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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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 February 21, 2003 was 15,387,397.
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 June 28, 2002 was
$247,588,000.
TABLE OF CONTENTS
PART I Page Numbers
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Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
And Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 27
Item 14. Controls and Procedures 27
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation F-21
2
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 (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 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
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.
Operating Strategies
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.
4
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
re-lease 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.
Redevelopment, Renovations and Acquisitions
The Company's redevelopment, renovation and acquisition 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 Washington, DC/Baltimore metropolitan area) 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.
5
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 Washington, DC/Baltimore metropolitan area,
the Company may, in the future, also acquire other types of real estate in other
areas of the country.
Capital Strategies
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.
Competition
As an owner of, or investor in, commercial real estate properties, the
Company is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition 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 retail and commercial 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.
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.
6
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.
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
7
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.
Item 2. Properties
Overview
The Company is the owner and operator of a real estate portfolio of 34
properties totaling approximately 6,300,000 square feet of gross leasable area
("GLA") located primarily in the Washington, DC/Baltimore metropolitan area. The
portfolio is composed of 29 neighborhood and community Shopping Centers, and
five predominantly Office Properties totaling approximately 5,100,000 and
1,200,000 square feet of GLA, respectively. Only the United States Government
(8.4%), a tenant of six properties and Giant Food (5.7%), a tenant of eight
Shopping Centers, individually accounted for more than 1.9% of the Company's
total revenues for the year ending December 31, 2002. With the exception of
three development parcels purchased in 2002, six Shopping Center properties and
a portion of one Office Property purchased or developed during the past six
years, the Company's Current Portfolio Properties consist of seasoned properties
that have been owned and managed by The Saul Organization for 15 years or more.
The Company expects to hold its properties as long-term investments, and it has
no maximum period for retention of any investment. It plans to selectively
acquire additional income-producing properties and to expand, renovate, and
improve its properties when circumstances warrant. See "Item 1.
Business--Operating Strategies" and "Business--Capital Strategies."
The Shopping Centers
Community and neighborhood shopping centers typically are anchored by
one or more supermarkets, discount department stores or drug stores. These
anchors offer day-to-day necessities rather than apparel and luxury goods and,
therefore, generate consistent local traffic. By contrast, regional malls
generally are larger and typically are anchored by one or more full-service
department stores.
The Shopping Centers (typically) are seasoned community and
neighborhood shopping centers located in well established, highly developed,
densely populated, middle and upper income areas. Based upon 2000 U.S. Census
Bureau data, the average estimated population within a three and five-mile
radius of the Shopping Centers is approximately 113,000 and 274,000,
respectively. The average household income within both the three and five-mile
radii of the Shopping Centers is approximately $73,000, compared to a national
average of $55,000. Because the Shopping Centers generally are located in highly
developed areas, management believes that there is little likelihood that
significant numbers of competing centers will be developed in the future.
The Shopping Centers range in size from 5,000 to 561,000 square feet of
GLA, with seven in excess of 300,000 square feet, and a weighted average of
approximately 175,000 square feet. A majority of the Shopping
8
Centers are anchored by several major tenants and other tenants offering
primarily day-to-day necessities and services. Seventeen of the 28 Shopping
Centers are anchored by a grocery store. As of February 21, 2003, no single
property accounted for more than 8.9% of the Portfolio Properties' GLA.
The Office Properties
Four of the five Office Properties are located in the Washington, DC
metropolitan area and contain an aggregate GLA of approximately 975,000 square
feet, comprised of 889,000 and 86,000 square feet of office and retail space,
respectively. The fifth Office Property is located in Tulsa, Oklahoma and
contains GLA of 197,000 square feet. The Office Properties represent three
distinct styles of facilities, are located in differing commercial environments
with distinctive demographic characteristics, and are geographically removed
from one another. As a consequence, management believes that the Washington DC
area Office Properties compete for tenants in different commercial and
geographic sub-markets of the metropolitan Washington, DC market and do not
compete with one another.
