THE MACERICH COMPANY IMPORTANT INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ofThe Macerich Company (the "Company") contains or incorporates statements that constitute forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as "may," "will," "could," "should," "expects," "anticipates," "intends," "projects," "predicts," "plans," "believes," "seeks," "estimates," "scheduled" and variations of these words and similar expressions. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Forward-looking statements appear in a number of places in this Form 10-Q and include statements regarding, among other matters:
•expectations regarding the Company's growth;
•the Company's beliefs regarding its acquisition, redevelopment, development, leasing and operational activities and opportunities, including the performance and financial stability of its retailers;
•the Company's acquisition, disposition and other strategies;
•regulatory matters pertaining to compliance with governmental regulations;
•the Company's capital expenditure plans and expectations for obtaining capital for expenditures;
•the Company's expectations regarding income tax benefits;
•the Company's expectations regarding its financial condition or results of operations; and
•the Company's expectations for refinancing its indebtedness, entering into and servicing debt obligations and entering into joint venture arrangements.
Stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and other
factors that may cause actual results, performance or achievements of the
Company or the industry to differ materially from the Company's future results,
performance or achievements, or those of the industry, expressed or implied in
such forward-looking statements. Such factors include, among others, general
industry, as well as global, national, regional and local economic and business
conditions, which will, among other things, affect demand for retail space or
retail goods, availability and creditworthiness of current and prospective
tenants, anchor or tenant bankruptcies, closures, mergers or consolidations,
lease rates, terms and payments, rising interest rates and inflation and its
impact on the financial condition and results of operation of the Company and
its tenants, availability, terms and cost of financing and operating expenses;
adverse changes in the real estate markets including, among other things,
competition from other companies, retail formats and technology, risks of real
estate development and redevelopment (including rising inflation, supply chain
disruptions and construction delays), acquisitions and dispositions; the
continuing adverse impact of the novel coronavirus ("COVID-19") on the U.S. ,
regional and global economies and the financial condition and results of
operations of the Company and its tenants; the liquidity of real estate
investments, governmental actions and initiatives (including legislative and
regulatory changes); environmental and safety requirements; and terrorist
activities or other acts of violence which could adversely affect all of the
above factors. You are urged to carefully review the disclosures we make
concerning these risks and other factors that may affect our business and
operating results, including those made in "Item 1A. Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2021 , as well as our other
reports filed with the Securities and Exchange Commission (the "SEC"), which
disclosures are incorporated herein by reference. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this document. The Company does not intend, and undertakes no
obligation, to update any forward-looking information to reflect events or
circumstances after the date of this document or to reflect the occurrence of
unanticipated events, unless required by law to do so.
Management's Overview and Summary
The Company is involved in the acquisition, ownership, development, redevelopment, management and leasing of regional and community/power shopping centers located throughoutthe United States . The Company is the sole general partner of, and owns a majority of the ownership interests in,The Macerich Partnership, L.P. (the "Operating Partnership"). As ofJune 30, 2022 , theOperating Partnership owned or had an ownership interest in 44 regional town centers, five community/power shopping centers and two redevelopment properties. These 51 regional town centers, community/power shopping centers and redevelopment properties (which include any adjoining mixed-use improvements) consist of approximately 48 million square feet of gross leasable area ("GLA") and are referred to herein as the "Centers". The Centers consist of consolidated Centers ("Consolidated Centers") and unconsolidated joint venture Centers ("Unconsolidated Joint Venture Centers"), unless the context otherwise requires. The property management, leasing and redevelopment of the Company's portfolio is provided by the Company's seven management companies (collectively referred to herein as the "Management Companies"). The Company 27
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is a self-administered and self-managed real estate investment trust ("REIT")
and conducts all of its operations through the Operating Partnership and the
Management Companies.
The following discussion is based primarily on the consolidated financial
statements of the Company for the three and six months ended June 30, 2022 and
2021. It compares the results of operations for the three months ended June 30,
2022 to the results of operations for the three months ended June 30, 2021 . It
also compares the results of operations and cash flows for the six months ended
June 30, 2022 to the results of operations and cash flows for the six months
ended June 30, 2021 .
This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
Dispositions:
OnMarch 29, 2021 , the Company soldParadise Valley Mall inPhoenix, Arizona to a newly formed joint venture for$100.0 million , resulting in a gain on sale of assets of approximately$5.6 million . Concurrent with the sale, the Company elected to reinvest into the new joint venture at a 5% ownership interest. The Company used the$95.3 million of net proceeds from the sale to pay down its line of credit (See "-Liquidity and Capital Resources"). OnSeptember 17, 2021 , the Company sold Tucson La Encantada inTucson, Arizona for$165.3 million , resulting in a gain on sale of assets of approximately$117.2 million . The Company used the net cash proceeds of approximately$100.1 million to pay down debt (See "-Liquidity and Capital Resources"). OnDecember 31, 2021 , the Company assigned its joint venture interest in The Shops atNorth Bridge inChicago, Illinois to its partner in the joint venture. The assignment included the assumption by the joint venture partner of the Company's share of the debt owed by the joint venture and no cash consideration was received by the Company. The Company recognized a loss of approximately$28.3 million in connection with the assignment.
On
For the twelve months endedDecember 31, 2021 , the Company and certain joint venture partners sold various land parcels in separate transactions, resulting in the Company's share of the gain on sale of land of$19.6 million . The Company used its share of the proceeds from these sales of$46.5 million to pay down debt and for other general corporate purposes. For the three and six months endedJune 30, 2022 , the Company and certain joint venture partners sold various land parcels in separate transactions, resulting in the Company's share of the gain on sale of land of$1.0 million and$12.3 million , respectively. The Company's proceeds from these sales in the three and six months endedJune 30, 2022 were$6.9 million and$27.3 million , respectively. The Company used its share of the proceeds from these sales to pay down debt and for other general corporate purposes.
