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: September 30, 2001
Commission File No. 1-11530
Taubman Centers, Inc.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2033632
-------------------------------- -----------------------------------------------
(State or other jurisdiction of (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
-------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(248) 258-6800
-------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No .
------- ------
As of November 10, 2001, there were outstanding 50,292,450 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 September 30, 2001 and December 31, 2000................................. 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
September 30, 2001 and 2000............................................................................ 3
Consolidated Statement of Operations and Comprehensive Income for the nine months ended
September 30, 2001 and 2000............................................................................ 4
Consolidated Statement of Cash Flows for the nine months ended September 30, 2001
and 2000 .............................................................................................. 5
Notes to Consolidated Financial Statements................................................................ 6
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
September 30 December 31
------------ -----------
2001 2000
---- ----
Assets:
Properties $ 2,137,983 $ 1,959,128
Accumulated depreciation and amortization (323,558) (285,406)
------------- -------------
$ 1,814,425 $ 1,673,722
Investment in Unconsolidated Joint Ventures (Note 5) 149,815 109,018
Cash and cash equivalents 20,474 18,842
Accounts and notes receivable, less allowance
for doubtful accounts of $5,023 and $3,796 in
2001 and 2000 31,945 32,155
Accounts and notes receivable from related parties (Note 11) 14,515 10,454
Deferred charges and other assets 50,494 63,372
------------- -------------
$ 2,081,668 $ 1,907,563
============= =============
Liabilities:
Notes payable $ 1,385,055 $ 1,173,973
Accounts payable and accrued liabilities 144,282 131,161
Dividends and distributions payable 18,971 12,784
------------- -------------
$ 1,548,308 $ 1,317,918
Commitments and Contingencies (Note 8)
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
September 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 September 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, 50,284,549 and 50,984,397 issued and
outstanding at September 30, 2001 and December 31,
2000 (Note 9) 503 510
Additional paid-in capital 668,693 676,544
Accumulated other comprehensive income (Note 2) (2,240)
Dividends in excess of net income (230,983) (184,796)
------------- -------------
$ 436,085 $ 492,370
------------- -------------
$ 2,081,668 $ 1,907,563
============= =============
See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Three Months Ended September 30
-------------------------------
2001 2000
---- ----
Income:
Minimum rents $ 43,580 $ 38,686
Percentage rents 523 634
Expense recoveries 25,151 22,434
Revenues from management, leasing and
development services 6,563 5,117
Other 6,368 7,918
------------- -------------
$ 82,185 $ 74,789
------------- -------------
Operating Expenses:
Recoverable expenses $ 22,324 $ 20,355
Other operating 8,507 6,639
Management, leasing and development services 4,794 4,633
General and administrative 4,906 4,595
Interest expense 17,200 14,741
Depreciation and amortization 16,947 14,800
------------- -------------
$ 74,678 $ 65,763
------------- -------------
Income before equity in income of Unconsolidated
Joint Ventures, gain on disposition of interest in center
and minority and preferred interests $ 7,507 $ 9,026
Equity in income of Unconsolidated Joint Ventures (Note 5) 4,788 5,228
------------- -------------
Income before gain on disposition of interest in center and
minority and preferred interests $ 12,295 $ 14,254
Gain on disposition of interest in center (Note 3) 85,339
------------- -------------
Income before minority and preferred interests $ 12,295 $ 99,593
Minority interest in consolidated joint ventures 644
Minority interest in TRG:
TRG income allocable to minority partners (3,229) (47,326)
Distributions less than (in excess of) earnings allocable to
minority partners (4,664) 39,798
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
------------- -------------
Net income $ 2,796 $ 89,815
Series A preferred dividends (4,150) (4,150)
------------- -------------
Net income (loss) allocable to common shareowners $ (1,354) $ 85,665
============= =============
Net income $ 2,796 $ 89,815
Other Comprehensive Income (Note 2):
Unrealized loss on interest rate instruments (3,366)
Reclassification adjustment for amounts recognized in net income 106
------------- -------------
Comprehensive income (loss) $ (464) $ 89,815
============= =============
Basic net income (loss) per common share (Note 10) $ (0.03) $ 1.63
============= =============
Diluted net income (loss) per common share (Note 10) $ (0.03) $ 1.62
============= =============
Cash dividends declared per common share $ .25 $ .245
============= =============
Weighted average number of common shares outstanding 50,987,512 52,545,001
============= =============
See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Nine Months Ended September 30
------------------------------
2001 2000
---- ----
Income:
Minimum rents $ 124,563 $ 111,108
Percentage rents 2,615 2,406
Expense recoveries 75,680 65,496
Revenues from management, leasing and
development services 19,020 17,683
Other 22,744 21,267
------------- -------------
$ 244,622 $ 217,960
------------- -------------
Operating Expenses:
Recoverable expenses $ 65,626 $ 58,139
Other operating 26,571 22,565
Management, leasing and development services 14,224 14,698
General and administrative 14,523 13,925
Interest expense 47,363 41,566
Depreciation and amortization 49,420 43,008
------------- -------------
$ 217,727 $ 193,901
------------- -------------
Income before equity in income of Unconsolidated
Joint Ventures, gain on disposition of interest in center,
extraordinary items, cumulative effect of change in
accounting principle and minority and preferred interests $ 26,895 $ 24,059
Equity in income before extraordinary items and cumulative
effect of change in accounting principle of
Unconsolidated Joint Ventures (Note 5) 14,859 21,551
------------- -------------
Income before gain on disposition of interest in center,
extraordinary items, cumulative effect of change in
accounting principle, and minority and preferred interests $ 41,754 $ 45,610
Gain on disposition of interest in center (Note 3) 85,339
------------- -------------
Income before extraordinary items, cumulative effect of change
in accounting principle, and minority and preferred interests 41,754 130,949
Extraordinary items (9,288)
Cumulative effect of change in accounting principle (Note 2) (8,404)
------------- -------------
Income before minority and preferred interests $ 33,350 $ 121,661
Minority interest in consolidated joint ventures 1,242
Minority interest in TRG:
TRG income allocable to minority partners (8,118) (52,350)
Distributions less than (in excess of) earnings allocable to
minority partners (15,667) 29,765
TRG Series C and D preferred distributions (Note 1) (6,750) (6,750)
------------- -------------
Net income $ 4,057 $ 92,326
Series A preferred dividends (12,450) (12,450)
------------- -------------
Net income (loss) allocable to common shareowners $ (8,393) $ 79,876
============= =============
Net income $ 4,057 $ 92,326
Other Comprehensive Income (Note 2):
Cumulative effect of change in accounting principle (779)
Unrealized loss on interest rate instruments (1,772)
Reclassification adjustment for amounts recognized in net income 311
------------- -------------
Comprehensive income $ 1,817 $ 92,326
============= =============
Basic net income per common share (Note 10):
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (0.07) $ 1.62
============= =============
Net income (loss) $ (0.17) $ 1.51
============= =============
Diluted net income per common share (Note 10):
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (0.08) $ 1.61
