The Macerich Company — 2017 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, comparing results primarily with 2016. Macerich is a self-managed REIT that owns, develops, redevelops, leases and manages U.S. regional and community shopping centers. At year-end it had interests in 55 centers totaling approximately 53 million square feet of gross leasable area (GLA); reported portfolio occupancy was 95.0%.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $993.7 million | $1,041.3 million |
| Net income attributable to Macerich | $146.1 million | $517.0 million |
| Diluted EPS | $1.02 | $3.52 |
| Diluted FFO | $582.9 million | $642.3 million |
| Cash from operating activities | $386.4 million | $429.5 million |
| Cash and cash equivalents at year-end | $91.0 million | $94.0 million |
| Consolidated mortgage and notes payable | $5.17 billion | $4.97 billion |
At December 31, 2017, total loan indebtedness including Macerich’s pro rata share of unconsolidated joint venture debt was approximately $7.7 billion. This includes $5.2 billion of consolidated debt, less $319.6 million attributable to noncontrolling interests, plus approximately $2.8 billion of pro rata joint venture mortgage debt and $60.0 million of pro rata joint venture term debt. The company had a $1.5 billion revolving credit facility, with $935 million drawn, and reported compliance with applicable loan covenants. Cash dividends and distributions were $443.8 million for the year; declared distributions were $2.87 per common share. The filing does not provide a single headline operating-margin measure.
Key portfolio indicators: tenant sales per square foot rose to $660 from $630; occupancy declined to 95.0% from 95.4%. Releasing spreads for small-shop leases were positive 15.2%: average initial rent on new and renewal leases was $59.20 per square foot versus $51.39 on expiring leases. The company reported an average tenant allowance of $23.24 per square foot.
Material changes versus the prior comparable period
- Revenue fell 4.6%, reflecting lower rents and recoveries associated with property dispositions, redevelopment activity and changes in joint venture accounting, partly offset by higher same-center rental revenue.
- Net income attributable to the company fell to $146.1 million from $517.0 million. The principal driver was the $372.9 million year-over-year decline in gains on asset sales and write-downs; 2016 included large gains from joint venture interest sales.
- Diluted FFO declined 9.3%. Operating cash flow decreased by $43.1 million.
- Interest expense increased $8.1 million to $171.8 million, primarily due to line-of-credit borrowings and same-center costs.
- The company sold Cascade Mall and Northgate Mall for $170.0 million combined, sold 500 North Michigan Avenue for $86.4 million, and completed other office and land sales through joint ventures. It repurchased 3.63 million shares for $221.4 million at an average $61.01 per share under its $500 million buyback authorization.
- Portfolio sales per square foot improved, but occupancy eased. The reported portfolio count decreased to 55 centers from 57.
Outlook, management commentary, risks and unusual items
- Management expected positive releasing spreads to continue in 2018. It anticipated $200–$300 million of development, redevelopment, expansion and renovation spending over the next 12 months; expected tenant allowances and leasing costs to be comparable to or below 2017.
- Fashion District Philadelphia redevelopment was expected to complete in Q4 2018, at an estimated total project cost of $305–$365 million; Macerich’s estimated share was $152.5–$182.5 million. The Kings Plaza former Sears redevelopment was expected to complete in Q2 2018, with total costs estimated at $95–$100 million.
- Management said operating expenses were expected to fall by approximately $10 million in 2018 following a workforce reduction of about 10% in February 2018. One-time charges of approximately $12 million were expected in Q1 2018.
- Cash needs for operations, debt service and dividends over the next 12 months were expected to be met through operating cash flow, working capital and/or the credit line. Management expected maturities during that period to be refinanced, restructured, extended or paid from the credit line or cash.
- Floating-rate debt creates sensitivity to rates: management estimated a 1 percentage-point increase would reduce annual earnings and cash flows by about $16.5 million. The company identified substantial debt, refinancing and capital-market access, tenant and anchor distress, e-commerce competition, lease renewal and occupancy, redevelopment execution, geographic concentration, environmental exposures and natural disasters among material risks.
- Unusual financial items included a $14.2 million fourth-quarter tax expense from remeasuring deferred tax assets after the Tax Cuts and Jobs Act, $22.1 million of real-estate impairment losses, and a $10.1 million write-down of non-real-estate assets. The 2017 net gain on sale or write-down of assets was $42.4 million.
- Management disclosed a provisional accounting impact from adopting the new revenue standard in 2018: an estimated $393.7 million financing-arrangement liability and $424.9 million increase in accumulated deficit relating to a co-venture arrangement. These estimates were subject to evaluation and change.
- The company identified eight vacant anchor locations in its portfolio and was seeking replacement tenants and/or considering redevelopment. Macy’s announced plans to close its Westside Pavilion location in March 2018.
Important facts for investors to verify
- Reconcile the $7.7 billion pro rata debt figure to consolidated debt and joint venture obligations, and review maturities, variable-rate exposure and credit-line availability.
- Assess the sustainability of FFO and operating cash flow relative to dividends, redevelopment commitments and share repurchases.
- Track occupancy, tenant sales, lease renewals and spreads, anchor vacancies and any retailer closures or bankruptcies.
- Monitor actual costs, completion dates, leasing progress and financing for Fashion District Philadelphia and Kings Plaza.
- Confirm the final accounting treatment and amounts for the co-venture arrangement and the effect of the tax-law change; assess future impairment and environmental exposures.