# Macerich Co: Form 10-Q for the period ended Mar 31, 2011

- Company: [Macerich Co](/companies/mac.md) (CIK 912242)
- Form: 10-Q
- Filed: 2011-05-06
- Accepted by EDGAR: May 6, 2011, 16:14 ET
- Period: 2011-03-31
- Accession: 0001047469-11-004716
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/912242/000104746911004716/a2203777z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/912242/000104746911004716/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-01-01 to 2011-03-31 | $191.1m | us-gaap:Revenues |
| Interest expense | 3 months, 2011-01-01 to 2011-03-31 | $52.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-01-01 to 2011-03-31 | −$2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-01-01 to 2011-03-31 | $34.0k | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2011-01-01 to 2011-03-31 | 130,574,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-01-01 to 2011-03-31 | $41.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2011-01-01 to 2011-03-31 | $73.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2011-03-31 | $188.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2011-03-31 | $7.50bn | us-gaap:Assets |
| Total liabilities | at 2011-03-31 | $4.36bn | us-gaap:Liabilities |
| Shareholders' equity | at 2011-03-31 | $2.83bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,838 characters.

### IMPORTANT INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of The Macerich Company (the "Company") contains or incorporates statements that constitute forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as "may," "will," "could," "should," "expects," "anticipates," "intends," "projects," "predicts," "plans," "believes," "seeks," "estimates," "scheduled" and variations of these words and similar expressions. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Forward-looking statements appear in a number of places in this Form 10-Q and include statements regarding, among other matters:

expectations regarding the Company's growth;

the Company's beliefs regarding its acquisition, redevelopment, development, leasing and operational activities and opportunities, including the performance of its retailers;

the Company's acquisition, disposition and other strategies;

regulatory matters pertaining to compliance with governmental regulations;

the Company's capital expenditure plans and expectations for obtaining capital for expenditures;

the Company's expectations regarding its financial condition or results of operations; and

the Company's expectations for refinancing its indebtedness, entering into debt obligations and entering into joint venture arrangements.

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 the industry to differ materially from the Company's future results, performance or achievements, or those of the industry, expressed or implied in such forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as our other reports filed with the Securities and Exchange Commission, which disclosures are incorporated herein by reference. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. The Company does not intend, and undertakes no obligation, to update any forward-looking information to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, unless required by law to do so.

### Management's 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 Operating Partnership. As of March 31, 2011, the Operating Partnership owned or had an ownership interest in 71 regional shopping centers and 14 community shopping centers totaling approximately 73 million square feet of gross leasable area. These 85 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 REIT and conducts all of its operations through the Operating Partnership and the Management Companies.

The following discussion is based primarily on the consolidated financial statements of the Company for the three months ended March 31, 2011 and 2010. It compares the results of operations and cash flows for the three months ended March 31, 2011 to the results of operations and cash flows for the three months ended March 31, 2010. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

#### Acquisitions:

On February 24, 2011, the Company increased its ownership interest in Kierland Commons, a 434,690 square foot community center in Scottsdale, Arizona, from 24.5% to 50%. The Company's share of the purchase price for this transaction was $34.2 million in cash and the assumption of $18.6 million of existing debt.

On February 28, 2011, the Company, in a 50/50 joint venture, acquired The Shops at Atlas Park, a 400,000 square foot community center in Queens, New York, for a total purchase price of $53.8 million. The Company's share of the purchase price was $26.9 million and was funded from the Company's cash on hand.

On February 28, 2011, the Company acquired the additional 50% ownership interest in Desert Sky Mall, an 893,561 square foot regional shopping center in Phoenix, Arizona, that it did not own. The total purchase price was $27.6 million which included the assumption of the third party's pro rata share of the mortgage note payable on the property of $25.7 million. Concurrent with the purchase of the partnership interest, the Company paid off the $51.5 million loan on the property. Desert Sky Mall is referred to herein as the "Acquisition Property."

#### Mervyn's:

In December 2007, the Company purchased a portfolio of ground leasehold interest and/or fee interests in 39 freestanding Mervyn's stores located in the Southwest United States. In January 2008, the Company purchased a ground leasehold interest in a freestanding Mervyn's store located in Hayward, California and in February 2008, the Company purchased a fee simple interest in a freestanding Mervyn's store located in Monrovia, California. These former Mervyn's stores are referred to herein as the "Mervyn's Properties." Mervyn's filed for bankruptcy protection in July 2008 and rejected all of its leases during the remainder of the year.

