Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on
the Form 10-Q of The Macerich Company (the Company) contains or
incorporates statements that constitute forward-looking statements. Those
statements appear in a number of places in this Form 10-Q and include
statements regarding, among other matters, the Companys growth, acquisition,
redevelopment and development opportunities, the Companys acquisition and
other strategies, regulatory matters pertaining to compliance with governmental
regulations and other factors affecting the Companys financial condition or
results of operations. Words such as expects, anticipates, intends, projects,
predicts, plans, believes, seeks, estimates, and should and
variations of these words and similar expressions, are used in many cases to
identify these forward-looking statements. Stockholders are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company or industry to vary materially from
the Companys future results, performance or achievements, or those of the
industry, expressed or implied in such forward-looking statements. Such factors
include the matters described herein and in the matters described under the
caption Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2006, which matters are incorporated herein by
reference. The Company will not update any forward-looking information to
reflect actual results or changes in the factors affecting the forward-looking
information.
Managements
Overview and Summary
The Company is involved in the acquisition, ownership,
development, 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). As of September 30, 2007, the Operating Partnership owned
or had an ownership interest in 73 regional shopping centers and 18 community
shopping centers aggregating approximately 78 million square feet of gross
leasable area. These 91 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
Companys Management Companies.
The following discussion
is based primarily on the consolidated financial statements of the Company for
the three and nine months ended September 30, 2007 and 2006. This
information should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
Acquisitions and
dispositions:
The financial statements reflect the following acquisitions,
dispositions and changes in ownership subsequent to the occurrence of each
transaction.
On February 1, 2006, the Company acquired Valley
River Center, an 835,694 square foot super-regional mall in Eugene,
Oregon. The total purchase price was $187.5 million and concurrent with the
acquisition, the Company placed a $100.0 million ten-year loan on the property.
The balance of the purchase price was funded by cash and borrowings under the
Companys line of credit.
On June 9, 2006, the Company sold Scottsdale/101,
a 564,000 square foot center in Phoenix, Arizona. The sale price was $117.6
million from which $56.0 million was used to payoff the mortgage on the
property. The Companys share of the realized gain was $25.8 million.
On July 13, 2006, the Company sold Park Lane
Mall, a 370,000 square foot center in Reno, Nevada, for $20 million resulting
in a gain of $5.9 million.
32
On July 26, 2006, the Company purchased 11
department stores located in 10 of its Centers from Federated Department Stores, Inc.
(Federated) for approximately $100.0 million. The purchase price consisted of
a $93.0 million cash payment at closing and a $7.0 million cash payment on March 29,
2007 in connection with a commitment by Federated to perform development work
at certain Company properties. The Companys share of the purchase price was
$81.0 million and was funded from the proceeds of sales of Park Lane Mall,
Greeley Mall, Holiday Village and Great Falls Marketplace, and from borrowings
under the Companys line of credit. The balance of the purchase price was paid
by the Companys joint venture partners where four of the eleven stores are
located.
On July 27, 2006, the Company sold Holiday
Village, a 498,000 square foot center in Great Falls, Montana and Greeley Mall,
a 564,000 square foot center in Greeley, Colorado, in a combined sale for $86.8
million, resulting in a gain of $28.7 million.
On August 11, 2006, the Company sold Great Falls
Marketplace, a 215,000 square foot community center in Great Falls, Montana,
for $27.5 million resulting in a gain of $11.8 million.
On December 1, 2006, the Company acquired
Deptford Mall, a two-level 1.0 million square foot super-regional mall in
Deptford, New Jersey. The total purchase price of $240.1 million was funded by
cash and borrowings under the Companys line of credit. On December 7,
2006, the Company placed a $100.0 million six-year loan bearing interest at a
fixed rate of 5.44% on the property. On May 23, 2007, the Company borrowed
an additional $72.5 million under the loan agreement.
On December 29, 2006, the Company sold Citadel
Mall, a 1,095,000 square foot center in Colorado Springs, Colorado, Crossroads
Mall, a 1,268,000 square foot center in Oklahoma City, Oklahoma and Northwest
Arkansas Mall, a 820,000 square foot center in Fayetteville, Arkansas, in a
combined sale for $373.8 million, resulting in a gain of $132.7 million. The
net proceeds were used to pay down the Companys line of credit and pay off the
Companys $75.0 million loan on Paradise Valley Mall.
On September 5, 2007, the Company purchased the
50% outside ownership interest in Hilton Village, a 97,000 square foot
specialty center in Scottsdale, Arizona, for $13.5 million which was funded by
cash, borrowings under the Companys line of credit and the assumption of a
mortgage note payable.
Deptford Mall is referred
herein as the 2006 Acquisition Center for the purposes of comparing the
results for the three months ended September 30, 2007 to the three months
ended September 30, 2006. Valley River Center and Deptford Mall are
referred to herein as the 2006 Acquisition Centers for the purposes of
comparing the results of the nine months ended September 30, 2007 to the
nine months ended September 30, 2006.
Redevelopment:
The grand opening of the first phase of Twenty Ninth
Street, an 817,085 square foot shopping district in Boulder, Colorado, took
place on October 13, 2006. The balance of the project was substantially
completed in the Summer of 2007.
