10-Q 1 mac-9302017x10q.htm 10-Q Document

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, 2017
Commission File No. 1-12504
THE MACERICH COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND
 
95-4448705
(State or other jurisdiction of
incorporation or organization)
 
(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 x       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 x        NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o 
 
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.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 x
Number of shares outstanding as of November 2, 2017 of the registrant's common stock, par value $0.01 per share: 140,772,872 shares




THE MACERICH COMPANY
FORM 10-Q
INDEX
Part I
 
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II
 
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(Unaudited)
 
September 30,
2017
 
December 31,
2016
ASSETS:
 
 
 
Property, net
$
7,164,649

 
$
7,357,310

Cash and cash equivalents
71,088

 
94,046

Restricted cash
50,736

 
49,951

Tenant and other receivables, net
111,153

 
136,998

Deferred charges and other assets, net
439,495

 
478,058

Due from affiliates
81,184

 
68,227

Investments in unconsolidated joint ventures
1,688,606

 
1,773,558

Total assets
$
9,606,911

 
$
9,958,148

LIABILITIES AND EQUITY:
 
 
 
Mortgage notes payable:
 
 
 
Related parties
$
172,810

 
$
176,442

Others
3,910,864

 
3,908,976

Total
4,083,674

 
4,085,418

Bank and other notes payable
966,757

 
880,482

Accounts payable and accrued expenses
69,617

 
61,316

Other accrued liabilities
302,082

 
366,165

Distributions in excess of investments in unconsolidated joint ventures
88,569

 
78,626

Co-venture obligation
59,118

 
58,973

Total liabilities
5,569,817

 
5,530,980

Commitments and contingencies

 

Equity:
 
 
 
Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 250,000,000 shares authorized, 140,918,189 and 143,985,036 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
1,409

 
1,440

Additional paid-in capital
4,503,670

 
4,593,229

Accumulated deficit
(758,758
)
 
(488,782
)
Total stockholders' equity
3,746,321

 
4,105,887

Noncontrolling interests
290,773

 
321,281

Total equity
4,037,094

 
4,427,168

Total liabilities and equity
$
9,606,911

 
$
9,958,148

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

3


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Minimum rents
$
144,991

 
$
154,018

 
$
443,439

 
$
457,514

Percentage rents
2,806

 
3,871

 
6,784

 
9,279

Tenant recoveries
72,897

 
74,447

 
214,257

 
230,568

Other
11,701

 
12,048

 
40,484

 
42,985

Management Companies
10,056

 
8,983

 
31,955

 
28,925

Total revenues
242,451

 
253,367

 
736,919

 
769,271

Expenses:
 
 
 
 
 
 
 
Shopping center and operating expenses
75,598

 
76,310

 
222,527

 
229,544

Management Companies' operating expenses
22,046

 
23,285

 
76,779

 
75,484

REIT general and administrative expenses
5,287

 
6,930

 
21,208

 
23,240

Depreciation and amortization
83,147

 
86,976

 
249,463

 
259,097

 
186,078

 
193,501

 
569,977

 
587,365

Interest expense:
 
 
 
 
 
 
 
Related parties
2,175

 
2,224

 
6,567

 
6,752

Other
41,090

 
37,759

 
120,320

 
114,202

 
43,265

 
39,983

 
126,887

 
120,954

Gain on extinguishment of debt, net

 
(5,284
)
 

 
(1,709
)
Total expenses
229,343

 
228,200

 
696,864

 
706,610

Equity in income of unconsolidated joint ventures
23,993

 
11,261

 
56,772

 
37,537

Co-venture expense
(3,150
)
 
(3,006
)
 
(11,150
)
 
(9,507
)
Income tax (expense) benefit
(2,869
)
 
(905
)
 
178

 
(2,736
)
(Loss) gain on sale or write down of assets, net
(11,854
)
 
(19,321
)
 
37,234

 
426,050

Net income
19,228

 
13,196

 
123,089

 
514,005

Less net income (loss) attributable to noncontrolling interests
1,730

 
(534
)
 
9,710

 
34,138

Net income attributable to the Company
$
17,498

 
$
13,730

 
$
113,379

 
$
479,867

Earnings per common share—net income attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.09

 
$
0.79

 
$
3.25

Diluted
$
0.12

 
$
0.09

 
$
0.79

 
$
3.25

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
141,299,000

 
143,923,000

 
142,188,000

 
147,504,000

Diluted
141,310,000

 
144,036,000

 
142,223,000

 
147,630,000

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

4


THE MACERICH COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 
Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
 
 
 
 
Shares
 
Par
Value
 
 
 
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2017
143,985,036

 
$
1,440

 
$
4,593,229

 
$
(488,782
)
 
$
4,105,887

 
$
321,281

 
$
4,427,168

Net income

 

 

 
113,379

 
113,379

 
9,710

 
123,089

Cumulative effect of adoption of ASU 2016-09

 

 

 
6,484

 
6,484

 

 
6,484

Amortization of share and unit-based plans
87,632

 
1

 
30,436

 

 
30,437

 

 
30,437

Employee stock purchases
20,443

 

 
986

 

 
986

 

 
986

Stock repurchases
(3,627,390
)
 
(36
)
 
(135,176
)
 
(86,216
)
 
(221,428
)
 

 
(221,428
)
Distributions declared ($2.13) per share

 

 

 
(303,623
)
 
(303,623
)
 

 
(303,623
)
Distributions to noncontrolling interests

 

 

 

 

 
(25,110
)
 
(25,110
)
Conversion of noncontrolling interests to common shares
452,468

 
4

 
15,191

 

 
15,195

 
(15,195
)
 

Redemption of noncontrolling interests

 

 
(608
)
 

 
(608
)
 
(301
)
 
(909
)
Adjustment of noncontrolling interests in Operating Partnership

 

 
(388
)
 

 
(388
)
 
388

 

Balance at September 30, 2017
140,918,189

 
$
1,409

 
$
4,503,670

 
$
(758,758
)
 
$
3,746,321

 
$
290,773

 
$
4,037,094

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

5


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
123,089

 
$
514,005

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on early extinguishment of debt, net

 
(1,709
)
Gain on sale or write down of assets, net
(37,234
)
 
(426,050
)
Depreciation and amortization
253,793

 
263,514

Amortization of net premium on mortgage notes payable
(2,799
)
 
(3,082
)
Amortization of share and unit-based plans
25,159

 
27,643

Straight-line rent adjustment
(7,502
)
 
(3,449
)
Amortization of above and below-market leases
(408
)
 
(9,115
)
Provision for doubtful accounts
3,806

 
2,460

Income tax (benefit) expense
(178
)
 
2,736

Equity in income of unconsolidated joint ventures
(56,772
)
 
(37,537
)
Distributions of income from unconsolidated joint ventures

 
5,607

Co-venture expense
11,150

 
9,507

Changes in assets and liabilities, net of acquisitions and dispositions:
 
