UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission File No. 1-12504
THE MACERICH COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND (State or other jurisdiction of incorporation or organization) |
95-4448705 (I.R.S. Employer Identification Number) |
|
401 Wilshire Boulevard, Suite 700, Santa Monica, California 90401 (Address of principal executive office, including zip code) |
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(310) 394-6000 (Registrant's telephone number, including area code) |
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N/A (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days.
YES ý NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO ý
Number of shares outstanding as of November 4, 2008 of the registrant's common stock, par value $.01 per share: 76,112,463 shares
THE MACERICH COMPANY
FORM 10-Q
INDEX
Part I |
Financial Information |
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Item 1. |
Financial Statements (Unaudited) |
3 | ||||
|
Consolidated Balance Sheets of the Company as of September 30, 2008 and December 31, 2007 |
3 | ||||
|
Consolidated Statements of Operations of the Company for the three and nine months ended September 30, 2008 and 2007 (Restated) |
4 | ||||
|
Consolidated Statement of Common Stockholders' Equity of the Company for the nine months ended September 30, 2008 |
5 | ||||
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Consolidated Statements of Cash Flows of the Company for the nine months ended September 30, 2008 and 2007 (Restated) |
6 | ||||
|
Notes to Consolidated Financial Statements |
7 | ||||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
40 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
56 | ||||
Item 4. |
Controls and Procedures |
57 | ||||
Part II |
Other Information |
|||||
Item 1. |
Legal Proceedings |
58 | ||||
Item 1A. |
Risk Factors |
58 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
59 | ||||
Item 3. |
Defaults Upon Senior Securities |
59 | ||||
Item 4. |
Submission of Matters to a Vote of Security Holders |
59 | ||||
Item 5. |
Other Information |
59 | ||||
Item 6. |
Exhibits |
59 | ||||
Signature |
61 |
2
THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
|
September 30, 2008 |
December 31, 2007 |
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---|---|---|---|---|---|---|---|---|---|
|
(Unaudited) |
|
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ASSETS: |
|||||||||
Property, net |
$ | 6,404,703 | $ | 6,187,473 | |||||
Cash and cash equivalents |
48,822 | 85,273 | |||||||
Restricted cash |
63,696 | 68,384 | |||||||
Marketable securities |
28,489 | 29,043 | |||||||
Tenant and other receivables, net |
117,774 | 137,498 | |||||||
Deferred charges and other assets, net |
393,498 | 386,802 | |||||||
Loans to unconsolidated joint ventures |
456 | 604 | |||||||
Due from affiliates |
4,903 | 5,729 | |||||||
Investments in unconsolidated joint ventures |
1,012,329 | 785,643 | |||||||
Assets held for sale |
| 250,648 | |||||||
Total assets |
$ | 8,074,670 | $ | 7,937,097 | |||||
LIABILITIES, MINORITY INTEREST, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY: |
|||||||||
Mortgage notes payable: |
|||||||||
Related parties |
$ | 308,043 | $ | 225,848 | |||||
Others |
3,284,246 | 3,102,422 | |||||||
Total |
3,592,289 | 3,328,270 | |||||||
Bank and other notes payable |
2,441,520 | 2,434,688 | |||||||
Accounts payable and accrued expenses |
74,427 | 97,086 | |||||||
Other accrued liabilities |
311,098 | 289,660 | |||||||
Preferred dividends payable |
276 | 6,356 | |||||||
Total liabilities |
6,419,610 | 6,156,060 | |||||||
Minority interest |
283,591 | 547,693 | |||||||
Commitments and contingencies |
|||||||||
Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,131 authorized, 0 and 3,067,131 issued and outstanding at September 30, 2008 and December 31, 2007, respectively |
| 83,495 | |||||||
Common stockholders' equity: |
|||||||||
Common stock, $.01 par value, 145,000,000 shares authorized, 76,085,867 and 72,311,763 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively |
761 | 723 | |||||||
Additional paid-in capital |
1,640,738 | 1,367,566 | |||||||
Accumulated deficit |
(246,055 | ) | (193,932 | ) | |||||
Accumulated other comprehensive loss |
(23,975 | ) | (24,508 | ) | |||||
Total common stockholders' equity |
1,371,469 | 1,149,849 | |||||||
Total liabilities, minority interest, preferred stock and common stockholders' equity |
$ | 8,074,670 | $ | 7,937,097 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
3
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||||
|
|
(Restated) |
|
(Restated) |
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Revenues: |
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Minimum rents |
$ | 133,985 | $ | 118,879 | $ | 396,745 | $ | 346,623 | |||||||
Percentage rents |
4,114 | 4,943 | 9,772 | 11,445 | |||||||||||
Tenant recoveries |
70,059 | 63,294 | 204,977 | 184,809 | |||||||||||
Management Companies |
10,261 | 9,242 | 30,334 | 27,595 | |||||||||||
Other |
7,388 | 5,766 | 20,428 | 18,774 | |||||||||||
Total revenues |
225,807 | 202,124 | 662,256 | 589,246 | |||||||||||
Expenses: |
|||||||||||||||
Shopping center and operating expenses |
74,098 | 66,574 | 214,382 | 190,463 | |||||||||||
Management Companies' operating expenses |
19,014 | 17,908 | 57,886 | 54,182 | |||||||||||
REIT general and administrative expenses |
2,881 | 1,992 | 11,419 | 11,777 | |||||||||||
Depreciation and amortization |
66,637 | 54,489 | 185,538 | 159,520 | |||||||||||
|
162,630 | 140,963 | 469,225 | 415,942 | |||||||||||
Interest expense: |
|||||||||||||||
Related parties |
5,002 | 3,772 | 12,381 | 9,634 | |||||||||||
Other |
65,304 | 52,566 | 197,258 | 169,450 | |||||||||||
|
70,306 | 56,338 | 209,639 | 179,084 | |||||||||||
Loss on early extinguishment of debt |
| | | 877 | |||||||||||
Total expenses |
232,936 | 197,301 | 678,864 | 595,903 | |||||||||||
Minority interest in consolidated joint ventures |
(539 | ) | (450 | ) | (1,943 | ) | (1,585 | ) | |||||||
Equity in income of unconsolidated joint ventures |
19,928 | 18,648 | 67,172 | 52,128 | |||||||||||
Income tax benefit (provision) |
362 | (429 | ) | 750 | 478 | ||||||||||
(Loss) gain on sale or write-down of assets |
(5,124 | ) | 147 | (3,961 | ) | 4,177 | |||||||||
Income from continuing operations |
7,498 | 22,739 | 45,410 | 48,541 | |||||||||||
Discontinued operations: |
|||||||||||||||
(Loss) gain on sale of assets |
(54 | ) | (903 | ) | 99,096 | (2,316 | ) | ||||||||
(Loss) income from discontinued operations |
(2 | ) | 2,528 | 303 | 4,395 | ||||||||||
Total (loss) income from discontinued operations |
(56 | ) | 1,625 | 99,399 | 2,079 | ||||||||||
Income before minority interest and preferred dividends |
7,442 | 24,364 | 144,809 | 50,620 | |||||||||||
Less: minority interest in Operating Partnership |
944 | 3,442 | 20,600 | 6,020 | |||||||||||
Net income |
6,498 | 20,922 | 124,209 | 44,600 | |||||||||||
Less: preferred dividends |
835 | 2,902 | 4,124 | 8,052 | |||||||||||
Less: adjustment of minority interest due to redemption value |
| (1,346 | ) | | 2,773 | ||||||||||
Net income available to common stockholders |
$ | 5,663 | $ | 19,366 | $ | 120,085 | $ | 33,775 | |||||||
Earnings per common sharebasic: |
|||||||||||||||
Income from continuing operations |
$ | 0.08 | $ | 0.24 | $ | 0.48 | $ | 0.49 | |||||||
Discontinued operations |
| 0.03 | 1.15 | (0.02 | ) | ||||||||||
Net income available to common stockholders |
$ | 0.08 | $ | 0.27 | $ | 1.63 | $ | 0.47 | |||||||
Earnings per common sharediluted: |
|||||||||||||||
Income from continuing operations |
$ | 0.08 | $ | 0.24 | $ | 0.48 | $ | 0.49 | |||||||
Discontinued operations |
| 0.03 | 1.15 | (0.02 | ) | ||||||||||
Net income available to common stockholders |
$ | 0.08 | $ | 0.27 | $ | 1.63 | $ | 0.47 | |||||||
Weighted average number of common shares outstanding: |
|||||||||||||||
Basic |
74,931,000 | 71,674,000 | 73,688,000 | 71,625,000 | |||||||||||
Diluted |
87,439,000 | 84,529,000 | 86,483,000 | 84,706,000 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
THE MACERICH COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
|
Common Stock | |
|
|
|
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|
|
Accumulated Other Comprehensive Loss |
Total Common Stockholders' Equity |
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|
Shares | Par Value |
Additional Paid-in Capital |
Accumulated Deficit |
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Balance January 1, 2008 |
72,311,763 | $ | 723 | $ | 1,367,566 | $ | (193,932 | ) | $ | (24,508 | ) | $ | 1,149,849 | |||||||
Comprehensive loss: |
||||||||||||||||||||
Net income |
| | | 124,209 | | 124,209 | ||||||||||||||
Reclassification of deferred losses |
| | | | 285 | 285 | ||||||||||||||
Interest rate swap/cap agreements |
| | | | 248 | 248 | ||||||||||||||
Total comprehensive income |
| | | 124,209 | 533 | 124,742 | ||||||||||||||
Amortization of share and unit-based plans |
186,917 | 2 | 15,959 | | | 15,961 | ||||||||||||||
Exercise of stock options |
362,888 | 4 | 8,568 | | | 8,572 | ||||||||||||||
Employee stock purchases |
6,494 | | 363 | | | 363 | ||||||||||||||
Distributions paid ($2.40) per share |
| | | (176,332 | ) | | (176,332 | ) | ||||||||||||
Preferred dividends |
| | (4,124 | ) | | | (4,124 | ) | ||||||||||||
Conversion of partnership units and Class A non-participating convertible preferred units to common shares |
150,674 | 2 | 5,056 | | | 5,058 | ||||||||||||||
Conversion of preferred shares to common shares |
3,067,131 | 30 | 83,465 | | | 83,495 | ||||||||||||||
Reversal of adjustments to minority interest for the redemption value of the Rochester Properties |
| | 172,805 | | | 172,805 | ||||||||||||||
Adjustment to reflect minority interest on a pro rata basis for period end ownership percentage of Operating Partnership units |
| | (8,920 | ) | | | (8,920 | ) | ||||||||||||
Balance September 30, 2008 |
76,085,867 | $ | 761 | $ | 1,640,738 | $ | (246,055 | ) | $ | (23,975 | ) | $ | 1,371,469 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
For the Nine Months Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||||
|
|
(Restated) |
||||||||
Cash flows from operating activities: |
||||||||||
Net income available to common stockholders |
$ | 120,085 | $ | 33,775 | ||||||
Preferred dividends |
4,124 | 8,052 | ||||||||
Adjustment to minority interest due to redemption value |
| 2,773 | ||||||||
Net income |
124,209 | 44,600 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Loss on early extinguishment of debt |
| 877 | ||||||||
Loss (gain) on sale or write-down of assets |
3,961 | (4,177 | ) | |||||||
(Gain) loss on sale of assets of discontinued operations |
(99,096 | ) | 2,316 | |||||||
Depreciation and amortization |
186,456 | 174,328 | ||||||||
Amortization of net premium on mortgage and bank and other notes payable |
(6,558 | ) | (7,668 | ) | ||||||
Amortization of share and unit-based plans |
8,402 | 11,119 | ||||||||
Minority interest in Operating Partnership |
20,600 | 6,020 | ||||||||
Minority interest in consolidated joint ventures |
1,943 | 13,156 | ||||||||
Equity in income of unconsolidated joint ventures |
(67,172 | ) | (52,128 | ) | ||||||
Distributions of income from unconsolidated joint ventures |
18,900 | 4,118 | ||||||||
Changes in assets and liabilities, net of acquisitions and dispositions: |
||||||||||
Tenant and other receivables, net |
20,800 | (10,371 | ) | |||||||
Other assets |
(1,890 | ) | (16,862 | ) | ||||||
Accounts payable and accrued expenses |
(27,142 | ) | 8,925 | |||||||
Due from affiliates |
826 | 1,989 | ||||||||
Other accrued liabilities |
(8,409 | ) | 31,829 | |||||||
Net cash provided by operating activities |
175,830 | 208,071 | ||||||||
Cash flows from investing activities: |
||||||||||
Acquisitions of property, development, redevelopment and property improvements |
(453,001 | ) | (434,133 | ) | ||||||
Redemption of Rochester Properties |
(18,794 | ) | | |||||||
Maturities of marketable securities |
807 | 912 | ||||||||
Deferred leasing costs |
(24,165 | ) | (24,359 | ) | ||||||
Distributions from unconsolidated joint ventures |
119,090 | 248,176 | ||||||||
Contributions to unconsolidated joint ventures |
(148,102 | ) | (18,532 | ) | ||||||
Repayments of loans to unconsolidated joint ventures |
148 | 220 | ||||||||
Proceeds from sale of assets |
3,742 | 15,814 | ||||||||
Restricted cash |
2,233 | (2,833 | ) | |||||||
Net cash used in investing activities |
(518,042 | ) | (214,735 | ) | ||||||
Cash flows from financing activities: |
||||||||||
Proceeds from mortgages and bank and other notes payable |
1,442,366 | 1,648,068 | ||||||||
Payments on mortgages and bank and other notes payable |
(925,760 | ) | (1,527,438 | ) | ||||||
Deferred financing costs |
(9,724 | ) | (1,919 | ) | ||||||
Purchase of Capped Calls |
| (59,850 | ) | |||||||
Repurchase of common stock |
| (74,970 | ) | |||||||
Proceeds from share and unit-based plans |
8,935 | 944 | ||||||||
Dividends and distributions |
(199,312 | ) | (186,390 | ) | ||||||
Dividends to preferred stockholders/preferred unit holders |
(10,744 | ) | (18,366 | ) | ||||||
Net cash provided by (used in) financing activities |
305,761 | (219,921 | ) | |||||||
Net decrease in cash |
(36,451 | ) | (226,585 | ) | ||||||
Cash and cash equivalents, beginning of period |
85,273 | 269,435 | ||||||||
Cash and cash equivalents, end of period |
$ | 48,822 | $ | 42,850 | ||||||
Supplemental cash flow information: |
||||||||||
Cash payments for interest, net of amounts capitalized |
$ | 220,718 | $ | 210,803 | ||||||
Non-cash transactions: |
||||||||||
Acquisition of minority interest in Non-Rochester Properties in exchange for interest in Rochester Properties |
$ | 205,520 | $ | | ||||||
Deposits contributed to unconsolidated joint ventures and the purchase of properties |
$ | 51,943 | $ | | ||||||
Accrued development costs included in accounts payable and accrued expenses and other accrued liabilities |
$ | 57,045 | $ | 30,259 | ||||||
Accrued preferred dividend payable |
$ | 276 | $ | 6,356 | ||||||
Acquisition of property by assumption of mortgage note payable |
$ | 15,789 | $ | 4,300 | ||||||
Conversion of Series A cumulative convertible redeemable preferred stock to common stock |
$ | 83,495 | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Organization:
The Macerich Company (the "Company") is involved in the acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers (the "Centers") located throughout the United States.
The Company commenced operations effective with the completion of its initial public offering on March 16, 1994. As of September 30, 2008, the Company was the sole general partner of and held an 86% ownership interest in The Macerich Partnership, L.P. (the "Operating Partnership"). The interests in the Operating Partnership are known as "OP Units." OP Units not held by the Company are redeemable, subject to certain restrictions, on a one-for-one basis for the Company's common stock or cash at the Company's option.
The Company was organized to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. The 14% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these consolidated financial statements as minority interest in the Operating Partnership.
