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    Securities and Exchange Commission
Washington, D.C. 20549

 

 

FORM 10-K
(Mark one)        

ý

 

Annual Report Pursuant to Section 13 OR 15(D) of the Securities Exchange Act of 1934
    For the fiscal year ended December 31, 2001 or

o

 

Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934 (no fee required)

 

 

For the transition period from                      to                     

 

 

Commission File Number 1-12504

 

 

The Macerich Company

 

 

(Exact name of registrant as specified in its charter)

 

 

Maryland
(State or other jurisdiction of Incorporation or organization)
401 Wilshire Boulevard, # 700
Santa Monica, California 90401
(Address of principal executive offices and zip code)

 

 

95-4448705
(I.R.S. Employer Identification No.)

 

 

Registrant's telephone number, including area code: (310) 394-6000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class
Common Stock, $0.01 Par Value
Preferred Share Purchase Rights

 

Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

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 12 months (or for such shorter periods that the registrant was required to file such report(s)) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/    No / /.

 

 

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. / /

 

 

As of February 28, 2002, the aggregate market value of the 28,934,500 shares of Common Stock held by non-affiliates of the registrant was $791 million based upon the closing price ($27.35) on the New York Stock Exchange composite tape on such date. (For this computation, the registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by executive officers and directors of the registrant and certain other shareholders; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) As of February 28, 2002, there were 36,045,146 shares of Common Stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

Portions of the proxy statement for the annual stockholders meeting to be held in 2002 are incorporated by reference into Part III.


THE MACERICH COMPANY

Annual Report on Form 10-K

For The Year Ended December 31, 2001


TABLE OF CONTENTS


Item No.


 

Page No.



Part I

 

 

1.   Business   1-11

2.   Properties   12-17

3.   Legal Proceedings   17

4.   Submission of Matters to a Vote of Security Holders   17


Part II

 

 

5.   Market for the Registrant's Common Equity and Related Stockholder Matters   18

6.   Selected Financial Data   19-21

7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   22-37

7A.   Quantitative and Qualitative Disclosures About Market Risk   38

8.   Financial Statements and Supplementary Data   39

9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   39


Part III

 

 

10.   Directors and Executive Officers of the Company   39

11.   Executive Compensation   39

12.   Security Ownership of Certain Beneficial Owners and Management   39

13.   Certain Relationships and Related Transactions   39


Part IV

 

 

14.   Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K   40-100


Signatures

 

101-102



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.

MACERICH 2001 Financial Statements    



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


General

There are several types of retail shopping centers, which are differentiated primarily based on size and marketing strategy. Regional shopping centers generally contain in excess of 400,000 square feet of GLA, are typically anchored by two or more department or large retail stores ("Anchors") and are referred to as "Regional Shopping Centers" or "Malls". Regional Shopping Centers also typically contain numerous diversified retail stores ("Mall Stores"), most of which are national or regional retailers typically located along corridors connecting the Anchors. Community Shopping Centers, also referred to as "strip centers,"

2    MACERICH 2001 Financial Statements



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.

MACERICH 2001 Financial Statements    3




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.

4    MACERICH 2001 Financial Statements



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:

 
  For the Years Ended December 31,


 
  1999(2)

  2000

  2001


Minimum rents   7.4%   7.3%   7.7%
Percentage rents   0.5%   0.5%   0.4%
Expense recoveries(1)   2.9%   3.0%   3.1%

Mall tenant occupancy costs   10.8%   10.8%   11.2%

(1)
Represents real estate tax and common area maintenance charges.

(2)
Excludes 1999 Acquisition Centers.


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

MACERICH 2001 Financial Statements    5



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:

Tenant

  Number of Locations
in the Portfolio

  % of Total Minimum Rents
as of December 31, 2001


The Limited, Inc.   153   4.6%
The Gap, Inc.   75   3.5%
AT&T Wireless Services   5   2.9%
Foot Locker, Inc.   107   2.4%
J.C. Penney Company, Inc.   32   1.9%
Luxottica Group, Inc.   84   1.3%
The Musicland Group, Inc.   51   1.1%
Zale Corporation   76   1.2%
Claire Stores, Inc.   93   1.1%
Federated Department Stores   25   1.0%


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.

6    MACERICH 2001 Financial Statements



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:

December 31,

  Average Base
Rent Per
Square Foot(1)

  Average Base
Rent Per Sq. Ft. on
Leases Commencing
During the Year(2)

  Average Base
Rent Per Sq. Ft. on
Leases Expiring
During the Year(3)


1999   $25.60   $29.76   $27.29
2000   $27.09   $32.95   $28.56
2001   $28.13   $33.33   $27.12

(1)
Average base rent per square foot is based on Mall and Freestanding Store GLA for spaces 10,000 square feet and under occupied as of December 31 for each of the Centers owned by the Company in 1999, 2000 and 2001.

(2)
The base rent on lease signings during the year represents the actual rent to be paid on a per square foot basis during the first twelve months. New Centers are excluded in the year of acquisition. Additionally, lease signings for the expansion area of Queens Center are excluded.

(3)
The average base rent on leases expiring during the year represents the final year minimum rent, on a cash basis, for all tenant leases 10,000 square feet and under expiring during the year. On a comparable space basis, average initial rents, excluding the impact of straight lining of rent, on leases 10,000 square feet and under commencing in 2001 was $34.20 compared to expiring rents of $27.12. The average base rent on leases expiring in 1999 excludes the 1999 Acquisition Centers.


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.

MACERICH 2001 Financial Statements    7




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:

Year Ending
December 31,

  Number of
Leases
Expiring

  Approximate
GLA of
Expiring
Leases(1)

  % of Total
Leased GLA
Represented by
Expiring Leases(2)

  Ending
Base Rent per
Square Foot of
Expiring Leases(1)


2002   534   828,426   11.28%   $27.23
2003   487   759,621   10.34%   $26.27
2004   468   695,515   9.47%   $28.46
2005   469   812,547   11.06%   $28.84
2006   441   759,779   10.34%   $30.69
2007   391   733,269   9.98%   $29.45
2008   379   690,906   9.41%   $31.20
2009   278   531,647   7.24%   $31.60
2010   334   588,753   8.01%   $32.65
2011   307   599,615   8.16%   $32.16

(1)
Includes joint ventures at pro rata share. Currently 29% of leases have provisions for future consumer price index increases which are not reflected in ending lease rent.

(2)
For leases 10,000 square feet and under


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.

8    MACERICH 2001 Financial Statements


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:

Name

  Number of
Anchor Stores

  GLA
Owned
By Anchor

  GLA
Leased
By Anchor

  Total GLA
Occupied
By Anchor


J.C. Penney   32   1,167,084   3,197,245   4,364,329
Sears   30   2,197,192   1,631,297   3,828,489
Target Corp.                
  Marshall Field's   2   115,193   100,790   215,983
  Mervyn's   12   571,016   413,337   984,353
  Target(1)   10   581,260   585,266   1,166,526

    Total   24   1,267,469   1,099,393   2,366,862
Federated Department Stores                
  Macy's(2)   14   1,558,964   666,741   2,225,705
  Lazarus   1   159,068     159,068
  The Bon Marche(3)   2     181,000   181,000

    Total   17   1,718,032   847,741   2,565,773
May Department Stores Co.                
  Robinsons-May   6   530,678   640,352   1,171,030
  Foley's   4   725,316     725,316
  Hechts   2   140,000   143,426   283,426
  Famous Barr   1   180,000     180,000
  Meier & Frank   2   242,505   200,000   442,505

    Total   15   1,818,499   983,778   2,802,277
Dillard's(1)   17   1,434,280   818,202   2,252,482
Saks, Inc.                
  Younker's   6     609,177   609,177
  Herberger's   5   269,969   202,778   472,747

    Total   11   269,969   811,955   1,081,924
Gottschalks   6   332,638   333,772   666,410
Nordstrom   5   226,853   503,369   730,222
Von Maur   3   186,686   59,563   246,249
Belk   2     156,750   156,750
Boscov's   2     314,717   314,717
Wal-Mart   2   281,455     281,455
Beall's   1     40,000   40,000
DeJong   1     43,811   43,811
Emporium   1     50,625   50,625
Gordman's   1     60,000   60,000
Home Depot   1     133,029   133,029
Kohl's   1     92,466   92,466
Peebles   1     42,090   42,090
Service Merchandise(4)   1     60,000   60,000
Vacant(1)   8   289,485   659,875   949,360

    182   11,189,642   11,939,678   23,129,320

(1)
Montgomery Ward filed for bankruptcy on December 28, 2000 and announced the closing of all its stores including the seven located at the Centers. Montgomery Ward assigned two of these leases to Dillard's (at Northpark Mall and Southpark Mall) and one to Target (at Lakewood Mall). The Target store is scheduled to open in late 2003.

(2)
Macy's will open at Capitola Mall in May 2002.

(3)
Federated Department Stores will open a new 110,000 square foot Bon Marche store at Redmond Town Center in the Fall of 2003.

(4)
Service Merchandise closed this store in February 2002. They filed for bankruptcy in March 1999 and recently announced plans to close all their stores in 2002.

MACERICH 2001 Financial Statements    9



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

10    MACERICH 2001 Financial Statements



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.

MACERICH 2001 Financial Statements    11



Item 2. Properties

The following table sets forth certain information about each of the Centers as of December 31, 2001:

Company's
Ownership
%

  Name of Center/ Location(1)

  Year of
Original
Construction/ Acquisition

  Year of
Most Recent
Expansion/ Renovation

  Total
GLA(2)

  Mall and
Free-standing
GLA

  Percentage
of Mall and
Free-standing
GLA Leased

  Anchors

  Sales Per
Square
Foot(3)


100%   Boulder Plaza
Boulder, Colorado
  1969/1989   1991   159,238   159,238   99.1%     $226
100%   Bristol Shopping Center(4)
Santa Ana, California
  1966/1986   1992   163,637   163,637   95.1%     264
50%   Broadway Plaza(4)
Walnut Creek, California
  1951/1985   1994   698,815   253,318   96.4%   Macy's (two), Nordstrom   624
100%   Capitola Mall(4)
Capitola, California
  1977/1995   1988   586,735   197,018   99.0%   Gottschalks, Macy's(11), Mervyn's, Sears   334
100%   Carmel Plaza
Carmel, California
  1974/1998   1993   115,215   115,215   86.3%     379
100%   Chesterfield Towne Center
Richmond, Virginia
  1975/1994   1997   1,037,358   425,192   94.2%   Dillard's (two), Hechts, Sears, J.C. Penney   338
100%   Citadel, The
Colorado Springs, Colorado
  1972/1997   1995   1,040,917   445,577   86.9%   Dillard's, Foley's, J.C. Penney, Mervyn's   310
100%   Corte Madera, Village at Corte Madera, California   1985/1998   1994   429,839   211,839   91.9%   Macy's, Nordstrom   538
100%   County East Mall
Antioch, California
  1966/1986   1989   493,895   175,335   93.7%   Sears, Gottschalks, Mervyn's(5)   319
100%   Crossroads Mall
Oklahoma City, Oklahoma
  1974/1994   1991   1,267,572   527,884   90.4%   Dillard's, Foley's, J.C. Penney(5)   253
100%   Fresno Fashion Fair
Fresno, California
  1970/1996   1983   874,316   313,435   94.9%   Gottschalks, J.C. Penney, Macy's (two)   420
100%   Great Falls Marketplace
Great Falls, Montana
  1997/1997     207,024   207,024   97.4%     126
100%   Greeley Mall
Greeley, Colorado
  1973/1986   1987   576,564   233,202   89.3%   Dillard's (two), J.C. Penney, Sears(5)   234
100%   Green Tree Mall(4)
Clarksville, Indiana
  1968/1975   1995   780,201   336,205   87.0%   Dillard's, J.C. Penney, Sears, Target   339
100%   Holiday Village Mall(4)
Great Falls, Montana
  1959/1979   1992   566,905   263,067   75.0%   Herberger's, J.C. Penney, Sears(5)   218
100%   Northgate Mall
San Rafael, California
  1964/1986   1987   743,176   272,845   91.9%   Macy's, Mervyns, Sears   344
100%   Northwest Arkansas Mall
Fayetteville, Arkansas
  1972/1998   1997   823,514   309,844   95.6%   Dillard's (two), J.C. Penney, Sears   309
100%   Pacific View
Ventura, California
  1965/1996   2001   1,237,237   401,064   98.3%   J.C. Penney, Macy's, Robinsons-May, Sears(5)   352
50%   Panorama Mall
Panorama, California
  1955/1979   1980   328,895   163,895   97.2%   Wal-Mart   314
100%   Queens Center
Queens, New York
  1973/1995   1991   623,876   155,733   100.0%   J.C. Penney, Macy's   964
100%   Rimrock Mall
Billings, Montana
  1978/1996   1980   609,560   294,120   92.8%   Dillard's (two), Herbergers, J.C. Penney   303
100%   Salisbury, Centre at Salisbury, Maryland   1990/1995   1990   878,796   273,815   94.1%   Boscov's, J.C. Penney, Hechts, Sears(5)   348
100%   Santa Monica Place
Santa Monica, California
  1980/1999   1990   560,441   277,191   87.9%   Macy's, Robinsons-May   358
100%   South Plains Mall
Lubbock, Texas
  1972/1998   1995   1,144,495   402,708   95.6%   Beall's, Dillard's (two), J.C. Penney, Meryvn's, Sears   343
100%   South Towne Center
Sandy, Utah
  1987/1997   1997   1,241,484   464,972   86.3%   Dillard's, J.C. Penney, Mervyn's, Target, Meier & Frank   321

