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Macerich Company 10-Q 2009

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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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

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

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

        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 ninety (90) days.

YES ý        NO o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve (12) months (or for such shorter period that the registrant was required to submit and post such files).

YES o        NO o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company 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

        Number of shares outstanding as of November 6, 2009 of the registrant's common stock, par value $.01 per share: 94,757,688 shares


Table of Contents


THE MACERICH COMPANY

FORM 10-Q

INDEX

Part I

 

Financial Information

       

Item 1.

 

Financial Statements (Unaudited)

    3  

 

Consolidated Balance Sheets of the Company as of September 30, 2009 and December 31, 2008

    3  

 

Consolidated Statements of Operations of the Company for the three and nine months ended September 30, 2009 and 2008

    4  

 

Consolidated Statements of Equity of the Company for the nine months ended September 30, 2009 and 2008

    5  

 

Consolidated Statements of Cash Flows of the Company for the nine months ended September 30, 2009 and 2008

    7  

 

Notes to Consolidated Financial Statements

    9  

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    47  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    63  

Item 4.

 

Controls and Procedures

    64  

Part II

 

Other Information

       

Item 1.

 

Legal Proceedings

    65  

Item 1A.

 

Risk Factors

    65  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    65  

Item 3.

 

Defaults Upon Senior Securities

    65  

Item 4.

 

Submission of Matters to a Vote of Security Holders

    65  

Item 5.

 

Other Information

    65  

Item 6.

 

Exhibits

    66  

Signature

    68  

2


Table of Contents


THE MACERICH COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value and share amounts)

(Unaudited)

 
  September 30,
2009
  December 31,
2008
 

ASSETS:

             

Property, net

  $ 5,692,278   $ 6,371,319  

Cash and cash equivalents

    79,558     66,529  

Restricted cash

    68,185     61,707  

Marketable securities

    27,539     27,943  

Tenant and other receivables, net

    100,973     118,374  

Deferred charges and other assets, net

    285,117     339,662  

Loans to unconsolidated joint ventures

    1,236     932  

Due from affiliates

    9,870     9,124  

Investments in unconsolidated joint ventures

    1,054,671     1,094,845  
           
     

Total assets

  $ 7,319,427   $ 8,090,435  
           

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY:

             

Mortgage notes payable:

             
 

Related parties

  $ 197,825   $ 306,859  
 

Others

    3,037,180     3,373,116  
           
     

Total

    3,235,005     3,679,975  

Bank and other notes payable

    1,733,048     2,260,443  

Accounts payable and accrued expenses

    79,763     114,502  

Other accrued liabilities

    255,513     289,146  

Investments in unconsolidated joint ventures

    68,150     80,915  

Co-venture obligation

    168,154      

Preferred dividends payable

    207     243  
           
     

Total liabilities

    5,539,840     6,425,224  
           

Redeemable noncontrolling interests

    23,327     23,327  
           

Commitments and contingencies

             

Equity:

             
 

Stockholders' equity:

             
   

Common stock, $.01 par value, 250,000,000 and 145,000,000 shares authorized, 80,976,775 and 76,883,634 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

    810     769  
   

Additional paid-in capital

    1,803,372     1,721,256  
   

Accumulated deficit

    (275,337 )   (274,834 )
   

Accumulated other comprehensive loss

    (33,121 )   (53,425 )
           
     

Total stockholders' equity

    1,495,724     1,393,766  
 

Noncontrolling interests

    260,536     248,118  
           
     

Total equity

    1,756,260     1,641,884  
           
     

Total liabilities, redeemable noncontrolling interests and equity

  $ 7,319,427   $ 8,090,435  
           

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

3


Table of Contents


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2009   2008   2009   2008  

Revenues:

                         
 

Minimum rents

  $ 119,489   $ 131,083   $ 367,245   $ 388,072  
 

Percentage rents

    3,909     4,114     9,402     9,772  
 

Tenant recoveries

    59,809     69,417     186,974     203,040  
 

Management Companies

    10,449     10,261     28,335     30,334  
 

Other

    6,640     7,386     21,537     20,420  
                   
   

Total revenues

    200,296     222,261     613,493     651,638  
                   

Expenses:

                         
 

Shopping center and operating expenses

    64,952     73,201     201,837     211,680  
 

Management Companies' operating expenses

    16,400     19,014     58,702     57,886  
 

REIT general and administrative expenses

    7,085     2,883     16,989     11,419  
 

Depreciation and amortization

    61,815     65,937     189,293     183,107  
                   

    150,252     161,035     466,821     464,092  
                   
 

Interest expense:

                         
   

Related parties

    4,405     5,002     16,449     12,381  
   

Other

    61,374     68,885     191,182     207,918  
                   

    65,779     73,887     207,631     220,299  
 

Loss (gain) on early extinguishment of debt

    455         (29,145 )    
                   
   

Total expenses

    216,486     234,922     645,307     684,391  

Equity in income of unconsolidated joint ventures

    19,165     19,928     49,647     67,172  

Income tax (provision) benefit

    (302 )   362     878     750  

Gain (loss) on sale or write down of assets

    157,612     (4,217 )   159,776     (3,054 )
                   

Income from continuing operations

    160,285     3,412     178,487     32,115  
                   

Discontinued operations:

                         
 

Gain (loss) on sale of assets

    3,968     (961 )   (23,045 )   98,189  
 

Income from discontinued operations

    118     1,947     982     5,787  
                   

Total income (loss) from discontinued operations

    4,086     986     (22,063 )   103,976  
                   

Net income

    164,371     4,398     156,424     136,091  

Less net income attributable to noncontrolling interests

    21,533     925     21,306     20,994  
                   

Net income attributable to the Company

    142,838     3,473     135,118     115,097  

Less preferred dividends

        835         4,124  
                   

Net income available to common stockholders

  $ 142,838   $ 2,638   $ 135,118   $ 110,973  
                   

Earnings per common share attributable to Company—basic:

                         
 

Income from continuing operations

  $ 1.71   $ 0.02   $ 1.96   $ 0.29  
 

Discontinued operations

    0.04     0.01     (0.25 )   1.21  
                   
 

Net income available to common stockholders

  $ 1.75   $ 0.03   $ 1.71   $ 1.50  
                   

Earnings per common share attributable to Company—diluted:

                         
 

Income from continuing operations

  $ 1.71   $ 0.02   $ 1.96   $ 0.29  
 

Discontinued operations

    0.04     0.01     (0.25 )   1.21  
                   
 

Net income available to common stockholders

  $ 1.75   $ 0.03   $ 1.71   $ 1.50  
                   

Weighted average number of common shares outstanding:

                         
 

Basic

    79,496,000     74,931,000     77,898,000     73,688,000  
                   
 

Diluted

    79,694,000     87,439,000     77,898,000     86,483,000  
                   

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

4


Table of Contents


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

 
  Stockholders' Equity    
   
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Loss
  Total
Stockholders'
Equity
  Noncontrolling
Interests
  Total
Equity
  Redeemable
Noncontrolling
Interests
 

Balance January 1, 2009

    76,883,634   $ 769   $ 1,721,256   $ (274,834 ) $ (53,425 ) $ 1,393,766   $ 248,118   $ 1,641,884   $ 23,327  
                                       

Comprehensive income:

                                                       
 

Net income

                135,118         135,118     20,869     155,987     437  
 

Interest rate swap/cap agreements

                    20,304     20,304         20,304      
                                       
 

Total comprehensive income

                135,118     20,304     155,422     20,869     176,291     437  

Amortization of share and unit-based plans

    174,962     2     13,359             13,361         13,361      

Employee stock purchases

    23,202         368             368         368      

Distributions paid ($2.00) per share

                (135,621 )       (135,621 )       (135,621 )    

Distributions to noncontrolling interests

                            (22,124 )   (22,124 )   (437 )

Issuance of common shares

    3,894,977     39     68,079             68,118         68,118      

Issuance of stock warrants

            14,564             14,564         14,564      

Contributions from noncontrolling interests

                            8,665     8,665      

Other

            (9,069 )           (9,069 )       (9,069 )    

Redemption of noncontrolling interests

                            (177 )   (177 )    

Adjustment of noncontrolling interest in Operating Partnership

            (5,185 )           (5,185 )   5,185          
                                       

Balance September 30, 2009

    80,976,775   $ 810   $ 1,803,372   $ (275,337 ) $ (33,121 ) $ 1,495,724   $ 260,536   $ 1,756,260   $ 23,327  
                                       

5


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THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(Dollars in thousands, except per share data)

(Unaudited)

 

 
  Stockholders' Equity    
   
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Loss
  Total
Common
Stockholders'
Equity
  Noncontrolling
Interests
  Total
Equity
  Redeemable
Noncontrolling
Interest
 

Balance January 1, 2008

    72,311,763     723     1,428,124     (203,505 )   (24,508 )   1,200,834     230,529     1,431,363     322,619  
                                       

Comprehensive income:

                                                       
 

Net income

                115,097         115,097     20,557     135,654     437  
 

Reclassification of deferred losses

                    285     285         285      
 

Interest rate swap/cap agreements

                    248     248         248      
                                       
 

Total comprehensive income

                115,097     533     115,630     20,557     136,187     437  

Amortization of share and unit-based plans

    186,917     2     15,959             15,961         15,961      

Exercise of stock options

    362,888     4     8,568             8,572         8,572      

Employee stock purchases

    6,494         363             363         363      

Distributions paid ($2.40) per share

                (176,329 )       (176,329 )       (176,329 )    

Distributions to noncontrolling interests

                            (33,108 )   (33,108 )   (437 )

Preferred dividends

            (4,124 )           (4,124 )       (4,124 )    

Contributions from noncontrolling interests

                            11,602     11,602      

Conversion of noncontrolling interests to common shares

    150,674     2     5,546             5,548     (5,548 )        