On March 4, 2011, the Company sold a fee interest in a former Mervyn's store for $3.4 million, resulting in a loss on sale of $2.2 million. The Company used the proceeds from the sale for general corporate purposes.

As of March 31, 2011, eight former Mervyn's stores in the Company's portfolio remain vacant. The Company is currently seeking replacement tenants for these spaces.

#### Other Transactions and Events:

On July 15, 2010, a court appointed receiver ("Receiver") assumed operational control of Valley View Center and responsibility for managing all aspects of the property. The Company anticipates the disposition of the asset, which is under the control of the Receiver, will be executed through foreclosure, deed in lieu of foreclosure, or by some other means, and will be completed within the next twelve months. Although the Company is no longer funding any cash shortfall, it continues to record the operations of the Valley View Center until the title for the Center is transferred and its obligation for the loan is discharged. Once title to the Center is transferred, the Company will remove the net assets and liabilities from the Company's consolidated balance sheets. The mortgage note payable on Valley View Center is non-recourse to the Company.

#### Inflation:

In the last three years, inflation has not had a significant impact on the Company because of a relatively low inflation rate. 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 an annual multiple of increases in the Consumer Price Index ("CPI"). In addition, about 6% to 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. Historically the majority of the leases also 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 generally accepted accounting principles ("GAAP") 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 Company's significant accounting policies are described in more detail in Note 2—Summary of Significant Accounting Policies in the Company's Notes to the Consolidated Financial Statements. 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 line rent adjustment." Currently, 59% of the Mall Store and Freestanding Store 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 certain tenants for their pro rata share of real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred. Other tenants pay a fixed rate and these tenant recoveries' revenues are recognized on a straight-line basis over the term of the related leases.

#### Property:

The Company capitalizes costs incurred in redevelopment and development of properties. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. Capitalized costs are allocated to the specific components of a project that are benefited. The Company considers a construction project as completed and held available for occupancy and ceases capitalization of costs when the areas under development have been substantially completed.

Maintenance and repair 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 first determines the value of land and buildings utilizing an "as if vacant" methodology. The Company then assigns a fair value to any debt assumed at acquisition. The purchase price is 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 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 Company's 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. The allocated values of above and below-market leases are amortized into minimum rents on a straight-line basis over the individual remaining lease terms. The remaining lease terms of below-market leases may include certain below-market fixed-rate renewal periods. In considering whether or not a lessee will execute a below-market fixed-rate lease renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition such as tenant mix in the center, the Company's relationship with the tenant and the availability of competing tenant space.

#### Asset Impairment:

The Company assesses whether an indicator of impairment in the value of its long-lived assets exists 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 tenant's ability to perform their duties and pay rent under the terms of the leases. The Company may recognize impairment losses 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.

The Company reviews its investments in unconsolidated joint ventures for a series of operating losses and other factors that may indicate that a decrease in the value of its investments has occurred which is other-than-temporary. The investment in each unconsolidated joint venture is evaluated periodically, and as deemed necessary, for recoverability and valuation declines that are other than temporary.

#### Fair Value of Financial Instruments:

The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions.

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company calculates the fair value of financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made.

#### Deferred Charges:

Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. As these deferred leasing costs represent productive assets incurred in connection with the Company's provision of leasing arrangements at the Centers, the related cash flows are classified as investing activities within the Company's Consolidated Statements of Cash Flows. 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 the renewal term. 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 Acquisition Property, the Mervyn's Properties and the Redevelopment Centers. The "Same Centers" include all consolidated Centers, excluding the Mervyn's Properties, the Acquisition Property and the Redevelopment Centers.

The "Redevelopment Centers" include Santa Monica Place and Shoppingtown Mall. The increase in revenue and expenses of the Redevelopment Centers during the three months ended March 31, 2011 in comparison to the three months ended March 31, 2010 is primarily due to the opening of Santa Monica Place in August 2010.

Unconsolidated joint ventures are reflected using the equity method of accounting. The Company's pro rata share of the results from these Centers is reflected in the Consolidated Statements of Operations as equity in income from unconsolidated joint ventures.