12    MACERICH 2001 Financial Statements


100%   Valley View Center
Dallas, Texas
  1973/1996   1996   1,504,818   446,921   89.9%   Dillard's, Foleys, J.C. Penney, Sears   296
100%   Vintage Faire Mall
Modesto, California
  1977/1996   2001   1,033,816   333,897   97.4%   Gottschalks, J.C. Penney, Macy's (two), Sears   386
19%   West Acres
Fargo, North Dakota
  1972/1986   2001   954,327   401,772   97.9%   Marshall Field's, Herberger's, J.C. Penney, Sears   382
100%   Westside Pavilion
Los Angeles, California
  1985/1998   2000   756,412   398,284   90.9%   Nordstrom, Robinsons-May   420

    Total/Average at December 31, 2001(a)   21,439,078   8,624,247   92.4%       $362

    Pacific Premier Retail Trust Properties(b):            

51%   Cascade Mall Burlington, Washington   1989/1999   1998   584,549   260,313   82.0%   The Bon Marche, Emporium, J.C. Penney, Sears, Target   $316
51%   Kitsap Mall
Silverdale, Washington
  1985/1999   1997   850,264   340,281   80.3%   The Bon Marche, J.C. Penney, Gottschalks, Mervyn's, Sears   382
51%   Lakewood Mall
Lakewood, California
  1953/1975   2001   2,127,894   973,928   91.9%   Home Depot, Target(8), J.C. Penney, Macy's,
Mervyn's, Robinsons-May
  339
51%   Los Cerritos Center
Cerritos, California
  1971/1999   1998   1,298,205   496,924   98.1%   Macy's, Mervyn's, Nordstrom, Robinsons-May,
Sears
  453
51%   Redmond Town Center(4)(6)
Redmond, Washington
  1997/1999   2000   1,152,905   1,152,905   95.6%   (10)   336
51%   Stonewood Mall(4)
Downey, California
  1953/1997   1991   927,505   356,758   96.7%   J.C. Penney, Mervyn's, Robinsons-May, Sears   353
51%   Washington Square
Portland, Oregon
  1974/1999   1995   1,357,417   423,081   95.5%   J.C. Penney, Meier & Frank, Mervyn's, Nordstrom, Sears   560

    Total/Average Pacific Premier Retail Trust Properties   8,298,739   4,004,190   92.9%       $401

    SDG Macerich Properties, L.P. Properties:            

50%   Eastland Mall(4)
Evansville, Indiana
  1978/1998   1995   1,072,787   479,832   96.3%   DeJong, Famous Barr, J.C. Penney, Lazarus, Service Merchandise(9)   $381
50%   Empire Mall(4)
Sioux Falls, South Dakota
  1975/1998   2000   1,286,193   596,086   91.9%   Marshall Field's, J.C. Penney, Gordman's, Kohl's, Sears, Target, Younkers   371
50%   Granite Run Mall
Media, Pennsylvania
  1974/1998   1993   1,047,283   546,474   98.3%   Boscov's, J.C. Penney, Sears   299
50%   Lake Square Mall
Leesburg, Florida
  1980/1998   1992   560,975   264,938   91.3%   Belk, J.C. Penney, Sears, Target   266
50%   Lindale Mall
Cedar Rapids, Iowa
  1963/1998   1997   693,366   387,803   86.5%   Sears, Von Maur, Younkers   293
50%   Mesa Mall
Grand Junction, Colorado
  1980/1998   1991   855,520   429,703   92.1%   Herberger's, J.C. Penney, Mervyn's, Sears, Target   318
50%   NorthPark Mall
Davenport, Iowa
  1973/1998   2001   1,056,596   405,063   94.7%   J.C. Penney, Dillard's(8), Sears, Von Maur, Younkers   240
50%   Rushmore Mall
Rapid City, South Dakota
  1978/1998   1992   835,138   430,478   96.1%   Herberger's, J.C. Penney, Sears, Target   294
50%   Southern Hills Mall
Sioux City, Iowa
  1980/1998     750,675   437,098   92.3%   Sears, Target, Younkers   309
50%   SouthPark Mall
Moline, Illinois
  1974/1998   1990   1,032,672   454,616   89.0%   Dillard's(8), J.C. Penney, Sears, Younkers, Von Maur   224

MACERICH 2001 Financial Statements    13


50%   SouthRidge Mall
Des Moines, Iowa
  1975/1998   1998   1,004,889   507,083   81.9%   Sears, Younkers,
J.C. Penney, Target(5)
  210
50%   Valley Mall
Harrisonburg, Virginia
  1978/1998   1992   511,889   197,026   96.8%   Belk, J.C. Penney, Wal-Mart, Peeble's   289

    Total/Average SDG Macerich Properties, L.P. Properties   10,707,983   5,136,200   92.1%       $293

    Grand Total/Average at December 31, 2001(c)   40,445,800   17,764,637   92.4%       $350

    Major Redevelopment Properties:            

100%   Crossroads Mall(4)
Boulder, Colorado
  1963/1979   1998   533,933   215,496   (7)   Foley's, Sears(5)   (7)
100%   Park Lane Mall(4)
Reno, Nevada
  1967/1978   1998   371,296   241,576   (7)   Gottschalks   (7)

    Total Major Redevelopment Properties   905,229   457,072            

    Grand Total at December 31, 2001   41,351,029   18,221,709            

a)
Excluding Pacific Premier Retail Trust Properties, SDG Macerich Properties, L.P. Properties and Major Redevelopment Properties

b)
Includes five contiguous freestanding properties

c)
Excluding Major Redevelopment Properties

(1)
The land underlying thirty-nine of the Centers is owned in fee entirely by the Company or, in the case of jointly-owned Centers, by the joint venture property partnership or limited liability company. All or part of the land underlying the remaining Centers is owned by third parties and leased to the Company, property partnership or limited liability company pursuant to long-term ground leases. Under the terms of a typical ground lease, the Company, property partnership or limited liability company pays rent for the use of the land and is generally responsible for all costs and expenses associated with the building and improvements. In some cases, the Company, property partnership or limited liability company has an option or right of first refusal to purchase the land. The termination dates of the ground leases range from 2002 to 2070.

(2)
Includes GLA attributable to Anchors (whether owned or non-owned) and Mall and Freestanding Stores as of December 31, 2001.

(3)
Sales are based on reports by retailers leasing Mall and Freestanding Stores for the year ending December 31, 2001 for tenants which have occupied such stores for a minimum of twelve months. Sales per square foot are based on tenants 10,000 square feet and under, excluding theaters, that occupied their space for the entire year.

(4)
Portions of the land on which the Center is situated are subject to one or more ground leases.

(5)
These properties have a vacant Anchor location. The Company is contemplating various replacement tenant/redevelopment opportunities for these vacant sites.

(6)
The office portion of this mixed-use development does not have retail sales.

(7)
Certain spaces have been intentionally held off the market and remain vacant because of major redevelopment plans. As a result, the Company believes the percentage of Mall and Freestanding GLA leased and the sales per square foot at these major redevelopment properties is not meaningful data.

(8)
Montgomery Ward filed for bankruptcy on December 28, 2000 and announced the closing of all its stores including the seven located at the Centers. Montgomery Ward assigned two of these leases to Dillard's (at NorthPark Mall and SouthPark Mall) and one to Target (at Lakewood Mall). The Target store is scheduled to open in late 2003.

(9)
Service Merchandise closed this store in February 2002. They filed for bankruptcy in March 1999 and recently announced plans to close all of their stores in 2002.

(10)
Federated Department Stores will open a new Bon Marche store at Redmond Town Center in the Fall of 2003.

(11)
Macy's will open a store at Capitola Mall in May 2002.

14    MACERICH 2001 Financial Statements



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.

Property Pledged
As Collateral

  Fixed or
Floating

  Annual
Interest
Rate

  Principal
Balance
(000's)

  Annual
Debt
Service
(000's)

  Maturity
Date

  Balance
Due on
Maturity
(000's)

  Earliest Date
on which all
Notes Can
Be Defeased
or Be Prepaid


Wholly-Owned Centers:                                  
Capitola Mall(1)   Fixed   7.13 % $ 47,857   $ 4,558   5/15/2011   $ 32,724   Any Time
Carmel Plaza   Fixed   8.18 %   28,358     2,421   5/1/2009     25,642   Any Time
Chesterfield Towne Center(2)   Fixed   9.07 %   62,742     6,580   1/1/2024     1,087   1/1/2006
Citadel   Fixed   7.20 %   70,708     6,648   1/1/2008     59,962   1/1/2003
Corte Madera, Village at   Fixed   7.75 %   70,626     6,190   11/1/2009     62,941   10/4/2003
Crossroads Mall–Boulder   Fixed   7.08 %   34,025     3,948   12/15/2010     28,107   Any Time
Fresno Fashion Fair   Fixed   6.52 %   68,724     4,561   8/10/2008     62,890   Any Time
Greeley Mall   Fixed   8.50 %   14,348     2,245   9/15/2003     12,519   Any Time
Green Tree Mall/Crossroads–OK/                                  
Salisbury   Fixed   7.23 %   117,714     8,499   3/5/2004     117,714   Any Time
Northwest Arkansas Mall   Fixed   7.33 %   59,867     5,209   1/10/2009     49,304   1/1/2004
Pacific View(3)   Fixed   7.16 %   88,715     7,221   8/31/2011     76,658   9/1/2003
Queens Center   Fixed   6.88 %   98,278     7,595   3/1/2009     88,651   2/4/2002
Rimrock Mall(4)   Fixed   7.45 %   45,966     3,841   10/1/2011     40,025   10/10/2003
Santa Monica Place   Fixed   7.70 %   84,275     7,272   11/1/2010     75,439   3/1/2003
South Plains Mall   Fixed   8.22 %   63,474     5,448   3/1/2009     57,557   2/17/2002
South Towne Center   Fixed   6.61 %   64,000     4,289   10/10/2008     64,000   Any Time
Valley View Mall   Fixed   7.89 %   51,000     4,080   10/10/2006     51,000   Any Time
Vintage Faire Mall   Fixed   7.89 %   69,245     6,099   9/1/2010     61,372   Any Time
Westside Pavilion   Fixed   6.67 %   99,590     6,529   7/1/2008     91,133   Any Time

    Total–Wholly Owned Centers           $ 1,239,512                    

Joint Venture Centers (at pro rata share):                                  
Broadway Plaza (50%)(5)   Fixed   6.68 % $ 35,328     3,089   8/1/2008     29,315   Any Time
Pacific Premier Retail Trust (51%)(5):                                  
  Cascade Mall   Fixed   6.50 %   12,642     1,461   8/1/2014     141   Any Time
  Kitsap Mall/Kitsap Place(6)   Fixed   8.06 %   31,110     2,755   6/1/2010     28,143   Any Time
  Lakewood Mall(7)   Fixed   7.20 %   64,770     4,661   8/10/2005     64,770   Any Time
  Lakewood Mall(8)   Floating   4.38 %   8,224     372   7/25/2003     8,224   Any Time
  Los Cerritos Center   Fixed   7.13 %   59,385     5,054   7/1/2006     54,955   6/1/2002
  North Point Plaza   Fixed   6.50 %   1,747     190   12/1/2015     47   2/7/2004
  Redmond Town Center–Retail   Fixed   6.50 %   31,564     2,686   2/1/2011     23,850   Any Time
  Redmond Town Center–Office   Fixed   6.77 %   44,324     3,575   7/10/2009     26,223   6/1/2002
  Stonewood Mall   Fixed   7.41 %   39,653     3,298   12/11/2010     36,192   3/19/2003
  Washington Square   Fixed   6.70 %   58,339     5,051   1/1/2009     48,289   3/1/2004
  Washington Square Too   Fixed   6.50 %   6,088     634   12/1/2016     116   2/17/2004
SDG Macerich Properties L.P. (50%)(5)(9)   Fixed   6.54 %   185,306     13,440   5/15/2006     185,306   Any Time
SDG Macerich Properties L.P. (50%)(5)(9)   Floating   2.39 %   92,250     6,568   5/15/2003     92,250   Any Time
SDG Macerich Properties L.P. (50%)(5)(9)   Floating   2.27 %   40,700     1,425   5/15/2006     40,700   Any Time
West Acres Center (19%)(5)   Fixed   6.52 %   7,425     681   1/1/2009     5,684   1/4/2002
West Acres Center (19%)(5)(10)   Fixed   9.17 %   1,894     212   1/1/2009     1,517   Any Time

    Total–Joint Venture Centers(5)           $ 720,749                    

    Total–All Centers           $ 1,960,261                    

MACERICH 2001 Financial Statements    15


Notes:

(1)
On May 2, 2001, the Company refinanced the debt on Capitola Mall. The prior loan of $36.4 million 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.