 
 
Tenant and other receivables
838

 
2,370

Other assets
11,743

 
(6,100
)
Due from affiliates
(13,004
)
 
14,729

Accounts payable and accrued expenses
11,263

 
(6,459
)
Other accrued liabilities
(23,094
)
 
(17,983
)
Net cash provided by operating activities
299,850

 
331,087

Cash flows from investing activities:
 
 
 
Development, redevelopment, expansion and renovation of properties
(90,758
)
 
(153,131
)
Property improvements
(34,425
)
 
(24,638
)
Proceeds from repayment of notes receivable
628

 
3,361

Deferred leasing costs
(25,045
)
 
(21,326
)
Distributions from unconsolidated joint ventures
226,152

 
411,405

Contributions to unconsolidated joint ventures
(80,332
)
 
(404,283
)
Proceeds from sale of assets
168,471

 
696,716

Restricted cash
(785
)
 
(13,978
)
Net cash provided by investing activities
163,906

 
494,126

 
 
 
 

6


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended September 30,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from mortgages, bank and other notes payable
510,000

 
2,716,138

Payments on mortgages, bank and other notes payable
(424,439
)
 
(2,024,965
)
Deferred financing costs
(2,586
)
 
(8,822
)
Payment of finance deposits
(8,600
)
 
(7,200
)
Proceeds from share and unit-based plans
986

 
834

Payment of debt extinguishment costs

 
(12,028
)
Stock repurchases
(221,428
)
 
(800,018
)
Redemption of noncontrolling interests
(909
)
 
(30
)
Settlement of contingent consideration

 
(10,012
)
Dividends and distributions
(328,733
)
 
(667,785
)
Distributions to co-venture partner
(11,005
)
 
(13,654
)
Net cash used in financing activities
(486,714
)
 
(827,542
)
Net decrease in cash and cash equivalents
(22,958
)
 
(2,329
)
Cash and cash equivalents, beginning of period
94,046

 
86,510

Cash and cash equivalents, end of period
$
71,088

 
$
84,181

Supplemental cash flow information:
 
 
 
Cash payments for interest, net of amounts capitalized
$
124,686

 
$
113,187

Non-cash investing and financing transactions:
 
 
 
Accrued development costs included in accounts payable and accrued expenses and other accrued liabilities
$
30,706

 
$
29,777

Mortgage notes payable assumed in exchange for investments in unconsolidated joint ventures
$

 
$
997,695

Mortgage note payable settled by deed-in-lieu of foreclosure
$

 
$
37,000

Conversion of Operating Partnership Units to common stock
$
15,195

 
$
10,720

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

7


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/power 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, 2017, the Company was the sole general partner of and held a 93% 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 "Code").
The property management, leasing and redevelopment of the Company's portfolio is provided by the Company's management companies, Macerich Property Management Company, LLC, a single member Delaware limited liability company, Macerich Management Company, a California corporation, Macerich Arizona Partners LLC, a single member Arizona limited liability company, Macerich Arizona Management LLC, a single member Delaware limited liability company, Macerich Partners of Colorado LLC, a single member 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. All seven of the management companies are collectively referred to herein as the "Management Companies."
All references to the Company in this Quarterly Report on Form 10-Q include the Company, those entities owned or controlled by the Company and predecessors of the Company, unless the context indicates otherwise.
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 in the United States ("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 an independent registered public accounting firm.
The Company's sole significant asset is its investment in the Operating Partnership and as a result, substantially all of the Company's assets and liabilities represent the assets and liabilities of the Operating Partnership. In addition, the Operating Partnership has investments in a number of variable interest entities ("VIEs").
The Operating Partnership's VIEs included the following assets and liabilities:
 
September 30,
2017
 
December 31,
2016
Assets:
 
 
 
Property, net
$
300,149

 
$
307,582

Other assets
70,881

 
68,863

Total assets
$
371,030

 
$
376,445

Liabilities:
 
 
 
Mortgage notes payable
$
130,403

 
$
133,245

Other liabilities
77,272

 
75,913

Total liabilities
$
207,675

 
$
209,158

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

8

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 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 Annual Report on Form 10-K for the year ended December 31, 2016. 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 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, 2016 has been derived from the audited financial statements but does not include all disclosures required by GAAP.
Recent Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, “Revenue From Contracts With Customers,” which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. ASU 2014-09 is effective for the Company beginning January 1, 2018, with early adoption permitted beginning January 1, 2017. The Company has evaluated each of its revenue streams and related accounting policies under the standard. The standard will initially apply to the Company's recognition of management companies and other revenues. This standard will not apply to the Company's recognition of tenant recoveries until January 1, 2019, when it adopts ASU 2016-02, "Leases (Topic 842)", as discussed below. Upon adoption of the standard, the Company has determined that the pattern of revenue recognition for management companies and other revenues will not change. Additionally, the Company will account for its joint venture in Chandler Fashion Center and Freehold Raceway Mall (See Note 10Co-Venture Arrangement) as a financing arrangement. As a result, the Company will replace the co-venture obligation on its consolidated balance sheet with a financing arrangement liability. The financing arrangement liability will be recorded at fair value upon adoption with any subsequent changes in fair value recognized as interest expense in its consolidated statements of operations.
In February 2016, the FASB issued ASU 2016-02, which sets out principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, certain of these costs are capitalizable and therefore this new standard may result in certain of these costs being expensed as incurred after adoption. Additionally, under the standard, certain common area maintenance recoveries must be accounted for as a non-lease component. The Company will evaluate whether bifurcating common area maintenance will affect the timing or recognition of such revenues.
Under ASU 2016-02, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months, regardless of their lease classification. The Company is a lessee on ground leases at certain properties, on certain office space leases and on certain other improvements and equipment. ASU 2016-02 will impact the accounting and disclosure requirements for these leases. ASU 2016-02 is effective for the Company under a modified retrospective approach beginning January 1, 2019. The Company is evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)," which amended the accounting for share-based payments, including the income tax consequences, classification of awards and classification on the statement of cash flows. The Company's adoption of this standard on January 1, 2017 under the modified retrospective method resulted in the recognition of excess tax benefits of $6,484 as a cumulative effect adjustment, which reduced its accumulated deficit and increased its deferred tax assets by the same amount.

