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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997.
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
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THE MACERICH COMPANY
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 95-4448705
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 WILSHIRE BOULEVARD, #700
SANTA MONICA, CALIFORNIA 90401
(Address of principal executive (Zip Code)
office)
Registrants telephone number, including area code: (310) 394-6911
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock, $0.01 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 of 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 23, 1998, the aggregate market value of the 20,708,781 shares
of Common Stock held by non-affiliates of the registrant was $582 million based
upon the closing price ($28.125) 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 23, 1998,
there were 28,898,881 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders meeting to be
held in 1998 are incorporated by reference into Part III.
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THE MACERICH COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
ITEM NO. PAGE NO.
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PART I
1. Business..................................................................................... 1-11
2. Properties................................................................................... 12-18
3. Legal Proceedings............................................................................ 18
4. Submission of Matter to a Vote of Security Holders........................................... 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 19
6. Selected Financial Data...................................................................... 19-21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 22-30
8. Financial Statements and Supplementary Data.................................................. 30
9. Changes in and Disagreements with Accountants or Accounting and Financial Disclosure......... 30
PART III
10. Directors and Executive Officers of the Company.............................................. 31
11. Executive Compensation....................................................................... 31
12. Security Ownership of Certain Beneficial Owners and Management............................... 31
13. Certain Relationships and Related Transactions............................................... 31
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............................... 32-57
SIGNATURES
PART I
ITEM 1. 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 38
regional shopping centers and four community centers aggregating approximately
33.1 million square feet of gross leasable area. These 42 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 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
DEBT AND EQUITY OFFERINGS
On February 5, 1997 the Company filed a new shelf registration statement for
$500 million worth of securities (including the remaining $16 million under the
former shelf) to be issued at a later date. The new shelf was declared effective
on December 8, 1997.
On June 27, 1997, the Company sold $150 million of convertible subordinated
debentures (the "Debentures") due 2002. In July 1997, an additional $11.4
million of the Debentures were sold. The net proceeds from the sale of the
Debentures of $157.4 million were used by the Company primarily to repay
floating rate debt and for general corporate purposes. On December 22, 1997, the
Company filed a shelf registration statement for $119.4 million of the
convertible debentures that were issued during June and July of 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Convertible Debt Offering and Recent Developments."
On February 25, 1998, the Company issued $100 million of convertible
preferred shares in a private placement. During February 1998, the Company
issued 2.9 million common shares ($79.6 million of total proceeds) from the
shelf registration. The proceeds from the sale of the preferred shares and the
common shares were used to acquire the ERE Yarmouth portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Convertible Debt Offering and Recent Developments."
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 million, consisting of $52 million of cash and $46 million of
assumed mortgage indebtedness.
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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 million which was funded with $58 million in
proceeds from a 10 year fixed rate loan placed concurrently on Villa Marina
Marketplace and the balance from cash on hand plus proceeds drawn from the
Company's line of credit.
Manhattan Village Shopping Center ("Manhattan Village") located in Manhattan
Beach, California was purchased through a joint venture on August 19, 1997.
Manhattan Village is a regional center with a total of 551,685 square feet of
retail, restaurant and entertainment space. The Company owns 10% of the joint
venture.
The Citadel, a 1,044,852 square foot super regional mall in Colorado
Springs, Colorado was purchased on December 19, 1997 for $108 million. The
purchase price was funded by a concurrently placed loan of $75.6 million plus
$32.4 million in cash.
Great Falls Marketplace, a 143,570 square foot community center in Great
Falls, Montana, developed by The Management Companies, was acquired on December
31, 1997. The acquisition price was $14.8 million which approximates the cost
incurred by The Management Companies to acquire and develop the site.
On February 27, 1998, the Company acquired, through a 50/50 joint venture
with an affiliate of Simon DeBartolo Group, Inc., a portfolio of twelve regional
malls ("the ERE Yarmouth portfolio"). 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 the assumption of $485 million of debt.
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.
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
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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 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 Limited Express 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.
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
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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 1996: Villa Marina
Marketplace ("Villa Marina") on January 25, 1996; Valley View Center on October
21, 1996; Vintage Faire Mall and Rimrock Mall on November 27, 1996; and
Buenaventura Mall, Fresno Fashion Fair and Huntington Center on December 18,
1996. Together these properties are referred to herein as the "1996 Acquisition
Centers".
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 in 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 referred to
herein as the "1997 Acquisition Centers".
On February 27, 1998, the Company, along with a joint venture partner,
acquired the ERE Yarmouth portfolio of 12 regional malls totaling 10.7 million
square feet. The Company is a 50% owner of this portfolio.
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 27, 1998, the Centers consist of 38 Regional
Shopping Centers and four Community Shopping Centers aggregating approximately
33.1 million square feet of GLA. 38 of the 42 Centers contain more than 400,000
square feet of GLA. The 38 Regional Shopping Centers in the Company's portfolio
average approximately 846,000 square feet of GLA and range in size from 1.8
million square feet of GLA at Lakewood Mall to 369,742 square feet of GLA at
Panorama Mall. The Company's four Community Shopping Centers, Boulder Plaza,
Villa Marina Marketplace, Bristol Shopping Center and Great Falls Marketplace,
have an average of 229,000 square feet of GLA. The 42 Centers presently include
149 Anchors totaling approximately 18.3 million square feet of GLA and
approximately 4,540 Mall and Freestanding Stores totaling approximately 14.8
million square feet of GLA.
Total revenues increased from $155 million in 1996 to $221 million in 1997
primarily due to 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, 16.0% in 1996 and 22.0% in 1995. Queens
Center accounted for 13.8% of 1996 shopping center revenue. Shopping center
revenues at Crossroads Mall-Colorado accounted for 10.6% of total shopping
center revenues in 1995. During 1995 Chesterfield accounted for 12.6% of total
Shopping Center revenues. No other Center generated more than 10% of shopping
center revenues during 1997, 1996 or 1995.
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 YEARS ENDED DECEMBER 31,
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1995(2) 1996(3) 1997(4)
---------- ---------- ------------
Mall store sales (in thousands)........................ $ 766,849 $ 992,614 $ 1,483,903
---------- ---------- ------------
---------- ---------- ------------
Minimum rents.......................................... 8.3% 8.3% 7.9%
Percentage rents....................................... 0.4% 0.4% 0.4%
Expense recoveries(1).................................. 2.6% 2.9% 3.0%
---------- ---------- ------------
Mall tenant occupancy costs............................ 11.3% 11.6% 11.3%
---------- ---------- ------------
---------- ---------- ------------
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(1) Represents real estate tax and common area maintenance charges.
(2) Excludes 1995 Acquisition Centers.
(3) Excludes 1996 Acquisition Centers.
(4) Excludes 1997 Acquisition Centers.
COMPETITION
The 38 Regional Shopping Centers are located in developed areas in middle to
upper income markets where there are relatively few other Regional Shopping
Centers. In addition, 37 of the 38 Regional Shopping Centers contain more than
400,000 square feet of GLA. The Company intends to consider additional expansion
and renovation projects to maintain and enhance the quality of the Centers and
their competitive position in their trade areas.
There are numerous owners and developers of real estate that compete with
the Company in its trade areas. There are nine other publicly traded mall REITs,
any of which under certain circumstances, could compete against the Company for
an acquisition or an Anchor. 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, internet shopping services and home shopping networks
that could adversely affect the Company's revenues.
MAJOR TENANTS
The Centers derived approximately 89.5% of their total rents for the year
ended December 31, 1997 from Mall and Freestanding Stores. One retailer
accounted for approximately 7.6% of annual base rents of the Company, and no
other single retailer accounted for more than 4.6%, as of December 31, 1997.
5
The following retailers (including their subsidiaries) represent the 10
largest retailers in the Company's portfolio at December 31, 1997 based upon
minimum rents in place as of December 31, 1997:
NUMBER OF STORES % OF TOTAL MINIMUM RENTS
RETAILER IN THE CENTERS AS OF DECEMBER 31, 1997
- ------------------------------------------------- ------------------- -----------------------------
The Limited...................................... 103 7.6%
Woolworth........................................ 113 4.6%
The Gap.......................................... 26 2.3%
Barnes & Noble................................... 32 1.9%
J.C. Penney...................................... 19(1) 1.8%
Federated Department Stores...................... 15(1) 1.6%
Melville......................................... 23 1.3%
The Musicland Group.............................. 30 1.3%
Consolidated Stores.............................. 24 1.1%
Sears............................................ 15(1) 1.0%
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(1) Amounts include Anchor stores as well as non-Anchor stores owned by the same
parent company.
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, 1997 comprises 75.3% 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
1997 was $27.58 per square foot, or 13.6% higher than the average base rent for
all Mall and Freestanding Stores (10,000 square feet or under) at December 31,
1997 of $24.27 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
DECEMBER 31 SQUARE FOOT(1) DURING THE YEAR(2) DURING THE YEAR(3)
- ------------------------------------- --------------- ------------------- -------------------
1995................................. $ 21.19 $ 23.13 $ 22.12
1996................................. $ 23.90 $ 27.02 $ 24.54
1997................................. $ 24.27 $ 27.58 $ 24.84
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(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 1995 (excluding the 1995
Acquisition Centers), 1996 (excluding the 1996 Acquisition Centers) and 1997
(excluding the 1997 Acquisition Centers).
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(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
1995 average excludes the 1995 Acquisition Centers, the 1996 average
excludes the 1996 Acquisition Centers and the 1997 average excludes the 1997
Acquisition Centers.
(3) The average base rent on leases expiring during the year represents the
final year minimum rent, on a cash basis, for tenant leases 10,000 square
feet or under expiring during the year. The average base rent on leases
expiring in 1995 excludes the 1995 Acquisition Centers, 1996 excludes the
1996 Acquisition Centers and the average for 1997 excludes the 1997
Acquisition Centers.
BANKRUPTCY AND 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 eleven of
its centers. If Montgomery Ward ceases to operate it could have an adverse
effect on a center.
Retail stores at the Centers other than Anchors may also seek the protection
of the bankruptcy laws, 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 7.6% of total rents, the
bankruptcy and subsequent closure of stores could create a decrease in occupancy
levels, reduced rental income or otherwise adversely affect the Centers.
LEASE EXPIRATIONS
The following table shows scheduled lease expirations (for Centers owned as
of December 31, 1997) 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.
ENDING
APPROXIMATE % OF TOTAL BASE RENT PER
NUMBER OF GLA OF LEASED GLA SQUARE FOOT OF
YEAR ENDING LEASES EXPIRING REPRESENTED BY EXPIRING
DECEMBER 31, EXPIRING LEASES EXPIRING LEASES(1) LEASES(1)
- ----------------------------- ------------- ------------ --------------------- -----------------
1998....................... 354 673,877 7.8% $ 23.22
1999....................... 298 538,553 6.2% $ 26.09
2000....................... 321 599,211 6.9% $ 27.35
2001....................... 257 496,600 5.8% $ 29.98
2002....................... 235 496,482 5.8% $ 27.70
2003....................... 214 506,674 5.9% $ 27.10
2004....................... 172 402,261 4.7% $ 26.81
2005....................... 164 481,210 5.6% $ 24.79
2006....................... 176 475,078 5.5% $ 26.79
2007....................... 165 449,402 5.2% $ 28.24
- ------------------------
(1) For leases 10,000 square feet or under
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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 typically lower than the rents charged to tenants of Mall and
Freestanding Stores. Each Anchor which owns its own store, and certain Anchors
which lease their stores, enter into reciprocal easement agreements with the
owner of the Center covering, among other things, operational matters, initial
construction and future expansion.
Anchors accounted for approximately 10.5% of the Company's total rent for
the year ended December 31, 1997.
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The following table identifies each Anchor, each parent company that owns
multiple anchors and the number of square feet owned or leased by each such
Anchor or parent company in the Company's portfolio at December 31, 1997, except
as otherwise indicated:
TOTAL GLA
NUMBER OF GLA OWNED GLA LEASED OCCUPIED BY
NAME ANCHOR STORES BY ANCHOR BY ANCHOR ANCHOR
- -------------------------------------------------------------- ------------- ----------- ----------- -----------
J.C. Penney................................................... 18 724,369 1,636,432 2,360,801
Sears......................................................... 13 795,445 744,659 1,540,104
Dayton Hudson Corp.
Mervyn's(1)................................................. 9 416,680 326,508 743,188
Target...................................................... 2 -- 267,341 267,341
Dayton's.................................................... 1 115,193 -- 115,193
------------- ----------- ----------- -----------
Total..................................................... 12 531,873 593,849 1,125,722
Federated Department Stores
Macy's...................................................... 7 930,844 411,599 1,342,443
Macy's Men's & Home......................................... 2 -- 155,614 155,614
Macy's Men's & Juniors...................................... 2 -- 146,906 146,906
------------- ----------- ----------- -----------
Total..................................................... 11 930,844 714,119 1,644,963
May Department Stores Co.
Foley's..................................................... 4 725,316 -- 725,316
Hechts...................................................... 2 140,000 100,000 240,000
Robinsons-May............................................... 2 146,250 362,852 509,102
------------- ----------- ----------- -----------
Total..................................................... 8 1,011,566 462,852 1,474,418
Montgomery Ward............................................... 8 476,714 581,770 1,058,484
Gottschalks................................................... 6 544,861 283,772 828,633
Dillard's..................................................... 5 822,802 65,163 887,965
Herberger's................................................... 2 -- 122,635 122,635
Belk.......................................................... 1 -- 109,933 109,933
Boscov's...................................................... 1 -- 140,000 140,000
Burlington Coat Factory....................................... 1 -- 133,650 133,650
Hennessy's.................................................... 1 -- 96,800 96,800
Home Depot.................................................... 1 -- 130,232 130,232
Joslins....................................................... 1 -- 93,270 93,270
Joslins Market................................................ 1 -- 40,000 40,000
Mercantile Stores, Inc. O.J. De Lendrecies.................... 1 188,000 -- 188,000
Nordstrom..................................................... 1 -- 185,241 185,241
Wal-Mart(2)................................................... 1 210,000 -- 210,000
ZCMI.......................................................... 1 -- 200,000 200,000
Vacant(3)..................................................... 2 -- 171,023 171,023
------------- ----------- ----------- -----------
96 6,236,474 6,505,400 12,741,874
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
- ------------------------------
(1) In February, 1998 the Company bought out the Mervyn's lease at Crossroads
Mall in Boulder, Colorado and then the Company sold the former Mervyn's
building to Sears. Sears is planning to renovate the former Mervyn's store
and to open in the fall, 1998. The Company is currently negotiating with
replacement tenants for the old Sears location.
