The Macerich Company: Q2 2019 Form 10-Q
Business context and period. Macerich is a U.S. REIT focused on owning, leasing, managing, developing and redeveloping shopping centers. At June 30, 2019, it held interests in 52 centers totaling approximately 51 million square feet. This unaudited filing covers the three and six months ended June 30, 2019; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $228.0 | $234.5 | $454.5 | $471.3 |
| Net income (loss) | $13.9 | $8.9 | $22.8 | $(25.5) |
| Net income (loss) attributable to Macerich | $15.7 | $7.8 | $23.6 | $(25.8) |
| Diluted earnings (loss) per share | $0.11 | $0.05 | $0.16 | $(0.19) |
| FFO attributable to common stockholders and unit holders, diluted | $133.6 | $125.7 | $255.6 | $249.2 |
| Net cash provided by operating activities | Not presented quarterly | $165.1 | $164.9 |
- Revenue and operating trends: Leasing revenue fell 2.8% in Q2 and 3.0% in the first half. Management attributed the declines principally to bad-debt provisions and lower property-tax recoveries, as well as property and joint-venture changes.
- Profit and FFO: Q2 net income attributable to the Company increased $7.9 million year over year, while diluted FFO rose 6.3%. First-half FFO increased 2.6%. Results benefited from the absence of $19.4 million of shareholder-activism costs recorded in Q2 2018; FFO excluding those costs was $133.6 million in Q2 2019 versus $145.1 million in Q2 2018, and $255.9 million versus $268.6 million for the first half.
- Cash flow: First-half operating cash flow was broadly flat. Investing activities used $22.9 million, compared with $266.1 million provided in the prior-year period, primarily because joint-venture distributions were much lower. Financing activities used $143.1 million; cash, cash equivalents and restricted cash ended the period at $148.4 million.
- Debt and liquidity: At June 30, consolidated mortgage notes were $4.305 billion and bank and other notes were $809.4 million. Cash and cash equivalents were $104.9 million, with $43.5 million of restricted cash. The $1.5 billion revolving credit facility had $810.0 million drawn and $689.7 million available, and matures July 2020 with a one-year extension option. Management reported covenant compliance and expected maturities over the next 12 months to be refinanced, restructured, extended or paid from the credit line or cash.
- Broader debt exposure: Management reported total outstanding indebtedness of $7.9 billion on a pro rata basis, including $3.2 billion of its share of unconsolidated joint-venture debt. This is a non-GAAP presentation and is not a substitute for consolidated debt.
- Margins: The filing does not provide a clear headline operating-margin measure. Operating expense and revenue movements are discussed below; reported net income also reflects depreciation, interest, joint-venture income and asset write-downs.
Material changes and unusual items
- First-half net income improved from a $25.5 million loss to $22.8 million income, mainly reflecting lower asset impairment/write-down losses and the absence of prior-year shareholder-activism costs. First-half 2019 also included a $15.4 million net loss on sale or write-down of assets, including development-cost write-downs.
- Q2 2019 leasing expenses increased to $7.7 million from $2.7 million, primarily because the new lease accounting standard requires certain leasing costs to be expensed rather than capitalized. ASC 842 adoption also resulted in a $2.2 million cumulative adjustment to accumulated deficit for straight-line rent receivables associated with tenants in litigation or bankruptcy.
- Reported first-half interest expense was lower year over year, in significant part because of changes in the fair value of the Chandler Freehold financing-arrangement obligation. The obligation is fair-value-sensitive to management estimates, including capitalization and discount rates and market rents.
- Sales per square foot for qualifying tenants rose to $776 from $692 over the trailing twelve months. Occupancy declined to 94.1% from 94.3%. Trailing-twelve-month releasing spreads were positive at 9.4%.
Outlook, risks and contingencies
- Management said it expected 2019 results to be negatively affected by rising interest rates, anticipated anchor closures and tenant bankruptcies, despite viewing regional shopping-center fundamentals in its markets as reasonably strong. A 1 percentage-point increase in rates was estimated to reduce annual earnings and cash flows by approximately $14.7 million based on $1.5 billion of floating-rate debt.
- The company expected $250 million to $350 million of development, redevelopment, expansion and renovation spending during the next 12 months. Separately, it anticipated $250 million to $300 million of pro rata redevelopment investment at recaptured Sears locations over several years. It had recaptured ten Sears locations by June 30; Sears-related leasing revenue was reported as less than 1% of total leasing revenue at the bankruptcy filing.
- Major projects include Fashion District Philadelphia, expected to be completed in September 2019, and redevelopments at Scottsdale Fashion Square. One Westside is being redeveloped with 584,000 square feet of office space leased to Google; completion is expected in 2022. The first phase of Los Angeles Premium Outlets is expected in fall 2021.
- Liquidity depends on operating cash flow, joint-venture distributions and access to debt and equity markets. Management cautioned that future access to capital on comparable terms is not assured. A 1% rate increase, retailer failures, anchor closures, co-tenancy provisions, refinancing conditions and development costs are notable risks.
- Contingencies included $65.8 million of letters of credit, which the Company did not expect to result in a liability, and $21.2 million of construction obligations expected to be settled within 12 months. One joint venture had $125.0 million of debt that could become recourse to the Company if the venture could not discharge it. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- After quarter-end, the Company declared a $0.75 per-share cash dividend/distribution payable September 6, 2019. Its Fashion District Philadelphia joint venture also borrowed an additional $26.0 million under an amended facility.
Important facts for investors to verify
- Refinancing plans and available liquidity ahead of the July 2020 revolving-credit maturity and other near-term debt maturities.
- Actual leasing, occupancy, tenant sales, bad-debt trends and the effects of anchor and tenant closures.
- Funding needs, cost estimates and completion schedules for redevelopment projects, including Sears recaptures and Fashion District Philadelphia.
- The sensitivity of earnings and cash flows to interest rates, floating-rate debt and fair-value assumptions for the Chandler Freehold financing arrangement.
- Joint-venture distributions and debt, including the potential recourse exposure and the distinction between pro rata and consolidated debt.
- FFO methodology and reconciliation to GAAP results; FFO is a supplemental non-GAAP measure and is not equivalent to operating cash flow or cash available for distributions.