Saul Centers Inc.
Annual Report 2019

Plain-text annual report

2019 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 including (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. Approximately 85% of the Company’s property operating income is generated from properties in the metropolitan Washington, DC/Baltimore area. TOTAL REVENUE(a) (In millions) 2019 | $231.5 2018 | $227.2 2017 | $226.3 2016 | $215.5 2015 | $208.1 NET INCOME Available to Common Stockholders (In millions) 2019 | $36.3 2018 | $36.0 2017 | $35.9 2016 | $32.9 2015 | $30.1 FUNDS FROM OPERATIONS Available to Common Shareholders(b) (In millions) 2019 | $95.1 2018 | $93.8 2017 | $94.0 2016 | $87.7 2015 | $83.8 ii (a) Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2019. (b) Funds From Operations (FFO) is a non-GAAP financial measure. The term Common Shareholders means common stockholders and holders of noncontrolling interests. See page 21 for a definition of FFO and reconciliation from Net Income. 2019 MESSAGE to ShareholdersPORTFOLIO COMPOSITION BASED ON 2019 PROPERTY OPERATING INCOME(1) 75.9% Shopping Centers 24.1% Mixed-Use 85.0% Metropolitan Washington, DC/ Baltimore area 15.0% Rest of U.S. (1) Property Operating Income equals total property revenue (net of provision for credit losses) less the sum of property operating expenses and real estate taxes. Summary Financial Data 2019 Year ended December 31, 2016 2017 2018 2015 Total Revenue(a) $ 231,525,000 $ 227,219,000 $ 226,299,000 $ 215,524,000 $ 208,111,000 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 Coverage(b) $ $ Property Data Number of Operating Properties(c) Total Portfolio Square Feet Shopping Center Square Feet Mixed-Use Square Feet Average Percentage Leased(d) $ 36,253,000 $ 35,964,000 $ 35,882,000 $ 32,904,000 $ 30,093,000 $ 95,059,000 $ 93,821,000 $ 93,987,000 $ 87,749,000 $ 83,815,000 23,053,000 22,425,000 22,008,000 21,615,000 21,196,000 30,913,000 30,156,000 29,511,000 28,990,000 28,449,000 1.57 $ 1.60 $ 1.63 $ 1.52 $ 3.08 $ 3.11 $ 3.18 $ 3.03 $ 69% 3.77 x 66% 3.53 x 64% 3.35 x 61% 3.29 x 1.42 2.95 57% 3.24 x 56 9,335,000 7,855,000 1,480,000 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 95% 95% 95% 95% 95% (a) Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2019. (b) 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. (c) Excludes land and development parcels (Ashland Square Phase II, New Market and Park Van Ness in 2015, Ashland Square Phase II, New Market and N. Glebe Road in 2016, 2017, and 2018, and Ashland Square Phase II, New Market, N. Glebe Road and 7316 Wisconsin Avenue in 2019). 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. (d) Average percentage leased includes commercial space only. 1 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM 2019 was another year of moderate domestic economic growth with a historically low interest rate environment. However, despite continuing global economic and political uncertainty, consumer confidence endured. As a result, our portfolio’s same property operating income increased a modest 1.2% over the prior year. Leasing activity continued to be solid, with an overall commercial space average percentage leased for 2019 of 95% for the fifth consecutive year. While we are firmly committed to well-located neighborhood shopping centers offering grocery, dining, fitness and service uses, we believe that overall retail challenges will continue for years to come. As a result, we are now allocating our resources and capital to our transit-centric, urban, mixed-use development pipeline, as we have over the past several years with Park Van Ness and, most recently, The Waycroft. THE WAYCROFT, ARLINGTON, VA THE WAYCROFT, ARLINGTON, VA CAPITAL MARKETS ACCOMPLISHMENTS In September 2019, we were able to take advantage of the historically low interest rate environment and the resulting attractive preferred stock market, and issued 6.000% Series E preferred stock, using the proceeds to redeem the remaining shares of our 6.875% Series C preferred stock. Additionally, since December 2018, we have repaid $95.0 million of fixed-rate loans on six of our properties, which were maturing either during 2019 or early 2020. During 2019, we completed two 15-year mortgage refinancings, totaling $50.6 million, at a weighted average interest rate of 4.40%. As of December 31, 2019, 30% of our total property operating income was being generated from unencumbered assets, compared to 22% five years ago, allowing us to increase our unsecured revolving credit line and term loan facility from $275 million to the current $400 million. Our weighted average cost of debt and preferred equity capital was 4.94% at December 31, 2019, a decrease from one year earlier, resulting in a savings of $3.8 million annually in combined interest and preferred stock dividends. Over the next five years, $145 million of our mortgage debt will mature, which has a weighted average interest rate of 6.7%, representing an opportunity to further lower our weighted average cost of capital. Our revolving credit line availability was $237.3 million at year-end 2019. Equity raised through our dividend reinvestment plan has averaged $22.4 million per year over the past three years. Thus, we believe that the combination of our credit facility, unencumbered assets outside of our revolver pool, 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. 2 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2019 MESSAGE to Shareholders2019 MESSAGE to Shareholders DEVELOPMENTS AND ACQUISITIONS The enhancement of liquidity through our 2018 and 2019 capital markets initiatives allows us to continue supplementing our core operating performance with mixed-use and pad site developments as opportunities are identified. The Waycroft, located at the corner of two major thoroughfares, Glebe Road and Wilson Boulevard, is within three blocks of the Ballston Metro Station in Arlington, Virginia. It is our largest mixed–use development to date. The Waycroft features three separate buildings, each with its own entrance and lobby, but internally connected with easy access throughout the entire property. Amenities shared amongst the three buildings include an interior courtyard, business center/work-from-home area, resident lounge and library, fitness center, clubroom, THE WAYCROFT, ARLINGTON, VA an expansive roof deck with a rooftop swimming pool and an indoor dog grooming and exercise facility. Construction is substantially complete with approximately 50% of the 491 apartment units expected to be ready for occupancy by April 2020, and the balance delivering later in the second quarter. The retail space is approximately 90% leased. A Target store (with a CVS pharmacy), which is scheduled to open in July 2020, accounts for 40,000 of the total 60,000 square feet. The leasing office and model units opened in late February 2020, and we have begun signing residential leases. We anticipate Metro Tower, located at 7316 Wisconsin Avenue in downtown Bethesda, Maryland, will be our next mixed-use development. The future 25-story high-rise will contain 366 residential units and 10,300 square feet of retail space. It is adjacent to both the new south entrance to the Red Line Metro Station and eastern terminus of the 3 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMPurple Line, which are both under construction. The property is well-located, just blocks from the future 1 million square foot Marriott International headquarters. The building currently encumbering the site is vacant, and we expect to begin demolition during the second quarter of 2020. We have completed development plans, and in July 2019, the Montgomery County Planning Board unanimously approved the site plan. Design and construction documents are being prepared and a site plan amendment has been submitted incorporating final design parameters. Additional approvals from the Washington Metropolitan Area Transit Authority and the Maryland Transit Administration are in process and are expected to be received by the fourth quarter of 2020. In November 2019, we entered into an agreement to acquire additional land in Rockville, Maryland, adjacent to the Twinbrook Metro Station. We have filed with the City of Rockville a site plan for Phase I of the Twinbrook Quarter development and that plan is currently undergoing community and governmental reviews. Combined with our adjacent 10.3 acre site, the redevelopment plan comprises 18.4 acres, and will contain 1,865 residential units, 431,000 square feet of office space and 473,000 square feet of retail space, including an 80,000 square foot Wegmans grocery store. Combining all three of our Montgomery County, Maryland development sites – Metro Tower, Twinbrook Quarter and our 7.6 acres at the White Flint (Red Line) Metro Station – the approved development potential of these sites includes up to 3,700 apartments and 975,000 square feet of retail and office space, which is further evidence of our focus on transit-centric, mixed-use properties. While we expect our mixed-use development pipeline to be our long term growth engine, in the near term, we will supplement these mixed- use developments with selective shopping center development and free-standing pad site buildings within our shopping center portfolio. Construction continues through 2020 on our 85,000 square foot Ashbrook Marketplace, where the Lidl grocery store opened for business prior to Thanksgiving. Overall, the Ashbrook shop space and four pads are 100% pre-leased, with initial tenant openings expected to occur during the second quarter, and stabilization expected in late 2020. Pad site development continues to be a driver of our shopping center operating income growth, requiring relatively less tenant improvement capital. In addition to pads in 601 PENNSYLVANIA AVENUE, WASHINGTON, DC PARK VAN NESS, WASHINGTON, DC 4 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2019 MESSAGE to ShareholdersAshbrook Marketplace, we have executed leases, as well as leases under negotiation, for a total of 12 additional pads, with aggregate annualized rents of $1.7 million. These pad deals are projected to become operational during 2020 and 2021. With these expansions, we expect to incur approximately $12.0 million in total capital costs, which would result in cash-on-cash return on investment in excess of 14%. During 2019, the 16,000 square foot small shop expansion of our Giant Food anchored Burtonsville Town Square shopping center in Montgomery County, Maryland came online, with the first tenant openings occurring during the first quarter of 2019. All new shop spaces are leased, with the last tenants scheduled to open during the second quarter of 2020. In addition, a lease has been executed with Taco Bell, which commenced construction on a free- standing building, scheduled to open in spring of 2020. At Lansdowne Town Center in Leesburg, Virginia, a Chick-fil-A and a Starbucks, both with drive-up windows, opened during the first quarter of 2020. We expect these two store openings will significantly increase traffic to that center. 2019 FINANCIAL RESULTS Total revenue increased to $231.5 million, a $4.3 million increase over the prior year. Operating income was $64.2 million, compared to $63.1 million a year earlier, and net income available to common stockholders was $36.3 million, compared to $36.0 million in 2018. The public real estate industry’s key performance measure, Funds From Operations (FFO) available to common stockholders and non- controlling interests (after deducting preferred stock dividends and preferred stock redemption costs), increased 1.3% to $95.1 million in 2019 from $93.8 million in 2018. The 2019 FFO increase was primarily due to (a) higher other revenue, primarily lease termination fees, exclusive of the impact of 7316 Wisconsin Avenue ($2.4 million), and (b) lower interest expense, net and amortization of deferred debt costs, exclusive of the impact of 7316 Wisconsin Avenue ($3.3 million), partially offset by (c) higher general and administrative expenses primarily due to a GAAP change requiring expensing of previously capitalized leasing compensation costs ($2.2 million), (d) the impact of the operations of 7316 Wisconsin Avenue as we terminated leases to prepare for redevelopment ($1.7 million), and (e) higher extinguishment in 2019 of issuance costs ASHBROOK MARKETPLACE, ASHBURN, VA LANSDOWNE TOWN CENTER, LEESBURG, VA 5 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2019 MESSAGE to Shareholdersupon redemption of preferred shares ($0.9 million). Although absolute FFO increased, on a per diluted share basis, FFO decreased to $3.08 in 2019 from $3.11 in 2018, due to an increase in shares outstanding, primarily from shares issued through the dividend reinvestment plan. Same property operating income increased 1.2% in 2019 as compared to 2018. Mixed-use same property operating income remained flat, year over year, while shopping center same property operating income increased $2.0 million or 1.6%, primarily due to termination fees received from recaptured tenant spaces. MIXED-USE HIGHLIGHTS Workforce trends, globalization, and urbanization are reshaping tenant preferences, changing the way people work, live, play and shop. Our mixed-use portfolio (including The Waycroft), contains over 2.0 million square feet of gross leasable area, comprised of over 1,000 apartment units, over 1.0 million square feet of office and 160,000 square feet of retail space. As such, entering 2020, our mixed- use assets represent a larger portion of the overall portfolio’s asset value and square footage than in the past. For the year ended December 31, 