SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2002
COMMISSION FILE NO. 1-12504
THE MACERICH COMPANY (Exact name of registrant as specified in its charter)
(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)
Common stock, par value $.01 per share: 36,310,929 shares Number of shares outstanding of the registrant's common stock, as of November 8, 2002.
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
Form 10-Q INDEX
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (Unaudited)
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share and per share amounts) (Unaudited)
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CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except share and per share amounts)(Unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
The accompanying notes are in integral part of these financial statements.
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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited)
1. Interim Financial Statements and Basis of Presentation:
The accompanying consolidated financial statements of The Macerich Company (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 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, 2001. 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 results for interim periods are not necessarily indicative of the results to be expected for a full year. The accompanying consolidated balance sheet as of December 31, 2001 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.
Certain reclassifications have been made in the 2001 consolidated financial statements to conform to the 2002 financial statement presentation.
Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of $7,148 to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in the quarter ended March 31, 2001. The Company reclassified $994 and expects to reclassify $1,328 from accumulated other comprehensive income to earnings for the nine months ended September 30, 2002 and for the year ended December 31, 2002, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. The Company does not believe that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.
On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the
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recognition of intangible assets. The Company has determined that the adoption of SFAS 141 did not have an impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company sold Boulder Plaza on March 19, 2002 and in accordance with SFAS 144, the results of Boulder Plaza for the periods from January 1, 2002 to March 19, 2002 and from January 1, 2001 to September 30, 2001 have been reclassified into "discontinued operations" on the consolidated statements of operations. Total revenues associated with Boulder Plaza were $495 and $1,558 for the periods January 1, 2002 to March 19, 2002 and January 1, 2001 to September 30, 2001, respectively.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections" ("SFAS 145"), which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4, SFAS 44 and SFAS 64 and amends SFAS 13 to modify the accounting for sales-leaseback transactions. SFAS 4 required the classification of gains and losses resulting from extinguishment of debt to be classified as extraordinary items. SFAS 64 amended SFAS 4 and is no longer necessary because SFAS 4 has been rescinded. The Company expects to reclassify a loss of $2,034 and $304 for the years ending December 31, 2001 and 2000, respectively, from extraordinary items upon adoption of SFAS 145 on January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its consolidated financial statements.
Stock-based compensation expense. In the second quarter of 2002 and effective beginning in the first quarter of 2002, the Company adopted the expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Effective January 1, 2002, the Company will value stock options issued using the Black-Scholes option-pricing model and recognizes this value as an expense over the period in which the options vest. Under this standard, recognition of expense for stock options is applied to all options granted after the beginning of the year of adoption. Prior to January 1, 2002, the Company followed the intrinsic method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees." The Company has not issued stock options in 2002 and accordingly the Company has not recognized any stock-based compensation expense related to stock options for the three and nine months ending September 30, 2002.
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 nine and three months ending September 30, 2002 and 2001. The computation of diluted earnings per share does not include the effect of outstanding restricted stock issued under the employee and director stock incentive plans as they are antidilutive using the treasury method. The Operating Partnership units ("OP units") not held by the Company have been included in the diluted EPS calculation since they are redeemable on a one-for-one basis for
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shares of common stock. The following table reconciles the basic and diluted earnings per share calculation:
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2. Organization:
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, 2002, The Operating Partnership owns or has an ownership interest in 56 regional shopping centers and 21 community shopping centers aggregating approximately 58 million square feet of gross leasable area ("GLA"). These 77 regional and community 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 single-member Delaware limited liability company, Macerich Management Company, a California corporation (collectively, the "Macerich Management Companies") and Westcor Partners, LLC, a single member Arizona limited liability company and Macerich Westcor Management, LLC, a single member Delaware limited liability company (collectively, the "Westcor Management Companies"). The term "Macerich Management Companies" includes Macerich Property Management Company, a California corporation, prior to the merger with Macerich Property Management Company, LLC on March 29, 2001 and Macerich Manhattan Management Company, a California corporation which has ceased operations and is a wholly-owned subsidiary of Macerich Management Company.
The Company was organized to qualify as a REIT under the Internal Revenue Code of 1986, as amended. As of September 30, 2002, the 23% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.
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3. Investments in Unconsolidated Joint Ventures and the Macerich Management Companies:
The following are the Company's investments in various joint ventures. The Operating Partnership's interest in each joint venture as of September 30, 2002 is as follows:
As of March 28, 2001, the Operating Partnership also owned all of the non-voting preferred stock of Macerich Property Management Company and Macerich Management Company, which is generally entitled to dividends equal to 95% of the net cash flow of each company. Macerich Manhattan Management Company, which has ceased operations, is a wholly owned subsidiary of Macerich Management Company. Effective March 29, 2001, Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). MPMC, LLC is a single-member Delaware limited liability company and is 100% owned by the Operating Partnership. The ownership structure of Macerich Management Company has remained unchanged.
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The Company accounts for the Macerich Management Companies (exclusive of MPMC, LLC) and joint ventures using the equity method of accounting. Effective March 29, 2001, the Company consolidated the accounts for MPMC, LLC.
On September 30, 2000, Manhattan Village, a 551,847 square foot regional shopping center, 10% of which was owned by the Operating Partnership, was sold. The joint venture sold the property for $89,000, including a note receivable from the buyer for $79,000 at a fixed interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001. On December 28, 2001, the note receivable was paid down by $5,000 and the maturity date was extended to September 30, 2002 at a new fixed interest rate of 9.5%. On July 2, 2002, the note receivable of $74,000 was paid in full.
