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: March 31, 1997
Commission File No. 1-11530
Taubman Centers, Inc.
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(An exact name of registrant as specified in its charter)
Michigan 38-2033632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan
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(Address of principal executive offices) 48303-0200
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(Zip Code)
(810) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
------- -------
As of May 9, 1997, there were outstanding 50,720,358 shares of the
Company's common stock, par value $0.01 per share.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements of Taubman Centers, Inc. (the Company) are
provided pursuant to the requirements of this item. The financial statements of
The Taubman Realty Group Limited Partnership (TRG) are also provided.
INDEX TO FINANCIAL STATEMENTS
TAUBMAN CENTERS, INC.
- ---------------------
Balance Sheet as of December 31, 1996 and March 31, 1997...................... 2
Statement of Operations for the three months ended March 31, 1996 and 1997.... 3
Statement of Cash Flows for the three months ended March 31, 1996 and 1997.... 4
Notes to Financial Statements................................................. 5
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
- --------------------------------------------
Consolidated Balance Sheet as of December 31, 1996 and March 31, 1997......... 9
Consolidated Statement of Operations for the three months ended
March 31, 1996 and 1997.................................................... 10
Consolidated Statement of Cash Flows for the three months ended
March 31, 1996 and 1997.................................................... 11
Notes to Consolidated Financial Statements................................... 12
- 1 -
TAUBMAN CENTERS, INC.
BALANCE SHEET
(in thousands, except share data)
December 31 March 31
----------- --------
1996 1997
---- ----
Assets:
Investment in TRG (Note 2) $ 369,131 $ 363,992
Cash and cash equivalents 9,388 9,317
Other assets 8 43
--------- ---------
$ 378,527 $ 373,352
========= =========
Liabilities:
Accounts payable and accrued liabilities $ 351 $ 417
Dividends payable 11,666 11,666
--------- ---------
$ 12,017 $ 12,083
Commitments and Contingencies (Note 3)
Shareowners' Equity:
Common Stock $ 507 $ 507
$0.01 par value, 250,000,000 shares authorized,
50,720,358 shares issued and outstanding
at December 31, 1996 and March 31, 1997
Additional paid-in capital 468,590 468,590
Dividends in excess of net income (102,587) (107,828)
--------- ---------
$ 366,510 $ 361,269
--------- ---------
$ 378,527 $ 373,352
========= =========
See notes to financial statements.
- 2 -
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Income:
Equity in TRG's income (Note 2) $5,414 $6,606
Interest and other 68 73
------ ------
$5,482 $6,679
Operating Expenses:
General and administrative $ 175 $ 191
Management fee 63 63
------ ------
$ 238 $ 254
------ ------
Net Income $5,244 $6,425
====== ======
Net Income per common share $ .12 $ .13
====== ======
Cash dividends declared per common share $ .22 $ .23
====== ======
Weighted average number of common
shares outstanding 44,111,232 50,720,358
========== ==========
See notes to financial statements.
- 3 -
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Cash Flows From Operating Activities:
Net Income $ 5,244 $ 6,425
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in other assets (30) (35)
Increase in accounts payable and
other liabilities 89 66
-------- --------
Net Cash Provided By Operating Activities $ 5,303 $ 6,456
-------- --------
Cash Flows Provided by Investing Activities -
Distributions from TRG in excess of net income $ 4,784 $ 5,139
-------- --------
Cash Flows From Financing Activities:
Cash dividends $ (9,710) $(11,666)
Purchases of stock (347)
-------- --------
Net Cash Used in Financing Activities $(10,057) $(11,666)
-------- --------
Net Increase (Decrease) In Cash $ 30 $ (71)
Cash and Cash Equivalents at Beginning of Period 7,886 9,388
-------- --------
Cash and Cash Equivalents at End of Period $ 7,916 $ 9,317
======== ========
See notes to financial statements.
- 4 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
Three months ended March 31, 1997
Note 1 - Interim Financial Statements
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, 1996. 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 for interim periods are not necessarily
indicative of the results for a full year.
Note 2 - Investment in TRG
The Company's investment in TRG at December 31, 1996 and March 31, 1997
consists of a 36.68% managing general partnership interest. Net income and
distributions are allocable to the general and limited TRG partners in
accordance with their percentage ownership. The Company's ownership percentage
in TRG for the three months ended March 31, 1996 and 1997 was 35.10% and 36.68%,
respectively.