============= =============
Net income (loss) $ (0.17) $ 1.50
============= =============
Cash dividends declared per common share $ .75 $ .735
============= =============
Weighted average number of common shares outstanding 50,526,117 52,797,985
============= =============
See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended September 30
------------------------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Income before extraordinary items, cumulative effect of
change in accounting principle, and minority and
preferred interests $ 41,754 $ 130,949
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 49,420 43,008
Provision for losses on accounts receivable 2,386 2,708
Other 2,674 2,727
Gains on sales of land (3,604) (7,692)
Gain on disposition of interest in center (85,339)
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets (2,551) (187)
Accounts payable and other liabilities (6,560) 5,079
------------- -------------
Net Cash Provided By Operating Activities $ 83,519 $ 91,253
------------- -------------
Cash Flows from Investing Activities:
Additions to properties $ (171,534) $ (126,721)
Proceeds from sales of land 7,072 2,575
Investment in equity securities (3,265) (1,944)
Acquisition of additional interest in center (23,644)
Contributions to Unconsolidated Joint Ventures (52,695) (6,448)
Distributions from Unconsolidated Joint Ventures
in excess of income before extraordinary items
and cumulative effect of change in accounting
principle 14,064 5,831
------------- -------------
Net Cash Used in Investing Activities $ (206,358) $ (150,351)
------------- -------------
Cash Flows from Financing Activities:
Debt proceeds $ 231,547 $ 167,805
Debt payments (20,465) (93)
Debt issuance costs (3,284) (9,245)
Repurchases of common stock (21,278) (15,279)
Distributions to minority and preferred interests (28,285) (29,335)
Issuance of stock pursuant to Continuing Offer 12,543 117
Cash dividends to common shareowners (38,007) (38,869)
Cash dividends to Series A preferred shareowners (8,300) (12,450)
------------- -------------
Net Cash Provided By Financing Activities $ 124,471 $ 62,651
------------- -------------
Net Increase in Cash and Cash Equivalents $ 1,632 $ 3,553
Cash and Cash Equivalents at Beginning of Period 18,842 20,557
------------- -------------
Cash and Cash Equivalents at End of Period $ 20,474 $ 24,110
============= =============
See notes to consolidated financial statements.
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2001 included 19 urban and suburban shopping centers in nine states.
An additional center opened in Palm Beach County, Florida in October 2001 and an additional center is 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 September 30, 2001, the Company owned 99% of the non-voting stock of Taub-Co (which holds a 98% interest in
The Taubman Company Limited Partnership (the Manager)) and its direct 2% limited partnership interest in the
Manager. Through these ownership interests, the Company has the perpetual rights to receive over 99% of the
economic benefits and cash flows generated by the Manager's operations. The Manager can not perform any services
to entities in which the Company is not a significant investor without the approval of the Company. The Company
has provided all of the operating capital to the Manager. The individuals who indirectly own the voting common
stock of Taub-Co have contributed nominal amounts of equity to Taub-Co and the Manager for the voting common
stock. These individuals' interests are aligned with the interests of the Company's management. The members of
Taub-Co's Board of Directors are also members of the Board of Directors of the Company. All of these factors
result in the Company having a controlling financial interest in Taub-Co and the Manager and therefore, the
operations of the Manager have been consolidated in the Company's financial statements.
At September 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 September 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, although distributions were less than net
income during 2000 due to a gain on the disposition of an interest in a center (Note 3).
The Company's ownership in the Operating Partnership at September 30, 2001 consisted of a 61.4% 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 September 30, 2001 and 2000 was 61.8% and
62.5%, respectively. During the nine months ended September 30, 2001, the Company's ownership in the Operating
Partnership decreased to 61.4% due to the ongoing share buyback and unit redemption program (Note 9), partially
offset by additional interests acquired in connection with the Continuing Offer (Note 8). At September 30, 2001,
the Operating Partnership had 82,119,615 units of partnership interest outstanding, of which the Company owned
50,284,549. 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.
In addition to the transition adjustments, the Company recognized as a reduction of earnings its share of
unrealized losses of $1.0 million and $3.5 million during the three and nine months ended September 30, 2001,
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 $0.9 million and $3.1 million represent the changes in value
of the Dolphin swap agreement and the remainder represents the changes in time value of cap instruments.
The Company recognized a reduction in OCI of approximately $3.3 million and $1.5 million for the three and
nine months ended September 30, 2001, respectively. Included in these amounts were $2.7 million and $1.8 million
in reductions related to a treasury lock hedging the Regency Square financing that occurred in October 2001 (Note
12), partially offset by $0.1 million and $0.3 million of OCI reclassified into earnings. Also included in the
net reduction of OCI for the three months ended September 30, 2001, was $0.7 million related to a treasury lock
entered into in March 2001 that was derecognized as a hedge and closed out in September 2001. The Company
recognized a slight net gain on the settlement.
Of the net derivative losses of $2.2 million included in Accumulated OCI as of September 30, 2001, the Company
expects that approximately $0.6 million will be reclassified into earnings during the next twelve months as the
related interest expense is accrued. Except as noted above, no hedges were derecognized or discontinued and no
other hedge ineffectiveness occurred during the three or nine months ended September 30, 2001.
Note 3 - Twelve Oaks and Lakeside Transaction
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
percent owner of Twelve Oaks Mall and its joint venture partner became the 100 percent owner of Lakeside, 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 acquisition of the additional interest in Twelve Oaks was accounted for
as a purchase. The Operating Partnership continues to manage Twelve Oaks, while the joint venture partner assumed
management responsibility for Lakeside. A gain of $85.3 million on the transaction was recognized by the
Company, representing 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.
Note 4 - 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 nine months ended
September 30, 2001, utilization of a deferred tax asset reduced the Company's federal income tax expense to $0.1
million. As of September 30, 2001, the Company had a net deferred tax asset of $5.2 million, after a valuation
allowance of $4.7 million.
Note 5 - 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 September 30, 2001
---------------------------- --------------- -------------------
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
Taubman-Cherry Creek Cherry Creek 50
Limited Partnership
West Farms Associates Westfarms 79
Woodland Woodland 50
In September 2001, International Plaza, a 1.3 million square foot center, opened in Tampa, Florida. As of
September 30, 2001, the Operating Partnership has a preferred investment in International Plaza of $19.2 million,
on which an annual preferential return of 8.25% will accrue. In addition to the preferred return on its
investment, the Operating Partnership will receive a return of its preferred investment before any available cash
will be utilized for distributions to non-preferred partners.
