Business context and reporting period
The Macerich Company filed this unaudited Form 10-Q for the three months ended March 31, 2018, compared with the same period in 2017. It owns, develops, redevelops, manages and leases U.S. shopping centers. At quarter-end, its portfolio comprised 48 regional and seven community/power centers, totaling approximately 53 million square feet. The Company held a 93% interest in its Operating Partnership.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $236.7 million | $247.0 million |
| Net income (loss) attributable to Company | $(33.6) million | $69.2 million |
| Diluted EPS | $(0.24) | $0.48 |
| FFO, diluted, attributable to common stockholders and unit holders | $123.5 million | $133.6 million |
| Cash provided by operating activities | $95.0 million | $102.7 million |
| Cash provided by investing activities | $311.4 million | $207.2 million |
| Cash used in financing activities | $(381.6) million | $(311.6) million |
Revenue declined 4.2%. Rental revenue fell 2.2%, and tenant recoveries fell 6.0%; management-company revenue also decreased. Total expenses increased to $253.4 million from $237.3 million, including higher interest expense of $52.6 million versus $41.3 million. The filing does not provide a single consolidated operating-margin measure.
The net loss included $37.5 million of losses on asset sales or write-downs, including impairment charges of $36.3 million on SouthPark Mall and $1.0 million on Promenade at Casa Grande. Q1 2017 included a $59.7 million gain from sales of Cascade Mall and Northgate Mall. FFO, a non-GAAP measure, declined 7.6% year over year.
Key operating indicators: trailing-12-month tenant sales per square foot increased to $686 from $639; occupancy decreased to 94.0% from 94.3%. Releasing spreads were positive 14.7% (new and renewal rents of $59.12 per square foot versus $51.55 expiring rents).
Balance sheet, debt and liquidity
At March 31, 2018, total assets were $9.16 billion, total liabilities $5.75 billion and total equity $3.41 billion. Cash and cash equivalents were $118.2 million, with restricted cash of $49.7 million. Consolidated mortgage notes payable were $4.25 billion; bank and other notes payable were $657.6 million. A $398.1 million financing-arrangement obligation was also recorded.
The Company reported $7.7 billion of total outstanding loan indebtedness on a pro rata basis, including its share of unconsolidated joint-venture debt; this is a company-defined supplemental measure, not consolidated GAAP debt. The $1.5 billion revolving credit facility had $660 million drawn at quarter-end and matures July 2020, with a one-year extension option. Management said the Company was in compliance with applicable loan covenants and expected maturities over the next 12 months to be refinanced, restructured, extended or paid from the credit line or cash.
Operating cash flow was lower year over year. Investing cash inflow included $418.3 million of distributions from unconsolidated joint ventures, substantially more than in Q1 2017, partly reflecting proceeds from joint-venture financings and an asset sale. Development, redevelopment, expansion and renovation expenditures were significant; the Company reported approximately $81 million for consolidated and joint-venture centers combined during the quarter.
Material changes, outlook and risks
- Accounting adoption: Effective January 1, 2018, ASC 606 changed the accounting for the Chandler Freehold arrangement to a financing arrangement. The change resulted in a $424.9 million cumulative adjustment to accumulated deficit and a $393.7 million opening financing obligation. Q1 financing-arrangement interest expense was $8.0 million, including a $4.4 million fair-value adjustment.
- Westside Pavilion: The Company agreed to contribute the property to a 25%/75% joint venture for a stated cash payment of $142.5 million and expected to complete the transfer within 12 months. The property was classified as held for sale; the transfer had not yet been completed at quarter-end.
- Workforce reduction: The Company reduced its workforce by approximately 10% and recorded a one-time $12.7 million charge. It anticipated approximately $10 million of expense reductions during 2018, excluding the charge.
- Spending and leasing outlook: Management expected $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months. It expected releasing spreads to remain positive for the rest of 2018. Fashion District Philadelphia redevelopment was expected to be completed in 2018; the Kings Plaza project was expected to be completed in Q2 2018.
- Distributions: Q1 cash dividends and distributions were $113.8 million, of which $95.0 million was funded by operations. A $0.74-per-share dividend/distribution was announced for payment in cash on June 1, 2018.
- Risks and contingencies: Management cited retail and tenant conditions, bankruptcies or closures, competition from e-commerce and other formats, real-estate development risks, financing availability and cost, and interest-rate fluctuations. A 1% rise in rates was estimated to reduce future earnings and cash flows by approximately $15.2 million annually, based on $1.5 billion of floating-rate debt. The Company had $60.6 million of letters of credit and $31.9 million of construction obligations; it did not expect the letters of credit to result in a liability. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How the $424.9 million ASC 606 transition adjustment and ongoing fair-value accounting for Chandler Freehold affect reported results, debt-like obligations and comparable FFO.
- Whether the Westside Pavilion contribution closes on the stated terms and how its completion affects earnings, cash flow and debt.
- Whether the Company achieves the expected $10 million of 2018 savings and controls planned redevelopment spending.
- Upcoming debt maturities, refinancing access, floating-rate exposure and the actual availability of revolving credit.
- Whether tenant sales, occupancy and positive releasing spreads persist amid retail-sector pressures.