# EDGAR Filing Document

**Accession Number:** 0000907254
**File Stem:** 0000907254-23-000027
**Filing Date:** 2023-3
**Character Count:** 139357
**Document Hash:** e7ca6dcf19a4bdce35406f18bd64f03e
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0000907254-23-000027.hdr.sgml**: 20230330

**ACCESSION NUMBER**: 0000907254-23-000027

**CONFORMED SUBMISSION TYPE**: ARS

**PUBLIC DOCUMENT COUNT**: 1

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230330

**DATE AS OF CHANGE**: 20230330

**EFFECTIVENESS DATE**: 20230330

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** SAUL CENTERS, INC.
- **CENTRAL INDEX KEY:** 0000907254
- **STANDARD INDUSTRIAL CLASSIFICATION:** REAL ESTATE INVESTMENT TRUSTS [6798]
- **IRS NUMBER:** 521833074
- **STATE OF INCORPORATION:** MD
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** ARS
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-12254
- **FILM NUMBER:** 23781016

**BUSINESS ADDRESS:**
- **STREET 1:** 7501 WISCONSIN AVENUE
- **STREET 2:** SUITE 1500
- **CITY:** BETHESDA
- **STATE:** MD
- **ZIP:** 20814
- **BUSINESS PHONE:** 301-986-7737

**MAIL ADDRESS:**
- **STREET 1:** 7501 WISCONSIN AVENUE
- **STREET 2:** SUITE 1500
- **CITY:** BETHESDA
- **STATE:** MD
- **ZIP:** 20814

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** SAUL CENTERS INC
- **DATE OF NAME CHANGE:** 19930617

### Attached PDF Documents

**Attachment 1:** `saular2022_33023final.pdf`

SauCenters

ANNUAL REPORT

to Shareholders 2022

![img-0.jpeg](img-0.jpeg)

Saul Centers, Inc. is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland, which currently operates and manages a real estate portfolio of 61 properties that includes (a) 50 community and neighborhood shopping centers and seven mixed-use properties with approximately 9.8 million square feet of leasable area and (b) four land and development properties. Over 85% of Saul Centers' property operating income is generated by properties in the metropolitan Washington, DC/Baltimore area.

![img-1.jpeg](img-1.jpeg)

THE WAYCROFT, ARLINGTON, VA

![img-2.jpeg](img-2.jpeg)

#### TOTAL REVENUE$^{(a)}$

(In millions)

2022 | \$245.9

2021 | \$239.2

2020 | \$225.2

2019 | \$231.5

2018 | \$227.2

#### NET INCOME

Available to Common Stockholders

(In millions)

2022 | \$39.0

2021 | \$37.2

2020 | \$29.2

2019 | \$36.3

2018 | \$36.0

#### FUNDS FROM OPERATIONS

Available to Common Stockholders and Noncontrolling Interests$^{(b)}$

(In millions)

2022 | \$103.2

2021 | \$100.7

2020 | \$90.0

2019 | \$95.1

2018 | \$93.8

$^{(a)}$ Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2022.

$^{(b)}$ Funds From Operations (FFO) is a non-GAAP financial measure. See page 48 of the 10-K for a definition of FFO and reconciliation to Net Income.

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

## PORTFOLIO COMPOSITION BASED ON 2022 PROPERTY OPERATING INCOME$^{1}$

![img-3.jpeg](img-3.jpeg)

$^{(1)}$ Property Operating Income equals total property revenue (net of provision for credit losses) less the sum of property operating expenses and real estate taxes.

|  | Year ended December 31, |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 | 2019 | 2018 |
| Summary Financial Data (a) |  |  |  |  |  |
| Total Revenue | $245,860,000 | $239,225,000 | $225,207,000 | $231,525,000 | $227,219,000 |
| Net Income Available to Common Stockholders | $39,000,000 | $37,195,000 | $29,188,000 | $36,253,000 | $35,964,000 |
| FFO Available to Common Stockholders and Noncontrolling Interests | $103,167,000 | $100,727,000 | $89,970,000 | $95,059,000 | $93,821,000 |
| Weighted Average Common Stock Outstanding (Diluted) | 23,972,000 | 23,662,000 | 23,357,000 | 23,053,000 | 22,425,000 |
| Weighted Average Common Stock and Units Outstanding (Diluted) | 33,972,000 | 33,098,000 | 31,267,000 | 30,913,000 | 30,156,000 |
| Net Income Per Share Available to Common Stockholders (Diluted) | $1.63 | $1.57 | $1.25 | $1.57 | $1.60 |
| FFO Per Share Available to Common Stockholders and Noncontrolling Interests (Diluted) | $3.04 | $3.04 | $2.88 | $3.08 | $3.11 |
| Common Dividend as a Percentage of FFO | 77% | 71% | 74% | 69% | 66% |
| Interest Expense Coverage (b) | 3.77x | 3.60x | 3.28x | 3.77x | 3.53x |
| Property Data |  |  |  |  |  |
| Number of Operating Properties (c) | 57 | 57 | 57 | 56 | 56 |
| Total Portfolio Square Feet | 9,822,000 | 9,819,000 | 9,822,000 | 9,335,000 | 9,300,000 |
| Shopping Center Square Feet | 7,877,000 | 7,874,000 | 7,877,000 | 7,855,000 | 7,750,000 |
| Mixed-Use Square Feet | 1,945,000 | 1,945,000 | 1,945,000 | 1,480,000 | 1,550,000 |
| Average Percentage Leased (d) | 93% | 92% | 92% | 95% | 95% |

$^{(a)}$ Certain reclassifications have been made to prior years to conform to the presentation used for year ended December 31, 2022.

$^{(b)}$ Interest expense coverage equals (i) operating income before the sum of interest expense and amortization of deferred debt costs, predevelopment expenses, acquisition related costs, and depreciation and amortization of deferred leasing costs divided by (ii) interest expense.

$^{(c)}$ Excludes land and development parcels (Ashland Square Phase II, New Market, and The Waycroft in 2018, and Ashland Square Phase II, New Market, The Waycroft, and Hampden House in 2019, and Ashland Square Phase II, New Market, and Hampden House in 2020, and Ashland Square Phase II, New Market, Hampden House, and Twinbrook Quarter in 2021 and 2022). Hampden House was acquired September 2018.

$^{(d)}$ Average percentage leased includes commercial space only.

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

1

# MESSAGE

## to our Shareholders

The past year was marked by the strengthening of our real estate portfolio despite the headwinds of increasing interest rates and capital market volatility. We remain committed to delivering value to our shareholders through strategic investments and operational excellence.

We achieved notable success in enhancing the performance of our properties. The leasing percentage of our shopping centers increased 1.3%, to 94.7% as of December 31, 2022, from 93.4% as of December 31, 2021. During the year, our office mixed-use leasing percentage increased slightly, to 82.0% from 81.6%. Our residential properties were 97.2% leased as of December 31, 2022, compared to 97.1% at the end of 2021. As of March 16, 2023, collection of tenant rent owed for 2022 totaled 99%. Same-property revenues increased to $245.9 million from $239.2 million, and same-property operating income increased to $181.3 million from $177.6 million, or 2.1%. In short, our real estate portfolio continued to improve in 2022.

Our development projects are progressing on schedule. Early in 2023, we poured concrete for the final above-grade residential level at Twinbrook Quarter Phase I in Rockville, Maryland. At Hampden House in Bethesda, Maryland, we have successfully completed excavation and are continuing below-grade construction.

Interest rates increased substantially during 2022 and early 2023, and elevated interest rates are expected to continue to affect earnings in 2023. We are not immune from the increased borrowing cost that is a result of higher interest rates. During the past year, however, we accessed the capital markets and executed several transactions to support a long-term, stable cost of debt and to provide additional liquidity to support our active developments.

![img-4.jpeg](img-4.jpeg)

TWINBROOK QUARTER, ROCKVILLE, MD

![img-5.jpeg](img-5.jpeg)

BROADLANDS VILLAGE, ASHBURN, VA

![img-6.jpeg](img-6.jpeg)

![img-7.jpeg](img-7.jpeg)

LEESBURG PIKE, BAILEYS CROSSROADS, VA

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

![img-8.jpeg](img-8.jpeg)

BROADLANDS VILLAGE, ASHBURN, VA

During 2023, we expect to begin drawing on our $145.0 million construction-to-permanent loan, which closed in November 2021, and which will finance a portion of the development cost of Twinbrook Quarter Phase I. This 20-year loan includes a 5-year construction period and a 15-year permanent loan, with a fixed interest rate of 3.83% during both the construction and permanent terms.

In February 2022, we closed on a $133.0 million construction-to-permanent loan which will fund a portion of the development cost of Hampden House. This loan provides us four years to complete construction followed by a 14-year permanent loan, with a fixed interest rate of 3.90% during both the construction and permanent terms. We expect to begin drawing on this loan in early 2024.

We also refinanced the mortgages on four shopping centers in 2022. In August, we closed on a $25.3 million, 15-year mortgage secured by Village Center and a $31.5 million, 7-year mortgage secured by Great Falls Center. These mortgages have fixed interest rates of 4.14% and 3.91%, respectively. In September, we refinanced the mortgage loans at Beacon Center and Seven Corners Center with a combined $143.0 million, 15-year fixed-rate mortgage at 5.05%. The net proceeds after repayments from all four mortgage refinances were used to reduce the outstanding balance of our bank revolving credit facility.

Also in August, we entered into two floating-to-fixed interest rate swaps totaling $100.0 million. These swaps effectively fix the all-in rate at 4.39% on $100.0 million of our variable rate debt. One $50.0 million swap is for five years and matures in 2027, and the other $50.0 million swap is for eight years and matures in 2030. As a result of these refinance and interest rate swap transactions, approximately 86.8% of our debt was fixed-rate as of December 31, 2022.

## CORE PROPERTY FUNDAMENTALS

### SHOPPING CENTERS

Shopping centers are the core of our real estate portfolio. Online shopping has continued to add convenient shopping options for consumers. The resilience of our shopping centers, however, demonstrates that online ordering complements, but does not supplant, the in-person shopping or dining experience. Further, tight margins in the grocery industry favor in-person shopping over the higher cost of last-mile grocery delivery. Our 50 retail centers, which are primarily grocery-anchored, comprised 74.5% of total property operating income in 2022.

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

3

![img-9.jpeg](img-9.jpeg)

THRUWAY, WINSTON-SALEM, NC

Our neighborhood shopping center portfolio performance continued to improve in 2022. Our leased percentage improved to 94.7% at the end of 2022 from 93.4% at the end of 2021. Included in our leased area is approximately 226,000 square feet, representing $4.9 million of additional annualized future base rent. Shopping center same-property operating income increased to $135.2 million in 2022 from $133.9 million in 2021, a 0.9% increase. Approximately 1.3 million square feet of expiring leases at an average rental rate of $21.37 per square foot were renewed or re-leased at an average of $22.50 per square foot, a 5.3% increase.

As opportunities arise, we replace underperforming tenants and add new retailers with stronger tenant credit that generate increased consumer traffic.

For example, in 2022 we leased 2,800 square feet to Apple Federal Credit Union at Ashbrook Marketplace in Loudoun County, Virginia, 9,200 square feet to Dollar Tree at Leesburg Pike in Fairfax County, Virginia, 19,600 square feet to Grocery Outlet at Southdale in Anne Arundel County, Maryland, and 30,000 square feet to O2 Fitness and 7,600 square feet to Sephora at Thruway in Winston-Salem, North Carolina. In total, we executed 304 new leases, renewed leases, and lease options for 1,274,000 square feet in 2022.

With many of the larger, previously vacant spaces now under lease, in 2023 our retail team is focused on leasing the remaining available small shop spaces in the portfolio. Further, we closely manage tenant buildout timelines, including the challenge of supply chain disruptions, in order to minimize the leased-to-opening period and accelerate commencement of cash flow. We continue to benefit from well-staggered lease expirations within our shopping center portfolio, with only 11.5% of leases, as measured by annual base rent, expiring in 2023.

