Business Context and Reporting Period
Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Macerich is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, development, redevelopment, management, and leasing of regional and community shopping centers. As of December 31, 2007, the portfolio consisted of 94 centers (74 regional, 20 community) aggregating approximately 80.7 million square feet of gross leasable area (GLA). The company operates through The Macerich Partnership, L.P.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $896.4 million | $829.7 million |
| Net Income Available to Common Stockholders | $71.7 million | $228.0 million |
| Funds From Operations (FFO) - Diluted | $407.9 million | $383.1 million |
| Cash Flow from Operating Activities | $326.1 million | $211.9 million |
| Total Debt (including pro rata JV debt) | $7.6 billion | $6.8 billion (approx.) |
| Debt to Total Market Capitalization | 53.7% | N/A |
| Cash and Cash Equivalents | $85.3 million | $269.4 million |
| Dividends Declared per Common Share | $2.93 | $2.75 |
Material Changes vs. Prior Period
- Net Income Decline: Net income available to common stockholders decreased significantly from $228.0 million in 2006 to $71.7 million in 2007. This decline is primarily attributed to a $217.8 million decrease in income from discontinued operations, as 2006 included substantial gains from the sale of multiple properties (e.g., Citadel Mall, Northwest Arkansas Mall, Crossroads Mall) which were not present in 2007.
- Revenue Growth: Total revenues increased by 8.0% to $896.4 million, driven by acquisitions (2006 Acquisition Centers and 2007 Acquisition Properties) and redevelopment activities.
- FFO Growth: Despite the drop in GAAP net income, FFO-diluted increased 6.5% to $407.9 million, reflecting the company's core operating performance excluding non-cash depreciation and gains/losses on asset sales.
- Acquisitions: In 2007, the company acquired the remaining 50% interest in Hilton Village ($13.5 million) and a portfolio of 39 freestanding Mervyn's stores ($400.2 million). In early 2008 (subsequent event), the company acquired a 50% interest in The Shops at North Bridge for $515.0 million.
- Dispositions: In 2007, 27 of the acquired Mervyn's stores were designated as "available for sale" and classified as discontinued operations. In early 2008, the company redeemed participating convertible preferred units in exchange for the "Rochester Properties" (Eastview Mall, Greece Ridge Center, Marketplace Mall, and Pittsford Plaza).
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to incur between $400 million and $600 million in 2008 for development, redevelopment, expansion, and renovations.
- Redevelopment Pipeline: Significant projects include the $130 million redevelopment of Scottsdale Fashion Square (opening Fall 2009), the redevelopment of Santa Monica Place (projected Fall 2009), and the expansion of The Oaks in Thousand Oaks (phased completion beginning Fall 2008).
- Debt Management: The company issued $950 million in convertible senior notes in March 2007, maturing in 2012, to refinance term loans and pay down its line of credit. The company maintains a $1.5 billion revolving line of credit.
- Risk Factors:
- Geographic Concentration: A significant percentage of centers are located in California and Arizona, making the company sensitive to local economic conditions.
- Tenant Concentration: While diversified, Mervyn's accounted for 3.3% of minimum rents. The bankruptcy or closure of major anchors could adversely affect traffic and rental income.
- Interest Rate Risk: The company has substantial debt; a 1% increase in interest rates on floating rate debt could decrease future earnings by approximately $11.5 million annually.
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income taxes and prohibit qualification for four subsequent years.
Key Facts for Investor Verification
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing FFO rather than GAAP Net Income, as the 2006 net income was heavily inflated by one-time asset sale gains not repeated in 2007.
- Mervyn's Portfolio: Confirm the status of the 27 freestanding Mervyn's stores designated as "available for sale" and the leaseback terms for the remaining 12 stores acquired in late 2007.
- Debt Maturities: Review the schedule of debt maturities, noting that a significant portion of consolidated center debt matures in 2008-2010, requiring refinancing or repayment.
- Convertible Notes: Assess the dilution risk associated with the $950 million convertible senior notes issued in 2007, noting the effective conversion price was increased via capped calls to approximately $130.06.
- Joint Venture Recourse: Verify the extent of recourse debt obligations in joint ventures, which could become the company's liability if the joint ventures fail to discharge obligations.