THE MACERICH COMPANY
Annual Report on Form 10-K
For The Year Ended December 31, 2000
Table of Contents
Part I
ITEM I. BUSINESS
General The Macerich Company (the "Company") is involved in the acquisition, ownership, 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"). The Operating Partnership owns or has an ownership interest in 46 regional shopping centers and five community shopping centers aggregating approximately 42 million square feet of gross leasable area ("GLA"). These 51 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 three management companies, Macerich Property Management Company, a California corporation, Macerich Manhattan Management Company, a California corporation, and Macerich Management Company, a California corporation (collectively, the "Management Companies").
The Company was organized as a Maryland corporation in September 1993 to continue and expand the shopping center operations of Mace Siegel, Arthur M. Coppola, Dana K. Anderson and Edward C. Coppola and certain of their business associates.
All references to the Company in this Form 10-K include the Company, those entities owned or controlled by the Company and predecessors of the Company, unless the context indicates otherwise.
RECENT DEVELOPMENTS
A. Stock Repurchase Program On November 10, 2000, the Company's Board of Directors approved a stock repurchase program of up to 3.4 million shares of common stock. As of December 31, 2000, the Company repurchased 564,000 shares of its common stock at an average price of $19.02 per share.
B. Refinancings On April 12, 2000, additional debt of $138.5 million was placed on the SDG Macerich Properties, L.P. portfolio. This debt, consisting of both fixed and floating interest rates, has a current average interest rate of 7.51% and matures May 15, 2006. The Company's share of the financing proceeds of $69.2 million was used to pay down the Company's line of credit.
On June 1, 2000, the Pacific Premier Retail Trust ("PPRT") joint venture refinanced the debt on Kitsap Mall. A $38.0 million loan at an effective interest rate of 8.60%, was paid in full and a new note was issued for $61.0 million bearing interest at a fixed rate of 8.06% and maturing June 1, 2010.
On August 31, 2000, the Company refinanced the debt on Vintage Faire Mall. The prior loan of $52.8 million, at a fixed interest rate of 7.65%, was paid in full and a new note was issued for $70.0 million bearing interest at a fixed rate of 7.89% and maturing September 1, 2010.
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On October 2, 2000, the Company refinanced the debt on Santa Monica Place. An $85.0 million floating rate loan was paid in full and a new note was issued for $85.0 million bearing interest at a fixed rate of 7.70% and maturing November 1, 2010.
On December 1, 2000, the PPRT joint venture refinanced the debt on Stonewood Mall. A $75.0 million floating rate loan was paid in full and a new note was issued for $77.8 million bearing interest at a fixed rate of 7.41% and maturing December 11, 2010.
C. Other Events 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 $89.0 million, including a note receivable from the buyer for $79.0 million at an interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001.
During 2000, the Company entered into a ten-year energy management and procurement contract with Enron Energy Services ("Enron"). Enron will manage the supply of electricity and natural gas and provide energy management services to the majority of the Centers.
During 2000, the Company invested $4.3 million in and became a founding member of MerchantWired, LLC, ("MerchantWired"). MerchantWired is providing a broadband communications network to retail property owners and retailers.
THE SHOPPING CENTER INDUSTRY
General There are several types of retail shopping centers, which are differentiated primarily based on size and marketing strategy. Regional shopping centers generally contain in excess of 400,000 square feet of GLA, are typically anchored by two or more department or large retail stores ("Anchors") and are referred to as "Regional Shopping Centers" or "Malls". Regional Shopping Centers also typically contain numerous diversified retail stores ("Mall Stores"), most of which are national or regional retailers typically located along corridors connecting the Anchors. Community Shopping Centers, also referred to as "strip centers," are retail shopping centers that are designed to attract local or neighborhood customers and are typically anchored by one or more supermarkets, discount department stores and/or drug stores. Community Shopping Centers typically contain 100,000 square feet to 400,000 square feet of GLA. In addition, freestanding retail stores are located along the perimeter of the shopping centers ("Freestanding Stores"). Anchors, Mall and Freestanding Stores and other tenants typically contribute funds for the maintenance of the common areas, property taxes, insurance, advertising and other expenditures related to the operation of the shopping center.
Regional Shopping Centers A Regional Shopping Center draws from its trade area by offering a variety of fashion merchandise, hard goods and services and entertainment, generally in an enclosed, climate controlled environment with convenient parking. Regional Shopping Centers provide an array of retail shops and entertainment facilities and often serve as the town center and the preferred gathering place for community, charity, and promotional events.
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The Company focuses on the acquisition, redevelopment, management and leasing of Regional Shopping Centers. Regional Shopping Centers have generally provided owners with relatively stable growth in income despite the cyclical nature of the retail business. This stability is due both to the diversity of tenants and to the typical dominance of Regional Shopping Centers in their trade areas. Regional Shopping Centers are difficult to develop because of the significant barriers to entry, including the limited availability of capital and suitable development sites, the presence of existing Regional Shopping Centers in most markets, a limited number of Anchors, and the associated development costs and risks. Consequently, the Company believes that few new Regional Shopping Centers will be built in the next five years.
Regional Shopping Centers have different strategies with regard to price, merchandise offered and tenant mix, and are generally tailored to meet the needs of their trade areas. Anchor tenants are located along common areas in a configuration designed to maximize consumer traffic for the benefit of the Mall Stores. Mall GLA, which generally refers to gross leasable area contiguous to the Anchors for tenants other than Anchors, is leased to a wide variety of smaller retailers. Mall Stores typically account for the majority of the revenues of a Regional Shopping Center.
Although a variety of retail formats compete for consumer purchases, the Company believes that Regional Shopping Centers will continue to be a preferred shopping destination. The combination of a climate controlled shopping environment, a dominant location, and a diverse tenant mix has resulted in Regional Shopping Centers generating higher tenant sales than are generally achieved at smaller retail formats. Further, the Company believes that department stores located in Regional Shopping Centers will continue to provide a full range of current fashion merchandise at a limited number of locations in any one market, allowing them to command the largest geographical trade area of any retail format.
Community Shopping Centers Community Shopping Centers are designed to attract local and neighborhood customers and are typically open air shopping centers, with one or more supermarkets, drugstores or discount department stores. National retailers such as Kids-R-Us at Bristol Shopping Center, Saks Fifth Avenue at Carmel Plaza and The Gap, Victoria's Secret and Express/Bath and Body at Villa Marina, provide the Company's Community Shopping Centers with the opportunity to draw from a much larger trade area than a typical supermarket or drugstore anchored Community Shopping Center.
BUSINESS OF THE COMPANY
Management and Operating Philosophy The Company believes that the shopping center business requires specialized skills across a broad array of disciplines for effective and profitable operations. For this reason, the Company has developed a fully integrated real estate organization with in-house acquisition, accounting, construction, finance, leasing, legal, marketing, property management and redevelopment expertise. In addition, the Company emphasizes a philosophy of decentralized property management, leasing and marketing performed by on-site professionals. The Company believes that this strategy results in the optimal operation, tenant mix and drawing power of each Center as well as the ability to quickly respond to changing competitive conditions of the Center's trade area.
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Property Management and Leasing. The Company believes that on-site property managers can most effectively operate the Centers. Each Center's property manager is responsible for overseeing the operations, marketing, maintenance and security functions at the Center. Property managers focus special attention on controlling operating costs, a key element in the profitability of the Centers, and seek to develop strong relationships with and to be responsive to the needs of retailers.
The Company believes strongly in decentralized leasing and accordingly, most of its leasing managers are located on-site to better understand the market and the community in which a Center is located. Leasing managers are charged with more than the responsibility of leasing space; they continually assess and fine tune each Center's tenant mix, identify and replace under performing tenants and seek to optimize existing tenant sizes and configurations.
Acquisitions. Since its initial public offering ("IPO"), the Company has acquired interests in shopping centers nationwide. These acquisitions were identified and consummated by the Company's staff of acquisition professionals who are strategically located in Santa Monica, Dallas, Denver, and Atlanta. The Company believes that it is geographically well positioned to cultivate and maintain ongoing relationships with potential sellers and financial institutions and to act quickly when acquisition opportunities arise. The Company focuses on assets that are or can be dominant in their trade area, have a franchise and where there is intrinsic value.
The Company made the following acquisitions in 1998: The Company along with a 50/50 joint venture partner, acquired a portfolio of twelve regional malls totaling 10.7 million square feet on February 27, 1998; South Plains Mall in Lubbock, Texas on June 19,1998; Westside Pavilion in Los Angeles, California on July 1, 1998; Village at Corte Madera in Corte Madera, California in June and July 1998; Carmel Plaza in Carmel, California on August 10, 1998; and Northwest Arkansas Mall in Fayetteville, Arkansas on December 15, 1998. Together, these properties are known as the "1998 Acquisition Centers."
On February 18, 1999, the Company, along with a joint venture partner, acquired a portfolio of three regional malls, the retail component of a mixed-use development, five contiguous properties and two non-contiguous community shopping centers totaling approximately 3.6 million square feet. The Company is a 51% owner of this portfolio. The second phase of this transaction, which closed on July 12, 1999, consisted of the acquisition of the office component of the mixed-use development. The two non-contiguous community shopping centers were subsequently sold in October and November of 1999. Additionally, the Company acquired Los Cerritos Center in Cerritos, California, on June 2, 1999 and Santa Monica Place in Santa Monica, California, on October 29, 1999. Together, these properties are known as the "1999 Acquisition Centers."
During 2000, market conditions, including the cost of capital and the lack of attractive opportunities, resulted in the first year subsequent to our IPO in which we had no acquisitions. Furthermore, management anticipates no acquisitions for 2001.
Redevelopment. One of the major components of the Company's growth strategy is its ability to redevelop acquired properties. For this reason, the Company has built a staff of redevelopment professionals who have primary responsibility for identifying redevelopment opportunities that will
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result in enhanced long-term financial returns and market position for the Centers. The redevelopment professionals oversee the design and construction of the projects in addition to obtaining required governmental approvals.
The Centers. As of December 31, 2000, the Centers consist of 46 Regional Shopping Centers and five Community Shopping Centers aggregating approximately 42 million square feet of GLA. The 46 Regional Shopping Centers in the Company's portfolio average approximately 884,378 square feet of GLA and range in size from 2.1 million square feet of GLA at Lakewood Mall to 328,667 square feet of GLA at Panorama Mall. The Company's five Community Shopping Centers, Boulder Plaza, Bristol Shopping Center, Carmel Plaza, Great Falls Marketplace and Villa Marina Marketplace, have an average of 217,652 square feet of GLA. The 46 Regional Shopping Centers presently include 182 Anchors totaling approximately 23.1 million square feet of GLA and approximately 6,363 Mall and Freestanding Stores totaling approximately 18.7 million square feet of GLA.