2019, mixed-use same property revenue increased 0.9%, while same property operating income increased 0.2%. The commercial average percentage leased on a same property basis in our mixed-use portfolio ended 2019 at over 90% for the fifth straight year. Within these totals, our 2019 residential same property operating income increased by 6.1% over the prior year. During 2019, we entered into 431 new or renewed apartment leases, with rents increasing by 2.3% over expiring leases. SHOPPING CENTER HIGHLIGHTS Types and sizes of retail tenants continued to evolve throughout 2019 in order to remain competitive with internet competition and changes in consumer demand. Grocers that are new or expanding in our market, such as Lidl and Aldi, are increasingly absorbing market share, while the increased presence of Target, Walmart and Wegmans in the grocery business, and pricing pressure from on-line grocery shopping options continue to make competition tight within the market. In spite of these pressures, since late 2018, we were able to retenant 3 underperforming grocery anchors with a Giant Food at Seven Corners, 99 Ranch at Shops at Fairfax, and an Aldi and LA Fitness at Broadlands Village, increasing annualized base rent on these spaces by over 10%. We believe these tenants will be better traffic generating anchors for these centers. METRO TOWER, BETHESDA, MD (RENDERING) LANSDOWNE TOWN CENTER, LEESBURG, VA 6 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2019 MESSAGE to ShareholdersOur shopping centers rely heavily on the traffic generated from grocery anchors. Twenty-six centers are anchored by national grocers, collectively reporting an average sales volume of over $500 per square foot. Twenty-one of these grocery-anchored centers are anchored by market leaders Giant, Publix and Kroger/Harris Teeter, which provide 56% of our shopping center property operating income. for Our 2019 same center property operating income increased by $2.0 million (or 1.6%) as compared to 2018, despite not having a full year of anchor tenant income from a combined 179,000 square feet of space at Seven Corners, Shops at Fairfax and Broadlands Village. All of these anchor spaces are rent under construction and scheduled commencement during the first half of 2020. Same space rents on signed renewals or new leases in 2019 decreased by 0.2% over previous expiring rents for 1.3 million square feet of space. However, this rent growth has been suppressed because certain of our shopping centers are planned for redevelopment, including our properties at Twinbrook and White Flint on Rockville Pike. We often accept lower rents at these properties in exchange for increased flexibility and control, as we have been deliberate in signing leases that have shorter terms and require minimal tenant improvements. When excluding these leases, same store rental rates for renewed or new tenants increased by 1.7% from expiring lease rates during 2019. Looking forward, we anticipate the successful lease- up of The Waycroft. This development will increase our transit-oriented luxury apartment inventory to over 1,000 units. In addition, while continuing to develop urban, transit-centric, mixed-use projects, we will deploy capital into selective grocery anchored shopping center construction, including small shop and pad site expansion of existing shopping centers, as opportunities arise. With 76% of our current property operating income derived from shopping centers in 2019, neighborhood and community shopping center operations remain our core business. However, we are reacting to changes in the market place, shifting our focus away from grocery anchored shopping centers, to become a Washington, DC based diversified REIT. With each mixed-use development added to our portfolio, our cash flow generation becomes less concentrated on shopping centers, moving towards our goal of a more balanced cash flow stream. Since our initial public offering, our compounded annual total return at December 31, 2019 was 10.0%, slightly higher than the S&P’s 9.9% over the same period. For 2019, our dividend payout ratio, defined as dividends paid divided by FFO, was a conservative 69%, while our leverage ratio, as measured by debt to total capitalization, was 37.5%. Although local and global political and economic to be challenging, we conditions continue believe that through the continued efforts of our diligent management team and our geographic concentration in the metropolitan Washington, DC area, Saul Centers will generate cash flow growth and asset value creation from its core assets, while adding incremental growth through our thoughtful approach to development. We express our thanks to our professional staff and to our shareholders for their loyalty and trust throughout the years. For the Board THRUWAY, WINSTON-SALEM, NC B. Francis Saul II March 5, 2020 7 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2019 MESSAGE to Shareholders Portfolio Properties As of December 31, 2019, 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 Ashbrook Marketplace, Ashburn, VA, 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 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 Olney, Olney, MD Orchard Park, Dunwoody, GA Palm Springs Center, Altamonte Springs, FL, Ravenwood, Baltimore, MD 78,453 221,596 23,120 356,971 115,660 121,269 49,140 194,258 174,438 138,021 138,804 141,450 78,686 21,500 246,148 18,982 136,440 91,666 131,700 107,103 96,201 114,381 253,052 40,697 189,422 97,752 192,718 67,488 111,316 100,032 143,577 53,765 87,365 126,446 93,328 8 Shopping Centers 11503 Rockville Pike/5541 Nicholson Lane, Rockville, MD 40,249 110,128 1500/1580/1582/1584 Rockville Pike, Rockville, MD 146,673 Seabreeze Plaza, Palm Harbor, FL 21,677 Marketplace at Sea Colony, Bethany Beach, DE 573,481 Seven Corners, Falls Church, VA 254,011 Severna Park Marketplace, Severna Park, MD 68,762 Shops at Fairfax, Fairfax, VA 173,341 Smallwood Village Center, Waldorf, MD 485,628 Southdale, Glen Burnie, MD 371,761 Southside Plaza, Richmond, VA 163,418 South Dekalb Plaza, Atlanta, GA 365,816 Thruway, Winston-Salem, NC 145,651 Village Center, Centreville, VA 101,058 Westview Village, Frederick, MD 480,676 White Oak, Silver Spring, MD TOTAL SHOPPING CENTERS 7,855,275 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 223,447 227,651 236,376 390,683 108,386 293,565 TOTAL MIXED-USE PROPERTIES 1,480,108 Land and Development Parcels 7316 Wisconsin Avenue, Bethesda, MD Ashland Square Phase II, Dumfries, VA The Waycroft, Arlington, VA New Market, New Market, MD TOTAL PORTFOLIO 9,335,383 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM FINANCIAL SECTION TABLE OF CONTENTS Selected Financial Data ......................................10 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................................ 11 Quantitative and Qualitative Disclosures About Market Risk ......................24 Management’s Report on Internal Control Over Financial Reporting ................. 25 Report of Independent Registered Public Accounting Firm: Opinion on the Financial Statements ............................26 Report of Independent Registered Public Accounting Firm: Opinion on Internal Control over Financial Reporting ............................................. 27 Report of Previous Independent Registered Public Accounting Firm: Opinion on the 2017 Financial Statements .......................................... 28 Consolidated Balance Sheets ..........................29 Consolidated Statements of Operations ..............................................................30 Consolidated Statements of Comprehensive Income .......................................31 Consolidated Statements of Equity .............. 32 Consolidated Statements of Cash Flows ............................................................. 33 Notes to Consolidated Financial Statements ..........................................34 9 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) 2019 Years Ended December 31, 2017 2018 2016 2015 Operating data Total revenue Total expenses 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 dividends Extinguishment of issuance costs upon redemption of preferred shares 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 limited partnership units - diluted Dividends Paid $ 231,525 (166,893) (436) — 64,196 (12,473) 51,723 (12,235) $ 227,219 (164,666) (3) 509 63,059 (12,505) 50,554 (12,262) $ 226,299 (165,701) 70 — 60,668 (12,411) 48,257 (12,375) $ 215,524 (159,811) (6) 1,013 56,720 (11,441) 45,279 (12,375) $ 208,111 (155,181) (10) 11 52,931 (10,463) 42,468 (12,375) (3,235) 36,253 (2,328) 35,964 $ $ — 35,882 — 32,904 — 30,093 $ $ $ $ 1.57 $ 1.60 $ 1.63 $ 1.52 $ 1.42 23,009 44 23,053 22,383 42 22,425 21,901 107 22,008 21,505 110 21,615 21,127 69 21,196 7,860 7,731 7,503 7,375 7,253 30,913 30,156 29,511 28,990 28,449 Cash dividends to common stockholders1 Cash dividends per share $ $ 48,568 2.12 $ $ 46,306 2.08 $ $ 44,576 2.04 $ $ 39,472 1.84 $ $ 35,645 1.69 Balance Sheet Data Real estate investments (net of accumulated depreciation) Total assets Total debt, including accrued interest Preferred stock Total equity Other Data Cash flow provided by (used in): Operating activities Investing activities Financing activities Funds from operations2: Net income Real property depreciation and amortization Gain on sale of property Funds from operations Preferred stock dividends Extinguishment of issuance costs upon redemption of preferred shares Funds from operations available to common stockholders and noncontrolling interests $ 1,518,123 1,618,340 1,094,715 185,000 443,356 $ 1,422,647 1,527,489 1,025,255 180,000 425,220 $ 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 $ 115,383 $ (135,663) 19,607 $ $ 110,339 $ (128,650) 21,981 $ $ 103,450 $ (113,306) 12,442 $ $ $ $ 89,090 (86,274) (4,497 $ 64,196 46,333 — 110,529 (12,235) $ 63,059 45,861 (509) 108,411 (12,262) $ 60,668 45,694 — 106,362 (12,375) $ 56,720 44,417 (1,013) 100,124 (12,375) $ $ $ $ 88,896 (69,587) (21,434) 52,931 43,270 (11) 96,190 (12,375) (3,235) (2,328) — — — $ 95,059 $ 93,821 $ 93,987 $ 87,749 $ 83,815 (1) During 2019, 2018, 2017, 2016, and 2015, shareholders reinvested $22.5 million, $28.8 million, $15.8 million, $10.3 million and $10.6 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 Condi- tion and Results of Operations-Funds From Operations.” 10 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM 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 13, discusses the Company’s results of operations for the past two years. Beginning on page 16, the Company provides an analysis of its liquidity and capital resources, including discussions of its cash flows, debt arrangements, sources of capital and financial commitments. Finally, on page 21, 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 29. We make statements in this section that are for- ward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, refer to the Company’s Form 10-K section enti- tled “Forward-Looking Statements.” Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, refer to the Company’s Form 10-K “Item 1A. Risk Factors.” OVERVIEW The Company’s primary strategy is to continue to focus on diversification of its assets through development of tran- sit-centric, residential mixed-use projects in the Washington, D.C. metropolitan area. The Company’s operating strategy also includes improvement of the operating performance and internal growth of its Shopping Centers and will sup- plement its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers. The Company’s primary strategy is to continue to focus on diversification of its assets through development of tran- sit-centric, residential mixed-use projects in the Washington, D.C. metropolitan area. Construction of The Waycroft, a project with 491 apartment units and 60,000 square feet of retail space, is nearing substantial completion on North Glebe Road, within two blocks of the Ballston Metro Station, in Arlington, Virginia. The Company also has a development pipeline of zoned sites, either in its portfolio (some of which are currently shopping center operating properties) or under contract, for development of up to 3,700 apartment units and 975,000 square feet of retail and office space. All such sites are located adjacent to red line Metro stations in Mont- gomery County, Maryland. The Company’s operating strategy also includes improve- ment of the operating performance and internal growth of its Shopping Centers and will supplement its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers. It intends to selectively add free-standing pad site buildings within its Shopping Center portfolio, and replace underperforming tenants with tenants that generate strong traffic, generally anchor stores such as supermarkets, drug stores and fitness centers, as evidenced by the coming additions of a 69,000 square foot Giant Food at Seven Corners and a 36,000 square foot LA Fitness at Broadlands Village. Exclusive of four pads under development within Ashbrook Marketplace, the Company currently has signed leases or leases under negotiation for 12 pad sites within its core portfolio. The pad sites are expected to be completed and operational by late 2021. In recent years, there has been a limited amount of qual- ity properties for sale and pricing of those properties has escalated. Accordingly, management believes acquisition opportunities for investment in existing and new shop- ping center and mixed-use properties in the near future is uncertain. Nevertheless, because of the Company’s con- servative capital structure, including its cash and capacity under its revolving credit facility, management believes that the Company is positioned to take advantage of additional investment opportunities as attractive properties are identi- fied and market conditions improve. (See “Item 1. Business - Capital Policies”.) It is management’s view that several of the sub-markets in which the Company operates have, or are expected to have in the future, attractive supply/demand characteristics. The Company will continue to evaluate ac- quisition, development and redevelopment as integral parts of its overall business plan. Economic conditions within the local Washington, DC met- ropolitan area have remained relatively stable. Issues facing the Federal government relating to taxation, spending and interest rate policy will likely continue to impact the office, retail and residential real estate markets over the coming years. Because the majority of the Company’s property op- erating income is produced by our Shopping Centers, we continually monitor the implications of government policy 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, decreased to 95.1% at December 31, 2019, from 95.7% at December 31, 2018. 