In March 2001, Dolphin Mall, a 1.4 million square foot value regional center, opened in Miami, Florida. As of
September 30, 2001, the Operating Partnership has a preferred investment in Dolphin Mall of $25.9 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 these results through the date of the transaction (Note 3). Twelve
Oaks is now 100% owned by the Operating Partnership and is a consolidated entity.
September 30 December 31
------------ -----------
2001 2000
---- ----
Assets:
Properties $ 1,361,766 $ 1,073,818
Accumulated depreciation and amortization (233,508) (189,644)
------------- -------------
$ 1,128,258 $ 884,174
Other assets 74,877 60,807
------------- -------------
$ 1,203,135 $ 944,981
============= =============
Liabilities and partnership equity:
Debt $ 1,116,499 $ 950,847
Other liabilities 116,245 49,069
TRG's partnership equity (accumulated deficiency in assets) 1,686 (36,570)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (31,295) (18,365)
------------- -------------
$ 1,203,135 $ 944,981
============= =============
TRG's partnership equity (accumulated deficiency in
assets) (above) $ 1,686 $ (36,570)
TRG basis adjustments, including elimination of intercompany profit 22,084 17,266
TCO's additional basis 126,045 128,322
------------- -------------
Investment in Unconsolidated Joint Ventures $ 149,815 $ 109,018
============= =============
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 57,455 $ 52,267 $ 165,885 $ 176,001
----------- ----------- ----------- -----------
Recoverable and other operating expenses $ 20,558 $ 18,626 $ 58,964 $ 62,516
Interest expense 18,740 15,992 54,900 49,911
Depreciation and amortization 10,662 6,941 28,389 23,282
----------- ----------- ----------- -----------
Total operating costs $ 49,960 $ 41,559 $ 142,253 $ 135,709
----------- ----------- ----------- -----------
Income before extraordinary items $ 7,495 $ 10,708 $ 23,632 $ 40,292
Extraordinary items (18,576)
Cumulative effect of change in accounting
principle (3,304)
----------- ----------- ----------- -----------
Net income $ 7,495 $ 10,708 $ 20,328 $ 21,716
=========== =========== =========== ===========
Net income allocable to TRG $ 4,045 $ 5,507 $ 10,935 $ 11,389
Cumulative effect of change in accounting
principle allocable to TRG 1,612
Extraordinary item allocable to TRG 9,288
Realized intercompany profit 1,502 480 4,589 3,921
Depreciation of TCO's additional basis (759) (759) (2,277) (3,047)
----------- ----------- ----------- -----------
Equity in income before extraordinary items
and cumulative effect of change in
accounting principle of Unconsolidated
Joint Ventures $ 4,788 $ 5,228 $ 14,859 $ 21,551
=========== =========== =========== ===========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 20,844 $ 18,182 $ 60,549 $ 63,290
Interest expense (9,713) (8,564) (28,772) (26,728)
Depreciation and amortization (6,343) (4,390) (16,918) (15,011)
----------- ----------- ----------- -----------
Income before extraordinary items
and cumulative effect of change in
accounting principle $ 4,788 $ 5,228 $ 14,859 $ 21,551
=========== =========== =========== ===========
Note 6 - Beneficial Interest in Debt and Interest Expense
In September 2001, the maturity date of the Company's $40 million line of credit was extended from November
2001 to June 2002.
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 8).
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 minority interests in Great Lakes Crossing, MacArthur Center, and The Mall at Wellington
Green.
At 100% At Beneficial Interest
------------------------------- ----------------------------------------------
Unconsolidated Unconsolidated
Consolidated Joint Consolidated Joint
Subsidiaries Ventures Subsidiaries Ventures Total
------------- ----------------- -------------- ----------------- -------------
(in thousands of dollars)
Debt as of:
September 30, 2001 1,385,055 1,116,499 1,308,506 548,327 1,856,833
December 31, 2000 1,173,973 950,847 1,105,008 483,683 1,588,691
Capital Lease Obligations:
September 30, 2001 634 200 585 132 717
December 31, 2000 1,581 630 1,522 416 1,938
Capitalized Interest
Nine months ended September 30, 2001 22,234 13,883 21,975 5,634 27,609
Nine months ended September 30, 2000 16,962 8,451 16,962 3,757 20,719
Interest expense:
Nine months ended September 30, 2001 47,363 54,900 43,594 28,772 72,366
Nine months ended September 30, 2000 41,566 49,911 37,795 26,728 64,523
Note 7 - 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 8). There were options for 1,128,852 units
exercised during the nine months ended September 30, 2001 at an average exercise price of $11.11 per unit. During
the nine months ended September 30, 2000, options for 11,854 units were exercised at a weighted average price of
$9.93 per unit. There were no options granted or cancelled during the nine months ended September 30, 2001.
There were options for 250,000 units granted at $11.25 per unit and options for 65,180 units were cancelled
during the nine months ended September 30, 2000 at a weighted average exercise price of $12.45 per unit. As of
September 30, 2001, there were vested options for 5.8 million units with a weighted average exercise price of
$11.32 per unit and outstanding options (including unvested options) for a total of 6.5 million units with a
weighted average exercise price of $11.39 per unit. Options for 3.6 million units granted at $11.14 per unit will
expire in November 2002 if not exercised.
Note 8 - 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 September 30, 2001 of $12.50 per common share, the aggregate value of interests in
the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $308 million.
The purchase of these interests at September 30, 2001 would have resulted in the Company owning an additional 30%
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 September 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 9/30/01 as of 9/30/01 as of 9/30/01 by TRG by TRG
- ------ ------------- ------------- ------------- ----------- ------------
(in millions of dollars)
Dolphin Mall 164.6 82.3 82.3 50% 100%
Great Lakes Crossing 151.6 128.9 151.6 100% 100%
International Plaza 153.0 40.5 153.0 100%(1) 100%(1)
The Mall at Millenia 37.4 18.7 18.7 50% 50%
The Mall at Wellington Green 106.3 95.7 106.3 100% 100%
The Shops at Willow Bend 179.6 179.6 179.6 100% 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 has guaranteed capital lease obligations of approximately $4 million
relating to its investment in MerchantWired, and has committed approximately $2 million in funding for
Constellation Real Technologies, LLC.
Note 9 - 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 September 30, 2001, the Company had purchased and the Operating Partnership had redeemed
approximately 4.1 million shares and units for approximately $47.1 million under this program.
