avatar Saul Centers, Inc. Finance, Insurance, And Real Estate
  • Location: Maryland 
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    2003 Annual Report to shareholders Saul Centers


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    SAUL CENTERS, INC. S aul Centers, Inc. is a self-managed, self-administered equity real estate investment trust headquartered in Bethesda, Maryland. After the February 2004 acquisitions of the Countryside and Boca Valley Plaza shopping centers, Saul Centers operates and manages a real estate portfolio of 38 community and neighborhood shopping center and office properties totaling approximately 6.8 million square feet of leasable area. Over 83% of our cash flow is generated from properties in the metropolitan Washington, DC/Baltimore area. Saul Centers’ primary operating strategy is to focus on continuing its program of internal growth, renovations, and expansions of community and neighborhood shopping centers, which primarily service the day-to-day necessities and services sub-sector of the overall retail market. The Company plans to supplement its growth through effective development of new office and retail properties and acquisitions of operating properties as appropriate opportunities arise. PORTFOLIO COMPOSITION Based on 2003 Operating Income 69.2% Shopping Centers 83.2% Metropolitan Washington, DC/Baltimore Area 30.8% Office 16.8% Rest of U.S. 2


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    H I S T O R I C Operating Performance TOTAL REVENUE $97.9 (in millions) $93.9 $86.0 $79.0 $94.0 $73.8 1 2 2 2 22 9 0 0 0 00 Washington Square 9 0 0 0 00 9 0 1 2 33 NET INCOME $19.6 available to common shareholders $18.0 (in millions) $17.3 $14.0 $13.3 1 2 2 2 22 9 0 0 0 00 9 0 0 0 00 Leesburg Pike 9 0 1 2 33 FUNDS FROM OPERATIONS* (in millions) $44.0 $43.5 $40.1 $35.6 $32.8 1 2 2 2 22 9 0 0 0 00 9 0 0 0 00 9 0 1 2 33 Boca Valley Plaza * Funds From Operations (FFO) is a non-GAAP financial measure. See page 44 for a definition of FFO and reconciliation to net income available to common shareholders. 3


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    COMPARATIVE Analysis Year ended December 31, 2003 2002 2001 2000 1999 Summary Financial Data Total Revenue $ 97,884,000 $ 93,963,000 $ 86,308,000 $ 79,029,000 $ 73,791,000 Net Income Available to Common Shareholders $ 17,998,000 $ 19,566,000 $ 17,314,000 $ 14,045,000 $ 13,297,000 FFO $ 43,474,000 $ 44,031,000 $ 40,141,000 $ 35,648,000 $ 32,830,000 Average Common Stock Outstanding 15,607,890 14,886,505 14,210,470 13,623,330 13,100,295 Average Shares and Units Outstanding 20,790,216 20,059,264 19,382,720 18,795,571 18,147,954 FFO Per Share (Diluted) $ 2.10 $ 2.20 $ 2.07 $ 1.90 $ 1.81 Net Income Available to Common Shareholders Per Share (Diluted) $ 1.15 $ 1.31 $ 1.22 $ 1.03 $ 1.01 Dividend as a Percentage of FFO 74% 71% 75% 82% 86% Interest Expense Coverage a 2.78 2.78 2.63 2.51 2.47 Property Data Number of Properties b 36 34 33 33 33 Total Portfolio Square Feet 6,532,000 6,272,000 6,159,000 6,143,000 6,108,000 Shopping Center Square Feet 5,328,000 5,069,000 4,956,000 4,941,000 4,936,000 Office Square Feet 1,204,000 1,203,000 1,203,000 1,202,000 1,172,000 c c Average Percentage Leased 93% 94% 93% 93% 92% (a) Interest expense coverage is defined as operating income before interest expense, amortization of deferred debt expense, depreciation and amortization, divided by interest expense. (b) Excludes development land parcels (Shops at Monocacy, Lansdowne and Clarendon Center). (c) Excludes Washington Square, which was under development. Thruway 4


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    M E S S A G E to our Shareholders I n August 2003, Saul Centers completed its tenth year as a public company. Our total debt and equity market capitalization increased to over $1 billion at year end 2003, from an initial value of $480 million in August 1993. Since 1993, we have increased total revenue from $57 million to over $97 million and net income from $7 million to over $18 million. Funds From Operations (FFO), a widely accepted non-GAAP During the past year, the Company and the real estate industry continued to benefit from low interest rates and the availability of capital. As we begin the new year, the national economy shows signs of recovery. While many national office markets remain oversupplied due to a low demand for space, the Washington, DC metropolitan area has been a bright spot with relatively low vacancy rates. Throughout 2003, retail continued to be a property sector with financial measure of operating performance for healthy supply/demand characteristics and REIT’s has increased from $24 million to over $43 generally stable performance. Retail properties million. Our FFO has grown by a compounded and Washington, DC area office buildings annual rate of 6.7% during this ten year period. produce over 99% of our cash flow. Our portfolio includes over 6.5 million square feet of community and neighborhood shopping center and office space leased at a historical high of 2003 Financial Results 94.4% at year end. Our capital structure includes For the year ending December 31, 2003, total $100 million of preferred stock, the result of a revenue increased by 4.2% to $97,884,000 successful offering completed in November 2003. compared to 2002. For 2003, net income The net proceeds from the offering coupled with available to common stockholders decreased the potential of our unused $125 million credit by 8.7% to $17,998,000. On a per share basis line will allow us to continue to expand and improve our property portfolio. Ravenwood 5


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    M E S S A G E to our Shareholders net income available to common stockholders investment performance was somewhat below decreased by 12.2% to $1.15 per share the average annual total return of 37.1% for (fully diluted). the 144 equity REIT stocks comprising the NAREIT Equity Index, but our 5-year For the quarter ending December 31, 2003, compounded annual total return of 23.0% total revenue increased by 6.6% to $26,129,000 ranked Saul Centers in the top 20 of these 144 compared to the 2002 quarter. For the 2003 REITs. Within the community and neighborhood quarter, net income available to common shopping center sector of REITs, Saul Centers stockholders decreased by 15.0% to $4,471,000. ranks at the median 5-year total return. Since On a per share basis net income available to the Company’s 1993 initial public offering, our common stockholders decreased by 20.0% to investors have received a compounded annual $.28 per share (fully diluted). ten-year return of over 13%. The initial dilutive impact of the preferred stock The Company’s Series A Preferred Stock was offering decreased 2003 annual and fourth issued in November 2003 at a share price of quarter net income, but provided cash and $25.00 per depositary share and a dividend yield credit line availability to fund acquisitions and of 8.0%. The December 31, 2003 closing price developments as the Company continues was $26.55 per share, yielding 7.5%. The Series to pursue investment opportunities. A Preferred is listed on the New York Stock FFO decreased 0.7% to $43,740,000 compared Exchange as “BFS.PrA”. to $44,031,000 for 2002. The decrease in FFO was primarily attributable to decreased operating income at the Company’s 601 Pennsylvania Avenue office building and the initial dilutive impact of the Company’s November 2003 preferred stock offering. On a fully diluted per share basis, FFO was $2.10 per share for 2003, a 4.5% decrease from $2.20 per share for 2002. For the fourth quarter, FFO increased 0.5% to $11,274,000 compared to $11,221,000 for the same quarter in 2002. On a fully diluted per share basis, FFO was $0.54 per share for the 2003 quarter and $0.55 per share for the 2002 fourth quarter. View from 601 Pennsylvania Avenue Shareholder Returns The Company’s common stock finished 2003 Portfolio Performance at a price of $28.67 per share. We paid four The Saul Centers core portfolio operating equal quarterly dividends of $0.39 per share, income decreased slightly from 2002 totals. for a total of $1.56 per share in 2003. While shopping center operating income, Approximately 18% of the dividend was on a same center basis, increased 0.5% for the classified as return of capital while 82% was year, the office portfolio decreased 2.1% for taxable as ordinary income. The combination 2003 over 2002. Performance of the office group of the common stock’s yield (5.4% at was adversely impacted by the February 2003 December 31, 2003) with its share price expiration of a major tenant lease at 601 appreciation produced a 28.0% total return Pennsylvania Avenue. A total of 53% of the to our shareholders last year. This favorable building had been occupied by the Federal Trade Commission. The tenant’s decision to 6


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    M E S S A G E to our Shareholders consolidate facilities at another location resulted The leasing percentage for the shopping center in a short-term leasing and income decline at portfolio increased to 94.1% from 93.9% at the the Company’s most significant office asset. previous year end. During 2003, the Company By December 31, 2003, the building was signed new retail leases for 499,000 square feet again 100% leased. of space at average initial cash rental rates of 7.0% over rents paid on expiring leases. Tenants generally want to continue doing business in our Shopping Center Results centers; over 450,000 square feet of leases expired Retail market conditions in the trade areas in 2003, and 75% of these tenants renewed their surrounding our shopping centers continue to leases. This was the highest renewal rate achieved be favorable. The tenants in our centers generally by us during the past three years. serve the needs of the surrounding neighborhood and provide goods and services such as groceries, prescription drugs, sundries and routine services such as hair care, dry cleaning and dining. Our Retail market conditions in the trade centers are located within communities having attractive demographic characteristics. The areas surrounding our shopping one-mile and three-mile average household centers continue to be favorable. incomes surrounding our shopping centers are $86,000 and $90,000, respectively with Kentlands Square Leesburg Pike populations of 28,000 and 118,000 people, respectively. Overall, the 19 grocers in our retail portfolio produced an average 2003 sales volume of $480 per square foot, a decrease of 1.7% over Overall retail sales, including anchor and shop the prior year but a compound average annual space, for those tenants required to report sales, increase of 2.3% over the past five years. Eighty totaled $281 per square foot in 2003. On a same percent of our shopping center operating store basis, sales levels increased 2.1% compared income is from centers in the Washington, DC to 2002 levels, with average annual increases of and Baltimore metropolitan areas. Within our 0.6% over the past three years. 23 core Washington, DC and Baltimore metropolitan centers, 15 are grocery anchored with grocers producing $520 per square foot in average sales. 7


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    M E S S A G E to our Shareholders We believe diversity is an important factor in Washington, DC office market, which compared minimizing tenant credit risk. Only three retailers favorably to national averages with an overall pay annualized base rents that total more than vacancy rate of less than 8.0% at year end. While 2% of our December 2003 annualized base rents. the Federal Trade Commission’s relocation had a These tenants are Giant at 5.0% and Safeway at negative impact on 2003 results, the subsequent 2.5%, the top two market share grocers in the releasing of the space to such tenants as the Company’s principal market area, metropolitan National Gallery of Art, the American Association Washington, DC and Baltimore, and Lowe’s of Health Plans and the Pharmaceutical Care Home Improvement at 2.1%. Association positions the building with a strong tenant base for the balance of this decade. Washington Square, our 235,000 square foot Class A office building, built in 2000 and located Office properties were 95.8% in Old Town Alexandria, Virginia, contributed leased at year end 2003. over $1.2 million of our increase in operating income as it approaches stabilized occupancy. The property was 93% leased at year end. Avenel Business Park Washington Square Interior The Company’s 380,000 square foot Avenel Business Park ended 2003 at 100% leased. Avenel Business Park, located adjacent to I-270 in Gaithersburg, Maryland, continues to attract Office Highlights tenants in the life science and biomedical The office/industrial segment contributed 31% research industry. of Saul Centers’ 2003 operating income. The Overall, the Company’s 1.2 million square feet office division’s most significant asset is 601 of office space is well positioned with long term Pennsylvania Avenue, which contributed leases. Our office portfolio is currently 95.8% approximately 30% of the office operating leased. Over 90% of the office leases have fixed income. The Company leased over 130,000 annual escalations averaging over 2.5% per year. square feet of space in the building over the past Leases representing only 10% of the Company’s eighteen months due in part to the superior December 2003 annualized base rents expire location of this asset within the downtown during 2004 and 2005. Tenant leases in the 8


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    M E S S A G E to our Shareholders office portfolio representing over 65% of the We expect total redevelopment costs, including current annualized base rents have expiration the initial property acquisition cost, to be dates in 2009 and beyond. approximately $22 million and project completion of the redevelopment to occur in the fall of 2004. Only two office tenants, the U.S. Government at Olde Forte Village is currently 67% leased. 4.0% and the American Association of Health Plans at 2.7%, accounted for more than 2% of In October 2003, we completed construction of our December 2003 annualized base rents. We the first phase of the Broadlands Village shopping are well positioned, with a diverse tenant base center located in Loudoun County, Virginia. The and long term escalating leases, to provide 58,000 square foot Safeway supermarket opened stable cash flow growth. in October 2003 and a Chevy Chase Bank pad building and many in-line small shops also opened during the fourth quarter. This 105,000 square Acquisitions & Developments foot first phase is 100% leased. We have applied During 2003 and continuing into early 2004, for permits and plan to begin construction of a the Company has actively pursued new property 30,000 square foot second phase in March 2004. investments. In July 2003, we acquired Olde We expect total development costs of both phases, including land acquisition costs, to be approximately $22 million and project substantial completion of phase two of the center to occur in the fall of 2004. The second phase is currently 12% pre-leased. Also in the fourth quarter of 2003, we acquired 13 acres of undeveloped land in Frederick, Maryland at the southeast corner of Maryland Route 26 and Monocacy Boulevard. We commenced construction in early December of the 102,000 square foot Shops at Monocacy to be anchored by a 57,000 square foot Giant grocery store. The Company expects development costs including the land Countryside acquisition, to total approximately $21.3 million and projects substantial completion Forte Village, a 161,000 square foot of the center to occur in the fall of 2004. neighborhood retail center constructed in The property is currently 61% pre-leased. the early 1980’s and located near the entrance In January 2004, we purchased 3.4 acres of to the Tantallon community in Fort Washington, undeveloped land adjacent to our 109,000 Maryland. The property is approximately 5 miles square foot Kentlands Square shopping center south of I-495, the Washington Beltway and is in Gaithersburg, Maryland. The Company plans anchored by a newly constructed 58,000 square to build a 41,300 square foot retail/office property foot Safeway which opened in March 2003. The comprised of 24,400 square feet of in-line retail balance of the center consists of approximately space and 16,900 square feet of professional office 48,000 square feet of in-line shop space, 16,000 suites. Construction is expected to commence in square feet of pad site buildings and the 39,000 spring 2004. Development costs, including the square foot former Safeway space. We have filed land acquisition, are projected to total $7.1 for permits and plan to begin redeveloping the million, and substantial completion of the center in March 2004. project is scheduled for the fall of 2004. 9


