SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
/ / 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 95-4448705
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard, # 700
Santa Monica, California 90401
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 394-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock,
$0.01 Par Value New York Stock Exchange
Preferred Share New York Stock Exchange
Purchase Rights
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 18, 1999, the aggregate market value of the 25,586,863
shares of Common Stock held by non-affiliates of the registrant was $598
million based upon the closing price ($23.375) 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 18, 1999,
there were 33,944,863 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders meeting to
be held in 1999 are incorporated by reference into Part III.
THE MACERICH COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Item No. Page No.
- -------- --------
PART I
1. Business......................................................................... 1-10
2. Properties....................................................................... 11-17
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.......................................................... 19-22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 23-34
7A. Quantitative and Qualitative Disclosures
About Market Risk....................................................... 34-35
8. Financial Statements and Supplementary Data...................................... 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 35
PART III
10. Directors and Executive Officers of the Company.................................. 36
11. Executive Compensation........................................................... 36
12. Security Ownership of Certain Beneficial Owners and Management................... 36
13. Certain Relationships and Related Transactions.................................. 36
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form
8-K............................................................................... 37-72
SIGNATURES
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 seven community shopping centers aggregating
approximately 40 million square feet of gross leasable area. These 53 regional
and community shopping centers are referred to hereinafter as the "Centers",
unless the context otherwise requires. The Company is a self-administered and
self-managed real estate investment trust ("REIT") and conducts all of its
operations through the Operating Partnership and the Company's three management
companies, Macerich Property Management Company, a California corporation,
Macerich Manhattan Management Company, a California corporation, and Macerich
Management Company, a California corporation (collectively, the "Management
Companies").
The Company was organized as a Maryland corporation in September 1993
to continue and expand the shopping center operations of Mace Siegel, Arthur M.
Coppola, Dana K. Anderson and Edward C. Coppola and certain of their business
associates.
All references to the Company in this Form 10-K include the Company,
those entities owned or controlled by the Company and predecessors of the
Company, unless the context indicates otherwise.
RECENT DEVELOPMENTS
A. EQUITY OFFERINGS
The Company sold 7,920,181 shares of its common stock in six offerings
during 1998, raising $203.8 million of net proceeds.
On February 25, 1998, the Company issued 3,627,131 shares of its Series
A cumulative convertible redeemable preferred stock ("Series A Preferred Stock")
for net proceeds totaling $99.0 million.
On June 17, 1998, the Company issued 5,487,471 shares of its Series B
cumulative convertible redeemable preferred stock ("Series B Preferred Stock")
for net proceeds totaling $148.5 million.
The total net proceeds from the 1998 common and preferred stock
offerings totaled $451.3 million. These proceeds were used for the 1998
acquisitions, reducing borrowings under the Company's line of credit and general
corporate purposes.
B. ACQUISITIONS
On February 27, 1998, the Company, through a 50/50 joint venture with
an affiliate of Simon Property Group, Inc., acquired the ERE Yarmouth portfolio
of twelve regional malls. The properties in the portfolio comprise 10.7 million
square feet and are located in eight states. The total purchase price was $974.5
million, which included $485.0 million of assumed debt, at market value. The
Company's share of the cash component of the purchase price was funded by
issuing $100.0 million of Series A Preferred Stock, $80.0 million of common
stock and borrowing the balance from the Company's line of credit.
South Plains Mall was acquired on June 19, 1998. South Plains Mall is a
1,140,574 square foot super regional mall located in Lubbock, Texas. The
purchase price was $115.5 million, consisting of $29.3 million of assumed debt,
at fair market value, and $86.2 million of cash. The cash portion was funded
with a portion of the proceeds from the Company's Series B Preferred Stock
offering.
Westside Pavilion was acquired on July 1, 1998 for $170.5 million.
Westside Pavilion is a 755,759 square foot regional mall located in Los Angeles,
California. The purchase price was funded with a portion of the proceeds from
the Company's Series B Preferred Stock offering, borrowings under the Company's
line of credit and the placement of a ten year $100.0 million mortgage secured
by the property.
1
B. ACQUISITIONS, CONTINUED:
The Village at Corte Madera is a 428,398 square foot regional mall in
Corte Madera, California, which the Company acquired in two phases: (i) 40% on
June 16, 1998 and (ii) the remaining 60% on July 24, 1998. In addition, Carmel
Plaza, a 115,215 square foot community shopping center in Carmel, California was
acquired on August 10, 1998. The combined purchase price was $165.5 million,
consisting of $40.0 million of assumed debt, the issuance of $7.9 million of
limited partnership interests in the Operating Partnership ("OP Units") and
$117.6 million in cash. The cash component was funded by borrowings under the
Company's line of credit.
Northwest Arkansas Mall was acquired on December 15, 1998. Northwest
Arkansas Mall is a 780,237 square foot regional mall located in Fayetteville,
Arkansas. The purchase price of $94.0 million was funded by a concurrently
placed loan of $63.0 million and borrowings of $31.0 million under the Company's
line of credit.
On February 18, 1999, through a 51/49 joint venture with Ontario
Teachers' Pension Plan Board, the Company closed on the first phase of a two
phase acquisition of a portfolio of properties. The phase one closing included
the acquisition of three regional malls, the retail component of a mixed-use
development, five contiguous properties and two non-contiguous community
shopping centers comprising approximately 3.6 million square feet for a total
purchase price of approximately $427.0 million. The purchase price was funded
with a $120.0 million loan placed concurrently with the closing, $140.4 million
of debt from an affiliate of the seller, and $39.4 million of assumed debt. The
balance of the purchase price was paid in cash. The Company's share of the cash
component was funded with the proceeds from two refinancings of centers and
borrowings under the Company's line of credit. The second phase consists of the
acquisition of the office component of the mixed-use development for a purchase
price of approximately $115 million. The closing of the second phase is expected
to occur in May 1999.
C. REFINANCINGS
On August 3, 1998, the Company, along with the joint venture partner,
refinanced the debt secured by Broadway Plaza. The loan of $43.5 million was
paid in full and a new note was issued for $75.0 million bearing interest at a
fixed rate of 6.68% and maturing August 1, 2008.
On August 7, 1998, the Company refinanced the debt on Fresno Fashion
Fair. A $38.0 million loan was paid in full and a new secured note was issued
for $69.0 million bearing interest at fixed rate of 6.52% and maturing August
10, 2008.
THE SHOPPING CENTER INDUSTRY
GENERAL
There are several types of retail shopping centers, which are
differentiated primarily based on size and marketing strategy. Retail shopping
centers generally contain in excess of 400,000 square feet of gross leasable
area ("GLA"), are typically anchored by two or more department or large retail
stores ("Anchors") and are referred to as "Regional Shopping Centers" or
"Malls". Regional Shopping Centers also typically contain numerous diversified
retail stores ("Mall Stores"), most of which are national or regional retailers
typically located along corridors connecting the Anchors. Community Shopping
Centers, also referred to as "strip centers," are retail shopping centers that
are designed to attract local or neighborhood customers and are typically
anchored by one or more supermarkets, discount department stores and/or drug
stores. Community Shopping Centers typically contain 100,000 square feet to
400,000 square feet of GLA. In addition, freestanding retail stores are located
along the perimeter of the shopping centers ("Freestanding Stores"). Anchors,
Mall and Freestanding Stores and other tenants typically contribute funds for
the maintenance of the common areas, property taxes, insurance, advertising and
other expenditures related to the operation of the shopping center.
2
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 and redevelopment 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. However, many of the market, financing and
economic risks typically associated with the development of new Regional
Shopping Centers can be mitigated by acquiring and redeveloping an existing
Regional Shopping Center. Furthermore, the value of Regional Shopping Centers
can be significantly enhanced through redevelopment, renovation and expansion.
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 bulk 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, Toys-R-Us at Boulder Plaza, and
The Gap, Victoria's Secret and Express/Bath and Body at Villa Marina, provide
the Company's Community Shopping Centers with the opportunity to draw from a
much larger trade area than a typical supermarket or drugstore anchored
Community Shopping Center.
BUSINESS OF THE COMPANY
MANAGEMENT AND OPERATING PHILOSOPHY
The Company believes that the shopping center business requires
specialized skills across a broad array of disciplines for effective and
profitable operations. For this reason, the Company has developed a fully
integrated real estate organization with in-house acquisition, redevelopment,
property management, leasing, finance, construction, marketing, legal and
accounting 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.
3
MANAGEMENT AND OPERATING PHILOSOPHY, CONTINUED:
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
where there is intrinsic value.
The Company made the following acquisitions in 1997: South Towne Center
in Sandy, Utah on March 27, 1997; Stonewood Mall in Downey, California on August
6, 1997; Manhattan Village in Manhattan Beach, California on August 19, 1997
through a joint venture in which the Company owns a 10% interest; The Citadel in
Colorado Springs, Colorado on December 19, 1997, and Great Falls Marketplace in
Great Falls, Montana on December 31, 1997. Together these properties are known
as the "1997 Acquisition Centers."
The Company made the following acquisitions in 1998: The Company
along with a 50/50 joint venture partner, acquired a portfolio of twelve
regional malls totaling 10.7 million square feet on February 27, 1998; South
Plains Mall in Lubbock, Texas on June 19,1998; Westside Pavilion in Los
Angeles, California on July 1, 1998; Village at Corte Madera in Corte Madera,
California in June and July 1998; Carmel Plaza in Carmel, California on
August 10, 1998; and Northwest Arkansas Mall in Fayetteville, Arkansas on
December 15, 1998. Together, these properties are known as the "1998
Acquisition Centers."
On February 18, 1999, the Company, along with a joint venture partner,
acquired a portfolio of three regional malls, the retail component of a
mixed-use development, five contiguous properties and two non-contiguous
community shopping centers totaling approximately 3.6 million square feet. The
Company is a 51% owner of this portfolio. The second phase of this transaction
consists of the acquisition of the office component of the mixed-use development
which is expected to occur in May 1999.
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 and Anchor approvals.
THE CENTERS. As of February 18, 1999, the Centers consist of 46
Regional Shopping Centers and seven Community Shopping Centers aggregating
approximately 40 million square feet of GLA. The 46 Regional Shopping Centers in
the Company's portfolio average approximately 842,000 square feet of GLA and
range in size from 1.9 million square feet of GLA at Lakewood Mall to 324,859
square feet of GLA at Panorama Mall. The Company's seven Community Shopping
Centers, Albany Plaza, Boulder Plaza, Bristol Shopping Center, Carmel Plaza,
Eastland Plaza, Great Falls Marketplace and Villa Marina Marketplace, have an
average of 180,000 square feet of GLA. The 46 Regional Shopping Centers
presently include 163 Anchors totaling approximately 22.0 million square feet of
GLA and approximately 5,515 Mall and Freestanding Stores totaling approximately
18.0 million square feet of GLA.
Total revenues increased from $221.2 million in 1997 to $283.9 million
in 1998 primarily due to the 1998 and 1997 acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Lakewood Mall generated 10.5% of total shopping center revenues in 1997 and
16.0% in 1996. Queens Center accounted for 13.8% of 1996 shopping center
revenue. No Center generated more than 10% of shopping center revenues during
1998.
4
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 Year Ended December 31,
1996 (2) 1997 (3) 1998 (4)
-------- -------- --------
Minimum rents 8.3% 7.9% 7.7%
Percentage rents 0.4% 0.4% 0.4%
Expense recoveries (1) 2.9% 3.0% 3.0%
------- ------- -------
Mall tenant occupancy costs 11.6% 11.3% 11.1%
------- ------- -------
------- ------- -------
(1) Represents real estate tax and common area maintenance charges.
(2) Excludes Centers acquired in 1996 (the "1996 Acquisition Centers"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Excludes 1997 Acquisition Centers.
(4) Excludes 1998 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 ten other publicly traded mall
companies, any of which under certain circumstances, could compete against the
Company for an acquisition, an Anchor or a tenant. This results in competition
for both acquisition of centers and for tenants to occupy space. The existence
of competing shopping centers could have a material impact on the Company's
ability to lease space and on the level of rent that can be achieved. There is
also increasing competition from other forms of retail, such as factory outlet
centers, power centers, discount shopping clubs, mail-order services, internet
shopping and home shopping networks that could adversely affect the Company's
revenues.
MAJOR TENANTS
The Centers derived approximately 89.9% of their total rents for the
year ended December 31, 1998 from Mall and Freestanding Stores. One retailer
accounted for approximately 6.1% of annual base rents of the Company, and no
other single retailer accounted for more than 4.5%, as of December 31, 1998.
The following retailers (including their subsidiaries) represent the 10
largest retailers in the Company's portfolio (excluding joint ventures) based
upon minimum rents in place as of December 31, 1998:
NUMBER OF STORES % OF TOTAL MINIMUM RENTS
RETAILER IN THE CENTERS AS OF DECEMBER 31, 1998
-------- -------------- -----------------------
The Limited 107 6.1%
Venator Group 126 4.5%
The Gap 28 2.6%
Barnes & Noble 29 1.8%
J.C. Penney 19 1.8%
Melville Corporation 32 1.2%
The Musicland Group 29 1.1%
Consolidated Stores 29 1.0%
Zale Corporation 24 0.9%
Hallmark Specialty Retail 20 0.8%
5
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 under 10,000 square feet in the
portfolio at December 31, 1998, comprises 70.0% 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 or under, commencing
during 1998 was $28.58 per square foot, or 14% higher than the average base rent
for all Mall and Freestanding Stores (10,000 square feet or under) at December
31, 1998 of $25.08 per square foot.
The following table sets forth for the Centers the average base rent
per square foot of Mall and Freestanding GLA, for tenants 10,000 square feet and
under, as of December 31 for each of the past three years.
Average Base Average Base
Average Base Rent Per Sq. Ft. on Rent Per Sq. Ft. on
Rent Per Leases Commencing Leases Expiring
Square Foot (1) During the Year (2) During the Year (3)
----------------------- ------------------------- -------------------------
DECEMBER 31,
1996............................ $23.90 $27.02 $24.54
1997............................ $24.27 $27.58 $24.84
1998............................ $25.08 $28.58 $26.34
(1) Average base rent per square foot is based on Mall and Freestanding Store
GLA for spaces 10,000 square feet or under occupied as of December 31 for
each of the Centers owned by the Company in 1996 (excluding the 1996
Acquisition Centers), 1997 (excluding the 1997 Acquisition Centers), and
1998 (excluding the 1998 Acquisition Centers).
(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. The
1996 average excludes the 1996 Acquisition Centers, the 1997 average
excludes the 1997 Acquisition Centers and the 1998 average excludes the
1998 Acquisition Centers.
(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 or under expiring during the year. On a comparable space basis,
average rents on leases under 10,000 square feet commencing in 1998 was
$31.04 compared to expiring rents of $26.34. The average base rent on
leases expiring in 1996 excludes the 1996 Acquisition Centers, the average
for 1997 excludes 1997 Acquisition Centers and the average for 1998
excludes the 1998 Acquisition Centers.
BANKRUPTCY AND/OR CLOSURE OF RETAIL STORES
The bankruptcy and/or closure of an Anchor, or its sale to a less
desirable retailer, could adversely affect customer traffic in a Center and
thereby reduce the income generated by that Center. Furthermore, the closing of
an Anchor could, under certain circumstances, allow certain other Anchors or
other tenants to terminate their leases or cease operating their stores at the
Center or otherwise adversely affect occupancy at the Center. During 1997,
Montgomery Ward filed for bankruptcy. The Company has Montgomery Ward as an
Anchor in 11 of its Centers. Montgomery Ward has indicated that it plans to
cease operating at three of these locations. The Company is negotiating to
recapture these locations and replace Montgomery Ward with another department
store. Montgomery Ward has not yet disclosed whether it will cease to operate
any of its eight remaining stores at the Centers. If Montgomery Ward ceases to
operate any of its stores and the Company is unable to replace them with other
tenants, it could have an adverse effect on a Center.
6
BANKRUPTCY AND/OR CLOSURE OF RETAIL STORES, CONTINUED:
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
6.1% 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.
LEASE EXPIRATIONS
The following table shows scheduled lease expirations (for Centers
owned as of December 31, 1998) of Mall and Freestanding Stores 10,000 square
feet or under for the next ten years, assuming that none of the tenants exercise
renewal options.
Approximate % of Total Ending
Number of GLA of Leased GLA Base Rent per
Year Ending Leases Expiring Represented by Square Foot of
December 31, Expiring Leases Expiring Leases (1) Expiring Leases (1)
------------ -------- ------ ------------------ -------------------
1999 587 1,057,547 11.9% $23.49
2000 465 840,962 9.5% $26.41
2001 428 807,193 9.1% $27.55
2002 373 794,459 8.9% $25.42
2003 435 950,597 10.7% $24.99
2004 308 727,502 8.2% $25.20
2005 323 869,563 9.8% $26.03
2006 296 804,328 9.1% $26.60
2007 318 841,666 9.5% $28.07
2008 291 811,139 9.1% $28.84
- ---------------------------------------------------------
(1) For leases 10,000 square feet or 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 represented approximately 10.1% of the Company's total rent for
the year ended December 31, 1998.
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 Centers as of December 31, 1998, except as
otherwise indicated:
7
ANCHORS, CONTINUED:
GLA GLA Total GLA
Number of Owned Leased Occupied
Name Anchor Stores By Anchor By Anchor By Anchor
- ---- ----------------- ---------------- ---------------- ------------------
J.C. Penney 30 1,196,066 2,731,774 3,927,840
Sears 25 1,437,831 1,518,413 2,956,244
Dayton Hudson Corp.
Mervyn's 10 409,180 408,508 817,688
Target 8 491,260 379,871 871,131
Dayton's 2 115,193 100,790 215,983
----------------- ---------------- ---------------- ------------------
Total 20 1,015,633 889,169 1,904,802
Dillard's 14 1,257,162 662,735 1,919,897
Federated Department Stores
Macy's 8 1,039,844 411,599 1,451,443
Macy's Men's & Home 2 - 155,614 155,614
Macy's Men's & Juniors 2 - 146,906 146,906
----------------- ---------------- ---------------- ------------------
Total 12 1,039,844 714,119 1,753,963
Montgomery Ward (1) 11 585,768 939,687 1,525,455
May Department Stores Co.
Foley's 4 725,316 - 725,316
Hechts 2 140,000 143,426 283,426
Robinsons-May 3 366,250 362,852 729,102
----------------- ---------------- ---------------- ------------------
Total 9 1,231,566 506,278 1,737,844
Younker's 6 - 609,177 609,177
Gottschalks 5 332,638 283,772 616,410
Herberger's 5 188,000 283,891 471,891
Nordstrom 3 109,000 323,369 432,369
Von Maur 3 186,686 59,563 246,249
Belk 2 - 127,950 127,950
Boscov's 2 - 314,717 314,717
Wal-Mart 2 281,455 281,455
Beall's 1 - 40,000 40,000
Burlington Coat Factory 1 - 133,650 133,650
DeJong 1 - 43,811 43,811
Famous Barr 1 180,000 - 180,000
Home Depot 1 - 130,232 130,232
Kohl's 1 - 92,466 92,466
Lazarus 1 159,068 - 159,068
Watson's 1 - 42,090 42,090
ZCMI 1 - 200,000 200,000
Vacant 5 - 348,023 348,023
----------------- ---------------- ---------------- ------------------
163 9,200,717 10,994,886 20,195,603
----------------- ---------------- ---------------- ------------------
----------------- ---------------- ---------------- ------------------
---------------------------
(1) During 1997, Montgomery Ward filed for bankruptcy. Montgomery Ward
announced that it will close its stores at Holiday Village Mall,
Rimrock Mall and Southridge Mall in 1999. The Company is negotiating to
recapture these locations and replace Montgomery Ward with another
department store. Montgomery Ward has not yet disclosed whether it will
cease to operate any of its eight remaining stores at the Centers.
8
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and
regulations, an owner of real estate may be liable for the cost of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner 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 ability to sell or
rent such property or to borrow using such property as collateral. Persons 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 treatment facility, whether or not such facility is
owned or operated by such person. 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 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:
- ASBESTOS. The Company has conducted ACM surveys at various
locations within the Centers. The surveys indicate that ACMs
are present or suspected in certain areas, primarily vinyl
floor tiles, mastics, roofing materials, drywall tape and
joint compounds. The identified ACMs are generally
non-friable, in good condition, and possess low
probabilities for disturbance. At certain Centers where ACMs
are present or suspected, however, some ACMs have been or
may be classified as "friable," and ultimately may require
removal under certain conditions. The Company has developed
and implemented an operations and maintenance (O&M) plan to
manage ACM in place.
- UNDERGROUND STORAGE TANKS. Underground storage tanks (USTs)
are or were present at certain of the Centers, often in
connection with tenant operations at gasoline stations or
automotive tire, battery and accessory service centers
located at such Centers. USTs also may be or have been
present at properties neighboring certain Centers. Some of
these tanks have either leaked or are suspected to have
leaked. Where leakage has occurred, investigation,
remediation, and monitoring costs may be incurred by the
Company if responsible current or former tenants, or other
responsible parties, are unavailable to pay such costs.
- CHLORINATED HYDROCARBONS. The presence of chlorinated
hydrocarbons such as perchloroethylene (PCE) and its
degradation byproducts have been detected at certain of the
Centers, often in connection with tenant dry cleaning
operations. Where PCE has been detected, the Company may
incur investigation, remediation and monitoring costs if
responsible current or former tenants, or other responsible
parties, are unavailable to pay such costs.