On November 1, 2006, the Company received Phoenix
City Council approval to add up to five mixed-use towers of up to 165 feet at
Biltmore Fashion Park. Biltmore Fashion Park is an established luxury
destination for first-to-market, high-end and luxury tenants in the
metropolitan Phoenix market. The mixed-use towers are planned to be built over
time based upon demand.
On January 22, 2007, the Fairfax County Board of
Supervisors approved plans for a transit-oriented development at Tysons Corner
Center in McLean, Virginia. The expansion will add 3.5 million square feet of
mixed-use space to the existing 2.2 million square foot regional shopping
center. The project is planned to be built in phases over the next 10 years
based on market demand and the expansion of the areas light rail system. Completion
of the entitlement process for Phase I, totaling roughly 1.4 million square
feet, is
33
anticipated for the first
quarter of 2008. The first phase of the project is anticipated to begin
development in late 2009.
In March 2007, the Company submitted its
entitlement requests to redevelop Santa Monica Place, a 540,000 square foot
shopping center in Santa Monica, California. In 2006, the Company acquired one
of the two anchor spaces at Santa Monica Place as a result of its Federated
acquisition. The redevelopment is estimated to be completed in late 2009.
The first phase of SanTan Village in Gilbert, Arizona,
opened on October 26, 2007. The 1.2 million square foot open-air super
regional shopping center opened with over 90% of the retail space committed with
Dillards and more than 85 specialty retailers joining Harkins Theatres, which
opened in March 2007. Approximately 100 retailers are expected to be open in
2007, with the balance of the project opening in phases throughout 2008. Future
phases include Dicks Sporting Goods, Best Buy, Barnes & Noble and up
to 13 restaurants.
The first phase of The Promenade at Casa Grande, a 1
million square foot, 130 acre department store anchored hybrid lifestyle
center, will open November 16, 2007 in fast-growing Pinal County, Arizona.
Ninety percent committed, the first phase of the project will open with
approximately 550,000 square feet of mini-majors, including Dillards, Target,
JCPenney, Bed, Bath & Beyond, Cost Plus World Market, Fashion Bug, Olive
Garden, Mimis Café and Sports Authority. The projects second phase,
complementary small shops and restaurants, is expected to open in Spring 2008.
The Promenade at Casa Grande is 51% owned by the Company.
Flagstaff Malls 435,000 square foot lifestyle
expansion began opening in phases on October 19, 2007. Phase I of The
Marketplace at Flagstaff Mall delivered approximately 240,000 square feet of
new retail space including Best Buy, Cost Plus World Market, Home Depot, Linens
n Things, Marshalls, Old Navy, Petco and Shoe Pavilion. Phase II, which will
consist of village shops, an entertainment plaza and pad space, is expected to
be complete in 2009-2010.
On November 8, 2007, Freehold Raceway Mall will open
the first phase of a combined expansion and renovation project that will add
96,000 square feet of new retail and restaurant uses to this high-performing
regional center in New Jersey. The expansion, which is 85% committed, will add
nine new-to-market additions including: Borders, The Cheesecake
Factory, P.F. Changs, Jared The Gallaria of Jewelry, The Territory Ahead, Ann
Taylor, Chicos, Coldwater Creek and White House/Black Market. The balance of
the project is expected to open throughout 2008.
Scottsdale Fashion Square, the 2 million square foot
luxury flagship, is undergoing a $130 million redevelopment and expansion. Phase
I of the redevelopment and expansion began in September 2007 with
demolition of the vacant anchor space acquired as a result of the Federated-May merger
and an adjacent parking structure. A 60,000 square foot Barneys New York, the
high-end retailers first Arizona location, will anchor an additional 100,000
square feet of up to 30 new luxury shops, which is planned to open Fall 2009 in
an urban setting on Scottsdale Road. New first-to-market deals recently
announced include Bottega Veneta, Grand Lux Café, Salvatore Ferragamo, CH
Carolina Herrera, A|X Armani Exchange and Michael Kors.
Construction continues on the combined redevelopment,
expansion and interior renovation of The Oaks, an upscale 1.1 million square
foot super-regional shopping center in Californias affluent Thousand Oaks. The
project is expected to be completed in Fall 2008. The markets first Nordstrom
department store is under construction.
The Company completed the site plan approval process
for the 106 acre, 1 million square foot regional shopping center at the core of
Estrella Falls on October 22, 2007. Infrastructure development for the 330 acre
mixed-use development is underway and the projects multi-phased opening is
expected to
34
begin Fall 2008 with the
adjacent 500,000 square foot power center that is currently under construction.
The mall is projected to open in phases beginning in 2009.
The Redevelopment Centers
include Twenty Ninth Street, The Oaks, Santa Monica Place and Westside Pavilion
Adjacent.
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 using an annual multiple of increases in
the Consumer Price Index (CPI). In addition, about 6%-13% of the leases
expire each year, which enables the Company to replace existing leases with new
leases at higher base rents if the rents of the existing leases are below the
then existing market rate. Additionally, historically the majority of the
leases required the tenants to pay their pro rata share of operating expenses.
In January 2005, the Company began entering into leases that require
tenants to pay a stated amount for operating expenses, generally excluding
property taxes, regardless of the expenses actually incurred at any Center.
This change shifts the burden of cost control to the Company.