(2)
The annual debt service payment represents the payment of principal and interest. In addition, contingent interest, as defined in the loan agreement, may be due to the extent that 35% of the gross receipts (as defined in the loan agreement) exceeds a base amount specified therein. Contingent interest recognized was $583,751, $416,814 and $385,556 for the years ended December 31, 2001, 2000 and 1999, respectively.

(3)
This loan was issued on July 10, 2001 for $89.0 million, and may be increased up to $96.0 million, subject to certain conditions.

(4)
On October 9, 2001, the Company refinanced the debt on Rimrock Mall. The prior loan of $29.3 million 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. The Company incurred a loss on early extinguishment of the prior debt in October 2001 of $1.7 million.

(5)
Reflects the Company's pro rata share of debt.

(6)
The loan is interest only until December 31, 2001. Effective January 1, 2002, monthly principal and interest of $450,150 will be payable through maturity. The debt is cross-collateralized by Kitsap Mall and Kitsap Place.

(7)
In connection with the acquisition of this property, the joint venture assumed $127.0 million of collateralized fixed rate notes (the "Notes"). The Notes bear interest at an average fixed rate of 7.20% and mature in August 2005. The Notes require the joint venture 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 $750,000 of restricted cash deposited with the trustee at December 31, 2001 and at December 31, 2000.

(8)
On July 28, 2000, the joint venture placed a $16.1 million floating rate note on the property bearing interest at LIBOR plus 2.25% and maturing July 2003. At December 31, 2001, the total interest rate was 4.38%.

(9)
In connection with the acquisition of these Centers, the joint venture assumed $485.0 million of mortgage notes payable, which are collateralized by the properties. At acquisition, the $300.0 million fixed rate portion of this debt reflected a fair value of $322.7 million, which included an unamortized premium of $22.7 million. This premium is being amortized as interest expense over the life of the loan using the effective interest method. At December 31, 2001 and December 31, 2000, the unamortized balance of the debt premium was $13.5 million and $16.1 million, respectively. This debt is due in May 2006 and requires monthly payments of $1.9 million. $184.5 million of this debt 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 December 31, 2000, respectively. This variable rate debt is covered by an interest rate cap agreement, which effectively prevents the interest rate from exceeding 11.53%. On April 12, 2000, the joint venture issued $138.5 million of additional mortgage notes, which are collateralized by the properties and are due in May 2006. $57.1 million of this debt requires fixed monthly interest payments of $387,000 at a weighted average rate of 8.13% while the floating rate notes of $81.4 million require monthly interest payments at a variable weighted average rate (based on LIBOR) of 2.27% and 7.08% at December 31, 2001 and 2000, respectively. This variable rate debt is covered by an interest rate cap agreement, which effectively prevents the interest rate from exceeding 11.83%.

(10)
On September 27, 2001, the joint venture placed a $10.0 million loan on the property bearing interest at a fixed rate of 9.17% maturing December 1, 2009.

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.

16    MACERICH 2001 Financial Statements



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.

MACERICH 2001 Financial Statements    17



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:

 
  Market Quotation Per Share

   
 
  Dividends/Distributions
Declared and Paid

Quarters Ended

  High

  Low


March 31, 2000   $23.94   $19.00   $0.51
June 30, 2000   24.00   20.44   0.51
September 30, 2000   24.75   20.25   0.51
December 31, 2000   20.75   18.44   0.53

March 31, 2001

 

$21.95

 

$18.75

 

$0.53
June 30, 2001   24.80   21.31   0.53
September 30, 2001   25.20   21.50   0.53
December 31, 2001   26.60   21.85   0.55

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:

 
  Series A Preferred Stock Dividends
  Series B Preferred Stock Dividends
Quarters Ended

  Declared

  Paid

  Declared

  Paid


March 31, 2000   $0.51   $0.51   $0.51   $0.51
June 30, 2000   $0.51   $0.51   $0.51   $0.51
September 30, 2000   $0.53   $0.51   $0.53   $0.51
December 31, 2000   $0.53   $0.53   $0.53   $0.53


Quarters Ended

 

 

 

 

 

 

 

 

March 31, 2001   $0.53   $0.53   $0.53   $0.53
June 30, 2001   $0.53   $0.53   $0.53   $0.53
September 30, 2001   $0.55   $0.53   $0.55   $0.53
December 31, 2001   $0.55   $0.55   $0.55   $0.55

18    MACERICH 2001 Financial Statements



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.

MACERICH 2001 Financial Statements    19


(All amounts in thousands, except per share data)

 
 
  The Company

 
 
  2001

  2000

  1999

  1998

  1997

 

 
OPERATING DATA:                                
Revenues:                                
  Minimum rents   $ 201,481   $ 195,236   $ 204,568   $ 179,710   $ 142,251  
  Percentage rents     12,394     12,558     15,106     12,856     9,259  
  Tenant recoveries     109,163     104,125     99,126     86,740     66,499  
  Other     11,535     8,173     8,644     4,555     3,205  

 
    Total revenues     334,573     320,092     327,444     283,861     221,214  
Shopping center and operating expenses(1)     110,827     101,674     100,327     89,991     70,901  
REIT general and administrative expenses     6,780     5,509     5,488     4,373     2,759  
Depreciation and amortization     65,983     61,647     61,383     53,141     41,535  
Interest expense     109,646     108,447     113,348     91,433     66,407  

 
Income before minority interest, unconsolidated entities, extraordinary item and cumulative effect of change in accounting principle     41,337     42,815     46,898     44,923     39,612  
Minority interest(2)     (19,001 )   (12,168 )   (38,335 )   (12,902 )   (10,567 )
Equity in income (loss) of unconsolidated joint ventures and management companies(1)     32,930     30,322     25,945     14,480     (8,063 )
Gain (loss) on sale of assets     24,491     (2,773 )   95,981     9     1,619  
Extraordinary loss on early extinguishment of debt     (2,034 )   (304 )   (1,478 )   (2,435 )   (555 )
Cumulative effect of change in accounting principle(3)         (963 )            

 
Net income     77,723     56,929     129,011     44,075     22,046  
Less preferred dividends     19,688     18,958     18,138     11,547      

 
Net income available to common stockholders   $ 58,035   $ 37,971   $ 110,873   $ 32,528   $ 22,046  

 
Earnings per share–basic:(4)                                
  Income before extraordinary item and cumulative effect of change in accounting principle   $ 1.76   $ 1.14   $ 3.30   $ 1.14   $ 0.86  
  Extraordinary item     (0.04 )   (0.01 )   (0.04 )   (0.08 )   (0.01 )
  Cumulative effect of change in accounting principle         (0.02 )            

 
    Net income per share–basic   $ 1.72   $ 1.11   $ 3.26   $ 1.06   $ 0.85  

 
Earnings per share–diluted:(4)(7)(8)                                
  Income before extraordinary item and cumulative effect of change in accounting principle   $ 1.76   $ 1.14   $ 3.01   $ 1.11   $ 0.86  
  Extraordinary item     (0.04 )   (0.01 )   (0.02 )   (0.05 )   (0.01 )
  Cumulative effect of change in accounting principle         (0.02 )            

 
Net income per share–diluted   $ 1.72   $ 1.11   $ 2.99   $ 1.06   $ 0.85  

 
OTHER DATA:                                
Funds from operations–diluted(5)   $ 175,068   $ 167,244   $ 164,302   $ 120,518   $ 83,427  
EBITDA(6)   $ 216,967   $ 212,909   $ 221,629   $ 189,497   $ 147,554  
EBITDA, including joint ventures at pro rata(6)   $ 323,798   $ 314,628   $ 301,803   $ 230,362   $ 154,140  
Cash flows provided by (used in):                                
  Operating activities   $ 140,506   $ 121,220   $ 139,576   $ 85,176   $ 78,476  
  Investing activities   $ (57,319 ) $ 2,083   $ (243,228 ) $ (761,147 ) $ (215,006 )
  Financing activities   $ (92,990 ) $ (127,485 ) $ 118,964   $ 675,960   $ 146,041  
Number of centers at year end     50     51     52     47     30  
Weighted average number of shares outstanding–basic(7)     44,963     45,050     46,130     43,016     37,982  
Weighted average number of shares outstanding–diluted(5)(7)(8)     58,902     59,319     60,893     43,628     38,403  
Cash distributions declared per common share   $ 2.14   $ 2.06   $ 1.965   $ 1.865   $ 1.78  

20    MACERICH 2001 Financial Statements


(All amounts in thousands)

 
  The Company

 
  December 31,

 
  2001

  2000

  1999

  1998

  1997


BALANCE SHEET DATA:                              
Investment in real estate (before accumulated depreciation)   $ 2,227,833   $ 2,228,468   $ 2,174,535   $ 2,213,125   $ 1,607,429
Total assets   $ 2,294,502   $ 2,337,242   $ 2,404,293   $ 2,322,056   $ 1,505,002
Total mortgage, notes and debentures payable   $ 1,523,660   $ 1,550,935   $ 1,561,127   $ 1,507,118   $ 1,122,959
Minority interest(2)   $ 113,986   $ 120,500   $ 129,295   $ 132,177   $ 100,463
Series A and Series B Preferred Stock   $ 247,336   $ 247,336   $ 247,336   $ 247,336    
Common stockholders' equity   $ 348,954   $ 362,272   $ 401,254   $ 363,424   $ 216,295

(1)
Unconsolidated joint ventures include all Centers and entities in which the Company does not have a controlling ownership interest and for Macerich Management Company and Macerich Manhattan Management Company for all periods presented and for Macerich Property Management Company through March 28, 2001. Effective March 29, 2001, the Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). 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.

(2)
"Minority Interest" reflects the ownership interest in the Operating Partnership not owned by the REIT.

(3)
In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which became effective for periods beginning after December 15, 1999. This bulletin modified the timing of revenue recognition for percentage rent received from tenants. This change will defer recognition of a significant amount of percentage rent for the first three calendar quarters into the fourth quarter. The Company applied this change in accounting principle as of January 1, 2000. The cumulative effect of this change in accounting principle at the adoption date of January 1, 2000, including the pro rata share of joint ventures, was approximately $1.8 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.

(4)
Earnings per share is based on Statement of Financial Accounting Standards No. 128 ("SFAS No. 128") for all years presented.

(5)
Funds from Operations ("FFO") represents net income (loss) (computed in accordance with generally accepted accounting principles ("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. The computation of FFO–diluted and weighted average number of shares outstanding-diluted includes the effect of outstanding common stock options and restricted stock using the treasury method. The convertible debentures are dilutive for the twelve month periods ending December 31, 2001, 2000 and 1999 and are included in the FFO calculation. On February 25, 1998, the Company sold $100 million of its Series A Preferred Stock. On June 17, 1998, the Company sold $150 million of its Series B Preferred Stock. The preferred stock can be converted on a one-for-one basis for common stock. The preferred stock was dilutive to FFO in 2001, 2000, 1999 and 1998 and the preferred stock and the convertible debentures were dilutive to net income in 1999.

(6)
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 by the reader as an alternative to operating income as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies.

(7)
Assumes that all OP Units are converted to common stock.

(8)
Assumes issuance of common stock for in-the-money options and restricted stock calculated using the Treasury method in accordance with SFAS No. 128 for all years presented.

MACERICH 2001 Financial Statements    21



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.

 
  Date Acquired

  Location


"1999 Acquisition Centers":        

Pacific Premier Retail Trust(*)   February 18, 1999   Three regional malls, retail component of a mixed-use development and five contiguous properties in Washington and Oregon. The office component of the mixed-used development was acquired July 12, 1999.
PPR Albany Plaza LLC(*)
PPR Eastland Plaza LLC(*)
  February 18, 1999   Two non-contiguous community shopping Centers located in Oregon and Ohio, respectively.
Los Cerritos Center(*)   June 2, 1999   Cerritos, California
Santa Monica Place   October 29, 1999   Santa Monica, California

(*)
denotes the Company owns its interests in these Centers through an unconsolidated joint venture or through one of the Management Companies.

MACERICH 2001 Financial Statements    23


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.


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. Refinancing

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.

26    MACERICH 2001 Financial Statements


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 foot 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.


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


Revenues

Minimum and percentage rents decreased by 5.4% to $207.8 million in 2000 from $219.7 million in 1999. Approximately $24.6 million of the decrease related to the contribution of 100% and 99% of the

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.


Expenses

Shopping center expenses increased to $101.7 million in 2000 compared to $100.3 million in 1999. Approximately $6.4 million of the increase resulted from the 1999 acquisition of Santa Monica Place, $3.4 million of the increase resulted from increased property taxes and recoverable expenses at the Same Centers. These increases were partially offset by a decrease of $8.1 million from the Contributed JV Assets.


