MAC

Business Context and Reporting Period

Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers across the United States. As of June 30, 2007, the portfolio included 91 centers (73 regional, 18 community) aggregating approximately 77 million square feet of gross leasable area.

Key Financial Metrics

Note: Debt to Total Market Capitalization ratio was approximately 47.4% as of June 30, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.6% year-over-year for the six-month period, driven by acquisitions (Valley River Center, Deptford Mall) and redevelopment projects. Rental revenue increased $12.9 million, while tenant recoveries increased $12.8 million.
• Net Income Decline: Net income available to common stockholders decreased 51.7% to $16.0 million. This decline is primarily attributable to the absence of significant gains from discontinued operations in 2007 compared to 2006 (which included a $25.8 million gain on the sale of Scottsdale/101 and other property sales).
• Interest Expense: Interest expense decreased $7.1 million year-over-year due to lower rates on the line of credit and repayment of term loans, partially offset by interest on $950 million of new convertible senior notes issued in March 2007.
• Discontinued Operations: Income from discontinued operations dropped significantly from $33.6 million in 2006 to a loss of $1.6 million in 2007, reflecting the one-time nature of the 2006 asset sales.
• Liquidity: Cash and cash equivalents decreased by $220.4 million, largely due to capital expenditures, debt repayments, and stock repurchases.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to incur between $400 million and $600 million in the next twelve months for development, redevelopment, expansion, and renovations.
• Dividends: On July 27, 2007, the Company declared a dividend of $0.71 per share for common stockholders, payable September 7, 2007.
• Debt Management: The Company issued $950 million in convertible senior notes (3.25% interest, maturing 2012) and purchased capped calls to mitigate dilution. The Company maintains a $1.5 billion revolving line of credit.
• Redevelopment Pipeline: Significant projects include the expansion of Tysons Corner Center (3.5 million sq. ft. mixed-use), Santa Monica Place, and the opening of SanTan Village and The Promenade at Casa Grande in late 2007.
• Risks: Primary market risk is interest rate exposure. A 1% increase in interest rates would decrease future earnings by approximately $4.9 million annually. The Company relies on maintaining REIT status to avoid corporate-level federal income tax.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which 2006 earnings were inflated by one-time asset sales ($132.7 million gain on three mall sales) versus 2007's recurring operational performance.
• Convertible Notes Dilution: Assess the potential dilution from the $950 million convertible senior notes issued in March 2007, noting the capped call mitigation strategy.
• Capital Expenditure Funding: Confirm the Company's ability to fund the projected $400-$600 million in development/redevelopment costs given the significant drawdown in cash reserves.
• Joint Venture Recourse: Review the $8.6 million in joint venture debt that could become recourse to the Company if specific ventures fail to meet obligations.
• FFO vs. Net Income: Focus on Funds From Operations (FFO) as the primary performance metric, as it excludes non-cash depreciation and one-time gains/losses, showing a 1.0% increase year-over-year.