11 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2019, amortizing fixed-rate mortgage debt with staggered maturities from 2020 to 2035 represented ap- proximately 85.2% of the Company’s notes payable, thus minimizing refinancing risk. The Company’s variable-rate debt consists of $162.5 million outstanding under the credit facility. As of December 31, 2019, the Company has loan availability of approximately $237.3 million under its $325.0 million revolving credit facility. Although it is management’s present intention to con- centrate future acquisition and development activities on transit-centric, primarily residential mixed-use properties in the Washington, D.C./Baltimore metropolitan area, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. The Company plans to continue to diversify in terms of property types, locations, size and market, and it does not set any limit on the amount or percentage of as- sets 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 con- ditions, 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. 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 fac- tors in identifying impairment indicators including recurring operating losses, significant decreases in occupancy, and sig- nificant 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 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 carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carry- ing 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 man- agement’s projections, the valuation could be negatively or positively affected. 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 Com- pany 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. 12 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMRESULTS OF OPERATIONS The following is a discussion of the components of revenue and expense for the entire Company. This section generally dis- cusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. For year-to-year comparison between 2018 and 2017, refer to the Company’s Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Part II, Item 7. Revenue (Dollars in thousands) Base rent Expense recoveries Percentage rent Other property revenue Credit losses on operating lease receivables Rental revenue Other revenue Total revenue Year ended December 31, 2018 2019 2017 Percentage Change 2019 from 2018 2018 from 2017 $ 185,724 36,521 910 1,423 $ 184,684 35,537 994 1,204 $ 181,141 35,347 1,458 1,145 (1,226) 223,352 8,173 $ 231,525 (685) 221,734 5,485 $ 227,219 (906) 218,185 8,114 $ 226,299 0.6 % 2.8 % (8.5) % 18.2 % 79.0 % 0.7 % 49.0 % 1.9 % 2.0 % 0.5 % (31.8) % 5.2 % (24.4) % 1.6 % (32.4) % 0.4 % Base rent includes $(1.4) million and $(0.9) million, for the years 2019 and 2018, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $1.4 million and $1.5 million for the years 2019 and 2018, respectively, to recognize income from the amortization of in-place leases. Total revenue increased 1.9% in 2019 compared to 2018. Base rent The $1.0 million increase in base rent in 2019 compared to 2018 was attributable to (a) a 110,187 square foot increase in leased space ($2.2 million) and (b) higher residential base rent ($0.7 million), partially offset by (c) a $0.22 per square foot decrease in base rent ($1.8 million). erable property operating expenses, largely repairs and maintenance and snow removal. Credit losses on operating lease receivables Credit losses increased $0.5 million in 2019 compared to 2018 primarily due to two office tenants. Expense recoveries Expense recovery income increased $1.0 million in 2019 compared to 2018 primarily due to an increase in recov- Other revenue Other revenue increased $2.7 million in 2019 compared to 2018 primarily due to higher lease termination fees. Operating Expenses (Dollars in thousands) Property operating expenses Real estate taxes Interest expense, net and amortization of deferred debt costs Depreciation and amortization of deferred leasing costs General and administrative Total expenses Year ended December 31, 2018 2019 2017 Percentage Change 2019 from 2018 2018 from 2017 $ 29,946 27,987 $ 28,202 27,376 $ 27,689 26,997 6.2 % 2.2 % 41,834 44,768 47,145 (6.6) % 46,333 20,793 $ 166,893 45,861 18,459 $ 164,666 45,694 18,176 $ 165,701 1.0 % 12.6 % 1.4 % 1.9 % 1.4 % (5.0) % 0.4 % 1.6 % (0.6) % Total expenses increased 1.4% in 2019 compared to 2018. 13 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Property operating expenses Property operating expenses increased $1.7 million in 2019 compared to 2018 primarily due to (a) higher repairs and maintenance expenses throughout the portfolio ($0.3 mil- lion), (b) higher snow removal costs ($0.3 million), and (c) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.7 million). Real estate taxes Real estate taxes increased $0.6 million in 2019 compared to 2018 primarily due to increased tax assessments at 601 Pennsylvania Avenue and Clarendon Center ($0.4 million). Interest expense, net and amortization of deferred debt costs Interest expense and amortization of deferred debt costs de- creased by $2.9 million in 2019 compared to 2018 primarily due to increased capitalized interest ($5.3 million), partially offset by higher interest incurred due to higher outstanding debt balances ($2.4 million). Depreciation and amortization Depreciation and amortization of deferred leasing costs in- creased by $0.5 million in 2019 compared to 2018 primarily due to the write off of the remaining assets at 7316 Wiscon- sin Avenue when the property was moved to development ($0.6 million). General and administrative General and administrative costs increased $2.3 million in 2019 compared to 2018 primarily due to higher compensa- tion and benefits expense related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($1.5 million). 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 total 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 net income plus (a) interest expense, net and amortization of deferred debt costs, (b) deprecia- tion and amortization of deferred leasing costs, (c) general and administrative expenses, and (d) change in fair value of derivatives, minus (e) gains on sale of property and (f) the operating income of properties which were not in operation for the entirety of the comparable periods. Other REITs may use different methodologies for calculat- ing 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 op- erating 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 amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and admin- istrative expenses or other gains and losses that relate to ownership of our properties. We believe the exclusion of these items from revenue and operating income is useful because the resulting measures capture the actual revenue generated and actual expenses incurred by operating our properties. Same property revenue and same property operating income are measures of the operating performance of our 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. 14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2019 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 49 Shopping Centers and six Mixed-Use properties for each period. Same Property Revenue (Dollars in thousands) Total 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 revenue Total Mixed-Use property revenue Less: Mixed-Use acquisitions, dispositions and development properties Total same Mixed-Use revenue Year ended December 31, 2018 2019 $ $ $ $ $ $ $ $ 231,525 (1,209) 230,316 167,834 62,482 230,316 167,888 (54) 167,834 63,637 (1,155) 62,482 $ $ $ $ $ $ $ $ 227,219 (973) 226,246 164,344 61,902 226,246 164,344 — 164,344 62,875 (973) 61,902 The $4.1 million increase in same property revenue for 2019 compared to 2018 was primarily due to (a) higher other reve- nue ($2.4 million), (b) a 63,023 square foot increase in leased space ($1.3 million), and (c) higher expense recovery income ($1.0 million), partially offset by (d) an $0.11 per square foot decrease in base rent ($0.9 million). 15 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Same Property Operating Income Year ended December 31, (Dollars in thousands) Net income Add: Interest expense, net and amortization of deferred debt costs Add: Depreciation and amortization of deferred leasing costs Add: General and administrative Add: Change in fair value of derivatives Less: Gain on sale of property Property operating income Add (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 Add (Less): Mixed-Use acquisitions, dispositions and development properties Total same Mixed-Use property operating income 2019 64,196 41,834 46,333 20,793 436 — 173,592 (568) 173,024 131,720 41,304 173,024 131,769 (49) 131,720 41,823 (519) 41,304 $ $ $ $ $ $ $ 2018 63,059 44,768 45,861 18,459 3 (509) 171,641 (727) 170,914 129,701 41,213 170,914 129,701 — 129,701 41,940 (727) 41,213 $ $ $ $ $ $ $ Same property operating income increased $2.1 million for 2019 compared to 2018 due primarily to (a) higher other revenue ($2.4 million) and (b) a 63,023 square foot in- crease in leased space ($1.3 million), partially offset by (c) an $0.11 per square foot decrease in base rent ($0.9 million) and (d) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.7 million). 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. IMPACT OF INFLATION Inflation has remained relatively low during 2019 and 2018. 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 the change in the consumer price index, commonly referred to as the CPI. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $13.9 million and $14.6 mil- lion at December 31, 2019 and 2018, respectively. The changes in cash and cash equivalents during the years ended December 31, 2019 and 2018 were attributable to operat- ing, investing and financing activities, as described below. (Dollars in thousands) Net cash provided by operating activities Net cash used in investing activities Net cash provided in financing activities Year Ended December 31, 2019 2018 $ 115,383 $ 110,339 (135,663) (128,650) 19,607 21,981 Increase (decrease) in cash and cash equivalents $ (673) $ 3,670 16 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM Operating Activities Net cash provided by operating activities represents cash re- ceived primarily from rental revenue, plus other revenue, less property operating expenses, leasing costs, normal recurring general and administrative expenses and interest payments on debt outstanding. Investing Activities Net cash used in investing activities includes property acquisi- tions, developments, redevelopments, tenant improvements and other property capital expenditures. The $7.0 million in- crease in cash used in investing activities is primarily due to (a) development expenditures, primarily related to The Waycroft ($37.5 million) and (b) increased additions to real estate investments throughout the portfolio ($9.0 million) partially offset by (c) lower acquisitions of real estate invest- ments ($40.8 million). Financing Activities Net cash provided by financing activities represents (a) cash received from loan proceeds and issuance of common stock, preferred stock and limited partnership units minus (b) cash used to repay and curtail loans, redeem preferred stock and pay dividends and distributions to holders of common stock, preferred stock and limited partnership units. See note 5 to the Consolidated Financial Statements for a discussion of financing activity. 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 common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from 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 expected to be approximately $275.0 million. The Company had incurred costs totaling $255.4 million as of December 31, 2019. The remaining cost will be funded by a $157.0 million construction-to-permanent loan. The Company may also re- develop certain of the Current Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the com- ing year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank bor- rowings 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 equity capital resources available to the Company. Any future borrowings may be at the Saul Centers, Operat- ing Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. The availability and terms of any such financing will depend upon market and other conditions. Management believes that the Company’s capital resources, which at December 31, 2019 included cash balances of approximately $13.9 million and borrowing availability of approximately $237.3 million on its unsecured revolving credit facility, will be sufficient to meet its liquidity needs for the foreseeable future. Contractual Payment Obligations As of December 31, 2019, the Company had unfunded contractual payment obligations of approximately $116.1 million, excluding operating obligations, due within the next 12 months. The table below shows the total con- tractual payment obligations as of December 31, 2019. 