Executive Summary / Key Takeaways

• Saul Centers, Inc. ($BFS) is a regionally focused REIT specializing in grocery-anchored shopping centers and mixed-use properties primarily within the resilient Washington, D.C./Baltimore metropolitan area.
• The company is strategically diversifying its portfolio through significant mixed-use developments like Twinbrook Quarter and Hampden House, which are transitioning from development costs to revenue-generating assets, expected to drive future earnings growth.
• Recent financial performance for the nine months ended September 30, 2025, shows a net income of $41 million and FFO of $75.20 million, impacted by initial operational costs of new developments, yet total revenue increased by 6.90% to $214.69 million.
• BFS maintains a prudent capital strategy with 85.70% fixed-rate debt and ample liquidity, mitigating interest rate risks and supporting ongoing development, despite a challenging interest rate environment.
• While facing localized competitive pressures and macroeconomic uncertainties, BFS's deep regional expertise, strategic focus on necessity-based retail, and pipeline of entitled development sites provide a foundation for long-term value creation.

The Capital Region's Cornerstone: Saul Centers' Strategic Evolution

Saul Centers, Inc. ($BFS) operates as a self-managed equity real estate investment trust, deeply embedded in the dynamic Washington, D.C./Baltimore metropolitan area. Since its incorporation in 1993, the company has cultivated a portfolio centered on community and neighborhood shopping centers, alongside a growing presence in mixed-use properties. This strategic concentration, with over 85% of its property net operating income (NOI) derived from this region, underscores its deep local market expertise and established relationships.

The company's overarching strategy revolves around enhancing its existing grocery-anchored shopping centers and expanding into transit-oriented, residential mixed-use developments. This dual approach aims to capture stable, necessity-based retail demand while capitalizing on urban densification trends. Key operational initiatives include adding pad sites to existing shopping centers and strategically redeveloping properties to replace underperforming tenants with high-traffic anchors, such as grocery stores.

In the context of technological differentiation, Saul Centers' competitive edge is not rooted in proprietary hardware or software, but rather in its strategic application of real estate development and management practices. The company's focus on transit-oriented mixed-use projects, for instance, leverages urban planning principles and demographic data to create integrated communities. This approach, while not "technology" in the traditional sense, represents a sophisticated, data-informed strategy for optimizing property value and tenant mix. The company's ability to identify and execute on entitled development sites near Metro stations in Montgomery County, Maryland, demonstrates a strategic use of market intelligence and development expertise. This allows BFS to create properties that meet evolving consumer demands for convenience and integrated living, thereby enhancing its competitive moat in a dense, high-barrier-to-entry market.

Financial Performance and Operational Momentum

Saul Centers' financial performance for the nine months ended September 30, 2025, reflects a period of significant investment and transition as major development projects come online. Net income for the nine-month period decreased to $41 million from $57.30 million in the prior year, primarily due to a $16.40 million adverse impact from the initial operations of Twinbrook Quarter Phase I. For the three months ended September 30, 2025, net income was $14 million, down from $19.60 million in the comparable prior-year quarter, with Twinbrook Quarter Phase I contributing a $4.70 million adverse impact.

Despite these initial operational costs, total revenue for the nine months ended September 30, 2025, increased by 6.90% to $214.69 million, driven largely by $8.90 million from Twinbrook Quarter Phase I. Similarly, total revenue for the three-month period rose by 7% to $72.00 million, with $3.90 million attributed to Twinbrook Quarter Phase I. Base rent saw a substantial increase of $14.70 million for the nine-month period, with Twinbrook Quarter Phase I contributing $8.30 million, and higher commercial and residential base rents (excluding Twinbrook Quarter Phase I) adding $5.40 million and $1 million, respectively.