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. Remediation began in October 1997. 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. $153,100
and $124,000 have already been incurred by the joint venture for remediation,
and professional and legal fees for the periods ending December 31, 1998 and
1997, respectively. An additional $408,000 remains reserved by the joint venture
as of December 31, 1998.
9
ENVIRONMENTAL MATTERS, CONTINUED:
The joint venture has been sharing costs on a 50/50 basis with a former owner of
the property and intends to look to additional responsible parties for recovery.
Low levels of toluene, a petroleum constituent, was detected in one of
three groundwater dewatering system holding tanks at Queens Center. Although the
Company believes that no remediation will be required, the Company established a
$150,000 reserve in 1996 to cover professional fees and testing costs, which was
reduced by costs incurred of $2,300 and $18,000 for the twelve months ending
December 31, 1998 and 1997, respectively. The Company intends to look to the
responsible parties and insurers if remediation is required.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has
been detected in structural fireproofing throughout much of the 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 $255,500 and
$170,000 in remediation costs for the twelve months ending December 31, 1998 and
1997, respectively.
INSURANCE
The Company has comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to the Centers. The Company or the joint
venture, as applicable, also currently carries earthquake insurance covering the
Centers located in California. Management believes that such insurance provides
adequate coverage. The Company has been notified by certain of its insurance
carriers that coverage will not be provided for various claims relating to the
Year 2000 issues and is negotiating with such carriers regarding the scope of
any Year 2000 exclusions.
QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
The Company elected to be taxed as a real estate investment trust 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 real estate investment trust under
the Code. As a real estate investment trust, 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 real
estate investment trust 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 1,443
persons, including eight executive officers, personnel in the areas of
acquisitions and business development (7), property management (260), leasing
(68), redevelopment/construction (22), financial services (37) and legal affairs
(24). In addition, in an effort to minimize operating costs, the Company
generally maintains its own security staff (447) and maintenance staff (570).
Approximately six of these employees are represented by a union. The Company
believes that relations with its employees are good.
10
ITEM 2. PROPERTIES
The following table sets forth certain information about each of
the Centers:
Year of Year of
Company's Original Most Recent Mall and
Ownership Name of Center / Construction/ Expansion / Total Free-standing
% Location (1) Acquisition Renovation GLA (2) GLA
- -------------------------------------------------- --------------- -------------- ---------------- --------------
100% Boulder Plaza 1969 / 1989 1991 158,997 158,997
Boulder, Colorado
100% Bristol Shopping Center (4) 1966 / 1986 1992 165,279 165,279
Santa Ana, California
50% Broadway Plaza (4) 1951 / 1985 1994 678,855 233,358
Walnut Creek, California
100% Capitola Mall (4) 1977 / 1995 1988 584,962 205,245
Capitola, California
100% Chesterfield Towne Center 1975 / 1994 1997 869,606 404,987
Richmond, Virginia
100% Citadel, The 1972 / 1997 1995 1,045,784 450,444
Colorado Springs, Colorado
100% County East Mall 1966 / 1986 1989 494,343 175,783
Antioch, California
100% Crossroads Mall 1974 / 1994 1991 1,174,207 434,519
Oklahoma City, Oklahoma
100% Fresno Fashion Fair 1970 / 1996 1983 874,306 313,425
Fresno, California
100% Great Falls Marketplace 1997 / 1997 - 159,758 159,758
Great Falls, Montana
100% Greeley Mall 1973 / 1986 1987 581,443 238,081
Greeley, Colorado
100% Green Tree Mall (4) 1968 / 1975 1995 781,737 337,741
Clarksville, Indiana
100% Holiday Village Mall (4) 1959 / 1979 1992 597,361 269,842
Great Falls, Montana
100% Lakewood Mall 1953 / 1975 1996 1,850,903 907,254
Lakewood, California
10% Manhattan Village Shopping Ctr (4) 1981 / 1997 1992 551,847 375,793
Manhattan Beach, California
100% Northgate Mall 1964 / 1986 1987 743,849 273,518
San Rafael, California
50% Panorama Mall 1955 / 1979 1980 324,859 159,859
Panorama, California
100% Queens Center 1973 / 1995 1991 624,337 156,194
Queens, New York
100% Rimrock Mall 1978 / 1996 1980 600,788 285,348
Billings, Montana
100% Salisbury, Centre at 1990 / 1995 1990 883,400 278,419
Salisbury, Maryland
100% South Towne Center 1987 / 1997 1997 1,236,356 459,844
Sandy, Utah
100% Stonewood Mall (4) 1953 / 1997 1991 927,553 356,806
Downey, California
Percentage
Company's of Mall and Sales Per
Ownership Name of Center / Free-standing Square
% Location (1) GLA Leased Anchors Foot (3)
- ------------------------------------------------------ ---------------- ---------------------------------------- -----------
100% Boulder Plaza 100.0% ----- $323
Boulder, Colorado
100% Bristol Shopping Center (4) 96.9% ----- 380
Santa Ana, California
50% Broadway Plaza (4) 99.2% Macy's, Nordstrom, 479
Walnut Creek, California Macy's Men's and Juniors
100% Capitola Mall (4) 97.5% Gottschalks, J.C. Penney, 305
Capitola, California Mervyn's, Sears
100% Chesterfield Towne Center 96.0% Dillard's (two), Hechts, Sears 317
Richmond, Virginia
100% Citadel, The 82.4% Dillard's, Foley's, J.C. Penney, Mervyn's 263
Colorado Springs, Colorado
100% County East Mall 88.5% Sears, Gottschalks, Mervyn's (8) 246
Antioch, California
100% Crossroads Mall 91.6% Dillards, Foley's, J.C. Penney, 221
Oklahoma City, Oklahoma Montgomery Ward (6)
100% Fresno Fashion Fair 97.4% Gottschalks, J.C. Penney, Macy's, 321
Fresno, California Macy's Men's and Children
100% Great Falls Marketplace 100.0% ----- 85
Great Falls, Montana
100% Greeley Mall 74.3% Dillard's (two), J.C. Penney, Sears, 237
Greeley, Colorado Montgomery Ward (6)
100% Green Tree Mall (4) 85.8% Dillard's, J.C. Penney, 329
Clarksville, Indiana Sears, Target
100% Holiday Village Mall (4) 93.6% Herberger's, J.C. Penney, Sears, 264
Great Falls, Montana Montgomery Ward (6)
100% Lakewood Mall 96.6% Home Depot, J.C. Penney, Mervyn's, 327
Lakewood, California Montgomery Ward (6), Robinson-May
10% Manhattan Village Shopping Ctr (4) 98.3% Macy's, Macy's Men's & Home 639
Manhattan Beach, California
100% Northgate Mall 92.3% Macy's, Mervyns, Sears 296
San Rafael, California
50% Panorama Mall 98.3% Wal-Mart (5) 408
Panorama, California
100% Queens Center 100.0% J.C. Penney, Macy's 740
Queens, New York
100% Rimrock Mall 93.7% Dillard's, Herbergers, J.C. Penney, 268
Billings, Montana Montgomery Ward (6)
100% Salisbury, Centre at 95.8% Boscov's, J.C. Penney, Hechts, 294
Salisbury, Maryland Montgomery Ward (6), Sears
100% South Towne Center 95.3% Dillard's, J.C. Penney, Mervyn's, Target, 226
Sandy, Utah ZCMI
100% Stonewood Mall (4) 85.7% J.C. Penney, Mervyn's, Robinson-May, 309
Downey, California Sears
11
ITEM 2. PROPERTIES, CONTINUED
Year of Year of
Company's Original Most Recent Mall and
Ownership Name of Center / Construction/ Expansion / Total Free-standing
% Location (1) Acquisition Renovation GLA (2) GLA
- -------------------------------------------------- --------------- -------------- --------------- -------------
100% Valley View Center 1973 / 1996 1996 1,507,699 449,802
Dallas, Texas
100% Villa Marina Marketplace 1972 / 1996 1995 448,517 448,517
Marina Del Rey, California
100% Vintage Faire Mall 1977 / 1996 - 1,047,409 347,490
Modesto, California
19% West Acres 1972 / 1986 1992 928,782 376,227
Fargo, North Dakota
--------------- -------------
TOTAL / AVERAGE AT DECEMBER 31, 1998 (a) 19,842,937 8,422,530
--------------- -------------
1998 ACQUISITION CENTERS
100% Carmel Plaza 1974 / 1998 1993 115,215 115,215
Carmel, California
100% Corte Madera, Village at 1985 / 1998 1994 428,398 210,398
Corte Madera, California
100% Northwest Arkansas Mall 1972 / 1998 1997 780,237 305,506
Fayetteville, Arkansas
100% South Plains Mall 1972 / 1998 1995 1,140,574 398,787
Lubbock, Texas
100% Westside Pavilion 1985 / 1998 1991 755,759 397,631
Los Angeles, California
---------------- --------------
TOTAL / AVERAGE 1998 ACQUISITIONS 3,220,183 1,427,537
---------------- --------------
TOTAL / AVERAGE AT DECEMBER 31, 1998 (b) 23,063,120 9,850,067
---------------- --------------
---------------- --------------
Percentage
Company's of Mall and Sales Per
Ownership Name of Center / Free-standing Square
% Location (1) GLA Leased Anchors Foot (3)
- ------------------------------------------------------ ---------------- ---------------------------------------- -----------
100% Valley View Center 92.7% Dillard's, Foleys, J.C. Penney, $274
Dallas, Texas Sears
100% Villa Marina Marketplace 96.7% ----- 429
Marina Del Rey, California
100% Vintage Faire Mall 90.5% Gottschalks, J.C. Penney, Macy's, 315
Modesto, California Macy's Men's & Home, Sears
19% West Acres 96.3% Daytons, Herberger's, J.C. Penney, Sears 346
Fargo, North Dakota
---------------- -----------
TOTAL / AVERAGE AT DECEMBER 31, 1998 (a) 93.4% $337
---------------- -----------
1998 ACQUISITION CENTERS
100% Carmel Plaza 97.7% ----- $327
Carmel, California
100% Corte Madera, Village at 92.4% Macy's, Nordstrom 476
Corte Madera, California
100% Northwest Arkansas Mall 91.7% Dillard's (two), J.C. Penney, Sears 267
Fayetteville, Arkansas
100% South Plains Mall 97.8% Beall's, Dillards, J.C. Penney, 295
Lubbock, Texas Mervyn's, Sears
100% Westside Pavilion 90.8% Nordstrom, Robinson-May 375
Los Angeles, California
---------------- -----------
TOTAL / AVERAGE 1998 ACQUISITIONS 93.6% $345
---------------- -----------
TOTAL / AVERAGE AT DECEMBER 31, 1998 (b) 93.4% $338
---------------- -----------
---------------- -----------
12
ITEM 2. PROPERTIES, CONTINUED
Year of Year of
Company's Original Most Recent Mall and
Ownership Name of Center / Construction/ Expansion / Total Free-standing
% Location (1) Acquisition Renovation GLA (2) GLA
- -------------------------------------------------- --------------- -------------- --------------- -------------
1998 ACQUISITION CENTERS (ERE
YARMOUTH PORTFOLIO)
50% Eastland Mall (4) 1978 / 1998 1995 1,084,907 543,643
Evansville, IN
50% Empire Mall (4) 1975 / 1998 1988 1,321,708 631,601
Sioux Falls, SD
50% Granite Run Mall 1974 / 1998 1993 1,034,479 533,670
Media, PA
50% Lake Square Mall 1980 / 1998 1992 560,671 264,634
Leesburg, FL
50% Lindale Mall 1963 / 1998 1997 690,417 384,854
Cedar Rapids, IA
50% Mesa Mall 1980 / 1998 1991 849,958 424,141
Grand Junction, CO
50% NorthPark Mall 1973 / 1998 1994 1,057,383 405,850
Davenport, IA
50% Rushmore Mall 1978 / 1998 1992 834,385 363,725
Rapid City, SD
50% Southern Hills Mall 1980 / 1998 ---- 752,588 439,011
Sioux City, IA
50% SouthPark Mall 1974 / 1998 1990 1,034,195 456,139
Moline, IL
50% SouthRidge Mall (4) 1975 / 1998 1998 1,008,267 510,461
Des Moines, IA
50% Valley Mall 1978 / 1998 1992 482,341 196,278
Harrisonburg, VA
1998 ACQUISITION CENTERS (ERE --------------- -------------
YARMOUTH PORTFOLIO) 10,711,299 5,154,007
--------------- -------------
GRAND TOTAL / AVERAGE AT DECEMBER 31, 1998 (c) 33,774,419 15,004,074
--------------- -------------
--------------- -------------
Percentage
Company's of Mall and Sales Per
Ownership Name of Center / Free-standing Square
% Location (1) GLA Leased Anchors Foot (3)
- ------------------------------------------------------ ---------------- ---------------------------------------- -----------
1998 ACQUISITION CENTERS (ERE
YARMOUTH PORTFOLIO)
50% Eastland Mall (4) 93.3% DeJong, Famous Barr, J.C. Penney, $299
Evansville, IN Lazarus
50% Empire Mall (4) 92.2% Daytons, J.C. Penney, Kohl's 355
Sioux Falls, SD Sears, Target, Younkers (8)
50% Granite Run Mall 99.1% Boscov's, J.C. Penney, Sears 297
Media, PA
50% Lake Square Mall 88.6% Belk, J.C. Penney, Sears, Target 220
Leesburg, FL
50% Lindale Mall 90.8% Sears, VonMaur, Younkers 272
Cedar Rapids, IA
50% Mesa Mall 94.2% Herberger's, J.C. Penney, Mervyn's, 248
Grand Junction, CO Sears, Target,
50% NorthPark Mall 87.4% J.C. Penney, Montgomery Ward (6), Sears, 244
Davenport, IA VonMaur, Younkers
50% Rushmore Mall 93.4% Herberger's, J.C. Penney, Sears, 256
Rapid City, SD Target (8)
50% Southern Hills Mall 91.9% Sears, Target, Younkers 337
Sioux City, IA
50% SouthPark Mall 90.2% J.C. Penney, Sears, Younkers, 235
Moline, IL VonMaur, Montgomery Ward (6)
50% SouthRidge Mall (4) 92.7% Sears, Younkers, J.C. Penney, 235
Des Moines, IA Target, Montgomery Ward (6)
50% Valley Mall 98.6% Belk, J.C. Penney, Wal-Mart, 279
Harrisonburg, VA Watson's
-----------
1998 ACQUISITION CENTERS (ERE ---- -----------
YARMOUTH PORTFOLIO) 92.7% 280
---- -----------
-----------
Grand Total / Average at December 31, 1998 (c) 93.2% $319
---- -----------
---- -----------
13
ITEM 2. PROPERTIES, CONTINUED
Year of Year of
Company's Original Most Recent Mall and
Ownership Name of Center / Construction/ Expansion / Total Free-standing
% Location (1) Acquisition Renovation GLA (2) GLA
- -------------------------------------------------- --------------- -------------- --------------- -------------
MAJOR REDEVELOPMENT PROPERTIES
100% Crossroads Mall (4) 1963 / 1979 1998 808,975 365,538
Boulder, Colorado
100% Huntington Center (4), (7) 1965 / 1996 1997 720,147 323,382
Huntington Beach, California
100% Pacific View (formerly
Buenaventura Mall 1965 / 1996 1999 646,851 191,515
Ventura, California
100% Parklane Mall (4) 1967 / 1978 1998 386,911 257,191
Reno, Nevada
--------------- -------------
TOTAL MAJOR REDEVELOPMENT CENTERS 2,562,884 1,137,626
--------------- -------------
TOTAL / AVERAGE (d) 36,337,303 16,141,700
--------------- -------------
1999 ACQUISITION CENTERS (e)
51% Albany Plaza 1983 / 1999 ---- 145,462 145,462
Albany, Oregon
51% Cascade Mall 1989 / 1999 1998 585,259 266,378
Burlington, Washington
51% Eastland Plaza 1974 / 1999 1993 65,313 65,313
Columbus, Ohio
51% Kitsap Mall 1985 / 1999 1997 850,236 340,253
Silverdale, Washington
51% Redmond Town Center (4) (f) 1997 / 1999 ---- 569,289 569,289
Redmond, Washington
51% Washington Square 1974 / 1999 1995 1,422,752 454,425
Tigard, Oregon
--------------- -------------
1999 ACQUISITION CENTERS 3,638,311 1,841,120
--------------- -------------
GRAND TOTAL / AVERAGE 39,975,614 17,982,820
--------------- -------------
--------------- -------------
Percentage
Company's of Mall and Sales Per
Ownership Name of Center / Free-standing Square
% Location (1) GLA Leased Anchors Foot (3)
- ------------------------------------------------------ ---------------- ---------------------------------------- -----------
Major Redevelopment Properties
100% Crossroads Mall (4) (9) Foley's, J.C. Penney, Sears (8) (9)
Boulder, Colorado
100% Huntington Center (4), (7) (9) Mervyn's, Burlington Coat Factory, (9)
Huntington Beach, California Montgomery Ward (6)
100% Pacific View (formerly (9) J.C. Penney, Macy's, Montgomery Ward (6) (9)
Buenaventura Mall)
Ventura, California (9) Gottschalks (9)
100% Parklane Mall (4)
Reno, Nevada
TOTAL MAJOR REDEVELOPMENT CENTERS
TOTAL / AVERAGE (d)
1999 ACQUISITION CENTERS (e)
51% Albany Plaza 73.2% ----- (10)
Albany, Oregon
51% Cascade Mall 87.8% The Bon Marche, Emporium, (10)
Burlington, Washington J.C. Penney, Sears
51% Eastland Plaza 74.7% ----- (10)
Columbus, Ohio
51% Kitsap Mall 97.3% The Bon Marche, J.C. Penney, Lamonts, (10)
Silverdale, Washington Mervyn's, Sears
51% Redmond Town Center (4) (f) 91.3% ----- (10)
Redmond, Washington
51% Washington Square 98.2% J.C. Penney, Meier & Frank, Mervyn's, (10)
Tigard, Oregon Nordstrom, Sears
------------
1999 ACQUISITION CENTERS 91.6%
------------
GRAND TOTAL / AVERAGE 93.0%
------------
------------
A) EXCLUDING 1998 ACQUISITIONS, REDEVELOPMENT PROPERTIES AND 1999 ACQUISITIONS
B) EXCLUDING REDEVELOPMENT PROPERTIES, ERE YARMOUTH PORTFOLIO AND
1999 ACQUISITIONS
C) EXCLUDING REDEVELOPMENT PROPERTIES AND 1999 ACQUISITIONS
D) EXCLUDING 1999 ACQUISITIONS
E) INCLUDES FIVE CONTIGUOUS FREESTANDING PROPERTIES
F) EXCLUDES THE OFFICE COMPONENT OF THIS MIXED-USE DEVELOPMENT WHICH IS
EXPECTED TO BE ACQUIRED IN MAY 1999.
14
ITEM 2. PROPERTIES, CONTINUED
(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 or property partnership pursuant to long-term ground
leases. Under the terms of a typical ground lease, the Company or property
partnership 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 or property partnership has an option or right
of first refusal to purchase the land. The termination dates of the ground
leases range from 2000 to 2070.
(2) Includes GLA attributable to Anchors (whether owned or non-owned) and Mall
and Freestanding Stores as of December 31, 1998.
(3) Sales are based on reports by retailers leasing Mall and Freestanding
Stores for the year ending December 31, 1998 for tenants which have
occupied such stores for a minimum of twelve months. Consistent with
industry practices, sales per square foot are based on gross leased and
occupied area, excluding theaters, and are not based on GLA.
(4) Portions of the land on which the Center is situated are subject to one
or more ground leases.
(5) Wal-Mart opened in May 1998.
(6) During 1997, Montgomery Ward filed for bankruptcy. Montgomery Ward
announced that it will close its stores at Holiday Village Mall, Rimrock
Mall and Southridge Mall in 1999. Montgomery Ward has not yet disclosed
whether it will cease to operate any of its eight remaining stores at the
Centers.
(7) Edwards Cinema signed a lease in January 1997 to open a 16 screen
theater in the former Broadway location.
(8) These properties have a vacant Anchor location. The Company is
contemplating various replacement tenant/redevelopment opportunities for
these vacant sites.
(9) 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 Free-standing GLA leased and the sales
per square foot at these major redevelopment properties is not meaningful
data.
(10) Final 1998 sales per square foot information is not currently
available.
15
MORTGAGE DEBT
The following table sets forth certain information regarding the
mortgages encumbering the Centers, including those Centers in which the Company
has less than a 100% interest. All mortgage debt is nonrecourse to the Company.
The information set forth below is as of December 31, 1998.
