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Financial Analysis of Maxwell Technologies -
February 19th, 2011
Santa Monica, CA-based Macerich Company (MAC) is a real estate investment trust (REIT) that owns and operates shopping centers throughout the US. Macerich's properties are concentrated in Arizona and California, and in 2005 it acquired competitor Wilmorite's foothold of properties in Virginia and New Jersey. Macerich focuses on high-performing markets - its tenants averaged sales of $472 per square foot in 2007, well ahead of the national average of $398 - and this lets the company charge above average rents to the tenants in its portfolio.
As of year-end 2007, MAC owned 74 regional shopping centers and 20 community shopping centers with approximately 78 million square feet of gross leasable area. MAC's malls, in addition to their location in high-growth suburban markets, are typically large enough (almost 900,000 square feet on average for the company's wholly owned regional shopping centers) to be considered town centers. High foot traffic to these centers help MAC's tenants meet their sales numbers and allow MAC to continue to charge high rents on its properties.
The commercial real estate market has suffered in 2008, due to the weakening U.S. Economy. This is a risk to MAC, as the retail stores that its tenants operate focus on consumer luxury or discretionary goods. When compared to other retail REITs, MAC is in in the middle of the pack in terms of size and the breadth of its geographic focus, but it differs from its peers by focusing on markets with higher per capita income. MAC expanded aggressively in 2007, acquiring over $900M in new properties. It is likely to continue this expansion in 2008, with a $536M development pipeline, although a credit crunch may be an obstacle to financing these projects.
1 Business Financials
2 Trends and Forces
2.1 U.S. Economic Cycles Will Lead To Fluctuating Revenues
2.2 Economic Changes in the Southwest Will Affect Mac's Revenues
2.3 Increasing Competition From Discount Stores Has The Potential To Adversely Affect Anchor Tenants’ Ability to Meet Lease Obligations
2.4 The Credit Crunch And Fluctuating Interest Rates Increases The Riskiness of Mac’s Debt Payments
2.5 A Credit Crunch Makes it Difficult For MAC To Continue Its Expansion
4 Market Share
MAC's revenues come, almost entirely, from rental income it receives from its tenants. MAC has been steadily increasing revenues through new acquisitions and development. In 2007 it invested over $900M in new acquisitions. Those included the acquisition of 39 Mervyn's department stores for $400M which MAC than leased back to the tenants on a long term basis and the acquisition of a $575M, 680,000 square foot department store in Chicago, IL MAC undertook in a 50/50 joint venture with an institutional investor. It also has an extensive development pipeline, which includes re-development on existing properties. MAC estimates it will invest $539M in 2008 and $536M in 2009 to develop new properties and re-develop existing centers and new acquisitions.
Due to requirements that REITS pay out 90% of their income as dividends, MAC primarily funds new acquisitions with debt. It purchases under-performing centers in prime locations using short term, variable rate debt and then redevelops them. Once the center has been redeveloped physically and its performance has improved, MAC refinances the property using long term fixed rate debt, often for a lower interest rate due to the property's increased performance and stability. After MAC refinances, it can use the property’s higher value to borrow more cash - which it can then use to finance more acquisitions.
From 2006 to 2007 revenues, income and FFO changed primarily due to:
An increase of 6.7% or $34.2M in rental revenue due to new acquisitions and redevelopment of previously acquired properties.
An increase of 7.7 or 19.4M in tenant recoveries (reimbursements paid by tenants for the cost of operating the center), again due primarily to new acquisitions.
An increase of $22.6M or 8.6% in operating expenses due to the cost of operating newly acquired properties.
MAC's expenses increased steadily with its revenues. This suggests the company is steadily expanding. It is concerning, however, that MAC's operating income remains such a low percentage of Revenues. MAC’s operating income (revenues MAC receives from operating its properties less its expenses from operating those properties) is a measure of MAC’s ability to operate its core business profitably. Operating income was negative in 2005 and 2006 despite steadily increasing revenues, suggesting MAC is having difficulties managing its expenses.
Also notable is the difference between MAC’s operating income and net income reported for the last five years. Its operating income is consistently lower than its net income. This difference is due to two factors; recognition of income from unconsolidated joint ventures and recognition of income from gains on sale of real estate. This is a possible warning sign. When the majority of MAC's income is earned from its unconsolidated joint ventures, activities that are outside its core business area, it is doubtful they will be able to keep revenues above expenses over the long term. Similarly, if MAC receives more income from its unconsolidated joint ventures than its consolidated properties, it suggests the company is not as effective at managing its consolidated assets as it is managing its joint ventures.
