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Macerich Company 10-K 2006

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    Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K

 

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005
    Commission File No. 1-12504

 

 

The Macerich Company
(Exact name of registrant as specified in its charter)

 

 

Maryland
(State or other jurisdiction of incorporation or organization)

 

 

401 Wilshire Boulevard, Suite 700,
Santa Monica, California 90401
(Address of principal executive offices, including zip code)

 

 

95-4448705
(I.R.S. Employer Identification Number)

 

 

Registrant's telephone number, including area code:
(310) 394-6000

 

 

Securities registered pursuant to Section 12(b) of the Act

 

 

Title of each class
Common Stock, $0.01 Par Value
Preferred Share Purchase Rights

 

 

Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes ý    No o

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes o    No ý

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment on to this Form 10-K.    o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer ý    Accelerated filer o    Non-accelerated filer    o

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý

 

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $2.4 billion as of the last business day of the registrant's most recent completed second quarter based upon the price at which the common shares were last sold on that day.

 

 

Number of shares outstanding of the registrant's common stock, as of February 24, 2006:
71,423,917 shares

 

 

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders meeting to be held in 2006 are incorporated by reference into Part III of this Form 10-K


THE MACERICH COMPANY

Annual Report on Form 10-K

For the Year Ended December 31, 2005

INDEX

Item No.

  Page No.


 

 

 


 

 


Part I

 

 

1.   Business   1

1A.   Risk Factors   15

1B.   Unresolved Staff Comments   23

2.   Properties   24

3.   Legal Proceedings   34

4.   Submission of Matters to a Vote of Securities Holders   34


Part II

 

 

5.   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   35

6.   Selected Financial Data   37

7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   40

7A.   Quantitative and Qualitative Disclosures About Market Risk   57

8.   Financial Statements and Supplementary Data   59

9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   59

9A.   Controls and Procedures   59

9B.   Other Information   62


Part III

 

 

10.   Directors and Executive Officers of the Registrant   63

11.   Executive Compensation   63

12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   63

13.   Certain Relationships and Related Transactions   64

14.   Principal Accountant Fees and Services   65


Part IV

 

 

15.   Exhibits and Financial Statement Schedules   66


Signatures

 

145



Part I


Item 1. Business

General

The Macerich Company (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 December 31, 2005, the Operating Partnership owned or had an ownership interest in 75 regional shopping centers, 20 community shopping centers and two development properties aggregating approximately 78.9 million square feet of gross leasable area ("GLA"). These 97 regional, community and development shopping centers are referred to hereinafter as the "Centers", unless the context otherwise requires. The Company is a self-administered and self-managed real estate investment trust ("REIT") and conducts all of its operations through the Operating Partnership and the Company's management companies, Macerich Property Management Company, LLC, a single-member Delaware limited liability company, Macerich Management Company, a California corporation, Westcor Partners, LLC, a single member Arizona limited liability company, Macerich Westcor Management, LLC, a single member Delaware limited liability company and Westcor Partners of Colorado, LLC, a Colorado limited liability company. As part of the Wilmorite acquisition (See Recent Developments—Acquisitions), the Company acquired MACW Mall Management, Inc., a New York corporation and MACW Property Management, LLC, a New York limited liability company. These two management companies are collectively referred to herein as the "Wilmorite Management Companies." The three Westcor management companies are collectively referred herein as the "Westcor Management Companies." All seven of the management companies are collectively referred to herein as the "Management Companies."

The Company was organized as a Maryland corporation in September 1993 to continue and expand the shopping center operations of Mace Siegel, Arthur M. Coppola, Dana K. Anderson and Edward C. Coppola (the "principals") and certain of their business associates.

All references to the Company in this Form 10-K include the Company, those entities owned or controlled by the Company and predecessors of the Company, unless the context indicates otherwise.

Recent Developments

Equity Offering

On January 19, 2006, the Company issued 10,952,381 common shares for net proceeds of $747.0 million. The proceeds from issuance of the shares were used to pay off the $619.0 million acquisition loan from the Wilmorite acquisition and to pay down a portion of the Company's line of credit pending use to pay part of the purchase price for Valley River Center (See Acquisitions).

Acquisitions

On February 1, 2006, the Company acquired Valley River Center, a 916,000 square foot super-regional mall in Eugene, Oregon. The total purchase price was $187.5 million and concurrent with the acquisition, the

The Macerich Company    1


Company placed a $100.0 million loan bearing interest at a fixed rate of 5.58% on the property. The balance of the purchase price was funded by cash and borrowings under the Company's line of credit.

On January 11, 2005, the Company became a 15% owner in a joint venture that acquired Metrocenter, a 1.3 million square foot super-regional mall in Phoenix, Arizona. The total purchase price was $160 million and concurrently with the acquisition, the joint venture placed a $112 million floating rate loan on the property. The Company's share of the purchase price, net of the debt, was $7.2 million which was funded by cash and borrowings under the Company's line of credit.

On January 21, 2005, the Company formed a 50/50 joint venture with a private investment company. The joint venture acquired a 49% interest in Kierland Commons, a 437,000 square foot mixed use center in Phoenix, Arizona. The joint venture's purchase price for the interest in the property was $49.0 million. The Company assumed its share of the underlying property debt and funded the remainder of its share of the purchase price by cash and borrowings under the Company's line of credit.

On April 8, 2005, the Company acquired Ridgmar Mall, a 1.3 million square foot super-regional mall in Fort Worth, Texas. The acquisition was completed in a 50/50 joint venture with an affiliate of Walton Street Capital, LLC. The purchase price was $71.1 million. Concurrent with the closing, a $57.4 million loan bearing interest at a fixed rate of 6.07% was placed on the property. The balance of the purchase price was funded by borrowings under the Company's line of credit.

On April 25, 2005, the Company and the Operating Partnership completed its acquisition of Wilmorite Properties, Inc., a Delaware corporation ("Wilmorite") and Wilmorite Holdings, L.P., a Delaware limited partnership ("Wilmorite Holdings"). Wilmorite's portfolio includes interests in 11 regional malls and two open-air community shopping centers with 13.4 million square feet of space located in Connecticut, New York, New Jersey, Kentucky and Virginia. The total purchase price was approximately $2.333 billion, plus adjustments for working capital, including the assumption of approximately $877.2 million of existing debt with an average interest rate of 6.43% and the issuance of $234 million of convertible preferred units ("CPUs") and $5.8 million of common units in Wilmorite Holdings. The balance of the consideration to the equity holders of Wilmorite and Wilmorite Holdings was paid in cash, which was provided primarily by a five-year, $450 million term loan bearing interest at LIBOR plus 1.50% and a $650 million acquisition loan with a term of up to two years and bearing interest initially at LIBOR plus 1.60%. An affiliate of the Operating Partnership is the general partner and, together with other affiliates, own approximately 83% of Wilmorite Holdings, with the remaining 17% held by those limited partners of Wilmorite Holdings who elected to receive CPUs or common units in Wilmorite Holdings rather than cash. Approximately $213 million of the CPUs can be redeemed, subject to certain conditions, for the portion of the Wilmorite portfolio generally located in the area of Rochester, New York.

Financing Activity

Concurrent with the Wilmorite closing, the Company modified its $250 million unsecured term loan. The interest rate was reduced from LIBOR plus 2.50% to LIBOR plus 1.50%.

Concurrent with the Wilmorite closing, the Company obtained a five-year $450 million term loan bearing interest at LIBOR plus 1.50% and a $650 million acquisition loan with a term of up to two years and bearing

2     The Macerich Company



interest initially at LIBOR plus 1.60%. The outstanding $619.0 million balance of this acquisition loan was paid off in full with the net proceeds of the Company's common stock offering on January 19, 2006 (See Equity Offering). The $450 million term loan has an interest rate swap agreement which effectively fixes the interest rate at 6.296% (4.796% swap rate plus 1.50%) from December 1, 2005 to April 15, 2010.

On May 20, 2005, the Company's joint venture in Lakewood Mall refinanced the loan on the property. The original loan of $127 million at an average interest rate of 7.1% was replaced with a ten-year $250 million loan bearing interest at 5.41%. The Company's share of the loan proceeds were used to pay down its line of credit.

On October 3, 2005, the Company obtained a 10-year $37 million fixed rate loan bearing interest at 4.97% at Flagstaff Mall. The proceeds were used to payoff the existing $13.0 million loan which had an interest rate of 7.8%. The balance of the loan proceeds were used to pay down the Company's line of credit.

On October 4, 2005, the Company's joint venture in Camelback Colonnade obtained a $41.5 million two-year loan bearing interest at LIBOR plus 0.69% on the property. The proceeds were used to pay off the existing $30.7 million loan which had an interest rate of 7.5%. The Company's share of the remaining loan proceeds were used to pay down the Company's line of credit.

On November 9, 2005, the Company refinanced the $72.0 million loan on Greece Ridge Mall. The interest rate was reduced from LIBOR plus 2.625% to LIBOR plus 0.65%.

On September 22, 2005, the Company's joint venture in Scottsdale 101 modified its construction loan and obtained an additional $16.0 million advance, increasing the loan to a $56 million floating-rate loan on the property at a rate of LIBOR plus 1.25%. The Company's share of the loan proceeds were used to pay down the Company's line of credit.

On December 29, 2005, the Company refinanced the loan on Valley View Mall. The old loan of $51.0 million with a fixed rate of 7.89% was replaced with a $125.0 million, five-year fixed rate loan bearing interest at 5.72%. The excess proceeds were used to pay down the Company's line of credit and used for general corporate purposes.

Redevelopment and Development Activity

At Washington Square in suburban Portland, Oregon, the Company had a grand opening on November 18, 2005 of a lifestyle oriented expansion project which consists of the addition of 76,000 square feet of shop space. In addition, an agreement has been reached with Mervyn's to recapture its 100,000 square foot location. The Company plans to recycle that square footage over the next two years.

At Fresno Fashion Fair, an 87,000 square foot lifestyle center expansion to the existing mall continues on schedule. The first phase, which included The Cheesecake Factory, opened on December 3, 2005. Completion of the balance of the project is expected in Summer 2006.

Construction continues on the Twenty Ninth Street project, a signature, outdoor retail development on 62 acres in the heart of Boulder, Colorado. Retail tenants include Ann Taylor Loft, Apple, Bath and Body Works,

The Macerich Company    3



Clark's Shoes, Puma, JJill, Victoria Secret, and White House/Black Market joining anchors Macy's department store, Wild Oats, Home Depot, and Century Theatres and an array of additional specialty stores and restaurants. Twenty Ninth Street is scheduled to open in phases starting in the Fall 2006.

Construction will begin in the first quarter of 2006 on the SanTan Village regional shopping center in Gilbert, Arizona. The center is an outdoor open air streetscape project planned to contain in excess of 1.5 million square feet on 120 acres. The center will be anchored by Dillard's, Harkins Theatres and will contain a lifestyle shopping district featuring retail, office, residential and restaurants. It is also anticipated that an additional department store will also anchor this center. The project is scheduled to open in phases starting in Fall 2007 with all phases completed by 2008.

Dispositions

On January 5, 2005, the Company sold the Arizona Lifestyle Galleries for $4.3 million. The sale resulted in a gain on sale of asset of $0.3 million.


The Shopping Center Industry

General

There are several types of retail shopping centers, which are differentiated primarily based on size and marketing strategy. Regional shopping centers generally contain in excess of 400,000 square feet of GLA and are typically anchored by two or more department or large retail stores ("Anchors") and are referred to as "Regional Shopping Centers" or "Malls". Regional Shopping Centers also typically contain numerous diversified retail stores ("Mall Stores"), most of which are national or regional retailers typically located along corridors connecting the Anchors. Community Shopping Centers, also referred to as "strip centers" or "urban villages" or "specialty centers" are retail shopping centers that are designed to attract local or neighborhood customers and are typically anchored by one or more supermarkets, discount department stores and/or drug stores. Community Shopping Centers typically contain 100,000 square feet to 400,000 square feet of GLA. In addition, freestanding retail stores are located along the perimeter of the shopping centers ("Freestanding Stores"). Anchors, Mall and Freestanding Stores and other tenants typically contribute funds for the maintenance of the common areas, property taxes, insurance, advertising and other expenditures related to the operation of the shopping center.

Regional Shopping Centers

A Regional Shopping Center draws from its trade area by offering a variety of fashion merchandise, hard goods and services and entertainment, often in an enclosed, climate controlled environment with convenient parking. Regional Shopping Centers provide an array of retail shops and entertainment facilities and often serve as the town center and the preferred gathering place for community, charity, and promotional events.

Regional Shopping Centers have generally provided owners with relatively stable growth in income despite the cyclical nature of the retail business. This stability is due both to the diversity of tenants and to the typical dominance of Regional Shopping Centers in their trade areas.

Regional Shopping Centers have different strategies with regard to price, merchandise offered and tenant mix, and are generally tailored to meet the needs of their trade areas. Anchor tenants are located along common

4     The Macerich Company



areas in a configuration designed to maximize consumer traffic for the benefit of the Mall Stores. Mall GLA, which generally refers to gross leasable area contiguous to the Anchors for tenants other than Anchors, is leased to a wide variety of smaller retailers. Mall Stores typically account for the majority of the revenues of a Regional Shopping Center.


Business of the Company

The Company has a four-pronged business strategy which focuses on the acquisition, leasing and management, redevelopment and development of Regional Shopping Centers.

Acquisitions.    The Company focuses on well-located, quality regional shopping centers that are, or it believes can be dominant in their trade area and have strong revenue enhancement potential. The Company subsequently seeks to improve operating performance and returns from these properties through leasing, management and redevelopment. Since its initial public offering, the Company has acquired interests in shopping centers nationwide. The Company believes that it is geographically well positioned to cultivate and maintain ongoing relationships with potential sellers and financial institutions and to act quickly when acquisition opportunities arise. (See "Recent Developments—Acquisitions").

Leasing and Management.    The Company believes that the shopping center business requires specialized skills across a broad array of disciplines for effective and profitable operations. For this reason, the Company has developed a fully integrated real estate organization with in-house acquisition, accounting, development, finance, leasing, legal, marketing, property management and redevelopment expertise. In addition, the Company emphasizes a philosophy of decentralized property management, leasing and marketing performed by on-site professionals. The Company believes that this strategy results in the optimal operation, tenant mix and drawing power of each Center as well as the ability to quickly respond to changing competitive conditions of the Center's trade area.

The Company believes that on-site property managers can most effectively operate the Centers. Each Center's property manager is responsible for overseeing the operations, marketing, maintenance and security functions at the Center. Property managers focus special attention on controlling operating costs, a key element in the profitability of the Centers, and seek to develop strong relationships with and to be responsive to the needs of retailers.

Similarly, the Company generally utilizes on-site and regionally located leasing managers to better understand the market and the community in which a Center is located. Leasing managers are charged with more than the responsibility of leasing space. The Company continually assesses and fine tunes each Center's tenant mix, identifies and replaces underperforming tenants and seeks to optimize existing tenant sizes and configurations.

On a selective basis, the Company also does property management and leasing for third parties. The Company currently manages three malls for third party owners on a fee basis. In addition, the Company manages four community centers for a related party. (See—"Item 13—Certain Relationships and Related Transactions").

Redevelopment.    One of the major components of the Company's growth strategy is its ability to redevelop acquired properties. For this reason, the Company has built a staff of redevelopment professionals who have primary responsibility for identifying redevelopment opportunities that will result in enhanced long-term

The Macerich Company    5



financial returns and market position for the Centers. The redevelopment professionals oversee the design and construction of the projects in addition to obtaining required governmental approvals. (See "Recent Developments—Redevelopment and Development Activity").

Development.    The Company is pursuing ground-up development projects on a selective basis. The Company believes it can supplement its strong acquisition, operations and redevelopment skills with its ground-up development expertise to further increase growth opportunities. (See "Recent Developments—Redevelopment and Development Activity").

The Centers

As of December 31, 2005, the Centers consist of 75 Regional Shopping Centers, 20 Community Shopping Centers and two development properties aggregating approximately 78.9 million square feet of GLA. The 75 Regional Shopping Centers in the Company's portfolio average approximately 972,126 square feet of GLA and range in size from 2.2 million square feet of GLA at Tyson's Corner Center to 323,449 square feet of GLA at Panorama Mall. The Company's 20 Community Shopping Centers have an average of 250,511 square feet of GLA. The Centers presently include 310 Anchors totaling approximately 42.0 million square feet of GLA and approximately 10,000 Mall and Freestanding Stores totaling approximately 36.9 million square feet of GLA.

Competition

There are numerous owners and developers of real estate that compete with the Company in its trade areas. There are seven other publicly traded mall companies and several large private mall companies, any of which under certain circumstances could compete against the Company for an acquisition, an Anchor or a tenant. This results in competition for both acquisition of centers and for tenants or Anchors to occupy space. The existence of competing shopping centers could have a material impact on the Company's ability to lease space and on the level of rent that can be achieved. There is also increasing competition from other retail formats and technologies, such as lifestyle centers, power centers, internet shopping and home shopping networks, factory outlet centers, discount shopping clubs and mail-order services that could adversely affect the Company's revenues.

Major Tenants

The Centers derived approximately 94.0% of their total rents for the year ended December 31, 2005 from Mall and Freestanding Stores. One tenant accounted for approximately 4.1% of minimum rents of the Company, and no other single tenant accounted for more than 3.6% as of December 31, 2005.

6     The Macerich Company


The following tenants (including their subsidiaries) represent the 10 largest tenants in the Company's portfolio (including joint ventures) based upon minimum rents in place as of December 31, 2005:

Tenant

  Primary DBA's

  Number of Locations in the Portfolio

  % of Total Minimum Rents
as of
December 31, 2005


Limited Brands, Inc.   Victoria's Secret, Bath and Body   220   4.1%
The Gap, Inc.   Gap, Old Navy, Banana Republic   123   3.6%
Foot Locker, Inc.   Footlocker, Lady Footlocker   166   2.2%
Luxottica Group S.P.A.   Lenscrafters, Sunglass Hut   218   1.8%
Cingular Wireless, LLC(1)   Cingular Wireless   31   1.6%
Zale Corporation   Zales   133   1.5%
Sun Capital Partners, Inc.(2)   Anchor Blue, Mervyn's, Sam Goody and Suncoast Motion Pictures   107   1.4%
Federated Department
Stores, Inc.(3)
  Macy's, Robinsons-May, Foley's   90   1.2%
J.C. Penney Company, Inc.   J.C. Penney   53   1.1%
Abercrombie & Fitch Co.   Abercrombie & Fitch, Hollister   50   1.1%

(1)
Includes Cingular Wireless office headquarters located at Redmond Town Center.

(2)
Sun Capital Partners, Inc. owns Musicland Holding Corp. which operates Sam Goody and Suncoast Motion Pictures. On February 1, 2006, Musicland Holding Corp. announced the closure of 341 of its low performing Sam Goody and Suncoast Picture Stores which include 26 stores in the Centers.

(3)
Federated Department Stores, Inc. disclosed that it has identified duplicate locations in certain malls which will be divested during 2006. Eleven of the identified stores are located in 10 of the Centers.

Mall and Freestanding Stores

Mall and Freestanding Store leases generally provide for tenants to pay rent comprised of a fixed base (or "minimum") rent and a percentage rent based on sales. In some cases, tenants pay only a fixed minimum rent, and in some cases, tenants pay only percentage rents. Historically, most leases for Mall and Freestanding Stores contain provisions that allow the Centers to recover their costs for maintenance of the common areas, property taxes, insurance, advertising and other expenditures related to the operations of the Center. The Company generally enters into leases which require tenants to pay a stated amount for such operating expenses, generally excluding property taxes, regardless of the expenses the Company actually incurs at any Center.

Tenant space of 10,000 square feet and under in the portfolio at December 31, 2005 comprises 68.9% of all Mall and Freestanding Store space. The Company uses tenant spaces of 10,000 square feet and under for comparing rental rate activity. The Company believes that to include space over 10,000 square feet would provide a less meaningful comparison.

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When an existing lease expires, the Company is often able to enter into a new lease with a higher base rent component. The average base rent for new Mall and Freestanding Store leases at the consolidated Centers, 10,000 square feet and under, commencing during 2005 was $35.60 per square foot, or 15.9% higher than the average base rent for all Mall and Freestanding Stores at the consolidated Centers, 10,000 square feet and under, expiring during 2005 of $30.71 per square foot.

The following tables set forth for the Centers, the average base rent per square foot of Mall and Freestanding GLA, for tenants 10,000 square feet and under, as of December 31 for each of the past three years:

Consolidated Centers:

For the Year Ended
December 31,

  Average Base
Rent Per Square Foot(1)

  Avg. Base
Rent Per Sq. Ft. on Leases Commencing During the Year(2)

  Avg. Base
Rent Per Sq. Ft. on Leases Expiring During the Year(3)


2003   $31.71   $36.77   $29.93
2004   $32.60   $35.31   $28.84
2005   $34.23   $35.60   $30.71

Joint Venture Centers:

For the Year Ended
December 31,

  Average Base
Rent Per Square Foot(1)

  Avg. Base
Rent Per Sq. Ft. on Leases Commencing During the Year(2)

  Avg. Base
Rent Per Sq. Ft. on Leases Expiring During the Year(3)


2003   $31.29   $37.00   $27.83
2004   $33.39   $36.86   $29.32
2005   $36.35   $39.08   $30.18

(1)
Average base rent per square foot is based on Mall and Freestanding Store GLA for spaces, 10,000 square feet and under, occupied as of December 31 for each of the Centers owned by the Company in 2003, 2004 and 2005.

(2)
The average base rent on lease signings commencing during the year represents the actual rent to be paid on a per square foot basis during the first twelve months. Lease signings for the expansion area of Queens Center and La Encantada are excluded.

(3)
The average base rent per square foot on leases expiring during the year represents the final year minimum rent, on a cash basis, for all tenant leases 10,000 square feet and under expiring during the year.

Cost of Occupancy

The Company's management believes that in order to maximize the Company's operating cash flow, the Centers' Mall Store tenants must be able to operate profitably. A major factor contributing to tenant

8     The Macerich Company


profitability is cost of occupancy. The following tables summarize occupancy costs for Mall Store tenants in the Centers as a percentage of total Mall Store sales for the last three years:

 
  For Years ended December 31,

Consolidated Centers:

  2003

  2004

  2005


Minimum Rents   8.7%   8.3%   8.3%
Percentage Rents   0.3%   0.4%   0.5%
Expense Recoveries(1)   3.8%   3.7%   3.6%

    12.8%   12.4%   12.4%

 
  For Years ended December 31,

Joint Venture Centers:

  2003

  2004

  2005


Minimum Rents   8.1%   7.7%   7.4%
Percentage Rents   0.4%   0.5%   0.5%
Expense Recoveries(1)   3.2%   3.2%   3.0%

    11.7%   11.4%   10.9%

(1)
Represents real estate tax and common area maintenance charges.

