10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED September 30, 2002 COMMISSION FILE NUMBER 1-12254 SAUL CENTERS, INC. ------------------ (Exact name of registrant as specified in its charter) Maryland 52-1833074 ----------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7501 Wisconsin Ave, Suite 1500, Bethesda, Maryland 20814 -------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (301) 986-6200 Number of shares of common stock, par value $0.01 per share outstanding as of November 1, 2002: 15,110,000 Indicate by check mark whether the 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 requirement for the past 90 days. YES X NO___ SAUL CENTERS, INC. Table of Contents
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) (a) Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.................................................................. 4 (b) Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001.................................................. 5 (c) Consolidated Statements of Stockholders' Equity as of September 30, 2002 and December 31, 2001........................................... 6 (d) Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001.................................................. 7 (e) Notes to Consolidated Financial Statements......................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (a) Liquidity and Capital Resources.................................................... 19 (b) Results of Operations Three months ended September 30, 2002 compared to three months ended September 30, 2001........................................................... 26 Nine months ended September 30, 2002 compared to nine months ended September 30, 2001........................................................... 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 30 Item 4. Controls and Procedures................................................................. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................... 31 Item 2. Changes in Securities................................................................... 31 Item 3. Defaults Upon Senior Securities......................................................... 31 Item 4. Submission of Matters to a Vote of Security Holders..................................... 31 Item 5. Other Information....................................................................... 31 Item 6. Exhibits and Reports on Form 8-K........................................................ 31 Signatures....................................................................................... 35
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary for the fair presentation of the financial position and results of operations of Saul Centers, Inc. All such adjustments are of a normal recurring nature. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements of Saul Centers, Inc. for the year ended December 31, 2001, which are included in its Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. -3- SAUL CENTERS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, (Dollars in thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------------- ASSETS Real estate investments Land $ 84,942 $ 67,710 Buildings and equipment 403,003 385,936 ------------------ ------------------ 487,945 453,646 Accumulated depreciation (146,875) (136,928) ------------------ ------------------ 341,070 316,718 Construction in progress 6,006 1,163 Cash and cash equivalents 727 1,805 Accounts receivable and accrued income, net 10,374 9,217 Prepaid expenses 14,228 12,514 Deferred debt costs, net 4,312 3,563 Other assets 1,939 1,423 ------------------ ------------------ Total assets $ 378,656 $ 346,403 ================== ================== LIABILITIES Notes payable $ 377,269 $ 351,820 Accounts payable, accrued expenses and other liabilities 16,848 14,697 Deferred income 2,174 4,009 ------------------ ------------------ Total liabilities 396,291 370,526 ------------------ ------------------ Minority interests -- -- ------------------ ------------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $0.01 par value, 30,000,000 shares authorized, 14,970,829 and 14,535,803 shares issued and outstanding, respectively 149 145 Additional paid-in capital 74,104 64,564 Accumulated deficit (91,888) (88,832) ------------------ ------------------ Total stockholders' equity (deficit) (17,635) (24,123) ------------------ ------------------ Total liabilities and stockholders' equity (deficit) $ 378,656 $ 346,403 ================== ==================
The accompanying notes are an integral part of these statements. -4- SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS (Dollars in thousands, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, except per share amounts) 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------------- REVENUE Base rent $ 19,184 $ 17,546 $ 56,532 $ 52,301 Expense recoveries 3,207 2,881 9,317 8,392 Percentage rent 446 557 1,220 1,410 Other 634 549 2,386 1,585 ------------------- ------------------- ------------------- ------------------- Total revenue 23,471 21,533 69,455 63,688 ------------------- ------------------- ------------------- ------------------- OPERATING EXPENSES Property operating expenses 2,441 2,131 7,165 6,357 Provision for credit losses 131 140 402 421 Real estate taxes 1,947 1,744 5,917 5,300 Interest expense 6,335 6,203 18,757 18,750 Amortization of deferred debt expense 180 142 504 415 Depreciation and amortization 5,578 3,880 13,882 11,172 General and administrative 1,356 1,004 3,900 3,009 ------------------- ------------------- ------------------- ------------------- Total operating expenses 17,968 15,244 50,527 45,424 ------------------- ------------------- ------------------- ------------------- Operating income 5,503 6,289 18,928 18,264 Non-operating item Gain on sale of property -- -- 1,426 -- ------------------- ------------------- ------------------- ------------------- Income before minority interests 5,503 6,289 20,354 18,264 ------------------- ------------------- ------------------- ------------------- MINORITY INTERESTS Minority share of income (1,411) (1,674) (5,272) (4,895) Distributions in excess of earnings (606) (343) (779) (1,156) ------------------- ------------------- ------------------- ------------------- Total minority interests (2,017) (2,017) (6,051) (6,051) ------------------- ------------------- ------------------- ------------------- Net income $ 3,486 $ 4,272 $ 14,303 $ 12,213 =================== =================== =================== =================== PER SHARE (BASIC AND DILUTIVE) Net income $ 0.24 $ 0.30 $ 0.97 $ 0.87 =================== =================== =================== ===================
The accompanying notes are an integral part of these statements. -5- SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