Earliest Date
Annual Balance on which all
Annual Principal Debt Due on Notes Can
Property Pledged Fixed or Interest Balance Service Maturity Maturity Be Defeased
As Collateral Floating Rate (000's) (000's) Date (000's) or Be Prepaid
- ------------------- -------- ---- ------- ------- -------- ------- -------------
Capitola Mall Fixed 9.25% $37,345 $3,801 12/15/01 $36,193 1/15/96
Carmel Plaza (3) Floating 7.54% 25,000 1,911 7/1/99 25,000 Any Time
Chesterfield Towne Center (1) Fixed 9.07% 65,064 6,580 1/1/24 1,087 1/1/06
Chesterfield Towne Center Fixed 8.54% 3,266 376 11/1/99 3,183 Any Time
Citadel Fixed 7.20% 74,575 6,648 1/1/08 59,962 1/1/03
Corte Madera, Village at (3) Floating 7.28% 60,000 4,332 11/5/99 60,000 Any Time
Crossroads Mall - Boulder Fixed 7.08% 35,280 3,948 12/15/10 28,107 1/15/00
Fresno Fashion Fair Fixed 6.52% 69,000 4,561 8/10/08 62,890 8/7/01
Greeley Mall Fixed 8.50% 17,055 2,245 9/15/03 12,519 Any Time
Green Tree Mall/Crossroads - OK/
Salisbury Fixed 7.23% 117,714 8,499 3/5/04 117,714 Any Time
Holiday Village Fixed 6.75% 17,000 1,147 4/1/01 17,000 1/10/99
Lakewood Mall Fixed 7.20% 127,000 9,140 8/10/05 127,000 Any Time
Northgate Mall Fixed 6.75% 25,000 1,688 4/1/01 25,000 1/10/99
Northwest Arkansas Mall Fixed 7.33% 63,000 5,209 1/10/09 49,304 1/1/04
Parklane Mall Fixed 6.75% 20,000 1,350 4/1/01 20,000 1/10/99
Queens Center Floating (2) 65,100 (2) 3/31/99 51,000 Any Time
Rimrock Mall Fixed 7.70% 31,002 2,924 1/1/03 28,496 1/1/00
South Plains Mall Fixed 6.30% 28,795 4,180 (4) 1/1/08 336 Any Time
South Towne Center Fixed 6.61% 64,000 4,289 10/10/08 64,000 7/24/01
Valley View Mall Fixed 7.89% 51,000 4,080 10/10/06 51,000 4/16/00
Villa Marina Marketplace Fixed 7.23% 58,000 4,249 10/10/06 58,000 8/29/00
Vintage Faire Mall Fixed 7.65% 54,522 5,122 1/1/03 50,089 1/1/00
Westside Pavilion Fixed 6.67% 100,000 6,529 7/1/08 91,133 7/1/01
--------------
Total - Wholly Owned Centers $1,208,718
--------------
--------------
Joint Venture Centers:
Broadway Plaza (50%) (5) Fixed 6.68% 37,306 3,089 8/1/08 29,315 Any Time
SDG Macerich Properties L.P. (50%) (5) Fixed 6.23%(6) 160,434 11,114 5/15/06 150,000 Any Time
SDG Macerich Properties L.P. (50%) (5) Floating 6.15%(6) 92,500 5,689 5/15/03 92,500 Any Time
West Acres Center (19%) (5) Fixed 8.89% 7,202 672 7/15/99 6,613
--------------
Total - All Centers $1,506,160
--------------
--------------
- -----------------------------
Notes:
(1) 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 $387,101 for
the year ended December 31, 1998 and $98,528 for the year ended
December 31, 1997.
(2) This loan bore interest at LIBOR plus 0.45%. There was an interest
rate protection agreement in place on the first $10.2 million 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 of 7.07% through 1997 and 7.7% thereafter. This loan was
paid in full on February 4, 1999 and refinanced with a new loan of
$100 million, with interest at 6.74%, maturing in 2009.
(3) These loans bear interest at LIBOR plus 2.0%.
16
MORTGAGE DEBT, CONTINUED:
(4) This note was assumed at acquisition. At the time of
acquisition in June 1998, this debt was recorded at fair market
value and the premium was amortized as interest expense over the
life of the loan using the effective interest method. The monthly
debt service payment was $348,000 per month and was calculated
based on a 12.5% interest rate. At December 31, 1998, the
unamortized premium was $6,165,000. On February 17, 1999, the
loan was paid in full and was refinanced with a new loan of $65
million, with interest at 7.49%, maturing in 2009.
(5) Reflects the Company's pro rata share of debt.
(6) In connection with the acquisition of these Centers, the
joint venture assumed $485 million of mortgage notes payable
which are secured by the properties. At acquisition, this debt
reflected a fair market 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, 1998, the unamortized
balance of the debt premium was $20.9 million. This debt is due
in May 2006 and requires a monthly payment of $926,000. $185
million of this debt is due in May 2003 and requires monthly
interest payments at a variable weighted average rate (based on
LIBOR) of 6.15% at December 31, 1998. This variable rate debt
is covered by an interest rate cap agreement which effectively
prevents the interest rate from exceeding 11.53%.
At December 31,1997, the Company had $55.0 million of borrowings
outstanding under its $60.0 million unsecured credit facility, which bore
interest at LIBOR plus 1.325%. On February 26, 1998, the Company increased this
credit facility to $150 million with a maturity of February 2000, currently
bearing interest at LIBOR plus 1.15%. The interest rate on such credit facility
fluctuates between 0.95% and 1.15% over LIBOR. As of December 31, 1998, $137
million of borrowings was outstanding under this line of credit at an interest
rate of 6.79%.
Additionally, the Company had issued $776,000 in letters of credit
guaranteeing performance by the Company of certain events. The Company does not
believe that these letters of credit will result in a liability to the Company.
During January 1999, the Company entered into a bank construction loan
agreement to fund $89.2 million of costs related to the redevelopment of Pacific
View. See "Item 2. Properties." The loan bears interest at LIBOR plus 2.25% and
matures in February 2001. Principal is drawn as construction costs are incurred.
During 1997, the Company issued and sold $161.4 million of convertible
subordinated debentures (the"Debentures") due 2002. The Debentures, which were
sold at par, bear interest at 7.25% annually (payable semi-annually) and are
convertible 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.
ITEM 3. LEGAL PROCEEDINGS.
The Company, the Operating Partnership, the Management Companies and
the affiliated partnerships are not currently involved in any material
litigation nor, to the Company's knowledge, is any material litigation currently
threatened against such entities or the Centers, other than routine litigation
arising in the ordinary course of business, most of which is expected to be
covered by liability insurance. For information about certain environmental
matters, see "Business of the Company - Environmental Matters."
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
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 1998, the Company's shares
traded at a high of $30.375 and a low of $22.25.
As of February 18, 1999 there were approximately 300 shareholders of
record. The following table shows high and low closing prices per share of
common stock during each quarter in 1997 and 1998 and dividends/distributions
per share of common stock declared and paid by quarter.
Market Quotation Per Share
-------------------------- Dividends/Distributions
Quarters Ended High Low Declared and Paid
- -------------- ---- --- -----------------
March 31, 1997 $ 29 5/8 $ 25 3/8 $ 0.44
June 30, 1997 28 7/8 24 7/8 0.44
September 30, 1997 29 11/16 27 1/8 0.44
December 31, 1997 29 9/16 24 3/4 0.46
March 31, 1998 30 3/8 27 0.46
June 30, 1998 29 3/4 26 1/16 0.46
September 30, 1998 29 3/8 22 1/4 0.46
December 31, 1998 28 7/16 24 0.485
The Company has issued 3,627,131 shares of its Series A Preferred Stock,
and 5,487,471 shares of its Series B Preferred Stock. The Series A Preferred
Stock and Series B Preferred Stock can be converted into shares of common stock
on a one-to-one basis. There is no established public trading market for either
the Series A Preferred Stock or the Series B Preferred Stock. All of the
outstanding shares of the Series A Preferred Stock are held by Security Capital
Preferred Growth Incorporated. All of the outstanding shares of the Series B
Preferred Stock are held by Ontario Teachers' Pension Plan Board. The Series A
Preferred Stock and Series B Preferred Stock were issued on February 25, 1998
and June 16, 1998, respectively. The following table shows the dividends per
share of preferred stock declared and paid by quarter. 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.
Series A Series B
Preferred Stock Preferred Stock
Dividends Dividends
Declared and Paid Declared and Paid
----------------- -----------------
Quarters Ended
--------------
March 31, 1998 .............................. N/A N/A
June 30, 1998 ................................ $0.179 N/A
September 30, 1998 ...................... 0.460 $0.071
December 31, 1998........................ 0.485 0.485
On October 1, 1998, the Company issued 30,000 shares of common stock
upon the redemption of 30,000 OP Units in a private placement to a limited
partner of the Operating Partnership, an accredited investor, pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
18
ITEM 6. SELECTED FINANCIAL DATA.
The following sets forth selected financial data for the Company on a
historical and pro forma consolidated basis, and for the Centers and the
Management Companies (collectively, the "Predecessor") on a historical combined
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 pro forma data for the Company for the year ended December 31, 1994
has been prepared as if the IPO, and the transactions related to the
reorganization of the Operating Partnership and formation of the Company (the
"Formation") and the application of the net proceeds of the IPO had occurred as
of January 1, 1994. The pro forma information is not necessarily indicative of
what the Company's financial position or results of operations would have been
assuming the completion of the Formation and IPO 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.
The Selected Financial Data is presented on a combined basis. The
limited partnership interests in the Operating Partnership (not owned by the
REIT) are reflected in the pro forma data as minority interest. Centers in which
the Company does not have a controlling ownership interest (Panorama Mall, North
Valley Plaza, Broadway Plaza, Manhattan Village, SDG Macerich Properties, L.P.
and West Acres Shopping Center) are referred to as the "Joint Venture Centers",
and along with the Management Companies, are reflected in the selected financial
data under the equity method of accounting. Accordingly, the net income from the
Joint Venture Centers and the Management Companies that is allocable to the
Company is included in the statement of operations as "Equity in income (loss)
of unconsolidated joint ventures and Management Companies."
19
ITEM 6. SELECTED FINANCIAL DATA
The Company Predecessor
---------------------------------------------------------------------------- --------------
Pro Forma
as Reported March 16 to January 1
to
1998 1997 1996 1995 for 1994 Dec 31,1994 Mar 15,1994
---- ---- ---- ---- -------- ----------- -----------
(All amounts in thousands, except per share data)
OPERATING DATA:
Revenues:
Minimum rents $179,710 $142,251 $99,061 $69,253 $59,640 $48,663 $9,993
Percentage rents 12,856 9,259 6,142 4,814 4,906 3,681 851
Tenant recoveries 86,740 66,499 47,648 26,961 22,690 18,515 3,108
Management fee income (2) - - - - - - 528
Other 4,555 3,205 2,208 1,441 921 582 100
---------- -------- ---------- -------- -------- --------- ---------
Total revenues 283,861 221,214 155,059 102,469 88,157 71,441 14,580
Shopping center expenses 89,991 70,901 50,792 31,580 28,373 22,576 4,891
Management, leasing and
development services (2) - - - - - - 557
REIT general and
administrative expenses 4,373 2,759 2,378 2,011 1,954 1,545 -
Depreciation and amortization 53,141 41,535 32,591 25,749 23,195 18,827 3,642
Interest expense 91,433 66,407 42,353 25,531 19,231 16,091 6,146
---------- -------- ---------- -------- -------- --------- ---------
Income (loss) before
minority interest,
unconsolidated entities
and extraordinary item 44,923 39,612 26,945 17,598 15,404 12,402 (656)
Minority interest (1) (12,902) (10,567) (10,975) (8,246) (8,008) (6,792) -
Equity in income (loss) of
unconsolidated joint ventures
and management companies (2) 14,480 (8,063) 3,256 3,250 3,054 3,016 (232)
Gain on sale of assets 9 1,619 - - - - -
Extraordinary loss on early
extinguishment of debt (2,435) (555) (315) (1,299) - - -
---------- -------- ---------- -------- -------- --------- ---------
Net income (loss) 44,075 22,046 18,911 11,303 10,450 8,626 (888)
Less preferred dividends 11,547 - - - - - N/A
---------- -------- ---------- -------- -------- --------- ---------
Net income (loss) available to
common stockholders $32,528 $22,046 $18,911 $11,303 $10,450 $8,626 ($888)
---------- -------- ---------- -------- -------- --------- ---------
---------- -------- ---------- -------- -------- --------- ---------
Earnings per share - basic: (3)
Income before extraordinary item $1.14 $0.86 $0.92 $0.78 $0.72 $0.60 N/A
Extraordinary item (0.08) (0.01) (0.01) (0.05) - - N/A
---------- -------- ---------- -------- -------- ---------
Net income per share - basic $1.06 $0.85 $0.91 $0.73 $0.72 $0.60 N/A
---------- -------- ---------- -------- -------- ---------
---------- -------- ---------- -------- -------- ---------
Earnings per share - diluted: (3)(7)
Income before extraordinary item $1.11 $0.86 $0.90 $0.78 $0.72 $0.60 N/A
Extraordinary item (0.05) (0.01) (0.01) (0.05) - - N/A
---------- -------- ---------- -------- -------- ---------
Net income per share - diluted $1.06 $0.85 $0.89 $0.73 $0.72 $0.60 N/A
---------- -------- ---------- -------- -------- ---------
---------- -------- ---------- -------- -------- ---------
20
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
The Company Predecessor
----------------------------------------------------------------------------- --------------
Pro Forma
as Reported March 16 to January 1
to
1998 1997 1996 1995 for 1994 Dec 31,1994 Mar 15,1994
---- ---- ---- ---- -------- ----------- -----------
(All amounts in thousands except per share data and number of Centers)
OTHER DATA:
Funds from operations-diluted (4) $120,518 $83,427 $62,428 $44,938 $39,343 $32,710 N/A
EBITDA (5) $189,497 $147,554 $101,889 $68,878 $57,592 $47,320 N/A
Cash flows from (used in):
Operating activities $85,176 $78,476 $80,431 $48,186 N/A $30,011 N/A
Investing activities ($761,147) ($215,006) ($296,675) ($88,413) N/A ($137,637) N/A
Financing activities $675,960 $146,041 $216,317 $51,973 N/A $99,584 N/A
Number of centers at year end 47 30 26 19 16 16 14
Weighted average number of
shares outstanding - basic (6) 43,016 37,982 32,934 26,930 25,645 25,714 N/A
Weighted average number of
shares outstanding - diluted N/A
(6)(7) 43,628 38,403 33,320 26,984 25,771 25,840
Cash distributions
declared per common share $1.865 $1.78 $1.70 $1.66 N/A $0.87 N/A
FFO per share - diluted (4) $2.426 $2.172 $1.874 $1.669 $1.534 N/A N/A
The Company
----------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
( All amounts in thousands)
BALANCE SHEET DATA:
Investment in real estate
(before accumulated depreciation) $2,213,125 $1,607,429 $1,273,085 $ 833,998 $ 554,788
Total assets $2,322,056 $1,505,002 $1,187,753 $ 763,398 $ 485,903
Total mortgage, notes and debentures
payable $1,507,118 $1,122,959 $ 789,239 $ 485,193 $ 313,632
Minority interest (1) $ 165,524 $ 100,463 $ 112,242 $ 95,740 $ 72,376
Stockholders' equity $ 577,413 $ 216,295 $ 237,749 $ 158,345 $ 86,939
(1) "Minority Interest" reflects the ownership interest in the Operating
Partnership not owned by the REIT.
(2) Unconsolidated joint ventures include all Centers in which the Company does
not have a controlling ownership interest and the Management Companies.
The Management Companies on a pro forma basis and after March 15, 1994
have been reflected using the equity method.
(3) Earnings per share is based on SFAS No. 128 for all years presented.
(4) Funds from Operations ("FFO") represents net income (loss) (computed in
accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales or write-down
of assets, plus depreciation and amortization (excluding depreciation on
personal property and amortization of loan and financial instrument costs),
and after adjustments for unconsolidated entities. Adjustments for
unconsolidated entities are calculated on the same basis. FFO does not
represent cash flow from operations as defined by GAAP and is not
necessarily indicative of cash available to fund all cash flow needs. The
computation of FFO - diluted and diluted average number of shares
outstanding includes the effect of outstanding common stock options and
restricted stock using the treasury method. Convertible debentures for the
twelve month period ending December 31, 1998 are anti-dilutive and are not
included. 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 not assumed
converted for purposes of net income per share as they would be
anti-dilutive to that calculation. The preferred shares are assumed
converted for purposes of FFO-diluted per share as they are dilutive to
that calculation.
21
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
(5) 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 and preferred
dividends. 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.
(6) Assumes that all OP Units are converted to common stock.
(7) 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.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL BACKGROUND AND PERFORMANCE MEASUREMENT
The Company believes that the most significant measures of its
operating performance are Funds from Operations and EBITDA. Funds from
Operations is defined as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales or write-down of
assets, plus depreciation and amortization (excluding depreciation on personal
property and amortization of loan and financial instrument costs), and after
adjustments for unconsolidated entities. Adjustments for unconsolidated entities
are calculated on the same basis. Funds from Operations does not represent cash
flow from operations as defined by GAAP and is not necessarily indicative of
cash available to fund all cash flow needs.
EBITDA represents earnings before interest, income taxes, depreciation,
amortization, minority interest, equity in income (loss) of unconsolidated
entities, extraordinary items, gain (loss) on sale of assets and preferred
dividends. This data is relevant to an understanding of the economics of the
shopping center business as it indicates cash flow available from operations to
service debt and satisfy certain fixed obligations. EBITDA should not be
construed as an alternative to operating income as an indicator of the Company's
operating performance, or to cash flows from operating activities (as determined
in accordance with GAAP) or as a measure of liquidity. While the performance of
individual Centers and the Management Companies determines EBITDA, the Company's
capital structure also influences Funds from Operations. The most important
component in determining EBITDA and Funds from Operations is Center revenues.
Center revenues consist primarily of minimum rents, percentage rents and tenant
expense recoveries. Minimum rents will increase to the extent that new leases
are signed at market rents that are higher than prior rents. Minimum rent 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, 1998, 1997
and 1996. The following discussion compares the activity for the year ended
December 31, 1998 to results of operations for 1997. Also included is a
comparison of the activities for the year ended December 31, 1997 to the results
for the year ended December 31, 1996. This information should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains or incorporates statements
that constitute forward-looking statements. Those statements appear in a number
of places in this Form 10-K and include statements regarding, among other
matters, the Company's growth and acquisition opportunities, the Company's
acquisition strategy, regulatory matters pertaining to compliance with
governmental regulations and other factors affecting the Company's financial
condition or results of operations. Words such as "expects," "anticipates,"
"intends," "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 results to vary
materially from the Company's future results, performance or achievements, or
those of the industry, expressed or implied in such forward-looking statements.
Such factors include, among others, general industry economic and business
conditions, which will, among other things, affect demand for retail space or
retail goods, availability and creditworthiness of current and prospective
tenants, lease rents, availability and cost of financing and operating expenses;
adverse changes in the real estate markets including, among other things,
competition with other companies, retail formats and technology, risks of real
estate development and acquisition; governmental actions and initiatives;
environmental and safety requirements; and Year 2000 compliance issues of the
Company and third parties and related service interruptions or payment delays.
The Company will not update any forward-looking information to reflect actual
results or changes in the factors affecting the forward-looking information.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table reflects the Company's acquisitions in 1996, 1997 and 1998:
Date
Acquired Location
-------------- ----------------
"1996 Acquisition Centers":
- ---------------------------
Villa Marina Marketplace January 25, 1996 Marina Del Rey, California
Valley View Center October 21, 1996 Dallas, Texas
Rimrock Mall November 27, 1996 Billings, Montana
Vintage Faire Mall November 27, 1996 Modesto, California
Pacific View (formerly
known as 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
Manhattan Village (*) August 19, 1997 Manhattan Beach, California
The Citadel Mall December 19, 1997 Colorado Springs, Colorado
Great Falls Marketplace December 31, 1997 Great Falls, Montana
"1998 Acquisition Centers":
- ----------------------------
ERE/Yarmouth Portfolio (*) February 27, 1998 Twelve properties in eight states
South Plains Mall June 19, 1998 Lubbock, Texas
Westside Pavilion July 1, 1998 Los Angeles, California
Village at Corte Madera June-July 1998 Corte Madera, California
Carmel Plaza August 10, 1998 Carmel, California
Northwest Arkansas Mall December 15, 1998 Fayetteville, Arkansas
(*) denotes the Company owns these Centers through a joint venture partnership.
The financial statements include the results of these Centers for periods
subsequent to their acquisition.
Many of the variations in the results of operations, discussed
below, occurred due to the addition of these properties to the portfolio
during 1998, 1997 and 1996. Many factors impact the Company's ability to
acquire additional properties including 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.
Accordingly, management is uncertain whether during the balance of 1999, 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 1998, 1997 and 1996 Acquisition Centers. Pacific View
(formerly known as Buenaventura Mall), Crossroads Mall-Boulder, Huntington
Center and Parklane Mall are currently under redevelopment and are referred
to herein as the "Redevelopment Centers." All other centers are referred to
herein as the "Same Centers".
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. During 1997,
Montgomery Ward filed for bankruptcy. The Company has Montgomery Ward as an
Anchor in 11 of its Centers. Montgomery Ward has indicated that it plans to
cease operating at three of these locations. The Company is negotiating to
recapture these locations and replace Montgomery Ward with another department
store. Montgomery Ward has not yet disclosed whether they will cease to operate
any of its eight remaining stores at the Centers. If Montgomery Ward ceases to
operate any of its stores and the Company is unable to replace them with other
tenants, it could have an adverse effect on a Center.
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.
24
ASSETS AND LIABILITIES
Total assets increased to $2,322 million at December 31, 1998 compared
to $1,505 million at December 31, 1997 and $1,188 million at December 31, 1996.
During that same period, total liabilities increased from $838 million in 1996
to $1,188 million in 1997 and $1,579 million in 1998. These changes were
primarily as a result of the 1996 and 1998 common stock offerings, the 1997
convertible debenture offering, the purchase of the 1998, 1997 and 1996
Acquisition Centers and related debt transactions.
