UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the fiscal year ended December 31, 2002
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File number 1-12254
SAUL CENTERS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1833074
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7501 Wisconsin Avenue, Suite 1500, Bethesda, Maryland 20814-6522
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, Par Value $0.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-
The number of shares of Common Stock, $0.01 par value, outstanding as of
September 24, 2003 was 15,726,645.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No ___
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The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing price of the registrant's
Common Stock on the New York Stock Exchange on September 24, 2003 was
$424,777,000.
TABLE OF CONTENTS
PART I Page Numbers
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Item 1. Business 3
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 20
PART III
Item 14. Controls and Procedures 21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation F-21
2
EXPLANATORY NOTE: This Form 10-K/A is being filed for the purpose of amending
and restating Items 1, 7, 8 and 14 and to update Item 15 of our Form 10-K for
the year ended December 31, 2002 (the "2002 Form 10-K") to incorporate our
responses to comments received from the Division of Corporation Finance of the
Securities and Exchange Commission (the "Staff") in connection with the Staff's
review of our Registration Statement on Form S-3 (File No. 333-107083) and
certain documents incorporated by reference therein, including the 2002 Form
10-K. Unless otherwise indicated, all information in this Form 10-K/A is as of
December 31, 2002 and does not reflect any subsequent information or events
other than the restatement.
PART I
Item 1. Business
General
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"). Saul Centers generally will not be subject to federal income tax,
provided it annually distributes at least 90% of its REIT taxable income to its
stockholders and meets 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 Centers or one of its subsidiaries is
the sole general partner, are referred to collectively as the "Company".
B. Francis Saul II serves as Chairman of the Board of Directors and Chief
Executive Officer of Saul Centers.
The Company's principal business activity is the ownership, management
and development of income-producing properties. The Company's long-term
objectives are to increase cash flow from operations and to maximize capital
appreciation of its real estate.
Saul Centers was formed to continue and expand the shopping center
business previously owned and conducted by the B.F. Saul Real Estate Investment
Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. 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 Partnership, the
"Partnerships"), shopping center and office properties, and the management
functions related to the transferred properties. Since its formation, the
Company has purchased and developed additional properties. The Company is
currently developing Broadlands Village, a grocery anchored shopping center in
Loudoun County. The Company recently completed development of Ashburn Village
III and IV, in-line retail and retail pad expansions to the Ashburn Village
shopping center; Washington Square at Old Town, a Class A mixed-use
office/retail complex in Alexandria, Virginia; and Crosstown Business Center, an
office/warehouse redevelopment located in Tulsa, Oklahoma. In June 2002, the
Company purchased 3030 Clarendon Center for future redevelopment. In September
2002, the Company purchased 109,642 square feet of retail space known as
Kentlands Square. In November 2002, the Company purchased a 19 acre parcel of
land in the Lansdowne community in Loudoun County, Virginia. The Company plans
to develop the Lansdowne parcel into a grocery anchored neighborhood and
community shopping center. As of December 31, 2002, the Company's properties
(the "Current Portfolio Properties") consisted of 29 operating shopping center
properties (the "Shopping Centers"), five predominantly office operating
properties (the "Office Properties") and three development and/or redevelopment
properties.
To facilitate the placement of collateralized mortgage debt, the
Company established Saul QRS, Inc. a wholly owned subsidiary of Saul Centers.
Saul QRS, Inc. was created to succeed to the interest of Saul Centers as the
sole general partner of Saul Subsidiary I Limited Partnership. The remaining
limited partnership interests in Saul Subsidiary I Limited Partnership and Saul
Subsidiary II Limited Partnership are held by the Operating Partnership as the
sole limited partner. Through this structure, the Company owns 100% of the
Current Portfolio Properties.
3
The following diagram depicts the Company's organizational structure
as of December 31, 2002.
[Organizational chart describing ownership of the Saul Centers and its
subsidiaries as of December 31, 2002. As of such date, Saul Centers was owned
72.6% by public stockholders and 27.4% by members of The Saul Organization. Saul
Centers also owned a 74.6% general partner interest in the Operating
Partnership, with the remaining 25.4% limited partner interest held by members
of The Saul Organization. Saul Centers also owned 100% of Saul QRS, Inc., which
was the 1% general partner of Saul Subsidiary I Limited Partnership. The
Operating Partnership owned a 99% limited partner interest in each of Saul
Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership. The
remaining 1% of general partnership interest in Saul Subsidiary II Limited
Partnership was owned by Saul Centers.]
Management of the Current Portfolio Properties
The Partnerships manage the Current Portfolio Properties and will
manage any subsequently acquired properties. The management of the properties
includes performing property management, leasing, design, renovation,
development and accounting duties for each property. The Partnerships provide
each property with a fully integrated property management capability, with
approximately 50 employees and with an extensive and mature network of
relationships with tenants and potential tenants as well as with members of the
brokerage and property owners' communities. The Company currently does not, and
does not intend to, retain third party managers or provide management services
to third parties.
The Company augments its property management capabilities by sharing
with The Saul Organization certain ancillary functions, at cost, such as
computer and payroll services, benefits administration and in-house legal
services. The Company also shares insurance administration expenses on a pro
rata basis with The Saul Organization. Management believes that these
arrangements result in lower costs than could be obtained by contracting with
third parties. These arrangements permit the Company to capture greater
economies of scale in purchasing from third party vendors than would otherwise
be available to the Company alone and to capture internal economies of scale by
avoiding payments representing profits with respect to functions provided
internally. The terms of all sharing arrangements with The Saul Organization,
including payments related thereto, are reviewed periodically by the Audit
Committee of the Company's Board of Directors.
The Company's corporate headquarters lease commenced in March 2002 and
is a sublease of office space from The Saul Organization at its cost. A
discussion of the lease terms are provided in Note 6, Long Term Lease
Obligations, of the Notes to Consolidated Financial Statements.
Principal Offices
The principal offices of the Company are located at 7501 Wisconsin
Avenue, Suite 1500, Bethesda, Maryland 20814-6522, and the Company's telephone
number is (301) 986-6200. The Company's internet web address is
www.saulcenters.com.
4
Policies with Respect to Certain Activities
The following is a discussion of the Company's operating strategy and
certain of its investment, financing and other policies. These strategies and
policies have been determined by the Board of Directors and, in general, may be
amended or revised from time to time by the Board of Directors without a vote of
the Company's stockholders.
Operating Strategy
The Company's primary operating strategy is to focus on its community
and neighborhood shopping center business and to operate its properties to
achieve both cash flow growth and capital appreciation. Community and
neighborhood shopping centers typically provide reliable cash flow and steady
long-term growth potential. Management intends to actively manage its property
portfolio by engaging in strategic leasing activities, tenant selection, lease
negotiation and shopping center expansion and reconfiguration. The Company seeks
to optimize tenant mix by selecting tenants for its shopping centers that
provide a broad spectrum of goods and services, consistent with the role of
community and neighborhood shopping centers as the source for day-to-day
necessities. Management believes that such a synergistic tenanting approach
results in increased cash flow from existing tenants by providing the Shopping
Centers with consistent traffic and a desirable mix of shoppers, resulting in
increased sales and, therefore, increased cash flows.
Management believes there is significant potential for growth in cash
flow as existing leases for space in the Shopping Centers expire and are
renewed, or newly available or vacant space is leased. The Company intends to
renegotiate leases aggressively and seek new tenants for available space in
order to maximize this potential for increased cash flow. As leases expire,
management expects to revise rental rates, lease terms and conditions, relocate
existing tenants, reconfigure tenant spaces and introduce new tenants to
increase cash flow. In those circumstances in which leases are not otherwise
expiring, management intends to attempt to increase cash flow through a variety
of means, including renegotiating rents in exchange for additional renewal
options or in connection with renovations or relocations, recapturing leases
with below market rents and re-leasing at market rates, as well as replacing
financially troubled tenants. When possible, management also will seek to
include scheduled increases in base rent, as well as percentage rental
provisions in its leases.
The Shopping Centers contain numerous undeveloped parcels within the
centers which are suitable for development as free-standing retail facilities,
such as restaurants, banks or auto centers. Management will continue to seek
desirable tenants for facilities to be developed on these sites and to develop
and lease these sites in a manner that complements the Shopping Centers in which
they are located.
The Company will also seek growth opportunities in its Washington, DC
metropolitan area office portfolio, primarily through development and
redevelopment. Management also intends to negotiate lease renewals or to release
available space in the Office Properties, while considering the strategic
balance of optimizing short-term cash flow and long-term asset value.
It is management's intention to hold properties for long-term
investment and to place strong emphasis on regular maintenance, periodic
renovation and capital improvement. Management believes that such
characteristics as cleanliness, lighting and security are particularly important
in community and neighborhood shopping centers, which are frequently visited by
shoppers during hours outside of the normal work-day. Management believes that
the Shopping Centers and Office Properties generally are attractive and well
maintained. The Shopping Centers and Office Properties will undergo expansion,
renovation, reconfiguration and modernization from time to time when management
believes that such action is warranted by opportunities or changes in the
competitive environment of a property. Several of the Shopping Centers have been
renovated recently. During 2002 and 2001, the Company was involved in
predevelopment and/or development of nine of its properties. The Company will
continue its practice of expanding existing properties by undertaking new
construction on outparcels suitable for development as free standing retail or
office facilities.
5
Investment in Real Estate or Interests in Real Estate
The Company's investment objective is to selectively and
opportunistically redevelop and renovate its properties, by replacing leases
with below market rents with strong, traffic-generating anchor stores such as
supermarkets and drug stores, as well as other desirable local, regional and
national tenants. The Company's strategy remains focused on continuing the
operating performance and internal growth of its existing Shopping Centers,
while enhancing this growth with selective retail redevelopments and
renovations.
Management believes that attractive opportunities for investment in
existing and new shopping center properties will continue to be available.
Management believes that the Company will be well situated to take advantage of
these opportunities because of its access to capital markets, ability to acquire
properties either for cash or securities (including Operating Partnership
interests in tax advantaged transactions) and because of management's experience
in seeking out, identifying and evaluating potential acquisitions. In addition,
management believes its shopping center expertise should permit it to optimize
the performance of shopping centers once they have been acquired.
Management also believes that opportunities exist for investment in new
office properties. It is management's view that several of the office
sub-markets in which the Company operates have very attractive supply/demand
characteristics. The Company will continue to evaluate new office development
and redevelopment as an integral part of its overall business plan.
In evaluating a particular redevelopment, renovation, acquisition, or
development, management will consider a variety of factors, including (i) the
location and accessibility of the property; (ii) the geographic area (with an
emphasis on the metropolitan Washington, DC/Baltimore area as well as the
Mid-Atlantic and Southeast regions of the United States) and demographic
characteristics of the community, as well as the local real estate market,
including potential for growth and potential regulatory impediments to
development; (iii) the size of the property; (iv) the purchase price; (v) the
non-financial terms of the proposed acquisition; (vi) the availability of funds
or other consideration for the proposed acquisition and the cost thereof; (vii)
the "fit" of the property with the Company's existing portfolio; (viii) the
potential for, and current extent of, any environmental problems; (ix) the
current and historical occupancy rates of the property or any comparable or
competing properties in the same market; (x) the quality of construction and
design and the current physical condition of the property; (xi) the financial
and other characteristics of existing tenants and the terms of existing leases;
and (xii) the potential for capital appreciation.
Although it is management's present intention to concentrate future
acquisition and development activities on community and neighborhood shopping
centers and office properties in the metropolitan Washington, DC/Baltimore area
and Mid-Atlantic and Southeast regions of the United States, the Company may
also selectively acquire shopping centers, office properties or other types of
real estate in other areas of the country.
While the Company may diversify in terms of property locations, size
and market, the Company does not set any limit on the amount or percentage of
Company assets that may be invested in any one property or any one geographic
area. The Company intends to engage in such future investment or development
activities in a manner that is consistent with the maintenance of our status as
a REIT for federal income tax purposes and that will not make the Company an
investment company under the Investment Company Act of 1940, as amended. Equity
investments in acquired properties may be subject to existing mortgage financing
and other indebtedness or to new indebtedness which may be incurred in
connection with acquiring or refinancing these investments.
Investments in Real Estate Mortgages
While the Company's current portfolio consists of, and its business
objectives emphasize, equity investments in commercial and neighborhood shopping
centers and office properties, the Company may, at the discretion of the Board
of Directors, invest in mortgages, participating or convertible mortgages, deeds
of trust and other types of real estate interests consistent with its
qualification as a REIT. However, the Company does not presently intend to
invest in real estate mortgages.
6
Investments in Securities of or Interests in Persons Primarily Engaged in Real
Estate Activities and Other Issuers.
Subject to the tests necessary for REIT qualification, the Company may
invest in securities of other REITs, other entities engaged in real estate
activities or securities of other issuers, including for the purpose of
exercising control over such entities.
Dispositions
The Company does not currently intend to dispose of any of its
properties, although the Company reserves the right to do so if, based upon
management's periodic review of the Company's portfolio, the Board of Directors
determines that such action would be in the best interest of the Company's
stockholders. Any decision to dispose of a property will be made by the Board of
Directors.
Capital Policies
As a general policy, the Company intends to maintain a ratio of its
total debt to total asset value of 50% or less and to actively manage the
Company's leverage and debt expense on an ongoing basis in order to maintain
prudent coverage of fixed charges. Asset value is the aggregate fair market
value of the Current Portfolio Properties and any subsequently acquired
properties as reasonably determined by management by reference to the
properties' aggregate cash flow. Given the Company's current debt level, it is
management's belief that the ratio of the Company's debt to total asset value as
of December 31, 2002 remains less than 50%.
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 factors as the Board of Directors then deems relevant.
The Board of Directors may modify the Company's debt capitalization policy based
on such a reevaluation and consequently, may increase or decrease the Company's
debt to total asset ratio above or below 50%. The Company selectively continues
to refinance or renegotiate the terms of its outstanding debt in order to
achieve longer maturities, and obtain generally more favorable loan terms,
whenever management determines the financing environment is favorable. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources --Borrowing Capacity."
The Company intends to finance future acquisitions and to make debt
repayments by utilizing the sources of capital then deemed to be most
advantageous. Such sources may include undistributed operating cash flow,
secured or unsecured bank and institutional borrowings, proceeds from the
Company's Dividend Reinvestment and Stock Purchase Plan, proceeds from the sale
of properties and private and public offerings of debt or equity securities.
Borrowings may be at the Operating Partnership or Subsidiary Partnerships' level
and securities offerings may include (subject to certain limitations) the
issuance of Operating Partnership interests convertible into common stock or
other equity securities.
Other Policies
The Company has authority to offer equity or debt securities in
exchange for property and to repurchase or otherwise acquire its common stock or
other securities in the open market or otherwise, and may engage in such
activities in the future. The Company expects, but is not obligated, to issue
common stock to holders of units of the Partnership upon exercise of their
redemption rights. The Company has not engaged in trading, underwriting or
agency distribution or sale of securities of other issuers other than the
Partnership and does not intend to do so. The Company has not made any loans to
third parties, although the Company may in the future make loans to third
parties.
