Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2004
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers. As of September 30, 2004, the portfolio included 62 regional centers, 18 community centers, and two development projects totaling approximately 61 million square feet of gross leasable area.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2004) | Amount ($ in thousands) |
|---|---|
| Total Revenues | 380,684 |
| Net Income | 59,311 |
| Net Income Available to Common Stockholders | 52,528 |
| Funds From Operations (FFO) - Diluted | 209,618 |
| Net Cash Provided by Operating Activities | 151,280 |
| Total Debt (Mortgage + Bank Notes) | 2,993,430 |
| Cash and Cash Equivalents | 52,706 |
| Property, Net | 3,382,285 |
Note: Total debt includes $2,196,430 in mortgage notes and $797,000 in bank notes payable. The Company's total outstanding loan indebtedness, including pro rata share of joint venture debt, was approximately $4.1 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.6% to $380.7 million from $347.4 million in the prior year period. Minimum and percentage rents rose 12.6% driven by acquisitions (FlatIron Crossing, Northridge Mall, Inland Center, NorthPark Center, Mall of Victor Valley, La Cumbre Plaza) and redevelopment completions (Queens Center, La Encantada).
- Net Income Decline: Net income available to common stockholders decreased 40.1% to $52.5 million from $87.7 million. This decline is primarily due to the absence of a $22.1 million gain on the sale of Bristol Center (discontinued operations) recorded in 2003, increased depreciation and amortization ($105.2 million vs. $73.4 million) due to SFAS 141 accounting changes, and higher interest expense.
- Expense Increases: Interest expense rose to $105.6 million from $98.8 million due to new borrowings for acquisitions and redevelopment, partially offset by the payoff of a $196.8 million term loan. Depreciation and amortization increased significantly due to the reclassification of purchase price allocations under SFAS 141.
- FFO Growth: Despite the drop in GAAP net income, FFO-diluted increased 9.8% to $209.6 million, reflecting the core operating performance excluding non-cash depreciation and asset sale gains.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to incur between $125 million and $180 million in 2004 for development, redevelopment, expansion, and renovations (excluding Queens Center, La Encantada, and Scottsdale 101 which are separately financed).
- Liquidity: The Company expanded its revolving line of credit to $1.0 billion on July 30, 2004, with $547 million outstanding as of September 30. The Company intends to fund future growth through debt/equity financings, joint ventures, and asset sales.
- Acquisitions: The Company is under contract to acquire Fiesta Mall in Mesa, Arizona (1 million sq. ft.) for $135 million, with closing expected in November 2004.
- Risks:
- Interest Rate Risk: A 1% increase in interest rates would decrease future earnings and cash flows by approximately $12.4 million annually based on $1.2 billion of variable rate debt.
- REIT Qualification: Failure to qualify as a REIT would result in corporate taxation and disqualification for four subsequent years.
- Joint Venture Control: The Company does not control cash distributions from eight joint venture centers, which could impact REIT distribution requirements.
- Environmental: Ongoing remediation costs for perchloroethylene (PCE) at a former joint venture property and asbestos at Fresno Fashion Fair.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of long-term debt maturities, noting $215.4 million due in 2005 and $188.2 million due in 2006 for consolidated centers.
- FFO Reconciliation: Review the reconciliation of Net Income to FFO to understand the impact of SFAS 141 depreciation adjustments and asset sale gains/losses.
- Joint Venture Exposure: Assess the $58.3 million of recourse debt exposure in unconsolidated joint ventures and the Company's pro-rata share of joint venture debt.
- Queens Center Redevelopment: Monitor the $250-$275 million redevelopment project at Queens Center, of which $248.5 million has been incurred as of September 30, 2004.
- Dividend Sustainability: Confirm that operating cash flows ($151.3 million for nine months) remain sufficient to cover the declared dividend of $0.65 per share (payable December 9, 2004) and preferred dividends.