The property management, leasing and redevelopment of the Company's portfolio is provided by the Company's management companies, Macerich Property Management Company, LLC ("MPMC, LLC"), a single member Delaware limited liability company, Macerich Management Company ("MMC"), a California corporation, Westcor Partners, L.L.C., a single member Arizona limited liability company, Macerich Westcor Management LLC, a single member Delaware limited liability company, Westcor Partners of Colorado, LLC, a Colorado limited liability company, MACW Mall Management, Inc., a New York corporation, and MACW Property Management, LLC, a single member New York limited liability company. These last two management companies are collectively referred to herein as the "Wilmorite Management Companies." The three Westcor management companies are collectively referred to herein as the "Westcor Management Companies." All seven of the management companies are collectively referred to herein as the "Management Companies."
2. Basis of Presentation:
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements and have not been audited by independent public accountants.
The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership. Investments in entities that are controlled by the Company or meet the definition of a variable interest entity in which an enterprise absorbs the majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity are consolidated; otherwise they are accounted for under the equity method and are reflected as "Investments in unconsolidated joint ventures."
7
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
2. Basis of Presentation: (Continued)
The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2007. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements for the interim periods have been made. The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated balance sheet as of December 31, 2007 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.
All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Tenant and Other Receivables:
Included in tenant and other receivables, net is an allowance for doubtful accounts of $2,482 and $2,417 at September 30, 2008 and December 31, 2007, respectively.
Included in tenant and other receivables, net are the following notes receivable:
On March 31, 2006, the Company received a note receivable that is secured by a deed of trust, bears interest at 5.5% and matures on March 31, 2031. At September 30, 2008 and December 31, 2007, the note had a balance of $9,503 and $9,661, respectively.
On January 1, 2008, as part of the Rochester Redemption (See Note 14Discontinued Operations), the Company received an unsecured note receivable that bears interest at 9.0% and matures on June 30, 2011. The balance on the note at September 30, 2008 was $11,763.
Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purpose of Lease Classification or Measurement under Statement 13 ("FSP FAS 157-1") and FSP SFAS 157-2, Effective Date of SFAS No. 157 ("FSP FAS 157-2"). FSP FAS 157-2 defers the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-1 excludes from the scope of SFAS No. 157 certain leasing transactions accounted for under SFAS No. 13, "Accounting for Leases." The Company adopted SFAS No. 157 and FSP FAS 157-1 on a prospective basis effective January 1, 2008. The adoption of
8
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
2. Basis of Presentation: (Continued)
SFAS No. 157 and FSP FAS 157-1 did not have a material impact on the Company's results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115." SFAS No. 159 permits, at the option of the reporting entity, measurement of certain assets and liabilities at fair value. The Company adopted SFAS No. 159 on January 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the Company's results of operations or financial condition as the Company did not elect to apply the fair value option to eligible financial instruments on that date.
In December 2007, the FASB issued SFAS No. 141 (revised), "Business Combinations." SFAS No. 141(R) requires all assets and assumed liabilities, including contingent liabilities, in a business combination to be recorded at their acquisition-date fair value rather than at historical costs. The Company is required to adopt SFAS No. 141 (R) on January 1, 2009. The Company is currently evaluating the impact of adoption on the Company's results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment to ARB No. 51." SFAS No. 160 clarifies the accounting for a noncontrolling interest or minority interest in a subsidiary included in consolidated financial statements. The Company is required to adopt SFAS No. 160 on January 1, 2009 and is currently evaluating the impact of adoption on the Company's results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133." SFAS No. 161 requires additional disclosures on derivative instruments and hedging activities and their effect on the reporting entity's financial statements. The Company is required to adopt SFAS No. 161 on January 1, 2009 and does not expect the adoption to have a material impact on the Company's results of operations or financial condition.
In May 2008, the FASB issued FSP APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires that convertible debt instruments that may be settled in cash be separated into liability and equity components in a manner that will reflect the reporting entity's nonconvertible debt borrowing rate. The Company is required to adopt FSP APB 14-1 on January 1, 2009 and is currently evaluating the impact of adoption on the Company's results of operations or financial condition.
Fair Value of Financial Instruments:
On January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. 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
9
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
2. Basis of Presentation: (Continued)
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 are 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 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.
3. Earnings per Share:
The computation of basic earnings per share ("EPS") is based on net income available to common stockholders and the weighted average number of common shares outstanding for the three and nine months ended September 30, 2008 and 2007. The computation of diluted earnings per share includes the dilutive effect of share and unit-based compensation plans and convertible senior notes calculated using the treasury stock method and the dilutive effect of all other dilutive securities calculated using the "if-converted" method. The OP Units and MACWH, LP common units not held by the Company have been included in the diluted EPS calculation since they may be redeemed on a one-for-one basis for common stock or cash, at the Company's option. The following table reconciles the basic and
10
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
3. Earnings per Share: (Continued)
diluted earnings per share calculation (dollar and share amounts in the tables (excluding footnotes) in thousands, except per share amounts):
|
For the Three Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||||||||||||||
|
Net Income |
Shares | Per Share |
Net Income |
Shares | Per Share |
|||||||||||||
Net income |
$ | 6,498 | $ | 20,922 | |||||||||||||||
Less: preferred dividends |
835 | 2,902 | |||||||||||||||||
Less: adjustment of minority interest due to redemption value |
| (1,346 | ) | ||||||||||||||||
Basic EPS: |
|||||||||||||||||||
Net income available to common stockholders |
5,663 | 74,931 | $ | 0.08 | 19,366 | 71,674 | $ | 0.27 | |||||||||||
Diluted EPS: |
|||||||||||||||||||
Conversion of partnership units |
944 | 12,493 | 3,442 | 12,546 | |||||||||||||||
Share and unit-based plans(1) |
| 15 | | 309 | |||||||||||||||
Net income available to common stockholders(2) |
$ | 6,607 | 87,439 | $ | 0.08 | $ | 22,808 | 84,529 | $ | 0.27 | |||||||||
|
For the Nine Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||||||||||||||
|
Net Income |
Shares | Per Share |
Net Income |
Shares | Per Share |
|||||||||||||
Net income |
$ | 124,209 | $ | 44,600 | |||||||||||||||
Less: preferred dividends |
4,124 | 8,052 | |||||||||||||||||
Less: adjustment of minority interest due to redemption value |
| 2,773 | |||||||||||||||||
Basic EPS: |
|||||||||||||||||||
Net income available to common stockholders |
120,085 | 73,688 | $ | 1.63 | 33,775 | 71,625 | $ | 0.47 | |||||||||||
Diluted EPS: |
|||||||||||||||||||
Conversion of partnership units |
20,600 | 12,528 | 6,020 | 12,775 | |||||||||||||||
Share and unit-based plans(1) |
| 267 | | 306 | |||||||||||||||
Net income available to common stockholders(2) |
$ | 140,685 | 86,483 | $ | 1.63 | $ | 39,795 | 84,706 | $ | 0.47 | |||||||||
11
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
3. Earnings per Share: (Continued)
The minority interest in the Operating Partnership as reflected in the Company's consolidated statements of operations has been allocated for EPS calculations as follows:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||||
Income from continuing operations |
$ | 952 | $ | 3,000 | $ | 6,157 | $ | 6,125 | |||||||
Discontinued operations: |
|||||||||||||||
(Loss) gain on sale of assets |
(8 | ) | (135 | ) | 14,399 | (350 | ) | ||||||||
Income from discontinued operations |
| 577 | 44 | 245 | |||||||||||
Total |
$ | 944 | $ | 3,442 | $ | 20,600 | $ | 6,020 | |||||||
The Company had an 86% and 85% ownership interest in the Operating Partnership as of September 30, 2008 and December 31, 2007, respectively. The remaining 14% and 15% limited partnership interest as of September 30, 2008 and December 31, 2007, respectively, was owned by certain of the Company's executive officers and directors, certain of their affiliates, and other outside investors in the form of OP Units. The OP Units may be redeemed on a one-for-one basis for common shares or cash, at the Company's option. The redemption value for each OP Unit as of any balance sheet date is the amount equal to the average of the closing quoted price per share of the Company's common stock, par value $.01 per share, as reported on the New York Stock Exchange for the ten trading days ending on the respective balance sheet date. Accordingly, as of September 30, 2008 and December 31, 2007, the aggregate redemption value of the then-outstanding OP Units not owned by the Company was $788,906 and $904,150, respectively.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures:
The following are the Company's investments in unconsolidated joint ventures. The Operating Partnership's interest in each joint venture property as of September 30, 2008 was as follows:
Joint Venture
|
Operating Partnership's Ownership %(1) |
|||
---|---|---|---|---|
Biltmore Shopping Center Partners LLC |
50.0 | % | ||
Camelback Colonnade SPE LLC |
75.0 | % | ||
Chandler Festival SPE LLC |
50.0 | % | ||
Chandler Gateway SPE LLC |
50.0 | % | ||
Chandler Village Center, LLC |
50.0 | % | ||
Coolidge Holding LLC |
37.5 | % | ||
Corte Madera Village, LLC |
50.1 | % | ||
Desert Sky MallTenants in Common |
50.0 | % | ||
East Mesa Land, L.L.C. |
50.0 | % | ||
East Mesa Mall, L.L.C.Superstition Springs Center |
33.3 | % | ||
Jaren Associates #4 |
12.5 | % | ||
Kierland Tower Lofts, LLC |
15.0 | % | ||
Macerich Northwestern Associates |
50.0 | % | ||
Macerich SanTan Phase 2 SPE LLCSanTan Village Power Center |
34.9 | % | ||
MetroRising AMS Holding LLC |
15.0 | % | ||
New River AssociatesArrowhead Towne Center |
33.3 | % | ||
North Bridge Chicago LLC |
50.0 | % | ||
NorthPark Land Partners, LP |
50.0 | % | ||
NorthPark Partners, LP |
50.0 | % | ||
One Scottsdale Investors LLC |
50.0 | % | ||
Pacific Premier Retail Trust |
51.0 | % | ||
PHXAZ/Kierland Commons, L.L.C. |
24.5 | % | ||
Propcor Associates |
25.0 | % | ||
Propcor II Associates, LLCBoulevard Shops |
50.0 | % | ||
Scottsdale Fashion Square Partnership |
50.0 | % | ||
SDG Macerich Properties, L.P. |
50.0 | % | ||
The Market at Estrella Falls LLC |
35.1 | % | ||
Tysons Corner Holdings LLC |
50.0 | % | ||
Tysons Corner LLC |
50.0 | % | ||
Tysons Corner Property Holdings II LLC |
50.0 | % | ||
Tysons Corner Property Holdings LLC |
50.0 | % | ||
Tysons Corner Property LLC |
50.0 | % | ||
WM Inland, L.L.C. |
50.0 | % | ||
West Acres Development, LLP |
19.0 | % | ||
Westcor/Gilbert, L.L.C. |
50.0 | % | ||
Westcor/Goodyear, L.L.C. |
50.0 | % | ||
Westcor/Queen Creek Commercial LLC |
37.7 | % | ||
Westcor/Queen Creek LLC |
37.7 | % | ||
Westcor/Queen Creek Medical LLC |
37.7 | % | ||
Westcor/Queen Creek Residential LLC |
37.6 | % | ||
Westcor/Surprise Auto Park LLC |
33.3 | % | ||
Westpen Associates |
50.0 | % | ||
WM Ridgmar, L.P. |
50.0 | % | ||
Wilshire BuildingTenants in Common |
30.0 | % |
13
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)
The Company generally accounts for its investments in joint ventures using the equity method of accounting unless the Company has a controlling interest in the joint venture or is the primary beneficiary in a variable interest entity. Although the Company has a greater than 50% interest in Pacific Premier Retail Trust, Camelback Colonnade SPE LLC and Corte Madera Village, LLC, the Company shares management control with the partners in these joint ventures and accounts for these joint ventures using the equity method of accounting.
The Company had the following recent investments in unconsolidated joint venture interests:
On September 5, 2007, the Company purchased the remaining 50% outside ownership interest in Hilton Village, a 96,546 square foot specialty center in Scottsdale, Arizona. The total purchase price of $13,500 was funded by cash, borrowings under the Company's line of credit and the assumption of an $8,600 mortgage note payable. The Center was previously accounted for under the equity method as an investment in unconsolidated joint ventures.
On October 25, 2007, the Company purchased a 30% tenant-in-common interest in the Wilshire Building, a 40,000 square foot strip center in Santa Monica, California. The total purchase price of $27,000 was funded by cash, borrowings under the Company's line of credit and the assumption of a $6,650 mortgage note payable. The results of the Wilshire Building are included below for the period subsequent to its date of acquisition.
On January 10, 2008, the Company, in a 50/50 joint venture, acquired The Shops at North Bridge, a 680,933 square foot urban shopping center in Chicago, Illinois, for a total purchase price of $515,000. The Company's share of the purchase price was funded by the assumption of a pro rata share of the $205,000 fixed rate mortgage on the Center and by borrowings under the Company's line of credit. The results of The Shops at North Bridge are included below for the period subsequent to its date of acquisition.
On June 11, 2008, the Company became a 50% owner in a joint venture that acquired One Scottsdale, which plans to develop a luxury retail and mixed-use property in Scottsdale, Arizona. The Company's share of the purchase price was $52,500, which was funded by borrowings under the Company's line of credit. The results of One Scottsdale are included below for the period subsequent to its date of acquisition.
Combined and condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures.
14
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)
Combined and Condensed Balance Sheets of Unconsolidated Joint Ventures:
|
September 30, 2008 |
December 31, 2007 |
||||||
---|---|---|---|---|---|---|---|---|
Assets(1): |
||||||||
Properties, net |
$ | 4,943,788 | $ | 4,294,147 | ||||
Other assets |
469,965 | 456,919 | ||||||
Total assets |
$ | 5,413,753 | $ | 4,751,066 | ||||
Liabilities and partners' capital(1): |
||||||||
Mortgage notes payable(2) |
$ | 4,129,590 | $ | 3,865,593 | ||||
Other liabilities |
228,027 | 183,884 | ||||||
The Company's capital(3) |
570,350 | 401,333 | ||||||
Outside partners' capital |
485,786 | 300,256 | ||||||
Total liabilities and partners' capital |
$ | 5,413,753 | $ | 4,751,066 | ||||
|
SDG Macerich Properties, L.P. |
Pacific Premier Retail Trust |
Tysons Corner LLC |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
As of September 30, 2008: |
||||||||||
Total assets |
$ | 887,873 | $ | 1,020,023 | $ | 638,599 | ||||
Total liabilities |
$ | 824,330 | $ | 840,419 | $ | 364,094 | ||||
As of December 31, 2007: |
||||||||||
Total assets |
$ | 904,186 | $ | 1,026,973 | $ | 640,179 | ||||
Total liabilities |
$ | 826,291 | $ | 842,816 | $ | 364,554 |
15
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)
investment and the book value of the underlying equity of the joint venture. The Company is amortizing this difference into income on a straight-line basis, consistent with the lives of the Company's underlying assets. The amortization of this difference was $2,040 and $1,337 for the three months ended September 30, 2008 and 2007, respectively, and $6,356 and $4,323 for the nine months ended September 30, 2008 and 2007, respectively.
