SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NO. 1-12504 THE MACERICH COMPANY - ------------------------------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 95-4448705 - ----------------------------------------------------- --------------- (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NUMBER) 401 WILSHIRE BOULEVARD, SUITE 700, SANTA MONICA, CA 90401 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)(ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 394-6911 ------------------- N/A - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF AUGUST 14, 1998. COMMON STOCK, PAR VALUE $.01 PER SHARE: 32,468,963 SHARES - -------------------------------------------------------------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE (12) MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORT) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST NINETY (90) DAYS. YES X NO ----------- ----------
FORM 10-Q INDEX PAGE PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS OF THE COMPANY AS OF JUNE 1 30, 1998 AND DECEMBER 31, 1997 CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE PERIODS FROM JANUARY 1 THROUGH JUNE 30, 1998 AND 2 1997 CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE PERIODS FROM APRIL 1 THROUGH JUNE 30, 1998 AND 1997 3 CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY FOR THE PERIODS FROM JANUARY 1 THROUGH JUNE 30, 1998 AND 4 1997 NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS 5 TO 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 TO 26 PART II: OTHER INFORMATION 27 TO 28
THE MACERICH COMPANY (THE COMPANY) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ <S> <C> <C> ASSETS: Property, net $1,522,107 $1,407,179 Cash and cash equivalents 96,366 25,154 Tenant receivables, net, including accrued overage rents of $1,983 in 1998 and $4,330 in 1997 23,967 23,696 Due from affiliates -- 3,105 Deferred charges and other assets, net 35,039 37,899 Investment in joint ventures and the Management Companies 279,903 7,969 ---------- ------------ Total assets $1,957,382 $1,505,002 ---------- ------------ ---------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY: Mortgage notes payable: Related parties $ 134,968 $ 135,313 Others 799,423 771,246 ---------- ------------ Total 934,391 906,559 Bank notes payable 93,000 55,000 Convertible debentures 161,400 161,400 Accounts payable 2,215 5,185 Accrued interest expense 5,156 4,878 Accrued real estate taxes and ground rent expense 6,657 7,272 Due to affiliates 1,329 15,109 Deferred acquisition liability 5,000 5,000 Preferred stock dividend payable 2,057 -- Other accrued liabilities 28,238 27,841 ---------- ------------ Total liabilities 1,239,443 1,188,244 ---------- ------------ Minority interest in Operating Partnership 161,680 100,463 ---------- ------------ Commitments and contingencies (Note 10) Stockholders' equity: Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,100 and 0 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 100,000 -- Series B cumulative convertible redeemable preferred stock, $.01 par value, 5,487,471 and 0 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 150,000 -- Common stock, $.01 par value, 100,000,000 shares authorized, 32,461,300 and 26,004,800 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 325 260 Additional paid in capital 311,140 219,121 Accumulated earnings -- -- Unamortized restricted stock (5,206) (3,086) ---------- ------------ Total stockholders' equity 556,259 216,295 ---------- ------------ Total liabilities and stockholders' equity $1,957,382 $1,505,002 ---------- ------------ ---------- ------------ </TABLE> The accompanying notes are an integral part of these financial statements. - 1 -
THE MACERICH COMPANY (THE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> JANUARY 1 to JUNE 30, -------------------------- 1998 1997 ----------- ----------- <S> <C> <C> REVENUES: Minimum rents $79,629 $65,554 Percentage rents 4,250 4,157 Tenant recoveries 36,822 30,913 Other 1,881 2,029 ----------- ----------- Total Revenues 122,582 102,653 ----------- ----------- OPERATING COSTS: Shopping center expenses 38,001 31,934 General and administrative expense 2,177 1,189 Interest expense: Related parties 5,083 5,110 Others 36,129 26,053 Depreciation and amortization 23,607 19,681 ----------- ----------- Total Expenses 104,997 83,967 ----------- ----------- Equity in income of unconsolidated joint ventures and the management companies 5,582 1,073 Gain on sale of assets 9 -- ----------- ----------- Income before extraordinary item and minority interest 23,176 19,759 Less extraordinary loss on early extinguishment of debt 90 512 Less minority interest in net income of the Operating Partnership 6,190 6,323 ----------- ----------- Net income 16,896 12,924 Less preferred dividends 2,706 -- ----------- ----------- Net income -- available to common stockholders $14,190 $12,924 ----------- ----------- ----------- ----------- Earnings per common share -- basic: Income before extraordinary item $0.49 $0.52 Extraordinary item 0.00 (0.02) ----------- ----------- Net income -- available to common stockholders $0.49 $0.50 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding -- basic 28,975,000 25,921,000 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding -- basic, assuming full conversion of operating units outstanding 41,063,000 38,008,000 ----------- ----------- ----------- ----------- Earnings per common share -- diluted: Income before extraordinary item $0.49 $0.51 Extraordinary item 0.00 (0.01) ----------- ----------- Net income -- available to common stockholders $0.49 $0.50 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding -- diluted for EPS 41,682,000 38,429,000 ----------- ----------- ----------- ----------- </TABLE> The accompanying notes are an integral part of these financial statements. - 2 -
THE MACERICH COMPANY (THE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, --------------------------- 1998 1997 ------------ ------------ <S> <C> <C> REVENUES: Minimum rents $ 40,213 $ 33,500 Percentage rents 1,080 1,950 Tenant recoveries 19,181 15,995 Other 933 905 ------------ ------------ Total Revenues 61,407 52,350 ------------ ------------ OPERATING COSTS: Shopping center expenses 19,279 16,173 General and administrative expense 1,153 440 Interest expense: Related parties 2,556 2,620 Others 18,080 13,777 Depreciation and amortization 11,894 10,207 ------------ ------------ Total Expenses 52,962 43,217 ------------ ------------ Equity in income of unconsolidated joint ventures and the management companies 4,152 706 Gain on sale of assets 9 -- ------------ ------------ Income before extraordinary item and minority interest 12,606 9,839 Less extraordinary loss on early extinguishment of debt -- 512 Less minority interest in net income of the Operating Partnership 3,182 3,155 ------------ ------------ Net income 9,424 6,172 Less preferred dividends 2,057 -- ------------ ------------ Net income -- available to common stockholders $ 7,367 $ 6,172 ------------ ------------ ------------ ------------ Earnings per common share -- basic: Income before extraordinary item $0.24 $0.26 Extraordinary item 0.00 (0.02) ------------ ------------ Net income -- available to common stockholders $0.24 $0.24 ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding -- basic 30,765,000 25,953,000 ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding -- basic, assuming full conversion of operating units outstanding 42,853,000 38,059,000 ------------ ------------ ------------ ------------ Earnings per common share -- diluted: Income before extraordinary item $0.24 $0.25 Extraordinary item 0.00 (0.01) ------------ ------------ Net income -- available to common stockholders $0.24 $0.24 ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding -- diluted for EPS 43,425,000 38,480,000 ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these financial statements. - 3 -