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

![img-10.jpeg](img-10.jpeg)

HAMPDEN HOUSE, BETHESDA, MD

![img-11.jpeg](img-11.jpeg)

THE WAYCROFT, ARLINGTON, VA

## OFFICE

Although we have seen a general trend of employees returning to the office for at least part of the work week, the office sector continues to present its own unique set of challenges. All our office mixed-use properties are located in the greater Washington, D.C. area and include Avenel Business Park, Clarendon Center North and South, 601 Pennsylvania Avenue and Washington Square.

Our office mixed-use leasing percentage increased slightly to 82.0% as of December 31, 2022 from 81.6% as of December 31, 2021. Same-property operating income from these properties remained essentially flat at $24.4 million in 2022, down slightly from $24.6 million in 2021. These results reflect our office leasing team's success at defending our existing tenant base while winning new tenants where possible. For the year, approximately 87,000 square feet of expiring leases at an average rental rate of $29.66 per square foot were renewed or re-leased at an average of $28.04 per square foot, a 5.5% decrease.

We continue to actively work to renew existing tenants and pursue tenants either new to our market or willing to relocate within the market. In addition, we continue to pursue a measured program constructing and leasing speculative suites to tenants requiring less than 5,000 square feet. Only 8.9% of leases at our office mixed-use properties, as measured by annual base rent, will expire in 2023.

## RESIDENTIAL

Our residential properties continued to demonstrate strong performance in 2022. The Waycroft, our 491-unit apartment house located in Ballston, Virginia, continued to stabilize in 2022, driving growth in our residential portfolio. Including The Waycroft, Lyon Place in Clarendon, Virginia, and Park Van Ness in Washington, D.C., residential same-property operating income grew to $18.9 million in 2022 from $16.5 million in 2021, a 14.5% increase. Our residential properties contributed 10.4% of same-property operating income in 2022, up from 9.3% in 2021. Our residential units were 97.2% leased as of December 31, 2022.

We look forward to the additions of Twinbrook Quarter Phase I and Hampden House to our residential portfolio in 2024 and 2025, respectively. Our residential investment continues to provide an important source of growth and diversification of income for our shareholders.

## DEVELOPMENT HIGHLIGHTS

During the year, we continued our construction of Twinbrook Quarter Phase I and Hampden House. Twinbrook Quarter Phase I is the first phase of our 18-acre development in Rockville, Maryland, located proximate to the Twinbrook

5

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

Metrorail Station on the Red Line. To finance a portion of the development costs of Twinbrook Quarter Phase I, we closed on a $145.0 million construction-to-permanent loan in 2021. Phase I will include 450 apartments, an 80,000 square foot Wegmans, and 25,000 square feet of small shop retail. We also have entitlements to build a 230,000 square foot office tower as part of Phase I in the future. Phase I is an important component to the success of our long-term plans at Twinbrook Quarter and includes the creation of Festival Street to the north of the block, and the extension of Chapman Avenue to the east of the block. Delivery of Phase I is scheduled to occur in 2024.

We began construction at Hampden House during the year. Located in downtown Bethesda, Maryland, Hampden House will include 366 apartments and 10,100 square feet of ground floor retail. The development is located adjacent to the Metrorail Red Line and the new Purple Line, which is under construction. To finance a portion of the development costs of Hampden House, we closed on a $133.0 million construction-to-permanent loan in the first quarter of 2022. Excavation is complete and below-grade construction is ongoing. Delivery of Hampden House is scheduled to occur in 2025.

Our existing land holdings at Twinbrook Quarter in Rockville and White Flint in North Bethesda, Maryland provide potential future opportunities for new ground-up development. We also continue to drive organic growth at our neighborhood shopping centers through the addition of pad development sites, where appropriate. Looking ahead, we currently have seven future pad sites either under lease or in various stages of negotiation.

## FINANCIAL RESULTS

Total revenue for the year ended December 31, 2022 increased 2.8% to $245.9 million from $239.2 million for the year ended December 31, 2021. During the same period, net income increased 6.1% to $65.4 million from $61.6 million. Year over year, total portfolio same-property revenue increased 2.8% and total same-property operating income increased 2.1%. Shopping center same-property operating income increased 0.9% and mixed-use same-property operating income increased 5.7%.

![img-12.jpeg](img-12.jpeg)

CLARENDON CENTER, ARLINGTON, VA

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

![img-13.jpeg](img-13.jpeg)

ASHBROOK MARKETPLACE, ASHBURN, VA

![img-14.jpeg](img-14.jpeg)

ASHBROOK MARKETPLACE, ASHBURN, VA

Funds From Operations available to common stockholders and noncontrolling interests totaled $103.2 million ($3.04 per diluted share) in 2022 compared to $100.7 million ($3.04 per diluted share) in 2021.

We maintain a disciplined approach to our liquidity, debt maturities, and leverage relative to the value of our assets. As of December 31, 2022, liquidity included $225.4 million in combined cash and available borrowing capacity under our bank revolving credit facility, compared to $234.4 million as of December 31, 2021. We renewed our $525 million bank credit facility in August 2021. The $425 million revolving line within the facility has an initial maturity of August 2025. We ended 2022 with approximately $1.2 billion of total debt outstanding, $1.07 billion of which was fixed-rate debt and the remaining $164.0 million was variable-rate debt. The weighted average maturity of our well-laddered debt is 8.0 years as of December 31, 2022.

Only $9.2 million of debt matures in 2023. We believe that the combination of our credit facility, proceeds from our $145.0 million and $133.0 million construction-to-permanent loans, proceeds from refinancing existing loans, proceeds from our dividend reinvestment plan, and our operating cash flow will provide adequate liquidity to finance our development pipeline over the coming years.

## CONCLUSION

In summary, our real estate portfolio continued to strengthen in 2022, characterized by improvement and resilience despite a tightening economic environment. The increase in interest rates and capital market volatility presented challenges that required us to remain agile and adapt to changing market conditions. In response, we executed several transactions to support a long-term, stable cost of debt. We also made progress on our developments, with Twinbrook Quarter Phase I and Hampden House continuing on schedule. We remain well positioned for continued long-term growth and committed to delivering value to our shareholders.

For the Board,

B. Francis Saul II
March 30, 2023

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

7

## PORTFOLIO PROPERTIES

Saul Centers' portfolio properties are located in Virginia, Maryland, Washington, DC, North Carolina, Delaware, Florida, Georgia, New Jersey and Oklahoma. Properties in the metropolitan Washington, DC/ Baltimore area represent over 82% of the portfolio's gross leasable area.

![img-15.jpeg](img-15.jpeg)

| PROPERTY/LOCATION | GROSS LEASABLE SQUARE FEET | PROPERTY/LOCATION | GROSS LEASABLE SQUARE FEET |
| --- | --- | --- | --- |
| Shopping Centers |  | Shopping Centers continued |  |
| Ashbrook Marketplace, Ashburn, VA | 85,819 | 11503 Rockville Pike/5541 Nicholson Lane, Rockville, MD | 40,249 |
| Ashburn Village, Ashburn, VA | 221,596 | 1500/1580/1582 Rockville Pike, Rockville, MD | 105,428 |
| Ashland Square Phase I, Dumfries, VA | 23,120 | Seabreeze Plaza, Palm Harbor, FL | 146,673 |
| Beacon Center, Alexandria, VA | 359,671 | Marketplace at Sea Colony, Bethany Beach, DE | 21,677 |
| BJ's Wholesale Club, Alexandria, VA | 115,660 | Seven Corners, Falls Church, VA | 573,481 |
| Boca Valley Plaza, Boca Raton, FL | 121,365 | Severna Park Marketplace, Severna Park, MD | 254,011 |
| Boulevard, Fairfax, VA | 49,140 | Shops at Fairfax, Fairfax, VA | 68,762 |
| Briggs Chaney Marketplace, Silver Spring, MD | 194,258 | Smallwood Village Center, Waldorf, MD | 173,341 |
| Broadlands Village, Ashburn, VA | 174,438 | Southdale, Glen Burnie, MD | 485,628 |
| Burtonsville Town Square, Burtonsville, MD | 139,928 | Southside Plaza, Richmond, VA | 371,761 |
| Countryside Marketplace, Sterling, VA | 138,804 | South Dekalb Plaza, Atlanta, GA | 163,418 |
| Cranberry Square, Westminster, MD | 141,450 | Thruway, Winston-Salem, NC | 365,816 |
| Cruse Marketplace, Cumming, GA | 78,686 | Village Center, Centreville, VA | 145,651 |
| Flagship Center, Rockville, MD | 21,500 | Westview Village, Frederick, MD | 103,186 |
| French Market, Oklahoma City, OK | 246,148 | White Oak, Silver Spring, MD | 480,676 |
| Germantown, Germantown, MD | 18,982 | TOTAL SHOPPING CENTERS | 7,877,330 |
| The Glen, Woodbridge, VA | 136,440 | Mixed-Use Properties |  |
| Great Falls Center, Great Falls, VA | 91,666 | Avenel Business Park, Gaithersburg, MD | 390,683 |
| Hampshire Langley, Takoma Park, MD | 131,700 | Clarendon Center - North, Arlington, VA | 108,386 |
| Hunt Club Corners, Apopka, FL | 107,103 | Clarendon Center - South, Arlington, VA | 293,565 |
| Jamestown Place, Altamonte Springs, FL | 96,201 | (includes 244 apartments comprising 188,671 square feet) |  |
| Kentlands Square I, Gaithersburg, MD | 119,694 | Park Van Ness, Washington, DC | 223,447 |
| Kentlands Square II and Kentlands Pad, Gaithersburg, MD | 253,052 | (includes 271 apartments comprising 214,600 square feet) |  |
| Kentlands Place, Gaithersburg, MD | 40,697 | 601 Pennsylvania Ave., Washington, DC | 227,651 |
| Lansdowne Town Center, Leesburg, VA | 196,817 | Washington Square, Alexandria, VA | 236,376 |
| Leesburg Pike Plaza, Baileys Crossroads, VA | 97,752 | The Waycroft, Arlington, VA | 464,757 |
| Lumberton Plaza, Lumberton, NJ | 192,718 | (includes 491 apartments comprising 404,709 square feet) |  |
| Metro Pike Center, Rockville, MD | 67,488 | TOTAL MIXED-USE PROPERTIES | 1,944,865 |
| Shops at Monocacy, Frederick, MD | 111,166 | Land and Development Parcels |  |
| Northrock, Warrenton, VA | 100,032 | Twinbrook Quarter, Rockville, MD |  |
| Olde Forte Village, Ft. Washington, MD | 143,577 | Hampden House, Bethesda, MD |  |
| Olney, Olney, MD | 53,765 | Ashland Square Phase II, Manassas, VA |  |
| Orchard Park, Dunwoody, GA | 87,365 | New Market, New Market, MD |  |
| Palm Springs Center, Altamonte Springs, FL | 126,446 | TOTAL PORTFOLIO | 9,822,195 |
| Ravenwood, Baltimore, MD | 93,328 |  |  |

SAUL CENTERS, INC. ANNUAL REPORT 2022 | WWW.SAULCENTERS.COM

8

# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 10-K

(Mark One)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File number 1-12254

# SAUL CENTERS, INC.

(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)

52-1833074
(I.R.S. Employer
Identification No.)

7501 Wisconsin Avenue, Suite 1500E, Bethesda, Maryland 20814-6522

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (301) 986-6200

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

| Title of each class | Trading symbol: | Name of each exchange on which registered |
| --- | --- | --- |
| Common Stock, Par Value $0.01 Per Share | BFS | New York Stock Exchange |
| Depository Shares each representing 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock, Par Value $0.01 Per Share | BFS/PRD | New York Stock Exchange |
| Depository Shares each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock, Par Value $0.01 Per Share | BFS/PRE | New York Stock Exchange |

Securities registered pursuant to Section 12(g) of the Act: N/A

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ☐

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer | ☐ | Accelerated filer | ☑ |
| --- | --- | --- | --- |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
|  |  | Emerging growth company | ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐

The number of shares of Common Stock, $0.01 par value, issued and outstanding as of February 23, 2023 was 23,913,630.

At June 30, 2022, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $619.1 million based upon the closing price of the registrant’s Common Stock on the New York Stock Exchange on June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter. The determination of affiliate status is solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.

