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 June 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 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 August 3, 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

Table of Contents


THE MACERICH COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS:
 
 
 
Property, net
$
6,868,844

 
$
7,109,230

Assets held for sale
143,327

 

Cash and cash equivalents
92,452

 
91,038

Restricted cash
50,060

 
52,067

Tenant and other receivables, net
92,143

 
112,653

Deferred charges and other assets, net
403,758

 
449,190

Due from affiliates
83,275

 
82,162

Investments in unconsolidated joint ventures
1,381,358

 
1,709,522

Total assets
$
9,115,217

 
$
9,605,862

LIABILITIES AND EQUITY:
 
 
 
Mortgage notes payable:
 
 
 
Related parties
$
169,038

 
$
171,569

Others
4,066,059

 
4,066,511

Total
4,235,097

 
4,238,080

Bank and other notes payable
732,801

 
932,184

Accounts payable and accrued expenses
57,880

 
58,412

Other accrued liabilities
292,725

 
325,701

Distributions in excess of investments in unconsolidated joint ventures
92,216

 
83,486

Financing arrangement obligation
389,323

 

Total liabilities
5,800,042

 
5,637,863

Commitments and contingencies

 

Equity:
 
 
 
Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 250,000,000 shares authorized, 141,184,335 and 140,993,985 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
1,412

 
1,410

Additional paid-in capital
4,558,873

 
4,510,489

Accumulated deficit
(1,489,742
)
 
(830,279
)
Accumulated other comprehensive loss
(33
)
 
(42
)
Total stockholders' equity
3,070,510

 
3,681,578

Noncontrolling interests
244,665

 
286,421

Total equity
3,315,175

 
3,967,999

Total liabilities and equity
$
9,115,217

 
$
9,605,862

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

3

Table of Contents

THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Minimum rents
$
142,883

 
$
152,893

 
$
285,290

 
$
298,448

Percentage rents
1,515

 
2,060

 
3,399

 
3,978

Tenant recoveries
66,762

 
68,948

 
134,854

 
141,360

Other
12,889

 
13,519

 
26,698

 
28,783

Management Companies
10,496

 
10,003

 
21,038

 
21,899

Total revenues
234,545

 
247,423

 
471,279

 
494,468

Expenses:
 
 
 
 
 
 
 
Shopping center and operating expenses
68,072

 
71,032

 
142,582

 
146,929

Management Companies' operating expenses
20,966

 
26,216

 
59,289

 
54,733

REIT general and administrative expenses
4,956

 
7,458

 
12,975

 
15,921

Costs related to shareholder activism
19,369

 

 
19,369

 

Depreciation and amortization
78,868

 
83,243

 
158,805

 
166,316

 
192,231

 
187,949

 
393,020

 
383,899

Interest (income) expense:
 
 
 
 
 
 
 
Related parties
(2,762
)
 
2,181

 
7,407

 
4,392

Other
41,677

 
40,140

 
84,143

 
79,230

 
38,915

 
42,321

 
91,550

 
83,622

Total expenses
231,146

 
230,270

 
484,570

 
467,521

Equity in income of unconsolidated joint ventures
15,669

 
16,936

 
32,541

 
32,779

Co-venture expense

 
(4,123
)
 

 
(8,000
)
Income tax (expense) benefit
(684
)
 
(437
)
 
2,265

 
3,047

(Loss) gain on sale or write down of assets, net
(9,518
)
 
(477
)
 
(47,030
)
 
49,088

Net income (loss)
8,866

 
29,052

 
(25,515
)
 
103,861

Less net income attributable to noncontrolling interests
1,050

 
2,414

 
242

 
7,980

Net income (loss) attributable to the Company
$
7,816

 
$
26,638

 
$
(25,757
)
 
$
95,881

Earnings per common share—attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.19

 
$
(0.19
)
 
$
0.67

Diluted
$
0.05

 
$
0.19

 
$
(0.19
)
 
$
0.67

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
141,137,000

 
141,695,000

 
141,081,000

 
142,640,000

Diluted
141,137,000

 
141,728,000

 
141,081,000

 
142,687,000

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

4

Table of Contents

THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
8,866

 
29,052

 
$
(25,515
)
 
$
103,861

Other comprehensive income (loss):
 
 
 
 
 
 
 
Interest rate cap
(52
)
 

 
9

 