THE MACERICH COMPANY (THE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> JANUARY 1 TO JUNE 30, ------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net income -- available to common stockholders $ 14,190 $ 12,924 Preferred dividends 2,706 -- ---------- ---------- Net income 16,896 12,924 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt 90 512 Gain on sale of assets (9) -- Depreciation and amortization 23,607 19,681 Amortization of net discount (premium) on trust deed note payable (34) 17 Minority interest in the net income of the Operating Partnership 6,190 6,323 Changes in assets and liabilities: Tenant receivables, net (271) 5,281 Other assets 5,611 231 Accounts payable and accrued expenses (3,307) (5,765) Preferred stock dividend payable 2,057 -- Other liabilities 397 (1,326) ---------- ---------- Total adjustments 34,331 24,954 ---------- ---------- Net cash provided by operating activities 51,227 37,878 ---------- ---------- Cash flows from investing activities: Acquisitions of property and improvements (88,840) (55,458) Renovations and expansions of centers (14,103) (5,366) Additions to tenant improvements (1,947) (1,467) Deferred charges (6,359) (7,338) Equity in income of unconsolidated joint ventures and the management companies (5,582) (1,073) Distributions from joint ventures 2,586 2,156 Contributions to joint ventures (268,938) -- Loan repayments to affiliates, net (10,675) (696) ---------- ---------- Net cash used in investing activities (393,858) (69,242) ---------- ---------- Cash flows from financing activities: Proceeds from mortgages and notes payable 249,000 206,000 Payments on mortgages and notes payable (213,251) (149,607) Net proceeds from equity offerings 417,022 -- Dividends and distributions to partners (36,222) (32,289) Dividends to preferred shareholders (2,706) -- ---------- ---------- Net cash provided by financing activities 413,843 24,104 ---------- ---------- Net increase (decrease) in cash 71,212 (7,260) Cash and cash equivalents, beginning of period 25,154 15,643 ---------- ---------- Cash and cash equivalents, end of period $ 96,366 $ 8,383 ---------- ---------- ---------- ---------- Supplemental cash flow information: Cash payment for interest, net of amounts capitalized $ 40,969 $ 31,077 ---------- ---------- ---------- ---------- Non cash transactions: Acquisition of property by assumption of debt $ 30,116 $ 46,202 ---------- ---------- ---------- ---------- </TABLE> The accompanying notes are an integral part of these financial statements. - 4 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION: The accompanying consolidated financial statements of The Macerich Company have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and have not been audited by independent public accountants. The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results for interim periods are not necessarily indicative of the results to be expected for a full year. The accompanying consolidated balance sheet as of December 31, 1997 has been derived from the audited financial statements, but does not include all disclosure required by GAAP. Certain reclassifications have been made in the 1997 financial statements to conform to the 1998 financial statement presentation. In March, 1998, the FASB, through its Emerging Issues Task Force ("EITF"), concluded based on EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", that all internal costs to source, analyze and close acquisitions should be expensed as incurred. The Company has historically capitalized these costs, in accordance with GAAP. The Company has adopted the FASB's interpretation effective March 19, 1998, and expects the impact to be an approximate $0.06 per share reduction of net income per share in 1998. In May, 1998, the FASB, through the EITF, modified the timing on recognition of revenue for percentage rent received from tenants in EITF 98-9, "Accounting for Contingent Rent in Interim Financial Periods". The Company applied this accounting change as of April 1, 1998. Although the Company believes this accounting change will have no material impact on the annual percentage rent recognized, the accounting change had the effect of deferring $1,792 of percentage rent that would have been recognized for the three months ended June 30, 1998 using the previous GAAP accounting method for percentage rent recognition. As a result of this accounting change, the Company expects a portion of percentage rent that previously would be recognized in the second and third quarters to be recognized in the fourth quarter. EARNINGS PER SHARE ("EPS") The computation of basic earnings per share is based on net income and the weighted average number of common shares outstanding for the three and six months ending June 30, 1998 and 1997. The diluted earnings per share give effect to the outstanding restricted stock and common stock options calculated using the treasury stock method. The convertible debentures and convertible preferred stock would be anti-dilutive to the calculation of diluted EPS and therefore are not included. The OP units not held by the Company have been included in the diluted EPS calculation since they are convertible on a one-for-one basis. The following table reconciles the basic and diluted earnings per share calculations: - 5 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 1998 1997 ----------------------------------- --------------------------------- NET NET PER INCOME SHARES PER SHARE INCOME SHARES SHARE ------- ------ --------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Net income $9,424 $6,172 Less: Preferred stock dividends 2,057 -- ------- ------ Basic EPS: Net income -- available to common stockholders 7,367 30,765 $0.24 6,172 25,953 $0.24 Diluted EPS: Effect of dilutive securities: Conversion of OP units 3,182 12,088 3,155 12,107 Employee stock options and restricted stock -- 572 41 421 Convertible preferred stock n/a -- antidilutive for EPS -- -- -- Convertible debentures n/a -- antidilutive n/a -- antidilutive ------- ------ --------- ------- ------- ------ Net income -- available to common stockholders $10,549 43,425 $0.24 $9,368 38,481 $0.24 ------- ------ --------- ------- ------- ------ ------- ------ --------- ------- ------- ------ </TABLE> <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 1998 1997 ----------------------------------- --------------------------------- NET NET PER INCOME SHARES PER SHARE INCOME SHARES SHARE ------- ------ --------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Net income $16,896 $12,924 Less: Preferred stock dividends 2,706 -- ------- ------- Basic EPS: Net income -- available to common stockholders 14,190 28,975 $0.49 12,924 25,921 $0.50 Diluted EPS: Effect of dilutive securities: Conversion of OP units 6,190 12,088 6,323 12,087 Employee stock options and restricted stock 177 619 82 421 Convertible preferred stock n/a -- antidilutive for EPS -- -- -- Convertible debentures n/a -- antidilutive n/a -- antidilutive ------- ------ --------- ------- ------- ------ Net income -- available to common stockholders $20,557 41,682 $0.49 $19,329 38,429 $0.50 ------- ------ --------- ------- ------- ------ ------- ------ --------- ------- ------- ------ </TABLE> - 6 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 2. ORGANIZATION: The Macerich Company (the "Company") was incorporated under the General Corporation Law of Maryland on September 9, 1993 and commenced operations effective with the completion of its initial public offering ("IPO") on March 16, 1994. The Company was formed to continue the business of the Macerich Group, which since 1972 has focused on the acquisition, ownership, redevelopment, management and leasing of regional shopping centers located throughout the United States. In 1994, the Company became the sole general partner of The Macerich Partnership L.P., (the "Operating Partnership"). The Operating Partnership owns or has an ownership interest in forty-one regional shopping centers and five community shopping centers, including a portfolio of twelve regional malls that was acquired on February 27, 1998. Collectively these properties and interests are referred to as the "Centers". The Company conducts all of its operations through the Operating Partnership and other wholly owned subsidiaries, and the Company's three Management Companies, Macerich Property Management Company, Macerich Management Company, and Macerich Manhattan Management Company, collectively referred to as "the Management Companies". The Company is a real estate investment trust under the Internal Revenue Code of 1986, as amended and owned approximately 77% of The Operating Partnership as of June 30, 1998. The limited partnership interest not owned by the Company is reflected in these financial statements as Minority Interest. 