JOHNSTON, LEMON RESEARCH

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1 Sara Name Grootwassink (202) (202) Saul Centers (NYSE- BFS) Corporate Profile RATING: Outperform RISK: Average Continuing Coverage RMS: S&P 500: Share Price as of $16 5/8 5/21/99: 52-Week Range: $14 3/8 18 3/8 Shares Outstanding (mil.)**: 12.9 Market Cap. (mil.): $295.9 Avg. Daily Volume: 19,879 Institutional Ownership: 18.8% Total Debt:* $291.8 Debt/Total Capitalization 49.7% Interest Coverage: 2.45 Dividend: $1.56 Yield: 9.4% 12-Month Price Target: $18 *As of March 31, 1999 ** Including partnership units, total units outstanding is 17.8 million. Saul Centers ( Saul or the Company ) is a self-managed, self-administered equity real estate investment trust headquartered in Chevy Chase, MD. Saul Centers operates and manages a portfolio of 34 neighborhood shopping center and office properties totaling approximately 5.9 million square feet. Approximately 80% of the Company s cash flow is generated from properties located in the Washington, D.C./Baltimore area. Saul Centers primary strategy is to continue focusing on internal growth through renovation and expansion of its neighborhood shopping centers. Saul supplements growth through selective development of new office and retail properties. Diluted FFO Yr/Yr. Year P/FFO DIV Yield FFO Payout Growth End $ $ % Ratio Rate 12/98 A % 4.3% 12/99 E % 4.5% 12/00 E % 5.4% Investment Highlights FIRST QUARTER 1999 FUNDS FROM OPERATIONS INCREASE 7.4% Saul Centers announced first quarter 1999 FFO growth of 7.4% over the same period in FFO increased 1.9% on a per share basis to $0.45. Revenues increased 3.7% over the first quarter of 1998 to $18.0 million. THREE NEW SIGNIFICANT DEVELOPMENTS CONTRIBUTE TO FFO/SHARE GROWTH Saul Centers has signed a lease for a new 148,000 square foot home improvement store in Alexandria, VA for Lowe s Companies, with an initial lease term of 20 years, scheduled to open in the summer of Saul commenced redevelopment at the Shops at Fairfax in Fairfax, VA to build a new 53,000 square foot SuperFresh grocery store, scheduled for completion in the fall of In February 1999, the Company announced the development and began construction of a new 230,000 square foot class a mixed-use office/retail complex on North Washington Street in Old Town Alexandria, VA, scheduled for completion in the summer of Vermont Ave., N.W. Washington, DC (202) STRONG YIELD AND SUSTAINABLE GROWTH Saul Centers is currently trading at 9.3x our 1999 FFO estimates, in line with the average shopping center REIT, while Saul Centers yield of 9.4% significantly exceeds the average shopping center yield of 7.9%. We expect Saul to grow FFO per share 4.5% in 1999, and 5.4% in 2000, without external acquisitions in both years. Due to Saul s strategy of internal growth and selective new development, exceptional yield, and decreasing payout ratio, we reiterate our opinion of Outperform, with average risk. May 24, 1999

2 Growth Strategies Saul Centers primary strategy is to continue focusing on internal growth through renovation and expansion of its neighborhood shopping centers to achieve cash flow growth and capital appreciation. The Company actively manages its properties and seeks tenants that provide a broad spectrum of goods and services. The diverse mix of tenants results in consistent traffic, thereby increasing the tenants sales and the cash flow of the properties. Saul Centers generates strong internal growth with strategic renovations and redevelopment of its existing properties. The Company seeks to opportunistically redevelop and renovate its properties, replacing undermarket leases with stronger tenants that generate high levels of traffic. Since the beginning of 1997 the Company has redeveloped, or is in the process of redeveloping twelve of its 34 properties. Saul plans to continue its practice of expanding existing properties, and developing outparcels as freestanding retail or office facilities. Saul supplements internal growth through the selective development of new office and retail properties, primarily in the Mid-Atlantic area. Capital Structure Saul s debt to total market capitalization was 49.7% at March 31, However, 93% of the Company s debt is fixed, with a weighted average remaining term of 12 years. The floating rate debt includes an unsecured credit line in the amount of $60 million. The balance outstanding under the line was $19.5 million at March 31, Saul Centers benefits from a dividend reinvestment plan, providing a significant source of lowcost capital. Saul Centers retains a significant amount of earnings through its dividend reinvestment plan. The various entities controlled by B.F. Saul own more than 40% of the common stock and partnership units. The dividends on a majority of partnership units, and a portion of the common stock are reinvested, providing a significant source of capital, estimated to be approximately $14 million in Properties Saul Centers owns and operates 34 properties totaling 5.9 million square feet of gross leaseable area, located primarily in the Washington, D.C./ Baltimore area. The portfolio contains 29 neighborhood shopping centers, four office properties and one industrial property. All but four shopping centers and one office property have been owned and managed by The Saul Organization for 15 years or more. The shopping centers are typically anchored buy one or more supermarkets, discount department stores or drug stores, offering day-to-day necessities, generating constant traffic. Eighteen of the 29 shopping centers are anchored by a grocery store. The centers are located in highly developed areas, with an average estimated population within a three- and five-mile radius of the centers of approximately 110,000 and 256,000, respectively. The four office properties are located in the Washington, D.C. metropolitan area and contain 714,000 spare feet of leaseable space. All of the properties are distinct and located in different commercial markets and therefore do not compete with each other. 601 Pennsylvania is a nine-story, Class A office Saul Centers May 24,