Competition
As an owner of, or investor in, community and neighborhood shopping
centers and office properties, the Company is subject to competition from an
indeterminate number of companies in connection with the acquisition,
7
development, ownership and leasing of similar properties. These investors
include investors with access to significant capital, such as domestic and
foreign corporations and financial institutions, publicly traded and privately
held REITs, private institutional investment funds, investment banking firms,
life insurance companies and pension funds.
With respect to acquisitions and developments, this competition may
reduce properties available for acquisition or development or increase prices
for raw land or developed properties of the type in which the Company invests.
The Company faces competition in providing leases to prospective tenants and in
re-letting space to current tenants upon expiration of their respective leases.
If the Company's tenants decide not to renew or extend their leases upon
expiration, the Company may not be able to re-let the space. Even if the tenants
do renew or the Company can re-let the space, the terms of renewal or
re-letting, including the cost of required renovations, may be less favorable
than current lease terms or than expectations for the space. This risk may be
magnified if the properties owned by our competitors have lower occupancy rates
than the Company's properties. As a result, these competitors may be willing to
make space available at lower prices than the space in the Current Portfolio
Properties.
Management believes that success in the competition for ownership and
leasing of property is dependent in part upon the geographic location of the
property, the tenant mix, the performance of property managers, the amount of
new construction in the area and the maintenance and appearance of the property.
Additional competitive factors impacting the Company's properties include the
ease of access to the properties, the adequacy of related facilities such as
parking, and the demographic characteristics in the markets in which the
properties compete. Overall economic circumstances and trends and new properties
in the vicinity of each of the Current Portfolio Properties are also competitive
factors.
Finally, retailers at our Shopping Centers face increasing competition
from outlet stores, discount shopping clubs, and other forms of marketing of
goods, such as direct mail, internet marketing and telemarketing. This
competition may reduce percentage rents payable to us and may contribute to
lease defaults or insolvency of tenants.
Environmental Matters
The Current Portfolio Properties are subject to various laws and
regulations relating to environmental and pollution controls. The effect upon
the Company of the application of such laws and regulations either prospectively
or retrospectively is not expected to have a materially adverse effect on the
Company's property operations. As a matter of policy, the Company requires an
environmental study be performed with respect to a property that may be subject
to possible environmental hazards prior to its acquisition to ascertain that
there are no material environmental hazards associated with such property.
Employees
As of February 21, 2003, the Company employed approximately 50 persons,
including six full-time leasing officers. None of the Company's employees are
covered by collective bargaining agreements. Management believes that its
relationship with employees is good.
Recent Developments
Property Acquisitions, Developments and Redevelopments.
A significant contributor to the Company's sustained historical
internal growth in shopping centers has been its continuing program of
renovation, redevelopment and expansion activities. These development activities
reposition the Company's centers to be competitive in the current retailing
environment. The redevelopments typically include and update of the facade, site
improvements and reconfiguring tenant spaces to accommodate tenant size
requirements and merchandising evolution. During 2002, the Company acquired an
operating shopping center and three development parcels. The three development
parcels, all in Northern Virginia suburbs of Washington, DC total 44 acres of
land and have existing zoning to develop over 600,000 square feet of retail and
mixed-use commercial space.
8
In April 2002, the Company purchased 24 acres of undeveloped land in
the Broadlands section of the Dulles Technology Corridor. The site is located
adjacent to the Claiborne Parkway exit (Exit 5) of the Dulles Greenway, in
Loudoun County, Virginia. The Dulles Greenway is the "gateway to Loudoun
County," a 14-mile extension of the Dulles Toll Road, connecting Washington
Dulles International Airport with historic Leesburg, Virginia. Broadlands is a
1,500 acre planned community consisting of 3,500 residences, approximately half
of which are constructed and currently occupied. The land is zoned to
accommodate approximately 225,000 square feet of neighborhood and community
retail development. The Company has commenced the initial phase of construction
totaling 112,000 square feet of retail space. Additionally, the Company has
recently executed a grocery anchor lease with Safeway for a 59,000 square foot
supermarket, and the first phase is 65% pre-leased.
In June 2002, the Company purchased Clarendon Center, located in
Arlington, Virginia. Clarendon Center is a 1.25 acre site with an existing and
primarily vacant 70,000 square foot office building with surface parking for 104
cars. It is located directly across the street from the Company's Clarendon and
Clarendon Station properties. The Company is analyzing its options for a
proposed redevelopment of the site.
In September 2002, the Company acquired a 109,625 square foot
neighborhood retail center located within the Kentlands development in
Gaithersburg, Maryland. The property, constructed in 1993, is anchored by a
102,250 square foot Lowe's home improvement store and is part of Kentlands
Square, a shopping center exceeding 350,000 square feet of retail space. The
Kentlands Square property is fully leased and includes an additional 6,000
square feet of retail development potential. The property was acquired for $14.3
million, subject to the assumption of a $7.8 million mortgage. The Kentlands
Square shopping center is contained within the 352 acre Kentlands development,
home to approximately 5,000 residents living in 1,500 units. The Kentlands
community features a mix of upscale and colonial design townhouses, apartments,
cottages and larger single family residences set along pedestrian friendly tree
lined streets. Kentlands' neighborhoods include amenities such as green spaces,
lakes and recreational, community and civic buildings.
In November 2002, the Company purchased approximately 19 acres of
undeveloped land located within the Lansdowne community in Loudoun County,
Virginia. The land is zoned to accommodate approximately 150,000 square feet of
neighborhood and community retail development.
During 2002, the Company continued the development of Washington Square
at Old Town, a new Class A mixed-use office/retail complex along North
Washington Street in historic Old Town Alexandria in Northern Virginia. The
project totals 235,000 square feet of leasable area and is well located on a
two-acre site along Alexandria's main street. The project consists of two
identical buildings separated by a landscaped brick courtyard. Base building
construction was completed in 2001 while the lease-up and build-out of the
remaining office tenant areas occurred throughout 2002. As of February 21, 2003,
90% of the 235,000 square feet of tenant space was leased: the 46,000 square
feet of street level retail space was 100% leased and the 189,000 square feet of
office space was 85% leased.
During 2002, the Company completed construction of the final phase of
its Ashburn Village shopping center. In 1994, Saul Centers purchased the
original 12.7 acre parcel of vacant land located within the 1,580 acre community
of Ashburn Village in Loudoun County, Virginia. The Company subsequently
acquired an adjacent 6.6 acres in 1999 and 7.1 acres in 2000. The Company has
successfully developed the site into an attractive 211,000 square foot
neighborhood shopping center anchored by a 67,000 square foot Giant Food store.
The first phase of the development comprised of 108,000 square feet commenced
operations in the fall of 1994. Ashburn Village phase II was a 49,000 square
foot in-line and pad expansion which commenced operations during the third
quarter of 2000. During the summer of 2001, the Company completed the
development of Ashburn Village III, consisting of a an additional 29,000 square
feet of in-line and pad retail space. Ashburn Village phases I, II and III are
100% leased. The Company commenced construction on Ashburn Village IV, during
the fourth quarter of 2001. This final phase consisting of 25,000 square feet of
retail space was completed during the summer of 2002 and is 84% leased.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section should be read in conjunction with the selected financial
data in "Item 6. Selected Financial Data"as filed in the 2002 Annual Report of
the Company on Form 10-K and the Consolidated Financial Statements of the
Company and The Saul Organization and the accompanying notes in "Item 8.
Financial Statements and Supplementary Data." Historical results and percentage
relationships set forth in these Items and this section should not be taken as
indicative of future operations of the Company. Capitalized terms used but not
otherwise defined in this section, have the meanings given to them in Items 1 -
6 of this Form 10-K. This Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
are generally characterized by terms such as "believe", "expect" and "may".
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those given in the forward-looking
statements as a result of changes in factors which include among others, the
following: general economic and business conditions, which will, among other
things, affect demand for retail and office space; demand for retail goods;
availability and credit worthiness of the prospective tenants; lease rents and
the terms and availability of financing; adverse changes in the real estate
markets including, among other things, competition with other companies and
technology, risks of real estate development and acquisition, governmental
actions and initiatives, debt refinancing risk, conflicts of interests,
maintenance of REIT status and environmental/safety requirements.
General
The following discussion is based on the consolidated financial
statements of the Company as of December 31, 2002 and for the year ended
December 31, 2002. Prior year data is based on the Company's consolidated
financial statements as of December 31, 2001 and 2000 and for the years ended
December 31, 2001 and 2000.
Critical Accounting Policies
The Company's accounting policies are in conformity with accounting
principles generally accepted in the United States ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to use judgment
in the application of accounting policies, including making estimates and
assumptions. These judgments affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the Company's financial statements and the reported amounts of revenue and
expenses during the reporting periods. If judgment or interpretation of the
facts and circumstances relating to various transactions had been different, it
is possible that different accounting policies would have been applied resulting
in a different presentation of the financial statements. Below is a discussion
of accounting policies which the Company considers critical in that they may
require judgment in their application or require estimates about matters which
are inherently uncertain. Additional discussion of accounting policies which the
Company considers significant, including further discussion of the critical
accounting policies described below, can be found in the notes to the
Consolidated Financial Statements.
Valuation of Real Estate Investments
Real estate investment properties are stated at historic cost basis
less depreciation. Management believes that these assets have generally
appreciated in value 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 these financial statements. Because these financial statements
are prepared in conformity with GAAP, they do not report the current value of
the Company's real estate assets.
If there is an event or change in circumstance that indicates an
impairment in the value of a real estate investment property, the Company
assesses an impairment in value by making a comparison of the current and
projected operating cash flows of the property over its remaining useful life,
on an undiscounted basis, to the carrying amount of that property. If such
carrying amount is greater than the estimated projected cash flows, the
10
Company would recognize an impairment loss equivalent to an amount required to
adjust the carrying amount to its estimated fair market value.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially complete and the
assets are placed in service, rental income, direct operating expenses, and
depreciation associated with such properties are included in current operations.
In the initial rental operations of development projects, a project is
considered substantially complete and available for occupancy upon completion of
tenant improvements, but no later than one year from the cessation of major
construction activity. Substantially completed portions of a project are
accounted for as separate projects. Depreciation is calculated using the
straight-line method and estimated useful lives of 33 to 50 years for buildings
and up to 20 years for certain other improvements. Leasehold improvements are
amortized over the lives of the related leases using the straight-line method.
Lease Acquisition Costs
Certain initial direct costs incurred by the Company in negotiating and
consummating a successful lease are capitalized and amortized over the initial
base term of the lease. Capitalized leasing costs consists of commissions paid
to third party leasing agents as well as internal direct costs such as employee
compensation and payroll related fringe benefits directly related to time spent
performing leasing related activities. Such activities include evaluating the
prospective tenant's financial condition, evaluating and recording guarantees,
collateral and other security arrangements, negotiating lease terms, preparing
lease documents and closing the transaction.
Revenue Recognition
Rental and interest income is accrued as earned except when doubt
exists as to collectibility, in which case the accrual is discontinued. When
rental payments due under leases vary from a straight-line basis because of free
rent periods or scheduled rent increases, income is recognized on a
straight-line basis throughout the initial term of the lease. Expense recoveries
represent a portion of property operating expenses billed to the tenants,
including common area maintenance, real estate taxes and other recoverable
costs. Expense recoveries are recognized in the period when the expenses are
incurred. Rental income based on a tenant's revenues, known as percentage rent,
is accrued when a tenant reports sales that exceed a specified breakpoint.
Legal Contingencies
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, the Company believes the final outcome of such matters will not have
a material adverse effect on the financial position or the results of
operations. Once it has been determined that a loss is probable to occur, the
estimated amount of the loss is recorded in the financial statements. Both the
amount of the loss and the point at which its occurrence is considered probable
can be difficult to determine.
Liquidity and Capital Resources
Cash and cash equivalents were $1,309,000 and $1,805,000 at December
31, 2002 and 2001, respectively. The Company's principal demands for liquidity
are expected to be distributions to its stockholders and unit holders, debt
service and loan repayments, 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% (95% for the tax years prior to
January 1, 2001) of its "real estate investment trust taxable income," as
defined in the Code. The Company anticipates that operating revenues will
provide the funds necessary for operations, debt service, distributions, and
required recurring capital expenditures. Balloon principal repayments are
expected to be funded by refinancings. The Company's cash flow is affected by
its operating, investing and financing activities, as described below.
11
Operating Activities
Cash provided by operating activities for the years ended December 31,
2002 and 2001 was $37,499,000 and $31,834,000, respectively, and represents, in
each year, cash received primarily from rental income, plus other income, less
property operating expenses, normal recurring general and administrative
expenses and interest payments on debt outstanding.
Investing Activities
Cash used in investing activities for the years ended December 31, 2002
and 2001 was $49,105,000 and $21,800,000, respectively, and primarily reflects
the acquisition of properties (Broadlands Village and Lansdowne land parcels,
Clarendon Center and Kentlands Square), tenant improvement activity and
constructions in progress during those years.
Management anticipates that during the coming year the Company may: i)
redevelop certain of the Current Portfolio Properties, ii) develop additional
freestanding outparcels or expansions within certain of the Shopping Centers,
iii) acquire existing neighborhood and community shopping centers and/or office
properties, and iv) develop new shopping center or office sites. Acquisition and
development of properties are undertaken only after careful analysis and review,
and management's determination that such properties are expected to provide
long-term earnings and cash flow growth. During the coming year, any
developments, expansions or acquisitions are expected to be funded with bank
borrowings from the Company's credit line, construction financing, proceeds from
the operation of the Company's dividend reinvestment plan or other external
capital resources available to the Company.
Financing Activities
Cash provided by financing activities for the year ended December 31,
2002 was $11,110,000 and cash used in financing activities for the year ended
December 31, 2001 was $10,001,000. Cash provided by financing activities for the
year ended December 31, 2002 primarily reflects:
. $53,547,000 of proceeds received from notes payable incurred during the
year; and
. $14,574,000 of proceeds received from the issuance of common stock
under the dividend reinvestment program and from the exercise of stock
options, and from the issuance of convertible limited partnership
interests in the Operating Partnership;
which was partially offset by:
. the repayment of borrowings on our notes payable totaling $24,624,000;
. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the year
totaling $31,100,000; and
. payments of $1,287,000 for refinancing the Company's line of credit and
extending the Washington Square construction loan.
Cash used in financing activities for the year ended December 31, 2001 primarily
reflects:
. $51,218,000 of proceeds received from notes payable incurred during the
year; and
. $11,976,000 of proceeds received from the issuance of common stock
issued under the dividend reinvestment program;
12
which was partially offset by:
. the repayment of borrowings on our notes payable totaling $42,851,000;
and
. distributions made to common stockholders and holders of convertible
limited partnership units in the Operating Partnership during the year
totaling $30,327,000.
The Company expects to fulfill its long range requirements for capital
resources in a variety of ways, including undistributed cash flow from
operations, secured or unsecured bank and institutional borrowings, private or
public offerings of debt or equity securities and proceeds from the sales of
properties. Borrowings may be at the Saul Centers, Operating Partnership or
Subsidiary Partnership level, and securities offerings may include (subject to
certain limitations) the issuance of additional limited partnership interests in
the Operating Partnership which can be converted into shares of Saul Centers
common stock.