Total revenues, including joint ventures at their pro rata share, increased to $486.1 million in 2000 from $461.2 million in 1999 primarily due to releasing space at higher rents. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." No Center generated more than 10% of shopping center revenues during 1999 and 2000.
Cost of Occupancy The Company's management believes that in order to maximize the Company's operating cash flow, the Centers' Mall Store tenants must be able to operate profitably. A major factor contributing to tenant profitability is cost of occupancy. The following table summarizes occupancy costs for Mall Store tenants in the Centers as a percentage of total Mall Store sales for the last three years:
Competition The 46 Regional Shopping Centers are generally located in developed areas in middle to upper income markets where there are relatively few other Regional Shopping Centers. In addition, 44 of the 46 Regional Shopping Centers contain more than 400,000 square feet of GLA. The Company intends to consider additional expansion and renovation projects to maintain and enhance the quality of the Centers and their competitive position in their trade areas.
There are numerous owners and developers of real estate that compete with the Company in its trade areas. There are eight other publicly traded mall companies and several large private mall companies,
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any of which under certain circumstances, could compete against the Company for an acquisition, an Anchor or a tenant. This results in competition for both acquisition of centers and for tenants to occupy space. The existence of competing shopping centers could have a material impact on the Company's ability to lease space and on the level of rent that can be achieved. There is also increasing competition from other forms of retail, such as factory outlet centers, power centers, discount shopping clubs, mail-order services, internet shopping and home shopping networks that could adversely affect the Company's revenues.
Major Tenants The Centers derived approximately 91.3% of their total rents for the year ended December 31, 2000 from Mall and Freestanding Stores. One tenant accounted for approximately 4.4% of annual base rents of the Company, and no other single tenant accounted for more than 3.0%, as of December 31, 2000.
The following tenants (including their subsidiaries) represent the 10 largest tenants in the Company's portfolio (including joint ventures) based upon minimum rents in place as of December 31, 2000:
Mall and Freestanding Stores Mall and Freestanding Store leases generally provide for tenants to pay rent comprised of a fixed base (or "minimum") rent and a percentage rent based on sales. In some cases, tenants pay only a fixed minimum rent, and in some cases, tenants pay only percentage rents. Most leases for Mall and Freestanding Stores contain provisions that allow the Centers to recover their costs for maintenance of the common areas, property taxes, insurance, advertising and other expenditures related to the operations of the Center.
The Company uses tenant spaces 10,000 square feet and under for comparing rental rate activity. Tenant space 10,000 square feet and under in the portfolio at December 31, 2000, comprises 69.2% of all Mall and Freestanding Store space. The Company believes that to include space over 10,000 square feet would provide a less meaningful comparison.
When an existing lease expires, the Company is often able to enter into a new lease with a higher base rent component. The average base rent for new Mall and Freestanding Store leases, 10,000 square feet
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or under, commencing during 2000 was $32.95 per square foot, or 22% higher than the average base rent for all Mall and Freestanding Stores (10,000 square feet or under) at December 31, 2000 of $27.09 per square foot.
The following table sets forth for the Centers the average base rent per square foot of Mall and Freestanding GLA, for tenants 10,000 square feet and under, as of December 31 for each of the past three years:
Bankruptcy and/or Closure of Retail Stores The bankruptcy and/or closure of an Anchor, or its sale to a less desirable retailer, could adversely affect customer traffic in a Center and thereby reduce the income generated by that Center. Furthermore, the closing of an Anchor could, under certain circumstances, allow certain other Anchors or other tenants to terminate their leases or cease operating their stores at the Center or otherwise adversely affect occupancy at the Center.
Retail stores at the Centers other than Anchors may also seek the protection of the bankruptcy laws and/or close stores, which could result in the termination of such tenants' leases and thus cause a reduction in the cash flow generated by the Centers. Although no single retailer accounts for greater than 4.4% of total rents, the bankruptcy and/or closure of stores could result in decreased occupancy levels, reduced rental income or otherwise adversely impact the Centers. Although certain tenants have filed for bankruptcy, the Company does not believe such filings and any subsequent closures of their stores will have a material adverse impact on its operations.
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Lease Expirations The following table shows scheduled lease expirations (for Centers owned as of December 31, 2000) of Mall and Freestanding Stores 10,000 square feet or under for the next ten years, assuming that none of the tenants exercise renewal options:
Anchors Anchors have traditionally been a major factor in the public's identification with Regional Shopping Centers. Anchors are generally department stores whose merchandise appeals to a broad range of shoppers. Although the Centers receive a smaller percentage of their operating income from Anchors than from Mall and Freestanding Stores, strong Anchors play an important part in maintaining customer traffic and making the Centers desirable locations for Mall and Freestanding Store tenants.
Anchors either own their stores, the land under them and in some cases adjacent parking areas, or enter into long-term leases with an owner at rates that are lower than the rents charged to tenants of Mall and Freestanding Stores. Each Anchor which owns its own store, and certain Anchors which lease their stores, enter into reciprocal easement agreements with the owner of the Center covering among other things, operational matters, initial construction and future expansion.
Anchors accounted for approximately 8.7% of the Company's total rent for the year ended December 31, 2000.
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The following table identifies each Anchor, each parent company that owns multiple Anchors and the number of square feet owned or leased by each such Anchor or parent company in the Company's portfolio at December 31, 2000:
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ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a current or prior owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons or entities who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of a release of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person or entity. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and therefore potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.
Each of the Centers has been subjected to a Phase I audit (which involves review of publicly available information and general property inspections, but does not involve soil sampling or ground water analysis) completed by an environmental consultant.
Based on these audits, and on other information, the Company is aware of the following environmental issues that are reasonably possible to result in costs associated with future investigation or remediation, or in environmental liability:
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
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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. A total of $187,976 and $149,466 have already been incurred by the joint venture for remediation, and professional and legal fees for the years ending December 31, 2000 and 1999, respectively. An additional $70,590 remains reserved by the joint venture as of December 31, 2000. The joint venture has been sharing costs on a 50/50 basis with a former owner of the property and intends to look to additional responsible parties for recovery.
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 includes a reserve of $3.3 million to cover future removal of this asbestos, as necessary. The Company incurred $25,939 and $90,876 in remediation costs for the years ending December 31, 2000 and 1999, respectively.
INSURANCE
The Company has comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to the Centers. The Company or the joint venture, as applicable, also currently carries earthquake insurance covering the Centers located in California. Management believes that such insurance provides adequate coverage.
QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its first taxable year ended December 31, 1994, and intends to conduct its operations so as to continue to qualify as a REIT under the Code. As a REIT, the Company generally will not be subject to federal and state income taxes on its net taxable income that it currently distributes to stockholders. Qualification and taxation as a REIT depends on the Company's ability to meet certain dividend distribution tests, share ownership requirements and various qualification tests prescribed in the Code.
EMPLOYEES
The Company and the Management Companies employ approximately 1,652 persons, including eight executive officers, personnel in the areas of acquisitions and business development (6), property management (263), leasing (76), redevelopment/construction (25), financial services (49) and legal affairs (33). In addition, in an effort to minimize operating costs, the Company generally maintains its own security staff (607) and maintenance staff (585). Approximately 14 of these employees are represented by a union. The Company believes that relations with its employees are good.
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ITEM 2. PROPERTIES
The following table sets forth certain information about each of the Centers as of December 31, 2000:
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MORTGAGE DEBT
The following table sets forth certain information regarding the mortgages encumbering the Centers, including those Centers in which the Company has less than a 100% interest. All mortgage debt is nonrecourse to the Company. The information set forth below is as of December 31, 2000.
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Notes:
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agreement which effectively prevents the interest rate from exceeding 11.53%. On April 12, 2000, the joint venture issued $138.5 million of additional mortgage notes which are secured by the properties and are due in May 2006. $57.1 million of this debt requires fixed monthly interest payments of $387,000 at a weighted average rate of 8.13% while the floating rate notes of $81.4 million require monthly interest payments at variable weighted average rate (based on LIBOR) of 7.08%. This variable rate debt is covered by an interest rate cap agreement which effectively prevents the interest rate from exceeding 11.83%.
The Company has a credit facility of $150 million with a maturity of May, 2002, bearing interest at LIBOR plus 1.15% at December 31, 2000. The line of credit was extended in March 2001 with the new interest rate on such credit facility fluctuating between 1.35% and 1.80% over LIBOR. As of December 31, 2000 and December 31, 1999, $59.0 million and $57.4 million of borrowings were outstanding under this line of credit at interest rates of 7.90% and 7.65%, respectively.
Additionally, as of December 31, 2000, the Company issued $10.8 million in letters of credit guaranteeing performance by the Company of certain obligations. The Company does not believe that these letters of credit will result in a liability to the Company.
During January 1999, the Company entered into a bank construction loan agreement to fund $89.2 million of costs related to the redevelopment of Pacific View. The loan bore interest at LIBOR plus 2.25% through 2000. In January 2001, the interest rate was reduced to LIBOR plus 1.75% and the loan matures in February 2002. Principal was drawn as construction costs were incurred. As of December 31, 2000 and 1999, $88.3 and $72.7 million, respectively, of principal has been drawn under the loan.
In addition, the Company had a note payable of $30.6 million due in February 2000 payable to the seller of the acquired portfolio. The note bore interest at 6.5%. The loan was paid in full on February 18, 2000.
During 1997, the Company issued and sold $161.4 million of convertible subordinated debentures (the "Debentures") due 2002. 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 $10.6 million of the Debentures. The Company recorded a gain on early extinguishment of debt of $1.0 million related to the transaction. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest.
ITEM 3. LEGAL PROCEEDINGS.
The Company, the Operating Partnership, the Management Companies and their respective affiliates are not currently involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against such entities or the Centers, other than routine litigation arising in the ordinary course of business, most of which is expected to be covered by liability insurance. For information about certain environmental matters, see "Business of the Company–Environmental Matters."
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company is listed and traded on the New York Stock Exchange ("NYSE") under the symbol "MAC". The common stock began trading on March 10, 1994 at a price of $19 per share. In 2000, the Company's shares traded at a high of $243/4 and a low of $187/16.
