THE MACERICH COMPANY (The Company) and
MACERICH PREDECESSOR AFFILIATES (Predecessor)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NO. 1-12504
THE MACERICH COMPANY
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(Exact name of registrant as specified in its charter)
MARYLAND 95-4448705
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
233 Wilshire Boulevard, Suite 700, Santa Monica, CA 90401
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (310) 394-5333
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Number of shares outstanding of each of the registrant's classes of common
stock, as of November 7, 1997.
Common stock, par value $.01 per share: 25,962,155
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
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1
The Macerich Company
Form 10Q
INDEX
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets of The Company
as of September 30, 1997 and December 31, 1996. 3
Condensed consolidated statements of operations of The
Company for the periods from January 1, 1997 through
September 30, 1997 and January 1, 1996 through
September 30, 1996. 4
Condensed consolidated statements of operations of
The Company for the periods from July 1, 1997 through
September 30, 1997 and July 1, 1996 through
September 30, 1996. 5
Condensed consolidated statements of cash flows of
The Company for the periods from January 1 through
September 30, 1997 and January 1, 1996 through
September 30, 1996. 6
Notes to condensed consolidated financial statements 7 to 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 to 24
Part II: Other Information 25
2
CONDENSED CONSOLIDATED BALANCE SHEETS OF THE COMPANY
(Dollars in thousands, except per share amounts)
(Unaudited)
September 30, December 31,
1997 1996
ASSETS:
Property, net $1,286,044 $1,108,668
Cash and cash equivalents 12,820 15,643
Tenant receivables, including accrued overage rents of
$3,693 in 1997 and $3,805 in 1996 22,527 23,192
Due from affiliates 3,379 3,105
Deferred charges and other assets, net 28,307 20,716
Investment in joint ventures and the Management Companies 13,205 16,429
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Total assets $1,366,282 $1,187,753
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable:
Related parties $135,480 $135,944
Others 681,341 584,295
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Total 816,821 720,239
Bank notes payable 11,000 69,000
Convertible debentures 161,115 -
Accounts payable 1,044 4,197
Accrued interest expense 6,844 3,584
Accrued real estate taxes and ground rent expense 9,814 7,616
Due to affiliates - 430
Deferred acquisition liability 5,000 5,000
Other accrued liabilities 31,541 27,696
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Total liabilities 1,043,179 837,762
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Minority interest in Operating Partnership 102,996 112,242
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Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized - none issued - -
Common stock, $.01 par value, 100,000,000 shares
authorized, 25,960,000 and 25,743,000 shares issued and
outstanding at September 30, 1997 and December 31, 1996, respectively 257 257
Additional paid in capital 223,416 238,346
Accumulated earnings - -
Unamortized restricted stock (3,566) (854)
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Total stockholders' equity 220,107 237,749
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Total liabilities and stockholders' equity $1,366,282 $1,187,753
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The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine months ended September 30
1997 1996
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-------------------- --------------------
REVENUES:
Minimum rents $101,228 $70,890
Percentage rents 6,434 4,570
Tenant recoveries 49,558 34,033
Other 2,465 1,642
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Total Revenues 159,685 111,135
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OPERATING COSTS:
Shopping center expenses 51,830 36,076
General and administrative expense 2,099 1,862
Interest expense 47,402 30,490
Depreciation and amortization 29,815 23,799
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Total Expenses 131,146 92,227
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Equity in income (loss) of unconsolidated joint ventures
and the management companies (7,608) 2,876
Gain on sale of asset 1,620 -
Extraordinary loss on early extinguishment of debt (563) (315)
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Income of the Operating Partnership 21,988 21,469
Minority interest in net income of Operating Partnership (7,195) (8,096)
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Net income $14,793 $13,373
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==================== ====================
Earnings per common share:
Income before extraordinary items $0.59 $0.68
Extraordinary item (0.02) (0.01)
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Net income $0.57 $0.67
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==================== ====================
Dividend/distribution per common share outstanding $1.32 $1.26
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Weighted average number of
common shares outstanding 25,886,000 19,993,000
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The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended September 30,
1997 1996
REVENUES:
Minimum rents $35,674 $24,249
Percentage rents 2,278 1,482
Tenant recoveries 18,645 11,451
Other 435 567
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Total Revenues 57,032 37,749
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OPERATING COSTS:
Shopping center expenses 19,896 12,279
General and administrative expense 910 466
Interest expense 16,239 10,131
Depreciation and amortization 10,134 8,148
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Total Expenses 47,179 31,024
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Equity in income (loss) of unconsolidated joint ventures
and the management companies (8,681) 754
Gain on sale of asset 1,620 -
Extraordinary loss on early extinguishment of debt (51) -
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Income of the Operating Partnership 2,741 7,479
Minority interest in income of Operating Partnership (871) (2,820)
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Net income $1,870 $4,659
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Earnings per share:
Income before extraordinary items $0.07 $0.23
Extraordinary items 0.00 0.00
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Net income per share $0.07 $0.23
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Dividend/distribution per common share outstanding $0.44 $0.42
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Weighted average number of common shares outstanding 25,956,000 19,993,000
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The accompanying notes are an integral part of these financial statements.
