UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q

(Mark One)

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~March 31,~~September 30, 2019

o ☐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, Maryland20814

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code ~~(301)~~ (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
6.125% Series D Preferred Stock, $0.01 par value	New York Stock Exchange	BFS/PRD
6.000% Series E Preferred Stock, $0.01 par value	New York Stock Exchange	BFS/PRE

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~~ x NO oYes ☒ 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~~ x NO oYes ☒ 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.



Large accelerated filer	x☒	Accelerated filer	o☐

Non-accelerated filer	o☐	Smaller reporting company	o☐

		Emerging growth company	o☐

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. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~YES~~ o NO x

~~-1-~~

~~Table of Contents~~

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of each class:~~ ~~Common Stock, $0.01 par value~~ ~~6.875% Series C Preferred Stock, $0.01 par value~~ ~~6.125% Series D Preferred Stock, $0.01 par valu~~e	~~Name of exchange on which registered:~~ ~~New York Stock Exchange~~ ~~New York Stock Exchange~~ ~~New York Stock Exchange~~	~~Trading symbol:~~ ~~BFS~~ ~~BFS/PRC~~ ~~BFS/PRD~~

Yes ☐ No ☒

Number of shares of common stock, par value $0.01 per share outstanding as of ~~April 30,~~October 31, 2019: ~~22.8~~23.1 million.

~~-2-~~

~~Table of Contents~~

SAUL CENTERS, INC.

Table of Contents



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

(a) Consolidated Balance Sheets as of ~~March 31,~~September 30, 2019 and December 31, 2018	34
(b) Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	45
(c) Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	56
(d) Consolidated Statements of Equity for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	67
(e) Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018	711
(f) Notes to Consolidated Financial Statements	812

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(a) Critical Accounting Policies	24
~~(b) Results of Operations:~~
~~Three months ended March 31, 2019 compared to three months ended March 31, 2018~~	25
~~Same Property Revenue~~	26
~~Same Property Operating Income~~(b) Results of Operations:
Three months ended September 30, 2019 compared to three months ended September 30, 2018	2627
Nine months ended September 30, 2019 compared to nine months ended September 30, 2018	28
Same Property Revenue	29
Same Property Operating Income	29
(c) Liquidity and Capital Resources	2831

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3336

Item 4. Controls and Procedures	3337

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	3438
Item 1A. Risk Factors	3438
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3438
Item 3. Defaults Upon Senior Securities	3438
Item 4. Mine Safety Disclosures	3438
Item 5. Other Information	3438
Item 6. Exhibits	3540
Signatures	3641

~~-2-~~

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Dollars in thousands, except per share amounts)	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Assets
Real estate investments
Land	$	488,942		$	488,918		$	450,256		$	488,918
Buildings and equipment	1,275,927			1,273,275			1,284,315			1,273,275
Construction in progress	216,545			185,972			317,798			185,972
	1,981,414			1,948,165			2,052,369			1,948,165
Accumulated depreciation	(535,269		)	(525,518		)	(553,829		)	(525,518		)
	1,446,145			1,422,647			1,498,540			1,422,647
Cash and cash equivalents	11,456			14,578			52,269			14,578
Accounts receivable and accrued income, net	51,603			53,876			55,207			53,876
Deferred leasing costs, net	26,967			28,083			24,947			28,083
Prepaid expenses, net	4,064			5,175			9,357			5,175
Other assets	5,593			3,130			6,444			3,130
Total assets	$	1,545,828		$	1,527,489		$	1,646,764		$	1,527,489
Liabilities
Notes payable	$	873,143		$	880,271		$	846,525		$	880,271
Term loan facility payable							74,666			74,591
Revolving credit facility payable	38,465			45,329			—			45,329
Term loan facility payable	74,616			74,591
Construction loan payable	36,897			21,655			93,537			21,655
Dividends and distributions payable	19,224			19,153			19,634			19,153
Accounts payable, accrued expenses and other liabilities	47,671			32,419			39,741			32,419
Deferred income	25,481			28,851			27,224			28,851
Total liabilities	1,115,497			1,102,269			1,101,327			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			105,000			105,000
Series D Cumulative Redeemable, 30,000 shares issued and outstanding	75,000			75,000			75,000			75,000
Common stock, $0.01 par value, 40,000,000 shares authorized, 22,860,039 and 22,739,207 shares issued and outstanding, respectively	229			227
Series E Cumulative Redeemable, 44,000 and 0 shares issued and outstanding, respectively							110,000			—
Common stock, $0.01 par value, 40,000,000 shares authorized, 23,116,013 and 22,739,207 shares issued and outstanding, respectively							231			227
Additional paid-in capital	391,122			384,533			401,395			384,533
Distributions in excess of accumulated earnings	(210,207		)	(208,593		)	(215,334		)	(208,593		)
Accumulated other comprehensive loss	(289		)	(255		)	(343		)	(255		)
Total Saul Centers, Inc. equity	360,855			355,912			475,949			355,912
Noncontrolling interest	69,476			69,308
Noncontrolling interests							69,488			69,308
Total equity	430,331			425,220			545,437			425,220
Total liabilities and equity	$	1,545,828		$	1,527,489		$	1,646,764		$	1,527,489

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

~~-3-~~-4-

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


(Dollars in thousands, except per share amounts)	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018
Revenue
Rental Revenue	$	56,803		$	54,990
Rental revenue							$	55,487		$	55,733		$	168,242		$	165,693
Other	2,947			1,118			1,565			1,177			6,701			3,407
Total revenue	59,750			56,108			57,052			56,910			174,943			169,100
Expenses
Property operating expenses	8,001			7,123			7,525			6,910			22,641			20,766
Real estate taxes	7,148			6,845			7,114			6,937			21,081			20,559
Interest expense, net and amortization of deferred debt costs	11,067			11,424			10,325			10,974			32,185			33,568
Depreciation and amortization of deferred leasing costs	11,643			11,349			12,018			11,256			35,185			33,956
General and administrative	4,814			4,420			4,742			4,141			14,696			13,208
Total expenses	42,673			41,161			41,724			40,218			125,788			122,057
Change in fair value of derivatives							—			10			—			(2		)
Gain on sale of property							—			—			—			509
Net Income	17,077			14,947			15,328			16,702			49,155			47,550
Noncontrolling interests
Income attributable to noncontrolling interests	(3,630		)	(2,359		)	(3,102		)	(3,547		)	(10,250		)	(9,265		)
Net income attributable to Saul Centers, Inc.	13,447			12,588			12,226			13,155			38,905			38,285
Extinguishment of issuance costs upon redemption of preferred shares	—			(2,328		)	—			—			—			(2,328		)
Preferred stock dividends	(2,953		)	(3,403		)	(3,210		)	(2,953		)	(9,116		)	(9,309		)
Net income available to common stockholders	$	10,494		$	6,857		$	9,016		$	10,202		$	29,789		$	26,648
Per share net income available to common stockholders
Basic and diluted	$	0.46		$	0.31		$	0.39		$	0.45		$	1.30		$	1.19
Dividends declared per common share outstanding	$	0.53		$	0.52		$	0.53		$	0.52		$	1.59		$	1.56

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

~~-4-~~-5-

Table of Contents

Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018			2019			2018
Net income	$	17,077		$	14,947		$	15,328		$	16,702		$	49,155		$	47,550
Other comprehensive income
Change in unrealized loss on cash flow hedge	(46		)	389			55			173			(118		)	727
Total comprehensive income	17,031			15,336			15,383			16,875			49,037			48,277
Comprehensive income attributable to noncontrolling interests	(3,618		)	(2,459		)	(3,117		)	(3,592		)	(10,220		)	(9,453		)
Total comprehensive income attributable to Saul Centers, Inc.	13,413			12,877			12,266			13,283			38,817			38,824
Extinguishment of issuance costs upon redemption of preferred shares	—			(2,328		)	—			—			—			(2,328		)
Preferred stock dividends	(2,953		)	(3,403		)	(3,210		)	(2,953		)	(9,116		)	(9,309		)
Total comprehensive income available to common stockholders	$	10,460		$	7,146		$	9,056		$	10,330		$	29,701		$	27,187

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

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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, December 31, 2017 $ 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
Redemption of 30,000 shares of Series C Cumulative preferred stock (75,000 ) —
2,311
(2,328 ) —
(75,017 ) —
(75,017 )
Issuance of shares 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
Series C preferred stock distributions —
—
—
(730 ) —
(730 ) —
(730 )
Distributions payable on Series C preferred stock ($42.97/share) —
—
—
(1,805 ) —
(1,805 ) —
(1,805 )
Distributions payable on Series D preferred stock ($28.92/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

Balance, December 31, 2018 $ 180,000
$ 227
$ 384,533
$ (208,593 ) $ (255 ) $ 355,912
$ 69,308
$ 425,220
Issuance of common stock:
120,347 shares pursuant to dividend reinvestment plan —
1
6,170
—
—
6,171
—
6,171
485 shares due to exercise of employee stock options, director share grant and issuance of directors’ deferred shares —
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 on Series C preferred stock ($42.97/share) —
—
—
(1,805 ) —
(1,805 ) —
(1,805 )
Distributions payable on Series D preferred stock ($38.28/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



(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 Interests			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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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 Interests			Total
Issuance of 44,000 shares of Series E Cumulative preferred stock	110,000		—		(3,731		)	—			—			106,269			—			106,269
Issuance of 107,398 shares of common stock:
105,753 shares pursuant to dividend reinvestment plan	—		1		5,673			—			—			5,674			—			5,674
1,645 shares due to exercise of stock options and issuance of directors’ deferred stock	—		—		406			—			—			406			—			406
Issuance of 13,406 partnership units pursuant to dividend reinvestment plan	—		—		—			—			—			—			720			720
Net income	—		—		—			12,226			—			12,226			3,102			15,328
Change in unrealized loss on cash flow hedge	—		—		—			—			41			41			14			55
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		)
Series E, $5.83 per share	—		—		—			(257		)	—			(257		)	—			(257		)
Distributions payable common stock ($0.53/share) and distributions payable partnership units ($0.53/unit)	—		—		—			(12,241		)	—			(12,241		)	(4,173		)	(16,414		)
Balance, September 30, 2019	$	290,000	$	231	$	401,395		$	(215,334	)	$	(343	)	$	475,949		$	69,488		$	545,437

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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 Interests			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
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	—			—		—			12,542			—			12,542			3,359			15,901
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			(204,405		)	(285		)	336,946			69,384			406,330

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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 Interests			Total
Issuance of common stock:
201,500 shares pursuant to dividend reinvestment plan	—		2		10,413		—			—			10,415			—			10,415
22,005 shares due to exercise of employee stock options, director share grant and issuance of directors’ deferred shares	—		—		1,210		—			—			1,210			—			1,210
Issuance of 13,107 partnership units	—		—		—		—			—			—			653			653
Net income	—		—		—		13,155			—			13,155			3,547			16,702
Change in unrealized loss on cash flow hedge	—		—		—		—			129			129			44			173
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)	—		—		—		(11,669		)	—			(11,669		)	(4,062		)	(15,731		)
Balance, September 30, 2018	$	180,000	$	225	$	373,036	$	(205,872	)	$	(156	)	$	347,233		$	69,566		$	416,799

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

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Table of Contents

Saul Centers, Inc.



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Nine months ended September 30,
(Dollars in thousands)	2019			2018
Cash flows from operating activities:
Net income	$	49,155		$	47,550
Adjustments to reconcile net income to net cash provided by operating activities:
Change in fair value of derivatives	—			2
Gain on sale of property	—			(509		)
Depreciation and amortization of deferred leasing costs	35,185			33,956
Amortization of deferred debt costs	1,130			1,224
Compensation costs of stock grants and options	1,501			1,434
Credit losses on operating lease receivables	986			530
Increase in accounts receivable and accrued income	(2,317		)	(1,846		)
Additions to deferred leasing costs	(1,380		)	(4,195		)
Increase in prepaid expenses	(4,182		)	(3,767		)
(Increase) decrease in other assets	(2,049		)	1,171
Increase in accounts payable, accrued expenses and other liabilities	5,696			2,681
Decrease in deferred income	(1,627		)	(3,358		)
Net cash provided by operating activities	82,098			74,873
Cash flows from investing activities:
Acquisitions of real estate investments (1)	—			(36,346		)
Additions to real estate investments	(13,398		)	(6,586		)
Additions to development and redevelopment projects	(91,657		)	(54,693		)
Repayment of note receivable	—			1,326
Net cash used in investing activities	(105,055		)	(96,299		)
Cash flows from financing activities:
Proceeds from notes payable	22,100			—
Repayments on notes payable	(55,992		)	(36,577		)
Proceeds from term loan facility	—			75,000
Proceeds from revolving credit facility	47,000			102,000
Repayments on revolving credit facility	(94,000		)	(86,000		)
Proceeds from construction loan	71,807			2,949
Additions to deferred debt costs	(432		)	(2,493		)
Proceeds from the issuance of:
Common stock	19,096			19,336
Partnership units (1)	2,454			4,699
Series D preferred stock	—			72,369
Series E preferred stock	106,269			—
Series C preferred stock redemption payment	—			(75,000		)
Preferred stock redemption costs	—			(13		)
Distributions to:
Series C preferred stockholders	(5,415		)	(7,433		)
Series D preferred stockholders	(3,444		)	(2,016		)
Common stockholders	(36,326		)	(34,613		)
Noncontrolling interests	(12,469		)	(11,919		)
Net cash provided by financing activities	60,648			20,289
Net increase (decrease) in cash and cash equivalents	37,691			(1,137		)
Cash and cash equivalents, beginning of period	14,578			10,908
Cash and cash equivalents, end of period	$	52,269		$	9,771
Supplemental disclosure of cash flow information:
Cash paid for interest	$	31,266		$	32,697
Increase in accrued real estate investments and development costs	$	1,507		$	6,880