ADDITIONAL (Dollars in thousands, COMMON PAID-IN ACCUMULATED except per share amounts) STOCK CAPITAL DEFICIT TOTAL ----------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT): Balance, December 31, 2001 145 64,564 (88,832) (24,123) Issuance of 169,826 shares of common stock 2 3,456 -- 3,458 Net income -- -- 6,335 6,335 Distributions payable ($.39 per share) -- -- (5,736) (5,736) ------------------- ------------------- ------------------- ------------------- Balance, March 31, 2002 147 68,020 (88,233) (20,066) Issuance of 125,558 shares of common stock 1 2,878 -- 2,879 Net income -- -- 4,482 4,482 Distributions payable ($.39 per share) -- -- (5,784) (5,784) ------------------- ------------------- ------------------- ------------------- Balance, June 30, 2002 148 70,898 (89,535) (18,489) Issuance of 139,642 shares of common stock 1 3,206 -- 3,207 Net income -- -- 3,486 3,486 Distributions payable ($.39 per share) -- -- (5,839) (5,839) ------------------- ------------------- ------------------- ------------------- Balance, September 30, 2002 $ 149 $ 74,104 $ (91,888) $ (17,635) =================== =================== =================== ===================
The accompanying notes are an integral part of these statements. -6- SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2002 2001 ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,303 $ 12,213 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 6,051 6,051 Gain on sale of property (1,426) -- Depreciation and amortization 14,386 11,587 Provision for credit losses 402 421 Decrease (increase) in accounts receivable (133) 1,753 Increase in prepaid expenses (5,649) (4,989) Decrease (increase) in other assets (516) 115 Increase (decrease) in accounts payable, accrued expenses and other liabilities 2,151 (2,853) Decrease in deferred income (1,835) (181) Other (72) 14 ------------------- ------------------- Net cash provided by operating activities 27,662 24,131 ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of real estate investments 31,129 -- Additions to real estate investments (65,428) (10,106) Additions to construction in progress (4,843) (7,273) ------------------- ------------------- Net cash used in investing activities (39,142) (17,379) ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 42,265 37,218 Repayments on notes payable (16,816) (30,424) Additions to deferred debt expense (1,181) (261) Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership 9,544 8,602 Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (23,410) (22,639) ------------------- ------------------- Net cash provided by (used in) financing activities 10,402 (7,504) ------------------- ------------------- Net increase (decrease) in cash and cash equivalents (1,078) (752) Cash and cash equivalents, beginning of period 1,805 1,772 ------------------- ------------------- Cash and cash equivalents, end of period $ 727 $ 1,020 =================== ===================
The accompanying notes are an integral part of these statements. -7- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) 1. ORGANIZATION, FORMATION AND STRUCTURE ORGANIZATION Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 90% of its REIT taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the "Company". B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers. 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, 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 and in September 2002, the Company purchased the fully leased Kentlands Square shopping center. As of September 30, 2002, the Company's properties (the "Current Portfolio Properties") consisted of 28 operating shopping center properties (the "Shopping Centers"), 5 predominantly office operating properties (the "Office Properties") and two development and 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. -8- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Mid-Atlantic region. The Company's long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate. Because the properties are located primarily in the Washington DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by several major tenants. Seventeen of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of December 31, 2001, no single Shopping Center accounted for more than 11.5% of the total Shopping Center gross leasable area. Only one retail tenant, Giant Food, at 6.2%, accounted for more than 2.1% of the Company's 2001 total revenues. No office tenant other than the United States Government, at 9.7%, accounted for more than 1.1% of 2001 total revenues. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation. REAL ESTATE INVESTMENT PROPERTIES These financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, do not report the current value of the Company's real estate assets. Real estate investment properties are stated at the lower of depreciated cost or fair value less cost to sell. 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. Real estate investment properties are reviewed for potential impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of an individual property's undiscounted expected future cash flows is less than its carrying amount, the Company's policy is to recognize an impairment loss measured by the amount the depreciated cost of the property exceeds its fair value. Fair value is calculated as the present value of expected future cash flows. -9- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Interest expense capitalized during the nine month periods ended September 30, 2002 and 2001, was $386,000 and $1,370,000, respectively. Once construction is substantially completed and the assets are placed in service, their rental income, direct operating expenses and depreciation are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred. 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. The 2002 third quarter depreciation expense includes an additional $1,311,000 of charges, ($.09 per share), resulting from assets retired based upon a comprehensive review of real estate asset records and the Company's revision of the assets' estimated useful lives. ACCOUNTS RECEIVABLE AND ACCRUED INCOME Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. In addition, accounts receivable include minimum rental income accrued on a straight-line basis to be paid by tenants over the terms of their respective leases. Straight line rent receivables at September 30, 2002 and December 31, 2001, of $5,652,000 and $4,675,000, respectively, are presented after netting deductions of $832,000 and $644,000, respectively, for tenants whose rent payment history or financial condition cast doubt upon the tenant's ability to perform under its lease obligations. Receivables are reviewed monthly and reserves are established when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of $879,000 and $559,000, at September 30, 2002 and December 31, 2001, respectively. LEASE ACQUISITION COSTS Certain initial direct costs incurred by the Company in negotiating and consummating a successful lease are capitalized and amortized over the initial base term of the lease. These costs of $11,051,000 and $10,419,000, are classified as prepaid expenses, net of accumulated amortization of $5,208,000 and $4,465,000, at September 30, 2002 and December 31, 2001, respectively. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly associated with time spent in leasing related activities. Such activities include analyzing 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. -10- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) DEFERRED DEBT COSTS Deferred debt costs consist of financing fees and costs incurred to obtain long-term financing. These fees and costs are being amortized over the terms of the respective loans or agreements. Deferred debt costs in the accompanying financial statements are shown net of accumulated amortization of $2,400,000 and $1,968,000, at September 30, 2002 and December 31, 2001, respectively. REVENUE RECOGNITION Rental and interest income are accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis in accordance with accounting principles generally accepted in the United States. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant's revenues ("percentage rent") is accrued when a tenant reports sales that exceed a specified breakpoint. INCOME TAXES The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under the Code, commencing with its taxable year ending December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 90% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. PER SHARE DATA Per share data is calculated in accordance with SFAS No. 128, "Earnings Per Share." Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible Limited Partnership Units and Employee stock options are the Company's potentially dilutive securities. For all periods presented, the Convertible Limited Partnership Units are anti-dilutive. The options are currently dilutive because the average share price of the Company's common stock exceeds the $20.00 exercise price. The options were not dilutive during the prior year's quarter or nine month period. Five executive officers have been granted 180,000 unexercised stock options. The treasury share method was used to measure the effect of the dilution. -11- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) Basic and Diluted Shares Outstanding September 30, (In thousands)
Nine months Quarter ended ended 2002 2001 2002 2001 ------------ ----------- ------------ ----------- Weighted average common shares outstanding - Basic........................ 14,924 14,295 14,788 14,122 Effect of dilutive options.................. 25 -- 19 -- ------------ ----------- ------------ ----------- Weighted average common shares outstanding - Diluted...................... 14,949 14,295 14,807 14,122 ============ =========== ============ =========== Average Share Price $ 23.21 * $ 22.38 *
* The option exercise price exceeded the average share price for these periods. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE OPERATING PARTNERSHIP The Saul Organization has a 25.9% limited partnership interest, represented by 5,172,000 convertible limited partnership units in the Operating Partnership, as of September 30, 2002. These Convertible Limited Partnership Units are convertible into shares of Saul Centers' common stock on a one-for-one basis. The impact of The Saul Organization's 25.9% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. Fully converted and diluted weighted average shares outstanding for the quarters ended September 30, 2002 and 2001, were 20,122,000 and 19,467,000, respectively. Fully converted and diluted weighted average shares outstanding for the nine month periods ended September 30, 2002 and 2001, were 19,979,000 and 19,294,000, respectively. DEFERRED COMPENSATION AND STOCK PLAN FOR DIRECTORS Saul Centers has established a Deferred Compensation and Stock Plan for Directors (the "Plan") for the benefit of its directors and their beneficiaries. A director may elect to defer all or part of his or her director's fees and has the option to have the fees paid in cash, in shares of -12- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock, the number of shares allocated to the director is determined by the market price of the common stock on the day the fee is earned. As of September 30, 2002, 170,000 shares were authorized and registered for use under the Plan, and 125,000 shares had been credited to the directors' deferred fee accounts. Beginning in 1999, pursuant to the Plan, 100 shares of the Company's common stock are awarded annually as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are issued on the date of the Annual Meeting, their issuance may not be deferred and transfer of the shares is restricted for a period of twelve months following the date of issue. 3. CONSTRUCTION IN PROGRESS Construction in progress includes the costs of active development projects and other predevelopment project costs. Development costs include direct construction costs and indirect costs such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of September 30, 2002 and December 31, 2001 are as follows: Construction in Progress (In thousands)
September 30, December 31, 2002 2001 ------------- ------------ Ashburn Village IV .................... $ -- $ 1,163 Broadlands ............................ 6,006 -- ------------- ------------ Total ................................. $ 6,006 $ 1,163 ============= ============
4. NOTES PAYABLE Notes payable totaled $377,269,000 at September 30, 2002, of which $296,427,000 (78.6%) was fixed rate debt and $80,842,000 (21.4%) was floating rate debt. At September 30, 2002, the Company had a $125,000,000 unsecured revolving credit facility with outstanding borrowings of $42,500,000. Borrowing availability is determined by operating income from the Company's existing unencumbered properties, which at September 30, 2002 allowed the Company to borrow an additional $32,500,000 for general corporate use. An additional $50,000,000 was available for funding working capital and operating property acquisitions, supported by the unencumbered properties' internal cash flow growth and operating income of future acquisitions and developments. The facility requires monthly interest payments either at a rate of LIBOR plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or at the bank's reference rate depending upon the Company's option. The -13- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) facility matures in August 2005 and provides for an additional one-year extension at the Company's option. The line is a $55 million expansion of a prior revolver. Loan costs associated with the new facility and unamortized loan costs associated with the prior revolver are being amortized over the new revolver's three-year term. The Company also had borrowed $38,342,000 of a $42,000,000 construction loan secured by Washington Square at September 30, 2002. The facility requires monthly interest payments at a rate of LIBOR plus 1.45%. Notes payable totaled $351,820,000 at December 31, 2001, of which $293,478,000 (83.4%), was fixed rate debt and $58,342,000 (16.6%) was floating rate debt. Outstanding borrowings on the $70,000,000 unsecured revolving credit facility were $20,000,000 at December 31, 2001, with borrowing availability of $50,000,000. At September 30, 2002, the scheduled maturities of all debt for years ending December 31, were as follows: Debt Maturity Schedule (In thousands) October 1 through December 31, 2002..... $ 1,808 2003.................................... 