3 Saul Centers has increased their investment in the Avenel Business Park to 332,000 square feet of office space. building with street level retail, located in a prime downtown location. Van Ness Square is a six-story office/retail building built in 1990, located in a highly developed commercial area in Northwest Washington, D.C. Avenel Business Park (Phases I-III) is a research park located in a Maryland suburb of Washington, D.C. On April 28, 1998, the Company purchased Avenel IV, a newly constructed and 100% leased office / flex building located adjacent to Avenel Phases I-III. Avenel IV contains 46,227 square feet of net leasable area, increasing the Company s investment in Avenel Business Park 16%, to 332,000 square feet. In July 1998, the Company began development of approximately 27,000 square feet of additional office flex space at Avenel Business Park on excess land that it owns. Construction of this new project (Avenel V) was substantially completed during January Approximately 46% of the space is leased, while leases are being negotiated for a portion of the remaining newly developed space. Avenel Business Park is currently over 93% leased. The combined business park consists of eleven one-story buildings built in five phases which were completed in 1981, 1985, 1989, 1998, and Due to its desirable location, the high quality of the property and the relative scarcity of research and development space in its immediate area, Avenel should continue to attract and retain desirable tenants the future. Crosstown Business Center is a 197,135 square foot warehouse and flex office complex located in Tulsa, Oklahoma. In an effort to capitalize on this property s proximity to Tulsa s international airport, Saul plans to convert the former strip shopping center to industrial use, which is more suitable to the property s location and physical layout. Recent renovations in the shopping center portfolio have resulted in an increase in occupancy to 94.5% at March 31, 1999, from 91.8% one year ago. Saul has recently begun development of a 230,000 square foot office / retail property located in Old Town Alexandria, VA. At March 31, 1999, 91.5% of the Company s 5.9 million square feet of leasable space was occupied by tenants, compared to 89.2% at March 31, The shopping center portfolio was 94.5% leased, compared to 91.8% a year ago. The Office Properties were 95.6% leased compared to 94.0% at March 31, The overall improvement in leasing percentage was attributable to the Company s successful leasing at recently renovated shopping centers: Seven Corners, Great Eastern and Beacon Centers, as well as improved leasing at Van Ness Square. Projects Under Development In February, the Company announced a new development in historic Old Town Alexandria in Northern Virginia. The project is a new 230,000 square foot Class A office / retail complex, with two twin four-story buildings and 45,000 square feet of street level retail. Completion is scheduled for the summer of Amenities will include 3-story atrium lobbies, concierge service, a fitness center, a 600 space parking structure and the newest technology in energy management systems. The Company has signed a 20 year lease with Lowe s Companies for a new 148,000 square foot home improvement store and garden center at Beacon Center in Alexandria, Virginia. The area leased by Lowe s consists of 100,000 square feet of existing space and 48,000 square feet of new building Saul Centers May 24,

