Business Context and Reporting Period
The Macerich Company, a Maryland corporation and Real Estate Investment Trust (REIT), filed its Form 10-Q for the quarter ended March 31, 1997. The Company focuses on the acquisition, ownership, redevelopment, management, and leasing of regional and community shopping centers. As of the reporting date, the Company owned or held interests in 24 regional shopping centers and three community shopping centers. The Company operates through The Macerich Partnership L.P. (the Operating Partnership), in which it holds approximately a 68% interest.
Key Financial Metrics
| Metric | Q1 1997 | Q1 1996 |
|---|---|---|
| Total Revenues | $50,302,000 | $35,293,000 |
| Net Income | $6,751,000 | $4,401,000 |
| Net Income Per Share | $0.26 | $0.22 |
| Funds From Operations (FFO) | $19,471,000 | $14,564,000 |
| Cash Flow from Operations | $23,731,000 | $15,915,000 |
| Total Debt (Mortgage + Bank Notes) | $881,606,000 | $789,239,000 |
| Cash and Cash Equivalents | $9,628,000 | $15,643,000 |
| Dividend Paid Per Share | $0.44 | $0.42 |
Note: Debt figures include $812.6 million in mortgage notes and $69 million in bank notes payable. Total debt including pro-rata joint venture debt was reported as $910.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $15.0 million (42.5%) year-over-year. This was driven primarily by the inclusion of "1996 Acquisition Centers" (properties acquired in late 1996) which were not fully consolidated in the prior year's first quarter.
- Expense Increases: Operating costs rose by $11.3 million. Interest expense increased by $4.9 million due to debt associated with new acquisitions. Shopping center expenses increased by $4.7 million.
- Net Income: Net income increased by $2.35 million (53.4%) to $6.75 million, reflecting the revenue growth from new properties.
- Acquisitions: The Company acquired South Towne Center in Sandy, Utah, in March 1997 for approximately $98 million (including $46.2 million assumed debt). This acquisition contributed to the balance sheet growth but had minimal impact on Q1 operating results due to the late closing date.
- Joint Venture Income: Equity in income of unconsolidated joint ventures decreased to $368,000 from $1.18 million, attributed to non-recurring fee income in 1996 and reduced third-party management fees.
Outlook, Risks, and Contingencies
- Liquidity and Capital: The Company maintains a $50 million unsecured line of credit with $12 million outstanding. Management intends to fund growth through a combination of equity offerings (a shelf registration for $500 million is filed but not yet effective) and debt financing. The debt-to-total market capitalization ratio stood at 46%.
- Interest Rate Risk: The Company had $287.3 million in floating-rate indebtedness. Interest rate protection agreements (caps) were in place for $65.1 million of this debt. In April 1997, $51 million of floating debt was refinanced at a fixed rate.
- Environmental Contingencies:
- North Valley Plaza: Perchloroethylene (PCE) and Dichlorethylene detected in soil/groundwater. A $680,000 reserve was established; remediation scheduled for H1 1997.
- Queens Center: Toluene detected in groundwater tanks. A $150,000 reserve was set aside for testing/fees.
- Villa Marina Marketplace: Dry cleaning chemicals detected. A $150,000 reserve established; previous owner is conducting assessment.
- Huntington Center: Dry cleaning chemicals detected. A $500,000 reserve established.
- Fresno Fashion Fair: Asbestos detected in fireproofing. A $3.3 million reserve was included in the acquisition accounting for future abatement.
- Operational Risks: Management noted risks related to anchor store bankruptcies (e.g., Federated Department Stores closures) and the competitive retail environment. Future acquisitions are uncertain due to capital availability and market conditions.
Investor Verification Checklist
- Acquisition Impact: Verify the pro forma impact of the South Towne Center acquisition and the full integration of 1996 acquisitions on future quarters.
- Debt Maturities: Review the schedule of mortgage maturities, noting several loans maturing in 1998, 1999, and 2001, and the status of refinancing efforts.
- Environmental Reserves: Monitor the sufficiency of the $4.785 million total environmental reserves against actual remediation costs, particularly for the North Valley Plaza and Fresno Fashion Fair sites.
- Interest Rate Exposure: Assess the impact of remaining floating-rate debt ($236.3 million after April refinancing) on future interest expense if rates rise.
- FFO vs. Net Income: Confirm the trend in Funds From Operations ($19.5 million) as the primary performance metric for REITs, noting it significantly exceeds net income due to depreciation add-backs.