SAUL CENTERS INC (Form: 10-Q, Received: 08/09/2004 14:34:23)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED June 30, 2004

COMMISSION FILE NUMBER 1-12254

SAUL CENTERS, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1833074

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7501 Wisconsin Avenue, Bethesda, Maryland 20814

(Address of principal executive office) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x No ¨

Number of shares of common stock, par value $0.01 per share outstanding as of August 6, 2004: 16,267,000

SAUL CENTERS, INC.

Table of Contents


			Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	(a)	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	4

	(b)	Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003	5

	(c)	Consolidated Statements of Stockholders’ Equity as of June 30, 2004 and December 31, 2003.	6

	(d)	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003.	7

	(e)	Notes to Consolidated Financial Statements	8

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

	(a)	Critical Accounting Policies	24

	(b)	Results of Operations
		Three months ended June 30, 2004 compared to three months ended June 30, 2003.	27

		Six months ended June 30, 2004 compared to six months ended June 30, 2003.	29

	(c)	Liquidity and Capital Resources	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40

Item 4.	Controls and Procedures		41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		41
Item 2.	Changes in Securities		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Submission of Matters to a Vote of Security Holders		42
Item 5.	Other Information		42
Item 6.	Exhibits and Reports on Form 8-K		42

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary for the fair presentation of the financial position and results of operations of Saul Centers, Inc. All such adjustments are of a normal recurring nature. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements of Saul Centers, Inc. for the year ended December 31, 2003, which are included in its Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

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Saul Centers, Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Dollars in thousands)	June 30 2004			December 31, 2003
Assets
Real estate investments
Land	$	109,153		$	82,256
Buildings and equipment		500,086			436,487
Construction in progress		41,938			33,372

		651,177			552,115
Accumulated depreciation		(172,851	)		(164,823	)

		478,326			387,292
Cash and cash equivalents		10,066			45,244
Accounts receivable and accrued income, net		15,558			14,642
Leasing costs, net		18,887			15,344
Prepaid expenses		2,170			3,633
Deferred debt costs, net		4,509			4,224
Other assets		5,266			1,237

Total assets	$	534,782		$	471,616

Liabilities
Mortgage notes payable	$	389,544		$	357,248
Revolving credit facility		22,000			—
Dividends and distributions payable		10,322			9,454
Accounts payable, accrued expenses and other liabilities		12,482			7,793
Deferred income		4,220			4,478

Total liabilities		438,568			378,973

Stockholders’ equity
Series A Cumulative Redeemable Preferred stock, par value $0.01 per share, 1,000,000 shares authorized and 40,000 shares issued and outstanding		100,000			100,000
Common stock, $0.01 par value, 30,000,000 shares authorized, 16,143,785 and 15,861,234 shares issued and outstanding, respectively		161			159
Additional paid-in capital		98,980			91,469
Accumulated deficit		(102,927	)		(98,985	)

Total stockholders’ equity		96,214			92,643

Total liabilities and stockholders’ equity	$	534,782		$	471,616

The accompanying notes are an integral part of these statements

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2004			2003			2004			2003
Revenue
Base rent	$	22,751		$	18,931		$	44,027		$	37,982
Expense recoveries		4,018			3,365			7,912			7,170
Percentage rent		260			215			704			664
Other		859			715			1,586			1,280

Total revenue		27,888			23,226			54,229			47,096

Operating expenses
Property operating expenses		2,870			2,579			5,762			5,608
Provision for credit losses		99			56			168			92
Real estate taxes		2,488			2,130			4,879			4,261
Interest expense		6,407			6,466			12,456			12,960
Amortization of deferred debt expense		227			199			444			397
Depreciation and amortization		5,347			4,285			9,985			8,327
General and administrative		2,121			1,495			3,877			2,896

Total operating expenses		19,559			17,210			37,571			34,541

Net Operating income before minority interests		8,329			6,016			16,658			12,555

Minority interests
Minority share of income		(1,545	)		(1,503	)		(3,102	)		(3,151	)
Distributions in excess of earnings		(498	)		(517	)		(965	)		(889	)

Total minority interests		(2,043	)		(2,020	)		(4,067	)		(4,040	)

Net income		6,286			3,996			12,591			8,515

Preferred dividends		(2,000	)		—			(4,000	)		—

Net income available to common shareholders		4,286			3,996			8,591			8,515

Per share (basic and dilutive)
Net income	$	0.27		$	0.26		$	0.54		$	0.55

Distributions declared per common share outstanding	$	0.39		$	0.39		$	0.78		$	0.78

The accompanying notes are an intregal part of these statements

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


(Dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Total
Stockholders’ equity:
Balance, December 31, 2003	$	100,000	$	159	$	91,469	$	(98,985	)	$	92,643

Issuance of 128,235 shares of common stock:		—		1		3,391		—			3,392
123,689 shares due to dividend reinvestment plan
4,546 shares due to directors deferred stock plan		—		—		126		—			126
Net income		—		—		—		6,305			6,305
Distributions payable preferred stock ($50.00 per share)		—		—		—		(2,000	)		(2,000	)
Distributions payable common stock ($.39 per share)		—		—		—		(6,236	)		(6,236	)

Balance, March 31, 2004		100,000		160		94,986		(100,916	)		94,230

Issuance of 155,721 shares of common stock:
140,253 shares due to dividend reinvestment plan				1		3,479					3,480
15,468 shares due to employee stock options and directors deferred stock plan						515					515
Net income								6,286			6,286
Distributions payable preferred stock ($50.00 per share)								(2,000	)		(2,000	)
Distributions payable common stock ($.39 per share)								(6,297	)		(6,297	)

Balance, June 30, 2004	$	100,000	$	161	$	98,980	$	(102,927	)	$	96,214

The accompanying notes are an intregal part of these statements

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Saul Centers, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For The Six Months Ended June 30,
(Dollars in thousands)	2004			2003
Cash flows from operating activities:
Net income	$	12,591		$	8,515
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests		4,067			4,040
Depreciation and amortization		10,428			8,724
Provision for credit losses		168			92
(Increase) decrease in accounts receivable		(1,084	)		2,291
Increase in leasing costs		(5,499	)		(3,533	)
Decrease in prepaid expenses		1,463			1,448
Increase in other assets		(4,029	)		(2,954	)
Increase in accounts payable, accrued expenses and other liabilities		4,690			2,444
Decrease in deferred income		(258	)		(792	)

Net cash provided by operating activities		22,537			20,275

Cash flows from investing activities:
Acquisitions of real estate investments, net*		(68,484	)		—
Additions to real estate investments		(5,412	)		(4,990	)
Additions to construction in progress		(7,141	)		(7,425	)

Net cash used in investing activities		(81,037	)		(12,415	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		36,700			50,313
Repayments on mortgage notes payable		(22,429	)		(43,303	)
Proceeds (repayments) from revolving credit facility		22,000			(7,750	)
Additions to deferred debt expense		(729	)		(547	)
Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership		7,513			8,750
Distributions to preferred stockholders		(3,244	)		—
Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership		(16,489	)		(15,987	)

Net cash provided by (used by) financing activities		23,322			(8,524	)

Net increase (decrease) in cash and cash equivalents		(35,178	)		(664	)
Cash and cash equivalents, beginning of period		45,244			1,309

Cash and cash equivalents, end of period	$	10,066		$	645

*	Supplemental discussion of non-cash investing and financing activities:

The $68,484,000 shown as 2004 real estate acquisitions does not include the $18,025,000 in total assumed mortgages for the properties acquired as the assumption of these mortgages was a non-cash acquisition cost. On February 13, 2004 the Company purchased Boca Valley Plaza for an acquisition cost of $17,865,000 and assumed a mortgage in the amount of $9,200,000 with the balance being paid in cash. On March 25, 2004 the Company purchased Cruse MarketPlace for an acquisition cost of $12,869,000 and assumed a mortgage of $8,825,000 with the balance being paid in cash.

The accompanying notes are an intregal part of these statements

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization, Formation and Structure

Organization

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”). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 90% of its REIT taxable income to its stockholders and meets 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 B.F. Saul Company, Chevy Chase Bank, F.S.B. 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 office properties, and the management functions related to the transferred properties. Since its formation, the Company has developed and purchased additional properties. During 2004 and 2003, the Company developed and purchased several properties. In July 2003 the Company purchased Olde Forte Village, a grocery anchored neighborhood shopping center located in Fort Washington, Maryland. The Company is currently developing Shops at Monocacy, a grocery anchored shopping center in Frederick, Maryland, the land of which was acquired in November 2003. During the fourth quarter of 2003, the Company completed development of Broadlands Village Phase I, an in-line retail and retail pad, grocery anchored shopping center. During the first six months of 2004, the Company purchased a land parcel for development of a 41,000 square foot retail/office property to be known as Kentlands Place, adjacent to its Kentlands Square shopping center and acquired four grocery anchored shopping centers; (1) Boca Valley Plaza, 121,000 square feet, located in Boca Raton, Florida, (2) Countryside, 142,000 square feet located in Loudoun County, Virginia (3) Cruse MarketPlace, 79,000 square feet, located in Forsyth County, Georgia, and (4) Briggs Chaney Plaza, 197,486 square feet, located in Silver Spring, Maryland. As of June 30, 2004, the Company’s properties (the “Current Portfolio Properties”) consisted of 34 operating shopping center properties (the “Shopping Centers”), five predominantly office operating properties (the “Office Properties”) and four (non-operating) development and/or redevelopment properties.

The Company established Saul QRS, Inc., a wholly owned subsidiary of Saul Centers, to facilitate the placement of collateralized mortgage debt in September 1997. Saul QRS, Inc. was created to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties.

2. Summary of Significant Accounting Policies

Nature of Operations

The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Washington, DC/Baltimore metropolitan area. The Company’s long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate.

Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by several major tenants. Twenty-three of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of June 30, 2004, no single property accounted for more than 7.9% of the total gross leasable area. Only two retail tenants, Giant Food (4.7%), a tenant at eight Shopping Centers and Safeway (2.7%), a tenant at seven Shopping Centers and one office tenant, the United States Government (3.5%), a tenant at five properties, individually accounted for more than 2.5% of the Company’s total revenues for the six months ended June 30, 2004.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation.

Real Estate Investment Properties

The Company purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases and customer relationships in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In the case of below market leases, the Company considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional lease expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer relationship.

The Company applied SFAS 141 when it recorded the 2004 acquisitions of Boca Valley Plaza, Countryside, Cruse MarketPlace and Briggs Chaney Plaza. For Boca Valley Plaza, approximately $958,000 of the $17,865,000 total cost of the acquisition, which includes the purchase price and closing costs, was allocated as lease intangible assets and included in lease acquisition costs at June 30, 2004. For Countryside, approximately $1,352,000 of the $30,305,000 total cost of the acquisition was allocated as lease intangible assets and included in lease acquisition costs at June 30, 2004. For Cruse MarketPlace, approximately $670,000 of the $12,768,000 total cost of the acquisition was allocated as lease intangible assets and included in lease acquisition costs at June 30, 2004. For Briggs Chaney Plaza, approximately $1,423,000 of the $27,732,000 total cost of the acquisition, was allocated as lease intangible assets and included in lease acquisition costs at June 30, 2004. The lease intangible assets are being amortized over the remaining periods of the leases acquired.