The excess of the Company's cost of its investment in TRG over its
proportionate share of TRG's accumulated deficiency in assets at December 31,
1996 and March 31, 1997 was $476.3 million and $474.2 million, respectively. The
Company's proportionate share of TRG's net income for the three months ended
March 31, 1996 and 1997 was $7.3 million and $8.7 million, respectively, reduced
by $1.9 million and $2.0 million, respectively, representing adjustments arising
from the Company's additional basis in TRG's net assets.
TRG's summarized balance sheet and results of operations information (in
thousands) are presented below, followed by information about TRG's beneficial
interest in the operations of its unconsolidated joint ventures. Beneficial
interest is calculated based on TRG's ownership interest in each of the joint
ventures.
- 5 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
December 31 March 31
----------- --------
1996 1997
---- ----
Assets:
Properties $1,126,873 $1,147,060
Accumulated depreciation and amortization 234,030 241,394
---------- ----------
$ 892,843 $ 905,666
Other assets 76,440 66,889
---------- ----------
$ 969,283 $ 972,555
========== ==========
Liabilities:
Unsecured notes payable $ 786,705 $ 786,746
Mortgage notes payable 159,703 159,703
Other notes payable 54,997 57,041
Capital lease obligation 39,849 44,339
Accounts payable and other liabilities 84,505 94,074
Distributions in excess of net income of
unconsolidated joint ventures 135,662 131,225
---------- ----------
$1,261,421 $1,273,128
Accumulated deficiency in assets (292,138) (300,573)
---------- ----------
$ 969,283 $ 972,555
========== ==========
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Revenues $59,732 $72,542
------- -------
Operating costs other than interest and
depreciation and amortization $26,803 $34,069
Interest expense 17,102 17,284
Depreciation and amortization 8,322 10,102
------- -------
$52,227 $61,455
------- -------
Equity in net income of unconsolidated
joint ventures 13,363 12,497
------- -------
Net Income $20,868 $23,584
======= =======
Three Months Ended March 31
---------------------------
1996 1997
---- ----
TRG's beneficial interest
in unconsolidated joint ventures' operations:
Revenues less recoverable and other
operating expenses $23,317 $21,799
Interest expense (7,172) (6,589)
Depreciation and amortization (2,782) (2,713)
------- -------
Net Income $13,363 $12,497
======= =======
- 6 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
Note 3 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of
its interest in TRG, the Company entered into an agreement with A. Alfred
Taubman and the General Motors Hourly-Rate Employes Pension Trust and the
General Motors Salaried Employes Pension Trust (the GM Trusts), each of whom
indirectly owns an interest in TRG, whereby each has the annual right to tender
to the Company units of partnership interest in TRG (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). 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 partners
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 Robert C. Larson and his family may
participate in tenders. The GM Trusts will be entitled to receive from TRG an
amount (not to exceed $10.9 million in the aggregate over the term of the
Partnership) equal to 5.5% of the amounts that the Company pays to the GM Trusts
under the Cash Tender Agreement.
Based on a market value at December 31, 1996 and March 31, 1997 of $12.875 and
$13.00 per common share, the aggregate value of interests in TRG which may be
tendered under the Cash Tender Agreement was approximately $954 million and $963
million, respectively. Purchase of these interests would result in the Company
owning an additional 53% interest in TRG.
The Company has made a continuing, irrevocable offer to all present holders
(other than certain excluded holders, including A. Alfred Taubman and the GM
Trusts), assignees of all present holders, those future holders of partnership
interests in TRG as the Company may, in its sole discretion, agree to include in
the continuing offer, and all existing and future optionees under TRG's
incentive option plan (described below) to exchange shares of common stock for
partnership interests in TRG (the Continuing Offer). The number of shares of
common stock to be exchanged is based on a market valuation of the Company on
the trading date immediately preceding the date of exchange. The offer is
subject to certain restrictions relating to the minimum value of interest
exchanged and ownership limitations.
The GM Trusts and the AT&T Master Pension Trust are able to sell shares of
common stock that they acquired in connection with the IPO through a registered
offering. Pursuant to a registration rights agreement with the Company, each of
the Trusts has 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). The
annual right is deemed to be exercised if they initiate or participate in a sale
pursuant to the Cash Tender Agreement, as described above. 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.