16
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)
Combined and Condensed Statements of Operations of Unconsolidated Joint Ventures:
|
SDG Macerich Properties, L.P. |
Pacific Premier Retail Trust |
Tysons Corner LLC |
Other Joint Ventures |
Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended September 30, 2008 |
||||||||||||||||||
Revenues: |
||||||||||||||||||
Minimum rents |
$ | 22,772 | $ | 33,138 | $ | 14,116 | $ | 73,095 | $ | 143,121 | ||||||||
Percentage rents |
1,012 | 1,102 | 556 | 3,664 | 6,334 | |||||||||||||
Tenant recoveries |
12,899 | 13,085 | 9,531 | 33,988 | 69,503 | |||||||||||||
Other |
676 | 967 | 534 | 5,192 | 7,369 | |||||||||||||
Total revenues |
37,359 | 48,292 | 24,737 | 115,939 | 226,327 | |||||||||||||
Expenses: |
||||||||||||||||||
Shopping center and operating expenses |
14,573 | 13,892 | 7,743 | 44,351 | 80,559 | |||||||||||||
Interest expense |
11,768 | 11,384 | 4,108 | 30,177 | 57,437 | |||||||||||||
Depreciation and amortization |
7,840 | 8,208 | 4,753 | 25,595 | 46,396 | |||||||||||||
Total operating expenses |
34,181 | 33,484 | 16,604 | 100,123 | 184,392 | |||||||||||||
Gain on sale of assets |
403 | | | 1,575 | 1,978 | |||||||||||||
Net income |
$ | 3,581 | $ | 14,808 | $ | 8,133 | $ | 17,391 | $ | 43,913 | ||||||||
Company's equity in net income |
$ | 1,790 | $ | 7,523 | $ | 4,066 | $ | 6,549 | $ | 19,928 | ||||||||
Three Months Ended September 30, 2007 |
||||||||||||||||||
Revenues: |
||||||||||||||||||
Minimum rents |
$ | 23,189 | $ | 30,894 | $ | 17,157 | $ | 60,695 | $ | 131,935 | ||||||||
Percentage rents |
1,166 | 1,546 | 560 | 4,019 | 7,291 | |||||||||||||
Tenant recoveries |
12,591 | 13,411 | 7,808 | 30,069 | 63,879 | |||||||||||||
Other |
1,017 | 1,033 | 495 | 8,804 | 11,349 | |||||||||||||
Total revenues |
37,963 | 46,884 | 26,020 | 103,587 | 214,454 | |||||||||||||
Expenses: |
||||||||||||||||||
Shopping center and operating expenses |
14,506 | 14,019 | 6,833 | 37,423 | 72,781 | |||||||||||||
Interest expense |
11,716 | 12,367 | 4,129 | 28,125 | 56,337 | |||||||||||||
Depreciation and amortization |
7,987 | 8,184 | 5,036 | 20,424 | 41,631 | |||||||||||||
Total operating expenses |
34,209 | 34,570 | 15,998 | 85,972 | 170,749 | |||||||||||||
Loss on sale of assets |
| | | (9 | ) | (9 | ) | |||||||||||
Net income |
$ | 3,754 | $ | 12,314 | $ | 10,022 | $ | 17,606 | $ | 43,696 | ||||||||
Company's equity in net income |
$ | 1,877 | $ | 6,267 | $ | 5,011 | $ | 5,493 | $ | 18,648 | ||||||||
17
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)
|
SDG Macerich Properties, L.P. |
Pacific Premier Retail Trust |
Tysons Corner LLC |
Other Joint Ventures |
Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nine Months Ended September 30, 2008 |
||||||||||||||||||
Revenues: |
||||||||||||||||||
Minimum rents |
$ | 69,357 | $ | 97,121 | $ | 44,266 | $ | 212,051 | $ | 422,795 | ||||||||
Percentage rents |
2,543 | 2,805 | 1,677 | 8,581 | 15,606 | |||||||||||||
Tenant recoveries |
37,176 | 38,001 | 27,766 | 101,782 | 204,725 | |||||||||||||
Other |
2,653 | 3,161 | 1,507 | 34,580 | 41,901 | |||||||||||||
Total revenues |
111,729 | 141,088 | 75,216 | 356,994 | 685,027 | |||||||||||||
Expenses: |
||||||||||||||||||
Shopping center and operating expenses |
44,311 | 40,355 | 22,953 | 125,675 | 233,294 | |||||||||||||
Interest expense |
35,028 | 34,278 | 12,350 | 88,490 | 170,146 | |||||||||||||
Depreciation and amortization |
22,998 | 24,129 | 14,033 | 75,059 | 136,219 | |||||||||||||
Total operating expenses |
102,337 | 98,762 | 49,336 | 289,224 | 539,659 | |||||||||||||
Gain on sale of assets |
389 | | | 16,361 | 16,750 | |||||||||||||
Net income |
$ | 9,781 | $ | 42,326 | $ | 25,880 | $ | 84,131 | $ | 162,118 | ||||||||
Company's equity in net income |
$ | 4,890 | $ | 21,526 | $ | 12,940 | $ | 27,816 | $ | 67,172 | ||||||||
Nine Months Ended September 30, 2007 |
||||||||||||||||||
Revenues: |
||||||||||||||||||
Minimum rents |
$ | 69,116 | $ | 92,602 | $ | 47,857 | $ | 181,731 | $ | 391,306 | ||||||||
Percentage rents |
2,892 | 4,003 | 646 | 8,655 | 16,196 | |||||||||||||
Tenant recoveries |
36,308 | 38,213 | 23,424 | 88,257 | 186,202 | |||||||||||||
Other |
2,805 | 2,981 | 1,412 | 17,315 | 24,513 | |||||||||||||
Total revenues |
111,121 | 137,799 | 73,339 | 295,958 | 618,217 | |||||||||||||
Expenses: |
||||||||||||||||||
Shopping center and operating expenses |
43,647 | 39,490 | 19,435 | 105,357 | 207,929 | |||||||||||||
Interest expense |
34,775 | 36,984 | 12,498 | 78,334 | 162,591 | |||||||||||||
Depreciation and amortization |
22,707 | 23,504 | 15,401 | 67,691 | 129,303 | |||||||||||||
Total operating expenses |
101,129 | 99,978 | 47,334 | 251,382 | 499,823 | |||||||||||||
(Loss) gain on sale of assets |
(4,751 | ) | | | 763 | (3,988 | ) | |||||||||||
Net income |
$ | 5,241 | $ | 37,821 | $ | 26,005 | $ | 45,339 | $ | 114,406 | ||||||||
Company's equity in net income |
$ | 2,621 | $ | 19,254 | $ | 13,002 | $ | 17,251 | $ | 52,128 | ||||||||
Significant accounting policies used by the unconsolidated joint ventures are similar to those used by the Company.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
5. Derivative Instruments and Hedging Activities:
The Company recognizes all derivatives in the consolidated financial statements and measures the derivatives at fair value. The Company uses derivative financial instruments in the normal course of business to manage or reduce its exposure to adverse fluctuations in interest rates. The Company designs its hedges to be effective in reducing the risk exposure that they are designated to hedge. Any instrument that meets the cash flow hedging criteria in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is formally designated as a cash flow hedge at the inception of the derivative contract. On an ongoing quarterly basis, the Company adjusts its balance sheet to reflect the current fair value of its derivatives. To the extent they are effective, changes in fair value of derivatives are recorded in comprehensive income. Ineffective portions, if any, are included in consolidated statements of operations. No ineffectiveness was recorded in net income during the three and nine months ended September 30, 2008 or 2007. If any derivative instrument used for risk management does not meet the hedging criteria, it is marked-to-market each period in the consolidated statements of operations. As of September 30, 2008, four of the Company's derivative instruments were not designated as cash flow hedges. Changes in the market value of these derivative instruments are recorded in the consolidated statements of operations.
As of September 30, 2008 and December 31, 2007, the Company had $0 and $286, respectively, reflected in other comprehensive income related to treasury rate locks settled in prior years. The Company reclassified $0 and $245 for the three months ended September 30, 2008 and 2007, respectively, and $285 and $723 for the nine months ended September 30, 2008 and 2007, respectively, related to treasury rate lock transactions settled in prior years from accumulated other comprehensive income to earnings.
Interest rate swap and cap agreements are purchased by the Company from third parties. Amounts received (paid) as a result of these agreements are recorded as a decrease (increase) to interest expense. The Company recorded other comprehensive income (loss) related to the marking-to-market of interest rate swap and cap agreements of $449 and ($17,593) for the three months ended September 30, 2008 and 2007, respectively, and $248 and ($9,839) for the nine months September 30, 2008 and 2007, respectively. The amount expected to be reclassified to interest expense in the next 12 months is immaterial.
The fair values of interest rate swap and cap agreements are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below or rose above the strike rate of the interest rate swap and cap agreements. The variable interest rates used in the calculation of projected receipts on the interest rate swap and cap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
19
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
5. Derivative Instruments and Hedging Activities: (Continued)
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following table presents the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:
|
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance at September 30, 2008 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||||||
Derivative Instruments |
$ | | $ | 182 | $ | | $ | 182 | |||||
Liabilities |
|||||||||||||
Derivative Instruments |
$ | | $ | 27,159 | $ | | $ | 27,159 |
Derivative instruments that are assets are included in deferred charges and other assets; derivative instruments that are liabilities are included in other accrued liabilities.
6. Property:
Property consists of the following:
|
September 30, 2008 |
December 31, 2007 |
|||||
---|---|---|---|---|---|---|---|
Land |
$ | 1,141,283 | $ | 1,146,096 | |||
Building improvements |
5,074,434 | 5,121,442 | |||||
Tenant improvements |
316,720 | 285,395 | |||||
Equipment and furnishings |
82,133 | 83,199 | |||||
Construction in progress |
724,954 | 442,670 | |||||
|
7,339,524 | 7,078,802 | |||||
Less accumulated depreciation |
(934,821 | ) | (891,329 | ) | |||
|
$ | 6,404,703 | $ | 6,187,473 | |||
Depreciation expense was $48,741 and $41,015 for the three months ended September 30, 2008 and 2007, respectively, and $140,901 and $118,365 for the nine months ended September 30, 2008 and 2007, respectively.
The Company recognized a gain on sale of land of $223 and $147 during the three months ended September 30, 2008 and 2007, respectively, and $1,386 and $4,146 for the nine months ended
20
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
6. Property: (Continued)
September 30, 2008 and 2007, respectively. In addition, the Company recognized a gain on sale of equipment and furnishings of $31 during the nine months ended September 30, 2007.
In September 2008, the Company changed its plans to sell the 29 Mervyn's stores located at shopping centers not owned or managed by the Company and therefore the results of these stores have been reclassified in the Company's consolidated statements of operations to continuing operations for all periods presented (See Note 14Discontinued Operations). The Company's decision was based on current conditions in the credit market and an expectation that a better return could be obtained by holding and operating the assets. As a result of this change, the Company was required to revalue the assets related to the stores at the lower of their i) carrying amount before the assets were classified as held for sale, adjusted for depreciation that would have otherwise been recognized had the assets been continuously classified as held and used, or ii) the fair value of the assets at the date subsequent to the decision not to sell. Accordingly, the Company recorded a loss of $5,347 in (loss) gain on sale or write-down of assets for the three and nine months ended September 30, 2008.
7. Marketable Securities:
Marketable securities are held to maturity and consist of the following:
|
September 30, 2008 |
December 31, 2007 |
|||||
---|---|---|---|---|---|---|---|
Government debt securities, at par value |
$ | 29,737 | $ | 30,544 | |||
Less discount |
(1,248 | ) | (1,501 | ) | |||
|
28,489 | 29,043 | |||||
Unrealized gain |
2,485 | 2,183 | |||||
Fair value |
$ | 30,974 | $ | 31,226 | |||
Future contractual maturities of marketable securities at September 30, 2008 are as follows:
1 year or less |
$ | 1,267 | ||
2 to 5 years |
4,111 | |||
6 to 10 years |
24,359 | |||
|
$ | 29,737 | ||
The proceeds from maturities and interest receipts from the marketable securities are restricted to the service of the $27,204 note on which the Company remains obligated following the sale of Greeley Mall on July 27, 2006 (See Note 10Bank and Other Notes Payable).
21
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
8. Deferred Charges and Other Assets:
Deferred charges and other assets are summarized as follows:
|
September 30, 2008 |
December 31, 2007 |
||||||
---|---|---|---|---|---|---|---|---|
Leasing |
$ | 130,875 | $ | 139,343 | ||||
Financing |
54,472 | 47,406 | ||||||
Intangible assets resulting from SFAS No. 141 allocations: |
||||||||
In-place lease values |
180,258 | 201,863 | ||||||
Leasing commissions and legal costs |
58,540 | 35,728 | ||||||
|
424,145 | 424,340 | ||||||
Less accumulated amortization(1) |
(140,116 | ) | (175,353 | ) | ||||
|
284,029 | 248,987 | ||||||
Other assets, net |
109,469 | 137,815 | ||||||
|
$ | 393,498 | $ | 386,802 | ||||
The allocated values of above market leases included in deferred charges and other assets, net and the below market leases included in other accrued liabilities, related to SFAS No. 141, consist of the following:
|
September 30, 2008 |
December 31, 2007 |
|||||
---|---|---|---|---|---|---|---|
Above Market Leases |
|||||||
Original allocated value |
$ | 78,249 | $ | 65,752 | |||
Less accumulated amortization |
(32,573 | ) | (38,530 | ) | |||
|
$ | 45,676 | $ | 27,222 | |||
Below Market Leases |
|||||||
Original allocated value |
$ | 189,216 | $ | 156,667 | |||
Less accumulated amortization |
(78,738 | ) | (93,090 | ) | |||
|
$ | 110,478 | $ | 63,577 | |||
In July 2008, Mervyn's filed for bankruptcy protection. The Company has 46 Mervyn's stores in its portfolio. The Company owns the ground leasehold and/or fee simple interest in 43 of those stores and the remaining three are owned by third parties but are located at the Centers. In August 2008, Mervyn's announced that it planned to close 26 of its stores during the three months ended December 31, 2008. Six of the planned store closings are part of the Company's portfolio. During the three months ended September 30, 2008, the Company concluded that it was more likely than not that these six leases would be rejected by Mervyn's. As a result, the Company has included in depreciation and amortization a write-down of the carrying value of the intangible assets of $5,214.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
9. Mortgage Notes Payable:
Mortgage notes payable consist of the following:
|
Carrying Amount of Mortgage Notes(a) | |
|
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | December 31, 2007 | |
|
|
|||||||||||||||||
Property Pledged as Collateral
|
Other | Related Party | Other | Related Party | Interest Rate |
Monthly Payment Term(b) |
Maturity Date |
|||||||||||||||
Capitola Mall |
$ | | $ | 37,966 | $ | | $ | 39,310 | 7.13 | % | 380 | 2011 | ||||||||||
Cactus Power Center(c) |
649 | | | 4.54 | % | 2 | 2011 | |||||||||||||||
Carmel Plaza |
25,922 | | 26,253 | | 8.18 | % | 202 | 2009 | ||||||||||||||
Chandler Fashion Center |
167,340 | 169,789 | | 5.50 | % | 435 | 2012 | |||||||||||||||
Chesterfield Towne Center(d) |
54,522 | | 55,702 | | 9.07 | % | 548 | 2024 | ||||||||||||||
Danbury Fair Mall |
171,570 | | 176,457 | | 4.64 | % | 1,225 | 2011 | ||||||||||||||
Deptford Mall |
172,500 | | 172,500 | | 5.41 | % | 778 | 2013 | ||||||||||||||
Deptford Mall(e) |
15,688 | | | | 6.46 | % | 101 | 2016 | ||||||||||||||
Eastview Commons(f) |
| | 8,814 | | | | | |||||||||||||||
Eastview Mall(f) |
| | 101,007 | | | | | |||||||||||||||
Fiesta Mall |
84,000 | | 84,000 | | 4.98 | % | 341 | 2015 | ||||||||||||||
Flagstaff Mall |
37,000 | | 37,000 | | 5.03 | % | 153 | 2015 | ||||||||||||||
FlatIron Crossing |
185,137 | | 187,736 | | 5.26 | % | 1,102 | 2013 | ||||||||||||||
Freehold Raceway Mall |
173,248 | | 177,686 | | 4.68 | % | 1,184 | 2011 | ||||||||||||||
Fresno Fashion Fair(g) |
84,927 | 84,927 | 63,590 | | 6.76 | % | 1,104 | 2015 | ||||||||||||||
Great Northern Mall |
39,772 | | 40,285 | | 5.19 | % | 234 | 2013 | ||||||||||||||
Greece Ridge Center(f) |
| | 72,000 | | | | | |||||||||||||||
Hilton Village |
8,543 | | 8,530 | | 5.27 | % | 37 | 2012 | ||||||||||||||
La Cumbre Plaza(h) |
30,000 | | 30,000 | | 3.87 | % | 84 | 2009 | ||||||||||||||
Marketplace Mall(f) |
| | 39,345 | | | | | |||||||||||||||
Northridge Mall |
80,030 | | 81,121 | | 4.94 | % | 453 | 2009 | ||||||||||||||
Oaks, The(i) |
165,000 | | | | 4.54 | % | 582 | 2011 | ||||||||||||||
Oaks, The(j) |
57,114 | | | | 5.49 | % | 218 | 2011 | ||||||||||||||
Pacific View |
87,761 | | 88,857 | | 7.20 | % | 602 | 2011 | ||||||||||||||
Panorama Mall(k) |
50,000 | | 50,000 | | 4.25 | % | 168 | 2010 | ||||||||||||||
Paradise Valley Mall |
20,507 | | 21,231 | | 5.89 | % | 183 | 2009 | ||||||||||||||
Pittsford Plaza(f) |
| | 24,596 | | | | | |||||||||||||||
Pittsford Plaza(f) |
| | 9,148 | | | | | |||||||||||||||
Prescott Gateway |
60,000 | | 60,000 | | 5.86 | % | 289 | 2011 | ||||||||||||||
Promenade at Casa Grande(l) |
96,911 | | 79,964 | | 5.02 | % | 401 | 2009 | ||||||||||||||
Queens Center |
89,333 | | 90,519 | | 7.11 | % | 633 | 2009 | ||||||||||||||
Queens Center |
107,151 | 107,150 | 108,539 | 108,538 | 7.00 | % | 1,591 | 2013 | ||||||||||||||
Rimrock Mall |
42,328 | | 42,828 | | 7.56 | % | 320 | 2011 | ||||||||||||||
Salisbury, Center at |
115,000 | | 115,000 | | 5.83 | % | 555 | 2016 | ||||||||||||||
Santa Monica Place |
78,186 | | 79,014 | | 7.79 | % | 606 | 2010 | ||||||||||||||
SanTan Village Regional Center(m) |
126,462 | | | | 5.27 | % | 506 | 2011 | ||||||||||||||
Shoppingtown Mall |
43,449 | | 44,645 | | 5.01 | % | 319 | 2011 | ||||||||||||||
South Plains Mall |
57,987 | | 58,732 | | 8.29 | % | 454 | 2009 | ||||||||||||||
South Towne Center(n) |
| | 64,000 | | | | | |||||||||||||||
Towne Mall |
14,487 | | 14,838 | | 4.99 | % | 100 | 2012 | ||||||||||||||
Tucson La Encantada |
| 78,000 | | 78,000 | 5.84 | % | 364 | 2012 | ||||||||||||||
Twenty Ninth Street(o) |
115,000 | | 110,558 | | 4.19 | % | 382 | 2009 | ||||||||||||||
Valley River Center |
120,000 | | 120,000 | | 5.60 | % | 558 | 2016 | ||||||||||||||
Valley View Center |
125,000 | | 125,000 | | 5.81 | % | 596 | 2011 | ||||||||||||||
Victor Valley, Mall of(p) |
100,000 | | 51,211 | | 4.35 | % | 340 | 2011 | ||||||||||||||
Village Fair North(q) |
| | 10,880 | | | | | |||||||||||||||
Vintage Faire Mall |
63,601 | | 64,386 | | 7.91 | % | 508 | 2010 | ||||||||||||||
Westside Pavilion(r) |
175,000 | | 92,037 | | 5.13 | % | 654 | 2011 | ||||||||||||||
Wilton Mall |
43,121 | | 44,624 | | 4.79 | % | 349 | 2009 | ||||||||||||||
|
$ | 3,284,246 | $ | 308,043 | $ | 3,102,422 | $ | 225,848 | ||||||||||||||
23
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
9. Mortgage Notes Payable: (Continued)
approximates the effective interest method. The interest rate disclosed represents the effective interest rate, including the debt premium (discount) and deferred finance cost.