3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND THE MANAGEMENT COMPANIES: The following are the Company's investments in various real estate joint ventures which own retail shopping centers. The Operating Partnership's interest in each joint venture as of June 30, 1998 is as follows: <TABLE> <CAPTION> THE OPERATING PARTNERSHIP'S JOINT VENTURE OWNERSHIP % ------------- --------------------------- <S> <C> Macerich Northwestern Associates 50% Panorama City Associates 50% SDG Macerich Properties, L.P. 50% Village at Corte Madera 40% West Acres Development 19% Manhattan Village, LLC 10% </TABLE> The Operating Partnership also owns the non-voting preferred stock of the Macerich Management Company and Macerich Property Management Company and is entitled to receive 95% of the distributable cash flow of these two entities. Macerich Manhattan Management Company is a 100% subsidiary of Macerich Management Company. The Company accounts for the Management Companies and joint ventures using the equity method of accounting. - 7 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND THE MANAGEMENT COMPANIES -- CONTINUED: On February 27, 1998, the Company, through a 50/50 joint venture, SDG Macerich Properties, L.P., acquired a portfolio of twelve regional malls. The total purchase price was $974,500 including the assumption of $485,000 in debt. The Company funded its 50% of the remaining purchase price by issuing 3,627,131 shares of Series A convertible preferred stock for gross proceeds totaling $100,000 in a private placement. The Company also issued 2,879,134 shares of common stock ($79,600 of total proceeds) under the Company's shelf registration statement. The balance of the purchase price was funded from the Company's line of credit. Each of the joint venture partners have assumed leasing and management responsibilities for six of the regional malls. On June 16, 1998, 40% of the Village at Corte Madera's partnership interest was acquired by the Company. On July 24, 1998, the remaining 60% of the partnership interests were acquired. The total purchase price was approximately $120,000 which included the assumption of $40,000 of debt. For periods after July 24, 1998, this investment will be accounted for as a consolidated subsidiary. The results of these joint ventures are included for the period subsequent to their respective dates of acquisition. In December 1997, North Valley Plaza, which was 50% owned by the Company, was sold. Combined and condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures, and the Management Companies, followed by information regarding the Operating Partnership's beneficial interest in the combined operations. Beneficial interest is calculated based on the Operating Partnership's ownership interests in the joint ventures and the Management Companies. COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ <S> <C> <C> Assets: Properties, net $1,195,318 $153,856 Other assets 34,141 10,013 ---------- ------------ Total assets $1,229,459 $163,869 ---------- ------------ ---------- ------------ Liabilities and partners' capital: Mortgage notes payable $604,498 $84,342 Other liabilities 40,428 6,563 The Company's capital 279,903 7,969 Outside partners' capital 304,630 64,995 ---------- ------------ Total liabilities and partners' capital $1,229,459 $163,869 ---------- ------------ ---------- ------------ </TABLE> - 8 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN UNSOLICITED JOINT VENTURES AND MANAGEMENT COMPANIES -- CONTINUED COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues $31,810 $ 9,411 $ 1,795 $43,016 ------- ------- ------- ------- Expenses: Shopping center expenses 11,706 3,142 -- 14,848 Interest 7,576 1,597 (112) 9,061 Management company expense -- -- 2,446 2,446 Depreciation and amortization 5,109 1,009 164 6,282 ------- ------- ------- ------- Total operating expenses 24,391 5,748 2,498 32,637 ------- ------- ------- ------- Gain on sale or write-down of assets -- 127 191 318 ------- ------ ------- ------- Net income (loss) $ 7,419 $ 3,790 $ (512) $10,697 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1997 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues -- $ 6,781 $ 1,021 $ 7,802 ------- ------- ------- ------- Expenses: Shopping center expenses -- 2,449 -- 2,449 Interest -- 1,600 (27) 1,573 Management company expense -- -- 882 882 Depreciation and amortization -- 1,029 96 1,125 ------- ------- ------- ------- Total operating expenses -- 5,078 951 6,029 ------- ------- ------- ------- Gain on sale or write-down of assets -- 340 -- 340 ------- ------- ------- ------- Net income -- $ 2,043 $ 70 $ 2,113 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> - 9 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN UNSOLICITED JOINT VENTURES AND MANAGEMENT COMPANIES -- CONTINUED: COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues $41,753 $18,905 $ 3,118 $ 63,776 ------- ------- ------- -------- Expenses: Shopping center expenses 14,563 6,426 -- 20,989 Interest 10,323 3,163 (191) 13,295 Management company expense -- -- 4,114 4,114 Depreciation and amortization 6,866 2,057 312 9,235 ------- ------- ------- -------- Total operating expenses 31,752 11,646 4,235 47,633 ------- ------- ------- -------- Gain (loss) on sale or write-down of assets -- 126 (197) (71) ------- ------- ------- -------- Net income (loss) $10,001 $ 7,385 $(1,314) $16,072 ------- ------- ------- -------- ------- ------- ------- -------- </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues -- $13,822 $1,848 $15,670 ------- ------- ------- -------- Expenses: Shopping center expenses -- 5,053 -- 5,053 Interest -- 3,182 (47) 3,135 Management company expense -- -- 1,904 1,904 Depreciation and amortization -- 2,065 180 2,245 ------- ------- ------- -------- Total operating expenses -- 10,300 2,037 12,337 ------- ------- ------- -------- Gain on sale or write-down of assets -- 347 -- 347 ------- ------- ------- -------- Net income (loss) -- $ 3,869 $ (189) $ 3,680 ------- ------- ------- -------- ------- ------- ------- -------- </TABLE> 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 related parties of $43,500 at June 30, 1998 and December 31, 1997. Interest expense incurred on these borrowings amounted to $749 and $750 for the three months ended June 30, 1998 and 1997, respectively, and $1,483 and $1,483 for the six months ended June 30, 1998 and 1997, respectively. - 10 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN UNSOLICITED JOINT VENTURES AND MANAGEMENT COMPANIES -- CONTINUED: PRO RATA SHARE OF COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND MANAGEMENT COMPANIES The following tables set forth the Operating Partnership's beneficial interest in the joint ventures: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues $15,904 $ 2,752 $ 1,705 $ 20,361 ------- ------- ------- -------- Expenses: Shopping center expenses 5,853 959 -- 6,812 Interest 3,788 535 (103) 4,220 Management company expense -- -- 2,325 2,325 Depreciation and amortization 2,555 347 155 3,057 ------- ------- ------- -------- Total operating expenses 12,196 1,841 2,377 16,414 ------- ------- ------- -------- Gain on sale or write-down of assets -- 24 181 205 ------- ------- ------- -------- Net income (loss) $ 3,708 $ 935 $ (491) $ 4,152 ------- ------- ------- -------- ------- ------- ------- -------- </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1997 ------------------------------------------------------------------------------ SDG OTHER MACERICH JOINT MGMT PROPERTIES, L.P. VENTURES COMPANIES TOTAL --------------- ---------- ---------- --------- <S> <C> <C> <C> <C> Revenues -- $ 2,506 $ 972 $ 3,478 ------- ------- ------- -------- Expenses: Shopping center expenses -- 926 -- 926 Interest -- 537 (25) 512 Management company expense -- -- 838 838 Depreciation and amortization -- 469 91 560 ------- ------- ------- -------- Total operating expenses -- 1,932 904 2,836 ------- ------- ------- -------- Gain (loss) on sale or write-down of assets -- 67 (3) 64 ------- ------- ------- -------- Net income -- $ 641 $ 65 $ 706 ------- ------- ------- -------- ------- ------- ------- -------- </TABLE> - 11 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND THE MANAGEMENT COMPANIES -- CONTINUED: PRO RATA SHARE OF COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 ----------------------------------------------------------- SDG MACERICH OTHER MGMT PROPERTIES, L.P. JOINT VENTURES COMPANIES