The Macerich Company — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2017. Macerich owns, operates, develops and leases U.S. shopping centers. At quarter-end, it owned or held interests in 55 centers totaling approximately 54 million square feet. Unless stated otherwise, dollar amounts below are in millions.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $247.4 | $259.9 | $494.5 | $515.9 |
| Net income attributable to Macerich | $26.6 | $45.2 | $95.9 | $466.1 |
| Diluted earnings per share | $0.19 | $0.31 | $0.67 | $3.12 |
| Diluted FFO attributable to common stockholders and unit holders | $148.6 | $160.3 | $282.2 | $301.4 |
- Six-month cash from operations was $190.2, compared with $219.7 in 2016. Investing activities provided $190.4, while financing activities used $387.6. Cash and cash equivalents were $87.1 at June 30.
- Consolidated debt was approximately $5.0 billion, including $4.0 billion of mortgage notes and $1.0 billion of bank and other notes. Management reported total debt of $7.6 billion including its pro rata share of unconsolidated joint venture debt. The $1.5 billion revolving credit facility had $1.0 billion drawn; its borrowing rate was 2.68%.
- Total assets were $9.7 billion and total liabilities were $5.5 billion. Restricted cash was $50.3 million. The company said it was in compliance with applicable loan covenants.
- Tenant sales per square foot rose to $646 from $626 year over year; occupancy declined to 94.4% from 95.0%. Trailing-12-month releasing spreads were positive 18.5% ($58.08 per square foot on new and renewal leases versus $49.01 on expiring leases).
- The filing does not provide a single headline operating margin measure.
Material changes versus the prior comparable period
- Revenue declined 4.8% in Q2 and 4.2% for the first half. Management attributed much of the first-half decline to asset dispositions, centers moved to joint ventures and redevelopment properties; same-center rental revenue increased.
- Q2 net income attributable to the company fell to $26.6 million from $45.2 million. First-half net income fell sharply from $466.1 million, principally because 2016 included much larger gains on sales of property and joint venture interests. First-half 2017 included a $59.7 million gain on the Cascade Mall and Northgate Mall sales, partly offset by a $10.1 million write-down of non-real-estate assets.
- FFO declined 7.3% in Q2 and 6.4% in the first half. First-half operating cash flow also decreased year over year.
- Interest expense rose $1.1 million in Q2 and $2.7 million in the first half, primarily reflecting increased line-of-credit borrowing and same-center costs.
- During the first half, the company repurchased 2.9 million shares for $181.7 million at an average $62.96 per share. The related board program authorized repurchases of up to $500 million.
Outlook, commentary and risks
- Management expected releasing spreads to remain positive for the rest of 2017. It expected $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months.
- The Fashion Outlets of Philadelphia redevelopment was expected to finish in 2018, with total project cost estimated at $305–$365 million; Macerich’s share of estimated cost was $152.5–$182.5 million. The Kings Plaza former Sears redevelopment was also expected to finish in 2018, at an estimated total cost of $95–$100 million.
- Management anticipated meeting operating, debt-service and dividend needs over the next 12 months through operating cash flow, working capital and/or credit-line borrowings. It expected debt maturities over that period to be refinanced, restructured, extended or paid from the credit line or cash.
- Interest-rate exposure is material: management estimated a 1 percentage-point rate increase would reduce annual earnings and cash flows by approximately $13.1 million, based on $1.3 billion of floating-rate debt.
- Key risks cited include retail-sector and tenant weakness, competition from other retail formats and technology, financing availability and cost, interest-rate fluctuations, development and redevelopment risks, and broader economic conditions. Management reported no material change to the risk factors in its 2016 Form 10-K and no material legal proceedings.
- The company declared a $0.71 per-share dividend/distribution on August 4, payable entirely in cash on September 7, 2017. Its $500 million ATM offering program was due to expire in August 2017; no shares had been sold under it in the first half.
Important facts for investors to verify
- How much of the reported earnings and period-to-period change reflects property-sale gains, write-downs and other nonrecurring items, versus ongoing property operations and FFO.
- Whether occupancy, tenant sales and releasing spreads remain supportive as leases expire, and how tenant recoveries and same-center revenue develop.
- Debt maturities, credit-line availability, refinancing terms and sensitivity to interest-rate increases, including debt held at unconsolidated joint ventures.
- Funding requirements and execution risks for the stated $200–$300 million development and redevelopment program, and the sustainability of cash dividends alongside buybacks.
- The company’s ability to maintain liquidity if tenant defaults or weaker capital-market conditions reduce operating cash flow or limit financing access.