(2) Wal-Mart purchased the former Broadway Store at Panorama Mall from Federated
in March 1997 which had been vacant since February 1996. Wal-Mart commenced
retrofit of the facility in October 1997 and plans to open its new facility
in June 1998.
(3) J.C. Penney vacated its facility in County East in 1997. The Company is
currently negotiating its replacement. At Crossroads Mall in Boulder, CO,
the Company paid $3 million in 1997 to terminate the Montgomery Ward's
lease. Gart Sports temporarily occupied this space through February 1998.
The Company is currently negotiating with replacement tenants.
9
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 with 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 the responsible current or former tenant, 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 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, which was sold to a third party on
December 18, 1997. The California Department of Toxic Substance Control (DTSC)
advised the Company in 1995 that very low levels of Dichlorethylene (1,2,DCE), a
degradation byproduct of PCE, have been detected in a water well located 1/4
mile west from the dry cleaners, and that the dry cleaning facility may have
contributed to the introduction of 1,2 DCE
10
into the water well. According to DTSC, the maximum contaminant level (MCL) for
1,2DCE which is permitted in drinking water is 6 parts per billion (ppb). The
1,2DCE which was detected in the water well at 1.2 ppb, is below the MCL. The
Company has retained an environmental consultant and has initiated extensive
testing of the site. Remediation began in October 1997. The joint venture that
owned the property (of which the Company is a 50% general partner) agreed as
between itself and the buyer, that it would be responsible for continuing to
pursue the investigation and remediation of impacted soil and groundwater
resulting from releases of PCE from the shopping center's former dry cleaner.
$124,000 and $155,000 has already been incurred for remediation, and
professional and legal fees in 1997 and 1996, respectively. An additional
$561,000 remains reserved as of December 31, 1997. The Company has initiated
cost recovery actions and intends to continue to look to responsible parties for
recovery.
Toluene, a petroleum constituent, was detected in one of three groundwater
dewatering system holding tanks at the Queens Center. Although the source of the
tolulene has not been fully defined, the Company suspects the source to be
either an adjacent automotive service station and/or a previous automotive
service station, which operated on site prior to development of the mall.
Toluene was detected at levels of 410 and 160 parts per billion (ppb) in samples
taken from the tank in October, 1995 and February 1996, respectively. Additional
samples were taken in May and December of 1996, with results of .63 ppb and
"non-detect" for the May sampling event and 16.2 ppb and 25.2 ppb for the
December sampling event. The maximum allowable contaminant level (MCL) for
toluene in drinking water is 1000 ppb. Although the Company believes that no
remediation will be required, it has set up a $150,000 reserve in 1996 to cover
professional fees and testing costs, which was reduced by $18,000 of costs
incurred in 1997. The Company intends to look to the responsible parties and
insurers if remediation is required.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has been
detected in structural fireproofing throughout much of the Mall. Recent testing
data conducted by a professional environmental consulting firm indicates that
the fireproofing is largely inaccessible to building occupants and is well
adhered to the structural members. Additionally, airborne concentrations of
asbestos are well within OSHA's permissible exposure limit (PEL) of .1 fcc. The
accounting for this acquisition included a reserve of $3.3 million to cover
future removal of this asbestos, as necessary. $170,000 was incurred for
abatement of this asbestos in 1997.
Dry cleaning chemicals including PCE were detected in soil and groundwater
in the vicinity of a former dry cleaning establishment at Huntington Center. The
release has been reported to the local government authorities. The Company has
retained an environmental consultant and is conducting additional site
assessment activities to attempt to determine the extent to which groundwater
has been impacted. The Company estimates, based on the data currently available,
that costs for assessment, remediation and legal services will not exceed
$500,000. Consequently, at the time of the acquisition, the Company established
a $500,000 reserve to cover professional and legal fees. $9,000 and $6,000 has
been incurred for remediation in 1997 and 1996, respectively. The Company
intends to look to responsible parties and insurers for cost recovery.
EMPLOYEES
The Company and the Management Companies employ approximately 1,264 persons,
including eight executive officers, personnel in the areas of acquisitions and
business development (5), property management (115), leasing (30),
redevelopment/construction (17), financial services (28) and legal affairs (10).
In addition, in an effort to minimize operating costs, the Company generally
maintains its own security staff (401) and maintenance staff (650).
Approximately 6 of these employees are represented by a union. The Company
believes that relations with its employees are good.
11
ITEM 2. PROPERTIES The following table sets forth certain information about
each of the Centers:
YEAR OF YEAR OF MOST DECEMBER 31, 1997-
ORIGINAL RECENT MALL AND PERCENTAGE OF MALL
NAME OF CENTER/ CONSTRUCTION/ EXPANSION/ FREE-STANDING AND FREE-STANDING
LOCATION(1) ACQUISITION RENOVATION TOTAL GLA(2) GLA GLA LEASED
- ---------------------------------------------- ------------- ------------- ------------ ------------- -------------------
Boulder Plaza ................................ 1969 / 1989 1991 158,997 158,997 100.0%
Boulder, Colorado
Bristol Shopping Center(4) ................... 1966 / 1986 1992 165,682 165,682 91.6%
Santa Ana, California
Broadway Plaza(4) ............................ 1951 / 1985 1994 679,427 233,930 98.0%
Walnut Creek, California
Capitola Mall(4) ............................. 1977 / 1995 1988 585,340 205,623 96.3%
Capitola, California
Chesterfield Towne Center .................... 1975 / 1994 1997 817,290 396,097 94.5%
Richmond, Virginia
County East Mall ............................. 1966 / 1986 1989 488,883 170,323 91.9%
Antioch, California
Crossroads Mall(4) ........................... 1963 / 1979 1986 809,004 365,567 80.6%
Boulder, Colorado
Crossroads Mall .............................. 1974 / 1994 1991 1,112,470 372,782 84.9%
Oklahoma City, Oklahoma
Fresno Fashion Fair .......................... 1970 / 1996 1983 881,394 320,513 97.9%
Fresno, California
Greeley Mall ................................. 1973 / 1986 1987 585,044 241,682 80.6%
Greeley, Colorado
Green Tree Mall(4) ........................... 1968 / 1975 1995 782,687 338,691 85.3%
Clarksville, Indiana
Holiday Village Mall(4) ...................... 1959 / 1979 1992 491,711 269,842 89.9%
Great Falls, Montana
Lakewood Mall ................................ 1953 / 1975 1996 1,804,489 860,840 98.3%
Lakewood, California
Northgate Mall ............................... 1964 / 1986 1987 744,020 273,689 89.8%
San Rafael, California
Panorama Mall ................................ 1955 / 1979 1980 369,742 159,742 96.8%
Panorama, California
Parklane Mall(4) ............................. 1967 / 1978 1997 448,727 319,007 91.8%
Reno, Nevada
Queens Center ................................ 1973 / 1995 1991 625,677 157,534 100.0%
Queens, New York
1997 SALES
NAME OF CENTER/ PER SQUARE
LOCATION(1) ANCHORS FOOT(3)
- ---------------------------------------------- ---------------------------------------------- -----------
Boulder Plaza ................................ -- $ 332
Boulder, Colorado
Bristol Shopping Center(4) ................... -- 369
Santa Ana, California
Broadway Plaza(4) ............................ Macy's, Nordstrom, 433
Walnut Creek, California Macy's Men's and Juniors,
Capitola Mall(4) ............................. Gottschalks, J.C. Penney, 287
Capitola, California Mervyn's, Sears
Chesterfield Towne Center .................... Hecht's, Belk, Dillard's, Sears, 309
Richmond, Virginia
County East Mall ............................. Sears, Gottschalks, Mervyn's(5) 236
Antioch, California
Crossroads Mall(4) ........................... Foley's, J.C. Penney, Mervyn's, Sears(6) 265
Boulder, Colorado
Crossroads Mall .............................. Dillards, Foley's, J.C. Penney, 211
Oklahoma City, Oklahoma Montgomery Ward
Fresno Fashion Fair .......................... Gottschalks, J.C. Penney, Macy's, 297
Fresno, California Macy's Men's and Children
Greeley Mall ................................. J.C. Penney, Sears, Joslins, Joslins Market 215
Greeley, Colorado Centre, Montgomery Ward
Green Tree Mall(4) ........................... Dillard's, J.C. Penney, 309
Clarksville, Indiana Sears, Target
Holiday Village Mall(4) ...................... Herberger's, J.C. Penney, Sears, 268
Great Falls, Montana Montgomery Ward
Lakewood Mall ................................ Home Depot, J.C. Penney, Mervyn's, Montgomery 318
Lakewood, California Ward, Robinsons-May
Northgate Mall ............................... Macy's, Mervyns, Sears 281
San Rafael, California
Panorama Mall ................................ Wal-Mart(7) 339
Panorama, California
Parklane Mall(4) ............................. Gottschalks 261
Reno, Nevada
Queens Center ................................ J.C. Penney, Macy's 690
Queens, New York
12
ITEM 2. PROPERTIES (CONTINUED)
YEAR OF YEAR OF MOST DECEMBER 31, 1997-
ORIGINAL RECENT MALL AND PERCENTAGE OF MALL
NAME OF CENTER/ CONSTRUCTION/ EXPANSION/ FREE-STANDING AND FREE-STANDING
LOCATION(1) ACQUISITION RENOVATION TOTAL GLA(2) GLA GLA LEASED
- ----------------------------------------------- ------------- ------------- ------------ ------------- -------------------
Rimrock Mall .................................. 1978 / 1996 1980 581,688 266,248 92.1%
Billings, Montana
Salisbury, Centre at .......................... 1990 / 1995 1990 883,791 278,810 89.9%
Salisbury, Maryland
Valley View Center ............................ 1973 / 1996 1996 1,519,453 461,556 86.1%
Dallas, Texas
Villa Marina Marketplace ...................... 1972 / 1996 1995 448,517 448,517 96.5%
Marina Del Rey, California
Vintage Faire Mall ............................ 1977 / 1996 -- 1,051,458 351,539 89.4%
Modesto, California
West Acres .................................... 1972 / 1986 1992 908,841 356,286 98.1%
Fargo, North Dakota
------------ ------------- -------
Total/Average at December 31, 1997*............ 16,944,332 7,173,497 92.1%
------------ ------------- -------
1997 Acquisition Centers
The Citadel ................................... 1972 / 1997 1995 1,044,852 449,512 83.6%
Colorado Springs, Colorado
Great Falls Marketplace ....................... 1997 / 1997 -- 143,570 143,570 100.0%
Great Falls, Montana
Manhattan Village Shopping Ctr.(4) ............ 1981 / 1997 1992 551,685 375,631 97.3%
Manhattan Beach, California
South Towne Center ............................ 1987 / 1997 1997 1,240,143 463,346 90.5%
Sandy, Utah
Stonewood Mall(4) ............................. 1953 / 1997 1991 927,218 356,471 89.4%
Downey, California
------------ ------------- -------
Total/Average 1997 Acquisitions.............. 3,907,468 1,788,530 90.7%
------------ ------------- -------
Total/Average at December 31, 1997**........... 20,851,800 8,962,027 91.8%
------------ ------------- -------
1997 SALES
NAME OF CENTER/ PER SQUARE
LOCATION(1) ANCHORS FOOT(3)
- ----------------------------------------------- ----------------------------------------------- -----------
Rimrock Mall .................................. Herbergers, Hennessy's, $ 248
Billings, Montana J.C. Penney, Montgomery Ward
Salisbury, Centre at .......................... Boscov's, J.C. Penney, Hechts, 277
Salisbury, Maryland Montgomery Ward, Sears
Valley View Center ............................ Dillard's, Foleys, J.C. Penney, 237
Dallas, Texas Sears
Villa Marina Marketplace ...................... -- 402
Marina Del Rey, California
Vintage Faire Mall ............................ Gottschalks, J.C. Penney, Macy's, 293
Modesto, California Macy's Men's & Home, Sears
West Acres .................................... Daytons, J.C. Penney, 347
Fargo, North Dakota O.J. De Lendrecies, Sears
-----
Total/Average at December 31, 1997*............ $ 310
-----
1997 Acquisition Centers
The Citadel ................................... Dillard's, Foley's, J.C. Penney, Mervyn's $ 273
Colorado Springs, Colorado
Great Falls Marketplace ....................... -- (8)
Great Falls, Montana
Manhattan Village Shopping Ctr.(4) ............ Macy's, Macy's Men's & Home 643
Manhattan Beach, California
South Towne Center ............................ 220
Sandy, Utah Dillard's, J.C. Penney, Mervyn's, Target, ZCMI
Stonewood Mall(4) ............................. 272
Downey, California J.C. Penney, Mervyn's, Robinsons-May, Sears
-----
Total/Average 1997 Acquisitions.............. $ 342
-----
Total/Average at December 31, 1997**........... $ 317
-----
13
ITEM 2. PROPERTIES (CONTINUED)
YEAR OF YEAR OF MOST DECEMBER 31, 1997-
ORIGINAL RECENT MALL AND PERCENTAGE OF MALL
NAME OF CENTER/ CONSTRUCTION/ EXPANSION/ FREE-STANDING AND FREE-STANDING
LOCATION(1) ACQUISITION RENOVATION TOTAL GLA(2) GLA GLA LEASED
- ----------------------------------------------- ------------- ------------- ------------ ------------- -------------------
MAJOR REDEVELOPMENT PROPERTIES
