The Macerich Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited. Macerich owns, operates, leases, develops and redevelops U.S. shopping centers. At quarter-end, its portfolio comprised 52 centers with approximately 51 million square feet of gross leasable area. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $231.1 | $242.2 | $685.6 | $713.5 |
| Net income attributable to Macerich | $46.4 | $74.0 | $69.9 | $48.3 |
| Diluted EPS | $0.33 | $0.52 | $0.49 | $0.34 |
| FFO, diluted, excluding Chandler Freehold financing expense | $133.2 | $149.6 | $388.8 | $398.8 |
Leasing revenue was $214.3 million in Q3 and $636.3 million for the first nine months, down 4.5% and 3.5%, respectively, year over year. Q3 net income declined primarily because 2018 included a $46.2 million gain on the One Westside transaction. Nine-month net income rose mainly because 2018 included $19.4 million of shareholder-activism costs; the comparable FFO measure above declined 2.5%. A separate measure that also excludes debt-extinguishment losses and shareholder-activism costs was $389.2 million for 2019 versus $418.1 million for 2018.
Results include a significant non-cash fair-value benefit related to the Chandler Freehold financing arrangement: $39.5 million in Q3 and $71.0 million for the first nine months, recorded as a reduction of interest expense. The benefit reflected changes in estimated property values and related debt and can vary with valuation assumptions.
For the nine months, operating cash flow was $272.0 million, investing cash flow was $16.6 million provided, and financing cash flow was $330.6 million used. Cash, cash equivalents and restricted cash totaled $107.3 million at period-end, down from $149.3 million at the start of the year. Cash dividends and distributions were $359.4 million; management reported $272.0 million funded by operations and the remaining $87.4 million from joint-venture distributions.
At September 30, total assets were $8.776 billion and total liabilities were $5.868 billion. Mortgage notes payable were $4.295 billion and bank and other notes payable were $749.8 million. The $1.5 billion revolving credit facility had $750.0 million drawn and $749.7 million available; it matures July 2020, with a one-year extension option. Management reported approximately $8.0 billion of total outstanding debt including Macerich’s pro rata share of unconsolidated joint-venture debt. The company said it was in compliance with applicable loan covenants.
Operating trends and material changes
- Trailing-twelve-month tenant sales per square foot increased to $800 from $707. Occupancy, excluding anchors, decreased to 93.8% from 95.1%.
- Trailing-twelve-month releasing spreads were positive by 8.3%: new and renewal leases averaged $60.04 per square foot versus $55.45 on expiring leases. Management expected positive spreads to continue through year-end.
- Reported leasing revenue fell amid lower lease-termination income and property-tax recoveries, and included $2.9 million of bad-debt provision in Q3 and $6.8 million year to date. ASC 842 adoption also moved certain leasing costs to expense and changed revenue presentation; a $2.2 million cumulative adjustment was recorded at adoption.
- Nine-month equity income from unconsolidated joint ventures declined to $34.1 million from $51.3 million, including the effect of prior-year property-sale gains and 2019 write-downs of intangible assets following lease terminations at the Seritage joint venture.
- Development, redevelopment, expansion and renovation spending was expected to be $200–$300 million over the next 12 months. Capital expenditures during the first nine months included $152.9 million for joint-venture centers and $83.1 million for consolidated centers in these categories.
Outlook, risks and contingencies
Management gave no specific earnings or FFO guidance in the provided filing text. It said 2019 results were expected to be negatively affected by rising interest rates, anchor closures and tenant bankruptcies, despite its view that regional shopping-center fundamentals in its markets appeared reasonably strong. A 1 percentage-point increase in interest rates was estimated to reduce annual future earnings and cash flows by approximately $14.4 million, based on $1.4 billion of floating-rate debt.
Sears had filed for bankruptcy; by September 30, Macerich had recaptured ten Sears locations and estimated its pro rata redevelopment investment at those locations at $130–$160 million over several years. Forever 21 filed for bankruptcy on September 29, 2019. Macerich had 29 stores totaling approximately 1.2 million square feet and expected four closures based on an October court filing; it also anticipated possible rent concessions at some remaining stores.
Major projects included Fashion District Philadelphia, expected to be 70% occupied by holiday 2019, and One Westside, where the creative-office space had been leased to Google and completion was expected in 2022. The company disclosed $100.8 million of letters of credit and said it did not expect them to result in a liability. One joint venture had $150.5 million of debt that could become recourse to Macerich if the venture could not meet the obligation. Management expected debt maturities over the next 12 months to be refinanced, restructured, extended or paid using the credit line or cash.
After quarter-end, Macerich announced a $0.75-per-share cash dividend/distribution and agreed to terms for a new $555 million, ten-year Kings Plaza loan at 3.67%, expected to close in Q4 2019. The filing reported no material legal proceedings and no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether the reported improvement in nine-month GAAP net income is sustainable, given the large non-cash Chandler Freehold fair-value benefit and prior-year unusual items.
- Leasing revenue, bad debts, occupancy and anchor/tenant closures, particularly the financial and leasing impact of Sears and Forever 21.
- Progress, costs, funding and expected returns on redevelopment projects, including the projected $200–$300 million of near-term spending and Sears-related commitments.
- Execution of the Kings Plaza refinancing and management’s refinancing plans for upcoming maturities and the July 2020 revolving-credit maturity.
- Liquidity and debt exposure, including joint-venture obligations, floating-rate borrowings, covenant compliance and the assumptions underlying the estimated $14.4 million annual sensitivity to a 1-point rate increase.