Taubman Centers, Inc. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2008
Commission File No. 1-11530
Taubman Centers, Inc.
(Exact name of registrant as specified in its charter)
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Michigan
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38-2033632 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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200 East Long Lake Road, Suite 300, Bloomfield Hills, Michigan
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48304-2324 |
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(Address of principal executive offices)
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(Zip Code) |
(248) 258-6800
(Registrants 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.
þ 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
As of July 31, 2008, there were outstanding 52,893,428 shares of the Companys common stock, par value $0.01
per share.
TAUBMAN CENTERS, INC.
CONTENTS
1
TAUBMAN
CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
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June 30 |
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December 31 |
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2008 |
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2007 |
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Assets: |
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Properties |
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$ |
3,785,814 |
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$ |
3,781,136 |
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Accumulated depreciation and amortization |
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(986,366 |
) |
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(933,275 |
) |
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$ |
2,799,448 |
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$ |
2,847,861 |
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Investment in Unconsolidated Joint Ventures (Note 4) |
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92,377 |
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92,117 |
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Cash and cash equivalents |
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33,575 |
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47,166 |
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Accounts and notes receivable, less provision for bad debts of $7,883
and $6,694 in 2008 and 2007 |
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43,554 |
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52,161 |
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Accounts receivable from related parties |
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2,024 |
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2,283 |
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Deferred charges and other assets (Notes 1 and 3) |
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226,633 |
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109,719 |
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$ |
3,197,611 |
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$ |
3,151,307 |
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Liabilities: |
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Notes payable (Note 5) |
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$ |
2,774,156 |
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$ |
2,700,980 |
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Accounts payable and accrued liabilities |
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248,810 |
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296,385 |
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Dividends and distributions payable |
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21,950 |
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21,839 |
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Distributions in excess of investments in and net income of Unconsolidated
Joint Ventures (Note 4) |
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153,344 |
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100,234 |
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$ |
3,198,260 |
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$ |
3,119,438 |
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Commitments and contingencies (Notes 1, 3, 5, 7, and 8) |
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Preferred Equity of TRG |
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$ |
29,217 |
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$ |
29,217 |
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Minority interests in TRG and consolidated joint ventures (Notes 1 and 3) |
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$ |
16,345 |
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$ |
18,494 |
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Shareowners Equity: |
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Series B Non-Participating Convertible Preferred Stock, $0.001 par and
liquidation value, 40,000,000 shares authorized, 26,514,235 shares issued
and outstanding at June 30, 2008 and December 31, 2007 |
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$ |
27 |
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$ |
27 |
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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 June 30, 2008 and December 31, 2007 |
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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 June 30, 2008 and December 31, 2007 |
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Common Stock, $0.01 par value, 250,000,000 shares authorized, 52,892,604
and 52,624,013 shares issued and outstanding at June 30, 2008 and
December 31, 2007 |
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529 |
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526 |
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Additional paid-in capital |
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550,917 |
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543,333 |
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Accumulated other comprehensive income (loss) |
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(7,384 |
) |
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(8,639 |
) |
Dividends in excess of net income (Note 1) |
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(590,300 |
) |
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(551,089 |
) |
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$ |
(46,211 |
) |
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$ |
(15,842 |
) |
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$ |
3,197,611 |
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$ |
3,151,307 |
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See notes to consolidated financial statements.
2
TAUBMAN
CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
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Three Months Ended June 30 |
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2008 |
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2007 |
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Revenues: |
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Minimum rents |
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$ |
87,583 |
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$ |
79,507 |
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Percentage rents |
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1,325 |
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997 |
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Expense recoveries |
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60,384 |
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57,923 |
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Management, leasing, and development services |
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3,891 |
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3,632 |
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Other |
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7,229 |
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10,215 |
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$ |
160,412 |
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$ |
152,274 |
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Expenses: |
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Maintenance, taxes, and utilities |
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$ |
46,485 |
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$ |
45,587 |
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Other operating |
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19,695 |
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16,078 |
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Management, leasing, and development services |
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2,421 |
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1,796 |
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General and administrative |
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7,943 |
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7,015 |
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Interest expense |
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35,972 |
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32,190 |
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Depreciation and amortization |
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36,179 |
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33,568 |
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$ |
148,695 |
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$ |
136,234 |
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Gains on land sales and other nonoperating income |
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$ |
1,456 |
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$ |
723 |
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Income before income tax expense, equity in income of Unconsolidated
Joint Ventures, and minority and preferred interests |
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$ |
13,173 |
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$ |
16,763 |
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Income tax expense (Note 2) |
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(250 |
) |
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Equity in income of Unconsolidated Joint Ventures (Note 4) |
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8,491 |
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9,239 |
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Income before minority and preferred interests |
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$ |
21,414 |
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$ |
26,002 |
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Minority share of consolidated joint ventures (Note 1): |
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Minority share of income of consolidated joint ventures |
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(1,130 |
) |
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(621 |
) |
Distributions in excess of minority share of income of
consolidated joint ventures |
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(4,258 |
) |
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(1,649 |
) |
Minority interest in TRG (Note 1): |
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Minority share of income of TRG |
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(4,505 |
) |
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(7,187 |
) |
Distributions in excess of minority share of income |
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(6,874 |
) |
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(3,437 |
) |
TRG Series F preferred distributions |
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(615 |
) |
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(615 |
) |
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Net income |
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$ |
4,032 |
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$ |
12,493 |
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Series G and H preferred stock dividends |
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(3,659 |
) |
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(3,659 |
) |
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Net income allocable to common shareowners |
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$ |
373 |
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$ |
8,834 |
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Net income |
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$ |
4,032 |
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$ |
12,493 |
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Other comprehensive income: |
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Unrealized gain on interest rate instruments and other |
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12,106 |
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5,733 |
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Reclassification adjustment for amounts recognized in net income |
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316 |
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315 |
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Comprehensive income |
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$ |
16,454 |
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$ |
18,541 |
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Basic earnings per common share (Note 9) - |
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Net income |
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$ |
0.01 |
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$ |
0.17 |
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Diluted earnings per common share (Note 9) - |
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Net income |
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$ |
0.01 |
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$ |
0.16 |
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Cash dividends declared per common share |
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$ |
0.415 |
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$ |
0.375 |
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Weighted average number of common shares outstanding basic |
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52,859,653 |
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53,412,542 |
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See notes to consolidated financial statements.
3
TAUBMAN
CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
|
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|
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|
Six Months Ended June 30 |
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2008 |
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2007 |
|
Revenues: |
|
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|
|
|
|
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|
Minimum rents |
|
$ |
174,153 |
|
|
$ |
158,162 |
|
Percentage rents |
|
|
3,900 |
|
|
|
3,305 |
|
Expense recoveries |
|
|
117,848 |
|
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|
108,546 |
|
Management, leasing, and development services |
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|
7,585 |
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|
8,522 |
|
Other |
