Principal of
$431,000 was amortized during 2016.
(q) The loan is collateralized by Village Center and requires equal monthly princi-
pal 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
$365,000 was amortized during 2016.
(r) 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 Com-
pany substituted White Oak as the collateral and borrowed an additional
$10.5 million. Principal of $584,000 was amortized during 2016.
(s) 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 $769,000 was amortized during 2016.
(t) 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
$742,000 was amortized during 2016.
(u) 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 $399,000
was amortized during 2016.
(v) The loan is collateralized by Clarendon Center and requires equal monthly
principal and interest payments of $753,000 based upon a 25-year amortiza-
tion schedule and a final payment of $70.5 million at loan maturity. Principal
of $3.2 million was amortized during 2016.
(w) 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 $1,036,000 was amortized during 2016.
(x) 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 $1,141,000 was amortized during 2016.
(y) The loan is collateralized by Cranberry Square and requires equal monthly
principal and interest payments of $113,000 based upon a 25-year amortiza-
tion schedule and a final payment of $10.9 million at loan maturity. Principal
of $520,000 was amortized during 2016.
(z) The loan in the original amount of $73.0 million closed in May 2012, is collat-
eralized 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 $1.6 million was
amortized during 2016.
(aa) 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
$474,000 was amortized in 2016.
(bb) The loan is collateralized by Beacon Center and requires equal monthly prin-
cipal and interest payments of $268,500 based upon a 20-year amortization
schedule and a final payment of $17.1 million at loan maturity. Principal of $1.3
million was amortized in 2016.
(cc) 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
$468,000 was amortized in 2016.
(dd) 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 mil-
lion at maturity. Principal of $765,000 was amortized in 2016.
(ee) 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 $391,000
was amortized in 2016.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
23
(hh) The loan is a $275.0 million unsecured revolving credit facility. Interest accrues
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.
(ii) The loan is collateralized by Metro Pike Center and requires monthly principal
and interest payments of approximately $48,000 and a final payment of $14.2
million at loan maturity. Principal of $319,000 was amortized during 2016.
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.
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.
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.
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ff) The loan is a $71.6 million construction-to-permanent facility that is collateral-
ized 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 con-
version to a permanent loan, monthly principal and interest payments totaling
$413,500 will be required based upon a 25-year amortization schedule. A
final payment of $39.6 million will be due at maturity.
(gg) 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 increase 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%. Neg-
ative amortization in 2016 totaled $164,000.
The carrying value of properties collateralizing the mortgage notes
payable totaled $957.2 million and $856.8 million as of December
31, 2016 and 2015, 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,
2016, 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).
2016 FINANCING ACTIVITY
In November 2016, the existing loan secured by Beacon Center was
increased by $11.25 million. The interest rate, amortization period
and maturity date did not change; the required monthly payment
was increased to $268,500. Proceeds were used to partially fund
the purchase of the ground which underlies Beacon Center.
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.
24
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUNDS FROM OPERATIONS
In 2016, the Company reported Funds From Operations (“FFO”)1 available to common stockholders and noncontrolling interests of
$87.7 million, a 4.7% increase from 2015 FFO available to common stockholders and noncontrolling interests of $83.8 million. Initial
operations of Park Van Ness adversely impacted 2016 FFO by approximately $1.1 million. The following 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) 2016 2015 2014 2013 2012
Net income $ 56,720 $ 52,931 $ 57,988 $ 34,842 $ 39,780
Subtract:
Gains on sales of properties (1,013) (11) (6,069) — (4,510)
Gain on casualty settlement — — — (77) (219)
Add:
Real estate depreciation –
discontinued operations — — — — 77
Real estate depreciation and amortization 44,417 43,270 41,203 49,130 40,112
FFO 100,124 96,190 93,122 83,895 75,240
Subtract:
Preferred dividends (12,375) (12,375) (13,361) (13,983) (15,140)
Preferred stock redemption — — (1,480) (5,228) —
FFO available to common stockholders
and noncontrolling interests $ 87,749 $ 83,815 $ 78,281 $ 64,684 $ 60,100
Average shares and units used to
compute FFO per share 28,990 28,449 27,977 27,330 26,614
FFO per share $ 3.03 $ 2.95 $ 2.80 $ 2.37 $ 2.26
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, im-
pairment charges on depreciable real estate assets and gains or losses from property dispositions. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company’s
Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should
not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating perform-
ance, 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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
25
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 750
N. Glebe Road and complete activities related to Park Van Ness
and may develop additional freestanding outparcels or expan-
sions within certain of the Shopping Centers. Although not
currently planned, it is possible that the Company may redevelop
additional Current Portfolio Properties and may develop expan-
sions within certain of the Shopping Centers. Acquisition and
development of properties are undertaken only after careful analy-
sis 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 2016, 2015, and 2014.
1500, 1580, 1582 AND 1584 ROCKVILLE PIKE
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.
Concurrently 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 single-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 contiguous 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.
26
SAUL CENTERS, INC. 2016 ANNUAL REPORT
OLNEY
Simultaneously with the sale of Olney Center in April 2014, the
Company entered 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 pur-
chase the property 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 mil-
lion increased by 1.5% annually beginning January 1, 2015 and
continuing each January thereafter. The Company has accounted
for this transaction as a secured financing.
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.
700, 726, 730, 750 N. GLEBE ROAD
From 2014 through 2016, the Company purchased four adjacent
properties for an aggregate $54.0 million located on N. Glebe
Road in Arlington, Virginia. The properties comprise 2.8 acres of
land. Effective August 1, 2016, the Company's properties at
Glebe Road were vacant and removed from service. The Com-
pany previously received zoning and site plan approval from
Arlington County, Virginia for the development of approximately
490 residential units and 62,000 square feet of retail space. Util-
ities have been disconnected, plans and specifications are in
process, interest, real estate taxes and other costs related to de-
velopment are being capitalized and the assets were reclassified
to construction in progress in the Consolidated Balance Sheets.
The demolition of the existing structures is expected to commence
in the Spring of 2017, pending the issuance of the demolition per-
mit. Commencement of construction remains uncertain and
dependent on completion of plans and specifications and award
of a general contract.
PARK VAN NESS
In 2016, the Company completed development of Park Van Ness,
a 271-unit residential project with approximately 9,000 square feet
of street-level retail, below street-level structured parking, and
amenities including a community room, landscaped courtyards,
a fitness room, a wi-fi lounge/business center, and a rooftop pool
and deck. The structure comprises 11 levels, five of which on the
east side are below street level. Because of the change in grade
from the street eastward to Rock Creek Park, apartments on all 11
levels have park or city views. The street level retail space is 100%
leased to a grocery/gourmet food market and an upscale Italian
restaurant. As of March 1, 2017, leases have been executed for
217 apartments (80.1%) and 205 apartments were occupied. The
total cost of the project, excluding predevelopment expense and
land, which the Company has owned, was approximately $93.0
million, a portion of which was financed with a $71.6 million
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SOUTHDALE
In the fourth quarter of 2016, the Company purchased for $15.0
million the land underlying Southdale. The land was previously
leased by the Company with an annual rent of approximately
$60,000. The purchase price was funded by the Company’s re-
volving credit facility.
BURTONSVILLE TOWN SQUARE
In January 2017, the Company purchased for $76.3 million, includ-
ing acquisition costs, Burtonsville Town Square, a 121,000 square
foot shopping center located in Burtonsville, Maryland. Bur-
tonsville Town Square is 100% leased and anchored by Giant
Food and CVS Pharmacy. It has expansion development potential
of up to 18,000 square feet of additional retail space. The pur-
chase was funded with a new $40.0 million mortgage loan and
through the Company's credit line facility. The mortgage bears in-
terest at 3.39%, requires monthly principal and interest payments
of $197,900 based upon a 25-year amortization schedule, and has
a 15-year maturity.
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.
CROSSTOWN BUSINESS CENTER
In December 2016, the Company sold for $5.4 million the 197,100
square foot Crosstown Business Center located in Tulsa, Okla-
homa and recognized a $1.0 million gain.
construction-to-permanent loan. Costs incurred through Decem-
ber 31, 2016, total approximately $92.9 million, of which $70.1
million has been financed by the loan.
THRUWAY PAD
In August 2016, the Company purchased for $3.1 million, a retail
pad site with an occupied 4,200 square foot bank building in Win-
ston Salem, North Carolina, and incurred acquisition costs of
$60,000. The property is contiguous with and an expansion of
the Company's Thruway Shopping Center.
