Business Context and Reporting Period
Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
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, 2005, the portfolio consisted of 97 centers (75 regional, 20 community, and 2 development properties) aggregating approximately 78.9 million square feet of gross leasable area (GLA). The company operates through The Macerich Partnership, L.P.
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Total Revenues | $767.4 million | $547.1 million |
| Net Income (GAAP) | $71.7 million | $91.6 million |
| Net Income Available to Common Stockholders | $52.6 million | $82.5 million |
| Funds From Operations (FFO) - Diluted | $336.8 million | $299.2 million |
| Cash Flow from Operating Activities | $235.3 million | $213.2 million |
| Total Debt (Consolidated + Pro Rata JV) | $6.9 billion | $4.2 billion (approx.) |
| Debt to Total Market Capitalization | 56.0% | N/A |
| Cash and Cash Equivalents | $155.1 million | $72.1 million |
| Dividends Declared per Common Share | $2.63 | $2.48 |
Material Changes vs. Prior Period
- Acquisitions: The most significant change was the April 25, 2005, acquisition of Wilmorite Properties, Inc. for approximately $2.33 billion. This added 11 regional malls and 2 community centers (13.4 million sq. ft.) to the portfolio. Other 2005 acquisitions included Ridgmar Mall (Fort Worth, TX) and joint venture interests in Metrocenter (Phoenix, AZ) and Kierland Commons (Phoenix, AZ).
- Revenue Growth: Total revenues increased 40.3% to $767.4 million, driven primarily by the Wilmorite acquisition ($92.9 million in rent revenue) and the 2004 acquisition centers.
- Net Income Decline: Net income available to common stockholders decreased 36.3% to $52.6 million. This decline was primarily due to increased interest expense ($249.9 million vs. $146.3 million) associated with the Wilmorite acquisition financing and higher depreciation/amortization ($206.1 million vs. $142.1 million).
- FFO Growth: Despite the GAAP net income decline, FFO-diluted increased 12.6% to $336.8 million, reflecting the accretive nature of the acquisitions when excluding non-cash depreciation.
- Debt Levels: Total outstanding loan indebtedness rose significantly to $6.9 billion (including $1.5 billion pro rata share of joint venture debt) to fund the Wilmorite acquisition and other growth initiatives.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to incur between $250 million and $350 million in 2006 for development, redevelopment, expansion, and renovations.
- Development Pipeline: Key projects include the Twenty Ninth Street project in Boulder, CO (opening Fall 2006), SanTan Village in Gilbert, AZ (opening Fall 2007), and expansions at Washington Square (Portland, OR) and Fresno Fashion Fair (Fresno, CA).
- Recent Financing: On January 19, 2006, the company issued 10.95 million common shares for net proceeds of $747.0 million to pay off a $619.0 million acquisition loan and reduce its line of credit.
- Key Risks:
- Tenant Concentration: Limited Brands (Victoria's Secret, Bath & Body Works) accounted for 4.1% of minimum rents. Federated Department Stores (Macy's, etc.) identified 11 duplicate locations in Macerich centers for divestiture in 2006.
- Environmental Liabilities: Potential costs associated with asbestos, underground storage tanks, and chlorinated hydrocarbons at various centers.
- Interest Rate Risk: A 1% increase in interest rates would decrease future earnings and cash flows by approximately $24.5 million per year based on $2.5 billion of floating rate debt.
- REIT Status: Failure to qualify as a REIT would subject the company to corporate income taxes and reduce funds available for distribution.
Investor Verification Checklist
- Wilmorite Integration: Verify the operational performance and rent growth of the newly acquired Wilmorite portfolio (13.4 million sq. ft.) in the Northeast and Midwest.
- Debt Maturity Wall: Review the schedule of debt maturities, specifically the $1.5 billion in joint venture debt maturing in May 2006 (SDG Macerich Properties) and the refinancing plans for these obligations.
- Tenant Divestitures: Monitor the impact of Federated Department Stores' planned divestiture of 11 duplicate locations and Musicland Holding Corp.'s closure of 26 stores on occupancy and rental income.
- Capital Allocation: Assess the use of the $747 million raised in the January 2006 equity offering and its impact on leverage ratios and future dividend sustainability.
- Development Progress: Track the lease-up rates and opening timelines for major redevelopment projects like Twenty Ninth Street and SanTan Village.