Executive Summary / Key Takeaways

• Saul Centers (NYSE:BFS) is a regionally focused REIT specializing in grocery-anchored shopping centers and mixed-use properties, primarily in the stable Washington, DC/Baltimore metropolitan area.
• The company is actively executing a significant development pipeline, notably Twinbrook Quarter Phase I and Hampden House, which are expected to drive future growth but are currently impacting near-term financial performance due to initial operating costs and capitalized interest.
• First quarter 2025 results showed a decline in net income and FFO, largely attributable to the initial operational phase of Twinbrook Quarter Phase I, though total revenue saw an increase driven by base rent and expense recoveries.
• BFS maintains a solid financial profile with manageable debt levels, ample availability under its credit facility, and a capital strategy focused on funding development and acquisitions through a mix of internal and external sources.
• While facing competitive pressures from larger, more diversified REITs and broader market risks like interest rate fluctuations and inflation, BFS leverages its operational efficiency and deep regional expertise as key differentiators.

Setting the Scene: A Regional REIT's Strategic Evolution

Saul Centers, Inc., established in 1993 as a real estate investment trust, has built its foundation on the ownership and operation of community and neighborhood shopping centers and mixed-use properties, predominantly concentrated within the resilient Washington, DC/Baltimore metropolitan market. Guided by a consistent leadership structure, including B. Francis Saul II as Chairman and CEO since inception, the company has grown its portfolio to 62 properties, encompassing over 10 million square feet of leasable area. This regional focus, with over 85% of property operating income derived from this specific geographic area, defines BFS's market position and investment narrative.

Within the competitive landscape of retail and mixed-use REITs, BFS operates alongside larger, more diversified players like Simon Property Group (SPG), Kimco Realty (KIM), Federal Realty Investment Trust (FRT), and Regency Centers (REG). While lacking the national scale of an SPG or the broad diversification of a KIM, BFS differentiates itself through deep regional expertise and a cost-efficient operational structure, partly facilitated by a long-standing shared services agreement with the affiliated Saul Organization. This arrangement contributes to lower operating costs per unit compared to some larger peers, providing a degree of operational efficiency that acts as a competitive moat in its core market.

BFS's strategic evolution is marked by a deliberate shift towards diversifying its asset base through transit-oriented, residential mixed-use developments, while simultaneously enhancing its core grocery-anchored shopping centers. This strategy aims to capitalize on entitled land within its existing portfolio and adapt to changing consumer and demographic trends in its high-barrier-to-entry market. The focus on necessity-based retail, anchored by tenants like Giant Food (which accounted for 4.8% of Q1 2025 total revenue), provides a degree of stability, while the push into residential and mixed-use seeks to capture additional growth avenues.

Unlike some competitors who may leverage advanced proprietary technology platforms for tenant management or development lifecycle, BFS's competitive edge appears rooted more in its localized market knowledge, established relationships, and the operational efficiencies gained through its organizational structure. While specific technological differentiators are not detailed, the company's ability to execute complex mixed-use developments and manage a diverse portfolio efficiently within its specific region suggests a reliance on strong operational processes and potentially standard industry technologies rather than unique, proprietary tech moats. The focus is on leveraging existing assets and market position rather than technological disruption.

Recent Performance: Development Impacts and Segment Trends

The first quarter of 2025 provided a clear illustration of BFS's strategic transition, with financial results significantly influenced by the initial operational phase of its major development projects. Net income for the three months ended March 31, 2025, decreased to $12.8 million, down from $18.3 million in the comparable period of 2024. This $5.5 million decline was primarily attributed to the adverse impact of the initial operations of Twinbrook Quarter Phase I.

Despite the drop in net income, total revenue saw a healthy increase of 7.7%, rising to $71.9 million in Q1 2025 from $66.7 million in Q1 2024. This growth was primarily driven by a $4.5 million increase in base rent, reflecting higher commercial base rent (excluding Twinbrook Quarter Phase I), the initial base rent contribution from Twinbrook Quarter Phase I ($1.9 million), and higher residential base rent. Expense recoveries also contributed positively, increasing by $1.3 million.

Total expenses, however, surged by 21.8% to $59.0 million in Q1 2025, up from $48.4 million in Q1 2024. This increase was largely due to $8.6 million of expenses associated with the initial operations of Twinbrook Quarter Phase I. Property operating expenses also rose significantly (30.3%), partly due to higher repairs and maintenance costs, including a notable increase in snow removal expenses ($1.7 million), and the operational costs of Twinbrook Quarter Phase I ($1.1 million). Interest expense saw a substantial 34.5% increase, driven by the debt associated with Twinbrook Quarter Phase I ($4.8 million impact) and higher average outstanding debt, partially offset by lower average interest rates and increased capitalized interest on the Hampden House project. Depreciation and amortization also increased (20.7%), primarily reflecting the Twinbrook Quarter Phase I assets coming into service.

