MACERICH CO annual report, FY2018

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The Macerich Company — 2018 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018. Macerich is a REIT that owns, operates, leases, develops and redevelops U.S. shopping centers. At year-end, it had interests in 52 centers totaling approximately 51 million square feet of gross leasable area, including consolidated properties and joint ventures.

Key financial metrics

  • Revenue: $960.4 million, down 3.4% from $993.7 million in 2017. Minimum rents were $575.9 million; tenant recoveries were $263.5 million.
  • Profit: Consolidated net income was $69.0 million, versus $161.7 million in 2017. Net income attributable to the Company was $60.0 million, or $0.42 per diluted share, versus $146.1 million, or $1.02 per diluted share. FFO, a supplemental non-GAAP measure, was $564.4 million, down 3.2% from $582.9 million. FFO excluding shareholder-activism costs was $583.8 million.
  • Cash flow: Operating cash flow was $344.3 million, down from $386.4 million. Investing activities provided $176.3 million and financing activities used $514.4 million.
  • Property performance: Portfolio occupancy was 95.4%, compared with 95.0% in 2017; comparable regional-center tenant sales per square foot rose to $726 from $660. Releasing spreads were positive at 11.1% for smaller mall and freestanding-store leases.
  • Debt and liquidity: Year-end consolidated mortgage and notes payable totaled $5.0 billion. Including Macerich’s pro rata share of unconsolidated joint-venture debt and excluding noncontrolling interests in consolidated debt, management reported total loan indebtedness of $7.9 billion. Cash and cash equivalents were $102.7 million; the $1.5 billion revolving credit facility had $910.0 million drawn and $589.7 million available. The Company reported compliance with its loan covenants.
  • Distributions: Declared distributions were $2.97 per common share for 2018. Cash dividends and distributions totaled $453.6 million.

Material changes versus the prior year

  • Revenue declined 3.4%; rental revenue fell 2.9%, largely reflecting property dispositions and One Westside’s transition to joint-venture accounting. Same-center rental revenue increased modestly.
  • Net income fell by $92.7 million. The principal driver was the swing in asset-sale and write-down results: a $42.4 million gain in 2017 versus a $31.8 million net loss in 2018. The 2018 result included $54.5 million of impairment charges, partly offset by a $46.2 million gain on the sale of a 75% interest in One Westside.
  • Interest expense increased $11.2 million to $183.0 million. FFO decreased 3.2%, while operating cash flow declined $42.1 million.
  • Macerich adopted ASC 606 on January 1, 2018, changing its accounting for Chandler Freehold to a financing arrangement. The transition produced a $424.9 million cumulative-effect increase in accumulated deficit; this accounting adjustment is not the same as a period operating cash outflow.

Outlook, commentary and risks

  • Management said regional shopping-center fundamentals in its markets appeared reasonably strong entering 2019, but expected 2019 results to be pressured by rising interest rates, anchor closures and tenant bankruptcies. No specific earnings or FFO guidance was provided in the supplied filing text.
  • Management expected positive releasing spreads to continue in 2019. Approximately 900,000 square feet of smaller-store leases—12.5% of that category’s GLA—were scheduled to expire during 2019.
  • Planned capital spending included $250 million to $350 million over the next 12 months for development, redevelopment, expansions and renovations. Major projects included Fashion District Philadelphia, Scottsdale Fashion Square, One Westside and Los Angeles Premium Outlets. Macerich also anticipated spending $250 million to $300 million, at its pro rata share, to redevelop Sears spaces, with openings expected in 2020–2024.
  • Sears filed for bankruptcy in October 2018. After additional January 2019 closures, eight Sears stores remained in the portfolio; store closures could reduce rent and trigger co-tenancy rights, though redevelopment or re-leasing may create longer-term value.
  • Management expected to refinance, restructure, extend or repay maturities coming due over the next 12 months. A 1 percentage-point increase in interest rates was estimated to reduce annual earnings and cash flows by approximately $17.6 million, based on $1.8 billion of floating-rate debt.
  • Other material risks include substantial leverage and refinancing dependence, tenant credit and e-commerce pressures, redevelopment cost and execution risk, geographic concentration, joint-venture partner constraints, environmental liabilities, natural disasters and insurance limits. The Company reported no material legal proceedings.

Unusual items and developments

  • Macerich recorded $19.4 million of shareholder-activism-related costs and a one-time $12.7 million workforce-reduction charge. Management reported approximately $10.0 million of expense reductions from the workforce changes, excluding the one-time charge.
  • 2018 dispositions included the 75% One Westside interest sale, Promenade at Casa Grande and a joint-venture sale of The Market at Estrella Falls. The Company also reported property impairments and development-cost write-offs.
  • Subsequent to year-end, Fashion Outlets of Chicago was refinanced with a $300 million loan at 4.58%, and the Company announced a $0.75-per-share cash distribution payable March 1, 2019.

Important facts for investors to verify

  • Review the debt maturity schedule, refinancing assumptions and available capacity under the revolving credit facility, particularly for 2019–2021 maturities.
  • Assess the effects of Sears and other tenant closures on occupancy, rents, co-tenancy clauses and the $250–$300 million anticipated Sears redevelopment commitment.
  • Track whether major redevelopment projects meet their expected schedules and budgets, and whether leasing and operating performance support projected returns.
  • Reconcile GAAP earnings with FFO and adjusted FFO, including the effects of impairments, asset sales, activism costs and the ASC 606 financing-arrangement adjustment.
  • Evaluate dividend coverage and funding sources: 2018 distributions exceeded operating cash flow, with part funded from joint-venture distributions classified as investing cash flow.