form10q3q08.htm
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, 2008
|
Commission
File No. 1-11530
|
Taubman Centers, Inc.
|
(Exact
name of registrant as specified in its charter)
|
Michigan
|
|
38-2033632
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
200
East Long Lake Road, Suite 300, Bloomfield Hills, Michigan
|
|
48304-2324
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(248)
258-6800
|
(Registrant's
telephone number, including area code)
|
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 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 90 days.
|
|
x Yes o
No
|
|
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,” “accelerated
filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
Large
Accelerated Filer x Accelerated Filer
o
Non-Accelerated Filer o Smaller Reporting
Company o
|
(Do not check if a smaller
reporting company)
|
|
Indicate
by a check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
|
o Yes x
No
|
|
|
As
of October 31, 2008, there were outstanding 53,018,987 shares of the
Company's common stock, par value $0.01 per
share.
|
TAUBMAN
CENTERS, INC.
CONTENTS
PART
I – FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements (Unaudited):
|
|
|
|
2
|
|
|
5
|
|
|
6
|
Item
2.
|
|
20
|
Item
3.
|
|
39
|
Item
4.
|
|
39
|
PART
II – OTHER INFORMATION
|
Item
1.
|
|
40
|
Item
1A.
|
|
40
|
Item
6.
|
|
41
|
|
|
|
|
|
TAUBMAN
CENTERS, INC.
(in
thousands, except share data)
|
|
September
30
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Properties
|
|
$ |
3,806,039 |
|
|
$ |
3,781,136 |
|
Accumulated depreciation and
amortization
|
|
|
(1,017,609 |
) |
|
|
(933,275 |
) |
|
|
$ |
2,788,430 |
|
|
$ |
2,847,861 |
|
Investment in Unconsolidated Joint
Ventures (Note 4)
|
|
|
93,419 |
|
|
|
92,117 |
|
Cash and cash
equivalents
|
|
|
36,698 |
|
|
|
47,166 |
|
Accounts and notes receivable,
less provision for bad debts of $8,276
and $6,694 in 2008 and
2007
|
|
|
40,947 |
|
|
|
52,161 |
|
Accounts receivable from related
parties
|
|
|
2,226 |
|
|
|
2,283 |
|
Deferred charges and other assets
(Notes 1 and 3)
|
|
|
220,143 |
|
|
|
109,719 |
|
|
|
$ |
3,181,863 |
|
|
$ |
3,151,307 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable (Note
5)
|
|
$ |
2,784,189 |
|
|
$ |
2,700,980 |
|
Accounts payable and accrued
liabilities
|
|
|
243,830 |
|
|
|
296,385 |
|
Dividends and distributions
payable
|
|
|
21,973 |
|
|
|
21,839 |
|
Distributions in excess of
investments in and net income of Unconsolidated
|
|
|
|
|
|
|
|
|
Joint Ventures (Note
4)
|
|
|
152,248 |
|
|
|
100,234 |
|
|
|
$ |
3,202,240 |
|
|
$ |
3,119,438 |
|
Commitments
and contingencies (Notes 1, 3, 5, 7, and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Equity of TRG
|
|
$ |
29,217 |
|
|
$ |
29,217 |
|
|
|
|
|
|
|
|
|
|
Minority
interests in TRG and consolidated joint ventures (Notes 1 and
3)
|
|
$ |
7,327 |
|
|
$ |
18,494 |
|
|
|
|
|
|
|
|
|
|
Shareowners'
Equity:
|
|
|
|
|
|
|
|
|
Series B Non-Participating
Convertible Preferred Stock, $0.001 par and
liquidation value, 40,000,000
shares authorized, 26,499,235 and 26,524,235
shares issued and outstanding at
September 30, 2008 and December 31, 2007
|
|
$ |
26 |
|
|
$ |
27 |
|
Series G Cumulative Redeemable
Preferred Stock, 4,000,000 shares
authorized, no par, $100 million
liquidation preference, 4,000,000 shares
issued and outstanding at
September 30, 2008 and December 31, 2007
|
|
|
|
|
|
|
|
|
Series H Cumulative Redeemable
Preferred Stock, 3,480,000 shares
authorized, no par, $87 million
liquidation preference, 3,480,000 shares
issued and outstanding at
September 30, 2008 and December 31, 2007
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value,
250,000,000 shares authorized, 52,948,733
and 52,624,013 shares issued and
outstanding at September 30, 2008 and
December 31, 2007
|
|
|
529 |
|
|
|
526 |
|
Additional paid-in
capital
|
|
|
554,140 |
|
|
|
543,333 |
|
Accumulated other comprehensive
income (loss)
|
|
|
(8,422 |
) |
|
|
(8,639 |
) |
Dividends in excess of net income
(Note 1)
|
|
|
(603,194 |
) |
|
|
(551,089 |
) |
|
|
$ |
(56,921 |
) |
|
$ |
(15,842 |
) |
|
|
$ |
3,181,863 |
|
|
$ |
3,151,307 |
|
See notes
to consolidated financial statements.
TAUBMAN CENTERS,
INC.
(in
thousands, except share data)
|
|
Three
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Minimum rents
|
|
$ |
87,401 |
|
|
$ |
81,273 |
|
Percentage rents
|
|
|
3,262 |
|
|
|
3,208 |
|
Expense recoveries
|
|
|
60,838 |
|
|
|
53,624 |
|
Management, leasing, and
development services
|
|
|
3,316 |
|
|
|
3,881 |
|
Other
|
|
|
8,896 |
|
|
|
8,667 |
|
|
|
$ |
163,713 |
|
|
$ |
150,653 |
|
Expenses:
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and
utilities
|
|
$ |
48,741 |
|
|
$ |
44,158 |
|
Other operating
|
|
|
18,482 |
|
|
|
16,574 |
|
Management, leasing, and
development services
|
|
|
1,843 |
|
|
|
2,074 |
|
General and
administrative
|
|
|
6,790 |
|
|
|
7,414 |
|
Interest expense
|
|
|
36,039 |
|
|
|
33,628 |
|
Depreciation and
amortization
|
|
|
35,464 |
|
|
|
33,757 |
|
|
|
$ |
147,359 |
|
|
$ |
137,605 |
|
Gains
on land sales and other nonoperating income
|
|
$ |
411 |
|
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense, equity in income of Unconsolidated
Joint Ventures, and minority and
preferred interests
|
|
$ |
16,765 |
|
|
$ |
14,186 |
|
Income
tax expense (Note 2)
|
|
|
(218 |
) |
|
|
|
|
Equity
in income of Unconsolidated Joint Ventures (Note 4)
|
|
|
11,289 |
|
|
|
11,275 |
|
Income
before minority and preferred interests
|
|
$ |
27,836 |
|
|
$ |
25,461 |
|
Minority
share of consolidated joint ventures (Note 1):
|
|
|
|
|
|
|
|
|
Minority share of income of
consolidated joint ventures
|
|
|
(1,416 |
) |
|
|
(1,044 |
) |
Distributions in excess of
minority share of income of
consolidated joint
ventures
|
|
|
(1,578 |
) |
|
|
(1,806 |
) |
Minority
interest in TRG (Note 1):
|
|
|
|
|
|
|
|
|
Minority share of income of
TRG
|
|
|
(7,445 |
) |
|
|
(6,849 |
) |
Distributions in excess of
minority share of income
|
|
|
(3,927 |
) |
|
|
(3,640 |
) |
TRG
Series F preferred distributions
|
|
|
(615 |
) |
|
|
(615 |
) |
Net
income
|
|
$ |
12,855 |
|
|
$ |
11,507 |
|
Series
G and H preferred stock dividends
|
|
|
(3,658 |
) |
|
|
(3,658 |
) |
Net
income allocable to common shareowners
|
|
$ |
9,197 |
|
|
$ |
7,849 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,855 |
|
|
$ |
11,507 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate
instruments and other
|
|
|
(1,353 |
) |
|
|
(4,186 |
) |
Reclassification adjustment for
amounts recognized in net income
|
|
|
315 |
|
|
|
315 |
|
Comprehensive
income
|
|
$ |
11,817 |
|
|
$ |
7,636 |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share (Note 9) -
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$ |
0.415 |
|
|
$ |
0.375 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic
|
|
|
52,908,924 |
|
|
|
52,456,144 |
|
See notes
to consolidated financial statements.
TAUBMAN CENTERS,
INC.
(in
thousands, except share data)
|
|
Nine
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Minimum rents
|
|
$ |
261,554 |
|
|
$ |
239,435 |
|
Percentage rents
|
|
|
7,162 |
|
|
|
6,513 |
|
Expense recoveries
|
|
|
178,686 |
|
|
|
162,170 |
|
Management, leasing, and
development services
|
|
|
10,901 |
|
|
|
12,403 |
|
Other
|
|
|
23,239 |
|
|
|
27,432 |
|
|
|
$ |
481,542 |
|
|
$ |
447,953 |
|
Expenses:
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and
utilities
|
|
$ |
138,766 |
|
|
$ |
127,664 |
|
Other operating
|
|
|
56,478 |
|
|
|
49,448 |
|
Management, leasing, and
development services
|
|
|
6,521 |
|
|
|
6,660 |
|
General and
administrative
|
|
|
23,066 |
|
|
|
21,750 |
|
Interest expense
|
|
|
108,993 |
|
|
|
95,512 |
|
Depreciation and
amortization
|
|
|
106,978 |
|
|
|
99,858 |
|
|
|
$ |
440,802 |
|
|
$ |
400,892 |
|
Gains
on land sales and other nonoperating income
|
|
$ |
3,670 |
|
|
$ |
2,252 |
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense, equity in income of Unconsolidated
Joint Ventures, and minority and
preferred interests
|
|
$ |
44,410 |
|
|
$ |
49,313 |
|
Income
tax expense (Note 2)
|
|
|
(658 |
) |
|
|
|
|
Equity
in income of Unconsolidated Joint Ventures (Note 4)
|
|
|
29,014 |
|
|
|
28,700 |
|
Income
before minority and preferred interests
|
|
$ |
72,766 |
|
|
$ |
78,013 |
|
Minority
share of consolidated joint ventures (Note 1):
|
|
|
|
|
|
|
|
|
Minority share of income of
consolidated joint ventures
|
|
|
(3,722 |
) |
|
|
(3,578 |
) |
Distributions in excess of
minority share of income of
consolidated joint
ventures
|
|
|
(7,973 |
) |
|
|
(2,847 |
) |
Minority
interest in TRG (Note 1):
|
|
|
|
|
|
|
|
|
Minority share of income of
TRG
|
|
|
(17,866 |
) |
|
|
(21,777 |
) |
Distributions in excess of
minority share of income
|
|
|
(16,268 |
) |
|
|
(9,910 |
) |
TRG
Series F preferred distributions
|
|
|
(1,845 |
) |
|
|
(1,845 |
) |
Net
income
|
|
$ |
25,092 |
|
|
$ |
38,056 |
|
Series
G and H preferred stock dividends
|
|
|
(10,975 |
) |
|
|
(10,975 |
) |
Net
income allocable to common shareowners
|
|
$ |
14,117 |
|
|
$ |
27,081 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,092 |
|
|
$ |
38,056 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest
rate instruments and other
|
|
|
(729 |
) |
|
|
1,571 |
|
Reclassification adjustment for
amounts recognized in net income
|
|
|
946 |
|
|
|
946 |
|
Comprehensive
income
|
|
$ |
25,309 |
|
|
$ |
40,573 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share (Note 9) -
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.27 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share (Note 9) -
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.26 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$ |
1.245 |
|
|
$ |
1.125 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic
|
|
|
52,815,246 |
|
|
|
53,093,894 |
|
See notes
to consolidated financial statements.
TAUBMAN
CENTERS, INC.
(in
thousands)
|
|
Nine
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
25,092 |
|
|
$ |
38,056 |
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Minority and preferred
interests
|
|
|
47,674 |
|
|
|
39,957 |
|
Depreciation and
amortization
|
|
|
106,978 |
|
|
|
99,858 |
|
Provision for bad
debts
|
|
|
3,455 |
|
|
|
2,827 |
|
Gains on sales of land and
land-related rights
|
|
|
(2,192 |
) |
|
|
|
|
Other
|
|
|
8,010 |
|
|
|
6,712 |
|
Increase (decrease) in cash
attributable to changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables, deferred charges,
and other assets
|
|
|
8,047 |
|
|
|
(3,255 |
) |
Accounts payable and other
liabilities
|
|
|
(21,500 |
) |
|
|
(6,994 |
) |
Net
Cash Provided By Operating Activities
|
|
$ |
175,564 |
|
|
$ |
177,161 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to
properties
|
|
$ |
(79,438 |
) |
|
$ |
(175,439 |
) |
Acquisition of marketable equity
securities and other assets
|
|
|
(1,939 |
) |
|
|
(2,290 |
) |
Acquisition of interests in The
Mall at Partridge Creek (Note 3)
|
|
|
(11,807 |
) |
|
|
|
|
Acquisition of additional interest
in The Pier Shops (Note 3)
|
|
|
|
|
|
|
(24,504 |
) |
Cash transferred in upon
consolidation of The Pier Shops (Note 3)
|
|
|
|
|
|
|
33,388 |
|
Funding of The Mall at Studio City
escrow (Note 3)
|
|
|
(54,334 |
) |
|
|
|
|
Proceeds from sales of land and
land-related rights
|
|
|
5,274 |
|
|
|
|
|
Contributions to Unconsolidated
Joint Ventures
|
|
|
(8,866 |
) |
|
|
(8,387 |
) |
Distributions from Unconsolidated
Joint Ventures in excess of income
|
|
|
61,645 |
|
|
|
4,983 |
|
Net
Cash Used In Investing Activities
|
|
$ |
(89,465 |
) |
|
$ |
(172,249 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Debt proceeds
|
|
$ |
334,269 |
|
|
$ |
227,483 |
|
Debt payments
|
|
|
(250,496 |
) |
|
|
(11,856 |
) |
Debt issuance
costs
|
|
|
(3,419 |
) |
|
|
(1,165 |
) |
Issuance of common stock and/or
partnership units in connection
with incentive
plans
|
|
|
3,809 |
|
|
|
|
|
Repurchase of common stock (Note
6)
|
|
|
|
|
|
|
(100,000 |
) |
Distributions to minority and
preferred interests (Note 1)
|
|
|
(101,893 |
) |
|
|
(41,374 |
) |
Cash dividends to preferred
shareowners
|
|
|
(10,975 |
) |
|
|
(10,975 |
) |
Cash dividends to common
shareowners
|
|
|
(65,705 |
) |
|
|
(59,769 |
) |
Other
|
|
|
(2,157 |
) |
|
|
(869 |
) |
Net
Cash Provided By (Used In) Financing Activities
|
|
$ |
(96,567 |
) |
|
$ |
1,475 |
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) In Cash and Cash Equivalents
|
|
$ |
(10,468 |
) |
|
$ |
6,387 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
47,166 |
|
|
|
26,282 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
36,698 |
|
|
$ |
32,669 |
|
See notes
to consolidated financial statements.
TAUBMAN
CENTERS, INC.
Note
1 – Interim Financial Statements
General
Taubman
Centers, Inc. (the Company or TCO) is a Michigan corporation that operates as a
self-administered and self-managed real estate investment trust (REIT). The
Taubman Realty Group Limited Partnership (Operating Partnership or TRG) is a
majority-owned partnership subsidiary of TCO that owns direct or indirect
interests in all of the company’s real estate properties. In this report, the
term “Company" refers to TCO, the Operating Partnership, and/or the Operating
Partnership's subsidiaries as the context may require. The Company engages in
the ownership, management, leasing, acquisition, disposition, development, and
expansion of regional and super-regional retail shopping centers and interests
therein. The Company’s owned portfolio as of September 30, 2008 included 23
urban and suburban shopping centers in ten states.
Taubman
Properties Asia LLC and its subsidiaries (Taubman Asia), which is the platform
for the Company’s expansion into the Asia-Pacific region, is headquartered in
Hong Kong.
Consolidation
The
consolidated financial statements of the Company include all accounts of the
Company, the Operating Partnership, and its consolidated subsidiaries, including
The Taubman Company LLC (the Manager) and Taubman Asia. In September 2008, the
Company acquired the interests of the owner of The Mall at Partridge Creek
(Partridge Creek) (Note 3). Prior to the acquisition, the Company consolidated
the accounts of the owner of Partridge Creek, which qualified as a variable
interest entity under Financial Accounting Standards Board (FASB) Interpretation
No. 46 “Consolidation of Variable Interest Entities” (FIN 46R) for which the
Operating Partnership was considered to be the primary beneficiary. In April
2007, the Company increased its ownership in The Pier Shops at Caesars (The Pier
Shops) to a 77.5% controlling interest and began consolidating the entity that
owns The Pier Shops (Note 3). Prior to the acquisition date, the Company
accounted for The Pier Shops under the equity method. All intercompany
transactions have been eliminated.