Real estate investment properties are reviewed for potential impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an event or change in circumstance that indicates an impairment in the value of a real estate investment property, the Company’s policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. If such carrying amount is in excess of the estimated projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. Saul Centers adopted SFAS 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” effective January 1, 2002. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has not recognized an impairment loss on any of its real estate.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Interest expense capitalized during the six month periods ended June 30, 2004 and 2003, was $1,542,000 and $540,000, respectively. Once construction is substantially completed and the assets are placed in service, their rental income, direct operating expenses and depreciation are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred. Repair and maintenance expense, included in property operating expenses for the six month periods ended June 30, 2004 and 2003, was $2,401,000 and $2,658,000, respectively.

A project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method with estimated useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements. Depreciation expense during the periods ended June 30, 2004 and 2003, was $8,028,000 and $7,031,000, respectively. Leasehold improvements are amortized over the lives of the related leases using the straight-line method.

Construction In Progress

Construction in progress includes the land, land acquisition costs, predevelopment costs, and development costs of active projects. Predevelopment costs associated with these active projects include closing costs, legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of June 30, 2004 and December 31, 2003 are as follows:

Construction in Progress

(In thousands)


	June 30, 2004		December 31, 2003
Clarendon Center	$	14,071	$	13,209
Shops at Monocacy		13,307		9,818
Broadlands Village II		2,628		1,151
Broadlands Village III		1,587		1,527
Lansdowne		6,418		6,138
Kentlands Place		2,450		—
Other		1,477		1,529

Total	$	41,938	$	33,372

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Cash and Cash Equivalents

Cash and cash equivalents include cash and short-term investments with maturities of three months or less measured from the acquisition date.

Accounts Receivable and Accrued Income

Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of $602,000 and $561,000, at June 30, 2004 and December 31, 2003, respectively.

In addition to rents due currently, accounts receivable include $10,612,000 and $9,370,000, at June 30, 2004 and December 31, 2003, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. These amounts are presented after netting allowances of $573,000 and $548,000, respectively, for tenants whose rent payment history or financial condition cast doubt upon the tenant’s ability to perform under its lease obligations.

Lease Acquisition Costs

Certain initial direct costs incurred by the Company in negotiating and consummating a successful lease are capitalized and amortized over the initial base term of the lease. These costs total $18,887,000 and $15,344,000, net of accumulated amortization of $8,139,000 and $6,671,000, as of June 30, 2004 and December 31, 2003, respectively. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly related to time spent performing leasing related activities. Such activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. Lease acquisition costs also include a portion of an acquired property’s purchase price as discussed previously in “Real Estate Investment Properties.”

Deferred Debt Costs

Deferred debt costs consist of financing fees and costs incurred to obtain long-term financing. These fees and costs are being amortized over the terms of the respective loans or agreements. Deferred debt costs totaled $4,509,000 and $4,224,000, and are presented net of accumulated amortization of $3,744,000 and $3,300,000, at June 30, 2004 and December 31, 2003, respectively.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Deferred Income

Deferred income consists of payments received from tenants prior to the time they are earned and recognized by the Company as revenue. These payments include prepayment of the following month’s rent, prepayment of real estate taxes when the taxing jurisdiction has a fiscal year differing from the calendar year reimbursements specified in the lease agreement and advance payments by tenants for tenant construction work provided by the Company.

Revenue Recognition

Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. 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 in accordance with generally accepted accounting principles. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint.

Income Taxes

The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under the Internal Revenue Code, commencing with its taxable year ended December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 90% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

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

The Company established a stock option plan in 1993 (the “1993 Plan”) for the purpose of attracting and retaining executive officers and other key personnel. The 1993 Plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares were made available under the 1993 Plan. The 1993 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.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

On May 23, 2003, the Compensation Committee granted options to purchase a total of 220,000 shares (80,000 shares from incentive stock options and 140,000 shares from nonqualified stock options) to six Company officers (the “2003 Options”). Following the grant of the 2003 Options, no shares were available for issuance under the 1993 Plan. The 2003 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The exercise price of $24.91 was the market trading price of the Company’s common stock at the time of the award.

Effective January 2003, the Company adopted the fair value method to value employee stock options using the prospective transition method specified under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company had no options eligible for valuation prior to the grant of the 2003 Options. The fair value of the 2003 Options was determined at the time of the award using the Black-Scholes model, a widely used method for valuing stock based employee compensation. Using the Black-Scholes model, the Company determined the total fair value of the 2003 Options to be $332,000 and recognizes compensation expense monthly during the four years the options vest. Compensation expense attributed to the 2003 Options during the six months ended June 30, 2004 was $42,000. The 2003 Options are due to expire May 22, 2013. One-fourth of the 2003 Options are vested as of June 30, 2004 or 55,000 shares. As of June 30, 2004, 7,500 of the vested options have been exercised and 47,500 remain unexercised.

At the annual meeting of the Company’s stockholders in 2004, the stockholders approved the adoption of the 2004 stock plan (the “2004 Plan”) for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 Plan provides for grants of options to purchase up to 500,000 shares of common stock as well as grants of up to 100,000 shares of common stock to directors. The 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 26, 2004, the Compensation Committee granted options to purchase a total of 152,500 shares (27,500 shares from incentive stock options and 125,000 shares from nonqualified stock options) to eleven Company officers and to the twelve Company directors (the “2004 Options”). The officers’ 2004 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The directors’ options are exercisable immediately. The exercise price of $25.78 was the market trading price of the Company’s common stock at the time of the award. Using the Black-Scholes model, the Company determined the total fair value of the 2004 Options to be $359,000, of which $293,000 and $67,000 were the values assigned to the officer options and director options respectively. Because the directors’ options vest immediately, the entire $67,000 was expensed as of the date of grant. The expense of the officers’ options will be recognized as compensation expense monthly during the four years the options vest. Compensation expense attributed to the 2004 Options during the six months ended June 30, 2004 was $80,000. The 2004 Options are due to expire April 25, 2014.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Pursuant to the 2004 Plan, the Compensation Committee established a Deferred Compensation Plan for Directors (the “Plan”) for the benefit of its directors and their beneficiaries. The Plan replaces the Company’s previous Deferred Compensation and Stock Plan for Directors. A director may elect to defer all or part of his or her director’s fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock, fees earned during a calendar quarter are aggregated and divided by the market price of the common stock on the quarter’s last trading day to determine the number of shares to be allocated to the director. As of June 30, 2004, 158,000 shares had been credited to the directors’ deferred fee accounts.

The Compensation Committee has also approved the annual award of 200 shares of the Company’s common stock and options to purchase 2,500 shares of 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 and options are issued on the date of the Annual Meeting and their issuance may not be deferred. The options are immediately exercisable.

Per Share Data

Per share data is calculated in accordance with SFAS No. 128, “Earnings Per Share.” 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 options are currently dilutive because the average share price of the Company’s common stock exceeds the exercise prices. The treasury share method was used to measure the effect of the dilution.

Basic and Diluted Shares Outstanding

(In thousands, except per share data)


	Quarter ended June 30,				Six months ended June 30,
	2004		2003		2004		2003
Weighted average common shares outstanding – Basic		16,090		15,534		16,019		15,432
Effect of dilutive options		33		12		31		10

Weighted average common shares outstanding – Diluted		16,123		15,546		16,050		15,442

Average Share Price	$	28.01	$	24.98	$	28.23	$	23.97

-15-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” FIN 45 outlines the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees. It states that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of its obligation. Saul Centers has guaranteed portions of its Partnership debt obligations, all of which are presented on the consolidated financial statements as mortgage notes payable and revolving credit facility. Saul Centers has guaranteed $2,964,000 of the mortgage notes payable and the entire $22,000,000 outstanding under the revolving credit facility, which are recourse loans made by the Operating Partnership as of June 30, 2004. The balance of the mortgage notes payable totaling $386,580,000 are non-recourse, however, as is customary when obtaining long term non-recourse financing, borrowers such as Saul Centers make certain representations to lenders, for example, that no fraud exists and the officers are authorized to execute loan documents and that there are no environmental matters relating to the properties which are in violation of applicable laws. Borrowers, including Saul Centers, typically agree to assume obligations arising from reliance upon these representations should a third party suffer damages related to individual mortgages. No additional liabilities were recognized as a result of the adoption of FIN 45.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which changes the guidelines for consolidation of and disclosure related to unconsolidated entities, if those unconsolidated entities qualify as variable interest entities, as defined in FIN 46. The Company does not have any unconsolidated entities or variable interest entities and therefore the adoption of FIN 46 will not have an impact upon the consolidated financial statements.

-16-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

3. Real Estate Acquired

Boca Valley Plaza

On February 13, 2004, the Company acquired Boca Valley Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 square foot neighborhood shopping center on U.S. Highway 1 in South Florida. The center, constructed in 1988, is 89% leased and anchored by a 42,000 square foot Publix supermarket. The property was acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million mortgage (See Note 5). The mortgage assumption was treated as a non-cash acquisition in the Statement of Cash Flows.

Countryside

On February 17, 2004, the Company completed the acquisition of the 130,000 square foot Safeway-anchored Countryside shopping center, its fourth neighborhood shopping center investment in Loudoun County, Virginia. The center is 95% leased and was acquired for a purchase price of $29.7 million.

Cruse MarketPlace

On March 25, 2004, the Company completed the acquisition of the 79,000 square foot Publix-anchored, Cruse MarketPlace located in Forsyth County, Georgia. Cruse MarketPlace was constructed in 2002 and is 97% leased. The center was purchased for $12.6 million subject to the assumption of an $8.8 million mortgage (See Note 5). The mortgage assumption was treated as a non-cash acquisition in the Statement of Cash Flows.

Briggs Chaney Plaza

On April 23, 2004, the Company completed the acquisition of the 197,000 square foot Safeway-anchored Briggs Chaney Plaza shopping center located in Silver Spring, Maryland. The center is 92% leased and was acquired for a purchase price of $27.3 million.

The Company accounted for the Boca Valley Plaza, Countryside, Cruse MarketPlace and Briggs Chaney acquisitions using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” The Company allocates the purchase price to various components, such as land, buildings and intangibles related to in-place leases and customer relationships, if applicable as described in Note 2. The results of operations of the acquired properties are included in the consolidated statements of operations as of the acquisition date.

The following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the three and six month periods ended June 30, 2004 and 2003, respectively, as if the above described acquisitions had occurred on January 1, 2004 and 2003, respectively. The unaudited pro-forma information does not purport to be indicative of the results that actually would have occurred if the combinations had been in effect for the three and six months ended June 30, 2004 and 2003, respectively.

-17-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Pro-Forma Combined Condensed Statements of Operations


	Three months ended June 30,
(in thousands, except per share data, unaudited)	2004		2003
Real estate revenues	$	28,056	$	25,252
Net income available to common shareholders	$	4,255	$	4,294
Earnings per common share – basic	$	0.26	$	0.28
Earnings per common share – diluted	$	0.26	$	0.28


	Six months ended June 30,
(in thousands, except per share data, unaudited)	2004		2003
Real estate revenues	$	55,929	$	51,096
Net income available to common shareholders	$	8,847	$	9,080
Earnings per common share – basic	$	0.55	$	0.59
Earnings per common share – diluted	$	0.55	$	0.59

4. Minority Interests - Holders of Convertible Limited Partner Units in the Operating Partnership

The Saul Organization has a 24.4% limited partnership interest, represented by 5,194,000 convertible limited partnership units in the Operating Partnership, as of June 30, 2004. These convertible limited partnership units are convertible into shares of Saul Centers’ common stock on a one-for-one basis, provided the rights may not be exercised at any time that The Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 24.9% of the outstanding equity securities of Saul Centers. The limited partnership units were not convertible as of June 30, 2004 because the Saul Organization owned in excess of 24.9% of the Company’s equity securities. The impact of The Saul Organization’s 24.4% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the quarters ended June 30, 2004 and 2003, were 21,316,000 and 20,727,000, respectively. Fully converted partnership units and diluted weighted average shares outstanding for the six month periods ended June 30, 2004 and 2003, were 21,241,000 and 20,622,000, respectively.

