Saul Centers Inc.
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORT to shareholders Saul Centers is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland. Saul Centers currently operates and manages a real estate portfolio comprised of 60 properties which includes (a) 56 community and neighborhood shopping centers and mixed-use properties with approximately 9.3 million square feet of leasable area and (b) four land and development properties. Over 85% of the Company’s property operating income is generated from properties in the metropolitan Washington, DC/Baltimore area. TOTAL REVENUE (In millions) 2018 | $228.2 2017 | $227.3 2016 | $217.1 2015 | $209.1 2014 | $207.1 NET INCOME Available to Common Stockholders (In millions) 2018 | $36.0 2017 | $35.9 2016 | $32.9 2015 | $30.1 2014 | $32.1 FUNDS FROM OPERATIONS Available to Common Shareholders* (In millions) 2018 | $93.8 2017 | $93.9 2016 | $87.7 2015 | $83.8 2014 | $78.3 * Funds From Operations (FFO) is a non-GAAP financial measure. The term Common Shareholders means common stockholders and holders of noncontrolling interests. See page 27 for a definition of FFO and reconciliation from Net Income. Portfolio Composition Based on 2018 Property Operating Income 1 75.6% Shopping Centers 24.4% Mixed-Use 85.3% Metropolitan Washington, DC/ Baltimore area 14.7% Rest of U.S. (1) Property Operating Income equals total property revenue less the sum of property operating expenses, provision for credit losses and real estate taxes. Year ended December 31, 2018 2017 2016 2015 2014 Summary Financial Data Total Revenue $ 228,176,000 $ 227,285,000 $ 217,070,000 $ 209,077,000 $ 207,092,000 Net Income Available to Common Stockholders FFO Available to Common Shareholders Weighted Average Common Stock Outstanding (Diluted) Weighted Average Common Stock and Units Outstanding Net Income Per Share Available to Common Stockholders (Diluted) FFO Per Share Available to Common Shareholders (Diluted) Common Dividend as a Percentage of FFO Interest Expense Coveragea $ $ Property Data Number of Operating Propertiesb Total Portfolio Square Feet Shopping Center Square Feet Mixed-Use Square Feet Average Percentage Leasedc $ 35,964,000 $ 35,882,000 $ 32,904,000 $ 30,093,000 $ 32,102,000 $ 93,821,000 $ 93,987,000 $ 87,749,000 $ 83,815,000 $ 78,281,000 22,425,000 22,008,000 21,615,000 21,196,000 20,821,000 30,156,000 29,511,000 28,990,000 28,449,000 27,977,000 1.60 $ 1.63 $ 1.52 $ 1.42 $ 3.11 $ 3.18 $ 3.03 $ 2.95 $ 66% 3.53 x 64% 3.35 x 61% 3.29 x 57% 3.24 x 1.54 2.80 56% 3.15 x 56 9,300,000 7,750,000 1,550,000 55 9,230,000 7,750,000 1,480,000 55 9,362,000 7,882,000 1,480,000 56 9,350,000 7,897,000 1,453,000 56 9,339,000 7,886,000 1,453,000 95% 95% 95% 95% 94% (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 land and development parcels (Ashland Square Phase II, New Market and Park Van Ness in 2014 and 2015, and Ashland Square Phase II, New Market and N. Glebe Road in 2016, 2017 and 2018). Burtonsville Town Square was acquired in January 2017, and 7316 Wisconsin Avenue was acquired September 2018. Crosstown Business Center was sold in December 2016, and Great Eastern was sold in September 2017. Crosstown Business Center was sold in December 2016, and Great Eastern was sold in September 2017. (c) Average percentage leased includes commercial space only. P A G E 1 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Message Message to Shareholders to Shareholders BROADLANDS VILLAGE, ASHBURN, VA In 2018, operating fundamentals remained solid at Saul Centers’ properties. We successfully re-tenanted our two anchor grocery vacancies, and achieved a five-year high leasing rate of 92.8% in small shop retail spaces. As a result, we ended 2018 with an overall commercial portfolio leasing rate of 95.5%. In addition, on a same-space basis, minimum rents were 1.3% higher on all new and renewed leases within our retail and office portfolios. Likewise, our residential portfolio was strong, at over 98% leased. Nevertheless, during 2018, global economic and political uncertainty contributed to volatility in interest rates and equity markets, culminating with a decline in many of the major equity indices. The price of Saul Centers’ common stock followed general market trends and, like other REIT stocks, fell at year end. P A G E 2 Capital Markets Accomplishments During the first quarter of 2018, we increased our bank financing commitments to $400 million from $275 million. The new facility includes a $75 million term loan and a $325 million revolving credit line. We also expanded our banking group to six from four national and regional banks. Also during the first quarter, we replaced 42% of our 67/8% Series C preferred stock with a new issuance of 61/8% Series D preferred stock, reducing our annual preferred dividend obligation by $560,000 per year. Later in 2018, we closed $54.9 million of mortgages in order to pay notes scheduled to mature either during 2018 or 2019. These mortgage refinancings, combined with the preferred stock transaction, reduced our weighted average cost of mortgage debt and preferred equity capital to 5.41% at year-end 2018 from 5.52% at SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM PARK VAN NESS, WASHINGTON, DC750 NORTH GLEBE ROAD, ARLINGTON, VA (ARTIST’S RENDERING) year-end 2017, representing a $1.2 million annual reduction in combined interest payments and preferred stock dividends. Availability under our revolving credit line was more than $190 million at year-end 2018, after funding over $55 million of construction costs at our 750 N. Glebe Road development, and acquiring our 7316 Wisconsin Avenue development site in Bethesda, Maryland for $40.7 million. initiatives allows us Developments and Acquisitions The liquidity created through our 2018 capital to continue markets supplementing our core operating performance with developments, expansions, and acquisitions, as opportunities are identified. During 2018, we substantially completed the shell construction of a 16,000 square foot small shop expansion of our Giant Food anchored Burtonsville Town Square shopping center in Montgomery County, Maryland. Construction of interior improvements in the expansion building is currently underway. We have executed leases for 55% of the space and we have prospects for an additional 3,900 square feet. Initial tenant openings are scheduled to occur during the first quarter of 2019. In addition, we have recently executed a lease with Taco Bell, who will construct a free-standing building on a pad site. In November 2018, we commenced site work construction on the 88,000 square foot Ashbrook Marketplace, a neighborhood shopping center in Ashburn, Virginia, which is scheduled to open in early 2020. We have executed a lease for a CONSTRUCTION IN PROGRESS 29,000 square foot Lidl grocery store to anchor the center. We have also executed a gas station pad lease and various shop space leases bringing our overall pre-leasing totals to 44% of the planned space. Lease negotiations are in progress for an additional 12,000 square feet of space. In late March 2019, we plan to commence development of a pad site expansion on vacant land owned at our Lansdowne Town Center in Ashburn, Virginia. A ground lease with Chick-fil-A has been executed for one pad with the building to be constructed by the tenant. We have also executed a lease with Starbucks for another pad, on which we will construct their base building. Both tenants are projected to be operational by early 2020. 750 N. Glebe Road, our largest mixed–use development to date, is under construction within two blocks of the Ballston Metro Station in Arlington, Virginia. The concrete structure is complete and pre-cast concrete panels, masonry and windows are being installed. Interior framing, electrical, plumbing, life safety systems, and HVAC work are also well underway. The development is scheduled for substantial completion in early P A G E 3 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM750 NORTH GLEBE ROAD, ARLINGTON,, VAMessage to Shareholders 7316 WISCONSIN AVENUE, BETHESDA, MD (ARTIST’S RENDERING) 2020. Upon completion, the buildings will feature four distinct architectural façade designs, complete with three residential lobbies, an expansive state of the art courtyard with outdoor seating and cooking facilities, a fitness center, community rooms, and a rooftop swimming pool. Retail leases have been executed for a 41,500 square foot Target store and 9,000 square feet of shop space, resulting in 84% of the retail space being pre-leased. With its 490 apartment units and 60,000 square feet street-level retail space, 750 N. Glebe Road will be a significant addition to our mixed-use portfolio. Late in 2018, we purchased 7316 Wisconsin Avenue and an interest in an adjacent parcel located at 4800 Hampden Lane in Bethesda, Maryland. The site is well located at the future Maryland Transit Administration Purple Line Station and the Metro Red Line Station extension, both currently under construction. The combined properties have mixed-use development potential of up to 365 apartment units and 10,000 square feet of street level retail pursuant to the approved Bethesda Downtown Plan. We have engaged architects and engineers, and have commenced design review hearings and sketch plan filings with Montgomery County as required in the site plan and building permit process. Including two assemblages of land totaling 17.9 acres at the White Flint and Twinbrook Red Line Metro Stations in Montgomery County, Maryland, our development pipeline currently includes up to 2,450 apartments and 630,000 square feet of commercial office and retail space, all in various planning stages. We will continue to move through the pre-development community approval processes while concurrently evaluating the supply and demand metrics of each sub-market before selecting our next mixed-use construction start, following 750 N. Glebe Road and 7316 Wisconsin Avenue. 2018 Financial Results Total revenue increased to $228.2 million, a $0.9 million increase over the prior year. Operating income was $62.6 million compared to $60.6 million a year earlier and net income available to common stockholders was $36.0 million, compared to $35.9 million in 2017. The public real estate industry’s key performance measure, Funds From Operations (FFO) available to common stockholders and non-controlling interests, decreased 0.2% to $93.8 million ($3.11 per diluted share) in 2018 from $94.0 million ($3.18 per diluted share) in 2017. The 2018 FFO decrease was primarily due to a) the net impact of 2017 anchor tenant lease terminations at Broadlands Village and Kentlands Square II shopping centers ($3.5 million) and b) the extinguishment of issuance costs upon redemption of preferred shares ($2.3 million) partially offset by c) higher base rent ($3.6 million) and d) lower interest and amortization of debt expense ($2.2 million). Same property operating income decreased 0.4% in 2018 as compared to 2017. Shopping center same property operating income decreased $1.5 million, primarily due to a) the $3.5 million net impact of the 2017 anchor lease terminations and b) $0.6 million of higher property operating expenses and real estate taxes, net of P A G E 4 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMPARK VAN NESS, WASHINGTON, DC SOUTHDALE, GLEN BURNIE, MD tenant recoveries, partially offset by c) higher base rent of $2.8 million. Mixed-use same property operating income increased by 1.9% primarily due to solid residential results. Shopping Center Performance With 76% of our shopping center property operating income derived from grocery-anchored centers, neighborhood and community shopping center operations remains our core business. While the uses and sizes of retail tenants continue to change in response to the continued expansion of internet competition, our overall shopping center leasing rate at year end was a healthy 96%. The intensity of competition amongst grocery stores continued throughout 2018. New market entries such as Lidl, the increased presence of Target and Walmart in the grocery business, and pricing pressure from on-line grocery shopping options continue to drive increased competition. Despite these forces, our same store anchor grocery sales decreased by only 0.9% during 2018, evidencing the importance of strong grocery anchors within neighborhood and community shopping centers to support continued healthy traffic to their tenants. Our centers anchored by market leaders such as Giant, Publix, Kroger and Harris Teeter provide 47% of our shopping center property operating income. With twenty-six of our centers anchored by a national grocer reporting an average sales volume of over $500 per square foot, our shopping center portfolio results rely heavily on the traffic generated from our grocery anchors. KENTLANDS SQUARE, GAITHERSBURG, MD (ABOVE AND BELOW) P A G E 5 Primarily fueling our property operating income growth in 2018 was an improved overall leasing rate to 96.0% at year-end 2018 from 94.3% at year-end 2017. The leasing rate in small shop space, defined as spaces that are less than 10,000 square feet, rose to 92.8% at year-end 2018, from 91.2% the prior year. Small shops comprise only 31.4% of shopping center square footage, but they produce 49% of annualized shopping center minimum rent. The 92.8% small shop leasing rate marked the highest year-end rate since pre-recession totals in 2007. Also contributing to this growth was a strong 78% renewal rate, as measured by expiring annualized minimum rent. The renewal rate of 78% exceeded our five year average of 76%. Growth SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM750 NORTH GLEBE ROAD, ARLINGTON,, VAMessage to Shareholders BURTONSVILLE TOWN SQUARE, BURTONSVILLE, MD Mixed-Use Portfolio Results After averaging 91.1% for the five-year period prior to 2017, our commercial leasing rate on a same property basis in our mixed-use portfolio ended 2018 at approximately 94% for the second straight year. Mixed-Use same property net operating income increased by $800,000 or 1.9%, in 2018 compared to 2017. This increase, primarily due to a full year of stabilized operations of Park Van Ness and a strong 2018 leasing rate for both of our apartment projects as of December 31, 2018, was 98.2%. Residential rents were unchanged over expiring rents for new leases signed in 2018, after decreasing 0.8% during 2017. Office sub-markets in the Washington, DC metropolitan area continue to be challenging, with high rent concession packages and pressure on rental rates. Same space office rents decreased by 8.0% compared to expiring rents for the 99,000 square feet of office leases executed in 2018, the tenth straight year of rent declines. During 2019, only 12 office leases comprising 75,000 square feet of space are scheduled to expire, representing $2.6 million of annualized base rent, thus minimizing continued rental rate declines into the near future. in shopping center net operating income was also a result of same space rental rate increases of 2.6% over expiring or previous rents on 1.4 million square feet of space, representing $24.5 million of annualized minimum rents. Following the decline in rents during the recession years (2009 through 2011), rents began to increase in 2012. Rent growth has averaged 2.7% since then. The majority of our $1.5 million decline in 2018 in shopping center same property operating income was caused by the $3.5 million net impact that resulted from our 2017 anchor tenant lease terminations at Kentlands Square II (K-Mart) and Broadlands Village (Safeway). Adjusting for that impact, shopping center same property operating income grew by $2.0 million. The full positive revenue impact of our re-tenanting of K-Mart to At Home and Safeway to Aldi and LA Fitness will begin to be recognized when LA Fitness begins operations, projected to occur during the fourth quarter 2019. Another driver of shopping center property operating income growth is pad site development. We had one new pad commence rent in 2018 and we have executed a total of five additional pad leases, with aggregate annualized rents of $675,000, which are projected to commence during 2019 and 2020. With capital costs expected to total $4.5 million, these expansions are expected to yield an attractive 15% cash-on- cash return on investment. P A G E 6 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMPARK VAN NESS, WASHINGTON, DC PALM SPRINGS CENTER, ALTAMONTE SPRINGS, FL Capital Structure We three 15-year mortgage completed refinancings over the past six months totaling $77 million, at a weighted average interest rate of 4.56%. After paying off a total of $12.7 million of maturing notes in January 2019, $12.2 million of debt now matures in 2019. In total, over the next five years, $131 million of our mortgage debt will mature, which has a weighted average interest rate of 5.75%. Our year-end 2018 leverage ratio was 38.8%, based on debt to total capitalization. As of February 28, 2019, we have $192 million available to draw under our revolving credit line, and equity raised through our dividend reinvestment plan has averaged $16 million per year over the past three years. We believe availability under our credit facility, proceeds from our dividend reinvestment plan and our operating cash flow will provide adequate liquidity to fund our proposed development pipeline over the coming years. total return Our compounded annual to shareholders over the more than 25 years since our 1993 initial public offering totaled 9.8% per year at December 31, 2018, including the general decline in REIT share prices in late 2018. This return is approximately 70 basis points more than the 9.1% annual return of the S&P 500 over the same period. Looking ahead, we anticipate the successful completion of construction of 750 N. Glebe Road during the next 12 months. This development will increase our transit-oriented luxury apartment inventory to over 1,000 units. Additionally, we will deploy smaller amounts of capital into selective grocery anchored shopping center construction and small shop and pad site expansion of existing shopping centers, while continuing to develop urban transit-centric, mixed-use projects as opportunities arise. On behalf of our Board, we continue to acknowledge the dedication, loyalty and hard work of our professional staff which produced the results that have allowed our shareholders an opportunity to participate in a long-term successful real estate investment. And we thank our shareholders for your confidence and support. For the Board P A G E 7 B. Francis Saul II March 12, 2019 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM750 NORTH GLEBE ROAD, ARLINGTON,, VAPortfolio Properties As of December 31, 2018, 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 81% 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 Ashland Square Phase I, Dumfries, VA Beacon Center, Alexandria, VA BJ’s Wholesale Club, Alexandria, VA Boca Valley Plaza, Boca Raton, FL Boulevard, Fairfax, VA P A G E 8 Briggs Chaney MarketPlace, Silver Spring, MD Broadlands Village, Ashburn, VA Burtonsville Town Square, Burtonsville, MD Countryside Marketplace, Sterling, VA Cranberry Square, Westminster, MD Cruse MarketPlace, Cumming, GA Flagship Center, Rockville, MD French Market, Oklahoma City, OK Germantown, Germantown, MD The Glen, Woodbridge, VA Great Falls Center, Great Falls, VA Hampshire Langley, Takoma Park, MD Hunt Club Corners, Apopka, FL Jamestown Place, Altamonte Springs, FL Kentlands Square I, Gaithersburg, MD Kentlands Square II, Gaithersburg, MD Kentlands Place, Gaithersburg, MD Lansdowne Town Center, Leesburg, VA Leesburg Pike Plaza, Baileys Crossroads, VA Lumberton Plaza, Lumberton, NJ Metro Pike Center, Rockville, MD Shops at Monocacy, Frederick, MD Northrock, Warrenton, VA Olde Forte Village, Ft. Washington, MD 221,596 23,120 356,971 115,660 121,269 49,140 194,258 174,438 122,052 138,804 141,450 78,686 21,500 246,148 18,982 136,440 91,666 131,700 107,103 96,201 114,381 246,965 40,697 189,422 97,752 192,718 67,488 109,144 100,032 143,577 Olney, Olney, MD Orchard Park, Dunwoody, GA Palm Springs Center, Altamonte Springs, FL Ravenwood, Baltimore, MD 11503 Rockville Pk / 5541 Nicholson Ln, Rockville, MD 1500/1580/1582/1584 Rockville Pike, Rockville, MD Seabreeze Plaza, Palm Harbor, FL Marketplace at Sea Colony, Bethany Beach, DE Seven Corners, Falls Church, VA Severna Park Marketplace, Severna Park, MD Shops at Fairfax, Fairfax, VA Smallwood Village Center, Waldorf, MD Southdale, Glen Burnie, MD Southside Plaza, Richmond, VA South Dekalb Plaza, Atlanta, GA Thruway, Winston-Salem, NC Village Center, Centreville, VA Westview Village, Frederick, MD White Oak, Silver Spring, MD 53,765 87,365 126,446 93,328 40,249 110,128 146,673 21,677 573,481 254,011 68,762 173,341 485,628 371,761 163,418 366,693 145,651 97,858 480,676 total shopping centers 7,750,271 Mixed-Use Properties Avenel Business Park, Gaithersburg, MD Clarendon Center – North, Arlington, VA Clarendon Center – South, Arlington, VA (includes 244 apartments comprising 188,671 square feet) Park Van Ness, Washington, DC (includes 271 apartments comprising 214,600 square feet) 601 Pennsylvania Ave., Washington, DC Washington Square, Alexandria, VA 7316 Wisconsin Avenue, Bethesda, MD total mixed-use properties total portfolio 390,683 108,386 293,565 223,447 227,651 236,376 69,601 1,549,709 9,299,980 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Financial Section TABLE OF CONTENTS Selected Financial Data ......................................Page 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................. Pages 11-31 Quantitative and Qualitative Disclosures About Market Risk .............................................Page 31 Management’s Report on Internal Control Over Financial Reporting ............................................Page 32 Report of Independent Registered Public Accounting Firm: Opinion on the Financial Statements ..........................................Page 33 Report of Previous Independent Registered Public Accounting Firm: Opinion on Internal Control Over Financial Reporting ........................Page 34 Report of Independent Registered Public Accounting Firm: Opinion on the Financial Statements ..........................................Page 35 Consolidated Balance Sheets ..............................Page 36 Consolidated Statements of Operations .............Page 37 Consolidated Statements of Comprehensive Income ......................................Page 38 Consolidated Statements of Equity .....................Page 39 Consolidated Statements of Cash Flows .............Page 40 Notes to Consolidated Financial Statements ................................... Pages 41-64 P A G E 9 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Selected Financial Data (In thousands, except per share data) Operating Data: Total property revenue Total property expenses Property operating income Other revenue Total other expenses Operating income Non-operating income: Change in fair value of derivatives Gains on sales of properties Net income Income attributable to noncontrolling interests Net income attributable to Saul Centers, Inc. Preferred stock redemption Preferred dividends Net income available to common stockholders Per Share Data (diluted): Net income available to common stockholders Basic and Diluted Shares Outstanding: Weighted average common shares - basic Effect of dilutive options Weighted average common shares - diluted Weighted average convertible limited partnership units Weighted average common shares and fully converted $ $ $ 2018 227,904 56,263 171,641 272 (109,360) 62,553 (3) 509 63,059 (12,505) 50,554 (2,328) (12,262) Years Ended December 31, 2016 2017 2015 $ $ 227,205 55,592 171,613 80 (111,095) 60,598 70 — 60,668 (12,411) 48,257 — (12,375) $ 217,019 53,701 163,318 51 (107,656) 55,713 (6) 1,013 56,720 (11,441) 45,279 — (12,375) $ 209,026 51,143 157,883 51 (105,004) 52,930 (10) 11 52,931 (10,463) 42,468 — (12,375) 2014 207,017 49,513 157,504 75 (105,650) 51,929 (10) 6,069 57,988 (11,045) 46,943 (1,480) (13,361) 35,964 $ 35,882 $ 32,904 $ 30,093 $ 32,102 1.60 $ 1.63 $ 1.52 $ 1.42 $ 1.54 22,383 42 22,425 7,731 21,901 107 22,008 7,503 21,505 110 21,615 7,375 21,127 69 21,196 7,253 20,772 49 20,821 7,156 limited partnership units - diluted 30,156 29,511 28,990 28,449 27,977 Dividends Paid: Cash dividends to common stockholders (1) Cash dividends per share Balance Sheet Data: $ $ 46,306 2.08 $ $ 44,576 2.04 $ $ 39,472 1.84 $ $ 35,645 1.69 $ $ 32,346 1.56 Real estate investments (net of accumulated depreciation) Total assets Total debt, including accrued interest Preferred stock Total equity Cash flow provided by (used in): Operating activities Investing activities Financing activities Funds from operations (2): Net income Real property depreciation and amortization Gain on property dispositions and casualty settlements Funds from operations Extinguishment of issuance costs upon redemption of preferred shares Preferred dividends Funds from operations available to common stockholders and noncontrolling interests $ 1,422,647 1,527,489 1,026,932 180,000 425,220 $ 1,315,034 1,422,452 962,162 180,000 393,103 $ 1,242,534 1,343,025 903,709 180,000 373,249 $ 1,197,340 1,295,408 869,652 180,000 353,727 $ 1,163,542 1,257,113 850,727 180,000 339,257 $ $ $ $ 110,339 (128,650) 21,981 63,059 45,861 (509) $ $ $ $ 103,450 (113,306) 12,442 60,668 45,694 — $ $ $ $ $ $ $ $ 89,090 (86,274) (4,497) 56,720 44,417 (1,013) $ $ $ $ 88,896 (69,587) (21,434) 52,931 43,270 (11) 86,568 (83,589) (8,148) 57,988 41,203 (6,069) $ 108,411 $ 106,362 $ 100,124 $ 96,190 $ 93,122 (2,328) (12,262) — (12,375) — (12,375) — (12,375) (1,480) (13,361) $ 93,821 $ 93,987 $ 87,749 $ 83,815 $ 78,281 (1) During 2018, 2017, 2016, 2015, and 2014, shareholders reinvested $28.8 million, $15.8 million, $10.3 million, $10.6 million and $9.3 million, respectively, in newly issued common stock through the Company’s dividend reinvestment plan. (2) Funds from operations (FFO) is a non-GAAP financial measure and is defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds From Operations.” P A G E 10 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Con- dition and Results of Operations (MD&A) begins with the Company’s primary business strategy to give the reader an overview of the goals of the Company’s business. This is followed by a discussion of the critical accounting policies that the Company believes are important to understanding the assumptions and judgments incorporated in the Compa- ny’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 19, 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 27, 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 statements and notes thereto beginning on page 36. Historical results set forth in Selected Financial Information, the Consolidated Financial Statements and Supplemental Data should not be taken as indicative of the Company’s future operations. OVERVIEW The Company’s principal business activity is the ownership, management and development of income-producing prop- erties. The Company’s long-term objectives are to increase cash flow from operations and to maximize capital appreci- ation of its real estate investments. The Company’s primary operating strategy is to focus on its community and neighborhood Shopping Center busi- ness and its transit-centric, primarily residential mixed-use properties to achieve both cash flow growth and capital appreciation. Management believes there is potential for long term growth in cash flow as existing leases for space in the Shopping Center and Mixed-Use Properties expire and are renewed, or newly available or vacant space is leased. The Company intends to renegotiate leases where possible and seek new tenants for available space in order to op- timize the mix of uses to improve foot traffic through the Shopping Centers. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate ex- isting 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 se- lectively attempts to increase cash flow through a variety of means, or in connection with renovations or relocations, recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percent- age rental provisions, in its leases. The Company’s redevelopment and renovation objective is to selectively and opportunistically redevelop and renovate its properties, by replacing below-market-rent leases with strong, traffic-generating anchor stores such as supermar- kets and drug stores, as well as other desirable local, regional and national tenants. The Company’s strategy remains fo- cused on continuing the operating performance and internal growth of its existing Shopping 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 struc- ture 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 December 31, 2018, 263 apartments (97.0%) were leased. The total cost of the proj- ect, excluding predevelopment expense and land, which the Company has owned, was approximately $93.0 mil- lion, a portion of which was financed with a $71.6 million construction-to-permanent 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 prop- erties 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 commencement 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 develop- ment potential of up to 1.6 million square feet of mixed-use space. The Company is actively engaged in a plan for re- development 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 mil- lion lease termination fee which was recognized as revenue in the first quarter. 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 P A G E 11 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMP A G E 12 fee revenue was partially offset by the loss of approximately $1.1 million in rental revenue over the remainder of 2016. The Company executed leases with two replacement ten- ants, whose occupancy and rent commencement occurred in 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 expected to be on the west side of Rockville Pike at Metro Pike Cen- ter. 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 on North Glebe Road in Arlington, Virginia, for an aggregate $54.0 million. The Company is developing approximately 490 res- idential units and 60,000 square feet of retail space, on 2.8 acres of land. Concrete work is substantially complete and pre-cast facade panels, masonry and windows are being installed. Interior framing, electrical, plumbing and HVAC work have commenced. The development is scheduled for substantial completion in early 2020. The total cost of the project, including acquisition of land, is expected to be approximately $275.0 million, a portion of which is being fi- nanced by a $157.0 million construction-to-permanent loan. Leases have been executed for a 41,500 square foot Target and 9,000 square feet of retail shop space, resulting in ap- proximately 84% of the retail space being leased. Albertson’s/Safeway, currently a tenant at seven of the Company’s shopping centers (two stores of which are op- erated by subtenants), 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, Mont- gomery 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 Food, for that space, which commenced operations in March 2017. The Company terminated the lease with Albertson’s/ Safeway at Broadlands and executed a lease with Aldi Food Market for 20,000 square feet of this space, which opened in November 2017, and has executed a lease with LA Fit- ness for substantially all of the remaining space. The fitness center is projected to open for business during the fourth quarter of 2019. In August 2018, Safeway closed its store at Palm Springs Center in Florida. The lease was purchased by Publix, and the store re-opened in November 2018. In January 2017, the Company purchased for $76.4 mil- lion, including acquisition costs, Burtonsville Town Square, a 121,000 square foot shopping center located in Burtonsville, Maryland. Burtonsville Town Square is 100% leased and anchored by Giant Food and CVS Pharmacy. The purchase was funded with a new $40.0 million mortgage loan and through the Company’s credit line facility. The Company has substantially completed construction of the shell of a 16,000 square foot small shop expansion and construction of inte- rior improvements is underway. Delivery of the first leased tenant spaces occurred in late 2018, with initial tenant openings scheduled for the first quarter of 2019. The total development cost is expected to be approximately $5.7 mil- lion. Leases have been executed for approximately 55% of the space and the Company has prospects for an additional 3,900 square feet. In addition, a lease has been executed with Taco Bell who will construct a free-standing building on a pad site within the property. During the three months ended June 30, 2017, the Company executed a termination agreement with Kmart at Kentlands Square II. Kmart closed its 104,000 square foot store at Kentlands in September 2017, and the Company gained possession on October 31, 2017. As a result of the ter- mination, the mortgage loan agreement requires that Saul Centers guarantee approximately $9.2 million of that loan effective October 31, 2017 (the termination date), which will be reduced upon satisfaction of conditions stated in the loan documents. Annual revenue to the Company under the Kmart lease totaled approximately $1.3 million. In Septem- ber 2018, the Company executed a lease with At Home for all of the space, which opened for business in January 2019. In May 2018, the Company acquired from the Saul Trust, in exchange for 176,680 limited partnership units, ap- proximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Ashburn, Virginia. The Company has received site plan approval and building permits for an approximately 88,000 square foot neighborhood shopping center. A 29,000 square foot anchor grocery store lease has been executed with Lidl and, including an executed gas station pad lease and shop space leases, overall pre-leasing totals approximately 44% of the planned space. In addition, lease negotiations are in progress for approximately 12,000 square feet of the planned pad building and small shop space. Site work commenced in November 2018, the grocer is scheduled to begin construction in the second quarter of 2019, and the shopping center is scheduled to open in early 2020. After construction of the shopping center and upon stabilization, the Company may be obligated to issue additional limited partnership units to the Saul Trust. In September 2018, the Company purchased for $35.5 million, plus $0.7 million of acquisition costs, an office build- ing and the underlying ground located at 7316 Wisconsin Avenue in Bethesda, Maryland. This site has mixed-use development potential of up to 325 apartment units and ap- proximately 10,000 square feet of street level retail pursuant to the approved Bethesda Downtown Plan. In December 2018, the Company purchased for $4.5 million, including acquisition costs, an interest in an adjacent parcel of land Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMand retail building. The Company is evaluating concept plans for the combined property in order to increase the mixed-use development potential by up to 40 additional apartment units. The purchase price was funded through the Company’s credit facility. In March 2019, the Company plans to commence de- velopment of a pad site expansion on land owned at its Lansdowne Town Center property in Ashburn, Virginia. Total development costs are expected to be approximately $4.0 million. A ground lease with Chick-fil-A has been ex- ecuted for one pad with the building to be constructed by the tenant. A lease with Starbucks has been executed for another pad and the Company will construct the building shell. Both buildings are projected to be completed and occupied by early 2020. In light of the limited amount of quality properties for sale and the escalated pricing of properties that the Company has been presented with or has inquired about over the past year, 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, management be- lieves 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 evalu- ate 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 Washington, DC metropolitan area have remained rela- tively stable, issues facing the Federal government relating to taxation, spending 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 prop- erty operating income is produced by our shopping centers, we continually monitor the implications of government pol- icy changes, as well as shifts in consumer demand 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 merchandising strategies in a way to maximize our future performance. The Company’s commercial leasing percent- age, on a comparable property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, increased to 95.7% at December 31, 2018, from 94.3% at December 31, 2017. 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, 2018, amortizing fixed-rate mortgage debt with staggered maturities from 2019 to 2035 represented ap- proximately 88.2% of the Company’s notes payable, thus minimizing refinancing risk. The Company’s variable-rate debt consists of $122.0 million outstanding under the credit facility. As of December 31, 2018, the Company has loan availability of approximately $190.7 million under its $325.0 million revolving credit facility. On January 4, 2019, the Company repaid in full the remain- ing balance of the mortgage loan secured by Countryside Marketplace, which was scheduled to mature in July 2019. On January 10, 2019, the Company closed on a 15-year, non-recourse $22.1 million mortgage loan secured by Olde Forte Village. The loan matures in 2034, bears interest at a fixed-rate of 4.65%, requires monthly principal and inter- est payments of $124,700 based on a 25-year amortization schedule and requires a final payment of $12.1 million. Proceeds were partially used to repay in full the existing mortgage secured by Olde Forte Village, which was sched- uled to mature in May 2019. The Operating Partnership entered into a Credit Agree- ment dated January 26, 2018, by and among the Operating Partnership, as Borrower, Wells Fargo Bank, National As- sociation, as Administrative Agent, Capital One, National Association, as Syndication Agent, Wells Fargo Securities, LLC and Capital One, National Association, as Joint Lead Ar- rangers, Wells Fargo Securities, LLC, as Sole Bookrunner and Wells Fargo Bank, National Association, Capital One, N.A., U.S. Bank National Association, TD Bank, N.A., Regions Bank and Associated Bank, National Association, as Lenders (the “New Credit Agreement”). The New Credit Agreement consists of a $400.0 million credit facility, of which $325.0 million is a revolving credit facility and $75.0 million is a term loan. The revolving credit facility matures on January 26, 2022, and may be extended by the Company for one additional year, subject to satisfac- tion of certain conditions. The term loan matures on January 26, 2023, and may not be extended. In general, loan availability under the New Facility is primarily determined by operating income from the Company’s exist- ing unencumbered properties. Interest accrues at a rate of LIBOR plus a spread of 135 basis points to 195 basis points under the revolving credit facility, and 130 basis points to 190 basis points under the term loan, each as determined by cer- tain leverage tests. As of December 31, 2018, the applicable spread for borrowings is 135 basis points under the revolving credit facility and 130 basis points under the term loan. P A G E 13 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMP A G E 14 The Company and certain subsidiaries of the Operating Partnership and the Company have guaranteed the payment obligations of the Partnership under the new facility. Although it is management’s present intention to con- centrate future acquisition and development activities on community and neighborhood shopping centers and office properties in the Washington, D.C. metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities pres- ent themselves. While the Company 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 pre- pared 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 estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the 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 aggregate 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 prepared 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 relative fair values. The fair value of buildings generally is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates and considers the present value of all cash flows expected to be generated by the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assess- ing the net effective rent and remaining term of the in-place lease relative to market terms for similar leases at acquisition taking 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 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 remain- ing contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets 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 development purposes. The property may be improved with an existing structure that would be demolished as part of the development. In such cases, the fair value of the building may be determined based only on existing leases and not include estimated cash flows related to future leases. Acquisition-related transac- tion 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 indi- cates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real es- tate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors in identifying impairment indicators including recur- ring operating losses, significant decreases in occupancy, and significant adverse changes in market conditions, 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 undis- counted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the prop- erty. If the carrying value is greater than the undiscounted projected cash flows, the Company would recognize an im- pairment loss equivalent to an amount required to adjust Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM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 projections, the valuation could be nega- tively or positively affected. When incurred, the Company capitalizes the cost of im- provements that extend the useful life of property and equipment. All repair and maintenance expenditures are expensed when incurred. Leasehold improvements expendi- tures are capitalized when certain criteria are met, including when we supervise construction and will own the improve- ment. 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 con- struction, the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. Com- mercial 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 proj- ects are considered substantially complete and available for occupancy upon receipt of the certificate of occupancy from the appropriate licensing authority. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of generally between 35 and 50 years for base buildings, or a shorter period if management deter- mines that the building has a shorter useful life, and up to 20 years for certain other improvements. Legal Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of current matters will not have a material adverse effect on its financial position or the results of operations. Upon determination that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine. RESULTS OF OPERATIONS The following is a discussion of the components of revenue and expense for the entire Company. Revenue P A G E 15 (Dollars in thousands) Base rent Expense recoveries Percentage rent Other property revenue Other revenue Year ended December 31, 2017 2018 2016 $ 184,684 $ 181,141 $ 172,381 35,537 35,347 34,269 994 6,689 272 1,458 9,259 80 1,379 8,990 51 Total revenue $ 228,176 $ 227,285 $ 217,070 Percentage Change 2018 from 2017 2017 from 2016 2.0 % 0.5 % (31.8) % (27.8) % 240.0 % 0.4 % 5.1 % 3.1 % 5.7 % 3.0 % 56.9 % 4.7 % Base rent includes $(0.9) million, $0.5 million and $1.8 million, for the years 2018, 2017, and 2016, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $1.5 million, $1.7 million and $1.8 million, for the years 2018, 2017, and 2016, respectively, to recognize income from the amortization of in-place leases. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total revenue increased 0.4% in 2018 compared to 2017 primarily due to (a) a $0.64 per square foot increase in base rent ($5.5 million), exclusive of the net impact of 2017 lease terminations at Broadlands and Kentlands Square II, (b) higher residential base rent ($1.0 million), (c) higher other property revenue ($1.0 million), exclusive of the termination fee at Broadlands and (d) higher expense recoveries ($0.2 million), partially offset by (e) the net impact of 2017 lease terminations at Broadlands and Kentlands Square II ($3.5 million), (f) a 142,665 square foot decrease in leased space ($2.8 million), exclusive of the net impact of a 2017 lease termination at Broadlands and Kentlands Square II, and (g) lower percentage rent ($0.5 million). Total revenue in- creased 4.7% in 2017 compared to 2016 primarily due to (a) a $0.76 per square foot increase in base rent ($6.6 mil- lion), (b) higher residential base rent ($4.8 million), and (c) higher expense recoveries ($1.1 million) partially offset by (d) a 135,477 square foot decrease in leased space ($2.5 million). A discussion of the components of revenue follows. Base rent The $3.5 million increase in base rent in 2018 compared to 2017 was attributable to (a) a $0.64 per square foot increase in base rent ($5.5 million) and (b) higher residential base rent ($1.0 million) partially offset by (c) a 142,665 square foot decrease in leased space ($2.8 million). The $8.8 mil- lion increase in base rent in 2017 compared to 2016 was attributable to (a) a $0.76 per square foot increase in base rent ($6.6 million) and (b) higher residential base rent ($4.8 million) partially offset by (c) a 135,477 square foot decrease in leased space ($2.5 million). Expense recoveries Expense recovery income increased $0.2 million in 2018 compared to 2017. Expense recovery income increased $1.1 million in 2017 compared to 2016 primarily due to higher real estate tax expense. Other revenue Other property revenue decreased $2.6 million in 2018 com- pared to 2017 primarily due to the collection in 2017 of a termination fee at Broadlands ($3.6 million) partially offset by termination fees collected in 2018 ($0.7 million). Other property revenue increased $0.3 million in 2017 compared to 2016. P A G E 16 (Dollars in thousands) Operating Expenses Year ended December 31, 2017 2018 2016 Percentage Change 2018 from 2017 2017 from 2016 Property operating expenses $ 28,202 $ 27,689 $ 27,527 1.9 % Provision for credit losses 685 906 1,494 (24.4) % Real estate taxes 27,376 26,997 24,680 1.4 % 45,040 47,225 45,683 (4.6) % Interest expense and amortization of deferred debt costs Depreciation and amortization of deferred leasing costs 45,861 45,694 44,417 General and administrative 18,459 18,176 17,496 Acquisition related costs — — 60 Total expenses $ 165,623 $ 166,687 $ 161,357 0.4 % 1.6 % — (0.6) % 0.6 % (39.4) % 9.4 % 3.4 % 2.9 % 3.9 % (100.0) % 3.3 % Total operating expenses decreased 0.6% in 2018 compared to 2017. Total operating expenses increased 3.3% in 2017 compared to 2016. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Property operating expenses Property operating expenses increased $0.5 million in 2018 compared to 2017. Property operating expenses increased $0.2 million in 2017 compared to 2016. 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 0.30%, 0.40%, and 0.69% for 2018, 2017, and 2016, respectively. Real estate tax es Real estate taxes increased $0.4 million in 2018 compared to 2017. Real estate taxes increased $2.3 million in 2017 compared to 2016 primarily due to (a) Park Van Ness ($0.7 million), (b) Burtonsville Town Square ($0.4 million) and (c) small increases throughout the remainder of the portfolio. Interest expense and amortization of deferred debt costs Interest expense and amortization of deferred debt costs de- creased by $2.2 million in 2018 compared to 2017 primarily due to higher capitalized interest ($2.7 million). Interest expense and amortization of deferred debt costs increased by $1.5 million in 2017 compared to 2016 primarily due to (a) Burtonsville Town Square ($2.2 million) and (b) Park Van Ness ($0.7 million) partially offset by (c) higher capital- ized interest ($1.0 million) and (d) lower average balances of mortgage debt throughout the portfolio ($0.4 million). Depreciation and amortization Depreciation and amortization of deferred leasing costs increased by $0.2 million in 2018 compared to 2017. Depre- ciation and amortization of deferred leasing costs increased $1.3 million in 2017 compared to 2016 primarily due to (a) Burtonsville Town Square ($1.4 million) and (b) Park Van Ness ($1.2 million) partially offset by (c) lower expense at North Glebe Road ($0.9 million) and (d) lower expense at 1500 Rockville Pike ($0.3 million). GAIN ON SALES OF PROPERTIES Gain on sale of property in 2018 resulted from the recogni- tion of the gain deferred in connection with the September 2017 sale of Great Eastern. Gain on sale of property in 2016 resulted from the December 2016 sale of Crosstown Business Center. SAME PROPERTY REVENUE AND SAME PROPERTY OPERATING INCOME Same property revenue and same property operating in- come are non-GAAP financial measures of performance and improve the comparability of these measures by excluding the results of properties which were not in operation for the entirety of the comparable reporting periods. We define same property revenue as property revenue minus the revenue of properties not in operation for the entirety of the comparable reporting periods, and we define same property operating income as property operating income minus 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. Accordingly, 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 oper- ating performance 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 amorti- zation expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative ex- penses 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. P A G E 17 General and administrative General and administrative costs increased $0.3 million in 2018 compared to 2017 primarily due to increased unused line of credit fees ($0.2 million). General and administrative costs increased $0.7 million in 2017 compared to 2016 primar- ily due to increased salary and benefit expense ($0.6 million). Same property revenue and same property operating income are measures of the operating performance of our proper- ties 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. Acquisition related costs Acquisition related costs in 2016 totaling approximately $0.1 million relate to the purchase of a retail pad site adjacent to the Company’s existing Thruway Shopping Center. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMThe tables below provide reconciliations of property revenue and property operating income under GAAP to same property revenue and same property operating income for the indicated periods. The same property results include 48 Shopping Centers and six Mixed-Use properties for each period. Same Property Revenue (in thousands) Total property revenue Less: Acquisitions, dispositions and development properties Total same property revenue Shopping centers Mixed-Use properties Total same property revenue Total shopping center revenue Less: Shopping Center acquisitions, dispositions and development properties Total same shopping center property revenue Total mixed-use property revenue Less: Mixed-Use acquisitions, dispositions and development properties Total same Mixed-Use revenue Year ended December 31, 2018 2017 $ 227,904 $ 227,205 (5,839) 222,065 159,806 62,259 222,065 164,671 (4,865) 159,806 63,233 (974) 62,259 $ $ $ $ $ $ $ $ $ $ $ $ $ (5,460) 221,745 160,393 61,352 221,745 165,853 (5,460) 160,393 61,352 — $ 61,352 P A G E 18 The $0.3 million increase in same property revenue for 2018 compared to 2017 was primarily due to (a) a $0.48 per square foot increase in base rent ($4.0 million), exclusive of the net impact of 2017 lease terminations at Broadlands and Kentlands Square II, (b) higher other property revenue ($0.6 million), exclusive of the termination fee at Broadlands and (c) increased expense recovery income ($0.3 million), partially offset by (d) the net impact of 2017 lease terminations at Broadlands and Kentlands Square II ($3.5 million) and (e) a 67,786 square foot decrease in leased space ($1.3 million), exclusive of the net impact of 2017 lease terminations at Broadlands and Kentlands Square II. Same Property Operating Income (in thousands) Property operating income Less: Acquisitions, dispositions and development properties Total same property operating income Shopping centers Mixed-Use properties Total same property operating income Shopping Center operating income Less: Shopping Center acquisitions, dispositions and development properties Total same Shopping Center operating income Mixed-Use property operating income Less: Mixed-Use acquisitions, dispositions and development properties Total same Mixed-Use property operating income Year ended December 31, 2018 2017 $ 171,641 $ 171,613 (4,787) 166,854 125,641 41,213 166,854 129,701 (4,060) 125,641 41,940 (727) 41,213 $ $ $ $ $ $ $ $ $ $ $ $ $ (4,083) 167,530 127,095 40,435 167,530 131,178 (4,083) 127,095 40,435 — $ 40,435 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Operating Activities Net cash provided by operating activities increased $6.8 million to $110.3 million for the year ended December 31, 2018 compared to $103.5 million for the year ended De- cember 31, 2017. Net cash provided by operating activities represents, in each year, cash received primarily from rental income, plus other income, less property operating expenses, normal recurring general and administrative expenses and in- terest payments on debt outstanding. Investing Activities Net cash used in investing activities increased $15.4 million to $128.7 million for the year ended December 31, 2018 from $113.3 million for the year ended December 31, 2017. Investing activities in 2018 primarily reflect tenant improvements and capital expenditures ($12.9 million), the Company’s development activities ($76.3 million) and the acquisition of various retail real estate assets ($40.8 million). Net cash used in investing activities increased $27.0 million to $113.3 million for the year ended December 31, 2017 from $86.3 million for the year ended December 31, 2016. Investing activities in 2017 primarily reflect (a) tenant im- provements and capital expenditures ($17.7 million), (b) the Company’s development activities ($22.8 million) and (c) the acquisition of various retail real estate assets ($79.5 million). Financing Activities Net cash provided by financing activities was $22.0 million and $12.4 million for the years ended December 31, 2018 and 2017, respectively. Net cash used in financing activities in 2018 primarily reflects: • proceeds of $54.9 million from mortgage notes payable; • proceeds of $75.0 million from the term loan facility; • net proceeds of $72.4 million from the issuance of Series D preferred stock; • proceeds of $102.0 million received from revolving credit facility draws; • proceeds of $5.4 million from the issuance of limited partnership units in the Operating Partnership under the dividend reinvestment program; • proceeds of $30.5 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 $23.3 million received from construction loan draws. P A G E 19 Same property operating income decreased $0.7 million for 2018 compared to 2017 due primarily to (a) the net impact of 2017 lease terminations at Broadlands and Kentlands II ($3.5 million), (b) a 67,786 square foot decrease in leased space ($1.3 million), (c) lower percentage rent ($0.5 million) and (d) higher commercial property operating expenses net of expense recoveries ($0.5 million), partially offset by (e) a $0.48 per square foot increase in base rent ($4.0 million), exclusive of the net impact of 2017 lease terminations at Broadlands and Kentlands Square II, (f) higher residential operating income ($0.8 million) and (g) higher other property revenue ($0.6 mil- lion), exclusive of the termination fee at Broadlands. IMPACT OF INFLATION Inflation has remained relatively low during 2018 and 2017. The impact of rising operating expenses due to inflation on the operating 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 operations. These provisions include upward periodic adjustments in base rent due from tenants, usually based on a stipulated increase and to a lesser extent on a factor of the change in the consumer price index, commonly referred to as the CPI. In addition, substantially all of the Company’s properties are leased to tenants under long-term leases, which provide for reimbursement 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 expenses exceed increases in their revenue. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $14.6 million and $10.9 mil- lion at December 31, 2018 and 2017, respectively. The changes in cash and cash equivalents during the years ended December 31, 2018 and 2017 were attributable to operat- ing, investing and financing activities, as described below. (in thousands) Net cash provided by operating activities Net cash used in investing activities Net cash provided in financing activities Year Ended December 31, 2018 2017 $ 110,339 $ 103,450 (128,650) (113,306) 21,981 12,442 Increase in cash equivalents $ 3,670 $ 2,586 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM which was partially offset by: • the partial redemption of Series C preferred stock totaling $75.0 million; • the repayment of mortgage notes payable totaling $72.6 million; • the repayment of amounts borrowed under the revolving credit facility totaling $116.0 million; • distributions to common stockholders totaling $46.3 million; • distributions to holders of convertible limited partnership units in the Operating Partnership totaling $16.0 million; • distributions made to preferred stockholders totaling $12.4 million; and • payments of $3.2 million for financing costs of mortgage notes payable; Net cash provided by financing activities for the year ended December 31, 2017 primarily reflects: • proceeds of $100.0 million from mortgage notes payable; • proceeds of $63.0 million received from revolving credit facility; • proceeds of $6.7 million from the issuance of limited partnership units in the Operating Partnership under the dividend reinvestment program; • proceeds of $22.8 million received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options; and • proceeds of $1.4 million from construction loan draws. which was partially offset by: • repayments of $51.0 million on the revolving credit facility; • the repayment of mortgage notes payable totaling $55.7 million; • distributions to common stockholders totaling $44.6 million; • distributions to holders of convertible limited partnership units in the Operating Partnership totaling $15.3 million; • distributions made to preferred stockholders totaling $12.4 million; and • payments of $2.6 million for financing costs of new mortgage loans; P A G E 20 LIQUIDITY REQUIREMENTS Short-term liquidity requirements consist primarily of nor- mal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to com- mon 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 properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate in- vestment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity require- ments (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit. Long-term liquidity requirements consist primarily of ob- ligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for property acquisitions and developments. The Company is developing a primarily residential project with street-level retail at 750 N. Glebe Road in Arlington, Virginia. The total cost of the project, including acquisition of land, is ex- pected to be approximately $275.0 million. The Company had invested $162.2 million as of December 31, 2018, and expects to invest approximately $73.4 million during 2019. The 2019 cost and the remaining cost will be funded by a $157.0 million construction-to-permanent loan. The Com- pany may also redevelop certain of the Current Portfolio Properties and may develop additional freestanding outpar- cels 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 pro- vide long-term earnings and cash flow growth. During the coming year, developments, expansions or acquisitions are expected to be funded with available cash, bank borrowings from the Company’s credit line, construction and permanent financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or eq- uity capital resources available to the Company. Any future borrowings may be at the Saul Centers, Operating Partner- ship or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Part- nership which can be converted into shares of Saul Centers common stock. The availability and terms of any such financ- ing will depend upon market and other conditions. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMContractual Payment Obligations As of December 31, 2018, the Company had unfunded contractual payment obligations of approximately $209.7 million, excluding operating obligations, due within the next 12 months. The table below shows the total contractual payment obli- gations as of December 31, 2018. (Dollars in thousands) Payments Due By Period Contractual Payment Obligations Notes Payable: Interest Scheduled Principal Balloon Payments Subtotal Corporate Headquarters Lease (1) Development Obligations Tenant Improvements One Year or Less More than 1 and up to 3 Years More than 3 and up to 5 Years After 5 Years Total $ 45,632 $ 78,901 $ 67,200 $ 131,888 $ 323,621 2,257 60,794 108,683 787 80,908 19,352 55,857 72,175 206,933 1,646 13,449 931 57,125 167,727 292,052 140 — — 136,122 480,132 251,361 780,828 748,142 1,355,810 — — — 2,573 94,357 20,283 Total Contractual Obligations $ 209,730 $ 222,959 $ 292,192 $ 748,142 $ 1,473,023 (1) See Note 7 to Consolidated Financial Statements. Corporate Headquarters Lease amounts represent an allocation to the Company based upon employees’ time dedicated to the Company’s business as specified in the Shared Services Agreement. Future amounts are subject to change as the number of employees employed by each of the parties to the lease fluctuates. Management believes that the Company’s cash flow from operations and its capital resources, which at December 31, 2018, included cash balances of $14.6 million and borrow- ing availability of approximately $190.7 million under its revolving credit facility, will be sufficient to meet its contrac- tual obligations for the foreseeable future. six or more quarters (whether or not declared or consecu- tive) and in certain other events. On February 22, 2018, the proceeds from the offering, together with cash on hand, were used to redeem 3.0 million depositary shares, each representing 1/100th of a share of the Company’s 6.875% Series C Cumulative Redeemable Preferred Stock. Preferred Stock Issues On January 23, 2018, Saul Centers sold, in an underwritten public offering, 3.0 million depositary shares, each repre- senting 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock, providing net cash proceeds of approximately $72.6 million. The depositary shares may be redeemed at the Company’s option, in whole or in part, on or after January 23, 2023, at the $25.00 liquidation prefer- ence, plus accumulated dividends to but not including the redemption date. The depositary shares pay an annual div- idend of $1.53125 per share, equivalent to 6.125% of the $25.00 liquidation preference. The Series D preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the de- positary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for At December 31, 2018, the Company had outstanding, 4.2 million depositary shares, each representing 1/100th of a share of 6.875% Series C Cumulative Redeemable Preferred Stock (“Series C Stock”). The depositary shares are redeem- able at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid div- idends. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The Series C Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes of control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. P A G E 21 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Dividend Reinvestments In December 1995, the Company established a Dividend Reinvestment Plan (the “Plan”) to allow its common stock- holders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distribu- tions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Company issued 566,435 and 258,759 shares under the Plan at a weighted average dis- counted price of $50.31 and $59.20 per share during the years ended December 31, 2018 and 2017, respectively. The Company issued 107,433 and 111,351 limited part- nership units under the Plan at a weighted average price of $50.56 and $60.48 per unit during the years ended De- cember 31, 2018 and 2017, respectively. The Company also credited 6,493 and 7,252 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ Deferred Compensation Plan at a weighted average dis- counted price of $50.28 and $59.70 per share, during the years ended December 31, 2018 and 2017, respectively. P A G E 22 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 reasonably 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, 2018. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company’s debt capitalization policy in light of current economic conditions, relative costs of capital, market values of the Company property portfolio, opportu- nities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company’s debt capitalization policy based on such a reevaluation without shareholder approval and consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more fa- vorable loan terms, whenever management determines the financing environment is favorable. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMThe following is a summary of notes payable as of December 31, 2018 and 2017. Notes Payable Year Ended December 31, (Dollars in thousands) 2018 2017 Fixed rate mortgages: $ Total fixed rate Variable rate loans: $ (a) — 9,159 (b) 12,676 (c) 12,714 (d) 11,295 (e) 9,601 (f) 7,766 (g) 36,711 (h) 6,943 (i) 5,480 (j) 31,723 (k) 9,728 (l) 10,609 (m) 11,702 (n) 14,952 (o) 13,013 (p) 23,198 (q) 27,222 (r) 27,168 (s) 14,086 (t) 102,310 (u) 30,888 (v) 35,258 (w) 16,515 (x) 62,630 (y) 15,345 (z) 38,120 (aa) 15,547 (bb) 27,060 (cc) 14,526 (dd) 38,076 (ee) 69,691 (ff) 58,523 (gg) 31,941 (hh) 22,900 (ii) 11,781 (jj) 23,332 (kk) 910,189 47,000 (ll) 75,000 (mm) — (nn) 30,201 9,783 13,529 13,543 12,029 9,948 8,244 37,998 7,325 5,649 32,673 9,999 10,877 12,577 15,452 13,438 23,873 28,115 28,025 14,537 105,817 32,016 36,507 17,086 64,472 15,859 39,968 16,055 27,884 14,950 39,140 71,211 60,000 — — 11,613 — 890,393 61,000 — 14,135 Total variable rate Total notes payable $ 122,000 $ 1,032,189 $ $ 75,135 965,528 Interest Rate* 5.88% 5.76% 5.62% 5.79% 5.22% 5.60% 5.30% 5.83% 5.81% 6.01% 5.62% 6.08% 6.43% 6.28% 7.35% 7.60% 7.02% 7.45% 7.30% 6.18% 5.31% 4.30% 4.53% 4.70% 5.84% 4.04% 3.51% 3.99% 3.69% 3.99% 3.39% 4.88% 3.75% 4.41% 4.69% 8.00% 4.67% 5.18% LIBOR + 1.35% LIBOR + 1.30% LIBOR + 1.65% 3.84% 5.02% P A G E 23 Scheduled Maturity* Jan-2019 May-2019 Jul-2019 Sep-2019 Jan-2020 May-2020 Jun-2020 Jul-2020 Feb-2021 Aug-2021 Jun-2022 Sep-2022 Apr-2023 Feb-2024 Jun-2024 Jun-2024 Jul-2024 Jul-2024 Jan-2025 Jan-2026 Apr-2026 Oct-2026 Nov-2026 Dec-2026 May-2027 Apr-2028 Jun-2028 Sep-2028 Mar-2030 Apr-2030 Feb-2032 Sep-2032 Dec-2032 Nov-2033 Jan-2034 Apr-2034 Sept-2035 8.5 Years Jan-2022 Jan-2023 Feb-2018 3.7 Years 8.0 Years * Interest rate and scheduled maturity data presented as of December 31, 2018. Totals computed using weighted averages. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM P A G E 24 (a) The loan was collateralized by three shopping centers, Broad- lands Village, The Glen and Kentlands Square I, and required 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. The loan was repaid in full in 2018 and replaced with two new loans. See (hh) and (ii) below. (b) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25-year amortization schedule and a final payment of $9.0 million at loan maturity. Principal of $624,100 was amortized during 2018. (c) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12.3 million at loan maturity. Principal of $853,100 was amortized during 2018. (d) 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 $829,100 was amortized during 2018. (i) (f) (e) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25-year amortization schedule and a final payment of $10.6 million at loan maturity. Principal of $733,800 was amortized during 2018. The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30-year amortization schedule and a final payment of $9.1 million at loan maturity. Principal of $347,300 was amortized during 2018. (g) The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25-year amortization schedule and a final payment of $7.1 million at loan maturity. Principal of $477,900 was amortized during 2018. (h) The loan and a corresponding interest-rate swap closed on June 29, 2010 and are collateralized by Thruway. On a combined basis, the loan and the interest-rate swap require equal monthly principal and interest payments of $289,000 based upon a 25-year amortization schedule and a final payment of $34.8 million at loan maturity. Principal of $1.3 million was amortized during 2018. The loan is collateralized by Jamestown Place and requires equal monthly principal and interest payments of $66,000 based upon a 25-year amortization schedule and a final payment of $6.1 million at loan maturity. Principal of $381,700 was amortized during 2018. The loan is collateralized by Hunt Club Corners and requires equal monthly principal and interest payments of $42,000 based upon a 30-year amortization schedule and a final payment of $5.0 million, at loan maturity. Principal of $169,300 was amortized during 2018. (k) 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 $949,600 was amortized during 2018. The loan is collateralized by Orchard Park and requires equal monthly principal and interest payments of $73,000 based upon a 30-year amortization schedule and a final payment of $8.6 million at loan maturity. Principal of $270,300 was amortized during 2018. (m) The loan is collateralized by BJ’s Wholesale and requires equal monthly principal and interest payments of $80,000 based upon a 30-year amortization schedule and a final payment of $9.3 million at loan maturity. Principal of $268,400 was amortized during 2018. (n) 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 $874,800 was amortized during 2018. (l) (j) (o) The loan is collateralized by Leesburg Pike and requires equal monthly principal and interest payments of $135,000 based upon a 25-year amortization schedule and a final payment of $11.5 million at loan maturity. Principal of $499,800 was amortized during 2018. (p) The loan is collateralized by Village Center and requires equal monthly principal and interest payments of $119,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan maturity. Principal of $424,700 was amortized during 2018. (q) The loan is collateralized by White Oak and requires equal monthly principal and interest payments of $193,000 based upon a 24.4 year weighted amortization schedule and a final payment of $18.5 mil- lion at loan maturity. The loan was previously collateralized by Van Ness Square. During 2012, the Company substituted White Oak as the collateral and borrowed an additional $10.5 million. Principal of $675,200 was amortized during 2018. (r) The loan is collateralized by Avenel Business Park and requires equal monthly principal and interest payments of $246,000 based upon a 25-year amortization schedule and a final payment of $20.9 million at loan maturity. Principal of $893,200 was amortized during 2018. (s) The loan is collateralized by Ashburn Village and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $20.5 million at loan maturity. Principal of $857,000 was amortized during 2018. (t) The loan is collateralized by Ravenwood and requires equal monthly principal and interest payments of $111,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan maturity. Principal of $451,200 was amortized during 2018. (u) The loan is collateralized by Clarendon Center and requires equal monthly principal and interest payments of $753,000 based upon a 25-year amortization schedule and a final payment of $70.5 million at loan maturity. Principal of $3.5 million was amortized during 2018. (v) 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 $1.1 million was amor- tized during 2018. (w) The loan is collateralized by Kentlands Square II and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $23.1 million at loan maturity. Principal of $1.2 million was amortized during 2018. (x) The loan is collateralized by Cranberry Square and requires equal monthly principal and interest payments of $113,000 based upon a 25-year amortization schedule and a final payment of $10.9 million at loan maturity. Principal of $570,500 was amortized during 2018. (y) The loan in the original amount of $73.0 million closed in May 2012, is collateralized by Seven Corners and requires equal monthly principal and interest payments of $463,200 based upon a 25-year amortization schedule and a final payment of $42.3 million at loan maturity. Principal of $1.8 million was amortized during 2018. (z) The loan is collateralized by Hampshire Langley and requires equal monthly principal and interest payments of $95,400 based upon a 25-year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $513,700 was amortized in 2018. (aa) The loan is collateralized by Beacon Center and requires equal monthly principal 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 $1.8 million was amortized in 2018. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM(bb) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $94,900 based upon a 25-year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $507,600 was amortized in 2018. (cc) The loan is collateralized by Shops at Fairfax and Boulevard shop- ping centers and requires equal monthly principal and interest payments totaling $153,300 based upon a 25-year amortization schedule and a final payment of $15.5 million at maturity. Principal of $824,000 was amortized in 2018. (dd) 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 $423,600 was amortized in 2018. (ee) The loan is collateralized by Burtonsville Town Square and requires equal monthly principal and interest payments of $197,900 based on a 25-year amortization schedule and a final payment of $20.3 million at loan maturity. Principal of $1.1 million was amortized in 2018. (ff) The loan is a $71.6 million construction-to-permanent facility that is collateralized by and financed a portion of the construction costs of Park Van Ness. During the construction period, interest was funded by the loan. Effective September 1, 2017, the loan converted to permanent financing and requires monthly principal and interest payments totaling $413,500 based upon a 25-year amortization schedule. A final payment of $39.6 million will be due at maturity. Principal of $1.5 million was amortized in 2018. (gg) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $308,500 based upon a 25-year amortization schedule and a final payment of $31.1 million at loan maturity. Principal of $1.5 million was amortized in 2018. (hh) The loan is collateralized by Broadlands Village and requires equal monthly principal and interest payments of $176,200 based on a 25-year amortization schedule and a final payment of $17.3 million at loan maturity. Principal of $58,600 was amortized in 2018. The carrying value of properties collateralizing the mortgage notes payable totaled $1.1 billion and $1.0 billion as of De- cember 31, 2018 and 2017, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. As of December 31, 2018, the Company was in com- pliance with all such covenants: • 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 ex- ceed 2.0x on a trailing four-quarter basis (interest expense coverage); and • limit the amount of debt so that interest, scheduled princi- pal amortization and preferred dividend coverage exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage). (ii) The loan is collateralized by The Glen and requires equal monthly principal and interest payments of $129,800 based on a 25-year amortization schedule and a final payment of $12.5 million at loan maturity. (jj) The Company entered into a sale-leaseback transaction with its Olney property 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 thereaf- ter. The arrangement provides for a final payment of $14.7 million and has an implicit interest rate of 8.0%. Negative amortization in 2018 totaled $168,600. (kk) The loan is a $157.0 million construction-to-permanent facility that is collateralized by and will finance a portion of the construction costs of Glebe Road. During the construction period, interest will be funded by the loan. After conversion to a permanent loan, monthly principal and interest payments totaling $887,900 will be required based upon a 25-year amortization schedule. (ll) The loan is a $325.0 million unsecured revolving credit facility. In- terest accrues at a rate equal to the sum of one-month LIBOR plus a spread of 135 basis points. The line may be extended at the Com- pany’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. (mm) The loan is a $75.0 million unsecured term facility. Interest accrues at a rate equal to the sum of one-month LIBOR plus a spread of 130 basis points. Monthly payments are interest only. (nn) The loan was collateralized by Metro Pike Center and required monthly principal and interest payments of approximately $48,000 and a final payment of $14.2 million at loan maturity. The loan was repaid in full during 2018. P A G E 25 2019 Financing Activity On January 4, 2019, the Company repaid in full the remain- ing balance of the mortgage loan secured by Countryside Marketplace, which was scheduled to mature in July 2019. On January 10, 2019, the Company closed on a 15-year, non-recourse $22.1 million mortgage loan secured by Olde Forte Village. The loan matures in 2034, bears interest at a fixed-rate of 4.65%, requires monthly principal and inter- est payments of $124,700 based on a 25-year amortization schedule and requires a final payment of $12.1 million. Proceeds were partially used to repay in full the existing mortgage secured by Olde Forte Village, which was sched- uled to mature in May 2019. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM2018 Financing Activity On January 26, 2018, the Company replaced its credit facil- ity. The new credit facility, which can be used for working capital, property acquisitions, development projects or letters of credit, totals $400.0 million, of which $325.0 million is a revolving credit facility and $75.0 million is a term loan. The revolving credit facility matures on January 26, 2022, and may be extended by the Company for one additional year, subject to satisfaction of certain conditions. The term loan matures on January 26, 2023, and may not be extended. In general, loan availability under the facility is primarily de- termined by operating income from the Company’s existing unencumbered properties. Interest accrues at a rate of LIBOR plus a spread of 135 basis points to 195 basis points under the revolving credit facility, and 130 basis points to 190 basis points under the term loan, each as determined by certain leverage tests. As of December 31, 2018, the applicable spread for borrowings is 135 basis points under the revolving credit facility and 130 basis points under the term loan. Saul Centers and certain consolidated subsidiaries of the Operat- ing Partnership have guaranteed the payment obligations of the Operating Partnership under the revolving credit facility. On October 3, 2018, the Company closed on a 15-year , non-recourse $32.0 million mortgage loan secured by Broad- lands Village. The loan matures in 2033, bears interest at a fixed-rate of 4.41%, requires monthly principal and inter- est payments of $176,200 based on a 25-year amortization schedule and requires a final payment of $17.3 million at maturity. P A G E 26 On December 18, 2018, the Company closed on a 15-year, non-recourse $22.9 million mortgage loan secured by The Glen. The loan matures in 2034, bears interest at a fixed-rate of 4.69%, requires monthly principal and interest payments of $129,800 based on a 25-year amortization schedule and requires a final payment of $12.5 million at maturity. 2017 Financing Activity On January 18, 2017, the Company closed on a 15-year, non-recourse $40.0 million mortgage loan secured by Burtonsville Town Square. The loan matures in 2032, bears interest at a fixed rate of 3.39%, requires monthly princi- pal and interest payments of $197,900 based on a 25-year amortization schedule and requires a final payment of $20.3 million million at maturity. On August 14, 2017, the Company closed on a $157.0 mil- lion construction-to-permanent loan, the proceeds of which will be used to partially fund the Glebe Road development project. The loan matures in 2035, bears interest at a fixed rate of 4.67%, requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the fourth quarter of 2021, and thereafter, monthly principal and interest payments of $887,900 based on a 25-year amortization schedule will be required. Effective September 1, 2017, the Company’s $71.6 million construction-to-permanent loan, which is fully drawn and secured by Park Van Ness, converted to permanent financ- ing. The loan matures in 2032, bears interest at a fixed rate of 4.88%, requires monthly principal and interest payments of $413,500 based on a 25-year amortization schedule and requires a final payment of $39.6 million at maturity. On November 20, 2017, the Company closed on a 15- year, non-recourse $60.0 million mortgage loan secured by Washington Square. The loan matures in 2032, bears in- terest at a fixed rate of 3.75%, requires monthly principal and interest payments of $308,500 based on a 25-year amortization schedule and requires a final payment of $31.1 million. Proceeds were used to repay the remaining balance of approximately $28.1 million on the existing mortgage and reduce the outstanding balance of the revolving credit facility. 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. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenue or ex- penses, results of operations, liquidity, capital expenditures or capital resources. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMFunds From Operations In 2018, the Company reported Funds From Operations (“FFO”)1 available to common stockholders and noncontrolling interests of $93.8 million, a 0.2% decrease from 2017 FFO available to common stockholders and noncontrolling interests of $94.0 million. The following table presents a reconciliation from net income to FFO available to common stockholders and noncon- trolling interests for the periods indicated: (Dollars in thousands except per share amounts) 2018 2017 2016 2015 2014 Year ended December 31, Net income Subtract: $ 63,059 $ 60,688 $ 56,720 $ 52,931 $ 57,988 Gains on sales of properties (509) — (1,013) (11) (6,069) Add: Real estate depreciation and amortization FFO Subtract: Preferred dividends Preferred stock redemption FFO available to common stockholders and noncontrolling interests Average shares and units used to compute FFO per share 45,861 108,411 45,694 106,362 44,417 100,124 43,270 96,190 41,203 93,122 (12,262) (2,328) (12,375) (12,375) (12,375) — — — (13,361) (1,480) $ 93,821 $ 93,987 $ 87,749 $ 83,815 $ 78,281 30,156 29,511 28,990 28,449 27,977 FFO per share $ 3.11 $ 3.18 $ 3.03 $ 2.94 $ 2.80 1 The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of perfor- mance 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 impairment charges on depreciable real estate assets and gains or losses from property dispositions. FFO does not rep- resent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company’s Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a meaningful supplemental measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what we believe occurs with our assets, and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other REITs. P A G E 27 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM ACQUISITIONS, REDEVELOPMENTS AND RENOVATION Management anticipates that during the coming year the Company will continue activities related to the redevelop- ment of 750 N. Glebe Road and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Although not currently planned, it is pos- sible that the Company may redevelop additional Current Portfolio Properties and may develop expansions within cer- tain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such prop- erties are expected to provide long-term earnings and cash flow growth. During the coming year, any developments, expansions or acquisitions are expected to be funded with borrowings from the Company’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital re- sources available to the Company. The Company has been selectively involved in acquisition, development, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for re- tail and office development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The following describes significant acquisitions, developments, redevelopments and renova- tions which affected the Company’s financial position and results of operations in 2018, 2017, and 2016. P A G E 28 700, 726, 730, 750 N. Glebe Road From 2014 through 2016, the Company purchased four ad- jacent properties on North Glebe Road in Arlington, Virginia, for an aggregate $54.0 million. The Company is develop- ing approximately 490 residential units and 60,000 square feet of retail space on 2.8 acres of land. Concrete work is substantially complete and pre-cast facade panels, ma- sonry and windows are being installed. Interior framing, electrical, plumbing and HVAC work have commenced. The development is scheduled for substantial completion in early 2020. The total cost of the project, including acquisition of land, is expected to be approximately $275.0 million, a portion of which is being financed by a $157.0 million con- struction-to-permanent loan. The Company has executed a 41,500 square foot anchor-lease with Target and leases for an aggregate of 9,000 square feet of retail shop space, re- sulting in approximately 84% of the retail space being leased. 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 struc- ture 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 December 31, 2018, 263 apartments (97.0%) were leased. The total cost of the proj- ect, 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. 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 Winston Salem, North Carolina, and incurred acquisition costs of $60,400. The property is contiguous with and an expansion of the Company’s Thruway Shopping Center. Ashbrook Marketplace In May 2018, the Company acquired from the Saul Trust, in exchange for 176,680 limited partnership units, ap- proximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Ashburn, Virginia. The Company has received site plan approval and building permits for an approximately 88,000 square foot neighborhood shopping center. A 29,000 square foot anchor grocery store lease has been executed with Lidl and, including an executed gas station pad lease and shop space leases, overall pre-leasing totals approximately 44% of the planned space. In addition, lease negotiations are in progress for approximately 12,000 square feet of the planned pad building and small shop space. Site work commenced in November 2018, the grocer is scheduled to begin construction in the second quarter of 2019, and the shopping center is scheduled to open in early 2020. After construction of the shopping center and upon stabilization, the Company may be obligated to issue additional limited partnership units to the Saul Trust. Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMBeacon Center In the fourth quarter of 2016, the Company purchased for $22.7 million, including acquisition costs, the land underly- ing Beacon Center. The land was previously leased by the Company with an annual rent of approximately $60,000. The purchase price was funded in part by an $11.25 million 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 $15.3 million, including acquisition costs, the land un- derlying 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 revolving credit facility. Burtonsville Town Square In January 2017, the Company purchased for $76.4 mil- lion, including acquisition costs, Burtonsville Town Square, a 121,000 square foot shopping center located in Burtonsville, Maryland. Burtonsville Town Square is 100% leased and anchored by Giant Food and CVS Pharmacy. The purchase was funded with a new $40.0 million mortgage loan and through the Company’s credit line facility. The mortgage bears interest at 3.39%, requires monthly principal and interest payments of $197,900 based upon a 25-year amor- tization schedule, and has a 15-year maturity. The Company has substantially completed construction of the shell of a 16,000 square foot small shop expansion and construc- tion of interior improvements is underway. Delivery of the first leased tenant spaces occurred in late 2018, with ini- tial tenant openings scheduled for the first quarter of 2019. The total development cost is expected to be approximately $5.7 million. Leases have been executed for approximately 55% of the space and the Company has prospects for an additional 3,900 square feet. In addition, a lease has been executed with Taco Bell who will construct a free-standing building on a pad site within the property. Olney Shopping Center In March 2017, the Company purchased for $3.1 million, including acquisition costs, the land underlying Olney Shop- ping Center. The land was previously leased by the Company with an annual rent of approximately $56,000. The pur- chase price was funded by the revolving credit facility. 7316 Wisconsin Avenue In September 2018, the Company purchased for $35.5 million, plus $0.7 million of acquisition costs, an office build- ing and the underlying ground located at 7316 Wisconsin Avenue in Bethesda, Maryland. This site has mixed-use development potential of up to 325 apartment units and ap- proximately 10,000 square feet of street level retail pursuant to the approved Bethesda Downtown Plan. In December 2018, the Company purchased for $4.5 million, including acquisition costs, an interest in an adjacent parcel of land and retail building. The Company is evaluating concept plans for the combined property in order to increase the mixed-use development potential by up to 40 additional apartment units. The purchase price was funded through the Company’s credit facility. Lansdowne Town Center In March 2019, the Company plans to commence de- velopment of a pad site expansion on land owned at its Lansdowne Town Center property in Ashburn, Virginia. Total development costs are expected to be approximately $4.0 million. A ground lease with Chick-fil-A has been ex- ecuted for one pad with the building to be constructed by the tenant. A lease with Starbucks has been executed for another pad and the Company will construct the building shell. Both buildings are projected to be completed and occupied by early 2020. PROPERTY SALES Crosstown Business Center In December 2016, the Company sold for $5.4 million the 197,100 square foot Crosstown Business Center located in Tulsa, Oklahoma and recognized a $1.0 million gain. Great Eastern Shopping Center In September 2017, the Company sold for $8.5 million the 255,400 square foot Great Eastern Shopping Center located in District Heights, Maryland. The Company provided $1.28 million second trust financing to the buyer, which bore in- terest at a fixed rate of 6%. In May 2018, the buyer repaid the loan in full and the Company recognized a $0.5 million gain that was previously deferred. P A G E 29 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM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 2018 2017 2016 49 49 49 7 6 6 7,750,271 1,146,438 7,750,098 1,076,838 7,882,054 1,076,208 96.0% 94.3% 96.0% 92.3% 94.5% 91.0% The residential components of Clarendon Center and Park Van Ness were 99.6% and 97.0% leased, respectively, at De- cember 31, 2018. 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 per- centage increased to 96.0% from 94.3% and the Mixed-Use leasing percentage decreased to 93.6% from 94.5%. The overall portfolio leasing percentage, on a comparative same property basis, increased to 95.7% at December 31, 2018 from 94.3% at December 31, 2017. The residential components of Clarendon Center and Park Van Ness were 96.7% and 95.9% leased, respectively, at December 31, 2017. 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 decreased to 94.2% from 96.1% and the Mixed-Use leasing percentage increased to 94.5% from 91.0%. The overall portfolio leasing percentage, on a comparative same property basis, decreased to 94.2% at December 31, 2017 from 95.5% at December 31, 2016. The 2016 Mixed-Use leasing percentage includes the recent- ly-developed Park Van Ness commercial space and excludes Crosstown Business Center. The residential components P A G E 30 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 opera- tion for the entirety of the comparable periods, 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 following table shows selected data for leases exe- cuted in the indicated periods. The information is based on executed leases without adjustment for the timing of occu- pancy, tenant defaults, or landlord concessions. The base rent for an expiring lease is the annualized contractual base rent, on a cash basis, as of the 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 contractual 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 Year ended December 31, Square Feet Base Rent per Square Foot Number of Leases New/Renewed Leases Expiring Leases 2018 2017 2016 1,555,620 1,315,192 1,292,483 281 280 244 $ 19.52 $ 19.26 19.60 17.24 19.45 17.05 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Additional information about commercial leasing activ- ity during the three months ended December 31, 2018, is set forth below. The below information includes leases for space which had not been previously leased during the period of the Company’s ownership, either as a result of acquisition or development. Commercial Leasing Activity Number of leases Square feet Per square foot average annualized: Base rent Tenant improvements Leasing costs Rent concessions New Leases Renewed Leases 26 113,458 40 142,837 $ 24.28 (6.76) (0.70) (0.48) $ 18.31 (0.47) (0.07) (0.05) Effective rents $ 16.34 $ 17.72 During 2018, the Company entered into 465 new or re- newed apartment leases. The monthly rent per square foot for these leases was unchanged at $3.44. During 2017, the Company entered into 475 new or renewed apartment leases, excluding new leases at Park Van Ness. The monthly rent per square foot for the 395 leases for units that were previously occupied decreased to $3.51 from $3.54. During 2016, the Company entered into 216 new or renewed apartment leases. The monthly rent per square foot for these leases increased to $3.57 from $3.45. As of December 31, 2018, 994,236 square feet of Commer- cial space was subject to leases scheduled to expire in 2019. Below is information about existing and estimated market base rents per square foot for that space. Expiring Leases Total Square feet Average base rent per square foot Estimated market base rent per square foot 994,236 19.98 $ 20.18 $ 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 fluctuations 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 instruments, 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 en- tered into an interest rate swap agreement with a $45.6 million notional amount to manage the interest rate risk as- sociated with $45.6 million of variable-rate mortgage 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, 2018 was approximately $0.4 million and is reflected in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet. The Company is exposed to interest rate fluctuations which will affect the amount of interest expense of its variable rate debt and the fair value of its fixed rate debt. As of December 31, 2018, the Company had variable rate indebt- edness totaling $122.0 million. If the interest rates on the Company’s variable rate debt instruments outstanding at De- cember 31, 2018 had been one percent higher, our annual interest expense relating to these debt instruments would have increased by $1.2 million, based on those balances. As of December 31, 2018, the Company had fixed-rate in- debtedness totaling $910.2 million with a weighted average interest rate of 5.18%. If interest rates on the Company’s fixed-rate debt instruments at December 31, 2018 had been one percent higher, the fair value of those debt instru- ments on that date would have decreased by approximately $47.7 million. P A G E 31 Management’s Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM 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 effectiveness of the Company’s internal control over fi- nancial reporting. Based upon the assessments, the Company’s management has concluded that, as of December 31, 2018, internal control over financial reporting was effective. The Com- pany’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s inter- nal control over financial reporting, which appears on page 34 in this Annual Report. the Company’s P A G E 32 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMReport of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Saul Centers, Inc. Opinion on the Financial Statements Basis for Opinion We have audited the accompanying consolidated balance sheet of Saul Centers, Inc. and subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of operations, comprehensive income, equity and cash flows for the year ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15(a)2(b) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial report- ing as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Tread- way Commission and our report dated February 26, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securi- ties and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis- statement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material mis- statement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presenta- tion of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Deloitte & Touche LLP McLean, Virginia February 26, 2019 We have served as the Company’s auditor since 2018. P A G E 33 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMReport of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Saul Centers, Inc. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regard- ing the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A compa- ny’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 trans- actions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with au- thorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dis- position of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over fi- nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Deloitte & Touche LLP McLean, Virginia February 26, 2019 Opinion on Internal Control over Financial Reporting We have audited the internal control over financial report- ing of Saul Centers, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company main- tained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on cri- teria established in Internal Control-Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 26, 2019 expressed an unqualified opinion thereon. Basis for Opinion P A G E 34 The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over fi- nancial reporting included in the accompanying Assessment of Effectiveness of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Compa- ny’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securi- ties and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over finan- cial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effec- tiveness of internal control based on the assessed risk, and performing such other procedures as we considered neces- sary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMReport of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Saul Centers, Inc. Opinion on the Financial Statements Basis for Opinion We have audited the accompanying consolidated balance sheet of Saul Centers, Inc. (the “Company”) as of December 31, 2017, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a)2(b) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all ma- terial respects, the financial position of the Company at December 31, 2017, and the results of its operations and its cash flows for each of the two years in the period ended De- cember 31, 2017, in conformity with U.S. generally accepted accounting principles. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securi- ties and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits in- cluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presenta- tion of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Ernst & Young LLP We served as the Company’s auditor from 2002 to 2018. Tysons, Virginia February 27, 2018 P A G E 35 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMConsolidated Balance Sheets (Dollars in thousands, except per share amounts) Assets Real estate investments Land Buildings and equipment Construction in progress Accumulated depreciation Cash and cash equivalents Accounts receivable and accrued income, net Deferred leasing costs, net Prepaid expenses, net Other assets Total assets Liabilities Mortgage notes payable Term loan facility payable Revolving credit facility payable Construction loan payable Dividends and distributions payable Accounts payable, accrued expenses and other liabilities Deferred income Total liabilities Equity P A G E 36 Preferred stock, 1,000,000 shares authorized: Series C Cumulative Redeemable, 42,000 and 72,000 shares issued and outstanding, respectively Series D Cumulative Redeemable, 30,000 and 0 shares issued and outstanding, respectively Common stock, $0.01 par value, 40,000,000 shares authorized, 22,739,207 and 22,123,128 shares issued and outstanding, respectively Additional paid-in capital Distributions in excess of accumulated earnings Accumulated other comprehensive loss Total Saul Centers, Inc. equity Noncontrolling interests Total equity Total liabilities and equity The Notes to Financial Statements are an integral part of these statements. December 31, 2018 December 31, 2017 $ 488,918 $ 450,256 1,273,275 185,972 1,948,165 (525,518) 1,422,647 14,578 53,876 28,083 5,175 3,130 1,261,830 91,114 1,803,200 (488,166) 1,315,034 10,908 54,057 27,255 5,248 9,950 $ 1,527,489 $ 1,422,452 $ 880,271 $ 897,888 74,591 45,329 21,655 19,153 32,419 28,851 — 60,734 — 18,520 23,123 29,084 1,102,269 1,029,349 105,000 180,000 75,000 227 384,533 (208,593) (255) 355,912 69,308 425,220 — 221 352,590 (197,710) (696) 334,405 58,698 393,103 $ 1,527,489 $ 1,422,452 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Consolidated Statements OF OPERATIONS (Dollars in thousands, except per share amounts) For The Year Ended December 31, 2017 2018 2016 Property revenue Base rent Expense recoveries Percentage rent Other $ 184,684 $ 181,141 $ 172,381 35,537 994 6,689 35,347 1,458 9,259 34,269 1,379 8,990 Total property revenue 227,904 227,205 217,019 Property operating expenses Property operating expenses Provision for credit losses Real estate taxes Total property expenses 28,202 685 27,376 56,263 27,689 906 26,997 55,592 27,527 1,494 24,680 53,701 Property operating income 171,641 171,613 163,318 Other revenue Other expenses Interest expense and amortization of deferred debt costs Depreciation and amortization of deferred leasing costs General and administrative Acquisition related costs Total other expenses Operating income Change in fair value of derivatives Gains on sale of property Net Income Noncontrolling interests 272 80 51 45,040 45,861 18,459 — 47,225 45,694 18,176 — 45,683 44,417 17,496 60 109,360 111,095 107,656 P A G E 37 62,553 (3) 509 63,059 60,598 70 — 60,668 Income attributable to noncontrolling interests (12,505) (12,411) Net income attributable to Saul Centers, Inc. 50,554 48,257 Extinguishment of issuance costs upon redemption of preferred shares Preferred stock dividends (2,328) (12,262) — (12,375) Net income available to common stockholders $ 35,964 $ 35,882 $ 32,904 Per share net income available to common stockholders Basic Diluted $ $ 1.61 1.60 $ $ 1.64 1.63 $ $ 1.53 1.52 The Notes to Financial Statements are an integral part of these statements. 55,713 (6) 1,013 56,720 (11,441) 5,279 — (12,375) SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Consolidated Statements OF COMPREHENSIVE INCOME (Dollars in thousands) Net income Other comprehensive income Unrealized gain on cash flow hedge Total comprehensive income Comprehensive income attributable to noncontrolling interests Total comprehensive income attributable to Saul Centers, Inc. Extinguishment of issuance costs upon redemption of preferred shares Preferred dividends For The Year Ended December 31, 2017 2018 2016 $ 63,059 $ 60,668 $ 56,720 594 63,653 (12,658) 50,995 (2,328) (12,262) 812 61,480 (12,620) 48,860 — (12,375) 678 57,398 (11,616) 45,782 — (12,375) Total comprehensive income available to common stockholders $ 36,405 $ 36,485 $ 33,407 The Notes to Financial Statements are an integral part of these statements. P A G E 38 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Consolidated Statements OF EQUITY Preferred Stock Common Stock Additional Paid-in Capital Distributions in Excess of Accumulated Earnings Accumulated Other Comprehensive (Loss) Total Saul Centers, Inc. Noncontrolling Interests Total $ 180,000 $ 213 $ 305,008 $ (180,091) $ (1,802 ) $ 303,328 $ 50,399 $ 353,727 2 10,309 2 12,854 — — — 45,279 — (9,282) (30,328) (3,093) — 10,311 — 10,311 — 12,856 — 12,856 — — 503 — — — — 45,279 503 (9,282) (30,328) (3,093) 6,910 11,441 175 — (10,392) — 6,910 56,720 678 (9,282) (40,720) (3,093) 180,000 217 328,171 (188,584) (1,299) 318,505 54,744 373,249 — (11,069) — (11,069) (3,789) (14,858) — — — — — — — — — — — — — — — — — — — — — — — — — — 221 — — 2 15,748 2 8,671 — — — 48,257 — (9,282) (33,490) (3,093) — 15,750 — 15,750 — 8,673 — 8,673 — — 603 — — — — (696) — — — 48,257 603 (9,282) (33,490) (3,093) 6,735 12,411 209 — (11,479) — 6,735 60,668 812 (9,282) (44,969) (3,093) (11,518) (3,922) (15,440) 334,405 72,367 (75,017) 58,698 — — 393,103 72,367 (75,017) P A G E 39 — (11,518) 352,590 (2,633) 2,311 (197,710) — (2,328) 6 28,817 — — 28,823 — 28,823 — — — — — — — — — — 3,448 — — — — — — — — — — 50,554 — (6,145) (3,164) (34,841) (1,805) (1,148) — — — 441 — — — — — 3,448 — 50,554 441 (6,145) (3,164) (34,841) (1,805) (1,148) — 14,159 12,505 153 — — (12,059) — — 3,448 14,159 63,059 594 (6,145) (3,164) (46,900) (1,805) (1,148) — (12,006) — (12,006) (4,148) (16,154) (Dollars in thousands, except per share amounts) Balance, December 31, 2015 Issuance of common stock: 186,797 shares pursuant to dividend reinvestment plan 251,323 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of 124,758 partnership units pursuant to dividend reinvestment plan Net income Change in unrealized loss on cash flow hedge Series C preferred stock distributions Common stock distributions Distributions payable on Series C preferred stock, $42.97 per share Distributions payable common stock ($0.51/share) and partnership units ($0.51/unit) Balance, December 31, 2016 Issuance of common stock: 266,011 shares pursuant to dividend reinvestment plan 152,758 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of 111,351 partnership units pursuant to dividend reinvestment plan Net income Change in unrealized loss on cash flow hedge Series C preferred stock distributions Common stock distributions Distributions payable on Series C preferred stock, $42.97 per share Distributions payable common stock ($0.52/share) and partnership units ($0.52/unit) Balance, December 31, 2017 Issuance of 30,000 shares of Series D Cumulative preferred stock Redemption of 30,000 shares of Series C Cumulative preferred stock Issuance of common stock: 572,928 shares pursuant to dividend reinvestment plan 43,150 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of 284,113 partnership units Net income Change in unrealized loss on cash flow hedge Preferred stock distributions: Series C Series D Common stock distributions Distributions payable on Series C preferred stock, $42.97 per share Distributions payable on Series D preferred stock, $38.28 per share Distributions payable common stock ($0.53/share) and partnership units ($0.53/unit) — — — — — — — — — — — — — — — — — — 180,000 75,000 (75,000) — — — — — — — — — — — Balance, December 31, 2018 $ 180,000 $ 227 $ 384,533 $ (208,593 ) $ (255) $ 355,912 $ 69,308 $ 425,220 The Notes to Financial Statements are an integral part of these statements. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Consolidated Statements OF CASH FLOWS (Dollars in thousands) Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Change in fair value of derivatives Gains on sales of properties Depreciation and amortization of deferred leasing costs Amortization of deferred debt costs Non cash compensation costs of stock grants and options Provision for credit losses Increase in accounts receivable and accrued income Additions to deferred leasing costs Increase (decrease) in prepaid expenses (Increase) decrease in other assets Increase in accounts payable, accrued expenses and other liabilities Increase (decrease) in deferred income Net cash provided by operating activities Cash flows from investing activities: Acquisitions of real estate investments (1) Additions to real estate investments Additions to development and redevelopment projects Proceeds from sale of properties (2) Net cash used in investing activities Cash flows from financing activities: Proceeds from mortgage notes payable Repayments on mortgage notes payable Proceeds from term loan facility Proceeds from revolving credit facility Repayments on revolving credit facility Proceeds from construction loans payable Additions to deferred debt costs Proceeds from the issuance of: Common stock Partnership units (1) Series D preferred stock Series C preferred stock redemption Preferred stock redemption costs Distributions to: Series C preferred stockholders Series D preferred stockholders Common stockholders Noncontrolling interests Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid for interest Increase (decrease) in accrued real estate investments and development costs P A G E 40 For The Year Ended December 31, 2017 2018 2016 $ 63,059 $ 60,668 $ 6,720 3 (509) 45,861 1,610 1,766 685 (336) (6,034) 73 3,681 225 255 (70) — 45,694 1,392 1,672 906 (1,643) (4,615) (294) 1,374 1,125 (2,759) 110,339 103,450 (40,836) (12,883) (76,257) 1,326 (79,499) (17,653) (22,842) 6,688 (128,650) (113,306) 54,900 (72,572) 75,000 102,000 (116,000) 23,332 (3,233) 30,503 5,383 72,369 (75,000) (12) (9,238) (3,164) (46,306) (15,981) 21,981 3,670 10,908 100,000 (55,679) 63,000 (51,000) 1,437 (2,583) 22,751 6,735 — — — (12,375) — (44,576) (15,268) 12,442 2,586 8,322 — — 6 (1,013) 44,417 1,343 1,603 1,494 (3,525) (4,633) (399) (6,368) 921 (1,476) 89,090 (48,250) (15,564) (27,231) 4,771 (86,274) 11,250 (24,653) 78,500 (57,500) 24,937 (125) 21,564 6,910 — — — (12,375) — (39,472) (13,533) (4,497) (1,681) 10,003 8,322 44,066 (7,098) $ 14,578 $ 10,908 $ $ 43,561 9,663 $ $ 45,713 2,097 $ $ $ (1) The 2018 acquisition of real estate and proceeds from the issuance of partnership units each excludes $8,776 in connection with the acquisition of Ashbrook Marketplace in exchange for limited partnership units. (2) Proceeds from sales of property in 2017 excludes $1,275 of seller financing in connection with the sale of the Company’s Great Eastern property, which were received in 2018. The Notes to Financial Statements are an integral part of these statements. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM NOTES to Consolidated Financial Statements 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 Internal 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 orga- nizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distri- butions 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 gen- eral 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. Formation and Structure of Company Saul Centers was formed to continue and expand the shop- ping center business previously owned and conducted by the B. F. Saul Real Estate Investment Trust (the “Saul Trust”), the B. F. Saul Company and certain other affiliated enti- ties, each of which is controlled by B. Francis Saul II and his family members (collectively, the “Saul Organization”). On August 26, 1993, members of the Saul Organization trans- ferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships,” and collectively with the Operating Partnership, the “Partnerships”), shopping center and mixed- used properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. The following table lists the significant properties acquired, devel- oped and/or disposed of by the Company since January 1, 2016. The following table lists the significant properties acquired, developed and/or disposed of by the Company since January 1, 2016. Name of Property Location Type Year of Acquisition/ Development/ Disposal Acquisitions Burtonsville Town Square Burtonsville, Maryland Shopping Center 7316 Wisconsin Avenue Bethesda, Maryland Mixed-Use 2017 2018 Developments 750 N. Glebe Road Arlington, Virginia Mixed-Use 2017 –2018 Ashbrook Marketplace Ashburn, Virginia Shopping Center Dispositions Crosstown Business Center Tulsa, Oklahoma Mixed-Use Great Eastern District Heights, Maryland Shopping Center * As of August 2016, this property was removed from operations and reclassified to development. 2018 2016 2017 P A G E 41 As of December 31, 2018, the Company’s properties (the “Current Portfolio Properties”) consisted of 49 shopping center properties (the “Shopping Centers”), seven mixed- use properties, which are comprised of office, retail and multi-family residential uses (the “Mixed-Use Properties”) and four (non-operating) development properties. Basis of Presentation The accompanying financial statements are presented on the historical cost basis of the Saul Organization because of affiliated ownership and common management and be- cause the assets and liabilities were the subject of a business combination with the Operating Partnership, the Subsidiary Partnerships and Saul Centers, all newly formed entities with no prior operations. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM NOTES to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidi- ary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighbor- hood shopping centers and mixed-used properties, primarily in the Washington, DC/Baltimore metropolitan 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 neg- ative impact on our overall financial performance than on the overall financial performance of a company with a port- folio that is more geographically diverse. A majority of the Shopping Centers are anchored by several major tenants. As of December 31, 2018, 32 of the Shopping Centers were anchored by a grocery store and offer primarily day- to-day necessities and services. Two retail tenants, Giant Food (4.7%), a tenant at ten Shopping Centers and Capital One Bank (2.7%), a tenant at 17 properties, individually ac- counted for 2.5% or more of the Company’s total revenue for the year ended December 31, 2018. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Saul Centers, its subsidiaries, and the Operat- ing Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions 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 in- come of the Operating Partnership. Because the Operating Partnership was already consolidated into the financial state- ments of the Company, the identification of it as a VIE has no impact on the consolidated financial statements of the Company. P A G E 42 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and as- sumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting pe- riod. 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 relative fair values. The fair value of buildings generally is determined as if the buildings were vacant upon acquisi- tion 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 property for future development purposes. The property may be improved with an existing structure that would be demolished as part of the development. In such cases, the fair value of the building may be determined based only on existing leases and not include estimated cash flows related to future leases. In certain circumstances, such as if the building is vacant and the Company intends to demolish the building in the near term, the entire purchase price will be allocated to land. The Company determines the fair value of above and below market intangibles associated with in-place leases by assess- ing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition taking into consideration the remaining contractual lease period, renewal periods, and the 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 remain- ing contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional expense over the remaining contractual lease term. To the extent customer SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES to Consolidated Financial Statements Depreciation is calculated using the straight-line method and estimated useful lives of generally between 35 and 50 years for base buildings, or a shorter period if management determines that the building has a shorter useful life, and up to 20 years for certain other improvements that extend the useful lives. Leasehold improvements expenditures are capitalized when certain criteria are met, including when the Company supervises construction and will own the improve- ments. 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 deferred leasing costs in the Consolidated Statements of Operations, for the years ended December 31, 2018, 2017, and 2016, was $39.8 million, $40.2 million, and $38.8 mil- lion, respectively. Repairs and maintenance expense totaled $11.9 million, $11.6 million, and $11.8 million for 2018, 2017, and 2016, respectively, and is included in property operating expenses in the accompanying consolidated finan- cial statements. Deferred Leasing Costs Deferred leasing costs consist of commissions paid to third- party leasing agents, internal direct costs such as employee compensation and payroll-related fringe benefits directly related to time spent performing leasing-related activities for successful commercial leases and amounts attributed to in place leases associated with acquired properties and are amortized, using the straight-line method, over the term of the lease or the remaining term of an acquired lease. Leasing related activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transac- tion. Unamortized deferred costs are charged to expense if the applicable lease is terminated prior to expiration of the initial lease term. Collectively, deferred leasing costs totaled $28.1 million and $27.3 million, net of accumulated amorti- zation of approximately $37.7 million and $35.3 million, as of December 31, 2018 and 2017, respectively. Amortization expense, which is included in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, totaled approximately $6.1 million, $5.5 million, and $5.6 million, for the years ended December 31, 2018, 2017, and 2016, respectively. P A G E 43 relationship intangibles are present in an acquisition, the fair values of the intangibles are amortized over the lives of the customer relationships. The Company has never recorded a customer relationship intangible asset. Acquisition-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 indi- cates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its 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 capitalization rates, historic operating results and market conditions that may affect the property. If the car- rying 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 afore- mentioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valuation could be negatively or positively affected. The Company did not recognize an impairment loss on any of its real estate in 2018, 2017, or 2016. Interest, real estate taxes, development related salary costs and other carrying costs are capitalized on projects under development and construction. Once construction is sub- stantially completed and the assets are placed in service, their rental income, real estate tax expense, property operat- ing expenses (consisting of payroll, repairs and maintenance, utilities, insurance and other property related expenses) and depreciation are included in current operations. Property operating expenses are charged to operations as incurred. Interest expense capitalized totaled $6.2 million, $3.5 mil- lion, and $2.5 million during 2018, 2017, and 2016, respectively. Commercial development projects are con- sidered 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 re- ceipt of the certificate of occupancy from the appropriate licensing authority. Substantially completed portions of a project are accounted for as separate projects. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM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 generally 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, 2018 and 2017, the Company had no assets designated as held for sale. 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, measured from the acquisition date, and/or are readily convertible to cash. Substantially all of the Company’s cash balances at December 31, 2018 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 Com- pany has not experienced any losses on such deposits and believes it is not exposed to any significant credit risk on those deposits. Construction in Progress Construction in progress includes preconstruction and de- velopment costs of active projects. Preconstruction costs include legal, zoning and permitting costs and other proj- ect carrying costs incurred 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, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. The following table shows the components of construction in progress. (in thousands) December 31, 2018 2017 N. Glebe Road $ 162,176 $ 83,462 Ashbrook Marketplace Other Total 11,124 12,672 — 7,652 $ 185,972 $ 91,114 P A G E 44 Accounts Receivable and Accrued Income Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the re- spective leases. Receivables are reviewed monthly and reserves are established with a charge to current period op- erations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accom- panying consolidated financial statements are shown net of an allowance for doubtful accounts of $0.6 million and $0.4 million, at December 31, 2018 and 2017, respectively. (in thousands) Year ended December 31, 2018 2017 2016 Beginning Balance $ 405 $ 1,958 $ 1,263 Provision for Credit Losses 685 906 1,494 Charge-offs (531) (2,459) (799) Ending Balance $ 559 $ 405 $ 1,958 In addition to rents due currently, accounts receivable also includes $43.3 million and $44.1 million, at December 31, 2018 and 2017, respectively, net of allowance for doubtful accounts totaling $0.1 million and $0.2 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. