10-Q 1 mac-9302018x10q.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, 2018
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 every Interactive Data File required to be submitted 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 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
 
 
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, 2018 of the registrant's common stock, par value $0.01 per share: 141,050,902 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,
2018
 
December 31,
2017
ASSETS:
 
 
 
Property, net
$
6,821,038

 
$
7,109,230

Cash and cash equivalents
93,479

 
91,038

Restricted cash
50,621

 
52,067

Tenant and other receivables, net
105,299

 
112,653

Deferred charges and other assets, net
387,449

 
449,190

Due from affiliates
87,670

 
82,162

Investments in unconsolidated joint ventures
1,465,174

 
1,709,522

Total assets
$
9,010,730

 
$
9,605,862

LIABILITIES AND EQUITY:
 
 
 
Mortgage notes payable:
 
 
 
Related parties
$
167,747

 
$
171,569

Others
3,917,114

 
4,066,511

Total
4,084,861

 
4,238,080

Bank and other notes payable
788,122

 
932,184

Accounts payable and accrued expenses
61,308

 
58,412

Other accrued liabilities
288,780

 
325,701

Distributions in excess of investments in unconsolidated joint ventures
115,299

 
83,486

Financing arrangement obligation
384,431

 

Total liabilities
5,722,801

 
5,637,863

Commitments and contingencies

 

Equity:
 
 
 
Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 250,000,000 shares authorized, 141,199,860 and 140,993,985 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
1,412

 
1,410

Additional paid-in capital
4,563,103

 
4,510,489

Accumulated deficit
(1,520,209
)
 
(830,279
)
Accumulated other comprehensive income (loss)
142

 
(42
)
Total stockholders' equity
3,044,448

 
3,681,578

Noncontrolling interests
243,481

 
286,421

Total equity
3,287,929

 
3,967,999

Total liabilities and equity
$
9,010,730

 
$
9,605,862

   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,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Minimum rents
$
146,256

 
$
144,991

 
$
431,546

 
$
443,439

Percentage rents
3,325

 
2,806

 
6,724

 
6,784

Tenant recoveries
68,045

 
72,897

 
202,899

 
214,257

Other
13,520

 
11,701

 
40,218

 
40,484

Management Companies
11,052

 
10,056

 
32,090

 
31,955

Total revenues
242,198

 
242,451

 
713,477

 
736,919

Expenses:
 
 
 
 
 
 
 
Shopping center and operating expenses
72,101

 
75,598

 
214,683

 
222,527

Management Companies' operating expenses
21,526

 
22,046

 
80,815

 
76,779

REIT general and administrative expenses
5,439

 
5,287

 
18,414

 
21,208

Costs related to shareholder activism

 

 
19,369

 

Depreciation and amortization
81,803

 
83,147

 
240,608

 
249,463

 
180,869

 
186,078

 
573,889

 
569,977

Interest expense:
 
 
 
 
 
 
 
Related parties
1,074

 
2,175

 
8,481

 
6,567

Other
43,853

 
41,090

 
127,996

 
120,320

 
44,927

 
43,265

 
136,477

 
126,887

Total expenses
225,796

 
229,343

 
710,366

 
696,864

Equity in income of unconsolidated joint ventures
18,789

 
23,993

 
51,330

 
56,772

Co-venture expense

 
(3,150
)
 

 
(11,150
)
Income tax (expense) benefit
(466
)
 
(2,869
)
 
1,799

 
178

Gain (loss) on sale or write down of assets, net
46,516

 
(11,854
)
 
(514
)
 
37,234

Net income
81,241

 
19,228

 
55,726

 
123,089

Less net income attributable to noncontrolling interests
7,213

 
1,730

 
7,455

 
9,710

Net income attributable to the Company
$
74,028

 
$
17,498

 
$
48,271

 
$
113,379

Earnings per common share—attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.12

 
$
0.34

 
$
0.79

Diluted
$
0.52

 
$
0.12

 
$
0.34

 
$
0.79

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
141,196,000

 
141,299,000

 
141,120,000

 
142,188,000

Diluted
141,196,000

 
141,310,000

 
141,125,000

 
142,223,000

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

4


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
81,241

 
19,228

 
$
55,726

 
$
123,089

Other comprehensive income:
 
 
 
 
 
 
 
Interest rate cap/swap agreements
175

 

 
184

 

Comprehensive income
81,416

 
19,228

 
55,910

 
123,089

Less net income attributable to noncontrolling interests
7,213

 
1,730

 
7,455

 
9,710

Comprehensive income attributable to the Company
$
74,203

 
$
17,498

 
$
48,455

 
$
113,379

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





5


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
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders' Equity
 
 
 
 
 
Shares
 
Par
Value
 
 
 
 
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2018
140,993,985

 
$
1,410

 
$
4,510,489

 
$
(830,279
)
 
$
(42
)
 
$
3,681,578

 
$
286,421

 
$
3,967,999

Net income

 

 

 
48,271

 

 
48,271

 
7,455

 
55,726

Cumulative effect of adoption of ASU 2014-09

 

 

 
(424,859
)
 

 
(424,859
)
 

 
(424,859
)
Interest rate cap/swap agreements

 

 

 

 
184

 
184

 

 
184

Amortization of share and unit-based plans
121,924

 
1

 
28,218

 

 

 
28,219

 

 
28,219

Employee stock purchases
17,240

 

 
806

 

 
 
 
806

 

