The Macerich Company — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018, compared with the same periods in 2017. Macerich is a U.S. REIT focused on owning, developing, redeveloping, managing and leasing shopping centers. At quarter-end, it owned or held interests in 53 centers totaling approximately 52 million square feet.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $242.2 million | $242.5 million | $713.5 million | $736.9 million |
| Net income attributable to Macerich | $74.0 million | $17.5 million | $48.3 million | $113.4 million |
| Diluted EPS | $0.52 | $0.12 | $0.34 | $0.79 |
| FFO attributable to common stockholders and unit holders, diluted | $149.6 million | $145.0 million | $398.8 million | $427.3 million |
| Cash from operating activities | Not presented quarterly in the supplied filing text | $247.2 million | $299.9 million |
At September 30, 2018, cash and cash equivalents were $93.5 million, restricted cash was $50.6 million, total assets were $9.0 billion and total liabilities were $5.7 billion. Consolidated mortgage debt was $4.1 billion and bank and other notes payable were $788.1 million. The company reported total outstanding loan indebtedness of approximately $7.7 billion, including its pro rata share of unconsolidated joint-venture debt. Its $1.5 billion revolving facility had $790.0 million drawn and $709.7 million available. Macerich was in compliance with applicable loan covenants.
Changes versus prior comparable periods
- Q3 revenue was essentially flat year over year. Rental revenue rose 1.2%, supported by same-center growth, while tenant recoveries declined.
- Q3 net income rose substantially, primarily because of the $46.2 million gain on selling a 75% interest in Westside Pavilion and the prior-year Southridge Center impairment. Q3 diluted FFO increased 3.1% to $149.6 million.
- Nine-month revenue declined 3.2% and diluted FFO declined 6.7%. Net income attributable to Macerich fell to $48.3 million from $113.4 million, reflecting the prior-year gains on property sales, 2018 impairment charges and shareholder-activism costs.
- Operating cash flow fell by $52.7 million to $247.2 million. Investing cash flow was $256.2 million, including $541.3 million in distributions from unconsolidated joint ventures; financing cash flow used $502.3 million.
- Debt balances declined overall versus December 31, 2017, while interest expense rose: $136.5 million for the first nine months versus $126.9 million. Cash interest paid, net of capitalized amounts, was $142.7 million.
Outlook, management commentary, risks and unusual items
- Management expected operating expenses, excluding a one-time workforce-reduction charge, to be approximately $10 million lower in 2019. The workforce reduction affected about 10% of employees and resulted in a $12.7 million charge in Q1 2018.
- Management expected to spend $200 million to $300 million over the next 12 months on development, redevelopment, expansion and renovations. Fashion District Philadelphia redevelopment was estimated at $400 million to $420 million, with completion expected in September 2019. The first phase of the Los Angeles Premium Outlets joint venture was expected to be completed in fall 2021.
- Management anticipated meeting operating, debt-service and dividend needs for the next 12 months through operating cash flow, joint-venture distributions, working capital and/or the revolving line. It expected debt maturities in the coming 12 months to be refinanced, restructured, extended or repaid with credit-line borrowings or cash.
- Same-center indicators improved: tenant sales per square foot increased to $707 from $659; occupancy rose to 95.1% from 94.3%; and trailing-12-month releasing spreads were positive 10.8%. Management expected positive releasing spreads for the remainder of 2018.
- Sears filed for Chapter 11 after quarter-end. Macerich reported 21 Sears stores representing approximately 3.1 million square feet and about 1% of annualized base minimum rent. Store closures could reduce rent or trigger co-tenancy clauses, though recapturing and re-leasing space may create value.
- Nine-month property impairments totaled approximately $46.6 million, including $36.3 million at SouthPark Mall. The company also incurred $19.4 million in shareholder-activism costs during Q2.
- Adopting ASC 606 changed Chandler Freehold’s accounting from a co-venture to a financing arrangement. The transition resulted in a $424.9 million cumulative reduction to accumulated equity; this accounting adjustment was not a cash charge of the period. The company said forthcoming lease-accounting rules would add lessee obligations to its balance sheet and could require internal leasing costs to be expensed.
- Interest-rate exposure remains material: management estimated a 1% increase in rates would reduce annual earnings and cash flow by about $16.4 million, based on $1.6 billion of floating-rate debt.
- After quarter-end, Macerich declared a $0.75 per-share dividend/distribution, payable in cash on December 3, 2018. The filing reported no material changes to previously disclosed risk factors and no material legal proceedings.
Important facts for investors to verify
- Whether property sales, joint-venture distributions and refinancing activity are recurring sources of liquidity, and how much debt maturity risk falls within the next 12 months.
- Whether operating cash flow and recurring FFO can support the dividend and planned $200 million to $300 million of capital spending.
- The effects of Sears store closures, tenant credit events and potential co-tenancy provisions on rents, occupancy and leasing costs.
- The assumptions behind property impairment estimates, including reduced holding periods, and the economic implications of the Chandler Freehold financing-arrangement accounting.
- The sensitivity of interest costs and cash flow to higher rates, including floating-rate exposure in unconsolidated joint ventures.