Seasonality:
The shopping center industry
is seasonal in nature, particularly in the fourth quarter during the holiday
season when retailer occupancy and retail sales are typically at their highest
levels. In addition, shopping malls achieve a substantial portion of their
specialty (temporary retailer) rents during the holiday season and the majority
of percentage rent is recognized in the fourth quarter. As a result of the
above, earnings are generally higher in the fourth quarter.
Critical Accounting
Policies
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Some of
these estimates and assumptions include judgments on revenue recognition,
estimates for common area maintenance and real estate tax accruals, provisions
for uncollectible accounts, impairment of long-lived assets, the allocation of
purchase price between tangible and intangible assets, and estimates for
environmental matters. The Companys significant accounting policies are
described in more detail in Note 2 to the audited Consolidated Financial
Statements in the Companys Annual Report on Form 10-K for the year ended December 31,
2006. However, the following policies are deemed to be critical.
Revenue Recognition
Minimum rental revenues
are recognized on a straight-line basis over the term of the related lease. The
difference between the amount of rent due in a year and the amount recorded as
rental income is referred to as the straight lining of rent adjustment.
Currently, 40% of the mall and freestanding leases contain provisions for CPI
rent increases periodically throughout the term of the lease. The Company
believes that using an annual multiple of CPI increases, rather than fixed
contractual rent increases, results in revenue recognition that more closely
matches the cash revenue from each lease and will provide more consistent rent
growth throughout the term of the leases. Percentage rents are recognized when
the tenants specified sales targets have been met. Estimated recoveries from
tenants for real estate taxes,
35
insurance
and other shopping center operating expenses are recognized as revenues in the
period the applicable expenses are incurred.
Property
Costs related to the development, redevelopment,
construction and improvement of properties are capitalized. Interest incurred
on development, redevelopment and construction projects is capitalized until
construction is substantially complete.
Maintenance and repairs expenses are charged to
operations as incurred. Costs for major replacements and betterments, which
includes HVAC equipment, roofs, parking lots, etc., are capitalized and
depreciated over their estimated useful lives. Gains and losses are recognized
upon disposal or retirement of the related assets and are reflected in
earnings.
Property
is recorded at cost and is depreciated using a straight-line method over the
estimated useful lives of the assets as follows:
Buildings and
improvements
|
|
5-40 years
|
|
Tenant
improvements
|
|
5-7 years
|
|
Equipment and
furnishings
|
|
5-7 years
|
|
Accounting for
Acquisitions
The Company accounts for all acquisitions in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations. The Company will first determine the value of the land
and buildings utilizing an as if vacant methodology. The Company will then
assign a fair value to any debt assumed at acquisition. The balance of the
purchase price will be allocated to tenant improvements and identifiable
intangible assets or liabilities. Tenant improvements represent the tangible
assets associated with the existing leases valued on a fair market value basis
at the acquisition date prorated over the remaining lease terms. The tenant improvements
are classified as an asset under property and are depreciated over the
remaining lease terms. Identifiable intangible assets and liabilities relate to
the value of in-place operating leases which come in three forms: (i) leasing
commissions and legal costs, which represent the value associated with cost
avoidance of acquiring in-place leases, such as lease commissions paid under
terms generally experienced in the Companys markets; (ii) value of
in-place leases, which represents the estimated loss of revenue and of costs
incurred for the period required to lease the assumed vacant property to the
occupancy level when purchased; and (iii) above or below market value of
in-place leases, which represents the difference between the contractual rents
and market rents at the time of the acquisition, discounted for tenant credit
risks. Leasing commissions and legal costs are recorded in deferred charges and
other assets and are amortized over the remaining lease terms. The value of
in-place leases are recorded in deferred charges and other assets and amortized
over the remaining lease terms plus an estimate of renewal of the acquired
leases. Above or below market leases are classified in deferred charges and
other assets or in other accrued liabilities, depending on whether the
contractual terms are above or below market, and the asset or liability is
amortized to rental revenue over the remaining terms of the leases.
When the Company acquires
real estate properties, the Company allocates the purchase price to the
components of these acquisitions using relative fair values computed using
estimates and assumptions. These estimates and assumptions impact the amount of
costs allocated between various components as well as the amount of costs
assigned to individual properties in multiple property acquisitions. These
allocations also impact depreciation expense and gains or loses recorded on
future sales of properties. Generally, the Company engages a valuation firm to
assist with these allocations.
36
Asset Impairment
The Company assesses
whether the value of its long-lived assets has been impairment by considering
factors such as expected future operating income, trends and prospects, as well
as the effects of demand, competition and other economic factors. Such factors
include the tenants ability to perform their duties and pay rent under the
terms of the leases. The Company may recognize an impairment loss if the cash
flows are not sufficient to cover its investment. Such a loss would be
determined as the difference between the carrying value and the fair value of a
Center.
Deferred Charges
Costs
relating to obtaining tenant leases are deferred and amortized over the initial
term of the agreement using the straight-line method. Costs relating to
financing of shopping center properties are deferred and amortized over the
life of the related loan using the straight-line method, which approximates the
effective interest method. In-place lease values are amortized over the
remaining lease term plus an estimate of renewal. Leasing commissions and legal
costs are amortized on a straight-line basis over the individual remaining
lease years. The ranges of the terms of the agreements are as follows:
Deferred lease
costs
|
|
1-15 years
|
|
Deferred
financing costs
|
|
1-15 years
|
|
In-place
lease values
|
|
Remaining lease
term plus an
estimate for renewal
|
|
Leasing commissions and
legal costs
|
|
5-10 years
|
|
Results of
Operations
Many of the variations in
the results of operations, discussed below, occurred due to the transactions
described above including the 2006 Acquisition Center(s) and the
Redevelopment Centers. For the comparison of the three and nine months ended
September 30, 2007 to the three and nine months ended September 30,
2006, the Same Centers include all consolidated Centers, excluding 2006
Acquisition Center(s) and the Redevelopment Centers.