As of February 27, 2001, there were approximately 534 stockholders of record. The following table shows high and low closing prices per share of common stock during each quarter in 1999 and 2000 and dividends/distributions per share of common stock declared and paid by quarter:
The Company has issued 3,627,131 shares of its Series A cumulative convertible redeemable preferred stock ("Series A Preferred Stock"), and 5,487,471 shares of its Series B cumulative convertible redeemable preferred stock ("Series B Preferred Stock"). The Series A Preferred Stock and Series B Preferred Stock can be converted into shares of common stock on a one-to-one basis. There is no established public trading market for either the Series A Preferred Stock or the Series B Preferred Stock. All of the outstanding shares of the Series A Preferred Stock are held by Security Capital Preferred Growth Incorporated. All of the outstanding shares of the Series B Preferred Stock are held by Ontario Teachers' Pension Plan Board. The Series A Preferred Stock and Series B Preferred Stock were issued on February 25, 1998 and June 16, 1998, respectively. The following table shows the dividends per share of preferred stock declared and paid for each quarter in 1999 and 2000. Preferred stock dividends are accrued quarterly and paid in arrears. 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.
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ITEM 6. SELECTED FINANCIAL DATA.
The following sets forth selected financial data for the Company on a historical basis. The following data should be read in conjunction with the financial statements (and the notes thereto) of the Company and "Management's Discussion And Analysis of Financial Condition and Results of Operations" each included elsewhere in this Form 10-K.
The Selected Financial Data is presented on a consolidated basis. The limited partnership interests in the Operating Partnership (not owned by the REIT) are reflected as minority interest. Centers and entities in which the Company does not have a controlling ownership interest (Panorama Mall, North Valley Plaza, Broadway Plaza, Manhattan Village, MerchantWired, LLC, Pacific Premier Retail Trust, SDG Macerich Properties, L.P. and West Acres Shopping Center) are referred to as the "Joint Venture Centers", and along with the Management Companies, are reflected in the selected financial data under the equity method of accounting. Accordingly, the net income from the Joint Venture Centers and the Management Companies that is allocable to the Company is included in the statement of operations as "Equity in income (loss) of unconsolidated joint ventures and Management Companies."
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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 by the reader as an alternative to operating income as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity.
ITEM 7. 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 and EBITDA. Funds from Operations 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. Funds from Operations 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.
EBITDA represents earnings before interest, income taxes, depreciation, amortization, minority interest, equity in income (loss) of unconsolidated entities, extraordinary items, gain (loss) on sale 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 to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. While the performance of individual Centers and the Management Companies determines EBITDA, the Company's capital structure also influences Funds from Operations. The most important component in determining EBITDA and Funds from Operations 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 financial statements of the Company for the years ended December 31, 2000, 1999 and 1998. The following discussion compares the activity for the year ended December 31, 2000 to results of operations for the year ended December 31, 1999.
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Also included is a comparison of the activities for the year ended December 31, 1999 to the results for the year ended December 31, 1998. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains or incorporates statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-K and include statements regarding, among other matters, the Company's growth and acquisition opportunities, the Company's acquisition strategy, 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 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, 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 technology, risks of real estate development, acquisitions and dispositions; governmental actions and initiatives and environmental and safety requirements. The Company will not update any forward-looking information to reflect actual results or changes in the factors affecting the forward-looking information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table reflects the Company's acquisitions in 1998 and 1999. There were no acquisitions in 2000.
The financial statements include the results of these Centers for periods subsequent to their acquisition.
On February 18, 1999, the Company formed Pacific Premier Retail Trust ("PPRT"), a 51/49 joint venture with Ontario Teachers' Pension Plan Board ("Ontario Teachers"), which closed on the acquisition of three regional malls, the retail component of a mixed-use development, five contiguous properties and two non-contiguous community shopping centers comprising approximately 3.6 million square feet for a total purchase price of approximately $427.0 million. On July 12, 1999, the Company closed on the acquisition of the office component of the mixed-use development for a purchase price of approximately $111.0 million.
On June 2, 1999, Macerich Cerritos, LLC ("Cerritos"), a wholly-owned subsidiary of Macerich Management Company, acquired Los Cerritos Center, a 1,302,374 square foot super regional mall in Cerritos, California. The total purchase price was $188.0 million, which was funded with $120.0 million of debt placed concurrently with the closing and a $70.8 million loan from the Company.
On October 26, 1999, 49% of the membership interests of Macerich Stonewood, LLC ("Stonewood"), Cerritos and Macerich Lakewood, LLC ("Lakewood"), were sold to Ontario Teachers' and concurrently
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Ontario Teachers' and the Company contributed their 99% collective membership interests in Stonewood and Cerritos and 100% of their collective membership interests in Lakewood to PPRT, a real estate investment trust, owned approximately 51% by the Company and 49% by Ontario Teachers. Lakewood, Stonewood, and Cerritos own Lakewood Mall, Stonewood Mall and Los Cerritos Center, respectively. The total value of the transaction was approximately $535.0 million. The properties were contributed to PPRT subject to existing debt of $322.0 million. The net cash proceeds to the Company were approximately $104.0 million, which were used for reduction of debt and for general corporate purposes. Lakewood and Stonewood are referred to herein as the "Contributed JV Assets."
On October 27, 1999, Albany Plaza, a 145,462 square foot community center, which was owned 51% by the Macerich Management Company, was sold.
On October 29, 1999, Macerich Santa Monica, LLC, a wholly-owned indirect subsidiary of the Company, acquired Santa Monica Place, a 560,421 square foot regional mall located in Santa Monica, California. The total purchase price was $130.8 million, which was funded with $80.0 million of debt placed concurrently with the closing with the balance funded from proceeds from the PPRT transaction described above. Santa Monica Place is referred to herein as the "1999 Acquisition Center."
On November 12, 1999, Eastland Plaza, a 65,313 square foot community center, which was 51% owned by the Macerich Management Company, was sold.
On November 16, 1999, the Company sold Huntington Center. Huntington Center is a shopping center located in Huntington Beach, California, that was purchased by the Company in December 1996. The Center was purchased as part of a package with Fresno Fashion Fair in Fresno, California, and Pacific View (formerly known as Buenaventura Mall) in Ventura, California. The Center was sold for $48.0 million and the net cash proceeds from the sale were used for general corporate purposes.
On September 30, 2000, Manhattan Village, a 551,847 square foot, regional shopping center, which was owned 10% by the Operating Partnership, was sold. The joint venture sold the property for $89.0 million, including a note receivable from the buyer for $79.0 million at an interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001.
The properties acquired by SDG Macerich Properties, L.P., PPRT and the Management Companies ("Joint Venture Acquisitions") are reflected using the equity method of accounting. The results of these acquisitions are reflected in the consolidated results of operations of the Company in equity in income of unconsolidated joint ventures and the Management Companies.
Many of the variations in the results of operations, discussed below, occurred due to the Joint Venture Acquisition Centers, the 1999 and 1998 Acquisition Centers and the partial sale and contribution of the Contributed JV Assets to PPRT during 1999. Many factors impact the Company's ability to acquire additional properties; including the availability and cost of capital, the overall debt to market capitalization level, interest rates and availability of potential acquisition targets that meet the Company's criteria. There were no acquisitions in 2000 because of market conditions, including the cost of capital and the lack of attractive opportunities. Furthermore, management currently anticipates no acquisitions for 2001. Accordingly, management is uncertain whether in future years that there will be similar acquisitions and corresponding increases in equity in income of unconsolidated joint ventures
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and the Management Companies and funds from operations that occurred as a result of the Joint Venture Acquisition Centers and the 1998 and 1999 Acquisition Centers. Pacific View (formerly known as Buenaventura Mall), Crossroads Mall-Boulder and Parklane Mall are currently under redevelopment and are referred to herein as the "Redevelopment Centers." All other Centers, excluding the 1999 and 1998 Acquisition Centers, the Joint Venture Acquisition Centers, the Contributed JV Assets and 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 in 2000 was $0.9 million compared to $2.6 million in 1999. Additionally, the Company recognized through equity in income of unconsolidated joint ventures, $2.2 million as its pro rata share of straight lined rents from joint ventures in 2000 compared to $2.3 million in 1999. These decreases resulted from the Company structuring the majority of its new leases using annual Consumer Price Index ("CPI") increases, which generally do not require straight lining treatment. 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.
The bankruptcy and/or closure of an Anchor, or its sale to a less desirable retailer, could adversely affect customer traffic in a Center and thereby reduce the income generated by that Center. Furthermore, the closing of an Anchor could, under certain circumstances, allow certain other Anchors or other tenants to terminate their leases or cease operating their stores at the Center or otherwise adversely affect occupancy at the Center. Other retail stores at the Centers may also seek the protection of bankruptcy laws and/or close stores, which could result in the termination of such tenants and thus cause a reduction in cash flow generated by the Centers.
In addition, the Company's success in the highly competitive real estate shopping center business depends upon many other factors, including general economic conditions, the ability of tenants to make rent payments, increases or decreases in operating expenses, occupancy levels, changes in demographics, competition from other centers and forms of retailing and the ability to renew leases or relet space upon the expiration or termination of leases.
ASSETS AND LIABILITIES
Total assets decreased to $2,337 million at December 31, 2000 compared to $2,404 million at December 31, 1999 and $2,322 million at December 31, 1998. During that same period, total liabilities increased from $1,579 million in 1998 to $1,626 million in 1999 and decreased to $1,607 million in 2000. These changes were primarily a result of the 1999 and 1998 Acquisition Centers, the partial sale and contribution of the Contributed JV Assets to PPRT and related debt transactions.
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On June 1, 2000, the PPRT joint venture refinanced the debt on Kitsap Mall. A $38.0 million loan at an effective interest rate of 8.60%, was paid in full and a new note was issued for $61.0 million bearing interest at a fixed rate of 8.06% and maturing June 1, 2010.
C. Other Events On September 30, 2000, Manhattan Village, a 551,847 square foot regional shopping center, 10% which was owned by the Operating Partnership, was sold. The joint venture sold the property for $89.0 million, including a note receivable from the buyer for $79.0 million at an interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001.
During 2000, the Company entered into a ten-year energy management and procurement contract with Enron. Enron will manage the supply of electricity and natural gas and provide energy management services to a majority of the Company's Centers.
During 2000, the Company invested $4.3 million in and became a founding member of MerchantWired. MerchantWired is providing a broadband communications network to retail property owners and retailers.