601 Pennsylvania Ave. is a nine-story, Class A office building (with a
small amount of street level retail space) built in 1986 and located in a prime
location in downtown Washington, DC. Van Ness Square is a six-story
office/retail building rebuilt in 1990. Van Ness Square is located in a highly
developed commercial area of Northwest Washington, DC which offers extensive
retail and restaurant amenities. Management believes that the Washington, DC
office market is one of the strongest and most stable leasing markets in the
nation, with relatively low vacancy rates in comparison to other major
metropolitan areas. Management believes that the long-term stability of this
market is attributable to the status of Washington, DC as the nation's capital
and to the presence of the Federal government, international agencies, and an
expanding private sector job market.
Washington Square at Old Town is a new 235,000 square foot Class A
mixed-use office/retail complex located on a two-acre site along Alexandria's
main street, North Washington Street, in historic Old Town Alexandria, Virginia.
Washington Square features two twin four-story buildings with brick and cast
stone exterior facades and glass curtain walls overlooking a spacious,
attractively landscaped brick courtyard. The property features three-story
atrium lobbies, a fitness center, concierge service, 600 space parking structure
and computerized energy management system.
Avenel Business Park (Phases I-III) is a research park located in the
suburban Maryland, I-270 biotech corridor. On April 1, 1998, the Company
purchased Avenel IV, a newly constructed and 100% leased office/flex building
located adjacent to Avenel Phases I-III. Two additional buildings (Avenel V)
were completed in January 1999. Phase VI was purchased October 2000. The
combined business park consists of twelve one-story buildings built in six
phases which were completed in 1981, 1985, 1989, 1998, 1999 and 2000. Management
believes that, due to its desirable location, the high quality of the property,
increased federal funding for medical research and the relative scarcity of
research and development space in its immediate area, Avenel should continue to
attract and retain desirable tenants in the future.
Crosstown Business Center is a 197,135 square foot flex
office/warehouse complex located in Tulsa, Oklahoma. The property is located in
close proximity to Tulsa's international airport and major roadways and has
attracted tenants requiring light industrial and distribution facilities.
The following table sets forth, at the dates indicated, certain
information regarding the Current Portfolio Properties:
9
Saul Centers, Inc.
Schedule of Current Portfolio Properties
December 31, 2002
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) (Acres) Dec-02 Dec-01 Anchor/Significant Tenants
---------- -------- -------- ----------- ------- -------- -------- --------------------------
Shopping Centers
- ----------------
Ashburn Village I, II & III Ashburn, VA 185,537 1994/00/01 23.3 100% 100% Giant Food, Blockbuster
Ashburn Village IV Ashburn, VA 25,200 2000/02 3.1 84% n/a
Beacon Center Alexandria, VA 352,915 1972(1993/99) 32.3 100% 100% Lowe's, Giant Food, Office
Depot, Outback Steakhouse,
Marshalls, Hollywwod Video,
Hancock Fabrics
Belvedere Baltimore, MD 54,941 1972 4.8 95% 86% Food King
Boulevard Fairfax, VA 56,350 1994(1999) 5.0 100% 93% Danker Furniture, Petco,
Party City
Clarendon Arlington, VA 6,940 1973 0.5 100% 100%
Clarendon Station Arlington, VA 4,868 1996 0.1 100% 78%
Flagship Center Rockville, MD 21,500 1972, 1989 0.5 100% 100%
French Market Oklahoma City, OK 244,724 1974(1984/98) 13.8 94% 93% Burlington Coat Factory, Bed
Bath & Beyond, Famous
Footwear, Lakeshore Learning
Center, BridesMart, Staples,
Dollar Tree
Germantown Germantown, MD 26,241 1992 2.7 82% 100%
Giant Baltimore, MD 70,040 1972(1990) 5.0 100% 100% Giant Food
The Glen Lake Ridge, VA 112,639 1994 14.7 87% 99% Safeway Marketplace
Great Eastern District Heights, MD 255,398 1972(1995) 23.9 99% 100% Giant Food, Pep Boys,
Big Lots, Run N' Shoot
Hampshire Langley Langley Park, MD 131,700 1972(1979) 9.9 100% 100% Safeway, Blockbuster
Kentlands Square Gaithersburg, MD 109,922 2002 11.5 100% n/a Lowe's
Leesburg Pike Baileys Crossroads, VA 97,880 1966(1982/95) 9.4 95% 100% CVS Pharmacy, Kinko's,
Hollywood Video
Lexington Mall Lexington, KY 315,719 1974 30.0 58% 69% Dillard's
Lumberton Lumberton, NJ 192,510 1975(1992/96) 23.3 96% 89% SuperFresh, Rite Aid,
Blockbuster, Ace Hardware
Olney Olney, MD 53,765 1975(1990) 3.7 100% 99% Rite Aid
Ravenwood Baltimore, MD 87,350 1972 8.0 100% 100% Giant Food, Hollywood Video
Seven Comers Falls Church, VA 560,998 1973(1994-7) 31.6 99% 100% Home Depot, Shoppers Club,
Michaels, Barnes & Noble,
Ross Dress For Less, G Street
Fabrics, Off-Broadway Shoes
Shops at Fairfax Fairfax, VA 68,743 1975(1993/99) 6.7 100% 100% Super H Mart, Blockbuster
10
Saul Centers, inc.
