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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12254
 
SAUL CENTERS INC.
(Exact name of registrant as specified in its charter)
Maryland
52-1833074
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7501 Wisconsin Avenue, Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code (301) 986-6200
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of exchange on which registered:
Trading symbol:
Common Stock, $0.01 par value
New York Stock Exchange
BFS
6.875% Series C Preferred Stock, $0.01 par value
New York Stock Exchange
BFS/PRC
6.125% Series D Preferred Stock, $0.01 par value
New York Stock Exchange
BFS/PRD

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       No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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Table of Contents

 
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  
Number of shares of common stock, par value $0.01 per share outstanding as of July 31, 2019: 23.0 million.
 

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Table of Contents

SAUL CENTERS, INC.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements


CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(Dollars in thousands, except per share amounts)
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Real estate investments
 
 
 
Land
$
488,942

 
$
488,918

Buildings and equipment
1,280,397

 
1,273,275

Construction in progress
249,719

 
185,972

 
2,019,058

 
1,948,165

Accumulated depreciation
(544,811
)
 
(525,518
)
 
1,474,247

 
1,422,647

Cash and cash equivalents
9,262

 
14,578

Accounts receivable and accrued income, net
51,602

 
53,876

Deferred leasing costs, net
25,525

 
28,083

Prepaid expenses, net
1,806

 
5,175

Other assets
6,720

 
3,130

Total assets
$
1,569,162

 
$
1,527,489

Liabilities
 
 
 
Notes payable
$
853,627

 
$
880,271

Term loan facility payable
74,641

 
74,591

Revolving credit facility payable
46,600

 
45,329

Construction loan payable
70,436

 
21,655

Dividends and distributions payable
19,313

 
19,153

Accounts payable, accrued expenses and other liabilities
42,287

 
32,419

Deferred income
25,649

 
28,851

Total liabilities
1,132,553

 
1,102,269

Equity
 
 
 
Preferred stock, 1,000,000 shares authorized:
 
 
 
Series C Cumulative Redeemable, 42,000 shares issued and outstanding
105,000

 
105,000

Series D Cumulative Redeemable, 30,000 shares issued and outstanding
75,000

 
75,000

Common stock, $0.01 par value, 40,000,000 shares authorized, 23,008,615 and 22,739,207 shares issued and outstanding, respectively
230

 
227

Additional paid-in capital
399,047

 
384,533

Distributions in excess of accumulated earnings
(212,109
)
 
(208,593
)
Accumulated other comprehensive loss
(384
)
 
(255
)
Total Saul Centers, Inc. equity
366,784

 
355,912

Noncontrolling interest
69,825

 
69,308

Total equity
436,609

 
425,220

Total liabilities and equity
$
1,569,162

 
$
1,527,489

The Notes to Financial Statements are an integral part of these statements.

-4-

Table of Contents
Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Rental revenue
$
55,953

 
$
54,970

 
$
112,756

 
$
109,960

Other
2,188

 
1,111

 
5,135

 
2,230

Total revenue
58,141

 
56,081

 
117,891

 
112,190

Expenses
 
 
 
 
 
 
 
Property operating expenses
7,115

 
6,732

 
15,116

 
13,856

Real estate taxes
6,819

 
6,778

 
13,967

 
13,622

Interest expense, net and amortization of deferred debt costs
10,793

 
11,168

 
21,860

 
22,594

Depreciation and amortization of deferred leasing costs
11,524

 
11,351

 
23,167

 
22,700

General and administrative
5,140

 
4,647

 
9,954

 
9,068

Total expenses
41,391

 
40,676

 
84,064

 
81,840

Change in fair value of derivatives

 
(12
)
 

 
(12
)
Gain on sale of property

 
509

 

 
509

Net Income
16,750

 
15,902

 
33,827

 
30,847

Noncontrolling interests
 
 
 
 
 
 
 
Income attributable to noncontrolling interests
(3,518
)
 
(3,359
)
 
(7,148
)
 
(5,718
)
Net income attributable to Saul Centers, Inc.
13,232

 
12,543

 
26,679

 
25,129

Extinguishment of issuance costs upon redemption of preferred shares

 

 

 
(2,328
)
Preferred stock dividends
(2,953
)
 
(2,953
)
 
(5,906
)
 
(6,356
)
Net income available to common stockholders
$
10,279

 
$
9,590

 
$
20,773

 
$
16,445

Per share net income available to common stockholders
 
 
 
 
 
 
 
Basic and diluted
$
0.45

 
$
0.43

 
$
0.91

 
$
0.74

Dividends declared per common share outstanding
$
0.53

 
$
0.52

 
$
1.06

 
$
1.04

The Notes to Financial Statements are an integral part of these statements.