Comprehensive income (loss)
8,814

 
29,052

 
(25,506
)
 
103,861

Less net income attributable to noncontrolling interests
1,050

 
2,414

 
242

 
7,980

Comprehensive income (loss) attributable to the Company
$
7,764

 
$
26,638

 
$
(25,748
)
 
$
95,881

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





5

Table of Contents

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 loss

 

 

 
(25,757
)
 

 
(25,757
)
 
242

 
(25,515
)
Cumulative effect of adoption of ASU 2014-09

 

 

 
(424,859
)
 

 
(424,859
)
 

 
(424,859
)
Interest rate cap

 

 

 

 
9

 
9

 

 
9

Amortization of share and unit-based plans
118,407

 
1

 
23,602

 

 

 
23,603

 

 
23,603

Employee stock purchases
17,240

 

 
806

 

 
 
 
806

 

 
806

Distributions declared ($1.48) per share

 

 

 
(208,847
)
 

 
(208,847
)
 

 
(208,847
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(17,898
)
 
(17,898
)
Conversion of noncontrolling interests to common shares
54,703

 
1

 
74

 

 

 
75

 
(75
)
 

Redemption of noncontrolling interests

 

 
(84
)
 

 

 
(84
)
 
(39
)
 
(123
)
Adjustment of noncontrolling interests in Operating Partnership

 

 
23,986

 

 

 
23,986

 
(23,986
)
 

Balance at June 30, 2018
141,184,335

 
$
1,412

 
$
4,558,873

 
$
(1,489,742
)
 
$
(33
)
 
$
3,070,510

 
$
244,665

 
$
3,315,175

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

6

Table of Contents

THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(25,515
)
 
$
103,861

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Loss (gain) on sale or write down of assets, net
47,030

 
(49,088
)
Depreciation and amortization
162,418

 
169,216

Amortization of premium on mortgage notes payable
(463
)
 
(1,860
)
Amortization of share and unit-based plans
19,090

 
19,652

Straight-line rent adjustment
(5,419
)
 
(4,544
)
Amortization of above and below-market leases
(1,782
)
 
(1,082
)
Provision for doubtful accounts
2,599

 
3,358

Income tax benefit
(2,265
)
 
(3,047
)
Equity in income of unconsolidated joint ventures
(32,541
)
 
(32,779
)
Distributions of income from unconsolidated joint ventures
669

 

Change in fair value of financing arrangement obligation
(4,386
)
 

Co-venture expense

 
8,000

Changes in assets and liabilities, net of dispositions:
 
 
 
Tenant and other receivables
13,876

 
5,401

Other assets
(2,676
)
 
2,346

Due from affiliates
(1,113
)
 
(13,365
)
Accounts payable and accrued expenses
4,245

 
(2,002
)
Other accrued liabilities
(8,917
)
 
(13,840
)
Net cash provided by operating activities
164,850

 
190,227

Cash flows from investing activities:
 
 
 
Development, redevelopment, expansion and renovation of properties
(98,852
)
 
(60,603
)
Property improvements
(17,421
)
 
(16,750
)
Proceeds from repayment of notes receivable
618

 
619

Deferred leasing costs
(18,323
)
 
(19,553
)
Distributions from unconsolidated joint ventures
448,067

 
170,734

Contributions to unconsolidated joint ventures
(75,017
)
 
(51,303
)
Proceeds from sale of assets
27,063

 
167,631

Net cash provided by investing activities
266,135

 
190,775

 
 
 
 

7

Table of Contents

THE MACERICH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
For the Six Months Ended June 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from mortgages, bank and other notes payable
195,000

 
300,000

Payments on mortgages, bank and other notes payable
(400,338
)
 
(279,419
)
Deferred financing costs
(178
)
 
(32
)
Proceeds from share and unit-based plans
806

 
986

Stock repurchases

 
(181,740
)
Redemption of noncontrolling interests
(123
)
 
(85
)
Dividends and distributions
(226,745
)
 
(219,946
)
Distributions to co-venture partner

 
(7,326
)
Net cash used in financing activities
(431,578
)
 
(387,562
)
Net decrease in cash, cash equivalents and restricted cash
(593
)
 
(6,560
)
Cash, cash equivalents and restricted cash, beginning of period
143,105

 
143,997

Cash, cash equivalents and restricted cash, end of period
$
142,512

 
$
137,437

Supplemental cash flow information:
 