A. EQUITY OFFERINGS
The Company sold 7,920,181 shares of its common stock in six offerings
during 1998, raising $203.8 million of net proceeds.
On February 25, 1998, the Company issued 3,627,131 shares of its Series
A Preferred Stock for net proceeds totaling $99.0 million.
On June 17, 1998, the Company issued 5,487,471 shares of its Series B
Preferred Stock for net proceeds totaling $148.5 million.
The total net proceeds from the 1998 common and preferred stock
offerings totaled $451.3 million. These proceeds were used for the 1998
acquisitions, reducing borrowings under the Company's line of credit and general
corporate purposes.
B. ACQUISITIONS
On February 27, 1998, the Company, through a 50/50 joint venture with
an affiliate of Simon Property Group, Inc., acquired the ERE Yarmouth portfolio
of twelve regional malls. The properties in the portfolio comprise 10.7 million
square feet and are located in eight states. The total purchase price was $974.5
million, which included $485.0 million of assumed debt, at market value. The
Company's share of the cash component of the purchase price was funded by
issuing $100.0 million of Series A Preferred Stock, $80.0 million of common
stock and borrowing the balance from the Company's line of credit.
South Plains Mall was acquired on June 19, 1998. South Plains Mall is a
1,140,574 square foot super regional mall located in Lubbock, Texas. The
purchase price was $115.5 million, consisting of $29.3 million of assumed debt,
at fair market value, and $86.2 million of cash. The cash portion was funded
with a portion of the proceeds from the Company's Series B Preferred Stock
offering.
Westside Pavilion was acquired on July 1, 1998 for $170.5 million.
Westside Pavilion is a 755,759 square foot regional mall located in Los Angeles,
California. The purchase price was funded with a portion of the proceeds from
the Company's Series B Preferred Stock offering, borrowings under the Company's
line of credit and the placement of a ten year $100.0 million mortgage secured
by the property.
The Village at Corte Madera is a 428,398 square foot regional mall in
Corte Madera, California, which the Company acquired in two phases: (i) 40% on
June 16, 1998 and (ii) the remaining 60% on July 24, 1998. In addition, Carmel
Plaza, a 115,215 square foot community shopping center in Carmel, California was
acquired on August 10, 1998. The combined purchase price was $165.5 million,
consisting of $40.0 million of assumed debt, the issuance of $7.9 million of OP
Units and $117.6 million in cash. The cash component was funded by borrowings
under the Company's line of credit.
Northwest Arkansas Mall was acquired on December 15, 1998. Northwest
Arkansas Mall is a 780,237 square foot regional mall located in Fayetteville,
Arkansas. The purchase price of $94.0 million was funded by a concurrently
placed loan of $63.0 million and borrowings of $31.0 million under the Company's
line of credit.
On February 18, 1999, through a 51/49 joint venture with Ontario
Teachers' Pension Plan Board, the Company closed on the first phase of a two
phase acquisition of a portfolio of properties. The phase one closing included
the acquisition of three regional malls, the retail component of a mixed-use
development, five contiguous properties and two non-contiguous community
shopping centers comprising approximately 3.6 million square feet for a total
purchase price of approximately $427.0 million. The purchase price was funded
with a $120.0 million loan placed concurrently with the closing, $140.4 million
of debt from an affiliate of the seller, and $39.4 million of assumed debt. The
balance of the purchase price was paid in cash. The Company's share of the cash
component was funded with the proceeds from two refinancings of centers and
borrowings under the Company's line of credit.
25
B. ACQUISITIONS, CONTINUED:
The second phase consists of the acquisition of the office component of the
mixed-use development for a purchase price of approximately $115 million. The
closing of the second phase is expected to occur in May 1999.
C. REFINANCINGS
On August 3, 1998, the Company, along with the joint venture partner,
refinanced the debt secured by Broadway Plaza. The loan of $43.5 million was
paid in full and a new note was issued for $75.0 million bearing interest at a
fixed rate of 6.68% and maturing August 1, 2008.
On August 7, 1998, the Company refinanced the debt on Fresno Fashion
Fair. A $38.0 million loan was paid in full and a new secured note was issued
for $69.0 million bearing interest at a fixed rate of 6.52% and maturing August
10, 2008.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Minimum and percentage rents increased by 27% to $192.6
million in 1998 from $151.5 million in 1997. Approximately $18.9
million of the increase resulted from the 1997 Acquisition Centers,
$18.8 million resulted from the 1998 Acquisition Centers and $5.0
million of the increase was attributable to the Same Centers. These
increases were partially offset by revenue decreases at the
Redevelopment Centers of $1.6 million in 1998.
Tenant recoveries increased to $86.7 million in 1998 from
$66.5 million in 1997. The 1998 and 1997 Acquisition Centers generated
$17.7 million of this increase and $2.2 million of the increase was
from the Same Centers.
Other income increased to $4.5 million in 1998 from $3.2
million in 1997. Approximately $0.6 million of the increase related to
the 1998 and 1997 Acquisition Centers, $0.7 million of the increase was
attributable to the Same Centers and the Redevelopment Centers.
EXPENSES
Shopping center expenses increased to $90.0 million in 1998
compared to $70.9 million in 1997. Approximately $17.3 million of the
increase resulted from the 1998 and 1997 Acquisition Centers. The other
Centers had a net increase of $1.8 million in shopping center expenses
resulting primarily from increased property taxes and recoverable
expenses.
General and administrative expenses increased to $4.4
million in 1998 from $2.8 million in 1997 primarily due to the
accounting change required by EITF 97-11, "Accounting for Internal
Costs Relating to Real Estate Property Acquisitions," which requires
the expensing of internal acquisition costs. Previously in accordance
with GAAP, certain internal acquisition costs were capitalized. The
increase is also attributable to higher executive and director
compensation expense.
INTEREST EXPENSE
Interest expense increased to $91.4 million in 1998 from
$66.4 million in 1997. This increase of $25.0 million is primarily
attributable to the acquisition activity in 1997 and 1998, which was
partially funded with secured debt and borrowings under the Company's
line of credit. In addition, in June and July of 1997, the Company
issued $161.4 million of convertible debentures, which contributed to
$5.7 million of this increase.
DEPRECIATION AND AMORTIZATION
Depreciation increased to $53.1 million from $41.5 million
in 1997. This increase relates primarily to the 1997 and 1998
Acquisition Centers.
26
MINORITY INTEREST
The minority interest represents the 28.4% weighted average
interest of the Operating Partnership that was not owned by the Company
during 1998. This compares to 31.8% not owned by the Company during
1997.
INCOME (LOSS) FROM UNCONSOLIDATED JOINT VENTURES AND MANAGEMENT
COMPANIES
The income from unconsolidated joint ventures and the
Management Companies was $14.5 million for 1998, compared to a loss of
$8.1 million in 1997. A total of $14.5 million of the change is
attributable to the 1998 acquisition of the ERE/Yarmouth portfolio.
Also, in 1997, there was a write-down and loss of $10.5 million on the
sale of North Valley Plaza.
GAIN ON SALE OF ASSETS
During 1997, the Company sold a parcel of land for a net gain
of $1.6 million compared to a minimal amount of gain on sale
recognized in 1998.
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1998, the Company wrote off $2.4 million of unamortized
financing costs, compared to $0.6 million written off in 1997.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
As a result of the foregoing, net income available to common
stockholders increased to $32.5 million in 1998 from $22.0 million in
1997.
OPERATING ACTIVITIES
Cash flow from operations was $85.2 million in 1998 compared
to $78.4 million in 1997. The increase resulted from the factors
discussed above, primarily the impact of the 1997 and 1998 Acquisition
Centers.
INVESTING ACTIVITIES
Cash flow used in investing activities was $761.1 million in
1998 compared to $215.0 million in 1997. The change resulted primarily
from the higher volume of acquisition activity completed in 1998
compared to 1997.
FINANCING ACTIVITIES
Cash flow from financing activities was $676.0 million in
1998 compared to $146.0 million in 1997. The increase resulted from the
offerings of 7,920,181 shares of common stock, 3,627,131 shares of
Series A Preferred Stock and 5,487,471 shares of Series B Preferred
Stock completed in 1998. No equity was raised in 1997.
EBITDA AND FUNDS FROM OPERATIONS
Primarily because of the factors mentioned above, EBITDA
increased 28% to $189.5 million in 1998 from $147.6 million in 1997 and
Funds from Operations - Diluted increased 44% to $120.5 million from
$83.4 million in 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Minimum and percentage rents increased by 44% to $151.5
million in 1997 from $105.2 million in 1996. Approximately $36.0
million of the increase resulted from the 1996 Acquisition Centers and
$11.9 million resulted from the 1997 Acquisition Centers. These
increases were partially offset by decreases of $0.5 million at
Parklane Mall and $0.3 million at Crossroads-Boulder, both due to
reduced occupancy incurred during redevelopment.
27
REVENUES, CONTINUED:
Tenant recoveries increased to $66.5 million in 1997 from
$47.7 million in 1996. The 1997 and 1996 Acquisition Centers generated
$19.6 million of this increase. These increases were partially offset
by lower recoveries resulting from lower Same Center recoverable
expenses in 1997 compared to 1996.
Other income increased to $3.2 million in 1997 from $2.2
million in 1996. Approximately $0.5 million of the increase related to
the 1997 and 1996 Acquisition Centers, and approximately $0.5 million
of this increase resulted from nonrecurring fee income received in
1997.
EXPENSES
Shopping center expenses increased to $70.9 million in 1997
compared to $50.8 million in 1996. Approximately $20.9 million of the
increase resulted from the 1997 and 1996 Acquisition Centers. The other
centers had a net decrease of $0.8 million in shopping center expenses
resulting primarily from decreased property taxes, insurance premiums
and recoverable expenses.
General and administrative expenses increased to $2.8
million in 1997 from $2.4 million in 1996, primarily due to increased
executive and director compensation expense and professional fee
expense.
INTEREST EXPENSE
Interest expense increased to $66.4 million in 1997 from
$42.4 million in 1996. This increase of $24.0 million is attributable
to the acquisition activity in 1997 and 1996, which was partially
funded with secured debt. In addition, in June and July 1997, the
Company issued $161.4 million of convertible debentures.
DEPRECIATION AND AMORTIZATION
Depreciation increased to $41.5 million from $32.6 million
in 1996. This increase relates primarily to the 1996 and 1997
Acquisition Centers.
MINORITY INTEREST
The minority interest represented the 31.8% weighted average
interest of the Operating Partnership that was not owned by the Company
during 1997. This compares to 36.9% not owned by the Company during
1996.
INCOME (LOSS) FROM UNCONSOLIDATED JOINT VENTURES AND MANAGEMENT
COMPANIES
The loss from unconsolidated joint ventures and the
Management Companies was $8.1 million for 1997, compared to a gain of
$3.3 million in 1996. A total of $10.5 million of the change is
attributable to the write-down and the loss on the sale of North Valley
Plaza in 1997.
GAIN ON SALE OF ASSETS
During 1997 the Company sold a parcel of land for a net gain
of $1.6 million. There was no gain on sale recognized in 1996.
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1997 the Company wrote off $0.6 million of unamortized
financing costs, compared to $0.3 million written off in 1996.
NET INCOME
As a result of the foregoing, net income increased to $22.0
million in 1997 from $18.9 million in 1996.
28
OPERATING ACTIVITIES
Cash flow from operations was $78.5 million in 1997 compared
to $80.4 million in 1996. The decrease resulted from the factors
discussed above, primarily the impact of the 1996 and 1997 Acquisition
Centers and related financings.
INVESTING ACTIVITIES
Cash flow used in investing activities was $215.0 million in
1997 compared to $296.7 million in 1996. The change resulted primarily
from the four acquisitions completed in 1997 compared to seven
acquisitions in 1996.
FINANCING ACTIVITIES
Cash flow from financing activities was $146.0 million in
1997 compared to $216.3 million in 1996. The decrease resulted from
more acquisition financing done in 1996 than 1997.
EBITDA AND FUNDS FROM OPERATIONS
Due primarily to the factors mentioned above, EBITDA
increased 45%, to $147.6 million in 1997 from $101.9 million in 1996
and Funds From Operations increased 33%, to $83.2 million, from $62.4
million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to meet its short term liquidity
requirements through cash generated from operations and working capital
reserves. The Company anticipates that revenues will continue to
provide necessary funds for its operating expenses and debt service
requirements, and to pay dividends to stockholders in accordance with
REIT requirements. The Company anticipates that cash generated from
operations, together with cash on hand, will be adequate to fund
capital expenditures which will not be reimbursed by tenants, other
than non-recurring capital expenditures. Capital for major expenditures
or major redevelopments has been, and is expected to continue to be,
obtained from equity or debt financings which include borrowings under
the Company's line of credit and construction loans. However, many
factors impact the Company's ability to access capital, such as its
overall debt to market capitalization level, interest rates and
interest coverage ratios. The Company currently is undertaking a $90
million redevelopment of Pacific View. See "Item 2. Properties." The
Company has a bank construction loan agreement to fund $89.2 million
of these construction costs.
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 public and private equity
offerings, debt financings and/or joint ventures. During 1998 and 1999,
the Company acquired two portfolios through joint ventures with another
party. The Company believes such joint venture arrangements provide an
attractive alternative to other forms of financing, particularly during
periods when access to public capital markets is restricted by
prevailing market conditions. See "Equity Offerings" and
"Acquisitions."
The Company's total outstanding loan indebtedness at
December 31, 1998 was $1.8 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 56%
at December 31, 1998. The Company's debt consists primarily of
fixed-rate conventional mortgages payable secured by individual
properties. See "Properties-Mortgage Debt" for a description of the
Company's outstanding mortgage indebtedness.
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. On February 18, 1998, the Company issued
1,052,650 shares and on February 23, 1998 an additional 1,826,484
shares were issued. On April 24, 1998, the Company issued 808,989
shares and an additional 967,256, 1,864, 802 and 1,400,000 shares were
issued on April 29, 1998, May 29, 1998 and December 14, 1998,
respectively. The aggregate offering price of these transactions was
approximately $212.9 million, leaving approximately $287.1 million
available under the shelf registration statement.
29
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
The Company has an unsecured line of credit for up to $150.0
million. There was $137.0 million of borrowings outstanding at
December 31, 1998.
At December 31, 1998, the Company had cash and cash
equivalents available of $25.1 million.
YEAR 2000 READINESS DISCLOSURE
THE INFORMATION PROVIDED BELOW CONTAINS YEAR 2000 STATEMENTS AND IS A
YEAR 2000 READINESS DISCLOSURE PURSUANT TO PUB. L. NO. 105-271.
YEAR 2000 ISSUES
The Year 2000 issue is the result of many existing computer programs
and embedded technology using two digits rather than four to define the
applicable year. The Company's computer equipment and software and devices with
embedded technology that are time-sensitive may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure or
erroneous data which would cause disruptions of operations.
The Company has initiated a Year 2000 compliance program consisting of
the following phases: (1) identification of Year 2000 issues; (2) assessment of
Year 2000 compliance of systems; (3) remediation or replacement of non-compliant
systems; (4) testing to verify compliance; and (5) contingency planning, as
appropriate. This program includes a review of both information technology
("IT") and non-IT systems and is being supervised by the Company's Year 2000
team which consists of management as well as operational and IT staff members.
On February 18, 1999, the Company acquired several properties from
various Safeco Corporation entities and is in the process of reviewing each
property's Year 2000 readiness. Such review is anticipated to be completed by
June 30, 1999. See "Recent Developments - Acquisitions". The following
disclosure provides information regarding the Company's properties excluding
those acquisition properties.
IT SYSTEMS
The Company has reviewed its core computer hardware systems and
software programs to determine if such systems and programs will properly
process dates in the Year 2000 and thereafter. Based on manufacturer or vendor
information, the Company presently believes most of its critical computer
hardware systems and software programs are substantially Year 2000 compliant.
The Company is aware of one critical hardware system which needs a Year 2000
upgrade at a cost of approximately $13,100. The Company is currently conducting
its own evaluation and testing to verify compliance of its critical hardware
systems and software and expects to conclude such testing by June 1, 1999.
The most important software program to the Company's operations is its
property management and accounting software. The Company has been advised by its
independent software vendor that it has completed its evaluation, testing and
modification of this program and the necessary changes have been completed to
achieve Year 2000 compliance. The Company is conducting its own evaluation and
testing to confirm this conclusion and expects to complete such testing by June
1, 1999.
The Company completed its assessment of the Year 2000 compliance of its
non-critical computer hardware systems and software programs by its target date
of December 31, 1998. Based on manufacturer or vendor information, the Company
presently believes that substantially all of its non-critical hardware systems
and software programs are Year 2000 compliant.
30
YEAR 2000 READINESS DISCLOSURE, CONTINED:
NON-IT SYSTEMS
Part of the Company's Year 2000 program also includes a review of
the various operating systems of each of its portfolio properties and main
offices. These systems typically include embedded technology which
complicates the Company's Year 2000 efforts. Examples of these types of
systems include energy management systems, telecommunication systems,
elevators, security systems and copiers. The various operating systems have
been assigned priorities based on the importance of the system to each
property's operations and the potential impact of non-compliance. All of the
Company's properties have substantially completed their initial assessment of
each system and are verifying Year 2000 compliance through the manufacturers
and/or vendors of the systems. Approximately 70% of the critical operating
systems for which the Company has received information from manufacturers or
vendors are substantially Year 2000 compliant as reported by such entities.
Certain critical systems, 11 energy management systems, one telephone system,
and one parking access computer software system, will need Year 2000 upgrades
and the Company is in the process of obtaining such upgrades at an aggregate
cost of approximately $50,000. Other non-compliant critical systems are being
upgraded by the manufacturer at no cost to the Company or were previously
scheduled for replacement or upgrades prior to January 1, 2000. With respect
to approximately 20% of its critical operating systems, the Company has not
received the necessary information to assess the Year 2000 compliance of such
systems. The Company is contacting these manufacturers/ vendors to obtain the
information necessary to complete its Year 2000 compliance assessment.
Each property is preparing recommendations regarding the remediation
and testing phases. Remediation and testing recommendations and time lines are
prepared based on the importance of each system to the property's operations and
information received from the manufacturer/vendor. The Company plans to
coordinate the testing phase with the manufacturers/vendors of the systems, as
appropriate. The Company established June 1, 1999 as its target date to complete
the remediation and testing phases for the critical operating systems at each
property. The Company will need the cooperation of its manufacturers/vendors in
providing information and testing assistance to meet this timeline for its
critical operating systems. If such cooperation is not provided, completion of
these phases will be delayed. The Company expects the Year 2000 program to
continue beyond January 1, 2000 with respect to non-critical operating systems
and issues.
MATERIAL THIRD PARTIES
The Company mailed surveys to its material vendors, utilities and
tenants about their plans and progress in addressing the Year 2000 issue. Those
entities surveyed include the utilities for each mall (i.e., electric, gas,
water, telephone and waste management companies), the largest tenants of the
Company based on the amount of their 1998 rent payments and certain Anchor
tenants. As of this date, the Company has received responses from approximately
58% of those entities surveyed. Generally, the responses received state that the
entity is in the process of addressing the Year 2000 compliance issues and
expects to achieve compliance prior to January 1, 2000.
COSTS
Because the Company's assessment, remediation and testing efforts are
ongoing, the Company is unable to estimate the actual costs of achieving Year
2000 compliance for its IT and non-IT systems. Based on information received
from manufacturers/vendors, the Company presently anticipates that the
assessment and remediation costs will not be material. As of December 31, 1998,
the Company has not expended significant amounts since its evaluation of Year
2000 issues has been primarily conducted by its own personnel. The Company does
not separately record the internal costs incurred for its Year 2000 compliance
program. Such costs are primarily the related payroll costs for its personnel
who are part of the Year 2000 program.
RISKS
As is true of most businesses, the Company is vulnerable to external
forces that might generally effect industry and commerce, such as utility
company Year 2000 compliance failures and related service interruptions. In
addition, failure of information and operating systems of tenants may delay the
payment of rent to the Company or impair their ability to operate. A formal
contingency plan has not yet been developed for dealing with the most reasonably
likely worst case scenario. The Company will continue to evaluate potential
areas of risk and develop a contingency plan, as appropriate.
Based on currently available information, the Company believes that the
Year 2000 issue will not pose significant operational problems for the Company.
However, if all Year 2000 issues are not properly identified, or assessment,
remediation and testing are not effected in a timely manner, there can be no
assurance that the Year 2000 issue will not adversely affect the Company's
results of operations or its relationships with tenants or other third parties.
Additionally, there can be no assurance that the Year 2000 issues of third
parties will not have an adverse impact on the Company's results of operations.
31
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 and sales or write-down of assets, plus depreciation and
amortization (excluding depreciation on personal property and
amortization of loan and financial instrument costs) and after
adjustments for unconsolidated entities. Adjustments for unconsolidated
entities are calculated on the same basis. FFO does not represent cash
flow from operations, as defined by GAAP, and is not necessarily
indicative of cash available to fund all cash flow needs. The following
reconciles net income available to common stockholders to FFO:
1998 1997
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
(amounts in thousands)
Net income - available to common stockholders $32,528 $22,046
Adjustments to reconcile net income to FFO-basic:
Minority interest 12,902 10,567
Loss on early extinguishment of debt 2,435 555
Gain on sale of wholly-owned assets (9) (1,619)
Loss on sale or write-down of assets from
unconsolidated entities (pro rata) 143 10,400
Depreciation and amortization on wholly owned centers 53,141 41,535
Depreciation and amortization on joint ventures and
from the management companies (pro rata) 10,879 2,312
Less: depreciation on personal property and
amortization of loan costs and interest rate caps (3,716) (2,608)
------------ ------------
FFO - basic (1) 43,016 $108,303 37,982 $83,188
Additional adjustment to arrive at FFO-diluted
Impact of convertible preferred stock 6,058 11,547 N/A N/A
Impact of stock options and restricted stock using
the treasury method 612 668 421 239
Impact of convertible debentures (n/a anti-dilutive)
----------- ----------- ----------- ------------
FFO - diluted (2) 49,686 $120,518 38,403 $83,427
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
32
FUNDS FROM OPERATIONS, CONTINUED:
(1) Calculated based upon basic net income as adjusted to reach
basic FFO. Weighted average number of shares includes the
weighted average shares of common stock outstanding for 1998
assuming the conversion of all outstanding OP Units.
