THE MACERICH COMPANY Annual Report on Form 10-K For The Year Ended December 31, 2001
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 four community shopping centers aggregating approximately 41 million square feet of gross leasable area ("GLA"). These 50 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, LLC, a single-member Delaware limited liability company, 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. Equity Offerings
On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $52.2 million. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project described below under "C. Redevelopment" and for general corporate purposes.
B. Refinancings
During 2001, the Company's line of credit facility was increased from $150.0 million to $200.0 million. The new line of credit matures in May 2002 with a one-year extension option subject to certain terms and conditions. The interest rate ranges from LIBOR plus 1.35% to 1.80%, depending on leverage levels.
On May 2, 2001, the Company refinanced the debt on Capitola Mall. The prior loan of $36.4 million, at a fixed interest rate of 9.25%, was paid in full and a new note was issued for $48.5 million bearing interest at a fixed rate of 7.13% and maturing May 15, 2011.
On July 10, 2001, the Company refinanced the debt on Pacific View. The prior bank construction loan of $89.3 million, at a floating interest rate (LIBOR plus 1.75%), was paid in full and a new permanent loan was issued for $89.0 million, which may be increased up to $96.0 million subject to certain conditions, bearing interest at a fixed rate of 7.16% and maturing August 31, 2011.
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On October 9, 2001, the Company refinanced the debt on Rimrock Mall. The prior loan of $29.3 million, at a fixed interest rate of 7.70%, was paid in full and a new note was issued for $46.0 million bearing interest at a fixed rate of 7.45% and maturing October 1, 2011.
C. Redevelopment
In the second quarter of 2001, the new $36.0 million expansion opened at Lakewood Mall. The expansion included 60,000 square feet of specialty tenant space and a second level food court. A new 210,000 square foot Macy's and a new Mervyn's department store anchor the expansion wing.
In the third quarter of 2001, the Company completed a $10.0 million interior and exterior renovation of Vintage Faire Mall.
On December 28, 2001, the Company, as part of its proposed redevelopment and expansion of Queens Center, purchased a five-acre parcel of land adjacent to the center. The project will involve both the renovation of the existing center as well as an expansion of the center from 623,876 square feet to approximately 1 million square feet, including the addition of 250,000 square feet of mall shops. Construction is expected to begin in the second quarter of 2002 with completion estimated to be, in phases, through late 2004. Additionally, Swedish apparel retailer Hennes and Monritz opened a 19,427 square feet store in 2001 at this Center.
D. 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. No shares of common stock were repurchased by the Company in 2001.
E. Other Events
On December 14, 2001, Villa Marina Marketplace, a 448,262 square foot community shopping center, located in Marina Del Rey, California, a wholly-owned property of the Company, was sold. The center, which the Company originally acquired on January 25, 1996, was sold for approximately $99.0 million, including the assumption of the existing mortgage of $58.0 million, which resulted in a $24.7 million gain. The Company used approximately $26 million of the net proceeds from this sale to retire $25.7 million of its outstanding convertible subordinated debentures due December 2002. The remaining balance of the proceeds was used for general corporate purposes.
On March 19, 2002, the Company sold Boulder Plaza, a 159,238 square foot community center in Boulder, Colorado for $24.7 million. The proceeds from the sale will be used for general corporate purposes.
The Shopping Center Industry
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,"
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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.
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 and Saks Fifth Avenue at Carmel Plaza 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.
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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.
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 underperforming 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 intrinsic value.
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 and 2001, market conditions, including the cost of capital and the lack of attractive opportunities, resulted in the first years subsequent to the Company's IPO in which there were no acquisitions. The Company believes the market conditions for acquisitions will improve in 2002.
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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 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, 2001, the Centers consist of 46 Regional Shopping Centers and four Community Shopping Centers aggregating approximately 41 million square feet of GLA. The 46 Regional Shopping Centers in the Company's portfolio average approximately 884,911 square feet of GLA and range in size from 2.1 million square feet of GLA at Lakewood Mall to 328,895 square feet of GLA at Panorama Mall. The Company's four Community Shopping Centers, Boulder Plaza, Bristol Shopping Center, Carmel Plaza, and Great Falls Marketplace, have an average of 161,279 square feet of GLA. The 46 Regional Shopping Centers presently include 182 Anchors totaling approximately 23.1 million square feet of GLA and approximately 6,258 Mall and Freestanding Stores totaling approximately 18.2 million square feet of GLA.
Total revenues, including joint ventures at their pro rata share of $171.1 million in 2001 and $166.0 million in 2000, increased to $505.7 million in 2001 from $486.1 million in 2000 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 2000 and 2001.
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 nine other publicly traded mall companies and several large private mall companies, any of which under certain circumstances could compete against the Company for an acquisition, an Anchor or
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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 retail formats and technologies, 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 91.6% of their total rents for the year ended December 31, 2001 from Mall and Freestanding Stores. One tenant accounted for approximately 4.6% of annual base rents of the Company, and no other single tenant accounted for more than 3.5% as of December 31, 2001.
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, 2001:
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, 2001, comprises 69.7% 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 and under, commencing during 2001 was $33.33 per square foot, or 18.5% higher than the average base rent for all Mall and Freestanding Stores (10,000 square feet and under) at December 31, 2001 of $28.13 per square foot.
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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
A decision by an Anchor or another significant tenant to cease operations at a Center could have an adverse effect on the Company. 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. In addition, mergers, acquisitions, consolidations or dispositions in the retail industry could result in the loss of tenants at one or more Centers.
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 4.6% 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, 2001) of Mall and Freestanding Stores 10,000 square feet and 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 8.4% of the Company's total rent for the year ended December 31, 2001.
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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, 2001:
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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 property
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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 $67,873 and $187,976 have already been incurred by the joint venture for remediation, and professional and legal fees for the years ending December 31, 2001 and 2000, respectively. An additional $188,325 remains reserved by the joint venture as of December 31, 2001, which management has estimated as its remaining obligation for the remediation. The joint venture has been sharing costs with former owners of the property.
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 $147,597 and $25,939 in remediation costs for the years ending December 31, 2001 and 2000, respectively. An additional $2.6 million remains reserved at December 31, 2001.
Insurance
The Centers have comprehensive liability, fire, flood, extended coverage and rental loss insurance. The Company or the joint venture owner, as applicable, also currently carries earthquake insurance covering the Centers located in California. Such policies are subject to a deductible equal to 5% of the total insured value of each Center, a $250,000 per occurrence minimum and a combined annual aggregate loss limit of $125 million on the Centers located in California. Management believes that such insurance policies have specifications and insured limits customarily carried for similar properties.
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 1,605 persons, including eight executive officers, personnel in the areas of acquisitions and business development (4), property management (258), leasing (83), redevelopment/construction (25), financial services (49) and legal affairs (31). In addition, in an effort to minimize operating costs, the Company generally maintains its own security staff (617) and maintenance staff (530). Approximately 17 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, 2001:
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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. The information set forth below is as of December 31, 2001.