 
806

Distributions declared ($2.22) per share

 

 

 
(313,342
)
 

 
(313,342
)
 

 
(313,342
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(26,101
)
 
(26,101
)
Contributions from noncontrolling interests

 

 

 

 
 
 

 
16

 
16

Conversion of noncontrolling interests to common shares
66,711

 
1

 
74

 

 

 
75

 
(75
)
 

Redemption of noncontrolling interests

 

 
(486
)
 

 

 
(486
)
 
(233
)
 
(719
)
Adjustment of noncontrolling interests in Operating Partnership

 

 
24,002

 

 

 
24,002

 
(24,002
)
 

Balance at September 30, 2018
141,199,860

 
$
1,412

 
$
4,563,103

 
$
(1,520,209
)
 
$
142

 
$
3,044,448

 
$
243,481

 
$
3,287,929

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

6


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
55,726

 
$
123,089

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss (gain) on sale or write down of assets, net
514

 
(37,234
)
Depreciation and amortization
246,038

 
253,793

Amortization of premium on mortgage notes payable
(696
)
 
(2,799
)
Amortization of share and unit-based plans
22,644

 
25,159

Straight-line rent adjustment
(8,963
)
 
(7,502
)
Amortization of above and below-market leases
(2,461
)
 
(408
)
Provision for doubtful accounts
3,787

 
3,806

Income tax benefit
(1,799
)
 
(178
)
Equity in income of unconsolidated joint ventures
(51,330
)
 
(56,772
)
Distributions of income from unconsolidated joint ventures
1,664

 

Change in fair value of financing arrangement obligation
(9,279
)
 

Co-venture expense

 
11,150

Changes in assets and liabilities, net of dispositions:
 
 
 
Tenant and other receivables
2,579

 
838

Other assets
7,143

 
11,743

Due from affiliates
(5,508
)
 
(13,004
)
Accounts payable and accrued expenses
6,692

 
11,263

Other accrued liabilities
(19,590
)
 
(23,094
)
Net cash provided by operating activities
247,161

 
299,850

Cash flows from investing activities:
 
 
 
Development, redevelopment, expansion and renovation of properties
(133,325
)
 
(90,758
)
Property improvements
(32,858
)
 
(34,425
)
Proceeds from repayment of notes receivable
829

 
628

Deferred leasing costs
(23,792
)
 
(25,045
)
Distributions from unconsolidated joint ventures
541,336

 
226,152

Contributions to unconsolidated joint ventures
(179,060
)
 
(80,332
)
Proceeds from sale of assets
83,029

 
168,471

Net cash provided by investing activities
256,159

 
164,691

 
 
 
 

7


THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from mortgages, bank and other notes payable
295,000

 
510,000

Payments on mortgages, bank and other notes payable
(457,710
)
 
(424,439
)
Deferred financing costs
(275
)
 
(2,586
)
Payment of finance deposits

 
(8,600
)
Proceeds from share and unit-based plans
806

 
986

Stock repurchases

 
(221,428
)
Redemption of noncontrolling interests
(719
)
 
(909
)
Contribution from noncontrolling interests
16

 

Dividends and distributions
(339,443
)
 
(328,733
)
Distributions to co-venture partner

 
(11,005
)
Net cash used in financing activities
(502,325
)
 
(486,714
)
Net increase (decrease) in cash, cash equivalents and restricted cash
995

 
(22,173
)
Cash, cash equivalents and restricted cash, beginning of period
143,105

 
143,997

Cash, cash equivalents and restricted cash, end of period
$
144,100

 
$
121,824

Supplemental cash flow information:
 
 
 
Cash payments for interest, net of amounts capitalized
$
142,680

 
$
124,686

Non-cash investing and financing transactions:
 
 
 
Accrued development costs included in accounts payable and accrued expenses and other accrued liabilities
$
48,827

 
$
30,706

Mortgage notes payable assumed in exchange for investments in unconsolidated joint ventures
$
139,249

 
$

Disposition of property in exchange for investments in unconsolidated joint ventures
$
36,305

 
$

Conversion of Operating Partnership Units to common stock
$
75

 
$
15,195

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

8


THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share and square foot 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, 2018, 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 consolidated variable interest entities ("VIEs").
The Operating Partnership's consolidated VIEs included the following assets and liabilities:
 
September 30,
2018
 
December 31,
2017
Assets:
 
 
 
Property, net
$
264,946

 
$
288,881

Other assets
27,579

 
60,586

Total assets
$
292,525

 
$
349,467

Liabilities:
 
 
 
