MAC

Business Context and Reporting Period

Company: The Macerich Company (Macerich)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and six months ended June 30, 2006

Business Overview: Macerich is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, development, and management of regional and community shopping centers. As of June 30, 2006, the Operating Partnership owned or had an interest in 97 centers (76 regional, 19 community, 2 development) aggregating approximately 80 million square feet of gross leasable area.

Key Financial Metrics

(All figures in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 25.1% ($84.9 million) year-over-year. This was driven primarily by the 2005 Wilmorite acquisition (adding ~$42.1 million in rent) and the 2006 Valley River Center acquisition. Tenant recoveries increased 29.4%.
• Profitability: Net income available to common stockholders increased 33.1% ($8.2 million). However, income from continuing operations decreased 32.8% ($12.2 million) due to higher interest and depreciation expenses, offset significantly by a $26.0 million gain on the sale of Scottsdale/101 classified as discontinued operations.
• Interest Expense: Interest expense increased 37.9% ($38.9 million) due to assumed debt from acquisitions, higher rates on the line of credit, and new term loans, partially offset by the payoff of a $619 million acquisition loan in January 2006.
• Depreciation: Depreciation and amortization increased 35.3% ($31.9 million), primarily attributed to the 2005 and 2006 acquisitions.
• Debt Reduction: Total liabilities decreased by approximately $700 million, largely due to the repayment of the $619 million acquisition loan and paydowns of the revolving line of credit.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to incur between $250 million and $350 million in 2006 for development, redevelopment, expansions, and renovations.
• Recent Transactions (Subsequent to Period End):
  • Sold Park Lane Mall ($20 million) and Holiday Village/Greeley Mall ($86.8 million) in July 2006.
  • Purchased 11 department stores from Federated Department Stores for approximately $93 million in July 2006.
  • Amended and expanded the revolving line of credit to $1.5 billion, extending maturity to April 2010.
• Dividends: A dividend of $0.68 per share was declared for common stockholders and OP unit holders, payable September 8, 2006.
• Risks:
  • Interest Rate Risk: The company has significant floating rate debt exposure. A 1% increase in interest rates would decrease future earnings and cash flows by approximately $15.2 million annually.
  • REIT Status: Failure to qualify as a REIT would subject the company to regular corporate income taxes.
  • Market Conditions: Performance is dependent on retail sales, occupancy rates, and the ability to access capital markets.

Investor Verification Checklist

• Debt Maturity Profile: Verify the schedule of debt maturities, noting that $1.2 billion of consolidated debt matures within 3 years (including the line of credit).
• Acquisition Integration: Assess the performance of the 2005 Wilmorite portfolio and the 2006 Valley River Center acquisition against pro forma expectations.
• Discontinued Operations: Confirm the impact of the Scottsdale/101 sale ($26 million gain) on net income and ensure it is not treated as recurring operating income.
• Interest Rate Hedging: Review the effectiveness of interest rate swaps and caps in mitigating the risk of rising LIBOR rates on the $1.3 billion of floating rate debt.
• Liquidity Position: Monitor the cash balance ($45.5 million) relative to the $1.5 billion credit facility and upcoming capital expenditure requirements.