-5-

Table of Contents
Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Net income
$
16,750

 
$
15,902

 
$
33,827

 
$
30,847

Other comprehensive income
 
 
 
 
 
 
 
Change in unrealized loss on cash flow hedge
(127
)
 
165

 
(173
)
 
554

Total comprehensive income
16,623

 
16,067

 
33,654

 
31,401

Comprehensive income attributable to noncontrolling interests
(3,473
)
 
(3,402
)
 
(7,103
)
 
(5,861
)
Total comprehensive income attributable to Saul Centers, Inc.
13,150

 
12,665

 
26,551

 
25,540

Extinguishment of issuance costs upon redemption of preferred shares

 

 

 
(2,328
)
Preferred stock dividends
(2,953
)
 
(2,953
)
 
(5,906
)
 
(6,356
)
Total comprehensive income available to common stockholders
$
10,197

 
$
9,712

 
$
20,645

 
$
16,856

The Notes to Financial Statements are an integral part of these statements.

-6-

Table of Contents
Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) 
(Dollars in thousands, except per share amounts)
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Distributions in Excess of Accumulated Earnings
 
Accumulated
Other Comprehensive
(Loss)
 
Total Saul
Centers, Inc.
 
Noncontrolling
Interest
 
Total
Balance, January 1, 2019
$
180,000

 
$
227

 
$
384,533

 
$
(208,593
)
 
$
(255
)
 
$
355,912

 
$
69,308

 
$
425,220

Issuance of 120,832 shares of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
120,347 shares pursuant to dividend reinvestment plan

 
1

 
6,170

 

 

 
6,171

 

 
6,171

485 shares due to exercise of stock options and issuance of directors’ deferred stock

 
1

 
419

 

 

 
420

 

 
420

Issuance of 13,742 partnership units pursuant to dividend reinvestment plan

 

 

 

 

 

 
705

 
705

Net income

 

 

 
13,447

 

 
13,447

 
3,630

 
17,077

Change in unrealized loss on cash flow hedge

 

 

 

 
(34
)
 
(34
)
 
(12
)
 
(46
)
Distributions payable preferred stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series C, $42.97 per share

 

 

 
(1,805
)
 

 
(1,805
)
 

 
(1,805
)
Series D, $38.28 per share

 

 

 
(1,148
)
 

 
(1,148
)
 

 
(1,148
)
Distributions payable common stock ($0.53/share) and distributions payable partnership units ($0.53/unit)

 

 

 
(12,108
)
 

 
(12,108
)
 
(4,155
)
 
(16,263
)
Balance, March 31, 2019
180,000

 
229

 
391,122

 
(210,207
)
 
(289
)
 
360,855

 
69,476

 
430,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of 148,576 shares of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
99,804 shares pursuant to dividend reinvestment plan

 
1

 
5,127

 

 

 
5,128

 

 
5,128

48,772 shares due to exercise of stock options and issuance of directors’ deferred stock

 

 
2,798

 

 

 
2,798

 

 
2,798

Issuance of 20,041 partnership units pursuant to dividend reinvestment plan

 

 

 

 

 

 
1,029

 
1,029

Net income

 

 

 
13,232

 

 
13,232

 
3,518

 
16,750

Change in unrealized loss on cash flow hedge

 

 

 

 
(95
)
 
(95
)
 
(32
)
 
(127
)
Distributions payable preferred stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series C, $42.97 per share

 

 

 
(1,805
)
 

 
(1,805
)
 

 
(1,805
)
Series D, $38.28 per share

 

 

 
(1,148
)
 

 
(1,148
)
 

 
(1,148
)
Distributions payable common stock ($0.53/share) and distributions payable partnership units ($0.53/unit)

 

 

 
(12,181
)
 

 
(12,181
)
 
(4,166
)
 
(16,347
)
Balance, June 30, 2019
$
180,000

 
$
230

 
$
399,047

 
$
(212,109
)
 
$
(384
)
 
366,784

 
$
69,825

 
$
436,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 









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Table of Contents
Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
(Unaudited) 
(Dollars in thousands, except per share amounts)
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Distributions in Excess of Accumulated Earnings
 
Accumulated
Other Comprehensive
(Loss)
 
Total Saul
Centers, Inc.
 