The U.S. economy, the retail industry as well as certain of the Company's operating results continued to improve during the first quarter of 2011. The Company's total regional mall occupancy as of March 31, 2011 increased compared to March 31, 2010. In addition, the recent trend of retail sales growth continued in this quarter with mall tenant sales per square foot increasing compared to the twelve months ended March 31, 2010 and December 31, 2010. While recent economic data has shown signs of a positive trend, the U.S. economy is still experiencing weakness, high levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels. If this positive trend does not continue, any further continuation of these adverse conditions could harm the Company's business, results of operations and financial condition.

### Comparison of Three Months Ended March 31, 2011 and 2010

#### Revenues:

Minimum and percentage rents (collectively referred to as "rental revenue") increased by $7.5 million, or 7.2%, from 2010 to 2011. The increase in rental revenue is attributed to an increase of $3.6 million from the Redevelopment Centers, $2.2 million from the Same Centers, $1.0 million from the Mervyn's Properties and $0.7 million from the Acquisition Property. The increase in rental revenue from the Same Centers is primarily due to an increase in occupancy and an increase in lease termination income as described below.

Rental revenue includes the amortization of above and below-market leases, the amortization of straight-line rents and lease termination income. The amortization of above and below-market leases increased from $2.0 million in 2010 to $2.2 million in 2011. The amortization of straight-lined rents decreased from $0.4 million in 2010 to $0.2 million in 2011. Lease termination income increased from $0.7 million in 2010 to $1.3 million in 2011.

Tenant recoveries increased $0.7 million, or 1.1%, from 2010 to 2011. The increase in tenant recoveries is attributed to an increase of $2.5 million from the Redevelopment Centers, $0.3 million from the Mervyn's Properties and $0.3 million from the Acquisition Property offset in part by a decrease of $2.4 million from the Same Centers. The decrease in tenant recoveries from the Same Centers is primarily due to a decrease in recoverable expenses.

#### Shopping Center and Operating Expenses:

Shopping center and operating expenses increased $2.0 million, or 3.2%, from 2010 to 2011. The increase in shopping center and operating expenses is attributed to an increase of $2.9 million from the Redevelopment Centers, $0.6 million from the Acquisition Property and $0.3 million from the Mervyn's Properties offset in part by a decrease of $1.8 million from the Same Centers. The decrease in shopping center and operating expenses at the Same Centers is primarily due to a decrease in property taxes and bad debt expense.

#### Management Companies' Operating Expenses:

Management Companies' operating expenses increased $3.7 million from 2010 to 2011 due to an increase in compensation costs in 2011.

#### REIT General and Administrative Expenses:

REIT general and administrative expenses increased by $0.1 million from 2010 to 2011.

#### Depreciation and Amortization:

Depreciation and amortization increased $5.4 million from 2010 to 2011. The increase in depreciation and amortization is primarily attributed to an increase of $3.5 million from the Redevelopment Centers, $1.3 million from the Same Centers and $0.3 million from the Acquisition Property.

#### Interest Expense:

Interest expense decreased $3.4 million from 2010 to 2011. The decrease in interest expense was primarily attributed to a decrease of $5.1 million from the Same Centers, $1.2 million from borrowings under the Company's line of credit and $0.2 million from the Senior Notes offset in part by an increase of $3.1 million from the Redevelopment Centers. The decrease in interest expense at the Same Centers is primarily attributed to the maturity of a $450.0 million interest rate swap agreement in April 2010.

The above interest expense items are net of capitalized interest, which decreased from $8.2 million in 2010 to $3.3 million in 2011, primarily due to a decrease in redevelopment activity.

#### Loss on Early Extinguishment of Debt:

The loss on early extinguishment of debt in 2011 is attributed to the prepayment of the mortgage note payable on Chesterfield Towne Center.

#### Equity in Income of Unconsolidated Joint Ventures:

Equity in income of unconsolidated joint ventures increased $13.8 million from 2010 to 2011. The increase in equity in income of unconsolidated joint ventures is primarily attributed to the Company's $12.5 million pro rata share of the remeasurement gain on the acquisition of an underlying ownership interest in Kierland Commons in 2011, see "Acquisitions."

