With consistent income generation and assets that stand to benefit from the gradual return to pre-pandemic lifestyles, Saul Centers, Inc. (BFS) has the fundamental strength to deliver consistent and impressive risk-adjusted returns in an economy exhibiting signs of sluggishness.
The retail sales data for March, released earlier today, dropped 1%, higher than the 0.4% decline expected by economists polled by Reuters. This represents the second straight monthly decline following an increase in January. The data increased by 2.9% year-over-year.
Also, March's Producer Price Index (PPI) declined 0.5% from the prior month, registering its largest drop since April 2020. Moreover, with the Consumer Price Index (CPI) data also indicating that the cumulative effect of interest-rate hikes by the Federal Reserve has begun to cool down inflation, an ebb in economic growth, although likely, may be short-lived.
Despite the inevitability of a turnaround, wild mood swings of the manic-depressive Mr. Market are expected to continue in the foreseeable future rendering jeopardizing returns from asset price appreciation.
In such a scenario, Real Estate Investment Trusts (REITs) are well placed to outperform other asset classes due to stable and rising rental incomes. With a mandate to pay at least 90% of their taxable income as dividends, REITs are ideal all-weather investment vehicles for long-term income investors when subscribed to at attractive valuations.
BFS is a REIT that is engaged in the ownership, operation, management, leasing, acquisition, renovation, expansion, development, and financing of community and neighborhood shopping centers and mixed-use properties. The company operates through two business segments: Shopping Centers and Mixed-Use Properties.
The stock has gained 6.3% over the past month to close the last trading session at $38.80.
Let’s take a closer look at BFS’ fundamentals.
Decent Track Record
Over the past three years, BFS’ revenue has grown at a 2% CAGR, while its EBITDA has grown at a 1.7% CAGR.
Over the same time horizon, BFS’ EPS and Total Assets have grown at 1.2% and 4.2% year-over-year, respectively.
Robust Financials
During the fiscal year that ended December 31, 2022, BFS’ total revenue increased by 2.8% year-over-year to come in at $245.86 million. During the same period, the trust benefited from higher base rent of $3.4 million, lower interest expense, amortization of deferred debt costs of $1.5 million, lower credit losses on operating lease receivables, and corresponding reserves of $0.7 million collectively.
As a result, BFS’ net income available to common stockholders increased by 4.9% year-over-year to $39 million, while the FFO available to common stockholders increased 2.4% year-over-year to $103.17 million, or $3.04 per share.
BFS’ total assets stood at $1.83 billion as of December 31, 2022, compared to $1.75 billion as of December 31, 2021.
Consistent Return of Capital to Shareholders
On March 9, BFS declared a quarterly dividend of $0.59 per share on its common stock to be paid on April 28, 2023, to holders of record on April 17, 2023. This represents a $0.02 per share or 3.5% increase over the dividend paid during the prior-year quarter.
BFS also announced dividends of $0.383 and $0.375 per depository share on its 6.125% Series D Cumulative Redeemable Preferred Stock and 6.000% Series E Cumulative Redeemable Preferred Stock, payable on April 17, 2023, to holders of record on April 3, 2023.
BFS pays a $2.36 per share dividend annually, which translates to a yield of 6.27% at the current price. This compares to its 4-year average dividend yield of 5.28%. The REIT’s dividend payouts have grown at a 2.8% CAGR over the past five years.
Optimistic Analyst Estimates
Analysts expect BFS’ revenue for the fiscal year ending December 31, 2022, to increase by 3.2% year-over-year to $253.60 million. The company’s FFO is expected to be $3.04 per share for the same period.
Both revenue and FFO are expected to increase by a further 3% and 2.1% during the next fiscal to come in at $261.18 million and $3.10 per share, respectively.
POWR Ratings Reflect Steady Prospects
BFS’ overall B rating translates to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BFS has an A grade for Stability, as reflected in its 24-Month Beta of 1.02 and the relatively low spread between its 52-week high and low prices of $56.22 and $35.64, respectively.
In addition, the stock has a B grade for Sentiment, in sync with favorable analyst estimates.
BFS’ fundamental strength has earned it the top spot among 21 stocks in the REITs - Retail category.
Click here for additional ratings for the Growth, Value, Momentum, and Quality of BFS.
Bottom Line
In view of its fundamental strength and consistent return of capital to shareholders, a temporary pullback in the wake of the recent retail sales data may present the perfect opportunity to load up on this Retail REIT.
How Does Saul Centers, Inc. (BFS) Stack up Against Its Peers?
BFS has been rated B, equating to a Buy. Investors could also check out these other REITs with an overall B (Buy) rating: Gaming and Leisure Properties, Inc. (GLPI) and Ladder Capital Corp (LADR).
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BFS shares were trading at $38.00 per share on Friday morning, down $0.80 (-2.06%). Year-to-date, BFS has declined -5.26%, versus a 8.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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