TOTAL ----------------- --------------- --------- -------- <S> <C> <C> <C> <C> Revenues $20,876 $5,544 $2,962 $29,382 ----------------- --------------- --------- -------- Expenses: Shopping center expenses 7,281 1,977 -- 9,258 Interest 5,162 1,060 (181) 6,041 Management company expense -- -- 3,910 3,910 Depreciation and amortization 3,433 699 295 4,427 ----------------- --------------- --------- -------- Total operating expenses 15,876 3,736 4,024 23,636 ----------------- --------------- --------- -------- Gain (loss) on sale or write-down of assets -- 24 (188) (164) ----------------- --------------- --------- -------- Net income (loss) $5,000 $1,832 ($1,250) $ 5,582 ----------------- --------------- --------- -------- ----------------- --------------- --------- -------- </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 ----------------------------------------------------------- SDG MACERICH OTHER MGMT PROPERTIES, L.P. JOINT VENTURES COMPANIES TOTAL ----------------- --------------- --------- -------- <S> <C> <C> <C> <C> Revenues -- $5,130 $1,756 $6,886 ----------------- --------------- --------- -------- Expenses: Shopping center expenses -- 1,937 -- 1,937 Interest -- 1,064 (44) 1,020 Management company expense -- -- 1,809 1,809 Depreciation and amortization -- 941 172 1,113 ----------------- --------------- --------- -------- Total operating expenses -- 3,942 1,937 5,879 ----------------- --------------- --------- -------- Gain on sale or write-down of assets -- 66 -- 66 ----------------- --------------- --------- -------- Net income (loss) -- $1,254 ($181) $1,073 ----------------- --------------- --------- -------- ----------------- --------------- --------- -------- </TABLE> - 12 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 4. PROPERTY: Property is comprised of the following at: <TABLE> <CAPTION> 1998 1997 ----------- ------------ <S> <C> <C> Land $ 336,152 $ 313,050 Building Improvements 1,330,120 1,235,459 Tenant Improvements 40,786 38,097 Equipment & Furnishings 8,072 7,576 Construction in Progress 27,306 13,247 ----------- ------------ 1,742,436 1,607,429 Less, accumulated depreciation (220,329) (200,250) ----------- ------------ $1,522,107 $1,407,179 ----------- ------------ ----------- ------------ </TABLE> 5. DEFERRED CHARGES AND OTHER ASSETS: Deferred charges and other assets, including deferred leasing and financing costs are: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 --------- ------------ <S> <C> <C> Leasing $ 28,770 $ 28,101 Financing 17,136 14,396 --------- ------------ 45,906 42,497 Less, accumulated amortization (18,787) (18,127) --------- ------------ 27,119 24,370 Other assets 7,920 13,529 --------- ------------ $ 35,039 $ 37,899 --------- ------------ --------- ------------ </TABLE> - 13 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 6. MORTGAGE NOTES PAYABLE: Mortgage notes payable at June 30, 1998 and December 31, 1997 consist of the following: <TABLE> <CAPTION> CARRYING AMOUNT OF NOTES ------------------------------------- 1998 1997 ----------------- ----------------- PROPERTY PLEDGED RELATED RELATED INTEREST PAYMENT MATURITY AS COLLATERAL OTHER PARTY OTHER PARTY RATE TERMS DATE - ---------------- -------- -------- -------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Capitola Mall -- $ 37,509 -- $ 37,675 9.25% 316(d) 2001 Chesterfield Towne Center $ 65,393 -- $ 65,708 -- 9.10% 548(e) 2024 Chesterfield Towne Center 3,314 -- 3,359 -- 8.54% 28(d) 1999 Citadel 75,142 -- 75,600 -- 7.20% 544(d) 2008 Crossroads Mall(a) -- 35,459 -- 35,638 7.08% 244(d) 2010 Fresno Fashion Fair(j) 38,000 -- 38,000 -- 8.40% interest only 2001 Greeley Mall 17,443 -- 17,815 -- 8.50% 187(d) 2003 Green Tree Mall/Crossroads -- OK Centre at Salisbury(b) 117,714 -- 117,714 -- 7.23% interest only 2004 Holiday Village Mall -- 17,000 -- 17,000 6.75% interest only 2001 Lakewood Mall(c) 127,000 -- 127,000 -- 7.20% interest only 2005 Northgate Mall -- 25,000 -- 25,000 6.75% interest only 2001 Parklane Mall -- 20,000 -- 20,000 6.75% interest only 2001 Queens Center 65,100 -- 65,100 -- (f) interest only 1999 Rimrock Mall 31,264 -- 31,517 -- 7.70% 244(d) 2003 South Plains Mall 30,066 -- -- -- 6.3% (i) 348(d) 2008 South Towne Center 65,000 -- 65,000 -- 6.62% (g) interest only 2008 Valley View Center 51,000 -- 51,000 -- 7.89% interest only 2006 Villa Marina Marketplace 58,000 -- 58,000 -- 7.23% interest only 2006 Vintage Faire Mall(h) 54,987 -- 55,433 -- 7.65% 427(d) 2003 -------- -------- -------- -------- Total $799,423 $134,968 $771,246 $135,313 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average interest rate at June 30, 1998 7.19% ----- ----- Weighted average interest rate at December 31, 1997 7.42% ----- ----- </TABLE> Notes: (a) This note was issued at a discount. The discount is being amortized over the life of the loan using the effective interest method. At June 30, 1998 and December 31, 1997, the unamortized discount was $413 and $430, respectively. (b) This loan is cross collateralized by Green Tree Mall, Crossroads Mall, Oklahoma and The Centre at Salisbury. (c) On August 15, 1995, the Company issued $127,000 of collateralized floating rate notes (the "Notes"). The Notes bear interest at an average fixed rate of 7.20% and mature in July 2005. - 14 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 6. MORTGAGE NOTES PAYABLE, CONTINUED: The Notes require the Company to deposit all cash flow from the property operations with a trustee to meet its obligations under the Notes. Cash in excess of the required amount, as defined, is released. Included in cash and cash equivalents is $750 of restricted cash deposited with the trustee at June 30, 1998 and at December 31, 1997. (d) This represents the monthly payment of principal and interest. (e) This amount represents the monthly payment of principal and interest. In addition, contingent interest, as defined in the loan agreement, may be due to the extent of 35% of the amount by which the property's gross receipts (as defined in the loan agreement) exceed a base amount specified therein. Contingent interest expense recognized by the Company was $0 for the six months ended June 30, 1998 and 1997, respectively. (f) This loan bears interest at LIBOR plus 0.45%. There is an interest rate protection agreement in place on the first $10,200 of this debt with a LIBOR ceiling of 5.88% through maturity with the remaining principal having an interest rate cap with a LIBOR ceiling at 7.7%. (g) At June 30, 1998, this loan had an interest rate of LIBOR plus 1.25% which totaled 6.906%. In July 1998, this loan was reduced by $1,000 and converted into a fixed rate loan bearing interest at 6.61% maturing in 2008. (h) Included in cash and cash equivalents is $3,031 and $3,030 at June 30, 1998 and December 31, 1997, respectively, of cash restricted under the terms of this loan agreement. (i) This note was assumed at acquisition. At the time of acquisition in June 1998, this debt was recorded at fair market value and the premium is being amortized over the life of the loan using the effective interest method. The monthly debt service payment is $348 per month and is calculated based on a 12.5% interest rate. At June 30, 1998, the unamortized premium was $6,783. (j) This loan was refinanced with a new loan of $69,000 on August 7, 1998. The Company incurred a loss on early extinguishment of the old debt of $2,300. The new loan is a fixed rate 10 year loan bearing interest at 6.52% and maturing in August, 2008. Certain mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt. Total interest expense capitalized for the three months ending June 30, 1998 and 1997 was $810 and $205, respectively; and $1,471 and $299 for the six months ended June 30, 1998 and 1997, respectively. The market value of notes payable at June 30, 1998 and December 31, 1997 is estimated to be approximately $1,077,300 and $1,013,000, respectively, based on current interest rates for comparable loans. - 15 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 7. BANK NOTES PAYABLE: At December 31, 1997, the Company had $55,000 outstanding under its $60,000 unsecured credit facility, which bore interest at LIBOR plus 1.325%. On February 26, 1998, the Company increased this credit facility to $150,000 with a maturity of February 2000, currently bearing interest at LIBOR plus 1.10%. As of June 30, 1998, $93,000 was outstanding on this line of credit. 