Business Context and Reporting Period
Company: The Macerich Company (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2004
Business Overview: The Company acquires, owns, develops, redevelops, manages, and leases regional and community shopping centers. As of June 30, 2004, the portfolio included 60 regional centers, 18 community centers, and two development projects totaling approximately 61 million square feet of gross leasable area.
Key Financial Metrics
| Metric (Dollars in thousands) | Six Months Ended June 30, 2004 |
Six Months Ended June 30, 2003 |
|---|---|---|
| Total Revenues | $252,320 | $230,225 |
| Net Income | $39,654 | $58,390 |
| Net Income Available to Common Stockholders | $35,229 | $47,999 |
| Earnings Per Share (Basic) | $0.60 | $0.93 |
| Funds From Operations (FFO) - Diluted | $136,731 | $127,048 |
| Cash Flow from Operating Activities | $81,653 | $94,819 |
| Total Assets | $4,277,108 | $4,145,593 |
| Total Liabilities | $3,018,670 | $2,855,559 |
| Cash and Cash Equivalents | $93,382 | $47,160 |
| Total Debt (Consolidated + Pro Rata JV) | ~$4.0 Billion | N/A |
Note: Total debt includes consolidated debt of $2.87 billion and the Company's pro rata share of joint venture debt of $1.16 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.6% to $252.3 million, driven by acquisitions (FlatIron Crossing, Northridge Mall) and development completions (Queens Center, La Encantada). Minimum and percentage rents rose 10%.
- Net Income Decline: Net income available to common stockholders decreased 26.6% to $35.2 million. This decline was primarily due to:
- Increased depreciation and amortization ($69.6M vs $48.1M) resulting from SFAS 141 accounting changes and new acquisitions.
- A significant reduction in "Gain on sale of assets" ($0.8M in 2004 vs $11.7M in 2003), as the 2003 period included a large gain from the sale of the Village at Corte Madera.
- Higher interest expense ($68.1M vs $67.0M) due to new unsecured notes and acquisitions.
- FFO Growth: Despite lower net income, FFO-Diluted increased 7.6% to $136.7 million, reflecting the non-cash nature of depreciation and the impact of asset sales.
- Balance Sheet: Cash and cash equivalents more than doubled to $93.4 million. Total liabilities increased by $163 million, primarily due to new mortgage financings for acquisitions and development projects.
Outlook, Risks, and Unusual Items
- Acquisitions and Development: The Company continues an aggressive acquisition strategy. Notable 2004 acquisitions include Inland Center (San Bernardino) and NorthPark Center (Dallas). Major redevelopment projects include Queens Center (expected completion late 2004) and La Encantada.
- Liquidity and Financing: On July 30, 2004 (subsequent to period end), the Company expanded its revolving line of credit from $425 million to $1 billion and reduced the interest rate spread. The Company maintains a debt-to-total market capitalization ratio of approximately 52.4%.
- Market Risks: Primary exposure is interest rate risk. The Company utilizes interest rate swaps and caps to manage variable rate debt exposure. A 1% increase in interest rates is estimated to decrease future earnings by approximately $11.7 million annually.
- Contingencies:
- Environmental: Ongoing remediation for Perchloroethylene (PCE) at a former joint venture site (North Valley Plaza) and asbestos removal at Fresno Fashion Fair. Reserves of $172,000 and $707,000 respectively are maintained.
- Legal: No material legal proceedings expected to have an adverse effect.
- Unusual Items: A $0.4 million loss on early extinguishment of debt was recorded in 2004. The 2003 period included a $22.2 million gain on the sale of Bristol Center (discontinued operations).
Investor Verification Checklist
- FFO vs. Net Income: Verify the reconciliation of Net Income to Funds From Operations (FFO), noting the significant impact of depreciation adjustments and asset sale gains/losses.
- Debt Maturities: Review the schedule of long-term debt obligations, specifically the $1.2 billion in variable rate debt and the $250 million unsecured notes maturing in 2007.
- Acquisition Integration: Assess the performance of recent major acquisitions (NorthPark Center, Inland Center) and the capitalization of development costs for Queens Center.
- Interest Rate Sensitivity: Confirm the effectiveness of interest rate hedging strategies (swaps and caps) given the Company's exposure to LIBOR-based debt.
- Dividend Coverage: Verify that FFO and cash flow from operations remain sufficient to cover the declared dividend of $0.61 per share (declared July 30, 2004).