Noncontrolling
Interest
 
Total
Balance, January 1, 2018
$
180,000

 
$
221

 
$
352,590

 
$
(197,710
)
 
$
(696
)
 
$
334,405

 
$
58,698

 
$
393,103

Issuance of 30,000 shares of Series D Cumulative preferred stock
75,000

 

 
(2,631
)
 

 

 
72,369

 

 
72,369

Partial redemption of 30,000 shares of Series C Cumulative preferred stock
(75,000
)
 

 
2,311

 
(2,328
)
 

 
(75,017
)
 

 
(75,017
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
69,750 shares pursuant to dividend reinvestment plan

 
1

 
3,676

 

 

 
3,677

 

 
3,677

8,088 shares due to exercise of employee stock options and issuance of directors’ deferred shares

 

 
769

 

 

 
769

 

 
769

Issuance of 38,037 partnership units pursuant to dividend reinvestment plan

 

 

 

 

 

 
2,017

 
2,017

Net income

 

 

 
12,588

 

 
12,588

 
2,359

 
14,947

Change in unrealized loss on cash flow hedge

 

 

 

 
289

 
289

 
100

 
389

Preferred stock distributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series C

 

 

 
(730
)
 

 
(730
)
 

 
(730
)
Distributions payable preferred stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series C, $42.97 per share

 

 

 
(1,805
)
 

 
(1,805
)
 

 
(1,805
)
Series D, $28.92 per share

 

 

 
(868
)
 

 
(868
)
 

 
(868
)
Distributions payable common stock ($0.52/share) and distributions payable partnership units ($0.52/unit)

 

 

 
(11,552
)
 

 
(11,552
)
 
(3,942
)
 
(15,494
)
Balance, March 31, 2018
180,000

 
222

 
356,715

 
(202,405
)
 
(407
)
 
334,125

 
59,232

 
393,357

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
85,202 shares pursuant to dividend reinvestment plan

 
1

 
4,050

 

 

 
4,051

 

 
4,051

2,647 shares due to exercise of stock options and issuance of directors’ deferred stock

 

 
648

 

 

 
648

 

 
648

Issuance of 219,102 partnership units

 

 

 

 

 

 
10,805

 
10,805

Net income

 

 

 
12,543

 

 
12,543

 
3,359

 
15,902

Change in unrealized loss on cash flow hedge

 

 

 

 
122

 
122

 
43

 
165

Distributions payable preferred stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series C, $42.97 per share

 

 

 
(1,805
)
 

 
(1,805
)
 

 
(1,805
)
Series D, $38.28 per share

 

 

 
(1,148
)
 

 
(1,148
)
 

 
(1,148
)
Distributions payable common stock ($0.52/share) and distributions payable partnership units ($0.52/unit)

 

 

 
(11,589
)
 

 
(11,589
)
 
(4,055
)
 
(15,644
)
Balance, June 30, 2018
$
180,000

 
$
223

 
$
361,413

 
$
(204,404
)
 
$
(285
)
 
$
336,947

 
$
69,384

 
$
406,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The Notes to Financial Statements are an integral part of these statements.