4 area. The center is 99% leased, with other tenants including Giant Food, Marshall s and Office Depot. Saul announced in 1998 the development of a new 53,000 square foot SuperFresh grocery store in Fairfax, VA. Funds From Operations increased 7.7% in 1998, with a 7.3% increase in base rents. Saul commenced another redevelopment in 1998 with the signing of a lease with SuperFresh for a new 53,000 square foot grocery store at the Shops at Fairfax, in Fairfax, Virginia. Construction is to be completed in the fall of 1999, with an additional 7,500 square feet of space to be constructed adjacent to the supermarket. The façade of the adjacent Boulevard shopping center, also owned by Saul Centers, is being renovated and modernized concurrently to take advantage of increased traffic to SuperFresh. In July 1998, Saul Centers began development of approximately 27,000 square feet of office/flex space in the Avenel Business Park on excess land that it owns. The construction was substantially competed in January 1999, and the property is currently 46% leased. Financial Performance In 1998, Saul Centers reported Funds From Operations of $29.8 million, an increase of 7.7% over 1997 on a fully converted basis. The increase in FFO is due to increased base rents from stabilizing redevleopments, and decreases operating expenses from disciplined asset management. In 1998, base rent increased 7.3%, primarily due to improved occupancy at Seven Corners and Beacon Center, increased minimum rents on lease rollover from three tenants previously paying percentage rents, and increased rents on renewed leases. The three tenants with increased minimum rents accounted for the decrease in percentage rent in Expense recoveries increased 4.6% due to improved occupancy at Seven Corners and the addition of the Avenel IV property. Operating expenses decreased 3.0% in 1998 to $7.8 million from $8.1 million in As a percentage of revenues, operating expenses decreased to 11.0% of revenues, from 11.9% in While general and administrative expenses increased nominally in 1998, general and administrative expenses decreased to 4.8% of revenues in 1998, from 4.9% in First Quarter 1999 Saul Centers announced first quarter 1999 FFO growth of 7.4% over the same period in FFO increased 1.9% on a per share basis to $0.45. Revenues increased 3.7% to $18.0 million, and net income increased 38.5% over the first quarter of 1998, due in part to an accounting change in Risks GEOGRAPHIC CONCENTRATION The most significant risk to Saul Centers continued funds from operations growth is its geographic concentration. Approximately 80% of Saul Centers cash flow is generated from properties located in the Washington, D.C./Baltimore area. However, we believe this risk is mitigated by continued strong economic growth and favorable demographics in the Washington area, as well as the moderate diversification by property type. Saul Centers May 24,

5 LOW FLOAT The other potential risk to investors is the low float in Saul Centers shares. However, the low float could result in strong price appreciation if analyst coverage increases the demand for shares. Conclusion We believe that the shares of Saul Centers present an attractive investment opportunity. While currently trading at 9.2x our 1999 FFO estimates, in line with the average shopping center REIT, Saul Centers has a current yield of 9.4%. Saul Centers yield significantly exceeds the average shopping center yield of 7.9%. We believe that Saul Centers is well positioned due to its focus on internal growth and selective new development. We reiterate our opinion of Outperform, with average risk, noting Saul Centers exceptional yield and solid capital structure. Saul Centers May 24,

6 Saul Centers Earnings Model Summary ($ in thousands, except per share data) 1998A 1Q99A 2Q99E 3Q99E 4Q99E FY 1999E Yr-Yr Chg FY 2000E Yr-Yr Chg Revenues: Base Rent 55,542 14,333 14,769 15,288 15,368 59, % 65, % Expense Recoveries 9,911 2,448 2,585 2,705 3,042 10, % 11, % Percentage Rent 2, , % 2, % Other 2, , % 1, % Total revenues 70,583 17,964 18,182 18,876 19,535 74, % 81, % Operating Expenses: Property operating expense 7,830 1,936 1,989 2,156 2,100 8, % 8, % Provision for credit losses % % Real estate taxes 6,128 1,534 1,624 1,687 1,711 6, % 6, % Total expenses 14,376 3,531 3,730 3,974 3,925 15, % 16, % Net Operating Income 56,207 14,433 14,452 14,902 15,610 59, % 65, % Gross Margin 79.6% 80.3% 79.5% 78.9% 79.9% 79.7% 80.1% 0.6% Other items: - Gen'l & Admin 3, , % 3, % EBITDA 52,814 13,571 13,581 14,031 14,727 55, % 61, % Amortization of deferred debt expense % % Depreciation & Amort 12,578 2,897 2,890 3,037 3,072 11, % 12, % Interest expense 22,627 5,530 5,585 5,669 5,726 22, % 23, % Operating Income 17,190 5,041 4,999 5,211 5,815 21, % 23, % Gain on sale of real estate, net Sales of interest rate protection agreements Net Income before extrodinary items 17,190 5,041 4,999 5,211 5,815 21, % 23, % Early exintinquishment of debt (50) % Net Income before minority interests 17,140 5,041 4,999 5,211 5,815 21, % 23, % Minority interest Minority share of income (4,354) (1,381) (1,426) (1,471) (1,516) (5,794) 33.1% (5,994) 3.5% Distributions in excess of earnings (2,886) (540) (540) (540) (540) (2,160) -25.2% (2,160) 0.0% Total minority interests (7,240) (1,921) (1,966) (2,011) (2,056) (7,954) 9.9% (8,154) 2.5% Net Income 9,900 3,120 3,033 3,200 3,759 13, % 15, % FFO Calculation: Net Income 16,369 5,041 4,999 5,211 5,815 21, % 23, % Add: Depreciation & Amort 12,578 2,897 2,890 3,037 3,072 11, % 12, % Add: Miscellaneous Funds From Operations 29,768 7,938 7,889 8,248 8,888 32, % 36, % Weighted average Diluted shares 17,233 17,800 18,040 18,280 18,520 18, % 19, % Earnings pershare % % FFO/share % % Dividends/share paid % % FFO payout ratio 90.3% 87.5% 89.2% 86.4% 81.3% 85.9% 81.6% EBITDA/Interest Saul Centers May 24,