Investments
in entities not controlled but over which the Company may exercise significant
influence (Unconsolidated Joint Ventures) are accounted for under the equity
method. The Company has evaluated its investments in the Unconsolidated Joint
Ventures and has concluded that the ventures are not variable interest entities
as defined in FIN 46R. Accordingly, the Company accounts for its interests in
these ventures under the guidance in Statement of Position 78-9 "Accounting for
Investments in Real Estate Ventures" (SOP 78-9), as amended by FASB Staff
Position 78-9-1, and Emerging Issues Task Force Issue No. 04-5 "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights" (EITF 04-5). The Company’s partners or other owners in these
Unconsolidated Joint Ventures have substantive participating rights, as
contemplated by paragraphs 16 through 18 of EITF 04-5, including approval rights
over annual operating budgets, capital spending, financing, admission of new
partners/members, or sale of the properties and the Company has concluded that
the equity method of accounting is appropriate for these interests.
Specifically, the Company’s 79% investment in Westfarms is through a general
partnership in which the other general partners have approval rights over annual
operating budgets, capital spending, refinancing, or sale of the
property.
Ownership
In
addition to the Company’s common stock, there are three classes of preferred
stock (Series B, G, and H) outstanding as of September 30, 2008. Dividends on
the 8% Series G and 7.625% Series H Preferred Stock are cumulative and are
payable in arrears on or about the last day of each calendar quarter. The
Company owns corresponding Series G and Series H Preferred Equity interests in
the Operating Partnership that entitle the Company to income and distributions
(in the form of guaranteed payments) in amounts equal to the dividends payable
on the Company’s Series G and Series H Preferred Stock.
The
Company also is obligated to issue to partners in the Operating Partnership
other than the Company, upon subscription, one share of nonparticipating Series
B Preferred Stock per each Operating Partnership unit. The Series B Preferred
Stock entitles its holders to one vote per share on all matters submitted to the
Company’s shareowners and votes together with the common stock on all matters as
a single class. The holders of Series B Preferred Stock are not entitled to
dividends or earnings. The Series B Preferred Stock is convertible into the
Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock
for one share of common stock.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Operating
Partnership
At
September 30, 2008, the Operating Partnership’s equity included three classes of
preferred equity (Series F, G, and H) and the net equity of the partnership
unitholders. Net income and distributions of the Operating Partnership are
allocable first to the preferred equity interests, and the remaining amounts to
the general and limited partners in the Operating Partnership in accordance with
their percentage ownership. The Series G and Series H Preferred Equity are owned
by the Company and are eliminated in consolidation. The Series F Preferred
Equity is owned by an institutional investor.
The
Company's ownership in the Operating Partnership at September 30, 2008 consisted
of a 67% managing general partnership interest, as well as the Series G and H
Preferred Equity interests. The Company's average ownership percentage in the
Operating Partnership for the nine months ended September 30, 2008 and 2007 was
67% and 66%, respectively. At September 30, 2008, the Operating Partnership had
79,481,177 units of partnership interest outstanding, of which the Company owned
52,948,733 units.
Minority
Interests
As of
September 30, 2008 and December 31, 2007, minority interests in the Company are
comprised of the ownership interests of (1) noncontrolling unitholders of the
Operating Partnership and (2) the noncontrolling interests in joint ventures
controlled by the Company through ownership or contractual
arrangements.
The net
equity of the Operating Partnership noncontrolling unitholders is less than
zero. The net equity balances of the noncontrolling partners in certain of the
consolidated joint ventures are also less than zero. Therefore, the interests of
the noncontrolling unitholders of the Operating Partnership and outside partners
with net equity balances in the consolidated joint ventures of less than zero
are recognized as zero balances within the consolidated balance sheet. The
interests of the noncontrolling partners with positive equity balances in
consolidated joint ventures represent the minority interests presented on the
Company’s consolidated balance sheet of $7.3 million and $18.5 million at
September 30, 2008 and December 31, 2007, respectively.
The
income allocated to the Operating Partnership noncontrolling unitholders is
equal to their share of distributions as long as the net equity of the Operating
Partnership is less than zero. Similarly, the income allocated to the
noncontrolling partners with net equity balances in consolidated joint ventures
of less than zero is equal to their share of operating
distributions.
The net
equity balances of the Operating Partnership and certain of the consolidated
joint ventures are less than zero because of accumulated distributions in excess
of net income and not as a result of operating losses. Distributions to partners
are usually greater than net income because net income includes non-cash charges
for depreciation and amortization.
In
January 2008, International Plaza refinanced its debt and distributed a portion
of the excess proceeds to its partner (Note 5). The joint venture partner’s
$51.3 million share of the distributed excess proceeds is classified as minority
interest and included in Deferred Charges and Other Assets in the Company’s
consolidated balance sheet. As of September 30, 2008, the total of excess
proceeds distributed to partners for this financing and the May 2006 financing
at the Cherry Creek consolidated joint venture, which are included in Deferred
Charges and Other Assets, was $96.8 million. The Company accounts for
distributions to minority partners that result from such financing transactions
as a debit balance minority interest upon determination that (1) the
distribution was the result of appreciation in the fair value of the property
above the book value, (2) the financing was provided at a loan to value ratio
commensurate with non-recourse real estate lending, and (3) the excess of the
property value over the financing provides support for the eventual recovery of
the debit balance minority interest upon sale or disposal of the property. Debit
balance minority interests are considered as part of the carrying value of a
property for purposes of evaluating impairment, should events or circumstances
indicate that the carrying value may not be recoverable.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In
January 2008, the Company's president of Taubman Asia (the Asia President)
obtained an ownership interest in Taubman Asia, a consolidated subsidiary. The
Asia President is entitled to 10% of Taubman Asia's dividends, with 85% of his
dividends being withheld as contributions to capital. These withholdings will
continue until he contributes and maintains his capital consistent with a 10%
ownership interest, including all capital funded by the Operating Partnership
for Taubman Asia's operating and investment activities prior and subsequent to
the Asia President obtaining his ownership interest. The Asia President's
ownership interest will be reduced to 5% upon his cumulatively receiving a
specified amount in dividends. The Operating Partnership will have a preferred
investment in Taubman Asia to the extent the Asia President has not yet
contributed capital commensurate with his ownership interest. This preferred
investment will accrue an annual preferential return equal to the Operating
Partnership's average borrowing rate (with the preferred investment and accrued
return together being referred to herein as the preferred interest). Taubman
Asia has the ability to call at any time the Asia President's ownership at fair
value, less the amount required to return the Operating Partnership's preferred
interest. The Asia President similarly has the ability to put his ownership
interest to Taubman Asia at 85% (increasing to 100% in 2013) of fair value, less
the amount required to return the Operating Partnership's preferred interest. In
the event of a liquidation of Taubman Asia, the Operating Partnership's
preferred interest would be returned in advance of any other ownership interest
or income. The Asia President's noncontrolling interest in Taubman Asia is
accounted for as a minority interest in the Company's financial statements,
currently at a zero balance.
See Note
11 – “New Accounting Pronouncements” regarding future changes to the accounting
for minority interests.
Finite Life
Entities
Statement
of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. At September 30, 2008, the
Company held controlling interests in consolidated entities with specified
termination dates in 2081 and 2083. The minority owners’ interests in these
entities are to be settled upon termination by distribution or transfer of
either cash or specific assets of the underlying entity. The estimated fair
value of these minority interests was approximately $192.9 million at September
30, 2008, compared to a book value of $(96.8) million, which was classified as
Deferred Charges and Other Assets in the Company’s consolidated balance
sheet.
Other
The
unaudited interim financial statements should be read in conjunction with the
audited financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2007. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been made. The results of interim periods are not necessarily
indicative of the results for a full year.
Dollar
amounts presented in tables within the notes to the financial statements are
stated in thousands, except share data or as otherwise noted.
Note
2 – Income Taxes
The
Company is subject to corporate level federal, state, and foreign income taxes
in its taxable REIT subsidiaries and state income taxes in certain partnership
subsidiaries, which are provided for in the Company’s financial statements. The
Company's deferred tax assets and liabilities reflect the impact of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and the bases of such assets and liabilities as measured by
tax laws. Deferred tax assets are reduced, if necessary, by a valuation
allowance to the amount where realization is more likely than not assured after
considering all available evidence. The Company’s temporary differences
primarily relate to deferred compensation and depreciation. In July 2007, the
State of Michigan signed into law the Michigan Business Tax Act (MBT), replacing
the Michigan single business tax with a business income tax and modified gross
receipts tax. These new taxes became effective on January 1, 2008, and are
subject to the provisions of SFAS No. 109 “Accounting for Income Taxes.” As of
September 30, 2008, the Company had a net federal, state, and foreign deferred
tax asset of $3.1 million, after a valuation allowance of $8.9 million. As of
December 31, 2007, the net federal, state, and foreign deferred tax asset was
$3.3 million, after a valuation allowance of $6.6 million.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
Company had no unrecognized tax benefits as defined by FASB Interpretation No.
48 “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109” as of September 30, 2008. The Company expects no significant
increases or decreases in unrecognized tax benefits due to changes in tax
positions within one year of September 30, 2008. The Company has no interest or
penalties relating to income taxes recognized in the statement of operations for
the three and nine months ended September 30, 2008 or in the balance sheet as of
September 30, 2008. As of September 30, 2008, returns for the calendar years
2004 through 2007 remain subject to examination by U.S. and various state and
foreign tax jurisdictions.
Note
3 – Acquisitions, New Development, and Services
The Mall at Partridge
Creek
Partridge
Creek, a 0.6 million square foot center, opened in October 2007 in Clinton
Township, Michigan. The center is anchored by Nordstrom, Parisian, and MJR
Theatres. In May 2006, the Company engaged the services of a third-party
investor to acquire certain property associated with the project, in order to
facilitate a Section 1031 like-kind exchange to provide flexibility for
disposing of assets in the future. The third-party investor was the owner of the
project and leased the land from a subsidiary of the Company. In turn, the owner
leased the project back to the Company.
Funding
for the project was provided by the following sources. The Company provided
approximately 45% of the project funding under a junior subordinated financing,
which was repaid in September 2008. The owner provided $9 million in equity.
Funding for the remaining project costs was provided by the owner’s third-party
recourse construction loan.
In
September 2008, the Company exercised its option to purchase the third-party
owner’s interests in Partridge Creek. The purchase price of $11.8 million
included the original owner's equity contribution of $9 million plus a 12%
cumulative return. The acquisition of the interests was accounted for under the
purchase method. The excess of the purchase price over the book value of the
interests acquired was approximately $3.8 million and was preliminarily
allocated principally to building and improvements. The Company assumed all of
the obligations and was assigned all of the owner's rights under the ground
lease, the operating lease, and any remaining obligations under the
loans.
University Town
Center
In May
2008, the Company announced it had entered into agreements to jointly develop
University Town Center, a regional mall in Sarasota, Florida. The 0.9 million
square foot shopping center will be part of a mixed-use development anchored by
Nordstrom, Neiman Marcus, and Macy's. The Company will own a 25% interest in the
center and expects its share of development costs to be approximately $90
million. The partnership is preparing to close on the purchase of the land and
begin construction in the next few months. Assuming this occurs as expected, the
Company would expect the center to open in November 2010. The partnership is
working with a number of banks on construction financing. If financing can not
be secured with desirable terms, the partnership is planning to self-fund the
project.
The Mall at Studio
City
In
February 2008, the Company announced that Taubman Asia is acquiring a 25%
interest in The Mall at Studio City, the retail component of Macao Studio City,
a major mixed-use project on the Cotai Strip in Macao, China. In addition,
Taubman Asia entered into long-term agreements to perform development,
management, and leasing services for the shopping center. The Company’s total
investment in the project (including the initial payment, allocation of
construction debt, and additional payments anticipated in years two and five
after opening) is expected to be approximately $200 million. Taubman Asia’s
investment is in a joint venture with Cyber One Agents Limited (Cyber One) and
will be accounted for under the equity method. Macao Studio City is being
developed by Cyber One, a joint venture between New Cotai, LLC and East Asia
Satellite Television Holdings, a subsidiary of eSun Holdings
(eSun).
The
Company’s $54 million initial cash payment has been placed into escrow until
financing for the overall project is completed. The $54 million escrowed payment
is classified within Deferred Charges and Other Assets on the consolidated
balance sheet. If the financing is not finalized by August 2009, the $54 million
in escrow will be returned to the Company. No interest is being capitalized on
this payment until financing for the overall project is complete. Since the
capital markets have deteriorated, the Company’s partners, with its support,
continue to actively pursue a variety of financing alternatives for the project.
Assuming the financing is obtained and construction is begun sometime in 2009,
the project is expected to open in 2011.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
Company’s services agreements were conditional upon eSun shareholder approval,
which was received in March 2008, however, any payments due under the
development services agreement can be delayed until financing is completed.
Excluding the $54 million initial refundable deposit, the Company had
capitalized costs of $2.5 million on the Macao project as of September 30, 2008.
Offsetting these costs, the Company received a $2.5 million non-refundable
development fee payment in October 2008 from the owner of the Macao project.
Such payment has been recorded as deferred revenue. The Company expensed costs
relating to the project incurred in the third quarter of 2008, and it expects to
continue expensing costs as incurred until financing is obtained.
The Pier Shops at
Caesars
The Pier
Shops, located in Atlantic City, New Jersey, began opening in phases in June
2006. Gordon Group Holdings LLC (Gordon) developed the center, and in January
2007, the Company assumed full management and leasing responsibility for the
center. In April 2007, the Company increased its ownership in The Pier Shops to
a 77.5% controlling interest. The remaining 22.5% interest continues to be held
by an affiliate of Gordon. The Company began consolidating The Pier Shops as of
the April 2007 purchase date. At closing, the Company made a $24.5 million
equity investment in the center, bringing its total equity investment to $28.5
million. At the purchase date, the book values of the center’s assets and
liabilities were $229.7 million and $171.3 million, respectively. The excess of
the book value of the net assets acquired over the purchase price was
approximately $17 million, which was allocated principally to building and
improvements. The Company is entitled to a 7% cumulative preferred return on its
$133.1 million total investment, including its $104.6 million share of debt. In
April 2007, The Pier Shops completed a refinancing of its existing construction
loan with a $135 million 10 year, non-recourse, interest-only loan with an
all-in rate of 6.1%. The Company will be responsible for any additional capital
requirements, on which it will receive a preferred return at a minimum of 8%. As
of September 30, 2008, the Company had provided $2.5 million of additional
capital.
The Mall at Oyster
Bay
In June
2007, the Supreme Court of the State of New York (Suffolk County) affirmed that
the Town of Oyster Bay had not provided a basis to deny the Company’s
application to build The Mall at Oyster Bay (Oyster Bay) in Syosset, Long
Island, New York. In September 2007, the Oyster Bay town board adopted a
resolution citing its reasons for denying the application for a special use
permit and submitted it to the Court. The Company responded with a motion asking
the Court to order the town to issue the permit. In June 2008, the Supreme Court
ordered the Town of Oyster Bay to immediately issue the Company a special use
permit. Subsequently in June of 2008, the Town filed a notice of appeal
regarding the court’s decision. The Company has filed a motion to expedite the
appeal process, which was granted in July 2008. In addition, the Company was
also granted a preference for oral argument, which is also expected to shorten
the appeal process. As a result, the Company is hopeful the appeal process can
be concluded in early 2009, clearing the way to start the long-delayed
construction of the center in the middle of 2009. From the start of
construction, it is less than a two year process to build the mall. The Company
continues to be confident that it is probable it will prevail and build the
mall, which has over 60% of the space committed and will be anchored by Neiman
Marcus, Nordstrom, and Barneys New York. However, if the Company is ultimately
unsuccessful it is anticipated that the recovery on this asset would be
significantly less than its current investment. The Company’s investment in
Oyster Bay was $153 million as of September 30, 2008.
Songdo International
Business District
In 2007,
the Company entered into an agreement to provide development services for a 1.1
million square foot retail and entertainment complex in Songdo International
Business District (Songdo), Incheon, South Korea. The Company also finalized an
agreement to provide management and leasing services for the retail component,
and it continues to provide services as the regional mall progresses. The
shopping center will be anchored by Lotte Department Store and Tesco Homeplus,
and the Company hopes to announce soon the third and final anchor, a major movie
complex. Construction of the center has begun with the foundations, underground
parking, and subway connections. The ownership group of the shopping center is
working to obtain the financing for the retail center and related buildings and
improvements. Full construction of the center will commence once financing is
complete. The ownership group remains committed to keeping the center on track
for a 2011 opening. The Company continues to evaluate an investment in the
shopping center, and a decision will likely occur when the financing is
finalized.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note
4 - Investments in Unconsolidated Joint Ventures
General
Information
The
Company owns beneficial interests in joint ventures that own shopping centers.
The Operating Partnership is the direct or indirect managing general partner or
managing member of these Unconsolidated Joint Ventures, except for the ventures
that own Arizona Mills, The Mall at Millenia, and Waterside Shops. The Company,
which formerly accounted for The Pier Shops as an Unconsolidated Joint Venture,
began consolidating it after acquiring a controlling interest in April 2007
(Note 3).
|
Ownership
as of
September 30, 2008 and December 31,
2007
|
Arizona
Mills
|
50%
|
Fair
Oaks
|
50
|
The
Mall at Millenia
|
50
|
Stamford
Town Center
|
50
|
Sunvalley
|
50
|
Waterside
Shops
|
25
|
Westfarms
|
79
|
The
Company's carrying value of its Investment in Unconsolidated Joint Ventures
differs from its share of the partnership or members equity reported in the
combined balance sheet of the Unconsolidated Joint Ventures due to (i) the
Company's cost of its investment in excess of the historical net book values of
the Unconsolidated Joint Ventures and (ii) the Operating Partnership’s
adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the Unconsolidated Joint Ventures. The
Company's additional basis allocated to depreciable assets is recognized on a
straight-line basis over 40 years. The Operating Partnership’s differences in
bases are amortized over the useful lives of the related assets.