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(Dollars in thousands) 2019 2018
Cash flows from operating activities:
Net income $ 17,077
$ 14,947
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of deferred leasing costs 11,643
11,349
Amortization of deferred debt costs 384
470
Compensation costs of stock grants and options 419
449
Credit losses on operating lease receivables 238
286
Increase in accounts receivable and accrued income 2,035
2,950
Additions to deferred leasing costs (554 ) (1,046 )
Decrease in prepaid expenses 1,111
1,163
Increase in other assets (2,500 ) (5,165 )
Increase in accounts payable, accrued expenses and other liabilities 5,158
1,863
Decrease in deferred income (3,370 ) (1,479 )
Net cash provided by operating activities 31,641
25,787
Cash flows from investing activities:
Acquisitions of real estate investments (24 ) —
Additions to real estate investments (2,874 ) (3,483 )
Additions to development and redevelopment projects (20,525 ) (13,240 )
Net cash used in investing activities (23,423 ) (16,723 )
Cash flows from financing activities:
Proceeds from notes payable 22,100
—
Repayments on notes payable (29,030 ) (21,522 )
Proceeds from term loan facility —
75,000
Proceeds from revolving credit facility 19,000
34,000
Repayments on revolving credit facility (26,000 ) (80,000 )
Proceeds from construction loan 15,217
—
Additions to deferred debt costs (397 ) (2,578 )
Proceeds from the issuance of:
Common stock 6,171
3,997
Partnership units 705
2,017
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 (1,805 ) (3,823 )
Series D preferred stockholders (1,148 ) —
Common stockholders (12,005 ) (11,518 )
Noncontrolling interests (4,148 ) (3,922 )
Net cash provided by financing activities (11,340 ) (10,993 )
Net decrease in cash and cash equivalents (3,122 ) (1,929 )
Cash and cash equivalents, beginning of period 14,578
10,908
Cash and cash equivalents, end of period $ 11,456
$ 8,979
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,647
$ 11,228
Increase in accrued real estate investments and development costs $ 10,048
$ 1,438

(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.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)


1.	Organization, ~~Formation and Structure~~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 and President 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~~2 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 following table lists the significant properties acquired and in development since December 31, 2017.~~



~~Name of Property~~	~~Location~~	~~Type~~	~~Year of Acquisition/ Development/Disposition~~
~~Acquisitions~~
~~7316 Wisconsin Avenue~~	~~Bethesda, MD~~	~~Mixed-Use~~	~~2018~~
~~Developments~~
~~750 N. Glebe Road~~	~~Arlington, VA~~	~~Mixed-Use~~	~~2017 - 2019~~
~~Ashbrook Marketplace~~	~~Ashburn, VA~~	~~Shopping Center~~	~~2018~~

~~As of~~ ~~March 31, 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.~~


2.	~~Summary of Significant Accounting Policies~~

~~Nature of Operations~~

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 ~~March 31,~~September 30, 2019,, 32 of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. ~~One~~Giant Food, a tenant at 10 Shopping Centers individually accounted for 4.7% of the Company's total revenue for the nine months ended September 30, 2019. No other tenant individually accounted for 2.5% or more of the Company’s total revenue, excluding lease termination fees, for the ~~three~~nine months ended~~March 31, 2019. Giant Food, a tenant at~~ ~~ten~~ ~~Shopping Centers individually accounted for~~ ~~4.6%~~ ~~of the Company's total revenue for the three months ended March 31,~~ September 30, 2019.

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Principles of Consolidation~~

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 ~~March 31,~~September 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%~~74.5% 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.

~~Basis of Presentation~~

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 ~~Saul Centers, Inc.~~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 ~~Saul Centers, Inc.~~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.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)


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.

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~~42.7 million and $43.3 million, at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, net of allowance for doubtful accounts totaling $~~30,800~~48,400 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.

~~Assets Held for Sale~~

~~The Company considers properties to be assets held for sale when all of the following criteria are met:~~

~~management commits to a plan to sell a property;~~

~~it is unlikely that the disposal plan will be significantly modified or discontinued;~~

~~the property is available for immediate sale in its present condition;~~

~~actions required to complete the sale of the property have been initiated;~~

~~sale of the property is probable and the Company expects the completed sale will occur within~~ ~~one~~ ~~year; and~~

~~the property is actively being marketed for sale at a price that is reasonable given its current market value.~~

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

The Company must make a determination as to the point in time that it is probable that a sale will be consummated, which generally occurs when an executed sales contract has no contingencies and the prospective buyer has significant funds at risk to ensure performance. Upon designation as an asset held for sale, the Company records the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and ceases depreciation. As of ~~March 31, 2019, the Company had no assets designated as held-for-sale.~~

~~Cash and Cash Equivalents~~

Cash and cash equivalents include short-term investments. Short-term investments include money market accounts and other investments which generally mature within three months, measured from the acquisition date, and/or are readily convertible to cash.

~~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 ~~March 31, 2019~~ ~~and~~ ~~December 31, 2018, is composed of the following:~~

(in thousands) March 31, 2019 December 31, 2018
Glebe Road $ 189,211
$ 162,176
Ashbrook Marketplace 13,068
11,124
Other 14,266
12,672
Total $ 216,545
$ 185,972

~~Deferred Debt Costs~~

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 $10.4 million and $~~10.3 million, net of accumulated amortization of~~ ~~$7.0 million~~ ~~and~~ ~~$7.3 million, at~~ ~~March 31, 2019~~ ~~and~~ ~~December 31, 2018, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets.~~

~~Deferred Income~~

Deferred income consists of payments received from tenants prior to the time they are earned and recognized by the Company as revenue, including tenant prepayment of rent for future periods, real estate taxes when the taxing jurisdiction has a fiscal year differing from the calendar year, reimbursements specified in the lease agreement and tenant construction work provided by the Company. In addition, deferred income includes the fair value of certain below market leases.

~~Deferred Leasing Costs~~

Deferred leasing costs consist of commissions paid to third-party leasing agents, internal costs such as employee compensation and payroll-related fringe benefits directly related to time spent performing leasing-related activities for successful commercial leases, amounts attributed to in-place leases associated with acquired properties and lease inducement costs. Leasing related activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. Effective with the adoption of ASU 2016-02 (defined below) 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 $27.0 million and $28.1 million, net of accumulated amortization of ~~$38.6 million~~ ~~and~~ ~~$37.7 million, as of~~ ~~March 31, 2019~~ ~~and~~ ~~December 31, 2018, respectively. Amortization expense, included in depreciation and amortization of deferred leasing costs in the consolidated statements of operations, totaled $1.6 million and $1.4 million for the~~ ~~three months endedMarch 31, 2019~~ ~~and~~ ~~2018, respectively.~~

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Derivative Financial Instruments~~

The Company may, when appropriate, employ derivative instruments, such as interest-rate swaps, to mitigate the risk of interest rate fluctuations. The Company does not enter into derivative or other financial instruments for trading or speculative purposes. Derivative financial instruments are carried at fair value as either assets or liabilities in the Consolidated Balance Sheets. For those derivative instruments that qualify and are designated as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as a fair value hedge or a cash flow hedge. For those derivative instruments that qualify and are designated as hedging instruments, the effective portion of the gain or loss on the hedge instruments is reported as a component of accumulated other comprehensive income (loss) and recognized in earnings within the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a derivative instrument is immediately recognized in earnings. For derivative instruments that do not qualify, or that qualify and are not designated, as hedging instruments, changes in fair value are immediately recognized in earnings.

Derivative financial instruments expose us to credit risk in the event of non-performance by the counterparties under the terms of the derivative instrument. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions as determined by management, and therefore, it believes that the likelihood of realizing losses from counterparty non-performance is remote.

~~Income Taxes~~

The Company made an election to be treated, and intends to continue operating so as to qualify, as a REIT under the Code, commencing with its taxable year ended December 31, 1993. A REIT generally will not be subject to federal income taxation, provided that distributions to its stockholders equal or exceed its REIT taxable income and it complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

~~Legal Contingencies~~

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on its financial position or results of operations. Upon determination that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

~~Postemployment Benefits~~

From time to time, the Company may enter into an arrangement with an employee at the time of the employee’s separation from service whereby the employee will receive certain payments in exchange for certain releases, covenants not to compete, or other promises. If no future services are required in order for the employee to receive the payments, the Company estimates the amount of payments to be made over the life of the arrangement and records that amount as an expense as of the date of the arrangement with a corresponding liability representing the amount to be paid in the future.

~~Predevelopment Expenses~~

Predevelopment expenses represent certain costs incurred by the Company in connection with active development and redevelopment projects and include, for example, costs related to the early termination of tenant leases and demolition of existing structures.

~~Real Estate Investment Properties~~

The Company purchases real estate investment properties from time to time and records assets acquired and liabilities assumed, including land, buildings, and intangibles related to in-place leases and customer relationships, based on their relative fair values. The fair value of buildings generally is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates and considers the present value of all cash flows expected to be generated by the property including an initial lease up period. From time to time the Company may purchase a property for future development purposes. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition taking into consideration the remaining contractual lease period, renewal periods, and the likelihood of the tenant exercising its

~~-11-~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

renewal options. The fair value of below market lease intangibles is recorded as deferred income and accreted as additional revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and amortized as a reduction of revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair values of the intangibles are amortized over the lives of the customer relationships. The Company has never recorded a customer relationship intangible asset.

If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valuation could be negatively or positively affected. The Company did not recognize an impairment loss on any of its real estate during the ~~three months endedMarch 31, 2019~~ ~~and~~ ~~2018~~.

When incurred, the Company capitalizes the cost of improvements that extend the useful life of property and equipment. All repair and maintenance expenditures are expensed when incurred. Leasehold improvements expenditures are capitalized when certain criteria are met, including when we supervise construction and will own the improvement. Tenant improvements that we own are depreciated over the life of the respective lease or the estimated useful life of the improvements, whichever is shorter.

Interest, real estate taxes, development-related salary costs and other carrying costs are capitalized on projects under development and construction. Upon substantial completion of construction and the placement of the assets into service, rental income, real estate tax expense, property operating expenses (consisting of payroll, repairs and maintenance, utilities, insurance and other property related expenses) and depreciation are included in current operations and capitalization of interest ceases. Property operating expenses are charged to operations as incurred. Interest capitalized totaled $2.1 million and $1.1 million for the ~~three months endedMarch 31, 2019~~ ~~and 2018, respectively. Commercial development projects are considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than~~ ~~one~~ year from the cessation of major construction activity. Multi-family residential development projects are considered substantially complete and available for occupancy upon receipt of the certificate of occupancy from the appropriate licensing authority. Substantially completed portions of a project are accounted for as separate projects.

~~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 $10.0 million and $9.9 million for the ~~three months endedMarch 31, 2019~~ ~~and~~ ~~2018, respectively. Repairs and maintenance expense totaled~~ ~~$3.7 million~~ ~~and $3.1 million for the~~ ~~three months endedMarch 31, 2019~~ ~~and~~ ~~2018, respectively, and is included in property operating expenses in the Consolidated Statements of Operations.~~

~~Revenue Recognition~~

Rental and interest income are accrued as earned. Recognition of rental income commences when control of the space has been given to the tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs, and are recognized in the period in which the expenses are incurred. Rental income based on a tenant’s revenue (“percentage rent”) is accrued when a tenant reports sales that exceed a breakpoint specified in the lease agreement.

~~-12-~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Stock-based Employee Compensation, Stock Plan and Deferred Compensation Plan for Directors~~

The Company uses the fair value method to value and account for employee stock options. The fair value of options granted is determined at the time of each award using the Black-Scholes model, a widely used method for valuing stock-based employee compensation, and the following assumptions: (1) Expected Volatility determined using the most recent trading history of the Company’s common stock (month-end closing prices) corresponding to the average expected term of the options; (2) Average Expected Term of the options is based on prior exercise history, scheduled vesting and the expiration date; (3) Expected Dividend Yield determined by management after considering the Company’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s market yield at the grant date; and (4) a Risk-free Interest Rate based upon the market yields of US Treasury obligations with maturities corresponding to the average expected term of the options at the grant date. The Company amortizes the value of options granted ratably over the vesting period and includes the amounts as compensation expense in general and administrative expenses.

The Company has a stock plan, which was originally approved in 2004, amended in 2008 and 2013 and which expires in 2023, for the purpose of attracting and retaining executive officers, directors and other key personnel (the “Stock Plan”). Pursuant to the Stock Plan, the Compensation Committee established a Deferred Compensation Plan for Directors for the benefit of its directors and their beneficiaries, which replaced a previous Deferred Compensation and Stock Plan for Directors. A director may make an annual election to defer all or part of his or her director’s fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon separation from the Board. If the director elects to have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the closing market price of the Company’s common stock on the first trading day of the following quarter to determine the number of shares to be credited to the director. During the three months ended March 31, 2019, 1,617 shares were credited to director's deferred fee accounts and 6,565 shares were issued. As of ~~March 31, 2019, the director's deferred fee accounts comprise~~ ~~109,696~~ ~~shares.~~

The Compensation Committee has also approved an annual award of shares of the Company’s common stock as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are awarded as of each Annual Meeting of Stockholders, and their issuance may not be deferred.

~~Noncontrolling Interests~~

~~Saul Centers is the sole general partner of the Operating Partnership, owning a~~ ~~74.4%~~ ~~common interest as of~~ ~~March 31, 2019~~. Noncontrolling interests in the Operating Partnership is comprised of limited partnership units owned by the Saul Organization. Noncontrolling interests reflected on the accompanying consolidated balance sheets is increased for earnings attributable to limited partnership interests and distributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interests reflected on the consolidated statements of operations represents earnings attributable to limited partnership interests.