MerchantWired LLC was formed by six major mall companies, including the Company, to provide a private, high-speed IP network to malls across the United States. The members of MerchantWired LLC agreed to sell all their collective membership interests in MerchantWired LLC under the terms of a definitive agreement with Transaction Network Services, Inc. ("TNSI"). The transaction was expected to close in the second quarter of 2002, but TNSI unexpectedly informed the members of MerchantWired LLC that it would not complete the transaction. As a result, MerchantWired LLC shut down its operations and transitioned its customers to alternate service providers. The Company does not anticipate making further cash contributions to MerchantWired LLC and wrote-off their remaining investment of $8,947 in the three months ended June 30, 2002, which is reflected in the equity in income of unconsolidated joint ventures.
On July 26, 2002, the Operating Partnership acquired Westcor Realty Limited Partnership and its affiliated companies ("Westcor"), which included the joint ventures noted in the above schedule. Westcor is the dominant owner, operator and developer of regional malls and specialty retail assets in the greater Phoenix area. The total purchase price was approximately $1,475,000 including the assumption of $733,000 in existing debt and the issuance of approximately $72,000 of convertible preferred operating partnership units at a price of $36.55 per unit. Additionally, $18,910 of partnership units of Westcor Realty Limited Partnership were issued to limited partners of Westcor which, subject to certain conditions, can be converted on a one for one basis into operating partnership units of the Operating Partnership. The balance of the purchase price was paid in cash which was provided primarily from a $380,000 interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250,000 term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level.
The results of Westcor 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 and the Macerich Management Companies.
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COMBINED AND CONDENSED BALANCE SHEETS OF UNCONSOLIDATED JOINT VENTURESAND THE MACERICH MANAGEMENT COMPANIES(Dollars in thousands)
COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURESAND THE MACERICH MANAGEMENT COMPANIES(Dollars in thousands)
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Significant accounting policies used by the unconsolidated joint ventures and the Macerich Management Companies are similar to those used by the Company.
Included in mortgage notes payable are amounts due to affiliates of Northwestern Mutual Life ("NML") of $154,286 and $157,567 as of September 30, 2002 and December 31, 2001, 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 $7,842 and $8,077 for the nine months ended September 30, 2002 and 2001, respectively; and $2,625 and $2,710 for the three months ended September 30, 2002 and 2001, respectively.
4. Property:
Property is summarized as follows:
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On June 10, 2002, the Company acquired The Oaks, a 1.1 million square foot super-regional mall in Thousand Oaks, California. The total purchase price was $152,500 and was funded with $108,000 of debt, bearing interest at LIBOR plus 1.15%, placed concurrently with the acquisition. The balance of the purchase price was funded by cash and borrowings under the Company's line of credit.
Additionally, the above schedule includes the acquisition of Westcor (See Note 12).
A gain on sale or write-down of assets of $10, 209 for the nine months ended September 30, 2002 includes a gain of $13,923 as a result of the Company selling Boulder Plaza on March 19, 2002 and is offset by a loss of $3,029 as a result of writing-off the Company's various technological investments in the quarter ended June 30, 2002.
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5. Mortgage Notes Payable:
Mortgage notes payable at September 30, 2002 and December 31, 2001 consist of the following:
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Mortgage notes payable of the unconsolidated joint ventures at September 30, 2002 and December 31, 2001 consist of the following:
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Certain mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.
Total interest expense capitalized, including the pro rata share of joint ventures of $510 and $273, during the nine and three months ended September 30, 2002, was $5,261 and $1,791, respectively. Total interest expense capitalized, including the pro rata share of joint ventures of $230 and $57, during the nine and three months ended September 30, 2001, was $3,903 and $1,340, respectively.
The fair value of mortgage notes payable, (including the pro rata share of joint ventures of $1,133,131 and $721,084 at September 30, 2002 and December 31, 2001 respectively), is estimated to be approximately $2,966,403 and $1,983,183, at September 30, 2002 and December 31, 2001, respectively, based on current interest rates for comparable loans.
6. Bank and Other Notes Payable:
The Company had a credit facility of $200,000 with a maturity of July 26, 2002, with a right to extend the facility to May 26, 2003 subject to certain conditions. The interest rate on such credit facility fluctuated between 1.35% and 1.80% over LIBOR depending on leverage levels. At December 31, 2001, $159,000 of borrowings were outstanding under this line of credit at an interest rate of 3.65%.
On July 26, 2002, the Company replaced the $200,000 credit facility with a new $425,000 revolving line of credit. This increased revolving line of credit has a three-year term plus a one-year extension. The interest rate fluctuates from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. As of September 30, 2002, $220,000 of borrowings were outstanding under this credit facility at an average interest rate of 4.78%. The Company, through its acquisition of Westcor, has an interest rate swap with a $50,000 notional amount. The swap matures December 1, 2003, and was designated as a cash flow hedge. This swap will serve to reduce exposure to interest rate risk effectively converting the LIBOR rate on $50,000 of the Company's variable interest rate borrowings to a rate of 3.215%. The swap is reported at fair value, with changes in fair value recorded as a component of other comprehensive income. Net receipts or payments under the agreement will be recorded as an adjustment to interest expense.
Concurrent with the acquisition of Westcor (See Note 3), the Company placed a $380,000 interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250,000 term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. At September 30, 2002, the entire $380,000 interim loan was outstanding at an interest rate of 4.56%. On October 22, 2002, the Company paid off $34,000 of this outstanding amount. At September 30, 2002, the entire $250,000 term loan was outstanding at an interest rate of 4.78%.
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Additionally, as of September 30, 2002, the Company has obtained $2,520 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.
7. Convertible Debentures:
During 1997, the Company issued and sold $161,400 of its convertible subordinated debentures (the "Debentures"). The Debentures, which were sold at par, bear interest at 7.25% annually (payable semi-annually) and are convertible into common stock at any time, on or after 60 days, from the date of issue at a conversion price of $31.125 per share. In November and December 2000, the Company purchased and retired $10,552 of the Debentures. In December 2001, the Company purchased and retired an additional $25,700 of the Debentures. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving credit facility to fully retire the Debentures at their maturity (See Note 6).