 
 
Cash payments for interest, net of amounts capitalized
$
93,032

 
$
82,864

Non-cash investing and financing transactions:
 
 
 
Accrued development costs included in accounts payable and accrued expenses and other accrued liabilities
$
36,841

 
$
31,500

Conversion of Operating Partnership Units to common stock
$
75

 
$
11,796

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

8

Table of Contents

THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share 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 June 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:
 
June 30,
2018
 
December 31,
2017
Assets:
 
 
 
Property, net
$
264,570

 
$
288,881

Other assets
55,955

 
60,586

Total assets
$
320,525

 
$
349,467

Liabilities:
 
 
 
Mortgage notes payable
$
127,265

 
$
129,436

Other liabilities
73,090

 
72,705

Total liabilities
$
200,355

 
$
202,141

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

9

Table of Contents
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 will impact the accounting and disclosure requirements for these leases. The standard 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.
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 $353 in net cash provided by investing activities on its consolidated statements of cash flows for the six months ended June 30, 2017.

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Table of Contents
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)
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 Six Months Ended June 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
$
92,452

 
$
87,133

Restricted cash
50,060

 
50,304

Cash, cash equivalents and restricted cash
$
142,512

 
$
137,437

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.
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. The Company's adoption of this standard on January 1, 2018 did not have a significant impact on its consolidated financial statements.
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.


11

Table of Contents
THE MACERICH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share and square foot 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 six months ended June 30, 2018 and 2017 (shares in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Net income (loss)
$
8,866

 
$
29,052

 
$
(25,515
)
 
$
103,861

Less net income attributable to noncontrolling interests
1,050

 
2,414

 
242

 
7,980

Net income (loss) attributable to the Company
7,816

 
26,638

 
(25,757
)
 
95,881

Allocation of earnings to participating securities
(304
)
 
(188
)
 
(547
)
 
(375
)
Numerator for basic and diluted EPS—net income (loss) attributable to common stockholders
$
7,512

 
$
26,450

 
$
(26,304
)
 
$
95,506

Denominator
 
 
 
 
 
 
 
Denominator for basic EPS—weighted average number of common shares outstanding
141,137

 
141,695

 
141,081

 
142,640

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

 
33

 

 
47

Denominator for diluted EPS—weighted average number of common shares outstanding
141,137

 
141,728

 
141,081

 
142,687

EPS—net (loss) income attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.19

 
$
(0.19
)
 
$
0.67

Diluted
$
0.05

 
$
0.19

 
$
(0.19
)
 
$
0.67

 
 
 
(1)
Diluted EPS excludes 90,619 convertible preferred partnership units for the three and six months ended June 30, 2018 and 2017, as their impact was antidilutive.
Diluted EPS excludes 10,397,726 and 10,526,547 Operating Partnership units ("OP Units") for the three months ended June 30, 2018 and 2017, respectively, and 10,344,766 and 10,558,809 OP Units for the six months ended June 30, 2018 and 2017, respectively, as their impact was antidilutive.
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 $13,078. The Company's pro rata share of the gain on the sale of assets of $6,539 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.

12

Table of Contents
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)

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.
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:
 
June 30,
2018
 
December 31,
2017
Assets(1):
 
 
 
Property, net
$
9,002,271

 
$
9,052,105

Other assets
620,500

 
635,838

Total assets
$
9,622,771

 
$
9,687,943

Liabilities and partners' capital(1):
 
 
 
Mortgage and other notes payable(2)
$
5,964,691

 
$
5,296,594

Other liabilities
386,509

 
405,052

Company's capital
1,839,908

 
2,188,057

Outside partners' capital
1,431,663

 
1,798,240

Total liabilities and partners' capital
$
9,622,771

 
$
9,687,943

Investments in unconsolidated joint ventures:
 
 
 
Company's capital
$
1,839,908

 
$
2,188,057

Basis adjustment(3)
(550,766
)
 
(562,021
)
 
$
1,289,142

 
$
1,626,036

 
 
 
 
Assets—Investments in unconsolidated joint ventures
$
1,381,358

 
$
1,709,522

Liabilities—Distributions in excess of investments in unconsolidated joint ventures
(92,216
)
 
(83,486
)
 
$
1,289,142

 
$
1,626,036

 
 
 
(1)
These amounts include the assets of $3,059,530 and $3,106,105 of Pacific Premier Retail LLC (the "PPR Portfolio") as of June 30, 2018 and December 31, 2017, respectively, and liabilities of $1,859,679 and $1,872,227 of the PPR Portfolio as of June 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 $701,884 and $482,332 as of June 30, 2018 and December 31, 2017, 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 $7,158 and $4,929 for the three months ended June 30, 2018 and 2017, respectively, and $12,116 and $8,089 for the six months ended June 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 $3,524 and $4,197 for the three months ended June 30, 2018 and 2017, respectively, and $7,627 and $8,224 for the six months ended June 30, 2018 and 2017, respectively.

