Business context and reporting period
The Macerich Company is a U.S. REIT focused on owning, developing, redeveloping, managing and leasing shopping centers. At June 30, 2018, its portfolio included interests in 48 regional malls and six community/power centers, totaling approximately 52 million square feet. This unaudited Form 10-Q covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
Amounts below are in millions, except per-share data and where noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $234.5 | $247.4 | $471.3 | $494.5 |
| Net income (loss) attributable to the Company | $7.8 | $26.6 | $(25.8) | $95.9 |
| Diluted earnings (loss) per share | $0.05 | $0.19 | $(0.19) | $0.67 |
| FFO attributable to common stockholders and unit holders | $125.7 | $148.6 | $249.2 | $282.2 |
| FFO excluding shareholder activism costs | $145.1 | $148.6 | $268.6 | $282.2 |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $164.9 | $190.2 |
Revenue declined 5.2% in Q2 and 4.7% in the first half year over year. Q2 FFO declined 15.4%; first-half FFO declined 11.7%. The filing does not provide a consolidated operating-margin measure in the supplied text.
- At June 30, cash and cash equivalents were $92.5 million and restricted cash was $50.1 million. The $1.5 billion revolving credit facility had $735.0 million drawn and $704.4 million available.
- Consolidated mortgage notes payable were $4.24 billion and bank and other notes payable were $732.8 million. Management reported total outstanding loan indebtedness of $7.7 billion including the Company’s pro rata share of joint-venture debt. The majority of debt was fixed-rate; the pro rata joint-venture debt component is not consolidated GAAP debt.
- Six-month investing cash inflow was $266.1 million, substantially reflecting $448.1 million of distributions from unconsolidated joint ventures; financing cash outflow was $431.6 million. Cash, cash equivalents and restricted cash ended the period at $142.5 million.
- Total assets were $9.12 billion and total liabilities $5.80 billion at June 30, 2018. The $424.9 million adoption adjustment to accumulated deficit materially reduced reported equity.
Material changes versus the prior comparable period
- Q2 net income attributable to the Company fell to $7.8 million from $26.6 million, principally reflecting $19.4 million of shareholder-activism costs. Q2 also included $9.2 million of impairment losses on two freestanding stores and Southridge Center, partly offset by a $4.9 million net interest benefit related to the financing arrangement.
- First-half results shifted from $95.9 million of attributable net income to a $25.8 million loss. The change primarily reflected a $96.1 million year-over-year swing in asset sale/write-down results: 2018 included $47.0 million of net losses, while 2017 included $49.1 million of net gains.
- First-half rental revenue decreased 4.5%. Management cited lower lease-termination income, dispositions and redevelopment activity, as well as weaker same-center rental revenue. Same-center shopping-center operating expenses rose $2.0 million in the first half.
- Operating cash flow decreased $25.4 million year over year. Investing cash flow increased, largely due to greater distributions from joint ventures, including proceeds associated with new joint-venture property financings.
Outlook, management commentary, risks and unusual items
- Management expects liquidity needs for operating expenses, debt service and dividends over the next 12 months to be met through operating cash flow, joint-venture distributions, working capital and/or the revolving credit facility. It expects maturities over that period to be refinanced, restructured, extended and/or paid from the credit line or cash.
- The Company expects to spend $200 million to $300 million over the next 12 months on development, redevelopment, expansion and renovations. Fashion District Philadelphia redevelopment was expected to be completed in September 2019, with total project cost estimated at $400 million to $420 million. Scottsdale Fashion Square redevelopment was expected to be completed in 2019, at an estimated total cost of $140 million to $160 million.
- Management reported trailing-12-month tenant sales per square foot of $692, up from $646; occupancy of 94.3%, down from 94.4%; and positive releasing spreads of 12.3%. It expected releasing spreads to remain positive for the rest of 2018. These measures exclude certain redevelopment and disposition properties.
- A February 2018 workforce reduction of approximately 10% generated a one-time $12.7 million charge in Q1; management anticipated approximately $10 million of expense savings during 2018, excluding that charge. Q2 shareholder-activism costs were $19.4 million, primarily legal and advisory fees.
- Effective January 1, 2018, adoption of ASC 606 changed Chandler Freehold’s accounting from a co-venture arrangement to a financing arrangement. The transition added a $393.7 million liability and a $424.9 million cumulative-effect charge to accumulated deficit; this was an accounting adjustment, not a cash expense of the period.
- Impairment losses in the first half included $36.3 million on SouthPark Mall, $7.5 million on two freestanding stores, $1.7 million on Southridge Center and $1.0 million on Promenade at Casa Grande, attributed to shorter estimated holding periods. Westside Pavilion was classified as held for sale in connection with a planned contribution to a joint venture for $142.5 million; completion was expected within 12 months.
- Interest-rate risk is material: management estimated that a 1% increase in rates would reduce annual earnings and cash flows by approximately $16 million based on $1.6 billion of floating-rate debt. The Company cited possible tenant defaults, economic weakness, retail competition, financing availability and cost, and development/redevelopment risks. It was in compliance with applicable loan covenants and reported no material change to its previously disclosed risk factors.
- The filing reports no material legal proceedings. Subsequent events included a July 6 sale by a joint venture of The Market at Estrella Falls for $49.1 million and a July 26 declaration of a $0.74-per-share dividend, payable in cash on September 7, 2018.
Important facts for investors to verify
- Reconcile the year-over-year revenue and FFO declines with same-center performance, lease-termination income, redevelopment activity and dispositions.
- Review the valuation assumptions and ongoing earnings effects of the Chandler Freehold financing arrangement, including its fair-value sensitivity.
- Assess debt maturities, floating-rate exposure, refinancing assumptions and the distinction between consolidated debt and pro rata joint-venture debt.
- Verify funding needs and expected returns for the $200 million to $300 million redevelopment and capital program, including project cost and completion estimates.
- Monitor occupancy, tenant sales, releasing spreads, tenant credit quality and the expected Westside Pavilion transfer.
- Evaluate the repeatability of cash flows and joint-venture distributions, and the sustainability of dividends relative to operating cash generation.