ANNUAL REPORT to Shareholders2021 Saul Centers, Inc. is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland, which currently operates and manages a real estate portfolio of 61 properties that includes (a) 50 community and neighborhood shopping centers and seven mixed-use properties with approximately 9.8 million square feet of leasable area and (b) four land and development properties. Approximately 86% of Saul Centers’ property operating income is generated by properties in the metropolitan Washington, DC/Baltimore area. TOTAL REVENUE(a) (In millions) 2021 | $239.2 2020 | $225.2 2019 | $231.5 2018 | $227.2 2017 | $226.3 NET INCOME Available to Common Stockholders (In millions) 2021 | $37.2 2020 | $29.2 2019 | $36.3 2018 | $36.0 2017 | $35.9 FUNDS FROM OPERATIONS Available to Common Stockholders and Noncontrolling Interests(b) (In millions) 2021 | $100.7 2020 | $90.0 2019 | $95.1 2018 | $93.8 2017 | $94.0 (a) Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2021. (b) Funds From Operations (FFO) is a non-GAAP financial measure. See page 23 for a definition of FFO and reconciliation to Net Income. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM PORTFOLIO COMPOSITION BASED ON 2021 PROPERTY OPERATING INCOME1 75.4% Shopping Centers 24.6% Mixed-Use 86.3% Metropolitan Washington, DC/ Baltimore area 13.7% 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(a) 2021 Year ended December 31, 2019 2020 2018 2017 Total Revenue $ 239,225,000 $ 225,207,000 $ 231,525,000 $ 227,219,000 $ 226,299,000 Net Income Available to Common Stockholders FFO Available to Common Stockholders and Noncontrolling Interests Weighted Average Common Stock Outstanding (Diluted) Weighted Average Common Stock and Units Outstanding (Diluted) 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) $ 37,195,000 $ 29,188,000 $ 36,253,000 $ 35,964,000 $ 35,882,000 $ 100,727,000 $ 89,970,000 $ 95,059,000 $ 93,821,000 $ 93,987,000 23,662,000 23,357,000 23,053,000 22,425,000 22,008,000 33,098,000 31,267,000 30,913,000 30,156,000 29,511,000 $ $ 1.57 $ 1.25 $ 1.57 $ 1.60 $ 3.04 $ 2.88 $ 3.08 $ 3.11 $ 69% 3.60x 74% 3.28x 69% 3.77x 66% 3.53x 1.63 3.18 64% 3.35 57 9,819,000 7,874,000 1,945,000 92% 57 9,822,000 7,877,000 1,945,000 92% 56 9,335,000 7,855,000 1,480,000 95% 56 9,300,000 7,750,000 1,550,000 95% 55 9,230,000 7,750,000 1,480,000 95% (a) Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2021. (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 The Waycroft in 2017 and 2018, and Ashland Square Phase II, New Market, The Waycroft and Hampden House in 2019, Ashland Square Phase II, New Market, and Hampden House in 2020, and Ashland Square Phase II, New Market, Hampden House, and Twinbrook Quarter in 2021). Burtonsville Town Square was acquired in January 2017 and Hampden House was acquired September 2018. (d) Average percentage leased includes commercial space only. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 1 Saul Centers experienced a year of recov- ery and growth in 2021. As consumers again ventured outside their homes, traffic began to increase at our well-located, grocery-anchored neighborhood shopping centers and cash col- lections from our retail tenants improved. During 2021, including cash rents due from tenants and straight-line rent, we recovered $1.4 million of prior credit losses, a large factor in the reduction of our net credit losses to $0.8 million. We opened new pad sites at several of our shopping centers, completed the initial lease-up of the residential units at The Waycroft in Arlington, Virginia, and continued to open new shops at our now ful- ly-leased Ashbrook Marketplace development in Loudoun County, Virginia. Funds From Operations grew to $100.7 million, $3.14 per basic share, in 2021, an increase from $90.0 million, $2.88 per basic share, in 2020 and, more importantly, an increase from $95.0 million, $3.08 per basic share, in 2019, before the Covid- 19 pandemic. This strong performance permitted us to increase our dividend for the first time since 2018, paying dividends totaling $2.16 per share in 2021, compared to $2.12 per share in 2020, representing a 69% payout ratio in 2021. We further increased our quarterly dividend to $0.57 per share, which was paid in January 2022. At Twinbrook Quarter, we started construction of the residential and retail components of Phase I and closed on a $145.0 million construction- to-permanent loan to finance a portion of the development costs. Later in the year, we began ASHBROOK MARKETPLACE, ASHBURN, VA 2 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MESSAGE to our Shareholders demolition in support of our Hampden House development. During the third quarter, we increased our bank credit facility to $525.0 million from $400.0 million, including a $100.0 million term loan and a $425.0 million revolving line of credit. For the current year, the focus of our core operations will be on improving occupancy and rental rates in our commercial and residential portfolios. Looking toward growth beyond our core, we will continue to develop new pad sites at our neighborhood shopping centers and focus on the early stages of development of both Twinbrook Quarter Phase I and Hampden House. We enter 2022 with strong operations, a healthy balance sheet with debt to total capitalization of 36.5%, and comfortable liquidity, with $234.4 million of cash and availability under our bank credit facility. CORE PROPERTY FUNDAMENTALS SHOPPING CENTERS After proving its resilience in the face of the pandemic during 2020, our neighborhood shopping center portfolio continued to perform well in 2021. Our retail centers, which are primarily grocery-anchored, comprised 75.4% of our total portfolio net operating income. Rent collections in this portfolio for the year ended 2021 are at 99%. While tenants in certain categories, such as dry cleaners, continue to lag their pre-pandemic performance, many of our tenants reported 2021 sales in excess of levels prior to the pandemic. During 2020 and 2021, we worked in concert with our tenants to ensure their continued operations, including entering into rent deferral agreements where necessary. The vast majority of these deferrals were made during the second quarter of 2020, immediately following the onset of the pandemic. To date, we have deferred a total of $9.1 million of rents. Of the $6.7 million of deferred rent that has come due as of March 31, 2022, $6.5 million, or 97%, has been repaid by our tenants. LANSDOWNE TOWN CENTER, LEESBURG, VA WESTVIEW VILLAGE, FREDERICK, MD From time to time, we replace underperforming tenants or add new retailers that generate stronger customer traffic, such as supermarkets, drug stores, fast food restaurants, and coffee shops. In 2021, we leased 47,000 square feet to Lotte Plaza, a grocer, at Countryside Marketplace. We also leased space to Shake Shack at Kentlands, Wendy’s at Beacon, and Chipotle at Clarendon. Additional pad sites that opened for business during 2021 include National Tire and Battery at Shops of Monocacy, State Employees Credit Union at Westview Village, and Mezeh Grill at The Glen. In total, we completed 69 new retail leases for over 290,000 square feet. We also executed renewals and options to extend terms for 145 additional spaces comprising approximately 865,000 square feet. Our year-end leased percentage for same property shopping centers was 93.4%, up from 93.1% at the end of 2020. During the year, on a same space basis, minimum rent per square foot on 1.2 million square feet of new and renewed leases executed SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 3 MESSAGE to our Shareholders HAMPDEN HOUSE, BETHESDA, MD (ARTIST’S RENDERING) during 2021 averaged $18.42 compared to $18.76 for expiring leases, a nominal 1.8% decrease. Our tenant renewal percentage was 80.5% in 2021, an increase over the prior five-year average of 76.2%. In 2022, our retail leasing team is focused on continuing to re-lease space that was vacated during the pandemic and beginning to again drive growth in rent per square foot. We continue to benefit from well-staggered lease expirations within our shopping center portfolio, with only 11.9% of leases, as measured by annual minimum rent, expiring during 2022. OFFICE Although the pandemic has continued to impact the office market, many employers have established re-opening protocols and employees have begun to return to the office. Vaccines were distributed and readily available to greater portions of the public as the year progressed and many governments relaxed mandated shutdowns, thereby significantly reducing the effect on the office market compared to 2020. We anticipate that it will take some time for companies to determine the optimum mix of in-office and remote work. As a result, we view uncertainty around the timing of a broadly-based full return to the office. Some tenants with near-term lease maturities have been able to negotiate reduced square footage and reduced rents. In early 2022, we have seen increased leasing activity in the greater Washington, D.C. market, where our mixed-use commercial properties are concentrated. Mixed-use commercial properties comprised 15.3% of our total portfolio property operating income in 2021. Year-end occupancy decreased to 82.3% at December 31, 2021 from 88.4% at December, 31 2020. Approximately 8.0% of our mixed-use commercial property leases, as measured by annual minimum rent, expire in 2022. We believe that the Washington, D.C. office market will continue to be resilient over the long-term. THE WAYCROFT, ARLINGTON, VA 4 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MESSAGE to our Shareholders RESIDENTIAL In early 2021, we successfully completed the residential lease-up of The Waycroft in Arlington, Virginia. Through our team’s hard work, we were able to lease the 491-unit apartment house during the first 12 months after opening. In early 2022, we signed a lease for the last vacant retail space at the development, bringing the property’s retail space to 100% leased. Our operations at The Waycroft contributed $2.0 million of the $10.7 million growth in 2021 Funds From Operations compared to 2020. As the remaining retail tenants with executed leases open and begin paying rent, we expect The Waycroft’s contribution to earnings to continue to grow. Including Lyon Place at Clarendon and Park Van Ness, our residential portfolio was 97.1% leased at year-end 2021. Our residential properties contributed 9.3% of total property operating income in 2021, up from 6.4% in 2020. In future years, we look forward to the additions of Twinbrook Quarter Phase I and Hampden House to our residential portfolio. DEVELOPMENT HIGHLIGHTS During the year, we started construction of Twinbrook Quarter Phase I. The first phase of our 18-acre project in Rockville, Maryland, is located adjacent to the Twinbrook Metrorail Station on the Red Line. Phase I will include 450 apartment units, an 80,000 square foot Wegmans, and 25,000 square feet of small shop retail. We also have entitlements to build a 230,000 square foot office tower as part of Phase I in the future. Phase I is an important component to the success of our long- term plans at Twinbrook Quarter and will include the creation of Festival Street to the north of the block, and the extension of Chapman Avenue on the east side of the block. To finance a portion of the costs of our Phase I development, we closed on a $145.0 million construction-to-permanent loan in the fourth quarter of 2021. Delivery of Phase I is scheduled to occur in 2024. At our Hampden House development, which is located adjacent to both the proposed Purple Line light rail and the Metrorail Red Line in downtown Bethesda, Maryland, we began demolition of the existing structure to prepare the site for a mixed- use project that will include 366 apartments and 10,100 square feet of ground floor retail. To finance a portion of the development costs of Hampden House, we closed on a $133.0 million construction-to-permanent loan in the first quarter of 2022. Delivery of Hampden House is scheduled to occur in 2025. The residential lease-up of The Waycroft was completed during the first quarter of 2021, and, accordingly, 2022 will be its first year of fully- leased residential operations. In addition, having fully leased the 60,100 square feet of ground floor retail, we expect to see the benefits of those tenants taking occupancy and commencing rent payment during 2022 and 2023. We continue to drive organic growth at our neighborhood shopping centers through the addition of pad sites, where appropriate. During 2021, tenants opened for business on new pad sites at The Glen, Shops of Monocacy, and Westview Village. Looking ahead, we currently have ten future pad sites either under lease or in various stages of lease negotiation. FINANCIAL RESULTS Total revenue for the year ended December 31, 2021 increased 6.2% to $239.2 million from $225.2 million for the year-ended December 31, 2020. During the same period, net income increased 22.5% to $61.6 million from $50.3 million. Funds From Operations available to common stockholders and noncontrolling interests totaled $100.7 million ($3.14 per basic share) in 2021 compared to $90.0 million ($2.88 per basic share) in 2020, a 12.0% increase. Our commercial portfolio was 92.0% leased at year-end, compared to 92.5% leased at the end SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 5 MESSAGE to our Shareholders of 2020. Shopping center leased percentage increased to 93.4% on December 31, 2021 from 93.1% at December 31, 2020 and commercial mixed-use leased percentage decreased to 82.3% at December 31, 2021 from 88.4% at December 31, 2020. Our residential mixed-use properties were 97.1% leased on December 31, 2021, compared to 85.5% leased on December 31, 2020. Year over year, total portfolio same property revenue increased by 1.5% and total same property operating income increased 1.7%. Shopping center same property operating income increased 5.7% and mixed-use same property operating income decreased 11.5%. We maintain a disciplined approach to our liquidity, debt maturities, and leverage relative to the value of our assets. As of December 31, 2021, liquidity included $234.4 million in combined cash and available borrowing capacity under our credit facility, compared to $247.2 million as of December 31, 2020. We ended 2021 with approximately $1.2 billion of debt outstanding, $949.0 million of which was secured fixed-rate debt and the remaining $206.0 million was variable-rate debt due under our credit facility. Our debt to total capitalization ratio was 36.5% as of December 31, 2021, down from 49.6% at December 31, 2020, primarily due to the increased market price of our common equity. As of March 30, 2022, our common stock price was $53.06 per share and our debt to total capitalization ratio was 36.5%. Our long-term debt maturities are well- staggered into the future. Approximately $36.5 KENTLANDS SQUARE I, GAITHERSBURG, MD 6 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MESSAGE to our Shareholders million of debt matures in 2022. We believe that the combination of our credit facility, proceeds from refinancing assets that currently have low-leverage, proceeds from our dividend reinvestment plan, and our operating cash flow will provide adequate liquidity to finance our proposed development pipeline over the coming years. CONCLUSION We move into 2022 with a healthy portfolio poised for additional growth. We expect to achieve continued recovery of our leased percentage at our shopping centers and to drive rent growth with our retail tenants given rebounding consumer demand and tenant sales. Our collection of current and previously deferred rents remains strong. Our net income and diversified cash flow remain resilient, our leverage remains prudent and our liquidity remains strong. In the near term, we expect The Waycroft to continue to increase its contribution to earnings. We also expect to open additional pad sites at our shopping centers. Longer term, the completion of Twinbrook Quarter Phase I and Hampden House, as well as our future development pipeline, will provide continuing growth for the Company’s shareholders. We thank you, our shareholders, for your continued confidence in our company. For