SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 2001
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan 48303-0200
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(Address of principal executive offices) (Zip Code)
(248) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No .
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As of August 10, 2001, there were outstanding 51,021,138 shares of the Company's common stock, par
value $0.01 per share.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following consolidated financial statements of Taubman Centers, Inc. (the Company) are provided pursuant to
the requirements of this item.
Consolidated Balance Sheet as of June 30, 2001 and December 31, 2000...................................... 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
June 30, 2001 and 2000................................................................................. 3
Consolidated Statement of Operations and Comprehensive Income for the six months ended
June 30, 2001 and 2000................................................................................. 4
Consolidated Statement of Cash Flows for the six months ended June 30, 2001 and 2000 ..................... 5
Notes to Consolidated Financial Statements................................................................ 6
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
June 30 December 31
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2001 2000
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Assets:
Properties $ 2,060,041 $ 1,959,128
Accumulated depreciation and amortization (310,120) (285,406)
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$ 1,749,921 $ 1,673,722
Investment in Unconsolidated Joint Ventures (Note 4) 131,681 109,018
Cash and cash equivalents 24,188 18,842
Accounts and notes receivable, less allowance
for doubtful accounts of $4,525 and $3,796 in
2001 and 2000 31,095 32,155
Accounts and notes receivable from related parties (Note 10) 15,524 10,454
Deferred charges and other assets 50,540 63,372
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$ 2,002,949 $ 1,907,563
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Liabilities:
Notes payable $ 1,316,161 $ 1,173,973
Accounts payable and accrued liabilities 113,579 131,161
Dividends payable 16,838 12,784
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$ 1,446,578 $ 1,317,918
Commitments and Contingencies (Note 7)
Series C and D Preferred Equity of TRG (Note 1) $ 97,275 $ 97,275
Partners' Equity of TRG Allocable to Minority Partners (Note 1)
Shareowners' Equity:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 8,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
June 30, 2001 and December 31, 2000 $ 80 $ 80
Series B Non-Participating Convertible Preferred Stock,
$0.001 par and liquidation value, 40,000,000 shares
authorized and 31,835,066 shares issued and
outstanding at June 30, 2001 and December 31, 2000 32 32
Series C Cumulative Redeemable Preferred Stock,
$0.01 par value, 1,000,000 shares authorized, $75 million
liquidation preference, none issued
Series D Cumulative Redeemable Preferred Stock,
$0.01 par value, 250,000 shares authorized, $25 million
liquidation preference, none issued
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 50,750,551 and 50,984,397 issued and
outstanding at June 30, 2001 and December 31,
2000 (Note 8) 508 510
Additional paid-in capital 674,529 676,544
Accumulated other comprehensive income (Note 2) 1,020
Dividends in excess of net income (217,073) (184,796)
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$ 459,096 $ 492,370
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$ 2,002,949 $ 1,907,563
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See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Three Months Ended June 30
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2001 2000
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Income:
Minimum rents $ 40,309 $ 35,434
Percentage rents 934 815
Expense recoveries 26,303 22,141
Revenues from management, leasing and
development services 6,086 6,377
Other 9,957 5,631
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$ 83,589 $ 70,398
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Operating Expenses:
Recoverable expenses $ 22,840 $ 19,455
Other operating 10,063 7,112
Management, leasing and development services 5,089 4,877
General and administrative 4,862 4,441
Interest expense 14,972 13,659
Depreciation and amortization 15,255 14,053
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$ 73,081 $ 63,597
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Income before equity in income of Unconsolidated
Joint Ventures and minority and preferred interests $ 10,508 $ 6,801
Equity in income of Unconsolidated Joint Ventures (Note 4) 5,215 7,728
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Income before minority and preferred interests $ 15,723 $ 14,529
Minority interest in consolidated joint ventures 181
Minority interest in TRG:
TRG income allocable to minority partners (4,406) (3,825)
Distributions in excess of earnings allocable to
minority partners (3,488) (3,704)
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
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Net income $ 5,760 $ 4,750
Series A preferred dividends (4,150) (4,150)
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Net income allocable to common shareowners $ 1,610 $ 600
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Net income $ 5,760 $ 4,750
Other Comprehensive Income (Note 2):
Unrealized gain on interest rate instruments 2,683
Reclassification adjustment for losses recognized in net income 106
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Comprehensive income $ 8,549 $ 4,750
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Basic and diluted net income per common share (Note 9) $ 0.03 $ 0.01
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Cash dividends declared per common share $ .25 $ .245
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Weighted average number of common shares outstanding 50,181,946 52,622,546
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See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Six Months Ended June 30
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2001 2000
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Income:
Minimum rents $ 80,983 $ 72,422
Percentage rents 2,092 1,772
Expense recoveries 50,529 43,062
Revenues from management, leasing and
development services 12,457 12,566
Other 16,376 13,349
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$ 162,437 $ 143,171
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Operating Expenses:
Recoverable expenses $ 43,302 $ 37,784
Other operating 18,064 15,926
Management, leasing and development services 9,430 10,065
General and administrative 9,617 9,330
Interest expense 30,163 26,825
Depreciation and amortization 32,473 28,208
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$ 143,049 $ 128,138
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Income before equity in income of Unconsolidated
Joint Ventures, extraordinary items, cumulative effect
of change in accounting principle and minority and
preferred interests $ 19,388 $ 15,033
Equity in income before extraordinary items and cumulative
effect of change in accounting principle of
Unconsolidated Joint Ventures (Note 4) 10,071 16,323
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Income before extraordinary items, cumulative effect of
change in accounting principle, and minority and
preferred interests $ 29,459 $ 31,356
Extraordinary items (9,288)
Cumulative effect of change in accounting principle (Note 2) (8,404)
Minority interest in consolidated joint ventures 598
Minority interest in TRG:
TRG income allocable to minority partners (4,889) (5,024)
Distributions in excess of earnings allocable to
minority partners (11,003) (10,033)
TRG Series C and D preferred distributions (Note 1) (4,500) (4,500)
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Net income $ 1,261 $ 2,511
Series A preferred dividends (8,300) (8,300)
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Net loss allocable to common shareowners $ (7,039) $ (5,789)
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Net income $ 1,261 $ 2,511
Other Comprehensive Income (Note 2):
Cumulative effect of change in accounting principle (779)
Unrealized gain on interest rate instruments 1,594
Reclassification adjustment for losses recognized in net income 205
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Comprehensive income $ 2,281 $ 2,511
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Basic and diluted earnings per common share (Note 9):
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (0.04) $ 0.00
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Net loss $ (0.14) $ (0.11)
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Cash dividends declared per common share $ .50 $ .49
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Weighted average number of common shares outstanding 50,291,596 52,925,868
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See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30
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2001 2000
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Cash Flows from Operating Activities:
Income before extraordinary items, cumulative effect of
change in accounting principle, and minority and
preferred interests $ 29,459 $ 31,356
Adjustments to reconcile income before
extraordinary items, cumulative effect of change
in accounting principle, minority and preferred interests to
net cash provided by operating activities:
Depreciation and amortization 32,473 28,208
Provision for losses on accounts receivable 1,208 1,913
Other 1,379 2,064
Gains on sales of land (2,749) (4,482)
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets (164) (9,627)
Accounts payable and other liabilities (12,245) 3,897
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Net Cash Provided By Operating Activities $ 49,361 $ 53,329
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Cash Flows from Investing Activities:
Additions to properties $ (112,575) $ (76,182)
Proceeds from sales of land 3,490 5,390
Investment in equity securities (2,890) (1,944)
Contributions to Unconsolidated Joint Ventures (28,679) (2,816)
Distributions from Unconsolidated Joint Ventures
in excess of income before extraordinary items
and cumulative effect of change in accounting
principle 8,182 3,831
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Net Cash Used in Investing Activities $ (132,472) $ (71,721)
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Cash Flows from Financing Activities:
Debt proceeds $ 143,597 $ 88,387
Debt payments (1,409)
Debt issuance costs (3,210) (5,397)
Repurchases of common stock (11,159) (7,461)
Distributions to minority and preferred interests (18,142) (19,557)
Issuance of stock pursuant to Continuing Offer 8,264
Cash dividends to common shareowners (25,334) (25,977)
Cash dividends to Series A preferred shareowners (4,150) (8,300)
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Net Cash Provided By Financing Activities $ 88,457 $ 21,695
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Net Increase in Cash and Cash Equivalents $ 5,346 $ 3,303
Cash and Cash Equivalents at Beginning of Period 18,842 20,557
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Cash and Cash Equivalents at End of Period $ 24,188 $ 23,860
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See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
Notes to Consolidated Financial Statements
Three months ended June 30, 2001
Note 1 - Interim Financial Statements
Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or REIT, is the managing general
partner of The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG). The Operating
Partnership is an operating subsidiary that engages in the ownership, management, leasing, acquisition,
development, and expansion of regional retail shopping centers and interests therein. The Operating
Partnership's portfolio as of June 30, 2001 includes 17 urban and suburban shopping centers in seven states. An
additional center opened in Plano, Texas in August 2001 and three other centers are under construction in
Florida.