8. CONVERTIBLE DEBENTURES: During 1997, the Company issued and sold $161,400 of convertible subordinated debentures (the "Debentures") due 2002. The Debentures, which were sold at par, bear interest at 7.25% annually (payable semi-annually) and are convertible at any time, on or after 60 days, from the date of issue at a conversion price of $31.125 per share. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest. 9. RELATED-PARTY TRANSACTIONS: The Company engaged The Management Companies to manage the operations of its properties and certain unconsolidated joint ventures. For the three months ending June 30, 1998 and 1997, management fees of $622 and $512, respectively; and for the six months ending June 30, 1998 and 1997 of $1,250 and $1,019, respectively, were paid to the Management Companies by the Company. Certain mortgage notes were held by outside partners of the individual Macerich Group partnerships. Interest expense in connection with these notes was $2,348 and $2,503 for the three months ended June 30, 1998 and 1997, respectively; and $4,875 and $4,993 for the six months ended June 30, 1998 and 1997, respectively. Included in accrued interest expense is interest payable to these partners of $492 and $517 at June 30, 1998 and December 31, 1997, respectively. 10. COMMITMENTS AND CONTINGENCIES: Certain partnerships have entered into 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 percent of base rent income, as defined. Ground rent expenses were $427 and $171 for the three months ended June 30, 1998 and 1997, respectively; and $644 and $342 for the six months ended June 30, 1998 and 1997, respectively. There were no contingent rents in either period. - 16 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 10. COMMITMENTS AND CONTINGENCIES, CONTINUED: Perchloroethylene (PCE) has been detected in soil and groundwater in the vicinity of a dry cleaning establishment at North Valley Plaza, which was sold on December 18, 1997. The California Department of Toxic Substance Control (DTSC) advised the Company in 1995 that very low levels of Dichlorethylene (1,2,DCE), a degradation byproduct of PCE, have been detected in a water well located 1/4 mile west from 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 1,2DCE which is permitted in drinking water is 6 parts per billion (ppb). The 1,2DCE which was detected in the water well at 1.2 ppb, is below the MCL. The Company has retained an environmental consultant and has initiated extensive testing of the site. Remediation began in October 1997. The joint venture that owned the property 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 shopping center's former dry cleaner. $65 and $11 has already been incurred by the Company for remediation, and professional and legal fees for the period ending June 30, 1998 and 1997, respectively. An additional $496 and $561 is accrued as a liability by the Company as of June 30, 1998 and December 31, 1997, respectively. The Company has initiated cost recovery actions and intends to continue to look to responsible parties for recovery. Low levels of toluene, a petroleum constituent, was detected in one of three groundwater dewatering system holding tanks at Queens Center. No government agency has requested any action to address this matter. Although the Company believes that no remediation will be required, the Company established a $150 reserve in 1996 to cover professional fees and testing costs, which was reduced by costs incurred of $1 and $5 for the six months ending June 30, 1998 and 1997, respectively. The Company intends to look to the responsible parties and insurers if remediation is required. The Company acquired Fresno Fashion Fair in December 1996. Asbestos has been detected in structural fireproofing throughout much of the Mall. 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 $134 and $12 for the six months ending June 30, 1998 and 1997, respectively. 11. PRO FORMA INFORMATION: On February 27, 1998, the Company, through a 50/50 joint venture, SDG Macerich Properties, L.P., acquired a portfolio of twelve regional malls. Additionally, on June 19, 1998, the Company acquired South Plains Mall in Lubbock, Texas for approximately $115,700. The purchase price consisted of $29,400 of debt, at market value, and $86,300 of cash. On a pro forma basis, reflecting these acquisitions as if they had occurred on January 1, 1998 and 1997, the Company would have reflected net income -- available to common stockholders of $15,960 and $14,553 for the six months ended June 30, 1998 and 1997, respectively. Net income -- available to common shareholders on a basic and diluted per share basis would be $0.49 and $0.50, for the six months ended June 30, 1998 respectively; and $0.56 and $0.46, for the six months ended June 30, 1997, respectively. - 17 -
THE MACERICH COMPANY (THE COMPANY) NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 12. PREFERRED STOCK: In February, 1998, the Company issued 3,627,131 shares of Series A cumulative convertible 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 dividend equal to the greater of $0.46 per share per quarter 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 preferred stock for proceeds totaling $150,000 in a direct private placement. The preferred stock can be converted on a one for one basis into common stock and will pay a dividend equal to the greater of $0.46 per share per quarter or the quarterly dividend then payable on a share of common stock. 13. SUBSEQUENT EVENTS: On August 5, 1998, a dividend\distribution of $0.46 per share was declared for common stockholders and OP unit holders of record on August 14, 1998. In addition, the Company declared a dividend of $0.46 on the Company's Series A cumulative convertible preferred stock and a dividend of $0.071 on the Company's Series B cumulative convertible preferred stock. The Company issued 5,487,470 shares of Series B cumulative convertible preferred stock on June 17, 1998, and the dividend declared represents a dividend for the period from June 17, 1998 through June 30, 1998. All dividends/distributions will be payable on September 4, 1998. On July 1, 1998, the Company acquired the Westside Pavilion in Los Angeles, California for $170,500. The purchase price was funded from the Company's line of credit and a new ten year $100,000 mortgage placed on the property at closing at an effective fixed interest rate of 6.65%. The Company acquired the remaining 60% of the Village at Corte Madera in Corte Madera, California, on July 24, 1998 and also acquired Carmel Plaza in Carmel, California on August 10, 1998. The combined purchase price was $165,500 consisting of the assumption of $40,000 of debt and the issuance of $8,000 of OP units and $117,500 in cash. - 18 -
THE MACERICH COMPANY (THE COMPANY) ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based primarily on the consolidated balance sheet of The Macerich Company (the "Company") as of June 30, 1998, and also compares the activities for the three and six months ended June 30, 1998 to the activities for the three and six months ended June 30, 1997. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect the fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature. This Quarterly Report on Form 10-Q contains or incorporates statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Quarterly Report on Form 10-Q and include statements regarding, among other matters, the Company's growth opportunities, the Company's acquisition strategy, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the Company's financial condition or results of operations. Stockholders are cautioned that any such forward looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from the future results, performance or achievements, expressed or implied in such forward looking statements. The following reflects the Company's acquisitions in 1997 and 1998: <TABLE> <CAPTION> DATE ACQUIRED LOCATION ----------------- --------------------------- <S> <C> <C> "1997 ACQUISITION CENTERS": South Towne Center March 27, 1997 Sandy, Utah Stonewood Mall August 6, 1997 Downey, California Manhattan Village Shopping Center August 19, 1997 Manhattan Beach, California The Citadel December 19, 1997 Colorado Springs, Colorado Great Falls Marketplace December 31, 1997 Great Falls, Montana "1998 ACQUISITION CENTERS": ERE/Yarmouth Portfolio February 27, 1998 Eight States