- 7 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
Currently, 4,500 units of partnership interest may be issued under TRG's
incentive option plan for employees of The Taubman Company Limited Partnership
(the Manager). The Manager, which is approximately 99% beneficially owned by
TRG, provides various administrative, management, accounting, shareowner
relations, and other services to the Company and TRG. The exercise price of all
outstanding options is equal to market value on the date of grant. Incentive
options generally become vested 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. Under the Continuing Offer, one unit of
partnership interest would be exchangeable for approximately 2,000 shares of the
Company's common stock at March 31, 1997. During the first quarter of 1997,
options for 51 units were issued at an exercise price of $26.0 thousand. There
were no cancellations or exercises during the first quarter of 1997. As of March
31, 1997, there were outstanding options for 3,587 units with a weighted average
exercise price of $22.2 thousand. As of March 31, 1997, options for 2,062 units
were vested with a weighted average exercise price of $22.4 thousand.
- 8 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31 March 31
----------- --------
1996 1997
---- ----
Assets:
Properties $1,126,873 $1,147,060
Accumulated depreciation and amortization 234,030 241,394
---------- ----------
$ 892,843 $ 905,666
Cash and cash equivalents 7,902 2,202
Accounts and notes receivable, less allowance
for doubtful accounts of $393 and $252
in 1996 and 1997 20,751 17,046
Accounts receivable from related parties 6,293 6,530
Deferred charges and other assets 41,494 41,111
---------- ----------
$ 969,283 $ 972,555
========== ==========
Liabilities:
Unsecured notes payable $ 786,705 $ 786,746
Mortgage notes payable 159,703 159,703
Other notes payable 54,997 57,041
Capital lease obligation 39,849 44,339
Accounts payable and other liabilities 84,505 94,074
Distributions in excess of net income of
unconsolidated Joint Ventures (Note 2) 135,662 131,225
---------- ----------
$1,261,421 $1,273,128
Commitments and Contingencies (Note 4)
Accumulated deficiency in assets (292,138) (300,573)
---------- ----------
$ 969,283 $ 972,555
========== ==========
Allocation of accumulated deficiency in assets:
General Partners $ (226,242) $ (232,774)
Limited Partners (65,896) (67,799)
---------- ----------
$ (292,138) $ (300,573)
========== ==========
See notes to financial statements.
- 9 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except units data)
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Revenues:
Minimum rents $34,763 $42,850
Percentage rents 1,027 1,454
Expense recoveries 19,607 22,705
Other 2,534 3,924
Revenue from management, leasing and
development services 1,801 1,609
------- -------
$59,732 $72,542
------- -------
Operating Costs:
Recoverable expenses $15,586 $18,998
Other operating 5,219 8,492
Management, leasing and development
services 1,245 923
General and administrative 4,753 5,656
Interest expense 17,102 17,284
Depreciation and amortization 8,322 10,102
------- -------
$52,227 $61,455
------- -------
Income before equity in net income
of unconsolidated Joint Ventures $ 7,505 $11,087
Equity in net income of unconsolidated
Joint Ventures (Note 2) 13,363 12,497
------- -------
Net Income $20,868 $23,584
======= =======
Allocation of Net Income:
General Partners $16,698 $18,264
Limited Partners 4,170 5,320
------- -------
$20,868 $23,584
======= =======
Net Income per Unit of Partnership Interest $ 329 $ 337
======= =======
Weighted Average Number of Units of
Partnership Interest Outstanding 63,521 69,998
======= =======
See notes to financial statements.
- 10 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Cash Flows From Operating Activities:
Net Income $ 20,868 $ 23,584
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 8,322 10,102
Provision for losses on accounts receivable 387 225
Amortization of deferred financing costs 565 591
Gain on sale of land (65)
Other 248 149
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Receivables, deferred charges and other assets (3,648) 1,163
Accounts payable and other liabilities (1,816) 9,569
-------- --------
Net Cash Provided By Operating Activities $ 24,926 $ 45,318
-------- --------
Cash Flows From Investing Activities:
Additions to properties $ (4,292) $(16,895)
Proceeds from sale of land 289
Distributions from unconsolidated
Joint Ventures in excess of net income 1,107 4,216
Contributions to unconsolidated Joint Ventures (661) (8,653)
-------- --------
Net Cash Used In Investing Activities $ (3,846) $(21,043)
-------- --------
Cash Flows From Financing Activities:
Debt proceeds $ 9,542 $ 2,044
Debt payments (9)
Cash distributions (29,056) (32,019)
-------- --------
Net Cash Used In Financing Activities $(19,523) $(29,975)
-------- --------
Net Increase (Decrease) In Cash $ 1,557 $ (5,700)
Cash and Cash Equivalents at Beginning of Period 16,836 7,902
-------- --------
Cash and Cash Equivalents at End of Period $ 18,393 $ 2,202
======== ========
Interest on mortgage notes and other loans paid during the three months ended
March 31, 1996 and 1997, net of amounts capitalized of $1,212 and $1,994, was
$6,401 and $5,003, respectively.