Debt premiums (discounts) consist of the following:
Property Pledged as Collateral
|
September 30, 2008 |
December 31, 2007 |
|||||
---|---|---|---|---|---|---|---|
Danbury Fair Mall |
$ | 10,232 | $ | 13,405 | |||
Deptford Mall |
(43 | ) | | ||||
Eastview Commons |
| 573 | |||||
Eastview Mall |
| 1,736 | |||||
Freehold Raceway Mall |
9,798 | 12,373 | |||||
Great Northern Mall |
(143 | ) | (164 | ) | |||
Hilton Village |
(57 | ) | (70 | ) | |||
Marketplace Mall |
| 1,650 | |||||
Paradise Valley Mall |
172 | 392 | |||||
Pittsford Plaza |
| 857 | |||||
Shoppingtown Mall |
2,918 | 3,731 | |||||
Towne Mall |
394 | 464 | |||||
Victor Valley, Mall of |
| 54 | |||||
Village Fair North |
| 49 | |||||
Wilton Mall |
1,629 | 2,729 | |||||
|
$ | 24,900 | $ | 37,779 | |||
24
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
9. Mortgage Notes Payable: (Continued)
Most of the mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.
Total interest expense capitalized was $10,421 and $9,836 for the three months ended September 30, 2008 and 2007, respectively, and $26,058 and $24,127 for the nine months ended September 30, 2008 and 2007, respectively.
The related party mortgage notes payable are amounts due to an affiliate of NML. See Note 11Related-Party Transactions for interest expense associated with these loans.
10. Bank and Other Notes Payable:
Bank and other notes payable consist of the following:
Convertible Senior Notes:
On March 16, 2007, the Company issued $950,000 in convertible senior notes ("Senior Notes") that are to mature on March 15, 2012. The Senior Notes bear interest at 3.25%, payable semiannually, are senior unsecured debt of the Company and are guaranteed by the Operating Partnership. Prior to December 14, 2011, upon the occurrence of certain specified events, the Senior Notes will be convertible at the option of the holder into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the election of the Company, at an initial conversion rate of 8.9702 shares per $1 principal amount. On and after December 15, 2011, the Senior Notes will be convertible at any time prior to the second business day preceding the maturity date at the option of the holder at the initial conversion rate. The initial conversion price of approximately $111.48 per share represented a 20% premium over the closing price of the Company's common stock on March 12, 2007. The initial conversion rate is subject to adjustment under certain circumstances. Holders of the Senior Notes do not have the right to require the Company to
25
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
10. Bank and Other Notes Payable: (Continued)
repurchase the Senior Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions. The carrying value of the Senior Notes at September 30, 2008 and December 31, 2007 includes an unamortized discount of $6,559 and $7,988, respectively, incurred at issuance and is amortized into interest expense over the term of the Senior Notes in a manner that approximates the effective interest method. As of September 30, 2008 and December 31, 2007, the effective interest rate was 3.66%. On October 24, 2008, the Company repurchased and retired $138,000 of the Senior Notes, resulting in a gain on early extinguishment of debt of approximately $58,000.
Concurrent with the issuance of the Senior Notes, the Company purchased two capped calls ("Capped Calls") from affiliates of the initial purchasers of the Senior Notes. The Capped Calls effectively increased the conversion price of the Senior Notes to approximately $130.06, which represents a 40% premium to the March 12, 2007 closing price of $92.90 per common share of the Company. The Capped Calls are expected to generally reduce the potential dilution upon exchange of the Senior Notes in the event the market value per share of the Company's common stock, as measured under the terms of the relevant settlement date, is greater than the strike price of the Capped Calls. If, however, the market value per share of the Company's common stock exceeds $130.06 per common share, then the dilution mitigation under the Capped Calls will be capped, which means there would be dilution from exchange of the Senior Notes to the extent that the market value per share of the Company's common stock exceeds $130.06. The cost of the Capped Calls was approximately $59,850 and was recorded as a charge to additional paid-in capital in 2007.
Line of Credit:
The Company has a $1,500,000 revolving line of credit that matures on April 25, 2010 with a one-year extension option. The interest rate fluctuates from LIBOR plus 0.75% to LIBOR plus 1.10% depending on the Company's overall leverage. The Company has an interest rate swap agreement that effectively fixed the interest rate on $400,000 of the outstanding balance of the line of credit at 6.23% until April 25, 2011. As of September 30, 2008 and December 31, 2007, borrowings outstanding were $1,022,750 and $1,015,000 at an effective interest rate, excluding the $400,000 swapped portion, of 4.54% and 6.19%, respectively.
Term Notes:
On April 25, 2005, the Company obtained a five-year, $450,000 term loan bearing interest at LIBOR plus 1.50%. In November 2005, the Company entered into an interest rate swap agreement that effectively fixed the interest rate of the term loan at 6.30% from December 1, 2005 to April 25, 2010. As of September 30, 2008 and December 31, 2007, the note had a balance outstanding of $448,125 and $450,000, respectively, with an effective interest rate of 6.50%.
On July 27, 2006, concurrent with the sale of Greeley Mall, the Company provided marketable securities to replace Greeley Mall as collateral for the mortgage note payable on the property (See Note 7Marketable Securities). As a result of this transaction, the debt was reclassified to bank and other notes payable. This note bears interest at an effective rate of 6.34% and matures in September
26
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
10. Bank and Other Notes Payable: (Continued)
2013. As of September 30, 2008 and December 31, 2007, the note had a balance outstanding of $27,204 and $27,676, respectively.
As of September 30, 2008 and December 31, 2007, the Company was in compliance with all applicable loan covenants.
11. Related-Party Transactions:
Certain unconsolidated joint ventures have engaged the Management Companies to manage the operations of the Centers. Under these arrangements, the Management Companies are reimbursed for compensation paid to on-site employees, leasing agents and project managers at the Centers, as well as insurance costs and other administrative expenses. The following fees were charged to unconsolidated joint ventures:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||
Management Fees |
|||||||||||||
MMC |
$ | 3,083 | $ | 2,622 | $ | 8,968 | $ | 7,728 | |||||
Westcor Management Companies |
2,019 | 1,722 | 5,734 | 4,983 | |||||||||
Wilmorite Management Companies |
433 | 416 | 1,266 | 1,189 | |||||||||
|
$ | 5,535 | $ | 4,760 | $ | 15,968 | $ | 13,900 | |||||
Development and Leasing Fees |
|||||||||||||
MMC |
$ | 261 | $ | 156 | $ | 456 | $ | 339 | |||||
Westcor Management Companies |
2,207 | 2,595 | 6,808 | 6,983 | |||||||||
Wilmorite Management Companies |
438 | | 1,314 | 50 | |||||||||
|
$ | 2,906 | $ | 2,751 | $ | 8,578 | $ | 7,372 | |||||
Certain mortgage notes are held by NML (See Note 9Mortgage Notes Payable). Interest expense in connection with these notes was $5,002 and $3,772 for the three months ended September 30, 2008 and 2007, respectively, and $12,381 and $9,634 for the nine months ended September 30, 2008 and 2007, respectively. Included in accounts payable and accrued expenses is interest payable to NML of $1,574 and $1,150 at September 30, 2008 and December 31, 2007, respectively.
As of September 30, 2008 and December 31, 2007, the Company had loans to unconsolidated joint ventures of $456 and $604, respectively. Interest income associated with these notes was $10 and $11 for the three months ended September 30, 2008 and 2007, respectively, and $31 and $33 for the nine months ended September 30, 2008 and 2007, respectively. These loans represent initial funds advanced to development stage projects prior to construction loan funding. Correspondingly, loan payables in the same amount have been accrued as an obligation by the various joint ventures.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
11. Related-Party Transactions: (Continued)
Due from affiliates of $4,903 and $5,729 at September 30, 2008 and December 31, 2007, respectively, represents unreimbursed costs and fees due from unconsolidated joint ventures under management agreements.
Certain Company officers and affiliates have guaranteed mortgages of $21,750 at one of the Company's joint venture properties.
12. Stock Repurchase Program:
On March 16, 2007, the Company repurchased 807,000 shares for $74,970 concurrent with the Senior Notes offering (See Note 10Bank and Other Notes Payable). These shares were repurchased pursuant to the Company's stock repurchase program authorized by the Company's Board of Directors on March 9, 2007. This repurchase program ended on March 16, 2007 because the maximum shares allowed to be repurchased under the program was reached.
13. Acquisitions:
The following acquisitions were recently completed by the Company:
Hilton Village:
On September 5, 2007, the Company purchased the remaining 50% outside ownership interest in Hilton Village, a 96,546 square foot specialty center in Scottsdale, Arizona. The total purchase price of $13,500 was funded by cash, borrowings under the Company's line of credit and the assumption of a mortgage note payable. The Center was previously accounted for under the equity method as an investment in unconsolidated joint ventures. The results of Hilton Village's operations have been included in the Company's consolidated financial statements since the acquisition date.
Mervyn's:
On December 17, 2007, the Company purchased a portfolio of ground leasehold and/or fee simple interests in 39 Mervyn's department stores for $400,160. The Company purchased an additional ground leasehold interest on January 31, 2008 for $13,182 and a fee simple interest on February 29, 2008 for $19,338. All of the purchased properties are located in the Southwest United States. The purchase price was funded by cash and borrowings under the Company's line of credit. Concurrent with each acquisition, the Company entered into individual agreements to lease back the properties to Mervyn's for terms of 14 to 20 years. The results of operations include these properties since the acquisition date. (See Note 6Property, Note 8Deferred Charges and Other Assets and Note 14Discontinued Operations).
Boscov's:
On May 20, 2008, the Company purchased fee simple interest in a 161,350 square foot Boscov's department store at Deptford Mall in Deptford, New Jersey. The total purchase price of $23,500 was funded by the assumption of the existing mortgage note on the property and by borrowings under the
28
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
13. Acquisitions: (Continued)
Company's line of credit. The results of operations have included this property since the date of acquisition.
14. Discontinued Operations:
The following operations were recently disposed or designated as held for sale by the Company:
Mervyn's:
On December 17, 2007, the Company purchased a portfolio of ground leasehold and/or fee simple interests in 39 Mervyn's department stores for $400,160. The Company purchased an additional ground leasehold interest on January 31, 2008 for $13,182 and a fee simple interest on February 29, 2008 for $19,338. (See Note 13Acquisitions). Upon closing of these acquisitions, management designated the 29 stores located at shopping centers not owned or managed by the Company in the portfolio as available for sale. The results of operations from these properties had been included in income from discontinued operations since the respective acquisition dates. The carrying value of these properties was recorded as assets held for sale at December 31, 2007 in the amount of $250,648.
In September 2008, the Company changed its plans to sell the 29 Mervyn's stores and therefore the results of these stores have been reclassified in the Company's consolidated statements of operations to continuing operations for all periods presented. The Company's decision was based on current conditions in the credit market and an expectation that a better return could be obtained by holding and operating the assets. As a result of this change, the Company was required to revalue the assets related to the stores at the lower of their i) carrying amount before the assets were classified as held for sale, adjusted for depreciation that would have otherwise been recognized had the assets been continuously classified as held and used, or ii) the fair value of the assets at the date subsequent to the decision not to sell. Accordingly, the Company recorded a loss of $5,347 in (loss) gain on sale or write-down of assets for the three and nine months ended September 30, 2008.
Rochester Redemption:
On April 25, 2005, the Company and the Operating Partnership acquired Wilmorite Properties, Inc., a Delaware corporation ("Wilmorite"), and Wilmorite Holdings, L.P., a Delaware limited partnership ("Wilmorite Holdings"). Wilmorite's portfolio included interests in 11 regional malls and two open-air community shopping centers with 13,400,000 square feet of space located in Connecticut, New York, New Jersey, Kentucky and Virginia. The total purchase price was approximately $2,333,333, plus adjustments for working capital, including the assumption of approximately $877,174 of existing debt with an average interest rate of 6.43%, and the issuance of 3,426,609 Class A participating convertible preferred units ("PCPUs") valued at $213,786, 344,625 Class A non-participating convertible preferred units valued at $21,501 and 93,209 common units in Wilmorite Holdings valued at $5,815. The balance of the consideration to the equity holders of Wilmorite and Wilmorite Holdings was paid in cash, which was provided primarily by a five-year, $450,000 term loan bearing interest at LIBOR plus 1.50% and a $650,000 acquisition loan which had a term of up to two years and bore interest initially at LIBOR plus 1.60%. An affiliate of the Operating
29
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
14. Discontinued Operations: (Continued)
Partnership is the general partner and, together with other affiliates, owned as of December 31, 2007 approximately 84% of Wilmorite Holdings, with the remaining 16% held by those limited partners of Wilmorite Holdings who elected to receive convertible preferred units or common units in Wilmorite Holdings rather than cash. These interests represented a minority interest in MACWH, LP, a subsidiary of the Operating Partnership and successor in interest in Wilmorite Holdings, which in turn holds the Wilmorite portfolio, and were recorded at predecessor basis, representing, at acquisition date, a $195,905 reduction from fair value in the balance sheet with the earnings attributable to these interests reported as minority interest in consolidated joint ventures in the consolidated statements of operations.