Comparison of the
Three Months Ended September 30, 2007 and 2006
Revenues
Minimum and percentage rents (collectively referred to
as rental revenue) increased by $14.8 million, or 12.3%, from 2006 to 2007.
Rental revenue increased $7.3 million from the Same Centers, $4.1 million from
the 2006 Acquisition Center and $3.4 million from the Redevelopment Centers.
The amortization of above and below market leases,
which is recorded in rental revenue, increased to $3.2 million in 2007 from
$3.0 million in 2006. The increase in amortization is primarily due to the accelerated
amortization of leases terminated in 2006. The amortization of straight-lined
rents, included in rental revenue, was $3.2 million in 2007 compared to $2.2
million in 2006. Lease termination income, included in rental revenue, was $3.7
million in 2007 compared to $0.7 million in 2006.
Tenant recoveries increased
$6.4 million, or 10.0%, from 2006 to 2007. Approximately $2.7 million of
the increase in tenant recoveries related to the 2006 Acquisition Center, $2.2
million related to the Same Centers and $1.4 million related to the
Redevelopment Centers.
37
Management Companies Revenues
Management Companies
revenues increased by $1.2 million from 2006 to 2007, primarily due to
increased management fees received from the joint venture Centers and increased
development fees from joint ventures.
Shopping Center and Operating Expenses
Shopping center and
operating expenses increased $6.4 million, or 9.4%, from 2006 to 2007.
Approximately $2.8 million of the increase in shopping center and operating
expenses related to the 2006 Acquisition Center, $2.1 million related to the
Same Centers and $1.5 million related to the Redevelopment Centers.
Management Companies Operating Expenses
Management Companies
operating expenses increased to $17.9 million in 2007 from $14.5 million in
2006, in part as a result of the additional costs of managing the joint venture
Centers and third party managed properties.
REIT General and Administrative Expenses
REIT general and
administrative expenses decreased by $0.6 million in 2007 from 2006,
primarily due to a decreased share and unit-based compensation expense in 2007.
Depreciation and Amortization
Depreciation and
amortization increased $6.6 million in 2007 from 2006. Approximately $3.0
million of the increase in depreciation and amortization related to the
Redevelopment Centers, $2.3 million related to the 2006 Acquisition Center and
$0.7 million related to the Same Centers.
Interest Expense
Interest expense decreased
$7.4 million in 2007 from 2006. The decrease in interest expense was primarily
attributed to a decrease of $6.8 million from the line of credit, $4.4 million
from the term loans, $4.0 million from the Same Centers and $2.5 million from
the Redevelopment Centers. The decrease in interest expense was offset in part
by an increase of $8.1 million due to the issuance of $950.0 million of
convertible senior notes on March 16, 2007 and an $2.4 million increase
from the 2006 Acquisition Center. The decrease in interest on the line of
credit was due to a decrease in average outstanding borrowings during 2007 due
to the issuance of the senior notes and a decrease in interest rates due to the
$400 million swap and lower LIBOR rates and spreads. The decrease in interest
on the term loans was due to the repayment of the $250 million loan in 2007 and
the repayment of the $619 million term loan in 2006. (See Liquidity and
Capital Resources). The above interest expense items are net of capitalized
interest of $9.8 million in 2007, up from $4.4 million in 2006 due to increases
in redevelopment activity.
Equity in Income of Unconsolidated Joint Ventures
The equity in income of
unconsolidated joint ventures increased $0.2 million in 2007 from 2006. The
increase in equity in income of unconsolidated joint ventures is primarily
attributed to an increase in rental revenues in 2007.
Discontinued Operations
The Company recorded a
loss of $0.7 million in 2007 and $47.8 million of income in 2006 from
discontinued operations. The decrease in income primarily relates to the gain
on the sales of Park Lane
38
Mall,
Holiday Village, Greeley Mall, Great Falls Marketplace, Citadel Mall,
Crossroads Mall and Northwest Arkansas Mall in 2006 (See Managements Overview
and SummaryAcquisitions and dispositions). As result of these sales, the
Company classified the results of operations for these properties to discontinued
operations for all periods presented.
Minority Interest in the Operating Partnership
The minority interest in
the Operating Partnership represents the 14.9% weighted average interest of the
Operating Partnership not owned by the Company during 2007 compared to the
15.6% not owned by the Company during 2006. The change in ownership interest is
primarily due to the stock offering by the Company in 2006, the redemption of
OP Units in 2007 and the repurchase of 807,000 shares in 2007 (See Note 12Stock
Repurchase Program of the Companys Consolidated Financial Statements).
Funds From Operations
Primarily as a result of
the factors mentioned above, Funds from Operations (FFO)diluted increased
28.2% to $111.0 million in 2007 from $86.6 million in 2006. For the
reconciliation of FFO and FFO-diluted to net income available to common
stockholders, see Funds from Operations.