5
THE MACERICH COMPANY (The Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY
(In Thousands)
For nine months ended September 30
1997 1996
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Cash flows from operating activities:
Net income $14,793 $13,373
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--------------------- --------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary loss on early extinguishment of debt 563 315
Gain on sale of assets (1,620) -
Depreciation and amortization 29,815 23,799
Amortization of discount on trust deed note payable 25 33
Minority interest in the income of the Operating Partnership 7,195 8,096
Changes in assets and liabilities:
Tenant receivables, net 663 (3,562)
Other assets (2,226) 447
Accounts payable and accrued expenses 2,305 2,009
Due to affiliates (704) (1,174)
Other liabilities 3,846 252
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Total adjustments 39,862 30,215
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Net cash provided by operating activities 54,655 43,588
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Cash flows from investing activities:
Acquisitions of property and improvements (147,585) (67,211)
Renovations and expansions of centers (10,072) (5,349)
Additions to tenant improvements (2,093) (624)
Deferred charges (9,879) (4,688)
Equity in (income) loss of unconsolidated joint ventures and
the management companies 7,608 (2,876)
Distributions from (contributions to) joint ventures (4,384) 2,058
Loans to affiliates - (3,200)
Proceeds from sale of assets 4,332 948
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Net cash used in investing activites (162,073) (80,942)
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Cash flows from financing activities:
Proceeds from notes, mortgages and debentures payable 316,115 131,544
Payments on mortgages and notes payable (162,645) (67,101)
Dividends and distributions (48,875) (40,028)
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Net cash provided by financing activities 104,595 24,415
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Net decrease in cash (2,823) (12,939)
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Cash and cash equivalents, beginning of period 15,643 15,570
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Cash and cash equivalents, end of period $12,820 $2,631
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Supplemental cash flow information:
Cash payment for interest (net of amounts capitalized) $41,069 $30,166
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Non-cash transactions:
Acquisition of Property by assumption of debt $46,202 $25,849
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Acquisition of Property by issuance of OP units $0 $600
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The accompanying notes are an integral part of these financial statements.
6
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Dollars in thousands)
1. Interim Financial Statements and Basis of Presentation:
The accompanying consolidated financial statements of The Macerich
Company ("financial statements") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements and
have not been audited by independent public accountants.
The unaudited interim financial statements should be read in
conjunction with the audited financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have
been made. The results for interim periods are not necessarily
indicative of the results to be expected for a full year.
Certain reclassifications have been made in the 1996 financial
statements to conform to the 1997 financial statement presentation.
The computation of primary earnings per share is based on net income
and the weighted average number of shares outstanding for the periods
presented. Outstanding common stock options, using the treasury method,
have less than a 3% dilutive effect on earnings per share and thus have
not been included in the computation.
2. Organization:
The Macerich Company (the "Company") was incorporated under the General
Corporation Law of Maryland on September 9, 1993 and commenced
operations effective with the completion of its initial public offering
("IPO") on March 16, 1994. The Company was formed to continue the
business of the Macerich Group, which since 1972 has focused on the
acquisition, ownership, redevelopment, management and leasing of
regional shopping centers located throughout the United States. In
1994, the Company became the sole general partner of The Macerich
Partnership L.P., (the "Operating Partnership"). The Operating
Partnership owns or has an ownership interest in 26 regional shopping
centers and three community shopping centers, including three that were
acquired in 1997. Collectively these properties and interests are
referred to as the "Centers". The Company conducts all of its
operations through the Operating Partnership and other wholly owned
subsidiaries, and the Company's three Management Companies, Macerich
Property Management Company, Macerich Management Company and Macerich
Manhattan Management Company, collectively referred to as "the
Management Companies".
The Company, a real estate investment trust under the Internal Revenue
Code of 1986, as amended, owns approximately 68% of The Operating
Partnership and is the sole General Partner. The limited partnership
interest not owned by the Company is reflected in these financial
statements as Minority Interest.
7
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies
The following are the Company's investments in various real estate
joint ventures which own regional retail shopping centers. The
Operating Partnership is a general partner in these joint ventures. The
Operating Partnership's interest in each joint venture is as follows:
The Operating Partnership's
Joint Venture Ownership %
Macerich Northwestern Associates 50%
North Valley Plaza Associates 50%
Panorama City Associates 50%
West Acres Development 19%
Manhattan Village 10%
The non-voting preferred stock of the Management Companies is owned by
the Operating Partnership, which provides the Operating Partnership the
right to receive 95% of the distributable cash flow from the Management
Companies. The Company accounts for the Management Companies and the
joint ventures using the equity method of accounting.
On August 19, 1997 Macerich acquired a 10% interest in the joint
venture that acquired Manhattan Village Mall in Manhattan Beach,
California. The results of that joint venture are included for the
period subsequent to the acquisition.
Combined and condensed balance sheets and statements of operations are
presented below for all unconsolidated joint ventures, and the
Management Companies, followed by information regarding the Operating
Partnership's beneficial interest in the combined operations.
Beneficial interest is calculated based on the Operating Partnership's
ownership interests in the joint ventures and the Management Companies.
