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 March 31, 2006

 

Commission File No. 1-12504

 

THE MACERICH COMPANY

(Exact name of registrant as specified in its charter)

 

MARYLAND

 

95-4448705

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification Number)

 

401 Wilshire Boulevard, Suite 700, Santa Monica, California 90401

(Address of principal executive office, including zip code)

 

(310) 394-6000

(Registrant’s telephone number, including area code)

 

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 report) 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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ý           Accelerated filer o       Non-accelerated filer 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 of the registrant’s common stock, as of May 8, 2006 Common Stock, par value $.01 per share: 71,787,675 shares

 

 



 

THE MACERICH COMPANY

 

FORM 10-Q

 

INDEX

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets of the Company as of March 31, 2006 and December 31, 2005

 

 

 

 

 

Consolidated Statements of Operations of the Company for the three months ended March 31, 2006 and 2005

 

 

 

 

 

Consolidated Statement of Common Stockholders’ Equity of the Company for the three months ended
March 31, 2006

 

 

 

 

 

Consolidated Statements of Cash Flows of the Company for three months ended March 31, 2006 and 2005

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signature

 

 

 

2



 

THE MACERICH COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

 

 

 

March 31,
2006

 

December 31,
2005

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

Property, net

 

$

5,671,809

 

$

5,438,496

 

Cash and cash equivalents

 

66,808

 

155,113

 

Restricted cash

 

58,515

 

54,659

 

Tenant receivables, net

 

80,851

 

89,165

 

Deferred charges and other assets, net

 

346,152

 

360,217

 

Loans to unconsolidated joint ventures

 

1,187

 

1,415

 

Due from affiliates

 

4,454

 

4,258

 

Investments in unconsolidated joint ventures

 

1,074,590

 

1,075,621

 

Total assets

 

$

7,304,366

 

$

7,178,944

 

 

 

 

 

 

 

LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Mortgage notes payable:

 

 

 

 

 

Related parties

 

$

153,716

 

$

154,531

 

Others

 

3,184,682

 

3,088,199

 

Total

 

3,338,398

 

3,242,730

 

Bank notes payable

 

1,524,000

 

2,182,000

 

Accounts payable and accrued expenses

 

71,030

 

75,121

 

Other accrued liabilities

 

202,915

 

226,985

 

Preferred stock dividend payable

 

5,970

 

5,970

 

Total liabilities

 

5,142,313

 

5,732,806

 

Minority interest

 

366,779

 

284,809

 

Commitments and contingencies

 

 

 

 

 

Class A participating convertible preferred units

 

213,786

 

213,786

 

Class A non-participating convertible preferred units

 

21,501

 

21,501

 

Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,131 shares authorized, issued and outstanding at March 31, 2006 and December 31, 2005

 

98,934

 

98,934

 

Common stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value, 145,000,000 shares authorized, 71,357,903 and 59,941,552 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively

 

716

 

599

 

Additional paid-in capital

 

1,703,391

 

1,050,891

 

Accumulated deficit

 

(250,057

)

(209,005

)

Accumulated other comprehensive income

 

7,003

 

87

 

Unamortized restricted stock

 

 

(15,464

)

Total common stockholders’ equity

 

1,461,053

 

827,108

 

Total liabilities, preferred stock and common stockholders’ equity

 

$

7,304,366

 

$

7,178,944

 

 

The accompanying notes are an integral part of these financial statements.

 

3



 

THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2006

 

2005

 

Revenues:

 

 

 

 

 

Minimum rents

 

$

129,763

 

$

91,273

 

Percentage rents

 

2,929

 

2,770

 

Tenant recoveries

 

65,912

 

44,827

 

Management Companies

 

7,257

 

5,277

 

Other

 

6,795

 

5,026

 

Total revenues

 

212,656

 

149,173

 

Expenses:

 

 

 

 

 

Shopping center and operating expenses

 

66,461

 

47,012

 

Management Companies’ operating expenses

 

14,714

 

11,047

 

REIT general and administrative expenses

 

3,698

 

2,652

 

 

 

84,873

 

60,711

 

Interest expense:

 

 

 

 

 

Related parties

 

2,698

 

2,032

 

Others

 

68,452

 

39,925

 

Total interest expense

 

71,150

 

41,957

 

Depreciation and amortization

 

61,949

 

36,159

 

Equity in income of unconsolidated joint ventures

 

21,016

 

11,246

 

Income tax benefit

 

533

 

509

 

(Loss) gain on sale of assets

 

(502

)

1,308

 

Loss on early extinguishment of debt

 

(1,782

)

 

Income from continuing operations

 

13,949

 

23,409

 

Discontinued operations:

 

 

 

 

 

Gain on sale of assets

 

 

297

 

Income from discontinued operations

 

934

 

991

 

Total from discontinued operations

 

934

 

1,288

 

Income before minority interest

 

14,883

 

24,697

 

Less: Minority interest

 

1,460

 

4,199

 

Net income

 

13,423

 

20,498

 

Less: preferred dividends

 

5,970

 

2,358

 

Net income available to common stockholders

 

$

7,453

 

$

18,140

 

 

 

 

 

 

 

Earnings per common share - basic:

 

 

 

 

 

Income from continuing operations

 

$

0.10

 

$

0.29

 

Discontinued operations

 

0.01

 

0.02

 

Net income per share available to common stockholders

 

$

0.11

 

$

0.31

 

 

 

 

 

 

 

Earnings per common share - diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.10

 

$

0.28

 

Discontinued operations

 

0.01

 

0.02

 

Net income per share available to common stockholders

 

$

0.11

 

$

0.30

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

68,738,000

 

58,865,000

 

Diluted

 

82,518,000

 

73,284,000

 

 

The accompanying notes are an integral part of these financial statements.

 

4



 

THE MACERICH COMPANY

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Total

 

 

 

Common Stock

 

Additional

 

 

 

Other

 

Unamortized

 

Common

 

 

 

 

 

Par

 

Paid-in

 

Accumulated

 

Comprehensive

 

Restricted

 

Stockholders’

 

 

 

Shares

 

Value

 

Capital

 

Deficit

 

Income

 

Stock

 

Equity

 

Balance December 31, 2005

 

59,941,552

 

$

599

 

$

1,050,891

 

$

(209,005

)

$

87

 

$

(15,464

)

$

827,108

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

13,423

 

 

 

13,423

 

Reclassification of deferred losses

 

 

 

 

 

332

 

 

332

 

Interest rate swap/cap agreements

 

 

 

 

 

6,584

 

 

6,584

 

Total comprehensive income

 

 

 

 

13,423

 

6,916

 

 

20,339

 

Amortization of share-based plans

 

279,904

 

4

 

3,328

 

 

 

 

3,332

 

Exercise of stock options

 

4,277

 

 

26

 

 

 

 

26

 

Common stock offering, gross

 

10,952,381

 

110

 

761,080

 

 

 

 

761,190

 

Underwriting and offering costs

 

 

 

(14,702

)

 

 

 

(14,702

)

Distributions paid ($0.68) per share

 

 

 

 

(48,505

)

 

 

(48,505

)

Preferred dividends

 

 

 

 

(5,970

)

 

 

(5,970

)

Conversion of Operating Partnership Units

 

179,789

 

3

 

7,051

 

 

 

 

7,054

 

Change in accounting principle due to adoption of SFAS No. 123 (R)

 

 

 

(15,464

)

 

 

15,464

 

 

Reclassification upon adoption of SFAS No.
123 (R)

 

 

 

6,000

 

 

 

 

6,000

 

Adjustment to reflect minority interest on a pro rata basis per period end ownership percentage of Operating Partnership units

 

 

 

(94,819

)

 

 

 

 

(94,819

)

 Balance March 31, 2006

 

71,357,903

 

$

716

 

$

1,703,391

 

$

(250,057

)

$

7,003

 

$

 

$

1,461,053

 

 

The accompanying notes are an integral part of these financial statements.