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Comparison of Years Ended December 31, 2000 and 1999
Revenues Minimum and percentage rents decreased by 5.4% to $207.8 million in 2000 from $219.7 million in 1999. Approximately $24.6 million of the decrease related to the contribution of 100% and 99% of the membership interests of Lakewood Mall and Stonewood Mall, respectively, to the PPRT joint venture on October 26, 1999. The Company's pro rata share of results from those assets subsequent to the contribution to PPRT is reflected in Income from Unconsolidated Joint Ventures. The decreases due to the Contributed JV Assets are partially offset by revenue increases of $8.2 million relating to the 1999 acquisition of Santa Monica Place.
In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which became effective for periods beginning after December 15, 1999. This bulletin modified the timing of revenue recognition for percentage rent received from tenants. This change will defer recognition of a significant amount of percentage rent for the first three calendar quarters into the fourth quarter. The Company applied this change in accounting principle as of January 1, 2000. The cumulative effect of this change in accounting principle at the adoption date of January 1, 2000, including pro rata share of joint ventures, was approximately $1.8 million.
Tenant recoveries increased to $104.1 million in 2000 from $99.1 million in 1999. The increase resulted from the impact of Santa Monica Place, Pacific View and from the Same Centers. These increases were partially offset by revenue decreases of $7.7 million resulting from the Contributed JV Assets.
Other income decreased to $8.2 million in 2000 from $8.6 million in 1999.
Expenses Shopping center expenses increased to $101.7 million in 2000 compared to $100.3 million in 1999. Approximately $6.4 million of the increase resulted from the 1999 acquisition of Santa Monica Place, $3.4 million of the increase resulted from increased property taxes and recoverable expenses at the Same Centers. These increases were partially offset by a decrease of $8.1 million from the Contributed JV Assets.
Interest Expense Interest expense decreased to $108.4 million in 2000 from $113.3 million in 1999. Approximately $7.5 million of the decrease is from the Contributed JV Assets. This decrease is partially offset by the acquisition activity in 1999, which was partially funded with secured debt and borrowings under the Company's line of credit.
Depreciation and Amortization Depreciation and amortization increased to $61.6 million in 2000 from $61.4 million in 1999. Approximately $2.5 million of the increase relates primarily to the 1999 Acquisition Center, which is partially offset by a decrease of $4.6 million relating to the Contributed JV Assets.
Minority Interest The minority interest represents the 24.3% weighted average interest of the Operating Partnership that was not owned by the Company during 2000. This compares to 26.3% not owned by the Company during 1999.
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Income From Unconsolidated Joint Ventures and Management Companies The income from unconsolidated joint ventures and the Management Companies was $30.3 million for 2000, compared to income of $25.9 million in 1999. A total of $8.2 million of the increase is attributable to the 1999 Joint Venture Acquisitions and the Contributed JV Assets. Additionally, $1.1 million is attributable to the gain from the sale of Manhattan Village on September 30, 2000. These increases are partially offset by the cumulative effect of the change in accounting principle for percentage rent required by SAB 101 of $0.8 million and additional interest expense from the debt restructuring at SDG Macerich Properties, L.P. of $4.8 million.
Gain (loss) on Sale of Assets A loss of $2.8 million in 2000 compares to a gain of $96.0 million in 1999. The 1999 gain was a result of the Company selling approximately 49% of the membership interests of Stonewood and Lakewood to Ontario Teachers' in October of 1999 and the Company's sale of Huntington Center on November 16, 1999.
Extraordinary Loss from Early Extinguishment of Debt In 2000, the Company recorded a loss from early extinguishment of debt of $0.3 million which was a result of write offs of $1.3 million of unamortized financing costs and is offset by a gain of $1.0 million relating to the Company's purchase and retirement of $10.6 million of the Debentures, compared to the write off of $1.5 million of unamortized financing costs in 1999.
Cumulative Effect of Change in Accounting Principle A loss of $1.0 million in 2000 compared to no loss in 1999 is a result of implementation of SAB 101 at January 1, 2000.
Net Income Available to Common Stockholders As a result of the foregoing, net income available to common stockholders decreased to $38.0 million in 2000 from $110.9 million in 1999.
Operating Activities Cash flow from operations was $121.2 million in 2000 compared to $139.6 million in 1999. The decrease is primarily because of decreased net operating income from the factors mentioned above.
Investing Activities Cash generated from investing activities was $1.7 million in 2000 compared to cash utilized by investing activities of $247.7 million in 1999. The change resulted primarily from the cash contributions for the joint venture acquisitions of $116.9 million in 1999 compared to $12.9 million in 2000. This is offset by increases in joint venture distributions of $113.0 million in 2000 compared to $30.0 million in 1999.
Financing Activities Cash flow used in financing activities was $127.1 million in 2000 compared to cash provided by financing activities of $123.4 million in 1999. The change resulted primarily from the refinancing of Centers in 1999.
EBITDA and Funds From Operations Primarily because of the factors mentioned above, EBITDA, including joint ventures at pro rata, increased 4.2% to $314.6 million in 2000 from $301.8 million in 1999 and Funds from Operations–Diluted increased 1.8% to $167.2 million in 2000 from $164.3 million in 1999.
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Comparison of Years Ended December 31, 1999 and 1998
Revenues Minimum and percentage rents increased by 14.1% to $219.7 million in 1999 from $192.6 million in 1998. Approximately $26.3 million of the increase resulted from the 1998 Acquisition Centers, $1.9 million from the 1999 acquisition of Santa Monica Place and $5.2 million of the increase was attributable to the Same Centers. These increases were partially offset by revenue decreases at the Redevelopment Centers of $2.1 million in 1999 and $4.2 million of the decrease related to the contribution of 100% and 99% of the membership interests of Lakewood Mall and Stonewood Mall, respectively, to the PPRT joint venture on October 26,1999.
Tenant recoveries increased to $99.1 million in 1999 from $86.7 million in 1998. The 1998 Acquisition Centers generated $12.9 million of this increase, $1.3 million was from the acquisition of Santa Monica Place, and $1.9 million of the increase was from the Same Centers. These increases were partially offset by revenue decreases at the Redevelopment Centers of $2.1 million in 1999 and $1.6 million of the decrease resulted from the contribution of Lakewood Mall and Stonewood Mall to the PPRT joint venture.
Other income increased to $8.6 million in 1999 from $4.5 million in 1998. Approximately $0.7 million of the increase related to the 1998 Acquisition Centers and the 1999 acquisition of Santa Monica Place, and $3.7 million of the increase was attributable to the Same Centers.
Expenses Shopping center expenses increased to $100.3 million in 1999 compared to $90.0 million in 1998. Approximately $13.2 million of the increase resulted from the 1998 Acquisition Centers and the 1999 acquisition of Santa Monica Place and $1.1 million of the increase resulted from increased property taxes and recoverable expenses at the Same Centers. The Redevelopment Centers had a net decrease of $2.0 million in shopping center expenses resulting primarily from decreased property taxes and recoverable expenses. The contribution of Lakewood Mall and Stonewood Mall to the PPRT joint venture resulted in $2.0 million of this decrease.
General and administrative expenses increased to $5.5 million in 1999 from $4.4 million in 1998 primarily as a result of the accounting change required by EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions," which requires the expensing of internal acquisition costs. Previously, in accordance with GAAP, certain internal acquisition costs were capitalized. The increase is also attributable to higher executive and director compensation expense.
Interest Expense Interest expense increased to $113.3 million in 1999 from $91.4 million in 1998. This increase of $22.1 million is primarily attributable to the acquisition activity in 1998 and 1999, which was partially funded with secured debt and borrowings under the Company's line of credit.
Depreciation and Amortization Depreciation increased to $61.4 million from $53.1 million in 1998. This increase relates primarily to the 1998 and 1999 Acquisition Centers.
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Minority Interest The minority interest represents the 26.3% weighted average interest of the Operating Partnership that was not owned by the Company during 1999. This compares to 28.4% not owned by the Company during 1998.
Income From Unconsolidated Joint Ventures and Management Companies The income from unconsolidated joint ventures and the Management Companies was $25.9 million for 1999, compared to income of $14.5 million in 1998. A total of $3.2 million of the change is attributable to the 1998 acquisitions of SDG Macerich Properties, L.P. and $7.9 million of the change is attributable to the 1999 acquisitions by Pacific Premier Retail Trust.
Gain on Sale of Assets A gain on sale of assets of $96.0 million is a result of the Company selling approximately 49% of the membership interests of Stonewood and Lakewood to Ontario Teachers' in October 1999 and the Company's sale of Huntington Center on November 16, 1999.
Extraordinary Loss from Early Extinguishment of Debt In 1999, the Company wrote off $1.5 million of unamortized financing costs, compared to $2.4 million written off in 1998.
Net Income Available to Common Stockholders As a result of the foregoing, including the gain on sale of assets, net income available to common stockholders increased to $110.9 million in 1999 from $32.5 million in 1998.
Operating Activities Cash flow from operations was $139.6 million in 1999 compared to $85.2 million in 1998. The increase is primarily because of increased net operating income from the 1998 and 1999 Acquisition Centers.
Investing Activities Cash flow used in investing activities was $247.7 million in 1999 compared to $761.1 million in 1998. The change resulted primarily from the cash contributions required by the Company for the joint venture acquisitions of $240.2 million in 1998 compared to $116.9 million in 1999, and the proceeds from the sale of assets in 1999 of $106.9 million.
Financing Activities Cash flow from financing activities was $123.4 million in 1999 compared to $676.0 million in 1998. The decrease resulted from no equity offerings in 1999 compared to 7,920,181 shares of common stock sold in 1998. Additionally, 9,114,602 shares of preferred stock were sold in the first and second quarters of 1998.
EBITDA and Funds From Operations Primarily because of the factors mentioned above, EBITDA, including joint ventures at pro rata, increased 31.0% to $301.8 million in 1999 from $230.4 million in 1998 and Funds from Operations—Diluted increased 36.3% to $164.3 million from $120.5 million in 1998.
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Liquidity and Capital Resources The Company intends to meet its short term liquidity requirements through cash generated from operations and working capital reserves. 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. 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.
The Company believes that it will have access to the capital necessary to execute its share repurchase program and expand its business in accordance with its strategies for growth and maximizing Funds from Operations. The Company presently intends to obtain additional capital necessary to expand its business and execute its share repurchase program through a combination of debt financings, joint ventures and the sale of non-core assets. During 1998 and 1999, the Company acquired two portfolios through joint ventures and raised additional capital in 1999 from the sale of interests in two properties to one joint venture partner. The Company believes such joint venture arrangements provide an attractive alternative to other forms of financing whether for acquisitions or other business opportunities.