17 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Dollars in thousands) Payments Due By Period Contractual Payment Obligations One Year or Less More than 1 and up to 3 Years More than 3 and up to 5 Years After 5 Years Total Notes Payable: Interest Scheduled Principal Balloon Payments Subtotal Corporate Headquarters Lease (1) Development and Predevelopment Obligations Tenant Improvements $ 46,166 $ 85,156 $ 72,305 $ 162,323 $ 365,950 28,421 16,074 90,661 901 14,785 9,729 58,670 135,014 278,840 1,883 1,973 4,513 58,762 150,874 281,941 125,809 527,297 815,429 — — — — — — 271,662 829,259 1,466,871 2,784 16,758 14,242 Total Contractual Obligations $ 116,076 $ 287,209 $ 281,941 $ 815,429 $ 1,500,655 (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. 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 distributions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Company issued 425,956 and 566,435 shares under the Plan at a weighted average discounted price of $52.27 and $50.31 per share during the years ended December 31, 2019 and 2018, respectively. The Company issued 60,936 and 107,433 limited partnership units under the Plan at a weighted average price of $52.99 and $50.56 per unit during the years ended December 31, 2019 and 2018, respectively. The Company also credited 4,506 and 6,493 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ Deferred Compensa- tion Plan at a weighted average discounted price of $52.28 and $50.28 per share, during the years ended December 31, 2019 and 2018, respectively. CAPITAL STRATEGY AND FINANCING ACTIVITY As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to ac- tively 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 ac- quired 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, 2019. 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 may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. The Com- pany continues to refinance or renegotiate the terms of its outstanding debt in order to extend maturities and obtain generally more favorable loan terms, whenever manage- ment determines the financing environment is favorable. The Company’s financing activity is described within note 5 to the Consolidated Financial Statements. The follow- ing is a summary of notes payable as of December 31, 2019 and 2018. 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM The following is a summary of notes payable as of December 31, 2019 and 2018. Notes Payable Year Ended December 31, 2019 2018 Interest Rate* Scheduled Maturity* (Dollars in thousands) Fixed rate mortgages: Olde Forte Village Countryside Marketplace Briggs Chaney Marketplace Shops at Monocacy Boca Valley Plaza Palm Springs Center Thruway Jamestown Place Hunt Club Corners Lansdowne Town Center Orchard Park BJ’s Wholesale Club Great Falls Center Leesburg Pike Center Village Center White Oak Avenel Business Park Ashburn Village Ravenwood Clarendon Center Severna Park Marketplace Kentlands Square II Cranberry Square Seven Corners Hampshire-Langley Beacon Center Seabreeze Plaza Shops at Fairfax / Boulevard Northrock Burtonsville Town Square Park Van Ness Washington Square Broadlands Village The Glen Olde Forte Village Olney Shops at Monocacy The Waycroft $ — — — — 9,234 7,262 — 6,539 5,300 30,719 9,441 10,323 10,774 14,414 12,555 22,475 26,260 26,245 13,606 98,611 29,710 33,952 15,917 60,677 14,810 36,206 15,019 26,205 14,085 36,975 68,095 56,990 31,221 22,448 21,702 11,952 28,500 110,199 $ 9,159 12,676 12,714 11,295 9,601 7,766 36,711 6,943 5,480 31,723 9,728 10,609 11,702 14,952 13,013 23,198 27,222 27,168 14,086 102,310 30,888 35,258 16,515 62,630 15,345 38,120 15,547 27,060 14,526 38,076 69,691 58,523 31,941 22,900 — 11,781 — 23,332 910,189 47,000 75,000 122,000 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% 7.45% 7.02% 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% 4.65% 8.00% 4.14% 4.67% 5.04% 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 Feb-2034 Apr-2034 Dec-2034 Sep-2035 9.3 Years LIBOR + 1.35% LIBOR + 1.30% 3.09% Jan-2022 Jan-2023 2.5 Years Total fixed rate 938,421 Variable rate loans: Revolving credit facility Term loan facility Total variable rate 87,500 75,000 162,500 Total notes payable $ 1,100,921 $ 1,032,189 4.75% 8.3 Years * Interest rate and scheduled maturity data presented as of December 31, 2019. Totals computed using weighted averages. 19 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At December 31, 2019, the Company had a $400.0 mil- lion credit facility comprised of a $325.0 million revolving facility and a $75.0 million term loan. As of December 31, 2019, 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 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. As of December 31, 2019, based on the value of the Company’s unencumbered properties, ap- proximately $237.3 million was available under the revolving credit facility, $87.5 million was outstanding and approxi- mately $185,000 was committed for letters of credit. The Company’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. As of December 31, 2019, the Com- pany was in compliance 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 exceed 2.0x on a trailing four-quarter basis (interest expense coverage); and limit the amount of debt so that interest, scheduled principal amortization and preferred dividend cover- age exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage). On September 17, 2019, Saul Centers sold, in an under- written public offering, 4.0 million depositary shares, each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock (the “Series E Stock”), providing net cash proceeds of approximately $96.8 million. The depositary shares may be redeemed in whole or in part, on or after September 17, 2024, at the $25.00 liquidation preference, plus accrued but unpaid dividends to, but not including the redemption date. The depositary shares pay an annual dividend of $1.50 per share, equivalent to 6.000% of the $25.00 liquidation preference. The Series E 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 depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. On September 23, 2019, Saul Centers sold, as a result of the exercise by the underwriters of their over-allotment option, an additional 0.4 million depositary shares of Series E Stock, providing net cash proceeds of approximately $9.5 million. On October 17, 2019, the Company used the proceeds from the Series E Stock offering to redeem the outstanding 4.2 million depos- itary shares of its Series C Stock, including all accumulated and unpaid distributions to, but not including the redemp- tion date. In the fourth quarter, approximately $3.2 million of costs associated with the redemption were charged against Net income available to common stockholders. 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. 20 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMFUNDS FROM OPERATIONS In 2019, the Company reported Funds From Operations (“FFO”)1 available to common stockholders and noncontrolling in- terests of $95.1 million, a 1.3% increase from 2018 FFO available to common stockholders and noncontrolling interests of $93.8 million. The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated: (Dollars in thousands except per share amounts) 2019 2018 2017 2016 2015 Year ended December 31, Net income Subtract: $ 64,196 $ 63,059 $ 60,668 $ 56,720 $ 52,931 Gains on sales of properties — (509) — (1,013) (11) Add: Real estate depreciation and amortization FFO Subtract: 46,333 110,529 45,861 108,411 45,694 106,362 44,417 100,124 43,270 96,190 Preferred stock dividends (12,235) (12,262) (12,375) (12,375) (12,375) Extinguishment of issuance costs upon redemption of preferred shares FFO available to common stockholders and noncontrolling interests Average shares and units used to compute FFO per share (3,235) (2,328) — — — $ 95,059 $ 93,821 $ 93,987 $ 87,749 $ 83,815 30,913 30,156 29,511 28,990 28,449 FFO per share $ 3.08 $ 3.11 $ 3.18 $ 3.03 $ 2.95 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. 21 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITIONS AND REDEVELOPMENTS Management anticipates that during the coming year, the Company will complete its development activities at The Waycroft, may 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 provide long-term earnings and cash flow growth. During the com- ing year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Com- pany’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital resources available to the Company. The Company has been selectively involved in acquisition, development, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and mixed-use development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to ana- lyze redevelopment, renovation and expansion opportunities within the portfolio. 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. 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 purchase price was funded through the Com- pany’s revolving credit facility. The Company has completed development plans for the combined property for the devel- opment of up to 366 apartment units and 10,300 square feet of retail space. In July 2019, the Montgomery County Planning Commission unanimously approved the Compa- ny’s site plan. Design and construction documents are being prepared and a site plan amendment has been submitted incorporating final design parameters. Additional approvals from the Washington Metropolitan Area Transit Authority and the Maryland Transit Administration are in process and are expected to be received by the fourth quarter of 2020. The Company has executed lease termination agreements with the final office tenants and, effective September 1, 2019, the asset was removed from service and transferred to construction in progress. The Company, as contract purchaser, has filed with the City of Rockville a site plan for Phase I of the Twinbrook Quarter development and is conducting community hearings and awaiting design review committee comments on its plan. The plan includes an 80,000 square foot Wegmans grocery store, 29,000 square feet of retail shop space, 460 resi- dential units and 237,000 square feet of office space. The phasing of these improvements and the timing of construc- tion will depend on removal of contingencies, final site plan approval, building permit approval and market conditions. The total development potential of this 8.1 acre site, when combined with the Company’s adjacent 10.3 acre site, totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space. 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 2019 2018 50 49 6 7 7,855,275 1,076,837 7,750,271 1,146,438 95.5% 96.0% 91.6% 92.3% 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM The residential components of Clarendon Center and Park Van Ness were 95.5% and 97.0% leased, respectively, at De- cember 31, 2019. The residential components of Clarendon Center and Park Van Ness were 99.6% and 97.0% leased, respectively, at December 31, 2018. 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 decreased to 95.6% from 96.0% and the Mixed-Use leasing percentage decreased to 91.6% from 93.6%. The overall portfolio leasing percentage, on a comparative same property basis, decreased to 95.1% at December 31, 2019 from 95.7% at December 31, 2018. 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 Base Rent per Square Foot Year ended December 31, Square Feet Number of Leases New/Renewed Leases 2019 2018 1,471,429 1,555,620 255 281 $ 18.24 19.52 Expiring Leases $ 18.39 19.26 Certain of the Company’s operating properties are planned for redevelopment, including its properties at Twinbrook and White Flint. Prior to the commencement of redevelopment, the Company continues to operate the properties. However, in order to provide the greatest amount of flexibility, the Company generally enters into leases with shorter terms at these “pre-development” properties. The shorter-term leases require less capital, but also yield lower rents. The impact of these leases with shorter terms and lower rents can impact the averages shown for all leasing activity. During 2019, the Company entered into six new or renewed leases, for 53,400 square feet of retail space, at pre-development properties that have shorter terms and lower rents than typical market condi- tions would suggest. Excluding these leases, the base rent on the 249 new or renewed leases on a same space basis would have been $18.26 per square foot compared to $18.10 per square foot for expiring leases. Additional information about commercial leasing activity during the three months ended December 31, 2019, 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. Number of leases Square feet Per square foot average annualized: Base rent Tenant improvements Leasing costs Rent concessions Effective rents Commercial Leasing Activity New Leases 13 54,300 First Generation/ Development 6 11,381 Renewed Leases 53 430,858 $ 32.01 $ 43.12 $ 12.84 (4.82) (0.38) (0.63) (9.70) (1.60) (0.31) (1.19) (0.10) (0.30) $ 26.18 $ 31.51 $ 11.25 23 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 2019, the Company entered into 431 new or re- newed apartment leases. The monthly rent per square foot for these leases increased to $3.53 from $3.45. During 2018, the Company entered into 465 new or renewed apartment leases. The monthly rent per square foot for these leases was unchanged at $3.44. As of December 31, 2019, 746,234 square feet of commercial space was subject to leases sched- uled to expire in 2020. 