#### Net Income (loss):

Net income increased from a net loss of $6.9 million in 2010 to $0.1 million of net income in 2011. The increase in net income is primarily attributed to an increase in equity in income from unconsolidated joint ventures of $13.8 million offset in part by the loss on early extinguishment of debt of $9.1 million in 2011.

#### Funds From Operations ("FFO"):

Primarily as a result of the factors mentioned above, FFO—diluted increased 2.9% from $71.6 million in 2010 to $73.7 million in 2011. For a reconciliation of FFO and FFO—diluted to net income (loss) available to common stockholders, the most directly comparable GAAP financial measure, see "Funds from Operations."

#### Operating Activities:

Cash provided by operating activities decreased from $64.9 million in 2010 to $41.5 million in 2011. The decrease was primarily due to changes in assets and liabilities and the results at the Centers as discussed above, including a $9.1 million loss on early extinguishment of debt.

#### Investing Activities:

Cash used in investing activities increased from $51.6 million in 2010 to $73.3 million in 2011. The increase was primarily due to an increase in contributions to unconsolidated joint ventures of $58.5 million offset in part by a decrease in acquisitions of property, development, redevelopment and property improvements of $31.2 million. The increase in contributions to unconsolidated joint ventures is primarily attributed to the Kierland Commons and The Shops at Atlas Park transactions (See "Acquisitions").

#### Financing Activities:

Cash used in financing activities increased from $10.3 million in 2010 to $225.8 million in 2011. The increase was primarily attributed to a decrease in proceeds from mortgages, bank and other notes payable of $71.9 million, an increase in cash dividends and distributions of $64.0 million, an increase in payments on mortgages, bank and other notes payable of $54.0 million and an increase in distributions to the co-venture partner of $26.8 million.

### Liquidity and Capital Resources

The Company anticipates meeting its liquidity needs for its operating expenses and debt service and dividend requirements through cash generated from operations, working capital reserves and/or borrowings under its unsecured line of credit. The completion of the Company's stock offering in April 2010, which raised net proceeds of approximately $1.2 billion, provided the Company with additional liquidity.

The following tables summarize capital expenditures incurred at the Centers:

*(Dollars in thousands)*

| Consolidated Centers: | For the Three Months Ended March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Acquisitions of property and equipment | $38,017 | $2,183 |
| Development, redevelopment and expansion of Centers | 19,345 | 35,686 |
| Renovations of Centers | 1,855 | 2,193 |
| Tenant allowances | 3,078 | 2,024 |
| Deferred leasing charges | 9,482 | 8,153 |
|  | $71,777 | $50,239 |
| **Joint Venture Centers (at Company's pro rata share):** |  |  |
| Acquisitions of property and equipment | $61,391 | $144 |
| Development, redevelopment and expansion of Centers | 7,604 | 7,059 |
| Renovations of Centers | 1,089 | 1,400 |
| Tenant allowances | 1,333 | 567 |
| Deferred leasing charges | 1,464 | 1,185 |
|  | $72,881 | $10,355 |

37

The Company expects amounts to be incurred in future years for tenant allowances and deferred leasing charges to be comparable or less than 2010 and that capital for those expenditures will be available from working capital, cash flow from operations, borrowings on property specific debt or unsecured corporate borrowings. The Company expects to incur between $100 million and $200 million during the next twelve months for development, redevelopment, expansion and renovations. Capital for these major expenditures, developments and/or redevelopments has been, and is expected to continue to be, obtained from a combination of equity or debt financings, which include borrowings under the Company's line of credit and construction loans. In addition to the Company's April 2010 equity offering and property refinancings, the Company has also generated additional liquidity in the past through joint venture transactions and the sale of non-core assets, and may continue to do so in the future.

The capital and credit markets can fluctuate, and at times, limit access to debt and equity financing for companies. As demonstrated by the Company's recent activity, including its new $1.5 billion line of credit and April 2010 equity offering, the Company was able to access capital; however, there is no assurance the Company will be able to do so in future periods or on similar terms and conditions. Many factors impact the Company's ability to access capital, such as its overall debt level, interest rates, interest coverage ratios and prevailing market conditions. In the event that the Company has significant tenant defaults as a result of the overall economy and general market conditions, the Company could have a decrease in cash flow from operations, which could create borrowings under its line of credit. These events could result in an increase in the Company's proportion of floating rate debt, which would cause it to be subject to interest rate fluctuations in the future.