45,908 2004.................................... 23,988 2005.................................... 50,470 2006.................................... 8,635 2007.................................... 9,357 Thereafter.............................. 237,103 ---------- Total................................... $ 377,269 ========== 5. SHAREHOLDERS' EQUITY (DEFICIT) AND MINORITY INTERESTS The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, do not report the current value of the Company's real estate assets. The Shareholders' Equity (Deficit) reported on the Consolidated Balance Sheets does not reflect any increase in value resulting from the difference between the current value and the net book value of the Company's assets. Therefore, Shareholders' Equity (Deficit) reported on the Consolidated Balance Sheets does not reflect the market value of stockholders' investment in the Company. The Consolidated Statement of Operations for the nine months ended September 30, 2002 includes a charge for minority interests of $6,051,000 consisting of $5,272,000 related to The Saul Organization's share of the net income for such period and $779,000 related to distributions to minority interests in excess of allocated net income for that period. The charge for the nine months ended September 30, 2001 of $6,051,000 consists of $4,895,000 related to The Saul Organization's share of net income for such period, and $1,156,000 related to distributions to minority interests in excess of allocated net income for that period. -14- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited) 6. BUSINESS SEGMENTS The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies for the segments presented below are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon net operating income for properties in each segment.
(Dollars in thousands) Shopping Office Corporate Consolidated Centers Properties and Other Totals ---------- ---------- --------- ------------ QUARTER ENDED SEPTEMBER 30, 2002 Real estate rental operations: Revenues ........................................ $ 15,294 $ 8,159 $ 18 $ 23,471 Expenses ........................................ (2,533) (1,986) -- (4,519) ---------- ---------- --------- ------------ Income from real estate ........................... 12,761 6,173 18 18,952 Interest expense & amortization of debt expense.. -- -- (6,515) (6,515) General and administrative ...................... -- -- (1,356) (1,356) ---------- ---------- --------- ------------ Subtotal .......................................... 12,761 6,173 (7,853) 11,081 Depreciation and amortization ................... (3,730) (1,848) -- (5,578) Minority interests .............................. -- -- (2,017) (2,017) ---------- ---------- --------- ------------ Net income ........................................ $ 9,031 $ 4,325 $ (9,870) $ 3,486 ========== ========== ========= ============ Capital investment ................................ $ 14,196 $ 1,754 $ 3 $ 15,953 ========== ========== ========= ============ Total assets ...................................... $ 211,886 $ 135,190 $ 31,580 $ 378,656 ========== ========== ========= ============ QUARTER ENDED SEPTEMBER 30, 2001 Real estate rental operations: Revenues ........................................ $ 14,657 $ 6,830 $ 46 $ 21,533 Expenses ........................................ (2,353) (1,662) -- (4,015) ---------- ---------- --------- ------------ Income from real estate ........................... 12,304 5,168 46 17,518 Interest expense & amortization of debt expense.. -- -- (6,345) (6,345) General and administrative ...................... -- -- (1,004) (1,004) ---------- ---------- --------- ------------ Subtotal .......................................... 12,304 5,168 (7,303) 10,169 Depreciation and amortization ................... (2,552) (1,328) -- (3,880) Minority interests .............................. -- -- (2,017) (2,017) ---------- ---------- --------- ------------ Net income ........................................ $ 9,752 $ 3,840 $ (9,320) $ 4,272 ========== ========== ========= ============ Capital investment ................................ $ 1,199 $ 2,941 $ -- $ 4,140 ========== ========== ========= ============ Total assets ...................................... $ 193,606 $ 122,597 $ 26,234 $ 342,437 ========== ========== ========= ============
-15- SAUL CENTERS, INC. Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands) Shopping Office Corporate Consolidated Centers Properties and Other Totals ---------- ---------- --------- ------------ NINE MONTHS ENDED SEPTEMBER 30, 2002 Real estate rental operations: Revenues ......................................... $ 45,438 $ 23,964 $ 53 $ 69,455 Expenses ......................................... (7,771) (5,713) -- (13,484) ---------- ---------- --------- ------------ Income from real estate ............................ 37,667 18,251 53 55,971 Interest expense & amortization of debt expense .. -- -- (19,261) (19,261) General and administrative ....................... -- -- (3,900) (3,900) ---------- ---------- --------- ------------ Subtotal ........................................... 37,667 18,251 (23,108) 32,810 Depreciation and amortization .................... (8,729) (5,153) -- (13,882) Gain on Sale of Property ......................... 1,426 -- -- 1,426 Minority interests ............................... -- -- (6,051) (6,051) ---------- ---------- --------- ------------ Net income ......................................... $ 30,364 $ 13,098 $ (29,159) $ 14,303 ========== ========== ========= ============ Capital investment ................................. $ 24,242 $ 14,892 $ 8 $ 39,142 ========== ========== ========= ============ Total assets ....................................... $ 211,886 $ 135,190 $ 31,580 $ 378,656 ========== ========== ========= ============ NINE MONTHS ENDED SEPTEMBER 30, 2001 Real estate rental operations: Revenues ......................................... $ 43,403 $ 20,152 $ 133 $ 63,688 Expenses ......................................... (7,633) (4,445) -- (12,078) ---------- ---------- --------- ------------ Income from real estate ............................ 35,770 15,707 133 51,610 Interest expense & amortization of debt costs .... -- -- (19,165) (19,165) General and administrative ....................... -- -- (3,009) (3,009) ---------- ---------- --------- ------------ Subtotal ........................................... 35,770 15,707 (22,041) 29,436 Depreciation and amortization .................... (7,519) (3,653) -- (11,172) Minority interests ............................... -- -- (6,051) (6,051) ---------- ---------- --------- ------------ Net income ......................................... $ 28,251 $ 12,054 $ (28,092) $ 12,213 ========== ========== ========= ============ Capital investment ................................. $ 6,661 10,718 -- $ 17,379 ========== ========== ========= ============ Total assets ....................................... $ 193,606 122,597 26,234 $ 342,437 ========== ========== ========= ============
