Business Context and Reporting Period
The Macerich Company is a self-managed REIT focused on owning, acquiring, developing, redeveloping, managing and leasing U.S. shopping centers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The company reported interests in 85 regional and community centers totaling approximately 72 million square feet.
Financial Results and Key Metrics
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $202.7 | $189.5 | $583.7 | $552.2 |
| Net income (loss) attributable to Macerich | $12.9 | $8.4 | $(6.2) | $1.6 |
| EPS attributable to common stockholders | $0.10 | $0.06 | $(0.06) | Approximately $0.00 |
| FFO, diluted (supplemental, non-GAAP) | $104.2 | $93.3 | $244.6 | $242.4 |
| Cash provided by operating activities | Not separately stated for the quarter | $180.5 | $126.8 |
- Q3 revenue increased 7.0%; net income attributable to the company rose to $12.9 million. Q3 diluted FFO increased 11.6%.
- Nine-month revenue increased 5.7%, but the company recorded a $6.2 million attributable net loss, principally reflecting the $35.7 million Shoppingtown Mall impairment and higher debt-extinguishment losses. Nine-month diluted FFO increased 0.9%.
- Q3 total expenses were $210.2 million, including $68.0 million of depreciation and amortization and $49.2 million of interest expense. Interest expense declined $2.5 million year over year, primarily due to the expiration of an interest-rate swap.
- Operating cash flow was $180.5 million for the nine months. Investing activities used $184.5 million and financing activities used $302.2 million; cash and equivalents declined from $445.6 million at year-end 2010 to $139.4 million at September 30, 2011.
- At September 30, consolidated mortgage debt was $3.172 billion and bank and other notes payable were $889.9 million. Management reported total outstanding loan indebtedness of approximately $6.4 billion, including $2.3 billion of its pro rata share of joint-venture debt.
- Liquidity included $139.4 million of cash and a $1.5 billion revolving credit facility, with $250 million drawn at quarter-end. The facility matures in May 2015, with a one-year extension option. The company reported compliance with applicable loan covenants.
- No single consolidated operating-margin measure is clearly provided. Key operating indicators: tenant sales per square foot increased to $467 from $426; occupancy excluding anchors declined to 91.9% from 92.6%; and releasing spreads rose 10.8% for the trailing twelve months.
Material Changes Versus the Prior Comparable Period
- Growth in quarterly revenue reflected acquisitions, the opening of Santa Monica Place, and higher rents and recoveries; Same Centers rental revenue declined slightly. Year-to-date revenue growth also included the redevelopment center and acquisitions.
- Equity income from unconsolidated joint ventures rose to $75.5 million for the nine months from $51.9 million, including Macerich’s share of gains related to Kierland Commons and the Granite Run Mall debt settlement.
- YTD operating cash flow improved, while investing outflows increased with acquisitions and joint-venture investments. Financing cash flow shifted from a $378.8 million inflow in 2010 to a $302.2 million outflow in 2011, in part because the prior-year period included proceeds from a $1.2 billion stock offering.
- Consolidated fixed-rate debt declined year over year to $2.6 billion, while floating-rate debt increased to $1.4 billion. Management estimated that a 1% rise in rates would reduce annual earnings and cash flows by approximately $15.8 million on $1.6 billion of floating-rate debt.
Outlook, Risks, Contingencies and Unusual Items
- Management expected to meet operating, debt-service and dividend needs over the next 12 months through operating cash flow, working capital and/or credit-line borrowings. It expected $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months.
- The $614.8 million carrying value of 3.25% convertible Senior Notes was due March 2012. After quarter-end, Macerich repurchased $180.3 million of the notes at par, funded with credit-line borrowings. Management said it had liquidity sources to address the remaining maturity.
- Shoppingtown Mall’s non-recourse mortgage was in maturity default; the loan servicer controlled the property, and a transfer to a receiver was anticipated. The company recorded a $35.7 million impairment. Valley View Center was also under a receiver, with a transfer or other disposition expected within 12 months; its debt was non-recourse.
- Joint-venture debt of $368.6 million could become recourse to the company in specified circumstances; partner indemnities covered $176.7 million. The company also had $19.6 million of letters of credit, which management did not expect to result in a liability.
- The Fashion Outlets of Niagara Falls acquisition included contingent consideration estimated at $14.2 million; the purchase price could rise from $200.0 million to a maximum of $218.7 million based on performance through July 2024? The filing specifies the measurement period through July 21, 2014.
- Management cited continuing economic and political uncertainty, weak U.S. economic conditions, persistent unemployment, reduced consumer confidence, and retail rents and valuations not fully recovered to pre-recession levels. It noted that occupancy declined primarily because of a tenant liquidation. Shopping-center earnings are seasonal, with the fourth quarter typically strongest.
- The company announced a $0.55 per-share dividend/distribution after quarter-end, payable entirely in cash on December 8, 2011 to holders of record November 11, 2011. The filing reported no material change to previously disclosed risk factors and no material legal proceedings.
Important Facts for Investors to Verify
- Confirm refinancing, extension or repayment plans for upcoming debt maturities, particularly the remaining Senior Notes, and review credit-line availability after the October repurchases.
- Track the status and financial consequences of Shoppingtown Mall and Valley View Center, including any receiver action or debt resolution.
- Assess whether tenant sales growth can continue and whether occupancy and Same Centers rents recover, given the reported occupancy decline and economic risks.
- Review joint-venture debt exposure, recourse triggers and the collectability and scope of partner indemnities.
- Monitor cash generation against dividends, acquisition commitments and the planned $200–$300 million of capital spending.