Financing Activities:
On
OnMarch 25, 2021 , the Company closed on a two-year extension for theGreen Acres Commons $124.6 million loan toMarch 29, 2023 . The interest rate is LIBOR plus 2.75% and the Company repaid$4.7 million of the outstanding loan balance at closing. OnApril 14, 2021 , the Company terminated its existing credit facility and entered into a new credit agreement, which provides for an aggregate$700 million facility, including a$525 million revolving loan facility that matures onApril 14, 2023 , with a one-year extension option, and a$175 million term loan facility that matures onApril 14, 2024 . The Company drew the$175 million term loan facility in its entirety simultaneously with entering into the new credit agreement inApril 2021 and subsequently paid off the remaining balance outstanding on the term loan facility with proceeds from the sale of Tucson La Encantada inSeptember 2021 . OnSeptember 15, 2021 , the Company further extended the loan maturity onDanbury Fair Mall toJuly 1, 2022 . The interest rate remained unchanged at 5.5%, and the Company repaid$10.0 million of the outstanding loan balance at closing. The loan maturity was further extended inJuly 2022 .
On
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including extension options. The loan is covered by an interest rate cap
agreement that effectively prevents LIBOR from exceeding 3.0% through
During the year endedDecember 31, 2021 , the Company repaid$1.7 billion of debt then outstanding, including the$985 million repaid in connection with entering into the new credit agreement inApril 2021 . These repaid amounts represented an approximately 20% reduction in the debt outstanding, at the Company's share, sinceDecember 31, 2020 . OnFebruary 2, 2022 , the Company's joint venture inFlatIron Crossing replaced the existing$197 million loan on the property with a new$175 million loan that bears interest at SOFR plus 3.70% and matures onFebruary 9, 2025 , including extension options. The loan is covered by an interest rate cap agreement that effectively prevents SOFR from exceeding 4.0% throughFebruary 15, 2024 .
On
OnMay 6, 2022 , the Company closed on a two-year extension for The Oaks loan toJune 5, 2024 , at a new fixed interest rate of 5.25%. The Company repaid$5.0 million of the outstanding loan balance at closing.
On
Redevelopment and Development Activities:
The Company's joint venture with Hudson Pacific Properties is redeveloping One Westside into 584,000 square feet of creative office space and 96,000 square feet of dining and entertainment space. The entire creative office space has been leased to$500.0 million and$550.0 million , with$125.0 million to$137.5 million estimated to be the Company's pro rata share. The Company has incurred$118.7 million of the total$474.9 million incurred by the joint venture as ofJune 30, 2022 . The joint venture expects to fund the remaining costs of the development with its$414.6 million construction loan. The Company has a 50/50 joint venture with Simon Property Group, which was initially formed to developLos Angeles Premium Outlets , a premium outlet center inCarson, California . The Company has funded$40.6 million of the total$81.2 million incurred by the joint venture as ofJune 30, 2022 . In connection with the closures and lease rejections of several Sears stores owned or partially owned by the Company, the Company anticipates spending between$130.0 million to$160.0 million at the Company's pro rata share to redevelop the Sears stores. The anticipated openings of such redevelopments are expected to occur over several years. The estimated range of redevelopment costs could increase if the Company or its joint venture decides to expand the scope of the redevelopments. The Company has funded$42.7 million at its pro rata share as ofJune 30, 2022 .
Other Transactions and Events:
InMarch 2020 , the COVID-19 outbreak was declared a pandemic by theWorld Health Organization . As a result, all of the markets that the Company operates in were subject to stay-at-home orders, and the majority of its properties were temporarily closed in part or completely. Following staggered re-openings during 2020, all Centers have been open and operating sinceOctober 7, 2020 . As of the date of this Quarterly Report on Form 10-Q, government-imposed capacity restrictions resulting from COVID-19 have been essentially eliminated across the Company's markets. Although overall fundamentals at the Centers continued to improve during 2021 and into the first half of 2022, the Company expects that its results will continue to be negatively impacted for the remainder of 2022 due, in part, to the continued impact of the COVID-19 pandemic, which has resulted in reduced occupancy relative to pre-COVID levels and additional Anchor closures, among other factors. The Company declared a cash dividend of$0.15 per share of its common stock for each quarter in the year endedDecember 31, 2021 and for the first and second quarters of 2022. OnJuly 20, 2022 , the Company declared a third quarter cash dividend of$0.15 per share of its common stock, which will be paid onSeptember 8, 2022 to stockholders of record onAugust 19, 2022 . The dividend amount will be reviewed by the Board on a quarterly basis. In connection with the commencement of separate "at the market" offering programs, on each ofFebruary 1, 2021 andMarch 26, 2021 , which are referred to as the "February 2021 ATM Program" and the "March 2021 ATM Program," respectively, and collectively as the "ATM Programs," the Company entered into separate equity distribution agreements with certain sales agents pursuant to which the Company may issue and sell shares of its common stock having an aggregate offering 29
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price of up to$500 million under each of theFebruary 2021 ATM Program and theMarch 2021 ATM Program, or a total of$1 billion under the ATM Programs. As ofJune 30, 2022 , the Company had approximately$151.7 million of gross sales of its common stock available under theMarch 2021 ATM Program. TheFebruary 2021 ATM Program was fully utilized as ofJune 30, 2021 and is no longer active. See "-Liquidity and Capital Resources" for a further discussion of the Company's anticipated liquidity needs, and the measures taken by the Company to meet those needs. Inflation: In the last five years, inflation has not had a significant impact on the Company. Most of the leases at the Centers have rent adjustments periodically throughout the lease term. These rent increases are either in fixed increments or based on using an annual multiple of increases in the Consumer Price Index. In addition, the routine expiration of leases for spaces 10,000 square feet and under each year enables the Company to replace existing leases with new leases at higher base rents if the rents of the existing leases are below the then existing market rate. The Company has generally entered into leases that require tenants to pay a stated amount for operating expenses, generally excluding property taxes, regardless of the expenses actually incurred at any Center, which places the burden of cost control on the Company. Additionally, most leases require the tenants to pay their pro rata share of property taxes and utilities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Some of these estimates and assumptions include judgments on revenue
recognition, estimates for common area maintenance and real estate tax accruals,
provisions for uncollectible accounts, impairment of long-lived assets, the
allocation of purchase price between tangible and intangible assets,
capitalization of costs and fair value measurements. The Company's significant
accounting policies and estimates are described in more detail in Note 2-Summary
of Significant Accounting Policies in the Company's Notes to the Consolidated
Financial Statements. However, the following policies are deemed to be critical.