the Board, B. Francis Saul II March 31, 2022 SEVEN CORNERS, FALLS CHURCH, VA BEACON CENTER, ALEXANDRIA, VA SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 7 ASHBURN VILLAGE, ASHBURN, VA MESSAGE to our Shareholders PORTFOLIO PROPERTIES Saul Centers’ portfolio properties are 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 82% of the portfolio’s gross leasable area. PROPERTY/LOCATION GROSS LEASABLE SQUARE FEET PROPERTY/LOCATION GROSS LEASABLE 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 and Kentlands Pad, 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 85,819 221,596 23,120 359,671 115,660 121,365 49,140 194,258 174,438 139,928 138,804 141,450 78,686 21,500 246,148 18,982 136,440 91,666 131,700 107,103 96,201 116,494 253,052 40,697 196,817 97,752 192,718 67,488 111,166 100,032 143,577 53,765 87,365 126,446 93,328 Shopping Centers continued 11503 Rockville Pike/5541 Nicholson Lane, Rockville, MD 1500/1580/1582 Rockville Pike, Rockville, MD Seabreeze Plaza, Palm Harbor, FL Marketplace at Sea Colony, Bethany Beach, DE Seven Corners, Falls Church, VA Severna Park Marketplace, Severna Park, MD Shops at Fairfax, Fairfax, VA Smallwood Village Center, Waldorf, MD Southdale, Glen Burnie, MD Southside Plaza, Richmond, VA South Dekalb Plaza, Atlanta, GA Thruway, Winston-Salem, NC Village Center, Centreville, VA Westview Village, Frederick, MD White Oak, Silver Spring, MD 40,249 105,428 146,673 21,677 573,481 254,011 68,762 173,341 485,628 371,761 163,418 365,816 145,651 103,186 480,676 TOTAL SHOPPING CENTERS 7,874,130 390,683 108,386 293,565 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 The Waycroft, Arlington, VA (includes 491 apartments comprising 404,709 square feet) 223,447 227,651 236,376 464,809 TOTAL MIXED-USE PROPERTIES 1,944,917 Land and Development Parcels Twinbrook Quarter, Rockville, MD Hampden House, Bethesda, MD Ashland Square Phase II, Manassas, VA New Market, New Market, MD TOTAL PORTFOLIO 9,819,047 8 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 .................................25 Reports of Independent Registered Public Accounting Firm ............................................26 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 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 9 SELECTED FINANCIAL DATA (In thousands, except per share data) 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 Net income available to common stockholders - diluted 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 $ $ $ 2021 239,225 (177,576) — — 61,649 (13,260) 48,389 (11,194) Years Ended December 31, 2019 2020 2018 2017 $ 225,207 (175,169) — 278 50,316 (9,934) 40,382 (11,194) $ 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) — 37,195 $ — 29,188 $ (3,235) 36,253 $ (2,328) 35,964 $ — 35,882 1.57 $ 1.25 $ 1.57 $ 1.60 $ 1.63 23,655 7 23,662 23,356 1 23,357 23,009 44 23,053 22,383 42 22,425 21,901 107 22,008 9,436 7,910 7,860 7,731 7,503 33,098 31,267 30,913 30,156 29,511 Cash dividends to common stockholders1 Cash dividends per share $ $ 50,963 2.16 $ $ 49,383 2.12 $ $ 48,568 2.12 $ $ 46,306 2.08 $ $ 44,576 2.04 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 Gains on sales of properties 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 $ 1,634,013 1,746,761 1,146,869 185,000 530,487 $ 1,517,090 1,645,572 1,154,540 185,000 427,533 $ 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 $ $ $ $ 118,381 (55,872) (74,771) 61,649 50,272 — 111,921 (11,194) 78,383 (56,168) (9,264) 50,316 51,126 (278) 101,164 (11,194) $ $ 115,383 (135,663) 19,607 64,196 46,333 — 110,529 (12,235) $ $ 110,339 (128,650) 21,981 63,059 45,861 (509) 108,411 (12,262) $ $ 103,450 (113,306) 12,442 60,668 45,694 — 106,362 (12,375) — — (3,235) (2,328) — $ 100,727 $ 89,970 $ 95,059 $ 93,821 $ 93,987 (1) During 2021, 2020, 2019, 2018, and 2017 shareholders reinvested $11.5 million, $7.7 million, $22.5 million, $28.8 million, and $15.8 million, respectively, in newly issued common stock through the Company’s dividend reinvestment plan. (2) Funds from operations (FFO) is a non-GAAP financial measure and is defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds From Operations.” 10 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) begins with the Compa- ny’s primary business strategy to give the reader an overview of the goals of the Company’s business. This is followed by a discussion of the critical accounting policies that the Company believes are important to understanding the assumptions and judgments incorporated in the Company’s reported financial results. The next section discusses the Company’s results of operations for the past two years. Beginning on page 18, the Company provides an analysis of its liquidity and cap- ital resources, including discussions of its cash flows, debt arrangements, sources of capital and financial commitments. On page 23, the Company discusses funds from operations, or FFO, which is a non-GAAP financial measure of perfor- mance of an equity REIT used by the REIT industry. The following discussion and analysis should be read in con- junction with the Consolidated Financial Statements and related footnotes included elsewhere in this Annual Report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risks may cause our actual results, per- formance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see “Item 1A. Risk Factors” in the 2021 Form 10-K. IMPACT OF COVID-19 On March 11, 2020, the World Health Organization declared a novel strain of coronavirus (“COVID-19”) a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. As a result, the COVID- 19 pandemic is negatively affecting almost every industry directly or indirectly. The actions taken by federal, state and local governments to mitigate the spread of COVID-19 by ordering closure of non- essential businesses and ordering residents to generally stay at home, and subsequent phased re-openings, have resulted in many of our tenants announcing mandated or temporary closures of their operations and/or requesting adjustments to their lease terms. While most of our tenants have re-opened their businesses, there remains significant uncertainty around the long-term economic impact of the COVID-19 pandemic, which could have a material and adverse effect on or cause disruption to our business or financial condition, results from operations, cash flows and the market value and trading price of our securities. If the effects of COVID-19 result in continued deterioration of economic and market conditions, or if the Company’s ex- pected holding period for assets changes, subsequent tests for impairment could result in impairment charges in the fu- ture. The Company can provide no assurance that material impairment charges with respect to the Company’s invest- ment properties will not occur in 2022 or future periods. As of December 31, 2021, we have not identified any impair- ment triggering events, including the impact of COVID-19 and corresponding tenant requests for rent relief. Therefore, under applicable GAAP guidance, no impairment charges have been recorded. However, we have yet to see the long- term effects of COVID-19 and the extent to which it may impact our tenants in the future. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry as a result of COVID-19, or changes in our long-term hold strat- egies, could be indicative of an impairment triggering event. Accordingly, the Company will continue to monitor circum- stances and events in future periods to determine whether impairment charges are warranted. While the Company’s grocery store, pharmacy, bank and home improvement store tenants generally remained fully open, many restaurants have operated with reduced hours and/or limited indoor seating, supplemented with delivery and curbside pick-up, and most health, beauty supply and services, fitness centers, and other non-essential businesses are open with limited or full customer capacity depending on location. As of February 18, 2022, payments by tenants of contractual base rent and operating expense and real estate tax recoveries totaled approximately 99% and 97% for the fourth quarter of 2021 and January 2022, respectively. During 2021, the Company generally did not charge late fees or de- linquent interest on past due payments and, in many cases, rent deferral agreements have been negotiated to allow tenants temporary relief where needed. The deferral agree- ments, generally, permit tenants to defer 30 to 90 days of rent, operating expense and real estate tax recovery payments until a later time in their lease term with repayment typically occurring over a 12-month period generally commencing in 2021. We expect that our rent collections will continue to be below our tenants’ contractual rent obligations for so long as governmental orders require non-essential businesses to remain at limited capacity or closed and residents to stay at home. We will continue to accrue rental revenue during the deferral period. However, we anticipate that some ten- ants eventually will not be able to pay amounts due and we will incur losses against our rent receivables. The extent and timing of the recognition of such losses will depend on fu- ture developments, which are highly uncertain and cannot be predicted. Management considers reserves established as of December 31, 2021, against such potential losses to be reasonable and adequate. Rent collections during the fourth quarter of 2021 and rent relief requests to-date may not be indicative of collections or requests in any future period. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 11 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a summary of the Company’s executed rent deferral agreements and repayment dates as of February 18, 2022, with the exception of amounts due, which are as of January 31, 2022. EXECUTED RENT DEFERRAL AGREEMENTS AND REPAYMENT DATES (In thousands) Original Rent Due by Quarter Original Rent Amount Repayment Year Repayment Amount Amount Due Amount Collected (prior to deferral) (after deferral) 2020 First Quarter $ 2020 Second Quarter 2020 Third Quarter 2020 Fourth Quarter 2021 First Quarter 2021 Second Quarter 2021 Third Quarter 2021 Fourth Quarter January 2022 Total 67 6,282 1,487 368 249 266 273 74 — $ 9,066 2020 2021 2022 2023 2024 2025 2026 Thereafter $ 331 $ 331 $ 331 5,703 219 5,531 189 5,703 2,033 645 234 48 19 53 Total $ 9,066 $ 6,253 $ 6,051 97% Collection Percentage (based on payments currently due) 100% 97% 86% When taking into account the amount of time elapsed since the due date of the payment, we continue to experience sequential improvement in our collection rates. The following table summarizes the Company’s consolidated total collections of the first quarter, second quarter, third quarter, fourth quarter and January 2022 rent billings as of February 18, 2022: 2021 First Quarter 2021 Second Quarter 2021 Third Quarter 2021 Fourth Quarter January 2022 Retail 99% 99% 99% 98% 97% Office 100% 100% 100% 100% 99% Residential 99% 99% 99% 99% 99% Total 99% 99% 99% 99% 97% Although the Company is and will continue to be actively engaged in rent collection efforts related to uncollected rent, and the Company will continue to work with certain ten- ants who have requested rent deferrals, the Company can provide no assurance that such efforts or our efforts in fu- ture periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. The Company strongly encouraged, and continues to encourage, small busi- ness tenants to apply for Paycheck Protection Program loans, as available, under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and all subsequent support programs available from federal, state and local governments. The Company has information that many tenants applied for these loans and several tenants have communicated that loan proceeds are being received and have subsequently remitted rental payments. As of January 31, 2022, the Company had $12.8 million of cash and cash equivalents and borrowing availability of approximately $208.8 million under its unsecured revolving credit facility. The extent of the effects of COVID-19 on the Company’s business, results of operations, cash flows, and growth pros- pects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See Item 1A. Risk Factors. However, we believe the actions we have taken and are continuing to take will help minimize interruptions to operations and will put the Company in the best position to participate in the recovery when the time comes. Management and the Board of Di- rectors will continue to actively monitor the effects of the COVID-19 pandemic, including governmental directives in the jurisdictions in which we operate and the recommendations of public health authorities, and will, as needed, take further 12 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS measures to adapt the Company’s business in the best inter- ests of our stockholders and personnel. The extent to which COVID-19 impacts our operations and those of our tenants will depend on future developments, which are highly un- certain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the actions taken to contain the outbreak or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others. is positioned to take advantage of additional investment op- portunities as attractive properties are identified and market conditions improve. (See “Item 1. Business - Capital Policies”.) It is management’s view that several of the sub-markets in which the Company operates have, or are expected to have in the future, attractive supply/demand characteristics. The Company will continue to evaluate acquisition, development and redevelopment as integral parts of its overall business plan. In accordance with guidance issued by state and local health authorities and with safety protocols in place as recom- mended by the Centers for Disease Control and Prevention, on June 1, 2021, the Company began transitioning employ- ees from a remote working environment to working in the office. On November 1, 2021, the Company formally re- opened, without occupancy restrictions, its corporate office in Bethesda, Maryland. Due to the most recent COVID-19 variant and the surge in cases, the Company is currently allowing employees the option to work remotely. The Com- pany does not anticipate any adverse impact on its ability to continue to operate its business during the transition back to the office. OVERVIEW The Company’s primary strategy is to continue to focus on diversification of its assets through development of transit-ori- ented, residential mixed-use projects in the Washington, D.C. metropolitan area. The Company’s operating strategy also includes improvement of the operating performance of its assets, internal growth of its Shopping Centers through the addition of pad sites, and supplementing its develop- ment pipeline with selective redevelopment and renovations of its core Shopping Centers. The Company has a pipeline of entitled sites in its portfolio, some of which are currently shopping center operating properties, 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 Montgomery County, Maryland. The Company intends to selectively add free-standing pad site buildings within its Shopping Center portfolio, and re- place underperforming tenants with tenants that generate strong traffic, including anchor stores such as supermarkets and drug stores. The Company has executed leases or leases are under negotiation for ten more pad sites. 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 shopping center and mixed-use properties in the near future is uncer- tain. Nevertheless, because of the Company’s conservative capital structure, including its cash and capacity under its re- volving credit facility, management believes that the Company Prior to the COVID-19 pandemic, economic conditions within the local Washington, DC metropolitan area had remained relatively stable. Issues facing the Federal government relat- ing 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 operating 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 ways to maximize our future performance. The Company’s commercial leasing percentage, on a same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, decreased to 92.0% at December 31, 2021, from 92.5% at December 31, 2020. The Company maintains a ratio of total debt to total asset value of under 50%, which allows the Company to obtain ad- ditional secured borrowings if necessary. As of December 31, 2021, amortizing fixed-rate mortgage debt with staggered maturities from 2022 to 2035 represented approximately 82.2% of the Company’s notes payable, thus minimizing re- financing risk. The Company’s variable-rate debt consists of $206.0 million outstanding under the credit facility. As of December 31, 2021, the Company has availability of approx- imately $219.8 million under its $425.0 million unsecured 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 Com- pany may, in the future, also acquire other types of real estate in other areas of the country as opportunities present them- selves. 