5. Mortgage Notes Payable and Revolving Credit Facility

Indebtedness outstanding under mortgage notes payable and revolving credit facility totaled $411,544,000 at June 30, 2004, of which $389,544,000 (94.7%) was fixed rate debt and $22,000,000 (5.3%) was floating rate debt. At June 30, 2004, the Company had a $125,000,000 unsecured revolving credit facility with outstanding borrowings of $22,000,000. The facility matures in August 2005, requires monthly interest payments at a rate of LIBOR plus a spread of

-18-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option and requires the Company to meet certain financial covenants. As of June 30, 2004, borrowings under the facility accrued interest at LIBOR plus 1.625% and the Company was in compliance with all financial covenants. Loan availability is determined by operating income from the Company’s unencumbered properties, which, as of June 30, 2004 would have allowed the Company to borrow an additional $53,000,000 for general corporate use. An additional $50,000,000 is available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions.

On February 13, 2004, the Company obtained a new 15-year $10,200,000 fixed-rate mortgage loan collateralized by Kentlands Square. The loan requires monthly principal and interest payments based upon a fixed interest rate of 5.94% and a 25 year amortization schedule. A balloon payment of $6,039,000 will be due at loan maturity, January 2019. Also on February 13, 2004 the Company purchased Boca Valley Plaza shopping center, located in Boca Raton, Florida. In conjunction with the acquisition, the Company assumed the seller’s non-recourse mortgage of $9,200,000. The loan matures in April 2007 and requires monthly interest only payments at a fixed rate of 6.82%. The loan is subject to prepayment penalties. On March 25, 2004 the Company purchased Cruse MarketPlace shopping center, located in Forsyth County, a suburb of Atlanta, Georgia. In conjunction with the acquisition, the Company assumed the seller’s non-recourse mortgage of $8,825,000. The loan matures in July 2013 at which time a balloon payment of $6,830,000 will be due. The loan requires monthly principal and interest payments based upon a fixed interest rate of 5.77% and a 24 year amortization schedule. On April 26, 2004, the Company obtained a new 15-year $15,500,000 fixed-rate mortgage loan collateralized by Olde Forte Village. The loan requires monthly principal and interest payments based upon a fixed interest rate of 5.76% and a 25 year amortization schedule. A balloon payment of $8,985,000 will be due at loan maturity, May 2019.

The Company has committed to execute a new 15-year $21,000,000 fixed-rate mortgage loan collateralized by Briggs Chaney Plaza. The loan requires monthly principal and interest payments based upon a fixed interest rate of 5.79% and a 25 year amortization schedule. The loan is expected to close during the third quarter of 2004. A balloon payment of $12,192,000 will be due at loan maturity, in the third quarter of 2019.

Mortgage notes payable totaled $357,248,000 at December 31, 2003, all of which was fixed rate debt. At December 31, 2003, the Company had no outstanding borrowings on its $125,000,000 unsecured revolving credit facility. Loan availability at December 31, 2003 allowed the Company to borrow up to $75,000,000 for general corporate use. An additional $50,000,000 was available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions.

-19-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

At June 30, 2004, the scheduled maturities of all debt, including scheduled principal amortization, for years ending December 31, were as follows:

Debt Maturity Schedule

( In thousands)


July 1 through December 31, 2004	$	4,739
2005		32,064
2006		10,856
2007		20,912
2008		12,609
2009		13,633
Thereafter		316,731

Total	$	411,544

6. Stockholders’ Equity and Minority Interests

The Consolidated Statement of Operations for the three months ended June 30, 2004 includes a charge for minority interests of $2,043,000, consisting of $1,545,000 related to The Saul Organization’s share of net income for the quarter, and $498,000 related to distributions to minority interests in excess of allocated net income for the quarter. The minority interests charge for the three months ended June 30, 2003 of $2,020,000 consists of $1,503,000 related to The Saul Organization’s share of net income for the quarter, and $517,000 related to distributions to minority interests in excess of allocated net income for the quarter. The Consolidated Statement of Operations for the six months ended June 30, 2004 includes a charge for minority interests of $4,067,000, consisting of $3,102,000 related to The Saul Organization’s share of net income for the period, and $965,000 related to distributions to minority interests in excess of allocated net income for the period. The minority interests charge for the six months ended June 30, 2003 of $4,040,000 consists of $3,151,000 related to The Saul Organization’s share of net income for the period, and $889,000 related to distributions to minority interests in excess of allocated net income for the period.

7. Related Party Transactions

Chevy Chase Bank, an affiliate of The Saul Organization, leases space in 15 of the Company’s properties. Total rental income from Chevy Chase Bank amounted to $862,000 and $705,000, for the six months ended June 30, 2004 and 2003, respectively.

The Company utilizes Chevy Chase Bank for its various checking and short-term interest bearing money market accounts. As of June 30, 2004, approximately $9,962,000 was held in deposit in these accounts.

On January 23, 2004 the Company purchased a 3.4 acre site, adjacent to the Company’s Kentlands Square property, from a subsidiary of Chevy Chase Bank for $1,425,000. The

-20-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Company is developing retail and office improvements on this site. The purchase price of the property was determined by the average of two independent third party appraisals which were contracted, one on behalf of the Company and one on behalf of the bank.

The Chairman and Chief Executive Officer, the President and the Chief Accounting Officer of the Company are also officers of various members of The Saul Organization and their management time is shared with The Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors.

The Company shares with The Saul Organization on a pro-rata basis certain ancillary functions such as computer hardware, software and support services and certain direct and indirect administrative payroll based on management’s estimate of usage or time incurred, as applicable. Billings by the Saul Organization for the Company’s share of these ancillary costs and expenses totaled $1,214,000 and $1,304,000, for the six month periods ended June 30, 2004 and June 30, 2003, respectively. Also, The Saul Organization subleases office space to the Company for its corporate headquarters. The terms of all such arrangements with The Saul Organization, including payments related thereto, are reviewed by the Audit Committee of the Board of Directors.

8. Subsequent Events

In July 2004, the Company closed on a new 15-year $21,350,000 fixed-rate mortgage loan collateralized by Countryside shopping center. The loan requires monthly principal and interest payments based upon a fixed interest rate of 5.62% and a 25 year amortization schedule. A balloon payment of $12,288,000 will be due at loan maturity, July 2019.

-21-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

9. Business Segments

The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies for the segments presented below are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon net operating income for properties in each segment.


(Dollars in thousands)	Shopping Centers			Office Properties			Corporate and Other			Consolidated Totals
Quarter ended June 30, 2004
Real estate rental operations:
Revenues	$	19,275		$	8,595		$	18		$	27,888
Expenses		(3,455	)		(2,002	)		—			(5,457	)

Income from real estate		15,820			6,593			18			22,431
Interest expense & amortization of debt expense		—			—			(6,634	)		(6,634	)
General and administrative		—			—			(2,121	)		(2,121	)

Subtotal		15,820			6,593			(8,737	)		13,676
Depreciation and amortization		(3,541	)		(1,806	)		—			(5,347	)
Minority interests		—			—			(2,043	)		(2,043	)

Net income	$	12,279		$	4,787		$	(10,780	)	$	6,286

Capital investment	$	13,397		$	2,040		$	—		$	15,437

Total assets	$	370,809		$	152,056		$	11,917		$	534,782

Quarter ended June 30, 2003
Real estate rental operations:
Revenues	$	15,677		$	7,534		$	15		$	23,226
Expenses		(2,928	)		(1,837	)		—			(4,765	)

Income from real estate		12,749			5,697			15			18,461
Interest expense & amortization of debt expense		—			—			(6,665	)		(6,665	)
General and administrative		—			—			(1,495	)		(1,495	)

Subtotal		12,749			5,697			(8,145	)		10,301
Depreciation and amortization		(2,544	)		(1,741	)		—			(4,285	)
Minority interests		—			—			(2,020	)		(2,020	)

Net income	$	10,205		$	3,956		$	(10,165	)	$	3,996

Capital investment	$	4,991		$	1,256		$	—		$	6,247

Total assets	$	219,288		$	136,495		$	39,134		$	394,917

-22-

Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)


(Dollars in thousands)	Shopping Centers			Office Properties			Corporate and Other			Consolidated Totals
Six months ended June 30, 2004

Real estate rental operations:
Revenues	$	37,121		$	17,002		$	106		$	54,229
Expenses		(6,815	)		(3,994	)		—			(10,809	)

Income from real estate		30,306			13,008			106			43,420
Interest expense & amortization of debt expense		—			—			(12,900	)		(12,900	)
General and administrative		—			—			(3,877	)		(3,877	)

Subtotal		30,306			13,008			(16,671	)		26,643
Depreciation and amortization		(6,396	)		(3,589	)		—			(9,985	)
Minority interests		—			—			(4,067	)		(4,067	)

Net income	$	23,910		$	9,419		$	(20,738	)	$	12,591

Capital investment	$	78,219		$	2,818		$	—		$	81,037

Total assets	$	370,809		$	152,056		$	11,917		$	534,782

Six months ended June 30, 2003

Real estate rental operations:
Revenues	$	31,668		$	15,395		$	33		$	47,096
Expenses		(6,356	)		(3,605	)		—			(9,961	)

Income from real estate		25,312			11,790			33			37,135
Interest expense & amortization of debt expense		—			—			(13,357	)		(13,357	)
General and administrative		—			—			(2,896	)		(2,896	)

Subtotal		25,312			11,790			(16,220	)		20,882
Depreciation and amortization		(4,877	)		(3,450	)		—			(8,327	)
Minority interests		—			—			(4,040	)		(4,040	)

Net income	$	20,435		$	8,340		$	(20,260	)	$	8,515

Capital investment	$	8,275		$	4,140		$	—		$	12,415

Total assets	$	219,288		$	136,495		$	39,134		$	394,917

-23-

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

This section should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes in “Item 1. Financial Statements” of this report. Historical results and percentage relationships set forth in Item 1 and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section, have the meanings given to them in Item 1 of this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as “believe”, “expect” and “may”.

Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those given in the forward-looking statements as a result of changes in factors which include among others, the following: general economic and business conditions, which will, among other things, affect demand for retail and office space; demand for retail goods; availability and credit worthiness of the prospective tenants; lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies and technology, risks of real estate development and acquisition, governmental actions and initiatives, debt refinancing risk, conflicts of interests, maintenance of REIT status and environmental/safety requirements.

General

The following discussion is based primarily on the consolidated financial statements of the Company, as of June 30, 2004 and for the three and six month periods ended June 30, 2004.

Critical Accounting Policies

The Company’s accounting policies are in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the Company’s financial statements and the reported amounts of revenue and expenses during the reporting periods. If judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of the financial statements. Below is a discussion of accounting policies which the Company considers critical in that they may require judgment in their application or require estimates about matters which are inherently uncertain. Additional discussion of accounting policies which the Company considers significant, including further discussion of the critical accounting policies described below, can be found in the notes to the Consolidated Financial Statements.