#### **DOCUMENTS INCORPORATED BY REFERENCE:**

Registrant incorporates by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K portions of registrant’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A. The definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

# TABLE OF CONTENTS

|  |  | Page Numbers |
| --- | --- | --- |
| PART I |  |  |
| Item 1. | Business | 4 |
| Item 1A. | Risk Factors | 10 |
| Item 1B. | Unresolved Staff Comments | 23 |
| Item 2. | Properties | 23 |
| Item 3. | Legal Proceedings | 30 |
| Item 4. | Mine Safety Disclosures | 30 |
| PART II |  |  |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 31 |
| Item 6. | [Reserved] | 33 |
| Item 7. | Management's Discussion and Analysis of Financial Condition And Results of Operations | 33 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 50 |
| Item 8. | Financial Statements and Supplementary Data | 51 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 51 |
| Item 9A. | Controls and Procedures | 51 |
| Item 9B. | Other Information | 53 |
| PART III |  |  |
| Item 10. | Directors, Executive Officers and Corporate Governance | 54 |
| Item 11. | Executive Compensation | 54 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters | 54 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 54 |
| Item 14. | Principal Accountant Fees and Services | 54 |
| PART IV |  |  |
| Item 15. | Exhibits and Financial Statement Schedules | 55 |
| Item 16. | Form 10-K Summary | 59 |
| FINANCIAL STATEMENT SCHEDULE |  |  |
| Schedule III. | Real Estate and Accumulated Depreciation | F-30 |

2

# PART I

## Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “plans,” “intends,” “estimates,” “anticipates,” “expects,” “believes” or similar expressions in this Form 10-K. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. Certain factors that could cause actual results or events to differ materially from those we anticipate are described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

- • *challenging domestic and global credit markets and their effect on discretionary spending;*
- • *the ability of our tenants to pay rent;*
- • *our reliance on shopping center “anchor” tenants and other significant tenants;*
- • *our substantial relationships with members of the Saul Organization;*
- • *risks of financing, such as increases in interest rates, restrictions imposed by our debt, our ability to meet existing financial covenants and our ability to consummate planned and additional financings on acceptable terms;*
  - • *our development activities;*
  - • *our access to additional capital;*
  - • *our ability to successfully complete additional acquisitions or redevelopments, or if they are consummated, whether such acquisitions or developments perform as expected;*
  - • *risks relating to cybersecurity, including disruption to our business and operations and exposure to liabilities from tenants, employees, capital providers, and other third parties;*
  - • *risks generally incident to the ownership of real property, including adverse changes in economic conditions, changes in the investment climate for real estate, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, the relative illiquidity of real estate and environmental risks; and*
  - • *risks related to our status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to our status as a REIT, the effect of future changes to REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT.*

In addition, we describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of this Annual Report on Form 10-K), “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A), and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (Part II, Item 7).

3

# Item 1. Business

## General

Saul Centers, Inc. ('Saul Centers') was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a 'REIT') under the Internal Revenue Code of 1986, as amended (the 'Code'). The Company is required to annually distribute at least 90% of its REIT taxable income (excluding net capital gains) to its stockholders and meet certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the 'Company.' B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

The Company's primary strategy is to continue to focus on diversification of its assets through development of transit-centric, residential mixed-use projects in the Washington, D.C. metropolitan area. The Company's operating strategy also includes improvement of the operating performance and internal growth of its Shopping Centers and will supplement its development of residential mixed-used projects with selective redevelopment and renovations of its core Shopping Centers.

Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B. F. Saul Real Estate Investment Trust (the 'Saul Trust'), the B. F. Saul Company and certain other affiliated entities, each of which is controlled by B. Francis Saul II and his family members (collectively, the 'Saul Organization'). On August 26, 1993, members of the Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the 'Operating Partnership'), and two newly formed subsidiary limited partnerships (the 'Subsidiary Partnerships,' and collectively with the Operating Partnership, the 'Partnerships'), shopping center and mixed-use properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. The Company conducts its business through the Operating Partnership and/or directly or indirectly owned subsidiaries.

As of December 31, 2022, the Company's properties (the 'Current Portfolio Properties') consisted of 50 shopping center properties (the 'Shopping Centers'), seven mixed-use properties, which are comprised of office, retail and multi-family residential uses (the 'Mixed-Use Properties') and four (non-operating) development properties.

## Management of the Current Portfolio Properties

The Operating Partnership manages the Current Portfolio Properties and will manage any subsequently acquired or developed properties. The management of the properties includes performing property management, leasing, design, renovation, development and accounting duties for each property. The Operating Partnership provides each property with a fully integrated property management capability, with approximately 70 full-time equivalent employees at its headquarters office and 59 full-time employees and nine part-time employees at its properties and with an extensive and mature network of relationships with tenants and potential tenants as well as with members of the brokerage and property owners' communities. The Company currently does not, and does not intend to, retain third party managers or provide management services to third parties.

The Company augments its property management capabilities by sharing with the Saul Organization certain ancillary functions, at cost, such as information technology and payroll services, benefits administration and in-house legal services. The Company also shares insurance administration expenses on a pro rata basis with the Saul Organization. Management believes that these arrangements result in lower costs than could be obtained by contracting with third parties. These arrangements permit the Company to capture greater economies of scale in purchasing from third party vendors than would otherwise be available to the Company alone and to capture internal economies of scale by avoiding payments representing profits with respect to functions provided internally. The terms of all sharing arrangements with the Saul Organization, including payments related thereto, are specified in a written agreement and are reviewed annually by the Audit Committee of the Company's Board of Directors.

4

The Company subleases its corporate headquarters space from the Saul Organization at the Company’s share of the cost. A discussion of the lease terms is provided in Note 7, Long Term Lease Obligations, of the Notes to Consolidated Financial Statements.

### Principal Offices

The principal offices of the Company are located at 7501 Wisconsin Avenue, Suite 1500E, Bethesda, Maryland 20814-6522, and the Company’s telephone number is (301) 986-6200. The Company’s internet web address is www.saulcenters.com. Information contained on the Company’s website is not part of this report. The Company makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We intend to comply with the requirements of Item 5.05 of Form 8-K regarding amendments to and waivers under the code of business conduct and ethics applicable to our Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer by providing such information on our website within four days after effecting any amendment to, or granting any waiver under, that code, and we will maintain such information on our website for at least twelve months. Alternatively, you may access these reports at the SEC’s website: www.sec.gov.

### Policies with Respect to Certain Activities

The following is a discussion of the Company’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been determined by the Board of Directors and, in general, may be amended or revised from time to time by the Board of Directors without a vote of the Company’s stockholders.

### Operating Strategy

The Company’s primary strategy is to continue to focus on diversification of its assets through development of transit-centric, residential mixed-use projects in the Washington, D.C. metropolitan area. The Company’s operating strategy also includes improvement of the operating performance of its assets, internal growth of its Shopping Centers through the addition of pad sites and supplementing its development pipeline with selective redevelopment and renovations of its core Shopping Centers. Community and neighborhood shopping centers typically provide reliable cash flow and steady long-term growth potential. Management actively manages its property portfolio by engaging in strategic leasing activities, tenant selection, lease negotiation and shopping center expansion and reconfiguration. The Company seeks to optimize its retail tenant mix by selecting tenants for its Shopping Centers and Mixed-Use Properties that provide a broad spectrum of goods and services, consistent with the role of community and neighborhood shopping centers as the source for day-to-day necessities. Management believes that such a synergistic tenanting approach results in increased cash flow from existing tenants by providing the Shopping Centers with consistent traffic and a desirable mix of shoppers, resulting in increased sales and, therefore, increased cash flows.

Management believes there is potential for long term growth in cash flow as existing leases for space in the Shopping Centers and Mixed-Use Properties expire and are renewed, or newly available or vacant space is leased. The Company intends to renegotiate leases where possible and seek new tenants for available space in order to optimize the mix of uses to improve foot traffic through the Shopping Centers. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate existing tenants, reconfigure tenant spaces and introduce new tenants with the goals of increasing occupancy, improving overall retail sales, and ultimately increasing cash flow as economic conditions improve. In those circumstances in which leases are not otherwise expiring, management selectively attempts to increase cash flow through a variety of means, or in connection with renovations or relocations, recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percentage rental provisions, in its leases.

5

It is management’s intention to hold properties for long-term investment and to place strong emphasis on regular maintenance, periodic renovation and capital improvement. Management believes that characteristics such as cleanliness, lighting and security are particularly important in community and neighborhood shopping centers, which are frequently visited by shoppers during hours outside of the normal work-day. Management believes that the Shopping Centers and Mixed-Use Properties generally are attractive and well maintained. The Shopping Centers and Mixed-Use Properties will undergo expansion, renovation, reconfiguration and modernization from time to time when management believes that such action is warranted by opportunities or changes in the competitive environment of a property. The Company will continue its practice of expanding existing properties by undertaking new construction on outparcels suitable for development as free standing retail or office facilities.

#### Investment in Real Estate

The Company has a pipeline of entitled sites in its portfolio, some of which are currently shopping center operating properties, for development of up to 3,700 apartment units and 975,000 square feet of retail and office space. All such sites are located proximate to Washington Metropolitan Area Transit Authority (“WMATA”) red line Metro stations in Montgomery County, Maryland.

The Company intends to selectively add free-standing pad site buildings within its Shopping Center portfolio, and replace underperforming tenants with tenants that generate strong traffic, including anchor stores such as supermarkets and drug stores. The Company has executed leases or leases are under negotiation for seven more pad sites.

In recent years, there has been a limited amount of quality properties for sale and pricing of those properties has escalated. Accordingly, management believes acquisition opportunities for investment in existing and new shopping center and mixed-use properties in the near future is uncertain. Nevertheless, because of the Company’s conservative capital structure, including its cash and capacity under its senior unsecured credit facility (the “Credit Facility”), management believes that the Company is positioned to take advantage of additional investment opportunities as attractive properties are identified and market conditions improve. (See “Item 1. Business - Capital Policies”.) It is management’s view that several of the sub-markets in which the Company operates have, or are expected to have in the future, attractive supply/demand characteristics. The Company will continue to evaluate acquisition, development and redevelopment as integral parts of its overall business plan.

In evaluating a particular redevelopment, renovation, acquisition, or development, management will consider a variety of factors, including: (i) the location, size and accessibility of the property, with an emphasis on the Washington, D.C./Baltimore metropolitan area; (ii) the demographic characteristics of the community, as well as the local real estate market, including potential for growth and potential regulatory impediments to development; (iii) the purchase price; (iv) the non-financial terms of the transaction; (v) the “fit” of the property with the Company’s existing portfolio; (vi) the potential for, and current extent of, any environmental problems; (vii) the current and historical occupancy rates of the property or any comparable or competing properties in the same market; (viii) the quality of construction and design and the current physical condition of the property; (ix) the financial and other characteristics of existing tenants and the terms of existing leases; and (x) the potential for capital appreciation.

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

The Company intends to engage in such future investment and development activities in a manner that enables the Company to qualify and maintain its status as a REIT for federal income tax purposes and that will not cause the Company to be regulated as an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments.

6

### Investments in Real Estate Mortgages

While the Company's current portfolio and business objectives emphasize equity investments in transit-centric, residential mixed-use properties, neighborhood shopping centers, and other mixed-use properties, the Company may, at the discretion of the Board of Directors, invest in mortgages, participating or convertible mortgages, deeds of trust and other types of real estate interests consistent with its qualification as a REIT. The Company does not presently invest, nor does it intend to invest, in real estate mortgages.

### Investments in Securities of or Interests in Persons Engaged in Real Estate Activities and Other Issues

Subject to the requirements to maintain REIT qualification, the Company may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. The Company does not presently invest, nor does it intend to invest, in any securities of other REITs.

### Dispositions

The Company may elect to dispose of properties if, based upon management's periodic review of the Company's portfolio, the Board of Directors determines that such action would be in the best interest of the Company's stockholders.

### Capital Policies

The Company has established a debt capitalization policy relative to asset value, which is computed by reference to the aggregate annualized cash flow from the properties in the Company's portfolio rather than relative to book value. The Company has used a measure tied to cash flow because it believes that the book value of its portfolio properties, which is the depreciated historical cost of the properties, does not accurately reflect the Company's ability to incur indebtedness. Asset value, however, is somewhat more variable than book value, and may not at all times reflect the fair market value of the underlying properties. As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Given the Company's current debt level, it is management's belief that the ratio of the Company's debt to total asset value is below 50% as of December 31, 2022.