 

5



 

THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

For the three months
ended March 31,

 

 

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income available to common stockholders

 

$

7,453

 

$

18,140

 

Preferred dividends

 

5,970

 

2,358

 

Net income

 

13,423

 

20,498

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on early extinguishment of debt

 

1,782

 

 

Loss (gain) on sale of assets

 

502

 

(1,308

)

Discontinued operations gain on sale of assets

 

 

(297

)

Depreciation and amortization

 

63,537

 

37,653

 

Amortization of net premium on mortgage notes payable

 

(3,333

)

(681

)

Amortization of share-based plans

 

2,479

 

1,625

 

Minority interest

 

1,460

 

4,199

 

Equity in income of unconsolidated joint ventures

 

(21,016

)

(11,246

)

Distributions of income from unconsolidated joint ventures

 

772

 

630

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Tenant receivables, net

 

8,337

 

6,044

 

Other assets

 

4,102

 

5,176

 

Accounts payable and accrued expenses

 

(10,203

)

2,538

 

Due from affiliates

 

(196

)

(2,633

)

Other accrued liabilities

 

(10,055

)

(2,145

)

Net cash provided by operating activities

 

51,591

 

60,053

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of property and property improvements

 

(262,672

)

(30,831

)

Issuance of note receivable

 

(10,000

)

 

Deferred leasing charges

 

(6,533

)

(3,691

)

Distributions from unconsolidated joint ventures

 

24,199

 

13,598

 

Contributions to unconsolidated joint ventures

 

(2,871

)

(26,472

)

Acquisitions of unconsolidated joint ventures

 

 

(32,479

)

Repayments from (loans to) unconsolidated joint ventures

 

228

 

(154

)

Proceeds from sale of assets

 

155

 

6,945

 

Restricted cash

 

(3,856

)

(4,134

)

Net cash used in investing activities

 

(261,350

)

(77,218

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from mortgages and bank notes payable

 

312,845

 

234,300

 

Payments on mortgages and bank notes payable

 

(871,844

)

(186,574

)

Deferred financing costs

 

(900

)

(77

)

Proceeds from exercise of common stock options

 

26

 

 

Net proceeds from stock offering

 

746,809

 

 

Dividends and distributions

 

(59,512

)

(47,152

)

Dividends to preferred stockholders / preferred unitholders

 

(5,970

)

(2,358

)

Net cash provided by (used in) financing activities

 

121,454

 

(1,861

)

Net decrease in cash

 

(88,305

)

(19,026

)

Cash and cash equivalents, beginning of period

 

155,113

 

72,114

 

Cash and cash equivalents, end of period

 

$

66,808

 

$

53,088

 

Supplemental cash flow information:

 

 

 

 

 

Cash payments for interest, net of amounts capitalized

 

$

79,215

 

$

41,663

 

Non-cash transactions:

 

 

 

 

 

Reclassification from other accrued liabilities to additional paid-in capital upon adoption of SFAS No. 123 (R)

 

$

6,000

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

6



 

THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

1.              Organization:

 

The Macerich Company (“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 was organized as a Maryland corporation in September 1993.

 

The Company is the sole general partner of, and owns or has a majority of the ownership interests in The Macerich Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”).  As of March 31, 2006, the Operating Partnership owned or had an ownership interest in 76 regional shopping centers, 20 community shopping centers and two development properties aggregating approximately 80 million square feet of gross leasable area (“GLA”).  These 98 regional, community and development shopping centers are referred to hereinafter as the “Centers”, unless the context otherwise requires.

 

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, Macerich Property Management Company, LLC, a Delaware limited liability company, Macerich Management Company, a California corporation (“MMC”), Westcor Partners, LLC, a Arizona limited liability company, Macerich Westcor Management LLC, a Delaware limited liability company and Westcor Partners of Colorado, LLC, a Colorado limited liability company.  As part of the Wilmorite closing (See Note 11- Acquisitions), the Company acquired MACW Mall Management, Inc., a New York corporation and MACW Property Management, LLC, a New York limited liability company.  These 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 was organized to qualify as a REIT under the Internal Revenue Code of 1986, as amended.  As of March 31, 2006, the 16% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.

 

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.  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.  Investments in entities that 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”.

 

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 for the year ended December 31, 2005.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made.  The preparation of 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 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, 2005 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.

 

7



 

A reclassification has been made to the Consolidated Statements of Cash Flows for the three months ended March 31, 2005 to reclassify $630 of distributions from unconsolidated joint ventures from net cash used in investing activities to net cash provided by operating activities as distributions of income from unconsolidated joint ventures.

 

All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

Accounting for the Impairment or Disposal of Long-Lived Assets:

 

On January 5, 2005, the Company sold Arizona Lifestyle Galleries for $4,300.  The sale of this property resulted in a gain on sale of $297 and the impact on the results for the three months ended March 31, 2005 was insignificant.

 

The results of Crossroads Mall in Oklahoma for the three months ended March 31, 2006 and 2005 have been reclassified to discontinued operations. The Company has identified this asset for disposition. Total revenues associated with Crossroads Mall were approximately $2,910 and $2,836 for the three months ended March 31, 2006 and 2005, respectively.

 

The results of Scottsdale/101 Associates for the three months ended March 31, 2006 and 2005 have been reclassified to discontinued operations. During the three months ended March 31, 2006, the Company identified this asset for disposition. Total revenues associated with Scottsdale/101 Associates were approximately $2,597 and $2,208 for the three months ended March 31, 2006 and 2005, respectively.

 

Recent Accounting Pronouncements:

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised), “Share-Based Payment” SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. The Company adopted this statement at January 1, 2006. See Note 14 – Share-Based Plans, for the impact of the adoption of SFAS No. 123 (R) on the results of operations.

 

In March 2005, FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations - an interpretation of SFAS No. 143.”  FIN No. 47, requires that a liability be recognized for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. As a result of the Company’s evaluation of FIN No. 47, the Company recorded an additional liability of $615 in 2005. As of March 31, 2006 and December 31, 2005, the Company’s liability for retirement obligations was $535 and $1,163, respectively.

