MAC

Business Context and Reporting Period

Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
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 year-end 2006, the portfolio consisted of 91 centers (73 regional, 18 community) aggregating approximately 76.9 million square feet of gross leasable area (GLA). The company operates through The Macerich Partnership, L.P.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.6% to $829.7 million, driven primarily by acquisitions (2005 and 2006 Acquisition Centers) and increased tenant recoveries.
• Net Income Surge: Net income available to common stockholders increased significantly to $228.0 million from $52.6 million. This was largely due to a $204.9 million gain on the sale of discontinued operations (properties sold in 2006), compared to minimal gains in 2005.
• FFO Growth: Diluted FFO increased 13.7% to $383.1 million, reflecting organic growth and the accretion of new acquisitions, excluding the impact of asset sales.
• Debt Management: The company expanded its revolving line of credit to $1.5 billion and refinanced significant portions of its debt portfolio, including a major refinancing of the SDG Macerich Properties joint venture debt, lowering average interest rates.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Capital Expenditures: Management expects to incur between $400 million and $600 million in 2007 for development, redevelopment, expansion, and renovations.
• Development Pipeline: Key projects include the completion of Twenty Ninth Street (Boulder, CO), the expansion of The Oaks (Thousand Oaks, CA) with a new Nordstrom, and the opening of SanTan Village (Gilbert, AZ) and The Promenade at Casa Grande (Arizona).
• Dividend Policy: The company intends to maintain its REIT status by distributing at least 90% of taxable income. A quarterly dividend of $0.71 per share was declared in February 2007.

Risks and Contingencies:

• Tenant Concentration: Limited Brands, Inc. accounted for 3.5% of total minimum rents; no other single tenant exceeded 2.9%.
• Anchor Vacancies: The company purchased 11 department stores from Federated Department Stores in 2006, creating vacant anchor spaces that require redevelopment or replacement tenants.
• Environmental Liabilities: Potential costs exist for asbestos removal and remediation of underground storage tanks or chlorinated hydrocarbons at various centers.
• Interest Rate Risk: A 1% increase in interest rates would decrease future earnings and cash flows by approximately $13.8 million annually based on outstanding floating rate debt.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of net income by excluding the $204.9 million one-time gain from asset sales; focus on FFO ($383.1 million) as a recurring performance metric.
• Anchor Replacement Strategy: Assess the timeline and cost associated with re-leasing the 11 vacant Federated anchor spaces acquired in July 2006.
• Debt Maturity Profile: Review the schedule of debt maturities, noting significant fixed-rate refinancings completed in 2006 and the expansion of the $1.5 billion credit facility.
• Development Execution: Monitor the progress and leasing rates of major redevelopment projects (Twenty Ninth Street, SanTan Village, The Oaks) to ensure they meet projected cost and revenue targets.
• REIT Compliance: Confirm continued compliance with REIT distribution requirements to avoid corporate-level taxation.