8. Related-Party Transactions:
The Company engaged the Macerich Management Companies to manage the operations of certain properties and unconsolidated joint ventures. For the nine and three months ending September 30, 2002, no management fees were paid to the Macerich Management Companies by the Company. For the nine and three months ending September 30, 2001, management fees of $757 and $0, respectively, were paid to the Macerich Management Companies by the Company. For the nine and three months ending September 30, 2002, management fees of $5,749 and $1,982 respectively; and for the nine and three months ending September 30, 2001, management fees of $5,461 and $1,902, respectively, were paid to the Macerich Management Companies by the joint ventures. For the period July 27, 2002 to September 30, 2002, management fees of $531 for the unconsolidated entities were paid to the Westcor Management Companies by the Company.
Certain mortgage notes are held by one of the Company's joint venture partners, NML. Interest expense in connection with these notes was $4,361 and $1,472 for the nine and three months ended September 30, 2002, respectively; and $5,450 and $1,491 for the nine and three months ended September 30, 2001, respectively. Included in accounts payable and accrued expenses is interest payable to NML of $243 and $263 at September 30, 2002 and December 31, 2001, respectively.
As of September 30, 2002, the Company has loans to unconsolidated joint ventures of $19,696. These loans represent initial funds advanced to development stage projects prior to construction loan fundings. Correspondingly, loans payable from unconsolidated joint ventures in this same amount have been accrued as an obligation of various joint ventures.
In 1997 and 1999, certain executive officers received loans from the Company totaling $6,500. These loans are full recourse to the executives and $6,000 of the loans were issued under the terms of the employee stock incentive plan, bear interest at 7%, are due in 2007 and 2009 and are secured by Company common stock owned by the executives. On February 9, 2000, $300 of the $6,000 of these loans was forgiven with respect to three of these officers and charged to compensation expense. On April 2, 2002, $2,700 of these loans were paid off in full by three of these officers. The $500 loan issued in 1997 was a non interest bearing note forgiven ratably over a five year term. These loans receivable totaling $3,175 and $5,189 are included in other assets at September 30, 2002 and December 31, 2001, respectively.
Certain Company officers and affiliates have guaranteed mortgages of $21,750 at one of the Company's joint venture properties and $2,000 at Greeley Mall.
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9. Commitments and Contingencies:
The Company has certain properties subject to noncancellable 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, net of amounts capitalized, were $991 and $359 for the nine and three months ended September 30, 2002, respectively; and were $160 and $75 for the nine and three months ended September 30, 2001, respectively. No contingent rent was incurred in either period.
Perchloroethylene ("PCE") has been detected in soil and groundwater in the vicinity of a dry cleaning establishment at North Valley Plaza, formerly owned by a joint venture of which the Company was a 50% member. The property was sold on December 18, 1997. The California Department of Toxic Substances Control ("DTSC") advised the Company in 1995 that very low levels of Dichloroethylene ("1,2 DCE"), a degradation byproduct of PCE, had been detected in a municipal water well located 1/4 mile west of the dry cleaners, and that the dry cleaning facility may have contributed to the introduction of 1,2 DCE into the water well. According to DTSC, the maximum contaminant level ("MCL") for 1,2 DCE which is permitted in drinking water is 6 parts per billion ("ppb"). The 1,2 DCE was detected in the water well at a concentration of 1.2 ppb, which is below the MCL. The Company has retained an environmental consultant and has initiated extensive testing of the site. The joint venture agreed (between itself and the buyer) that it would be responsible for continuing to pursue the investigation and remediation of impacted soil and groundwater resulting from releases of PCE from the former dry cleaner. Approximately $188 and $42 have already been incurred by the joint venture for remediation, professional and legal fees for the nine months ending September 30, 2002 and 2001, respectively. The joint venture has been sharing costs with former owners of the property. The Company believes no additional reserve is required to be established at this time by the joint venture.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has been detected in structural fireproofing throughout much of the Center. Testing data conducted by professional environmental consulting firms indicates that the fireproofing is largely inaccessible to building occupants and is well adhered to the structural members. Additionally, airborne concentrations of asbestos were well within OSHA's permissible exposure limit ("PEL") of .1 fcc. The accounting for this acquisition included a reserve of $3,300 to cover future removal of this asbestos, as necessary. The Company incurred $169 and $145 in remediation costs for the nine months ending September 30, 2002 and 2001, respectively. An additional $2,440 remains reserved at September 30, 2002.
Dry cleaning chemicals have been detected in soil and groundwater in the vicinity of a former dry cleaning establishment at Bristol Center. The Santa Ana Regional Water Quality Control Board has been notified of the release. The Company has retained an environmental consultant to assess the extent of the chemicals that are present in soil and groundwater and develop a remedial action plan. The remedial action plan has been completed and has been approved by the Santa Ana Regional Water Quality Control Board. The Company is evaluating bids from independent contractors for remediation and based on such bids has established a reserve of $680 as of September 30, 2002. Remediation is expected to begin in the fourth quarter of 2002.
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.
On June 17, 1998, the Company issued 5,487,471 shares of Series B cumulative convertible redeemable preferred stock ("Series B Preferred Stock") for proceeds totaling $150,000 in a private
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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 and Series B Preferred Stock have not been declared and/or paid.
The holders of Series A Preferred Stock and Series B Preferred Stock have redemption rights if a change in control of the Company occurs, as defined under the respective Articles Supplementary for each series. Under such circumstances, the holders of the Series A Preferred Stock and Series B 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 their respective liquidation preference plus accrued and unpaid dividends. The Series A Preferred Stockholder 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. Common Stock Offerings:
On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $51,941. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes.