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|
14,343 |
|
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|
18,765 |
|
|
|
|
|
|
|
|
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|
$ |
317,829 |
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|
$ |
297,300 |
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|
|
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|
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Expenses: |
|
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|
|
|
|
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|
Maintenance, taxes, and utilities |
|
$ |
90,025 |
|
|
$ |
83,506 |
|
Other operating |
|
|
37,996 |
|
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|
32,874 |
|
Management, leasing, and development services |
|
|
4,678 |
|
|
|
4,586 |
|
General and administrative |
|
|
16,276 |
|
|
|
14,336 |
|
Interest expense |
|
|
72,954 |
|
|
|
61,884 |
|
Depreciation and amortization |
|
|
71,514 |
|
|
|
66,101 |
|
|
|
|
|
|
|
|
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|
$ |
293,443 |
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|
$ |
263,287 |
|
|
|
|
|
|
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|
Gains on land sales and other nonoperating income |
|
$ |
3,259 |
|
|
$ |
1,114 |
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|
|
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|
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|
|
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|
|
|
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|
Income before income tax expense, equity in income of Unconsolidated
Joint Ventures, and minority and preferred interests |
|
$ |
27,645 |
|
|
$ |
35,127 |
|
Income tax expense (Note 2) |
|
|
(440 |
) |
|
|
|
|
Equity in income of Unconsolidated Joint Ventures (Note 4) |
|
|
17,725 |
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|
|
17,425 |
|
|
|
|
|
|
|
|
Income before minority and preferred interests |
|
$ |
44,930 |
|
|
$ |
52,552 |
|
Minority share of consolidated joint ventures (Note 1): |
|
|
|
|
|
|
|
|
Minority share of income of consolidated joint ventures |
|
|
(2,306 |
) |
|
|
(2,534 |
) |
Distributions in excess of minority share of income of
consolidated joint ventures |
|
|
(6,395 |
) |
|
|
(1,041 |
) |
Minority interest in TRG (Note 1): |
|
|
|
|
|
|
|
|
Minority share of income of TRG |
|
|
(10,421 |
) |
|
|
(14,928 |
) |
Distributions in excess of minority share of income |
|
|
(12,341 |
) |
|
|
(6,270 |
) |
TRG Series F preferred distributions |
|
|
(1,230 |
) |
|
|
(1,230 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
12,237 |
|
|
$ |
26,549 |
|
Series G and H preferred stock dividends |
|
|
(7,317 |
) |
|
|
(7,317 |
) |
|
|
|
|
|
|
|
Net income allocable to common shareowners |
|
$ |
4,920 |
|
|
$ |
19,232 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,237 |
|
|
$ |
26,549 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on interest rate instruments and other |
|
|
624 |
|
|
|
5,757 |
|
Reclassification adjustment for amounts recognized in net income |
|
|
631 |
|
|
|
631 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,492 |
|
|
$ |
32,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share (Note 9) - |
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.09 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.83 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding basic |
|
|
52,767,430 |
|
|
|
53,418,055 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
TAUBMAN
CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,237 |
|
|
$ |
26,549 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Minority and preferred interests |
|
|
32,693 |
|
|
|
26,003 |
|
Depreciation and amortization |
|
|
71,514 |
|
|
|
66,101 |
|
Provision for bad debts |
|
|
2,383 |
|
|
|
2,464 |
|
Gains on sales of land and land-related rights |
|
|
(2,192 |
) |
|
|
|
|
Other |
|
|
4,498 |
|
|
|
4,123 |
|
Increase (decrease) in cash attributable to changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables, deferred charges, and other assets |
|
|
3,965 |
|
|
|
(8,037 |
) |
Accounts payable and other liabilities |
|
|
(23,201 |
) |
|
|
(14,975 |
) |
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities |
|
$ |
101,897 |
|
|
$ |
102,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Additions to properties |
|
$ |
(54,480 |
) |
|
$ |
(99,258 |
) |
Acquisition of marketable equity securities and other assets |
|
|
(1,936 |
) |
|
|
(2,290 |
) |
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 |
|
|
(5,998 |
) |
|
|
(2,937 |
) |
Distributions from Unconsolidated Joint Ventures in excess of income |
|
|
61,605 |
|
|
|
4,418 |
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities |
|
$ |
(49,869 |
) |
|
$ |
(91,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Debt proceeds |
|
$ |
333,503 |
|
|
$ |
136,313 |
|
Debt payments |
|
|
(259,951 |
) |
|
|
(7,961 |
) |
Debt issuance costs |
|
|
(3,425 |
) |
|
|
|
|
Issuance of common stock and/or partnership units in connection
with incentive plans |
|
|
2,615 |
|
|
|
|
|
Repurchase of common stock (Note 6) |
|
|
|
|
|
|
(50,000 |
) |
Distributions to minority and preferred interests (Note 1) |
|
|
(85,868 |
) |
|
|
(27,056 |
) |
Cash dividends to preferred shareowners |
|
|
(7,317 |
) |
|
|
(7,317 |
) |
Cash dividends to common shareowners |
|
|
(43,754 |
) |
|
|
(39,950 |
) |
Other |
|
|
(1,422 |
) |
|
|
28 |
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
$ |
(65,619 |
) |
|
$ |
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash and Cash Equivalents |
|
$ |
(13,591 |
) |
|
$ |
15,102 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Period |
|
|
47,166 |
|
|
|
26,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
33,575 |
|
|
$ |
41,384 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
TAUBMAN
CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 companys real estate properties. In this
report, the term Company refers to TCO, the Operating Partnership, and/or the Operating
Partnerships 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 Companys owned portfolio as of
June 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
Companys 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. The Company consolidates the accounts of the owner of The Mall at
Partridge Creek (Partridge Creek) (Note 3), which qualifies 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 is 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 Companys 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 Companys 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 Companys common stock, there are three classes of preferred stock (Series
B, G, and H) outstanding as of June 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 Companys 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 Companys 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 Companys common stock
at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.
6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Operating Partnership
At June 30, 2008, the Operating Partnerships 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 Companys ownership in the Operating Partnership at June 30, 2008 consisted of a 67%
managing general partnership interest, as well as the Series G and H Preferred Equity interests.
The Companys average ownership percentage in the Operating Partnership for the six months ended
June 30, 2008 and 2007 was 67% and 66%, respectively. At June 30, 2008, the Operating Partnership
had 79,440,048 units of partnership interest outstanding, of which the Company owned 52,892,604
units.
Minority Interests
As of June 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 Companys consolidated balance sheet of
$16.3 million and $18.5 million at June 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 partners $51.3 million share of the
distributed excess proceeds is classified as minority interest and included in Deferred Charges and
Other Assets in the Companys consolidated balance sheet. As of June 30, 2008, the total of excess
proceeds distributed to partners for this and the Cherry Creek consolidated joint venture 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.
7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2008, the Companys 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 Asias 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 Asias operating and investment activities prior and subsequent to the Asia President
obtaining his ownership interest. The Asia Presidents 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 Partnerships 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 Presidents ownership at fair
value, less the amount required to return the Operating Partnerships 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
Partnerships preferred interest. In the event of a liquidation of Taubman Asia, the Operating
Partnerships preferred interest would be returned in advance of any other ownership interest or
income. The Asia Presidents noncontrolling interest in Taubman Asia is accounted for as a minority
interest in the Companys 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 June 30, 2008, the Company
held controlling majority interests in consolidated entities with specified termination dates
between 2080 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 were approximately $192.9 million at June 30,
2008, compared to a book value of $(87.6) million, of which $(96.8) million was classified as
Deferred Charges and Other Assets and $9.2 million was classified as Minority Interests in the
Companys 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 Companys 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 and Other 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 Companys financial statements. The Companys 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 Companys 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 June 30, 2008, the Company had a
net federal, state, and foreign deferred tax asset of $3.1 million, after a valuation allowance of
$7.7 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.
8
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 June
30, 2008. The Company expects no significant increases or decreases in unrecognized tax benefits
due to changes in tax positions within one year of June 30, 2008. The Company has no interest or
penalties relating to income taxes recognized in the statement of operations for the three and six
months ended June 30, 2008 or in the balance sheet as of June 30, 2008. As of June 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 Acquisition, New Development, and Services
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 Macys.
The center is projected to start construction in fall 2008 and open in November 2010, contingent
upon obtaining final site plan approval. The Company will own a 25% interest in the center and
expects its share of development costs to be approximately $90 million.
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, which is
located 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
Companys 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 Asias 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 Companys $54 million
initial investment has been placed into escrow until financing for the overall project is
completed. The Company had previously expected that its partners in the project would have
completed the financing by summer 2008; however given the current conditions in the capital
markets, completion of the financing is taking longer than expected. No interest is being
capitalized on this payment until the escrow is released. The $54 million escrowed payment is
classified within Deferred Charges and Other Assets on the consolidated balance sheet. The
Companys 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. While it does not control the construction schedule, the Company
believes the project is likely to open in late 2010 or early 2011.
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 centers 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, which the Company
continues to estimate will be in the range of $15 million over the next two years, on which it will
receive a preferred return at a minimum of 8%.
9
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, which opened in April 2008, 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
became the owner of the project and leases the land from a subsidiary of the Company. In turn, the
owner leases 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. The owner provided
$9 million in equity. Funding for the remaining project costs was provided by the owners third
party construction loan. The owners equity contribution, representing minority interest, is
included within Minority Interests in TRG and Consolidated Joint Ventures in the Companys
consolidated balance sheet.
The Company intends to exercise its option to purchase the property and assume the ground
lease from the owner during the exchange period ending October 2008. The option, if exercised, will
provide the owner a 12% cumulative return on its equity. In the event the Company does not exercise
its right to purchase the property from the owner, the owner will have the right to sell all of its
interest in the property, provided that the purchaser shall assume all of the obligations and be
assigned all of the owners rights under the ground lease, the operating lease, and any remaining
obligations under the loans.
The Company has guaranteed the lease payments on the operating lease (excluding monthly
supplemental rent equal to 1.67% of the owners outstanding equity balance, commencing after the
exchange period). The lease payments are structured to cover debt service, ground rent payments,
and other expenses of the lessor. The Company consolidates the accounts of the owner. The junior
loan and other intercompany transactions are eliminated in consolidation.
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 Companys 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 courts 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. 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 Companys investment in Oyster Bay was $149 million as of June 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 shopping center will be anchored by Lotte Department Store. The
Company also finalized an agreement to provide management and leasing services for the retail
component. Construction of the center has begun with the foundations, underground parking, and
subway connections. Full construction of the center is expected to begin in fall 2008, with the
shopping complex expected to open in 2011. The Company is negotiating an investment in the project
and anticipates finalizing its decision on this investment in 2008.
10
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 |
|
|
June 30, 2008 and |
Shopping Center |
|
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 Companys 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 Companys cost of its investment in excess of the
historical net book values of the Unconsolidated Joint Ventures and (ii) the Operating
Partnerships adjustments to the book basis, including intercompany profits on sales of services
that are capitalized by the Unconsolidated Joint Ventures. The Companys additional basis allocated
to depreciable assets is recognized on a straight-line basis over 40 years. The Operating
Partnerships 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 Partnerships beneficial
interest in the combined information. Beneficial interest is calculated based on the Operating
Partnerships 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 Companys acquisition of a controlling interest in April 2007 (Note 3). The
Operating Partnerships 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).