As of December 31, 2002, the scheduled maturities of all debt for years
ended December 31, are as follows:
Debt Maturity Schedule
----------------------
(In thousands)
2003* ......................... $ 46,940
2004 .......................... 23,988
2005 .......................... 54,720
2006 .......................... 8,635
2007 .......................... 9,357
Thereafter .................... 237,103
-------------
Total ......................... $ 380,743
=============
* A total of $39,374 of the 2003 maturities was refinanced in January
2003.
Management believes that the Company's capital resources, including
approximately $30,250,000 for general corporate use and $45,000,000 for
qualified future acquisitions provided by the Company's revolving line of
credit, which was available for borrowing as of December 31, 2002, will be
sufficient to meet its liquidity needs for the foreseeable future.
Dividend Reinvestments
In December 1995, the Company established a Dividend Reinvestment 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 distributions. The
Plan provides for investing in newly issued shares of common stock at a 3%
discount from market price without payment of any brokerage commissions, service
charges or other expenses. All expenses of the Plan are paid by the Company. The
Company issued 556,872 and 645,423 shares under the Plan at a weighted average
discounted price of $22.24 and $17.99 per share during the years ended December
31, 2002 and 2001, respectively.
Additionally, the Operating Partnership issued 3,110 limited
partnership units under a dividend reinvestment plan mirroring the Plan at a
weighted average discounted price of $23.18 per unit during the year ended
December 31, 2002.
13
Capital Strategy and Financing Activity
The Company's capital strategy is to maintain a ratio of total debt to
total fair market 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. Management believes that current total debt
remains less than 50% of total fair market asset value.
The following is a summary of notes payable as of December 31, 2002 and
2001:
Notes Payable
(Dollars in thousands) Principal Outstanding December 31, Interest Scheduled
2002 2001 Rate * Maturity *
------------------------------------------------------------------------
Fixed Rate Mortgages: $135,641 (a) $138,215 7.67 % Oct 2012
93,044 (b) 95,716 8.23 % Dec 2011
34,830 (c) 35,583 7.88 % Jan 2013
13,667 (d) 13,936 8.33 % June 2015
9,797 (e) 10,028 6.88 % May 2004
7,640 (f) -- 8.18 % Feb 2004
------------------------------------------------------------------------
Total Fixed Rate 294,619 293,478 7.89 % 9.2 Years
------------------------------------------------------------------------
Variable Rate Loans:
Construction Loan 39,374 (g) 38,342 2.89 % Jan 2003
Line of Credit 46,750 (h) 20,000 3.09 % Aug 2005
------------------------------------------------------------------------
Total Variable Rate 86,124 58,342 3.00 % 1.5 Years
------------------------------------------------------------------------
Total Notes Payable $380,743 $351,820 6.78 % 7.4 Years
========================================================================
*Interest rate and scheduled maturity data presented for December 31, 2002.
Totals computed using weighted averages.
(a) The loan is collateralized by nine shopping centers (Seven Corners,
Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza,
Belvedere, Giant and Ravenwood) and requires equal monthly principal
and interest payments of $1,103,000 based upon a 25 year amortization
schedule and a balloon payment of $96,300,000 at loan maturity.
Principal of $2,574,000 was amortized during 2002.
(b) The loan is collateralized by Avenel Business Park, Van Ness Square,
Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The
loan has been increased on three occasions since its inception in 1997.
The 8.23% blended interest rate is the weighted average of the initial
loan rate and additional borrowings rates. The loan requires equal
monthly principal and interest payments of $871,000 based upon a
weighted average 23 year amortization schedule and a balloon payment of
$55,788,000 at loan maturity. Principal of $2,672,000 was amortized
during 2002.
(c) The loan is collateralized by 601 Pennsylvania Avenue and requires
equal monthly principal and interest payments of $294,000 based upon a
25 year amortization schedule and a balloon payment of $22,808,000 at
loan maturity. Principal of $753,000 was amortized during 2002.
14
(d) The loan is collateralized by Shops at Fairfax and Boulevard shopping
centers and requires monthly principal and interest payments based upon
a 22 year amortization schedule. Principal of $269,000 was amortized
during 2002.
(e) The loan is collateralized by The Glen shopping center and a corporate
guarantee. The loan requires monthly principal and interest payments
based upon a 23 year amortization schedule. Principal of $231,000 was
amortized during 2002.
(f) The loan is collateralized by Kentlands Square shopping center and
requires monthly principal and interest payments based upon a 15 year
amortization schedule. Principal of $166,000 was amortized during 2002.
(g) The loan is a construction loan totaling $42,000,000 and is
collateralized by Washington Square. Interest expense is calculated
based upon the 1, 2, 3 or 6 month LIBOR rate plus a spread of 1.45% to
1.9% (determined by certain leasing and/or construction benchmarks) or
upon the bank's prime rate at the Company's option. The loan was repaid
on January 9, 2003. The interest rate in effect on December 31, 2002
was based on a weighted average LIBOR of 1.44% and spread of 1.45%. The
effective annual average interest rate, which considers debt cost
amortization, was 3.69% for 2002.
(h) The loan is an unsecured revolving credit facility totaling
$125,000,000. Loan availability is determined by operating income from
the Company's unencumbered properties. An additional amount is
available for funding qualified operating property acquisitions.
Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR
rate plus a spread of 1.625% to 1.875% (determined by certain debt
service coverage and leverage tests) or upon the bank's reference rate
at the Company's option. The line may be extended one year with payment
of a fee of 1/4% at the Company's option. The interest rate in effect
on December 31, 2002 was based on a weighted average LIBOR of 1.391%
and spread of 1.625% and a prime rate of 4.25%. The effective annual
average interest rate, which considers debt cost amortization and
unused line fees, was 4.84% for 2002. Monthly payments are interest
only and will vary depending upon the amount outstanding and the
applicable interest rate for any given month.
The December 31, 2002 and 2001, depreciation adjusted cost of
properties collateralizing the mortgage notes payable totaled $280,051,000 and
$264,831,000, respectively. All of the Company's variable rate debt, including
its line of credit, require the Company and its subsidiaries to maintain
financial covenants. The Company's material covenants require the Company, on a
consolidated basis, to:
. limit the amount of debt so as to maintain a gross asset value in
excess of liabilities of at least $250 million;
. limit the amount of debt as a percentage of gross asset value (leverage
ratio) to less than 60%;
. limit the amount of debt so that interest coverage will exceed 1.9 to 1
on a trailing four quarter basis; and
. limit the amount of debt so that interest and scheduled principal
amortization coverage exceeds 1.6 to 1.
As of December 31, 2002, the Company was in compliance with all such
covenants.
Notes payable at December 31, 2002 and 2001, totaling $266,392,000 and
$242,168,000, respectively, are guaranteed by members of The Saul Organization.
The Company's interest expense coverage ratio (calculated as operating income
before interest expense, amortization of deferred debt expense and depreciations
and amortization, divided by interest expense), increased to 2.78 during the
past year, from 2.63 in 2001.
During 2002 the Company closed a new $125 million unsecured revolving
credit facility to provide working capital and funds for redevelopments and
acquisitions. The line has a three-year term and provides for an additional
one-year extension at the Company's option. The new line is a $55 million
expansion of a prior revolver. The additional availability under the new
facility will enable the Company to access capital for future purchases of
operating properties as opportunities arise. As of December 31, 2002,
$46,750,000 was outstanding under the line, with interest calculated using LIBOR
plus 1.625%. Loan availability is determined by operating income from the
Company's unencumbered properties, which, as of December 31, 2002 allowed the
Company to borrow an additional $30,250,000 for general corporate use. An
additional $48 million is available for funding working capital and operating
property acquisitions supported by the unencumbered properties' internal cash
flow growth and operating income of future acquisitions. Also during 2002, the
Company committed to replace its $42,000,000 construction loan used to finance
the building of Washington Square at Old Town with a $42,500,000 permanent
mortgage. The new permanent financing closed in January 2003, matures in 15
years and requires monthly principal and interest payments based upon a 27.5
year amortization period and 6.01% interest rate. In September 2002, the Company
assumed a $7,806,000 mortgage in conjunction with its acquisition of Kentlands
Square shopping center.
15
Funds From Operations
In 2002, the Company reported Funds From Operations (FFO) of
$44,031,000, representing a 9.7% increase over 2001 FFO of $40,141,000. The
following table presents a reconciliation from net income to FFO:
(In thousands) For the Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net Income $ 19,566 $ 17,314 $ 14,045 $ 13,297 $ 9,129
Subtract:
Gain on sale of property -1,426 -- -- -553 --
Add:
Minority Interests 8,070 8,069 8,069 7,923 7,240
Cumulative effect of change in accounting method -- -- -- -- 771
Depreciation and amortization of real property 17,821 14,758 13,534 12,163 12,578
----------------------------------------------------------
FFO/1/ $ 44,031 $ 40,141 $ 35,648 $ 32,830 $ 29,718
==========================================================
Average shares and units used to compute FFO per share 20,059 19,383 18,796 18,148 17,233
Acquisitions, Redevelopments and Renovations
The Company has been selectively involved in acquisition, redevelopment
and renovation activities. It continues to evaluate the acquisition of land
parcels for retail and office development and acquisitions of operating
properties for opportunities to enhance operating income and cash flow growth.
The Company also continues to take advantage of redevelopment, renovation and
expansion opportunities within the portfolio, as demonstrated by its recent
activities at Washington Square and Ashburn Village.
In April 2002, the Company purchased 24 acres of undeveloped land in
the Broadlands section of the Dulles Technology Corridor. The site is located
adjacent to the Claiborne Parkway exit (Exit 5) of the Dulles Greenway, in
Loudoun County, Virginia. The Dulles Greenway is the "gateway to Loudoun
County," a 14-mile extension of the Dulles Toll Road, connecting Washington
Dulles International Airport with historic Leesburg, Virginia. Broadlands is a
1,500 acre planned community consisting of 3,500 residences, approximately half
of which are constructed and currently occupied. The land is zoned to
accommodate approximately 225,000 square feet of neighborhood and community
retail development. The Company has commenced the initial phase of construction
totaling 112,000 square feet of retail space. Additionally, the Company has
recently executed a grocery anchor lease with Safeway for a 59,000 square foot
supermarket, and the first phase is 65% pre-leased.
---------------
/1/ FFO is a widely accepted non-GAAP financial measure of operating performance
for REITs. FFO is defined by the National Association of Real Estate Investment
Trusts as net income, computed in accordance with GAAP, plus minority interest,
extraordinary items and depreciation and amortization, excluding gains or losses
from property sales. 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 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, 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 supplemental measure of operating performance and
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the ability of
the Company to incur and service debt, to make capital expenditures and to fund
other cash needs. FFO may not be comparable to similarly titled measures
employed by other REITs.
16
In June 2002, the Company purchased Clarendon Center, located in
Arlington, Virginia. Clarendon Center is a 1.25 acre site with an existing and
primarily vacant 70,000 square foot office building with surface parking for 104
cars. It is located directly across the street from the Company's Clarendon and
Clarendon Station properties. The Company is analyzing its options for a
proposed redevelopment of the site.
In September 2002, the Company acquired a 109,625 square foot
neighborhood retail center located within the Kentlands development in
Gaithersburg, Maryland. The property, constructed in 1993, is anchored by a
102,250 square foot Lowe's home improvement store and is part of Kentlands
Square, a shopping center exceeding 350,000 square feet of retail space. The
Kentlands Square property is fully leased and includes an additional 6,000
square feet of retail development potential. The property was acquired for $14.3
million, subject to the assumption of a $7.8 million mortgage. The Kentlands
Square shopping center is contained within the 352 acre Kentlands development,
home to approximately 5,000 residents living in 1,500 units. The Kentlands
community features a mix of upscale and colonial design townhouses, apartments,
cottages and larger single family residences set along pedestrian friendly tree
lined streets. Kentlands' neighborhoods include amenities such as green spaces,
lakes and recreational, community and civic buildings.
In November 2002, The Company purchased approximately 19 acres of
undeveloped land located within the Lansdowne community in Loudoun County,
Virginia. The land is zoned to accommodate approximately 150,000 square feet of
neighborhood and community retail development.
During 2002, the Company continued the development of Washington Square
at Old Town, a new Class A mixed-use office/retail complex along North
Washington Street in historic Old Town Alexandria in Northern Virginia. The
project totals 235,000 square feet of leasable area and is well located on a
two-acre site along Alexandria's main street. The project consists of two
identical buildings separated by a landscaped brick courtyard. Base building
construction was completed in 2001 while the lease-up and build-out of the
remaining office tenant areas occurred throughout 2002. As of February 21, 2003,
90% of the 235,000 square feet of tenant space was leased: the 46,000 square
feet of street level retail space was 100% leased and the 189,000 square feet of
office space was 85% leased.
During 2002, the Company completed construction of the final phase of
its Ashburn Village shopping center. In 1994, Saul Centers purchased the
original 12.7 acre parcel of vacant land located within the 1,580 acre community
of Ashburn Village in Loudoun County, Virginia. The Company subsequently
acquired an adjacent 6.6 acres in 1999 and 7.1 acres in 2000. The Company has
successfully developed the site into an attractive 211,000 square foot
neighborhood shopping center anchored by a 67,000 square foot Giant Food store.
The first phase of the development comprised of 108,000 square feet commenced
operations in the fall of 1994. Ashburn Village phase II was a 49,000 square
foot in-line and pad expansion which commenced operations during the third
quarter of 2000. During the summer of 2001, the Company completed the
development of Ashburn Village III, consisting of a an additional 29,000 square
feet of in-line and pad retail space. Ashburn Village phases I, II and III are
100% leased. The Company commenced construction on Ashburn Village IV, during
the fourth quarter of 2001. This final phase consisting of 25,000 square feet of
retail space was completed during the summer of 2002 and is 84% leased.
Portfolio Leasing Status
At December 31, 2002, the operating portfolio consisted of 29 Shopping
Centers and five predominantly Office Properties, all of which are located in
seven states and the District of Columbia.
As of December 31, 2002, 93.7% of the Company's approximately 6,300,000
square feet of space was leased compared to 93.5% at December 31, 2001. The
shopping center portfolio was 93.9% leased at December 31, 2002 compared to
94.3% at December 31, 2001. The Office Properties were 92.9% leased at December
31, 2002 compared to 90.4% as of December 31, 2001. The slight improvement in
the portfolio's leasing percentage resulted from increased leasing at the
Ashburn Village and Washington Square developments, offset in part by decreased
leasing at Lexington Mall and 601 Pennsylvania Avenue. The Company is
intentionally not renewing leases at Lexington Mall in order to redevelop the
shopping center and a major lease with a US Government tenant expired at 601
Pennsylvania Avenue.
17
Results of Operations
The following discussion compares the results of the Company for the
year ended December 31, 2002 with the year ended December 31, 2001, and compares
the year ended December 31, 2001 with the year ended December 31, 2000. This
information should be read in conjunction with the accompanying consolidated
financial statements and the notes related thereto.