~~Per Share Data~~

Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the convertible limited partnership units are non-dilutive. The following table sets forth, for the indicated periods, weighted averages of the number of common shares outstanding, basic and dilutive, the effect of dilutive options and the number of options which are not dilutive because the average price of the Company's common stock was less than the exercise prices. The treasury stock method was used to measure the effect of the dilution.

Three months ended March 31,
(In thousands) 2019 2018
Weighted average common stock outstanding-Basic 22,820
22,178
Effect of dilutive options 43
40
Weighted average common stock outstanding-Diluted 22,863
22,218
Non-dilutive options 438
446
Years non-dilutive options were issued 2016 and 2017 2016 and 2017

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

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~~1 option to renew for an additional five years. The right of use asset and corresponding lease liability totaled ~~$2.1~~$1.8 million and ~~$2.2~~$1.8 million, respectively, at ~~March 31,~~September 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~~Management does not expect that the ~~impact that~~adoption of ASU 2016-13 will have a material impact 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

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

flow of the hedged item are reported as a component of interest expense and amortization of deferred debt costs in the Statements of Operations.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the presentation used for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.


3.	Real Estate ~~Transactions~~

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 September 30, 2019 and December 31, 2018, is composed of the following:



(in thousands)	September 30, 2019		December 31, 2018
Glebe Road	$	237,305	$	162,176
7316 Wisconsin Avenue	42,626		—
Ashbrook Marketplace	22,570		11,124
Other	15,297		12,672
Total	$	317,798	$	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 $24.9 million and $28.1 million, net of accumulated amortization of $40.4 million and $37.7 million, as of September 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 $4.5 million and $4.3 million for the nine months ended September 30, 2019 and 2018, respectively.

Real Estate Investment Properties

As of September 30, 2019, the Company’s properties (the “Current Portfolio Properties”) consisted of 49 shopping center properties (the “Shopping Centers”), 6 mixed-use properties, which are comprised of office, retail and multi-family residential uses (the “Mixed-Use Properties”) and 5 (non-operating) development properties.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

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 $30.7 million and $29.7 million for the nine months ended September 30, 2019 and 2018, respectively. Repairs and maintenance expense totaled $9.7 million and $8.7 million for the nine months ended September 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.

7316 Wisconsin Avenue

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

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. The Company has executed lease termination agreements with the final 2 office tenants and, effective September 1, 2019, the asset was removed from service and transferred to construction in progress at its carrying value of $42.6 million.

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. ~~See Note 2. Summary of Significant Accounting Policies-Real Estate Investment Properties.~~

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

(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 ~~March 31,~~September 30, 2019, the Saul Organization holds a ~~25.6%~~25.5% limited partnership interest in the Operating Partnership represented by approximately ~~7.8~~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 ~~March 31,~~September 30, 2019, approximately ~~900,000~~2,130,000 units were convertible into shares of Saul Centers common stock.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

The impact of the Saul Organization’s approximately ~~25.6%~~25.5% 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 ~~March 31,~~September 30, 2019 and 2018, were approximately ~~30.7~~31.0 million and ~~29.8~~30.3 million, respectively, and for the nine months ended September 30, 2019and 2018, were approximately 30.8 million and 30.0 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 $1.0 billion at ~~March 31,~~September 30, 2019, of which approximately ~~$918.5~~$948.1 million was fixed-rate debt and approximately ~~$115.0~~$75.0 million was variable rate debt ~~including~~

~~$40.0 million~~ outstanding under ~~an unsecured revolving credit facility and $75.0 million outstanding under a term loan~~the credit facility. The carrying value of the properties collateralizing the notes payable totaled approximately $1.1 billion as of ~~March 31,~~September 30, 2019.

At ~~March 31,~~September 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 ~~March 31,~~September 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 ~~March 31,~~September 30, 2019, based on the value of the Company’s unencumbered properties, approximately ~~$230.5~~$296.3 million was available under the revolving credit facility, ~~$40.0 million~~there was no outstanding balance and approximately $185,000 was committed for letters of credit.

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.

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~~Notes to Consolidated Financial Statements (Unaudited)~~

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 ~~$69.3~~$68.5 million outstanding balance at ~~March 31,~~September 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~~0 on October 1, 2021), (b) a portion of the Kentlands Square II mortgage loan (approximately ~~$8.7~~$8.6 million of the ~~$34.9~~$34.3 million outstanding balance at ~~March 31,~~September 30, 2019), and (c) a portion of the Broadlands Village mortgage (approximately ~~$4.0~~$3.9 million of the ~~$31.8~~$31.4 million outstanding balance at ~~March 31,~~September 30, 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.

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Notes to Consolidated Financial Statements (Unaudited)

At ~~March 31,~~September 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
October 1 through December 31, 2019	$	—	$	7,384	$	7,384
2020	61,163		28,536		89,699
2021	11,012		28,333		39,345
2022	36,503		28,923		65,426
2023	84,225		29,313		113,538
2024	66,645		27,908		94,553
Thereafter	497,257		115,902		613,159
Principal amount	$	756,805	$	266,299	1,023,104
Unamortized deferred debt costs					8,376
Net					$	1,014,728

(In thousands)
Balloon
Payments

Scheduled
Principal
Amortization
Total
April 1 through December 31, 2019 $ 12,060
$ 22,312
$ 34,372
2020 61,163
28,538
89,701
2021 11,012
28,335
39,347
2022 76,502
(a) 28,925
105,427
2023 84,225
29,316
113,541
2024 66,637
27,882
94,519
Thereafter 440,667
115,901
556,568
Principal amount $ 752,266
$ 281,209
1,033,475
Unamortized deferred debt costs 10,354
Net $ 1,023,121

~~(a) Includes $40.0~~Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the term loan 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 $8.4 million ~~outstanding under~~and $10.3 million, net of accumulated amortization of $6.7 million and $7.3 million, at September 30, 2019 and December 31, 2018, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets. At September 30, 2019, deferred debt costs related to the revolving credit ~~facility.~~facility, which had 0 outstanding balance, totaling $1.3 million, net of accumulated amortization of $0.9 million, are included in Other Assets in the Consolidated Balance Sheets.

Interest expense, net and amortization of deferred debt costs for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
Interest incurred	$	13,103		$	12,361		$	38,972		$	36,863
Amortization of deferred debt costs	370			377			1,130			1,224
Capitalized interest	(3,088		)	(1,716		)	(7,756		)	(4,301		)
Interest expense	10,385			11,022			32,346			33,786
Less: Interest income	60			48			161			218
Interest expense, net and amortization of deferred debt costs	$	10,325		$	10,974		$	32,185		$	33,568

Three Months Ended March 31,
(In thousands) 2019 2018
Interest incurred $ 12,881
$ 12,200
Amortization of deferred debt costs 384
470
Capitalized interest (2,146 ) (1,144 )
Interest expense 11,119
11,526
Less: Interest income 52
102
Interest expense, net $ 11,067
$ 11,424

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~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~


6.	Equity

The consolidated statements of operations for the ~~three~~nine months ended~~March 31,~~ September 30, 2019 and 2018, reflect noncontrolling interests of ~~$3.6~~$10.3 million and ~~$2.4~~$9.3 million, respectively, representing income attributable to the Saul Organization for each period.

At September 30, 2019, the Company had outstanding 4.2 million depositary shares, each representing 1/100th of a share of 6.875% Series C Cumulative Redeemable Preferred Stock (the “Series C Stock”). The depositary shares are redeemable at the Company’s option, in whole or in part, at the $25.00 liquidation preference plus accrued but unpaid dividends. The depositary shares pay an annual dividend of $1.71875 per share, equivalent to 6.875% of the $25.00 liquidation preference. The Series C Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes of control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. In October 2019, the Company redeemed all outstanding depositary shares representing interests in the Series C Stock (see Subsequent Events).

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Notes to Consolidated Financial Statements (Unaudited)

At ~~March 31,~~September 30, 2019, the Company had outstanding 3.0 million depositary shares, each representing 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock (the "Series D Stock"). The depositary shares may be redeemed at the Company’s option, in whole or in part, on or after January 23, 2023, at the $25.00 liquidation preference, plus accrued but unpaid dividends to but not including the redemption date. The depositary shares pay an annual dividend of $1.53125 per share, equivalent to 6.125% of the $25.00 liquidation preference. The Series D Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

~~At March 31,~~On September 17, 2019, ~~the Company had outstanding 4.2~~Saul Centers sold, in an underwritten public offering, 4.0 million depositary shares, each representing 1/100th of a share of ~~6.875%~~6.000% Series CE Cumulative Redeemable Preferred Stock (the “Series CE Stock”)., providing net cash proceeds of approximately $96.8 million. The depositary shares ~~are redeemable at the Company’s option,~~may be redeemed in whole or in part, on or after September 17, 2024, at the ~~$25.00~~$25.00 liquidation preference, plus accrued but unpaid ~~dividends.~~dividends to but not including the redemption date. The depositary shares pay an annual dividend of ~~$1.71875~~$1.50 per share, equivalent to ~~6.875%~~6.000% of the ~~$25.00~~$25.00 liquidation preference. The Series CE Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes ofin control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. On September 23, 2019, Saul Centers sold, as a result of the exercise by the underwriters of their over-allotment option, an additional 0.4 million depositary shares of Series E Stock, providing net cash proceeds of approximately $9.5 million.

Per Share Data



	Three months ended September 30,		Nine months ended September 30,
(In thousands)	2019	2018	2019	2018
Weighted average common stock outstanding-Basic	23,081	22,432	22,947	22,290
Effect of dilutive options	40	69	46	46
Weighted average common stock outstanding-Diluted	23,121	22,501	22,993	22,336
Non-dilutive options	698	443	612	508
Years non-dilutive options were issued	2016, 2017 and 2019	2016 and 2017	2016, 2017 and 2019	2015, 2016 and 2017


7.	Related Party Transactions

The Chairman, ~~and~~ Chief Executive Officer and President, the ~~President,~~Executive Vice President-Real Estate, the Executive Vice President-Chief Legal and Administrative Officer and the Senior Vice President-Chief Accounting Officer of the Company are also officers of various members of the Saul Organization and their management time is shared with the Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors, with the exception of the Senior Vice President-Chief Accounting Officer whose share of annual compensation allocated to the Company is determined by the shared services agreement (described below).

The Company participates in a multiemployer 401K plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Company contributions, which are included in general and administrative expense or property operating expenses in the Consolidated Statements of Operations, at the discretionary amount of up to ~~six~~6 percent of the employee’s cash compensation, subject to certain limits, were ~~$96,500~~$264,300 and $~~90,700~~264,900 for the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, respectively. All amounts contributed by employees and the Company are fully vested.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

The Company also participates in a multiemployer nonqualified deferred compensation plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. According to the plan, which can be modified or discontinued at any time, participating employees defer 2% of their compensation in excess of a specified amount. For the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, the Company credited to employee accounts ~~$56,500~~$186,300 and $~~46,900~~161,500, respectively, which is the sum of accrued earnings and three times the amount deferred by employees and is included in general and administrative expense. All amounts contributed by employees and credited by the Company are fully vested. The cumulative unfunded liability under this plan was ~~$2.8~~$3.0 million and $2.7 million, at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, and is included in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets.

The Company has entered into a shared services agreement (the “Agreement”) with the Saul Organization that provides for the sharing of certain personnel and ancillary functions such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is provided for in the Agreement and is based upon head count, estimates of usage or estimates of time incurred, as applicable. The terms of the Agreement and the payments made thereunder are deemed reasonable by management and are reviewed annually by the Audit Committee of the Board of Directors, which consists entirely of independent directors. Billings by the Saul Organization for the Company’s share of these ancillary costs and expenses for the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, which included rental expense for the Company’s headquarters lease, totaled approximately ~~$2.2~~$6.4 million and $~~2.0~~6.2 million, net,

~~-17-~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

respectively. The amounts are generally expensed as incurred and are primarily reported as general and administrative expenses in the Consolidated Statements of Operations. As of ~~March 31,~~September 30, 2019 and December 31, 2018, accounts payable, accrued expenses and other liabilities included approximately ~~$754,400~~$810,600 and $933,400, respectively, representing amounts due to the Saul Organization for the Company’s share of these ancillary costs and expenses.

The Company has entered into a shared third-party predevelopment cost agreement (the “Predevelopment Agreement”) with the Trust. The Predevelopment Agreement relates to the sharing of third-party predevelopment costs incurred in connection with the planning of the future redevelopment of certain adjacent real estate assets in the Twinbrook area of Rockville, Maryland. The costs will be shared on a pro rata basis based on the acreage owned by each entity and neither party is obligated to advance funds to the other.

In August 2016, the Company entered into an agreement to acquire from the Trust approximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Ashburn, Virginia. The transaction closed on May 9, 2018, and the Company issued 176,680 limited partnership units to the Trust. The Company ~~intends to construct~~is constructing a shopping center, Ashbrook Marketplace, and upon stabilization, may be obligated to issue additional limited partnership units to the Trust.

The Company subleases its corporate headquarters space from a member of the Saul Organization. The lease commenced in March 2002, expires in 2022, and provides for base rent increases of 3% per year, with payment of a pro-rata share of operating expenses over a base year amount. The Agreement requires each party to pay an allocation of total rental payments based on a percentage proportionate to the number of employees employed by each party. The Company’s rent expense for its headquarters location was ~~$193,900~~$593,500 and $~~195,100~~590,000 for the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, respectively, and is included in general and administrative expense.

The B. F. Saul Insurance Agency, Inc., a subsidiary of the B. F. Saul Company and a member of the Saul Organization, is a general insurance agency that receives commissions and fees in connection with the Company’s insurance program. Such commissions and fees amounted to ~~$73,400~~$284,900 and $~~84,100~~251,800 for the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, respectively.