11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
December 31 |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Properties |
|
$ |
1,067,183 |
|
|
$ |
1,056,380 |
|
Accumulated depreciation and amortization |
|
|
(350,487 |
) |
|
|
(347,459 |
) |
|
|
|
|
|
|
|
|
|
$ |
716,696 |
|
|
$ |
708,921 |
|
Cash and cash equivalents |
|
|
19,805 |
|
|
|
40,097 |
|
Accounts and notes receivable, less provision for bad debts of
$2,766 and $1,799 in 2008 and 2007 |
|
|
18,779 |
|
|
|
26,271 |
|
Deferred charges and other assets |
|
|
24,648 |
|
|
|
18,229 |
|
|
|
|
|
|
|
|
|
|
$ |
779,928 |
|
|
$ |
793,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and accumulated deficiency in assets: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
1,111,158 |
|
|
$ |
1,003,463 |
|
Accounts payable and other liabilities |
|
|
42,024 |
|
|
|
55,242 |
|
TRGs accumulated deficiency in assets |
|
|
(205,895 |
) |
|
|
(151,363 |
) |
Unconsolidated Joint Venture Partners accumulated deficiency
in assets |
|
|
(167,359 |
) |
|
|
(113,824 |
) |
|
|
|
|
|
|
|
|
|
$ |
779,928 |
|
|
$ |
793,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRGs accumulated deficiency in assets (above) |
|
$ |
(205,895 |
) |
|
$ |
(151,363 |
) |
TRGs investment in University Town Center (Note 3) |
|
|
3,368 |
|
|
|
|
|
TRG basis adjustments, including elimination of intercompany profit |
|
|
73,948 |
|
|
|
74,660 |
|
TCOs additional basis |
|
|
67,612 |
|
|
|
68,586 |
|
|
|
|
|
|
|
|
Net Investment in Unconsolidated Joint Ventures |
|
$ |
(60,967 |
) |
|
$ |
(8,117 |
) |
Distributions in excess of investments in and net income of
Unconsolidated Joint Ventures |
|
|
153,344 |
|
|
|
100,234 |
|
|
|
|
|
|
|
|
Investment in Unconsolidated Joint Ventures |
|
$ |
92,377 |
|
|
$ |
92,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
Six Months Ended June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
63,497 |
|
|
$ |
63,871 |
|
|
$ |
127,571 |
|
|
$ |
127,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, utilities, and other operating
expenses |
|
|
22,470 |
|
|
|
21,713 |
|
|
$ |
45,130 |
|
|
$ |
46,270 |
|
Interest expense |
|
|
16,272 |
|
|
|
16,617 |
|
|
|
32,144 |
|
|
|
34,421 |
|
Depreciation and amortization |
|
|
9,497 |
|
|
|
9,180 |
|
|
|
18,814 |
|
|
|
18,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs |
|
$ |
48,239 |
|
|
$ |
47,510 |
|
|
$ |
96,088 |
|
|
$ |
99,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income |
|
|
160 |
|
|
|
367 |
|
|
|
479 |
|
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,418 |
|
|
$ |
16,728 |
|
|
$ |
31,962 |
|
|
$ |
28,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to TRG |
|
$ |
8,461 |
|
|
$ |
9,426 |
|
|
$ |
17,719 |
|
|
$ |
17,997 |
|
Realized intercompany profit, net of depreciation on
TRGs basis adjustments |
|
|
516 |
|
|
|
299 |
|
|
|
979 |
|
|
|
400 |
|
Depreciation of TCOs additional basis |
|
|
(486 |
) |
|
|
(486 |
) |
|
|
(973 |
) |
|
|
(972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of Unconsolidated Joint Ventures |
|
$ |
8,491 |
|
|
$ |
9,239 |
|
|
$ |
17,725 |
|
|
$ |
17,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial interest in Unconsolidated Joint Ventures
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less maintenance, taxes, utilities, and other
operating expenses |
|
$ |
22,644 |
|
|
$ |
23,536 |
|
|
$ |
45,758 |
|
|
$ |
45,420 |
|
Interest expense |
|
|
(8,457 |
) |
|
|
(8,325 |
) |
|
|
(16,719 |
) |
|
|
(16,627 |
) |
Depreciation and amortization |
|
|
(5,696 |
) |
|
|
(5,972 |
) |
|
|
(11,314 |
) |
|
|
(11,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of Unconsolidated Joint Ventures |
|
$ |
8,491 |
|
|
$ |
9,239 |
|
|
$ |
17,725 |
|
|
$ |
17,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
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 Companys 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 Companys $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 Partnerships 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 Partnerships 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 Partnerships beneficial interest in the Unconsolidated Joint Ventures, prior to April
2007, excludes The Pier Shops.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 100% |
|
At Beneficial Interest |
|
|
|
|
|
|
Unconsolidated |
|
|
|
|
|
Unconsolidated |
|
|
Consolidated |
|
Joint |
|
Consolidated |
|
Joint |
|
|
Subsidiaries |
|
Ventures |
|
Subsidiaries |
|
Ventures |
Debt as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
2,774,156 |
|
|
|
1,111,158 |
|
|
|
2,414,807 |
|
|
|
570,573 |
|
December 31, 2007 |
|
|
2,700,980 |
|
|
|
1,003,463 |
|
|
|
2,416,292 |
|
|
|
517,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
4,099 |
|
|
|
301 |
|
|
|
4,088 |
|
|
|
150 |
|
December 31, 2007 |
|
|
5,521 |
|
|
|
504 |
|
|
|
5,507 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008 |
|
|
4,890 |
|
|
|
73 |
|
|
|
4,824 |
|
|
|
60 |
|
Six months ended June 30, 2007 |
|
|
7,428 |
|
|
|
78 |
|
|
|
7,400 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008 |
|
|
72,954 |
|
|
|
32,144 |
|
|
|
63,219 |
|
|
|
16,719 |
|
Six months ended June 30, 2007 |
|
|
61,884 |
|
|
|
34,421 |
|
|
|
55,046 |
|
|
|
16,627 |
|
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 June 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 Companys tax status, pay preferred distributions, and for
distributions related to the sale of certain assets.
13
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Payments of principal and interest on the loans in the following table are guaranteed by the
Operating Partnership as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRGs |
|
Amount of |
|
|
|
|
|
|
|
|
|
|
beneficial |
|
loan balance |
|
% of loan |
|
|
|
|
Loan |
|
interest in loan |
|
guaranteed |
|
balance |
|
% of interest |
|
|
balance as |
|
balance as |
|
by TRG as |
|
guaranteed |
|
guaranteed |
Center |
|
of 6/30/08 |
|
of 6/30/08 |
|
of 6/30/08 |
|
by TRG |
|
by TRG |
|
|
(in millions of dollars) |
|
|
|
|
|
|
|
|
Dolphin Mall |
|
|
120.0 |
|
|
|
120.0 |
|
|
|
120.0 |
|
|
|
100 |
% |
|
|
100 |
% |
Fairlane Town Center |
|
|
80.0 |
|
|
|
80.0 |
|
|
|
80.0 |
|
|
|
100 |
% |
|
|
100 |
% |
Twelve Oaks Mall |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
The Operating Partnership has also guaranteed certain obligations of Partridge Creek (Note 3).
The Company is required to escrow cash balances for specific uses stipulated by certain of its
lenders. As of June 30, 2008 and December 31, 2007, the Companys cash balances restricted for
these uses were $1.9 million and $1.0 million, respectively. Such amounts are included within cash
and cash equivalents in the Companys consolidated balance sheet.
Note 6 Equity Transactions
Common Stock and Equity
In July 2007, the Companys Board of Directors authorized the repurchase of $100 million of
the Companys 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 Companys 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 June 30, 2008, $50 million remained of the 2007
authorization.
During the six months ended June 30, 2007, 839,809 shares of Series B Preferred Stock were
converted to 54 shares of the Companys common stock as a result of tenders of units under the
Continuing Offer (Note 8). No shares were converted during the six months ended June 30, 2008. See
Note 7 for equity issuances under share-based compensation plans.
Note 7 Share-Based Compensation
In May 2008, the Companys 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. As of June 30, 2008, there were no grants of share-based compensation under the
2008 Omnibus Plan. 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.
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 $1.9 million and $4.0 million for the three and six months ended
June 30, 2008, respectively, and $1.8 million and $3.4 million for the three and six months ended
June 30, 2007, respectively. Compensation cost capitalized as part of properties and deferred
leasing costs was $0.2 million and $0.5 million for the three and six months ended June 30, 2008,
respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2007,
respectively.
Further information regarding activities relating to the incentive option plan and long-term
incentive plan during the three and six months ended June 30, 2008 is provided below.
14
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Incentive Options
The Companys incentive option plan (the Option Plan), which was shareowner approved,
permitted the grant of options to employees. The Operating Partnerships units issued in connection
with the Option Plan are exchangeable for new shares of the Companys common stock under the
Continuing Offer (Note 8). Options for 1.4 million partnership units have been granted and are
outstanding at June 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 Companys 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 six months ended June 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
Companys 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 six months ended June 30, 2008 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Range of |
|
|
|
Number |
|
|
Weighted Average |
|
|
Contractual Term |
|
|
Exercise |
|
|
|
of Options |
|
|
Exercise Price |
|
|
(in years) |
|
|
Prices |
|
Outstanding at January 1, 2008 |
|
|
1,330,646 |
|
|
$ |
36.54 |
|
|
|
7.8 |
|
|
$ |
29.38 - $55.90 |
|
Granted |
|
|
230,567 |
|
|
|
50.65 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(170,431 |
) |
|
|
31.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
1,390,782 |
|
|
$ |
39.45 |
|
|
|
7.7 |
|
|
$ |
29.38 - $55.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested options at June 30, 2008 |
|
|
531,232 |
|
|
$ |
36.52 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2008. Each
RSU represents the right to receive upon vesting one share of the Companys 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 Companys common stock on the grant date.
15
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of activity for the six months ended June 30, 2008 under the LTIP is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Restricted Stock Units |
|
Grant Date Fair Value |
Outstanding at January 1, 2008 |
|
|
358,297 |
|
|
$ |
41.63 |
|
Granted |
|
|
121,037 |
|
|
|
50.65 |
|
Redeemed |
|
|
(135,359 |
) |
|
|
32.03 |
|
Forfeited |
|
|
(587 |
) |
|
|
50.65 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
343,388 |
|
|
|
48.58 |
|
|
|
|
|
|
|
|
|
|
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 June
30, 2008 were vested.