Analyzing performance on a same property basis, which excludes properties not operational for the full comparable periods (primarily Twinbrook Quarter Phase I), provides a clearer view of the core portfolio's trends. Same property revenue increased by $1.8 million (2.7%) to $68.2 million, driven by higher expense recoveries and base rent, partially offset by lower other property revenue. Same property Net Operating Income (NOI) saw a slight decrease of 0.5% to $48.0 million.

Breaking down same property NOI by segment:

• Shopping Centers: Same property NOI decreased by $0.5 million (1.4%) to $35.3 million. This was primarily due to lower other property revenue, lower expense recoveries (net of expenses), and lower lease termination fees, partially offset by higher base rent.
• Mixed-Use Properties: Same property NOI increased by $0.3 million (2.2%) to $12.7 million. This was mainly driven by higher residential base rent, partially offset by lower expense recoveries (net of expenses).

Funds From Operations (FFO) available to common stockholders and noncontrolling interests, a key REIT performance metric, totaled $24.6 million in Q1 2025, a decrease of 10.6% compared to Q1 2024. The initial operations of Twinbrook Quarter Phase I had a significant adverse impact of $4.4 million on FFO. Excluding this impact, FFO increased by $1.5 million, primarily due to higher commercial base rent and lower interest expense, partially offset by lower expense recoveries (net of expenses) and lower other property revenue.

Operational metrics showed a slight decrease in the overall commercial leasing percentage (same property basis) to 94.0% at March 31, 2025, from 94.6% a year prior. However, the residential portfolio (same property, excluding The Milton at Twinbrook Quarter) saw an increase in leasing percentage to 99.3% from 98.7%. As of March 31, 2025, approximately 149,083 square feet of leased commercial space remained unoccupied, representing 1.7% of total commercial GLA, expected to generate $4.2 million in additional annualized base rent upon tenant occupancy.

The Development Pipeline: Fueling Future Growth

BFS's strategic focus on development is most evident in its active pipeline, particularly the Twinbrook Quarter and Hampden House projects, both located in prime Montgomery County, Maryland locations near Metro stations.

Twinbrook Quarter Phase I in Rockville, MD, is a significant mixed-use undertaking. The residential component, "The Milton at Twinbrook Quarter," comprising 452 apartment units, was delivered and opened on October 1, 2024. As of May 5, 2025, 274 residential units had been leased and occupied, indicating a steady lease-up process. The retail portion, featuring an 80,000 square foot Wegmans supermarket and 25,000 square feet of small shop space (totaling approximately 105,000 sq ft of ground floor retail), has its base building complete and is 96% leased (101,400 sq ft). These leased retail spaces, including Wegmans, are anticipated to open at various times throughout 2025 and 2026 as tenants complete their buildouts. The remaining investment to complete Phase I (excluding capitalized interest) is projected not to exceed $11.7 million. The project is partially financed by a $145 million construction-to-permanent loan, with $128.5 million outstanding as of March 31, 2025.

Hampden House, located in downtown Bethesda, MD, is another key mixed-use development that will include up to 366 apartment units and 10,100 square feet of retail space. Construction is progressing, with exterior facade installation nearing completion and interior work ongoing. This project is expected to open in late 2025. The remaining investment to complete Hampden House (excluding capitalized interest) is not expected to exceed $28.9 million, financed in part by a $133 million construction-to-permanent loan, with $81.3 million outstanding as of March 31, 2025.

These projects represent the initial phases of a larger development potential on entitled sites within BFS's portfolio, which could accommodate up to 3,200 apartment units and 870,000 square feet of retail and office space. The successful lease-up and stabilization of Twinbrook Quarter Phase I and the timely completion and lease-up of Hampden House are critical to realizing the value creation potential of this development strategy and driving future NOI and FFO growth.

Beyond major developments, BFS continues its strategy of internal growth within its shopping center portfolio by selectively adding free-standing pad site buildings and strategically replacing underperforming tenants with those that generate strong traffic. This granular approach complements the larger development projects and contributes to incremental NOI growth.

Financial Health and Capital Strategy

Saul Centers maintains a financial structure designed to support its operational and development activities while managing risk. As of March 31, 2025, the company's total assets stood at $2.13 billion, with total liabilities of $1.64 billion and total equity of $491.7 million.

Liquidity is supported by cash on hand and availability under its senior unsecured credit facility. Cash and cash equivalents were $6.5 million at March 31, 2025. Net cash provided by operating activities was $30.4 million for the three months ended March 31, 2025, a decrease from $33.8 million in the prior year period. Net cash used in investing activities decreased significantly to $24.5 million from $45.6 million, primarily due to lower development expenditures. Net cash provided by financing activities was $9.7 million, a shift from cash used in the prior year, influenced by changes in borrowings and repayments on the revolving credit facility and construction loans.