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    M E S S A G E to our Shareholders In mid-February 2004, we completed the The property was acquired for a purchase price of acquisition of the 130,000 square foot Safeway- $17.5 million, subject to the assumption of a anchored Countryside shopping center, our fourth $9.2 million mortgage. neighborhood shopping center investment in fast- growing Loudoun County, Virginia. The center is The acquisitions of Olde Forte Village, Countryside 95% leased and was acquired for a purchase price and Boca Valley Plaza and our development of $29.7 million. Loudoun County has of Broadlands Village and Shops at Monocacy demonstrate the execution of our strategy to focus on centers located in neighborhoods with favorable demographic characteristics which are anchored by the number one or two market share grocers in their geographic areas. Capital Structure We enlarged and diversified our capital structure during 2003 with the issuance of $100 million of perpetual preferred stock. The initial annual dividend was equivalent to an 8% yield to investors. Net proceeds from the issuance were used to to acquire the Shops at Monocacy development land in November and the Boca Valley Plaza Countryside and Boca Valley Plaza shopping centers during the first quarter of 2004 and experienced strong population and income to pay down all of the balances outstanding growth in the past decade. Our retail investments on the Company’s revolving credit line. in Ashburn Village, Broadlands Village and At year end 2003, Saul Centers’ outstanding debt Countryside shopping centers and the Lansdowne totaled $357 million. All debt was fixed rate with land parcel are the dominant retail sites in their an average maturity of 9.6 years and a weighted respective planned communities, with existing average interest rate of 7.5%. The Company had residential units totaling between 1,500 and prudent leverage of less than 40% debt to total 5,000 homes each, and average household capitalization at December 31, 2003, and interest incomes of over $98,000. expense coverage of 2.8 times for the year. We added Publix as one of our grocery tenants The Company’s financial results during the fourth with the February 2004 acquisition of Boca Valley quarter of 2003 were temporarily impacted by the Plaza in Boca Raton, Florida. Boca Valley Plaza is dilutive effect of the November 2003 preferred a 121,000 square foot neighborhood shopping stock offering; however, we remain confident that center on U.S. Highway 1 in a very attractive we can continue to effectively invest capital to demographic area of South Florida. Household produce long-term cash flow growth. incomes within a three-mile radius average over $83,000. The center was constructed in 1988, is For the Board 90% leased and is anchored by a 42,000 square foot Publix supermarket. Publix is the dominant grocer in South Florida with an estimated 50% market share of grocery store sales in the Miami- Dade, Broward and Palm Beach tri-county area. B. Francis Saul II March 4, 2004 10


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    P O R T F O L I O Properties As of December 31, 2003, Saul Centers’ portfolio properties are located in Virginia, Maryland, Washington, DC, North Carolina, Oklahoma, New Jersey, Georgia and Kentucky. In February 2004, a property in Boca Raton, Florida was added to the portfolio. Properties in the metropolitan Washington, DC/Baltimore area represent 70% of the portfolio’s gross leasable area. Gross Leasable Gross Leasable Property/Location Square Feet Property/Location Square Feet Shopping Centers Olney, Olney, MD 53,765 Ashburn Village, Ashburn, VA 185,537 Ravenwood, Baltimore, MD 85,958 Ashburn Village IV, Ashburn, VA 25,790 Seven Corners, Falls Church, VA 560,998 Beacon Center, Alexandria, VA 352,915 Shops at Fairfax, Fairfax, VA 68,743 Belvedere, Baltimore, MD 54,941 Southdale, Glen Burnie, MD 484,115 Boulevard, Fairfax, VA 56,350 Southside Plaza, Richmond, VA 341,891 Broadlands Village, Loudoun County, VA 104,492 South Dekalb Plaza, Atlanta, GA 163,418 Clarendon, Arlington, VA 6,940 Thruway, Winston-Salem, NC 338,774 Clarendon Station, Arlington, VA 4,868 Village Center, Centreville, VA 143,109 Flagship Center, Rockville, MD 21,500 West Park, Oklahoma City, OK 76,610 French Market, Oklahoma City, OK 244,724 White Oak, Silver Spring, MD 480,156 Germantown, Germantown, MD 26,241 Total Shopping Centers 5,328,355 Giant, Baltimore, MD 70,040 The Glen, Lake Ridge, VA 112,639 Office Properties Great Eastern, District Heights, MD 255,398 Avenel Business Park, Gaithersburg, MD 388,684 Hampshire Langley, Langley Park, MD 131,700 Crosstown Business Center, Tulsa, OK 197,135 Kentlands Square, Gaithersburg, MD 109,922 601 Pennsylvania Ave, Washington, DC 226,604 Leesburg Pike, Baileys Crossroads, VA 97,752 Van Ness Square, Washington, DC 156,493 Lexington Mall, Lexington, KY 314,535 Washington Square, Alexandria, VA 234,775 Lumberton Plaza, Lumberton, NJ 193,544 Total Office Properties 1,203,691 Olde Forte Village, Ft. Washington, MD 160,990 Total Portfolio 6,532,046 (as of December 31, 2003) The Company purchased 13 acres of vacant land in Frederick, Maryland which is being developed as Shops at Monocacy. The 102,000-square-foot shopping center is under construction, is approximately 60% preleased and is expected to be operational by November 2004. The Company also purchased 19 acres of vacant land in the Lansdowne community in Loudoun County, Virginia and a 1.25 acre site in the Clarendon area of Arlington, Virginia, as future development and redevelopment properties. 11


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    R E P O R T O F Independent Public Accountants Board of Directors and Stockholders Saul Centers, Inc.: We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. Our audits also included the financial statement schedule listed in Item 15 of Form 10-K. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. The financial statements of Saul Centers, Inc. as of December 31, 2001, and for the year ended December 31, 2001, were audited by other auditors who have ceased operations and whose report dated February 13, 2002, expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saul Centers, Inc. at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP McLean, Virginia February 3, 2004, except as to Note 13, for which the date is February 17, 2004. 12


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    R E P O R T O F Independent Public Accountants To the Board of Directors of Saul Centers, Inc.: We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. (a Maryland corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saul Centers, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Vienna, Virginia February 13, 2002 Note: As permitted by Rule 2-02 (e) of Regulation S-X promulgated under the Securities Act of 1933, this is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the filing of our Form 10-K for the year ended December 31, 2001. After reasonable efforts, we have been unable to have Arthur Anderson LLP reissue this audit report in connection with the filing of our Form 10-K for the years ended December 31, 2003 and 2002. 13


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    SAUL CENTERS, INC. Consolidated Balance Sheets December 31, (Dollars in thousands) 2003 2002 Assets Real estate investments Land $ 110,624 $ 95,786 Buildings and equipment 437,086 405,153 Construction in progress 4,405 2,975 552,115 503,914 Accumulated depreciation (164,823) (150,286) 387,292 353,628 Cash and cash equivalents 45,244 1,309 Accounts receivable and accrued income, net 14,642 12,505 Prepaid expenses 18,977 15,712 Deferred debt costs, net 4,224 4,125 Other assets 1,237 1,408 Total assets $ 471,616 $ 388,687 Liabilities Notes payable $ 357,248 $ 380,743 Dividends and distributions payable 9,454 7,942 Accounts payable, accrued expenses and other liabilities 7,793 8,785 Deferred income 4,478 4,484 Total liabilities 378,973 401,954 Stockholders’ equity (deficit) Series A Cumulative Redeemable Preferred stock, 1,000,000 shares authorized and 40,000 shares issued and outstanding in 2003 100,000 -- Common stock, $0.01 par value, 30,000,000 shares authorized, 15,861,234 and 15,196,582 shares issued and outstanding, respectively 159 152 Additional paid-in capital 91,469 79,131 Accumulated deficit (98,985) (92,550) Total stockholders’ equity (deficit) 92,643 (13,267) Total liabilities and stockholders’ equity (deficit) $ 471,616 $ 388,687 14 The accompanying notes are an integral part of these statements.


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    SAUL CENTERS, INC. Consolidated Statements of Operations (Dollars in thousands, For the Year Ended December 31, except per share amounts) 2003 2002 2001 Revenue Base rent $ 78,167 $ 75,699 $ 69,662 Expense recoveries 14,438 12,680 11,456 Percentage rent 1,695 1,850 2,113 Other 3,584 3,734 3,077 Total revenue 97,884 93,963 86,308 Operating expenses Property operating expenses 11,363 10,115 8,503 Provision for credit losses 171 421 617 Real estate taxes 8,580 8,021 7,226 Interest expense 25,772 25,113 24,920 Amortization of deferred debt expense 801 725 566 Depreciation and amortization 17,838 17,821 14,758 General and administrative 6,213 5,537 4,335 Total operating expenses 70,738 67,753 60,925 Operating income 27,146 26,210 25,383 Non-operating item Gain on sale of property 182 1,426 -- Income before minority interests 27,328 27,636 25,383 Minority interests Minority share of income (6,495) (7,130) (6,777) Distributions in excess of earnings (1,591) (940) (1,292) Total minority interests (8,086) (8,070) (8,069) Net income 19,242 19,566 17,314 Preferred dividends (1,244) -- -- Net income available to common shareholders $ 17,998 $ 19,566 17,314 Per Share – Net income available to common shareholders Basic $ 1.15 $ 1.32 $ 1.22 Fully diluted $ 1.15 $ 1.31 $ 1.22 The accompanying notes are an integral part of these statements. 15


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    SAUL CENTERS, INC. Consolidated Statements of Stockholders’ Equity (Deficit) Additional (Dollars in thousands, Preferred Common Paid-in Accumulated except per share amounts) Stock Stock Capital Deficit Total Stockholders’ equity (deficit) Balance, December 31, 2000 $ -- $ 139 $ 52,594 $ (83,888) $ (31,859) Issuance of 666,268 shares of common stock: 645,423 shares - dividend reinvestment plan -- 6 11,609 -- 11,615 20,845 shares - directors' deferred compensation -- -- 361 -- 361 Net income -- -- -- 17,314 17,314 Distributions – common stock -- -- -- (16,588) (16,588) Distributions payable common stock ($.39 per share) -- -- -- (5,670) (5,670) Balance, December 31, 2001 -- 145 64,564 (88,832) (24,123) Issuance of 660,779 shares of common stock: 556,872 shares - dividend reinvestment plan -- 6 12,469 -- 12,475 103,907 shares - employee stock options and directors deferred stock plan -- 1 2,098 -- 2,099 Net income -- -- -- 19,566 19,566 Distributions – common stock -- -- -- (17,360) (17,360) Distributions payable common stock ($.39 per share) -- -- -- (5,924) (5,924) Balance, December 31, 2002 -- 152 79,131 (92,550) (13,267) Issuance of 664,651 shares of common stock: 552,170 shares - dividend reinvestment plan -- 6 13,697 -- 13,703 112,481 shares - employee stock options and directors deferred stock plan -- 1 2,314 -- 2,315 Issuance of 40,000 shares of preferred stock 100,000 -- (3,673) -- 96,327 Net income -- -- -- 19,242 19,242 Distributions payable preferred stock ($.31 per share) -- -- -- (1,244) (1,244) Distributions – common stock -- -- -- (18,247) (18,247) Distributions payable common stock ($.39 per share) -- -- -- (6,186) (6,186) Balance, December 31, 2003 $ 100,000 $ 159 $ 91,469 $ (98,985) $ 92,643 16 The accompanying notes are an integral part of these statements.


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    SAUL CENTERS, INC. Consolidated Statements of Cash Flows For the Year Ended December 31, (Dollars in thousands) 2003 2002 2001 Cash flows from operating activities Net income $ 19,242 $ 19,566 $ 17,314 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 8,086 8,070 8,069 Gain on sale of property (182) (1,426) -- Depreciation and amortization 18,639 18,546 15,324 Provision for credit losses 171 421 617 Increase in accounts receivable (2,308) (2,283) (823) Increase in prepaid expenses (6,454) (7,661) (5,568) Decrease in other assets 171 15 347 Increase (decrease) in accounts payable, accrued expenses and other liabilities (992) 1,522 (5,155) Increase (decrease) in dividends payable 6 254 260 Increase (decrease) in deferred income (6) 475 1,449 Net cash provided by operating activities 36,373 37,499 31,834 Cash flows from investing activities Acquisitions of real estate investments (25,474) (36,677) -- Additions to real estate investments (9,286) (6,660) (13,055) Additions to construction in progress (13,371) (5,768) (8,745) Net cash used in investing activities (48,131) (49,105) (21,800) Cash flows from financing activities Proceeds from notes payable 128,134 53,547 51,218 Repayments on notes payable (151,629) (24,624) (42,851) Additions to deferred debt costs (900) (1,287) (17) Proceeds from the issuance of preferred stock 96,327 -- -- Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership 16,018 14,574 11,976 Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (32,257) (31,100) (30,327) Net cash provided by financing activities 55,693 11,110 (10,001) Net increase (decrease) in cash and cash equivalents 43,935 (496) 33 Cash and cash equivalents, beginning of period 1,309 1,805 1,772 Cash and cash equivalents, end of period $ 45,244 $ 1,309 $ 1,805 Supplemental disclosures of cash flow information: Cash paid for interest, net of amount capitalized $ 25,496 $ 25,089 $ 24,419 The accompanying notes are an integral part of these statements. 17


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    NOTES to Consolidated Financial Statements 1. ORGANIZATION, FORMATION, completed the first phase of the Broadlands Village AND BASIS OF PRESENTATION development, a grocery anchored neighborhood shopping center in Loudoun County, Virginia. In July Organization 2003, the Company purchased Olde Forte Village, a Saul Centers, Inc. (“Saul Centers”) was incorporated grocery anchored neighborhood shopping center in under the Maryland General Corporation Law on Fort Washington, Maryland. In November 2002, the June 10, 1993. Saul Centers operates as a real estate Company purchased a 19 acre parcel of land in the investment trust (a “REIT”) under the Internal Lansdowne community in Loudoun County, Virginia. Revenue Code of 1986, as amended (the “Code”). The Company plans to develop the Lansdowne Saul Centers generally will not be subject to federal parcel into a grocery anchored neighborhood income tax, provided it annually distributes at least shopping center. In September 2002, the Company 90% of its REIT taxable income to its stockholders purchased 109,642 square feet of retail space known and meets certain organizational and other as Kentlands Square. In the summer of 2002, the requirements. Saul Centers has made and intends Company completed development of Ashburn to continue to make regular quarterly distributions Village IV, an in-line retail and pad building to its stockholders. Saul Centers, together with expansion to the Ashburn Village shopping center. its wholly owned subsidiaries and the limited In June 2002, the Company purchased Clarendon partnerships of which Saul Centers or one of its Center for future redevelopment. As of December subsidiaries is the sole general partner, are referred 31, 2003, the Company’s properties (the “Current to collectively as the “Company”. B. Francis Saul II Portfolio Properties”) consisted of 31 operating serves as Chairman of the Board of Directors and shopping center properties (the “Shopping Chief Executive Officer of Saul Centers. Centers”), five predominantly office operating Formation and Structure of Company properties (the “Office Properties”) and three Saul Centers was formed to continue and expand development and/or redevelopment properties. the shopping center business previously owned and The Company established Saul QRS, Inc., a wholly conducted by the B.F. Saul Real Estate Investment owned subsidiary of Saul Centers, to facilitate the Trust, the B.F. Saul Company, Chevy Chase Bank, placement of collateralized mortgage debt. Saul F.S.B. and certain other affiliated entities, each of QRS, Inc. was created to succeed to the interest which is controlled by B. Francis Saul II and his of Saul Centers as the sole general partner of Saul family members (collectively, “The Saul Subsidiary I Limited Partnership. The remaining Organization”). On August 26, 1993, members of limited partnership interests in Saul Subsidiary I The Saul Organization transferred to Saul Holdings Limited Partnership and Saul Subsidiary II Limited Limited Partnership, a newly formed Maryland Partnership are held by the Operating Partnership limited partnership (the “Operating Partnership”), as the sole limited partner. Through this structure, and two newly formed subsidiary limited the Company owns 100% of the Current Portfolio partnerships (the “Subsidiary Partnerships”, and Properties. collectively with the Operating Partnership, the “Partnerships”), shopping center and office Basis of Presentation properties, and the management functions related The accompanying financial statements of the to the transferred properties. Since its formation, Company have been presented on the historical the Company has purchased and developed cost basis of The Saul Organization because of additional properties, including seven properties affiliated ownership and common management during 2002 and 2003. In November 2003, the and because the assets and liabilities were the Company acquired approximately 13 acres of subject of a business combination with the undeveloped land in Frederick, Maryland where it is Operating Partnership, the Subsidiary Partnerships developing Shops at Monocacy, a 102,000 square and Saul Centers, all newly formed entities with foot grocery anchored neighborhood shopping no prior operations. center. The property was approximately 60% pre- leased at purchase. In October 2003, the Company 18