Mortgage notes payable
$
126,279

 
$
129,436

Other liabilities
40,634

 
72,705

Total liabilities
$
166,913

 
$
202,141

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

9

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot 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, 2017. 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, 2017 has been derived from the audited financial statements but does not include all disclosures required by GAAP.
Shareholder Activism Costs:
During the three months ended June 30, 2018, the Company incurred $19,369 in costs associated with activities related to shareholder activism. These costs were primarily for legal and advisory services.
Recent Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, “Revenue From Contracts With Customers (ASC 606)," which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard 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 the standard specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. The standard applies to the Company's recognition of management companies and other revenues. The Company's adoption of the standard on January 1, 2018 did not have an impact on the pattern of revenue recognition for management companies and other revenues.
Additionally, under ASC 606, the Company changed its accounting for its joint venture in Chandler Freehold from a co-venture arrangement to a financing arrangement (See Note 11Financing Arrangement). Upon adoption of the standard on January 1, 2018, the Company replaced its $31,150 distributions in excess of co-venture obligation (See Note 8Deferred Charges and Other Assets, net) with a financing arrangement obligation of $393,709 on its consolidated balance sheets. This resulted in the recognition of a $424,859 increase in the Company’s accumulated deficit as a cumulative effect adjustment under the modified retrospective method of adoption.
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. Under the standard, 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. The standard is effective for the Company under a modified retrospective approach beginning January 1, 2019.
The FASB has provided a transition package of practical expedients for implementation, which include (i) relief from re-assessing whether an expired or existing contract meets the definition of a lease, (ii) relief from re-assessing the classification of expired or existing leases at the adoption date and (iii) allowing previously capitalized initial direct leasing costs to continue to be amortized. In July 2018, the FASB issued ASU 2018-11, “Leases: Targeted improvements”, which provides companies with an additional transition option that would permit the application of the standard as of the adoption date rather than to all periods presented. The Company plans to utilize this transition option when it adopts the new standard on January 1, 2019 and also plans to elect to use the transition practical expedients package available to the Company under the new standard.



10

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

Recent Accounting Pronouncements: (Continued)
Under ASU 2016-02, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, the Company will no longer be able to capitalize internal leasing costs and instead will be required to expense these costs as incurred. The Company capitalized internal leasing costs of $5,141 and $5,376 during the three months ended September 30, 2018 and 2017, respectively, and $16,928 and $17,075 during the nine months ended September 30, 2018 and 2017, respectively.
For leases where the Company is the lessee, the adoption of the standard will significantly change the accounting on the Company's consolidated balance sheets since these leases will be required to be recorded on the Company’s consolidated balance sheets as an obligation of the Company. Existing leases executed before the January 1, 2019 adoption date will continue to be accounted for as operating leases and the new guidance will not have a material impact on the Company's recognition of lease expense.
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. On January 1, 2018, the Company adopted the standard and retrospectively applied the guidance of the standard to the prior period presented, which resulted in an increase of $785 in net cash provided by investing activities on its consolidated statements of cash flows for the nine months ended September 30, 2017.
The following table presents a reconciliation of the beginning of period and end of period cash, cash equivalents and restricted cash reported on the Company's consolidated balance sheets to the totals shown on its consolidated statements of cash flows:
 
For the Nine Months Ended September 30,
 
2018
 
2017
Beginning of period
 
 
 
Cash and cash equivalents
$
91,038

 
$
94,046

Restricted cash
52,067

 
49,951

Cash, cash equivalents and restricted cash
$
143,105

 
$
143,997

End of period
 
 
 
Cash and cash equivalents
$
93,479

 
$
71,088

Restricted cash
50,621

 
50,736

Cash, cash equivalents and restricted cash
$
144,100

 
$
121,824

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 and should be treated as an asset acquisition. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The primary difference between business combinations and asset acquisitions is the recognition of transaction costs, which are expensed as period costs for business combinations and capitalized for asset acquisitions. The Company's adoption of this standard on January 1, 2018 did not have a significant impact on its consolidated financial statements.

11

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

Recent Accounting Pronouncements: (Continued)
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 has concluded that property sales represent transactions with non-customers. Sales of property generally represent only one performance obligation and are recognized when an enforceable contract is in place, collectability is ensured and control is transferred to the buyer. As a result of the adoption of the standard on January 1, 2018, the Company will prospectively measure the noncontrolling interest retained in partial sale transactions of real estate at fair value.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which aims to (i) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (ii) reduce the complexity of and simplify the application of hedge accounting by preparers. The standard is effective for the Company beginning January 1, 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
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, 2018 and 2017 (shares in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Net income
$
81,241

 
$
19,228

 
$
55,726

 
$
123,089

Less net income attributable to noncontrolling interests
7,213

 
1,730

 
7,455

 
9,710

Net income attributable to the Company
74,028

 
17,498

 
48,271

 
113,379

Allocation of earnings to participating securities
(278
)
 
(193
)
 
(824
)
 
(567
)
Numerator for basic and diluted EPS—net income attributable to common stockholders
$
73,750

 
$
17,305

 
$
47,447

 
$
112,812

Denominator
 
 
 
 
 
 
 
Denominator for basic EPS—weighted average number of common shares outstanding
141,196

 
141,299

 
141,120

 
142,188

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

 
11

 
5

 
35

Denominator for diluted EPS—weighted average number of common shares outstanding
141,196

 
141,310

 
141,125

 
142,223

EPS—net income attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.12

 
$
0.34

 
$
0.79

Diluted
$
0.52

 
$
0.12

 
$
0.34

 
$
0.79

 
 
 
(1)
Diluted EPS excludes 90,619 convertible preferred partnership units for the three and nine months ended September 30, 2018 and 2017, as their impact was antidilutive. Diluted EPS excludes 10,377,936 and 10,324,376 Operating Partnership units ("OP Units") for the three months ended September 30, 2018 and 2017, respectively, and 10,355,946 and 10,479,806 OP Units for the nine months ended September 30, 2018 and 2017, respectively, as their impact was antidilutive.