The consolidated financial statements of the Company include all accounts of the Company, the Operating
Partnership and its consolidated subsidiaries; all intercompany balances have been eliminated. Investments in
entities not unilaterally controlled by ownership or contractual obligation (Unconsolidated Joint Ventures) are
accounted for under the equity method.
At June 30, 2001, the Operating Partnership's equity included three classes of preferred equity (Series A, C,
and D) 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 A
Preferred Equity is owned by the Company and is eliminated in consolidation. The Series C and Series D Preferred
Equity are owned by institutional investors and have a fixed 9% coupon rate, no stated maturity, sinking fund, or
mandatory redemption requirements.
Because the net equity of the partnership unitholders is less than zero, the interest of the noncontrolling
unitholders is presented as a zero balance in the balance sheet as of June 30, 2001 and December 31, 2000. The
income allocated to the noncontrolling unitholders is equal to their share of distributions. The net equity of
the Operating Partnership is 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.
The Company's ownership in the Operating Partnership at June 30, 2001 consisted of a 61.6% managing general
partnership interest, as well as the Series A Preferred Equity interest. The Company's average ownership
percentage in the Operating Partnership for the three months ended June 30, 2001 and 2000 was 61.4% and 62.6%,
respectively. During the six months ended June 30, 2001, the Company's ownership in the Operating Partnership
decreased to 61.6% due to the ongoing share buyback and unit redemption program (Note 8), partially offset by
additional interests acquired in connection with the Continuing Offer (Note 7). At June 30, the Operating
Partnership had 82,585,617 units of partnership interest outstanding, of which the Company owned 50,750,551.
Included in the total units outstanding are 261,088 units issued in connection with the 1999 acquisition of Lord
Associates that currently do not receive allocations of income or distributions.
The unaudited interim financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 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.
Certain prior year amounts have been reclassified to conform to 2001 classifications.
Note 2 - Change in Accounting Principle
Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards
for derivative instruments. All derivatives, whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in the Company's earnings as interest expense. The
Company uses derivative instruments primarily to manage exposure to interest rate risks inherent in variable rate
debt and refinancings. The Company routinely uses cap, swap, and treasury lock agreements to meet these
objectives. For interest rate cap instruments designated as cash flow hedges, changes in the time value were
excluded from the assessment of hedge effectiveness. The swap agreement on the Dolphin construction facility does
not qualify for hedge accounting although its use is consistent with the Company's overall risk management
objectives. As a result, the Company recognizes its share of losses and income related to this agreement in
earnings as the value of the agreement changes.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million.
These amounts represent the transition adjustments necessary to mark the Company's share of interest rate
agreements to fair value as of January 1, 2001. During the three and six months ended June 30, 2001, in
addition to the transition adjustments, the Company recognized as a reduction of earnings its share of unrealized
losses of $0.7 million and $2.5 million, respectively, due to the decline in interest rates and the resulting
decrease in value of the Company's interest rate agreements. Of these amounts, approximately $0.6 million and
$2.1 million represent the changes in value of the Dolphin swap agreement and $0.1 million and $0.4 million
represent the changes in time value of cap instruments, respectively. The Company also recognized increases in
OCI of approximately $2.7 million and $1.6 million for the three and six months ended June 30, 2001, primarily
representing net unrealized gains on instruments hedging a refinancing expected to occur during the second half
of the year.
Of the net unrealized gains of $1.0 million included in Accumulated OCI as of June 30, 2001, the Company
expects that approximately $0.3 million will be reclassified into earnings during the next twelve months as the
related interest expense is accrued. Hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three or six months ended June 30, 2001. No hedges were derecognized or discontinued
for the three or six months ended June 30, 2001.
Note 3 - Tax Elections
In connection with the Tax Relief Extension Act of 1999, the Company made Taxable REIT Subsidiary elections
for all of its corporate subsidiaries. The elections, effective for January 1, 2001, were made pursuant to
section 856(I) of the Internal Revenue Code. The Company's Taxable REIT Subsidiaries are subject to corporate
level income taxes which will be provided for in the Company's financial statements.
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 after considering all available evidence. The Company's temporary differences primarily
relate to deferred compensation, depreciation and deferred income. During the three and six months ended June
30, 2001, utilization of a deferred tax asset reduced the Company's federal income tax expense to $0.1 million.
As of June 30, 2001, the Company had a net deferred tax asset of $3.3 million, after a valuation allowance of
$6.7 million.
Note 4 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in Unconsolidated Joint Ventures. The Operating Partnership is the
managing general partner or managing member in these Unconsolidated Joint Ventures, except for those denoted with
a (*).
Ownership as of
Unconsolidated Joint Venture Shopping Center June 30, 2001
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Arizona Mills, L.L.C. * Arizona Mills 37%
Dolphin Mall Associates Dolphin Mall 50
Limited Partnership
Fairfax Company of Virginia L.L.C. Fair Oaks 50
Forbes Taubman Orlando L.L.C. * The Mall at Millenia 50
(under construction)
Rich-Taubman Associates Stamford Town Center 50
Tampa Westshore Associates International Plaza 26
Limited Partnership (under construction)
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
West Farms Associates Westfarms 79
Woodland Woodland 50
In March 2001, Dolphin Mall, a 1.4 million square foot value regional center, opened in Miami, Florida.
Through April 2001, the Operating Partnership advanced $15.7 million to Dolphin Mall Associates Limited
Partnership to fund construction costs. In April 2001, the Operating Partnership contributed its note receivable
plus accrued interest to this Unconsolidated Joint Venture in exchange for a preferred interest in the center.
As of June 30, 2001, the Operating Partnership has a preferred investment in Dolphin Mall of $16.0 million, on
which an annual preferential return of 16.0% will accrue.
The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the
deficiency in assets reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the
Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures
and (ii) the Operating Partnership's adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to
depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership's differences
in bases are amortized over the useful lives of the related assets.
Combined balance sheet and results of operations information are presented in the following table (in
thousands) for all Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in
the combined information. Beneficial interest is calculated based on the Operating Partnership's ownership
interest in each of the Unconsolidated Joint Ventures. The accounts of Lakeside and Twelve Oaks, formerly 50%
Unconsolidated Joint Ventures, are included in the operations for the three and six months ended June 30, 2000.
Twelve Oaks is now 100% owned by the Operating Partnership and is a consolidated entity.
June 30 December 31
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2001 2000
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Assets:
Properties $ 1,252,010 $ 1,073,818
Accumulated depreciation and amortization (201,940) (189,644)
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$ 1,050,070 $ 884,174
Other assets 69,867 60,807
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$ 1,119,937 $ 944,981
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Liabilities and partners' accumulated deficiency in assets:
Debt $ 1,070,142 $ 950,847
Other liabilities 93,877 49,069
TRG's accumulated deficiency in assets (15,611) (36,570)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (28,471) (18,365)
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$ 1,119,937 $ 944,981
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TRG's accumulated deficiency in assets (above) $ (15,611) $ (36,570)
TRG basis adjustments, including elimination of intercompany profit 20,488 17,266
TCO's additional basis 126,804 128,322
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Investment in Unconsolidated Joint Ventures $ 131,681 $ 109,018
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Three Months Ended Six Months Ended
June 30 June 30
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2001 2000 2001 2000
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Revenues $ 54,375 $ 61,555 $ 108,430 $ 123,734
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Recoverable and other operating expenses $ 19,946 $ 21,622 $ 38,406 $ 43,890
Interest expense 17,570 17,069 36,160 33,919
Depreciation and amortization 8,595 8,168 17,727 16,341
----------- ----------- ----------- -----------
Total operating costs $ 46,111 $ 46,859 $ 92,293 $ 94,150
----------- ----------- ----------- -----------
Income before extraordinary items $ 8,264 $ 14,696 $ 16,137 $ 29,584
Extraordinary items 18,576
Cumulative effect of change in accounting
principle 3,304
----------- ----------- ----------- -----------
Net income $ 8,264 $ 14,696 $ 12,833 $ 11,008
=========== =========== =========== ===========
Net income allocable to TRG $ 4,496 $ 7,448 $ 6,890 $ 5,882
Cumulative effect of change in accounting
principle allocable to TRG 1,612
Extraordinary item allocable to TRG 9,288
Realized intercompany profit 1,478 1,424 3,087 3,441
Depreciation of TCO's additional basis (759) (1,144) (1,518) (2,288)
----------- ----------- ----------- -----------
Equity in income before extraordinary items
and cumulative effect of change in
accounting principle of Unconsolidated
Joint Ventures $ 5,215 $ 7,728 $ 10,071 $ 16,323
=========== =========== =========== ===========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 19,653 $ 22,215 $ 39,705 $ 45,108
Interest expense (9,243) (9,126) (19,059) (18,164)
Depreciation and amortization (5,195) (5,361) (10,575) (10,621)
----------- ----------- ----------- -----------
Income before extraordinary items
and cumulative effect of change in
accounting principle $ 5,215 $ 7,728 $ 10,071 $ 16,323
=========== =========== =========== ===========
Note 5 - Beneficial Interest in Debt and Interest Expense
In May 2001, the Company closed on a $168 million construction loan for The Mall at Wellington Green. This
loan bears interest at LIBOR plus 1.85% and has an initial term of three years with two one-year extension
options. The interest on $70 million of the loan is capped at 7.00% plus credit spread and the interest on
another $70 million is capped at 7.25% plus credit spread. The Operating Partnership guarantees 100% of
principal and interest; the amounts guaranteed will be reduced as certain center performance and valuation
criteria are met (Note 7).