Lease Expirations

The following tables show scheduled lease expirations (for Centers owned as of December 31, 2005) of Mall and Freestanding Stores (10,000 square feet and under) for the next ten years, assuming that none of the tenants exercise renewal options:

Consolidated Centers:

Year Ending
December 31,

  Number of
Leases
Expiring

  Approximate
GLA of
Leases Expiring(1)

  % of Total
Leased GLA
Represented by
Expiring Leases(2)

  Ending Base Rent
per Square Foot of
Expiring Leases(1)


2006   547   1,151,106   13.27%   $31.92
2007   433   959,315   11.06%   $31.45
2008   403   800,201   9.22%   $35.90
2009   355   713,211   8.22%   $35.59
2010   473   977,999   11.27%   $38.36
2011   409   1,100,180   12.68%   $37.40
2012   284   781,858   9.01%   $35.16
2013   201   494,677   5.70%   $39.62
2014   264   602,204   6.94%   $47.56
2015   280   743,851   8.57%   $45.17

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Joint Venture Centers (at Company's pro rata share):

Year Ending
December 31,

  Number of
Leases
Expiring

  Approximate
GLA of
Leases Expiring(1)

  % of Total
Leased GLA
Represented by
Expiring Leases(2)

  Ending Base Rent
per Square Foot of
Expiring Leases(1)


2006   433   415,258   10.91%   $36.19
2007   383   432,169   11.36%   $33.42
2008   418   434,656   11.42%   $36.95
2009   401   430,567   11.32%   $36.43
2010   400   414,615   10.90%   $39.43
2011   317   387,525   10.19%   $38.84
2012   251   269,831   7.09%   $42.82
2013   223   244,582   6.43%   $41.87
2014   214   262,849   6.91%   $40.93
2015   220   283,424   7.45%   $41.55

(1)
Currently, 37% of leases have provisions for future consumer price index increases which are not reflected in ending lease rent.

(2)
For leases 10,000 square feet and under.

Anchors

Anchors have traditionally been a major factor in the public's identification with Regional Shopping Centers. Anchors are generally department stores whose merchandise appeals to a broad range of shoppers. Although the Centers receive a smaller percentage of their operating income from Anchors than from Mall and Freestanding Stores, strong Anchors play an important part in maintaining customer traffic and making the Centers desirable locations for Mall and Freestanding Store tenants.

Anchors either own their stores, the land under them and in some cases adjacent parking areas, or enter into long-term leases with an owner at rates that are lower than the rents charged to tenants of Mall and Freestanding Stores. Each Anchor, which owns its own store, and certain Anchors which lease their stores, enter into reciprocal easement agreements with the owner of the Center covering among other things, operational matters, initial construction and future expansion.

Anchors accounted for approximately 6.0% of the Company's total rent for the year ended December 31, 2005.

10     The Macerich Company



The following table identifies each Anchor, each parent company that owns multiple Anchors and the number of square feet owned or leased by each such Anchor or parent company in the Company's portfolio at December 31, 2005:

Name

  Number of
Anchor Stores

  GLA
Owned by
Anchor

  GLA
Leased by
Anchor

  Total GLA
Occupied
by Anchor


Federated Department Stores, Inc.(1)                
  Macy's   30   3,443,795   1,363,651   4,807,446
  Robinsons-May   17   1,901,396   1,084,491   2,985,887
  Foley's   7   1,379,668     1,379,668
  Kaufmann's   5   495,816   149,009   644,825
  Hecht's   3   140,000   380,502   520,502
  Meier & Frank   2   242,505   200,000   442,505
  Lord & Taylor   4   209,422   199,372   408,794
  Filene's   2     288,879   288,879
  Bloomingdale's   1     255,888   255,888
  Marshall Field's   2   115,193   100,790   215,983
  Famous-Barr   1   180,000     180,000

    Total   74   8,107,795   4,022,582   12,130,377
Sears Holdings Corporation                
  Sears   53   4,800,780   2,240,500   7,041,280
  Great Indoors, The   1     131,051   131,051
  K-Mart   1     86,479   86,479

    Total   55   4,800,780   2,458,030   7,258,810
J.C. Penney   51   2,757,645   4,010,957   6,768,602
Dillard's(2)   29   3,693,812   1,052,582   4,746,394
Nordstrom(3)   11   699,127   1,128,369   1,827,496
The Bon-Ton Stores Inc.(4)                
  Younkers(4)   6     609,177   609,177
  Bon-Ton, The   6   263,534   335,184   598,718
  Herberger's(4)   5   269,969   214,573   484,542

    Total   17   533,503   1,158,934   1,692,437
Sun Capital Partners, Inc.                
  Mervyn's(5)   19   888,611   627,412   1,516,023
Target(6)   12   920,541   564,279   1,484,820
Gottschalk's   8   332,638   608,772   941,410
Home Depot (Expo Design Center)(7)   4   132,003   375,404   507,407
Neiman Marcus   3   120,000   321,450   441,450
Wal-Mart(8)   2   371,527     371,527
Burlington Coat Factory   4   186,570   172,838   359,408
Boscov's   2     314,717   314,717
Steve & Barry's University Sportswear   2   148,750   157,000   305,750
Von Maur   3   186,686   59,563   246,249
Belk, Inc.                
  Belk   3     200,925   200,925
Lowe's   1   135,197     135,197
Best Buy   2   129,441     129,441
Wegmans Food Markets, Inc.                
  Chase-Pitkin Home & Garden   1     124,832   124,832
Kohl's   1     114,359   114,359
Dick's Sporting Goods   1     97,241   97,241
Saks Fifth Avenue   1     92,000   92,000
L.L. Bean   1     75,778   75,778
Gordmans   1     60,000   60,000
Peebles   1     42,090   42,090
Beall's   1     40,000   40,000

    310   24,144,626   17,880,114   42,024,740

(1)
Federated Department Stores, Inc. disclosed that it has identified duplicate locations in certain malls which will be divested during 2006. Eleven of the identified stores are located in 10 of the Centers.

(2)
Dillard's completed a 58,000 square foot expansion at Green Tree Mall in March 2005.

(3)
Nordstrom opened a new 200,000 square foot store at NorthPark Center in November 2005.

The Macerich Company    11


(4)
The Bon-Ton Stores, Inc. has acquired Herberger's and Younkers from Saks Incorporated in a transaction completed in March 2006. Herberger's completed a 42,000 square foot expansion at Rimrock Mall in October 2005. The Bon-Ton stores at Great Northern Mall and Shoppingtown Mall closed in January 2006.

(5)
At Washington Square, an agreement has been reached with Mervyn's to recapture its 100,000 square foot location. The Company plans to recycle that square footage over the next two years.

(6)
Target opened a new 116,000 square foot store at Valley Mall in October 2005.

(7)
Home Depot opened a new 141,000 square foot store at Twenty Ninth Street in January 2006.

(8)
Wal-Mart opened a 206,527 square foot store at San Tan Village in January 2005.

Environmental Matters

Each of the Centers has been subjected to a Phase I audit (which involves review of publicly available information and general property inspections, but does not involve soil sampling or ground water analysis) completed by an environmental consultant.

Based on these audits, and on other information, the Company is aware of the following environmental issues that may reasonably result in costs associated with future investigation or remediation, or in environmental liability:

    Asbestos. The Company has conducted asbestos-containing materials ("ACM") surveys at various locations within the Centers. The surveys indicate that ACMs are present or suspected in certain areas, primarily vinyl floor tiles, mastics, roofing materials, drywall tape and joint compounds. The identified ACMs are generally non-friable, in good condition, and possess low probabilities for disturbance. At certain Centers where ACMs are present or suspected, however, some ACMs have been or may be classified as "friable," and ultimately may require removal under certain conditions. The Company has developed and implemented an operations and maintenance ("O&M") plan to manage ACMs in place.

    Underground Storage Tanks. Underground storage tanks ("USTs") are or were present at certain of the Centers, often in connection with tenant operations at gasoline stations or automotive tire, battery and accessory service centers located at such Centers. USTs also may be or have been present at properties neighboring certain Centers. Some of these tanks have either leaked or are suspected to have leaked. Where leakage has occurred, investigation, remediation, and monitoring costs may be incurred by the Company if responsible current or former tenants, or other responsible parties, are unavailable to pay such costs.

    Chlorinated Hydrocarbons. The presence of chlorinated hydrocarbons such as perchloroethylene ("PCE") and its degradation byproducts have been detected at certain of the Centers, often in connection with tenant dry cleaning operations. Where PCE has been detected, the Company may incur investigation, remediation and monitoring costs if responsible current or former tenants, or other responsible parties, are unavailable to pay such costs.

PCE has been detected in soil and groundwater in the vicinity of a dry cleaning establishment at North Valley Plaza, formerly owned by a joint venture of which the Company was a 50% member. The property was sold on December 18, 1997. The California Department of Toxic Substances Control ("DTSC") advised the

12     The Macerich Company


Company in 1995 that very low levels of Dichloroethylene ("1,2 DCE"), a degradation byproduct of PCE, had been detected in a municipal water well located 1/4 mile west of the dry cleaners, and that the dry cleaning facility may have contributed to the introduction of 1,2 DCE into the water well. According to the DTSC, the maximum contaminant level ("MCL") for 1,2 DCE which is permitted in drinking water is 6 parts per billion ("ppb"). The 1,2 DCE was detected in the water well at a concentration of 1.2 ppb, which is below the MCL. In 1998, DTSC issued an order to multiple responsible parties regarding this contamination. The Company has retained an environmental consultant and has initiated extensive testing of the site. The joint venture agreed (between itself and the buyer) that it would be responsible for continuing to pursue the investigation and remediation of impacted soil and groundwater resulting from releases of PCE from the former dry cleaner. A total of $0.1 million and $0.1 million have already been incurred by the joint venture for remediation, professional and legal fees for the years ended December 31, 2005 and 2004, respectively. The Company has been sharing costs with former owners of the property. A minimal amount remains reserved at December 31, 2005.

The Company acquired Fresno Fashion Fair in December 1996. Asbestos was detected in structural fireproofing throughout much of the Center. Testing data conducted by professional environmental consulting firms indicates that the fireproofing is largely inaccessible to building occupants and is well adhered to the structural members. Additionally, airborne concentrations of asbestos were well within OSHA's permissible exposure limit of .1 fcc. The accounting at acquisition included a reserve of $3.3 million to cover future removal of this asbestos, as necessary. The Center was recently renovated and a substantial amount of the asbestos was removed. The Company incurred $0.5 million and $0.1 million in remediation costs for the years ended December 31, 2005 and 2004, respectively. An additional $1.2 million remains reserved at December 31, 2005.

Insurance

Each of the Centers has comprehensive liability, fire, extended coverage and rental loss insurance with insured limits customarily carried for similar properties. The Company does not insure certain types of losses (such as losses from wars), because they are either uninsurable or not economically insurable. In addition, while the Company or the relevant joint venture, as applicable, carries earthquake insurance on the Centers located in California, the policies are subject to a deductible equal to 5% of the total insured value of each Center, a $100,000 per occurrence minimum and a combined annual aggregate loss limit of $200 million on these Centers. While the Company or the relevant joint venture also carries terrorism insurance on the Centers, the policies are subject to a $10,000 deductible and a combined annual aggregate loss of $800 million for both certified and non-certified acts of terrorism. Each Center has environmental insurance covering eligible third-party losses, remediation and non-owned disposal sites, subject to a $100,000 deductible and a $10 million three-year aggregate limit. Some environmental losses are not covered by this insurance because they are uninsurable or not economically insurable. Furthermore, the Company carries title insurance on substantially all of the Centers for less than their full value.

Qualification as a Real Estate Investment Trust

The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its first taxable year ended December 31, 1994, and intends to conduct its operations so as to continue to qualify as a REIT under the Code. As a REIT, the Company generally will not be subject to federal and state income taxes on its net taxable income that it currently distributes to

The Macerich Company    13


stockholders. Qualification and taxation as a REIT depends on the Company's ability to meet certain dividend distribution tests, share ownership requirements and various qualification tests prescribed in the Code.

Employees

As of December 31, 2005, the Company and the management companies employ 2,787 persons, including executive officers (8), personnel in the areas of acquisitions and business development (13), property management (477), leasing (135), redevelopment/development (104), financial services (247) and legal affairs (59). In addition, in an effort to minimize operating costs, the Company generally maintains its own security and guest services staff (1,680) and in some cases maintenance staff (64). The Company primarily engages a third party to handle maintenance at the Centers. Unions represent 18 of these employees. The Company believes that relations with its employees are good.

Available Information; Website Disclosure; Corporate Governance Documents

The Company's corporate website address is www.macerich.com. The Company makes available free-of-charge through this website its reports on Forms 10-K, 10-Q and 8-K and all amendments thereto, as soon as reasonably practicable after the reports have been filed with, or furnished to, the Securities and Exchange Commission. These reports are available under the heading "Investing—SEC Filings," through a free hyperlink to a third-party service.

The following documents relating to Corporate Governance are available on the Company's website at www.macerich.com under "Investing—Corporate Governance":

      Guidelines on Corporate Governance
      Code of Business Conduct and Ethics
      Code of Ethics for CEO and Senior Financial Officers
      Audit Committee Charter
      Compensation Committee Charter
      Executive Committee Charter
      Nominating and Corporate Governance Committee Charter

You may also request copies of any of these documents by writing to:

      Attention: Corporate Secretary
      The Macerich Company
      401 North Wilshire Blvd., Suite 700
      Santa Monica, CA 90401

14     The Macerich Company



Item 1A. Risk Factors

We invest primarily in shopping centers, which are subject to a number of significant risks that are beyond our control.

Real property investments are subject to varying degrees of risk that may affect the ability of our Centers to generate sufficient revenues to meet operating and other expenses, including debt service, lease payments, capital expenditures and tenant improvements, and to make distributions to us and our stockholders. Centers wholly owned by us are referred to as "Wholly Owned Centers" and Centers that are partly but not wholly owned by us are referred to as "Joint Venture Centers." A number of factors may decrease the income generated by the Centers, including:

    the national economic climate;

    the regional and local economy (which may be negatively impacted by plant closings, industry slowdowns, union activity, adverse weather conditions, natural disasters, terrorist activities and other factors);

    local real estate conditions (such as an oversupply of, or a reduction in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants);

    perceptions by retailers or shoppers of the safety, convenience and attractiveness of a Center; and

    increased costs of maintenance, insurance and operations (including real estate taxes).

Income from shopping center properties and shopping center values are also affected by applicable laws and regulations, including tax, environmental, safety and zoning laws, and by interest rate levels and the availability and cost of financing. In addition, the number of prospective buyers interested in purchasing shopping centers is limited. Therefore, if we were to sell one or more of our Centers, we may receive less money than we originally invested in the Center.

Some of our Centers are geographically concentrated and, as a result, are sensitive to local economic and real estate conditions.

A significant percentage of our Centers are located in California and Arizona and 12 Centers in the aggregate are located in New York, New Jersey and Connecticut. To the extent that weak economic or real estate conditions, including as a result of the factors described in the preceding risk factor, or other factors affect California, Arizona, New York, New Jersey or Connecticut (or their respective regions) more severely than other areas of the country, our financial performance could be negatively impacted.

Our Centers must compete with other retail centers and retail formats for tenants and customers.

There are numerous shopping facilities that compete with the Centers in attracting tenants to lease space, and an increasing number of new retail formats and technologies other than retail shopping centers compete with the Centers for retail sales. Competing retail formats include lifestyle centers, factory outlet centers, power

The Macerich Company    15



centers, discount shopping clubs, mail-order services, internet shopping and home shopping networks. Our revenues may be reduced as a result of increased competition.

Our Centers depend on tenants to generate rental revenues.

Our revenues and funds available for distribution will be reduced if:

    a significant number of our tenants are unable (due to poor operating results, bankruptcy, terrorist activities or other reasons) to meet their obligations;

    we are unable to lease a significant amount of space in the Centers on economically favorable terms; or

    for any other reason, we are unable to collect a significant amount of rental payments.

A decision by an Anchor, or other significant tenant to cease operations at a Center could also have an adverse effect on our financial condition. The closing of an Anchor or other significant tenant may allow other Anchors and/or other tenants to terminate their leases, seek rent relief and/or cease operating their stores at the Center or otherwise adversely affect occupancy at the Center. In addition, Anchors and/or tenants at one or more Centers might terminate their leases as a result of mergers, acquisitions, consolidations, dispositions or bankruptcies in the retail industry. The bankruptcy and /or closure of retail stores, or sale of an Anchor or store to a less desirable retailer, may reduce occupancy levels, customer traffic and rental income, or otherwise adversely affect our financial performance. Furthermore, if the store sales of retailers operating in the Centers decline sufficiently, tenants might be unable to pay their minimum rents or expense recovery charges. In the event of a default by a lessee, the affected Center may experience delays and costs in enforcing its rights as lessor.

For example, on October 24, 2005, Federated Department Stores, Inc. disclosed that it has identified 82 duplicate locations in certain malls which will be divested during 2006. Eleven of the identified stores are located in 10 of our Centers. On February 1, 2006, Musicland Holding Corp. announced the closure of 341 of its low performing Sam Goody and Suncoast Picture Stores which include 26 stores located in the Centers. Retail Brand Alliance has recently closed 26 of its Casual Corner, Petite Sophisticate and August Max stores located in the Centers. No assurances can be given regarding the impact on us of those divestitures or closures if or when they occur.

Our acquisition and real estate development strategies may not be successful.

Our historical growth in revenues, net income and funds from operations has been closely tied to the acquisition and redevelopment of shopping centers. Many factors, including the availability and cost of capital, our total amount of debt outstanding, interest rates and the availability of attractive acquisition targets, among others, will affect our ability to acquire and redevelop additional properties in the future. We may not be successful in pursuing acquisition opportunities, and newly acquired properties may not perform as well as expected. Expenses arising from our efforts to complete acquisitions, redevelop properties or increase our market penetration may have a material adverse effect on our business, financial condition and results of operations. We face competition for acquisitions primarily from other REITs, as well as from private

16     The Macerich Company



real estate companies and financial buyers. Some of our competitors have greater financial and other resources. Increased competition for shopping center acquisitions may impact adversely our ability to acquire additional properties on favorable terms. We cannot guarantee that we will be able to implement our growth strategy successfully or manage our expanded operations effectively and profitably.

We may not be able to achieve the anticipated financial and operating results from newly acquired assets. Some of the factors that could affect anticipated results are:

    Our ability to integrate and manage new properties, including increasing occupancy rates and rents at such properties;

    the disposal of non-core assets within an expected time frame; and

    Our ability to raise long-term financing to implement a capital structure at a cost of capital consistent with our business strategy.

Our business strategy also includes the selective development and construction of retail properties. Any development, redevelopment and construction activities that we may undertake will be subject to the risks of real estate development, including lack of financing, construction delays, environmental requirements, budget overruns, sunk costs and lease-up. Furthermore, occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable. Real estate development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, and occupancy and other required governmental permits and authorizations. If any of the above events occur, our ability to pay dividends to our stockholders and service our indebtedness could be adversely affected.

U.S. federal income tax developments could affect the desirability of investing in us for individual taxpayers.

In May 2003, U.S. federal legislation was enacted that reduced the maximum tax rate for dividends payable to individual taxpayers generally from 38.6% to 15% (from January 1, 2003 through 2008). However, dividends payable by REITs are not eligible for such treatment, except in limited circumstances which we do not expect to occur. Although this legislation did not have a directly adverse effect on the taxation of REITs or dividends paid by REITs, the more favorable treatment for non-REIT dividends could cause individual investors to consider investments in non-REIT corporations as more attractive relative to an investment in a REIT.

Certain individuals have substantial influence over the management of both us and the Operating Partnership, which may create conflicts of interest.

Under the limited partnership agreement of the Operating Partnership, we, as the sole general partner, are responsible for the management of the Operating Partnership's business and affairs. Each of the principals serve as our executive officers and are members of our board of directors. Accordingly, these principals have substantial influence over our management and the management of the Operating Partnership.

The tax consequences of the sale of some of the Centers may create conflicts of interest.

The Macerich Company    17



The principals will experience negative tax consequences if some of the Centers are sold. As a result, the principals may not favor a sale of these Centers even though such a sale may benefit our other stockholders.

The guarantees of indebtedness by and certain holdings of the principals may create conflicts of interest.

The principals have guaranteed mortgage loans encumbering one of the Centers. As of December 31, 2005, the principals have guaranteed an aggregate principal amount of approximately $21.8 million. The existence of guarantees of these loans by the principals could result in the principals having interests that are inconsistent with the interests of our stockholders.

The principals may have different interests than our stockholders because they are significant holders of the Operating Partnership.

If we were to fail to qualify as a REIT, we will have reduced funds available for distributions to our stockholders.

We believe that we currently qualify as a REIT. No assurance can be given that we will remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. The complexity of these provisions and of the applicable income tax regulations is greater in the case of a REIT structure like ours that holds assets in partnership form. The determination of various factual matters and circumstances not entirely within our control, including determinations by our partners in the Joint Venture Centers, may affect our continued qualification as a REIT. In addition, legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to our qualification as a REIT or the U.S. federal income tax consequences of that qualification.

If in any taxable year we were to fail to qualify as a REIT, we will suffer the following negative results:

    we will not be allowed a deduction for distributions to stockholders in computing our taxable income; and

    we will be subject to U.S. federal income tax on our taxable income at regular corporate rates.

In addition, if we were to lose our REIT status, we will be prohibited from qualifying as a REIT for the four taxable years following the year during which the qualification was lost, absent relief under statutory provisions. As a result, net income and the funds available for distributions to our stockholders would be reduced for at least five years and the fair market value of our shares could be materially adversely affected. Furthermore, the Internal Revenue Service could challenge our REIT status for past periods, which if successful could result in us owing a material amount of tax for prior periods. It is possible that future economic, market, legal, tax or other considerations might cause our board of directors to revoke our REIT election.

18     The Macerich Company


Even if we remain qualified as a REIT, we might face other tax liabilities that reduce our cash flow. Further, we might be subject to federal, state and local taxes on our income and property. Any of these taxes would decrease cash available for distributions to stockholders.

Complying with REIT requirements might cause us to forego otherwise attractive opportunities.

In order to qualify as a REIT for U.S. federal income tax purposes, we must satisfy tests concerning, among other things, our sources of income, the nature of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may cause us to forego opportunities we would otherwise pursue.

In addition, the REIT provisions of the Internal Revenue Code impose a 100% tax on income from "prohibited transactions." Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale in the ordinary course of business, other than foreclosure property. This 100% tax could impact our desire to sell assets and other investments at otherwise opportune times if we believe such sales could be considered a prohibited transaction.

Complying with REIT requirements may force us to borrow to make distributions to our stockholders.

As a REIT, we generally must distribute 90% of our annual taxable income (subject to certain adjustments) to our stockholders. From time to time, we might generate taxable income greater than our net income for financial reporting purposes, or our taxable income might be greater than our cash flow available for distributions to our stockholders. If we do not have other funds available in these situations, we might be unable to distribute 90% of our taxable income as required by the REIT rules. In that case, we would need to borrow funds, sell a portion of our investments (potentially at disadvantageous prices) or find another alternative source of funds. These alternatives could increase our costs or reduce our equity and reduce amounts for investments.

Outside partners in Joint Venture Centers result in additional risks to our stockholders.

We own partial interests in property partnerships that own 44 Joint Venture Centers as well as fee title to a site that is ground leased to a property partnership that owns a Joint Venture Center and several development sites. We may acquire partial interests in additional properties through joint venture arrangements. Investments in Centers that are not Wholly Owned Centers involve risks different from those of investments in Wholly Owned Centers.