See notes to financial statements.
- 11 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 1997
Note 1 - Interim Financial Statements
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership,
operation, management, leasing, acquisition, development, redevelopment,
expansion, financing and refinancing of regional retail shopping centers
(Taubman Shopping Centers) and interests therein. Taubman Centers, Inc. is the
managing general partner of TRG. GMPTS Limited Partnership, TG Partners Limited
Partnership and Taub-Co Management, Inc. are also general partners.
The unaudited interim financial statements should be read in conjunction with
the audited financial statements and related notes included in TRG's Annual
Report on Form 10-K for the year ended December 31, 1996. 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 for interim periods are not necessarily
indicative of the results for a full year.
Note 2 - Investments in Joint Ventures
Certain Taubman Shopping Centers are partially owned through joint ventures
(Joint Ventures). TRG is also the managing general partner of these Joint
Ventures. TRG's interest in each Joint Venture is as follows:
TRG's %
Ownership
as of
Joint Venture Taubman Shopping Center March 31, 1997
--------------------------------------------------------------------------
Arizona Mills, L.L.C. Arizona Mills
(under construction) 37%
Fairfax Associates Fair Oaks 50
Lakeside Mall Limited
Partnership Lakeside 50
Rich-Taubman Associates Stamford Town Center 50
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
Taubman MacArthur Associates MacArthur Center
Limited Partnership (under construction) 70
Twelve Oaks Mall Limited
Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodfield Associates Woodfield 50
Woodland Woodland 50
- 12 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TRG reduces its investment in Joint Ventures to eliminate intercompany
profits on sales of services that are capitalized by the Joint Ventures. As a
result, the carrying value of TRG's investment in Joint Ventures is less than
TRG's share of the deficiency in assets reported in the combined balance sheet
of the unconsolidated Joint Ventures by $8.6 million and $8.9 million at
December 31, 1996 and at March 31, 1997, respectively. These differences are
amortized over the useful lives of the related assets.
Combined balance sheet and results of operations information are presented
below (in thousands) for all Joint Ventures, followed by TRG's beneficial
interest in the combined information. Beneficial interest is calculated based on
TRG's ownership interest in each of the Joint Ventures.
December 31 March 31
----------- --------
1996 1997
---- ----
Assets:
Properties, net $ 461,658 $ 476,102
Other assets 71,278 64,119
--------- ---------
$ 532,936 $ 540,221
========= =========
Liabilities and partners' accumulated
deficiency in assets:
Debt $ 724,162 $ 748,892
Capital lease obligations 5,000 6,995
Other liabilities 53,817 36,209
TRG accumulated deficiency in assets (127,097) (122,293)
Joint Venture Partners' accumulated
deficiency in assets (122,946) (129,582)
--------- ---------
$ 532,936 $ 540,221
========= =========
TRG accumulated deficiency in assets (above) $(127,097) $(122,293)
Elimination of intercompany profit (8,565) (8,932)
--------- ---------
Distributions in excess of net income
of unconsolidated Joint Ventures $(135,662) $(131,225)
========= =========
Three Months Ended March 31
---------------------------
1996 1997
---- ----
Revenues $70,032 $60,681
------- -------
Recoverable and other operating expenses $27,485 $22,357
Interest expense 13,850 12,367
Depreciation and amortization 5,673 5,284
------- -------
Total operating costs $47,008 $40,008
------- -------
Net income $23,024 $20,673
======= =======
Net income attributable to TRG $12,041 $11,406
Realized intercompany profit 1,322 1,091
------- -------
Equity in net income of unconsolidated
Joint Ventures $13,363 $12,497
======= =======
- 13 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Three Months Ended March 31
---------------------------
1996 1997
---- ----
TRG's beneficial interest
in unconsolidated Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $23,317 $21,799
Interest expense (7,172) (6,589)
Depreciation and amortization (2,782) (2,713)
------- -------
Net Income $13,363 $12,497
======= =======
Note 3 - Beneficial Interest in Debt and Interest Expense
In March 1997, TRG completed the renegotiation of the terms of its unsecured
revolving credit facility available for general partnership purposes. The new
terms increased the facility to $300 million from $200 million, reduced the
current contractual interest rate by 60 basis points to LIBOR plus 90 basis
points and extended the maturity until March 2000. Included in the credit
facility is a competitive bid option program, which allows TRG to hold auctions
among the banks participating in the facility for short term borrowings of up to
$150 million.