Acquisitions:
Upon the acquisition of real estate properties, the Company evaluates whether
the acquisition is a business combination or asset acquisition. For both
business combinations and asset acquisitions, the Company allocates the purchase
price of properties to acquired tangible assets and intangible assets and
liabilities. For asset acquisitions, the Company capitalizes transaction costs
and allocates the purchase price using a relative fair value method allocating
all accumulated costs. For business combinations, the Company expenses
transaction costs incurred and allocates purchase price based on the estimated
fair value of each separately identified asset and liability. The Company
allocates the estimated fair value of acquisitions to land, building, tenant
improvements and identified intangible assets and liabilities, based on their
estimated fair values. In addition, any assumed mortgage notes payable are
recorded at their estimated fair values. The estimated fair value of the land
and buildings is determined utilizing an "as if vacant" methodology. Tenant
improvements represent the tangible assets associated with the existing leases
valued on a fair value basis at the acquisition date prorated over the remaining
lease terms. The tenant improvements are classified as an asset under property
and are depreciated over the remaining lease terms. Identifiable intangible
assets and liabilities relate to the value of in-place operating leases which
come in three forms: (i) leasing commissions and legal costs, which represent
the value associated with "cost avoidance" of acquiring in-place leases, such as
lease commissions paid under terms generally experienced in the Company's
markets; (ii) value of in-place leases, which represents the estimated loss of
revenue and of costs incurred for the period required to lease the "assumed
vacant" property to the occupancy level when purchased; and (iii) above or
below-market value of in-place leases, which represents the difference between
the contractual rents and market rents at the time of the acquisition,
discounted for tenant credit risks. Leasing commissions and legal costs are
recorded in deferred charges and other assets and are amortized over the
remaining lease terms. The value of in-place leases are recorded in deferred
charges and other assets and amortized over the remaining lease terms plus any
below-market fixed rate renewal options. Above or below-market leases are
classified in deferred charges and other assets or in other accrued liabilities,
depending on whether the contractual terms are above or below-market, and the
asset or liability is amortized to minimum rents over the remaining terms of the
leases. The remaining lease terms of below-market leases may include certain
below-market fixed-rate renewal periods. In considering whether or not a lessee
will execute a below-market fixed-rate lease renewal option, the Company
evaluates economic factors and certain qualitative factors at the time of
acquisition such as tenant mix in the Center, the Company's relationship with
the tenant and the availability of competing tenant space.
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Remeasurement gains and losses are recognized when the Company becomes the primary beneficiary of an existing equity method investment that is a variable interest entity to the extent that the fair value of the existing equity investment exceeds the carrying value of the investment, and remeasurement losses to the extent the carrying value of the investment exceeds the fair value. The fair value is determined based on a discounted cash flow model, with the significant unobservable inputs including discount rate, terminal capitalization rate and market rents.
Asset Impairment:
The Company assesses whether an indicator of impairment in the value of its properties exists by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include projected rental revenue, operating costs and capital expenditures as well as estimated holding periods and capitalization rates. If an impairment indicator exists, the determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis or a contracted sales price, with the carrying value of the related assets. The Company generally holds and operates its properties long-term, which decreases the likelihood of their carrying values not being recoverable. A shortened holding period increases the risk that the carrying value of a long-lived asset is not recoverable. Properties classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell. The Company reviews its investments in unconsolidated joint ventures for a series of operating losses and other factors that may indicate that a decrease in the value of its investments has occurred which is other-than-temporary. The investment in each unconsolidated joint venture is evaluated periodically, and as deemed necessary, for recoverability and valuation declines that are other-than-temporary.
Fair Value of Financial Instruments:
The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The Company calculates the fair value of financial instruments and includes this additional information in the Notes to the Consolidated Financial Statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. The Company records its financing arrangement (See Note 12-Financing Arrangement in the Company's Notes to the Consolidated Financial Statements) obligation at fair value on a recurring basis with changes in fair value being recorded as interest expense in the Company's consolidated statements of operations. The fair value is determined based on a discounted cash flow model, with the significant unobservable inputs including discount rate, terminal capitalization rate, and market rents. The fair value of the financing arrangement obligation is sensitive to these significant unobservable inputs and a change in these inputs may result in a significantly higher or lower fair value measurement.
Results of Operations
Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting the Company's properties described in Management's Overview and Summary above, including theRedevelopment Properties and theDisposition Properties (as defined below). For purposes of the discussion below, the Company defines "Same Centers" as those Centers that are substantially complete and in operation for the entirety of both periods of the comparison.Non-Same Centers for comparison purposes include those Centers or properties that are going through a substantial redevelopment often resulting in the closing of a portion of the Center ("Redevelopment Properties ") and properties that have been disposed of ("Disposition Properties "). The Company moves a Center in and out of Same Centers based on whether the Center is substantially complete and in operation for the 31
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entirety of both periods of the comparison. Accordingly, the Same Centers
consist of all consolidated Centers, excluding the
For the comparison of the three and six months ended
Unconsolidated joint ventures are reflected using the equity method of accounting. The Company's pro rata share of the results from these Centers is reflected in the Consolidated Statements of Operations as equity in (loss) income of unconsolidated joint ventures.