-8-

Table of Contents
Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
(Dollars in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
33,827

 
$
30,847

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Change in fair value of derivatives

 
12

Gain on sale of property

 
(509
)
Depreciation and amortization of deferred leasing costs
23,167

 
22,700

Amortization of deferred debt costs
760

 
847

Compensation costs of stock grants and options
1,142

 
1,097

Credit losses on operating lease receivables
556

 
429

Decrease in accounts receivable and accrued income
1,718

 
2,994

Additions to deferred leasing costs
(581
)
 
(2,790
)
Decrease in prepaid expenses
3,369

 
3,579

Increase in other assets
(3,590
)
 
(4,536
)
Increase in accounts payable, accrued expenses and other liabilities
6,666

 
2,511

Decrease in deferred income
(3,202
)
 
(3,490
)
Net cash provided by operating activities
63,832

 
53,691

Cash flows from investing activities:
 
 
 
Acquisitions of real estate investments (1)
(24
)
 
(162
)
Additions to real estate investments
(7,857
)
 
(2,911
)
Additions to development and redevelopment projects
(60,718
)
 
(35,246
)
Repayment of note receivable

 
1,326

Net cash used in investing activities
(68,599
)
 
(36,993
)
Cash flows from financing activities:
 
 
 
Proceeds from notes payable
22,100

 

Repayments on notes payable
(48,715
)
 
(29,001
)
Proceeds from term loan facility

 
75,000

Proceeds from revolving credit facility
36,000

 
50,000

Repayments on revolving credit facility
(35,000
)
 
(86,000
)
Proceeds from construction loan
48,731

 

Additions to deferred debt costs
(420
)
 
(3,212
)
Proceeds from the issuance of:
 
 
 
Common stock
13,375

 
8,048

Partnership units (1)
1,734

 
4,046

Series D preferred stock

 
72,369

Series C preferred stock redemption payment

 
(75,000
)
Preferred stock redemption costs

 
(13
)
Distributions to:
 
 
 
Series C preferred stockholders
(3,610
)
 
(5,628
)
Series D preferred stockholders
(2,296
)
 
(868
)
Common stockholders
(24,145
)
 
(23,058
)
Noncontrolling interests
(8,303
)
 
(7,864
)
Net cash used in financing activities
(549
)
 
(21,181
)
Net decrease in cash and cash equivalents
(5,316
)
 
(4,483
)
Cash and cash equivalents, beginning of period
14,578

 
10,908

Cash and cash equivalents, end of period
$
9,262

 
$
6,425

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
21,186

 
$
22,145

Increase in accrued real estate investments and development costs
$
3,029

 
$
3,987




(1) The 2018 acquisition of real estate and proceeds from the issuance of partnership units each excludes $8,776 in connection with the acquisition of Ashbrook Marketplace in exchange for limited partnership units.


-9-

Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


 
1.
Organization, Basis of Presentation
Saul Centers, Inc. (“Saul Centers”) was incorporated under the Maryland General Corporation Law on June 10, 1993, and operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company is required to annually distribute at least 90% of its REIT taxable income (excluding net capital gains) to its stockholders and meet certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly-owned subsidiaries and the limited partnerships of which Saul 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 “Trust”), the B. F. Saul Company and certain other affiliated entities, each of which is controlled by B. Francis Saul II and his family members (collectively, the “Saul Organization”). On August 26, 1993, members of the Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships,” and, collectively with the Operating Partnership, the “Partnerships”), shopping center and mixed-use properties and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties.
The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and mixed-use properties, primarily in the Washington, DC/Baltimore metropolitan area.
Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by one or more major tenants. As of June 30, 2019, 32 of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. Giant Food, a tenant at ten Shopping Centers individually accounted for 4.7% of the Company's total revenue for the six months ended June 30, 2019. No other tenant individually accounted for 2.5% or more of the Company’s total revenue for the six months ended June 30, 2019.
The accompanying consolidated financial statements of the Company include the accounts of Saul Centers and its subsidiaries, including the Operating Partnership and Subsidiary Partnerships, which are majority owned by Saul Centers. Substantially all assets and liabilities of the Company as of June 30, 2019 and December 31, 2018, are comprised of the assets and liabilities of the Operating Partnership. The debt arrangements which are subject to recourse are described in Note 5. All significant intercompany balances and transactions have been eliminated in consolidation.
The Operating Partnership is a variable interest entity ("VIE") because the limited partners do not have substantive kick-out or participating rights. The Company is the primary beneficiary of the Operating Partnership because it has the power to direct its activities and the rights to absorb 74.4% of its net income. Because the Operating Partnership was previously consolidated into the financial statements of the Company, classification of it as a VIE had no impact on the consolidated financial statements of the Company.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company. for the interim periods have been included. 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 the Company. for the year ended December 31, 2018, which are included in its Annual Report on Form 10-K. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to those instructions. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

2.
Summary of Significant Accounting Policies

Our significant accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 have not changed significantly in amount or composition.