ASHBROOK MARKETPLACE
In August 2016, the Company entered into an agreement to ac-
quire from B. F. Saul Real Estate Investment Trust (the “Trust”), for
an initial purchase price of $8.8 million, approximately 14.3 acres
of land located at the intersection of Ashburn Village Boulevard
and Russell Branch Parkway in Loudoun County, Virginia. The land
is zoned for up to 115,000 square feet of retail development. In
order to allow the Company time to pre-lease and complete proj-
ect plans and specifications, the parties have agreed to a closing
date in early 2018, at which time the Company will exchange lim-
ited partnership units for the land. The number of limited
partnership units to be exchanged will be based on the initial pur-
chase price and the average share value (as defined in the
agreement) of the Company’s common stock at the time of the ex-
change. The Company intends to construct a shopping center
and, upon stabilization, may be obligated to issue additional lim-
ited partnership units to the Trust.
BEACON CENTER
In the fourth quarter of 2016, the Company purchased for $22.5
million the land underlying Beacon Center. The land was previ-
ously leased by the Company with an annual rent of approximately
$60,000. The purchase price was funded in part by an $11.25 mil-
lion increase to the existing mortgage collateralized by Beacon
Center and in part by the Company’s revolving credit facility.
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
2016 49 6 7,882,054 1,076,208 96.0% 91.0%
2015 50 6 7,896,499 1,264,488 95.4% 91.0%
2014 50 6 7,886,304 1,264,488 95.0% 90.8%
SAUL CENTERS, INC. 2016 ANNUAL REPORT
27
Management’s Discussion and Analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 2016 Mixed-Use leasing percentage includes the recently-de-
veloped Park Van Ness commercial space and excludes Crosstown
Business Center. The residential components of Clarendon Center
and Park Van Ness were 97.1% and 72.7% leased at December 31,
2016. On a same property basis, which excludes the impact of
properties not in operation for the entirety of the comparable peri-
ods, the Shopping Center leasing percentage increased to 96.0%
from 95.4% and the Mixed-Use leasing percentage decreased to
90.9% from 92.2%. The overall portfolio leasing percentage, on a
comparative same property basis, increased to 95.4% at December
31, 2016 from 95.0% at December 31, 2015.
The Clarendon Center residential component was 99.2% leased
at December 31, 2015. On a same property basis, which excludes
the impact of properties not in operation for the entirety of the
comparable periods, the Shopping Center leasing percentage in-
creased to 95.3% from 95.0%. and the Mixed-Use leasing
percentage 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 excludes the Giant
Center, which was sold in 2014. 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 op-
eration for the entirety of the comparable periods, the Shopping
Center leasing percentage increased to 95.0% from 94.5% and the
Mixed-Use leasing percentage increased 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.
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 an-
nualized contractual base rent, on a cash basis, as of the expiration
date of the lease. The base rent for a new or renewed lease is the
annualized contractual base rent, on a cash basis, as of the expected
rent commencement date. Because tenants that execute leases may
not ultimately take possession of their space or pay all of their con-
tractual rent, the changes presented in the table provide 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
2016 1,292,483 244 $ 17.24 $ 17.05
2015 1,583,310 259 15.15 14.82
2014 1,224,700 276 18.60 18.26
Additional information about commercial leasing activity during
the three months ended December 31, 2016, 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 16 41
Square feet 65,221 214,737
Per square foot average
annualized:
Base rent $ 20.87 $ 20.34
Tenant improvements (0.62) (0.01)
Leasing costs (0.08) ––
Rent concessions (0.06) ––
Effective rents $ 20.11 $ 20.33
During 2016, the Company entered into 216 new or renewed apart-
ment leases, excluding new leases at Park Van Ness. The monthly
rent per square foot for these leases was increased to $3.57 from
$3.45. During 2015, the Company entered into 222 new or re-
newed 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.
As of December 31, 2016, 952,517 square feet of Commercial
space was subject to leases scheduled to expire in 2017. Below is
information about existing and estimated market base rents per
square foot for that space.
EXPIRING LEASES
Total
Square feet 952,517
Average base rent per square foot $ 17.50
Estimated market base rent per square foot $ 17.83
28
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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, 2016, the
Company had variable rate indebtedness totaling $63.5 million.
If the interest rates on the Company’s variable rate debt instru-
ments outstanding at December 31, 2016 had been one percent
higher, our annual interest expense relating to these debt instru-
ments would have increased by $634,820, based on those
balances. As of December 31, 2016, the Company had fixed-rate
indebtedness totaling $844.3 million with a weighted average in-
terest rate of 5.48%. If interest rates on the Company’s fixed-rate
debt instruments at December 31, 2016 had been one percent
higher, the fair value of those debt instruments on that date would
have decreased by approximately $38.6 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, 2016 was approximately $2.1 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, 2016,
the Company’s internal control over financial reporting was
effective. The Company’s independent registered public ac-
counting 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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
29
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, 2016 and 2015, 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, 2016. Our audits also
included the financial statement schedule listed in the Index at
Item 15(a)2(b). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and sched-
ule 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, 2016 and 2015, and the consol-
idated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in rela-
tion to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Saul
Centers, Inc.’s internal control over financial reporting as of De-
cember 31, 2016, 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 7, 2017 expressed an un-
qualified opinion thereon.
Ernst & Young LLP
McLean, Virginia
March 7, 2017
30
SAUL CENTERS, INC. 2016 ANNUAL REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
on Internal Control Over Financial Reporting
Report
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, 2016, 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
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, 2016, 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, 2016 and 2015, and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and
cash flows for each of the three years in the period ended Decem-
ber 31, 2016 of Saul Centers, Inc. and our report dated March 7,
2017 expressed an unqualified opinion thereon.
Ernst & Young LLP
McLean, Virginia
March 7, 2017
SAUL CENTERS, INC. 2016 ANNUAL REPORT
31
Consolidated Balance Sheets
December 31, December 31,
(Dollars in thousands, except per share amounts) 2016 2015
Assets
Real estate investments
Land $ 422,546 $ 424,837
Buildings and equipment 1,214,697 1,114,357
Construction in progress 63,570 83,516
1,700,813 1,622,710
Accumulated depreciation (458,279) (425,370)
1,242,534 1,197,340
Cash and cash equivalents 8,322 10,003
Accounts receivable and accrued income, net 53,033 51,076
Deferred leasing costs, net 25,983 26,919
Prepaid expenses, net 5,057 4,663
Other assets 8,096 5,407
Total assets $ 1,343,025 $ 1,295,408
Liabilities
Mortgage notes payable $ 783,400 $ 796,169
Revolving credit facility payable 48,217 26,695
Construction loan payable 68,672 43,641
Dividends and distributions payable 17,953 15,380
Accounts payable, accrued expenses and other liabilities 20,838 27,687
Deferred income 30,696 32,109
Total liabilities 969,776 941,681
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, 40,000,000 shares authorized,
21,704,359 and 21,266,239 shares issued and outstanding, respectively 217 213
Additional paid-in capital 328,171 305,008
Accumulated deficit (188,584) (180,091)
Accumulated other comprehensive loss (1,299) (1,802)
Total Saul Centers, Inc. stockholders' equity 318,505 303,328
Noncontrolling interests 54,744 50,399
Total stockholders' equity 373,249 353,727
Total liabilities and stockholders' equity $ 1,343,025 $ 1,295,408
The Notes to Financial Statements are an integral part of these statements.