9

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
2. Summary of Significant Accounting Policies: (Continued)

Recent Accounting Pronouncements: (Continued)
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash flows (Topic 230)," which amended the accounting for the statement of cash flows by providing guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company's adoption of this standard on January 1, 2017 resulted in the reclassification of $12,028 of debt extinguishment costs from operating activities to financing activities on its consolidated statement of cash flows for the nine months ended September 30, 2016.
On November 17, 2016, the FASB issued ASU 2016-18, “Restricted Cash,” which requires that the statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. This standard states that transfers between cash, cash equivalents, and restricted cash are not part of the entity’s operating, investing, and financing activities. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for the Company beginning January 1, 2018 with early adoption permitted. The Company does not believe that the adoption of ASU 2016-18 will have a significant impact on its consolidated statements of cash flows.
On January 5, 2017, the FASB issued ASU 2017-01, “Business Combinations,” which clarifies the definition of a business. The objective of the standard is to add further guidance that assists entities in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred assets and activities are not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. ASU 2017-01 is effective for the Company beginning January 1, 2018 with early adoption permitted using a prospective transition method. The Company does not believe that the adoption of 2017-01 will have a significant impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The Company is required to adopt ASU 2017-05 beginning January 1, 2018 with early adoption permitted. The Company does not believe that the adoption of ASU No. 2017-05 will have a significant impact on its consolidated financial statements.


10

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

3.
Earnings per Share ("EPS"):
The following table reconciles the numerator and denominator used in the computation of EPS for the three and nine months ended September 30, 2017 and 2016 (shares in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
Net income
$
19,228

 
$
13,196

 
$
123,089

 
$
514,005

Net income attributable to noncontrolling interests
(1,730
)
 
534

 
(9,710
)
 
(34,138
)
Net income attributable to the Company
17,498

 
13,730

 
113,379

 
479,867

Allocation of earnings to participating securities
(193
)
 
(170
)
 
(567
)
 
(586
)
Numerator for basic and diluted EPS—net income attributable to common stockholders
$
17,305

 
$
13,560

 
$
112,812

 
$
479,281

Denominator
 
 
 
 
 
 
 
Denominator for basic EPS—weighted average number of common shares outstanding
141,299

 
143,923

 
142,188

 
147,504

Effect of dilutive securities(1):
 
 
 
 
 
 
 
Share and unit-based compensation plans
11

 
113

 
35

 
126

Denominator for diluted EPS—weighted average number of common shares outstanding
141,310

 
144,036

 
142,223

 
147,630

Earnings per common share—net income attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.09

 
$
0.79

 
$
3.25

Diluted
$
0.12

 
$
0.09

 
$
0.79

 
$
3.25

 
 
 
(1)
Diluted EPS excludes 90,619 and 138,759 convertible preferred partnership units for the three months ended September 30, 2017 and 2016, respectively, and 90,619 and 138,759 convertible preferred partnership units for the nine months ended September 30, 2017 and 2016, respectively, as their impact was antidilutive.
Diluted EPS excludes 10,324,376 and 10,666,565 Operating Partnership units ("OP Units") for the three months ended September 30, 2017 and 2016, respectively, and 10,479,806 and 10,773,029 OP Units for the nine months ended September 30, 2017 and 2016, respectively, as their impact was antidilutive.

11

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

4.
Investments in Unconsolidated Joint Ventures:
The Company has made the following recent investments and dispositions in its unconsolidated joint ventures:
On January 6, 2016, the Company sold a 40% ownership interest in Arrowhead Towne Center, a 1,197,000 square foot regional shopping center in Glendale, Arizona, for $289,496, resulting in a gain on the sale of assets of $101,629. The sales price was funded by a cash payment of $129,496 and the assumption of a pro rata share of the mortgage note payable on the property of $160,000. The Company used the cash proceeds from the sale to pay down its line of credit and for general corporate purposes, which included funding the Special Dividend (See Note 12Stockholders' Equity). Upon completion of the sale of the ownership interest, the Company no longer has a controlling interest in the joint venture due to the substantive participation rights of the outside partner. Accordingly, the Company accounts for its investment in Arrowhead Towne Center under the equity method of accounting.
On January 14, 2016, the Company formed a joint venture, whereby the Company sold a 49% ownership interest in Deptford Mall, a 1,040,000 square foot regional shopping center in Deptford, New Jersey; FlatIron Crossing, a 1,432,000 square foot regional shopping center in Broomfield, Colorado; and Twenty Ninth Street, an 847,000 square foot regional shopping center in Boulder, Colorado (the "MAC Heitman Portfolio"), for $771,478, resulting in a gain on the sale of assets of $340,734. The sales price was funded by a cash payment of $478,608 and the assumption of a pro rata share of the mortgage notes payable on the properties of $292,870. The Company used the cash proceeds from the sale to pay down its line of credit and for general corporate purposes. Upon completion of the sale of the ownership interest, the Company no longer has a controlling interest in the joint venture due to the substantive participation rights of the outside partner. Accordingly, the Company accounts for its investment in the MAC Heitman Portfolio under the equity method of accounting.
On March 1, 2016, the Company, through a 50/50 joint venture, acquired Country Club Plaza, a 1,001,000 square foot regional shopping center in Kansas City, Missouri, for a purchase price of $660,000. The Company funded its pro rata share of the purchase price of $330,000 from borrowings under its line of credit. On March 28, 2016, the joint venture placed a $320,000 loan on the property that bears interest at an effective rate of 3.88% and matures on April 1, 2026. The Company used its pro rata share of the proceeds to pay down its line of credit and for general corporate purposes.
On March 17, 2017, the Company's joint venture in Country Club Plaza sold an office building for $78,000, resulting in a gain on sale of assets of $4,580. The Company's pro rata share of the gain on the sale of assets of $2,290 was included in equity in income from joint ventures. The Company used its share of the proceeds to fund repurchases under the 2017 Stock Buyback Program (See Note 12Stockholders' Equity).
On September 18, 2017, the Company's joint venture in Fashion District Philadelphia sold an office building for $61,500, resulting in a gain on sale of assets of $13,426. The Company's pro rata share of the gain on the sale of assets of $6,713 was included in equity in income from joint ventures. The Company used its share of the proceeds to fund repurchases under the 2017 Stock Buyback Program (See Note 12Stockholders' Equity).


12

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 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,
2017
 
December 31,
2016
Assets(1):
 
 
 
Property, net
$
9,058,868

 
$
9,176,642

Other assets
655,905

 
614,607

Total assets
$
9,714,773

 
$
9,791,249

Liabilities and partners' capital(1):
 
 
 
Mortgage and other notes payable(2)
$
5,311,238

 
$
5,224,713

Other liabilities
438,235

 
403,369

Company's capital
2,166,954

 
2,279,819

Outside partners' capital
1,798,346

 
1,883,348

Total liabilities and partners' capital
$
9,714,773

 
$
9,791,249

Investments in unconsolidated joint ventures:
 
 
 
Company's capital
$
2,166,954

 
$
2,279,819

Basis adjustment(3)
(566,917
)
 
(584,887
)
 
$
1,600,037

 
$
1,694,932

 
 
 
 
Assets—Investments in unconsolidated joint ventures
$
1,688,606

 
$
1,773,558

Liabilities—Distributions in excess of investments in unconsolidated joint ventures
(88,569
)
 
(78,626
)
 