13

Table of Contents
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 June 30, 2018
 
 
 
 
 
Revenues:
 
 
 
 
 
Minimum rents
$
32,881

 
$
123,940

 
$
156,821

Percentage rents
269

 
1,262

 
1,531

Tenant recoveries
11,400

 
47,312

 
58,712

Other
1,244

 
14,973

 
16,217

Total revenues
45,794

 
187,487

 
233,281

Expenses:
 
 
 
 
 
Shopping center and operating expenses
9,517

 
60,325

 
69,842

Interest expense
16,770

 
37,356

 
54,126

Depreciation and amortization
24,071

 
60,973

 
85,044

Total operating expenses
50,358

 
158,654

 
209,012

Gain on sale or write down of assets, net

 
559

 
559

Net (loss) income
$
(4,564
)
 
$
29,392

 
$
24,828

Company's equity in net (loss) income
$
(257
)
 
$
15,926

 
$
15,669

Three Months Ended June 30, 2017
 
 
 
 
 
Revenues:
 
 
 
 
 
Minimum rents
$
32,045

 
$
126,765

 
$
158,810

Percentage rents
221

 
2,126

 
2,347

Tenant recoveries
11,373

 
46,119

 
57,492

Other
1,402

 
13,017

 
14,419

Total revenues
45,041

 
188,027

 
233,068

Expenses:
 
 
 
 
 
Shopping center and operating expenses
9,711

 
58,886

 
68,597

Interest expense
16,675

 
32,976

 
49,651

Depreciation and amortization
24,802

 
62,090

 
86,892

Total operating expenses
51,188

 
153,952

 
205,140

Loss on sale or write down of assets, net

 
(2
)
 
(2
)
Net (loss) income
$
(6,147
)
 
$
34,073

 
$
27,926

Company's equity in net (loss) income
$
(1,034
)
 
$
17,970

 
$
16,936




14

Table of Contents
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
Six Months Ended June 30, 2018
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
65,620

 
 
$
251,648

 
$
317,268

Percentage rents
701

 
 
3,073

 
3,774

Tenant recoveries
22,800

 
 
95,416

 
118,216

Other
2,261

 
 
26,064

 
28,325

Total revenues
91,382

 
 
376,201

 
467,583

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
19,198

 
 
121,646

 
140,844

Interest expense
33,496

 
 
70,388

 
103,884

Depreciation and amortization
48,555

 
 
123,385

 
171,940

Total operating expenses
101,249

 
 
315,419

 
416,668

Gain on sale or write down of assets, net

 
 
1,529

 
1,529

Net (loss) income
$
(9,867
)
 
 
$
62,311

 
$
52,444

Company's equity in net (loss) income
$
(873
)
 
 
$
33,414

 
$
32,541

Six Months Ended June 30, 2017
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Minimum rents
$
65,581

 
 
$
250,268

 
$
315,849

Percentage rents
951

 
 
3,864

 
4,815

Tenant recoveries
22,812

 
 
94,034

 
116,846

Other
2,428

 
 
24,528

 
26,956

Total revenues
91,772

 
 
372,694

 
464,466

Expenses:
 
 
 
 
 
 
Shopping center and operating expenses
19,471

 
 
121,081

 
140,552

Interest expense
33,401

 
 
65,255

 
98,656

Depreciation and amortization
51,078

 
 
124,969

 
176,047

Total operating expenses
103,950

 
 
311,305

 
415,255

(Loss) gain on sale or write down of assets, net
(35
)
 
 
4,579

 
4,544

Net (loss) income
$
(12,213
)
 
 
$
65,968

 
$
53,755

Company's equity in net (loss) income
$
(1,996
)
 