Conversion of preferred shares to common shares

    3,067,131     30     83,465             83,495         83,495      

Redemption of noncontrolling interests

                            (489 )   (489 )   (96,564 )

Reversal of adjustments to redemption value of redeemable noncontrolling interests

            202,728             202,728         202,728     (202,728 )

Other

            1,585             1,585     3,047     4,632      

Adjustment of noncontrolling interest in Operating Partnership

            (57,299 )           (57,299 )   57,299          
                                       

Balance September 30, 2008

    76,085,867   $ 761   $ 1,684,915   $ (264,737 ) $ (23,975 ) $ 1,396,964   $ 283,889   $ 1,680,853   $ 23,327  
                                       

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

6


Table of Contents


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
  For the Nine Months
Ended September 30,
 
 
  2009   2008  

Cash flows from operating activities:

             
 

Net income

  $ 156,424   $ 136,091  
 

Adjustments to reconcile net income to net cash provided by operating activities:

             
   

Gain on early extinguishment of debt

    (29,145 )    
   

(Gain) loss on sale or write down of assets

    (159,776 )   3,054  
   

Loss (gain) on sale of assets of discontinued operations

    23,045     (98,189 )
   

Depreciation and amortization

    199,180     186,456  
   

Amortization of net discount on mortgage and bank and other notes payable

    392     4,103  
   

Amortization of share and unit-based plans

    5,719     8,402  
   

Equity in income of unconsolidated joint ventures

    (49,647 )   (67,172 )
   

Distributions of income from unconsolidated joint ventures

    7,981     18,900  
   

Changes in assets and liabilities, net of acquisitions and dispositions:

             
     

Tenant and other receivables, net

    3,519     20,800  
     

Other assets

    11,537     (1,890 )
     

Accounts payable and accrued expenses

    (46,365 )   (27,142 )
     

Due from affiliates

    (746 )   826  
     

Other accrued liabilities

    (48,383 )   (8,409 )
           
 

Net cash provided by operating activities

    73,735     175,830  
           

Cash flows from investing activities:

             
 

Acquisitions of property, development, redevelopment and property improvements

    (133,686 )   (453,001 )
 

Redemption of Rochester Properties

        (18,794 )
 

Maturities of marketable securities

    638     807  
 

Deferred leasing costs

    (22,218 )   (24,165 )
 

Distributions from unconsolidated joint ventures

    137,112     119,090  
 

Contributions to unconsolidated joint ventures

    (41,421 )   (148,102 )
 

Proceeds from loans to unconsolidated joint ventures

    (304 )   148  
 

Proceeds from sale of assets

    342,109     3,742  
 

Restricted cash

    (9,239 )   2,233  
           
 

Net cash provided by (used in) investing activities

    272,991     (518,042 )
           

Cash flows from financing activities:

             
 

Proceeds from mortgages, bank and other notes payable

    412,245     1,442,366  
 

Payments on mortgages, bank and other notes payable

    (778,852 )   (925,760 )
 

Repurchase of Senior Notes

    (55,029 )    
 

Deferred financing costs

    (5,872 )   (9,724 )
 

Proceeds from share and unit-based plans

    368     8,935  
 

Proceeds from issuance of warrants to purchase common stock

    14,564      
 

Contributions from co-venture partner

    165,716      
 

Dividends and distributions

    (86,837 )   (199,312 )
 

Dividends to preferred stockholders / preferred unitholders

        (10,744 )
           
 

Net cash (used in) provided by financing activities

    (333,697 )   305,761  
           
 

Net increase (decrease) in cash

    13,029     (36,451 )

Cash and cash equivalents, beginning of period

    66,529     85,273  
           

Cash and cash equivalents, end of period

  $ 79,558   $ 48,822  
           

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Table of Contents


THE MACERICH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 
  For the Nine Months
Ended September 30,
 
 
  2009   2008  

Supplemental cash flow information:

             
 

Cash payments for interest, net of amounts capitalized

  $ 207,833   $ 220,718  
           

Non-cash transactions:

             
 

Acquisition of noncontrolling interests in properties

  $   $ 205,520  
           
 

Deposits contributed to unconsolidated joint ventures and the purchase of properties

  $   $ 51,943  
           

Accrued development costs included in accounts payable and accrued expenses and other accrued liabilities

  $ 35,501   $ 57,045  
           
 

Accrued preferred dividend payable

  $ 207   $ 276  
           
 

Acquisition of property by assumption of mortgage note payable

  $   $ 15,789  
           
 

Stock dividend

  $ 68,117   $  
           
 

Conversion of Series A cumulative convertible preferred stock to common stock

  $   $ 83,495  
           

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

8


Table of Contents


THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

1. Organization:

        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 on March 16, 1994. As of September 30, 2009, the Company was the sole general partner of and held an 87% ownership interest in The Macerich Partnership, L.P. (the "Operating Partnership"). The Company was organized to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.

        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 ("MMC"), a California corporation, Westcor Partners, L.L.C., a single member Arizona limited liability company, Macerich Westcor Management LLC, a single member Delaware limited liability company, Westcor Partners of Colorado, LLC, a Colorado limited liability company, MACW Mall Management, Inc., a New York corporation, and MACW Property Management, LLC, a single member New York limited liability company. These last 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."

2. Summary of Significant Accounting Policies:

Basis of Presentation:

        The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements and have not been audited by independent public accountants.

        The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership. Investments in entities that are controlled by the Company or 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."

        The unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Current Report on Form 8-K filed May 27, 2009. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements for the interim periods have been made. The preparation of consolidated 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

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

2. Summary of Significant Accounting Policies: (Continued)


the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated balance sheet as of December 31, 2008 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.

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

Tenant and Other Receivables, net:

        Included in tenant and other receivables, net, is an allowance for doubtful accounts of $5,760 and $3,754 at September 30, 2009 and December 31, 2008, respectively.

        Included in tenant and other receivables, net, are the following notes receivable:

        On March 31, 2006, the Company received a note receivable that is secured by a deed of trust, bears interest at 5.5% and matures on March 31, 2031. At September 30, 2009 and December 31, 2008, the note had a balance of $9,283 and $9,450, respectively.

        On January 1, 2008, as part of the Rochester Redemption (See Note 17—Discontinued Operations), the Company received an unsecured note receivable that bears interest at 9.0% and matures on June 30, 2011. The balance on the note at September 30, 2009 and December 31, 2008 was $11,763.

        On August 16, 2009, the Company received a $1,800 note receivable from J&R Holdings XV, LLC ("Pederson") that bears interest at 10% and matures August 14, 2014. Pederson is considered a related party because it has an ownership interest in Promenade at Casa Grande. The note is secured by Pederson's interest in Promenade at Casa Grande. Interest income on the note was $22 for the three and nine months ended September 30, 2009.

Recent Accounting Pronouncements Adopted:

        In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification ("FASB Codification") and the Hierarchy of Generally Accepted Accounting Principles." This pronouncement establishes the FASB Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The Company adopted this pronouncement on July 1, 2009 and has updated its references to specific GAAP literature to reflect the codification.

        The following are recent accounting pronouncements adopted on April 1, 2009:

        SFAS No. 165, "Subsequent Events," which was superseded by the FASB Codification and is now included in ASC 855, establishes principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

        FSP SFAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies," which was superseded by the FASB Codification and is now included in ASC 805-20, addresses application issues on the accounting for contingencies in a

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

2. Summary of Significant Accounting Policies: (Continued)


business combination. The adoption of this pronouncement did not have any impact on the Company's consolidated financial statements.

        The following are recent accounting pronouncements adopted on January 1, 2009:

        FSP SFAS No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," which was superseded by the FASB Codification and is now included in ASC 820-10, reaffirmed the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

        SFAS No. 141(R), "Business Combinations," which was superseded by the FASB Codification and is now included in ASC 805, requires an acquiring entity to recognize acquired assets and assumed liabilities in a transaction at fair value as of the acquisition date and changes the accounting treatment for certain items, including acquisition costs, which will be required to be expensed as incurred. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

        SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133," which was superseded by the FASB Codification and is now included in ASC 815-10, requires qualitative disclosures about objectives and strategies for using derivatives and quantitative disclosures about the fair value of and gains and losses on derivative instruments. As a result of the Company's adoption of this pronouncement, the Company has expanded its disclosures concerning its derivative instruments and hedging activities in Note 5—Derivative Instruments and Hedging Activities.

        Emerging Issues Task Force ("EITF") No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock," which was superseded by the FASB Codification and is now included in ASC 815-40, provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the scope exception for classification as a derivative. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

        SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51," which was superseded by the FASB Codification and is now included in ASC 810-10-45, requires that noncontrolling interests be presented as a component of consolidated stockholders' equity and eliminates "minority interest accounting" such that the amount of net income attributable to the noncontrolling interests will be presented as part of consolidated net income on the consolidated statements of operations. See Note 22—Cumulative Effect of Adoption of Accounting Principles for a summary of the impact of the adoption of this pronouncement on the Company's consolidated financial statements.

        FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash Settlement)," which was superseded by the FASB Codification and is now included in ASC 470, requires the initial proceeds from convertible debt that may be settled in cash to be bifurcated between a liability component and an equity component. The objective of the guidance is to require the liability and equity components of convertible debt to be separately

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

2. Summary of Significant Accounting Policies: (Continued)


accounted for in a manner such that the interest expense recorded on the convertible debt would not equal the contractual rate of interest on the convertible debt, but instead would be recorded at a rate that would reflect the issuer's conventional non-convertible debt borrowing rate at the date of issuance. This is accomplished through the creation of a discount on the debt that would be accreted using the effective interest method as additional non-cash interest expense over the period the debt is expected to remain outstanding. See Note 22—Cumulative Effect of Adoption of Accounting Principles for a summary of the impact of the adoption of this pronouncement on the Company's consolidated financial statements.