The Operating Partnership's beneficial interest in the debt, capital lease obligations, capitalized interest,
and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest in consolidated subsidiaries excludes debt and
interest relating to the 15% minority interest in Great Lakes Crossing and the 30% minority interest in MacArthur
Center.
At 100% At Beneficial Interest
---------------------------------- --------------------------------------------------
Unconsolidated Unconsolidated
Consolidated Joint Consolidated Joint
Subsidiaries Ventures Subsidiaries Ventures Total
--------------- ------------------ --------------- ----------------- ----------------
(in thousands of dollars)
Debt as of:
June 30, 2001 1,316,161 1,070,142 1,238,849 532,527 1,771,376
December 31, 2000 1,173,973 950,847 1,105,008 483,683 1,588,691
Capital Lease Obligations:
June 30, 2001 965 342 911 227 1,138
December 31, 2000 1,581 630 1,522 416 1,938
Capitalized Interest
Six months ended June 30, 2001 16,396 9,662 16,300 3,940 20,240
Six months ended June 30, 2000 10,127 4,607 10,127 2,081 12,208
Interest expense:
Six months ended June 30, 2001 30,163 36,160 27,597 19,059 46,656
Six months ended June 30, 2000 26,825 33,919 24,366 18,164 42,530
Note 6 - Incentive Option Plan
The Operating Partnership has an incentive option plan for employees of the Manager. Currently, options for
7.7 million Operating Partnership units may be issued under the plan, substantially all of which have been
issued. Incentive options generally become exercisable to the extent of one-third of the units on each of the
third, fourth, and fifth anniversaries of the date of grant. Options expire ten years from the date of grant.
The Operating Partnership's units issued in connection with the incentive option plan are exchangeable for shares
of the Company's common stock under the Continuing Offer (Note 7). There were options for 744,454 units
exercised during the six months ended June 30, 2001 at an average exercise price of $11.10 per unit. There were
no options exercised during the six months ended June 30, 2000. There were no options granted or cancelled
during the six months ended June 30, 2001. There were options for 250,000 units granted at $11.25 per unit and
no options cancelled during the six months ended June 30, 2000. As of June 30, 2001, there were vested options
for 6.2 million units with a weighted average exercise price of $11.31 per unit and outstanding options
(including unvested options) for a total of 6.9 million units with a weighted average exercise price of $11.37
per unit. Options for 4.0 million units granted at $11.14 per unit will expire in November 2002 if not
exercised.
Note 7 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of its partnership interest in the
Operating Partnership, the Company entered into an agreement (the Cash Tender Agreement) with A. Alfred Taubman,
who is the Company's chairman and 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. The
Company will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds
of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through
the sale of new shares of its stock. The tendering partner will bear all market risk if the market price at
closing is less than the purchase price and will bear the costs of sale. Any proceeds of the offering in excess
of the purchase price will be for the sole benefit of the Company. At A. Alfred Taubman's election, his family
and certain others may participate in tenders.
Based on a market value at June 30, 2001 of $14.00 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $337.8 million. The
purchase of these interests at June 30, 2001 would have resulted in the Company owning an additional 29% 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 and future optionees under the Operating Partnership's incentive option 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 partnership interest is exchangeable for one share of the
Company's common stock.
Shares of common stock that were acquired by GMPT in connection with the IPO may be sold through a registered
offering. Pursuant to a registration rights agreement with the Company, the owners of these shares have the
annual right to cause the Company to register and publicly sell their shares of common stock (provided that the
shares have an aggregate value of at least $50 million and subject to certain other restrictions). All expenses
of such a registration are to be borne by the Company, other than the underwriting discounts or selling
commissions, which will be borne by the exercising party.
The Company is currently involved in certain litigation arising in the ordinary course of business. Management
believes that this litigation will not have a material adverse effect on the Company's financial statements.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2001. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/01 as of 6/30/01 as of 6/30/01 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 164.6 82.3 82.3 50% 100%
Great Lakes Crossing 169.6 144.2 169.6 100% 100%
International Plaza 121.4 32.2 121.4 100%(1) 100%(1)
The Mall at Millenia 22.3 11.2 11.2 50% 50%
The Mall at Wellington Green 86.0 77.4 86.0 100% 100%
The Shops at Willow Bend 153.1 153.1 153.1 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of approximately 25% of the amounts guaranteed.
In addition, the Operating Partnership guarantees the $100 million facility secured by an interest in Twelve
Oaks that was obtained in August 2000. Also, the Operating Partnership has guaranteed capital lease obligations
of $3.8 million relating to its investment in MerchantWired, and has committed an additional $1.5 million in
funding for Constellation Real Technologies, LLC.
Note 8 - Common Stock Repurchases
In March 2000, the Company's Board of Directors authorized the purchase of up to $50 million of the Company's
common stock in the open market. The stock may be purchased from time to time as market conditions warrant. For
each share of the Company's stock repurchased, an equal number of the Company's Operating Partnership units are
redeemed. As of June 30, 2001, the Company had purchased and the Operating Partnership had redeemed
approximately 3.3 million shares and units for approximately $36.9 million.
Note 9 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available to common shareowners by the
average number of common shares outstanding during each period. For diluted earnings per common share, the
Company's ownership interest in the Operating Partnership (and therefore earnings) are adjusted assuming the
exercise of all options for units of partnership interest under the Operating Partnership's incentive option plan
having exercise prices less than the average market value of the units using the treasury stock method. For the
three months ended June 30, 2001 and 2000, options for 0.3 million and 2.0 million units of partnership interest
with average exercise price of $13.56 and $12.46 per unit were excluded from the computation of diluted earnings
per unit because the exercise prices were greater than the average market price for the period calculated. For
the six months ended June 30, 2001 and 2000, options for 1.1 million and 2.0 million units of partnership
interest with average exercise price $13.00 and $12.46 per unit were excluded from the computation of diluted
earnings per unit because the exercise prices were greater than average market price for the period calculated.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except share data)
Income (loss) before extraordinary items and cumulative effect
of change in accounting principle allocable to common
shareowners (Numerator):
Net income (loss) allocable to common shareowners $ 1,610 $ 600 $ (7,039) $ (5,789)
Common shareowners' share of cumulative effect of
change in accounting principle 4,924
Common shareowners' share of extraordinary items 5,823
----------- ----------- ---------- ------------
Basic income (loss) before extraordinary items and
cumulative effect of change in accounting principle $ 1,610 $ 600 $ (2,115) $ 34
Effect of dilutive options (91) (34) (119) (71)
----------- ----------- ---------- ------------
Diluted income (loss) before extraordinary items and
cumulative effect of change in accounting principle $ 1,519 $ 566 $ (2,234) $ (37)
=========== =========== ========== ============
Shares (Denominator) - basic and diluted 50,181,946 52,622,546 50,291,596 52,925,868
=========== =========== ========== ============
Income (loss) before extraordinary items and
cumulative effect of change in accounting principle
per common share - basic and diluted $ 0.03 $ 0.01 $ (0.04) $ 0.00
=========== =========== ========= ============
Extraordinary items per common share - basic and diluted $ (0.11)
===========
Cumulative effect of change in accounting
principle per common share - basic and diluted $ (0.10)
=========
Note 10 - Cash Flow Disclosures and Noncash Investing and Financing Activities
Interest on mortgage notes and other loans paid during the six months ended June 30, 2001 and 2000, net of
amounts capitalized of $16.4 million and $10.1 million, was $27.9 million and $23.8 million, respectively. The
following non-cash investing and financing activities occurred during the six months ended June 30, 2001 and 2000:
Six Months ended June 30
------------------------
2001 2000
---- ----
Non-cash additions to properties $ 8,473 $ 5,357
Non-cash contributions to Unconsolidated Joint Ventures 3,778 2,762
Partnership units released 878
Accrual of preferred dividends and distributions 6,400
Unrealized gain on interest rate instruments included in
Other Comprehensive Income 1,020
Adjustment of interest rate instruments -
Cumulative effect of change in accounting principle 8,404
In April 2001, the $10 million investment in Swerdlow was converted into a note receivable bearing interest of
12% with a maturity date in December 2001.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent
the Company's expectations or beliefs concerning future events, including the following: statements regarding
future developments and joint ventures, rents and returns, statements regarding the continuation of historical
trends and any statements regarding the sufficiency of the Company's cash balances and cash generated from
operating and financing activities for the Company's future liquidity and capital resource needs. The Company
cautions that although forward-looking statements reflect the Company's 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 the
headings "General Risks of the Company" and "Environmental Matters" in the Company's 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
The Company owns a managing general partner's interest in The Taubman Realty Group Limited Partnership
(Operating Partnership or TRG), through which the Company conducts all of its operations. The Operating
Partnership owns, develops, acquires, and operates regional shopping centers nationally. The Consolidated
Businesses consist of shopping centers that are controlled by ownership or contractual agreement, development
projects for future regional shopping centers, and The Taubman Company Limited Partnership (the Manager).