8
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies - Continued
COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
September 30, December 31,
1997 1996
Assets:
Properties, net $153,456 $106,751
Other assets 13,212 13,257
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Total assets $166,668 $120,008
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Liabilities and partners' capital:
Mortgage notes payable $84,486 $81,925
Other liabilities 9,298 11,116
The Company's capital 13,205 16,429
Outside Partners' capital 59,679 10,538
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Total liabilities and partners' capital $166,668 $120,008
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THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
Three Months Ended Sept 30 Nine Months Ended Sept 30
1997 1996 1997 1996
Revenues $9,764 $8,782 $25,434 $24,132
--------------- --------------- --------------- ----------------
Expenses:
Shopping center expenses 3,116 3,195 8,169 6,886
Interest 1,549 1,609 4,684 4,822
Management company expense 1,493 871 3,397 2,675
Depreciation and amortization 1,256 1,202 3,501 3,244
--------------- --------------- --------------- ----------------
Total operating costs 7,414 6,877 19,751 17,627
--------------- --------------- --------------- ----------------
Gain (loss) on sale or write down of assets (20,923) - (20,576) 282
--------------- --------------- --------------- ----------------
Net income (loss) ($18,573) $1,905 ($14,893) $6,787
=============== =============== =============== ================
Significant accounting policies used by the unconsolidated joint ventures and
the Management Companies are similar to those used by the Macerich Company.
Included in mortgage notes payable are amounts due to related parties of $43,500
at September 30, 1997 and December 31, 1996. Interest expense incurred on these
borrowings amounted to $750 and $748 for the three months ended September 30,
1997 and 1996, respectively, and $2,233 and $2,236 for the nine months ended
September 30, 1997 and 1996, respectively.
9
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies - Continued
Included in gain or loss on sale or write down of assets is $20,923 of loss on
the write down of carrying cost to net realizable value on North Valley Plaza in
accordance with Financial Accounting Standards # 121. The Company's share of
that write down is $9,138.
The following table sets forth the Operating Partnership's beneficial interest
in the joint ventures and the Management Companies:
PRO RATA SHARE OF COMBINED AND STATEMENT OF
OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
Three Months Ended Sept 30 Nine Months Ended Sept 30
1997 1996 1997 1996
Revenues $4,047 $3,877 $10,933 $11,369
--------------- --------------- --------------- ---------------
Expenses:
Shopping center expenses 1,103 1,087 3,039 2,871
Interest 492 539 1,512 1,611
Management company expense 1,418 905 3,227 2,541
Depreciation and amortization 577 592 1,691 1,524
--------------- --------------- --------------- ---------------
Total operating costs 3,590 3,123 9,469 8,547
--------------- --------------- --------------- ---------------
Gain (loss) on sale or write down of assets (9,138) - (9,072) 54
--------------- --------------- --------------- ---------------
Net income (loss) ($8,681) $754 ($7,608) $2,876
=============== =============== =============== ===============
4. Property:
Property is comprised of the following:
Sept 30, December 31,
1997 1996
Land $290,272 $239,847
Building and improvements 1,133,411 990,125
Tenant Improvements 36,242 34,149
Equipment and Furnishings 6,054 4,769
Construction in Progress 10,346 4,195
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1,476,325 1,273,085
Less, accumulated depreciation (190,281) (164,417)
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$1,286,044 $1,108,668
================== ====================
10
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
5. Deferred Charges And Other Assets:
Deferred charges and other assets include leasing, financing and other assets
are:
Sept 30, December 31,
1997 1996
Leasing $27,073 $25,629
Financing 13,034 7,891
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40,107 33,520
Less, accumulated amortization (16,658) (15,434)
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23,449 18,086
Other assets 4,858 2,630
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Total $28,307 $20,716
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11
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
6. Notes and Mortgages Payable:
Notes and mortgages payable at September 30, 1997 and December 31, 1996
consists of the following:
Carrying Amount of Notes
1997 1996
Property Pledged Related Related Interest Payment Maturity
As Collateral Other Party Other Party Rate Terms Date
- ------------------- ----- ----- ----- ----- ---- ----- -- ----
Capitola Mall ---- $37,755 ---- $37,976 9.25% 316 (d) 2001
Chesterfield Towne Center $65,860 ---- ---- ---- 9.10% 548(e) 2024
Chesterfield Towne Center ---- ---- $59,023 ---- 8.75% 475(e) 2024
Chesterfield Towne Center ---- ---- 5,304 ---- 9.38% 43(e) 2024
Chesterfield Towne Center ---- ---- 1,922 ---- 8.88% 16(e) 2024
Chesterfield Towne Center 3,381 ---- 3,444 ---- 8.54% 28(d) 1999
Crossroads Mall (a) ---- 35,725 ---- 35,968 7.08% 244(d) 2010
Fresno Fashion Fair 38,000 ---- 38,000 ---- 8.4interest only 2005
Greeley Mall 17,996 ---- 18,514 ---- 8.50% 187(d) 2003
Green Tree Mall/Crossroads - OK/
Salisbury (b) 117,714 ---- 117,714 ---- 7.2interest only 2004
Holiday Village ---- 17,000 ---- 17,000 6.7interest only 2001
Lakewood Mall (c) 127,000 ---- 127,000 ---- 7.2interest only 2005
Northgate Mall ---- 25,000 ---- 25,000 6.7interest only 2001
Parklane Mall ---- 20,000 ---- 20,000 6.7interest only 2001
Queens Center 65,100 ---- 65,100 ---- (f) interest only 1999
Rimrock Mall 31,638 ---- 31,994 ---- 7.70% 244(d) 2003
South Towne Center 50,000 ---- ---- ---- (g) interest only 1999
Valley View Mall 51,000 ---- 60,000 ---- (h) interest only 2006
Villa Marina Marketplace 58,000 ---- ---- ---- 7.2interest only 2006
Vintage Faire Mall (i) 55,652 ---- 56,280 ---- 7.65% 427(d) 2003
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Total $681,341 $135,480 $584,295 $135,944
=========== =========== =========== ==========
Weighted average interest rate at September 30, 1997 7.55%
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Weighted average interest rate at December 31, 1996 7.45%
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THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
Notes:
(a) This note was issued at a discount. The discount is being
amortized over the life of the loan using the effective interest
method. At September 30, 1997 and December 31, 1996 the
unamortized discount was $438 and $463, respectively.
