The Macerich Company (NYSE: MAC) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Macerich is a REIT focused on owning, leasing, managing, developing and redeveloping U.S. shopping centers. At year-end it had interests in 52 centers, totaling approximately 51 million square feet of gross leasable area.
Financial and operating performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total revenue | $927.5 million | $960.4 million | Down 3.4% |
| Leasing revenue | $858.9 million | $884.0 million | Down 2.8%; includes $7.7 million provision for lease credit losses |
| Net income attributable to Macerich | $96.8 million | $60.0 million | Up 61.3% |
| Diluted EPS | $0.68 | $0.42 | Up from prior year |
| Diluted FFO, excluding Chandler Freehold financing expense | $537.0 million | $564.4 million | Down 4.9%; non-GAAP measure |
| Cash from operating activities | $355.2 million | $344.3 million | Up $10.8 million |
| Year-end cash and cash equivalents | $100.0 million | $102.7 million | Restricted cash was an additional $14.2 million |
| Consolidated mortgage and notes payable | $5.21 billion | $4.98 billion | Pro rata total debt, including joint ventures and adjusted for noncontrolling interests, was $8.1 billion |
- Net income benefited significantly from a $76.6 million noncash decrease in the fair value of the Chandler Freehold financing obligation, recorded as a reduction of interest expense. Reported interest expense fell $44.7 million year over year, while FFO excluding that financing expense declined.
- Regional center occupancy fell to 94.0% from 95.4%. Sales per square foot rose to $801 from $726. For small-shop leases, the reported releasing spread was positive 4.7% ($59.15 on new and renewal leases versus $56.50 on expiring leases).
- Common distributions declared were $3.00 per share, versus $2.97 in 2018. Cash dividends and distributions paid totaled $474.5 million, compared with $355.2 million of cash generated by operating activities.
- The filing does not provide a single company-wide operating margin. It reports total expenses of $859.9 million and net income of $102.6 million, but those figures include items such as depreciation, joint-venture income and asset gains or losses.
Material changes and unusual items
- ASC 842 lease accounting was adopted in 2019. It changed the presentation of leasing revenue and costs, required lease liabilities and right-of-use assets, and resulted in a $2.2 million cumulative-effect adjustment for certain straight-line rent receivables. Comparisons are affected by reclassifications and accounting changes.
- Leasing expense increased to $29.6 million from $11.6 million, primarily due to the new lease standard’s treatment of certain leasing costs. Management-company operating expenses fell $25.1 million, partly reflecting the absence of 2018 workforce-reduction costs and lower payroll and compensation costs.
- Asset-sale and write-down losses were $11.9 million in 2019, compared with $31.8 million in 2018. The 2018 result included impairment losses and a gain on the sale of a 75% interest in One Westside.
- Fourth-quarter 2019 revenue was $241.8 million and net income attributable to the Company was $26.9 million, or $0.19 per diluted share. Fourth-quarter 2018 figures were $246.9 million, $11.7 million and $0.08 per diluted share, respectively. The filing notes that shopping-center earnings are generally seasonally higher in Q4.
Debt, liquidity and capital spending
- At December 31, 2019, the $1.5 billion revolving credit facility had $820.0 million drawn and $679.7 million available. The facility matured July 6, 2020, with a one-year extension option; the company said near-term maturities were expected to be refinanced, restructured, extended or paid from cash or the line of credit.
- Company-reported pro rata debt was $8.1 billion. Most debt was fixed-rate; the filing estimates a 1% increase in interest rates would reduce annual earnings and cash flows by approximately $10.5 million, based on $1.0 billion of floating-rate debt.
- Management expected to spend $250 million to $300 million over the next 12 months on development, redevelopment, expansions and renovations. It expected tenant allowances and deferred leasing charges to be comparable to 2019.
- Capital projects included Fashion District Philadelphia, with total estimated cost of $400 million to $420 million; One Westside, estimated at $500 million to $550 million, with creative-office space fully leased to Google and completion expected in 2022; and redevelopment of Sears locations, estimated at $130 million to $160 million at Macerich’s pro rata share.
Outlook, risks and contingencies
- Management said market fundamentals appeared “reasonably strong,” but expected 2020 results to be negatively affected by anchor closures and tenant bankruptcies. It anticipated positive releasing spreads in 2020; the filing does not provide specific earnings or FFO guidance.
- Retailer distress remained a material exposure. Forever 21 filed for bankruptcy in 2019 and represented 1.4% of minimum and percentage rental revenue at year-end; Sears-related closures and lease rejections also required replacement leasing and redevelopment. Anchor closures may affect co-tenancy provisions and other tenants’ rent or occupancy.
- Other significant risks include high leverage and refinancing access, interest-rate and LIBOR transition exposure, tenant demand and e-commerce competition, redevelopment cost and lease-up risk, geographic concentration, joint-venture partner and recourse-debt exposure, and environmental, natural-disaster and insurance risks.
- Potential obligations included $40.8 million of letters of credit, which the Company did not expect to result in a liability, and $4.2 million of outstanding construction-related obligations expected to be settled within 12 months. One joint venture had $150.5 million of debt that could become recourse to the Company if the venture could not discharge it. No material legal proceedings were reported.
- KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The auditor highlighted judgments involving ground-lease borrowing rates, Chandler Freehold’s fair value and property impairment indicators.
Important facts for investors to verify
- Whether the revolving credit facility and near-term property maturities were refinanced, extended or repaid, and on what terms.
- Whether occupancy and leasing spreads stabilized, and whether reported sales growth translated into tenant rent-paying capacity.
- Actual tenant closures, concessions, co-tenancy effects and redevelopment costs associated with Sears, Forever 21 and other distressed retailers.
- Progress, remaining funding needs and delivery timing for Fashion District Philadelphia, One Westside and other major projects.
- The assumptions behind the $76.6 million Chandler Freehold fair-value adjustment and its effect on reported earnings versus recurring cash flow and FFO.
- Dividend coverage and liquidity, given distributions exceeded operating cash flow in 2019 and the company relies partly on joint-venture distributions and external financing.