Comparison of the
Nine Months Ended September 30, 2007 and 2006
Revenues
Rental revenue increased by $27.7 million, or 7.6%,
from 2006 to 2007. The increase in rental revenue is attributed to an increase
of $13.4 million from the 2006 Acquisition Centers, $8.5 million from the
Redevelopment Centers and $5.7 million from the Same Centers.
The amortization of above and below market leases,
which is recorded in rental revenue, decreased to $8.9 million in 2007 from
$10.3 million in 2006. The decrease in amortization is primarily due to the accelerated
amortization of leases terminated in 2006. The amortization of straight-lined
rents, included in rental revenue, was $6.8 million in 2007 compared to $6.2
million in 2006. Lease termination income, included in rental revenue, was $8.8
million in 2007 and 2006.
Tenant recoveries
increased $19.2 million, or 10.3%, from 2006 to 2007. The increase in
tenant recoveries is attributed to an increase of $8.2 million from the 2006
Acquisition Centers, $7.6 million from the Same Centers and $3.4 million from
the Redevelopment Centers.
Management Companies Revenues
Management Companies
revenues increased by $4.9 million from 2006 to 2007, primarily due to
increased management fees received from the joint venture Centers, additional
third party management contracts and increased development fees from joint
ventures.
Shopping Center and Operating Expenses
Shopping center and
operating expenses increased $17.9 million, or 9.3%, from 2006 to 2007.
Approximately $7.8 million of the increase in shopping center and operating
expenses related to the 2006 Acquisition Centers, $5.8 million related to the
Same Centers and $4.3 million related to the Redevelopment Centers.
39
Management Companies Operating Expenses
Management Companies
operating expenses increased to $54.2 million in 2007 from $41.3 million in
2006, in part as a result of the additional costs of managing the joint venture
Centers and third party managed properties.
REIT General and Administrative Expenses
REIT general and
administrative expenses increased by $2.2 million in 2007 from 2006,
primarily due to increased share and unit-based compensation expense in 2007.
Depreciation and Amortization
Depreciation and
amortization increased $8.7 million in 2007 from 2006. The increase in
depreciation and amortization is primarily attributed to an increase of $8.2
million at the 2006 Acquisition Centers and $6.6 million at the Redevelopment
Centers offset in part by a decrease of $6.4 million at the Same Centers.
Interest Expense
Interest expense decreased
$14.5 million in 2007 from 2006. The decrease in interest expense was primarily
attributed to a decrease of $11.5 million from the line of credit, $10.9
million from term loans, $7.0 million from the Same Centers, and $5.9 million
from the Redevelopment Centers. The decrease in interest expense was offset in
part by an increase of $17.7 million due to the issuance of $950.0 million of
convertible senior notes on March 16, 2007 and an increase of $4.1 million
from the 2006 Acquisition Centers. The decrease in interest on the line of
credit was due to a decrease in average outstanding borrowings during 2007 due
to the issuance of the senior notes and a decrease in interest rates. The
decrease in interest on term loans was due to the repayment of the $250 million
loan in 2007 and the repayment of the $619 million term loan in 2006. (See Liquidity
and Capital Resources). The above interest expense items are net of
capitalized interest of $24.1 million in 2007, up from $10.6 million in 2006
due to increases in redevelopment activity.
Equity in Income of Unconsolidated Joint Ventures
The equity in income of
unconsolidated joint ventures decreased $5.2 million in 2007 from 2006. The decrease
in equity in income of unconsolidated joint ventures is due in part to a $2.4
million loss on sale of assets at the SDG Macerich Properties, L.P. joint
venture and $3.1 million in additional interest expense and depreciation at
other joint ventures due to the completion of development projects.
Loss on Early Extinguishment of Debt
The Company recorded a
$0.9 million loss from the early extinguishment of the $250 million term loan
in 2007. In 2006, the Company recorded a loss from the early extinguishment of
debt of $1.8 million related to the pay off of the $619 million term loan.
Discontinued Operations
The Company recorded a
loss of $2.3 million in 2007 and $81.4 million of income in 2006 from
discontinued operations. The decrease in income is primarily related to the
recognition of gain on the sales of Scottsdale/101, Park Lane Mall, Holiday
Village, Greeley Mall, Great Falls Marketplace, Citadel Mall, Crossroads Mall
and Northwest Arkansas Mall in 2006 (See Managements Overview and SummaryAcquisitions
and dispositions). As result of these sales, the Company classified the
results of operations for these properties to discontinued operations for all
periods presented.
40
Minority Interest in the Operating Partnership
The minority interest in
the Operating Partnership represents the 15.1% weighted average interest of the
Operating Partnership not owned by the Company during 2007 compared to the
15.9% not owned by the Company during 2006. The change in ownership interest is
primarily due to the stock offering by the Company in 2006, the redemption of
OP Units in 2007 and the repurchase of 807,000 shares in 2007 (See Note 12Stock
Repurchase Program of the Companys Consolidated Financial Statements).
Funds From Operations
Primarily as a result of
the factors mentioned above, FFOdiluted increased 13.8% to $298.2 million
in 2007 from $262.0 million in 2006. For the reconciliation of FFO and
FFO-diluted to net income available to common stockholders, see Funds from
Operations.