Years Ended December 31, 2002 and 2001
Revenues for the year ended December 31, 2002 ("2002") totaled
$93,963,000 compared to $86,308,000 for the comparable year in 2001 ("2001"), an
increase of $7,655,000 (8.9%).
Base rent income was $75,699,000 for 2002 compared to $69,662,000 for
2001, representing an increase of $6,037,000 (8.7%). Approximately 40% of the
increase in base rent resulted from new leases in effect at recently developed
and redeveloped properties: Washington Square, Ashburn Village III & IV,
Crosstown Business Center and French Market. Approximately 30% of the increase
resulted from a major tenant paying higher rent under the terms of a short-term
lease extension at 601 Pennsylvania Avenue. The balance of the base rent
increase resulted from releasing property space in the remaining Current
Portfolio Properties at rental rates higher than expiring rents.
Expense recoveries were $12,680,000 for 2002 compared to $11,456,000
for the comparable 2001 period, representing an increase of $1,224,000 (10.7%).
The commencement of operations at the newly developed and redeveloped properties
accounted for 45% of the increase in expense recoveries, while the balance of
the increase in expense recoveries resulted from improved occupancy and
increases in recoverable property tax expense. Expense recoveries represent a
portion of property operating expenses billed to tenants, including common area
maintenance, real estate taxes and other recoverable costs.
Percentage rent was $1,850,000 in 2002, compared to $2,113,000 in
2001, a decrease of $263,000 (12.4%). Approximately 40% of the percentage rent
decrease occurred at Lexington Mall where the Company is positioning the mall
for redevelopment and approximately 20% of the decrease occurred at French
Market where a restaurant tenant reported lower sales revenue compared to the
previous year. Percentage rent is rental income calculated on the portion of a
tenant's revenues that exceed a specified breakpoint.
Other income, which consists primarily of parking income at three of
the Office Properties, kiosk leasing, temporary leases and payments associated
with early termination of leases, was $3,734,000 in 2002, compared to $3,077,000
in 2001, representing an increase of $657,000 (21.4%). The increase in other
income resulted primarily from a $500,000 increase in lease termination payments
compared to the prior year, approximately half of which was recognized at
Washington Square, and a $300,000 increase in parking income due to the lease-up
of office space at Washington Square.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, increased
$1,612,000 (19.0%) to $10,115,000 in 2002 from $8,503,000 in 2001. Approximately
40% of the property operating expense increase resulted from the commencement of
operations at Washington Square and 25% of the increase resulted from snow
removal expenses sustained as a result of two snow storms impacting many of the
Company's properties in December 2002.
The provision for credit losses decreased $196,000 (31.8%) to $421,000
in 2002 from $617,000 in the 2001 year. The credit loss provision in 2002
represented a return to historic levels, comparable to $467,000 recorded in
2000. The credit loss provision in 2001 was elevated due primarily to three
retail tenants and an office tenant in bankruptcy. In 2002, no significant
tenants declared bankruptcy impairing the collectibility of rents receivable.
Real estate taxes increased $795,000 (11.0%) to $8,021,000 in 2002
from $7,226,000 in 2001. Thirty-four percent of the increase in real estate tax
expense in 2002 resulted from the commencement of operations at Washington
Square, while approximately 36% resulted from increased taxes at the Company's
two Washington, DC office properties.
18
Interest expense increased $193,000 (0.8%) to $25,113,000 for 2002 from
$24,920,000 reported for 2001. The minor variance resulted from the net of
increased interest paid on permanent fixed rate financing for recently developed
and redeveloped properties, offset by interest expense savings from lower
interest rates on the Company's variable rate debt.
Amortization of deferred debt expense increased $159,000 (28.1%) to
$725,000 for 2002 compared to $566,000 for 2001. The increase resulted from the
amortization of additional loan costs associated with extending the maturity of
the Washington Square construction loan to January 2003 and costs associated
with refinancing the Company's unsecured line of credit during the third quarter
of 2002.
Depreciation and amortization expense increased $3,063,000 (20.8%) from
$14,758,000 in 2001 to $17,821,000 in 2002. Nearly half of the change or
$1,311,000, resulted from assets retired based upon a comprehensive review of
real estate asset records and the Company's revision of the assets' estimated
useful lives. The balance of the change reflects increased depreciation expense
on developments and acquisitions placed in service during the past twelve
months.
General and administrative expense, which consists of payroll,
administrative and other overhead expenses, was $5,537,000 for 2002, an increase
of $1,202,000 (27.7%) over 2001. Forty percent of the expense increase in 2002
compared to 2001 resulted from increased corporate office rent, 15% resulted
from the write-off of abandoned property acquisition costs, 15% resulted from
increased payroll and 10% resulted from increased legal expense.
The Company recognized a gain on the sale of real estate of $1,426,000
in 2002. There were no property sale gains reported in 2001. In 1999, the
District of Columbia condemned and purchased the Company's Park Road property as
part of an assemblage of parcels for a neighborhood revitalization project. The
Company disputed the original purchase price awarded by the District. The gain
represents additional net proceeds the Company was awarded upon settlement of
the dispute.
Years Ended December 31, 2001 and 2000
Revenues for the year ended December 31, 2001 ("2001"), totaled
$86,308,000 compared to $79,029,000 for the comparable period in 2000 ("2000"),
an increase of $7,279,000 (9.2%).
Base rent increased to $69,662,000 in 2001 from $63,837,000 in 2000,
representing a $5,825,000 (9.1%) increase. The increase in base rent resulted
primarily from new leases in effect at recently developed and acquired
properties: Ashburn Village II and III and a portion of Washington Square
(approximately 100,000 square feet) during the 2001.
Expense recoveries increased to $11,456,000 in 2001 from $10,129,000 in
2000, representing an increase of $327,000 (2.9%). Expense recoveries represent
a portion of property operating expenses billed to tenants, including common
area maintenance, real estate taxes and other recoverable costs.
Percentage rent was $2,113,000 in 2001, compared to $2,097,000 in 2000,
representing an increase of $16,000 (0.8%). Percentage rent is rental income
calculated on the portion of a tenant's revenues that exceed a specified
breakpoint.
Other income, which consists primarily of parking income at three of
the Office Properties, kiosk leasing, temporary leases and payments associated
with early termination of leases, was $3,077,000 in 2001, compared to $1,966,000
in 2000, representing an increase of $1,111,000 (56.5%). The increase in other
income resulted from a $442,000 increase in lease termination payments compared
to the prior year, collection of $363,000 from the estate of a former tenant in
bankruptcy and a $304,000 increase in parking rents primarily due to the
commencement of operations at Washington Square.
19
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, increased $232,000 (2.8%) to
$8,503,000 in 2001 from $8,271,000 in 2000.
The provision for credit losses was $617,000 in 2001 compared to
$467,000 in 2000, representing an increase of $150,000 (32.1%). The comparative
credit loss increase resulted primarily from additions to credit loss reserves
for three retail tenants and an office tenant in bankruptcy and unpaid rents in
dispute with two shopping center tenants and an office tenant.
Real estate taxes were $7,226,000 in 2001 compared to $6,451,000 in
2000, representing an increase of $775,000 (12.0%). Approximately half of the
increase was attributable to development properties placed in service during the
latter half of 2000 and during 2001. Approximately a quarter of the increase
resulted from an assessment increase for the Company's Thruway shopping center.
Interest expense was $24,920,000 in 2001 compared to $23,843,000 in
2000, representing an increase of $1,077,000 (4.5%). The increase in interest
expense resulted from increased borrowings related to the development and
acquisition of properties placed in service during 2001 and 2000.
Amortization of deferred debt expense was $566,000 in 2001 compared to
$458,000 in 2000, an increase of $108,000 (23.6%). The increase resulted from a
full year of amortizing the costs of renewing and amending the Company's
revolving line of credit in July 2000 and $38 million of new long term debt put
in place during 2000 and 2001.
Depreciation and amortization expense was $14,758,000 in 2001 compared
to $13,534,000 in 2000, representing an increase of $1,224,000 (9.0%). The
increase resulted from increased amortization of leasing costs and depreciation
of construction costs related to newly developed and acquired properties placed
in service during 2001 and 2000.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $4,335,000 in 2001
compared to $3,891,000 in 2000, representing an increase of $444,000 (11.4%).
Approximately half of the year over year increase resulted from additional
payroll expenses and a quarter of the increase resulted from the write-off of
abandoned acquisition costs.
Item 8. Financial Statements and Supplementary Data
NOTICE REGARDING ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended, provides that
if any part of a registration statement at the time it becomes effective
contains an untrue statement of a material fact or an omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, any person acquiring a security pursuant to the
registration statement (unless it is proved that at the time of the acquisition
the person knew of the untruth or omission) may sue, among others, every
accountant who has consented to be named as having prepared or certified any
part of the registration statement or as having prepared or certified any report
or valuation which is used in connection with the registration statement with
respect to the statement in the registration statement, report or valuation
which purports to have been prepared or certified by the accountant.
Prior to the date of the filing of this Form 10-K, the Arthur Andersen
LLP partners who reviewed our audited financial statements contained herein
resigned from Arthur Andersen LLP and Arthur Andersen LLP was convicted for
obstruction of justice and elected to cease practicing before the SEC in August
2002. As a result, after reasonable efforts, we have been unable to obtain
Arthur Andersen LLP's written consent to the incorporation by reference into our
previously filed Registration Statements File No. 333-85254, 333-41436,
333-54232, 333-71323, 333-88127, File No. 333-60064, File No. 333-59962, and
File No. 33-77890 and in their related prospectuses (the "Prior Registration
Statements") of its audit report with respect to our financial statements for
the fiscal year ended December 31, 2001.
20
Under these circumstances, Rule 437a under the Securities Act permits
us to file this Form 10-K without a written consent from Arthur Andersen LLP.
Accordingly, Arthur Andersen LLP will not be liable to persons acquiring our
securities registered pursuant to the Prior Registration Statements under
Section 11(a) of the Securities Act because it has not consented to being named
as an expert in the Prior Registration Statements.
The financial statements of the Company and its consolidated
subsidiaries are included in this report on the pages indicated, and are
incorporated herein by reference:
Page
----
F-1 (a) Report of Independent Auditors - Ernst & Young LLP
F-2 (a) Report of Independent Public Accountants - Arthur Andersen LLP
F-3 (b) Consolidated Balance Sheets - December 31, 2002 and 2001
F-4 (c) Consolidated Statements of Operations - Years ended December 31, 2002,
2001 and 2000.
F-5 (d) Consolidated Statements of Stockholders' Equity (Deficit)- Years ended
December 31, 2002, 2001 and 2000.
F-6 (e) Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001 and 2000.
F-7 (f) Notes to Consolidated Financial Statements
The selected quarterly financial data included in Note 14 of the Notes
to Consolidated Financial Statements referred to above are incorporated herein
by reference.
PART III
Item 14. Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chairman and Chief
Executive Officer and its Senior Vice President, Chief Financial Officer,
Secretary and Treasurer, as appropriate, to allow timely decisions regarding
required disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e) promulgated under the Exchange Act. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including its Chairman and
Chief Executive Officer and its Senior Vice President, Chief Financial Officer,
Secretary and Treasurer, and its Vice President and Controller (acting Chief
Accounting Officer) of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of December 31,2002. Based on
the foregoing, the Company's Chairman and Chief Executive Officer, its Senior
Vice President, Chief Financial Officer, Secretary and Treasurer and its Vice
President and Controller (acting Chief Accounting Officer) concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level as of December 31, 2002.
During the three months ended December 31, 2002, there were no
significant changes in the Company's internal control over financial reporting
that materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
21
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of the Company and their
consolidated subsidiaries are incorporated by reference in
Part II, Item 8.
(a) Report of Independent Auditors - Ernst & Young LLP
(a) Report of Independent Public Accountants - Arthur Andersen
LLP
(b) Consolidated Balance Sheets - December 31, 2002 and 2001
(c) Consolidated Statements of Operations - Years ended December
31, 2002, 2001 and 2000
(d) Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 2002, 2001 and 2000
(e) Consolidated Statements of Cash Flows - Years ended December
31, 2002, 2001 and 2000
(f) Notes to Consolidated Financial Statements
2. Financial Statement Schedule and Supplementary Data
(a) Selected Quarterly Financial Data for the Company are
incorporated by reference in Part II, Item 8
(b) Schedule of the Company:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
3. Exhibits
(a) First Amended and Restated Articles of Incorporation of Saul
Centers, Inc. filed with the Maryland Department of
Assessments and Taxation on August 23, 1993 and filed as
Exhibit 3.(a) of the 1993 Annual Report of the Company on Form
10-K is hereby incorporated by reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in
effect at and after August 24, 1993 and as of August 26,
1993 and filed as Exhibit 3(b) of the 1993 Annual Report of
the Company on Form 10-K is hereby incorporated by
reference. The First Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Subsidiary
I Limited Partnership, the Second Amendment to the First
Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership, the Third Amendment
to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership and the
Fourth Amendment to the First Amended and Restated Agreement
of Limited Partnership of Saul Subsidiary I Limited
Partnership as filed as Exhibit 3.(b) of the 1997 Annual
Report of the Company on Form 10-K is hereby incorporated by
reference.
22
10. (a) First Amended and Restated Agreement of Limited
Partnership of Saul Holdings Limited Partnership filed
as Exhibit No. 10.1 to Registration Statement No.
33-64562 is hereby incorporated by reference. The First
Amendment to the First Amended and Restated Agreement of
Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul
Holdings Limited Partnership, and the Third Amendment to
the First Amended and Restated Agreement of Limited
Partnership of Saul Holdings Limited Partnership filed
as Exhibit 10.(a) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by
reference. The Fourth Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul
Holdings Limited Partnership filed as Exhibit 10.(a) of
the March 31, 1997 Quarterly Report of the Company is
hereby incorporated by reference. The Fifth Amendment to
the First Amended and Restated Agreement of Limited
Partnership of Saul Holdings Limited Partnership filed
as Exhibit 4.(c) to Registration Statement No.
333-41436, is hereby incorporated by reference.
(b) First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership and
Amendment No. 1 thereto filed as Exhibit 10.2 to
Registration Statement No. 33-64562 are hereby
incorporated by reference. The Second Amendment to the
First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership,
the Third Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership and the Fourth Amendment to the
First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership as
filed as Exhibit 10.(b) of the 1997 Annual Report of the
Company on Form 10-K is hereby incorporated by
reference.
(c) First Amended and Restated Agreement of Limited
Partnership of Saul II Subsidiary Partnership and
Amendment No. 1 thereto filed as Exhibit 10.3 to
Registration Statement No. 33-64562 are hereby
incorporated by reference. The Second Amendment to the
First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary II Limited Partnership
filed as Exhibit 10.(c) of the June 30, 2001 Quarterly
Report of the Company is hereby incorporated by
reference.
(d) Property Conveyance Agreement filed as Exhibit 10.4 to
Registration Statement No. 33-64562 is hereby
incorporated by reference.