We may have fiduciary responsibilities to our partners that could affect decisions concerning the Joint Venture Centers. Third parties may share control of major decisions relating to the Joint Venture Centers, including decisions with respect to sales, refinancings and the timing and amount of additional capital contributions, as

The Macerich Company    19



well as decisions that could have an adverse impact on our status. For example, we may lose our management rights relating to the Joint Venture Centers if:

    we fail to contribute our share of additional capital needed by the property partnerships;

    we default under a partnership agreement for a property partnership or other agreements relating to the property partnerships or the Joint Venture Centers; or

    with respect to certain of the Joint Venture Centers, if certain designated key employees no longer are employed in the designated positions.

In addition, some of our outside partners control the day-to-day operations of eight Joint Venture Centers (NorthPark Center, West Acres Center, Eastland Mall, Granite Run Mall, Lake Square Mall, NorthPark Mall, South Park Mall and Valley Mall). We, therefore, do not control cash distributions from these Centers, and the lack of cash distributions from these Centers could jeopardize our ability to maintain our qualification as a REIT.

Our holding company structure makes it dependent on distributions from the Operating Partnership.

Because we conduct our operations through the Operating Partnership, our ability to service our debt obligations and pay dividends to our stockholders is strictly dependent upon the earnings and cash flows of the Operating Partnership and the ability of the Operating Partnership to make distributions to us. Under the Delaware Revised Uniform Limited Partnership Act, the Operating Partnership is prohibited from making any distribution to us to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the Operating Partnership (other than some non-recourse liabilities and some liabilities to the partners) exceed the fair value of the assets of the Operating Partnership.

Possible environmental liabilities could adversely affect us.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in that real property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of investigation, removal or remediation of hazardous or toxic substances may be substantial. In addition, the presence of hazardous or toxic substances, or the failure to remedy environmental hazards properly, may adversely affect the owner's or operator's ability to sell or rent affected real property or to borrow money using affected real property as collateral.

Persons or entities that arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of hazardous or toxic substances at the disposal or treatment facility, whether or not that facility is owned or operated by the person or entity arranging for the disposal or treatment of hazardous or toxic substances. Laws exist that impose liability for release of ACMs into the air, and third parties may seek recovery from owners or operators of real property for personal injury associated with exposure to ACMs. In connection with our ownership, operation, management, development and

20     The Macerich Company



redevelopment of the Centers, or any other centers or properties we acquire in the future, we may be potentially liable under these laws and may incur costs in responding to these liabilities.

Uninsured losses could adversely affect our financial condition.

Each of our Centers has comprehensive liability, fire, extended coverage and rental loss insurance with insured limits customarily carried for similar properties. We do not insure certain types of losses (such as losses from wars), because they are either uninsurable or not economically insurable. In addition, while we or the relevant joint venture, as applicable, carry earthquake insurance on the Centers located in California, the policies are subject to a deductible equal to 5% of the total insured value of each Center, a $100,000 per occurrence minimum and a combined annual aggregate loss limit of $200 million on these Centers. While we or the relevant joint venture also carries terrorism insurance on the Centers, the policies are subject to a $10,000 deductible and a combined annual aggregate loss limit of $800 million for both certified and non-certified acts of terrorism. Each Center has environmental insurance covering eligible third-party losses, remediation and non-owned disposal sites, subject to a $100,000 deductible and a $10 million three-year aggregate limit. Some environmental losses are not covered by this insurance because they are uninsurable or not economically insurable. Furthermore, we carry title insurance on many of the Centers for less than their full value. If an uninsured loss or a loss in excess of insured limits occurs, the entity that owns the affected Center could lose its capital invested in the Center, as well as the anticipated future revenue from the Center, while remaining obligated for any mortgage indebtedness or other financial obligations related to the Center. An uninsured loss or loss in excess of insured limits may negatively impact our financial condition.

As the general partner of the Operating Partnership and certain of the property partnerships, we are generally liable for any of its unsatisfied obligations other than non-recourse obligations.

An ownership limit and certain anti-takeover defenses could inhibit a change of control of us or reduce the value of our common stock.

The Ownership Limit.    In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding stock (after taking into account options to acquire stock) may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include some entities that would not ordinarily be considered "individuals") during the last half of a taxable year. Our Charter restricts ownership of more than 5% (the "Ownership Limit") of the lesser of the number or value of our outstanding shares of stock by any single stockholder (with limited exceptions for some holders of limited partnership interests in the Operating Partnership, and their respective families and affiliated entities, including all four principals). In addition to enhancing preservation of our status as a REIT, the Ownership Limit may:

    have the effect of delaying, deferring or preventing a change in control of us or other transaction without the approval of our board of directors, even if the change in control or other transaction is in the best interest of our stockholders; and

    limit the opportunity for our stockholders to receive a premium for their common stock that they might otherwise receive if an investor were attempting to acquire a block of common stock in excess of the Ownership Limit or otherwise effect a change in control of us.

The Macerich Company    21


Our board of directors, in its sole discretion, may waive or modify (subject to limitations) the Ownership Limit with respect to one or more of our stockholders, if it is satisfied that ownership in excess of this limit will not jeopardize our status as a REIT.

Stockholder Rights Plan and Selected Provisions of our Charter and Bylaws.    Agreements to which we are a party, as well as some of the provisions of our Charter and bylaws, may have the effect of delaying, deferring or preventing a third party from making an acquisition proposal for us and may inhibit a change in control that some, or a majority, of our stockholders might believe to be in their best interest or that could give our stockholders the opportunity to realize a premium over the then-prevailing market prices for our shares. These agreements and provisions include the following:

    a stockholder rights plan (which is generally triggered when an entity, group or person acquires 15% or more of our common stock), which, in the event of a takeover attempt not approved by our board of directors, allows our stockholders to purchase shares of our common stock, or the common stock of the acquiring entity, at a 50% discount;

    a staggered board of directors and limitations on the removal of directors, which may make the replacement of incumbent directors more time-consuming and difficult;

    advance notice requirements for stockholder nominations of directors and stockholder proposals to be considered at stockholder meetings;

    the obligation of the directors to consider a variety of factors (in addition to maximizing stockholder value) with respect to a proposed business combination or other change of control transaction;

    the authority of the directors to classify or reclassify unissued shares and issue one or more series of common stock or preferred stock;

    the authority to create and issue rights entitling the holders thereof to purchase shares of stock or other securities or property from us; and

    limitations on the amendment of our Charter and bylaws, the dissolution or change in control of us, and the liability of our directors and officers.

Selected Provisions of Maryland Law.    The Maryland General Corporation Law prohibits business combinations between a Maryland corporation and an interested stockholder (which includes any person who beneficially holds 10% or more of the voting power of the corporation's shares) or its affiliates for five years following the most recent date on which the interested stockholder became an interested stockholder and, after the five-year period, requires the recommendation of the board of directors and two super-majority stockholder votes to approve a business combination unless the stockholders receive a minimum price determined by the statute. As permitted by Maryland law, our Charter exempts from these provisions any business combination between us and the principals and their respective affiliates and related persons. Maryland law also allows the board of directors to exempt particular business combinations before the interested stockholder becomes an interested stockholder. Furthermore, a person is not an interested

22     The Macerich Company


stockholder if the transaction by which he or she would otherwise have become an interested stockholder is approved in advance by the board of directors.

The Maryland General Corporation Law also provides that the acquirer of certain levels of voting power in electing directors of a Maryland corporation (one-tenth or more but less than one-third, one-third or more but less than a majority and a majority or more) is not entitled to vote the shares in excess of the applicable threshold, unless voting rights for the shares are approved by holders of two thirds of the disinterested shares or unless the acquisition of the shares has been specifically or generally approved or exempted from the statute by a provision in our Charter or bylaws adopted before the acquisition of the shares. Our Charter exempts from these provisions voting rights of shares owned or acquired by the principals and their respective affiliates and related persons. Our bylaws also contain a provision exempting from this statute any acquisition by any person of shares of our common stock. There can be no assurance that this bylaw will not be amended or eliminated in the future. The Maryland General Corporation Law and our Charter also contain supermajority voting requirements with respect to our ability to amend our Charter, dissolve, merge, or sell all or substantially all of our assets.


Item 1B. Unresolved Staff Comments

Not Applicable

The Macerich Company    23



Item 2. Properties

Company's Ownership

  Name of Center/ Location(1)

  Year of Original Construction/ Acquisition

  Year of Most Recent Expansion/ Renovation

  Total GLA(2)

  Mall and Freestanding GLA

  Percentage of Mall and Freestanding GLA Leased

  Anchors

  Sales Per Square Foot(3)



WHOLLY OWNED CENTERS:
100%   Capitola Mall(4)
Capitola, California
  1977/1995   1988   586,595   196,878   97.2%   Gottschalks, Macy's, Mervyn's, Sears   $338
100%   Chandler Fashion Center
Chandler, Arizona
  2001/2002     1,321,556   636,396   94.8%   Dillard's, Robinsons-May, Nordstrom, Sears   560
100%   Chesterfield Towne Center
Richmond, Virginia
  1975/1994   2000   969,716   424,490   94.5%   Dillard's, Hecht's, Sears, J.C. Penney   325
100%   Citadel, The Colorado Springs,
Colorado
  1972/1997   1995   1,095,053   453,348   94.7%   Dillard's, Foley's, J.C. Penney, Mervyn's   336
100%   Crossroads Mall
Oklahoma City, Oklahoma
  1974/1994   1991   1,268,116   551,859   87.1%   Dillard's, Foley's, J.C. Penney, Steve & Barry's University Sportswear   258
100%   Danbury Fair Mall
Danbury, Connecticut
  1986/2005   1991   1,291,603   495,395   96.7%   Filene's(5), J.C. Penney, Lord & Taylor, Macy's, Sears   591
100%   Eastview Mall
Victor, New York
  1971/2005   2003   1,695,666   798,584   97.9%   The Bon-Ton, Home Depot, J.C. Penney, Kaufmann's, Lord & Taylor, Sears, Target   353
100%   Fiesta Mall
Mesa, Arizona
  1979/2004   1999   1,036,578   313,022   94.6%   Dillard's, Macy's, Robinsons-May(5), Sears   380
100%   Flagstaff Mall
Flagstaff, Arizona
  1979/2002   1986   354,119   150,107   99.6%   Dillard's, J.C. Penney, Sears   327
100%   FlatIron Crossing
Broomfield, Colorado
  2000/2002     1,421,262   777,521   93.5%   Dillard's, Foley's, Nordstrom, Dick's Sporting Goods   409
100%   Freehold Raceway Mall
Freehold, New Jersey
  1990/2005   2004   1,582,742   791,118   98.7%   J.C. Penney, Lord & Taylor, Macy's, Nordstrom, Sears   461
100%   Fresno Fashion Fair
Fresno, California
  1970/1996   2006   927,361   366,480   97.2%   Gottschalks, J.C. Penney, Macy's (two)   543
100%   Great Northern Mall
Clay, New York
  1988/2005     896,297   566,309   97.7%   The Bon-Ton(6), Kaufmann's, Sears   258
100%   Greece Ridge Center
Greece, New York
  1967/2005   1993   1,445,453   818,369   95.8%   Burlington Coat Factory, The Bon-Ton, J.C. Penney, Kaufmann's, Sears   292
100%   Greeley Mall
Greeley, Colorado
  1973/1986   2003   564,236   294,332   90.1%   Dillard's (two), J.C. Penney, Sears   271
100%   Green Tree Mall
Clarksville, Indiana
  1968/1975   2005   712,942   296,342   84.8%   Dillard's(7), J.C. Penney, Sears   379
100%   Holiday Village Mall(4)
Great Falls, Montana
  1959/1979   1992   498,094   275,369   66.2%   Herberger's, J.C. Penney, Sears   244
                                 

24     The Macerich Company


100%   La Cumbre Plaza(4)
Santa Barbara, California
  1967/2004   1989   495,096   178,096   94.4%   Robinsons-May, Sears   383
100%   Northgate Mall
San Rafael, California
  1964/1986   1987   740,141   269,810   88.1%   Macy's, Mervyn's, Sears   $376
100%   Northridge Mall
Salinas, California
  1972/2003   1994   864,072   327,092   96.3%   J.C. Penney, Macy's, Mervyn's, Sears   369
100%   Northwest Arkansas Mall
Fayetteville, Arkansas
  1972/1998   1997   820,581   306,911   91.4%   Dillard's (two), J.C. Penney, Sears   368
100%   Pacific View
Ventura, California
  1965/1996   2001   1,044,943   411,129   89.3%   J.C. Penney, Macy's, Robinsons-May(5), Sears   395
100%   Panorama Mall
Panorama, California
  1955/1979   2005   323,449   158,449   89.4%   Wal-Mart   369
100%   Paradise Valley Mall
Phoenix, Arizona
  1979/2002   1990   1,222,642   417,214   91.3%   Dillard's, J.C. Penney, Macy's(5), Robinsons-May, Sears   359
100%   Prescott Gateway
Prescott, Arizona
  2002/2002   2004   578,295   334,107   87.9%   Dillard's, Sears, J.C. Penney   260
100%   Queens Center(4)
Queens, New York
  1973/1995   2004   962,798   408,031   96.3%   J.C. Penney, Macy's   656
100%   Rimrock Mall
Billings, Montana
  1978/1996   1999   598,406   286,736   95.1%   Dillard's (two), Herberger's(6), J.C. Penney   339
100%   Rotterdam Square
Schenectady, New York
  1980/2005   1990   582,164   272,389   91.4%   Filene's, K-Mart, Sears   231
100%   Salisbury, Centre at Salisbury, Maryland   1990/1995   2005   847,875   350,459   86.7%   Boscov's, J.C. Penney, Hecht's, Sears   354
100%   Shoppingtown Mall
Dewitt, New York
  1954/2005   2000   1,014,618   531,918   92.7%   The Bon-Ton(6), J.C. Penney, Kaufmann's, Sears   263
100%   Somersville Towne Center
Antioch, California
  1966/1986   2004   501,359   173,137   89.6%   Sears, Gottschalks, Mervyn's, Macy's   368
100%   South Plains Mall
Lubbock, Texas
  1972/1998   1995   1,143,279   401,492   92.0%   Beall's, Dillard's (two), J.C. Penney, Meryvn's, Sears   340
100%   South Towne Center
Sandy, Utah
  1987/1997   1997   1,267,785   491,273   96.2%   Dillard's, J.C. Penney, Mervyn's, Target, Meier & Frank   384
100%   The Oaks
Thousand Oaks, California
  1978/2002   1993   1,065,991   339,916   94.0%   J.C. Penney, Macy's (two)(5), Robinsons-May (two)(5)   516
100%   Towne Mall
Elizabethtown, Kentucky
  1985/2005   1989   353,645   182,773   88.6%   J.C. Penney, Belk, Sears   273
100%   Valley View Center
Dallas, Texas
  1973/1997   2004   1,633,286   575,389   93.6%   Dillard's, Foley's, J.C. Penney, Sears   310
100%   Victor Valley, Mall of Victorville, California   1986/2004   2001   479,813   205,964   97.8%   Gottschalks, J.C. Penney, Mervyn's, Sears   466
100%   Vintage Faire Mall
Modesto, California
  1977/1996   2001   1,084,494   384,575   96.8%   Gottschalks, J.C. Penney, Macy's (two), Sears   547
                                 

The Macerich Company    25


100%   Westside Pavilion
Los Angeles, California
  1985/1998   2000   667,404   309,276   91.1%   Nordstrom, Robinsons-May   473
100%   Wilton Mall at Saratoga
Saratoga Springs, New York
  1990/2005   1998   661,160   457,282   95.1%   The Bon-Ton, J.C. Penney, Sears   $302

    Total/Average Wholly Owned   36,620,685   15,979,337   93.4%       $395


JOINT VENTURE CENTERS (VARIOUS PARTNERS):
33.3%   Arrowhead Towne Center
Glendale, Arizona
  1993/2002   2004   1,130,404   391,990   95.9%   Dillard's, Robinsons-May, J.C. Penney, Sears, Mervyn's   $547
50%   Biltmore Fashion Park
Phoenix, Arizona
  1963/2003   1993   593,429   288,429   94.6%   Macy's, Saks Fifth Avenue   694
50%   Broadway Plaza(4)
Walnut Creek, California
  1951/1985   1994   698,069   252,572   99.6%   Macy's (two), Nordstrom   763
50.1%   Corte Madera, Village at
Corte Madera, California
  1985/1998   2005   432,726   214,726   98.3%   Macy's, Nordstrom   659
50%   Desert Sky Mall
Phoenix, Arizona
  1981/2002   1993   896,835   302,246   87.7%   Sears, Dillard's, Burlington Coat Factory, Mervyn's, Steve & Barry's University Sportswear   332
50%   Inland Center(4)
San Bernardino, California
  1966/2004   2004   1,032,093   248,419   83.8%   Macy's(5), Robinsons-May, Sears, Gottschalks   506
37.5%   Marketplace Mall, The (4) Henrietta, New York   1982/2005   1993   1,023,281   508,689   88.2%   The Bon-Ton, J.C. Penney, Kaufmann's, Sears   298
15%   Metrocenter (4)
Phoenix, Arizona
  1973/2005   1996   1,282,348   599,099   86.0%   Dillard's, J.C. Penney, Robinsons-May, Sears   343
50%   NorthPark Center(4)
Dallas, Texas
  1965/2004   2005   1,408,315   437,393   89.5%   Dillard's, Foley's, Nieman Marcus, Nordstrom(9)   705
50%   Ridgmar
Fort Worth, Texas
  1976/2005   2000   1,269,135   395,162   81.6%   Dillard's, Foley's, J.C. Penney, Nieman Marcus, Sears   311
50%   Scottsdale Fashion Square
Scottsdale, Arizona
  1961/2002   2003   2,050,596   849,177   96.6%   Dillard's, Robinsons-May, Macy's, Nordstrom, Neiman Marcus   654
33.3%   Superstition Springs Center(4)
Mesa, Arizona
  1990/2002   2002   1,279,489   432,950   94.7%   Burlington Coat Factory, Dillard's, Robinsons-May, J.C. Penney, Sears, Mervyn's, Best Buy   427
50%   Tysons Corner Center (4)
McLean, Virginia
  1990/2005   2003   2,168,567   1,280,325   97.7%   Bloomingdale's, Hecht's, L.L. Bean, Lord & Taylor, Nordstrom   718
19%   West Acres
Fargo, North Dakota
  1972/1986   2001   949,532   396,977   98.4%   Marshall Field's, Herberger's, J.C. Penney, Sears   431

    Total/Average Joint Ventures (Various Partners)   16,214,819   6,598,154   93.0%       $536

                                 

26     The Macerich Company



PACIFIC PREMIER RETAIL TRUST PROPERTIES:
51%   Cascade Mall
Burlington, Washington
  1989/1999   1998   594,358   270,122   95.2%   Macy's (two), J.C. Penney, Sears, Target   $333
51%   Kitsap Mall(4)
Silverdale, Washington
  1985/1999   1997   847,180   337,197   96.7%   Macy's, J.C. Penney, Gottschalks, Mervyn's, Sears   $408
51%   Lakewood Mall
Lakewood, California
  1953/1975   2001   2,086,531   978,547   98.7%   Home Depot, Target, J.C. Penney, Macy's(5), Mervyn's, Robinsons-May   412
51%   Los Cerritos Center
Cerritos, California
  1971/1999   1998   1,289,066   487,785   94.3%   Macy's, Mervyn's, Nordstrom, Robinsons-May(5), Sears   522
51%   Redmond Town Center(4)(10)
Redmond, Washington
  1997/1999   2000   1,282,982   1,172,982   97.9%   Macy's   355
51%   Stonewood Mall(4)
Downey, California
  1953/1997   1991   929,941   359,194   97.7%   J.C. Penney, Mervyn's, Robinsons-May, Sears   421
51%   Washington Square
Portland, Oregon
  1974/1999   2005   1,455,049   520,713   97.6%   J.C. Penney, Meier & Frank, Mervyn's(8), Nordstrom, Sears   627

    Total/Average Pacific Premier Retail Trust Properties   8,485,107   4,126,540   97.3%       $450


SDG MACERICH PROPERTIES, L.P. PROPERTIES:
50%   Eastland Mall(4)
Evansville, Indiana
  1978/1998   1996   1,040,355   551,211   97.9%   Famous-Barr(5), J.C. Penney, Macy's   $376
50%   Empire Mall(4)
Sioux Falls, South Dakota
  1975/1998   2000   1,343,357   597,835   91.0%   Marshall Field's, J.C. Penney, Gordmans, Kohl's, Sears, Target, Younkers   385
50%   Granite Run Mall
Media, Pennsylvania
  1974/1998   1993   1,046,506   545,697   91.3%   Boscov's, J.C. Penney, Sears   264
50%   Lake Square Mall
Leesburg, Florida
  1980/1998   1995   560,782   264,745   87.0%   Belk, J.C. Penney, Sears, Target   297
50%   Lindale Mall
Cedar Rapids, Iowa
  1963/1998   1997   689,248   383,685   95.1%   Sears, Von Maur, Younkers   294
50%   Mesa Mall
Grand Junction, Colorado
  1980/1998   2003   852,456   411,248   91.6%   Herberger's, J.C. Penney, Mervyn's, Sears, Target   330
50%   NorthPark Mall
Davenport, Iowa
  1973/1998   2001   1,075,664   424,131   90.5%   J.C. Penney, Dillard's, Sears, Von Maur, Younkers   271
50%   Rushmore Mall
Rapid City, South Dakota
  1978/1998   1992   838,397   433,737   92.2%   Herberger's, J.C. Penney, Sears, Target   332
50%   Southern Hills Mall
Sioux City, Iowa
  1980/1998   2003   796,937   483,360   93.1%   Sears, Younkers, J.C. Penney   303
50%   SouthPark Mall
Moline, Illinois
  1974/1998   1990   1,025,836   447,780   83.0%   J.C. Penney, Sears, Younkers, Von Maur, Dillard's   214
50%   SouthRidge Mall
Des Moines, Iowa
  1975/1998   1998   883,185   494,433   76.9%   Sears, Younkers, J.C. Penney, Target   179
50%   Valley Mall
Harrisonburg, Virginia
  1978/1998   1992   509,202   194,124   93.8%   Belk, J.C. Penney, Peebles, Target(11)   267

                                 

The Macerich Company    27


    Total/Average SDG Macerich Properties, L.P. Properties   10,661,925   5,231,986   90.2%       $300

    Total/Average Joint Ventures   35,361,851   15,956,680   93.2%       $440

    Total/Average before Community Centers   71,982,536   31,936,017   93.3%       $417