(b) This loan is cross collateralized by Green Tree Mall, Crossroads
Mall, Oklahoma and Salisbury.
(c) On August 15, 1995 the Company issued $127,000 of collateralized
floating rate notes (the "Notes"). The Notes bear interest at an
average fixed rate of 7.20% and mature in July 2005.
12
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
6. Mortgage Notes Payable, Continued:
The Note requires the Company to deposit all cash flow from the
property operations with a trustee to meet its obligations under
the Notes. Cash in excess of the required amount, as defined, is
released. Included in cash and cash equivalents is $750 of
restricted cash deposited with the trustee at September 30, 1997
and at December 31, 1996.
(d) This represents the monthly payment of principal and interest.
(e) This amount represents the monthly payment of principal and
interest. In addition, contingent interest, as defined in the loan
agreement, may be due to the extent 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 $0 for the period ended
September 30, 1997 and $245 for the nine months ended September 30,
1996. As of January 1, 1997 all these loans were consolidated into
a new loan of $66,200 at an interest rate of 9.1%.
(f) This loan bears interest at LIBOR plus 0.45%. There is an interest
rate protection agreement in place on the first $10,200 of this
debt with a LIBOR ceiling of 5.88% through maturity with the
remaining principal having an interest rate cap with a LIBOR
ceiling at 7.07% through 1997 and 7.7% thereafter.
(g) This loan bears interest at LIBOR plus 1.0% and the loan
can be converted into a 10 year fixed rate loan any time
prior to 1999.
(h) As of December 31, 1996 this loan bore interest at LIBOR
plus 1.50%; however, on April 16, 1997 the Company
converted this into a fixed rate loan bearing interest at
7.89% and maturing in October 2006.
(i) Included in cash and cash equivalents is $3,045 and
$3,025 at September 30, 1997 and December 31, 1996,
respectively, of cash restricted under the terms of this
loan agreement.
Certain mortgage loan agreements contain a prepayment penalty provision for
the early extinguishment of the debt.
Total interest expense capitalized during the nine months ended
September 30, 1997 and 1996 was $1,916 and $235, respectively.
The market value of mortgage notes payable at September 30, 1997 and
December 31, 1996 is estimated to be approximately $843,000 and $733,000,
respectively, based on current interest rates for comparable loans.
13
7. Bank Notes Payable:
The Company has a $50,000 unsecured line of credit with a bank. The line of
credit bears interest at LIBOR plus 1.50% and matures in June 1998. There
was a $11,000 balance outstanding on the line of credit at September 30,
1997 and $12,000 at December 31, 1996. Also, at December 31, 1996 there was
a $57,000 unsecured note which was paid off in 1997.
8. Convertible Debentures:
On June 27, 1997, the Company issued and sold $150,000 of convertible
subordinated debentures (the "Debentures") due 2002. An additional $11,115
of debentures were sold in July, 1997. The Debentures, which were sold at
par, bear interest at 7.25% annually (payable semi-annually) and are
convertible at any time, on or after 60 days, from the date of issue at a
conversion price of $31.125 per share. The Debentures mature on December
15, 2002 and are callable by the Company after June 15, 2002 at par plus
accrued interest.
9. Related-Party Transactions:
The Company engages The Management Companies to manage the operations of
the unconsolidated joint ventures and other affiliated shopping centers.
The Management Companies are reflected under the equity method of
accounting for investments.
Certain mortgage notes were held by outside partners of the individual
Macerich Group partnerships. Interest expense in connection with these
notes was $2,538 and $2,688 for the three months ended September 30, 1997
and 1996, respectively, and $7,531 and $8,105 for the nine months ended
September 30, 1997 and for 1996, respectively. Included in accrued interest
expense is interest payable to these partners of $491 and $516 at September
30, 1997 and December 31, 1996, respectively.
10. Commitments and contingencies:
Certain partnerships have entered into noncancellable operating ground
leases. The leases expire at various times through 2060, subject in some
cases to options to extend the terms of the lease. Certain leases provide
for contingent rent payments based on a percent of base rent income, as
defined. Ground rent expenses were $573 for the nine months ended September
30, 1997, and $580 for the nine months ended September 30, 1996. Ground
rent expenses were $231 and $192 for three months ended September 30, 1997
and 1996, respectively.