12

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

4. Investments in Unconsolidated Joint Ventures:
The Company has made the following recent investments and dispositions in its unconsolidated joint ventures:
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 unconsolidated joint ventures. The Company used its share of the proceeds to fund repurchases under the 2017 Stock Buyback Program (See Note 13Stockholders' Equity).
On September 18, 2017, the Company's joint venture in Fashion District Philadelphia sold its ownership interest in 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 unconsolidated joint ventures. The Company used its share of the proceeds to fund repurchases under the 2017 Stock Buyback Program (See Note 13Stockholders' Equity).
On December 14, 2017, the Company’s joint venture in Westcor/Queen Creek LLC sold land for $30,491, resulting in a gain on sale of assets of $14,853. The Company’s share of the gain on sale was $5,436, which was included in equity in income of unconsolidated joint ventures. The Company used its portion of the proceeds to pay down its line of credit and for general corporate purposes.
On February 16, 2018, the Company's joint venture in Fashion District Philadelphia sold its ownership interest in an office building for $41,800, resulting in a gain on sale of assets of $5,545. The Company's pro rata share of the gain on the sale of assets of $2,773 was included in equity in income from unconsolidated joint ventures. The Company used its share of the proceeds to pay down its line of credit and for general corporate purposes.
On July 6, 2018, the Company’s joint venture in The Market at Estrella Falls, a 298,000 square foot community center in Goodyear, Arizona, sold the property for $49,100, resulting in a gain on sale of assets of $12,598. The Company's share of the gain of $2,996 was included in equity in income from unconsolidated joint ventures. The proceeds were used to pay off the $24,118 mortgage loan payable on the property, settle development obligations and for distributions to the partners. The Company used its share of the net proceeds for general corporate purposes.
On August 31, 2018, the Company completed the sale of a 75% ownership interest in Westside Pavilion, a 755,000 square foot regional shopping center in Los Angeles, California, for $142,500, resulting in a gain on sale of assets of $46,242. The sales price was funded by a cash payment of $36,903 and the assumption of a pro rata share of the mortgage note payable on the property of $105,597. From March 1, 2018 to the completion of the sale, the Company accounted for its interest in Westside Pavilion as a collaborative arrangement (See Note 14Collaborative Arrangement). Since completion of the sale, the Company has accounted for its ownership interest in Westside Pavilion under the equity method of accounting.
On September 6, 2018, the Company formed a 50/50 joint venture with Simon Property Group to develop Los Angeles Premium Outlets, a 400,000 square foot outlet center in Carson, California. The joint venture expects to complete the first phase of the development in fall 2021.

13

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot 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,
2018
 
December 31,
2017
Assets(1):
 
 
 
Property, net
$
9,212,359

 
$
9,052,105

Other assets
717,509

 
635,838

Total assets
$
9,929,868

 
$
9,687,943

Liabilities and partners' capital(1):
 
 
 
Mortgage and other notes payable(2)
$
6,064,931

 
$
5,296,594

Other liabilities
390,211

 
405,052

Company's capital
1,893,278

 
2,188,057

Outside partners' capital
1,581,448

 
1,798,240

Total liabilities and partners' capital
$
9,929,868

 
$
9,687,943

Investments in unconsolidated joint ventures:
 
 
 
Company's capital
$
1,893,278

 
$
2,188,057

Basis adjustment(3)
(543,403
)
 
(562,021
)
 
$
1,349,875

 
$
1,626,036

 
 
 
 
Assets—Investments in unconsolidated joint ventures
$
1,465,174

 
$
1,709,522

Liabilities—Distributions in excess of investments in unconsolidated joint ventures
(115,299
)
 
(83,486
)
 
$
1,349,875

 
$
1,626,036

 
 
 
(1)
These amounts include the assets of $3,047,915 and $3,106,105 of Pacific Premier Retail LLC (the "PPR Portfolio") as of September 30, 2018 and December 31, 2017, respectively, and liabilities of $1,856,185 and $1,872,227 of the PPR Portfolio as of September 30, 2018 and December 31, 2017, respectively.
(2)
Included in mortgage and other notes payable are amounts due to an affiliate of Northwestern Mutual Life ("NML") of $699,437 and $482,332 as of September 30, 2018 and December 31, 2017, respectively. NML is considered a related party because it was a joint venture partner with the Company in Macerich Northwestern Associates—Broadway Plaza until October 12, 2018. Interest expense on these borrowings was $7,148 and $4,903 for the three months ended September 30, 2018 and 2017, respectively, and $19,264 and $12,992 for the nine months ended September 30, 2018 and 2017, 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 $1,160 and $4,227 for the three months ended September 30, 2018 and 2017, respectively, and $8,787 and $12,451 for the nine months ended September 30, 2018 and 2017, respectively.

14

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot 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, 2018
 
 
 
 
 
Revenues:
 
 
 
 
 
Minimum rents
$
32,999

 
$
123,799

 
$
156,798

Percentage rents
1,012

 
4,591

 
5,603

Tenant recoveries
11,884

 
47,286

 
59,170

Other
991

 
13,081

 
14,072

Total revenues
46,886

 
188,757

 
235,643

Expenses:
 
 
 
 
 
Shopping center and operating expenses
9,893

 
61,528

 
71,421

Interest expense
16,680

 
37,968

 
54,648

Depreciation and amortization
24,582

 
61,323

 
85,905

Total operating expenses
51,155

 
160,819

 
211,974

(Loss) gain on sale or write down of assets, net
(47
)
 
12,622

 
12,575

Net (loss) income
$
(4,316
)
 
$
40,560

 
$
36,244

Company's equity in net (loss) income
$
(148
)
 