 

In June 2005, a consensus was reached by FASB related to Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, controls a Limited Partnership or Similar Entity When the Limited Partners have Certain Rights.”  Effective for general partners of all new limited partnerships and for existing limited partnerships for which the partnership agreements are modified, the guidance in this Issue became effective after June 29, 2005.  For general partners in all other limited partnerships, the guidance in this Issue will become effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, and provides that application of either one of two transition methods described in the Issue would be acceptable.  The adoption of this Issue did not have a material effect on the Company’s results of operations or financial condition.

 

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB Statements No. 133 and 140.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The Company is required to adopt SFAS No. 155 for fiscal year 2007 and does not expect its adoption to have a material effect on the Company’s results of operations or financial condition.

 

8



 

Fair Value of Financial Instruments

 

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. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Derivative Instruments and Hedging Activities

 

In accordance with SFAS No. 133, “Accounting for 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 hedge interest rate risk. The Company requires that hedging derivative instruments are effective in reducing the risk exposure that they are designated to hedge. For derivative instruments associated with the hedge of an anticipated transaction, hedge effectiveness criteria also requires that it be probable that the underlying transaction occurs. Any instrument that meets these cash flow hedging criteria, and other criteria required by SFAS No. 133, is formally designated as a hedge at the inception of the derivative contract. The Company designs its hedges to be perfectly effective. When the terms of an underlying transaction are modified resulting in some ineffectiveness, the portion of the change in the derivative fair value related to the ineffectiveness from period to period will be included in net income. 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 March 31, 2006, four of the Company’s seven derivative instruments were designated as cash flow hedges.

 

On an ongoing quarterly basis, the Company adjusts its balance sheet to reflect the current fair value of its derivatives. Changes in the fair value of derivatives are recorded each period in income or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction. To the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument being hedged, the ineffective portion of the hedge is immediately recognized in income. There were no ineffective portions during the three months ended March 31, 2006 and 2005.  Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to income. This reclassification occurs when the hedged items are also recognized in income. The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

 

To determine the fair value of derivative instruments, the Company uses standard market conventions and techniques such as discounted cash flow analysis, option pricing models, and termination cost at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

 

As of March 31, 2006 and December 31, 2005, the Company had $2,430 and $2,762, respectively, reflected in other comprehensive income related to treasury rate locks settled in prior years. The Company reclassified $332 and $330 for the three months ended March 31, 2006 and 2005, respectively, related to treasury rate lock transactions settled in prior years from accumulated other comprehensive income to earnings. It is anticipated that an additional $996 will be reclassified during the remainder of 2006.

 

9



 

Interest rate swap and cap agreements are purchased by the Company from third parties to hedge the risk of interest rate increases on some of the Company’s floating rate debt. Payments received as a result of these agreements are recorded as a reduction of interest expense. The fair value of these agreements are included in deferred charges and other assets. The fair value of these agreements will vary with fluctuations in interest rates and will either be recorded in income or other comprehensive income depending on its effectiveness. The Company will be exposed to credit loss in the event of nonperformance by the counter parties to the financial instruments; however, management does not anticipate nonperformance by the counter parties. Additionally, the Company recorded other comprehensive income of $6,584 and $268 related to the marking-to-market of interest rate swap/cap agreements for the three months ended March 31, 2006 and 2005, respectively.  The interest rate caps and interest rate swap transactions are described below.

 

The $450,000 term loan (See Note 7 – Bank Notes Payable) has an interest rate swap agreement which effectively fixes the interest rate at 6.30% from December 1, 2005 to April 15, 2010. The fair value of the swap at March 31, 2006 and December 31, 2005 was $5,555 and ($927), respectively.

 

The Company has an interest rate cap from July 9, 2004 to August 9, 2007 with a notional amount of $30,000 on its loan at La Cumbre Plaza (See Note 6 – Mortgage Notes Payable). This interest rate cap prevents the LIBOR rate from exceeding 7.12%. The fair value of this cap agreement at March 31, 2006 and December 31, 2005 was zero.

 

The Company has an interest cap agreement from September 9, 2005 to December 15, 2007 with a notional amount of $72,000 on its Greece Ridge loan (See Note 6 – Mortgage Notes Payable). This interest rate cap prevents the LIBOR rate from exceeding 6.625% through September 15, 2006 and 7.95% through December 15, 2007. The fair value of the cap agreement at March 31, 2006 and December 31, 2005 was zero.

 

The Company has an interest cap agreement from February 2, 2006 to March 1, 2008 with a notional amount of $50,000 on its Panorama loan (See Note 6 – Mortgage Notes Payable). This interest rate cap prevents the LIBOR rate from exceeding 6.65%. The fair value of the cap agreement at March 31, 2006 was $9.

 

The Company has three interest rate cap agreements that are stand-alone derivative instruments and do not qualify for hedge accounting under SFAS No. 133.

 

Earnings per Share (“EPS”):

 

The computation of basic earnings per share is based on net income and the weighted average number of common shares outstanding for the three months ended March 31, 2006 and 2005.  The computation of diluted earnings per share includes the effect of dilutive securities calculated using the treasury stock method.  The OP units not held by the Company have been included in the diluted EPS since they may be redeemable on a one-for-one basis, at the Company’s option.

 

10



 

The following table computes the basic and diluted earnings per share calculation (dollars and shares in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2006

 

2005

 

 

 

Net
Income

 

Shares

 

Per
Share

 

Net
Income

 

Shares

 

Per
Share

 

Net income

 

$

13,423

 

 

 

 

 

$

20,498

 

 

 

 

 

Less: Preferred dividends (1)

 

5,970

 

 

 

 

 

2,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

7,453

 

68,738

 

$

0.11

 

18,140

 

58,865

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of OP units

 

1,460

 

13,485

 

 

 

4,199

 

14,075

 

 

 

Employee stock options

 

 

295

 

 

 

 

344

 

 

 

Net income available to common stockholders

 

$

8,913

 

82,518

 

$

0.11

 

$

22,339

 

73,284

 

$

0.30

 

 


(1) During the three months ended March 31, 2006, the preferred dividends include $3,503 of convertible preferred units (See Note 11 – Acquisitions).

 

The minority interest as reflected in the Company’s consolidated statements of operations has been allocated for EPS calculations as follows:

 

 

 

For the Three Months Ended

 

 

 

2006

 

2005

 

Income from continuing operations

 

$

1,307

 

$

3,953

 

Discontinued operations:

 

 

 

 

 

Gain on sale of assets

 

 

57

 

Income from discontinued operations

 

153

 

189

 

 

 

$

1,460

 

$

4,199

 

 

11



 

3.              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 March 31, 2006 is as follows:

 

Joint Venture

 

Partnership’s
Ownership %

 

SDG Macerich Properties, L.P.