-16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes in "Item 1. Financial Statements" of this report. Historical results and percentage relationships set forth in Item 1 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 Item 1 of this Form 10-Q. This Form 10-Q 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 primarily on the consolidated financial statements of the Company, as of September 30, 2002 and for the three and nine month periods ended September 30, 2002. 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 accompanying notes in "Item 1. Financial Statements" of this report. -17- 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 accounting principles generally accepted in the United States, 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 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 associated with time spent in leasing related activities. Such activities include analyzing the prospective tenant's financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transactions. Revenue Recognition Rental and interest income are 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 -18- 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. 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. 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. Liquidity and Capital Resources Cash and cash equivalents were $.7 million and $1.0 million at September 30, 2002 and 2001, respectively. The Company's cash flow is affected by its operating, investing and financing activities, as described below. Operating Activities Cash provided by operating activities for the nine month periods ended September 30, 2002 and 2001 was $27.7 million and $24.1 million, respectively, and represents, in each period, cash received primarily from rental income, plus other income, less normal recurring general and administrative expenses and interest payments on debt outstanding. Investing Activities Cash used in investing activities for the nine month periods ended September 30, 2002 and 2001 was $39.1 million and $17.4 million, respectively, and primarily reflects the acquisition of properties and construction in progress during those periods. Financing Activities Cash provided by financing activities for the nine month period ended September 30, 2002 was $10.4 million and cash used by financing activities for the nine month period ended September 30, 2001 was $7.5 million. Cash provided by financing activities for the nine month period ended September 30, 2002 primarily reflects: . $42.3 million of proceeds received from notes payable during the period; and . $9.5 million of proceeds received from the issuance of common stock and convertible limited partnership units in the Operating Partnership by dividend reinvestment programs; which was partially offset by: -19- . the repayment of borrowings on our notes payable totaling $16.8 million; and . distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $23.4 million. Cash used by financing activities for the nine month period ended September 30, 2001 primarily reflects: . $37.2 million of proceeds received from notes payable incurred during the period; and . $8.6 million of proceeds received from the issuance of common stock and convertible limited partnership units in the Operating Partnership pursuant to dividend reinvestment programs. which was partially offset by: . the repayment of borrowings on our notes payable totaling $30.4 million; . distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the period totaling $22.6 million. The Company's principal demands for liquidity are expected to be distributions to its stockholders, 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. Management anticipates that during the coming year the Company may: i) redevelop certain of the Shopping Centers, 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. 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 -20- 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 September 30, 2002, the scheduled maturities of all debt for years ended December 31, are as follows: Debt Maturity Schedule (In thousands) October 1 through December 31, 2002.............. $ 1,808 2003............................................. 45,908 2004............................................. 23,988 2005............................................. 50,470 2006............................................. 8,635 2007............................................. 9,357 Thereafter....................................... 237,103 --------- Total............................................ $ 377,269 ========= Management believes that the Company's current capital resources, including borrowing availability on the Company's revolving line of credit, , will be sufficient to meet its liquidity needs for the foreseeable future. The revolving line of credit borrowing availability is determined by operating income from the Company's existing unencumbered properties, which at September 30, 2002 allowed the Company to borrow an additional $32,500,000 for general corporate use. An additional $50,000,000 was available for funding working capital and operating property acquisitions, supported by the unencumbered properties' internal cash flow growth and operating income of future acquisitions and developments. Dividend Reinvestment and Stock Purchase Plan 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 421,000 and 469,000 shares under the Plan at weighted average discounted prices of $21.94 per share and $17.75 per share, during the nine month periods ended September 30, 2002 and 2001, respectively. -21- Capital Strategy and Financing Activity The Company's capital strategy is to maintain a ratio of 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. Management believes that current total debt remains less than 50% of total asset value. The Company closed a new $125 million unsecured revolving credit facility in August 2002 to provide working capital and funds for redevelopments and acquisitions. The line has a three-year term expiring on August 29, 2005 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 facility requires monthly interest payments either at