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 764,234 22.29 $ 22.35 $ 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 terminated on November 21, 2019, and the Company incurred a $0.4 million charge to change in fair value of derivatives. 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, 2019, the Company had variable rate indebt- edness totaling $162.5 million. If the interest rates on the Company’s variable rate debt instruments outstanding at De- cember 31, 2019 had been one percent higher, our annual interest expense relating to these debt instruments would have increased by $1.6 million, based on those balances. As of December 31, 2019, the Company had fixed-rate in- debtedness totaling $938.4 million with a weighted average interest rate of 5.04%. If interest rates on the Company’s fixed-rate debt instruments at December 31, 2019 had been one percent higher, the fair value of those debt instru- ments on that date would have decreased by approximately $51.7 million. 24 SAUL CENTERS, INC. 2019 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, 2019, 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 27 in this Annual Report. the Company’s 25 SAUL CENTERS, INC. 2019 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 We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consoli- dated statements of operations, comprehensive income, equity and cash flows for the years ended December 31, 2019 and 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 finan- cial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in confor- mity 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 reporting as of December 31, 2019, based on cri- teria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission and our report dated February 27, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion 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 fi- nancial 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. Critical Audit Matters Critical audit matters are matters arising from the cur- rent-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Deloitte & Touche LLP McLean, Virginia February 27, 2020 We have served as the Company’s auditor since 2018. 26 SAUL CENTERS, INC. 2019 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. /s/ Deloitte & Touche LLP McLean, Virginia February 27, 2020 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Tread- way Commission (COSO). In our opinion, the Company has maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020, expressed an un- qualified opinion on those financial statements. Basis for Opinion 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. 27 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMREPORT OF PREVIOUS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Saul Centers, Inc. Opinion on the 2017 Financial Statements We have audited the accompanying consolidated state- ments of operations, comprehensive income, equity and cash flows of Saul Centers, Inc. (the Company) for the year ended December 31, 2017, and the related notes and fi- nancial statement schedule for the year ended December 31, 2017 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 material respects, the consolidated results of the Company at December 31, 2017, and the results of its op- erations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Basis for Opinion 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 fi- nancial 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. /s/ Ernst & Young LLP We served as the Company’s auditor from 2002 to 2018. Tysons, Virginia February 27, 2018 28 SAUL CENTERS, INC. 2019 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 Preferred stock, 1,000,000 shares authorized: Series C Cumulative Redeemable, 0 and 42,000 shares issued and outstanding, respectively Series D Cumulative Redeemable, 30,000 shares issued and outstanding, respectively Series E Cumulative Redeemable, 44,000 and 0 shares issued and outstanding, respectively Common stock, $0.01 par value, 40,000,000 shares authorized, 23,231,240 and 22,739,207 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, 2019 December 31, 2018 $ 453,322 $ 488,918 1,292,631 335,644 2,081,597 (563,474) 1,518,123 13,905 52,311 24,083 5,363 4,555 1,273,275 185,972 1,948,165 (525,518) 1,422,647 14,578 53,876 28,083 5,175 3,130 $ 1,618,340 $ 1,527,489 $ 821,503 $ 880,271 74,691 86,371 108,623 19,291 35,199 29,306 74,591 45,329 21,655 19,153 32,419 28,851 1,174,984 1,102,269 — 75,000 110,000 232 410,926 (221,177) — 374,981 68,375 443,356 105,000 75,000 — 227 384,533 (208,593) (255) 355,912 69,308 425,220 $ 1,618,340 $ 1,527,489 29 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) For The Year Ended December 31, 2018 2019 2017 Revenue Rental revenue Other Total revenue Expenses Property operating expenses Real estate taxes Interest expense, net and amortization of deferred debt costs Depreciation and amortization of deferred leasing costs General and administrative Total expenses Change in fair value of derivatives Gains on sale of property Net Income Noncontrolling interests Income attributable to noncontrolling interests Net income attributable to Saul Centers, Inc. Preferred stock dividends $ 223,352 $ 221,734 $ 218,185 8,173 5,485 8,114 231,525 227,219 226,299 29,946 27,987 41,834 46,333 20,793 28,202 27,376 44,768 45,861 18,459 27,689 26,997 47,145 45,694 18,176 166,893 164,666 165,701 (436) — 64,196 (12,473) 51,723 (12,235) (3) 509 63,059 (12,505) 50,554 (12,262) (2,328) 70 — 60,668 (12,411) 48,257 (12,375) — Extinguishment of issuance costs upon redemption of preferred shares (3,235) Net income available to common stockholders $ 36,253 $ 35,964 $ 35,882 Per share net income available to common stockholders Basic Diluted The Notes to Financial Statements are an integral part of these statements. $ 1.58 $ 1.57 $ 1.61 $ 1.60 $ 1.64 $ 1.63 30 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM (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. Preferred stock dividends Extinguishment of issuance costs upon redemption of preferred shares Total comprehensive income available to common stockholders The Notes to Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Year Ended December 31, 2018 2019 2017 $ 64,196 $ 63,059 $ 60,668 93 64,289 (12,561) 51,728 (12,235) 594 63,653 (12,658) 50,995 (12,262) 812 61,480 (12,620) 48,860 (12,375) (3,235) (2,328) — $ 36,258 $ 36,405 $ 36,485 31 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM CONSOLIDATED STATEMENTS OF EQUITY (Dollars in thousands, except per share amounts) 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) Balance, December 31, 2018 Issuance of 44,000 shares of Series E Cumulative preferred stock Redemption of 42,000 shares of Series C Cumulative preferred stock Issuance of common stock: 430,462 shares pursuant to dividend reinvestment plan 61,571 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of 60,936 partnership units Net income Change in unrealized loss on cash flow hedge Preferred stock distributions: Series C Series D Series E Common stock distributions Distributions payable on Series D preferred stock, $38.28 per share Distributions payable on Series E preferred stock, $37.50 per share Distributions payable common stock ($0.53/share) and partnership units ($0.53/unit) 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 $ 217 $ 328,171 $ (188,584) $ (1,299) $ 318,505 $ 54,744 $ 373,249 — — — — — — — — — 180,000 75,000 (75,000) — — — — — — — — — — — 180,000 110,000 (105,000) — — — — — — — — — — — — 2 15,748 2 8,671 — — — 48,257 — (9,282) (33,490) (3,093) — — — — — — — (11,518) 352,590 (2,633) 2,311 (197,710) — (2,328) — — — — — — — 221 — — — 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) 6 28,817 — — 28,823 — 28,823 — — — — — — — — — — 227 — — 3,448 — — — — — — — — — — 50,554 — (6,145) (3,164) (34,841) (1,805) (1,148) — (12,006) 384,533 (3,735) 3,235 (208,593 ) — (3,235) — — — 441 — — — — — — (255) — — 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) (4,148) (16,154) 355,912 106,265 (105,000) 69,308 — — 425,220 106,265 (105,000) 4 22,494 — — 22,498 — 22,498 1 — — — — — — — — — — 4,399 — — — — — — — — — — — 51,723 — (5,736) (3,444) (257) (36,562) (1,148) (1,650) — — — 255 — — — — — — 4,400 — 51,723 255 (5,736) (3,444) — (36,562) (1,148) (1,650) — 3,180 12,473 88 — — — (12,494) — — 4,400 3,180 64,196 343 (5,736) (3,444) (257) (49,056) (1,148) (1,650) — (12,275) — (12,275) (4,180) (16,455) Balance, December 31, 2019 $ 185,000 $ 232 $ 410,926 $ (221,177) $ — $ 374,981 $ 68,375 $ 443,356 The Notes to Financial Statements are an integral part of these statements. 32 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM (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 Gain on sale of property 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) decrease in accounts receivable and accrued income Additions to deferred leasing costs Increase (decrease) in prepaid expenses 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 property (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 E preferred stock Series C preferred stock redemption Preferred stock redemption costs Distributions to: Series C preferred stockholders Series D preferred stockholders Series E preferred stockholders Common stockholders Noncontrolling interests Net cash provided by 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 CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended December 31, 2018 2019 2017 $ 64,196 $ 63,059 $ 60,668 436 — 46,333 1,518 1,859 1,226 339 (1,843) (188) 894 158 455 115,383 — (21,891) (113,772) — (135,663) 50,600 (109,235) — 152,500 (112,000) 86,868 (1,010) 25,039 3,180 — 106,265 (105,000) — (7,541) (4,592) (257) (48,568) (16,642) 19,607 (673) 14,578 13,905 40,434 303 $ $ $ 3 (509) 45,861 1,610 1,766 685 (336) (6,034) 73 3,681 225 255 110,339 (40,836) (12,883) (76,257) 1,326 (128,650) 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 14,578 43,561 9,663 $ $ $ (70) — 45,694 1,392 1,672 906 (1,643) (4,615) (294) 1,374 1,125 (2,759) 103,450 (79,499) (17,653) (22,842) 6,688 (113,306) 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 10,908 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, plus accrued interest of $51. The Notes to Financial Statements are an integral part of these statements. 33 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM 1. ORGANIZATION, BASIS OF PRESENTATION 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, Chief Executive Officer and President of Saul Centers. 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 entities, 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 transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships,” and collectively with the Operating Partner- ship, the “Partnerships”), Shopping Centers 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 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 Wash- ington, DC/Baltimore metropolitan area, a disproportionate economic downturn in the local economy would have a greater negative impact on our overall financial performance than on the overall financial performance of a company with a portfolio that is more geographically diverse. A major- ity of the Shopping Centers are anchored by several major tenants. As of December 31, 2019, 33 of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. One retail tenant, Giant Food (4.7%), a tenant at ten Shopping Centers, individually accounted for 2.5% or more of the Company’s total revenue for the year ended December 31, 2019. As of December 31, 2019, the Current Portfolio Properties consisted of 50 Shopping Centers, six Mixed-Use Properties, and four (non-operating) development properties. The accompanying consolidated financial statements of the Company include the accounts of Saul Centers and its sub- sidiaries, including the Operating Partnership and Subsidiary Partnerships, which are majority owned by Saul Centers. Substantially all assets and liabilities of the Company as of December 31, 2019 and December 31, 2018, are comprised of the assets and liabilities of the Operating Partnership. The debt arrangements which are subject to recourse are de- scribed in Note 5. 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 74.6% 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions 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. The most significant estimates and assumptions relate to impairment of real estate properties. Actual results could differ from those estimates. Real Estate Investment Properties 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 con- ditions, 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. 34 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS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 2019, 2018, or 2017. 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, 2019, 2018, and 2017, was $40.5 million, $39.8 million, and $40.2 mil- lion, respectively. Repairs and maintenance expense totaled $12.5 million, $11.9 million, and $11.6 million for 2019, 2018, and 2017, respectively, and is included in property operating expenses in the accompanying consolidated finan- cial statements. 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 ex- pects 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, 2019 and 2018, the Company had no assets designated as held for sale. 