Shopping centers that are not controlled and that are owned through joint ventures with third parties
(Unconsolidated Joint Ventures) are accounted for under the equity method.
The operations of the shopping centers are best understood by measuring their performance as a whole, without
regard to the Company's 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.
In August 2000, the Company completed a transaction to acquire an additional interest in one of its
Unconsolidated Joint Ventures; the Operating Partnership became the 100 percent owner of Twelve Oaks and the
joint venture partner became the 100 percent owner of Lakeside. Statistics presented include Lakeside through
the date of the transaction.
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. Accordingly, revenues and
occupancy levels are generally highest in the fourth quarter.
The following table summarizes certain quarterly operating data for 2000 and the first and second quarters of
2001.
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2000 2000 2000 2000 2000 2001 2001
-------------- ------------- ------------- ------------- --------------- --------------- ----------------
(in thousands)
Mall tenant sales $589,996 $628,999 $602,417 $895,783 $2,717,195 $570,223 $605,945
Revenues 132,331 130,923 127,034 142,318 532,606 132,903 137,964
Occupancy:
Average 88.8% 88.1% 88.8% 90.3% 89.1% 87.0% (1) 85.5%(2)
Ending 88.5% 88.1% 89.2% 90.5% 90.5% 85.1% (1) 85.6%(2)
Leased space 91.4% 90.5% 91.7% 93.8% 93.8% 90.8% (1) 90.0%(2)
(1) Excluding Dolphin Mall, which opened in March 2001, average occupancy, ending occupancy, and leased
space would have been 88.1%, 88.4%, and 92.4%, respectively.
(2) Excluding Dolphin Mall, average occupancy, ending occupancy, and leased space would have been 87.9%,
87.7%, and 91.8%, respectively.
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) relative to sales
are considerably higher in the first three quarters than they are in the fourth quarter. The following table
summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of sales for 2000 and the first
and second quarters of 2001:
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2000 2000 2000 2000 2000 2001 2001
------------ ----------- ----------- ----------- ----------- ----------- ----------
Minimum rents 11.3% 10.6% 10.6% 7.2% 9.7% 11.2% 10.5%
Percentage rents 0.3 0.1 0.1 0.6 0.3 0.3 0.1%
Expense recoveries 4.8 4.7 4.7 3.7 4.4 5.0 5.1%
---- ---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 16.4% 15.4% 15.4% 11.5% 14.4% 16.5% 15.7%
==== ==== ==== ==== ==== ==== =====
Current Operating Trends
In 2001, the regional shopping center industry has been affected by the softening of the national economic
cycle. Economic pressures that affect consumer confidence, job growth, energy costs, and income gains can
affect retail sales growth and impact the Company's ability to lease vacancies and negotiate rents at
advantageous rates. A number of regional and national retailers have recently announced store closings or filed
for bankruptcy. During the remainder of 2001, largely as a result of the current economic conditions, the
Company expects that the average occupancy of its portfolio may continue to decline, tenant bankruptcies may
exceed historical levels, and tenant sales growth may continue to slow down and/or reverse. The impact of a
softening economy on the Company's current results of operations may be moderated by lease cancellation income,
which tends to increase in down-cycles of the economy.
In the second quarter of 2001, for the first time in the Company's history as a public company, sales per
square foot decreased both for the quarter and for the six month period compared to the prior year, reflecting
the current difficult retail environment. In addition, an increased number of the Company's tenants have sought
the protection of the bankruptcy laws in 2001. The number of leases so affected was 3.4% through June 30, 2001,
compared to 2.3% for the full year in 2000. This statistic for the full year 2001 may exceed the Company's
highest reported statistic of 4.5%. However, not all bankruptcies result in tenants closing.
On a comparable center basis, average occupancy was 87.9% for the second quarter of 2001, a decrease of 0.7%
from 88.6% for the second quarter of 2000, and 88.1% for the first half of 2001, a decrease of 0.8% from 88.9%
for the first half of 2000. The Company expects that the year over year decrease may widen to as much as 1.7% as
the year progresses.
Rental Rates
Annualized average base rent per square foot for all mall tenants at the 16 centers owned and open for at
least two years was $40.88 for the three months ended June 30, 2001, compared to $40.00 for the three months
ended June 30, 2000. As leases have expired in the shopping centers, the Company has 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 periods 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 will 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.
Results of Operations
New Center Openings
In March 2001, Dolphin Mall, a 1.4 million square foot value regional center, opened in Miami, Florida.
Dolphin Mall is a 50% owned Unconsolidated Joint Venture and is accounted for under the equity method. The
Company currently estimates an unleveraged return of approximately 6% in 2001 on its share of the project cost of
approximately $145 million. The Operating Partnership will be entitled to a preferred return on $16 million of
equity contributions made to this center through June 2001, which were used to fund construction costs.
The Shops at Willow Bend, a wholly owned regional center, opened August 3, 2001 in Plano, Texas. The 1.5
million square foot center is anchored by Neiman Marcus, Saks Fifth Avenue, Lord & Taylor, Foley's and
Dillard's. Saks Fifth Avenue will open in 2004.
Two additional centers are scheduled to open in 2001. International Plaza will open in Tampa, Florida in
September; and The Mall at Wellington Green will open in West Palm Beach County, Florida in October.
International Plaza, a 1.3 million square foot center, will be anchored by Nordstrom, Lord & Taylor, Dillard's
and Neiman Marcus. The Company originally had a controlling 50.1% interest in the partnership (Tampa Westshore)
that owns the project. The Company was responsible for providing the funding for project costs in excess of
construction financing in exchange for a preferential return. In November 1999, the Company entered into
agreements with a new investor, which provided funding for the project and thereby reduced the Company's
ownership interest to approximately 26%. It is anticipated that given the preferential return arrangements, the
original 49.9% owner in Tampa Westshore will not initially receive cash distributions. The Company expects to be
initially allocated approximately 33% of the net operating income of the project, with an additional 7%
representing return of capital.
The Mall at Wellington Green, a 1.3 million square foot center will initially be anchored by Lord & Taylor,
Burdines, Dillard's and JCPenney. A fifth anchor, Nordstrom, is obligated under the reciprocal easement
agreement to open within 24 months of the opening of the center and is presently expected to open in 2003. The
center will be owned by a joint venture in which the Operating Partnership has a 90% controlling interest.
The Company expects returns on these four new centers to average 8.5% on $670 milion of cost for the period
that these centers will be open in 2001. The Company's share of costs for the four centers is projected to
be approximately $700 million. The Company expects returns to average 10% in 2002 and 11% in 2003. These returns
exclude land sale gains upon which interest expense savings on the gains will add approximately 0.25% to the
projects' returns, based on interest savings due to the reduction of debt. Estimates regarding returns
on projects 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 tenants, contractors,
and residual land purchasers; 2) cost overruns; and 3) timing of tenant openings, land sales, and project
expenditures.
Other Significant Debt, Equity, and Other Transactions
The following represent other significant debt, equity, and other transactions which affect the operating
results described under Comparison of Three Months Ended June 30, 2001 to the Three Months Ended June 30, 2000
and comparison of Six Months Ended June 30, 2001 to the Six Months Ended June 30, 2000.
In April 2001, the Operating Partnership's $10 million investment in Swerdlow was converted into a loan
bearing interest at 12% and maturing in December 2001.
In October 2000, a $146 million refinancing of Arizona Mills was completed. The proceeds were primarily used
to repay the existing $142.2 million mortgage and to fund transaction costs. The Operating Partnership
recognized its $0.2 million share of an extraordinary charge, consisting of the write-off of deferred financing
costs. Also in October 2000, MacArthur Center completed a $145 million secured financing. The proceeds were used
to repay the existing $120 million construction loan and transaction costs. The remaining net proceeds of
approximately $23.9 million were distributed to the Operating Partnership, which used the distribution to pay
down its line of credit.
