MAC

Business Context and Reporting Period

Company: The Macerich Company (REIT)
Filing Type: Form 10-Q
Period Ended: March 31, 2007
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers across the United States. As of March 31, 2007, the portfolio included 91 centers (73 regional, 18 community) aggregating approximately 77 million square feet of gross leasable area.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.5% to $211.7 million, driven by acquisitions (Valley River Center, Deptford Mall) and redevelopment projects, offset by lower lease termination income at "Same Centers."
• Profitability Decline: Net income available to common stockholders dropped 65.6% to $2.6 million. This was primarily due to a significant decrease in income from discontinued operations (sales of properties in 2006) and a reduction in equity income from unconsolidated joint ventures.
• Interest Expense: Total interest expense decreased slightly to $67.6 million. This reduction was driven by the repayment of a $250 million term loan and lower rates on consolidated centers, partially offset by interest on new $950 million convertible senior notes issued in March 2007.
• Capital Structure: The Company issued $950 million in convertible senior notes (3.25% interest, maturing 2012) and repaid $541.5 million of existing borrowings. Concurrently, the Company repurchased 807,000 shares of common stock for approximately $75 million.
• Liquidity: Cash and cash equivalents decreased by $221.5 million to $47.9 million, primarily due to investing activities (acquisitions and development) and financing outflows (debt repayments and stock repurchases).

Guidance, Outlook, and Risks

• Development Pipeline: Significant redevelopment projects are underway, including the expansion of The Oaks (completion Fall 2008), SanTan Village (Phase I opening October 2007), and the transit-oriented development at Tysons Corner Center (Phase I entitlements expected Q1 2008).
• Capital Expenditures: Management expects to incur between $400 million and $600 million in 2007 for development, redevelopment, expansion, and renovations.
• Dividends: A dividend of $0.71 per share was declared for common stockholders, payable June 8, 2007.
• Risk Factors: The Company faces interest rate risk, though it manages this through a mix of fixed-rate debt and derivative instruments (swaps and caps). A 1% increase in interest rates is estimated to decrease future earnings by approximately $5.0 million annually. The Company also notes standard risks related to the shopping center industry, including tenant creditworthiness and economic conditions.
• Unusual Items: The adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) resulted in a $1.6 million charge to additional paid-in capital. The Company recorded a $0.9 million loss on the early extinguishment of debt.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that approximately $314 million of consolidated debt is due within one year (2008).
• Convertible Notes Impact: Assess the dilution potential of the new $950 million convertible senior notes, which have an initial conversion price of ~$111.48 (20% premium to March 2007 price) but are capped at ~$130.06 via purchased call options.
• Joint Venture Exposure: Review the pro-rata share of joint venture debt ($1.7 billion) and the specific recourse debt exposure ($8.6 million) where the Company may be liable beyond its equity interest.
• Discontinued Operations: Confirm that the significant gains from property sales in 2006 are classified as discontinued operations and will not recur in the current period.
• Capital Expenditure Funding: Monitor the Company's ability to fund the projected $400-$600 million in capital expenditures given the reduction in cash reserves and reliance on debt/equity markets.