        FSP EITF No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," which was superseded by the FASB Codification and is now included in ASC 260-10-45, provides that instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. See Note 22—Cumulative Effect of Adoption of Accounting Principles for a summary of the impact of the adoption of this pronouncement on the Company's consolidated financial statements.

        FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," which was superseded by the FASB Codification and is now included in ASC 825-10-50, requires disclosures on a quarterly basis that provide qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The Company has provided these disclosures in Note 10—Mortgage Notes Payable and Note 11—Bank and Other Notes Payable.

        FSP SFAS No. 115-2 and SFAS No. 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," which was superseded by the FASB Codification and is now included in ASC 320-10-35, requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted:

        In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB No. 140," which was superseded by the FASB Codification and is now included in ASC 860. ASC 860 removes the concept of a qualifying special-purpose entity and requires a transferor to consider all arrangements or agreements made contemporaneously with, or in contemplation of, a transfer of a financial asset in order to determine whether a transferor and all of the entities included in the transferor's financial statements being presented have surrendered control of the transferred financial asset. The Company is required to adopt this pronouncement prospectively starting January 1, 2010 and does not believe that this pronouncement will have a material impact on its results of operations or financial condition.

        In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)," which was superseded by the FASB Codification and is now included in ASC 810. The provision of ASC 810 provides guidance for determining whether an entity is the primary beneficiary in a variable interest entity. It also requires ongoing reassessments and additional disclosures about an entity's involvement in variable interest entities. The Company is required to adopt this pronouncement on

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

2. Summary of Significant Accounting Policies: (Continued)


January 1, 2010 and is currently evaluating the impact of the adoption of this pronouncement on its results of operations and financial condition.

3. Earnings per Share ("EPS"):

        The following table reconciles the numerator and denominator used in the computation of earnings per share for the three and nine months ended September 30, 2009 and 2008.

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
 
  2009   2008   2009   2008  

Numerator

                         

Income from continuing operations

  $ 160,285   $ 3,412   $ 178,487   $ 32,115  

Income (loss) from discontinued operations

    4,086     986     (22,063 )   103,976  

Income attributable to noncontrolling interests

    (21,533 )   (925 )   (21,306 )   (20,994 )
                   

Net income attributable to the Company

    142,838     3,473     135,118     115,097  

Preferred dividends

        (835 )       (4,124 )

Allocation of earnings to participating securities

    (3,347 )   (216 )   (2,241 )   (694 )
                   

Numerator for basic earnings per share—net income

                         
 

available to common stockholders

    139,491     2,422     132,877     110,279  

Effect of assumed conversions:

                         
 

Partnership units

        386         19,051  
 

Convertible non-participating preferred units

    208              
                   

Numerator for diluted earnings per share—net income

                         
 

available to common stockholders

  $ 139,699   $ 2,808   $ 132,877   $ 129,330  
                   

Denominator

                         

Denominator for basic earnings per share—weighted average number of common shares outstanding

    79,496     74,931     77,898     73,688  

Effect of dilutive securities:(1)

                         
 

Partnership units(2)

        12,493         12,528  
 

Convertible non-participating preferred units(3)

    198              
 

Share and unit-based plans(4)

        15         267  
                   

Denominator for diluted earnings per share—weighted average number of common shares outstanding

    79,694     87,439     77,898     86,483  
                   

Earnings per common share—basic:

                         
 

Income from continuing operations

  $ 1.71   $ 0.02   $ 1.96   $ 0.29  
 

Discontinued operations

    0.04     0.01     (0.25 )   1.21  
                   
 

Net income available to common stockholders

  $ 1.75   $ 0.03   $ 1.71   $ 1.50  
                   

Earnings per common share—diluted:

                         
 

Income from continuing operations

  $ 1.71   $ 0.02   $ 1.96   $ 0.29  
 

Discontinued operations

    0.04     0.01     (0.25 )   1.21  
                   
 

Net income available to common stockholders

  $ 1.75   $ 0.03   $ 1.71   $ 1.50  
                   

(1)
The Senior Notes (See Note 11—Bank and Other Notes Payable) are excluded from diluted EPS for the three and nine months ended September 30, 2009 and 2008 as their effect would be antidilutive to net income available to common stockholders.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

3. Earnings per Share ("EPS"): (Continued)

    The then-outstanding convertible preferred stock (See Note 14—Cumulative Convertible Redeemable Preferred Stock) was convertible on a one-for-one basis for common stock. The convertible preferred stock was excluded from diluted EPS for the three and nine months ended September 30, 2008 as its effect would be antidilutive to net income available to common stockholders.

(2)
Diluted EPS excludes 11,852,494 and 11,735,942 partnership units for the three and nine months ended September 30, 2009, respectively, as their effect was antidilutive to net income available to common stockholders.

(3)
Diluted EPS excludes 194,000 convertible non-participating preferred units for the three months ended September 30, 2008 and excludes 195,000 and 215,000 convertible non-participating preferred units for the nine months ended September 30, 2009 and 2008, respectively, as their impact was antidilutive to net income available to common stockholders.

(4)
Diluted EPS excludes 1,166,334 of unexercised stock appreciation rights and 132,500 of unexercised stock options for the three and nine months ended September 30, 2009 as their effect was antidilutive to net income available to common stockholders.

        The noncontrolling interests of the Operating Partnership as reflected in the Company's consolidated statements of operations have been allocated for EPS calculations as follows:

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
 
  2009   2008   2009   2008  

Income from continuing operations

  $ 21,003   $ 784   $ 24,194   $ 5,886  

Discontinued operations:

                         
 

Gain (loss) on sale or write-down of assets

    515     (137 )   (3,017 )   14,267  
 

Income from discontinued operations

    15     278     129     841  
                   
   

Total

  $ 21,533   $ 925   $ 21,306   $ 20,994  
                   

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures:

        The following are the Company's investments in various joint ventures or properties jointly owned with third parties. The Company and Operating Partnership's interest in each joint venture as of September 30, 2009 is as follows:

Joint Venture
  Ownership %(1)  

Biltmore Shopping Center Partners LLC

    50.0 %

Camelback Colonnade SPE LLC

    75.0 %

Chandler Festival SPE LLC

    50.0 %

Chandler Gateway SPE LLC

    50.0 %

Chandler Village Center, LLC

    50.0 %

Coolidge Holding LLC

    37.5 %

Corte Madera Village, LLC

    50.1 %

Desert Sky Mall—Tenants in Common

    50.0 %

East Mesa Land, L.L.C. 

    50.0 %

East Mesa Mall, L.L.C.—Superstition Springs Center

    33.3 %

FlatIron Property Holding,L.L.C. 

    25.0 %

Jaren Associates #4

    12.5 %

Kierland Tower Lofts, LLC

    15.0 %

Macerich Northwestern Associates—Broadway Plaza

    50.0 %

Macerich SanTan Phase 2 SPE LLC—SanTan Village Power Center

    34.9 %

MetroRising AMS Holding LLC—Metrocenter Mall

    15.0 %

New River Associates—Arrowhead Towne Center

    33.3 %

North Bridge Chicago LLC

    50.0 %

NorthPark Land Partners, LP

    50.0 %

NorthPark Partners, LP

    50.0 %

One Scottsdale Investors LLC

    50.0 %

Pacific Premier Retail Trust

    51.0 %

PHXAZ/Kierland Commons, L.L.C. 

    24.5 %

Propcor Associates

    25.0 %

Propcor II Associates, LLC—Boulevard Shops

    50.0 %

Queens Mall Limited Partnership

    51.0 %

Queens Mall Expansion Limited Partnership

    51.0 %

Scottsdale Fashion Square Partnership

    50.0 %

SDG Macerich Properties, L.P. 

    50.0 %

The Market at Estrella Falls LLC

    35.1 %

Tysons Corner Holdings LLC

    50.0 %

Tysons Corner LLC

    50.0 %

Tysons Corner Property Holdings II LLC

    50.0 %

Tysons Corner Property Holdings LLC

    50.0 %

Tysons Corner Property LLC

    50.0 %

WM Inland, L.L.C. 

    50.0 %

West Acres Development, LLP

    19.0 %

Westcor/Gilbert, L.L.C. 

    50.0 %

Westcor/Queen Creek Commercial LLC

    37.9 %

Westcor/Queen Creek LLC

    37.8 %

Westcor/Queen Creek Medical LLC

    37.7 %

Westcor/Queen Creek Residential LLC

    37.7 %

Westcor/Surprise Auto Park LLC

    33.3 %

Westpen Associates

    50.0 %

Wilshire Building—Tenants in Common

    30.0 %

WM Ridgmar, L.P. 

    50.0 %

(1)
The Company and Operating Partnership's ownership interest in this table reflects its legal ownership interest but may not reflect its economic interest since each joint venture has various agreements regarding cash flow, profits and losses, allocations, capital requirements and other matters.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures: (Continued)

        The Company generally accounts for its investments in joint ventures using the equity method unless the Company has a controlling interest in the joint venture or is the primary beneficiary in a variable interest entity. Although the Company has a greater than 50% interest in Pacific Premier Retail Trust, Camelback Colonnade SPE LLC, Corte Madera Village, LLC, Queens Mall Limited Partnership and Queens Mall Expansion Limited Partnership, the Company shares management control with the partners in these joint ventures and, therefore, accounts for these joint ventures using the equity method of accounting.

        The Company has recently made the following investments and dispositions in unconsolidated joint ventures:

        On January 10, 2008, the Company, in a 50/50 joint venture, acquired The Shops at North Bridge, a 680,933 square foot urban shopping center in Chicago, Illinois, for a total purchase price of $515,000. The Company's share of the purchase price was funded by the assumption of a pro rata share of the $205,000 fixed rate mortgage on the Center and by borrowings under the Company's line of credit. The results of The Shops at North Bridge are included below for the period subsequent to its date of acquisition.