Schedule of current portfolio properties
December 31, 2002
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) (Acres) Dec-02 Dec-01 Anchor/Significant Tenants
-------- -------- -------- ----------- ------- ------ ------ --------------------------
Shopping Centers (Continued)
- ----------------------------
Southdale Glen Burnie, MD 484,115 1972(1986) 39.6 95% 94% Giant Food, Home Depot,
Circuit City, Kids R Us,
Michaels, Marshalls
PetSmart, Value City
Furniture
Southside Plaza Richmond, VA 341,981 1972 32.8 93% 91% CVS Pharmacy, Community
Pride Supermarket, Maxway
South Dekalb Plaza Atlanta GA 162,793 1976 14.6 100% 100% MacFrugals, Pep Boys, The
Emory Clinic, Maxway
Thruway Winston-Salem, NC 344,960 1972(1997) 30.5 92% 97% Harris Toeter, Fresh
Market, Bed Bath & Beyond,
Stein Mart, Eckerd Drugs,
Borders Books, Zany
Brainy, Blockbuster
Village Center Centreville, VA 143,100 1990 17.2 98% 100% Giant Food, Tuesday
Morning, Blockbuster
West Park Oklahoma City, OK 76,610 1975 11.2 57% 57% Homeland Stores, Family
Dollar
White Oak Silver Spring, MD 480,156 1972(1993) 28.5 100% 99% Giant Food, Sears, Rite
Aid, Blockbuster
--------- ------ ----- -----
Total Shopping Centers 5,069,505 438.2 93.9% 94.3%
--------- ------ ----- -----
Office Properties
- -----------------
Avenel Business Park Graithersburg, MD 388,620 1981-(2000) 37.1 98% 100% General Services
Administration, VIRxSYS,
Boston Biomedica,
Broadsoft, NeuralSTEM,
Quanta Systems
Crosstown Business Center Tulsa, OK 197,135 1975-(2000) 22.4 93% 82% Compass Group, Roxtec,
Outdoor Inovations, Auto
Panels Plus, Gofit,
Freedom Express
601 Pennsylvania Ave Washington, DC 225,414 1973-(1986) 1.0 91% 99% General Services
Administration, Credit
Union National Assn,
Southern Company, HQ
Global, Alltel, American
Arbitration, Capital Grille
Van Ness Square Washington, DC 156,493 1973-(1990) 1.2 92% 97% INTELSAT, Team Video Intl,
Office Depot, Pier 1
Washington Square Alexandria, VA 234,775 1975(2000) 2.0 88% 69% Vanderweil Engineering,
World Wide Retail Exch.,
EarthTech, Thales, Trader
Joe's, Kinko's, Blockbuster
--------- ------ ----- -----
Total Office Properties 1,202,437 61.7 92.9% 90.4%
--------- ------ ----- -----
Total Prperties 6,271,942 499.9/(o)/ 93.8% 93.5%
========= ====== ===== =====
/(o)/ The Company has purchased 24 acres of vacant land which is being developed
as Broadlands Village, 19 acres of vacant land in the Lansdowne community
in Loudoun County, Virginia and a 1.25 acre site in the Clarendon area of
Arlington, Virginia, as future development and redevelopment properties.