One positive sign for MAC investors is the company's steadily increasing Funds From Operations (FFO). FFO, a performance measure commonly used in the real estate industry, is obtained from a company's net income, excluding any gain/sale on real estate sold during the period and excluding any depreciation/amortization. It measures a company’s funds produced from operations available for reinvestment or distribution to shareholders. MAC's increasing FFO, which takes into account income from unconsolidated joint ventures, suggests that as a whole MAC has been able to earn a positive return, even if its accounting income has been small due to depreciation expense.
Trends and Forces
U.S. Economic Cycles Will Lead To Fluctuating Revenues
MAC’s properties consist mainly of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for MAC's properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for MAC's properties.
Mac's centers are particularly prone to economic hiccup, as they charge above average rents. They are able to do this because of greater than average sales per square foot, $468 in 2007 vs. a national average of $398. Its tenants are also focused on consumer luxury items such as designer apparel, jewelry and electronics. In 2007 its top tenants in terms of revenue were: Mervyn's, Gap (GPS), Limited Brands (LTD), Foot Locker (FL), AT&T (T), Abercrombie & Fitch Company (ANF), Luxottica Group, S.p.A. (LUX) and Zale (ZLC). These retailers traditionally see decreases in sales as shoppers’ discretionary income declines. If tenants in MACs centers start seeing slower sales, MAC is likely to see demand for its properties drop as tenants move to less expensive centers.
MAC has leases on 50.6% of its gross leasable area (GLA) expiring by 2012. If, when these leases expire, MAC offered discounted rents on space to increase occupancy levels during an economic down cycle, the effects would likely be seen over a number of years. This is because leases with smaller tenants usually last for at least a few years, and leases with anchor tenants (large stores which occupy a large portion of a property's GLA) can last much longer. If these leases were signed when rents were lower, MAC will see lower income over the life of the lease.
Economic Changes in the Southwest Will Affect Mac's Revenues
A large portion of MAC's retail centers are concentrated in the Southwest United States, primarily Arizona and California. It also has eight centers located in Connecticut, New York and New Jersey. Because of this regional concentration MAC is particularly vulnerable not only to changes in national economic conditions, but to any regional economic changes. Any change in general economic conditions on a national, regional, or local scale which adversely affects MAC's tenants will decrease the amount of base rent, expense reimbursement and overages the company receives from its tenants, as all of these are tied to tenant performance. As the economy worsens there has been an increase in retailers failing to renew leases or, through bankruptcy protection, cancelling leases.
MAC is somewhat insulated from the risk that a single tenant company will become insolvent and cancel their leases, as the company's top five tenants account for only 10.8% of rent..
Increasing Competition From Discount Stores Has The Potential To Adversely Affect Anchor Tenants’ Ability to Meet Lease Obligations
MAC operates regional and community shopping centers, which are facing increasing risk from outlet stores, discount stores, and other retailers. As these competitors gain market share, they adversely impact the ability of MAC's tenants to pay rent, and decrease MAC's collections of base rents, expense reimbursements and overages. MAC's centers feature retail anchors such as Macy's Inc. (M), Sears Holdings (SHLD), J.C. Penney (JCP) and Dillard's (DDS). During difficult economic times many consumers switch from these mid market retailers and purchase goods at big box or discount retailers such as Wal-Mart Stores (WMT) and Target (TGT). Many mid market retailers have been experiencing difficulty and are closing stores or filing for bankruptcy protection. 
Though no single tenant pays more than 3.3% of base rent at MAC's centers, this is not the full picture of the risk that one of the company’s tenants will cancel their lease obligations. MAC's centers use anchor tenants, large tenants which occupy a large portion of space and draw other tenants to a property. Many of MAC's anchor tenants own the properties in which their stores are located in. Though anchor tenants accounted for only 4.9% of minimum rents in 2007, MAC's anchor tenants occupied over 40 million square feet of space at its properties. MAC's top five anchor tenants account for almost 80% of total space occupied by its anchor tenants. This concentration increases the harm to MAC if one of those companies were to cancel leases or cease operation. If one of MAC’s largest anchor tenants decided to close down its stores it would impact not just one but many of MAC’s centers.