        On June 11, 2008, the Company became a 50% owner in a joint venture that acquired One Scottsdale, which plans to develop a mixed-use property in Scottsdale, Arizona. The Company's share of the purchase price was $52,500, which was funded by borrowings under the Company's line of credit. The results of One Scottsdale are included below for the period subsequent to its date of acquisition.

        On December 19, 2008, the Company sold a fee and/or ground leasehold interest in three freestanding Mervyn's department stores to Pacific Premier Retail Trust, one of the Company's joint ventures, for $43,405, resulting in a gain on sale of assets of $1,511. The Company's pro rata share of the proceeds was used to pay down the Company's line of credit. See Mervyn's in Note 16—Acquisitions and in Note 17—Discontinued Operations.

        On July 30, 2009, the Company sold a 49% ownership interest in Queens Center to a third party for $152,654, resulting in a gain on sale of assets of $153,907. See Note 7—Property. The Company used the proceeds from the sale of the ownership interest in the property to pay down the Term Loan (see "Term Loan" in Note 11—Bank and Other Notes Payable) and for general corporate purposes. The results of Queens Center are included below for the period subsequent to the sale of the ownership interest.

        On September 3, 2009, the Company formed a joint venture with a third party whereby the Company sold a 75% interest in FlatIron Crossing. As part of this transaction, the Company issued three warrants for an aggregate of 1,250,000 shares of common stock of the Company (See Note 15—Stockholders' Equity). The Company received $123,750 in cash proceeds for the overall transaction, of which $8,068 was attributed to the warrants. The proceeds attributable to the interest sold exceeded the Company's carrying value in the interest sold by $28,720. However, due to certain contractual rights afforded to the buyer of the interest in FlatIron Crossing, the Company has only recognized a gain on sale of $2,654. The remaining net cash proceeds in excess of the Company's carrying value in the interest sold has been included in other accrued liabilities and will not be recognized until dissolution of the joint venture or disposition of the Company's or buyer's interest in the joint venture. The

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures: (Continued)

Company used the proceeds from the sale of the ownership interest to pay down the Term Loan and for general corporate purposes. The results of FlatIron Crossing are included below for the period subsequent to the sale of the ownership interest.

        Combined and condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures.

Combined and Condensed Balance Sheets of Unconsolidated Joint Ventures:

 
  September 30,
2009
  December 31,
2008
 

Assets(1):

             
 

Properties, net

  $ 5,312,813   $ 4,706,823  
 

Other assets

    509,814     531,976  
           
 

Total assets

  $ 5,822,627   $ 5,238,799  
           

Liabilities and partners' capital(1):

             
 

Mortgage notes payable(2)

  $ 4,803,054   $ 4,244,270  
 

Other liabilities

    225,248     215,975  
 

Company's capital

    384,922     434,504  
 

Outside partners' capital

    409,403     344,050  
           

Total liabilities and partners' capital

  $ 5,822,627   $ 5,238,799  
           

Investment in unconsolidated joint ventures:

             
 

Company's capital

  $ 384,922   $ 434,504  
 

Basis adjustment(3)

    601,599     579,426  
           
 

Investments in unconsolidated joint ventures

  $ 986,521   $ 1,013,930  
           
 

Assets—Investments in unconsolidated joint ventures

 
$

1,054,671
 
$

1,094,845
 
 

Liabilities—Investments in unconsolidated joint ventures

    (68,150 )   (80,915 )
           

  $ 986,521   $ 1,013,930  
           

(1)
These amounts include the assets and liabilities of the following significant subsidiaries as of September 30, 2009 and December 31, 2008:

 
  SDG
Macerich
Properties, L.P.
  Pacific
Premier
Retail
Trust
  Tysons
Corner
LLC
 

As of September 30, 2009:

                   

Total Assets

  $ 855,958   $ 1,118,972   $ 323,575  

Total Liabilities

  $ 817,257   $ 1,039,695   $ 333,370  

As of December 31, 2008:

                   

Total Assets

  $ 882,117   $ 1,148,831   $ 328,064  

Total Liabilities

  $ 823,550   $ 976,506   $ 333,307  

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures: (Continued)

(2)
Certain joint ventures have debt that could become recourse debt to the Company should the joint venture be unable to discharge the obligations of the related debt. As of September 30, 2009 and December 31, 2008, a total of $17,450 and $16,898, respectively, could become recourse debt to the Company.

    Included in mortgage notes payable are amounts due to affiliates of Northwestern Mutual Life ("NML") of $583,821 and $211,098 as of September 30, 2009 and December 31, 2008, respectively. NML is considered a related party because it is a joint venture partner with the Company in Macerich Northwestern Associates. Interest expense incurred on these borrowings amounted to $9,384 and $2,923 for the three months ended September 30, 2009 and 2008, respectively, and $16,895 and $7,082 for the nine months ended September 30, 2009 and 2008, respectively.

(3)
This represents the difference between the cost of an investment and the book value of the underlying equity of the joint venture. The Company is amortizing this difference into income on a straight-line basis, consistent with the lives of the underlying assets. The amortization of this difference was $2,319 and $2,040 for the three months ended September 30, 2009 and 2008, respectively, and $7,429 and $6,356 for the nine months ended September 30, 2009 and 2008, respectively.

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Table of Contents


THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures: (Continued)

Combined and Condensed Statements of Operations of Unconsolidated Joint Ventures:

 
  SDG
Macerich
Properties, L.P.
  Pacific
Premier
Retail Trust
  Tysons
Corner
LLC
  Other
Joint
Ventures
  Total  

Three Months Ended September 30, 2009

                               

Revenues:

                               
 

Minimum rents

  $ 22,393   $ 34,087   $ 14,415   $ 81,922   $ 152,817  
 

Percentage rents

    911     1,154     298     3,924     6,287  
 

Tenant recoveries

    12,450     12,257     9,735     39,761     74,203  
 

Other

    838     1,088     616     6,728     9,270  
                       
   

Total revenues

    36,592     48,586     25,064     132,335     242,577  
                       

Expenses:

                               
 

Shopping center and operating expenses

    14,261     13,729     7,923     48,826     84,739  
 

Interest expense

    11,768     13,159     3,923     34,342     63,192  
 

Depreciation and amortization

    7,918     9,294     4,482     27,391     49,085  
                       
 

Total operating expenses

    33,947     36,182     16,328     110,559     197,016  
                       

Loss on sale of assets

                (1,962 )   (1,962 )
                       

Net income

  $ 2,645   $ 12,404   $ 8,736   $ 19,814   $ 43,599  
                       

Company's equity in net income

  $ 1,322   $ 6,359   $ 4,368   $ 7,116   $ 19,165  
                       

Three Months Ended September 30, 2008

                               

Revenues:

                               
 

Minimum rents

  $ 22,772   $ 33,138   $ 14,116   $ 73,095   $ 143,121  
 

Percentage rents

    1,012     1,102     556     3,664     6,334  
 

Tenant recoveries

    12,899     13,085     9,531     33,988     69,503  
 

Other

    676     967     534     5,192     7,369  
                       
   

Total revenues

    37,359     48,292     24,737     115,939     226,327  
                       

Expenses:

                               
 

Shopping center and operating expenses

    14,573     13,892     7,743     44,351     80,559  
 

Interest expense

    11,768     11,384     4,108     30,177     57,437  
 

Depreciation and amortization

    7,840     8,208     4,753     25,595     46,396  
                       
 

Total operating expenses

    34,181     33,484     16,604     100,123     184,392  
                       

Gain on sale of assets

    403             1,575     1,978  
                       

Net income

  $ 3,581   $ 14,808   $ 8,133   $ 17,391   $ 43,913  
                       

Company's equity in net income

  $ 1,790   $ 7,523   $ 4,066   $ 6,549   $ 19,928  
                       

19


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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

4. Investments in Unconsolidated Joint Ventures: (Continued)

 

 
  SDG
Macerich
Properties, L.P.
  Pacific
Premier
Retail Trust
  Tysons
Corner
LLC
  Other
Joint
Ventures
  Total  

Nine Months Ended September 30, 2009

                               

Revenues:

                               
 

Minimum rents

  $ 67,872   $ 98,888   $ 43,561   $ 219,638   $ 429,959  
 

Percentage rents

    2,155     2,571     680     7,192     12,598  
 

Tenant recoveries

    36,583     36,709     28,353     107,325     208,970  
 

Other

    2,524     3,058     1,501     16,527     23,610  
                       
   

Total revenues

    109,134     141,226     74,095     350,682     675,137  
                       

Expenses:

                               
 

Shopping center and operating expenses

    42,228     40,698     23,627     132,116     238,669  
 

Interest expense

    34,925     37,838     11,885     90,079     174,727  
 

Depreciation and amortization

    22,942     27,136     13,436     79,690     143,204  
                       
 

Total operating expenses

    100,095     105,672     48,948     301,885     556,600  
                       

Gain (loss) on sale of assets

    44               (1,845 )   (1,801 )
                       

Net income

  $ 9,083   $ 35,554   $ 25,147   $ 46,952   $ 116,736  
                       

Company's equity in net income

  $ 4,541   $ 18,133   $ 12,574   $ 14,399   $ 49,647  
                       

Nine Months Ended September 30, 2008

                               

Revenues:

                               
 

Minimum rents

  $ 69,357   $ 97,121   $ 44,266   $ 212,051   $ 422,795  
 

Percentage rents

    2,543     2,805     1,677     8,581     15,606  
 

Tenant recoveries

    37,176     38,001     27,766     101,782     204,725  
 

Other

    2,653     3,161     1,507     34,580     41,901  
                       
   

Total revenues

    111,729     141,088     75,216     356,994     685,027  
                       

Expenses:

                               
 

Shopping center and operating expenses

    44,311     40,355     22,953     125,675     233,294  
 

Interest expense

    35,028     34,278     12,350     88,490     170,146  
 

Depreciation and amortization

    22,998     24,129     14,033     75,059     136,219  
                       
 

Total operating expenses

    102,337     98,762     49,336     289,224     539,659  
                       

Gain on sale of assets

    389             16,361     16,750  
                       

Net income

  $ 9,781   $ 42,326   $ 25,880   $ 84,131   $ 162,118  
                       

Company's equity in net income

  $ 4,890   $ 21,526   $ 12,940   $ 27,816   $ 67,172  
                       

        Significant accounting policies used by the unconsolidated joint ventures are similar to those used by the Company.