Note 10 - 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 September 30, 2001 and 2000, options for 0.2 million and 6.9 million units of partnership
interest with average exercise price of $13.89 and $11.51 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 nine months ended September 30, 2001 and 2000, options for 0.8 million and 3.6 million units
of partnership interest with average exercise price of $13.30 and $12.14 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 Nine Months
Ended September 30 Ended September 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 $ (1,354) $ 85,665 $ (8,393) $ 79,876
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 $ (1,354) $ 85,665 $ (3,469) $ 85,699
Effect of dilutive options (78) (349) (325) (451)
----------- ----------- ---------- ------------
Diluted income (loss) before extraordinary items and
cumulative effect of change in accounting principle $ (1,432) $ 85,316 $ (3,794) $ 85,248
=========== =========== ========== ============
Shares (Denominator) - basic and diluted 50,987,512 52,545,001 50,526,117 52,797,985
=========== =========== ========== ============
Income (loss) before extraordinary items and
cumulative effect of change in accounting principle
per common share - basic $ (0.03) $ 1.63 $ (0.07) $ 1.62
=========== =========== ========== ============
per common share - diluted $ (0.03) $ 1.62 $ (0.08) $ 1.61
=========== =========== ========== ============
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 11 - Cash Flow Disclosures and Noncash Investing and Financing Activities
Interest on mortgage notes and other loans paid during the nine months ended September 30, 2001 and 2000, net
of amounts capitalized of $22.2 million and $17.0 million, was $43.0 million and $36.2 million, respectively. The
following non-cash investing and financing activities occurred during the nine months ended September 30, 2001
and 2000:
Nine Months ended September 30
------------------------------
2001 2000
---- ----
Non-cash additions to properties $ 32,827 $ 21,461
Non-cash contributions to Unconsolidated Joint Ventures 3,778 2,762
Step-up in Company's basis in Twelve Oaks (Note 3) 121,654
Land contracts 800 7,341
Debt assumed with Twelve Oaks transaction (Note 3) 50,015
Partnership units released 878
Unrealized gain on interest rate instruments included in
Other Comprehensive Income (Note 2) 2,240
Adjustment of interest rate instruments -
Cumulative effect of change in accounting principle (Note 2) 8,404
Non-cash additions to properties primarily represent accrued construction and tenant allowance costs of new
centers and development projects.
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.
Note 12 - Subsequent Events
In October 2001, the Operating Partnership completed an $82.5 million financing secured by Regency Square.
The new financing bears interest at a coupon rate of 6.75% and matures in November 2011. Including the effect of
a treasury lock and other financing costs, the all-in rate on this mortgage is 7.19%.
In November 2001, the Operating Partnership closed on a $275 million line of credit to replace its previous
$200 million line. The new line of credit bears interest at a rate of LIBOR plus 0.90% and is secured by
Fairlane Town Center and Twelve Oaks Mall. The facility has a three year term with a one year extension option.
The net proceeds of the October and November financings were used to pay off $150 million outstanding under
loans previously secured by Twelve Oaks Mall and the balance under the expiring revolving credit facility.
In October 2001, the Operating Partnership committed to a restructuring of its development operations. A
restructuring charge of approximately $2.0 million will be recorded during the three months ended December 31,
2001, primarily representing the cost of certain involuntary terminations of personnel. Pursuant to the
restructuring plan, 17 positions were eliminated within the development department.
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 three quarters of 2001.
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
2000 2000 2000 2000 2000 2001 2001 2001
----------- ----------- ----------- ------------ -------------- ------------ ------------ ------------
(in thousands)
Mall tenant sales $589,996 $628,999 $602,417 $895,783 $2,717,195 $570,223 $605,945 $617,805
Revenues 132,331 130,923 127,034 142,318 532,606 132,903 137,964 139,640
Occupancy:
Average 88.8% 88.1% 88.8% 90.3% 89.1% 87.0% (1) 85.5%(2) 84.0% (3)
Ending 88.5% 88.1% 89.2% 90.5% 90.5% 85.1% (1) 85.6%(2) 83.0% (3)
Leased space 91.4% 90.5% 91.7% 93.8% 93.8% 90.8% (1) 90.0%(2) 88.0% (3)
(1) Excluding centers that opened in 2001, average occupancy, ending occupancy, and leased space would have
been 88.1%, 88.4%, and 92.4%, respectively.
(2) Excluding centers that opened in 2001, average occupancy, ending occupancy, and leased space would have
been 87.9%, 87.7%, and 91.8%, respectively.
(3) Excluding centers that opened in 2001, average occupancy, ending occupancy, and leased space would have
been 87.6%, 87.7%, and 91.5%, 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
three quarters of 2001:
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
2000 2000 2000 2000 2000 2001 2001 2001
--------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Minimum rents 11.3% 10.6% 10.6% 7.2% 9.7% 11.2% 10.5% 11.2%
Percentage rents 0.3 0.1 0.1 0.6 0.3 0.3 0.1 0.1
Expense recoveries 4.8 4.7 4.7 3.7 4.4 5.0 5.1 4.8
Mall tenant occupancy costs 16.4% 15.4% 15.4% 11.5% 14.4% 16.5% 15.7% 16.1%
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 announced store closings or filed for
bankruptcy. In addition to overall economic pressures, the events of September 11 had a negative impact on
September sales, although centers' traffic counts have recently returned to pre-September 11 levels. During the
remainder of 2001, largely as a result of the current economic conditions, the Company expects that the year over
year comparisons of average occupancy of its portfolio may continue to decline, tenant bankruptcies may exceed
historical levels, and tenant sales may continue to moderate or decrease. 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.
For the nine months ended September 30, 2001, for the first time in the Company's history as a public company,
sales per square foot decreased in comparison to the corresponding period in the prior year, reflecting the
current difficult retail environment as well as the direct impact of the events of September 11. Sales per square
foot for the three and nine months ended September 30, 2001 decreased by 4.0% and 1.5%, respectively, in relation
to the comparable periods of 2000. Through August 2001, sales per square foot had decreased by 0.3% in
comparison to the same period in 2000, with sales per square foot for September 2001 decreasing 9.8% from
September 2000. 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 3.9% through September 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 87.6% for the third quarter of 2001, a decrease of 1.4%
from 89.0% for the third quarter of 2000, and 87.9% for the nine months ended September 30, 2001, a decrease of
1.0% from 88.9% for the comparable period of 2000. The performance of two centers (Beverly Center and Great Lakes
Crossing) accounted for the majority of the decline in occupancy. The Company is in the process of remerchandising
Beverly Center resulting in a higher number of frictional vacancies at the center. In addition, a number of
unanticipated early lease terminations caused a decline in occupancy at Great Lakes Crossing.
The negative sales trend also directly impacts the amount of percentage rents certain tenants and anchors
pay. However, the effects of declines in sales experienced during 2001 on the Company's operations are
moderated by the relatively minor share of total rents (approximately three percent) percentage rents represent.
The Company also expects the tragic events of September 11 will have an impact on future insurance coverage.
The Company presently has coverage for terrorist acts in its policies, which expire in April 2002. The Company
expects that the insurance industry will not be prepared to offer this coverage at the Company's renewal.
