Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers in the United States. As of March 31, 2008, the portfolio included 91 centers aggregating approximately 77 million square feet of gross leasable area.
Restatement Note: The financial statements for the three months ended March 31, 2007, and the balance sheet as of December 31, 2007, have been restated to correctly account for the acquisition of the Wilmorite portfolio and the classification of convertible preferred units as minority interest rather than permanent equity.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 (Restated) |
|---|---|---|
| Total Revenues | $210,944 | $192,798 |
| Net Income | $98,082 | $6,083 |
| Net Income Available to Common Stockholders | $95,628 | $3,508 |
| Earnings Per Share (Basic) | $1.32 | $0.05 |
| Earnings Per Share (Diluted) | $1.30 | $0.05 |
| Funds From Operations (FFO) - Diluted | $96,008 | $85,068 |
| Net Cash Provided by Operating Activities | $34,996 | $56,294 |
| Total Assets | $7,838,193 | $7,937,097 |
| Total Liabilities | $6,126,538 | $6,156,060 |
| Total Debt (Consolidated + Pro Rata JV) | $7.7 Billion | N/A |
| Cash and Cash Equivalents | $64,260 | $85,273 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.4% to $210.9 million, driven by a 10.2% increase in rental revenue ($11.9 million) and a 9.0% increase in tenant recoveries ($5.5 million). Growth was attributed to acquisitions (Mervyn's portfolio, Hilton Village) and redevelopment centers.
- Profitability Surge: Net income available to common stockholders increased significantly from $3.5 million to $95.6 million. This is primarily due to a $99.3 million gain recognized from the "Rochester Redemption" (exchange of Rochester Properties for Non-Rochester Properties) classified as discontinued operations.
- Operating Expenses: Total expenses increased to $223.2 million from $201.4 million. Interest expense rose $6.8 million due to the issuance of $950 million in convertible senior notes in 2007 and increased line of credit borrowings.
- Cash Flow: Net cash provided by operating activities decreased to $35.0 million from $56.3 million, largely due to changes in working capital assets and liabilities compared to the prior year.
- Investing Activities: Net cash used in investing activities increased to $244.8 million (from $77.1 million) due to significant contributions to unconsolidated joint ventures ($111.5 million), primarily for the acquisition of The Shops at North Bridge.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to incur between $400 million and $600 million in 2008 for development, redevelopment, expansion, and renovations.
- Major Projects:
- The Oaks: Expansion with a new Nordstrom department store expected to open Fall 2008.
- Santa Monica Place: Redevelopment started April 2008; projected reopening Fall 2009.
- Scottsdale Fashion Square: Luxury wing expansion anchored by Barneys New York; expected opening Fall 2009.
- Liquidity: The Company maintains a $1.5 billion revolving line of credit (matures April 2010) with $1.323 billion outstanding as of March 31, 2008. Cash on hand was $64.3 million.
- Debt Profile: Total outstanding loan indebtedness was $7.7 billion (including pro rata joint venture debt), resulting in a debt-to-total market capitalization ratio of approximately 55.2%.
- Interest Rate Risk: The Company manages interest rate risk through swaps and caps. A 1% increase in interest rates on floating rate debt ($1.4 billion) would decrease future earnings and cash flows by approximately $14.0 million per year.
- Restatement Risk: The filing includes a significant restatement of prior periods due to accounting errors regarding the Wilmorite acquisition and minority interest classification.
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to the 2007 comparative figures regarding the Wilmorite acquisition and minority interest classification (Note 20).
- Discontinued Operations: Confirm the sustainability of the $99.3 million gain from the Rochester Redemption, as this is a non-recurring item driving the majority of Q1 2008 net income.
- Debt Covenants: Review compliance with loan covenants, particularly given the high leverage ratio (55.2%) and significant debt maturities in 2009-2011.
- Joint Venture Exposure: Assess the recourse debt exposure ($8.7 million) and the performance of unconsolidated joint ventures, which contributed $22.3 million to equity income.
- Capital Expenditure Funding: Evaluate the Company's ability to fund the projected $400-$600 million in capital expenditures given the current cash position and debt levels.