 

50.0

%

 

 

 

 

Pacific Premier Retail Trust

 

51.0

%

 

 

 

 

Westcor Joint Ventures:

 

 

 

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

%

Desert Sky Mall—Tenants 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

%

New River Associates—Arrowhead Towne Center

 

33.3

%

Propcor Associates

 

25.0

%

Propcor II Associates, LLC—Boulevard Shops

 

50.0

%

Russ Lyon Realty/Westcor Venture I

 

50.0

%

SanTan Village Phase 2 LLC

 

37.5

%

Scottsdale Fashion Square Partnership

 

50.0

%

Westcor/Gilbert, L.L.C.

 

50.0

%

Westcor/Goodyear, L.L.C.

 

50.0

%

Westcor/Queen Creek LLC

 

37.5

%

Westcor/Queen Creek Commercial LLC

 

37.5

%

Westcor/Queen Creek Medical LLC

 

37.5

%

Westcor/Queen Creek Residential LLC

 

37.5

%

Westcor/Surprise LLC

 

33.3

%

Westlinc Associates—Hilton Village

 

50.0

%

Westpen Associates

 

50.0

%

 

 

 

 

Other Joint Ventures:

 

 

 

Biltmore Shopping Center Partners LLC

 

50.0

%

Corte Madera Village, LLC

 

50.1

%

Macerich Northwestern Associates

 

50.0

%

MetroRising AMS Holding LLC

 

15.0

%

NorthPark Land Partners, LP

 

50.0

%

NorthPark Partners, LP

 

50.0

%

PHXAZ/Kierland Commons, L.L.C.

 

24.5

%

Tysons Corner Holdings LLC

 

50.0

%

Tysons Corner Property Holdings LLC

 

50.0

%

Tysons Corner LLC

 

50.0

%

Tysons Corner Property Holdings II LLC

 

50.0

%

Tysons Corner Property LLC

 

50.0

%

West Acres Development, LLP

 

19.0

%

W.M. Inland, L.L.C.

 

50.0

%

WM Ridgmar, L.P.

 

50.0

%

 

The Company accounts for unconsolidated joint ventures using the equity method of accounting.

 

12



 

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 these joint venture partners and accounts for these joint ventures using the equity method of accounting.

 

On January 11, 2005, the Company became a 15% owner in a joint venture that acquired Metrocenter, a 1.3 million square foot super-regional mall in Phoenix, Arizona. The total purchase price was $160,000 and concurrently with the acquisition, the joint venture placed a $112,000 floating rate loan on the property. The Company’s share of the purchase price, net of the debt, was $7,200 which was funded by cash and borrowings under the Company’s line of credit.  The results of Metrocenter are included below for the period subsequent to its date of acquisition.

 

On January 21, 2005, the Company formed a 50/50 joint venture with a private investment company. The joint venture acquired a 49% interest in Kierland Commons, a 437,000 square foot mixed use center in Phoenix, Arizona. The joint venture’s purchase price for the interest in the center was $49,000. The Company assumed its share of the underlying property debt and funded the remainder of its share of the purchase price with cash and borrowings under the Company’s line of credit.  The results of Kierland Commons are included below for the period subsequent to its date of acquisition.

 

On April 8, 2005, the Company in a 50/50 joint venture with an affiliate of Walton Street Capital, LLC, acquired Ridgmar Mall, a 1.3 million square foot super-regional mall in Fort Worth, Texas.  The total purchase price was $71,075 and concurrently with the transaction, the joint venture placed a $57,400 fixed rate loan of 6.0725% on the property.  The balance of the Company’s pro rata share, $6,838, of the purchase price was funded by borrowings under the Company’s line of credit.  The results of Ridgmar Mall are included below for the period subsequent to its date of acquisition.

 

On April 25, 2005, as part of the Wilmorite acquisition (See Note 11 – Acquisitions), the Company became a 50% joint venture partner in Tysons Corner, a 2.2 million super-regional mall in McLean, Virginia.  The results of Tysons Corner below are included 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.

 

Combined and Condensed Balance Sheets of Unconsolidated Joint Ventures

 

 

 

March 31,
2006

 

December 31,
2005

 

Assets:

 

 

 

 

 

Properties, net

 

$

4,090,096

 

$

4,127,540

 

Other assets

 

412,675

 

333,022

 

Total assets

 

$

4,502,771

 

$

4,460,562

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Mortgage notes payable(1)

 

$

3,125,225

 

$

3,077,018

 

Other liabilities

 

159,527

 

169,253

 

The Company’s capital(2)

 

618,947

 

618,803

 

Outside partners’ capital

 

599,072

 

595,488

 

Total liabilities and partners’ capital

 

$

4,502,771

 

$

4,460,562

 

 


(1)       Certain joint ventures have debt that could become recourse debt to the Company should the joint venture be unable to discharge the obligations of the related debt. As of March 31, 2006 and December 31, 2005, the total amount of debt that could recourse to the Company was $10,189 and $21,630, respectively.

 

(2)       The Company’s investment in unconsolidated joint ventures was $455,643 and $456,818 more than the underlying equity as reflected in the joint ventures’ financial statements as of March 31, 2006 and December 31, 2005, respectively. This represents the difference between the cost of the 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 depreciable lives on property. The depreciation and amortization was $3,583 and $3,436 for the three months ended March 31, 2006 and 2005, respectively.

 

13



 

Combined and Condensed Statements of Operations of Unconsolidated Joint Ventures

 

 

 

SDG
Macerich
Properties

 

Pacific
Premier
Retail Trust

 

Westcor
Joint
Ventures

 

Other
Joint
Ventures

 

Total

 

Three Months Ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

24,024

 

$

31,377

 

$

24,822

 

$

39,563

 

$

119,786

 

Percentage rents

 

1,109

 

1,637

 

922

 

1,728

 

5,396

 

Tenant recoveries

 

11,620

 

11,509

 

10,510

 

23,908

 

57,547

 

Other

 

797

 

862

 

1,561

 

4,228

 

7,448

 

Total revenues

 

37,550

 

45,385

 

37,815

 

69,427

 

190,177

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Shopping center and operating expenses

 

14,616

 

12,071

 

11,152

 

24,317

 

62,156

 

Interest expense

 

9,170

 

12,824

 

8,664

 

12,169

 

42,827

 

Depreciation and amortization

 

7,367

 

7,157

 

7,241

 

14,557

 

36,322

 

Total operating expenses

 

31,153

 

32,052

 

27,057

 

51,043

 

141,305

 

Net income

 

$

6,397

 

$

13,333

 

$

10,758

 

$

18,384

 

$

48,872

 

Company’s equity in net income

 

$

3,198

 

$

6,713

 

$

3,996

 

$

7,109

 

$

21,016

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

22,956

 

$

28,570

 

$

21,616

 

$

20,051

 

$

93,193

 

Percentage rents

 

1,205

 

1,279

 

553

 

884

 

3,921

 

Tenant recoveries

 

11,091

 

10,419

 

9,303

 

9,504

 

40,317

 

Other

 

1,420

 

925

 

1,034

 

2,503

 

5,882

 

Total revenues

 

36,672

 

41,193

 

32,506

 

32,942

 

143,313

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Shopping center and operating expenses

 

