MAC

Business Context and Reporting Period

The Macerich Company, a self-administered and self-managed Real Estate Investment Trust (REIT), filed its Form 10-Q for the quarter ended March 31, 1999. The Company acquires, owns, redevelops, manages, and leases regional and community shopping centers across the United States. Operations are conducted through The Macerich Partnership, L.P. (Operating Partnership) and three management companies. As of March 31, 1999, the portfolio included 46 regional and 7 community shopping centers aggregating approximately 40 million square feet of gross leasable area.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 29% to $78.8 million, driven by a 28% increase in minimum and percentage rents ($54.5 million vs. $42.6 million) and a 31% increase in tenant recoveries ($23.1 million vs. $17.6 million). Growth was primarily attributable to acquisitions in 1998 (SDG Macerich Properties) and 1999 (Pacific Premier Retail Trust).
• Expense Increases: Total expenses rose to $66.7 million from $52.0 million. Interest expense increased significantly to $26.7 million (from $20.6 million) due to debt incurred for acquisitions. General and administrative expenses rose to $1.4 million due to a change in accounting treatment (EITF 97-11) requiring the expensing of internal acquisition costs.
• Joint Venture Income: Equity in income of unconsolidated joint ventures surged to $5.3 million from $1.4 million, reflecting the impact of the SDG Macerich and Pacific Premier acquisitions.
• Extraordinary Items: The Company recorded an extraordinary loss of $0.97 million on the early extinguishment of debt, compared to $0.09 million in the prior year.

Guidance, Outlook, and Risks

• Acquisitions and Redevelopment: The Company closed the first phase of a two-phase acquisition via Pacific Premier Retail Trust in February 1999, with the second phase expected in May 1999. A major $90 million redevelopment of Pacific View is underway, funded by a bank construction loan.
• Liquidity: The Company maintains a $150 million unsecured line of credit with $112.5 million outstanding as of March 31, 1999. Management anticipates cash from operations and existing reserves will fund operating expenses and dividends, while major capital expenditures will be funded through debt or equity.
• Year 2000 Compliance: The Company is actively managing Y2K risks for IT and non-IT systems (e.g., elevators, security). While most critical systems are compliant, approximately 20% of critical operating systems at centers lack vendor confirmation. Management believes Y2K will not pose significant operational problems but notes risks related to third-party failures.
• Tenant Risks: The Company faces potential adverse effects from the bankruptcy of anchor tenant Montgomery Ward, which plans to cease operations at three locations. The Company is negotiating replacements.
• Environmental Contingencies: Reserves exist for asbestos removal at Fresno Fashion Fair ($3.3 million) and environmental remediation at North Valley Plaza ($0.377 million remaining).

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and occupancy rates of the newly acquired SDG Macerich and Pacific Premier properties.
• Debt Refinancing: Monitor the refinancing of $60 million in variable-rate debt maturing in 1999 and the impact of interest rate fluctuations on the $322 million variable-rate debt portfolio.
• Montgomery Ward Impact: Track the progress of lease negotiations to replace Montgomery Ward at the three affected centers and assess potential vacancy risks.
• Year 2000 Status: Confirm the completion of remediation and testing for the remaining 20% of critical operating systems lacking vendor confirmation.
• FFO vs. Net Income: Review the reconciliation of Net Income to Funds From Operations (FFO), noting the significant impact of depreciation and amortization adjustments.