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Notes:
The Company has a credit facility of $200.0 million with a maturity of May, 2002 with a right to extend the facility for one year subject to certain conditions. The interest rate on such credit facility fluctuates between 1.35% and 1.80% over LIBOR, depending on leverage levels. As of December 31, 2001 and December 31, 2000, $159.0 million and $59.0 million of borrowings were outstanding under this line of credit at interest rates of 3.65% and 7.90%, respectively.
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Additionally, as of December 31, 2001, the Company has obtained $0.8 million in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result in a liability to the Company.
During January 1999, the Company entered into a bank construction loan agreement to fund $89.3 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 was scheduled to mature February 2002. Principal was drawn as construction costs were incurred. As of December 31, 2000, $88.3 million of principal had been drawn under the loan at an interest rate of 8.63%. On July 10, 2001, the Company paid off this loan in full and a permanent loan was issued for $89.0 million, which may be increased up to $96.0 million subject to certain conditions, bearing interest at a fixed rate of 7.16% and maturing August 31, 2011.
During 1997, the Company issued and sold $161.4 million of convertible subordinated debentures (the "Debentures"). The Debentures, which were sold at par, bear interest at 7.25% annually (payable semi-annually) and are convertible into common stock at any time, on or after 60 days, from the date of issue at a conversion price of $31.125 per share. In November and December 2000, the Company purchased and retired $10.6 million of the Debentures. The Company recorded a gain on early extinguishment of debt of $1.0 million related to the transaction. In December 2001, the Company purchased and retired an additional $25.7 million of the Debentures. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest. The Company is negotiating a credit facility with its bank group in which the proceeds are intended to retire the Debentures. The Company expects to put this facility in place during 2002 and fully retire the Debentures prior to their maturity.
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–Environmental Matters."
Item 4. Submission of Matters 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 2001, the Company's shares traded at a high of $26.70 and a low of $18.75.
As of February 28, 2002, there were approximately 551 stockholders of record. The following table shows high and low closing prices per share of common stock during each quarter in 2000 and 2001 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. Preferred stock dividends are accrued quarterly and paid in arrears. The Series A Preferred Stock and Series B 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 following table shows the dividends per share of preferred stock declared and paid for each quarter in 2000 and 2001:
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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." Effective March 29, 2001, Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). MPMC, LLC is a single-member Delaware limited liability company and is 100% owned by the Operating Partnership. The ownership structure of Macerich Management Company has remained unchanged. The Joint Venture Centers and the Management Companies (exclusive of MPMC, LLC) 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." Effective March 29, 2001, the Company consolidated the accounts for MPMC, LLC.
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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 ("FFO") and EBITDA. FFO is defined as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales or write-down of assets and cumulative effect of change in accounting principle, plus depreciation and amortization (excluding depreciation on personal property and amortization of loan and financial instrument costs), and after adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. FFO does not represent cash flow from operations as defined by GAAP and is not necessarily indicative of cash available to fund all cash flow needs. FFO, as presented, may not be comparable to similarly titled measures reported by other real estate investment trusts.
EBITDA represents earnings before interest, income taxes, depreciation, amortization, minority interest, equity in income (loss) of unconsolidated entities, extraordinary items, gain (loss) on sale 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. EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies. While the performance of individual Centers and the Management Companies determines EBITDA, the Company's capital structure also influences FFO. The most important component in determining EBITDA and FFO is Center revenues. Center revenues consist primarily of minimum rents, percentage rents and tenant expense recoveries. Minimum rents will increase to the extent that new leases are signed at market rents that are higher than prior rents. Minimum rents will also fluctuate up or down with changes in the occupancy level. Additionally, to the extent that new leases are signed with more favorable expense recovery terms, expense recoveries will increase.
Percentage rents generally increase or decrease with changes in tenant sales. As leases roll over, however, a portion of historical percentage rent is often converted to minimum rent. It is therefore common for percentage rents to decrease as minimum rents increase. Accordingly, in discussing financial performance, the Company combines minimum and percentage rents in order to better measure revenue growth.
The following discussion is based primarily on the consolidated financial statements of the Company for the years ended December 31, 2001, 2000 and 1999. The following discussion compares the activity for the year ended December 31, 2001 to results of operations for the year ended December 31, 2000. Also included is a comparison of the activities for the year ended December 31, 2000 to the results for the year ended December 31, 1999. 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, acquisition and redevelopment opportunities, the Company's acquisition and other strategies, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the Company's financial condition or results of operations. Words
22 MACERICH 2001 Financial Statements
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 the matters described herein and the following factors among others: general industry, economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of current and prospective tenants, tenant bankruptcies, lease rates and terms, availability and cost of financing, interest rate fluctuations and operating expenses; adverse changes in the real estate markets including, among other things, competition from other companies, retail formats and technologies, risks of real estate redevelopment, acquisitions and dispositions; governmental actions and initiatives (including legislative and regulatory changes); environmental and safety requirements; and terrorist activities that could adversely affect all of the above factors. The Company will not update any forward-looking information to reflect actual results or changes in the factors affecting the forward-looking information.
The following table reflects the Company's acquisitions in 1999. There were no acquisitions in 2001 or 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
MACERICH 2001 Financial Statements 23
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, 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 a fixed interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001. On December 28, 2001, the note receivable was paid down by $5.0 million and the maturity date was extended to September 30, 2002 at a new fixed interest rate of 9.50%.
On December 14, 2001, Villa Marina Marketplace, a 448,262 square foot community shopping center located in Marina del Rey, California, a wholly-owned property of the Company, was sold. The center was sold for approximately $99.0 million, including the assumption of the existing mortgage of $58.0 million, which resulted in a $24.7 million gain. The Company used approximately $26 million of the net proceeds from this sale to retire $25.7 million of its outstanding convertible subordinated debentures due December 2002. The remaining balance of the proceeds was used for general corporate purposes.
The properties acquired by 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.
24 MACERICH 2001 Financial Statements
Many of the variations in the results of operations, discussed below, occurred due to the 1999 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 2001 or 2000 because of market conditions, including the cost of capital and the lack of attractive opportunities. 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 and the Management Companies and Funds From Operations that occurred as a result of the 1999 Acquisition Centers. Pacific View (formerly known as Buenaventura Mall), Crossroads Mall-Boulder and Parklane Mall are currently under redevelopment or in the case of Pacific View, was recently redeveloped and are referred to herein as the "Redevelopment Centers." All other Centers, excluding the Redevelopment Centers, are referred to herein as the "Same Centers," unless the context otherwise requires.
Revenues include rents attributable to the accounting practice of straight lining of rents which requires rent to be recognized each year in an amount equal to the average rent over the term of the lease, including fixed rent increases over that period. The amount of straight lined rents, included in consolidated revenues, recognized in 2001 was $(0.1) million compared to $0.9 million in 2000 and $2.6 million in 1999. Additionally, the Company recognized through equity in income of unconsolidated joint ventures, $1.4 million as its pro rata share of straight lined rents from joint ventures in 2001 compared to $2.2 million in 2000 and $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. Currently, 29% of the mall and freestanding leases contain provisions for CPI rent increases periodically throughout the term of the lease. The Company believes that using CPI increases, rather than fixed contractual rent increases, results in revenue recognition that more closely matches the cash revenue from each lease and will provide more consistent rent growth throughout the term of the leases.