$
18,937

 
$
18,789

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




15

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

 
PPR Portfolio
 
 
Other
Joint
Ventures
 
Total
Nine Months Ended September 30, 2018
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
98,619

 
 
$
375,447

 
$
474,066

Percentage rents
1,713

 
 
7,664

 
9,377

Tenant recoveries
34,684

 
 
142,702

 
177,386

Other
3,252

 
 
39,145

 
42,397

Total revenues
138,268

 
 
564,958

 
703,226

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
29,091

 
 
183,174

 
212,265

Interest expense
50,176

 
 
108,356

 
158,532

Depreciation and amortization
73,137

 
 
184,708

 
257,845

Total operating expenses
152,404

 
 
476,238

 
628,642

(Loss) gain on sale or write down of assets, net
(47
)
 
 
14,151

 
14,104

Net (loss) income
$
(14,183
)
 
 
$
102,871

 
$
88,688

Company's equity in net (loss) income
$
(1,021
)
 
 
$
52,351

 
$
51,330

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

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

16

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

5. Derivative Instruments and Hedging Activities:
The Company uses interest rate cap and interest rate swap agreements to manage the interest rate risk of its floating rate debt. The Company recorded other comprehensive income related to the marking-to-market of derivative instruments of $175 and $184 for the three and nine months ended September 30, 2018. There were no derivatives outstanding during the three and nine months ended September 30, 2017.
        The following derivatives were outstanding at September 30, 2018:
Property
 
Notional Amount
 
Product
 
LIBOR Rate
 
Maturity
 
Fair Value
Santa Monica Place
 
$
300,000

 
Cap
 
4.00
%
 
12/9/2019
 
$
1

The Macerich Partnership, L.P.
 
$
400,000

 
Swap
 
2.85
%
 
9/14/2021
 
$
173

        The above derivative instruments were designated as hedging instruments with an aggregate fair value (Level 2 measurement) and were included in deferred charges and other assets, net. The fair value of the Company's interest rate derivatives was determined using discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied 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.
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 the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swap. As a result, the Company determined that its interest rate cap and swap valuations in their entirety are classified in Level 2 of the fair value hierarchy.
6. Property, net:
Property, net consists of the following:
 
September 30,
2018
 
December 31,
2017
Land
$
1,521,252

 
$
1,567,152

Buildings and improvements
6,308,628

 
6,385,035

Tenant improvements
659,402

 
620,352

Equipment and furnishings
186,377

 
187,998

Construction in progress
176,976

 
366,996

 
8,852,635

 
9,127,533

Less accumulated depreciation
(2,031,597
)
 
(2,018,303
)
 
$
6,821,038

 
$
7,109,230

Depreciation expense was $69,237 and $69,343 for the three months ended September 30, 2018 and 2017, respectively, and $204,031 and $207,663 for the nine months ended September 30, 2018 and 2017, respectively.
The gain (loss) on sale or write down of assets, net was $46,516 and $(11,854) for the three months ended September 30, 2018 and 2017, respectively, and $(514) and $37,234 for the nine months ended September 30, 2018 and 2017, respectively.

17

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


The gain (loss) on sale or write down of assets, net for the three and nine months ended September 30, 2018 includes a gain of $46,242 on the sale of a 75% ownership interest in Westside Pavilion (See Note 4Investments in Unconsolidated Joint Ventures). The gain (loss) on sale or write down of assets, net for the nine months ended September 30, 2018 also includes a loss of $311 on the sale of Promenade at Casa Grande (See Note 15Dispositions). The gain (loss) 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 15Dispositions) offset in part by a loss of $10,138 on the write down of an investment in non-real estate assets.
The gain (loss) on sale or write down of assets, net for the nine months ended September 30, 2018 includes impairment losses of $36,338 on SouthPark Mall, $7,494 on two freestanding stores, $1,695 on Southridge Center and $1,043 on Promenade at Casa Grande. The gain (loss) on sale or write down of assets, net for the three and nine months ended September 30, 2017 includes an impairment loss of $12,036 on Southridge Center. The impairment losses were 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 losses recorded for the nine months ended September 30, 2018 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)
September 30, 2018
 
$
72,700

 
$

 
$
72,700

 
$

The fair values relating to the impairments were based on sales contracts.
7. Tenant and Other Receivables, net:
Included in tenant and other receivables, net is an allowance for doubtful accounts of $3,139 and $2,786 at September 30, 2018 and December 31, 2017, respectively. Also included in tenant and other receivables, net are accrued percentage rents of $2,439 and $8,711 at September 30, 2018 and December 31, 2017, respectively, and a deferred rent receivable due to straight-line rent adjustments of $69,664 and $61,859 at September 30, 2018 and December 31, 2017, respectively.