If an anchor tenant cancels their lease or become insolvent, not only would MAC lose the base rent, overages, and expense reimbursements from that single tenant, but its smaller tenants would suffer from the decreased foot traffic. Leases for smaller tenants in a retail center often contain clauses allowing for lease terminations or rent reductions if an anchor tenant leaves the property. If an anchor tenant left the property, smaller tenants have the option to cancel their leases rather than wait for MAC to locate a new anchor. Because of this, the abrupt departure of anchor tenant can drastically decrease the value of a retail center.
The Credit Crunch And Fluctuating Interest Rates Increases The Riskiness of Mac’s Debt Payments
MAC has approximately $5.8B in outstanding debt, 16.6% or $1.0B of which is variable rate debt. The interest rates MAC pays are primarily based on a certain spread the company pays above LIBOR. If rates were to increase, MAC will see an increase in its variable rate debt payments, lowering its cash flows and income for the period.
Most of MAC's variable rate debt is subject to cap agreements, which state the rate on the debt will not go above a certain level. This limits MAC's potential losses due to interest rate fluctuations, but these caps are typically set above interest rate levels when the cap was established, leaving potential for loss.
Interest Rate fluctuations are also an issue as MAC has approximately 76% of its debt maturing by 2012. If interest rates rise MAC will have to refinance maturing debt at unfavorable rates - in the case of fixed rate debt, this would lower the company's cash flow over the life of the loan.
A Credit Crunch Makes it Difficult For MAC To Continue Its Expansion
Rising interest costs would make it more costly for MAC to issue new debt, as they will have to provide a higher return. As discussed above MAC relies on new debt to fund its expansion. The unavailability of credit or higher interest rates are an obstacle to the firm’s growth.
MAC also faces the risk it will be unable to refinance the $683.4M in debt maturing in 2012. If MAC is unable to refinance this debt it will be forced to sell assets at unfavorable terms, decreasing the company’s returns. This also means the company will have fewer assets available to use as collateral for secured loans, decreasing its access to secured debt.
MAC competes with numerous other firms to both acquire properties and lease tenants. Competing REITs include:
Simon Property Group (SPG) Simon property group owns 320 income producing properties in 41 states and Puerto Rico. It operates 184 regional malls, as well as outlet centers, community lifestyle centers and other shopping centers. It properties contain approximately 242M square feet of gross leasable area.
General Growth Properties (GGP) owns and operates over 200 regional malls in 45 states.
Taubman Centers (TCO) has a portfolio of 23 properties mostly consisting of super-regional malls with more than 800,000 square feet. 
CBL & Associates Properties (CBL) is an active developer of new regional malls, open-air centers, lifestyle and community centers that owns, holds interests in, or manages 159 properties including 86 enclosed malls and open-air centers. Their strategy focuses on acquisition of regional malls.
The table below provides competitive data comparing GGP with some of its close competitors.
Company Revenues (12/31/2007, Millions) Market Cap(Billions, 04/17/08) Operating Properties Number of States With Operating Properties
Macerich Company (MAC) 896.37  5.35  94  19 
Simon Property Group (SPG) 3650.80  22.75  320  41 
General Growth Properties (GGP) 3261.80  9.92  200  45 
Taubman Centers (TCO) 626.82  2.96  23  10 
CBL & Associates Properties (CBL) 1040.63  1.62  159  27 
In 2007 MAC's market share among global Retail REITs was just 4%. Market share is listed by Funds From Operations (FFO), a metric that takes into account earnings from existing properties but not cash from acquisitions or sales of assets. Globally there are 38 REITs focusing on retail properties producing an aggregate $10.0B in FFO.] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000.
General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.
Westfield Group ((WDC) is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom, valued at $53.2 billion.
Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.
Simon Property Group (SPG) develops and leases regional malls, shopping centers and strip malls. Simon Property Group owns or has an interest in over 379 properties comprising over 256 million square feet of gross leasable area across investments in the U.S., Europe, and Asia, making it the largest public U.S. real estate company. Simon Property Group's investments tend to be in large metropolitan areas with very high consumer traffic and are comprised of anchor department stores alongside smaller retailers.
Last edited by netrashetty; February 19th, 2011 at 03:37 PM..