Current expectations are that the government will likely offer some type of coverage for terrorism.
Given the state of the insurance industry prior to September 11, and the impact of September 11, the Company
believes its premiums could increase by as much as 50 to 75% for property coverage and over 25% for liability
coverage. These increases would impact the Company's common area maintenance rates paid by the
Company's tenants by about 30 cents per square foot. Total occupancy costs paid by tenants signing leases in the
Company's traditional centers are on average about $70 per square foot.
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 $40.92 for the three months ended September 30, 2001, compared to $39.56 for the
three months ended September 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
Operating Partnership will be entitled to a preferred return on approximately $26 million of equity contributions
made to this center through September 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.
International Plaza, a 1.3 million square foot regional center, opened September 14, 2001 in Tampa, Florida.
International Plaza is 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 regional center, opened October 5, 2001 in Palm Beach
County, Florida and is initially 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 is owned by a joint venture in which the Operating
Partnership has a 90% controlling interest. 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 Company's share of costs for the four centers is projected to be approximately $700 million. Approximately
$45 million of this amount represents costs related to the opening of Nordstrom's and additional tenant space at
Wellington Green in 2003 and the opening of Saks Fifth Avenue at Willow Bend in 2004. Based on leases currently
signed and out for signature, the Company expects returns on these four new centers to average 9% in 2002.
Approximately 100 additional stores remain to be leased at these centers in order to achieve anticipated
stabilized returns of 11%. 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; 3) timing of tenant openings, land
sales, and project expenditures; and 4) early lease terminations and bankruptcies.
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 September 30, 2001 to the Three Months Ended September
30, 2000 and comparison of Nine Months Ended September 30, 2001 to the Nine Months Ended September 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 Mall and the joint venture partner became the 100% owner of Lakeside, 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, a $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.
Subsequent Events
In October 2001, the Operating Partnership completed an $82.5 million financing secured by Regency Square.
The new financing bears interest at a coupon rate of 6.75% and matures in November 2011. Including the effect of
a treasury lock and other financing costs, the all-in rate on this mortgage is 7.19%.
In October 2001, the Operating Partnership committed to a restructuring of its development operations. A
restructuring charge of approximately $2.0 million will be recorded during the three months ended December 31,
2001, primarily representing the cost of certain involuntary terminations of personnel. Pursuant to the
restructuring plan, 17 positions were eliminated within the development department.
In November 2001, the Operating Partnership closed on a new $275 million of credit (Liquidity and Capital
Resources). The net proceeds of the October and November financings were used to pay off $150 million outstanding
under loans previously secured by Twelve Oaks Mall and the balance under the expiring revolving credit facility.
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.
In addition to the transition adjustments, the Company recognized as a reduction of earnings its share of
unrealized losses of $1.0 million and $3.5 million during the three and nine months ended September 30, 2001,
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 $0.9 million and $3.1 million represent the changes in value
of the Dolphin swap agreement and the remainder represents the changes in time value of cap instruments.
The Company recognized a reduction in OCI of approximately $3.3 million and $1.5 million for the three and
nine months ended September 30, 2001, respectively. Included in these amounts were $2.7 million and $1.8 million
in reductions related to a treasury lock hedging the Regency Square financing that occurred in October 2001,
partially offset by $0.1 million and $0.3 million of OCI reclassified into earnings. Also included in the net
reduction of OCI for the three months ended September 30, 2001, was $0.7 million related to a treasury lock
entered into in March 2001 that was derecognized as a hedge and closed out in September 2001. The Company
recognized a slight net gain on the settlement.
Of the net derivative losses of $2.2 million included in Accumulated OCI as of September 30, 2001, the Company
expects that approximately $0.6 million will be reclassified into earnings during the next twelve months as the
related interest expense is accrued. Except as noted above, no hedges were derecognized or discontinued and no
other hedge ineffectiveness occurred during the three or nine months ended September 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 September 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 two 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, although distributions were less than net income during 2000 due to the gain on the disposition of
the Company's interest in Lakeside. 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 62% 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 through the date of the transaction.
Comparison of the Three Months Ended September 30, 2001 to the Three Months Ended September 30, 2000
The following table sets forth operating results for the three months ended September 30, 2001 and September
30, 2000, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended September 30, 2001 Three months ended September 30, 2000
-------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 43.6 36.5 80.1 38.7 33.7 72.4
Percentage rents 0.5 0.3 0.8 0.6 0.3 0.9
Expense recoveries 25.2 18.2 43.4 22.4 17.0 39.5
Management, leasing and development 6.6 6.6 5.1 5.1
Other 6.4 2.5 8.8 7.9 1.2 9.1
---- ---- ----- ---- ---- -----
Total revenues 82.2 57.5 139.6 74.8 52.3 127.0
OPERATING COSTS:
Recoverable expenses 22.3 16.3 38.6 20.3 14.9 35.2
Other operating 8.5 2.9 11.5 6.6 2.9 9.5
Management, leasing and development 4.8 4.8 4.6 4.6
General and administrative 4.9 4.9 4.6 4.6
Interest expense 17.2 18.7 35.9 14.7 16.0 30.8
Depreciation and amortization (2) 16.9 10.6 27.6 14.8 6.8 21.6
---- ---- ----- ---- ---- -----
Total operating costs 74.7 48.6 123.3 65.7 40.7 106.4
---- ---- ----- ---- ---- -----
7.5 8.8 16.3 9.0 11.6 20.6
==== ==== ==== =====
Equity in income of
Unconsolidated Joint Ventures (2) 4.8 5.2
---- ----
Income before gain on disposition and
minority and preferred interests 12.3 14.3
Gain on disposition of interest in 85.3
center
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated
joint ventures 0.6
Minority share of income of TRG (3.2) (47.3)
Distributions less than (in excess of)
minority share of income (4.7) 39.8
---- ----
Net income 2.8 89.8
Series A preferred dividends (4.2) (4.2)
---- ----
Net income (loss) allocable to common
shareowners (1.4) 85.7
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 41.7 38.2 79.8 38.6 34.5 73.1
EBITDA - outside partners' share (1.5) (17.3) (18.9) (1.5) (16.3) (17.8)
---- ---- ----- ---- ---- -----
EBITDA contribution 40.1 20.8 61.0 37.0 18.2 55.2
Beneficial Interest Expense (16.0) (9.7) (25.7) (13.4) (8.6) (22.0)
Non-real estate depreciation (0.6) (0.6) (0.8) (0.8)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ----- ---- ---- -----
Funds from Operations contribution 17.1 11.1 28.2 16.4 9.6 26.0
==== ==== ==== ==== ==== =====
(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) Amortization of the Company's additional basis in the Operating Partnership was $1.9 million in both
2001 and 2000. Of this amount, $0.8 million was included in equity in income of Unconsolidated Joint Ventures, while $1.1
million was included in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization. Funds from Operations is
defined and discussed in Liquidity and Capital Resources.