In its
consolidated balance sheet, the Company separately reports its investment in
joint ventures for which accumulated distributions have exceeded investments in
and net income of the joint ventures. The net equity of certain joint ventures
is less than zero because distributions are usually greater than net income, as
net income includes non-cash charges for depreciation and
amortization.
Combined Financial
Information
Combined
balance sheet and results of operations information is presented in the
following table for the Unconsolidated Joint Ventures, followed by the Operating
Partnership's beneficial interest in the combined information. Beneficial
interest is calculated based on the Operating Partnership's ownership interest
in each of the Unconsolidated Joint Ventures. Amounts related to The Pier Shops
are included in the combined information of the Unconsolidated Joint Ventures
through the date of the Company’s acquisition of a controlling interest in April
2007 (Note 3). The Operating Partnership’s investment in The Pier Shops
represented an effective 6% interest based on relative equity contributions,
prior to the Company acquiring a controlling interest. The combined information
of the Unconsolidated Joint Ventures excludes the balances of University Town
Center (Note 3).
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
September
30
2008
|
|
|
December
31
2007
|
|
Assets:
|
|
|
|
|
|
|
Properties
|
|
$ |
1,078,007 |
|
|
$ |
1,056,380 |
|
Accumulated depreciation and
amortization
|
|
|
(358,771 |
) |
|
|
(347,459 |
) |
|
|
$ |
719,236 |
|
|
$ |
708,921 |
|
Cash and cash
equivalents
|
|
|
22,779 |
|
|
|
40,097 |
|
Accounts and notes receivable,
less provision for bad debts of
$1,456 and $1,799 in 2008 and
2007
|
|
|
19,677 |
|
|
|
26,271 |
|
Deferred charges and other
assets
|
|
|
23,578 |
|
|
|
18,229 |
|
|
|
$ |
785,270 |
|
|
$ |
793,518 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and accumulated deficiency in assets:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$ |
1,108,605 |
|
|
$ |
1,003,463 |
|
Accounts payable and other
liabilities
|
|
|
44,794 |
|
|
|
55,242 |
|
TRG's accumulated deficiency in
assets
|
|
|
(202,745 |
) |
|
|
(151,363 |
) |
Unconsolidated Joint Venture
Partners' accumulated deficiency
in assets
|
|
|
(165,384 |
) |
|
|
(113,824 |
) |
|
|
$ |
785,270 |
|
|
$ |
793,518 |
|
|
|
|
|
|
|
|
|
|
TRG's
accumulated deficiency in assets (above)
|
|
$ |
(202,745 |
) |
|
$ |
(151,363 |
) |
TRG’s
investment in University Town Center (Note 3)
|
|
|
4,461 |
|
|
|
|
|
TRG
basis adjustments, including elimination of intercompany
profit
|
|
|
72,329 |
|
|
|
74,660 |
|
TCO's
additional basis
|
|
|
67,126 |
|
|
|
68,586 |
|
Net
Investment in Unconsolidated Joint Ventures
|
|
$ |
(58,829 |
) |
|
$ |
(8,117 |
) |
Distributions
in excess of investments in and net income of
Unconsolidated Joint
Ventures
|
|
|
152,248 |
|
|
|
100,234 |
|
Investment
in Unconsolidated Joint Ventures
|
|
$ |
93,419 |
|
|
$ |
92,117 |
|
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
67,054 |
|
|
$ |
64,366 |
|
|
$ |
194,625 |
|
|
$ |
192,059 |
|
Maintenance,
taxes, utilities, and other operating expenses
|
|
$ |
21,858 |
|
|
$ |
19,152 |
|
|
$ |
66,988 |
|
|
$ |
65,422 |
|
Interest
expense
|
|
|
16,421 |
|
|
|
15,980 |
|
|
|
48,565 |
|
|
|
50,401 |
|
Depreciation
and amortization
|
|
|
9,714 |
|
|
|
8,901 |
|
|
|
28,528 |
|
|
|
27,809 |
|
Total
operating costs
|
|
$ |
47,993 |
|
|
$ |
44,033 |
|
|
$ |
144,081 |
|
|
$ |
143,632 |
|
Nonoperating
income
|
|
|
115 |
|
|
|
375 |
|
|
|
594 |
|
|
|
1,189 |
|
Net
income
|
|
$ |
19,176 |
|
|
$ |
20,708 |
|
|
$ |
51,138 |
|
|
$ |
49,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocable to TRG
|
|
$ |
10,640 |
|
|
$ |
11,576 |
|
|
$ |
28,359 |
|
|
$ |
29,573 |
|
Realized
intercompany profit, net of depreciation on TRG's
basis adjustments
|
|
|
1,136 |
|
|
|
185 |
|
|
|
2,115 |
|
|
|
585 |
|
Depreciation
of TCO's additional basis
|
|
|
(487 |
) |
|
|
(486 |
) |
|
|
(1,460 |
) |
|
|
(1,458 |
) |
Equity
in income of Unconsolidated Joint Ventures
|
|
$ |
11,289 |
|
|
$ |
11,275 |
|
|
$ |
29,014 |
|
|
$ |
28,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in Unconsolidated Joint Ventures'
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less maintenance, taxes,
utilities, and other
operating
expenses
|
|
$ |
25,636 |
|
|
$ |
25,543 |
|
|
$ |
71,394 |
|
|
$ |
70,963 |
|
Interest expense
|
|
|
(8,570 |
) |
|
|
(8,369 |
) |
|
|
(25,289 |
) |
|
|
(24,996 |
) |
Depreciation and
amortization
|
|
|
(5,777 |
) |
|
|
(5,899 |
) |
|
|
(17,091 |
) |
|
|
(17,267 |
) |
Equity in income of Unconsolidated
Joint Ventures
|
|
$ |
11,289 |
|
|
$ |
11,275 |
|
|
$ |
29,014 |
|
|
$ |
28,700 |
|
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note
5 – Beneficial Interest in Debt and Interest Expense
In May
2008, the Company amended its $40 million revolver, extending the maturity date
by two years, to February 2011.
In April
2008, Fair Oaks, a 50% owned Unconsolidated Joint Venture, completed a $250
million non-recourse refinancing that bears interest at LIBOR plus 1.40%. The
loan agreement has a three-year term, with two one-year extension options. The
loan is interest-only for the entire term, except during the second one-year
extension period, if elected. Fair Oaks also entered into an agreement to swap
the floating rate for an all-in fixed rate of 4.56% for the initial three-year
term of the loan agreement. The swap agreement has
been designated, and is expected to be effective, as a cash flow hedge of the
interest payments on the new debt. Changes in the fair value of the swap
agreement at each balance sheet date during the term of the agreement are
recorded in Other Comprehensive Income (OCI). Proceeds from the
refinancing were used to pay off the existing $140 million 6.6% loan, plus
accrued interest and fees. Excess proceeds were distributed to the partners, and
the Company’s share was used to pay down its revolving credit
facilities.
In
January 2008, the Company completed a $325 million non-recourse refinancing at
International Plaza that bears interest at LIBOR plus 1.15%. The loan agreement
has a three-year term, with two one-year extension options. The loan is
interest-only for the entire term, except during the second one-year extension
period, if elected. The Company also entered into an agreement to swap the
floating rate for an all-in fixed rate of 5.375% for the initial three-year term
of the loan agreement. The swap agreement has been designated, and is expected
to be effective, as a cash flow hedge of the interest payments on the new debt.
Changes in the fair value of the swap agreement at each balance sheet date
during the term of the agreement are recorded in OCI. Proceeds from the
refinancing were used to pay off the existing $175.2 million 4.37% (effective
rate) loan, accrued interest, and the Company’s $33.5 million preferential
equity, with the remaining amount distributed based upon ownership percentages
of the Company and its 49.9% joint venture partner.
The
Operating Partnership's beneficial interest in the debt, capital lease
obligations, capitalized interest, and interest expense of its consolidated
subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest in the
consolidated subsidiaries excludes debt and interest related to the minority
interests in Cherry Creek Shopping Center (50%), International Plaza (49.9%),
The Pier Shops (22.5% as of April 2007, Note 3), The Mall at Wellington Green
(10%), and MacArthur Center (5%). The Operating Partnership’s beneficial
interest in the Unconsolidated Joint Ventures, prior to April 2007, excludes The
Pier Shops.
|
|
At
100%
|
|
|
At
Beneficial Interest
|
|
|
|
Consolidated
Subsidiaries
|
|
|
Unconsolidated
Joint
Ventures
|
|
|
Consolidated
Subsidiaries
|
|
|
Unconsolidated
Joint
Ventures
|
|
Debt
as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
2,784,189 |
|
|
|
1,108,605 |
|
|
|
2,424,899 |
|
|
|
569,049 |
|
December 31, 2007
|
|
|
2,700,980 |
|
|
|
1,003,463 |
|
|
|
2,416,292 |
|
|
|
517,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
3,369 |
|
|
|
234 |
|
|
|
3,360 |
|
|
|
117 |
|
December 31, 2007
|
|
|
5,521 |
|
|
|
504 |
|
|
|
5,507 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
2008
|
|
|
7,483 |
|
|
|
134 |
|
|
|
7,376 |
|
|
|
119 |
|
Nine months ended September 30,
2007
|
|
|
11,896 |
|
|
|
235 |
|
|
|
11,835 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
2008
|
|
|
108,993 |
|
|
|
48,565 |
|
|
|
94,307 |
|
|
|
25,289 |
|
Nine months ended September 30,
2007
|
|
|
95,512 |
|
|
|
50,401 |
|
|
|
84,938 |
|
|
|
24,996 |
|
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt Covenants and
Guarantees
Certain
loan agreements contain various restrictive covenants, including a minimum net
worth requirement, minimum interest coverage ratios, a maximum payout ratio on
distributions, a minimum debt yield ratio, a minimum fixed charges coverage
ratio, and a maximum leverage ratio, the latter being the most restrictive. The
Operating Partnership is in compliance with all of its covenants as of September
30, 2008. The maximum payout ratio on distributions covenant limits the payment
of distributions generally to 95% of funds from operations, as defined in the
loan agreements, except as required to maintain the Company's tax status, pay
preferred distributions, and for distributions related to the sale of certain
assets.
Payments
of principal and interest on the loans in the following table are guaranteed by
the Operating Partnership as of September 30, 2008.
Center
|
|
Loan
balance
as
of 9/30/08
|
|
|
TRG's
beneficial
interest
in loan
balance
as
of 9/30/08
|
|
|
Amount
of
loan
balance
guaranteed
by
TRG as
of
9/30/08
|
|
|
%
of loan
balance
guaranteed
by
TRG
|
|
|
%
of interest
guaranteed
by
TRG
|
|
|
|
(in
millions of dollars)
|
|
|
|
|
|
|
|
Dolphin
Mall
|
|
|
120.0 |
|
|
|
120.0 |
|
|
|
120.0 |
|
|
|
100 |
% |
|
|
100 |
% |
Fairlane
Town Center
|
|
|
73.8 |
|
|
|
73.8 |
|
|
|
73.8 |
|
|
|
100 |
% |
|
|
100 |
% |
Twelve
Oaks Mall
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
100 |
% |
|
|
100 |
% |
The
Operating Partnership has also guaranteed certain obligations of Partridge
Creek, which is encumbered by a $71.4 million recourse construction loan (Note
3).
The
Company is required to escrow cash balances for specific uses stipulated by
certain of its lenders. As of September 30, 2008 and December 31, 2007, the
Company’s cash balances restricted for these uses were $2.8 million and $1.0
million, respectively. Such amounts are included within cash and cash
equivalents in the Company’s consolidated balance sheet.
Note
6 - Equity Transactions
Common Stock and
Equity
In July
2007, the Company’s Board of Directors authorized the repurchase of $100 million
of the Company’s common stock on the open market or in privately negotiated
transactions. During 2007, the Company repurchased 987,180 shares of its common
stock for a total of $50 million under this authorization. In addition, in 2007
the Company repurchased an additional 923,364 shares for $50 million,
representing the remaining amount under a previous program approved by the
Company’s Board of Directors in December 2005. All shares repurchased have been
cancelled. For each share of stock repurchased, an equal number of Operating
Partnership units owned by the Company were redeemed. Repurchases of common
stock were financed through general corporate funds, including borrowings under
existing lines of credit. As of September 30, 2008, $50 million remained of the
2007 authorization.
During
the nine months ended September 30, 2007, 1,285,809 shares of Series B Preferred
Stock were converted to 84 shares of the Company's common stock as a result of
tenders of units under the Continuing Offer (Note 8). No shares were converted
during the nine months ended September 30, 2008. See Note 7 for equity issuances
under share-based compensation plans.
Note
7 – Share-Based Compensation
In May
2008, the Company’s shareowners approved The Taubman Company 2008 Omnibus
Long-Term Incentive Plan (2008 Omnibus Plan). The 2008 Omnibus Plan provides for
the award to directors, officers, employees, and other service providers of the
Company of restricted shares, restricted units of limited partnership in the
Operating Partnership, options to purchase shares or Operating Partnership
units, share appreciation rights, unrestricted Shares or Operating Partnership
units, and other awards to acquire up to an aggregate of 6,100,000 Company
common shares or Operating Partnership units, of which substantially all were
available as of September 30, 2008. The Company anticipates that all future
grants of share-based compensation will be made under the 2008 Omnibus Plan. In
addition, non-employee directors have the option to defer their compensation,
other than their meeting fees, under a deferred compensation
plan.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to
the adoption of the 2008 Omnibus Plan, the Company provided share-based
compensation through an incentive option plan, a long-term incentive plan, and
non-employee directors' stock grant and deferred compensation plans. The
compensation cost charged to income for these share-based compensation plans was
$1.8 million and $5.8 million for the three and nine months ended September 30,
2008, respectively, and $1.7 million and $5.1 million for the three and nine
months ended September 30, 2007, respectively. Compensation cost capitalized as
part of properties and deferred leasing costs was $0.2 million and $0.7 million
for the three and nine months ended September 30, 2008, respectively, and $0.2
million and $0.6 million for the three and nine months ended September 30, 2007,
respectively.
Further
information regarding activities relating to the incentive option plan and
long-term incentive plan during the three and nine months ended September 30,
2008 is provided below.
Incentive
Options
The
Company’s incentive option plan (the Option Plan), which was shareowner
approved, permitted the grant of options to employees. The Operating
Partnership's units issued in connection with the Option Plan are exchangeable
for new shares of the Company's common stock under the Continuing Offer (Note
8). Options for 1.4 million partnership units have been granted and are
outstanding at September 30, 2008. Of the 1.4 million options outstanding, 0.9
million have vesting schedules with one-third vesting at each of the first,
second, and third years of the grant anniversary, if continuous service has been
provided or upon retirement or certain other events if earlier. Substantially
all of the other 0.5 million options outstanding have vesting schedules with
one-third vesting at each of the third, fifth, and seventh years of the grant
anniversary, if continuous service has been provided and certain conditions
dependent on the Company’s market performance in comparison to its competitors
have been met or upon retirement or certain other events if earlier. The options
have ten-year contractual terms.
The
Company estimated the value of the options issued during the nine months ended
September 30, 2008 using a Black-Scholes valuation model based on the following
assumptions and resulting in the weighted average grant date fair value shown
below:
|
|
2008
|
|
Expected
volatility
|
|
|
24.33 |
% |
Expected
dividend yield
|
|
|
3.50 |
% |
Expected
term (in years)
|
|
|
6 |
|
Risk-free
interest rate
|
|
|
3.08 |
% |
Weighted
average grant-date fair value
|
|
|
$9.31 |
|
Expected
volatility and dividend yields are based on historical volatility and yields of
the Company’s common stock, respectively, as well as other factors. In
developing the assumption of expected term, the Company has considered the
vesting and contractual terms as required by the simplified method of developing
expected term assumptions. The risk-free interest rates used are based on the
U.S. Treasury yield curves in effect at the times of grants. The Company assumes
no forfeitures under the Option Plan due to the small number of participants and
low turnover rate.
A summary
of option activity under the Option Plan for the nine months ended September 30,
2008 is presented below:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining
Contractual
Term
(in years)
|
|
|
Range
of
Exercise Prices
|
|
Outstanding
at January 1, 2008
|
|
|
1,330,646 |
|
|
$ |
36.54 |
|
|
|
7.8 |
|
|
$ |
29.38
- $55.90 |
|
Granted
|
|
|
230,567 |
|
|
|
50.65 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(210,736 |
) |
|
|
31.55 |
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
|
1,350,477 |
|
|
$ |
39.73 |
|
|
|
7.5 |
|
|
$ |
29.38
- $55.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
vested options at September 30, 2008
|
|
|
490,927 |
|
|
$ |
37.05 |
|
|
|
7.1 |
|
|
|
|
|
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-Term Incentive
Plan
The
Company established The Taubman Company 2005 Long-Term Incentive Plan (LTIP) in
2005, which was shareowner approved. The LTIP allowed the Company to make grants
of restricted stock units (RSU) to employees. There were RSU for 0.3 million
shares outstanding at September 30, 2008. Each RSU represents the right to
receive upon vesting one share of the Company’s common stock plus a cash payment
equal to the aggregate cash dividends that would have been paid on such share of
common stock from the date of grant of the award to the vesting date. Each RSU
is valued at the closing price of the Company’s common stock on the grant
date.