However, total expenses also increased significantly, rising by 20.90% to $173.79 million for the nine-month period, primarily due to $25.30 million in expenses from Twinbrook Quarter Phase I. Interest expense, net, and amortization of deferred debt costs increased by 37.10% to $50.63 million for the nine months, largely due to $14.40 million from Twinbrook Quarter Phase I and $3.60 million from higher average outstanding debt. This was partially offset by $2.40 million from lower average interest rates and $2.20 million from higher capitalized interest related to Hampden House.

Funds From Operations (FFO) available to common stockholders and noncontrolling interests, a key REIT performance metric, decreased by 11.40% to $75.20 million for the nine months ended September 30, 2025. This was adversely impacted by $9.80 million, or $0.28 per basic and diluted share, due to the initial operations of Twinbrook Quarter Phase I. Excluding Twinbrook Quarter Phase I, FFO decreased by $1 million, primarily due to higher general and administrative costs, lower lease termination fees, and increased credit losses on operating lease receivables, partially offset by higher commercial and residential base rents.

The company's commercial portfolio leasing percentage decreased to 94.50% as of September 30, 2025, from 95.70% a year prior. On a same-property basis, this figure stood at 94.40%. Approximately 167,090 square feet of leased commercial space, representing 1.90% of total commercial square footage, had not yet been occupied as of September 30, 2025. This space is expected to generate approximately $5.30 million in additional annualized base rent upon tenant occupancy. The residential portfolio, excluding The Milton at Twinbrook Quarter, maintained a strong 98.50% lease rate.

Strategic Initiatives and Future Outlook

Saul Centers is actively executing its strategy to diversify and enhance its portfolio. The Twinbrook Quarter Phase I development in Rockville, Maryland, is a prime example. The residential portion, "The Milton at Twinbrook Quarter," comprising 452 apartment units, was completed on October 1, 2024, and as of November 3, 2025, 95.40% of these units were leased and occupied. The 80,000 square foot Wegmans supermarket at Twinbrook Quarter opened on June 25, 2025, and 95.70% of the ground floor retail space has been leased, with remaining retail expected to open through 2025 and 2026. The remaining investment to complete Twinbrook Quarter Phase I is not expected to exceed $10.10 million, excluding imputed capitalized interest. The full development potential of the 18.40-acre Twinbrook Quarter site is substantial, including 1,865 residential units, 473,000 square feet of retail, and 431,000 square feet of office space across all phases.

Another significant mixed-use project, Hampden House in downtown Bethesda, Maryland, opened for residential tenants on October 1, 2025. This project will include up to 366 apartment units and 10,100 square feet of retail space. As of November 3, 2025, 19.10% of the residential units were leased and occupied, and 85.10% of the ground floor retail space has been leased. The remaining investment to complete Hampden House is not expected to exceed $9.20 million, excluding imputed capitalized interest. These expansions are explicitly expected to drive earnings growth by year-end.

Further demonstrating its commitment to grocery-anchored retail, Saul Centers entered into a lease with Publix for a new grocery store at Ashland Square in Prince William County, Virginia, subsequent to the third quarter. This development is projected to ultimately comprise approximately 124,000 square feet of retail space, including the 50,325 square foot Publix, three existing pad sites, four additional pad sites, and about 30,000 square feet of small shop space. The budget for Ashland Square's development and associated financing is yet to be finalized.

The company maintains a strong liquidity position, with approximately $101.10 million available and undrawn under its new $600 million credit facility as of September 30, 2025. This facility, refinanced on July 30, 2025, consists of a $460 million revolving credit facility and a $140 million term loan, with maturities extending to 2029 and 2028, respectively, and extension options.

Saul Centers also actively manages interest rate risk, with approximately 85.70% of its $1.61 billion outstanding debt in fixed-rate instruments, including $100 million hedged by floating-to-fixed interest rate swaps. This strategy mitigates exposure to interest rate fluctuations, with an estimated $0.60 million expected to be reclassified from other comprehensive income as a decrease to interest expense over the next twelve months. The company remains in compliance with all financial covenants under its credit facility, including a leverage ratio limit of less than 60%, interest coverage exceeding 2.0x, and fixed charge coverage exceeding 1.4x.