Buenaventura Mall ............................. 1965 / 1996 1997 801,277 345,941 (9)
Ventura, California
Huntington Center ............................. 1965 / 1996 1997 683,382 286,617(10) (9)
Huntington Beach, California
------------ -------------
TOTAL MAJOR REDEVELOPMENT CENTERS 1,484,659 632,558
------------ -------------
TOTAL/AVERAGE AT DECEMBER 31, 1997*** 22,336,459 9,594,585
------------ -------------
1998 ACQUISITION CENTERS (ERE YARMOUTH
PORTFOLIO)
Eastland Mall(4) .............................. 1978 / 1998 1995 1,085,280 544,016 95.2%
Evansville, IN
Empire Mall(4) ................................ 1975 / 1998 1988 1,334,557 632,535 91.9%
Sioux Falls, SD
Granite Run Mall .............................. 1974 / 1998 1993 1,036,359 535,950 90.8%
Media, PA
Lake Square Mall .............................. 1980 / 1998 1992 560,671 264,634 87.6%
Leesburg, FL
Lindale Mall .................................. 1963 / 1998 1997 691,940 386,377 92.0%
Cedar Rapids, IA
Mesa Mall ..................................... 1980 / 1998 1991 851,354 425,537 93.6%
Grand Junction, CO
NorthPark Mall ................................ 1973 / 1998 1994 1,066,818 415,285 83.8%
Davenport, IA
Rushmore Mall ................................. 1978 / 1998 1992 837,255 366,595 81.8%
Rapid City, SD
Southern Hills Mall ........................... 1980 / 1998 -- 752,588 439,011 94.7%
Sioux City, IA
SouthPark Mall ................................ 1974 / 1998 1990 1,034,542 456,486 90.3%
Moline, IL
1997 SALES
NAME OF CENTER/ PER SQUARE
LOCATION(1) ANCHORS FOOT(3)
- ----------------------------------------------- ----------------------------------------------- -----------
MAJOR REDEVELOPMENT PROPERTIES
Buenaventura Mall ............................. J.C. Penney, Macy's, Montgomery Ward 269
Ventura, California
Huntington Center ............................. Mervyn's, Burlington Coat Factory 328
Huntington Beach, California Montgomery Ward
-----
TOTAL MAJOR REDEVELOPMENT CENTERS $ 294
-----
TOTAL/AVERAGE AT DECEMBER 31, 1997*** $ 315
-----
1998 ACQUISITION CENTERS (ERE YARMOUTH
PORTFOLIO)
Eastland Mall(4) .............................. J.C. Penney, Lazarus, Famous Barr, (11)
Evansville, IN DeJong
Empire Mall(4) ................................ Best(12), Younkers, J.C. Penney, Sears, (11)
Sioux Falls, SD Dayton's, Kohl's, Target
Granite Run Mall .............................. J.C. Penney, Sears, Boscov's (11)
Media, PA
Lake Square Mall .............................. Belk-Lindsey, Sears, J.C. Penney, (11)
Leesburg, FL Target
Lindale Mall .................................. Younker's, VonMaur, Sears (11)
Cedar Rapids, IA
Mesa Mall ..................................... Sears, Herberger's, J.C. Penney, (11)
Grand Junction, CO Mervyn's, Target
NorthPark Mall ................................ Younkers, VonMaur, J.C. Penney, (11)
Davenport, IA Sears, Montgomery Ward
Rushmore Mall ................................. Best(12), J.C. Penney, Sears, Herberger's, (11)
Rapid City, SD Target
Southern Hills Mall ........................... Younker's, Sears, Target (11)
Sioux City, IA
SouthPark Mall ................................ J.C. Penney, Sears, Younkers, (11)
Moline, IL VonMaur, Montgomery Ward
14
ITEM 2. PROPERTIES (CONTINUED)
YEAR OF YEAR OF MOST DECEMBER 31, 1997
ORIGINAL RECENT MALL AND PERCENTAGE OF MALL
NAME OF CENTER/ CONSTRUCTION/ EXPANSION/ FREE-STANDING AND FREE- STANDING
LOCATION(1) ACQUISITION RENOVATION TOTAL GLA(2) GLA GLA LEASED
- ----------------------------------------------- ------------- ------------- ------------ ------------- ------------------
SouthRidge Mall(4) ............................ 1975 / 1998 1992 993,875 536,523 75.0%
Des Moines, IA
Valley Mall ................................... 1978 / 1998 1992 482,348 196,285 97.6%
Harrisonburg, VA
------------ ------------- -------
1998 ACQUISITION CENTERS (ERE YARMOUTH 10,727,587 5,199,234 89.3%
PORTFOLIO)
------------ ------------- -------
GRAND TOTAL/AVERAGE 33,064,046 14,793,819 90.9%
------------ ------------- -------
------------ ------------- -------
1997 SALES
NAME OF CENTER/ PER SQUARE
LOCATION(1) ANCHORS FOOT(3)
- ----------------------------------------------- ----------------------------------------------- -----------
SouthRidge Mall(4) ............................ Sears, Younkers, J.C. Penney, (11)
Des Moines, IA Target, Montgomery Ward
Valley Mall ................................... J.C. Penney, Leggett, Watson's, (11)
Harrisonburg, VA Wal-Mart
1998 ACQUISITION CENTERS (ERE YARMOUTH
PORTFOLIO)
GRAND TOTAL/AVERAGE
- ------------------------
* EXCLUDING 1997 ACQUISITIONS, REDEVELOPMENT PROPERTIES AND 1998 ACQUISITIONS
** EXCLUDING REDEVELOPMENT PROPERTIES AND 1998 ACQUISITIONS
*** EXCLUDING 1998 ACQUISITIONS
15
- ------------------------
(1) The land underlying thirty of the Centers is owned in fee entirely by the
Company or, in the case of jointly-owned Centers, by the property
partnership. 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. All
centers are wholly owned by Company or its subsidiaries, except for
Broadway Plaza (50%), Panorama Mall (50%), West Acres (19%), Manhattan
Village Shopping Center (10%) and the ERE Yarmouth Portfolio (50%).
(2) Includes GLA attributable to Anchors (whether owned or non-owned) and Mall
and Freestanding Stores as of December 31, 1997.
(3) Sales are based on reports by retailers leasing Mall and Freestanding
Stores for the year ending December 31, 1997 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) J.C. Penney vacated its facility in the Center in 1997. The Company is
currently in negotiations with a replacement tenant.
(6) The Company paid $3 million in 1997 to terminate the Montgomery Ward's
lease. Gart Sports is temporarily occupying this space until February 1998.
In addition, the Company bought the Mervyn's building in February, 1998 and
sold it to Sears. Sears will occupy the former Mervyn's store and the
Company will recapture the existing Sears building. The Company is
currently negotiating with other tenants to occupy these locations.
(7) The Broadway Store ceased operations in February 1996. Wal-Mart purchased
the former Broadway store from Federated in March 1997, commenced retrofit
of the building in October 1997 and plans to open its new facility in June
1998.
(8) Spaces comprising Total GLA at December 31, 1997 have only been developed
and leased within fourth quarter of 1997 and, therefore, comparable sales
figures are not available for presentation in accordance with the
presentation methodology outlined in footnote (3).
(9) Certain spaces have been intentionally held off the market and remain
vacant due to major redevelopment strategy. As a result, the Company
believes the percentage of mall and free-standing GLA leased at these major
redevelopments is not meaningful data.
(10) Edwards Cinema signed a lease in January 1997 to occupy the former
Broadway location. Edwards is expected to open a 21 screen theater complex
on that site in November 1999.
(11) Sales per square foot information not currently available.
(12) The Company is contemplating various replacement tenant/redevelopment
opportunities for these vacant sites.
16
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 for properties owned as of December 31, 1997.
ANNUAL BALANCE EARLIEST DATE
ANNUAL PRINCIPAL DEBT DUE ON ON WHICH ALL
PROPERTY PLEDGED FIXED OR INTEREST BALANCE SERVICE MATURITY MATURITY NOTES CAN
AS COLLATERAL FLOATING RATE (000'S) (000'S) DATE (000'S) BE PREPAID
- ------------------------------- --------- ----------- ---------- ----------- --------- ---------- -------------
Capitola Mall.................. Fixed 9.25% $ 37,675 3,801 12/15/01 $ 36,193 Any Time
Chesterfield Towne Center(1)... Fixed 9.10% 65,708 6,580 1/1/24 1,087 1/1/24(2)
Chesterfield Towne Center...... Fixed 8.54% 3,359 376 11/1/99 3,183 Any Time
Citadel........................ Fixed 7.20% 75,600 6,528 1/1/08 59,962 Any Time
Crossroads Mall--Boulder....... Fixed 7.08% 35,638 2,928 12/15/10 28,107 12/15/01
Fresno Fashion Fair............ Fixed 8.40% 38,000 3,165 10/1/01 38,000 Any Time
Greeley Mall................... Fixed 8.50% 17,815 2,245 9/15/03 12,519 Any Time
Green Tree Mall/
Crossroads--OK/Salisbury...... Fixed 7.23% 117,714 8,499 3/16/04 117,174 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 9,081 8/10/05 127,000 Any Time
Northgate Mall................. Fixed 6.75% 25,000 1,688 4/1/01 25,000 1/10/99
Parklane Mall.................. Fixed 6.75% 20,000 1,350 4/1/01 20,000 Any Time
Queens Center.................. Floating (3) 65,100 (3) 3/31/99 51,000 Any Time
Rimrock Mall................... Fixed 7.70% 31,517 2,924 1/1/03 28,496 Any Time
South Towne Center............. Floating (4) 65,000 (4) 10/10/08 65,000 Any Time
Valley View Mall............... Fixed 7.89% 51,000 4,024 11/1/06 51,000 Any Time
Villa Marina Marketplace....... Fixed 7.23% 58,000 4,193 10/10/06 58,000 Any Time
Vintage Faire Mall............. Fixed 7.65% 55,433 5,116 1/1/03 50,089 Any Time
----------
Total--Wholly Owned
Centers.................... 906,559
Joint Venture Centers:
Broadway Plaza (50%)(5)........ Fixed 6.84% 21,750 1,487 5/5/98 21,750 Any Time
West Acres Center (19%)(5)..... Fixed 8.96% 7,170 648 7/15/99 6,613
----------
Total--All Centers $ 935,479
----------
----------
- ------------------------
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 $398,619 for the year ended December 31,
1996 and $98,528 for the year ended December 31, 1997.
(2) No prepayment except under certain circumstances in the event of the sale of
the Center.
(3) The interest rate is LIBOR plus .45%. LIBOR was 5.81% at December 31, 1997.
There is an interest rate cap on $10 million of this debt at a LIBOR strike
rate of 5.88% through maturity. The remaining principal has an interest rate
cap with a LIBOR strike rate of 7.7%.
17
(4) At December 31, 1997 this loan was at LIBOR plus 1%, which totaled 6.9%. In
February 1998, this loan was converted to a 10 year loan at a fixed rate of
6.62%, maturing in February 2008.
(5) Reflects the Company's pro rata share of debt.
The Company, at December 31, 1997, had a $60 million unsecured credit
facility with a financial institution which bears interest at approximately
LIBOR plus 1.325% or the institution's prime rate. There was $55 million
outstanding on this facility as of December 31, 1997 and $12 million outstanding
as of December 31, 1996. The Company increased this credit facility to $150
million on February 26, 1998 to partially fund the ERE Yarmouth portfolio.
In addition to the above debt, the Company has also issued $161.4 million of
unsecured subordinated convertible debentures due in December 2002. The
debentures bear interest at 7.25% and are convertible into shares of common
stock of the Company at a conversion price of $31.125.
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.
18
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 1997 the Company's shares traded
at a high of $29.6875 and a low of $24.875.
As of March 4, 1998 there were approximately 241 shareholders of record. The
following table shows high and low closing prices per share of common stock for
each quarter in 1996 and 1997 and dividends/ distributions per share of common
stock declared and paid by quarter.
DIVIDENDS/
MARKET QUOTATION DISTRIBUTIONS
PER SHARE ---------------
-------------------- DECLARED
QUARTERS ENDED HIGH LOW AND PAID
- ------------------------------------------------------------ --------- --------- ---------------
March 31, 1996.............................................. $ 201/8 $ 191/4 $ 0.42
June 30, 1996............................................... 211/4 19 0.42
September 30, 1996.......................................... 227/8 20 0.42
December 31, 1996........................................... 261/8 213/4 0.44
March 31, 1997.............................................. 295/8 253/8 0.44
June 30, 1997............................................... 287/8 247/8 0.44
September 30, 1997.......................................... 2911/16 271/8 0.44
December 31, 1997........................................... 299/16 246/8 0.46
In June and July 1997, the Company sold a total of $161.4 million of its
7 1/4% Convertible Subordinated Debentures due 2002 (the "Debentures"). The
Debentures were offered and sold only (1) outside the U.S. in accordance with
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act"), and (2) inside the U.S. to qualified institutional buyers in accordance
with Rule 144A under the Securities Act. Lazard Capital Markets, Lehman Brothers
International (Europe) and UBS Limited agreed to purchase the Debentures at a
purchase price of 100% of the principal amount, less an aggregate offering
discount of 2.5% (plus reimbursement of expenses). The Debentures 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 net proceeds of $157.4 million were
used primarily to repay floating rate debt and for general corporate purposes.
On December 22, 1997, the Company filed a shelf registration statement (File No.
333-38721) with respect to $119.4 million of the Debentures.
On February 25, 1998, the Company sold $100 million of its Series A
Cumulative Convertible Redeemable Preferred Stock, par value $0.01 per share
(the "Series A Preferred Stock") in a private placement to Security Capital
Preferred Growth Incorporated ("SCPG"), an accredited investor, pursuant to
Section 4(2) of the Securities Act. In connection with the transaction, the
Company paid a placement fee of $1 million to an affiliate of SCPG. The Series A
Preferred Stock can be converted into shares of common stock on a one-for-one
basis. The proceeds from the sale of the Series A Preferred Stock were used to
acquire the ERE Yarmouth portfolio.