The Company's total outstanding loan indebtedness at March 31, 2011 was $6.0 billion (including $609.6 million of unsecured debt and $2.2 billion of its pro rata share of joint venture debt). The majority of the Company's debt consists of fixed-rate conventional mortgages payable collateralized by individual properties. Approximately $270.5 million of the outstanding total indebtedness matures in 2011 (at the Company's pro rata share and excluding loans with extensions and refinancing transactions that have recently closed). The Company expects that all of these maturities during the next twelve months, except the mortgage note payable on Valley View Center, will be refinanced, restructured, extended and/or paid off from the Company's line of credit or cash on hand.

The Company's Senior Notes bear interest at 3.25%, payable semiannually, mature on March 15, 2012 and are senior to unsecured debt of the Company and are guaranteed by the Operating Partnership. The carrying value of the Senior Notes at March 31, 2011 was $609.6 million. See Note 11—Bank and Other Notes Payable in the Company's Notes to the Consolidated Financial Statements.

The Company had, through the Operating Partnership, a $1.5 billion revolving line of credit that bore interest at LIBOR plus a spread of 0.75% to 1.10% depending on the Company's overall leverage that matured on April 25, 2011. On May 2, 2011, the Company, through the Operating Partnership, obtained a new $1.5 billion revolving line of credit that bears interest at LIBOR plus a spread of 1.75% to 3.0% depending on the Company's overall leverage and matures on May 2, 2015 with a one-year extension option. Based on the Company's current leverage levels, the borrowing rate on the new facility is LIBOR plus 2.0%. The line of credit can be expanded, depending on certain conditions, up to a total facility of $2.0 billion. All obligations under the line of credit are unconditionally guaranteed by the Company and certain of its direct and indirect subsidiaries and are secured, subject to certain exceptions, by pledges of direct and indirect ownership interests in certain of the subsidiary guarantors.

Cash dividends and distributions for the three months ended March 31, 2011 were $73.1 million. A total of $41.5 million was funded by cash flows provided by operations. The remaining $31.6 million was funded through distributions received from unconsolidated joint ventures which are included in the cash flows from investing activities section of the Company's Consolidated Statement of Cash Flows.

At March 31, 2011, the Company was in compliance with all applicable loan covenants under its agreements.

At March 31, 2011, the Company had cash and cash equivalents available of $188.0 million.

#### Off-Balance Sheet Arrangements:

The Company accounts for its investments in joint ventures 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."

In addition, certain joint ventures also have secured debt that could become recourse debt to the Company or its subsidiaries, in excess of the Company's pro rata share, should the joint ventures be unable to discharge the obligations of the related debt. At March 31, 2011, the balance of the debt that could be recourse to the Company was $347.0 million offset in part by an indemnity from one of its joint venture partners for $161.6 million. The maturities of the recourse debt, net of indemnification, are $8.5 million in 2011, $172.5 million in 2013 and $4.4 million in 2014.

Additionally, as of March 31, 2011, the Company is contingently liable for $24.4 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 as of March 31, 2011 for the consolidated Centers over the periods in which they are expected to be paid (in thousands):

| Contractual Obligations | Payment Due by Period Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than five years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt obligations (includes expected interest payments) | $4,032,595 | $1,774,090 | $766,055 | $880,620 | $611,830 |
| Operating lease obligations(1) | 822,635 | 13,920 | 28,434 | 25,325 | 754,956 |
| Purchase obligations(1) | 14,838 | 14,838 | — | — | — |
| Other long-term liabilities | 252,893 | 206,898 | 4,177 | 4,136 | 37,682 |
|  | $5,122,961 | $2,009,746 | $798,666 | $910,081 | $1,404,468 |

(1)

See Note 17—Commitments and Contingencies of the Company's Consolidated Financial Statements.

### Funds From Operations

The Company uses 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 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 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. The Company believes that such a presentation also provides investors with a more meaningful measure of its operating results in comparison to the operating results of other REITs. Further, FFO on a 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. The Company also cautions that 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 (loss) available to common stockholders is provided below.