A summary
of activity for the nine months ended September 30, 2008 under the LTIP is
presented below:
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding
at January 1, 2008
|
|
|
358,297 |
|
|
$ |
41.63 |
|
Granted
|
|
|
121,037 |
|
|
|
50.65 |
|
Redeemed
|
|
|
(136,200 |
) |
|
|
32.15 |
|
Forfeited
|
|
|
(3,502 |
) |
|
|
49.34 |
|
Outstanding
at September 30, 2008
|
|
|
339,632 |
|
|
|
48.57 |
|
RSU vest
on the third year anniversary of the grant if continuous service has been
provided for that period, or upon retirement or certain other events if earlier.
Based on an analysis of historical employee turnover, the Company has made an
annual forfeiture assumption of 2.4% of grants when recognizing compensation
costs relating to the RSU. None of the RSU outstanding at September 30, 2008
were vested.
Note
8 - Commitments and Contingencies
At the
time of the Company's initial public offering and acquisition of its partnership
interest in the Operating Partnership in 1992, the Company entered into an
agreement (the Cash Tender Agreement) with A. Alfred Taubman, who owns an
interest in the Operating Partnership, whereby he has the annual right to tender
to the Company units of partnership interest in the Operating Partnership
(provided that the aggregate value is at least $50 million) and cause the
Company to purchase the tendered interests at a purchase price based on a market
valuation of the Company on the trading date immediately preceding the date of
the tender. At A. Alfred Taubman's election, his family and certain others may
participate in tenders. The Company will have the option to pay for these
interests from available cash, borrowed funds, or from the proceeds of an
offering of the Company's common stock. Generally, the Company expects to
finance these purchases through the sale of new shares of its stock. The
tendering partner will bear all market risk if the market price at closing is
less than the purchase price and will bear the costs of sale. Any proceeds of
the offering in excess of the purchase price will be for the sole benefit of the
Company. The Company accounts for the Cash Tender Agreement between the Company
and Mr. Taubman as a freestanding written put option. As the option put price is
defined by the current market price of the Company's stock at the time of
tender, the fair value of the written option defined by the Cash Tender
Agreement is considered to be zero.
Based on
a market value at September 30, 2008 of $50.00 per common share, the aggregate
value of interests in the Operating Partnership that may be tendered under the
Cash Tender Agreement was approximately $1.3 billion. The purchase of these
interests at September 30, 2008 would have resulted in the Company owning an
additional 32% interest in the Operating Partnership.
The
Company has made a continuing, irrevocable offer to all present holders (other
than certain excluded holders, including A. Alfred Taubman), assignees of all
present holders, those future holders of partnership interests in the Operating
Partnership as the Company may, in its sole discretion, agree to include in the
continuing offer, and all existing optionees under the Option Plan and all
existing and future optionees under the 2008 Omnibus Plan to exchange shares of
common stock for partnership interests in the Operating Partnership (the
Continuing Offer). Under the Continuing Offer agreement, one unit of the
Operating Partnership interest is exchangeable for one share of the Company's
common stock. Upon a tender of Operating Partnership units, the corresponding
shares of Series B Preferred Stock, if any, will automatically be converted into
the Company’s common stock at a rate of 14,000 shares of Series B Preferred
Stock for one common share.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In
November 2007, three developers of a project called Blue Back Square (BBS) in
West Hartford, Connecticut, filed a lawsuit in the Connecticut Superior Court,
Judicial District of Hartford at Hartford (Case No. CV-07-5014613-S) against the
Company, the Westfarms Unconsolidated Joint Venture, and its partners and its
subsidiary, alleging that the defendants (i) filed or sponsored vexatious legal
proceedings and abused legal process in an attempt to thwart the development of
the competing BBS project, (ii) interfered with contractual relationships with
certain tenants of BBS, and (iii) violated Connecticut fair trade law. The
lawsuit alleges damages in excess of $30 million and seeks double and treble
damages and punitive damages. Also in early November 2007, the Town of West
Hartford and the West Hartford Town Council filed a substantially similar
lawsuit against the same entities in the same court (Case No. CV-07-5014596-S).
The second lawsuit did not specify any particular amount of damages but
similarly requests double and treble damages and punitive damages. The lawsuits
are in their early legal stages and the Company is vigorously defending both.
The outcome of these lawsuits cannot be predicted with any certainty and
management is currently unable to estimate an amount or range of potential loss
that could result if an unfavorable outcome occurs. While management does not
believe that an adverse outcome in either lawsuit would have a material adverse
effect on the Company’s financial condition, there can be no assurance that an
adverse outcome would not have a material effect on the Company’s results of
operations for any particular period.
See Note
1 regarding the put option held by the noncontrolling member in Taubman Asia,
Note 3 regarding contingencies related to Oyster Bay, Note 5 for the Operating
Partnership's guarantees of certain notes payable and other obligations, and
Note 7 for obligations under existing share-based compensation
plans.
Note
9 - Earnings Per Share
Basic
earnings per share amounts are based on the weighted average of common shares
outstanding for the respective periods. Diluted earnings per share amounts are
based on the weighted average of common shares outstanding plus the dilutive
effect of potential common stock. Potential common stock includes outstanding
partnership units exchangeable for common shares under the Continuing Offer
(Note 8), outstanding options for units of partnership interest under the Option
Plan, RSU under the LTIP and Non-Employee Directors’ Deferred Compensation Plan
(Note 7), and unissued partnership units under a unit option deferral election.
In computing the potentially dilutive effect of potential common stock,
partnership units are assumed to be exchanged for common shares under the
Continuing Offer, increasing the weighted average number of shares outstanding.
The potentially dilutive effects of partnership units outstanding and/or
issuable under the unit option deferral elections are calculated using the
if-converted method, while the effects of other potential common stock are
calculated using the treasury stock method.
As of
September 30, 2008, there were 8.8 million partnership units outstanding and 0.9
million unissued partnership units under unit option deferral elections that may
be exchanged for common shares of the Company under the Continuing Offer. These
outstanding partnership units and unissued units were excluded from the
computation of diluted earnings per share as they were anti-dilutive in all
periods presented. These outstanding units and unissued units could only be
dilutive to earnings per share if the minority interests' ownership share of the
Operating Partnership's income was greater than their share of
distributions.
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income allocable to common
shareowners (Numerator)
|
|
$ |
9,197 |
|
|
$ |
7,849 |
|
|
$ |
14,117 |
|
|
$ |
27,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(Denominator) – basic
|
|
|
52,908,924 |
|
|
|
52,456,144 |
|
|
|
52,815,246 |
|
|
|
53,093,894 |
|
Effect
of dilutive securities
|
|
|
503,312 |
|
|
|
617,845 |
|
|
|
554,972 |
|
|
|
638,065 |
|
Shares
(Denominator) – diluted
|
|
|
53,412,236 |
|
|
|
53,073,989 |
|
|
|
53,370,218 |
|
|
|
53,731,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
|
$ |
0.27 |
|
|
$ |
0.51 |
|
Diluted
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
|
$ |
0.26 |
|
|
$ |
0.50 |
|
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note
10 – Fair Value Disclosures
The
Company's valuation of marketable securities, which are considered to be
available-for-sale, and an insurance deposit utilize unadjusted quoted
prices determined by active markets for the specific securities the Company has
invested in, and therefore fall into Level 1 of the fair value hierarchy. The
Company's valuation of its derivative instruments are determined using widely
accepted valuation techniques, including discounted cash flow analysis on the
expected cash flows of each derivative and therefore fall into level 2 of the
fair value hierarchy. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based
inputs, including forward curves. The Company’s valuation of residual land
collateralizing certain land contract receivables is determined by using
observable market data including comparable parcels of land in similar locations
and therefore also falls into level 2 of the fair value hierarchy.
For
assets and liabilities measured at fair value on a recurring basis, quantitative
disclosure of the fair value for each major category of assets and liabilities
is presented below:
|
|
Fair
Value Measurements at
September 30,
2008 Using
|
|
Description
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Available-for-sale
securities
|
|
$ |
2,418 |
|
|
|
|
Insurance
deposit
|
|
|
8,798 |
|
|
|
|
Derivative
assets
|
|
|
|
|
|
$ |
367 |
|
Total assets
|
|
$ |
11,216 |
|
|
$ |
367 |
|
|
|
|
|
|
|
|
|
|
Derivative
interest rate instruments liabilities (Note 5)
|
|
|
|
|
|
$ |
(3,673 |
) |
Total
liabilities
|
|
|
|
|
|
$ |
(3,673 |
) |
The
insurance deposit shown above represents an escrow account maintained in
connection with a property and casualty insurance arrangement for the Company’s
shopping centers, and is classified within Deferred Charges and Other Assets. A
corresponding deferred revenue relating to amounts billed to tenants for this
arrangement has been classified within Accounts Payable and Other
Liabilities.
The
Company has two delinquent land contract receivables with book values of $1.0
million and $0.6 million as of September 30, 2008. The original maturities
of these notes were July 2007 and August 2008. The fair value of the land that
serves as collateral is at least equal to the book value of the receivables. In
addition, $2.2 million of notes receivable from three tenants with common
ownership became delinquent during the third quarter 2008. The notes are
guaranteed by affiliates of the tenants. After receipt of a partial repayment,
the Company is negotiating the repayment terms and expects to recover the
remaining net book value of $1.8 million.
Note
11 - New Accounting Pronouncements
In May
2008, the FASB issued Statement No. 162 “The Hierarchy of Generally Accepted
Accounting Principles.” The current hierarchy of generally accepted
accounting principles is set forth in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.”
Statement No. 162 is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles for nongovernmental
entities. This Statement is effective November 15, 2008. The Company is
currently evaluating the application of this Statement but does not anticipate
that the Statement will have a material effect on the Company’s results of
operations or financial position, as the Statement does not directly impact the
accounting principles applied in the preparation of the Company's financial
statements.
TAUBMAN
CENTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March
2008, the FASB issued Statement No. 161 “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133.” This Statement amends Statement No. 133 to provide additional
information about how derivative and hedging activities affect an entity’s
financial position, financial performance, and cash flows. The Statement
requires enhanced disclosures about an entity’s derivatives and hedging
activities. Statement No. 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008. The Company is
currently evaluating the application of this Statement and anticipates the
Statement will not have an effect on its results of operations or financial
position as the Statement only provides for new disclosure
requirements.
In
December 2007, the FASB issued Statement No. 160 "Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” This Statement
amends Accounting Research Bulletin (ARB) 51 to establish accounting and
reporting standards for the noncontrolling interest (previously referred to as a
minority interest) in a subsidiary and for the deconsolidation of a subsidiary.
The Statement also amends certain of ARB 51’s consolidation procedures for
consistency with the requirements of FASB Statement No. 141 (Revised) “Business
Combinations.” Statement No. 160 will require noncontrolling interests to be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. Statement No. 160 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. In March
2008, the SEC announced revisions to EITF Topic No. D-98 "Classification and
Measurement of Redeemable Securities" that provide interpretive guidance on the
interaction between Topic No. D-98 and Statement No.160.
The
Company anticipates that upon adoption of Statement No. 160 in 2009, the
noncontrolling interests in the Operating Partnership and certain consolidated
joint ventures will no longer need to be carried at zero balances in the
Company’s balance sheet. As a result, the income allocated to these
noncontrolling interests would no longer be required to be equal to the share of
distributions. See Note 1 regarding current accounting for minority interests.
The Company is continuing to evaluate other effects this Statement and its
interpretations, including those in Topic No. D-98, would have on the Company’s
financial position and results of operations.
Also in
December 2007, the FASB issued Statement No. 141 (Revised) "Business
Combinations.” This Statement establishes principles and requirements for how
the acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and any goodwill acquired in the
business combination or a gain from a bargain purchase. This Statement requires
most identifiable assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at “full fair value.”
Statement No. 141 (Revised) must be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
application is prohibited. The Company is currently evaluating the application
of this Statement and its effect on the Company's financial position and results
of operations.
In
September 2006, the FASB issued Statement No. 157 “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This Statement applies to accounting pronouncements
that require or permit fair value measurements, except for share-based payments
transactions under FASB Statement No. 123 (Revised) “Share-Based Payment.” This
Statement was effective for financial statements issued for fiscal years
beginning after November 15, 2007, except for non-financial assets and
liabilities, for which this Statement will be effective for years beginning
after November 15, 2008. The Company is evaluating the effect of implementing
the Statement relating to such non-financial assets and liabilities, although
the Statement does not require any new fair value measurements or remeasurements
of previously reported fair values.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains various “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent our expectations or beliefs concerning future events,
including the following: statements regarding future developments and joint
ventures, rents, returns, and earnings; statements regarding the continuation of
trends; and any statements regarding the sufficiency of our cash balances and
cash generated from operating, investing, and financing activities for our
future liquidity and capital resource needs. We caution that although
forward-looking statements reflect our good faith beliefs and best judgment
based upon current information, these statements are qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including those risks, uncertainties, and factors
detailed from time to time in reports filed with the SEC, and in particular
those set forth under “Risk Factors” in our Annual Report on Form 10-K. The
following discussion should be read in conjunction with the accompanying
consolidated financial statements of Taubman Centers, Inc. and the notes
thereto.
General
Background and Performance Measurement
Taubman
Centers, Inc. (TCO) is a Michigan corporation that operates as a
self-administered and self-managed real estate investment trust (REIT). The
Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a
majority-owned partnership subsidiary of TCO, which owns direct or indirect
interests in all of our real estate properties. In this report, the terms "we",
"us", and "our" refer to TCO, the Operating Partnership, and/or the Operating
Partnership's subsidiaries as the context may require. We own, develop, acquire,
dispose of, and operate regional and super-regional shopping centers. The
Consolidated Businesses consist of shopping centers that are controlled by
ownership or contractual agreements, development projects for future
regional shopping centers, variable interest entities for which we are the
primary beneficiary, The Taubman Company LLC (Manager), and Taubman Properties
Asia LLC and its subsidiaries (Taubman Asia). In September 2008, we acquired the
interests of the owner of The Mall at Partridge Creek (Partridge Creek) (see
“Note 3 – Acquisitions, New Development, and Services” to our consolidated
financial statements). Prior to the acquisition, we consolidated the accounts of
the owner of Partridge Creek, which qualified as a variable interest entity
under Financial Accounting Standards Board Interpretation No. 46 “Consolidation
of Variable Interest Entities” for which the Operating Partnership was
considered to be the primary beneficiary. Shopping centers owned through joint
ventures that are not controlled by us but over which we have significant
influence (Unconsolidated Joint Ventures) are accounted for under the equity
method.
References
in this discussion to “beneficial interest” refer to our ownership or pro-rata
share of the item being discussed. Also, the operations of the shopping centers
are often best understood by measuring their performance as a whole, without
regard to our ownership interest. Consequently, in addition to the discussion of
the operations of the Consolidated Businesses, the operations of the
Unconsolidated Joint Ventures are presented and discussed as a
whole.
The
comparability of information used in measuring performance is affected by the
opening of Partridge Creek in October 2007 and The Pier Shops at Caesars (The
Pier Shops), which began opening in phases in June 2006. In April 2007, we
increased our ownership in The Pier Shops to 77.5% (see “Results of Operations
– New Development and Acquisitions”). The Pier Shops’ results of operations
are included within the Consolidated Businesses for periods beginning April 13,
2007 and within the Unconsolidated Joint Ventures prior to the acquisition date.
Our investment in The Pier Shops represented an effective 6% interest prior to
the acquisition date, based on relative equity contributions. Additional
“comparable center” statistics that exclude Partridge Creek and The Pier Shops
are provided to present the performance of comparable centers in our continuing
operations.
Current
Operating Trends
The
global credit and financial crisis has gained momentum in the past few weeks and
there is considerable uncertainty as to how severe the current downturn may be
and how long it may continue. It is difficult to predict the impact on our
business but we expect that the economy will continue to strain the resources of
our tenants and their customers. Amid the softening of the U.S. economy over the
last year, a number of regional and national retailers have announced store
closings or filed for bankruptcy. During the nine months ended September 30,
2008, 1.5% of our tenants sought the protection of the bankruptcy laws, compared
to 0.3% for the comparable period in 2007. Although this level of bankruptcies
is the highest we’ve reported for that period since 2004, this statistic is
within our annual five year history of 0.4% to 2.2%.
However,
we saw relatively little impact of the current financial crisis on our operating
results in the current quarter. Our occupancy was up modestly and rents showed
solid increases compared to the prior year. Our tenants reported a 0.5% increase
in sales in the quarter and year to date sales per square foot growth was 2.3%.
Although we’re pleased to continue to report positive tenant sales growth during
a time of such economic uncertainty, the consumer clearly moderated spending as
the third quarter of 2008 progressed. In fact, tenant sales per square foot
decreased about 5% in September 2008 compared to the prior year. We do not see
anything in the environment that will modify this downward trend through year
end.