8.	Stock-based Employee Compensation, Stock Option Plans, and Deferred Compensation Plan for Directors

In 2004, the Company ~~has~~ established a stock incentive plan (the "Plan"), as amended. Under the Plan, options were granted at an exercise price not less than the market value of the common stock on the date of grant and expire ten years from the date of grant. Officer options vest ratably over four years following the grant and are charged to expense using the straight-line method over the vesting period. Director options vest immediately and are charged to expense as of the date of grant.

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Notes to Consolidated Financial Statements (Unaudited)

(3) Expected Dividend Yield determined by management after considering the Company’s current and historic dividend yield rates, the Company’s yield in relation to other retail REITs and the Company’s market yield at the grant date; and (4) a Risk-free Interest Rate based upon the market yields of US Treasury obligations with maturities corresponding to the average expected term of the options at the grant date. The Company amortizes the value of options granted ratably over the vesting period and includes the amounts as compensation expense in general and administrative expenses.

Pursuant to the Plan, the Compensation Committee established a Deferred Compensation Plan for Directors for the benefit of the Company’s directors and their beneficiaries, which replaced a previous Deferred Compensation and Stock Plan for Directors. Annually, directors are given the ability to make an election to defer all or part of their fees and have the option to have their fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon separation from the Board. If a director elects to their have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the closing market price of the Company’s common stock on the first trading day of the following quarter to determine the number of shares to be credited to the director. During the nine months ended September 30, 2019, 5,017 shares were credited to director's deferred fee accounts and 7,058 shares were issued. As of September 30, 2019, the director's deferred fee accounts comprise 112,603 shares.

The following table summarizes the ~~amount and activity of each grant with outstanding unexercised options, the total value and variables~~assumptions used in the ~~computation~~valuation of the 2018 and 2019 option grants. During the ~~amount expensed and~~nine months ended September 30, 2019, stock option expense totaling $1.3 million was included in general and administrative expense in the Consolidated Statements of ~~Operations for~~Operations. As of September 30, 2019, the ~~three months endedMarch 31, 2019~~.

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~~Notes~~estimated future expense related to ~~Consolidated Financial Statements (Unaudited)~~

unvested stock options was $2.9 million.

Directors
Grant date 4/24/2009 5/7/2010 5/13/2011 5/4/2012 5/10/2013 5/9/2014 5/8/2015 5/6/2016 5/5/2017 5/11/2018 Subtotals
Total grant 32,500
32,500
32,500
35,000
35,000
30,000
35,000
32,500
27,500
27,500
320,000
Vested 32,500
32,500
32,500
35,000
35,000
30,000
35,000
32,500
27,500
27,500
320,000
Exercised 30,000
27,500
25,000
25,000
22,500
17,500
12,500
7,500
—
2,500
170,000
Forfeited —
2,500
2,500
—
—
—
2,500
2,500
5,000
—
15,000
Exercisable at March 31, 2019 2,500
2,500
5,000
10,000
12,500
12,500
20,000
22,500
22,500
25,000
135,000
Remaining unexercised 2,500
2,500
5,000
10,000
12,500
12,500
20,000
22,500
22,500
25,000
135,000
Exercise price $ 32.68
$ 38.76
$ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
$ 57.74
$ 59.41
$ 49.46

Volatility 0.344
0.369
0.358
0.348
0.333
0.173
0.166
0.166
0.173
0.192

Expected life (years) 6.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0

Assumed yield 4.54 % 4.23 % 4.16 % 4.61 % 4.53 % 4.48 % 4.54 % 3.75 % 3.45 % 3.70 %
Risk-free rate 2.19 % 2.17 % 1.86 % 0.78 % 0.82 % 1.63 % 1.50 % 1.23 % 1.89 % 2.84 %
Total value at grant date $ 222,950
$ 287,950
$ 297,375
$ 257,250
$ 278,250
$ 109,500
$ 125,300
$ 151,125
$ 165,550
$ 169,400
$ 2,064,650
Expensed in previous years 222,950
287,950
297,375
257,250
278,250
109,500
125,300
151,125
165,550
169,400
2,064,650
Expensed in 2019 —
—
—
—
—
—
—
—
—
—
—
Future expense —
—
—
—
—
—
—
—
—
—
—
Officers
Grant date 5/13/2011 5/4/2012 5/10/2013 5/9/2014 5/8/2015 5/6/2016 5/5/2017 5/11/2018 Subtotal
Grand
Totals
Total grant 162,500
242,500
202,500
170,000
190,000
194,000
205,000
217,500
1,584,000
1,904,000
Vested 118,750
107,500
171,875
168,125
140,625
96,375
51,250
—
854,500
1,174,500
Exercised 103,750
92,455
129,375
46,126
20,625
3,750
—
—
396,081
566,081
Forfeited 43,750
135,000
30,625
1,875
3,125
1,875
—
—
216,250
231,250
Exercisable at March 31, 2019 15,000
15,045
42,500
121,999
120,000
92,625
51,250
—
458,419
593,419
Remaining unexercised 15,000
15,045
42,500
121,999
166,250
188,375
205,000
217,500
971,669
1,106,669
Exercise price $ 41.82
$ 39.29
$ 44.42
$ 47.03
$ 51.07
$ 57.74
$ 59.41
$ 49.46

Volatility 0.330
0.315
0.304
0.306
0.298
0.185
0.170
0.177

Expected life (years) 8.0
8.0
8.0
7.0
7.0
7.0
7.0
7.0

Assumed yield 4.81 % 5.28 % 5.12 % 4.89 % 4.94 % 3.80 % 3.50 % 3.75 %
Risk-free rate 2.75 % 1.49 % 1.49 % 2.17 % 1.89 % 1.55 % 2.17 % 2.94 %
Gross value at grant date $ 1,366,625
$ 1,518,050
$ 1,401,300
$ 1,349,800
$ 1,584,600
$ 1,136,840
$ 1,324,300
$ 1,313,700
$ 10,995,215
$ 13,059,865
Estimated forfeitures 367,937
845,100
211,925
14,887
26,062
86,628
91,642
83,157
1,727,338
1,727,338
Expensed in previous years 998,688
672,950
1,189,375
1,334,913
1,322,596
700,128
513,600
205,088
6,937,338
9,001,988
Expensed in 2019 —
—
—
—
176,957
65,637
77,040
76,908
396,542
396,542
Future expense —
—
—
—
58,985
284,447
642,018
948,547
1,933,997
1,933,997
Weighted average term of remaining future expense (in years) 2.4



	Directors						Officers
Grant date	May 11, 2018			May 3, 2019			May 11, 2018			May 3, 2019
Exercise price	$	49.46		$	55.71		$	49.46		$	55.71
Volatility	0.192			0.236			0.177			0.206
Expected life (years)	5.0			5.0			7.0			7.0
Assumed yield	3.70		%	3.75		%	3.75		%	3.80		%
Risk-free rate	2.84		%	2.33		%	2.94		%	2.43		%

~~-19-~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

The table below summarizes the option activity for the ~~three~~nine months ended~~March 31,~~September 30, 2019:



	Number of Shares		Weighted Average Exercise Price per share		Aggregate Intrinsic Value
Outstanding at January 1	1,114,169		$	52.40	$	543,662
Granted	260,000		55.71		—
Exercised	(47,055	)	45.11		512,322
Expired/Forfeited	(7,500	)	56.07		—
Outstanding at September 30	1,319,614		53.29		3,712,807
Exercisable at September 30	773,614		52.29		2,889,025

Number of
Shares

Weighted
Average
Exercise Price
per share

Aggregate
Intrinsic Value
Outstanding at January 1 1,114,169
$ 52.40
$ 543,662
Granted —
—
—
Exercised —
—
—
Expired/Forfeited (7,500 ) 56.07

Outstanding at March 31 1,106,669
52.38
2,056,820
Exercisable at March 31 593,419
50.86
1,627,519

The intrinsic value measures the price difference between the options’ exercise price and the closing share price quoted by the New York Stock Exchange as of the date of measurement. The intrinsic value for shares exercised during the period was calculated by using the closing share price on the date of exercise. At ~~March 29,~~September 30, 2019, the final trading day of the ~~first~~third quarter, the closing share price of $~~51.37~~54.51 was lower than the exercise price of the 210,875, 227,500, and ~~227,500~~260,000 outstanding options granted in 2016, 2017 and ~~2017,~~2019, respectively. The weighted average remaining contractual life of the Company’s outstanding and exercisable options is ~~7.0~~7.2 years and ~~6.0~~6.1 years, respectively.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)


9.	Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed-rate payment terms was determined using Level 3 data in a discounted cash flow approach, which is based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed-rate financing and, assuming long-term interest rates of approximately ~~4.05%~~3.50% and 4.40%, would be approximately $~~946.1~~977.8 million and $927.0 million, respectively, compared to the principal balance of ~~$918.5~~$948.1 million and $910.2 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt.

The Company carries its interest rate swap at fair value. The Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was determined using Level 3 inputs and is not significant. Derivative instruments are classified within Level 2 of the fair value hierarchy because their values are determined using third-party pricing models which contain inputs that are derived from observable market data. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measure of volatility, and correlations of such inputs. The swap agreement terminates on July 1, 2020. As of ~~March 31,~~September 30, 2019, the fair value of the interest-rate swap was approximately $0.4 million and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. The decrease in value from inception of the swap is reflected in Other Comprehensive Income in the Consolidated Statements of Comprehensive Income.


10.	Commitments and Contingencies

Neither the Company nor the current portfolio properties are subject to any material litigation, nor, to management’s knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in the aggregate, will not have a material adverse impact on the Company or the current portfolio properties.

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)


11.	Business Segments

The Company has ~~two~~2 reportable business segments: Shopping Centers and Mixed-Use Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income and cash flows from real estate of the combined properties in each segment. All of our properties within each segment generate similar types of revenues and expenses related to tenant rent, reimbursements and operating expenses. Although services are provided to a range of tenants, the types of services provided to them are similar within each segment. The properties in each portfolio have similar economic characteristics and the nature of the products and services provided to our tenants and the method to distribute such services are consistent throughout the portfolio. Certain reclassifications have been made to prior year information to conform to the 2019 presentation.

~~-20-~~



(In thousands)	Shopping Centers			Mixed-Use Properties			Corporate and Other			Consolidated Totals
Three months ended September 30, 2019
Real estate rental operations:
Revenue	$	41,313		$	15,739		$	—		$	57,052
Expenses	(8,974		)	(5,665		)	—			(14,639		)
Income from real estate	32,339			10,074			—			42,413
Interest expense, net and amortization of deferred debt costs	—			—			(10,325		)	(10,325		)
Depreciation and amortization of deferred leasing costs	(7,260		)	(4,758		)	—			(12,018		)
General and administrative	—			—			(4,742		)	(4,742		)
Net income (loss)	$	25,079		$	5,316		$	(15,067	)	$	15,328
Capital investment	$	9,166		$	27,290		$	—		$	36,456
Total assets	$	985,244		$	609,560		$	51,960		$	1,646,764

Three months ended September 30, 2018
Real estate rental operations:
Revenue	$	41,091		$	15,819		$	—		$	56,910
Expenses	(8,574		)	(5,273		)	—			(13,847		)
Income from real estate	32,517			10,546			—			43,063
Interest expense, net and amortization of deferred debt costs	—			—			(10,974		)	(10,974		)
Depreciation and amortization of deferred leasing costs	(7,249		)	(4,007		)	—			(11,256		)
General and administrative	—			—			(4,141		)	(4,141		)
Change in fair value of derivatives	—			—			10			10
Net income (loss)	$	25,268		$	6,539		$	(15,105	)	$	16,702
Capital investment	$	15,145		$	44,161		$	—		$	59,306
Total assets	$	982,038		$	514,480		$	9,620		$	1,506,138

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)



(Dollars in thousands)	Shopping Centers			Mixed-Use Properties			Corporate and Other			Consolidated Totals
Nine months ended September 30, 2019
Real estate rental operations:
Revenue	$	126,730		$	48,213		$	—		$	174,943
Expenses	(27,214		)	(16,508		)	—			(43,722		)
Income from real estate	99,516			31,705			—			131,221
Interest expense, net and amortization of deferred debt costs	—			—			(32,185		)	(32,185		)
Depreciation and amortization of deferred leasing costs	(21,917		)	(13,268		)	—			(35,185		)
General and administrative	—			—			(14,696		)	(14,696		)
Net income (loss)	$	77,599		$	18,437		$	(46,881	)	$	49,155
Capital investment	$	22,746		$	82,309		$	—		$	105,055
Total assets	$	985,244		$	609,560		$	51,960		$	1,646,764

Nine months ended September 30, 2018
Real estate rental operations:
Revenue	$	122,770		$	46,330		$	—		$	169,100
Expenses	(25,931		)	(15,394		)	—			(41,325		)
Income from real estate	96,839			30,936			—			127,775
Interest expense, net and amortization of deferred debt costs	—			—			(33,568		)	(33,568		)
Depreciation and amortization of deferred leasing costs	(21,880		)	(12,076		)	—			(33,956		)
General and administrative	—			—			(13,208		)	(13,208		)
Change in fair value of derivatives	—			—			(2		)	(2		)
Gain on sale of property	509			—			—			509
Net income (loss)	$	75,468		$	18,860		$	(46,778	)	$	47,550
Capital investment	$	22,288		$	74,011		$	—		$	96,299
Total assets	$	982,038		$	514,480		$	9,620		$	1,506,138

(In thousands)
Shopping
Centers

Mixed-Use
Properties

Corporate
and Other

Consolidated
Totals
Three months ended March 31, 2019
Real estate rental operations:
Revenue $ 43,159
$ 16,591
$ —
$ 59,750
Expenses (9,688 ) (5,461 ) —
(15,149 )
Income from real estate 33,471
11,130
—
44,601
Interest expense, net and amortization of deferred debt costs —
—
(11,067 ) (11,067 )
Depreciation and amortization of deferred leasing costs (7,282 ) (4,361 ) —
(11,643 )
General and administrative —
—
(4,814 ) (4,814 )
Net income (loss) $ 26,189
$ 6,769
$ (15,881 ) $ 17,077
Capital investment $ 4,613
$ 18,810
$ —
$ 23,423
Total assets $ 968,674
$ 566,163
$ 10,991
$ 1,545,828

Three months ended March 31, 2018
Real estate rental operations:
Revenue $ 40,924
$ 15,184
$ —
$ 56,108
Expenses (8,877 ) (5,091 ) —
(13,968 )
Income from real estate 32,047
10,093
—
42,140
Interest expense and amortization of deferred debt costs —
—
(11,424 ) (11,424 )
Depreciation and amortization of deferred leasing costs (7,298 ) (4,051 ) —
(11,349 )
General and administrative —
—
(4,420 ) (4,420 )
Net income (loss) $ 24,749
$ 6,042
$ (15,844 ) $ 14,947
Capital investment $ 3,260
$ 13,463
$ —
$ 16,723
Total assets $ 971,596
$ 448,970
$ 8,581
$ 1,429,147

12. Subsequent Events

In September 2019, the Company announced the redemption of all outstanding depositary shares representing interests in its Series C Stock. The depositary shares were redeemed on October 17, 2019 at $25.00 per depositary share, plus all accrued and unpaid dividends to, but not including, the redemption date, for an aggregate redemption price of $25.07638 per depositary share. In the fourth quarter, costs associated with the redemption were charged against Net income available to common stockholders. After the redemption date, dividends on the depositary shares representing interests in the Series C Stock ceased to accrue.