The Company's historical growth in revenues, net income and Funds From Operations have been closely tied to the acquisition and redevelopment of shopping centers. Many factors, including those described above, will affect the Company's ability to acquire and redevelop additional properties in the future. In addition, the following describes some of the other significant factors that could impact the Company's future results of operations.
General Factors Affecting the Centers; Competition: Real property investments are subject to varying degrees of risk that may affect the ability of the Centers to generate sufficient revenues to meet operating and other expenses, including debt service, lease payments, capital expenditures and tenant improvements, and to make distributions to their owners and the Company's stockholders. Income from shopping center properties may be adversely affected by a number of factors, including: the national economic climate; the regional and local economy (which may be adversely impacted by plant closings, industry slowdowns, adverse weather conditions, natural disasters, terrorist activities, and other factors); local real estate conditions (such as an oversupply of, or a reduction in demand for, retail space or retail goods and the availability and creditworthiness of current and prospective tenants); perceptions by retailers or shoppers of the safety, convenience and attractiveness of the shopping center; and increased costs of maintenance, insurance and operations (including real estate taxes). There are numerous shopping facilities that compete with the Centers in attracting tenants to lease space, and an increasing number of new retail formats and technologies other than retail shopping centers that compete with the Centers for retail sales (see
MACERICH 2001 Financial Statements 25
"Business–Competition"). Increased competition could adversely affect the Company's revenues. Income from shopping center properties and shopping center values are also affected by such factors as applicable laws and regulations, including tax, environmental, safety and zoning laws (see "Business–Environmental Matters"), interest rate levels and the availability and cost of financing.
Dependence on Tenants: The Company's revenues and funds available for distribution would be adversely affected if a significant number of the Company's lessees were unable (due to poor operating results, bankruptcy or other reasons) to meet their obligations, if the Company were unable to lease a significant amount of space in the Centers on economically favorable terms, or if for any reason, the Company were unable to collect a significant amount of rental payments. A decision by an Anchor or another significant tenant to cease operations at a Center could also have an adverse effect on the Company. In addition, mergers, acquisitions, consolidations, dispositions or bankruptcies in the retail industry could result in the loss of tenants at one or more Centers. (See "Business-Bankruptcy and/or Closure of Retail Stores.") Furthermore, if the store sales of retailers operating in the Centers were to decline sufficiently, tenants might be unable to pay their minimum rents or expense recovery charges. In the event of a default by a lessee, the Center may also experience delays and costs in enforcing its rights as lessor.
Assets and Liabilities
Total assets decreased to $2,295 million at December 31, 2001 compared to $2,337 million at December 31, 2000 and $2,404 million at December 31, 1999. During that same period, total liabilities decreased from $1,626 million in 1999 to $1,607 million in 2000 and decreased to $1,584 million in 2001. These changes were primarily a result of the partial sale and contribution of the Contributed JV Assets to PPRT, the sale of Villa Marina Marketplace and related debt transactions.
B. Refinancing
26 MACERICH 2001 Financial Statements
On December 28, 2001, the Company, as part of its proposed redevelopment and expansion of Queens Center, purchased a five-acre parcel of land adjacent to the center. The project will involve both the renovation of the existing center as well as an expansion of the center from 623,876 square feet to approximately 1 million square feet, including the addition of 250,000 square feet of mall shops. Construction is expected to begin in the second quarter of 2002 with completion estimated to be, in phases, through late 2004. Additionally, Swedish apparel retailer Hennes and Monritz opened a 19,427 square foot store in 2001 at this Center.
Comparison of Years Ended December 31, 2001 and 2000
Revenues
Minimum and percentage rents increased by 2.9% to $213.9 million in 2001 from $207.8 million in 2000. Approximately $4.4 million of the increase is attributed to the Same Centers primarily due to releasing space at higher rents and $1.9 million of the increase relates to the Redevelopment Centers primarily due to the recently completed redevelopment at Pacific View Mall. This is partially offset by $0.2 million relating to the sale of Villa Marina Marketplace.
MACERICH 2001 Financial Statements 27
Tenant recoveries increased to $109.2 million in 2001 from $104.1 million in 2000 due to increased recoverable shopping center and operating expenses. Approximately $5.0 million of the increase is attributable to the Same Centers and $0.4 million of the increase relates to the Redevelopment Centers. This is partially offset by $0.3 million relating to decreases from the sale of Villa Marina Marketplace.
Other income increased to $11.5 million in 2001 from $8.2 million in 2000. This increase related primarily from parking fees, investment income and new business initiatives such as advertising revenue and preferred vendor income.
Expenses
Shopping center and operating expenses increased to $110.8 million in 2001 compared to $101.7 million in 2000. The increase is a result of $3.2 million of increased property taxes, insurance and other recoverable expenses at the Centers and approximately $0.9 million relates to increases in bad debt expense and legal fees at the Centers. Additionally, effective March 29, 2001, the Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). Expenses for MPMC, LLC for periods commencing March 29, 2001, are now consolidated and represented $5.0 million of the change. Prior to March 29, 2001, MPMC, LLC was an unconsolidated entity accounted for using the equity method of accounting.
REIT general and administrative expenses increased to $6.8 million in 2001 from $5.5 million in 2000 primarily due to marking to market the stock-based incentive plans.
Interest Expense
Interest expense increased to $109.6 million in 2001 from $108.4 million in 2000. Capitalized interest was $5.7 million in 2001, down from $7.2 million in 2000 primarily due to the reduction of capitalized interest at the recently redeveloped Pacific View Mall. (See "Properties- Mortgage Debt").
Depreciation and Amortization
Depreciation and amortization increased to $66.0 million in 2001 from $61.6 million in 2000. Approximately $1.4 million of the increase is due to greater depreciation at Pacific View, which recently completed an $89.0 million redevelopment and $3.0 million relates to additional capital costs at the Same Centers.
Minority Interest
The minority interest represents the 24.8% weighted average interest of the Operating Partnership that was not owned by the Company during 2001. This compares to 24.3% not owned by the Company during 2000.
Income From Unconsolidated Joint Ventures and Management Companies
The income from unconsolidated joint ventures and the Management Companies was $32.9 million for 2001, compared to income of $30.3 million in 2000. A total of $0.6 million of the increase is attributable to the 1999 Joint Venture Acquisitions and the Contributed JV Assets and $2.6 million is attributable to the SDG Macerich Properties, L.P. portfolio. Additionally, income from the Management Companies increased by $3.0 million primarily due to MPMC, LLC being consolidated effective March 29, 2001. These increases are partially offset by $2.8 million of additional loss as a result of the Company's investment in MerchantWired, LLC compared to 2000.
28 MACERICH 2001 Financial Statements
Gain (loss) on Sale of Assets
A gain of $24.5 million in 2001 compares to a loss of $2.8 million in 2000. The 2001 gain was a result of the Company selling Villa Marina Marketplace on December 14, 2001 (See "Business-Recent Developments–Other Events").