On January 1, 2008, a subsidiary of the Operating Partnership, at the election of the holders, redeemed the 3,426,609 PCPUs. As a result of the redemption, the Company received the 16.32% minority interest in the portion of the Wilmorite portfolio that included Danbury Fair Mall, Freehold Raceway Mall, Great Northern Mall, Rotterdam Square, Shoppingtown Mall, Towne Mall, Tysons Corner Center and Wilton Mall, collectively referred to as the "Non-Rochester Properties," for total consideration of $224,393, in exchange for the Company's ownership interest in the portion of the Wilmorite portfolio that consisted of Eastview Commons, Eastview Mall, Greece Ridge Center, Marketplace Mall and Pittsford Plaza, collectively referred to as the "Rochester Properties," including approximately $18,000 in cash held at those properties. Included in the redemption consideration was the assumption of the remaining 16.32% interest in the indebtedness of the Non-Rochester Properties, which had an estimated fair value of $105,962. The Company determined the fair value of the debt using a present value model based upon the terms of equivalent debt and upon credit spreads made available to the Company. The fair value of the debt consisted of $71,032 of Level 2 inputs and $34,930 of Level 3 inputs in accordance with SFAS No. 157. The source of the Level 2 inputs involved the use of the nominal weekly average of the U.S. treasury rates. In addition, the Company also received additional consideration of $11,763, in the form of a note, for certain working capital adjustments, extraordinary capital expenditures, leasing commissions, tenant allowances, and decreases in indebtedness during the Company's period of ownership of the Rochester Properties. The Company recognized a gain of $99,263 on the exchange based on the difference between the fair value of the additional interest acquired in the Non-Rochester Properties and the carrying value of the Rochester Properties, net of minority interest. This exchange is referred to herein as the "Rochester Redemption."
As a result of the Rochester Redemption, the Company recorded a credit to additional paid-in capital of $172,805 due to the reversal of adjustments to minority interest for the redemption value on the Rochester Properties over the Company's historical cost. In addition, the Company recorded a step-up in the basis of approximately $218,812 in the remaining portion of the Non-Rochester Properties.
The Company has classified the results of operations for the three and nine months ended September 30, 2008 and 2007 for all of the above dispositions as discontinued operations.
30
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
14. Discontinued Operations: (Continued)
Revenues and (loss) income from discontinued operations were as follows:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||||
Scottsdale/101 |
$ | | $ | 10 | $ | 10 | $ | 54 | ||||||
Park Lane Mall |
| | | 14 | ||||||||||
Holiday Village |
| 27 | 338 | 160 | ||||||||||
Greeley Mall |
| | | (3 | ) | |||||||||
Great Falls Marketplace |
| | (21 | ) | | |||||||||
Citadel Mall |
| | | 47 | ||||||||||
Northwest Arkansas Mall |
| | | 33 | ||||||||||
Crossroads Mall |
| | | (26 | ) | |||||||||
Rochester Properties |
| 21,860 | | 62,199 | ||||||||||
|
$ | | $ | 21,897 | $ | 327 | $ | 62,478 | ||||||
(Loss) income from discontinued operations: |
||||||||||||||
Scottsdale/101 |
$ | (2 | ) | $ | 4 | $ | (2 | ) | $ | 7 | ||||
Park Lane Mall |
| | | 19 | ||||||||||
Holiday Village |
| 18 | 338 | 132 | ||||||||||
Greeley Mall |
| 178 | | (79 | ) | |||||||||
Great Falls Marketplace |
| | (33 | ) | 1 | |||||||||
Citadel Mall |
| 68 | | (66 | ) | |||||||||
Northwest Arkansas Mall |
| (1 | ) | | 22 | |||||||||
Crossroads Mall |
| (28 | ) | | 22 | |||||||||
Rochester Properties |
| 2,289 | | 4,337 | ||||||||||
|
$ | (2 | ) | $ | 2,528 | $ | 303 | $ | 4,395 | |||||
15. Commitments and Contingencies:
The Company has certain properties that are subject to non-cancelable operating ground leases. The leases expire at various times through 2107, subject in some cases, to options to extend the terms of the lease. Certain leases provide for contingent rent payments based on a percentage of base rental income as defined in the lease agreements. Ground rent expense was $1,821 and $961 for the three months ended September 30, 2008 and 2007, respectively, and $5,456 and $2,679 for the nine months ended September 30, 2008 and 2007, respectively. No contingent rent was incurred in either period.
As of September 30, 2008 and December 31, 2007, the Company was contingently liable for $6,221 and $6,574, respectively, in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result
31
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
15. Commitments and Contingencies: (Continued)
in a liability to the Company. In addition, the Company has a $24,000 letter of credit that serves as collateral to a liability assumed in the acquisition of Shoppingtown Mall in 2005.
The Company has entered into a number of construction agreements related to its redevelopment and development activities. Obligations under these agreements are contingent upon the completion of the services within the guidelines specified in the agreement. At September 30, 2008, the Company had $115,259 in outstanding obligations which it believes will be settled in the next twelve months.
16. Share and Unit-Based Plans:
The Company has established share and unit-based compensation plans for the purpose of attracting and retaining executive officers, directors and key employees. The share-based compensation plans provide for grants of stock awards, stock options, stock appreciation rights, operating partnership units and phantom stock units. In addition, the Company has established an Employee Stock Purchase Plan to allow employees to purchase the Company's common stock at a discount.
The Company accounts for its share and unit-based compensation plans in accordance with SFAS No. 123(R), "Share-Based Payment." Under SFAS No. 123(R), an equity instrument is not recorded to common stockholders' equity until the related compensation expense is recorded over the requisite service period of the award. The Company records compensation cost on a straight-line basis for awards, excluding the market-indexed awards referred to as "LTIP Units." Compensation cost for the market-indexed LTIP Unit awards are recognized under the graded attribution method.
On March 7, 2008, the Company granted 1,257,134 stock appreciation rights ("SARs") to certain executives of the Company as an additional component of compensation. The SARs vest on March 15, 2011. Once the SARs have vested, the executive will have up to 10 years from the grant date to exercise the SARs. There is no performance requirement, only a service condition of continued employment. Upon exercise, the executives will receive unrestricted common shares for the appreciation in value of the SARs from the grant date to the exercise date. The Company has measured the grant date value of each SAR to be $7.68 as determined using the Black-Scholes Option Pricing Model based upon the following assumptions: volatility of 22.52%, dividend yield of 5.23%, risk free rate of 3.15%, current value of $61.17 and an expected term of 8 years. The assumptions for volatility and dividend yield were based on the Company's historical experience as a publicly traded company, the current value was based on the closing price on the date of grant and the risk free rate was based upon the interest rate of the 10-year treasury bond on the date of grant.
32
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
16. Share and Unit-Based Plans: (Continued)
The following table summarizes the activity of the other non-vested share and unit-based plans:
|
LTIP Units | Stock Awards | Phantom Stock | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Number of Units |
Weighted Average Grant Date Fair Value |
Number of Shares |
Weighted Average Grant Date Fair Value |
Number of Units |
Weighted Average Grant Date Fair Value |
||||||||||||||
Balance at January 1, 2008 |
187,387 | $ | 55.90 | 336,072 | $ | 77.21 | 6,419 | $ | 83.86 | |||||||||||
Granted |
118,780 | $ | 61.17 | 127,273 | $ | 61.17 | 4,408 | $ | 65.62 | |||||||||||
Vested |
(6,817 | ) | $ | 89.21 | (182,498 | ) | $ | 70.06 | (6,816 | ) | $ | 71.93 | ||||||||
Forfeited |
| (1,140 | ) | $ | 71.71 | | ||||||||||||||
Balance at September 30, 2008 |
299,350 | $ | 57.02 | 279,707 | $ | 74.60 | 4,011 | $ | 83.86 | |||||||||||
The following summarizes the compensation cost under share and unit-based plans:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||
LTIP units |
$ | 1,416 | $ | 2,172 | $ | 4,401 | $ | 6,220 | |||||
Stock awards |
2,812 | 3,164 | 8,805 | 9,160 | |||||||||
Stock options |
150 | 44 | 446 | 44 | |||||||||
SARs |
805 | | 1,819 | | |||||||||
Phantom stock units |
162 | 147 | 490 | 437 | |||||||||
|
$ | 5,345 | $ | 5,527 | $ | 15,961 | $ | 15,861 | |||||
The Company capitalized share and unit-based compensation costs of $2,636 and $1,671 during the three months ended September 30, 2008 and 2007, respectively, and $7,559 and $4,740 during the nine months ended September 30, 2008 and 2007, respectively.
17. Cumulative Convertible Redeemable Preferred Stock:
On February 25, 1998, the Company issued 3,627,131 shares of Series A cumulative convertible redeemable preferred stock ("Series A Preferred Stock") for proceeds totaling $100,000 in a private placement. The preferred stock was convertible on a one for one basis into common stock and paid a quarterly dividend equal to the greater of $0.46 per share, or the dividend then payable on a share of common stock.
No dividends could be declared or paid on any class of common or other junior stock to the extent that dividends on Series A Preferred Stock had not been declared and/or paid.
The holder of the Series A Preferred Stock had redemption rights if a change in control of the Company occured, as defined under the Articles Supplementary. Under such circumstances, the holder of the Series A Preferred Stock was entitled to require the Company to redeem its shares, to the extent the Company had funds legally available therefor, at a price equal to 105% of its liquidation preference
33
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
17. Cumulative Convertible Redeemable Preferred Stock: (Continued)
plus accrued and unpaid dividends. The Series A Preferred Stock holder also had the right to require the Company to repurchase its shares if the Company failed to be taxed as a REIT for federal tax purposes at a price equal to 115% of its liquidation preference plus accrued and unpaid dividends to the extent funds were legally available therefor.
On October 18, 2007, the holder of the Series A Preferred Stock converted 560,000 shares to common shares. On May 6, 2008, the holder of the Series A Preferred Stock converted 684,000 shares to common shares. On May 8, 2008, the holder of the Series A Preferred Stock converted 1,338,860 shares to common shares. On September 17, 2008, the holder of the Series A Preferred Stock converted the remaining 1,044,271 shares to common shares.
18. Income Taxes:
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1994. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders. It is management's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, then it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income, if any.
Each partner is taxed individually on its share of partnership income or loss, and accordingly, no provision for federal and state income tax is provided for the Operating Partnership in the consolidated financial statements.
The Company has made Taxable REIT Subsidiary elections for all of its corporate subsidiaries other than its Qualified REIT Subsidiaries. The elections, effective for the year beginning January 1, 2001 and future years were made pursuant to section 856(l) of the Internal Revenue Code. The Company's Taxable REIT Subsidiaries ("TRSs") are subject to corporate level income taxes which are provided for in the Company's consolidated financial statements. The Company's primary TRSs include Macerich Management Company and Westcor Partners, L.L.C.
34
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
18. Income Taxes: (Continued)
The income tax benefit (provision) of the TRSs is as follows:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||
Current |
$ | | $ | | $ | | $ | (17 | ) | ||||
Deferred |
362 | (429 | ) | 750 | 495 | ||||||||
Total income tax benefit (provision) |
$ | 362 | $ | (429 | ) | $ | 750 | $ | 478 | ||||
SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets and liabilities of the TRSs relate primarily to differences in the book and tax bases of property and to operating loss carryforwards for federal and state income tax purposes. A valuation allowance for deferred tax assets is provided if the Company believes it is more likely than not that all or some portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future periods. The net operating loss carryforwards are currently scheduled to expire through 2028, beginning in 2012. Net deferred tax assets of $15,420 and $12,080 were included in deferred charges and other assets, net at September 30, 2008 and December 31, 2007, respectively.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109," on January 1, 2007. The adoption of this standard did not have a material impact on the Company's results of operations or financial condition. At the adoption date of January 1, 2007, the Company had $1,574 of unrecognized tax benefit, all of which would affect the Company's effective tax rate if recognized, and which was recorded as a charge to accumulated deficit. At September 30, 2008, the Company had $2,031 of unrecognized tax benefit. As a result of tax positions taken during the current year, an increase in the unrecognized tax benefit of $477 and a decrease in the unrecognized tax benefit of $352 (relating to the expiration of the statute of limitations for the 2004 tax year) were included in the Company's consolidated statement of operations.
The tax years 2005-2007 remain open to examination by the taxing jurisdictions to which the Company is subject. The Company does not expect that the total amount of unrecognized tax benefit will materially change within the next 12 months.
19. Segment Information:
The Company currently operates in one business segment, the acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers. Additionally, the Company operates in one geographic area, the United States.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
20. Restatement:
Subsequent to the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2007, management determined that the consolidated financial statements as of December 31, 2007 and December 31, 2006, and for each of the three years during the period ended December 31, 2007 required restatement to correctly account for the acquisition of Wilmorite and Wilmorite Holdings and the convertible preferred units ("CPU's") issued to prior owners in connection with the acquisition of the Wilmorite portfolio (see Note 14Discontinued Operations). On June 3, 2008, the Company filed Amendment No. 1 on Form 10-K/A to restate these periods. Additionally, the interim periods from fiscal 2007 have been corrected by the Company with each Quarterly Report on Form 10-Q filed in 2008. The Company improperly applied purchase accounting to 100% of the Wilmorite and Wilmorite Holdings acquisition and therefore minority interests in the Wilmorite portfolio were improperly recorded at fair value at the time of acquisition and presented outside of permanent equity as Class A participating and non-participating convertible preferred securities in the consolidated balance sheets with the periodic distributions reflected as preferred dividends as a reduction of net income available to common stockholders within the consolidated statements of operations. Upon further consideration, the Company determined that these interests represent a minority interest in MACWH, LP, which in turn holds the Wilmorite portfolio. Accordingly, the Company should only have applied purchase accounting to the extent of its proportionate interest in MACWH, LP. The Company has corrected the accounting for these interests by recording a reduction in these interests of $195,905 from fair value to predecessor basis in the consolidated balance sheets with the earnings and dividends paid attributable to these interests reported as minority interests in consolidated joint ventures in the consolidated statements of operations. The adjustment also includes a reduction in depreciation expense from the 100% stepped up property basis previously reported.
In addition, because the participating CPU's were redeemable for the Rochester Properties (assets of MACWH, LP) at the option of the CPU holders, they are subject to EITF Topic D-98, "Classification and Measurement of Redeemable Securities" and accounted for as redeemable minority interest at the greater of their redemption value or amount that would result from applying Accounting Research Bulletin No. 51 "Consolidated Financial Statements" consolidation accounting. The Company recognized the redeemable minority interest at historical cost within purchase accounting and subsequently adjusted the carrying value of the redeemable minority interest or redemption value changes at the end of each reporting period as a reduction of net income available to common stockholders within the consolidated statements of operations.