-24-

Real Estate Investments

Real estate investment properties are stated at historic cost basis less depreciation. Management believes that these assets have generally appreciated in value 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 these financial statements. Because these financial statements are prepared in conformity with GAAP, they do not report the current value of the Company’s real estate assets. The purchase price of real estate assets acquired is allocated between land, building and in-place acquired leases based on the relative fair values of the components at the date of acquisition. Base buildings are depreciated on a straight-line basis over their estimated useful lives of 35 to 50 years. Intangibles associated with acquired in-place leases are amortized over the remaining base lease terms.

If there is an event or change in circumstance that indicates an impairment in the value of a real estate investment property, the Company assesses an impairment in value by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. If such carrying amount is greater than the estimated projected cash flows, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value.

When incurred, the Company capitalizes the cost of improvements that extend the useful life of property and equipment and all repair and maintenance expenditures are expensed.

Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is substantially complete and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations.

In the initial rental operations of development projects, a project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements. Leasehold improvements are amortized over the lives of the related leases using the straight-line method.

Lease Acquisition Costs

Certain initial direct costs incurred by the Company in negotiating and consummating successful leases are capitalized and amortized over the initial base term of the leases. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly related to time spent performing leasing related activities. Such activities include evaluating prospective tenants’ financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing transactions.

-25-

Revenue Recognition

Rental income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis throughout the initial term of the lease. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues, known as percentage rent, is accrued when a tenant reports sales that exceed a specified breakpoint.

Allowance for Doubtful Accounts - Current and Deferred Receivables

Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. In addition to rents due currently, accounts receivable include amounts representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. Reserves are established with a charge to income for tenants whose rent payment history or financial condition casts doubt upon the tenant’s ability to perform under its lease obligations.

Legal Contingencies

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

-26-

Results of Operations

Quarter ended June 30, 2004 compared to quarter ended June 30, 2003

Revenue


	For the quarters ended June 30,				2004 to 2003 Change
(dollars in thousands)	2004		2003		$		%
Revenue
Base rent	$	22,751	$	18,931	$	3,820	20.2	%
Expense recoveries		4,018		3,365		653	19.4	%
Percentage rent		260		215		45	20.9	%
Other		859		715		144	20.1	%

Total	$	27,888	$	23,226	$	4,662	20.1	%

Base rent. The increase in base rent for 2004 versus 2003 was primarily attributable (71% or approximately $2,700,000) to leases in effect at recently acquired and developed properties: Olde Forte Village, Broadlands Village, Boca Valley Plaza, Countryside, Cruse MarketPlace and Briggs Chaney Plaza (the “Acquisition and Development Properties”). The lease-up of space at 601 Pennsylvania Avenue (25% or approximately $960,000) substantially accounted for the balance of the increase.

Expense recoveries. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. The majority of the increase in expense recovery income was contributed by the Acquisition and Development Properties (76% or approximately $495,000). The lease-up of space in the Office Properties substantially accounted for the balance of the increase (21% or approximately $140,000).

Other income. Other income consists primarily of parking income at three of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases and interest income from the investment of cash balances. The increase in other income for 2004 versus 2003 resulted primarily from an increase in parking income at 601 Pennsylvania Avenue and Washington Square (50% or approximately $70,000) and a slight increase in lease termination payments (30% or approximately $44,000) from tenants at Thruway and Avenel Business Park.

-27-

Operating Expenses


	For the quarters ended June 30,				2004 to 2003 Change
(dollars in thousands)	2004		2003		$			%
Operating Expenses
Property operating expenses	$	2,870	$	2,579	$	291		11.3	%
Provision for credit losses		99		56		43		76.8	%
Real estate taxes		2,488		2,130		358		16.8	%
Interest expense		6,407		6,466		(59	)	(0.9	%)
Amortization of deferred debt		227		199		28		14.1	%
Depreciation and amortization		5,347		4,285		1,062		24.8	%
General and administrative		2,121		1,495		626		41.9	%

Total	$	19,559	$	17,210	$	2,349		13.6	%

Property operating expenses. Property operating expenses consist primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses. The Acquisition and Development Properties incurred property operating expenses of approximately $308,000 during the 2004 quarter which was slightly offset by a $17,000 decrease in property operating expenses at the remainder of the property portfolio.

Provision for credit losses. The provision for credit losses increased for 2004 versus 2003 primarily due to 2003’s absence of any significant tenant bankruptcy or collection difficulties. The 2004 provision for credit loss totals less than one half of one percent (0.50%) of total income.

Real estate taxes. The increase in real estate taxes for 2004 versus 2003 was primarily attributable to the commencement of operations at the Acquisition and Development Properties (79% or approximately $285,000).

Interest expense. Interest expense decreased in 2004 versus 2003 despite an average increase in outstanding borrowings of approximately $24,000,000 because the majority of the increased borrowings were used to fund construction and development work, and qualified for interest capitalization. Interest is capitalized as a cost of these projects and during the 2004 and 2003 quarters, $801,000 and $296,000, respectively, was capitalized and not included in interest expense.

Amortization of deferred debt expense. The increase in amortization of deferred debt expense for 2004 versus 2003 resulted from new long-term debt incurred during the fourth quarter of 2003 and first quarter of 2004.

Depreciation and amortization . The increase in depreciation and amortization expense resulted from the Acquisition and Development Properties placed in service during 2003 and 2004.

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General and administrative. General and administrative expense consists of payroll, administrative and other overhead expenses. The increase in general and administrative expense for 2004 versus 2003 was attributable to increased payroll and employment expenses (40%) primarily resulting from staffing for the Company’s evaluation of property acquisitions, increased legal and accounting fees as well as other administrative expenses incurred to comply with new corporate governance rules (26%) and the expensing of officer and director stock options (18%).

Six months ended June 30, 2004 compared to six months ended June 30, 2003

Revenue


	For the six months ended June 30,				2004 to 2003 Change
(dollars in thousands)	2004		2003		$		%
Revenue
Base rent	$	44,027	$	37,982	$	6,045	15.9	%
Expense recoveries		7,912		7,170		742	10.3	%
Percentage rent		704		664		40	6.0	%
Other		1,586		1,280		306	23.9	%

Total	$	54,229	$	47,096	$	7,133	15.1	%

Base rent. The increase in base rent for 2004 versus 2003 periods was primarily attributable (68% or approximately $4,130,000) to leases in effect at the Acquisition and Development Properties. The lease-up of space at 601 Pennsylvania Avenue (21% or approximately $1,262,000) substantially accounted for the balance of the increase.

Expense recoveries. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. The Acquisition and Development Properties provided expense recovery income of approximately $753,000 which was offset slightly by a $11,000 decrease in expense recovery income from the remainder of the property portfolio.

Percentage rent. Percentage rent, which was relatively stable between the two periods, is rental income calculated on the portion of a tenant’s revenues that exceed a specified breakpoint. Increased sales by a restaurant tenant at 601 Pennsylvania Ave accounted for $60,000 of the percentage rent increase, which was offset by a $20,000 decrease in percentage rent income at Lexington Mall, a center the Company is repositioning for redevelopment.

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for 2004 versus 2003 consisted primarily from an increase in parking income at the Office Properties (44% or approximately $104,000) and a slight increase in lease termination payments (23% or approximately $53,000) from tenants at Thruway, Seven Corners and Avenel Business Park.

Operating Expenses


	For the six months ended June 30,				2004 to 2003 Change
(dollars in thousands)	2004		2003		$			%
Operating Expenses
Property operating expenses	$	5,762	$	5,608	$	154		2.7	%
Provision for credit losses		168		92		76		82.6	%
Real estate taxes		4,879		4,261		618		14.5	%
Interest expense		12,456		12,960		(504	)	(3.9	%)
Amortization of deferred debt		444		397		47		11.8	%
Depreciation and amortization.		9,985		8,327		1,658		19.9	%
General and administrative		3,877		2,896		981		33.9	%

Total	$	37,571	$	34,541	$	3,030		8.8	%

Property operating expenses. Property operating expenses consist primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses. The Acquisition and Development Properties incurred property operating expenses of approximately $450,000 during the 2004 period which was offset by a $292,000 decrease in property operating expenses at the remainder of the property portfolio due to 2003’s unseasonably severe winter weather primarily in the Mid-Atlantic region.

Provision for credit losses. The provision for credit losses increased for 2004 versus 2003 primarily due to 2003’s absence of any significant tenant bankruptcy or collection difficulties. The 2004 provision for credit loss includes a $50,000 provision for a tenant at Leesburg Pike Plaza and a $31,000 provision for a tenant at Southside Plaza.

Interest expense. Interest expense decreased in 2004 versus 2003 despite a slight increase in outstanding borrowings of approximately $2,500,000. Interest expense was reduced by interest capitalized on costs of construction and development work. Interest is capitalized as a cost of construction and development projects. During the 2004 and 2003 quarters, $1,542,000 and $540,000, respectively, was capitalized.

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Amortization of deferred debt expense. The increase in amortization of deferred debt expense for 2004 versus 2003 resulted from new long-term debt incurred during the later half of 2003 and first six months of 2004.

Depreciation and amortization . The increase in depreciation and amortization expense resulted from the Acquisition and Development Properties placed in service during 2003 and 2004.

General and administrative. General and administrative expense consists of payroll, administrative and other overhead expenses. The increase in general and administrative expense for 2004 versus 2003 was attributable to increased payroll and employment expenses (49%) primarily resulting from staffing for the Company’s evaluation of property acquisitions, increased legal and accounting fees as well as other administrative expenses incurred to comply with new corporate governance rules (20%) and the expensing of officer and director stock options (14%).

Liquidity and Capital Resources

Cash and cash equivalents were $10,066,000 and $645,000 at June 30, 2004 and 2003, respectively. The Company’s cash flow is affected by its operating, investing and financing activities, as described below.


	Six months ended June 30,
(dollars in thousands)	2004			2003
Cash provided by operating activities	$	22,537		$	20,275
Cash used in investing activities		(81,037	)		(12,415	)
Cash provided by (used in) financing activities		23,322			(8,524	)

Increase (decrease) in cash	$	(35,178	)	$	(664	)

Operating Activities

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

Investing Activities

Cash used in investing activities primarily reflects the acquisition of properties (Boca Valley Plaza, Countryside, Cruse MarketPlace, Briggs Chaney Plaza and Kentlands land parcel) and the construction of Shops at Monocacy and Broadlands Village II in 2004, the construction of Broadlands Village in 2003, and tenant improvements and other additions to construction in progress.

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Management anticipates that during the coming year the Company may: i) redevelop certain of the Current Portfolio Properties, ii) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, iii) acquire existing neighborhood and community shopping centers and/or office properties, and iv) develop new shopping center or office sites. Acquisition and development of properties are undertaken only after careful analysis and review, and management’s determination that such properties are expected to provide long-term earnings and cash flow growth. During the coming year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company’s credit line, construction financing, proceeds from the operation of the Company’s dividend reinvestment plan or other external capital resources available to the Company.