On November 5, 2019, the Company ~~has reviewed operating activities~~entered into an agreement (the "Contribution Agreement") to acquire from the Trust, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland (the “Contributed Property”). In exchange for the ~~period subsequent~~Contributed Property, the Company will issue to ~~March 31, 2019~~the Trust 1,416,071 limited partnership units in the Operating Partnership (“OP Units”) at an agreed value of $56.00 per OP Unit, representing an aggregate value of $79.3 million for the Contributed Property. Title to the Contributed Property and ~~determined there~~the OP Units will be placed in escrow until certain conditions of the Contribution Agreement are ~~no subsequent events required to be disclosed.~~satisfied.

~~-21-~~

~~Table of Contents~~


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes in “Item 1. Financial Statements” of this report and the more detailed information contained in the Company’s Form 10-K for the year ended December 31, 2018. Historical results and percentage relationships set forth in Item 1 and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section have the meanings given to them in Item 1 of this Form 10-Q.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as “believe,” “expect” and “may.”

Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those given in the forward-looking statements as a result of changes in factors which include, among others, the following:

continuing risks related to the challenging domestic and global credit markets and their effect on discretionary spending;

risks that the Company’s tenants will not pay rent;

risks related to the Company’s reliance on shopping center “anchor” tenants and other significant tenants;

risks related to the Company’s substantial relationships with members of the Saul Organization;

risks of financing, such as increases in interest rates, restrictions imposed by the Company’s debt, the Company’s ability to meet existing financial covenants and the Company’s ability to consummate planned and additional financings on acceptable terms;

risks related to the Company’s development activities;

risks that the Company’s growth will be limited if the Company cannot obtain additional capital;

risks that planned and additional acquisitions or redevelopments may not be consummated, or if they are consummated, that they will not perform as expected;

risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks;

risks related to the Company’s status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to the Company’s status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT; and

such other risks as described in Part I, Item 1A of the Company’s Form 10-K for the year ended December 31, 2018.

General

The following discussion is based primarily on the consolidated financial statements of the Company as of and for the three and nine months ended ~~March 31,~~September 30, 2019.

Overview

The Company’s principal business activity is the ownership, management and development of income-producing properties. The Company’s long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate investments.

The Company’s primary operating strategy is to focus on its community and neighborhood ~~shopping center~~Shopping Center business and its transit-centric, primarily residential ~~mixed-use~~Mixed-Use properties to achieve both cash flow growth and capital appreciation. Management believes there is potential for long-term growth in cash flow as existing leases for space in the Shopping Centers and Mixed-Use properties expire and are renewed, or newly-available or vacant space is leased. The Company intends to renegotiate leases where possible and seek new tenants for available space in order to optimize the mix of uses to improve foot traffic through the Shopping Centers. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate existing tenants, reconfigure tenant spaces and introduce new tenants with the goals of increasing occupancy, improving overall retail sales, and ultimately increasing cash flow as economic conditions improve. In those circumstances in

~~-22-~~

~~Table of Contents~~

which leases are not otherwise expiring, or in connection with renovations or relocations, management selectively attempts to increase cash flow through a variety of means, including recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percentage rental provisions, in its leases.

~~The recent period of economic expansion has now run in excess of five years. While economic~~Economic conditions within the local Washington, DC metropolitan area have remained relatively ~~stable, issues~~stable. Issues facing the Federal government relating to taxation, spending and interest rate policy will likely continue to impact the office, retail and residential real estate markets over the coming years. Because the majority of the Company’s property operating income is produced by our shopping centers, we continually monitor the implications of government policy changes, as well as shifts in consumer demand between on-line and in-store shopping, on future shopping center construction and retailer store expansion plans. Based on our observations, we continue to adapt our marketing and merchandising strategies in a way to maximize our future performance. The Company’s overall leasing percentage, on a comparative same property basis, which excludes the impact of properties not in operation for the entirety of the comparable periods, was ~~95.7%~~94.8% at ~~March 31,~~September 30, 2019, compared to ~~94.1%~~95.2% at ~~March 31,~~September 30, 2018.

The Company maintains a ratio of total debt to total asset value of under 50%, which allows the Company to obtain additional secured borrowings if necessary. As of ~~March 31,~~September 30, 2019, amortizing fixed-rate debt with staggered maturities from ~~2019~~2020 to 2035 represented approximately ~~88.9%~~92.7% of the Company’s notes payable, thus minimizing refinancing risk in any given year. As of ~~March 31,~~September 30, 2019, the Company’s variable-rate debt consisted of ~~$115.0~~$75.0 million outstanding under the credit facility. As of ~~March 31,~~September 30, 2019, the Company ~~has~~had availability of approximately ~~$230.5~~$296.3 million under its $325.0 million unsecured revolving credit facility.

Although it is management’s present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers and transit-centric, primarily residential mixed-use properties in the Washington, DC/Baltimore metropolitan area and the southeastern region of the United States, the Company may, in the future, also acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area.

The following table sets forth average annualized base rent per square foot and average annualized effective rent per square foot for the Company's Commercial properties (all properties except for the Clarendon Center and Park Van Ness apartments). For purposes of this table, annualized effective rent is annualized base rent minus amortized tenant improvements and amortized leasing commissions.


	Three months ended March 31,										Nine months ended September 30,
	2019		2018		2017		2016		2015		2019		2018		2017		2016		2015
Base rent	$	20.08	$	20.26	$	18.91	$	18.71	$	18.37	$	20.15	$	20.13	$	19.30	$	18.67	$	18.47
Effective rent	$	18.14	$	18.33	$	17.12	$	16.86	$	16.74	$	18.28	$	18.25	$	17.49	$	16.87	$	16.78

Recent Developments

On July 31, 2019, J. Page Lansdale tendered his resignation as President and Chief Operating Officer of the Company effective December 31, 2019. On September 30, 2019, Mr. Lansdale advised the Company’s Chairman that his resignation will be effective September 30, 2019. Mr. Lansdale will remain a member of the Company’s Board of Directors and will be a consultant to the Company through December 31, 2019. Mr. Lansdale’s resignation, including the accelerated effective date, was not in connection with any disagreements with the Company about any matter. On October 1, 2019, the Board of Directors appointed B. Francis Saul II as President, effective immediately. In addition, the Company promoted each of Christopher H. Netter, Scott V. Schneider and D. Todd Pearson to the position of Executive Vice President.

On November 5, 2019, the Company entered into an agreement (the "Contribution Agreement") to acquire from the Trust, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland (the “Contributed Property”). In exchange for the Contributed Property, the Company will issue to the Trust 1,416,071 limited partnership units in the Operating Partnership (“OP Units”) at an agreed value of $56.00 per OP Unit, representing an aggregate value of $79.3 million for the Contributed Property. Title to the Contributed Property and the OP Units will be placed in escrow until certain conditions of the Contribution Agreement are satisfied. See Part II, Item 5 in this Form 10-Q for more details about this transaction.

From 2014 through 2016, in separate transactions, the Company purchased four adjacent properties on North Glebe Road in Arlington, Virginia, for an aggregate $54.0 million. The Company is developing approximately 490 residential units and 60,000 square feet of retail space on 2.8 acres of land. Construction is complete on the three level below grade parking structure. ~~Concrete~~The building exterior facade and rooftop amenities are nearing completion. Interior units and public area finishes are expected to be completed in early 2020. Public right of way improvements and courtyard site work ~~is substantially complete and pre-cast facade panels, masonry and windows~~ are ~~being installed. Interior framing, electrical, plumbing and HVAC work continues.~~in progress. The development is scheduled for substantial completion in ~~early~~the Spring of 2020. The total cost of the project, including acquisition of land, is expected to be approximately $275.0 million, a portion of which will be financed with a $157.0 million construction-to-permanent loan. Costs incurred through ~~March 31,~~September 30, 2019 total approximately ~~$189.2~~$237.3 million, of which ~~$38.5~~$95.1 million has been financed by the loan. Leases have been executed for a 41,500 square foot Target and 11,000 square feet of retail shop space, resulting in approximately 88% of the planned retail space being leased.

Albertson's/Safeway is currently a tenant at seven of the Company's shopping centers, two locations of which are subleased to other grocers. In February 2017, the Company terminated the lease with Albertson's/Safeway at Broadlands Village. The Company executed a lease with Aldi Food Market for 20,000 square feet of this space, which opened in November 2017, and has executed a lease with LA Fitness for substantially all of the remaining space. The fitness center is under construction and projected to open for business during the fourth quarter of 2019.

~~-23-~~

~~Table of Contents~~

In the fourth quarter of 2018, the Company substantially completed construction of the shell of a 16,000 square foot small shop expansion at Burtonsville Town Square and construction of interior improvements is underway. Delivery of the first leased tenant spaces occurred in late 2018, and tenant openings began in the first quarter of 2019. The total development cost is expected to be approximately $5.7 million. Leases have been executed for approximately ~~55%~~79% of the space and the Company has prospects for the remaining portion. In addition, a lease has been executed with Taco Bell who ~~will construct~~is expected to commence construction in late 2019 of a free-standing building on a pad site within the property.

During the three months ended June 30, 2017, the Company executed a termination agreement with Kmart at Kentlands Square II. In September 2018, the Company executed a lease with At Home for all of the space, which opened for business in January 2019.

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 Ashburn, Virginia. The ~~Company has received site plan approval for~~Company's Ashbrook Marketplace, an approximately ~~88,000~~83,000 square foot neighborhood shopping ~~center.~~center, is under construction. A 29,000 square foot anchor grocery store lease has been executed with Lidl and, including executed pad and shop space leases, overall pre-leasing totals approximately ~~50%~~84% of the planned space. In addition, lease negotiations are in progress for ~~approximately 10,400~~the remaining 10,315 square feet of small shop space and the ~~remaining planned~~Company has prospects for the final pad ~~building~~site. Grocer and small shop ~~space. Site work commenced in November 2018, shop space~~base building construction ~~is underway and the grocer commenced construction~~are projected to be completed in the ~~second quarter~~fall of 2019. ~~The shopping center~~Lidl is scheduled to open in late 2019, and the remaining tenants will begin opening in early 2020. After construction of the shopping center and upon stabilization, the Company may be obligated to issue additional limited partnership units to the Trust.

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 ~~Company has completed schematic design plans for the combined property for the mixed-use development of up to 365 apartment units and 10,000 square feet of retail space. The~~ purchase price was funded through the Company's revolving credit facility. The Company has completed development plans for the combined property for the development of up to 366 apartment units and 10,300 square feet of retail space. In July 2019, the Montgomery County Planning Commission unanimously approved the Company's site plan. Design and construction documents are being prepared. The Company has executed lease termination agreements with the final two office tenants and, effective September 1, 2019, the asset was removed from service and transferred to construction in progress.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which requires management to make certain estimates and assumptions that affect the reporting of financial position and results of operations. If judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of the financial statements. The Company has identified the following policies that, due to estimates and assumptions inherent in these policies, involve a relatively high degree of judgment and complexity.

Real Estate Investments

Real estate investment properties are stated at historic cost less depreciation. Although the Company intends to own its real estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the Company’s investment profile. Management believes

that the Company’s real estate assets have generally appreciated in value since their acquisition or development and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in the financial statements. Because the financial statements are prepared in conformity with GAAP, they do not report the current value of the Company’s real estate investment properties.

If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the projected cash flows of the property over its remaining useful life, on an undiscounted basis, are compared to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, an impairment loss is recognized equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management’s projections, the valuation could be negatively or positively affected.

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Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes the final outcome of current matters will not have a material adverse effect on its financial position or the results of operations. Upon determination that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

Results of Operations

Three months ended ~~March 31,~~September 30, 2019 (the "2019 Quarter") compared to the three months ended~~March 31,~~September 30, 2018 (the "2018 Quarter")

Revenue


	Three months ended March 31,						2018 to 2019 Change					Three months ended September 30,						2018 to 2019 Change
(Dollars in thousands)	2019			2018			Amount			Percent		2019			2018			Amount			Percent
Base rent	$	46,610		$	45,867		$	743		1.6	%	$	46,250		$	46,189		$	61		0.1	%
Expense recoveries	9,811			8,771			1,040			11.9	%	9,159			9,209			(50		)	(0.5	)%
Percentage rent	284			418			(134		)	(32.1	)%	147			119			28			23.5	%
Other property revenue	336			220			116			52.7	%	362			317			45			14.2	%
Credit losses on operating lease receivables	(238		)	(286		)	48			(16.8	)%	(431		)	(101		)	(330		)	326.7	%
Rental revenue	56,803			54,990			1,813			3.3	%	55,487			55,733			(246		)	(0.4	)%
Other revenue	2,947			1,118			1,829			163.6	%	1,565			1,177			388			33.0	%
Total revenue	$	59,750		$	56,108		$	3,642		6.5	%	$	57,052		$	56,910		$	142		0.2	%

Base rent includes $~~(215,900)~~(530,300) and $~~(145,600)~~(246,700) for the 2019 Quarter and 2018 Quarter, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $~~360,100~~354,200 and $~~412,400~~404,700, for the 2019 Quarter and 2018 Quarter, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.