 
$
34,775

 
$
32,779

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

15

Table of Contents
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 recorded other comprehensive income (loss) related to the marking-to-market of an interest rate cap agreement of $(52) and $9 for the three and six months ended June 30, 2018. There were no derivatives outstanding during the three and six months ended June 30, 2017.
        The following derivative was outstanding at June 30, 2018:
Property
 
Notional Amount
 
Product
 
LIBOR Rate
 
Maturity
 
Fair Value
Santa Monica Place
 
$
300,000

 
Cap
 
4.00
%
 
12/9/2019
 
$
6

        The above interest rate cap agreement was designated as a hedging instrument with a fair value (Level 2 measurement) of $6 and $11 at June 30, 2018 and December 31, 2017, respectively, was included in deferred charges and other assets, net.
6. Property, net:
Property, net consists of the following:
 
June 30,
2018
 
December 31,
2017
Land
$
1,518,161

 
$
1,567,152

Buildings and improvements
6,099,577

 
6,385,035

Tenant improvements
616,150

 
620,352

Equipment and furnishings
190,031

 
187,998

Construction in progress
437,386

 
366,996

 
8,861,305

 
9,127,533

Less accumulated depreciation
(1,992,461
)
 
(2,018,303
)
 
$
6,868,844

 
$
7,109,230

Depreciation expense was $66,850 and $69,364 for the three months ended June 30, 2018 and 2017, respectively, and $134,794 and $138,320 for the six months ended June 30, 2018 and 2017, respectively.
The (loss) gain on sale or write down of assets, net was $(9,518) and $(477) for the three months ended June 30, 2018 and 2017, respectively, and $(47,030) and $49,088 for the six months ended June 30, 2018 and 2017, respectively.
The (loss) gain on sale or write down of assets, net for the three and six months ended June 30, 2018 includes impairment losses of $7,494 on two freestanding stores and $1,660 on Southridge Center. In addition, the (loss) gain on sale or write down of assets, net for the six months ended June 30, 2018 includes impairment losses of $36,338 on SouthPark Mall and $1,043 on Promenade at Casa Grande. The impairment losses were due to the reduction of the estimated holding period of the properties.
The (loss) gain on sale or write down of assets, net for three and six months ended June 30, 2018 includes a loss of $311 on the sale of Promenade at Casa Grande (See Note 15Dispositions). In addition, the (loss) gain on sale or write down of assets, net for the six months ended June 30, 2017 includes a gain of $59,713 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.

16

Table of Contents
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 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 three and six months ended June 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)
June 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 $2,996 and $2,786 at June 30, 2018 and December 31, 2017, respectively. Also included in tenant and other receivables, net are accrued percentage rents of $917 and $8,711 at June 30, 2018 and December 31, 2017, respectively, and a deferred rent receivable due to straight-line rent adjustments of $66,419 and $61,859 at June 30, 2018 and December 31, 2017, respectively.
8. Deferred Charges and Other Assets, net:
Deferred charges and other assets, net consist of the following:
 
June 30,
2018
 
December 31,
2017
Leasing
$
215,499

 
$
232,819

Intangible assets:
 
 
 
In-place lease values
97,204

 
108,432

Leasing commissions and legal costs
24,421

 
25,958

Above-market leases
150,829

 
164,040

Deferred tax assets
30,834

 
29,006

Deferred compensation plan assets
54,441

 
52,221

Distributions in excess of co-venture obligation(1)

 
31,150

Other assets
67,652

 
66,990

 
640,880

 
710,616

Less accumulated amortization(2)
(237,122
)
 
(261,426
)
 
$
403,758

 
$
449,190

 
 
 
(1)
See Note 11Financing Arrangement.
(2)
Accumulated amortization includes $69,192 and $74,507 relating to in-place lease values, leasing commissions and legal costs at June 30, 2018 and December 31, 2017, respectively. Amortization expense of in-place lease values, leasing commissions and legal costs was $3,552 and $5,545 for the three months ended June 30, 2018 and 2017, respectively, and $7,390 and $11,549 for the six months ended June 30, 2018 and 2017, respectively.