Note 8 Commitments and Contingencies
At the time of the Companys 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 Taubmans
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 Companys 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 Companys 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 June 30, 2008 of $48.65 per common share, the aggregate value of
interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was
approximately $1.2 billion. The purchase of these interests at June 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 Companys 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
Companys common stock at a rate of 14,000 shares of Series B Preferred Stock for one common share.
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 Companys financial condition, there can
be no assurance that an adverse outcome would not have a material effect on the Companys results
of operations for any particular period.
16
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
See Note 1 regarding the put option held by the noncontrolling member in Taubman Asia, Note 3
regarding obligations and commitments related to Partridge Creek and contingencies related to
Oyster Bay, Note 5 for the Operating Partnerships 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 June 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 Partnerships income
was greater than their share of distributions. Due to the non-cash impact of depreciation and amortization, it
is unlikely that income in any period will be greater than distributions, other than in a period in which the
Company recognizes a gain on the disposition of an operating center or other significant, unusual income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
Six Months Ended June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income allocable to common
shareowners (Numerator) |
|
$ |
373 |
|
|
$ |
8,834 |
|
|
$ |
4,920 |
|
|
$ |
19,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator) basic |
|
|
52,859,653 |
|
|
|
53,412,542 |
|
|
|
52,767,430 |
|
|
|
53,418,055 |
|
Effect of dilutive securities |
|
|
572,321 |
|
|
|
643,718 |
|
|
|
580,802 |
|
|
|
648,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator) diluted |
|
|
53,431,974 |
|
|
|
54,056,260 |
|
|
|
53,348,232 |
|
|
|
54,066,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.17 |
|
|
$ |
0.09 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.16 |
|
|
$ |
0.09 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Fair Value Disclosures
The Companys 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 Companys 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.
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:
17
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 Using |
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
Description |
|
(Level 1) |
|
|
(Level 2) |
|
Available-for-sale securities |
|
$ |
2,174 |
|
|
|
|
|
Insurance deposit |
|
|
8,770 |
|
|
|
|
|
Derivative assets |
|
|
|
|
|
$ |
836 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,944 |
|
|
$ |
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative interest rate instruments liabilities (Note 5) |
|
|
|
|
|
$ |
(2,859 |
) |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
$ |
(2,859 |
) |
|
|
|
|
|
|
|
|
The insurance deposit shown above represents an escrow account maintained in connection with a
property and casualty insurance arrangement for the Companys 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. In previous periods, such amounts had been presented on a net basis and have not
been reclassified as such amounts are not material to the consolidated financial statements.
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 60 days following the SECs
approval of the Public Company Oversight Board Auditing amendments to SAS 69. The Company is
currently evaluating the application of this Statement but does not anticipate that the Statement
will have a material effect on the Companys results of operations or financial position, as the
Statement does not directly impact the accounting principles applied in the preparation of the
Companys financial statements.
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
entitys financial position, financial performance, and cash flows. The Statement requires enhanced
disclosures about an entitys 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 51s 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 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 Companys 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 Companys financial position and results of operations.
18
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Companys 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.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements 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 Partnerships 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).
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
The Mall at Partridge Creek (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 Acquisition). 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
Amid the recent softening of the U.S. economy, a number of regional and national retailers
have announced store closings or filed for bankruptcy. During the six months ended June 30, 2008,
1.3% of our tenants sought the protection of the bankruptcy laws, the highest second quarter level
since 2004. However, our occupancy was up modestly and rents showed strong increases compared to
the prior year.
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.
20
Our tenant sales statistics showed modest growth for the second quarter of 2008, with sales
per square foot increasing 3.3% over the second quarter of 2007. Tenant sales have increased every
quarter for over five years; however, beginning in the fourth quarter of 2007, the rate of growth
has slowed. 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. While sales are critical over the long
term, the diverse structure of leases in a strong regional mall portfolio results in steady,
predictable, almost bond-like earnings streams that are generally resistant to economic cycles.
Consequently, even if the economy continues to weaken, we continue to feel very comfortable with
the performance of our centers. 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 second quarter of 2008, ending occupancy increased slightly to 90.0% compared to 89.9%
in the second quarter of 2007. We expect occupancy to be relatively flat for the second half of the
year. 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 June 30, 2008, approximately 1.4% of mall tenant space was occupied by temporary
tenants.
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 |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Average rent per square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
$ |
45.12 |
|
|
$ |
43.64 |
|
|
$ |
44.84 |
|
|
$ |
43.75 |
|
Unconsolidated Joint Ventures |
|
|
45.04 |
|
|
|
42.00 |
|
|
|
44.48 |
|
|
|
41.87 |
|
Opening base rent per square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
$ |
65.89 |
|
|
$ |
45.85 |
|
|
$ |
54.80 |
|
|
$ |
51.34 |
|
Unconsolidated Joint Ventures |
|
|
58.66 |
|
|
|
44.29 |
|
|
|
59.05 |
|
|
|
47.02 |
|
Square feet of GLA opened: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
|
121,981 |
|
|
|
173,469 |
|
|
|
442,653 |
|
|
|
393,813 |
|
Unconsolidated Joint Ventures |
|
|
71,860 |
|
|
|
43,798 |
|
|
|
233,269 |
|
|
|
149,903 |
|
Closing base rent per square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
$ |
45.55 |
|
|
$ |
46.82 |
|
|
$ |
44.23 |
|
|
$ |
42.26 |
|
Unconsolidated Joint Ventures |
|
|
41.07 |
|
|
|
54.59 |
|
|
|
45.04 |
|
|
|
47.27 |
|
Square feet of GLA closed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
|
131,758 |
|
|
|
143,634 |
|
|
|
568,414 |
|
|
|
547,505 |
|
Unconsolidated Joint Ventures |
|
|
62,578 |
|
|
|
41,838 |
|
|
|
303,929 |
|
|
|
180,717 |
|
Releasing spread per square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Businesses |
|
$ |
20.34 |
|
|
$ |
(0.97 |
) |
|
$ |
10.57 |
|
|
$ |
9.08 |
|
Unconsolidated Joint Ventures |
|
|
17.59 |
|
|
|
(10.30 |
) |
|
|
14.01 |
|
|
|
(0.25 |
) |
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 2008, the releasing spreads per square foot of the Consolidated
Businesses and Unconsolidated Joint Ventures were impacted by the opening of several tenant spaces
with high rental rates at certain centers. In the six months ended June 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 Corporations accounting for lease incentives
at Arizona Mills, a 50% owned joint venture. Also in 2007, the releasing spread per square foot of
the Unconsolidated Joint Ventures was impacted by the opening of several tenant spaces at a value
center that had no closing spaces.
21
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 events. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd |
|
1st |
|
|
|
|
|
4th |
|
3rd |
|
2nd |
|
1st |
|
|
Quarter |
|
Quarter |
|
Total |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
2008 |
|
2008 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
|
(in thousands of dollars, except occupancy and leased space data) |
Mall tenant sales (1) |
|
|
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 |
|
|
161,868 |
|
|
|
159,220 |
|
|
|
630,417 |
|
|
|
180,212 |
|
|
|
151,791 |
|
|
|
152,997 |
|
|
|
145,417 |
|
Unconsolidated Joint Ventures |
|
|
63,657 |
|
|
|
64,393 |
|
|
|
264,174 |
|
|
|
70,926 |
|
|
|
64,740 |
|
|
|
64,233 |
|
|
|
64,275 |
|
Occupancy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending-comparable |
|
|
90.1 |
% |
|
|
90.0 |
% |
|
|
91.5 |
% |
|
|
91.5 |
% |
|
|
90.1 |
% |
|
|
90.1 |
% |
|
|
89.7 |
% |
Average-comparable |
|
|
90.0 |
|
|
|
90.2 |
|
|
|
90.3 |
|
|
|
91.1 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
89.8 |
|
Ending |
|
|
90.0 |
|
|
|
89.8 |
|
|
|
91.1 |
|
|
|
91.1 |
|
|
|
89.9 |
|
|
|
89.9 |
|
|
|
89.7 |
|
Average |
|
|
89.9 |
|
|
|
89.9 |
|
|
|
90.0 |
|
|
|
90.7 |
|
|
|
89.8 |
|
|
|
89.7 |
|
|
|
89.8 |
|
Leased space: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable |
|
|
92.7 |
% |
|
|
93.0 |
% |
|
|
93.8 |
% |
|
|
93.8 |
% |
|
|
93.4 |
% |
|
|
92.6 |
% |
|
|
92.1 |
% |
All centers |
|
|
92.6 |
|
|
|
93.0 |
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd |
|
1st |
|
|
|
|
|
4th |
|
3rd |
|
2nd |
|
1st |
|
|
Quarter |
|
Quarter |
|
Total |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
2008 |
|
2008 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
|
|
Consolidated Businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents |
|
|
9.9 |
% |
|
|
10.2 |
% |
|
|
8.9 |
% |
|
|
7.1 |
% |
|
|
9.5 |
% |
|
|
9.7 |
% |
|
|
10.0 |
% |
Percentage rents |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Expense recoveries |
|
|
5.3 |
|
|
|
5.3 |
|
|
|
4.9 |
|
|
|
4.2 |
|
|
|
5.0 |
|
|
|
5.8 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mall tenant occupancy costs |
|
|
15.4 |
% |
|
|
15.8 |
% |
|
|
14.2 |
% |
|
|
12.0 |
% |
|
|
14.8 |
% |
|
|
15.6 |
% |
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Joint Ventures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents |
|
|
9.3 |
% |
|
|
9.2 |
% |
|
|
8.0 |
% |
|
|
6.1 |
% |
|
|
9.1 |
% |
|
|
8.8 |
% |
|
|
8.8 |
% |
Percentage rents |
|
|
0.0 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Expense recoveries |
|
|
4.4 |
|
|
|
4.2 |
|
|
|
4.2 |
|
|
|
3.6 |
|
|
|
4.7 |
|
|
|
4.5 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mall tenant occupancy costs |
|
|
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 six month periods ended June 30, 2008 and 2007, or are expected to impact operations
in the future.