a rate of LIBOR plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or at the bank's reference rate depending upon the Company's option. The additional availability under the new facility will enable the Company to access capital for future purchases of operating properties as opportunities arise. At November 1, 2002, $46.0 million was outstanding under the line, with interest calculated using LIBOR plus 1.625%. Loan availability is determined by operating income from the Company's existing unencumbered properties, which at November 1, 2002 allowed the Company to borrow an additional $29.0 million for general corporate use. An additional $50 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 and developments. Management believes that the Company's current capital resources, which include the Company's credit line, will be sufficient to meet its liquidity needs for the foreseeable future. At November 1, 2002, the Company had fixed interest rates on approximately 77.8% of its total debt outstanding. At November 1, 2002, the fixed rate debt had a weighted average remaining term of approximately 9.3 years. Funds From Operations For the third quarter of 2002, the Company reported Funds From Operations ("FFO") of $11,081,000. This represents a 9.0% increase over the comparable 2001 period's FFO of $10,169,000. For the nine month period ended September 30, 2002, the Company reported FFO of $32,810,000 representing a 11.5% increase over the comparable 2001 period's FFO of $29,436,000. FFO is presented on a fully converted basis and as a widely accepted measure of operating performance for REITs is defined as net income before extraordinary items, gains and losses on property sales and before real estate depreciation and amortization. The following table represents a reconciliation from net income before minority interests to FFO: -22- Funds From Operations Schedule (Amounts in thousands)
Three Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- Income before minority interests ................................ $ 5,503 $ 6,289 Add: Depreciation and amortization of real property ............ 5,578 3,880 -------------- -------------- Funds From Operations ........................................... $ 11,081 $ 10,169 ============== ============== Average Shares and Units Used to Compute FFO per Share .......... 20,122 19,467 ============== ==============
Funds From Operations Schedule (Amounts in thousands)
Nine Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- Income before minority interests ................................ $ 20,354 $ 18,264 Subtract: Gain on Sale of Property .................................. -1,426 -- Add: Depreciation and amortization of real property ............ 13,882 11,172 -------------- -------------- Funds From Operations ........................................... $ 32,810 $ 29,436 ============== ============== Average Shares and Units Used to Compute FFO per Share .......... 19,979 19,294 ============== ==============
FFO, as defined by the National Association of Real Estate Investment Trusts, presented on a fully converted basis and a widely accepted measure of operating performance for real estate investment trusts, is defined 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 generally accepted accounting principles and may not be indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. -23- Redevelopment, Renovations and Acquisitions The Company has selectively engaged in redevelopment, renovation and acquisition activities. It continues to evaluate land parcels for retail and office development and potential 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 activities in 2001 at Washington Square, Ashburn Village and Crosstown Business Center. During 2001, 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 has been completed. The build-out of office tenant areas continues. As of September 30, 2002, the Company has signed leases on 87% of the 235,000 square feet of tenant space: the 46,000 square feet of street level retail space is 98% leased and the 189,000 square feet of office space is 85% leased. During late 1999, the Company purchased land located within the 1,580 acre community of Ashburn Village in Loudoun County, Virginia, adjacent to its 108,000 square foot Ashburn Village neighborhood shopping center. The land was developed into Ashburn Village II, a 40,200 square foot in-line and pad expansion to the existing shopping center, containing 23,600 square feet of retail space and 16,600 square feet of professional office suites. Ashburn Village II commenced operations during the third quarter of 2000. In August 2000, the Company purchased an additional 7.1 acres of land adjacent to Ashburn Village II for $1,579,000. During 2001, the Company completed the development of 4.0 acres of the land known as Ashburn Village III, consisting of a fully leased 28,000 square foot in-line and pad expansion to the retail area of the existing shopping center. The Company commenced construction on the remaining 3.1 acres known as Ashburn Village IV, during the fourth quarter of 2001. This phase consists of 25,000 square feet of retail space and two pad sites and completes the development of Ashburn Village. Leases have been signed for 80% of this new Ashburn Village IV shop space as of September 30, 2002. Construction was substantially completed during the third quarter of 2002. The conversion and redevelopment of the former Tulsa, Oklahoma shopping center to an office/warehouse facility named Crosstown Business Center continued throughout 2001, with substantial completion during the first quarter of 2002. Twelve tenants lease 93% of the facility as of September 30, 2002. 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 -24- 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 is preparing drawings for the initial phase of construction totaling 112,000 square feet of retail space and is moving forward to obtain site plan approvals from Loudoun County. Additionally the Company has recently executed a grocery anchor lease with Safeway for a 59,000 square foot supermarket. In June 2002, the Company purchased 3030 Clarendon Boulevard, located in Arlington, Virginia. 3030 Clarendon 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. Portfolio Leasing Status At September 30, 2002, the operating portfolio consisted of 28 Shopping Centers and 5 predominantly Office Properties, all of which are located in 7 states and the District of Columbia. At September 30, 2002, 94.3% of the Company's 6,272,000 square feet of space in operation was leased to tenants, as compared to 93.5% at September 30, 2001. The Shopping Center portfolio was 94.4% leased at September 30, 2002 compared to 94.9% at September 30, 2001. The Office Properties were 93.9% leased at September 30, 2002 compared to 87.6% as of September 30, 2001. The overall improvement in the 2002 quarter's leasing percentage compared to the prior year's quarter resulted primarily from the lease-up of Crosstown Business Center from 78.0% to 93.4%, and Washington Square from 58.6% to 87.3%, at September 30, 2001 and September 30, 2002, respectively. -25- Results of Operations The following discussion compares the results of the Company for the three-month periods ended September 30, 2002 and 2001, respectively. This information should be read in conjunction with the accompanying consolidated financial statements and the notes related thereto. These financial statements include all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the interim periods presented. Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Revenues for the three-month period ended September 30, 2002 (the "2002 Quarter") totaled $23,471,000 compared to $21,533,000 for the comparable quarter in 2001 (the "2001 Quarter"), an increase of $1,938,000 (9.0%). Base rent income was $19,184,000 for the 2002 Quarter compared to $17,546,000 for the 2001 Quarter, representing an increase of $1,638,000 (9.3%). Approximately 50% of the increase resulted from a major tenant paying higher rent under the terms of a short-term lease extension at 601 Pennsylvania Avenue. Approximately 33% 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. 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 $3,207,000 for the 2002 Quarter compared to $2,881,000 for the comparable 2001 Quarter, representing an increase of $326,000 (11.3%). Of the increase in expense recovery income, approximately 40% resulted from the commencement of operations at the recently developed and redeveloped properties, while the balance of the increase in expense recoveries resulted from improved occupancy and increases in recoverable property tax expense. Percentage rent was $446,000 in the 2002 Quarter compared to $557,000 in the 2001 Quarter, a decrease of $111,000 (19.9%). The percentage rent decrease occurred primarily at Lexington Mall where the Company is positioning the mall for redevelopment and French Market where a restaurant tenant reported lower sales revenue compared to the previous year's quarter. A grocery tenant reported better than expected sales in the prior year's quarter at Thruway shopping center, contributing to the comparative decrease in the 2002 Quarter's percentage rent. 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 $634,000 in the 2002 Quarter, compared to $549,000 in the 2001 Quarter, representing an increase of $85,000 (15.5%). The increase in other income resulted in large part from a $74,000 increase in parking income due primarily to the lease-up of office space at Washington Square and to a lesser extent, increased parking revenue at 601 Pennsylvania Avenue . -26- Operating expenses, consisting primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses, increased $310,000 (14.5%) to $2,441,000 in the 2002 Quarter from $2,131,000 in the 2001 Quarter. Approximately half of the property operating expense increase resulted from the commencement of operations at Washington Square. The provision for credit losses decreased $9,000 (6.4%) to $131,000 in the 2002 Quarter from $140,000 in the 2001 Quarter. Real estate taxes increased $203,000 (11.6%) to $1,947,000 in the 2002 Quarter from $1,744,000 in the 2001 Quarter. Thirty percent of the increase in real estate tax expense in the 2002 Quarter resulted from the commencement of operations at Washington Square, while another 30% resulted from increased taxes at the Company's two Washington, DC office properties. Twenty percent of the tax increase was due to higher tax expense at Thruway shopping center. Interest expense increased $132,000 (2.1%) to $6,335,000 for the 2002 Quarter from $6,203,000 reported for the 2001 Quarter. The change resulted from 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 $38,000 (26.8%) to $180,000 for the 2002 Quarter compared to $142,000 for the 2001 Quarter. 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 $1,698,000 (43.8%) from $3,880,000 in the 2001 Quarter to $5,578,000 in the 2002 Quarter. Approximately 75% 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 $1,356,000 for the 2002 Quarter, an increase of $352,000 (35.1%) over the 2001 Quarter. 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% of the increase resulted from increased data processing expenses. -27- Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Revenues for the nine-month period ended September 30, 2002 (the "2002 Period") totaled $69,455,000 compared to $63,688,000 for the comparable period in 2001 (the "2001 Period"), an increase of $5,767,000 (9.1%). Base rent income was $56,532,000 for the 2002 Period compared to $52,301,000 for the 2001 Period, representing an increase of $4,231,000 (8.1%). 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 $9,317,000 for the 2002 Period compared to $8,392,000 for the comparable 2001 Period, representing an increase of $925,000 (11.0%). Of the increase in expense recovery income, 45% resulted from the commencement of operations at the newly developed and redeveloped properties, while the balance of the increase in expense recoveries resulted from improved occupancy and increases in recoverable property tax expense. Percentage rent was $1,220,000 in the 2002 Period, compared to $1,410,000 in the 2001 Period, a decrease of $190,000 (13.5%). 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 $2,386,000 in the 2002 Period, compared to $1,585,000 in the 2001 Period, representing an increase of $801,000 (50.5%). The increase in other income resulted primarily from a $655,000 increase in lease termination payments compared to the prior year, approximately half of which was recognized at Washington Square, and a $143,000 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 $808,000 (12.7%) to $7,165,000 in the 2002 Period from $6,357,000 in the 2001 Period. Approximately 60% of the property operating expense increase resulted from the commencement of operations at Washington Square. The provision for credit losses decreased $19,000 (4.5%) to $402,000 in the 2002 Period from $421,000 in the 2001 Period. -28- Real estate taxes increased $617,000 (11.6%) to $5,917,000 in the 2002 Period from $5,300,000 in the 2001 Period. Thirty-three percent of the increase in real estate tax expense in the 2002 Period resulted from the commencement of operations at Washington Square, twenty percent resulted from increased taxes at Thruway shopping center, while approximately 35% resulted from increased taxes at the Company's two Washington, DC office properties. Interest expense increased $7,000 (0.0%) to $18,757,000 for the 2002 Period from $18,750,000 reported for the 2001 Period. 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 $89,000 (21.4%) to $504,000 for the 2002 Period compared to $415,000 for the 2001 Period. 