  • Page 19

    NOTES to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT Real Estate Investment Properties ACCOUNTING POLICIES The Company purchases real estate investment properties from time to time and allocates the Nature of Operations purchase price to various components, such as land, The Company, which conducts all of its activities buildings, and intangibles related to in-place leases through its subsidiaries, the Operating Partnership and customer relationships in accordance with and Subsidiary Partnerships, engages in the Financial Accounting Standards Board (“FASB”) ownership, operation, management, leasing, Statement of Financial Accounting Standards acquisition, renovation, expansion, development (“SFAS”) 141, “Business Combinations.” The and financing of community and neighborhood purchase price is allocated based on the relative shopping centers and office properties, primarily in fair value of each component. The fair value of the Washington, DC/Baltimore metropolitan area. buildings is determined as if the buildings were Because the properties are located primarily in the vacant upon acquisition and subsequently leased at Washington, DC/Baltimore metropolitan area, the market rental rates. As such, the determination of Company is subject to a concentration of credit fair value considers the present value of all cash risk related to these properties. A majority of the flows expected to be generated from the property Shopping Centers are anchored by several major including an initial lease-up period. The Company tenants. Nineteen of the Shopping Centers are determines the fair value of above and below market anchored by a grocery store and offer primarily intangibles associated with in-place leases by day-to-day necessities and services. As of December assessing the net effective rent and remaining term 31, 2003, no single property accounted for more of the leases relative to market terms for similar than 8.6% of the total gross leasable area of the leases at acquisition. In the case of below market portfolio. Only the United States Government leases, the Company considers the remaining (4.1%), a tenant of six properties, and Giant Food contractual lease period and renewal periods, taking (5.7%), a tenant of eight Shopping Centers, into consideration the likelihood of the tenant individually accounted for more than 2.4% of the exercising its renewal options. The fair value of Company’s total revenues for the year ending a below market lease component is recorded as December 31, 2003. deferred income and amortized as additional lease Principles of Consolidation revenue over the remaining contractual lease period The accompanying consolidated financial statements and any renewal option periods included in the of the Company include the accounts of Saul valuation analysis. The fair value of above market Centers, its subsidiaries, and the Operating lease intangibles is recorded as a deferred asset and Partnership and Subsidiary Partnerships which are is amortized as a reduction of lease revenue over the majority owned by Saul Centers. All significant remaining contractual lease term. The Company intercompany balances and transactions have been determines the fair value of at-market in-place leases eliminated in consolidation. considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period Use of Estimates and carrying costs associated with the lease-up The preparation of financial statements in period. Intangible assets associated with at-market conformity with accounting principles generally in-place leases are amortized as additional lease accepted in the United States requires management expense over the remaining contractual lease term. to make estimates and assumptions that affect To the extent customer relationship intangibles the reported amounts of assets and liabilities and are present in an acquisition, the fair value of the disclosure of contingent assets and liabilities at the intangibles are amortized over the life of the date of the financial statements and the reported customer relationship. amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 19


  • Page 20

    NOTES to Consolidated Financial Statements The Company applied SFAS 141 when it recorded as grounds maintenance, lot sweeping and snow the July 2003 acquisition of Olde Forte Village and removal, are charged to operations as incurred. the November 14, 2003 acquisition of Shops at Repairs and maintenance expense totaled Monocacy. Approximately $760,000 of the $4,943,000, $3,852,000 and $2,913,000, for 2003, $16,670,000 total cost of the Olde Forte acquisition 2002 and 2001, respectively, and is included in was allocated as lease intangible assets and included operating expenses in the accompanying in prepaid expenses at acquisition. Approximately consolidated financial statements. Interest expense $141,000 of the $9.3 million total cost of the Shops capitalized totaled $1,382,000, $548,000 and at Monocacy acquisition was allocated as lease $1,640,000, for 2003, 2002 and 2001, respectively. intangible assets and included as prepaid expenses. In the initial rental operations of development The lease intangible assets are being amortized over projects, a project is considered substantially the remaining periods of the leases acquired. complete and available for occupancy upon Real estate investment properties are reviewed for completion of tenant improvements, but no later potential impairment losses whenever events or than one year from the cessation of major changes in circumstances indicate that the carrying construction activity. Substantially completed amount of an asset may not be recoverable. If there portions of a project are accounted for as separate is an event or change in circumstance that indicates projects. Depreciation is calculated using the an impairment in the value of a real estate straight-line method and estimated useful lives of 35 investment property, the Company’s policy is to to 50 years for base buildings and up to 20 years for assess any impairment in value by making a certain other improvements. Depreciation expense comparison of the current and projected operating for the years ended December 31, 2003, 2002 and cash flows of the property over its remaining useful 2001 was $14,649,000, $15,526,000 and life, on an undiscounted basis, to the carrying $12,748,000, respectively. Leasehold improvements amount of that property. If such carrying amount is are amortized over the lives of the related leases in excess of the estimated projected operating cash using the straight-line method. flows of the property, the Company would recognize an impairment loss equivalent to an amount Lease Acquisition Costs required to adjust the carrying amount to its Certain initial direct costs incurred by the Company estimated fair market value. Saul Centers adopted in negotiating and consummating a successful lease SFAS 144, “Accounting for Impairment or Disposal are capitalized and amortized over the initial base of Long-Lived Assets,” effective January 1, 2002. term of the lease. These costs are included in This Statement addresses financial accounting and prepaid expenses and total $15,345,000 and reporting for the impairment or disposal of long- $12,140,000, net of accumulated amortization of lived assets. The Company has not recognized an $6,671,000 and $5,259,000, as of December 31, impairment loss in 2003, 2002 or 2001 on any of 2003 and 2002, respectively. Capitalized leasing its real estate. costs consist of commissions paid to third party leasing agents as well as internal direct costs such as Interest, real estate taxes and other carrying costs employee compensation and payroll related fringe are capitalized on projects under construction. benefits directly related to time spent performing Once construction is substantially complete and the leasing related activities. Such activities include assets are placed in service, rental income, direct evaluating the prospective tenant’s financial operating expenses, and depreciation associated condition, evaluating and recording guarantees, with such properties are included in current collateral and other security arrangements, operations. Expenditures for repairs and negotiating lease terms, preparing lease documents maintenance, which includes contract services such and closing the transaction. 20


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    NOTES to Consolidated Financial Statements Construction in Progress In addition to rents due currently, accounts Construction in progress includes predevelopment receivable include $9,370,000 and $6,262,000, at costs and development costs of active projects. December 31, 2003 and 2002, respectively, Predevelopment costs associated with these active representing minimum rental income accrued on a projects include legal, zoning and permitting costs straight-line basis to be paid by tenants over the and other project carrying costs incurred prior to the remaining term of their respective leases. These commencement of construction. Development costs amounts are presented after netting allowances of include direct construction costs and indirect costs $548,000 and $693,000, respectively, for tenants incurred subsequent to the start of construction such whose rent payment history or financial condition as architectural, engineering, construction cast doubt upon the tenant’s ability to perform management and carrying costs consisting of under its lease obligations. interest, real estate taxes and insurance. Cash and Cash Equivalents Construction in progress balances as of December Cash and cash equivalents include cash and short- 31, 2003 and 2002 are as follows: term investments with maturities of three months or less measured from the acquisition date. Construction in Progress Deferred Debt Costs (In thousands) December 31, Deferred debt costs consist of fees and costs 2003 2002 incurred to obtain long-term financing, construction Broadlands Village $ -- $ 875 financing and the revolving line of credit. These fees and costs are being amortized over the terms of the Shops at Monocacy 277 -- respective loans or agreements. Deferred debt costs Clarendon Center 1,675 512 totaled $4,224,000 and $4,125,000, and are presented net of accumulated amortization of Other 2,453 1,588 $3,300,000 and $2,499,000, at December 31, 2003 Balance $ 4,405 $ 2,975 and 2002, respectively. Deferred Income Accounts Receivable and Accrued Income Deferred income consists of payments received from Accounts receivable primarily represent amounts tenants prior to the time they are earned and currently due from tenants in accordance with the recognized by the Company as revenue. These terms of the respective leases. Receivables are payments include prepayment of the following reviewed monthly and reserves are established with month’s rent, prepayment of real estate taxes when a charge to current period operations when, in the the taxing jurisdiction has a fiscal year differing from opinion of management, collection of the receivable the calendar year reimbursements specified in the is doubtful. Accounts receivable in the lease agreement and advance payments by tenants accompanying consolidated financial statements are for tenant construction work provided by the shown net of an allowance for doubtful accounts of Company. $561,000 and $681,000, at December 31, 2003 and Revenue Recognition 2002, respectively. Rental and interest income is accrued as earned except when doubt exists as to collectibility, in Allowance for Doubtful Accounts which case the accrual is discontinued. When rental payments due under leases vary from a straight-line (In thousands) For the Year Ended basis because of free rent periods or stepped December 31, increases, income is recognized on a straight-line 2003 2002 basis in accordance with accounting principles Beginning Balance $ 681 $ 559 generally accepted in the United States. Expense recoveries represent a portion of property operating Provision for Credit Losses 171 421 expenses billed to the tenants, including common Charge-offs (291) (299) area maintenance, real estate taxes and other recoverable costs. Expense recoveries are Ending Balance $ 561 $ 681 recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint. 21


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    NOTES to Consolidated Financial Statements Income Taxes Deferred Compensation and The Company made an election to be treated, and Stock Plan for Directors intends to continue operating so as to qualify as a Saul Centers has established a Deferred REIT under sections 856 through 860 of the Internal Compensation and Stock Plan for Directors (the Revenue Code of 1986, as amended, commencing “Plan”) for the benefit of its directors and their with its taxable year ending December 31, 1993. A beneficiaries. A director may elect to defer all or REIT generally will not be subject to federal income part of his or her director’s fees and has the option taxation on that portion of its income that qualifies to have the fees paid in cash, in shares of common as REIT taxable income to the extent that it stock or in a combination of cash and shares of distributes at least 90% of its REIT taxable income to common stock upon termination from the Board of stockholders and complies with certain other Directors. If the director elects to have fees paid in requirements. Therefore, no provision has been stock, the number of shares allocated to the director made for federal income taxes in the accompanying is determined by the market price of the common consolidated financial statements. As of December stock on the day the fee is earned. As of December 31, 2003 and 2002, the total tax basis of the 31, 2003, 170,000 shares were authorized and Company’s assets was $501,594,000 and registered for use under the Plan, and 149,000 $410,497,000, and the tax basis of the liabilities was shares had been credited to the directors’ deferred $470,105,000 and $392,157,000, respectively. fee accounts. Stock Based Employee Compensation Beginning in 1999, pursuant to the Plan, 100 shares Effective January 2003, the Company adopted the of the Company’s common stock are awarded fair value method to value employee stock options annually as additional compensation to each director using the prospective transition method specified serving on the Board of Directors as of the record under SFAS No. 148, “Accounting for Stock-Based date for the Annual Meeting of Stockholders. The Compensation-Transition and Disclosure.” The shares are issued on the date of the Annual Meeting, Company had no options eligible for valuation prior their issuance may not be deferred and transfer of to the grant of the 2003 Options. The fair value of the shares is restricted for a period of twelve months the 2003 Options was determined at the time of the following the date of issue. award using the Black-Scholes model, a widely used Per Share Data method for valuing stock based employee Per share data is calculated in accordance with SFAS compensation, and the following assumptions: No. 128, “Earnings Per Share.” Per share data for expected volatility was determined using the ten net income (basic and diluted) is computed using year trading history of the Company’s common weighted average shares of common stock. stock (month-end closing prices), an average Convertible limited partnership units and employee expected term outstanding of seven years, expected stock options are the Company’s potentially dilutive dividend yield throughout the option term of 7% securities. For all periods presented, the convertible and risk-free interest rate of 4% based upon an limited partnership units are anti-dilutive. For the assumed 10-year US Treasury rate. Using the Black- years ended December 31, 2003 and 2002, the Scholes model, the Company determined the total options are dilutive because the average share price fair value of the 2003 Options to be $332,000 and of the Company’s common stock exceeded the recognizes compensation expense monthly during exercise prices. The options were not dilutive for the the four years the options vest. Compensation year ended December 31, 2001. The Company expense attributed to the 2003 Options during the granted 180,000 stock options to five executive year ended December 31, 2003 was $50,000. The officers in 1993 and 1994, of which no shares, 2003 Options are due to expire May 22, 2013 and 93,210 shares and 180,000 shares were unexercised as of December 31, 2003, none of the 2003 Options as of December 31, 2003, 2002 and 2001, are vested. respectively. The Company granted 220,000 stock options to six executive officers in May 2003, of which all 220,000 shares remained unexercised as of December 31, 2003. The treasury share method was used to measure the effect of the dilution. 22


