Business Context and Reporting Period
Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: Macerich is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, redevelopment, management, and leasing of regional and community shopping centers. As of December 31, 1998, the Company owned or had an ownership interest in 46 regional shopping centers and seven community shopping centers, aggregating approximately 40 million square feet of gross leasable area (GLA). The Company operates through The Macerich Partnership, L.P. (the Operating Partnership).
Key Financial Metrics
| Metric | 1998 | 1997 |
|---|---|---|
| Total Revenues | $283.9 million | $221.2 million |
| Net Income (GAAP) | $44.1 million | $22.0 million |
| Net Income Available to Common Stockholders | $32.5 million | $22.0 million |
| Funds from Operations (FFO) - Diluted | $120.5 million | $83.4 million |
| EBITDA | $189.5 million | $147.6 million |
| Cash Flow from Operating Activities | $85.2 million | $78.5 million |
| Total Assets | $2,322.1 million | $1,505.0 million |
| Total Debt (Mortgage, Notes, Debentures) | $1,507.1 million | $1,123.0 million |
| Stockholders' Equity | $577.4 million | $216.3 million |
| Dividends Declared per Common Share | $1.865 | $1.78 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 28% to $283.9 million, driven primarily by acquisitions in 1997 and 1998. Minimum and percentage rents rose 27% to $192.6 million.
- Profitability: Net income available to common stockholders increased 48% to $32.5 million. FFO-diluted increased 44% to $120.5 million.
- Acquisition Activity: Significant expansion occurred in 1998, including the acquisition of the ERE Yarmouth portfolio (12 malls, 10.7 million sq. ft.) via a 50/50 joint venture, South Plains Mall, Westside Pavilion, Village at Corte Madera, Carmel Plaza, and Northwest Arkansas Mall.
- Capital Structure: The Company raised $451.3 million in net proceeds from equity offerings in 1998 (common and preferred stock). Total debt increased to $1.5 billion to fund acquisitions and refinancings.
- Expense Increases: Interest expense rose 38% to $91.4 million due to increased debt load from acquisitions. General and administrative expenses increased due to a change in accounting treatment for internal acquisition costs (EITF 97-11) and higher compensation.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Recent Developments
- Acquisitions: On February 18, 1999, the Company closed the first phase of a $427 million acquisition of a portfolio of properties (3.6 million sq. ft.) through a joint venture with Ontario Teachers' Pension Plan Board. A second phase involving office space is expected in May 1999.
- Refinancings: The Company refinanced debt on Broadway Plaza ($75 million) and Fresno Fashion Fair ($69 million) in August 1998 at fixed rates maturing in 2008.
- Redevelopment: Major redevelopment projects are underway at Pacific View, Crossroads Mall (Boulder), Huntington Center, and Parklane Mall.
Risks and Contingencies
- Tenant Bankruptcy: Montgomery Ward, an anchor tenant in 11 centers, filed for bankruptcy in 1997 and plans to close three locations in 1999. The Company is negotiating replacements, but failure to do so could adversely affect center income.
- Environmental Liabilities: The Company faces potential costs related to asbestos, underground storage tanks, and chlorinated hydrocarbons (PCE). Specific reserves include $3.3 million for asbestos at Fresno Fashion Fair and $408,000 for PCE remediation at a former joint venture property.
- Year 2000 Compliance: The Company is in the remediation and testing phase for IT and non-IT systems. While costs are not expected to be material, failure of third-party systems (utilities, tenants) could impact operations.
- Market Risk: The Company is exposed to interest rate risk. A 1% increase in rates would decrease future earnings by approximately $3.8 million annually based on variable rate debt outstanding.
Investor Verification Checklist
- Acquisition Integration: Verify the financial performance and occupancy rates of the 1998 acquisitions, particularly the ERE Yarmouth portfolio, to ensure they meet projected returns.
- Montgomery Ward Replacement: Monitor the progress of replacing Montgomery Ward anchors in the three closing locations to mitigate revenue loss.
- Debt Maturities: Review the schedule for debt maturing in 1999 ($160.8 million) and the status of refinancing negotiations for the remaining balance.
- Environmental Reserves: Assess the adequacy of reserves for environmental remediation, specifically the $3.3 million asbestos reserve at Fresno Fashion Fair and ongoing PCE costs.
- FFO vs. GAAP: Compare Funds from Operations ($120.5 million) against GAAP Net Income ($32.5 million) to understand the impact of depreciation and amortization on reported earnings.