14,635

 

11,736

 

10,480

 

13,438

 

50,289

 

Interest expense

 

8,604

 

11,296

 

8,392

 

8,256

 

36,548

 

Depreciation and amortization

 

7,189

 

6,814

 

9,606

 

6,115

 

29,724

 

Total operating expenses

 

30,428

 

29,846

 

28,478

 

27,809

 

116,561

 

Gain on sale of assets

 

 

 

880

 

 

880

 

Net income

 

$

6,244

 

$

11,347

 

$

4,908

 

$

5,133

 

$

27,632

 

Company’s equity in net income

 

$

3,122

 

$

5,786

 

$

109

 

$

2,229

 

$

11,246

 

 

Significant accounting policies used by the unconsolidated joint ventures are similar to those used by the Company. Included in mortgage notes payable are amounts due to affiliates of Northwestern Mutual Life (“NML”) of $136,514 and $137,954 as of March 31, 2006 and December 31, 2005, respectively. NML is considered a related party because they are a joint venture partner with the Company in Macerich Northwestern Associates. Interest expense incurred on these borrowings amounted to $2,276 and $2,348 for the three months ended March 31, 2006 and 2005 respectively.

 

4.              Property:

 

Property consists of the following:

 

 

 

March 31,
2006

 

December 31,
2005

 

Land

 

$

1,181,079

 

$

1,095,180

 

Building improvements

 

4,765,373

 

4,604,803

 

Tenant improvements

 

225,020

 

222,619

 

Equipment and furnishings

 

78,274

 

75,836

 

Construction in progress

 

186,214

 

162,157

 

 

 

6,435,960

 

6,160,595

 

Less accumulated depreciation

 

(764,151

)

(722,099

)

 

 

$

5,671,809

 

$

5,438,496

 

 

The Company had a loss of $623 from the sale of assets and a $121 gain from the sale of land, during the three months ended March 31, 2006 and a gain on sale of land of $1,308 for the three months ended March 31, 2005.

 

14



 

5.              Deferred Charges And Other Assets:

 

Deferred charges and other assets are summarized as follows:

 

 

 

March 31,
2006

 

December 31,
2005

 

Leasing

 

$

123,915

 

$

117,060

 

Financing

 

37,527

 

39,323

 

Intangible assets resulting from SFAS No. 141 allocations:

 

 

 

 

 

In-place lease values

 

214,723

 

218,488

 

Leasing commissions and legal costs

 

35,896

 

36,732

 

 

 

412,061

 

411,603

 

Less accumulated amortization

 

(160,217

)

(142,747

)

 

 

251,844

 

268,856

 

Other assets

 

94,308

 

91,361

 

 

 

$

346,152

 

$

360,217

 

 

Additionally, as it relates to SFAS No. 141, a deferred credit representing the allocated value to below market leases of $77,858 and $84,241 is recorded in “Other accrued liabilities” of the Company, as of March 31, 2006 and December 31, 2005, respectively. Included in “Other assets” of the Company is an allocated value of above market leases of $29,845 and $28,660, as of March 31, 2006 and December 31, 2005, respectively. Accordingly, the allocated values of below and above market leases will be amortized into minimum rents on a straight-line basis over the individual remaining lease terms.

 

15



 

6.     Mortgage Notes Payable:

 

Mortgage notes payable consist of the following:

 

 

 

Carrying Amount of Mortgage Notes (a)

 

 

 

Monthly

 

 

 

 

 

March 31, 2006

 

December 31, 2005

 

Interest

 

Payment

 

Maturity

 

Property Pledged as Collateral

 

Other

 

Related Party

 

Other

 

Related Party

 

Rate

 

Term (b)

 

Date

 

Borgata

 

$

15,284

 

$

 

$

15,422

 

$

 

5.39

%

$

115

 

2007

 

Capitola Mall

 

 

42,180

 

 

42,573

 

7.13

%

380

 

2011

 

Carmel Plaza

 

26,963

 

 

27,064

 

 

8.18

%

202

 

2009

 

Chandler Fashion Center

 

175,131

 

 

 

175,853

 

 

5.48

%

1,043

 

2012

 

Chesterfield Towne Center (c)

 

58,162

 

 

58,483

 

 

9.07

%

548

 

2024

 

Citadel, The

 

63,587

 

 

64,069

 

 

7.20

%

544

 

2008

 

Danbury Fair Mall

 

187,557

 

 

189,137

 

 

4.64

%

1,225

 

2011

 

Eastview Commons

 

9,336

 

 

9,411

 

 

5.46

%

66

 

2010

 

Eastview Mall

 

104,198

 

 

104,654

 

 

5.10

%

592

 

2014

 

Fiesta Mall

 

84,000

 

 

84,000

 

 

4.88

%

346

 

2015

 

Flagstaff Mall

 

37,000

 

 

37,000

 

 

4.97

%

155

 

2015

 

FlatIron Crossing

 

193,417

 

 

194,188

 

 

5.23

%

1,102

 

2013

 

Freehold Raceway Mall

 

187,721

 

 

189,161

 

 

4.68

%

1,184

 

2011

 

Fresno Fashion Fair

 

65,291

 

 

65,535

 

 

6.52

%

437

 

2008

 

Great Northern Mall

 

41,414

 

 

41,575

 

 

5.19

%

224

 

2013

 

Greece Ridge Center (d)

 

72,000

 

 

72,012

 

 

5.40

%

305

 

2007

 

Greeley Mall

 

28,704

 

 

28,849

 

 

6.18

%

197

 

2013

 

La Cumbre Plaza (e)

 

30,000

 

 

30,000

 

 

5.45

%

133

 

2007

 

La Encantada (f)

 

51,000

 

 

45,905

 

 

6.29

%

248

 

2008

 

Marketplace Mall

 

41,282

 

 

41,545

 

 

5.30

%

267

 

2017

 

Northridge Mall (g)

 

83,515

 

 

83,840

 

 

4.84

%

453

 

2009

 

Northwest Arkansas Mall

 

54,052

 

 

54,442

 

 

7.33

%

434

 

2009

 

Oaks, The (h)

 

108,000

 

 

108,000

 

 

 

5.60

%

487

 

2006

 

Pacific View

 

91,200

 

 

91,512

 

 

 

7.16

%

648

 

2011

 

Panorama Mall (i)

 

50,000

 

 

32,250

 

 

5.48

%

228

 

2010

 

Paradise Valley Mall

 

76,452

 

 

76,930

 

 

5.39

%

506

 

2007

 

Paradise Valley Mall

 

22,817

 

 

23,033

 

 

5.89

%

183

 

2009

 

Pittsford Plaza

 

25,769

 

 

25,930

 

 

5.02

%

160

 

2013

 

Prescott Gateway (j)

 

35,280

 

 

35,280

 

 

6.46

%

177

 

2007

 

Paradise Village Ground Leases

 

 

 

7,190

 

 

5.39

%

 

(k)

 

Queens Center

 

93,093

 

 

93,461

 

 

6.88

%

633

 

2009

 