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

The Company intends to finance future acquisitions and developments and to make debt repayments by utilizing the sources of capital then deemed to be most advantageous. Such sources may include undistributed operating cash flow, secured or unsecured bank and institutional borrowings, proceeds from the Company's Dividend Reinvestment and Stock Purchase Plan, proceeds from the sale of properties and private and public offerings of debt or equity securities. Borrowings may be at the Operating Partnership or Subsidiary Partnerships level and securities offerings may include (subject to certain limitations) the issuance of Operating Partnership interests convertible into common stock or other equity securities.

7

## Other Policies

The Company has the authority to offer equity or debt securities in exchange for property and to repurchase or otherwise acquire its common stock or other securities in the open market or otherwise, and may engage in such activities in the future. The Company expects, but is not obligated, to issue common stock to holders of units of the Operating Partnership upon exercise of their redemption rights. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issuers other than the Operating Partnership and does not intend to do so. The Company has not made any loans to third parties, although the Company may in the future make loans to third parties. In addition, the Company has policies relating to related party transactions discussed in 'Item 1A. Risk Factors.'

## Competition

As an owner of, or investor in, transit-centric residential mixed-use properties, community and neighborhood shopping centers, and other mixed-use properties, the Company is subject to competition from an indeterminate number of entities in connection with the acquisition, development, ownership and leasing of similar properties. These entities include investors with access to significant capital, such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds.

Competition may reduce the number of properties available for acquisition or development or increase the price for raw land or developed properties of the type in which the Company invests. The Company faces competition in providing leases to prospective tenants and in re-letting space to current tenants upon expiration of their respective leases. If tenants decide not to renew or extend their leases upon expiration, the Company may not be able to re-let the space. Even if the tenants do renew or the Company can re-let the space, the terms of renewal or re-letting, including the cost of required renovations, may be less favorable than current lease terms or than expectations for the space. This risk may be magnified if the properties owned by our competitors have lower occupancy rates than the Company's properties. As a result, these competitors may be willing to make space available at lower prices than the space in the Current Portfolio Properties.

Management believes that success in the competition for ownership and leasing property is dependent in part upon the geographic location of the property, the tenant mix, the performance of property managers, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors impacting the Company's properties include the ease of access to the properties, the adequacy of related facilities such as parking, and the demographic characteristics in the markets in which the properties compete. Overall economic circumstances and trends and new properties in the vicinity of each of the Current Portfolio Properties are also competitive factors.

Finally, retailers at our Shopping Centers face increasing competition from outlet stores, online retailers, discount shopping clubs and other forms of marketing goods, such as direct mail, internet marketing and telemarketing. This competition may reduce percentage rents payable to us and may contribute to lease defaults or insolvency of tenants.

## Human Capital

As of December 31, 2022, the Company had approximately 70 full-time equivalent corporate employees and 59 full-time employees and nine part-time employees at its properties. None of our employees are represented by a collective bargaining unit.

The Company is committed to equal employment opportunities and does not discriminate against any person based on race, color, religion, gender, national origin, age, disability, sexual orientation or gender preference. Employee compensation is competitive, and the Company provides insurance benefits, retirement savings plans, paid time off and childcare benefits for all of its full-time employees. The Company encourages employee wellness in every aspect of life, including physical fitness, mental well-being and social connectedness. We annually hold several in-house training programs that focus on communication, self-awareness, delegation, feedback, accountability, team dynamics and other skills that provide our employees with personal growth opportunities.

8

We support the continuing education of our employees through (a) reimbursement of the cost of seeking undergraduate and graduate degrees at colleges and universities and (b) reimbursement of costs related to seminars, conferences and workshops. We previously launched a program that we call LEAD that enhances our other training and education programs by providing our talented employees with the tools necessary to effectively lead and manage. We manage an internship program to support the development of future real estate professionals.

#### Government Regulation Affecting Our Properties

The Current Portfolio Properties are subject to various laws and regulations relating to environmental and pollution controls. The impact upon the Company from the application of such laws and regulations either prospectively or retrospectively is not expected to have a materially adverse effect on the Company's property operations. As a matter of policy, the Company requires an environmental study be performed with respect to a property that may be subject to possible environmental hazards prior to its acquisition to ascertain that there are no material environmental hazards associated with such property.

See 'Item 1A. Risk Factors - Risk Factors Related to our REIT Status and Other Laws and Regulations' for further discussion of potential material effects of our compliance with government regulations, including environmental regulations and the rules governing REITS.

#### Recent Developments

The Company is developing Twinbrook Quarter Phase I ('Phase I') located in Rockville, Maryland. Phase I includes an 80,000 square foot Wegmans, approximately 25,000 square feet of small shop space, 450 apartments and a 230,000 square foot office building. The office tower portion of Phase I is not being constructed at this time. In connection with the development of the residential and retail portions of Phase I, we must also invest in infrastructure and other items that will support both Phase I and other portions of the development of Twinbrook Quarter. The total cost of the project is expected to be approximately $331.5 million, of which $271.4 million is related to the development of the residential and retail portions of Phase I and $60.1 million is related to infrastructure and other items. A portion of the project will be financed by a $145.0 million construction-to-permanent loan. Construction of the structure is ongoing. Concrete is being poured at the 12th level above ground, which is the final above ground level of the residential and retail portions of Phase I. Initial delivery of Phase I is anticipated in late 2024. The development potential of all phases of the entire 18.4 acre Twinbrook Quarter site totals 1,865 residential units, 473,000 square feet of retail space, and 431,000 square feet of office space.

The Company is developing Hampden House, a project located in downtown Bethesda, Maryland that will include up to 366 apartment units and 10,100 square feet of retail space. The total cost of the project is expected to be approximately $246.4 million, a portion of which will be financed by a $133.0 million construction-to-permanent loan. Excavation is complete and below grade construction of foundation systems is in progress. Construction is expected to be completed during 2025.

9

Saul Centers, Inc.

# CONSOLIDATED STATEMENTS OF CASH FLOWS

| (Dollars in thousands) | For The Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Cash flows from operating activities: |  |  |  |
| Net income | $65,392 | $61,649 | $50,316 |
| Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |
| Loss on early extinguishment of debt | 648 | - | - |
| Gain on sale of property | - | - | (278) |
| Depreciation and amortization of deferred leasing costs | 48,969 | 50,272 | 51,126 |
| Amortization of deferred debt costs | 1,985 | 1,710 | 1,570 |
| Non cash compensation costs of stock grants and options | 1,521 | 1,562 | 1,438 |
| Credit losses (recoveries) on operating lease receivables | (88) | 812 | 5,212 |
| (Increase) decrease in accounts receivable and accrued income | 2,424 | 5,446 | (17,818) |
| Additions to deferred leasing costs | (2,716) | (1,814) | (8,050) |
| (Increase) decrease in other assets | 4,511 | (2,820) | 5 |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | 524 | (285) | 861 |
| Increase (decrease) in deferred income | (2,019) | 1,895 | (6,013) |
| Net cash provided by operating activities | 121,151 | 118,427 | 78,369 |
| Cash flows from investing activities: |  |  |  |
| Acquisitions of real estate investments (1) (2) (3) | - | (9,011) | - |
| Additions to real estate investments | (15,781) | (21,023) | (20,547) |
| Additions to development and redevelopment projects | (101,107) | (25,884) | (35,983) |
| Proceeds from sale of property | - | - | 376 |
| Net cash used in investing activities | (116,888) | (55,918) | (56,154) |
| Cash flows from financing activities: |  |  |  |
| Proceeds from mortgage notes payable | 199,750 | - | 52,100 |
| Repayments on mortgage notes payable | (174,096) | (42,641) | (45,654) |
| Proceeds from term loan facility | - | 25,000 | - |
| Proceeds from revolving credit facility | 155,000 | 46,000 | 90,000 |
| Repayments on revolving credit facility | (97,000) | (44,500) | (73,000) |
| Proceeds from construction loans payable | - | 10,917 | 35,883 |
| Payments of debt extinguishment costs | (593) | - | - |
| Additions to deferred debt costs | (9,869) | (6,393) | (1,206) |
| Proceeds from the issuance of: |  |  |  |
| Common stock | 8,173 | 14,425 | 8,264 |
| Partnership units (1) (2) (3) | 1,322 | 2,398 | 1,677 |
| Distributions to: |  |  |  |
| Series D preferred stockholders | (4,594) | (4,593) | (4,594) |
| Series E preferred stockholders | (6,600) | (6,600) | (6,600) |
| Common stockholders | (55,523) | (50,963) | (49,383) |
| Noncontrolling interests | (21,548) | (17,821) | (16,751) |
| Net cash used in financing activities | (5,578) | (74,771) | (9,264) |
| Net increase (decrease) in cash and cash equivalents | (1,315) | (12,262) | 12,951 |
| Cash and cash equivalents, beginning of year | 14,594 | 26,856 | 13,905 |
| Cash and cash equivalents, end of year | $13,279 | $14,594 | $26,856 |
| Supplemental disclosure of cash flow information: |  |  |  |
| Cash paid for interest | $40,725 | $44,575 | $44,990 |
| Accrued capital expenditures included in accounts payable, accrued expenses, and other liabilities | $19,006 | $5,906 | $4,327 |

(1) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $79,300 in connection with the contribution of Twinbrook Quarter by the B. F. Saul Real Estate Investment Trust in exchange for limited partnership units, half of which units remain in escrow.
(2) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $21,500 in connection with the contribution of the Twinbrook Quarter leasehold interest in exchange for limited partnership units.
(3) The 2021 acquisition of real estate and proceeds from the issuance of partnership units each excludes $4,320 in connection with the issuance of additional limited partnership units to B. F. Saul Real Estate Investment Trust as additional consideration pursuant to the terms of the 2016 contribution agreement, as amended, related to Ashbrook Marketplace.

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

F-9

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

# **1. ORGANIZATION, BASIS OF PRESENTATION**

Saul Centers, Inc. (“Saul Centers”) was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company is required to annually distribute at least 90% of its REIT taxable income (excluding net capital gains) to its stockholders and meet certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company.” B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B. F. Saul Real Estate Investment Trust (the “Saul Trust”), the B. F. Saul Company and certain other affiliated entities, each of which is controlled by B. Francis Saul II and his family members (collectively, the “Saul Organization”). On August 26, 1993, members of the Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships,” and collectively with the Operating Partnership, the “Partnerships”), Shopping Centers and Mixed-Used Properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties.

The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and mixed-used properties, primarily in the Washington, DC/Baltimore metropolitan area.

Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, a disproportionate economic downturn in the local economy would have a greater negative impact on our overall financial performance than on the overall financial performance of a company with a portfolio that is more geographically diverse. A majority of the Shopping Centers are anchored by several major tenants. As of December 31, 2022, 33 of the Shopping Centers were anchored by a grocery store and offer primarily day-to-day necessities and services. One retail tenant, Giant Food (5.1%), a tenant at 11 Shopping Centers, individually accounted for 2.5% or more of the Company’s total revenue for the year ended December 31, 2022.

As of December 31, 2022, the Current Portfolio Properties consisted of 50 Shopping Centers, seven Mixed-Use Properties, and four (non-operating) development properties.

The accompanying consolidated financial statements of the Company include the accounts of Saul Centers and its subsidiaries, including the Operating Partnership and Subsidiary Partnerships, which are majority owned by Saul Centers. Substantially all assets and liabilities of the Company as of December 31, 2022 and December 31, 2021, are comprised of the assets and liabilities of the Operating Partnership. The debt arrangements which are subject to recourse are described in Note 5. All significant intercompany balances and transactions have been eliminated in consolidation.

The Operating Partnership is a variable interest entity (“VIE”) of the Company because the limited partners do not have substantive kick-out or participating rights. The Company is the primary beneficiary of the Operating Partnership because it has the power to direct the activities of the Operating Partnership and the rights to absorb 72.0% of the net income of the Operating Partnership. Because the Operating Partnership is consolidated into the financial statements of the Company, the identification of it as a VIE has no impact on the consolidated financial statements of the Company.

F-10

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

# **2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

# **Use of Estimates**

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions relate to impairment of real estate properties and collectability of operating lease receivables. Actual results could differ from those estimates.