32
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Consolidated Statements OF OPERATIONS
For The Year Ended December 31,
(Dollars in thousands, except per share amounts) 2016 2015 2014
Revenue
Base rent $ 172,381 $ 168,303 $ 164,599
Expense recoveries 34,269 32,911 32,132
Percentage rent 1,379 1,608 1,492
Other 9,041 6,255 8,869
Total revenue 217,070 209,077 207,092
Operating expenses
Property operating expenses 27,527 26,565 26,479
Provision for credit losses 1,494 915 680
Real estate taxes 24,680 23,663 22,354
Interest expense and amortization of deferred debt costs 45,683 45,165 46,034
Depreciation and amortization of deferred leasing costs 44,417 43,270 41,203
General and administrative 17,496 16,353 16,961
Acquisition related costs 60 84 949
Predevelopment expenses — 132 503
Total operating expenses 161,357 156,147 155,163
Operating income 55,713 52,930 51,929
Change in fair value of derivatives (6) (10) (10)
Gains on sales of properties 1,013 11 6,069
Net Income 56,720 52,931 57,988
Income attributable to noncontrolling interests (11,441) (10,463) (11,045)
Net income attributable to Saul Centers, Inc. 45,279 42,468 46,943
Preferred stock redemption — — (1,480)
Preferred dividends (12,375) (12,375) (13,361)
Net income available to common stockholders $ 32,904 $ 30,093 $ 32,102
Per share net income available to common stockholders
Basic $ 1.53 $ 1.42 $ 1.55
Diluted $ 1.52 $ 1.42 $ 1.54
The Notes to Financial Statements are an integral part of these statements.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
33
Consolidated Statements OF COMPREHENSIVE INCOME
For The Year Ended December 31,
(Dollars in thousands) 2016 2015 2014
Net income $ 56,720 $ 52,931 $ 57,988
Other comprehensive income
Unrealized gain (loss) on cash flow hedge 678 124 (675)
Total comprehensive income 57,398 53,055 57,313
Comprehensive income attributable to noncontrolling interests (11,616) (10,495) (10,874)
Total comprehensive income attributable to Saul Centers, Inc. 45,782 42,560 46,439
Preferred stock redemption — — (1,480)
Preferred dividends (12,375) (12,375) (13,361)
Total comprehensive income available to common stockholders $ 33,407 $ 30,185 $ 31,598
The Notes to Financial Statements are an integral part of these statements.
34
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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, 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
Issuance of common stock:
186,797 shares pursuant to dividend reinvestment plan — 2 10,309 — — 10,311 — 10,311
251,323 shares due to exercise of employee stock options
and issuance of directors' deferred stock — 2 12,854 — — 12,856 — 12,856
Issuance of 124,758 partnership units pursuant to dividend
reinvestment plan — — — — — — 6,910 6,910
Net income — — — 45,279 — 45,279 11,441 56,720
Change in unrealized loss on cash flow hedge — — — — 503 503 175 678
Series C preferred stock distributions — — — (9,282) — (9,282) — (9,282)
Common stock dis tributions — — — (30,328) — (30,328) (10,392) (40,720)
Distributions payable on Series C preferred stock, $42.97 per share — — — (3,093) — (3,093) — (3,093)
Distributions payable common stock ($0.51/share) and
distributions payable partnership units ($0.51/unit) — — — (11,069) — (11,069) (3,789) (14,858)
Balance, December 31, 2016 $ 180,000 $ 217 $ 328,171 $ (188,584) $ (1,299) $ 318,505 $ 54,744 $ 373,249
The Notes to Financial Statements are an integral part of these statements.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
35
Consolidated Statements OF CASH FLOWS
For the Year Ended December 31,
(Dollars in thousands) 2016 2015 2014
Cash flows from operating activities:
Net income $ 56,720 $ 52,931 $ 57,988
Adjustments to reconcile net income to net cash provided by operating activities:
Change in fair value of derivatives 6 10 10
Gains on sales of properties (1,013) (11) (6,069)
Depreciation and amortization of deferred leasing costs 44,417 43,270 41,203
Amortization of deferred debt costs 1,343 1,433 1,327
Non cash compensation costs of stock grants and options 1,603 1,434 1,240
Provision for credit losses 1,494 915 680
Increase in accounts receivable and accrued income (3,516) (5,207) (3,320)
Additions to deferred leasing costs (4,633) (5,563) (4,048)
Increase in prepaid expenses (399) (570) (60)
(Increase) decrease in other assets (6,377) 1,535 (694)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 921 (937) 1,149
Decrease in deferred income (1,476) (344) (2,838)
Net cash provided by operating activities 89,090 88,896 86,568
Cash flows from investing activities:
Acquisitions of real estate investments (1) (48,250) (4,894) (57,494)
Additions to real estate investments (15,564) (18,855) (14,986)
Additions to development and redevelopment projects (27,231) (45,870) (17,788)
Proceeds from sale of properties 4,771 32 6,679
Net cash used in investing activities (86,274) (69,587) (83,589)
Cash flows from financing activities:
Proceeds from mortgage notes payable (1) 11,250 46,000 —
Repayments on mortgage notes payable (24,653) (52,963) (22,071)
Proceeds from construction loans payable 24,937 39,817 5,391
Proceeds from revolving credit facility 78,500 20,000 90,000
Repayments on revolving credit facility (57,500) (35,000) (47,000)
Additions to deferred debt costs (125) (296) (1,264)
Proceeds from the issuance of:
Common stock 21,564 15,583 15,596
Partnership units 6,910 5,673 8,877
Series C preferred stock — — 39,260
Series A preferred stock redemption payment — — (40,000)
Distributions to:
Series A preferred stockholders — — (3,849)
Series C preferred stockholders (12,375) (12,375) (9,625)
Common stockholders (39,472) (35,645) (32,346)
Noncontrolling interests (13,533) (12,228) (11,117)
Net cash used in financing activities (4,497) (21,434) (8,148)
Net increase (decrease) in cash and cash equivalents (1,681) (2,125) (5,169)
Cash and cash equivalents, beginning of year 10,003 12,128 17,297
Cash and cash equivalents, end of year $ 8,322 $ 10,003 $ 12,128
Supplemental disclosure of cash flow information:
Cash paid for interest $ 44,066 $ 45,965 $ 45,443
Increase (decrease) in accrued real estate investments and development costs $ (7,098) $ 5,201 $ 1,548
(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.
36
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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 “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 Or-
ganization”). On August 26, 1993, members of the Saul
Organization transferred to Saul Holdings Limited Partnership, a
newly formed Maryland limited partnership (the “Operating Part-
nership”), 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 trans-
ferred 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, 2014.
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
700 N. Glebe Road Arlington, Virginia Development August 2016
DEVELOPMENTS
Park Van Ness Washington, DC Mixed-Use 2013-2016
DISPOSITIONS
Giant Center Milford Mill, Maryland Shopping Center April 2014
Crosstown Business Center Tulsa, Oklahoma Mixed-Use December 2016
* As of August 2016, these properties were removed from operations and reclassified to development.
As of December 31, 2016, the Company’s properties (the “Current
Portfolio Properties”) consisted of 49 shopping center properties
(the “Shopping Centers”), six mixed-use properties, which are
comprised of office, retail and multi-family residential uses (the
“Mixed-Use Properties”) and three (non-operating) development
properties.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
37
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, 2016,
29 of the Shopping Centers were anchored by a grocery store and
offer primarily day-to-day necessities and services. The number of
grocery-anchored centers excludes the Briggs Chaney Plaza and
Broadlands Village shopping centers, where Safeway ceased op-
erations during the quarter ended June 30, 2016, but whose
leases remain in full force and effect. Three retail tenants, Giant
Food (4.3%), a tenant at nine Shopping Centers, Capital One Bank
(2.8%), a tenant at 20 properties, and Albertson's/Safeway
(2.6%), 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, 2016.
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.
The Operating Partnership is a variable interest entity (“VIE”) of the
Company because the limited partners do not have substantive kick-
out or participating rights. The Company is the primary beneficiary
of the Operating Partnership because it has the power to direct the
activities of the Operating Partnership and the rights to absorb
74.3% of the net income of the Operating Partnership. Because the
Operating Partnership was already consolidated into the financial
statements of the Company, the identification of it as a VIE has no
impact on the consolidated financial statements of the Company.
38
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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
reporting period. Actual results could differ from those estimates.
REAL ESTATE INVESTMENT PROPERTIES
The Company purchases real estate investment properties from
time to time and 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 market
intangibles associated with in-place leases by assessing the net ef-
fective rent and remaining term of the lease relative to market terms
for similar leases at acquisition taking into consideration the remain-
ing contractual lease period, renewal periods, and the likelihood
of the tenant exercising its renewal options. The fair value of a
below market lease component is recorded as deferred income
and accreted as additional lease revenue over the remaining con-
tractual lease period. If the fair value of the below market lease
intangible includes fair value associated with a renewal option, such
amounts are not accreted until the renewal option is exercised. If
the renewal option is not exercised the value is recognized at that
time. The fair value of above market lease intangibles is recorded
as a deferred asset and is amortized as a reduction of lease revenue
over the remaining contractual lease term. The Company deter-
mines the fair value of at-market in-place leases considering the cost
of acquiring similar leases, the foregone rents associated with the
lease-up period and carrying costs associated with the lease-up pe-
riod. 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 amor-
tized over the lives of the customer relationships. The Company
has never recorded a customer relationship intangible asset. Ac-
quisition-related transaction costs are either (a) expensed as
incurred when related to business combinations or (b) capitalized
to land and/or building when related to asset acquisitions.