The Company considers tenant annual sales, occupancy rates (excluding large retail stores or "Anchors") and releasing spreads (i.e., a comparison of initial average base rent per square foot on leases executed during the trailing twelve months to average base rent per square foot at expiration for the leases expiring during the trailing twelve months based on the spaces 10,000 square feet and under) to be key performance indicators of the Company's internal growth. During the second quarter of 2022, comparable tenant sales for spaces less than 10,000 square feet across the portfolio increased by 2.2% relative to the second quarter of 2021 and 16.8% relative to pre-COVID sales during the second quarter of 2019. The leased occupancy rate of 91.8% atJune 30, 2022 represented a 2.4% increase from 89.4% atJune 30, 2021 and a 0.5% sequential increase compared to the 91.3% occupancy rate atMarch 31, 2022 . Releasing spreads increased as the Company executed leases at an average rent of$57.58 for new and renewal leases executed compared to$57.23 on leases expiring, resulting in a releasing spread increase of$0.35 per square foot, or 0.6%, for the trailing twelve months endedJune 30, 2022 . The Company continues to renew or replace leases that are scheduled to expire in 2022, however, for a variety of factors, the Company cannot be certain of its ability to sign, renew or replace leases expiring in 2022 or beyond. The remaining 2022 lease expirations continue to be an important focal point for the Company. As ofJune 30, 2022 , the Company has executed leases or commitments from retailers that are in lease documentation for 71% of the leased space expiring in 2022, and another 22% of such expiring space is in the letter of intent stage. Excluding those leases, the remaining leases expiring in 2022, which represent approximately 145,000 square feet of the Centers, are in the prospecting stage.
During the quarter ended
Outlook
The Company has a long-term four-pronged business strategy that focuses on the acquisition, leasing and management, redevelopment and development of regional town centers. Although fundamentals at the Centers continued to improve during 2021 and into the first half of 2022, the Company expects that its results will continue to be negatively impacted for the remainder of 2022 due, in part, to the continued impact of the COVID-19 pandemic, which has resulted in reduced occupancy relative to pre-COVID levels and additional Anchor closures, among other factors. All Centers have been open and operating sinceOctober 7, 2020 . As of the date of this Quarterly Report on Form 10-Q, government-imposed capacity restrictions resulting from COVID-19 have been essentially eliminated across the Company's markets. The Company experienced a positive impact to its leasing revenue during the three months endedJune 30, 2022 as leasing revenue increased by approximately 4.15% compared to the three months endedJune 30, 2021 . This increase includes the joint ventures at the Company's share and excludes theDisposition Properties and The Shops at Northbridge, at the Company's share (See "Dispositions" above). This increase was primarily due to decreases in retroactive rent abatements incurred in the second quarter of 2022 compared to the second quarter of 2021 and increases in lease termination income, which were partially offset by decreases in straight-line rent revenue and lower recovery from bad debt reserves compared to the second quarter of 2021. Sales and traffic at the Company's Centers continued to improve during the second quarter of 2022. Traffic levels during the second quarter of 2022 continued to range in the mid 90%'s relative to the pre-pandemic second quarter of 2019 and although the Company experienced high customer conversion rates, sales increased at a more modest pace than the double-digit tenant sales growth from 2021 and early 2022. Comparable tenant sales from spaces less than 10,000 square feet across the portfolio increased by 2.2% and 16.8% relative to the second quarter of 2021 and the pre-COVID sales during the second quarter of 2019, respectively. Portfolio tenant sales per square foot for spaces less than 10,000 square feet for the trailing twelve months endedJune 30, 2022 were$860 , which represents a record high for the Company for the second quarter in a row. During the second quarter of 2022, the Company signed 274 new and renewal leases for approximately 1.2 million square feet, compared to 216 leases and 686,000 square feet signed during the second quarter of 2021. 32
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The Company believes that diversity of use within its tenant base will be a prominent internal growth catalyst at its Centers going forward, as new uses enhance the productivity and diversity of the tenant mix and have the potential to significantly increase customer traffic at the applicable Centers. During the quarter endedJune 30, 2022 , the Company signed deals for new stores with new-to-Macerich portfolio uses for over 82,000 square feet, with another 279,000 square feet of such new-to-Macerich portfolio leases currently in negotiation as of the date of this Quarterly Report on Form 10-Q.