Financing Activities

Cash provided by financing activities for the period ended June 30, 2004 primarily reflects:

•

$36,700,000 of proceeds received from mortgage notes payable during the period;

•

$22,000,000 of net proceeds from draws and repayments on the revolving credit facility; and

•

$7,513,000 of proceeds received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options, and from the issuance of convertible limited partnership interests in the Operating Partnership;

which was partially offset by:

•

the repayment of borrowings on mortgage notes payable totaling $22,429,000;

•

distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the period totaling $16,489,000;

•

distributions made to preferred stockholders during the period totaling $3,244,000; and

•

payments of $729,000 for financing costs of three mortgage loans during 2004.

Cash used in financing activities for the period ended June 30, 2003 primarily reflects:

•

the repayment of borrowings on our mortgage notes payable totaling $43,303,000;

•

the net amount of repayments in excess of draws on the revolving credit facility totaling $7,750,000;

•

distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $15,987,000; and

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•

payments of $547,000 for refinancing costs of a mortgage loan in 2003;

which was partially offset by:

•

$50,313,000 of proceeds received from mortgage notes payable incurred during the period; and

•

$8,750,000 of proceeds received from the issuance of common stock under the dividend reinvestment program and from the exercise of stock options, and from the issuance of convertible limited partnership interests in the Operating Partnership.

Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Internal Revenue Code. The Company expects to meet these short-term liquidity requirements (other than amounts required for additional property acquisitions and developments) through cash provided from operations and its existing line of credit. The Company anticipates that any additional property acquisitions and developments in the next 12 months will be funded with future long-term secured and unsecured debt and the public or private issuance of common or preferred equity or units, each of which may be initially funded with our existing line of credit.

Long-term liquidity requirements consisted primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for property acquisitions and developments. We expect to meet long-term liquidity requirements through cash provided from operations, long-term secured and unsecured borrowings, private or public offerings of debt or equity securities and proceeds from the sales of properties. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. The availability and terms of any such financing will depend upon market and other conditions.

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As of June 30, 2004, the scheduled maturities, including scheduled principal amortization, of all debt for years ended December 31, are as follows:

Debt Maturity Schedule

( In thousands)


July 1 through December 31, 2004	$	4,739
2005		32,064
2006		10,856
2007		20,912
2008		12,609
2009		13,633
Thereafter		316,731

Total	$	411,544

Management believes that the Company’s capital resources, which at June 30, 2004 included cash balances of $10 million and borrowing availability of $103 million on its revolving line of credit, ($53,000,000 for general corporate use and $50,000,000 for qualified future acquisitions), will be sufficient to meet its liquidity needs for the foreseeable future.

Preferred Stock Issue

On July 16, 2003, the Company filed a shelf registration statement (the “Shelf Registration Statement”) with the SEC relating to the future offering of up to an aggregate of $100 million of preferred stock and depositary shares. On November 5, 2003 the Company sold 3,500,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock. The underwriters exercised an over-allotment option, purchasing an additional 500,000 depositary shares on November 26, 2003.

The depositary shares may be redeemed, in whole or in part, at the $25.00 liquidation preference at the Company’s option on or after November 5, 2008. The depositary shares will pay an annual dividend of $2.00 per share, equivalent to 8% of the $25.00 liquidation preference. The first dividend, paid on January 15, 2004 was for less than a full quarter and covered the period from November 5 through December 31, 2003. The Series A preferred 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. Investors in the depositary shares generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters (whether or not declared or consecutive) and in certain other events.

Net proceeds from the issuance were approximately $96.3 million and initially were used to fully repay $52.5 million outstanding under the Company’s revolving credit facility and thereafter used to acquire land and operating properties and also fund construction and development projects.

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Dividend Reinvestments

In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to allow its common stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The 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 Company issued 263,942 and 295,989 shares under the Plan at a weighted average discounted price of $25.40 and $22.14 per share during the six month periods ended June 30, 2004 and 2003, respectively.

Additionally, the Operating Partnership issued 6,198 and 6,674 limited partnership units under a dividend reinvestment plan mirroring the Plan at a weighted average discounted price of $25.40 and $22.14 per share during the six month periods ended June 30, 2004 and 2003, respectively.

Capital Strategy and Financing Activity

As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company’s leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties’ aggregate cash flow. Given the Company’s current debt level, it is management’s belief that the ratio of the Company’s debt to total asset value was below 50% as of June 30, 2004.

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 consequently, may increase or decrease the Company’s debt to total asset ratio above or below 50% or may waive the policy for certain periods of time. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable.

Off-Balance Sheet Arrangements

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

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Funds From Operations

For the quarter ended June 30, 2004, the Company reported Funds From Operations (FFO) ⁽¹⁾ available to common shareholders of $11,676,000 representing a 13.3% increase over the 2003 quarter’s FFO available to common shareholders of $10,301,000. For the six month period ended June 30, 2004, the Company reported FFO available to common shareholders of $22,643,000 representing an 8.4% increase over the 2003 period’s FFO available to common shareholders of $20,882,000. The following table presents a reconciliation from net income to FFO available to common stockholders for the periods indicated:

Funds From Operations Schedule

(Amounts in thousands)


	For the quarters ended June 30,
	2004			2003
Net income	$	6,286		$	3,996
Add:
Minority interests		2,043			2,020
Depreciation and amortization of real property		5,347			4,285

FFO		13,676			10,301
Subtract:
Preferred stock dividends		(2,000	)		—

FFO Available to Common Shareholders	$	11,676		$	10,301

Average Shares and Units Used to Compute FFO per Share		21,316			20,727


	For the six months ended June 30,
	2004			2003
Net income	$	12,591		$	8,515
Add:
Minority interests		4,067			4,040
Depreciation and amortization of real property		9,985			8,327

FFO		26,643			20,882
Subtract:
Preferred stock dividends		(4,000	)		—

FFO Available to Common Shareholders	$	22,643		$	20,882

Average Shares and Units Used to Compute FFO per Share		21,241			20,622

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(1) FFO is a widely accepted non-GAAP financial measure of operating performance for REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net income, computed in accordance with GAAP, plus minority interests, extraordinary items and real estate depreciation and amortization, excluding gains or losses from property sales. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs.

Acquisitions, Redevelopments and Renovations

The Company has been selectively involved in acquisition, redevelopment and renovation activities. It continues to evaluate the acquisition of land parcels for retail and office development and acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to take advantage of redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its recent activities at Olde Forte Village, Broadlands Village and Thruway. The following describes the acquisitions, redevelopments and renovations which affected the Company’s results of operations in 2003 and 2004.

Olde Forte Village

In July 2003, the Company acquired Olde Forte Village, a 161,000 square foot neighborhood shopping center located in Fort Washington, Maryland. The center is anchored by a newly constructed 58,000 Safeway supermarket which opened in March 2003, relocating from a smaller store within the center. The center then contained approximately 50,000 square feet of vacant space, consisting primarily of the former Safeway space, which the Company is redeveloping in 2004. The Company has completed the demolition of the portion of the shopping center to be reconfigured and has commenced site improvements and small shop construction and renovation. The Company expects total redevelopment costs, including the initial property acquisition cost, to be approximately $22 million and projects substantial completion of the redevelopment in late 2004. Olde Forte Village was 67% leased at June 30, 2004.

Broadlands Village

The Company purchased 24 acres of undeveloped land in the Broadlands section of the Dulles Technology Corridor of Loudoun County, Virginia in April 2002. Broadlands is a 1,500 acre planned community consisting of 3,500 residences, approximately half of which are constructed and currently occupied. In October 2003, the Company completed construction of the first phase of the Broadlands Village shopping center. The 58,000 square foot Safeway supermarket opened in October 2003 with a pad building and many in-line small shops also opening in the fourth quarter of 2003. The 105,000 square foot first phase is 100% leased. Construction of a 30,000 square foot second phase commenced in March 2004. The Company expects total development costs of both phases, including the land acquisition, to be approximately $22 million and projects substantial completion of phase two of the center in the fall of 2004. The second phase was 45% pre-leased at June 30, 2004.

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Thruway

During the fourth quarter of 2003, the Company commenced a 15,725 square foot expansion of the Thruway shopping center located in Winston Salem, North Carolina. The new development includes replacing a former 6,100 square foot single-tenant pad building with a new multi-tenant building. Leases have been executed for 100% of the new space, including Ann Taylor Loft, JoS. A Banks Clothiers, Chico’s and Liz Claiborne. This $2.5 million expansion was substantially completed in April 2004 with tenant openings beginning in March 2004.

Shops at Monocacy

In November 2003, the Company acquired 13 acres of undeveloped land in Frederick, Maryland at the southeast corner of Maryland Route 26 and Monocacy Boulevard. Construction commenced in early December of a 105,000 square foot shopping center to be anchored by a 57,000 square foot Giant grocery store. The Company expects total development costs, including the land acquisition, to be approximately $21.8 million and projects substantial completion of the center in the fall of 2004. The property was 63% pre-leased at June 30, 2004.

Kentlands Place

In January 2004, the Company purchased 3.4 acres of undeveloped land adjacent to its 109,000 square foot Kentlands Square shopping center in Gaithersburg, Maryland. The Company commenced construction of a 41,300 square foot retail/office property, comprised of 24,400 square feet of in-line retail space and 16,900 square feet of professional office suites, in April 2004. Development costs, including the land acquisition, are projected to total $7.1 million, and substantial completion is scheduled for late 2004. The property has no pre-leasing at June 30, 2004, however several tenant prospects have been identified and lease negotiations are proceeding.

Boca Valley Plaza

The Company added Publix as one of its grocery tenants with the February 2004 acquisition of Boca Valley Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 square foot neighborhood shopping center on U.S. Highway 1 in South Florida. The center, constructed in 1988 was 89% leased at June 30, 2004 and is anchored by a 42,000 square foot Publix supermarket. The property was acquired for a purchase price of $17.5 million, subject to the assumption of a $9.2 million mortgage.

Countryside

In mid-February 2004, the Company completed the acquisition of the 130,000 square foot Safeway-anchored Countryside shopping center, its fourth neighborhood shopping center investment in Loudoun County, Virginia. The center was 95% leased at June 30, 2004 and was acquired for a purchase price of $29.7 million.

Cruse MarketPlace

Briggs Chaney Plaza

In April 2004 the Company acquired Briggs Chaney Plaza in Silver Spring, Maryland. Briggs Chaney Plaza is a 197,000 square foot neighborhood shopping center on Route 29 in Montgomery County, Maryland. The center, constructed in 1983, is 92% leased and is anchored by a 45,000 square foot Safeway supermarket and a 28,000 square foot Ross Dress For Less. The property was acquired for $27.3 million. The Company has filed for permits and plans to begin interior construction to reconfigure a large portion of the vacant space, and is completing plans for a substantial façade renovation of the shopping center. This construction is projected to be substantially completed in early 2005.

Portfolio Leasing Status

The following chart sets forth certain information regarding the operating portfolio for the periods ended June 30, 2004 and 2003, respectively.


	Total Properties		Total Square Footage		Percent Leased
As of June 30,	Shopping Centers	Office	Shopping Centers	Office	Shopping Centers		Office
2004	34	5	5,868,000	1,206,000	93.8	%	94.8	%
2003	29	5	5,070,000	1,203,000	93.9	%	92.6	%

The improvement in the portfolio’s leasing percentage in 2004 resulted primarily from improved leasing at 601 Pennsylvania Avenue, Southdale and Thruway.

Forward-Looking Statements

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

•

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

•

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

•

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

•

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

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•

risks related to the Company’s development activities;

•

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

•

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

•

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

•

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

Subsequent Events

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company’s results of operations. The Company does not enter into financial instruments for trading purposes.