12. Westcor Acquisition:
On July 26, 2002, the Operating Partnership acquired Westcor Realty Limited Partnership and its affiliated companies ("Westcor"). Westcor is the dominant owner, operator and developer of regional malls and specialty retail assets in the greater Phoenix area. The total purchase price was approximately $1,475,000 including the assumption of $733,000 in existing debt and the issuance of approximately $72,000 of convertible preferred operating partnership units at a price of $36.55 per unit. Additionally, $18,910 of partnership units of Westcor Realty Limited Partnership were issued to limited partners of Westcor which, subject to certain conditions, can be converted on a one for one basis into operating partnership units of the Operating Partnership. The balance of the purchase price was paid in cash which was provided primarily from a $380,000 interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250,000 term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level.
On a pro forma basis, reflecting Westcor as if it had occurred on January 1, 2001 and 2002, the Company would have reflected net income available to common stockholders of $30,554 and $4,394 for the nine months ended September 30, 2002 and 2001 respectively. Net income available to common stockholders on a diluted per share basis would be $0.81 and $0.25 for the nine months ended September 30, 2002 and 2001, respectively. Total consolidated revenues of the Company would have been $324,011 and $281,678 for the nine months ended September 30, 2002 and 2001, respectively.
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The condensed balance sheet of Westcor presented below is as of the date of acquisition:
The purchase price allocation adjustments included in the Company's balance sheet as of September 30, 2002 are based on information available at this time. Subsequent adjustments to the allocation may be made based on additional information.
13. Subsequent Events:
On November 7, 2002, a dividend/distribution of $0.57 per share was declared for common stockholders and OP unit holders of record on November 18, 2002. In addition, the Company declared a dividend of $0.57 on the Company's Series A Preferred Stock and a dividend of $0.57 on the Company's Series B Preferred Stock. All dividends/distributions will be payable on December 9, 2002.
On November 8, 2002, the Company purchased its joint venture partner's 50% interest in Panorama City Associates for $23,700. Accordingly, the Company now owns 100% of Panorama City Associates which owns Panorama Mall in Panorama, California.
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Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
General Background and Performance Measurement
The Company believes that the most significant measures of its operating performance are Funds from Operations ("FFO") and EBITDA. FFO is defined as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales or write-down of assets and cumulative effect of change in accounting principle, plus depreciation and amortization (excluding depreciation on personal property and amortization of loan and financial instrument costs), and after adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. FFO does not represent cash flow from operations as defined by GAAP and is not necessarily indicative of cash available to fund all cash flow needs. FFO, as presented, may not be comparable to similarly titled measures reported by other real estate investment trusts.
EBITDA represents earnings before interest, income taxes, depreciation, amortization, minority interest, equity in income (loss) of unconsolidated entities, extraordinary items, gain (loss) on sale or write-down of assets, preferred dividends and cumulative effect of change in accounting principle. This data is relevant to an understanding of the economics of the shopping center business as it indicates cash flow available from operations to service debt and satisfy certain fixed obligations. EBITDA should not be construed as an alternative to operating income as an indicator of the Company's operating performance, or cash flow from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies. While the performance of individual Centers and the management companies determines EBITDA, the Company's capital structure also influences FFO. The most important component in determining EBITDA and FFO is Center revenues. Center revenues consist primarily of minimum rents, percentage rents and tenant expense recoveries. Minimum rents will increase to the extent that new leases are signed at market rents that are higher than prior rents. Minimum rents will also fluctuate up or down with changes in the occupancy level. Additionally, to the extent that new leases are signed with more favorable expense recovery terms, expense recoveries will increase.
Percentage rents generally increase or decrease with changes in tenant sales. As leases roll over, however, a portion of historical percentage rent is often converted to minimum rent. It is therefore common for percentage rents to decrease as minimum rents increase. Accordingly, in discussing financial performance, the Company combines minimum and percentage rents in order to better measure revenue growth.
The following discussion is based primarily on the consolidated balance sheet of the Company as of September 30, 2002 and also compares the activities for the nine and three months ended September 30, 2002 to the activities for the nine and three months ended September 30, 2001. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect the fair representation of the results for the interim periods presented and all such adjustments are of a normal recurring nature.
Forward-Looking Statements
This quarterly report on Form 10-Q contains or incorporates statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-Q and include statements regarding, among other matters, the Company's growth, acquisition, redevelopment and development opportunities, the Company's acquisition and other strategies, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the Company's financial condition or results of operations. Words such as "expects," "anticipates," "intends," "projects," "predicts," "plans," "believes," "seeks," "estimates," and "should" and variations of these
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words and similar expressions, are used in many cases to identify these forward-looking statements. 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 industry to vary materially from the Company's future results, performance or achievements, or those of the industry, expressed or implied in such forward-looking statements. Such factors include the matters described herein and the following factors among others: general industry, economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of current and prospective tenants, tenant bankruptcies, lease rates and terms, availability and cost of financing, interest rate fluctuations and operating expenses; adverse changes in the real estate markets including, among other things, competition from other companies, retail formats and technologies, risks of real estate redevelopment, development, acquisitions and dispositions; governmental actions and initiatives (including legislative and regulatory changes); environmental and safety requirements; and terrorist activities that could adversely affect all of the above factors. The Company will not update any forward-looking information to reflect actual results or changes in the factors affecting the forward-looking information.
Statement on Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the financial statements and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectable accounts and estimates for environmental matters. The Company's significant accounting policies are described in more detail in Note 2 of the audited consolidated financial statements included in the Company's Annual Report on Form 10K for the year ended December 31, 2001. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition:
Minimum rental revenues are recognized on a straight-line basis over the terms 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 lining of rent adjustment." Currently, 27% of the mall and freestanding leases contain provisions for CPI rent increases, periodically throughout the term of the lease. The Company believes that using 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 on an accrual basis consistent with Statement of Accounting Bulletin 101. Recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.
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Property:
Costs related to the development, redevelopment, construction and improvement of properties are capitalized and depreciated as outlined below. Interest incurred or imputed on development, redevelopment and construction projects are capitalized until construction is substantially complete.
Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which includes HVAC equipment, roofs, parking lots, etc. are capitalized and depreciated over their estimated useful lives. Realized 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:
The Company assesses whether there has been an 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 an impairment loss if the income stream is 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. Cost 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. The range of the terms of agreements are as follows:
Recent Transactions
On December 14, 2001, Villa Marina Marketplace, a 448,262 square foot community shopping center located in Marina del Rey, California, a wholly-owned property of the Company, was sold. The center was sold for approximately $99.0 million, including the assumption of the existing mortgage of $58.0 million, which resulted in a $24.7 million gain. The Company used approximately $26 million of the net proceeds from this sale to retire $25.7 million of its outstanding Debentures. The remaining balance of the proceeds was used for general corporate purposes.
On March 19, 2002, the Company sold Boulder Plaza, a 159,238 square foot community center in Boulder, Colorado for $24.8 million. The proceeds of $23.7 million from the sale will be used for general corporate purposes.
On June 10, 2002, the Company acquired The Oaks, a 1.1 million square foot super-regional mall in Thousand Oaks, California. The total purchase price was $152.5 million and was funded with $108.0 million of debt, bearing interest at LIBOR plus 1.15%, placed concurrently with the acquisition. The balance of the purchase price was funded by cash and borrowings under the Company's line of credit. The Oaks is referred to herein as the "Acquisition Center."
On July 26, 2002, the Operating Partnership acquired Westcor Realty Limited Partnership and its affiliated companies ("Westcor"). Westcor is the dominant owner, operator and developer of regional
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malls and specialty retail assets in the greater Phoenix area. The total purchase price was approximately $1.475 billion including the assumption of $733 million in existing debt and the issuance of approximately $72 million of convertible preferred operating partnership units at a price of $36.55 per unit. Additionally, $18.9 million of partnership units of Westcor Realty Limited Partnership were issued to limited partners of Westcor which, subject to certain conditions, can be converted on a one for one basis into operating partnership units of the Operating Partnership. The balance of the purchase price was paid in cash which was provided primarily from a $380 million interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250 million term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level.
Crossroads Mall-Boulder and Parklane Mall are currently under redevelopment and are referred to herein as the "Redevelopment Centers." All other Centers, excluding the Acquisition Center, the Westcor portfolio and the Redevelopment Centers, are referred to herein as the "Same Centers," unless the context otherwise requires.
Revenues include rents attributable to the accounting practice of straight lining of rents which requires rent to be recognized each year in an amount equal to the average rent over the term of the lease, including fixed rent increases over that period. The amount of straight lined rents, included in consolidated revenues, recognized for the nine and three months ended September 30, 2002 was $0.1 million and $0.4 million, respectively, compared to ($0.1) million and $0.0 million for the nine and three months ended September 30, 2001, respectively; Additionally, the Company recognized through equity in income of unconsolidated joint ventures $1.4 million and $1.0 million as its pro rata share of straight lined rents from joint ventures for the nine and three months ended September 30, 2002, respectively, compared to $1.0 and $0.3 million for the nine and three months ended September 30, 2001, respectively.
Risk Factors
The Company's historical growth in revenues, net income and Funds From Operations have been closely tied to the acquisition and redevelopment of shopping centers. Many factors, including the availability and cost of capital, the Company's total amount of debt outstanding, interest rates and the availability of attractive acquisition targets, among others, will affect the Company's ability to acquire, redevelop and develop additional properties in the future. The Company may not be successful in pursuing acquisition opportunities, and newly acquired properties may not perform as well as expected. Expenses arising from the Company's efforts to complete acquisitions, redevelop or develop properties or increase its market penetration may have an adverse effect on its business, financial condition and results of operations. In addition, the following describes some of the other significant factors that may impact the Company's future results of operations.
General Factors Affecting the Centers; Competition: Real property investments are subject to varying degrees of risk that may affect the ability of the Centers to generate sufficient revenues to meet operating and other expenses, including debt service, lease payments, capital expenditures and tenant improvements, and to make distributions to the Company and the Company's stockholders. Income from shopping center properties may be adversely affected by a number of factors, including: the national economic climate; the regional and local economy (which may be adversely impacted by plant closings, industry slowdowns, adverse weather conditions, natural disasters, terrorist activities, and other factors); local real estate conditions (such as an oversupply of, or a reduction in demand for, retail space or retail goods and the availability and creditworthiness of current and prospective tenants); perceptions by retailers or shoppers of the safety, convenience and attractiveness of the shopping center; and increased costs of maintenance, insurance and operations (including real estate taxes). A significant percentage of the Centers are located in California and the Westcor centers are concentrated in Arizona. To the extent that economic or other factors affect California or Arizona (or
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their respective regions generally) more severely than other areas of the country, the negative impact on the Company's economic performance could be significant. There are numerous shopping facilities that compete with the Centers in attracting tenants to lease space, and an increasing number of new retail formats and technologies other than retail shopping centers that compete with the Centers for retail sales. Increased competition could adversely affect the Company's revenues. Income from shopping center properties and shopping center values are also affected by such factors as applicable laws and regulations, including tax, environmental, safety and zoning laws, interest rate levels and the availability and cost of financing.
Dependence on Tenants: The Company's revenues and funds available for distribution would be adversely affected if a significant number of the Company's lessees were unable (due to poor operating results, bankruptcy or other reasons) to meet their obligations, if the Company were unable to lease a significant amount of space in the Centers on economically favorable terms, or if for any reason, the Company were unable to collect a significant amount of rental payments. A decision by a department store or another significant tenant to cease operations at a Center could also have an adverse effect on the Company. In addition, mergers, acquisitions, consolidations, dispositions or bankruptcies in the retail industry could result in the loss of tenants at one or more Centers. Furthermore, if the store sales of retailers operating in the Centers were to decline sufficiently, tenants might be unable to pay their minimum rents or expense recovery charges. In the event of a default by a lessee, the Center may also experience delays and costs in enforcing its rights as lessor.