Competitive Landscape and Risk Assessment

Saul Centers operates in a competitive real estate market, primarily against other REITs focused on retail and mixed-use properties. Key competitors include larger, nationally diversified players like Simon Property Group , and more regionally focused entities such as Kimco Realty Corporation and Federal Realty Investment Trust .

Compared to Simon Property Group (SPG), BFS's strength lies in its concentrated regional expertise in the D.C./Baltimore area, allowing for deeper local market penetration and relationships. While SPG benefits from a national scale and broader diversification, BFS's localized approach can lead to more tailored developments and potentially more stable performance within its core markets. BFS's gross profit margin of 75.86% and operating profit margin of 51.23% demonstrate solid operational efficiency, though direct comparative profitability metrics for SPG are not provided in the same format. SPG's P/E ratio of 26.60 and P/B ratio of 25.39 suggest a higher market valuation compared to BFS's P/E of 18.74 and P/B of 2.31, potentially reflecting SPG's larger scale and broader market presence.

Against Kimco Realty Corporation (KIM), which specializes in grocery-anchored open-air centers, BFS shares a similar focus on necessity-based retail. However, BFS's emphasis on mixed-use developments, integrating residential and office components, provides a broader revenue base and appeals to evolving urban demands. KIM's P/E ratio of 24.45 and P/B ratio of 1.32 indicate a different valuation profile. BFS's strategic integration of diverse property types within its mixed-use portfolio offers a competitive advantage by creating vibrant community hubs.

Federal Realty Investment Trust (FRT), another East Coast-focused REIT with mixed-use properties, is a closer comparable. FRT often targets premium, high-traffic urban developments. BFS's regional concentration allows for a more granular understanding of local market dynamics and community needs, potentially leading to more efficient execution in its specific sub-markets. FRT's P/E ratio of 24.70 and P/B ratio of 2.60 are somewhat aligned with BFS, suggesting similar investor perceptions of their asset quality and growth prospects.

A primary risk for Saul Centers is its significant concentration of market risk in the Washington, D.C./Baltimore metropolitan area. This exposure makes the company susceptible to regional economic downturns, federal government actions (such as employee reductions or shutdowns), and shifts in consumer demand between online and in-store shopping. Management actively monitors these factors and adapts its strategies to mitigate potential impacts. Furthermore, the current economic and capital markets environment introduces uncertainty regarding future acquisition opportunities. Inflationary pressures could also impact the company by increasing unreimbursed operating costs faster than rent increases and potentially affecting consumer demand at its retail centers, although the company has not been significantly impacted by these items in the current year. Interest rate fluctuations pose a risk to the $230 million of unhedged variable-rate debt, with a one percentage point increase or decrease impacting annual interest expense by $2.30 million.

Conclusion

Saul Centers, Inc. presents a compelling investment thesis rooted in its focused strategy within the resilient Washington, D.C./Baltimore metropolitan area. The company's commitment to grocery-anchored shopping centers provides a stable foundation of necessity-based retail, while its strategic pivot towards transit-oriented mixed-use developments like Twinbrook Quarter and Hampden House positions it for long-term growth. These projects, despite initial operational costs impacting recent net income and FFO, are poised to become significant drivers of future earnings as they achieve full occupancy and stabilization.

The company's disciplined capital management, characterized by a high proportion of fixed-rate debt and robust liquidity, provides a buffer against interest rate volatility and supports its ambitious development pipeline. While the concentrated geographic exposure and broader macroeconomic uncertainties present inherent risks, Saul Centers' deep local market expertise and proactive development strategy offer a strong competitive stance against both larger national players and more specialized regional competitors. The ongoing successful lease-up of its new mixed-use properties and the strategic addition of new grocery anchors underscore a clear path to enhanced profitability and sustained shareholder value in an evolving real estate landscape.