(2) The computation of FFO - diluted and diluted average number
of shares outstanding includes the effect of outstanding common
stock options and restricted stock using the treasury method.
Convertible debentures for the twelve month period are
anti-dilutive and are not included. 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 not
assumed converted for purposes of net income per share as they
would be anti-dilutive to that calculation. The preferred shares
are assumed converted for purposes of FFO-diluted per share as
they are dilutive to that calculation.
Included in minimum rents were rents attributable to the accounting
practice of straight lining of rents. The amount of straight lining of
rents that impacted minimum rents was $3,814,000 for 1998, $3,599,000
for 1997 and $1,832,000 for 1996.
INFLATION
In the last three years, inflation has not had a significant
impact on the Company because of a relatively low inflation rate. Most of
the leases at the Centers have rent adjustments periodically through the
lease term. These rent increases are either in fixed increments or based on
increases in the Consumer Price Index. In addition, many of the leases are
for terms of less than ten years, which enables the Company to replace
existing leases with new leases at higher base rents if the rents of the
existing leases are below the then existing market rate. Additionally, most
of the leases require the tenants to pay their pro rata share of operating
expenses. This reduces the Company's exposure to increases in costs and
operating expenses resulting from inflation.
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. As a result of the above, earnings are generally
highest in the fourth quarter of each year.
NEW PRONOUNCEMENTS ISSUED:
In March, 1998, the Financial Accounting Standards Board
("FASB"), through its Emerging Issues Task Force ("EITF"), concluded based
on EITF 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions," that all internal costs to source, analyze and
close acquisitions should be expensed as incurred. The Company has
historically capitalized these costs in accordance with GAAP. The Company
has adopted the FASB's interpretation effective March 19,1998, and the
impact was approximately $0.04 per share reduction of net income and
FFO-diluted per share for 1998.
In May, 1998, the FASB, through the EITF, modified the timing
of recognition of revenue for percentage rent received from tenants in EITF
98-9, "Accounting for Contingent Rent in Interim Financial Periods." The
Company applied this accounting change as of April 1, 1998. The accounting
change had the effect of deferring $1,792,000 of percentage rent in the
second quarter of 1998 and $972,000 of percentage rent in the third quarter
of 1998. During the fourth quarter of 1998, the FASB reversed EITF 98-9.
Accordingly, the Company has resumed accounting for percentage rent on the
accrual basis. The effect of these changes was that approximately
$2,764,000 was deferred from the second and third quarters of 1998 to the
fourth quarter of 1998.
33
NEW PRONOUNCEMENTS ISSUED, CONTINUED:
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for
the Company's financial statements for periods beginning January 1, 2000.
The new standard requires companies to record derivatives on the balance
sheet, measured at fair value. Changes in the fair values of those
derivatives will be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. The Company has
not yet determined when it will implement SFAS 133 nor has it completed the
complex analysis required to determine the impact on its financial
statements.
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, 1998
concerning the Company's long term debt obligations, including principal
cash flows by scheduled maturity, weighted average interest rates and
estimated fair value ("FV").
For the Year Ended December 31,
(dollars in thousands)
1999 2000 2001 2002
---- ---- ---- ----
Long term debt:
Fixed rate $10,670 $8,159 $107,461 $10,302
Average interest rate 7.30% 7.30% 7.26% 7.26%
Fixed rate - Debentures - - - 161,400
Average interest rate - - - 7.25%
Variable rate 150,100 - 137,000 -
Average interest rate 6.76% - 6.79% -
-----------------------------------------------------
Total debt - Wholly owned Centers $160,770 $8,159 $244,461 $171,702
-----------------------------------------------------
Joint Venture Centers:
(at Company's pro rata share)
Fixed rate $7,202 - - -
Average interest rate 8.89% - - -
Variable rate - - - -
Average interest rate - - - -
-----------------------------------------------------
Total debt - All Centers $167,972 $8,159 $244,461 $171,702
-----------------------------------------------------
-----------------------------------------------------
2003 Thereafter Total FV
---- ---------- ----- --
Long term debt:
Fixed rate $99,832 $822,194 $1,058,618 $1,121,753
Average interest rate 7.20% 7.20% 7.20% -
Fixed rate - Debentures - - 161,400 155,719
Average interest rate - - 7.25% -
Variable rate - - 287,100 287,100
Average interest rate - - 6.77% -
-----------------------------------------------------
Total debt - Wholly owned Centers $99,832 $822,194 $1,507,118 $1,564,572
-----------------------------------------------------
Joint Venture Centers:
(at Company's pro rata share)
Fixed rate - $197,740 $204,942 $205,828
Average interest rate - 6.50% 7.20% -
Variable rate 92,500 - 92,500 92,500
Average interest rate 6.15% - 6.15% -
-----------------------------------------------------
Total debt - All Centers $192,332 $1,019,934 $1,804,560 $1,862,900
-----------------------------------------------------
-----------------------------------------------------
Of the total variable rate debt maturing in 1999, $65.1 million was paid in
full on February 4, 1999, and refinanced with a new $100 million fixed rate
loan at an interest rate of 6.74%. The Company is currently in negotiations
to refinance the remaining $85.0 million maturing in 1999 with fixed rate
debt. The $137.0 million of variable debt maturing in 2001 represents the
outstanding borrowings under the Company's credit facility. The credit
facility matures in February 2000, with a one year option to extend the
maturity date to February 2001. The table reflects the Company extending
the maturity date to February 2001.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, CONTINUED:
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 $3.8 million per year based
on $379.6 million outstanding at December 31, 1998.
The fair value of the Company's long term debt is estimated based on
discounted cash flows at interest rates that management believes reflects
the risks associated with long term debt of similar risk and duration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement
Schedules for the required information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
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 1999 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 1999 Annual Meeting of Stockholders; provided, however, that
neither the Report of the Compensation Committee on executive compensation nor
the Stock Performance Graph set forth therein shall 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 1999 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 1999 Annual Meeting of Stockholders.
36
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. 39
Consolidated balance sheets of the Company as of December 31, 1998 and 1997.
40
Consolidated statements of operations of the Company for the years ended
December 31, 1998, 1997 and 1996. 41
Consolidated statements of stockholders' equity of the Company for the years
ended December 31, 1998, 1997 and 1996. 42
Consolidated statements of cash flows of the Company for the years ended
December 31, 1998, 1997 and 1996. 43
Notes to consolidated financial statements 44-61
2. Financial Statements of SDG Macerich Properties, L.P.
Independent Auditors' Report 62
Balance sheet of SDG Macerich Properties, L.P. as of December 31, 1998.
63
Statement of operations of SDG Macerich Properties, L.P. for the year ended
December 31, 1998. 64
Statement of cash flows of SDG Macerich Properties, L.P. for the year ended
December 31, 1998. 65
Statement of partners' equity of the SDG Macerich Properties, L.P. for the
year ended December 31, 1998. 66
Notes to financial statements 67-69
3. Financial Statement Schedules
Schedule III - Real estate and accumulated depreciation of the Company
70-71
Schedule III - Real estate and accumulated depreciation of SDG Macerich
Properties, L.P. 72
(b) 1. Reports on Form 8-K.
Form 8-K/A dated November 10, 1998 amending the Form 8-K
regarding the acquisition of the Village at Corte Madera and
the Form 8-K regarding the acquisition of Carmel Plaza and
including certain financial statements and pro forma financial
information regarding such acquisitions. -
37
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND Page
REPORTS ON FORM 8-K, CONTINUED:
Page
-------
Form 8-K dated November 13, 1998, as amended by Form 8-K/A
dated December 8, 1998, regarding the declaration of a
dividend of one preferred share purchase right for each
outstanding share of common stock. -
Form 8-K dated December 14, 1998 with respect to the Underwriting Agreement
and opinion of counsel regarding the issuance of 1,400,000 shares of common
stock. -
Form 8-K dated December 30, 1998 with respect to the acquisition of
Northwest Arkansas Mall. -
(c) 1. Exhibits
The Exhibit Index attached hereto is incorporated by reference under this
item. -
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Macerich Company:
We have audited the consolidated financial statements and financial statement
schedule of The Macerich Company (the "Company") as listed in Items 14(a)(1) and
(3) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these 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 10% of
1998 consolidated total assets of the Company, and the equity in its net income
represents approximately 33% of the Company's 1998 consolidated net income.
Those statements were audited by other auditors whose report has been furnished
to us and our opinion, 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 in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of The Macerich Company as of December 31,
1998 and 1997, and the consolidated results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
Los Angeles, California
March 17, 1999
39
THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
----------------------------------
1998 1997
---- ----
ASSETS:
Property, net $1,966,845 $1,407,179
Cash and cash equivalents 25,143 25,154
Tenant receivables, including accrued overage rents of
$5,917 in 1998 and $4,330 in 1997 37,373 23,696
Due from affiliates - 3,105
Deferred charges and other assets, net 62,673 37,899
Investments in joint ventures and the Management Companies 230,022 7,969
----------------- ----------------
Total assets $2,322,056 $1,505,002
----------------- ----------------
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable:
Related parties $134,625 $135,313
Others 1,074,093 771,246
----------------- ----------------
Total 1,208,718 906,559
Bank notes payable 137,000 55,000
Convertible debentures 161,400 161,400
Accounts payable and accrued expenses 27,701 17,335
Due to affiliates 2,953 15,109
Other accrued liabilities 36,927 32,841
Preferred stock dividend payable 4,420 -
----------------- ----------------
Total liabilities 1,579,119 1,188,244
Minority interest in Operating Partnership 165,524 100,463
----------------- ----------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Series A cumulative convertible redeemable preferred stock, $.01 par
value, 3,627,131 and 0 shares authorized, issued and outstanding
at December 31, 1998 and December 31, 1997,
respectively 36 -
Series B cumulative convertible redeemable preferred stock, $.01 par
value, 5,487,471 and 0 shares authorized, issued and outstanding
at December 31, 1998 and December 31, 1997,
respectively 55 -
Common stock, $.01 par value, 100,000,000 shares
authorized, 33,901,963 and 26,004,800 shares issued and
outstanding at December 31, 1998 and 1997, respectively 338 260
Additional paid in capital 581,508 219,121
Accumulated earnings - -
Unamortized restricted stock (4,524) (3,086)
----------------- ----------------
Total stockholders' equity 577,413 216,295
----------------- ----------------
Total liabilities and stockholders' equity $2,322,056 $1,505,002
----------------- ----------------
----------------- ----------------
The accompanying notes are an integral part of these financial statements.
40
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the years ended
December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
REVENUES:
Minimum rents $179,710 $142,251 $99,061
Percentage rents 12,856 9,259 6,142
Tenant recoveries 86,740 66,499 47,648
Other 4,555 3,205 2,208
----------- ------------ ---------
Total revenues 283,861 221,214 155,059
----------- ------------ ---------
EXPENSES:
Shopping center expenses 89,991 70,901 50,792
General and administrative expense 4,373 2,759 2,378
----------- ------------ ---------
94,364 73,660 53,170
----------- ------------ ---------
Interest expense:
Related parties 10,224 10,287 10,172
Others 81,209 56,120 32,181
Depreciation and amortization 53,141 41,535 32,591
----------- ------------ ---------
144,574 107,942 74,944
----------- ------------ ---------
Equity in income (loss) of
unconsolidated joint ventures
and the management companies 14,480 (8,063) 3,256
Gain on sale of assets 9 1,619 -
----------- ------------ ---------
Income before minority interest
and extraordinary item 59,412 33,168 30,201
Extraordinary loss on early
extinguishment of debt (2,435) (555) (315)
----------- ------------ ---------
Income of the Operating Partnership 56,977 32,613 29,886
Less minority interest in net income
of the Operating Partnership 12,902 10,567 10,975
----------- ------------ ---------
Net income 44,075 22,046 18,911
Less preferred dividends 11,547 - -
----------- ------------ ---------
Net income available to common stockholders $32,528 $22,046 $18,911
----------- ------------ ---------
----------- ------------ ---------
Earnings per common share - basic:
Income before extraordinary item $1.14 $0.86 $0.92
Extraordinary item (0.08) (0.01) (0.01)
----------- ------------ ---------
Net income - available to common stockholders $1.06 $0.85 $0.91
----------- ------------ ---------
----------- ------------ ---------
Weighted average number of common shares
outstanding - basic 30,805,000 25,891,000 20,781,000
----------- ------------ ---------
----------- ------------ ---------
Weighted average number of common shares
outstanding - basic, assuming full conversion
of operating units outstanding 43,016,000 37,982,000 32,934,000
----------- ------------ ---------
----------- ------------ ---------
Earnings per common share - diluted:
Income before extraordinary item $1.11 $0.86 $0.90
Extraordinary item (0.05) (0.01) (0.01)
----------- ------------ ---------
Net income - available to common stockholders $1.06 $0.85 $0.89
----------- ------------ ---------
----------- ------------ ---------
Weighted average number of common shares
outstanding - diluted for EPS 43,628,000 38,403,000 33,320,000
----------- ------------ ---------
----------- ------------ ---------
The accompanying notes are an integral part of these financial statements.
41
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Common Preferred
Common Preferred Stock Stock Additional
Stock Stock Par Par Paid In
(# shares) (# of shares) Value Value Capital
---------- ------------- -------- --------- ----------
Balance December 31, 1995 19,977,000 - $200 - $158,145
Common stock issued to
public 5,750,000 57 122,129
Issuance costs (152)
Issuance of restricted stock 41,238 854
Unvested restricted stock (41,238)
Exercise of stock options 16,000 291
Distributions paid ($1.70 per share) (17,565)
Net income
Adjustment to reflect minority
interest on a pro rata basis
according to year end ownership
percentage of Operating Partnership (25,356)
---------------------------------------------------------------------------
Balance December 31, 1996 25,743,000 - 257 - 238,346
Issuance costs (352)
Issuance of restricted stock 89,958 2,471
Unvested restricted stock (89,958)
Restricted stock vested in 1997 8,248
Exercise of stock options 253,552 3 2,410
Distributions paid ($1.78 per share) (24,061)
Net income
Adjustment to reflect minority
interest on a pro rata basis
according to year end ownership
percentage of Operating Partnership 307
---------------------------------------------------------------------------
Balance December 31, 1997 26,004,800 - 260 - 219,121
Common stock issued to public 7,828,124 78 214,562
Preferred stock issued 9,114,602 $91 249,909
Issuance costs (13,813)
Issuance of restricted stock 83,018 2,383
Unvested restricted stock (83,018)
Restricted stock vested in 1998 26,039
Exercise of stock options 43,000 839
Distributions paid ($1.865) per share (24,464)
Net income
Adjustment to reflect minority interest
on a pro rata basis according to year
end ownership percentage of
Operating Partnership (67,029)
---------------------------------------------------------------------------
Balance December 31, 1998 33,901,963 9,114,602 $338 $91 $581,508
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Unamortized Total
Accumulated Restricted Stockholders'
Earnings Stock Equity
----------- ----------- ---------------
Balance December 31, 1995 - - $158,345
Common stock issued to
public 122,186
Issuance costs (152)
Issuance of restricted stock 854
Unvested restricted stock ($854) (854)
Exercise of stock options 291
Distributions paid ($1.70 per share) ($18,911) (36,476)
Net income 18,911 18,911
Adjustment to reflect minority
interest on a pro rata basis
according to year end ownership
percentage of Operating Partnership (25,356)
-------------------------------------------------
Balance December 31, 1996 - (854) 237,749
Issuance costs (352)
Issuance of restricted stock 2,471
Unvested restricted stock (2,471) (2,471)
Restricted stock vested in 1997 239 239
Exercise of stock options 2,413
Distributions paid ($1.78 per share) (22,046) (46,107)
Net income 22,046 22,046
Adjustment to reflect minority
interest on a pro rata basis
according to year end ownership
percentage of Operating Partnership 307
-------------------------------------------------
Balance December 31, 1997 - (3,086) 216,295
Common stock issued to public 214,640
Preferred stock issued 250,000
Issuance costs (13,813)
Issuance of restricted stock 2,383
Unvested restricted stock (2,383) (2,383)
Restricted stock vested in 1998 945 945
Exercise of stock options 839
Distributions paid ($1.865) per share (32,528) (56,992)
Net income 32,528 32,528
Adjustment to reflect minority interest
on a pro rata basis according to year
end ownership percentage of
Operating Partnership (67,029)
-------------------------------------------------
Balance December 31, 1998 - ($4,524) $577,413
-------------------------------------------------
-------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 1, 1998 JANUARY 1, 1997 JANUARY 1, 1996
TO TO TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- ----------------------- ----------------------
Cash flows from operating activities:
Net income - available to common stockholders $32,528 $22,046 $18,911
Preferred dividends 11,547 - -
----------------------- ----------------------- ----------------------
Net income 44,075 22,046 18,911
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt 2,435 555 315
Gain on sale of assets (9) (1,619) -
Depreciation and amortization 53,141 41,535 32,591
Amortization of (premium) discount on trust deed
note payable (635) 33 33
Minority interest in the net income of the
Operating Partnership 12,902 10,567 10,975
Changes in assets and liabilities:
Tenant receivables, net (13,677) (504) (7,977)
Other assets (19,772) (10,899) 1,181
Accounts payable and accrued expenses 10,366 1,938 6,596
Due to affiliates (12,156) 14,679 (382)
Other liabilities 4,086 145 18,188
Accrued preferred stock dividend 4,420 - -
----------------------- ----------------------- ----------------------
Total adjustments 41,101 56,430 61,520
----------------------- ----------------------- ----------------------
Net cash provided by operating activities 85,176 78,476 80,431
----------------------- ----------------------- ----------------------
Cash flows from investing activities:
Acquisitions of property and improvements (481,735) (199,729) (277,319)
Renovations and expansions of centers (40,545) (12,929) (8,019)
Additions to tenant improvements (5,383) (2,599) (920)
Deferred charges (14,536) (12,542) (9,111)
Equity in (income) loss of unconsolidated joint
ventures and the management companies (14,480) 8,063 (3,256)
Distributions from joint ventures 32,623 8,181 4,107
Contributions to joint ventures (240,196) (7,783) -
Loans to affiliates 3,105 - (3,105)
Proceeds from sale of assets - 4,332 948
----------------------- ----------------------- ----------------------
Net cash used in investing activities (761,147) (215,006) (296,675)
----------------------- ----------------------- ----------------------
Cash flows from financing activities:
Proceeds from mortgages, notes and debentures
payable 480,348 331,400 235,673
Payments on mortgages and notes payable (165,671) (119,515) (84,775)
Net proceeds from equity offerings 450,828 - 122,034
Dividends and distributions (77,998) (65,844) (56,615)
Dividends to preferred shareholders (11,547) - -
----------------------- ----------------------- ----------------------
Net cash provided by financing activities 675,960 146,041 216,317
----------------------- ----------------------- ----------------------
Net (decrease) increase in cash (11) 9,511 73
Cash and cash equivalents, beginning of period 25,154 15,643 15,570
----------------------- ----------------------- ----------------------
Cash and cash equivalents, end of period $25,143 $25,154 $15,643
----------------------- ----------------------- ----------------------
----------------------- ----------------------- ----------------------
Supplemental cash flow information:
Cash payment for interest, net of amounts
capitalized $89,543 $65,475 $40,572
----------------------- ----------------------- ----------------------
----------------------- ----------------------- ----------------------
Non-cash transactions:
Acquisition of property by assumption of debt $70,116 $121,800 $152,228
----------------------- ----------------------- ----------------------
----------------------- ----------------------- ----------------------
Acquisition of property by issuance of OP Units $7,917 - $600
----------------------- ----------------------- ----------------------
----------------------- ----------------------- ----------------------
The accompanying notes are an integral part of these financial statements.
43
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 the initial public offering (the
"IPO") on March 16, 1994. The Company is the sole general partner of
and holds a 78% 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 22% limited partnership interest of the Operating
Partnership not owned by the Company is reflected in these financial
statements as minority interest.
The property management, leasing and redevelopment of the
Company's portfolio is provided by the Macerich Management Company,
Macerich Property Management Company and Macerich Manhattan Management
Company, all California corporations (together referred to hereafter as
the "Management Companies"). The non-voting preferred stock of the
Macerich Management Company and Macerich Property Management Company is
owned by the Operating Partnership, which provides the Operating
Partnership the right to receive 95% of the distributable cash flow
from the Management Companies. Macerich Manhattan Management Company is
a 100% subsidiary of Macerich Management Company.
BASIS OF PRESENTATION:
The consolidated financial statements of the Company include
the accounts of the Company and the Operating Partnership. The
properties which the Operating Partnership does not own a greater than
50% interest in, and the Management Companies, have been accounted for
under the equity method of accounting. These entities are reflected on
the Company's consolidated financial statements as "Investments in
joint ventures and the Management Companies."