As of
The Company's rent collections for the first half of 2022 have been comparable to pre-COVID-19 levels for the same period. The Company previously completed its negotiations with national and local tenants to secure rental payments. Those negotiations resulted in the Company entering into lease amendments which granted significant rental assistance in the form of rent deferral and/or rent reduction. Many of the Company's leases contain co-tenancy clauses. Certain Anchor or small tenant closures have become permanent, whether caused by the pandemic, or otherwise, and co-tenancy clauses within certain leases may be triggered as a result. The Company does not anticipate that the negative impact of such clauses on lease revenue will be significant. During the year endedDecember 31, 2021 , the Company incurred$47.6 million of rent abatements at the Company's share relating primarily to 2020 rents as a result of COVID-19 and negotiated$4.6 million of rent deferrals during the year endedDecember 31, 2021 at the Company's share. During the six months endedJune 30, 2022 , the Company incurred less than$1.1 million of rent abatements at the Company's share compared to$44.3 million for the six months endedJune 30, 2021 which related primarily to 2020 rents as a result of COVID-19. The Company negotiated$4.3 million of rent deferrals during the three months endedJune 30, 2021 at the Company's share compared to less than$0.1 million of rent deferrals during the three months endedJune 30, 2022 . As ofJune 30, 2022 ,$3.4 million of the rent deferrals remain outstanding, with$1.2 million scheduled to be repaid during the remainder of 2022 and the balance scheduled for repayment in 2023 and thereafter. During 2021, the pace of bankruptcy filings involving the Company's tenants decreased substantially as compared to 2020, with ten bankruptcy filings, totaling 62 leases and involving approximately 369,000 square feet and$11.9 million of annual leasing revenue at the Company's share. This included two leases totaling 139,000 square feet with a single department store retailer that quickly emerged from bankruptcy and assumed both of its leases with the Company. Excluding this department store retailer, bankruptcy filings during 2021 only involved approximately 230,000 square feet. The Company continues to expect that the pace of bankruptcy filings in 2022 will be low. Year-to-date in 2022, there has only been one bankruptcy filing involving a single tenant of the Company involving approximately 3,000 square feet of leased space. During 2022, the Company expects to generate positive cash flow from operations after recurring operating capital expenditures, leasing capital expenditures and payment of dividends. This assumption does not include any potential capital generated from dispositions, refinancings or issuances of common equity. This expected surplus will be used to de-lever the Company's balance sheet as well as to fund the Company's development and redevelopment pipeline. The Company has successfully secured all requested extensions from both balance sheet lenders and CMBS lenders/servicers spanning nine loan extensions totaling over$1.6 billion of debt sinceSeptember 2020 , including the following refinancing and extensions in 2022. OnFebruary 2, 2022 , the Company's joint venture inFlatIron Crossing replaced the existing$197 million loan on the property with a new$175 million loan that bears interest at SOFR plus 3.70% and matures onFebruary 9, 2025 , including extension options. OnApril 29, 2022 , the Company closed on a new$72 million loan at Pacific View with a fixed rate of 5.29% that matures onMay 6, 2032 . OnMay 6, 2022 , the Company closed on a two-year extension of the loan on The Oaks toJune 5, 2024 . The loan will now bear a fixed interest rate of 5.25%, and the Company repaid$5.0 million of the outstanding loan balance at closing. Additionally, onJuly 1, 2022 , the Company extended the loan maturity onDanbury Fair Mall toJuly 1, 2023 . The interest rate remained unchanged at 5.5%, and the Company repaid$10.0 million of the outstanding loan balance at closing (See "-Financing Activities" in Management's Overview and Summary). Rising interest rates are increasing the cost of the Company's borrowings due to its outstanding floating-rate debt and have led to higher interest rates on new fixed-rate debt. The Company expects to incur increased interest expense from the refinancing or extension of loans that may currently carry below-market interest rates. In certain cases, the Company may limit its exposure to interest rate fluctuations related to a portion of its floating-rate debt by using interest rate cap and swap agreements. Such agreements, subject to current market conditions, allow the Company to replace floating-rate debt with fixed-rate debt in order to achieve its desired ratio of floating-rate to fixed-rate debt. However, any interest rate cap or swap agreements that the Company enters into may not be effective in reducing its exposure to interest rate changes. For example, the Company's prior swap agreements, which expired onSeptember 30, 2021 , resulted in increases in interest expense in 2021. 33
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Comparison of Three Months Ended
Revenues:
Leasing revenue decreased by$8.4 million , or 4.3%, from 2021 to 2022. The decrease in leasing revenue is attributed to decreases of$5.5 million from the Same Centers and$2.9 million from theDisposition Properties . Leasing revenue includes the amortization of above and below-market leases, the amortization of straight-line rents, lease termination income, percentage rent and the recovery of bad debts. The amortization of above and below-market leases was$0.6 million for both 2021 and 2022. The amortization of straight-line rents decreased from$6.0 million in 2021 to$(0.5) million in 2022. Lease termination income decreased from$5.2 million in 2021 to$0.6 million in 2022. Percentage rent decreased from$10.3 million in 2021 to$6.9 million in 2022. Recovery of bad debts decreased from$9.1 million in 2021 to$1.4 million in 2022.
Other income decreased from
Management Companies' revenue increased from
Shopping Center and Operating Expenses:
Shopping center and operating expenses increased$2.1 million , or 3.1%, from 2021 to 2022. The increase in shopping center and operating expenses is attributed to increases of$3.2 million from the Same Centers offset in part by a decrease of$1.1 million from theDisposition Properties .
Leasing Expenses:
Leasing expenses increased from
Management Companies' Operating Expenses:
Management Companies' operating expenses increased
REIT General and Administrative Expenses:
REIT general and administrative expenses decreased
Depreciation and Amortization:
Depreciation and amortization decreased
Interest Expense:
Interest expense decreased$1.7 million from 2021 to 2022. The decrease in interest expense is attributed to decreases of$6.5 million from lower outstanding balances on the Company's revolving line of credit,$0.4 million from the Same Centers and$0.7 million from theDisposition Properties offset in part by an increase of$5.9 million from the financing arrangement (See Note 12-Financing Arrangement in the Company's Notes to the Consolidated Financial Statements). The increase in interest expense from the financing arrangement is primarily due to the change in fair value of the underlying properties and the mortgage notes payable on the underlying properties.
Equity in Income of
Equity in income of unconsolidated joint ventures decreased$13.7 million from 2021 to 2022. The decrease in equity in income of unconsolidated joint ventures is primarily due to a decrease in other income related to mark-to-market valuation adjustments on investments in 2021 compared to 2022.
Loss on Sale or Write Down of Assets, net:
The loss on sale or write down of assets, net decreased$2.8 million from 2021 to 2022 primarily due to lower impairment charges in 2022 compared to 2021 and a decrease in gains from land sales in 2022 compared to 2021. 34
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Net Loss:
Net loss increased
Funds From Operations ("FFO"):
Primarily as a result of the factors mentioned above, FFO attributable to common stockholders and unit holders-diluted, excluding financing expense in connection with Chandler Freehold decreased 19.4% from$127.6 million in 2021 to$102.9 million in 2022. For a reconciliation of net loss attributable to the Company, the most directly comparable GAAP financial measure, to FFO attributable to common stockholders and unit holders-diluted, and FFO attributable to common stockholders and unit holders, excluding financing expense in connection with Chandler Freehold-diluted, see "Funds From Operations ("FFO")" below.