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    NOTES to Consolidated Financial Statements Basic and Diluted Shares Outstanding required to recognize, at the inception of a guarantee, a liability for the fair value of its (In thousands) December 31, obligation. Saul Centers has guaranteed portions 2003 2002 2001 of its Operating Partnership debt obligations, all of Weighted average which are presented on the consolidated financial common shares statements as mortgage notes payable. Saul Centers outstanding – Basic 15,591 14,865 14,210 has guaranteed $2,964,000 of the notes payable which are recourse loans made by the Operating Effect of Partnership as of December 31, 2003. The dilutive options 17 22 -- balance of the mortgage notes payable totaling Weighted average $354,284,000 are non-recourse, however, as is common shares customary when obtaining long term non-recourse outstanding – Diluted 15,608 14,887 14,210 financing, borrowers such as Saul Centers make certain representations to lenders, for example, that Average Share Price $ 25.77 $ 22.90 * no fraud exists and the officers are authorized to execute loan documents. Borrowers, including Saul * The option exercise price exceeded the average share price Centers, typically agree to assume obligations arising for these periods. from reliance upon these representations should a Reclassifications third party suffer damages related to individual Certain reclassifications have been made to the prior mortgages. No additional liabilities were recognized year financial statements to conform to the current as a result of the adoption of FIN 45 and the year presentation. The reclassifications have no Company does not expect the adoption of FIN 45 impact on operating results previously reported. to have a material impact on its financial condition or results of operations. Recent Accounting Pronouncements In January 2003, the FASB issued FIN 46, In April 2002, the FASB issued SFAS No. 145, “Consolidation of Variable Interest Entities.” FIN 46 “Rescission of FASB No. 4, 44 and 64, Amendment is an Interpretation of Accounting Research Bulletin of FASB No. 13 and Technical Corrections.” SFAS No. 51 and addresses consolidation by business No. 145, among other things, changes the financial enterprises of variable interest entities (“VIEs”). reporting requirements for the gains or losses FIN 46 is based on the theory that an enterprise recognized from the extinguishment of debt. controlling another entity through interests other Under SFAS No. 4, all gains and losses from the than voting interests should consolidate the extinguishment of debt were required to be controlled entity. Business enterprises are required aggregated and, if material, classified as an under the provisions of FIN 46 to identify VIEs, extraordinary item, net of the related income tax based on specified characteristics, and then effect. SFAS No. 145 eliminates SFAS No. 4 and as determine whether they should be consolidated. a result, the criteria in APB Opinion No. 30 now Generally, an enterprise that holds a majority will be used to classify those gains and losses. variable interest in another enterprise is considered The Company has no gains or losses from debt the primary beneficiary of that enterprise and, extinguishment that would require restatement. therefore, should consolidate the VIE. The primary The Company does not expect the adoption of beneficiary of a VIE is also required to include various SFAS No. 145 to have a material impact on its disclosures in interim and annual financial financial condition or results of operations. statements. Additionally, an enterprise that holds a In November 2002, the Financial Accounting significant variable interest in a VIE, but that is not Standards Board (“FASB”) issued Interpretation No. the primary beneficiary, is also required to make (“FIN”) 45, “Guarantor’s Accounting and Disclosure certain disclosures. In December 2003, the FASB Requirements for Guarantees, Including Direct issued a revised Interpretation No. 46 which Guarantees of Indebtedness of Others.” FIN 45 modifies and clarifies various aspects of the original outlines the disclosures to be made by a guarantor Interpretation. The adoption of this statement and in its financial statements about its obligations under of the revised interpretation did not have a material certain guarantees. It states that a guarantor is impact on our financial condition or results of operations. 23


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    NOTES to Consolidated Financial Statements In May 2003, the FASB issued SFAS No. 150, 4. NOTES PAYABLE “Accounting for Certain Financial Instruments with Notes payable totaled $357,248,000 at December Characteristics of both Liabilities and Equity,” (“SFAS 31, 2003, all of which was fixed rate debt. At the 150”). SFAS 150 establishes standards for how an prior year’s end notes payable totaled issuer classifies and measures certain financial $380,743,000, of which $294,619,000 was fixed instruments with characteristics of both liabilities and rate debt and $86,124,000 was variable rate debt. equity. SFAS 150 requires an issuer to classify certain At December 31, 2003, the Company had a $125 financial instruments as liabilities, which may have million unsecured revolving credit facility with no been previously classified as equity, because those outstanding borrowings. The facility matures August instruments embody obligations of the issuer. SFAS 2005 and requires monthly interest payments, if 150 also requires disclosure of the nature and terms applicable, at a rate of LIBOR plus a spread of of the financial instruments and the rights and 1.625% to 1.875% (determined by certain debt obligations embodied in those instruments. SFAS service coverage and leverage tests) or upon the 150 was effective for financial instruments entered bank’s reference rate at the Company’s option. Loan into or modified after May 31, 2003, and is availability is determined by operating income from otherwise effective as of the first interim period the Company’s unencumbered properties, which, beginning after June 15, 2003. On October 29, as of December 31, 2003, allowed the Company to 2003, the FASB indefinitely delayed the provision of borrow up to $75 million for general corporate use. the statement related to non-controlling interests in An additional $50 million is available for funding limited life subsidiaries that are consolidated. The working capital and operating property acquisitions adoption of SFAS 150, given this deferral, did not supported by the unencumbered properties’ internal have a material impact on the Company’s financial cash flow growth and operating income of future condition or results of operations. acquisitions. 3. MINORITY INTERESTS - HOLDERS In January 2003, the Company replaced its $42 OF CONVERTIBLE LIMITED million construction loan used to finance the PARTNERSHIP UNITS IN THE building of Washington Square with a $42.5 million, 15-year mortgage. In March 2003, the Company OPERATING PARTNERSHIP executed a $15 million loan to finance the The Saul Organization has a 24.6% limited construction of Broadlands Village shopping center, partnership interest, represented by 5,188,000 which was paid off in December 2003 using convertible limited partnership units, in the proceeds from a $17.45 million, 15-year mortgage. Operating Partnership, as of December 31, 2003. Also in December 2003, the Company refinanced a These convertible limited partnership units are $9.6 million mortgage secured by The Glen convertible into shares of Saul Centers’ common shopping center with a new $12.35 million, 15-year stock on a one-for-one basis, provided the rights mortgage. In August 2003, the Company executed may not be exercised at any time that The Saul an $8 million increase to a fixed-rate mortgage loan Organization beneficially owns, directly or indirectly, collateralized by Ashburn Village shopping center. in the aggregate more than 24.9% of the outstanding equity securities of Saul Centers. The limited partnership units were not convertible as of December 31, 2003 because The Saul Organization owned in excess of 24.9% of the Company’s equity securities. The impact of The Saul Organization’s 24.6% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the years ended December 31, 2003, 2002 and 2001, were 20,790,000, 20,059,000 and 19,383,000, respectively. 24


  • Page 25

    NOTES to Consolidated Financial Statements The following is a summary of notes payable as of December 31, 2003 and 2002: Notes Payable (Dollars in thousands) December 31, Interest Scheduled 2003 2002 Rate * Maturity * Fixed Rate Mortgages: $ 132,859 (a) $ 135,641 7.67 % Oct 2012 98,103 (b) 93,044 8.00 % Dec 2011 29,800 (c) -- 5.94 % Jan 2019 41,982 (d) -- 6.01 % Feb 2018 34,017 (e) 34,830 7.88 % Jan 2013 13,375 (f) 13,667 8.33 % Jun 2015 -- (g) 9,797 6.88 % May 2004 7,112 (h) 7,640 8.18 % Feb 2004 Total Fixed Rate 357,248 294,619 7.48 % 9.6 Years Variable Rate Loans: Construction Loan -- (i) 39,374 -- -- Line of Credit -- (j) 46,750 LIBOR plus 1.625% Aug 2005 Total Variable Rate -- 86,124 -- -- Total Notes Payable $ 357,248 $ 380,743 7.48 % 9.6 Years *Interest rate and scheduled maturity data presented for December 31, 2003. Totals computed using weighted averages. (a) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25-year amortization schedule and a balloon payment of $96,300,000 at loan maturity. Principal of $2,782,000 was amortized during 2003. (b) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997, most recently, an $8 million increase in September 2003. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowings rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23-year amortization schedule and a balloon payment of $63,153,000 at loan maturity. Principal of $2,941,000 was amortized during 2003. (c) The loan, consisting of two notes dated December 2003, is currently collateralized by two shopping centers, Broadlands Village and The Glen and requires equal monthly principal and interest payments of $191,000 based upon a 25-year amortization schedule and a balloon payment of $17,706,000 at loan maturity. Payments commenced February 2004. The loan was increased by $10,200,000 in February 2004 (see (h) below). (d) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5-year amortization schedule and a balloon payment of $27,872,000 at loan maturity. Principal of $518,000 was amortized during 2003. The proceeds from this loan were used to pay-off and retire the construction loan on this property in January 2003 (see (i) below). (e) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25-year amortization schedule and a balloon payment of $22,808,000 at loan maturity. Principal of $813,000 was amortized during 2003. (f) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22-year amortization schedule and a balloon payment of $7,630,000 at loan maturity. Principal of $292,000 was amortized during 2003. (g) The loan, which was collateralized by The Glen shopping center and a corporate guarantee, was paid off and retired in December 2003 (see (c) above). (h) The loan was collateralized by Kentlands Square shopping center and requires monthly principal and interest payments based upon a 15-year amortization schedule. Principal of $528,000 was amortized during 2003. This loan was repaid and retired in February 2004 with additional loan proceeds added to the $29,800,000, 5.94% loan (see (c) above) (See Note 13-Subsequent Events). (i) The $42,000,000 Washington Square construction loan was paid off and retired in January 2003 through a permanent financing (see (d) above). (j) The loan is an unsecured revolving credit facility totaling $125,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. There were no outstanding borrowings as of December 31, 2003. Monthly payments, if applicable, are interest only and will vary depending upon 25 the amount outstanding and the applicable interest rate for any given month.


  • Page 26

    NOTES to Consolidated Financial Statements The December 31, 2003 and 2002 depreciation 5. LEASE AGREEMENTS adjusted cost of properties collateralizing the Lease income includes primarily base rent arising mortgage notes payable totaled $295,506,000 and from noncancelable commercial leases. Base rent $280,051,000, respectively. The Company’s credit for the years ended December 31, 2003, 2002 and facility requires the Company and its subsidiaries to 2001, amounted to $78,167,000, $75,699,000 maintain certain financial covenants. The and $69,662,000, respectively. Future contractual Company’s material covenants require the Company, payments under noncancelable leases for years on a consolidated basis, to: ended December 31, are as follows: • limit the amount of debt so as to maintain a gross asset value in excess of liabilities of at least $250 Future Contractual Payments million; • limit the amount of debt as a percentage of gross (In thousands) asset value (leverage ratio) to less than 60%; 2004 $ 78,294 • limit the amount of debt so that interest coverage will exceed 2.1 to 1 on a trailing four quarter 2005 71,575 basis; and 2006 64,891 • limit the amount of debt so that interest, scheduled principal amortization and preferred 2007 58,540 dividend coverage exceeds 1.6 to 1. 2008 50,077 As of December 31, 2003, the Company was in Thereafter 262,694 compliance with all such covenants. Total $ 586,071 Notes payable at December 31, 2003 and 2002, totaling $166,876,000 and $266,392,000, respectively, are guaranteed by members of The The majority of the leases also provide for rental Saul Organization. increases and expense recoveries based on As of December 31, 2003, the scheduled increases in the Consumer Price Index or increases maturities of all debt including scheduled principal in operating expenses, or both. These increases amortization for years ended December 31, are as generally are payable in equal installments follows: throughout the year based on estimates, with adjustments made in the succeeding year. Expense recoveries for the years ended December 31, 2003, Debt Maturity Schedule 2002 and 2001 amounted to $14,438,000, (In thousands) $12,680,000 and $11,456,000, respectively. In addition, certain retail leases provide for percentage 2004 * $ 15,741 rent based on sales in excess of the minimum 2005 9,397 specified in the tenant’s lease. Percentage rent amounted to $1,695,000, $1,850,000 and 2006 10,149 $2,113,000, for the years ended December 31, 2007 10,963 2003, 2002 and 2001, respectively. 2008 11,815 6. LONG-TERM LEASE OBLIGATIONS Thereafter 299,183 Certain properties are subject to noncancelable Total $ 357,248 long-term leases which apply to land underlying the Shopping Centers. Certain of the leases provide * A total of $7,112 of the 2004 maturities was refinanced in for periodic adjustments of the base annual rent and February 2004. require the payment of real estate taxes on the underlying land. The leases will expire between 2058 and 2068. Reflected in the accompanying consolidated financial statements is minimum ground rent expense of $164,000, $164,000 and 26


  • Page 27

    NOTES to Consolidated Financial Statements $167,000, for each of the years ended December year. The charge for the year ended December 31, 31, 2003, 2002 and 2001, respectively. The future 2001 of $8,069,000 consists of $6,777,000 related minimum rental commitments under these ground to The Saul Organization’s share of the net income leases are as follows: for the year and $1,292,000 related to distributions to minority interests in excess of allocated net Ground Lease Rental Commitments income for the year. (In thousands) Annually Total On July 16, 2003, the Company filed a shelf 2004-2008 Thereafter registration statement (the “Shelf Registration Beacon Center $ 53 $ 3,183 Statement”) with the SEC relating to the future offering of up to an aggregate of $100 million of Olney 51 4,373 preferred stock and depositary shares. On Southdale 60 3,545 November 5, 2003 the Company sold 3,500,000 depositary shares, each representing 1/100th of a Total $ 164 $ 11,101 share of 8% Series A Cumulative Redeemable Preferred Stock. The underwriters exercised an over- In addition to the above, Flagship Center consists of allotment option, purchasing an additional 500,000 two developed outparcels that are part of a larger depositary shares on November 26, 2003. adjacent community shopping center formerly The depositary shares may be redeemed, in whole owned by The Saul Organization and sold to an or in part, at the $25.00 liquidation preference at affiliate of a tenant in 1991. The Company has the Company’s option on or after November 5, a 90-year ground leasehold interest which 2008. The depositary shares will pay an annual commenced in September 1991 with a minimum dividend of $2.00 per share, equivalent to 8% of the rent of one dollar per year. $25.00 liquidation preference. The first dividend, The Company’s corporate headquarters lease paid on January 15, 2004 was for less than a full commenced in March 2002. The 10-year lease quarter and covered the period from November 5 provides for an initial annual rental payment of through December 31, 2003. The Series A preferred $513,000, escalated at 3% per year, with payment stock has no stated maturity, is not subject to any of a pro-rata share of operating expenses over a base sinking fund or mandatory redemption and is not year amount. Reflected in the accompanying convertible into any other securities of the Company. financial statements is straight-lined rental expense Investors in the depositary shares generally have no of $584,000 for the year ended December 31, 2003. voting rights, but will have limited voting rights if The future minimum rental commitments under this the Company fails to pay dividends for six or more lease are $584,000 annually for the five years from quarters (whether or not declared or consecutive) 2004 through 2008, and $1,849,000 thereafter. and in certain other events. This lease expense is included in the shared services Net proceeds from the issuance were approximately portion of general and administrative expense (see $96.3 million and initially were used to fully repay Note 8 – Related Party Transactions). $52.5 million outstanding under the Company’s revolving credit facility and the remaining balance 7. STOCKHOLDERS’ EQUITY AND was invested in short-term certificates of deposit. MINORITY INTERESTS The cash and credit line availability will be used to The consolidated statement of operations for the fund acquisitions and developments as the Company year ended December 31, 2003 includes a charge identifies investment opportunities. for minority interests of $8,086,000, consisting of $6,495,000 related to The Saul Organization’s share of the net income for the year and $1,591,000 8. RELATED PARTY TRANSACTIONS related to distributions to minority interests in excess Chevy Chase Bank, an affiliate of The Saul of allocated net income for the year. The charge for Organization, leases space in 15 of the Company’s the year ended December 31, 2002 of $8,070,000, properties. Total rental income from Chevy Chase consisting of $7,130,000 related to The Saul Bank amounted to $1,495,000, $1,368,000 and Organization’s share of the net income for the year $1,330,000, for the years ended December 31, and $940,000 related to distributions to minority 2003, 2002 and 2001, respectively. interests in excess of allocated net income for the 27


