The Macerich Company — Q2 2012 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2012, compared with the same 2011 periods. Macerich owns, operates, develops and leases U.S. shopping centers. At quarter-end, it reported interests in 70 centers totaling approximately 64 million square feet.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $204.5 million | $181.3 million | $414.5 million | $361.6 million |
| Income from continuing operations | $14.9 million | $19.6 million | $63.1 million | $25.1 million |
| Net income (loss) attributable to the Company | $133.4 million | $(19.2) million | $119.3 million | $(19.2) million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $144.6 million | $89.9 million |
| Diluted FFO | $226.2 million | $102.9 million | $332.4 million | $176.6 million |
| Diluted AFFO | $106.2 million | $105.3 million | $215.3 million | $179.8 million |
At June 30, cash and cash equivalents were $89.8 million; restricted cash was $58.9 million. Consolidated debt comprised $3.302 billion of mortgage notes and $764.4 million of bank and other notes, or approximately $4.067 billion total. The company also reported approximately $1.9 billion as its pro rata share of unconsolidated joint-venture debt; total outstanding indebtedness including that share was about $6.0 billion. The $1.5 billion revolving credit facility had $615 million drawn, and the $125 million unsecured term loan was outstanding. The company reported compliance with loan covenants.
No specific operating-margin measure is provided. For the six months, operating cash flow covered $144.6 million of the $161.1 million of dividends and distributions; the remainder was funded from joint-venture distributions classified as investing cash flow.
Material changes versus prior periods
- Revenue rose 12.8% in Q2 and 14.6% in the first half, primarily reflecting acquired properties, including the SDG Acquisition Properties; same-center rental revenue declined $2.9 million in Q2 and $1.7 million for the half-year.
- Q2 attributable net income swung to profit mainly because discontinued operations included major gains on debt extinguishments and property sales. These gains are not indicative of recurring center operations: continuing-operations income fell from $19.6 million to $14.9 million.
- First-half operating cash flow increased by $54.7 million. Investing cash flow was a $7.7 million source, versus a $197.3 million use in 2011, with higher property-sale proceeds and lower joint-venture contributions. Financing cash use was $129.8 million.
- Debt balances declined from year-end: mortgage notes fell to $3.302 billion from $3.328 billion, and bank and other notes to $764.4 million from $877.6 million. The company repaid $439.3 million of maturing senior notes in March, funded with additional line-of-credit borrowings.
- Reported operating indicators improved: tenant sales per square foot rose to $513 from $458, occupancy to 92.7% from 92.3%, and trailing-twelve-month releasing spreads were positive 16.3%. These measures exclude certain troubled, development and redevelopment properties.
Outlook, risks and unusual items
- Management expected to meet operating, debt-service and dividend needs over the next 12 months using operating cash flow, working capital and/or the unsecured line of credit. It expected near-term loan maturities to be refinanced, restructured, extended or paid from credit-line borrowings or cash.
- Management expected $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months. Fashion Outlets of Chicago was expected to open in summer 2013; its estimated project cost was approximately $200 million. A Tysons Corner expansion was estimated at $600 million, including $300 million attributable to Macerich, with completion expected in fall 2014.
- The filing cites continued economic and political uncertainty, persistent U.S. economic weakness and unemployment, and retail rents and valuations still below pre-recession levels. Reduced tenant performance could lower cash flow, increase credit-line usage and raise floating-rate exposure. A 1% rate increase was estimated to reduce annual earnings and cash flow by approximately $18.3 million.
- Joint-venture debt that could become recourse to Macerich was $372.4 million, partly covered by $178.6 million of partner indemnities. The company also disclosed $92.1 million of construction-related purchase obligations, most expected within 12 months, and $4.6 million of letters of credit that management did not expect to result in a liability.
- Unusual discontinued-operations gains included $104.0 million on the Valley View Center debt extinguishment and $16.4 million on Prescott Gateway; Valley View also incurred a $54.3 million impairment charge. Prescott Gateway was conveyed to its lender. The company sold several other properties and joint-venture interests during the period.
- The July 27, 2012 dividend declaration was $0.55 per share, payable entirely in cash on September 7 to holders of record August 20. The filing provides no specific earnings guidance.
Important facts for investors to verify
- Separate recurring operating performance from property-sale, impairment and debt-extinguishment gains; review the FFO and AFFO reconciliations and their non-GAAP limitations.
- Check the schedule of upcoming debt maturities, refinancing assumptions, credit-line availability and floating-rate exposure.
- Assess same-center trends alongside acquisition-driven revenue growth, including occupancy, sales per square foot and releasing spreads.
- Review potential joint-venture recourse obligations, indemnity collectability, development commitments and contingent purchase consideration for Fashion Outlets of Niagara.
- Evaluate cash available for dividends against operating cash flow, capital spending and joint-venture distributions.