Tenant
sales and sales per square foot information are operating statistics used in
measuring the productivity of the portfolio and are based on reports of sales
furnished by mall tenants. Over the long term, the level of mall tenant sales is
the single most important determinant of revenues of the shopping centers
because mall tenants provide approximately 90% of these revenues and because
mall tenant sales determine the amount of rent, percentage rent, and recoverable
expenses (together, total occupancy costs) that mall tenants can afford to pay.
However, levels of mall tenant sales can be considerably more volatile in the
short run than total occupancy costs, and may be impacted significantly, either
positively or negatively, by the success or lack of success of a small number of
tenants or even a single tenant.
Sales
directly impact the amount of percentage rents certain tenants and anchors pay.
The effects of increases or declines in sales on our operations are moderated by
the relatively minor share of total rents that percentage rents represent.
However, there is increased uncertainty about sales for the holidays, and most
of the year’s percentage rents are typically recorded in the fourth
quarter.
While
sales are critical over the long term, the high quality regional mall business
is a very stable business model with its diversity of income from thousands of
tenants, its staggered lease maturities, and high proportion of fixed rent.
However, a sustained trend in sales does impact, either negatively or
positively, our ability to lease vacancies and negotiate rents at advantageous
rates. In the current environment, we are finding that negotiations are tougher,
however, retailers continue to recognize the need to position themselves for the
future. While no one knows when the economy will improve, many retailers are
actively signing deals.
In the
third quarter of 2008, ending occupancy increased slightly to 90.5% compared to
90.0% in the third quarter of 2007. We expect that occupancy will increase
during the fourth quarter and that we will end the year close to last year’s
level of 91.2%. See “Seasonality” for occupancy and leased space statistics.
Temporary tenants, defined as those with lease terms less than 12 months, are
not included in occupancy or leased space statistics. As of September 30, 2008,
approximately 2.2% of mall tenant space was occupied by temporary tenants,
compared to 1.8% at September 30, 2007.
Leased
space was 92.4% at September 30, 2008, down 0.9% from last year. The difference
between leased space and occupancy is that leased space includes spaces where
leases have been signed but the tenants are not yet open. Neither statistic
includes temporary tenants. We view occupancy as the more important of the two
as it represents those spaces upon which we are collecting rent for permanent
tenants. Finally, the spread between leased space and occupied space, about 2%
this quarter, is consistent with our history of 2% to 3% in the third
quarter.
As leases
have expired in the shopping centers, we have generally been able to rent the
available space, either to the existing tenant or a new tenant, at rental rates
that are higher than those of the expired leases. In a period of increasing
sales, rents on new leases will tend to rise as tenants' expectations of future
growth become more optimistic. In periods of slower growth or declining sales,
rents on new leases will grow more slowly or may decline for the opposite
reason. However, center revenues nevertheless increase as older leases roll over
or are terminated early and replaced with new leases negotiated at current
rental rates that are usually higher than the average rates for existing leases.
Rent per square foot information for comparable centers in our Consolidated
Businesses and Unconsolidated Joint Ventures follows:
|
|
Three
Months
Ended
September 30
|
|
|
Nine
Months
Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Average
rent per square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
$ |
44.20 |
|
|
$ |
42.84 |
|
|
$ |
44.40 |
|
|
$ |
43.21 |
|
Unconsolidated Joint
Ventures
|
|
|
44.48 |
|
|
|
43.32 |
|
|
|
44.71 |
|
|
|
42.35 |
|
Opening
base rent per square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
$ |
59.86 |
|
|
$ |
51.42 |
|
|
$ |
55.68 |
|
|
$ |
52.98 |
|
Unconsolidated Joint
Ventures
|
|
|
50.41 |
|
|
|
72.08 |
|
|
|
55.94 |
|
|
|
52.23 |
|
Square
feet of GLA opened:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
|
89,548 |
|
|
|
280,960 |
|
|
|
539,769 |
|
|
|
663,029 |
|
Unconsolidated Joint
Ventures
|
|
|
91,345 |
|
|
|
45,175 |
|
|
|
336,210 |
|
|
|
203,079 |
|
Closing
base rent per square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
$ |
71.90 |
|
|
$ |
51.45 |
|
|
$ |
47.46 |
|
|
$ |
45.68 |
|
Unconsolidated Joint
Ventures
|
|
|
50.77 |
|
|
|
48.47 |
|
|
|
46.26 |
|
|
|
47.77 |
|
Square
feet of GLA closed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
|
70,320 |
|
|
|
166,388 |
|
|
|
644,076 |
|
|
|
698,395 |
|
Unconsolidated Joint
Ventures
|
|
|
71,622 |
|
|
|
80,729 |
|
|
|
378,951 |
|
|
|
265,065 |
|
Releasing
spread per square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
$ |
(12.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
8.22 |
|
|
$ |
7.30 |
|
Unconsolidated Joint
Ventures
|
|
|
(0.36 |
) |
|
|
23.61 |
|
|
|
9.68 |
|
|
|
4.46 |
|
The
spread between opening and closing rents may not be indicative of future
periods, as this statistic is not computed on comparable tenant spaces, and can
vary significantly from period to period depending on the total amount,
location, and average size of tenant space opening and closing in the period. In
the third quarter of 2008, the releasing spreads per square foot of the
Consolidated Businesses were impacted by store size, as the average size of the
stores opening was approximately 1,000 square feet greater than the average size
of the stores closing. Generally, smaller stores command a greater rent per
square foot. In the nine months ended September 30, 2007, average rent per
square foot for the Unconsolidated Joint Ventures was adversely impacted by a
$0.6 million cumulative prior year adjustment related to The Mills Corporation’s
accounting for lease incentives at Arizona Mills, a 50% owned joint
venture.
Seasonality
The
regional shopping center industry is seasonal in nature, with mall tenant sales
highest in the fourth quarter due to the Christmas season, and with lesser,
though still significant, sales fluctuations associated with the Easter holiday
and back-to-school period. While minimum rents and recoveries are generally not
subject to seasonal factors, most leases are scheduled to expire in the first
quarter, and the majority of new stores open in the second half of the year in
anticipation of the Christmas selling season. Additionally, most percentage
rents are recorded in the fourth quarter. Accordingly, revenues and occupancy
levels are generally highest in the fourth quarter. Gains on sales of peripheral
land and lease cancellation income may vary significantly from quarter to
quarter.
|
|
3rd
Quarter
2008
|
|
|
2nd
Quarter
2008
|
|
|
1st
Quarter
2008
|
|
|
Total
2007
|
|
|
4th
Quarter
2007
|
|
|
3rd
Quarter
2007
|
|
|
2nd
Quarter
2007
|
|
|
1st
Quarter
2007
|
|
|
|
(in
thousands of dollars, except occupancy and leased space
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mall
tenant sales (1)
|
|
|
1,112,502 |
|
|
|
1,116,027 |
|
|
|
1,083,608 |
|
|
|
4,734,940 |
|
|
|
1,555,011 |
|
|
|
1,075,465 |
|
|
|
1,061,767 |
|
|
|
1,042,697 |
|
Revenues
and gains on land sales
and other nonoperating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
|
|
164,124 |
|
|
|
161,868 |
|
|
|
159,220 |
|
|
|
630,417 |
|
|
|
180,212 |
|
|
|
151,791 |
|
|
|
152,997 |
|
|
|
145,417 |
|
Unconsolidated Joint
Ventures
|
|
|
67,169 |
|
|
|
63,657 |
|
|
|
64,393 |
|
|
|
264,174 |
|
|
|
70,926 |
|
|
|
64,740 |
|
|
|
64,233 |
|
|
|
64,275 |
|
Occupancy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending-comparable
|
|
|
90.6 |
% |
|
|
90.2 |
% |
|
|
90.1 |
% |
|
|
91.5 |
% |
|
|
91.5 |
% |
|
|
90.2 |
% |
|
|
90.1 |
% |
|
|
89.8 |
% |
Average-comparable
|
|
|
90.5 |
|
|
|
90.1 |
|
|
|
90.2 |
|
|
|
90.3 |
|
|
|
91.2 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
89.9 |
|
Ending
|
|
|
90.5 |
|
|
|
90.0 |
|
|
|
89.9 |
|
|
|
91.2 |
|
|
|
91.2 |
|
|
|
90.0 |
|
|
|
89.9 |
|
|
|
89.8 |
|
Average
|
|
|
90.4 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
90.7 |
|
|
|
89.8 |
|
|
|
89.8 |
|
|
|
89.9 |
|
Leased
space:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
|
|
|
92.5 |
% |
|
|
92.7 |
% |
|
|
93.0 |
% |
|
|
93.8 |
% |
|
|
93.8 |
% |
|
|
93.4 |
% |
|
|
92.7 |
% |
|
|
92.1 |
% |
All centers
|
|
|
92.4 |
|
|
|
92.7 |
|
|
|
93.1 |
|
|
|
93.8 |
|
|
|
93.8 |
|
|
|
93.3 |
|
|
|
92.4 |
|
|
|
92.1 |
|
(1)
|
Based
on reports of sales furnished by mall
tenants.
|
Because
the seasonality of sales contrasts with the generally fixed nature of minimum
rents and recoveries, mall tenant occupancy costs (the sum of minimum rents,
percentage rents, and expense recoveries) as a percentage of sales are
considerably higher in the first three quarters than they are in the fourth
quarter.
|
|
3rd
Quarter
2008
|
|
|
2nd
Quarter
2008
|
|
|
1st
Quarter
2008
|
|
|
Total
2007
|
|
|
4th
Quarter
2007
|
|
|
3rd
Quarter
2007
|
|
|
2nd
Quarter
2007
|
|
|
1st
Quarter
2007
|
|
Consolidated
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
9.9 |
% |
|
|
9.9 |
% |
|
|
10.2 |
% |
|
|
8.9 |
% |
|
|
7.1 |
% |
|
|
9.5 |
% |
|
|
9.7 |
% |
|
|
10.0 |
% |
Percentage
rents
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Expense
recoveries
|
|
|
5.4 |
|
|
|
5.3 |
|
|
|
5.3 |
|
|
|
4.9 |
|
|
|
4.2 |
|
|
|
5.0 |
|
|
|
5.8 |
|
|
|
5.1 |
|
Mall tenant occupancy
costs
|
|
|
15.6 |
% |
|
|
15.4 |
% |
|
|
15.8 |
% |
|
|
14.2 |
% |
|
|
12.0 |
% |
|
|
14.8 |
% |
|
|
15.6 |
% |
|
|
15.4 |
% |
Unconsolidated
Joint Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
9.5 |
% |
|
|
9.3 |
% |
|
|
9.2 |
% |
|
|
8.0 |
% |
|
|
6.1 |
% |
|
|
9.1 |
% |
|
|
8.8 |
% |
|
|
8.8 |
% |
Percentage
rents
|
|
|
0.4 |
|
|
|
0.0 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Expense
recoveries
|
|
|
4.8 |
|
|
|
4.4 |
|
|
|
4.2 |
|
|
|
4.2 |
|
|
|
3.6 |
|
|
|
4.7 |
|
|
|
4.5 |
|
|
|
4.0 |
|
Mall tenant occupancy
costs
|
|
|
14.7 |
% |
|
|
13.7 |
% |
|
|
13.8 |
% |
|
|
12.6 |
% |
|
|
10.4 |
% |
|
|
14.1 |
% |
|
|
13.6 |
% |
|
|
13.0 |
% |
Results
of Operations
The
following sections discuss certain 2008 and 2007 transactions that affected
operations in the three and nine month periods ended September 30, 2008 and
2007, or are expected to impact operations in the future.
New Development and
Acquisitions
Partridge
Creek opened on October 18, 2007 in Clinton Township, Michigan. The 0.6 million
square foot center is anchored by Nordstrom, Parisian, and MJR Theatres. In
September 2008, we purchased the third-party owner’s interests in Partridge
Creek for $11.8 million (see “Note 3 – Acquisitions, New Development, and
Services” to our consolidated financial statements).
In
September 2007, a 165,000 square foot Nordstrom opened at Twelve Oaks Mall
(Twelve Oaks) along with approximately 97,000 square feet of additional new
store space. In addition, Macy’s has renovated its store and added 60,000 square
feet of store space.
In
November 2007, Stamford Town Center (Stamford) opened a new lifestyle wing,
including a mix of signature retail and restaurant offerings. In addition, we
renovated the seventh level, adding a 450-seat food court and interactive
children’s play area. The food court opened in early 2008.
The Pier
Shops, located in Atlantic City, New Jersey, began opening in phases in June
2006. Gordon Group Holdings LLC (Gordon) developed the center, and in January
2007, we assumed full management and leasing responsibility for the center. In
April 2007, we increased our ownership in The Pier Shops to a 77.5% controlling
interest. The remaining 22.5% interest continues to be held by an affiliate of
Gordon. We began consolidating The Pier Shops as of the April 2007 purchase
date. At closing, we made a $24.5 million equity investment in the center,
bringing our total equity investment to $28.5 million. We are entitled to a 7%
cumulative preferred return on our $133.1 million total investment, including
our $104.6 million share of debt (see “Debt and Equity Transactions”). We will
be responsible for any additional capital requirements, on which we will receive
a preferred return at a minimum of 8%. As of September 30, 2008, we had provided
$2.5 million of additional capital.
See also
“Taubman Asia” and “Third-Party Management, Leasing, and Development Services”
for other development and service arrangements.
Potential
Disposition
In April
2008, we announced that Stamford, a 50% owned Unconsolidated Joint Venture, was
being marketed for sale. The primary impetus for the sale was from our joint
venture partner, as part of the normal execution of its portfolio strategy. The
sale of assets is consistent with our strategy to recycle capital when
appropriate. However, given the current market conditions, we have stopped
marketing of the center.
Taubman
Asia
In
February 2008, we announced that Taubman Asia is acquiring a 25% interest in The
Mall at Studio City, the retail component of Macao Studio City, a major
mixed-use project on the Cotai Strip in Macao, China. In addition, Taubman Asia
entered into long-term agreements to perform development, management, and
leasing services for the shopping center. Our total investment in the project
(including the initial payment, allocation of construction debt, and additional
payments anticipated in years two and five after opening) is expected to be
approximately $200 million, with an anticipated after-tax return of about 10%.
Taubman Asia’s investment is in a joint venture with Cyber One Agents Limited
(Cyber One) and will be accounted for under the equity method. Macao Studio City
is being developed by Cyber One, a joint venture between New Cotai, LLC and East
Asia Satellite Television Holdings, a subsidiary of eSun Holdings (eSun). The
overall project recently received its final entitlements, including its Phase II
approvals, which allow it to expand from its Phase I size of 3.7 million square
feet to over 6 million square feet. We continue to experience a great deal of
retailer interest and we are very pleased with the progress we are making
merchandising this center.
Our $54
million initial cash payment has been placed into escrow until financing for the
overall project is completed. If the financing is not finalized by August 2009,
the $54 million in escrow will be returned to us. No interest is being
capitalized on this payment until financing for the overall project is complete.
Since the capital markets have deteriorated, our partners, with support from us,
continue to actively pursue a variety of financing alternatives for the
project. Our partners are well-capitalized, have no debt on the property,
and expect to weather this credit market for as long as it takes to stabilize.
Given the strength of the Macao market, the retailer response, and the quality
of the project planned, although the timing of construction may be delayed, we
continue to believe the project will be built. Assuming the financing is
obtained and construction is begun sometime in 2009, the project is expected to
open in 2011.
Our
services agreements were conditional upon eSun shareholder approval, which was
received in March 2008, however, any payments due under the development services
agreement can be delayed until financing is completed. Excluding the $54 million
initial refundable deposit, we had capitalized costs of $2.5 million on the
Macao project as of September 30, 2008. Offsetting these costs, we received a
$2.5 million non-refundable development fee payment in October 2008 from
the owner of the Macao project. We expensed costs relating to the project
incurred in the third quarter of 2008, and we expect to continue expensing costs
as incurred until financing is obtained.
In 2007,
we entered into an agreement to provide development services for a 1.1 million
square foot retail and entertainment complex in Songdo International Business
District (Songdo), Incheon, South Korea. We also finalized an agreement to
provide management and leasing services for the retail component, and we
continue to provide services as the regional mall progresses. The shopping
center will be anchored by Lotte Department Store and Tesco Homeplus, and we
hope to announce soon the third and final anchor, a major movie complex.
Construction of the center has begun with the foundations, underground parking,
and subway connections. The ownership group of the shopping center is working to
obtain the financing for the retail center and related buildings and
improvements. While great progress has been made, and the ownership has told us
they are negotiating a conditional commitment from a substantial Korean
bank, nothing is easy to finalize in today’s capital markets. Full construction
of the center will commence once financing is complete. The ownership group
remains committed to keeping the center on track for a 2011 opening. We continue
to evaluate an investment in the shopping center, and a decision will likely
occur when the financing is finalized.
Third-Party Management,
Leasing, and Development Services
In
addition to the services described in “Taubman Asia”, we have several current
and potential projects that contribute or may contribute in the future to our
third-party revenue results.
We have a
management agreement for Woodfield Mall, which is owned by a third-party. This
contract is renewable year-to-year and is cancelable by the owner with 90 days
written notice. We also have an agreement for retail leasing and development and
design advisory services for CityCenter, a mixed use urban development project
scheduled to open in late 2009 on the Strip in Las Vegas, Nevada. The term of
this fixed-fee contract is approximately 25 years, effective June 2005, and is
generally cancelable for cause and by the project owner upon payment to us of a
cancellation fee.