In January 1997, Arizona Mills, L.L.C. closed on a secured $145 million
construction facility maturing in 2002. The loan bears interest at one month
LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate
of 9.5%. The payment of the principal and interest is recourse to each of the
owners of Arizona Mills, L.L.C. to the extent of its respective ownership
percentage. Proceeds totaling $13.1 million were distributed to the owners as
reimbursement for amounts previously expended on construction costs, of which
TRG's share was $4.8 million. Borrowings on the facility at March 31, 1997 were
$20.9 million. TRG owns a 37% interest in Arizona Mills, L.L.C.
TRG's beneficial interest in the debt (excluding capital lease obligations),
capitalized interest, and interest expense (net of capitalized interest) of TRG,
its consolidated subsidiaries and its unconsolidated Joint Ventures is
summarized as follows:
TRG's Share TRG's TRG's
Joint of Joint Consolidated Beneficial
Ventures Ventures Subsidiaries Interest
-------- -------- ------------ -------
Debt as of:
December 31, 1996 $724,162 $396,962 $1,001,405 $1,398,367
March 31, 1997 748,892 407,847 1,003,490 1,411,337
Capitalized interest:
Three months ended
March 31, 1996 $ 871 $ 561 $ 1,212 $ 1,773
Three months ended
March 31, 1997 1,980 1,267 1,994 3,261
Interest expense
(Net of capitalized interest):
Three months ended
March 31, 1996 $ 13,850 $ 7,172 $ 17,102 $ 24,274
Three months ended
March 31, 1997 12,367 6,589 17,284 23,873
- 14 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4 - Incentive Option Plan
TRG has an incentive option plan for employees of the Manager. Currently,
4,500 units of partnership interest may be issued under the plan. The exercise
price of all outstanding options is equal to market value on the date of grant.
Incentive options generally become vested 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. During the first quarter of
1997, options for 51 units were issued at an exercise price of $26.0 thousand.
There were no cancellations or exercises during the first quarter of 1997. As of
March 31, 1997, there were outstanding options for 3,587 units with a weighted
average exercise price of $22.2 thousand. As of March 31, 1997, options for
2,062 units were vested with a weighted average exercise price of $22.4
thousand.
- 15 -
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The following discussion should be read in conjunction with the accompanying
Financial Statements of Taubman Centers, Inc. and the Notes thereto and the
Consolidated Financial Statements of The Taubman Realty Group Limited
Partnership and the Notes thereto.
General Background and Performance Measurement
The Company, through its interest in and as managing general partner of TRG,
participates in TRG's Managed Businesses. TRG's Managed Businesses include: (i)
wholly owned Taubman Shopping Centers, development projects for future regional
shopping centers (Development Projects) and The Taubman Company Limited
Partnership (the Manager), (collectively, the Consolidated Businesses); and (ii)
Taubman Shopping Centers partially owned through joint ventures (Joint
Ventures).
TRG consolidates the wholly owned Taubman Shopping Centers, the Development
Projects, and the Manager. The Joint Ventures are accounted for under the equity
method in TRG's Consolidated Financial Statements.
Certain aspects of the performance of the Managed Businesses are best
understood by measuring their performance as a whole, without regard to TRG's
ownership interest. For example, mall tenant sales and shopping center occupancy
trends fit this category and are so analyzed below. In addition, trends in
certain items of revenue and expense are often best understood in the same
fashion, and the discussions following take this approach when appropriate. When
relevant, these items are also discussed separately with regard to the
Consolidated Businesses and the Joint Ventures.
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 TRG's
Managed Businesses for 1996 and the first quarter of 1997:
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
1996 1996 1996 1996 1996 1997
------------------------------------------------------------
(in thousands)
Mall tenant sales $591,677 $617,821 $627,791 $989,956 $2,827,245 $600,709
Revenues 129,764 128,497 129,730 138,250 526,241 130,322
Occupancy
Average Occupancy 87.8% 87.3% 86.8% 87.6% 87.4% 86.5%
Ending Occupancy 87.7% 87.3% 86.8% 88.0% 88.0% 86.4%
Leased Space 89.5% 88.2% 87.6% 89.0% 89.0% 88.7%
- 16 -
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 1996 and the first quarter of
1997:
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
1996 1996 1996 1996 1996 1997
-------------------------------------------------
Minimum rents 12.3% 11.7% 11.7% 7.6% 10.4% 12.6%
Percentage rents 0.3 0.3 0.3 0.3 0.3 0.2
Expense recoveries 5.6 5.0 4.6 3.5 4.5 5.2
---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 18.2% 17.0% 16.6% 11.4% 15.2% 18.0%
==== ==== ==== ==== ==== ====
Rental Rates
Average base rent per square foot for all mall tenants at the 18 Centers owned
and open for at least five years was $38.25 for the twelve months ended March
31, 1997, compared to $36.73 for the twelve months ended March 31, 1996.