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 an 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
19
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
what results of operations would have been assuming the completion of the
Formation and the 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 greater than 50% ownership interest (Panorama Mall,
North Valley Plaza, Broadway Plaza, Manhattan Village 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.
THE COMPANY
----------------------------------------------------------- PREDECESSOR
PRO FORMA ------------------------
AS REPORTED MARCH 16 TO JANUARY 1 TO
1997 1996 1995 FOR 1994 DEC 31,1994 MAR 15,1994 1993
--------- --------- --------- ----------- ------------- ------------- ---------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF CENTERS)
Operating Data:
Revenues:
Minimum rents......................... $ 142,251 $ 99,061 $ 69,253 $ 59,640 $ 48,663 $ 9,993 $ 49,219
Percentage rents...................... 9,259 6,142 4,814 4,906 3,681 851 3,550
Tenant recoveries..................... 66,499 47,648 26,961 22,690 18,515 3,108 16,320
Management fee income(2).............. -- -- -- -- -- 528 2,658
Other................................. 3,205 2,208 1,441 921 582 100 766
--------- --------- --------- ----------- ------------- ------ ---------
Total revenues...................... 221,214 155,059 102,469 88,157 71,441 14,580 72,513
Shopping center expenses................ 70,901 50,792 31,580 28,373 22,576 4,891 23,881
Management, leasing and development
services (2)........................... -- -- -- -- -- 557 2,084
REIT general and administrative
expenses............................... 2,759 2,378 2,011 1,954 1,545 -- --
Depreciation and amortization........... 41,535 32,591 25,749 23,195 18,827 3,642 16,385
Interest expense........................ 66,407 42,353 25,531 19,231 16,091 6,146 27,783
--------- --------- --------- ----------- ------------- ------ ---------
Income (loss) before minority interest,
unconsolidated entities and
extraordinary item..................... 39,612 26,945 17,598 15,404 12,402 (656) 2,380
Minority interest(1).................... (10,567) (10,975) (8,246) (8,008) (6,792) -- --
Equity in income (loss) of
unconsolidated joint ventures and
management companies (2)............... (8,063) 3,256 3,250 3,054 3,016 (232) (178)
Gain on sale of assets.................. 1,619 -- -- -- -- -- --
Extraordinary loss on early
extinguishment of debt................. (555) (315) (1,299) -- -- -- --
--------- --------- --------- ----------- ------------- ------ ---------
Net income (loss)....................... $ 22,046 $ 18,911 $ 11,303 $ 10,450 $ 8,626 ($ 888) $ 2,202
--------- --------- --------- ----------- ------------- ------ ---------
--------- --------- --------- ----------- ------------- ------ ---------
Earnings per share--basic:(3)
Income before extraordinary item...... $ 0.86 $ 0.92 $ 0.78 $ 0.72 $ 0.60 N/A N/A
Extraordinary item.................... (0.01) (0.01) (0.05) -- -- N/A N/A
--------- --------- --------- ----------- -------------
Net income per share--basic......... $ 0.85 $ 0.91 $ 0.73 $ 0.72 $ 0.60 N/A N/A
--------- --------- --------- ----------- -------------
--------- --------- --------- ----------- -------------
Earnings per share--diluted:(8)
Income before extraordinary item...... $ 0.85 $ 0.90 $ 0.78 $ 0.72 $ 0.60 N/A N/A
Extraordinary item.................... (0.01) (0.01) (0.05) -- -- N/A N/A
--------- --------- --------- ----------- -------------
Net income per share--diluted........... $ 0.84 $ 0.89 $ 0.73 $ 0.72 $ 0.60 N/A N/A
--------- --------- --------- ----------- -------------
--------- --------- --------- ----------- -------------
20
PRO FORMA
AS REPORTED MARCH 16 TO JANUARY 1 TO
1997 1996 1995 FOR 1994 DEC 31,1994 MAR 15,1994 1993
--------- --------- --------- ----------- ------------ ------------- ---------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF CENTERS)
Other Data:
Funds from operations--basic(4).... $ 83,188 $ 62,428 $ 44,938 $ 39,343 $ 32,710 N/A N/A
The Company's share
of FFO--basic(5).................. $ 56,233 $ 39,502 $ 25,982 $ 22,011 $ 18,300 N/A N/A
EBITDA(6).......................... $ 147,554 $ 101,889 $ 68,878 $ 57,592 $ 47,320 N/A N/A
Cash flows from (used in):
Operating activities............. $ 78,476 $ 80,431 $ 48,186 N/A $ 30,011 N/A N/A
Investing activities............. $(215,006) $(296,675) $ (88,413) N/A $ (137,637) N/A N/A
Financing activities............. $ 146,041 $ 216,317 $ 51,973 N/A $ 99,584 N/A N/A
Number of centers at year end...... 30 26 19 16 16 14 14
Weighted average number of shares
outstanding--basic(7)............. 37,982 32,934 26,930 25,645 25,714 N/A N/A
Weighted average number of shares
outstanding--diluted(7)(8)........ 38,403 33,320 26,984 25,771 25,840 N/A N/A
Cash distributions declared per
common share...................... $ 1.78 $ 1.70 $ 1.66 N/A $ .87 N/A N/A
THE COMPANY PREDECESSOR
------------------------------------------ -----------
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- -----------
(ALL AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA:
Investment in real estate
(before accumulated depreciation)..................... $1,607,429 $1,273,085 $ 833,998 $ 554,788 $ 375,972
Total assets............................................ $1,505,002 $1,187,753 $ 763,398 $ 485,903 $ 314,591
Total mortgage and notes payable........................ $1,122,959 $ 789,239 $ 485,193 $ 313,632 $ 372,817
Minority interest(1).................................... $ 100,463 $ 112,242 $ 95,740 $ 72,376 $ --
Partners' deficit....................................... $ -- $ -- $ -- $ -- $ (88,294)
Stockholders' equity.................................... $ 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 that the Company does not
wholly own and the Management Companies. The Management Companies on a pro
forma basis and after March 15, 1994 have been reflected on 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 of property,
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.
(5) The Company's share of FFO represents the Company's weighted average
ownership of the Operating Partnership multiplied by total FFO.
(6) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, minority interest, equity in income (loss) of unconsolidated
entities, extraordinary items and gain (loss) on sale of assets. 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.
(7) Assumes that all OP Units are converted to common stock.
(8) Assumes issuance of common stock for in-the-money options and restricted
stock calculated using the Treasury method in accordance with SFAS No. 128
for all years presented.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL BACKGROUND AND PERFORMANCE MEASUREMENT
The Company believes that the most significant measures of its operating
performance are Funds from Operations 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 of real property, 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, income in unconsolidated entities,
extraordinary items and gain (loss) on sale of assets. 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, 1997, 1996 and 1995.
The following discussion compares the activity for the year ended December 31,
1997 to results of operations for 1996. Also included is a comparison of the
activities for the year ended December 31, 1996 to the results for the year
ended December 31, 1995.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
This annual report on Form 10-K contains or incorporates statements that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number of
places in this Form 10-K and include statements regarding, among other matters,
the Company's growth opportunities, the Company's acquisition strategy,
regulatory matters pertaining to compliance with governmental regulations and
other factors affecting the Company's financial condition or results of
operations. Stockholders are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks, uncertainties and
other factors which may cause actual results, performance or achievements to
differ materially from the future results, performance or achievements,
expressed or implied in such forward looking statements.
22
The following table reflects the Company's acquisitions in 1995, 1996 and
1997:
DATE ACQUIRED LOCATION
----------------------- ---------------------------------
"1995 ACQUISITION CENTERS":
The Centre at Salisbury............................... August 15, 1995 Salisbury, Maryland
Capitola Mall......................................... December 21, 1995 Capitola, California
Queens Center......................................... December 28, 1995 Queens, New York
"1996 ACQUISITION CENTERS":
Villa Marina Marketplace.............................. January 25, 1996 Marina Del Rey, California
Valley View Center.................................... October 21, 1996 Dallas, Texas
Rimrock Mall.......................................... November 27, 1996 Billings, Montana
Vintage Faire Mall.................................... November 27, 1996 Modesto, California
Buenaventura Mall..................................... December 18, 1996 Ventura, California
Fresno Fashion Fair................................... December 18, 1996 Fresno, California
Huntington Center..................................... December 18, 1996 Huntington Beach, California
"1997 ACQUISITION CENTERS":
South Towne Center.................................... March 27, 1997 Sandy, Utah
Stonewood Mall........................................ August 6, 1997 Downey, California
Manhattan Village Shopping Center..................... August 19, 1997 Manhattan Beach, California
The Citadel Mall...................................... December 19, 1997 Colorado Springs, Colorado
Great Falls Marketplace............................... December 31, 1997 Great Falls, Montana
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 1997
and 1996. Many factors, such as the availability and cost of capital, overall
debt to market capitalization level, interest rates and availability of
potential acquisition targets that meet the Company's criteria, impact the
Company's ability to acquire additional properties. Accordingly, management is
uncertain as to whether during the balance of 1998, and in future years, there
will be similar acquisitions and corresponding increases in revenues, net income
and funds from operations that occurred as a result of the addition of the 1997
and 1996 Acquisition Centers. All other centers are referred to herein as the
"Same Centers".
The bankruptcy and/or closure of retail stores, particularly Anchors, may
reduce customer traffic and cash flow generated by a Center. During 1997,
Montgomery Ward filed bankruptcy. The Company has 11 Montgomery Ward stores in
its portfolio. Montgomery Ward has not yet disclosed whether they will cease
operating any of their stores in the Company's centers. The long-term closure of
these or other stores could adversely affect the Company's performance.
In addition, the Company's success in the highly competitive real estate
shopping center business depends upon many other factors, including general
economic conditions, the ability of tenants to make rent payments, increases or
decreases in operating expenses, occupancy levels, changes in demographics,
competition from other centers and forms of retailing and the ability to renew
leases or relet space upon the expiration or termination of leases.
ASSETS AND LIABILITIES
Total assets increased to $1,505 million at December 31, 1997 compared to
$1,188 million at December 31, 1996 and $763 million at December 31, 1995.
During that same period, total liabilities increased from $509 million in 1995
to $838 million in 1996 and $1,188 million in 1997. These changes were primarily
as a result of the 1996 and 1995 common stock offerings, the 1997 convertible
debenture offering,
23
the purchase of the 1997, 1996 and 1995 Acquisition Centers and related debt
transactions described below.
A. CONVERTIBLE DEBENTURE OFFERING
On June 27, 1997, the Company issued and sold $150 million of convertible
subordinated debentures due 2002 and an additional $11.4 million of debentures
were sold in July 1997 ("the Debentures"). The Debentures, which were sold at
par, bear interest at 7.25% annually (payable semi-annually) and are convertible
into shares of the Company's common stock 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. The net proceeds from the sale of the Debentures
of $157.4 million were used to repay floating rate debt and for general
corporate purposes.
B. 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 million, consisting of $52 million of cash and $46 million of
assumed mortgage indebtedness.
Stonewood Mall is a 927,218 square foot super regional mall in Downey,
California, which the Company acquired on August 6, 1997. The purchase price was
$92 million which was funded with $58 million in proceeds from a 10 year fixed
rate loan placed concurrently on Villa Marina Marketplace and 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 $66.6
million and was paid in cash.
The Citadel, a 1,044,852 square foot super regional mall in Colorado
Springs, Colorado, was purchased on December 19, 1997 for $108 million. The
purchase price was funded by a concurrently placed loan of $75.6 million plus
$32.4 million in cash.
Great Falls Marketplace is an 143,570 square foot community center developed
by the Management Companies and sold to the Company on December 31, 1997. The
purchase price of $14.8 million approximates the cost incurred by the Management
Companies to acquire and develop the site.
C. RECENT DEVELOPMENTS
On February 27, 1998, the Company, through a 50/50 joint venture with an
affiliate of Simon DeBartolo Group, Inc., acquired a portfolio of twelve
regional malls. The properties in the portfolio total 10.7 million square feet
and are located in eight states. The total purchase price was $974.5 million,
which included $485 million of assumed debt. The balance of the Company's share
of the purchase price was funded by issuing $100 million of convertible
preferred stock, $79.6 million of common stock issued to two unit trusts, and
the balance from the Company's line of credit.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Minimum and percentage rents increased by 44% to $151.5 million from $105.2.
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.
24
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 an $0.8 million reduction in
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
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 represents 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.
25
OPERATING ACTIVITIES
Cash flow from operations was $78.5 million 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Minimum and percentage rents increased by 42% to $105.2 million from $74.1
million. Approximately $19.0 million of the increase resulted from the 1995
Acquisition Centers and $13.2 million resulted from the 1996 Acquisition
Centers. These increases were partially offset by declining rents of $1.1
million at Parklane Mall which was adversely impacted by an Anchor closure in
1996.
Tenant recoveries increased to $47.7 million in 1996 from $27.0 million in
1995. The 1996 and 1995 Acquisition Centers caused $19.3 million of this
increase. Approximately $1.1 million of the increase was due to higher
recoverable expenses in 1996 compared to 1995.
Other income increased to $2.2 million in 1996 from $1.4 million in 1995.
Approximately $1.2 million of the increase related to the 1996 and 1995
Acquisition Centers. This increase was partially offset by lower interest income
of $0.3 million in 1996 compared to 1995.
EXPENSES
Shopping center expenses increased to $50.8 million in 1996 compared to
$31.6 million in 1995. Approximately $18.7 million of the increase resulted from
the 1996 and 1995 Acquisition Centers. The other centers had a net increase of
$0.5 million in shopping center expenses of which approximately $1.1 million was
for increased property taxes and $0.5 million of increased bad debt expense,
offset by a reduction in ground rent expense of $1.3 million which resulted from
the October, 1995 acquisition of land at Crossroads Mall--Boulder which had
previously been leased.
General and administrative expenses increased to $2.4 million in 1996 from
$2.0 million in 1995 primarily due to increased professional fee expense.