COMMUNITY/SPECIALTY CENTERS:
100%   Borgata, The Scottsdale, Arizona   1981/2002     79,326   79,326   75.9%     $342
50%   Boulevard Shops
Chandler, Arizona
  2001/2002   2004   173,823   173,823   98.9%     419
75%   Camelback Colonnade
Phoenix, Arizona
  1961/2002   1994   624,131   544,131   98.0%   Mervyn's   328
100%   Carmel Plaza
Carmel, California
  1974/1998   1993   95,571   95,571   93.5%     396
50%   Chandler Festival
Chandler, Arizona
  2001/2002     503,735   368,538   99.1%   Lowe's   310
50%   Chandler Gateway
Chandler, Arizona
  2001/2002                   255,289   124,238   100.0%   The Great Indoors   435
50%   Chandler Village Center
Chandler, Arizona
  2004/2002   2005 ongoing   262,429   119,296   100.0%   Target   N/A
100%   Great Falls Marketplace
Great Falls, Montana
  1997/1997     215,024   215,024   97.5%     169
50%   Hilton Village(4)(10)
Scottsdale, Arizona
  1982/2002     96,593   96,593   87.2%     508
24.5%   Kierland Commons
Phoenix, Arizona
  1999/2005   2003   437,189   437,189   95.3%       710
100%   La Encantada
Tucson, Arizona
  2002/2002   2005   251,142   251,142   85.0%     462
100%   Paradise Village Office Park II
Phoenix, Arizona
  1982/2002     46,834   46,834   98.4%     N/A
63.6%   Pittsford Plaza
Pittsford, New York
  1965/2005   1982   528,093   403,261   96.9%   Chase-Pitkin Home & Garden   220
46%   Scottsdale 101(4)
Phoenix, Arizona
  2002/2002   2004   563,878   462,503   98.9%   Expo Design Center   311
100%   Village Center
Phoenix, Arizona
  1985/2002     170,801   59,055   90.4%   Target   308
100%   Village Crossroads
Phoenix, Arizona
  1993/2002     187,336   86,627   81.0%   Burlington Coat Factory   372
100%   Village Fair
Phoenix, Arizona
  1989/2002     271,417   207,817   94.6%   Best Buy   231
100%   Village Plaza
Phoenix, Arizona
  1978/2002     79,810   79,810   97.4%     280
100%   Village Square I
Phoenix, Arizona
  1978/2002     21,606   21,606   100.0%     175
100%   Village Square II
Phoenix, Arizona
  1978/2002     146,193   70,393   95.5%   Mervyn's   201

    Total/Average Community/Specialty Centers   5,010,220   3,942,777   95.6%       $408

    Total before major development and redevelopment properties and other assets   76,992,756   35,878,794   93.5%       $416


MAJOR DEVELOPMENT AND REDEVELOPMENT PROPERTIES:
100%   Park Lane Mall(4)
Reno, Nevada
  1967/1978   1998   369,992   240,272   (14)   Gottschalks   N/A
37.5%   SanTan Village
Gilbert, Arizona
  2004/2004   2005 ongoing   445,014   238,487   (14)   Wal-Mart(12)   N/A
100%   Santa Monica Place
Santa Monica, California
  1980/1999   1990   556,933   273,683   (14)   Macy's, Robinsons-May(5)   N/A
                                 

28     The Macerich Company


100%   Twenty-Ninth Street(4)
Boulder, Colorado
  1963/1979   2005 ongoing   304,425   13,144   (14)   Foley's, Home Depot(13)   N/A
100%   Westside Pavilion Adjacent
Los Angeles, California
  1985/1998   2005 ongoing   90,982   90,982   (14)     N/A

    Total Major Development and Redevelopment Properties       1,767,346   856,568            


OTHER ASSETS:
100%   Paradise Village ground leases   — /2002       169,238   169,238   90.2%     N/A

    Total Other Assets       169,238   169,238   90.2%        

    Grand Total at December 31, 2005       78,929,340   36,904,600            
(1)
With respect to 77 Centers, the underlying land controlled by the Company is owned in fee entirely by the Company, or, in the case of jointly-owned Centers, by the joint venture property partnership or limited liability company. With respect to the remaining Centers, the underlying land controlled by the Company is owned by third parties and leased to the Company, the property partnership or the limited liability company pursuant to long-term ground leases. Under the terms of a typical ground lease, the Company, the property partnership or the limited liability company pays rent for the use of the land and is generally responsible for all costs and expenses associated with the building and improvements. In some cases, the Company, the property partnership or the limited liability company has an option or right of first refusal to purchase the land. The termination dates of the ground leases range from 2013 to 2132.

(2)
Includes GLA attributable to Anchors (whether owned or non-owned) and Mall and Freestanding Stores as of December 31, 2005.

(3)
Sales are based on reports by retailers leasing Mall and Freestanding Stores for the twelve months ended December 31, 2005 for tenants which have occupied such stores for a minimum of 12 months. Sales per square foot are based on tenants 10,000 square feet and under, excluding theaters.

(4)
Portions of the land on which the Center is situated are subject to one or more ground leases.

(5)
Federated Department Stores, Inc. disclosed that it has identified duplicate locations in certain malls which will be divested during 2006. Eleven of the identified stores are located in 10 of the Centers.

(6)
The Bon-Ton Stores, Inc. has acquired Herberger's and Younkers from Saks Incorporated in a transaction completed in June 2006. Herberger's completed a 42,000 square foot expansion at Rimrock Mall in October 2005. The Bon-Ton stores at Great Northern Mall and Shoppingtown Mall closed in January 2006.

(7)
Dillard's completed a 58,000 square foot expansion at Green Tree Mall in March 2005.

(8)
At Washington Square, an agreement has been reached with Mervyn's to recapture its 100,000 square foot location. The Company plans to recycle that square footage over the next two years.

(9)
Nordstrom opened a new 200,000 square foot store at NorthPark Center in November 2005.

(10)
The office portion of this mixed-use development does not have retail sales.

(11)
Target opened a new 116,000 square foot store at Valley Mall in October 2005.

(12)
Wal-Mart opened a 206,527 square foot store at San Tan Village in January 2005.

(13)
Home Depot opened a new 141,000 square foot store at Twenty Ninth Street in January 2006.

(14)
Tenant spaces have been intentionally held off the market and remain vacant or are under construction because of major development or redevelopment plans. As a result, the Company believes the percentage of mall and freestanding GLA leased and the sales per square foot at these major redevelopment properties is not meaningful data.

The Macerich Company    29


Mortgage Debt

The following table sets forth certain information regarding the mortgages encumbering the Centers, including those Centers in which the Company has less than a 100% interest. The information set forth below is as of December 31, 2005, (dollars in thousands):

Property Pledged as Collateral

  Fixed or Floating

  Annual Interest Rate

  Carrying
Amount(1)

  Annual Debt Service

  Maturity Date

  Balance Due on Maturity

  Earliest Date on which all Notes Can Be Defeased or Be Prepaid


Consolidated Centers:
Borgata   Fixed   5.39%   $15,422   $1,380   10/11/07   $14,352   Any Time
Capitola Mall   Fixed   7.13%   42,573   4,558   5/15/11   32,724   Any Time
Carmel Plaza   Fixed   8.18%   27,064   2,421   5/1/09   25,642   Any Time
Chandler Fashion Center   Fixed   5.48%   175,853   12,514   11/1/12   152,097   Any Time
Chesterfield Towne Center(2)   Fixed   9.07%   58,483   6,580   1/1/24   1,087   1/1/06
Citadel, The   Fixed   7.20%   64,069   6,528   1/1/08   59,962   Any Time
Danbury Fair Mall   Fixed   4.64%   189,137   14,698   2/1/11   155,173   Any Time
Eastview Commons   Fixed   5.46%   9,411   792   9/30/10   7,942   Any Time
Eastview Mall   Fixed   5.10%   104,654   7,107   1/18/14   87,927   10/19/06
Fiesta Mall   Fixed   4.88%   84,000   4,152   1/1/15   84,000   12/2/07
Flagstaff Mall   Fixed   4.97%   37,000   1,863   11/1/15   37,000   10/3/08
FlatIron Crossing   Fixed   5.23%   194,188   13,223   12/1/13   164,187   Any Time
Freehold Raceway   Fixed   4.68%   189,161   14,208   7/7/11   155,678   Any Time
Fresno Fashion Fair   Fixed   6.52%   65,535   5,244   8/10/08   62,974   Any Time
Great Northern   Fixed   5.19%   41,575   2,685   12/1/13   35,566   4/18/06
Greece Ridge(3)   Floating   5.02%   72,012   3,665   11/6/07   72,012   Any Time
Greeley Mall   Fixed   6.18%   28,849   2,359   9/1/13   23,446   Any Time
La Cumbre(4)   Floating   5.25%   30,000   1,597   8/9/07   30,000   Any Time
La Encantada(5)   Floating   6.39%   45,905   2,974   1/6/06   45,905   Any Time
Marketplace Mall   Fixed   5.30%   41,545   3,204   12/10/17   24,353   Any Time
Northridge(6)   Fixed   4.84%   83,840   5,438   7/1/09   70,991   Any Time
Northwest Arkansas Mall   Fixed   7.33%   54,442   5,209   1/10/09   48,343   Any Time
Oaks, The(7)   Floating   5.34%   108,000   5,847   7/1/06   108,000   Any Time
Pacific View   Fixed   7.16%   91,512   7,780   8/31/11   83,045   Any Time
Panorama Mall(8)   Floating   4.90%   32,250   1,580   1/31/06   32,250   Any Time
Paradise Valley Mall   Fixed   5.39%   76,930   6,068   1/1/07   74,889   Any Time
Paradise Valley Mall   Fixed   5.89%   23,033   2,193   5/1/09   19,863   Any Time
Pittsford Plaza   Fixed   5.02%   25,930   1,914   1/1/13   20,673   1/1/07
Prescott Gateway(9)   Floating   6.03%   35,280   2,127   7/31/07   35,280   Any Time
Paradise Village Ground Leases(10)   Fixed   5.39%   7,190   670   3/1/06   7,134   Any Time
Queens Center   Fixed   6.88%   93,461   7,595   3/1/09   88,651   Any Time
Queens Center(11)   Fixed   7.00%   223,916   18,013   3/31/13   204,203   2/19/08
Rimrock Mall   Fixed   7.45%   44,032   3,841   10/1/11   40,025   Any Time
Rotterdam Square(12)   Floating   6.00%   9,786   756   12/31/06   9,527   Any Time
Salisbury, Center at(13)   Floating   4.75%   79,875   3,794   2/20/06   79,875   Any Time
Santa Monica Place   Fixed   7.70%   81,052   7,272   11/1/10   75,544   Any Time
Scottsdale 101/Associates(14)   Floating   5.62%   56,000   3,147   9/16/08   56,000   Any Time
Shoppingtown Mall   Fixed   5.01%   47,752   3,828   5/11/11   38,968   Any Time
South Plains Mall   Fixed   8.22%   60,561   5,448   3/1/09   57,557   Any Time
South Towne Center   Fixed   6.61%   64,000   4,289   10/10/08   64,000   Any Time
Towne Mall   Fixed   4.99%   15,724   1,206   11/1/12   12,316   Any Time
Valley View Center   Fixed   5.72%   125,000   7,247   1/1/11   125,000   12/28/08
Victor Valley, Mall of   Fixed   4.60%   53,601   3,645   3/1/08   50,850   Any Time
Village Center(10)   Fixed   5.39%   6,877   744   4/1/06   6,782   Any Time
Village Fair North   Fixed   5.89%   11,524   983   7/15/08   10,710   Any Time
Village Plaza   Fixed   5.39%   5,024   566   11/1/06   4,757   Any Time
Vintage Faire Mall   Fixed   7.89%   66,266   6,099   9/1/10   61,372   Any Time
Westside Pavilion   Fixed   6.67%   94,895   7,538   7/1/08   91,133   Any Time
Wilton Mall   Fixed   4.79%   48,541   4,183   11/1/09   40,838   Any Time

            $3,242,730                

                             

30     The Macerich Company


Joint Venture Centers (at Company's Pro Rata Share):
Arrowhead Towne Center(33.3%)   Fixed   6.38%   $27,601   $2,240   10/1/11   $24,256   Any Time
Biltmore Fashion Park(50%)   Fixed   4.68%   41,336   2,433   7/10/09   34,972   Any Time
Boulevard Shops(50%)(15)   Floating   5.64%   10,700   603   12/16/07   10,700   Any Time
Broadway Plaza(50%)   Fixed   6.68%   31,994   3,089   8/1/08   29,315   Any Time
Camelback Colonnade(75%)(16)   Floating   5.02%   31,125   1,584   10/9/07   31,125   11/29/07
Cascade(51%)   Fixed   5.10%   20,722   1,362   7/1/10   19,221   6/22/07
Chandler Festival(50%)   Fixed   4.37%   15,437   958   10/1/08   14,583   7/1/08
Chandler Gateway(50%)   Fixed   5.19%   9,700   658   10/1/08   9,223   7/1/08
Chandler Village Center(50%)   Floating   6.19%   8,312   510   12/19/06   8,312   Any Time
Corte Madera, The Village at(50.1%)   Fixed   7.75%   33,707   3,095   11/1/09   31,534   Any Time
Desert Sky Mall(50%)(17)   Fixed   5.42%   13,136   1,020   1/1/06   13,136   Any Time
East Mesa Land(50%)(18)   Floating   5.31%   2,066   120   11/15/06   2,041   Any Time
East Mesa Land(50%)(18)   Fixed   5.39%   618   36   11/15/06   611   Any Time
Hilton Village(50%)   Fixed   5.39%   4,186   415   1/1/07   3,949   Any Time
Inland Center(50%)   Fixed   4.64%   27,000   1,270   2/11/09   27,000   4/1/06
Kierland Greenway(24.5%)   Fixed   5.85%   16,602   1,144   1/1/13   13,679   Anytime
Kierland Main Street(24.5%)   Fixed   4.99%   3,821   251   1/2/13   3,502   11/3/07
Kitsap Mall/Place(51%)   Fixed   8.06%   29,947   2,755   6/1/10   28,143   Any Time
Lakewood (51%)   Fixed   5.41%   127,500   6,995   6/1/15   127,500   8/19/07
Los Cerritos Center(51%)   Fixed   7.13%   55,602   5,054   7/1/06   55,049   Any Time
Metrocenter(15%)(19)   Floating   4.80%   16,800   806   2/9/08   16,800   8/9/06
Metrocenter (15%)(20)   Floating   7.82%   726   57   2/9/08   726   8/9/06
NorthPark Center(50%)(21)   Fixed   8.33%   120,569   7,677   5/10/12   113,288   Any Time
NorthPark Center(50%)(21)   Fixed   7.25%   3,500   254   8/30/06   3,500   Any Time
Redmond-Office(51%)   Fixed   6.77%   37,722   4,443   7/10/09   30,285   Any Time
Redmond Retail(51%)   Fixed   4.81%   38,010   2,025   8/1/09   27,164   2/1/07
Ridgmar(50%)   Fixed   6.07%   28,700   1,800   4/11/10   28,700   Any Time
SDG Macerich Properties, LP(50%)(22)   Fixed   6.54%   179,215   13,476   5/15/06   178,550   Any Time
SDG Macerich Properties, LP(50%)(22)   Floating   4.79%   93,250   4,457   5/15/06   93,250   Any Time
SDG Macerich Properties, LP(50%)(22)   Floating   4.74%   40,700   1,917   5/15/06   40,700   Any Time
SanTan Village Phase II(37.5%)(23)   Floating   6.57%   8,061   530   11/2/07   8,061   Any Time
Scottsdale Fashion Square Series I(50%)   Fixed   5.39%   80,082   5,702   8/31/07   78,000   Any Time
Scottsdale Fashion Square Series II(50%)   Fixed   5.39%   34,667   2,904   8/31/07   33,250   Any Time
Stonewood Mall (51%)   Fixed   7.41%   38,592   3,298   12/11/10   36,244   Any Time
Superstition Springs(33.3%)(24)   Floating   5.28%   15,837   902   11/1/06   15,629   Any Time
Superstition Springs(33.3%)(24)   Fixed   5.39%   4,737   270   11/1/06   4,682   Any Time
Tyson's Corner Center(50%)   Fixed   5.22%   174,570   11,232   2/17/14   147,595   3/1/06
Washington Square(51%)   Fixed   6.70%   53,115   5,051   2/1/09   48,021   Any Time
Washington Square(51%)(25)   Floating   6.25%   17,411   1,088   2/1/09   16,012   11/1/06
West Acres(19%)   Fixed   6.52%   6,528   681   1/1/09   5,684   Any Time
West Acres(19%)   Fixed   9.17%   1,708   212   9/30/09   1,461   Any Time

            $1,505,612                

(1)
The mortgage notes payable balances include the unamortized debt premiums (discounts). Debt premiums (discounts) represent the excess of the fair value of debt over the principal value of debt assumed in various acquisitions. The debt premiums (discounts) are being amortized into interest expense over the term of the related debt, in a manner which approximates the effective interest method. The annual interst rate in the above tables represent the effective interest rate, including the debt premiums (discounts).

The Macerich Company    31


Property Pledged as Collateral

   
 

 
Borgata     $538  
Danbury Fair Mall     21,862  
Eastview Commons     979  
Eastview Mall     2,300  
Freehold Raceway     19,239  
Great Northern     (218 )
Marketplace Mall     1,976  
Paradise Valley Mall     789  
Paradise Valley Mall     978  
Pittsford Plaza     1,192  
Paradise Village Ground Leases     30  
Rotterdam Square     110  
Shoppingtown Mall     5,896  
Towne Mall     652  
Victor Valley, Mall at     699  
Village Center     35  
Village Fair North     243  
Village Plaza     130  
Wilton Mall     5,661  

 
    $ 63,091  

 
Property Pledged as Collateral

   

Arrowhead Towne Center     $635
Biltmore Fashion Park     3,586
Kierland Greenway     1,020
Hilton Village     120
Scottsdale Fashion Square Series I     2,082
Scottsdale Fashion Square Series II     1,414
SDG Macerich Properties, L.P.     665
Tysons Corner Center     4,570

    $ 14,092

(2)
This annual debt service represents the payment of principal and interest. In addition, contingent interest, as defined in the loan agreement, may be due to the extent that 35% of the amount by which the property's gross receipts (as defined in the loan agreement) exceeds a base amount specified therein. Contingent interest expense recognized by the Company was $0.7 million for the year ended December 31, 2005.

(3)
The floating rate loan bears interest at LIBOR plus 0.65%. The Company has stepped interest rate cap agreements over the term of the loan that effectively prevent LIBOR from exceeding 7.95%.

(4)
Concurrent with the acquisition of this property, the Company placed a $30.0 million floating rate loan bearing interest at LIBOR plus 0.88%. The loan matures August 9, 2007 with two one-year extensions through August 9, 2009. At December 31, 2005, the total interest rate was 5.25%. This floating rate debt is covered by an interest rate cap agreement over the loan term which effectively prevents LIBOR from exceeding 7.12%.

(5)
This represents a construction loan which shall not exceed $51.0 million bearing interest at LIBOR plus 2.0%. At December 31, 2005, the total interest rate was 6.39%. On January 6, 2006, the Company modified the loan to reduce the interest rate to LIBOR plus 1.75% with the opportunity for further reduction upon satisfaction of certain conditions to LIBOR plus 1.50%. The maturity date was extended to August 1, 2008, with two extension options of eighteen and twelve months, respectively.

(6)
On June 30, 2004, the Company placed an $85.0 million loan maturing in 2009. The loan floated at LIBOR plus 2.0% for six months and then converted to a fixed rate loan at 4.94%. The effective interest rate over the loan term is 4.84%.

(7)
Concurrent with the acquisition of the mall, the Company placed a $108.0 million loan bearing interest at LIBOR plus 1.15% and maturing July 1, 2004 with three consecutive one year options. $92.0 million of the loan is at LIBOR plus 0.7% and $16.0 million is at LIBOR plus 3.75%. In July 2005, the Company extended the loan maturity to July 2006. At December 31, 2005, the weighted average interest rate was 5.34%.

32     The Macerich Company


(8)
This loan bore interest at LIBOR plus 1.65%. On February 15, 2006, the existing loan was paid-off in full and replaced with a $50.0 million floating rate loan that bears interest at LIBOR plus 0.85% and matures in February 2010. There is an interest rate cap agreement on the new loan that effectively prevents LIBOR from exceeding 6.65%.

(9)
On July 31, 2004, this construction loan matured and was replaced with a three-year loan, plus two one-year extension options at LIBOR plus 1.65%. At December 31, 2005, the total interest rate was 6.03%.

(10)
Both of these loans were paid off in full on January 3, 2006.

(11)
This represented a $225.0 million construction loan which bore interest at LIBOR plus 2.50%. The loan converted to a fixed rate loan at 7.00% on August 19, 2005, due to the completion and stabilization of the expansion and redevelopment project. NML is the lender for 50% of the construction loan. The funds advanced by NML are considered related party debt as they are a joint venture partner with the Company in Macerich Northwestern Associates.

(12)
The floating rate loan bears interest at LIBOR plus 1.75%. The total interest rate at December 31, 2005 was 6.0%.

(13)
This floating rate loan was issued on February 18, 2004. The loan bears interest at LIBOR plus 1.375% and matures February 20, 2006 with a one-year extension option. At December 31, 2005, the total interest rate was 4.75%. The Company has extended the maturity date to March 31, 2006. The Company is in the process of refinancing this loan.

(14)
The property has a construction note payable which shall not exceed $54.0 million, which bore interest at LIBOR plus 2.00%. At December 31, 2005, the total interest rate was 5.62%. On September 22, 2005, this loan was modified to increase the loan to $56.0 million, and to reduce the interest rate to LIBOR plus 1.25%. The loan matures on September 16, 2008 and has two one-year extension options.

(15)
The property has a construction note payable which shall not exceed $11.4 million bearing interest at LIBOR plus 2.0%. At December 31, 2005, the total interest rate was 5.64%. On December 16, 2005, the joint venture refinanced the existing loan with a $21.4 million loan bearing interest at LIBOR plus 1.25%. The loan matures on December 16, 2007 and has one twelve-month extension option.

(16)
On October 4, 2005, the joint venture refinanced the existing loan on the property with a $41.5 million loan bearing interest at LIBOR plus 0.69%. The loan matures on October 9, 2007, and has three one-year extension options. This floating rate debt is covered by an interest rate cap agreement over the loan term which effectively prevents LIBOR from exceeding 8.54%.

(17)
On March 1, 2006, the joint venture refinanced the existing loan on the property with a $51.5 million floating rate loan bearing interest at LIBOR plus 1.10%. The loan matures in February 2008 and has three one year extension options.

(18)
This note was assumed at acquisition. The loan consists of 3 traunches, with a range of maturities from 36 months (with two 18-month extension options) to 60 months. The floating rate debt ranges from LIBOR plus 0.60% to LIBOR plus 2.50%, and fixed rate debt ranges from 5.01% to 6.18%. This loan is part of a larger loan group, and is cross-collateralized and cross-defaulted with the other properties in that group, which are unaffiliated with the Company. An interest rate swap was entered into to convert $0.4 million of floating rate debt with a weighted average interest rate of 3.97% to a fixed rate of 5.39%. The interest rate swap has been designated as a hedge in accordance with Statement on Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative Instruments and Hedging Activities." Additionally, interest rate caps were entered into on a portion of the debt and reverse interest rate caps were simultaneously sold to offset the effect of the interest rate cap agreements. These interest rate caps do not qualify for hedge accounting in accordance with SFAS No. 133.