(4) 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 September 30, 2001 were $82.2 million, a $7.4 million or 9.9%
increase over the comparable period in 2000. Minimum rents increased $4.9 million of which $4.7 million was due
to the opening of Willow Bend and 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 Willow Bend and Twelve Oaks. Management, leasing, and development revenue
increased primarily due to the timing of leasing transactions. Other revenue decreased primarily due to decreases
in gains on sales of peripheral land and interest income, primarily offset by increases in lease cancellation
revenue.
Total operating costs were $74.7 million, a $9.0 million or 13.7% increase over the comparable period in 2000.
Recoverable expenses increased primarily due to Willow Bend and Twelve Oaks. Other operating expense increased
due to Willow Bend, increased marketing expense, and losses relating to the investment in MerchantWired.
Interest expense increased primarily due to a decrease in capitalized interest upon opening of Willow Bend and
increased debt incurred for working capital needs, partially offset by decreases due to changes in rates on
floating rate debt. Depreciation expense increased due to Willow Bend and Twelve Oaks.
Unconsolidated Joint Ventures
Total revenues for the three months ended September 30, 2001 were $57.5 million, a $5.2 million or 9.9%
increase from the comparable period of 2000. Rents and recoveries increased primarily due to Dolphin Mall and
International Plaza, partially offset by Lakeside and Twelve Oaks. Other revenue increased primarily due to an
increase in lease cancellation revenue.
Total operating costs increased by $7.9 million to $48.6 million for the three months ended September 30,
2001. Recoverable expenses increased primarily due to Dolphin and International Plaza, partially offset by
Lakeside and Twelve Oaks. Interest expense increased due to a decrease in capitalized interest upon opening of
Dolphin Mall and changes in the value of Dolphin Mall's swap agreement, partially offset by decreases due to
Lakeside and Twelve Oaks. Depreciation expense increased primarily due to the opening of Dolphin Mall and
International Plaza, partially offset by Lakeside and Twelve Oaks.
As a result of the foregoing, income of the Unconsolidated Joint Ventures decreased by $2.8 million to $8.8
million. The Company's equity in income of the Unconsolidated Joint Ventures was $4.8 million, a $0.4 million
decrease from the comparable period in 2000.
Net Income
As a result of the foregoing, the Company's income before gain on disposition and minority and preferred
interests decreased $2.0 million or 14.0% to $12.3 million for the three months ended September 30, 2001. During
the third quarter of 2000, the Company recognized an $85.3 million gain on the disposition of its interest in
Lakeside. After allocation of income to minority and preferred interests, the net income (loss) allocable to
common shareowners for 2001 was $(1.4) million compared to $85.7 million in 2000.
Comparison of the Nine Months Ended September 30, 2001 to the Nine Months Ended September 30, 2000
The following table sets forth operating results for the nine months ended September 30, 2001 and September
30, 2000, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Nine months ended September 30, 2001 Nine months ended September 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 124.6 103.3 227.9 108.5 112.6 221.1
Percentage rents 2.6 1.1 3.7 2.4 1.3 3.8
Expense recoveries 75.7 51.0 126.7 64.5 58.1 122.6
Management, leasing and development 19.0 19.0 17.7 17.7
Other 22.7 10.5 33.2 21.2 4.0 25.2
---- ---- ----- ---- ---- -----
Total revenues 244.6 165.9 410.5 214.3 176.0 390.3
OPERATING COSTS:
Recoverable expenses 65.6 46.2 111.8 56.6 48.6 105.2
Other operating 26.6 9.1 35.7 19.9 10.3 30.1
Management, leasing and development 14.2 14.2 14.7 14.7
General and administrative 14.5 14.5 13.9 13.9
Interest expense 47.4 54.9 102.3 41.6 50.1 91.7
Depreciation and amortization (3) 49.4 27.9 77.3 42.0 22.6 64.6
---- ---- ----- ---- ---- -----
Total operating costs 217.7 138.1 355.8 188.6 131.6 320.2
Net results of Memorial City (2) (1.6) (1.6)
---- ---- ----- ---- ---- -----
26.9 27.8 54.7 24.1 44.4 68.4
==== ===== ==== =====
Equity in income of
Unconsolidated Joint Ventures (3) (4) 14.9 21.6
---- ----
Income before gain on disposition,
extraordinary items, cumulative
effect of change in accounting principle,
and minority and preferred interests 41.8 45.6
Gain on disposition of interest in 85.3
center
Extraordinary items (9.3)
Cumulative effect of change in
accounting principle (8.4)
TRG preferred distributions (6.8) (6.8)
Minority share of consolidated
joint ventures 1.2
Minority share of income of TRG (8.1) (52.4)
Distributions less than (in excess of)
minority share of income (15.7) 29.8
---- ----
Net income 4.1 92.3
Series A preferred dividends (12.5) (12.5)
---- ----
Net income (loss) allocable to common
shareowners (8.4) 79.9
==== ====
SUPPLEMENTAL INFORMATION (5):
EBITDA - 100% 123.7 110.6 234.3 108.6 117.1 225.7
EBITDA - outside partners' share (5.5) (50.0) (55.5) (5.7) (53.8) (59.5)
---- ---- ----- ---- ---- -----
EBITDA contribution 118.2 60.5 178.7 102.9 63.3 166.2
Beneficial Interest Expense (43.6) (28.8) (72.4) (37.8) (26.7) (64.5)
Non-real estate depreciation (2.1) (2.1) (2.3) (2.3)
Preferred dividends and distributions (19.2) (19.2) (19.2) (19.2)
---- ---- ----- ---- ---- -----
Funds from Operations contribution 53.3 31.8 85.1 43.6 36.6 80.2
==== ==== ===== ==== ==== =====
(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 $5.7 million and $6.1
million in 2001 and 2000, respectively. Of these amounts, $2.3 million and $3.0 million were included in equity in income
of Unconsolidated Joint Ventures in 2001 and 2000, respectively, while $3.4 million and $3.0 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 nine months ended September 30, 2001 were $244.6 million, a $30.3 million or 14.1%
increase over the comparable period in 2000. Minimum rents increased $16.1 million of which $15.3 million was
due to the opening of Willow Bend and 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 Willow Bend and Twelve Oaks. Management, leasing, and development revenue
increased primarily due to the timing of leasing transactions. 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 $217.7 million, a $29.1 million or 15.4% increase over the comparable period in
2000. Recoverable expenses increased primarily due to Willow Bend and Twelve Oaks. Other operating expense
increased due to Willow Bend, 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 a decrease in capitalized interest upon opening of Willow Bend, offset by decreases due to
changes in rates on floating rate debt. Depreciation expense increased primarily due to Willow Bend and Twelve
Oaks.