Operating Activities
Cash flow from operations
increased to $208.1 million in 2007 from $138.9 million in 2006. The
increase was primarily due to changes in assets and liabilities in 2007
compared to 2006 and due to the results at the Centers as discussed above.
Investing Activities
Cash used in investing
activities increased to $214.7 million in 2007 from $184.4 million in 2006. The
increase in cash used in investing activities was due to a decrease in cash
proceeds from the sale of assets, offset in part, by an increase in cash
distributions from unconsolidated joint ventures and a decrease in capital
expenditures.
Financing Activities
Cash flow used in
financing activities increased to $219.9 million in 2007 from $47.5 million in
2006. The increase in cash used in financing activities was primarily
attributed to $59.8 million for the purchase of the Capped Calls in connection
with the issuance of the convertible senior notes and $75.0 million for the
repurchase of the Companys common stock in 2007, offset in part by the $950
million convertible senior notes issuance in 2007 and the $746.8 million in
proceeds from the common stock offering in 2006 (See Liquidity and Capital
Resources).
Liquidity and
Capital Resources
The Company intends to meet its short term liquidity
requirements through cash generated from operations, working capital reserves,
property secured borrowings, unsecured corporate borrowings and borrowings
under the revolving line of credit. The Company anticipates that revenues will
continue to provide necessary funds for its operating expenses and debt service
requirements, and to pay dividends to stockholders in accordance with REIT
requirements. The Company anticipates that cash generated from operations,
together with cash on hand, will be adequate to fund capital expenditures which
will not be reimbursed by tenants, other than non-recurring capital expenditures.
41
The
following tables summarize capital expenditures incurred at the Centers for the
nine months ended September 30:
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
(Dollars in thousands)
|
|
|
|
|
|
Consolidated
Centers:
|
|
|
|
|
|
Acquisitions of
property and equipment
|
|
$
|
29,262
|
|
$
|
334,888
|
|
Development,
redevelopment and expansion of Centers
|
|
378,694
|
|
101,991
|
|
Renovations of
Centers
|
|
19,057
|
|
37,573
|
|
Tenant allowances
|
|
15,018
|
|
20,608
|
|
Deferred leasing
charges
|
|
17,135
|
|
17,380
|
|
|
|
$
|
459,166
|
|
$
|
512,440
|
|
Joint
Venture Centers (at Companys pro rata share):
|
|
|
|
|
|
Acquisitions of
property and equipment
|
|
$
|
4,347
|
|
$
|
24,324
|
|
Development,
redevelopment and expansion of Centers
|
|
20,691
|
|
39,047
|
|
Renovations of
Centers
|
|
8,880
|
|
6,973
|
|
Tenant allowances
|
|
9,726
|
|
8,186
|
|
Deferred leasing
charges
|
|
2,887
|
|
3,093
|
|
|
|
$
|
46,531
|
|
$
|
81,623
|
|
Management expects similar levels to be incurred in
future years for tenant allowances and deferred leasing charges and to incur
between $400 million to $600 million in the next twelve months for
development, redevelopment, expansion and renovations. Capital for major
expenditures or major developments and redevelopments has been, and is expected
to continue to be, obtained from equity or debt financings which include
borrowings under the Companys line of credit and construction loans. However,
many factors impact the Companys ability to access capital, such as its
overall debt level, interest rates, interest coverage ratios and prevailing
market conditions.
The Companys total outstanding loan indebtedness at September 30,
2007 was $6.9 billion (including $1.8 billion of its pro rata share of
joint venture debt). This equated to a debt to Total Market Capitalization
(defined as total debt of the Company, including its pro rata share of joint
venture debt, plus aggregate market value of outstanding shares of common
stock, assuming full conversion of OP Units, MACWH, LP units and preferred
stock into common stock) ratio of approximately 46.4% at September 30,
2007. The majority of the Companys debt consists of fixed-rate conventional
mortgages payable collateralized by individual properties.
The Company filed a shelf registration statement,
effective June 6, 2002, to sell securities. The shelf registration is for
a total of $1.0 billion of common stock, common stock warrants or common
stock rights. The Company sold a total of 15.2 million shares of common
stock under this shelf registration on November 27, 2002. The aggregate
offering price of this transaction was approximately $440.2 million,
leaving approximately $559.8 million available under the shelf
registration statement. In addition, the Company filed another shelf
registration statement, effective October 27, 2003, to sell up to
$300 million of preferred stock. On January 12, 2006, the Company
filed a shelf registration statement registering an unspecified amount of
common stock that it may offer in the future.
On March 16, 2007, the Company issued $950
million in convertible senior notes (Senior Notes) that are to mature on March 15,
2012. The Senior Notes bear interest at 3.25%, payable semiannually, are senior
to unsecured debt of the Company and are guaranteed by the Operating
Partnership. Prior to December 14, 2011, upon the occurrence of certain
specified events, the Senior Notes will be convertible at
42
the option of holder into
cash, shares of the Companys common stock or a combination of cash and shares
of the Companys common stock, at the election of the Company, at an initial
conversion rate of 8.9702 shares per $1,000 principal amount. On and after December 15,
2011, the Senior Notes will be convertible at any time prior to the second
business day preceding the maturity date at the option of the holder at the
initial conversion rate. The initial conversion price of approximately $111.48
per share represents a 20% premium over the closing price of the Companys
common stock on March 12, 2007. The initial conversion rate is subject to
adjustment in certain circumstances. Holders of the Senior Notes do not have
the right to require the Company to repurchase the Senior Notes prior to
maturity except in connection with the occurrence of certain fundamental change
transactions.