Village at Corte Madera June 16, 1998 Corte Madera, California South Plains Mall June 19, 1998 Lubbock, Texas </TABLE> The financial statements include the results of these centers for periods subsequent to their acquisition. Manhattan Village Shopping Center, the ERE/Yarmouth portfolio and the Village at Corte Madera ("Joint Venture Acquisitions") were acquired by unconsolidated joint ventures of the Company which 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. - 19 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Many of the variations in the results of operations, discussed below, occurred due to the addition of these properties to the portfolio during 1998 and 1997. Many factors, such as the availability and cost of capital, overall debt to market capitalization level, interest rates and availability of potential acquisition targets that meet the Company's criteria, impact the Company's ability to acquire additional properties. Accordingly, management is uncertain as to whether during the balance of 1998, and in future years, there will be similar acquisitions and corresponding increases in revenues, equity in income of unconsolidated joint ventures and the Management Companies, net income and funds from operations that occurred as a result of the addition of the 1998 and 1997 Acquisition Centers. All other centers are referred to herein as the "Same Centers". The bankruptcy and/or closure of retail stores, particularly anchors, may reduce customer traffic and cash flow generated by a center. During 1997, Montgomery Ward filed bankruptcy. The Company has 11 Montgomery Ward stores in its portfolio. Montgomery Ward has not yet disclosed whether they will cease operating any of their stores in the Company's centers. The long-term closure of these or other stores could adversely affect the Company's performance. In addition, the Company's success in the highly competitive real estate shopping center business depends upon many other factors, including general economic conditions, the ability of tenants to make rent payments, increases or decreases in operating expenses, occupancy levels, changes in demographics, competition from other centers and forms of retailing and the ability to renew leases or re-let space upon the expiration or termination of leases. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUES Minimum and percentage rents together increased by $14.2 million to $83.9 million for the six months ended June 30, 1998 compared to $69.7 million in the six months ended June 30, 1997. The 1997 Acquisition Centers contributed $12.7 million of the increase with approximately $1.5 million generated from the Same Centers. The impact of EITF 98-9, "Accounting for Contingent Rents in Interim Financial Periods," which was implemented on April 1, 1998, reduced percentage rents by $1.8 million for the six months ending June 30, 1998. Tenant recoveries for the six months ended June 30, 1998 increased by $5.9 million compared to the same period in 1997. This was primarily due to the addition of the 1997 Acquisition Centers. In addition, Same Centers recoveries increased by $1.1 million due to increased recoverable expenses during the quarter. EXPENSES Shopping center expenses increased by $6.1 million for the six months ended June 30, 1998 compared to the same period in 1997. Approximately $4.8 million of the increase was due to the addition of the 1997 Acquisition Centers. The Same Centers had a net increase of $1.3 million, primarily from an increase in maintenance, repair, security and utility expenses. - 20 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) General and administrative expenses increased to $2.2 million for the six months ended June 30, 1998 compared to $1.2 million in the same period in 1997, primarily due to the accounting change required by EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", which requires the expensing of internal acquisition costs. Previously, in accordance with GAAP, certain internal acquisition costs were capitalized. The increase is also attributable to increased executive and director compensation expense. Interest expense increased to $41.2 million at June 30, 1998 compared to $31.2 million at June 30, 1997. This increase of $10.0 million is partially attributable to the acquisition activity in 1997 and 1998, which was partially funded with secured debt and borrowings under the Company's line of credit. In addition, in June and July of 1997, the Company issued $161.4 million of convertible debentures which resulted in $5.7 million of the variance. Depreciation and amortization increased to $23.6 million at June 30, 1998 compared to $19.7 million at June 30, 1997. This increase of $3.9 million relates primarily to the 1997 Acquisition Centers. INCOME FROM UNCONSOLIDATED JOINT VENTURES AND THE MANAGEMENT COMPANIES The income from unconsolidated joint ventures and the Management Companies increased to $5.6 million compared to $1.1 million for the period ended June 30, 1997. This increase was primarily due to the Joint Venture Acquisitions. NET INCOME Net income for the six months ended June 30, 1998 increased to $14.2 million compared to $12.9 million for the six months ended June 30, 1997. This increase was due to the factors discussed above. CASH FLOWS FROM OPERATING ACTIVITIES As a result of the factors discussed above, cash flow from operations increased to $51.2 million for the six months ended June 30, 1998 from $37.9 million during the same period in 1997. This increase is primarily due to increased net operating income from the 1997 Acquisition Centers. CASH FLOWS FROM INVESTING ACTIVITIES Net cash flow used in investing activities increased to $393.9 million for the six months ended June 30, 1998 from $69.2 million for the same period in 1997. This increase is primarily due to more cash being used for acquisitions in the six months ended June 30, 1998 compared to the same period in 1997. CASH FLOWS FROM FINANCING ACTIVITIES Cash flow from financing activities increased to $413.8 million for the six months ended June 30, 1998 from $24.1 million for the same period in 1997 as a result of net proceeds received from issuing stock and debt in 1998. - 21 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUES Minimum and percentage rents together increased by $5.8 million to $41.3 million for the three months ended June 30, 1998 compared to $35.5 million in the three months ended June 30, 1997. The 1997 Acquisition Centers contributed $5.4 million of the increase with approximately $0.5 million generated from the Same Centers. The impact of EITF 98-9, which was implemented April 1, 1998, reduced percentage rents by $1.8 million for the three months ended June 30, 1998. Tenant recoveries for the second quarter of 1998 increased by $3.2 million compared to the second quarter of 1997. The addition of the 1997 Acquisition Centers represented 2.2 million of this increase with the remaining increase of $1.0 million attributable to the Same Centers. EXPENSES Shopping center expenses increased by $3.1 million for the three months ended June 30, 1998 compared to the same period in 1997. Approximately $2.3 million of the increase was due to the addition of the 1997 Acquisition Centers. The Same Centers had a net increase of $0.8 million, primarily from an increase in maintenance, repair, security and utility expenses. General and administrative expenses increased to $1.1 million for the three months ended June 30, 1998 compared to $0.4 million in the same period in 1997, primarily due to the accounting change required by EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", which requires the expensing of internal acquisition costs that had been previously capitalized. The increase is also attributable to increased executive and director compensation expense. Interest expense increased to $20.6 million for the three months ended June 30, 1998 compared to the $16.4 million for the three months ended June 30, 1997. This increase of $4.2 million is partially attributable to the acquisition activity in 1997 and 1998, which was partially funded with secured debt and borrowings under the Company's line of credit. In addition, in June and July of 1997, the Company issued $161.4 million of convertible debentures which resulted in $2.8 million of the variance. Depreciation and amortization increased to $11.9 million for the