INTEREST EXPENSE
Interest expense increased to $42.4 million in 1996 from $25.5 million in
1995. Interest expense attributable to County East Mall decreased $1.2 million
in 1996 due to the payoff of that debt on
26
December 31, 1995. Also, there was a decrease of $1.3 million at Crossroads
Mall--Boulder due to a December 1995 refinancing at a substantially lower
interest rate. These reductions partially offset the increase of $19.1 million
from the 1995 and 1996 Acquisition Centers.
DEPRECIATION AND AMORTIZATION
Depreciation increased to $32.6 million from $25.7 million in 1995. An
increase of approximately $7.6 million related to the 1995 and 1996 Acquisition
Centers. This increase was offset by a decrease of approximately $1.4 million in
amortization of financial instruments in 1996 which resulted from several
financial instruments becoming fully amortized in 1995.
MINORITY INTEREST
The minority interest represents the 36.9% weighted average interest of the
Operating Partnership that was not owned by the Company during 1996, compared to
45.0% during 1995.
INCOME (LOSS) FROM UNCONSOLIDATED JOINT VENTURES AND MANAGEMENT COMPANIES
The income from unconsolidated joint ventures and the management companies
was $3.3 million for 1996, which was essentially the same as 1995.
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In connection with the sale of an interest rate cap, the Company wrote off
unamortized financing costs of $0.3 million in 1996. In 1995 the Company wrote
off $1.3 million of loan costs concurrent with the 1995 refinancing of Lakewood
Mall.
NET INCOME
As a result of the foregoing, net income increased to $18.9 million in 1996
from $11.3 million in 1995.
OPERATING ACTIVITIES
Cash flow from operations increased to $80.4 million compared to $48.2
million in 1995. The increase resulted from the factors discussed above,
primarily the impact of the 1995 and 1996 Acquisition Centers.
INVESTING ACTIVITIES
Cash flow used in investing activities was $296.7 million in 1996 compared
to $88.4 million in 1995. The change resulted primarily from the seven
acquisitions completed in 1996 compared to three acquisitions in 1995.
FINANCING ACTIVITIES
Cash flow from financing activities increased to $216.3 million in 1996
compared to $52.0 million in 1995. The increase resulted from more mortgage
financing done in 1996, primarily to fund the 1996 acquisitions.
EBITDA AND FUNDS FROM OPERATIONS
Due primarily to the factors mentioned above, EBITDA increased 48%, to
$101.9 million in 1996 from $68.9 million in 1995 and Funds From Operations
increased 39%, to $62.4 million, from $44.9 million in 1995.
27
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to meet its short term liquidity requirements through
cash generated from operations and working capital reserves. The Company
anticipates that revenues will continue to provide necessary funds for its
operating expenses and debt service requirements, and to pay dividends to
stockholders in accordance with REIT requirements. The Company anticipates that
cash generated from operations, together with cash on hand, will be adequate to
fund capital expenditures which will not be reimbursed by tenants, other than
non-recurring capital expenditures. Capital for major expenditures or
redevelopments has been, and is expected to continue to be, obtained from equity
or debt financings.
The Company believes that it will have access to the capital necessary to
expand its business in accordance with its strategies for growth and maximizing
Funds from Operations. The Company presently intends to obtain additional
capital necessary to expand its business through a combination of additional
equity offerings and debt financings.
The Company's total outstanding loan indebtedness at December 31, 1997 was
$1.2 billion (including its pro rata share of joint venture debt). This equated
to a debt to Total Market Capitalization (defined as total debt of the Operating
Partnership, including its pro rata share of joint venture debt, plus aggregate
market value of outstanding shares of common stock, assuming full conversion of
OP Units into stock) rate of approximately 51.5% at year end. Such debt consists
primarily of conventional mortgages payable secured by individual properties.
See "Properties--Mortgage Debt" for a description of the Company's outstanding
indebtedness. In connection with $65.1 million of the Company's floating rate
indebtedness, the Company has entered into interest rate protection agreements
that limit the Company's exposure to increases in interest rates. See
"Properties--Mortgage Debt."
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 or common stock warrants. On February 18, 1998, the Company
issued 1,826,484 shares from the shelf and on February 12, 1998 an additional
1,052,650 shares were issued from the shelf. The total proceeds of both
transactions were approximately $79.6 million, leaving approximately $420
million available on the shelf registration.
The Company has an unsecured line of credit which has been recently expanded
up to $150 million. There was $55 million outstanding at December 31, 1997 and
$123 million outstanding after the ERE Yarmouth portfolio acquisition on
February 27, 1998.
At December 31, 1997 the Company had cash and cash equivalents of $25.2
million.
YEAR 2000 COMPLIANCE
The Company has been advised by its independent software vendor that it has
completed its evaluation, testing and modification of the property management
and accounting software used by the Company and the necessary changes have been
completed to achieve year 2000 compliance. The Company does not believe it will
have any significant accounting or operations impact as a result of the year
2000.
FUNDS FROM OPERATIONS
The Company believes that the most significant measure of its performance is
Funds from Operations ("FFO"). FFO is defined by The National Association of
Real Estate Investment Trusts ("NAREIT") to be: Net income (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales of real property, plus depreciation and amortization (excluding
depreciation on personal property and amortization of loan and financial
instrument cost) and after adjustments for unconsolidated entities. Adjustments
for unconsolidated entities will be calculated on the same basis. FFO does not
represent cash flow from operations, as defined by generally accepted accounting
principles, and is not
28
necessarily indicative of cash available to fund all cash flow needs. The
following reconciles net income to FFO:
1997 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Net income.............................................................. $ 22,046 $ 18,911
Adjustments to reconcile net income to FFO:
Minority interest..................................................... 10,567 10,975
Depreciation and amortization on wholly owned properties.............. 41,535 32,591
Pro rata share of unconsolidated entities depreciation and
amortization........................................................ 2,312 2,096
Extraordinary loss on early extinguishment of debt.................... 555 315
Gain on sale of assets from wholly owned centers...................... (1,619) --
Pro rata share of (gain) loss on sale of joint venture assets......... 10,400 (110)
Amortization of loan costs, including interest rate caps and swaps.... (2,075) (2,090)
Depreciation of personal property..................................... (533) (260)
--------- ---------
FFO--basic(1)........................................................... 37,982 83,188 32,934 62,428
Add back interest expense and amortization of loan costs on convertible
debentures............................................................ 6,468 --
Weighted average additional shares assuming debenture conversion........ 2,664 --
--------- --------- --------- ---------
Sub-total after conversion of debentures................................ 40,646 89,656 32,934 62,428
To arrive at FFO--diluted:
Deduct effect of antidilutive debentures.............................. (2,664) (6,468) -- --
Impact of stock options and restricted stock using the Treasury
method................................................................ 421 239 386 --
--------- --------- --------- ---------
FFO--diluted(2)......................................................... 38,403 $ 83,427 33,320 $ 62,428
--------- --------- --------- ---------
--------- --------- --------- ---------
- ------------------------
(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 1997 assuming the conversion of OP units.
(2) The computation of dilutive and diluted average number of shares outstanding
includes the effect of common stock options outstanding and restricted stock
using the Treasury method. Convertible debentures are antidilutive and are
not included.
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 $3,599,000 for 1997, $1,832,000 for 1996 and $944,000
for 1995.
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
29
pro rata share of operating expenses. This reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation.
NEW PRONOUNCEMENTS ISSUED:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. The Company does not
expect this pronouncement to materially impact the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supercedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. The new standard becomes effective for the
Company for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company does not expect this pronouncement to materially
change the Company's current reporting and disclosures.
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 OR ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
PAGE
-----
(a) 1. Financial Statements
Report of Independent Accountants.............................................................. 33
Consolidated balance sheets of the Company as of December 31, 1997 and 1996.................... 34
Consolidated statements of operations of the Company for the years ended December 31, 1997,
1996 and 1995................................................................................ 35
Consolidated statements of stockholders' equity of the Company for the years ended December 31,
1997, 1996 and 1995.......................................................................... 36
Consolidated statements of cash flows of the Company for the years ended December 31, 1997,
1996 and 1995................................................................................ 37
Notes to consolidated financial statements..................................................... 38
2. Financial Statement Schedule
Schedule III--Real estate and accumulated depreciation......................................... 56
(b) 1. Reports on Form 8-K filed during the last quarter of 1997 are incorporated by reference to this
item
A. Form 8-K dated August 15, 1997, and Form 8-K/A dated October 15, 1997 for the acquisition of
Stonewood Mall, including the financial statements of South Towne Center and pro forma
financial information........................................................................ --
(c) 1. Exhibits
The Exhibit Index attached hereto is incorporated by reference to this item.................... --
32
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 as listed in Item 14(a) 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 financial statements and the financial statement schedule based
on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Macerich
Company as of December 31, 1997 and 1996, and the consolidated results of the
Macerich Company's operations and its cash flows for the years ended December
31, 1997, 1996 and 1995, 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.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1998
33
THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS:
Property, net......................................................................... $ 1,407,179 $ 1,108,668
Cash and cash equivalents............................................................. 25,154 15,643
Tenant receivables, net, including accrued overage rents of $4,330 in 1997 and $3,805
in 1996............................................................................. 23,696 23,192
Due from affiliates................................................................... 3,105 3,105
Deferred charges and other assets, net................................................ 37,899 20,716
Investments in joint ventures and the Management Companies............................ 7,969 16,429
------------ ------------
Total assets...................................................................... $ 1,505,002 $ 1,187,753
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable:
Related parties..................................................................... $ 135,313 $ 135,944
Others.............................................................................. 771,246 584,295
------------ ------------
Total............................................................................... 906,559 720,239
Bank notes payable.................................................................... 55,000 69,000
Convertible debentures................................................................ 161,400 --
Accounts payable...................................................................... 5,185 4,197
Accrued interest expense.............................................................. 4,878 3,979
Accrued real estate taxes and ground rent expense..................................... 7,272 7,221
Due to affiliates..................................................................... 15,109 430
Deferred acquisition liability........................................................ 5,000 5,000
Other accrued liabilities............................................................. 27,841 27,696
------------ ------------
Total liabilities................................................................. 1,188,244 837,762
------------ ------------
Minority interest in Operating Partnership............................................ 100,463 112,242
------------ ------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized--none issued.......... -- --
Common stock, $.01 par value, 100,000,000 shares authorized, 26,004,800 and
25,743,000 shares issued and outstanding at December 31, 1997 and 1996,
respectively...................................................................... 260 257
Additional paid in capital.......................................................... 219,121 238,346
Accumulated earnings................................................................ -- --
Unamortized restricted stock........................................................ (3,086) (854)
------------ ------------
Total stockholders' equity........................................................ 216,295 237,749
------------ ------------
Total liabilities and stockholders' equity...................................... $ 1,505,002 $ 1,187,753
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
34
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
REVENUES:
Minimum rents..................................................... $ 142,251 $ 99,061 $ 69,253
Percentage rents.................................................. 9,259 6,142 4,814
Tenant recoveries................................................. 66,499 47,648 26,961
Other............................................................. 3,205 2,208 1,441
------------- ------------- -------------
Total revenues.................................................. 221,214 155,059 102,469
------------- ------------- -------------
EXPENSES:
Shopping center expenses.......................................... 70,901 50,792 31,580
General and administrative expense................................ 2,759 2,378 2,011
------------- ------------- -------------
73,660 53,170 33,591
------------- ------------- -------------
Interest expense:
Related parties................................................. 10,287 10,172 8,226
Others.......................................................... 56,120 32,181 17,305
Depreciation and amortization..................................... 41,535 32,591 25,749
------------- ------------- -------------
107,942 74,944 51,280
------------- ------------- -------------
Equity in income (loss) of unconsolidated joint ventures and the
management companies.............................................. (8,063) 3,256 3,250
Gain on sale of assets.............................................. 1,619 -- --
------------- ------------- -------------
Income before minority interest and extraordinary item.............. 33,168 30,201 20,848
Extraordinary loss on early extinguishment of debt.................. (555) (315) (1,299)
------------- ------------- -------------
Income of the Operating Partnership................................. 32,613 29,886 19,549
Less minority interest in net income of the Operating Partnership... 10,567 10,975 8,246
------------- ------------- -------------
Net income.......................................................... $ 22,046 $ 18,911 $ 11,303
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share--basic:
Income before extraordinary item.................................. $ 0.86 $ 0.92 $ 0.78
Extraordinary item................................................ (0.01) (0.01) (0.05)
------------- ------------- -------------
Net income--basic................................................. $ 0.85 $ 0.91 $ 0.73
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of shares of common stock
outstanding--basic................................................ 25,891,000 20,781,000 15,482,000
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share--diluted:
Income before extraordinary item.................................. $ 0.85 $ 0.90 $ 0.78
Extraordinary item................................................ (0.01) (0.01) (0.05)
------------- ------------- -------------
Net income--diluted............................................... $ 0.84 $ 0.89 $ 0.73
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of shares of common stock
outstanding--diluted.............................................. 26,312,000 21,167,000 15,536,000
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
35
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON COMMON ADDITIONAL UNAMORTIZED TOTAL
STOCK STOCK PAR PAID IN ACCUMULATED RESTRICTED STOCKHOLDERS'
(# SHARES) VALUE CAPITAL EARNINGS STOCK EQUITY
----------- ----------- ----------- ------------ ------------- ------------
Balance December 31, 1994................... 14,375,000 $ 144 $ 86,795 -- -- $ 86,939
Common stock issued to public............. 5,600,000 56 107,408 107,464
Issuance costs............................ (582) (582)
Distributions paid ($1.66 per share)...... (14,913) $ (11,303) (26,216)
Net income................................ 11,303 11,303
Adjustment to reflect minority interest on
a pro rata basis according to year end
ownership percentage of Operating
Partnership............................. (20,615) (20,615)
Other, net................................ 2,000 52 52
----------- ----- ----------- ------------ ------------- ------------
Balance December 31, 1995................... 19,977,000 200 158,145 -- -- 158,345
Common stock issued to public............. 5,750,000 57 122,129 122,186
Issuance costs............................ (152) (152)
Issuance of restricted stock.............. 41,238 854 854
Unvested restricted stock................. (41,238) $ (854) (854)
Exercise of stock options................. 16,000 291 291
Distributions paid ($1.70 per share)...... (17,565) (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) (25,356)
----------- ----- ----------- ------------ ------------- ------------
Balance December 31, 1996................... 25,743,000 257 238,346 -- (854) 237,749
Issuance costs............................ (352) (352)
Issuance of restricted stock.............. 89,958 2,471 2,471
Unvested restricted stock................. (89,958) (2,471) (2,471)
Restricted stock vested in 1997........... 8,248 239 239
Exercise of stock options................. 253,552 3 2,410 2,413
Distributions paid ($1.78 per share)...... (24,061) (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............................. 307 307
----------- ----- ----------- ------------ ------------- ------------
Balance December 31, 1997................... 26,004,800 $ 260 $ 219,121 $ -- $ (3,086) $ 216,295
----------- ----- ----------- ------------ ------------- ------------
----------- ----- ----------- ------------ ------------- ------------
The accompanying notes are an integral part of these financial statements.
