The Macerich Company (NYSE: MAC) — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2021. Macerich owns, manages, leases, develops and redevelops U.S. shopping centers. At quarter-end, its portfolio comprised 50 centers with approximately 49 million square feet of gross leasable area. All centers had been open since October 7, 2020; COVID-related capacity restrictions had been essentially eliminated in its markets.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $212.1 million | $185.8 million | $618.0 million | $591.4 million |
| Net income (loss) | $113.0 million | $(22.6) million | $41.2 million | $(40.6) million |
| Net income (loss) attributable to Macerich | $106.7 million | $(22.2) million | $31.3 million | $(39.8) million |
| Diluted EPS | $0.50 | $(0.15) | $0.16 | $(0.28) |
| FFO, diluted, excluding Chandler Freehold financing expense and debt-extinguishment loss | $101.4 million | $83.4 million | $304.5 million | $266.6 million |
- Revenue and operations: Q3 revenue rose 14.1% year over year, including a 12.3% increase in leasing revenue. Nine-month revenue increased 4.5%. Q3 leasing revenue benefited from higher percentage rent, improved tenant sales and lower bad-debt provisions; the nine-month period also benefited from a recovery of previously provided bad debts. The filing does not provide a single conventional operating-margin measure.
- Operating indicators: Comparable tenant sales for spaces under 10,000 square feet rose 13.8% in Q3 versus Q3 2019 and 8.7% for the first nine months versus the comparable 2019 period. Leased occupancy was 90.3% at September 30, up from 89.4% at June 30 but below 90.8% a year earlier. Trailing-12-month releasing spreads were negative 2.5%: new and renewal leases averaged $55.23 per square foot versus $56.65 on expiring leases.
- Cash flow: Nine-month cash from operations was $211.6 million, versus $65.1 million in 2020. Investing activities provided $256.1 million, versus $122.8 million used, primarily reflecting $323.0 million of asset-sale proceeds. Financing used $777.3 million, including substantial debt repayments. Cash, cash equivalents and restricted cash declined $309.5 million to $173.1 million; unrestricted cash was $117.6 million at quarter-end.
- Debt and liquidity: Consolidated mortgage notes were $4.43 billion and bank and other notes were $114.3 million at September 30. Macerich reported approximately $7.2 billion of total indebtedness including its pro rata share of joint-venture debt and adjustments for noncontrolling interests. The new credit facility had $130 million drawn on its revolver and $394.7 million of additional availability; the $175 million term loan had been repaid. The company reported compliance with applicable loan covenants.
- Equity and distributions: ATM offerings generated $829.9 million net proceeds from 62.0 million shares during the first nine months, primarily used to repay the prior credit line. Shares outstanding increased to 213.3 million from 149.8 million at year-end 2020. Cash distributions were $0.15 per share each quarter; a further $0.15 fourth-quarter distribution was announced after quarter-end.
Material changes and unusual items
- Q3 GAAP net income included a $118.6 million net gain on asset sales and write-downs, primarily the $117.2 million gain on the September sale of Tucson La Encantada. The nine-month net gain was $93.4 million, including that sale gain and a $27.3 million impairment of Estrella Falls. Accordingly, GAAP earnings and EPS were materially affected by dispositions and impairment items.
- Q3 diluted FFO, as defined by Macerich, increased 21.6% year over year; nine-month diluted FFO increased 14.2%. FFO is a non-GAAP supplemental measure and is not a substitute for GAAP earnings or operating cash flow.
- The company sold Paradise Valley Mall for $100 million in March and La Encantada for $165.3 million in September. Net proceeds were used principally to reduce debt; Macerich retained a 5% interest in the Paradise Valley joint venture.
- In April, Macerich replaced its prior credit facility, repaid $985 million of debt and established a $700 million facility. It also extended or secured extensions for near-term property loans totaling approximately $950 million. Two interest-rate swaps expired September 30 and were not renewed; certain property loans reverted to floating rates on October 1.
- Rent abatements at the company’s share were $46.3 million for the first nine months of 2021, primarily relating to 2020 rents; $6.7 million of negotiated rent deferrals remained outstanding at September 30. Management said rent collections had improved to levels comparable to before COVID-19.
Outlook, risks and contingencies
- Management expected significant 2021 cash flow after recurring operating and leasing capital expenditures and dividends, excluding proceeds from potential dispositions, refinancings or equity issuance. It expected any surplus to support deleveraging and the development pipeline. No specific earnings or FFO guidance was provided.
- Management said retail fundamentals improved, with traffic in the mid-90% range relative to 2019 and strong leasing activity, but expected remaining-2021 results to remain affected by COVID-19, occupancy below pre-pandemic levels and anchor closures. Some tenant bankruptcies and closures may trigger co-tenancy provisions, although the company did not expect a significant revenue impact.
- Key risks include refinancing and capital-market access, floating-rate debt, tenant credit and occupancy, redevelopment costs, and continuing economic or pandemic-related effects. A 1% increase in rates was estimated to reduce annual earnings and cash flow by approximately $4.5 million based on floating-rate debt outstanding at September 30. The filing also notes that future replacement rates for LIBOR could be higher or more volatile.
- One joint venture had $50 million of debt that could become recourse to Macerich if the venture could not meet its obligation. The company also had $40.9 million in letters of credit, of which $40.6 million was secured by restricted cash; management did not expect the letters of credit to result in a liability. Outstanding construction obligations were $2.9 million. Management reported no material legal proceedings and no material changes to the prior annual report’s risk factors.
- Major development commitments include the One Westside joint venture project, with total estimated cost of $500–$550 million and Macerich’s pro rata share estimated at $125–$137.5 million; the office space is leased to Google and expected to be completed in 2022. The company also anticipated spending $130–$160 million at its share to redevelop former Sears spaces over several years.
Important facts for investors to verify
- How much of the reported earnings recovery is recurring property performance versus asset-sale gains, impairment items and bad-debt recoveries; compare GAAP earnings with FFO and operating cash flow.
- Whether occupancy, tenant sales, rent collections and leasing spreads continue to improve, and whether anchor closures or co-tenancy provisions affect rents.
- Near-term refinancing outcomes, revolver availability, covenant headroom and the cost of floating-rate exposure after the swaps expired.
- The implications of the 62.0 million ATM shares issued for per-share results and future dilution, and the company’s intended use of remaining ATM capacity.
- Actual redevelopment spending and funding, including One Westside and Sears-site projects, and any changes to estimated costs or timing.