Real estate investment trust (REIT) Saul Centers (NYSE: BFS) offers a relatively generous 4.7% yield and was able to maintain its dividend despite the blow dealt by the 2020 coronavirus pandemic. In a world where the S&P 500 Index's yield is a troublingly low 1.3%, this REIT is worth a closer inspection. There are some positives and some negatives, but do management's big plans make it worth buying?
The core business
Saul Centers owns shopping centers and mixed-use properties. It's not a unique combination, with other REITs following a similar path. Shopping centers have historically been a pretty consistent property type, especially those anchored by grocery stores, which is a focus for Saul Centers, with nearly 80% of its centers falling into this desirable category. Shopping centers account for roughly 76% of the REIT's rent roll.
The remaining 24% of the company's rents are generated from mixed-use assets. These are far larger and more complex assets, often including retail, office, and residential components. The portfolio includes 50 shopping centers and just seven mixed-use developments.
Saul Centers also owns four land parcels it intends to develop in the future. It opened its newest mixed-use asset, The Waycroft, in April of 2020. Despite terrible timing, which really had nothing to do with Saul Centers, the property's retail component is currently 90% leased, with Target serving as the anchor tenant. The apartments, meanwhile, are basically fully occupied. It would be fair to say that management delivered on this project even in a difficult market.
Which brings up one last key issue to understand about Saul Centers -- 85% of its portfolio is located in and around Washington, D.C. In other words, it's a relatively small and hyper-focused REIT. The mixed-use assets add some diversification, but the ups and downs of the Washington, D.C., area will be big drivers here.
Of those four land parcels owned by Saul Centers, three are located near metro stops and are likely to become mixed-use properties. In fact, one known as Twinbrook Quarter is already in predevelopment, and a second, Hampden House, is on the drawing board. So, for at least the next decade, Saul Centers will likely be driven by the development of these properties.
Given the REIT's three properties on metro stops, it already has some experience with this game plan. And while big ground-up construction projects are always risky endeavors, the success of The Waycroft suggests that Saul Centers should be able to follow through on its plans. That includes eventually building at the third metro stop, where it has yet to announce more specific intentions.
Meanwhile, from a portfolio perspective, these developments suggest that mixed-use assets will grow as a percentage of the company's rent roll. That's not bad, as it will increase the company's diversification from a rent-collection perspective, adding more apartment and office properties to the mix. However, with all these developments being in the D.C. area, they will simultaneously increase the REIT's geographical focus.
These long-term projects are likely to be executed in stages and, thus, offer material built-in opportunities for growth that will play out over time. So, it wouldn't be surprising if Saul Centers was still working on at least one of these assets (perhaps that third metro location) 10 years from now.
That's an interesting story that might attract some real estate investors. However, the caveat is that this regionally focused REIT is set to get even more geographically focused. Conservative types might find that a bit troubling, especially given Saul Centers' modest $1 billion market cap.
The future is laid out
So where will Saul Centers be in 10 years? The simple answer is bigger, while the more nuanced answer is more diversified by property type and more focused geographically. Long-term investors will need to think carefully about that before hitting the buy button. Although the 4.7% dividend yield here is relatively generous, for more conservative investors, it may not offer enough compensation to take on the inherent construction and concentration risks. That's not meant to suggest that Saul Centers is a bad company, just that it's likely to be something of an acquired taste.