Perchloroethylene (PCE) has been detected in soil and groundwater in the
vicinity of a dry cleaning establishment at North Valley Plaza. The
California Department of Toxic Substance Control (DTSC) has advised the
Company that very low levels of Dichlorethylene (1,2,DCE) a degradation
byproduct of PCE, have been detected in a water well located 1/4 mile west
from the dry cleaners, and that the dry cleaning facility may have
contributed to the introduction of 1,2 DCE into the water well. According
to DTSC, the maximum contaminant level (MCL) for 1,2DCE which is permitted
in drinking water is 6 parts per billion (ppb); and the 1,2DCE was detected
in the water well at 1.2 ppb, which is below the MCL. The Company has
retained an environmental consultant and has initiated extensive testing of
the site. Remediation began in October, 1997. The joint venture that owns
that property had accrued a $620 reserve at September 30, 1997. In
addition, $220 has already been incurred, to cover professional fees,
testing costs and remediation.
14
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
10. Commitments and contingencies - Continued:
Toluene, a petroleum constituent, was detected in one of three groundwater
dewatering system holding tanks at the Queens Center. Although the source
of the toluene has not been fully defined, the Company suspects the source
to be a) an adjacent service station and/or b) a previous automotive
service station operation, which occurred on-site prior to development of
the mall. Toluene was detected at levels of 410 and 160 parts per billion
(ppb) in samples taken from the tank in October, 1995 and February 1996,
respectively. Additional samples were taken in May and December of 1996,
with results of .63 ppb and "non-detect" for the May sampling event and
16.2 ppb and 25.2 ppb for the December sampling event. The maximum
containment level (MCL) for toluene in drinking water is 150 ppb. Although
the Company believes that no remediation will be required, it has set up a
$150 reserve, of which $11 has already been incurred, to cover professional
fees and testing costs. The Company intends to look to the responsible
parties and insurers if remediation is required.
Dry cleaning chemicals, including PCE were detected in soil and groundwater
in the vicinity of a dry cleaning establishment at Villa Marina
Marketplace. The previous owner of the property has reported the release to
the local government authorities and has agreed, subject to a limited
indemnity agreement, to fully assess and remediate the site to the extent
required by those authorities. The previous owner removed the dominant
source of impacted soil in 1996. The local regulators have confirmed in
writing that no further action is required with respect to the soil and
have requested additional assessment of the groundwater. The previous owner
has conducted such assessment and has submitted its data to the local
regulators. Although the Company believes that it will not be required to
participate in assessment or remediation activities, it has set up a $150
reserve ($9 of which has already been incurred) to cover professional and
legal fees.
Dry cleaning chemicals including PCE were detected in soil and groundwater
in the vicinity of a former dry cleaning establishment at Huntington
Center. The release has been reported to the local government authorities.
The Company has retained an environmental consultant and is initiating
additional site assessment activities to attempt to determine the extent to
which groundwater has been impacted. The Company estimates, based on the
data currently available, that costs for assessment, remediation and legal
services will not exceed $500. Consequently, a $500 reserve was established
at the time of the acquisition ($9 of which has already been incurred) to
cover professional and legal fees. The Company intends to look to
responsible parties and insurers for cost recovery.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has
been detected in structural fireproofing throughout much of the Mall.
Recent testing data conducted by a professional environmental consulting
firm indicates that the fireproofing is largely inaccessible to building
occupants and is well adhered to the structural members. Additionally,
airborne concentrations of asbestos are well within OSHA's permissible
exposure limit (PEL) of .1 fcc. The Company intends to abate asbestos
fireproofing as tenant spaces become vacant. A reserve of $3,300 was set up
at acquisition ($94 of which has already been incurred) to cover future
removal of this asbestos, as necessary.
15
THE MACERICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars in thousands)
11. Acquisition:
South Towne Center was acquired in March, 1997 for approximately $98,000,
which included assumption of debt of $46,200 and $51,800 in cash. On a pro
forma basis, reflecting this acquisition as if it had occurred on January
1, 1997, the Company would have reported, for the nine months ended
September 30, 1997, total revenues of $161,723, net income of $14,238, and
net income per share of $0.55. On a pro forma basis, if the acquisition had
occurred on January 1, 1996, the Company would have reported, for the nine
months ended September 30, 1996, total revenues of $118,364, net income of
$12,442 and net income per share of $0.62. This pro forma information is
based on assumptions management believes to be appropriate. The pro forma
information is not necessarily indicative of what the actual results would
have been had the acquisition occurred at the beginning of the period
indicated, nor does it purport to project the Company's financial position
or results of operations at any future date or for any future period.
Stonewood Mall was acquired in August, 1997 for approximately $92,000. The
Company paid cash for the acquisition and concurrently borrowed $58,000
from its credit facility collateralized by Villa Marina Marketplace. On a
pro forma basis, reflecting this acquisition as if it had occurred on
January 1, 1997, the Company would have reported, for the nine months ended
September 30, 1997, total revenues of $166,046, net income of $15,115, and
net income per share of $0.58. On a pro forma basis, if the acquisition had
occurred on January 1, 1996, the Company would have reported, for the nine
months ended September 30, 1996, total revenues of $120,182, net income of
$13,792 and net income per share of $0.69. This pro forma information is
based on assumptions management believes to be appropriate. The pro forma
information is not necessarily indicative of what the actual results would
have been had the acquisition occurred at the beginning of the period
indicated, nor does it purport to project the Company's financial position
or results of operations at any future date or for any future period.