Real Estate Development Risks: Through the Company's acquisition of Westcor, its business strategy has expanded to include the selective development and construction of retail properties. Any development, redevelopment and construction activities that the Company undertakes will be subject to the risks of real estate development, including lack of financing, construction delays, environmental requirements, budget overruns, sunk costs and lease-up. Furthermore, occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable. Real estate development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. If any of the above events occur, the ability to pay distributions and service the Company's indebtedness could be adversely affected.
Comparison of Nine Months Ended September 30, 2002 and 2001
Revenues
Minimum and percentage rents increased by 7.7% to $164.1 million in 2002 from $152.3 million in 2001. Approximately $5.7 million of the increase is attributed to the Same Centers primarily due to releasing space at higher rents, $3.7 million relates to the Acquisition Center and $10.9 million relates to Westcor. This is offset by a $7.4 million decrease relating to the sales of Villa Marina Marketplace and Boulder Plaza and $1.2 million of the decrease relates to the Redevelopment Centers.
Tenant recoveries increased to $85.4 million in 2002 from $79.6 million in 2001. Approximately $4.5 million relates to the Westcor transaction, $2.2 million relates to the Acquisition Center and $1.2 million relates to the Same Centers. These increases are offset by decreases of $0.2 million relating to the Redevelopment Centers and $1.8 million attributed to the sales of Villa Marina Marketplace and Boulder Plaza.
Expenses
Shopping center and operating expenses increased to $90.0 million in 2002 compared to $80.2 million in 2001. The increase is a result of $4.4 million of increased property taxes, insurance and other recoverable and non-recoverable expenses at the Same Centers. Additionally, effective March 29, 2001, the Macerich Property Management Company merged with and into Macerich Property
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Management Company, LLC ("MPMC, LLC"). Expenses for MPMC, LLC for periods commencing March 29, 2001, are now consolidated and represent $1.4 million of the change. Prior to March 29, 2001, MPMC, LLC was an unconsolidated entity accounted for using the equity method of accounting. The Acquisition Center accounted for $2.2 million of the increase in expenses and $4.3 million of the increase related to Westcor. These increases are offset by decreases of approximately $2.5 million related to the sales of Villa Marina Marketplace and Boulder Plaza and $0.3 million from the Redevelopment Centers.
Interest Expense
Interest expense increased to $86.4 million in 2002 from $83.0 million in 2001. Approximately $9.1 million of the increase is related to the debt from the Westcor transaction and $1.0 million from the Acquisition Center. This increase is offset by decreases of approximately $3.2 million related to the sale of Villa Marina Marketplace and approximately $0.9 million related to the payoff of debt in 2001. In addition, the Company purchased and retired an additional $25.7 million of debentures in December 2001 which reduced interest expense by $1.5 million in 2002 compared to 2001. Capitalized interest was $4.8 million in 2002, up from $3.7 million in 2001.
Depreciation and Amortization
Depreciation and amortization increased to $55.1 million in 2002 from $48.8 million in 2001. Approximately $2.7 million relates to additional capital costs at the Same Centers, $1.2 million relates to the Acquisition Center and $4.0 million relates to Westcor. This increase is offset by a decrease of $1.8 million from the sale of Villa Marina Marketplace and Boulder Plaza.
Income from Unconsolidated Joint Ventures and Macerich Management Companies
The income from unconsolidated joint ventures and the Macerich Management Companies was $21.0 million for 2002, compared to income of $20.9 million in 2001. Income from the Macerich Management Companies increased by $1.1 million primarily due to MPMC, LLC being consolidated effective March 29, 2001. SDG Macerich Properties, LP income increased by $2.4 million primarily due to lower interest expense on floating rate debt. Pacific Premier Retail Trust's income increased by $3.7 million primarily due to a $2.3 million gain on sale of assets in 2002 and approximately $1.4 million relating to increases in minimum and percentage rents. Additionally, $2.4 million was attributed to the Westcor transaction. These increases are offset by $10.2 million of loss from the write-down of the Company's investment in MerchantWired, LLC.
Gain (loss) on Sale or Write-Down of Assets
A gain of $10.2 million in 2002 compares to a loss of $0.3 million in 2001. The 2002 gain was a result of the Company selling Boulder Plaza and recognizing a $13.9 million gain on March 19, 2002, which is offset by a $3.0 million loss representing the write-down of assets from the Company's various technological investments.
Extraordinary Loss from Early Extinguishment of Debt
In 2002, the Company recorded a loss from early extinguishment of debt of $0.9 million compared to $0.2 million in 2001.
Net Income Available to Common Stockholders
Primarily as a result of the sale of Boulder Plaza, the purchase of the Acquisition Center, the Westcor transaction and the foregoing results, net income available to common stockholders increased to $27.7 million in 2002 from $22.5 million in 2001.
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Operating Activities
Cash flow from operations was $131.4 million in 2002 compared to $99.5 million in 2001. The increase is primarily due to the Westcor transaction, the Acquisition Center, consolidating the results of MPMC, LLC effective March 29, 2001, and increased net operating income at the Centers as mentioned above.
Investing Activities
Cash used in investing activities was $836.5 million in 2002 compared to cash used in investing activities of $55.7 million in 2001. The change resulted primarily from the Westcor transaction, the Acquisition Center and the write-down of assets of $10.2 million relating to MerchantWired, LLC, which are reflected in equity in income of unconsolidated joint ventures. These decreases are offset by the net cash proceeds received of $23.8 million in 2002 from the sale of Boulder Plaza.
Financing Activities
Cash flow provided by financing activities was $741.7 million in 2002 compared to cash flow used in financing activities of $52.2 million in 2001. The change resulted primarily from the new debt from the Westcor transaction, the $52.0 million of net proceeds from the 2002 equity offering, the financing of the Acquisition Center in 2002 and the refinancing of Centers in 2001.
