The Macerich Company — Q1 2019 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Macerich is a REIT focused on owning, leasing, managing, and redeveloping U.S. shopping centers. At quarter-end, its portfolio included 52 centers totaling approximately 51 million square feet; it owned 93% of its Operating Partnership.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $226.5 million | $236.7 million | Down 4.3% |
| Net income (loss) | $8.8 million | $(34.4) million | Company-attributable: $7.8 million versus $(33.6) million |
| Diluted EPS | $0.05 | $(0.24) | Improved from a loss |
| FFO, diluted, attributable to common stockholders and unit holders | $121.9 million | $123.5 million | Down 1.3%; non-GAAP measure |
| Cash from operating activities | $98.8 million | $95.0 million | Up $3.9 million |
| Cash from investing activities | $(1.2) million | $311.4 million | Prior period included much larger JV distributions |
| Cash used in financing activities | $(92.8) million | $(381.6) million | Lower use largely reflected higher debt proceeds |
At March 31, cash and cash equivalents were $111.0 million, restricted cash was $43.1 million, and total assets were $9.00 billion. Balance-sheet mortgage notes payable were $4.16 billion and bank and other notes payable were $848.9 million. Management reported approximately $5.0 billion of consolidated debt and $7.9 billion of total debt including Macerich’s pro rata share of unconsolidated joint venture debt. The $1.5 billion revolving credit facility had $850 million drawn and $649.7 million available. The company was in compliance with applicable loan covenants.
Operating indicators improved year over year: tenant sales were $746 per square foot versus $686; occupancy was 94.7% versus 94.0%; and trailing-twelve-month releasing spreads were positive 11.0% ($58.85 on new and renewal leases versus $53.01 on expiring leases). No operating margin figure is separately highlighted in the filing.
Material changes and unusual items
- Leasing revenue fell $7.1 million (3.3%), reflecting lower Same Center revenue and changes in a joint venture transition property and a disposition. Management cited bad debt expense in lease revenue as a factor.
- Net income improved primarily because asset-sale and write-down losses fell to $6.3 million from $37.5 million. Q1 2019 included a $6.9 million development-cost write-down, partly offset by a $0.5 million land-sale gain; Q1 2018 included $36.3 million of SouthPark Mall impairment and $1.0 million of Promenade at Casa Grande impairment. Q1 2018 also included a $12.7 million workforce-reduction charge.
- Interest expense declined $14.3 million, substantially reflecting a favorable fair-value adjustment to the Chandler Freehold financing arrangement. Equity income from unconsolidated joint ventures declined $4.6 million, partly because Q1 2018 included a joint-venture asset-sale gain.
- ASC 842 lease accounting was adopted January 1, 2019. Adoption added right-of-use assets and lease liabilities and resulted in a $2.2 million cumulative adjustment for certain straight-line rent receivables. Prior-period revenue and expense classifications were re-presented for comparison, so presentation changes affect year-over-year line items.
Outlook, risks, and commitments
- Management characterized regional shopping-center fundamentals in its markets as reasonably strong early in 2019, but expected results to be pressured by rising interest rates, anchor closures, and tenant bankruptcies. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
- Management expected $250 million to $350 million of development, redevelopment, expansion, and renovation spending over the next 12 months. It also anticipated tenant allowances and deferred leasing costs to be comparable to or below 2018 levels.
- Major projects include Fashion District Philadelphia, expected to complete in September 2019, and the Scottsdale Fashion Square redevelopment, expected in 2019. One Westside’s office and dining/entertainment redevelopment is expected to complete in 2022; its creative office space is leased to Google. Los Angeles Premium Outlets’ first phase is expected in fall 2021.
- Macerich anticipated $250 million to $300 million of its pro rata redevelopment spending for Sears spaces, with openings expected between 2020 and 2024. Eight Sears stores remained open in the portfolio at March 31; none of the leases had been rejected, including at closed locations. Sears represented less than 1% of leasing revenue when it filed for bankruptcy, but closures could affect rent and co-tenancy arrangements.
- Management expected all debt maturities in the next 12 months to be refinanced, restructured, extended, or paid with the line of credit or cash. A 1% increase in interest rates was estimated to reduce annual earnings and cash flows by approximately $15.1 million, based on $1.5 billion of floating-rate debt.
- Cash dividends and distributions of $114.4 million were paid or declared for the quarter; $98.8 million was funded by operating cash flow and the balance by JV distributions. A $0.75-per-share/unit distribution was subsequently announced, payable entirely in cash on June 3, 2019.
- Contingencies include $65.8 million of letters of credit, which the company did not expect to result in a liability, and $13.1 million of outstanding construction obligations. One joint venture had $125 million of debt that could become recourse to the company if the venture cannot discharge it.
Important facts for investors to verify
- Whether leasing revenue, tenant credit losses, occupancy, sales, and releasing spreads remain resilient, particularly as anchor tenants close or restructure.
- Debt refinancing progress, floating-rate exposure, credit-facility availability, and the assumptions supporting management’s expectation to address upcoming maturities.
- Actual spending, funding sources, and completion timelines for redevelopment projects, including Sears spaces and joint-venture projects.
- Cash coverage of distributions and the potential liquidity effects of planned capital spending and JV funding needs.
- The implications of the $125 million potentially recourse JV debt and other commitments or contingencies.
- Comparability of reported results after adoption of ASC 842 and the significance of fair-value estimates affecting financing-arrangement income or expense.