18

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

8. Deferred Charges and Other Assets, net:
Deferred charges and other assets, net consist of the following:
 
September 30,
2018
 
December 31,
2017
Leasing
$
223,811

 
$
232,819

Intangible assets:
 
 
 
In-place lease values
95,807

 
108,432

Leasing commissions and legal costs
24,140

 
25,958

Above-market leases
149,283

 
164,040

Deferred tax assets
30,366

 
29,006

Deferred compensation plan assets
50,939

 
52,221

Distributions in excess of co-venture obligation(1)

 
31,150

Other assets
60,465

 
66,990

 
634,811

 
710,616

Less accumulated amortization(2)
(247,362
)
 
(261,426
)
 
$
387,449

 
$
449,190

 
 
 
(1)
See Note 11Financing Arrangement.
(2)
Accumulated amortization includes $70,627 and $74,507 relating to in-place lease values, leasing commissions and legal costs at September 30, 2018 and December 31, 2017, respectively. Amortization expense of in-place lease values, leasing commissions and legal costs was $3,114 and $4,206 for the three months ended September 30, 2018 and 2017, respectively, and $10,504 and $15,755 for the nine months ended September 30, 2018 and 2017, respectively.
The allocated values of above-market leases and below-market leases consist of the following:
 
September 30,
2018
 
December 31,
2017
Above-Market Leases
 
 
 
Original allocated value
$
149,283

 
$
164,040

Less accumulated amortization
(54,688
)
 
(60,210
)
 
$
94,595

 
$
103,830

Below-Market Leases(1)
 
 
 
Original allocated value
$
108,568

 
$
120,573

Less accumulated amortization
(53,955
)
 
(55,489
)
 
$
54,613

 
$
65,084

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

19

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

9. Mortgage Notes Payable:
Mortgage notes payable at September 30, 2018 and December 31, 2017 consist of the following:
 
 
Carrying Amount of Mortgage Notes(1)
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
 
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)
 
$

 
$
199,954

 
$

 
$
199,904

 
3.77
%
 
$
625

 
2019
Danbury Fair Mall
 
101,977

 
101,977

 
104,599

 
104,598

 
5.53
%
 
1,538

 
2020
Fashion Outlets of Chicago(6)
 

 
199,541

 

 
199,298

 
3.76
%
 
600

 
2020
Fashion Outlets of Niagara Falls USA
 

 
110,448

 

 
112,770

 
4.89
%
 
727

 
2020
Freehold Raceway Mall(5)
 

 
398,171

 

 
398,050

 
3.94
%
 
1,300

 
2029
Fresno Fashion Fair
 

 
323,410

 

 
323,261

 
3.67
%
 
971

 
2026
Green Acres Commons(7)
 

 
127,776

 

 
107,219

 
4.81
%
 
460

 
2021
Green Acres Mall
 

 
286,386

 

 
291,366

 
3.61
%
 
1,447

 
2021
Kings Plaza Shopping Center
 

 
439,695

 

 
447,231

 
3.67
%
 
2,229

 
2019
Oaks, The
 

 
193,229

 

 
196,732

 
4.14
%
 
1,064

 
2022
Pacific View
 

 
122,132

 

 
124,397

 
4.08
%
 
668

 
2022
Queens Center
 

 
600,000

 

 
600,000

 
3.49
%
 
1,744

 
2025
Santa Monica Place(8)
 

 
296,882

 

 
296,366

 
3.76
%
 
865

 
2022
SanTan Village Regional Center
 

 
122,376

 

 
124,703

 
3.14
%
 
589

 
2019
Towne Mall
 

 
20,842

 

 
21,161

 
4.48
%
 
117

 
2022
Tucson La Encantada
 
65,770

 

 
66,970

 

 
4.23
%
 
368

 
2022
Victor Valley, Mall of
 

 
114,660

 

 
114,617

 
4.00
%
 
380

 
2024
Vintage Faire Mall
 

 
259,635

 

 
263,818

 
3.55
%
 
1,256

 
2026
Westside Pavilion(9)
 

 

 

 
141,020

 


 


 

 
 
$
167,747

 
$
3,917,114

 
$
171,569

 
$
4,066,511

 
 

 
 

 
 

(1)
The mortgage notes payable balances includes an unamortized debt premium. Debt premiums represent the excess of the fair value of debt over 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 loan on Fashion Outlets of Niagara Falls USA had a premium of $1,934 and $2,630 at September 30, 2018 and December 31, 2017, respectively.
The mortgage notes payable 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 $14,232 and $17,838 at September 30, 2018 and December 31, 2017, respectively.
(2)
The interest rate disclosed represents the effective interest rate, including the impact of debt premium 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.
(5)
A 49.9% interest in the loan has been assumed by a third party in connection with the Company's joint venture in Chandler Freehold (See Note 11Financing Arrangement).
(6)
The loan bears interest at LIBOR plus 1.50%. At September 30, 2018 and December 31, 2017, the total interest rate was 3.76% and 3.02%, respectively.
(7)
On March 1, 2018, the Company borrowed the remaining $20,000 available under the loan agreement on the property. The loan bears interest at LIBOR plus 2.15%. At September 30, 2018 and December 31, 2017, the total interest rate was 4.81% and 4.07%, respectively.

20

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

(8)
The loan bears interest at LIBOR plus 1.35%. The loan is covered by an interest rate cap agreement that effectively prevents LIBOR from exceeding 4.0% during the period ending December 9, 2019 (See Note 5Derivative Instruments and Hedging Activities). At September 30, 2018 and December 31, 2017, the total interest rate was 3.76% and 3.13%, respectively.
(9)
On August 31, 2018, a 75% interest in the loan was assumed by a third party in connection with the sale of a 75% ownership interest in the underlying property (See Note 4Investments in Unconsolidated Joint Ventures).
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 $3,751 and $3,428 for the three months ended September 30, 2018 and 2017, respectively, and $12,752 and $9,405 for the nine months ended September 30, 2018 and 2017, respectively.
Related party mortgage notes payable are amounts due to an affiliate of NML. See Note 17Related Party Transactions for interest expense associated with loans from NML.
The estimated fair value (Level 2 measurement) of mortgage notes payable at September 30, 2018 and December 31, 2017 was $4,088,227 and $4,250,816, 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.

