The Macerich Company — Q1 2014 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2014, compared with Q1 2013. Macerich is a REIT that owns, develops, manages and leases shopping centers. At quarter-end, it had ownership interests in 61 centers totaling approximately 55 million square feet; it owned 93% of its Operating Partnership.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $264.5 million | $243.3 million; up 8.7% |
| Income from continuing operations | $19.6 million | $20.0 million |
| Net income attributable to Macerich | $17.8 million | $18.1 million |
| Diluted EPS | $0.13 | $0.13 |
| Diluted FFO | $121.6 million | $127.0 million; down 4.3% |
| Cash provided by operating activities | $97.9 million | $107.5 million |
| Cash and cash equivalents | $64.9 million | $69.7 million at Dec. 31, 2013 |
| Consolidated mortgage debt | $4.384 billion | $4.415 billion at Dec. 31, 2013 |
| Bank and other notes payable | $227.1 million | $167.5 million at Dec. 31, 2013 |
Revenue growth reflected higher rents and tenant recoveries, including contributions from acquired and redeveloped properties. Shopping center operating expenses rose 15.0%, partly because of harsh winter weather and higher utilities. Interest expense declined $3.3 million. Equity income from unconsolidated joint ventures fell $4.3 million. A $1.6 million loss on asset sales in Q1 2014 contrasted with a $4.8 million gain in Q1 2013. Q1 2013 also included $2.6 million of discontinued-operations income.
The company reported total outstanding loan indebtedness of approximately $6.1 billion, including its pro rata share of unconsolidated joint venture debt. A $1.5 billion revolving credit facility, expandable to $2.0 billion subject to conditions, had $90 million drawn at quarter-end; the borrowing rate was LIBOR plus 1.38%. A separate $125 million unsecured term loan was outstanding. Management reported compliance with applicable loan covenants. The filing does not provide a clear consolidated debt-to-equity or current-ratio figure.
Material changes and operating indicators
- Same-center and portfolio growth measures improved: tenant sales per square foot rose to $565 from $535; occupancy increased to 95.1% from 93.4%; and trailing-12-month releasing spreads were 14.8% positive, or $49.39 per square foot on new and renewal leases versus $43.02 on expiring leases.
- FFO declined despite revenue growth, reflecting lower joint-venture income and other operating changes. Management cautions that FFO is supplemental, not GAAP net income or cash available for all needs.
- Q1 investing cash use was $22.3 million, versus $456.6 million in Q1 2013, when the company acquired Green Acres Mall. Financing activities used $80.4 million, compared with $352.1 million provided in Q1 2013.
- Share- and unit-based compensation expense increased to $20.3 million from $5.1 million, mainly due to LTIP awards.
- During Q1, Macerich sold Rotterdam Square, Somersville Towne Center and Lake Square Mall, recognizing an aggregate $1.6 million loss. Lake Square’s $13.3 million sale price included $9.6 million in notes receivable.
Outlook, risks and contingencies
- No specific earnings or FFO guidance is provided. Management expects positive releasing spreads to continue in 2014 and anticipates that debt maturities over the next 12 months will be refinanced, restructured, extended or paid using the credit line or cash on hand.
- The company expects to spend $300–$400 million over the next 12 months on development, redevelopment, expansion and renovation. It expects to fund these projects through a mix of debt or equity financing, including credit-line borrowings and construction loans. Major projects include Tysons Corner, Fashion Outlets of Niagara Falls USA and Broadway Plaza.
- Management expects to meet operating, debt-service and distribution needs for the next 12 months using operating cash flow, working capital and/or the revolving credit facility. It also noted plans to sell additional non-core assets, subject to market conditions, and warned that access to capital markets is not assured.
- Interest-rate exposure is material: the filing estimates that a 1% increase in rates would reduce annual earnings and cash flows by approximately $6.6 million, based on roughly $0.7 billion of floating-rate debt.
- Joint-venture debt of $33.5 million could become recourse to Macerich if the ventures cannot pay; a partner indemnity covers $16.8 million. The company also had $16.4 million in letters of credit and $54.8 million in outstanding construction obligations, which it expects to settle within 12 months.
- Key risks cited include economic and retail-market conditions, tenant defaults or bankruptcies, financing availability and cost, interest rates, development and redevelopment execution, competition, and regulatory or environmental matters. The company reported no material legal proceedings and no material change to its previously disclosed risk factors.
- The company adopted ASU 2014-08 on January 1, 2014; it reported no material financial-statement impact. The report notes seasonality, with earnings generally higher in Q4.
Important facts for investors to verify
- Whether improved sales, occupancy and positive releasing spreads translate into sustainable same-center rent and cash-flow growth.
- Whether FFO, operating cash flow and tenant recoveries can support the distribution and the planned $300–$400 million capital program.
- Debt maturities, refinancing execution, availability and terms of the credit facility, and exposure to floating interest rates.
- Progress, costs and completion timing for major development and redevelopment projects, including the company’s funding share of joint ventures.
- Collection and credit risk on the $9.6 million Lake Square sale notes and other related-party or joint-venture receivables and obligations.
- The effect of asset dispositions, elevated share-based compensation and Q1’s unusual comparison items on recurring earnings.
After quarter-end, the company announced a $0.62-per-share dividend/distribution, payable entirely in cash on June 6, 2014, to holders of record May 9, 2014.