  • Page 28

    NOTES to Consolidated Financial Statements The Company utilizes Chevy Chase Bank for its and 2001, respectively. The amount of billings various checking accounts and as of December 31, expensed in the period incurred are primarily 2003 had $45.2 million deposited in cash and reported as general and administrative operating short-term investment accounts. expenses in these consolidated financial statements. Philip D. Caraci, the Company’s President and On January 23, 2004, the Company purchased a director until March 2003 and current Vice 3.4 acre site, adjacent to the Company’s Kentlands Chairman, received a cash consulting fee of $75,886 Square property, from a subsidiary of Chevy Chase during 2003. Additionally, an entity controlled by Bank, for $1,425,000. The Company plans to Mr. Caraci’s son leased space in one of the develop retail and office improvements on this site. Company’s shopping centers during 2003 and four The purchase price of the property was determined different Company shopping centers during 2002. by the average of two independent third party The total rental income for this leased space was appraisals which were contracted, one on behalf of $9,000 and $143,000 during the years ended the Company and one on behalf of the bank (see December 31, 2003 and 2002, respectively. The Note 13-Subsequent Events). leases for the properties under contract during 2002 were assigned to unaffiliated third parties during 9. STOCK OPTION PLAN 2002 and no further rental income was received The Company has established a stock option plan under these leases from the affiliated party during for the purpose of attracting and retaining executive 2003. The Company believes that all of these leases officers and other key personnel. The plan provides have comparable terms to leases that would have for grants of options to purchase a specified number been obtained from unrelated third parties. of shares of common stock. A total of 400,000 Additionally, leasing commission payments of shares were initially available under the plan. The $5,000 and $37,000 for the years ended December plan authorizes the Compensation Committee of the 31, 2003 and 2002, respectively, were made to this Board of Directors to grant options at an exercise affiliated party for procurement of third party tenant price which may not be less than the market value leases at the Company’s properties. of the common stock on the date the option is The Chairman and Chief Executive Officer, the granted. President and the Chief Accounting Officer of the During 1993 and 1994, the Compensation Company are also officers of various members of Committee granted options to purchase a total of The Saul Organization and their management time 180,000 shares (90,000 shares from incentive stock is shared with The Saul Organization. Their annual options and 90,000 shares from nonqualified stock compensation is fixed by the Compensation options) to five Company officers. The options Committee of the Board of Directors. vested 25% per year over four years, have an The Company shares with The Saul Organization on exercise price of $20 per share and a term of ten a pro-rata basis the cost of certain ancillary functions years, subject to earlier expiration upon termination such as computer hardware, software and support of employment. No compensation expense was services and certain direct and indirect recognized as a result of these grants. During the administrative payroll based on management’s year ended December 31, 2003, 93,210 option estimate of usage or time incurred, as applicable. shares were exercised (40,100 incentive stock Also, The Saul Organization subleases office space options and 53,110 nonqualified stock options). to the Company for its corporate headquarters (see As of December 31, 2003, no 1993 and 1994 Note 6-Long-Term Lease Obligations for the terms options remained unexercised. of this lease). The terms of all sharing arrangements On May 23, 2003, the Compensation Committee with The Saul Organization, including payments granted options to purchase a total of 220,000 related thereto, are reviewed periodically by the shares (80,000 shares from incentive stock options Audit Committee of the Board of Directors, which and 140,000 shares from nonqualified stock options) consists entirely of independent directors. Billings to six Company officers (the “2003 Options”). The by the Saul Organization for the Company’s share of 2003 Options vest 25% per year over four years and these ancillary costs and expenses for the years have a term of ten years, subject to earlier expiration ended December 31, 2003, 2002 and 2001, totaled upon termination of employment. The exercise $2,628,000, $2,574,000 and $1,971,000, of which price of $24.91 was the market trading price of the $2,313,000, $2,542,000 and $2,010,000, were paid Company’s common stock at the time of the award. during the years ended December 31, 2003, 2002 28


  • Page 29

    NOTES to Consolidated Financial Statements Effective January 2003, the Company adopted the the fixed rate notes payable is in excess of the fair value method to value employee stock options $357,248,000 carrying value. Management using the prospective transition method specified estimates that the fair value of these fixed rate under SFAS No. 148, “Accounting for Stock-Based notes payable, assuming current long term interest Compensation-Transition and Disclosure.” The rates of approximately 6%, would be approximately Company had no options eligible for valuation prior $386,300,000. to the grant of the 2003 Options. The fair value of the 2003 Options was determined at the time of the 12. COMMITMENTS AND award using the Black-Scholes model, a widely used CONTINGENCIES method for valuing stock based employee compensation, and the following assumptions: Neither the Company nor the Current Portfolio expected volatility was determined using the ten Properties are subject to any material litigation, year trading history of the Company’s common nor, to management’s knowledge, is any material stock (month-end closing prices), an average litigation currently threatened against the Company, expected term outstanding of seven years, expected other than routine litigation and administrative dividend yield throughout the option term of 7% proceedings arising in the ordinary course of and risk-free interest rate of 4% based upon an business. Management believes that these items, assumed 10-year US Treasury rate. Using the Black- individually or in the aggregate, will not have a Scholes model, the Company determined the total material adverse impact on the Company or the fair value of the 2003 Options to be $332,000 and Current Portfolio Properties. recognizes compensation expense monthly during the four years the options vest. Compensation 13. SUBSEQUENT EVENTS expense attributed to the 2003 Options during On January 23, 2004 the Company purchased a the year ended December 31, 2003 was $50,000. 3.4 acre site, adjacent to the Company’s Kentlands The 2003 Options are due to expire May 22, 2013 Square property, from a subsidiary of Chevy Chase and as of December 31, 2003, none of the 2003 Bank, for $1,425,000. The Company plans to Options are vested. develop retail and office improvements on this site. The purchase price of the property was determined 10. NON-OPERATING ITEMS by the average of two independent third party appraisals which were contracted, one on behalf Gain on Sale of Property of the Company and one on behalf of the bank. The gain on sale of property of $182,000 in 2003 represents the gain recognized as a result of a On February 13, 2004 the Company acquired the condemnation of a portion of the land at the 121,000 square foot Publix anchored, Boca Valley Company’s Avenel Business Park property. The Plaza shopping center located in Boca Raton, Florida gain on sale of property of $1,426,000 in 2002 for a purchase price of $17.5 million. The property represents the final proceeds received upon was approximately 90% leased at the date of appeal of the District of Columbia’s purchase acquisition. of the Company’s Park Road property as part On February 13, 2004 the Company closed on of an assemblage of parcels for a neighborhood a new mortgage loan, refinancing a maturing revitalization project. There were no property mortgage loan secured by its Kentlands Square sales in 2001. center. The new loan, in the amount of $10,200,000, matures on January 2019 and requires 11. FAIR VALUE OF FINANCIAL equal monthly interest and principal payments of INSTRUMENTS $65,345 based upon an interest rate of 5.94% and Statement of Financial Accounting Standards No. a 25 year amortization schedule. The loan requires 107, “Disclosure about Fair Value of Financial a balloon principal payment of $6,009,000 at Instruments,” requires disclosure about the fair value maturity. of financial instruments. The carrying values of cash, On February 17, 2004 the Company acquired the accounts receivable, accounts payable and accrued 130,000 square foot Safeway anchored, Countryside expenses are reasonable estimates of their fair value. shopping center located in Loudoun County, Virginia Based upon management’s estimate of borrowing for a purchase price of $29.7 million. The property rates and loan terms currently available to the was approximately 95% leased at the date of Company for fixed rate financing, the fair value of acquisition. 29


  • Page 30

    NOTES to Consolidated Financial Statements 14. DISTRIBUTIONS reinvestment plan that mirrors the Plan, which allows limited partnership interests the opportunity In December 1995, the Company established a to buy additional limited partnership units. Dividend Reinvestment and Stock Purchase Plan (the “Plan”), to allow its stockholders and holders of During 2003, $1.28 per share of the distributions limited partnership interests an opportunity to buy paid represented ordinary dividend income and additional shares of common stock by reinvesting all $0.28 per share represented return of capital to or a portion of their dividends or distributions. The the shareholders. No preferred dividends were Plan provides for investing in newly issued shares of paid during 2003. The following summarizes common stock at a 3% discount from market price distributions paid during the years ended December without payment of any brokerage commissions, 31, 2003, 2002 and 2001, and includes activity in service charges or other expenses. All expenses of the Plan as well as limited partnership units issued the Plan are paid by the Company. The Operating from the reinvestment of unit distributions: Partnership also maintains a similar dividend Total Distributions to Dividend Reinvestments Common Limited Partnership Common Units Discounted (in thousands) Stockholders Unitholders Stock Issued Issued Share Price Distributions during 2003 October 31 $ 6,135 $ 2,023 129,319 2,919 $ 26.38 July 31 6,088 2,023 126,862 2,847 26.67 April 30 6,021 2,020 139,576 3,262 22.88 January 31 5,927 2,020 156,413 3,412 21.49 $ 24,171 $ 8,086 552,170 12,440 Distributions during 2002 October 31 $ 5,839 $ 2,019 136,107 3,110 $ 23.18 July 31 5,785 2,017 135,603 -- 22.94 April 30 5,736 2,017 119,772 -- 22.94 January 31 5,670 2,017 165,390 -- 20.39 $ 23,030 $ 8,070 556,872 3,110 Distributions during 2001 October 31 $ 5,599 $ 2,018 176,319 -- $ 18.62 July 31 5,529 2,017 175,790 -- 18.04 April 30 5,460 2,017 169,753 -- 17.95 January 31 5,410 2,017 123,561 -- 17.07 $ 21,998 $ 8,069 645,423 -- In December 2003, 2002 and 2001, the Board of Directors of the Company authorized a distribution of $0.39 per share payable in January 2004, 2003 and 2002, to holders of record on January 16, 2004, January 17, 2003 and January 17, 2002, respectively. As a result, $6,187,000, $5,927,000 and $5,670,000, were paid to common shareholders on January 30, 2004, January 31, 2003 and January 31, 2002, respectively. Also, $2,023,000, $2,020,000 and $2,017,000, were paid to limited partnership unitholders on January 31, 2004, January 31, 2003 and January 31, 2002 ($0.39 per Operating Partnership unit), respectively. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock dividends and minority interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements. 30


  • Page 31

    NOTES to Consolidated Financial Statements 15. INTERIM RESULTS (UNAUDITED) The following summary presents the results of operations of the Company for the quarterly periods of years 2003, 2002 and 2001. 2003 Calendar Year (In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 23,870 $ 23,226 $ 24,659 $ 26,129 Income before minority interests 6,539 6,016 7,035 7,738(a) Minority interests (2,020) (2,020) (2,023) (2,023) Net income $ 4,519 $ 3,996 $ 5,012 $ 5,715 Net income per share (basic & diluted) $ 0.29 $ 0.26 $ 0.32 $ 0.28 (a) Includes $182 gain on land condemnation at Avenel Business Park 2002 Calendar Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 23,191 $ 22,793 $ 23,471 $ 24,508 Income before minority interests 8,352(b) 6,499 5,503 7,282 Minority interests (2,017) (2,017) (2,017) (2,019) Net income $ 6,335 $ 4,482 $ 3,486 $ 5,263 Net income per share (basic & diluted) $ 0.43 $ 0.30 $ 0.24 $ 0.35 (b) Includes $1,426 gain on sale of Park Road property. 2001 Calendar Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 21,236 $ 20,919 $ 21,533 $ 22,620 Income before minority interests 6,051 5,924 6,289 7,119 Minority interests (2,017) (2,017) (2,017) (2,018) Net income $ 4,034 $ 3,907 $ 4,272 $ 5,101 Net income per share (basic & diluted) $ 0.29 $ 0.28 $ 0.30 $ 0.35 31


  • Page 32

    NOTES to Consolidated Financial Statements 16. BUSINESS SEGMENTS The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies of the segments presented below are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance based upon income from real estate for the combined properties in each segment. Shopping Office Corporate Consolidated Centers Properties and Other Totals 2003 Real estate rental operations: Revenue $ 66,070 $ 31,722 $ 92 $ 97,884 Expenses (12,274) (7,840) -- (20,114) Income from real estate 53,796 23,882 92 77,770 Interest expense & amortization of debt costs -- -- (26,573) (26,573) General and administrative -- -- (6,213) (6,213) Subtotal 53,796 23,882 (32,694) 44,984 Depreciation and amortization (10,429) (7,409) -- (17,838) Gain on property sale -- 182 -- 182 Minority interests -- -- (8,086) (8,086) Net income $ 43,367 $ 16,655 $ (40,780) $ 19,242 Capital investment $ 41,357 $ 6,844 $ -- $ 48,201 Total assets $ 247,511 $ 135,653 $ 88,452 $ 471,616 2002 Real estate rental operations: Revenue $ 61,597 $ 32,261 $ 105 $ 93,963 Expenses (10,675) (7,882) -- (18,557) Income from real estate 50,922 24,379 105 75,406 Interest expense & amortization of debt costs -- -- (25,838) (25,838) General and administrative -- -- (5,537) (5,537) Subtotal 50,922 24,379 (31,270) 44,031 Depreciation and amortization (11,295) (6,526) -- (17,821) Gain on property sale 1,426 1,426 Minority interests -- -- (8,070) (8,070) Net income $ 41,053 $ 17,853 $ (39,340) $ 19,566 Capital investment $ 31,769 $ 17,336 $ -- $ 49,105 Total assets $ 215,692 $ 135,836 $ 37,159 $ 388,687 2001 Real estate rental operations: Revenue $ 58,714 $ 27,427 $ 167 $ 86,308 Expenses (10,324) (6,022) -- (16,346) Income from real estate 48,390 21,405 167 69,962 Interest expense & amortization of debt costs -- -- (25,486) (25,486) General and administrative -- -- (4,335) (4,335) Subtotal 48,390 21,405 (29,654) 40,141 Depreciation and amortization (9,751) (5,007) -- (14,758) Minority interests -- -- (8,069) (8,069) Net income $ 38,639 $ 16,398 $ (37,723) $ 17,314 Capital investment $ 8,220 $ 13,580 $ -- $ 21,800 Total assets $ 192,762 $ 124,529 $ 29,112 $ 346,403 32