# **Real Estate Investment Properties**

Real estate investment properties are stated at historic cost less depreciation. Although the Company intends to own its real estate investment properties over a long term, from time to time it will evaluate its market position, market conditions, and other factors and may elect to sell properties that do not conform to the Company's investment profile. Management believes that the Company's real estate assets have generally appreciated in value since their acquisition or development and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company's liabilities as reported in the financial statements. Because the financial statements are prepared in conformity with GAAP, they do not report the current value of the Company's real estate investment properties.

If there is an event or change in circumstance that indicates a potential impairment in the value of a real estate investment property, the Company prepares an analysis to determine whether the carrying value of the real estate investment property exceeds its estimated fair value. The Company considers both quantitative and qualitative factors including recurring operating losses, significant decreases in occupancy, and significant adverse changes in legal factors and business climate. If impairment indicators are present, the Company compares the projected cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying value of that property. The Company assesses its undiscounted projected cash flows based upon estimated capitalization rates, historic operating results and market conditions that may affect the property. If the carrying value is greater than the undiscounted projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its then estimated fair value. The fair value of any property is sensitive to the actual results of any of the aforementioned estimated factors, either individually or taken as a whole. Should the actual results differ from management's projections, the valuation could be negatively or positively affected. The Company did not recognize an impairment loss on any of its real estate in 2022, 2021, or 2020.

Depreciation is calculated using the straight-line method and estimated useful lives of generally between 35 and 50 years for base buildings, or a shorter period if management determines that the building has a shorter useful life, and up to 20 years for certain other improvements that extend the useful lives. Leasehold improvements expenditures are capitalized when certain criteria are met, including when the Company supervises construction and will own the improvements. Tenant improvements are amortized, over the shorter of the lives of the related leases or the useful life of the improvement, using the straight-line method. Depreciation expense, which is included in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, for the years ended December 31, 2022, 2021, and 2020, was $44.6 million, $45.5 million, and $45.9 million, respectively. Repairs and maintenance expense totaled $15.2 million, $13.5 million, and $11.1 million for 2022, 2021, and 2020, respectively, and is included in property operating expenses in the accompanying consolidated financial statements.

As of December 31, 2022, we have not identified any impairment triggering events, including the impact of COVID-19 and corresponding tenant requests for rent relief. Accordingly, under applicable GAAP guidance, no impairment charges were recorded.

F-11

# **SAUL CENTERS, INC.**
**Notes to Consolidated Financial Statements**

# **Assets Held for Sale**

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

- management commits to a plan to sell a property;
- it is unlikely that the disposal plan will be significantly modified or discontinued;
- the property is available for immediate sale in its present condition;
- actions required to complete the sale of the property have been initiated;
- sale of the property is probable and the Company expects the completed sale will occur within one year; and
- the property is actively being marketed for sale at a price that is reasonable given its current market value.

The Company must make a determination as to the point in time that it is probable that a sale will be consummated, which generally occurs when an executed sales contract has no contingencies and the prospective buyer has significant funds at risk to ensure performance. Upon designation as an asset held for sale, the Company records the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and ceases depreciation. As of December 31, 2022 and 2021, the Company had no assets designated as held for sale.

# **Revenue Recognition**

We lease Shopping Centers and Mixed-Use Properties to lessees in exchange for monthly payments that cover rent, and where applicable, reimbursement for property taxes, insurance, and certain property operating expenses. Our leases were determined to be operating leases and generally range in term from one to 15 years.

Some of our leases have termination options and/or extension options. Termination options allow the lessee to terminate the lease prior to the end of the lease term, provided certain conditions are met. Termination options generally require advance notification from the lessee and payment of a termination fee. Termination fees are recognized as revenue over the modified lease term. Extension options are subject to terms and conditions stated in the lease.

Rental and interest income are accrued as earned. Recognition of rental income commences when control of the space has been given to the tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Upon adoption of ASU 2016-02, we made a policy election not to separate lease and nonlease components and have accounted for each lease component and the related nonlease components together as a single component. Expense recoveries are recognized in the period in which the expenses are incurred. Rental income based on a tenant's revenue ("percentage rent") is accrued when a tenant reports sales that exceed a specified breakpoint, pursuant to the terms of their respective leases.

Due to the business disruptions and challenges severely affecting the global economy caused by the novel strain of coronavirus ("COVID-19") pandemic, some lessees have requested rent relief, including rent deferrals and other lease concessions. The lease modification guidance in ASU 2016-02 does not contemplate the rapid execution of concessions for multiple tenants in response to sudden liquidity constraints of lessees. In April 2020, the FASB staff issued a question and answer document that provided guidance allowing the Company to elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply such relief, which, in the case of rent deferrals, results in the accrual of rent due from tenants and defers the payment of that rent to a future date, and will monitor the collectability of rent receivables.

# **Accounts Receivable, Accrued Income, and Allowance for Doubtful Accounts**

Accounts receivable are primarily comprised of rental and reimbursement billings due from tenants, and straight-line rent receivables representing the cumulative amount of adjustments necessary to present rental income on a straight-line basis. Individual leases are assessed for collectability and, upon the determination that the

F-12

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

collection of rents is not probable, accrued rent and accounts receivable are charged off, and the charge off is reflected as an adjustment to rental revenue. Revenue from leases where collection is not probable is recorded on a cash basis until collectability is determined to be probable. We also assess whether operating lease receivables, at the portfolio level, are appropriately valued based upon an analysis of balances outstanding, effects of tenant bankruptcies, historical levels of bad debt and current economic trends. Additionally, because of the uncertainties related to the impact of the COVID-19 pandemic, our assessment also takes into consideration the types of business conducted by tenants and current discussions with the tenants, as well as recent rent collection experience. Evaluating and estimating uncollectable lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to management at the time of evaluation. For the year-ended December 31, 2022, we increased rental revenue by $461,400 due to payments from tenants of receivables that were previously reserved or charged off. Actual results could differ from these estimates.

At December 31, 2022 and December 31, 2021, accounts receivable was comprised of:

| (In thousands) | December 31, 2022 | December 31, 2021 |
| --- | --- | --- |
| Rents currently due | $8,433 | $8,484 |
| Deferred rents | 1,042 | 2,872 |
| Straight-line rent | 45,815 | 46,681 |
| Other receivables | 2,706 | 3,704 |
| Reserve for credit losses on operating lease receivables | (1,673) | (3,082) |
| Total | $56,323 | $58,659 |

### Deferred Leasing Costs

Deferred leasing costs primarily consist of initial direct costs incurred in connection with successful property leasing and amounts attributed to in place leases associated with acquired properties. Such amounts are capitalized and amortized, using the straight-line method, over the term of the lease or the remaining term of an acquired lease. Initial direct costs primarily consist of leasing commissions, costs paid to external third-party brokers, and internal lease commissions that are incremental to obtaining a lease and would not have been incurred if the lease had not been obtained. Unamortized deferred costs are charged to expense if the applicable lease is terminated prior to expiration of the initial lease term. Collectively, deferred leasing costs totaled $22.4 million and $24.0 million, net of accumulated amortization of approximately $51.3 million and $48.7 million, as of December 31, 2022 and 2021, respectively. Amortization expense, which is included in Depreciation and amortization of deferred leasing costs in the Consolidated Statements of Operations, totaled approximately $4.3 million, $4.7 million, and $5.2 million, for the years ended December 31, 2022, 2021, and 2020, respectively.

### Cash and Cash Equivalents

Cash and cash equivalents include short-term investments. Short-term investments include money market accounts and other investments which generally mature within three months, measured from the acquisition date, and/or are readily convertible to cash. Substantially all of the Company’s cash balances at December 31, 2022 are held in accounts at various banks. From time to time the Company may maintain deposits with financial institutions in amounts in excess of federally insured limits. The Company has not experienced any losses on such deposits and believes it is not exposed to any significant credit risk on those deposits.

### Deferred Income

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

F-13

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

# **Derivative Financial Instruments**

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

# **Income Taxes**

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

As of December 31, 2022, the Company had no material unrecognized tax benefits and there exist no potentially significant unrecognized tax benefits which are reasonably expected to occur within the next twelve months. The Company recognizes penalties and interest accrued related to unrecognized tax benefits, if any, as general and administrative expense. No penalties and interest have been accrued in years 2022, 2021, and 2020. The tax basis of the Company’s real estate investments was approximately $1.61 billion and $1.64 billion as of December 31, 2022 and 2021, respectively. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations by tax authorities for years before 2019.

# **Legal Contingencies**

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, which are generally covered by insurance. Upon determination that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements.

# **Recently Issued Accounting Standards**

Recently issued accounting standards or pronouncements have been excluded because they are either not relevant to the Company or they are expected not to have a material impact on the Consolidated Financial Statements of the Company.

# **Reclassifications**

Certain reclassifications have been made to prior years to conform to the presentation used for the year ended December 31, 2022.

F-14

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

# **3. REAL ESTATE**

# **Construction in Progress**

Construction in progress includes land, preconstruction and development costs of active projects. Preconstruction costs include legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. The following table shows the components of construction in progress.

| (in thousands) | December 31, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Twinbrook Quarter | $227,672 | $138,069 |
| Hampden House | 80,704 | 56,898 |
| Other | 11,307 | 10,944 |
| Total | $319,683 | $205,911 |

# **Acquisitions**

# *Twinbrook Quarter*

On November 5, 2019, the Company entered into the Twinbrook Contribution Agreement to acquire from 1592 Rockville Pike, a wholly-owned subsidiary of the Saul Trust, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland in exchange for 1,416,071 limited partnership units in the Operating Partnership. The Contributed Property is immediately adjacent to approximately 10.3 acres owned by the Company. Title to the Contributed Property and the units were placed in escrow until certain conditions of the Twinbrook Contribution Agreement were satisfied.

The units issued to 1592 Rockville Pike will remain in escrow until the conditions of the Twinbrook Contribution Agreement, as amended, are satisfied. Half of the units held in escrow were released on October 18, 2021. The remaining units held in escrow are scheduled to be released on October 18, 2023.

On March 5, 2021, the Company entered into an amendment to the Twinbrook Contribution Agreement in which it and 1592 Rockville Pike agreed to release to the Company from escrow the deed and assignment of the leasehold interest of the Contributed Property, as of that date. The Company also reimbursed 1592 Rockville Pike for certain expenses pursuant to the Twinbrook Contribution Agreement totaling $7.4 million. Acquisition costs totaled $1.2 million. The Company recorded a finance lease right-of-use asset of $19.4 million and corresponding lease liability of $19.4 million related to the leasehold interest assumed in the transaction. The incremental borrowing rate used to calculate the lease liability was 5.63%.

On June 29, 2021, the third-party landlord under the ground lease contributed to the Company the fee simple interest in the land underlying the leasehold interest in exchange for 469,740 limited partnership units in the Operating Partnership, representing an aggregate value of $21.5 million. Acquisition costs were paid in cash and totaled $0.7 million. Accordingly, the finance lease right-of-use asset and finance lease liability were extinguished. Amortization expense and interest expense related to the lease totaled $104,000 and $362,800, respectively, for the twelve months ended December 31, 2021.

F-15

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

# **Allocation of Purchase Price of Real Estate Acquired**

The Company allocates the purchase price of real estate investment properties to various components, such as land, buildings and intangibles related to in-place leases and customer relationships, based on their relative fair values.

During 2021, the Company acquired properties that had an aggregate cost of $108.3 million, including acquisition costs. The entire amount was allocated to land.

The gross carrying amount of lease intangible assets included in deferred leasing costs as of December 31, 2022 and 2021 was $10.7 million and $11.0 million, respectively, and accumulated amortization was $9.2 million and $9.1 million, respectively. Amortization expense totaled $0.4 million, $0.5 million and $0.6 million, for the years ended December 31, 2022, 2021, and 2020, respectively. The gross carrying amount of below market lease intangible liabilities included in deferred income as of December 31, 2022 and 2021 was $23.3 million and $23.3 million, respectively, and accumulated amortization was $17.3 million and $16.0 million, respectively. Accretion income totaled $1.3 million, $1.4 million, and $1.4 million, for the years ended December 31, 2022, 2021, and 2020, respectively. The gross carrying amount of above market lease intangible assets included in accounts receivable as of December 31, 2022 and 2021 was $0.6 million and $0.6 million, respectively, and accumulated amortization was $194,800 and $161,800, respectively. Amortization expense totaled $32,900, $32,900 and $43,600, for the years ended December 31, 2022, 2021 and 2020, respectively. The remaining weighted-average amortization period as of December 31, 2022 is 4.6 years, 6.3 years, and 4.9 years for lease acquisition costs, above market leases and below market leases, respectively.