Comparison of Six Months Ended
Revenues:
Leasing revenue increased by$15.5 million , or 4.1%, from 2021 to 2022. The increase in leasing revenue is attributed to an increase of$22.8 million from the Same Centers offset in part by a decrease of$7.3 million from theDisposition Properties . Leasing revenue includes the amortization of above and below-market leases, the amortization of straight-line rents, lease termination income, percentage rent and the recovery of bad debts. The amortization of above and below-market leases increased from$1.0 million in 2021 to$1.2 million in 2022. Straight-line rents decreased from$10.8 million in 2021 to$(2.5) million in 2022. Lease termination income increased from$8.1 million in 2021 to$12.4 million in 2022. Percentage rent decreased from$17.2 million in 2021 to$15.5 million in 2022. Recovery of bad debts decreased from$5.9 million in 2021 to$0.9 million in 2022.
Other revenue decreased from
Management Companies' revenue increased from
Shopping Center and Operating Expenses:
Shopping center and operating expenses decreased$1.2 million , or 0.8%, from 2021 to 2022. The decrease in shopping center and operating expenses is attributed to a decrease of$2.8 million from theDisposition Properties offset in part by an increase of$1.6 million from the Same Centers.
Leasing Expenses:
Leasing expenses increased from
Management Companies' Operating Expenses:
Management Companies' operating expenses increased
REIT General and Administrative Expenses:
REIT general and administrative expenses decreased
Depreciation and Amortization:
Depreciation and amortization decreased$10.7 million from 2021 to 2022. The decrease in depreciation and amortization is attributed to decreases of$6.2 million from the Same Centers and$4.5 million from theDisposition Properties .
Interest Expense:
Interest expense decreased$3.8 million from 2021 to 2022. The decrease in interest expense was attributed to a decrease of$14.4 million from lower outstanding balances on the Company's revolving line of credit,$1.5 million from theDisposition Properties and$0.5 million from the Same Centers offset in part by an increase of$12.6 million from the financing arrangement discussed in Note 12 in the Company's Notes to the Consolidated Financial Statements. The increase in interest expense from 35
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the financing arrangement is primarily due to the change in fair value of the underlying properties and the mortgage notes payable on the underlying properties.
Equity in (Loss) Income of
Equity in (loss) income of unconsolidated joint ventures decreased$44.7 million from 2021 to 2022. The decrease in equity in (loss) income of unconsolidated joint ventures is primarily due to the write-down of assets as a result of the reduction in the estimated holding periods of certain properties.
Gain (Loss) on Sale or Write Down of Assets, net:
Gain (loss) on sale or write down of assets, net increased from a loss of$25.2 million in 2021 to a gain of$5.4 million in 2022. The increase is primarily due to the impairment and loss on sale of$41.6 million onEstrella Falls in 2021 offset in part by the gain on sale ofParadise Valley Mall of$4.2 million in 2021 and land sales gain of$20.4 million in 2021 compared to land sales gain of$15.2 million in 2022. Net Loss:
Net loss decreased
Primarily as a result of the factors mentioned above, FFO attributable to common stockholders and unit holders-diluted, excluding financing expense in connection with Chandler Freehold increased 5.9% from$203.1 million in 2021 to$215.2 million in 2022. For a reconciliation of net loss attributable to the Company, the most directly comparable GAAP financial measure, to FFO attributable to common stockholders and unit holders-diluted, and FFO attributable to common stockholders and unit holders, excluding financing expense in connection with Chandler Freehold-diluted, see "Funds From Operations ("FFO")" below.
Operating Activities:
Cash provided by operating activities increased$2.4 million from 2021 to 2022. The increase is primarily due to the changes in assets and liabilities and the results, as discussed above.
Investing Activities:
Cash provided by investing activities decreased$53.8 million from 2021 to 2022. The decrease in cash provided by investing activities is primarily attributed to a decrease in proceeds from the sale of assets of$119.0 million offset in part by increases in distributions from unconsolidated joint ventures of$24.9 million , proceeds from collection of receivable in connection with sale of joint venture property of$21.0 million and decreases of contributions to unconsolidated joint ventures of$7.6 million .
Financing Activities:
Cash used in financing activities decreased$0.3 billion from 2021 to 2022. The decrease in cash used in financing activities is primarily due to the decrease in payments on mortgages, bank and other notes payable of$1.5 billion offset by proceeds received from sales of common shares under the ATM Programs of$791.5 million and proceeds from mortgages, bank and other notes payable of$470.0 million .
Liquidity and Capital Resources
The Company anticipates meeting its liquidity needs for its operating expenses, debt service and dividend requirements for the next twelve months and beyond through cash generated from operations, distributions from unconsolidated joint ventures, working capital reserves and/or borrowings under its line of credit. Following the uncertain environment brought about by COVID-19, the Company took a number of previously disclosed measures in the years endedDecember 31, 2020 and 2021 to enhance its liquidity position over the short-term, but currently anticipates meeting its liquidity needs for the next twelve months as it has done historically. 36
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Uses of Capital
The following tables summarize capital expenditures incurred at the Centers (at the Company's pro rata share):
For the Six Months Ended June 30,
(Dollars in thousands) 2022 2021
Consolidated Centers:
Acquisitions of property, building improvement and equipment $ 5,981 $ 7,285
Development, redevelopment, expansions and renovations of Centers 23,519 22,764
Tenant allowances 10,618 8,141
Deferred leasing charges 791 1,427
$ 40,909 $ 39,617
Joint Venture Centers:
Acquisitions of property, building improvement and equipment $ 4,102 $ 3,365
Development, redevelopment, expansions and renovations of Centers 27,679 24,585
Tenant allowances 8,962 3,949
Deferred leasing charges 1,700 1,408
$ 42,443 $ 33,307
The Company expects amounts to be incurred during the next twelve months for
tenant allowances and deferred leasing charges to be less than or comparable to
2021. The Company expects to incur approximately $80.0 million to $90.0 million
during the remainder of 2022 for development, redevelopment, expansion and
renovations. This includes the Company's share of the development costs of One
Westside of approximately $12.0 million , which is fully funded by a non-recourse
construction facility. Capital for these expenditures, developments and/or
redevelopments has been, and is expected to continue to be, obtained from a
combination of cash on hand, debt or equity financings, which are expected to
include borrowings under the Company's line of credit, from property financings
and construction loans, each to the extent available.