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 $2,710,000 (24.3%) from $11,172,000 in the 2001 Period to $13,882,000 in the 2002 Period. Approximately 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 $3,900,000 for the 2002 Period, an increase of $891,000 (29.6%) over the 2001 Period. 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% of the increase resulted from increased legal expense. The Company recognized a gain on the sale of real estate of $1,426,000 in the 2002 Period. 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. -29- ITEM 3. 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 September 30, 2002, the Company had variable rate indebtedness totaling $80,842,000. Interest rate fluctuations will affect the Company's annual interest expense on its variable rate debt. If the interest rate on the Company's variable rate debt outstanding at September 30, 2002 had been one percent higher, its annual interest expense relating to these debt instruments would have increased by $808,000. Interest rate fluctuations will also affect the fair value of the Company's fixed rate debt instruments. As of September 30, 2002, the Company had fixed rate indebtedness totaling $296,427,000. If interest rates on the Company's fixed rate debt instruments at September 30, 2002 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $18,000,000. ITEM 4. 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. 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, 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 and its Senior Vice President, Chief Financial Officer, Secretary and Treasurer concluded that the Company's disclosure controls and procedures were effective. -30- 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 II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 3. (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 are 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 are 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 -31- 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 are 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 Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of the 1997 Annual Report of the Company on Form 10-K are hereby incorporated by reference. (c) First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership filed as Exhibit 10.(c) of the June 30, 2001 Quarterly Report of the Company is hereby incorporated by reference. (d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference. (e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to -32- Registration Statement No. 33-64562 is hereby incorporated by reference. (f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference. (g) Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference. (h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8 to Registration Statement No. 33-64562 is hereby incorporated by reference. (i) Agreement of Assumption dated as of August 26, 1993 executed by Saul Holdings Limited Partnership and filed as Exhibit 10.(i) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (j) Deferred Compensation Plan for Directors dated as of December 13, 1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the Company on Form 10-K, as amended and restated by the Deferred Compensation and Stock Plan for Directors, dated as of March 18, 1999, filed as Exhibit 10.(k) of the March 31, 1999 Quarterly Report of the Company on Form 10-Q, as amended and restated by the Deferred Compensation and Stock Plan for Directors dated as of April 27, 2001 filed as Exhibit 99 to the Registration Statement No. 333-59962, is hereby incorporated by reference. (k) Loan Agreement dated as of November 7, 1996 by and among Saul Holdings Limited Partnership, Saul Subsidiary II Limited Partnership and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc., filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (l) Promissory Note dated as of January 10, 1997 by and between Saul Subsidiary II Limited Partnership and The Northwestern Mutual Life Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (m) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I Limited Partnership as Borrower and Nomura Asset Capital Corporation as Lender filed as Exhibit 10.(p) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (n) Revolving Credit Agreement dated as of August 30, 2002 by and between Saul Holdings Limited Partnership as Borrower; U.S. Bank National Association, as administrative agent and sole lead arranger; Wells Fargo Bank, National Association, as syndication agent, and U.S. Bank National Association, Wells Fargo Bank, National Association, Comerica Bank, -33- Southtrust Bank, KeyBank National Association as Lenders is filed herewith. (o) Promissory Note dated as of November 30, 1999 by and between Saul Holdings Limited Partnership as Borrower and Wells Fargo Bank National Association as Lender filed as Exhibit 10.(r) of the 1999 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (p) Guaranty dated as of August 30, 2002 by and between Saul Centers, Inc. as Guarantor and U.S. Bank National Association, as administrative agent and sole lead arranger for itself and other financial institutions, the Lenders, is filed herewith. 99. Schedule of Portfolio Properties -34- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAUL CENTERS, INC. (Registrant) Date: November 14, 2002 /s/ Philip D. Caraci ---------------------------------------------- Philip D. Caraci, President Date: November 14, 2002 /s/ Scott V. Schneider ---------------------------------------------- Scott V. Schneider Senior Vice President, Chief Financial Officer -35- CERTIFICATIONS I, B. Francis Saul II, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Saul Centers, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -36- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ B. Francis Saul II ------------------------------------ B. Francis Saul II Chairman and Chief Executive Officer -37- CERTIFICATIONS I, Scott V. Schneider, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Saul Centers, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -38- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Scott V. Schneider ----------------------------- Scott V. Schneider Senior Vice President, Chief Financial Officer, Secretary and Treasurer -39- CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, B. Francis Saul II, the Chairman and Chief Executive Officer of Saul Centers, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2002 /s/ B. Francis Saul II ----------------- ----------------------------------------- Name: B. Francis Saul II Title: Chairman & Chief Executive Officer -40- CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Scott V. Schneider, the Chief Financial Officer of Saul Centers, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2002 /s/ Scott V. Schneider ----------------- ------------------------------------ Name: Scott V. Schneider Title: Senior Vice President, Chief Financial Officer, Secretary & Treasurer -41-