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. Accounts Receivable, Accrued Income, and Allowance for Doubtful Accounts Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of their re- spective leases. Lease related receivables are reduced for credit losses. Such losses are recognized as a reduction of rental revenue in the consolidated statements of operations. Receivables are reviewed monthly and reserves are estab- lished with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying consol- idated financial statements are shown net of an allowance for doubtful accounts of $0.4 million and $0.6 million, at December 31, 2019 and 2018, respectively. In addition to rents due currently, accounts receivable also includes $42.1 million and $43.3 million, at December 31, 2019 and 2018, respectively, net of allowance for doubtful accounts totaling $30,000 and $58,500, respectively, rep- resenting minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. 35 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL 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 $24.1 million and $28.1 million, net of accumulated amorti- zation of approximately $41.6 million and $37.7 million, as of December 31, 2019 and 2018, respectively. Amortization expense, which is included in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, totaled approximately $5.8 million, $6.1 million, and $5.5 million, for the years ended December 31, 2019, 2018, and 2017, respectively. 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, 2019 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. 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. 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 December 31, 1993. A REIT generally will not be subject to federal in- come taxation, provided that distributions to its stockholders equal or exceed its REIT taxable income and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consoli- dated financial statements. As of December 31, 2019, 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 2019, 2018, and 2017. The tax basis of the Compa- ny’s real estate investments was approximately $1.33 billion and $1.35 billion as of December 31, 2019 and 2018, 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 2016. 36 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTSLegal Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. Upon determination that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. Recently Issued Accounting Standards In February 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) 2016-02, ‘‘Leases’’ (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, in- cluding requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, interim periods within those years, and requires a modified retrospective transition approach for all leases existing at the date of initial appli- cation, with an option to use certain practical expedients for those existing leases. Upon adoption of ASU 2016-02 effective January 1, 2019, we elected the practical expedient for all leases with respect to lease identification, lease clas- sification, and initial direct costs. We made a policy election not to separate lease and nonlease components and have accounted for each lease component and the related non- lease components together as a single component. There have been no significant changes to our lessor accounting for operating leases as a result of ASU 2016-02. We lease Shopping Centers and Mixed-Use Properties to les- sees in exchange for monthly payments that cover rent, and where applicable, reimbursement for property taxes, insur- ance, and certain property operating expenses. Our leases were determined to be operating leases and generally range in term from one to 15 years. Some of our leases have termination options and/or extension options. Termination options allow the lessee to terminate the lease prior to the end of the lease term, provided certain conditions are met. Termination options generally require advance notification from the lessee and payment of a ter- mination fee. Termination fees are recognized as revenue over the modified lease term. Extension options are subject to terms and conditions stated in the lease. On January 1, 2019, a right of use asset and correspond- ing lease liability related to our headquarters lease were recorded in other assets and other liabilities, respectively. The lease expires on February 28, 2022, with one option to renew for an additional five years. The right of use asset and corresponding lease liability totaled $1.6 million and $1.6 million, respectively, at December 31, 2019. 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. Management has determined that the adoption of ASU 2016-13 will not have a material impact on our consolidated financial statements and related disclosures because the vast majority of the Company’s receivables relate to operating leases which are accounted for under ASC 842. In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging” (“ASU 2017-12”). ASU 2017-12 amends fi- nancial reporting for hedging activities to better align that reporting with risk management activities. ASU 2017-12 ex- pands and refines hedge accounting for both financial and nonfinancial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Effective with the adoption of ASU 2017-12 on January 1, 2019, changes in the fair value of the Company’s interest rate swap related to changes in the cash flow of the hedged item are reported as a component of interest expense and amortization of de- ferred debt costs in the Statements of Operations. Reclassifications Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2019. 3. REAL ESTATE Construction in Progress Construction in progress includes land, preconstruction and development 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. December 31, (In thousands) The Waycroft 7316 Wisconsin Avenue Ashbrook Marketplace Other Total 2019 $ 255,443 44,638 19,128 16,435 $ 335,644 2018 $ 162,176 — 11,124 12,672 $ 185,972 37 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisitions 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 Shopping Center. The land was previously leased by the Company with an annual rent of approximately $56,000. The purchase 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. 7316 Wisconsin Avenue In September 2018, the Company purchased for $35.5 million, plus $0.7 million of acquisition costs, an office building and the underlying ground located at 7316 Wis- consin Avenue in Bethesda, Maryland. In December 2018, the Company purchased for $4.5 million, including acqui- sition costs, an interest in an adjacent parcel of land and retail building. The purchase price was funded through the Company’s credit facility. The Company has executed lease termination agreements with the final two office tenants and, effective September 1, 2019, the asset was removed from service and transferred to construction in progress at its carrying value of $42.6 million. 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. 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, includ- ing acquisition costs. Of the total acquisition cost, $28.4 million was allocated to land, $45.8 million was allocated 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. The gross carrying amount of lease intangible assets in- cluded in deferred leasing costs as of December 31, 2019 and 2018 was $11.7 million and $12.5 million, respectively, and accumulated amortization was $8.5 million and $8.1 million, respectively. Amortization expense totaled $0.9 million, $1.3 million and $1.1 million, for the years ended December 31, 2019, 2018, and 2017, respectively. The gross carrying amount of below market lease intangible lia- bilities included in deferred income as of December 31, 2019 and 2018 was $24.1 million and $24.8 million, respectively, and accumulated amortization was $13.9 million and $13.1 million, respectively. Accretion income totaled $1.5 million, $1.7 million, and $1.7 million, for the years ended December 31, 2019, 2018, and 2017, respectively. The gross carrying amount of above market lease intangible assets included in accounts receivable as of December 31, 2019 and 2018 was $0.6 million and $0.8 million, respectively, and accumulated amortization was $108,300 and $143,900, respectively. Amortization expense totaled $109,600, $110,500 and $31,600, for the years ended December 31, 2019, 2018 and 2017, respectively. The remaining weighted-average amortization period as of December 31, 2019 is 4.5 years, 7.6 years, and 5.3 years for lease acquisition costs, above market leases and below market leases, respectively. 38 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2019, scheduled amortization of intan- gible assets and deferred income related to in place leases is as follows: ended December 31, 2019, 2018, and 2017, were 30.9 mil- lion, 30.2 million, and 29.5 million, respectively. Amortization of Intangible Assets and Deferred Income Related to In-Place Leases Lease acquisition costs $ 708 535 383 317 198 996 (Dollars in thousands) 2020 2021 2022 2023 2024 Thereafter Above- Below- market market leases leases $ 1,434 43 $ 1,409 33 1,306 33 1,297 33 878 33 3,853 343 Total $ 3,137 $ 518 $ 10,177 4. NONCONTROLLING INTERESTS – HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP Saul Centers is the sole general partner of the Operating Partnership, owning a 74.6% common interest as of De- cember 31, 2019. 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. The Saul Organization holds a 25.4% limited partnership in- terest in the Operating Partnership represented by 7,886,916 limited partnership units, as of December 31, 2019. 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, 2019, approximately 925,000 units were eligible for conversion. The impact of the Saul Organization’s 25.4% limited part- nership interest in the Operating Partnership is reflected as Noncontrolling Interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the years 5. MORTGAGE NOTES PAYABLE, REVOLVING CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS At December 31, 2019, the principal amount of outstanding debt totaled $1.1 billion, of which $938.4 million was fixed rate debt and $162.5 million was variable rate debt. The prin- cipal amount of the Company’s outstanding debt totaled $1.0 billion at December 31, 2018, of which $910.2 million was fixed rate debt and $122.0 million was variable rate debt. At December 31, 2019, the Company had a $400.0 mil- lion unsecured credit facility, which can be used for working capital, property acquisitions or development projects, 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 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, 2019, based on the value of the Company’s unencumbered properties, approximately $237.3 million was available under the revolving credit facility, $87.5 million was outstanding and approximately $185,000 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, 2019, 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 mortgage (approximately $6.7 million of the $68.1 million outstanding balance at December 31, 2019, which guarantee will be reduced to (i) $3.3 million on October 1, 2020 and (ii) zero on October 1, 2021), (b) a portion of the Kentlands Square II mortgage (approximately $8.5 mil- lion of the $34.0 million outstanding balance at December 31, 2019), (c) a portion of the Broadlands mortgage (ap- proximately $3.9 million of the $31.2 million outstanding balance at December 31, 2019), and (d) a portion of the Avenel Business Park mortgage (approximately $6.3 million of the $26.3 million outstanding balance at December 31, 2019). All other notes payable are non-recourse. 39 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 18, 2017, the Company closed on a 15-year, non-recourse $40.0 million mortgage loan secured by Bur- tonsville 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 mil- lion construction-to-permanent loan, the proceeds of which will be used to partially fund The Waycroft 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 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 ma- turity. Proceeds were used to repay the remaining principal balance of approximately $15.2 million on the existing mort- gage, the remaining balance of approximately $7.3 million on the existing mortgage collateralized by the Glen, the re- maining balance of approximately $6.1 million on the existing mortgage collateralized by Kentlands Square I, and reduce the outstanding balance of the revolving credit facility. 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. On January 4, 2019, the Company repaid in full the remain- ing principal balance of $12.7 million 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. On June 3, 2019, the Company repaid in full the remaining principal balance of $12.4 million of the mortgage loan se- cured by Briggs Chaney Marketplace, which was scheduled to mature in September 2019. On November 12, 2019, the Company closed on a 15- year, non-recourse $28.5 million mortgage loan secured by Shops at Monocacy. The loan matures in 2034, bears interest at a fixed-rate of 4.14%, requires monthly princi- pal and interest payments of $152,600 based on a 25-year amortization schedule and requires a final payment of $15.1 million. Proceeds were partially used to repay in full the ex- isting mortgage secured by Shops at Monocacy, which was scheduled to mature in January 2020. On November 21, 2019, the Company repaid in full the re- maining principal balance of $35.6 million of the mortgage loan secured by Thruway, which was scheduled to mature in July 2020. The Company’s corresponding swap agreement was terminated on the same day. The carrying value of the properties collateralizing the mortgage notes payable totaled $1.1 billion and $1.1 bil- lion, as of December 31, 2019 and 2018, respectively. The Company’s credit facility requires the Company and its sub- sidiaries to maintain certain financial covenants, which are summarized below. The Company was in compliance as of December 31, 2019. • • • limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio); limit the amount of debt so that interest coverage will exceed 2.0 x on a trailing four-quarter basis (interest expense coverage); and limit the amount of debt so that interest, scheduled principal amortization and preferred dividend cover- age exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage). 