Business context and reporting period
The Macerich Company is a REIT that owns, develops, redevelops, manages and leases U.S. shopping centers. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the same period in 2014. At quarter-end, the portfolio included interests in 59 centers totaling approximately 55 million square feet. Acquisitions and changes in ownership materially affect period-to-period comparability.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $318.3 million | $264.5 million |
| Net income | $26.7 million | $19.6 million |
| Net income attributable to Macerich | $24.6 million | $17.8 million |
| Diluted earnings per share | $0.15 | $0.13 |
| FFO, diluted | $133.5 million | $121.6 million |
| Cash from operating activities | $162.1 million | $97.9 million |
| Cash used in investing activities | $150.0 million | $22.3 million |
Amounts are rounded; filing financial statements report dollars in thousands unless otherwise indicated. The filing does not present a single consolidated operating-margin measure.
- Revenue and operating trends: Revenue rose 20.4%, chiefly because of acquired properties. Minimum rents increased to $190.8 million from $151.6 million, and tenant recoveries to $105.7 million from $91.5 million. Management reported trailing-twelve-month tenant sales per square foot of $607 versus $565, occupancy of 95.4% versus 95.1%, and positive releasing spreads of 20.5%.
- Earnings quality and costs: Net income included a $22.1 million noncash gain on remeasurement of the existing Inland Center interest. It also included $13.6 million of costs related to the unsolicited takeover offer. Depreciation and amortization increased to $120.6 million from $88.7 million; interest expense rose to $53.3 million from $46.3 million. FFO, a non-GAAP measure, increased 9.9%; excluding the debt-extinguishment gain and takeover costs, diluted FFO was $144.9 million versus $121.9 million. The company cautions that FFO is not cash flow and may not be comparable across REITs.
- Cash flow and investment: Operating cash flow increased by $64.2 million year over year. Investing outflows included $90.2 million for development, redevelopment, expansion and renovation, and $26.3 million for property acquisitions. Cash and cash equivalents at quarter-end were $118.2 million.
- Debt and liquidity: Consolidated debt was approximately $6.5 billion; management reported total outstanding indebtedness of $7.2 billion including its pro rata share of unconsolidated joint-venture debt. The $1.5 billion revolving credit facility had $852.0 million drawn and matures in August 2018; the borrowing rate was LIBOR plus 1.50%. The company was in compliance with applicable loan covenants. Management expected to meet operating, debt-service and dividend needs over the next 12 months with operating cash flow, working capital and/or revolver borrowings.
Material changes, outlook and risks
- In February, Macerich acquired the remaining 50% of Inland Center for $51.3 million, including assumed debt, and recorded the $22.1 million remeasurement gain. The property contributed $1.7 million of incremental revenue and a $0.2 million net loss after acquisition.
- Management expected $300 million to $400 million of development, redevelopment, expansion and renovation spending over the next 12 months. It expected positive releasing spreads for the remainder of 2015. The company anticipated refinancing, restructuring, extending or repaying maturities over the next 12 months, except for Great Northern Mall.
- Great Northern Mall’s nonrecourse mortgage entered maturity default on January 1, 2015. The company was working with the servicer and expected the property to transfer to the servicer or a receiver.
- Interest-rate exposure is material: management estimated that a 1 percentage-point increase in rates would reduce annual earnings and cash flows by approximately $14 million, based on $1.4 billion of floating-rate debt.
- Simon Property Group made unsolicited acquisition proposals in March; Macerich’s board rejected them as substantially undervaluing the company. Macerich incurred $13.6 million in related costs. Separately, litigation concerning Land & Buildings’ director nominations was settled under a cooperation agreement announced May 4, 2015.
- Subsequent events: Macerich received a commitment for a $410 million Lakewood Center mortgage at a fixed 3.43% rate with an 11-year term; declared a $0.65-per-share distribution, payable in cash on June 5, 2015; and entered a 50/50 joint venture with Sears for nine locations, paying $150 million for its interest using revolver borrowings.
- Principal disclosed risks include retail and tenant demand, tenant creditworthiness and closures, competition and e-commerce, development and redevelopment execution, financing access and cost, interest-rate fluctuations, and economic and regulatory conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue and FFO growth reflects acquired properties versus same-center performance, and how sustainable the reported leasing and occupancy trends are.
- The recurring earnings impact of the Inland Center remeasurement gain, takeover-related costs, and acquisition-related depreciation and interest expense.
- Debt maturities and refinancing progress, including Great Northern Mall, and the company’s remaining revolver capacity and exposure to floating rates.
- Whether planned $300 million to $400 million of capital spending and the Sears joint venture can be funded without materially increasing leverage or requiring equity issuance.
- The final purchase accounting for Inland Center, execution and costs of major redevelopment projects, and any material changes in tenant credit, leasing demand or property performance.