Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 1998
Business Overview: The Company acquires, owns, redevelops, manages, and leases regional and community shopping centers. Operations are conducted through The Macerich Partnership L.P. (Operating Partnership) and three Management Companies. As of September 30, 1998, the Company owned approximately 77% of the Operating Partnership.
Key Financial Metrics (Nine Months Ended Sept 30, 1998)
| Metric | 1998 (in thousands) | 1997 (in thousands) |
|---|---|---|
| Total Revenues | $197,661 | $159,685 |
| Net Income (GAAP) | $25,667 | $14,793 |
| Net Income Available to Common Stockholders | $18,769 | $14,793 |
| Funds from Operations (FFO) - Diluted | $80,653 | $59,923 |
| Cash Flow from Operating Activities | $82,826 | $55,359 |
| Cash Flow from Investing Activities | ($655,828) | ($162,777) |
| Cash Flow from Financing Activities | $564,750 | $104,595 |
| Total Debt (Mortgage + Bank Notes) | $1,242,585 | $961,559 |
| Cash and Cash Equivalents | $16,902 | $25,154 |
| Debt to Total Market Cap Ratio | 54% | N/A |
Note: Debt figures exclude pro-rata share of joint venture debt ($619,063). Total indebtedness including joint ventures was approximately $1.7 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23.8% to $197.7 million, driven primarily by the addition of 1997 and 1998 acquisition centers. Minimum and percentage rents rose $26.1 million.
- Acquisition Activity: Significant capital deployment occurred in 1998, including the acquisition of the ERE/Yarmouth portfolio (12 malls via joint venture), South Plains Mall, Westside Pavilion, Village at Corte Madera, and Carmel Plaza. Net cash used in investing activities surged to $655.8 million compared to $162.8 million in 1997.
- Financing: The Company raised substantial capital to fund acquisitions, issuing $100 million of Series A and $150 million of Series B convertible preferred stock, plus approximately $178.8 million in common stock. Bank notes payable increased from $55 million to $140 million.
- Profitability: Net income available to common stockholders increased 27% to $18.8 million. Earnings per share (diluted) rose from $0.57 to $0.62.
- Joint Venture Income: Equity in income of unconsolidated joint ventures turned from a $7.6 million loss in 1997 to an $8.4 million gain in 1998, largely due to the 1997 write-down of North Valley Plaza and new 1998 acquisitions.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates meeting short-term liquidity needs through operating cash flow and working capital. Future growth capital is expected to be obtained through a combination of equity offerings and debt financings. The Company maintains a shelf registration for up to $500 million of securities, with approximately $321.2 million remaining available as of the filing date.
Unusual Items and Accounting Changes
- Extraordinary Loss: A $2.4 million loss was recorded on the early extinguishment of debt.
- EITF 97-11: Adoption of new rules requiring expensing of internal acquisition costs (previously capitalized) is expected to reduce net income by approximately $0.05 per share in 1998.
- EITF 98-9: Changes in percentage rent recognition timing deferred approximately $3.4 million of revenue from Q2 and Q3 to Q4 1998.
Risks and Contingencies
- Environmental: Remediation costs are being incurred for Perchloroethylene (PCE) at the former North Valley Plaza (sold in 1997) and asbestos at Fresno Fashion Fair. Reserves and accrued liabilities exist for these matters.
- Tenant Bankruptcy: The bankruptcy of Montgomery Ward poses a risk to cash flow, as the Company has 11 stores in its portfolio.
- Year 2000 Compliance: The Company is in the remediation and testing phase for IT and non-IT systems. While no significant operational problems are currently anticipated, failure of third-party systems could impact rent collection.
Investor Verification Checklist
- Debt Structure: Verify the weighted average interest rate (7.01%) and the mix of fixed vs. floating rate debt, noting the $65.1 million in floating rate debt protected by interest rate caps.
- Preferred Stock Dilution: Confirm the terms of the $250 million in Series A and B convertible preferred stock issued in 1998 and their impact on future common share count upon conversion.
- Acquisition Integration: Assess the performance of the 1998 acquisitions (Westside Pavilion, ERE/Yarmouth portfolio) to ensure they meet projected cash flow targets.
- Environmental Liabilities: Monitor the status of remediation costs for North Valley Plaza and Fresno Fashion Fair to ensure reserves are adequate.
- Year 2000 Status: Track the completion of testing for critical property management software and embedded systems in shopping centers.