In August 2000, the Company completed a transaction to acquire an additional ownership in one of its
Unconsolidated Joint Ventures. Under the terms of the agreement, the Operating Partnership became the 100% owner
of Twelve Oaks and the joint venture partner became the 100% owner of Lakeside. Both properties remained subject
to the existing mortgage debt. The transaction resulted in a net payment to the joint venture partner of
approximately $25.5 million in cash. The results of Twelve Oaks have been consolidated in the Company's results
subsequent to the acquisition date (prior to that date, Twelve Oaks was accounted for under the equity method as
an Unconsolidated Joint Venture). A gain of $85.3 million on the transaction was recognized by the Company
representing its share of the excess of the fair value over the net book basis of the Company's interest in
Lakeside, adjusted for the $25.5 million paid and transaction costs.
In January 2000, the $76 million refinancing of Stamford Town Center was completed. The proceeds were used to
repay the $54 million participating mortgage, the $18.3 million prepayment premium, and accrued interest and
transaction costs. The Operating Partnership recognized its $9.3 million share of an extraordinary charge, which
consisted primarily of a prepayment premium.
New Accounting Pronouncement
Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards
for derivative instruments. All derivatives, whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in the Company's earnings as interest expense. The
Company uses derivative instruments primarily to manage exposure to interest rate risks inherent in variable rate
debt and refinancings. The Company routinely uses cap, swap, and treasury lock agreements to meet these
objectives. For interest rate cap instruments designated as cash flow hedges, changes in the time value were
excluded from the assessment of hedge effectiveness. The swap agreement on the Dolphin construction facility does
not qualify for hedge accounting although its use is consistent with the Company's overall risk management
objectives. As a result, the Company recognizes its share of losses and income related to this agreement in
earnings as the value of the agreement changes.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million.
These amounts represent the transition adjustments necessary to mark the Company's share of interest rate
agreements to fair value as of January 1, 2001. During the three and six months ended June 30, 2001, in
addition to the transition adjustments, the Company recognized as a reduction of earnings its share of unrealized
losses of $0.7 million and $2.5 million, respectively, due to the decline in interest rates and the resulting
decrease in value of the Company's interest rate agreements. Of these amounts, approximately $0.6 million and
$2.1 million represent the changes in value of the Dolphin swap agreement and $0.1 million and $0.4 million
represent the changes in time value of cap instruments, respectively. The Company also recognized increases in
OCI of approximately $2.7 million and $1.6 million for the three and six months ended June 30, 2001, primarily
representing net unrealized gains on instruments hedging a refinancing expected to occur during the second half
of the year.
Of the net unrealized gains of $1.0 million included in Accumulated OCI as of June 30, 2001, the Company
expects that approximately $0.3 million will be reclassified into earnings during the next twelve months as the
related interest expense is accrued. Hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three or six months ended June 30, 2001. No hedges were derecognized or discontinued
for the three or six months ended June 30, 2001.
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers'
operations. During the three months ended June 30, 2001, revenues (excluding land sales and certain individually
significant lease cancellation fees) less operating costs (operating and recoverable expenses) of those centers
owned and open for the entire period increased approximately three percent in comparison to the same centers'
results in the comparable period of 2000. This growth was primarily due to increases in minimum rents, revenue
from the JCDecaux program, and expense reductions. The Company expects that comparable center operations will
increase annually by two to three percent. This is a forward-looking statement and certain significant factors
could cause the actual results to differ materially; refer to the General Risks of the Company in the Company's
latest filing on Form 10-K.
Presentation of Operating Results
The following tables contain the combined operating results of the Company's Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the noncontrolling partners of the Operating Partnership and
preferred interests is deducted to arrive at the results allocable to the Company's common shareowners. Because
the net equity of the Operating Partnership is less than zero, the income allocated to the noncontrolling
partners is equal to their share of distributions. The net equity of these minority 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. Also, losses allocable to minority partners in certain consolidated joint ventures are added back
to arrive at the net results of the Company. The Company's average ownership percentage of the Operating
Partnership was approximately 61% and 63% in the 2001 and 2000 periods, respectively. The results of Twelve Oaks
are included in the Consolidated Businesses in 2001, while both Twelve Oaks and Lakeside are included as
Unconsolidated Joint Ventures for 2000.
Comparison of the Three Months Ended June 30, 2001 to the Three Months Ended June 30, 2000
The following table sets forth operating results for the three months ended June 30, 2001 and June 30, 2000,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended June 30, 2001 Three months ended June 30, 2000
-----------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES(2) VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-----------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 40.3 34.0 74.3 34.7 39.6 74.3
Percentage rents 0.9 0.2 1.2 0.8 0.2 1.0
Expense recoveries 26.3 16.5 42.8 21.9 20.3 42.2
Management, leasing and development 6.1 6.1 6.4 6.4
Other 10.0 3.6 13.6 5.6 1.5 7.1
---- ---- ---- ---- ---- ----
Total revenues 83.6 54.4 138.0 69.4 61.6 130.9
OPERATING COSTS:
Recoverable expenses 22.8 16.1 38.9 19.0 17.0 36.0
Other operating 10.1 2.8 12.8 6.4 3.5 9.9
Management, leasing and development 5.1 5.1 4.9 4.9
General and administrative 4.9 4.9 4.4 4.4
Interest expense 15.0 17.6 32.6 13.7 17.1 30.8
Depreciation and amortization (3) 15.3 8.4 23.7 13.7 8.0 21.7
---- ---- ---- ---- ---- ----
Total operating costs 73.1 44.8 117.9 62.1 45.6 107.6
Net results of Memorial City (2) (0.5) (0.5)
---- ---- ---- ---- ---- ----
10.5 9.5 20.1 6.8 15.9 22.7
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (3) 5.2 7.7
---- ----
Income before minority and preferred
interests 15.7 14.5
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated
joint ventures 0.2
Minority share of income of TRG (4.4) (3.8)
Distributions in excess of minority
share of income (3.5) (3.7)
---- ----
Net income 5.8 4.8
Series A preferred dividends (4.2) (4.2)
---- ----
Net income allocable to common
shareowners 1.6 0.6
==== ====
SUPPLEMENTAL INFORMATION (4):
EBITDA - 100% 40.7 35.5 76.3 34.5 41.0 75.5
EBITDA - outside partners' share (2.1) (15.9) (18.0) (1.9) (18.8) (20.7)
---- ---- ---- ---- ---- ----
EBITDA contribution 38.6 19.7 58.2 32.6 22.2 54.8
Beneficial Interest Expense (13.7) (9.2) (23.0) (12.4) (9.1) (21.5)
Non-real estate depreciation (0.7) (0.7) (0.7) (0.7)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ---- ---- ---- ----
Funds from Operations contribution 17.8 10.4 28.2 13.1 13.1 26.2
==== ==== ==== ==== ==== ====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures and are net
of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of their
performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements, the
Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) The results of operations of Memorial City are presented net in this table. The Operating Partnership ceased to lease and
manage Memorial City on April 30, 2000.
(3) Amortization of the Company's additional basis in the Operating Partnership was $1.9 million and $2.1 million in 2001 and
2000, respectively. Of these amounts, $0.8 million and $1.1 million were included in equity in income of Unconsolidated
Joint Ventures in 2001 and 2000, respectively, while $1.1 million and $0.9 million were included in depreciation and
amortization in 2001 and 2000, respectively.
(4) EBITDA represents earnings before interest and depreciation and amortization. Funds from Operations is defined and
discussed in Liquidity and Capital Resources.
(5) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2000 amounts to conform
to 2001 classifications.
Consolidated Businesses
- -----------------------
Total revenues for the three months ended June 30, 2001 were $83.6 million, a $14.2 million or 20.5% increase
over the comparable period in 2000. Minimum rents increased $5.6 million of which $5.3 million was due to the
inclusion of Twelve Oaks. Minimum rents also increased due to tenant rollovers and advertising space
arrangements, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily due
to Twelve Oaks. Other revenue increased primarily due to increases in gains on sales of peripheral land, lease
cancellation revenue, and interest income.
Total operating costs were $73.1 million, an $11.0 million or 17.7% increase over the comparable period in
2000. Recoverable expenses increased primarily due to Twelve Oaks. Other operating expense increased primarily
due to increases in the charge to operations for costs of pre-development activities, increased marketing
expense, professional fees relating to process improvement projects, and losses relating to the investment in
MerchantWired. Interest expense increased primarily due to debt assumed and incurred relating to Twelve Oaks and
working capital needs, offset by decreases due to changes in rates on floating rate debt. Depreciation expense
increased due to Twelve Oaks.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for the three months ended June 30, 2001 were $54.4 million, a $7.2 million or 11.7% decrease
from the comparable period of 2000. Rents and recoveries decreased primarily due to Lakeside and Twelve Oaks,
partially offset by Dolphin Mall. Other revenue increased primarily due to an increase in lease cancellation
revenue.
Total operating costs decreased by $0.8 million to $44.8 million for the three months ended June 30, 2001.
Recoverable expenses decreased primarily due to Lakeside and Twelve Oaks, offset by Dolphin. Interest expense
increased because of a decrease in capitalized interest upon opening of Dolphin Mall, as well as changes in the
value of Dolphin Mall's interest rate agreements, offset by decreases due to Lakeside and Twelve Oaks.