As leases have expired in the Taubman Shopping Centers, TRG 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 a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or 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.
The annual spread between average annualized base rent of stores opening and
closing, excluding renewals, has ranged between six and eleven dollars per
square foot during the past five years. TRG anticipates that the spread between
opening and closing rents for the 1997 fiscal year will narrow from the nine
dollars per square foot achieved in 1996. This statistic is difficult to predict
in part because TRG's leasing policies and practices may result in early lease
terminations with actual average closing rents which may vary from the average
rent per square foot of scheduled lease expirations. In addition, the opening or
closing of large tenant spaces, which generally pay a lower rent per square
foot, can significantly change the spread in a given year.
Results of Operations
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996
Taubman Centers, Inc.
The Company is the managing general partner of TRG and shares in TRG's
financial performance to the extent of its ownership percentage. The Company's
ownership of TRG was 36.68% for the three months ended March 31, 1997, and
35.10% for the three months ended March 31, 1996. As of March 31, 1997, the
Company had 50.7 million shares outstanding, up from 44.1 million at March 31,
1996.
- 17 -
Equity in income of TRG consists of the Company's $8.7 million proportionate
share of TRG's net income for the three months ended March 31, 1997 and $7.3
million for the same period in 1996. These amounts were reduced by $2.0 million
and $1.9 million, respectively, representing adjustments arising from the
Company's additional basis in TRG's net assets. Net income for the three months
ended March 31, 1997 was $6.4 million, or $0.13 per share, compared to $5.2
million, or $0.12 per share, for the first quarter of 1996.
TRG
1996 Transactions
During 1996, TRG completed the following acquisitions: Paseo Nuevo in June,
the remaining 75% interest in Fairlane Town Center (Fairlane) previously held by
a Joint Venture Partner in July, and La Cumbre Plaza (La Cumbre) in December.
Also during 1996, TRG issued new units of partnership interest to the former
Joint Venture Partner of Fairlane in connection with TRG's acquisition of
Fairlane, and to the Company in connection with an offering of the Company's
common stock and the exercise of incentive options. The net proceeds from the
issuances were used to repay short term borrowings and to acquire La Cumbre.
In November 1996, TRG entered into an agreement to lease Memorial City Mall
(Memorial City) while TRG investigates the redevelopment opportunities of the
center (See Liquidity and Capital Resources -- Capital Spending). As a
development project, Memorial City has been excluded from all operating
statistics in this report, and Memorial City's results of operations have been
presented as a net line item in the following tabular comparison of TRG's
results of operations for the first quarter of 1997 compared to the prior year's
comparable period.
Occupancy and Mall Tenant Sales
The average occupancy rate in the Taubman Shopping Centers was 86.5% for the
three months ended March 31, 1997 compared to 87.8% for the comparable period in
1996. TRG expects that it will not achieve year over year increases in average
occupancy before the fourth quarter of 1997. The ending occupancy rate for the
Taubman Shopping Centers at March 31, 1997 was 86.4% versus 87.7% at the same
date in 1996. Leased space at March 31, 1997 was 88.7% compared to 89.5% at the
same date in 1996.
Total sales for Taubman Shopping Center mall tenants in the three months ended
March 31, 1997 were $600.7 million, a 1.5% increase from $591.7 million in the
first quarter of 1996. Mall tenant sales per square foot increased 0.4% over the
first quarter of 1996. Mall tenant sales for centers owned and open for all of
the first quarters of 1997 and 1996 (which excludes Paseo Nuevo and La Cumbre)
were $578.4 million in the first quarter of 1997, a 2.3% decrease from the first
quarter of 1996. Sales statistics for the first quarter of 1997 were negatively
affected by new competition near certain centers. TRG expects that the effect of
the competition on sales will moderate late in 1997 after the anniversary date
of the opening of the competing centers. In addition, sales in the first quarter
of 1996 were favorably impacted as most retailers reported five weeks of sales
for January (this extra week occurs every five to six years). The compound
annual growth rate on sales per square foot for the two year period ending March
31, 1997 was 4.2%.