New Development
Partridge Creek opened on October 18, 2007 in Clinton Township, Michigan. The 0.6 million
square foot center is anchored by Nordstrom, which opened on April 18, 2008, Parisian, and MJR
Theatres. See Liquidity and Capital Resources Contractual Obligations The Mall at Partridge
Creek Contractual Obligations regarding this center.
22
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, Macys 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 childrens play area. The food court opened in early 2008.
See also Taubman Asia and Third-Party Management, Leasing, and Development Services for
other development and service arrangements.
Acquisition
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, estimated to be in
the range of $15 million over the next two years, on which we will receive a preferred return at a
minimum of 8%. While sales at the center continue to be good, the timing of final lease up is at a
slower pace than we previously anticipated. A major factor is the lease up of the few remaining
large spaces on the third and fourth levels of the center which are intended to be restaurants,
night clubs, and entertainment uses. Consequently, we expect to see modest improvement in The Pier
Shops operations in 2008. We continue to believe as the asset stabilizes we will see significant
growth in net operating income.
Potential Disposition
In April 2008, we announced that Stamford, a 50% owned Unconsolidated Joint Venture, is being
marketed for sale. The primary impetus for the sale is from our joint venture partner, as part of
the normal execution of its portfolio strategy. We both agree that this is a good time to
capitalize on the value that has been added to this asset with its recent renovation. The sale of
assets is consistent with our strategy to recycle capital when appropriate. We can not currently
estimate any impact for the possible sale of Stamford due to the uncertainty as to the price,
timing, and use of proceeds or whether in fact the center will be sold.
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, which has begun
construction 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 Asias
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). Our $54 million initial cash payment has been placed into escrow until financing for the
overall project is completed. We had previously expected that our partners in the project would
have completed the financing by summer 2008; however given the current conditions in the capital
markets, completion of the financing is taking longer than expected. No interest is being
capitalized on this payment until the escrow is released. 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. While we do not
control the construction schedule, we believe the project is likely to open in late 2010 or early
2011.
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. The shopping center will be anchored by Lotte Department Store. We also finalized an
agreement to provide management and leasing services for the retail component. Construction of the
center has begun with the foundations, underground parking, and subway connections. Full
construction of the center is expected to begin in fall 2008, with the shopping complex expected to
open sometime in 2011. We are negotiating an investment in the project and anticipate finalizing
our decision on this investment in 2008.
23
Third-Party Management, Leasing, and Development Services
In addition to the services described in Taubman Asia, we have several current and potential
projects that are expected to contribute significant amounts of third-party revenue to our results
in the future. The actual amounts of revenue in any future period are subject to various factors
affecting recognition of income as described below. In addition, our estimates of future income may
vary considerably from actual results due to 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.
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.
We are finalizing a development agreement regarding City Creek Center, a mixed-use project in
Salt Lake City, Utah. 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 now expected to open in spring
2012. We are also finalizing agreements to be an investor in this project under a participating
lease structure.
We continue to negotiate an agreement to provide initial leasing services for a lifestyle
center in the city of North Las Vegas, Nevada. This is a mixed-use project that will include
retail, dining, and entertainment of up to 1.3 million square feet and a residential component
consisting of approximately 800 units. The shopping center is estimated to open in 2010. The
developer of the residential component is a joint venture which includes an affiliate of the
Taubman family. The Taubman family affiliate also participates in the projects non-residential
component.
Subject to many assumptions, our best estimate is that during the 2009 to 2011 timeframe, we
will earn an aggregate of about $35 million of net margin from management, leasing, and development
fees, depending on opening dates and the various factors discussed above and assuming no current
ownership in the Songdo project. Net margin for these projects means total revenue less related
expenses and taxes. The timing of revenue recognition is very difficult to predict due to a number
of factors. 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. Of the
approximately $35 million, we expect this third-party margin could peak in 2010 when the level of
activity is expected to be the greatest. Although this activity is highly profitable, it is very
volatile and a substantial portion of this increased activity represents non-recurring income. Once
the significant development and initial leasing effort is complete for these projects, fees will be
much more modest. As we have discussed in the past, we would generally prefer to own as much equity
in a project as possible. However, each of these projects met a series of criteria including
profitability and synergy with our ongoing activities that made them attractive for us to pursue.
We would expect that some level of this activity will always be present in our business.
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.
24
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 June 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 six months
ended June 30, 2008 and 66% during the three and six months ended June 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 Six Months Ended June 30, 2008 to the Six Months Ended June 30,
2007.
25
Comparison of the Three Months Ended June 30, 2008 to the Three Months Ended June 30, 2007
The following table sets forth operating results for the three months ended June 30, 2008 and
June 30, 2007, showing the results of the Consolidated Businesses and Unconsolidated Joint
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 30, 2008 |
|
June 30, 2007 |
|
|
|
|
|
|
UNCONSOLIDATED |
|
|
|
|
|
UNCONSOLIDATED |
|
|
CONSOLIDATED |
|
JOINT VENTURES |
|
CONSOLIDATED |
|
JOINT VENTURES |
|
|
BUSINESSES |
|
AT 100%(1) |
|
BUSINESSES |
|
AT 100%(1) |
|
|
(in millions of dollars) |
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents |
|
|
87.6 |
|
|
|
38.8 |
|
|
|
79.5 |
|
|
|
37.1 |
|
Percentage rents |
|
|
1.3 |
|
|
|
0.5 |
|
|
|
1.0 |
|
|
|
1.6 |
|
Expense recoveries |
|
|
60.4 |
|
|
|
21.7 |
|
|
|
57.9 |
|
|
|
22.8 |
|
Management, leasing, and development services |
|
|
3.9 |
|
|
|
|
|
|
|
3.6 |
|
|
|
|
|
Other |
|
|
7.2 |
|
|
|
2.6 |
|
|
|
10.2 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
160.4 |
|
|
|
63.5 |
|
|
|
152.3 |
|
|
|
63.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities |
|
|
46.5 |
|
|
|
16.1 |
|
|
|
45.6 |
|
|
|
16.0 |
|
Other operating |
|
|
19.7 |
|
|
|
5.6 |
|
|
|
16.1 |
|
|
|
4.8 |
|
Management, leasing, and development services |
|
|
2.4 |
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
General and administrative |
|
|
7.9 |
|
|
|
|
|
|
|
7.0 |
|
|
|
|
|
Interest expense |
|
|
36.0 |
|
|
|
16.3 |
|
|
|
32.2 |
|
|
|
16.6 |
|
Depreciation and amortization (2) |
|
|
36.2 |
|
|
|
9.8 |
|
|
|
33.6 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
148.7 |
|
|
|
47.8 |
|
|
|
136.2 |
|
|
|
47.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on land sales and other nonoperating income |
|
|
1.5 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.2 |
|
|
|
15.9 |
|
|
|
16.8 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of Unconsolidated Joint Ventures
(2) |
|
|
8.5 |
|
|
|
|
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority and preferred interests |
|
|
21.4 |
|
|
|
|
|
|
|
26.0 |
|
|
|
|
|
Minority and preferred interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG preferred distributions |
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
Minority share of income of consolidated joint
ventures |
|
|
(1.1 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
Distributions in excess of minority share of income
of consolidated joint ventures |
|
|
(4.3 |
) |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
Minority share of income of TRG |
|
|
(4.5 |
) |
|
|
|
|
|
|
(7.2 |
) |
|
|
|
|
Distributions in excess of minority share of income
of TRG |
|
|
(6.9 |
) |
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.0 |
|
|
|
|
|
|
|
12.5 |
|
|
|
|
|
Preferred dividends |
|
|
(3.7 |
) |
|
|
|
|
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareowners |
|
|
0.4 |
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA 100% |
|
|
85.3 |
|
|
|
42.0 |
|
|
|
82.5 |
|
|
|
43.5 |
|
EBITDA outside partners share |
|
|
(10.0 |
) |
|
|
(19.3 |
) |
|
|
(8.3 |
) |
|
|
(20.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial interest in EBITDA |
|
|
75.4 |
|
|
|
22.6 |
|
|
|
74.2 |
|
|
|
23.5 |
|
Beneficial interest expense |
|
|
(31.1 |
) |
|
|
(8.5 |
) |
|
|
(28.6 |
) |
|
|
(8.3 |
) |
Beneficial income tax expense |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-real estate depreciation |
|
|
(0.7 |
) |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
Preferred dividends and distributions |
|
|
(4.3 |
) |
|
|
|
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations contribution |
|
|
39.0 |
|
|
|
14.2 |
|
|
|
40.7 |
|
|
|
15.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
26
Consolidated Businesses
Total revenues for the quarter ended June 30, 2008 were $160.4 million, an $8.1 million or
5.3% increase over the comparable period in 2007. Minimum rents increased $8.1 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. Minimum rents also increased due to The
Pier Shops, which we began consolidating in April 2007 upon the acquisition of a controlling
interest in the center. Expense recoveries increased primarily due to Partridge Creek and Twelve
Oaks. Other income decreased primarily due to a decrease in lease cancellation revenue, which was
partially offset by increases in parking-related revenue.