$
1,600,037

 
$
1,694,932

 
 
 
(1)
These amounts include the assets of $3,120,534 and $3,179,255 of Pacific Premier Retail LLC (the "PPR Portfolio") as of September 30, 2017 and December 31, 2016, respectively, and liabilities of $1,878,719 and $1,887,952 of the PPR Portfolio as of September 30, 2017 and December 31, 2016, respectively.
(2)
Included in mortgage and other notes payable are amounts due to an affiliate of Northwestern Mutual Life ("NML") of $484,716 and $265,863 as of September 30, 2017 and December 31, 2016, respectively. NML is considered a related party because it is a joint venture partner with the Company in Macerich Northwestern Associates—Broadway Plaza. Interest expense on these borrowings was $4,903 and $2,775 for the three months ended September 30, 2017 and 2016, respectively, and $12,992 and $14,133 for the nine months ended September 30, 2017 and 2016, respectively.
(3)
The Company amortizes the difference between the cost of its investments in unconsolidated joint ventures and the book value of the underlying equity into income on a straight-line basis consistent with the lives of the underlying assets. The amortization of this difference was $4,227 and $4,988 for the three months ended September 30, 2017 and 2016, respectively, and $12,451 and $14,114 for the nine months ended September 30, 2017 and 2016, respectively.

13

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:
 
PPR Portfolio
 
 
Other
Joint
Ventures
 
Total
Three Months Ended September 30, 2017
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
35,052

 
 
$
123,663

 
$
158,715

Percentage rents
903

 
 
3,953

 
4,856

Tenant recoveries
12,015

 
 
47,841

 
59,856

Other
1,713

 
 
12,329

 
14,042

Total revenues
49,683

 
 
187,786

 
237,469

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
10,591

 
 
60,394

 
70,985

Interest expense
16,890

 
 
33,214

 
50,104

Depreciation and amortization
25,449

 
 
62,958

 
88,407

Total operating expenses
52,930

 
 
156,566

 
209,496

Gain on sale or write down of assets, net

 
 
13,426

 
13,426

Net (loss) income
$
(3,247
)
 
 
$
44,646

 
$
41,399

Company's equity in net income
$
620

 
 
$
23,373

 
$
23,993

Three Months Ended September 30, 2016
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
33,332

 
 
$
121,109

 
$
154,441

Percentage rents
1,117

 
 
4,228

 
5,345

Tenant recoveries
11,933

 
 
48,540

 
60,473

Other
987

 
 
11,697

 
12,684

Total revenues
47,369

 
 
185,574

 
232,943

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
9,897

 
 
61,335

 
71,232

Interest expense
16,688

 
 
32,126

 
48,814

Depreciation and amortization
27,091

 
 
70,030

 
97,121

Total operating expenses
53,676

 
 
163,491

 
217,167

Loss on sale or write down of assets, net

 
 
(343
)
 
(343
)
Net (loss) income
$
(6,307
)
 
 
$
21,740

 
$
15,433

Company's equity in net (loss) income
$
(871
)
 
 
$
12,132

 
$
11,261

 
 
 
 
 
 
 



14

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. Investments in Unconsolidated Joint Ventures: (Continued)

 
PPR Portfolio
 
 
Other
Joint
Ventures
 
Total
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
100,633

 
 
$
373,931

 
$
474,564

Percentage rents
1,854

 
 
7,817

 
9,671

Tenant recoveries
34,827

 
 
141,875

 
176,702

Other
4,141

 
 
36,857

 
40,998

Total revenues
141,455

 
 
560,480

 
701,935

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
30,062

 
 
181,475

 
211,537

Interest expense
50,291

 
 
98,469

 
148,760

Depreciation and amortization
76,527

 
 
187,927

 
264,454

Total operating expenses
156,880

 
 
467,871

 
624,751

(Loss) gain on sale or write down of assets, net
(35
)
 
 
18,005

 
17,970

Net (loss) income
$
(15,460
)
 
 
$
110,614

 
$
95,154

Company's equity in net (loss) income
$
(1,376
)
 
 
$
58,148

 
$
56,772

Nine Months Ended September 30, 2016
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
95,389

 
 
$
347,146

 
$
442,535

Percentage rents
2,219

 
 
8,605

 
10,824

Tenant recoveries
35,828

 
 
138,635

 
174,463

Other
4,514

 
 
34,801

 
39,315

Total revenues
137,950

 
 
529,187

 
667,137

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
28,997

 
 
173,563

 
202,560

Interest expense
47,957

 
 
91,130

 
139,087

Depreciation and amortization
81,971

 
 
187,327

 
269,298

Total operating expenses
158,925

 
 
452,020

 
610,945

Loss on sale or write down of assets, net

 
 
(343
)
 
(343
)
Net (loss) income
$
(20,975
)
 
 
$
76,824

 
$
55,849

Company's equity in net (loss) income
$
(3,845
)
 
 
$
41,382

 
$
37,537


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

15

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

5.
Property, net:
Property, net consists of the following:
 
September 30,
2017
 
December 31,
2016
Land
$
1,578,877

 
$
1,607,590

Buildings and improvements
6,412,728

 
6,511,741

Tenant improvements
613,854

 
622,878

Equipment and furnishings
184,379

 
177,036

Construction in progress
342,539

 
289,966

 
9,132,377

 
9,209,211

Less accumulated depreciation
(1,967,728
)
 
(1,851,901
)
 
$
7,164,649

 
$
7,357,310

Depreciation expense was $69,343 and $68,792 for the three months ended September 30, 2017 and 2016, respectively, and $207,663 and $206,870 for the nine months ended September 30, 2017 and 2016, respectively.
The (loss) gain on sale or write down of assets, net was $(11,854) and $(19,321) for the three months ended September 30, 2017 and 2016, respectively, and $37,234 and $426,050 for the nine months ended September 30, 2017 and 2016, respectively.
The (loss) gain on sale or write down of assets, net for the nine months ended September 30, 2017 includes a gain of $59,698 on the sale of Cascade Mall and Northgate Mall (See Note 14Dispositions) offset in part by a loss of $10,138 on the write down of an investment in non-real estate assets.
The (loss) gain on sale or write down of assets, net for the nine months ended September 30, 2016 includes a gain of $101,629 on the sale of a 40% ownership interest in Arrowhead Towne Center (See Note 4Investments in Unconsolidated Joint Ventures), a gain of $340,734 on the sale of a 49% ownership interest in the MAC Heitman Portfolio (See Note 4Investments in Unconsolidated Joint Ventures), a gain of $24,894 on the sale of Capitola Mall (See Note 14Dispositions), a loss of $3,066 on the sale of a former Mervyn's store (See Note 14Dispositions) and a loss of $12,180 on an adjustment to contingent consideration (See Note 13—Acquisitions).
The (loss) gain on sale or write down of assets, net also includes impairment losses of $12,036 on Southridge Center for the three and nine months ended September 30, 2017, $23,335 on Promenade at Casa Grande for the three and nine months ended September 30, 2016 and $7,188 on The Marketplace at Flagstaff for the nine months ended September 30, 2016. The impairment losses are due to the reduction of the estimated holding period of the properties.
The following table summarizes certain of the Company's assets that were measured on a nonrecurring basis as a result of impairment charges recorded for the three and nine months ended September 30, 2017 and 2016 as described above:
 
