Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers. As of September 30, 2005, the portfolio included 98 centers (76 regional, 20 community, 2 development projects) aggregating approximately 79 million square feet of gross leasable area. A significant portion of the portfolio is located in California, Arizona, and the Northeast (New York, New Jersey, Connecticut).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 |
Three Months Ended Sep 30, 2004 |
Nine Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2004 |
|---|---|---|---|---|
| Total Revenue | $205,423 | $130,007 | $543,182 | $384,086 |
| Net Income | $10,338 | $19,656 | $42,151 | $59,311 |
| Net Income Available to Common Stockholders | $4,064 | $17,298 | $28,954 | $52,528 |
| Diluted EPS (Common) | $0.07 | $0.29 | $0.49 | $0.89 |
| Funds From Operations (FFO) - Diluted | $81,090 | $72,887 | $234,110 | $209,618 |
| Cash Flow from Operating Activities | N/A | N/A | $184,978 | $166,197 |
| Total Assets | $7,063,037 | N/A | N/A | N/A |
| Total Liabilities | $5,596,053 | N/A | N/A | N/A |
| Total Debt (Consolidated + Pro Rata JV) | $6.7 Billion | N/A | N/A | N/A |
Note: FFO is a non-GAAP measure used by REITs. Net Income available to common stockholders is significantly lower than Net Income due to preferred dividends ($6.3M for Q3, $13.2M for YTD).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 58% year-over-year for the quarter and 41% for the nine-month period. This growth is primarily driven by the acquisition of the Wilmorite portfolio (closed April 25, 2005) and 2004 acquisitions (Inland Center, NorthPark, Fiesta Mall, etc.).
- Net Income Decline: Despite revenue growth, Net Income available to common stockholders decreased significantly (76% for Q3, 45% for YTD). This was caused by:
- Increased interest expense ($71.4M for Q3 vs. $37.4M in 2004) due to debt assumed in the Wilmorite acquisition and new term/acquisition loans.
- Higher depreciation and amortization ($57.2M for Q3 vs. $34.7M in 2004) from new assets.
- Discontinued operations income decreased due to the prior-year sale of the Westbar property.
- Balance Sheet Expansion: Total assets increased from $4.6 billion (Dec 31, 2004) to $7.1 billion (Sep 30, 2005). Total liabilities increased from $3.4 billion to $5.6 billion, reflecting the $2.3 billion Wilmorite acquisition funded by debt and equity.
- FFO Growth: Funds From Operations (Diluted) increased 11.2% for the quarter and 11.7% for the nine-month period, indicating improved operational cash generation despite the drop in GAAP net income.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Management expects to incur between $150 million and $200 million in 2005 for development, redevelopment, expansions, and renovations.
- Dividends: A dividend of $0.68 per share was declared for common stockholders and OP unit holders on October 26, 2005, payable December 9, 2005. A dividend of $0.68 was also declared on Series A Preferred Stock.
- Acquisition Impact: The Wilmorite acquisition added 13.4 million square feet of space. Pro forma results for the nine months ended Sep 30, 2005, would have shown Net Income available to common stockholders of $18.2 million (vs. actual $29.0 million) and Diluted EPS of $0.31 (vs. actual $0.49), reflecting the dilutive impact of the transaction.
- Risks and Contingencies:
- Interest Rate Risk: The Company has significant variable rate debt ($2.8 billion consolidated + $201.6 million pro rata JV). A 1% increase in rates would decrease future earnings by approximately $30.2 million annually. The Company uses interest rate swaps and caps to hedge portions of this risk.
- Tenant Concentration: Federated Department Stores identified 82 duplicate locations for divestiture starting in 2006; 11 of these are in Macerich centers.
- Environmental: Ongoing remediation costs for asbestos at Fresno Fashion Fair (reserve of $610k remaining) and PCE contamination at a former joint venture property (reserve of $34k remaining).
- REIT Qualification: Failure to qualify as a REIT would result in corporate taxation and disqualification for four subsequent years.
Investor Verification Checklist
- Debt Service Coverage: Verify the Company's ability to service the increased debt load ($6.7 billion total) given the rise in interest expense and variable rate exposure.
- Wilmorite Integration: Assess the performance of the newly acquired Wilmorite portfolio against pro forma expectations and the timeline for disposing of non-core assets.
- Tenant Divestitures: Monitor the impact of Federated Department Stores' planned store closures on occupancy and rental income at the affected 10 centers.
- Capital Markets Access: Confirm the Company's ability to refinance maturing debt (e.g., $465M due in 2005) and access equity markets given the current leverage ratio of 56.3%.
- FFO vs. Net Income: Understand the divergence between GAAP Net Income (impacted by depreciation and interest) and FFO (the primary metric for REIT valuation).