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 quarter and six months ended June 30, 2015. At quarter-end, its portfolio included 59 centers totaling approximately 55 million square feet. Comparisons are affected by acquisitions, dispositions and changes in joint-venture ownership.
Financial results and key metrics
Amounts are in millions of dollars except per-share data, percentages and where noted.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $322.8 | $254.3 | $641.1 | $518.8 |
| Net income attributable to Macerich | $14.4 | $16.1 | $39.0 | $33.9 |
| Diluted EPS | $0.09 | $0.11 | $0.24 | $0.24 |
| Diluted FFO | $151.0 | $129.8 | $284.5 | $251.4 |
| Cash from operations | Not presented for quarter | $272.9 | $190.6 |
- Quarterly revenue rose 26.9%, while net income attributable to the Company fell 10.5%. Six-month revenue rose 23.6% and attributable net income rose 15.0%. Diluted EPS was flat year over year for the six-month period.
- Reported attributable net margin, calculated as attributable net income divided by revenue, was approximately 4.5% for Q2 2015 versus 6.3% in Q2 2014, and 6.1% for the first half of 2015 versus 6.5% in the first half of 2014.
- Management reported diluted FFO growth of 16.3% for Q2 and 13.2% for the first half. FFO excluding debt-extinguishment effects and takeover-related costs was $164.0 million for Q2 and $308.9 million for the first half; FFO is a supplemental, non-GAAP measure, not cash flow.
- First-half investing cash outflow was $458.1 million, including $312.4 million of contributions to unconsolidated joint ventures and $132.2 million for property development, redevelopment and renovation. Financing provided $210.7 million; cash increased $25.4 million to $110.3 million.
- At June 30, mortgage debt was $5.84 billion and bank and other notes payable were $902.0 million. Management reported approximately $7.4 billion of total loan indebtedness, including its pro rata share of joint-venture debt. The $1.5 billion revolver had $767.0 million drawn; the stated borrowing rate was LIBOR plus 1.50%. Cash and cash equivalents were $110.3 million. The Company said it was in compliance with applicable loan covenants.
Material changes versus the prior comparable period
- Revenue growth was largely acquisition-driven: management attributed $49.9 million of the Q2 rental-revenue increase and $97.9 million of the first-half increase to acquired properties. Same-center rental revenue declined $0.5 million in Q2 and $2.6 million in the first half.
- First-half results included a $22.1 million gain on remeasurement when Macerich acquired the remaining interest in Inland Center. The company also incurred $25.0 million of first-half costs related to an unsolicited takeover proposal, including $11.4 million in Q2.
- Debt and interest expense increased amid acquisitions, refinancing and borrowing activity. First-half interest expense was $108.2 million versus $92.1 million in 2014.
- On April 30, Macerich invested $150 million for a 50% interest in a Sears joint venture owning nine freestanding stores. On June 30, it transferred Great Northern Mall to its nonrecourse mortgage lender by deed-in-lieu of foreclosure and recorded a $1.6 million debt-extinguishment loss.
- For the trailing 12 months, tenant sales per square foot rose to $623 from $567, occupancy increased to 95.5% from 95.4%, and releasing spreads were 17.5% ($55.68 per square foot on new and renewal leases versus $47.38 on expiring leases).
Outlook, commentary, risks and unusual items
- Management expected to meet operating, debt-service and dividend needs for the next 12 months through operating cash flow, working capital and/or revolver borrowings. It expected maturities over that period to be refinanced, restructured, extended or paid from the revolver or cash.
- The Company expected to spend $300 million to $400 million over the next 12 months on development, redevelopment, expansion and renovations. Management expected leasing spreads to remain positive for the rest of 2015; leases scheduled to expire represented 1.1 million square feet, or 11.3% of mall and freestanding-store GLA for spaces 10,000 square feet and under.
- The board rejected two unsolicited Simon Property Group proposals, concluding they substantially undervalued Macerich and were not in stockholders’ best interests. The filing reports $25.0 million of related first-half costs. A $500 million at-the-market equity program remained available, with no shares sold in the first half.
- Interest-rate risk is material: management estimated that a 1 percentage-point increase in rates would reduce annual earnings and cash flows by approximately $13.1 million, based on $1.3 billion of floating-rate debt. Capital-market access, refinancing, tenant defaults, retail competition, development execution and local economic conditions were identified as risks.
- Outstanding construction-agreement obligations were $75.7 million, which management expected to settle in the next 12 months. Potentially recourse joint-venture debt was $6.5 million, partly offset by a $3.3 million partner indemnity; letters of credit totaled $2.8 million, which the Company did not expect to result in a liability.
- On July 24, after quarter-end, the Company announced a $0.65-per-share common dividend/distribution, payable in cash on September 8, 2015 to holders of record August 20.
Most important facts for investors to verify
- How much of reported growth and FFO improvement reflects acquired properties and portfolio changes versus same-center operating performance.
- Whether leasing spreads, tenant sales and occupancy remain strong, and whether planned 2015 lease renewals and re-leasing achieve management’s expectations.
- Debt maturities, refinancing terms, revolver availability and sensitivity to higher interest rates, including debt held in joint ventures.
- Delivery, cost and funding progress for the $300–$400 million development and redevelopment plan and outstanding construction commitments.
- The full earnings and cash-flow impact of takeover-related costs, the Inland Center remeasurement gain, and other disposition or impairment items.