21

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

10. 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, 2018, the borrowing rate on the facility was LIBOR plus 1.45%. The Company has an interest rate swap agreement that effectively converts $400,000 of the outstanding balance from floating rate debt of LIBOR plus 1.45% to fixed rate debt of 4.30% until September 14, 2021 (See Note 5Derivative Instruments and Hedging Activities). As of September 30, 2018 and December 31, 2017, borrowings under the line of credit were $790,000 and $935,000, respectively, less unamortized deferred finance costs of $5,781 and $7,548, respectively, at a total interest rate of 4.08% and 3.13%, respectively. As of September 30, 2018 and December 31, 2017, the Company's availability under the line of credit for additional borrowings was $709,720 and $504,412, respectively, The estimated fair value (Level 2 measurement) of the line of credit at September 30, 2018 and December 31, 2017 was $791,233 and $919,158, respectively, based on a present value model using a credit interest rate spread offered to the Company for comparable debt.
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, 2018 and December 31, 2017, the note had a balance of $3,903 and $4,732, respectively. The estimated fair value (Level 2 measurement) of the note at September 30, 2018 and December 31, 2017 was $3,900 and $4,717, 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, 2018 and December 31, 2017, the Company was in compliance with all applicable financial loan covenants.
11. Financing Arrangement:
On September 30, 2009, the Company formed a joint venture, whereby a third party acquired a 49.9% interest in Chandler Fashion Center, a 1,316,000 square foot regional shopping center in Chandler, Arizona, and Freehold Raceway Mall, a 1,672,000 square foot regional shopping center in Freehold, New Jersey, referred to herein as Chandler Freehold. As a result of the Company having certain rights under the agreement to repurchase the assets after the seventh year of the formation of Chandler Freehold, the transaction did not qualify for sale treatment. The Company, however, is not obligated to repurchase the assets. The transaction was initially accounted for as a co-venture 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 net cash proceeds received from the third party less costs allocated to a warrant. The co-venture obligation was increased for the allocation of income to the co-venture partner and decreased for distributions to the co-venture partner.
Upon adoption of ASC 606 on January 1, 2018, the Company changed its accounting for Chandler Freehold from a co-venture arrangement to a financing arrangement. Accordingly, the Company replaced its $31,150 distributions in excess of co-venture obligation (See Note 8Deferred Charges and Other Assets, net) with a financing arrangement liability of $393,709 on its consolidated balance sheets. This resulted in the recognition of a $424,859 increase in the Company’s accumulated deficit as a cumulative effect adjustment under the modified retrospective method of adoption. The fair value (Level 3 measurement) of the financing arrangement obligation was based upon a multiple on net operating income of 21 times, a discount rate of 5.8% and market rents per square foot of $20 to $225. The fair value of the financing arrangement obligation is sensitive to these significant unobservable inputs and a change in these inputs may result in a significantly higher or lower fair value measurement. Distributions to the partner and subsequent changes in fair value of the financing arrangement obligation are recognized as interest expense in the Company's consolidated statements of operations.

22

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot amounts)
(Unaudited)
11. Financing Arrangement: (Continued)


During the three and nine months ended September 30, 2018 and 2017, the Company incurred interest (income) expense in connection with the financing arrangement as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Distributions of the partner's share of net income
$
2,111

 
$

 
$
6,577

 
$

Distributions in excess of the partner's share of net income
1,754

 

 
4,803

 

Adjustment to fair value of financing arrangement obligation
(4,893
)
 

 
(9,279
)
 

 
$
(1,028
)
 
$

 
$
2,101

 
$

12. 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, 2018 and December 31, 2017. The remaining 7% limited partnership interest as of September 30, 2018 and December 31, 2017 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, 2018 and December 31, 2017, the aggregate redemption value of the then-outstanding OP Units not owned by the Company was $579,249 and $671,592, 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.
13. Stockholders' Equity:
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, from time to time as permitted by securities laws and other legal requirements.
During the period from February 12, 2017 to December 31, 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 15Dispositions), its share of the proceeds from the sale of ownership interests in 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. There were no repurchases during the three and nine months ended September 30, 2018.