Total revenue increased ~~6.5%~~0.2% in the 2019 Quarter compared to the 2018 ~~Quarter primarily due to (a) a $1.8~~Quarter.

Base Rent. The $0.1 million increase in ~~termination fees,~~base rent in the 2019 Quarter compared to 2018 Quarter is primarily attributable to (a) higher residential base rent ($0.2 million) partially offset by (b) a ~~$1.0 million increase in expense recoveries, and (c) a 183,900~~22,400 square foot ~~increase~~decrease in leased commercial space ($~~0.9~~0.1 million) ~~partially offset by (d) a $0.17 per square foot decrease in base rent ($0.4 million)~~.

Credit Losses on Operating Lease Receivables. Credit losses on operating lease receivables for the 2019 Quarter represents 0.76% of the Company’s revenue, an increase from 0.18% for the 2018 Quarter. The increase is primarily due to one office tenant at 7316 Wisconsin Avenue, which was recently removed from service, and two retail tenants.

Other Revenue. Other revenue increased $0.4 million primarily due to higher lease termination fees.

Expenses


	Three months ended March 31,				2018 to 2019 Change					Three months ended September 30,				2018 to 2019 Change
(Dollars in thousands)	2019		2018		Amount			Percent		2019		2018		Amount			Percent
Property operating expenses	$	8,001	$	7,123	$	878		12.3	%	$	7,525	$	6,910	$	615		8.9	%
Real estate taxes	7,148		6,845		303			4.4	%	7,114		6,937		177			2.6	%
Interest expense, net and amortization of deferred debt costs	11,067		11,424		(357		)	(3.1	)%	10,325		10,974		(649		)	(5.9	)%
Depreciation and amortization of deferred leasing costs	11,643		11,349		294			2.6	%	12,018		11,256		762			6.8	%
General and administrative	4,814		4,420		394			8.9	%	4,742		4,141		601			14.5	%
Total expenses	$	42,673	$	41,161	$	1,512		3.7	%	$	41,724	$	40,218	$	1,506		3.7	%

Total expenses increased 3.7% in the 2019 Quarter compared to the 2018 Quarter.

Property Operating Expenses. Property operating expenses increased ~~12.3%~~8.9% in the 2019 Quarter primarily due to (a) higher ~~snow removal costs ($0.3 million), (b) increased~~ repairs and maintenance costs ~~throughout the portfolio~~ ($~~0.3~~0.2 million) and ~~(c)~~(b) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.2 million).

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~~Real Estate Taxes.~~ ~~Real estate taxes increased 4.4% in the 2019 Quarter primarily due to (a) an increase at 601 Pennsylvania Avenue ($0.1 million) and (b) small increases at several properties throughout the portfolio.~~

Interest Expense, net and Amortization of Deferred Debt Costs. Interest expense decreased ~~3.1%~~5.9% in the 2019 Quarter primarily due to (a) higher capitalized interest ($~~1.0~~1.4 million) partially offset by (b) higher interest incurred due to the higher outstanding debt balances ($~~0.6~~0.7 million).

General and Administrative. General and administrative expenses increased ~~8.9%~~14.5% primarily due to higher compensation and benefits expense related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.3 million).

Nine months ended September 30, 2019 (the "2019 Period") compared to the nine months ended September 30, 2018 (the "2018 Period")

Revenue



	Nine Months Ended September 30,						2018 to 2019 Change
(Dollars in thousands)	2019			2018			Amount			Percent
Base rent	$	139,735		$	137,999		$	1,736		1.3	%
Expense recoveries	27,647			26,582			1,065			4.0	%
Percentage rent	760			786			(26		)	(3.3	)%
Other property revenue	1,087			856			231			27.0	%
Credit losses on operating lease receivables	(987		)	(530		)	(457		)	86.2	%
Rental revenue	168,242			165,693			2,549			1.5	%
Other revenue	6,701			3,407			3,294			96.7	%
Total revenue	$	174,943		$	169,100		$	5,843		3.5	%

Base rent includes $(742,000) and $(627,400) for the 2019 Period and the 2018 Period, respectively, to recognize base rent on a straight-line basis. In addition, base rent includes $1.1 million and $1.2 million for the 2019 Period and the 2018 Period, respectively, to recognize income from the amortization of in-place leases acquired in connection with purchased real estate investment properties.

Total revenue increased 3.5% in the 2019 Period compared to the 2018 Period.

Base Rent. The $1.7 million increase in base rent in the 2019 Period compared to 2018 Period is primarily attributable to (a) a 67,000 square foot increase in leased commercial space ($1.0 million), (b) higher residential base rent ($0.6 million), and (c) a $0.02 per square foot increase in commercial base rent ($0.2 million).

Expense Recoveries. Expense recoveries increased 4.0% in the 2019 Period primarily due to an increase in recoverable property operating expenses, largely repairs and maintenance and snow removal.

Credit Losses on Operating Lease Receivables. Credit losses on operating lease receivables for the 2019 Period represents 0.56% of the Company’s revenue, an increase from 0.31% for the 2018 Period. The increase is primarily due to two office tenants, one of which was at 7316 Wisconsin Avenue, which was recently removed from service, and two retail tenants.

Other Revenue. Other revenue increased $3.3 million primarily due to higher lease termination fees.

Expenses



	Nine Months Ended September 30,				2018 to 2019 Change
(Dollars in thousands)	2019		2018		Amount			Percent
Property operating expenses	$	22,641	$	20,766	$	1,875		9.0	%
Real estate taxes	21,081		20,559		522			2.5	%
Interest expense, net and amortization of deferred debt costs	32,185		33,568		(1,383		)	(4.1	)%
Depreciation and amortization of deferred leasing costs	35,185		33,956		1,229			3.6	%
General and administrative	14,696		13,208		1,488			11.3	%
Total expenses	$	125,788	$	122,057	$	3,731		3.1	%

Total expenses increased 3.1% in the 2019 Period compared to the 2018 Period.

Property Operating Expenses. Property operating expenses increased 9.0% in the 2019 Period primarily due to (a) higher repairs and maintenance expenses throughout the portfolio ($0.7 million), (b) higher snow removal costs ($0.3 million), and (c) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.5 million).

Real Estate Taxes. Real estate taxes increased 2.5% in the 2019 Period primarily due to increases at (a) 601 Pennsylvania Avenue ($0.3 million) and (b) 7316 Wisconsin Avenue ($0.2 million).

Interest and Amortization of Deferred Debt Costs. Interest and amortization of deferred debt costs decreased 4.1% to $32.2 million in the 2019 Period primarily due to increased capitalized interest ($3.5 million) partially offset by (b) higher interest incurred due to the higher outstanding debt balances ($2.1 million).

Depreciation and Amortization of Deferred Leasing Costs. The increase in depreciation and amortization to $35.2 million in the 2019 Period from $34.0 million in the 2018 Period was primarily due to the 2018 acquisition of 7316 Wisconsin Avenue ($1.3 million).

General and Administrative. General and administrative expenses increased 11.3% primarily due to higher compensation and benefits expense related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.9 million).

Same property revenue and same property operating income

Same property revenue and same property operating income are non-GAAP financial measures of performance and improve the comparability of these measures by excluding the results of properties which were not in operation for the entirety of the comparable reporting periods.

We define same property revenue as total revenue minus the revenue of properties not in operation for the entirety of the comparable reporting periods, and we define same property operating income as net income plus (a) interest expense, net and amortization of deferred debt costs, (b) depreciation and amortization of deferred leasing costs, ~~and~~ (c) general and administrative expenses, and (d) change in fair value of derivatives, minus ~~(d)~~(e) gains on property dispositions and (f) the operating income of properties which were not in operation for the entirety of the comparable periods.

Other REITs may use different methodologies for calculating same property revenue and same property operating income. Accordingly, our same property revenue and same property operating income may not be comparable to those of other REITs.

Same property revenue and same property operating income are used by management to evaluate and compare the operating performance of our properties, and to determine trends in earnings, because these measures are not affected by the cost of our funding, the impact of depreciation and amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative expenses or other gains and losses that relate to ownership of our properties. We believe the exclusion of these items from property revenue and property operating income is useful because the resulting measures capture the actual revenue generated and actual expenses incurred by operating our properties.

Same property revenue and same property operating income are measures of the operating performance of our properties but do not measure our performance as a whole. Such measures are therefore not substitutes for total revenue, net income or operating income as computed in accordance with GAAP.

The tables below provide reconciliations of total property revenue and property operating income under GAAP to same property revenue and operating income for the indicated periods. The same property results for the three months ended ~~March 31,~~September 30, 2019 and 2018 include 49 Shopping Centers and six ~~Mixed-Used~~Mixed-Use properties and for nine months ended September 30, 2019 and 2018 include 49 Shopping Centers and six Mixed-Use properties.

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Same property revenue


(in thousands)	Three months ended March 31,					Three months ended September 30,						Nine months ended September 30,
	2019			2018		2019			2018			2019			2018
Total revenue	$	59,750		$	56,108	$	57,052		$	56,910		$	174,943		$	169,100
Less: Acquisitions, dispositions and development properties	(889		)	—		(72		)	(82		)	(1,155		)	(82		)
Total same property revenue	$	58,861		$	56,108	$	56,980		$	56,828		$	173,788		$	169,018

Shopping Centers	$	43,159		$	40,924	$	41,313		$	41,091		$	126,730		$	122,770
Mixed-Use properties	15,702			15,184		15,667			15,737			47,058			46,248
Total same property revenue	$	58,861		$	56,108	$	56,980		$	56,828		$	173,788		$	169,018

Total Shopping Center revenue	$	43,159		$	40,924	$	41,313		$	41,091		$	126,730		$	122,770
Less: Shopping Center acquisitions, dispositions and development properties	—			—		—			—			—			—
Total same Shopping Center revenue	$	43,159		$	40,924	$	41,313		$	41,091		$	126,730		$	122,770

Total Mixed-Use property revenue	$	16,591		$	15,184	$	15,739		$	15,819		$	48,213		$	46,330
Less: Mixed-Use acquisitions, dispositions and development properties	(889		)	—		(72		)	(82		)	(1,155		)	(82		)
Total same Mixed-Use revenue	$	15,702		$	15,184	$	15,667		$	15,737		$	47,058		$	46,248

The ~~$2.8~~$0.2 million increase in same property revenue for the 2019 Quarter compared to the 2018 Quarter, was primarily due to (a) increased lease termination fees ($~~1.2~~0.4 million) partially offset by (b) increased credit losses on operating lease receivables ($0.3 million).

The $4.8 million increase in same property revenue for the 2019 Period, compared to the 2018 Period, was primarily due to (a) increased lease termination fees ($2.5 million), (b) increased base rent ($1.3 million), and (c) increased expense recoveries ($1.0 million) ~~and (c) increased base rent ($0.5 million)~~.

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~~Table of Contents~~

Same property operating income


	Three Months Ended March 31,					Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2019			2018		2019		2018			2019			2018
Net income	$	17,077		$	14,947	$	15,328	$	16,702		$	49,155		$	47,550
Add: Interest expense, net and amortization of deferred debt costs	11,067			11,424		10,325		10,974			32,185			33,568
Add: Depreciation and amortization of deferred leasing costs	11,643			11,349		12,018		11,256			35,185			33,956
Add: General and administrative	4,814			4,420		4,742		4,141			14,696			13,208
Add: Change in fair value of derivatives						—		(10		)	—			2
Less: Gain on sale of property						—		—			—			(509		)
Property operating income	44,601			42,140		42,413		43,063			131,221			127,775
Less: Acquisitions, dispositions and development properties	(628		)	—
Add (Less): Acquisitions, dispositions and development properties						97		(52		)	(519		)	(52		)
Total same property operating income	$	43,973		$	42,140	$	42,510	$	43,011		$	130,702		$	127,723

Shopping Centers	$	33,471		$	32,047	$	32,339	$	32,517		$	99,516		$	96,839
Mixed-Use properties	10,502			10,093		10,171		10,494			31,186			30,884
Total same property operating income	$	43,973		$	42,140	$	42,510	$	43,011		$	130,702		$	127,723

Shopping Center operating income	$	33,471		$	32,047	$	32,339	$	32,517		$	99,516		$	96,839
Less: Shopping Center acquisitions, dispositions and development properties	—			—		—		—			—			—
Total same Shopping Center operating income	$	33,471		$	32,047	$	32,339	$	32,517		$	99,516		$	96,839

Mixed-Use property operating income	$	11,130		$	10,093	$	10,074	$	10,546		$	31,705		$	30,936
Less: Mixed-Use acquisitions, dispositions and development properties	(628		)	—
Add (Less): Mixed-Use acquisitions, dispositions and development properties						97		(52		)	(519		)	(52		)
Total same Mixed-Use property operating income	$	10,502		$	10,093	$	10,171	$	10,494		$	31,186		$	30,884

The ~~$1.8~~$0.5 million ~~increase~~decrease in same property operating income in the 2019 Quarter compared to the 2018 Quarter was primarily due to (a) higher credit losses on operating lease receivables ($0.3 million), (b) initial direct costs related to leasing activities that, in accordance with ASU 2016-02, are no longer capitalized ($0.2 million), (c) higher repairs and maintenance ($0.2 million) and (d) higher real estate taxes ($0.1 million) partially offset by (e) increased lease termination fees ($~~1.2~~0.4 million).