The Company's total outstanding loan indebtedness at December 31, 2000 was $2.3 billion (including its pro rata share of joint venture debt). This equated to a debt to Total Market Capitalization (defined as total debt of the Company, including its pro rata share of joint venture debt, plus aggregate market value of outstanding shares of common stock, assuming full conversion of OP Units and preferred stock into common stock) ratio of approximately 69% at December 31, 2000. The Company's debt consists primarily of fixed-rate conventional mortgages payable secured by individual properties.
The Company has filed a shelf registration statement, effective December 8, 1997, to sell securities. The shelf registration is for a total of $500 million of common stock, common stock warrants or common stock rights. During 1998, the Company sold a total of 7,920,181 shares of common stock under this shelf registration. The aggregate offering price of these transactions was approximately $212.9 million, leaving approximately $287.1 million available under the shelf registration statement.
The Company has an unsecured line of credit for up to $150.0 million. There were $59.0 million of borrowings outstanding at December 31, 2000. The line of credit has been extended to May 2002.
At December 31, 2000, the Company had cash and cash equivalents available of $36.3 million.
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Funds From Operations The Company believes that the most significant measure of its performance is 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. 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 that impacted minimum rents was $865,259 for 2000, $2,628,000 for 1999 and $3,814,000 for 1998. The decline in straight-lining of rents from 1999 to 2000 is due to the Company structuring its new leases using rent increases tied to the change in CPI rather than using contractually fixed rent increases. CPI increases do not generally require straight-lining of rent treatment.
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, many of the leases are for terms of less than ten years, 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, most 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, plus the change in accounting principle discussed below for percentage rent, earnings are generally higher in the fourth quarter of each year.
New Pronouncements Issued In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101), which became effective for periods beginning after December 15, 1999. This bulletin modified the timing of revenue recognition for percentage rent received from tenants. This change will defer recognition of a significant amount of percentage rent for the first three calendar quarters into the fourth quarter. The Company applied this change in accounting principle as of January 1, 2000. The cumulative effect of this change in accounting principle at the adoption date of January 1, 2000, including the pro rata share of joint ventures, was approximately $1,750,000.
In June 1998, the 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 will be 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. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delays the implementation of SFAS 133 from January 1, 2000 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities–an Amendment of FASB Statement No. 133," ("SFAS 138") which amends the accounting and reporting standards of SFAS 133. The Company has determined the implementation of SFAS 133 and SFAS 138 will not have a material impact on its consolidated financial statements.
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ITEM 7A. 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 December 31, 2000 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 $59.0 million of variable debt maturing in 2001 represents the outstanding borrowings under the Company's credit facility. Subsequent to December 31, 2000, the line of credit was extended to May 2002.
In addition, the Company has assessed the market risk for its variable rate debt and believes that a 1% increase in interest rates would decrease future earnings and cash flows by approximately $2.9 million per year based on $288.5 million outstanding at December 31, 2000.
The fair value of the Company's long term debt is estimated based on discounted cash flows at interest rates that management believes reflects the risks associated with long term debt of similar risk and duration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement Schedules for the required information.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
There is hereby incorporated by reference the information which appears under the captions "Election of Directors," "Executive Officers" and "Section 16 Reporting" in the Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
There is hereby incorporated by reference the information which appears under the caption "Executive Compensation" in the Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders; provided, however, that the Report of the Compensation Committee on executive compensation and the Stock Performance Graph set forth therein shall not be incorporated by reference herein, in any of the Company's prior or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates such report or stock performance graph by reference therein and shall not be otherwise deemed filed under either of such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information which appears under the captions "Principal Stockholders," "Information Regarding Nominees and Directors" and "Executive Officers" in the Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information which appears under the captions "Certain Transactions" in the Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders.
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Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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40
Report of Independent Accountants
To the Board of Directors and Stockholders of The Macerich Company:
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 39 present fairly, in all material respects, the financial position of The Macerich Company (the "Company") at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(4) on page 40 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of SDG Macerich Properties, L.P. (the "Partnership"), the investment in which is reflected in the accompanying consolidated financial statements using the equity method of accounting. The investment in the Partnership represents approximately 7.2 percent and 10.0 percent of the Company's consolidated total assets at December 31, 2000 and 1999, respectively, and the equity in income represents approximately 33.1%, 16.0% and 44.6% of the related consolidated net income for each of the three years in the period ended December 31, 2000. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Partnership, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101.
As discussed in Note 16 to the consolidated financial statements, the Company has revised its accounting for the Series A and Series B redeemable preferred stock to classify such securities outside of common stockholders' equity.
PricewaterhouseCoopers LLP
Los Angeles, CAFebruary 13, 2001
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CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
The accompanying notes are an integral part of these financial statements.
42
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
43
44
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Organization and Basis of Presentation:
The Macerich Company (the "Company") commenced operations effective with the completion of its initial public offering (the "IPO") on March 16, 1994. The Company is the sole general partner of and, assuming conversion of the redeemable preferred stock, holds a 79% ownership interest in The Macerich Partnership, L. P. (the "Operating Partnership"). The interests in the Operating Partnership are known as OP Units. OP Units not held by the Company are redeemable, subject to certain restrictions, on a one-for-one basis, for the Company's common stock or cash at the Company's option.
The Company was organized to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. The 21% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.
The property management, leasing and redevelopment of the Company's portfolio is provided by the Macerich Management Company, Macerich Property Management Company and Macerich Manhattan Management Company, all California corporations (together referred to hereafter as the "Management Companies"). The non-voting preferred stock of the Macerich Management Company and Macerich Property Management Company is owned by the Operating Partnership, which provides the Operating Partnership the right to receive 95% of the distributable cash flow from the Management Companies. Macerich Manhattan Management Company is a 100% subsidiary of Macerich Management Company.
Basis Of Presentation: The consolidated financial statements of the Company include the accounts of the Company and the Operating Partnership. The properties in which the Operating Partnership does not have a controlling interest in, and the Management Companies, have been accounted for under the equity method of accounting. These entities are reflected on the Company's consolidated financial statements as "Investments in joint ventures and the Management Companies."
All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
2. Summary of Significant Accounting Policies:
Cash And Cash Equivalents: The Company considers all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents, for which cost approximates fair value. Included in cash is restricted cash of $1,464 at December 31, 2000 and $1,418 at December 31, 1999.
Tenant Receivables: Included in tenant receivables are allowances for doubtful accounts of $700 and $1,752 at December 31, 2000 and 1999, respectively.
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Revenues: 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." Rental income was increased by $865 in 2000, $2,628 in 1999 and $3,814 in 1998 due to the straight lining of rent adjustment. Percentage rents are recognized on an accrual basis. Recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable costs are incurred.
The Management Companies provide property management, leasing, corporate, redevelopment and acquisition services to affiliated and non-affiliated shopping centers. In consideration for these services, the Management Companies receive monthly management fees generally ranging from 1.5% to 5% of the gross monthly rental revenue of the properties managed.
Property: Costs related to the redevelopment, construction and improvement of properties are capitalized. Interest costs are capitalized until construction is substantially complete.
Expenditures for maintenance and repairs are charged to operations as incurred. 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 between the carrying value and the fair value of a center. Management believes no such impairment has occurred in its net property carrying values at December 31, 2000 and 1999.
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Deferred Charges: Costs relating to financing of shopping center properties and obtaining tenant leases are deferred and amortized over the initial term of the agreement. The straight-line method is used to amortize all costs except financing, for which the effective interest method is used. The range of the terms of the agreements are as follows:
In March 1998, the Financial Accounting Standards Board ("FASB"), through its Emerging Issues Task Force ("EITF"), concluded based on EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions," that all internal costs to source, analyze and close acquisitions should be expensed as incurred. The Company had historically capitalized these costs, in accordance with generally accepted accounting principles ("GAAP"). The Company had adopted the FASB's interpretation effective March 19, 1998.
Deferred Acquisition Liability: As part of the Company's total consideration to the seller of Capitola Mall, the Company issued $5,000 of OP Units five years after the acquisition date, which was December 21, 1995. The number of OP Units was determined based on the Company's common stock price at December 21, 2000. A total of 254,373 of OP Units were issued to these partners on December 21, 2000.
Income Taxes: The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. A REIT is generally not subject to income taxation on that portion of its income that qualifies as REIT taxable income as long as it distributes at least 95 percent of its taxable income to its stockholders and complies with other requirements. Accordingly, no provision has been made for income taxes in the consolidated financial statements.
On a tax basis, the distributions of $2.06 paid during 2000 represented $1.7304 of ordinary income and $0.3296 of return of capital. The distributions of $1.965 per share during 1999 represented $1.30 of ordinary income and $0.665 of capital gain. During 1998, the distributions were $1.865 per share of which $1.12 was ordinary income and $0.745 was return of capital.
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.
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Reclassifications: Certain reclassifications have been made to the 1998 and 1999 consolidated financial statements to conform to the 2000 consolidated financial statements presentation.
Accounting Pronouncements: In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which became effective for periods beginning after December 15, 1999. This bulletin modified the timing of revenue recognition for percentage rent received from tenants. This change will defer recognition of a significant amount of percentage rent for the first three calendar quarters into the fourth quarter. The Company applied this change in accounting principle as of January 1, 2000. The cumulative effect of this change in accounting principle at the adoption date of January 1, 2000, including the pro rata share of joint ventures, was approximately $1,750. If the Company had recorded percentage rent using the methodology prescribed in SAB 101, the Company's net income available to common stockholders would have been reduced by $1,290 or $0.02 per diluted share for the year ended December 31, 1999.
In June 1998, the 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 will be 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. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delays the implementation of SFAS 133 from January 1, 2000 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133," ("SFAS 138") which amends the accounting and reporting standards of SFAS 133. The Company has determined the implementation of SFAS 133 and SFAS 138 will not have a material impact on its consolidated financial statements.
Fair Value of Financial Instruments: To meet the reporting requirement of SFAS No. 107, "Disclosures about 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
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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.
Interest rate cap agreements were purchased by the Company from third parties to hedge the risk of interest rate increases on some of the Company's variable rate debt. The cost of these cap agreements was amortized over the life of the cap agreement on a straight line basis. Payments received as a result of the cap agreements were recorded as a reduction of interest expense. The unamortized costs of the cap agreements were included in deferred charges. The fair value of these caps will vary with fluctuations in interest rates. The Company is exposed to credit loss in the event of nonperformance by these counter parties to the financial instruments; however, management does not anticipate nonperformance by the counter parties.