In connection with the issuance of the Senior Notes,
the Company purchased two capped calls (Capped Calls) from affiliates of the
initial purchasers of the Senior Notes. The Capped Calls effectively increase
the conversion price of the Senior Notes to approximately $130.06, which
represents a 40% premium to the March 12, 2007 closing price of $92.90 per
common share of the Company.
The Company has a $1.5 billion revolving line of
credit that matures on April 25, 2010 with a one-year extension option. The
interest rate fluctuates between LIBOR plus 0.75% to LIBOR plus 1.10% depending
on the Companys overall leverage. In September 2006, the Company entered
into an interest rate swap agreement that effectively fixed the interest rate
on $400.0 million of the outstanding balance of the line of credit at 6.23%
until April 25, 2011. As of September 30, 2007 and December 31,
2006, borrowings outstanding were $405.0 million and $934.5 million at an
average interest rate, net of the $400.0 million swapped portion, of 6.03% and
6.60%, respectively. On March 16, 2007, the Company repaid $541.5 million
of borrowings outstanding from the proceeds of the Senior Notes (See Note 10Bank
and Other Notes Payable of the Companys Consolidated Financial Statements).
On May 13, 2003, the Company issued
$250.0 million in unsecured notes maturing in May 2007 with a one-year
extension option bearing interest at LIBOR plus 2.50%. On April 25, 2005, the
Company modified these unsecured notes and reduced the interest rate to LIBOR
plus 1.50%. On March 16, 2007, the Company repaid the notes from the
proceeds of the Senior Notes (See Note 10Bank and Other Notes Payable of the
Companys Consolidated Financial Statements). At December 31, 2006, all of
the notes were outstanding at an interest rate of 6.94%.
On April 25, 2005, the Company obtained a five
year, $450.0 million term loan bearing interest at LIBOR plus 1.50%. In November 2005,
the Company entered into an interest rate swap agreement that effectively fixed
the interest rate of the $450.0 million term loan at 6.30% from December 1,
2005 to April 15, 2010. At September 30, 2007 and December 31,
2006, the entire loan was outstanding with an interest rate of 6.30%.
At September 30, 2007, the Company was in
compliance with all applicable loan covenants.
At September 30,
2007, the Company had cash and cash equivalents available of
$42.9 million.
Off-Balance Sheet Arrangements
The Company has an ownership interest in a number of
joint ventures as detailed in Note 4 to the Companys Consolidated
Financial Statements included herein. The Company accounts for those
investments that it does not have a controlling interest or is not the primary
beneficiary using the equity method of accounting and those investments are
reflected on the Consolidated Balance Sheets of the Company as Investments in
Unconsolidated Joint Ventures. A pro rata share of the mortgage debt on these
properties is shown in Item 3. Quantitative and Qualitative Disclosure about
Market Risk.
In addition, certain joint ventures also have debt
that could become recourse debt to the Company or its subsidiaries, in excess
of its pro rata share, should the joint ventures be unable to discharge the
obligations of the related debt.
43
The
following reflects the maximum amount of debt principal that could be recourse
to the Company at September 30, 2007 (in thousands):
Property
|
|
|
|
Recourse
Debt
|
|
Maturity
Date
|
|
Boulevard Shops
|
|
|
$
|
4,280
|
|
|
12/16/2007
|
|
Chandler Village
Center
|
|
|
4,322
|
|
|
12/19/2007
|
|
|
|
|
$
|
8,602
|
|
|
|
|
Additionally, as of September 30,
2007, the Company is contingently liable for $6.9 million in letters of
credit guaranteeing performance by the Company of certain obligations relating
to the Centers. The Company does not believe that these letters of credit will
result in a liability to the Company.
Long-term contractual obligations
The
following is a schedule of long-term contractual obligations for the
consolidated Centers as of September 30, 2007, over the periods in which
they are expected to be paid (in thousands):
|
|
Payment Due by Period
|
|
Contractual Obligations
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
five years
|
|
Long-term debt
obligations (includes expected interest payments)
|
|
$
|
5,406,117
|
|
$
|
311,495
|
|
$
|
859,007
|
|
$
|
2,833,793
|
|
$
|
1,401,822
|
|
Operating lease
obligations
|
|
258,635
|
|
5,267
|
|
10,624
|
|
10,718
|
|
232,026
|
|
Purchase
obligations
|
|
159,306
|
|
159,306
|
|
|
|
|
|
|
|
Other long-term
liabilities
|
|
349,791
|
|
349,791
|
|
|
|
|
|
|
|
|
|
$
|
6,173,849
|
|
$
|
825,859
|
|
$
|
869,631
|
|
$
|
2,844,511
|
|
$
|
1,633,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds From
Operations
The Company uses Funds from Operations (FFO) in
addition to net income to report its operating and financial results and
considers FFO and FFO-diluted as supplemental measures for the real estate
industry and a supplement to Generally Accepted Accounting Principles (GAAP)
measures. The National Association of Real Estate Investment Trusts (NAREIT)
defines FFO as net income (loss) (computed in accordance with GAAP), excluding
gains (or losses) from extraordinary items and sales of depreciated operating
properties, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect FFO on
the same basis. FFO and FFO on a fully diluted basis are useful to investors in
comparing operating and financial results between periods. This is especially
true since FFO excludes real estate depreciation and amortization as the
Company believes real estate values fluctuate based on market conditions rather
than depreciating in value ratably on a straight-line basis over time. FFO on a
fully diluted basis is one of the measures investors find most useful in
measuring the dilutive impact of outstanding convertible securities. FFO does
not represent cash flow from operations as defined by GAAP, should not be considered
as an alternative to net income as defined by GAAP and is not indicative of
cash available to fund all cash flow needs. FFO, as presented, may not be
comparable to similarly titled measures reported by other real estate
investment trusts. The reconciliation of FFO and FFO-diluted to net income
available to common stockholders is provided below.
