Business context and reporting period
The Macerich Company is a self-managed REIT that acquires, owns, develops, redevelops, leases and manages U.S. shopping centers. This Form 10-K covers the fiscal year ended December 31, 2013; fourth-quarter results are also summarized below. At year-end, the portfolio included 64 centers with approximately 57 million square feet of gross leasable area, including unconsolidated joint ventures.
Financial and operating performance
- Revenue: $1.029 billion, up 29.1% from $797.5 million in 2012. Management attributed most of the increase to acquired properties, including Green Acres Mall, and the opening of Fashion Outlets of Chicago.
- Profit: Net income attributable to Macerich was $420.1 million, versus $337.4 million. Diluted EPS was $3.00, versus $2.51. Continuing-operations income attributable to common shareholders per diluted share fell to $1.06 from $2.07; the reported earnings increase was substantially influenced by property-sale gains in discontinued operations.
- FFO: Diluted funds from operations, a non-GAAP measure, decreased 8.7% to $527.6 million from $577.9 million. AFFO was also $527.6 million in 2013; the filing cautions that FFO and AFFO are not substitutes for GAAP income or operating cash flow.
- Cash flow: Operating cash flow was $422.0 million, up from $351.3 million. Investing activities provided $271.9 million, primarily reflecting asset-sale proceeds and joint-venture distributions; financing activities used $690.0 million. Year-end cash and cash equivalents were $69.7 million.
- Debt and liquidity: Total loan indebtedness, including Macerich’s pro rata share of unconsolidated joint-venture debt, was approximately $6.0 billion. Consolidated mortgage, bank and other notes payable totaled $4.583 billion. The amended revolving credit facility is $1.5 billion, expandable subject to conditions; $30 million was drawn at year-end, and a separate $125 million term loan was outstanding. The company reported compliance with applicable loan covenants.
- Operating indicators: Regional-center occupancy rose to 94.6% from 93.8%; sales per square foot increased to $562 from $517. Releasing spreads for qualifying small-shop leases were 17.2% positive, with new and renewal rents averaging $49.09 per square foot versus $41.88 on expiring leases.
- Shareholder distributions: 2013 distributions declared were $2.36 per common share, up from $2.23. The fourth-quarter dividend was $0.62 per share.
Material changes versus 2012
- Revenue growth reflected acquisitions and portfolio changes; expenses also rose, including shopping-center operating expenses (up 30.9%), depreciation and amortization, and interest expense.
- Continuing-operations income declined to $159.0 million from $303.2 million. Equity income from unconsolidated joint ventures increased to $167.6 million, including gains on joint-venture asset sales; gains on remeasurement, sale or write-down of assets in continuing operations fell to a net loss of $26.9 million from a gain of $228.7 million.
- Discontinued-operations income rose to $289.9 million from $63.2 million, principally due to gains from 2013 property sales. Major dispositions included Green Tree Mall, Northridge Mall, Rimrock Mall, Chesterfield Towne Center and Centre at Salisbury. Fiesta Mall was conveyed to its non-recourse lender by deed-in-lieu of foreclosure.
- Consolidated notes payable decreased from $5.261 billion to $4.583 billion. The company sold shares through its at-the-market program for $171.1 million net proceeds and used the proceeds to reduce its credit-line borrowings.
Outlook, risks and unusual items
- Management expected positive releasing spreads to continue in 2014 and anticipated refinancing, restructuring, extending or paying off maturities over the next 12 months. It planned $250–$350 million of development, redevelopment, expansion and renovation spending over that period; funding was expected from a combination of debt and equity financing, including credit-line and construction-loan borrowings.
- Major projects included the Tysons Corner Center mixed-use expansion, with completion expected in stages during 2014 and early 2015, and a Fashion Outlets of Niagara Falls expansion expected to finish in late 2014. Fashion Outlets of Chicago opened in August 2013.
- Key risks include substantial debt and refinancing needs, interest-rate exposure, dependence on external capital, tenant defaults or anchor closures, leasing and development execution, competition from online and other retail formats, geographic concentration, joint-venture control and obligations, and environmental or natural-disaster exposure. A 1% rise in rates was estimated to reduce future earnings and cash flows by about $5.8 million based on year-end floating-rate debt; no interest-rate caps or swaps were in place at year-end.
- Unusual items include significant property-sale and remeasurement gains, impairments, and a prior maturity default on Great Northern Mall’s loan. The filing reports that an agreement reached in February 2014 extended that loan to January 2015 and waived default interest. Rotterdam Square was sold in January 2014 for $8.5 million.
- The company reported no material legal proceedings. Management and the auditor concluded that internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much of 2013 GAAP earnings came from recurring property operations versus sales, remeasurement gains and other unusual items; compare continuing-operations results with FFO and operating cash flow.
- Debt maturities, refinancing assumptions, covenant headroom, variable-rate exposure and the company’s total debt including its share of joint-venture obligations.
- Whether occupancy, tenant sales and positive lease spreads persist, and the impact of upcoming lease expirations, anchor vacancies and tenant credit quality.
- Actual costs, funding and delivery progress for the announced development and redevelopment projects, and the contribution of recently acquired properties to earnings and cash flow.
- Potential environmental remediation costs, insurance limits and deductibles, and contingent joint-venture recourse obligations.