Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q
Reporting Period: Quarter and six months ended June 30, 1998
Business Overview: The Company acquires, owns, redevelops, manages, and leases regional and community shopping centers. As of June 30, 1998, the portfolio included 41 regional and 5 community centers, significantly expanded by a February 1998 joint venture acquisition of 12 regional malls (SDG Macerich Properties, L.P.).
Key Financial Metrics (Six Months Ended June 30, 1998)
| Metric | 1998 (YTD) | 1997 (YTD) |
|---|---|---|
| Total Revenues | $122,582,000 | $102,653,000 |
| Net Income (Available to Common) | $14,190,000 | $12,924,000 |
| Earnings Per Share (Basic) | $0.49 | $0.50 |
| Funds from Operations (FFO) - Basic | $41,063,000 | $39,431,000 |
| Cash Flow from Operations | $51,227,000 | $37,878,000 |
| Total Debt (Mortgage + Bank + Debentures) | $1,188,791,000 | $1,122,959,000 |
| Cash and Cash Equivalents | $96,366,000 | $25,154,000 |
| Debt to Total Market Cap | 48.6% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19.4% ($19.9 million) driven primarily by the addition of 1997 acquisition centers and the 1998 joint venture portfolio. Minimum and percentage rents rose $14.2 million.
- Expense Increases: Interest expense increased $10.0 million due to new debt financing for acquisitions and the issuance of $161.4 million in convertible debentures in 1997. General and administrative expenses rose due to a new accounting standard (EITF 97-11) requiring the expensing of internal acquisition costs.
- Equity in Joint Ventures: Income from unconsolidated joint ventures surged from $1.1 million to $5.6 million, reflecting the impact of the 12-mall portfolio acquired in February 1998.
- Capital Structure: The Company issued $250 million in convertible preferred stock (Series A and Series B) and raised approximately $178.8 million in common stock proceeds during the period to fund acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes:
- EITF 97-11: Effective March 1998, internal acquisition costs are now expensed rather than capitalized, expected to reduce net income by approximately $0.06 per share in 1998.
- EITF 98-9: Effective April 1998, percentage rent recognition timing changed, deferring $1.8 million of revenue to the fourth quarter.
- Acquisition Strategy: Management intends to continue expanding through equity and debt financings. Subsequent to the period end, the Company acquired Westside Pavilion ($170.5 million) and the remaining interest in Village at Corte Madera.
- Risks and Contingencies:
- Tenant Bankruptcy: Potential closure of 11 Montgomery Ward anchor stores could adversely affect cash flow.
- Environmental: Ongoing remediation for perchloroethylene (PCE) at North Valley Plaza (sold in 1997) and asbestos at Fresno Fashion Fair. Reserves of $496,000 and $3.3 million are established, respectively.
- Year 2000 Compliance: Management believes software modifications are complete and no significant impact is expected.
- Liquidity: The Company maintains a $150 million unsecured credit facility ($93 million outstanding) and $96.4 million in cash. Management anticipates cash flow from operations will cover operating expenses, debt service, and dividends.
Investor Verification Checklist
- Acquisition Integration: Verify the operational performance and lease-up status of the 12 regional malls acquired via the SDG joint venture in February 1998.
- Debt Maturities: Review the schedule of mortgage maturities, noting the weighted average interest rate of 7.19% and the mix of fixed vs. floating rates.
- Preferred Stock Dilution: Assess the impact of the $250 million in convertible preferred stock (Series A and B) on future common equity dilution upon conversion.
- Environmental Liabilities: Monitor the status of remediation costs at North Valley Plaza and Fresno Fashion Fair to ensure reserves remain adequate.
- FFO vs. Net Income: Compare Funds from Operations ($41.1 million) against Net Income ($14.2 million) to understand the impact of depreciation and amortization on the Company's true operating cash generation.