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 assets that may be invested in any one property or any one geographic area. The following table sets forth average annualized base rent per square foot and average annualized effective rent per square foot for the Company’s commercial properties (all SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 13 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS properties except for the apartments within The Waycroft, Clarendon Center and Park Van Ness properties). For pur- poses of this table, annualized effective rent is annualized base rent minus amortized tenant improvements and amor- tized leasing commissions. The $0.66 per square foot increase in base rent in the 2021 Period compared to the 2020 Period is primarily attributable to a rate increase in commercial leases relating to completed development projects. COMMERCIAL RENTS Year ended December 31, 2021 2020 2019 Base rent $ 20.63 $ 19.97 $ 19.91 Effective rent $ 18.91 $ 18.25 $ 18.08 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 man- agement to make certain estimates and assumptions that affect the reporting of financial position and results of oper- ations. See Note 2 to the Consolidated Financial Statements in this report. The Company has identified the following policies that, due to estimates and assumptions inherent in those policies, involve a relatively high degree of judgment and complexity. Real Estate Investments Real estate investment properties are stated at historic cost less depreciation. Although the Company intends to own its real estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the Company’s investment profile. Management believes that the Company’s real estate assets have generally appreciated in value since their acquisition or development and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in the financial statements. Because the financial statements are prepared in conformity with GAAP, they do not report the current value of the Com- pany’s real estate investment properties. If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company con- siders both quantitative and qualitative factors in identifying impairment indicators including recurring operating losses, significant decreases in occupancy, and significant adverse changes in market conditions, legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an 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 carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the val- uation could be negatively or positively affected. 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. Individual leases are assessed for collectability and, upon the determination that the collection of rents is not probable, accrued rent and accounts receivable are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is determined to be probable. We also assess whether operat- ing lease receivables, at the portfolio level, are appropriately valued based upon an analysis of balances outstanding, ef- fects of tenant bankruptcies, historical levels of bad debt and current economic trends. Additionally, because of the un- certainties related to the impact of the COVID-19 pandemic, our assessment also takes into consideration the types of business conducted by tenants and current discussions with the tenants, as well as recent rent collection experience. Evaluating and estimating uncollectable lease payments and related receivables requires a significant amount of judgment by management and is based on the best information avail- able to management at the time of evaluation. Actual results could differ from these estimates. Legal Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company be- lieves 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. 14 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following is a discussion of the components of revenue and expense for the entire Company. This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year com- parisons between 2020 and 2019 that are not included in this Annual Report can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for year-ended December 31, 2020 filed with the Securities and Exchange Commission (the “2020 Form 10-K”) on February 25, 2021. REVENUE Year ended December 31, Percentage Change (Dollars in thousands) 2021 2020 2019 Base rent Expense recoveries Percentage rent Other property revenue Credit losses on operating lease receivables Rental revenue Other revenue Total revenue $ 197,930 $ 188,636 $ 185,724 34,500 1,504 1,393 (812) 234,515 4,710 34,678 927 1,252 (5,212) 220,281 4,926 36,521 910 1,423 (1,226) 223,352 8,173 $ 239,225 $ 225,207 $ 231,525 2021 from 2020 2020 from 2019 4.9 % (0.5) % 62.2 % 11.3 % (84.4) % 6.5 % (4.4) % 6.2 % 1.6 % (5.0) % 1.9 % (12.0) % 325.1 % (1.4) % (39.7) % (2.7) % Base rent includes $1.7 million and $1.3 million, for the years 2021 and 2020, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $1.4 million and $1.4 million for the years 2021 and 2020, respectively, to recognize income from the amortization of in-place leases. Total revenue increased 6.2% in 2021 compared to 2020 as described below. Base rent The $9.3 million increase in base rent in 2021 compared to 2020 was attributable to The Waycroft, which was completed in April 2020 ($9.8 million). Percentage rent The $0.6 million increase in percentage rent in 2021 com- pared to 2020 was attributable to increased sales reported by anchor and retail tenants at multiple Shopping Centers. Credit losses on operating lease receivables Credit losses decreased $4.4 million in 2021 compared to 2020, primarily due to collections across the portfolio as tenant operations have improved due to restrictions related to COVID-19 being removed or lessened. OPERATING EXPENSES Year ended December 31, Percentage Change (Dollars in thousands) 2021 2020 2019 2021 from 2020 2020 from 2019 Property operating expenses $ 32,881 $ 28,857 $ 28,747 29,560 29,946 27,987 13.9 % (2.8) % (3.6) % 5.6 % 45,424 46,519 41,834 (2.4) % 11.2 % Real estate taxes Interest expense, net and amortization of deferred debt costs Depreciation and amortization of deferred leasing costs General and administrative Total expenses $ 177,576 $ 175,169 $ 166,893 50,272 20,252 51,126 19,107 46,333 20,793 (1.7) % 6.0 % 1.4 % 10.3 % (8.1) % 5.0 % SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 15 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total expenses increased 1.4% in 2021 compared to 2020 as described below. Property operating expenses Property operating expenses increased $4.0 million in 2021 compared to 2020 primarily due to (a) increased expenses at The Waycroft, which opened in April 2020 ($1.7 million), (b) increased expenses throughout the portfolio related to snow ($1.0 million), and (c) increased expenses throughout the portfolio, exclusive of The Waycroft ($1.3 million). Real estate taxes Real estate taxes decreased $0.8 million in 2021 compared to 2020 primarily due to (a) reductions of tax assessments across the portfolio, exclusive of The Waycroft ($1.8 million), par- tially offset by (b) the substantial completion of The Waycroft ($1.0 million) and cessation of capitalization of real estate taxes. Interest expense, net and amortization of deferred debt costs Interest expense and amortization of deferred debt costs de- creased by $1.1 million in 2021 compared to 2020 primarily due to (a) a lower weighted average interest rate, exclusive of The Waycroft ($2.5 million), partially offset by (b) higher interest expense related to the substantial completion of The Waycroft in April 2020 ($0.8 million), (c) higher capitalized interest ($0.2 million), and (d) higher average debt outstand- ing ($0.2 million). Depreciation and amortization Depreciation and amortization of deferred leasing costs de- creased by $0.9 million in 2021 compared to 2020 primarily due to lower amortization of deferred leasing costs during the period ($0.6 million). General and administrative General and administrative costs increased $1.1 million in 2021 compared to 2020 primarily due to (a) higher employee costs ($0.9 million) and (b) higher loan administration costs ($0.2 million). SAME PROPERTY REVENUE AND SAME PROPERTY OPERATING INCOME Same property revenue and same property operating income are non-GAAP financial measures of performance and im- prove the comparability of these measures by excluding the results of properties which were not in operation for the en- tirety 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 calculating same property revenue and same property operating income. Accordingly, our same property revenue and same prop- erty operating income may not be comparable to those of other REITs. Same property revenue and same property operating income are used by management to evaluate and compare the oper- ating performance of our properties, and to determine trends in earnings, because these measures are not affected by the cost of our funding, the impact of depreciation and amorti- zation expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative ex- penses or other gains and losses that relate to ownership of our properties. We believe the exclusion of these items from revenue and operating income is useful because the resulting measures capture the actual revenue generated and actual expenses incurred by operating our properties. 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. 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 indi- cated periods. The same property results include 50 Shopping Centers and six Mixed-Use properties for each period. 16 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAME PROPERTY REVENUE (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 Year ended December 31, 2021 2020 $ 239,225 $ 225,207 (15,596) (4,790) $ 223,629 $ 220,417 $ 169,681 $ 161,854 53,948 58,563 $ 223,629 $ 220,417 $ 169,681 $ 161,854 Less: Shopping Center acquisitions, dispositions and development properties — — Total same Shopping Center revenue Total Mixed-Use property revenue $ 169,681 $ 161,854 $ 69,544 $ 63,353 Less: Mixed-Use acquisitions, dispositions and development properties (15,596) (4,790) Total same Mixed-Use revenue $ 53,948 $ 58,563 The $3.2 million increase in same property revenue in 2021 compared to 2020 was due to (a) lower credit losses on operating lease receivables and corresponding reserves (collectively, $6.3 million) and (b) higher base rent at Ashbrook Marketplace ($1.1 million), partially offset by (c) lower base rent in the Mixed-Used portfolio ($4.3 million). SAME PROPERTY OPERATING INCOME (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 Less: Gain on sale of property Property operating income Less: Acquisitions, dispositions and development properties Total same property operating income Shopping Centers Mixed-Use properties Total same property operating income Shopping Center operating income Less: Shopping Center acquisitions, dispositions and development properties Total same Shopping Center operating income Mixed-Use property operating income Less: Mixed-Use acquisitions, dispositions and development properties Year ended December 31, 2021 2020 $ 61,649 $ 50,316 45,424 50,272 20,252 — 177,597 (9,312) 46,519 51,126 19,107 (278) 166,790 (1,271) $ 168,285 $ 165,519 $ 133,897 $ 126,656 34,388 38,863 $ 168,285 $ 165,519 $ 133,897 $ 126,656 — $ 133,897 $ 43,700 (9,312) — $ 126,656 $ 40,134 (1,271) Total same Mixed-Use property operating income $ 34,388 $ 38,863 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 17 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Same property operating income increased $2.8 million in 2021 compared to 2020 due primarily to (a) lower credit losses on operating lease receivables and corresponding reserves (collectively, $6.3 million), (b) higher base rent at Ashbrook Marketplace ($1.1 million), and (c) higher percent- age rent ($0.6 million), partially offset by (d) lower base rent in the Mixed-Used portfolio ($4.3 million), and (e) lower ex- pense recoveries, net ($0.9 million). IMPACT OF INFLATION The impact of rising operating expenses due to inflation on the operating performance of the Company’s portfolio is partially mitigated by terms in substantially all of the Com- pany’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 ex- tent, on the change in the consumer price index, commonly referred to as the CPI. In addition, substantially all of the Company’s properties are leased to tenants under long-term leases, which provide for reimbursement of operating expenses by tenants. These leases tend to reduce the Company’s exposure to rising prop- erty expenses due to inflation. Inflation and increased costs may have an adverse impact on the Company’s tenants if increases in their operating expenses exceed increases in their revenue. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $14.6 million and $26.9 million at December 31, 2021 and 2020, respectively. The changes in cash and cash equivalents during the years ended December 31, 2021 and 2020 were attributable to operating, investing and financing activities, as described below. (In thousands) Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Year ended December 31, 2021 2020 $ 118,381 $ 78,383 (55,872) (56,168) (74,771) (9,264) Increase (decrease) in cash and cash equivalents $ (12,262) $ 12,951 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 outstanding debt. Investing Activities Net cash used in investing activities includes property acquisi- tions, developments, redevelopments, tenant improvements and other property capital expenditures. The $0.3 million de- crease in cash used in investing activities is primarily due to (a) lower development expenditures ($8.8 million) and (b) lower additions to real estate investments throughout the portfolio ($0.8 million), partially offset by (c) higher acquisitions of real estate investments ($9.0 million). Financing Activities Net cash provided by (used in) 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 com- mon and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate in- vestment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity require- ments (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit. Long-term liquidity requirements consist primarily of ob- ligations under our long-term debt and dividends paid to our preferred shareholders. The Company anticipates that long-term liquidity requirements will also include amounts required for property acquisitions and developments. The Company is currently developing Phase I of Twinbrook Quar- ter, a project that includes an 80,000 square foot Wegmans, and approximately 25,000 square feet of small shop space, 18 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and 450 apartments, which are currently under construc- tion. Located in Rockville, Maryland, Phase I also includes a planned 230,000 square foot office building that is not under construction at this time. In November 2021, the Company closed on a $145.0 million construction-to-perma- nent loan, the proceeds of which will be used to partially finance the residential and retail portions of Phase I. The Company has completed development plans for Hampden House, for the development of up to 366 apartment units and 10,100 square feet of retail space, and is in the process of demolishing the existing structure to prepare the site for future development. On February 23, 2022, the Company closed on a $133.0 million construction-to-permanent loan, the proceeds of which will be used to partially finance the project. Demolition began in the fourth quarter of 2021 to prepare the site for future development. The Company has entered into a contract with a general contractor and construction is expected to be completed during 2025. The Company may also redevelop certain of the Current Portfolio Properties and may develop additional freestanding outpar- cels or expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank borrowings from the Company’s credit line, construction and permanent financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or equity capital resources available to the Company. Any future bor- rowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may in- clude (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, 2021 included cash balances of approximately $14.6 million and borrowing availability of approximately $219.8 million under its unsecured revolving credit facility, provide sufficient liquidity and flexibility to meet the needs of the Company’s operations as the effects of the COVID-19 pandemic continue to evolve. Contractual Payment Obligations As of December 31, 2021, the Company had unfunded contractual payment obligations of approximately $193.8 million, excluding operating obligations, due within the next 12 months. The table below shows the total contractual pay- ment obligations as of December 31, 2021. (Dollars in thousands) Notes Payable: Interest Scheduled Principal Balloon Payments Subtotal Corporate Headquarters Lease(1) Development and Predevelopment Obligations Tenant Improvements CONTRACTUAL PAYMENT OBLIGATIONS Payments Due By Period One Year or Less More Than One Year $ 45,138 31,033 36,502 112,673 146 66,735 14,236 $ 279,299 $ 206,377 881,116 1,366,792 — 159,728 2,842 Total 324,437 237,410 917,618 1,479,465 146 226,463 17,078 Total Contractual Obligations $ 193,790 $ 1,529,362 $ 1,723,152 1. See Note 7 to Consolidated Financial Statements. Corporate Headquarters Lease amounts represent an allocation to the Company based upon employ- ees’ 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. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 19 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dividend Reinvestments In December 1995, the Company established a Dividend Rein- vestment Plan (the “Plan”) to allow its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The Plan pro- vides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Com- pany issued 287,239 and 220,863 shares under the Plan at a weighted average discounted price of $39.17 and $33.94 per share during the years ended December 31, 2021 and 2020, respectively. The Company issued 61,009 and 51,579 limited partnership units under the Plan at a weighted average price of $39.74 and $32.99 per unit during the years ended De- cember 31, 2021 and 2020, respectively. The Company also credited 6,376 and 7,635 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ Deferred Compensation Plan at a weighted average discounted price of $39.31 and $31.18 per share, during the years ended De- cember 31, 2021 and 2020, respectively. CAPITAL STRATEGY AND FINANCING ACTIVITY As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently 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, 2021. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company’s debt capitalization policy in light of current economic conditions, relative costs of capital, market values of the Company property portfolio, opportunities for acquisition, development or expansion, and such other fac- tors 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 ap- proval and may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the pol- icy for certain periods of time. The Company continues to refinance or renegotiate the terms of its outstanding debt in order to extend maturities and obtain generally more fa- vorable loan terms, whenever management determines the financing environment is favorable. 20 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company’s financing activity is described within note 5 to the Consolidated Financial Statements. The following is a summary of notes payable as of December 31, 2021 and 2020. Notes Payable (Dollars in thousands) Fixed rate mortgages: 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 Ashbrook Marketplace Kentlands The Waycroft Total fixed rate Variable rate loans: Revolving credit facility Term loan facility Total variable rate Total notes payable NOTES PAYABLE Year ended December 31, 2020 2021 Interest Rate* Scheduled Maturity* $ — — 28,533 8,812 9,692 8,651 13,213 11,528 20,874 24,108 24,186 12,553 90,600 27,197 31,155 14,634 56,413 12,868 32,170 13,897 24,398 13,108 34,558 64,661 53,745 29,613 21,393 20,682 12,299 27,143 21,329 28,899 156,116 949,028 106,000 100,000 206,000 $ 6,110 5,109 29,657 9,136 10,018 9,788 13,836 12,061 21,704 25,224 25,253 13,095 94,712 28,480 32,585 15,290 58,607 13,480 34,223 14,469 25,318 13,626 35,836 66,420 55,398 30,467 21,933 21,204 12,125 27,836 21,922 29,746 146,083 980,751 104,500 75,000 179,500 5.81% 6.01% 5.62% 6.08% 6.43% 6.61% 7.35% 7.60% 6.89% 7.45% 7.30% 6.18% 5.31% 4.30% 4.53% 4.70% 5.84% 4.04% 3.51% 3.99% 3.69% 3.99% 3.39% 4.88% 3.75% 4.41% 4.69% 4.65% 8.00% 4.14% 3.80% 3.43% 4.67% 4.93% LIBOR + 1.35% LIBOR + 1.30% 1.43% $ 1,155,028 $ 1,160,251 4.30% 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 Aug-2035 Aug-2035 Sep-2035 8.30 years Aug-2025 Feb-2027 4.39 years 7.60 years * Interest rate and scheduled maturity data presented as of December 31, 2021. Totals computed using weighted averages. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 21 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On January 5, 2021, the Company repaid in full the remain- ing principal balance of $6.1 million of the mortgage loan secured by Jamestown Place, which was scheduled to mature in February 2021. On June 11, 2021, the Company repaid in full the remaining principal balance of $5.0 million of the mortgage loan se- cured by Hunt Club Corners, which was scheduled to mature in August 2021. On August 31, 2021, the Company replaced its credit facil- ity. The new credit facility, which can be used for working capital, property acquisitions, development projects or let- ters of credit, totals $525.0 million (the “New Facility”), of which $425.0 million is a revolving credit facility (the “Re- volving Line”) and $100.0 million is a term loan (the “Term Loan”). As of December 31, 2021, the applicable spread for borrowings was 135 basis points under the Revolving Line 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 New Facility. Letters of credit may be issued under the revolving credit facility. As of December 31, 2021, based on the value of the Company’s unencumbered properties, approximately $219.8 million was available under the Revolving Line, $106.0 million was outstanding and ap- proximately $185,000 was committed for letters of credit. The facility requires the Company and its subsidiaries to main- tain compliance with certain financial covenants. The material covenants require the Company, on a consolidated basis, to: • • • 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 ex- pense 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). As of December 31, 2021, the Company was in compliance with all such covenants. On November 19, 2021, the Company closed on a $145.0 million construction-to-permanent loan, the proceeds of which will be used to partially fund Phase I of the Twinbrook Quarter development project. The loan matures in 2041, bears interest at a fixed rate of 3.83%, and requires inter- est only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the fourth quarter of 2026, and thereafter, monthly principal and interest payments based on a 25-year amortization schedule will be required. On February 23, 2022, the Company closed on a $133.0 mil- lion construction-to-permanent loan, the proceeds of which will be used to partially fund Hampden House. The loan ma- tures in 2040, bears interest at a fixed rate of 3.90%, and requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is ex- pected in the first quarter of 2026, and thereafter, monthly principal and interest payments based on a 25-year amorti- zation schedule will be required. 22 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUNDS FROM OPERATIONS In 2021, the Company reported Funds From Operations (“FFO”)1 available to common stockholders and noncontrolling interests of $100.7 million, a 12.0% increase from 2020 FFO available to common stockholders and noncontrolling interests of $90.0 million. The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated: (In thousands, except per share amounts) Net income Subtract: Gain on sales of properties Add: Real estate depreciation and amortization FFO Subtract: Year ended December 31, 2021 $ 61,649 2020 2019 $ 50,316 $ 64,196 — (278) — 50,272 111,921 51,126 101,164 46,333 110,529 Preferred stock dividends (11,194) (11,194) (12,235) Extinguishment of issuance costs upon redemption of preferred shares FFO available to common stockholders and noncontrolling interests Weighted average shares and units: Basic Diluted(2) Basic FFO per share available to common stockholders and noncontrolling interests Diluted FFO per share available to common stockholders and noncontrolling interests. — — (3,235) $ 100,727 $ 89,970 $ 95,059 32,029 33,098 $ $ 3.14 3.04 31,266 31,267 $ $ 2.88 2.88 30,869 30,913 $ $ 3.08 3.08 1 The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT as net income, computed in accordance with GAAP, plus real estate depreciation and amortization, and excluding impairment charges on depreciable real estate assets and gains or losses from property dispositions. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company’s Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a meaningful supplemental measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what we believe occurs with our assets, and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other REITs. 2 Beginning March 5, 2021, fully diluted shares and units includes 1,416,071 limited partnership units held in escrow related to the contribution of Twinbrook Quarter by 1592 Rockville Pike. Half of the units held in escrow were released on October 18, 2021. The remaining units held in escrow are scheduled to be released on October 18, 2023. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 23 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITIONS AND REDEVELOPMENTS Management anticipates that during the coming year, the Company 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. Portfolio Leasing Status The following chart sets forth certain information regarding commercial leases at our properties for the periods indicated. This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discus- sions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for year-ended December 31, 2020 filed with the Securities and Exchange Commission (the “2020 Form 10-K”) on February 25, 2021. PORTFOLIO LEASING STATUS Total Properties Total Square Footage Percentage Leased As of December 31, 2021 2020 Shopping Centers Mixed- Use 50 50 7 7 Shopping Centers 7,874,130 7,876,692 Mixed- Use 1,136,937 1,136,937 Shopping Centers 93.4 % 93.0 % Mixed- Use 82.3 % 88.4 % On a same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, the Shopping Center leasing percentage increased to 93.4% from 93.1% and the Mixed-Use leasing percentage decreased to 82.3% from 88.3% The overall portfolio leasing percentage, on a comparative same property basis, decreased to 92.0% at December 31, 2021 from 92.5% at December 31, 2020. The Residential portfolio was 97.1% leased at December 31, 2021, compared to 85.5% at December 31, 2020. The in- crease in Residential portfolio occupancy is primarily due to completion in 2021 of the initial lease up of The Waycroft, which opened in April 2020. The following table shows selected data for leases executed in the indicated periods. The information is based on exe- cuted leases without adjustment for the timing of occupancy, tenant defaults, or landlord concessions. The base rent for an expiring lease is the annualized contractual base rent, on a cash basis, as of the expiration date of the lease. The base rent for a new or renewed lease is the annualized con- tractual 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 Commercial Property Leasing Activity Base Rent per Square Foot Year ended December 31, 2021 2020 Square Feet 1,353,543 1,371,377 Number of Leases New/Renewed Leases Expiring Leases 285 247 $ $ 21.07 24.70 $ $ 21.59 25.15 24 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Additional information about commercial leasing activity during the three months ended December 31, 2021, 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 20 106,450 $ 18.73 (1.95) (0.62) (0.44) $ 15.72 First Generation/ Development Leases — — — — — — — $ $ Renewed Leases 54 249,335 $ 22.16 (2.10) (1.66) (0.04) $ 18.36 During 2021, the Company entered into 694 new or renewed apartment leases. The monthly rent per square foot for these leases decreased to $3.22 from $3.28. During 2020, exclud- ing The Waycroft residential property, the Company entered into 392 new or renewed apartment leases. The monthly rent per square foot for these leases decreased to $3.30 from $3.51. As of December 31, 2021, 843,842 square feet of Commer- cial space was subject to leases scheduled to expire in 2022. Below is information about existing and estimated market base rents per square foot for that space. Expiring Leases: Square feet Total 843,842 Average base rent per square foot $ Estimated market base rent per square foot $ 22.34 22.97 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 inte- gral 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 Compa- ny’s results of operations. 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 Decem- ber 31, 2021, the Company had variable rate indebtedness totaling $206.0 million. If the interest rates on the Compa- ny’s variable rate debt instruments outstanding at December 31, 2021 had been one percent higher, our annual interest expense relating to these debt instruments would have in- creased by $2.1 million, based on those balances. As of December 31, 2021, the Company had fixed-rate indebted- ness totaling $949.0 million with a weighted average interest rate of 4.93%. If interest rates on the Company’s fixed-rate debt instruments at December 31, 2021 had been one per- cent higher, the fair value of those debt instruments on that date would have decreased by approximately $47.7 million. The Company may, where appropriate, employ derivative fi- nancial instruments, such as interest rate swaps to mitigate the risk of interest rate fluctuations. At December 31, 2021, the Company had no such derivative financial instruments. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 25 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2021 and 2020, the related consoli- dated statements of operations, comprehensive income, equity and cash flows for each of the three years in the pe- riod ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15(a)2(b) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over finan- cial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission and our report dated February 24, 2022, 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 audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securi- ties and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits in- cluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presenta- tion of the financial statements. We believe that our audits provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a mat- ter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the finan- cial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, pro- viding a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 26 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONTINUED Collectability of Operating Lease Receivables — Refer to Note 2 to the financial statements Critical Audit Matter Description Accounts receivable are primarily comprised of rental and reimbursement billings due from tenants, and straight-line rent receivables representing the cumulative amount of future adjustments necessary to present rental income on a straight-line basis. Individual leases are assessed for col- lectability and upon the determination that the collection of rents is not probable, accrued rent and accounts receiv- able are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is determined to be probable. The Company also assessed whether operating lease receivables, at the portfolio level, are appropriately valued based upon an anal- ysis of balances outstanding, effects of tenant bankruptcies, historical levels of bad debt and current economic trends. For the year-ended December 31, 2021, the Company re- duced rental revenue by $0.8 million due to lease-related reserves and charge offs. We identified the Company’s evaluation of collectability of lease receivables as a critical audit matter because of the significant assumptions management makes when deter- mining whether the collection of operating lease receivables is probable. Management’s evaluation is based on the best information available to the Company at the time of pre- paring the financial statements and takes into consideration the types of business conducted by tenants and current discussions with the tenants, as well as recent rent collec- tion experience. Auditing management’s assessment of collectability of lease receivables required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s analysis and assessment of collectability. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the collectability of operat- ing lease receivables included the following, among others: • We tested the effectiveness of controls over manage- ment’s evaluation of tenant-level considerations that may indicate that the collection of operating lease receivables is not probable including management’s re- view of its accounts receivable aging schedule. • We obtained management’s analysis of the collectability of tenant accounts receivables and performed the fol- lowing procedures, among others: – – Tested the completeness and accuracy of the accounts receivable aging schedule as of Decem- ber 31, 2021, by obtaining tenant agreements, monthly charge statements, and evidence of cash collections subsequent to year end; and For a selected sample of tenants with outstanding receivables as of December 31, 2021, evaluated the reasonableness of management’s assumptions re- garding collection probability by inspecting tenant correspondence, historical payment patterns and subsequent cash collections, evidence of lease modification negotiations, including rent deferrals or abatements, evidence of tenant bankruptcy or liquidity constraints, and performing corroborating inquiries of management, including the Collections Department. /s/ Deloitte & Touche LLP McLean, Virginia February 24, 2022 We have served as the Company’s auditor since 2018. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 27 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 24, 2022 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, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company main- tained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on cri- teria 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, 2021, of the Company and our report dated February 24, 2022, 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. 28 SAUL CENTERS, INC. ANNUAL REPORT 2021 | 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 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 D Cumulative Redeemable, 30,000 shares issued and outstanding Series E Cumulative Redeemable, 44,000 shares issued and outstanding Common stock, $0.01 par value, 42,000,000 and 40,000,000 shares authorized, respectively, 23,840,471 and 23,476,626 shares issued and outstanding, respectively Additional paid-in capital Partnership units in escrow Distributions in excess of accumulated earnings Total Saul Centers, Inc. equity Noncontrolling interests Total equity December 31, 2021 2020 $ 511,529 $ 511,482 1,566,686 205,911 2,284,126 (650,113) 1,634,013 14,594 58,659 24,005 15,490 1,543,837 69,477 2,124,796 (607,706) 1,517,090 26,856 64,917 26,872 9,837 $ 1,746,761 $ 1,645,572 $ 941,456 $ 827,603 99,233 103,167 — 21,672 25,558 25,188 74,791 103,913 144,607 19,448 24,384 23,293 1,216,274 1,218,039 75,000 75,000 110,000 110,000 238 436,609 39,650 (256,448) 405,049 125,438 530,487 235 420,625 — (241,535) 364,325 63,208 427,533 Total liabilities and equity $ 1,746,761 $ 1,645,572 The Notes to Financial Statements are an integral part of these statements. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 29 CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) 2021 2020 2019 For the Year Ended December 31, 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 Gain on sale of properties Net Income Noncontrolling interests 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 net income available to common stockholders Basic Diluted $ $ $ The Notes to Financial Statements are an integral part of these statements. $ 234,515 $ 220,281 $ 223,352 4,710 239,225 32,881 28,747 45,424 50,272 20,252 177,576 — — 61,649 (13,260) 48,389 (11,194) — 37,195 1.57 1.57 4,926 225,207 28,857 29,560 46,519 51,126 19,107 175,169 — 278 50,316 (9,934) 40,382 (11,194) — 29,188 1.25 1.25 $ $ $ 8,173 231,525 29,946 27,987 41,834 46,333 20,793 166,893 (436) — 64,196 (12,473) 51,723 (12,235) (3,235) 36,253 1.58 1.57 $ $ $ 30 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Year Ended December 31, 2021 2020 2019 $ 61,649 $ 50,316 $ 64,196 — 61,649 (13,260) 48,389 — 50,316 (9,934) 40,382 93 64,289 (12,561) 51,728 (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 (11,194) (11,194) (12,235) Extinguishment of issuance costs upon redemption of preferred shares — — (3,235) Total comprehensive income available to common stockholders $ 37,195 $ 29,188 $ 36,258 The Notes to Financial Statements are an integral part of these statements. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 31 CONSOLIDATED STATEMENTS OF EQUITY (Dollars in thousands, except per share amounts) 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) Balance, December 31, 2019 Issuance of common stock: 228,498 shares pursuant to dividend reinvestment plan 16,887 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of 51,579 partnership units Net income Preferred stock distributions: 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) Balance, December 31, 2020 Issuance of common stock: 293,615 shares pursuant to dividend reinvestment plan 70,231 shares due to exercise of employee stock options and issuance of directors’ deferred stock Issuance of partnership units: 61,009 pursuant to dividend reinvestment plan 469,740 pursuant to the acquisition of Twinbrook leasehold interest 93,674 for the Ashbrook bonus value pursuant to the Ashbrook Contribution 1,416,071 restricted units pursuant to the Twinbrook Contribution Agreement 708,036 restricted units released from escrow pursuant to the Twinbrook Contribution Agreement Net income Preferred stock distributions: 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 ($0.57/share) and partnership units ($0.57/unit) $ $ 180,000 110,000 (105,000) — — — — — — — — — — — — 185,000 — — — — — — — — — — 185,000 — — — — — — — — — — — — — — Preferred Stock Common Stock Additional Paid-in Capital Partnership Units in Escrow Distributions in Excess of Accumulated Earnings Accumulated Other Comprehensive (Loss) Total Saul Centers, Inc. Noncontrolling Interests Total $ (208,593) — (3,235) (255) — — $ 355,912 106,265 (105,000) $ 69,308 — — $ 425,220 106,265 (105,000) $ $ 384,533 (3,735) 3,235 22,494 4,399 — — — — — — — — — — 410,926 7,732 1,967 — — — — — — — — 420,625 11,497 4,487 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 79,300 (39,650) — — — — — — — 227 — — 4 1 — — — — — — — — — — 232 3 — — — — — — — — — 235 3 — — — — — — — — — — — — — 238 — — — 51,723 — (5,736) (3,444) (257) (36,562) (1,148) (1,650) (12,275) (221,177) — — — 40,382 (3,446) (4,950) (37,108) (1,148) (1,650) (12,438) (241,535) — — — — — — — 48,389 (3,445) (4,950) (38,525) (1,149) (1,650) (13,583) — — — — 255 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 22,498 — 22,498 4,400 — 51,723 255 (5,736) (3,444) (257) (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) (4,180) (16,455) 374,981 68,375 443,356 7,735 — 7,735 1,967 — 40,382 (3,446) (4,950) (37,108) (1,148) (1,650) — 1,677 9,934 — — (12,571) — — 1,967 1,677 50,316 (3,446) (4,950) (49,679) (1,148) (1,650) (12,438) (4,207) (16,645) 364,325 63,208 427,533 11,500 4,487 — — — — — 2,398 21,500 11,500 4,487 2,398 21,500 4,320 4,320 79,300 — 79,300 (39,650) 48,389 (3,445) (4,950) (38,525) (1,149) (1,650) 39,650 13,260 — — (13,614) — — — 61,649 (3,445) (4,950) (52,139) (1,149) (1,650) (13,583) (5,284) (18,867) $ (405,049) $ 125,438 $ 530,487 Balance, December 31, 2021 $ 185,000 $ $ 436,609 $ 39,650 $ (256,448) $ The Notes to Financial Statements are an integral part of these statements. 32 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2020 2019 2021 $ 61,649 $ 50,316 $ 64,196 (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 Credit losses on operating lease receivables (Increase) decrease in accounts receivable and accrued income Additions to deferred leasing costs (Increase) decrease in other assets Increase (decrease) 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, 2, 3) Additions to real estate investments Additions to development and redevelopment projects Proceeds from sale of property 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, 2, 3) Series E preferred stock Series C preferred stock redemption Distributions to: Series C preferred stockholders Series D preferred stockholders Series E preferred stockholders Common stockholders Noncontrolling interests Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid for interest Increase (decrease) in accrued real estate investments and development costs $ $ $ — — 50,272 1,710 1,562 812 5,446 (1,814) (2,820) (331) 1,895 118,381 ( 9,011) (18,636) (28,225) — (55,872) — (42,641) 25,000 46,000 (44,500) 10,917 (6,393) 14,425 2,398 — — — (4,593) (6,600) (50,963) (17,821) (74,771) (12,262) 26,856 14,594 44,575 1,626 $ $ $ — (278) 51,126 1,570 1,438 5,212 (17,818) (8,050) 5 875 (6,013) 78,383 — (19,484) (37,060) 376 (56,168) 52,100 (45,654) — 90,000 (73,000) 35,883 (1,206) 8,264 1,677 — — — (4,594) (6,600) (49,383) (16,751) (9,264) 12,951 13,905 26,856 44,990 (11,690) 436 — 46,333 1,518 1,859 1,226 339 (1,843) 706 158 455 115,383 — (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 $ $ $ (1) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $79,300 in connection with the contribution of Twinbrook Quarter by the B. F. Saul Real Estate Investment Trust in exchange for limited partnership units, half of which units remain in escrow. See Notes 3 and 4 to the Consolidated Financial Statements. (2) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $21,500 in connection with the contribution of the Twinbrook Quarter leasehold interest in exchange for limited partnership units. See Notes 3 and 4 to the Consolidated Financial Statements. (3) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $4,320 in connection with the issuance of ad- ditional limited partnership units to B. F. Saul Real Estate Investment Trust as additional consideration pursuant to the terms of the 2016 contribution agreement, as amended, related to Ashbrook Marketplace. See Note 7 to the Consolidated Financial Statements. The Notes to Financial Statements are an integral part of these statements. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 33 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 organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Cen- ters or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company.” B. Francis Saul II serves as Chairman of the Board of Directors and Chief Exec- utive Officer 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 Subsidiary Part- nerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood 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 majority of the Shopping Centers are anchored by several major ten- ants. As of December 31, 2021, 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 (5.3%), a tenant at 11 Shopping Centers, individually accounted for 2.5% or more of the Company’s total revenue for the year ended December 31, 2021. As of December 31, 2021, the Current Portfolio Properties consisted of 50 Shopping Centers, seven Mixed-Use Proper- ties, 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, 2021 and December 31, 2020, 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 Part- nership and the rights to absorb 71.9% of the net income of the Operating Partnership. Because the Operating Partner- ship was already consolidated into the financial statements of the Company, the identification of it as a VIE has no impact on the consolidated financial statements of the Company. 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 and collectability of operating lease receivables. 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 conditions, and other factors and may elect to sell properties that do not conform to the Company’s investment profile. Management believes that the Company’s real estate assets have generally appreciated in value since their acquisition or development and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in the financial statements. 34 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Because the financial statements are prepared in conformity with GAAP, they do not report the current value of the Com- pany’s real estate investment properties. If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment prop- erty exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and sig- nificant 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 carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount re- quired to adjust the carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valuation could be negatively or positively affected. The Company did not recognize an impairment loss on any of its real estate in 2021, 2020, or 2019. 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 im- provement, 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, 2021, 2020, and 2019, was $45.5 million, $45.9 million, and $40.5 mil- lion, respectively. Repairs and maintenance expense totaled $13.5 million, $11.1 million, and $12.5 million for 2021, 2020, and 2019, respectively, and is included in property op- erating expenses in the accompanying consolidated financial statements. As of December 31, 2021, we have not identified any impair- ment triggering events, including the impact of COVID-19 and corresponding tenant requests for rent relief. Accordingly, under applicable GAAP guidance, no impairment charges were recorded. Assets Held for Sale The Company considers properties to be assets held for sale when all of the following criteria are met: • management commits to a plan to sell a property; • it is unlikely that the disposal plan will be significantly modified or discontinued; the property is available for immediate sale in its present condition; actions required to complete the sale of the property have been initiated; sale of the property is probable and the Company expects the completed sale will occur within one year; and the property is actively being marketed for sale at a price that is reasonable given its current market value. • • • • The Company must make a determination as to the point in time that it is probable that a sale will be consummated, which generally occurs when an executed sales contract has no contingencies and the prospective buyer has significant funds at risk to ensure performance. Upon designation as an asset held for sale, the Company records the carrying value of each property at the lower of its carrying value or its es- timated fair value, less estimated costs to sell, and ceases depreciation. As of December 31, 2021 and 2020, the Com- pany 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. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 35 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable, Accrued Income, and Allowance for Doubtful Accounts Accounts receivable are primarily comprised of rental and re- imbursement billings due from tenants, and straight-line rent receivables representing the cumulative amount of adjust- ments necessary to present rental income on a straight-line basis. Individual leases are assessed for collectability and, upon the determination that the collection of rents is not probable, accrued rent and accounts receivable are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is de- termined to be probable. We also assess whether operating lease receivables, at the portfolio level, are appropriately valued based upon an analysis of balances outstanding, ef- fects of tenant bankruptcies, historical levels of bad debt and current economic trends. Additionally, because of the uncer- tainties related to the impact of the COVID-19 pandemic, our assessment also takes into consideration the types of business conducted by tenants and current discussions with the ten- ants, as well as recent rent collection experience. Evaluating and estimating uncollectable lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to management at the time of evaluation. For the year-ended December 31, 2021, we reduced rental revenue by $0.8 mil- lion due to lease-related reserves and charge offs. Actual results could differ from these estimates. At December 31, 2021 and December 31, 2020, accounts receivable was comprised of: (In thousands) Rents currently due Deferred rents and payment plans Straight-line rent Other receivables Credit losses on operating lease receivables Total December 31, $ 2021 8,484 4,141 46,239 2,877 (3,082) 2020 $ 13,321 8,205 44,863 3,751 (5,223) $ 58,659 $ 64,917 Deferred Leasing Costs Deferred leasing costs primarily consist of initial direct costs incurred in connection with successful property leasing and amounts attributed to in place leases associated with acquired properties. Such amounts are capitalized and amor- tized, using the straight-line method, over the term of the lease or the remaining term of an acquired lease. Initial direct costs primarily consist of leasing commissions, costs paid to external third-party brokers, and internal lease commissions that are incremental to obtaining a lease and would not have been incurred if the lease had not been obtained. Unamor- tized 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 $24.0 million and $26.9 million, net of accumulated amortization of approxi- mately $48.7 million and $44.5 million, as of December 31, 2021 and 2020, respectively. Amortization expense, which is included in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, totaled approximately $4.7 million, $5.2 million, and $5.8 million, for the years ended December 31, 2021, 2020, and 2019, 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 read- ily convertible to cash. Substantially all of the Company’s cash balances at December 31, 2021 are held in accounts at var- ious banks. From time to time the Company may maintain deposits with financial institutions in amounts in excess of federally insured limits. The Company has not experienced any losses on such 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 ju- risdiction 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, de- ferred income includes unamortized balances that represent the fair value of certain below market leases determined as of the date of acquisition. 36 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 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 qual- ify for hedge accounting. The effective portion of any gain or loss on the hedge instruments is reported as a compo- nent of accumulated other comprehensive income (loss) and recognized in earnings within the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a derivative instrument is immediately recognized in earnings. For 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 income 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 consolidated financial statements. As of December 31, 2021, 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 2021, 2020, and 2019. The tax basis of the Compa- ny’s real estate investments was approximately $1.64 billion and $1.55 billion as of December 31, 2021 and 2020, 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 2018. 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, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, interim periods within those years, and requires a modified retrospective transition approach for all leases existing at the date of initial application, with an option to use certain practical expedients for those existing leases. Upon adoption of ASU 2016-02 effective January 1, 2019, we elected the practical expedient for all leases with respect to lease identification, lease classification, 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 nonlease components to- gether 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 termi- nation 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 corresponding lease liability related to our headquarters lease were recorded in other assets and other liabilities, respectively. The lease commenced in March 2002 and expires on February 28, 2022. Negotiations are ongoing for a renewal of the Compa- ny’s office space at the same location. The right of use asset and corresponding lease liability totaled $0.1 million and $0.1 million, respectively, at December 31, 2021. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 37 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Due to the business disruptions and challenges severely af- fecting the global economy caused by the novel strain of coronavirus (“COVID-19”) pandemic, many lessees have requested rent relief, including rent deferrals and other lease concessions. The lease modification guidance in ASU 2016-02 does not contemplate the rapid execution of con- cessions for multiple tenants in response to sudden liquidity constraints of lessees. In April 2020, the FASB staff issued a question and answer document that provided guidance allowing the Company to elect to either apply the lease modification accounting framework or not, with such elec- tion applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply such relief, which, in the case of rent deferrals, results in the accrual of rent due from tenants and defers the payment of that rent to a future date, and will monitor the collectability of rent receivables. 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 requires consideration of a broader range of information to support credit loss estimates. ASU 2016-13 is effective for annual pe- riods beginning after December 15, 2019, including interim periods within those years. The adoption of ASU 2016-13 effective January 1, 2020, had no material impact on our consolidated financial statements and related disclosures be- cause 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 the year ended December 31, 2021. 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. (In thousands) Twinbrook Quarter Hampden House The Waycroft Other Total December 31, 2021 2020 $ 138,069 $ — 56,898 50,723 — 8,651 10,944 10,103 $ 205,911 $ 69,477 Acquisitions Twinbrook Quarter On November 5, 2019, the Company entered into the Twinbrook Contribution Agreement to acquire from 1592 Rockville Pike, a wholly-owned subsidiary of the Saul Trust, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland in exchange for 1,416,071 limited partnership units in the Operating Part- nership. The Contributed Property is immediately adjacent to approximately 10.3 acres owned by the Company. Title to the Contributed Property and the units were placed in escrow until certain conditions of the Twinbrook Contribution Agree- ment were satisfied. The units issued to 1592 Rockville Pike will remain in escrow until the conditions of the Twinbrook Contribution Agreement, as amended, are satisfied. Half of the units held in escrow were released on October 18, 2021. The remaining units held in escrow are scheduled to be released on October 18, 2023. 38 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS On March 5, 2021, the Company entered into an amendment to the Twinbrook Contribution Agreement in which it and 1592 Rockville Pike agreed to release to the Company from escrow the deed and assignment of the leasehold interest of the Contributed Property, as of that date. The Company also reimbursed 1592 Rockville Pike for certain expenses pursu- ant to the Twinbrook Contribution Agreement totaling $7.4 million. Acquisition costs totaled $1.2 million. The Company recorded a finance lease right-of-use asset of $19.4 million and corresponding lease liability of $19.4 million related to the leasehold interest assumed in the transaction. The incre- mental borrowing rate used to calculate the lease liability was 5.63%. On June 29, 2021, the third-party landlord under the ground lease contributed to the Company the fee simple interest in the land underlying the leasehold interest in exchange for 469,740 limited partnership units in the Operating Part- nership, representing an aggregate value of $21.5 million. Acquisition costs were paid in cash and totaled $0.7 million. Accordingly, the finance lease right-of-use asset and finance lease liability were extinguished. Amortization expense and interest expense related to the lease totaled $104,000 and $362,800, respectively, for the twelve months ended December 31, 2021. 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 2021, the Company acquired properties that had an aggregate cost of $108.3 million, including acquisition costs. The entire amount was allocated to land. The gross carrying amount of lease intangible assets included in deferred leasing costs as of December 31, 2021 and 2020 was $11.0 million and $11.0 million, respectively, and ac- cumulated amortization was $9.1 million and $8.6 million, respectively. Amortization expense totaled $0.5 million, $0.6 million and $0.9 million, for the years ended December 31, 2021, 2020, and 2019, respectively. The gross carrying amount of below market lease intangible liabilities included in deferred income as of December 31, 2021 and 2020 was $23.3 million and $23.7 million, respectively, and accumulated amortization was $16.2 million and $15.0 million, respec- tively. Accretion income totaled $1.4 million, $1.4 million, and $1.5 million, for the years ended December 31, 2021, 2020, and 2019, respectively. The gross carrying amount of above market lease intangible assets included in accounts re- ceivable as of December 31, 2021 and 2020 was $0.6 million and $0.6 million, respectively, and accumulated amortization was $161,800 and $128,900, respectively. Amortization ex- pense totaled $32,900, $43,600 and $109,600, for the years ended December 31, 2021, 2020 and 2019, respectively. The remaining weighted-average amortization period as of De- cember 31, 2021 is 4.6 years, 6.8 years, and 4.9 years for lease acquisition costs, above market leases and below mar- ket leases, respectively. As of December 31, 2021, scheduled amortization of intangible assets and deferred income related to in place leases is as follows: (In thousands) Lease acquisition costs Above market leases Below market leases 2022 2023 2024 2025 2026 Thereafter Total $ 368 317 198 153 131 712 $ 1,879 $ $ 33 33 33 33 33 277 474 $ $ 1,306 1,297 878 601 509 2,744 7,335 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 39 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 4. NONCONTROLLING INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP Saul Centers is the sole general partner of the Operating Part- nership, owning a 71.9% common interest as of December 31, 2021. Noncontrolling interest in the Operating Partner- ship 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 interests and dis- tributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interest reflected on the consolidated statements of operations represents earnings allocated to limited partnership interests held by the Saul Organization. The Saul Organization holds a 26.7% limited partnership in- terest in the Operating Partnership represented by 8,801,214 limited partnership units, as of December 31, 2021. 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, 2021, approximately 540,000 units were eligible for conversion. As of December 31, 2021, a third party investor holds a 1.4% limited partnership interest in the Operating Partnership rep- resented by 469,740 convertible limited partnership units. At the option of the unit holder, these units are convertible into shares of Saul Centers’ common stock on a one-for-one basis; provided that, in lieu of the delivery of Saul Centers’ common stock, Saul Centers may, in its sole discretion, deliver cash in an amount equal to the value of such Saul Centers’ common stock. The impact of the Saul Organization’s 26.7% limited part- nership interest in the Operating Partnership is reflected as Noncontrolling Interests in the accompanying consolidated financial statements. Weighted average fully diluted part- nership units and common stock outstanding for the years ended December 31, 2021, 2020, and 2019, were 33.1 mil- lion, 31.3 million, and 30.9 million, respectively. The 0.7 million limited partnership units remaining in escrow after October 18, 2021, in connection with the Twinbrook Contribution Agreement, are not eligible to receive distribu- tions from the Operating Partnership until such time as they are released from escrow. 5. MORTGAGE NOTES PAYABLE, REVOLVING CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS At December 31, 2021, the principal amount of outstand- ing debt totaled $1.2 billion, of which $949.0 million was fixed rate debt and $206.0 million was variable rate debt. The principal amount of the Company’s outstanding debt totaled $1.2 billion at December 31, 2020, of which $980.8 million was fixed rate debt and $179.5 million was variable rate debt. At December 31, 2021, the Company had a $525.0 million unsecured credit facility, which can be used for working cap- ital, property acquisitions, development projects or letters of credit, of which $425.0 million is a Revolving Line and $100.0 million is a Term Loan. The Revolving Line matures on August 29, 2025, which term may be extended by the Company for one additional year, subject to satisfaction of certain conditions. The Term Loan matures on February 26, 2027, and may not be extended. In general, loan availability under the New Facility is primarily determined by operating income from the Company’s existing unencumbered proper- ties. Interest accrues at a rate of LIBOR plus a spread of 135 basis points to 195 basis points under the Revolving Line, and 130 basis points to 190 basis points under the Term Loan, each as determined by certain leverage tests. As of Decem- ber 31, 2021, the applicable spread for borrowings is 135 basis points under the Revolving Line 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 New Facility. Letters of credit may be issued under the re- volving credit facility. On December 31, 2021, based on the value of the Company’s unencumbered properties, approxi- mately $219.8 million was available under the Revolving Line, $106.0 million was outstanding and approximately $185,000 was committed for letters of credit. Saul Centers and certain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obliga- tions of the Operating Partnership under the credit facility. The Operating Partnership is the guarantor of (a) a portion of the Broadlands mortgage (approximately $3.7 million of the $29.6 million outstanding balance at December 31, 2021), (b) a portion of the Avenel Business Park mortgage (approximately $6.3 million of the $24.1 million outstanding balance at December 31, 2021), (c) a portion of The Way- croft mortgage (approximately $23.6 million of the $156.1 million outstanding balance at December 31, 2021), (d) the 40 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Ashbrook Marketplace mortgage (totaling $21.3 million at December 31, 2021), and (e) the mortgage secured by Kent- lands Place, Kentlands Square I and Kentlands pad (totaling $28.9 million at December 31, 2021). All other notes payable are non-recourse. The guarantee on the Kentlands Square II mortgage loan was released on February 5, 2020. The guarantee on the Park Van