The Company periodically enters into treasury lock agreements in order to hedge its exposure to interest rate fluctuations on anticipated financings. Under these agreements, the Company pays or receives an amount equal to the difference between the treasury lock rate and the market rate on the date of settlement, based on the notional amount of the hedge. The realized gain or loss on the contracts is recorded on the balance sheet, in other assets, and amortized as interest expense over the period of the hedged loans.
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 years ended December 31, 2000, 1999 and 1998. The computation of diluted earnings per share includes the effect of outstanding restricted stock and common stock options calculated using the Treasury stock method. The 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. The following table reconciles the basic and diluted earnings per share calculation:
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Concentration of Risk: The Company maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100. At various times during the year, the Company had deposits in excess of the FDIC insurance limit.
No Center generated more than 10% of shopping center revenues during 2000, 1999 or 1998.
The Centers derived approximately 91.3%, 90.2% and 89.9% of their total rents for the years ended December 31, 2000, 1999 and 1998, respectively, from Mall and Freestanding Stores. The Limited represented 4.4%, 5.2% and 6.1% of total minimum rents in place as of December 31, 2000, 1999 and 1998, respectively, and no other retailer represented more than 3.0%, 3.2% and 4.5% of total minimum rents as of December 31, 2000, 1999 and 1998, respectively.
Management Estimates: 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.
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3. Investments in Joint Ventures and the Management Companies:
The following are the Company's investments in various joint ventures. The Operating Partnership's interest in each joint venture as of December 31, 2000 is as follows:
The Operating Partnership also owns the non-voting preferred stock of the Macerich Management Company and Macerich Property Management Company and is entitled to receive 95% of the distributable cash flow of these two entities. Macerich Manhattan Management Company is a 100% subsidiary of Macerich Management Company. The Company accounts for the Management Companies and joint ventures using the equity method of accounting.
On February 27, 1998, the Company, through SDG Macerich Properties, L.P., a 50/50 joint venture with an affiliate of Simon Property Group, Inc., acquired a portfolio of twelve regional malls. The properties in the portfolio comprise 10.7 million square feet and are located in eight states. The total purchase price was $974,500, which included $485,000 of assumed debt, at fair value. Each of the joint venture partners have assumed leasing and management responsibilities for six of the regional malls.
On February 18, 1999, the Company formed Pacific Premier Retail Trust ("PPRT"), a 51/49 joint venture with Ontario Teachers' Pension Plan Board ("Ontario Teachers") which closed on the acquisition of three regional malls, the retail component of a mixed-use development, five contiguous properties and two non-contiguous community shopping centers comprising approximately 3.6 million square feet for a total purchase price of approximately $427,000. On July 12, 1999, the Company closed on the acquisition of the office component of the mixed-use development for a purchase price of approximately $111,000.
On June 2, 1999, Macerich Cerritos, LLC ("Cerritos"), a wholly-owned subsidiary of Macerich Management Company, acquired Los Cerritos Center in Cerritos, California. The total purchase price was $188,000, which was funded with $120,000 of debt placed concurrently with the closing and a $70,800 loan from the Company.
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On October 26, 1999, 49% of the membership interests of Macerich Stonewood, LLC ("Stonewood"), Cerritos and Macerich Lakewood, LLC ("Lakewood"), were sold to Ontario Teachers' and concurrently Ontario Teachers' and the Company contributed their 99% collective membership interests in Stonewood and Cerritos and 100% of their collective membership interests in Lakewood to PPRT. Lakewood, Stonewood, and Cerritos own Lakewood Mall, Stonewood Mall and Los Cerritos Center, respectively. The total value of the transaction was approximately $535,000. The properties were contributed to PPRT subject to existing debt of $322,000.
The results of these joint ventures are included for the period subsequent to their respective dates of acquisition.
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 an interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001. A gain from sale of the property for $10,945 was recorded at September 30, 2000.
Combined and condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures and the Management Companies, followed by information regarding the Operating Partnership's beneficial interest in the combined operations. Beneficial interest is calculated based on the Operating Partnership's ownership interests in the joint ventures and the Management Companies.
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COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
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COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
Significant accounting policies used by the unconsolidated joint ventures and the 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 $161,281 and $156,219, for the years ended December 31, 2000 and 1999, 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 $9,801, $7,138 and $3,786 for the years ended December 31, 2000, 1999, and 1998, respectively.
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The following table sets forth the Operating Partnership's beneficial interest in the joint ventures and the Management Companies:
PRO RATA SHARE OF COMBINED AND CONDENSED STATEMENT OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
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4. Property:
Property is summarized as follows:
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was $51,764, $52,592 and $46,030, respectively.
A gain on sale of assets of $95,981 for the year ended December 31, 1999 is a result of the Company selling approximately 49% of the membership interests of Stonewood and Lakewood to Ontario Teachers' on October 26, 1999 and the Company's sale of Huntington Center on November 16, 1999.
5. Deferred Charges and Other Assets:
Deferred charges and other assets are summarized as follows:
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6. Mortgage Notes Payable:
Mortgage notes payable at December 31, 2000 and December 31, 1999 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 prorata share of joint ventures, during 2000, 1999 and 1998 was $8,619, $7,243 and $3,603, respectively.
The fair value of mortgage notes payable for wholly-owned Centers at December 31, 2000 and December 31, 1999 is estimated to be approximately $1,282,163 and $1,179,469, respectively, based on current interest rates for comparable loans.
The above debt matures as follows:
The Company is currently in negotiations to refinance $98.6 million of the debt maturing in 2001. The remaining debt maturing in 2001 reflects the amortization of principal on existing debt.
7. Bank and Other Notes Payable:
The Company has a credit facility of $150,000 with a maturity of May 2002, bearing interest at LIBOR plus 1.15% at December 31, 2000. The line of credit was extended in March 2001 with the new interest rate on such credit facility fluctuating between 1.35% and 1.80% over LIBOR. As of December 31, 2000 and December 31, 1999, $59,000 and $57,400 of borrowings were outstanding under this line of credit at interest rates of 7.90% and 7.65%, respectively.
Additionally, as of December 31, 2000, the Company issued $10,776 in letters of credit guaranteeing performance by the Company of certain obligations. The Company does not believe that these letters of credit will result in a liability to the Company.
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During January 1999, the Company entered into a bank construction loan agreement to fund $89,200 of costs related to the redevelopment of Pacific View. The loan bore interest at LIBOR plus 2.25% through 2000. In January 2001, the interest rate was reduced to LIBOR plus 1.75% and the loan matures in February 2002. Principal was drawn as construction costs were incurred. As of December 31, 2000 and 1999, $88,340 and $72,671, respectively, of principal has been drawn under the loan.
In addition, the Company had a note payable of $30,600 due in February 2000 payable to the seller of the PPRT portfolio. The note bore interest at 6.5%. The entire $30,600 loan was paid off on February 18, 2000.
8. Convertible Debentures:
During 1997, the Company issued and sold $161,400 of convertible subordinated debentures (the "Debentures") due 2002. 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. The Company recorded a gain on early extinguishment of debt of $1,018 related to the transaction. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest.
9. Related-Party Transactions:
The Company engaged the Management Companies to manage the operations of its properties and certain unconsolidated joint ventures. During 2000, 1999 and 1998, management fees of $3,094, $3,247 and $2,817, respectively, were paid to the Management Companies by the Company. During 2000, 1999 and 1998, management fees of $7,322, $4,982, and $2,375, respectively, were paid to the Management Companies by the joint ventures.
Certain mortgage notes are held by one of the Company's joint venture partners. Interest expense in connection with these notes was $10,187, $10,171 and $10,224 for the years ended December 31, 2000, 1999 and 1998, respectively. Included in accounts payables and accrued expense is interest payable to these partners of $612 and $513 at December 31, 2000 and 1999, respectively.
In 1997 and 1999, certain executive officers received loans from the Company totaling $6,500. These loans are full recourse to the executives. $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 loans was forgiven with respect to three of these officers and charged to compensation expense. The $500 loan issued in 1997 is non interest bearing and is forgiven ratably over a five year term. These loans receivable are included in other assets at December 31, 2000 and 1999.
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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.
10. Future Rental Revenues:
Under existing noncancellable operating lease agreements, tenants are committed to pay the following minimum rental payments to the Company:
11. Commitments and Contingencies:
The Company has certain properties subject to noncancellable operating ground leases. The leases expire at various times through 2070, 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 $345, $890 and $1,125 for the years ended December 31, 2000, 1999 and 1998, respectively. No contingent rent was incurred for the years ended December 31, 2000, 1999 or 1998.
Minimum future rental payments required under the leases are as follows:
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
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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. A total of $187, $149 and $153 have already been incurred by the joint venture for remediation and professional and legal fees for the years ending December 31, 2000, 1999 and 1998, respectively. An additional $71 remains reserved by the joint venture as of December 31, 2000. The joint venture has been sharing costs on a 50/50 basis with a former owner of the property and intends to look to additional responsible parties for recovery.
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 includes a reserve of $3,300 to cover future removal of this asbestos, as necessary. The Company incurred $26, $91 and $255 in remediation costs for the years ending December 31, 2000, 1999 and 1998, respectively.
12. Profit Sharing Plan:
The Management Companies and the Company have a retirement profit sharing plan that was established in 1984 covering substantially all of their eligible employees. The plan is qualified in accordance with section 401(a) of the Internal Revenue Code. Effective January 1, 1995, this plan was modified to include a 401(k) plan whereby employees can elect to defer compensation subject to Internal Revenue Service withholding rules. This plan was further amended effective February 1, 1999, to add the Macerich Company Common Stock Fund as a new investment alternative under the plan. A total of 150,000 shares of common stock were reserved for issuance under the plan. Contributions by the Management Companies are made at the discretion of the Board of Directors and are based upon a specified percentage of employee compensation. The Management Companies and the Company contributed $833, $615 and $509 to the plan during the years ended December 31, 2000, 1999 and 1998, respectively.
13. Stock Option Plan:
The Company has established an employee stock incentive plan under which stock options or restricted stock and/or other stock awards may be awarded for the purpose of attracting and retaining executive
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officers, directors and key employees. The Company has issued options to employees and directors to purchase shares of the Company under the stock incentive plan. The term of these options is ten years from the grant date. These options generally vest 331/3% per year over three years and were issued and are exercisable at the market value of the common stock at the grant date.