Extraordinary Loss from Early Extinguishment of Debt
In 2001, the Company recorded a loss from early extinguishment of debt of $2.0 million which was a result of write offs of unamortized financing costs, compared to the write off of $0.3 million of unamortized financing costs in 2000.
Cumulative Effect of Change in Accounting Principle
A charge of $1.0 million in 2000 was recorded as a result of implementation of SAB 101 at January 1, 2000.
Net Income Available to Common Stockholders
Primarily as a result of the sale of Villa Marina Marketplace and the foregoing results, net income available to common stockholders increased to $58.0 million in 2001 from $38.0 million in 2000.
Operating Activities
Cash flow from operations was $140.5 million in 2001 compared to $121.2 million in 2000. The increase is primarily due to consolidating the results of MPMC, LLC effective March 29, 2001 and increased net operating income at the Centers as mentioned above.
Investing Activities
Cash used in investing activities was $57.3 million in 2001 compared to cash provided by investing activities of $2.1 million in 2000. The change resulted primarily from $24.0 million of increased property improvements, renovations and expansion of Centers, tenant allowances and deferred leasing charges in 2001 compared to 2000. Additionally, joint venture distributions in 2001 were $70.2 million less than 2000 due to the distribution of proceeds in 2000 from the additional debt placed on the SDG Macerich Properties, L.P. portfolio. These decreases are offset by the net cash proceeds received of $39.7 million in 2001 from the sale of Villa Marina Marketplace.
Financing Activities
Cash flow used in financing activities was $93.0 million in 2001 compared to cash flow used in financing activities of $127.5 million in 2000. The change resulted primarily from the refinancing of Centers in 2001 (See "Properties-Mortgage Debt").
EBITDA and Funds From Operations
Primarily because of the factors mentioned above, EBITDA, including joint ventures at pro rata, increased 2.9% to $323.8 million in 2001 from $314.6 million in 2000 and Funds from Operations–Diluted increased 4.7% to $175.1 million in 2001 from $167.2 million in 2000.
Comparison of Years Ended December 31, 2000 and 1999
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
MACERICH 2001 Financial Statements 29
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.
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 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 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.
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.
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
30 MACERICH 2001 Financial Statements
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.
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.
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.
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.
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.
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.
Cash generated from investing activities was $2.1 million in 2000 compared to cash utilized by investing activities of $243.2 million in 1999. The change resulted primarily from the cash contributions for the joint venture acquisitions of $116.9 million in 1999 compared to $4.3 million in 2000. This is offset by increases in joint venture distributions of $104.4 million in 2000 compared to $30.0 million in 1999.
Cash flow used in financing activities was $127.5 million in 2000 compared to cash provided by financing activities of $119.0 million in 1999. The change resulted primarily from the refinancing of Centers in 1999.
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.
MACERICH 2001 Financial Statements 31
Liquidity and Capital Resources
The Company intends to meet its short term liquidity requirements through cash generated from operations and working capital reserves and borrowing under its line of credit. The Company anticipates that revenues will continue to provide necessary funds for its operating expenses and debt service requirements, and to pay dividends to stockholders in accordance with REIT requirements. The Company anticipates that cash generated from operations, together with cash on hand, will be adequate to fund capital expenditures which will not be reimbursed by tenants, other than non-recurring capital expenditures. The following table summarizes capital expenditures incurred at the wholly-owned Centers for the twelve months ending December 31,:
Management expects similar levels to be incurred in future years for tenant allowances and deferred leasing charges and to incur between $20 million to $50 million in 2002 for renovations and expansions, excluding Queens Center expansion which will be separately financed. Capital for major expenditures or major redevelopments has been, and is expected to continue to be, obtained from equity or debt financings which include borrowings under the Company's line of credit and construction loans. However, many factors impact the Company's ability to access capital, such as its overall debt level, interest rates, interest coverage ratios and prevailing market conditions.
On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $52.2 million. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes. The Queens Center expansion and redevelopment is anticipated to cost between $250 million and $275 million. The Company is currently negotiating construction and permanent loans, which will be secured by the Queens Center property to finance the remaining project costs. Construction is expected to begin in the second quarter of 2002 with completion estimated to be, in phases, through late 2004.
The Company believes that it will have access to the capital necessary to expand its business in accordance with its strategies for growth and maximizing Funds from Operations. The Company presently intends to obtain additional capital necessary for these purposes through a combination of debt or equity financings, joint ventures and the sale of non-core assets. The Company believes joint venture arrangements have in the past and may in the future provide an attractive alternative to other forms of financing, whether for acquisitions or other business opportunities.
The Company's total outstanding loan indebtedness at December 31, 2001 was $2.2 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 61% at December 31, 2001. The Company's debt consists primarily of fixed-rate conventional mortgages payable secured by individual properties.
32 MACERICH 2001 Financial Statements
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. The Company sold a total of 7,920,181 shares of common stock in 1998 and 1,968,957 shares of common stock in 2002 under this shelf registration. The aggregate offering price of these transactions was approximately $267.9 million, leaving approximately $232.1 million available under the shelf registration statement.
The Company has an unsecured line of credit for up to $200.0 million with a maturity of May 2002 with a right to extend the facility for one year subject to certain conditions. It is anticipated that subsequent to December 31, 2001, the line of credit will be extended to May 2003. There were $159.0 million of borrowings outstanding at December 31, 2001.
The Company has $125.1 million of convertible subordinated debentures (the "Debentures") which mature December 15, 2002. The Debentures are callable on June 15, 2002 at par plus accrued interest. The Company is negotiating a credit facility with its bank group in which the proceeds are intended to retire these Debentures. The Company expects to put this credit facility in place during 2002 and plans to fully retire the Debentures prior to their maturity.
At December 31, 2001, the Company had cash and cash equivalents available of $26.5 million.
The Company has certain guarantees totaling $6.8 million relating to its ownership interest in MerchantWired, LLC.
The Company has a 2.9% interest in Constellation Real Technologies, LLC, a joint venture investing in real estate technology initiatives and opportunities. The Company funded $1.0 million in 2001 and has committed to fund up to an additional $3.0 million to this joint venture.
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. FFO, as presented, may not be comparable to
MACERICH 2001 Financial Statements 33
similarly titled measures reported by other real estate investment trusts. The following reconciles net income available to common stockholders to FFO:
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 ($72,029) for 2001, $865,259 for 2000 and $2,628,000 for 1999. The decline in straight-lining of rents from 1999 to 2001 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
34 MACERICH 2001 Financial Statements
term. These rent increases are either in fixed increments or based on increases in the CPI. In addition, about 8%-12% of the leases expire each year, which enables the Company to replace existing leases with new leases at higher base rents if the rents of the existing leases are below the then existing market rate. Additionally, 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.
Statement on Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgements on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectable accounts and estimates for environmental matters. The Company's significant accounting policies are described in more detail in Note 2 to the Consolidated Financial Statements. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition:
Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight lining of rent adjustment." Currently, 29% of the mall and freestanding leases contain provisions for CPI rent increases periodically throughout the term of the lease. The Company believes that using CPI increases, rather than fixed contractual rent increases, results in revenue recognition that more closely matches the cash revenue from each lease and will provide more consistent rent growth throughout the term of the leases. Percentage rents are recognized on an accrual basis. Recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.
