MAC

Business Context and Reporting Period

Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers across the United States. As of September 30, 2007, the portfolio included 91 centers (73 regional, 18 community) aggregating approximately 78 million square feet of gross leasable area.

Key Financial Metrics

Note: Total debt includes $1.8 billion of the Company's pro rata share of joint venture debt. Cash equivalents decreased significantly from the beginning of the period ($269.4 million) to the end ($42.9 million).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10.8% for the nine months ended September 30, 2007, compared to the prior year. Rental revenue grew 7.6%, driven by acquisitions (Valley River Center, Deptford Mall) and redevelopment projects.
• Net Income Decline: Net income available to common stockholders dropped 58.5% year-over-year for the nine-month period. This decline is primarily attributed to the absence of significant gains from discontinued operations in 2007, which totaled $81.4 million in 2006 (sales of Citadel Mall, Crossroads Mall, Northwest Arkansas Mall, etc.).
• Interest Expense: Interest expense decreased $14.5 million for the nine-month period due to lower line of credit borrowings and term loan repayments, partially offset by interest on $950 million of convertible senior notes issued in March 2007.
• FFO Increase: Despite the drop in GAAP net income, FFO-diluted increased 13.8% to $298.2 million, reflecting strong core operating performance excluding non-recurring asset sales.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to incur between $400 million and $600 million in the next twelve months for development, redevelopment, expansion, and renovations.
• Major Projects: Significant redevelopment activity includes the expansion of Tysons Corner Center (3.5 million sq. ft. mixed-use), Santa Monica Place, Scottsdale Fashion Square, and the opening of SanTan Village and The Promenade at Casa Grande.
• Debt Management: The Company maintains a debt-to-total market capitalization ratio of approximately 46.4%. It utilizes interest rate swaps and caps to manage floating rate exposure, with a 1% increase in rates estimated to decrease future earnings by approximately $5.0 million annually.
• Risks: Primary risks include interest rate fluctuations, the ability to access capital markets, and general economic conditions affecting retail sales and tenant occupancy. The Company relies on REIT status to avoid corporate-level federal income tax.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the 2006 net income was inflated by one-time asset sale gains ($81.4 million) versus recurring operational income.
• Convertible Senior Notes: Review the terms of the $950 million 3.25% convertible notes issued in March 2007, specifically the conversion price ($111.48) and the impact of the purchased "capped calls" on potential dilution.
• Liquidity Position: Assess the significant drawdown in cash and cash equivalents (from $269.4 million to $42.9 million) and the reliance on the $1.5 billion revolving line of credit (with $405 million outstanding).
• Joint Venture Exposure: Confirm the Company's pro rata share of joint venture debt ($1.8 billion) and the specific recourse debt obligations ($8.6 million) that could become liabilities if joint ventures default.
• Capital Expenditure Funding: Evaluate the plan to fund the projected $400-$600 million in capital expenditures, given the reduced cash reserves and high debt load.