Funds From Operations
Primarily because of the factors mentioned above, Funds from Operations—Diluted increased 12.2% to $133.8 million in 2002 from $119.3 million in 2001.
Comparison of Three Months Ended September 30, 2002 and 2001
Minimum and percentage rents increased by 23% to $64.1 million in 2002 from $52.1 million in 2001. Approximately $1.0 million of the increase is attributed to the Same Centers primarily due to releasing space at higher rents, $3.0 million relates to the Acquisition Center and $10.9 million relates to the Westcor transaction. This is offset by decreases of $2.6 million relating to the sales of Villa Marina Marketplace and Boulder Plaza and $0.4 million from the Redevelopment Centers.
Tenant recoveries increased to $34.0 million in 2002 from $27.8 million in 2001. Approximately $4.5 million of the increase is attributable to Westcor, $1.9 million relates to the Acquisition Center and $1.0 million relates to the Same Centers. This is offset by decreases of $0.7 million relating to the sales of Villa Marina Marketplace and Boulder Plaza and $0.3 million relating to the Redevelopment Centers.
Shopping center and operating expenses increased to $36.4 million in 2002 from $28.5 million in 2001. The results of the quarter ended September 30, 2002 included $2.2 million of increased property taxes, insurance and other recoverable and non-recoverable expenses at the Same Centers, $1.9 million relating to the Acquisition Center and $4.1 million relating to Westcor. This increase is offset by decreases of approximately $0.8 million related to the sales of Villa Marina Marketplace and Boulder Plaza and $0.1 million from the Redevelopment Centers.
Interest expense increased to $36.2 million in 2002 from $27.5 million in 2001. Approximately $9.1 million of the increase is related to the Westcor transaction and $0.8 million from the Acquisition
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Center. This increase is offset by decreases of approximately $1.1 million related to the sale of Villa Marina Marketplace. In addition, the Company purchased and retired an additional $25.7 million of debentures in December 2001, which reduced interest expense by $0.6 million in 2002 compared to 2001. Capitalized interest was $1.5 million in 2002, up from $1.3 million in 2001.
Depreciation and amortization increased to $21.5 million in 2002 from $16.5 million in 2001. Approximately $0.7 million relates to additional capital costs at the Same Centers, $1.0 million relates to the Acquisition Center and $4.0 million relates to the Westcor transaction. This increase is offset by a decrease of $1.2 million from the sale of Villa Marina Marketplace and Boulder Plaza.
Income From Unconsolidated Joint Ventures and Macerich Management Companies
The income from unconsolidated joint ventures and the Macerich Management Companies was $15.5 million for 2002 compared to $8.2 million in 2001. SDG Macerich Properties, LP income increased by $0.8 million primarily due to lower interest expense on floating rate debt. Pacific Premier Retail Trust's income increased by $3.1 million primarily due to a $2.3 million gain on sale of assets in 2002 and approximately $0.4 million relating to increases in minimum and percentage rents. Additionally, $2.4 million was attributed to the Westcor transaction. Income from the Macerich Management Companies increased by $0.4 million.
In 2002, the Company recorded a loss from early extinguishment of debt of $0.9 million.
Primarily as a result of the purchase of the Acquisition Center, the Westcor transaction and the foregoing results, net income available to common stockholders increased to $11.7 million in 2002 from $9.3 million in 2001.
Primarily because of the factors mentioned above, Funds from Operations—Diluted increased 22.6% to $52.1 million in 2002 from $42.5 million in 2001.
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 and borrowing under the new 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. The following table summarizes capital
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expenditures incurred at the Centers, including the pro rata share of joint ventures, for the nine months ending September 30,
Management expects to incur similar levels in future years for tenant allowances and deferred leasing charges and to incur between $25 million to $100 million in 2002 for redevelopment and expansions, excluding Queens Center expansion and the developments of La Encantada and Scottsdale 101 which will be separately financed. Capital for major expenditures or major 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.
On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $52.0 million. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes. The Queens Center expansion and redevelopment is anticipated to cost approximately $280 million. The Company is currently negotiating construction and permanent loans, which will be secured by the Queens Center property to finance the remaining project costs. Construction began in the second quarter of 2002 with completion estimated to be, in phases, through late 2004.
The Company has obtained a loan for $51.0 million for the development of La Encantada and the Company is negotiating a $54.0 million loan for the Scottsdale 101 development.
The Company believes that it will have access to the capital necessary to expand its business in accordance with its strategies for growth and maximizing Funds from Operations. The Company presently intends to obtain additional capital necessary for these purposes through a combination of debt or equity financings, joint ventures and the sale of non-core assets. The Company believes joint venture arrangements have in the past and may in the future provide an attractive alternative to other forms of financing, whether for acquisitions or other business opportunities.
The Company's total outstanding loan indebtedness at September 30, 2002 was $3.7 billion (including its pro rata share of joint venture debt of $1.1 billion). 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 preferred stock into common stock) ratio of approximately 67% at September 30, 2002. The majority of the Company's debt consists of fixed-rate conventional mortgages payable secured by individual properties.
The Company has filed a shelf registration statement, effective June 6, 2002, to sell securities. The shelf registration is for a total of $1 billion of common stock, common stock warrants or common stock rights.
The Company had an unsecured line of credit for up to $200.0 million with a maturity of July 26, 2002 with a right to extend the facility to May 26, 2003 subject to certain conditions. On July 26, 2002, concurrent with the closing of Westcor, the Company replaced this $200.0 million credit facility with a
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new $425.0 million revolving line of credit. This increased revolving line of credit has a three-year term plus a one-year extension. The interest rate fluctuates from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. As of September 30, 2002, $220.0 million was outstanding at an average interest rate of 4.78%.