- 18 -
The following table sets forth operating results for TRG's Managed Businesses
for the three months ended March 31, 1996 and 1997, showing the results of the
Consolidated Businesses and Joint Ventures:
Three Months Ended March 31, 1996 Three Months Ended March 31, 1997
----------------------------------------- -----------------------------------------
TRG TOTAL: TRG TOTAL:
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES VENTURES(1) BUSINESSES BUSINESSES(2) VENTURES(1) BUSINESSES
----------------------------------------- -----------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 34.8 41.0 75.8 40.8 37.6 78.5
Percentage rents 1.0 0.8 1.8 1.4 0.3 1.7
Expense recoveries 19.6 26.3 45.9 21.9 21.5 43.5
Other 4.3 1.9 6.2 5.5 1.2 6.7
----- ----- ----- ----- ----- -----
Total revenues 59.7 70.0 129.7 69.6 60.7 130.3
OPERATING COSTS:
Recoverable expenses 15.6 22.5 38.1 18.0 18.3 36.3
Other operating 5.2 3.2 8.4 6.5 2.7 9.2
Management, leasing and
development 1.2 1.2 0.9 0.9
General and administrative 4.8 4.8 5.7 5.7
Interest expense 17.1 14.0 31.1 17.3 12.5 29.8
Depreciation and amortization 8.3 5.5 13.8 10.0 5.1 15.2
----- ----- ----- ----- ----- -----
Total operating costs 52.2 45.2 97.4 58.4 38.6 97.0
Net results of Memorial City(2) (0.1) (0.1)
----- ----- ----- ----- ----- -----
7.5 24.8 32.3 11.1 22.1 33.2
===== ===== ===== =====
Equity in net income of Joint Ventures 13.4 12.5
----- -----
NET INCOME 20.9 23.6
===== =====
SUPPLEMENTAL INFORMATION(3)
EBITDA contribution 32.9 23.3 56.2 38.5 21.8 60.3
TRG's Beneficial Interest Expense (17.1) (7.2) (24.3) (17.3) (6.6) (23.9)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
----- ----- ----- ----- ----- -----
Distributable Cash Flow contribution 15.4 16.1 31.5 20.7 15.2 35.9
===== ===== ===== ===== ===== =====
(1) With the exception of the Suplemental Information, amounts represent 100% of
the Joint Ventures. Amounts are net of intercompany profits.
(2) The results of operations of Memorial City are presented net in this table.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future.
(3) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources - Distributions.
(4) Amounts in the table may not add due to rounding.
- 19 -
TRG --Consolidated Businesses
- -----------------------------
Total revenues for the three months ended March 31, 1997 were $69.6 million, a
$9.9 million or 16.6% increase over the comparable period in 1996. Minimum rents
increased $6.0 million, of which $5.4 million was caused by the Fairlane, Paseo
Nuevo, and La Cumbre acquisitions. The results of Fairlane have been
consolidated in TRG's results subsequent to the acquisition date in July 1996
(prior to that date Fairlane was accounted for under the equity method as a
Joint Venture). The increase in expense recoveries was primarily due to
Fairlane, Paseo Nuevo, and La Cumbre, offset by decreases at certain other
Centers. Other revenue increased $1.2 million primarily due to an insurance
recovery and a litigation settlement, partially offset by a decrease in lease
cancellation revenue.
Total operating costs increased $6.2 million, or 11.9%, to $58.4 million.
Recoverable, other operating, and depreciation and amortization expenses
increased primarily due to the Fairlane, Paseo Nuevo, and La Cumbre
acquisitions. General and administrative expense increased by $0.9 million
primarily due to increases in compensation, including the continuing phase-in of
the long-term compensation plan, and professional fees.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated income statements by the amounts
representing Memorial City's revenues and expenses, which are presented in the
preceding table as a net amount.
Joint Ventures
- --------------
Total revenues for the three months ended March 31, 1997 were $60.7 million, a
$9.3 million, or 13.3%, decrease from the comparable period of 1996, of which
$7.0 million was caused by the change of Fairlane from a Joint Venture to a
Consolidated Business. The decrease in minimum rents was primarily due to
Fairlane. The decrease in expense recoveries was due to Fairlane and a decrease
in recoverable expenses. Other income decreased by $0.7 million primarily due to
decreases in lease cancellation and interest income.