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 2016, 2015, or 2014.
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 $2.5 million, $2.2 million, and $0.7 million during 2016,
2015, and 2014, 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
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
deferred leasing costs in the Consolidated Statements of Opera-
tions, for the years ended December 31, 2016, 2015, and 2014,
was $38.7 million, $37.7 million, and $35.9 million, respectively.
Repairs and maintenance expense totaled $11.8 million, $11.6 mil-
lion, and $11.9 million for 2016, 2015, and 2014, 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 $26.0 mil-
lion and $26.9 million, net of accumulated amortization of
approximately $30.4 million and $26.6 million, as of December
31, 2016 and 2015, respectively. Amortization expense, which is
included in Depreciation and amortization of deferred leasing
costs in the Consolidated Statements of Operations, totaled ap-
proximately $5.7 million, $5.6 million, and $5.3 million, for the
years ended December 31, 2016, 2015, and 2014, 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) 2016 2015
Park Van Ness $ — $ 77,245
N. Glebe Road 58,147 —
Other 5,423 6,271
Total $ 63,570 $ 83,516
SAUL CENTERS, INC. 2016 ANNUAL REPORT
39
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 re-
ceivable in the accompanying consolidated financial statements
are shown net of an allowance for doubtful accounts of $2.0 million
and $1.3 million, at December 31, 2016 and 2015, respectively.
Year ended December 31,
(In thousands) 2016 2015 2014
Beginning Balance $1,263 $ 677 $ 572
Provision for Credit Losses 1,494 915 680
Charge-offs (799) (329) (575)
Ending Balance $1,958 $ 1,263 $ 677
In addition to rents due currently, accounts receivable also includes
$43.1 million and $41.4 million, at December 31, 2016 and 2015,
respectively, net of allowance for doubtful accounts totaling $0.5
million and $0.5 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 197,100 square feet of gross leasable area. The book
40
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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. The asset was sold in 2016.
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, 2016 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 $7.5 million and $8.7 million, net of accumulated
amortization of $7.3 million and $6.2 million at December 31,
2016 and 2015, 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
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. 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 common area maintenance, real
estate taxes and other recoverable costs. Expense recoveries are
recognized in the period in which the expenses are incurred.
Rental income based on a tenant’s revenue (“percentage rent”) is
accrued when a tenant reports sales that exceed a specified break-
point, 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, 2016, 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 2016, 2015, and 2014.
The tax basis of the Company’s real estate investments was ap-
proximately $1.3 billion and $1.1 billion as of December 31, 2016
and 2015, 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 2013.
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 Ex-
pected Term of the options is based on prior exercise history,
scheduled vesting and the expiration date; (3) Expected Dividend
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
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 De-
ferred Compensation Plan for Directors for the benefit of its
directors and their beneficiaries, which replaced a previous De-
ferred Compensation and Stock Plan for Directors. A director may
make an annual election to defer all or part of his or her director’s
fees and has the option to have the fees paid in cash, in shares of
common stock or in a combination of cash and shares of common
stock upon separation from the Board. If the director elects to have
fees paid in stock, fees earned during a calendar quarter are ag-
gregated 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, 2016, the directors’ deferred fee accounts comprise 246,800
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, 2016, 2015,
and 2014. 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 $150,100,
$143,000, and $112,900, for the years ended December 31,
2016, 2015, and 2014, respectively.
NONCONTROLLING INTEREST
Saul Centers is the sole general partner of the Operating Partner-
ship, owning a 74.3% common interest as of December 31, 2016.
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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
41
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) 2016 2015 2014
Weighted average common
shares outstanding - Basic 21,505 21,127 20,772
Effect of dilutive options 110 69 49
Weighted average common
shares outstanding - Diluted 21,615 21,196 20,821
Average share price $ 58.96 $ 53.38 $ 49.09
Non-dilutive options 129 111 107
Years non-dilutive options
were issued 2007 , 2015 2007 2007
and 2016 and 2015 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.
an entity to recognize the amount of revenue which it expects to
be entitled for the transfer of promised goods or services to cus-
tomers. ASU 2014-09 is effective for annual periods beginning
after December 15, 2017, and interim periods within those years
and early adoption is not permitted. ASU 2014-09 must be ap-
plied retrospectively by either restating prior periods or by
recognizing the cumulative effect as of the first date of application.
We have not yet selected a transition method and are evaluating
the impact that ASU 2014-09 will have on our consolidated finan-
cial statements and related disclosures.
(“ASU 2015-02”).
In February 2015, the FASB issued ASU No. 2015-02, “Consolida-
tion”
ASU 2015-02 modifies existing
consolidation guidance for reporting organizations that are required
to evaluate whether they should consolidate certain legal entities.
All legal entities are subject to reevaluation under the revised con-
solidation model. ASU 2015-02 is effective for annual periods
beginning after December 15, 2015, and interim periods within
those years. The adoption of ASU 2015-02 effective January 1, 2016,
resulted in the Operating Partnership being classified as a variable
interest entity. Because the Operating Partnership was already con-
solidated into the financial statements, adoption had no impact on
the Company’s consolidated financial statements or 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. The Company retrospectively adopted ASU
2015-03 effective January 1, 2016. As a result of the adoption of
ASU 2015-03, the Company no longer reports its net deferred
debt costs as an asset and instead reports those amounts as re-
duction of the carrying value of the associated debt.
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 targeted changes
to lessor accounting. ASU 2016-02 is effective for annual periods
beginning after December 15, 2018, interim periods within those
years, and requires a modified retrospective transition approach for
all leases existing at the date of initial application, 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 consoli-
dated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09 titled “Revenue
from Contracts with Customers” and subsequently issued several
related ASUs (collectively “ASU 2014-09”). ASU 2014-09 will re-
place most existing revenue recognition guidance and will require
In March 2016, the FASB issued ASU 2016-09, “Compensation-
Stock Compensation” (“ASU 2016-09”). ASU 2016-09 simplifies
the accounting for several aspects of share-based payments in-
cluding the income tax consequences, classification of awards as
42
SAUL CENTERS, INC. 2016 ANNUAL REPORT
either equity or liabilities and classification on the statement of cash
flows. ASU 2016-09 is effective for annual periods beginning after
December 15, 2016 and interim periods within those years. The
transition method varies based on the specific amendment. The
Company does not believe that the adoption of ASU 2016-09 will
have a material impact on our consolidated financial statements
or related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instru-
ments-Credit Losses” (“ASU 2016-13”). ASU 2016-13 replaces the
incurred loss impairment methodology with a methodology that
reflects expected credit losses and requires consideration of a
broader range of information to support credit loss estimates. ASU
2016-13 is effective for annual periods beginning after December
15, 2019, including interim periods within those years. We are
evaluating the impact that ASU 2016-13 will have on our consoli-
dated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Def-
inition of a Business” (“ASU 2017-01”). ASU 2017-01 provides that
when substantially all of the fair value of the gross assets acquired is
concentrated in a single identifiable asset or group of similar identi-
fiable assets, the set is not a business. ASU 2017-01 is effective
prospectively for annual periods beginning after December 15,
2017, and interim periods within those years. Early application is
permitted for transactions for which the acquisition date occurs be-
fore the effective date provided the transaction has not been
reported in the financial statements. The Company expects to
adopt ASU 2017-01 during the first quarter of 2017, the effect of
which, for asset acquisitions, will be (a) the capitalization of acquisi-
tion costs, instead of expense, and (b) recordation of acquired assets
and assessment liabilities at relative fair value, instead of fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years to conform
to the presentation used for year ended December 31, 2016.
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 December 2014,
the company purchased for $6.2 million 1584 Rockville Pike and in-
curred acquisition costs of $0.2 million. These retail properties are
contiguous with each other and the Company's property at 1500
Rockville Pike and are located in Rockville, Maryland.
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
700, 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
September 2015, the Company purchased for $4.0 million, 726
N. Glebe Road and incurred acquisition costs of $0.1 million. In
August 2016, the Company purchased for $7.2 million, including
acquisition costs, 700 N. Glebe Road. These properties are
contiguous and are located in Arlington, Virginia.
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.
THRUWAY PAD
In August 2016, the Company purchased for $3.1 million, a retail pad
site with an occupied bank building in Winston Salem, North Car-
olina, and incurred acquisition costs of $60,000. The property is
contiguous with and an expansion of the Company's Thruway asset.