Sources of Capital
The Company has also generated liquidity in the past, and may continue to do so in the future, through equity offerings and issuances, property refinancings, joint venture transactions and the sale of non-core assets. For example, the Company soldParadise Valley Mall inPhoenix, Arizona and Tucson La Encantada inTucson, Arizona during the year endedDecember 31, 2021 . The Company used the proceeds from these sales to pay down its line of credit and other debt obligations. Furthermore, the Company has filed a shelf registration statement, which registered an unspecified amount of common stock, preferred stock, depositary shares, debt securities, warrants, rights, stock purchase contracts and units that may be sold from time to time by the Company. On each ofFebruary 1, 2021 andMarch 26, 2021 , the Company registered a separate "at the market" offering program, pursuant to which the Company may issue and sell shares of its common stock having an aggregate offering price of up to$500 million under each ATM Program, or a total of$1.0 billion under the ATM Programs, in amounts and at times to be determined by the Company. TheFebruary 2021 ATM Program was fully utilized as ofJune 30, 2021 and is no longer active. During the three and six months endedJune 30, 2022 , no shares were issued under theMarch 2021 ATM Program. As ofJune 30, 2022 , the Company had approximately$151.7 million of gross sales of its common stock available under theMarch 2021 ATM Program. The capital and credit markets can fluctuate and, at times, limit access to debt and equity financing for companies. The Company has been able to access capital; however, there is no assurance the Company will be able to do so in future periods or on similar terms and conditions. Many factors impact the Company's ability to access capital, such as its overall debt level, interest rates, interest coverage ratios, prevailing market conditions and the impact of COVID-19. The Company expects to incur increased interest expense from the refinancing or extension of loans that may currently carry below-market interest rates. In addition, increases in the Company's proportion of floating rate debt will cause it to be subject to interest rate fluctuations in the future. The Company's total outstanding loan indebtedness, which includes mortgages and other notes payable, atJune 30, 2022 was$6.86 billion (consisting of$4.44 billion of consolidated debt, less$0.46 billion of noncontrolling interests, plus$2.88 37
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billion of its pro rata share of unconsolidated joint venture debt). The majority of the Company's debt consists of fixed-rate conventional mortgage notes collateralized by individual properties. The Company expects that all of the maturities during the next twelve months will be refinanced, restructured, extended and/or paid off from the Company's line of credit or cash on hand. The Company believes that the pro rata debt provides useful information to investors regarding its financial condition because it includes the Company's share of debt from unconsolidated joint ventures and, for consolidated debt, excludes the Company's partners' share from consolidated joint ventures, in each case presented on the same basis. The Company has several significant joint ventures and presenting its pro rata share of debt in this manner can help investors better understand the Company's financial condition after taking into account the Company's economic interest in these joint ventures. The Company's pro rata share of debt should not be considered as a substitute for the Company's total consolidated debt determined in accordance with GAAP or any other GAAP financial measures and should only be considered together with and as a supplement to the Company's financial information prepared in accordance with GAAP. The Company accounts for its investments in joint ventures that it does not have a controlling interest or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the consolidated balance sheets of the Company as investments in unconsolidated joint ventures.
As of
Additionally, as ofJune 30, 2022 , the Company was contingently liable for$41.0 million in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. As ofJune 30, 2022 ,$40.7 million of these letters of credit were secured by restricted cash. The Company does not believe that these letters of credit will result in a liability to the Company. The Company has successfully secured all requested extensions from both balance sheet lenders and CMBS lenders/servicers spanning nine loan extensions totaling over$1.6 billion of debt sinceSeptember 2020 , including the following refinancing and extensions in 2022. OnFebruary 2, 2022 , the Company's joint venture inFlatIron Crossing replaced the existing$197 million loan on the property with a new$175 million loan that bears interest at SOFR plus 3.70% and matures onFebruary 9, 2025 , including extension options. OnApril 29, 2022 , the Company closed on a new$72 million loan at Pacific View with a fixed rate of 5.29% that matures onMay 6, 2032 . OnMay 6, 2022 , the Company closed on a two-year extension of the loan on The Oaks toJune 5, 2024 . The loan will now bear a fixed interest rate of 5.25%, and the Company repaid$5.0 million of the outstanding balance at closing. Additionally, onJuly 1, 2022 , the Company extended the loan maturity onDanbury Fair Mall toJuly 1, 2023 . The interest rate remained unchanged at 5.5%, and the Company repaid$10.0 million of the outstanding loan balance at closing. The Company has a$700 million credit facility, including a$525 million revolving loan facility that matures onApril 14, 2023 , with a one-year extension option, and a$175 million term loan facility that matures onApril 14, 2024 . The revolving loan facility can be expanded up to$800 million , subject to receipt of lender commitments and other conditions. All obligations under the credit facility are guaranteed unconditionally by the Company and are secured in the form of mortgages on certain wholly-owned assets and pledges of equity interests held by certain of the Company's subsidiaries. The credit facility bears interest at LIBOR plus a spread of 2.25% to 3.25% depending on Company's overall leverage level. As ofJune 30, 2022 , the borrowing rate was LIBOR plus 2.25%. As ofJune 30, 2022 , borrowings under the credit facility were$86.0 million less unamortized deferred finance costs of$11.0 million for the revolving loan facility at a total interest rate of 5.21%. As ofJune 30, 2022 , the Company's availability under the revolving loan facility for additional borrowings was$438.7 million .