Interest Expense

Interest expense decreased to $108.4 million in 2000 from $113.3 million in 1999. Approximately $7.5 million of the decrease is from the Contributed JV Assets. This decrease is partially offset by the acquisition activity in 1999, which was partially funded with secured debt and borrowings under the Company's line of credit.


Depreciation and Amortization

Depreciation and amortization increased to $61.6 million in 2000 from $61.4 million in 1999. Approximately $2.5 million of the increase relates primarily to the 1999 Acquisition Center, which is partially offset by a decrease of $4.6 million relating to the Contributed JV Assets.


Minority Interest

The minority interest represents the 24.3% weighted average interest of the Operating Partnership that was not owned by the Company during 2000. This compares to 26.3% not owned by the Company during 1999.


Income From Unconsolidated Joint Ventures and Management Companies

The income from unconsolidated joint ventures and the Management Companies was $30.3 million for 2000, compared to income of $25.9 million in 1999. A total of $8.2 million of the increase is attributable to the 1999 Joint Venture Acquisitions and the Contributed JV Assets. Additionally, $1.1 million is attributable

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.


Gain (loss) on Sale of Assets

A loss of $2.8 million in 2000 compares to a gain of $96.0 million in 1999. The 1999 gain was a result of the Company selling approximately 49% of the membership interests of Stonewood and Lakewood to Ontario Teachers' in October of 1999 and the Company's sale of Huntington Center on November 16, 1999.


Extraordinary Loss from Early Extinguishment of Debt

In 2000, the Company recorded a loss from early extinguishment of debt of $0.3 million which was a result of write offs of $1.3 million of unamortized financing costs and is offset by a gain of $1.0 million relating to the Company's purchase and retirement of $10.6 million of the Debentures, compared to the write off of $1.5 million of unamortized financing costs in 1999.


Cumulative Effect of Change in Accounting Principle

A loss of $1.0 million in 2000 compared to no loss in 1999 is a result of implementation of SAB 101 at January 1, 2000.


Net Income Available to Common Stockholders

As a result of the foregoing, net income available to common stockholders decreased to $38.0 million in 2000 from $110.9 million in 1999.


Operating Activities

Cash flow from operations was $121.2 million in 2000 compared to $139.6 million in 1999. The decrease is primarily because of decreased net operating income from the factors mentioned above.


Investing Activities

Cash generated from investing activities was $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.


Financing Activities

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.


EBITDA and Funds From Operations

Primarily because of the factors mentioned above, EBITDA, including joint ventures at pro rata, increased 4.2% to $314.6 million in 2000 from $301.8 million in 1999 and Funds from Operations–Diluted increased 1.8% to $167.2 million in 2000 from $164.3 million in 1999.

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,:

(Dollars in Millions)

 
  2001

  2000


Renovations, expansions and acquisitions of property, equipment and improvements   $ 68.2   $ 50.4
Tenant allowances     9.9     5.9
Deferred leasing charges     13.7     11.4

  Total   $ 91.8   $ 67.7

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:

(amounts in thousands)

   
 
 
  2001

  2000

 
 
  Shares

  Amount

  Shares

  Amount

 

 
Net income–available to common stockholders       $ 58,035       $ 37,971  
Adjustments to reconcile net income to FFO-basic:                      
  Minority interest         19,001         12,168  
  Loss on early extinguishment of debt         2,034         304  
  (Gain) loss on sale of wholly-owned assets         (24,491 )       2,773  
  (Gain) loss on sale or write-down of assets from unconsolidated entities (pro rata)         (191 )       (235 )
  Depreciation and amortization on wholly owned centers         65,983         61,647  
  Depreciation and amortization on joint ventures and from the management companies (pro rata)         28,077         24,472  
  Cumulative effect of change in accounting principle–wholly owned centers                 963  
  Cumulative effect of change in accounting principle–prorata unconsolidated entities         128         787  
Less: depreciation on personal property and amortization of loan costs and interest rate caps         (4,969 )       (5,106 )

 
FFO–basic(1)   44,963   $ 143,607   45,050   $ 135,744  
Additional adjustment to arrive at FFO-diluted                      
  Impact of convertible preferred stock   9,115     19,688   9,115     18,958  
  Impact of stock options and restricted stock using the treasury method   (n/a–antidilutive)   (n/a–antidilutive)  
  Impact of convertible debentures   4,824     11,773   5,154     12,542  

 
FFO–diluted(2)   58,902   $ 175,068   59,319   $ 167,244  

 
(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 2001 assuming the conversion of all outstanding OP Units. As of December 31, 2001, 11.2 million of OP Units were outstanding.

(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. The debentures are dilutive at December 31, 2001 and 2000 and are included in the FFO calculation. On February 25, 1998, the Company sold $100 million of its Series A Preferred Stock. On June 17, 1998, the Company sold $150 million of its Series B Preferred Stock. The preferred stock can be converted on a one-for-one basis for common stock. The preferred shares are assumed converted for purposes of 2001 and 2000 FFO-diluted 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 ($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:


Buildings and improvements   5-40 years
Tenant improvements   initial term of related lease
Equipment and furnishings   5-7 years

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:


Deferred lease costs   1-15 years
Deferred financing costs   1-15 years

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.


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"):

(dollars in thousands)

   
 
  For the Years Ended December 31,

   
   
   
 
  2002

  2003

  2004

  2005

  2006

  Thereafter

  Total

  FV


Long term debt:                                                
  Fixed rate   $ 13,585   $ 26,838   $ 132,200   $ 15,671   $ 67,851   $ 983,367   $ 1,239,512   $ 1,262,099
  Average interest rate     7.39 %   7.39 %   7.39 %   7.39 %   7.36 %   7.36 %   7.38 %  
  Fixed rate–Debentures     125,148                         125,148     125,784
  Average interest rate     7.25 %                       7.25 %  
  Variable rate     159,000                         159,000     159,000
  Average interest rate     6.00 %                       6.00 %  

Total debt–Wholly owned Centers   $ 297,733   $ 26,838   $ 132,200   $ 15,671   $ 67,851   $ 983,367   $ 1,523,660   $ 1,546,883

Joint Venture Centers:                                                
(at Company's pro rata share)                                                
  Fixed rate   $ 7,766   $ 8,655   $ 9,241   $ 74,752   $ 64,023   $ 415,138   $ 579,575   $ 579,910
  Average interest rate     6.87 %   6.87 %   6.87 %   6.83 %   6.97 %   6.97 %   6.90 %  
  Variable rate         100,474             40,700         141,174     141,174
  Average interest rate         4.80 %           4.54 %       4.75 %  

Total debt–Joint Ventures   $ 7,766   $ 109,129   $ 9,241   $ 74,752   $ 104,723   $ 415,138   $ 720,749   $ 721,084

Total debt–All Centers   $ 305,499   $ 135,967   $ 141,441   $ 90,423   $ 172,574   $ 1,398,505   $ 2,244,409   $ 2,267,967

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.

None.


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

 
   
   
  Page


(a)   1.   Financial Statements of the Company    
        Report of Independent Accountants   42
        Consolidated balance sheets of the Company as of December 31, 2001 and 2000   43
        Consolidated statements of operations of the Company for the years ended December 31, 2001, 2000 and 1999   44
        Consolidated statements of common stockholders' equity of the Company for the years ended December 31, 2001, 2000 and 1999   45
        Consolidated statements of cash flows of the Company for the years ended December 31, 2001, 2000 and 1999   46
        Notes to consolidated financial statements   47-69
    2.   Financial Statements of Pacific Premier Retail Trust    
        Report of Independent Accountants   70
        Consolidated balance sheets of Pacific Premier Retail Trust as of December 31, 2001 and 2000   71
        Consolidated statements of operations of Pacific Premier Retail Trust for the years ended December 31, 2001 and 2000 and for the period from February 18, 1999 (Inception) through December 31, 1999   72
        Consolidated statements of stockholders' equity of Pacific Premier Retail Trust for the years ended December 31, 2001 and 2000 and for the period from February 18, 1999 (Inception) through December 31, 1999   73
        Consolidated statements of cash flows of Pacific Premier Retail Trust for the years ended December 31, 2001 and 2000 and for the period from February 18, 1999 (Inception) through December 31, 1999   74
        Notes to consolidated financial statements   75-83
    3.   Financial Statements of SDG Macerich Properties, L.P.    
        Independent Auditors' Report   84
        Balance sheets of SDG Macerich Properties, L.P. as of December 31, 2001 and 2000   85
        Statements of operations of SDG Macerich Properties, L.P. for the years ended December 31, 2001, 2000 and 1999   86
        Statements of cash flows of SDG Macerich Properties, L.P. for the years ended December 31, 2001, 2000 and 1999   87
        Statements of partners' equity of SDG Macerich Properties, L.P. for years ended December 31, 2001, 2000 and 1999   88
        Notes to financial statements   89-93

40    MACERICH 2001 Financial Statements


    4.   Financial Statement Schedules    
        Schedule III–Real estate and accumulated depreciation of the Company   94-95
        Schedule III–Real estate and accumulated depreciation of Pacific Premier Retail Trust   96-97
        Schedule III–Real estate and accumulated depreciation of SDG Macerich Properties, L.P   98-100
(b)   1.   Reports on Form 8-K    
        Current Report on Form 8-K, event date February 19, 2002, filing the Company's February 19, 2002 earnings release (as modified).    
        Current Report on Form 8-K, event date February 25, 2002, filing various agreements relating to the Company's sale of 1,968,957 shares of Common Stock on February 28, 2002.    
(c)   1.   Exhibits    
        The Exhibit Index attached hereto is incorporated by reference under this item    

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, CA
February 13, 2002

42    MACERICH 2001 Financial Statements


THE MACERICH COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 
  December 31,

 
 
  2001

  2000

 

 
ASSETS:              
Property, net   $ 1,887,329   $ 1,933,584  
Cash and cash equivalents     26,470     36,273  
Tenant receivables, including accrued overage rents of $6,390 in 2001 and $6,486 in 2000     42,537     38,922  
Deferred charges and other assets, net     59,640     55,323  
Investments in joint ventures and the Management Companies     278,526     273,140  

 
    Total assets   $ 2,294,502   $ 2,337,242  

 
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY:              
Mortgage notes payable:              
  Related parties   $ 81,882   $ 133,063  
  Others     1,157,630     1,119,684  

 
  Total     1,239,512     1,252,747  
Bank notes payable     159,000     147,340  
Convertible debentures     125,148     150,848  
Accounts payable and accrued expenses     26,161     24,681  
Due to affiliates     998     8,800  
Other accrued liabilities     28,394     17,887  
Preferred stock dividend payable     5,013     4,831  

 
    Total liabilities     1,584,226     1,607,134  

 
Minority interest in Operating Partnership     113,986     120,500  

 
Commitments and contingencies (Note 11)              
Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,131 shares authorized, issued and outstanding at December 31, 2001 and 2000     98,934     98,934  
Series B cumulative convertible redeemable preferred stock, $.01 par value, 5,487,471 shares authorized, issued and outstanding at December 31, 2001 and 2000     148,402     148,402  

 
      247,336     247,336  

 
Common stockholders' equity:              
  Common stock, $.01 par value, 100,000,000 shares authorized, 33,981,946 and 33,612,462 shares issued and outstanding at December 31, 2001 and 2000, respectively     340     338  
  Additional paid in capital     366,349     359,306  
  Accumulated (deficit) earnings     (4,944 )   10,314  
  Accumulated other comprehensive loss     (5,820 )    
  Unamortized restricted stock     (6,971 )   (7,686 )

 
    Total common stockholders' equity     348,954     362,272  

 
      Total liabilities, preferred stock and common stockholders' equity   $ 2,294,502   $ 2,337,242  

 

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

MACERICH 2001 Financial Statements    43


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

 
  For the years ended December 31,

 
 
  2001

  2000

  1999

 

 
REVENUES:                    
  Minimum rents   $ 201,481   $ 195,236   $ 204,568  
  Percentage rents     12,394     12,558     15,106  
  Tenant recoveries     109,163     104,125     99,126  
  Other     11,535     8,173     8,644  

 
    Total revenues     334,573     320,092     327,444  

 
EXPENSES:                    
  Shopping center and operating expenses     110,827     101,674     100,327  
  General and administrative expense     6,780     5,509     5,488  

 
      117,607     107,183     105,815  

 
  Interest expense:                    
    Related parties     6,935     10,106     10,170  
    Others     102,711     98,341     103,178  

 
    Total interest expense     109,646     108,447     113,348  

 
  Depreciation and amortization     65,983     61,647     61,383  
Equity in income of unconsolidated joint ventures and the management companies     32,930     30,322     25,945  
Gain (loss) on sale of assets     24,491     (2,773 )   95,981  

 
Income before extraordinary item, cumulative effect of change in accounting principle and minority interest     98,758     70,364     168,824  
Extraordinary loss on early extinguishment of debt     (2,034 )   (304 )   (1,478 )
Cumulative effect of change in accounting principle         (963 )    