(e) Management Functions Conveyance Agreement filed as
Exhibit 10.5 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(f) Registration Rights and Lock-Up Agreement filed as
Exhibit 10.6 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(g) Exclusivity and Right of First Refusal Agreement filed
as Exhibit 10.7 to Registration Statement No. 33-64562
is hereby incorporated by reference.
(h) Saul Centers, Inc. 1993 Stock Option Plan filed as
Exhibit 10.8 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(i) Agreement of Assumption dated as of August 26, 1993
executed by Saul Holdings Limited Partnership and filed
as Exhibit 10. (I) of the 1993 Annual Report of the
Company on Form 10-K is hereby incorporated by
reference.
(j) Deferred Compensation and Stock Plan for Directors,
dated as of March 18, 1999, filed as Exhibit 10.(k) of
the March 31, 1999 Quarterly Report of the Company, is
hereby incorporated by reference.
23
(k) Loan Agreement dated as of November 7, 1996 by and among
Saul Holdings Limited Partnership, Saul Subsidiary II
Limited Partnership and PFL Life Insurance Company, c/o
AEGON USA Realty Advisors, Inc., filed as Exhibit 10.(t)
of the March 31, 1997 Quarterly Report of the Company,
is hereby incorporated by reference.
(l) Promissory Note dated as of January 10, 1997 by and
between Saul Subsidiary II Limited Partnership and The
Northwestern Mutual Life Insurance Company, filed as
Exhibit 10.(z) of the March 31, 1997 Quarterly Report of
the Company, is hereby incorporated by reference.
(m) Loan Agreement dated as of October 1, 1997 between Saul
Subsidiary I Limited Partnership, as Borrower and Nomura
Asset Capital Corporation, as Lender, is as filed as
Exhibit 10.(p) of the 1997 Annual Report of the Company
on Form 10-K is hereby incorporated by reference.
(n) Revolving Credit Agreement dated as of August 30, 2002
by and between Saul Holdings Limited Partnership as
Borrower; U.S. Bank National Association, as
administrative agent and sole lead arranger; Wells Fargo
Bank, National Association, as syndication agent, and
U.S. Bank National Association, Wells Fargo Bank,
National Association, Comerica Bank, Southtrust Bank,
KeyBank National Association as Lenders, as filed as
Exhibit 10.(n) of the September 30, 2002 Quarterly
Report of the Company, is hereby incorporated by
reference.
(o) Guaranty dated as of August 30, 2002 by and between Saul
Centers, Inc. as Guarantor and U.S. Bank National
Association, as administrative agent and sole lead
arranger for itself and other financial institutions,
the Lenders, as filed as Exhibit 10.(p) of the September
30, 2002 Quarterly Report of the Company, is hereby
incorporated by reference.
(p) Amended and Restated Promissory Note dated January 13,
2003 by and between Saul Holdings Limited Partnership as
Borrower and Metropolitan Life Insurance Company as
lender, as filed as Exhibit 10.(p) of the 2002 Annual
Report of the Company on Form 10-K is hereby
incorporated by reference.
23. Consent of Ernst & Young LLP, Independent Public Accountants
is filed herewith.
31. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive
Officer and Chief Financial Officer (filed herewith).
32. Section 1350 Certifications of Chief Executive Officer and
Chief Financial Officer (filed herewith).
Reports on Form 8-K.
--------------------
None.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SAUL CENTERS, INC.
(Registrant)
Date: September 26, 2003 /s/ B. Francis Saul II
---------------------------------------
B. Francis Saul II
Chairman of the Board of Directors
& Chief Executive Officer (Principal
Executive Officer)
Date: September 26, 2003 /s/ B. Francis Saul III
---------------------------------------
B. Francis Saul III, President and
Director
Date: September 26, 2003 /s/ Scott V. Schneider
---------------------------------------
Scott V. Schneider, Senior Vice
President, Treasurer and Secretary
(Principal Financial Officer)
Date: September 26, 2003 /s/ Richard R. Meiburger
---------------------------------------
Richard R. Meiburger, Vice President and
Controller (acting Principal Accounting
Officer)
Date: September 26, 2003 /s/ Philip D. Caraci
---------------------------------------
Philip D. Caraci, Vice Chairman and
Director
Date: September 26, 2003 /s/ John E. Chapoton
---------------------------------------
John E. Chapoton, Director
Date: September 26, 2003 /s/ Gilbert M. Grosvenor
---------------------------------------
Gilbert M. Grosvenor, Director
Date: September 26, 2003 /s/ Philip C. Jackson Jr.
---------------------------------------
Philip C. Jackson Jr., Director
Date: September 26, 2003 /s/ David B. Kay
---------------------------------------
David B. Kay, Director
Date: September 26, 2003 /s/ General Paul X. Kelley
---------------------------------------
General Paul X. Kelley, Director
Date: September 26, 2003 /s/ Charles R. Longsworth
---------------------------------------
Charles R. Longsworth, Director
Date: September 26, 2003 /s/ Patrick F. Noonan
---------------------------------------
Patrick F. Noonan, Director
Date: September 26, 2003 /s/ James W. Symington
---------------------------------------
James W. Symington, Director
Date: September 26, 2003 /s/ John R. Whitmore
---------------------------------------
John R. Whitmore, Director
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Saul Centers, Inc.
We have audited the accompanying consolidated balance sheet of Saul
Centers, Inc. as of December 31, 2002, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the year then
ended. Our audits also included the financial statement schedule listed in
Item 15 of Form 10-K. These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit. The
financial statements of Saul Centers, Inc. as of December 31, 2001, and for the
years ended December 31, 2001 and 2000, were audited by other auditors who have
ceased operations and whose report dated February 13, 2002, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Saul Centers,
Inc. at December 31, 2002, and the consolidated results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
McLean, Virginia
February 7, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Saul Centers, Inc.:
We have audited the accompanying consolidated balance sheets of Saul Centers,
Inc. (a Maryland corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Saul Centers, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 13, 2002
Note: As permitted by Rule 2-02 (e) of Regulation S-X promulgated under the
Securities Act of 1933, this is a copy of the audit report previously issued by
Arthur Andersen LLP in connection with the filing of our Form 10-K for the
fiscal year ended December 31, 2001. After reasonable efforts, we have been
unable to have Arthur Anderson LLP reissue this audit report in connection with
the filing of our Form 10-K for the fiscal year ended December 31, 2002.
F-2
Saul Centers, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Dollars in thousands) 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Assets
Real estate investments
Land $ 90,469 $ 67,710
Buildings and equipment 405,153 384,575
Construction in progress 8,292 2,524
------------ ------------
503,914 454,809
Accumulated depreciation (150,286) (136,928)
------------ ------------
353,628 317,881
Cash and cash equivalents 1,309 1,805
Accounts receivable and accrued income, net 12,505 9,217
Prepaid expenses 15,712 12,514
Deferred debt costs, net 4,125 3,563
Other assets 1,408 1,423
------------ ------------
Total assets $ 388,687 $ 346,403
============ ============
Liabilities
Notes payable $ 380,743 $ 351,820
Accounts payable, accrued expenses and other liabilities 16,727 14,697
Deferred income 4,484 4,009
------------ ------------
Total liabilities 401,954 370,526
------------ ------------
Minority interests -- --
------------ ------------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 15,196,582 and 14,535,803 shares issued and
outstanding, respectively 152 145
Additional paid-in capital 79,131 64,564
Accumulated deficit (92,550) (88,832)
------------ ------------
Total stockholders' equity (deficit) (13,267) (24,123)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 388,687 $ 346,403
============ ============
The accompanying notes are an integral part of these statements.
F-3
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, For the Year Ended December 31,
except per share amounts) 2002 2001 2000
--------------------------------------------- ---------------------------------------------
Revenue
Base rent $ 75,699 $ 69,662 $ 63,837
Expense recoveries 12,680 11,456 11,129
Percentage rent 1,850 2,113 2,097
Other 3,734 3,077 1,966
------------- ------------- -------------
Total revenue 93,963 86,308 79,029
------------- ------------- -------------
Operating expenses
Property operating expenses 10,115 8,503 8,271
Provision for credit losses 421 617 467
Real estate taxes 8,021 7,226 6,451
Interest expense 25,113 24,920 23,843
Amortization of deferred debt expense 725 566 458
Depreciation and amortization 17,821 14,758 13,534
General and administrative 5,537 4,335 3,891
------------- ------------- -------------
Total operating expenses 67,753 60,925 56,915
------------- ------------- -------------
Operating income 26,210 25,383 22,114
Non-operating item
Gain on sale of property 1,426 -- --
------------- ------------- -------------
Income before minority interests 27,636 25,383 22,114
------------- ------------- -------------
Minority interests
Minority share of income (7,130) (6,777) (6,081)
Distributions in excess of earnings (940) (1,292) (1,988)
------------- ------------- -------------
Total minority interests (8,070) (8,069) (8,069)
------------- ------------- -------------
Net income $ 19,566 $ 17,314 $ 14,045
============= ============= =============
Per Share Amounts:
Net income (basic) $ 1.32 $ 1.22 $ 1.03
============= ============= =============
Net income (diluted) $ 1.31 $ 1.22 $ 1.03
============= ============= =============
The accompanying notes are an integral part of these statements.
F-4
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional
(Dollars in thousands, Common Paid-in Accumulated
except per share amounts) Stock Capital Deficit Total
-------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Balance, December 31, 1999 $ 133 $ 44,616 $ (76,608) $ (31,859)
Issuance of 535,390 shares of
common stock 6 7,978 -- 7,984
Net income -- -- 14,045 14,045
Distributions ($1.17 per share) -- -- (15,915) (15,915)
Distributions payable ($.39 per share) -- -- (5,410) (5,410)
------------ ------------ ------------- -------------
Balance, December 31, 2000 139 52,594 (83,888) (31,155)
Issuance of 666,268 shares of
common stock 6 11,970 -- 11,976
Net income -- -- 17,314 17,314
Distributions ($1.17 per share) -- -- (16,588) (16,588)
Distributions payable ($.39 per share) -- -- (5,670) (5,670)
------------ ------------ ------------- -------------
Balance, December 31, 2001 145 64,564 (88,832) (24,123)
Issuance of 660,779 shares of
common stock 7 14,567 -- 14,574
Net income -- -- 19,566 19,566
Distributions ($1.17 per share) -- -- (17,360) (17,360)
Distributions payable ($.39 per share) -- -- (5,924) (5,924)
------------ ------------ ------------- -------------
Balance, December 31, 2002 $ 152 $ 79,131 $ (92,550) $ (13,267)
============ ============ ============= =============
The accompanying notes are an integral part of these statements.
F-5
Saul Centers, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
(Dollars in thousands) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 19,566 $ 17,314 $ 14,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 8,070 8,069 8,069
Gain on sale of property (1,426) -- --
Depreciation and amortization 18,546 15,324 13,992
Provision for credit losses 421 617 467
Decrease (increase) in accounts receivable (2,283) (823) (1,284)
Increase in prepaid expenses (7,661) (5,568) (3,152)
Decrease (increase) in other assets 15 347 (252)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 1,776 (4,895) 1,201
Increase (decrease) in deferred income 475 1,449 (305)
------------- ------------- -------------
Net cash provided by operating activities 37,499 31,834 32,781
------------- ------------- -------------
Cash flows from investing activities:
Acquisitions of real estate investments (28,871) -- --
Additions to real estate investments (14,466) (13,055) (18,233)
Additions to construction in progress (5,768) (8,745) (25,193)
------------- ------------- -------------
Net cash used in investing activities (49,105) (21,800) (43,426)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from notes payable 53,547 51,218 69,700
Repayments on notes payable (24,624) (42,851) (36,515)
Additions to deferred debt expense (1,287) (17) (315)
Proceeds from the issuance of common stock and
convertible limited partnership units in
the Operating Partnership 14,574 11,976 7,984
Distributions to common stockholders and holders
of convertible limited partnership units in
the Operating Partnership (31,100) (30,327) (29,394)
------------- ------------- -------------
Net cash provided by (used in) financing activities 11,110 (10,001) 11,460
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (496) 33 815
Cash and cash equivalents, beginning of year 1,805 1,772 957
------------- ------------- -------------
Cash and cash equivalents, end of year $ 1,309 $ 1,805 $ 1,772
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amount capitalized $ 25,089 $ 24,419 $ 23,456
============= ============= =============
The accompanying notes are an integral part of these statements.
F-6
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION
Organization
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. Saul Centers operates as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). Saul Centers generally will not be subject to federal income tax,
provided it annually distributes at least 90% of its REIT taxable income to its
stockholders and meets 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 Centers or one of its subsidiaries is
the sole general partner, are referred to collectively as the "Company". B.
Francis Saul II serves as Chairman of the Board of Directors and Chief Executive
Officer of Saul Centers.
Formation and Structure of Company
Saul Centers was formed to continue and expand the shopping center
business previously owned and conducted by the B.F. Saul Real Estate Investment
Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other
affiliated entities (collectively, "The Saul Organization"). On August 26, 1993,
The Saul Organization transferred to Saul Holdings Limited Partnership, a newly
formed Maryland limited partnership (the "Operating Partnership"), and two newly
formed subsidiary limited partnerships (the "Subsidiary Partnerships", and
collectively with the Operating Partnership, the "Partnerships"), shopping
center and office properties, and the management functions related to the
transferred properties. Since its formation, the Company has purchased and
developed additional properties. The Company is currently developing Broadlands
Village, a grocery anchored shopping center in Loudoun County. The Company
recently completed development of Ashburn Village III and IV, in-line retail and
retail pad expansions to the Ashburn Village shopping center; Washington Square
at Old Town, a Class A mixed-use office/retail complex in Alexandria, Virginia;
and Crosstown Business Center, an office/warehouse redevelopment located in
Tulsa, Oklahoma. In June 2002 the Company purchased Clarendon Center for future
redevelopment. In September 2002, the Company purchased 109,642 square feet of
retail space known as Kentlands Square. In November 2002 the Company purchased a
19 acre parcel of land in the Lansdowne community in Loudoun County, Virginia.
The Company plans to develop the Lansdowne parcel into a grocery anchored
neighborhood and community shopping center. As of December 31, 2002, the
Company's properties (the "Current Portfolio Properties") consisted of 29
operating shopping center properties (the "Shopping Centers"), five
predominantly office operating properties (the "Office Properties") and three
development and/or redevelopment properties.
The Company established Saul QRS, Inc., a wholly owned subsidiary of
Saul Centers, to facilitate the placement of collateralized mortgage debt. Saul
QRS, Inc. was created to succeed to the interest of Saul Centers as the sole
general partner of Saul Subsidiary I Limited Partnership. The remaining limited
partnership interests in Saul Subsidiary I Limited Partnership and Saul
Subsidiary II Limited Partnership are held by the Operating Partnership as the
sole limited partner. Through this structure, the Company owns 100% of the
Current Portfolio Properties.
Basis of Presentation
The accompanying financial statements of the Company have been
presented on the historical cost basis of The Saul Organization because of
affiliated ownership and common management and because the assets and
liabilities were the subject of a business combination with the Operating
Partnership, the Subsidiary Partnerships and Saul Centers, all newly formed
entities with no prior operations.