20


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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

5. 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 interest rate swap and cap agreements (collectively, "interest rate agreements") in the normal course of business to manage or reduce its exposure to adverse fluctuations in interest rates. The Company designs its hedges to be effective in reducing the risk exposure that they are designated to hedge. Any instrument that meets the cash flow hedging criteria is formally designated as a cash flow hedge at the inception of the derivative contract. On an ongoing quarterly basis, the Company adjusts its balance sheet to reflect the current fair value of its derivatives. To the extent they are effective, changes in fair value of derivatives are recorded in comprehensive income. Ineffective portions, if any, are included in net income. No ineffectiveness was recorded in net income during the three or nine months ended September 30, 2009 or 2008. If any derivative instrument used for risk management does not meet the hedging criteria, it is marked-to-market each period in the consolidated statements of operations. As of September 30, 2009, one of the Company's derivative instruments was not designated as a cash flow hedge. Changes in the market value of this derivative instrument is recorded in the consolidated statements of operations. As of September 30, 2009, the Company's derivative instruments did not contain any credit risk related contingent features or collateral arrangements.

        The Company reclassified $0 and $285 for the three and nine months ended September 30, 2008, respectively, related to treasury rate lock transactions settled in prior years from accumulated other comprehensive income to earnings.

        Amounts paid (received) as a result of interest rate agreements are recorded as an addition (reduction) of interest expense. The Company recorded other comprehensive income related to the marking-to-market of interest rate agreements of $2,815 and $449 for the three months ended September 30, 2009 and 2008, respectively and $20,304 and $248 for the nine months ended September 30, 2009 and 2008, respectively. The amount expected to be reclassified to interest expense in the next 12 months is immaterial.

        The following derivatives were outstanding at September 30, 2009:

Property/Entity
  Notional
Amount
  Product   Rate   Maturity   Fair
Value
 

Panorama Mall(1)(2)

    50,000   Cap     6.65 %   3/1/2010      

Paradise Valley Mall(2)

    85,000   Cap     5.00 %   9/12/2011     107  

The Oaks(2)

    150,000   Cap     6.25 %   7/1/2010      

The Operating Partnership(3)

    450,000   Swap     4.80 %   4/15/2010     (10,777 )

The Operating Partnership(3)

    400,000   Swap     5.08 %   4/25/2011     (25,221 )

Westside Pavilion(2)

    175,000   Cap     5.50 %   6/1/2010      

(1)
Derivative is not designated as a hedge.

(2)
See additional disclosure in Note 10—Mortgage Notes Payable.

(3)
See additional disclosure in Note 11—Bank and Other Notes Payable.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

5. Derivative Instruments and Hedging Activities: (Continued)

 
  Asset Derivatives   Liability Derivatives  
 
   
  September 30,
2009
  December 31,
2008
   
  September 30,
2009
  December 31,
2008
 
 
  Balance
Sheet
Location
  Fair
Value
  Fair
Value
  Balance
Sheet
Location
  Fair
Value
  Fair
Value
 
Derivatives designated as hedging instruments
   
   
   
   
   
   
 
 

Interest rate cap agreements

  Other assets   $ 107   $ 2   Other liabilities   $   $  
 

Interest rate swap agreements

  Other assets           Other liabilities     35,998     56,434  
                           

Total derivatives designated as hedging instruments

        107     2         35,998     56,434  
                           

Derivatives not designated as
hedging instruments

 

 


 

 


 

 


 

 


 

 


 

 


 
 

Interest rate cap agreements

  Other assets           Other liabilities          
 

Interest rate swap agreements

  Other assets           Other liabilities          
                           

Total derivatives not designated as hedging instruments

                         
                           

Total derivatives

      $ 107   $ 2       $ 35,998   $ 56,434  
                           

6. Fair Value:

        The fair values of interest rate agreements are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below or rose above the strike rate of the interest rate agreements. The variable interest rates used in the calculation of projected receipts on the interest rate agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

        Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2009 and December 31, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the

22


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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

6. Fair Value: (Continued)


overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

        The following table presents certain of the Company's derivative instruments measured at fair value as of September 30, 2009:

 
  Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
  Significant Other
Observable
Inputs (Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total  

Assets

                         

Derivative instruments

  $   $ 107   $   $ 107  

Liabilities

                         

Derivative instruments

        35,998         35,998  

7. Property:

        Property consists of the following:

 
  September 30,
2009
  December 31,
2008
 

Land

  $ 1,080,375   $ 1,135,013  

Building improvements

    4,638,867     5,190,049  

Tenant improvements

    324,614     327,877  

Equipment and furnishings

    106,218     101,991  

Construction in progress

    549,356     600,773  
           

    6,699,430     7,355,703  

Less accumulated depreciation

    (1,007,152 )   (984,384 )
           

  $ 5,692,278   $ 6,371,319  
           

        Depreciation expense was $51,356 and $48,308 for the three months ended September 30, 2009 and 2008, respectively, and $156,555 and $139,280 for the nine months ended September 30, 2009 and 2008, respectively.

        The Company recognized a gain (loss) on sale or write down of assets of $157,612 and ($4,217) for the three months ended September 30, 2009 and 2008, respectively, and $159,776 and ($3,054) for the nine months ended September 30, 2009 and 2008, respectively.

        The gain (loss) on sale or write down of assets includes a gain on the sale of land of $792 and $224 for the three months ended September 30, 2009 and 2008, respectively, and $3,599 and $1,387 for the nine months ended September 30, 2009 and 2008, respectively. The Company wrote off development costs of $592 and $1,235 for the three and nine months ended September 30, 2009,

23


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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

7. Property: (Continued)


respectively. In addition, the Company wrote down $4,441 of assets related to Mervyn's for the three and nine months ended September 30, 2008.

        The gain on sale of assets also includes a gain on the sale of a 49% interest in Queens Center of $153,907 during the three and nine months ended September 30, 2009. In addition, the Company also recorded a gain of $2,654 on the sale of a 75% interest in FlatIron Crossing. See Note 4—Investment in Unconsolidated Joint Ventures.

8. Marketable Securities:

        Marketable Securities consists of the following:

 
  September 30,
2009
  December 31,
2008
 

Government debt securities, at par value

  $ 28,470   $ 29,108  

Less discount

    (931 )   (1,165 )
           

    27,539     27,943  

Unrealized gain

    2,993     4,347  
           

Fair value

  $ 30,532   $ 32,290  
           

        Future contractual maturities of marketable securities at September 30, 2009 are as follows:

1 year or less

  $ 1,299  

2 to 5 years

    27,171  
       

  $ 28,470  
       

        The proceeds from maturities and interest receipts from the marketable securities are restricted to the service of the Greeley Note (See Note 11—Bank and Other Notes Payable). The Company accounts for its investments in marketable securities as held-to-maturity debt securities as the Company has the intent and the ability to hold these securities until maturity. Accordingly, investments in marketable securities are carried at their amortized cost. The discount on marketable securities is amortized into interest income on a straight-line basis over the term of the securities, which approximates the effective interest method.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

9. Deferred Charges And Other Assets, net:

        Deferred charges and other assets, net consists of the following:

 
  September 30,
2009
  December 31,
2008
 

Leasing

  $ 144,688   $ 139,374  

Financing

    48,006     54,256  

Intangible assets:

             
 

In-place lease values

    139,335     175,428  
 

Leasing commissions and legal costs

    48,377     57,832  
           

    380,406     426,890  

Less accumulated amortization(1)

    (175,520 )   (181,579 )
           

    204,886     245,311  

Other assets

    80,231     94,351  
           

  $ 285,117   $ 339,662  
           

(1)
Accumulated amortization includes $95,390 and $104,600 relating to intangibles at September 30, 2009 and December 31, 2008, respectively. Amortization expense for intangible assets was $4,425 and $12,501 for the three months ended September 30, 2009 and 2008, respectively, and $16,071 and $29,740 for the nine months ended September 30, 2009 and 2008, respectively.