BEACON CENTER
In the fourth quarter of 2016, the Company purchased for $22.5
million the land underlying Beacon Center. The land was previ-
ously leased by the Company with an annual rent of approximately
$60,000. The purchase price was funded in part by an $11.25 mil-
lion increase to the existing mortgage collateralized by Beacon
Center and in part by the Company’s revolving credit facility.
SOUTHDALE
In the fourth quarter of 2016, the Company purchased for $15.0
million the land underlying Southdale. The land was previously
leased by the Company with an annual rent of approximately
$60,000. The purchase price was funded by the Company’s re-
volving credit facility.
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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
43
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
During 2016, the Company purchased two properties at an ag-
gregate cost of $10.3 million, and incurred acquisition costs
totaling $60,400. The purchase price was allocated to the assets
acquired and liabilities assumed based on their fair value as shown
in the following table.
PURCHASE PRICE ALLOCATION
OF ACQUISITIONS
700 N. Glebe Thruway
Road Pad Total
Land $ 7,236 $ 2,196 $ 9,432
Buildings — 874 874
In-place Leases — 93 93
Above Market Rent — — —
Below Market Rent — (63) (63)
Total Purchase Price $ 7,236 $ 3,100 $ 10,336
During 2015, the Company purchased one property, 726 N.
Glebe Road, 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
44
SAUL CENTERS, INC. 2016 ANNUAL REPORT
The gross carrying amount of lease intangible assets included in
deferred leasing costs as of December 31, 2016 and 2015 was
$24.1 million and $24.0 million, respectively, and accumulated
amortization was $20.5 million and $19.2 million, respectively.
Amortization expense totaled $1.2 million, $1.3 million and $1.3
million, for the years ended December 31, 2016, 2015, and 2014,
respectively. The gross carrying amount of below market lease in-
tangible liabilities included in deferred income as of December
31, 2016 and 2015 was $29.9 million and $29.9 million, respec-
tively, and accumulated amortization was $15.5 million and $13.7
million, respectively. Accretion income totaled $1.8 million, $1.8
million, and $1.9 million, for the years ended December 31, 2016,
2015, and 2014, respectively. The gross carrying amount of above
market lease intangible assets included in accounts receivable as
of December 31, 2016 and 2015 was $1.0 million and $1.0 million,
respectively, and accumulated amortization was $999,700 and
$998,200, respectively. Amortization expense totaled $1,500,
$1,500 and $22,500, for the years ended December 31, 2016,
2015 and 2014, respectively. The remaining weighted-average
amortization period as of December 31, 2016 is 3.5 years, 1.0 year,
and 5.9 years for lease acquisition costs, above market leases and
below market leases, respectively.
As of December 31, 2016, 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
2017 $ 762 $ 1 $ 1,677
2018 708 1 1,618
2019 537 — 1,481
2020 419 — 1,399
2021 384 — 1,375
Thereafter 840 — 6,887
Total $ 3,650 $ 2 $ 14,437
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
4. NONCONTROLLING INTEREST -
HOLDERS OF CONVERTIBLE LIMITED
PARTNERSHIP UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization holds a 25.7% limited partnership interest
in the Operating Partnership represented by 7,430,516 limited
partnership units, as of December 31, 2016. 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, 2016, approximately 530,000 units were eligible
for conversion.
The impact of the Saul Organization’s 25.7% 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, 2016,
2015, and 2014, were 28,989,900,
28,449,400, and
27,977,500, respectively.
5. MORTGAGE NOTES PAYABLE,
REVOLVING CREDIT FACILITY, INTEREST
EXPENSE AND AMORTIZATION OF
DEFERRED DEBT COSTS
At December 31, 2016, the principal amount of outstanding debt
totaled $907.8 million, of which $844.3 million was fixed rate
debt and $63.5 million was variable rate debt. The principal
amount of the Company’s outstanding debt totaled $875.2 mil-
lion at December 31, 2015, of which $832.4 million was fixed rate
debt and $42.8 million was variable rate debt. At December 31,
2016, the Company had a $275.0 million unsecured revolving
credit facility, which can be used for working capital, property ac-
quisitions or development projects. The revolving credit facility
matures on June 23, 2018, and may be extended by the Company
SAUL CENTERS, INC. 2016 ANNUAL REPORT
45
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
for one additional year subject to the Company’s satisfaction of
certain conditions. Saul Centers and certain consolidated sub-
sidiaries of the Operating Partnership have guaranteed the
payment obligations of the Operating Partnership under the re-
volving credit facility. Letters of credit may be issued under the
revolving credit facility. On December 31, 2016, based on the
value of the Company's unencumbered properties, approximately
$225.6 million was available under the line, $49.0 million was out-
standing and approximately $448,000 was committed for letters
of credit. The interest rate under the facility is variable and equals
the sum of one-month LIBOR and a margin that is based on the
Company’s leverage ratio and which can range from 145 basis
points to 200 basis points. As of December 31, 2016, 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 $14.5 million outstanding at
December 31, 2016) and all of the Park Van Ness construction-to-
permanent loan. All other notes payable are non-recourse.
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.
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 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 were used to repay in full the
$14.5 million remaining balance of existing debt secured
by Northrock.
In November 2016, the existing loan secured by Beacon Center was
increased by $11.25 million. The interest rate, amortization period
and maturity date did not change; the required monthly payment
was increased to $268,500. Proceeds were used to partially fund
the purchase of the ground which underlies Beacon Center.
46
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of notes payable as of December 31, 2016 and 2015.
NOTES PAYABLE
Year Ended December 31, Interest Scheduled
(Dollars in thousands) 2016 2015 Rate* Maturity*
Fixed rate mortgages: $ 29,428 (a) $ 30,778 6.01% Feb-2018
32,036 (b) 33,766 5.88% Jan-2019
10,372 (c) 10,928 5.76% May-2019
14,335 (d) 15,098 5.62% Jul-2019
14,325 (e) 15,064 5.79% Sep-2019
12,725 (f) 13,387 5.22% Jan-2020
10,277 (g) 10,587 5.60% May-2020
8,697 (h) 9,127 5.30% Jun-2020
39,213 (i) 40,360 5.83% Jul-2020
7,685 (j) 8,025 5.81% Feb-2021
5,808 (k) 5,959 6.01% Aug-2021
33,571 (l) 34,420 5.62% Jun-2022
10,253 (m) 10,492 6.08% Sep-2022
11,129 (n) 11,365 6.43% Apr-2023
13,401 (o) 14,177 6.28% Feb-2024
15,917 (p) 16,348 7.35% Jun-2024
13,832 (q) 14,197 7.60% Jun-2024
24,504 (r) 25,088 7.02% Jul-2024
28,945 (s) 29,714 7.45% Jul-2024
28,822 (t) 29,564 7.30% Jan-2025
14,961 (u) 15,360 6.18% Jan-2026
109,144 (v) 112,299 5.31% Apr-2026
33,097 (w) 34,133 4.30% Oct-2026
37,701 (x) 38,842 4.53% Nov-2026
17,630 (y) 18,150 4.70% Dec-2026
66,210 (z) 67,850 5.84% May-2027
16,352 (aa) 16,826 4.04% Apr-2028
41,753 (bb) 31,844 3.51% Jun-2028
16,543 (cc) 17,011 3.99% Sep-2028
28,679 (dd) 29,444 3.69% Mar-2030
15,357 (ee) 15,748 3.99% Apr-2030
70,144 (ff) 45,208 4.88% Sep-2032
11,446 (gg) 11,282 8.00% Apr-2034
Total fixed rate 844,292 832,441 5.48% 8.5 Years
Variable rate loans:
49,000 (hh) 28,000 LIBOR + 1.45% Jun-2018
14,482 (ii) 14,801 LIBOR + 1.65% Feb-2018
Total variable rate 63,482 42,801 2.22% 1.3 Years
Total notes payable $ 907,774 $ 875,242 5.25% 8.0 Years
* Interest rate and scheduled maturity data presented as of December 31, 2016. Totals computed using weighted averages. Amounts shown are
principal amounts and have not been reduced by any deferred debt issuance costs.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
47
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The loan is collateralized by Washington Square and requires equal monthly
principal and interest payments of $264,000 based upon a 27.5-year amorti-
zation schedule and a final payment of $28.0 million at loan maturity. Principal
of $1.4 million was amortized during 2016.
(b) The loan is collateralized by three shopping centers, Broadlands Village, The
Glen and Kentlands Square I, and requires equal monthly principal and interest
payments of $306,000 based upon a 25-year amortization schedule and a
final payment of $28.4 million at loan maturity. Principal of $1.7 million was
amortized during 2016.
