Business context and reporting period
The Macerich Company is a REIT that owns, develops, leases and manages U.S. regional and community shopping centers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010. At quarter-end, its portfolio included 85 centers totaling approximately 73 million square feet, including properties held through joint ventures.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise. The filing does not provide a clear comparable operating-margin measure.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $181.9 | $202.2 | $364.0 | $407.9 |
| Net income (loss) attributable to Company | ($0.4) | ($21.7) | ($6.8) | ($7.7) |
| Diluted FFO, a non-GAAP measure | $77.5 | $59.9 | $149.1 | $162.8 |
| Cash from operations | Not presented quarterly | Not presented quarterly | $72.8 | $65.8 |
- Q2 revenue declined about 10%; rental revenue declined 14.3%. For the first half, revenue declined about 10.8% and rental revenue declined 15.5%.
- Q2 diluted FFO increased 29.3%, while first-half diluted FFO fell 8.4%. FFO is supplemental, not a substitute for GAAP earnings or operating cash flow.
- Cash and cash equivalents were $596.7 at June 30, versus $93.3 at year-end 2009. First-half financing cash flow was $454.4, driven principally by the equity offering.
- Balance-sheet mortgage debt was $3.27 billion and bank and other notes payable were $627.7 million. Management reported total debt of approximately $6.1 billion including its pro rata share of joint-venture debt.
- The company had $3.27 billion of total equity and $3.27 billion of total liabilities at June 30. Its $1.5 billion revolving credit facility was fully available after repayment of outstanding borrowings; the facility maturity had been extended to April 25, 2011.
Material changes versus the prior comparable period
- Lower rents and tenant recoveries primarily reflected the prior-year sales of interests in Queens Center and FlatIron Crossing and other joint-venture portfolio changes. Management cited modest increases in certain Same Center revenue components, offset by higher Same Center operating costs.
- Q2 interest expense fell $19.7 versus 2009, reflecting lower joint-venture, term-loan and revolver costs. First-half interest expense fell $34.2.
- The Q2 2009 loss included a $27.0 impairment charge on former Mervyn’s properties; this largely explains the improvement in discontinued operations and reported net loss in Q2 2010.
- On April 20 and 23, the company issued 31 million shares, raising approximately $1.22 billion net. Proceeds repaid the revolver and reduced property debt; the remaining proceeds were intended for debt repayment or general corporate purposes. Issued and outstanding shares increased to 130.2 million from 96.7 million at year-end.
Outlook, risks and unusual items
- Management expected all debt maturities over the following 12 months to be refinanced, extended or paid from the credit line or cash on hand. It expected to spend $150–$200 million during the remainder of 2010 on development, redevelopment, expansion and renovations. No specific earnings or revenue guidance was provided.
- Santa Monica Place was scheduled to open in August 2010; management estimated another $43.3 million of project costs for the remainder of 2010. Northgate Mall redevelopment was expected to require another $3.4 million.
- A court-appointed receiver took control of Valley View Center on July 15, 2010. The company anticipated a disposition through foreclosure, deed in lieu or another process within 12 months. The mortgage is non-recourse to the company, but operations were to remain consolidated until title transfer and discharge of the obligation.
- Management cited ongoing risks from weak economic conditions, tenant defaults or requests for rent relief, refinancing and capital-market access, and variable interest rates. A 1 percentage-point rate increase was estimated to reduce annual earnings and cash flows by approximately $10.9 million on $1.1 billion of floating-rate debt.
- Potential exposures included $17.1 million of joint-venture debt that could become recourse, $27.0 million of performance letters of credit, and $26.9 million of construction commitments. Management stated it did not expect the letters of credit to result in a liability.
- A $0.50-per-share cash dividend was declared after quarter-end for payment in September 2010. The company reported compliance with debt covenants and effective disclosure controls; it reported no material change in risk factors or material legal proceedings.
Important facts for investors to verify
- Whether the assumed refinancing, extensions or repayment of near-term maturities occurred, and the subsequent availability and terms of the credit facility.
- How the share issuance and debt repayments affected per-share results, leverage and interest costs, including the effect of further share dilution.
- Whether revenue trends at comparable centers, tenant collections and leasing activity improved, and how much of reported FFO movement reflects portfolio changes.
- The final cost, opening and operating contribution of Santa Monica Place and other redevelopment projects.
- The outcome and accounting impact of the Valley View Center receivership, and any change in joint-venture recourse, construction commitments or other contingencies.
- Whether operating cash flow and joint-venture distributions are sufficient to support dividends, debt service and planned capital spending.