Queens Center

 

111,536

 

111,536

 

111,958

 

111,958

 

7.00

%

1,501

 

2013

 

Rimrock Mall

 

43,891

 

 

44,032

 

 

7.45

%

320

 

2011

 

Rotterdam Square (l)

 

9,719

 

 

9,786

 

 

6.43

%

63

 

2006

 

Salisbury, Centre at (m)

 

79,875

 

 

79,875

 

 

4.75

%

316

 

2006

 

Santa Monica Place

 

80,793

 

 

81,052

 

 

7.70

%

606

 

2010

 

Scottsdale/101 (n)

 

56,000

 

 

56,000

 

 

6.05

%

262

 

2008

 

Shoppingtown Mall

 

47,364

 

 

47,752

 

 

5.01

%

319

 

2011

 

South Plains Mall

 

60,332

 

 

60,561

 

 

8.22

%

454

 

2009

 

South Towne Center

 

64,000

 

 

64,000

 

 

6.61

%

357

 

2008

 

Towne Mall

 

15,615

 

 

15,724

 

 

4.99

%

101

 

2012

 

Valley River Center (o)

 

100,000

 

 

 

 

5.58

%

465

 

2016

 

Valley View Center

 

125,000

 

 

125,000

 

 

5.72

%

604

 

2011

 

Victor Valley, Mall of

 

53,303

 

 

53,601

 

 

4.60

%

304

 

2008

 

Village Center

 

 

 

6,877

 

 

5.39

%

 

(k)

 

Village Fair North

 

11,447

 

 

11,524

 

 

5.89

%

82

 

2008

 

Village Plaza

 

4,949

 

 

5,024

 

 

5.39

%

47

 

2006

 

Vintage Faire Mall

 

66,047

 

 

66,266

 

 

7.89

%

508

 

2010

 

Westside Pavilion

 

94,537

 

 

94,895

 

 

6.67

%

628

 

2008

 

Wilton Mall

 

48,049

 

 

48,541

 

 

4.79

%

349

 

2009

 

 

 

$

3,184,682

 

$

153,716

 

$

3,088,199

 

$

154,531

 

 

 

 

 

 

 

 


(a)

 

The mortgage notes payable balances include the unamortized debt premiums (discount).  Debt premiums (discount) represent the excess of the fair value of debt over the principal value of debt assumed in various acquisitions and are amortized into interest expense over the remaining term of the related debt in a manner that approximates the effective interest method.

 

16



 

The debt premiums (discount) as of March 31, 2006 and December 31, 2005 consist of the following:

 

Property Pledged as Collateral

 

2006

 

2005

 

Borgata

 

$

465

 

$

538

 

Danbury Fair Mall

 

20,819

 

21,862

 

Eastview Commons

 

928

 

979

 

Eastview Mall

 

2,230

 

2,300

 

Freehold Raceway Mall

 

18,381

 

19,239

 

Great Northern Mall

 

(211

)

(218

)

Marketplace Mall

 

1,935

 

1,976

 

Paradise Valley Mall

 

592

 

789

 

Paradise Valley Mall

 

905

 

978

 

Pittsford Plaza

 

1,150

 

1,192

 

Paradise Village Ground Leases

 

 

30

 

Rotterdam Square

 

83

 

110

 

Shoppingtown Mall

 

5,629

 

5,896

 

Towne Mall

 

629

 

652

 

Victor Valley, Mall of

 

619

 

699

 

Village Center

 

 

35

 

Village Fair North

 

219

 

243

 

Village Plaza

 

91

 

130

 

Wilton Mall

 

5,294

 

5,661

 

 

 

$

59,758

 

$

63,091

 

 

(b)

 

This represents the monthly payment of principal and interest.

 

 

 

(c)

 

In addition to monthly principal and interest payments, contingent interest, as defined in the loan agreement, may be due to the extent that 35% of the amount by which the property’s gross receipts exceeds a base amount. Contingent interest expense recognized by the Company was $70 and $199 for the three months ended March 31, 2006 and 2005, respectively.

 

 

 

(d)

 

The floating rate loan bears interest at LIBOR plus 0.65%. The Company has stepped interest rate cap agreements over the term of the loan that effectively prevents LIBOR from exceeding 7.95%.

 

 

 

(e)

 

The floating rate loan bears interest at LIBOR plus 0.88% that matures in August 9, 2007 with two one-year extensions through August 9, 2009. The Company has an interest rate cap agreement over the loan term which effectively prevents LIBOR from exceeding 7.12%. At March 31, 2006 and December 31, 2005, the total interest rate was 5.45% and 5.25%, respectively.

 

 

 

(f)

 

This represents a construction loan which shall not exceed $51,000 that bore interest at LIBOR plus 2.0%. On January 6, 2006, the Company modified the loan to reduce the interest rate to LIBOR plus 1.75% with the opportunity for further reduction upon satisfaction of certain conditions to LIBOR plus 1.50%. The maturity was extended to August 1, 2008 with two extension options of eighteen and twelve months, respectively.

 

 

 

(g)

 

The loan bore interest at LIBOR plus 2.0% for six months and then converted at January 1, 2005 to a fixed rate loan at 4.94%. The effective interest rate over the entire term is 4.84%.

 

 

 

(h)

 

Concurrent with the acquisition of the mall, the Company placed a $108,000 loan bearing interest at LIBOR plus 1.15% and maturing July 1, 2004 with three consecutive one year options. $92,000 of the loan is at LIBOR plus 0.7% and $16,000 is at LIBOR plus 3.75%. In July 2005, the Company extended the loan maturity to July 2006. In May 2006, the Company paid off $16,000 of the loan.

 

 

 

(i)

 

On February 15, 2006, the Company paid off the existing floating rate loan that bore interest at LIBOR plus 1.65% and replaced it with a $50.0 million floating rate loan that bears interest at LIBOR plus 0.85% and matures in February 2010. There is an interest rate cap agreement on the new loan which effectively prevents LIBOR from exceeding 6.65%. At March 31, 2006 and December 31, 2005, the total interest rate was 5.48% and 4.90%, respectively.

 

 

 

(j)

 

The floating rate loan bears interest at LIBOR plus 1.65%. At March 31, 2006 and December 31, 2005, the total interest rate was 6.46% and 6.03%, respectively.

 

 

17



 

(k)                 These loans were paid off in full on January 3, 2006.

 

(l)                    The floating rate loan bears interest at LIBOR plus 1.75%. At March 31, 2006 and December 31, 2005, the total interest rate was 6.43% and 6.00%, respectively.

 

(m)               This floating rate loan bore interest at LIBOR plus 1.375% and was to mature on February 20, 2006. On April 19, 2006, the Company refinanced the loan on the property. The existing loan was replaced with an $115,000 loan bearing interest at 5.79% and maturing on May 1, 2016.

 

(n)                 The property has a construction note payable which shall not exceed $54,000, which bore interest at LIBOR plus 2.00%. On September 22, 2005, this loan was modified to increase the loan to $56,000 and to reduce the interest rate to LIBOR plus 1.25%. At March 31, 2006, the total interest rate was 6.05%. The loan matures on September 16, 2008 and has two one-year extension options.