(c) 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
$556,000 was amortized during 2016.
(d) The loan is collateralized by Countryside and requires equal monthly principal
and interest payments of $133,000 based upon a 25-year amortization sched-
ule and a final payment of $12.3 million at loan maturity. Principal of $763,000
was amortized during 2016.
(e) 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 $739,000 was amortized during 2016.
(f) The loan is collateralized by Shops at Monocacy and requires equal monthly
principal and interest payments of $112,000 based upon a 25-year amortiza-
tion schedule and a final payment of $10.6 million at loan maturity. Principal
of $662,000 was amortized during 2016.
(g) The loan is collateralized by Boca Valley Plaza and requires equal monthly prin-
cipal and interest payments of $75,000 based upon a 30-year amortization
schedule and a final payment of $9.1 million at loan maturity. Principal of
$310,000 was amortized during 2016.
(h) 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
$430,000 was amortized during 2016.
(i) The loan and a corresponding interest-rate swap closed on June 29, 2010 and
are collateralized by Thruway. On a combined basis, the loan and the interest-
rate swap require equal monthly principal and interest payments of $289,000
based upon a 25-year amortization schedule and a final payment of $34.8 mil-
lion at loan maturity. Principal of $1,147,000 was amortized during 2016.
(j) The loan is collateralized by Jamestown Place and requires equal monthly prin-
cipal and interest payments of $66,000 based upon a 25-year amortization
schedule and a final payment of $6.1 million at loan maturity. Principal of
$340,000 was amortized during 2016.
(k) 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 $151,000 was amortized during 2016.
(l) 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
$849,000 was amortized during 2016.
(m) The loan is collateralized by Orchard Park and requires equal monthly principal
and interest payments of $73,000 based upon a 30-year amortization sched-
ule and a final payment of $8.6 million at loan maturity. Principal of $239,000
was amortized during 2016.
(n) 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
$236,000 was amortized during 2016.
(o) 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 $776,000 was amortized
during 2016.
(p) The loan is collateralized by Leesburg Pike and requires equal monthly princi-
pal and interest payments of $135,000 based upon a 25-year amortization
48
SAUL CENTERS, INC. 2016 ANNUAL REPORT
schedule and a final payment of $11.5 million at loan maturity. Principal of
$431,000 was amortized during 2016.
(q) The loan is collateralized by Village Center and requires equal monthly princi-
pal 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
$365,000 was amortized during 2016.
(r) 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 Com-
pany substituted White Oak as the collateral and borrowed an additional
$10.5 million. Principal of $584,000 was amortized during 2016.
(s) 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 $769,000 was amortized during 2016.
(t) 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
$742,000 was amortized during 2016.
(u) 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 $399,000
was amortized during 2016.
(v) The loan is collateralized by Clarendon Center and requires equal monthly
principal and interest payments of $753,000 based upon a 25-year amortiza-
tion schedule and a final payment of $70.5 million at loan maturity. Principal
of $3.2 million was amortized during 2016.
(w) 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 $1,036,000 was amortized during 2016.
(x) 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 $1,141,000 was amortized during 2016.
(y) The loan is collateralized by Cranberry Square and requires equal monthly
principal and interest payments of $113,000 based upon a 25-year amortiza-
tion schedule and a final payment of $10.9 million at loan maturity. Principal
of $520,000 was amortized during 2016.
(z) The loan in the original amount of $73.0 million closed in May 2012, is collat-
eralized 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 $1.6 million was
amortized during 2016.
(aa) 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
$474,000 was amortized in 2016.
(bb) The loan is collateralized by Beacon Center and requires equal monthly prin-
cipal and interest payments of $268,500 based upon a 20-year amortization
schedule and a final payment of $17.1 million at loan maturity. Principal of $1.3
million was amortized in 2016.
(cc) 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
$468,000 was amortized in 2016.
(dd) 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 mil-
lion at maturity. Principal of $765,000 was amortized in 2016.
(ee) 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 $391,000
was amortized in 2016.
(ff) The loan is a $71.6 million construction-to-permanent facility that is collateral-
ized 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 con-
version to a permanent loan, monthly principal and interest payments totaling
$413,500 will be required based upon a 25-year amortization schedule. A
final payment of $39.6 million will be due at maturity.
(gg) 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 increase 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%. Neg-
ative amortization in 2016 totaled $164,000.
The carrying value of properties collateralizing the mortgage notes
payable totaled $957.2 million and $856.8 million as of December
31, 2016 and 2015, 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,
2016, 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
2.0 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, 2016 and 2015,
totaling $51.0 million, are guaranteed by members of the Saul Or-
ganization. As of December 31, 2016, 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
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
(hh) The loan is a $275.0 million unsecured revolving credit facility. Interest accrues
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.
(ii) The loan is collateralized by Metro Pike Center and requires monthly principal
and interest payments of approximately $48,000 and a final payment of $14.2
million at loan maturity. Principal of $319,000 was amortized during 2016.
The components of interest expense are set forth below.
INTEREST EXPENSE
Year ended December 31,
(In thousands) 2016 2015 2014
Interest incurred $ 46,867 $ 45,898 $ 45,396
Amortization of
deferred debt costs 1,343 1,433 1,327
Capitalized interest (2,527) (2,166) (689)
Total $ 45,683 $ 45,165 $ 46,034
Deferred debt costs capitalized during the years ending Decem-
ber 31, 2016, 2015 and 2014 totaled $0.1 million, $0.3 million
and $1.3 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, 2016, 2015, and 2014, amounted to $172.4
million, $168.3 million, and $164.6 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
2017 $ — $ 26,418 $ 26,418
(In thousands)
2018 90,865 (a) 26,394 117,259
2019 60,793 25,037 85,830
2020 61,163 22,331 83,494
2021 11,011 21,859 32,870
Thereafter 452,142 109,761 561,903
$ 675,974 $ 231,800 907,774
Unamortized
deferred debt costs 7,485
Net $ 900,289
(a) Includes $49.0 million outstanding under the line of credit.
2017 $ 154,489
2018 138,724
2019 117,135
2020 97,155
2021 78,248
Thereafter 245,218
Total $ 830,969
SAUL CENTERS, INC. 2016 ANNUAL REPORT
49
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, 2016, 2015, and 2014, amounted to $34.3 million,
$32.9 million, and $32.1 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 $1.4 million, $1.6 million, and $1.5 million, for the
years ended December 31, 2016, 2015, and 2014, respectively.
The Company’s corporate headquarters space is leased by a mem-
ber of the Saul Organization. The lease commenced in March
2002, and was extended to March 2017. A lease extension is
being finalized which will extend the term to March 2022. The
Company and the Saul Organization entered into a Shared Serv-
ices Agreement whereby each party pays an allocation of total
rental payments based on a percentage proportionate to the num-
ber of employees employed by each party. The Company’s rent
expense for the years ended December 31, 2016, 2015, and 2014
was $843,300, $904,900, and $840,800, respectively. Ex-
penses arising from the lease are included in general and
administrative expense (see Note 9 – Related Party Transactions).
7. LONG-TERM LEASE OBLIGATIONS
During 2016, the Company purchased the land underlying Beacon
Center and Southdale - See Note 3. As a result, at December 31,
2016, one remaining property is subject to a noncancelable long-
term lease which applies to land underlying the Shopping Center.
The lease provides for periodic adjustments of the base annual rent
and requires the payment of real estate taxes on the underlying land.
The lease expires in 2068. Reflected in the accompanying consol-
idated financial statements is minimum ground rent expense of
$159,000, $176,000, and $176,000, for the years ended Decem-
ber 31, 2016, 2015, and 2014, respectively. The future minimum
rental commitments under this ground lease are as follows:
LONG-TERM LEASE OBLIGATIONS
(In thousands)
2017 $ 56
2018 56
2019 57
2020 62
2021 62
Therafter 3,636
$ 3,929
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.
8. STOCKHOLDERS’ EQUITY AND
NONCONTROLLING INTEREST
The Consolidated Statements of Operations for the years ended
December 31, 2016, 2015, and 2014 reflect noncontrolling inter-
est of $11.4 million, $10.5 million, and $11.0 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 Cumu-
lative Redeemable Preferred Stock (the “Series A Stock”). The
depositary shares were redeemable, in whole or in part at the Com-
pany’s option, from time to time, at $25.00 per share. The
depositary shares paid an annual dividend of $2.00 per share,
equivalent to 8% of the $25.00 per share liquidation preference.