three months ended June 30, 1998 compared to $10.2 million for the same period in 1997. This increase of $1.7 million relates primarily to the 1997 Acquisition Centers. INCOME FROM UNCONSOLIDATED JOINT VENTURES AND THE MANAGEMENT COMPANIES The income from unconsolidated joint ventures and the Management Companies increased to $4.2 million for the three months ended June 30, 1998 compared to $0.7 million for the same period in 1997. This increase was primarily due to the Joint Venture Acquisitions. NET INCOME Net income for the three months ended June 30, 1998 increased to $7.4 million compared to $6.2 million for the three months ended June 30, 1997. This increase was due to the factors discussed above. - 22 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company intends to meet its short term liquidity needs through cash generated from operations and working capital reserves. The Company anticipates that revenues will continue to provide necessary funds for its operating expenses and debt service requirements, and to pay dividends to stockholders in accordance with REIT requirements. The Company anticipates that cash generated from operations, together with cash on hand, will be adequate to fund capital expenditures which will not be reimbursed by tenants, other than non-recurring capital expenditures. Capital for major expenditures or redevelopments has been, and is expected to continue to be, obtained from equity or debt financings. 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 to expand its business through a combination of additional equity offerings and debt financings. The Company's total outstanding loan indebtedness at June 30, 1998 was $1,487.2 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 all outstanding OP Units and preferred stock into common stock) rate of 48.6% at June 30, 1998. The Company's debt consists primarily of fixed rate, conventional mortgages payable secured by individual properties. In connection with $65.1 million of the Company's floating rate indebtedness, the Company has entered into interest rate protection agreements that limit the Company's exposure to increases in interest rates. The Company has filed a shelf registration statement, effective December 8, 1997, to sell securities. The shelf registration was for a total of $500 million of common stock, common stock warrants or common stock rights. On February 18, 1998, the Company issued 1,052,650 shares and on February 23, 1998, an additional 1,826,484 shares were issued. On April 24, 1998, the Company issued 808,989 shares and an additional 967,256 and 1,864,802 shares were issued on April 29, 1998 and May 29, 1998, respectively. The total gross proceeds of these transactions were approximately $178.8 million, leaving approximately $321.2 million available under the shelf registration statement. The Company has an unsecured line of credit up to $150 million. There was $55 million outstanding at December 31, 1997 and $93 million outstanding on June 30, 1998. At June 30, 1998 and December 31, 1997, the Company had cash and cash equivalents of $96.4 million and $25.2 million, respectively. - 23 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 COMPLIANCE The Company has been advised by its independent software vendor that it has completed its evaluation, testing and modification of the property management and accounting software used by the Company and the necessary changes have been completed to achieve year 2000 compliance. The Company is conducting its own evaluation and testing regarding this software and does not believe there will be any significant accounting or property management impact as a result of the year 2000. In addition, the Company is in the process of evaluating and/or testing computer and other operational systems located at its properties for any potential year 2000 compliance issues. FUNDS FROM OPERATIONS The Company believes that the most significant measure of its performance is Funds from Operations ("FFO"). FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to be: Net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales or write down of assets, 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 will be calculated on the same basis. FFO does not represent cash flow from operations, as defined by generally accepted accounting principles, and is not necessarily indicative of cash available to fund all cash flow needs. The following reconciles net income - --available to common stockholders to FFO: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, --------------------------------------------------- 1998 1997 --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT ------ --------- ------- --------- (AMOUNTS IN THOUSANDS) <S> <C> <C> <C> <C> Net income -- available to common stockholders $ 14,190 $ 12,924 Adjustments to reconcile net income to FFO: Minority interest 6,190 6,323 Depreciation and amortization on wholly owned properties 23,607 19,681 Pro rata share of unconsolidated entities' depreciation and amortization 4,427 1,113 Gain on sale of assets (9) -- Extraordinary loss on early extinguishment of debt 90 512 Pro rata share of (gain) loss on sale or write-down 164 (66) from unconsolidated entities Amortization of loan costs, including interest rate caps (1,502) (833) Depreciation of personal property (366) (223) --------- --------- FFO -- basic (1) 41,063 46,791 38,008 39,431 To arrive at FFO -- diluted: Impact of convertible preferred stock 2,949 2,706 -- -- Impact of stock options and restricted stock using the treasury method 619 256 421 120 Impact of convertible debentures (n/a anti-dilutive) ------ --------- ------- --------- FFO -- diluted (2) 44,631 $ 49,753 38,429 $ 39,551 ------ --------- ------- --------- ------ --------- ------- --------- </TABLE> - 24 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, --------------------------------------------------- 1998 1997 --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT ------ --------- ------- --------- (AMOUNTS IN THOUSANDS) <S> <C> <C> <C> <C> Net income -- available to common stockholders $ 7,367 $ 6,172 Adjustments to reconcile net income to FFO: Minority interest 3,182 3,155 Depreciation and amortization on wholly owned properties 11,894 10,207 Pro rata share of unconsolidated entities' depreciation and amortization 3,057 560 Gain on sale of assets (9) -- Extraordinary loss on early extinguishment of debt -- 512 Pro rata share of (gain) loss on sale or write-down (205) (64) from unconsolidated entities Amortization of loan costs, including interest rate caps (716) (468) Depreciation of personal property (192) (114) --------- --------- FFO -- basic (1) 42,853 24,378 38,059 19,960 To arrive at FFO -- diluted: Impact of convertible preferred stock 4,471 2,057 -- -- Impact of stock options and restricted stock using the treasury method 572 -- 421 60 Impact of convertible debentures (n/a anti-dilutive) ------ --------- ------- --------- FFO -- diluted (2) 47,896 $ 26,435 38,480 $ 20,020 ------ --------- ------- --------- ------ --------- ------- --------- </TABLE> 1) Calculated based upon basic net income as adjusted to reach basic FFO. Weighted average number of shares includes the weighted average shares of common stock outstanding for 1998 and 1997 assuming the conversion of all outstanding OP units. 2) The computation of FFO -- diluted and diluted average number of shares outstanding includes the effect of outstanding common stock options and restricted stock using the treasury method. Convertible debentures are anti-dilutive and are not included. On February 25, 1998, the Company sold $100 million of cumulative convertible preferred stock. On June 17, 1998, the Company sold an additional $150 million of cumulative convertible preferred stock. The preferred stock can be converted on a 1 for 1 basis for common stock. These preferred shares are not assumed converted for purposes of net income per share as they would be anti-dilutive to that calculation. The preferred shares are assumed converted for purposes of FFO per share as they are dilutive to that calculation. 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 $1.8 million and $1.7 million for the six months ended June 30, 1998 and 1997, respectively; and $.9 million and $1.0 million for the three months ended June 30, 1998 and 1997, respectively. - 25 -
