The Macerich Company — Q3 2014 Form 10-Q
Business and period. Macerich owns, operates, develops and leases U.S. shopping centers as a REIT. At September 30, 2014, its portfolio included interests in 62 centers totaling approximately 57 million square feet. This unaudited filing covers the three and nine months ended September 30, 2014; comparisons are with the same periods in 2013.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $263.5 | $258.2 | $782.3 | $747.3 |
| Income attributable to the Company | $35.9 | $38.1 | $69.8 | $275.2 |
| Diluted EPS | $0.25 | $0.27 | $0.49 | $1.97 |
| FFO, diluted | $132.5 | $129.6 | $383.9 | $387.0 |
| Cash from operating activities | Not separately stated for the quarter | $296.9 | $328.9 |
- Q3 revenue rose 2.1%; Company-attributable income declined 5.8%, while diluted FFO increased 2.3%.
- Nine-month revenue rose 4.7%, but Company-attributable income fell substantially and diluted FFO declined 0.8%.
- At September 30, total assets were $9.21 billion, cash and cash equivalents $58.5 million, and total equity $3.54 billion. Consolidated debt was approximately $4.93 billion; management reported total outstanding indebtedness of approximately $6.3 billion including its pro rata share of unconsolidated joint-venture debt.
- The $1.5 billion revolving credit facility had $410 million drawn, a stated borrowing rate of LIBOR plus 1.38%, and a maturity date of August 2018. The Company was in compliance with applicable loan covenants.
- Cash used in investing activities was $342.4 million for the nine months, versus $234.5 million of cash provided in 2013. Cash provided by financing activities was $34.3 million, versus $567.0 million used in 2013. Cash declined $11.2 million to $58.5 million.
- Net interest expense for nine months was $139.9 million, down from $149.7 million. The filing states a 1% increase in interest rates would reduce annual earnings and cash flows by approximately $9 million, based on $0.9 billion of floating-rate debt.
Changes, operating indicators and notable items
- The nine-month earnings comparison is heavily affected by 2013 asset-sale gains: 2013 included $137.1 million of discontinued-operations income and substantial joint-venture disposition gains. 2014 had no discontinued-operations income after early adoption of ASU 2014-08; it also recorded $44.6 million of equity income from unconsolidated joint ventures, down from $145.5 million.
- Management attributed higher rental revenue to acquisitions, redevelopment activity and same-center growth, partly offset by property dispositions. For nine months, shopping-center operating expenses increased 7.0%.
- Trailing-12-month tenant sales per square foot increased to $571 from $549; occupancy increased to 95.6% from 93.7%; and releasing spreads were positive 20.5% ($52.79 per square foot on new and renewal leases versus $43.80 on expiring leases). These measures exclude specified redevelopment, acquisition and disposed properties.
- Q3 asset gains included a $9.0 million gain on sale of the Company’s Wilshire Boulevard interest. Nine-month results also included impairment losses of $8.8 million, compared with $28.0 million in the prior-year period. 2013 results included a $36.3 million Camelback Colonnade remeasurement gain.
- Major activity included acquiring the remaining 49% of Cascade Mall for $15.2 million and investing $106.8 million for a 50% interest in a joint venture to redevelop The Gallery in Philadelphia. The Company also paid $18.7 million of contingent consideration related to Fashion Outlets of Niagara Falls USA.
- Development and redevelopment spending was significant. Management expected to spend $300–$400 million on development, redevelopment, expansion and renovations over the next 12 months. Fashion Outlets of Niagara Falls USA expansion was completed in October 2014; other projects included Tysons Corner Center and Broadway Plaza.
Outlook, risks and contingencies
- Management expected to meet operating, debt-service and dividend needs over the next 12 months using operating cash flow, working capital and/or credit-line borrowings. It expected maturities during that period to be refinanced, restructured, extended or paid from the credit line or cash, except that Great Northern Mall was noted separately.
- Management expected positive releasing spreads to continue for the remainder of 2014. The filing does not provide formal earnings or FFO guidance.
- Risks highlighted include tenant defaults or bankruptcies, retail-sector and economic weakness, development and redevelopment execution, availability and cost of financing, interest-rate changes, and access to capital markets. Future ATM share sales are discretionary; $500 million remained available under the 2014 program at quarter-end.
- Joint-venture debt that could become recourse to the Company was $33.5 million, partly offset by a $16.8 million partner indemnity; the net amount was expected to mature in 2015. The Company also had $18.4 million in letters of credit and $39.5 million of construction obligations expected to be settled within 12 months.
- No material legal proceedings or material changes to the previously reported risk factors were disclosed. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Subsequent events: the Company announced a $0.65-per-share cash dividend/distribution for December 5, 2014, and sold South Towne Center on October 31, 2014 for $205 million, intending to use proceeds partly to pay down its credit line.
Investor verification priorities
- Separate recurring property-level performance from 2013 asset-sale and joint-venture gains when assessing the sharp decline in reported net income.
- Review debt maturities, refinancing plans, floating-rate exposure, and the availability and terms of the revolving credit facility.
- Assess whether planned development spending, including The Gallery and other major projects, can be funded while maintaining liquidity and distributions.
- Verify the sustainability of higher occupancy, tenant sales and releasing spreads, and monitor tenant credit quality and leasing costs.
- Review joint-venture leverage and guarantees, construction commitments, and the outcomes of asset dispositions and redevelopment projects.