(19)
On January 11, 2005, concurrent with the acquisition of the property, the joint venture entered into a mortgage loan of $112.0 million, which bears interest at LIBOR plus 0.94%. The loan matures on February 9, 2008 and has two one-year extension options. The joint venture entered into an interest rate swap agreement for $112.0 million to convert this loan from floating to fixed at a rate of 3.86%, which effectively limits the interest rate on this loan to 4.80%. The interest rate swap has been designated as a hedge in accordance with SFAS No. 133.

(20)
On January 11, 2005, concurrent with the acquisition of the property, the joint venture entered into a loan for $37.38 million, which bears interest at LIBOR plus 3.45%. The weighted average interest rate at December 31, 2005 was 7.82%.

(21)
The annual debt service represents the payment of principal and interest. In addition, contingent interest, as defined in the loan agreement, is due upon the occurrence of certain capital events and is equal to 15% of proceeds less the base amount.

(22)
In connection with the acquisition of these Centers, the joint venture assumed $485.0 million of mortgage notes payable which are collateralized by the properties. At acquisition, the $300.0 million fixed rate portion of this debt reflected a fair value of $322.7 million, which included an unamortized premium of $22.7 million. This premium is being amortized as interest expense over the life of the loan using the effective interest method. At December 31, 2005, the unamortized balance of the debt premium was $1.3 million.

    On April 12, 2000, the joint venture issued $138.5 million of additional mortgage notes, which are collateralized by the properties and are due in May 2006. $57.1 million of this debt requires fixed monthly interest payments of $0.4 million at a weighted average rate of 8.13% while the floating rate notes of $81.4 million require monthly interest payments at a floating weighted average rate (based on LIBOR) of 4.74% at December 31, 2005. This floating rate debt is covered by an interest rate cap agreement which effectively prevents LIBOR from exceeding 11.83%.

The Macerich Company    33


    $184.5 million of this debt was refinanced in May 2003 with a new loan of $186.5 million that requires monthly interest payments at a floating weighted average rate (based on LIBOR) of 4.79% at December 31, 2005. This floating rate debt is covered by interest rate cap agreements, which effectively prevent LIBOR from exceeding 10.63%.

    Management of the joint venture anticipates it will successfully refinance the existing debt, all of which matures in May 2006, with debt having similar terms to the current debt.

(23)
The property has a construction note payable which shall not exceed $28.0 million bearing interest at LIBOR plus 2.0%. At December 31, 2005, the total interest rate was 6.57%.

(24)
This note was assumed at acquisition. The loan consists of 3 tranches, with a range of maturities from 36 months (with two 18-month extension options) to 60 months. The floating rate debt ranges from LIBOR plus 0.60% to LIBOR plus 2.5%, and fixed rate debt ranges from 5.01% to 6.18%. This loan is part of a larger loan group, and is cross-collateralized and cross-defaulted with the other properties in that group, which are unaffiliated with the Company. An interest rate swap was entered into that converts $3.0 million of floating rate debt with a weighted average interest rate of 3.97% to a fixed rate of 5.39%. The interest rate swap has been designated as a hedge in accordance with SFAS No. 133. Additionally, interest rate caps were entered into on a portion of the debt and reverse interest rate caps were simultaneously sold to offset the effect of the interest rate cap agreements. These interest rate caps do not qualify for hedge accounting in accordance with SFAS No. 133.

(25)
On October 7, 2004, the joint venture placed an additional mortgage loan on the property totaling $35.0 million bearing interest at LIBOR plus 2.00%.


Item 3. Legal Proceedings

None of the Company, the Operating Partnership, Macerich Property Management Company, LLC, Macerich Management Company, the Westcor Management Companies, Wilmorite Management Companies or their respective affiliates are currently involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against such entities or the Centers, other than routine litigation arising in the ordinary course of business, most of which is expected to be covered by liability insurance. For information about certain environmental matters, see "Business—Environmental Matters."


Item 4. Submission of Matters to a Vote of Securities Holders

None

34     The Macerich Company



Part II


Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of the Company is listed and traded on the New York Stock Exchange under the symbol "MAC". The common stock began trading on March 10, 1994 at a price of $19 per share. In 2005, the Company's shares traded at a high of $71.22 and a low of $53.10.

As of February 24, 2006, there were approximately 961 stockholders of record. The following table shows high and low closing prices per share of common stock during each quarter in 2004 and 2005 and dividends/distributions per share of common stock declared and paid by quarter:

 
  Market Quotation Per Share

   
 
  Dividends/
Distributions
Declared/Paid

Quarter Ended

  High

  Low


March 31, 2004   $53.90   $43.60   $0.61
June 30, 2004   54.30   39.75   0.61
September 30, 2004   55.79   46.60   0.61
December 31, 2004   64.66   54.10   0.65

March 31, 2005   62.15   53.28   0.65
June 30, 2005   67.32   54.00   0.65
September 30, 2005   71.19   62.15   0.65
December 31, 2005   68.58   60.91   0.68

The Company issued 3,627,131 shares of its Series A cumulative convertible redeemable preferred stock ("Series A Preferred Stock"). There is no established public trading market for the Series A Preferred Stock. The Series A Preferred Stock was issued on February 25, 1998. Preferred stock dividends are accrued quarterly and paid in arrears. The Series A Preferred Stock can be converted on a one for one basis into common stock and will pay a quarterly dividend equal to the greater of $0.46 per share, or the dividend then payable on a share of common stock. No dividends will be declared or paid on any class of common or other junior stock to the extent that dividends on Series A Preferred Stock have not been declared and/or paid. The

The Macerich Company    35



following table shows the dividends per share of preferred stock declared and paid for each quarter in 2004 and 2005:

 
  Series A Preferred Stock Dividend

Quarter Ended

  Declared

  Paid


March 31, 2004   $0.61   $0.61
June 30, 2004   0.61   0.61
September 30, 2004   0.65   0.61
December 31, 2004   0.65   0.65

March 31, 2005   0.65   0.65
June 30, 2005   0.65   0.65
September 30, 2005   0.68   0.65
December 31, 2005   0.68   0.68

The Company's existing financing agreements limit, and any other financing agreements that the Company enters into in the future will likely limit, the Company's ability to pay cash dividends. Specifically, the Company may pay cash dividends and make other distributions based on a formula derived from Funds from Operations (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Funds From Operations) and only if no event of default under the financing agreements has occurred, unless, under certain circumstances, payment of the distribution is necessary to enable the Company to qualify as a REIT under the Internal Revenue Code.

36     The Macerich Company



Item 6. Selected Financial Data

The following sets forth selected financial data for the Company on a historical basis. The following data should be read in conjunction with the financial statements (and the notes thereto) of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" each included elsewhere in this Form 10-K. All amounts in thousands except per share data.

 
  Years Ended December 31,

 
  2005

  2004

  2003

  2002

  2001



OPERATING DATA:

 

 

 

 

 

 

 

 

 

 
  Revenues:                    
    Minimum rents(1)   $461,428   $329,689   $286,298   $219,537   $189,838
    Percentage rents   26,085   17,654   12,427   10,735   11,976
    Tenant recoveries   229,463   159,005   152,696   115,993   104,019
    Management Companies(2)   26,128   21,549   14,630   4,826   312
    Other   24,281   19,169   17,526   11,819   11,263

      Total revenues   767,385   547,066   483,577   362,910   317,408
Shopping center and operating expenses   243,767   164,465   151,325   113,808   97,094
Management Companies' operating expenses(2)   52,839   44,080   32,031   12,881   8,515
REIT general and administrative expenses   12,106   11,077   8,482   7,435   6,780
Depreciation and amortization   206,083   142,096   104,920   74,504   62,595
Interest expense   249,910   146,327   130,707   120,288   107,560

Income from continuing operations before minority interest, equity in income of unconsolidated joint ventures and management companies, income tax benefit (provision), gain (loss) on sale or write-down of assets and loss on early extinguishment of debt   2,680   39,021   56,112   33,994   34,864
Minority interest(3)   (12,450)   (19,870)   (28,907)   (20,189)   (19,001)
Equity in income of unconsolidated joint ventures and management companies(2)   76,303   54,881   59,348   43,049   32,930
Income tax benefit (provision)(4)   2,031   5,466   444   (300)  
Gain (loss) on sale or write down of assets   1,288   927   12,420   (3,820)   24,491
Loss on early extinguishment of debt   (1,666)   (1,642)   (170)   (3,605)   (2,034)
Discontinued operations:(5)                    
  Gain on sale of assets   242   7,114   22,031   26,073  
  Income from discontinued operations   3,258   5,736   6,756   6,180   6,473

Net income   71,686   91,633   128,034   81,382   77,723
Less preferred dividends/preferred units   19,098   9,140   14,816   20,417   19,688

Net income available to common stockholders   $52,588   $82,493   $113,218   $60,965   $58,035

Earnings per share ("EPS")—basic:                    
  Income from continuing operations   $0.84   $1.23   $1.68   $0.98   $1.58
  Discontinued operations   0.05   0.18   0.43   0.65   0.14

    Net income per share—basic   $0.89   $1.41   $2.11   $1.63   $1.72

EPS—diluted:(6)(7)                    
  Income from continuing operations   $0.83   $1.22   $1.71   $0.98   $1.58
  Discontinued operations   0.05   0.18   0.38   0.64   0.14

Net income per share—diluted   $0.88   $1.40   $2.09   $1.62   $1.72

The Macerich Company    37


 
  As of December 31,

 
  2005

  2004

  2003

  2002

  2001



BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 
Investment in real estate (before accumulated depreciation)   $6,160,595   $4,149,776   $3,662,359   $3,251,674   $2,227,833
Total assets   $7,178,944   $4,637,096   $4,145,593   $3,662,080   $2,294,502
Total mortgage, notes and debentures payable   $5,424,730   $3,230,120   $2,682,598   $2,291,908   $1,523,660
Minority interest(3)   $284,809   $221,315   $237,615   $221,497   $113,986
Class A participating convertible preferred units   $213,786   $—   $—   $—   $—
Class A non-participating convertible preferred units   $21,501   $—   $—   $—   $—
Series A and Series B Preferred Stock   $98,934   $98,934   $98,934   $247,336   $247,336
Common stockholders' equity   $827,108   $913,533   $953,485   $797,798   $348,954
 
  Years Ended December 31,


 

 

2005


 

2004


 

2003


 

2002


 

2001



OTHER DATA:

 

 

 

 

 

 

 

 

 

 
Funds from operations ("FFO")-diluted(8)   $336,831   $299,172   $269,132   $194,643   $173,372
Cash flows provided by (used in):                    
  Operating activities   $235,296   $213,197   $215,752   $163,176   $140,506
  Investing activities   $(131,948)   $(489,822)   $(341,341)   $(875,032)   $(57,319)
  Financing activities   $(20,349)   $308,383   $115,703   $739,122   $(92,990)
  Number of centers at year end   97   84   78   79   50
Weighted average number of shares outstanding—EPS basic   59,279   58,537   53,669   37,348   33,809
Weighted average number of shares outstanding—EPS diluted(6)(7)   73,573   73,099   75,198   50,066   44,963
Cash distribution declared per common share   $2.63   $2.48   $2.32   $2.22   $2.14
(1)
During 2001, the Company adopted SFAS No. 141, "Business Combination ". (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Statement on Critical Accounting Policies") The amortization of above and below market leases, which is recorded in minimum rents, was $11.6 million, $9.2 million, $6.1 million and $1.1 million for the years ending December 31, 2005, 2004, 2003 and 2002, respectively.

(2)
Unconsolidated joint ventures include all Centers and entities in which the Company does not have a controlling ownership interest and for Macerich Management Company through June 30, 2003 and for Macerich Property Management Company through March 28, 2001. Effective March 29, 2001, the Macerich Property Management Company merged with and into MPMC, LLC. The Company accounts for the joint ventures using the equity method of accounting. Effective March 29, 2001, the Company began consolidating the accounts for MPMC, LLC. Effective July 1, 2003, the Company began to consolidate Macerich Management Company, in accordance with FIN 46. Effective July 26, 2002, the Company consolidated the accounts of the Westcor Management Companies.

(3)
"Minority Interest" reflects the ownership interest in the Operating Partnership and other entities not owned by the REIT.

(4)
The Company's Taxable REIT Subsidiaries ("TRSs") are subject to corporate level income taxes (See Note 2 of the Company's Consolidated Financial Statements).

(5)
In 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Statement on Critical Accounting Policies")

The Company sold Boulder Plaza on March 19, 2002 and in accordance with SFAS No. 144, the results of Boulder Plaza for the periods from January 1, 2002 to March 19, 2002 and for the years ended December 31, 2001 and 2000 have been classified as discontinued operations. Total revenues associated with Boulder Plaza were approximately $0.5 million for the period January 1, 2002 to March 19, 2002 and $2.1 million for the year ended December 31, 2001.

Additionally, the Company sold its 67% interest in Paradise Village Gateway on January 2, 2003 (acquired in July 2002), and the loss on sale of $0.2 million has been classified as discontinued operations in 2003. Total revenues associated with Paradise Village Gateway for the period ending December 31, 2002 were $2.4 million. The Company sold Bristol Center on August 4, 2003, and the results for the period January 1, 2003 to August 4, 2003 and for the years ended December 31, 2002, and 2001 have been classified as discontinued operations. The sale of Bristol Center resulted in a gain on sale of asset of $22.2 million in

38     The Macerich Company


(6)
Assumes that all OP Units and Westcor partnership units are converted to common stock on a one-for-one basis. The Westcor partnership units were converted into OP Units on July 27, 2004, which were subsequently redeemed for common stock on October 4, 2005.

(7)
Assumes issuance of common stock for in-the-money options and restricted stock calculated using the treasury method in accordance with SFAS No. 128 for all years presented.

(8)
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. For the reconciliation of FFO and FFO-diluted to net income, see "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations."

The computation of FFO-diluted includes the effect of outstanding common stock options and restricted stock using the treasury method. It also assumes the conversion of MACWH, LP units to the extent that they are dilutive to the FFO computation (See Note 15—Wilmorite Acquisition of the Company's Notes to the Consolidated Financial Statements). The Company had $125.1 million of convertible subordinated debentures (the "Debentures") which matured December 15, 2002. The Debentures were dilutive for the twelve month periods ending December 31, 2002 and 2001 and were included in the FFO calculation. The Debentures were paid off in full on December 13, 2002. On February 25, 1998, the Company sold $100 million of its Series A Preferred Stock. On June 16, 1998, the Company sold $150 million of its Series B Preferred Stock. The Preferred Stock can be converted on a one-for-one basis for common stock. The Series A and Series B Preferred Stock then outstanding was dilutive to FFO in 2005, 2004, 2003, 2002 and 2001 and was dilutive to net income in 2003. All of the Series B Preferred Stock was converted to common stock on September 9, 2003.

The Macerich Company    39



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Annual Report on Form 10-K contains or incorporates statements that constitutes forward-looking statements. Those statements appear in a number of places in this Form 10-K and include statements regarding, among other matters, the Company's growth, acquisition, redevelopment and development opportunities, the Company's acquisition and other strategies, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the Company's financial condition or results of operations. Words such as "expects," "anticipates," "intends," "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 Company's 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 under "Item 1A. Risk Factors," among others. The Company will not update any forward-looking information to reflect actual results or changes in the factors affecting the forward-looking information.


Management's Overview and Summary

The Macerich Company (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 December 31, 2005, the Operating Partnership owned or had an ownership interest in 75 regional shopping centers, 20 community shopping centers and two development properties aggregating approximately 78.9 million square feet of gross leasable area ("GLA"). These 97 regional, community and development shopping centers are referred to hereinafter as the "Centers", unless the context otherwise requires. The Company is a self-administered and self-managed real estate investment trust ("REIT") and conducts all of its operations through the Operating Partnership and the Company's management companies.

The following discussion is based primarily on the consolidated financial statements of the Company for the years ended December 31, 2005, 2004 and 2003. The following discussion compares the activity for the year ended December 31, 2005 to results of operations for the year ended December 31, 2004. Also included is a comparison of the activities for the year ended December 31, 2004 to the results for the year ended December 31, 2003. 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 January 2, 2003, the Company sold its 67% interest in Paradise Village Gateway, a 296,153 square foot Phoenix area urban village, for approximately $29.4 million. The proceeds from the sale were used to repay a portion of the term loan. The sale resulted in a loss on sale of asset of $0.2 million.

40     The Macerich Company



On January 31, 2003, the Company purchased its joint venture partner's 50% interest in FlatIron Crossing. The purchase price consisted of approximately $68.3 million in cash plus the assumption of the joint venture partner's share of debt of $90.0 million.

On May 15, 2003, the Company sold 49.9% of its partnership interest in the Village at Corte Madera for a total purchase price of approximately $65.9 million, which included the assumption of a proportionate amount of the partnership debt in the amount of approximately $34.7 million. The Company retained a 50.1% partnership interest and has continued leasing and managing the asset. The sale resulted in a gain on sale of asset of $8.8 million.

On June 6, 2003, the Shops at Gainey Village, a 138,000 square foot Phoenix area specialty center, was sold for $55.7 million. The Company, which owned 50% of this property, received total proceeds of $15.8 million and recorded a gain on sale of asset of $2.8 million.

On August 4, 2003, the Company sold Bristol Center, a 161,000 square foot community center in Santa Ana, California. The sales price was approximately $30.0 million and the Company recorded a gain on sale of asset of $22.2 million which is reflected in discontinued operations.

On September 15, 2003, the Company acquired Northridge Mall, an 864,000 square foot super-regional mall in Salinas, California. The total purchase price was $128.5 million and was funded by sale proceeds from Bristol Center and borrowings under the Company's line of credit. Northridge Mall is referred herein as the "2003 Acquisition Center."

On December 18, 2003, the Company acquired Biltmore Fashion Park, a 600,000 square foot regional mall in Phoenix, Arizona. The total purchase price was $158.5 million, which included the assumption of $77.4 million of debt. The Company also issued 705,636 partnership units of the Operating Partnership at a price of $42.80 per unit. The balance of the Company's 50% share of the purchase price of $10.5 million was funded by cash and borrowings under the Company's line of credit. The mall is owned in a 50/50 joint venture with an institutional partner.

On January 30, 2004, the Company, in a 50/50 joint venture with a private investment company, acquired Inland Center, a 1 million square foot super-regional mall in San Bernardino, California. The total purchase price was $63.3 million and concurrently with the acquisition, the joint venture placed a $54.0 million fixed rate loan on the property. The Company's share of the remainder of the purchase price was funded by cash and borrowings under the Company's line of credit.

On May 11, 2004, the Company acquired an ownership interest in NorthPark Center, a 1.4 million square foot regional mall in Dallas, Texas. The Company's initial investment in the property was $30.0 million which was funded by borrowings under the Company's line of credit. In addition, the Company assumed a pro rata share of debt of $86.6 million and funded an additional $45.0 million post-closing.

On July 1, 2004, the Company acquired the Mall of Victor Valley in Victorville, California and on July 20, 2004, the Company acquired La Cumbre Plaza in Santa Barbara, California. The Mall of Victor Valley is a 480,000 square foot regional mall and La Cumbre Plaza is a 495,000 square foot regional mall. The

The Macerich Company    41



combined total purchase price was $151.3 million. The purchase price for the Mall of Victor Valley included the assumption of an existing fixed rate loan of $54.0 million at 5.25% maturing in March, 2008. Concurrent with the closing of La Cumbre Plaza, a $30.0 million floating rate loan was placed on the property with an initial interest rate of 2.29%. The balance of the purchase price was paid in cash and borrowings from the Company's revolving line of credit.

On November 16, 2004, the Company acquired Fiesta Mall, a 1 million square foot super regional mall in Mesa, Arizona. The total purchase price was $135.2 million which was funded by borrowings under the Company's line of credit. On December 2, 2004, the Company placed a ten year $84.0 million fixed rate loan at 4.88% on the property.

On December 16, 2004, the Company sold the Westbar property, a Phoenix area property that consisted of a collection of ground leases, a shopping center, and land for $47.5 million. The sale resulted in a gain on sale of asset of $6.8 million.

On December 30, 2004, the Company purchased the unaffiliated owners' 50% tenants in common interest in Paradise Village Ground Leases, Village Center, Village Crossroads, Village Fair and Paradise Village Office Park II. All of these assets are located in Phoenix, Arizona. The total purchase price was $50.0 million which included the assumption of the unaffiliated owners' share of debt of $15.2 million. The balance of the purchase price was paid in cash and borrowings from the Company's line of credit. Accordingly, the Company now owns 100% of these assets.

On January 5, 2005, the Company sold Arizona Lifestyle Galleries for $4.3 million. The sale resulted in a gain on sale on asset of $0.3 million.

On January 11, 2005, the Company became a 15% owner in a joint venture that acquired Metrocenter, a 1.3 million square foot super-regional mall in Phoenix, Arizona. The total purchase price was $160 million and concurrently with the acquisition, the joint venture placed a $112 million loan on the property. The Company's share of the purchase price, net of the debt, was $7.2 million which was funded by cash and borrowings under the Company's line of credit.

On January 21, 2005, the Company formed a 50/50 joint venture with a private investment company. The joint venture acquired a 49% interest in Kierland Commons, a 437,000 square foot mixed use center in Phoenix, Arizona. The joint venture's purchase price for the interest in the center was $49.0 million. The Company assumed its share of the underlying property debt and funded the remainder of its share of the purchase price by cash and borrowings under the Company's line of credit.

On April 8, 2005, the Company acquired Ridgmar Mall, a 1.3 million square foot super-regional mall in Fort Worth, Texas. The acquisition was completed in a 50/50 joint venture with an affiliate of Walton Street Capital, LLC. The purchase price was $71.1 million. Concurrent with the closing, a $57.4 million loan bearing interest at a fixed rate of 6.0725% was placed on the property. The balance of the purchase price was funded by borrowings under the Company's line of credit.

42     The Macerich Company



On April 25, 2005, the Company and the Operating Partnership completed its acquisition of Wilmorite Properties, Inc., a Delaware corporation ("Wilmorite") and Wilmorite Holdings, L.P., a Delaware limited partnership ("Wilmorite Holdings"). Wilmorite's portfolio includes interests in 11 regional malls and two open-air community shopping centers with 13.4 million square feet of space located in Connecticut, New York, New Jersey, Kentucky and Virginia. The total purchase price was approximately $2.333 billion, plus adjustments for working capital, including the assumption of approximately $877.2 million of existing debt with an average interest rate of 6.43% and the issuance of $234 million of convertible preferred units ("CPUs") and $5.8 million of common units in Wilmorite Holdings. The balance of the consideration to the equity holders of Wilmorite and Wilmorite Holdings was paid in cash, which was provided primarily by a five-year, $450 million term loan bearing interest at LIBOR plus 1.50% and a $650 million acquisition loan with a term of up to two years and bearing interest initially at LIBOR plus 1.60%. An affiliate of the Operating Partnership is the general partner and, together with other affiliates, own approximately 83% of Wilmorite Holdings, with the remaining 17% held by those limited partners of Wilmorite Holdings who elected to receive CPUs or common units in Wilmorite Holdings rather than cash. Approximately $213 million of the CPUs can be redeemed, subject to certain conditions, for the portion of the Wilmorite portfolio generally located in the area of Rochester, New York. The Wilmorite portfolio, exclusive of Tysons Corner Center and Tysons Corner Office (collectively referred herein as "Tysons Center"), are referred to herein as the "2005 Wilmorite Centers."