F-7
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company, which conducts all of its activities through its
subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in
the ownership, operation, management, leasing, acquisition, renovation,
expansion, development and financing of community and neighborhood shopping
centers and office properties, primarily in the Washington, DC/Baltimore
metropolitan area. Because the properties are located primarily in the
Washington, DC/Baltimore metropolitan area, the Company is subject to a
concentration of credit risk related to these properties. A majority of the
Shopping Centers are anchored by several major tenants. Seventeen of the
Shopping Centers are anchored by a grocery store and offer primarily day-to-day
necessities and services. As of December 31, 2002, no single property accounted
for more than 8.9% of the total gross leasable area. Only one retail tenant,
Giant Food, at 5.7%, accounted for more than 1.9% of the Company's 2002 total
revenues. No office tenant other than the United States Government, at 8.4%,
accounted for more than 1.4% of 2002 total revenues.
Principles of Consolidation
The accompanying consolidated financial statements of the Company
include the accounts of Saul Centers, its subsidiaries, and the Operating
Partnership and Subsidiary Partnerships which are majority owned by Saul
Centers. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Real Estate Investment Properties
Real estate investment properties are stated at historic cost basis
less accumulated depreciation. Management believes that these assets have
generally appreciated in value 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 these financial statements. These financial
statements are prepared in conformity with accounting principles generally
accepted in the United States, and accordingly, do not report the current value
of the Company's real estate assets.
The Company purchases real estate investment properties from time to
time and allocates the purchase price to various components, such as land,
buildings, and intangibles related to in-place leases and customer relationships
in accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") 141, "Business Combinations." The
purchase price is allocated based on the relative fair value of each component.
The fair value of buildings is determined as if the buildings were vacant upon
acquisition and subsequently leased at market rental rates. As such, the
determination of fair value considers the present value of all cash flows
expected to be generated from the property including an initial lease up period.
The Company determines the fair value of above and below market intangibles
associated with in-place leases by assessing the net effective rent and
remaining term of the lease relative to market terms for similar leases at
acquisition. In the case of below market leases, the Company considers the
remaining contractual lease period and renewal periods, taking into
consideration the likelihood of the tenant exercising its renewal options. The
fair value of a below market lease component is recorded as deferred income and
amortized as additional lease revenue over the remaining contractual lease
period and any renewal option periods included in the valuation analysis. The
fair value of above market lease intangibles is recorded as a deferred asset and
is amortized as a reduction of lease revenue over the remaining contractual
lease term. The Company determines the fair value of at-market in-place leases
considering the cost of acquiring similar leases, the foregone rents associated
with the lease-up period and carrying costs associated with the lease-up period.
Intangible assets associated with at-market in-place leases are amortized as
additional lease expense over the remaining contractual lease term. To the
extent customer relationship intangibles are present in an acquisition, the fair
value of the intangibles are amortized over the life of the customer
relationship.
If there is an event or change in circumstance that indicates an
impairment in the value of a real estate investment property, the Company's
policy is to assess any impairment in value by making a comparison of the
current and projected operating cash flows of the property over its remaining
useful life, on an undiscounted basis, to the carrying amount of that property.
If such carrying amount is in excess of the estimated projected operating cash
flows of the property, the Company would recognize an impairment loss equivalent
to an amount required to adjust the carrying amount to its estimated fair market
value. Saul Centers adopted SFAS 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. This Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The Company has not recognized an impairment loss in 2002, 2001 or 2000
on any of its real estate.
F-8
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially complete and the
assets are placed in service, rental income, direct operating expenses, and
depreciation associated with such properties are included in current operations.
Expenditures for repairs and maintenance, which includes contract services such
as grounds maintenance, lot sweeping and snow removal, are charged to operations
as incurred. Repairs and maintenance expense totaled $3,852,000, $2,913,000 and
$3,144,000, for 2002, 2001 and 2000, respectively, and is included in operating
expenses in the accompanying consolidated financial statements. Interest expense
capitalized totaled $548,000, $1,640,000 and $2,681,000, for 2002, 2001 and
2000, respectively.
In the initial rental operations of development projects, a project is
considered substantially complete and available for occupancy upon completion of
tenant improvements, but no later than one year from the cessation of major
construction activity. Substantially completed portions of a project are
accounted for as separate projects. Depreciation is calculated using the
straight-line method and estimated useful lives of 33 to 50 years for buildings
and up to 20 years for certain other improvements. Leasehold improvements are
amortized over the lives of the related leases using the straight-line method.
Lease Acquisition Costs
Certain initial direct costs incurred by the Company in negotiating and
consummating a successful lease are capitalized and amortized over the initial
base term of the lease. These costs are included in prepaid expenses and total
$12,140,000 and $10,419,000, net of accumulated amortization of $5,259,000 and
$4,465,000, as of December 31, 2002 and 2001, respectively. Capitalized leasing
costs consist of commissions paid to third party leasing agents as well as
internal direct costs such as employee compensation and payroll related fringe
benefits directly related to time spent performing leasing related activities.
Such activities include evaluating the prospective tenant's financial condition,
evaluating and recording guarantees, collateral and other security arrangements,
negotiating lease terms, preparing lease documents and closing the transaction.
Construction in Progress
Construction in progress includes the land acquisition costs,
predevelopment costs, and development costs of active projects. Predevelopment
costs associated with these active projects include closing costs, legal, zoning
and permitting costs and other project 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. Construction in
progress balances as of December 31, 2002 and 2001 are as follows:
Construction in Progress
(In thousands)
December 31,
2002 2001
---- ----
Broadlands Village ............... $ 6,192 $ --
Ashburn Village IV ............... -- 1,163
Other ............................ 2,100 1,361
------- -------
Balance .......................... $ 8,292 $ 2,524
======= =======
Accounts Receivable and Accrued Income
Accounts receivable primarily represent amounts currently due from
tenants in accordance with the terms of the respective leases. Receivables are
reviewed monthly and reserves are established with a charge to current period
operations when, in the opinion of management, collection of the receivable is
doubtful. Accounts receivable in the accompanying consolidated financial
statements are shown net of an allowance for doubtful accounts of $681,000 and
$559,000, at December 31, 2002 and 2001, respectively.
F-9
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
Allowance for Doubtful Accounts
(In thousands)
For the Years Ended December 31,
2002 2001
----- -----
Beginning Balance .................. $ 559 $ 563
Provision for Credit Losses ........ 421 617
Charge-offs ........................ -299 -621
----- -----
Ending Balance ..................... $ 681 $ 559
===== =====
In addition to rents due currently, accounts receivable include
$6,262,000 and $4,675,000, at December 31, 2002 and 2001, respectively,
representing minimum rental income accrued on a straight-line basis to be paid
by tenants over the remaining term of their respective leases. These amounts are
presented after netting allowances of $693,000 and $676,000, respectively, for
tenants whose rent payment history or financial condition cast doubt upon the
tenant's ability to perform under its lease obligations.
Deferred Debt Costs
Deferred debt costs consist of fees and costs incurred to obtain
long-term financing, construction financing and the revolving line of credit.
These fees and costs are being amortized over the terms of the respective loans
or agreements. Deferred debt costs totaled $4,125,000 and $3,563,000, and are
presented net of accumulated amortization of $2,693,000 and $1,968,000, at
December 31, 2002 and 2001, respectively.
Deferred Income
Deferred income consists of payments received from tenants prior to the
time they are earned and recognized by the Company as revenue. These payments
include prepayment of the following month's rent, prepayment of real estate
taxes when the taxing jurisdiction has a fiscal year differing from the calendar
year reimbursements specified in the lease agreement and advance payments by
tenants for tenant construction work provided by the Company.
Revenue Recognition
Rental and interest income is accrued as earned except when doubt
exists as to collectibility, in which case the accrual is discontinued. 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
in accordance with accounting principles generally accepted in the United
States. Expense recoveries represent a portion of property operating expenses
billed to the tenants, including common area maintenance, real estate taxes and
other recoverable costs. Expense recoveries are recognized in the period when
the expenses are incurred. Rental income based on a tenant's revenues
("percentage rent") is accrued when a tenant reports sales that exceed a
specified breakpoint.
Income Taxes
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ending December 31, 1993. A REIT generally will not be subject to federal income
taxation on that portion of its income that qualifies as REIT taxable income to
the extent that it distributes at least 90% of its REIT taxable income to
stockholders 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, 2002 and 2001, the total
tax basis of the Company's assets was $410,497,000 and $377,704,000, and the tax
basis of the liabilities was $392,157,000 and $362,464,000, respectively.
F-10
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
Deferred Compensation and Stock Plan for Directors
Saul Centers has established a Deferred Compensation and Stock Plan for
Directors (the "Plan") for the benefit of its directors and their beneficiaries.
A director may elect to defer all or part of his or her director's fees and has
the option to have the fees paid in cash, in shares of common stock or in a
combination of cash and shares of common stock upon termination from the Board
of Directors. If the director elects to have fees paid in stock, the number of
shares allocated to the director is determined by the market price of the common
stock on the day the fee is earned. As of December 31, 2002, 170,000 shares were
authorized and registered for use under the Plan, and 130,000 shares had been
credited to the directors' deferred fee accounts.
Beginning in 1999, pursuant to the Plan, 100 shares of the Company's
common stock are awarded annually 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 issued on the date of the Annual Meeting, their
issuance may not be deferred and transfer of the shares is restricted for a
period of twelve months following the date of issue.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Direct Guarantees of Indebtedness of
Others." FIN 45 outlines the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees. It states
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of its obligation. Saul Centers has guaranteed
portions of its Partnership debt obligations, all of which are presented on the
consolidated financial statements as mortgage notes payable. Saul Centers has
guaranteed $95,921,000 of the notes payable which are recourse loans made by the
Operating Partnership as of December 31, 2002. The balance of the mortgage notes
payable totaling $284,822,000 are non-recourse, however, as is customary when
obtaining long term non-course financing, Saul Centers has agreed to assume
certain obligations should they arise specific to individual mortgages. No
additional liabilities must be recognized as a result of the adoption of FIN 45
and the Company does not expect the adoption of FIN 45 to have a material impact
on its financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 outlines alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company has not made a
voluntary change to the fair value based method. As a result, the adoption of
SFAS No. 148 will not have a impact upon the consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which changes the guidelines for consolidation of and
disclosure related to unconsolidated entities, if those unconsolidated entities
qualify as variable interest entities, as defined in FIN 46. The Company does
not have any unconsolidated entities or variable interest entities and therefore
the adoption of FIN 46 will not have an impact upon the consolidated financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and short-term investments with
maturities of three months or less measured from the acquisition date.
Per Share Data
Per share data is calculated in accordance with SFAS No. 128, "Earnings
Per Share." Per share data for net income (basic and diluted) is computed using
weighted average shares of common stock. Convertible limited partnership units
and employee stock options are the Company's potentially dilutive securities.
For all periods
F-11
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
presented, the convertible limited partnership units are anti-dilutive. The
options are currently dilutive because the average share price of the Company's
common stock exceeds the $20.00 exercise price. The options were not dilutive
during years previous to 2002. Five executive officers have been granted 180,000
stock options, 93,210 shares which remain unexercised as of December 31, 2002.
The treasury share method was used to measure the effect of the dilution.
Basic and Diluted Shares Outstanding
------------------------------------
(In thousands) December 31
-----------
2002 2001 2000
-----------------------------------
Weighted average common shares
outstanding - Basic .......... 14,865 14,210 13,623
Effect of dilutive options ... 22 -- --
-----------------------------------
Weighted average common shares
outstanding - Diluted ........ 14,887 14,210 13,623
===================================
Average Share Price $ 22.90 * *
-------------------
* The option exercise price exceeded the average share price
for these periods.
3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS
IN THE OPERATING PARTNERSHIP
The Saul Organization has a 25.4% limited partnership interest,
represented by 5,175,000 convertible limited partnership units, in the Operating
Partnership, as of December 31, 2002. These convertible limited partnership
units are convertible into shares of Saul Centers' common stock on a one-for-one
basis, provided the rights may not be exercised at any time that The Saul
Organization beneficially owns, directly or indirectly, in the aggregate more
than 24.9% of the outstanding equity securities of Saul Centers. The limited
partnership units were not convertible as of December 31, 2002 because the Saul
Organization owned in excess of 24.9% of the Company's equity securities. The
impact of The Saul Organization's 25.4% limited partnership interest in the
Operating Partnership is reflected as minority interests in the accompanying
consolidated financial statements. Fully converted partnership units and diluted
weighted average shares outstanding for the years ended December 31, 2002, 2001
and 2000, were 20,059,000, 19,383,000 and 18,796,000, respectively.
4. NOTES PAYABLE
During 2002 the Company closed a new $125 million unsecured revolving
credit facility to provide working capital and funds for redevelopments and
acquisitions. The line has a three-year term and provides for an additional
one-year extension at the Company's option. The new line is a $55 million
expansion of a prior revolver. The additional availability under the new
facility will enable the Company to access capital for future purchases of
operating properties as opportunities arise. At December 31, 2002, $46,750,000
was outstanding under the line, with interest calculated using LIBOR plus
1.625%. Loan availability is determined by operating income from the Company's
unencumbered properties, which, as of December 31, 2002 allowed the Company to
borrow an additional $30,250,000 for general corporate use. An additional $48
million is available for funding working capital and operating property
acquisitions supported by the unencumbered properties' internal cash flow growth
and operating income of future acquisitions. Also during 2002, the Company
committed to replace its $42,000,000 construction loan used to finance the
building of Washington Square at Old Town with a $42,500,000 permanent mortgage.
The new permanent financing, closed in January 2003, matures in 15 years and
requires monthly principal and interest payments based upon a 27.5 year
amortization period and 6.01% interest rate. In September 2002, the Company
assumed a $7,806,000 mortgage in conjunction with its acquisition of Kentlands
Square shopping center.
F-12
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
The following is a summary of notes payable as of December 31, 2002 and
2001:
Notes Payable
(Dollars in thousands) Principal Outstanding December 31, Interest Scheduled
2002 2001 Rate * Maturity *
------------------------------------------------------------------------
Fixed Rate Mortgages: $135,641 (a) $ 138,215 7.67 % Oct 2012
93,044 (b) 95,716 8.23 % Dec 2011
34,830 (c) 35,583 7.88 % Jan 2013
13,667 (d) 13,936 8.33 % Jun 2015
9,797 (e) 10,028 6.88 % May 2004
7,640 (f) -- 8.18 % Feb 2004
------------------------------------------------------------------------
Total Fixed Rate 294,619 293,478 7.89 % 9.2 Years
------------------------------------------------------------------------
Variable Rate Loans:
Construction Loan 39,374 (g) 38,342 2.89 % Jan 2003
Line of Credit 46,750 (h) 20,000 3.09 % Aug 2005
------------------------------------------------------------------------
Total Variable Rate 86,124 58,342 3.00 % 1.5 Years
------------------------------------------------------------------------
Total Notes Payable $380,743 $ 351,820 6.78 % 7.4 Years
========================================================================
*Interest rate and scheduled maturity data presented for December 31, 2002.
Totals computed using weighted averages.