All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an
original maturity of 90 days or less when purchased to be cash
equivalents, for which cost approximates market. Included in cash is
restricted cash of $5,954 at December 31, 1998 and $5,810 at December
31, 1997.
TENANT RECEIVABLES:
Included in tenant receivables are allowance for doubtful
accounts of $1,707 and $1,303 at December 31, 1998 and 1997,
respectively.
REVENUES:
Minimum rental revenues are recognized on a straight-line
basis over the terms of the related lease. The difference between the
amount of rent due in a year and the amount recorded as rental income
is referred to as the "straight lining of rent adjustment." Rental
income was increased by $3,814 in 1998, $3,599 in 1997 and $1,832 in
1996 due to the straight lining of rent adjustment. Percentage rents
are recognized on an accrual basis. Recoveries from tenants for real
estate taxes, insurance and other shopping center operating expenses
are recognized as revenues in the period the applicable costs are
incurred.
The Management Companies provide property management, leasing,
corporate, redevelopment and acquisitions 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.
44
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY:
Costs related to the redevelopment, construction and
improvement of properties are capitalized. Interest costs are
capitalized until construction is substantially complete.
Expenditures for maintenance and repairs are charged to
operations as incurred. Realized gains and losses are recognized upon
disposal or retirement of the related assets and are reflected in
earnings.
Property is recorded at cost and is depreciated using a
straight-line method over the estimated useful lives of the assets as
follows:
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 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, 1998.
DEFERRED CHARGES:
Costs relating to financing of shopping center properties and
obtaining tenant leases are deferred and amortized over the initial
term of the agreement. The straight-line method is used to amortize all
costs except financing, for which the effective interest method is
used. The range of the terms of the agreements are as follows:
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 will issue $5,000 of OP Units five years
after the acquisition date, which was December 21, 1995. The number of
OP Units will be determined based on the Company's common stock price
at that time.
INCOME TAXES:
The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended. A REIT is generally not
subject to income taxation on that portion of its income that qualifies
as REIT taxable income as long as it distributes at least 95 percent of
its taxable income to its stockholders and complies with other
requirements. Accordingly, no provision has been made for income taxes
in the consolidated financial statements.
On a tax basis, the distributions of $1.865 paid during 1998
represented $1.12 of ordinary income and $0.745 of return of capital
and the distributions of $1.78 per share during 1997 represented $0.96
of ordinary income and $0.82 return of capital. During 1996, the
distributions were $1.70 per share of which $1.14 was ordinary income
and $0.56 was return of capital.
Each partner is taxed individually on its share of partnership
income or loss, and accordingly, no provision for federal and state
income tax is provided for the Operating Partnership in the
consolidated financial statements.
45
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1996 and 1997
consolidated financial statements to conform to the 1998 financial
statement presentation.
ACCOUNTING PRONOUNCEMENTS:
In March 1998, the Financial Accounting Standards Board
("FASB"), through its Emerging Issues Task Force ("EITF"), concluded
based on EITF 97-11, "Accounting for Internal Costs Relating to Real
Estate Property Acquisitions," that all internal costs to source,
analyze and close acquisitions should be expensed as incurred. The
Company has historically capitalized these costs, in accordance with
generally accepted accounting principles ("GAAP"). The Company has
adopted the FASB's interpretation effective March 19, 1998, and the
impact was an approximate $.04 per share reduction in net income
diluted per share for 1998.
In May 1998, the FASB, through the EITF, modified the timing
of recognition of revenue for percentage rent received from tenants in
EITF 98-9, "Accounting for Contingent Rent in Interim Financial
Periods." The Company applied this accounting change as of April 1,
1998. The accounting change had the effect of deferring $1,792 of
percentage rent in the second quarter of 1998 and $972 of percentage
rent in the third quarter of 1998. During the fourth quarter of 1998,
the FASB reversed EITF 98-9. Accordingly, the Company has resumed
accounting for percentage rent on the accrual basis. The effect of
these changes was that approximately $2,764 was deferred from the
second and third quarters of 1998 to the fourth quarter of 1998.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective
for the Company's consolidated financial statements for periods
beginning January 1, 2000. The new standard requires companies to
record derivatives on the balance sheet, measured at fair value.
Changes in the fair values of those derivatives will be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company has not yet determined
when it will implement SFAS 133 nor has it completed the complex
analysis required to determine the 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 are 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 is
amortized over the life of the cap agreement on a straight line basis.
Payments received as a result of the cap agreements are recorded as a
reduction of interest expense. The unamortized costs of the cap
agreements are included in deferred charges. The fair market value of
these caps will vary with fluctuations in interest rates. The Company
is exposed to credit loss in the event of nonperformance by these
counter parties to the financial instruments, however, management does
not anticipate nonperformance by the counter parties.
46
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The Company periodically enters into treasury lock agreements
in order to hedge its exposure to interest rate fluctuations on
anticipated financings. Under these agreements, the Company pays or
receives an amount equal to the difference between the treasury lock
rate and the market rate on the date of settlement, based on the
notional amount of the hedge. The realized gain or loss on the
contracts is recorded on the balance sheet, in other assets, and
amortized to interest expense over the period of the hedged loans. At
December 31,1998, the Company had one unsettled treasury lock for a
notional amount of $140,000. As of December 31, 1998, the treasury lock
rate was higher than the market rate resulting in an unrealized hedge
liability of approximately $5,935, which has been accrued at December
31, 1998.
EARNINGS PER SHARE ("EPS"):
During 1998, the Company implemented SFAS No. 128, "Earnings
per share." 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, 1998, 1997 and 1996. 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 convertible debentures and convertible preferred
stock were not included in the calculation as the effect of their
inclusion would be antidilutive. The OP Units not held by the Company
have been included in the diluted EPS calculation since they are
redeemable on a one-for-one basis. The following table reconciles the
basic and diluted earnings per share calculation:
For the years ended
(In thousands, except per share data)
1998 1997 1996
-------------------------------------- ---------------------------------- ------------------------
Net Per Net Per Net Per
Income Shares Share Income Shares Share Income Shares Share
------------------ ------ ----- ------------------ ------ ----- ------ ------ -----
Net income $44,075 30,805 $22,046 25,891 $18,911 20,781
Less: Preferred stock
dividends 11,547 - -
Basic EPS:
------------------ ------ ----- ------------------ ------ ----- ------- ------ -----
Net income - available to
common stockholders $32,528 30,805 $1.06 $22,046 25,891 $0.85 $18,911 20,781 $0.91
Dilted EPS:
Conversion of OP units 12,902 12,211 10,567 12,091 10,975 12,153
Employee stock options
and restricted stock 668 612 239 421 - 386
Convertible preferred
stock n/a - antidultive N/A N/A
for EPS
Convertible
debentures n/a - antidilutive n/a - antidilutive N/A
------------------ ------ ----- ------------------ ------ ----- ------- ------ -----
Net income - available
to common stockholders $46,098 43,628 $1.06 $32,852 38,403 $0.85 $29,886 33,320 $0.89
------------------ ------ ----- ------------------ ------ ----- ------- ------ -----
------------------ ------ ----- ------------------ ------ ----- ------- ------ -----
47
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
Lakewood Mall generated 10.5% of total shopping center
revenues in 1997 and 16% in 1996. Queens Center accounted for 13.8% of
total shopping center revenues in 1996. No Center generated more than
10% of shopping center revenues during 1998.
The Centers derived approximately 89.9% and 89.5% of their
total rents for the year ended December 31, 1998 and 1997,
respectively, from Mall and Freestanding Stores. The Limited
represented 6.1% and 7.6% of total minimum rents in place as of
December 31, 1998 and 1997, respectively, and no other retailer
represented more than 4.5% and 4.6% of total minimum rents as of
December 31, 1998 and 1997, 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.
YEAR 2000 COMPLIANCE:
The Company has initiated a Year 2000 compliance program
consisting of the following phases: (1) identification of Year 2000
issues; (2) assessment of Year 2000 compliance of systems; (3)
remediation or replacement of non-compliant systems; (4) testing to
verify compliance; and (5) contingency planning, as appropriate. The
Company is in the process of assessing, remediating and testing both
its information technology ("IT") and non-IT systems. Because the
Company's assessment, remediation and testing efforts are ongoing, the
Company is unable to estimate the actual costs of achieving Year 2000
compliance for its IT and non-IT systems. As of December 31, 1998, the
Company has not expended significant amounts since its evaluation of
Year 2000 issues has been primarily conducted by its own personnel. The
Company is also surveying its material vendors, utilities and tenants
about their plans and progress in addressing the Year 2000 issue.
3. INVESTMENTS IN 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's interest in each joint venture as of December
31, 1998 is as follows:
The Operating
Partnership's
Joint Venture Ownership %
------------- -------------
Macerich Northwestern Associates 50%
Manhattan Village, LLC 10%
Panorama City Associates 50%
SDG Macerich Properties, L.P. 50%
West Acres Development 19%
The Operating Partnership also owns the non-voting preferred
stock of the Macerich Management Company and Macerich Property
Management Company and is entitled to receive 95% of the distributable
cash flow of these two entities. Macerich Manhattan Management Company
is a 100% subsidiary of Macerich Management Company. The Company
accounts for the Management Companies and joint ventures using the
equity method of accounting.
48
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVESTMENTS IN JOINT VENTURES AND THE MANAGEMENT COMPANIES, CONTINUED:
On February 27, 1998, the Company, through a 50/50 joint
venture, SDG Macerich Properties, L.P., acquired a portfolio of twelve
regional malls. The total purchase price was $974,500 including the
assumption of $485,000 in debt, at market value. The Company funded its
50% of the remaining purchase price by issuing 3,627,131 shares of
Series A cumulative convertible preferred stock ("Series A Preferred
Stock") for gross proceeds totaling $100,000 in a private placement.
The Company also issued 2,879,134 shares of common stock ($79,600 of
total proceeds) under the Company's shelf registration statement. The
balance of the purchase price was funded from the Company's line of
credit. Each of the joint venture partners have assumed leasing and
management responsibilities for six of the regional malls.
On August 19, 1997, the Company acquired a 10% interest in the
joint venture that acquired Manhattan Village Shopping Center
("Manhattan Village") in Manhattan Beach, California.
The results of these joint ventures are included for the
period subsequent to their respective dates of acquisition.
In December 1997, North Valley Plaza, which was 50% owned by
the Company, was sold.
Combined and condensed balance sheets and statements of
operations are presented below for all unconsolidated joint ventures
and the Management Companies, followed by information regarding the
Operating Partnership's beneficial interest in the combined operations.
Beneficial interest is calculated based on the Operating Partnership's
ownership interests in the joint ventures and the Management Companies.
COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
December 31, December 31,
1998 1997
---- ----
Assets:
Properties, net $1,141,984 $153,856
Other assets 38,103 10,013
-------------- --------------
Total assets $1,180,087 $163,869
-------------- --------------
-------------- --------------
Liabilities and partners' capital:
Mortgage notes payable $618,384 $84,342
Other liabilities 42,048 6,563
The Company's capital 230,022 7,969
Outside partners' capital 289,633 64,995
-------------- --------------
Total liabilities and partners' capital $1,180,087 $163,869
-------------- --------------
-------------- --------------
49
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
For the years ended December 31,
1998
--------------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
--------------------------------------------------------
Revenues $115,426 $34,345 $7,091 $156,862
--------------------------- -------------- -------------
Expenses:
Management Company expense - - 10,122 10,122
Shopping center expenses 42,594 8,956 - 51,550
Interest 26,432 7,129 (398) 33,163
Depreciation and amortization 17,383 4,288 787 22,458
--------------------------- -------------- -------------
Total operating costs 86,409 20,373 10,511 117,293
--------------------------- -------------- -------------
Gain (loss) on sale
or write down of assets 29 140 (198) (29)
--------------------------- -------------- -------------
Net income (loss) $29,046 $14,112 ($3,618) $39,540
--------------------------- -------------- -------------
--------------------------- -------------- -------------
For the years ended December 31,
1997
-----------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
-----------------------------------------------------
Revenues - $32,482 $4,163 $36,645
-------------- ---------- ------------ ------------
Expenses:
Management Company expense - - 4,738 4,738
Shopping center expenses - 11,952 - 11,952
Interest - 6,361 (204) 6,157
Depreciation and amortization - 4,600 392 4,992
-------------- ---------- ------------ ------------
Total operating costs - 22,913 4,926 27,839
-------------- ---------- ------------ ------------
Gain (loss) on sale
or write down of assets - (20,491) 184 (20,307)
-------------- ---------- ------------ ------------
Net income (loss) - ($10,922) ($579) ($11,501)
-------------- ---------- ------------ ------------
-------------- ---------- ------------ ------------
For the years ended December 31,
1996
----------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
----------------------------------------------------
Revenues - $27,059 $4,474 $31,533
---------------- --------- --------------- ---------
Expenses:
Management Company expense - - 4,293 4,293
Shopping center expenses - 9,598 - 9,598
Interest - 6,415 (6) 6,409
Depreciation and amortization - 4,252 154 4,406
---------------- --------- --------------- ---------
Total operating costs - 20,265 4,441 24,706
---------------- --------- --------------- ---------
Gain (loss) on sale
or write down of assets - 581 - 581
---------------- --------- --------------- ---------
Net income (loss) - $7,375 $33 $7,408
---------------- --------- --------------- ---------
---------------- --------- --------------- ---------
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 $74,612, $43,500 and
$43,500 for the years ended December 31, 1998, 1997 and 1996,
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
$3,786, $2,974 and $2,974 for the years ended December 31, 1998, 1997
and 1996, respectively.
Included in the gain (loss) on sale or write-down of assets is
$20,990 of loss on the sale and write-down of North Valley Plaza in
1997.
50
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the Operating Partnership's beneficial interest
in the joint ventures and the Management Companies:
PRO RATA SHARE OF COMBINED AND CONDENSED STATEMENT OF OPERATIONS OF JOINT
VENTURES AND THE MANAGEMENT COMPANIES
For the years ended December 31,
1998
-------------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
----------------------------- -------------------------
Revenues $57,713 $9,394 $6,736 $73,843
----------------------------- -------------------------
Expenses:
Management Company expense - - 9,616 9,616
Shopping center expenses 21,297 2,065 - 23,362
Interest 13,216 2,525 (378) 15,363
Depreciation and amortization 8,692 1,439 748 10,879
----------------------------- -------------- ----------
Total operating costs 43,205 6,029 9,986 59,220
----------------------------- -------------- ----------
Gain (loss) on sale
or write down of assets 15 30 (188) (143)
----------------------------- -------------- ----------
Net income (loss) $14,523 $3,395 ($3,438) $14,480
----------------------------- -------------- ----------
----------------------------- -------------- ----------
For the years ended December 31,
1997
-------------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
---------------- ---------- -------------- ----------
Revenues - $11,197 $3,955 $15,152
---------------- ---------- -------------- ----------
Expenses:
Management Company expense - - 4,328 4,328
Shopping center expenses - 4,238 - 4,238
Interest - 2,129 (192) 1,937
Depreciation and amortization - 1,940 372 2,312
---------------- ---------- -------------- ----------
Total operating costs - 8,307 4,508 12,815
---------------- ---------- -------------- ----------
Gain (loss) on sale
or write down of assets - (10,400) - (10,400)
---------------- ---------- -------------- ----------
Net income (loss) - ($7,510) ($553) ($8,063)
---------------- ---------- -------------- ----------
---------------- ---------- -------------- ----------
For the years ended December 31,
1996
------------------------------------------------------
SDG Other Management Total
Macerich Joint Companies
Properties, L.P. Ventures
----------------- --------- --------------- ---------
Revenues - $11,061 $3,919 $14,980
----------------- --------- --------------- ---------
Expenses:
Management Company expense - - 3,747 3,747
Shopping center expenses - 3,856 - 3,856
Interest - 2,141 (6) 2,135
Depreciation and amortization - 1,950 146 2,096
----------------- --------- --------------- ---------
Total operating costs - 7,947 3,887 11,834
----------------- --------- --------------- ---------
Gain (loss) on sale
or write down of assets - 110 - 110
----------------- --------- --------------- ---------
Net income (loss) - $3,224 $32 $3,256
----------------- --------- --------------- ---------
----------------- --------- --------------- ---------
51
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. PROPERTY:
Property is summarized as follows:
December 31,
------------------------------------
1998 1997
---- ----
Land $422,592 $313,050
Building improvements 1,684,188 1,235,459
Tenant improvements 47,808 38,097
Equipment & furnishings 9,097 7,576
Construction in progress 49,440 13,247
--------------- ----------------
2,213,125 1,607,429
Less, accumulated depreciation (246,280) (200,250)
--------------- ----------------
$1,966,845 $1,407,179
--------------- ----------------
--------------- ----------------
Depreciation expense for the years ended December 31, 1998 and 1997 was $46,041
and $35,835, respectively.
5. DEFERRED CHARGES AND OTHER ASSETS:
Deferred charges and other assets are summarized as follows:
December 31,
-------------------------------------------
1998 1997
---- ----
Leasing $30,338 $28,101
Financing 19,137 14,396
-------------------- ----------------------
49,475 42,497
Less, accumulated amortization (20,108) (18,127)
-------------------- ----------------------
29,367 24,370
Other assets 33,306 13,529
-------------------- ----------------------
$62,673 $37,899
-------------------- ----------------------
-------------------- ----------------------
52
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. MORTGAGE NOTES PAYABLE:
Mortgage notes payable at December 31, 1998 and December 31, 1997 consist
of the following:
Carrying Amount of Notes
------------------------------------
1998 1997
------------- ------------------
Property Pledged Related Related Interest Payment Maturity
As Collateral Other Party Other Party Rate Terms Date
- ---------------- ----- ----- ----- ----- ---- ----- ----
Capitola Mall -- $37,345 -- $37,675 9.25% 316(d) 2001
Carmel Plaza (k) $25,000 -- -- -- 7.54% interest only 1999
Chesterfield Towne Center 65,064 -- $65,708 -- 9.07% 548(e) 2024
Chesterfield Towne Center 3,266 -- 3,359 -- 8.54% 31(d) 1999
Citadel 74,575 -- 75,600 -- 7.20% 554(d) 2008
Corte Madera, Village at (k) 60,000 -- -- -- 7.28% interest only 1999
Crossroads Mall-Boulder (a) -- 35,280 -- 35,638 7.08% 244(d) 2010
Fresno Fashion Fair (j) 69,000 -- 38,000 -- 6.52% interest only 2008
Greeley Mall 17,055 -- 17,815 -- 8.50% 187(d) 2003
Green Tree Mall/Crossroads - OK/
Salisbury (b) 117,714 -- 117,714 -- 7.23% interest only 2004
Holiday Village -- 17,000 -- 17,000 6.75% interest only 2001
Lakewood Mall (c) 127,000 -- 127,000 -- 7.20% interest only 2005
Northgate Mall -- 25,000 -- 25,000 6.75% interest only 2001
Northwest Arkansas Mall 63,000 -- -- -- 7.33% 434(d) 2009
Parklane Mall -- 20,000 -- 20,000 6.75% interest only 2001
Queens Center 65,100 -- 65,100 -- (f) interest only 1999
Rimrock Mall 31,002 -- 31,517 -- 7.70% 244(d) 2003
South Plains Mall 28,795 -- -- -- 6.3%(i) 348(d) 2008
South Towne Center (g) 64,000 -- 65,000 -- 6.61% interest only 2008
Valley View Center 51,000 -- 51,000 -- 7.89% interest only 2006
Villa Marina Marketplace 58,000 -- 58,000 -- 7.23% interest only 2006
Vintage Faire Mall (h) 54,522 -- 55,433 -- 7.65% 427(d) 2003
Westside Pavilion 100,000 -- -- -- 6.67% interest only 2008
---------- -------- -------- --------
Total $1,074,093 $134,625 $771,246 $135,313
---------- -------- -------- --------
---------- -------- -------- --------
Weighted average interest rate at December 31, 1998 7.24%
-----
-----
Weighted average interest rate at December 31, 1997 7.42%
-----
-----
(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 December 31, 1998 and December 31, 1997 the unamortized
discount was $397 and $430, respectively.
(b) This loan is cross collateralized by Green Tree Mall, Crossroads
Mall-Oklahoma and the Centre at Salisbury.
(c) On August 15, 1995, the Company issued $127,000 of collateralized
floating rate notes (the "Notes"). The Notes bear interest at an
average fixed rate of 7.20% and mature in July 2005. The Notes
require the Company to deposit all cash flow from the property
operations with a trustee to meet its obligations under the Notes.
Cash in excess of the required amount, as defined, is released.
Included in cash and cash equivalents is $750 of restricted cash
deposited with the trustee at December 31, 1998 and at 1997.
(d) This represents the monthly payment of principal and interest.
53
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. MORTGAGE NOTES PAYABLE, CONTINUED:
(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 $387 for the year
ended December 31, 1998 and $98 for the year ended December 31,
1997.
(f) This loan bore interest at LIBOR plus 0.45%. There was 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 of 7.07% through 1997 and 7.7% thereafter. This loan was
paid in full on February 4, 1999 and refinanced with a new loan
of $100,000, with interest at 6.74%, maturing in 2009.
(g) At December 31, 1997, this loan had an interest rate of LIBOR plus
1%, which totaled 6.9%. In July 1998, this loan was reduced by
$1,000 and converted into a fixed rate loan bearing interest at
6.61% and maturing in 2008.
