The Macerich Company — 2012 Form 10-K
Business and period: Self-managed REIT focused on owning, leasing, managing, acquiring and redeveloping U.S. shopping centers. This filing covers the fiscal year ended December 31, 2012; comparisons are to 2011 unless noted. At year-end, the portfolio comprised 70 centers with approximately 63 million square feet of gross leasable area. Macerich owned 93% of its operating partnership.
Financial and operating performance
- Revenue: $881.3 million, up 15.5% from $763.4 million. Rental revenue rose 16.3%, primarily because of acquired properties; same-center minimum and percentage rent declined $1.1 million.
- Profit: Net income attributable to the Company was $337.4 million, or $2.51 per diluted share, compared with $156.9 million, or $1.18, in 2011. Income included substantial remeasurement, asset-sale and debt-extinguishment gains; reported net income is therefore not a clean measure of recurring operations. The filing does not provide a single directly comparable operating-margin measure.
- Funds from operations: Diluted FFO was $577.9 million versus $399.6 million. AFFO, which excludes specified effects of troubled properties and debt forgiveness, was $460.9 million versus $411.8 million. FFO and AFFO are non-GAAP supplemental measures, not substitutes for cash flow or net income.
- Cash flow: Operating cash flow was $351.3 million, up from $237.3 million. Investing used $963.4 million, chiefly reflecting acquisitions; financing provided $610.6 million. Year-end cash and cash equivalents were $65.8 million.
- Property indicators: Regional-center occupancy increased to 93.8% from 92.7%; sales per square foot rose to $517 from $489; and releasing spreads were positive 15.4%. Same-center occupancy and sales exclude centers under development or redevelopment.
- Debt and liquidity: Total loan indebtedness was approximately $6.9 billion, including $1.6 billion of the Company’s pro rata share of unconsolidated joint-venture debt. Consolidated mortgage and notes payable were $5.26 billion. The $1.5 billion revolving credit facility had $675 million drawn at year-end; the Company also reported a $125 million unsecured term loan. Management said it expected to refinance, restructure, extend or repay near-term maturities. The Company reported compliance with loan covenants.
- Equity and distributions: Total equity was $3.42 billion, compared with $3.16 billion. Distributions declared were $2.23 per common share for 2012, versus $2.05 in 2011.
Material changes and significant transactions
- Acquired Kings Plaza Shopping Center for $756 million; acquired the remaining interests in FlatIron Crossing and Arrowhead Towne Center for approximately $310 million and $144 million, respectively. These acquisitions increased ownership control and contributed to year-over-year revenue growth.
- Sold or exited several properties and interests, including NorthPark Center and multiple community centers; sale proceeds were generally used to reduce the line of credit or for general corporate purposes.
- Revenues and cash generation increased, but growth reflected portfolio changes as well as operating performance. Shopping-center operating expenses rose 15.8%, and depreciation and amortization rose $50.5 million, primarily due to acquisitions.
- Cash used in investing activities increased substantially, while financing cash flow shifted from a $403.6 million outflow in 2011 to a $610.6 million inflow in 2012. The Company issued $175.6 million net under its at-the-market equity program and paid off $439.3 million of Senior Notes in March 2012.
Outlook, risks and unusual items
- Management expected releasing spreads to remain positive in 2013. It forecast $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months, funded through a combination of debt and equity financing, construction loans and other sources. It also planned to sell certain non-core assets, subject to market conditions. No earnings or FFO guidance was provided.
- Post-year-end activity included the January 2013 acquisition of Green Acres Mall for $500 million, funded with a $325 million property mortgage and line-of-credit borrowings. The Company also drew the remaining $146 million available under the Kings Plaza mortgage.
- Key risks include economic and retail weakness, tenant bankruptcies or store closures, lease-renewal and occupancy risk, competition from online and other retail formats, geographic concentration in California and Arizona, and dependence on external financing. A 1% increase in interest rates was estimated to reduce future earnings and cash flows by approximately $17.2 million annually; no interest-rate caps or swaps were outstanding at year-end.
- Approximately $498 million of indebtedness at the Company’s pro rata share was expected to mature in 2013 after subsequent refinancing and loan commitments. The Company’s ability to refinance on acceptable terms is not assured.
- Unusual items included $115.7 million and $84.2 million remeasurement gains related to Arrowhead Towne Center and FlatIron Crossing, respectively; a $104.0 million gain on extinguishment of Valley View Center debt; and a $16.3 million gain on extinguishment of Prescott Gateway debt. A $54.3 million impairment charge was recorded for Valley View Center before its sale.
- Potential obligations include $51.2 million of joint-venture debt that could become recourse to the Company, partly offset by $21.3 million of partner indemnities; $3.8 million of letters of credit; and $41.1 million of outstanding construction obligations. Environmental exposures include asbestos, underground storage tanks and chlorinated hydrocarbons. The filing reports no material legal proceedings.
Important facts for investors to verify
- How much of reported earnings and FFO growth reflects recurring property operations versus acquisitions, remeasurement gains and debt extinguishments; compare with AFFO and operating cash flow.
- Whether occupancy, tenant sales and releasing spreads remain strong, especially at same centers, and how upcoming lease expirations and anchor vacancies affect rents.
- Progress refinancing 2013 maturities and maintaining liquidity, covenant compliance and access to capital after major acquisitions and development spending.
- Actual costs, funding and leasing progress for Fashion Outlets of Chicago and the Tysons Corner expansion, and the outcome of planned non-core asset sales.
- Potential share dilution from the remaining $322.1 million ATM authorization and the Company’s capacity to sustain distributions while meeting REIT requirements.
Reporting quality: KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management reported disclosure controls and internal controls were effective at December 31, 2012.