36
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
20. Restatement: (Continued)
The following is a summary of the impact of the restatement on the financial statements below:
|
As Previously Reported |
Restatement Adjustment |
Reclassification Adjustments(1) |
As Restated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Consolidated Statement of Operations for the three months ended September 30, 2007 |
|||||||||||||||
Revenues: |
|||||||||||||||
Minimum rents |
$ | 130,371 | $ | | $ | (11,492 | ) | $ | 118,879 | ||||||
Percentage rents |
4,992 | | (49 | ) | 4,943 | ||||||||||
Tenant recoveries |
70,623 | | (7,329 | ) | 63,294 | ||||||||||
Management Companies |
9,242 | | | 9,242 | |||||||||||
Other |
8,756 | | (2,990 | ) | 5,766 | ||||||||||
Total revenues |
223,984 | | (21,860 | ) | 202,124 | ||||||||||
Expenses: |
|||||||||||||||
Shopping center and operating expenses |
73,831 | | (7,257 | ) | 66,574 | ||||||||||
Management Companies' operating expenses |
17,908 | | | 17,908 | |||||||||||
REIT general and administrative expenses |
1,992 | | | 1,992 | |||||||||||
Depreciation and amortization |
60,171 | (1,112 | ) | (4,570 | ) | 54,489 | |||||||||
|
153,902 | (1,112 | ) | (11,827 | ) | 140,963 | |||||||||
Interest expense: |
|||||||||||||||
Related parties |
3,772 | | | 3,772 | |||||||||||
Other |
56,210 | | (3,644 | ) | 52,566 | ||||||||||
|
59,982 | | (3,644 | ) | 56,338 | ||||||||||
Total expenses |
213,884 | (1,112 | ) | (15,471 | ) | 197,301 | |||||||||
Minority interest in consolidated joint ventures |
(721 | ) | (3,825 | ) | 4,096 | (450 | ) | ||||||||
Equity in income of unconsolidated joint ventures |
18,648 | | | 18,648 | |||||||||||
Income tax benefit |
(429 | ) | | | (429 | ) | |||||||||
Gain on sale of assets |
147 | | | 147 | |||||||||||
Income from continuing operations |
27,745 | (2,713 | ) | (2,293 | ) | 22,739 | |||||||||
Discontinued operations: |
|||||||||||||||
Loss on sale of assets |
(905 | ) | | 2 | (903 | ) | |||||||||
Income from discontinued operations |
237 | | 2,291 | 2,528 | |||||||||||
Total (loss) income from discontinued operations |
(668 | ) | | 2,293 | 1,625 | ||||||||||
Income before minority interest and preferred dividends |
27,077 | (2,713 | ) | | 24,364 | ||||||||||
Less: minority interest in Operating Partnership |
3,070 | 372 | | 3,442 | |||||||||||
Net income |
24,007 | (3,085 | ) | | 20,922 | ||||||||||
Less: preferred dividends |
6,727 | (3,825 | ) | | 2,902 | ||||||||||
Less: adjustment of minority interest due to redemption value |
| (1,346 | ) | | (1,346 | ) | |||||||||
Net income available to common stockholders |
$ | 17,280 | $ | 2,086 | $ | | $ | 19,366 | |||||||
Earnings per common sharebasic: |
|||||||||||||||
Income from continuing operations |
$ | 0.25 | $ | 0.03 | $ | (0.04 | ) | $ | 0.24 | ||||||
Discontinued operations |
(0.01 | ) | | $ | 0.04 | $ | 0.03 | ||||||||
Net income available to common stockholders |
$ | 0.24 | $ | 0.03 | $ | | $ | 0.27 | |||||||
Earnings per common sharediluted: |
|||||||||||||||
Income from continuing operations |
$ | 0.25 | $ | 0.03 | $ | (0.04 | ) | $ | 0.24 | ||||||
Discontinued operations |
(0.01 | ) | | $ | 0.04 | $ | 0.03 | ||||||||
Net income available to common stockholders |
$ | 0.24 | $ | 0.03 | $ | | $ | 0.27 | |||||||
37
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
20. Restatement: (Continued)
|
As Previously Reported |
Restatement Adjustment |
Reclassification Adjustments(1) |
As Restated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Consolidated Statement of Operations for the nine months ended September 30, 2007 |
|||||||||||||||
Revenues: |
|||||||||||||||
Minimum rents |
$ | 380,256 | $ | | $ | (33,633 | ) | $ | 346,623 | ||||||
Percentage rents |
11,620 | | (175 | ) | 11,445 | ||||||||||
Tenant recoveries |
206,416 | | (21,607 | ) | 184,809 | ||||||||||
Management Companies |
27,595 | | | 27,595 | |||||||||||
Other |
25,554 | | (6,780 | ) | 18,774 | ||||||||||
Total revenues |
651,441 | | (62,195 | ) | 589,246 | ||||||||||
Expenses: |
|||||||||||||||
Shopping center and operating expenses |
211,224 | | (20,761 | ) | 190,463 | ||||||||||
Management Companies' operating expenses |
54,182 | | | 54,182 | |||||||||||
REIT general and administrative expenses |
11,777 | | | 11,777 | |||||||||||
Depreciation and amortization |
177,665 | (3,337 | ) | (14,808 | ) | 159,520 | |||||||||
|
454,848 | (3,337 | ) | (35,569 | ) | 415,942 | |||||||||
Interest expense: |
|||||||||||||||
Related parties |
9,634 | | | 9,634 | |||||||||||
Other |
180,165 | | (10,715 | ) | 169,450 | ||||||||||
|
189,799 | | (10,715 | ) | 179,084 | ||||||||||
Loss on early extinguishment of debt |
877 | | | 877 | |||||||||||
Total expenses |
645,524 | (3,337 | ) | (46,284 | ) | 595,903 | |||||||||
Minority interest in consolidated joint ventures |
(2,237 | ) | (10,919 | ) | 11,571 | (1,585 | ) | ||||||||
Equity in income of unconsolidated joint ventures |
52,128 | | | 52,128 | |||||||||||
Income tax benefit |
478 | | | 478 | |||||||||||
Gain on sale of assets |
4,181 | | (4 | ) | 4,177 | ||||||||||
Income from continuing operations |
60,467 | (7,582 | ) | (4,344 | ) | 48,541 | |||||||||
Discontinued operations: |
|||||||||||||||
(Loss) gain on sale of assets |
(2,325 | ) | | 9 | (2,316 | ) | |||||||||
Income from discontinued operations |
60 | | 4,335 | 4,395 | |||||||||||
Total income from discontinued operations |
(2,265 | ) | | 4,344 | 2,079 | ||||||||||
Income before minority interest and preferred dividends |
58,202 | (7,582 | ) | | 50,620 | ||||||||||
Less: minority interest in Operating Partnership |
5,935 | 85 | | 6,020 | |||||||||||
Net income |
52,267 | (7,667 | ) | | 44,600 | ||||||||||
Less: preferred dividends |
18,971 | (10,919 | ) | | 8,052 | ||||||||||
Less: adjustment of minority interest due to redemption value |
| 2,773 | | 2,773 | |||||||||||
Net income available to common stockholders |
$ | 33,296 | $ | 479 | $ | | $ | 33,775 | |||||||
Earnings per common sharebasic: |
|||||||||||||||
Income from continuing operations |
$ | 0.49 | $ | 0.01 | $ | (0.01 | ) | $ | 0.49 | ||||||
Discontinued operations |
(0.03 | ) | | 0.01 | $ | (0.02 | ) | ||||||||
Net income |
$ | 0.46 | $ | 0.01 | $ | | $ | 0.47 | |||||||
Earnings per common sharediluted: |
|||||||||||||||
Income from continuing operations |
$ | 0.49 | $ | 0.01 | $ | (0.01 | ) | $ | 0.49 | ||||||
Discontinued operations |
(0.03 | ) | | 0.01 | $ | (0.02 | ) | ||||||||
Net income |
$ | 0.46 | $ | 0.01 | $ | | $ | 0.47 | |||||||
38
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
20. Restatement: (Continued)
|
As Previously Reported |
Restatement Adjustment |
Reclassification Adjustments(1) |
As Restated | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Consolidated Statement of Cash Flows for the nine months ended September 30, 2007 |
|||||||||||||
Net income available to common stockholders |
33,296 | 479 | | 33,775 | |||||||||
Preferred dividends |
18,971 | (10,919 | ) | | 8,052 | ||||||||
Adjustment of minority interest due to redemption value |
| 2,773 | | 2,773 | |||||||||
Net income |
52,267 | (7,667 | ) | | 44,600 | ||||||||
Depreciation and amortization |
177,665 | (3,337 | ) | | 174,328 | ||||||||
Minority interest in Operating Partnership |
5,935 | 85 | | 6,020 | |||||||||
Minority interest in consolidated joint ventures |
2,237 | 10,919 | | 13,156 |
21. Subsequent Events:
On October 31, 2008, the Company declared a dividend/distribution of $0.80 per share for common stockholders and OP Unit holders of record on November 17, 2008. In addition, MACWH, LP declared a distribution of $1.05 for its non-participating convertible preferred unit holders and $0.80 per unit for its common unit holders of record on November 17, 2008. All dividends/distributions will be paid on December 8, 2008.
On October 24, 2008, the Company repurchased and retired $138,000 of the Senior Notes for $76,600, resulting in a gain on early extinguishment of debt of approximately $58,000. The purchase price was funded by borrowings under the Company's line of credit.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of The 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," and "estimates" 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:
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. You are urged to carefully review the disclosures the Company makes concerning risks and other factors that may affect our business and operating results, including those made in "Item 1A. Risk Factors" in this Form 10-Q and in our Annual Report on Form 10-K/A for the year ended December 31, 2007, as well as our other reports filed with the Securities and Exchange Commission, 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 Discussion and Analysis of Financial Condition and Results of Operations has been updated to reflect the restatement of the consolidated statements of operations for the three and nine months ended September 30, 2007 and the consolidated statement of cash flows for the nine months ended September 30, 2007. For a more detailed description of the restatement, see Note 20Restatement, in the Company's Notes to Consolidated Financial Statements.
Management's Overview and Summary
The Company is involved in the acquisition, ownership, development, redevelopment, management, and leasing of regional and community shopping centers located throughout the United States. The Company is the sole general partner of, and owns a majority of the ownership interests in, The Macerich Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"). As of September 30, 2008, the Operating Partnership owned or had an ownership interest in 72 regional shopping centers and 19 community shopping centers aggregating approximately 77 million square feet
40
of gross leasable area. These 91 regional and community shopping centers are referred to hereinafter as the "Centers," unless the context otherwise requires.
The property management, leasing and redevelopment of the Company's portfolio is provided by the Company's management companies, Macerich Property Management Company, LLC ("MPMC, LLC"), a single member Delaware limited liability company, Macerich Management Company ("MMC"), a California corporation, Westcor Partners, L.L.C., a single member Arizona limited liability company, Macerich Westcor Management LLC, a single member Delaware limited liability company, Westcor Partners of Colorado, LLC, a Colorado limited liability company, MACW Mall Management, Inc., a New York corporation, and MACW Property Management, LLC, a single member New York limited liability company. These last two management companies are collectively referred to herein as the "Wilmorite Management Companies." The three Westcor management companies are collectively referred to herein as the "Westcor Management Companies." All seven of the management companies are collectively referred to herein as the "Management Companies."
The Company is a self-administered and self-managed real estate investment trust ("REIT") and conducts all of its operations through the Operating Partnership and the Company's Management Companies.
The following discussion is based primarily on the consolidated financial statements of the Company for the three and nine months ended September 30, 2008 and 2007. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
Acquisitions and Dispositions:
The financial statements reflect the following acquisitions, dispositions and changes in ownership subsequent to the occurrence of each transaction.
On September 5, 2007, the Company purchased the remaining 50% outside ownership interest in Hilton Village, a 96,546 square foot specialty center in Scottsdale, Arizona. The total purchase price of $13.5 million was funded by cash, borrowings under the Company's line of credit and the assumption of an $8.6 million mortgage note payable. The Center was previously accounted for under the equity method as an investment in unconsolidated joint ventures.
On December 17, 2007, the Company purchased a portfolio of ground leasehold and/or fee simple interests in 39 freestanding Mervyn's stores located in the Southwest United States. The purchase price of $400.2 million was funded by cash and borrowings under the Company's line of credit. The results of operations have included these properties since the date of acquisition. (See Note 6Property and Note 8Deferred Charges and Other Assets of the Company's Consolidated Financial Statements and Item 1ARisk Factors).
Hilton Village and the Mervyn's freestanding stores acquired in 2007 are referred herein as the "2007 Acquisition Properties."
On January 1, 2008, a subsidiary of the Operating Partnership, at the election of the holders, redeemed the 3,426,609 Class A participating convertible preferred units ("PCPUs"). As a result of the redemption, the Company received the 16.32% minority interest in the portion of the Wilmorite portfolio that included Danbury Fair Mall, Freehold Raceway Mall, Great Northern Mall, Rotterdam Square, Shoppingtown Mall, Towne Mall, Tysons Corner Center and Wilton Mall, collectively referred to as the "Non-Rochester Properties," for total consideration of $224.4 million, in exchange for the Company's ownership interest in the portion of the Wilmorite portfolio that consisted of Eastview Mall, Eastview Commons, Greece Ridge Center, Marketplace Mall and Pittsford Plaza, collectively referred to as the "Rochester Properties." Included in the redemption consideration was the assumption of the remaining 16.32% interest in the indebtedness of the Non-Rochester Properties, which had an estimated fair value of $106.0 million. The Company determined the fair value of the debt using a
41
present value model based upon the terms of equivalent debt and upon credit spreads made available to the Company. The fair value of the debt consisted of $71.1 million of Level 2 inputs and $34.9 million of Level 3 inputs in accordance with SFAS No. 157. In addition, the Company also received additional consideration of $11.8 million, in the form of a note, for certain working capital adjustments, extraordinary capital expenditures, leasing commissions, tenant allowances, and decreases in indebtedness during the Company's period of ownership of the Rochester Properties. The Company recognized a gain of $99.3 million on the exchange. This exchange is referred to herein as the "Rochester Redemption."
On January 10, 2008, the Company, in a 50/50 joint venture, acquired The Shops at North Bridge, a 680,933 square foot urban shopping center in Chicago, Illinois, for a total purchase price of $515 million. The Company's share of the purchase price was funded by the assumption of a pro rata share of the $205 million fixed rate mortgage on the Center and by borrowings under the Company's line of credit.
On January 31, 2008, the Company purchased a ground leasehold interest in a freestanding Mervyn's store located in Hayward, California. The purchase price of $13.2 million was funded by cash and borrowings under the Company's line of credit. The results of operations have included this property since the date of acquisition.
On February 29, 2008, the Company purchased a fee simple interest in a freestanding Mervyn's store located in Monrovia, California. The purchase price of $19.3 million was funded by cash and borrowings under the Company's line of credit. The results of operations have included this property since the date of acquisition.
On May 20, 2008, the Company purchased fee simple interest in a 161,350 square foot Boscov's department store at Deptford Mall in Deptford, New Jersey. The total purchase price of $23.5 million was funded by the assumption of the existing mortgage note on the property and by borrowings under the Company's line of credit. The results of operations have included this property since the date of acquisition. The Boscov store and the Mervyn's stores acquired in 2008 are referred to herein as the "2008 Acquisition Properties."
On June 11, 2008, the Company became a 50% owner in a joint venture that acquired One Scottsdale, which plans to develop a luxury retail and mixed-use property in Scottsdale, Arizona. The Company's share of the purchase price was $52.5 million, which was funded by borrowings under the Company's line of credit.
Mervyn's:
In July 2008, Mervyn's filed for bankruptcy protection and announced in October its plans to liquidate all merchandise, auction its store leases and wind down its business. The Company has 46 Mervyn's stores in its portfolio (See Exhibit 99.1 of this Form 10-Q). The Company owns the ground leasehold and/or fee simple interest in 43 of those stores and the remaining three are owned by third parties but are located at the Centers. In the event Mervyn's elects, under the bankruptcy laws, to reject the lease of any Mervyn's store in its portfolio, (i) the Company will lose rental revenues and tenant recoveries due under the applicable lease, and (ii) there will be a write off of the intangible asset and/or liability recorded as a result of applying SFAS No. 141, "Business Combinations" ("SFAS 141") to such lease. In connection with the acquisition of the Mervyn's portfolio (See Note 13-Acquisitions of the Company's Consolidated Financial Statements) and applying SFAS 141, the Company recorded intangible assets of $110.7 million and intangible liabilities of $59.0 million. During the third quarter of 2008, the Company recorded a write-down of $5.2 million due to the anticipated rejection of six of the Company's leases by Mervyn's. At September 30, 2008, the Company had unamortized intangible assets of $101.2 million and unamortized intangible liabilities of $56.6 million related to its Mervyn's portfolio.