Ness mortgage was released on October 1, 2021. On February 10, 2020, the Company repaid in full the remain- ing principal balance of $9.2 million of the mortgage loan secured by Boca Valley Plaza, which was scheduled to mature on May 10, 2020. On March 3, 2020, the Company repaid in full the remain- ing principal balance of $7.1 million of the mortgage loan secured by Palm Springs Center, which was scheduled to ma- ture on June 1, 2020. On July 14, 2020, the Company closed on a 15-year, $22.1 million mortgage loan secured by Ashbrook Marketplace. The loan matures in 2035, bears interest at a fixed rate of 3.80%, requires monthly principal and interest payments of $114,226 based on a 25-year amortization schedule and requires a final payment of $11.5 million at maturity. The proceeds from the loan were used to pay down the revolving credit facility. On July 24, 2020, the Company closed on a 15-year, $30.0 million mortgage loan secured by Kentlands Place, Kentlands Square I and Kentlands Pad. The loan matures in 2035, bears interest at a fixed rate of 3.43%, requires monthly princi- pal and interest payments of $149,064 based on a 25-year amortization schedule and requires a final payment of $15.3 million at maturity. The proceeds from the loan were used to pay down the revolving credit facility. On January 5, 2021, the Company repaid in full the remain- ing principal balance of $6.1 million of the mortgage loan secured by Jamestown Place, which was scheduled to mature in February 2021. On June 11, 2021, the Company repaid in full the remaining principal balance of $5.0 million of the mortgage loan se- cured by Hunt Club Corners, which was scheduled to mature in August 2021. On November 19, 2021, the Company closed on a $145.0 million construction-to-permanent loan, the proceeds of which will be used to partially fund Phase I of the Twinbrook Quarter development project. The loan matures in 2041, bears interest at a fixed rate of 3.83%, requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the fourth quar- ter of 2026, and thereafter, monthly principal and interest payments based on a 25-year amortization schedule will be required. The carrying value of the properties collateralizing the mort- gage notes payable totaled $1.1 billion and $1.2 billion, as of December 31, 2021 and 2020, respectively. The Compa- ny’s credit facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. The Company was in compliance as of December 31, 2021. • • • 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 ex- pense coverage); and limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage). Mortgage notes payable totaling $41.0 million at each of December 31, 2021 and 2020, are guaranteed by members of the Saul Organization. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 41 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021, the scheduled maturities of all debt including scheduled principal amortization for years ended December 31 are as follows: (In thousands) 2022 2023 2024 2025 2026 Thereafter Principal amount Unamortized deferred debt costs Net (a) Includes $106.0 million outstanding under the revolving facility. Balloon Payments Scheduled Principal Amortization Total $ 36,502 $ 31,033 $ 67,535 9,225 66,164 126,363 (a) 134,088 545,276 31,498 30,792 27,874 24,347 91,866 40,723 96,956 154,237 158,435 637,142 $ 917,618 $ 237,410 1,155,028 11,172 $ 1,143,856 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 inter- est method. Deferred debt costs totaled $11.2 million and $9.3 million, net of accumulated amortization of $7.7 million and $8.7 million at December 31, 2021 and 2020, respec- tively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets. The components of interest expense are set forth below. (In thousands) Interest incurred Amortization of deferred debt costs Capitalized interest Interest expense Less: Interest income Interest expense, net and amortization of deferred debt costs Year ended December 31, 2021 2020 2019 $ 50,552 $ 51,705 $ 52,044 1,710 (6,831) 45,431 7 1,570 (6,616) 46,659 140 1,518 (11,480) 42,082 248 $ 45,424 $ 46,519 $ 41,834 Deferred debt costs capitalized during the years ending December 31, 2021, 2020 and 2019 totaled $6.4 million, $1.2 million and $1.0 million, respectively. 42 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 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, 2021, 2020, and 2019, amounted to $197.9 million, $188.6 million, and $185.7 million, respectively. Future contractual payments under noncancelable leases for years ended December 31 (which exclude the effect of straight-line rents), are as follows: (In thousands) 2022 2023 2024 2025 2026 Thereafter $ 163,383 147,981 124,039 101,482 77,584 336,423 $ 950,892 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 operat- ing expenses. The expense recoveries generally are payable in equal installments throughout the year based on estimates, with adjustments made in the succeeding year. Expense re- coveries for the years ended December 31, 2021, 2020, and 2019, amounted to $34.5 million, $34.7 million, and $36.5 million, respectively. In addition, certain retail leases provide for percentage rent based on sales in excess of the minimum specified in the tenant’s lease. Percentage rent amounted to $1.5 million, $0.9 million, and $0.9 million, for the years ended December 31, 2021, 2020, and 2019, respectively. 7. LONG-TERM LEASE OBLIGATIONS At December 31, 2021 and 2020, no properties were situ- ated upon land subject to noncancelable long- term leases. 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 lease- hold interest which commenced in September 1991 with a minimum rent of one dollar per year. Countryside shopping center was acquired in February 2004. Because of certain land use considerations, approximately 3.4% of the under- lying land is held under a 99-year ground lease. The lease requires the Company to pay minimum rent of one dollar per year as well as its pro-rata share of the real estate taxes. The Company’s corporate headquarters space is leased by a member of the Saul Organization. The lease commenced in March 2002 and expires in February 2022. Negotiations are ongoing for a renewal of the Company’s office space at the same location. The Company and the Saul Organi- zation entered into a Shared Services Agreement whereby each party pays an allocation of total rental payments based on a percentage proportionate to the number of employees employed by each party. The Company’s rent expense for the years ended December 31, 2021, 2020, and 2019 was $799,500, $799,300, and $806,500, respectively. Expenses arising from the lease are included in general and administra- tive expense (see Note 9 – Related Party Transactions). 8. EQUITY AND NONCONTROLLING INTEREST The Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 reflect non- controlling interest of $13.3 million, $9.9 million, and $12.5 million, respectively, representing income attributable to lim- ited partnership units not held by Saul Centers. At December 31, 2021, 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 re- demption 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 re- demption 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 cer- tain other events. At December 31, 2021, the Company had outstanding 4.4 million depositary shares, each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock (the “Series E Stock”). The depositary shares may be redeemed at the Company’s option, 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 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 43 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the de- positary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. Per Share Data Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convert- ible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the convertible limited partnership units are an- ti-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 Average share price Non-dilutive options Years non-dilutive options were issued 9. RELATED PARTY TRANSACTIONS The Chairman and Chief Executive Officer, the President and Chief Operating Officer, the Executive Vice President-Chief Legal and Administrative Officer and the Senior Vice Presi- dent-Chief Accounting Officer and Treasurer of the Company are also officers of various members of the Saul Organization and their management time is shared with the Saul Organiza- tion. 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 and Trea- surer whose share of annual compensation allocated to the Company is determined by the shared services agreement (de- scribed below). The Company participates in a multiemployer 401K plan with 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 ex- penses in the consolidated statements of operations, at the discretionary amount of up to 6% of the employee’s cash compensation, subject to certain limits, were $404,300, $302,000, and $322,200, for 2021, 2020, and 2019, respec- tively. 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. According to the plan, which can be modified or discontinued at any December 31, 2021 2020 2019 23,655 7 23,662 43.53 1,360 $ 23,356 1 23,357 33.84 1,439 $ 22,009 44 23,053 53.41 633 $ 2013 through 2021 2014 through 2020 2016, 2017 and 2019 time, participating employees defer 2% of their compensation in excess of a specified amount and the Company matches those deferrals up to three times the amount deferred by employees. The Company’s expense, included in general and administrative expense, totaled $238,400, $241,300, and $345,200, for the years ended December 31, 2021, 2020, and 2019, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $3.2 million and $2.9 million, at December 31, 2021 and 2020, 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 pro- vided for in the Agreement and is based upon head count, estimates of usage or estimates of time incurred, as appli- cable. 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, 2021, 2020, and 2019, which included rental expense for the Company’s headquarters lease (see Note 7. Long Term Lease Obligations), totaled $8.0 million, $7.4 million, and 44 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS $8.4 million, respectively. The amounts are expensed when incurred and are primarily reported as general and administra- tive expenses or capitalized to specific development projects in these consolidated financial statements. As of December 31, 2021 and 2020, accounts payable, accrued expenses and other liabilities included $1.1 million and $782,700, respec- tively, representing billings due to the Saul Organization for the Company’s share of these ancillary costs and expenses. On March 5, 2021, the Company acquired from 1592 Rock- ville Pike, 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, Maryland. See Notes 3 and 4. In August 2016, the Company entered into an agreement (the “Ashbrook Contribution 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 constructed a shopping center, Ashbrook Marketplace. On June 30, 2021, the Com- pany issued 93,674 additional limited partnership units as additional consideration to the Saul Trust in accordance with the Ashbrook Contribution Agreement, as amended. The B. F. Saul Insurance Agency of Maryland, Inc., a subsid- iary 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 $397,900, $427,700, and $399,600, for the years ended December 31, 2021, 2020, and 2019, respectively. 10. STOCK OPTION PLAN Stock Based Employee Compensation, Deferred Compensation 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 account 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 Company’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s market yield at the grant date; and (4) a Risk-free Interest Rate based upon the market yields of US Treasury obligations with maturities cor- responding to the average expected term of the options at the grant date. The Company amortizes the value of op- tions granted ratably over the vesting period and includes the amounts as compensation expense in general and adminis- trative 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 closing 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, 2021, 9,486 shares were credited to director’s deferred fee accounts and 7,874 shares were is- sued. As of December 31, 2021, the director’s deferred fee accounts comprise 120,240 shares. The Compensation Committee has also approved an annual award of shares of the Company’s common stock as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are awarded as of each Annual Meeting of Stockholders, and their issuance may not be deferred. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 45 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan for the purpose of attracting and retaining 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 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 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’ 2019 Options were immediately exercisable. The exercise price of $55.71 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2019 Options to be $1.9 million, of which $1.7 million and $226,600 were assigned to the of- ficer options and director options, respectively. Because the directors’ options vested immediately, the entire $226,600 was expensed as of the date of grant. The expense for the of- ficers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective April 24, 2020, the Compensation Committee granted options to purchase 238,000 shares (29,624 incen- tive stock options and 208,376 nonqualified stock options) to 20 Company officers and 11 Company Directors (the “2020 Options”), which expire on April 23, 2030. The officers’ 2020 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ 2020 Options were immediately exercisable. The exercise price of $50.00 per share was determined by the compensation committee. The exercise price was greater than the closing market price of the Company’s common stock on the date of award, which was $28.02. Using the Black-Scholes model, the Company determined the total fair value of the 2020 Options to be $0.2 million, of which $0.2 million and $23,100 were assigned to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $23,100 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest. Effective May 7, 2021, the Compensation Committee granted options to purchase 250,500 shares (35,572 incen- tive stock options and 214,928 nonqualified stock options) to 21 Company officers and 11 Company Directors (the “2021 Options”), which expire on May 6, 2031. The officers’ 2021 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ 2021 Options were immediately exercisable. The exercise price of $43.89 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2021 Options to be $1.4 million, of which $1.2 million and $173,800 were assigned to the of- ficer options and director options, respectively. Because the directors’ options vested immediately, the entire $173,800 was expensed as of the date of grant. The expense for the of- ficers’ 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 2019, 2020 and 2021 option grants. During the twelve months ended December 31, 2021, stock option expense totaling $1.3 million was included in general and administrative expense in the Consolidated Statements of Operations. As of December 31, 2021, the estimated future expense related to unvested stock options was $1.7 million. 