Management compensates for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of FFO and FFO-diluted to net income (loss) available to common stockholders. Management believes that to further understand the Company's performance, FFO should be compared with the Company's reported net income (loss) and considered in addition to cash flows in accordance with GAAP, as presented in the Company's Consolidated Financial Statements.

The following reconciles net income (loss) available to common stockholders to FFO and FFO-diluted (dollars and shares in thousands):

|  | For the Three Months Ended March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Net income (loss) available to common stockholders | $34 | $(6,357) |
| Adjustments to reconcile net income (loss) to FFO—basic and diluted: |  |  |
| Noncontrolling interest in the Operating Partnership | 3 | (798) |
| Loss on sale or write-down of consolidated assets, net(1) | 437 | — |
| Add: gain on undepreciated assets—consolidated assets(1) | 542 | — |
| (Gain) loss on sale, remeasurement or write-down of assets from unconsolidated joint ventures, net(2) | (12,550) | 62 |
| Add: gain (loss) on sale of undepreciated assets—from unconsolidated joint ventures(2) | 40 | (31) |
| Less write down of unconsolidated joint ventures(2) | — | (32) |
| Depreciation and amortization on consolidated assets | 64,626 | 59,215 |
| Less: depreciation and amortization attributable to noncontrolling interest on consolidated joint ventures | (4,494) | (5,093) |
| Depreciation and amortization on unconsolidated joint ventures(2) | 28,525 | 27,455 |
| Less: depreciation on personal property | (3,482) | (2,824) |
| FFO—basic and diluted | $73,681 | $71,597 |
| Weighted average number of FFO shares |  |  |
| outstanding for FFO—basic and diluted(3): | 142,477 | 109,118 |

(1)

The net total of these line items equal the loss (gain) on sales of depreciated assets. These line items are included in this reconciliation to provide the Company's investors with more detailed information and do not represent a departure from FFO as defined by NAREIT.

(2)

Unconsolidated assets are presented at the Company's pro rata share.

(3)

Calculated based upon basic net income as adjusted to reach basic FFO. As of March 31, 2011 and 2010, 12.1 million and 12.2 million OP Units were outstanding, respectively.

The computation of FFO—diluted shares outstanding includes the effect of share and unit-based compensation plans and the Senior Notes using the treasury stock method. It also assumes the conversion of MACWH, LP common and preferred units to the extent that they are dilutive to the FFO computation. The MACWH, LP preferred units were antidilutive to the calculations for the three months ended March 31, 2011 and 2010 and were not included in the above calculations.

## Market risk

As filed, 5,414 characters.

The Company's primary market risk exposure is interest rate risk. The Company has managed and will continue to manage interest rate risk by (1) maintaining a ratio of fixed rate, long-term debt to total debt such that floating rate exposure is kept at an acceptable level, (2) reducing interest rate exposure on certain long-term floating rate debt through the use of interest rate caps and/or swaps with appropriately matching maturities, (3) using treasury rate locks where appropriate to fix rates on anticipated debt transactions, and (4) taking advantage of favorable market conditions for long-term debt and/or equity.

The following table sets forth information as of March 31, 2011 concerning the Company's long term debt obligations, including principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value ("FV") (dollars in thousands):

| CONSOLIDATED CENTERS: Long term debt: | For the years ended March 31, 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | FV |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed rate(1) | $1,266,926 | $414,963 | $71,217 | $96,210 | $627,116 | $582,249 | $3,058,681 | $3,214,202 |
| Average interest rate | 6.10% | 5.52% | 5.77% | 5.16% | 6.69% | 5.08% | 5.91% |  |
| Floating rate | 418,662 | 121,365 | 118,959 | — | 107,000 | — | 765,986 | 769,711 |
| Average interest rate | 2.67% | 6.52% | 3.88% |  | 3.15% |  | 3.54% |  |
| Total debt—Consolidated Centers | $1,685,588 | $536,328 | $190,176 | $96,210 | $734,116 | $582,249 | $3,824,667 | $3,983,913 |
| **UNCONSOLIDATED JOINT VENTURE CENTERS:** |  |  |  |  |  |  |  |  |
| Long term debt (at Company's pro rata share): |  |  |  |  |  |  |  |  |
| Fixed rate | $60,938 | $406,750 | $476,976 | $65,594 | $375,801 | $580,250 | $1,966,309 | $2,118,310 |
| Average interest rate | 6.00% | 7.05% | 5.36% | 7.65% | 5.76% | 6.10% | 6.10% |  |
| Floating rate | 146,806 | 58,846 | 10,277 | — | — | 25,000 | 240,929 | 240,725 |
| Average interest rate | 1.20% | 5.07% | 3.38% |  |  | 3.56% | 2.48% |  |
| Total debt—Unconsolidated Joint Venture Centers | $207,744 | $465,596 | $487,253 | $65,594 | $375,801 | $605,250 | $2,207,238 | $2,359,035 |