Property:
Costs related to the redevelopment, construction and improvement of properties are capitalized. Interest incurred or imputed on redevelopment and construction projects are capitalized until construction is substantially complete.
MACERICH 2001 Financial Statements 35
Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which includes HVAC equipment, roofs, parking lots, etc. are capitalized and depreciated over their estimated useful lives. Realized gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.
Property is recorded at cost and is depreciated using a straight-line method over the estimated useful lives of the assets as follows:
The Company assesses whether there has been an impairment in the value of its long-lived assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants' ability to perform their duties and pay rent under the terms of the leases. The Company may recognize an impairment loss if the income stream is not sufficient to cover its investment. Such a loss would be determined as the difference between the carrying value and the fair value of a center.
Deferred Charges:
Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Cost relating to financing of shopping center properties are deferred and amortized over the life of the related loan using the straight-line method, which approximates the effective interest method. The range of the terms of the agreements are as follows:
Some of these estimates and assumptions include judgements on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectable accounts and estimates for environmental matters. The Company's significant accounting policies are described in more detail in Note 2 to the Consolidated Financial Statements.
New Pronouncements Issued
In December 1999, the Securities and Exchange Commission 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
36 MACERICH 2001 Financial Statements
date of January 1, 2000, including the pro rata share of joint ventures, was approximately $1.8 million. 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 $1.3 million or $0.02 per diluted share, $1.1 million or $0.025 per diluted share and $0.6 million or $0.016 per diluted share for the years ended December 31, 1999, 1998 and 1997, respectively.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delayed 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," ("SFAS138"), which amended the accounting and reporting standards of SFAS 133. As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of $7.1 million to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in the quarter ended March 31, 2001.The Company expects that $1.3 million will be reclassified from accumulated other comprehensive income to earnings for the year ended December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. The Company does not believe that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.
On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the recognition of intangible assets. The Company has determined that the adoption of SFAS 141 will not have an impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that the adoption of SFAS 144 will not have a material impact on its consolidated financial statements.
MACERICH 2001 Financial Statements 37
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, 2001 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 $159.0 million of variable debt maturing in 2002 represents the outstanding borrowings under the Company's credit facility. It is anticipated that subsequent to December 31, 2001, the line of credit will be extended to May 2003.
On December 15, 2002, the Company has $125.1 million of Debentures which will mature. The Debentures are callable on June 15, 2002 at par plus accrued interest. The Company is negotiating a credit facility with its bank group in which the proceeds are intended to retire these Debentures. The Company expects to put this credit facility in place during 2002 and plans to fully retire the Debentures prior to their maturity.
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 $3.0 million per year based on $300.2 million outstanding at December 31, 2001.
The fair value of the Company's long term debt is estimated based on discounted cash flows at interest rates that management believes reflect the risks associated with long term debt of similar risk and duration.
38 MACERICH 2001 Financial Statements
Item 8. Financial Statements and Supplementary Data
Refer to the Index to Financial Statements and Financial Statement Schedules for the required information.
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 2002 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 2002 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 2002 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 2002 Annual Meeting of Stockholders.
MACERICH 2001 Financial Statements 39
Part IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K
40 MACERICH 2001 Financial Statements
MACERICH 2001 Financial Statements 41
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) present fairly, in all material respects, the financial position of The Macerich Company (the "Company") at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 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) 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 7.3% and 7.2% of the Company's consolidated total assets at December 31, 2001 and 2000, respectively, and the equity in income represents approximately 21.7%, 22.1% and 13.7% of the related consolidated net income for each of the three years in the period ended December 31, 2001. 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. Additionally, as discussed in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133.
PricewaterhouseCoopers LLP
Los Angeles, CAFebruary 13, 2002
42 MACERICH 2001 Financial Statements
THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
The accompanying notes are an integral part of these financial statements.
MACERICH 2001 Financial Statements 43
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
44 MACERICH 2001 Financial Statements
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
MACERICH 2001 Financial Statements 45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
46 MACERICH 2001 Financial Statements
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 three management companies, Macerich Property Management Company, LLC, a Delaware limited liability company, Macerich Manhattan Management Company, a California corporation, and Macerich Management Company, a California corporation (collectively, the "Management Companies"). The term "Management Companies" includes Macerich Property Management Company prior to its merger with Macerich Property Management Company, LLC ("MPMC, LLC") on March 29, 2001.
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 (excluding MPMC, LLC), have been accounted for under the equity method of accounting. Effective March 29, 2001, the Company consolidated the accounts for MPMC, LLC. 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 $3,495 at December 31, 2001 and $1,464 at December 31, 2000.
Tenant Receivables:
Included in tenant receivables are allowances for doubtful accounts of $727 and $700 at December 31, 2001 and 2000, respectively.
MACERICH 2001 Financial Statements 47
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 decreased by $72 in 2001 and increased by $865 in 2000 and $2,628 in 1999 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 expenses 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.
Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which include HVAC equipment, roofs, parking lots, etc. are capitalized and depreciated over their estimated useful lives. Realized gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.
The Company assesses whether there has been an impairment in the value of its long-lived assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants' ability to perform their duties and pay rent under the terms of the leases. The Company may recognize an impairment loss if the income stream is not sufficient to cover its investment. Such a loss would be determined as the difference between the carrying value and the fair value of a center. Management believes no such impairment has occurred in its net property carrying values at December 31, 2001 and 2000.
48 MACERICH 2001 Financial Statements
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 elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1994. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders (95% for years beginning prior to January 1, 2001). It is management's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. As such, no provision for federal income taxes has been included in the accompanying consolidated financial statements. If the Company fails to qualify as a REIT in any taxable year, then it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income, if any.
Each partner is taxed individually on its share of partnership income or loss, and accordingly, no provision for federal and state income tax is provided for the Operating Partnership in the consolidated financial statements.
MACERICH 2001 Financial Statements 49
The following table reconciles net income available to common stockholders to taxable income available to common stockholders for the years ended December 31:
For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, return of capital or a combination thereof. The following table details the components of the distributions for the years ended December 31:
Reclassifications:
Certain reclassifications have been made to the 1999 and 2000 consolidated financial statements to conform to the 2001 consolidated financial statements presentation.
Accounting Pronouncements:
In December 1999, the Securities and Exchange Commission 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
50 MACERICH 2001 Financial Statements
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 Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delayed 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 amended the accounting and reporting standards of SFAS 133. As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of $7,148 to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in the quarter ended March 31, 2001. The Company expects that $1,328 will be reclassified from accumulated other comprehensive income to earnings for the year ended December 31, 2002.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting
MACERICH 2001 Financial Statements 51
model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that the adoption of SFAS 144 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 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 would vary with fluctuations in interest rates. The Company was exposed to credit loss in the event of nonperformance by these counter parties to the financial instruments; however, management did not anticipate nonperformance by the counter parties. As of December 31, 2001 and 2000, no interest rate cap agreements were outstanding.