(a) The loan is collateralized by nine shopping centers (Seven Corners,
Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza,
Belvedere, Giant and Ravenwood) and requires equal monthly principal
and interest payments of $1,103,000 based upon a 25 year amortization
schedule and a balloon payment of $96,3000,000 at loan maturity.
Principal of $2,574,000 was amortized during 2002.
(b) The loan is collateralized by Avenel Business Park, Van Ness Square,
Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The
loan has been increased on three occasions since its inception in 1997.
The 8.23% blended interest rate is the weighted average of the initial
loan rate and additional borrowings rates. The loan requires equal
monthly principal and interest payments of $871,000 are based upon a
weighted average 23 year amortization schedule and a balloon payment
of $55,788,000 at loan maturity. Principal of $2,672,000 was amortized
during 2002.
(c) The loan is collateralized by 601 Pennsylvania Avenue and requires
equal monthly principal and interest payments of $294,000 based upon a
25 year amortization schedule and a balloon payment of $22,808,000 at
loan maturity. Principal of $753,000 was amortized during 2002.
(d) The loan is collateralized by Shops at Fairfax and Boulevard shopping
centers and requires monthly principal and interest payments based upon
a 22 year amortization schedule. Principal of $269,000 was amortized
during 2002.
(e) The loan is collateralized by The Glen shopping center and a corporate
guarantee. The loan requires monthly principal and interest payments
based upon a 23 year amortization schedule. Principal of $231,000 was
amortized during 2002.
(f) The loan is collateralized by Kentlands Square shopping center and
requires monthly principal and interest payments based upon a 15 year
amortization schedule. Principal of $166,000 was amortized during 2002.
(g) The loan is a construction loan totaling $42,000,000 and is
collateralized by Washington Square. Interest expense is calculated
based upon the 1, 2, 3 or 6 month LIBOR rate plus a spread of 1.45% to
1.9% (determined by certain leasing and/or construction benchmarks) or
upon the bank's prime rate at the Company's option. The loan was repaid
on January 9, 2003. The interest rate in effect on December 31, 2002
was based on a weighted average LIBOR of 1.44% and spread of 1.45%. The
effective annual average interest rate, which considers debt cost
amortization, was 3.69% for 2002.
(h) The loan is an unsecured revolving credit facility totaling
$125,000,000. Loan availability is determined by operating income from
the Company's unencumbered properties. An additional amount is
available for funding qualified operating property acquisitions.
Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR
rate plus a spread of 1.625% to 1.875% (determined by certain debt
service coverage and leverage tests) or upon the bank's reference rate
at the Company's option. The line may be extended one
F-13
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
year with payment of a fee of 1/4% at the Company's option. The
interest rate in effect on December 31, 2002 was based on a weighted
average LIBOR of 1.391% and spread of 1.625% and a prime rate of
4.25%. The effective annual average interest rate, which considers
debt cost amortization and unused line fees, was 4.84% for 2002.
Monthly payments are interest only and will vary depending upon the
amount outstanding and the applicable interest rate for any given
month.
The December 31, 2002 and 2001, depreciation adjusted cost of
properties collateralizing the mortgage notes payable totaled $280,051,000 and
$264,831,000, respectively. All of the Company's variable rate debt, including
its line of credit, require the Company and its subsidiaries to maintain
financial covenants. The Company's material covenants require the Company, on a
consolidated basis, to:
. limit the amount of debt so as to maintain a gross asset value in
excess of liabilities of at least $250 million;
. limit the amount of debt as a percentage of gross asset value
(leverage ratio) to less than 60%;
. limit the amount of debt so that interest coverage will exceed 1.9
to 1 on a trailing four quarter basis; and
. limit the amount of debt so that interest and scheduled principal
amortization coverage exceeds 1.6 to 1.
As of December 31, 2002, the Company was in compliance with all such covenants.
Notes payable at December 31, 2002 and 2001, totaling $266,392,000 and
$242,168,000, respectively, are guaranteed by members of The Saul Organization.
As of December 31, 2002, the scheduled maturities of all debt including
scheduled principal amortization for years ended December 31, are as follows:
Debt Maturity Schedule
----------------------
(In thousands)
2003 * ............................... $ 46,940
2004 ................................. 23,988
2005 ................................. 54,720
2006 ................................. 8,635
2007 ................................. 9,357
Thereafter ........................... 237,103
-------------
Total ................................ $ 380,743
=============
* A total of $39,374 of the 2003 maturities was refinanced in
January 2003.
5. LEASE AGREEMENTS
Lease income includes primarily base rent arising from noncancelable commercial
leases. Base rent for the years ended December 31, 2002, 2001 and 2000, amounted
to $75,699,000, $69,662,000 and $63,837,000, respectively. Future contractual
payments under noncancelable leases for years ended December 31, are as follows:
Future Contractual Payments
---------------------------
(In thousands)
2003 ................................. $ 70,701
2004 ................................. 64,776
2005 ................................. 58,094
2006 ................................. 51,148
2007 ................................. 44,966
Thereafter ........................... 244,364
-------------
Total ................................ $ 534,049
=============
The majority of the leases also provide for rental increases and
expense recoveries based on increases in the Consumer Price Index or increases
in operating expenses, or both. These increases generally are payable in equal
installments throughout the year based on estimates, with adjustments made in
the succeeding year. Expense recoveries for the years ended December 31, 2002,
2001 and 2000 amounted to $12,680,000, $11,456,000 and $11,129,000,
respectively. In addition, certain retail leases provide for percentage rent
based on sales in excess of
F-14
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
the minimum specified in the tenant's lease. Percentage rent amounted to
$1,850,000, $2,113,000 and $2,097,000, for the years ended December 31, 2002,
2001 and 2000, respectively.
6. LONG-TERM LEASE OBLIGATIONS
Certain properties are subject to noncancelable long-term leases which
apply to land underlying the Shopping Centers. Certain of the leases provide for
periodic adjustments of the base annual rent and require the payment of real
estate taxes on the underlying land. The leases will expire between 2058 and
2068. Reflected in the accompanying consolidated financial statements is minimum
ground rent expense of $164,000, $167,000 and $157,000, for each of the years
ended December 31, 2002, 2001 and 2000, respectively. The future minimum rental
commitments under these ground leases are as follows:
Ground Lease Rental Commitments
(In thousands)
Annually Total
2003-2007 Thereafter
----------- ----------
Beacon Center $ 53 $ 3,236
Olney 51 4,423
Southdale 60 3,605
----- --------
Total $ 164 $ 11,264
===== ========
In addition to the above, Flagship Center consists of two developed
outparcels that are part of a larger adjacent community shopping center formerly
owned by The Saul Organization and sold to an affiliate of a tenant in 1991. The
Company has a 90-year ground leasehold interest which commenced in September
1991 with a minimum rent of one dollar per year.
The Company's corporate headquarters lease commenced in March 2002. The
10-year lease provides for an initial annual rental payment of $513,000,
escalated at 3% per year, with payment of a pro-rata share of operating expenses
over a base year amount. Reflected in the accompanying financial statements is
straight-lined rental expense of $549,000 for the year ended December 31, 2002.
The future minimum rental commitments under this lease are $653,000 annually for
the five years from 2003 through 2007, and $2,722,000 thereafter. This lease
expense is included in the shared services portion of general and administrative
expense (see Note 8 - Related Party Transactions).
7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
The consolidated statement of operations for the year ended December
31, 2002 includes a charge for minority interests of $8,070,000, consisting of
$7,130,000 related to The Saul Organization's share of the net income for the
year and $940,000 related to distributions to minority interests in excess of
allocated net income for the year. The charge for the year ended December 31,
2001 of $8,069,000, consisting of $6,777,000 related to The Saul Organization's
share of the net income for the year and $1,292,000 related to distributions to
minority interests in excess of allocated net income for the year. The charge
for the year ended December 31, 2000 of $8,069,000 consists of $6,081,000
related to The Saul Organization's share of the net income for the year and
$1,988,000 related to distributions to minority interests in excess of allocated
net income for the year.
8. RELATED PARTY TRANSACTIONS
In October 2000, the Company purchased, through its Operating
Partnership, Avenel VI, a 30,000 square foot office/flex property for $4,200,000
based on an independent third party appraisal. The seller was a member of The
Saul Organization.
F-15
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
In August 2000, the Company purchased a land parcel of 7.11 acres, located
within the 1,580 acre community of Ashburn Village in Loudoun County, Virginia,
adjacent to its Ashburn Village neighborhood shopping center at a price of
$1,580,000, based on an independent third party appraisal. The land was
developed to expand the existing shopping center. The seller was a member of The
Saul Organization.
Chevy Chase Bank, an affiliate of The Saul Organization, leases space in 13
of the Company's properties. Total rental income from Chevy Chase Bank amounted
to $1,368,000, $1,330,000 and $1,223,000, for the years ended December 31, 2002,
2001 and 2000, respectively.
An entity controlled by the son of Philip D. Caraci, the Company's
President and director until March 2003 and current Vice Chairman, leased space
in four of the Company's Shopping Centers during 2002. The total rental income
was $143,000 during the year ended December 31, 2002. The leases were assigned
to unaffiliated third parties during the year and no further rental income will
be received under these leases from the affiliated party during 2003.
Additionally, a $37,000 leasing commission payment was made to this affiliated
party for procurement of a third party tenant lease at one of the Company's
Shopping Centers.
The Chairman and Chief Executive Officer, the President, and the Chief
Accounting Officer of the Company are also officers of various members of The
Saul Organization and their management time is shared with The Saul
Organization. Their annual compensation is fixed by the Compensation Committee
of the Board of Directors.
The Company shares with The Saul Organization on a pro-rata basis certain
ancillary functions such as computer hardware, software and support services and
certain direct and indirect administrative payroll based on management's
estimate of usage or time incurred, as applicable. Also, The Saul Organization
subleases office space to the Company for its corporate headquarters (see Note
6-Long-Term Lease Obligations for the terms of this lease). The terms of all
such arrangements with The Saul Organization, including payments related
thereto, are reviewed by the Audit Committee of the Board of Directors. Included
in general and administrative expense for the years ended December 31, 2002,
2001 and 2000, are charges totaling $2,574,000, $1,971,000 and $2,091,000,
related to shared services, of which $2,542,000, $2,010,000 and $2,056,000, were
paid during the years ended December 31, 2002, 2001 and 2000, respectively.
9. STOCK OPTION PLAN
The Company has established a stock option plan for the purpose of
attracting and retaining executive officers and other key personnel. The plan
provides for grants of options to purchase a specified number of shares of
common stock. A total of 400,000 shares are available under the plan. The 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.
The Compensation Committee has granted options to purchase a total of
180,000 shares (90,000 shares from incentive stock options and 90,000 shares
from nonqualified stock options) to five Company officers, all of which were
granted in 1993 and 1994. The options vested 25% per year over four years, have
an exercise price of $20 per share and a term of ten years, subject to earlier
expiration upon termination of employment. During the year ended December 31,
2002, 86,790 option shares were exercised (49,900 incentive stock options and
36,890 nonqualified stock options). The remaining 93,210 unexercised option
shares are fully vested and expire September 23, 2003. No compensation expense
has been recognized as a result of these grants.
F-16
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
10. NON-OPERATING ITEMS
Gain on Sale of Property
Gain on sale of property of $1,426,000 in 2002 represents the final
proceeds received upon appeal of the District of Columbia's purchase of the
Company's Park Road property as part of an assemblage of parcels for a
neighborhood revitalization project. There were no property sales in 2001 or
2000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure about the fair value
of financial instruments. The carrying values of cash, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value. Based on interest rates currently available to the Company, the carrying
value of the variable rate credit line payable is a reasonable estimation of its
fair value, because the debt bears interest based on short-term interest rates.
Based upon management's estimate of borrowing rates and loan terms currently
available to the Company for fixed rate financing, the fair value of the fixed
rate notes payable is in excess of the $294,619,000 carrying value. Management
estimates that the fair value of these fixed rate notes payable, assuming
current long term interest rates of approximately 6%, would be approximately
$329,000,000.
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 administrative 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.
F-17
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
13. DISTRIBUTIONS
In December 1995, the Company established a Dividend Reinvestment 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 distributions. The
Plan provides for investing in newly issued shares of common stock at a 3%
discount from market price without payment of any brokerage commissions, service
charges or other expenses. All expenses of the Plan are paid by the Company. The
Operating Partnership also maintains a similar dividend reinvestment plan that
mirrors the Plan, which allows limited partnership interests the opportunity to
buy additional limited partnership units.
During 2002, $1.46 per share of the distributions paid represented
ordinary dividend income and $0.10 per share represented return of capital to
the shareholders. The following summarizes distributions paid during the years
ended December 31, 2002, 2001 and 2000, and includes activity in the Plan as
well as limited partnership units issued from the reinvestment of unit
distributions:
Total Distributions to Dividend Reinvestments
---------------------- ----------------------
Limited Common
Common Partnership Stock Units Discounted
Stockholders Unitholders Issued Issued Share Price
------------ ----------- ------ ------ -----------
(in thousands) (in thousands)
Distributions during 2002
-------------------------
October 31 $ 5,839 $ 2,019 136,107 3,110 $ 23.18
July 31 5,785 2,017 135,603 -- 22.94
April 30 5,736 2,017 119,772 -- 22.94
January 31 5,670 2,017 165,390 -- 20.39
-------- ------- ------- -------
$ 23,030 $ 8,070 556,872 3,110
======== ======= ======= =======
Distributions during 2001
-------------------------
October 31 $ 5,599 $ 2,018 176,319 -- $ 18.62
July 31 5,529 2,017 175,790 -- 18.04
April 30 5,460 2,017 169,753 -- 17.95
January 31 5,410 2,017 123,561 -- 17.07
-------- ------- ------- -------
$ 21,998 $ 8,069 645,423 --
======== ======= ======= =======
Distributions during 2000
-------------------------
October 31 $ 5,356 $ 2,018 133,435 -- $ 14.85
July 31 5,305 2,017 125,705 -- 15.34
April 28 5,254 2,017 125,558 -- 14.97
January 31 5,202 2,017 129,789 -- 14.43
-------- ------- ------- -------
$ 21,117 $ 8,069 514,487 --
======== ======= ======= =======
In December 2002, 2001 and 2000, the Board of Directors of the Company
authorized a distribution of $0.39 per share payable in January 2003, 2002 and
2001, to holders of record on January 17, 2003, January 17, 2002 and January 15,
2001, respectively. As a result, $5,924,000, $5,670,000 and $5,410,000, were
paid to common shareholders on January 31, 2003, January 31, 2002 and January
31, 2001, respectively. Also, $2,018,000, $2,017,000 and $2,017,000, were paid
to limited partnership unitholders on January 31, 2003, January 31, 2002 and
January 31, 2001 ($0.39 per Operating Partnership unit), respectively. These
amounts are reflected as a reduction of stockholders' equity in the case of
common stock dividends and minority interests deductions in the case of limited
partner distributions and are included in accounts payable in the accompanying
consolidated financial statements.
F-18
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
14. INTERIM RESULTS (UNAUDITED)
The following summary presents the results of operations of the Company
for the quarterly periods of years 2002, 2001 and 2000.