(1)

Fixed rate debt includes the $400.0 million of floating rate mortgages payable. These amounts have effective fixed rates over the remaining term due to the swap agreements as discussed below.

The consolidated Centers' total fixed rate debt at March 31, 2011 and December 31, 2010 was $3.1 billion. The average interest rate on fixed rate debt at March 31, 2011 and December 31, 2010 was 5.91% and 5.98%, respectively. The consolidated Centers' total floating rate debt at March 31, 2011 and December 31, 2010 was $766.0 million and $766.9 million, respectively. The average interest rate on floating rate debt at March 31, 2011 and December 31, 2010 was 3.54% and 3.85%, respectively.

The Company's pro rata share of the Joint Venture Centers' fixed rate debt at March 31, 2011 and December 31, 2010 was $2.0 billion. The average interest rate on fixed rate debt at March 31, 2011 and December 31, 2010 was 6.10% and 6.11%, respectively. The Company's pro rata share of the Joint

Venture Centers' floating rate debt at March 31, 2011 and December 31, 2010 was $240.9 million and $241.7 million, respectively. The average interest rate on the floating rate debt at March 31, 2011 and December 31, 2010 was 2.48% and 2.24%, respectively.

The Company uses derivative financial instruments in the normal course of business to manage or hedge interest rate risk and records all derivatives on the balance sheet at fair value (See Note 5—Derivative Instruments and Hedging Activities in the Company's Notes to the Consolidated Financial Statements).

The following are outstanding derivatives at March 31, 2011 (amounts in thousands):

| Property/Entity | Notional Amount | Product | Rate | Maturity | Company's Ownership | Fair Value(1) |
| --- | ---: | --- | ---: | --- | ---: | ---: |
| La Cumbre Plaza | $30,000 | Cap | 3.00% | 12/9/2011 | 100% | $— |
| Paradise Valley Mall | 85,000 | Cap | 5.00% | 9/12/2011 | 100% | — |
| Superstition Springs Center | 67,500 | Cap | 8.63% | 9/9/2011 | 33% | — |
| The Oaks | 150,000 | Cap | 6.25% | 7/1/2011 | 100% | — |
| Victor Valley Mall | 100,000 | Swap | 5.08% | 4/25/2011 | 100% | (307) |
| Vintage Faire Mall | 135,000 | Swap | 5.08% | 4/25/2011 | 100% | (414) |
| Westside Pavilion | 175,000 | Cap | 5.50% | 6/5/2011 | 100% | — |
| Westside Pavilion | 165,000 | Swap | 5.08% | 4/25/2011 | 100% | (507) |

(1)

Fair value at the Company's ownership percentage.

Interest rate cap agreements ("Cap") offer protection against floating rates on the notional amount from exceeding the rates noted in the above schedule, and interest rate swap agreements ("Swap") effectively replace a floating rate on the notional amount with a fixed rate as noted above.

In addition, the Company has assessed the market risk for its floating rate debt and believes that a 1% increase in interest rates would decrease future earnings and cash flows by approximately $10.1 million per year based on $1.0 billion outstanding of floating rate debt at March 31, 2011.

The fair value of the Company's long-term debt is estimated based on discounted cash flows at interest rates that management believes reflect the risks associated with long-term debt of similar risk and duration.

## Controls and procedures

As filed, 1,588 characters.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, management carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation as of March 31, 2011, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and (b) is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In addition, there has been no change in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 213 characters.

There have been no material changes to the risk factors relating to the Company set forth under the caption "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

Filed May 6, 2011.
Source: SEC EDGAR, the filing index for accession 0001047469-11-004716. Last ingested by Listed: Nov 5, 2026, 12:24 ET. No prices; not investment advice.