44
The
following reconciles net income available to common stockholders to FFO and
FFO-diluted (dollars in thousands):
|
|
For the Three Months
Ended
September 30,
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net incomeavailable to
common stockholders
|
|
$
|
17,280
|
|
$
|
46,968
|
|
$
|
33,296
|
|
$
|
80,092
|
|
Adjustments to reconcile net income to FFObasic:
|
|
|
|
|
|
|
|
|
|
Minority interest
in the Operating Partnership
|
|
3,070
|
|
8,901
|
|
5,935
|
|
15,131
|
|
Loss (gain) on sale of
consolidated assets
|
|
758
|
|
(46,560
|
)
|
(1,889
|
)
|
(109,020
|
)
|
Add: minority interest
share of gain (loss) on sale of consolidated joint ventures
|
|
39
|
|
(192
|
)
|
388
|
|
36,816
|
|
Gain on undepreciated consolidated
assets
|
|
150
|
|
2,339
|
|
811
|
|
5,715
|
|
Less minority interest
on sale of undepreciated assets
|
|
(39
|
)
|
|
|
(361
|
)
|
|
|
Loss (gain) on sale of
assets from unconsolidated entities (pro rata)
|
|
4
|
|
(1
|
)
|
2,024
|
|
(245
|
)
|
Add: (loss) gain on
undepreciated assets on unconsolidated assets (pro rata)
|
|
(4
|
)
|
|
|
346
|
|
244
|
|
Depreciation and
amortization on consolidated assets
|
|
60,173
|
|
56,120
|
|
177,665
|
|
179,071
|
|
Less: depreciation and
amortization allocable to minority interests on consolidated joint
ventures
|
|
(1,019
|
)
|
(1,128
|
)
|
(3,346
|
)
|
(4,351
|
)
|
Depreciation and
amortization on joint ventures (pro rata)
|
|
23,422
|
|
21,045
|
|
68,506
|
|
62,209
|
|
Less: depreciation on
personal property and amortization of loan costs and interest rate caps
|
|
(4,437
|
)
|
(3,472
|
)
|
(12,076
|
)
|
(11,139
|
)
|
FFObasic
|
|
99,397
|
|
84,020
|
|
271,299
|
|
254,523
|
|
Additional adjustments to arrive at FFOdiluted:
|
|
|
|
|
|
|
|
|
|
Impact of convertible
preferred stock
|
|
2,902
|
|
2,575
|
|
8,052
|
|
7,508
|
|
Impact of convertible
debt
|
|
8,686
|
|
|
|
18,855
|
|
|
|
FFOdiluted
|
|
$
|
110,985
|
|
$
|
86,595
|
|
$
|
298,206
|
|
$
|
262,031
|
|
Weighted average number of FFO shares outstanding
for:
|
|
|
|
|
|
|
|
|
|
FFObasic(1)
|
|
84,219
|
|
84,726
|
|
84,400
|
|
83,924
|
|
Adjustments for the impact of dilutive securities in
computing FFO-diluted:
|
|
|
|
|
|
|
|
|
|
Convertible preferred
stock
|
|
3,627
|
|
3,627
|
|
3,627
|
|
3,627
|
|
Stock options
|
|
309
|
|
295
|
|
306
|
|
292
|
|
Convertible debt
|
|
8,522
|
|
|
|
6,212
|
|
|
|
FFOdiluted(2)
|
|
96,677
|
|
88,648
|
|
94,545
|
|
87,843
|
|
(1)
Calculated based upon
basic net income as adjusted to reach basic FFO. As of September 30, 2007 and
2006, 12.5 million and 13.2 million OP Units were outstanding, respectively.
(2)
The computation of
FFOdiluted shares outstanding includes the effect of outstanding common stock
options and restricted stock using the treasury method. It also assumes the
conversion of MACWH, LP common and preferred units and the Senior Notes to the
extent that they are dilutive to the FFO computation (See Note 10Bank and
Other Notes Payable of the Companys Consolidated Financial Statements). The
preferred stock can be converted on a one-for-one basis for common stock. The
then outstanding preferred shares are assumed converted for purposes of
FFO-diluted as they are dilutive to that calculation. The MACWH, LP preferred
units were antidilutive to the calculations at September 30, 2007 and 2006 and
were not included in the above calculations. The Senior Notes were dilutive to
the calculations for the three and nine months ended September 30, 2007.
45