(In thousands, except per share amounts)
--------------------------------------------------------------------------
2002 Calendar Year
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Revenues $ 23,191 $ 22,793 $ 23,471 $ 24,508
---------------- ---------------- ---------------- ----------------
Income before minority interests 8,352 (a) 6,499 5,503 7,282
Minority interests (2,017) (2,017) (2,017) (2,019)
---------------- ---------------- ---------------- ----------------
Net income $ 6,335 $ 4,482 $ 3,486 $ 5,263
================ ================ ================ ================
Net income per share (basic & diluted) $ 0.43 $ 0.30 $ 0.24 $ 0.35
================ ================ ================ ================
(a) Includes $1,426 gain on sale of Park Road property.
--------------------------------------------------------------------------
2001 Calendar Year
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Revenues $ 21,236 $ 20,919 $ 21,533 $ 22,620
---------------- ---------------- ---------------- ----------------
Income before minority interests 6,051 5,924 6,289 7,119
Minority interests (2,017) (2,017) (2,017) (2,018)
---------------- ---------------- ---------------- ----------------
Net income $ 4,034 $ 3,907 $ 4,272 $ 5,101
================ ================ ================ ================
Net income per share (basic & diluted) $ 0.29 $ 0.28 $ 0.30 $ 0.35
================ ================ ================ ================
--------------------------------------------------------------------------
2000 Calendar Year
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Revenues $ 19,407 $ 18,988 $ 19,724 $ 20,910
---------------- ---------------- ---------------- ----------------
Income before minority interests 5,533 5,183 5,859 5,539
Minority interests (2,017) (2,017) (2,017) (2,018)
---------------- ---------------- ---------------- ----------------
Net income $ 3,516 $ 3,166 $ 3,842 $ 3,521
================ ================ ================ ================
Net income per share (basic & diluted) $ 0.26 $ 0.24 $ 0.28 $ 0.25
================ ================ ================ ================
F-19
SAUL CENTERS, INC.
Notes to Consolidated Financial Statements
15. BUSINESS SEGMENTS
The company has two reportable business segments: Shopping Centers and
Office Properties. The accounting policies of the segments presented
below are the same as those described in the summary of significant
accounting policies (see Note 1). The Company evaluates performance
based upon income from real estate for the combined properties in each
segment.
(In thousands) Shopping Office Corporate Consolidated
Centers Properties and Other Totals
------------ ------------ ------------ ------------
2002
----
Real estate rental operations:
Revenues .................................... $ 61,597 $ 32,261 $ 105 $ 93,963
Expenses .................................... (10,675) (7,882) -- (18,557)
--------- --------- --------- ---------
Income for real estate ......................... 50,922 24,379 105 75,406
Interest expense & amortization of debt costs -- -- (25,838) (25,838)
General and administrative .................. -- -- (5,537) (5,537)
--------- --------- --------- ---------
Subtotal ....................................... 50,922 24,379 (31,270) 44,031
Depreciation and amortization ............... (11,295) (6,526) -- (17,821)
Gain on property sale ....................... 1,426 1,426
Minority interests .......................... -- -- (8,070) (8,070)
--------- --------- --------- ---------
Net income ..................................... $ 41,053 $ 17,853 $ (39,340) $ 19,566
========= ========= ========= =========
Capital investment ............................. $ 31,769 $ 17,336 $ -- $ 49,105
========= ========= ========= =========
Total assets ................................... $ 215,692 $ 135,836 $ 37,159 $ 388,687
========= ========= ========= =========
2001
----
Real estate rental operations:
Revenues .................................... $ 58,714 $ 27,427 $ 167 $ 86,308
Expenses .................................... (10,324) (6,022) -- (16,346)
--------- --------- --------- ---------
Income from real estate ........................ 48,390 21,405 167 69,962
Interest expense & amortization of debt costs -- -- (25,486) (25,486)
General and administrative .................. -- -- (4,335) (4,335)
--------- --------- --------- ---------
Subtotal ....................................... 48,390 21,405 (29,654) 40,141
Depreciation and amortization ............... (9,751) (5,007) -- (14,758)
Minority interest ........................... -- -- (8,069) (8,069)
--------- --------- --------- ---------
Net income ..................................... $ 38,639 $ 16,398 $ (37,723) $ 17,314
========= ========= ========= =========
Capital investment ............................. $ 8,220 $ 13,580 $ -- $ 21,800
========= ========= ========= =========
Total assets ................................... $ 192,762 $ 124,529 $ 29,112 $ 346,403
========= ========= ========= =========
2000
----
Real estate rental operations:
Revenues .................................... $ 59,969 $ 21,837 $ 223 $ 79,029
Expenses .................................... (10,252) (4,937) -- (15,189)
--------- --------- --------- ---------
Income from real estate ........................ 46,717 16,900 223 63,840
Interest expense & amortization of debt costs -- -- (24,301) (24,301)
General and adminstrative ................... -- -- (3,891) (3,891)
--------- --------- --------- ---------
Subtotal ....................................... 46,717 16,900 (27,969) 35,648
Depreciation and amortization ............... (9,453) (4,079) (2) (13,534)
Minority interests .......................... -- -- (8,069) (8,069)
--------- --------- --------- ---------
Net income ..................................... $ 37,264 $ 12,821 $ (36,040) $ 14,045
========= ========= ========= =========
Capital investment ............................. $ 14,886 $ 28,540 $ -- $ 43,426
========= ========= ========= =========
Total assets ................................... $ 185,518 $ 117,497 $ 31,435 $ 334,450
========= ========= ========= =========
F-20
Schedule III
SAUL CENTERS, INC.
Real Estate and Accumulated Depreciation
December 31, 2002
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
--------------------------------------------------------
Subsequent Buildings
Initial to and Leasehold
Basis Acquisition Land Improvements Interests Total
-------------- -------------- ------------- -------------- ------------- -------------
Shopping Centers
Ashburn Village, Ashburn, VA $ 11,431 $ 15,969 $ 6,764 $ 20,636 $ -- $ 27,400
Beacon Center, Alexandria, VA 1,493 14,856 -- 15,255 1,094 16,349
Belvedere, Baltimore, MD 932 845 263 1,514 -- 1,777
Boulevard, Fairfax, VA 4,883 1,512 3,687 2,708 -- 6,395
Broadlands, Loudoun County, VA 5,317 1,003 5,317 1,003 -- 6,320
Clarendon, Arlington, VA 385 405 636 154 -- 790
Clarendon Station, Arlington, VA 834 37 425 446 -- 871
Flagship Center, Rockville, MD 160 9 169 -- -- 169
French Market, Oklahoma City, OK 5,781 9,739 1,118 14,402 -- 15,520
Germantown, Germantown, MD 3,576 297 2,034 1,839 -- 3,873
Giant, Baltimore, MD 998 364 422 940 -- 1,362
The Glen, Lake Ridge, VA 12,918 799 5,300 8,417 -- 13,717
Great Eastern, District Heights., MD 3,472 9,381 2,263 10,590 -- 12,853
Hampshire Langley, Langley Park, MD 3,159 2,768 1,856 4,071 -- 5,927
Kentlands, Gaithersburg, MD 14,534 123 5,006 9,651 -- 14,657
Lansdowne, Loudoun County, VA 5,526 158 5,526 158 -- 5,684
Leesburg Pike, Baileys Crossroads, VA 2,418 5,082 1,132 6,368 -- 7,500
Lexington Mall, Lexington, KY 4,868 5,991 2,111 8,748 -- 10,859
Lumberton Plaza, Lumberton, NJ 4,400 9,016 950 12,466 -- 13,416
Olney, Olney, MD 1,884 1,404 -- 3,288 -- 3,288
Ravenwood, Baltimore, MD 1,245 1,745 703 2,287 -- 2,990
Seven Corners, Falls Church, VA 4,848 39,541 4,913 39,476 -- 44,389
Shops at Fairfax, Fairfax, VA 2,708 9,193 992 10,909 -- 11,901
Southdale, Glen Burnie, MD 3,650 15,541 -- 18,569 622 19,191
Southside Plaza, Richmond, VA 6,728 4,586 1,878 9,436 -- 11,314
South Dekalb Plaza, Atlanta, GA 2,474 2,635 703 4,406 -- 5,109
Thruway, Winston-Salem, NC 4,778 14,060 5,464 13,269 105 18,838
Village Center, Centreville, VA 16,502 731 7,851 9,382 -- 17,233
West Park, Oklahoma City, OK 1,883 596 485 1,994 -- 2,479
White Oak, Silver Spring, MD 6,277 3,742 4,787 5,232 -- 10,019
-------------- -------------- ------------- -------------- ------------- -------------
Total Shopping Centers 140,062 172,128 72,755 237,614 1,821 312,190
-------------- -------------- ------------- -------------- ------------- -------------
Office Properties
Avenel Business Park, Gaithersburg, MD 21,459 19,021 3,851 36,629 -- 40,480
Clarendon Center, Arlington, VA 11,534 512 11,534 512 -- 12,046
Crosstown Business Center, Tulsa, OK 3,454 5,513 604 8,363 -- 8,967
601 Pennsylvania Ave., Washington DC 5,479 48,336 5,667 48,148 -- 53,815
Van Ness Square, Washington, DC 812 27,131 831 27,112 -- 27,943
Washington Square, Alexandria VA 2,034 46,240 544 47,730 -- 48,274
-------------- -------------- ------------- -------------- ------------- -------------
Total Office Properties 44,772 146,753 23,031 168,494 -- 191,525
-------------- -------------- ------------- -------------- ------------- -------------
Preacquistion Costs 199
-------------
Total $ 184,834 $ 318,881 $ 95,786 $ 406,108 $ 1,821 $ 503,914
Buildings
and
Improvements
Accumulated Book Related Date of Date Depreciable
Depreciation Value Debt Construction Acquired Lives in Years
-------------- ------------ ------------- -------------- ------------- ----------------
Shopping Centers
Ashburn Village, Ashburn, VA $ 2,686 $ 24,714 $ 18,847 1994 & 2000-2 3/94 40
Beacon Center, Alexandria, VA 6,725 9,624 10,924 1960 & 1974 1/72 40 & 50
Belvedere, Baltimore, MD 966 811 2,547 1958 1/72 40
Boulevard, Fairfax, VA 469 5,926 5,483 1969 4/94 40
Broadlands, Loudoun County, VA -- 6,320 -- 2002 3/02 40
Clarendon, Arlington, VA 43 747 470 1949 7/73 33
Clarendon Station, Arlington, VA 87 784 207 1949 1/96 40
Flagship Center, Rockville, MD -- 169 775 1972 1/72 --
French Market, Oklahoma City, OK 4,692 10,828 5,489 1972 & 2001 3/74 50
Germantown, Germantown, MD 636 3,237 1,757 1990 8/93 40
Giant, Baltimore, MD 654 708 2,584 1959 1/72 40
The Glen, Lake Ridge, VA 1,871 11,846 9,797 1993 6/94 40
Great Eastern, District Heights., MD 3,682 9,171 11,073 1958 & 1960 1/72 40
Hampshire Langley, Langley Park, MD 2,333 3,594 10,141 1960 1/72 40
Kentlands, Gaithersburg, MD 60 14,597 7,640 2002 9/02 40
Lansdowne, Loudoun County, VA -- 5,684 -- 2002 11/02 40
Leesburg Pike, Baileys Crossroads, VA 3,836 3,664 11,001 1965 2/66 40
Lexington Mall, Lexington, KY 4,944 5,915 7,407 1971 & 1974 3/74 50
Lumberton Plaza, Lumberton, NJ 7,053 6,363 7,761 1975 12/75 40
Olney, Olney, MD 1,969 1,319 3,690 1972 11/75 40
Ravenwood, Baltimore, MD 850 2,140 6,537 1959 1/72 40
Seven Corners, Falls Church, VA 14,143 30,246 44,259 1956 7/73 33
Shops at Fairfax, Fairfax, VA 2,782 9,119 8,184 1975 & 2001 6/75 50
Southdale, Glen Burnie, MD 12,385 6,806 11,627 1962 & 1987 1/72 40
Southside Plaza, Richmond, VA 6,211 5,103 9,800 1958 1/72 40
South Dekalb Plaza, Atlanta, GA 2,864 2,245 3,798 1970 2/76 40
Thruway, Winston-Salem, NC 5,994 12,844 25,316 1955 & 1965 5/72 40
Village Center, Centreville, VA 2,615 14,618 8,656 1990 8/93 40
West Park, Oklahoma City, OK 1,105 1,374 175 1974 9/75 50
White Oak, Silver Spring, MD 3,484 6,535 23,385 1958 & 1967 1/72 40
-------------- ------------ -------------
Total Shopping Centers 95,139 217,051 259,330
-------------- ------------ -------------
Office Properties
Avenel Business Park, Gaithersburg, MD 15,428 25,052 31,838 1984, 1986, 12/84, 8/85, 35 & 40
-- 1990, 1998 2/86, 4/98
& 2000 & 10/2000
Clarendon Center, Arlington, VA -- 12,046 -- 2002 4/02 40
Crosstown Business Center, Tulsa, OK 2,687 6,280 431 1974 10/75 40
601 Pennsylvania Ave., Washington DC 21,745 32,070 34,830 1986 7/73 35
Van Ness Square, Washington, DC 13,456 14,487 14,940 1990 7/73 35
Washington Square, Alexandria VA 1,831 46,443 39,374 1952 & 2001 7/73 40
-------------- ------------ -------------
Total Office Properties 55,147 136,378 121,413
-------------- ------------ -------------
Preacquistion Costs 199
------------
Total $ 150,286 $ 353,628 $ 380,743
F-21
Schedule III
SAUL CENTERS, INC.
Real Estate and Accumulated Depreciation
December 31, 2002
Depreciation and amortization related to the real estate
investments reflected in the statements of operations is calculated
over the estimated useful lives of the assets as follows:
Base building 33 - 50 years
Building components 20 years
Tenant improvements The greater of the term of the lease or
the useful life of the improvements
The aggregate remaining net basis of the real estate investments
for federal income tax purposes was approximately $362,604,000 at
December 31, 2002. Depreciation and amortization are provided on
the declining balance and straight-line methods over the estimated
useful lives of the assets.
The changes in total real estate investments and related
accumulated depreciation for each of the years in the three year
period ended December 31, 2002 are summarized as follows.
(In thousands) 2002 2001 2000
--------------------------------------------------------- ------------- ------------- -------------
Total real estate investments:
Balance, beginning of year $ 454,809 $ 433,009 $ 389,583
Acquisitions 28,871
Improvements 20,234 21,800 43,426
Sales -- -- --
Retirements -- -- --
------------- ------------- -------------
Balance, end of year $ 503,914 $ 454,809 $ 433,009
============= ============= =============
Total accumulated depreciation:
Balance, beginning of year $ 136,928 $ 124,180 $ 112,272
Depreciation expense 15,526 12,748 11,908
Sales -- -- --
Retirements 2,168 -- --
------------- ------------- -------------
Balance, end of year $ 150,286 $ 136,928 $ 124,180
============= ============= =============
F-22