(h) Included in cash and cash equivalents is $3,048 and $3,030 at
December 31, 1998 and 1997 respectively, of cash restricted under
the terms of this loan agreement.
(i) This note was assumed at acquisition. At the time of acquisition
in June 1998, this debt was recorded at fair market value and the
premium is being amortized as interest expense over the life of
the loan using the effective interest method. The monthly debt
service payment is $348 per month and is calculated based on a
12.5% interest rate. At December 31, 1998, the unamortized premium
was $6,165. On February 17, 1999, the loan was paid in full and
was refinanced with a new loan of $65,000, with interest at 7.49%,
maturing in 2009.
(j) The Company incurred a loss on early extinguishment of the old debt in
1998 for $2,345.
(k) These loans bear interest at LIBOR plus 2.0%.
Certain mortgage loan agreements contain a prepayment penalty provision for
the early extinguishment of the debt.
Total interest expense capitalized during 1998, 1997 and 1996 was $3,199,
$2,224, and $461, respectively.
The market value of mortgage notes payable at December 31, 1998 and December
31, 1997 is estimated to be approximately $1,271,853 and $1,013,000,
respectively, based on current interest rates for comparable loans.
The above debt matures as follows:
Years Ending
December 31,
------------
1999 $160,770
2000 8,159
2001 107,461
2002 10,302
2003 99,832
2004 and beyond 822,194
-----------
$1,208,718
-----------
-----------
Of the $160,770 maturing in 1999, $65.1 million was paid in full on
February 4, 1999 and refinanced with a new $100 million fixed rate loan at an
interest rate of 6.74%. The Company is currently in negotiations to refinance
the remaining debt maturing in 1999.
54
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. BANK NOTES PAYABLE:
At December 31, 1997, the Company had $55,000 of borrowings outstanding
under its $60,000 unsecured credit facility, which bore interest at LIBOR
plus 1.325%. On February 26, 1998, the Company increased this credit
facility to $150,000 with a maturity of February 2000, currently bearing
interest at LIBOR plus 1.15%. The interest rate on such credit facility
fluctuates between 0.95% and 1.15% over LIBOR. As of December 31, 1998,
$137,000 of borrowings was outstanding under this line of credit at an
interest rate of 6.79%.
Additionally, the Company had issued $776 in letters of credit
guaranteeing performance by the Company of certain events. 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 $89,200 of costs related to the development of Pacific
View. The loan bears interest at LIBOR plus 2.25% and matures in February
2001. Principal is drawn as construction costs are incurred.
8. CONVERTIBLE DEBENTURES:
During 1997, the Company issued and sold $161,400 of convertible
subordinated debentures (the "Debentures") due 2002. The Debentures, which
were sold at par, bear interest at 7.25% annually (payable semi-annually)
and are convertible at any time, on or after 60 days, from the date of
issue at a conversion price of $31.125 per share. The Debentures mature on
December 15, 2002 and are callable by the Company after June 15, 2002 at
par plus accrued interest.
9. RELATED-PARTY TRANSACTIONS:
The Company engaged the Management Companies to manage the operations
of its properties and certain unconsolidated joint ventures. During 1998,
1997 and 1996 management fees of $2,817, $2,219 and $1,788, respectively,
were paid to the Management Companies by the Company.
Certain mortgage notes are held by one of the Company's joint venture
partners. Interest expense in connection with these notes was $10,224,
$10,287 and $10,168 for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in accounts payables and accrued expense is interest
payable to these partners of $512, $518, $516 at December 31, 1998, 1997
and 1996, respectively.
Included in due to affiliates at December 31, 1997 is $14,800, which is
a note payable to the Management Companies for the purchase of Great Falls
Marketplace. The note was paid in full in February 1998.
In 1997, certain executive officers, received loans from the Company
totaling $5,500. These loans are full recourse to the executives. $5,000 of
the loans were issued under the terms of the employee stock incentive plan,
bear interest at 7%, are due in 2007 and are secured by Company common
stock owned by the executives. The remaining loan is non interest bearing
and is forgiven ratably over a five year term. These loans receivable are
included in other assets at December 31, 1998 and 1997.
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.
55
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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,
------------
1999 $181,782
2000 168,307
2001 151,387
2002 138,468
2003 124,028
2004 and beyond 521,784
-------
$1,285,756
----------
----------
11. COMMITMENTS AND CONTINGENCIES:
The Company has certain properties subject to noncancellable operating
ground leases. The leases expire at various times through 2070, subject in
some cases to options to extend the terms of the lease. Certain leases
provide for contingent rent payments based on a percentage of base rental
income, as defined. Ground rent expenses were $1,125 (including contingent
rent of $0) in 1998, $817 (including contingent rent of $0) in 1997 and
$704 (including contingent rents of $0) in 1996.
Minimum future rental payments required under the leases are as
follows:
Years Ending
December 31,
-------------
1999 $593,259
2000 593,359
2001 586,859
2002 586,859
2003 602,175
2004 and beyond 32,351,034
----------
$35,313,545
----------
----------
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. Remediation began in October 1997. 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. $153 and
$124 have already been incurred by the joint venture for remediation, and
professional and legal fees for the periods ending December 31, 1998 and 1997,
respectively. An additional $408 remains reserved by the joint venture as of
December 31, 1998. The joint venture has been sharing costs on a 50/50 basis
with a former owner of the property and intends to look to additional
responsible parties for recovery.
56
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Low levels of toluene, a petroleum constituent, was detected in one of
three groundwater dewatering system holding tanks at Queens Center. Although the
Company believes that no remediation will be required, the Company established a
$150 reserve in 1996 to cover professional fees and testing costs, which was
reduced by costs incurred of $2 and $18 for the twelve months ending December
31, 1998 and 1997, respectively. The Company intends to look to the responsible
parties and insurers if remediation is required.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has
been detected in structural fireproofing throughout much of the 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 $255 and $170 in
remediation costs for the twelve months ending December 31, 1998 and 1997,
respectively.
12. PROFIT SHARING PLAN:
The Management Companies and the Company have a retirement profit
sharing plan that was established in 1984 covering substantially all of
their eligible employees. The plan is qualified in accordance with section
401(a) of the Internal Revenue Code. Effective January 1, 1995 this plan
was modified to include a 401(k) plan whereby employees can elect to defer
compensation subject to Internal Revenue Service withholding rules.
Contributions by the Management Companies are made at the discretion of the
Board of Directors and are based upon a specified percentage of employee
compensation. The Management Companies and the Company contributed $513,
$400, $350 to the plan in 1998, 1997 and 1996, respectively.
13. STOCK OPTION PLAN:
The Company has established an employee stock incentive plan under
which stock options or restricted stock 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 plan. The term of these
options is ten years from the grant date. These options generally vest 33
1/3% per year over three years and were issued and are exercisable at the
market value of the common stock at the grant date.
In addition, the Company has established a plan for non employee
directors. The non employee director options have a term of ten years from
the grant date, vest six months after grant and are issued at the market
value of the common stock on the grant date. The plan reserved 25,000
shares, all of which were granted as of December 31, 1998.
215,215 shares of restricted stock also have been issued under the
employees stock incentive plan to executives. These awards are granted
based on certain performance criteria for the Company. The restricted stock
generally vests over 5 years and the compensation expense related to these
grants is determined by market value at vesting date and is amortized over
the vesting period on a straight line basis. As of December 31, 1998 and
1997, 26,039 and 8,248 shares, respectively, of restricted stock had
vested. A total of 83,018 shares at a weighted average price of $28.71 were
issued in 1998, 89,958 shares at a weighted average price of $27.46 were
issued in 1997 and 41,238 shares at a weighted average price of $20.70 were
issued during 1996 and no shares were issued or outstanding in 1995.
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 $944, $239 and $0 in 1998, 1997 and 1996,
respectively.
Approximately 803,000 and 692,000 additional shares were reserved and
were available for issuance under the stock incentive plan at December 31,
1998 and 1997, respectively. The plan allows for granting options or
restricted stock at market value.
57
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK OPTION PLAN, CONTINUED:
Weighted
Average
Employee Plan Director Plan Exercise Price
------------------------ -------------------------- # of Options On Exercisable
Option Price Option Price Exercisable Options
Shares Per Share Shares Per Share At Year End At Year End
------ --------- ------ ------------ ----------- --------------
Shares outstanding at December 31, 1994 1,148,000 $19.00-$19.63 17,500 $19.00-$21.38
Granted 115,000 $ 20.25 5,000 $ 20.00
Exercised (2,000) $ 19.00 - -
Forfeited (6,500) - - - 399,784 $19.02
---------- ---------------- -------- ---------------- ----------- ------------
----------- ------------
Shares outstanding at December 31, 1995 1,254,500 $19.00-$20.25 22,500 $19.00-$21.38
---------------- ----------------
Granted 281,000 $ 21.62 5,000 $ 26.12
Exercised (16,000) $ 19.00 - -
Forfeited (7,166) - - -
---------- ---------------- -------- ----------------
Shares outstanding at December 31, 1996 1,512,334 $19.00 - $21.62 27,500 $19.00 - $26.12 793,697 $19.09
---------------- ---------------- ----------- ------------
----------- ------------
Granted 369,109 $26.50-$26.88 5,000 $ 28.50
Exercised (253,552) $ 19.00 - -
Forfeited (8,000) - - -
---------- ---------------- -------- ----------------
Shares outstanding at December 31, 1997 1,619,891 $19.00-$26.88 32,500 $19.00-$28.50 1,230,227 $20.58
---------------- ------------ -----------
----------- -----------
Granted 412,500 27.38 5,000 $ 25.625
Exercised (66,080) 19.00 (7,000) $19.00-$21.375
Forfeited - -
---------- ---------------- -------- ----------------
Shares outstanding at December 31, 1998 1,966,311 $19.00-$27.38 30,500 $19.00-$28.50 1,330,654 $19.38
---------- ---------------- -------- ---------------- ------------ ------------
---------- ---------------- -------- ---------------- ------------ ------------
The weighted average exercise price for options granted in 1995 was
$20.25, in 1996 was $21.65, in 1997 was $27.06 and in 1998 was $27.38.
The weighted average remaining contractual life for options outstanding
at December 31, 1998 was 5 years and the weighted average remaining
contractual life for options exercisable at December 31, 1998 was 5 years.
The Company records options granted using Accounting Principles Board
(APB) opinion Number 25, "Accounting for Stock Issued to Employees and
Related Interpretations." Accordingly, no compensation expense is
recognized on the date the options are granted. If the Company had recorded
compensation expense using the methodology prescribed in Financial
Accounting Standards Number 123, the Company's net income would have been
reduced by approximately $228 or $0.00 per share for the year ended
December 31, 1998 and $108 or $0.00 per share for the year ended December
31, 1997.
The weighted average fair value of options granted during 1998 and 1997
were $2.01 and $2.51, respectively. The fair value of each option grant
issued in 1998 and 1997 is estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: (a) dividend yield of 7.8% in 1998 and 7.0% in 1997, (b)
expected volatility of the Company's stock of 17.26% in 1998 and 14.9% in
1997, (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 and seven years for options
granted in 1998 and 1997, respectively.
58
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 in its sole discretion,
credit a participant's account with an amount equal to a percentage of the
participant's deferral. The Company contributed $295 during 1998 and $154 during
1997 to two of these plans.
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. ACQUISITIONS:
South Towne Center was acquired on March 27, 1997. South Towne Center is a
1,240,143 square foot super regional mall located in Sandy, Utah. The purchase
price was $98,000, consisting of $52,000 of cash and $46,000 of assumed mortgage
indebtedness.
Stonewood Mall is a super regional mall in Downey, California which the
Company acquired on August 6, 1997. Stonewood Mall contains 927,218 square feet
and the purchase price was $92,000 which was funded with $58,000 in proceeds
from a 10 year fixed rate loan placed concurrently on Villa Marina Marketplace
and the balance from cash on hand.
Manhattan Village located in Manhattan Beach, California was purchased by a
joint venture on August 19, 1997. The Company owns a 10% interest in the joint
venture. Manhattan Village is a regional center with a total of 551,685 square
feet of retail, restaurant and entertainment space. The purchase price was
$66,600.
The Citadel, a 1,044,852 square foot super regional mall in Colorado
Springs, Colorado was purchased on December 19, 1997 for $108,000. The purchase
price was funded by a concurrently placed loan of $75,600 plus $32,400 in cash.
Great Falls Marketplace is a 143,570 square foot community center developed
by the Management Companies and sold to the Company on December 31, 1997. The
purchase price of $14,800 approximates the cost incurred by the Management
Companies to acquire and develop the site.
On February 27, 1998, the Company, through a 50/50 joint venture with an
affiliate of Simon Property Group, Inc., acquired the ERE Yarmouth portfolio of
twelve regional malls. The properties in the portfolio comprise 10.7 million
square feet and are located in eight states. The total purchase price was $974.5
million, which included $485.0 million of assumed debt, at market value. The
Company's share of the cash component of the purchase price was funded by
issuing $100.0 million of Series A Preferred Stock, $80.0 million of common
stock and borrowing the balance from the Company's line of credit.
South Plains Mall was acquired on June 19, 1998. South Plains Mall is a
1,140,574 square foot super regional mall located in Lubbock, Texas. The
purchase price was $115.5 million, consisting of $29.3 million of assumed debt,
at fair market value, and $86.2 million of cash. The cash portion was funded
with a portion of the proceeds from the Company's Series B cumulative
convertible redeemable preferred stock ("Series B Preferred Stock") offering.
Westside Pavilion was acquired on July 1, 1998 for $170.5 million. Westside
Pavilion is a 755,759 square foot regional mall located in Los Angeles,
California. The purchase price was funded with a portion of the proceeds from
the Company's Series B Preferred Stock offering, borrowings under the Company's
line of credit and the placement of a ten year $100.0 million mortgage secured
by the property.
59
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. ACQUISITIONS, CONTINUED:
The Village at Corte Madera is a 428,398 square foot regional mall in
Corte Madera, California, which the Company acquired in two phases: (i) 40% on
June 16, 1998 and (ii) the remaining 60% on July 24, 1998. In addition, Carmel
Plaza, a 115,215 square foot community shopping center in Carmel, California was
acquired on August 10, 1998. The combined purchase price was $165.5 million,
consisting of $40.0 million of assumed debt, the issuance of $7.9 million of OP
Units and $117.6 million in cash. The cash component was funded by borrowings
under the Company's line of credit.
Northwest Arkansas Mall was acquired on December 15, 1998. Northwest
Arkansas Mall is a 780,237 square foot regional mall located in Fayetteville,
Arkansas. The purchase price of $94.0 million was funded by a concurrently
placed loan of $63.0 million and borrowings of $31.0 million under the Company's
line of credit.
See "Note 20 - Subsequent Events" for description of an acquisition
occurring in February 1999.
16. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma financial information combines the
consolidated results of operations of the Company for 1998 and 1997 as if
the 1998 Acquisitions had occurred on January 1, 1997, after giving effect
to certain adjustments, including depreciation, interest expense relating
to debt incurred to finance the acquisitions and general and administrative
expense to manage the properties. The 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 acquisitions 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.
Years ended December 31,
1998 1997
---- ----
Revenues $319,946 $280,279
Income before minority interest and extraordinary items 44,442 19,944
Income before extraordinary items 33,319 14,837
Net income 47,883 30,505
Net income - available to common stockholders 30,884 14,282
Per share income before extraordinary items $0.98 $0.44
Net income per share - available to common stockholders - basic $0.91 $0.42
Weighted average number of common shares outstanding - basic 33,902 33,811
Per share income before extraordinary items $0.95 $0.43
Net income per share - available to common stockholders - diluted $0.90 $0.42
Weighted average number of common shares outstanding - diluted 46,725 46,323
60
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. PREFERRED STOCK:
On February 25, 1998, the Company issued 3,627,131 shares of 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
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.
18. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of periodic results of operations for 1998 and
1997:
1998 Quarter Ended 1997 Quarter Ended
----------------------------------------------- --------------------------------------------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
------- -------- -------- ------- ------- -------- -------- -------
Revenues $86,200 $75,079 $61,407 $61,175 $61,529 $57,032 $52,350 $50,303
Income before minority interest
and extraordinary items 23,583 12,653 12,607 10,569 10,626 2,792 9,839 9,911
Income before
extraordinary items 13,780 6,903 7,368 6,912 7,253 1,921 6,684 6,743
Net income - available to common
stockholders 13,759 4,579 7,368 6,822 7,253 1,870 6,180 6,743
Income before extraordinary
items per share $0.42 $0.23 $0.24 $0.25 $0.28 $0.07 $0.25 $0.26
Net income - available to common
stockholders per share - basic $0.42 $0.15 $0.24 $0.25 $0.28 $0.07 $0.24 $0.26
19. SEGMENT INFORMATION:
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
established standards for disclosure about operating segments and related
disclosures about products and services, geographic areas, and major
customers. The Company currently operates in one business segment, the
acquisition, ownership, redevelopment, management and leasing of regional
and community shopping centers. Additionally, the Company operates in one
geographic area, the United States.
20. SUBSEQUENT EVENTS (UNAUDITED):
On February 10, 1999 a dividend/distribution of $0.485 per share was
declared for common stockholders and OP Unit holders of record on February
18, 1999. In addition, the Company declared a dividend of $0.485 on the
Company's Series A Preferred Stock and a dividend of $0.485 on the
Company's Series B Preferred Stock. All dividends/distributions will be
payable on March 8, 1999.
On February 18, 1999, through a 51/49 joint venture with Ontario
Teachers' Pension Plan Board, the Company closed on the first phase of a
two phase acquisition of a portfolio of properties. The phase one closing
included the acquisition of three regional malls, the retail component of a
mixed-use development, five contiguous properties and two non-contiguous
community shopping centers comprising approximately 3.6 million square feet
for a total purchase price of approximately $427.0 million. The purchase
price was funded with a $120.0 million loan placed concurrently with the
closing, $140.4 million of debt from an affiliate of the seller, and $39.4
million of assumed debt. The balance of the purchase price was paid in
cash. The Company's share of the cash component was funded with the
proceeds from two refinancings of centers and borrowings under the
Company's line of credit.
61
INDEPENDENT AUDITORS' REPORT
The Partners
SDG Macerich Properties, L.P.:
We have audited the accompanying balance sheet of SDG Macerich Properties,
L.P. as of December 31, 1998, and the related statements of operations, cash
flows, and partners' equity for the year then ended. In connection with our
audit 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted
accounting principles. 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.
KPMG LLP
Indianapolis, Indiana
February 11, 1999
62
SDG MACERICH PROPERTIES, L.P.
Balance Sheet
December 31, 1998
(Dollars in thousands)
ASSETS
Properties:
Land $ 199,377
Building and Improvements 804,724
Equipment and furnishings 472
-----------
1,004,573
Less accumulated depreciation 17,383
-----------
987,190
Cash and cash equivalents 9,156
Tenant receivables, including accrued revenue
less allowance for doubtful accounts of $804 20,579
Prepaid real estate taxes and other assets 1,096
-----------
$ 1,018,021
-----------
-----------
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable $ 505,868
Accounts payable 10,935
Due to affiliates 443
Accrued real estate taxes 12,423
Accrued interest expense 1,562
Accrued management and leasing fees 249
Other liabilities 1,503
-----------
Total liabilities 532,983
Partners' equity 485,038
-----------
$ 1,018,021
-----------
-----------
See accompanying notes to financial statements.
63
SDG MACERICH PROPERTIES, L.P.
Statement of Operations
Year ended December 31, 1998
(Dollars in thousands)
Revenues:
Minimum rents $ 72,016
Overage rents 5,782
Tenant recoveries 35,806
Other 1,822
----------
115,426
----------
Expenses:
Property operations 13,561
Depreciation of properties 17,383
Real estate taxes 13,577
Repairs and maintenance 6,312
Advertising and promotion 5,013
Management fees 3,062
Provision for credit losses 809
Interest on mortgage notes 26,432
Other 231
----------
86,380
----------
Net income $ 29,046
----------
----------
See accompanying notes to financial statements.
64
SDG MACERICH PROPERTIES, L.P.
Statement of Cash Flows
Year ended December 31, 1998
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 29,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of properties 17,383
Amortization of debt premium (1,843)
Change in receivables (14,452)
Change in accrued real estate taxes (527)
Other items 8,871
----------
Net cash provided by operating activities 38,478
----------
Cash flows from investing activities:
Acquisition of properties, net of mortgage notes payable assumed (480,392)
Improvements to properties (4,922)
----------
Net cash used by investing activities (485,314)
----------
Cash flows from financing activities:
Contributions by partners 480,392
Distributions to partners (24,400)
----------
Net cash provided by financing activities 455,992
----------
Net increase in cash and cash equivalents 9,156
Cash and cash equivalents at beginning of year --
----------
Cash and cash equivalents at end of year $ 9,156
----------
----------
Supplemental cash flow information:
Cash payments for interest $ 26,713
----------
----------
Non-cash transaction:
Fair value of mortgage notes payable assumed with properties acquired $ 507,711
Fair value of other liabilities, net, assumed with properties acquired 11,548
-----------
-----------
See accompanying notes to financial statements.
65
SDG MACERICH PROPERTIES, L.P.
Statement of Partners' Equity
Year ended December 31, 1998
(Dollars in thousands)
SIMON THE
PROPERTY MACERICH
GROUP, INC. COMPANY
AFFILIATES AFFILIATES TOTAL
----------- ---------- ---------
Percentage ownership interest 50% 50% 100%
---------- ---------- ---------
---------- ---------- ---------
Balance at January 1, 1998 $ -- -- --
Contributions 240,196 240,196 480,392
Distributions (12,200) (12,200) (24,400)
Net income for the year 14,523 14,523 29,046
---------- ---------- ---------
Balance at December 31, 1998 $ 242,519 242,519 485,038
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to financial statements.
