MAC

Business Context and Reporting Period

Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Macerich is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, development, redevelopment, management, and leasing of regional and community shopping centers. As of December 31, 2008, the portfolio consisted of 92 centers (72 regional, 20 community) totaling approximately 76 million square feet of gross leasable area (GLA). The company operates through The Macerich Partnership, L.P.

Key Financial Metrics

Note: Net income for 2008 includes significant non-recurring gains from discontinued operations and debt extinguishment.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10.7% to $901.5 million, driven by acquisitions (Mervyn's portfolio, Shops at North Bridge) and redevelopment centers. Rental revenue increased 12.3%.
• Profitability Surge: Net income available to common stockholders more than doubled to $183.3 million. This was primarily due to a $99.1 million gain on the "Rochester Redemption" (discontinued operations) and a $95.3 million gain on the early extinguishment of debt.
• Operating Expenses: Shopping center operating expenses increased 11.8% to $287.1 million, largely due to new acquisitions and higher bad debt expense ($2.0 million increase).
• Depreciation: Increased 30.7% to $277.8 million, reflecting new assets and a $32.9 million write-off of intangible assets related to Mervyn's lease terminations.
• Debt Management: The company repurchased $222.8 million of convertible senior notes for $122.7 million, resulting in the aforementioned gain. Total debt increased to $8.0 billion, including $2.3 billion unsecured and $2.0 billion pro-rata joint venture debt.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management anticipates meeting liquidity needs through cash from operations, working capital, and borrowings under a $1.5 billion line of credit. The company expects to incur between $80 million and $120 million in 2009 for development and redevelopment. While the company accessed capital throughout 2008, management notes that current turmoil in credit markets limits access to financing and may force reliance on variable-rate debt.

Unusual Items

• Mervyn's Bankruptcy: Mervyn's filed for bankruptcy in July 2008. Macerich owns 45 former Mervyn's stores. The company recorded a $5.2 million write-down in Q3 2008 and a $27.7 million write-off of unamortized intangible assets in Q4 2008. However, 23 leases were assumed by Kohl's and Forever 21.
• Rochester Redemption: A non-cash exchange of assets resulted in a $99.1 million gain classified as discontinued operations.
• Development Write-offs: The company wrote off $8.7 million in development costs for projects it decided not to pursue and recorded an $18.8 million impairment charge on land held for development.

Risk Factors

• Economic Recession: The national recession and constrained credit markets pose risks to consumer spending, tenant sales, and the ability to refinance debt.
• Geographic Concentration: Significant exposure to California and Arizona, which have been adversely affected by weak economic conditions.
• Tenant Concentration: While no single tenant exceeds 2.4% of minimum rents, the bankruptcy of major anchors (like Mervyn's) creates vacancy and leasing risks.
• Debt Maturities: Approximately $406 million of debt matures in 2009 (excluding extensions), requiring refinancing in a difficult market.

Investor Verification Checklist

• Debt Refinancing: Verify the company's ability to refinance the $406 million in 2009 maturities given the constrained credit market.
• Mervyn's Replacement: Monitor the lease-up progress of the 22 Mervyn's locations where leases were rejected and the opening of new Kohl's and Forever 21 stores.
• FFO vs. Net Income: Analyze Funds From Operations (FFO) as the primary performance metric, as Net Income was significantly inflated by one-time gains ($194.4 million total from debt and asset exchanges).
• Development Pipeline: Review the status of major redevelopment projects (Santa Monica Place, Scottsdale Fashion Square) and the impact of the $27.5 million in development write-offs/impairments on future capital allocation.
• Interest Rate Exposure: Assess the impact of rising interest rates on the $1.8 billion of floating-rate debt, noting the company's use of caps and swaps.