 
Income of the Operating Partnership     96,724     69,097     167,346  
Less minority interest in net income of the Operating Partnership     19,001     12,168     38,335  

 
Net income     77,723     56,929     129,011  
Less preferred dividends     19,688     18,958     18,138  

 
Net income available to common stockholders   $ 58,035   $ 37,971   $ 110,873  

 
Earnings per common share–basic:                    
  Income before extraordinary item and cumulative effect of change in accounting principle   $ 1.76   $ 1.14   $ 3.30  
  Extraordinary item     (0.04 )   (0.01 )   (0.04 )
  Cumulative effect of change in accounting principle         (0.02 )    

 
Net income–available to common stockholders   $ 1.72   $ 1.11   $ 3.26  

 
Weighted average number of common shares outstanding–basic     33,809,000     34,095,000     34,007,000  

 
Weighted average number of common shares outstanding–basic, assuming full conversion of operating units outstanding     44,963,000     45,050,000     46,130,000  

 
Earnings per common share–diluted:                    
  Income before extraordinary item and cumulative effect of change in accounting principle   $ 1.76   $ 1.14   $ 3.01  
  Extraordinary item     (0.04 )   (0.01 )   (0.02 )
  Cumulative effect of change in accounting principle         (0.02 )    

 
Net income–available to common stockholders   $ 1.72   $ 1.11   $ 2.99  

 
Weighted average number of common shares outstanding–diluted for EPS     44,963,000     45,050,000     60,893,000  

 

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

44    MACERICH 2001 Financial Statements


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

(Dollars in thousands, except share data)

 
  Common
Stock
(# shares)

  Common
Stock
Par
Value

  Additional
Paid In
Capital

  Accumulated
Earnings
(Deficit)

  Accumulated
Other
Comprehensive
Loss

  Unamortized
Restricted
Stock

  Total
Common
Stockholders'
Equity

 

 
Balance December 31, 1998   33,901,963   $338   $367,610       $(4,524 ) $363,424  
  Issuance costs           (198 )             (198 )
  Issuance of restricted stock   176,600       4,007               4,007  
  Unvested restricted stock   (176,600 )                 (4,007 ) (4,007 )
  Restricted stock vested in 1999   51,675                   2,037   2,037  
  Exercise of stock options   88,250       1,705               1,705  
  Distributions paid $(1.965) per share               $(67,359 )         (67,359 )
  Preferred dividends               (18,138 )         (18,138 )
  Net income               129,011           129,011  
  Conversion of OP units to common stock   30,737       441               441  
  Adjustment to reflect minority interest on a pro rata basis according to year end ownership percentage of Operating Partnership           (9,669 )             (9,669 )

 
Balance December 31, 1999   34,072,625   338   363,896   43,514     (6,494 ) 401,254  
  Issuance costs           (7 )             (7 )
  Issuance of restricted stock   169,556       3,412               3,412  
  Unvested restricted stock   (169,556 )                 (3,412 ) (3,412 )
  Restricted stock vested in 2000   82,733                   2,220   2,220  
  Exercise of stock options   20,704       388               388  
  Common stock repurchase   (563,600 )     (10,739 )             (10,739 )
  Distributions paid $(2.06) per share               (71,171 )         (71,171 )
  Preferred dividends               (18,958 )         (18,958 )
  Net income               56,929           56,929  
  Adjustment to reflect minority interest on a pro rata basis according to year end ownership percentage of Operating Partnership           2,356               2,356  

 
Balance December 31, 2000   33,612,462   338   359,306   10,314     (7,686 ) 362,272  
  Comprehensive income:                              
    Net income               77,723           77,723  
    Cumulative effect of change in accounting principle                   $(7,148 )     (7,148 )
    Reclassification of deferred losses                   1,328       1,328  
               
     
 
  Total comprehensive income               77,723   (5,820 )     71,903  
  Issuance costs           90               90  
  Issuance of restricted stock   145,602       3,196               3,196  
  Unvested restricted stock   (145,602 )                 (3,196 ) (3,196 )
  Restricted stock vested in 2001   120,852                   3,911   3,911  
  Exercise of stock options   248,632   2   4,848               4,850  
  Distributions paid $(2.14) per share               (73,293 )         (73,293 )
  Preferred dividends               (19,688 )         (19,688 )
  Adjustment to reflect minority interest on a pro rata basis according to year end ownership percentage of Operating Partnership           (1,091 )             (1,091 )

 
Balance December 31, 2001   33,981,946   $340   $366,349   $(4,944 ) $(5,820 ) $(6,971 ) $348,954  

 

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

MACERICH 2001 Financial Statements    45


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 
  For the years ended December 31,

 
 
  2001

  2000

  1999

 

 
Cash flows from operating activities:                    
  Net income–available to common stockholders   $ 58,035   $ 37,971   $ 110,873  
  Preferred dividends     19,688     18,958     18,138  

 
  Net income     77,723     56,929     129,011  
  Adjustments to reconcile net income to net cash provided by operating activities:                    
  Extraordinary loss on early extinguishment of debt     2,034     304     1,478  
  Cumulative effect of change in accounting principle         963      
  (Gain) loss on sale of assets     (24,491 )   2,773     (95,981 )
  Depreciation and amortization     65,983     61,647     61,383  
  Amortization of net discount on trust deed note payable     33     33     191  
  Minority interest in the net income of the Operating Partnership     19,001     12,168     38,335  
  Changes in assets and liabilities:                    
    Tenant receivables, net     (3,615 )   (5,462 )   (3,174 )
    Other assets     (529 )   967     9,817  
    Accounts payable and accrued expenses     1,480     (3,134 )   2,407  
    Due to affiliates     (7,802 )   1,811     4,059  
    Other liabilities     10,507     (7,962 )   (8,178 )
    Accrued preferred stock dividend     182     183     228  

 
      Total adjustments     62,783     64,291     10,565  

 
  Net cash provided by operating activities     140,506     121,220     139,576  

 
Cash flows from investing activities:                    
  Acquisitions of property and property improvements     (14,889 )   (5,639 )   (142,564 )
  Renovations, dispositions and expansions of centers     (53,264 )   (44,808 )   (74,560 )
  Tenant allowances     (9,856 )   (5,913 )   (7,213 )
  Deferred leasing charges     (13,668 )   (11,352 )   (12,895 )
  Equity in income of unconsolidated joint ventures and the management companies     (32,930 )   (30,322 )   (25,945 )
  Distributions from joint ventures     34,152     104,368     29,989  
  Contributions to joint ventures     (6,608 )   (4,251 )   (116,944 )
  Proceeds from sale of assets     39,744         106,904  

 
  Net cash (used in) provided by investing activities     (57,319 )   2,083     (243,228 )

 
Cash flows from financing activities:                    
  Proceeds from mortgages, notes and debentures payable     345,727     295,672     584,270  
  Payments on mortgages, notes and debentures payable     (315,033 )   (305,897 )   (328,452 )
  Deferred financing costs     (2,852 )   (385 )   (4,457 )
  Dividends and distributions     (101,144 )   (97,917 )   (114,259 )
  Dividends to preferred shareholders     (19,688 )   (18,958 )   (18,138 )

 
  Net cash (used in) provided by financing activities     (92,990 )   (127,485 )   118,964  

 
  Net (decrease) increase in cash     (9,803 )   (4,182 )   15,312  
Cash and cash equivalents, beginning of period     36,273     40,455     25,143  

 
Cash and cash equivalents, end of period   $ 26,470   $ 36,273   $ 40,455  

 
Supplemental cash flow information:                    
  Cash payment for interest, net of amounts capitalized   $ 109,856   $ 108,003   $ 112,399  

 
Non-cash transactions:                    
  Disposition of property by assumption of debt   $ 58,000          

 
  Contributions of liabilities in excess of assets to joint venture           $ 8,820  

 

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

46    MACERICH 2001 Financial Statements


THE MACERICH COMPANY

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.


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.

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.

Property is recorded at cost and is depreciated using a straight-line method over the estimated useful lives of the assets as follows:


Buildings and improvements   5-40 years
Tenant improvements   initial term of related lease
Equipment and furnishings   5-7 years

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 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:


Deferred lease costs   1-15 years
Deferred financing costs   1-15 years


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:

(Dollars in thousands)

 
 
  2001

  2000

  1999

 

 
Net income available to common stockholders   $ 58,035   $ 37,971   $ 110,873  
  Add: Book depreciation and amortization available to common stockholders     41,813     39,699     37,554  
  Less: Tax depreciation and amortization available to common stockholders     (37,154 )   (33,998 )   (34,430 )
    Book/tax difference on gain on divestiture of real estate     1,612         (42,370 )
  Other book/tax differences, net(1)     (354 )   7,590     705  

 
Taxable income available to common stockholders   $ 63,952   $ 51,262   $ 72,332  

 

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:

 
  2001

  2000

  1999

 

 
Ordinary income   $ 1.37   63.9 % $ 1.73   84.0 % $ 1.30   66.0 %
Capital gains     0.38   17.7 %     0.0 %   0.61   31.0 %
Unrecaptured Section 1250 Gain     0.22   10.3 %     0.0 %   0.06   3.0 %
Return of capital     0.17   8.1 %   0.33   16.0 %     0.0 %

 
Dividends paid or payable   $ 2.14   100.0 % $ 2.06   100.0 % $ 1.97   100.0 %

 


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 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

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:

(in thousands, except per share data)

 
  For the years ended

 
  2001

  2000

  1999

 
  Net
Income

  Shares

  Per
Share

  Net
Income

  Shares

  Per
Share

  Net
Income

  Shares

  Per
Share


  Net income   $ 77,723   33,809         $ 56,929   34,095         $ 129,011   34,007      
  Less: Preferred stock dividends     19,688               18,958               18,138          

Basic EPS                                                

  Net income–available to common stockholders   $ 58,035   33,809   $ 1.72   $ 37,971   34,095   $ 1.11   $ 110,873   34,007   $ 3.26

Diluted EPS:                                                

  Conversion of OP units     19,001   11,154           12,168   10,955           38,335   12,123      
  Employee stock options and restricted stock     n/a–antidilutive           n/a–antidilutive           1,824   462      
  Convertible preferred stock     n/a–antidilutive           n/a–antidilutive           18,138   9,115      
  Convertible debentures     n/a–antidilutive           n/a–antidilutive           12,616   5,186      

  Net income–available to common stockholders   $ 77,036   44,963   $ 1.72   $ 50,139   45,050   $ 1.11   $ 181,786   60,893   $ 2.99


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:

Joint Venture

  The Operating
Partnership's Ownership %


Macerich Northwestern Associates   50%
Manhattan Village, LLC   10%
MerchantWired, LLC   9.64%
Pacific Premier Retail Trust   51%
Panorama City Associates   50%
SDG Macerich Properties, L.P.   50%
West Acres Development   19%

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 October 27, 1999, Albany Plaza, a 145,462 square foot community center, which was owned 51% by the Macerich Management Company, was sold.

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 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

 
  December 31,
2001

  December 31,
2000


ASSETS:            
  Properties, net   $ 2,179,908   $ 2,064,777
  Other assets     157,494     155,919

    Total assets   $ 2,337,402   $ 2,220,696

LIABILITIES AND PARTNERS' CAPITAL:            
  Mortgage notes payable   $ 1,457,871   $ 1,461,857
  Other liabilities     138,531     51,791
  The Company's capital     278,526     273,140
  Outside partners' capital     462,474     433,908

    Total liabilities and partners' capital   $ 2,337,402   $ 2,220,696

MACERICH 2001 Financial Statements    55



COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES

For the years ended December 31,

 
  2001

  2000

  1999

 
  SDG Macerich Properties, L.P.

  Pacific Premier Retail Trust

  Other Joint Ventures

  Mgmt Co.'s

  Total

  SDG Macerich Properties, L.P.

  Pacific Premier Retail Trust

  Other Joint Ventures

  Mgmt Co.'s

  Total

  SDG Macerich Properties, L.P.