 
Total Fair Value Measurement
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Unobservable Inputs
 
Significant Unobservable Inputs
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
2017
 
$
11,500

 
$

 
$
11,500

 
$

2016
 
$
66,000

 
$

 
$

 
$
66,000


16

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
5. Property, net: (Continued)


The fair value relating to impairment assessments were based upon a discounted cash flow model that includes all cash inflows and outflows over a specific holding period, or the negotiated sales price, if applicable. Projected cash flows are comprised of contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Terminal capitalization rates and discount rates utilized in these models are based on a reasonable range of current market rates for each property analyzed. Based upon these inputs, the Company determined that its valuations of properties using a discounted cash flow model are classified within Level 3 of the fair value hierarchy.
The following table sets forth quantitative information about the unobservable inputs of the Company’s Level 3 real estate recorded as of September 30, 2016:
Terminal capitalization rate
 
 
7.0% - 8.0%
 
Discount rate
 
 
8.0% - 9.5%
 
Market rents per square foot
 
 
$5.75 - $20.00
 
6.
Tenant and Other Receivables, net:
Included in tenant and other receivables, net is an allowance for doubtful accounts of $2,559 and $1,991 at September 30, 2017 and December 31, 2016, respectively. Also included in tenant and other receivables, net are accrued percentage rents of $1,866 and $9,509 at September 30, 2017 and December 31, 2016, respectively, and a deferred rent receivable due to straight-line rent adjustments of $62,182 and $56,761 at September 30, 2017 and December 31, 2016, respectively.
On March 17, 2014, in connection with the sale of Lake Square Mall, the Company issued a note receivable for $6,500 that bore interest at an effective rate of 6.5%, which was collateralized by a trust deed on Lake Square Mall and that was to mature on March 17, 2018. At September 30, 2017 and December 31, 2016, the note had a balance of $6,245 and $6,284, respectively. On October 20, 2017, the note was repaid in full. The Company used the proceeds from the repayment for general corporate purposes.

17

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

7.
Deferred Charges and Other Assets, net:
Deferred charges and other assets, net consist of the following:
 
September 30,
2017
 
December 31,
2016
Leasing
$
232,443

 
$
239,983

Intangible assets:
 
 
 
In-place lease values
112,994

 
140,437

Leasing commissions and legal costs
27,621

 
32,384

Above-market leases
171,156

 
181,851

Deferred tax assets
44,964

 
38,301

Deferred compensation plan assets
49,430

 
42,711

Other assets
59,358

 
72,206

 
697,966

 
747,873

Less accumulated amortization(1)
(258,471
)
 
(269,815
)
 
$
439,495

 
$
478,058

 
 
 
(1)
Accumulated amortization includes $75,818 and $88,785 relating to in-place lease values, leasing commissions and legal costs at September 30, 2017 and December 31, 2016, respectively. Amortization expense of in-place lease values, leasing commissions and legal costs was $4,206 and $8,983 for the three months ended September 30, 2017 and 2016, respectively, and $15,755 and $26,033 for the nine months ended September 30, 2017 and 2016, respectively.
The allocated values of above-market leases and below-market leases consist of the following:
 
September 30,
2017
 
December 31,
2016
Above-Market Leases
 
 
 
Original allocated value
$
171,156

 
$
181,851

Less accumulated amortization
(61,000
)
 
(57,505
)
 
$
110,156

 
$
124,346

Below-Market Leases(1)
 
 
 
Original allocated value
$
128,750

 
$
144,713

Less accumulated amortization
(57,314
)
 
(58,400
)
 
$
71,436

 
$
86,313

 
 
 
(1)
Below-market leases are included in other accrued liabilities.

18

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

8.
Mortgage Notes Payable:
Mortgage notes payable at September 30, 2017 and December 31, 2016 consist of the following:
 
 
Carrying Amount of Mortgage Notes(1)
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
Property Pledged as Collateral
 
Related Party
 
Other
 
Related Party
 
Other
 
Effective Interest
Rate(2)
 
Monthly
Debt
Service(3)
 
Maturity
Date(4)
Chandler Fashion Center(5)
 
$

 
$
199,885

 
$

 
$
199,833

 
3.77
%
 
$
625

 
2019

Danbury Fair Mall
 
105,448

 
105,448

 
107,929

 
107,928

 
5.53
%
 
1,538

 
2020

Fashion Outlets of Chicago(6)
 

 
199,218

 

 
198,966

 
2.90
%
 
457

 
2020

Fashion Outlets of Niagara Falls USA
 

 
113,534

 

 
115,762

 
4.89
%
 
727

 
2020

Freehold Raceway Mall(5)(7)
 

 
217,379

 

 
220,643

 
4.20
%
 
1,132

 
2018

Fresno Fashion Fair
 

 
323,208

 

 
323,062

 
3.67
%
 
971

 
2026

Green Acres Commons(8)
 

 
107,446

 

 

 
3.96
%
 
312

 
2021

Green Acres Mall
 

 
293,004

 

 
297,798

 
3.61
%
 
1,447

 
2021

Kings Plaza Shopping Center
 

 
449,709

 

 
456,958

 
3.67
%
 
2,229

 
2019

Northgate Mall(9)
 

 

 

 
63,434

 

 

 

Oaks, The
 

 
197,875

 

 
201,235

 
4.14
%
 
1,064

 
2022

Pacific View
 

 
125,136

 

 
127,311

 
4.08
%
 
668

 
2022

Queens Center
 

 
600,000

 

 
600,000

 
3.49
%
 
1,744

 
2025

Santa Monica Place(10)
 

 
215,508

 

 
219,564

 
2.99
%
 
1,004

 
2018

SanTan Village Regional Center
 

 
125,470

 

 
127,724

 
3.14
%
 
589

 
2019

Stonewood Center(11)
 

 
94,994

 

 
99,520

 
1.80
%
 
640

 
2017

Towne Mall
 

 
21,266

 

 
21,570

 
4.48
%
 
117

 
2022

Tucson La Encantada
 
67,362

 

 
68,513

 

 
4.23
%
 
368

 
2022

Victor Valley, Mall of
 

 
114,602

 

 
114,559

 
4.00
%
 
380

 
2024

Vintage Faire Mall
 

 
265,195

 

 
269,228

 
3.55
%
 
1,256

 
2026

Westside Pavilion
 

 
141,987

 

 
143,881

 
4.49
%
 
783

 
2022

 
 