As of December 31, 2022, scheduled amortization of intangible assets and deferred income related to in place leases is as follows:

| (In thousands) | Lease acquisition costs | Above market leases | Below market leases |
| --- | --- | --- | --- |
| 2023 | $316 | $33 | $1,297 |
| 2024 | 199 | 33 | 878 |
| 2025 | 153 | 33 | 601 |
| 2026 | 131 | 33 | 509 |
| 2027 | 121 | 33 | 507 |
| Thereafter | 593 | 244 | 2,237 |
| Total | $1,513 | $409 | $6,029 |

# **4. NONCONTROLLING INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP**

Saul Centers is the sole general partner of the Operating Partnership, owning a 72.0% common interest as of December 31, 2022. Noncontrolling interest in the Operating Partnership is comprised of limited partnership units owned by the Saul Organization. Noncontrolling interest reflected on the accompanying consolidated balance sheets is increased for earnings allocated to limited partnership interests and distributions reinvested in additional units, and is decreased for limited partner distributions. Noncontrolling interest reflected on the consolidated statements of operations represents earnings allocated to limited partnership interests held by the Saul Organization.

The Saul Organization holds a 26.6% limited partnership interest in the Operating Partnership represented by 8,827,873 limited partnership units, as of December 31, 2022. The units are convertible into shares of Saul Centers’ common stock, at the option of the unit holder, on a one-for-one basis provided that, in accordance with the Saul Centers, Inc. Articles of Incorporation, the rights may not be exercised at any time that the Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 39.9% of the value of the outstanding common stock and preferred stock of Saul Centers (the “Equity Securities”). As of December 31, 2022, approximately 411,000 units were eligible for conversion.

F-16

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

As of December 31, 2022, a third party investor holds a 1.4% limited partnership interest in the Operating Partnership represented by 469,740 convertible limited partnership units. At the option of the unit holder, these units are convertible into shares of Saul Centers' common stock on a one-for-one basis; provided that, in lieu of the delivery of Saul Centers' common stock, Saul Centers may, in its sole discretion, deliver cash in an amount equal to the value of such Saul Centers' common stock.

The impact of the Saul Organization's 26.6% limited partnership interest in the Operating Partnership is reflected as Noncontrolling Interests in the accompanying consolidated financial statements. Weighted average fully diluted partnership units and common stock outstanding for the years ended December 31, 2022, 2021, and 2020, were 34.0 million, 33.1 million, and 31.3 million, respectively.

The Company previously issued 708,035 limited partnership units related to the contribution of Twinbrook Quarter that are held in escrow and will be released on October 18, 2023. Until such time as the units are released from escrow, they are not eligible to receive distributions from the Operating Partnership.

# **5. NOTES PAYABLE, BANK CREDIT FACILITY, INTEREST EXPENSE AND AMORTIZATION OF DEFERRED DEBT COSTS**

At December 31, 2022, the principal amount of outstanding debt totaled $1.2 billion, of which $1.07 billion was fixed rate debt and $164.0 million was variable rate debt. The principal amount of the Company's outstanding debt totaled $1.2 billion at December 31, 2021, of which $949.0 million was fixed rate debt and $206.0 million was variable rate debt.

At December 31, 2022, the Company had a $525.0 million Credit Facility comprised of a $425.0 million revolving credit facility and a $100.0 million term loan. The revolving credit facility matures on August 29, 2025, which may be extended by the Company for one additional year, subject to satisfaction of certain conditions. The term loan matures on February 26, 2027, and may not be extended. Through October 2, 2022, interest accrued at LIBOR plus an applicable spread, which was determined by certain leverage tests. Effective October 3, 2022, in conjunction with the execution of the First Amendment to the Credit Facility, interest accrues at SOFR plus 10 basis points plus an applicable spread, which is determined by certain leverage tests. As of December 31, 2022, the applicable spread for borrowings was 140 basis points related to the revolving credit facility and 135 basis points related to the term loan. Letters of credit may be issued under the Credit Facility. On December 31, 2022, based on the value of the Company's unencumbered properties, approximately $212.1 million was available under the Credit Facility, $264.0 million was outstanding and approximately $185,000 was committed for letters of credit.

On August 23, 2022, the Company entered into two floating-to-fixed interest rate swap agreements to manage the interest rate risk associated with $100.0 million of its variable-rate debt. Each swap agreement became effective October 3, 2022 and each has a $50.0 million notional amount. One agreement terminates on October 1, 2027 and effectively fixes SOFR at 2.96%. The other agreement terminates on October 1, 2030 and effectively fixes SOFR at 2.91%. Because the interest-rate swaps effectively fix SOFR for $100.0 million of variable-rate debt, unless otherwise indicated, $100.0 million of variable-rate debt will be treated as fixed-rate debt for disclosure purposes beginning September 30, 2022. The Company has designated the agreements as cash flow hedges for accounting purposes.

As of December 31, 2022, the fair value of the interest-rate swaps totaled approximately $4.0 million, which is included in Other assets in the Consolidated Balance Sheets. The increase in value from inception of the swaps is reflected in Other Comprehensive Income in the Consolidated Statements of Comprehensive Income.

On February 23, 2022, the Company closed on a $133.0 million construction-to-permanent loan, the proceeds of which will be used to partially fund Hampden House. The loan matures in 2040, bears interest at a fixed rate of 3.90%, and requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the first quarter of 2026, and thereafter, monthly principal and interest payments based on a 25-year amortization schedule will be required.

On March 11, 2022, the Company repaid in full the remaining principal balance of $28.3 million of the mortgage loan secured by Lansdowne Town Center, which was scheduled to mature in June 2022.

F-17

# **SAUL CENTERS, INC.**
**Notes to Consolidated Financial Statements**

On June 7, 2022, the Company repaid in full the remaining principal balance of $8.6 million of the mortgage loan secured by Orchard Park, which was scheduled to mature in September 2022.

On August 4, 2022, the Company closed on a 15-year, non-recourse, $25.3 million mortgage secured by Village Center. The loan matures in 2037, bears interest at a fixed-rate of 4.14%, requires monthly principal and interest payments of $135,200 based on a 25-year amortization schedule and requires a final payment of $13.4 million at maturity. Proceeds were used to repay the remaining balance of approximately $11.2 million on the existing mortgage and reduce the outstanding balance of the Credit Facility. A $0.4 million loss on early extinguishment of debt was recognized.

On August 24, 2022, the Company closed on a 7-year, non-recourse, $31.5 million mortgage secured by Great Falls Center. The loan matures in 2029, bears interest at a fixed-rate of 3.91%, requires monthly principal and interest payments of $164,700 based on a 25-year amortization schedule and requires a final payment of $25.7 million at maturity. Proceeds were used to repay the remaining balance of approximately $8.0 million on the existing mortgage and reduce the outstanding balance of the Credit Facility. A $0.2 million loss on early extinguishment of debt was recognized.

On September 6, 2022, the Company closed on a 15-year, non-recourse, $143.0 million mortgage secured by Beacon Center and Seven Corners Center. The loan matures in 2037, bears interest at a fixed-rate of 5.05%, requires monthly principal and interest payments of $840,100 based on a 25-year amortization schedule and requires a final payment of $79.9 million at maturity. Proceeds were used to repay the remaining balance of approximately $85.3 million on the existing mortgages and reduce the outstanding balance of the Credit Facility. This transaction was treated as a modification of the original debt agreement. A prepayment penalty of $5.9 million was incurred, which was deferred and will be amortized as interest expense over the life of the loan and is included as a reduction to notes payable, net in the Consolidated Balance Sheets.

Saul Centers and certain consolidated subsidiaries of the Operating Partnership have guaranteed the payment obligations of the Operating Partnership under the Credit Facility. The Operating Partnership is the guarantor of (a) a portion of the Broadlands mortgage (approximately $3.6 million of the $28.9 million outstanding balance at December 31, 2022), (b) a portion of the Avenel Business Park mortgage (approximately $6.3 million of the $22.9 million outstanding balance at December 31, 2022), (c) a portion of The Waycroft mortgage (approximately $23.6 million of the $152.7 million outstanding balance at December 31, 2022), (d) the Ashbrook Marketplace mortgage (totaling $20.8 million at December 31, 2022), and (e) the mortgage secured by Kentlands Place, Kentlands Square I and Kentlands pad (totaling $28.2 million at December 31, 2022). All other notes payable are non-recourse.

On January 5, 2021, the Company repaid in full the remaining principal balance of $6.1 million of the mortgage loan secured by Jamestown Place, which was scheduled to mature in February 2021.

On June 11, 2021, the Company repaid in full the remaining principal balance of $5.0 million of the mortgage loan secured by Hunt Club Corners, which was scheduled to mature in August 2021.

On November 19, 2021, the Company closed on a $145.0 million construction-to-permanent loan, the proceeds of which will be used to partially fund Phase I of the Twinbrook Quarter development project. The loan matures in 2041, bears interest at a fixed rate of 3.83%, requires interest only payments, which will be funded by the loan, until conversion to permanent. The conversion is expected in the fourth quarter of 2026, and thereafter, monthly principal and interest payments based on a 25-year amortization schedule will be required.

The carrying value of the properties collateralizing the mortgage notes payable totaled $1.0 billion and $1.1 billion, as of December 31, 2022 and 2021, respectively. The Company's Credit Facility requires the Company and its subsidiaries to maintain certain financial covenants, which are summarized below. The Company was in compliance as of December 31, 2022.

- limit the amount of debt as a percentage of gross asset value, as defined in the loan agreement, to less than 60% (leverage ratio);
- limit the amount of debt so that interest coverage will exceed 2.0 x on a trailing four-quarter basis (interest expense coverage); and

F-18

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

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

Mortgage notes payable totaling $2.0 million and $41.0 million, respectively, at each of December 31, 2022 and 2021, are guaranteed by members of the Saul Organization.

As of December 31, 2022, the scheduled maturities of all debt including scheduled principal amortization for years ended December 31 are as follows:

| (in thousands) | Balloon Payments | Scheduled Principal Amortization | Total |
| --- | --- | --- | --- |
| 2023 | $9,225 | $32,926 | $42,151 |
| 2024 | 50,117 | 33,566 | 83,683 |
| 2025 | 184,363 (a) | 31,423 | 215,786 |
| 2026 | 134,088 | 28,062 | 162,150 |
| 2027 | 100,000 (b) | 23,454 | 123,454 |
| Thereafter | 440,093 | 171,366 | 611,459 |
| Principal amount | $917,886 | $320,797 | 1,238,683 |
| Unamortized deferred debt costs |  |  | 15,783 |
| Net |  |  | $1,222,900 |

(a) Includes $164.0 million outstanding under the Credit Facility.

(b) Includes $100.0 million outstanding under the Credit Facility.

# **Deferred Debt Costs**

Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the Credit Facility. These fees and costs are being amortized on a straight-line basis over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $15.8 million and $11.2 million, net of accumulated amortization of $7.9 million and $7.7 million at December 31, 2022 and 2021, respectively, and are reflected as a reduction of the related debt in the Consolidated Balance Sheets.

The components of interest expense are set forth below.

| (in thousands) | Year ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Interest incurred | $53,219 | $50,552 | $51,705 |
| Amortization of deferred debt costs | 1,985 | 1,710 | 1,570 |
| Capitalized interest | (11,191) | (6,831) | (6,616) |
| Interest expense | 44,013 | 45,431 | 46,659 |
| Less: Interest income | 76 | 7 | 140 |
| Interest expense, net and amortization of deferred debt costs | $43,937 | $45,424 | $46,519 |

Deferred debt costs capitalized during the years ended December 31, 2022, 2021 and 2020 totaled $9.9 million, $6.4 million and $1.2 million, respectively.