THE MACERICH COMPANY (THE COMPANY) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INFLATION In the last three years, inflation has not had a significant impact on the Company because of a relatively low inflation rate. Most of the leases at the Centers have rent adjustments periodically through the lease term. These rent increases are either in fixed increments or based on increases in the Consumer Price Index. In addition, many of the leases are for terms of less than ten years, which enables the Company to replace existing leases with new leases at higher base rents if the rents of the existing leases are below the then existing market rate. Additionally, most of the leases require the tenants to pay their pro rata share of operating expenses. This reduces the Company's exposure to increases in costs and operating expenses resulting from inflation. NEW ACCOUNTING PRONOUNCEMENTS In March, 1998, the FASB, through its Emerging Issues Task Force ("EITF"), concluded based on EITF 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions," that all internal costs to source, analyze and close acquisitions should be expensed as incurred. The Company has historically capitalized these costs, in accordance with GAAP. The Company has adopted the FASB's interpretation effective March 19, 1998, and expects the impact to be an approximate $.06 per share reduction of net income and FFO -- diluted per share in 1998. In May, 1998, the FASB, through the EITF, modified the timing on recognition of revenue for percentage rent received from tenants in EITF 98-9, "Accounting for Contingent Rents in Interim Financial Periods." The Company applied this accounting change as of April 1, 1998. Although the Company believes this accounting change will have no material impact on the annual percentage rent recognized, the accounting change had the effect of deferring $1.8 million of percentage rent that would have been recognized using the previous GAAP accounting method for percentage rent recognition. As a result of this accounting change, the Company expects a portion of percentage rent that previously would be recognized in the second and third quarters to be recognized in the fourth quarter. - 26 -
THE MACERICH COMPANY (THE COMPANY) PART II OTHER INFORMATION Item 1 Legal Proceedings During the ordinary course of business, the Company, from time to time, is threatened with, or becomes a party to, legal actions and other proceedings. Management is of the opinion that the outcome of currently known actions and proceedings to which it is a party will not, singly or in the aggregate, have a material adverse effect on the Company. Item 2 Changes in Securities and Use of Proceeds On June 17, 1998, the Company sold 5,487,471 shares of its Series B Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), at a price of $27.335 per share, for total gross proceeds of approximately $150 million, in a private placement to The Ontario Teachers' Pension Plan Board ("Ontario Teachers"), an accredited investor, pursuant to Section 4(2) of the Securities Act. In lieu of a placement fee, the total purchase price was reduced by approximately $1.5 million, for net proceeds to the Company of $148.5 million. The Series B Preferred Stock can be converted into shares of Common Stock on a one-for-one basis subject to certain limitations. The proceeds from the sale of the Series B Preferred Stock were used to acquire South Plains Mall and Westside Pavilion and for general corporate purposes. Additional information regarding the Series B Preferred Stock, including the Articles of Amendment and Restatement and Registration Rights Agreement with respect to the Series B Preferred Stock, was filed with the Commission on Form 8-K dated July 14, 1998 (event date June 17, 1998). On July 24, 1998, as partial consideration for the acquisition of the Village at Corte Madera ("Corte Madera"), The Macerich Partnership, L.P. (the "Operating Partnership") issued $8 million of OP Units in a private placement pursuant to Section 4(2) of the Securities Act to Harry S. Newman and LeRoy H. Brettin (the "Investors") as sellers of Corte Madera. The OP Units are redeemable by the Operating Partnership for cash, or at the option of the Company, for Common Stock. The Company and the Operating Partnership entered into a Redemption, Registration Rights and Lock-Up Agreement (the "Registration Rights Agreement") with the Investors with respect to such OP Units and Common Stock. The Registration Rights Agreement, among other things, provides certain piggyback registration rights to the Investors. A copy of the Registration Rights Agreement is attached hereto as Exhibit 4.1. Additional information regarding the purchase of Corte Madera was filed with the Commission on Form 8-K dated August 7, 1998, event date July 24, 1998. Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders The following matters were voted upon at the Annual Meeting of Stockholders held on May 29, 1998: A. The following three persons were elected as Directors of the Company to serve until the annual meeting of stockholders in 2001 and until their respective successors are duly elected and qualified: <TABLE> <CAPTION> Number of Shares ---------------- For Against Authority Withheld --- ------- ------------------ <S> <C> <C> <C> Edward C. Coppola 22,020,047 - 886,209 Fred S. Hubbell 22,019,547 - 886,709 Dr. William P. Sexton 22,019,572 - 886,684 </TABLE> B. The ratification of selection of Coopers & Lybrand LLP as independent public accountants for the fiscal year ended December 31, 1998. Votes For 22,852,444 Against 3,807 Abstain 50,005 Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits Number Description 4.1 Redemption, Registration Rights and Lock-up Agreement dated as of July 24, 1998 among The Macerich Company, The Macerich Partnership, L.P., Harry S. Newman, Jr. and LeRoy H. Brettin. (b) Reports on Form 8-K A report on Form 8-K dated April 6, 1998, event date February 25, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the issuance of 3,627,131 shares of the Company's Series A Cumulative Convertible Redeemable Preferred Stock. A report on Form 8-K/A dated April 22, 1998, event date February 27, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the acquisition of twelve regional malls by SDG Macerich Properties, L.P. from the Equitable Assurance Society of the United States. A report on Form 8-K dated April 23, 1998, event date April 21, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the Underwriting Agreement and certain other documents regarding the sale of 808,989 shares of Common Stock. A report on Form 8-K dated April 28, 1998, event date April 23, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the Underwriting Agreement and certain other documents regarding the sale of 967,255 shares of Common Stock to Merrill Lynch, Pierce, Fenner & Smith, Incorporated. - 27 -
THE MACERICH COMPANY (THE COMPANY) (b) Reports on Form 8-K continued: A report on Form 8-K dated May 29, 1998, event date May 27, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the Underwriting Agreement and certain other documents regarding the sale of 1,864,802 shares of Common Stock. A report on Form 8-K dated July 2, 1998, event date June 19, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the acquisition of South Plains Mall. A report on Form 8-K dated July 10, 1998, event date July 1, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the acquisition of Westside Pavilion. A report on Form 8-K dated July 14, 1998, event date June 17, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the issuance of 5,487,471 shares of the Company's Series B Cumulative Convertible Redeemable Preferred Stock. A report on Form 8-K dated August 7, 1998, event date July 24, 1998, was filed with the Securities and Exchange Commission for the purpose of disclosing the acquisition of the Village at Corte Madera. - 28 -
THE MACERICH COMPANY (THE COMPANY) Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Macerich Company By: /s/ Thomas E. O'Hern -------------------- Thomas E. O'Hern Senior Vice President and Chief Financial Officer Date: August 14, 1998 - 29 -
THE MACERICH COMPANY (THE COMPANY) Exhibit Index Exhibit No. Page (a) Exhibits Number Description 4.1 Redemption, Registration Rights and Lock-up Agreement dated as of July 24, 1998 among The Macerich Company, The Macerich Partnership, L.P., Harry S. Newman, Jr. and LeRoy H. Brettin. - 30 -