7 Saul Centers Portfolio Leaseable Percentage Property Location Area Leased Anchor / Significant Tenants Shopping Centers Ashburn Village Ashburn, VA 108, % Giant Food, Blockbuster Beacon Center Alexandria, VA 355, % Lowe's, Giant Food, Office Depot, Outback Steakhouse, Marshalls Belvedere Baltimore, MD 54,941 94% Food King Boulevard Fairfax, VA 56,578 92% Danker Furniture, Petco, Party City Clarendon Arlington, VA 6, % Clarendon Station Arlington, VA 4, % Flagship Center Rockville, MD 21, % Bed Bath & Beyond, Fleming Food, Staples French Market Oklahoma City, OK 213,668 75% Germantown Germantown, MD 26,241 97% Giant Baltimore, MD 70, % Giant Food The Glen Lake Ridge, VA 112,639 97% Safeway Marketplace, CVS Pharmacy Great Eastern District Heights, MD 255,448 96% Giant Food, Pep Boys, Big Lots, Run N' Shoot Hampshire Langley Langley Park, MD 134, % Safeway, McCrory Leesburg Pike Baileys Crossroads, VA 97, % Zany Brainy, CVS Pharmacy, Hollywood Video Lexington Mall Lexington, KY 315,747 91% Dillard's, Dawahares of Lexington, Fashion Shops, Rite Aid Lumberton Lumberton, NJ 189,898 91% SuperFreash, Rite Aid, Blockbuster, Mandee North Washington Alexandria, VA 41, % Property under development Olney Olney, MD 53,756 94% Rite Aid Park Road Center Washington, DC 106, % Ravenwood Baltimore, MD 87, % Giant Food Seven Corners Falls Church, VA 567, % Home Depot, Shoppers Club, Best Buy, Michaels, Barnes & Noble Shop at Fairfax Fairfax, VA 60, % SuperFresh Southdale Glen Burnie, MD 479,749 99% Giant Food, Hechinger, Circuit City, Kid R Us, Michaels, Marshalls Southside Plaza Richmond, VA 352,964 91% CVS Pharmacy, Community Pride Supermarket, Maxway South Dekalb Plaza Atlanta, GA 167,591 76% Bolton Furniture, MacFrugals, Pep Boys, The Emory Clinic Thruway Winston-Salem, NC 345,194 94% Harris Teeter, Fresh Market, Eckerd Drugs, Houlihan's, Borders Books Village Center Centreville, VA 142,881 91% Giant Food West Park Oklahoma City, OK 77,810 46% Homeland Stores White Oak Silver Spring, MD 480, % Giant Food, Sears, Rite Aid, Blockbuster Total Shopping Centers 4,989,459 94% Office Properties Avenel I-III Gaithersburg, MD 285,218 99% Quanta Systems, General Services Administration Avenel IV Gaithersburg, MD 46, % Boston Biomedica, MicroAge Avenel V Gaithersburg, MD 27,000 46% 601 Pennsylvania Washington, DC 225,153 97% General Services Administration, Capital Grille Ave Van Ness Square Washington, DC 157,697 96% United Mine Workers Pension Trust, Office Depot, Pier 1 Industrial Property Total Office Properties 741,295 96% Crosstown Tulsa, OK 197,135 2% Total Portfolio 5,927,889 92%

8 JL Research Department 1101 Vermont Avenue, N.W. Washington, D.C (800) JL Capital Management, Inc Vermont Avenue, N.W. Suite 608 Washington, D.C (800) Johnston, Lemon & Co. Incorporated Established 1920 Member New York Stock Exchange, SIPC ADDITIONAL INFORMATION ON THE SECURITIES MENTIONED IN THIS REPORT IS AVAILABLE UPON REQUEST. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual client objectives, this report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. From time to time, this firm and/or its directors, officers, employees or members of their immediate families may have a long or short position in the securities mentioned in this report. Moreover, the securities mentioned in this report may be sold to or purchased from customers or otherwise bythis firm or its directors, officers, employees or members of their immediate families, as principal.