MACERICH CO quarterly report, Q2 FY2014

The Macerich Company — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Macerich owns, operates, leases, develops and redevelops U.S. shopping centers. At quarter-end, its portfolio included 61 centers with approximately 55 million square feet of gross leasable area. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.

Financial results and condition

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Total revenue	$254.3 million	$245.9 million	$518.8 million	$489.2 million
Income from continuing operations	$18.0 million	$91.4 million	$37.6 million	$111.4 million
Net income attributable to Macerich	$16.1 million	$219.0 million	$33.9 million	$237.1 million
Diluted FFO	$129.8 million	$130.4 million	$251.4 million	$257.4 million
Cash from operating activities	Six-month period: $190.6 million	Prior-year six-month period: $182.8 million

Second-quarter revenue rose 3.4%; six-month revenue rose 6.1%. Growth reflected acquisitions and redevelopment activity, with a smaller contribution from same centers.
GAAP earnings fell sharply against 2013, which included substantial property-sale gains and gains recognized through unconsolidated joint ventures. In Q2 2013, discontinued operations contributed $143.4 million; Q2 2014 had none. The company adopted a revised discontinued-operations accounting standard in 2014, affecting comparability.
Management reported diluted FFO down 0.4% for Q2 and 2.3% for the first half. FFO is a non-GAAP supplemental measure and is not a substitute for GAAP earnings or operating cash flow.
Interest expense declined year over year: $45.8 million versus $50.4 million in Q2 and $92.1 million versus $100.1 million for the first half.
At June 30, cash and cash equivalents were $56.5 million; restricted cash was $15.4 million. Total assets were $9.06 billion and total liabilities were $5.47 billion.
Consolidated mortgage debt was $4.37 billion; bank and other notes payable were $386.7 million. Management described total outstanding loan indebtedness, including its pro rata share of unconsolidated joint-venture debt and adjustments for noncontrolling interests, as approximately $6.2 billion.
The revolving credit facility was $1.5 billion, with $250 million drawn; it matures in August 2018 and bore interest at LIBOR plus 1.38% based on quarter-end leverage. The company also had a $125 million unsecured term loan. It reported compliance with applicable loan covenants.

Operating trends and changes from prior year

For the twelve months ended June 30, tenant sales per square foot increased to $567 from $545; occupancy, excluding anchors, rose to 95.4% from 93.8%.
Trailing-twelve-month releasing spreads were positive 18.1%: new and renewal leases averaged $51.33 per square foot versus $43.46 for expiring leases. Management expected positive releasing spreads to continue in 2014.
Cash provided by operations increased to $190.6 million for the first half. Cash used in investing was $174.8 million, compared with $120.5 million, reflecting fewer asset-sale proceeds and joint-venture distributions and increased joint-venture contributions; lower property acquisitions partly offset these uses. Cash used in financing was $29.0 million, versus $81.2 million.
In June, Macerich acquired the remaining 49% interest in Cascade Mall for $15.2 million, bringing its ownership to 100%. During the first half, it also sold three regional malls, recording losses on sale.

Outlook, capital plans and risks

Management anticipated meeting operating, debt-service and dividend needs for the next twelve months through operating cash flow, working capital and/or revolver borrowings. It expected to refinance, restructure, extend or repay maturities falling due in that period.
The company expected to spend $300–$400 million over the next twelve months on development, redevelopment, expansion and renovation. It expected to fund these needs through a combination of debt and equity financing, including the revolver and construction loans. No specific earnings guidance is provided in the filing text.
Major projects included the Tysons Corner Center expansion, with the office tower beginning occupancy in July 2014 and the remaining project expected to finish in early 2015; the Fashion Outlets of Niagara Falls expansion, expected to finish in late 2014; and the Broadway Plaza expansion, with its first phase expected in fall 2015.
After quarter-end, the company announced a $0.62 per-share dividend/distribution, payable entirely in cash on September 5, 2014. It also formed a 50/50 joint venture for The Gallery in Philadelphia and invested $106.8 million, funded with revolver borrowings.
Interest-rate exposure is a key market risk. Management estimated that a 1 percentage-point rate increase would reduce annual earnings and cash flows by approximately $8.3 million, based on about $0.8 billion of floating-rate debt.
Potential contingencies include $33.5 million of joint-venture debt that could become recourse to the company, partly offset by a $16.8 million partner indemnity; $18.4 million of letters of credit; and $36.7 million in outstanding construction obligations, which management expected to settle within twelve months. The company did not expect the letters of credit to result in a liability.
The quarter included an $8.5 million impairment related to three freestanding stores after estimated holding periods were shortened. Management cited economic and retail-sector conditions, tenant creditworthiness, financing availability and interest rates, competition, and development and redevelopment execution among relevant risks. It reported no material change to previously disclosed risk factors and no material legal proceedings.

Important facts for investors to verify

How much of the reported revenue and operating improvement reflects same-center performance versus acquisitions, redevelopment and property dispositions.
The effect of 2013 property-sale and joint-venture gains, and the discontinued-operations accounting change, when comparing GAAP earnings across periods.
Debt maturities and refinancing progress, revolver availability, floating-rate exposure, and the extent of any joint-venture debt guarantees.
Whether the $300–$400 million development and redevelopment spending outlook, project schedules and funding plans remain on track.
Whether occupancy, tenant sales and releasing spreads continue to support rent growth, and whether the impairment assumptions for affected assets change.
The cash-flow coverage of dividends and distributions, including the post-quarter cash dividend and The Gallery investment.