Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Nine months ended September 30, 1997
Business Overview: The Company acquires, owns, redevelops, manages, and leases regional and community shopping centers. Operations are conducted through The Macerich Partnership L.P. (Operating Partnership) and three Management Companies. As of September 30, 1997, the portfolio included 26 regional and three community shopping centers, including three acquired in 1997 (South Towne Center and Stonewood Mall).
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 1997) | Amount ($ in thousands) |
|---|---|
| Total Revenues | $159,685 |
| Net Income | $14,793 |
| Funds From Operations (FFO) | $62,791 |
| Net Cash Provided by Operating Activities | $54,655 |
| Total Debt (Mortgage, Bank, Debentures) | $988,936 |
| Cash and Cash Equivalents | $12,820 |
| Dividends Paid (Nine Months) | $48,875 |
Note: Total debt includes $816,821 in mortgage notes, $11,000 in bank notes, and $161,115 in convertible debentures. The Company's total outstanding loan indebtedness including pro rata joint venture debt was $1,017.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 43.7% to $159.7 million from $111.1 million in the prior year period. This was driven primarily by acquisitions (South Towne Center and Stonewood Mall) and the 1996 acquisition centers.
- Net Income: Net income increased 10.6% to $14.8 million from $13.4 million. However, earnings per share (EPS) decreased from $0.67 to $0.57 due to a significant increase in the weighted average number of shares outstanding (25.9 million vs. 20.0 million) and a large impairment charge.
- Joint Venture Loss: Equity in income of unconsolidated joint ventures swung from a $2.9 million profit in 1996 to a $7.6 million loss in 1997. This was caused by a $9.1 million write-down of the carrying cost of North Valley Plaza to net realizable value.
- Debt Structure: The Company issued $161.1 million in convertible debentures in June/July 1997. Total interest expense rose 55.5% to $47.4 million due to increased debt levels associated with acquisitions.
- Cash Flow: Operating cash flow increased 25.4% to $54.7 million. Investing cash outflows increased significantly to $162.1 million (from $80.9 million) due to property acquisitions and improvements.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Impairment: A $9.1 million share of a write-down on North Valley Plaza (joint venture) reduced income.
- Extraordinary Loss: $0.6 million loss on the early extinguishment of debt.
- Gain on Sale: $1.6 million gain on the sale of an asset.
- Environmental Contingencies:
- North Valley Plaza: Perchloroethylene (PCE) detected; remediation began October 1997. Reserve of $0.6 million established.
- Queens Center: Toluene detected in groundwater; $0.15 million reserve established.
- Villa Marina Marketplace & Huntington Center: Dry cleaning chemicals detected; reserves of $0.15 million and $0.5 million established, respectively.
- Fresno Fashion Fair: Asbestos detected in fireproofing; $3.3 million reserve established for future abatement.
- Operational Risks:
- Tenant Bankruptcy: Montgomery Wards filed bankruptcy; the Company has nine stores in its portfolio. Closure of anchor stores could reduce traffic and cash flow.
- Interest Rate Risk: $126.1 million of floating rate indebtedness exists, though $65.1 million is hedged via interest rate protection agreements.
- Liquidity & Capital Resources: The Company maintains a $50 million line of credit ($11 million utilized). A shelf registration for $500 million of equity/warrants is filed but not yet effective. Management anticipates using operations, equity, and debt to fund growth.
Investor Verification Checklist
- Acquisition Impact: Verify the pro forma impact of the South Towne Center and Stonewood Mall acquisitions on future revenue and FFO.
- Joint Venture Health: Assess the long-term viability of the North Valley Plaza joint venture following the $9.1 million impairment charge.
- Debt Maturity Profile: Review the maturity dates of the $161.1 million convertible debentures (2002) and the weighted average interest rate of 7.55%.
- Environmental Liabilities: Monitor the status of remediation at North Valley Plaza, Queens Center, and Fresno Fashion Fair to ensure reserves are adequate.
- Tenant Concentration: Evaluate the risk exposure related to the nine Montgomery Wards locations and potential anchor store vacancies.
- Dilution: Confirm the impact of the convertible debentures and potential OP unit conversions on future EPS.