12. Subsequent Event:
On November 6, 1997 a dividend of $0.46 per share was declared for
shareholder and OP unit holders of record on November 21, 1997. The
dividend is payable on December 9, 1997.
16
THE MACERICH COMPANY (The Company)
Item II
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is based primarily on the consolidated balance
sheet of the Macerich Company ("the Company") as of September 30, 1997, and also
compares the activities for the nine months and three months ended September 30,
1997, to the activities for the nine months and three months ended September 30,
1996.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect the fair statement of the results for the interim periods presented, and
all such adjustments are of a normal recurring nature.
This Quarterly Report on Form 10-Q contains or incorporates statements
that constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number of
places in this Quarterly Report on Form 10-Q and include statements regarding,
among other matters, the Company's growth opportunities, the Company's
acquisition strategy, regulatory matters pertaining to compliance with
governmental regulations and other factors affecting the Company's financial
condition or results of operations. Stockholders are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks, uncertainties and other factors which may cause actual results,
performance or achievements to differ materially from the future results,
performance or achievements, expressed or implied in such forward looking
statements.
The following table reflects the Company's acquisitions in 1995, 1996
and 1997:
Date
Acquired Location
"1995 Acquisition Centers":
The Centre at Salisbury August 15, 1995 Salisbury, Maryland
Capitola Mall December 21, 1995 Capitola, California
Queens Center December 28, 1995 Queens, New York
"1996 Acquisition Centers":
Villa Marina Marketplace January 25, 1996 Marina Del Rey, California
Valley View Mall October 21, 1996 Dallas, Texas
Rimrock Mall November 27, 1996 Billings, Montana
Vintage Faire Mall November 27, 1996 Modesto, California
Buenaventura Mall December 18, 1996 Ventura, California
Fresno Fashion Fair December 18, 1996 Fresno, California
Huntington Center December 18, 1996 Huntington Beach, California
"1997 Acquisition Centers":
South Towne Center March 27, 1997 Sandy, Utah
Stonewood Mall August 6, 1997 Downey, California
17
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
As a result of the acquisitions, many of the variations in the results
of operations, discussed below, occurred due to the addition of these properties
to the portfolio during 1997 and 1996. Many factors, such the availability and
cost of capital, overall debt to market capitalization level, interest rates and
availability of potential acquisition targets that meet the Company's criteria,
impact the Company's ability to acquire additional properties. Accordingly,
management is uncertain as to whether during the balance of 1997, and in future
years, there will be similar acquisitions and corresponding increases in
revenues, net income and funds from operations that occurred as a result of the
1997 and 1996 Acquisition Centers. All other centers are referred to herein as
the "Same Centers".
The bankruptcy and/or closure of retail stores, particularly Anchors,
may reduce customer traffic and cash flow generated by a Center. During 1997
Montgomery Wards filed bankruptcy. The Company has nine Montgomery Wards stores
in its portfolio. Montgomery Wards has not as of yet disclosed whether they will
cease to operate any of their stores in the Company's centers. During 1995,
Federated Department Stores, Inc. announced the closure of the Broadway Stores
at Panorama and Huntington Center, and Weinstocks at Parklane. Although the
Panorama store has been sold to Wal-Mart, and the Company is replacing the other
two stores with multi-screen theater complexes. The long-term closure of these
or other stores could adversely affect the Company's performance.
In addition, the Company's success in the highly competitive real
estate shopping center business depends upon many other factors, including
general economic conditions, the ability of tenants to make rent payments,
increases or decreases in operating expenses, occupancy levels, changes in
demographics, competition from other centers and forms of retailing and the
ability to renew leases or relet space upon the expiration or termination of
leases.
18
THE MACERICH COMPANY (The Company)
Results of Operations - Nine months Ended September 30, 1997 and 1996
Revenues
Minimum and percentage rents together increased $32.2
million to $107.7 million for the nine months ended September 30, 1997
compared to $75.5 million in the nine months ended September 30, 1996.
The Acquisition Centers contributed virtually all of this increase.
Tenant recoveries for the nine months ended September 30, 1997
increased by $15.5 million. This was due to the addition of the 1997
and 1996 Acquisition Centers ($15.4 million) and increases in
recoveries at the Same Centers of $0.1 million which resulted from
higher recoverable expenses.
Expenses
Operating expenses, including shopping center, management,
leasing and ground rent expense, increased by $15.8 million for the
nine months ended September 30, 1997 compared to the same period in
1996. This increase was due to the addition of the 1997 and 1996
Acquisition Centers ($16.2 million) partially offset by decreases in
the Same Centers recoverable expenses of $0.4 million. Depreciation and
amortization increased by $6.0 million. This increase was primarily due
to the 1996 Acquisition Centers. Interest expense increased by $16.9
million primarily due to the increased interest expense on debt used to
acquire to the 1997 and 1996 Acquisition Centers.
Income (Loss) From Unconsolidated Joint Ventures and The Management
Companies
The income (loss) from unconsolidated joint ventures and
management companies decreased to $(7.6) million compared to $2.9
million for the period ended September 30, 1996. This decrease was
primarily due to the write down of carrying costs to net realizable
value on North Valley Plaza. The Company's share of the write down is
$9,138.