Depreciation expense increased primarily due to the opening of Dolphin Mall, partially offset by Lakeside and
Twelve Oaks.
As a result of the foregoing, income of the Unconsolidated Joint Ventures decreased by $6.4 million or 40.3%
to $9.5 million. The Company's equity in income of the Unconsolidated Joint Ventures was $5.2 million, a 32.5%
decrease from the comparable period in 2000.
Net Income
- ----------
As a result of the foregoing, the Company's income before minority and preferred interests increased $1.2
million or 8.3% to $15.7 million for the three months ended June 30, 2001. After allocation of income to
minority and preferred interests, the net income allocable to common shareowners for 2001 was $1.6 million
compared to $0.6 million in 2000.
Comparison of the Six Months Ended June 30, 2001 to the Six Months Ended June 30, 2000
The following table sets forth operating results for the six months ended June 30, 2001 and June 30, 2000,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Six months ended June 30, 2001 Six months ended June 30, 2000
----------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES(2) VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
----------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 81.0 66.8 147.8 69.8 78.9 148.7
Percentage rents 2.1 0.8 2.9 1.8 1.0 2.8
Expense recoveries 50.5 32.8 83.3 42.1 41.0 83.1
Management, leasing and development 12.5 12.5 12.6 12.6
Other 16.4 8.0 24.4 13.3 2.8 16.0
---- ---- ---- ---- ---- ----
Total revenues 162.4 108.4 270.9 139.5 123.7 263.3
OPERATING COSTS:
Recoverable expenses 43.3 29.9 73.2 36.2 33.7 69.9
Other operating 18.1 6.2 24.2 13.2 7.4 20.6
Management, leasing and development 9.4 9.4 10.1 10.1
General and administrative 9.6 9.6 9.3 9.3
Interest expense 30.2 36.2 66.4 26.8 34.1 60.9
Depreciation and amortization (3) 32.5 17.3 49.7 27.2 15.8 43.0
---- ---- ---- ---- ---- ----
Total operating costs 143.0 89.5 232.5 122.9 91.0 213.9
Net results of Memorial City (2) (1.6) (1.6)
---- ---- ---- ---- ---- ----
19.4 19.0 38.3 15.0 32.8 47.8
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (3) (4) 10.1 16.3
---- ----
Income before extraordinary items,
cumulative effect of change in
accounting principle, and minority
and preferred interests 29.5 31.4
Extraordinary items (9.3)
Cumulative effect of change in
accounting principle (8.4)
TRG preferred distributions (4.5) (4.5)
Minority share of consolidated
joint ventures 0.6
Minority share of income of TRG (4.9) (5.0)
Distributions in excess of minority
share of income (11.0) (10.0)
---- ----
Net income 1.3 2.5
Series A preferred dividends (8.3) (8.3)
---- ----
Net loss allocable to common
shareowners (7.0) (5.8)
==== ====
SUPPLEMENTAL INFORMATION (5):
EBITDA - 100% 82.0 72.4 154.4 70.1 82.7 152.8
EBITDA - outside partners' share (4.0) (32.7) (36.7) (4.2) (37.6) (41.8)
---- ---- ---- ---- ---- ----
EBITDA contribution 78.0 39.7 117.7 65.9 45.1 111.0
Beneficial Interest Expense (27.6) (19.1) (46.7) (24.4) (18.2) (42.5)
Non-real estate depreciation (1.4) (1.4) (1.5) (1.5)
Preferred dividends and distributions (12.8) (12.8) (12.8) (12.8)
---- ---- ---- ---- ---- ----
Funds from Operations contribution 36.2 20.6 56.9 27.2 26.9 54.2
==== ==== ==== ==== ==== ====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures and are net
of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of their
performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements,
the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) The results of operations of Memorial City are presented net in this table. The Operating Partnership ceased to lease and
manage Memorial City on April 30, 2000.
(3) Amortization of the Company's additional basis in the Operating Partnership was $3.8 million and $4.2 million in 2001 and
2000, respectively. Of these amounts, $1.5 million and $2.3 million were included in equity in income of Unconsolidated
Joint Ventures in 2001 and 2000, respectively, while $2.3 million and $1.9 million were included in depreciation and
amortization in 2001 and 2000, respectively.
(4) Equity in income of Unconsolidated Joint Ventures is before the cumulative effect of the change in accounting principle
incurred in connection with the Company's adoption of SFAS 133. The Company's share of the Unconsolidated Joint
Ventures' cumulative effect was approximately $1.6 million.
(5) EBITDA represents earnings before interest and depreciation and amortization. Funds from Operations is defined and discussed
in Liquidity and Capital Resources.
(6) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2000 amounts to conform
to 2001 classifications.
Consolidated Businesses
- -----------------------
Total revenues for the six months ended June 30, 2001 were $162.4 million, a $22.9 million or 16.4% increase
over the comparable period in 2000. Minimum rents increased $11.2 million of which $10.6 million was due to the
inclusion of Twelve Oaks. Minimum rents also increased due to tenant rollovers and advertising space
arrangements, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily due
to Twelve Oaks. Other revenue increased primarily due to increases in lease cancellation revenue and interest
income, partially offset by a decrease in gains on sales of peripheral land.
Total operating costs were $143.0 million, a $20.1 million or 16.4% increase over the comparable period in
2000. Recoverable expenses increased primarily due to Twelve Oaks. Other operating expense increased due to an
increase in the charge to operations for costs of pre-development activities, increased marketing expense,
professional fees relating to process improvement projects, and losses relating to the investment in
MerchantWired. Interest expense increased primarily due to debt assumed and incurred relating to Twelve Oaks and
working capital needs, offset by decreases due to changes in rates on floating rate debt. Depreciation expense
increased primarily due to Twelve Oaks.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for the six months ended June 30, 2001 were $108.4 million, a $15.3 million or 12.4% decrease
from the comparable period of 2000. Rents and recoveries decreased primarily due to Lakeside and Twelve Oaks,
partially offset by Dolphin Mall. Other revenue increased primarily due to an increase in lease cancellation
revenue.
Total operating costs decreased by $1.5 million to $89.5 million for the six months ended June 30, 2001.
Recoverable expenses decreased primarily due to Lakeside and Twelve Oaks, partially offset by Dolphin Mall. Other
operating expense decreased primarily due to a decrease in bad debt expense and Twelve Oaks and Lakeside,
partially offset by Dolphin Mall. Interest expense increased because of a decrease in capitalized interest upon
opening of Dolphin Mall, as well as changes in the value of Dolphin Mall's interest rate agreements, partially
offset by decreases due to Lakeside and Twelve Oaks. Depreciation expense increased primarily due to the opening
of Dolphin Mall, partially offset by Lakeside and Twelve Oaks.
As a result of the foregoing, income before extraordinary items and cumulative effect of change in accounting
principle of the Unconsolidated Joint Ventures decreased by $13.8 million or 42.1% to $19.0 million. The
Company's equity in income before extraordinary items and the cumulative effect of the change in accounting
principle of the Unconsolidated Joint Ventures was $10.1 million, a 38.0% decrease from the comparable period in
2000.
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary items, cumulative effect of change in
accounting principle, and minority and preferred interests decreased $1.9 million to $29.5 million for the six
months ended June 30, 2001. During 2001, a cumulative effect of a change in accounting principle of $8.4 million
was recognized in connection with the Company's adoption of SFAS 133. During 2000, an extraordinary charge of
$9.3 million was recognized related to the refinancing of the debt on Stamford Town Center. After allocation of
income to minority and preferred interests, the net loss allocable to common shareowners for 2001 was $(7.0)
million compared to $(5.8) million in 2000.
Liquidity and Capital Resources
In the following discussion, references to beneficial interest represent the Operating Partnership's share of
the results of its consolidated and unconsolidated businesses. The Company does not have and has not had any
parent company indebtedness; all debt discussed represents obligations of the Operating Partnership or its
subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities, distributions from its joint
ventures, the unutilized portion of its credit facilities, and its ability to access the capital markets assure
adequate liquidity to conduct its operations in accordance with its dividend and financing policies.
As of June 30, 2001, the Company had a consolidated cash balance of $24.2 million. Additionally, the Company
has a secured $200 million line of credit. This line had $88.0 million of borrowings as of June 30, 2001 and
expires in September 2001. The Company is in the process of obtaining a 45-day extension on this facility. The
Company is also negotiating a new facility to replace this current line of credit. The Company also has available
a second secured bank line of credit of up to $40 million. The line had $5.5 million of borrowings as of June
30, 2001 and expires in November 2001.