The Mall of Victor Valley, La Cumbre Plaza, Fiesta Mall, Paradise Village Ground Leases, Village Center, Village Crossroads, Village Fair and Paradise Village Office Park II are referred to herein as the "2004 Acquisition Centers."

Biltmore Fashion Park, Inland Center, Kierland Commons, Metrocenter, NorthPark Center, Ridgmar Mall and Tysons Center are joint ventures and these properties are reflected using the equity method of accounting. The Company's share of the results of these acquisitions are reflected in the consolidated results of operations of the Company in the income statement line item entitled "Equity in income of unconsolidated joint ventures."

Many of the variations in the results of operations, discussed below, occurred due to the transactions described above including the acquisition of the 2005 Wilmorite Centers and the 2004 Acquisition Centers. Kierland Commons, Metrocenter, Ridgmar Mall and Tysons Center are referred to herein as the "2005 Joint Venture Acquisition Centers." Biltmore Fashion Park, Inland Center and NorthPark Center are referred to herein as the "2004 Joint Venture Acquisition Centers." 29th Street, Parklane Mall, Santa Monica Place and Queens Center were under redevelopment during all or a portion of the reporting periods and are referred to herein as the "Redevelopment Centers." La Encantada and Scottsdale 101 were under development during all or a portion of the reporting periods and are referred to herein as the "Development Properties." All other Centers, excluding the Redevelopment Centers, the Development Properties, the 2005 Wilmorite Centers, the 2004 Acquisition Centers, the 2005 Joint Venture Acquisition Centers and the 2004 Acquisition Centers, are referred to herein as the "Same Centers," unless the context otherwise requires.

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

The Macerich Company    43


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 require 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.


Critical Accounting Policies

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

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 Company's significant accounting policies are described in more detail in Note 2 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 terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight lining of rent adjustment." Currently, 37% 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, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.

44     The Macerich Company


Property

Costs related to the development, redevelopment, construction and improvement of properties are capitalized. Interest incurred or imputed 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   initial term of related lease
Equipment and furnishings   5-7 years

Accounting for Acquisitions

The Company accounts for all acquisitions entered into subsequent to June 30, 2001 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 acquisition date prorated over the remaining lease terms. The tenant improvements are classified as an asset under real estate investments 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) origination value, which represents the value associated with "cost avoidance" of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our 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. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as another asset and amortized over the remaining lease term plus an estimate of renewal of the acquired leases. Above or below market leases are classified as an other asset or liability, 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 its 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.

The Macerich Company    45



Generally, the Company engages a valuation firm to assist with the allocation.

Asset Impairment

The Company assesses whether there has been impairment in the value of its long-lived assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the 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.

Deferred Charges

Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Cost 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 range 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


Comparison of Years Ended December 31, 2005 and 2004

Revenues

Minimum and percentage rents increased by 40.4% to $487.5 million in 2005 from $347.3 million in 2004. Approximately $92.9 million of the increase relates to the 2005 Wilmorite Centers, $1.6 million relates to the Same Centers, $21.6 million relates to the 2004 Acquisition Centers and $24.1 million primarily relates to Queens Center and the Development Properties.

The amount of straight-lined rents, included in minimum rent, was $6.7 million in 2005 compared to $1.0 million in 2004. This increase in straight-lining of rents relates to the 2005 Wilmorite Centers and the 2004 Acquisition Centers which is offset by decreases resulting from the Company structuring the majority of its new leases using an annual multiple of CPI increases, which generally do not require straight-lining treatment.

The amortization of above and below market leases, which is recorded in minimum rents, increased to $11.6 million in 2005 from $9.2 million in 2004. The increase is primarily due to the 2005 Wilmorite Centers and the 2004 Acquisition Centers.

Tenant recoveries increased to $229.5 million in 2005 from $159.0 million in 2004. Approximately $52.9 million of the increase relates to the 2005 Wilmorite Centers, $5.3 million relates to Queens Center

46     The Macerich Company


and the Development Properties, $9.2 million relates to the 2004 Acquisition Centers and $3.1 million relates to the Same Centers.

Management Companies' revenues increased by 21.4% to $26.1 million in 2005 from $21.5 million in 2004 primarily due to increased management fees received from the 2005 and 2004 Joint Venture Acquisition Centers and third party management contracts.

Shopping Center and Operating Expenses

Shopping center and operating expenses increased to $243.8 million in 2005 compared to $164.5 million in 2004. This increase is a result of $54.9 million of expenses from the 2005 Wilmorite Centers, $10.5 million from the 2004 Acquisition Centers, $5.5 million from Queens Center and the Development Properties and $2.0 million from increased operating and ground rent expenses at the Same Centers. In addition, there was a write-off of a contingent compensation liability of $6.4 million in 2004.

Management Companies' Operating Expenses

Management Companies' operating expenses increased by 19.7% to $52.8 million in 2005 from $44.1 million in 2004, primarily due to higher compensation expense in 2005 compared to 2004.

REIT General and Administrative Expenses

REIT general and administrative expenses increased to $12.1 million in 2005 from $11.1 million in 2004, primarily due to increases in stock-based compensation expense compared to 2004.

Depreciation and Amortization

Depreciation and amortization increased to $206.1 million in 2005 from $142.1 million in 2004. Approximately $60.6 million relates to the 2005 Wilmorite Centers, $3.0 million relates to the 2004 Acquisition Centers and $3.6 million relates to Queens Center and the Development Properties. This is offset by a $3.2 million decrease relating to the Same Centers.

Interest Expense

Interest expense increased to $249.9 million in 2005 from $146.3 million in 2004. Approximately $26.6 million relates to the assumed debt from the 2005 Wilmorite Centers, $39.8 million relates to the term and acquisition loans for the Wilmorite Acquisition, $19.8 million relates to increased borrowings and higher interest rates under the Company's line of credit, $2.0 million relates to the Northridge Center loan which closed on June 30, 2004, $5.9 million relates to the 2004 Acquisition Centers, $10.6 million relates to Queens Center and the Development Properties and $4.5 million relates to an increase in interest rates on floating rate debt at the Same Centers. These increases are offset in part by a $4.6 million decrease related to the payoff of the $250 million term loan on July 30, 2004. Additionally, capitalized interest was $10.0 million in 2005, down from $8.9 million in 2004.

Minority Interest

The minority interest represents the 19.0% weighted average interest of the Operating Partnership not owned by the Company during 2005. This compares to 19.5% not owned by the Company during 2004.

The Macerich Company    47


Equity in Income from Unconsolidated Joint Ventures

The equity in income from unconsolidated joint ventures was $76.3 million for 2005, compared to $54.9 million in 2004. This primarily relates to increased net income from the 2005 and 2004 Joint Venture Acquisition Centers of $13.7 million. Included in the equity in income from unconsolidated joint ventures is the Company's pro rata share of straight-line rents, which increased to $4.8 million in 2005 from $1.0 million in 2004.

Income Tax Benefit

Income tax benefit from taxable REIT subsidiaries ("TRSs") decreased by $3.4 million in 2005 compared to 2004 primarily due to the tax effects of state taxes for states in which the TRSs are combined with the Company, the tax effect of stock-based compensation and the tax effects related to certain acquired assets in 2004.

Gain on Sale of Assets

In 2005, a gain of $1.3 million was recorded relating to land sales compared to a $0.9 million gain on land sales in 2004.

Loss on Early Extinguishment of Debt

In 2005, the Company recorded a loss from early extinguishment of debt of $1.7 million related to the refinancing of the Valley View Mall loan. In 2004, the Company recorded a loss from early extinguishment of debt of $1.6 million related to the payoff of a loan at one of the Redevelopment Centers and the payoff of the $250 million term loan on July 30, 2004.

Discontinued Operations

The gain on sale of $0.2 million in 2005 relates primarily to the sale of Arizona Lifestyle Galleries on January 5, 2005. In 2004, the gain on sale primarily related to the $6.8 million gain from the sale of the Westbar property on December 16, 2004. The decrease in income from discontinued operations relates to the Westbar property.

Funds From Operations

Primarily as a result of the factors mentioned above, Funds from Operations ("FFO")—Diluted increased 12.6% to $336.8 million in 2005 from $299.2 million in 2004. 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 was $235.3 million in 2005 compared to $213.2 million in 2004. The increase is primarily due to the foregoing results at the Centers and offset by a decrease in distributions of income from unconsolidated joint ventures in 2005 compared to 2004.

Investing Activities

Cash used in investing activities was $131.9 million in 2005 compared to $489.8 million in 2004. The change resulted primarily from increases in distributions of capital from unconsolidated joint ventures. This is offset by the joint venture acquisitions of Metrocenter and Kierland Commons, the Company's additional contributions to NorthPark Center and the decreased development, redevelopment, expansion and

48     The Macerich Company


renovation of Centers in 2005 compared to 2004 due to completion of the Queens Center and La Encantada projects.

Financing Activities

Cash flow used in financing activities was $20.3 million in 2005 compared to cash flow provided by financing activities of $308.4 million in 2004. The 2005 decrease compared to 2004 resulted primarily from fewer refinancings for 2005 than 2004 and increased dividend payments to common stockholders. Additionally, the funding of the Queens construction loan was $65.7 million less in 2005 compared to 2004 due to the substantial completion of the expansion project.


Comparison of Years Ended December 31, 2004 and 2003

Revenues

Minimum and percentage rents increased by 16.3% to $347.3 million in 2004 from $298.7 million in 2003. Approximately $11.7 million of the increase relates to the Same Centers, $0.8 million of the increase relates to the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing, $7.4 million relates to the 2003 Acquisition Center, $10.1 million relates to the 2004 Acquisition Centers and $22.0 million relates to the Redevelopment and Development Centers, primarily Queens Center, La Encantada and Scottsdale 101 where phases of the developments have been completed. Additionally, these increases in minimum and percentage rents are offset by decreasing revenues of $3.4 million related to the Company's sale of a 49.9% interest in the Village at Corte Madera.

The amortization of above and below market leases, which is recorded in minimum rents, increased to $9.2 million in 2004 from $6.1 million in 2003. The increase is primarily due to the 2003 Acquisition Center, 2004 Acquisition Centers and the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing.

The amount of straight-lined rents, included in minimum rent, was $1.0 million in 2004 as compared to $2.9 million in 2003. The decrease is due to the structuring of new leases with rent increases based upon annual multiples of CPI rather than fixed contractual rent increases.

Tenant recoveries increased to $159.0 million in 2004 from $152.7 in 2003. Approximately $0.1 million relates to the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing, $3.4 million relates to the Redevelopment and Development Centers, primarily Queens Center, La Encantada and Scottsdale 101, $4.4 million relates to the 2003 Acquisition Center and $3.7 million relates to the 2004 Acquisition Centers. This is offset by a $3.8 million decrease due to a change in estimated recovery rates at the Same Centers and a $1.1 million decrease relating to the Company's sale of a 49.9% partnership interest in the Village at Corte Madera.

Management Companies' revenues increased by 47.3% to $21.5 million in 2004 compared to $14.6 million in 2003 primarily due to consolidating Macerich Management Company effective July 1, 2003 in accordance with FIN 46. Prior to July 1, 2003, the Macerich Management Company was accounted for using the equity method of accounting.

The Macerich Company    49



Shopping Center and Operating Expenses

Shopping center and operating expenses increased to $164.5 million in 2004 compared to $151.3 million in 2003. The increase is a result of $4.6 million related to the 2003 Acquisition Center, $4.2 million due to the 2004 Acquisition Centers, $7.3 million related to the Redevelopment and Development Centers, primarily Queens Center, La Encantada and Scottsdale 101, $0.1 million related to the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing and $5.3 million relating to the Same Centers due to increases in recoverable and non-recoverable expenses. This is offset by a decrease of non-recoverable expenses due to a write-off of a $6.4 million compensation liability and a $1.4 million decrease related to the Company's sale of a 49.9% partnership interest in the Village at Corte Madera.

Management Companies' Operating Expenses

Expenses increased by 37.8% to $44.1 million in 2004 from $32.0 million in 2003 primarily due to consolidating Macerich Management Company effective July 1, 2003 in accordance with FIN 46. Prior to July 1, 2003, the Macerich Management Company was accounted for using the equity method of accounting.

REIT General and Administrative Expenses

REIT general and administrative expenses increased to $11.1 million in 2004 from $8.5 million in 2003, primarily due to increases in professional services and stock-based compensation expense.

Depreciation and Amortization

Depreciation and amortization increased to $142.1 million in 2004 from $104.9 million in 2003. Approximately $3.3 million of the increase relates to the 2003 Acquisition Center, $7.8 million relates to the 2004 Acquisition Centers, $2.0 million relates to consolidating Macerich Management Company effective July 1, 2003, $3.8 million relates to additional capital expenditures at the Same Centers and $8.5 million relates to Queens Center, La Encantada and Scottsdale 101. Additionally, $12.9 million of depreciation and amortization was recorded for the year ended December 31, 2004 compared to the same period in 2003 due to the 2002, 2003 and 2004 acquisitions. This is offset by a $1.1 million decrease relating to the sale of 49.9% of the partnership interest in the Village at Corte Madera.

50     The Macerich Company


Interest Expense

Interest expense increased to $146.3 million in 2004 from $130.7 million in 2003. Approximately $4.5 million of the increase relates to the refinancing of FlatIron Crossing on November 4, 2003, $4.8 million relates to the $250 million of unsecured notes issued on May 13, 2003, $5.3 million relates to increased borrowings on the Company's line of credit, $2.0 million relates to the 2003 Acquisition Center, $2.0 million relates to the 2004 Acquisition Centers and $8.7 million relates primarily to Queens Center, La Encantada and Scottsdale 101. These increases are offset by $2.0 million, which relates to the Company's sale of a 49.9% partnership interest in the Village at Corte Madera, $4.1 million relates to the payoff of the $196.5 million term loan on July 30, 2004, $2.5 million relates to the payoff of the 29th Street loan on February 3, 2004 and $5.9 million relates to other financing activity at the Same Centers. Capitalized interest was $8.9 million in 2004, down from $12.1 million in 2003.

Minority Interest

The minority interest represents the 19.5% weighted average interest of the Operating Partnership not owned by the Company during 2004. This compares to 20.74% not owned by the Company during 2003.

Equity in Income from Unconsolidated Joint Ventures and Macerich Management Company

The income from unconsolidated joint ventures and the Macerich Management Company was $54.9 million for 2004, compared to income of $59.3 million in 2003. This decrease is primarily due to increased depreciation relating to SFAS No. 141 on the 2004 Joint Venture Acquisition Centers and consolidating Macerich Management Company effective July 1, 2003 in accordance with FIN 46. Prior to July 1, 2003, the Macerich Management Company was accounted for using the equity method of accounting.

Income Tax Benefit

Income tax benefit from TRSs increased by $5.0 million in 2004 compared to 2003 primarily due to the tax effects of state taxes for states in which the TRSs are combined with the Company, the change in tax rates applicable to certain acquired assets, the tax effect of stock-based compensation and the release of a valuation allowance in 2003.

Gain on Sale of Assets

In 2004, a gain of $0.9 million was recorded relating to land sales compared to $1.0 million of land sales in 2003. A gain of $12.4 million in 2003 represents primarily the Company's sale of 49.9% of its partnership interest in the Village at Corte Madera on May 15, 2003 and the sale of the Shops at Gainey Village.

Loss on Early Extinguishment of Debt

In 2004, the Company recorded a loss from early extinguishment of debt of $1.6 million related to the payoff of a loan at one of the Redevelopment Centers and the payoff of the $196.8 million term loan.

Discontinued Operations

In 2004, the $7.1 million gain on sale relates primarily to the sale of the Westbar property. The gain on sale of $22.0 million in 2003 relates primarily to the sale of Bristol Center on August 4, 2003.

The Macerich Company    51


Net Income Available to Common Stockholders

Primarily as a result of the sale of Bristol Center in 2003, the purchase of the 2003 Acquisition Center and the 2004 Acquisition Centers, the sale of 49.9% of the partnership interest in the Village at Corte Madera, the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing, the change in depreciation expense due to SFAS No. 141, the redevelopment of Queens Center, the developments of La Encantada and Scottsdale 101 and the foregoing results, net income available to common stockholders decreased to $82.5 million in 2004 from $113.2 million in 2003.

Operating Activities

Cash flow from operations was $213.2 million in 2004 compared to $215.7 million in 2003. The decrease is primarily due to the foregoing results at the Centers as mentioned above.

Investing Activities

Cash used in investing activities was $489.8 million in 2004 compared to cash used in investing activities of $341.3 million in 2003. The change resulted primarily from the proceeds of $107.2 million received in 2003 from the sale of Paradise Village Gateway, the Shops at Gainey Village, Bristol Center and the 49.9% interest in the Village at Corte Madera which is offset by increased contributions to joint ventures and acquisitions of joint ventures, $291.5 million relating to the 2004 Acquisition Centers and by the Company's purchase of its joint venture partner's 50% interest in FlatIron Crossing on January 31, 2003.

Financing Activities

Cash flow provided by financing activities was $308.4 million in 2004 compared to cash flow provided by financing activities of $115.7 million in 2003. The 2004 increase compared to 2003 resulted primarily from $94.1 million of additional funding relating to Queens construction loan, the $85.0 million Northridge loan, the new $84.0 million loan at Fiesta Mall and increased borrowings under the Company's line of credit, which is offset by the Company acquiring 50% of its joint venture partner's interest in FlatIron Crossing in January 2003, the $32.3 million funding of the Panorama loan in the first quarter of 2003 and increased dividends being paid in 2004 compared to 2003.

Funds From Operations

Primarily as a result of the factors mentioned above, Funds from Operations—Diluted increased 11.1% to $299.2 million in 2004 from $269.1 million in 2003. For the reconciliation of FFO and FFO-diluted to net income available to common stockholders, see "Funds from Operations."

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

52     The Macerich Company


reimbursed by tenants, other than non-recurring capital expenditures. The following tables summarize capital expenditures (in millions) incurred at the Centers for the years ending December 31:

Consolidated Centers:

  2005

  2004

  2003


Acquisitions of property and equipment   $1,767.2   $301.1   $359.2
Development, redevelopment and expansion of Centers   77.2   139.3   166.3
Renovations of Centers   51.1   21.2   21.7
Tenant allowances   21.8   10.9   7.3
Deferred leasing charges   21.8   16.8   15.2

  Total   $1,939.1   $489.3   $569.7


Joint Venture Centers (at Company's pro rata share):

 

 

 

 

 

 

Acquisitions of property and equipment(1)   $736.4   $41.1   $(19.2)
Development, redevelopment and expansion of Centers   79.4   6.6   17.6
Renovations of Centers   32.2   10.1   2.8
Tenant allowances   8.9   10.5   4.7
Deferred leasing charges   5.1   3.7   3.3

  Total   $862.0   $72.0   $9.2

(1)
Includes the Company's purchase of its joint venture partner's 50% interest in FlatIron Crossing on January 31, 2003.

Management expects similar levels to be incurred in future years for tenant allowances and deferred leasing charges and to incur between $250 million to $350 million in 2006 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 Company's line of credit and construction loans. However, 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.

The Company believes that it will have access to the capital necessary to expand its business in accordance with its strategies for growth and maximizing FFO. The Company presently intends to obtain additional capital necessary for these purposes through a combination of debt or equity financings, joint ventures and the sale of non-core assets. The Company believes joint venture arrangements have in the past and may in the future provide an attractive alternative to other forms of financing, whether for acquisitions or other business opportunities.

The Company's total outstanding loan indebtedness at December 31, 2005 was $6.9 billion (including $1.5 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 and preferred stock into common stock) ratio of approximately 56.0% at December 31, 2005. The majority of the Company's debt consists of fixed-rate conventional mortgages payable collateralized by individual properties.

The Macerich Company    53



The Company filed a shelf registration statement, effective June 6, 2002, to sell securities. The shelf registration was for a total of $1.0 billion of common stock, common stock warrant 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 as may from time to time be offered.

On January 19, 2006, the Company issued 10.9 million shares of common stock for net proceeds of $747.0 million. The net proceeds were used to pay off the $619.0 million acquisition loan (See Note 15 of the Company's Notes to Consolidated Financial Statements) and to pay down the line of credit pending use to pay part of the purchase price for Valley River Center (See Recent Developments—Acquisitions).

The Company had a $425.0 million revolving line of credit. This revolving line of credit had a three-year term through July 26, 2005 with a one-year extension option. The interest rate fluctuated from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. On July 30, 2004, the Company amended and expanded the revolving line of credit to $1.0 billion and extended the maturity to July 30, 2007 plus a one-year extension. In April 2005, the interest rate on the facility was reduced to 1.50% over LIBOR based on the Company's current leverage level. The interest rate fluctuates from LIBOR plus 1.15% to LIBOR plus 1.70% depending on the Company's overall leverage level. As of December 31, 2005, $863.0 million of borrowings were outstanding at an average interest rate of 5.93%.

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%. The proceeds were used to pay down and create more availability under the Company's line of credit. At December 31, 2005 and December 31, 2004, the entire $250.0 million of notes were outstanding at an interest rate of 6.0% and 4.45%, respectively. The Company had an interest rate swap agreement which effectively fixed the interest rate at 4.45% from November 2003 to October 13, 2005. Concurrently with the Wilmorite closing, the Company modified these unsecured notes. The interest rate was reduced to LIBOR plus 1.50%.

At December 31, 2005, the Company had cash and cash equivalents available of $155.1 million.

Off-Balance Sheet Arrangements

The Company has an ownership interest in a number of joint ventures as detailed in Note 3 to the Company's Consolidated Financial Statements included herein. The Company accounts for those investments 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 2. Properties—Mortgage Debt.

In addition, certain joint ventures also have debt that could become recourse debt to the Company or its subsidiaries, in excess of it's pro rata share, should the joint ventures be unable to discharge the obligations

54     The Macerich Company



of the related debt. The following reflects the maximum amount of debt principal that could recourse to the Company at December 31, 2005 (in thousands):

Property Name

  Recourse Debt

  Maturity Date


Boulevard Shops   $4,280   12/16/2007
Chandler Village Center   16,624   12/19/2006
Metrocenter   726   2/9/2008

    $21,630    

The above amounts decreased $2.5 million from December 31, 2004.

Additionally, as of December 31, 2005, the Company is contingently liable for $5.6 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 December 31, 2005) for the consolidated Centers 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)   $6,547,117   $1,257,222   $2,167,317   $1,316,588   $1,805,990
Operating lease obligations   420,378   5,941   12,099   12,687   389,651
Purchase obligations   22,073   22,073      
Other long-term liabilities   308,076   308,076      

    $7,297,644   $1,593,312   $2,179,416   $1,329,275   $2,195,641

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.

The Macerich Company    55


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.

The inclusion of gains (losses) on sales of peripheral land included in FFO for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 were $3.4 million (including $2.1 million from joint ventures at pro rata), $4.4 million (including $3.5 million from joint ventures at pro rata), $1.4 million (including $0.4 million from joint ventures at pro rata), $2.5 million (including $2.4 million from joint ventures at pro rata), $0.3 million (including $0.1 million from joint ventures at pro rata), respectively.