In
addition, we are negotiating agreements on two new projects. We are finalizing a
development agreement regarding City Creek Center, a mixed-use project in Salt
Lake City, Utah, which is expected to open in spring 2012. We are also
finalizing agreements to be an investor in this project under a participating
lease structure. Further, we continue to negotiate an agreement to provide
initial leasing services for a lifestyle center in the city of North Las Vegas,
Nevada.
The
actual amounts of revenue in any future period are difficult to predict because
of many factors, including the timing of completion of contractual arrangements
and the actual timing of construction starts and opening dates of the various
projects. In light of the current capital markets, the timing of construction
starts may be delayed until the completion of financing. In addition, the amount
of revenue we recognize is reduced by any ownership interest we may have in a
project. Also, there are various factors that determine the timing of
recognition of revenue. For development, revenue is recognized when the work is
performed. For leasing, it is recognized when the leases are signed or when
stores open, depending on the agreement. We have previously provided estimates
of an aggregate of about $35 million of net margin on our third-party services
for the 2009 to 2011 period, subject to the many uncertainties and factors
described at that time. About half of that estimated net margin was from
Woodfield Mall, CityCenter and our other current domestic business. Because of
the significant uncertainty as to the timing of full construction starts and the
opening dates, as well as to the uncertainty as to our possible ownership
interest in the Songdo project, which would reduce net margin, we are not going
to continue to forecast third-party income beyond 2008. Although we expect that
unless one of the new projects starts construction, net margin in 2009 would be
typical of our historical average of approximately $6 million.
Debt and Equity
Transactions
In April
2008, Fair Oaks, a 50% owned Unconsolidated Joint Venture, completed a $250
million non-recourse refinancing that bears interest at LIBOR plus 1.40%.
The loan agreement has a three-year term, with two one-year extension
options. The loan is interest-only for the entire term, except during the second
one-year extension period, if elected. Fair Oaks also entered into an agreement
to swap the floating rate for an all-in fixed rate of 4.56% for the initial
three-year term of the loan agreement. Proceeds from the refinancing were used
to pay off the existing $140 million 6.6% loan, plus accrued interest and fees.
Excess proceeds were distributed to the partners, and our share was used to pay
down our revolving credit facilities.
In
January 2008, we completed a $325 million non-recourse refinancing at
International Plaza that bears interest at LIBOR plus 1.15%. The loan agreement
has a three-year term, with two one-year extension options. The loan is
interest-only for the entire term, except during the second one-year extension
period, if elected. We also entered into an agreement to swap the floating rate
for an all-in fixed rate of 5.375% for the initial three-year term of the loan
agreement. Proceeds from the refinancing were used to pay off the existing
$175.2 million 4.37% (effective rate) loan, accrued interest, and our $33.5
million preferential equity, with the remaining amount distributed on ownership
percentages with our 49.9% joint venture partner.
In 2007,
we completed financings of approximately $335 million comprised of a $200
million increase in our revolving line of credit and the refinancing of The Pier
Shops.
In 2007,
our Board of Directors authorized the repurchase of $100 million of our common
stock on the open market or in privately negotiated transactions. During 2007,
we repurchased 987,180 shares of our common stock for a total of $50 million
under this authorization. In addition, in 2007 we repurchased an additional
923,364 shares for $50 million, representing the remaining amount under a
previous program approved by our Board of Directors in December 2005. All shares
repurchased have been cancelled. For each share of stock repurchased, an equal
number of Operating Partnership units owned by TCO were redeemed. Repurchases of
common stock were financed through general corporate funds, including borrowings
under existing lines of credit. As of September 30, 2008, $50 million remained
of the 2007 authorization.
New Accounting
Pronouncements
See “Note
11 – New Accounting Pronouncements” to our consolidated financial statements
regarding certain new accounting pronouncements that we expect to adopt in 2008
and 2009.
Presentation of Operating
Results
Income
Allocation
The
following table contains the operating results of our Consolidated Businesses
and the Unconsolidated Joint Ventures. Income allocated to the minority partners
in the Operating Partnership and preferred interests is deducted to arrive at
the results allocable to our common shareowners. Because the net equity balances
of the Operating Partnership and the outside partners in certain consolidated
joint ventures are less than zero, the income allocated to these minority and
outside partners is equal to their share of operating distributions. The net
equity of these minority and outside partners is less than zero due to
accumulated distributions in excess of net income and not as a result of
operating losses. Distributions to partners are usually greater than net income
because net income includes non-cash charges for depreciation and amortization.
Our average ownership percentage of the Operating Partnership was 67% during the
three and nine months ended September 30, 2008 and 66% during the three and nine
months ended September 30, 2007.
The
results of The Pier Shops are presented within the Consolidated Businesses
beginning April 13, 2007, as a result of our acquisition of a controlling
interest in the center. The results of The Pier Shops prior to the acquisition
date are included within the Unconsolidated Joint Ventures.
Use
of Non-GAAP Measures
The
operating results in the following table include the supplemental earnings
measures of Beneficial Interest in EBITDA and Funds from Operations (FFO).
Beneficial Interest in EBITDA represents our share of the earnings before
interest, income taxes, and depreciation and amortization of our consolidated
and unconsolidated businesses. We believe Beneficial Interest in EBITDA provides
a useful indicator of operating performance, as it is customary in the real
estate and shopping center business to evaluate the performance of properties on
a basis unaffected by capital structure.
The
National Association of Real Estate Investment Trusts (NAREIT) defines FFO as
net income (loss) (computed in accordance with Generally Accepted Accounting
Principles (GAAP)), excluding gains (or losses) from extraordinary items and
sales of properties, plus real estate related depreciation and after adjustments
for unconsolidated partnerships and joint ventures. We believe that FFO is a
useful supplemental measure of operating performance for REITs. Historical cost
accounting for real estate assets implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values instead
have historically risen or fallen with market conditions, we and most industry
investors and analysts have considered presentations of operating results that
exclude historical cost depreciation to be useful in evaluating the operating
performance of REITs. We primarily use FFO in measuring performance and in
formulating corporate goals and compensation.
Our
presentations of Beneficial Interest in EBITDA and FFO are not necessarily
comparable to the similarly titled measures of other REITs due to the fact that
not all REITs use the same definitions. These measures should not be considered
alternatives to net income or as an indicator of our operating performance.
Additionally, neither represents cash flows from operating, investing or
financing activities as defined by GAAP. Reconciliations of Net Income Allocable
to Common Shareowners to Funds from Operations and Net Income to Beneficial
Interest in EBITDA are presented following the Comparison of the Nine Months
Ended September 30, 2008 to the Nine Months Ended September 30,
2007.
Comparison
of the Three Months Ended September 30, 2008 to the Three Months Ended September
30, 2007
The
following table sets forth operating results for the three months ended
September 30, 2008 and September 30, 2007, showing the results of the
Consolidated Businesses and Unconsolidated Joint Ventures:
|
Three
Months Ended
September
30, 2008
|
Three
Months Ended
September
30, 2007
|
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
(in millions of dollars)
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
87.4 |
|
|
|
39.2 |
|
|
|
81.3 |
|
|
|
37.5 |
|
Percentage
rents
|
|
|
3.3 |
|
|
|
1.7 |
|
|
|
3.2 |
|
|
|
1.3 |
|
Expense
recoveries
|
|
|
60.8 |
|
|
|
25.0 |
|
|
|
53.6 |
|
|
|
23.9 |
|
Management, leasing, and
development services
|
|
|
3.3 |
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
Other
|
|
|
8.9 |
|
|
|
1.2 |
|
|
|
8.7 |
|
|
|
1.7 |
|
Total
revenues
|
|
|
163.7 |
|
|
|
67.1 |
|
|
|
150.7 |
|
|
|
64.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and
utilities
|
|
|
48.7 |
|
|
|
17.2 |
|
|
|
44.2 |
|
|
|
15.6 |
|
Other operating
|
|
|
18.5 |
|
|
|
3.9 |
|
|
|
16.6 |
|
|
|
3.0 |
|
Management, leasing, and
development services
|
|
|
1.8 |
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
General and
administrative
|
|
|
6.8 |
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
Interest
expense
|
|
|
36.0 |
|
|
|
16.5 |
|
|
|
33.6 |
|
|
|
16.0 |
|
Depreciation and amortization
(2)
|
|
|
35.5 |
|
|
|
9.9 |
|
|
|
33.8 |
|
|
|
9.5 |
|
Total
expenses
|
|
|
147.4 |
|
|
|
47.5 |
|
|
|
137.6 |
|
|
|
44.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on land sales and other nonoperating income
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
1.1 |
|
|
|
0.4 |
|
|
|
|
16.8 |
|
|
|
19.7 |
|
|
|
14.2 |
|
|
|
20.6 |
|
Income
tax expense
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of Unconsolidated Joint Ventures (2)
|
|
|
11.3 |
|
|
|
|
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority and preferred interests
|
|
|
27.8 |
|
|
|
|
|
|
|
25.5 |
|
|
|
|
|
Minority
and preferred interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG preferred
distributions
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
Minority share of income of
consolidated joint
ventures
|
|
|
(1.4 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
Distributions in excess of
minority share of income
of consolidated joint
ventures
|
|
|
(1.6 |
) |
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
Minority share of income of
TRG
|
|
|
(7.4 |
) |
|
|
|
|
|
|
(6.8 |
) |
|
|
|
|
Distributions in excess of
minority share of income
of TRG
|
|
|
(3.9 |
) |
|
|
|
|
|
|
(3.6 |
) |
|
|
|
|
Net
income
|
|
|
12.9 |
|
|
|
|
|
|
|
11.5 |
|
|
|
|
|
Preferred
dividends
|
|
|
(3.7 |
) |
|
|
|
|
|
|
(3.7 |
) |
|
|
|
|
Net
income allocable to common shareowners
|
|
|
9.2 |
|
|
|
|
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA - 100%
|
|
|
88.3 |
|
|
|
46.1 |
|
|
|
81.6 |
|
|
|
46.1 |
|
EBITDA - outside partners'
share
|
|
|
(9.3 |
) |
|
|
(20.4 |
) |
|
|
(8.9 |
) |
|
|
(20.6 |
) |
Beneficial interest in
EBITDA
|
|
|
79.0 |
|
|
|
25.6 |
|
|
|
72.6 |
|
|
|
25.5 |
|
Beneficial interest
expense
|
|
|
(31.1 |
) |
|
|
(8.6 |
) |
|
|
(29.9 |
) |
|
|
(8.4 |
) |
Beneficial income tax
expense
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-real estate
depreciation
|
|
|
(0.7 |
) |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
Preferred dividends and
distributions
|
|
|
(4.3 |
) |
|
|
|
|
|
|
(4.3 |
) |
|
|
|
|
Funds from Operations
contribution
|
|
|
42.6 |
|
|
|
17.1 |
|
|
|
37.8 |
|
|
|
17.2 |
|
(1)
|
With
the exception of the Supplemental Information, amounts include 100% of the
Unconsolidated Joint Ventures. Amounts are net of intercompany
transactions. The Unconsolidated Joint Ventures are presented at 100% in
order to allow for measurement of their performance as a whole, without
regard to our ownership interest. In our consolidated financial
statements, we account for investments in the Unconsolidated Joint
Ventures under the equity method.
|
(2)
|
Amortization
of our additional basis in the Operating Partnership included in
depreciation and amortization was $1.2 million in both 2008 and 2007.
Also, amortization of our additional basis included in equity in income of
Unconsolidated Joint Ventures was $0.5 million in both 2008 and
2007.
|
(3)
|
Amounts
in this table may not add due to
rounding.
|
Consolidated
Businesses
Total
revenues for the quarter ended September 30, 2008 were $163.7 million, a $13.0
million or 8.6% increase over the comparable period in 2007. Minimum rents
increased $6.1 million, primarily due to the October 2007 opening of Partridge
Creek and the September 2007 expansion at Twelve Oaks, as well as tenant
rollovers and increases in occupancy. Expense recoveries increased primarily due
to Partridge Creek, as well as increases in recoverable costs at certain centers
and Twelve Oaks. Other income increased slightly primarily due to increases in
parking-related revenue, which was substantially offset by a decrease in lease
cancellation revenue.
Total
expenses were $147.4 million, a $9.8 million or 7.1% increase over the
comparable period in 2007. Maintenance, taxes, and utilities expense increased
primarily due to Partridge Creek, as well as increases in property taxes and
maintenance costs at certain centers. Other operating expense increased
primarily due to increased pre-development costs, which were partially offset by
decreased property management costs. General and administrative expense
decreased primarily due to decreased bonus expense. Interest expense increased
primarily due to the January 2008 refinancing at International Plaza, Partridge
Creek, the expansion at Twelve Oaks, and the escrowed Macao payment. These
increases were partially offset by decreases in floating interest rates.
Depreciation expense increased primarily due to Partridge Creek.
Unconsolidated Joint
Ventures
Total
revenues for the three months ended September 30, 2008 were $67.1 million, a
$2.7 million or 4.2% increase from the comparable period in 2007. Minimum rents
increased by $1.7 million primarily due to the November 2007 expansion at
Stamford, as well as tenant rollovers and increases in occupancy. Expense
recoveries increased primarily due to increased revenue from marketing and
promotion services and increases in maintenance costs at certain centers, which
were partially offset by decreases due to adjustments in 2007 to prior estimated
recoveries at certain centers.
Total
expenses increased by $3.4 million or 7.7%, to $47.5 million for the three
months ended September 30, 2008. Maintenance, taxes, and utilities expense
increased primarily due to increases in maintenance costs and property taxes at
certain centers. Other operating expense increased due to Stamford and increased
costs related to marketing and promotion services, which were partially offset
by a decrease in the provision for bad debts.
As a
result of the foregoing, income of the Unconsolidated Joint Ventures decreased
by $0.9 million to $19.7 million for the three months ended September 30, 2008.
Our equity in income of the Unconsolidated Joint Ventures was $11.3 million for
both for the three months ended September 30, 2008 and 2007.
Net
Income
Our
income before minority and preferred interests was $27.8 million for the three
months ended September 30, 2008, compared to $25.5 million for the three months
ended September 30, 2007. After allocation of income to minority and preferred
interests, net income allocable to common shareowners for 2008 was $9.2 million
compared to $7.8 million in the comparable period in 2007.
Comparison
of the Nine Months Ended September 30, 2008 to the Nine Months Ended September
30, 2007
The
following table sets forth operating results for the nine months ended September
30, 2008 and September 30, 2007, showing the results of the Consolidated
Businesses and Unconsolidated Joint Ventures:
|
Nine
Months Ended
September
30, 2008
|
Nine
Months Ended
September
30, 2007
|
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
(in millions of dollars)
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
261.6 |
|
|
|
116.4 |
|
|
|
239.4 |
|
|
|
113.1 |
|
Percentage
rents
|
|
|
7.2 |
|
|
|
3.6 |
|
|
|
6.5 |
|
|
|
3.9 |
|
Expense
recoveries
|
|
|
178.7 |
|
|
|
69.1 |
|
|
|
162.2 |
|
|
|
69.3 |
|
Management, leasing, and
development services
|
|
|
10.9 |
|
|
|
|
|
|
|
12.4 |
|
|
|
|
|
Other
|
|
|
23.2 |
|
|
|
5.5 |
|
|
|
27.4 |
|
|
|
5.8 |
|
Total
revenues
|
|
|
481.5 |
|
|
|
194.6 |
|
|
|
448.0 |
|
|
|
192.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and
utilities
|
|
|
138.8 |
|
|
|
48.6 |
|
|
|
127.7 |
|
|
|
49.3 |
|
Other operating
|
|
|
56.5 |
|
|
|
16.0 |
|
|
|
49.4 |
|
|
|
14.2 |
|
Management, leasing, and
development services
|
|
|
6.5 |
|
|
|
|
|
|
|
6.7 |
|
|
|
|
|
General and
administrative
|
|
|
23.1 |
|
|
|
|
|
|
|
21.8 |
|
|
|
|
|
Interest
expense
|
|
|
109.0 |
|
|
|
48.6 |
|
|
|
95.5 |
|
|
|
50.4 |
|
Depreciation and amortization
(2)
|
|
|
107.0 |
|
|
|
29.4 |
|
|
|
99.9 |
|
|
|
29.5 |
|
Total
expenses
|
|
|
440.8 |
|
|
|
142.7 |
|
|
|
400.9 |
|
|
|
143.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on land sales and other nonoperating income
|
|
|
3.7 |
|
|
|
0.6 |
|
|
|
2.3 |
|
|
|
1.2 |
|
|
|
|
44.4 |
|
|
|
52.6 |
|
|
|
49.3 |
|
|
|
49.9 |
|
Income
tax expense
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of Unconsolidated Joint Ventures (2)
|
|
|
29.0 |
|
|
|
|
|
|
|
28.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority and preferred interests
|
|
|
72.8 |
|
|
|
|
|
|
|
78.0 |
|
|
|
|
|
Minority
and preferred interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG preferred
distributions
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
Minority share of income of
consolidated joint
ventures
|
|
|
(3.7 |
) |
|
|
|
|
|
|
(3.6 |
) |
|
|
|
|
Distributions in excess of
minority share of income
of consolidated joint
ventures
|
|
|
(8.0 |
) |
|
|
|
|
|
|
(2.8 |
) |
|
|
|
|
Minority share of income of
TRG
|
|
|
(17.9 |
) |
|
|
|
|
|
|
(21.8 |
) |
|
|
|
|
Distributions in excess of
minority share of income
of TRG
|
|
|
(16.3 |
) |
|
|
|
|
|
|
(9.9 |
) |
|
|
|
|
Net
income
|
|
|
25.1 |
|
|
|
|
|
|
|
38.1 |
|
|
|
|
|
Preferred
dividends
|
|
|
(11.0 |
) |
|
|
|
|
|
|
(11.0 |
) |
|
|
|
|
Net
income allocable to common shareowners
|
|
|
14.1 |
|
|
|
|
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA - 100%
|
|
|
260.4 |
|
|
|
130.6 |
|
|
|
244.7 |
|
|
|
129.7 |
|
EBITDA - outside partners'
share
|
|
|
(28.8 |
) |
|
|
(59.2 |
) |
|
|
(26.0 |
) |
|
|
(58.8 |
) |
Beneficial interest in
EBITDA
|
|
|
231.6 |
|
|
|
71.4 |
|
|
|
218.7 |
|
|
|
71.0 |
|
Beneficial interest
expense
|
|
|
(94.3 |
) |
|
|
(25.3 |
) |
|
|
(84.9 |
) |
|
|
(25.0 |
) |
Beneficial income tax
expense
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-real estate
depreciation
|
|
|
(2.2 |
) |
|
|
|
|
|
|
(2.0 |
) |
|
|
|
|
Preferred dividends and
distributions
|
|
|
(12.8 |
) |
|
|
|
|
|
|
(12.8 |
) |
|
|
|
|
Funds from Operations
contribution
|
|
|
121.6 |
|
|
|
46.1 |
|
|
|
118.9 |
|
|
|
46.0 |
|
(1)
|
With
the exception of the Supplemental Information, amounts include 100% of the
Unconsolidated Joint Ventures. Amounts are net of intercompany
transactions. The Unconsolidated Joint Ventures are presented at 100% in
order to allow for measurement of their performance as a whole, without
regard to our ownership interest. In our consolidated financial
statements, we account for investments in the Unconsolidated Joint
Ventures under the equity method.
|
(2)
|
Amortization
of our additional basis in the Operating Partnership included in
depreciation and amortization was $3.7 million in both 2008 and 2007.