The $3.0 million increase in same property operating income in the 2019 Period compared to the 2018 Period was primarily due to (a) increased lease termination fees ($2.5 million) and (b) ~~an increase~~increased base rent ($1.3 million), partially offset by (c) initial direct costs related to leasing activities that, in ~~base rent~~accordance with ASU 2016-02, are no longer capitalized ($0.5 million).

Liquidity and Capital Resources

Cash and cash equivalents totaled $~~11.5~~52.3 million and $~~9.0~~9.8 million at ~~March 31,~~September 30, 2019 and 2018, respectively. The Company’s cash flow is affected by its operating, investing and financing activities, as described below.


	Three Months Ended March 31,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
Net cash provided by operating activities	$	31,641		$	25,787		$	82,098		$	74,873
Net cash used in investing activities	(23,423		)	(16,723		)	(105,055		)	(96,299		)
Net cash used in financing activities	(11,340		)	(10,993		)
Decrease in cash and cash equivalents	$	(3,122	)	$	(1,929	)
Net cash provided by financing activities							60,648			20,289
Increase (decrease) in cash and cash equivalents							$	37,691		$	(1,137	)

Operating Activities

Net cash provided by operating activities represents cash received primarily from rental revenue, plus other revenue, less property operating expenses, leasing costs, normal recurring general and administrative expenses and interest payments on debt outstanding.

Investing Activities

Net cash used in investing activities includes property acquisitions, developments, redevelopments, tenant improvements and other property capital expenditures. The ~~$6.7~~$8.8 million increase in cash used in investing activities is primarily due to ~~higher~~(a) development expenditures related to Glebe Road ($~~7.3~~37.0 million) ~~partially offset by lower~~and (b) increased additions to real estate investments throughout the portfolio ($~~0.6~~6.8 million).

~~-28-~~

~~Table~~ partially offset by (c) lower acquisitions of ~~Contents~~

real estate investments ($36.3 million).

Financing Activities

Net cash provided by (or used in) financing activities represents (a) cash received from loan proceeds and issuance of common stock, preferred stock and limited partnership units minus (b) cash used to repay and curtail loans, redeem preferred stock and pay dividends and distributions to holders of common stock, preferred stock and limited partnership units. See note 5 to the consolidated financial statements for a discussion of financing activity.

Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from operations, available cash and its existing line of credit.

Long-term liquidity requirements consist primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for property acquisitions and developments. The Company is developing a primarily residential project with street-level retail at 750 N. Glebe Road in Arlington, Virginia. The total cost of the project, including acquisition of land, is expected to be approximately $275.0 million. The Company had incurred costs totaling ~~$189.2~~$237.3 million as of ~~March 31,~~September 30, 2019. The remaining cost will be funded by a $157.0 million construction-to-permanent loan, which closed in 2017. The Company may also redevelop certain of the Current Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers.

Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, developments, expansions or acquisitions (if any) are expected to be funded with available cash, bank borrowings from the Company’s credit line, construction and permanent financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external debt or equity capital resources available to the Company. Any future borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. The availability and terms of any such financing will depend upon market and other conditions.

Management believes that the Company’s capital resources, which at ~~March 31,~~September 30, 2019 included cash balances of approximately $~~11.5~~52.3 million and borrowing availability of approximately $~~230.5~~296.3 million on its unsecured revolving credit facility, will be sufficient to meet its liquidity needs for the foreseeable future.

Dividend Reinvestments

The Company has a DRIP that allows its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The DRIP provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the DRIP are paid by the Company. The Company issued ~~119,215~~322,534 and ~~67,985~~303,252 shares under the DRIP at a weighted average discounted price of $~~51.28~~52.08 and $~~52.71~~50.78 per share, during the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, respectively. The Company issued ~~13,742~~47,189 and ~~38,037~~93,566 limited partnership

units under the DRIP at a weighted average price of ~~$52.16~~$52.77 and ~~$53.03~~$50.61 per unit during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively. The Company also credited ~~1,132~~3,370 and ~~1,765~~5,298 shares to directors pursuant to the reinvestment of dividends specified by the Directors’ Deferred Compensation Plan at a weighted average discounted price of $~~51.28~~52.09 and $~~52.71~~50.49 per share, during the ~~three~~nine months ended~~March 31,~~September 30, 2019 and 2018, respectively.

Capital Strategy and Financing Activity

As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggregate cash flow. Given the Company’s current debt level, it is management’s belief that the ratio of the Company’s debt to total asset value was below 50% as of ~~March 31,~~September 30, 2019.

~~-29-~~

~~Table of Contents~~

The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company’s debt/capitalization strategy in light of current economic conditions, relative costs of capital, market values of the Company’s property portfolio, opportunities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company’s debt/capitalization policy based on such a reevaluation without shareholder approval and consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable.

The facility requires the Company and its subsidiaries to maintain compliance with certain financial covenants. The material covenants require the Company, on a consolidated basis, to:


•	limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio);


•	limit the amount of debt so that interest coverage will exceed 2.0x on a trailing four-quarter basis (interest expense coverage); and


•	limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds 1.4x on a trailing four-quarter basis (fixed charge coverage).

~~limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than~~ ~~60%~~ ~~(leverage ratio);~~

~~limit the amount of debt so that interest coverage will exceed~~ ~~2.0x on a trailing~~ ~~four-quarter~~ ~~basis (interest expense coverage); and~~

~~limit the amount of debt so that interest, scheduled principal amortization and preferred dividend coverage exceeds~~ ~~1.4x on a trailing~~ ~~four-quarter~~ ~~basis (fixed charge coverage).~~

As of ~~March 31,~~September 30, 2019, the Company was in compliance with all such covenants.

Preferred Stock

On September 17, 2019, Saul Centers sold, in an underwritten public offering, 4.0 million depositary shares, each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock (the “Series E Stock”), providing net cash proceeds of approximately $96.8 million. The depositary shares may be redeemed in whole or in part, on or after September 17, 2024, at the $25.00 liquidation preference, plus accrued but unpaid dividends to but not including the redemption date. The depositary shares pay an annual dividend of $1.50 per share, equivalent to 6.000% of the $25.00 liquidation preference. The Series E Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events. On September 23, 2019, Saul Centers sold, as a result of the exercise by the underwriters of their over-allotment option, an additional 0.4 million depositary shares of Series E Stock, providing net cash proceeds of approximately $9.5 million. On October 17, 2019, the Company used the proceeds from the Series E Stock offering to redeem the outstanding 4.2 million depositary shares of its Series C Stock, including all accumulated and unpaid distributions to, but not including the redemption date. In the fourth quarter, approximately $3.2 million of costs associated with the redemption were charged against Net income available to common stockholders. As a result of the overlap between the issuance of the Series E Stock and the

redemption of the Series C Stock, the Company incurred $0.3 million of additional preferred stock dividends during the September 2019 quarter.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

~~-30-~~

~~Table of Contents~~

Funds From Operations

Funds From Operations (FFO)¹ available to common stockholders and noncontrolling interests for the 2019 ~~Quarter,~~Period, totaled ~~$25.8~~$75.2 million, an increase of ~~25.3%~~8.5% compared to the 2018 ~~Quarter.~~Period. FFO for the 2019 ~~Quarter~~Period increased primarily due to (a) higher lease termination fees in the core portfolio ($2.5 million), (b) extinguishment in 2018 of issuance costs upon redemption of preferred shares ($2.3 million), ~~(b) higher termination fees in the core portfolio ($1.2 million),~~ (c) ~~the net operating income of recently acquired properties ($0.6 million), (d) lower preferred stock dividends ($0.5 million) and (e)~~ higher base rent in the core portfolio ($1.3 million), and (d) lower preferred stock dividends ($0.2 million), partially offset by (e) the impact of the operations of 7316 Wisconsin Avenue ($0.5 million).

The following table presents a reconciliation from net income to FFO available to common stockholders and noncontrolling interests for the periods indicated:


	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)	2019			2018			2019			2018			2019			2018
Net income	$	17,077		$	14,947		$	15,328		$	16,702		$	49,155		$	47,550
Subtract:
Gain on sale of property							—			—			—			(509		)
Add:
Real estate depreciation and amortization	11,643			11,349			12,018			11,256			35,185			33,956
FFO	28,720			26,296			27,346			27,958			84,340			80,997
Subtract:
Extinguishment of issuance costs upon redemption of preferred shares							—			—			—			(2,328		)
Preferred stock dividends	(2,953		)	(3,403		)	(3,210		)	(2,953		)	(9,116		)	(9,309		)
Extinguishment of issuance costs upon redemption of preferred shares	—			(2,328		)
FFO available to common stockholders and noncontrolling interests	$	25,767		$	20,565		$	24,136		$	25,005		$	75,224		$	69,360
Weighted average shares:
Diluted weighted average common stock	22,863			22,218			23,121			22,501			22,993			22,336
Convertible limited partnership units	7,835			7,567			7,869			7,808			7,852			7,700
Average shares and units used to compute FFO per share	30,698			29,785			30,990			30,309			30,845			30,036
FFO per share available to common stockholders and noncontrolling interests	$	0.84		$	0.69		$	0.78		$	0.83		$	2.44		$	2.31

The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT as net income, computed in accordance with GAAP, plus real estate depreciation and amortization, and excluding impairment charges on real estate assets and gains or losses from real estate dispositions. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Company’s Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a meaningful supplemental measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time (i.e. depreciation), which is contrary to what the Company believes occurs with its assets, and because industry analysts have accepted it as a performance measure. FFO may not be comparable to similarly titled measures employed by other REITs.

Acquisitions and Redevelopments

During the remainder of the year, the Company will continue its redevelopment activities at Glebe Road, may redevelop certain of the Current Portfolio Properties and may develop additional freestanding outparcels or expansions within certain of the Shopping Centers. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the balance of the year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital resources available to the Company.

~~-31-~~

~~Table of Contents~~

The Company has been selectively involved in acquisition, development, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and mixed-use development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to analyze redevelopment, renovation and expansion opportunities within the portfolio. ~~The following describes the acquisition, development, redevelopment and renovation activities of the Company in~~ ~~2018~~ ~~and the~~ ~~three months endedMarch 31, 2019~~.

Portfolio Leasing Status

The following chart sets forth certain information regarding Commercial leases at our properties.

Total Properties Total Square Footage Percent Leased

Shopping
Centers
Mixed-Use
Shopping
Centers
Mixed-Use
Shopping
Centers
Mixed-Use
March 31, 2019 49
7
7,759,048
1,146,438
96.0 % 90.1 %
March 31, 2018 49
6
7,753,571
1,076,837
94.3 % 92.5 %



	Total Properties		Total Square Footage		Percent Leased
	Shopping Centers	Mixed-Use	Shopping Centers	Mixed-Use	Shopping Centers		Mixed-Use
September 30, 2019	49	6	7,760,730	1,076,837	95.2	%	91.9	%
September 30, 2018	49	7	7,752,046	1,146,438	95.7	%	90.6	%

As of ~~March 31,~~September 30, 2019, ~~95.2%~~94.8% of the Commercial portfolio was leased, compared to ~~94.1%~~95.0% at ~~March 31,~~September 30, 2018. On a same property basis, ~~95.7%~~94.8% of the Commercial portfolio was leased, compared to ~~94.1%~~95.2% at ~~March 31,~~September 30, 2018. As of ~~March 31,~~September 30, 2019, the Residential portfolio was ~~99.0%~~97.9% leased compared to ~~95.9%~~95.7% at ~~March 31,~~September 30, 2018.

The following table shows selected data for leases executed in the indicated periods. The information is based on executed leases without adjustment for the timing of occupancy, tenant defaults, or landlord concessions. The base rent for an expiring lease is the annualized contractual base rent, on a cash basis, as of the expiration date of the lease. The base rent for a new or renewed lease is the annualized contractual base rent, on a cash basis, as of the expected rent commencement date. Because tenants that execute leases may not ultimately take possession of their space or pay all of their contractual rent, the changes presented in the table provide information only about trends in market rental rates. The actual changes in rental income received by the Company may be different.


			Average Base Rent per Square Foot							Average Base Rent per Square Foot
Three months ended March 31,	Square Feet	Number of Leases	New/Renewed Leases		Expiring Leases
Three months ended September 30,							Three months ended September 30,	Square Feet	Number of Leases	New/Renewed Leases		Expiring Leases
2019	436,284	70	$	17.77	$	17.38		179,919	54	$	23.76	$	24.17
2018	340,570	80	18.10		17.66			297,013	48	18.07		18.44

Additional information about the 2019 leasing activity is set forth below. The below information includes leases for space which had not been previously leased during the period of the Company's ownership, either a result of acquisition or development.


	New Leases			Renewed Leases			New Leases			First Generation/Development Leases			Renewed Leases
Number of leases	15			57			14			3			40
Square feet	57,921			381,822			26,452			20,757			153,467
Per square foot average annualized:
Base rent	$	30.17		$	16.11		$	21.69		$	22.99		$	24.12
Tenant improvements	(5.66		)	(0.19		)	(4.55		)	(5.37		)	(0.29		)
Leasing costs	(0.86		)	(0.08		)	(0.79		)	(0.45		)	(0.07		)
Rent concessions	(0.06		)	(0.02		)	(0.14		)	—			(0.04		)
Effective rents	$	23.59		$	15.82		$	16.21		$	17.17		$	23.72

During the three months ended ~~March 31,~~September 30, 2019, the Company entered into 94199 new or renewed apartment leases. The average monthly rent per square foot increased to $3.52 from $3.45. During the three months ended September 30, 2018, the Company entered into 190 new or renewed apartment leases. The average monthly rent per square foot decreased to ~~$3.48~~$3.49 from $3.50. ~~During the~~ ~~three months ended March 31, 2018, the Company entered into 100 new or renewed apartment leases. The average monthly rent per square foot decreased to $3.47 from $3.50.~~

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~~Table of Contents~~

As of December 31, 2018, 994,236 square feet of Commercial space was subject to leases scheduled to expire in 2019. Of those leases, as of ~~March 31,~~September 30, 2019, leases representing ~~604,417~~284,847 square feet of Commercial space have not yet renewed and are scheduled to expire over the next ~~nine~~three months. Below is information about existing and estimated market base rents per square foot for that space.