$
172,810

 
$
3,910,864

 
$
176,442

 
$
3,908,976

 
 

 
 

 
 


(1)
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. Debt premiums (discounts) consist of the following:
Property Pledged as Collateral
September 30,
2017
 
December 31,
2016
Fashion Outlets of Niagara Falls USA
$
2,862

 
$
3,558

Stonewood Center
246

 
2,349

 
$
3,108

 
$
5,907

The mortgage notes payable balances also include unamortized deferred finance costs that are amortized into interest expense over the remaining term of the related debt in a manner that approximates the effective interest method. Unamortized deferred finance costs were $12,810 and $12,716 at September 30, 2017 and December 31, 2016, respectively.
(2)
The interest rate disclosed represents the effective interest rate, including the debt premiums (discounts) and deferred finance costs.
(3)
The monthly debt service represents the payment of principal and interest.
(4)
The maturity date assumes that all extension options are fully exercised and that the Company does not opt to refinance the debt prior to these dates. These extension options are at the Company's discretion, subject to certain conditions, which the Company believes will be met.

19

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
8. Mortgage Notes Payable: (Continued)

(5)
A 49.9% interest in the loan has been assumed by a third party in connection with a co-venture arrangement (See Note 10Co-Venture Arrangement).
(6)
The loan bears interest at LIBOR plus 1.50% and matures on March 31, 2020. At September 30, 2017 and December 31, 2016, the total interest rate was 2.90% and 2.43%, respectively.
(7)
On October 19, 2017, the joint venture replaced the existing loan on the property with a new $400,000 loan that bears interest at 3.90% and matures on November 1, 2029 (See Note 19Subsequent Events).
(8)
On September 29, 2017, the Company placed a new $110,000 loan on the property that bears interest at LIBOR plus 2.15% and matures on March 29, 2021. The loan can be expanded, depending on certain conditions, up to $130,000. At September 30, 2017, the total interest rate was 3.96%.
(9)
On January 18, 2017, the loan was paid off in connection with the sale of the underlying property (See Note 14Dispositions).
(10)
On October 13, 2017, the Company entered into a loan commitment with a lender to replace the existing loan on the property with a new $300,000 five-year floating rate loan. The new loan is expected to close in the fourth quarter of 2017.  The Company expects to use the excess proceeds to pay down its line of credit (See Note 19Subsequent Events).
(11)
On November 1, 2017, the Company paid off the loan on the property (See Note 19Subsequent Events).
Most of the mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.
The Company's mortgage notes payable are secured by the properties on which they are placed and are non-recourse to the Company.
The Company expects that all loan maturities during the next twelve months will be refinanced, restructured, extended and/or paid-off from the Company's line of credit or with cash on hand.
Total interest expense capitalized was $3,428 and $2,707 for the three months ended September 30, 2017 and 2016, respectively, and $9,405 and $7,572 for the nine months ended September 30, 2017 and 2016, respectively.
Related party mortgage notes payable are amounts due to an affiliate of NML. See Note 16Related Party Transactions for interest expense associated with loans from NML.
The estimated fair value (Level 2 measurement) of mortgage notes payable at September 30, 2017 and December 31, 2016 was $4,112,364 and $4,126,819, respectively, based on current interest rates for comparable loans. 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.
9.
Bank and Other Notes Payable:
Bank and other notes payable consist of the following:
Line of Credit:
The Company has a $1,500,000 revolving line of credit that bears interest at LIBOR plus a spread of 1.30% to 1.90%, depending on the Company's overall leverage level, and matures on July 6, 2020 with a one-year extension option. The line of credit can be expanded, depending on certain conditions, up to a total facility of $2,000,000.
Based on the Company's leverage level as of September 30, 2017, the borrowing rate on the facility was LIBOR plus 1.45%. As of September 30, 2017 and December 31, 2016, borrowings under the line of credit, were $970,000 and $885,000, respectively, less unamortized deferred finance costs of $8,176 and $10,039, respectively, at a total interest rate of 3.01% and 2.40%, respectively. The estimated fair value (Level 2 measurement) of the line of credit at September 30, 2017 and December 31, 2016 was $960,233 and $865,921, respectively, based on a present value model using a credit interest rate spread offered to the Company for comparable debt.

20

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

9. Bank and Other Notes Payable: (Continued)

Prasada Note:
On March 29, 2013, the Company issued a $13,330 note payable that bears interest at 5.25% and matures on May 30, 2021. The note payable is collateralized by a portion of a development reimbursement agreement with the City of Surprise, Arizona. At September 30, 2017 and December 31, 2016, the note had a balance of $4,933 and $5,521, respectively. The estimated fair value (Level 2 measurement) of the note at September 30, 2017 and December 31, 2016 was $5,067 and $5,786, respectively, based on current interest rates for comparable notes. 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 collateral for the underlying debt.
As of September 30, 2017 and December 31, 2016, the Company was in compliance with all applicable financial loan covenants.
10.
Co-Venture Arrangement:
On September 30, 2009, the Company formed a joint venture, whereby a third party acquired a 49.9% interest in Freehold Raceway Mall, a 1,671,000 square foot regional shopping center in Freehold, New Jersey, and Chandler Fashion Center, a 1,318,000 square foot regional shopping center in Chandler, Arizona.
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 was established for the amount of $168,154, representing the net cash proceeds received from the third party. The co-venture obligation is increased for the allocation of income to the co-venture partner and decreased for distributions to the co-venture partner. The co-venture obligation was $59,118 and $58,973 at September 30, 2017 and December 31, 2016, respectively.
11. Noncontrolling Interests:
The Company allocates net income of the Operating Partnership based on the weighted average ownership interest during the period. The net income of the Operating Partnership that is not attributable to the Company is reflected in the consolidated statements of operations as noncontrolling interests. The Company adjusts the noncontrolling interests in the Operating Partnership at the end of each period to reflect its ownership interest in the Company. The Company had a 93% ownership interest in the Operating Partnership as of September 30, 2017 and December 31, 2016. The remaining 7% limited partnership interest as of September 30, 2017 and December 31, 2016 was owned by certain of the Company's executive officers and directors, certain of their affiliates and other third party investors in the form of OP Units. The OP Units may be redeemed for shares of 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 10 trading days ending on the respective balance sheet date. Accordingly, as of September 30, 2017 and December 31, 2016, the aggregate redemption value of the then-outstanding OP Units not owned by the Company was $555,597 and $733,141, 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. The Company may redeem them for cash or shares of the Company's stock at the Company's option and they 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.