Also, amortization of our additional basis included in equity in income of
Unconsolidated Joint Ventures was $1.5 million in both 2008 and
2007.
|
(3)
|
Amounts
in this table may not add due to
rounding.
|
Consolidated
Businesses
Total
revenues for the nine months ended September 30, 2008 were $481.5 million, a
$33.5 million or 7.5% increase over the comparable period in 2007. Minimum rents
increased $22.2 million, primarily due to the October 2007 opening of Partridge
Creek, the September 2007 expansion at Twelve Oaks, and The Pier Shops, which we
began consolidating in April 2007 upon the acquisition of a controlling interest
in the center. Minimum rents also increased due to tenant rollovers and
increases in occupancy. Expense recoveries increased primarily due to Partridge
Creek, Twelve Oaks, and The Pier Shops, as well as increased recoverable costs
at certain centers and an increase in revenue from marketing and promotion
services. Management, leasing, and development revenue decreased primarily due
to lower revenue on the Songdo development contract, which in the first quarter
of 2007 included revenue related to 2006 services. We now expect that
management, leasing, and development revenues, less taxes and other related
expenses, will be about $6 million for the full year of 2008. Other income
decreased primarily due to a decrease in lease cancellation revenue, which was
partially offset by increases in parking-related revenue and sponsorship income.
During the nine months ended September 30, 2008, we recognized our approximately
$3.3 million and $0.9 million share of the Consolidated Businesses’ and
Unconsolidated Joint Ventures’ lease cancellation revenue. In late October 2008,
we finalized a binding agreement to settle an ongoing dispute with a former
tenant and we now expect that our share of total lease cancellation income for
the year will be between $9 million and $10 million.
Total
expenses were $440.8 million, a $39.9 million or 10.0% increase over the
comparable period in 2007. Maintenance, taxes, and utilities expense increased
primarily due to Partridge Creek and The Pier Shops, as well as increases in
maintenance costs and property taxes at certain centers. Other operating expense
increased due to increased pre-development costs, Partridge Creek, and an
increase in property management costs. We now expect that pre-development costs
for both our domestic and Asia projects will be about $17 million in 2008.
General and administrative expense increased primarily due to increased
professional fees, compensation, and travel, which were partially offset by
decreased bonus expense. Our annual bonus plan is based on the achievement of
certain performance criteria, including the level of FFO. In addition, our
deferred long-term compensation grants are marked to market quarterly based on
our stock price. Interest expense increased primarily due to the January 2008
refinancing at International Plaza, Partridge Creek, and The Pier Shops.
Interest expense also increased due to the repurchase of common stock in 2007,
the expansion at Twelve Oaks, and the escrowed Macao payment. These increases
were partially offset by decreases in floating interest rates. Depreciation
expense increased due to Partridge Creek, The Pier Shops, and Twelve Oaks, which
were partially offset by changes in depreciable lives of tenant allowances and
other assets in connection with early terminations in 2007.
Gains on
land sales and other nonoperating income increased primarily due to $2.2 million
of gains on land sales and land-related rights in the nine months ended
September 30, 2008. This increase was partially offset by a gain on the
termination of swaps at International Plaza in 2007. There were no land sales in
the nine months ended September 30, 2007. We expect gains on land sales to be
under $3 million in 2008.
Unconsolidated Joint
Ventures
Total
revenues for the nine months ended September 30, 2008 were $194.6 million, a
$2.5 million or 1.3% increase from the comparable period in 2007. Minimum rents
increased by $3.3 million, primarily due to tenant rollovers, the November 2007
expansion at Stamford, prior year adjustments at Arizona Mills in 2007, and
increased income from specialty retailers, which were partially offset by the
reduction due to the consolidation of The Pier Shops and decreases due to
frictional vacancy on spaces that have begun to open in the second half of the
year. Expense recoveries decreased slightly, primarily due to The Pier Shops and
decreases due to adjustments in 2007 to prior estimated recoveries at certain
centers, which were offset by increased maintenance costs at certain centers,
Stamford, and an increase in revenue from marketing and promotion
services.
Total
expenses decreased by $0.7 million or 0.5%, to $142.7 million for the nine
months ended September 30, 2008. Maintenance, taxes, and utilities expense
decreased due to The Pier Shops, which was partially offset by increases in
maintenance costs at certain centers and Stamford. Other operating expense
increased primarily due to Stamford and increased professional fees, which were
partially offset by The Pier Shops. Interest expense decreased due to The Pier
Shops, which was partially offset by the refinancing at Fair Oaks. Depreciation
expense remained relatively flat, with decreases due to The Pier Shops being
partially offset by Stamford.
As a
result of the foregoing, income of the Unconsolidated Joint Ventures increased
by $2.7 million to $52.6 million for the nine months ended September 30, 2008.
We had an effective 6% interest in The Pier Shops based on relative equity
contributions, prior to our acquisition of a controlling interest in April 2007
(see “Results of Operations – New Development and Acquisitions”). Our equity in
income of the Unconsolidated Joint Ventures was $29.0 million, a $0.3 million
increase from the comparable period in 2007.
Net
Income
Our
income before minority and preferred interests was $72.8 million for the nine
months ended September 30, 2008, compared to $78.0 million for the nine months
ended September 30, 2007. After allocation of income to minority and preferred
interests, net income allocable to common shareowners for 2008 was $14.1 million
compared to $27.1 million in the comparable period in 2007.
Reconciliation
of Net Income Allocable to Common Shareowners to Funds from
Operations
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions of dollars)
|
|
Net
income allocable to common shareowners
|
|
|
9.2 |
|
|
|
7.8 |
|
|
|
14.1 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less) depreciation and amortization: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at
100%
|
|
|
35.5 |
|
|
|
33.8 |
|
|
|
107.0 |
|
|
|
99.9 |
|
Minority partners in
consolidated joint ventures
|
|
|
(2.9 |
) |
|
|
(4.2 |
) |
|
|
(10.4 |
) |
|
|
(11.9 |
) |
Share of unconsolidated joint
ventures
|
|
|
5.8 |
|
|
|
5.9 |
|
|
|
17.1 |
|
|
|
17.3 |
|
Non-real estate
depreciation
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(2.2 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
minority interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority share of income of
TRG
|
|
|
7.4 |
|
|
|
6.8 |
|
|
|
17.9 |
|
|
|
21.8 |
|
Distributions in excess of
minority share of
income of TRG
|
|
|
3.9 |
|
|
|
3.6 |
|
|
|
16.3 |
|
|
|
9.9 |
|
Distributions in excess of
minority share of
income of consolidated joint
ventures
|
|
|
1.6 |
|
|
|
1.8 |
|
|
|
8.0 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from Operations
|
|
|
59.7 |
|
|
|
55.0 |
|
|
|
167.7 |
|
|
|
164.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCO's
average ownership percentage of TRG
|
|
|
66.6 |
% |
|
|
65.9 |
% |
|
|
66.5 |
% |
|
|
65.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from Operations allocable to TCO
|
|
|
39.8 |
|
|
|
36.2 |
|
|
|
111.6 |
|
|
|
108.7 |
|
(1)
|
Depreciation
includes $3.5 million and $2.6 million of mall tenant allowance
amortization for the three months ended September 30, 2008 and 2007,
respectively, and $10.2 million and $8.1 million for the nine months ended
September 30, 2008 and 2007,
respectively.
|
(2)
|
Amounts
in this table may not recalculate due to
rounding.
|
Reconciliation
of Net Income to Beneficial Interest in EBITDA
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions of dollars)
|
|
Net
income
|
|
|
12.9 |
|
|
|
11.5 |
|
|
|
25.1 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less) depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at
100%
|
|
|
35.5 |
|
|
|
33.8 |
|
|
|
107.0 |
|
|
|
99.9 |
|
Minority partners in
consolidated joint ventures
|
|
|
(2.9 |
) |
|
|
(4.2 |
) |
|
|
(10.4 |
) |
|
|
(11.9 |
) |
Share of unconsolidated joint
ventures
|
|
|
5.8 |
|
|
|
5.9 |
|
|
|
17.1 |
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less) preferred interests, interest expense, and
income tax
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
distributions
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
1.8 |
|
|
|
1.8 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at
100%
|
|
|
36.0 |
|
|
|
33.6 |
|
|
|
109.0 |
|
|
|
95.5 |
|
Minority partners in
consolidated joint ventures
|
|
|
(5.0 |
) |
|
|
(3.7 |
) |
|
|
(14.7 |
) |
|
|
(10.6 |
) |
Share of unconsolidated joint
ventures
|
|
|
8.6 |
|
|
|
8.4 |
|
|
|
25.3 |
|
|
|
25.0 |
|
Income tax
expense
|
|
|
0.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
minority interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority share of income of
TRG
|
|
|
7.4 |
|
|
|
6.8 |
|
|
|
17.9 |
|
|
|
21.8 |
|
Distributions in excess of
minority share of
income of TRG
|
|
|
3.9 |
|
|
|
3.6 |
|
|
|
16.3 |
|
|
|
9.9 |
|
Distributions in excess of
minority share of
income of consolidated joint
ventures
|
|
|
1.6 |
|
|
|
1.8 |
|
|
|
8.0 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in EBITDA
|
|
|
104.6 |
|
|
|
98.2 |
|
|
|
302.9 |
|
|
|
289.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCO's
average ownership percentage of TRG
|
|
|
66.6 |
% |
|
|
65.9 |
% |
|
|
66.5 |
% |
|
|
65.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in EBITDA allocable to TCO
|
|
|
69.7 |
|
|
|
64.7 |
|
|
|
201.6 |
|
|
|
191.0 |
|
(1)
|
Amounts
in this table may not recalculate due to
rounding.
|
Liquidity
and Capital Resources
Capital
resources are required to maintain our current operations, pay dividends, and
fund planned capital spending, future developments, and other commitments and
contingencies. Current market conditions have severely limited the availability
of new sources of financing and capital, which will clearly have an impact on
our ability and the ability of our partners to obtain construction financing for
planned new development projects in the near term. However, we are financed with
property-specific secured debt and we have no maturities on our current debt
until fall 2010, when our share of three loans totaling $264 million mature. In
addition, the three loans maturing in 2010 are financed at historically
conservative loan to value ratios reflecting only five to eight times current
net operating income for the properties. Further, of the $364
million of additional debt that matures in 2011(excluding our lines of credit,
which are discussed below), $288 million can be extended at our option to 2013,
subject to certain covenants.
As of
September 30, 2008, we had a consolidated cash balance of $36.7 million, of
which $2.8 million is restricted to specific uses stipulated by our lenders. We
also have secured lines of credit of $550 million and $40 million. As of
September 30, 2008, the total amount utilized of the $550 million and $40
million lines of credit was $225 million. Both lines of credit mature in
February 2011. The $550 million line of credit has a one-year extension option.
Twelve banks participate in these facilities. Given the lack of debt maturities
until 2010, we believe we have sufficient liquidity from our lines of credit and
cash flows from both our consolidated and unconsolidated properties to meet our
planned operating, financing and capital needs and commitments during this
period.
Operating
Activities
Our net
cash provided by operating activities was $175.6 million in 2008, compared to
$177.2 million in 2007. See also "Results of Operations" for descriptions of
2008 and 2007 transactions affecting operating cash flows.
Investing
Activities
Net cash
used in investing activities was $89.5 million in 2008 compared to $172.2
million in 2007. Cash used in investing activities was impacted by the timing of
capital expenditures, with additions to properties in 2008 and 2007 for the
construction of Partridge Creek, the expansion and renovation at Twelve Oaks,
the acquisition of land for future development, and our Oyster Bay project, as
well as other development activities and capital items. A tabular presentation
of 2008 capital spending is shown in “Capital Spending.” In 2008 and 2007, $1.9
million and $2.3 million, respectively, were used to acquire marketable equity
securities and other assets. In 2008, we exercised our option to purchase
interest in Partridge Creek from the third-party owner for $11.8 million (see
“Note 3 – Acquisitions, New Development, and Services -The Mall at Partridge
Creek”). In 2007, we purchased a controlling interest in The Pier Shops for
$24.5 million, and upon its consolidation we included its $33.4 million balance
of cash on our balance sheet. In 2008, a $54.3 million contribution was made
related to our acquisition of a 25% interest in The Mall at Studio City. The
contribution will be held in escrow until financing for the project is complete
(see “Results of Operations – Taubman Asia”). Contributions to Unconsolidated
Joint Ventures of $8.9 million and $8.4 million in 2008 and 2007, respectively,
were made primarily to fund our initial contribution to University Town Center
in 2008 (see “Planned Capital Spending – New Centers”) and the expansions at
Stamford and Waterside in both 2008 and 2007.
Sources
of cash used in funding these investing activities, other than cash flow from
operating activities, included distributions from Unconsolidated Joint Ventures
as well as transactions described under “Financing Activities.” Distributions in
excess of earnings from Unconsolidated Joint Ventures provided $61.6 million in
2008 and $5.0 million in 2007. The amounts in 2008 included excess proceeds from
the Fair Oaks refinancing. Net proceeds from the sale of peripheral land and
land-related rights were $5.3 million in 2008. There were no land sales in the
first three quarters of 2007. The timing of land sales is variable and proceeds
from land sales can vary significantly from period to period.
Financing
Activities
Net cash
used in financing activities was $96.6 million in 2008, compared to $1.5 million
provided by financing activities in 2007. Proceeds from the issuance of debt,
net of payments and issuance costs, were $80.4 million in 2008, compared to
$214.5 million in 2007. In 2008, a net $3.8 million was received in connection
with incentive plans. Repurchases of common stock totaled $100.0 million in
2007. Total dividends and other distributions paid were $178.6 million and
$112.1 million in 2008 and 2007, respectively. Distributions to minority and
preferred interests in 2008 include $51.3 million of excess proceeds from the
refinancing of International Plaza.
Beneficial Interest in
Debt
At
September 30, 2008, the Operating Partnership's debt and its beneficial interest
in the debt of its Consolidated and Unconsolidated Joint Ventures totaled
$2,993.9 million with an average interest rate of 5.40% excluding amortization
of debt issuance costs and the effects of interest rate cap premiums, and losses
on settlement of derivatives used to hedge the refinancing of certain fixed rate
debt. These costs are reported as interest expense in the results of operations.