        The allocated values of above-market leases included in deferred charges and other assets, net, and below-market leases included in other accrued liabilities, consist of the following:

 
  September 30,
2009
  December 31,
2008
 

Above-Market Leases

             

Original allocated value

  $ 51,964   $ 71,808  

Less accumulated amortization

    (33,837 )   (49,014 )
           

  $ 18,127   $ 22,794  
           

Below-Market Leases

             

Original allocated value

  $ 125,014   $ 185,976  

Less accumulated amortization

    (71,431 )   (108,197 )
           

  $ 53,583   $ 77,779  
           

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

10. Mortgage Notes Payable:

        Mortgage notes payable consists of the following:

 
  Carrying Amount of Mortgage Notes(a)    
   
   
 
 
  September 30, 2009   December 31, 2008    
   
   
 
Property Pledged as Collateral
  Other   Related Party   Other   Related Party   Interest
Rate
  Monthly
Payment(b)
  Maturity
Date
 

Capitola Mall

  $   $ 36,051   $   $ 37,497     7.13 %   380     2011  

Cactus Power Center(c)

            654                    

Carmel Plaza(d)

    25,443         25,805         7.45 %   202     2010  

Chandler Fashion Center(e)

    163,913           166,500         5.50 %   435     2012  

Chesterfield Towne Center(f)

    52,819         54,111         9.07 %   548     2024  

Danbury Fair Mall

    164,840         169,889         4.64 %   1,225     2011  

Deptford Mall

    172,500         172,500         5.41 %   778     2013  

Deptford Mall

    15,501         15,642         6.46 %   101     2016  

Fiesta Mall

    84,000         84,000         4.98 %   341     2015  

Flagstaff Mall

    37,000         37,000         5.03 %   153     2015  

FlatIron Crossing(g)

            184,248                  

Freehold Raceway Mall(e)

    167,118         171,726         4.68 %   1,184     2011  

Fresno Fashion Fair

    84,017     84,018     84,706     84,705     6.76 %   1,104     2015  

Great Northern Mall

    39,044         39,591         5.11 %   234     2013  

Hilton Village

    8,560         8,547         5.27 %   37     2012  

La Cumbre Plaza(h)

    30,000         30,000         1.62 %   28     2009  

Northridge Mall(i)

    71,726         79,657         8.20 %   453     2011  

Oaks, The(j)

    165,000         165,000         2.37 %   284     2011  

Oaks, The(k)

    88,106         65,525         2.99 %   176     2011  

Pacific View

    86,204         87,382         7.20 %   602     2011  

Panorama Mall(l)

    50,000         50,000         1.31 %   46     2010  

Paradise Valley Mall(m)

    85,000         20,259         6.30 %   390     2012  

Prescott Gateway

    60,000         60,000         5.86 %   289     2011  

Promenade at Casa Grande(n)

    86,617         97,209         1.74 %   122     2010  

Queens Center(o)

            88,913                  

Queens Center(o)

            106,657     106,657              

Rimrock Mall

    41,617         42,155         7.57 %   320     2011  

Salisbury, Center at

    115,000         115,000         5.83 %   555     2016  

Santa Monica Place

    76,974         77,888         7.79 %   606     2010  

SanTan Village Regional Center(p)

    135,646         126,573         2.98 %   287     2011  

Shoppingtown Mall

    41,805         43,040         5.01 %   319     2011  

South Plains Mall(q)

    55,360         57,721         9.49 %   454     2029  

South Towne Center

    89,126         89,915         6.39 %   554     2015  

Towne Mall

    13,996         14,366         4.99 %   100     2012  

Tucson La Encantada

        77,756         78,000     5.84 %   363     2012  

Twenty Ninth Street(r)

    106,710         115,000         5.45 %   467     2011  

Valley River Center

    120,000         120,000         5.59 %   558     2016  

Valley View Center

    125,000         125,000         5.81 %   596     2011  

Victor Valley, Mall of(s)

    100,000         100,000         2.16 %   158     2011  

Vintage Faire Mall

    62,480         63,329         7.92 %   508     2010  

Westside Pavilion(t)

    175,000         175,000         2.96 %   330     2011  

Wilton Mall

    41,058         42,608         4.79 %   349     2029  
                                     

  $ 3,037,180   $ 197,825   $ 3,373,116   $ 306,859                    
                                     

(a)
The mortgage notes payable balances include the unamortized debt premiums (discounts). Debt premiums (discounts) represent the excess (deficiency) of the fair value of debt over (under) the principal value of debt assumed in various acquisitions and are amortized into interest expense over the remaining term of the related debt in a manner that approximates the effective interest method. The interest rate disclosed represents the effective interest rate, including the debt premium (discounts) and deferred finance cost.

26


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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

10. Mortgage Notes Payable: (Continued)

    Debt premiums (discounts) consist of the following:

Property Pledged as
Collateral
  September 30,
2009
  December 31,
2008
 

Danbury Fair Mall

  $ 6,004   $ 9,166  

Deptford Mall

    (37 )   (41 )

Freehold Raceway Mall

    6,365     8,940  

Great Northern Mall

    (116 )   (137 )

Hilton Village

    (40 )   (53 )

Paradise Valley Mall

        99  

Shoppingtown Mall

    1,838     2,648  

Towne Mall

    300     371  

Wilton Mall

    163     1,263  
           

  $ 14,477   $ 22,256  
           
(b)
This represents the monthly payment of principal and interest.

(c)
On September 4, 2009, the construction loan was paid off.

(d)
The loan was extended to May 1, 2010.

(e)
On September 30, 2009, 49.9% of the loan was assumed by an unrelated party in connection with entering into a co-venture arrangement with that unrelated party. See Note 12—Co-Venture Arrangement.

(f)
In addition to monthly principal and interest payments, 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 exceeds a base amount. Contingent interest expense recognized was $0 and $86 for the three months ended September 30, 2009 and 2008, respectively and ($331) and $199 for the nine months ended September 30, 2009 and 2008, respectively.

(g)
On September 3, 2009, 75.0% of the loan was assumed by an unrelated party in connection with the sale of a 75.0% interest of the underlying property to that party. See Note 4—Investments in Unconsolidated Joint Ventures.

(h)
The loan bears interest at LIBOR plus 0.88%. The Company is currently negotiating to extend this loan. At September 30, 2009 and December 31, 2008, the total interest rate was 1.62% and 2.58%, respectively.

(i)
On June 1, 2009, the Company extended the loan until January 1, 2011 at an interest rate of 8.20%.

(j)
The loan bears interest at LIBOR plus 1.75% and matures on July 10, 2011 with two one-year extension options. At September 30, 2009 and December 31, 2008, the total interest rate was 2.37% and 3.48%, respectively. The loan is covered by an interest rate cap agreement that effectively prevents LIBOR from exceeding 6.25% over the loan term. See Note 5—Derivative Instruments and Hedging Activities.

(k)
The construction loan allows for total borrowings of up to $135,000, bears interest at LIBOR plus a spread of 1.75% to 2.10%, depending on certain conditions and matures on July 10, 2011, with two one-year extension options. At September 30, 2009 and December 31, 2008, the total interest rate was 2.99% and 4.24%, respectively.

(l)
The loan bears interest at LIBOR plus 0.85% and matures on February 28, 2010, with a one-year extension option. The loan is covered by an interest rate cap agreement that effectively prevents LIBOR from exceeding 6.65%. See Note 5—Derivative Instruments and Hedging Activities. At September 30, 2009 and December 31, 2008, the total interest rate was 1.31% and 1.62%, respectively.

(m)
The previous loan was paid off in full on May 1, 2009. On August 31, 2009, the Company placed a new $85,000 loan on the property that bears interest at LIBOR plus 4.0% and matures on August 31, 2012 with two one-year extension options.

(n)
The loan bears interest at LIBOR plus a spread of 1.20% to 1.40%, depending on certain conditions. The loan matures on August 16, 2010, with a one-year extension option, subject to provisions of the loan agreement. At September 30, 2009 and December 31, 2008, the total interest rate was 1.74% and 3.35%, respectively.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

10. Mortgage Notes Payable: (Continued)

(o)
On July 30, 2009, 49% of the loan was assumed by an unrelated party in connection with the sale of a 49% interest of the underlying property to that party. See Note 4—Investments in Unconsolidated Joint Ventures.

(p)
The construction loan on the property allows for total borrowings of up to $150,000 and bears interest at LIBOR plus a spread of 2.10% to 2.25%, depending on certain conditions. The loan matures on June 13, 2011, with two one-year extension options. At September 30, 2009 and December 31, 2008, the total interest rate was 2.98% and 3.91%, respectively.

(q)
On March 1, 2009, the interest rate on the loan increased from 7.49% to 9.49% and the loan was extended until March 1, 2029.

(r)
On March 25, 2009, the loan agreement was modified to bear interest at LIBOR plus 3.40% and matures on June 5, 2011, with a one-year extension option. At September 30, 2009 and December 31, 2008, the total interest rate was 5.45% and 2.20%, respectively.

(s)
The loan bears interest at LIBOR plus 1.60% and matures on May 6, 2011, with two one-year extension options. At September 30, 2009 and December 31, 2008, the total interest rate on the loan was 2.16% and 3.74%, respectively.

(t)
The loan bears interest at LIBOR plus 2.00% and matures on June 5, 2011, with two one-year extension options. At September 30, 2009 and December 31, 2008, the total interest rate on the loan was 2.96% and 4.07%, respectively. The loan is covered by an interest rate cap agreement that effectively prevents LIBOR from exceeding 5.50% until June 1, 2010. See Note 5—Derivative Instruments and Hedging Activities.

        Most of the mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.

        The Company expects all 2009 loan maturities will be refinanced, extended and/or paid-off from the Company's line of credit.

        Total interest expense capitalized was $5,400 and $10,421 for the three months ended September 30, 2009 and 2008, respectively, and $15,223 and $26,058 for the nine months ended September 30, 2009 and 2008, respectively.

        Related party mortgage notes payable are amounts due to affiliates of NML. See Note 19—Related Party Transactions, for interest expense associated with loans from NML.

        The fair value of mortgage notes payable at September 30, 2009 and December 31, 2008 was $2,927,402 and $3,529,762, respectively, based on current interest rates for comparable loans. The method for computing fair value was determined using a present value model and an interest rate that included a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt.

11. Bank and Other Notes Payable:

        Bank and other notes payable consist of the following:

Convertible Senior Notes ("Senior Notes"):

        The Senior Notes bear interest at 3.25%, payable semiannually, are senior unsecured debt of the Company and are guaranteed by the Operating Partnership. Prior to December 14, 2011, upon the occurrence of certain specified events, the Senior Notes will be convertible at the option of the holder into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the election of the Company, at an initial conversion rate of

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

11. Bank and Other Notes Payable: (Continued)


8.9702 shares per $1 principal amount. On and after December 15, 2011, the Senior Notes will be convertible at any time prior to the second business day preceding the maturity date at the option of the holder at the initial conversion rate. The initial conversion price of approximately $111.48 per share represented a 20% premium over the closing price of the Company's common stock on March 12, 2007, the date of issuance of the Senior Notes. The initial conversion rate is subject to adjustment under certain circumstances. Holders of the Senior Notes do not have the right to require the Company to repurchase the Senior Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions.