 

(o)                 Concurrent with the acquisition of this property, the Company placed a $100,000 loan that bears interest at 5.58% and matures on February 16, 2016.

 

Most of the mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.

 

Total interest expense capitalized during the three months ended March 31, 2006 and 2005 was $3,037, and $2,204, respectively.

 

Related party mortgage notes payable are amounts due to affiliates of NML.

 

The fair value of mortgage notes payable is estimated to be approximately $3,369,322 and $3,341,000, at March 31, 2006 and December 31, 2005, respectively, based on current interest rates for comparable loans.

 

7.              Bank Notes Payable:

 

The Company has a revolving line of credit of $1,000,000 with a maturity of July 30, 2007 plus a one-year extension.  The interest rate fluctuates from LIBOR plus 1.15% to LIBOR plus 1.70% depending on the Company’s overall leverage level.  As of March 31, 2006 and December 31, 2005, $824,000 and $863,000 of borrowings were outstanding at a weighted average interest rate of 6.47% and 5.93%, respectively.

 

On May 13, 2003, the Company issued $250,000 in unsecured notes maturing in May 2007 with a one-year extension option bearing interest at LIBOR plus 2.50%.  The proceeds were used to pay down the Company’s line of credit.  At March 31, 2006 and December 31, 2005, $250,000 was outstanding at an interest rate of 6.43% and 6.0%, respectively. The Company had an interest rate swap agreement from November 2003 to October 13, 2005, which effectively fixed the LIBOR rate at 4.45%.  On April 25, 2005, the Company modified the notes and reduced the interest rate from LIBOR plus 2.5% to LIBOR plus 1.5%.

 

On April 25, 2005, concurrent with the Wilmorite acquisition (See Note 11 – Acquisitions), the Company obtained 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%. In November 2005, the Company entered into an interest rate swap agreement that effectively fixed the interest rate of the $450,000 term loan at 6.30% from December 1, 2005 to April 15, 2010. At December 31, 2005 the entire term loan and $619,000 of the acquisition loan were outstanding with interest rates of 6.30% and 6.04%, respectively. On January 19, 2006, concurrent with a stock offering (See Note 12 – Stock Offering), the acquisition loan was paid off in full, resulting in a loss on early extinguishment of debt of $1,782. As of March 31, 2006, the entire term loan was outstanding with an interest rate of 6.30%.

 

As of March 31, 2006 and December 31, 2005, the Company was in compliance with all applicable loan covenants.

 

18



 

8.              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 are fees charged to unconsolidated joint ventures:

 

 

 

For the Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Management Fees

 

 

 

 

 

MMC

 

$

3,011

 

$

2,352

 

Westcor Management Companies

 

1,664

 

1,398

 

Wilmorite Management Companies

 

343

 

 

 

 

$

5,018

 

$

3,750

 

 

 

 

 

 

 

Development and Leasing Fees

 

 

 

 

 

MMC

 

$

258

 

$

244

 

Westcor Management Companies

 

756

 

393

 

Wilmorite Management Companies

 

47

 

 

 

 

$

1,061

 

$

637

 

 

Certain mortgage notes on the properties are held by NML (See Note 6 – Mortgage Notes Payable). NML is considered to be a related party because they are a joint venture partner with the Company in Macerich Northwestern Associates. Interest expense in connection with these notes was $2,696 and $2,032 for the three months ended March 31, 2006 and 2005, respectively.  Included in accounts payable and accrued expenses is interest payable to these partners of $805 and $782 at March 31, 2006 and December 31, 2005, respectively.

 

As of March 31, 2006 and December 31, 2005, the Company had loans to unconsolidated joint ventures of $1,187 and $1,415, respectively.  Interest income associated with these notes was $24 and $88 for the three months ended March 31, 2006 and 2005, respectively. These loans represent initial funds advanced to development stage projects prior to construction loan funding. Correspondingly, loan payables have in the same amount have been accrued as an obligation by the various joint ventures.

 

Due from affiliates of $4,454 and $4,258 at March 31, 2006 and December 31, 2005, 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.

 

9.              Commitments and Contingencies:

 

The Company has certain properties that are subject to non-cancelable operating ground leases.  The leases expire at various times through 2098, 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.  Ground rent expenses were $1,279 and $863 for the three months ended March 31, 2006 and 2005, respectively. No contingent rent was incurred in either period.

 

As of March 31, 2006 and December 31, 2005, the Company was contingently liable for $6,092 and $5,616, 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 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 Wilmorite (See Note 11 - Acquisitions).

 

19



 

10.       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 can be converted on a one for one basis into common stock and will pay 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 will be declared or paid on any class of common or other junior stock to the extent that dividends on Series A Preferred Stock have not been declared and/or paid.

 

The holders of Series A Preferred Stock have redemption rights if a change in control of the Company occurs, as defined under the Articles Supplementary.  Under such circumstances, the holders of the Series A Preferred Stock are entitled to require the Company to redeem their shares, to the extent the Company has funds legally available therefor, at a price equal to 105% of its liquidation preference plus accrued and unpaid dividends.  The Series A Preferred Stock holder also has the right to require the Company to repurchase its shares if the Company fails 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 are legally available therefor.

 

11.       Acquisitions:

 

Wilmorite

 

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”).  The results of Wilmorite and Wilmorite Holding’s operations have been included in the Company’s consolidated financial statements since that date.  Wilmorite’s portfolio included interests in 11 regional malls and two open-air community shopping centers with 13.4 million 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 $234,169 of convertible preferred units (“CPUs”) and $5,815 of common units in Wilmorite Holdings.  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%.  In January 2006, the acquisition loan was paid off in full (See Note 7 – Bank and Other Notes Payable). An affiliate of the Operating Partnership is the general partner, and together with other affiliates, own approximately 83% of Wilmorite Holdings, with the remaining 17% held by those limited partners of Wilmorite Holdings who elected to receive CPUs or common units in Wilmorite Holdings rather than cash.  Approximately $212,668 of the CPUs can be redeemed, subject to certain conditions, for the portion of the Wilmorite portfolio that consists of Eastview Mall, Eastview Commons, Greece Ridge Center, Marketplace Mall and Pittsford Plaza.  That right is exercisable during a period of three months beginning on August 31, 2007.

 

On an unaudited pro forma basis, reflecting the acquisition of Wilmorite as if it had occurred on January 1, 2005, the Company would have reflected net income available to common stockholders of $10,151 for the three months ended March 31, 2005.  Net income available to common stockholders on a diluted per share basis would have been $0.17 for the three months ended March 31, 2005.  Total consolidated revenues of the Company would have been $202,180 for the three months ended March 31, 2005.