The Company has $125.1 million of convertible subordinated debentures (the "Debentures"), which mature December 15, 2002. The Debentures are callable after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving line of credit to fully retire the Debentures at their maturity.
At September 30, 2002, the Company had cash and cash equivalents available of $63.2 million.
Funds From Operations:
The Company believes that the most significant measure of its performance is Funds from Operations ("FFO"). FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to be: Net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales or write-down of assets, and cumulative effect of change in accounting principle, plus depreciation and amortization (excluding depreciation on personal property and amortization of loan and financial instrument costs) and after adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. FFO does not represent cash flow from operations, as defined by GAAP, and is not necessarily indicative of cash available to fund all cash flow needs. FFO, as presented, may not be comparable to similarly titled
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measures reported by other real estate investment trusts. The following reconciles net income available to common stockholders to FFO:
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Included in minimum rents were rents attributable to the accounting practice of straight lining of rents. The amount of straight lining of rents, including the Company's pro rata share from joint ventures, that impacted minimum rents was $1.5 million and $1.4 million for the nine and three months ended September 30, 2002, respectively; and $0.9 million and $0.3 million for the nine and three months ended September 30, 2001, respectively.
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 increases in the CPI. In addition, about 8%-12% 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, the majority of the leases require the tenants to pay their pro rata share of operating expenses. This reduces the Company's exposure to increases in costs and operating expenses resulting from inflation.
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, and the implementation of Staff Accounting Bulletin 101, earnings are generally higher in the fourth quarter of each year.
New Pronouncements Issued
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows.
As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of approximately $7.1 million to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in
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the quarter ended March 31, 2001. The Company reclassified approximately $1.0 million and expects to reclassify approximately $1.3 million from accumulated other comprehensive income to earnings for the nine months ended September 30, 2002 and for the year ended December 31, 2002, respectively.
On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the recognition of intangible assets. The Company has determined that the adoption of SFAS 141 did not have an impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company sold Boulder Plaza on March 19, 2002 and in accordance with SFAS 144 the results of Boulder Plaza for the periods from January 1, 2002 to March 19, 2002 and from January 1, 2001 to September 30, 2001 have been reclassified into "discontinued operations" on the consolidated statements of operations. Total revenues associated with Boulder Plaza was approximately $0.5 and $1.6 million for the periods January 1, 2002 to March 19, 2002 and January 1, 2001 to September 30, 2001, respectively.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections" ("SFAS 145"), which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4, SFAS 44 and SFAS 64 and amends SFAS 13 to modify the accounting for sales-leaseback transactions. SFAS 4 required the classification of gains and losses resulting from extinguishments of debt to be classified as extraordinary items. SFAS 64 amended SFAS 4 and is no longer necessary because SFAS 4 has been rescinded. The Company expects to reclassify a loss of approximately $2.0 million and $0.3 million for the years ending December 31, 2001 and 2000, respectively, from extraordinary items upon adoption of SFAS 145 on January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its consolidated financial statements.
Stock-based compensation expense. In the second quarter of 2002 and effective beginning in the first quarter of 2002, the Company adopted the expense recognition provisions of SFAS No. 123,
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"Accounting for Stock-Based Compensation". Effective January 1, 2002, the Company will value stock options issued using the Black-Scholes option-pricing model and recognizes this value as an expense over the period in which the options vest. Under this standard, recognition of expense for stock options is applied to all options granted after the beginning of the year of adoption. Prior to January 1, 2002, the Company followed the intrinsic method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not issued stock options in 2002 and accordingly the Company has not recognized any stock-based compensation expense related to stock options for the three and nine months ending September 30, 2002.
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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 conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level, (2) reducing interest rate exposure on certain long-term variable rate debt through the use of interest rate caps 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, 2002 concerning the Company's long term debt obligations, including principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value ("FV").
The $150.7 million of variable debt maturing in 2002 represents the debt at Chandler Fashion Center. On October 21, 2002, the Company paid this loan in full and a new note was issued for $184.0 million bearing interest at a fixed rate of 5.48% and maturing November 1, 2012.
The Company has $125.1 million of Debentures which will mature on December 15, 2002. The Debentures are callable after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving credit facility to fully retire the Debentures at their maturity (See Note 6).
In addition, the Company has assessed the market risk for its variable rate debt as of September 30, 2002 and believes that a 1% increase in interest rates would decrease future earnings and cash flows by approximately $13.0 million per year based on $1.3 billion outstanding (excluding the $150.7 million debt refinanced on October 21, 2002) at September 30, 2002.
The fair value of the Company's long term debt is estimated based on discounted cash flows at interest rates that management believes reflect the risks associated with long term debt of similar risk and duration.
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Item 4 Controls and Procedures
Within the 90-day period before the filing of this report, the chief executive officer and chief financial officer of the Company (collectively, the "certifying officers") have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-14 of the Securities Exchange Act of 1934). The certifying officers concluded, based on their evaluation, that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date when the internal controls were evaluated.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
During the ordinary course of business, the Company, from time to time, is threatened with, or becomes a party to, legal actions and other proceedings. Management is of the opinion that the outcome of currently known actions and proceedings to which it is a party will not, singly or in the aggregate, have a material adverse effect on the Company.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
The Audit Committee of the Board of Directors preapproved the retention of PricewaterhouseCoopers to perform various audit and tax services for the Company. The approved tax services are permitted non-audit services under the Sarbanes-Oxley Act of 2002.
Item 6 Exhibits and Reports on Form 8-K
Current Report on Form 8-K event date July 26, 2002, (reporting completion of the acquisition of Westcor) as amended by Current Report on Form 8-K/A (filing the required financial statements and information for the acquisition).
Current Report on Form 8-K event date July 29, 2002 (reporting public announcement of completion of the acquisition of Westcor.)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SECTION 302 CERTIFICATION
I, Arthur Coppola, certify that:
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I, Thomas E. O'Hern, certify that:
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EXHIBIT INDEX
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