Debt and Equity Transactions
Discussion of significant debt and equity transactions that affected operations is contained in the Results
of Operations. In addition to the items described therein, in May 2001, the Company closed on a $168 million
construction loan for the Mall at Wellington Green. The loan bears interest at LIBOR plus 1.85% and has an
initial term of three years with two one-year extension options. The interest on $70 million of the loan is
capped at 7% plus credit spread and the interest on another $70 million is capped at 7.25% plus credit spread.
The Operating Partnership guarantees 100% of principal and interest; the amounts guaranteed will be reduced as
certain center performance and valuation criteria are met.
Summary of Investing Activities
Net cash used in investing activities was $132.5 million in 2001 compared to $71.7 million in 2000. Cash used
in investing activities was impacted by the timing of capital expenditures, with additions to properties in 2001
and 2000 for the construction of The Mall at Wellington Green and The Shops at Willow Bend as well as other
development activities and other capital items (see Capital Spending below). Proceeds from sales of peripheral
land were $3.5 million, a decrease of $1.9 million from 2000. Contributions to Unconsolidated Joint Ventures were
$28.7 million in 2001 and $2.8 million in 2000, primarily representing funding for construction activities at
Dolphin Mall. An additional $2.9 million was invested in technology-related ventures in 2001. Distributions from
Unconsolidated Joint Ventures were primarily consistent with 2000.
Summary of Financing Activities
Financing activities contributed cash of $88.5 million, an increase of $66.8 million from the $21.7 million in
2000. Debt proceeds, net of repayments and issuance costs, provided $139.0 million in 2001, an increase of $56
million from 2000. Stock repurchases of $11.2 million were made in connection with the Company's stock repurchase
program in 2001, an increase of $3.7 million from 2000. Issuance of stock pursuant to the Continuing Offer
contributed $8.3 million in 2001. Due to the timing of the 2001 end of the quarter, the Company's second quarter
2001 preferred dividends and distributions were not paid until July 2001.
Beneficial Interest in Debt
At June 30, 2001, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $1,771.4 million. As shown in the following table, $24.3
million of this debt was floating rate debt that remained unhedged at June 30, 2001. Interest rates shown do not
include amortization of debt issuance costs and interest rate hedging costs. Debt issuance costs and interest
rate hedging costs are reported as interest expense in the results of operations. Amortization of debt issuance
costs added 0.42% to TRG's effective interest rate in the second quarter of 2001. Included in beneficial interest
in debt is debt used to fund development and expansion costs. Beneficial interest in assets on which interest is
being capitalized totaled $574.9 million as of June 30, 2001. Beneficial interest in capitalized interest was
$9.9 million and $20.2 million for the three and six months ended June 30, 2001, respectively.
Beneficial Interest in Debt
-------------------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(in millions Rate at Cap of Rate at
of dollars) 6/30/01 Rate Resets 6/30/01
----------- ------- ------ ------- -------
Total beneficial interest in fixed rate debt $944.7 7.57% (1)
Floating rate debt hedged via interest rate caps:
Through October 2001 50.0 4.43 8.55% Monthly 3.86%
Through March 2002 100.0 5.15(1) 7.25 Monthly 3.86
Through March 2002 144.5 5.56 7.25 Monthly 3.86
Through July 2002 43.4 5.10 6.50 Monthly 3.86
Through August 2002 38.0 4.78 8.20 Monthly 3.86
Through September 2002 100.0(2) 8.14(3) 7.00 Monthly 3.86
Through October 2002 26.5 5.65 7.10 Monthly 3.86
Through November 2002 80.2(4) 5.25(1) 8.75 Monthly 3.86
Through May 2003 119.0(5) 5.89 7.15 Monthly 3.86
Through September 2003 63.0 5.73(1) 7.00 Monthly 3.86
Through September 2003 37.8(6) 5.43(1) 7.25 Monthly 3.86
Other floating rate debt 24.3 5.15(1)
--------
Total beneficial interest in debt $1,771.4 6.70(1)
========
(1) Denotes weighted average interest rate.
(2) This construction debt at a 50% owned unconsolidated joint venture is swapped at a rate of 6.14% when LIBOR is below 6.7%.
(3) Rate reflects impact of interest rate swap.
(4) This construction debt at a 50% owned unconsolidated joint venture is hedged with an $80.2 million cap.
(5) The notional amount on the cap, which hedges a construction facility, accretes $7 million a month until it reaches $147
million.
(6) The notional amount on the cap, which hedges a construction facility on a 90% owned consolidated joint venture, accretes
$6 million a month until it reaches $70 million.
Sensitivity Analysis
The Company has exposure to interest rate risk on its debt obligations and interest rate instruments. Based on
the Operating Partnership's beneficial interest in debt and interest rates in effect at June 30, 2001, a one
percent increase or decrease in interest rates on floating rate debt would decrease or increase cash flows by
approximately $7.3 million and, due to the effect of capitalized interest, annual earnings by approximately $4.4
million. Based on the Company's consolidated debt and interest rates in effect at June 30, 2001, a one percent
increase in interest rates would decrease the fair value of debt by approximately $38.9 million, while a one
percent decrease in interest rates would increase the fair value of debt by approximately $41.7 million.
Covenants and Commitments
Certain loan agreements contain various restrictive covenants, including limitations on net worth, minimum
debt service and fixed charges coverage ratios, a maximum payout ratio on distributions, and a minimum debt yield
ratio, the latter being the most restrictive. The Company is in compliance with all of such covenants.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2001. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/01 as of 6/30/01 as of 6/30/01 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 164.6 82.3 82.3 50% 100%
Great Lakes Crossing 169.6 144.2 169.6 100% 100%
International Plaza 121.4 32.2 121.4 100%(1) 100%(1)
The Mall at Millenia 22.3 11.2 11.2 50% 50%
The Mall at Wellington Green 86.0 77.4 86.0 100% 100%
The Shops at Willow Bend 153.1 153.1 153.1 100% 100%
(1) The new investor in the International Plaza venture has indemnified the Operating Partnership to the
extent of approximately 25% of the amounts guaranteed.
In addition, the Operating Partnership guarantees the $100 million facility secured by an interest in Twelve
Oaks that was obtained in August 2000.
Funds from Operations
A principal factor that the Company considers in determining dividends to shareowners is Funds from Operations
(FFO), which is defined as income before extraordinary items, cumulative effects of changes in accounting
principles, real estate depreciation and amortization, and the allocation to the minority interest in the
Operating Partnership, less preferred dividends and distributions. Gains on dispositions of depreciated
operating properties are excluded from FFO.
Funds from Operations does not represent cash flows from operations, as defined by generally accepted
accounting principles, and should not be considered to be an alternative to net income as an indicator of
operating performance or to cash flows from operations as a measure of liquidity. However, the National
Association of Real Estate Investment Trusts (NAREIT) suggests that Funds from Operations is a useful
supplemental measure of operating performance for REIT's. Funds From Operations as presented by the Company may
not be comparable to similarly titled measures of other companies.
Reconciliation of Income to Funds from Operations
- -------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
--------------------------- ---------------------------
(in millions of dollars)
Income before minority and preferred interests (1) (2) 15.7 14.5
Depreciation and amortization (3) 15.3 14.1
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 5.2 5.4
Non-real estate depreciation (0.7) (0.7)
Minority partners in consolidated joint ventures
share of funds from operations (0.9) (0.6)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 28.2 26.2
==== ====
Funds from Operations allocable to TCO 17.3 16.4
==== ====
(1) Includes gains on peripheral land sales of $1.5 million and $0.2 million for the three months ended June
30, 2001 and June 30, 2000, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.2
million and zero for the three months ended June 30, 2001 and June 30, 2000, respectively.
(3) Includes $0.7 million and $0.6 million of mall tenant allowance amortization for the three months ended
June 30, 2001 and June 30, 2000, respectively.
(4) Includes $0.6 million and $0.3 million of mall tenant allowance amortization for the three months ended
June 30, 2001 and June 30, 2000, respectively.
(5) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
---------------- ----------------
(in millions of dollars)
Income before extraordinary items, cumulative
effect of change in accounting principle, and
minority and preferred interests (1) (2) 29.5 31.4
Depreciation and amortization (3) 32.5 28.2
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 10.6 10.6
Non-real estate depreciation (1.4) (1.5)
Minority partners in consolidated joint ventures
share of funds from operations (1.4) (1.7)
Preferred dividends and distributions (12.8) (12.8)
---- ----
Funds from Operations - TRG 56.9 54.2
==== ====
Funds from Operations allocable to TCO 34.9 34.0
==== ====
(1) Includes gains on peripheral land sales of $2.8 million and $4.0 million for the six months ended June
30, 2001 and June 30, 2000, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.3
million and $(0.2) million for the six months ended June 30, 2001 and June 30, 2000, respectively.
(3) Includes $1.3 million and $1.1 million of mall tenant allowance amortization for the six months ended
June 30, 2001 and June 30, 2000, respectively.
(4) Includes $1.0 million and $0.7 million of mall tenant allowance amortization for the six months ended
June 30, 2001 and June 30, 2000, respectively.
(5) Amounts in this table may not add due to rounding.