  • Page 33

    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Management’s Discussion and Analysis of Financial goal of increasing cash flow. In those circumstances Condition and Results of Operations (MD&A) begins in which leases are not otherwise expiring, with the Company’s primary business strategy to management selectively attempts to increase cash give the reader an overview of the goals of the flow through a variety of means, or in connection Company’s business. This is followed by a discussion with renovations or relocations, recapturing leases of the critical accounting policies that the Company with below market rents and re-leasing at market believes are important to understanding the rates, as well as replacing financially troubled assumptions and judgments incorporated in the tenants. When possible, management also will seek Company’s reported financial results. The next to include scheduled increases in base rent, as well section, beginning on page 35, discusses the as percentage rental provisions, in its leases. Company’s results of operations for the past two The Company’s redevelopment and renovation years. Beginning on page 38, the Company objective is to selectively and opportunistically provides an analysis of its liquidity and capital redevelop and renovate its properties by replacing resources, including discussions of its cash flows, leases with below market rents with strong, traffic- debt arrangements, sources of capital and financial generating anchor stores, such as supermarkets and commitments. Finally, on page 44, the Company drug stores, as well as other desirable local, regional discusses funds from operations, or FFO, which is a and national tenants. The Company’s strategy relative non-GAAP financial measure of performance remains focused on continuing the operating of an equity REIT used by the REIT industry. performance and internal growth of its existing The MD&A should be read in conjunction with Shopping Centers, while enhancing this growth with the Company’s Annual Report on Form 10-K which selective retail redevelopments and renovations. includes the consolidated financial statements and Management believes that attractive acquisition and notes thereto appearing earlier in this annual report development opportunities for investment in existing to shareholders, as well as the subsection captioned and new shopping center properties will continue to “Forward-looking Statements” below. Historic be available from time to time. Management results set forth in Selected Financial Information, believes that the Company’s capital structure will the Financial Statements and Supplemental Data enable it to take advantage of these opportunities included in Item 6 and Item 8 of the Company’s as they arise. In addition, management believes its Report on Form 10-K should not be taken as shopping center expertise should permit it to indicative of the Company’s future operations. optimize the performance of shopping centers once they have been acquired. OVERVIEW Management also believes that opportunities may The Company’s principal business activity is the arise for investment in new office properties. It is ownership, management and development of management’s view that several of the office sub- income-producing properties. The Company’s long- markets in which the Company operates have term objectives are to increase cash flow from attractive supply/demand characteristics. The operations and to maximize capital appreciation of Company will continue to evaluate new office its real estate. development and redevelopment as an integral The Company’s primary operating strategy is to part of its overall business plan. focus on its community and neighborhood shopping Although it is management’s present intention to center business and to operate its properties to concentrate future acquisition and development achieve both cash flow growth and capital activities on community and neighborhood appreciation. Management believes there is shopping centers and office properties in the potential for growth in cash flow as existing leases Washington, DC/Baltimore metropolitan area, the for space in the Shopping Centers expire and are Company may, in the future, also acquire other renewed, or as newly available or vacant space is types of real estate in other areas of the country as leased. The Company intends to renegotiate leases opportunities present themselves. While the where possible and seek new tenants for available Company may diversify in terms of property space in order to maximize this potential for locations, size and market, the Company does not increased cash flow. As leases expire, management set any limit on the amount or percentage of expects to revise rental rates, lease terms and Company assets that may be invested in any one conditions, relocate existing tenants, reconfigure property or any one geographic area. In January tenant spaces and introduce new tenants with the 2004, the Company acquired a 3.4 acre site, 33


  • Page 34

    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations adjacent to the Company’s Kentlands Square estimated useful lives of 35 to 50 years. Intangibles property, where it plans to develop retail and office associated with acquired in-place leases are improvements. In February 2004, the Company amortized over the remaining base lease terms. acquired a 121,000 square foot neighborhood If there is an event or change in circumstance that shopping center in Boca Raton, Florida anchored indicates an impairment in the value of a real estate by Publix, the dominant grocer in South Florida investment property, the Company assesses an in addition to another February 2004 acquisition impairment in value by making a comparison of of a 130,000 square foot grocery anchored the current and projected operating cash flows of neighborhood shopping center in Loudoun the property over its remaining useful life, on an County, Virginia. undiscounted basis, to the carrying amount of that property. If such carrying amount is greater than CRITICAL ACCOUNTING POLICIES the estimated projected cash flows, the Company The Company’s accounting policies are in would recognize an impairment loss equivalent to conformity with accounting principles generally an amount required to adjust the carrying amount accepted in the United States (“GAAP”). The to its estimated fair market value. preparation of financial statements in conformity When incurred, the Company capitalizes the cost of with GAAP requires management to use judgment improvements that extend the useful life of property in the application of accounting policies, including and equipment and all repair and maintenance making estimates and assumptions. These expenditures are expensed. judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets Interest, real estate taxes and other carrying costs and liabilities at the dates of the Company’s financial are capitalized on projects under construction. statements and the reported amounts of revenue Once construction is substantially complete and the and expenses during the reporting periods. If assets are placed in service, rental income, direct judgment or interpretation of the facts and operating expenses, and depreciation associated circumstances relating to various transactions had with such properties are included in current been different, it is possible that different accounting operations. policies would have been applied resulting in a In the initial rental operations of development different presentation of the financial statements. projects, a project is considered substantially Below is a discussion of accounting policies which complete and available for occupancy upon the Company considers critical in that they may completion of tenant improvements, but no later require judgment in their application or require than one year from the cessation of major estimates about matters which are inherently construction activity. Substantially completed uncertain. Additional discussion of accounting portions of a project are accounted for as separate policies which the Company considers significant, projects. Depreciation is calculated using the including further discussion of the critical accounting straight-line method and estimated useful lives of 35 policies described below, can be found in the notes to 50 years for base buildings and up to 20 years for to the Consolidated Financial Statements. certain other improvements. Leasehold Real Estate Investments improvements are amortized over the lives of the Real estate investment properties are stated at related leases using the straight-line method. historic cost basis less depreciation. Management Lease Acquisition Costs believes that these assets have generally appreciated Certain initial direct costs incurred by the Company in value and, accordingly, the aggregate current in negotiating and consummating successful leases value exceeds their aggregate net book value and are capitalized and amortized over the initial base also exceeds the value of the Company’s liabilities term of the leases. Capitalized leasing costs consist as reported in these financial statements. Because of commissions paid to third party leasing agents these financial statements are prepared in as well as internal direct costs such as employee conformity with GAAP, they do not report the compensation and payroll related fringe benefits current value of the Company’s real estate assets. directly related to time spent performing leasing The purchase price of real estate assets acquired is related activities. Such activities include evaluating allocated between land, building and in-place prospective tenants’ financial condition, evaluating acquired leases based on the relative fair values of and recording guarantees, collateral and other the components at the date of acquisition. Buildings security arrangements, negotiating lease terms, are depreciated on a straight-line basis over their preparing lease documents and closing transactions. 34


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Revenue Recognition opinion of management, collection of the receivable Rental and interest income is accrued as earned is doubtful. In addition to rents due currently, except when doubt exists as to collectibility, in accounts receivable include amounts representing which case the accrual is discontinued. When rental minimum rental income accrued on a straight-line payments due under leases vary from a straight-line basis to be paid by tenants over the remaining term basis because of free rent periods or scheduled rent of their respective leases. Reserves are established increases, income is recognized on a straight-line with a charge to income for tenants whose rent basis throughout the initial term of the lease. payment history or financial condition casts doubt Expense recoveries represent a portion of property upon the tenant’s ability to perform under its lease operating expenses billed to tenants, including obligations. common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are Legal Contingencies recognized in the period when the expenses are The Company is subject to various legal proceedings incurred. Rental income based on a tenant’s and claims that arise in the ordinary course of revenues, known as percentage rent, is accrued business. These matters are generally covered by when a tenant reports sales that exceed a specified insurance. While the resolution of these matters breakpoint. cannot be predicted with certainty, the Company believes the final outcome of such matters will not Allowance for Doubtful Accounts - have a material adverse effect on the financial Current and Deferred Receivables position or the results of operations. Once it has Accounts receivable primarily represent amounts been determined that a loss is probable to occur, the currently due from tenants in accordance with the estimated amount of the loss is recorded in the terms of the respective leases. Receivables are financial statements. Both the amount of the loss reviewed monthly and reserves are established with and the point at which its occurrence is considered a charge to current period operations when, in the probable can be difficult to determine. RESULTS OF OPERATIONS REVENUE For the year ended December 31, Percentage Change (in thousands) 2003 2002 2001 2003 to 2002 2002 to 2001 Revenue Base rent $ 78,167 $ 75,699 $ 69,662 3.3% 8.7% Expense recoveries 14,438 12,680 11,456 13.9% 10.7% Percentage rent 1,695 1,850 2,113 (8.4%) (12.4)% Other 3,584 3,734 3,077 (4.0%) 21.4% Total $ 97,884 $ 93,963 $ 86,308 4.2% 8.9% Base rent This increase was partially offset by an The increase in base rent for 2003 versus 2002 was approximately $1,920,000 decrease in base rent primarily attributable to leases in effect at recently at 601 Pennsylvania Avenue resulting from the acquired and developed properties: Ashburn Village departure of a major tenant whose lease expired IV, Kentlands Square and Olde Forte Village during the first quarter of 2003. The major tenant (approximately $1,890,000), the continued lease-up was also paying higher rent under the terms of a of space at Washington Square (approximately short-term lease extension during the prior year, $1,200,000), and releasing space at several other increasing the magnitude of the variance between properties at rental rates higher than expiring rental periods. By December 31, 2003, the former tenant’s rates. space was re-leased and 601 Pennsylvania Avenue was 100% leased. 35


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations The increase in base rent for 2002 versus 2001 was Percentage rent primarily attributable to leases in effect at recently Percentage rent is rental income calculated on the acquired and developed properties: Washington portion of a tenant’s revenues that exceed a Square, Ashburn Village III & IV, Crosstown Business specified breakpoint. The decrease in percentage Center and French Market (40% of increase), a rent for 2003 versus 2002 was primarily attributable major tenant paying higher rent under the terms of to reduced sales reported by the grocery store and a a short-term lease extension at 601 Pennsylvania pad building tenant at Beacon Center (27% of Avenue (30% of increase), and releasing space at decrease) and a drug store tenant at each of several other properties at increased rental rates Southside Plaza (27% of decrease) and Thruway (30% of increase). (20% of decrease) paying higher minimum rent in lieu of percentage rent. Expense recoveries Expense recoveries represent a portion of property The decrease in percentage rent for 2002 versus operating expenses billed to tenants, including 2001 was primarily attributable to the positioning of common area maintenance, real estate taxes and Lexington Mall for redevelopment (40% of decrease) other recoverable costs. The increase in expense and lower sales revenue over the prior year reported recoveries for 2003 versus 2002 was primarily by a restaurant tenant at French Market (20% of attributable to income resulting from billings to decrease). tenants for their share of increased snow removal Other income expenses during 2003 (25% of increase) and the Other income consists primarily of parking income commencement of operations at the newly acquired at three of the Office Properties, kiosk leasing, and developed properties (28% of increase). temporary leases and payments associated with early The increase in expense recoveries for 2002 versus termination of leases. The decrease in other income 2001 was primarily attributable to the for 2003 versus 2002 resulted primarily from a commencement of operations at the newly $365,000 decrease in lease termination payments developed and redeveloped properties (45% of compared to the prior year. The increase in other increase), while the balance of the increase resulted income for 2002 versus 2001 resulted primarily from from improved occupancy and increases in a $500,000 increase in lease termination payments recoverable property tax expense. compared to the prior year, approximately half of which was recognized at Washington Square, and a $300,000 increase in parking income due to the lease-up of office space at Washington Square. OPERATING EXPENSES For the year ended December 31, Percentage Change (in thousands) 2003 2002 2001 2003 to 2002 2002 to 2001 Operating expenses: Property operating expenses $ 11,363 $ 10,115 $ 8,503 12.3% 19.0% Provision for credit losses 171 421 617 (59.4)% (31.8)% Real estate taxes 8,580 8,021 7,226 7.0% 11.0% Interest expense 25,772 25,113 24,920 2.6% 0.8% Amortization of deferred debt 801 725 566 10.5% 28.1% Depreciation and amortization 17,838 17,821 14,758 0.1% 20.8% General and administrative 6,213 5,537 4,335 12.2% 27.7% Total $ 70,738 $ 67,753 $ 60,925 4.4% 11.2% 36


  • Page 37

    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Property operating expenses Interest expense Property operating expenses consist primarily of The increase in interest expense for 2003 versus repairs and maintenance, utilities, payroll, insurance 2002 resulted primarily from the placement of a and other property related expenses. The increase new $42.5 million, 15-year, 6.01% fixed rate in property operating expenses for 2003 versus 2002 mortgage replacing Washington Square’s resulted primarily from an increase in snow removal construction loan which charged interest at a expense of $650,000 due to unseasonably severe variable rate averaging 3.5% during the prior year. winter weather primarily in the Mid-Atlantic region. The increase was partially offset by interest expense The Company also paid increased property insurance savings from lower interest rates on the Company’s premiums of approximately $190,000 during 2003. variable rate debt and the repayment of amounts In addition, approximately $130,000 of the increase borrowed under the revolving credit agreement in resulted from the settlement of a dispute with a November 2003 using proceeds from the preferred former tenant at Crosstown Business Park and stock offering. related legal expenses. The increase in interest expense for 2002 versus The increase in property operating expenses for 2001 resulted from the net of increased interest 2002 versus 2001 primarily resulted from the paid on permanent fixed rate financing for recently commencement of operations at Washington Square developed and redeveloped properties, offset by (40% of increase) and an increase in snow removal interest expense savings from lower interest rates expenses sustained as a result of two snow storms on the Company’s variable rate debt. impacting many of the Company’s properties in December 2002 (25% of increase). Amortization of deferred debt expense The increase in amortization of deferred debt Provision for credit losses expense for 2003 versus 2002 resulted primarily The provision for credit losses decreased for 2003 from the full year’s amortization of additional loan versus 2002 primarily due to the absence of any costs in 2003 associated with refinancing the significant tenant bankruptcy or collection difficulties Company’s revolving credit agreement during the in 2003 as compared to 2002 when the Company third quarter of 2002. established reserves for two office tenants in The increase in amortization of deferred debt bankruptcy and a reserve for a rent dispute with expense for 2002 versus 2001 resulted from the another office tenant. amortization of additional loan costs associated with The provision for credit losses decreased for 2002 extending the maturity of the Washington Square versus 2001 primarily because of a smaller number construction loan to January 2003 and costs of tenant bankruptcies in 2002 versus 2001. The associated with refinancing the Company’s revolving credit loss provision in 2001 was elevated due credit agreement during the third quarter of 2002. primarily to three retail tenants and an office tenant in bankruptcy. Depreciation and amortization Depreciation and amortization expense was virtually Real estate taxes unchanged from 2002 to 2003. The Company The increase in real estate taxes for 2003 recorded new depreciation expense on versus 2002 was primarily attributable to the developments and acquisitions placed in service commencement of operations at the newly acquired during 2002 and 2003, which was offset by a and developed properties (40% of increase) and $1,311,000 charge-off recorded in 2002, resulting increased real estate taxes assessed at 601 from assets retired based upon a comprehensive Pennsylvania Avenue (30% of increase). review of real estate asset records and the Company’s revision of the assets’ estimated The increase in real estate taxes for 2002 versus useful lives. 2001 was primarily attributable to the commencement of operations at Washington Square (34% of increase) and increased taxes at the Company’s two Washington, DC office properties (36% of increase). 37