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM 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 amor- tized on a straight-line basis over the terms of the respective loans or agreements, which approximates the effective in- terest method. Deferred debt costs totaled $10.3 million and $6.9 million, net of accumulated amortization of $7.3 mil- lion and $8.2 million at December 31, 2018 and 2017, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets. At December 31, 2017, deferred debt costs totaling $1.8 million, related to the Glebe Road construction loan, which had no outstand- ing balance, are included in Other Assets in the Consolidated Balance Sheets. Deferred Income Deferred income consists of payments received from ten- ants 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 differing 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 in- struments, 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 specu- lative purposes. Derivative financial instruments are carried at fair value as either assets or liabilities on the consolidated balance sheets. For those derivative instruments that qualify, the Company may designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge or a cash flow hedge. Derivative instruments that are designated as a hedge are evaluated to ensure they continue to qualify for hedge accounting. The effective portion of any gain or loss on the hedge instruments is reported as a component of accumulated other comprehensive income (loss) and recog- nized in earnings within the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a derivative instrument is immediately recognized in earnings. For de- rivative 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. Recogni- tion 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, includ- ing 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 continue operating so as to qualify, as a REIT under the Code, commencing with its taxable year ended Decem- ber 31, 1993. A REIT generally will not be subject to federal income taxation, provided that distributions to its stockhold- ers 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, 2018, the Company had no material unrecognized tax benefits and there exist no potentially significant unrecognized tax benefits which are reasonably expected to occur within the next twelve months. The Com- pany recognizes penalties and interest accrued related to unrecognized tax benefits, if any, as general and administra- tive expense. No penalties and interest have been accrued in years 2018, 2017, and 2016. The tax basis of the Compa- ny’s real estate investments was approximately $1.35 billion and $1.32 billion as of December 31, 2018 and 2017, re- spectively. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations by tax authorities for years before 2015. Stock Based Employee Compensation, Deferred Compensation and Stock Plan for Directors The Company uses the fair value method to value and ac- count for employee stock options. The fair value of options granted is determined at the time of each award using the Black-Scholes model, a widely used method for valuing stock based employee compensation, and the following assumptions: (1) Expected Volatility determined using the most recent trading history of the Company’s common stock (month-end closing prices) corresponding to the average expected term of the options; (2) Average Expected Term P A G E 45 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMof the options is based on prior exercise history, scheduled vesting and the expiration date; (3) Expected Dividend Yield determined by management after considering the Compa- ny’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s mar- ket yield at the grant date; and (4) a Risk-free Interest Rate based upon the market yields of US Treasury obligations with maturities corresponding to the average expected term of the options at the grant date. The Company amortizes the value of options granted ratably over the vesting period and includes the amounts as compensation in general and administrative expenses. The Company has a stock plan, which was originally ap- proved in 2004, amended in 2008 and 2013 and which expires in 2023, for the purpose of attracting and retaining executive officers, directors and other key personnel (the “Stock Plan”). Pursuant to the Stock Plan, the Compensa- tion Committee established a Deferred Compensation Plan for Directors for the benefit of its directors and their bene- ficiaries, which replaced a previous Deferred 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 di- rector elects to have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the com- mon 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, 2018, the directors’ deferred fee accounts comprise 114,644 shares. The Compensation Committee has also approved an annual award of shares of the Company’s common stock as addi- tional 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 An- nual Meeting of Shareholders, and their issuance may not be deferred. Each director was issued 200 shares for each of the years ended December 31, 2018, 2017, and 2016. 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 $108,800, $130,700, and $150,100, for the years ended December 31, 2018, 2017, and 2016, respectively. P A G E 46 Noncontrolling Interest Saul Centers is the sole general partner of the Operating Partnership, owning a 74.3% common interest as of De- cember 31, 2018. Noncontrolling interest in the Operating Partnership is comprised of limited partnership units owned by the Saul Organization. Noncontrolling interest reflected on the accompanying consolidated balance sheets is increased for earnings allocated to limited partnership inter- ests and distributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interest reflected on the consolidated statements of oper- ations represents earnings allocated to limited partnership interests held by the Saul Organization. Per Share Data Per share data for net income (basic and diluted) is com- puted using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the 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 (Shares in thousands) Weighted average common shares outstanding - Basic December 31, 2017 2016 2018 22,383 21,901 21,505 Effect of dilutive options 42 107 110 Weighted average common shares outstanding - Diluted 22,425 22,008 21,615 Average share price $ 52.50 $ 61.63 $ 58.96 Non-dilutive options Years non-dilutive options were issued 492 — 129 2015, 2016 and 2017 2007, 2015 and 2016 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. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Recently Issued Accounting Standards In May 2014, the FASB issued ASU No. 2014-09 titled “Reve- nue from Contracts with Customers” and subsequently issued several related ASUs (collectively “ASU 2014-09”). ASU 2014- 09 replaces most existing revenue recognition guidance and requires an entity to recognize the amount of revenue which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, and interim pe- riods within those years and early adoption is not permitted. ASU 2014-09 must be applied retrospectively by either re- stating prior periods or by recognizing the cumulative effect as of the first date of application. The Company adopted ASU 2014-09 effective January 1, 2018, using the modified retrospective approach. The adoption of ASU 2014-09 did not have an impact on the consolidated financial statements because the majority of the Company’s revenue consists of lease-related income from leasing arrangements, which is specifically excluded from ASU 2014-09. Other revenues, as a whole, are immaterial to total revenues. There was no change to previously reported amounts as a result of the adoption of ASU 2014-09. In February 2016, the FASB issued ASU 2016-02, ‘‘Leases’’ (“ASU 2016-02”). ASU 2016-02 amends the existing ac- counting standards 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 ex- isting at the date of initial application, with an option to use certain practical expedients for those existing leases. Upon adoption of ASU 2016-02 effective January 1, 2019, we anticipate election of the practical expedient with respect to cost recoveries. We anticipate that the accounting for initial direct costs will impact the amount of those costs that are charged to expense. In 2018, we capitalized approx- imately $2.1 million of initial direct costs that would have been charged to expense under ASU 2016-02. For those leases where we are lessee, the adoption of ASU 2016-02 will require us to record a right of use asset and a lease liability on the consolidated balance sheet. The right of use asset and lease liability are not expected to be material to the financial statements. In June 2016, the FASB issued ASU 2016-13, “Financial In- struments-Credit Losses” (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and re- quires 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, includ- ing interim periods within those years. We are evaluating the impact that ASU 2016-13 will have on our consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition 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 identifiable assets, the set is not a business. ASU 2017-01 is effective prospectively for annual periods beginning after December 15, 2017, and interim pe- riods within those years. Early application is permitted for transactions for which the acquisition date occurs before the effective date provided the transaction has not been re- ported in the financial statements. The Company adopted ASU 2017-01 during the first quarter of 2017, the effect of which, for asset acquisitions, was (a) the capitalization of acquisition costs, instead of expense, and (b) recordation of acquired assets and assumed 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, 2018. 3. REAL ESTATE ACQUIRED 700, 726, 730 and 750 N. Glebe Road In August 2014, the Company purchased for $40.0 mil- lion, 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 acquisi- tion 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 Com- pany purchased for $7.2 million, including acquisition costs, 700 N. Glebe Road. These properties are contiguous and are located in Arlington, Virginia. 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 Carolina, and incurred acquisition costs of $60,400. 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 $22.7 million, including acquisition costs, the land underly- ing Beacon Center. The land was previously leased by the Company with an annual rent of approximately $60,000. The purchase price was funded in part by an $11.25 million increase to the existing mortgage collateralized by Beacon Center and in part by the Company’s revolving credit facility. P A G E 47 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMAllocation of Purchase Price of Real Estate Acquired The Company allocates the purchase price of real estate in- vestment properties to various components, such as land, buildings and intangibles related to in-place leases and cus- tomer relationships, based on their relative fair values. See Note 2. Summary of Significant Accounting Policies-Real Es- tate Investment Properties. During 2018, the Company acquired properties that had an aggregate cost of $49.5 million, including acquisition costs. The purchase price was allocated to assets acquired and lia- bilities assumed based on their relative fair values as shown in the following table. Purchase Price Allocation of Acquisitions 7316 Ashbrook Wisconsin (in thousands) Marketplace Avenue Total Land Buildings In-place Leases Above Market Rent Below Market Rent $ 8,776 — — — — $ 38,662 979 886 168 (21) $ 47,438 979 886 — (21) Total Purchase Price $ 8,776 $ 40,674 $ 49,450 During 2017, the Company purchased one property, Burtonsville Town Square, at a cost of $76.4 million, in- cluding acquisition costs. Of the total acquisition cost, $28.4 million was allocated to land, $45.8 million was al- located to buildings, $2.2 million was allocated to in-place leases, $0.6 million was allocated to above-market rent, and $(0.6) million was allocated to below-market rent, based on their relative fair values. Southdale In the fourth quarter of 2016, the Company purchased for $15.3 million, including acquisition costs, the land un- derlying 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 revolving credit facility. Burtonsville Town Square In January 2017, the Company purchased for $76.4 million, including acquisition costs, Burtonsville Town Square located in Burtonsville, Maryland. Olney Shopping Center In March 2017, the Company purchased for $3.1 million, including acquisition costs, the land underlying Olney Shop- ping Center. The land was previously leased by the Company with an annual rent of approximately $56,000. The pur- chase price was funded by the revolving credit facility. Ashbrook Marketplace In May 2018, the Company acquired from the Saul Trust, in exchange for 176,680 limited partnership units, ap- proximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Loudoun County, Virginia. Based on the closing price of the Company’s common stock, the land and the limited partnership units were recorded at a value of $8.8 million. Acquisition costs related to the transaction totaled approxi- mately $0.2 million. P A G E 48 7316 Wisconsin Avenue In September 2018, the Company purchased for $35.5 million, plus $0.7 million of acquisition costs, an office build- ing and the underlying ground located at 7316 Wisconsin Avenue in Bethesda, Maryland. This site has mixed-use development potential of up to 325 apartment units and approximately 10,000 square feet of street level retail pursuant to the approved Bethesda Downtown Plan. In December 2018, the Company purchased for $4.5 million, including acquisition costs, an interest in an adjacent parcel of land and retail building. The Company is evaluating con- cept plans for the combined property in order to increase the mixed-use development potential by up to 40 additional apartment units. The purchase price was funded through the Company’s credit facility. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM During 2016, the Company purchased properties that had an aggregate 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 Road Thruway Pad Total (in thousands) Land Buildings In-place Leases Above Market Rent Below Market Rent $ 7,236 — — — — $ 2,196 874 93 — (63) $ 9,432 874 93 — (63) Total Purchase Price $ 7,236 $ 3,100 $ 10,336 The gross carrying amount of lease intangible assets included in deferred leasing costs as of December 31, 2018 and 2017 was $12.5 million and $12.3 million, respectively, and ac- cumulated amortization was $8.1 million and $7.5 million, respectively. Amortization expense totaled $1.3 million, $1.1 million and $1.0 million, for the years ended Decem- ber 31, 2018, 2017, and 2016, respectively. The gross carrying amount of below market lease intangible liabilities included in deferred income as of December 31, 2018 and 2017 was $24.8 million and $25.1 million, respectively, and accumulated amortization was $13.1 million and $11.8 mil- lion, respectively. Accretion income totaled $1.7 million, $1.7 million, and $1.8 million, for the years ended Decem- ber 31, 2018, 2017, and 2016, respectively. The gross carrying amount of above market lease intangible assets in- cluded in accounts receivable as of December 31, 2018 and 2017 was $0.8 million and $0.6 million, respectively, and accumulated amortization was $0.1 million and $39,500, respectively. Amortization expense totaled $110,500, $31,600 and $1,500, for the years ended December 31, 2018, 2017 and 2016, respectively. The remaining weight- ed-average amortization period as of December 31, 2018 is 4.1 years, 7.2 years, and 5.5 years for lease acquisition costs, above market leases and below market leases, respectively. As of December 31, 2018, scheduled amortization of intan- gible 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 acquisition costs Below- Above- market market leases leases $ 1,141 785 538 383 316 1,197 $ 102 52 36 33 33 376 $ 1,533 1,434 1,409 1,306 1,297 4,731 (in thousands) 2019 2020 2021 2022 2023 Thereafter Total $ 4,360 $ 632 $ 11,710 4. NONCONTROLLING INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP The Saul Organization holds a 25.7% limited partnership in- terest in the Operating Partnership represented by 7,825,980 limited partnership units, as of December 31, 2018. The units are convertible into shares of Saul Centers’ common stock, at the option of the unit holder, on a one-for-one basis pro- vided that, in accordance 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 in- directly, in the aggregate more than 39.9% of the value of the outstanding common stock and preferred stock of Saul Centers (the “Equity Securities”). As of December 31, 2018, approximately 920,000 units were eligible for conversion. The impact of the Saul Organization’s 25.7% limited part- nership interest in the Operating Partnership is reflected as Noncontrolling Interests in the accompanying consoli- dated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the years ended December 31, 2018, 2017, and 2016, were 30,156,100, 29,510,900, and 28,989,900, respectively. P A G E 49 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM P A G E 50 5. MORTGAGE NOTES PAYABLE, REVOLVING CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS At December 31, 2018, the principal amount of outstand- ing debt totaled $1.0 billion, of which $910.2 million was fixed rate debt and $122.0 million was variable rate debt. The principal amount of the Company’s outstanding debt totaled $965.5 million at December 31, 2017, of which $890.4 million was fixed rate debt and $75.1 million was variable rate debt. At December 31, 2018, the Company had a $400.0 million unsecured credit facility, which can be used for working cap- ital, property acquisitions or development projects, of which $325.0 million is a revolving credit facility and $75.0 mil- lion is a term loan. The revolving credit facility matures on January 26, 2022, and may be extended by the Company for one additional year subject to the Company’s satisfac- tion of certain conditions. The term loan matures on January 26, 2023, and may not be extended. Saul Centers and cer- tain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obligations of the Operating Partnership under the credit facility. Letters of credit may be issued under the revolving credit facility. On December 31, 2018, based on the value of the Company’s unencumbered properties, approximately $190.7 million was available under the revolving credit facility, $47.0 million was outstanding and approximately $184,600 was committed for letters of credit. Interest at a rate equal to the sum of one-month LIBOR and a margin that is based on the Company’s leverage ratio and which can range from 135 basis points to 195 basis points under the revolving facility and from 130 basis points to 190 basis points under the term loan. As of December 31, 2018, the margin was 135 basis points under the revolving facility and 130 basis points under the term loan. Saul Centers is a guarantor of the credit facility, of which the Operating Partnership is the borrower. The Operating Partnership is the guarantor of (a) a portion of the Park Van Ness loan (approximately $10.0 million of the $69.7 million outstanding balance at December 31, 2018, which guaran- tee will be reduced to (i) $6.7 million on October 1, 2019, (ii) $3.3 million on October 1, 2020 and (iii) zero on October 1, 2021), (b) a portion of the Kentlands Square II mortgage loan (approximately $8.8 million of the $35.3 million out- standing balance at December 31, 2018) and (c) a portion of the Broadlands mortgage (approximately $4.0 million of the $31.9 million outstanding balance at December 31, 2018). All other notes payable are non-recourse. 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. On January 18, 2017, the Company closed on a 15-year, non-recourse $40.0 million mortgage loan secured by Burtonsville Town Square. The loan matures in 2032, bears interest at a fixed rate of 3.39%, requires monthly princi- pal and interest payments of $197,900 based on a 25-year amortization schedule and requires a final payment of $20.3 million at maturity. On August 14, 2017, the Company closed on a $157.0 million construction-to-permanent loan, the proceeds of which will be used to partially fund the Glebe Road development proj- ect. The loan matures in 2035, bears interest at a fixed rate of 4.67%, requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the fourth quarter of 2021, and thereafter, monthly principal and interest payments of $887,900 based on a 25-year amortization schedule will be required. Effective September 1, 2017, the Company’s $71.6 million construction-to-permanent loan, which is fully drawn and secured by Park Van Ness, converted to permanent financ- ing. The loan matures in 2032, bears interest at a fixed rate of 4.88%, requires monthly principal and interest payments of $413,460 based on a 25-year amortization schedule and requires a final payment of $39.6 million at maturity. On November 20, 2017, the Company closed on a 15- year, non-recourse $60.0 million mortgage loan secured by Washington Square. The loan matures in 2032, bears in- terest at a fixed rate of 3.75%, requires monthly principal and interest payments of $308,500 based on a 25-year amortization schedule and requires a final payment of $31.1 million. Proceeds were used to repay the remaining balance of approximately $28.1 million on the existing mortgage and reduce the outstanding balance of the revolving credit facility. On October 3, 2018, the Company closed on a 15-year, non-recourse $32.0 million mortgage loan secured by Broadlands Village. The loan matures in 2033, bears interest at a fixed-rate of 4.41%, requires monthly principal and interest payments of $176,200 based on a 25-year amortization sched- ule and requires a final payment of $17.3 million at maturity. On December 18, 2018, the Company closed on a 15-year, non-recourse $22.9 million mortgage loan secured by The Glen. The loan matures in 2034, bears interest at a fixed-rate of 4.69%, requires monthly principal and interest payments of $129,800 based on a 25-year amortization schedule and requires a final payment of $12.5 million at maturity. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMThe following is a summary of notes payable as of December 31, 2018 and 2017. The following is a summary of notes payable as of December 31, 2018 and 2017. Notes Payable Notes Payable Year Ended December 31, Year Ended December 31, Interest Interest Rate* Rate* (Dollars in thousands) (Dollars in thousands) 2018 2018 2017 2017 Fixed rate mortgages: Fixed rate mortgages: $ $ Total fixed rate Total fixed rate Variable rate loans: Variable rate loans: $ $ (a) — (a) — 9,159 (b) 9,159 (b) 12,676 (c) 12,676 (c) 12,714 (d) 12,714 (d) 11,295 (e) 11,295 (e) 9,601 (f) 9,601 (f) 7,766 (g) 7,766 (g) 36,711 (h) 36,711 (h) 6,943 (i) 6,943 (i) 5,480 (j) 5,480 (j) 31,723 (k) 31,723 (k) 9,728 (l) 9,728 (l) 10,609 (m) 10,609 (m) 11,702 (n) 11,702 (n) 14,952 (o) 14,952 (o) 13,013 (p) 13,013 (p) 23,198 (q) 23,198 (q) 27,222 (r) 27,222 (r) 27,168 (s) 27,168 (s) 14,086 (t) 14,086 (t) 102,310 (u) 102,310 (u) 30,888 (v) 30,888 (v) 35,258 (w) 35,258 (w) 16,515 (x) 16,515 (x) 62,630 (y) 62,630 (y) 15,345 (z) 15,345 (z) 38,120 (aa) 38,120 (aa) 15,547 (bb) 15,547 (bb) 27,060 (cc) 27,060 (cc) 14,526 (dd) 14,526 (dd) 38,076 (ee) 38,076 (ee) 69,691 (ff) 69,691 (ff) 58,523 (gg) 58,523 (gg) 31,941 (hh) 31,941 (hh) 22,900 (ii) 22,900 (ii) 11,781 (jj) 11,781 (jj) 23,332 (kk) 23,332 (kk) 910,189 910,189 47,000 (ll) 47,000 (ll) 75,000 (mm) 75,000 (mm) — — (nn) (nn) Total variable rate Total variable rate Total notes payable Total notes payable 122,000 $ 122,000 $ 1,032,189 $ 1,032,189 $ $ $ 30,201 30,201 9,783 9,783 13,529 13,529 13,543 13,543 12,029 12,029 9,948 9,948 8,244 8,244 37,998 37,998 7,325 7,325 5,649 5,649 32,673 32,673 9,999 9,999 10,877 10,877 12,577 12,577 15,452 15,452 13,438 13,438 23,873 23,873 28,115 28,115 28,025 28,025 14,537 14,537 105,817 105,817 32,016 32,016 36,507 36,507 17,086 17,086 64,472 64,472 15,859 15,859 39,968 39,968 16,055 16,055 27,884 27,884 14,950 14,950 39,140 39,140 71,211 71,211 60,000 60,000 — — — — 11,613 11,613 — — 890,393 890,393 61,000 61,000 — — 14,135 14,135 75,135 75,135 965,528 965,528 5.88% 5.88% 5.76% 5.76% 5.62% 5.62% 5.79% 5.79% 5.22% 5.22% 5.60% 5.60% 5.30% 5.30% 5.83% 5.83% 5.81% 5.81% 6.01% 6.01% 5.62% 5.62% 6.08% 6.08% 6.43% 6.43% 6.28% 6.28% 7.35% 7.35% 7.60% 7.60% 7.02% 7.02% 7.45% 7.45% 7.30% 7.30% 6.18% 6.18% 5.31% 5.31% 4.30% 4.30% 4.53% 4.53% 4.70% 4.70% 5.84% 5.84% 4.04% 4.04% 3.51% 3.51% 3.99% 3.99% 3.69% 3.69% 3.99% 3.99% 3.39% 3.39% 4.88% 4.88% 3.75% 3.75% 4.41% 4.41% 4.69% 4.69% 8.00% 8.00% 4.67% 4.67% 5.18% 5.18% LIBOR + 1.35% LIBOR + 1.35% LIBOR + 1.30% LIBOR + 1.30% LIBOR + 1.65% LIBOR + 1.65% 3.84% 3.84% 5.02% 5.02% Scheduled Scheduled Maturity* Maturity* Jan-2019 Jan-2019 May-2019 May-2019 Jul-2019 Jul-2019 Sep-2019 Sep-2019 Jan-2020 Jan-2020 May-2020 May-2020 Jun-2020 Jun-2020 Jul-2020 Jul-2020 Feb-2021 Feb-2021 Aug-2021 Aug-2021 Jun-2022 Jun-2022 Sep-2022 Sep-2022 Apr-2023 Apr-2023 Feb-2024 Feb-2024 Jun-2024 Jun-2024 Jun-2024 Jun-2024 Jul-2024 Jul-2024 Jul-2024 Jul-2024 Jan-2025 Jan-2025 Jan-2026 Jan-2026 Apr-2026 Apr-2026 Oct-2026 Oct-2026 Nov-2026 Nov-2026 Dec-2026 Dec-2026 May-2027 May-2027 Apr-2028 Apr-2028 Jun-2028 Jun-2028 Sep-2028 Sep-2028 Mar-2030 Mar-2030 Apr-2030 Apr-2030 Feb-2032 Feb-2032 Sep-2032 Sep-2032 Dec-2032 Dec-2032 Nov-2033 Nov-2033 Jan-2034 Jan-2034 Apr-2034 Apr-2034 Sept-2035 Sept-2035 8.5 Years 8.5 Years Jan-2022 Jan-2022 Jan-2023 Jan-2023 Feb-2018 Feb-2018 3.7 Years 3.7 Years 8.0 Years 8.0 Years P A G E 51 * Interest rate and scheduled maturity data presented as of December 31, 2018. Totals computed using weighted averages. Amounts * Interest rate and scheduled maturity data presented as of December 31, 2018. Totals computed using weighted averages. Amounts shown are shown are principal amounts and have not been reduced by any deferred debt issuance costs. principal amounts and have not been reduced by any deferred debt issuance costs. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM P A G E 52 (a) The loan was collateralized by three shopping centers, Broad- lands Village, The Glen and Kentlands Square I, and required 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. The loan was repaid in full in 2018 and replaced with two new loans. See (hh) and (ii) below. (b) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25-year amortization schedule and a final payment of $9.0 million at loan maturity. Principal of $624,100 was amortized during 2018. (c) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12.3 million at loan maturity. Principal of $853,100 was amortized during 2018. (d) 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 $829,100 was amortized during 2018. (i) (f) (e) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25-year amortization schedule and a final payment of $10.6 million at loan maturity. Principal of $733,800 was amortized during 2018. The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30-year amortization schedule and a final payment of $9.1 million at loan maturity. Principal of $347,300 was amortized during 2018. (g) The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25-year amortization schedule and a final payment of $7.1 million at loan maturity. Principal of $477,900 was amortized during 2018. (h) The loan and a corresponding interest-rate swap closed on June 29, 2010 and are collateralized by Thruway. On a combined basis, the loan and the interest-rate swap require equal monthly principal and interest payments of $289,000 based upon a 25-year amortization schedule and a final payment of $34.8 million at loan maturity. Principal of $1.3 million was amortized during 2018. The loan is collateralized by Jamestown Place and requires equal monthly principal and interest payments of $66,000 based upon a 25-year amortization schedule and a final payment of $6.1 million at loan maturity. Principal of $381,700 was amortized during 2018. The loan is collateralized by Hunt Club Corners and requires equal monthly principal and interest payments of $42,000 based upon a 30-year amortization schedule and a final payment of $5.0 million, at loan maturity. Principal of $169,300 was amortized during 2018. (k) 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 $949,600 was amortized during 2018. The loan is collateralized by Orchard Park and requires equal monthly principal and interest payments of $73,000 based upon a 30-year amortization schedule and a final payment of $8.6 million at loan maturity. Principal of $270,300 was amortized during 2018. (m) The loan is collateralized by BJ’s Wholesale and requires equal monthly principal and interest payments of $80,000 based upon a 30-year amortization schedule and a final payment of $9.3 million at loan maturity. Principal of $268,400 was amortized during 2018. (n) 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 $874,800 was amortized during 2018. (l) (j) (o) The loan is collateralized by Leesburg Pike and requires equal monthly principal and interest payments of $135,000 based upon a 25-year amortization schedule and a final payment of $11.5 million at loan maturity. Principal of $499,800 was amortized during 2018. (p) The loan is collateralized by Village Center and requires equal monthly principal and interest payments of $119,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan maturity. Principal of $424,700 was amortized during 2018. (q) The loan is collateralized by White Oak and requires equal monthly principal and interest payments of $193,000 based upon a 24.4 year weighted amortization schedule and a final payment of $18.5 mil- lion at loan maturity. The loan was previously collateralized by Van Ness Square. During 2012, the Company substituted White Oak as the collateral and borrowed an additional $10.5 million. Principal of $675,200 was amortized during 2018. (r) The loan is collateralized by Avenel Business Park and requires equal monthly principal and interest payments of $246,000 based upon a 25-year amortization schedule and a final payment of $20.9 million at loan maturity. Principal of $893,200 was amortized during 2018. (s) The loan is collateralized by Ashburn Village and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $20.5 million at loan maturity. Principal of $857,000 was amortized during 2018. (t) The loan is collateralized by Ravenwood and requires equal monthly principal and interest payments of $111,000 based upon a 25-year amortization schedule and a final payment of $10.1 million at loan maturity. Principal of $451,200 was amortized during 2018. (u) The loan is collateralized by Clarendon Center and requires equal monthly principal and interest payments of $753,000 based upon a 25-year amortization schedule and a final payment of $70.5 million at loan maturity. Principal of $3.5 million was amortized during 2018. (v) 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 $1.1 million was amor- tized during 2018. (w) The loan is collateralized by Kentlands Square II and requires equal monthly principal and interest payments of $240,000 based upon a 25-year amortization schedule and a final payment of $23.1 million at loan maturity. Principal of $1.2 million was amortized during 2018. (x) The loan is collateralized by Cranberry Square and requires equal monthly principal and interest payments of $113,000 based upon a 25-year amortization schedule and a final payment of $10.9 million at loan maturity. Principal of $570,500 was amortized during 2018. (y) The loan in the original amount of $73.0 million closed in May 2012, is collateralized by Seven Corners and requires equal monthly principal and interest payments of $463,200 based upon a 25-year amortization schedule and a final payment of $42.3 million at loan maturity. Principal of $1.8 million was amortized during 2018. (z) The loan is collateralized by Hampshire Langley and requires equal monthly principal and interest payments of $95,400 based upon a 25-year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $513,700 was amortized in 2018. (aa) The loan is collateralized by Beacon Center and requires equal monthly principal 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 $1.8 million was amortized in 2018. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM(bb) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $94,900 based upon a 25-year amortization schedule and a final payment of $9.5 million at loan maturity. Principal of $507,600 was amortized in 2018. (cc) The loan is collateralized by Shops at Fairfax and Boulevard shop- ping centers and requires equal monthly principal and interest payments totaling $153,300 based upon a 25-year amortization schedule and a final payment of $15.5 million at maturity. Principal of $824,000 was amortized in 2018. (dd) 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 $423,600 was amortized in 2018. (ee) The loan is collateralized by Burtonsville Town Square and requires equal monthly principal and interest payments of $197,900 based on a 25-year amortization schedule and a final payment of $20.3 million at loan maturity. Principal of $1.1 million was amortized in 2018. (ff) The loan is a $71.6 million construction-to-permanent facility that is collateralized by and financed a portion of the construction costs of Park Van Ness. During the construction period, interest was funded by the loan. Effective September 1, 2017, the loan converted to permanent financing and requires monthly principal and interest payments totaling $413,500 based upon a 25-year amortization schedule. A final payment of $39.6 million will be due at maturity. Principal of $1.5 million was amortized in 2018. (gg) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $308,500 based upon a 25-year amortization schedule and a final payment of $31.1 million at loan maturity. Principal of $1.5 million was amortized in 2018. (hh) The loan is collateralized by Broadlands Village and requires equal monthly principal and interest payments of $176,200 based on a 25-year amortization schedule and a final payment of $17.3 million at loan maturity. Principal of $58,600 was amortized in 2018. The carrying value of the properties collateralizing the mortgage notes payable totaled $1.1 billion and $1.0 billion, as of December 31, 2018 and 2017, respectively. The Company’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. The Company was in compliance as of December 31, 2018. • 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 ex- ceed 2.0x on a trailing four-quarter basis (interest expense coverage); and • limit the amount of debt so that interest, scheduled princi- pal amortization and preferred dividend coverage exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage). Mortgage notes payable at each of December 31, 2018 and 2017, totaling $51.0 million, are guaranteed by members of the Saul Organization. As of December 31, 2018, the (ii) The loan is collateralized by The Glen and requires equal monthly principal and interest payments of $129,800 based on a 25-year amortization schedule and a final payment of $12.5 million at loan maturity. (jj) The Company entered into a sale-leaseback transaction with its Olney property 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 thereaf- ter. The arrangement provides for a final payment of $14.7 million and has an implicit interest rate of 8.0%. Negative amortization in 2018 totaled $168,600. (kk) The loan is a $157.0 million construction-to-permanent facility that is collateralized by and will finance a portion of the construction costs of Glebe Road. During the construction period, interest will be funded by the loan. After conversion to a permanent loan, monthly principal and interest payments totaling $887,900 will be required based upon a 25-year amortization schedule. (ll) The loan is a $325.0 million unsecured revolving credit facility. In- terest accrues at a rate equal to the sum of one-month LIBOR plus a spread of 135 basis points. The line may be extended at the Com- pany’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. (mm) The loan is a $75.0 million unsecured term facility. Interest accrues at a rate equal to the sum of one-month LIBOR plus a spread of 130 basis points. Monthly payments are interest only. (nn) The loan was collateralized by Metro Pike Center and required monthly principal and interest payments of approximately $48,000 and a final payment of $14.2 million at loan maturity. The loan was repaid in full during 2018. scheduled maturities of all debt including scheduled principal amortization for years ended December 31 are as follows: Debt Maturity Schedule Scheduled Principal Amortization Balloon Payments Total $ 60,794 $ 2,257 $ 63,051 61,163 11,012 28,042 27,815 89,205 38,827 83,502 (a) 28,381 111,883 84,225 28,745 112,970 (in thousands) 2019 2020 2021 2022 2023 Thereafter 480,132 136,121 616,253 Principal Amount $ 780,828 $ 251,361 $ 1,032,189 Unamortized deferred debt costs Net 10,343 $ 1,021,846 (a) Includes $47.0 million outstanding under the revolving facility. P A G E 53 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM The components of interest expense are set forth below. 7. LONG-TERM LEASE OBLIGATIONS Interest Expense Year ended December 31, 2017 2016 2018 (in thousands) Interest incurred $ 49,652 $ 49,322 $ 46,867 Amortization of deferred debt costs 1,610 1,392 1,343 Capitalized interest (6,222) (3,489) (2,527) Total $ 45,040 $ 47,225 $ 45,683 Deferred debt costs capitalized during the years ending December 31, 2018, 2017 and 2016 totaled $3.2 million, $2.6 million and $0.1 million, respectively. 6. LEASE AGREEMENTS Lease income includes primarily base rent arising from non- cancelable leases. Base rent (including straight-line rent) for the years ended December 31, 2018, 2017, and 2016, amounted to $184.7 million, $181.1 million, and $172.4 mil- lion, 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 $ 163,489 146,425 125,372 101,778 79,903 244,801 P A G E 54 (in thousands) 2019 2020 2021 2022 2023 Thereafter Total During 2016 and 2017, the Company purchased the land underlying Olney, Beacon Center and Southdale - See Note 3. As a result, at December 31, 2018, no properties are subject to noncancelable long-term leases which apply to underlying land. Reflected in the accompanying consoli- dated financial statements is minimum ground rent expense of $10,500 and $159,000, for the years ended December 31, 2017 and 2016, respectively. Flagship Center consists of two developed 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. Coun- tryside shopping center was acquired in February 2004. Because of certain land use considerations, approximately 3.4% of the underlying land is held under a 99-year ground lease. The lease requires the Company to pay minimum rent of one dollar per year as well as its pro-rata share of the real estate taxes. The Company’s corporate headquarters space is leased by a member of the Saul Organization. The lease commenced in March 2002, and expires in February 2022. The Company and the Saul Organization entered into a Shared Services Agreement whereby each party pays an allocation of total rental payments based on a percentage proportionate to the number of employees employed by each party. The Compa- ny’s rent expense for the years ended December 31, 2018, 2017, and 2016 was $779,800, $774,700, and $843,300, respectively. Expenses arising from the lease are included in general and administrative expense (see Note 9 – Related Party Transactions). 8. EQUITY AND NONCONTROLLING $ 861,768 INTEREST The majority of the leases provide for rental increases and expense recoveries based on fixed annual increases or increases in the Consumer 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, 2018, 2017, and 2016, amounted to $35.5 million, $35.3 million, and $34.3 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 $1.0 million, $1.5 million, and $1.4 mil- lion, for the years ended December 31, 2018, 2017, and 2016, respectively. The Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016 reflect non- controlling interest of $12.5 million, $12.4 million, and $11.4 million, respectively, representing the Saul Organiza- tion’s share of the net income for the year. On January 23, 2018, Saul Centers sold, in an underwritten public offering, 3.0 million depositary shares, each repre- senting 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock (the “Series D Stock”), pro- viding net cash proceeds of approximately $72.6 million. The depositary shares may be redeemed at the Company’s option, in whole or in part, on or after January 23, 2023, at the $25.00 liquidation preference, plus accrued but un- paid dividends to but not including the redemption date. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM NOTES to Consolidated Financial Statements The depositary shares pay an annual dividend of $1.53125 per share, equivalent to 6.125% of the $25.00 liquidation preference. The Series D Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Com- pany except in connection with certain changes in 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 quar- ters (whether or not declared or consecutive) and in certain other events. On February 22, 2018, the proceeds from the offering, together with cash on hand, were used to redeem 3.0 million depositary shares, each representing 1/100th of a share of the Company’s 6.875% Series C Cumulative Redeemable Preferred Stock (the “Series C Stock”). Costs associated with the redemption were charged against Net income available to common stockholders. At December 31, 2018, the Company had outstanding, 4.2 million depositary shares, each representing 1/100th of a share of Series C Stock. The depositary shares are redeem- able at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid div- idends. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The Series C Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes of control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. 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 Presi- dent-Chief Accounting Officer of the Company are also officers of various members of the Saul Organization and their management time is shared with the Saul Organization. Their annual compensation is fixed by the Compensation Commit- tee of the Board of Directors, with the exception of the Senior Vice President-Chief Accounting Officer whose share of an- nual compensation allocated to the Company is determined by the shared services agreement (described below). The Company participates in a multiemployer 401K plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Company contributions, which are included in general and administrative expense or property operating expenses in the consolidated statements of operations, at the discretionary amount of up to six percent of the em- ployee’s cash compensation, subject to certain limits, were $345,900, $349,500, and $329,000, for 2018, 2017, and 2016, respectively. All amounts deferred by employees and contributed by the Company are fully vested. The Company also participates in a multiemployer nonqual- ified deferred compensation plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Accord- ing to the plan, which can be modified or discontinued at any time, participating employees defer 2% of their com- pensation in excess of a specified amount. For the years ended December 31, 2018, 2017, and 2016, the Company contributed three times the amount deferred by employees. The Company’s expense, included in general and administra- tive expense, totaled $282,500, $228,500, and $250,800, for the years ended December 31, 2018, 2017, and 2016, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $2.7 million and $2.4 million, at De- cember 31, 2018 and 2017, respectively, and is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets. The Company has entered into a shared services agreement (the “Agreement”) with the Saul Organization that provides for the sharing of certain personnel and ancillary functions such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is provided for in the Agreement and is based upon head count, estimates of usage or estimates of time incurred, as applicable. Senior management has determined that the final allocations of shared costs are reasonable. The terms of the Agreement and the payments made thereunder are reviewed annually by the Audit Committee of the Board of Directors, which consists entirely of independent directors. Net billings by the Saul Organization for the Company’s share of these ancillary costs and expenses for the years ended December 31, 2018, 2017, and 2016, which included rental expense for the Company’s headquarters lease (see Note 7. Long Term Lease Obligations), totaled $8.4 million, P A G E 55 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM$8.1 million, and $7.2 million, respectively. The amounts are expensed when incurred and are primarily reported as general and administrative expenses or capitalized to spe- cific development projects in these consolidated financial statements. As of December 31, 2018 and 2017, accounts payable, accrued expenses and other liabilities included $933,400 and $993,200, 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 pre- development cost agreement with the Saul 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 ad- jacent real estate assets in the Twinbrook area of Rockville, Maryland. On December 8, 2016, the Company entered into a replacement agreement with the Saul Trust which extended the expiration date to December 31, 2017 and provides for automatic twelve month renewals unless ei- ther 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 sub- sidiary of the B. F. Saul Company and a member of the Saul Organization, is a general insurance agency that receives commissions and counter-signature fees in connection with the Company’s insurance program. Such commissions and fees amounted to approximately $407,900, $288,400, and $360,500, for the years ended December 31, 2018, 2017, and 2016, respectively. In August 2016, the Company entered into an agreement to acquire from the Saul Trust, approximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Ashburn, Virginia. The transaction closed on May 9, 2018, and the Company issued 176,680 limited partnership units to the Saul Trust. The Company in- tends to construct a shopping center and, upon stabilization, may be obligated to issue additional limited partnership units to the Saul Trust. P A G E 56 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 options 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 ex- ecutive officers, directors and other key personnel. The 2004 stock plan was subsequently amended by the Compa- ny’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 purchase 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 24, 2009, the Compensation Committee granted options to purchase 32,500 shares (all nonquali- fied stock options) to 13 Company directors (the “2009 Options”), which were immediately exercisable and expire on April 23, 2019. The exercise price of $32.68 per share was the closing market price of the Company’s common stock on the date of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2009 Options to be $222,950. Because the directors’ 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 options to purchase 32,500 shares (all nonqualified stock options) to 13 Company directors (the “2010 Op- tions”), 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’ options vested immediately, the entire $287,950 was expensed as of the date of grant. No options were granted to the Com- pany’s officers in 2010. NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMEffective May 13, 2011, the Compensation Committee granted options to purchase 195,000 shares (65,300 in- centive stock options and 129,700 nonqualified stock options) to 15 Company officers and 13 Company Directors (the “2011 options”), which expire on May 12, 2021. The officers’ 2011 Options vest 25% per year over four years and are subject to early expiration upon termination of em- ployment. 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 Com- pany determined the total fair value of the 2011 Options to be $1.6 million, of which $1.3 million and $297,375 were assigned to the officer options and director options, respec- tively. 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 expense monthly during the four years the options vest. Effective May 4, 2012, the Compensation Committee granted options to purchase 277,500 shares (26,157 in- centive stock options and 251,343 nonqualified stock options) to 15 Company officers and 14 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 termination of em- ployment. 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 Com- pany determined the total fair value of the 2012 Options to be $1.7 million, of which $1.4 million and $257,250 were assigned to the officer options and director options, respec- tively. Because the directors’ options vested immediately, the entire $257,250 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective May 10, 2013, the Compensation Committee granted options to purchase 237,500 shares (35,592 incen- tive stock options and 201,908 nonqualified stock options) to 15 Company officers and 14 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 mar- ket price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company de- termined the total fair value of the 2013 Options to be $1.5 million, of which $1.2 million and $278,250 were assigned to the officer options and director options, respec- tively. 