The Macerich Company — Q3 2010 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Macerich is a REIT focused on owning, developing, managing and leasing shopping centers. At quarter-end, it had interests in 85 centers totaling approximately 73 million square feet of gross leasable area.
Financial performance
Amounts below are in millions of dollars, except per-share data and where stated otherwise.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $190.7 | $197.8 | $554.7 | $605.7 |
| Net income attributable to Macerich | $8.4 | $142.8 | $1.6 | $135.1 |
| FFO, diluted | $93.3 | $88.7 | $242.4 | $251.4 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $126.8 | $73.7 |
- Revenue and expenses: Nine-month minimum rents fell to $311.1 million from $361.4 million; tenant recoveries were $180.2 million versus $185.1 million. Nine-month total expenses were $605.9 million, down from $640.3 million, including interest expense of $159.3 million versus $207.6 million.
- Per-share results: Q3 basic and diluted EPS were $0.06 versus $1.75. Nine-month EPS was reported as $0.00 versus $1.71; the 2010 common-stockholder numerator was a loss of $0.4 million after earnings allocations.
- Cash flow and investment: Nine-month investing activities used $112.5 million, compared with $273.0 million provided in 2009. Financing activities provided $378.8 million, principally reflecting the 2010 stock offering. Capital expenditures at consolidated centers were $207.2 million; the company’s pro rata share for joint ventures was $35.8 million.
- Liquidity and debt: Cash and cash equivalents were $486.4 million at September 30, versus $93.3 million at year-end 2009. Consolidated mortgage debt was $3.278 billion and bank and other notes payable were $630.1 million. Management reported total outstanding indebtedness of $6.1 billion, including its $2.2 billion pro rata share of joint-venture debt. The $1.5 billion revolving line was fully available after being paid off with offering proceeds; it matured April 25, 2011. The company reported compliance with applicable loan covenants.
- Dividend: Cash dividends and distributions totaled $153.9 million in the first nine months. A $0.50-per-share distribution was announced after quarter-end, payable entirely in cash on December 8, 2010.
Material changes versus the prior period
- Revenue declined 3.6% in Q3 and 8.4% for the first nine months. Management attributed much of the declines to properties now accounted for as joint ventures and weaker same-center rental revenue; lower lease-termination income also weighed on rental revenue.
- Reported net income fell sharply against 2009, when results included large gains on asset sales, notably the sale of a 49% interest in Queens Center. Q3 2009 also included substantial asset-sale gains. These items make GAAP earnings comparisons unusually uneven.
- FFO increased 5.3% in Q3 but declined 3.6% for the nine-month period. Interest expense declined in both comparisons, partly reflecting debt repayments and changes in the debt and joint-venture portfolios.
- The April 2010 offering of 31 million shares generated approximately $1.221 billion net proceeds, substantially increasing cash and equity and funding repayment of the revolving line and reductions in property debt. Shares issued and outstanding rose from 96.7 million at year-end 2009 to 130.2 million at September 30, 2010.
Outlook, risks and unusual items
- Management expected to fund operating costs, debt service and distributions through operating cash flow, working capital and/or the credit line. It expected debt maturities over the next 12 months to be refinanced, extended or paid from available credit or cash.
- Management expected $150 million to $250 million of development, redevelopment, expansion and renovation spending over the next 12 months. Santa Monica Place opened in August 2010; Northgate redevelopment was also underway.
- Valley View Center was under court-appointed receivership from July 15, 2010. Management anticipated a disposition, potentially through foreclosure or deed in lieu, within 12 months. The mortgage is non-recourse; the company continued recording the property pending transfer of title and discharge of its loan obligation.
- Economic weakness, retailer performance, tenant defaults, rent relief requests, leasing conditions and access to capital could adversely affect cash flow and financing. Management estimated that a 1% increase in interest rates would reduce annual earnings and cash flow by approximately $10.8 million, based on $1.1 billion of floating-rate debt.
- Joint-venture debt of $17.1 million could become recourse to the company if the relevant ventures cannot meet obligations. The company also disclosed $26.6 million of letters of credit and $18.0 million of construction commitments, generally expected to be settled within 12 months.
- Management reported no material changes to previously disclosed risk factors and no material legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the timing, terms and funding plan for upcoming property-loan maturities and the April 2011 revolving-credit maturity.
- Track same-center leasing, occupancy, tenant defaults, rent concessions and lease-termination income to assess underlying property performance.
- Confirm the status and accounting impact of Valley View Center’s expected disposition and the treatment of its non-recourse mortgage.
- Assess planned redevelopment spending and the cash generation and leasing progress at Santa Monica Place and Northgate.
- Reconcile reported GAAP earnings with FFO and examine the effect of the share offering and increased share count on per-share results.
FFO is a supplemental, non-GAAP measure and is not equivalent to cash flow from operations or cash available for distributions.