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations The increase in depreciation and amortization Company’s results of operations. These provisions expense for 2002 versus 2001 resulted primarily include upward periodic adjustments in base rent from assets retired based upon a comprehensive due from tenants, usually based on a stipulated review of real estate asset records and the increase and to a lesser extent on a factor of the Company’s revision of the assets’ estimated useful change in the consumer price index, commonly lives (50% of increase). The balance of the change referred to as the CPI. reflects increased depreciation expense on Substantially all of the Company’s properties are developments and acquisitions placed in service leased to tenants under long-term, triple-net leases. during the past twelve months. Triple-net leases tend to reduce the Company’s General and administrative exposure to rising property expenses due to General and administrative expense consists of inflation. Inflation and increased costs may have payroll, administrative and other overhead expenses. an adverse impact on the Company’s tenants if The increase in general and administrative expense increases in their operating expenses exceed for 2003 versus 2002 was primarily attributable to increases in their revenue. increased payroll and employment expenses (57% of increase). Approximately one-half of the LIQUIDITY AND CAPITAL RESOURCES increased payroll expense resulted from staffing for Cash and cash equivalents were $45,244,000 and the Company’s evaluation of property acquisitions. $1,309,000 at December 31, 2003 and 2002, The increase in general and administrative expense respectively. The changes in cash and cash resulted also from increased corporate insurance equivalents during the years ended December 31, premiums (17% of increase) and increased data 2003 and 2002 were attributable to operating, processing expenses (14% of increase). investing and financing activities, as described The increase in general and administrative expense below. for 2002 versus 2001 was primarily attributable to increased corporate office rent (40% of increase), Year Ended December 31, the write-off of abandoned property acquisition (in thousands) 2003 2002 costs (15% of increase), increased payroll (15% of Cash provided by increase) and increased legal expense associated operating activities $ 36,373 $ 37,499 with compliance with the Sarbanes-Oxley Act of Cash used in 2002 (10% of increase). investing activities (48,131) (49,105) Gain on Sale of Property Cash provided by financing activities 55,693 11,110 The Company recognized a gain on the sale of real estate of $182,000 in 2003 and $1,426,000 Increase (decrease) in 2002. The 2003 gain resulted from the State in cash $ 43,935 $ (496) of Maryland’s condemnation and purchase of a piece of vacant land at Avenel Business Park for improvement of an interchange on I-270, adjacent Operating Activities to the property. The 2002 gain resulted from the Cash provided by operating activities for the years 1999 District of Columbia condemnation and ended December 31, 2003 and 2002 was purchase of the Company’s Park Road property as $36,373,000 and $37,499,000, respectively, and part of an assemblage of parcels for a neighborhood represents, in each year, cash received primarily revitalization project. The Company disputed the from rental income, plus other income, less property original purchase price awarded by the District. operating expenses, normal recurring general and The 2002 gain represents additional net proceeds administrative expenses and interest payments on the Company was awarded upon settlement of debt outstanding. the dispute. Investing Activities Cash used in investing activities for the years ended Impact of Inflation December 31, 2003 and 2002 was $48,131,000 Inflation has remained relatively low and has had a and $49,105,000, respectively, and primarily reflects minimal impact on the operating performance of the acquisition of properties (the Shops at Monocacy the Company’s portfolio; however, substantially all land parcel, and Olde Forte Village in 2003 and of the Company’s leases contain provisions designed Broadlands Village and Lansdowne land parcels, to mitigate the adverse impact of inflation on the 38


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Clarendon Center and Kentlands Square in 2002), Cash provided by financing activities for the year the construction of Broadlands Village shopping ended December 31, 2002 primarily reflects: center, tenant improvements and construction in • $53,547,000 of proceeds received from notes progress during those years. payable incurred during the year; and Management anticipates that during the coming • $14,574,000 of proceeds received from the year the Company may: i) redevelop certain of the issuance of common stock under the dividend Current Portfolio Properties, ii) develop additional reinvestment program and from the exercise of freestanding outparcels or expansions within stock options, and from the issuance of convertible certain of the Shopping Centers, iii) acquire existing limited partnership interests in the Operating neighborhood and community shopping centers Partnership; and/or office properties, and iv) develop new which was partially offset by: shopping center or office sites. Acquisition and development of properties are undertaken only • the repayment of borrowings on notes after careful analysis and review, and management’s payable totaling $24,624,000; determination that such properties are expected to • distributions made to common stockholders provide long-term earnings and cash flow growth. and holders of convertible limited partnership During the coming year, any developments, units in the Operating Partnership during the expansions or acquisitions are expected to be year totaling $31,100,000; and funded with the net proceeds of the Company’s • payments of $1,287,000 for refinancing the November 2003 $100 million preferred stock Company’s line of credit and extending the offering described under “Preferred Stock Issue” Washington Square construction loan. below, bank borrowings from the Company’s credit Liquidity Requirements line, construction financing, proceeds from the Short-term liquidity requirements consist primarily operation of the Company’s dividend reinvestment of normal recurring operating expenses and capital plan or other external capital resources available to expenditures, debt service requirements (including the Company. debt service relating to additional and replacement Financing Activities debt), distributions to common and preferred Cash provided by financing activities for the years stockholders, distributions to unit holders and ended December 31, 2003 and 2002, was amounts required for expansion and renovation $55,693,000 and $11,110,000, respectively. Cash of the Current Portfolio Properties and selective provided by financing activities for the year ended acquisition and development of additional December 31, 2003 primarily reflects: properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute • $128,134,000 of proceeds received from notes to its stockholders at least 90% of its “real estate payable incurred during the year; investment trust taxable income,” as defined in the • $96,327,000 of proceeds from the issuance of Code. The Company expects to meet these short- $100,000,000 Series A 8% Cumulative term liquidity requirements (other than amounts Redeemable Preferred Stock after netting required for additional property acquisitions and issuance costs of $3,673,000, and developments) through cash provided from • $16,018,000 of proceeds received from the operations and its existing line of credit. The issuance of common stock under the dividend Company anticipates that any additional property reinvestment program and from the exercise of acquisitions and developments in the next 12 stock options, and from the issuance of convertible months will be funded with the remaining net limited partnership interests in the Operating proceeds of the Company’s November 2003 $100 Partnership; million preferred stock offering described under which was partially offset by: “Preferred Stock Issue” below, future long-term secured and unsecured debt and the public or • the repayment of borrowings on notes payable private issuance of common or preferred equity or totaling $151,629,000; units, each of which may be initially funded with • distributions made to common stockholders and the Company’s existing line of credit. holders of convertible limited partnership units in the Operating Partnership during the year totaling $32,257,000; and • payments of $900,000 for financing costs of three mortgage loans during 2003. 39


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Long-term liquidity requirements consisted primarily debt or equity securities and proceeds from the sales of obligations under long-term debt and dividends of properties. Borrowings may be at the Saul paid to preferred shareholders. The Company Centers, Operating Partnership or Subsidiary anticipates that long-term liquidity requirements will Partnership level, and securities offerings may also include amounts required for property include (subject to certain limitations) the issuance acquisitions and developments. It expects to meet of additional limited partnership interests in the long-term liquidity requirements through cash Operating Partnership which can be converted provided from operations, long-term secured and into shares of Saul Centers common stock. The unsecured borrowings, private or public offerings of availability and terms of any such financing will depend upon market and other conditions. Contractual Payment Obligations As of December 31, 2003, the Company had unfunded contractual payment obligations of approximately $21.3 million due within the next 12 months. The table below specifies the total contractual payment obligations as of December 31, 2003. (in thousands) Payments Due By Period Less than After Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years Notes Payable $ 357,248 $ 15,741 $ 19,546 $ 22,778 $ 299,183 Operating Leases 1 11,921 164 328 328 11,101 Corporate Headquarters Lease 1 4,785 538 1,125 1,194 1,928 Development Obligations 4,445 4,445 -- -- -- Contractual Operating Obligations 407 407 -- -- -- Total Contractual Cash Obligations $ 378,806 $ 21,295 $ 20,999 $ 24,300 $ 312,212 1 See Note 6 to Consolidated Financial Statements. As of December 31, 2003, the scheduled maturities, Management believes that the Company’s capital including scheduled principal amortization, of all resources, which at December 31, 2003 included debt for years ended December 31, are as follows: cash balances of $45 million and borrowing availability of $125 million on its revolving line of Debt Maturity Schedule credit, ($75,000,000 for general corporate use and $50,000,000 for qualified future acquisitions), will be (In thousands) sufficient to meet its liquidity needs for the foreseeable future. 2004 * $ 15,741 2005 9,397 Preferred Stock Issue On July 16, 2003, the Company filed a shelf 2006 10,149 registration statement (the “Shelf Registration 2007 10,963 Statement”) with the SEC relating to the future offering of up to an aggregate of $100 million 2008 11,815 of preferred stock and depositary shares. On Thereafter 299,183 November 5, 2003, the Company sold 3,500,000 depositary shares, each representing 1/100th of Total $ 357,248 a share of 8% Series A Cumulative Redeemable * A total of $7,112 of the 2004 maturities was refinanced in Preferred Stock. The underwriters exercised an February 2004. The new loan expires in 2019. over-allotment option, purchasing an additional 500,000 depositary shares on November 26, 2003. 40


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations The depositary shares may be redeemed, in whole or CAPITAL STRATEGY AND in part, at the $25.00 liquidation preference at the FINANCING ACTIVITY Company’s option on or after November 5, 2008. The depositary shares will pay an annual dividend of As a general policy, the Company intends to $2.00 per share, equivalent to 8% of the $25.00 maintain a ratio of its total debt to total asset value liquidation preference. The first dividend, paid on of 50% or less and to actively manage the January 15, 2004, was for less than a full quarter and Company’s leverage and debt expense on an covered the period from November 5 through ongoing basis in order to maintain prudent coverage December 31, 2003. The Series A preferred stock of fixed charges. Asset value is the aggregate fair has no stated maturity, is not subject to any sinking market value of the Current Portfolio Properties and fund or mandatory redemption and is not any subsequently acquired properties as reasonably convertible into any other securities of the Company. determined by management by reference to the Investors in the depositary shares generally have no properties’ aggregate cash flow. Given the voting rights, but will have limited voting rights if Company’s current debt level, it is management’s the Company fails to pay dividends for six or more belief that the ratio of the Company’s debt to total quarters (whether or not declared or consecutive) asset value was below 50% as of December 31, and in certain other events. 2003. Net proceeds from the issuance were approximately The organizational documents of the Company do $96.3 million and initially were used to fully repay not limit the absolute amount or percentage of $52.5 million outstanding under the Company’s indebtedness that it may incur. The Board of revolving credit facility and the remaining balance Directors may, from time to time, reevaluate the was invested in short-term certificates of deposit. Company’s debt capitalization policy in light of current economic conditions, relative costs of Dividend Reinvestments capital, market values of the Company property In December 1995, the Company established a portfolio, opportunities for acquisition, development Dividend Reinvestment and Stock Purchase Plan (the or expansion, and such other factors as the Board of “Plan”) to allow its common stockholders and Directors then deems relevant. The Board of holders of limited partnership interests an Directors may modify the Company’s debt opportunity to buy additional shares of common capitalization policy based on such stock by reinvesting all or a portion of their a reevaluation without shareholder approval and dividends or distributions. The Plan provides for consequently, may increase or decrease the investing in newly issued shares of common stock at Company’s debt to total asset ratio above or below a 3% discount from market price without payment 50% or may waive the policy for certain periods of of any brokerage commissions, service charges or time. The Company selectively continues to other expenses. All expenses of the Plan are paid by refinance or renegotiate the terms of its outstanding the Company. The Company issued 552,170 and debt in order to achieve longer maturities, and 556,872 shares under the Plan at a weighted obtain generally more favorable loan terms, average discounted price of $24.18 and $22.25 per whenever management determines the financing share during the years ended December 31, 2003 environment is favorable. and 2002, respectively. Additionally, the Operating Partnership issued 12,440 and 3,110 limited partnership units under a dividend reinvestment plan mirroring the Plan at a weighted average discounted price of $24.18 and $22.25 per unit during the years ended December 31, 2003 and 2002, respectively. 41


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations The following is a summary of notes payable as of December 31, 2003 and 2002: Notes Payable (Dollars in thousands) December 31, Interest Scheduled 2003 2002 Rate * Maturity * Fixed Rate Mortgages: $ 132,859 (a) $ 135,641 7.67 % Oct 2012 98,103 (b) 93,044 8.00 % Dec 2011 29,800 (c) -- 5.94 % Jan 2019 41,982 (d) -- 6.01 % Feb 2018 34,017 (e) 34,830 7.88 % Jan 2013 13,375 (f) 13,667 8.33 % Jun 2015 -- (g) 9,797 6.88 % May 2004 7,112 (h) 7,640 8.18 % Feb 2004 Total Fixed Rate 357,248 294,619 7.48 % 9.6 Years Variable Rate Loans: Construction Loan -- (i) 39,374 -- -- Line of Credit -- (j) 46,750 LIBOR plus 1.625% Aug 2005 Total Variable Rate -- 86,124 -- -- Total Notes Payable $ 357,248 $ 380,743 7.48 % 9.6 Years *Interest rate and scheduled maturity data presented for December 31, 2003. Totals computed using weighted averages. (a) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25-year amortization schedule and a balloon payment of $96,300,000 at loan maturity. Principal of $2,782,000 was amortized during 2003. (b) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997, most recently, an $8 million increase in September 2003. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowings rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23-year amortization schedule and a balloon payment of $63,153,000 at loan maturity. Principal of $2,941,000 was amortized during 2003. (c) The loan, consisting of two notes dated December 2003, is currently collateralized by two shopping centers, Broadlands Village and The Glen and requires equal monthly principal and interest payments of $191,000 based upon a 25-year amortization schedule and a balloon payment of $17,706,000 at loan maturity. Payments commenced February 2004. The loan was increased by $10,200,000 in February 2004 (see (h) below). (d) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5-year amortization schedule and a balloon payment of $27,872,000 at loan maturity. Principal of $518,000 was amortized during 2003. The proceeds from this loan were used to pay-off and retire the construction loan on this property in January 2003 (see (i) below). (e) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25-year amortization schedule and a balloon payment of $22,808,000 at loan maturity. Principal of $813,000 was amortized during 2003. (f) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22-year amortization schedule and a balloon payment of $7,630,000 at loan maturity. Principal of $292,000 was amortized during 2003. (g) The loan, which was collateralized by The Glen shopping center and a corporate guarantee, was paid off and retired in December 2003 (see (c) above). (h) The loan was collateralized by Kentlands Square shopping center and requires monthly principal and interest payments based upon a 15-year amortization schedule. Principal of $528,000 was amortized during 2003. This loan was repaid and retired in February 2004 with additional loan proceeds added to the $29,800,000, 5.94% loan (see (c) above) (See Note 13-Subsequent Events). (i) The $42,000,000 Washington Square construction loan was paid off and retired in January 2003 through a permanent financing (see (d) above). (j) The loan is an unsecured revolving credit facility totaling $125,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. There were no 42 outstanding borrowings as of December 31, 2003. Monthly payments, if applicable, are interest only and will vary depending upon the amount outstanding and the applicable interest rate for any given month.