Total expenses were $148.7 million, a $12.5 million or 9.2% increase over the comparable
period in 2007. Maintenance, taxes, and utilities expense increased primarily due to Partridge
Creek. Other operating expense increased due to increased pre-development costs, Partridge Creek,
and an increase in the provision for bad debts. General and administrative expense increased
primarily due to increases in compensation and travel. We expect that general and administrative
expense will continue to average approximately $8 million for each remaining quarter of 2008.
Interest expense increased primarily due to Partridge Creek and the January 2008 refinancing at
International Plaza. 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 and
The Pier Shops.
Gains on land sales and other nonoperating income increased primarily due to $1.0 million of
gains on land sales and land-related rights in the second quarter of 2008. There were no land sales
in the second quarter of 2007.
Unconsolidated Joint Ventures
Total revenues for the three months ended June 30, 2008 were $63.5 million, a $0.4 million or
0.6% decrease from the comparable period in 2007. Minimum rents increased by $1.7 million due to
tenant rollovers and the November 2007 expansion at Stamford, which were partially offset by
decreases due to frictional vacancy on spaces that are expected to open in the second half of the
year. Percentage rents decreased primarily due to a true-up adjustment at a center in the prior
year. Expense recoveries decreased due to The Pier Shops.
Total expenses increased by $0.7 million or 1.5%, to $47.8 million for the three months ended
June 30, 2008. Generally, increases related to the Stamford expansion were offset by reductions due
to The Pier Shops.
As a result of the foregoing, income of the Unconsolidated Joint Ventures decreased by $1.2
million to $15.9 million for the three months ended June 30, 2008. Our equity in income of the
Unconsolidated Joint Ventures was $8.5 million, a $0.7 million decrease from the comparable period
in 2007.
Net Income
Our income before minority and preferred interests was $21.4 million for the three months
ended June 30, 2008, compared to $26.0 million for the three months ended June 30, 2007. After
allocation of income to minority and preferred interests, net income allocable to common
shareowners for 2008 was $0.4 million compared to $8.8 million in the comparable period in 2007.
27
Comparison of the Six Months Ended June 30, 2008 to the Six Months Ended June 30, 2007
The following table sets forth operating results for the six months ended June 30, 2008 and
June 30, 2007, showing the results of the Consolidated Businesses and Unconsolidated Joint
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, 2008 |
|
June 30, 2007 |
|
|
|
|
|
|
UNCONSOLIDATED |
|
|
|
|
|
UNCONSOLIDATED |
|
|
CONSOLIDATED |
|
JOINT VENTURES |
|
CONSOLIDATED |
|
JOINT VENTURES |
|
|
BUSINESSES |
|
AT 100%(1) |
|
BUSINESSES |
|
AT 100%(1) |
|
|
(in millions of dollars) |
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents |
|
|
174.2 |
|
|
|
77.2 |
|
|
|
158.2 |
|
|
|
75.6 |
|
Percentage rents |
|
|
3.9 |
|
|
|
1.9 |
|
|
|
3.3 |
|
|
|
2.6 |
|
Expense recoveries |
|
|
117.8 |
|
|
|
44.1 |
|
|
|
108.5 |
|
|
|
45.4 |
|
Management, leasing, and development services |
|
|
7.6 |
|
|
|
|
|
|
|
8.5 |
|
|
|
|
|
Other |
|
|
14.3 |
|
|
|
4.4 |
|
|
|
18.8 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
317.8 |
|
|
|
127.6 |
|
|
|
297.3 |
|
|
|
127.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities |
|
|
90.0 |
|
|
|
31.4 |
|
|
|
83.5 |
|
|
|
33.7 |
|
Other operating |
|
|
38.0 |
|
|
|
12.1 |
|
|
|
32.9 |
|
|
|
11.2 |
|
Management, leasing, and development services |
|
|
4.7 |
|
|
|
|
|
|
|
4.6 |
|
|
|
|
|
General and administrative |
|
|
16.3 |
|
|
|
|
|
|
|
14.3 |
|
|
|
|
|
Interest expense |
|
|
73.0 |
|
|
|
32.2 |
|
|
|
61.9 |
|
|
|
34.4 |
|
Depreciation and amortization (2) |
|
|
71.5 |
|
|
|
19.5 |
|
|
|
66.1 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
293.4 |
|
|
|
95.2 |
|
|
|
263.3 |
|
|
|
99.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on land sales and other nonoperating income |
|
|
3.3 |
|
|
|
0.5 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.6 |
|
|
|
32.9 |
|
|
|
35.1 |
|
|
|
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of Unconsolidated Joint Ventures
(2) |
|
|
17.7 |
|
|
|
|
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority and preferred interests |
|
|
44.9 |
|
|
|
|
|
|
|
52.6 |
|
|
|
|
|
Minority and preferred interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG preferred distributions |
|
|
(1.2 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
Minority share of income of consolidated joint
ventures |
|
|
(2.3 |
) |
|
|
|
|
|
|
(2.5 |
) |
|
|
|
|
Distributions in excess of minority share of income
of consolidated joint ventures |
|
|
(6.4 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
Minority share of income of TRG |
|
|
(10.4 |
) |
|
|
|
|
|
|
(14.9 |
) |
|
|
|
|
Distributions in excess of minority share of income
of TRG |
|
|
(12.3 |
) |
|
|
|
|
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.2 |
|
|
|
|
|
|
|
26.5 |
|
|
|
|
|
Preferred dividends |
|
|
(7.3 |
) |
|
|
|
|
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareowners |
|
|
4.9 |
|
|
|
|
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA 100% |
|
|
172.1 |
|
|
|
84.5 |
|
|
|
163.1 |
|
|
|
83.6 |
|
EBITDA outside partners share |
|
|
(19.5 |
) |
|
|
(38.7 |
) |
|
|
(17.1 |
) |
|
|
(38.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial interest in EBITDA |
|
|
152.6 |
|
|
|
45.8 |
|
|
|
146.0 |
|
|
|
45.4 |
|
Beneficial interest expense |
|
|
(63.2 |
) |
|
|
(16.7 |
) |
|
|
(55.0 |
) |
|
|
(16.6 |
) |
Beneficial income tax expense |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-real estate depreciation |
|
|
(1.4 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
Preferred dividends and distributions |
|
|
(8.5 |
) |
|
|
|
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations contribution |
|
|
78.9 |
|
|
|
29.0 |
|
|
|
81.1 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $2.5 million in both 2008 and 2007. Also, amortization of our additional
basis included in equity in income of Unconsolidated Joint Ventures was $1.0 million in both
2008 and 2007. |
|
(3) |
|
Amounts in this table may not add due to rounding. |
28
Consolidated Businesses
Total revenues for the six months ended June 30, 2008 were $317.8 million, a $20.5 million or
6.9% increase over the comparable period in 2007. Minimum rents increased $16.0 million, primarily
due to the October 2007 opening of Partridge Creek, The Pier Shops, which we began consolidating in
April 2007 upon the acquisition of a controlling interest in the center, and the September 2007
expansion at Twelve Oaks. Minimum rents also increased due to tenant rollovers and increases in
occupancy. Expense recoveries increased primarily due to Partridge Creek, The Pier Shops, and
Twelve Oaks. 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 expect that management, leasing, and development revenues, less taxes and other
related expenses, will be between $6 million and $7 million in 2008. Other income decreased
primarily due to a decrease in lease cancellation revenue, which was partially offset by increases
in parking-related revenue. During the six months ended June 30, 2008, we recognized our
approximately $1.7 million and $0.9 million share of the Consolidated Businesses and
Unconsolidated Joint Ventures lease cancellation revenue. For 2008, we continue to estimate that
our share of lease cancellation revenue will be approximately $7 million to $8 million, although
there is a risk that we may not be able to achieve these amounts.
Total expenses were $293.4 million, a $30.1 million or 11.4% 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 at certain centers. These
increases were partially offset by a decrease in utilities expense. Other operating expense
increased due to increased pre-development and property management costs and Partridge Creek. We
expect that pre-development costs for both our domestic and Asia projects will be about $15 million
to $16 million in 2008. General and administrative expense increased primarily due to increased
compensation, professional fees, and travel. Interest expense increased primarily due to Partridge
Creek, The Pier Shops, and the January 2008 refinancing at International Plaza. 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 six months ended June 30, 2008. There were no
land sales in the six months ended June 30, 2007. We expect gains on land sales to be $3 million to
$4 million in 2008, although there is a risk that we may not be able to achieve these amounts.
Unconsolidated Joint Ventures
Total revenues for the six months ended June 30, 2008 were $127.6 million, a $0.1 million or
0.1% decrease from the comparable period in 2007. Minimum rents increased by $1.6 million,
primarily due to tenant rollovers, the November 2007 expansion at Stamford, and prior year
adjustments at Arizona Mills in 2007, which were partially offset by the reduction due to the
consolidation of The Pier Shops and decreases due to frictional vacancy on spaces that are expected
to open in the second half of the year. Expense recoveries decreased primarily due to The Pier
Shops, which was partially offset by increased recoverable costs at certain centers.
Total expenses decreased by $4.1 million or 4.1%, to $95.2 million for the six months ended
June 30, 2008. Maintenance, taxes, and utilities expense decreased due to The Pier Shops, which was
partially offset by Stamford and increases in maintenance costs at certain centers. Other operating
expense increased due to increases in the provision for bad debts, professional fees, and Stamford,
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 decreased due to
The Pier Shops, which was partially offset by Stamford.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $3.6
million to $32.9 million for the six months ended June 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 Acquisition). Our equity in income of the
Unconsolidated Joint Ventures was $17.7 million, a $0.3 million increase from the comparable period
in 2007.