11
Item 3. Legal Proceedings
In the normal course of business, the Company is involved in
litigation, including litigation arising out of the collection of rents, the
enforcement or defense of the priority of its security interests, and the
continued development and marketing of certain of its real estate properties. In
the opinion of management, litigation that is currently pending should not have
a material adverse impact on the financial condition or future operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Saul Centers shares are listed on the New York Stock Exchange under the
symbol "BFS". The composite high and low closing sale prices for the shares of
common stock as reported by the New York Stock Exchange for each quarter of 2002
and 2001 were as follows:
Period Share Price
------ -----------
High Low
---- ---
October 1, 2002 - December 31, 2002 $24.51 $22.52
July 1, 2002 - September 30, 2002 $25.40 $21.91
April 1, 2002 - June 30, 2002 $25.90 $22.13
January 1, 2002 - March 31, 2002 $22.55 $21.02
October 1, 2001 - December 31, 2001 $22.00 $18.98
July 1, 2001 - September 30, 2001 $19.87 $18.25
April 1, 2001 - June 30, 2001 $19.30 $18.05
January 1, 2001 - March 31, 2001 $19.00 $17.60
On February 21, 2003, the closing price was $23.13.
Holders
The approximate number of holders of record of the common stock was 450 as of
February 21, 2003.
12
Dividends
Under the Code, REIT's are subject to numerous organizational and
operation requirements, including the requirement to distribute at least 90% of
REIT taxable income. The Company distributed amounts greater than the required
amount in 2002 and 2001. Actual distributions by the Company were $31,100,000 in
2002 and $30,067,000 in 2001. The Company may or may not elect to distribute in
excess of 90% of REIT taxable income in future years.
The Company's estimate of cash flow available for distributions is
believed to be based on reasonable assumptions and represents a reasonable basis
for setting distributions. However, the actual results of operations of the
Company will be affected by a variety of factors, including actual rental
revenue, operating expenses of the Company, interest expense, general economic
conditions, federal, state and local taxes (if any), unanticipated capital
expenditures, and the adequacy of reserves. While the Company intends to
continue paying regular quarterly distributions, any future payments will be
determined solely by the Board of Directors and will depend on a number of
factors, including cash flow of the Company, its financial condition and capital
requirements, the annual distribution requirements required to maintain its
status as a REIT under the Code, and such other factors as the Board of
Directors deems relevant.
The Company paid four quarterly distributions in the amount of $0.39
per share, during each of the years ended December 31, 2002 and 2001, totaling
$1.56 per share for each of these years. The annual distribution amounts paid by
the Company exceed the distribution amounts required for tax purposes.
Distributions to the extent of our current and accumulated earnings and profits
for federal income tax purposes generally will be taxable to a stockholder as
ordinary dividend income. Distributions in excess of current and accumulated
earnings and profits will be treated as a nontaxable reduction of the
stockholder's basis in such stockholder's shares, to the extent thereof, and
thereafter as taxable gain. Distributions that are treated as a reduction of the
stockholder's basis in its shares will have the effect of deferring taxation
until the sale of the stockholder's shares. The Company has determined that
93.5% of the total $1.56 per share paid in calendar year 2002 represents
currently taxable dividend income to the stockholders, while the balance of 6.5%
is considered return of capital. No assurance can be given regarding what
portion, if any, of distributions in 2003 or subsequent years will constitute a
return of capital for federal income tax purposes.
Item 6. Selected Financial Data
The selected financial data of the Company contained herein has been
derived from the consolidated financial statements of the Company. The data
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this report. The historical selected financial
data have been derived from audited financial statements for all periods.
