The Macerich Company — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Macerich is a U.S. shopping-center REIT. At quarter-end, it owned or held interests in 69 regional and community shopping centers totaling approximately 62 million square feet. Financial amounts below are in millions unless otherwise noted.
Financial results and key metrics
- Revenue: Q3 revenue was $215.7, up 11.6% from $193.3. Nine-month revenue was $630.2, up 13.6% from $554.9. Management attributed the increases principally to acquired properties; nine-month rental revenue from Same Centers decreased $2.0.
- Profit and EPS: Q3 net income attributable to Macerich was $43.9, or $0.33 per diluted share, versus $12.9, or $0.10, a year earlier. Nine-month attributable income was $163.2, or $1.22 per diluted share, versus a $6.2 loss, or a $0.06 loss per share.
- Items affecting comparability: Nine-month 2012 income included $69.4 from discontinued operations and $40.6 of gains on remeasurement, sales or write-downs of assets. The discontinued-operations result included substantial debt-extinguishment and disposition effects; reported net income therefore is not a measure of recurring operating performance.
- FFO: Diluted FFO was $112.9 in Q3, up 8.3% year over year, and $445.3 for nine months, up 58.6%. Nine-month diluted AFFO was $328.3 versus $287.2. These are non-GAAP supplemental measures, not substitutes for operating cash flow.
- Cash flow: Nine-month operating cash flow was $256.2, compared with $180.5 in 2011. Investing activities provided $91.5, versus using $184.5, reflecting asset-sale proceeds and reduced joint-venture contributions. Financing activities used $338.4. Cash and cash equivalents at September 30 were $76.6.
- Margins and operating indicators: The filing does not present a single company-wide operating-margin measure. Same-Center indicators improved: tenant sales per square foot rose to $511 from $467, occupancy increased to 93.0% from 91.9%, and releasing spreads were positive 18.5% for the trailing twelve months.
- Assets, liabilities and liquidity: Total assets were $7.61 billion and total liabilities $4.32 billion. Consolidated mortgage notes payable were $3.39 billion and bank and other notes payable $404.2 million. Management reported total loan indebtedness of approximately $5.5 billion, including $380 million of unsecured debt and $1.7 billion of its pro rata share of joint-venture debt. The $1.5 billion revolving facility had $255 million drawn; a separate $125 million unsecured term loan was outstanding. The company reported covenant compliance and $76.6 million of cash.
- Distributions and equity: The company sold 2.96 million shares through its at-the-market program for $175.9 million net proceeds, used to reduce line-of-credit borrowings. It paid $1.65 per share in distributions during the first nine months.
Material changes and transactions
- Revenue growth primarily reflected the inclusion of acquired properties, notably the six SDG Acquisition Properties; the 2012 period also included the acquisition of 500 North Michigan Avenue. Acquisition-related expenses and depreciation also increased.
- Interest expense declined $8.0 for the first nine months, mainly because the $439.3 million of senior notes were repaid at maturity in March 2012 and other financing costs decreased; acquisition-related debt partly offset the reduction.
- During 2012, Macerich sold or exited several assets and joint-venture interests, including NorthPark Center, Chandler Village Center, Chandler Festival, Chandler Gateway and Carmel Plaza. Proceeds were used in part to pay down the line of credit.
- Valley View Center was sold by a court-appointed receiver, generating a $104.0 million debt-extinguishment gain after a $54.3 million impairment charge. Prescott Gateway was conveyed to its lender, producing a $16.3 million debt-extinguishment gain. The related non-recourse obligations were discharged.
- Consolidated debt declined overall from $4.21 billion at December 31, 2011 to approximately $3.79 billion at September 30, 2012, while equity increased. The company also refinanced or placed several property loans during the period.
Outlook, risks and contingencies
- Management expected operating expenses, debt service and distributions over the next twelve months to be funded by operations, working capital and/or revolver borrowings. It expected to refinance, restructure, extend or repay maturities due in that period.
- The company expected to spend $200–$300 million over the next twelve months on development, redevelopment, expansions and renovations. Fashion Outlets of Chicago was under development, with completion expected in summer 2013 and estimated total cost of approximately $200 million. The Tysons Corner joint-venture expansion was expected to finish in fall 2014, at an estimated total cost of $600 million.
- Management cited improved sales, occupancy and leasing trends, and expected positive releasing spreads through the remainder of 2012. It also cautioned that economic and political uncertainty, persistent unemployment and retail rents and property values below pre-recession levels could adversely affect results. Retail real estate is seasonal, with earnings typically higher in the fourth quarter.
- Interest-rate exposure is material: management estimated that a 1 percentage-point rate increase would reduce annual earnings and cash flows by approximately $12.9 million based on $1.3 billion of floating-rate debt. No derivatives were outstanding at quarter-end.
- Joint-venture debt of $370.5 million could become recourse to Macerich under specified circumstances; partner indemnities covered $177.8 million. Outstanding construction-related obligations were $66.3 million, expected to be settled within twelve months. Management did not expect letters of credit totaling $4.2 million to result in a liability.
- After quarter-end, Macerich acquired its remaining 75% interest in FlatIron Crossing for $195.9 million plus its share of mortgage debt, and acquired the remaining 33.3% interest in Arrowhead Towne Center for $144.4 million. It also agreed to acquire Kings Plaza for $751 million and Green Acres Mall for $500 million, subject to stated conditions, with financing expected from the revolver and property mortgages.
- The company said it was in compliance with loan covenants; disclosure controls were effective and there were no material changes to internal control over financial reporting. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings and FFO growth reflects sustainable Same-Center performance versus acquisitions, asset sales, debt forgiveness and other nonrecurring items.
- The refinancing plan and costs for near-term maturities, and remaining borrowing capacity after the announced acquisitions and planned capital spending.
- Actual funding, closing and integration of Kings Plaza and Green Acres Mall, including the conditional nature of the Green Acres agreement.
- Exposure to floating rates and the potential recourse obligations arising from joint-venture debt, including the scope and collectability of partner indemnities.
- Whether sales, occupancy and releasing spreads remain positive, and whether development projects meet expected schedules, costs and returns.