17

Table of Contents
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: (Continued)

The allocated values of above-market leases and below-market leases consist of the following:
 
June 30,
2018
 
December 31,
2017
Above-Market Leases
 
 
 
Original allocated value
$
150,829

 
$
164,040

Less accumulated amortization
(53,429
)
 
(60,210
)
 
$
97,400

 
$
103,830

Below-Market Leases(1)
 
 
 
Original allocated value
$
114,988

 
$
120,573

Less accumulated amortization
(57,301
)
 
(55,489
)
 
$
57,687

 
$
65,084

 
 
 
(1)
Below-market leases are included in other accrued liabilities.
9. Mortgage Notes Payable:
Mortgage notes payable at June 30, 2018 and December 31, 2017 consist of the following:
 
 
Carrying Amount of Mortgage Notes(1)
 
 
 
 
 
 
 
 
June 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)
 
$

 
$
199,937

 
$

 
$
199,904

 
3.77
%
 
$
625

 
2019
Danbury Fair Mall
 
102,863

 
102,863

 
104,599

 
104,598

 
5.53
%
 
1,538

 
2020
Fashion Outlets of Chicago(6)
 

 
199,460

 

 
199,298

 
3.64
%
 
580

 
2020
Fashion Outlets of Niagara Falls USA
 

 
111,219

 

 
112,770

 
4.89
%
 
727

 
2020
Freehold Raceway Mall(5)
 

 
398,129

 

 
398,050

 
3.94
%
 
1,300

 
2029
Fresno Fashion Fair
 

 
323,360

 

 
323,261

 
3.67
%
 
971

 
2026
Green Acres Commons(7)
 

 
127,545

 

 
107,219

 
4.69
%
 
447

 
2021
Green Acres Mall
 

 
288,043

 

 
291,366

 
3.61
%
 
1,447

 
2021
Kings Plaza Shopping Center
 

 
442,204

 

 
447,231

 
3.67
%
 
2,229

 
2019
Oaks, The
 

 
194,409

 

 
196,732

 
4.14
%
 
1,064

 
2022
Pacific View
 

 
122,895

 

 
124,397

 
4.08
%
 
668

 
2022
Queens Center
 

 
600,000

 

 
600,000

 
3.49
%
 
1,744

 
2025
Santa Monica Place(8)
 

 
296,695

 

 
296,366

 
3.67
%
 
844

 
2022
SanTan Village Regional Center
 

 
123,151

 

 
124,703

 
3.14
%
 
589

 
2019
Towne Mall
 

 
20,948

 

 
21,161

 
4.48
%
 
117

 
2022
Tucson La Encantada
 
66,175

 

 
66,970

 

 
4.23
%
 
368

 
2022
Victor Valley, Mall of
 

 
114,646

 

 
114,617

 
4.00
%
 
380

 
2024
Vintage Faire Mall
 

 
261,025

 

 
263,818

 
3.55
%
 
1,256

 
2026
Westside Pavilion(9)
 

 
139,530

 

 
141,020

 
4.49
%
 
783

 
2022
 
 
$
169,038

 
$
4,066,059

 
$
171,569

 
$
4,066,511

 
 

 
 

 
 


18

Table of Contents
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)


(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 $2,166 and $2,630 at June 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 $15,638 and $17,838 at June 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 June 30, 2018 and December 31, 2017, the total interest rate was 3.64% 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 June 30, 2018 and December 31, 2017, the total interest rate was 4.69% and 4.07%, respectively.
(8)
The loan bears interest at LIBOR plus 1.35%. At June 30, 2018 and December 31, 2017, the total interest rate was 3.67% and 3.13%, respectively.
(9)
On March 1, 2018, the Company entered into an agreement to contribute the underlying property into an unconsolidated joint venture (See Note 14Collaborative Arrangement).
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 $4,670 and $3,343 for the three months ended June 30, 2018 and 2017, respectively, and $9,001 and $5,977 for the six months ended June 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 June 30, 2018 and December 31, 2017 was $4,229,459 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.

19

Table of Contents
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 June 30, 2018, the borrowing rate on the facility was LIBOR plus 1.45%. As of June 30, 2018 and December 31, 2017, borrowings under the line of credit were $735,000 and $935,000, respectively, less unamortized deferred finance costs of $6,313 and $7,548, respectively, at a total interest rate of 3.71% and 3.13%, respectively. As of June 30, 2018 and December 31, 2017, the Company's availability under the line of credit for additional borrowings was $704,412 and $504,412, respectively, The estimated fair value (Level 2 measurement) of the line of credit at June 30, 2018 and December 31, 2017 was $724,122 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 June 30, 2018 and December 31, 2017, the note had a balance of $4,114 and $4,732, respectively. The estimated fair value (Level 2 measurement) of the note at June 30, 2018 and December 31, 2017 was $4,111 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 June 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 1,318,000 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.