Cash dividends and distributions for the six months ended
At
At
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Table of Contents Material Cash Commitments: The following is a schedule of material cash commitments as ofJune 30, 2022 for the consolidated Centers over the periods in which they are expected to be paid (in thousands): Payment Due by Period Less than 1 - 3 3 - 5 More than Cash Commitments Total 1 year years years five years Long-term debt obligations (includes expected interest payments)(1)$ 5,175,862 $ 1,040,506 $ 1,739,771 $ 690,717 $ 1,704,868 Lease obligations(2) 189,350 12,197 34,045 22,574 120,534$ 5,365,212 $ 1,052,703 $ 1,773,816 $ 713,291 $ 1,825,402
__________________________________________________________
(1)Interest payments on floating rate debt were based on rates in effect at
Funds From Operations ("FFO")
The Company uses FFO in addition to net income to report its operating and financial results and considers FFO and FFO -diluted as supplemental measures for the real estate industry and a supplement to GAAP measures.The National Association of Real Estate Investment Trusts defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of properties, plus real estate related depreciation and amortization, impairment write-downs of real estate and write-downs of investments in an affiliate where the write-downs have been driven by a decrease in the value of real estate held by the affiliate and after adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. The Company accounts for its joint venture in Chandler Freehold as a financing arrangement. In connection with this treatment, the Company recognizes financing expense on (i) the changes in fair value of the financing arrangement obligation, (ii) any payments to the joint venture partner equal to their pro rata share of net income and (iii) any payments to the joint venture partner less than or in excess of their pro rata share of net income. The Company excludes from its definition of FFO the noted expenses related to the changes in fair value and for the payments to the joint venture partner less than or in excess of their pro rata share of net income.
The Company also presents FFO excluding financing expense in connection with Chandler Freehold.
FFO and FFO on a diluted basis are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization, as the Company believes real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. The Company believes that such a presentation also provides investors with a meaningful measure of its operating results in comparison to the operating results of other REITs. In addition, the Company believes that FFO excluding financing expense in connection with Chandler Freehold and non-routine costs associated with extinguishment of debt provide useful supplemental information regarding the Company's performance as they show a more meaningful and consistent comparison of the Company's operating performance and allows investors to more easily compare the Company's results. The Company further believes that FFO on a diluted basis is a measure investors find most useful in measuring the dilutive impact of outstanding convertible securities. The Company believes that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs. The Company also cautions that FFO, as presented, may not be comparable to similarly titled measures reported by other real estate investment trusts.
Management compensates for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of net (loss) income to FFO and FFO-diluted. Management believes that to further understand the Company's performance, FFO should be compared with the Company's reported net (loss) income and considered in addition to cash flows in accordance with GAAP, as presented in the Company's consolidated financial statements.
The following reconciles net loss attributable to the Company to FFO and FFO-diluted attributable to common stockholders and unit holders-basic and diluted, excluding financing expense in connection with Chandler Freehold for the three and six months endedJune 30, 2022 and 2021 (dollars and shares in thousands): 39
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For the Three Months Ended June For the Six Months Ended June
30, 30,
2022 2021 2022 2021
Net loss attributable to the Company
(622) 87 (2,122) (4,269)
Loss (gain) on sale or write down of assets, net-consolidated assets
1,091 3,927 (5,362) 25,210
Add: noncontrolling interests share of gain on sale or write down of assets-consolidated assets
22 5,902 4,443 5,855
Add: gain on sale of undepreciated assets-consolidated assets 66 15,722 15,147 19,818
Less: noncontrolling interests share of gain of undepreciated assets-consolidated assets
- (4,894) (4,422) (6,085)
Loss on write-down of non-real estate assets-consolidated assets - (1,000) (2,000) (2,200)
(Gain) loss on sale or write down of assets-unconsolidated joint ventures, net(1)
(845) 106 28,982 79
Add: gain on sale of undepreciated assets-unconsolidated joint ventures(1)
956 - 1,555 -
Depreciation and amortization-consolidated assets 72,458 77,630 145,314 156,026
Less: noncontrolling interests in depreciation and amortization-consolidated assets
(6,480) (5,085) (14,293) (9,160)
Depreciation and amortization-unconsolidated joint ventures(1) 45,162 46,126 89,563 93,232
Less: depreciation on personal property (2,714) (3,309) (5,664) (6,687)
FFO attributable to common stockholders and unit holders-basic and diluted
93,710 123,447 198,575 196,450
Financing expense in connection with Chandler Freehold 9,140 4,147 16,646 6,698
FFO attributable to common stockholders and unit holders, excluding financing expense in connection with Chandler Freehold-basic and diluted
Weighted average number of FFO shares outstanding for: FFO attributable to common stockholders and unit holders-basic(2)
223,649 215,576 223,576 192,633
Adjustments for impact of dilutive securities in computing FFO-diluted:
Share and unit based compensation plans - - - -
Weighted average number of FFO shares outstanding for FFO attributable to common stockholders and unit holders-basic and diluted(2)
223,649 215,576 223,576 192,633
(1) Unconsolidated joint ventures are presented at the Company's pro rata share.
(2) Calculated based upon basic net income as adjusted to reach basic FFO. Includes 8.7 million and 9.8 million of OP Units outstanding for the three months endedJune 30, 2022 and 2021, respectively, and 8.7 million and 10.3 million of OP Units outstanding for the six months endedJune 30, 2022 and 2021, respectively. The computation of FFO-diluted shares outstanding includes the effect of share and unit-based compensation plans using the treasury stock method. It also assumes the conversion ofMACWH, LP common and preferred units to the extent that they are dilutive to the FFO-diluted computation. 40
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