Unconsolidated Joint Ventures
Total revenues for the nine months ended September 30, 2001 were $165.9 million, a $10.1 million or 5.7%
decrease from the comparable period of 2000. Rents and recoveries decreased primarily due to Lakeside and Twelve
Oaks, partially offset by Dolphin Mall and International Plaza. Other revenue increased primarily due to an
increase in lease cancellation revenue.
Total operating costs increased by $6.5 million to $138.1 million for the nine months ended September 30,
2001. Recoverable expenses decreased primarily due to Lakeside and Twelve Oaks, partially offset by Dolphin Mall
and International Plaza. Other operating expense decreased primarily due to Twelve Oaks and Lakeside, partially
offset by Dolphin Mall and International Plaza. Interest expense increased due to a decrease in capitalized
interest upon opening of Dolphin Mall and changes in the value of Dolphin Mall's swap agreement, partially offset
by decreases due to Lakeside and Twelve Oaks. Depreciation expense increased primarily due to the opening of
International Plaza and 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 $16.6 million to $27.8 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 $14.9 million, a $6.7 million decrease from the comparable period in 2000.
Net Income
As a result of the foregoing, the Company's income before gain on disposition, extraordinary items, cumulative
effect of change in accounting principle, and minority and preferred interests decreased $3.8 million to $41.8
million for the nine months ended September 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, the
Company recognized an $85.3 million gain on the disposition of its interest in Lakeside and an extraordinary
charge of $9.3 million related to the refinancing of the debt on Stamford Town Center. After allocation of income
to minority and preferred interests, the net income (loss) allocable to common shareowners for 2001 was $(8.4)
million compared to $79.9 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 September 30, 2001, the Company had a consolidated cash balance of $20.5 million. Additionally, the
Company had a secured $200 million line of credit. This line had $108.0 million of borrowings as of September
30, 2001 and in November 2001 was replaced with a $275 million line of credit expiring in November 2004, bearing
interest at LIBOR plus 0.90%, and secured by Fairlane Town Center and Twelve Oaks Mall. The Company also has
available a second secured bank line of credit of up to $40 million. The line had $26.6 million of borrowings as
of September 30, 2001 and expires in June 2002.
Summary of Investing Activities
Net cash used in investing activities was $206.4 million in 2001 compared to $150.4 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). Net proceeds from sales of
peripheral land were $7.1 million, an increase of $4.5 million from 2000. Although 2001 gains on land sales were
less than the comparable period in 2000, net proceeds were higher in 2001 because certain 2000 sales involved
land contracts. Contributions to Unconsolidated Joint Ventures were $52.7 million in 2001 and $6.4 million in
2000, primarily representing funding for construction activities at Dolphin Mall and International Plaza. An
additional $3.3 million was invested in technology-related ventures in 2001. During 2000, net acquisition costs
of $23.6 million were incurred in connection with the Lakeside and Twelve Oaks transaction. Distributions from
Unconsolidated Joint Ventures increased from 2000.
Summary of Financing Activities
Financing activities contributed cash of $124.5 million, an increase of $61.8 million from the $62.7 million
in 2000. Debt proceeds, net of repayments and issuance costs, provided $207.8 million in 2001, an increase of
$49.3 million from 2000. Stock repurchases of $21.3 million were made in connection with the Company's stock
repurchase program in 2001, an increase of $6.0 million from 2000. Issuance of stock pursuant to the Continuing
Offer contributed $12.5 million in 2001. Due to the timing of the 2001 quarter end, the Company's third quarter
2001 preferred dividends and distributions were not paid until October 2001.
Beneficial Interest in Debt
At September 30, 2001, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $1,856.8 million with an average interest rate of 6.37%,
excluding 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 0.43% to TRG's effective interest rate in the third 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 $301.1 million as of September 30, 2001. Beneficial interest in capitalized interest
was $7.4 million and $27.6 million for the three and nine months ended September 30, 2001, respectively.
Beneficial Interest in Debt
--------------------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(in millions Rate at Cap of Rate at
of dollars) 9/30/01 Rate Resets 9/30/01
----------- -------- ------- --------- -------
Total beneficial interest in fixed rate debt $943.6 7.57% (1)
Floating rate debt hedged via interest rate caps:
Through October 2001 50.0 3.94 8.55% Monthly 2.63%
Through March 2002 100.0 4.77(1) 7.25 Monthly 2.63
Through March 2002 144.5 5.23(1) 7.25 Monthly 2.63
Through July 2002 43.4 5.16 6.50 Monthly 2.63
Through August 2002 38.0 4.29 8.20 Monthly 2.63
Through September 2002 100.0(2) 5.44(1) 7.00 Monthly 2.63
Through October 2002 26.5 5.50 7.10 Monthly 2.63
Through November 2002 80.2(3) 4.93(1) 8.75 Monthly 2.63
Through May 2003 140.0(4) 5.66 7.15 Monthly 2.63
Through September 2003 63.0 5.55 7.00 Monthly 2.63
Through September 2003 54.0(5) 5.24(1) 7.25 Monthly 2.63
Other floating rate debt 73.6 4.77(1)
--------
Total beneficial interest in debt $1,856.8 6.37(1)
========
(1) Denotes weighted average interest rate before amortization of financing costs.
(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) This construction debt at a 50% owned unconsolidated joint venture is hedged with an $80.2 million cap.
(4) The notional amount on the cap, which hedges a construction facility, accretes $7 million a month until
it reaches $147 million.
(5) 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. Subsequent
to September 30, 2001, in order to mitigate this risk the Company fixed the interest rates contracts on certain of
its floating rate debt obligations through the use of long-term LIBOR contracts. The following table presents
information about the Company's beneficial interest in debt as of November 2, 2001, including debt incurred and
refinancings which occurred through that date (Results of Operations-Subsequent Events), as well as use of these
long-term LIBOR contracts.