The $525 million Credit Facility, comprising a $425 million revolving credit facility and a $100 million term loan, provides significant financial flexibility. As of March 31, 2025, approximately $132.4 million was available and undrawn under the facility. The revolving credit facility matures in August 2025 (with a potential one-year extension), and the term loan matures in February 2027. BFS was in compliance with all financial covenants under the Credit Facility as of March 31, 2025, including leverage, interest expense coverage, and fixed charge coverage ratios.

Total outstanding debt was approximately $1.56 billion at March 31, 2025, with a weighted average remaining term of 8.5 years. A significant portion, approximately 87.5% of notes payable (including $100 million of variable-rate debt hedged by interest rate swaps), was fixed-rate debt with staggered maturities extending to 2041, which helps mitigate refinancing risk in a rising interest rate environment. The remaining $196 million was unhedged variable rate debt under the Credit Facility. The company estimates that a one percentage point increase in interest rates on this unhedged debt would increase annual interest expense by $2 million.

BFS's capital strategy includes maintaining a ratio of total debt to total estimated asset market value of 50% or less, a target management believes was met as of March 31, 2025. Future capital requirements for developments, acquisitions, and redevelopments are expected to be funded through a combination of available cash, bank borrowings, construction/permanent financing, proceeds from the Dividend Reinvestment Plan (DRIP), and other external capital sources.

Comparing BFS's financial ratios to its peers reveals some key differences. BFS's Debt/Equity ratio of 4.70 is higher than KIM (0.81), FRT (1.44), and REG (0.75), but lower than SPG (8.42). This suggests BFS carries more leverage than its grocery-anchored and mixed-use peers but less than the large mall operator. BFS's Gross Profit Margin (71.73%) and Operating Profit Margin (51.89%) are competitive, falling within the range of its peers (SPG: 83%/52%, KIM: 69%/31%, FRT: 67%/39%, REG: 43%/35%). The Net Profit Margin (17.08%) is lower than SPG (40%), KIM (20%), FRT (25%), and REG (28%), potentially reflecting the impact of development costs and interest expense. BFS's Dividend Yield (6.76%) is notably higher than SPG (5%), KIM (4%), FRT (4%), and REG (4%), which could appeal to income-focused investors, although its Payout Ratio (1.34) suggests the dividend is not fully covered by net income, a common characteristic for REITs where FFO is a more relevant metric for dividend sustainability.

Risks and Outlook

While BFS benefits from its strategic focus and development pipeline, several risks warrant investor attention. The concentration of properties in the Washington, DC/Baltimore area exposes the company to regional economic downturns and shifts in government policy, which can impact office, retail, and residential markets. Reliance on key tenants like Giant Food also presents concentration risk.

The current interest rate environment poses a risk, particularly for the unhedged variable rate debt and the cost of future borrowings or refinancings. Inflation could increase operating costs not fully recoverable from tenants and potentially dampen consumer spending at retail properties. Development projects, while offering significant upside, carry inherent risks related to construction delays, cost overruns, and successful lease-up and stabilization. The adverse impact of Twinbrook Quarter Phase I's initial operations on recent results underscores these risks.

Management's outlook is centered on the successful execution and stabilization of its development pipeline. The expected openings of retail components at Twinbrook Quarter Phase I throughout 2025 and 2026 and the opening of Hampden House in late 2025 are key milestones. The remaining investment required for these projects is relatively modest, suggesting the heavy lifting of construction financing is largely complete.

Management believes that sub-markets within its operating region offer attractive supply-demand characteristics and remains open to selective acquisition opportunities as market conditions improve. The strategy of adding pad sites and redeveloping existing centers provides additional avenues for growth beyond the major mixed-use projects. While specific full-year guidance figures were not provided in the Q1 2025 filing, the commentary suggests a focus on operational execution and leveraging the new developments to drive future performance, aiming to overcome the initial drag experienced in Q1 2025.

Conclusion

Saul Centers presents an investment narrative anchored in its deep regional expertise within the stable Washington, DC/Baltimore market and its commitment to value creation through a focused development pipeline. The recent financial performance reflects the near-term costs associated with bringing major projects like Twinbrook Quarter Phase I online, temporarily impacting net income and FFO. However, the underlying revenue growth and the progress on developments like Twinbrook Quarter and Hampden House point towards future growth potential as these assets stabilize and contribute fully to the portfolio's operating income.

While facing competitive pressures from larger, more diversified REITs and navigating macroeconomic risks, BFS's operational efficiency and strategic focus on necessity-based retail and transit-oriented mixed-use properties provide a foundation. Investors should monitor the successful lease-up and performance of the new developments, trends in same property NOI for both segments, and the company's ability to manage its debt profile in the current interest rate environment. The investment thesis hinges on the successful execution of its development strategy and the continued resilience of its core regional markets to drive long-term value.