36
THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
JANUARY 1, JANUARY 1, JANUARY 1,
1997 TO DEC 1996 TO DEC 1995 TO DEC
31, 1997 31, 1996 31, 1995
-------------- -------------- --------------
Cash flows from operating activities:
Net income.................................................... $ 22,046 $ 18,911 $ 11,303
-------------- -------------- --------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt............ 555 315 1,299
Gain on sale of assets........................................ (1,619) -- --
Depreciation and amortization................................. 41,535 32,591 25,749
Amortization of discount on trust deed note payable........... 33 33 547
Minority interest in net income of the Operating
Partnership................................................. 10,567 10,975 8,246
Changes in assets and liabilities:
Tenant receivables, net..................................... (504) (7,977) (2,973)
Other assets................................................ (10,899) 1,181 (2,149)
Accounts payable and accrued expenses....................... 1,938 6,596 1,378
Due to affiliates........................................... 14,679 (382) 345
Other liabilities........................................... 145 18,188 4,441
-------------- -------------- --------------
Total adjustments......................................... 56,430 61,520 36,883
-------------- -------------- --------------
Net cash provided by operating activities..................... 78,476 80,431 48,186
-------------- -------------- --------------
Cash flows from investing activities:
Acquisitions of property and improvements..................... (199,729) (277,319) (75,738)
Renovations and expansions of centers......................... (12,929) (8,019) (4,571)
Additions to tenant improvements.............................. (2,599) (920) (1,554)
Deferred charges.............................................. (12,542) (9,111) (6,698)
Equity in (income) loss of unconsolidated joint ventures and
the management companies.................................... 8,063 (3,256) (3,250)
Distributions from joint ventures............................. 8,181 4,107 3,774
Contributions to joint ventures............................... (7,783) -- (376)
Loans to affiliates........................................... -- (3,105) --
Proceeds from sale of assets.................................. 4,332 948 --
-------------- -------------- --------------
Net cash used in investing activites.......................... (215,006) (296,675) (88,413)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes, mortgages and debentures payable......... 331,400 235,673 148,000
Payments on mortgages and notes payable....................... (119,515) (84,775) (157,800)
Net proceeds from equity offerings............................ -- 122,034 106,879
Dividends and distributions................................... (65,844) (56,615) (45,106)
-------------- -------------- --------------
Net cash provided by financing activities..................... 146,041 216,317 51,973
-------------- -------------- --------------
Net increase in cash.......................................... 9,511 73 11,746
Cash and cash equivalents, beginning of period.................. 15,643 15,570 3,824
-------------- -------------- --------------
Cash and cash equivalents, end of period........................ $ 25,154 $ 15,643 $ 15,570
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental cash flow information:
Cash payment for interest, net of amounts capitalized......... $ 65,475 $ 40,572 $ 24,429
-------------- -------------- --------------
-------------- -------------- --------------
Non-cash transactions:
Acquisition of property by assumption of debt................. $ 121,800 $ 152,228 $ 178,900
-------------- -------------- --------------
-------------- -------------- --------------
Acquisition of property by issuance of OP units............... $ -- $ 600 $ 18,448
-------------- -------------- --------------
-------------- -------------- --------------
The accompanying notes are an integral part of these financial statements.
37
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT 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 68% 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
can be exchanged, subject to certain restrictions, on a one-for-one basis, into
the Company's common stock.
The Company was organized to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. The 32% limited
partnership interest of the Operating Partnership not owned by the Company is
reflected in these financial statements as minority interest. The average total
number of OP Units outstanding in The Operating Partnership (including the OP
Units owned by the Company) was 37,982,000 for the year ended December 31, 1997,
32,934,000 for the year ended December 31, 1996, and 26,930,000 for the year
ended December 31, 1995.
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
investment 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 $5,810 at
December 31, 1997 and $3,783 at December 31, 1996.
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 $3,599 in 1997,
$1,832 in 1996 and $944 in 1995 due to the straight lining of rent adjustment.
Percentage rents are
38
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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,
development 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.
PROPERTY:
Costs related to the acquisition, development, 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:
Tenant improvements..................... initial term of related lease
Buildings and improvements.............. 5-40 years
Equipment and furnishings............... 5-7 years
The Company assesses whether there has been a permanent impairment in the
value of its 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 a permanent impairment loss if the income stream were 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 permanent
impairment has occurred in its net property carrying values at December 31,
1997.
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.......... 2-15 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.
39
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 $1.78 paid during 1997 represented
$0.96 of ordinary income and $0.82 of return of capital and the distributions of
$1.70 per share during 1996 represented $1.14 of ordinary income and $0.56
return of capital. During 1995 the distributions were $1.66 per share of which
$1.00 was ordinary income and $0.66 was return of capital.
Each partner is taxed individually on their 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 financial statement presentation.
ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. The Company does not
expect this pronouncement to materially impact the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supercedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. The new standard becomes effective for the
Company for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company does not expect this pronouncement to materially
change the Company's current reporting and disclosures.
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
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
40
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 party.
EARNINGS PER SHARE ("EPS"):
During 1997, the Company implemented SFAS No. 128. 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, 1997, 1996 and 1995.
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 were not included in the calculation as the
effect of their inclusion would be antidilutive. The OP Units not held by the
Company have not been included in the diluted EPS calculation as there would be
no effect on the per share amounts as earnings allocated to an OP Unit are the
same amount as allocated to a share of common stock. The following table
reconciles the basic and diluted earnings per share calculation:
FOR THE YEARS ENDED
------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
NET PER NET PER NET PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------- ------ ------ ------- ------ ------ ------- ------ -----
(IN THOUSANDS)
BASIC EPS
Income available to common shareholders... $22,046 25,891 $ 0.85 $18,911 20,781 $ 0.91 $11,303 15,482 $0.73
DILUTED EPS
Effect of dilutive securities:
Employee stock options and
restricted stock...................... 162 421 (0.01) -- 386 (0.02) -- 54 --
------- ------ ------ ------- ------ ------ ------- ------ -----
Income available to common shareholders... $22,208 26,312 $ 0.84 $18,911 21,167 $ 0.89 $11,303 15,536 $0.73
------- ------ ------ ------- ------ ------ ------- ------ -----
------- ------ ------ ------- ------ ------ ------- ------ -----
CONCENTRATION OF RISK:
Lakewood Mall generated 10.5% of total shopping center revenues in 1997,
16.0% in 1996 and 22.0% in 1995. Queens Center accounted for 13.8% in 1996 of
total shopping center revenues. Shopping center revenues at Crossroads
Mall-Colorado accounted for 10.6% of total shopping center revenues in 1995.
During 1995 Chesterfield accounted for 12.6% of total Shopping Center revenues.
No other Center generated more than 10% of shopping center revenues during 1997,
1996 or 1995.
41
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Centers derived approximately 89.5% of their total rents for the year
ended December 31, 1997 from Mall and Freestanding Stores. The Limited
represented 7.6% of total minimum rents in place as of December 31, 1997 and no
other retailer represented more than 4.6% of total minimum rents as of December
31, 1997.
MANAGEMENT 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 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 been advised by its independent software vendor that it has
completed its evaluation and testing and has made the necessary changes to the
property management and accounting software utilized by the Company and the
software is in year 2000 compliance. The Company does not believe there will be
any significant accounting impact as a result of the year 2000.
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, 1997 is as follows:
THE OPERATING
PARTNERSHIP'S
JOINT VENTURE OWNERSHIP %
- ------------------------------------------------------------------------------- -------------------
Macerich Northwestern Associates............................................... 50%
Manhattan Village, LLC......................................................... 10%
Panorama City Associates....................................................... 50%
West Acres Development......................................................... 19%
The Operating Partnership also owns the non-voting preferred stock of the
Management Companies and is entitled to receive 95% of the distributable cash
flow. The Company accounts for the management companies and joint ventures using
the equity method of accounting.
On August 19, 1997 Macerich acquired a 10% interest in the joint venture
that acquired Manhattan Village Shopping Center ("Manhattan Village") in
Manhattan Beach, California. The results of that joint venture are included for
the period subsequent to the 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.
42
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVESTMENTS IN JOINT VENTURES AND THE MANAGEMENT COMPANIES: (CONTINUED)
COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Assets:
Properties, net.................................................................... $ 153,856 $ 106,751
Other assets....................................................................... 10,013 13,257
------------ ------------
Total assets................................................................... $ 163,869 $ 120,008
------------ ------------
------------ ------------
Liabilities and partners' capital:
Mortgage notes payable............................................................. $ 84,342 $ 81,925
Other liabilities.................................................................. 6,563 11,116
The Company's capital.............................................................. 7,969 16,429
Outside partners' capital.......................................................... 64,995 10,538
------------ ------------
Total liabilities and partners' capital........................................ $ 163,869 $ 120,008
------------ ------------
------------ ------------
COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
Revenues........................................................................ $ 36,645 $ 31,533 $ 32,270
---------- --------- ---------
Expenses:
Management Company expense.................................................... 4,738 4,293 3,987
Shopping center expenses...................................................... 11,952 9,598 9,293
Interest...................................................................... 6,157 6,409 6,414
Depreciation and amortization................................................. 4,992 4,406 4,485
---------- --------- ---------
Total operating costs......................................................... 27,839 24,706 24,179
---------- --------- ---------
Gain (loss) on sale or write down of assets..................................... (20,307) 581 1,265
---------- --------- ---------
Net income (loss)............................................................. $ (11,501) $ 7,408 $ 9,356
---------- --------- ---------
---------- --------- ---------
Significant accounting policies used by the unconsolidated joint ventures
and the Management Companies are similar to those used by the Company.
Included in mortgage notes payable are amounts due to related parties of
$43,500 for the years ended December 31, 1997, 1996 and 1995. Interest expense
incurred on these borrowings amounted to $2,974 for the years ended December 31,
1997, 1996 and 1995.
Included in the gain (loss) on sale of assets is $20,990 of loss on the sale
and writedown of North Valley Plaza in 1997.
43
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)
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues............................................................. $ 15,152 $ 14,980 $ 15,393
--------- --------- ---------
Expenses:
Management Company expense......................................... 4,328 3,747 3,988
Shopping center expenses........................................... 4,238 3,856 4,042
Interest........................................................... 1,937 2,135 2,098
Depreciation and amortization...................................... 2,312 2,096 2,255
--------- --------- ---------
Total operating costs.............................................. 12,815 11,834 12,383
--------- --------- ---------
Gain (loss) on sale or write down of assets.......................... (10,400) 110 240
--------- --------- ---------
Net income (loss).................................................. $ (8,063) $ 3,256 $ 3,250
--------- --------- ---------
--------- --------- ---------
4. PROPERTY:
Property is summarized as follows:
DECEMBER 31
--------------------
1997 1996
--------- ---------
Land...................................................................... $ 313,050 $ 239,847
Building improvements..................................................... 1,235,459 990,125
Tenant improvements....................................................... 38,097 34,149
Equipment & furnishings................................................... 7,576 4,769
Construction in progress.................................................. 13,247 4,195
--------- ---------
1,607,429 1,273,085
Less, accumulated depreciation............................................ (200,250) (164,417)
--------- ---------
$1,407,179 $1,108,668
--------- ---------
--------- ---------
5. DEFERRED CHARGES AND OTHER ASSETS:
Deferred charges and other assets are summarized as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
Leasing.............................................................. $ 28,101 $ 25,629
Financing............................................................ 14,396 7,891
------------- -------------
42,497 33,520
Less, accumulated amortization....................................... (18,127) (15,434)
------------- -------------
24,370 18,086
Other assets......................................................... 13,529 2,630
------------- -------------
$ 37,899 $ 20,716
------------- -------------
------------- -------------
44
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. MORTGAGE NOTES PAYABLE:
Mortgage notes payable at December 31, 1997 and December 31, 1996 consist of
the following:
CARRYING AMOUNT OF NOTES
----------------------------------------------
1997 1996
---------------------- ----------------------
PROPERTY PLEDGED RELATED RELATED INTEREST MATURITY
AS COLLATERAL OTHER PARTY OTHER PARTY RATE PAYMENT TERMS DATE
- ---------------------------------- ---------- ---------- ---------- ---------- ---------- -------------- -----------
Capitola Mall..................... -- $ 37,675 -- $ 37,976 9.25% 316(d) 2001
Chesterfield Towne Center......... $ 65,708 -- -- -- 9.10% 548(e) 2024
Chesterfield Towne Center......... -- -- $ 59,023 -- 8.75% 475(e) 2024
Chesterfield Towne Center......... -- -- 5,304 -- 9.38% 43(e) 2024
Chesterfield Towne Center......... -- -- 1,922 -- 8.88% 16(e) 2024
Chesterfield Towne Center......... 3,359 -- 3,444 -- 8.54% 28(d) 1999
Citadel........................... 75,600 -- -- -- 7.20% 544(d) 2008
Crossroads Mall(a)................ -- 35,638 -- 35,968 7.08% 244(d) 2010
Fresno Fashion Fair............... 38,000 -- 38,000 -- 8.40% interest only 2001
Greeley Mall...................... 17,815 -- 18,514 -- 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
Parklane Mall..................... -- 20,000 -- 20,000 6.75% interest only 2001
Queens Center..................... 65,100 -- 65,100 -- (f) interest only 1999
Rimrock Mall...................... 31,517 -- 31,994 -- 7.70% 244(d) 2003
South Towne Center................ 65,000 -- -- -- (g) interest only 2008
Valley View Center................ 51,000 -- 60,000 -- 7.89%(h) interest only 2006
Villa Marina Marketplace.......... 58,000 -- -- -- 7.23% interest only 2006
Vintage Faire Mall(i)............. 55,433 -- 56,280 -- 7.65% 427(d) 2003
---------- ---------- ---------- ----------
Total............................. $ 771,246 $ 135,313 $ 584,295 $ 135,944
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average interest rate at
December 31, 1997............... 7.42%
----------
----------
Weighted average interest rate at
December 31, 1996............... 7.45%
----------
----------
- ------------------------
(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, 1997
and December 31, 1996 the unamortized discount was $430 and $463,
respectively.