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 was recorded on the balance sheet, in other assets, and amortized as interest expense over the period of the hedged loans. As of January 1, 2001, in accordance with SFAS 133, the gain or loss on the contracts has been reclassified to accumulated other comprehensive income on the balance sheet. As of December 31, 2001 and 2000, no treasury lock agreements were outstanding.
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, 2001, 2000 and 1999. 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
52 MACERICH 2001 Financial Statements
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:
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 2001, 2000 or 1999.
The Centers derived approximately 91.6%, 91.3% and 90.2% of their total rents for the years ended December 31, 2001, 2000 and 1999, respectively, from Mall and Freestanding Stores. The Limited represented 4.6%, 4.4% and 5.2% of total minimum rents in place as of December 31, 2001, 2000 and 1999, respectively, and no other retailer represented more than 3.5%, 3.0% and 3.2% of total minimum rents as of December 31, 2001, 2000 and 1999, 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.
MACERICH 2001 Financial Statements 53
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, 2001 is as follows:
As of March 28, 2001, the Operating Partnership also owned all of the non-voting preferred stock of Macerich Property Management Company and Macerich Management Company, which is generally entitled to dividends equal to 95% of the net cash flow of each company. Macerich Manhattan Management Company is a wholly owned subsidiary of Macerich Management Company. Effective March 29, 2001, Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). MPMC, LLC is a single-member Delaware limited liability company and is 100% owned by the Operating Partnership. The ownership structure of Macerich Management Company has remained unchanged. The Company accounts for the Management Companies (exclusive of MPMC, LLC), and joint ventures using the equity method of accounting. Effective March 29, 2001, the Company consolidated the accounts for MPMC, LLC.
On 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.
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,
54 MACERICH 2001 Financial Statements
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 a fixed interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001. On December 28, 2001, the note receivable was paid down by $5,000 and the maturity date was extended to September 30, 2002 at a new fixed interest rate of 9.50%. 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.
COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
MACERICH 2001 Financial Statements 55
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 $157,567 and $161,281, at December 31, 2001 and 2000, 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 $10,761, $10,189 and $7,386 for the years ended December 31, 2001, 2000, and 1999, respectively.
56 MACERICH 2001 Financial Statements
4. Property:
Property is summarized as follows:
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $54,973, $51,764 and $52,592, respectively.
A gain on sale of assets of $24,491 for the year ended December 31, 2001 is primarily a result of the Company selling Villa Marina Marketplace on December 14, 2001.
5. Deferred Charges And Other Assets:
Deferred charges and other assets are summarized as follows:
MACERICH 2001 Financial Statements 57
6. Mortgage Notes Payable:
Mortgage notes payable at December 31, 2001 and December 31, 2000 consist of the following:
58 MACERICH 2001 Financial Statements
MACERICH 2001 Financial Statements 59
Certain mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.
Total interest expense capitalized, including the pro rata share of joint ventures of $909, $1,407 and $573 (in 2001, 2000 and 1999, respectively), during 2001, 2000 and 1999 was $6,561, $8,619 and $7,243, respectively.
The fair value of mortgage notes payable, including the pro rata share of joint ventures of $721,084 and $727,769 at December 31, 2001 and December 31, 2000, respectively, is estimated to be approximately $1,983,183 and $2,009,932, respectively, based on current interest rates for comparable loans.
60 MACERICH 2001 Financial Statements
The above debt matures as follows:
The debt maturing in 2002 reflects the amortization of principal on existing debt.
7. Bank and Other Notes Payable:
The Company has a credit facility of $200,000 with a maturity of May 2002 with a right to extend the facility for one year subject to certain conditions. It is anticipated that subsequent to December 31, 2001, the line of credit will be extended to May 2003. The interest rate on such credit facility fluctuates between 1.35% and 1.80% over LIBOR depending on leverage levels. As of December 31, 2001 and December 31, 2000, $159,000 and $59,000 of borrowings were outstanding under this line of credit at interest rates of 3.65% and 7.90%, respectively.
Additionally, as of December 31, 2001, the Company has obtained $776 in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result in a liability to the Company.
During January 1999, the Company entered into a bank construction loan agreement to fund $89,250 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 was scheduled to mature in February 2002. Principal was drawn as construction costs were incurred. As of December 31, 2000, $88,340 of principal had been drawn under the loan at an interest rate of 8.63%. On July 10, 2001, the Company paid off this loan in full and a permanent loan was issued for $89,000, which may be increased up to $96,000 subject to certain conditions, bearing interest at a fixed rate of 7.16% and maturing August 31, 2011.
MACERICH 2001 Financial Statements 61
8. Convertible Debentures:
During 1997, the Company issued and sold $161,400 of its convertible subordinated debentures (the "Debentures"). The Debentures, which were sold at par, bear interest at 7.25% annually (payable semi-annually) and are convertible into common stock at any time, on or after 60 days, from the date of issue at a conversion price of $31.125 per share. In November and December 2000, the Company purchased and retired $10,552 of the Debentures. The Company recorded a gain on early extinguishment of debt of $1,018 related to the transaction. In December 2001, the Company purchased and retired an additional $25,700 of the Debentures. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest. The Company is negotiating a credit facility with its bank group in which the proceeds are intended to retire the Debentures. The Company expects to put this facility in place during 2002 and fully retire the Debentures prior to their maturity.
9. Related-Party Transactions:
The Company engaged the Management Companies to manage the operations of its properties and certain unconsolidated joint ventures. During 2001, 2000 and 1999, management fees of $757, $3,094 and $3,247, respectively, were paid to the Management Companies by the Company. During 2001, 2000 and 1999, management fees of $7,640, $7,322 and $4,982, 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 $6,935, $10,106 and $10,171 for the years ended December 31, 2001, 2000 and 1999, respectively. Included in accounts payables and accrued expense is interest payable to these partners of $263 and $509 at December 31, 2001 and 2000, 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 an 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, 2001 and 2000.
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.
62 MACERICH 2001 Financial Statements
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 guarantees totaling $6,810 relating to its ownership interest in MerchantWired, LLC.
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 $396, $345 and $890 for the years ended December 31, 2001, 2000 and 1999, respectively. No contingent rent was incurred for the years ended December 31, 2001, 2000 or 1999.
Minimum future rental payments required under the leases are as follows:
MACERICH 2001 Financial Statements 63
The Company has a 2.9% interest in Constellation Real Technologies, LLC, a joint venture investing in real estate technology initiatives and opportunities. The Company funded $959 in 2001 and has committed to fund up to an additional $3,041 to this joint venture.
Perchloroethylene ("PCE") has been detected in soil and groundwater in the vicinity of a dry cleaning establishment at North Valley Plaza, formerly owned by a joint venture of which the Company was a 50% member. The property was sold on December 18, 1997. The California Department of Toxic Substances Control ("DTSC") advised the Company in 1995 that very low levels of Dichloroethylene ("1,2 DCE"), a degradation byproduct of PCE, had been detected in a municipal water well located 1/4 mile west of the dry cleaners, and that the dry cleaning facility may have contributed to the introduction of 1,2 DCE into the water well. According to DTSC, the maximum contaminant level ("MCL") for 1,2 DCE which is permitted in drinking water is 6 parts per billion ("ppb"). The 1,2 DCE was detected in the water well at a concentration of 1.2 ppb, which is below the MCL. The Company has retained an environmental consultant and has initiated extensive testing of the site. The joint venture agreed (between itself and the buyer) that it would be responsible for continuing to pursue the investigation and remediation of impacted soil and groundwater resulting from releases of PCE from the former dry cleaner. A total of $118, $187 and $149 have already been incurred by the joint venture for remediation, professional and legal fees for the years ending December 31, 2001, 2000 and 1999, respectively. An additional $188 remains reserved by the joint venture as of December 31, 2001, which management has estimated as its remaining obligation for the remediation. The joint venture has been sharing costs with former owners of the property.