The Series A preferred stock had no stated maturity, was not subject
to any sinking fund or mandatory redemption and was not convert-
ible into any other securities of the Company. Investors in the
depositary shares generally had no voting rights, but would have
had limited voting rights if the Company failed 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 accu-
mulated deficit in the respective periods.
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
50
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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 Ac-
counting 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 (de-
scribed 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 con-
tributions, which are included in general and administrative 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
$329,000, $400,000, and $379,000, for 2016, 2015, and 2014,
respectively. All amounts deferred by employees 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 requirements
as specified in the plan. According to the plan, which can be mod-
ified or discontinued at any time, participating employees defer 2%
of their compensation in excess of a specified amount. For the years
ended December 31, 2016, 2015, and 2014, the Company con-
tributed three times the amount deferred by employees. The
Company’s expense, included in general and administrative ex-
pense, totaled $250,800, $224,900, and $192,800, for the years
ended December 31, 2016, 2015, and 2014, respectively. All
amounts deferred by employees and the Company are fully vested.
The cumulative unfunded liability under this plan was $2.1 million
and $1.8 million, at December 31, 2016 and 2015, respectively, and
is included in accounts payable, accrued expenses and other liabil-
ities in the consolidated balance sheets.
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016, 2015, and
2014, which included rental expense for the Company’s head-
quarters lease (see Note 7. Long Term Lease Obligations), totaled
$7.5 million, $8.2 million, and $7.4 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, 2016 and 2015, accounts payable, accrued
expenses and other liabilities included $829,000 and $655,000,
respectively, representing billings due to the Saul Organization for
the Company’s share of these ancillary costs and expenses.
The Company has entered into a shared third-party predevelop-
ment cost agreement with the Trust (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. On December 8, 2016, the Company en-
tered into a replacement agreement with the Saul Trust which
extended the expiration date to December 31, 2017 and provides
for automatic twelve months renewals unless either party provides
notice of termination. The costs will be shared 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 $360,500, $443,500, and $427,300, for the years
ended December 31, 2016, 2015, and 2014, respectively.
Effective as of September 4, 2012, the Company entered into a
consulting agreement with B. F. Saul III, one of the Company’s for-
mer 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, such
consulting fees totaled $495,000.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
51
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, the Company entered into an agreement to ac-
quire from the Trust, for an initial purchase price of $8.8 million,
approximately 14.3 acres of land located at the intersection of Ash-
burn Village Boulevard and Russell Branch Parkway in Loudoun
County, Virginia. In order to allow the Company time to pre-lease
and complete project plans and specifications, the parties have
agreed to a closing date in early 2018, at which time the Company
will exchange limited partnership units for the land. The number
of limited partnership units to be exchanged will be based on the
initial purchase price and the average share value (as defined in
the agreement) of the Company’s common stock at the time of the
exchange. The Company intends to construct a shopping center
and, upon stabilization, may be obligated to issue additional lim-
ited partnership units to the Trust.
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.
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.
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
52
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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 $1.2 million and $278,250 were as-
signed to the officer options and director options, respectively.
Because the directors' options vested immediately, the entire
$278,250 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 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
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Effective May 6, 2016, the Compensation Committee granted op-
tions to purchase 226,500 shares (24,248 incentive stock options
and 202,252 nonqualified stock options) to 19 Company officers
and 13 Company Directors (the “2016 options”), which expire on
May 5, 2026. The officers’ 2016 Options vest 25% per year over
four years and are subject to early expiration upon termination of
employment. The directors’ 2016 Options were immediately ex-
ercisable. The exercise price of $57.74 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 2016 Options to be $1.2 million, of which
$1.0 million and $151,125 were assigned to the officer options and
director options, respectively. Because the directors’ options
vested immediately, the entire $151,125 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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
53
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, 2016, 2015 and 2014.
(Dollars in thousands, except per share data)
STOCK OPTIONS ISSUED TO DIRECTORS
Grant date
Total grant
Vested
Exercised
Forfeited
Exercisable at
December 31, 2016
4/27/2007
4/25/2008
4/24/2009
5/7/2010
5/13/2011
5/4/2012
5/10/2013
5/9/2014
5/8/2015
5/6/2016
Subtotals
30,000
30,000
32,500
32,500
32,500
35,000
35,000
30,000
35,000
32,500
325,000
30,000
30,000
32,500
32,500
32,500
35,000
35,000
30,000
35,000
32,500
325,000
10,000
12,500
25,000
17,500
17,500
17,500
15,000
10,000
5,000
—
130,000
7,500
7,500
—
2,500
2,500
—
—
—
—
—
20,000
12,500
10,000
7,500
12,500
12,500
17,500
20,000
20,000
30,000
32,500
175,000
Remaining unexercised
12,500
10,000
7,500
12,500
12,500
17,500
20,000
20,000
30,000
32,500
175,000
Exercise price
$ 54.17
$ 50.15
$ 32.68
$ 38.76
$ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
$ 57.74
Volatility
0.225
0.237
0.344
0.369
0.358
0.348
0.333
0.173
0.166
0.166
Expected life (years)
8.0
7.0
6.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
Assumed yield
4.39%
4.09%
4.54%
4.23%
4.16%
4.61%
4.53%
4.48%
4.54%
3.75%
Risk-free rate
Total value at
grant date
Expensed in
previous years
4.65%
3.49%
2.19%
2.17%
1.86%
0.78%
0.82%
1.63%
1.50%
1.23%
$ 285
$ 255
$ 223
$ 288
$ 298
$ 257
$ 278
$ 110
$125
$151
$ 2,270
285
255
223
288
298
257
278
—
—
—
1,884
Expensed in 2014
—
—
—
—
—
—
—
110
—
—
110
Expensed in 2015
—
—
—
—
—
—
—
—
125
—
125
Expensed in 2016
—
—
—
—
—
—
—
—
—
151
151
Future expense
—
—
—
—
—
—
—
—
—
—
—
Grant date
Total grant
Vested
Exercised
Forfeited
Exercisable at
December 31, 2016
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
5/6/2016
Subtotals
135,000
162,500
242,500
202,500
170,000
190,000
194,000
1,296,500
67,500
118,750
107,500
131,875
85,000
47,500
—
558,125
67,500
92,915
91,205
68,750
31,250
6,250
—
357,870
67,500
43,750
135,000
30,625
1,250
1,875
—
280,000
—
25,835
16,295
63,125
53,750
41,250
—
200,255
Remaining unexercised
—
25,835
16,295
103,125
137,500
181,875
194,000
658,630
Exercise price
$ 54.17
$ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
$ 57.74
Volatility
0.233
0.330
0.315
0.304
0.306
0.298
0.185
Expected life (years)
6.5
8.0
8.0
8.0
7.0
7.0
7.0
Assumed yield
Risk-free rate
Gross value at
grant date
4.13%
4.61%
4.81%
2.75%
5.28%
1.49%
5.12%
1.49%
4.89%
2.17%
4.94%
1.89%
3.80%
1.55%
$ 1,339
$ 1,366
$ 1,518
$ 1,401
$ 1,350
$ 1,585
$ 1,137
$ 9,696
Estimated forfeitures
62
368
845
280
169
142
87
1,953
Expensed in
previous years
1,277
692
262
209
—
—
—
2,440
Expensed in 2014
—
217
157
284
197
—
—
855
Expensed in 2015
—
89
157
269
295
241
—
1,051
Expensed in 2016
—
—
97
269
295
361
175
1,197
Future expense
—
—
—
90
394
841
875
2,200
Grand
Totals
1,621,500
883,125
487,870
300,000
375,255
833,630
$ 11,966
1,953
4,324
965
1,176
1,348
2,200
Weighted average term of remaining future expense 2.5 years
54
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the option activity for the years 2016, 2015, and 2014:
OPTION ACTIVITY
2016 2015 2014
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding at January 1 860,274 $ 46.58 748,208 $ 44.79 753,625 $ 42.55
Granted 226,500 57.74 225,000 51.07 200,000 47.03
Exercised (246,894) 45.59 (112,934) 43.67 (167,917) 37.71
Expired/Forfeited (6,250) 45.31 –– –– (37,500) 43.56
Outstanding December 31 833,630 49.92 860,274 46.58 748,208 44.79
Exercisable at December 31 375,255 46.68 435,899 45.33 380,708 44.85
The intrinsic value of options exercised in 2016, 2015, and 2014,
was $3.4 million, $1.5 million and $2.0 million, respectively. The
intrinsic value of options outstanding and exercisable at year end
2016 was $13.9 million and $7.5 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 30, 2016, the final trading day of calendar 2016, the closing
price of $66.61 per share was used for the calculation of aggregate
intrinsic value of options outstanding and exercisable at that date.