-10-

Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions relate to impairment of real estate properties. Actual results could differ from those estimates.
Accounts Receivable, Accrued Income and Allowance for Doubtful Accounts
Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of their respective leases. Lease related receivables are reduced for credit losses. Such losses are recognized as a reduction of rental revenue in the consolidated statements of operations.
In addition to rents due currently, accounts receivable includes approximately $43.2 million and $43.3 million, at June 30, 2019 and December 31, 2018, respectively, net of allowance for doubtful accounts totaling $29,600 and $58,500, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases.

Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) 2016-02, ‘‘Leases’’ (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, interim periods within those years, and requires a modified retrospective transition approach for all leases existing at the date of initial application, with an option to use certain practical expedients for those existing leases. Upon adoption of ASU 2016-02 effective January 1, 2019, we elected the practical expedient for all leases with respect to lease identification, lease classification, and initial direct costs. We made a policy election not to separate lease and nonlease components and have accounted for each lease component and the related nonlease components together as a single component. There have been no significant changes to our lessor accounting for operating leases as a result of ASU 2016-02.
We lease shopping centers and mixed-use properties to lessees in exchange for monthly payments that cover rent, and where applicable, reimbursement for property taxes, insurance and certain property operating expenses. Our leases were determined to be operating leases and generally range in term from one to 15 years.
Some of our leases have termination options and/or extension options. Termination options allow the lessee to terminate the lease prior to the end of the lease term, provided certain conditions are met. Termination options generally require advance notification from the lessee and payment of a termination fee. Termination fees are recognized as revenue over the modified lease term. Extension options are subject to terms and conditions stated in the lease.
On January 1, 2019, a right of use asset and corresponding lease liability related to our headquarters lease were recorded in other assets and other liabilities, respectively. The lease expires on February 28, 2022, with one option to renew for an additional five years. The right of use asset and corresponding lease liability totaled $2.0 million and $2.0 million, respectively, at June 30, 2019.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses" ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of information to support credit loss estimates. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those years. We are evaluating the impact that ASU 2016-13 will have on our consolidated financial statements and related disclosures. 
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging” (“ASU 2017-12”). ASU 2017-12 amends financial reporting for hedging activities to better align that reporting with risk management activities. ASU 2017-12 expands and refines hedge accounting for both financial and nonfinancial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Effective with the adoption of ASU 2017-12 on January 1, 2019, changes in the fair value of the Company’s interest rate swap related to changes in the cash flow of the hedged item are reported as a component of interest expense and amortization of deferred debt costs in the Statements of Operations.

-11-

Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the presentation used for the six months ended June 30, 2019.


3.
Real Estate
Construction In Progress
Construction in progress includes land, preconstruction and development costs of active projects. Preconstruction costs include legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress as of June 30, 2019 and December 31, 2018, is composed of the following:
(in thousands)
 