F-19

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

# **6. LEASE AGREEMENTS**

Lease income includes primarily base rent arising from noncancelable leases. Base rent (including straight-line rent) for the years ended December 31, 2022, 2021, and 2020, amounted to $201.2 million, $197.9 million, and $188.6 million, respectively. Future contractual payments under noncancelable leases for years ended December 31 (which exclude the effect of straight-line rents), are as follows:

| (in thousands) |  |
| --- | --- |
| 2023 | $168,994 |
| 2024 | 150,313 |
| 2025 | 126,360 |
| 2026 | 101,571 |
| 2027 | 82,878 |
| Thereafter | 318,265 |
|  | $948,381 |

The majority of the leases provide for rental increases based on fixed annual increases or increases in the Consumer Price Index and expense recoveries based on increases in operating expenses. The expense recoveries generally are payable in equal installments throughout the year based on estimates, with adjustments made in the succeeding year. Expense recoveries for the years ended December 31, 2022, 2021, and 2020, amounted to $36.0 million, $34.5 million, and $34.7 million, respectively. In addition, certain retail leases provide for percentage rent based on sales in excess of the minimum specified in the tenant’s lease. Percentage rent amounted to $1.6 million, $1.5 million, and $0.9 million, for the years ended December 31, 2022, 2021, and 2020, respectively.

# **7. LONG-TERM LEASE OBLIGATIONS**

At December 31, 2022 and 2021, no properties were situated upon land subject to noncancelable long-term leases.

Flagship Center consists of two developed out parcels that are part of a larger adjacent community shopping center formerly owned by the Saul Organization and sold to an affiliate of a tenant in 1991. The Company has a 90-year ground leasehold interest which commenced in September 1991 with a minimum rent of one dollar per year. Countryside shopping center was acquired in February 2004. Because of certain land use considerations, approximately 3.4% of the underlying land is held under a 99-year ground lease. The lease requires the Company to pay minimum rent of one dollar per year as well as its pro-rata share of the real estate taxes.

The Company’s corporate headquarters space is leased by a member of the Saul Organization. The lease commenced in March 2002 and expires in February 2027. The Company and the Saul Organization entered into a Shared Services Agreement whereby each party pays an allocation of total rental payments based on a percentage proportionate to the number of employees employed by each party. The Company’s rent expense for the years ended December 31, 2022, 2021, and 2020 was $824,300, $799,500, and $799,300, respectively. Expenses arising from the lease are included in general and administrative expense (see Note 9 - Related Party Transactions).

On January 1, 2019, in conjunction with the adoption of ASU 2016-02, a right of use asset and corresponding lease liability related to our headquarters lease were recorded in other assets and other liabilities, respectively. The lease commenced in March 2002 and expires on February 28, 2027. On February 28, 2022, the lease was extended for an additional period of 60 months. In conjunction with the lease extension, a right of use asset and corresponding lease liability was recognized of $3.8 million and $3.8 million, respectively. The right of use asset and corresponding lease liability totaled $3.2 million and $3.2 million, respectively, at December 31, 2022.

# **8. EQUITY AND NONCONTROLLING INTERESTS**

The Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 2020 reflect noncontrolling interests of $15.2 million, $13.3 million, and $9.9 million, respectively, representing income attributable to limited partnership units not held by Saul Centers.

F-20

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

At December 31, 2022, the Company had outstanding 3.0 million depository shares, each representing 1/100th of a share of 6.125% Series D Cumulative Redeemable Preferred Stock (the 'Series D Stock'). The depository shares may be redeemed at the Company's option, in whole or in part, on or after January 23, 2023, at the $25.00 liquidation preference, plus accrued but unpaid dividends to but not including the redemption date. The depository shares pay an annual dividend of $1.53125 per share, equivalent to 6.125% of the $25.00 liquidation preference. The Series D Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the depository shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

At December 31, 2022, the Company had outstanding 4.4 million depository shares, each representing 1/100th of a share of 6.000% Series E Cumulative Redeemable Preferred Stock (the 'Series E Stock'). The depository shares may be redeemed at the Company's option, in whole or in part, on or after September 17, 2024, at the $25.00 liquidation preference, plus accrued but unpaid dividends to but not including the redemption date. The depository shares pay an annual dividend of $1.50 per share, equivalent to 6.000% of the $25.00 liquidation preference. The Series E Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company except in connection with certain changes in control or delisting events. Investors in the depository shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

# **Per Share Data**

Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company's potentially dilutive securities. For all periods presented, the convertible limited partnership units are anti-dilutive. The treasury stock method was used to measure the effect of the dilution.

|  | December 31, |  |  |
| --- | --- | --- | --- |
| (Shares in thousands) | 2022 | 2021 | 2020 |
| Weighted average common shares outstanding - Basic | 23,964 | 23,655 | 23,356 |
| Effect of dilutive options | 8 | 7 | 1 |
| Weighted average common shares outstanding - Diluted | 23,972 | 23,662 | 23,357 |
| Average share price | $46.21 | $43.53 | $33.84 |
| Non-dilutive options | 1,438 | 1,360 | 1,439 |
| Years non-dilutive options were issued | 2013 through 2022 | 2013 through 2021 | 2014 through 2020 |

# **9. RELATED PARTY TRANSACTIONS**

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

The Company participates in a multiemployer 401K plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. Company contributions, which are included in general and administrative expense or property operating expenses in the consolidated statements of operations, at the discretionary amount of up to 6% of the employee's cash compensation, subject to certain limits,

F-21

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

were $387,700, $404,300, and $302,000, for 2022, 2021, and 2020, respectively. All amounts deferred by employees and contributed by the Company are fully vested.

The Company also participates in a multiemployer nonqualified deferred compensation plan with entities in the Saul Organization which covers those full-time employees who meet the requirements as specified in the plan. According to the plan, which can be modified or discontinued at any time, participating employees defer 2% of their compensation in excess of a specified amount and the Company matches those deferrals up to three times the amount deferred by employees. The Company’s expense, included in general and administrative expense, totaled $337,900, $238,400, and $241,300, for the years ended December 31, 2022, 2021, and 2020, respectively. All amounts deferred by employees and the Company are fully vested. The cumulative unfunded liability under this plan was $3.0 million and $3.2 million, at December 31, 2022 and 2021, respectively, and is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.

The Company has entered into a shared services agreement (the “Agreement”) with the Saul Organization that provides for the sharing of certain personnel and ancillary functions such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is provided for in the Agreement and is based upon head count, estimates of usage or estimates of time incurred, as applicable. Senior management has determined that the final allocations of shared costs are reasonable. The terms of the Agreement and the payments made thereunder are reviewed annually by the Audit Committee of the Board of Directors, which consists entirely of independent directors. Net billings by the Saul Organization for the Company’s share of these ancillary costs and expenses for the years ended December 31, 2022, 2021, and 2020, which included rental expense for the Company’s headquarters lease (see Note 7. Long Term Lease Obligations), totaled $9.6 million, $8.0 million, and $7.4 million, respectively. The amounts are expensed when incurred and are primarily reported as general and administrative expenses or capitalized to specific development projects in these consolidated financial statements. As of December 31, 2022 and 2021, accounts payable, accrued expenses and other liabilities included $1.2 million and $1.1 million, respectively, representing billings due to the Saul Organization for the Company’s share of these ancillary costs and expenses.

On March 5, 2021, the Company acquired from 1592 Rockville Pike, approximately 6.8 acres of land and its leasehold interest in approximately 1.3 acres of contiguous land, together in each case with the improvements located thereon, located at the Twinbrook Metro Station in Rockville, Maryland. See Notes 3 and 4.

In August 2016, the Company entered into an agreement (the “Ashbrook Contribution Agreement”) to acquire from the Saul Trust approximately 13.7 acres of land located at the intersection of Ashburn Village Boulevard and Russell Branch Parkway in Ashburn, Virginia. The transaction closed on May 9, 2018, and the Company issued 176,680 limited partnership units to the Saul Trust. The Company constructed a shopping center, Ashbrook Marketplace. On June 30, 2021, the Company issued 93,674 additional limited partnership units as additional consideration to the Saul Trust in accordance with the Ashbrook Contribution Agreement, as amended.

The B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the B. F. Saul Company and a member of the Saul Organization, is a general insurance agency that receives commissions and counter-signature fees in connection with the Company’s insurance program. Such commissions and fees amounted to approximately $286,900, $397,900, and $427,700, for the years ended December 31, 2022, 2021, and 2020, respectively.

## **10. STOCK OPTION PLAN**

### **Stock Based Employee Compensation, Deferred Compensation and Stock Plan for Directors**

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

The Company uses the fair value method to value and account for employee stock options. The fair value of options granted is determined at the time of each award using the Black-Scholes model, a widely used

F-22

# **SAUL CENTERS, INC.**  
**Notes to Consolidated Financial Statements**

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

Pursuant to the Plan, the Compensation Committee established a Deferred Compensation Plan for Directors for the benefit of the Company's directors and their beneficiaries, which replaced a previous Deferred Compensation and Stock Plan for Directors. Annually, directors are given the ability to make an election to defer all or part of their fees and have the option to have their fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon separation from the Board. If a director elects to their have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the closing market price of the Company's common stock on the first trading day of the following quarter to determine the number of shares to be credited to the director. During the twelve months ended December 31, 2022, 8,322 shares were credited to director's deferred fee accounts and 7,738 shares were issued. As of December 31, 2022, the director's deferred fee accounts comprise 120,824 shares.

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

At the annual meeting of the Company's stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 stock plan was subsequently amended by the Company's stockholders at the 2008 Annual Meeting, further amended at the 2013 Annual Meeting, and further amended at the 2019 Annual Meeting (the 'Amended 2004 Plan'). The Amended 2004 Plan, which terminates in 2029, provides for grants of options to purchase up to 3,400,000 shares of common stock. The Amended 2004 Plan authorizes the Compensation Committee of the Board of Directors to grant options at an exercise price which may not be less than the market value of the common stock on the date the option is granted.

Effective April 24, 2020, the Compensation Committee granted options to purchase 238,000 shares (29,624 incentive stock options and 208,376 nonqualified stock options) to 20 Company officers and 11 Company Directors (the '2020 Options'), which expire on April 23, 2030. The officers' 2020 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors' 2020 Options were immediately exercisable. The exercise price of $50.00 per share was determined by the Compensation Committee. The exercise price was greater than the closing market price of the Company's common stock on the date of award, which was $28.02. Using the Black-Scholes model, the Company determined the total fair value of the 2020 Options to be $0.2 million, of which $0.2 million and $23,100 were assigned to the officer options and director options, respectively. Because the directors' options vested immediately, the entire $23,100 was expensed as of the date of grant. The expense for the officers' options is being recognized as compensation expense monthly during the four years the options vest.

Effective May 7, 2021, the Compensation Committee granted options to purchase 250,500 shares (35,572 incentive stock options and 214,928 nonqualified stock options) to 21 Company officers and 11 Company Directors (the '2021 Options'), which expire on May 6, 2031. The officers' 2021 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors' 2021 Options were immediately exercisable. The exercise price of $43.89 per share was the closing market price of the Company's common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2021 Options to be $1.4 million, of which $1.2 million and $173,800 were assigned to the officer options and director options, respectively. Because the directors' options vested immediately, the entire $173,800 was expensed

F-23

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest.

Effective May 13, 2022, the Compensation Committee granted options to purchase 248,000 shares (25,745 incentive stock options and 222,255 nonqualified stock options) to 19 Company officers and 11 Company Directors (the “2022 Options”), which expire on May 12, 2032. The officers’ 2022 Options vest 25% per year over four years and are subject to early expiration upon termination of employment. The directors’ 2022 Options were immediately exercisable. The exercise price of $47.90 per share was the closing market price of the Company’s common stock on the date of award. Using the Black-Scholes model, the Company determined the total fair value of the 2022 Options to be $1.8 million, of which $1.6 million and $229,350 were assigned to the officer options and director options, respectively. Because the directors’ options vested immediately, the entire $229,350 was expensed as of the date of grant. The expense for the officers’ options is being recognized as compensation expense monthly during the four years the options vest.