Net Income
Our income before minority and preferred interests was $44.9 million for the six months ended
June 30, 2008, compared to $52.6 million for the six months ended June 30, 2007. After allocation
of income to minority and preferred interests, net income allocable to common shareowners for 2008
was $4.9 million compared to $19.2 million in the comparable period in 2007.
29
Reconciliation of Net Income Allocable to Common Shareowners to Funds from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
Six Months Ended June 30 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(in millions of dollars) |
Net income allocable to common shareowners |
|
|
0.4 |
|
|
|
8.8 |
|
|
|
4.9 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (less) depreciation and amortization: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at 100% |
|
|
36.2 |
|
|
|
33.6 |
|
|
|
71.5 |
|
|
|
66.1 |
|
Minority partners in consolidated joint ventures |
|
|
(3.9 |
) |
|
|
(4.0 |
) |
|
|
(7.5 |
) |
|
|
(7.7 |
) |
Share of unconsolidated joint ventures |
|
|
5.7 |
|
|
|
6.0 |
|
|
|
11.3 |
|
|
|
11.4 |
|
Non-real estate depreciation |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(1.4 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add minority interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority share of income of TRG |
|
|
4.5 |
|
|
|
7.2 |
|
|
|
10.4 |
|
|
|
14.9 |
|
Distributions in excess of minority share of
income of TRG |
|
|
6.9 |
|
|
|
3.4 |
|
|
|
12.3 |
|
|
|
6.3 |
|
Distributions in excess of minority share of
income of consolidated joint ventures |
|
|
4.3 |
|
|
|
1.6 |
|
|
|
6.4 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations |
|
|
53.2 |
|
|
|
56.0 |
|
|
|
108.0 |
|
|
|
109.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCOs average ownership percentage of TRG |
|
|
66.6 |
% |
|
|
66.1 |
% |
|
|
66.5 |
% |
|
|
66.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations allocable to TCO |
|
|
35.4 |
|
|
|
37.0 |
|
|
|
71.8 |
|
|
|
72.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Depreciation includes $3.5 million and $2.9 million of mall tenant allowance amortization
for the three months ended June 30, 2008 and 2007, respectively, and $6.7 million and $5.5
million for the six months ended June 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 June 30 |
|
Six Months Ended June 30 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(in millions of dollars) |
Net income |
|
|
4.0 |
|
|
|
12.5 |
|
|
|
12.2 |
|
|
|
26.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (less) depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at 100% |
|
|
36.2 |
|
|
|
33.6 |
|
|
|
71.5 |
|
|
|
66.1 |
|
Minority partners in consolidated joint ventures |
|
|
(3.9 |
) |
|
|
(4.0 |
) |
|
|
(7.5 |
) |
|
|
(7.7 |
) |
Share of unconsolidated joint ventures |
|
|
5.7 |
|
|
|
6.0 |
|
|
|
11.3 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (less) preferred interests, interest expense, and
income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distributions |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
1.2 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated businesses at 100% |
|
|
36.0 |
|
|
|
32.2 |
|
|
|
73.0 |
|
|
|
61.9 |
|
Minority partners in consolidated joint ventures |
|
|
(4.9 |
) |
|
|
(3.6 |
) |
|
|
(9.7 |
) |
|
|
(6.8 |
) |
Share of unconsolidated joint ventures |
|
|
8.5 |
|
|
|
8.3 |
|
|
|
16.7 |
|
|
|
16.6 |
|
Income tax expense |
|
|
0.3 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add minority interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority share of income of TRG |
|
|
4.5 |
|
|
|
7.2 |
|
|
|
10.4 |
|
|
|
14.9 |
|
Distributions in excess of minority share of
income of TRG |
|
|
6.9 |
|
|
|
3.4 |
|
|
|
12.3 |
|
|
|
6.3 |
|
Distributions in excess of minority share of
income of consolidated joint ventures |
|
|
4.3 |
|
|
|
1.6 |
|
|
|
6.4 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial interest in EBITDA |
|
|
98.0 |
|
|
|
97.8 |
|
|
|
198.3 |
|
|
|
191.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCOs average ownership percentage of TRG |
|
|
66.6 |
% |
|
|
66.1 |
% |
|
|
66.5 |
% |
|
|
66.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial interest in EBITDA allocable to TCO |
|
|
65.2 |
|
|
|
64.6 |
|
|
|
131.9 |
|
|
|
126.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts in this table may not recalculate due to rounding. |
30
Liquidity and Capital Resources
In the following discussion, references to beneficial interest represent the Operating
Partnerships ownership share of the results of its consolidated and unconsolidated businesses. We
do not have, and have not had, any parent company indebtedness; all debt discussed represents
obligations of the Operating Partnership or its subsidiaries and joint ventures.
Capital resources are required to maintain our current operations, pay dividends, and fund
planned capital spending, future developments, and other commitments and contingencies. We believe
that our net cash provided by operating activities, distributions from our joint ventures, the
unutilized portions of our credit facilities, and our ability to access the capital markets assure
adequate liquidity to meet current and future cash requirements and will allow us to conduct our
operations in accordance with our dividend and financing policies. The following sections contain
information regarding our recent capital transactions and sources and uses of cash; beneficial
interest in debt and sensitivity to interest rate risk; contractual obligations; covenants,
commitments, and contingencies; and historical capital spending. We then provide information
regarding our anticipated future capital spending and our dividend policies.
As of June 30, 2008, we had a consolidated cash balance of $33.6 million, of which $1.9
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 June 30, 2008, the total amounts borrowed on the $550
million and $40 million lines of credit were $200.0 million and $12.4 million, respectively. Both
lines of credit mature in February 2011. The $550 million line of credit has a one-year extension
option. With over $300 million available under our lines of credit we have a significant amount of
liquidity. In addition, we have no maturities on our debt until 2010.
Operating Activities
Our net cash provided by operating activities was $101.9 million in 2008, compared to $102.2
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 $49.9 million in 2008 compared to $91.2 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 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 $6.0 million and
$2.9 million in 2008 and 2007, respectively, were made primarily to fund our initial contribution
to University Town Center (see Planned Capital Spending New Centers) and the expansions at
Stamford and Waterside.
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 $4.4 million in 2007. The amount
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 half 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 $65.6 million in 2008, compared to $4.1 million
provided by financing activities in 2007. Proceeds from the issuance of debt, net of payments and
issuance costs, were $70.1 million in 2008, compared to $128.4 million in 2007. In 2008, a net $2.6
million was received in connection with incentive plans. Repurchases of common stock totaled $50.0
million in 2007. Total dividends and other distributions paid were $136.9 million and $74.3 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.
31
Beneficial Interest in Debt
At June 30, 2008, the Operating Partnerships debt and its beneficial interest in the debt of
its Consolidated and Unconsolidated Joint Ventures totaled $2,985.4 million with an average
interest rate of 5.37% 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 six months ended June 30, 2008 includes $0.4 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 $188.2 million as of June 30, 2008, which includes $185.6
million of assets on which interest is being capitalized. Beneficial interest in capitalized
interest was $4.9 million for the six months ended June 30, 2008. The following table presents
information about our beneficial interest in debt as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate |
|
|
Amount |
|
Including Spread |
|
|
(in millions of dollars) |
|
|
|
|
Fixed rate debt |
|
|
2,398.7 |
|
|
|
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 |
|
|
283.8 |
|
|
|
3.29 |
% (1) |
|
|
|
|
|
|
|
|
|
Total floating rate debt |
|
|
586.6 |
|
|
|
4.03 |
% (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total beneficial interest in debt |
|
|
2,985.4 |
|
|
|
5.37 |
% (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs (2) |
|
|
|
|
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
Average all-in rate |
|
|
|
|
|
|
5.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(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 Partnerships beneficial interest in
debt subject to floating rates in effect at June 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 $2.8 million and $2.3 million, respectively, and, due to the effect of capitalized
interest, annual earnings by approximately $2.6 million and $2.0 million, respectively. Based on
our consolidated debt and interest rates in effect at June 30, 2008 and 2007, a one percent
increase in interest rates would decrease the fair value of debt by approximately $119.9 million
and $123.3 million, respectively, while a one percent decrease in interest rates would increase the
fair value of debt by approximately $128.1 million and $132.6 million, respectively.
32
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 June 30, 2008 are provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than |
|
1-3 years |
|
3-5 years |
|
More than 5 |
|
|
Total |
|
1 year (2008) |
|
(2009-2010) |
|
(2011-2012) |
|
years (2013+) |
|
|
(in millions of dollars) |
Debt (1) |
|
|
2,774.2 |
|
|
|
6.9 |
|
|
|
226.1 |
|
|
|
632.5 |
|
|
|
1,908.6 |
|
Interest payments |
|
|
861.1 |
|
|
|
75.3 |
|
|
|
295.6 |
|
|
|
217.7 |
|
|
|
272.5 |
|
Purchase obligations -
Planned capital spending (2) |
|
|
60.9 |
|
|
|
60.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 2008. |
|
(2) |
|
As of June 30, 2008, we were contractually liable for $22.2 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. |
The Mall at Partridge Creek Contractual Obligations
In May 2006, we engaged the services of a third-party investor to acquire certain property
associated with Partridge Creek, in order to facilitate a Section 1031 like-kind exchange to
provide flexibility for disposing of assets in the future. The third-party investor became the
owner of the project and leases the land from one of our subsidiaries. In turn, the owner leases
the project back to us.