(b) This loan is cross collateralized by Green Tree Mall, Crossroads
Mall--Oklahoma and Salisbury.
(c) On August 15, 1995 the Company issued $127,000 of collateralized floating
rate notes (the "Notes"). The Notes bear interest at an average fixed rate
of 7.20% and mature in July 2005. The Notes require
45
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. MORTGAGE NOTES PAYABLE: (CONTINUED)
the Company to deposit all cash flow from the property operations with a
trustee to meet its obliga-tions 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, 1997 and 1996.
(d) This represents the monthly payment of principal and interest.
(e) This amount represents the monthly payment of principal and interest. In
addition, contingent interest, as defined in the loan agreement, may be due
to the extent that 35% of the amount by which the property's gross receipts
(as defined in the loan agreement) exceeds a base amount specified therein.
Contingent interest expense recognized by the Company was $98 for the year
ended December 31, 1997 and $399 for the year ended December 31, 1996. As of
January 1, 1997 all these loans were consolidated into a new loan of $66,200
at an interest rate of 9.1%.
(f) This loan bears interest at LIBOR plus 0.45%. There is an interest rate
protection agreement in place on the first $10,200 of this debt with a LIBOR
ceiling of 5.88% through maturity with the remaining principal having an
interest rate cap with a LIBOR ceiling at 7.07% through 1997 and 7.7%
thereafter.
(g) At December 31, 1997 this loan had an interest rate of LIBOR plus 1%, which
totalled 6.9%. In February 1998, this loan was converted into a fixed rate
loan bearing interest at 6.622% maturing in 2008.
(h) On April 16, 1997 the Company converted this loan into a fixed rate 10 year
loan bearing interest at 7.89% and maturing in October 2006.
(i) Included in cash and cash equivalents is $3,030 at December 31, 1997 and
1996, of cash restricted under the terms of this loan agreement.
Certain mortgage loan agreements contain a prepayment penalty provision for
the early extinguishment of the debt.
Total interest expense capitalized during 1997, 1996 and 1995 was $2,224,
$461, and $546, respectively.
The market value of mortgage notes payable at December 31, 1997 and December
31, 1996 is estimated to be approximately $1,013,000 and $733,000,
respectively, based on current interest rates for comparable loans.
46
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. MORTGAGE NOTES PAYABLE: (CONTINUED)
The above debt matures as follows:
YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
1998.............................................................................. $ 4,671
1999.............................................................................. 73,419
2000.............................................................................. 5,468
2001.............................................................................. 142,074
2002.............................................................................. 5,934
2003 and beyond................................................................... 674,993
----------
$ 906,559
----------
----------
7. BANK NOTES PAYABLE:
At December 31, 1997, the Company had $55,000 outstanding under its $60,000
unsecured credit facility. The notes bear interest at LIBOR plus 1.325%. As of
February 26, 1998, the Company increased this credit facility to $150,000 with a
maturity of February 2000.
8. CONVERTIBLE DEBENTURES:
On June 27, 1997, the Company issued and sold $150,000 of convertible
subordinated debentures (the "Debentures") due 2002. An additional $11,400 of
Debentures were sold in July 1997. The Debentures, which were sold at par, bear
interest at 7.25% annually (payable semi-annually) and are convertible at any
time, on or after 60 days, from the date of issue at a conversion price of
$31.125 per share. The Debentures mature on December 15, 2002 and are callable
by the Company after June 15, 2002 at par plus accrued interest.
9. RELATED-PARTY TRANSACTIONS:
The Company engaged the Management Companies to manage the operations of its
properties and certain unconsolidated joint ventures. During 1997, 1996 and 1995
management fees of $2,219, $1,788 and $1,456, 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 $10,287, $10,168
and $8,226 for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in accounts payables and accrued expense is interest payable to these
partners of $518, $516 and $537 at December 31, 1997, 1996, and 1995
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 off in February 1998.
In 1997 certain executive officers, under the terms of the employee
incentive plan, received loans from the Company totaling $5,500. These loans are
full recourse to the executives. $5,000 of the loans bear interest at 7%, are
due in 2007 and are secured by Company Stock owned by the executives. The
remaining
47
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. RELATED-PARTY TRANSACTIONS: (CONTINUED)
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, 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.
10. FUTURE RENTAL REVENUES:
Under existing noncancellable operating lease agreements, tenants are
committed to pay the following minimum rentals to the Company:
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------
1998.................................................................. $ 142,023
1999.................................................................. 132,589
2000.................................................................. 119,643
2001.................................................................. 103,807
2002.................................................................. 92,896
2003 and beyond....................................................... 415,539
------------
$ 1,006,497
------------
------------
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 percent of base rent income, as defined.
Ground rent expenses were $817 (including contingent rent of $0) in 1997, $704
(including contingent rent of $0) in 1996 and $1,944 (including contingent rents
of $1,168) in 1995.
Minimum future rental payments required under the leases are as follows:
YEARS ENDING
DECEMBER 31,
- -------------------------------------------------------------------------
1998..................................................................... $ 412
1999..................................................................... 456
2000..................................................................... 456
2001..................................................................... 449
2002..................................................................... 449
2003 and beyond.......................................................... 20,359
---------
$ 22,581
---------
---------
Certain leases also require the lessee to pay real estate taxes, insurance
and certain other operating costs applicable to the leased property.
48
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Perchloroethylene (PCE) has been detected in soil and groundwater in the
vicinity of a dry cleaning establishment at North Valley Plaza, which was sold
to a third party on December 18, 1997. The California Department of Toxic
Substance Control (DTSC) advised the Company in 1995 that very low levels of
Dichlorethylene (1,2,DCE), a degradation byproduct of PCE, have been detected in
a water well located 1/4 mile west from the dry cleaners, and that the dry
cleaning facility may have contributed to the introduction of 1,2 DCE into the
water well. According to DTSC, the maximum contaminant level (MCL) for 1,2DCE
which is permitted in drinking water is 6 parts per billion (ppb). The 1,2DCE
which was detected in the water well at 1.2 ppb, is below the MCL. The Company
has retained an environmental consultant and has initiated extensive testing of
the site. Remediation began in October 1997. The joint venture that owned the
property agreed (between itself and the buyer) that it would be responsible for
continuing to pursue the investigation and remediation of impacted soil and
groundwater resulting from releases of PCE from the shopping center's former dry
cleaner. $124 and $155 has already been incurred by the Company for remediation,
and professional and legal fees in 1997 and 1996, respectively. An additional
$561 remains reserved by the Company as of December 31, 1997. The Company has
initiated cost recovery actions and intends to continue to look to responsible
parties for recovery.
Toluene, a petroleum constituent, was detected in one of three groundwater
dewatering system holding tanks at Queens Center. Although the source of the
tolulene has not been fully defined, the Company suspects the source to be
either an adjacent automotive service station and/or a previous automotive
service station, which operated on site prior to development of the mall.
Toluene was detected at levels of 410 and 160 parts per billion (ppb) in samples
taken from the tank in October, 1995 and February 1996, respectively. Additional
samples were taken in May and December of 1996, with results of .63 ppb and
"non-detect" for the May sampling event and 16.2 ppb and 25.2 ppb for the
December sampling event. The maximum containment level (MCL) for toluene in
drinking water is 1000 ppb. Although the Company believes that no remediation
will be required, it set up a $150 reserve in 1996 to cover professional fees
and testing costs, which was reduced by $18 of costs incurred in 1997. The
Company intends to look to the responsible parties and insurers if remediation
is required.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has been
detected in structural fireproofing throughout much of the Mall. Recent 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 are
well within OSHA's permissible exposure limit (PEL) of .1 fcc. The accounting
for this acquisition included a reserve of $3,300 to cover future removal of
this asbestos, as necessary. The Company incurred $170 for abatement of this
asbestos in 1997.
Dry cleaning chemicals including PCE were detected in soil and groundwater
in the vicinity of a former dry cleaning establishment at Huntington Center. The
release has been reported to the local government authorities. The Company has
retained an environmental consultant and is conducting additional site
assessment activities to attempt to determine the extent to which groundwater
has been impacted. The Company estimates, based on the data currently available,
that costs for assessment, remediation and legal services will not exceed $500.
Consequently, at the time of the acquisition, the Company established a $500
reserve to cover professional and legal fees. $9 and $6 has been incurred for
remediation in 1997 and 1996, respectively. The Company intends to look to
responsible parties and insurers for cost recovery.
49
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $400, $350 and $348 to the plan in 1997, 1996 and
1995, respectively.
13. STOCK INCENTIVE 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 grant date. The plan reserved 52,500 shares, all of which were granted
as of December 31, 1997.
Also, under the employees stock incentive plan 131,196 shares of restricted
stock have been issued 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 the grant date and is amortized over the vesting period on a
straight line basis. As of December 31, 1997 and 1996, 8,248 and 0 shares,
respectively, of restricted stock had vested. A total of 89,958 shares at a
weighted average price of $27.46 were issued in 1997 and 41,238 shares were
issued during 1996, at a weighted average price of $20.70, 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 other common stock and is considered issued when vested.
Compensation expense for restricted stock was $239 in 1997 and $0 for the years
ended December 31, 1996 and 1995.
50
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK INCENTIVE PLAN: (CONTINUED)
An additional 691,803 and 412,762 shares were reserved and were available
for issuance under the stock incentive plan at December 31, 1997 and 1996,
respectively. The plan allows for granting options or restricted stock at market
value.
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) -- -- --
---------- --------------- --------- ---------------
Shares outstanding at December 31,
1995............................... 1,254,500 $ 19.00-$20.25 22,500 $ 19.00-$21.38 399,784 $ 19.02
--------------- --------------- ------------ ------
------------ ------
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........................... 349,109 $ 26.50-$26.88 25,000 $ 28.50
Exercised......................... (253,552) $ 19.00 -- --
Forfeited......................... (8,000) -- -- --
---------- --------------- --------- ---------------
Shares outstanding at December 31,
1997............................... 1,599,891 $ 19.00-$26.88 52,500 $ 19.00-$28.50 1,230,227 $ 20.58
---------- --------------- --------- --------------- ------------ ------
---------- --------------- --------- --------------- ------------ ------
The weighted average exercise price for options granted in 1995 is $20.25,
in 1996 is $21.65 and in 1997 is $27.06.
51
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK INCENTIVE PLAN: (CONTINUED)
The weighted average remaining contractual life for options outstanding at
December 31, 1997 is 6.25 years and the weighted average remaining contractual
life for options exercisable at December 31, 1997 is 6.25 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 $108 or $0.00 per
share for the year ended December 31, 1997 and $56 or $0.00 per share for the
year ended December 31, 1996.
The weighted average fair value of options granted during 1997 and 1996 are
$2.51 and $1.89, respectively. The fair value of each option grant issued in
1997 and 1996 is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: (a)
dividend yield of 7.0% in 1997 and 7.5% in 1996, (b) expected volatility of the
Company's stock of 14.9% in 1997 and 17.6% in 1996, (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 1997 and 1996, respectively.
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 $154 during 1997, $125 during
1996 and $104 in 1995 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:
On March 16, 1994, concurrent with the IPO, the Company acquired Crossroads
Mall--Oklahoma ("Crossroads--OK"). Crossroads--OK is a 1,112,470 million square
foot super regional mall in Oklahoma City, Oklahoma. The purchase price was
$51,500 and was paid in cash.
On July 21, 1994, the Company acquired Chesterfield Towne Center
("Chesterfield") in Richmond, Virginia. Chesterfield is a 817,290 square foot
regional mall. The purchase price of $84,500 was paid with approximately $13,100
in cash, $3,900 in OP Units of the Operating Partnership and assumption of the
existing mortgage of approximately $67,500.
On August 15, 1995 the Company acquired The Centre at Salisbury
("Salisbury"), an 883,791 square foot super regional mall. The total purchase
price was $78,000, and was comprised of $55,600 of cash, $21,000 of debt and
approximately $1,400 in OP Units.
Capitola Mall ("Capitola") was acquired on December 21, 1995. Capitola is a
585,340 square foot regional mall. The purchase price was $57,500 and was
comprised of the issuance of OP Units valued at
52
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. ACQUISITIONS: (CONTINUED)
$12,100, the assumption of $38,300 of mortgage indebtedness, and cash of $2,100.
The remaining $5,000 of consideration will be paid in OP Units in five years.
Queens Center ("Queens"), a 625,677 square foot regional mall, was acquired
on December 28, 1995. The total purchase price was $108,000 which consisted of
assumption of debt of $66,000 and $42,000 of cash.
Villa Marina Marketplace ("Villa Marina") was acquired on January 25, 1996.