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 $148, $26 and $91 in remediation costs for the years ending December 31, 2001, 2000 and 1999, respectively. An additional $2,610 remains reserved at December 31, 2001.
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
64 MACERICH 2001 Financial Statements
employee compensation. The Management Companies and the Company contributed $923, $833 and $615 to the plan during the years ended December 31, 2001, 2000 and 1999, respectively.
13. Stock Option Plan:
The Company has established employee stock incentive plans under which stock options or restricted stock and/or other stock awards may be awarded for the purpose of attracting and retaining executive officers, directors and key employees. The Company has issued options to employees and directors to purchase shares of the Company under the stock incentive plans. 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. Options granted under these plans to non-employee directors vest six months from 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 all shares were granted as of December 31, 2001.
The Company issued 704,094 shares of restricted stock under the employees stock incentive plans to executives as of December 31, 2001. 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, 2001 and 2000, 289,482 and 169,559 shares, respectively, of restricted stock had vested. A total of 145,602 shares at a weighted average price of $21.95 were issued in 2001, a total of 169,556 shares at a weighted average price of $20.125 were issued in 2000, and a total of 176,600 shares at a weighted average price of $22.69 were issued in 1999. 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 $3,911, $2,220 and $2,037 in 2001, 2000 and 1999, respectively.
Approximately 449,536 and 31,000 of additional shares were reserved and were available for issuance under the stock incentive plans at December 31, 2001 and 2000, respectively. The plans allow for, among other things, granting options or restricted stock at market value.
MACERICH 2001 Financial Statements 65
The following table summarizes all stock options granted, exercised or forfeited under the employee and director plans over the last three years:
The weighted average exercise price for options granted in 1999 was $23.35, in 2000 was $20.12, and $26.60 in 2001.
The weighted average remaining contractual life for options outstanding at December 31, 2001 was 5 years and the weighted average remaining contractual
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 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 $32 or $0.00 per share for the year ended December 31, 2001, $471 or $0.01 per share for the year ended December 31, 2000 and $488 or $0.01 per share for the year ended December 31, 1999. The weighted average fair value of options granted during 2001, 2000 and 1999 were $0.98, $1.27 and $0.98, respectively. The fair value of each option grant issued in 2001, 2000 and 1999 is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) dividend yield of 9.75% in 2001, 10.2% in 2000 and
66 MACERICH 2001 Financial Statements
10% in 1999, (b) expected volatility of the Company's stock of 17.31% in 2001, 20.35% in 2000 and 17.29% in 1999, (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 2001, 2000 and 1999.
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 $461, $387 and $296 to the plans during the years ended December 31, 2001, 2000 and 1999, 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. No shares were repurchased under this program by the Company in 2001.
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.
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.
MACERICH 2001 Financial Statements 67
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.
17. Quarterly Financial Data (Unaudited):
The following is a summary of periodic results of operations for 2001 and 2000:
18. Segment Information:
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 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 15, 2002 a dividend/distribution of $0.55 per share was declared for common stockholders and OP Unit holders of record on February 22, 2002. In addition, the Company declared a dividend of
68 MACERICH 2001 Financial Statements
$0.55 on the Company's Series A Preferred Stock and a dividend of $0.55 on the Company's Series B Preferred Stock. All dividends/distributions will be payable on March 7, 2002.
On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $52,214. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes.
On March 19, 2002, the Company sold Boulder Plaza, a 159,238 square foot community center in Boulder, Colorado for $24,750. The proceeds from the sale will be used for general corporate purposes.
MACERICH 2001 Financial Statements 69
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) present fairly, in all material respects, the financial position of Pacific Premier Retail Trust (the "Trust") at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 and for the period from February 18, 1999 (Inception) through 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) 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.
February 13, 2002
70 MACERICH 2001 Financial Statements
PACIFIC PREMIER RETAIL TRUST(A Maryland Real Estate Investment Trust)
MACERICH 2001 Financial Statements 71
For the Years Ended December 31, 2001 and 2000 andfor the Period from February 18, 1999 (Inception)through December 31, 1999
72 MACERICH 2001 Financial Statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MACERICH 2001 Financial Statements 73
74 MACERICH 2001 Financial Statements
PACIFIC PREMIER RETAIL TRUST
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 from the Company and Ontario Teachers 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.
MACERICH 2001 Financial Statements 75
The properties as of December 31, 2001 and their locations are as follows:
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 $2,366 and $1,207 at December 31, 2001 and 2000, respectively.
Included in tenant receivables are accrued overage rents of $2,700 and $2,630 and an allowance for doubtful accounts of $596 and $258 at December 31, 2001 and 2000, respectively.
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 $2,082, $3,306 and $2,501 in 2001, 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 expenses are incurred.
76 MACERICH 2001 Financial Statements
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 investment. Such a loss would be 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, 2001 and 2000.
Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Costs relating to financing of properties are deferred and amortized over the life of the related loan using the straight-line method, which approximates the effective interest method. The range of the terms of the agreements are as follows:
Income taxes:
The Trust elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1999. To qualify as a REIT, the Trust must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders (95% for years beginning prior to January 1, 2001). It is management's current intention to adhere to these requirements and maintain the Trust's REIT status. As a REIT, the Trust generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. As such, no provision for federal income taxes has been included in the accompanying consolidated financial statements. If the Trust fails to qualify as a REIT in any taxable year, then it will be subject to federal income taxes at regular corporate rates (including any applicable
MACERICH 2001 Financial Statements 77
alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Trust qualifies for taxation as a REIT, the Trust may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income, if any.
The following table reconciles net income to taxable income for the years ended December 31:
For income tax purposes, distributions consist of ordinary income, capital gains, return of capital or a combination thereof. The following table details the components of the distributions for the years ended December 31:
In December 1999, the Securities and Exchange Commission 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, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in
78 MACERICH 2001 Financial Statements
the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delayed 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 amended 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.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. The Trust does not believe that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Trust adopted SFAS 144 on January 1, 2002. The Trust has determined that the adoption of SFAS 144 will not have a material 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
MACERICH 2001 Financial Statements 79
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.
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 12.1%, 12.8% and 9.5% of total minimum rents in place as of December 31, 2001, 2000 and 1999, respectively; and no other tenant represented more than 3.5%, 3.8% and 2.7% of total minimum rents as of December 31, 2001, 2000 and 1999, respectively.
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.
3. Property:
Depreciation expense for the years ended December 31, 2001 and 2000 and the period ended 1999 was $21,571, $19,543 and $10,302, respectively.