In addition, the Company has established a plan for non employee directors. The non employee director options have a term of ten years from the grant date, vest six months after grant and are issued at the market value of the common stock on the grant date. The plan reserved 50,000 shares of which 47,500 shares were granted as of December 31, 2000.
The Company issued 559,448 shares of restricted stock under the employees stock incentive plan to executives. These awards are granted based on certain performance criteria for the Company. The restricted stock generally vests over 3 to 5 years and the compensation expense related to these grants is determined by the market value at the vesting date and is amortized over the vesting period on a straight line basis. As of December 31, 2000 and 1999, 169,559 and 85,962 shares, respectively, of restricted stock had vested. A total of 169,556 shares at a weighted average price of $20.125 were issued in 2000, 176,600 shares at a weighted average price of $22.69 were issued in 1999, 83,018 shares at a weighted average price of $28.71 were issued during 1998 and 89,958 shares at a weighted average price of $27.46 were issued during 1997. Restricted stock is subject to restrictions determined by the Company's compensation committee. Restricted stock has the same dividend and voting rights as common stock and is considered issued when vested. Compensation expense for restricted stock was $2,220, $2,037 and $945 in 2000, 1999 and 1998, respectively.
Approximately 31,000 and 319,000 additional shares were reserved and were available for issuance under the stock incentive plan at December 31, 2000 and 1999, respectively. The plan allows for, among other things, granting options or restricted stock at market value.
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The Company has established an additional employee stock incentive plan in November of 2000 which provides for the granting of stock options, restricted stock and other stock awards for the purpose of attracting and retaining executive officers, directors and key employees. No stock awards have been granted under this new plan as of December 31, 2000.
The weighted average exercise price for options granted in 1997 was $27.06, in 1998 was $27.38, in 1999 was $23.35 and in 2000 was $20.12.
The weighted average remaining contractual life for options outstanding at December 31, 2000 was 5 years and the weighted average remaining contractual life for options exercisable at December 31, 2000 was 5 years.
The Company records options granted using Accounting Principles Board (APB) opinion Number 25, "Accounting for Stock Issued to Employees and Related Interpretations." Accordingly, no compensation
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expense is recognized on the date the options are granted. If the Company had recorded compensation expense using the methodology prescribed in SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income would have been reduced by approximately $471 or $0.01 per share for the year ended December 31, 2000, $488 or $0.01 per share for the year ended December 31, 1999 and $228 or $0.00 per share for the year ended December 31, 1998.
The weighted average fair value of options granted during 2000, 1999 and 1998 were $1.27, $0.98 and $2.01, respectively. The fair value of each option grant issued in 2000, 1999 and 1998 is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) dividend yield of 10.2% in 2000, 10% in 1999 and 7.8% in 1998, (b) expected volatility of the Company's stock of 20.35% in 2000, 17.29% in 1999 and 17.26% in 1998, (c) a risk free interest rate based on U.S. Zero Coupon Bonds with time of maturity approximately equal to the options' expected time to exercise and (d) expected option lives of five years for options granted in 2000, 1999 and 1998.
14. Deferred Compensation Plans:
The Company has established deferred compensation plans under which key executives of the Company may elect to defer receiving a portion of their cash compensation otherwise payable in one calendar year until a later year. The Company may, as determined by the Board of Directors at its sole discretion, credit a participant's account with an amount equal to a percentage of the participant's deferral. The Company contributed $387, $296 and $295 to the plans during the years ended December 31, 2000, 1999 and 1998, respectively.
In addition, certain executives have split dollar life insurance agreements with the Company whereby the Company generally pays annual premiums on a life insurance policy in an amount equal to the executives deferral under one of the Company's deferred compensation plans.
15. Stock Repurchase Program:
On November 10, 2000, the Company's Board of Directors approved a stock repurchase program of up to 3.4 million shares of common stock. As of December 31, 2000, the Company repurchased 564,000 shares of its common stock at an average price of $19.02 per share.
16. 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.
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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 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 of 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 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.
Although the Company believes that the likelihood of redemption occurring is remote, it has revised its 1999 consolidated financial statements in accordance with the Securities and Exchange Commission's Accounting Series Release No. 268. As a result, the carrying value of the Series A Preferred Stock and Series B Preferred Stock as redeemable, which was previously presented as a component of common stockholders' equity, has now been presented outside of common stockholders' equity as of December 31, 1999.
The matter described above had no effect on the Company's net income, total assets or total liabilities.
The Company's previously reported redeemable preferred stock was at $0 at December 31, 1999. After reflecting adjustments of $98,934 and $148,402 to present the Series A Preferred Stock and Series B Preferred Stock as redeemable, the redeemable preferred stock, as revised, is $247,336 at December 31, 1999. The Company's previously reported Minority Interest in Operating Partnership was $157,599 at December 31, 1999. In connection with the Series A Preferred Stock and Series B Preferred Stock being presented outside of common stockholders' equity, Minority Interest in Operating Partnership, as revised, is $129,295 at December 31, 1999. The Company's previously reported common stockholders' equity was $620,286 at December 31, 1999. After reflecting adjustments of $98,934 and $148,402 to present the Series A Preferred Stock and Series B Preferred Stock as redeemable and the related adjustment to Minority Interest in Operating Partnership, the Company's common stockholders' equity, as revised, is $401,254 at December 31, 1999.
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17. Quarterly Financial Data (Unaudited):
The following is a summary of periodic results of operations for 2000 and 1999:
For all quarterly balance sheet dates, an amount of $247,366 and approximately $31,000, previously presented in common stockholders' equity is now presented as redeemable preferred stock and minority interest, respectively.
18. Segment Information:
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. The Company currently operates in one business segment, the acquisition, ownership, redevelopment, management and leasing of regional and community shopping centers. Additionally, the Company operates in one geographic area, the United States.
19. Subsequent Events:
On February 13, 2001 a dividend/distribution of $0.53 per share was declared for common stockholders and OP Unit holders of record on February 22, 2001. In addition, the Company declared a dividend of $0.53 on the Company's Series A Preferred Stock and a dividend of $0.53 on the Company's Series B Preferred Stock. All dividends/distributions will be payable on March 7, 2001.
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To the Board of Trustees and Stockholders of Pacific Premier Retail Trust:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 39 present fairly, in all material respects, the financial position of Pacific Premier Retail Trust (the "Trust") at December 31, 2000 and 1999, and the results of its operations and its cash flows for the year ended December 31, 2000 and for the period from February 18, 1999 (Inception) to December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(4) on page 40 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2000, the Trust adopted Staff Accounting Bulletin 101.
PricewaterhouseCoopers LLPFebruary 13, 2001
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PACIFIC PREMIER RETAIL TRUST(A Maryland Real Estate Investment Trust)
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For the Year Ended December 31, 2000 andfor the Period from February 18, 1999 (Inception)through December 31, 1999
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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On February 18, 1999, Macerich PPR Corp. (the "Corp"), an indirect wholly owned subsidiary of The Macerich Company (the "Company"), and Ontario Teachers' Pension Plan Board ("Ontario Teachers"') acquired a portfolio of properties in the first of a two-phase acquisition and formed the Pacific Premier Retail Trust (the "Trust").
The first phase of the acquisition consisted of three regional malls, the retail component of a mixed-use development and five contiguous properties comprising approximately 3.4 million square feet for a total purchase price of approximately $415,000. The purchase price was funded with a $120,000 loan placed concurrently with the closing, $109,800 of debt from an affiliate of the seller and $39,400 of assumed debt. The balance of the purchase price was paid in cash.
The second phase consisted of the acquisition of the office component of the mixed-use development for a purchase price of approximately $111,000. The purchase price was funded with a $76,700 loan placed concurrently with the closing and the balance was paid in cash.
On October 26, 1999, 99% of the membership interests of Los Cerritos Center and Stonewood Mall and 100% of the membership interests of Lakewood Mall were contributed to the Trust. The total value of the transaction was approximately $535,000. The properties were contributed to the Trust subject to existing debt of $322,000. The properties were recorded at approximately $453,100 to reflect the cost basis of the assets contributed to the Trust.
The Trust was organized to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. The Corp maintains a 51% ownership interest in the Trust, while Ontario Teachers' maintains a 49% ownership interest in the Trust.
The properties as of December 31, 2000 and their locations are as follows:
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Cash and Cash Equivalents: The Trust considers all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents, for which cost approximates fair value. Included in cash is restricted cash of $2,009 and $1,299 at December 31, 2000 and 1999, respectively.
Tenant Receivables: Included in tenant receivables are accrued overage rents of $2,630 and $2,835 and an allowance for doubtful accounts of $258 and $171 at December 31, 2000 and 1999, respectively.
Revenues: 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." Rental income was increased by $3,306 and $2,501 in 2000 and 1999, respectively, due to the straight lining of rents. Percentage rents are recognized on an accrual basis. Recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable costs are incurred.
Property is recorded at cost and is depreciated using a straight-line method over the estimated lives of the assets as follows:
The Trust 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 Trust may recognize an impairment loss if the income stream is not sufficient to cover its investments. Such a loss would be
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determined as the difference between the carrying value and the fair value of a property. Management believes no such impairment has occurred in its net property carrying values at December 31, 2000 and 1999.
Deferred Charges: Costs relating to financing of properties and obtaining tenant leases are deferred and amortized over the initial term of the agreement. The straight-line method is used to amortize all costs except financing, for which the effective interest method is used. The range of the terms of the agreements are as follows:
Income taxes: The Trust has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. A REIT is generally not subject to income taxation on that portion of its income that qualifies as REIT taxable income as long as it distributes at least 95% of its taxable income to its stockholders and complies with other requirements. Accordingly, no provision has been made for income taxes in the financial statements.
Accounting Pronouncements: In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which became effective for periods beginning after December 15, 1999. This bulletin modified the timing of revenue recognition for percentage rent received from tenants. This change will defer recognition of a significant amount of percentage rent for the first three calendar quarters into the fourth quarter. The Trust applied this change in accounting principle as of January 1, 2000. The cumulative effect of this change in accounting principle at the adoption date of January 1, 2000, was approximately $397. If the Trust had recorded percentage rent using the methodology prescribed in SAB 101, the Trust's net income would have been reduced by $397 for the period ended December 31, 1999.
In June 1998, 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 will be 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. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delays the implementation of SFAS 133 from January 1, 2000 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an
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Amendment of FASB Statement No. 133," ("SFAS 138") which amends the accounting and reporting standards of SFAS 133. The Trust has determined the implementation of SFAS 133 and SFAS 138 will not have an impact on its consolidated financial statements.