66
SDG MACERICH PROPERTIES, L.P.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands)
(1) GENERAL
(A) PARTNERSHIP ORGANIZATION
On December 29, 1997, affiliates of Simon Property Group, Inc.
(Simon) and affiliates of The Macerich Company (Macerich) formed a
limited partnership to acquire and operate a portfolio of 12
regional shopping centers. The Partnership acquired the properties
on February 27, 1998. The accompanying financial statements
include the results of operations of the properties since the date
of acquisition.
(B) PROPERTIES
Simon and Macerich have divided the property management services
with affiliates of each company managing 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 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, 1998, fixed minimum rents to be
received in each of the next five years and thereafter are
summarized as follows:
1999 $ 73,955
2000 66,828
2001 60,055
2002 54,013
2003 45,958
Thereafter 157,741
--------
$458,550
--------
--------
67
SDG MACERICH PROPERTIES, L.P.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands)
(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.
Tenant recoveries for real estate taxes and common area
maintenance are adjusted annually based on the actual expenses,
and the related revenues are recognized in the year in which the
expenses are incurred. Charges for other operating expenses are
billed monthly with periodic adjustments based on the estimated
utility usage and/or a current price index, and the related
revenues are recognized as the amounts are billed and as
adjustments become determinable.
(B) CASH EQUIVALENTS
All highly liquid debt instruments purchased with a maturity of
three months or less are considered to be cash equivalents.
(C) PROPERTIES
Properties are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets
as follows:
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 other repairs and maintenance items are expensed as
incurred.
The Partnership assesses whether there has been an impairment in
the value of its properties by considering factors such as
expected future operating income, trends and prospects, as well as
the effects of demand, competition and other economic factors.
Such factors include the tenants ability to perform their duties
and pay rent under the terms of the leases. The Partnership would
recognize an impairment loss if the estimated future income stream
is not sufficient to recover its investment. Such a loss would be
the difference between the carrying value and the fair value of a
property. Management believes no impairment in its net property
carrying values has occurred at December 31, 1998.
68
SDG MACERICH PROPERTIES, L.P.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands)
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(E) 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.
(3) MORTGAGE NOTES PAYABLE AND FAIR VALUE OF FINANCIAL INSTRUMENTS
In connection with the acquisition of the shopping center properties,
the Partnership assumed $485,000 of mortgage notes payable which are
secured by liens on the properties. The notes consist of $300,000 of
debt which is due in May 2006 and requires monthly interest payments at
a fixed weighted average rate of 7.41% and $185,000 of debt which is due
in May 2003 and requires monthly interest payments at a variable
weighted average rate (based on LIBOR) of 6.15% at December 31, 1998.
The variable rate debt is covered by an interest cap agreement which
effectively prevents the variable rate from exceeding 11.53%.
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, 1998, the unamortized balance of the debt premium was
$20,868.
The fair value of the fixed-rate debt at December 31, 1998 based on an
interest rate of 6.70% is estimated to be approximately $312,000. The
$185,000 carrying value of the variable-rate debt and the Partnership's
other financial instruments are estimated to equal their fair values.
(4) MANAGEMENT SERVICES
An affiliate of Simon manages six of the properties and an affiliate of
Macerich manages the other six properties, both for a fee of 4% of gross
receipts, as defined. Management fees incurred in 1998 totaled $1,592
for the Simon-managed properties and $1,470 for the Macerich-managed
properties.
(5) CONTINGENT LIABILITY
The Partnership currently is not involved with any litigation other than
routine litigation 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 Company's financial statements.
69
THE MACERICH COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
12/31/98
(IN THOUSANDS)
INITIAL COST TO COMPANY
-------------------------------------
COST
EQUIPMENT CAPITALIZED
BUILDING AND AND SUBSEQUENT TO
LAND IMPROVEMENTS FURNISHINGS ACQUISITION
--------- ------------ ----------- -----------
Shopping Centers:
Bristol Shopping Center $0 $11,051 $0 $1,935
Boulder Plaza 2,650 7,950 0 2,157
Capitola Mall 11,312 46,689 0 1,335
Carmel Plaza 9,080 36,354 0 225
Chesterfield Towne Center 18,517 72,936 2 8,638
Citadel, The 21,600 86,711 0 1,865
Corte Madera, Village at 24,433 97,821 0 548
County East Mall 2,633 15,131 716 13,967
Crossroads Mall - Boulder 0 37,528 64 32,775
Crossroads Mall - Oklahoma 10,279 43,458 291 8,713
Fresno Fashion Fair 17,966 72,194 0 (1,653)
Great Falls Marketplace 2,960 11,840 0 8
Greeley Mall 5,600 12,617 13 7,698
Green Tree Mall 4,947 14,893 332 23,246
Holiday Village Shopping Mall 2,311 13,488 138 22,510
Huntington Beach Center 11,868 11,867 0 4,123
Lakewood Mall 12,502 31,158 117 95,492
Northgate Mall 7,144 29,805 841 24,657
Northwest Arkansas Mall 18,800 75,358 0 0
Pacific View (formerly
known as Buenaventura Mall) 8,697 8,696 0 22,862
Parklane Mall 1,377 11,775 173 18,931
Queens Center 21,460 86,631 8 2,156
Rimrock Mall 8,737 35,652 0 1,519
Salisbury, The Centre at 15,290 63,474 31 1,186
South Plains Mall 23,100 92,728 0 1,183
South Towne Center 19,600 78,954 0 4,768
Stonewood Mall 18,400 73,933 0 1,207
Valley View Center 17,100 68,687 0 9,656
Villa Marina Marketplace 15,852 65,441 0 679
Vintage Faire Mall 14,902 60,532 0 2,213
Westside Pavilion 34,100 136,819 0 412
--------------------------------------------------
$383,217 $1,512,171 $2,726 $315,011
--------------------------------------------------
--------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
-------------------------------------------------------
FURNITURE, TOTAL COST
FIXTURES NET OF
BUILDING AND AND CONSTUCTION ACCUMULATED ACCUMULATED
LAND IMPROVEMENTS EQUIPMENT IN PROGRESS TOTAL DEPRECIATION DEPRECIATION
-------- ------------ --------- ----------- ---------- ------------ ------------
Shopping Centers:
Bristol Shopping Center $132 $12,851 $0 $3 $12,986 $5,651 $7,335
Boulder Plaza 2,919 9,838 0 0 12,757 2,887 9,870
Capitola Mall 11,309 47,989 38 0 59,336 3,816 55,520
Carmel Plaza 9,080 36,567 12 0 45,659 371 45,288
Chesterfield Towne Center 18,517 79,399 2,038 139 100,093 11,790 88,303
Citadel, The 21,600 88,521 47 8 110,176 2,430 107,746
Corte Madera, Village at 24,433 98,344 25 0 122,802 1,133 121,669
County East Mall 4,099 27,483 798 67 32,447 10,522 21,925
Crossroads Mall - Boulder 21,616 42,154 128 6,469 70,367 23,384 46,983
Crossroads Mall - Oklahoma 10,279 46,946 345 5,171 62,741 7,322 55,419
Fresno Fashion Fair 17,966 70,380 43 118 88,507 3,753 84,754
Great Falls Marketplace 2,960 11,848 0 0 14,808 305 14,503
Greeley Mall 5,600 20,222 98 8 25,928 9,911 16,017
Green Tree Mall 4,947 38,008 463 0 43,418 21,072 22,346
Holiday Village Shopping Mall 3,500 34,737 210 0 38,447 20,743 17,704
Huntington Beach Center 11,868 11,965 31 3,994 27,858 639 27,219
Lakewood Mall 24,916 113,408 651 294 139,269 46,588 92,681
Northgate Mall 8,400 53,045 935 67 62,447 19,406 43,041
Northwest Arkansas Mall 18,800 75,358 0 0 94,158 90 94,068
Pacific View (formerly
known as Buenaventura Mall) 8,697 8,794 18 22,746 40,255 471 39,784
Parklane Mall 2,426 25,213 402 4,215 32,256 16,457 15,799
Queens Center 21,454 87,400 634 767 110,255 6,873 103,382
Rimrock Mall 8,737 36,966 106 99 45,908 2,095 43,813
Salisbury, The Centre at 15,284 64,219 478 0 79,981 5,884 74,097
South Plains Mall 23,100 93,877 34 0 117,011 1,316 115,695
South Towne Center 19,600 83,696 26 0 103,322 3,978 99,344
Stonewood Mall 18,400 74,908 232 0 93,540 2,756 90,784
Valley View Center 17,100 73,059 631 4,653 95,443 4,447 90,996
Villa Marina Marketplace 15,852 66,082 35 3 81,972 5,026 76,946
Vintage Faire Mall 14,901 61,601 627 518 77,647 3,402 74,245
Westside Pavilion 34,100 137,118 12 101 171,331 1,762 169,569
------------------------------------------------------------------------------------
$422,592 $1,731,996 $9,097 $49,440 $2,213,125 $246,280 $1,966,845
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
70
THE MACERICH COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
Depreciation and amortization of the Company's investment in buildings and
improvements reflected in the statements
Buildings and Improvements 5 - 40 years
Tenant Improvements life of related lease
Equipment and Furnishings 5 -7 years
The changes in total real estate assets for the three years ended December
31, 1998 are as follows:
1996 1997 1998
---- ---- ----
Balance, beginning of year $833,998 $1,273,085 $1,607,429
Additions 439,087 334,344 605,696
Disposals and retirements 0 0 0
----------------------------------------
Balance, end of year $1,273,085 $1,607,429 $2,213,125
----------------------------------------
----------------------------------------
The changes in accumulated depreciation and amortization for the three years
ended December 31, 1998 are as follows:
1996 1997 1998
---- ---- ----
Balance, beginning of year $139,098 $164,417 $200,250
Additions 25,319 35,833 46,030
Disposals and retirements 0 0 0
------------------------------------
Balance, end of year $164,417 $200,250 $246,280
------------------------------------
71
SDG MACERICH PROPERTIES, L.P.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1998
(Dollars in thousands)
Initial Cost to Partnership Costs
--------------------------------------------------- Capitalized
Building and Equipment Subsequent
Shopping Center (1) Location Land Improvements and Furnishings to Acquisition
- ------------------- -------- ---- ------------ --------------- --------------
Mesa Mall Grand Junction, Colorado $ 11,155 44,635 -- 25
Lake Square Mall Leesburg, Florida 7,348 29,392 -- 172
South Park Mall Moline, Illinois 21,341 85,540 -- 522
Eastland Mall Evansville, Indiana 28,160 112,642 -- 833
Lindale Mall Cedar Rapids, Iowa 12,534 50,151 -- 197
North Park Mall Davenport, Iowa 17,210 69,042 -- 585
South Ridge Mall Des Moines, Iowa 11,524 46,097 -- 993
Granite Run Mall Media, Pennsylvania 26,147 104,671 -- 536
Rushmore Mall Rapid City, South Dakota 12,089 50,588 -- 43
Empire Mall Sioux City, South Dakota 23,706 94,860 -- 519
Empire East Sioux City, South Dakota 2,073 8,291 -- 1
Southern Hills Mall Sioux City, South Dakota 15,697 62,793 -- 429
Valley Mall Harrisonburg, Virginia 10,393 41,572 -- 67
--------------------------------------------------------------------
$ 199,377 800,274 -- 4,922
--------------------------------------------------------------------
--------------------------------------------------------------------
Gross Book Value at December 31, 1998 Total Cost
------------------------------------------- Net of
Building and Equipment Accumulated Accumulated
Shopping Center (1) Location Land Improvements and Furnishings Depreciation Depreciation
- ------------------- -------- ---- ------------ --------------- ------------ ------------
Mesa Mall Grand Junction, Colorodo 11,155 44,643 17 969 54,846
Lake Square Mall Leesburg, Florida 7,348 29,556 8 642 36,270
South Park Mall Moline, Illinois 21,341 86,055 7 1,838 105,565
Eastland Mall Evansville, Indiana 28,160 113,266 209 2,435 139,200
Lindale Mall Cedar Rapids, Iowa 12,534 50,335 13 1,102 61,780
North Park Mall Davenport, Iowa 17,210 69,616 11 1,496 85,341
South Ridge Mall Des Moines, Iowa 11,524 47,040 50 1,014 57,600
Granite Run Mall Media, Pennsylvania 26,147 105,126 81 2,257 129,097
Rushmore Mall Rapid City, South Dakota 12,089 50,603 28 1,129 61,591
Empire Mall Sioux City, South Dakota 23,706 95,351 28 2,064 117,021
Empire East Sioux City, South Dakota 2,073 8,291 1 177 10,188
Southern Hills Mall Sioux City, South Dakota 15,697 63,207 15 1,371 77,548
Valley Mall Harrisonburg, Virginia 10,393 41,635 4 889 51,143
------------------------------------------------------------------------
199,377 804,724 472 17,383 987,190
------------------------------------------------------------------------
------------------------------------------------------------------------
Depreciation and amortization of the Partnership's investment in shopping
center properties reflected in the statement of operations are calculated
over the estimated useful lives of the assets as follows:
Building and improvements 39 years
Equipment and furnishings 5-7 years
The changes in total shopping center properties for the year ended December
31, 1998 are as follows:
Balance, beginning of year $ --
Acquisitions 999,651
Additions 4,922
Disposals and retirements --
-----------
Balance, end of year $ 1,004,573
-----------
-----------
The changes in accumulated depreciation for the year ended December 31, 1998
are as follows:
Balance, beginning of year $ --
Additions 17,383
Disposals and retirements --
--------
Balance, end of year $ 17,383
--------
--------
(1) All of the shopping centers are encumbered by mortgage notes payable with
a December 31, 1998 carrying value of $505,868.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE MACERICH COMPANY
By /s/ ARTHUR M. COPPOLA
--------------------------------------
Arthur M. Coppola
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ ARTHUR M. COPPOLA President and Chief Executive Officer March 29, 1999
- ----------------------- And Director
Arthur M. Coppola
/s/ MACE SIEGEL Chairman of the Board March 29, 1999
- -----------------------
Mace Siegel
/s/ DANA K. ANDERSON Vice Chairman of the Board March 29, 1999
- -----------------------
Dana K. Anderson
/s/ EDWARD C. COPPOLA Executive Vice President March 29, 1999
- -----------------------
Edward C. Coppola
/s/ JAMES COWNIE Director March 29, 1999
- -----------------------
James Cownie
/s/ THEODORE HOCHSTIM Director March 29, 1999
- -----------------------
Theodore Hochstim
/s/ FREDERICK HUBBELL Director March 29, 1999
- -----------------------
Frederick Hubbell
/s/ STANLEY MOORE Director March 29, 1999
- -----------------------
Stanley Moore
/s/ WILLIAM SEXTON Director March 29, 1999
- -----------------------
William Sexton
/s/ THOMAS E. O'HERN Executive Vice President, Treasurer and March 29, 1999
- ----------------------- Chief Financial and Accounting Officer
Thomas E. O'Hern
73
X
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
3.1* Articles of Amendment and Restatement of the Company
3.1.1** Articles Supplementary of the Company
3.1.2*** Articles Supplementary of the Company (Series A Preferred Stock)
3.1.3**** Articles Supplementary of the Company (Series B Preferred Stock)
3.1.4 Articles Supplementary of the Company (Series C Junior Participating Preferred
Stock)
3.2***** Amended and Restated Bylaws of the Company
4.1***** Form of Common Stock Certificate
4.2****** Form of Preferred Stock Certificate (Series A Preferred Stock)
4.2.1 Form of Preferred Stock Certificate (Series B Preferred Stock)
4.2.2***** Form of Preferred Stock Certificate (Series C Junior Participating Preferred
Stock)
4.3******* Indenture for Convertible Subordinated Debentures dated June 27, 1997
4.4***** Agreement dated as of November 10, 1998 between the Company and First Chicago
Trust Company of New York, as Rights Agent
10.1******** Amended and Restated Limited Partnership Agreement for the Operating
Partnership dated as of March 16, 1994
10.1.1****** Amendment to Amended and Restated Limited Partnerships Agreement for the
Operating Partnership dated June 27, 1997
10.1.2****** Amendment to Amended and Restated Limited Partnership Agreement for the
Operating Partnership dated November 16, 1997
10.1.3****** Fourth Amendment to Amended and Restated Limited Partnership Agreement for the
Operating Partnership dated February 25, 1998
10.1.4****** Fifth Amendment to Amended and Restated Limited Partnership Agreement for the
Operating Partnership dated February 26, 1998
10.1.5 Sixth Amendment to Amended and Restated Limited Partnership Agreement for the
Operating Partnership dated June 17, 1998
10.1.6 Seventh Amendment to Amended and Restated Limited Partnership Agreement for
the Operating Partnership dated December 31, 1998
74
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
10.2******** Employment Agreement between the Company and Mace Siegel dated as of March 16,
1994
10.2.1******** List of Omitted Employment Agreements
10.2.2****** Employment Agreement between Macerich Management Company and Larry Sidwell
dated as of February 11, 1997
10.3****** The Macerich Company Amended and Restated 1994 Incentive Plan
10.4# The Macerich Company 1994 Eligible Directors' Stock Option Plan
10.5# The Macerich Company Deferred Compensation Plan
10.6# The Macerich Company Deferred Compensation Plan for Mall Executives
10.7******** The Macerich Company Eligible Directors' Deferred Compensation Plan/Phantom
Stock Plan
10.8******** The Macerich Company Executive Officer Salary Deferral Plan
10.9 1999 Cash Bonus/Restricted Stock Program under the Amended and Restated 1994
Incentive Plan (including the form of restricted Stock Award Agreement)
10.10******** Registration Rights Agreement, dated as of March 16, 1994, between the Company
and The Northwestern Mutual Life Insurance Company
- -
10.11******** Registration Rights Agreement, dated as of March 16, 1994, among the Company
and Mace Siegel, Dana K. Anderson, Arthur M. Coppola and Edward C. Coppola
10.12******* Registration Rights Agreement, dated as of March 16, 1994, among the Company,
Richard M. Cohen and MRII Associates
10.13******* Registration Rights Agreement dated as of June 27, 1997
10.14******* Registration Rights Agreement dated as of February 25, 1998 between the
Company and Security Capital Preferred Growth Incorporated
10.15******** Incidental Registration Rights Agreement dated March 16, 1994
10.16****** Incidental Registration Rights Agreement dated as of July 21, 1994
10.17****** Incidental Registration Rights Agreement dated as of August 15, 1995
10.18****** Incidental Registration Rights Agreement dated as of December 21, 1995
10.18.1****** List of Incidental/Demand Registration Rights Agreements, Election Forms,
Accredited/Non-Accredited Investors Certificates and Investor Certificates
75
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
10.19 Registration Rights Agreement dated as of June 17, 1998 between the Company
and the Ontario Teachers' Pension Plan Board
10.20 Redemption, Registration Rights and Lock-Up Agreement dated as of July 24,
1998 between the Company and Harry S. Newman, Jr. and LeRoy H. Brettin
10.21******** Indemnification Agreement, dated as of March 16, 1994, between the Company and
Mace Siegel
10.21.1******** List of Omitted Indemnification Agreements
10.22* Partnership Agreement for Macerich Northwestern Associates, dated as of
January 17, 1985, between Macerich Walnut Creek Associates and the
Northwestern Mutual Life Insurance Company
10.23******** First Amendment to Macerich Northwestern Associates Partnership Agreement
between Operating Partnership and the Northwestern Mutual Life Insurance
Company
10.24* Agreement of Lease (Crossroads-Boulder), dated December 31, 1960, between H.R.
Hindry, as lessor, and Gerri Von Frellick, as lessee, with amendments and
supplements thereto
10.25****** Secured Full Recourse Promissory Note dated November 17, 1997 Due November 16,
2007 made by Edward C. Coppola to the order of the Company
10.25.1****** List of Omitted Secured Full Recourse Notes
10.26****** Stock Pledge Agreement dated as of November 17, 1997 made by Edward C. Coppola
for the benefit of the Company
10.26.1****** List of omitted Stock Pledge Agreement
10.27****** Promissory Note dated as of May 2, 1997 made by David J. Contis to the order
of Macerich Management Company
10.28## Purchase and Sale Agreement between the Equitable Life Assurance Society of
the United States and S.M. Portfolio Partners
10.29****** Partnership Agreement of S.M. Portfolio Ltd. Partnership
10.30 First Amended and Restated Credit Agreement, dated as of June 25, 1998,
between the Operating Partnership, the Company and Wells Fargo Bank, National
Association
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.2 Consent of Independent Auditors (KPMG LLP)
76
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
* Previously filed as an exhibit to the Company's Registration Statement on Form
S-11, as amended (No. 33-68964), and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date May 30, 1995, and
incorporated herein by reference.
*** Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date February 25, 1998, and
incorporated herein by reference.
**** Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date June 17, 1998, and
incorporated herein by reference.
***** Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date November 10, 1998, as
amended, and incorporated herein by reference.
****** Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997, and incorporated herein by reference.
******* Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date June 20, 1997, and
incorporated herein by reference.
******** Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
# Previously filed as an exhibit to the Company's
Quarterly Statement on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference.
## Previously filed as an exhibit to the Company's Current
Report on Form 8-K, event date February 27, 1998, and
incorporated herein by reference.
77