21

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

12.
Stockholders' Equity:
2015 Stock Buyback Program:
On September 30, 2015, the Company's Board of Directors authorized the repurchase of up to $1,200,000 of the Company's outstanding common shares over the period ending September 30, 2017, as market conditions warranted.
On November 12, 2015, the Company entered into an accelerated share repurchase program ("ASR") to repurchase $400,000 of the Company's common stock. In accordance with the ASR, the Company made a prepayment of $400,000 and received an initial share delivery of 4,140,788 shares. On January 19, 2016, the ASR was completed and the Company received delivery of an additional 970,609 shares. The average price of the 5,111,397 shares repurchased under the ASR was $78.26 per share. The ASR was funded from proceeds in connection with the financing and sale of a 40% ownership interest in the PPR Portfolio.
On February 17, 2016, the Company entered into an ASR to repurchase an additional $400,000 of the Company's common stock. In accordance with the ASR, the Company made a prepayment of $400,000 and received an initial share delivery of 4,222,193 shares. On April 19, 2016, the ASR was completed and the Company received delivery of an additional 861,235 shares. The average price of the 5,083,428 shares repurchased under the ASR was $78.69 per share. The ASR was funded from borrowings under the Company's line of credit, which had been paid down from the proceeds from the financings and sale of ownership interests in Arrowhead Towne Center and the MAC Heitman Portfolio (See Note 4Investments in Unconsolidated Joint Ventures).
On May 9, 2016, the Company entered into an ASR to repurchase the remaining $400,000 of the Company's common stock authorized for repurchase. In accordance with the ASR, the Company made a prepayment of $400,000 and received an initial share delivery of 3,964,812 shares. On July 11, 2016, the ASR was completed and the Company received delivery of an additional 1,104,162 shares. The average price of the 5,068,974 shares repurchased under the ASR was $78.91 per share. The ASR was funded from borrowings under the Company's line of credit, which had been paid down from the proceeds from the financings and sale of ownership interests in Arrowhead Towne Center and the MAC Heitman Portfolio (See Note 4Investments in Unconsolidated Joint Ventures).
2017 Stock Buyback Program:
On February 12, 2017, the Company's Board of Directors authorized the repurchase of up to $500,000 of its outstanding common shares as market conditions and the Company’s liquidity warrant. Repurchases may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including ASR transactions, or other methods of acquiring shares and pursuant to Rule 10b5-1 of the Securities Act of 1934, from time to time as permitted by securities laws and other legal requirements.
During the period from February 12, 2017 to September 30, 2017, the Company repurchased a total of 3,627,390 of its common shares for $221,428, representing an average price of $61.01 per share. The Company funded the repurchases from the net proceeds of the sale of Cascade Mall and Northgate Mall (See Note 14Dispositions), its share of the proceeds from the sale of office buildings at Fashion District Philadelphia and Country Club Plaza (See Note 4Investments in Unconsolidated Joint Ventures) and from borrowings under its line of credit.
Special Dividends:
On October 30, 2015, the Company declared two special dividends/distributions ("Special Dividend"), each of $2.00 per share of common stock and per OP Unit. The first Special Dividend was paid on December 8, 2015 to common stockholders and OP Unit holders of record on November 12, 2015. The second Special Dividend was paid on January 6, 2016 to common stockholders and OP Unit holders of record on November 12, 2015. The Special Dividends were funded from proceeds in connection with the financing and sale of ownership interests in the PPR Portfolio and Arrowhead Towne Center (See Note 4Investments in Unconsolidated Joint Ventures).

22

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
12. Stockholders' Equity: (Continued)

At-The-Market Stock Offering Program ("ATM Program"):
On August 20, 2014, the Company entered into an equity distribution agreement with a number of sales agents (the "ATM Program") to issue and sell, from time to time, shares of common stock, par value $0.01 per share, having an aggregate offering price of up to $500,000 (the “ATM Shares”). Sales of the ATM Shares could have been made in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an “at the market” offering, which included sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange. The Company agreed to pay each sales agent a commission that was not to exceed, but could have been lower than, 2% of the gross proceeds of the ATM Shares sold through such sales agent under the distribution agreement. The ATM program expired by its term in August 2017. No shares were sold under the program.
13.
Acquisitions:
Fashion Outlets of Chicago:
On October 31, 2014, the Company purchased the outside ownership interest in its consolidated joint venture in Fashion Outlets of Chicago for $69,987. The purchase price was funded by a cash payment of $55,867 and the settlement of the balance on notes receivables of $14,120. The purchase agreement included contingent consideration based on the financial performance of Fashion Outlets of Chicago at an agreed upon date in 2016. On August 19, 2016, the Company paid $23,800 in full settlement of the contingent consideration obligation.
14.
Dispositions:
The following are recent dispositions of properties:
On April 13, 2016, the Company sold Capitola Mall, a 586,000 square foot regional shopping center in Capitola, California, for $93,000, resulting in a gain on the sale of assets of $24,894. The Company used the proceeds from the sale to pay down its line of credit and for general corporate purposes.
On May 31, 2016, the Company sold a former Mervyn's store in Yuma, Arizona, for $3,200, resulting in a loss on the sale of assets of $3,066. The Company used the proceeds from the sale to pay down its line of credit and for general corporate purposes.
On July 15, 2016, the Company conveyed Flagstaff Mall, a 347,000 square foot regional shopping center in Flagstaff, Arizona, to the mortgage lender by a deed-in-lieu of foreclosure and was discharged from the mortgage note payable. The loan was non-recourse to the Company. As a result, the Company recognized a gain on the extinguishment of debt of $5,284.
On January 18, 2017, the Company sold Cascade Mall, a 589,000 square foot regional shopping center in Burlington, Washington; and Northgate Mall, a 750,000 square foot regional shopping center in San Rafael, California, in a combined transaction for $170,000, resulting in a gain on the sale of assets of $59,698. The proceeds were used to pay off the mortgage note payable on Northgate Mall and to repurchase shares of the Company's common stock under the 2017 Stock Buyback Program (See Note 12Stockholders' Equity).
15.
Commitments and Contingencies:
The Company has certain properties that are subject to non-cancelable operating ground leases. The leases expire at various times through 2098, subject in some cases to options to extend the terms of the lease. Certain leases provide for contingent rent payments based on a percentage of base rental income, as defined in the lease. Ground lease rent expense was $2,589 and $2,395 for the three months ended September 30, 2017 and 2016, respectively, and $7,757 and $7,312 for the nine months ended September 30, 2017 and 2016, respectively. No contingent rent was incurred during the three and nine months ended September 30, 2017 or 2016.