The Company is exposed to interest rate fluctuations primarily as a result of its variable rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. As of June 30, 2004, the Company had variable rate indebtedness totaling $22,000,000. Interest rate fluctuations will affect the Company’s annual interest expense on its variable rate debt. If the interest rate on the Company’s variable rate debt instruments outstanding at June 30, 2004 had been one percent higher, our annual interest expense relating to these debt instruments would have increased by $220,000, based on those balances. Interest rate fluctuations will also affect the fair value of the Company’s fixed rate debt instruments. As of June 30, 2004, the Company had fixed rate indebtedness totaling $389,544,000. If interest rates on the Company’s fixed rate debt instruments at June 30, 2004 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $21,163,000.

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Item 4. Controls and Procedures

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

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including its Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer, and its Vice President and Chief Accounting Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2004. Based on the foregoing, the Company’s Chairman and Chief Executive Officer, its Senior Vice President-Chief Financial Officer, Secretary and Treasurer and its Vice President and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2004.

During the three months ended June 30, 2004, there were no significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

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Item 4. Submission of Matters to a Vote of Security Holders

On April 26, 2004, the Company held its Annual Meeting of Stockholders, at which General Paul X. Kelley, Charles R. Longsworth, Patrick F. Noonan and B. Francis Saul III were reelected to the Board of Directors for three year terms expiring at the 2007 Annual Meeting. Holders of over 91.3% of the 15,988,877 outstanding shares of common stock eligible to vote, of which 99.2% voted in favor of the four nominees for director. The terms of the remaining Board members did not expire as of the April 26, 2004 meeting and those individuals continue as directors of the Company.

Holders of over 92.0% of the outstanding shares voted on Proposal 2, of which over 99.9% voted in favor of the revision to the Articles of Incorporation, to require that the composition of the Board of Directors and any committee of the Board satisfy independence requirements of federal securities laws and stock exchange rules.

Holders of over 64.1% of the outstanding shares voted on Proposal 3, of which over 95.8% voted in favor of the 2004 Stock Plan which authorized the issue of 600,000 shares for officer and director option and stock grants.

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

Exhibits

3. (a)

First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K are hereby incorporated by reference. Articles of Amendment to the First Amended and Restated Articles of Incorporation of Saul Centers, Inc., filed with the Maryland Department of Assessments and Taxation on May 28, 2004 are filed herewith.

(b)

Amended and Restated Bylaws of Saul Centers, Inc. as in effect at and after August 24, 1993 and as of August 26, 1993 and filed as Exhibit 3.(b) of the 1993 Annual Report of the Company on Form 10-K are hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated

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Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 3.(b) of the 1997 Annual Report of the Company on Form 10-K are hereby incorporated by reference.

(c)

Articles Supplementary to First Amended and Restated Articles of Incorporation of the Company, dated October 30, 2003, filed as Exhibit 2 to the Company’s Current Report on Form 8-A dated October 31, 2003, is hereby incorporated by reference.

4. (a)

Deposit Agreement, dated November 5, 2003, among the Company, Continental Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and filed as Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

(b)

Form specimen of receipt representing the depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock of Saul Centers, Inc. and included as part of Exhibit 4 to the Registration Statement on Form 8-A on October 31, 2003 is hereby incorporated by reference.

10. (a)

First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to Registration Statement No. 33-64562 is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, and the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 1997 Quarterly Report of the Company is hereby incorporated by reference. The Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 4.(c) to Registration Statement No. 333-41436, is hereby incorporated by reference. The Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the September 30, 2003 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. The Seventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the December 31, 2003 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

-43-

(b)

First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of the 1997 Annual Report of the Company on Form 10-K are hereby incorporated by reference.

(c)

First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited Partnership filed as Exhibit 10.(c) of the June 30, 2001 Quarterly Report of the Company is hereby incorporated by reference.

(d)

Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference.

(e)

Management Functions Conveyance Agreement filed as Exhibit 10.5 to Registration Statement No. 33-64562 is hereby incorporated by reference.

(f)

Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.

(g)

Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference.

(h)

Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8 to Registration Statement No. 33-64562 is hereby incorporated by reference.

(i)

Saul Centers, Inc. 2004 Stock Plan filed as Exhibit 99 to Registration Statement No. 333-115262 is hereby incorporated by reference.

(j)

Agreement of Assumption dated as of August 26, 1993 executed by Saul Holdings Limited Partnership and filed as Exhibit 10.(i) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

(k)

Deferred Compensation Plan for Directors, dated as of April 23, 2004 as filed herewith.

-44-

(l)

Loan Agreement dated as of November 7, 1996 by and among Saul Holdings Limited Partnership, Saul Subsidiary II Limited Partnership and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc., filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference.

(m)

Promissory Note dated as of January 10, 1997 by and between Saul Subsidiary II Limited Partnership and The Northwestern Mutual Life Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference.

(n)

Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I Limited Partnership as Borrower and Nomura Asset Capital Corporation as Lender filed as Exhibit 10.(p) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference.

(o)

Revolving Credit Agreement dated as of August 30, 2002 by and between Saul Holdings Limited Partnership as Borrower; U.S. Bank National Association, as administrative agent and sole lead arranger; Wells Fargo Bank, National Association, as syndication agent, and U.S. Bank National Association, Wells Fargo Bank, National Association, Comerica Bank, Southtrust Bank, KeyBank National Association as Lenders, as filed as Exhibit 10.(n) of the September 30, 2002 Quarterly Report of the Company, is hereby incorporated by reference.

(p)

Guaranty dated as of August 30, 2002 by and between Saul Centers, Inc. as Guarantor and U.S. Bank National Association, as administrative agent and sole lead arranger for itself and other financial institutions, the Lenders, as filed as Exhibit 10.(p) of the September 30, 2002 Quarterly Report of the Company, is hereby incorporated by reference.

(q)

Amended and Restated Promissory Note dated January 13, 2003 by and between Saul Holdings Limited Partnership as Borrower and Metropolitan Life Insurance Company as lender, as filed as Exhibit 10.(p) of the December 31, 2002 Annual Report of the Company on Form 10-K, is hereby incorporated by reference.

31.

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

32.

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

99.

Schedule of Portfolio Properties

-45-

Reports on Form 8-K

A Form 8-K dated April 22, 2004, was furnished to the SEC on April 23, 2004, in response to Items 7 and 12 to furnish a press release announcing the Company’s financial results for the quarter ended March 31, 2004.

A Form 8-K dated May 7, 2004, was filed with the SEC on May 7, 2004, in response to Items 5 and 7 to furnish pro forma financial information on two properties, the purchase prices of which, in the aggregate, exceeded 10% of the Company’s total assets of as December 31, 2003.

SIGNATURES

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


		SAUL CENTERS, INC.
		(Registrant)

Date: August 9, 2004		/s/ B. Francis Saul III
		B. Francis Saul III, President

Date: August 9, 2004		/s/ Scott V. Schneider
		Scott V. Schneider
		Senior Vice President, Chief Financial Officer
		(principal financial officer)

Date: August 9, 2004		/s/ Kenneth D. Shoop
		Kenneth D. Shoop
		Vice President, Chief Accounting Officer
		(principal accounting officer)

-46-

EXHIBIT 3.(a)

ARTICLES OF AMENDMENT

THE FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION

SAUL CENTERS, INC.

Saul Centers, Inc., a Maryland corporation having its principal office in Maryland in Bethesda, Maryland (hereinafter called the “corporation”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:

FIRST: The First Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) are hereby amended by striking out ARTICLE V, SECTION 3 in its entirety and inserting in lieu thereof the following:

Section 3. Independent Directors. Notwithstanding anything herein to the contrary, at all times (except during a period of vacancy or vacancies on the Board of Directors), the Board of Directors and any committee thereof shall have such number of directors with such characteristics as may be necessary to satisfy all independence requirements set forth in the Securities Exchange Act of 1934 and the rules and regulations promulgated by the Securities and Exchange Commission thereunder, and the rules and regulations of any stock exchange or automated interdealer quotation system on which any equity securities of the Company are listed or quoted.

SECOND: The amendment of the Articles of Incorporation of the corporation as hereinabove set forth has been duly advised by the board of directors and approved by the stockholders of the corporation.

IN WITNESS WHEREOF: Saul Centers, Inc., has caused these presents to be signed in its name and on its behalf by its Chairman of the Board and Chief Executive Officer and attested by its Senior Vice President, Chief Financial Officer, Treasurer and Secretary on May 4, 2004.

THE UNDERSIGNED , Chairman of the Board and Chief Executive Officer of Saul Centers, Inc., who executed on behalf of said corporation, the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information, and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury.


ATTEST:		Saul Centers, Inc.

/s/ Scott V. Schneider		/s/ B. Francis Saul II
Scott V. Schneider, Senior Vice President, Chief Financial Officer, Treasurer and Secretary		B. Francis Saul II, Chairman of the Board and Chief Executive Officer

EXHIBIT 10(k)

2004 Saul Centers, Inc. Deferred Compensation Plan For Directors

ARTICLE I

INTRODUCTION

This 2004 Saul Centers, Inc. Deferred Compensation Plan for Directors (the “Plan”) is established by Saul Centers, Inc. (the “Company”) for the benefit of its Directors and their Beneficiaries (as such terms are defined below), and it shall be maintained according to the terms hereof.

ARTICLE II

DEFINITIONS

2.1 DEFINITIONS . When used herein, the following words and phrases shall have the meanings assigned to them, unless the context clearly indicates otherwise:

(a) “Beneficiary” means the person or persons, natural or otherwise, designated by a Director under section 8.1 to receive any death benefit payable under section 6.3. In the event that there is no Beneficiary designated by a Director, the designation is void or the Beneficiary predeceases the Director, the Director’s Beneficiary shall be the person in the first of the following classes in which there is a survivor: (i) the Director’s spouse; (ii) the Director’s children in equal shares, except that if any of the children predecease the Director but leaves issue surviving, then such issue shall take by right of representation the share the parent would have taken if living; (iii) the Director’s estate.

(b) “Board of Directors” means the board of directors of Saul Centers, Inc.

(c) “Cash Deferred Fee Accounts” means an account established by the Company in the name of a Director to which is credited (1) any Director’s Fees that are deferred by the Director under section 3.1(a) and directed into the Cash Deferred Fee Account under section 3.1(b), and (2) any interest that is credited by the Company under Article IV, and from which is debited payment made under Article VI and Article VII.

(d) “Company” means Saul Centers, Inc.

(e) “Deferred Fee Accounts” means a Director’s Cash Deferred Fee Account and Stock Deferred Fee Account.

(f) “Deferred Fee Agreement” means the written agreement, substantially in the form of Exhibit A hereto, between the Company and a Director, that together with the Plan, governs the Director’s rights to payment of deferred Director’s Fees (adjusted for investment performance) under the Plan.

(g) “Director” means a member of the Board of Directors.

(h) “Director’s Fees” means the annual retainer paid to a Director, any fees paid to a Director for attending meetings of the Board of Directors or any committee of the Board of Directors, and any fees paid to a Director for serving as chairman of a committee of the Board of Directors.

