Most investors looking to branch into the world of retail real estate investment trusts (REITs) will likely look to mega giants like Simon Property Group, Kimco, or Realty Income first. After all, their strong track record and sizable portfolios definitely make them appealing investment options, but their returns and price tags don't always make them value buys.
That's why some investors may look to smaller players, like Saul Centers (NYSE: BFS), to gain access to a smaller, more focused portfolio of retail assets while earning a higher return. If you're considering buying Saul Centers, find out whether it's a buy right now.
The case for Saul Centers
Saul Centers is very niche-driven, earning 85% of its operating income from the greater Washington, D.C./Baltimore area and deriving 75% of its income from shopping centers. Currently, it owns, leases, and manages 50 neighborhood and community shopping centers and seven mixed-use properties, totaling 9.8 million square feet of leasable space under management. And with four developments underway, this REIT is growing.
In April 2020, the company added The Waycroft, which is its largest mixed-use investment property. The development includes residential apartment units and retail shops anchored by Target and is 99% leased to date. The growth in leasing -- from 90% at the time it opened to 99% now -- has boosted revenues by $2.1 million for the second quarter when compared to the year prior.
The company was definitely impacted by the pandemic, having a number of retail tenants close temporarily, but 2021 is showing positive signs of recovery. For Q2 2021, 98% of its portfolio rent was paid, and 92% of the $8.22 million in rent deferrals has been paid. Funds from operations grew $0.05, and net income per share increased 7% for the six months ended 2021 compared to the prior year.
The case against Saul Centers
Being super focused on one market can be beneficial if you become a dominant player, but you're also exposed to major market risks. New York City-focused investors are struggling right now as demand weakens for city living and leasing -- a perfect example of why market diversification can pay off big. While Washington, D.C., hasn't suffered the same fate, things can change, and that puts Saul Centers in a vulnerable position.
Another case against Saul Centers is its debt ratios. As of Q1 2021, the company's debt-to-total-capitalization ratio was 42.3%, not unreasonable given the current market's performance but slightly higher than I'd personally like to see.
The company doesn't disclose its debt-to-EBITDA, a common metric used to help determine debt-to-earnings for REITs, although it's believed to be over 7x, which is high by most REIT standards but not out of line among the retail sector.
The good news is that the company's next major debt maturity is in 2022, and with $203.8 million in its revolving line of credit and $10.1 million in cash on hand, it should be sufficient to help cover its debt obligations, including dividends.
Is it a buy?
Sauls Center definitely has a defined niche and seems to be operating well within its prospective market, but scale and diversification will really help the company and its shareholders grow in the coming years. Personally, I would love to see its mixed-use portfolio increase to help balance some of the volatility in the retail market and the challenges of competing with e-commerce.
The company recently increased its dividend, bringing its return to 4.8% -- definitely appealing compared to other retail REITs right now that fall below 2%. I think Saul Centers could be a worthwhile buy for more risk-tolerant and patient investors, but I believe other value buys in the retail sector offer more diversification among markets, especially when it comes to share price.