Fair Value of Financial Instruments: To meet the reporting requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the Trust calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. The estimated fair value amounts have been determined by the Trust 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 Trust 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.
Concentration of Risk: The Trust maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100. At various times during the year, the Trust had deposits in excess of the FDIC insurance limit.
AT&T Wireless Services represented 12.8% and 9.5% of total minimum rents in place as of December 31, 2000 and 1999, respectively; and no other tenant represented more than 3.8% and 2.7% of total minimum rents as of December 31, 2000 and 1999.
Management Estimates: The preparation of financial statements in conformity with generally accepted accounting principles ("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.
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3. Property:
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4. Mortgage Notes Payable:
Mortgage notes payable at December 31, 2000 and 1999 consist of the following:
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Total interest costs capitalized for the years ended December 31, 2000 and 1999 was $1,905 and $290, respectively.
The fair value of mortgage notes payable at December 31, 2000 and 1999 is estimated to be approximately $714,084 and $621,393, respectively, based on interest rates for comparable loans.
5. Related Party Transactions:
The Trust engages the Macerich Management Company (the "Management Company"), an affiliate of the Company, to manage the operations of the Trust. The Management Company provides property management, leasing, corporate, redevelopment and acquisitions services to the properties of the Trust. In consideration of these services, the Management Company receives monthly management fees ranging from 1.0% to 4.0% of the gross monthly rental revenue of the properties managed. During the year ended 2000 and the period ended 1999, the Trust incurred management fees of $4,584 and $2,253, respectively, to the Management Company.
A mortgage note collateralized by the office component of Redmond Town Center is held by one of the Company's joint venture partners. In connection with this note, interest expense was $4,953 and $2,192 during the year ended December 31, 2000 and the period ended 1999, respectively. Additionally, $386 and $248 of interest costs were capitalized during the year ended December 31, 2000 and the period ended 1999, respectively, in relation to this note.
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6. Future Rental Revenues:
The property leases generally provide for fixed annual minimum rent, overage rent based on sales, and reimbursement for certain operating expenses, including real estate taxes. For leases in effect at December 31, 2000, fixed minimum rents to be received in each of the next five years and thereafter are summarized as follows:
7. Redeemable Preferred Stock:
On October 6, 1999, the Trust issued 125 shares of Series A Redeemable Preferred Shares of Beneficial Interest ("Preferred Stock") for proceeds totaling $500 in a private placement. On October 26, 1999, the Trust issued 254 and 246 shares of Preferred Stock to the Corp and Ontario Teachers', respectively. The Preferred Stock can be redeemed by the Trust at any time with 15 days notice for $4,000 per share plus accumulated and unpaid dividends and the applicable redemption premium. The Preferred Stock will pay a semiannual dividend equal to $300 per share. The Preferred Stock has limited voting rights.
8. Commitments:
The Trust has certain properties subject to non-cancelable operating ground leases. The leases expire at various times through 2069, subject in some cases to options to extend the terms of the lease. Ground rent expense, net of amounts capitalized, was $634 and $905 for the year ended December 31, 2000 and the period ended 1999, respectively.
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Independent Auditors' Report
The Partners SDG Macerich Properties, L.P.:
We have audited the accompanying balance sheets of SDG Macerich Properties, L.P. as of December 31, 2000 and 1999, and the related statements of operations, cash flows, and partners' equity for each of the years in the three year period ended December 31, 2000. In connection with our audits of the financial statements, we have also audited the related financial statement schedule (Schedule III). These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SDG Macerich Properties, L.P. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule (Schedule III), when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2(a) to the financial statements, the Partnership changed its method of accounting for overage rent in 2000.
Indianapolis, IndianaFebruary 9, 2001
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SDG MACERICH PROPERTIES, L.P.
BALANCE SHEETS
As of December 31, 2000 and 1999
See accompanying notes to financial statements.
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STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999 and 1998
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STATEMENTS OF CASH FLOWS
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STATEMENTS OF PARTNERS' EQUITY
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(1) General
(a) Partnership Organization On December 29, 1997, affiliates of Simon Property Group, Inc. (Simon) and The Macerich Company (Macerich) formed a limited partnership to acquire and operate a portfolio of 12 regional shopping centers. SDG Macerich Properties, L.P. (the Partnership) acquired the properties on February 27, 1998, and the accompanying financial statements include the results of operations of the properties since the date of acquisition. As a result, the statement of operations presented for 1998 only represents ten months of activity.
(b) Properties Affiliates of Simon and Macerich each manage six of the shopping centers. The shopping centers and their locations are as follows:
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The shopping center leases generally provide for fixed annual minimum rent, overage rent based on sales, and reimbursement for certain operating expenses, including real estate taxes. For leases in effect at December 31, 2000, fixed minimum rents to be received in each of the next five years and thereafter are summarized as follows:
(2) Summary of Significant Accounting Policies
(a) Revenues All leases are classified as operating leases, and minimum rents are recognized monthly on a straight-line basis over the terms of the leases.
Most retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year, generally ending on January 31. Overage rents are recognized as revenues based on reported and estimated sales for each tenant through December 31. Differences between estimated and actual amounts are recognized in the subsequent year.
During January 2000, the Emerging Issues Task Force addressed certain revenue recognition policies which required overage rent to be recognized as revenue only when each tenant's sales exceeded its threshold. The Partnership previously recognized overage rent before the threshold was met based on tenant sales over a prorated base sales amount. The Partnership changed its accounting effective January 1, 2000 and recorded a loss for the cumulative effect of the change of $1,053.
Tenant recoveries for real estate taxes and common area maintenance are adjusted annually based on the actual expenses, and the related revenues are recognized in the year in which the expenses are incurred. Charges for other operating expenses are billed monthly with periodic adjustments based on the estimated utility usage and/or a current price index, and the related revenues are recognized as the amounts are billed and as adjustments become determinable.
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(b) Cash Equivalents All highly liquid debt instruments purchased with a maturity of three months or less are considered to be cash equivalents.
(c) Properties Properties are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. All repairs and maintenance items are expensed as incurred.
The Partnership assesses whether there has been an impairment in the value of a property 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 Partnership would recognize an impairment loss if the estimated future income stream of a property is not sufficient to recover its investment. Such a loss would be the difference between the carrying value and the fair value of a property. Management believes no impairment in its net property carrying values have occurred.
(d) Financing Costs Financing costs of $2,866 related to the proceeds of mortgage notes obtained April 12, 2000 are being amortized to interest expense over the remaining life of the notes.
(e) Use of Estimates 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 reported amounts of 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.
(f) Income Taxes As a partnership, the allocated share of income or loss for the year is includable in the income tax returns of the partners; accordingly, income taxes are not reflected in the accompanying financial statements.
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(3) Mortgage Notes Payable and Fair Value of Financial Instruments
In connection with the acquisition of the properties in 1998, the Partnership assumed $485,000 of mortgage notes secured by the properties. The notes consist of $300,000 of debt that is due in May 2006 and requires monthly interest payments at a fixed weighted average rate of 7.41% and $185,000 of debt that is due in May 2003 and requires monthly interest payments at a variable weighted average rate (based on LIBOR) of 7.21% at December 31, 2000 (6.96% at December 31, 1999). The variable rate debt is covered by an interest cap agreement that effectively prevents the variable rate from exceeding 11.53%. In March 2000, the Partnership made a principal payment of $500 on the variable rate debt in order to obtain $138,500 of additional mortgage financing.
The fair value assigned to the $300,000 fixed-rate debt at the acquisition date based on an estimated market interest rate of 6.23% was $322,711, and the resultant debt premium is being amortized to interest expense over the remaining term of the debt using a level yield method. At December 31, 2000 and 1999, the unamortized balance of the debt premium was $16,114 and $18,565, respectively.
On April 12, 2000, the Partnership obtained $138,500 of additional mortgage financing which is also secured by the properties. The notes consist of $57,100 of debt that requires monthly interest payments at a fixed weighted average rate of 8.13% and $81,400 of debt that requires monthly interest payments at a variable weighted average rate (based on LIBOR) of 7.08% at December 31, 2000. All of the notes mature on May 15, 2006. The variable rate debt is covered by an interest cap agreement that effectively prevents the variable rate from exceeding 11.83%.
The fair value of the fixed-rate debt of $357,100 at December 31, 2000 and $300,000 at December 31, 1999, based on an interest rate of 6.94% and 8.34%, respectively, is estimated to be $368,892 and $288,261, respectively. The carrying value of the variable-rate debt of $265,900 and the Partnership's other financial instruments are estimated to approximate their fair values.
SFAS 133 will be effective for the Partnership beginning January 1, 2001 and may not be applied retroactively. The fair value of the interest rate cap agreements is to be reflected in the balance sheet as derivative financial instruments, and changes in the fair values are to be recognized currently in earnings or other comprehensive earnings. The impact of this change of accounting is not significant.
Interest costs of $195 were capitalized in 2000 as a component of the cost of major development projects.
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(4) Management Services
Management fees incurred in 2000, 1999 and 1998 totaled $1,900, $1,960 and $1,592, respectively, for the Simon-managed properties and $1,862, $1,803 and $1,470, respectively, for the Macerich-managed properties, both based on a fee of 4% of gross receipts, as defined.
(5) Contingent Liability
The Partnership currently is not involved with any litigation other than routine and administrative proceedings arising in the ordinary course of business. On the basis of consultation with counsel, management believes that these items will not have a material adverse impact on the Partnership's financial statements taken as a whole.
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December 31, 2000
Schedule III. Real Estate and Accumulated Depreciation
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Depreciation and amortization of the Company's investment in buildings and improvements reflected in the statements of income are calculated over the estimated useful lives of the asset as follows:
The changes in total real estate assets for the three years ended December 31, 2000 are as follows:
The changes in accumulated depreciation and amortization for the three years ended December 31, 2000 are as follows:
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Depreciation and amortization of the Trust's investment in buildings and improvements reflected in the statement of income are calculated over the estimated useful lives of the asset as follows:
The changes in total real estate assets for the two years ended December 31, 2000 are as follows:
The changes in accumulated depreciation and amortization for the two years ended December 31, 2000 are as follows:
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Depreciation and amortization of the Partnership's investment in shopping center properties reflected in the statement of operations are calculated over the estimated useful lives of the assets as follows:
The changes in total shopping center properties for the years ended December 31, 2000, 1999 and 1998 are as follows:
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The changes in accumulated depreciation for the years ended December 31, 2000, 1999 and 1998 are as follows:
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX
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