Loss on Early Extinguishment of Debt
The Company paid off $160.2 million of debt during the second
and third quarters of 1997 resulting in unamortized loan costs of
$0.563 million being written off as an extraordinary item for the nine
months ending September 30, 1997 compared to $0.315 million for the
same period in 1996.
Net Income
Net income for the period increased to $14.8 million
compared to $13.4 million for the nine months ended September 30, 1996.
This increase was due to the factors discussed above.
Cash Flows From Operating Activities
As a result of the factors discussed above, cash flow from
operations increased to $54.6 million for the nine months ended
September 30, 1997 from $43.6 million for the same period in 1996.
19
THE MACERICH COMPANY (The Company)
Cash Flows From Investing Activities
Net cash flow used in investing activities increased to
$(162.1) million from $(80.9) million due primarily to more cash being
used for acquisitions in 1997 compared to 1996.
20
THE MACERICH COMPANY (The Company)
Results of Operations - Three months Ended September 30, 1997 and 1996
Revenues
Minimum and percentage rents together increased $12.2
million. Of this increase approximately $13.1 million related to the
1997 and 1996 Acquisition Centers. This was somewhat offset by a
decrease of $0.9 million from the Same Centers.
Tenant recoveries increased to $18.6 million in 1997, from
$11.5 million in 1996. The Acquisition Centers were responsible for
$4.2 million of this increase and the balance of the increase was
primarily from the Same Centers.
Expenses
Operating expenses, including shopping center and ground rent
expenses, increased by $7.6 million to $19.9 million in 1997, most of
the change related to the Acquisition Centers ($6.5 million). The
balance of the change was primarily due to higher Same Center
recoverable expenses of $1.1 million. Depreciation and amortization for
the quarter increased to $10.1 million from $8.1 million for the same
period in 1996. Approximately $2.2 million of this increase was
attributable to the Acquisition Centers. Interest expense increased
from $10.1 million in 1996 to $16.2 million in 1997. Most of the
increase related to debt assumed on, or debt incurred to acquire, the
Acquisition Centers.
Income (Loss) From Unconsolidated Joint Ventures and
The Management Companies
The income (loss) from unconsolidated joint ventures and the
Management Companies decreased from $754 in 1996 to $(8.7) million in
1997. This decrease was primarily due to the write down of carrying
costs of net realizable value on North Valley Plaza. The Company's
share of the write down is $9,138.
Net Income
Net income for the period decreased to $1.9 million from
$4.7 million for the three months ended September 30, 1996. This
decrease was due to the factors discussed above.
21
THE MACERICH COMPANY (The Company)
Liquidity and Capital Resources
The Company intends to meet its short term liquidity
requirements through cash generated from operations and working capital
reserves. The Company anticipates that revenues will continue to
provide necessary funds for its operating expenses and debt service
requirements, and to pay dividends to stockholders in accordance with
REIT requirements. The Company anticipates that cash generated from
operations, together with cash on hand, will be adequate to fund
capital expenditures which will not be reimbursed by tenants, other
than non-recurring capital expenditures. Capital for major expenditures
or redevelopments has been, and is expected to continue to be, obtained
from equity or debt financings.
The Company believes that it will have access to the capital
necessary to expand its business in accordance with its strategies for
growth and maximizing Funds from Operations. The Company presently
intends to obtain additional capital necessary to expand its business
through a combination of additional equity offerings and debt
financings.
The Company's total outstanding loan indebtedness at
September 30, 1997 was $1,017.9 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 Operating Partnership,
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 into stock) rate of 47% at September 30, 1997.
Such debt consists primarily of conventional mortgages payable secured
by individual properties, plus $161.1 million of convertible debentures
maturing in December, 2002. At September 30, 1997 the Company had a
total of $126.1 million of floating rate indebtedness. In connection
with $65.1 million of the Company's floating rate indebtedness, the
Company has entered into interest rate protection agreements that limit
the Company's exposure to increases in interest rates.
The Company has filed a shelf registration, which is not yet
effective, to sell $500 million of common stock and common stock
warrants.
The Company's line of credit is $50 million. The outstanding
borrowings on the line of credit at September 30, 1997 were $11.0
million.
At September 30, 1997 the Company had cash and cash
equivalents available of $12.8 million.