40 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTSMortgage notes payable at December 31, 2019 and 2018, totaling $41.0 million and $51.0 million, respectively, are guaranteed by members of the Saul Organization. As of December 31, 2019, the scheduled maturities of all debt including scheduled principal amortization for years ended December 31 are as follows: Balloon Payments $ 16,074 11,012 124,002 (a) 84,225 66,649 527,297 Scheduled Principal Amortization Total $ 28,421 29,025 29,645 30,065 28,697 125,809 $ 44,495 40,037 153,647 114,290 95,346 653,106 $ 829,259 $ 271,662 $ 1,100,921 9,733 $ 1,091,188 (In thousands) 2020 2021 2022 2023 2024 Thereafter Principal amount Unamortized deferred debt costs Net (a) Includes $87.5 million outstanding under the revolving facility. 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 interest method. Deferred debt costs totaled $9.7 million and $10.3 million, net of accumulated amortization of $7.5 million and $7.3 million at December 31, 2019 and 2018, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets. The components of interest expense are set forth below. Interest Expense (In thousands) Year ended December 31, 2018 2019 2017 Interest incurred $ 52,044 $ 49,652 $ 49,322 Amortization of deferred debt costs 1,518 1,610 1,392 Capitalized interest (11,480) (6,222) (3,489) Interest expense 42,082 45,040 47,225 Less: Interest income 248 272 80 Interest expense, net and amortization of deferred debt costs $ 41,834 $ 44,768 $ 47,145 Deferred debt costs capitalized during the years ending De- cember 31, 2019, 2018 and 2017 totaled $1.0 million, $3.2 million and $2.6 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, 2019, 2018, and 2017, amounted to $185.7 million, $184.7 million, and $181.1 million, respectively. Future contractual payments under noncancelable leases for years ended December 31 (which exclude the effect of straight-line rents), are as follows: Future Contractual Rent Payments (In thousands) 2020 2021 2022 2023 2024 Thereafter Total $ 166,227 149,949 126,101 104,489 75,172 260,141 $ 882,079 The majority of the leases provide for rental increases based on fixed annual increases or increases in the Consumer Price Index and expense recoveries based on 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, 2019, 2018, and 2017, amounted to $36.5 million, $35.5 million, and $35.3 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 $0.9 million, $1.0 million, and $1.5 mil- lion, for the years ended December 31, 2019, 2018, and 2017, respectively. 7. LONG-TERM LEASE OBLIGATIONS At December 31, 2018 and 2019, no properties are sub- ject to noncancelable long-term leases which apply to underlying land. 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 41 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2019, 2018, and 2017 was $806,500, $779,800, and $774,700, respectively. Expenses arising from the lease are included in general and administrative expense (see Note 9 – Related Party Transactions). 8. EQUITY AND NONCONTROLLING INTEREST The Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 reflect noncon- trolling interest of $12.5 million, $12.5 million, and $12.4 million, respectively, representing the Saul Organization’s share of the net income for the year. At December 31, 2019, the Company had outstanding 3.0 million depositary shares, each representing 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock (the “Series D Stock”). 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 unpaid dividends to but not including the redemption date. 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 Company 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 quarters (whether or not declared or consecutive) and in certain other events. On September 17, 2019, Saul Centers sold, in an under- written public offering, 4.0 million depositary shares, each representing 1/100th of a share of 6.000% Series E Cumu- lative Redeemable Preferred Stock (the “Series E Stock”), providing net cash proceeds of approximately $96.8 million. The depositary shares may be redeemed in whole or in part, on or after September 17, 2024, at the $25.00 liquidation preference, plus accrued but unpaid dividends to but not in- cluding the redemption date. The depositary shares pay an annual dividend of $1.50 per share, equivalent to 6.000% of the $25.00 liquidation preference. The Series E 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 depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. On September 23, 2019, Saul Centers sold, as a result of the exercise by the underwriters of their over-allotment option, an additional 0.4 million depositary shares of Series E Stock, providing net cash proceeds of approximately $9.5 million. 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 (the “Series C Stock”). The depositary shares are re- deemable at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid dividends. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The 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. In September 2019, the Company an- nounced the redemption of all outstanding depositary shares representing interests in its Series C Stock. The depositary shares were redeemed on October 17, 2019 at $25.00 per depositary share, plus all accrued and unpaid dividends to, but not including, the redemption date, for an aggregate redemption price of $25.07638 per depositary share. In the fourth quarter, costs associated with the redemption were charged against Net income available to common stockhold- ers. After the redemption date, dividends on the depositary shares representing interests in the Series C Stock ceased to accrue. 42 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS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. (Shares in thousands) Weighted average common shares outstanding - Basic Effect of dilutive options Weighted average common shares outstanding - Diluted December 31, 2018 2017 2019 23,009 44 22,383 42 21,901 107 23,053 22,425 22,008 Average share price $ 53.41 $ 52.50 $ 61.63 Non-dilutive options Years non-dilutive options were issued 633 492 — 2016, 2017 2015, 2016 and 2019 and 2017 9. RELATED PARTY TRANSACTIONS The Chairman, Chief Executive Officer and President, the Executive Vice President of Real Estate, the Executive Vice President-Chief Legal and Administrative Officer and the Se- nior Vice President-Chief Accounting Officer of the Company are also officers of various members of the Saul Organiza- tion and their management time is shared with the Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors, with the exception of the Senior Vice President-Chief Accounting Officer whose share of annual compensation allocated to the Company is determined by the shared services agree- ment (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 $322,200, $345,900, and $349,500, for 2019, 2018, and 2017, 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, 2019, 2018, and 2017, the Company contributed three times the amount deferred by employees. The Company’s expense, included in general and administra- tive expense, totaled $345,200, $282,500, and $228,500, for the years ended December 31, 2019, 2018, and 2017, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $3.1 million and $2.7 million, at De- cember 31, 2019 and 2018, 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, 2019, 2018, and 2017, which included rental expense for the Company’s headquarters lease (see Note 7. Long Term Lease Obligations), totaled $8.4 million, $8.4 million, and $8.1 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, 2019 and 2018, accounts payable, accrued expenses and other liabilities included $918,700 and $933,400, 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 43 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On November 5, 2019, the Company entered into an agree- ment (the “Contribution Agreement”) to acquire from the Saul Trust, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, to- gether in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Mary- land (the “Contributed Property”). In exchange for the Contributed Property, the Company will issue to the Saul Trust 1,416,071 limited partnership units in the Operating Partnership (“OP Units”) at an agreed upon value of $56.00 per OP Unit, representing an aggregate value of $79.3 mil- lion for the Contributed Property. Deed to the Contributed Property and the OP Units have been placed in escrow until certain conditions of the Contribution Agreement are satisfied. 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 $399,600, $407,900, and $288,400, for the years ended December 31, 2019, 2018, and 2017, 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. 10. STOCK OPTION PLAN Stock Based Employee Compensation, Deferred Compensa- tion and Stock Plan for Directors In 2004, the Company established a stock incentive plan (the “Plan”), as amended. Under the Plan, options were granted at an exercise price not less than the market value of the common stock on the date of grant and expire ten years from the date of grant. Officer options vest ratably over four years following the grant and are charged to expense using the straight-line method over the vesting period. Director options vest immediately and are charged to expense as of the date of grant. 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 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 expense in gen- eral and administrative expenses. Pursuant to the Plan, the Compensation Committee estab- lished a Deferred Compensation Plan for Directors for the benefit of the Company’s directors and their beneficiaries, which replaced a previous Deferred Compensation and Stock Plan for Directors. Annually, directors are given the ability to make an election to defer all or part of their fees and have the option to have their 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 a director elects to their have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the clos- ing market price of the Company’s common stock on the first trading day of the following quarter to determine the number of shares to be credited to the director. During the twelve months ended December 31, 2019, 6,822 shares were credited to director’s deferred fee accounts and 7,058 shares were issued. As of December 31, 2019, the director’s deferred fee accounts comprise 114,408 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 Annual Meeting of Stockholders, and their issuance may not be de- ferred. 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 exec- utive officers, directors and other key personnel. The 2004 stock plan was subsequently amended by the Company’s stockholders at the 2008 Annual Meeting, further amended 44 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTSat the 2013 Annual Meeting, and further amended at the 2019 Annual Meeting (the “Amended 2004 Plan”). The Amended 2004 Plan, which terminates in 2029, provides for grants of options to purchase up to 3,400,000 shares of common stock. 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 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. Effective May 3, 2019, the Compensation Committee granted options to purchase 260,000 shares (34,651 incen- tive stock options and 225,349 nonqualified stock options) to 23 Company officers and 11 Company Directors (the “2019 options”), which expire on May 2, 2029. The officers’ 2019 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ 2018 Options were immediately exercisable. The exercise price of $55.71 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 2019 Options to be $1.9 million, of which $1.7 million and $226,600 were assigned to the officer options and director options, respectively. Be- cause the directors’ options vested immediately, the entire $226,600 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. The following table summarizes the assumptions used in the valuation of the 2017, 2018, and 2019 option grants. During the twelve months ended December 31, 2019, stock option expense totaling $1.6 million was included in general and administrative expense in the Consolidated Statements of Operations. As of December 31, 2019, the estimated future expense related to unvested stock options was $2.6 million. 