13
Saul Centers, Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Operating Data:
- ---------------
Total revenue ........................................ $ 93,963 $ 86,308 $ 79,029 $ 73,791 $ 70,583
Operating expenses ................................... 67,753 60,925 56,915 53,124 53,393
--------- --------- --------- --------- ---------
Operating income ..................................... 26,210 25,383 22,114 20,667 17,190
Non-operating income(loss)
Gain on sale of property .......................... 1,426 -- -- 553 --
Change in accounting method ....................... -- -- -- -- (771)
--------- --------- --------- --------- ---------
Income before extraordinary item and minority
interests ............................................ 27,636 25,383 22,114 21,220 16,419
Extraordinary item: Early extinguishment of debt ....... -- -- -- -- (50)
--------- --------- --------- --------- ---------
Income before minority interests ....................... 27,636 25,383 22,114 21,220 16,369
Minority interests ..................................... (8,070) (8,069) (8,069) (7,923) (7,240)
--------- --------- --------- --------- ---------
Net income ............................................. $ 19,566 $ 17,314 $ 14,045 $ 13,297 $ 9,129
========= ========= ========= ========= =========
Per Share Data(diluted):
- ----------------------------------
Net income before extraordinary item and
minority interests ................................. $ 1.38 $ 1.31 $ 1.18 $ 1.17 $ 0.95
========= ========= ========= ========= =========
Net income ........................................... $ 1.31 $ 1.22 $ 1.03 $ 1.01 $ 0.72
========= ========= ========= ========= =========
Basic and Diluted Shares Outstanding
Weighted average common shares - basic ............ 14,865 14,210 13,623 13,100 12,644
Effect of diluted options ......................... 22 -- -- -- --
--------- --------- --------- --------- ---------
Weighted average common shares - diluted .......... 14,887 14,210 13,623 13,100 12,644
Weighted average convertible limited
partnership units ............................... 5,172 5,172 5,172 5,048 4,589
--------- --------- --------- --------- ---------
Weighted average common shares and fully coverted
limited partnership units - diluted ............. 20,059 19,383 18,796 18,148 17,233
========= ========= ========= ========= =========
Dividends Paid:
- ---------------
Cash dividends to common stockholders (1) ......... $ 23,030 $ 21,998 $ 21,117 $ 20,308 $ 19,731
========= ========= ========= ========= =========
Cash dividends per share .......................... $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 1.56
========= ========= ========= ========= =========
Balance Sheet Data:
- -------------------
Real Estate Investments (net of accumulated
depreciation) ...................................... $ 353,628 $ 317,881 $ 308,829 $ 277,311 $ 250,657
Total assets ......................................... 388,687 346,403 334,450 299,665 271,034
Total debt, including accrued interest ............... 382,619 353,554 344,686 311,114 291,576
Total stockholders' equity (deficit) ................. (13,267) (24,123) (31,155) (31,859) (37,284)
Other Data
- ----------
Cash flow provided by (used in):
Operating activities .............................. $ 37,499 $ 31,834 $ 32,781 $ 31,645 $ 29,686
Investing activities .............................. $ (49,105) $ (21,800) $ (43,426) $ (36,920) $ (14,776)
Financing activities .............................. $ 11,110 $ (10,001) $ 11,460 $ 3,837 $ (13,203)
Fund from operations (2)
Net income ........................................ $ 19,566 $ 17,314 $ 14,045 $ 13,297 $ 9,129
Minority Interests ................................ 8,070 8,069 8,069 7,923 7,240
Depreciation and amortization of real property .... 17,821 14,758 13,534 12,163 12,578
Gain on sale of property .......................... (1,426) -- -- (553) --
Change in accounting method ....................... -- -- -- -- 771
--------- --------- --------- --------- ---------
Funds from operations ................................ $ 44,031 $ 40,141 $ 35,648 $ 32,830 $ 29,718
========= ========= ========= ========= =========
(1) Of the amounts presented, $12,882, $11,976, $7,984, $7,162 and $6,634 was
reinvested by shareholders in newly issued common stock by operation of the
Company's dividend reinvestment plan during 2002, 2001, 2000, 1999 and
1998, respectively.
(2) Funds From Operations (FFO) is a non-GAAP financial measure. For a
definition of FFO, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Funds From Operations."
14
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"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
15
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.
16
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;
17
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.
18
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 monthly principal and
interest payments based upon a 25 year amortization schedule. 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. Monthly principal and
interest payments are based upon a weighted average 23 year
amortization schedule. Principal of $2,672,000 was amortized during
2002.