Villa Marina is a 448,517 square foot community center/entertainment complex
located in Marina del Rey, California. The purchase price was $80,000,
consisting of $57,600 of cash and $22,400 of assumption of mortgage
indebtedness.
Valley View Center is a super regional mall in Dallas, Texas which the
Company acquired on October 21, 1996. Valley View Mall contains 1,519,453 square
feet and the purchase price was $87,500.
Rimrock Mall, located in Billings, Montana, and Vintage Faire Mall, located
in Modesto, California were purchased simultaneously on November 27, 1996. The
combined purchase price was $118,200. Vintage Faire Mall is a super regional
mall with 1,051,458 square feet and Rimrock Mall is a regional mall consisting
of 581,688 square feet.
Buenaventura Mall, Fresno Fashion Fair and Huntington Center were purchased
on December 18, 1996 for a combined price of $128,900. Buenaventura Mall,
located in Ventura, California, is an 801,277 square foot regional mall, Fresno
Fashion Fair, located in Fresno, California, is a super regional mall containing
881,394 square feet and Huntington Center, located in Huntington Beach,
California, consists of 839,901 square feet.
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.
53
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On February 27, 1998, the Company, through a recently formed 50/50 joint
venture with an affiliate of Simon DeBartolo 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 $974,500, which included $485,000 of assumed debt.
16. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma financial information combines the
consolidated results of operations of the Company for 1997 and 1996 as if the
1997 Acquisitions had occurred on January 1, 1996, 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,
----------------------
1997 1996
---------- ----------
Revenues.............................................................. $ 242,084 $ 189,358
Income before minority interest and extraordinary items............... 30,984 27,837
Income before extraordinary items..................................... 20,935 17,730
Net income............................................................ 20,558 17,415
Per share income before extraordinary items........................... $ 0.80 $ 0.85
Net income per share--basic........................................... $ 0.79 $ 0.84
Weighted average number of common shares outstanding-- basic.......... 25,891 20,781
Per share income before extraordinary items........................... $ 0.79 $ 0.83
Net income per share--diluted......................................... $ 0.78 $ 0.82
Weighted average number of common shares outstanding-- diluted........ 26,312 21,167
54
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of periodic results of operations for 1997 and
1996:
1997 QUARTER ENDED 1996 QUARTER ENDED
------------------------------------------ ------------------------------------------
DEC 31 SEPT 30 JUNE 30 MAR 31 DEC 31 SEPT 30 JUNE 30 MAR 31
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues.............................. $ 61,529 $ 57,032 $ 52,350 $ 50,303 $ 43,924 $ 37,749 $ 38,093 $ 35,293
Income before minority interest and
extraordinary items................. 10,626 2,792 9,839 9,911 8,417 7,479 7,240 7,065
Income before extraordinary items..... 7,253 2,035 6,385 6,751 5,539 4,659 4,502 4,401
Net income............................ 7,253 1,870 6,172 6,751 5,539 4,659 4,312 4,401
Income before extraordinary items per
share--basic........................ $ 0.28 $ 0.07 $ 0.25 $ 0.26 $ 0.24 $ 0.23 $ 0.22 $ 0.22
Net income per share--basic........... $ 0.28 $ 0.07 $ 0.24 $ 0.26 $ 0.24 $ 0.23 $ 0.21 $ 0.22
18. SUBSEQUENT EVENTS:
On January 30, 1998 a $0.46 per share dividend was declared, payable to
stockholders of record as of February 9, 1998 and paid on March 5, 1998.
On February 27, 1998, the Company, through a 50/50 joint venture, acquired a
portfolio of 12 regional malls. The total purchase price was $974,500 including
the assumption of $485,000 in debt. The Company funded its half of the remaining
purchase price by issuing 3,627,131 shares of convertible preferred stock for
proceeds totaling $100,000 in a private placement. The preferred stock can be
converted on a one for one basis into common stock and will pay a dividend equal
to the greater of $0.46 per share per quarter or the dividend then payable on a
share of common stock. The Company also issued 2,879,134 shares of common stock
($79,600 of total proceeds) from the Company's shelf registration, at an average
price of $27.65, to two unit trusts. The balance of the purchase price was
funded from the Company's $150,000 line of credit.
55
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
GROSS AMOUNT AT WHICH CARRIED AT CLOSE
INITIAL COST TO COMPANY OF PERIOD
--------------------------------------- COST ---------------------------------------
EQUIPMENT CAPITALIZED FURNITURE,
BUILDING AND AND SUBSEQUENT TO BUILDING AND FIXTURES AND
LAND IMPROVEMENTS FURNISHINGS ACQUISITION LAND IMPROVEMENTS EQUIPMENT
--------- ------------- ------------- ------------- --------- ------------- -------------
Shopping Centers
Bristol Shopping Center....... $ 0 $ 11,051 $ 0 $ 1,856 $ 132 $ 12,773 $ 0
Boulder Plaza................. 2,650 7,950 0 2,154 2,919 9,835 0
Buenaventura Mall............. 8,697 8,697 0 1,738 8,697 8,793 6
Capitola Mall................. 11,312 46,689 0 914 11,309 47,577 29
Chesterfield Towne Center..... 18,517 72,936 2 5,798 18,517 77,076 1,620
Citadel, The.................. 21,600 86,711 0 0 21,600 86,711 0
County East Mall.............. 2,633 15,131 716 13,292 4,099 26,833 793
Crossroads Mall--Boulder...... 0 37,528 64 29,253 21,616 41,964 115
Crossroads Mall--Oklahoma..... 10,279 43,458 291 5,914 10,279 45,944 339
Fresno Fashion Fair........... 17,966 72,194 0 (1,173) 17,966 70,986 33
Great Falls Marketplace....... 2,960 11,840 0 0 2,960 11,840 0
Greeley Mall.................. 5,600 12,617 13 7,561 5,600 20,100 91
Green Tree Mall............... 4,947 14,893 332 22,813 4,947 37,599 439
Holiday Village Mall.......... 2,311 13,488 138 22,025 3,491 34,268 203
Huntington Center............. 11,868 11,868 0 1,449 11,868 11,965 4
Lakewood Mall................. 12,502 31,158 117 92,888 24,913 109,456 638
Northgate Mall................ 7,144 29,805 841 24,051 8,400 52,508 929
Parklane Mall................. 1,377 11,775 173 16,175 2,409 25,206 395
Queens Center................. 21,460 86,631 8 1,670 21,454 87,390 629
Rimrock Mall.................. 8,737 35,652 0 929 8,737 36,498 77
Salisbury, The Centre at...... 15,290 63,474 31 925 15,284 63,967 469
South Towne Center............ 19,600 78,954 0 3,030 19,600 81,961 23
Stonewood Mall................ 18,400 73,933 0 127 18,400 74,046 14
Valley View Center............ 17,100 68,687 0 3,368 17,100 71,261 616
Villa Marina Marketplace...... 15,852 65,441 0 400 15,852 65,811 21
Vintage Faire Mall............ 14,902 60,532 0 751 14,901 61,188 93
--------- ------------- ------ ------------- --------- ------------- ------
$ 273,703 $ 1,073,092 $ 2,726 $ 257,908 $ 313,050 $ 1,273,556 $ 7,576
--------- ------------- ------ ------------- --------- ------------- ------
--------- ------------- ------ ------------- --------- ------------- ------
TOTAL COST
NET OF
CONSTRUCTION ACCUMULATED ACCUMULATED
IN PROGRESS TOTAL DEPRECIATION DEPRECIATION
------------- --------- ------------- ------------
Shopping Centers
Bristol Shopping Center....... $ 2 $ 12,907 $ 5,140 $ 7,767
Boulder Plaza................. 0 12,754 2,542 10,212
Buenaventura Mall............. 1,635 19,131 243 18,888
Capitola Mall................. 0 58,915 2,514 56,401
Chesterfield Towne Center..... 40 97,253 8,594 88,659
Citadel, The.................. 0 108,311 85 108,226
County East Mall.............. 47 31,772 9,452 22,320
Crossroads Mall--Boulder...... 3,150 66,845 22,224 44,621
Crossroads Mall--Oklahoma..... 3,380 59,942 5,695 54,247
Fresno Fashion Fair........... 2 88,987 1,927 87,060
Great Falls Marketplace....... 0 14,800 1 14,799
Greeley Mall.................. 0 25,791 9,022 16,769
Green Tree Mall............... 0 42,985 19,299 23,686
Holiday Village Mall.......... 0 37,962 19,161 18,801
Huntington Center............. 1,347 25,184 327 24,857
Lakewood Mall................. 1,658 136,665 41,447 95,218
Northgate Mall................ 4 61,841 17,756 44,085
Parklane Mall................. 1,490 29,500 15,539 13,961
Queens Center................. 296 109,769 4,555 105,214
Rimrock Mall.................. 6 45,318 1,053 44,265
Salisbury, The Centre at...... 0 79,720 3,987 75,733
South Towne Center............ 0 101,584 1,640 99,944
Stonewood Mall................ 0 92,460 769 91,691
Valley View Center............ 178 89,155 2,238 86,917
Villa Marina Marketplace...... 9 81,693 3,294 78,399
Vintage Faire Mall............ 3 76,185 1,746 74,439
------------- --------- ------------- ------------
$ 13,247 $1,607,429 $ 200,250 $1,407,179
------------- --------- ------------- ------------
------------- --------- ------------- ------------
56
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
Depreciation and amortization of the Macerich Company's investment in
buildings and improvements reflected in the statements of income are calculated
over the estimated useful lives of the asset as follows:
Buildings and Improvements.............................. 5-40 years
life of related
Tenant Improvements..................................... lease
Equipment and Furnishings............................... 5-7 years
The changes in total real estate assets for the three years ended December
31, 1997 are as follows:
1995 1996 1997
--------- ---------- -----------
Balance, beginning of year.............................. 554,788 833,998 1,273,085
Additions............................................... 279,210 439,087 334,344
Disposals and retirements............................... 0 0 0
--------- ---------- -----------
Balance, end of year.................................... 833,998 1,273,085 1,607,429
--------- ---------- -----------
--------- ---------- -----------
The changes in accumulated depreciation and amortization for the three years
ended December 31, 1997 are as follows:
1995 1996 1997
--------- --------- ---------
Balance, beginning of year................................... 119,466 139,098 164,417
Additions.................................................... 19,632 25,319 35,833
Disposals and retirements.................................... 0 0 0
--------- --------- ---------
Balance, end of year......................................... 139,098 164,417 200,250
--------- --------- ---------
--------- --------- ---------
57
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 And March 26, 1998
Arthur M. Coppola Director
/s/ MACE SIEGEL
- ------------------------------ Chairman of the Board March 26, 1998
Mace Siegel
/s/ DANA K. ANDERSON
- ------------------------------ Vice Chairman of the Board March 26, 1998
Dana K. Anderson
/s/ EDWARD C. COPPOLA
- ------------------------------ Executive Vice President March 26, 1998
Edward C. Coppola and Director
/s/ JAMES COWNIE
- ------------------------------ Director March 26, 1998
James Cownie
/s/ THEODORE HOCHSTIM
- ------------------------------ Director March 26, 1998
Theodore Hochstim
/s/ FREDERICK HUBBELL
- ------------------------------ Director March 26, 1998
Frederick Hubbell
/s/ STANLEY MOORE
- ------------------------------ Director March 26, 1998
Stanley Moore
/s/ WILLIAM SEXTON
- ------------------------------ Director March 26, 1998
William Sexton
Senior Vice President,
/s/ THOMAS E. O'HERN Treasurer and Chief
- ------------------------------ Financial and Accounting March 26, 1998
Thomas E. O'Hern Officer
58
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
3.2* Bylaws of the Company
4.1** Form of Common Stock Certificate
4.2 Form of Preferred Stock Certificate
4.3***** Indenture for Convertible Subordinated Debentures dated June 27, 1997
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 Partnership 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
10.2*** 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*** Registration Rights Agreement, dated as of March 16, 1994, between the Company
and The Northwestern Mutual Life Insurance Company
10.10*** 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
10.11*** Registration Rights Agreement, dated as of March 16, 1994, among the Company,
Richard M. Cohen and MRII Associates
10.12***** Registration Rights Agreement dated as of June 27, 1997
10.13 Registration Rights Agreement dated as of February 25, 1998
10.14*** Incidental Registration Rights Agreement, dated as of March 16, 1994
10.15 Incidental Registration Rights Agreement dated as of July 21, 1994
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- -------------- --------------------------------------------------------------------------------- -----------------
10.16 Incidental Registration Rights Agreement dated as of August 15, 1995
10.17 Incidental Registration Rights Agreement dated as of December 21, 1995
10.17.1 List of Incidental/Demand Registration Rights Agreements, Election Forms,
Accredited/Non-Accredited Investors Certificates, and Investor Certificates
10.18*** Indemnification Agreement, dated as of March 16, 1994, between the Company and
Mace Siegel
10.18.1*** List of omitted Indemnification Agreements
10.19* Partnership Agreement for Macerich Northwestern Associates, dated as of January
17, 1985, between Macerich Walnut Creek Associates and The Northwestern Mutual
Life Insurance Company
10.20*** First Amendment to Macerich Northwestern Associates Partnership Agreement between
Operating Partnership and The Northwestern Mutual Life Insurance Company
10.21* 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
10.22 Secured Full Recourse Promissory Note dated November 17, 1997 Due November 16,
2007 made by Edward C. Coppola to the order of the Company
10.23 List of omitted Secured Full Recourse Notes
10.24 Stock Pledge Agreement dated as of November 17, 1997 made by Edward C. Coppola
for the benefit of the Company
10.25 List of omitted Stock Pledge Agreements
10.26 Promissory Note dated as of May 2, 1997 made by David S. Contis to the order of
Macerich Management Company
10.27****** Purchase and Sale Agreement between The Equitable Life Assurance Society of the
United States and S.M. Portfolio Partners
10.28 Partnership Agreement of S.M. Portfolio Ltd. Partnership
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.)
- ------------------------
* 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 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 June 20, 1997, 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.