46 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Directors Officers Grant date Exercise price Volatility Expected life (years) Assumed yield Risk-free rate May 3, 2019 April 24, 2020 May 7, 2021 May 3, 2019 April 24, 2020 May 7, 2021 $ 55.71 $ 50.00 $ 43.89 $ 55.71 $ 50.00 $ 43.89 0.236 5.0 0.258 5.0 3.75 % 2.33 % 3.80 % 0.36 % 0.297 5.0 4.96 % 0.77 % 0.206 7.0 3.80 % 2.43 % 0.240 7.0 0.275 7.0 3.85 % 0.51 % 4.97 % 1.24 % The table below summarizes the option activity for the years 2021, 2020, and 2019: 2021 2020 2019 Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Outstanding at January 1 1,502,670 $ 52.86 1,309,614 $ 53.38 1,114,169 $ 52.40 Granted Exercised Expired/Forfeited 250,500 (64,920) (87,000) Outstanding December 31 1,601,250 Exercisable at December 31 1,098,500 43.89 45.07 53.60 51.73 53.22 238,000 (10,749) (34,195) 1,502,670 971,545 50.00 49.19 54.09 52.86 53.01 260,000 (57,055) (7,500) 1,309,614 763,614 55.71 44.53 56.07 53.38 52.43 The intrinsic value of options exercised in 2021, 2020, and 2019, was $0.4 million, $0.1 million and $0.6 million, re- spectively. The intrinsic value of options outstanding and exercisable at year end 2021 was $4.9 million and $2.3 mil- lion, respectively. Because the closing price was less than the exercise price of all outstanding options, no option had any intrinsic value at December 31, 2020. The date of exer- cise was the measurement date for shares exercised during the period. The intrinsic value measures the difference be- tween the options’ exercise price and the closing share price quoted by the New York Stock Exchange as of the date of measurement. At December 31, 2021, the final trading day of calendar 2021, the closing price of $53.02 per share was used for the calculation of aggregate intrinsic value of op- tions outstanding and exercisable at that date. The weighted average remaining contractual life of the Company’s exercis- able and outstanding options at December 31, 2021 are 5.3 and 6.2 years, respectively. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and floating rate debt are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed- rate payment terms was determined using Level 3 data in a discounted cash flow approach, which is based upon manage- ment’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, and as- suming long term interest rates of approximately 3.60% and 3.40%, would be approximately $933.0 million and $981.0 million as of December 31, 2021 and 2020, respectively, compared to the principal balance of $949.0 million and $980.8 million at December 31, 2021 and 2020, respec- tively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt. Effective June 30, 2011, the Company determined that one of its interest-rate swap arrangements was a highly effective hedge of the cash flows under one of its variable-rate 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. 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. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 47 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 13. DISTRIBUTIONS In December 1995, the Company established a Dividend Re- investment and Stock Purchase Plan (the “Plan”), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distribu- tions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price with- out payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Operating Partnership also maintains a similar dividend reinvestment plan that mirrors the Plan, which allows holders of limited partnership interests the opportunity to buy either additional limited partnership units or common stock shares of the Company. The Company paid common stock distributions of $2.16 per share in 2021, $2.12 per share in 2020, and $2.12 per share in 2019, Series C preferred stock dividends of $1.80, per de- positary share in 2019, Series D preferred stock dividends of $1.53, $1.53 and $1.53, respectively, per depositary share in 2021, 2020, and 2019, and Series E preferred stock dividends of $1.50, $1.50, and $0.06, respectively, per depositary share in 2021, 2020, and 2019. Of the common stock dividends paid, $1.49 per share, $1.43 per share, and $2.00 per share, represented ordinary dividend income in 2021, 2020, and 2019, respectively, and $0.67 per share, $0.69 per share, and $0.12 per share represented return of capital to the shareholders in 2021, 2020, and 2019, respectively. All of the preferred dividends paid represented ordinary dividend income. The following summarizes distributions paid during the years ended December 31, 2021, 2020, and 2019, and includes activity in the Plan as well as limited partnership units issued from the reinvestment of unit distributions: Total Distributions to Dividend Reinvestments (Dollars in thousands, except per share amounts) Distributions during 2021 Preferred Stockholders Common Stockholders Limited Partnership Unitholders Common Stock Shares Issued Discounted Share Price Limited Partnership Units Issued Average Unit Price $ 2,798 $ 13,037 $ 4,702 63,970 $ 45.46 13,697 $ 45.95 2,798 2,798 2,799 12,999 12,488 12,439 4,694 4,218 4,207 65,171 68,206 96,268 44.44 41.87 29.50 Total 2020 $ 11,193 $ 50,963 $ 17,821 293,615 $ 2,798 $ 12,371 $ 4,195 117,368 $ 24.08 23,370 $ 24.35 2,798 2,799 2,799 12,373 12,364 12,275 4,188 4,188 4,180 14,525 12,627 83,978 28.98 32.22 48.59 Total 2020 $ 11,194 $ 49,383 $ 16,751 228,498 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Distributions during 2020 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Distributions during 2019 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter $ 3,531 $ 12,251 $ 4,173 104,558 $ 52.84 13,747 $ 53.73 2,953 2,953 2,953 12,195 12,116 12,006 4,166 105,753 4,155 99,804 4,148 120,347 53.66 51.38 51.28 13,841 13,978 19,493 61,009 44.92 42.33 29.83 13,108 — 15,101 51,579 29.47 — 49.40 13,406 20,041 13,742 60,936 54.56 51.99 52.16 Total 2019 $ 12,390 $ 48,568 $ 16,642 430,462 48 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS In December 2021, the Board of Directors of the Company authorized a distribution of $0.57 per common share payable in January 2022 to holders of record on January 14, 2022. As a result, $10.6 million was paid to common shareholders on January 31, 2022. Also, $5.3 million was paid to limited partnership unitholders on January 31, 2022 ($0.57 per Op- erating Partnership unit). The Board of Directors authorized preferred stock dividends of (a) $0.3750 per Series E depos- itary share and (b) $0.3828 per Series D depositary share to holders of record on January 3, 2022. As a result, $2.8 mil- lion was paid to preferred shareholders on January 18, 2022. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock and preferred stock div- idends and noncontrolling interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements. 14. 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 2021 presentation. (In thousands) As of or for the year ended December 31, 2021 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 Net income (loss) Capital investment Total assets Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals $ 169,681 $ 69,544 $ (35,784) 133,897 (25,844) 43,700 — — — $ 239,225 (61,628) 177,597 — — — — (28,843) 105,054 12,639 946,993 $ $ $ (21,429) 22,271 43,233 777,709 $ $ $ $ $ $ (45,424) (20,252) — (65,676) — (45,424) (20,252) (50,272) 61,649 55,872 $ $ 22,059 $ 1,746,761 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 49 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) As of or for the year ended December 31, 2020 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 Gain on sale of property Net income (loss) Capital investment Total assets 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 Shopping Centers Mixed-Use Properties Corporate and Other Consolidated Totals $ 161,854 $ 63,353 $ (35,198) 126,656 — — (23,219) 40,134 — — (30,891) (20,235) 278 96,043 15,203 975,195 $ $ $ — 19,899 40,965 643,503 $ $ $ $ $ $ — — — (46,519) (19,107) — — $ 225,207 (58,417) 166,790 (46,519) (19,107) (51,126) 278 50,316 56,168 (65,626) — $ $ 26,874 $ 1,645,572 $ 167,888 $ 63,637 $ (36,119) 131,769 — — (21,814) 41,823 — — (29,112) (17,221) — 102,657 33,968 980,096 $ $ $ — 24,602 101,695 625,183 $ $ $ $ $ $ — — — (41,834) (20,793) — (436) (63,063) — $ 231,525 (57,933) 173,592 (41,834) (20,793) (46,333) (436) $ $ 64,196 135,663 13,061 $ 1,618,340 50 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 15. IMPACT OF COVID-19 On March 11, 2020, the World Health Organization declared a novel strain of coronavirus (“COVID-19”) a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. As a result, the COVID- 19 pandemic is negatively affecting almost every industry directly or indirectly. The actions taken by federal, state and local governments to mitigate the spread of COVID-19 by ordering closure of non- essential businesses and ordering residents to generally stay at home, and subsequent phased re-openings, have resulted in many of our tenants announcing mandated or temporary closures of their operations and/or requesting adjustments to their lease terms. While most of our tenants have re-opened their businesses, there remains significant uncertainty around the long-term economic impact of the COVID-19 pandemic, which could have a material and adverse effect on or cause disruption to our business or financial condition, results from operations, cash flows and the market value and trading price of our securities. While the Company’s grocery stores, pharmacies, banks and home improvement stores generally remain open, restaurants, if open, are operating at limited capacity, with many offering only delivery and curbside pick-up, and most health, beauty supply and services, fitness centers, and other non-essential businesses are in various phases of re-opening depending on location. The Company is generally not charging late fees or delinquent interest on past due rent payments and, in many cases, rent deferral agreements are being negotiated to allow tenants temporary relief where needed. As of February 18, 2022, payments by tenants of contractual base rent and operating expense and real estate tax recoveries totaled ap- proximately 99% for the fourth quarter of 2021. The following table summarizes the Company’s consolidated total collections of the first quarter, second quarter, third quarter and fourth quarter rent billings as of January 31, 2022: 2021 First Quarter 2021 Second Quarter 2021 Third Quarter 2021 Fourth Quarter Retail 99% 99% 99% 98% Office 100% 100% 100% 100% Residential 99% 99% 99% 99% Total 99% 99% 99% 99% 16. SUBSEQUENT EVENTS The Company has reviewed operating activities for the period subsequent to December 31, 2021 and prior to the date that financial statements are issued, February 24, 2022, and determined there are no subsequent events that are required to be disclosed. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 51 NOTESTO 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 shareholders with a convenient and cost-free way to increase their invest- ment in Saul Centers. Shares purchased under the dividend reinvestment plan are issued at a 3% discount from the av- erage price of the stock on the dividend payment date. The Plan’s prospectus is available for review in the Shareholders Information section of the Company’s web site. To receive more information please call the plan administrator at (800) 509-5586 and request to speak with a service representative or write: Continental Stock Transfer and Trust Company Attention: Saul Centers, Inc. Dividend Reinvestment Plan 1 State Street 30th Floor New York, NY 10004-1561 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 Company distributed more than the required amount in 2021 and 2020. See Notes to Consolidated Financial Statements, No. 13, “Distributions.” The Company may or may not elect to distribute in excess of 90% of REIT taxable income in future years. The Company’s estimate of cash flow available for distribu- tions is believed to be based on reasonable assumptions and represents a reasonable basis for setting distributions. How- ever, the actual results of operations of the Company will be affected by a variety of factors, including but not limited to actual rental revenue, operating expenses of the Company, interest expense, general economic conditions, federal, state and local taxes (if any), unanticipated capital expenditures, the adequacy of reserves and preferred dividends. While the Company intends to continue paying regular quarterly distri- butions, any future payments will be determined solely by the Board of Directors and will depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution amounts required to maintain its status as a REIT under the Code, and such other factors as the Board of Directors deems relevant. We are obligated to pay regular quarterly distributions to holders of preferred depositary shares, prior to distributions on the common stock. 52 SAUL CENTERS, INC. ANNUAL REPORT 2021 | 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 2021 and 2020 as follows: COMMON STOCK PRICES Period Share Price October 1, 2021 – December 31, 2021 July 1, 2021 – September 30, 2021 April 1, 2021 – June 30, 2021 January 1, 2021 – March 31, 2021 October 1, 2020 – December 31, 2020 July 1, 2020 – September 30, 2020 April 1, 2020 – June 30, 2020 January 1, 2020 – March 31, 2020 High $ 42.59 $ 47.53 $ 46.95 $ 53.85 $ 34.60 $ 32.85 $ 40.42 $ 56.95 Low $ 29.93 $ 39.89 $ 42.50 $ 45.38 $ 24.09 $ 24.03 $ 25.96 $ 25.61 On March 30, 2022, the closing price was $53.06 per share. The approximate number of holders of record of the common stock was 120 as of March 30, 2022. 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. SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 53 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, 2016. COMPARISON OF CUMULATIVE TOTAL RETURN d e t s e v n I 0 0 1 $ r e p n r u t e R l a t o T $250 $225 $200 $175 $150 $125 $100 $75 $50 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2021 Period Ended INDEX Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2021 Saul Centers1 $100.00 $95.78 $76.16 $89.40 $57.15 $100.16 S&P 5002 $100.00 $121.83 $116.49 $152.71 $181.35 $233.41 Russell 20003 $100.00 $114.65 $102.02 $128.06 $153.62 $176.39 FTSE NAREIT Equity4 $100.00 $105.23 $100.36 $126.45 $116.34 $166.64 1 Source: S&P Capital I.Q. 2 Source: Bloomberg. 3 Source: FTSE Russell. 4 Source: FTSE National Association of Real Estate Investment Trusts. 54 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM SAUL CENTERS CORPORATE DATA DIRECTORS EXECUTIVE OFFICERS B. Francis Saul II Chairman and Chief Executive Officer B. Francis Saul II Chairman and Chief Executive Officer Philip D. Caraci Vice Chairman The Honorable John E. Chapoton Partner, Brown Investment Advisory George P. Clancy, Jr. Executive Vice President, Retired Chevy Chase Bank J. Page Lansdale President and Chief Operating Officer, Retired Willoughby B. Laycock Senior Vice President, Residential Design and Market Research H. Gregory Platts Senior Vice President and Treasurer, Retired National Geographic Society Earl A. Powell III Director, Retired 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 D. Todd Pearson President and Chief Operating Officer Christine N. Kearns Executive Vice President, Chief Legal and Administrative Officer Christopher H. Netter Executive Vice President, Retail Leasing Carlos L. Heard Senior Vice President, Chief Financial Officer Joel A. Friedman Senior Vice President, Chief Accounting Officer and Treasurer Bettina T. Guevara Senior Vice President, General Counsel and Secretary John F. Collich Senior Vice President, Chief Acquisitions and Development Officer Judi Garland Senior Vice President, Office Lori Godby Senior Vice President, Residential Donald A. Hachey Senior Vice President, Construction Amitha Prabhu Senior Vice President, Chief Audit Executive COUNSEL Pillsbury Winthrop Shaw Pittman LLP Washington, DC 20036 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP McLean, Virginia 22102 WEB SITE www.saulcenters.com EXCHANGE LISTING New York Stock Exchange (NYSE) Symbol: Common Stock: BFS Preferred Stock: BFS.PrD Preferred Stock: BFS.PrE TRANSFER AGENT Continental Stock Transfer and Trust Company 1 State Street 30th Floor New York, NY 10004-1561 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 2021, the Company filed with the NYSE the Certification of its Chief Executive Officer confirming that he was not aware of any violation by the Company of the NYSE’s corporate governance listing standards. HEADQUARTERS 7501 Wisconsin Ave. Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 SAUL CENTERS, INC. ANNUAL REPORT 2021 | WWW.SAULCENTERS.COM 55 ANNUAL MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders will be held at 11:00 a.m., local time, on May 13, 2022, at the Hyatt Regency Bethesda, One Bethesda Metro Center, Bethesda, Maryland (at the Southwest Corner of the intersection of Wisconsin Avenue and Old Georgetown Road, adjacent to the Bethesda Station on the Metro Red Line). 7501 Wisconsin Avenue, Suite 1500E Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com