June 30, 2019
 
December 31, 2018
Glebe Road
 
$
215,554

 
$
162,176

Ashbrook Marketplace
 
18,272

 
11,124

Other
 
15,893

 
12,672

Total
 
$
249,719

 
$
185,972


Deferred Leasing Costs
Deferred leasing costs consist of commissions paid to third-party and internal leasing agents, internal costs such as payroll-related fringe benefits which are direct and incremental to successful commercial leases, amounts attributed to in-place leases associated with acquired properties and lease inducement costs. Effective with the adoption of ASU 2016-02 on January 1, 2019, all costs incurred prior to the execution of a lease are charged to expense and not capitalized. Unamortized deferred leasing costs are charged to expense if the applicable lease is terminated prior to expiration of the initial lease term. Deferred leasing costs are amortized over the term of the lease or remaining term of acquired leases. Collectively, deferred leasing costs totaled $25.5 million and $28.1 million, net of accumulated amortization of $39.3 million and $37.7 million, as of June 30, 2019 and December 31, 2018, respectively. Amortization expense, included in depreciation and amortization of deferred leasing costs in the consolidated statements of operations, totaled $3.2 million and $2.9 million for the six months ended June 30, 2019 and 2018, respectively.
Real Estate Investment Properties
As of June 30, 2019, the Company’s properties (the “Current Portfolio Properties”) consisted of 49 shopping center properties (the “Shopping Centers”), seven mixed-use properties, which are comprised of office, retail and multi-family residential uses (the “Mixed-Use Properties”) and four (non-operating) development properties.
Depreciation is calculated using the straight-line method and estimated useful lives of generally between 35 and 50 years for base buildings, or a shorter period if management determines that the building has a shorter useful life, and up to 20 years for certain other improvements that extend the useful lives. Leasehold improvement expenditures are capitalized when certain criteria are met, including when the Company supervises construction and will own the improvements. Tenant improvements are amortized, over the shorter of the lives of the related leases or the useful life of the improvements, using the straight-line method. Depreciation expense in the Consolidated Statements of Operations totaled $20.0 million and $19.8 million for the six months ended June 30, 2019 and 2018, respectively. Repairs and maintenance expense totaled $6.6 million and $5.9 million for the six months ended June 30, 2019 and 2018, respectively, and is included in property operating expenses in the Consolidated Statements of Operations.

Acquisitions
Ashbrook Marketplace
In May 2018, the Company acquired from the Trust, in exchange for 176,680 limited partnership units, approximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Loudoun County, Virginia. Based on the closing price of the Company's common stock, the land and the limited partnership units were recorded at a value of $8.8 million. Acquisition costs related to the transaction totaled approximately $0.2 million.

-12-

Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


7316 Wisconsin Avenue
In September 2018, the Company purchased for $35.5 million, plus $0.7 million of acquisition costs, an office building and the underlying ground located at 7316 Wisconsin Avenue in Bethesda, Maryland. In December 2018, the Company purchased for $4.5 million, including acquisition costs, an interest in an adjacent parcel of land and retail building. The purchase price was funded through the Company's revolving credit facility.
Allocation of Purchase Price of Real Estate Acquired
The Company allocates the purchase price of real estate investment properties to various components, such as land, buildings and intangibles related to in-place leases and customer relationships, based on their relative fair values or fair values.
During 2018, the Company acquired properties that had an aggregate cost of $49.5 million, including acquisition costs. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values as shown in the following table.
(in thousands)
Ashbrook Marketplace
 
7316 Wisconsin Avenue
 
Total
Land
$
8,776

 
$
38,686

 
$
47,462

Buildings

 
979

 
979

In-place Leases

 
886

 
886

Above Market Rent

 
168

 
168

Below Market Rent

 
(21
)
 
(21
)
Total Purchase Price
$
8,776

 
$
40,698

 
$
49,474

 
 
 
 
 
 


4.
Noncontrolling Interests - Holders of Convertible Limited Partnership Units in the Operating Partnership
As of June 30, 2019, the Saul Organization holds a 25.6% limited partnership interest in the Operating Partnership represented by approximately 7.9 million convertible limited partnership units. These units are convertible into shares of Saul Centers’ common stock, at the option of the unit holder, on a one-for-one basis provided that, in accordance with the Company's Articles of Incorporation, the rights may not be exercised at any time that the Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 39.9% of the value of the outstanding common stock and preferred stock of Saul Centers (the “Equity Securities”). As of June 30, 2019, approximately 750,000 units were convertible into shares of Saul Centers common stock.
The impact of the Saul Organization’s approximately 25.6% limited partnership interest in the Operating Partnership is reflected as Noncontrolling Interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average common stock outstanding for the three months ended June 30, 2019 and 2018, were approximately 30.8 million and 30.0 million, respectively, and for the six months ended June 30, 2019 and 2018, were approximately 30.8 million and 29.9 million, respectively.