  Pacific Premier Retail Trust

  Other Joint Ventures

  Mgmt Co.'s

  Total


Revenues:                                                                                          
  Minimum rents   $ 94,279   $ 100,315   $ 20,910       $ 215,504   $ 91,635   $ 94,496   $ 24,487       $ 210,618   $ 88,014   $ 46,170   $ 25,497   $ 5,940   $ 165,621
  Percentage rents     6,253     6,140     1,717         14,110     6,282     5,872     2,077         14,231     7,422     3,497     2,268     191     13,378
  Tenant recoveries     42,223     37,604     10,150         89,977     41,621     34,187     10,219         86,027     40,647     15,866     11,305     2,917     70,735
  Management fee               $ 10,250     10,250               $ 12,944     12,944                 10,033     10,033
  Other     2,322     1,950     18,099     287     22,658     1,921     1,605     3,689     1,230     8,445     2,291     336     1,243     897     4,767

  Total revenues     145,077     146,009     50,876     10,537     352,499     141,459     136,160     40,472     14,174     332,265     138,374     65,869     40,313     19,978     264,534

Expenses:                                                                                          
  Management Company expense                 9,568     9,568                 15,181     15,181                 12,737     12,737
  Shopping center and operating expenses     52,305     42,088     44,391         138,784     51,962     37,217     20,360         109,539     50,972     18,373     13,205     2,724     85,274
  Interest expense     36,754     48,569     8,212     (257 )   93,278     40,119     46,527     7,457     (355 )   93,748     30,565     21,642     7,579     5,291     65,077
  Depreciation and amortization     25,391     22,817     16,856     1,047     66,111     23,573     20,238     3,081     1,068     47,960     21,451     10,463     3,362     2,405     37,681

  Total operating expenses     114,450     113,474     69,459     10,358     307,741     115,654     103,982     30,898     15,894     266,428     102,988     50,478     24,146     23,157     200,769

Gain (loss) on sale of assets         69     669     31     769     416         12,336     (1,200 )   11,552     5         961     (392 )   574
Extraordinary loss on early extinguishment of debt                             (375 )           (375 )                  
Cumulative effect of change in accounting principle     (256 )               (256 )   (1,053 )   (397 )   (98 )   (9 )   (1,557 )                  

  Net income (loss)   $ 30,371   $ 32,604   $ (17,914 ) $ 210   $ 45,271   $ 25,168   $ 31,406   $ 21,812   $ (2,929 ) $ 75,457   $ 35,391   $ 15,391   $ 17,128   $ (3,571 ) $ 64,339

Company's pro rata share of net income (loss)   $ 15,186   $ 16,588   $ 956   $ 200   $ 32,930   $ 12,582   $ 16,018   $ 4,505   $ (2,783 ) $ 30,322   $ 17,695   $ 7,850   $ 3,783   $ (3,383 ) $ 25,945

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:

 
  December 31,

 
 
  2001

  2000

 

 
Land   $  382,739   $  397,947  
Building improvements   1,688,720   1,716,860  
Tenant improvements   66,808   56,723  
Equipment & furnishings   18,405   12,259  
Construction in progress   71,161   44,679  

 
    2,227,833   2,228,468  
Less, accumulated depreciation   (340,504 ) (294,884 )

 
    $1,887,329   $1,933,584  

 

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:

 
  December 31,

 
 
  2001

  2000

 

 
Leasing   $  49,832   $  43,606  
Financing   19,271   17,956  

 
    69,103   61,562  
Less, accumulated amortization   (32,514 ) (28,761 )

 
    36,589   32,801  
Other assets   23,051   22,522  

 
    $  59,640   $  55,323  

 

MACERICH 2001 Financial Statements    57


6. Mortgage Notes Payable:

Mortgage notes payable at December 31, 2001 and December 31, 2000 consist of the following:

 
  Carrying Amount of Notes

   
   
   
 
  2001

  2000

   
   
   
Property Pledged
As Collateral

  Other

  Related Party

  Other

  Related Party

  Interest Rate

  Payment Terms

  Maturity Date


Wholly-Owned Centers:                                    
Capitola Mall(b)       $ 47,857       $ 36,587   7.13 % 380 (a) 2011
Carmel Plaza   $ 28,358       $ 28,626       8.18 % 202 (a) 2009
Chesterfield Towne Center     62,742         63,587       9.07 % 548 (c) 2024
Citadel     70,708         72,091       7.20 % 554 (a) 2008
Corte Madera, Village at     70,626         71,313       7.75 % 516 (a) 2009
Crossroads Mall-Boulder(d)         34,025         34,476   7.08 % 244 (a) 2010
Fresno Fashion Fair     68,724         69,000       6.52 % 437 (a) 2008
Greeley Mall     14,348         15,328       8.50 % 187 (a) 2003
Green Tree Mall/Crossroads– OK/Salisbury(e)     117,714         117,714       7.23 % interest only   2004
Holiday Village                 17,000   6.75 % interest only   (f)
Northgate Mall                 25,000   6.75 % interest only   (f)
Northwest Arkansas Mall     59,867         61,011       7.33 % 434 (a) 2009
Pacific View(g)     88,715               7.16 % 602 (a) 2011
Parklane Mall                 20,000   6.75 % interest only   (f)
Queens Center     98,278         99,300       6.88 % 633 (a) 2009
Rimrock Mall(h)     45,966         29,845       7.45 % 320 (a) 2011
Santa Monica Place(i)     84,275         84,939       7.70 % 606 (a) 2010
South Plains Mall     63,474         64,077       8.22 % 454 (a) 2009
South Towne Center     64,000         64,000       6.61 % interest only   2008
Valley View Center     51,000         51,000       7.89 % interest only   2006
Villa Marina Marketplace(j)             58,000       7.23 % interest only   2006
Vintage Faire Mall(k)     69,245         69,853       7.89 % 508 (a) 2010
Westside Pavilion     99,590         100,000       6.67 % interest only   2008

  Total–Wholly Owned Centers   $ 1,157,630   $ 81,882   $ 1,119,684   $ 133,063            

Joint Venture Centers (at pro rata share):                                    
Broadway Plaza (50%)(l)       $ 35,328       $ 36,032   6.68 % 257 (a) 2008
Pacific Premier Retail Trust (51%)(l):                                    
  Cascade Mall   $ 12,642       $ 13,261       6.50 % 122 (a) 2014
  Kitsap Mall/ Kitsap Place(m)     31,110         31,110       8.06 % 230 (a) 2010
  Lakewood Mall(n)     64,770         64,770       7.20 % interest only   2005
  Lakewood Mall(o)     8,224         8,224       4.38 % interest only   2003
  Los Cerritos Center     59,385         60,174       7.13 % 421 (a) 2006
  North Point Plaza     1,747         1,821       6.50 % 16 (a) 2015
  Redmond Town Center–Retail     31,564         32,176       6.50 % 224 (a) 2011
  Redmond Town Center–Office(p)         44,324         45,500   6.77 % 370 (a) 2009
  Stonewood Mall(q)     39,653         39,653       7.41 % 275 (a) 2010
  Washington Square     58,339         59,441       6.70 % 421 (a) 2009
  Washington Square Too     6,088         6,318       6.50 % 53 (a) 2016
SDG Macerich Properties L.P. (50%)(l)(r)     185,306         186,607       6.54 % 1,120 (a) 2006
SDG Macerich Properties L.P. (50%)(l)(r)     92,250         92,250       2.39 % interest only   2003
SDG Macerich Properties L.P. (50%)(l)(r)     40,700         40,700       2.27 % interest only   2006
West Acres Center (19%)(l)(s)     7,425         7,600       6.52 % 57 (a) 2009
West Acres Center (19%)(l)(t)     1,894               9.17 % 18 (a) 2009

    Total–Joint Venture Centers   $ 641,097   $ 79,652   $ 644,105   $ 81,532            

    Total–All Centers   $ 1,798,727   $ 161,534   $ 1,763,789   $ 214,595            

(a)
This represents the monthly payment of principal and interest.

58    MACERICH 2001 Financial Statements


(b)
On May 2, 2001, the Company refinanced the debt on Capitola Mall. The prior loan was paid in full and a new note was issued for $48,500 bearing interest at a fixed rate of 7.13% and maturing May 15, 2011.

(c)
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 that 35% of the amount by which the property's gross receipts (as defined in the loan agreement) exceeds a base amount specified therein. Contingent interest expense recognized by the Company was $584, $417 and $385 for the years ended December 31, 2001, 2000 and 1999, respectively.

(d)
This note was issued at a discount. The discount is being amortized over the life of the loan using the effective interest method. At December 31, 2001 and December 31, 2000, the unamortized discount was $297 and $331, respectively.

(e)
This loan is cross collateralized by Green Tree Mall, Crossroads Mall-Oklahoma and the Centre at Salisbury.

(f)
These loans were paid off in full on March 31, 2001.

(g)
This loan was issued on July 10, 2001 for $89,000, and may be increased up to $96,000 subject to certain conditions.

(h)
On October 9, 2001, the Company refinanced the debt on Rimrock Mall. The prior loan was paid in full and a new note was issued for $46,000 bearing interest at a fixed rate of 7.45% and maturing October 1, 2011. The Company incurred a loss on early extinguishment of the prior debt in October 2001 of $1,702.

(i)
On October 2, 2000, the Company refinanced this loan with a 10 year fixed rate $85,000 loan bearing interest at 7.70%. The prior loan bore interest at LIBOR plus 1.75%.

(j)
This property was sold on December 14, 2001. The buyer of the property assumed the debt in full.

(k)
On August 31, 2000, the Company refinanced the debt on Vintage Faire. The prior loan was paid in full and a new note was issued for $70,000 bearing interest at a fixed rate of 7.89% and maturing September 1, 2010. The Company incurred a loss on early extinguishment of the prior debt in 2000 of $984.

(l)
Reflects the Company's pro rata share of debt.

(m)
At acquisition, this debt was recorded at its fair value of $41,475, which included an unamortized premium of $2,050. This premium was being amortized as interest expense over the life of the loan using the effective interest method. The joint venture's monthly debt service was $349 and was calculated based on an 8.60% interest rate. At December 31, 1999, the joint venture's unamortized premium was $1,365. On June 1, 2000, the joint venture paid off in full the old debt and a new note was issued for $61,000 bearing interest at a fixed rate of 8.06% and maturing June 2010. The new loan is interest only until December 31, 2001. Effective January 1, 2002, monthly principal and interest of $450 will be payable through maturity. The new debt is cross-collateralized by Kitsap Mall and Kitsap Place.

(n)
In connection with the acquisition of this property, the joint venture assumed $127,000 of collateralized fixed rate notes (the "Notes"). The Notes bear interest at an average fixed rate of 7.20% and mature in August 2005. The Notes require the joint venture 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 December 31, 2001 and at December 31, 2000.

(o)
On July 28, 2000, the joint venture placed a $16,125 floating rate note on the property bearing interest at LIBOR plus 2.25% and maturing July 2003. At December 31, 2001 and 2000, the total interest rate was 4.38% and 9.0%, respectively.

MACERICH 2001 Financial Statements    59


(p)
Concurrent with the acquisition, the joint venture placed $76,700 of debt and obtained a construction loan for an additional $16,000. The entire principal of $16,000 has been drawn on the construction loan.

(q)
On December 1, 2000, the joint venture refinanced the debt on Stonewood. The prior loan was paid in full and a new note was issued for $77,750 bearing interest at a fixed rate of 7.41% and maturing December 11, 2010. The joint venture incurred a loss on early extinguishment of the prior debt in 2000 of $375.

(r)
In connection with the acquisition of these Centers, the joint venture assumed $485,000 of mortgage notes payable which are collateralized by the properties. At acquisition, the $300,000 fixed rate portion of this debt reflected a fair value of $322,700, which included an unamortized premium of $22,700. This premium is being amortized as interest expense over the life of the loan using the effective interest method. At December 31, 2001 and December 31, 2000, the unamortized balance of the debt premium was $13,512 and $16,114, respectively. This debt is due in May 2006 and requires monthly payments of $1,852. $184,500 of this debt 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 December 31, 2000, respectively. This variable rate debt is covered by an interest rate cap agreement, which effectively prevents the interest rate from exceeding 11.53%. On April 12, 2000, the joint venture issued $138,500 of additional mortgage notes, which are collateralized by the properties and are due in May 2006. $57,100 of this debt requires fixed monthly interest payments of $387 at a weighted average rate of 8.13% while the floating rate notes of $81,400 require monthly interest payments at a variable weighted average rate (based on LIBOR) of 2.27% and 7.08% at December 31, 2001 and December 31, 2000, respectively. This variable rate debt is covered by an interest rate cap agreement, which effectively prevents the interest rate from exceeding 11.83%.

(s)
On January 4, 1999, the joint venture replaced the prior debt with a new loan of $40,000. The loan has a fixed interest rate of 6.52% and matures January 2009. The debt is interest only until January 2001 at which time monthly payments of principal and interest will be due in the amount of $299.

(t)
On September 27, 2001, the joint venture placed a $10,000 loan on the property bearing interest at a fixed rate of 9.17% maturing December 1, 2009.

