A High Yield Shopping Center REIT
Saul Centers (BFS) is a self-managed, self-managed real estate investment trust specializing in the ownership, management and development of neighborhood and community shopping centers, as well as mixed-use properties. At the time of its last filings, the company operated 50 shopping centers and 10 mixed-use properties comprising 7.8 million and 1.9 million square feet of gross leasable area, respectively.
I am neutral on the title.
Saul Centers Operating Strategy
The Company’s properties are primarily located in the Washington, DC and Baltimore metropolitan area, which accounts for 85% of Saul’s operating income. While the company’s diversification strategy includes the development of transit-oriented mixed-use residential projects, these properties will also be located in the Washington, D.C. metro area, where management’s expertise can likely give the best results.
Over the past few years, shopping mall properties have been one of the most difficult real estate areas to operate. The e-commerce boom had already started hurting foot traffic years ago, while the pandemic further pressured mall owners in 2020-21 amid blanket restrictions. , lockdowns and changes in consumer behavior.
Despite this, Saul Centers managed to produce resilient results. Rental revenue fell just 1.5% in 2020 to $220 million, while in 2021 it reached a new all-time high of $234.5 million despite underlying challenges from the past two years. This has been possible thanks to management’s thoughtful strategy, which maximizes the potential income from its properties, as well as the overall qualities of the company’s property portfolio.
A key feature of management’s strategy incorporates improving the operational performance of its assets through the addition of pad sites. Additionally, management is focused on increasing its development pipeline with selective redevelopment and renovations of its key shopping centers.
In general, management has always been looking for that extra trait that will unlock value among their properties and improve their returns on investment. Take for example the 3,700 apartments and the company’s 975,000 square feet of commercial and office space that is currently under development. All of these development sites are located adjacent to Red Line subway stations in Montgomery County, Maryland. As such, the company should benefit from increased operating leverage and rental growth in these properties once they come online.
In its malls, the company’s strategy has been to replace underperforming tenants with others that have the potential to generate high traffic, including flagship stores such as supermarkets and pharmacies. In fact, 33 of Saul’s malls have a grocery store as their mainstay and primarily offer daily necessities and services. As a result, malls in Saul can attract foot traffic relatively easily, as shoppers go there for their daily necessities. Simultaneously, it increases the chances that shoppers will spend money at other stores in the mall, resulting in strong tenant loyalty.
Speaking of tenant retention, Saul Centers’ real estate portfolio includes a diverse tenant base and high quality tenants overall. Giant Food, tenant of 11 of Saul’s malls, for example, individually accounted for 5.2% of the company’s total revenue in the first quarter of 2022. Additionally, no other tenant accounted for more than 2, 5% of Saul’s total revenue, while most tenants include blue chip companies, such as McDonald’s (MCD), Starbucks (SBUX), CVS Health (SVC), and other resilient businesses.
Saul Centers’ latest results once again illustrated the company’s strength in a rather uncertain business environment. For the first quarter of fiscal 2022, revenue was $62.1 million, implying a 5.8% year-over-year increase. Specifically, same property revenue increased $3.4 million or 5.8%, while same property operating income increased $3.0 million or 7.1% from compared to Q1-2021. Saul’s improved results were driven by lower credit losses on operating lease receivables, high capitalized interest, higher base rent and increased parking revenue.
As a result, funds from operations were $27.0 million or $0.80 per diluted share, a notable improvement from $22.7 million and $0.71, respectively, of last year. Along with the rise in total revenue that boosted this metric, funds from operations (FFO) was also boosted by higher lease termination fees. In addition to the qualities of the business, as mentioned earlier, contributing to the quality of the rental income of the business, they were also visible in Saul’s occupancy rates, which are among the best in the industry.
Lately, malls have struggled to retain tenants amid low foot traffic, which has forced some retailers to relocate or relocate. With several Saul tenants providing essential services (eg, pharmacies, grocery stores), the company’s commercial and residential portfolios were 92.5% and 96.8% leased, respectively, at the end of the quarter. This compares to 92.2% and 96.9% for the prior year period, which is even a slight improvement in combined occupancy.
The Taking of Wall Street
As far as Wall Street is concerned, Saul Centers has a consensus Hold rating based on a single Hold assigned in the last three months. At $54.00, the Saul Centers average price target implies 13.9% upside potential.
Is the stock worth buying?
Based on Saul Center’s first quarter results and overall leasing profile, I expect the company to deliver near $3.20/share FFO for fiscal year 2022. At current share price levels, this implies a P/FFO of about 15.5. While that doesn’t suggest a discount, especially for a company with somewhat limited growth prospects while operating in a rather risky real estate sub-sector, Saul’s overall qualities can likely support this multiple.
Moreover, the current annual dividend per share of $2.28 is quite well covered and implies a substantial yield of 4.7%. The dividend is unlikely to rise quickly, but there is room for modest increases, similar to last year’s 3.6% increase. So, conservative income-oriented investors will likely appreciate Saul Centers’ investment record.
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