5.
Notes Payable, Revolving Credit Facility, Interest and Amortization of Deferred Debt Costs
The principal amount of the Company’s outstanding debt totaled approximately $1.1 billion at June 30, 2019, of which approximately $932.3 million was fixed-rate debt and approximately $123.0 million was variable rate debt, including
$48.0 million outstanding under an unsecured revolving credit facility and $75.0 million outstanding under a term loan credit facility. The carrying value of the properties collateralizing the notes payable totaled approximately $1.1 billion as of June 30, 2019.
At June 30, 2019, the Company had a $400.0 million credit facility comprised of a $325.0 million revolving facility and a $75.0 million term loan. As of June 30, 2019, the applicable spread for borrowings is 135 basis points under the revolving credit facility and 130 basis points under the term loan. Saul Centers and certain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obligations of the Operating Partnership under the credit facility. Letters of credit may be issued under the revolving credit facility. As of June 30, 2019, based on the value of the Company’s unencumbered properties, approximately $253.0 million was available under the revolving credit facility, $48.0 million was outstanding and approximately $185,000 was committed for letters of credit.

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Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


On January 4, 2019, the Company repaid in full the remaining balance of the mortgage loan secured by Countryside Marketplace, which was scheduled to mature in July 2019.
On January 10, 2019, the Company closed on a 15-year, non-recourse $22.1 million mortgage loan secured by Olde Forte Village. The loan matures in 2034, bears interest at a fixed-rate of 4.65%, requires monthly principal and interest payments of $124,700 based on a 25-year amortization schedule and requires a final payment of $12.1 million. Proceeds were partially used to repay in full the existing mortgage secured by Olde Forte Village, which was scheduled to mature in May 2019.
On June 3, 2019, the Company repaid in full the remaining balance of the mortgage loan secured by Briggs Chaney Marketplace, which was scheduled to mature in September 2019.
Saul Centers is a guarantor of the credit facility, of which the Operating Partnership is the borrower. The Operating Partnership is the guarantor of (a) a portion of the Park Van Ness loan (approximately $10.0 million of the $68.9 million outstanding balance at June 30, 2019, which guarantee will be reduced to (i) $6.7 million on October 1, 2019, (ii) $3.3 million on October 1, 2020 and (iii) zero on October 1, 2021), (b) a portion of the Kentlands Square II mortgage loan (approximately $8.7 million of the $34.6 million outstanding balance at June 30, 2019), and (c) a portion of the Broadlands Village mortgage (approximately $3.9 million of the $31.6 million outstanding balance at March 31, 2019). All other notes payable are non-recourse.
At December 31, 2018, the principal amount of the Company’s outstanding debt totaled approximately $1.0 billion, of which $910.2 million was fixed rate debt and $122.0 million was variable rate debt, including $47.0 million outstanding under an unsecured revolving credit facility. The carrying value of the properties collateralizing the notes payable totaled approximately $1.1 billion as of December 31, 2018.
At June 30, 2019, the scheduled maturities of debt, including scheduled principal amortization, for years ending December 31, were as follows:
(In thousands)
Balloon
Payments
 
Scheduled
Principal
Amortization
 
Total
July 1 through December 31, 2019
$

 
$
14,675

 
$
14,675

2020
61,163

 
28,537

 
89,700

2021
11,012

 
28,334

 
39,346

2022
84,502

(a)
28,925

 
113,427

2023
84,225

 
29,315

 
113,540

2024
66,640

 
27,894

 
94,534

Thereafter
474,181

 
115,902

 
590,083

Principal amount
$
781,723

 
$
273,582

 
1,055,305

Unamortized deferred debt costs
 
 
 
 
10,001

Net
 
 
 
 
$
1,045,304


(a) Includes $48.0 million outstanding under the revolving credit facility.

Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the credit facility. These fees and costs are being amortized on a straight-line basis over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $10.0 million and $10.3 million, net of accumulated amortization of $7.2 million and $7.3 million, at June 30, 2019 and December 31, 2018, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets.

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Table of Contents
Notes to Consolidated Financial Statements (Unaudited)


Interest expense, net and amortization of deferred debt costs for the three and six months ended June 30, 2019 and 2018, were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Interest incurred
$
12,988

 
$
12,302

 
$
25,868

 
$
24,503

Amortization of deferred debt costs
375

 
377

 
760

 
847

Capitalized interest
(2,522
)
 
(1,442
)
 
(4,668
)
 
(2,586
)
Interest expense
10,841

 
11,237

 
21,960

 
22,764

Less: Interest income
48

 
69

 
100

 
170

Interest expense, net and amortization of deferred debt costs
$
10,793