45 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTSGrant date May 5, 2017 Exercise price Volatility Expected life (years) Assumed yield Risk-free rate $ 59.41 0.173 5.0 3.45 % 1.89 % Directors May 11, 2018 $ 49.46 0.192 May 3, 2019 55.71 $ 0.236 May 5, 2017 59.41 $ 0.170 Officers May 11, 2018 $ 49.46 0.177 May 3, 2019 55.71 $ 0.206 5.0 3.70 % 2.84 % 5.0 3.75 % 2.33 % 7.0 3.50 % 2.17 % 7.0 3.75 % 2.94 % 7.0 3.80 % 2.43 % The table below summarizes the option activity for the years 2019, 2018, and 2017: 2019 2018 2017 Weighted Average Exercise Price Shares $ 1,114,169 260,000 (57,055) (7,500) 52.40 55.71 44.53 56.07 Weighted Average Exercise Price $ 52.80 49.46 42.98 54.78 Shares 913,320 245,000 (39,151) (5,000) $ Shares 833,630 232,500 (149,060) (3,750) 1,309,614 53.38 1,114,169 52.40 913,320 Weighted Average Exercise Price 49.92 59.41 46.97 53.73 52.80 763,614 $ 52.43 600,919 $ 50.93 430,945 $ 48.94 Outstanding at January 1 Granted Exercised Expired/ Forfeited Outstanding December 31 Exercisable at December 31 The intrinsic value of options exercised in 2019, 2018, and 2017, was $0.6 million, $0.5 million and $2.2 million, re- spectively. The intrinsic value of options outstanding and exercisable at year end 2019 was $2.5 million and $2.0 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, 2019, the final trading day of calendar 2019, the clos- ing price of $52.78 per share was used for the calculation of aggregate intrinsic value of options outstanding and exercisable at that date. The weighted average remaining contractual life of the Company’s exercisable and outstand- ing options at December 31, 2019 are 5.9 and 7.0 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 3.55% and 4.40%, would be approximately $957.4 million and $927.0 million as of December 31, 2019 and 2018, respectively, compared to the principal balance of $938.4 million and $910.2 million at December 31, 2019 and 2018, respectively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt. 46 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective June 30, 2011, the Company determined that one of its interest-rate swap arrangements was a highly effective hedge of the cash flows under one of its variable-rate mort- gage loans and designated the swap as a cash flow hedge of that mortgage. The swap was carried at fair value with changes in fair value recognized either in income or compre- hensive income depending on the effectiveness of the swap. The swap was terminated on November 21, 2019. 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. 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 The Company paid common stock distributions of $2.12 per share in 2019, $2.08 per share in 2018, and $2.04 per share in 2017, Series C preferred stock dividends of $1.80, $1.72, and $1.72, respectively, per depositary share during each of 2019, 2018, and 2017, Series D preferred stock dividends of $1.53 and $1.05, respectively, per depositary share in 2019 and 2018, and Series E preferred stock dividends of $0.06 per depositary share in 2019. Of the common stock dividends paid, $2.00 per share, $1.61 per share, and $1.70 per share, represented ordinary dividend income in 2019, 2018, and 2017, respectively, and $0.12 per share, $0.47 per share, and $0.34 per share represented return of capital to the shareholders in 2019, 2018, and 2017, respectively. All of the preferred stock dividends paid were considered ordinary dividend income. The following summarizes distributions paid during the years ended December 31, 2019, 2018, and 2017, and includes activity in the Plan as well as limited partnership units issued from the reinvestment of unit distributions: (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 2019 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter $ 3,531 2,953 2,953 2,953 $ 12,251 12,195 12,116 12,006 $ 4,173 4,166 4,155 4,148 104,558 105,753 99,804 120,347 $ 52.84 53.66 51.38 51.28 Total 2019 $ 12,390 $ 48,568 $ 16,642 430,462 Distributions during 2018 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter $ 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 Total 2018 $ 12,402 $ 46,306 $ 15,981 572,928 Distributions during 2017 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter $ 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 Total 2017 $ 12,375 $ 44,576 $ 15,268 266,011 13,747 13,406 20,041 13,742 60,936 13,867 13,107 42,422 38,037 107,433 15,596 16,021 40,623 39,111 111,351 $ 53.73 54.56 51.99 52.16 $ 50.20 52.60 47.83 53.03 $ 60.08 58.13 59.96 62.15 47 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2019, the Board of Directors of the Com- pany authorized a distribution of $0.53 per common share payable in January 2020 to holders of record on January 17, 2020. As a result, $12.3 million was paid to common shareholders on January 31, 2020. Also, $4.2 million was paid to limited partnership unitholders on January 31, 2020 ($0.53 per Operating Partnership unit). The Board of Di- rectors authorized preferred stock dividends of (a) $0.3750 per Series E depositary share and (b) $0.3828 per Series D depositary share to holders of record on January 2, 2020. 14. INTERIM RESULTS (UNAUDITED) As a result, $2.8 million was paid to preferred shareholders on January 15, 2020. These amounts are reflected as a re- duction of stockholders’ equity in the case of common stock and preferred stock dividends and noncontrolling interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements. The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2019 and 2018. (Dollars in thousands, except per share amounts) 2019 Net income attributable to Saul Centers, Inc. Net income available to common stockholders Net income available to common stockholders per diluted share (Dollars in thousands, except per share amounts) 2018 Total revenue Net Income Total revenue Net Income 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter $ 59,750 $ 58,141 $ 57,052 $ 56,582 17,077 13,447 10,494 0.46 16,750 13,232 10,279 0.45 15,328 12,226 9,016 0.39 15,041 12,818 6,464 0.27 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter $ 56,109 $ 56,081 $ 56,910 $ 58,119 14,946 12,587 6,856 0.31 15,902 12,543 9,590 0.43 16,702 13,155 10,202 0.45 15,509 12,269 9,316 0.41 Net income attributable to Saul Centers, Inc. Net income available to common stockholders Net income available to common stockholders per diluted share 48 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES 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 2019 presentation. (In thousands) As of or for the year ended December 31, 2019 Real estate rental operations: Revenue Expenses Income from real estate Interest expense, net 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 As of or for the year ended December 31, 2018 Real estate rental operations: Revenue Expenses Income from real estate Interest expense, net 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 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals $ 167,888 (36,119) 131,769 $ 63,637 (21,814) 41,823 $ — — — $ 231,525 (57,933) 173,592 — — — — (41,834) (20,793) (41,834) (20,793) (29,112) (17,221) — (46,333) $ $ $ $ — 102,657 33,968 980,096 164,344 (34,643) 129,701 — — $ $ $ $ — 24,602 101,695 625,183 62,875 (20,935) 41,940 — — $ $ $ $ (436) (63,063) — 13,061 (436) 64,196 135,663 $ $ $ 1,618,340 — — $ 227,219 (55,578) — (44,768) (18,459) 171,641 (44,768) (18,459) (29,251) (16,610) — (45,861) — 509 100,959 13,485 971,321 $ $ $ — — 25,330 115,165 537,500 $ $ $ (3) — (63,230) — 18,668 $ $ $ (3) 509 63,059 128,650 $ $ $ 1,527,489 49 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) As of or for the year ended December 31, 2017 Real estate rental operations: Revenue Expenses Income from real estate Interest expense, net 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 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals $ 165,232 (34,054) 131,178 $ 61,067 (20,632) 40,435 $ — — — $ 226,299 (54,686) 171,613 — — — — (47,145) (18,176) (47,145) (18,176) (29,977) (15,717) — (45,694) — 101,201 90,896 974,061 $ $ $ — 24,718 29,098 438,283 $ $ $ 70 (65,251) — 10,108 $ $ $ 70 60,668 119,994 $ $ $ 1,422,452 16. SUBSEQUENT EVENTS The Company has reviewed operating activities for the pe- riod subsequent to December 31, 2019 and prior to the date that financial statements are issued, February 27, 2020, and determined there are no subsequent events that are required to be disclosed. 50 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COMNOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIVIDEND REINVESTMENT PLAN AND DISTRIBUTIONS DIVIDEND REINVESTMENT PLAN Saul Centers, Inc. offers a dividend reinvestment plan which enables its shareholders to automatically invest some of or all dividends in additional shares. The plan provides share- holders with a convenient and cost-free way to increase their investment in Saul Centers. Shares purchased under the dividend reinvestment plan are issued at a 3% discount from the average price of the stock on the dividend pay- ment 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 ACQUISITION OF EQUITY SECURITIES BY THE SAUL ORGANIZATION Through participation in the Company’s Dividend Reinvest- ment Plan, during the quarter ended December 31, 2019, (a) B. Francis Saul II, the Company’s Chairman of the Board, Chief Executive Officer, and President (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 wholly-owned subsidiaries of either B. F. Saul Company or the Saul Trust, acquired an aggregate of 65,293 shares of common stock and 13,747 limited partnership units at an average price of $53.00 per share/unit, in respect of the October 31, 2019 dividend distribution. Such limited part- nership units were issued in reliance on Section 4(a)(2) of the Securities Act of 1933. No shares were acquired pursuant to a publicly announced plan or program. 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 2019 and 2018. 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 fu- ture 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 distributions, any future payments will be determined solely by the Board of Directors and will depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution amounts required to maintain its status as a REIT under the Code, and such other factors as the Board of Directors deems relevant. We are obligated to pay regular quarterly distributions to holders of depositary shares, prior to distri- butions on the common stock. 51 SAUL CENTERS, INC. 2019 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 2019 and 2018 as follows: COMMON STOCK PRICES Period Share Price October 1, 2019 – December 31, 2019 July 1, 2019 – September 30, 2019 April 1, 2019 – June 30, 2019 January 1, 2019– March 31, 2019 October 1, 2018 – December 31, 2018 July 1, 2018 – September 30, 2018 April 1, 2018 – June 30, 2018 January 1, 2018– March 31, 2018 High $ 57.23 $ 56.86 $ 58.06 $ 58.11 $ 54.39 $ 60.00 $ 53.74 $ 61.86 Low $ 50.09 $ 49.30 $ 52.09 $ 45.89 $ 45.71 $ 52.28 $ 47.50 $ 48.93 On February 20, 2020, the closing price was $48.37 per share. The approximate number of holders of record of the common stock was 128 as of February 20, 2020. Many of our shares of common stock are held by brokers and institutions on behalf of stockholders. We are unable to estimate the total number of stockholders represented by these record holders. 52 SAUL CENTERS, INC. 2019 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 Financial Times Stock Exchange Group National Association of Real Estate Investment Trust Equity Index (“FTSE 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, 2014. COMPARISON OF CUMULATIVE TOTAL RETURN 200 $200 175 $175 d e t s e v n 150 I $150 0 0 1 $ r e p n r u t e R 125 $125 l a t o T 100 $100 $75 75 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Period Ended INDEX Saul Centers S&P 500 Russell 2000 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 $100 $100 $100 $92.51 $124.16 $118.92 $94.56 $110.00 $101.38 $113.51 $138.29 $132.23 $173.34 $95.59 $115.95 $132.94 $118.30 $148.49 FTSE NAREIT Equity $100 $103.20 $111.99 $117.84 $112.39 $141.61 53 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM SAUL CENTERS CORPORATE INFORMATION DIRECTORS EXECUTIVE OFFICERS B. Francis Saul II Chairman, Chief Executive Officer and President B. Francis Saul II Chairman, Chief Executive Officer and President COUNSEL Pillsbury Winthrop Shaw Pittman LLP Washington, DC 20036 J. Page Lansdale President and Chief Operating Officer, Emeritus D. Todd Pearson Executive Vice President, Real Estate 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 Willoughby B. Laycock Senior Vice President, Residential 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 Christine N. Kearns Executive Vice President, Chief Legal and Administrative Officer Scott V. Schneider Executive Vice President, Chief Financial Officer and Treasurer Christopher H. Netter Executive Vice President, Retail Leasing John F. Collich Senior Vice President, Chief Acquisitions and Development Officer Steven N. Corey Senior Vice President, Office Leasing Joel A. Friedman Senior Vice President, Chief Accounting Officer Bettina Guevara Senior Vice President, General Counsel and Secretary Donald A. Hachey Senior Vice President, Construction Willoughby B. Laycock Senior Vice President, Residential Amitha Prabhu Senior Vice President, Internal Audit Charles W. Sherren, Jr. Senior Vice President, Management 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.PrD Preferred Stock: BFS.PrE TRANSFER AGENT Continental Stock Transfer and Trust Company 17 Battery Place New York, NY 10004 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 2019, 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 54 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM2020 A N N U A L MEETING of Stockholders The Annual Meeting of Stockholders will be held at 11:00 a.m., local time, on April 24, 2020, 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.) 55 SAUL CENTERS, INC. 2019 ANNUAL REPORT | WWW.SAULCENTERS.COM7501 Wisconsin Avenue, Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com 

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