The Macerich Company — Q3 2017 Form 10-Q
Business and period: Macerich is a REIT focused on owning, developing, redeveloping, managing and leasing U.S. shopping centers. This unaudited filing covers the quarter and nine months ended September 30, 2017. Its portfolio comprised 55 centers totaling approximately 54 million square feet.
Financial performance and position
- Revenue: Q3 revenue was $242.5 million, down 4.3% from $253.4 million a year earlier. Nine-month revenue was $736.9 million, down 4.2% from $769.3 million.
- Profit: Q3 net income attributable to the Company was $17.5 million, versus $13.7 million; diluted EPS was $0.12 versus $0.09. Nine-month attributable net income was $113.4 million, versus $479.9 million; diluted EPS was $0.79 versus $3.25. The prior-year comparison includes substantial property-sale gains.
- FFO: Diluted FFO attributable to common stockholders and unit holders was $145.0 million in Q3, down 9.5% year over year, and $427.3 million for nine months, down 7.4%. FFO is a non-GAAP supplemental measure, not a substitute for cash flow or net income.
- Cash flow: Nine-month operating cash flow was $299.9 million, down from $331.1 million. Investing activities provided $163.9 million, compared with $494.1 million; financing activities used $486.7 million, compared with $827.5 million. Cash and cash equivalents were $71.1 million at quarter-end, excluding $50.7 million of restricted cash.
- Debt and liquidity: Consolidated mortgage and bank/other notes payable totaled approximately $5.05 billion. Management reported total debt of $7.7 billion including its pro rata share of unconsolidated joint-venture debt. The $1.5 billion revolving credit facility had $970 million borrowed at quarter-end; its rate was 3.01%, and it matures in 2020 with a one-year extension option. The Company said it was in compliance with loan covenants.
- Balance sheet: Total assets were $9.61 billion and total liabilities $5.57 billion at September 30, 2017. Property, net, was $7.16 billion; investments in unconsolidated joint ventures were $1.69 billion.
Changes and operating indicators
- Q3 revenue fell primarily because of redevelopment and sold properties; same-center rental revenue increased modestly. Nine-month rental revenue also reflected dispositions, redevelopment and properties moved into joint ventures, partly offset by same-center growth.
- For the trailing twelve months, tenant sales per square foot rose to $659 from $626, while occupancy declined to 94.3% from 95.3%. Releasing spreads were positive 15.0%: new and renewal rents averaged $57.71 per square foot versus $50.17 on expiring leases.
- Nine-month net income declined sharply year over year largely because 2016 included $467.3 million of gains from asset and joint-venture interest sales, while 2017 included a $59.7 million gain on the Cascade Mall and Northgate Mall sale and a $12.0 million Southridge Center impairment.
- The Company repurchased 3.63 million shares for $221.4 million through September 30, at an average $61.01 per share, under a $500 million authorization.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management anticipated meeting the next twelve months’ operating, debt-service and dividend needs through operating cash flow, working capital and/or its credit line.
- Management expected $200–$300 million of development, redevelopment, expansion and renovation spending over the next twelve months. Fashion District Philadelphia was expected to be completed in 2018; the Kings Plaza Sears redevelopment was also expected to be completed in 2018.
- Management expected near-term debt maturities to be refinanced, restructured, extended or paid from the credit line or cash. Subsequent to quarter-end, Stonewood Center’s mortgage was repaid using credit-line borrowings; refinancing commitments or completed refinancing were also reported for Santa Monica Place and Freehold Raceway Mall, and a loan commitment was obtained for Inland Center.
- A $0.74-per-share dividend was announced after quarter-end, payable in cash on December 1, 2017. Certain planned financings and refinancing transactions remained subject to closing.
- Key risks identified include retail demand and tenant creditworthiness, store closures or bankruptcies, competition from e-commerce and other retail formats, real-estate development and redevelopment risk, access to financing and interest-rate changes. A 1% increase in rates was estimated to reduce annual future earnings and cash flows by approximately $13.9 million, based on $1.4 billion of floating-rate debt.
- The filing reported no material change to the prior annual report’s risk factors, no material legal proceedings, and effective disclosure controls. The Company disclosed $62.6 million of outstanding construction obligations expected to be settled within twelve months and $60.9 million of letters of credit; management did not expect the letters of credit to result in a liability.
Important facts for investors to verify
- Underlying same-center trends: occupancy, tenant sales and rent spreads, including the effect of redevelopment and dispositions.
- Recurring operating performance versus reported earnings and FFO, particularly the effect of property-sale gains and impairments.
- Credit-line borrowing, total and floating-rate debt exposure, upcoming maturities, and completion and terms of announced refinancing transactions.
- Funding needs and returns for the $200–$300 million projected capital program, and the effect of redevelopment on leasing and cash flow.
- Dividend coverage by operating cash flow and whether further share repurchases depend on asset sales or additional borrowing.