23

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

15. Commitments and Contingencies: (Continued)

As of September 30, 2017, the Company was contingently liable for $60,927 in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result in a liability to the Company.
The Company has entered into a number of construction agreements related to its redevelopment and development activities. Obligations under these agreements are contingent upon the completion of the services within the guidelines specified in the agreements. At September 30, 2017, the Company had $62,609 in outstanding obligations which it believes will be settled in the next twelve months.
16.
Related Party Transactions:
Certain unconsolidated joint ventures have engaged the Management Companies to manage the operations of the Centers. Under these arrangements, the Management Companies are reimbursed for compensation paid to on-site employees, leasing agents and project managers at the Centers, as well as insurance costs and other administrative expenses.
The following are fees charged to unconsolidated joint ventures:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Management fees
$
4,749

 
$
4,271

 
$
13,914

 
$
13,240

Development and leasing fees
3,385

 
2,952

 
11,376

 
10,149

 
$
8,134

 
$
7,223

 
$
25,290

 
$
23,389

Certain mortgage notes on the properties are held by NML (See Note 8Mortgage Notes Payable). Interest expense in connection with these notes was $2,175 and $2,224 for the three months ended September 30, 2017 and 2016, respectively, and $6,567 and $6,752 for the nine months ended September 30, 2017 and 2016, respectively. Included in accounts payable and accrued expenses is interest payable on these notes of $721 and $736 at September 30, 2017 and December 31, 2016, respectively.
Due from (to) affiliates includes unreimbursed and/or prepaid costs and fees from unconsolidated joint ventures due to (from) the Management Companies. As of September 30, 2017 and December 31, 2016, the amounts due from (to) the unconsolidated joint ventures was $4,905 and $(6,809), respectively.
In addition, due from affiliates at September 30, 2017 and December 31, 2016 included a note receivable from RED/303 LLC ("RED") that bears interest at 5.25% and matures on May 30, 2021. Interest income earned on this note was $66 and $81 for the three months ended September 30, 2017 and 2016, respectively, and $204 and $294 for the nine months ended September 30, 2017 and 2016, respectively. The balance on this note was $4,998 and $5,593 at September 30, 2017 and December 31, 2016, respectively. RED is considered a related party because it is a partner in a joint venture development project. The note is collateralized by RED's membership interest in the development project.
Also included in due from affiliates is a note receivable from Lennar Corporation that bears interest at LIBOR plus 2% and matures upon the completion of certain milestones in connection with the development of Fashion Outlets of San Francisco. Interest income earned on this note was $621 and $583 for the three months ended September 30, 2017 and 2016, respectively, and $1,839 and $1,629 for the nine months ended September 30, 2017 and 2016, respectively. The balance on this note was $71,281 and $69,443 at September 30, 2017 and December 31, 2016, respectively. Lennar Corporation is considered a related party because it is a joint venture partner in Fashion Outlets of San Francisco.

24

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

17.
Share and Unit-Based Plans:
Under the Long-Term Incentive Plan ("LTIP"), each award recipient is issued a form of units ("LTIP Units") in the Operating Partnership. Upon the occurrence of specified events and subject to the satisfaction of applicable vesting conditions, LTIP Units (after conversion into OP Units) are ultimately redeemable for common stock of the Company, or cash at the Company's option, on a one-unit for one-share basis. LTIP Units receive cash dividends based on the dividend amount paid on the common stock of the Company. The LTIP may include both market-indexed awards and service-based awards.
The market-indexed LTIP Units vest over the service period of the award based on the percentile ranking of the Company in terms of total return to the stockholders (the "Total Return") per common stock share relative to the Total Return of a group of peer REITs, as measured at the end of the measurement period.
On January 1, 2017, the Company granted 66,079 LTIP Units with a grant date fair value of $70.84 per LTIP Unit that will vest in equal annual installments over a service period ending December 31, 2019. Concurrently, the Company granted 297,849 market-indexed LTIP Units ("2017 LTIP Units") at a grant date fair value of $47.15 per LTIP Unit that vest over a service period ending December 31, 2019. The fair value of the 2017 LTIP Units was estimated on the date of grant using a Monte Carlo Simulation model that assumed a risk free interest rate of 1.49% and an expected volatility of 20.75%.
On March 3, 2017, the Company granted 134,742 LTIP Units at a fair value of $66.57 per LTIP Unit that were fully vested on the grant date.
On May 30, 2017, the Company granted 25,000 non-qualified stock options with a grant date fair value of $10.02 that will vest on May 30, 2019. The Company measured the value of each option awarded using the Black-Scholes Option Pricing Model based upon the following assumptions: volatility of 30.19%, dividend yield of 4.93%, risk free rate of 2.08%, current value of $57.55 and an expected term of 8 years.
On June 1, 2017, the Company granted 1,522 LTIP Units with a grant date fair value of $58.31 per LTIP Unit that will vest in equal annual installments over a service period ending May 29, 2020. Concurrently, the Company granted 6,714 market-indexed LTIP Units at a grant date fair value of $39.66 per LTIP Unit that vest over a service period ending May 29, 2020. The fair value of the market-indexed LTIP Units was estimated on the date of grant using a Monte Carlo Simulation model that assumed a risk free interest rate of 1.45% and an expected volatility of 21.40%.
The following summarizes the compensation cost under the share and unit-based plans:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
LTIP Units
$
5,269

 
$
5,204

 
$
24,892

 
$
27,752

Stock awards

 

 

 
20

Stock units
1,002

 
965

 
4,947

 
5,339

Stock options
34

 
4

 
53

 
12

Phantom stock units
185

 
212

 
545

 
1,010

 
$
6,490

 
$
6,385

 
$
30,437

 
$
34,133


The Company capitalized share and unit-based compensation costs of $983 and $750 for the three months ended September 30, 2017 and 2016, respectively, and $5,278 and $6,490 for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized compensation costs of share and unit-based plans at September 30, 2017 consisted of $5,554 from LTIP Units, $4,338 from stock units, $208 from stock options and $466 from phantom stock units.
The following table summarizes the activity of the non-vested LTIP Units, phantom stock units and stock units:

25

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
17. Share and Unit-Based Plans: (Continued)

 
LTIP Units
 
Phantom Stock Units
 
Stock Units
 
Units
 
Value(1)
 
Units
 
Value(1)
 
Units
 
Value(1)
Balance at January 1, 2017
322,572

 
$
58.18

 
5,845

 
$
81.47

 
148,428

 
$
78.53

Granted
506,906

 
55.33

 
8,439

 
68.34

 
86,426

 
66.47

Vested
(134,742
)
 
66.57

 
(8,166
)
 
71.85

 
(80,804
)
 
75.67

Forfeited

 

 

 

 
(2,695
)
 
69.57

Balance at September 30, 2017
694,736

 
$
54.48

 
6,118

 
$
76.20

 
151,355

 
$
73.32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Value represents the weighted average grant date fair value.

The following table summarizes the activity of the stock appreciations rights ("SARs") and stock options outstanding:
 
SARs
 
Stock Options
 
Units
 
Value(1)
 
Units
 
Value(1)
Balance at January 1, 2017
284,146

 
$
53.85

 
10,565

 
$
56.77

Granted

 

 
25,000

 
57.55

Exercised

 

 

 

Balance at September 30, 2017
284,146

 
$
53.85

 
35,565

 
$
57.32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Value represents the weighted average exercise price.