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 expense monthly during the four years the option was vested. Effective May 9, 2014, the Compensation Committee granted options to purchase 200,000 shares (29,300 in- centive stock options and 170,700 nonqualified stock options) to 18 Company officers and 12 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 em- ployment. 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 Com- pany determined the total fair value of the 2014 Options to be $1.3 million, of which $1.2 million and $109,500 were assigned to the officer options and director options, respec- tively. 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 expense monthly during the four years the options vest. P A G E 57 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMEffective May 8, 2015, the Compensation Committee granted options to purchase 225,000 shares (33,690 incen- tive 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 exercisable. The exercise price of $51.07 per share was the closing mar- ket price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company de- termined the total fair value of the 2015 Options to be $1.57 million, of which $1.44 million and $125,300 were assigned to the officer options and director options, respec- tively. 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 recognized as compensation expense monthly during the four years the options vest. Effective May 6, 2016, the Compensation Committee granted options to purchase 226,500 shares (24,248 incen- tive 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 exercisable. The exercise price of $57.74 per share was the closing mar- ket price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company deter- mined the total fair value of the 2016 Options to be $1.2 million, of which $1.0 million and $151,100 were assigned to the officer options and director options, respectively. Be- cause the directors’ options vested immediately, the entire $151,100 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective May 5, 2017, the Compensation Committee granted options to purchase 232,500 shares (21,492 incen- tive stock options and 211,008 nonqualified stock options) to 20 Company officers and 11 Company Directors (the “2017 options”), which expire on May 4, 2027. The officers’ 2017 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ 2017 Options were immediately exercisable. The exercise price of $59.41 per share was the closing mar- ket price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company deter- mined the total fair value of the 2017 Options to be $1.4 million, of which $1.2 million and $165,600 were assigned to the officer options and director options, respectively. Be- cause the directors’ options vested immediately, the entire $165,600 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective May 11, 2018, the Compensation Committee granted options to purchase 245,000 shares (25,914 in- centive stock options and 219,086 nonqualified stock options) to 22 Company officers and 11 Company Directors (the “2018 options”), which expire on May 10, 2028. The officers’ 2018 Options vest 25% per year over four years and are subject to early expiration upon termination of em- ployment. The directors’ 2018 Options were immediately exercisable. The exercise price of $49.46 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Com- pany determined the total fair value of the 2018 Options to be $1.4 million, of which $1.2 million and $169,400 were assigned to the officer options and director options, respec- tively. Because the directors’ options vested immediately, the entire $169,400 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. P A G E 58 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM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, 2018, 2017 and 2016. (Dollars in thousands, except per share data) Stock Options Issued to Directors Grant date Total grant Vested Exercised Forfeited Exercisable at December 31, 2018 Remaining unexercised Exercise price Volatility Expected life (years) Assumed yield Risk-free rate Total value at grant date Expensed in previous years Expensed in 2016 Expensed in 2017 Expensed in 2018 Future expense Grant date Total grant Vested Exercised Forfeited Exercisable at December 31, 2018 Remaining unexercised Exercise price Volatility Expected life (years) Assumed yield Risk-free rate Gross value at grant date Estimated forfeitures Expensed in previous years Expensed in 2016 Expensed in 2017 Expensed in 2018 Future expense 4/24/2009 5/7/2010 5/13/2011 5/4/2012 5/10/2013 5/9/2014 5/8/2015 5/6/2016 5/5/2017 5/11/2018 Subtotals 32,500 32,500 32,500 35,000 35,000 30,000 35,000 32,500 27,500 27,500 320,000 32,500 32,500 32,500 35,000 35,000 30,000 35,000 32,500 27,500 27,500 320,000 30,000 27,500 25,000 25,000 22,500 17,500 12,500 — 2,500 2,500 — — — — 7,500 — — 2,500 2,500 170,000 — 7,500 2,500 2,500 2,500 2,500 5,000 5,000 10,000 12,500 12,500 22,500 25,000 25,000 25,000 142,500 10,000 12,500 12,500 22,500 25,000 25,000 25,000 142,500 $ 32.68 $ 38.76 $ 41.82 $ 39.29 $ 44.42 $ 47.03 $ 51.07 $ 57.74 $ 59.41 $ 49.46 0.344 6.0 4.54% 2.19% 0.369 5.0 4.23% 2.17% 0.358 5.0 0.348 5.0 4.16% 1.86% 4.61% 0.78% 0.333 5.0 4.53% 0.82% 0.173 5.0 4.48% 1.63% 0.166 5.0 4.54% 1.50% 0.166 5.0 3.75% 1.23% 0.173 5.0 3.45% 1.89% 0.192 5.0 3.70% 2.84% $ 223 $ 288 $ 298 $ 257 $ 278 $ 110 $ 125 $ 151 $ 166 $ 169 $ 2,065 223 288 298 257 278 110 125 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 151 — — — — — 166 — — — — — 169 — 1,579 151 166 169 — P A G E 59 Stock options issued to officers and grand totals 5/13/2011 5/4/2012 5/10/2013 5/9/2014 5/8/2015 5/6/2016 5/5/2017 5/11/2018 Subtotals 162,500 242,500 202,500 170,000 190,000 194,000 205,000 217,500 1,584,000 118,750 107,500 171,875 168,125 140,625 103,750 92,455 129,375 43,750 135,000 30,625 46,126 1,875 20,625 3,125 96,375 3,750 1,875 51,250 — — — — — 854,500 396,081 216,250 15,000 15,000 15,045 15,045 42,500 42,500 121,999 120,000 92,625 51,250 — 458,419 121,999 166,250 188,375 205,000 217,500 971,669 $ 41.82 $ 39.29 $ 44.42 $ 47.03 $ 51.07 $ 57.74 $ 59.41 $ 49.46 0.330 8.0 4.81% 2.75% 0.315 8.0 5.28% 1.49% 0.304 8.0 5.12% 1.49% 0.306 7.0 4.89% 2.17% 0.298 7.0 4.94% 1.89% 0.185 7.0 3.80% 1.55% 0.170 7.0 3.50% 2.17% 0.177 7.0 3.75% 2.94% $ 1,367 $ 1,518 $ 1,401 $ 1,350 $ 1,585 $ 1,137 $ 1,324 $ 1,313 $ 10,995 $ 368 999 — — — — 845 576 97 — — — 212 762 269 158 — — 15 492 296 295 252 — 142 240 360 361 361 121 86 — 175 263 263 350 92 — — 205 308 719 83 — — — 205 1,025 1,843 3,069 1,197 1,282 1,389 2,215 Grand Totals 1,904,000 1,174,500 566,081 223,750 600,919 1,114,169 13,060 1,843 4,648 1,348 1,448 1,558 2,215 Weighted average term of remaining future expense 2.5 years NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM The table below summarizes the option activity for the years 2018, 2017, and 2016: Option Activity 2018 2017 Weighted Average Weighted Average 2016 Weighted Shares Exercise Price Shares Exercise Price Shares Exercise Price Average Outstanding at January 1 913,320 $ 52.80 833,630 $ 49.92 860,274 $ 46.58 Granted Exercised Expired/Forfeited 245,000 (39,151) (5,000) Outstanding December 31 1,114,169 Exercisable at December 31 600,919 49.46 42.98 54.78 52.40 50.93 232,500 (149,060) (3,750) 913,320 430,945 59.41 46.97 53.73 52.80 48.94 226,500 (246,894) (6,250) 833,630 375,255 57.74 45.59 45.31 49.92 46.68 P A G E 60 The intrinsic value of options exercised in 2018, 2017, and 2016, was $0.5 million, $2.2 million and $3.4 million, re- spectively. The intrinsic value of options outstanding and exercisable at year end 2018 was $0.5 million and $0.5 mil- lion, respectively. The intrinsic value measures the difference between the options’ exercise price and the closing share price quoted by the New York Stock Exchange as of the date of measurement. The date of exercise was the measurement date for shares exercised during the period. At December 31, 2018, the final trading day of calendar 2018, the closing price of $47.22 per share was used for the calculation of ag- gregate 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, 2018 are 6.2 and 7.2 years, respectively. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and floating rate debt are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed-rate payment terms was determined using Level 3 data in a discounted cash flow approach, which is based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, and assuming long term interest rates of approximately 4.40% and 3.90%, would be approximately $927.0 mil- lion and $951.7 million as of December 31, 2018 and 2017, respectively, compared to the principal balance of $910.2 million and $890.4 million at December 31, 2018 and 2017, 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 its only interest-rate swap arrangement was a highly effective hedge of the cash flows under one of its variable-rate mortgage loans and designated the swap as a cash flow hedge of that mort- gage. 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 (Dollars in thousands) Increase (decrease) in fair value: Recognized in earnings Recognized in other comprehensive income Year ended December 31, 2016 2017 2018 $ (3) $ 70 $ (6) 594 812 678 Total $ 591 $ 882 $ 672 The Company carries its interest rate swaps at fair value. The Company has determined the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was 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 contain inputs that are derived from observable market data. Where possible, the values produced by the pricing models are ver- ified 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 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM of such inputs. The swap agreement terminates on July 1, 2020. As of December 31, 2018, the fair value of the inter- est-rate swap was approximately $0.4 million and is included in “Accounts payable, accrued expenses and other liabilities” in the consolidated balance sheets. The decrease in value from inception of the swap designated as a cash flow hedge is reflected in “Other Comprehensive Income” in the Consol- idated Statements of Comprehensive Income. 12. COMMITMENTS AND CONTINGENCIES Neither the Company nor the Current Portfolio Properties are subject to any material litigation, nor, to management’s knowledge, is any material litigation currently threatened against the Company, other than routine litigation and ad- ministrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in the aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties. 13. DISTRIBUTIONS In December 1995, the Company established a Dividend Re- investment and Stock Purchase Plan (the “Plan”), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distribu- tions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price with- out 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 sim- ilar dividend reinvestment plan that mirrors the Plan, which allows holders of limited partnership interests the oppor- tunity to buy either additional limited partnership units or common stock shares of the Company. The Company paid common stock distributions of $2.08 per share in 2018, $2.04 per share in 2017, and $1.84 per share in 2016, Series C preferred stock dividends of $1.72 per de- positary share during each of 2018, 2017, and 2016, and Series D preferred stock dividends of $1.05 per depositary share in 2018. Of the common stock dividends paid, $1.61 per share, $1.70 per share, and $1.75 per share, represented ordinary dividend income in 2018, 2017, and 2016, respec- tively, and $0.47, per share $0.34 per share and $0.09 per share represented return of capital to the shareholders in 2018, 2017, and 2016, respectively. All of the preferred stock dividends paid were considered ordinary dividend income. P A G E 61 (Dollars in thousands, except per share amounts) Preferred Stockholders Common Stockholders Limited Partnership Unitholders Common Stock Shares Issued Limited Discounted Partnership Share Price Units Issued Average Unit Price Total Distributions to Dividend Reinvestments Distributions during 2018 October 31 July 31 April 30 January 31 Total 2018 Distributions during 2017 October 31 July 31 April 30 January 31 Total 2017 Distributions during 2016 October 31 July 31 April 30 January 31 Total 2016 $ 2,953 2,953 2,672 3,824 $ 11,706 11,590 11,545 11,465 $ 4,062 4,055 3,942 3,922 216,476 201,500 85,202 69,750 $ 49.34 51.68 47.54 52.71 $ 12,402 $ 46,306 $ 15,981 572,928 $ 3,094 3,094 3,094 3,093 $ 11,221 11,160 11,119 11,076 $ 3,838 3,830 3,810 3,790 82,991 85,731 51,003 46,286 $ 59.33 57.40 59.64 61.85 $ 12,375 $ 44,576 $ 15,268 266,011 $ 3,094 3,094 3,094 3,093 $ 10,168 10,133 10,029 9,142 $ 3,478 3,465 3,449 3,141 44,176 39,487 48,854 54,280 $ 57.18 65.64 51.59 49.24 $ 12,375 $ 39,472 $ 13,533 186,797 13,867 13,107 42,422 38,037 107,433 15,596 16,021 40,623 39,111 111,351 30,891 26,897 34,201 32,769 124,758 $ 50.20 52.60 47.83 53.03 $ 60.08 58.13 59.96 62.15 $ 57.18 65.64 51.59 49.24 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM In December 2018, the Board of Directors of the Company authorized a distribution of $0.53 per common share payable in January 2019, to holders of record on January 17, 2019. As a result, $12.0 million was paid to common shareholders on January 31, 2019. Also, $4.1 million was paid to limited partnership unitholders on January 31, 2019 ($0.53 per Op- erating Partnership unit). The Board of Directors authorized preferred stock dividends of (a) $0.4297 per Series C depos- itary share and (b) $0.3828 per Series D depositary share to holders of record on January 2, 2019. As a result, $3.0 mil- lion was paid to preferred shareholders on January 15, 2019. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock and preferred stock div- idends and noncontrolling interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements. 14. INTERIM RESULTS (UNAUDITED) The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2018 and 2017. (In thousands, except per share amounts) 2018 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenue $ 56,496 $ 56,293 $ 57,059 $ 58,328 Operating income before loss on early extinguishment of debt, gain on casualty settlement, and noncontrolling interests Gain on sales of properties Net income attributable to Saul Centers, Inc. Net income available to common stockholders Net income available to common stockholders per diluted share (In thousands, except per share amounts) P A G E 62 14,946 — 12,587 6,856 15,405 509 12,543 9,590 16,692 — 13,155 10,202 15,510 — 12,269 9,316 0.31 0.43 0.45 0.41 2017 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenue $ 58,466 $ 55,907 $ 56,237 $ 56,675 Operating income before loss on early extinguishment of debt, gain on casualty settlement, and noncontrolling interests Gain on sales of properties Net income attributable to Saul Centers, Inc. Net income available to common stockholders Net income available to common stockholders per diluted share 17,374 — 13,704 10,610 14,422 — 11,510 8,416 14,386 — 11,483 8,390 14,416 — 11,560 8,466 0.49 0.38 0.38 0.38 NOTES to Consolidated Financial StatementsSAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM NOTES to Consolidated Financial Statements 15. BUSINESS SEGMENTS The Company has two reportable business segments: Shop- ping Centers and Mixed-Use Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income and cash flows from real estate for the combined properties in each segment. All of our properties within each segment generate similar types of revenues and expenses related to tenant rent, reimbursements and operating expenses. Al- though 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 provided to our tenants and the method to distribute such services are consistent throughout the portfolio. Certain re- classifications have been made to prior year information to conform to the 2018 presentation. (In thousands) As of or for the year ended December 31, 2018 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals Real estate rental operations: Revenue Expenses Income from real estate Other revenue Interest expense and amortization of deferred debt costs General and administrative Depreciation and amortization of deferred leasing costs Change in fair value of derivatives Gain on sale of property Net income (loss) Capital investment Total assets (In thousands) $ 164,671 (34,970) 129,701 — — — (29,251) — 509 $ 63,233 (21,293) $ 41,940 — — — (16,610) — — — — — 272 (45,040) (18,459) — (3) — $ 227,904 (56,263) 171,641 272 (45,040) (18,459) (45,861) (3) 509 $ 100,959 $ 25,330 $ 13,485 $ 115,165 $ 971,321 $ 537,500 $ $ $ (63,230) $ 63,059 — $ 128,650 18,668 $ 1,527,489 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals P A G E 63 As of or for the year ended December 31, 2017 Real estate rental operations: Revenue Expenses Income from real estate Other revenue Interest expense and amortization of deferred debt costs General and administrative Depreciation and amortization of deferred leasing costs Change in fair value of derivatives Net income (loss) Capital investment Total assets $ 165,853 (34,675) 131,178 — — — (29,977) — $ 61,352 (20,917) $ 40,435 — — — (15,717) — — — — 80 (47,225) (18,176) — 70 $ 227,205 (55,592) 171,613 80 (47,225) (18,176) (45,694) 70 $ 101,201 $ 90,896 $ $ 24,718 29,098 $ 974,061 $ 438,283 $ $ $ (65,251) $ 60,668 — $ 119,994 10,108 $ 1,422,452 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM NOTES to Consolidated Financial Statements (In thousands) As of or for the year ended December 31, 2016 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals Real estate rental operations: Revenue Expenses Income from real estate Other revenue Interest expense and amortization of deferred debt costs General and administrative Depreciation and amortization of deferred leasing costs Acquisition related costs Change in fair value of derivatives Gain on sale of property Net income (loss) Capital investment Total assets $ 160,179 (34,931) 125,248 — — — (29,964) (60) — — $ 56,840 (18,770) $ 38,070 — — — (14,453) — — 1,013 $ 95,224 $ 64,044 $ $ 24,630 27,001 $ 976,545 $ 358,419 $ $ $ — — — 51 $ 217,019 (53,701) 163,318 51 (45,683) (17,496) — — (6) — (63,134) — $ $ (45,683) (17,496) (44,417) (60) (6) 1,013 56,720 91,045 8,061 $ 1,343,025 P A G E 64 16. SUBSEQUENT EVENTS The Company has reviewed operating activities for the period subsequent to December 31, 2018 and prior to the date that financial statements are issued, February 26, 2019, and determined there are no subsequent events that are required to be disclosed. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Dividend Reinvestment Plan and Distributions ACQUISITION OF EQUITY SECURITIES BY THE SAUL ORGANIZATION Through participation in the Company’s Dividend Reinvest- ment Plan, during the quarter ended December 31, 2018, (a) B. Francis Saul II, the Company’s Chairman of the Board and Chief Executive Officer, (b) his spouse, (c) the Saul Trust and B. F. Saul Company, for each of which Mr. B. F. Saul II serves as either President or Chairman, and (d) B. F. Saul Property Company, Avenel Executive Park Phase II, LLC, SHLP Unit Acquisition Corp. and Dearborn, LLC, which are whol- ly-owned subsidiaries of either B. F. Saul Company or the Saul Trust, acquired an aggregate of 162,367 shares of common stock and 13,867 limited partnership units at an average price of $49.41 per share/unit, in respect of the October 31, 2018 dividend distribution. No shares were acquired pursuant to a publicly announced plan or program. P A G E 65 DIVIDEND REINVESTMENT PLAN Saul Centers, Inc. offers a dividend reinvestment plan which enables its shareholders to automatically invest some of or all dividends in additional shares. The plan provides share- holders with a convenient and cost-free way to increase their investment in Saul Centers. Shares purchased under the divi- dend 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 administra- tor at (800) 509-5586 and request to speak with a service representative or write: Continental Stock Transfer and Trust Company Attention: Saul Centers, Inc. Dividend Reinvestment Plan 17 Battery Place New York, NY 10004 DIVIDENDS AND DISTRIBUTIONS Under the Code, REITs are subject to numerous organiza- tional and operating requirements, including the requirement to distribute at least 90% of REIT taxable income. The Com- pany distributed more than the required amount in 2018 and 2017. 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 distribu- tions is believed to be based on reasonable assumptions and represents a reasonable basis for setting distributions. How- ever, the actual results of operations of the Company will be affected by a variety of factors, including but not limited to actual rental revenue, operating expenses of the Company, interest expense, general economic conditions, federal, state and local taxes (if any), unanticipated capital expenditures, the adequacy of reserves and preferred dividends. While the Company intends to continue paying regular quarterly distri- butions, any future payments will be determined solely by the Board of Directors and will depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution amounts required to maintain its status as a REIT under the Code, and such other factors as the Board of Directors deems rele- vant. We are obligated to pay regular quarterly distributions to holders of depositary shares, prior to distributions on the common stock. SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Market Information Shares of Saul Centers common stock are listed on the New York Stock Exchange under the symbol “BFS”. The composite high and low closing sale prices for the Company’s shares of common stock were reported by the New York Stock Exchange for each quarter of 2018 and 2017 as follows: COMMON STOCK PRICES Period Share Price October 1, 2018 – December 31, 2018 July 1, 2018 – September 30, 2018 April 1, 2018 – June 30, 2018 January 1, 2018– March 31, 2018 October 1, 2017 – December 31, 2017 July 1, 2017 – September 30, 2017 April 1, 2017 – June 30, 2017 January 1, 2017– March 31, 2017 High $ 54.39 $ 60.00 $ 53.74 $ 61.86 $ 65.30 $ 62.76 $ 64.59 $ 66.80 Low $ 45.71 $ 52.28 $ 47.50 $ 48.93 $ 60.09 $ 57.58 $ 56.33 $ 60.57 On February 20, 2019, the closing price was $57.58 per share. The approximate number of holders of record of the common stock was 166 as of February 20, 2019. P A G E 66 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM Performance Graph Rules promulgated under the Exchange Act require the Company to present a graph comparing the cumulative total stockholder return on its Common Stock with the cumulative total stockholder return of (i) a broad equity market index, and (ii) a published industry index or peer group. The following graph compares the cumulative total stockholder return of the Company’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the National Association of Real Estate Investment Trust Equity Index (“NAREIT Equity”), the S&P 500 Index (“S&P 500”) and the Russell 2000 Index (“Russell 2000”). The graph assumes the investment of $100 on December 31, 2013. Comparison of Cumulative Total Return $175 $150 d e t s e v n I 0 0 1 $ r e p n r u t e R l a t o T $125 $100 P A G E 67 Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Period Ended INDEX Saul Centers1 S&P 5002 Russell 20003 NAREIT Equity4 Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 $100 $100 $100 $100 $123.76 $114.49 $153.66 $142.31 $108.64 $113.69 $115.26 $129.05 $157.22 $150.33 $104.89 $100.26 $121.63 $139.44 $124.09 $130.14 $134.30 $145.74 $153.36 $146.27 SAUL CENTERS, INC. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COM 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 H. Gregory Platts Senior Vice President and Treasurer, Emeritus, National Geographic Society Earl A. Powell III Director, National Gallery of Art Andrew M. Saul II Chief Executive Officer Genovation Cars Mark Sullivan III Financial and Legal Consultant John R. Whitmore Financial Consultant P A G E 68 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 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 Charles W. Sherren, Jr. Senior Vice President, Management Amitha Prabhu Senior Vice President, Internal Audit Benjamin Underwood Vice President, Residential COUNSEL Pillsbury Winthrop Shaw Pittman LLP Washington, DC 20036 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP McLean, Virginia 22102 WEB SITE www.saulcenters.com EXCHANGE LISTING New York Stock Exchange (NYSE) Symbol: Common Stock: BFS Preferred Stock: BFS.PrC Preferred Stock: BFS.PrD 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 2018, 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. 2018 ANNUAL REPORT | WWW.SAULCENTERS.COMANNUAL MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders will be held at 11:00 a.m., local time, on May 3, 2019, 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.) 7501 Wisconsin Avenue, Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com 

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