Beneficial Interest Weighted Average Weighted
in Debt Fixed Rate/ Average
as of 11/02/01 LIBOR+Spread All-In Rate
------------------- ---------------- ------------
Fixed rate debt $ 1,026.1 7.5% 7.7%
Floating rate debt:
Fixed to October/November 2002 489.1 4.2% 4.8%
Fixed to July 2002 43.4 5.2% 6.3%
Fixed to March 2002 128.4 4.0% 4.4%
Fixed to February 2002 50.0 3.1% 3.5%
Floating month to month 150.1 3.4% 4.3%
-----------------
Total $ 1,887.1 5.9% 6.3%
================= ==== ====
Based on the Operating Partnership's beneficial interest in floating rate debt in effect at September 30,
2001, excluding debt fixed under long-term LIBOR rate contracts, a one percent increase or decrease in interest
rates on this floating rate debt would decrease or increase cash flows by approximately $3.2 million and, due to
the effect of capitalized interest, annual earnings by approximately $2.7 million. Based on the Company's
consolidated debt and interest rates in effect at September 30, 2001, a one percent increase in interest rates
would decrease the fair value of debt by approximately $36.0 million, while a one percent decrease in interest
rates would increase the fair value of debt by approximately $38.5 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 September 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 9/30/01 as of 9/30/01 as of 9/30/01 by TRG by TRG
- ------ ------------- ------------- ------------- ----------- --------------
(in millions of dollars)
Dolphin Mall 164.6 82.3 82.3 50% 100%
Great Lakes Crossing 151.6 128.9 151.6 100% 100%
International Plaza 153.0 40.5 153.0 100%(1) 100%(1)
The Mall at Millenia 37.4 18.7 18.7 50% 50%
The Mall at Wellington Green 106.3 95.7 106.3 100% 100%
The Shops at Willow Bend 179.6 179.6 179.6 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of approximately 25% of the amounts guaranteed.
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
September 30, 2001 September 30, 2000
-------------------- ------------------
(in millions of dollars)
Income before gain on disposition of interest
in center and minority and preferred interests (1) (2) 12.3 14.3
Depreciation and amortization (3) 16.9 14.8
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 6.3 4.4
Non-real estate depreciation (0.6) (0.8)
Minority partners in consolidated joint ventures
share of funds from operations (0.3) (0.2)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 28.2 26.0
==== ====
Funds from Operations allocable to TCO 17.4 16.3
==== ====
(1) Includes gains on peripheral land sales of $0.9 million and $3.2 million for the three months ended
September 30, 2001 and September 30, 2000, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.3
million and zero for the three months ended September 30, 2001 and September 30, 2000, respectively.
(3) Includes $0.7 million and $0.5 million of mall tenant allowance amortization for the three months ended
September 30, 2001 and September 30, 2000, respectively.
(4) Includes $0.6 million and $0.3 million of mall tenant allowance amortization for the three months ended
September 30, 2001 and September 30, 2000, respectively.
(5) Amounts in this table may not add due to rounding.
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(in millions of dollars)
Income before gain on disposition of interest in
center, extraordinary items, cumulative
effect of change in accounting principle, and
minority and preferred interests (1) (2) 41.8 45.6
Depreciation and amortization (3) 49.4 43.0
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 16.9 15.0
Non-real estate depreciation (2.1) (2.3)
Minority partners in consolidated joint ventures
share of funds from operations (1.7) (1.9)
Preferred dividends and distributions (19.2) (19.2)
----- -----
Funds from Operations - TRG 85.1 80.2
===== =====
Funds from Operations allocable to TCO 52.4 50.2
===== =====
(1) Includes gains on peripheral land sales of $3.6 million and $7.2 million for the nine months ended
September 30, 2001 and September 30, 2000, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.5
million and $(0.2) million for the nine months ended September 30, 2001 and September 30, 2000, respectively.
(3) Includes $1.9 million and $1.6 million of mall tenant allowance amortization for the nine months ended
September 30, 2001 and September 30, 2000, respectively.
(4) Includes $1.5 million and $0.9 million of mall tenant allowance amortization for the nine months ended
September 30, 2001 and September 30, 2000, respectively.
(5) Amounts in this table may not add due to rounding.
Reconciliation of Funds from Operations to Income
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(in millions of dollars)
Fund from Operations-TRG 28.2 26.0
Gain on disposition of interest in center 116.5
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (16.9) (14.8)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.0 0.2
Depreciation of TCO's additional basis 1.9 1.9
Non-real estate depreciation 0.6 0.8
Share of Unconsolidated Joint Ventures' depreciation and
amortization (6.3) (4.4)
---- -----
Net income - TRG 8.4 126.3
==== =====
TCO's ownership share of net income of TRG (1) 5.2 79.0
TCO's additional basis in TRG gain on disposition
of interest in center (31.2)
Depreciation of TCO's additional basis (1.9) (1.9)
---- -----
Income before distributions in excess of earnings
allocable to minority interest - TCO 3.3 45.9
Distributions less than (in excess of) earnings allocable to minority
interest (4.7) 39.8
---- -----
Net income (loss) allocable to common shareowners -TCO (1.4) 85.7
==== =====
(1) TCO's average ownership of TRG was approximately 62% and 63% during the three months ended September 30,
2001 and 2000.
(2) Amounts in this table may not add due to rounding.
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(in millions of dollars)
Fund from Operations-TRG 85.1 80.2
Gain on disposition of interest in center 116.5
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (49.4) (43.0)
Minority partners in consolidated joint ventures
share of depreciation and amortization 2.6 1.9
Depreciation of TCO's additional basis 5.7 6.1
Non-real estate depreciation 2.1 2.3
Share of Unconsolidated Joint Ventures' depreciation and
amortization (16.9) (15.0)
----- -----
Income before extraordinary items and cumulative effect
of change in accounting principle - TRG 29.1 149.0
===== =====
TCO's ownership share of income of TRG (1) 17.9 93.2
TCO's additional basis in TRG gain (31.2)
Depreciation of TCO's additional basis (5.7) (6.1)
----- -----
Income before distributions in excess of earnings
allocable to minority interest - TCO 12.2 55.9
Distributions less than (in excess of) earnings allocable to minority
interest (15.7) 29.8
----- -----
Income (loss) before extraordinary items and cumulative effect
of change in accounting principle allocable to common
shareowners-TCO (3.5) 85.7
===== =====
(1) TCO's average ownership of TRG was approximately 62% and 63% during the nine months ended September 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 September 11, 2001, the Company declared a quarterly dividend of $0.25 per common share payable October 22,
2001 to shareowners of record on October 1, 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
September 30, 2001, which was paid on October 1, 2001 to shareowners of record on September 21, 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, a food court at Woodland in Grand Rapids, Michigan opened in early November 2001, and a food
court at Twelve Oaks Mall, in the suburban Detroit area, will open in mid-November 2001. The Operating
Partnership's share of the cost of these projects is expected to be approximately $11.0 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. These estimates do not include costs of the Stony Point project in Richmond, Virginia, for which
the Company expects to obtain board approval and begin construction in early 2002. 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 September 30, 2001, the Company has a net
investment of approximately $4 million in the venture, representing $5.8 million of contributions less the
Company's share of losses through September 2001. The Company has also severally guaranteed its share of
equipment lease payments, an approximately $4 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 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 of approximately $2 million. In total, the Company's current technology exposure is approximately $17
million as of September 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 September 30, 2001 of $12.50 per common share, the aggregate value of interests in
the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $308 million.
The purchase of these interests at September 30, 2001 would have resulted in the Company owning an additional 30%
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".
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: November 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