Expiring Leases:	Total		Total
Square feet	604,417		284,847
Average base rent per square foot	$	22.38	$	24.11
Estimated market base rent per square foot	$	22.30	$	23.41

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company’s results of operations.

The Company may, where appropriate, employ derivative instruments, such as interest rate swaps, to mitigate the risk of interest rate fluctuations. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. On June 29, 2010, the Company entered into an interest rate swap agreement with a $45.6 million notional amount to manage the interest rate risk associated with $45.6 million of variable-rate debt. The swap agreement was effective July 1, 2010, terminates on July 1, 2020 and effectively fixes the interest rate on the debt at 5.83%. The fair value of the swap at ~~March 31,~~September 30, 2019 was approximately $0.4 million and is reflected in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet.

The Company is exposed to interest rate fluctuations which will affect the amount of interest expense of its variable rate debt and the fair value of its fixed rate debt. As of ~~March 31,~~September 30, 2019, the Company had variable rate indebtedness totaling $~~115.0~~75.0 million. If the interest rates on the Company’s variable rate debt instruments outstanding at ~~March 31,~~September 30, 2019 had been one percentage point higher, our annual interest expense relating to these debt instruments would have increased by $~~1.2~~0.8 million based on those balances. As of ~~March 31,~~September 30, 2019, the Company had fixed-rate indebtedness totaling $~~918.5~~948.1 million with a weighted average interest rate of ~~5.14%~~5.11%. If interest rates on the Company’s fixed-rate debt instruments at ~~March 31,~~September 30, 2019 had been one percentage point higher, the fair value of those debt instruments on that date would have been approximately $~~49.0~~49.9 million less than the carrying value.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chairman, ~~and~~ Chief Executive Officer and President, its ~~Senior~~Executive Vice President-Chief Financial Officer, Secretary and Treasurer, and its Senior Vice President-Chief Accounting Officer as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including its Chairman, ~~and~~ Chief Executive Officer and President, its ~~Senior~~Executive Vice President-Chief Financial Officer, Secretary and Treasurer, and its Senior Vice President-Chief Accounting Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of ~~March 31,~~September 30, 2019. Based on the foregoing, the Company’s Chairman, ~~and~~ Chief Executive Officer and President, its ~~Senior~~Executive Vice President-Chief Financial Officer, Secretary and Treasurer and its Senior Vice President-Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of ~~March 31,~~September 30, 2019.

During the quarter ended ~~March 31,~~September 30, 2019, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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~~Table of Contents~~

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

None


Item 1A.	Risk Factors

The Company has no material updates to the risk factors presented in Item 1A. Risk Factors in the 2018 Annual Report of the Company on Form 10-K.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

B. Francis Saul II, the Company’s Chairman of the Board, ~~and~~ Chief Executive Officer and President, his spouse and entities affiliated with Mr. Saul II, through participation in the Company’s Dividend Reinvestment and Stock Purchase Plan for the

~~January~~July 31, 2019 dividend distribution acquired ~~66,385~~64,022 shares of common stock at a price of $~~51.28~~53.66 per share and

~~13,742~~13,406 limited partnership units at a price of ~~$52.16~~$54.56 per unit. The limited partnership units were sold under Section 4(a)(2) of the Securities Act of 1933.


Item 3.	Defaults Upon Senior Securities

None


Item 4.	Mine Safety Disclosures

Not Applicable


Item 5.	Other Information

~~None~~On November 5, 2019, Saul Centers, Inc. (“Saul Centers”), through its operating partnership, Saul Holdings Limited Partnership (the “Operating Partnership” and, together with Saul Centers, the “Company”), entered into a contribution agreement with the B. F. Saul Real Estate Investment Trust (the “Trust”), one of several members of the organization controlled by Mr. B. Francis Saul II, Chairman of the Board of Directors, Chief Executive Officer and President of Saul Centers (collectively, the “Saul Organization”). Pursuant to the contribution agreement, the Trust has agreed to contribute to the Operating Partnership its fee simple interest in approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland (the “Contributed Property”). In light of the substantial relationships between the Company and members of the Saul Organization, including the Trust, and consistent with the 1993 Exclusivity and Right of First Refusal Agreement between the Company and the Saul Organization, which governs the proposed transaction, the independent members of the Company’s board of directors evaluated, negotiated and unanimously approved the Operating Partnership's acquisition of the Contributed Property pursuant to the terms of the contribution agreement.

The Company owns approximately 10.3 acres immediately north and adjacent to the Contributed Property. The contribution transaction will permit the Company to pursue a comprehensive, mixed-use development for the entire 18.4 acre assemblage (collectively, the “Twinbrook Quarter”) consistent with the Company’s strategy to seek growth opportunities in its Washington, D.C. metropolitan area Mixed-Use Portfolio through development. Approval for the Twinbrook Quarter development plan was obtained from the City of Rockville in May 2019 based upon an application previously jointly filed by the Company and the Trust. The approved zoning for Twinbrook Quarter allows development of 1,865 residential units, 472,950 gross square feet of retail space, and 431,440 gross square feet of office space. Of this total, the approved zoning on the Contributed Property allows for 918 residential units, 182,460 gross square feet of retail space and 234,340 gross square feet of office space. An 80,000 square foot anchor grocery store lease on the Contributed Property has been executed with Wegman’s. The total project build-out is projected to span over ten years from the start of construction, with a projected timeline subject to site plan approvals and building permits. Site plan documents are in process and scheduled to be filed in late 2019.

A proceeding challenging the validity of the approval of the Twinbrook Quarter development plan has been instituted by a local resident notorious for lodging similar challenges to other development approvals granted by the City of Rockville in recent years. The Company and the Trust believe that the challenge is without merit and intend to contest it vigorously. Nevertheless, the parties have agreed to escrow their respective closing deliverables in respect of the proposed contribution transaction pending receipt of a final, non-appealable resolution of the proceeding. The Contributed Property will be released from the escrow and transferred to the Operating Partnership (the “First Escrow Release”) on October 18, 2021, or such later date that is ten days after a final, non-appealable resolution of the proceeding, not favorable to the local resident, has been issued; an earlier release date may be jointly chosen by the parties if a final, non-appealable resolution of the proceeding, not favorable to the local resident, is issued earlier than October 18, 2021. The contribution agreement may be terminated if a final, non-appealable resolution of the proceeding, favorable to the local resident, is issued. Pending the final, non-appealable

~~-34-~~

resolution of the proceeding, the parties expect to continue to collaborate in pursuing pre-development efforts with respect to Twinbrook Quarter.

~~Table~~In exchange for the Contributed Property, the Operating Partnership has placed into escrow for issuance to the Trust 1,416,071 units of ~~Contents~~limited partnership interest in the Operating Partnership (“OP Units”) at an agreed value of $56.00 per OP Unit, representing an aggregate value of $79.3 million for the Contributed Property. Subject to the First Escrow Release having occurred, half of the OP Units will be released from escrow (the “Second Escrow Release”) on the later of the date of the First Escrow Release or October 18, 2021, with the other half being released on the second anniversary of the Second Escrow Release, to be no earlier than October 18, 2023. Any OP Units released to the Trust may be converted into or exchanged for the Company’s common stock subject to the terms of the Company’s organizational documents.

The Company also has agreed to reimburse the Trust on the date of the First Escrow Release for its share of net operating income or loss from the Contributed Property from October 2019 and the pre-development expenses incurred in connection with the Twinbrook Quarter site plan submission for Phase I of the project from May 2019 through the date the Contributed Property is released from the escrow to the Operating Partnership.

The foregoing summary of the contribution agreement and the acquisition of the Contributed Property does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the contribution agreement, a copy of which will be filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2019.


Item 6.	Exhibits



31.		Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

32.		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

99.	(a)	Schedule of Portfolio Properties (filed herewith).

101.		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended ~~March 31,~~September 30, 2019, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of equity and comprehensive income, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.

104.		Cover Page Interactive Data File (the Cover Page Interactive Data File is embedded within the Inline XBRL document).

~~-35-~~

~~Table of Contents~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	SAUL CENTERS, INC. (Registrant)

Date: ~~May 2,~~November 7, 2019	/s/ ~~J. Page Lansdale~~B. Francis Saul II
	~~J. Page Lansdale,~~ B. Francis Saul II Chairman, Chief Executive Officer, and President ~~and Chief Operating Officer~~

Date: ~~May 2,~~November 7, 2019	/s/ Scott V. Schneider
	Scott V. Schneider ~~Senior~~Executive Vice President, Chief Financial Officer (principal financial officer)

Date: ~~May 2,~~November 7, 2019	/s/ Joel A. Friedman
	Joel A. Friedman Senior Vice President, Chief Accounting Officer (principal accounting officer)

~~-36-~~-41-



(in thousands)	March 31, 2019		December 31, 2018
Glebe Road	$	189,211	$	162,176
Ashbrook Marketplace	13,068		11,124
Other	14,266		12,672
Total	$	216,545	$	185,972



	Directors
Grant date	4/24/2009			5/7/2010			5/13/2011			5/4/2012			5/10/2013			5/9/2014			5/8/2015			5/6/2016			5/5/2017			5/11/2018			Subtotals
Total grant	32,500			32,500			32,500			35,000			35,000			30,000			35,000			32,500			27,500			27,500			320,000
Vested	32,500			32,500			32,500			35,000			35,000			30,000			35,000			32,500			27,500			27,500			320,000
Exercised	30,000			27,500			25,000			25,000			22,500			17,500			12,500			7,500			—			2,500			170,000
Forfeited	—			2,500			2,500			—			—			—			2,500			2,500			5,000			—			15,000
Exercisable at March 31, 2019	2,500			2,500			5,000			10,000			12,500			12,500			20,000			22,500			22,500			25,000			135,000
Remaining unexercised	2,500			2,500			5,000			10,000			12,500			12,500			20,000			22,500			22,500			25,000			135,000
Exercise price	$	32.68		$	38.76		$	41.82		$	39.29		$	44.42		$	47.03		$	51.07		$	57.74		$	59.41		$	49.46
Volatility	0.344			0.369			0.358			0.348			0.333			0.173			0.166			0.166			0.173			0.192
Expected life (years)	6.0			5.0			5.0			5.0			5.0			5.0			5.0			5.0			5.0			5.0
Assumed yield	4.54		%	4.23		%	4.16		%	4.61		%	4.53		%	4.48		%	4.54		%	3.75		%	3.45		%	3.70		%
Risk-free rate	2.19		%	2.17		%	1.86		%	0.78		%	0.82		%	1.63		%	1.50		%	1.23		%	1.89		%	2.84		%
Total value at grant date	$	222,950		$	287,950		$	297,375		$	257,250		$	278,250		$	109,500		$	125,300		$	151,125		$	165,550		$	169,400		$	2,064,650
Expensed in previous years	222,950			287,950			297,375			257,250			278,250			109,500			125,300			151,125			165,550			169,400			2,064,650
Expensed in 2019	—			—			—			—			—			—			—			—			—			—			—
Future expense	—			—			—			—			—			—			—			—			—			—			—
	Officers
Grant date	5/13/2011			5/4/2012			5/10/2013			5/9/2014			5/8/2015			5/6/2016			5/5/2017			5/11/2018			Subtotal						Grand Totals
Total grant	162,500			242,500			202,500			170,000			190,000			194,000			205,000			217,500			1,584,000						1,904,000
Vested	118,750			107,500			171,875			168,125			140,625			96,375			51,250			—			854,500						1,174,500
Exercised	103,750			92,455			129,375			46,126			20,625			3,750			—			—			396,081						566,081
Forfeited	43,750			135,000			30,625			1,875			3,125			1,875			—			—			216,250						231,250
Exercisable at March 31, 2019	15,000			15,045			42,500			121,999			120,000			92,625			51,250			—			458,419						593,419
Remaining unexercised	15,000			15,045			42,500			121,999			166,250			188,375			205,000			217,500			971,669						1,106,669
Exercise price	$	41.82		$	39.29		$	44.42		$	47.03		$	51.07		$	57.74		$	59.41		$	49.46
Volatility	0.330			0.315			0.304			0.306			0.298			0.185			0.170			0.177
Expected life (years)	8.0			8.0			8.0			7.0			7.0			7.0			7.0			7.0
Assumed yield	4.81		%	5.28		%	5.12		%	4.89		%	4.94		%	3.80		%	3.50		%	3.75		%
Risk-free rate	2.75		%	1.49		%	1.49		%	2.17		%	1.89		%	1.55		%	2.17		%	2.94		%
Gross value at grant date	$	1,366,625		$	1,518,050		$	1,401,300		$	1,349,800		$	1,584,600		$	1,136,840		$	1,324,300		$	1,313,700		$	10,995,215					$	13,059,865
Estimated forfeitures	367,937			845,100			211,925			14,887			26,062			86,628			91,642			83,157			1,727,338						1,727,338
Expensed in previous years	998,688			672,950			1,189,375			1,334,913			1,322,596			700,128			513,600			205,088			6,937,338						9,001,988
Expensed in 2019	—			—			—			—			176,957			65,637			77,040			76,908			396,542						396,542
Future expense	—			—			—			—			58,985			284,447			642,018			948,547			1,933,997						1,933,997
Weighted average term of remaining future expense (in years)	2.4