(c) The loan is collateralized by 601 Pennsylvania Avenue and requires
monthly principal and interest payments based upon a 25 year
amortization schedule. Principal of $753,000 was amortized during 2002.
19
(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.
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. Certain loans are subject to financial covenant
tests, the most significant of which are debt service coverage and loan to asset
value requirements under the variable rate loans. The Company believes it is 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 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.
20
Funds From Operations
In 2002, the Company reported Funds From Operations (FFO) of
$44,031,000 on a fully converted basis, representing a 9.7% increase over 2001
FFO of $40,141,000. The following table presents a reconciliation from
income before minority interests to FFO:
(In thousands) For the Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income before minority interests $ 27,636 $ 25,383 $ 22,114 $ 21,220 $ 16,369
Subtract:
Gain on sale of property -1,426 -- -- -553 --
Add:
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 presented on a fully converted basis, and is defined by the
National Association of Real Estate Investment Trusts as net income before gains
or losses from property sales, extraordinary items, and before real estate
depreciation and amortization. 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 in come, 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 wit 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.
21
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.
22
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 recovery income, while the balance
of the increase in expense recoveries resulted from improved occupancy and
increases in recoverable property tax expense.
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.
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
23
Washington Square, while approximately 36% resulted from increased taxes at the
Company's two Washington, DC office properties.
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%).
Percentage rent was $2,113,000 in 2001, compared to $2,097,000 in 2000,
representing an increase of $16,000 (0.8%).
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.
24
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 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates. Interest rate fluctuations are
monitored by management as an integral part of the Company's overall risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results of
operations. The Company does not enter into financial instruments for trading
purposes.
The Company is exposed to interest rate fluctuations primarily as a
result of its variable rate debt used to finance the Company's development and
acquisition activities and for general corporate purposes. As of December 31,
2002, the Company had variable rate indebtedness totaling $86,124,000. Interest
rate fluctuations will affect the Company's interest expense on its variable
rate debt. If the interest rate on the Company's variable rate debt instruments
outstanding at December 31, 2002 had been one percent higher, annual interest
expense relating to these debt instruments would have increased by $861,000,
based on those balances. Interest rate fluctuations will also affect the fair
value of the Company's fixed rate debt instruments. As of December 31, 2002, the
Company had fixed rate indebtedness totaling $294,619,000. If interest rates on
the Company's fixed rate debt instruments at December 30, 2001 had been one
percent higher, the fair value of those debt instruments on that date would have
decreased by approximately $18,192,000.
25
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.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Certain information Part III requires will be filed in a definitive
proxy statement with the SEC pursuant to Regulation 14A (the "Proxy Statement")
not later than 120 days after the end of the fiscal year covered by this Report,
and certain information to be included therein is incorporated herein by
reference. Only those sections or pages of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
Item 10. Directors and Executive Officers of the Registrant
The information this Item requires is incorporated by reference to the
information under the captions "Election of Directors" on pages 3 through 6 of
the Company's Proxy Statement to be filed with the SEC for its annual
shareholders' meeting to be held on April 25, 2003.
Item 11. Executive Compensation
The information this Item requires is incorporated by reference to the
information under the captions "Compensation Committee Report," "Executive
Compensation" and "Performance Graph" on pages 7, 8 and 11, respectively, of the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held on April 25, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information this Item requires is incorporated by reference to the
information under the captions "Equity Compensation Plan Information" and
"Security Ownership of Certain Beneficial Owners and Management" on pages 9 and
12, respectively, of the Company's Proxy Statement to be filed with the SEC for
its annual shareholders' meeting to be held on April 25, 2003.
Item 13. Certain Relationships and Related Transactions
The information this Item requires is incorporated by reference to the
information under the caption "Certain Relationships and Transactions" on page
13 of the Company's Proxy Statement to be filed with the SEC for its annual
shareholders' meeting to be held on April 25, 2003.
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-14(c) 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.
27
Within 90 days prior to the date of this report, 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
Chief Accounting Officer of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chairman and Chief Executive Officer, its Senior Vice President, Chief
Financial Officer, Secretary and Treasurer and its Chief Accounting Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date the Company completed its evaluation.
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.
28
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.
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 Amendmen