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Notes payable at December 31, 2003 and 2002, Also in December 2003, the Company refinanced a totaling $166,876,000 and $266,392,000, $9.6 million mortgage secured by The Glen respectively, are guaranteed by members of The Saul shopping center with a new $12.35 million, 15-year Organization. The Company’s interest expense mortgage. In August 2003, the Company executed coverage ratio (calculated as operating income an $8 million increase to a fixed-rate mortgage loan before interest expense, amortization of deferred collateralized by Ashburn Village shopping center. debt expense and depreciation and amortization, During 2002, the Company closed a new $125 divided by interest expense) was 2.78 for both 2003 million unsecured revolving credit facility to provide and 2002. The December 31, 2003 and 2002 working capital and funds for redevelopments and depreciation adjusted cost of properties acquisitions. The line has a three-year term and collateralizing the mortgage notes payable totaled provides for an additional one-year extension at the $295,311,000 and $280,051,000, respectively. Company’s option. The new line is a $55 million expansion of a prior revolver. The additional The Company’s credit facility requires the Company availability under the new facility enables the and its subsidiaries to maintain certain financial Company to access capital for future purchases of covenants. The Company’s material covenants operating properties as opportunities arise. As of require the Company, on a consolidated basis, to: December 31, 2003, there were no amounts • limit the amount of debt so as to maintain a gross outstanding under the line. Interest is currently asset value in excess of liabilities of at least $250 calculated using LIBOR plus 1.625%. Loan million; availability is determined by operating income from • limit the amount of debt as a percentage of gross the Company’s unencumbered properties, which, as asset value (leverage ratio) to less than 60%; of December 31, 2003, allowed the Company to • limit the amount of debt so that interest coverage borrow $75 million for general corporate use. An will exceed 2.1 to 1 on a trailing four quarter basis; additional $50 million is available for funding and working capital and operating property acquisitions • limit the amount of debt so that interest, supported by the unencumbered properties’ internal scheduled principal amortization and preferred cash flow growth and operating income of future dividend coverage exceeds 1.6 to 1. acquisitions. As of December 31, 2003, the Company was in compliance with all such covenants. Off-Balance Sheet Arrangements The Company has no off-balance sheet In January 2003, the Company replaced its $42 arrangements that are reasonably likely to have million construction loan used to finance the a current or future material effect on the Company’s building of Washington Square with a $42.5 million, financial condition, revenue or expenses, results of 15-year mortgage. In March 2003, the Company operations, liquidity, capital expenditures or capital executed a $15 million loan to finance the resources. construction of Broadlands Village shopping center, which was paid off in December 2003 using proceeds from a $17.45 million, 15-year mortgage. 43


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations FUNDS FROM OPERATIONS In 2003, the Company reported Funds From Operations (FFO) of $43,740,000 representing a 0.7% decrease from 2002 FFO of $44,031,000. The following table presents a reconciliation from net income available to common stockholders to FFO for the periods indicated: (In thousands) For the Year Ended December 31, 2003 2002 2001 2000 1999 Net income available to common stockholders $17,998 $19,566 $17,314 $14,045 $13,297 Subtract: Gain on sale of property (182) (1,426) -- -- (553) Add: Minority interests 8,086 8,070 8,069 8,069 7,923 Depreciation and amortization of real property 17,838 17,821 14,758 13,534 12,163 FFO 1 $43,740 $44,031 $40,141 $35,648 $32,830 Average shares and units used to compute FFO per share 20,790 20,059 19,383 18,796 18,148 1 FFO is a widely accepted non-GAAP financial measure of operating performance for REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net income, computed in accordance with GAAP, plus minority interests, extraordinary items and real estate depreciation and amortization, excluding gains or losses from property sales. 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 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 supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. ACQUISITIONS, REDEVELOPMENTS Olde Forte Village AND RENOVATIONS In July 2003, the Company acquired Olde Forte Village, a 161,000 square-foot neighborhood The Company has been selectively involved in shopping center located in Fort Washington, acquisition, redevelopment and renovation activities. Maryland. The center is anchored by a newly It continues to evaluate the acquisition of land constructed 58,000 square-foot Safeway parcels for retail and office development and supermarket which opened in March 2003, acquisitions of operating properties for opportunities relocating from a smaller store within the center. to enhance operating income and cash flow growth. The center contains approximately 50,000 square The Company also continues to take advantage of feet of vacant space, consisting primarily of the redevelopment, renovation and expansion former Safeway space, which the Company plans opportunities within the portfolio, as demonstrated to redevelop in 2004. The Company has filed for by its recent activities at Thruway and Ashburn permits and plans to begin redevelopment in March Village. The following describes the acquisitions, 2004. The Company expects total redevelopment redevelopments and renovations which affected the costs, including the initial property acquisition cost, Company’s results of operations in 2002 and 2003. to be approximately $22 million and projects completion of the redevelopment in the fall of 2004. Olde Forte Village is currently 67% leased. 44


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations Broadlands Village Kentlands Square The Company purchased 24 acres of undeveloped In January 2004, the Company purchased 3.4 acres land in the Broadlands section of the Dulles of undeveloped land adjacent to its 109,000 square Technology Corridor of Loudoun County, Virginia in foot Kentlands Square shopping center in April 2002. Broadlands is a 1,500 acre planned Gaithersburg, Maryland. The Company plans to community consisting of 3,500 residences, build a 41,300 square foot retail/office property approximately half of which are constructed and comprised of 24,400 square feet of in-line retail currently occupied. In October 2003, the Company space and 16,900 square feet of professional office completed construction of the first phase of the suites. Construction is expected to commence in Broadlands Village shopping center. The 58,000 spring 2004. Development costs, including the land square foot Safeway supermarket opened in October acquisition, are projected to total $7.1 million, and 2003 with a pad building and many in-line small substantial completion of the project is scheduled for shops also opening in the fourth quarter of 2003. the fall of 2004. The 105,000 square foot first phase is 100% leased. Construction of a 30,000 square foot second phase Countryside is planned to commence in March 2004. The In mid-February 2004, the Company completed the Company expects total development costs of both acquisition of the 130,000 square foot Safeway- phases, including the land acquisition, to be anchored Countryside shopping center, its fourth approximately $22 million and projects substantial neighborhood shopping center investment in completion of phase two of the center in the fall of Loudoun County, Virginia. The center is 95% leased 2004. The second phase is currently 12% pre-leased. and was acquired for a purchase price of $29.7 million. Thruway During the fourth quarter of 2003, the Company Boca Valley Plaza commenced a 15,725 square foot expansion of the The Company added Publix as one of its grocery Thruway shopping center located in Winston Salem, tenants with the February 2004 acquisition of Boca North Carolina. The new development includes Valley Plaza in Boca Raton, Florida. Boca Valley Plaza replacing a former 6,100 square foot single-tenant is a 121,000 square foot neighborhood shopping pad building with a new multi-tenant building. center on U.S. Highway 1 in an attractive Leases have been executed for 52% of the new demographic area of South Florida. The center, space, including Ann Taylor Loft and Chico’s. This constructed in 1988, is 90% leased and anchored $2.5 million expansion is projected to be by a 42,000 square foot Publix supermarket. The substantially completed in the spring of 2004. property was acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million Shops at Monocacy mortgage. In November 2003, the Company acquired 13 acres of undeveloped land in Frederick, Maryland at the southeast corner of Maryland Route 26 and Monocacy Boulevard. Construction commenced in early December of a 102,000 square foot shopping center to be anchored by a 57,000 square foot Giant grocery store. The Company expects total development costs, including the land acquisition, to be approximately $21.3 million and projects substantial completion of the center in the fall of 2004. The property is currently 63% pre-leased. 45


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    M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S of Financial Condition & Results of Operations PORTFOLIO LEASING STATUS The following chart sets forth certain information regarding our properties for the periods indicated. Total Properties Total Square Footage Percent Leased Shopping Office Shopping Office Shopping Office As of December 31, Centers Centers Centers 2001 28 5 4,956,000 1,203,000 94.3% 90.4% 2002 29 5 5,069,000 1,203,000 93.9% 92.9% 2003 31 5 5,328,000 1,204,000 94.1% 95.8% The improvement in the portfolio’s leasing • risks related to the Company’s substantial percentage in 2003 resulted primarily from relationships with members of The Saul improved leasing in the Office Properties at 601 Organization; Pennsylvania Avenue, Washington Square and • risks of financing, such as increases in interest Avenel Business Park. rates, restrictions imposed by the Company’s debt, the Company’s ability to meet existing financial The improvement in the portfolio’s 2002 leasing covenants and the Company’s ability to percentage resulted from increased leasing at the consummate planned and additional financings on Ashburn Village and Washington Square acceptable terms; developments, offset in part by decreased leasing at • risks related to the Company’s development Lexington Mall and 601 Pennsylvania Avenue. The activities; Company is intentionally not renewing leases at • risks that the Company’s growth will be limited if Lexington Mall in order to redevelop the shopping the Company cannot obtain additional capital; center and a major lease with a US Government • risks that planned and additional acquisitions or tenant expired at 601 Pennsylvania Avenue. redevelopments may not be consummated, or if they are consummated, that they will not perform FORWARD-LOOKING STATEMENTS as expected; This Annual Report contains forward-looking • risks generally incident to the ownership of real statements within the meaning of Section 27A of the property, including adverse changes in economic Securities Act of 1933, as amended, and Section 21E conditions, changes in the investment climate for of the Securities Exchange Act of 1934, as amended. real estate, changes in real estate taxes and other These statements are generally characterized by operating expenses, adverse changes in terms such as “believe”, “expect” and “may”. governmental rules and fiscal policies, the relative Although the Company believes that the illiquidity of real estate and environmental risks; expectations reflected in such forward-looking and statements are based upon reasonable assumptions, • risks related to the Company’s status as a REIT for the Company’s actual results could differ materially federal income tax purposes, such as the existence from those given in the forward-looking statements of complex regulations relating to the Company’s as a result of changes in factors which include status as a REIT, the effect of future changes in REIT among others, the following: requirements as a result of new legislation and the adverse consequences of the failure to qualify as a • risks that the Company’s tenants will not pay rent; REIT. • risks related to the Company’s reliance on shopping center “anchor” tenants and other significant tenants; 46


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    DIVIDEND Reinvestment Plan Saul Centers, Inc. offers a dividend reinvestment plan which enables its shareholders to automatically invest some of or all dividends in additional shares. The plan provides shareholders with a convenient and cost-free way to increase their investment in Saul Centers. Shares purchased under the dividend reinvestment plan are issued at a 3% discount from the closing price of the stock on the dividend payment date. The Plan’s prospectus is available for review in the Shareholders Information section of the Company’s web site. To receive more information please call the plan administrator at (800) 509-5586 and request to speak with a service representative or write: Continental Stock Transfer & Trust Company Attention: Saul Centers, Inc. Dividend Reinvestment Plan 17 Battery Place New York, NY 10004 COMMON STOCK PRICES Period Share Price High Low Fourth Quarter, 2003 $29.04 $26.62 Third Quarter, 2003 $27.95 $25.75 Second Quarter, 2003 $26.55 $23.59 First Quarter, 2003 $24.10 $21.97 Fourth Quarter, 2002 $24.51 $22.52 Third Quarter, 2002 $25.40 $21.91 Second Quarter, 2002 $25.90 $22.13 First Quarter, 2002 $22.55 $21.02 On February 27, 2004, the closing price was $27.90. There were approximately 405 holders of record as of that date. 47


  • Page 48

    SAUL CENTERS, INC. Corporate Information DIRECTORS EXECUTIVE OFFICERS WEB SITE www.saulcenters.com B. Francis Saul II B. Francis Saul II Chairman & Chief Chairman & Chief EXCHANGE LISTING Executive Officer Executive Officer New York Stock Exchange B. Francis Saul III B. Francis Saul III Symbol: President President Common Stock: BFS Preferred Stock: BFS.PrA Philip D. Caraci Scott V. Schneider Senior Vice President, TRANSFER AGENT Vice Chairman Chief Financial Officer, Continental Stock Transfer & The Honorable Treasurer & Secretary Trust Company John E. Chapoton Attention: Saul Centers, Inc. Partner, Brown Investment Kenneth D. Shoop Vice President, Dividend Reinvestment Plan Advisory 17 Battery Place Chief Accounting Officer Gilbert M. Grosvenor New York, NY 10004 Chairman of the Christopher H. Netter (800) 509-5586 Board of Trustees, Senior Vice President, Leasing National Geographic Society INVESTOR RELATIONS John F. Collich Saul Centers, Inc. Philip C. Jackson, Jr. Senior Vice President, 7501 Wisconsin Ave. Adjunct Professor Emeritus, Retail Development Suite 1500 Birmingham-Southern M. Laurence Millspaugh Bethesda, MD 20814-6522 College Senior Vice President, A copy of the Saul Centers, Acquisitions & Development Inc. annual report to the David B. Kay Securities and Exchange Chief Financial Officer, Charles W. Sherren, Jr. Commission on Form 10-K J.E. Robert Companies Senior Vice President, may be printed from the General Paul X. Kelley Management Company’s web site or Chairman, American Battle obtained at no cost to Monuments Commission COUNSEL stockholders by writing to Shaw Pittman LLP the above address or Charles R. Longsworth Washington, DC 20037 calling (301) 986-6016. Chairman Emeritus, Colonial Williamsburg Foundation INDEPENDENT AUDITORS HEADQUARTERS Ernst & Young LLP 7501 Wisconsin Ave. Patrick F. Noonan McLean, Virginia 22102 Suite 1500 Chairman Emeritus, Bethesda, MD 20814-6522 The Conservation Fund Phone: (301) 986-6200 The Honorable James W. Symington Of Counsel, O’Connor & Hannan, Attorneys at Law John R. Whitmore Senior Advisor to the Bessemer Group, Inc. 48


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    ANNUAL MEETING of Shareholders The Annual Meeting of Shareholders will be held at 11:00 a.m., local time, on April 23, 2004, at the Hyatt Regency Bethesda, One Bethesda Metro Center, Bethesda, MD (at the southwest corner of the Wisconsin Avenue and Old Georgetown Road intersection, adjacent to the Bethesda Metro Stop on the Metro Red Line.) 49


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    Saul Centers 7501 Wisconsin Avenue, Suite 1500 Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com

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