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

 
  2005
  2004
  2003
  2002
  2001
 
  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

  Shares

  Amount


Net income—available to common stockholders   73,250   $52,588   72,715   $82,493   67,332   $113,218   49,611   $60,965   44,963   $58,035
Adjustments to reconcile net income to FFO—basic:                                        
  Minority interest     12,450     19,870     28,907     20,189     19,001
  Gain on sale or write-down of wholly-owned assets     (1,530)     (8,041)     (34,451)     (22,253)     (24,491)
  Add: Gain on land sales—consolidated assets     1,307     939     1,054     128     215
  Less: Impairment write-down of consolidated assets                 (3,029)    
  (Gain) loss on sale or write-down of assets from unconsolidated entities (pro rata)     (1,954)     (3,353)     (155)     8,021     (191)
  Add: Gain on land sales from unconsolidated entities (pro rata)     2,092     3,464     387     2,403     123
  Less: Impairment write-down of pro rata unconsolidated entities                 (10,237)    
  Depreciation and amortization on wholly-owned centers     203,065     144,828     109,569     78,837     65,983
  Depreciation and amortization on joint ventures and from management companies (pro rata)     73,247     61,060     45,133     37,355     28,077
  Cumulative effect of change in accounting principle—pro rata unconsolidated entities                     128
  Less: depreciation on personal property and amortization of loan costs and interest rate caps     (14,724)     (11,228)     (9,346)     (7,463)     (4,969)

FFO—basic(1)   73,250   326,541   72,715   290,032   67,332   254,316   49,611   164,916   44,963   141,911
Additional adjustments to arrive at FFO—diluted:                                        
  Impact of convertible preferred stock   3,627   9,648   3,627   9,140   7,386   14,816   9,115   20,417   9,115   19,688
  Impact of non-participating convertible preferred units   197   642                
  Impact of stock options using the treasury method   323     385     480     456      
  Impact of convertible debentures               3,833   9,310   4,824   11,773

  FFO—diluted(2)   77,397   $336,831   76,727   $299,172   75,198   $269,132   63,015   $194,643   58,902   $173,372

(1)
Calculated based upon basic net income as adjusted to reach basic FFO. As of December 31, 2005, 2004, 2003, 2002 2001, 13.5 million, 14.2 million, 14.2 million, 13.7 million and 11.2 million of OP Units and Westcor partnership units were outstanding, respectively. The Westcor partnership units were converted to OP Units on July 27, 2004 which were subsequently redeemed for common stock on October 4, 2005.

(2)
The computation of FFO—diluted 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 units to the extent that it is dilutive to the FFO computation (See Note 15-Wilmorite Acquisition of the Company's Notes to the Consolidated Financial Statements). The convertible debentures were dilutive for the years ended December 31, 2002 and 2001 and were included in the FFO calculation. The convertible debentures were paid off in full on December 13, 2002. On February 25, 1998, the Company sold $100 million of its Series A Preferred Stock. On June 16, 1998, the Company sold $150 million of its Series B Preferred Stock. On

56     The Macerich Company


    September 9, 2003, 5.5 million shares of Series B Preferred Stock were converted into common shares. 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 2005, 2004, 2003, 2002 and 2001 FFO-diluted as they are dilutive to that calculation.


Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company's primary market risk exposure is interest rate risk. The Company has managed and will continue to manage interest rate risk by (1) maintaining a 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 December 31, 2005 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):

 
  For the Years Ended December 31,

   
   
   
 
  2006

  2007

  2008

  2009

  2010

  Thereafter

  Total

  FV


CONSOLIDATED CENTERS:                            
Long term debt:                            
  Fixed rate   $57,653   $130,515   $378,414   $399,629   $627,505   $1,630,016   $3,223,732   $2,872,260
  Average interest rate   5.60%   5.60%   5.50%   5.60%   5.70%   6.30%   5.70%    
  Floating rate   894,706   1,178,292   56,000       72,000   2,200,998   2,200,998
  Average interest rate   5.90%   5.80%   5.20%           5.00%   5.80%    

Total debt—Consolidated Centers   $952,359   $1,308,807   $434,414   $399,629   $627,505   $1,702,016   $5,424,730   $5,073,258

JOINT VENTURE CENTERS:                            
Long term debt (at Company's pro rata share:)                            
  Fixed rate   $262,023   $132,294   $66,263   $227,644   $118,381   $448,664   $1,255,269   $1,340,256
  Average interest rate   6.60%   6.90%   6.30%   6.90%   6.30%   6.20%   6.60%    
  Floating rate   165,943   50,327   17,984   16,089       250,343   250,343
  Average interest rate   5.10%   5.20%   5.50%   6.30%           5.20%    

Total debt—Joint Venture Centers   $427,966   $182,621   $84,247   $243,733   $118,381   $448,664   $1,505,612   $1,590,599

The consolidated Centers' total fixed rate debt was $3.2 billion and $1.8 billion at December 31, 2005 and 2004, respectively. The average interest rate was 5.70% and 6.42% and December 31, 2005 and 2004, respectively.

The consolidated Centers' total floating rate debt was $2.2 billion and $1.5 billion at December 31, 2005 and 2004, respectively. The average interest rate was 5.80% and 3.89% at December 31, 2005 and 2004, respectively.

The Company's pro rata share of the Joint Venture Centers' fixed rate debt was $1.3 billion and $956.4 million at December 31, 2005 and 2004, respectively. The average interest rate increased to 6.60% at December 31, 2005 from 6.46% at December 31, 2004. The Company's pro rata share of the Joint Venture Centers' floating rate debt was $250.3 million and $190.9 million at December 31, 2005 and 2004, respectively. The average interest rate increased from 3.02% at December 31, 2004 to 5.20% at December 31, 2005.

The Macerich Company    57



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 in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." (See "Notes to Consolidated Financial Statements—Fair Value of Financial Instruments")

The Company's $450.0 million term loan has an interest rate swap agreement which effectively fixed the interest rate at 6.296% (4.796% Swap rate plus 1.50%) from December 1, 2005 to April 15, 2010. The fair value of this swap agreement at December 31, 2005 was ($0.9) million.

The Company has an interest rate cap from July 9, 2004 to August 9, 2007 with a notional amount of $30.0 million on the loan at La Cumbre Plaza. This interest rate cap prevents the LIBOR interest rate from exceeding 7.12%. The fair value of this cap agreement at December 31, 2005 and December 31, 2004 was zero.

The Company's East Mesa Land and Superstition Springs joint venture have an interest rate swap through February 15, 2007, which converts $3.4 million of floating rate debt with a weighted average interest rate of 3.97% to a fixed rate of 5.39%. This swap has been designated as a hedge in accordance with SFAS No. 133. Additionally, interest rate caps were simultaneously sold to offset the effect of the interest rate cap agreements. These interest rate caps do not qualify for hedge accounting in accordance with SFAS No.133.

The Company's Metrocenter joint venture has an interest rate swap agreement which effectively converts the Company's $16.8 million share of floating rate debt to a fixed interest rate of 4.80% from January 2005 to February 2008. The fair value of this swap agreement is reflected in other comprehensive income and the Company's share of the fair value of this swap agreement at December 31, 2005 was $0.3 million.

The Company has an interest cap from September 9, 2005 to December 15, 2007 with a notional amount of $72.0 million on its Greece Ridge loan. The interest rate cap prevents the LIBOR interest rate from exceeding 6.625% through September 15, 2006 and 7.95% through December 15, 2007. The fair value of this cap agreement at December 31, 2005 was zero.

The Company's Camelback Colonnade joint venture has an interest cap from September 30, 2005 to November 17, 2008 with a notional amount of $41.5 million on the loan the property. The interest rate cap prevents the LIBOR interest rate from exceeding 8.54%. The fair value of this cap agreement at December 31, 2005 was zero.

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 $24.5 million per year based on $2.5 billion outstanding of floating rate debt at December 31, 2005.

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.

58     The Macerich Company




Item 8. Financial Statements and Supplementary Data

Refer to the Index to Financial Statements and Financial Statement Schedules for the required information appearing in Item 15.


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None


Item 9A. Controls and Procedures

Based on their evaluation as of December 31, 2005, the Company's Chief Executive Officer and Chief Financial Officer, have concluded that the Company's disclosure controls and procedures (as defined in Rules 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) accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Management's Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework. The Company's management has concluded that, as of December 31, 2005, its internal control over financial reporting is effective based on these criteria. The Company's independent registered public accounting firm, Deloitte and Touche LLP, has issued an audit report on management's assessment of our internal control over financial reporting, which is included herein.

The Macerich Company    59


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
The Macerich Company
Santa Monica, California

We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that The Macerich Company and its subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

60     The Macerich Company



In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2005, of the Company and our report dated March 9, 2006 expressed an unqualified opinion on those financial statements and financial statement schedules.

Deloitte & Touche LLP
Los Angeles, California

March 9, 2006

The Macerich Company    61


Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.


Item 9B. Other Information

None

62     The Macerich Company



Part III

Item 10. Directors and Executive Officers of the Registrant

There is hereby incorporated by reference the information which appears under the captions "Information Regarding Nominees and Directors," "Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance," "Audit Committee Matters" and "Codes of Ethics" in the Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders and is responsive to the information required by this Item.


Item 11. Executive Compensation

There is hereby incorporated by reference the information which appears under the caption "Election of Directors" in the Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders and is responsive to the information required by this Item. Notwithstanding the foregoing, the Report of the Compensation Committee on executive compensation and the Stock Performance Graph set forth therein shall not be incorporated by reference herein, in any of the Company's prior or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates such report or stock performance graph by reference therein and shall not be otherwise deemed filed under either of such Acts.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

There is hereby incorporated by reference the information which appears under the captions "Principal Stockholders," "Information Regarding Nominees and Directors" and "Executive Officers" in the Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders and is responsive to the information required by this Item.

Equity Compensation Plan Information

The Company currently maintains two equity compensation plans for the granting of equity awards to directors, officers and employees: the 2003 Equity Incentive Plan ("2003 Plan") and the Eligible Directors' Deferred Compensation/Phantom Stock Plan ("Director Phantom Stock Plan"). Certain of the Company's outstanding stock awards were granted under other equity compensation plans which are no longer available for stock awards: the 1994 Eligible Directors' Stock Option Plan (the "Director Plan"), the Amended and Restated 1994 Incentive Plan (the "1994 Plan") and the 2000 Incentive Plan (the "2000 Plan").

Summary Table.    The following table sets forth, for the Company's equity compensation plans, the number of shares of Common Stock subject to outstanding options, warrants and rights, the weighted-average exercise

The Macerich Company    63



price of outstanding options, and the number of shares remaining available for future award grants as of December 31, 2005.

Plan Category

  Number of shares of
Common Stock to be
issued upon exercise
of outstanding
options, warrants
and rights
(a)

  Weighted average
exercise price of
outstanding options,
warrants and
rights(1)
(b)

  Number of shares of
Common Stock remaining
available for future
issuance under equity
compensation plans
(excluding shares
reflected in column(a))
(c)

 

 
Equity Compensation Plans approved by stockholders   524,097 (2) $23.89   6,412,052 (3)
Equity Compensation Plans not approved by stockholders   20,000 (4) $30.75    

 
  Total   544,097       6,412,052  

 
(1)
Weighted average exercise price of outstanding options does not include stock units.

(2)
Represents 412,976 shares subject to outstanding options under the 1994 Plan, 2003 Plan and 97,621 shares underlying stock units, payable on a one-for-one basis, credited to stock unit accounts under the Director Phantom Stock Plan, and 13,500 shares subject to outstanding options under the Director Plan.

(3)
Of these shares, 5,541,349 were available for options, stock appreciation rights, restricted stock, stock units, stock bonuses, performance based awards, dividend equivalent rights and operating partnership units or other convertible or exchangeable units under the 2003 Plan, 134,517 were available for issuance under stock units under the Director Phantom Stock Plan and 736,186 were available for issuance under the Employee Stock Purchase Plan.

(4)
Represents 20,000 shares subject to outstanding options under the 2000 Plan. The 2000 Plan did not require approval of, and has not been approved by, the Company's stockholders. No additional awards will be made under the 2000 Plan. The 2000 Plan generally provided for the grant of options, stock appreciation rights, restricted stock awards, stock units, stock bonuses and dividend equivalent rights to employees, directors and consultants of the Company or its subsidiaries. The only awards that were granted under the 2000 Plan were stock options and restricted stock. The stock options granted generally expire not more than 10 years after the date of grant and vest in three equal annual installments, commencing on the first anniversary of the grant date. The restricted stock grants generally vest over three years.


Item 13. Certain Relationships and Related Transactions

There is hereby incorporated by reference the information which appears under the captions "Certain Transactions" in the Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders.

64     The Macerich Company



Item 14. Principal Accountant Fees and Services

There is hereby incorporated by reference the information which appears under the captions "Principal Accountant Fees and Services" and "Audit Committee Pre-Approval Policy" in the Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders.

The Macerich Company    65



Part IV

Item 15. Exhibits and Financial Statement Schedules

 
   
   
  Page


(a) and (c)   1.   Financial Statements of the Company    

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

68

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

69

 

 

 

 

Consolidated balance sheets of the Company as of December 31, 2005 and 2004

 

70

 

 

 

 

Consolidated statements of operations of the Company for the years ended December 31, 2005, 2004 and 2003

 

71

 

 

 

 

Consolidated statements of common stockholders' equity of the Company for the years ended December 31, 2005, 2004 and 2003

 

72

 

 

 

 

Consolidated statements of cash flows of the Company for the years ended December 31, 2005, 2004 and 2003

 

73

 

 

 

 

Notes to consolidated financial statements

 

74

 

 

2.

 

Financial Statements of Pacific Premier Retail Trust

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

110

 

 

 

 

Report of Independent Auditors

 

111

 

 

 

 

Consolidated balance sheets of Pacific Premier Retail Trust as of December 31, 2005 and 2004

 

112

 

 

 

 

Consolidated statements of operations of Pacific Premier Retail Trust for the years ended December 31, 2005, 2004 and 2003

 

113

 

 

 

 

Consolidated statements of stockholders' equity of Pacific Premier Retail Trust for the years ended December 31, 2005, 2004 and 2003

 

114

 

 

 

 

Consolidated statements of cash flows of Pacific Premier Retail Trust for the years ended December 31, 2005, 2004 and 2003

 

115

 

 

 

 

Notes to consolidated financial statements

 

116

 

 

3.

 

Financial Statements of SDG Macerich Properties, L.P.

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

127

 

 

 

 

Balance sheets of SDG Macerich Properties, L.P. as of December 31, 2005 and 2004

 

128

 

 

 

 

Statements of operations of SDG Macerich Properties, L.P. for the years ended December 31, 2005, 2004 and 2003

 

129

 

 

 

 

Statements of cash flows of SDG Macerich Properties, L.P. for the years ended December 31, 2005, 2004 and 2003

 

130
             

66     The Macerich Company



 

 

 

 

Statements of partners' equity of SDG Macerich Properties, L.P. for the years ended December 31, 2005, 2004 and 2003

 

131

 

 

 

 

Notes to financial statements

 

132

 

 

4.

 

Financial Statement Schedules

 

 

 

 

 

 

Schedule III—Real estate and accumulated depreciation of the Company

 

138

 

 

 

 

Schedule III—Real estate and accumulated depreciation of Pacific Premier Retail Trust

 

141

 

 

 

 

Schedule III—Real estate and accumulated depreciation of SDG Macerich Properties, L.P

 

143

(b)

 

1.

 

Exhibits

 

 

 

 

 

 

The Exhibit Index attached hereto is incorporated by reference under this item

 

147

The Macerich Company    67



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Macerich Company
Santa Monica, California

We have audited the accompanying consolidated balance sheets of The Macerich Company and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of operations, common stockholders' equity, and cash flows for each of the years then ended. Our audits also included the Company's consolidated financial statement schedules listed in the Index at Item 15(a)(4) as of and for the years ended December 31, 2005 and 2004. These consolidated financial statements and consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedules based on our audits. The consolidated financial statements and the consolidated financial statement schedules of the Company for the year ended December 31, 2003 were audited by other auditors whose report, dated March 11, 2004, except for Note 2, "Accounting for the Impairment or Disposal of Long Lived Assets" as to which the date is March 11, 2005 expressed an unqualified opinion on those statements. We did not audit the consolidated financial statements of SDG Macerich Properties, L.P. (the "Partnership"), the Company's investment in which is reflected in the accompanying consolidated financial statements using the equity method of accounting. The Company's equity of $142,102,000 and $147,915,000 in the Partnership's net assets at December 31, 2005 and 2004, respectively, and $15,537,000 and $16,499,000 in the Partnership's net income for the two years ended December 31, 2005 are included in the accompanying consolidated financial statements. Such financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Partnership, is based solely on the report of such other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, such 2005 and 2004 consolidated financial statements present fairly, in all material respects, the financial position of The Macerich Company and subsidiaries at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and the report of the other auditors, such consolidated financial statement schedules as of and for the years ended December 31, 2005 and 2004, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

   

Deloitte & Touche LLP
Los Angeles, California

 

March 9, 2006

 

68     The Macerich Company



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of The Macerich Company:

In our opinion, based on our audit and the report of other auditors, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, the results of operations and cash flows of The Macerich Company (the "Company") for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(4) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We did not audit the financial statements of SDG Macerich Properties, L.P. (the "Partnership"), the investment in which is reflected in the accompanying consolidated financial statements using the equity method of accounting. The investment in the Partnership represents approximately 3.7% of the Company's consolidated total assets at December 31, 2003 and the equity in income, net of minority interest, represents approximately 12.5% of the related consolidated net income for the year ended December 31, 2003. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Partnership, is based solely on the report of the other auditors. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Los Angeles, CA
March 11, 2004 except for Note 2, "Accounting for the
Impairment or Disposal of Long Lived Assets" as to
which the date is March 11, 2005

The Macerich Company    69



THE MACERICH COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

 
  December 31,

 
  2005

  2004


ASSETS        
Property, net   $5,438,496   $3,574,553
Cash and cash equivalents   155,113   72,114
Restricted cash   54,659   12,351
Tenant receivables, net   89,165   68,716
Deferred charges and other assets, net   360,217   280,694
Loans to unconsolidated joint ventures   1,415   6,643
Due from affiliates   4,258   3,502
Investments in unconsolidated joint ventures   1,075,621   618,523

    Total assets   $7,178,944   $4,637,096


LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY:

 

 

 

 
Mortgage notes payable:        
  Related parties   $154,531   $141,782
  Others   3,088,199   2,195,338

  Total   3,242,730   2,337,120
Bank notes payable   2,182,000   893,000
Accounts payable and accrued expenses   75,121   47,755
Other accrued liabilities   226,985   123,081
Preferred stock dividend payable   5,970   2,358

    Total liabilities   5,732,806   3,403,314

Minority interest   284,809   221,315

Commitments and contingencies        
Class A participating convertible preferred units   213,786  

Class A non-participating convertible preferred units   21,501  

Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,131 shares authorized, issued and outstanding at December 31, 2005 and 2004   98,934   98,934
Common stockholders' equity:        
  Common stock, $.01 par value, 145,000,000 shares authorized, 59,941,552 and 58,785,694 shares issued and outstanding at December 31, 2005 and 2004, respectively   599   586
  Additional paid-in capital   1,050,891   1,029,940
  Accumulated deficit   (209,005)   (103,489)
  Accumulated other comprehensive income   87   1,092
  Unamortized restricted stock   (15,464)   (14,596)

    Total common stockholders' equity   827,108   913,533

      Total liabilities, preferred stock and common stockholders' equity   $7,178,944   $4,637,096

The accompanying notes are an integral part of these financial statements.

70     The Macerich Company



THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

 
  For the years ended December 31,

 
  2005

  2004

  2003


REVENUES:            
  Minimum rents   $461,428   $329,689   $286,298
  Percentage rents   26,085   17,654   12,427
  Tenant recoveries   229,463   159,005   152,696
  Management Companies   26,128   21,549   14,630
  Other   24,281   19,169   17,526

Total revenues   767,385   547,066   483,577


EXPENSES:

 

 

 

 

 

 
  Shopping center and operating expenses   243,767   164,465   151,325
  Management Companies' operating expenses   52,839   44,080   32,031
  REIT general and administrative expenses   12,106   11,077   8,482

    308,712   219,622   191,838

  Interest expense:            
    Related parties   9,638   5,800   5,689
    Others   240,272   140,527   125,018

Total interest expense   249,910   146,327   130,707

Depreciation and amortization   206,083   142,096   104,920
Equity in income of unconsolidated joint ventures and the management companies   76,303   54,881   59,348
Income tax benefit   2,031   5,466   444
Gain on sale of assets   1,288   927   12,420
Loss on early extinguishment of debt   (1,666)   (1,642)   (170)

Income from continuing operations   80,636   98,653   128,154
Discontinued operations:            
  Gain on sale of assets   242   7,114   22,031
  Income from discontinued operations   3,258   5,736   6,756

Total from discontinued operations   3,500   12,850   28,787

Income before minority interest   84,136   111,503   156,941
Less: Minority interest   12,450   19,870   28,907

Net income   71,686   91,633   128,034
Less: Preferred dividends   19,098   9,140   14,816

Net income available to common stockholders   $52,588   $82,493   $113,218

Earnings per common share—basic:            
  Income from continuing operations   $0.84   $1.23   $1.68
  Discontinued operations   0.05   0.18   0.43

  Net income per share available to common stockholders   $0.89   $1.41   $2.11

Earnings per common share—diluted:            
  Income from continuing operations   $0.83   $1.22   $1.71
  Discontinued operations   0.05   0.18   0.38

  Net income per share available to common stockholders   $0.88   $1.40   $2.09

Weighted average number of common shares outstanding            
  Basic   59,279,000   58,537,000   53,669,000

  Diluted   73,573,000   73,099,000   75,198,000

The accompanying notes are an integral part of these financial statements.