Reconciliation of Funds from Operations to Net Income
- ------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
-------------------- ---------------------
(in millions of dollars)
Fund from Operations-TRG 28.2 26.2
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (15.3) (14.1)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.1 0.6
Depreciation of TCO's additional basis 1.9 2.1
Non-real estate depreciation 0.7 0.7
Share of Unconsolidated Joint Ventures' depreciation and
amortization (5.2) (5.4)
---- ----
Net income - TRG 11.4 10.2
==== ====
TCO's ownership share of net income of TRG (1) 7.0 6.4
Depreciation of TCO's additional basis (1.9) (2.1)
---- ----
Income before distributions in excess of earnings
allocable to minority interest - TCO 5.1 4.3
Distributions in excess of earnings allocable to minority
interest (3.5) (3.7)
---- ----
Net income allocable to common shareowners-TCO 1.6 0.6
==== ====
(1) TCO's average ownership of TRG was approximately 61% and 63% during the three months ended June 30, 2001 and 2000.
(2) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------------ ----------------
(in millions of dollars)
Fund from Operations-TRG 56.9 54.2
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (32.5) (28.2)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.6 1.7
Depreciation of TCO's additional basis 3.8 4.2
Non-real estate depreciation 1.4 1.5
Share of Unconsolidated Joint Ventures' depreciation and
amortization (10.6) (10.6)
---- ----
Income before extraordinary items and cumulative effect
of accounting change - TRG 20.5 22.8
==== ====
TCO's ownership share of income of TRG (1) 12.7 14.2
Depreciation of TCO's additional basis (3.8) (4.2)
---- ----
Income before distributions in excess of earnings
allocable to minority interest - TCO 8.9 10.0
Distributions in excess of earnings allocable to minority
interest (11.0) (10.0)
---- ----
Income before extraordinary items and cumulative effect
of accounting change allocable to common shareowners-TCO (2.1) 0.0
===== ====
(1) TCO's average ownership of TRG was approximately 61% and 63% during the six months ended June 30, 2001 and 2000.
(2) Amounts in this table may not add due to rounding.
Dividends
The Company pays regular quarterly dividends to its common and Series A preferred shareowners. Dividends to
its common shareowners are at the discretion of the Board of Directors and depend on the cash available to the
Company, its financial condition, capital and other requirements, and such other factors as the Board of
Directors deems relevant. Preferred dividends accrue regardless of whether earnings, cash availability, or
contractual obligations were to prohibit the current payment of dividends.
On May 31, 2001, the Company declared a quarterly dividend of $0.25 per common share payable July 20, 2001 to
shareowners of record on July 2, 2001. The Board of Directors also declared a quarterly dividend of $0.51875 per
share on the Company's 8.3% Series A Preferred Stock for the quarterly dividend period ended June 30, 2001, which
was paid on July 2, 2001 to shareowners of record on June 22, 2001.
The tax status of total 2001 common dividends declared and to be declared, assuming continuation of a $0.25
per common share quarterly dividend, is estimated to be approximately 30% return of capital, and approximately
70% of ordinary income. The tax status of total 2001 dividends to be paid on Series A Preferred Stock is
estimated to be 100% ordinary income. These are forward-looking statements and certain significant factors could
cause the actual results to differ materially, including: 1) the amount of dividends declared; 2) changes in the
Company's share of anticipated taxable income of the Operating Partnership due to the actual results of the
Operating Partnership; 3) changes in the number of the Company's outstanding shares; 4) property acquisitions or
dispositions; 5) financing transactions, including refinancing of existing debt; and 6) changes in the Internal
Revenue Code or its application.
The annual determination of the Company's common dividends is based on anticipated Funds from Operations
available after preferred dividends and distributions, as well as financing considerations and other appropriate
factors. Further, the Company has decided that the growth in common dividends will be less than the growth in
Funds from Operations for the immediate future.
Any inability of the Operating Partnership or its Joint Ventures to obtain 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 the Company for the payment of
dividends.
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally recovered from tenants. The
following table summarizes planned capital spending, which is not recovered from tenants and assumes no
acquisitions during 2001:
2001
--------------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
--------------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion 194.2 (3) 305.8 (4) 313.5
Mall tenant allowances 9.5 6.4 12.4
Pre-construction development and other 15.5 0.5 15.7
----- ----- -----
Total 219.2 312.7 341.6
===== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes the Operating Partnership's share of construction costs for The Mall at Wellington Green (a 90%
owned consolidated joint venture), International Plaza (a 26% owned unconsolidated joint venture), Dolphin
Mall (a 50% owned unconsolidated joint venture), and The Mall at Millenia (a 50% owned unconsolidated joint
venture).
(3) Includes costs related to The Shops at Willow Bend and The Mall at Wellington Green.
(4) Includes costs related to Dolphin Mall, International Plaza, and The Mall at Millenia.
The Operating Partnership has entered into a 50%-owned joint venture to develop The Mall at Millenia currently
under construction in Orlando, Florida. This project is expected to cost approximately $200 million and open in
October 2002. The Mall at Millenia will be anchored by Bloomingdale's, Macy's, and Neiman Marcus.
Additionally, food courts at Twelve Oaks, in the suburban Detroit area, and Woodland in Grand Rapids, Michigan
are scheduled to open in the fall of 2001. The Operating Partnership's share of the cost of these projects is
expected to be approximately $12.5 million.
The Operating Partnership and The Mills Corporation have formed an alliance to develop value super-regional
projects in major metropolitan markets. The ten-year agreement calls for the two companies to jointly develop
and own at least seven of these centers, each representing approximately $200 million of capital investment. A
number of locations across the nation are targeted for future initiatives.
The Operating Partnership anticipates that its share of costs for development projects scheduled to be
completed in 2002 will be as much as $46 million in 2002. Estimates of future capital spending include only
projects approved by the Company's Board of Directors and, consequently, estimates will change as new projects
are approved. Estimates regarding capital expenditures presented above 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) changes in the scope and number of
projects; 3) cost overruns; 4) timing of expenditures; 5) financing considerations; and 6) actual time to
complete projects.
Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company providing internet
and network infrastructure to shopping centers and retailers. As of June 30, 2001, the Company has a net
investment of approximately $4 million in the venture, representing $5.4 million of contributions less the
Company's share of losses through June 2001. The Company has also severally guaranteed its share of equipment
lease payments, a $3.8 million commitment.
The Company also owns a $7.4 million preferred interest in Fashionmall.com, an e-commerce company that
markets, promotes, advertises, and sells fashion apparel and related accessories and products over the internet.
Fashionmall.com continues to have sufficient cash on hand to cover the Company's preferred position should
Fashionmall.com ever liquidate. As Fashionmall.com has stated in its recently filed tender offer documents, the
company is exploring many options including "acquisitions, mergers, sales of assets, issuing special dividends or
finding other options to provide opportunities for liquidity to shareholders". Some of these options and their
timing could impact the Company's preference more favorably than others.
Also, the Company has an investment of $500 thousand in Constellation Real Technologies, LLC, with a
commitment for an additional $1.5 million. In total, the Company's current technology exposure is approximately
$17 million as of June 30, 2001, including contingencies and commitments.
Cash Tender Agreement
A. Alfred Taubman 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 (the Cash Tender Agreement). At A. Alfred Taubman's election, his family, and
Robert C. Larson and his family may participate in tenders. The Company will have the option to pay for these
interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's common
stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock.
The tendering partner will bear all market risk if the market price at closing is less than the purchase price
and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the
sole benefit of the Company.
Based on a market value at June 30, 2001 of $14.00 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $338 million. The
purchase of these interests at June 30, 2001 would have resulted in the Company owning an additional 29% interest
in the Operating Partnership.
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 "Liquidity and
Capital Resources - Sensitivity Analysis".
Item 4. Submission of Matters to a Vote of Security Holders
On May 31, 2001, the Company held its annual meeting of shareholders. The matters on which shareholders voted
were: the election of three directors to serve a three year term, and the ratification of the Board's selection
of Deloitte & Touche LLP as the Company's independent auditors for the year ended December 31, 2001. Allan J.
Bloostein, Jerome A. Chazen, and S. Parker Gilbert were re-elected at the meeting, and the six remaining
incumbent directors continued to hold office after the meeting. The shareholders ratified the selection of the
independent auditors. The results of the voting are shown below:
ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES WITHHELD
-------- --------- --------------
Allan J. Bloostein 70,585,229 62,239
Jerome A. Chazen 70,583,759 63,709
S. Parker Gilbert 70,589,739 57,729
RATIFICATION OF AUDITORS
70,569,744 Votes were cast for ratification;
53,303 Votes were cast against ratification; and
24,421 Votes abstained (including broker non-votes).
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 -- Debt Maturity Schedule
b) Current Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: August 13, 2001 By: /s/ Lisa A. Payne
-------------------------------------
Lisa A. Payne
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
------
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 -- Debt Maturity Schedule