The following table summarizes the assumptions used in the valuation of the 2020, 2021 and 2022 option grants. During the twelve months ended December 31, 2022, stock option expense totaling $1.3 million was included in general and administrative expense in the Consolidated Statements of Operations. As of December 31, 2022, the estimated future expense related to unvested stock options was $2.1 million.

| Grant date | Directors |  |  | Officers |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | May 13, 2022 | May 7, 2021 | April 24, 2020 | May 13, 2022 | May 7, 2021 | April 24, 2020 |
| Exercise price | $47.90 | $43.89 | $50.00 | $47.90 | $43.89 | $50.00 |
| Fair value per option | $8.34 | $6.32 | $0.84 | $7.66 | $5.96 | $0.92 |
| Volatility | 30.00% | 29.70% | 25.80% | 27.10% | 27.50% | 24.00% |
| Expected life (years) | 5.0 | 5.0 | 5.0 | 7.0 | 7.0 | 7.0 |
| Assumed yield | 4.90% | 4.96% | 3.80% | 4.93% | 4.97% | 3.85% |
| Risk-free rate | 2.89% | 0.77% | 0.36% | 2.95% | 1.24% | 0.51% |

The table below summarizes the option activity for the years 2022, 2021, and 2020:

|  | 2022 |  | 2021 |  | 2020 |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price |
| Outstanding at January 1 | 1,601,250 | $51.73 | 1,502,670 | $52.86 | 1,309,614 | $53.38 |
| Granted | 248,000 | 47.90 | 250,500 | 43.89 | 238,000 | 50.00 |
| Exercised | (26,875) | 44.44 | (64,920) | 45.07 | (10,749) | 49.19 |
| Expired/Forfeited | (54,000) | 52.60 | (87,000) | 53.60 | (34,195) | 54.09 |
| Outstanding December 31 | 1,768,375 | 51.28 | 1,601,250 | 51.73 | 1,502,670 | 52.86 |
| Exercisable at December 31 | 1,237,250 | 52.76 | 1,098,500 | 53.22 | 971,545 | 53.01 |

The intrinsic value of options exercised in 2022, 2021, and 2020, was $0.2 million, $0.4 million and $0.1 million, respectively. There was no intrinsic value of options outstanding and exercisable at year end 2022. The intrinsic value of options outstanding and exercisable at year end 2021 was $4.9 million and $2.3 million, respectively. The date of exercise was the measurement date for shares exercised during the period. The intrinsic value measures the difference between the options’ exercise price and the closing share price quoted by the New

F-24

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

York Stock Exchange as of the date of measurement. At December 30, 2022, the final trading day of calendar 2022, the closing price of $40.68 per share was used for the calculation of aggregate intrinsic value of options outstanding and exercisable at that date. The weighted average remaining contractual life of the Company’s exercisable and outstanding options at December 31, 2022 are 4.7 and 5.8 years, respectively.

# **11. FAIR VALUE OF FINANCIAL INSTRUMENTS**

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and floating rate debt are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed-rate payment terms was determined using Level 2 data in a discounted cash flow approach, which is based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, would be approximately $919.2 million and $933.0 million as of December 31, 2022 and 2021, respectively, compared to the principal balance of $1.07 billion and $949.0 million at December 31, 2022 and 2021, respectively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt.

# **12. DERIVATIVES AND HEDGING ACTIVITIES**

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2022, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that approximately $1.8 million will be reclassified from other comprehensive income and reflected as a decrease to interest expense.

The Company carries its interest-rate swaps at fair value. The Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was determined using Level 3 inputs and is not significant. Derivative instruments are classified within Level 2 of the fair value hierarchy because their values are determined using third-party pricing models that contain inputs that are derived from observable market data. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measure of volatility, and correlations of such inputs.

The table below details the fair value and location of the interest rate swaps as of December 31, 2022 and 2021.

| (In thousands) | Fair Values of Derivative Instruments |  |  |  |
| --- | --- | --- | --- | --- |
|  | December 31, |  |  |  |
|  | 2022 |  | 2021 |  |
| Derivative Instrument | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value |
| Interest rate swaps | Other Assets | $3,962 | N/A | N/A |

F-25

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2022, 2021, and 2020.

| (In thousands) | The Effect of Hedge Accounting on Other Comprehensive Income (OCI) |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Amount of Gain (or Loss) Recognized in OCI |  |  | Location of Gain (or Loss) Reclassified from OCI into Income |  |  | Amount of Gain (or Loss) Reclassified from OCI into Income |  |  |
|  | For the Years Ended December 31, |  |  |  |  |  |  |  |  |
| Derivative Instrument | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 |
| Interest rate swaps | $4,139 | $- | $- | Interest expense, net and amortization of deferred debt costs | N/A | N/A | $177 | N/A | N/A |

# **13. COMMITMENTS AND CONTINGENCIES**

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

# **14. DISTRIBUTIONS**

In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commissions, service charges or other expenses. All expenses of the Plan are paid by the Company. The Operating Partnership also maintains a similar dividend reinvestment plan that mirrors the Plan, which allows holders of limited partnership interests the opportunity to buy either additional limited partnership units or common stock shares of the Company.

The Company paid common stock distributions of $2.32 per share in 2022, $2.16 per share in 2021, and $2.12 per share in 2020, Series D preferred stock dividends of $1.53, $1.53 and $1.53, respectively, per depository share in 2022, 2021, and 2020, and Series E preferred stock dividends of $1.50, $1.50, and $1.50, respectively, per depository share in 2022, 2021, and 2020. Of the common stock dividends paid, $1.32 per share, $1.49 per share, and $1.43 per share, represented ordinary dividend income in 2022, 2021, and 2020, respectively, and $1.00 per share, $0.67 per share, and $0.69 per share represented return of capital to the shareholders in 2022, 2021, and 2020, respectively. All of the preferred dividends paid represented ordinary dividend income.

F-26

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

The following summarizes distributions paid during the years ended December 31, 2022, 2021, and 2020, and includes activity in the Plan as well as limited partnership units issued from the reinvestment of unit distributions:

| (Dollars in thousands, except per share amounts) | Total Distributions to |  |  | Dividend Reinvestments |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  | Preferred Stockholders | Common Stockholders | Limited Partnership Unitholders | Common Stock Shares Issued | Discounted Share Price | Limited Partnership Units Issued | Average Unit Price |
| Distributions during 2022 |  |  |  |  |  |  |  |
| 4th Quarter | $2,798 | $14,159 | $5,486 | 13,698 | $39.70 | - | $ - |
| 3rd Quarter | 2,799 | 14,156 | 5,486 | 10,577 | 50.80 | - | - |
| 2nd Quarter | 2,798 | 13,625 | 5,292 | 57,819 | 51.61 | 12,955 | 51.55 |
| 1st Quarter | 2,799 | 13,583 | 5,284 | 61,863 | 47.66 | 13,704 | 48.16 |
| Total 2022 | $11,194 | $55,523 | $21,548 | 143,957 |  | 26,659 |  |
| Distributions during 2021 |  |  |  |  |  |  |  |
| 4th Quarter | $2,798 | $13,037 | $4,702 | 63,970 | $45.46 | 13,697 | $45.95 |
| 3rd Quarter | 2,799 | 12,999 | 4,694 | 65,171 | 44.44 | 13,841 | 44.92 |
| 2nd Quarter | 2,798 | 12,488 | 4,218 | 68,206 | 41.87 | 13,978 | 42.33 |
| 1st Quarter | 2,799 | 12,439 | 4,207 | 96,268 | 29.50 | 19,493 | 29.83 |
| Total 2021 | $11,194 | $50,963 | $17,821 | 293,615 |  | 61,009 |  |
| Distributions during 2020 |  |  |  |  |  |  |  |
| 4th Quarter | $2,798 | $12,371 | $4,195 | 117,368 | $24.08 | 23,370 | $24.35 |
| 3rd Quarter | 2,799 | 12,373 | 4,188 | 14,525 | 28.98 | 13,108 | 29.47 |
| 2nd Quarter | 2,798 | 12,364 | 4,188 | 12,627 | 32.22 | - | - |
| 1st Quarter | 2,799 | 12,275 | 4,180 | 83,978 | 48.59 | 15,101 | 49.40 |
| Total 2020 | $11,194 | $49,383 | $16,751 | 228,498 |  | 51,579 |  |

In December 2022, the Board of Directors of the Company authorized a distribution of $0.59 per common share payable in January 2023 to holders of record on January 17, 2023. As a result, $13.6 million was paid to common shareholders on January 31, 2023. Also, $5.5 million was paid to limited partnership unitholders on January 31, 2023 ($0.59 per Operating Partnership unit). The Board of Directors authorized preferred stock dividends of (a) $0.3750 per Series E depository share and (b) $0.3828 per Series D depository share to holders of record on January 3, 2023. As a result, $2.8 million was paid to preferred shareholders on January 17, 2023. These amounts are reflected as a reduction of stockholders’ equity in the case of common stock and preferred stock dividends and noncontrolling interests deductions in the case of limited partner distributions and are included in dividends and distributions payable in the accompanying consolidated financial statements.

## 15. BUSINESS SEGMENTS

The Company has two reportable business segments: Shopping Centers and Mixed-Use Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income and cash flows from real estate for the combined properties in each segment. All of our properties within each segment generate similar types of revenues and expenses related to tenant rent, reimbursements and operating expenses. Although services are provided to a range of tenants, the types of services provided to them are similar within each segment. The properties in each portfolio have similar economic characteristics and the nature of the products and services provided to our tenants and the method to distribute such services are consistent throughout the portfolio. Certain reclassifications have been made to prior year information to conform to the 2022 presentation.

F-27

# **SAUL CENTERS, INC.**  
 **Notes to Consolidated Financial Statements**

*(In thousands)*

As of or for the year ended December 31, 2022

|  | Shopping Centers | Mixed-Use Properties | Corporate and Other | Consolidated Totals |
| --- | --- | --- | --- | --- |
| Real estate rental operations: |  |  |  |  |
| Revenue | $172,055 | $73,805 | $ - | $245,860 |
| Expenses | (36,895) | (27,627) | - | (64,522) |
| Income from real estate | 135,160 | 46,178 | - | 181,338 |
| Interest expense, net and amortization of deferred debt costs | - | - | (43,937) | (43,937) |
| General and administrative | - | - | (22,392) | (22,392) |
| Depreciation and amortization of deferred leasing costs | (28,359) | (20,610) | - | (48,969) |
| Loss on early extinguishment of debt | - | - | (648) | (648) |
| Net income (loss) | $106,801 | $25,568 | $(66,977) | $65,392 |
| Capital investment | $8,412 | $108,476 | $ - | $116,888 |
| Total assets | $928,071 | $885,500 | $19,731 | $1,833,302 |

As of or for the year ended December 31, 2021

| Real estate rental operations: |  |  |  |  |
| --- | --- | --- | --- | --- |
| Revenue | $169,681 | $69,544 | $ - | $239,225 |
| Expenses | (35,784) | (25,844) | - | (61,628) |
| Income from real estate | 133,897 | 43,700 | - | 177,597 |
| Interest expense, net and amortization of deferred debt costs | - | - | (45,424) | (45,424) |
| General and administrative | - | - | (20,252) | (20,252) |
| Depreciation and amortization of deferred leasing costs | (28,843) | (21,429) | - | (50,272) |
| Net income (loss) | $105,054 | $22,271 | $(65,676) | $61,649 |
| Capital investment | $12,673 | $43,245 | $ - | $55,918 |
| Total assets | $946,993 | $777,709 | $22,059 | $1,746,761 |

As of or for the year ended December 31, 2020

| Real estate rental operations: |  |  |  |  |
| --- | --- | --- | --- | --- |
| Revenue | $161,854 | $63,353 | $ - | $225,207 |
| Expenses | (35,198) | (23,219) | - | (58,417) |
| Income from real estate | 126,656 | 40,134 | - | 166,790 |
| Interest expense, net and amortization of deferred debt costs | - | - | (46,519) | (46,519) |
| General and administrative | - | - | (19,107) | (19,107) |
| Depreciation and amortization of deferred leasing costs | (30,891) | (20,235) | - | (51,126) |
| Gain on sale of property | 278 | - | - | 278 |
| Net income (loss) | $96,043 | $19,899 | $(65,626) | $50,316 |
| Capital investment | $15,207 | $40,947 | $ - | $56,154 |
| Total assets | $975,195 | $643,503 | $26,874 | $1,645,572 |

F-28