The Macerich Company    71



THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

(Dollars in thousands, except per share data)

 
  Common Stock
   
   
   
   
   
 
  Additional
Paid-in
Capital

   
  Accumulated Other
Comprehensive
Income (Loss)

  Unamortized
Restricted
Stock

  Total Common
Stockholders'
Equity

 
  Shares

  Par Value

  Accumulated
Deficit


Balance December 31, 2002   51,490,929   $514   $835,900   $(23,870)   $(4,811)   $(9,935)   $797,798

Comprehensive income:                            
  Net income         128,034       128,034
  Reclassification of deferred losses           1,328     1,328
  Interest rate swap/cap agreements           1,148     1,148

  Total comprehensive income         128,034   2,476     130,510
  Issuance costs       (254)         (254)
  Issuance of restricted stock   374,846   4   12,262         12,266
  Unvested restricted stock   (374,846)   (4)         (12,262)   (12,266)
  Vested restricted stock   214,641   2         7,492   7,494
  Exercise of stock options   519,954   5   10,981         10,986
  Distributions paid ($2.32) per share         (127,889)       (127,889)
  Preferred dividends         (14,816)       (14,816)
  Conversion of OP Units   190,000   2   6,937         6,939
  Conversion of Series B Preferred Stock   5,487,000   55   148,347         148,402
  Adjustment to reflect minority interest on a pro rata basis per year end ownership percentage of OP units       (5,685)         (5,685)

Balance December 31, 2003   57,902,524   578   1,008,488   (38,541)   (2,335)   (14,705)   953,485

Comprehensive income:                            
  Net income         91,633       91,633
  Reclassification of deferred losses           1,351     1,351
  Interest rate swap/cap agreements           2,076     2,076

  Total comprehensive income         91,633   3,427     95,060
  Issuance of restricted stock   153,692   2   8,282         8,284
  Unvested restricted stock   (153,692)   (2)         (8,282)   (8,284)
  Vested restricted stock   320,114   3         8,391   8,394
  Issuance of phantom stock   17,862     795         795
  Exercise of stock options   465,984   5   9,509         9,514
  Distributions paid ($2.48) per share         (147,441)       (147,441)
  Preferred dividends         (9,140)       (9,140)
  Conversion of OP Units   79,210     1,785         1,785
  Adjustment to reflect minority interest on a pro rata basis per year end ownership percentage of OP units       1,081         1,081

Balance December 31, 2004   58,785,694   586   1,029,940   (103,489)   1,092   (14,596)   913,533

Comprehensive income:                            
  Net income         71,686       71,686
  Reclassification of deferred losses           1,351     1,351
  Interest rate swap/cap agreements           (2,356)     (2,356)

  Total comprehensive income         71,686   (1,005)     70,681
  Issuance of restricted stock   260,898   3   12,393         12,396
  Unvested restricted stock   (260,898)   (3)         (12,393)   (12,396)
  Vested restricted stock   247,371   3         11,525   11,528
  Issuance of phantom stock              
  Exercise of stock options   182,237   2   4,595         4,597
  Distributions paid ($2.63) per share         (158,104)       (158,104)
  Preferred dividends         (19,098)       (19,098)
  Conversion of OP Units   726,250   8   21,587         21,595
  Adjustment to reflect minority interest on a pro rata basis per year end ownership percentage of OP units       (17,624)         (17,624)

Balance December 31, 2005   59,941,552   $599   $1,050,891   $(209,005)   $87   $(15,464)   $827,108

The accompanying notes are an integral part of these financial statements.

72     The Macerich Company



THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 
  For the years ended December 31,

 
  2005

  2004

  2003


Cash flows from operating activities:            
  Net income available to common stockholders   $52,588   $82,493   $113,218
  Preferred dividends   19,098   9,140   14,816

  Net income   71,686   91,633   128,034

  Adjustments to reconcile net income to net cash provided by operating activities:            
    Loss on early extinguishment of debt   1,666   1,642   155
    Gain on sale of assets   (1,288)   (927)   (12,420)
    Discontinued operations gain on sale of assets   (242)   (7,114)   (22,031)
    Depreciation and amortization   208,932   146,378   109,029
    Amortization of net premium on trust deed note payable   (10,193)   (805)   (2,235)
    Amortization of restricted stock grants   8,286   6,236  
    Minority interest   12,450   19,870   28,907
    Equity in income of unconsolidated joint ventures   (76,303)   (54,881)   (59,348)
    Distributions of income from unconsolidated joint ventures   9,010   12,728   12,969
    Changes in assets and liabilities, net of acquisitions:            
      Tenant receivables, net   (6,400)   (951)   (21,207)
      Other assets   31,517   (12,162)   (7,573)
      Accounts payable and accrued expenses   5,181   (3,678)   20,267
      Due to affiliates   (14,276)   1,904   (4,088)
      Other accrued liabilities   (4,730)   13,324   48,276
      Accrued preferred stock dividend       (2,983)

  Net cash provided by operating activities   235,296   213,197   215,752

Cash flows from investing activities:            
  Acquisitions of property and property improvements   (171,842)   (538,529)   (362,935)
  Deferred leasing charges   (21,837)   (16,822)   (15,214)
  Distributions from unconsolidated joint ventures   155,537   80,303   46,856
  Contributions to unconsolidated joint ventures   (58,381)   (41,913)   (44,714)
  Acquisitions of unconsolidated joint ventures   (43,048)   (36,538)   (68,320)
  Repayments from (loans to) unconsolidated joint ventures   5,228   22,594   (704)
  Proceeds from sale of assets   6,945   46,630   107,177
  Restricted cash   (4,550)   (5,547)   (3,487)

  Net cash used in investing activities   (131,948)   (489,822)   (341,341)

Cash flows from financing activities:            
  Proceeds from mortgages and notes payable   483,127   770,306   646,429
  Payments on mortgages and notes payable   (286,369)   (276,003)   (373,965)
  Deferred financing costs   (4,141)   (8,723)   (3,326)
  Exercise of common stock options and employee stock purchases   4,597   9,514   10,986
  Dividends and distributions   (202,078)   (177,717)   (149,605)
  Dividends to preferred stockholders/preferred unitholders   (15,485)   (8,994)   (14,816)

  Net cash (used in) provided by financing activities   (20,349)   308,383   115,703

  Net increase (decrease) in cash   82,999   31,758   (9,886)
Cash and cash equivalents, beginning of period   72,114   40,356   50,242

Cash and cash equivalents, end of period   $155,113   $72,114   $40,356

Supplemental cash flow information:            
  Cash payment for interest, net of amounts capitalized   $244,474   $140,552   $138,067

Non-cash transactions:            
  Acquisition of property by issuance of convertible preferred units and common units   $241,103   $—   $—

  Acquisition of property by issuance of bank notes payable   $1,198,503   $—   $—

  Acquisition of property by assumption of mortgage notes payable   $809,542   $54,023   $—

  Acquisition of property by issuance of operating partnership units   $—   $—   $30,201

  Acquisition of property by assumption of joint venture debt   $—   $—   $180,000

The accompanying notes are an integral part of these financial statements.

The Macerich Company    73



THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1.    Organization and Basis of Presentation:

The Macerich Company (the "Company") is involved in the acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers (the "Centers") located throughout the United States.

The Company commenced operations effective with the completion of its initial public offering (the "IPO") on March 16, 1994. As of December 31, 2005, the Company is the sole general partner of and assuming conversion of the preferred units holds an 82% ownership interest in The Macerich Partnership, L. P. (the "Operating Partnership"). The interests in the Operating Partnership are known as OP Units. OP Units not held by the Company are redeemable, subject to certain restrictions, on a one-for-one basis for the Company's common stock or cash at the Company's option.

The Company was organized to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. The 18% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.

The property management, leasing and redevelopment of the Company's portfolio is provided by the Company's management companies, Macerich Property Management Company, LLC, ("MPMC, LLC") a single-member Delaware limited liability company, Macerich Management Company, a California corporation, Westcor Partners, LLC, a single member Arizona limited liability company, Macerich Westcor Management, LLC, a single member Delaware limited liability company and Westcor Partners of Colorado, LLC, a Colorado limited liability company. As part of the Wilmorite closing (See Note 15—Wilmorite Acquisition), the Company acquired MACW Mall Management, Inc., a New York corporation and MACW Property Management, LLC, a New York limited liability company. These two management companies are collectively referred to herein as the "Wilmorite Management Companies." The three Westcor management companies are collectively referred to herein as the "Westcor Management Companies." All seven of the management companies are collectively referred to herein as the "Management Companies."

Basis of Presentation:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership. Investments in entities that meet the definition of a variable interest entity in which an enterprise absorbs the majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity are consolidated; otherwise they are accounted for under the equity method and are reflected as "Investments in Unconsolidated Joint Ventures". Effective July 1, 2003, the Company began consolidating the accounts of Macerich Management Company, in accordance with FIN 46 (See Note 2—Summary of Significant Accounting Policies). Prior to July 1, 2003,

74     The Macerich Company


the Company accounted for Macerich Management Company under the equity method of accounting. The use of the term "Macerich Management Company" refers to Macerich Management Company prior to July 1, 2003 when their accounts were reflected in the Company's consolidated financial statements under the equity method of accounting.

A reclassification has been made to the 2004 and 2003 Consolidated Statements of Cash Flows to reclassify $12,728 and $12,969, respectively of distributions from joint ventures from net cash used in investing activities to net cash provided from operating activities as a return on investment of joint ventures.

All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

2.    Summary of Significant Accounting Policies:

Cash and Cash Equivalents:

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value. Restricted cash includes impounds of property taxes and other capital reserves required under the loan agreements.

Tenant Receivables:

Included in tenant receivables are allowances for doubtful accounts of $4,588 and $5,604 at December 31, 2005 and 2004, respectively. Also included in tenant receivables are accrued percentage rents of $11,423 and $7,174 at December 31, 2005 and 2004, respectively.

Revenues:

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight-lining of rent adjustment." Rental income was increased by $5,666 in 2005, decreased by $1,864 in 2004 and increased by $2,887 in 2003 due to the straight-lining of rent adjustment. Percentage rents are recognized and accrued when tenants' specified sales targets have been met.

Estimated recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.

The management companies provide property management, leasing, corporate, development, redevelopment and acquisition services to affiliated and non-affiliated shopping centers. In consideration for these services, the management companies receive monthly management fees generally ranging from 1.5% to 6% of the gross monthly rental revenue of the properties managed.

The Macerich Company    75



Property:

Costs related to the development, redevelopment, construction and improvement of properties are capitalized. Interest incurred or imputed 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   initial term of related lease
Equipment and furnishings   5-7 years

The Company accounts for all acquisitions in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The Company determines the value of the land and buildings utilizing an "as if vacant" methodology. The Company then assigns a fair value to any debt assumed at acquisition. The balance of 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 market value basis at acquisition date prorated and depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases, including ground leases, which come in three forms: (i) origination value, which represents the value associated with "cost avoidance" of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our 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. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as an other asset and amortized over the remaining lease term plus an estimate of renewal of the acquired leases. Above or below market leases are classified as an other asset or liability, 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.

76     The Macerich Company



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 its 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, rental revenues and gains or losses recorded on future sales of properties. Generally, the Company engages a valuation firm to assist with the allocation.

The Company assesses whether there has been impairment in the value of its long-lived assets by considering 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 determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Long-lived assets classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell. Management believes no such impairment has occurred in its net property carrying values at December 31, 2005 and 2004.

Deferred Charges:

Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Cost 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 lease years. The range 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

Income Taxes:

The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1994. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders. It is management's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, then it will be subject to federal income taxes

The Macerich Company    77


at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income, if any.

Each partner is taxed individually on its share of partnership income or loss, and accordingly, no provision for federal and state income tax is provided for the Operating Partnership in the consolidated financial statements.

The following table reconciles net income available to common stockholders to taxable income available to common stockholders for the years ended December 31:

 
  2005

  2004

  2003


Net income available to common stockholders   $52,588   $82,493   $113,218
  Add: Book depreciation and amortization available to common stockholders   197,861   117,882   73,343
  Less: Tax depreciation and amortization available to common stockholders   (161,108)   (101,122)   (90,989)
    Book/tax difference on gain on divestiture of real estate   253   (3,383)   (19,255)
    Book/tax difference related to SFAS 141 purchase price allocation and market value debt adjustment (excluding SFAS 141 depreciation and amortization)   (16,962)   (12,436)   (7,523)
    Other book/tax differences, net(1)   5,798   (3,529)   1,571

Taxable income available to common stockholders   $78,430   $79,905   $70,365

(1)
Primarily due to timing differences relating to straight-line rents and prepaid rents, stock option exercises deductible for tax purposes and investments in unconsolidated joint ventures and Taxable REIT Subsidiaries.

For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, unrecaptured Section 1250 gain and return of capital or a combination thereof. The following table details the components of the distributions, on a per share basis, for the years ended December 31:

 
  2005

  2004

  2003


Ordinary income   $1.41   53.6%   $1.58   63.7%   $1.57   67.7%
Qualified dividends   0.07   2.7%     0.0%     0.0%
Capital gains   0.03   1.1%   0.03   1.2%   0.04   1.6%
Unrecaptured Section 1250 gain     0.0%     0.0%   0.08   3.3%
Return of capital   1.12   42.6%   0.87   35.1%   0.63   27.4%

Dividends paid   $2.63   100.0%   $2.48   100.0%   $2.32   100.0%

78     The Macerich Company


The Company has made Taxable REIT Subsidiary elections for all of its corporate subsidiaries other than its Qualified REIT Subsidiaries. The elections, effective for the year beginning January 1, 2001 and future years, were made pursuant to section 856(l) of the Internal Revenue Code. The Company's Taxable REIT Subsidiaries ("TRSs") are subject to corporate level income taxes which are provided for in the Company's consolidated financial statements. The Company's primary TRSs include Macerich Management Company, Westcor Partners, LLC and Westcor TRS, LLC.

The income tax benefit of the TRSs for the years ended December 31, 2005, 2004 and 2003 is as follows:

 
  2005

  2004

  2003


Current   $1,171   $570   $207
Deferred   (3,202)   (6,036)   (651)

Total income tax benefit   $(2,031)   $(5,466)   $(444)

Income tax benefit of the TRSs for the years ended December 31, 2005, 2004 and 2003 are reconciled to the amount computed by applying the Federal corporate tax rate as follows:

 
  2005

  2004

  2003


Book (loss) income for TRSs   $(3,729)   $2,595   $5,279

Tax at statutory rate on earnings from continuing operations before income taxes   $(1,267)   $882   $1,795
Stock-based compensation   (844)   (1,753)   (944)
Reduction in valuation allowance       (1,208)
Change in tax rate relating to change in tax status     (2,964)  
Change in state tax rate     (394)  
Tax at statutory rate on earnings not subject to federal income taxes and other   80   (1,237)   (87)

Income tax benefit   $(2,031)   $(5,466)   $(444)

SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets and liabilities of the TRSs relate primarily to differences in the book and tax bases of property and to operating loss carryforwards for federal income tax purposes. A valuation allowance for deferred tax assets is provided if the Company believes it is more likely than not that all or some portion of the deferred tax assets will not be realized. Realization of

The Macerich Company    79



deferred tax assets is dependent on the Company generating sufficient taxable income in future periods. The net operating loss carryforwards are currently scheduled to expire through 2025, beginning in 2011.

The tax effects of temporary differences and carryforwards of the TRSs included in the net deferred tax assets at December 31, 2005 and 2004 are summarized as follows:

 
  2005

  2004


Net operating loss carryforwards   $14,146   $13,876
Property, primarily differences in depreciation and amortization, the tax basis of land assets and treatment of certain other costs   (5,033)   (7,061)
Other   1,143   915

Net deferred tax assets   $10,256   $7,730

Accounting for the Impairment or Disposal of Long-Lived Assets:

The Company sold Paradise Village Gateway on January 2, 2003 and recorded a loss on sale of $161 for the year ended December 31, 2003. Additionally, the Company sold Bristol Center on August 4, 2003, and the results from the period January 1, 2003 to August 4, 2003, have been classified as discontinued operations. The sale of Bristol Center resulted in a gain of $22,206 in 2003. Total revenues associated with Bristol Center were $2,523 for the period from January 1, 2003 to August 4, 2003.

The Company sold Westbar on December 16, 2004, and the results for the period January 1, 2004 to December 16, 2004 and for the year ended December 31, 2003 have been classified as discontinued operations. The sale of Westbar resulted in a gain on sale of asset of $6,781. Total revenues associated with Westbar were approximately $4,784 for the period January 1, 2004 to December 16, 2004 and $5,738 for the year ended December 31, 2003.

On January 5, 2005, the Company sold Arizona Lifestyle Galleries for $4,300. The sale of this property resulted in a gain on sale of asset of $297 and the impact on the results for the years ended December 31, 2005, 2004 and 2003 were insignificant.

The Company has identified the Crossroads Mall in Oklahoma as an asset for sale and has therefore, classified the properties results of operations for the years ended December 31, 2005, 2004 and 2003 as discontinued operations. Total revenues associated with Crossroads Mall were approximately $10,921, $11,227 and $12,249 for the years ended December 31, 2005, 2004 and 2003, respectively.

The carrying amounts of the properties sold or held for sale include property of $54,853 and $59,371 at December 31, 2005 and 2004, respectively.

80     The Macerich Company



Variable Interest Entities

The Company consolidates all variable interest entities ("VIEs") in which it is deemed to be the primary beneficiary in accordance with Financial Accounting Standards Board Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). As of December 31, 2005, the Company consolidated three VIEs in connection with its assessment of FIN 46R. The impact of consolidating the VIEs was insignificant at December 31, 2005.

Fair Value of Financial Instruments

The Company calculates the fair value of financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company recognizes all derivatives in the consolidated financial statements and measures the derivatives at fair value. The Company uses derivative financial instruments in the normal course of business to manage or hedge interest rate risk. The Company requires that hedging derivative instruments are effective in reducing the risk exposure that they are designated to hedge. For derivative instruments associated with the hedge of an anticipated transaction, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Any instrument that meets these cash flow hedging criteria, and other criteria required by SFAS No. 133, is formally designated as a hedge at the inception of the derivative contract. The Company designs its hedges to be perfectly effective. When the terms of an underlying transaction are modified resulting in some ineffectiveness, the portion of the change in the derivative fair value related to ineffectiveness from period to period will be included in net income. If any derivative instrument used for risk management does not meet the hedging criteria, it is marked-to-market each period in the statement of operations. Three of the Company's six derivative instruments are designated as cash flow hedges defined by SFAS No. 133.

On an ongoing quarterly basis, the Company adjusts its balance sheet to reflect the current fair value of its derivatives. Changes in the fair value of derivatives are recorded each period in income or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction. To the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument being hedged, the ineffective portion of the hedge is immediately recognized in income. There

The Macerich Company    81



were no ineffective portions during the years ended December 31, 2005, 2004 and 2003. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to income. This reclassification occurs when the hedged items are also recognized in income. The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

To determine the fair value of derivative instruments, the Company uses standard market conventions and techniques such as discounted cash flow analysis, option pricing models, and termination cost at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

As of December 31, 2005 and December 31, 2004, the Company had $2,762 and $4,109 reflected in other comprehensive income related to treasury rate locks settled in prior years, respectively. The Company reclassified $1,351 for the years ended December 31, 2005 and 2004, and $1,328 for the year ended December 31, 2003, related to treasury rate lock transactions settled in prior years from accumulated other comprehensive income to earnings. It is anticipated that a similar amount will be reclassified in 2006.

Interest rate swap and cap agreements are purchased by the Company from third parties to hedge the risk of interest rate increases on some of the Company's floating rate debt. Payments received as a result of the cap agreements are recorded as a reduction of interest expense. The fair value of the cap agreements are included in deferred charges. The fair value of these caps will vary with fluctuations in interest rates and will either be recorded in income or other comprehensive income depending on its effectiveness. The Company will be exposed to credit loss in the event of nonperformance by the counter parties to the financial instruments; however, management does not anticipate nonperformance by the counter parties. Additionally, the Company recorded other comprehensive (loss) income of ($2,356), $2,076 and $1,148 related to the mark to market of interest rate swap/cap agreements for the years ended December 31, 2005, 2004, and 2003, respectively. The interest rate caps and interest rate swap transactions are described below.

The Company had an interest rate swap agreement on its $250,000 term note (See—Note 7—Bank Notes Payable) which effectively fixed the interest rate at 4.45% from November 2003 to its maturity date of October 13, 2005. The fair value of this swap was reflected in other comprehensive income and had a fair value at December 31, 2004 of $1,900.

The $450,000 term loan (See Note 7—Bank Notes Payable) has an interest rate swap agreement which effectively fixes the interest rate at 6.296% (4.796% swap rate plus 1.50%) from December 1, 2005 to April 15, 2010. The fair value of the swap at December 31, 2005 was ($927).

82     The Macerich Company



The Company has an interest rate cap from July 9, 2004 to August 9, 2007 with a notional amount of $30,000 on its loan at La Cumbre Plaza (See—Note 6—Mortgage Notes Payable). This interest rate cap prevents the LIBOR rate from exceeding 7.12%. The fair value of this cap agreement at December 31, 2005 and December 31, 2004 was zero.

The Company has an interest cap from September 9, 2005 to December 15, 2007 with a notional amount of $72,000 on its Greece Ridge loan. The interest rate cap prevents the LIBOR interest rate from exceeding 6.625% through September 15, 2006 and 7.95% through December 15, 2007. The fair value of this cap agreement at December 31, 2005 was zero.

The Company has three interest rate cap agreements that are stand-alone derivative instruments and do not qualify for hedge accounting under SFAS No. 133. Changes in the market value of these instruments would be recorded in the statement of operations.

Earnings per Share ("EPS"):

The computation of basic earnings per share is based on net income and the weighted average number of common shares outstanding for the years ended December 31, 2005, 2004 and 2003. The computation of diluted earnings per share includes the effect of dilutive securities calculated using the Treasury stock method. The OP Units and the Westcor partnership units not held by the Company have been included in the diluted EPS calculation since they may be redeemable on a one-for-one basis, at the Company's option. The Westcor partnership units were converted to OP Units on July 27, 2004 which were subsequently redeemed for common stock on October 4, 2005. The following table reconciles the basic and diluted earnings per share calculation:

 
  2005

  2004

  2003

 
  Net income

  Shares

  Per share

  Net income

  Shares

  Per share

  Net income

  Shares

  Per share


Net income   $71,686           $91,633           $128,034        
Less: Preferred dividends(1)   19,098           9,140           14,816        

Basic EPS:                                    
Net income available to common stockholders   52,588   59,279   $0.89   82,493   58,537   $1.41   113,218   53,669   $2.11
Diluted EPS:                                    
  Conversion of OP units   12,450   13,971       19,870   14,178       28,907   13,663    
  Employee stock options     323         384         480    
  Convertible preferred stock/preferred units   n/a—antidilutive   n/a—antidilutive   14,816   7,386    

Net income available to common stockholders   $65,038   73,573   $0.88   $102,363   73,099   $1.40   $156,941   75,198   $2.09

(1)
In 2005, the preferred dividends include $9,449 of convertible preferred units (See Note 15—Wilmorite Acquisition).

The Macerich Company    83


The minority interest as reflected in the Company's consolidated statements of operations has been allocated for EPS calculations as follows:

 
  2005

  2004

  2003


Income from continuing operations   $11,785   $17,364   $23,066
Discontinued operations:            
  Gain on sale of assets   46   1,387   4,470
  Income from discontinued operations   619   1,119   1,371

    $12,450   $19,870   $28,907

Concentration of Risk:

The Company maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100. At various times during the year, the Company had deposits in excess of the FDIC insurance limit.

No Center or tenant generated more than 10% of total revenues during 2005, 2004 or 2003.

The Centers derived approximately 94.0%, 93.8% and 93.6% of their total minimum rents for the years ended December 31, 2005, 2004 and 2003, respectively, from Mall and Freestanding Stores. The Limited represented 4.1%, 3.6% and 4.3% of total minimum rents in place as of December 31, 2005, 2004 and 2003, respectively, and no other retailer represented more than 3.6%, 3.2% and 3.2% of total minimum rents as of December 31, 2005, 2004 and 2003, respectively.

Management Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the year ending December 31, 2004, the Company changed its estimate for common area expense recoveries applicable to prior periods. This change in estimate resulted in a $4,129 charge for the year ending December 31, 2004.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised), "Share-Based Payment" SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. The Company will adopt the new statement as of January 1, 2006. The adoption of this statement will not have a material effect on the Company's results of operations or financial condition.

84     The Macerich Company


In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—an amendment of Accounting Principle Board ("APB") Opinion No. 29." The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of si