The weighted average remaining contractual life of the Company’s
exercisable and outstanding options at December 31, 2016 are 6.4
and 7.5 years, respectively.
11. 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 4.25% and
3.75%, would be approximately $851.3 million and $892.9 mil-
lion as of December 31, 2016 and 2015, respectively, compared
to the principal balance of $844.3 million and $832.4 million at
December 31, 2016 and 2015, 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 in-
terest-rate swap arrangements was a highly effective hedge of the
cash flows under one of its variable-rate mortgage loans and desig-
nated 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 effectiveness
of the swap. The following chart summarizes the changes in fair
value of the Company’s swap for the indicated periods.
SWAPS FAIR VALUE
Year ended December 31,
(Dollars in thousands) 2016 2015 2014
Increase (decrease)
in fair value:
Recognized in earnings $ (6) $ (10) $ (10)
Recognized in other
comprehensive income 678 124 (675)
Total $ 672 $ 114 $ (685)
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,
2016, the fair value of the interest-rate swap was approximately
$2.1 million and is included in “Accounts payable, accrued ex-
penses 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.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
55
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
13. 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 pro-
vides for investing in newly issued shares of common stock at a 3%
discount from market price without payment of any brokerage
commissions, service charges or other expenses. All expenses of
the Plan are paid by the Company. The Operating Partnership also
maintains a similar dividend reinvestment plan that mirrors the
Plan, which allows holders of limited partnership interests the op-
portunity to buy either additional limited partnership units or
common stock shares of the Company.
The Company paid common stock distributions of $1.84 per share
in 2016 and $1.69 per share during 2015 and $1.56 per share dur-
ing 2014, Series A preferred stock dividends of $2.41 per
depositary share in 2014 and Series C preferred stock dividends
of $1.72 per depositary share during each of 2016, 2015, and
2014. Of the common stock dividends paid, $1.75 per share,
$1.69 per share, and $1.56 per share, represented ordinary divi-
dend income in 2016, 2015, and 2014, respectively, and $0.09
per share represented return of capital to the shareholders in
2016. All of the preferred stock dividends paid were considered
ordinary dividend income.
The following summarizes distributions paid during the years
ended December 31, 2016, 2015, and 2014, 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 2016
October 31 $ 3,094 $ 10,168 $ 3,478 44,176 $ 57.18 30,891 $ 57.18
July 31 3,094 10,133 3,465 39,487 65.64 26,897 65.64
April 30 3,094 10,029 3,449 48,854 51.59 34,201 51.59
January 31 3,093 9,142 3,141 54,280 49.24 32,769 49.24
Total 2016 $ 12,375 $ 39,472 $ 13,533 186,797 124,758
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
56
SAUL CENTERS, INC. 2016 ANNUAL REPORT
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2016, the Board of Directors of the Company author-
ized a distribution of $0.51 per common share payable in January
2017, to holders of record on January 17, 2017. As a result, $11.0
million was paid to common shareholders on January 31, 2017.
Also, $3.8 million was paid to limited partnership unitholders on
January 31, 2017 ($0.51 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 6, 2017. As a result, $3.1 million was paid to preferred share-
holders on January 13, 2017. 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 div-
idends and distributions payable
the accompanying
consolidated financial statements.
in
14. INTERIM RESULTS (UNAUDITED)
The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2016 and 2015.
(In thousands, except per share amounts) 2016
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Revenue $ 56,926 $ 52,710 $ 53,233 $ 54,201
Operating income before loss on early extinguishment
of debt, gain on casualty settlement, and
noncontrolling interests 16,381 13,250 12,722 13,360
Gain on sales of properties — — — 1,013
Net income attributable to Saul Centers, Inc. 12,948 10,627 10,239 11,465
Net income available to common stockholders 9,854 7,533 7,146 8,371
Net income available to common stockholders
per diluted share 0.46 0.35 0.33 0.38
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
SAUL CENTERS, INC. 2016 ANNUAL REPORT
57
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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
expenses related to tenant rent, reimbursements and operating
expenses. Although services are provided to a range of tenants,
the types of services provided to them are similar within each 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
2016 presentation.
Shopping Mixed-Use Corporate and Consolidated
(In thousands) Centers Properties Other Totals
As of or for the year ended December 31, 2016
Real estate rental operations:
Revenue $ 160,179 $ 56,840 $ 51 $ 217,070
Expenses (34,931) (18,770) — (53,701)
Income from real estate 125,248 38,070 51 163,369
Interest expense and amortization of deferred debt costs — — (45,683) (45,683)
General and administrative — — (17,496) (17,496)
Subtotal 125,248 38,070 (63,128) 100,190
Depreciation and amortization of deferred leasing costs (29,964) (14,453) — (44,417)
Acquisition related costs (60) — — (60)
Change in fair value of derivatives — — (6) (6)
Gain on sale of property — 1,013 — 1,013
Net income (loss) $ 95,224 $ 24,630 $ (63,134) $ 56,720
Capital investment $ 64,044 $ 27,001 $ — $ 91,045
Total assets $ 976,545 $ 358,419 $ 8,061 $ 1,343,025
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 $ 931,256 $ 354,254 $ 9,898 $ 1,295,408
58
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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, 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 $ 939,267 $ 305,579 $ 12,267 $ 1,257,113
16. SUBSEQUENT EVENTS
The Company has reviewed operating activities for the period sub-
sequent to December 31, 2016 and prior to the date that financial
settlements are issued, March 7, 2017, and determined the follow-
ing subsequent event is required to be disclosed.
In January 2017, the Company purchased for $76.3 million, includ-
ing acquisition costs, Burtonsville Town Square located in
Burtonsville, Montgomery County, Maryland.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
59
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 2016 and 2015.
Distributions by the Company to common stockholders and
holders of limited partnership units in the Operating Partnership
were $53.0 million and $47.9 million in 2016 and 2015, respec-
tively. Distributions to preferred stockholders were $12.4 million
in each of 2016 and 2015. See Notes to Consolidated Financial
Statements, No. 13, “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 $1.84,
$1.69 and $1.56 per common share during 2016, 2015 and
2014, 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. Of the $1.84 per common share dividend paid
in 2016, 95% was treated as a taxable dividend and 5% repre-
sented a return of capital. All of the 2015 and 2014 common
dividends were treated as taxable dividends. No assurance can
be given regarding what portion, if any, of distributions in 2017
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.
60
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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 2016 and 2015 as follows:
Market Infor mation
COMMON STOCK PRICES
Period Share Price
High Low
October 1, 2016 – December 31, 2016 $ 68.23 $ 58.79
July 1, 2016 – September 30, 2016 $ 68.58 $ 61.28
April 1, 2016 – June 30, 2016 $ 61.71 $ 51.59
January 1, 2016– March 31, 2016 $ 53.50 $ 47.77
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, 2015 $ 56.93 $ 49.19
January 1, 2015– March 31, 2015 $ 60.30 $ 53.52
On March 1, 2017, the closing price was $64.62 per share.
The approximate number of holders of record of the common stock was 190 as of March 1, 2017.
SAUL CENTERS, INC. 2016 ANNUAL REPORT
61
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 Invest-
ment 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 December 31, 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
$250
$225
$200
$175
$150
$125
$100
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2011
Dec. 31, 2012 Dec. 31, 2013 Dec. 31, 2014
Dec. 31, 2015 Dec. 31, 2016
Saul Centers1
S&P 5002
Russell 20003
$100
$100
$100
$125.24
$144.16
$178.42
$165.06
$221.52
$116.00
$153.57
$174.60
$177.01
$198.18
$116.35
$161.52
$169.42
$161.95
$196.45
NAREIT Equity4
$100
$118.06
$120.97
$157.43
$162.46
$176.30
1 Source: S&P Capital I.Q.
2 Source: Bloomberg
3 Source: FTSE Russell
4 Source: National Association of Real Estate Investment Trusts
62
SAUL CENTERS, INC. 2016 ANNUAL REPORT
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
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 2016, 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
SAUL CENTERS, INC. 2016 ANNUAL REPORT
63
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders will be
held at 11:00 a.m., local time, on May 5, 2017,
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.)
64
SAUL CENTERS, INC. 2016 ANNUAL REPORT
7501 Wisconsin Avenue, Suite 1500E
Bethesda, MD 20814-6522
Phone: (301) 986-6200
Website: www.saulcenters.com