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Redevelopment:
On September 5, 2008 a new, 138,000 square foot Nordstrom Department Store opened at The Oaks, the latest milestone in the multi-phased expansion and redevelopment of this 1,047,095 square foot regional shopping center in Thousand Oaks, California. Simultaneous with the opening of Nordstrom, the Company completed a renovation of the existing Center. Construction on the two-level, open-air retail, dining and entertainment venue, anchored by Muvico Entertainment and four restaurants, and a complete interior renovation continues toward a phased opening. The two-level retail expansion is expected to begin opening in phases in late 2008.
Construction continues on Santa Monica Place, a regional shopping center under development in Santa Monica, California. In September, the Company announced that Bloomingdale's will join Nordstrom. Bloomingdale's will open the first of the store's SoHo concept outside of Manhattan. New tenants, recently announced include eight new retail and restaurant names, including: Kitson, Coach, BCBG Max Azria, Joe's Jeans, True Religion and Lacoste, plus the first two chef-driven restaurant concepts for the project's signature rooftop Dining Deck, SINO Restaurant+Lounge and Ozumo. Construction is moving well, with new buildings now taking shape to create the project's sophisticated, urban, open-air environment.
The Company announced six first-to-market luxury retailers and restaurantsBvlgari, Cartier, True Religion, Teavana, Marcella's and Modern Steakto Scottsdale Fashion Square, Arizona's luxury and fashion retail flagship. Construction continues on a 160,000 square foot expansion of the Center, which is projected to open in Fall 2009 anchored by Barneys New York.
Inflation:
In the last three years, inflation has not had a significant impact on the Company because of a relatively low inflation rate. Most of the leases at the Centers have rent adjustments periodically through 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 ("CPI"). In addition, about 6%-13% of the leases expire each year, which 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. Additionally, historically the majority of the leases required the tenants to pay their pro rata share of operating expenses. In January 2005, the Company began entering 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. This change shifts the burden of cost control to the Company.
Seasonality:
The shopping center industry is seasonal in nature, particularly in the fourth quarter during the holiday season when retailer occupancy and retail sales are typically at their highest levels. In addition, shopping malls achieve a substantial portion of their specialty (temporary retailer) rents during the holiday season and the majority of percentage rent is recognized in the fourth quarter. As a result of the above, earnings are generally higher in the fourth quarter.
In light of the current economic downturn, consumer spending levels in the fourth quarter of 2008 are expected to be adversely affected which could result in lower percentage rent and/or the inability of tenants to meet their lease obligations.
Critical Accounting Policies
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
43
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, and estimates for environmental matters. The Company's significant accounting policies are described in more detail in Note 2 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2007. However, the following policies are deemed to be critical.
Revenue Recognition:
Minimum rental revenues are recognized on a straight-line basis over the term of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight line rent adjustment." Currently, 53% of the mall and freestanding leases contain provisions for CPI rent increases periodically throughout the term of the lease. The Company believes that using an annual multiple of CPI increases, rather than fixed contractual rent increases, results in revenue recognition that more closely matches the cash revenue from each lease and will provide more consistent rent growth throughout the term of the leases. Percentage rents are recognized when the tenants' specified sales targets have been met. Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred. Other tenants pay a fixed rate and these tenants recoveries' revenues are recognized on a straight-line basis over the term of the related leases.
Property:
The Company capitalizes costs incurred in redevelopment and development of properties in accordance with Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Cost" and SFAS No. 67 "Accounting for Costs and the Initial Rental Operations of Real Estate Properties." The costs of land and building under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, developments costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. Capitalized costs are allocated to the specific components of a project that are benefited. The Company considers a construction project as completed and held available for occupancy and ceases capitalization of costs when the areas under development have been substantially completed.
Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which includes HVAC equipment, roofs and parking lots are capitalized and depreciated over their estimated useful lives. Gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.
Property is recorded at cost and is depreciated using a straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements |
5 - 40 years | |
Tenant improvements |
5 - 7 years | |
Equipment and furnishings |
5 - 7 years |
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Accounting for Acquisitions:
The Company accounts for all acquisitions in accordance with SFAS No. 141, "Business Combinations." The Company first determines the value of the land and buildings utilizing an "as if vacant" methodology. The Company then assigns a fair value to any debt assumed at acquisition. The balance of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a fair market value basis at the acquisition date prorated over the remaining lease terms. The tenant improvements are classified as an asset under real estate investments 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 an estimate of renewal of the acquired leases. 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.
When the Company acquires a real estate property, the Company allocates the purchase price to the components of these acquisitions using relative fair values computed using its estimates and assumptions. These estimates and assumptions impact the amount of costs allocated between various components as well as the amount of costs assigned to individual properties in multiple property acquisitions. These allocations also impact depreciation expense and gains or losses recorded on future sales of properties.
Asset Impairment:
The Company assesses whether there has been impairment in the value of its long-lived assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants' ability to perform their duties and pay rent under the terms of the leases. The Company may recognize impairment losses if the discounted cash flows are not sufficient to cover its investment. Such a loss would be determined as the difference between the carrying value and the fair value of a Center.
Deferred Charges:
Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Costs relating to financing of shopping center properties are deferred and amortized over the life of the related loan using the straight-line method, which approximates the effective interest method. In-place lease values are amortized over the remaining lease term plus an estimate of renewal. Leasing commissions and legal costs are amortized on a
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straight-line basis over the individual remaining lease years. The ranges of the terms of the agreements are as follows:
Deferred lease costs |
1 - 15 years | |
Deferred financing costs |
1 - 15 years | |
In-place lease values |
Remaining lease term plus an estimate for renewal | |
Leasing commissions and legal costs |
5 - 10 years |
Recent Accounting Pronouncements not yet Adopted
In December 2007, the FASB issued SFAS No. 141 (revised), "Business Combinations." SFAS No. 141(R) requires all assets and assumed liabilities, including contingent liabilities, in a business combination to be recorded at their acquisition-date fair value rather than at historical costs. The Company is required to adopt SFAS No. 141 (R) on January 1, 2009. The Company is currently evaluating the impact of adoption on the Company's results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment to ARB No. 51". SFAS No. 160 clarifies the accounting for a noncontrolling interest or minority interest in a subsidiary included in consolidated financial statements. The Company is required to adopt SFAS No. 160 on January 1, 2009 and is currently evaluating the impact of adoption on the Company's results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133." SFAS No. 161 requires additional disclosures on derivative instruments and hedging activities and their effect on the reporting entity's financial statements. The Company is required to adopt SFAS No. 161 on January 1, 2009 and does not expect the adoption to have a material impact on the Company's results of operations or financial condition.
In May 2008, the FASB issued FSP APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires that convertible debt instruments that may be settled in cash be separated into liability and equity components in a manner that will reflect the reporting entity's nonconvertible debt borrowing rate. The Company is required to adopt FSP APB 14-1 on January 1, 2009 and is currently evaluating the impact of adoption on the Company's results of operations or financial condition.
Results of Operations
Many of the variations in the results of operations, discussed below, occurred due to the transactions described above, including the 2008 Acquisition Properties, the 2007 Acquisition Properties and the Redevelopment Centers. For the comparison of the three and nine months ended September 30, 2008 to the three and nine months ended September 30, 2007, the "Same Centers" include all consolidated Centers, excluding the 2008 Acquisition Properties, the 2007 Acquisition Properties and the Redevelopment Centers. The Redevelopment Centers include The Oaks, Northgate Mall, Santa Monica Place, Westside Pavilion, The Marketplace at Flagstaff, SanTan Village Regional Center and Promenade at Casa Grande.
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Comparison of the Three Months Ended September 30, 2008 and 2007
Revenues:
Minimum and percentage rents (collectively referred to as "rental revenue") increased by $14.3 million, or 11.6%, from 2007 to 2008. The increase in rental revenue is attributed to an increase of $8.9 million from the 2007 Acquisition Properties, $5.2 million from the Redevelopment Centers, $1.2 million from the 2008 Acquisition Properties, offset in part by $1.0 million decrease from the Same Centers. The decrease at the Same Centers is primarily due to a decrease in lease termination income, straight-line rents and the amortization of above and below market leases which was offset by an increase in rental revenue due to rent escalations and lease renewals at higher rental rates.
Rental revenue includes the amortization of above and below market leases, the amortization of straight-line rents and lease termination income. The amortization of above and below market leases decreased from $3.2 million in 2007 to $3.0 million in 2008. The amortization of straight-lined rents decreased from $3.2 million in 2007 to $2.3 million in 2008. Lease termination income decreased from $3.7 million in 2007 to $2.5 million in 2008.
Tenant recoveries increased $6.8 million, or 10.7%, from 2007 to 2008. The increase in tenant recoveries is attributed to an increase of $4.1 million from the Same Centers, $1.9 million from the 2007 Acquisition Properties, $0.5 million from the Redevelopment Centers and $0.3 million from the 2008 Acquisition Properties.
Management Companies' revenues increased by $1.0 million from 2007 to 2008, primarily due to increased management fees and development fees received from the joint venture Centers and third party managed properties.
Shopping Center and Operating Expenses:
Shopping center and operating expenses increased $7.5 million, or 11.3%, from 2007 to 2008. Approximately $4.6 million of the increase in shopping center and operating expenses is from the Same Centers due to increases in property taxes and utility expenses, $2.7 million is from the 2007 Acquisition Properties, $0.3 million is from the 2008 Acquisition Properties and $0.1 million is from the Redevelopment Centers.
Management Companies' Operating Expenses:
Management Companies' operating expenses increased $1.1 million from 2007 to 2008, in part as a result of the additional costs of managing the joint venture Centers and third party managed properties and higher compensation expense due to increased staffing and higher professional fees.
REIT General and Administrative Expenses:
REIT general and administrative expenses increased by $0.9 million from 2007 to 2008. The increase is primarily due to an increase in share and unit-based compensation expense in 2008.
Depreciation and Amortization:
Depreciation and amortization increased $12.1 million from 2007 to 2008. The increase in depreciation and amortization is primarily attributed to an increase of $7.3 million from the 2007 Acquisition Properties, $4.6 million from the Redevelopment Centers, $0.4 million from the 2008 Acquisition Properties and $0.2 million from the Same Centers. The increase from the 2007 Acquisition Properties was primarily related to six Mervyn's leases in the Company's portfolio as described under "Mervyn's".
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Interest Expense:
Interest expense increased $14.0 million from 2007 to 2008. The increase in interest expense was primarily attributed to an increase of $7.1 million from the Company's line of credit, $4.6 million from the Same Centers and $4.3 million from the Redevelopment Centers.
The increase in interest expense on the Company's line of credit was due to an increase in average outstanding borrowings during 2008, in part, because of the purchase of the 2007 Acquisition Properties, The Shops at North Bridge and the 2008 Acquisition Properties, which was offset in part by lower LIBOR rates and spreads.
The above interest expense items are net of capitalized interest, which increased from $9.8 million in 2007 to $10.4 million in 2008.
Equity in Income of Unconsolidated Joint Ventures:
The equity in income of unconsolidated joint ventures increased $1.3 million from 2007 to 2008. The increase in equity in income of unconsolidated joint ventures is due in part to the acquisition of The Shops at North Bridge in 2008.
(Loss) Gain on Sale or Write-down of Assets
The Company recorded a loss on sale or write-down of assets of $5.1 million in 2008 and gain on sale of assets of $0.1 million in 2007. The loss on sale of assets in 2008 is primarily attributed to a $5.3 million adjustment to reduce the carrying value of Mervyn's stores that had been previously held for sale. (See Note 14Discontinued Operations of the Company's Consolidated Financial Statements).
Discontinued Operations:
Income from discontinued operations decreased $1.7 million from 2007 to 2008. The decrease is primarily due to the Rochester Redemption (See "Management's Overview and SummaryAcquisitions and Dispositions.") As a result of the Rochester Redemption, the Company classified the results of operations for these properties to discontinued operations for both periods presented.
Minority Interest in the Operating Partnership:
The minority interest in the Operating Partnership represents the 14.2% weighted average interest of the Operating Partnership not owned by the Company during 2008 compared to the 14.9% not owned by the Company during 2007. The decrease in minority interest is primarily attributed to the conversion of 1,004,271 preferred shares into common shares in the 2008 period (See Note 17Cumulative Convertible Redeemable Preferred Stock of the Company's Consolidated Financial Statements).
Funds From Operations:
Primarily as a result of the factors mentioned above, funds from operations ("FFO")diluted decreased 8.0% from $111.0 million in 2007 to $102.1 million in 2008. For the reconciliation of FFO and FFOdiluted to net income available to common stockholders, see "Funds from Operations" below.
Comparison of the Nine Months Ended September 30, 2008 and 2007
Revenues:
Rental revenue increased by $48.4 million, or 13.5%, from 2007 to 2008. The increase in rental revenue is attributed to an increase of $27.2 million from the 2007 Acquisition Properties, $11.6 million
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from the Redevelopment Centers, $2.5 million from the 2008 Acquisition Properties and $7.1 million from the Same Centers. The increase from the Same Centers is primarily due to rent escalations and lease renewals at higher rents which was offset by decreases in lease termination income, amortization of straight-line rents, and amortization of above and below market leases.
Rental revenue includes the amortization of above and below market leases, the amortization of straight-line rents and lease termination income. The amortization of above and below market leases increased from $8.9 million in 2007 to $9.0 million in 2008. The amortization of straight-lined rents decreased from $6.8 million in 2007 to $5.9 million in 2008. Lease termination income decreased from $8.8 million in 2007 to $6.4 million in 2008.
Tenant recoveries increased $20.2 million, or 10.9%, from 2007 to 2008. The increase in tenant recoveries is attributed to an increase of $10.3 million from the Same Centers, $5.9 million from the 2007 Acquisition Properties, $3.3 from the Redevelopment Centers and $0.7 million from the 2008 Acquisition Properties.
Management Companies' revenues increased by $2.7 million from 2007 to 2008, primarily due to increased management fees received from the joint venture Centers, additional third party management contracts and increased development fees from joint ventures.
Shopping Center and Operating Expenses:
Shopping center and operating expenses increased $23.9 million, or 12.5%, from 2007 to 2008. Approximately $12.3 million of the increase in shopping center and operating expenses is from the Same Centers due to increases in property taxes and utility expenses, $8.2 million is from the 2007 Acquisition Properties, $3.9 million is from the Redevelopment Centers and $0.8 million is from the 2008 Acquisition Properties.
Management Companies' Operating Expenses:
Management Companies' operating expenses increased $3.7 million in 2007 to 2008, in part as a result of the additional costs of managing the joint venture Centers and third party managed properties, and higher compensation expense due to increased staffing and higher professional fees.
REIT General and Administrative Expenses:
REIT general and administrative expenses decreased by $0.4 million from 2007 to 2008. The decrease is primarily due to a decrease in share and unit-based compensation expense in 2008.
Depreciation and Amortization:
Depreciation and amortization increased $26.0 million from 2007 to 2008. The increase in depreciation and amortization is primarily attributed to an increase of $11.4 million from the 2007 Acquisition Properties, $7.4 million from the Redevelopment Centers, $5.5 million from the Same Centers and $0.5 million from the 2008 Acquisition Properties. The increase from the 2007 Acquisition Properties was primarily related to six Mervyn's leases in the Company's portfolio as described under "Mervyn's".
Interest Expense:
Interest expense increased $30.6 million from 2007 to 2008. The increase in interest expense was primarily attributed to $17.3 million from borrowings under the Company's line of credit, $8.4 million from the convertible senior notes issued on March 16, 2007, $6.3 million from the Same Centers and $4.2 million from the Redevelopment Centers. The increase in interest expense was offset in part by a decrease of $3.6 million from term loans.
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The increase in interest expense on the Company's line of credit was due to an increase in average outstanding borrowings during 2008, in part, because of the purchase of The Shops at North Bridge, the 2007 Acquisition Properties and the 2008 Acquisition Properties which is offset in part by lower LIBOR rates and spreads. The decrease in interest on term loans was due to the repayment of the $250 million loan in 2007.
The above interest expense items are net of capitalized interest, which increased from $24.1 million in 2007 to $26.1 million in 2008 due to an increase in redevelopment activity in 2008.
Loss on Early Extinguishment of Debt:
The Company recorded a $0.9 million loss from the early extinguishment of the $250 million term loan in 2007.