80 MACERICH 2001 Financial Statements
4. Mortgage Notes Payable:
Mortgage notes payable at December 31, 2001 and 2000 consist of the following:
MACERICH 2001 Financial Statements 81
Total interest costs capitalized for the years ended December 31, 2001, 2000 and 1999 were $1,202, $1,905 and $290, respectively.
The fair value of mortgage notes payable at December 31, 2001 and 2000 is estimated to be approximately $701,624 and $714,084, respectively, based on interest rates for comparable loans. The above debt matures as follows:
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 years ended 2001 and 2000 and the period ended 1999, the Trust incurred management fees of $4,952, $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 $5,973, $4,953 and $2,192 during the years ended December 31, 2001 and 2000 and the period ended 1999, respectively. Additionally, $0, $386 and $248 of interest costs were capitalized during the years ended December 31, 2001 and 2000 and the period ended 1999, respectively, in relation to this note.
82 MACERICH 2001 Financial Statements
6. Future Rental Revenues:
Under existing noncancellable operating lease agreements, tenants are committed to pay the following minimum rental payments to the Trust:
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 noncancellable 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 $1,157, $634 and $905 for the years ended December 31, 2001 and 2000 and the period ended 1999, respectively.
MACERICH 2001 Financial Statements 83
Independent Auditors' Report
The PartnersSDG Macerich Properties, L.P.:
We have audited the accompanying balance sheets of SDG Macerich Properties, L.P. as of December 31, 2001 and 2000, and the related statements of operations, cash flows, and partners' equity for each of the years in the three-year period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, 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 rents in 2000.
KPMG LLP
Indianapolis, IndianaFebruary 8, 2002
84 MACERICH 2001 Financial Statements
SDG MACERICH PROPERTIES, L.P.
Balance Sheets
As of December 31, 2001 and 2000
See accompanying notes to financial statements.
MACERICH 2001 Financial Statements 85
Statements of Operations
Years ended December 31, 2001, 2000 and 1999
86 MACERICH 2001 Financial Statements
Statements of Cash Flows
MACERICH 2001 Financial Statements 87
Statements of Partners' Equity
88 MACERICH 2001 Financial Statements
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(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.
(b) Properties
Affiliates of Simon and Macerich each manage six of the shopping centers. The shopping centers and their locations are as follows:
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, 2001, fixed minimum rents to be received in each of the next five years and thereafter are summarized as follows:
MACERICH 2001 Financial Statements 89
(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 method effective January 1, 2000 and recorded a loss for the cumulative effect of the change in 2000 of $1,053.
Tenant recoveries for real estate taxes and common area maintenance are adjusted annually based on 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.
(b) Cash Equivalents
All highly liquid debt instruments purchased with original maturities 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,
90 MACERICH 2001 Financial Statements
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 carrying values of its properties have occurred.
(d) Financing Costs
Financing costs of $2,572 related to the proceeds of mortgage notes issued 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 and disclosures 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.
(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.
(g) Derivative Financial Instruments
The Partnership uses derivative financial instruments in the normal course of business to manage, or hedge, interest rate risk and records all derivatives on the balance sheet at fair value. The Partnership requires that hedging derivative instruments are effective in reducing the risk exposure that they are designated to hedge. For derivative instruments associated with the hedge of an anticipated transaction, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Any instrument that meets these hedging criteria is formally designated as a hedge at the inception of the derivative contract. When the terms of an underlying transaction are modified resulting in some ineffectiveness, the portion of the change in the derivative fair value related to ineffectiveness from period to period will be included in net income. If any derivative instrument used for risk management does not meet the hedging criteria then it is marked-to-market each period, however, the Partnership intends for all derivative transactions to meet all the hedge criteria and qualify as hedges.
On an ongoing quarterly basis, the Partnership adjusts its balance sheet to reflect the current fair value of its derivatives. Changes in the fair value of derivatives are recorded each period in income or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. To the extent that the change in value of a derivative
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does not perfectly offset the change in value of the instrument being hedged, the ineffective portion of the hedge is immediately recognized in income. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to income. This reclassification occurs when the hedged items are also recognized in income. The Partnership has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.
To determine the fair values of derivative instruments, the Partnership uses standard market conventions and techniques such as discounted cash flow analysis, option pricing models, and termination cost at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
(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 2.39% and 7.21% at December 31, 2001 and 2000, respectively. The variable rate debt is covered by an interest cap agreement that effectively prevents the variable rate from exceeding 11.53% (see note 5). 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, 2001 and 2000, the unamortized balance of the debt premium was $13,512 and $16,114, 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 2.27% and 7.08% at December 31, 2001 and 2000, respectively. 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% (see note 5).
The fair value of the fixed-rate debt of $357,100 at December 31, 2001 and 2000 based on an interest rate of 6.43% and 6.94%, respectively, is estimated to be $372,100 and $368,892, 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.
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 2001, 2000 and 1999 totaled $1,973, $1,900 and $1,960, respectively, for the Simon-managed properties and $1,991, $1,862 and $1,803, respectively, for the Macerich-managed properties, both based on a fee of 4% of gross receipts, as defined.
(5) Cumulative Effect of Accounting Change
Effective January 1, 2001, the Partnership adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended in June 2000 by SFAS 138, Accounting for Derivative Instruments and Hedging Activities.SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and requires the Partnership to record on the balance sheet all derivative instruments at fair value and to recognize certain non-cash changes in these fair values either in the statement of operations or other comprehensive income, as appropriate under SFAS 133. SFAS 133 currently impacts the accounting for the Partnership's interest rate cap agreements.
Upon adoption of SFAS 133, the Partnership recorded the difference between the fair value of the derivative instruments and the previous carrying amount of its interest rate cap agreements on its balance sheets in net income, as the cumulative effect of a change in accounting principle in accordance with APB 20, Accounting Changes. On adoption, the Partnership's net fair value of derivatives was $80 which was recorded in other assets. In addition, an expense of $256 was recorded as a cumulative effect of accounting change in the statement of operations.
As of December 31, 2001, the Partnership has recorded derivatives at their fair values of $156 included in other assets. These derivatives consist of interest rate cap agreements with a total notional amount of $266,400, with maturity dates ranging form May 2003 to May 2006. The Partnership's exposure to market risk due to changes in interest rates relates to the Partnership's long-term debt obligations. Through its risk management strategy, the Partnership manages exposure to interest rate market risk by interest rate protection agreements to effectively cap a portion of variable rate debt. The Partnership's intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contract hedging these exposures. The Partnership does not enter into interest rate protection agreements for speculative purposes.
(6) 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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THE MACERICH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (Dollars in thousands)
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, 2001 are as follows:
The changes in accumulated depreciation and amortization for the three years ended December 31, 2001 are as follows:
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PACIFIC PREMIER RETAIL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (Dollars in thousands)
96 MACERICH 2001 Financial Statements
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:
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SDG MACERICH PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (Dollars in thousands)
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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, 2001, 2000 and 1999 are as follows:
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The changes in accumulated depreciation for the years ended December 31, 2001, 2000 and 1999 are as follows:
100 MACERICH 2001 Financial Statements
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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