MAC

Business Context and Reporting Period

Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2005
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers. As of June 30, 2005, the portfolio included 98 centers (76 regional, 20 community, 2 development projects) aggregating approximately 78 million square feet of gross leasable area.

Key Financial Metrics (Six Months Ended June 30, 2005)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 33% to $337.8 million, driven primarily by the acquisition of the Wilmorite portfolio (11 regional malls) in April 2005 and 2004 acquisitions. Minimum and percentage rents rose 37.7%.
• Net Income Decline: Net income available to common stockholders decreased 29.4% to $24.9 million. This decline is attributed to significantly higher interest expense ($104.3 million vs. $68.0 million) and depreciation/amortization ($90.4 million vs. $67.2 million) resulting from new acquisitions and development projects.
• Balance Sheet Expansion: Total assets increased 53% to $7.08 billion, and total liabilities increased 64% to $5.58 billion, reflecting the $2.33 billion Wilmorite acquisition funded by debt assumption and new borrowings.
• FFO Increase: Despite lower GAAP net income, FFO-Diluted increased 11.9% to $153.0 million, reflecting the operational accretion of new properties before the impact of depreciation and interest.

Guidance, Outlook, Risks, and Unusual Items

• Major Acquisition: On April 25, 2005, the Company completed the acquisition of Wilmorite Properties for approximately $2.33 billion. This included assuming $877 million of debt and issuing $234 million of convertible preferred units. Pro forma results for the six months ended June 30, 2005, would have shown diluted EPS of $0.34.
• Capital Expenditures: Management expects to incur between $150 million and $200 million in 2005 for development, redevelopment, expansions, and renovations.
• Dividends: A dividend of $0.65 per share was declared on July 29, 2005, payable September 9, 2005.
• Risk Factors:
  • Interest Rate Risk: The Company has significant variable rate debt ($2.8 billion consolidated). A 1% increase in rates would decrease future earnings by approximately $27.4 million annually.
  • Tenant Concentration: Federated Department Stores identified 68 duplicate locations for divestiture, 10 of which are Macerich centers, posing a potential risk to occupancy and rent.
  • REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income taxes and disqualify it for four subsequent years.
• Unusual Items: The Company recorded a $1.3 million gain on land sales in 2005. Discontinued operations income decreased due to the prior year sale of the Westbar property.

Investor Verification Checklist

• Debt Service Coverage: Verify the Company's ability to service the increased debt load ($5.28 billion) given the rise in interest expense and variable rate exposure.
• Wilmorite Integration: Assess the operational performance and integration of the newly acquired Wilmorite portfolio against pro forma expectations.
• Tenant Divestitures: Monitor the impact of Federated Department Stores' planned store closures on occupancy rates and rental income at the 10 affected centers.
• Capital Markets Access: Confirm the Company's ability to refinance maturing debt and access capital markets for the projected $150-$200 million in capital expenditures.
• FFO vs. Net Income: Analyze the divergence between GAAP Net Income and FFO to understand the impact of depreciation and acquisition-related amortization on reported earnings.