The Macerich Company — Q1 2017 Form 10-Q
Business and period: The Macerich Company is a REIT focused on owning, developing, redeveloping, managing and leasing shopping centers. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. At quarter-end, the portfolio comprised 55 centers with approximately 54 million square feet of gross leasable area. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Total revenue | $247.0 | $256.0 in Q1 2016; down 3.5% |
| Net income attributable to the Company | $69.2; diluted EPS $0.48 | $420.9; diluted EPS $2.76 in Q1 2016 |
| Net income | $74.8 | $451.4 in Q1 2016 |
| FFO attributable to common stockholders and unit holders, diluted | $133.6 | $141.0 in Q1 2016; down 5.3% |
| Cash provided by operating activities | $102.7 | $119.9 in Q1 2016 |
| Cash and cash equivalents | $92.3 | $94.0 |
| Total assets | $9,712.1 | $9,958.1 |
| Consolidated debt | $4,918.8 per MD&A debt maturity disclosure | — |
| Company’s pro rata total debt, including joint ventures | Approximately $7.5 billion | — |
| Revolving credit facility | $1.5 billion capacity; $900.0 drawn | Matures July 2020, with a one-year extension option |
Interest expense was $41.3 million, up from $39.8 million. The filing reports no formal operating-margin measure. Revenue and earnings comparisons are affected by property sales and changes in joint-venture accounting.
Material changes and unusual items
- Revenue declined primarily as a result of dispositions and the 2016 transition of Arrowhead Towne Center and the MAC Heitman Portfolio to unconsolidated joint ventures. Same-center rental revenue increased $1.0 million, while tenant recoveries declined.
- Net income fell by $376.6 million, principally because Q1 2016 included large gains on sales of ownership interests in Arrowhead Towne Center and the MAC Heitman Portfolio. Q1 2017 included a $59.7 million gain on the sale of Cascade Mall and Northgate Mall, partly offset by a $10.1 million write-down of non-real-estate assets.
- Operating cash flow decreased $17.2 million year over year. Investing activities provided $207.1 million, including $167.6 million of asset-sale proceeds and $114.5 million of joint-venture distributions. Financing activities used $311.6 million; cash decreased $1.8 million during the quarter.
- The Company repurchased 2.20 million shares in March for $141.1 million, averaging $64.17 per share, under a new $500 million authorization. Approximately $359.0 million remained available under the program at March 31.
- Tenant sales per square foot rose to $639 from $625 year over year, but occupancy declined to 94.3% from 95.1%. Trailing-twelve-month releasing spreads were positive 17.5%.
Outlook, liquidity, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expects positive releasing spreads to continue for the remainder of 2017.
- The Company expects $200 million to $300 million of development, redevelopment, expansion and renovation spending over the next 12 months. Fashion Outlets of Philadelphia is expected to be completed in 2018; the Company’s estimated share of total project cost is $152.5 million to $182.5 million. The Kings Plaza redevelopment is expected to finish in summer 2018, with total cost estimated at $95 million to $100 million.
- Management expects operating cash flow, working capital and/or the unsecured credit facility to meet operating, debt-service and dividend needs for the next 12 months. It expects debt maturities during that period to be refinanced, restructured, extended or paid with credit-facility borrowings or cash. The Company reported compliance with applicable loan covenants.
- Floating-rate exposure was approximately $1.2 billion; management estimated that a 1 percentage-point rate increase would reduce annual earnings and cash flows by about $12 million. The filing highlights retail demand, tenant creditworthiness and bankruptcies, competition and technology, redevelopment execution, financing availability and cost, interest rates, and economic conditions as risks.
- Outstanding construction obligations were $72.7 million, which management expects to settle within 12 months. The Company was contingently liable for $61.0 million in letters of credit and did not expect them to result in a liability. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- A $0.71-per-share dividend was announced after quarter-end, payable in cash on June 2, 2017 to holders of record on May 5.
Important facts for investors to verify
- How much of the earnings decline reflects ordinary operating performance versus prior-year asset-sale gains, and how FFO trends compare with same-center results.
- The drivers and implications of lower occupancy and tenant recoveries, alongside higher tenant sales and positive leasing spreads.
- Debt maturities, refinancing plans, credit-facility availability and sensitivity to floating interest rates, including joint-venture debt exposure.
- Funding sources and expected returns for the planned redevelopment spending and share repurchases, and the effect of the cash dividend on liquidity.
- Progress, costs and leasing outcomes at Fashion Outlets of Philadelphia and Kings Plaza, as well as any changes in tenant credit or retail conditions.