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:

Years Ending
December 31,

  Wholly-Owned Centers

  Joint Venture Centers
(at pro rata share)

  Total


2002   $    13,585   $  7,766   $    21,351
2003   26,838   109,129   135,967
2004   132,200   9,241   141,441
2005   15,671   74,752   90,423
2006   67,851   104,723   172,574
2007 and beyond   983,367   415,138   1,398,505

    $1,239,512   $720,749   $1,960,261

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:

Years Ending
December 31,

   

2002   $168,436
2003   158,737
2004   147,433
2005   130,029
2006   112,246
2007 and beyond   441,355

    $1,158,236

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:

Years Ending
December 31,

   

2002   $2,022
2003   2,022
2004   2,026
2005   2,026
2006   2,026
2007 and beyond   113,028

    $123,150

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:

 
  Incentive Plans

  Non-Employee Director Plan

   
  Weighted
Average
Exercise Price
On Exercisable
Options
At Year End

 
  # of Options
Exercisable
At Year End

 
  Shares

  Option Price
Per Share

  Shares

  Option Price
Per Share


Shares outstanding at December 31, 1998   1,986,311   $  19.00-$  27.38   30,500   $  19.00-$  28.50   1,330,654   $  19.38

  Granted   520,000   $  23.375   5,000   $  20.688        
  Exercised   (88,250 ) $  19.00              
  Forfeited   (18,500 )              

Shares outstanding at December 31, 1999   2,399,561   $  19.00-$27.38   35,500   $  19.00-$28.50   1,536,473   $  21.72

  Granted   60,000   $  19.813-$  20.313   5,000   $  19.813        
  Exercised   (15,000 ) $  19.00              

Shares outstanding at December 31, 2000   2,444,561   $  19.00-$  27.38   40,500   $  19.00-$  28.50   1,934,680   $  21.91

  Granted   22,500   $  26.600   2,500   $  26.600        
  Exercised   (248,489 ) $  19.00              
  Forfeited   (433,500 ) $  19.00-$  27.38              

Shares outstanding at December 31, 2001   1,785,072   $  19.00-$  27.38   43,000   $  19.00-$  28.50   1,609,740   $  21.56

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:

 
  2001 Quarter Ended

  2000 Quarter Ended

 
  Dec 31

  Sept 30

  June 30

  Mar 31

  Dec 31

  Sept 30

  June 30

  Mar 31


Revenues   $  93,233   $  82,886   $  80,691   $  77,763   $  91,597   $  76,937   $  76,255   $  75,303
Income before minority interest and extraordinary items   54,042   17,245   13,907   13,564   26,658   15,102   14,628   13,976
Income before extraordinary items   37,370   9,267   6,827   6,605   16,199   8,153   7,597   7,289
Net income–available to common stockholders   35,523   9,267   6,826   6,419   16,879   7,169   7,597   6,326
Income before extraordinary items and cumulative effect of change in accounting principle per share   $  0.97   $  0.27   $  0.20   $  0.20   $  0.46   $  0.24   $  0.22   $  0.22
Net income–available to common stockholders per share–basic   $  1.05   $  0.27   $  0.20   $  0.20   $  0.46   $  0.21   $  0.22   $  0.22

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



REPORT OF INDEPENDENT ACCOUNTANTS

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.

PricewaterhouseCoopers LLP

February 13, 2002

70    MACERICH 2001 Financial Statements


PACIFIC PREMIER RETAIL TRUST
(A Maryland Real Estate Investment Trust)

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 
  December 31,

 
  2001

  2000


ASSETS:            
Property, net   $ 1,001,032   $ 1,001,484
Cash and cash equivalents     6,727     12,174
Tenant receivables, net     8,347     9,756
Deferred rent receivables     7,888     5,806
Deferred charges, less accumulated amortization of $1,977 and $851 at December 31, 2001 and 2000, respectively     4,879     3,745
Other assets     1,404     612

  Total assets   $ 1,030,277   $ 1,033,577

LIABILITIES AND STOCKHOLDERS' EQUITY:            
Mortgage notes payable:            
  Related parties   $ 86,910   $ 89,215
  Others     614,746     621,465

  Total     701,656     710,680
Accounts payable     1,416     2,524
Accrued interest payable     3,598     3,705
Accrued real estate taxes     2,468     1,486
Tenant security deposits     1,278     1,171
Other accrued liabilities     4,605     3,425
Due to related parties     863     1,802

  Total liabilities     715,884     724,793

Commitments (Note 8)            
Stockholders' equity:            
    Series A redeemable preferred stock, $.01 par value, 625 shares authorized, issued and outstanding at December 31, 2001 and 2000        
    Common stock, $.01 par value, 219,611 shares authorized issued and outstanding at December 31, 2001 and 2000     2     2
    Additional paid in capital     307,613     307,613
    Accumulated earnings     6,778     1,169

      Total stockholders' equity     314,393     308,784

        Total liabilities and stockholders' equity   $ 1,030,277   $ 1,033,577

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

MACERICH 2001 Financial Statements    71


PACIFIC PREMIER RETAIL TRUST
(A Maryland Real Estate Investment Trust)

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2001 and 2000 and
for the Period from February 18, 1999 (Inception)
through December 31, 1999

(Dollars in thousands)

 
  2001

  2000

  1999


Revenues:                  
  Minimum rents   $ 100,315   $ 94,496   $ 46,170
  Percentage rents     6,140     5,872     3,497
  Tenant recoveries     37,604     34,187     15,866
  Other income     1,950     1,605     336

Total revenues     146,009     136,160     65,869

Expenses:                  
  Interest     48,569     46,527     21,642
  Depreciation and amortization     22,817     20,238     10,463
  Maintenance and repairs     9,757     9,051     4,627
  Real estate taxes     11,028     10,317     4,743
  Management fees     4,952     4,584     2,253
  General and administrative     2,909     2,280     1,132
  Ground rent     1,157     634     905
  Insurance     1,485     891     301
  Marketing     824     895     662
  Utilities     6,002     4,978     2,012
  Security     3,892     3,524     1,724

Total expenses     113,392     103,919     50,464

    Income before minority interest, extraordinary item and cumulative effect of change in accounting principle     32,617     32,241     15,405
Minority interest     82     63     14
Extraordinary (gain) loss on early extinguishment of debt     (69 )   375    
Cumulative effect of change in accounting principle         397    

    Net income   $ 32,604   $ 31,406   $ 15,391

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

72    MACERICH 2001 Financial Statements


PACIFIC PREMIER RETAIL TRUST
(A Maryland Real Estate Investment Trust)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2001 and 2000 and
for the Period from February 18, 1999 (Inception)
through December 31, 1999

(Dollars in thousands, except share data)

 
  Common stock
(# of shares)

  Preferred
stock
(# of shares)

  Common
stock Par
value

  Additional
Paid in
capital

  Accumulated
Earnings

  Total
Stockholders'
Equity

 

 
Common stock issued to Macerich PPR Corp.   111,691       $1   $115,527       $115,528  
Common stock issued to Ontario Teachers' Pension Plan Board   107,920       1   189,677       189,678  
Preferred stock issued       625       2,500       2,500  
Issuance costs               (91 )     (91 )
Distributions paid to Macerich PPR Corp.                   $(6,524 ) (6,524 )
Distributions paid to Ontario Teachers' Pension Plan Board                   (6,268 ) (6,268 )
Other distributions paid                   (18 ) (18 )
Net income                   15,391   15,391  

 
Balance December 31, 1999   219,611   625   2   307,613   2,581   310,196  
Distributions paid to Macerich PPR Corp.                   (16,645 ) (16,645 )
Distributions paid to Ontario Teachers' Pension Plan Board                   (16,098 ) (16,098 )
Other distributions paid                   (75 ) (75 )
Net income                   31,406   31,406  

 
Balance December 31, 2000   219,611   625   2   307,613   1,169   308,784  
Distributions paid to Macerich PPR Corp.                   (13,677 ) (13,677 )
Distributions paid to Ontario Teachers' Pension Plan Board                   (13,243 ) (13,243 )
Other distributions paid                   (75 ) (75 )
Net income                   32,604   32,604  

 
Balance December 31, 2001   219,611   625   $2   $307,613   $6,778   $314,393  

 

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

MACERICH 2001 Financial Statements    73


PACIFIC PREMIER RETAIL TRUST
(A Maryland Real Estate Investment Trust)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2001 and 2000 and
for the Period from February 18, 1999 (Inception)
through December 31, 1999

(Dollars in thousands)

 
  2001

  2000

  1999

 

 
Cash flows from operating activities:                    
  Net income   $ 32,604   $ 31,406   $ 15,391  

 
Adjustment to reconcile net income to net cash provided by operating activities:                    
  Depreciation and amortization     22,817     20,238     10,463  
  Minority interest     82     63     14  
  Extraordinary (gain) loss on early extinguishment of debt     (69 )   375      
  Cumulative effect of change in accounting principle         397      
Changes in assets and liabilities:                    
    Tenant receivables, net     1,409     (3,360 )   (3,438 )
    Deferred rent receivables     (2,082 )   (3,305 )   (2,501 )
    Other assets     (792 )   166     27  
    Accounts payable     (1,108 )   (562 )   2,870  
    Accrued interest payable     (107 )   149     2,285  
    Accrued real estate taxes     982     574     (1,228 )
    Tenant security deposits     107     153     315  
    Other accrued liabilities     1,098     (5,830 )   5,435  
    Due to related parties     (939 )   323     4,108  

 
        Total adjustments     21,398     9,381     18,350  

 
        Net cash flows provided by operating activities     54,002     40,787     33,741  

 
Cash flows from investing activities:                    
  Acquisition of property and improvements     (21,119 )   (36,284 )   (389,536 )
  Deferred leasing costs     (2,287 )   (2,372 )   (704 )

 
        Net cash flows used in investing activities     (23,406 )   (38,656 )   (390,240 )

 
Cash flows from financing activities:                    
  Proceeds from notes payable         163,188     203,444  
  Payments on notes payable     (9,024 )   (123,670 )   (4,942 )
  Net proceeds from preferred stock offering             409  
  Contributions             175,266  
  Distributions     (26,620 )   (32,443 )   (12,737 )
  Preferred dividends paid     (375 )   (375 )   (73 )
  Deferred finance costs     (24 )   (952 )   (573 )

 
        Net cash flows (used in) provided by financing activities     (36,043 )   5,748     360,794  

 
        Net (decrease) increase in cash     (5,447 )   7,879     4,295  
Cash, beginning of period     12,174     4,295      

 
Cash, end of year   $ 6,727   $ 12,174   $ 4,295  

 
Supplemental cash flow information:                    
  Cash payments for interest, net of amounts capitalized   $ 48,676   $ 46,378   $ 18,087  

 
Non-cash transactions:                    
  Non-cash contribution of assets, net of assumed debt           $ 131,100  

 
  Non-cash assumption of debt           $ 150,625  

 

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

74    MACERICH 2001 Financial Statements


PACIFIC PREMIER RETAIL TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1. Organization and Basis of Presentation:

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:


Cascade Mall   Burlington, Washington
Creekside Crossing Mall   Redmond, Washington
Cross Court Plaza   Burlington, Washington
Kitsap Mall   Silverdale, Washington
Kitsap Place Mall   Silverdale, Washington
Lakewood Mall   Lakewood, California
Los Cerritos Center   Cerritos, California
Northpoint Plaza   Silverdale, Washington
Redmond Towne Center   Redmond, Washington
Redmond Office   Redmond, Washington
Stonewood Mall   Downey, California
Washington Square Mall   Portland, Oregon
Washington Square Too   Portland, Oregon

2. Summary of Significant Accounting Policies:

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.


Tenant Receivables:

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.


Revenues:

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight lining of rent adjustment." Rental income was increased by $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.


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.

76    MACERICH 2001 Financial Statements



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 lives of the assets as follows:


Buildings and improvements   5-39 years
Tenant improvements   initial term of related lease
Equipment and furnishings   5-7 years

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.


Deferred Charges:

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:


Deferred lease costs   1-9 years
Deferred financing costs   1-12 years


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:

(Dollars in thousands)

 
 
  2001

  2000

  1999

 

 
Net income   $ 32,604   $ 31,406   $ 15,391  
  Add: Book depreciation and amortization     22,817     20,238     10,463  
  Less: Tax depreciation and amortization     (23,415 )   (21,820 )   (8,796 )
  Other book/tax differences, net(1)     (2,775 )   (6,774 )   (3,142 )

 
Taxable income   $ 29,231   $ 23,050   $ 13,916  

 
(1)
Primarily due to timing differences relating to straight-line rents and prepaid rents.

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:

 
  2001

  2000

  1999

 

 
Ordinary income   $ 121.21   100.0 % $ 122.74   81.0 % $ 65.11   100.0 %
Return of capital       0.0 %   28.79   19.0 %     0.0 %

 
Dividends paid or payable   $ 121.21   100.0 % $ 151.53   100.0 % $ 65.11   100.0 %

 


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 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.

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 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.


Concentration of Risk:

The Trust maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100. At various times during the year, the Trust had deposits in excess of the FDIC insurance limit.

AT&T Wireless Services represented 12.1%, 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.