Equity in Income of Unconsolidated Joint Ventures:
The equity in income of unconsolidated joint ventures increased $15.0 million from 2007 to 2008. The increase in equity in income of unconsolidated joint ventures is due in part to an increase of $3.2 million related to the acquisition of The Shops at North Bridge in 2008, an increase of $6.6 million from commission income earned in 2008 and a $2.0 million loss on the sale of assets at the SDG Macerich Properties, L.P. in 2007.
(Loss) Gain on Sale or Write-down of Assets
The Company recorded a loss on sale or write-down of assets of $4.0 million in 2008 and gain on sale of assets of $4.2 million in 2007. The loss on sale of assets in 2008 is primarily attributed to a $5.3 million adjustment to reduce the carrying value of Mervyn's stores that had been previously held for sale. (See Note 14Discontinued Operations of the Company's Consolidated Financial Statements), offset in part by a gain on land of $1.4 million. The gain on sale of assets in 2007 is attributed to $4.1 million of gain on sales of land.
Discontinued Operations:
Income from discontinued operations increased $97.3 million from 2007 to 2008. The increase is primarily due to the $99.3 million gain from the Rochester Redemption in 2008 (See "Management's Overview and SummaryAcquisitions and Dispositions"). As a result of the Rochester Redemption, the Company classified the results of operations for these properties to discontinued operations for both periods presented.
Minority Interest in the Operating Partnership:
The minority interest in the Operating Partnership represents the 14.5% weighted average interest of the Operating Partnership not owned by the Company during 2008 compared to the 15.1% not owned by the Company during 2007. The decrease in minority interest is primarily attributed to the conversion of 3,067,131 preferred shares into common shares in 2008 (See Note 17Cumulative Convertible Redeemable Preferred Stock of the Company's Consolidated Financial Statements) and the repurchase of 807,000 shares in 2007 (See Note 12Stock Repurchase Program of the Company's Consolidated Financial Statements).
Funds From Operations:
Primarily as a result of the factors mentioned above, FFOdiluted increased 1.0% from $298.2 million in 2007 to $301.3 million in 2008. For the reconciliation of FFO and FFOdiluted to net income available to common stockholders, see "Funds from Operations" below.
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Operating Activities:
Cash flows provided by operations decreased from $208.1 million in 2007 to $175.8 million in 2008. The decrease was primarily due to changes in assets and liabilities in 2007 compared to 2008 and due to the results at the Centers as discussed above.
Investing Activities:
Cash used in investing activities increased from $214.7 million in 2007 to $518.0 million in 2008. The increase in cash used in investing activities was primarily due to a $129.6 million increase in contributions to unconsolidated joint ventures, a $129.1 million decrease in cash distributions from unconsolidated joint ventures, an $18.9 million increase in capital expenditures and $18.8 million of cash transferred relating to the Rochester Redemption. The increase in contributions to unconsolidated joint ventures was attributed to the Company's pro rata share of the purchase of The Shops at North Bridge (See "Management's Overview and SummaryAcquisitions and Dispositions.")
Financing Activities:
Cash flow provided by financing activities increased to $305.7 million, compared to cash used in financing activities of $219.9 million in 2007. The increase in cash provided by financing activities was primarily due to a decrease of $601.7 million in repayments of mortgages and bank notes payable in 2008, the $75.0 million repurchase of common shares in 2007 and the $59.9 million purchase of Capped Calls in 2007, offset in part by a decrease of $205.7 million in proceeds from mortgage and bank notes payable in 2008. The decrease in proceeds and repayments of mortgages and bank notes payable in 2008 is due to the issuance of the $950.0 million convertible senior notes in 2007.
Liquidity and Capital Resources
The Company intends to meet its short term liquidity requirements through cash generated from operations, working capital reserves, property secured borrowings, unsecured corporate borrowings and borrowings under the revolving line of credit. The Company anticipates that revenues will continue to provide necessary funds for its operating expenses and debt service requirements and to pay dividends to stockholders in accordance with REIT requirements. The Company anticipates that cash generated from operations, together with cash on hand, will be adequate to fund capital expenditures which will not be reimbursed by tenants, other than non-recurring capital expenditures.
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The following tables summarize capital expenditures incurred at the Centers:
|
For the Nine Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
2008 | 2007 | |||||
Consolidated Centers: |
|||||||
Acquisitions of property and equipment |
$ | 75,872 | $ | 29,262 | |||
Development, redevelopment and expansion of Centers |
382,620 | 378,694 | |||||
Renovations of Centers |
5,194 | 19,057 | |||||
Tenant allowances |
10,042 | 15,018 | |||||
Deferred leasing charges |
17,786 | 17,135 | |||||
|
$ | 491,514 | $ | 459,166 | |||
Joint Venture Centers (at Company's pro rata share) : |
|||||||
Acquisitions of property and equipment |
$ | 266,361 | $ | 4,347 | |||
Development, redevelopment and expansion of Centers |
30,086 | 20,691 | |||||
Renovations of Centers |
2,548 | 8,880 | |||||
Tenant allowances |
5,200 | 9,726 | |||||
Deferred leasing charges |
3,461 | 2,887 | |||||
|
$ | 307,656 | $ | 46,531 | |||
Management expects similar levels to be incurred in future years for tenant allowances and deferred leasing charges and expects to incur between $400 million to $600 million in 2008 for development, redevelopment, expansion and renovations. Capital for major expenditures, developments and/or redevelopments has been, and is expected to continue to be, obtained from equity or debt financings which include borrowings under the Company's line of credit and construction loans. However, many factors impact the Company's ability to access capital, such as its overall debt level, interest rates, interest coverage ratios and prevailing market conditions. Accordingly, the Company may not be able to obtain financing arrangements on terms acceptable to the Company or at all, which could have adverse impact on, the Company's cash flows and results of operations.
The Company's total outstanding loan indebtedness at September 30, 2008 was $8.0 billion (including $2.0 billion of its pro rata share of joint venture debt). This equated to a debt to Total Market Capitalization (defined as total debt of the Company, including its pro rata share of joint venture debt, plus aggregate market value of outstanding shares of common stock, assuming full conversion of OP Units and MACWH, LP units into common stock) ratio of approximately 58.4% at September 30, 2008. The majority of the Company's debt consists of fixed-rate conventional mortgages payable collateralized by individual properties.
The Company filed a shelf registration statement, effective June 6, 2002, to sell securities. The shelf registration is for a total of $1.0 billion of common stock, common stock warrants or common stock rights. The Company sold a total of 15.2 million shares of common stock under this shelf registration on November 27, 2002. The aggregate offering price of this transaction was approximately $440.2 million, leaving approximately $559.8 million available under the shelf registration statement. In addition, the Company filed another shelf registration statement, effective October 27, 2003, to sell up to $300 million of preferred stock. On January 12, 2006, the Company filed a shelf registration statement registering an unspecified amount of common stock that it may offer in the future.
On March 16, 2007, the Company issued $950 million in convertible senior notes ("Senior Notes") that mature on March 15, 2012. The Senior Notes bear interest at 3.25%, payable semiannually, are senior to unsecured debt of the Company and are guaranteed by the Operating Partnership. Prior to
52
December 14, 2011, upon the occurrence of certain specified events, the Senior Notes will be convertible at the option of holder into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the election of the Company, at an initial conversion rate of 8.9702 shares per $1,000 principal amount. On and after December 15, 2011, the Senior Notes will be convertible at any time prior to the second business day preceding the maturity date at the option of the holder at the initial conversion rate. The initial conversion price of approximately $111.48 per share represented a 20% premium over the closing price of the Company's common stock on March 12, 2007. The initial conversion rate is subject to adjustment under certain circumstances. Holders of the Senior Notes do not have the right to require the Company to repurchase the Senior Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions. On October 24, 2008, the Company repurchased and retired $138.0 million of the Senior Notes.
In connection with the issuance of the Senior Notes, the Company purchased two capped calls ("Capped Calls") from affiliates of the initial purchasers of the Senior Notes. The Capped Calls effectively increase the conversion price of the Senior Notes to approximately $130.06, which represented a 40% premium to the March 12, 2007 closing price of $92.90 per common share of the Company.
The Company has a $1.5 billion revolving line of credit that matures on April 25, 2010 with a one-year extension option. The interest rate fluctuates between LIBOR plus 0.75% to LIBOR plus 1.10% depending on the Company's overall leverage. In September 2006, the Company entered into an interest rate swap agreement that effectively fixed the interest rate on $400.0 million of the outstanding balance of the line of credit at 6.23% until April 25, 2011. On March 16, 2007, the Company repaid $541.5 million of borrowings outstanding from the proceeds of the Senior Notes (See Note 10Bank and Other Notes Payable of the Company's Consolidated Financial Statements). As of September 30, 2008 and December 31, 2007, borrowings outstanding were $1,022.8 million and $1,015.0 million, respectively, at an effective interest rate, net of the $400.0 million swapped portion, of 4.51% and 6.19%, respectively.
On April 25, 2005, the Company obtained a five-year, $450.0 million term loan bearing interest at LIBOR plus 1.50%. In November 2005, the Company entered into an interest rate swap agreement that effectively fixed the interest rate of the $450.0 million term loan at 6.30% from December 1, 2005 to April 15, 2010. At September 30, 2008 and December 31, 2007, the borrowing outstanding was $448.1 million and $450.0 million, respectively, with an interest rate of 6.50%.
At September 30, 2008, the Company was in compliance with all applicable loan covenants.
At September 30, 2008, the Company had cash and cash equivalents available of $48.8 million.
Off-Balance Sheet Arrangements:
The Company has an ownership interest in a number of joint ventures as detailed in Note 4 to the Company's Consolidated Financial Statements included herein. The Company accounts for those investments in which 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." A pro rata share of the mortgage debt on these properties is shown in "Item 3. Quantitative and Qualitative Disclosure About Market Risk."
In addition, certain joint ventures also have debt that could become recourse debt to the Company or its subsidiaries, in excess of the Company's pro rata share, should the joint ventures be unable to discharge the obligations of the related debt.
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The following reflects the maximum amount of debt principal that could recourse to the Company at September 30, 2008 (in thousands):
Property
|
Recourse Debt |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|
Boulevard Shops |
$ | 4,280 | 12/17/2010 | ||||
Chandler Village Center |
4,375 | 1/15/2011 | |||||
The Market at Estrella Falls |
12,413 | 6/1/2011 | |||||
|
$ | 21,068 | |||||
Additionally, as of September 30, 2008, the Company is contingently liable for $6.2 million in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result in any liability to the Company.
Long-term Contractual Obligations:
The following is a schedule of long-term contractual obligations as of September 30, 2008 for the consolidated Centers over the periods in which they are expected to be paid (in thousands):
|
Payment Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
|
Total | Less than 1 year |
1 - 3 years |
3 - 5 years |
More than five years |
|||||||||||
Long-term debt obligations (includes expected interest payments) |
$ | 6,355,677 | $ | 594,688 | $ | 3,139,865 | $ | 1,584,543 | $ | 1,036,581 | ||||||
Operating lease obligations(1) |
494,289 | 11,094 | 22,248 | 21,938 | 439,009 | |||||||||||
Purchase obligations(1) |
115,259 | 115,259 | | | | |||||||||||
Other long-term liabilities(2) |
385,801 | 385,801 | | | | |||||||||||
|
$ | 7,351,026 | $ | 1,106,842 | $ | 3,162,113 | $ | 1,606,481 | $ | 1,475,590 | ||||||
Funds From Operations
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 ("NAREIT") defines FFO as net income (loss) computed in accordance with GAAP, excluding gains (or losses) from extraordinary items and sales of depreciated operating properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. FFO and FFO on a fully 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. FFO on a fully diluted basis is one of the measures investors find most useful in measuring the dilutive impact of outstanding convertible securities. 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. FFO, as presented, may not be comparable to
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similarly titled measures reported by other real estate investment trusts. The reconciliation of FFO and FFO-diluted to net income available to common stockholders is provided below.
The following reconciles net income to common stockholders to FFO and FFO-diluted (dollars in thousands):
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2008 | 2007 | |||||||||||
Net incomeavailable to common stockholders |
$ | 5,663 | $ | 19,366 | $ | 120,085 | $ | 33,775 | |||||||
Adjustments to reconcile net income to FFObasic: |
|||||||||||||||
Minority interest in the Operating Partnership |
944 | 3,442 | 20,600 | 6,020 | |||||||||||
Adjustment of minority interest due to redemption value |
| (1,346 | ) | | 2,773 | ||||||||||
Loss (gain) on sale or write-down of consolidated assets |
5,178 | 757 | (95,135 | ) | (1,889 | ) | |||||||||
Add: minority interest share of gain on sale of consolidated joint ventures |
| 39 | 589 | 387 | |||||||||||
Gain on sale of undepreciated consolidated assets |
224 | 111 | 798 | 450 | |||||||||||
(Gain) loss on sale of joint venture assets(1) |
(349 | ) | 4 | (3,272 | ) | 2,024 | |||||||||
Add minority interest on sale of undepreciated consolidated assets |
| | 487 | | |||||||||||
Gain on undepreciated joint venture assets(1) |
328 | (4 | ) | 2,764 | 346 | ||||||||||
Depreciation and amortization on consolidated assets |
66,637 | 59,061 | 185,538 | 174,327 | |||||||||||
Less: depreciation and amortization allocable to minority interests on consolidated joint ventures |
(1,065 | ) | (1,019 | ) | (2,426 | ) | (3,346 | ) | |||||||
Depreciation and amortization on joint venture assets(1) |
26,292 | 23,422 | 74,326 | 68,506 | |||||||||||
Depreciation on personal property and amortization of loan costs |
(2,558 | ) | (4,438 | ) | (7,159 | ) | (12,074 | ) | |||||||
FFObasic |
101,294 | 99,395 | 297,195 | 271,299 | |||||||||||
Additional adjustments to arrive at FFOdiluted: |
|||||||||||||||
Impact of convertible preferred stock |
835 | 2,902 | 4,124 | 8,052 | |||||||||||
Impact of convertible debt |
| 8,686 | | 18,855 | |||||||||||
FFOdiluted |
$ | 102,129 | $ | 110,983 | $ | 301,319 | $ | 298,206 | |||||||
Weighted average number of FFO shares outstanding for: |
|||||||||||||||
FFObasic(2) |
87,424 | 84,220 | 86,216 | 84,400 | |||||||||||
Adjustments for the impact of dilutive securities in computing FFO-diluted: |
|||||||||||||||
Convertible preferred stock |
894 | 3,627 | 1,935 | 3,627 | |||||||||||
Share and unit-based compensation plans |
15 | 308 | 267 | 306 | |||||||||||
Convertible debt |
| 8,522 | | 6,212 | |||||||||||
FFOdiluted(3) |
88,333 | 96,677 | 88,418 | 94,545 | |||||||||||
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk. The Company has managed and will continue to manage interest rate risk by (1) maintaining a ratio of fixed rate, long-term debt to total debt such that floating rate exposure is kept at an acceptable level, (2) reducing interest rate exposure on certain long-term floating rate debt through the use of interest rate caps and/or swaps with appropriately matching maturities, (3) using treasury rate locks where appropriate to fix rates on anticipated debt transactions, and (4) taking advantage of favorable market conditions for long-term debt and/or equity.
The following table sets forth information as of September 30, 2008 concerning the Company's long term debt obligations, including principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value ("FV") (dollars in thousands):
|
For the years ended September 30, | |
|
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | FV | ||||||||||||||||||
CONSOLIDATED CENTERS: |
||||||||||||||||||||||||||
Long term debt: |
||||||||||||||||||||||||||
Fixed rate |
$ | 321,182 | $ | 982,963 | $ | 697,080 | $ | 198,124 | $ | 1,315,993 | $ | 979,580 | $ | 4,494,922 | $ | 4,343,340 | ||||||||||
Average interest rate |
6.46 | % | 6.34 | % | 5.67 | % | 6.25 | % | 4.41 | % | 5.82 | % | 5.59 | % | ||||||||||||
Floating rate |
241,912 | 50,000 | 1,246,975 | | | | 1,538,887 | 1,538,887 | ||||||||||||||||||
Average interest rate |
4.48 | % | 4.25 | % | 4.72 | % | 4.65 | % |