Business context and reporting period
The Macerich Company is a REIT that owns, develops, redevelops, manages and leases U.S. shopping centers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. At quarter-end, its portfolio comprised interests in 50 regional and seven community/power centers, totaling approximately 55 million square feet.
Financial performance and position
Amounts are in millions of dollars except per-share data. Comparisons are with the same 2015 periods.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $259.9 | $322.8 | $515.9 | $641.1 |
| Net income attributable to Macerich | $45.2 | $14.4 | $466.1 | $39.0 |
| Diluted EPS | $0.31 | $0.09 | $3.12 | $0.24 |
| Diluted FFO attributable to common stockholders and unit holders | $160.3 | $151.0 | $301.4 | $284.5 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $207.7 | $272.9 |
- Six-month net income included $445.4 million of net gains on asset sales or write-downs, principally gains from selling interests in Arrowhead Towne Center and the MAC Heitman Portfolio, plus the Capitola Mall sale. The comparable 2015 period included a $3.7 million net loss in this line and a $22.1 million gain on remeasurement of Inland Center.
- At June 30, cash and cash equivalents were $73.1 million and restricted cash was $45.0 million. Total assets were $10.0 billion; total liabilities were $5.4 billion.
- Consolidated mortgage debt was $3.90 billion and bank and other notes payable were $1.02 billion. Management reported total outstanding loan indebtedness of $7.4 billion, including its pro rata share of unconsolidated joint-venture debt. The company was in compliance with applicable loan covenants.
- Six-month investing cash flow was a $484.8 million source, principally reflecting asset-sale proceeds and joint-venture distributions; financing cash flow was a $705.8 million use. Cash declined $13.4 million during the period.
- Same-center tenant sales per square foot rose to $626 from $623; occupancy declined to 95.0% from 95.5%. Trailing-twelve-month releasing spreads were positive 16.1%.
Material changes versus prior comparable period
- Reported revenue fell 19.5% in Q2 and 19.5% for the first half, primarily because several centers shifted from consolidated ownership to equity-method joint ventures and because of dispositions. For the first half, rental revenue declined $80.8 million, while same-center rental revenue increased $21.8 million.
- Q2 net income rose $33.7 million, aided by the $15.6 million year-over-year improvement in gains/losses on asset sales and the absence of $11.4 million in 2015 takeover-response costs. First-half net income rose sharply, mainly because of the $449.1 million year-over-year improvement in asset-sale/write-down results.
- Diluted FFO increased 6.2% in Q2 and 5.9% for the first half. First-half operating cash flow decreased $65.2 million year over year; management cited portfolio transitions, working-capital changes and operating results.
- During the first half, the company sold a 40% interest in Arrowhead Towne Center, a 49% interest in three centers in the MAC Heitman Portfolio, and Capitola Mall. It also acquired, through a 50/50 joint venture, Country Club Plaza.
- The company repurchased $800 million of shares during the first half under its $1.2 billion authorization; the final $400 million accelerated repurchase was completed after quarter-end. Shares issued and outstanding declined from 154.4 million at December 31, 2015 to 144.7 million at June 30, 2016.
Outlook, risks and unusual items
- Management expected to meet operating, debt-service and dividend needs for the next 12 months through operating cash flow, working capital and/or its revolving credit facility. It expected $300–$400 million of development, redevelopment, expansion and renovation spending over the next 12 months.
- Management expected positive releasing spreads to continue through the remainder of 2016. Approximately 1.0 million square feet of small-shop space, or 12.2% of relevant gross leasable area, was scheduled to expire during that period.
- After quarter-end, the $1.5 billion revolving credit facility was amended to mature July 6, 2020, with a one-year extension option and conditional capacity to increase to $2.0 billion. At June 30, borrowings were approximately $1.015 billion; the company reported $485 million of nominal undrawn capacity before considering facility conditions.
- Management expected to refinance, restructure, extend or repay maturities in the next 12 months, except Flagstaff Mall. On July 15, 2016, the company transferred Flagstaff Mall to its non-recourse lender by deed-in-lieu of foreclosure and was discharged from the loan. The property’s loan had been in maturity default since November 2015.
- Interest-rate risk is material: management estimated that a 1 percentage-point increase in rates would reduce annual earnings and cash flows by approximately $15.2 million, based on $1.5 billion of floating-rate debt.
- Other disclosed exposures include $61.0 million of letters of credit, which management did not expect to result in a liability; $45.6 million of construction obligations expected to be settled within 12 months; and $5.0 million of joint-venture debt that could become recourse, partly offset by a $2.5 million partner indemnity.
- Key business risks include tenant defaults, bankruptcies and closures; economic and retail-market weakness; competition and changes in retail formats or technology; financing availability and interest-rate changes; and development and redevelopment risks. Management reported no material change in previously disclosed risk factors and no material legal proceedings.
- A $0.68 per-share dividend/distribution was announced after quarter-end, payable in cash on September 8, 2016 to holders of record August 19, 2016. No earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Separate recurring property performance from the large, nonrecurring gains on asset sales when assessing first-half earnings and EPS.
- Review FFO alongside GAAP earnings and cash flow; FFO is a supplemental non-GAAP measure and does not represent cash available for all needs.
- Reconcile consolidated debt with the reported $7.4 billion total including pro rata joint-venture debt, and assess upcoming maturities, floating-rate exposure and credit-facility conditions.
- Assess whether same-center sales, occupancy and positive leasing spreads can offset the portfolio-driven decline in reported revenue and changes in tenant demand.
- Review the funding and sustainability of share repurchases, dividends and planned capital spending, particularly given first-half operating cash flow and use of asset-sale proceeds.
- Confirm the effects of the Flagstaff Mall transfer and other post-quarter events in subsequent filings.