        The Company purchased two capped calls ("Capped Calls") from affiliates of the initial purchasers of the Senior Notes that effectively increased the conversion price to approximately $130.06 per common share, which represents a 40% premium to the March 12, 2007 closing price of $92.90 per common share of the Company. The Capped Calls are expected to generally reduce the potential dilution upon exchange of the Senior Notes in the event the market value per share of the Company's common stock, as measured under the terms of the relevant settlement date, is greater than the strike price of the Capped Calls. If, however, the market value per share of the Company's common stock exceeds $130.06 per common share, then the dilution mitigation under the Capped Calls will be capped, which means there would be dilution from exchange of the Senior Notes to the extent that the market value per share of the Company's common stock exceeds $130.06.

        During the nine months ended September 30, 2009, the Company repurchased and retired $89,065 of the Senior Notes for $54,135 and recorded a gain on extinguishment of $29,801. The repurchase was funded by borrowings under the Company's line of credit.

        The carrying value of the Senior Notes at September 30, 2009 and December 31, 2008 was $611,519 and $687,654, respectively, which included an unamortized discount of $26,581 and $39,511, respectively. As of September 30, 2009 and December 31, 2008, the effective interest rate was 5.41%. The fair value of the Senior Notes at September 30, 2009 and December 31, 2008 was $575,885 and $379,435, respectively, based on the quoted market price on each date.

Line of Credit:

        The Company has a $1,500,000 revolving line of credit that matures on April 25, 2010 with a one-year extension option. The interest rate fluctuates from LIBOR plus 0.75% to LIBOR plus 1.10% depending on the Company's overall leverage. The Company has an existing interest rate swap agreement that effectively fixed the interest rate on $400,000 of the outstanding balance of the line of credit at 6.23% until April 25, 2011. Concurrent with the payoff of the Term Loan, the Company applied the interest payments associated with the interest rate swap agreement from that loan to a portion of the outstanding line of credit balance. As a result, the interest rate swap agreement from the Term Loan effectively fixed the interest rate on $450,000 of the outstanding balance of the line of credit at 6.30% until April 25, 2010. See Note 5—Derivative Instruments and Hedging Activities.

        As of September 30, 2009 and December 31, 2008, borrowings outstanding were $1,095,000 and $1,099,500, at an average interest rate, excluding the $850,000 swapped portion, of 3.83% and 3.19%, respectively. The fair value of the Company's line of credit at September 30, 2009 and December 31,

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

11. Bank and Other Notes Payable: (Continued)


2008 was $1,084,388 and $1,067,631, respectively, based on a present value model using current interest rate spreads offered to the Company for comparable debt.

Term Loan:

        The Company had a five-year term loan that bore interest at LIBOR plus 1.50%. The loan had a balance of $446,250 at December 31, 2008. Concurrent with the payoff of this loan during the three months ended September 30, 2009, the Company applied the interest payments associated with the interest rate swap agreement from this loan to a portion of the outstanding line of credit balance.

Greeley Note:

        On July 27, 2006, concurrent with the sale of Greeley Mall, the Company provided marketable securities to replace Greeley Mall as collateral for the mortgage note payable on the property (See Note 8—Marketable Securities). As a result of this transaction, the debt was reclassified to bank and other notes payable. This note bears interest at an effective rate of 6.34% and matures in September 2013. As of September 30, 2009 and December 31, 2008, the note had a balance outstanding of $26,529 and $27,038, respectively. The fair value of the note at September 30, 2009 and December 31, 2008 was $19,794 and $19,074, respectively, based on current interest rates for comparable loans. The method for computing fair value was determined using a present value model and an interest rate that included a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt.

        As of September 30, 2009 and December 31, 2008, the Company was in compliance with all applicable loan covenants under its debt agreements.

12. Co-Venture Arrangement:

        On September 30, 2009, the Company formed a joint venture with Heitman, a Chicago-based real estate management firm, whereby Heitman acquired a 49.9% interest in Freehold Raceway Mall and Chandler Fashion Center. As part of this transaction, the Company issued a warrant in favor of a Heitman entity to purchase 935,358 shares of common stock of the Company at an exercise price of $46.68 per share. See "Warrants" in Note 15—Stockholders' Equity. The Company received approximately $174,650 in cash proceeds for the overall transaction, of which $6,496 was attributed to the warrants. The Company used the proceeds from this transaction to pay down the line of credit.

        As a result of the Company having certain rights under the agreement to repurchase the assets after the seventh year of the venture formation, the transaction did not qualify for sale treatment. The Company, however, is not obligated to repurchase the assets. The transaction has been accounted for as a profit-sharing arrangement, and accordingly the assets, liabilities and operations of the properties remain on the books of the Company and a co-venture obligation has been established for the amount of $168,154, representing the net cash proceeds received from Heitman less costs allocated to the warrant.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

13. Noncontrolling Interests:

        The Company allocates net income to the Operating Partnership based on the weighted average ownership interest during the period. The 13% limited partnership interest of the Operating Partnership not owned by the Company at September 30, 2009 is reflected in these consolidated financial statements as permanent equity.

        The interests in the Operating Partnership are known as OP Units. OP Units not held by the Company are redeemable at the election of the holder, and the Company may redeem them for the Company's stock or cash, at the Company's option. The redemption value for each OP Unit as of any balance sheet date is the amount equal to the average of the closing price per share of the Company's common stock, par value $0.01 per share, as reported on the New York Stock Exchange for the ten trading days ending on the respective balance sheet date. Accordingly, as of September 30, 2009 and December 31, 2008, the aggregate redemption value of the then-outstanding OP Units not owned by the Company was $384,162 and $227,091, respectively.

        The Company issued common and preferred units of MACWH, LP in April 2005 in connection with the acquisition of the Wilmorite portfolio. The common and preferred units of MACWH, LP are redeemable at the election of the holder and the Company may redeem them for cash or shares of the Company's stock at the Company's option and are classified as permanent equity.

        Included in permanent equity are outside ownership interests in various consolidated joint ventures. The joint ventures do not have rights that require the Company to redeem the ownership interests in either cash or stock.

        The outside ownership interests in the Company's joint venture in Shoppingtown Mall have a purchase option for $24,000. In addition, under certain conditions as defined by the partnership agreement, these partners have the right to "put" their partnership interests to the Company. Due to the redemption feature of the ownership interest in Shoppingtown Mall, these noncontrolling interests have been included in temporary equity.

14. Cumulative Convertible Redeemable Preferred Stock:

        On February 25, 1998, the Company issued 3,627,131 shares of Series A cumulative convertible redeemable preferred stock ("Series A Preferred Stock") for proceeds totaling $100,000 in a private placement. The preferred stock was convertible on a one-for-one basis into common stock and paid a quarterly dividend equal to the greater of $0.46 per share, or the dividend then payable on a share of common stock.

        The holder of the Series A Preferred Stock had redemption rights if a change in control of the Company occurred, as defined under the Articles Supplementary. Under such circumstances, the holder of the Series A Preferred Stock was entitled to require the Company to redeem its shares, to the extent the Company had funds legally available therefor, at a price equal to 105% of its liquidation preference plus accrued and unpaid dividends. The Series A Preferred Stock holder also had the right to require the Company to repurchase its shares if the Company failed to be taxed as a REIT for federal tax purposes at a price equal to 115% of its liquidation preference plus accrued and unpaid dividends to the extent funds were legally available therefor.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

14. Cumulative Convertible Redeemable Preferred Stock: (Continued)

        No dividends could be declared or paid on any class of common or other junior stock to the extent that dividends on Series A Preferred Stock had not been declared and/or paid.

        On October 18, 2007, the holder of the Series A Preferred Stock converted 560,000 shares to common shares. On May 6, 2008, the holder of the Series A Preferred Stock converted 684,000 shares to common shares. On May 8, 2008, the holder of the Series A Preferred Stock converted 1,338,860 shares to common shares. On September 17, 2008, the holder of the Series A Preferred Stock converted the remaining 1,044,271 shares to common shares.

15. Stockholders' Equity:

Authorized Shares:

        On June 8, 2009, the Company amended its articles of incorporation to increase the number of common shares authorized from 145,000,000 common shares to 250,000,000 common shares.

Stock Dividends:

        On June 22, 2009, the Company issued 2,236,954 common shares to its common stockholders and OP Unit holders in connection with a declaration of a quarterly dividend of $0.60 per share of common stock on May 1, 2009, consisting of a combination of cash and shares of the Company's common stock. The cash component of the dividend (not including cash paid in lieu of fractional shares) was 10% in the aggregate, or $0.06 per share, with the balance paid in shares of the Company's common stock.

        On September 21, 2009, the Company issued 1,658,023 common shares to its common stockholders and OP Unit holders in connection with a declaration of a quarterly dividend of $0.60 per share of common stock on August 12, 2009, consisting of a combination of cash and shares of the Company's common stock. The cash component of the dividend (not including cash paid in lieu of fractional shares) was 10% in the aggregate, or $0.06 per share, with the balance paid in shares of the Company's common stock.

        In accordance with the provisions of Internal Revenue Service Revenue Procedure 2009-15, stockholders were asked to make an election to receive the dividends all in cash or all in shares. To the extent that more than 10% of cash was elected in the aggregate, the cash portion was prorated. Stockholders who elected to receive the dividends in cash received a cash payment of at least $0.06 per share. Stockholders who did not make an election received 10% in cash and 90% in shares of common stock. The number of shares issued on June 22, 2009 as a result of the dividend was calculated based on the volume weighted average trading prices of the Company's common stock on the New York Stock Exchange on June 10, 2009 through June 12, 2009 of $19.9927. The number of shares issued on September 21, 2009 as a result of the dividend was calculated based on the volume weighted average trading prices of the Company's common stock on the New York Stock Exchange on September 9, 2009 through September 11, 2009 of $28.5100.