(i) “Fair Market Value” means, with respect to a share of the Company’s common stock, (i) if the common stock is listed on a national securities exchange or traded on the National Market System, the closing price of the common stock on the determination date or if there are no sales on such date, then on the next preceding date on which there were sales of

common stock, all as published in the Eastern Edition of the Wall Street Journal, (ii) if the common stock is not listed on a national securities exchange or traded on the National Market System, the mean between the bid and asked prices last reported by the National Association of Securities Dealers, Inc. for the over-the-counter market on the determination date or, if no bid and asked prices are reported on such date, then on the next preceding date on which there were such quotations, or (iii) if the common stock is not listed on a national securities exchange or traded on the National Market System and quotations for the common stock are not reported by the National Association of Securities Dealers, Inc., the fair market value determined by Board of Directors.

(j) “Financial Hardship” means the financial inability of a Director, as determined by the President of the Company, to provide the necessary funds to meet any unforeseen and extraordinary expenses incurred on account of accident, sickness or disability affecting the Director or any member of his or her family.

(k) “Interest” means the amount of interest credited to a Director’s Cash Deterred Fee Account at an annual rate determined quarterly in accordance with section 4.2.

(l) “Plan” means the 2004 Saul Centers, Inc. Deferred Compensation Plan for Directors set forth in this document, as amended by the Company from time to time.

(m) “Shares” means the phantom shares of the Company’s common stock credited to a Director’s Stock Deferred Fee Account pursuant to Article III and Article V.

(n) “Stock Deferred Fee Accounts means an account established by the Company in the name of a Director to which are credited (1) Shares for any Director’s Fees that are deferred

by the Director under section 3.1(a) and directed into the Stock Deferred Fee Account under section 3.1(b), and (2) any additional Shares that are credited by the Company under Article V and from which are debited payments made under Article VI and Article VII.

ARTICLE III

DEFERRAL OF DIRECTOR’S FEES

3.1 ELECTION TO DEFER FEES . (a) The Plan shall be effective for Director’s Fees earned on or after April 24, 2004. For purposes of the Plan, each Director shall be deemed to have made a deferral election identical to the deferral election that was effective for the Director on April 23, 2004, under the Saul Centers, Inc. Deferred Compensation and Stock Plan for Directors, as amended April 27, 2001. For a new Director, the election to defer Director’s Fees shall be made within thirty days following the Director’s election or appointment. Any election or deemed election to defer shall continue in effect unless modified or revoked in accordance with section 3.3.

(b) When a Director elects to defer Director’s Fees under section 3.1(a), the Director shall also elect whether amounts deferred should be credited to his or her Cash Deferred Fee Account, to his or her Stock Deferred Fee Account, or both, in percentages authorized in the Director’s Deferred Fee Agreement.

3.2 CREDITING TO DEFERRED FEE ACCOUNTS . (a) When a Director elects under section 3.1(b) to have Director’s Fees credited to his or her Cash Deferred Fee Account, as of the first business day of each calendar quarter the Company shall credit the Director’s Cash Deferred Fee Account with the amount of such Director’s Fees that are subject to the deferral and crediting election and that either are earned on such date or were earned after the first business day of the immediately preceding calendar quarter.

(b) When a Director elects under section 3.1(b) to have Director’s Fees credited to his or her Stock Deferred Fee Account, as of the first business day of each calendar quarter the Company shall credit the Director’s Stock Deferred Fee Account with a certain number of Shares. The number of Shares credited to the Stock Deferred Fee Account shall be the quotient of (1) the amount of Director’s Fees to be credited to the Stock Deferred Fee Account divided by (2) the Fair Market Value of the Company’s common stock on such date that the Shares are credited to the Stock Deferred Fee Account. For purposes of the foregoing sentence, the amount of Director’s Fees to be credited to the Stock Deferred Fee Account shall equal the Director’s Fees that are subject to the deferral and crediting election and that either are earned on the first business day of the calendar quarter or were earned since the first business day of the immediately preceding calendar quarter.

3.3 MODIFICATION OR REVOCATION OF DEFERRAL . A Director may, on a prospective basis, change the amount of Director’s Fees to be deferred by executing a new Deferred Fee Agreement or revoke his or her election to defer Director’s Fees by a written revocation to the Secretary of the Company.

3.4 MODIFICATION OF INVESTMENT DIRECTION . A Director may, on a prospective basis, modify his or her election regarding the Deferred Fee Accounts to which his or her deferred Director’s Fees are credited.

ARTICLE IV

INTEREST

4.1 INTEREST . Interest shall be credited to each Director’s Cash Deferred Fee Account, as of the end of each calendar quarter, at an annual rate determined pursuant to section 4.2. Interest shall be credited during each quarter that a Director has any amount credited to his or her Cash Deferred Fee Account under the Plan.

4.2 RATE OF INTEREST . Interest shall be credited at a rate equal to two percentage points less than the dividend rate for the dividend paid in the calendar quarter then just ended on the Company’s common stock computed as of the date that the dividend is paid, based on the closing price of the Company’s common stock on such date.

ARTICLE V

DIVIDENDS

5.1 CREDITING OF DIVIDENDS . Each Director with Shares credited to his or her Stock Deferred Fee Account on the record date of a dividend on the Company’s common stock shall be credited on the payment date of the dividend with an amount determined by the product of the number of Shares credited to the Director’s Stock Deferred Fee Account on the dividend record date and the dividend per share on the Company’s common stock. Such amount shall be credited on the dividend payment date to the Director’s Cash Deferred Fee Account, unless the Director at such time has a Deferred Fee Agreement in effect which provides for the deferral of any portion of the Directors fees otherwise payable during the period which includes the dividend payment date to be credited to the Director’s Stock Deferred Fee Account. In such a case, the dividend reinvestment provisions of Section 5.2 shall apply.

5.2 DIVIDEND REINVESTMENT SHARES . If the Director has a Deferred Fee Agreement in effect on the payment date of dividends on the Company’s common stock and such Deferred Fee Agreement provides for any portion of the Director’s fees otherwise payable during the period which includes the dividend payment date to be credited to the Director’s Stock Deferred Fee Account, then on the dividend payment date the Director’s Stock Deferred Fee Account shall be credited with a number of Shares determined by dividing the amount of the dividends for the Director as determined under Section 5.1 by ninety-seven percent (97%) of Fair Market Value of the Company’s common stock on the dividend payment date.

ARTICLE VI

PAYMENT OF DEFERRED FEES

6.1 DEFERRED FEES AND INTEREST . A Director shall be entitled to receive a benefit equal to the amounts credited to his or her Deferred Fee Accounts at the time or times specified in such Director’s Deferred Fee Agreement. Amounts credited to a Director’s Cash Deferred Fee Account shall be paid in cash. Shares credited to a Director’s Stock Deferred Fee Account shall be paid by the delivery by the Company of certificates representing a like number of the Company’s common shares.

6.2 PAYMENT . (a) At the election of a Director, the amount credited to the Director’s Deferred Fee Accounts shall be paid in a lump sum or in installments in accordance with the terms of such Director’s Deferred Fee Agreement. Amounts credited to a Director’s

Cash Deferred Fee Accounts shall bear interest at the rate specified in Article IV during the installment payout period. Shares credited to a Director’s Stock Deferred Fee Account shall continue to result in the crediting of additional amounts to a Director’s Cash Deferred Fee Account or additional Shares to the Director’s Stock Deferred Fee Account in accordance with Article V during the installment payout period.

(b) Notwithstanding the foregoing, no distribution of shares of the Company’s common stock shall be made in settlement of a Director’s Stock Deferred Fee Account unless the Company may validly issue shares of the Company’s common stock at such time pursuant to all applicable rules and regulations, including but not limited to corporate law, securities law and stock exchange rules. If shares of the Company’s common stock may not be issued, subject to compliance with applicable rules and regulations, the Fair Market Value of the Shares credited to a Director’s Deferred Fees Account shall be distributed in cash.

6.3 DEATH OF A DIRECTOR . If a Director dies with any amount credited to his or her Deferred Fee Accounts (the balance to be determined as of the first business day of the calendar quarter that immediately follows his or her death), then his or her Beneficiary shall be entitled to receive the entire amount in a lump sum. Such payment shall be made as soon as practicable after the first business day of the calendar quarter that immediately follows his or her death. Amounts credited to a Director’s Cash Deferred Fee Account and Shares credited to a Director’s Stock Deferred Fee Account shall continue to result in the crediting of additional amounts to a Director’s Cash Deferred Fee Account or additional Shares to the Director’s Stock Deferred Fee Account in accordance with Article IV or V prior to lump sum payment.

ARTICLE VII

HARDSHIP WITHDRAWALS

7.1 WITHDRAWALS FROM DEFERRED FEE ACCOUNTS . (a) No Director, Beneficiary, nor any other individual or entity shall have any right to make any withdrawals from such Director’s Deferred Fee Accounts or to alter any installment payments provided under this Agreement.

(b) Notwithstanding section 7.1(a), a Director shall, in the discretion of the Company, be entitled to withdraw all or a portion of the amount credited to his or her Deferred Fee Accounts in the event of Financial Hardship. Withdrawals from the Cash Deferred Fee Account shall be payable in cash and withdrawals from the Stock Deferred Fees Account shall be payable in Shares, subject to the provisions of section 6.2(b).

ARTICLE VIII

BENEFICIARIES

8.1 DESIGNATION OF BENEFICIARY . Each Director may designate from time to any person or person, natural or otherwise, as his or her Beneficiary or Beneficiaries to whom benefits under section 6.3 are to be paid if he or she dies while entitled to benefits. Each Beneficiary designation shall be made either in the Deferred Fee Agreement or on a form prescribed by the Secretary of the Company and shall be effective only when filed with the Secretary during the Director’s lifetime. Each Beneficiary designation filed with the Secretary shall revoke all Beneficiary designations previously made by the Director. The revocation of a Beneficiary designation shall not require the consent of any designated Beneficiary.

ARTICLE IX

ADMINISTRATION

9.1 PLAN LIMITATIONS. As of the date a Share is credited to a Director’s Stock Deferred Fee Account, such Share is deemed to constitute the grant of a Stock Award under the Saul Centers, Inc. 2004 Stock Plan to the Director for one phantom share unit. No Share shall be credited to a Director’s Stock Deferred Fee Account to the extent that the crediting of such Share and the resulting deemed Stock Award to the Director would cause the Saul Centers, Inc. 2004 Stock Plan to exceed the limit on aggregate shares of Company common stock that may be issued as Stock Awards under such plan.

9.2 RIGHT TO TERMINATE . The Compensation Committee of the Board of Directors may amend or terminate the Plan at any time in whole or in part. No amendment or termination of the Plan shall reduce any amounts credited to a Director’s Deferred Fee Accounts, any amount owed to him or her by the Company as of the date of amendment or termination, or the amount of Interest accrued or number of Shares to be credited, as of such date, to his or her account.

9.3 NO FUNDING OBLIGATION . The obligation of the Company to pay any benefits under the Plan shall be unfunded and unsecured, and any payments under the Plan shall be made from the general assets of the Company. The Company, however, in its discretion, may set aside assets or purchase annuity or life insurance contracts to discharge all or part of its obligations under the Plan. The assets set aside or the annuity, or life insurance contracts shall remain in the name of the Company, and no trust shall be created by setting aside the assets or purchasing annuity or life insurance contracts. Director’s rights under the Plan are not

assignable or transferable other than by will or the laws of descent and distribution, and such rights are exercisable during the Director’s lifetime only by him or her, or by his or her guardian or legal representative.

9.4 APPLICABLE LAW . This Plan shall be construed and enforced in accordance with the laws of the State of Maryland, except to the extent superseded by federal law.