22
THE MACERICH COMPANY (The Company)
Funds From Operations
The Company believes that the most significant measure of its
performance is Funds from Operations ("FFO"). FFO is defined by The
National Association of Real Estate Investment Trusts ("NAREIT") to be:
Net income, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization excluding
depreciation of personal property, amortization of financing cost and
amortization of financial instruments, and after adjustments for
unconsolidated joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect FFO on
the same basis. Also, extraordinary items and significant non-recurring
events are excluded from the FFO calculation. FFO does not represent
cash flow from operations, as defined by generally accepted accounting
principles, and is not necessarily indicative of cash available to fund
all cash flow needs. The following reconciles net income to FFO:
Nine months ended Three months ended
Sept 30, Sept 30,
1997 1996 1997 1996
---- ---- ---- ----
(amounts in thousands)
Net income $14,793 $13,373 $1,870 $4,659
Adjustments to reconcile
net income to FFO:
Loss on early extinguishment of debt 563 315 51 -
Gain on sale of assets (1,620) - (1,620) -
Minority interest 7,195 8,096 871 2,820
Depreciation and amortization on
wholly owned properties 29,815 23,799 10,134 8,148
Less amortization of loan costs and
financial instruments and
depreciation of personal property (1,765) (1,896) (708) (579)
Interest on convertible debentures 3,048 - 2,928 -
Pro rata share of joint venture
depreciation and amortization of real estate 1,690 1,524 578 592
Gain on sale or write-down of assets from
joint ventures (pro rata) 9,072 (54) 9,138 -
--------------- -------------- --------------- ---------------
Total FFO $62,791 $45,157 $23,242 $15,640
=============== ============== =============== ===============
Weighted average number of shares outstanding,
assuming full conversion of debentures and OP Units 39,769 32,111 43,185 32,111
=============== ============== =============== ===============
The 1997 weighted average number of shares outstanding
includes the conversion of convertible debentures of $161,115,000,
bearing interest at 7.25% at a conversion price of $31.125, of which
$150,000,000 were issued on June 27, 1997 and an additional $11,115,000
were sold in July, 1997.
Included in minimum rents for the nine months ended September
30, 1997 were $2.6 million of rents attributable to the accounting
practice of "straight lining of rents." This compares to $1.3 million
for the same period in 1996.
23
THE MACERICH COMPANY (The Company)
Inflation
In the last three years, inflation has not had a
significant impact on the Company because of a relatively low inflation
rate. Substantially all the leases at the Centers have rent adjustments
periodically through the lease term. These rent increases are either in
fixed increments or based on increases in the Consumer Price Index. In
addition, many of the leases are for terms of less than ten years,
which enables the Company to replace existing leases with new leases at
higher base rents if the rents of the existing leases are below the
then existing market rate. Additionally, most of the leases require the
tenants to pay their pro rata share of operating expenses. This reduces
the Company's exposure to increases in costs and operating expenses
resulting from inflation.
New Accounting Pronouncements, Issued But Not Yet Effective
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" (EPS). SFAS No. 128 supercedes and simplifies
the existing computational guidelines under Accounting Principles
Board Opinion No. 15. The new pronouncement is effective for
periods ended after December 15, 1997. Among other changes, SFAS No.
128 eliminates the presentation of primary EPS and replaces it with
basic EPS for which common stock equivalents are not considered in
the computation. SFAS No. 128 also revises the computation of
diluted EPS. The Company does not expect SFAS No. 128 to have
a material impact on its EPS, financial condition or results of
operations.
In June 1997, the FASB issued SFAS No. 130 Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. The Company does not expect this pronouncement to
materially impact the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This
statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. The new standard becomes effective for the Company
for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the
requirements of this standard. The Company does not expect this
pronouncement to materially change the Company's current reporting and
disclosures.
24
PART II
Other Information
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Earnings per share
(b) Reports on Form 8-K
A report on Form 8-K/A dated October 15, 1997, event date
August 6, 1997, was filed with the Securities and
Exchange Commission for the purpose of filing the
information required by Item 7 regarding the acquisition
of Stonewood Mall.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Macerich Company
By: /s/ THOMAS E. O'HERN
Thomas E. O'Hern
Senior Vice President and
Chief Financial Officer
Date: November 17 , 1997
26
Exhibit 11.1
THE MACERICH COMPANY
Computation of Earnings Per Share
(Amounts in thousands, except per share data)
For the quarter ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Primary
Net income as reported $1,870 $4,659 $14,793 $13,373
================== ================= ================== ================
================== ================= ================== ================
Weighted average number of shares outstanding 25,956 19,993 25,886 19,993
*Incremental shares resulting from stock options
and restricted stock
------------------ ----------------- ------------------ ----------------
------------------ ----------------- ------------------ ----------------
Weighted average number of shares of common
stock and equivalents 25,956 19,993 25,886 19,993
================== ================= ================== ================
================== ================= ================== ================
Primary earnings per share $0.07 $0.23 $0.57 $0.67
================== ================= ================== ================
================== ================= ================== ================
Fully Diluted
Net income as reported $1,870 $4,659 $14,793 $13,373
================== ================= ================== ================
================== ================= ================== ================
Weighted average number of shares outstanding 25,956 19,993 25,886 19,993
*Incremental shares resulting from stock options
and restricted stock
------------------ ----------------- ------------------ ----------------
------------------ ----------------- ------------------ ----------------
Weighted average number of shares of common
stock and equivalents 25,956 19,993 25,886 19,993
================== ================= ================== ================
================== ================= ================== ================
Fully diluted earnings per share $0.07 $0.23 $0.57 $0.67
================== ================= ================== ================
================== ================= ================== ================
* Outstanding common stock options, using the Treasury method, have less than a
3% dilutive effect on earnings per share and thus have not been included in this
computation.
27
5
9-MOS
Dec-31-1997
SEP-30-1997
12,820
0
25,906
0
0
41,512
1,476,325
190,821
1,366,282
157,239
988,936
0
0
220,107
0
1,366,282
0
159,685
0
90,295
7,195
0
47,402
0
0
0
0
0
0
14,793
0
0