 

20



 

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:

 

Assets:

 

 

 

Property

 

$

1,798,487

 

Investments in unconsolidated joint ventures

 

443,681

 

Other assets

 

225,275

 

Total assets

 

2,467,443

 

 

 

 

 

Liabilities:

 

 

 

Mortgage notes payable

 

809,542

 

Other liabilities

 

130,191

 

Minority interest

 

96,196

 

Total liabilities

 

1,035,929

 

 

 

 

 

Net assets acquired

 

$

1,431,514

 

 

Valley River

 

On February 1, 2006, the Company acquired Valley River Center, a 916,000 square foot super-regional mall in Eugene, Oregon. The total purchase price was $187,500 and concurrent with the acquisition, the Company placed a $100,000 loan on the property. The balance of the purchase price was funded by cash and borrowings under the Company’s line of credit. The results of Valley River Center’s operations have been included in the Company’s consolidated financial statements since the acquisition date.

 

12.       Stock Offering:

 

On January 19, 2006, the Company issued 10,952,381 common shares for net proceeds of $746,488. The proceeds from issuance of the shares were used to pay off the $619,000 acquisition loan (See Note 7 - Bank Notes Payable) and to pay down a portion of the Company’s line of credit pending use to pay part of the purchase price for Valley River Center (See Note 11 – Acquisitions).

 

13.       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 (“TRS’s”) 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, LLC.

 

21



 

The income tax expense (benefit) of the TRS’s is as follows:

 

 

 

For the Three Months Ended

 

 

 

2006

 

2005

 

Current

 

$

11

 

$

(39

)

Deferred

 

(544

)

(470

)

Total income tax benefit

 

$

(533

)

$

(509

)

 

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 TRS’s relate primarily to differences in the book and tax bases of property and to operating loss carryforwards for federal 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 2025, beginning in 2011. Net deferred tax assets were $10,845 and $10,256 at March 31, 2006 and December 31, 2005, respectively.

 

14.       Share-Based Plans:

 

The Company has established share-based compensation plans for the purpose of attracting and retaining executive officers, directors and key employees. In addition, the Company has established an Employee Stock Purchase Plan (“ESPP”) to allow employees to purchase the Company’s common stock at a discount.

 

On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” to account for its share-based compensation plans using the modified-prospective method. Accordingly, prior period amounts have not been restated. 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 expense on a straight-line basis for all awards. Prior to the adoption of SFAS No. 123(R), and in accordance with the previous accounting guidance, the Company recognized compensation expense and an increase to additional paid in capital for the fair value of vested stock awards and stock options. In addition, the Company recognized compensation expense and a corresponding liability for the fair value of vested stock units issued under the Eligible Directors’ Deferred Compensation/Phantom Stock Plan (“Directors’ Phantom Stock Plan”).

 

In connection with the adoption of SFAS No. 123(R), the Company determined that $6,000 included in other accrued liabilities at December 31, 2005, in connection with the Directors’ Phantom Stock Plan should be included in additional paid-in capital. Additionally, the Company reclassified $15,464 from the Unamortized Restricted Stock line item within equity to additional paid-in capital. The Company made these reclassifications during the three months ended March 31, 2006.

 

2003 Equity Incentive Plan

 

The 2003 Equity Incentive Plan (“2003 Plan”) authorizes the grant of stock awards, stock options, stock appreciation rights, stock units, stock bonuses, performance based awards, dividend equivalent rights and operating partnership units or other convertible or exchangeable units. As of March 31, 2006, only stock awards and stock options have been granted under the 2003 Plan. All awards granted under the 2003 Plan have a term of 10 years or less. These awards were generally granted based on certain performance criteria for the Company and the employees. The aggregate number of shares of common stock that may be issued under the 2003 Plan is 6,000,000 shares. As of March 31, 2005, there were 5,365,391 shares available for issuance under the 2003 Plan.

 

22



 

The following stock awards and stock options were granted under the 2003 Plan:

 

Stock Awards

 

The stock awards vest over three years and the compensation expense related to the grants are determined by the market value at the grant date and are amortized over the vesting period on a straight-line basis. Stock awards are subject to restrictions determined by the Company’s compensation committee. Stock awards have the same dividend and voting rights as common stock. Compensation expense for stock awards was $3,002 and $2,268, for the three months ended March 31, 2006 and 2005, respectively.  As of March 31, 2006, there was $25,474 of total unrecognized compensation cost related to non-vested stock awards. This cost is expected to be recognized over a weighted average period of three years.

 

The following table summarizes the non-vested stock awards activity during the three months ended March 31, 2006:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Vaue

 

Balance at December 31, 2005

 

523,654

 

$

42.12

 

Granted

 

175,958

 

$

73.95

 

Vested

 

(279,904

)

$

42.73

 

Forfeitures

 

 

 

Balance at March 31, 2006

 

419,708

 

$

48.14

 

 

Stock Options

 

The stock options vested six months after the grant date and were issued at the fair value of the common stock at the grant date. The term of these stock options is ten years from the grant date. The Company has not issued stock options since 2003. All outstanding stock options were fully vested as of December 31, 2005, and therefore, were not impacted by the adoption of SFAS No. 123(R).

 

The following table summarizes the activity of stock options outstanding during the three months ended March 31, 2006:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Options

 

Exercise Price

 

Balance at December 31, 2005

 

2,500

 

$

39.43

 

Granted

 

 

 

Exercised

 

 

 

Forfeitures

 

 

 

Balance at March 31, 2006

 

2,500

 

$

39.43

 

 

Directors’ Phantom Stock Plan

 

The Directors’ Phantom Stock Plan offers non-employee members of the board of directors (“Directors”) the opportunity to defer their cash compensation and to receive that compensation in common stock rather than in cash after termination of service or a predetermined period. Compensation generally includes the annual retainer and regular meeting fees payable by the Company to the Directors. Every Director has elected to receive their compensation in common stock. Deferred amounts are credited as units of phantom stock at the beginning of each three-year deferral period by dividing the present value of the deferred compensation by the average fair market value of the Company’s common stock at the date of grant. Compensation expense related to the phantom stock award was determined by the amortization of the value of the stock units on a straight-line basis over the applicable three-year service period. The stock units vest as the Directors’ services (to which the fees relate) are rendered. Vested phantom stock units are ultimately paid out in common stock on a one-unit for one-share basis. Stock units receive dividend equivalents in the form of additional stock units based on the dividend amount paid on the common stock. Compensation expense for stock awards was $162 and $128, for the three months ended March 31, 2006 and 2005, respectively. The aggregate number of phantom stock units that may be granted under the Directors’ Phantom Stock Plan is 250,000. As of March 31, 2005, there were 133,481 units available for grant under the Directors’ Phantom Stock Plan. As of March 31, 2006, there was $166 of total unrecognized cost related to non-vested phantom stock units. This cost is expected to be recognized over a weighted average period of one year.

 

23



 

The following table summarizes the activity of the non-vested phantom stock units during the three months ended March 31, 2006:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Units

 

Fair Vaue

 

Balance at December 31, 2005

 

5,858

 

$

43.70

 

Granted

 

1,036

 

$

70.93

 

Vested

 

(2,500

)

$

54.67

 

Forfeitures