9.5 ADMINISTRATION AND INTERPRETATION . The President of Saul Centers, Inc. shall have the authority and responsibility to administer and interpret the Plan. Benefits due and owing to a Director or Beneficiary under the Plan shall be paid when due without any requirement that a claim for benefits be filed. However, any Director or Beneficiary who has not received the benefits to which he or she believes himself or herself entitled may file a written claim with the President, who shall act on the claim within thirty days, and such action on any such claim shall be conclusive.

EXHIBIT A

DEFERRED FEE AGREEMENT

This Agreement between Saul Centers, Inc. (the “Company”) and (the “Director”) is made the day of , 20 , under the 2004 Saul Centers, Inc. Deferred Compensation Plan for Directors (the “Plan”).

1. DEFERRED FEE PLAN . The Director agrees to the terms and conditions of the Plan, a copy of which has been delivered to the Director and constitutes a part of this Agreement. Capitalized words and phrases in this Agreement shall have the meaning given to them in the Plan, unless the context clearly indicates otherwise.

2. ELECTION TO DEFER FEES . The Director authorizes and directs the Company to defer [insert percentage or dollar amount] of the Director’s Fees earned on and after 20 and in each subsequent calendar year. The Director may at any time revoke this election on a prospective basis beginning after the date of such revocation by delivering to the Secretary of the Company a written revocation of the election.

3. INVESTMENT OF DEFERRED FEES . The Director elects to have his or her deferred Director’s Fees apportioned between Cash and Stock Deferred Fee Accounts as follows (circle appropriate percentages):


Cash Deferred Fee Account:	0	%	25	%	50	%	75	%	100	%
Stock Deferred Fee Account:	0	%	25	%	50	%	75	%	100	%

4. FORM OF PAYMENT . The Director elects to receive the amount of Deferred Fees credited to his or her Deferred Fee Accounts pursuant to this Agreement in (check one):

a lump sum; or

substantially equal annual Installments over a period of _ years (not to exceed ten).

Payment shall commence:

, 20 ; or

upon termination of service as director.

5. BENEFICIARY . The Director requests that, upon his or her death, any amounts remaining in his or her Deferred Fee Accounts be paid to the Beneficiary or Beneficiaries he or she has designated in a Notice of Designation of Beneficiary filed with the Secretary of the Company.

IN WITNESS WHEREOF , the parties hereto have executed this Agreement on the day and year written above.



Witness		Director

		SAUL CENTERS, INC.

		By

		Name:

		Title:

Exhibit 31

CERTIFICATIONS

I, B. Francis Saul II, certify that:

1.	I have reviewed this report on Form 10-Q of Saul Centers, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2004

/ S / B. Francis Saul II

B. Francis Saul II

Chairman and Chief Executive Officer

CERTIFICATIONS

I, Scott V. Schneider, certify that:

1.	I have reviewed this report on Form 10-Q of Saul Centers, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2004

/ S /Scott V. Schneider

Scott V. Schneider

Senior Vice President,

Chief Financial Officer,

Secretary and Treasurer

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, B. Francis Saul II, the Chairman and Chief Executive Officer of Saul Centers, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2004 (the “Report”). The undersigned hereby certifies that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: August 9, 2004		/ S / B. Francis Saul II
	Name:	B. Francis Saul II
	Title:	Chairman & Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Scott V. Schneider, the Chief Financial Officer of Saul Centers, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2004 (the “Report”). The undersigned hereby certifies that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: August 9, 2004		/ S / Scott V. Schneider
	Name:	Scott V. Schneider
	Title:	Senior Vice President,
		Chief Financial Officer, Secretary &
		Treasurer

Saul Centers, Inc.

Schedule of Current Portfolio Properties

June 30, 2004



Property	Location	Leasable Area (Square Feet)	Year Developed or Acquired (Renovated)	Land Area (Acres)	Percentage Leased				Anchor /Significant Tenants
Property	Location	Leasable Area (Square Feet)	Year Developed or Acquired (Renovated)	Land Area (Acres)	Jun-04		Jun-03		Anchor /Significant Tenants

Shopping Centers

Ashburn Village	Ashburn, VA	211,327	1994 /00 /01/02	26.4	100	%	100	%	Giant Food, Reston Hospital Center, Blockbuster, Long & Foster

Beacon Center	Alexandria, VA	352,915	1972 (1993/99)	32.3	97	%	100	%	Lowe’s, Giant Food, Office Depot, Outback Steakhouse, Marshalls, Hancock Fabrics, Party Depot

Belvedere	Baltimore, MD	54,941	1972	4.8	100	%	95	%	Food King

Boca Valley Plaza	Boca Raton, FL	121,269	2004	12.7	89	%	n / a		Publix, Blockbuster

Boulevard	Fairfax, VA	56,350	1994 (1999)	5.0	100	%	100	%	Danker Furniture, Petco, Panera Bread, Party City

Briggs Chaney Plaza	Silver Spring, MD	197,486	2004	18.2	92	%	n / a		Safeway, Ross Dress For Less, Chuck E Cheese, Family Dollar

Broadlands Village	Loudoun County, VA	104,492	2003	24.0	100	%	n / a		Safeway

Clarendon	Arlington, VA	6,940	1973	0.5	100	%	100	%

Clarendon Station	Arlington, VA	4,868	1996	0.1	100	%	100	%

Countryside	Loudoun County, VA	141,696	2004	16.0	95	%	n / a		Safeway, CVS Pharmacy

Cruse MarketPlace	Forsyth County, GA	78,686	2004	10.6	97	%	n / a		Publix

Flagship Center	Rockville, MD	21,500	1972, 1989	0.5	100	%	100	%

French Market	Oklahoma City, OK	244,724	1974 (1984/98)	13.8	96	%	94	%	Burlington Coat Factory, Bed Bath & Beyond, Famous Footwear, Lakeshore Learning Center, BridesMart, Staples, Dollar Tree

Germantown	Germantown, MD	26,241	1992	2.7	100	%	82	%

Giant	Baltimore, MD	70,040	1972 (1990)	5.0	100	%	100	%	Giant Food

The Glen	Lake Ridge, VA	112,229	1994	14.7	100	%	92	%	Safeway Marketplace

Great Eastern	District Heights, MD	254,448	1972 (1995)	23.9	100	%	98	%	Giant Food, Pep Boys, Big Lots, Run N’ Shoot

Hampshire Langley	Takoma Park, MD	131,700	1972 (1979)	9.9	100	%	100	%	Safeway, Blockbuster

Kentlands Square	Gaithersburg, MD	109,922	2002	11.5	100	%	100	%	Lowe’s

Leesburg Pike	Baileys Crossroads, VA	97,752	1966 (1982/95)	9.4	100	%	100	%	Party Depot, CVS Pharmacy, Kinko’s, Hollywood Video

Lexington Mall	Lexington, KY	314,535	1974	30.0	58	%	58	%	Dillard’s

Lumberton Plaza	Lumberton, NJ	193,044	1975 (1992/96)	23.3	95	%	98	%	SuperFresh, Rite Aid, Blockbuster, Ace Hardware

Olde Forte Village	Ft. Washington, MD	142,417	2003	16.0	67	%	n / a		Safeway

Olney	Olney, MD	53,765	1975 (1990)	3.7	100	%	100	%	Rite Aid

Ravenwood	Baltimore, MD	85,958	1972	8.0	98	%	96	%	Giant Food, Hollywood Video

Exhibit

Saul Centers, Inc.

Schedule of Current Portfolio Properties

June 30, 2004



Property	Location	Leasable Area (Square Feet)	Year Developed or Acquired (Renovated)	Land Area (Acres)		Percentage Leased				Anchor /Significant Tenants
Property	Location	Leasable Area (Square Feet)	Year Developed or Acquired (Renovated)	Land Area (Acres)		Jun-04		Jun-03		Anchor /Significant Tenants

Shopping Centers (continued)

Seven Corners	Falls Church, VA	560,998	1973 (1994-7)	31.6		99	%	99	%	Home Depot, Shoppers Club, Michaels, Barnes & Noble, Ross Dress For Less, G Street Fabrics, Off-Broadway Shoes

Shops at Fairfax	Fairfax, VA	68,743	1975 (1993/99)	6.7		100	%	100	%	Super H Mart, Blockbuster

Southdale	Glen Burnie, MD	484,115	1972 (1986)	39.6		99	%	94	%	Giant Food, Home Depot, Circuit City, Michaels, Marshalls, PetSmart, Value City Furniture

Southside Plaza	Richmond, VA	347,651	1972	32.8		88	%	95	%	CVS Pharmacy, Maxway

South Dekalb Plaza	Atlanta, GA	163,418	1976	14.6		97	%	100	%	MacFrugals, Pep Boys, The Emory Clinic, Maxway

Thruway	Winston-Salem, NC	354,285	1972 (1997)	30.5		91	%	87	%	Harris Teeter, Fresh Market, Bed Bath & Beyond, Stein Mart, Eckerd Drugs, Borders Books, Blockbuster

Village Center	Centreville, VA	143,109	1990	17.2		100	%	100	%	Giant Food, Tuesday Morning, Blockbuster

West Park	Oklahoma City, OK	76,610	1975	11.2		72	%	54	%	Drapers Market, Family Dollar

White Oak	Silver Spring, MD	480,156	1972 (1993)	28.5		100	%	99	%	Giant Food, Sears, Rite Aid, Blockbuster



	Total Shopping Centers	5,868,330		535.6		93.8	%	93.9	%



Office Properties

Avenel Business Park	Gaithersburg, MD	390,964	1981-2000	37.1		93	%	99	%	General Services Administration, VIRxSYS, Boston Biomedica, Broadsoft, Arrow Financial, Quanta Systems

Crosstown Business Center	Tulsa, OK	197,135	1975 (2000)	22.4		93	%	93	%	Compass Group, Roxtec, Outdoor Inovations, Auto Panels Plus, Gofit, Freedom Express

601 Pennsylvania Ave	Washington, DC	226,604	1973 (1986)	1.0		100	%	88	%	National Gallery of Art, American Assn. of Health Plans, Credit Union National Assn., Southern Company, HQ Global, Pharmaceutical Care Mgmt Assn, Freedom Forum, Capital Grille

Van Ness Square	Washington, DC	156,493	1973 (1990)	1.2		96	%	92	%	INTELSAT, Team Video Intl, Office Depot, Pier 1

Washington Square	Alexandria, VA	234,775	1975 (2000)	2.0		93	%	87	%	Vanderweil Engineering, World Wide Retail Exch., EarthTech, Thales, New American Schools, Trader Joe’s, Kinko’s, Talbot’s, Blockbuster



	Total Office Properties	1,205,971		63.7		94.8	%	92.6	%



	Total Portfolio	7,074,301		599.3	^(a)	94.0	%	93.7	%

^(a)

The Company purchased 13 acres of vacant land in Frederick, Maryland which is being developed as Shops at Monocacy. The 102,000 square foot shopping center is under construction, is approximately 63% preleased and is expected to be operational November 2004. The Company purchased 3.4 acres of vacant land which is being developed as Kentlands Place, a 41,300 Square foot retail/office property adjacent to Kentlands Square shopping center.

The Company also purchased 19 acres of vacant land in the Lansdowne community in Loudoun County, Virginia and a 1.25 acre site in the Clarendon area of Arlington, Virginia, as future development and redevelopment properties.

Exhibit