23

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot amounts)
(Unaudited)
13. 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 Program expired by its terms in August 2017. No shares were sold under the ATM Program.
14. Collaborative Arrangement:
On March 1, 2018, the Company formed a 25/75 joint venture with a third party, whereby the Company agreed to contribute Westside Pavilion, a 755,000 square foot regional shopping center in Los Angeles, California in exchange for a cash payment of $142,500. The Company completed the transfer on August 31, 2018.
During the period from March 1, 2018 to August 31, 2018, the Company accounted for the operations of Westside Pavilion as a collaborative arrangement. Both partners shared operating control of the property and the Company was reimbursed by the outside partner for 75% of the carrying cost of the property, which were defined in the agreement as operating expenses in excess of revenues, debt service and capital expenditures. Accordingly, the Company reduced minimum rents, percentage rents, tenant recoveries, other revenue, shopping center and operating expenses and interest expense by its partner's 75% share and recorded a receivable due from its partner, which was settled upon completion of the transfer of the property. In addition, the Company was reimbursed by its partner for its 75% share of mortgage loan principal payments and capital expenditures during the period. Since completion of the transfer, the Company has accounted for its investment in Westside Pavilion under the equity method of accounting (See Note 4Investments in Unconsolidated Joint Ventures).
15. Dispositions:
The following are recent dispositions of properties:
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 13Stockholders' Equity).
On November 16, 2017, the Company sold 500 North Michigan Avenue, a 326,000 square foot office building in Chicago, Illinois, for $86,350, resulting in a gain on sale of assets of $14,597. The Company used the proceeds from the sale to pay down its line of credit and for other general corporate purposes.
On May 17, 2018, the Company sold Promenade at Casa Grande, a 761,000 square foot community center in Casa Grande, Arizona, for $26,000, resulting in a loss on sale of assets of $311. The Company used the proceeds from the sale to pay down its line of credit and for other general corporate purposes.
16. Commitments and Contingencies:
The Company has certain properties that are subject to non-cancelable operating 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. Rent expense was $4,571 and $4,301 for the three months ended September 30, 2018 and 2017, respectively, and $13,379 and $12,785 for the nine months ended September 30, 2018 and 2017, respectively.
No contingent rent was incurred during the three and nine months ended September 30, 2018 or 2017.
As of September 30, 2018, the Company was contingently liable for $65,780 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.

24

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

16. Commitments and Contingencies: (Continued)

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, 2018, the Company had $8,894 in outstanding obligations which it believes will be settled in the next twelve months.
17. 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,
 
2018
 
2017
 
2018
 
2017
Management fees
$
4,971

 
$
4,749

 
$
14,366

 
$
13,914

Development and leasing fees
3,970

 
3,385

 
10,895

 
11,376

 
$
8,941

 
$
8,134

 
$
25,261

 
$
25,290

Certain mortgage notes on the properties are held by NML (See Note 9Mortgage Notes Payable). Interest expense in connection with these notes was $2,102 and $2,175 for the three months ended September 30, 2018 and 2017, respectively, and $6,380 and $6,567 for the nine months ended September 30, 2018 and 2017, respectively. Included in accounts payable and accrued expenses is interest payable on these notes of $699 and $716 at September 30, 2018 and December 31, 2017, respectively.
Interest (income) expense from related party transactions also includes $(1,028) and $2,101 for the three and nine months ended September 30, 2018 in connection with the Financing Arrangement (See Note 11Financing Arrangement).
Due from affiliates includes unreimbursed costs and fees from unconsolidated joint ventures due to the Management Companies. As of September 30, 2018 and December 31, 2017, the amounts due from the unconsolidated joint ventures was $9,482 and $5,411, respectively.
In addition, due from affiliates at September 30, 2018 and December 31, 2017 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 $55 and $66 for the three months ended September 30, 2018 and 2017, respectively, and $172 and $204 for the nine months ended September 30, 2018 and 2017, respectively. The balance on this note was $3,903 and $4,796 at September 30, 2018 and December 31, 2017, 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 $808 and $621 for the three months ended September 30, 2018 and 2017, respectively, and $2,330 and $1,839 for the nine months ended September 30, 2018 and 2017, respectively. The balance on this note was $74,285 and $71,955 at September 30, 2018 and December 31, 2017, respectively. Lennar Corporation is considered a related party because it is a joint venture partner in Fashion Outlets of San Francisco.

25

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

18. 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 stockholders (the "Total Return") per share of common stock relative to the Total Return of a group of peer REITs, as measured at the end of the measurement period.
During the nine months ended September 30, 2018, the Company granted the following LTIP Units:
Grant Date
 
Units
 
Type
 
Fair Value per LTIP Unit
 
Vest Date
1/1/2018
 
65,466

 
Service-based
 
$
65.68

 
12/31/2020
1/1/2018
 
291,326

 
Market-indexed
 
$
44.28

 
12/31/2020
1/29/2018
 
13,632

 
Service-based
 
$
66.02

 
2/1/2022
1/29/2018
 
1,893

 
Service-based
 
$
66.02

 
12/31/2020
1/29/2018
 
7,775

 
Market-indexed
 
$
48.23

 
12/31/2020
3/2/2018
 
99,407

 
Service-based
 
$
59.04

 
3/2/2018
4/26/2018
 
89,637

 
Service-based
 
$
55.78

 
4/26/2018
 
 
569,136

 
 
 
 
 
 
The fair value of the market-indexed LTIP Units (Level 3) granted on January 1, 2018 were estimated on the date of grant using a Monte Carlo Simulation model that assumed a risk free interest rate of 1.98% and an expected volatility of 23.38%. The fair value of the market-indexed LTIP Units granted on January 29, 2018 were estimated on the date of grant using a Monte Carlo Simulation model that assumed a risk free interest rate of 2.25% and an expected volatility of 23.86%.
The following table summarizes the activity of the non-vested LTIP Units, phantom stock units and stock units:
 
LTIP Units
 
Phantom Stock Units
 
Stock Units
 
Units
 
Value(1)
 
Units
 
Value(1)
 
Units
 
Value(1)
Balance at January 1, 2018
636,632

 
$
52.36

 
4,054

 
$
79.82

 
151,355

 
$
73.32

Granted
569,136

 
51.78

 
8,765

 
61.46

 
87,193

 
58.85

Vested
(189,044
)
 
57.49

 
(10,581
)
 
54.70

 
(108,201
)
 
74.21

Forfeited
(23,666
)
 
44.28

 
(845
)
 
77.91