        The Company has elected to account for the stock portion of its distributions as stock issuances as opposed to a stock dividend. Accordingly, the impact of the shares issued is reflected in the Company's earnings per share calculation on a prospective basis. The issuance of the stock dividend resulted in a

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

15. Stockholders' Equity: (Continued)


reduction of $0.01 and $0.03 on both basic and diluted earnings per share for the three and nine months ended September 30, 2009.

Warrants:

        On September 3, 2009, the Company issued three warrants in connection with the sale of a 75% ownership interest in FlatIron Crossing. See Note 4—Investments in Unconsolidated Joint Ventures. The warrants provide for a purchase in the aggregate of 1,250,000 shares of the Company's common stock. The warrants were valued at $8,068 and recorded as a credit to additional paid-in capital. Each warrant has a three-year term and was immediately exercisable upon its issuance, has an exercise price of approximately $30.62 per share until September 3, 2011 and an exercise price of approximately $34.79 from September 4, 2011 until September 3, 2012, with such prices subject to anti-dilutive adjustments. The warrants allow for either gross or net issue settlement at the option of the warrant holder. In the event that the warrant holder elects a net issue settlement, the Company may elect to settle the warrants in cash or shares. In addition, the Company has entered into registration rights agreements with the warrant holders requiring the Company to provide certain registration rights regarding the resale of shares of common stock underlying each warrant.

        On September 30, 2009, the Company issued a warrant in connection with its formation of a co-venture to own and operate Freehold Raceway Mall and Chandler Fashion Center. See Note 12—Co-Venture Arrangement. The warrant provides for the purchase of 935,358 shares of the Company's common stock. The warrant was valued at $6,496 and recorded as a credit to additional paid-in capital. The warrant was immediately exercisable upon its issuance and will expire 30 days after the refinancing or repayment of each loan encumbering the Centers has closed. The warrant has an exercise price of $46.68 per share, with such price subject to anti-dilutive adjustments. The warrant allows for either gross or net issue settlement at the option of the warrant holder. In the event that the warrant holder elects a net issue settlement, the Company may elect to settle the warrant in cash or shares; provided, however, that in the event the Company elects to deliver cash, the holder may elect to instead have the exercise of the warrant satisfied in shares. In addition, the Company has entered into a registration rights agreement with the warrant holders requiring the Company to provide certain registration rights regarding the resale of shares of common stock underlying the warrant.

        The issuance of the warrants was exempt from registration under the Securities Act of 1933, as amended ("Securities Act"), pursuant to Section 4(2) of the Securities Act. Each investor represented that it was an accredited investor, as defined in Rule 501 of Regulation D, and that it was acquiring the securities for its own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.

16. Acquisitions:

        The Company has completed the following acquisitions:

Mervyn's:

        On December 17, 2007, the Company purchased a portfolio of ground leasehold and/or fee simple interests in 39 Mervyn's department stores for $400,160. The Company purchased an additional ground

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

16. Acquisitions: (Continued)


leasehold interest on January 31, 2008 for $13,182 and a fee simple interest on February 29, 2008 for $19,338. All of the purchased properties are located in the southwest United States. The purchase price was funded by cash and borrowings under the Company's line of credit. Concurrent with each acquisition, the Company entered into individual agreements to lease back the properties to Mervyn's for terms of 14 to 20 years. In connection with the acquisition of the Mervyn's portfolio, the Company recorded intangible assets of $110.7 million and intangible liabilities of $59.0 million. The results of operations include these properties since the acquisition date.

Boscov's:

        On May 20, 2008, the Company purchased a fee simple interest in a 161,350 square foot Boscov's department store at Deptford Mall in Deptford, New Jersey. The total purchase price of $23,500 was funded by the assumption of the existing mortgage note on the property and by borrowings under the Company's line of credit. The results of operations have included this property since the date of acquisition.

17. Discontinued Operations:

        The following operations were recently discontinued:

Mervyn's:

        In July 2008, Mervyn's filed for bankruptcy protection and in October 2008 announced its plans to liquidate all merchandise, auction its store leases and wind down its business. The Company had 45 former Mervyn's stores in its portfolio. The Company owned the ground leasehold and/or fee simple interest in 44 of those stores and the remaining store was owned by a third party but was located at one of the Centers.

        In September 2008, the Company recorded a write-down of $5,214 due to the anticipated rejection of six of the Company's leases by Mervyn's. In addition, the Company terminated its former plan to sell the 29 Mervyn's stores located at shopping centers not owned or managed by the Company. The Company's decision was based on current conditions in the credit market and the assumption that a better return could be obtained by holding and operating the assets. As a result of the change in plans to sell, the Company recorded a loss of $5,347 in (loss) gain on sale or write-down of assets in order to adjust the carrying value of these assets for depreciation expense that otherwise would have been recognized had these assets been continuously classified as held and used.

        In December 2008, Kohl's and Forever 21 assumed a total of 23 of the Mervyn's leases and the remaining 22 leases were rejected by Mervyn's under the bankruptcy laws. As a result, the Company wrote off the unamortized intangible assets and liabilities related to the rejected and unassumed leases in December 2008. The Company wrote off $27,655 of unamortized intangible assets related to lease in place values, leasing commissions and legal costs to depreciation and amortization. Unamortized intangible assets of $14,881 relating to above market leases and unamortized intangible liabilities of $24,523 relating to below market leases were written off to minimum rents.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

17. Discontinued Operations: (Continued)

        On December 19, 2008, the Company sold a fee and/or ground leasehold interest in three freestanding Mervyn's department stores to Pacific Premier Retail Trust, one of the Company's joint ventures, for $43,405, resulting in a gain on sale of assets of $1,511. The Company's pro rata share of the proceeds was used to pay down the Company's line of credit.

        In June 2009, the Company recorded an impairment charge of $25,958, as it relates to the fee and/or ground leasehold interests in five former Mervyn's stores due to the anticipated loss on the sale of these properties in July 2009. The Company subsequently sold the properties during the third quarter for $52,689 in total proceeds, resulting in an additional $403 loss related to transaction costs. The Company used the proceeds from the sales to pay down the Company's Term loan and for general corporate purposes.

        On September 29, 2009, the Company sold a leasehold interest in a former Mervyn's location for $4,510, resulting in a gain on sale of $4,197. The Company used the proceeds from the sale to pay down the Company's line of credit and for general corporate purposes.

Rochester Redemption:

        On January 1, 2008, a subsidiary of the Operating Partnership, at the election of the holders, redeemed the 3,426,609 participating convertible preferred units ("PCPUs"). As a result of the redemption, the Company received the 16.32% noncontrolling interest in the portion of the Wilmorite portfolio that included Danbury Fair Mall, Freehold Raceway Mall, Great Northern Mall, Rotterdam Square, Shoppingtown Mall, Towne Mall, Tysons Corner Center and Wilton Mall, collectively referred to as the "Non-Rochester Properties," for total consideration of $224,393, in exchange for the Company's ownership interest in the portion of the Wilmorite portfolio that consisted of Eastview Commons, Eastview Mall, Greece Ridge Center, Marketplace Mall and Pittsford Plaza, collectively referred to as the "Rochester Properties," including approximately $18,000 in cash held at those properties. Included in the redemption consideration was the assumption of the remaining 16.32% interest in the indebtedness of the Non-Rochester Properties, which had an estimated fair value of $105,962. In addition, the Company also received additional consideration of $11,763, in the form of a note, for certain working capital adjustments, extraordinary capital expenditures, leasing commissions, tenant allowances, and decreases in indebtedness during the Company's period of ownership of the Rochester Properties. The Company recognized a gain of $99,082 on the exchange based on the difference between the fair value of the additional interest acquired in the Non-Rochester Properties and the carrying value of the Rochester Properties, net of noncontrolling interest. This exchange is referred to herein as the "Rochester Redemption."

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

17. Discontinued Operations: (Continued)

        The Company determined the fair value of the debt using a present value model based upon the terms of equivalent debt and upon credit spreads made available to the Company. The following table represents the debt measured at fair value on January 1, 2008:

 
  Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
  Significant Other
Observable
Inputs (Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Balance at
January 1, 2008
 

Liabilities

                         

Debt on Non-Rochester Properties

  $   $ 71,032   $ 34,930   $ 105,962  

        The source of the Level 2 inputs involved the use of the nominal weekly average of the U.S. treasury rates. The source of the Level 3 inputs was based on comparable credit spreads on the estimated value of the property that serves as the underlying collateral of the debt.

        As a result of the Rochester Redemption, the Company recorded a credit to additional paid-in capital of $172,805 due to the reversal of adjustments to noncontrolling interests for the redemption value on the Rochester Properties over the Company's historical cost. In addition, the Company recorded a step-up in the basis of approximately $218,812 in the remaining portion of the Non-Rochester Properties.

Other Dispositions:

        In June 2009, the Company recorded an impairment charge of $1,037, as it related to the anticipated loss on the sale of Village Center, a 170,801 square foot urban village property, in July 2009. The Company subsequently sold the property on July 14, 2009 for $11,912 in total proceeds, resulting in a gain of $172 related to a change in estimate in transaction costs. The Company used the proceeds from the sale to pay down the Term loan and for general corporate purposes.

        The Company has classified the results of operations and gain or loss on sale for the three and nine months ended September 30, 2009 and 2008 for all of the above dispositions as discontinued operations.

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THE MACERICH COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

17. Discontinued Operations: (Continued)

        Revenues and income from discontinued operations consist of the following:

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
 
  2009   2008   2009   2008  

Revenues:

                         
 

Scottsdale/101

  $   $   $   $ 10  
 

Holiday Village

                338  
 

Great Falls Marketplace

                (21 )
 

Mervyn's

    369     3,117     2,938     9,155  
 

Village Center

    (2 )   429     925     1,463  
                   

  $ 367   $ 3,546   $ 3,863   $ 10,945  
                   

Income from discontinued operations:

                         
 

Scottsdale/101

  $