Business Context and Reporting Period
Company: The Macerich Company (Macerich)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Macerich is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, development, redevelopment, management, and leasing of regional and community shopping centers. As of December 31, 2003, the portfolio consisted of 78 centers (58 regional, 18 community, and 2 development properties) aggregating approximately 58 million square feet of gross leasable area (GLA). The company operates through The Macerich Partnership, L.P.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Total Revenues | $486.0 million | $372.5 million |
| Net Income | $128.0 million | $81.4 million |
| Net Income Available to Common Stockholders | $113.2 million | $61.0 million |
| Funds From Operations (FFO) - Diluted | $269.1 million | $194.6 million |
| Cash Flow from Operating Activities | $261.7 million | $206.2 million |
| Total Assets | $4.15 billion | $3.66 billion |
| Total Debt (Mortgage, Notes, Debentures) | $2.68 billion | $2.29 billion |
| Debt to Total Market Capitalization | 52.5% | Filing text does not provide a clear value for 2002 |
| Cash and Cash Equivalents | $47.2 million | $53.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 30.5% to $486.0 million, driven primarily by the 2002 acquisition of the Westcor portfolio and The Oaks, as well as 2003 acquisitions (FlatIron Crossing, Northridge Mall, Biltmore Fashion Park). Minimum and percentage rents rose 28.6%.
- Profitability: Net income available to common stockholders increased 85.6% to $113.2 million. This surge was aided by a $22.2 million gain on the sale of Bristol Center (discontinued operations) and improved operating income from the expanded portfolio.
- Acquisitions: Significant 2003 activity included purchasing the remaining 50% interest in FlatIron Crossing ($68.3M cash + debt assumption), acquiring Northridge Mall ($128.5M), and acquiring a 50% interest in Biltmore Fashion Park ($158.5M total price).
- Dispositions: The company sold its 67% interest in Paradise Village Gateway (loss of $0.2M), 49.9% of Village at Corte Madera (gain of $8.8M), and Shops at Gainey Village (gain of $2.8M).
- Debt Structure: Total debt increased to $2.68 billion. The company issued $250 million in unsecured notes in May 2003 and refinanced several properties to convert floating rates to fixed rates, including a $200 million loan on FlatIron Crossing.
Guidance, Outlook, and Risks
- Development Outlook: Management expects to incur between $125 million and $180 million in 2004 for development, redevelopment, and renovations (excluding Queens Center, La Encantada, and Scottsdale 101, which are separately financed). Queens Center expansion is expected to stabilize in 2005.
- Capital Strategy: The company intends to fund growth through debt/equity financings, joint ventures, and sales of non-core assets. A $425 million revolving line of credit remains available, with $319 million outstanding at year-end.
- Key Risks:
- Interest Rate Risk: A 1% increase in interest rates would decrease future earnings and cash flows by approximately $10.1 million annually based on variable rate debt exposure.
- Tenant Concentration: While no single tenant exceeds 4.3% of minimum rents, the bankruptcy or closure of major anchors (e.g., Limited Brands, The Gap) could adversely affect traffic and income.
- Environmental Liabilities: Potential costs related to asbestos, underground storage tanks, and chlorinated hydrocarbons (PCE) at various centers. Specific reserves exist for Fresno Fashion Fair ($0.7M) and North Valley Plaza ($0.2M).
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income taxes and disqualify it for four subsequent years.
Investor Verification Checklist
- Debt Maturity Wall: Verify the schedule of debt maturities, noting significant fixed-rate debt maturing in 2006 (SDG Macerich Properties) and 2005 (Lakewood Mall).
- Variable Rate Exposure: Confirm the effectiveness of interest rate swaps and caps hedging the $1.0 billion+ of variable rate debt.
- Joint Venture Recourse: Review the $37.4 million in potential recourse debt obligations from joint ventures (Boulevard Shops, Scottsdale 101) that could exceed pro-rata shares.
- Environmental Reserves: Assess the adequacy of reserves for asbestos removal at Fresno Fashion Fair and PCE remediation at North Valley Plaza.
- FFO Reconciliation: Review the reconciliation of Net Income to FFO, specifically the adjustments for SFAS 141 purchase price allocations and gains/losses on asset sales.