Funding for the project was provided by the following sources. We provided approximately 45%
of the project funding under a junior subordinated financing. The owner provided $9 million in
equity. Funding for the remaining project costs was provided by the owners third-party
construction loan, which has a balance of $70.6 million as of June 30, 2008.
We intend to exercise our option to purchase the property and assume the ground lease from the
owner during the exchange period ending October 2008. The option, if exercised, will provide the
owner a 12% cumulative return on its equity. In the event that we do not exercise our right to
purchase the property from the owner, the owner will have the right to sell all of its interest in
the property, provided that the purchaser shall assume all of the obligations and be assigned all
of the owners rights under the ground lease, the operating lease, and any remaining obligations
under the loans.
We have guaranteed the lease payments on the operating lease (excluding monthly supplemental
rent equal to 1.67% of the owners outstanding equity balance, commencing after the exchange
period). The lease payments are structured to cover debt service, ground rent payments, and other
expenses of the lessor. We consolidate the accounts of the owner. The junior loans and other
intercompany transactions are eliminated in consolidation.
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 June 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.
33
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally recovered from
tenants. Capital spending through June 30, 2008 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial |
|
|
|
|
|
|
Beneficial Interest |
|
|
|
|
|
Interest in |
|
|
Consolidated |
|
in Consolidated |
|
Unconsolidated |
|
Unconsolidated |
|
|
Businesses |
|
Businesses |
|
Joint Ventures |
|
Joint Ventures |
|
|
(in millions of dollars) |
New Development Projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-construction development activities (2) |
|
|
7.9 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
New centers (3) |
|
|
2.6 |
|
|
|
2.6 |
|
|
|
5.0 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing Centers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renovation projects with incremental GLA
and/or anchor replacement |
|
|
3.0 |
|
|
|
2.7 |
|
|
|
14.8 |
|
|
|
5.6 |
|
Renovations with no incremental GLA effect
and other |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
3.0 |
|
|
|
2.2 |
|
Mall tenant allowances (4) |
|
|
3.2 |
|
|
|
3.1 |
|
|
|
3.8 |
|
|
|
2.5 |
|
Asset replacement costs reimbursable by tenants |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
3.3 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office improvements and equipment (5) |
|
|
3.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties |
|
|
21.7 |
|
|
|
21.0 |
|
|
|
29.8 |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 six months ended June 30, 2008, in addition to the costs above, we incurred our $3.2
million share of Consolidated Businesses and $0.7 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 six months ended June 30, 2008:
|
|
|
|
|
|
|
(in millions of dollars) |
Consolidated Businesses capital spending |
|
|
21.7 |
|
Differences between cash and accrual basis |
|
|
32.8 |
|
|
|
|
|
|
Additions to properties |
|
|
54.5 |
|
|
|
|
|
|
34
Planned Capital Spending
The following table summarizes planned capital spending for 2008, excluding acquisitions as
well as costs related to City Creek Center, Taubman Asia projects, and other projects or expansions
for which budgets have not yet been approved by the Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 (1) |
|
|
|
|
|
|
Beneficial Interest |
|
|
|
|
|
Beneficial Interest |
|
|
Consolidated |
|
in Consolidated |
|
Unconsolidated |
|
in Unconsolidated |
|
|
Businesses |
|
Businesses |
|
Joint Ventures |
|
Joint Ventures |
|
|
|
|
|
|
(in millions of dollars) |
|
|
|
|
New development projects (2) |
|
|
18.2 |
|
|
|
18.2 |
|
|
|
17.0 |
|
|
|
6.0 |
|
Existing centers (3) |
|
|
60.6 |
|
|
|
54.1 |
|
|
|
53.1 |
|
|
|
37.5 |
|
Corporate office improvements and
equipment (4) |
|
|
3.8 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
82.6 |
|
|
|
76.1 |
|
|
|
70.1 |
|
|
|
43.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Given
the high probability of our moving forward on projects in Salt Lake City and Macao, we are
capitalizing our costs, although it may be some time before the contingency of completing the
financing on the Macao project is met and the final agreements on the City Creek Center project are
executed due to their complexity. As of June 30, 2008, the combined capitalized costs of these
projects were $3.6 million. Costs of these projects, excluding the $54 million initial Macao
payment and related interest expense, will continue to be relatively modest until full construction
of the centers begins.
Disclosures regarding planned capital spending, including estimates regarding capital
expenditures, occupancy, and returns on new developments presented below 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)
financing considerations, (7) actual time to 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.
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 Macys. The center is
projected to start construction in fall 2008 and open in November 2010, contingent upon obtaining
final site plan approval. 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%.
We are finalizing a development agreement regarding City Creek Center, a mixed-use project in
Salt Lake City, Utah. 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 now expected to open in spring
2012. The 0.7 million square foot retail component of the project will include Macys and Nordstrom
as anchors. 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.
35
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 courts
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. Depending on the timing of the construction and opening of the
center, we anticipate spending approximately $500 million on the project and receiving an
approximate 7% return. Our investment in this project as of June 30, 2008 was $149 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 an adjoining parcel, which is 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. We are
working closely with the department stores in hope of achieving a 2011 opening.
See Results of Operations Taubman Asia regarding the status of our involvement in The Mall
at Studio City and Songdo.
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 May 29, 2008 we declared a quarterly dividend of $0.415 per common share that was paid on
July 21, 2008 to shareowners of record on June 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 June 30, 2008 to shareowners of record on June 20, 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.
36
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
Managements 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 June 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 June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
37
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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 June 30, 2008.
Item 1A. Risk Factors
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.
Item 4. Submission of Matters to a Vote of Security Holders
On May 29, 2008, we held our annual meeting of shareowners. The matters on which shareowners
voted were: the election of four directors, the ratification of the Audit Committees appointment
of KPMG LLP as our independent registered public accounting firm for the year ending December 31,
2008, approval of the 2008 Omnibus Long-Term Incentive Plan, and the shareowner proposal requesting
that the Board of Directors take the necessary steps to declassify the Board of Directors. Robert
S. Taubman, Lisa A. Payne, and William U. Parfet were re-elected at the meeting. Ronald W. Tysoe
was also elected at the meeting, following his appointment in December 2007 to fill the existing vacancy in the class
of directors whose term will expire in 2010. The five remaining incumbent directors, William S.
Taubman, Graham T. Allison, Jerome A. Chazen, Craig M. Hatkoff, and Peter Karmanos, Jr., continued
to hold office after the meeting. The shareowners ratified the appointment of KPMG LLP as our
independent registered public accounting firm. The shareowners approved the 2008 Omnibus Long-Term
Incentive Plan. The shareowners did not approve the shareowner proposal requesting that the Board
of Directors take the necessary steps to declassify the Board of Directors. The results of the
voting are shown below:
Proposal 1 Election of Directors
|
|
|
|
|
|
|
NOMINEES |
|
TERM |
|
VOTES FOR |
|
VOTES WITHHELD |
Ronald W. Tysoe
|
|
2 Years
|
|
72,715,445
|
|
1,615,851 |
Robert S. Taubman
|
|
3 Years
|
|
72,283,395
|
|
2,047,901 |
Lisa A. Payne
|
|
3 Years
|
|
69,919,592
|
|
4,411,703 |
William U. Parfet
|
|
3 Years
|
|
72,208,943
|
|
2,122,353 |
Proposal 2 Ratification of Appointment of KPMG LLP as
our Independent Registered Public Accounting Firm
|
|
|
74,237,244
|
|
Votes were cast for ratification; |
73,330
|
|
Votes were cast against ratification; and |
20,719
|
|
Votes abstained. |
Proposal 3 Approval of the 2008 Omnibus Long-Term Incentive Plan
|
|
|
69,160,701
|
|
Votes were cast for; |
3,031,053
|
|
Votes were cast against; and |
266,871
|
|
Votes abstained. |
Proposal 4 Shareowner Proposal
|
|
|
39,111,766
|
|
Votes were cast for; |
33,072,553
|
|
Votes were cast against;
and |
274,306
|
|
Votes abstained. |
* For Proposal 1, the four nominees receiving the most votes cast were elected as directors.
Proposals 2, 3, and 4 required the affirmative vote of 662/3% of the outstanding voting shares for
approval; the total outstanding voting shares as of the record date, April 7, 2008, were 79,332,767
shares.
Item 5. Other Information
Refer to Note 7 Share-Based Compensation to our consolidated financial statements relating
to the shareholder approval in May 2008 of The Taubman Company 2008 Omnibus Long-Term Incentive
Plan, as well as our definitive proxy statement for the 2008 annual meeting of shareholders, filed
April 15, 2008, which contained a summary of the material terms of such plan.
38
Item 6. Exhibits
|
|
|
|
|
10(a)
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Taubman Properties Asia LLC, a Delaware Limited Liability
Company |
|
|
|
|
|
10(b)
|
|
|
|
Employment Agreement between The Taubman Company Asia
Limited and Morgan Parker |
|
|
|
|
|
10(c)
|
|
|
|
First Amendment to the Taubman Centers, Inc. Non-Employee
Directors Deferred Compensation Plan |
|
|
|
|
|
10(d)
|
|
|
|
The Taubman Company 2008 Omnibus Long-Term Incentive Plan
(incorporated herein by reference to Appendix A to the
Registrants Proxy Statement on Schedule 14A, filed with
the Commission on April 15, 2008) |
|
|
|
|
|
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 |
39
SIGNATURES
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: August 1, 2008 |
By: |
/s/ Lisa A. Payne
|
|
|
Lisa A. Payne |
|
|
Vice Chairman, Chief Financial Officer, and
Director
(Principal Financial Officer) |
|
40