Management Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Property:

Property is summarized as follows:

 
  December 31,

 
 
  2001

  2000

 

 
Land   $ 237,754   $ 237,754  
Building and improvements     803,615     783,170  
Tenant improvements     4,180     2,348  
Equipment and furnishings     2,921     1,417  
Construction in progress     3,978     6,640  

 
      1,052,448     1,031,329  
Less, accumulated depreciation     (51,416 )   (29,845 )

 
    $ 1,001,032   $ 1,001,484  

 

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:

 
  Carrying Amount of Notes

   
   
   
 
  2001

  2000

   
   
   
Property Pledged
As Collateral

  Other

  Related
Party

  Other

  Related
Party

  Interest
Rate

  Payment
Terms

  Maturity
Date


Cascade Mall   $ 24,788       $ 26,002       6.50 % 239 (a) 2014
Kitsap Mall/Kitsap Place(b)     61,000         61,000       8.06 % 450 (a) 2010
Lakewood Mall(c)     127,000         127,000       7.20 % interest only   2005
Lakewood Mall(d)     16,125         16,125       4.38 % interest only   2003
Los Cerritos Center     116,441         117,988       7.13 % 826 (a) 2006
North Point Plaza     3,425         3,571       6.50 % 31 (a) 2015
Redmond Town Center–Retail     61,890         63,090       6.50 % 439 (a) 2011
Redmond Town Center–Office(e)       $ 86,910       $ 89,215   6.77 % 726 (a) 2009
Stonewood Mall(f)     77,750         77,750       7.41 % 539 (a) 2010
Washington Square     114,390         116,551       6.70 % 825 (a) 2009
Washington Square Too     11,937         12,388       6.50 % 104 (a) 2016

Total   $ 614,746   $ 86,910   $ 621,465   $ 89,215            


(a)
This represents the monthly payment of principal and interest.

(b)
In connection with the acquisition of this property, the Trust assumed $39,425 of debt. At acquisition, this debt was recorded at fair value of $41,475, which included an unamortized premium of $2,050. This premium was being amortized as interest expense over the life of the loan using the effective interest method. The Trust's monthly debt service was $349 and was calculated based on an 8.60% interest rate. At December 31, 1999, the Trust's unamortized premium was $1,365. On June 1, 2000, the Trust paid off in full the old debt and a new note was issued for $61,000 bearing interest at a fixed rate of 8.06% and maturing June 2010. The new loan is interest only until December 31, 2001. Effective January 1, 2002, monthly principal and interest of $450 will be payable through maturity. The new debt is cross-collateralized by Kitsap Mall and Kitsap Place.

(c)
In connection with the acquisition of this property, the Trust assumed $127,000 of collateralized fixed rate notes (the "Notes"). The Notes bear interest at an average fixed rate of 7.20% and mature in August 2005. The Notes require the Trust 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 December 31, 2001 and 2000.

(d)
On July 28, 2000, the Trust placed a $16,125 floating rate note on the property bearing interest at LIBOR plus 2.25% and maturing July 2003. At December 31, 2001 and 2000, the total interest rate was 4.38% and 9.0%, respectively.

(e)
Concurrent with the acquisition of the property, the Trust placed $76,700 of debt and obtained a construction loan for an additional $16,000. The entire principal of $16,000 has been drawn on the construction loan.

(f)
On December 1, 2000, the Trust refinanced the debt on this property. The old loan was paid in full and a new note was issued for $77,750 bearing interest at a fixed rate of 7.41% and maturing December 11, 2010. The Trust incurred a loss on early extinguishment of the old debt in 2000 of $375.

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

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:

Years Ending December 31,

   

2002   $ 10,555
2003     28,111
2004     12,806
2005     140,905
2006     121,718
2007 and beyond     387,561

    $ 701,656

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:


2002   $ 91,785
2003     88,115
2004     82,609
2005     75,285
2006     67,386
Thereafter     301,815

    $ 706,995

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.

Minimum future rental payments required under the leases are as follows:

Years Ending December 31,

   

2002   $ 1,130
2003     1,145
2004     1,145
2005     1,145
2006     1,145
Thereafter     62,984

    $ 68,694

MACERICH 2001 Financial Statements    83



Independent Auditors' Report

The Partners
SDG Macerich Properties, L.P.:

We have audited the accompanying balance sheets of SDG Macerich Properties, L.P. as of December 31, 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, Indiana
February 8, 2002

84    MACERICH 2001 Financial Statements


SDG MACERICH PROPERTIES, L.P.

Balance Sheets

As of December 31, 2001 and 2000

(Dollars in thousands)

 
  2001

  2000


ASSETS:            
Properties:            
  Land   $ 199,962   $ 199,962
  Building and improvements     845,083     829,542
  Equipment and furnishings     2,125     1,955

          1,047,170     1,031,459
  Less accumulated depreciation     86,892     62,019

      960,278     969,440
Cash and cash equivalents     9,425     7,088
Tenant receivables, including accrued revenue, less allowance for doubtful accounts of $1,043 and $1,648     23,814     20,507
Due from affiliates     51     97
Deferred financing costs, net of accumulated amortization of $750 and $358     1,822     2,508
Prepaid real estate taxes and other assets     2,898     1,327

    $ 998,288   $ 1,000,967

LIABILITIES AND PARTNERS' EQUITY:            
Mortgage notes payable   $ 636,512   $ 639,114
Accounts payable     9,341     5,945
Due to affiliates     176     156
Accrued real estate taxes     15,229     15,223
Accrued interest expense     1,575     2,064
Accrued management fee     432     557
Other liabilities     989     681

  Total liabilities     664,254     663,740
Partners' equity     334,034     337,227

    $ 998,288   $ 1,000,967

See accompanying notes to financial statements.

MACERICH 2001 Financial Statements    85


SDG MACERICH PROPERTIES, L.P.

Statements of Operations

Years ended December 31, 2001, 2000 and 1999

(Dollars in thousands)

 
  2001

  2000

  1999


Revenues:              
  Minimum rents   $ 93,628   91,333   88,051
  Overage rents     5,994   5,848   6,905
  Tenant recoveries     47,814   47,593   47,161
  Other     3,141   2,599   2,382

      150,577   147,373   144,499

Expenses:              
  Property operations     18,740   17,955   18,750
  Depreciation of properties     24,941   23,201   21,451
  Real estate taxes     18,339   18,464   18,603
  Repairs and maintenance     9,206   8,577   6,979
  Advertising and promotion     6,816   6,843   7,481
  Management fees     3,964   3,762   3,763
  Provision (recoveries) for credit losses, net     (107 ) 1,289   748
  Interest on mortgage notes     37,183   40,477   30,565
  Other     868   584   768

      119,950   121,152   109,108

    Income before cumulative effect of a change in accounting principle     30,627   26,221   35,391
  Cumulative effect of a change in accounting for derivative instruments in 2001 and overage rents in 2000     (256 ) (1,053 )

    Net income   $ 30,371   25,168   35,391

See accompanying notes to financial statements.

86    MACERICH 2001 Financial Statements


SDG MACERICH PROPERTIES, L.P.

Statements of Cash Flows

Years ended December 31, 2001, 2000 and 1999

(Dollars in thousands)

 
  2001

  2000

  1999

 

 
Cash flows from operating activities:                
  Net income   $ 30,371   25,168   35,391  
Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation of properties     24,941   23,201   21,451  
  Amortization of debt premium     (2,602 ) (2,451 ) (2,303 )
  Amortization of financing costs     429   358    
  Change in tenant receivables     (3,307 ) 192   (121 )
  Other items     2,022   (1,481 ) (2,248 )

 
    Net cash provided by operating activities     51,854   44,987   52,170  

 
Cash flows from investing activities:                
  Additions to properties     (15,779 ) (14,819 ) (12,394 )
  Proceeds from sale of land       424    

 
    Net cash used by investing activities     (15,779 ) (14,395 ) (12,394 )

 
Cash flows from financing activities:                
  Payments on mortgage note       (500 )  
  Proceeds from mortgage notes payable       138,500    
  Deferred financing costs       (2,866 )  
  Distributions to partners, net of $800 non-cash in 2000     (33,738 ) (166,970 ) (40,600 )

 
    Net cash provided by financing activities     (33,738 ) (31,836 ) (40,600 )

 
    Net change in cash and cash equivalents     2,337   (1,244 ) (824 )
Cash and cash equivalents at beginning of year     7,088   8,332   9,156  

 
Cash and cash equivalents at end of year   $ 9,425   7,088   8,332  

 
Supplemental cash flow information:                
  Cash payments for interest   $ 39,912   42,231   32,868  

 

See accompanying notes to financial statements.

MACERICH 2001 Financial Statements    87


SDG MACERICH PROPERTIES, L.P.

Statements of Partners' Equity

Years ended December 31, 2001, 2000 and 1999

(Dollars in thousands)

 
  Simon Property
Group, Inc.
affiliates

  The Macerich
Company
affiliates

  Total

 

 
Percentage ownership interest     50 % 50 % 100 %

 
Balance at December 31, 1998   $ 242,519   242,519   485,038  
  Net income     17,695   17,696   35,391  
  Distributions     (20,300 ) (20,300 ) (40,600 )

 
Balance at December 31, 1999     239,914   239,915   479,829  
  Net income     12,584   12,584   25,168  
  Distributions     (83,885 ) (83,885 ) (167,770 )

 
Balance at December 31, 2000     168,613   168,614   337,227  
  Net income     15,186   15,185   30,371  
  Other comprehensive income:                
    Transition adjustment resulting from adoption of SFAS No. 133     40   40   80  
    Derivative financial instruments     47   47   94  

 
      Total comprehensive income     15,273   15,272   30,545  
  Distributions     (16,869 ) (16,869 ) (33,738 )

 
Balance at December 31, 2001   $ 167,017   167,017   334,034  

 

See accompanying notes to financial statements.

88    MACERICH 2001 Financial Statements


SDG MACERICH PROPERTIES, L.P.

NOTES TO FINANCIAL STATEMENTS

December 31, 2001, 2000 and 1999

(Dollars in thousands)

(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:


Simon managed properties:    

  South Park Mall   Moline, Illinois
  Valley Mall   Harrisonburg, Virginia
  Granite Run Mall   Media, Pennsylvania
  Eastland Mall and Convenience Center   Evansville, Indiana
  Lake Square Mall   Leesburg, Florida
  North Park Mall   Davenport, Iowa

Macerich managed properties:    

  Lindale Mall   Cedar Rapids, Iowa
  Mesa Mall   Grand Junction, Colorado
  South Ridge Mall   Des Moines, Iowa
  Empire Mall and Empire East   Sioux Falls, South Dakota
  Rushmore Mall   Rapid City, South Dakota
  Southern Hills Mall   Sioux City, Iowa

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:


2002   $  77,325
2003   70,351
2004   62,521
2005   51,340
2006   43,208
Thereafter   142,974

    $447,719

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:


Buildings and improvements   39 years
Equipment and furnishings   5-7 years
Tenant improvements   Initial term of related lease

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

MACERICH 2001 Financial Statements    91



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.

92    MACERICH 2001 Financial Statements



(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.

MACERICH 2001 Financial Statements    93



THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

(Dollars in thousands)


Schedule III. Real Estate and Accumulated Depreciation

 
  Initial Cost to Company

   
  Gross Amount at Which Carried at Close of Period

   
   
 
  Land

  Building and
Improvements

  Equipment
and
Furnishings

  Cost
Capitalized
Subsequent to
Acquisition

  Land

  Building and
Improvements

  Furniture,
Fixtures and
Equipment

  Constuction
in Progress

  Total

  Accumulated
Depreciation

  Total Cost
Net of
Accumulated
Depreciation


Shopping Centers/Entities:                                                                  
Bristol Shopping Center   $ 132   $ 11,587   $ 0   $ 1,624   $ 132   $ 13,196   $ 0   $ 15   $ 13,343   $ 7,221   $ 6,122
Boulder Plaza     2,919     9,053     0     1,944     2,919     10,997     0     0     13,916     3,952     9,964
Capitola Mall     11,312     46,689     0     2,942     11,309     49,115     90     429     60,943     8,000     52,943
Carmel Plaza     9,080     36,354     0     1,062     9,080     37,308     37     71     46,496     3,369     43,127
Chesterfield Towne Center     18,517     72,936     2     18,688     18,517     89,416     2,194     16     110,143     22,642     87,501
Citadel, The     21,600     86,711     0     4,796     21,600     90,817     423     267     113,107     10,281     102,826
Corte Madera, Village at     24,433     97,821     0     3,234     24,433     100,837     174     44     125,488     9,152     116,336
County East Mall     4,096     20,317     1,425     7,953     4,099     28,581     838     273     33,791     13,928     19,863
Crossroads Mall–Boulder     50     37,793     64     49,241     21,616     42,441     162     22,929     87,148     26,640     60,508
Crossroads Mall–Oklahoma     10,279     43,486     291     14,104     12,797     53,926     386     1,051     68,160     13,035     55,125
Fresno Fashion Fair     17,966     72,194     0     (497 )   17,966     70,948     150     599     89,663     9,441     80,222
Great Falls Marketplace     2,960     11,840     0     669     3,090     12,379     0     0     15,469     1,259     14,210
Greeley Mall     5,601     12,648     13     9,068     5,601     21,476     172     81     27,330     12,597     14,733
Green Tree Mall     4,947     14,925     332     24,489     4,947     39,181     565     0     44,693     25,586     19,107
Holiday Village Mall     3,491     18,229     138     18,959     5,268     35,196     254     99     40,817     24,280     16,537
Northgate Mall     8,400     34,865     841     21,339     8,400     55,686     1,002     357