Interest expense for the nine months ended September 30, 2008 includes $0.6
million of non-cash amortization relating to acquisitions, or 0.03% of the
average all-in rate. Beneficial interest in debt includes debt used to fund
development and expansion costs. Beneficial interest in construction work in
process totaled $199.4 million as of September 30, 2008, which includes $195.6
million of assets on which interest is being capitalized. Beneficial interest in
capitalized interest was $7.5 million for the nine months ended September 30,
2008. The following table presents information about our beneficial interest in
debt as of September 30, 2008:
|
|
Amount
|
|
|
Interest
Rate
Including
Spread
|
|
|
|
(in
millions of dollars)
|
|
|
|
|
Fixed
rate debt
|
|
|
2,394.0 |
|
|
|
5.70 |
%
(1) |
|
|
|
|
|
|
|
|
|
Floating
rate debt:
|
|
|
|
|
|
|
|
|
Swapped through December
2010
|
|
|
162.8 |
|
|
|
5.01 |
% |
Swapped through March
2011
|
|
|
125.0 |
|
|
|
4.22 |
% |
Swapped through October
2012
|
|
|
15.0 |
|
|
|
5.95 |
% |
|
|
|
302.8 |
|
|
|
4.73 |
%
(1) |
Floating month to
month
|
|
|
297.1 |
|
|
|
3.69 |
%
(1) |
Total floating rate
debt
|
|
|
599.9 |
|
|
|
4.22 |
%
(1) |
|
|
|
|
|
|
|
|
|
Total
beneficial interest in debt
|
|
|
2,993.9 |
|
|
|
5.40 |
%
(1) |
|
|
|
|
|
|
|
|
|
Amortization
of financing costs (2)
|
|
|
|
|
|
|
0.19 |
% |
Average
all-in rate
|
|
|
|
|
|
|
5.59 |
% |
(1)
|
Represents
weighted average interest rate before amortization of financing
costs.
|
(2)
|
Financing
costs include financing fees, interest rate cap premiums, and losses on
settlement of derivatives used to hedge the refinancing of certain fixed
rate debt.
|
(3)
|
Amounts
in table may not add due to
rounding.
|
Sensitivity
Analysis
We have
exposure to interest rate risk on our debt obligations and interest rate
instruments. We use derivative instruments primarily to manage exposure to
interest rate risks inherent in variable rate debt and refinancings. We
routinely use cap, swap, treasury lock, and rate lock agreements to meet these
objectives. Based on the Operating Partnership's beneficial interest in debt
subject to floating rates in effect at September 30, 2008 and 2007, a one
percent increase or decrease in interest rates on this floating rate debt would
decrease or increase annual cash flows by approximately $3.0 million and $3.2
million, respectively, and, due to the effect of capitalized interest, annual
earnings by approximately $2.7 million and $2.8 million, respectively. Based on
our consolidated debt and interest rates in effect at September 30, 2008 and
2007, a one percent increase in interest rates would decrease the fair value of
debt by approximately $118.0 million and $124.4 million, respectively, while a
one percent decrease in interest rates would increase the fair value of debt by
approximately $125.8 million and $133.6 million, respectively.
Contractual
Obligations
In
conducting our business, we enter into various contractual obligations,
including those for debt, capital leases for property improvements, operating
leases for land and office space, purchase obligations (primarily for
construction), and other long-term commitments. Disclosure of these items is
contained in our Annual Report on Form 10-K. Updates of the 10-K disclosures for
debt obligations and planned capital spending, which can vary significantly from
period to period, as of September 30, 2008 are provided in the table
below:
|
|
Payments Due by Period for Consolidated Businesses at
100%
|
|
|
|
Total
|
|
|
Less
than
1 year (2008)
|
|
|
1-3
years
(2009-2010)
|
|
|
3-5
years
(2011-2012)
|
|
|
More
than 5 years (2013+)
|
|
|
|
(in
millions of dollars)
|
|
Debt
(1)
|
|
|
2,784.2 |
|
|
|
3.5 |
|
|
|
226.9 |
|
|
|
645.2 |
|
|
|
1,908.6 |
|
Interest
payments (1)
|
|
|
827.3 |
|
|
|
38.0 |
|
|
|
298.9 |
|
|
|
217.9 |
|
|
|
272.5 |
|
Purchase
obligations -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned
capital spending (2)
|
|
|
42.9 |
|
|
|
42.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
settlement periods for debt do not consider extension options. Amounts
relating to interest on floating rate debt are calculated based on the
debt balances and interest rates as of September 30,
2008.
|
(2)
|
As
of September 30, 2008, we were contractually liable for $20.0 million of
this planned spending. See "Planned Capital Spending" for detail regarding
planned funding.
|
(3)
|
Amounts
in this table may not add due to
rounding.
|
Loan Commitments and
Guarantees
Certain
loan agreements contain various restrictive covenants, including a minimum net
worth requirement, minimum interest coverage ratios, a maximum payout ratio on
distributions, a minimum debt yield ratio, a minimum fixed charges coverage
ratio, and a maximum leverage ratio, the latter being the most restrictive. We
are in compliance with all of our covenants as of September 30, 2008. The
maximum payout ratio on distributions covenant limits the payment of
distributions generally to 95% of funds from operations, as defined in the loan
agreements, except as required to maintain our tax status, pay preferred
distributions, and for distributions related to the sale of certain
assets.
See “Note
5 – Beneficial Interest in Debt and Interest Expense – Debt Covenants and
Guarantees” to the consolidated financial statements for more
details.
Cash Tender
Agreement
A. Alfred
Taubman has the annual right to tender units of partnership interest in the
Operating Partnership and cause us to purchase the tendered interests at a
purchase price based on a market valuation of TCO on the trading date
immediately preceding the date of the tender. See “Note 8 – Commitments and
Contingencies” to the consolidated financial statements for more
details.
Capital
Spending
New
Centers
In May
2008, we announced that we had entered into agreements to jointly develop
University Town Center, a regional mall in Sarasota, Florida. The 0.9 million
square foot shopping center will be part of a mixed-use development anchored by
Nordstrom, Neiman Marcus, and Macy's. We will own a 25% interest in the center
and we expect our share of development costs to be approximately $90 million,
with a stabilized return on our investment of 8.5% to 9%. The partnership is
preparing to close on the purchase of the land and begin construction in the
next few months. Assuming this occurs as expected, we would expect the center to
open in November 2010. The partnership is working with a number of banks on
construction financing. If financing can
not be
secured with desirable terms, the partnership is planning to self-fund the
project.
We are
finalizing a development agreement regarding City Creek Center, a mixed-use
project in Salt Lake City, Utah. The 0.7 million square foot retail component of
the project will include Macy’s and Nordstrom as anchors. In April 2008, we
received approval for the important pedestrian bridge that links the retail
component and encourages circulation throughout the project. This was a
significant step toward final design approval, and the project is expected
to open in spring 2012. We have been a consultant throughout the planning
process for this project and are finalizing agreements to develop, manage,
lease, and own the retail space under a participating lease. When we have
finalized these complex agreements, we will provide the anticipated costs and
returns. Meanwhile, construction is progressing and we are leasing
space.
In June
2007, the Supreme Court of the State of New York (Suffolk County) affirmed that
the Town of Oyster Bay had not provided a basis to deny our application to build
our Oyster Bay project in Syosset, Long Island, New York. In September 2007, the
Oyster Bay Town Board adopted a resolution citing its reasons for denying our
application for a special use permit and submitted it to the Court. We responded
with a motion asking the Court to order the town to issue the permit. In June
2008, the Supreme Court ordered the Town of Oyster Bay to immediately issue a
special use permit. Subsequently in June of 2008, the Town filed a notice of
appeal regarding the court’s decision. We have filed a motion to expedite the
appeal process, which was granted in July 2008. In addition, we were also
granted a preference for oral argument, which is also expected to shorten the
appeal process. As a result, we are hopeful the appeal process can be concluded
in early 2009, clearing the way to start the long-delayed construction of the
center. From the start of construction, it is less than a two year process to
build the mall. We continue to be confident that it is probable we will prevail
and build the mall, which has over 60% of the space committed and will be
anchored by Neiman Marcus, Nordstrom, and Barneys New York. However, if we are
ultimately unsuccessful, it is anticipated that the recovery on this asset would
be significantly less than our current investment. We previously anticipated
spending approximately $500 million on the project and receiving an approximate
7% return. We will update these numbers once we know the final construction
schedule and when the source and cost of financing and other considerations are
known. Our investment in this project as of September 30, 2008 was $153 million.
With capitalized interest, storage costs, leasing, and other ongoing
expenditures, we expect our investment to increase $3 million to $4 million each
quarter. If we were to determine for any period that sufficient development
activities were not underway to permit capitalization of interest and other
carrying costs, these costs, which comprise the majority of the quarterly
spending, would be expensed as incurred.
In
January 2007, we acquired land for future development in North Atlanta, Georgia.
We are making progress on the development of this land and two adjoining
parcels, which are currently under our option, as a significant mixed use
project. The project would include about 1.4 million square feet of retail,
900,000 square feet of office, 875 residential units, and 500 hotel
rooms.
See
“Results of Operations – Taubman Asia” regarding the status of our involvement
in The Mall at Studio City and Songdo.
2008
Capital Spending
Capital
spending for routine maintenance of the shopping centers is generally recovered
from tenants. Capital spending through September 30, 2008 is summarized in the
following table:
|
|
2008 (1)
|
|
|
|
Consolidated
Businesses
|
|
|
Beneficial
Interest
in
Consolidated
Businesses
|
|
|
Unconsolidated
Joint Ventures
|
|
|
Beneficial
Interest in Unconsolidated
Joint
Ventures
|
|
|
|
(in
millions of dollars)
|
|
New
Development Projects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-construction development
activities (2)
|
|
|
15.5 |
|
|
|
15.5 |
|
|
|
|
|
|
|
New centers (3)
|
|
|
3.6 |
|
|
|
3.6 |
|
|
|
6.5 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renovation projects with
incremental GLA
and/or anchor
replacement
|
|
|
5.9 |
|
|
|
5.0 |
|
|
|
17.5 |
|
|
|
6.7 |
|
Renovations with no incremental
GLA effect
and other
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
6.2 |
|
|
|
4.2 |
|
Mall tenant allowances (4)
|
|
|
6.0 |
|
|
|
5.6 |
|
|
|
7.3 |
|
|
|
4.4 |
|
Asset replacement costs
reimbursable by tenants
|
|
|
4.2 |
|
|
|
3.8 |
|
|
|
4.8 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
office improvements and equipment (5)
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to properties
|
|
|
39.9 |
|
|
|
38.0 |
|
|
|
42.4 |
|
|
|
21.9 |
|
(1)
|
Costs
are net of intercompany profits and are computed on an accrual
basis.
|
(2)
|
Primarily
includes costs related to Oyster Bay. Excludes $54 million escrow deposit
paid in 2008 relating to the Macao
project.
|
(3)
|
Includes
costs related to Partridge Creek and University Town
Center.
|
(4)
|
Excludes
initial lease-up costs.
|
(5)
|
Includes
U.S. and Asia offices.
|
(6)
|
Amounts
in this table may not add due to
rounding.
|
For the
nine months ended September 30, 2008, in addition to the costs above, we
incurred our $4.7 million share of Consolidated Businesses’ and $1.1 million
share of Unconsolidated Joint Ventures’ capitalized leasing costs.
The
following table presents a reconciliation of the Consolidated Businesses’
capital spending shown above (on an accrual basis) to additions to properties
(on a cash basis) as presented in our Consolidated Statement of Cash Flows for
the nine months ended September 30, 2008:
|
|
(in
millions of dollars)
|
|
|
|
|
|
Consolidated
Businesses’ capital spending
|
|
|
39.9 |
|
Differences
between cash and accrual basis
|
|
|
39.5 |
|
Cash
basis additions to properties
|
|
|
79.4 |
|
Planned
2008 Capital Spending
The
following table summarizes planned capital spending for 2008, excluding
acquisitions as well as costs related to our Macao project and projects or
expansions for which budgets have not yet been approved by the Board of
Directors:
|
|
2008 (1)
|
|
|
|
Consolidated
Businesses
|
|
|
Beneficial
Interest
in
Consolidated
Businesses
|
|
|
Unconsolidated
Joint
Ventures
|
|
|
Beneficial
Interest
in
Unconsolidated
Joint
Ventures
|
|
|
|
(in
millions of dollars)
|
|
New
development projects (2)
|
|
|
25.5 |
|
|
|
25.5 |
|
|
|
35.0 |
|
|
|
18.0 |
|
Existing
centers (3)
|
|
|
53.3 |
|
|
|
48.7 |
|
|
|
57.4 |
|
|
|
40.3 |
|
Corporate
office improvements
and equipment (4)
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
82.8 |
|
|
|
78.2 |
|
|
|
92.4 |
|
|
|
58.3 |
|
(1)
|
Costs
are net of intercompany profits.
|
(2)
|
Primarily
includes costs related to Oyster Bay and University Town Center. Excludes
$54 million escrow deposit paid in 2008 relating to the Macao
project.
|
(3)
|
Primarily
includes costs related to the renovation at Fairlane, mall tenant
allowances, and asset replacement costs reimbursable by
tenants.
|
(4)
|
Includes
U.S. and Asia offices.
|
(5)
|
Amounts
in this table may not add due to
rounding.
|
Estimates
of future capital spending include only projects approved by our Board of
Directors and, consequently, estimates will change as new projects are approved.
Costs of potential development projects, including our exploration of
development possibilities in Asia, are expensed until we conclude that it is
probable that the project will reach a successful conclusion. We are currently
capitalizing costs on our projects in Salt Lake City and Sarasota, although it
may be year end before the final agreements on the City Creek Center project are
executed due to their complexity. As of September 30, 2008, the combined
capitalized costs of these projects were $5.8 million.
Disclosures
regarding planned capital spending, including estimates regarding capital
expenditures, occupancy, and returns on new developments are forward-looking
statements and certain significant factors could cause the actual results to
differ materially, including but not limited to (1) actual results of
negotiations with anchors, tenants, and contractors, (2) timing and outcome of
litigation and entitlement processes, (3) changes in the scope, number, and
valuation of projects, (4) cost overruns, (5) timing of expenditures, (6)
availability of and cost of financing and other financing considerations, (7)
actual time to start construction and complete projects, (8) changes in economic
climate, (9) competition from others attracting tenants and customers, (10)
increases in operating costs, (11) timing of tenant openings, and (12) early
lease terminations and bankruptcies.
Dividends
We pay
regular quarterly dividends to our common and Series G and Series H preferred
shareowners. Dividends to our common shareowners are at the discretion of the
Board of Directors and depend on the cash available to us, our financial
condition, capital and other requirements, and such other factors as the Board
of Directors deems relevant. To qualify as a REIT, we must distribute at least
90% of our REIT taxable income prior to net capital gains to our shareowners, as
well as meet certain other requirements. We must pay these distributions in the
taxable year the income is recognized or in the following taxable year if they
are declared during the last three months of the taxable year, payable to
shareowners of record on a specified date during such period and paid during
January of the following year. Such distributions are treated as paid by us and
received by our shareowners on December 31 of the year in which they are
declared. In addition, at our election, a distribution for a taxable year may be
declared in the following taxable year if it is declared before we timely file
our tax return for such year and if paid on or before the first regular dividend
payment after such declaration. These distributions qualify as dividends paid
for the 90% REIT distribution test for the previous year and are taxable to
holders of our capital stock in the year in which paid. Preferred dividends
accrue regardless of whether earnings, cash availability, or contractual
obligations were to prohibit the current payment of dividends.
The
annual determination of our common dividends is based on anticipated Funds from
Operations available after preferred dividends and our REIT taxable income, as
well as assessments of annual capital spending, financing considerations, and
other appropriate factors.
Any
inability of the Operating Partnership or its joint ventures to secure financing
as required to fund maturing debts, capital expenditures, and changes in working
capital, including development activities and expansions, may require the
utilization of cash to satisfy such obligations, thereby possibly reducing
distributions to partners of the Operating Partnership and funds available to us
for the payment of dividends.
On
September 3, 2008 we declared a quarterly dividend of $0.415 per common share
that was paid on October 20, 2008 to shareowners of record on September 30,
2008. The Board of Directors also declared a quarterly dividend of $0.50 per
share on our 8% Series G Cumulative Redeemable Preferred Stock and a quarterly
dividend of $0.4765625 per share on our 7.625% Series H Cumulative Redeemable
Preferred Stock, each paid on September 30, 2008 to shareowners of record on
September 19, 2008.
Additional
Information
We
provide supplemental investor information coincident with our earning
announcements that can be found online at www.taubman.com under "Investor
Relations."
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The
information required by this item is included in this report at Item 2 under the
caption “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources – Sensitivity
Analysis.”
Item 4. Controls and Procedures
As of the
end of the period covered by this quarterly report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2008, our disclosure
controls and procedures were effective to ensure the information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized, and reported within
the time periods prescribed by the SEC, and that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART
II
OTHER
INFORMATION
Refer to
“Note 8 – Commitments and Contingencies” to our consolidated financial
statements relating to the Blue Back Square project. There were no material
developments regarding this litigation during the quarter ended September 30,
2008.
There
were no material changes in our risk factors previously disclosed in Part I,
Item 1A. of our Form 10-K for the year ended December 31, 2007.
12
|
--
|
Statement
Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
|
31(a)
|
--
|
Certification
of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31(b)
|
--
|
Certification
of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32(a)
|
--
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32(b)
|
--
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99
|
--
|
Debt
Maturity Schedule
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TAUBMAN
CENTERS, INC.
|
Date:
November 3, 2008
|
By:
/s/ Lisa A. Payne
|
|
Lisa
A. Payne
|
|
Vice
Chairman, Chief Financial Officer, and Director (Principal Financial
Officer)
|