Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers in the United States. As of September 30, 2008, the portfolio included 91 centers (72 regional, 19 community) aggregating approximately 77 million square feet of gross leasable area.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2007 (Restated) |
|---|---|---|---|
| Total Revenues | $225,807 | $662,256 | $589,246 |
| Net Income Available to Common Stockholders | $5,663 | $120,085 | $33,775 |
| Funds From Operations (FFO) - Diluted | $102,129 | $301,319 | $298,206 |
| Net Cash Provided by Operating Activities | N/A | $175,830 | $208,071 |
| Total Debt (Consolidated + Pro Rata JV) | N/A | $8.0 Billion | N/A |
| Cash and Cash Equivalents | $48,822 | $48,822 | $85,273 (Dec 31, 2007) |
Note: Nine-month Net Income includes a significant non-recurring gain from discontinued operations (see below).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.6% for the three months and 12.4% for the nine months ended September 30, 2008, compared to the prior year. Growth was driven by acquisitions (Mervyn's portfolio, Hilton Village, The Shops at North Bridge) and redevelopment centers, partially offset by a decline in "Same Centers" rental revenue due to economic conditions.
- Discontinued Operations Impact: Net income for the nine months ended September 30, 2008, was significantly boosted by a $99.1 million gain on the "Rochester Redemption" (exchange of Rochester Properties for increased interest in Non-Rochester Properties). Excluding this gain, continuing operations income was $45.4 million.
- Asset Write-downs: The Company recorded a $5.3 million loss on the write-down of assets related to Mervyn's stores previously classified as held for sale but reclassified to continuing operations due to credit market conditions.
- Interest Expense: Interest expense increased 24.8% for the three months and 17.1% for the nine months, primarily due to higher borrowings on the line of credit to fund acquisitions and redevelopment.
- Restatement: Prior year periods (2007) have been restated to correct the accounting for the Wilmorite acquisition and minority interests, resulting in adjustments to revenues, expenses, and net income.
Guidance, Outlook, Risks, and Unusual Items
- Mervyn's Bankruptcy Risk: Mervyn's filed for bankruptcy in July 2008 and plans to liquidate. The Company owns interests in 46 Mervyn's stores. While six leases were written down in Q3, the Company faces potential loss of rental revenue and further write-offs of intangible assets if Mervyn's rejects additional leases.
- Economic Environment: Management cites the current economic recession, volatility in capital markets, and declining consumer spending as significant risks. These factors may impact tenant ability to pay rent and the Company's access to capital.
- Capital Expenditures: The Company expects to incur between $400 million and $600 million in 2008 for development, redevelopment, expansion, and renovations. Major projects include The Oaks (Thousand Oaks, CA), Santa Monica Place, and Scottsdale Fashion Square.
- Debt Maturities: The Company has significant debt maturities in 2009 and 2010. Management intends to meet liquidity requirements through operating cash flow, working capital, and borrowings under its $1.5 billion revolving line of credit.
- Unusual Items:
- Rochester Redemption: A $99.3 million gain recognized in discontinued operations from the exchange of assets.
- Senior Notes Repurchase: Subsequent to the period end (October 24, 2008), the Company repurchased $138 million of Senior Notes, resulting in a gain of approximately $58 million.
Investor Verification Checklist
- Mervyn's Exposure: Verify the status of lease rejections by Mervyn's and the potential for additional intangible asset write-downs beyond the $5.2 million recorded in Q3.
- Debt Refinancing: Assess the Company's ability to refinance or extend debt maturing in 2009-2010 given the tight credit markets and high leverage (58.4% debt to total market capitalization).
- FFO vs. Net Income: Analyze Funds From Operations (FFO) as a primary performance metric, as Net Income is distorted by the one-time Rochester Redemption gain and asset write-downs.
- Restatement Details: Review Note 20 to understand the full impact of the accounting restatement on historical comparability.
- Joint Venture Recourse: Evaluate the $21.1 million of recourse debt in joint ventures that could become the Company's liability if those ventures default.