20

Table of Contents
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 six months ended June 30, 2018 and 2017, the Company incurred interest (income) expense in connection with the financing arrangement as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Distributions of the partner's share of net income
$
2,464

 
$

 
$
4,466

 
$

Distributions in excess of the partner's share of net income
1,411

 

 
3,049

 

Adjustment to fair value of financing arrangement obligation
(8,768
)
 

 
(4,386
)
 

 
$
(4,893
)
 
$

 
$
3,129

 
$

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 June 30, 2018 and December 31, 2017. The remaining 7% limited partnership interest as of June 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 June 30, 2018 and December 31, 2017, the aggregate redemption value of the then-outstanding OP Units not owned by the Company was $590,571 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 six months ended June 30, 2018.

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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 expects to complete the transfer during the next twelve months. Both partners share operating control of the property and the Company will be reimbursed by the outside partner for 75% of the carrying cost of the property, which are defined in the agreement as operating expenses in excess of revenues, debt service and capital expenditures.
Since March 1, 2018, the Company has accounted for the operations of Westside Pavilion as a collaborative arrangement.  Accordingly, the Company has 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 will be settled upon completion of the transfer of the property.  The Company's partner's reimbursable 75% share of mortgage loan principal payments and capital expenditures are recorded as a receivable and a deferred gain that will be recognized when the transfer is completed.
Additionally, the Company has classified the long-lived assets of Westside Pavilion as held for sale on its consolidated balance sheet and has ceased the recognition of depreciation and amortization expense as of March 1, 2018.
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 $59,713. 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 $4,572 and $4,267 for the three months ended June 30, 2018 and 2017, respectively, and $8,808 and $8,484 for the six months ended June 30, 2018 and 2017, respectively.
No contingent rent was incurred during the three and six months ended June 30, 2018 or 2017.

22

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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)

As of June 30, 2018, the Company was contingently liable for $60,588 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 June 30, 2018, the Company had $10,034 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 June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Management fees
$
4,716

 
$
4,685

 
$
9,395

 
$
9,165

Development and leasing fees
3,321

 
2,721

 
6,925

 
7,991

 
$
8,037

 
$
7,406

 
$
16,320

 
$
17,156

Certain mortgage notes on the properties are held by NML (See Note 9Mortgage Notes Payable). Interest expense in connection with these notes was $2,131 and $2,181 for the three months ended June 30, 2018 and 2017, respectively, and $4,278 and $4,392 for the six months ended June 30, 2018 and 2017, respectively. Included in accounts payable and accrued expenses is interest payable on these notes of $705 and $716 at June 30, 2018 and December 31, 2017, respectively.
Interest expense from related party transactions also includes $(4,893) and $3,129 for the three and six months ended June 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 June 30, 2018 and December 31, 2017, the amounts due from the unconsolidated joint ventures was $5,683 and $5,411, respectively.
In addition, due from affiliates at June 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 $57 and $68 for the three months ended June 30, 2018 and 2017, respectively, and $117 and $138 for the six months ended June 30, 2018 and 2017, respectively. The balance on this note was $4,114 and $4,796 at June 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 $773 and $607 for the three months ended June 30, 2018 and 2017, respectively, and $1,522 and $1,218 for the six months ended June 30, 2018 and 2017, respectively. The balance on this note was $73,478 and $71,955 at June 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.

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Table of Contents
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 six months ended June 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 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

 
7,337

 
63.03

 
86,495

 
59.00

Vested
(189,044
)
 
57.49

 
(7,761
)
 
54.70

 
(107,505
)
 
74.43

Forfeited
(23,666
)
 
44.28

 
(845
)
 
77.91

 

 

Balance at June 30, 2018
993,058

 
$
51.24

 
2,785

 
$
66.79

 
130,345

 
$
64.24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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:

24

Table of Contents
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: (Continued)

 
SARs
 
Stock Options
 
Units
 
Value(1)
 
Units
 
Value(1)
Balance at January 1, 2018
235,439

 
$
53.83

 
35,565

 
$
57.32

Granted

 

 

 

Exercised
(235,439
)
 
53.83

 

 

Balance at June 30, 2018

 
$

 
35,565