Total operating costs decreased by $6.6 million, or 14.6%, to $38.6 million
for the three months ended March 31, 1997, including a $4.7 million decrease due
to Fairlane. Recoverable expenses decreased $4.2 million primarily due to
Fairlane and decreases in utilities and maintenance costs. Other operating costs
decreased primarily due to Fairlane and a decrease in bad debt expense. Interest
expense decreased $1.5 million primarily due to a decrease in debt related to
Fairlane and an increase in capitalized interest, partially offset by an
increase in debt used to finance capital expenditures. Operating costs as
presented in the preceding table differ from the amounts shown in the combined,
summarized financial statements of the unconsolidated Joint Ventures (Note 2 to
TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, net income of the Joint Ventures decreased by
$2.7 million, or 10.9%, to $22.1 million. TRG's equity in net income of the
Joint Ventures was $12.5 million, a 6.7% decrease from the comparable period in
1996.
Net Income
- ----------
As a result of the foregoing, net income for the first quarter of 1997 was
$23.6 million, a 12.9% increase from the comparable period in 1996.
- 20 -
Liquidity and Capital Resources
Taubman Centers, Inc.
As of March 31, 1997, the Company had a cash balance of $9.3 million, the
source of which was primarily TRG's distributions, and had incurred no
indebtedness. During the first three months of 1997 and 1996, the Company
received distributions from TRG of $11.7 million and $10.2 million,
respectively. On March 5, 1997, the Company declared a quarterly dividend of
$0.23 per common share payable April 18, 1997 to shareholders of record March
31, 1997.
The Company pays regular quarterly dividends to its shareowners. The Company's
ability to pay dividends is affected by several factors, most importantly, the
receipt of distributions from TRG (see Distributions below). Dividends by the
Company 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.
The tax status of total 1997 dividends declared and to be declared, assuming
continuation of a $0.23 per common share quarterly dividend, is estimated to be
approximately 35% return of capital, and approximately 65% of ordinary income.
This is a forward-looking statement 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 TRG
due to the actual results of TRG; 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 Company's Board of Directors has authorized the purchase of up to 750
thousand shares of the Company's common stock in the open market. The stock may
be purchased from time to time as market conditions warrant. In the first
quarter of 1996, the Company purchased 36.8 thousand shares for approximately
$0.3 million. There were no purchases during the first quarter of 1997. As of
March 31, 1997, the Company had purchased a cumulative total of 491.8 thousand
shares of its common stock for approximately $4.7 million. Funding for the
purchases was provided by excess cash that otherwise would have been invested in
cash equivalents.
As of March 31, 1997, the Company had 50.7 million shares outstanding compared
to 44.1 million at March 31, 1996.
TRG
As of March 31, 1997, TRG had a cash balance of $2.2 million. In March 1997,
TRG completed the renegotiation of the terms of its unsecured revolving credit
facility available for general partnership purposes. The new terms increased the
facility to $300 million from $200 million, reduced the current contractual
interest rate by 60 basis points to LIBOR plus 90 basis points and extended the
maturity until March 2000. Included in the credit facility is a competitive bid
option program, which allows TRG to hold auctions among the banks participating
in the facility for short term borrowings of up to $150 million. There were no
borrowings under this facility at March 31, 1997. TRG also has available an
unsecured bank line of credit of up to $30 million with borrowings of $12.2
million at March 31, 1997. This line expires in August 1998. TRG also has
available a secured commercial paper facility of up to $75 million, with
borrowings of $45 million at March 31, 1997. Commercial paper is generally sold
with a 30 day maturity. This facility is supported by a line of credit facility,
which is renewable quarterly for a twelve month period.
Proceeds from short term borrowings of $2.0 million provided funding for the
first three months of 1997 compared to $9.5 million in the comparable period of
1996.
- 21 -
TRG has issued a total of $287 million of notes since the inception of TRG's
medium-term note program in 1995 under TRG's $500 million shelf registration
statement. There were no medium-term note issuances in the first quarters of
1997 and 1996.
In January 1997, Arizona Mills, L.L.C. closed on a secured $145 million
construction facility maturing in 2002. The loan bears interest at one month
LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate
of 9.5%. The payment of the principal and interest is recourse to each of the
owners of Arizona Mills, L.L.C. to the extent of its respective ownership
percentage. Proceeds totaling $13.1 million were distributed to the owners as
reimbursement for amounts previously expended on construction costs, of which
TRG's share was $4.8 million. Borrowings on the facility at March 31, 1997 were
$20.9 million. TRG owns a 37% interest in Arizona Mills, L.L.C.
At March 31, 1997, TRG's debt and its beneficial interest in the debt of its
Joint Ventures (excluding $48.2 million of capital lease obligations) totaled
$1,411.3 million. As shown in the following table, there was no unhedged
floating rate debt at March 31, 1997. Interest rates shown do not include
amortization of debt issuance costs and interest rate hedging costs. These items
are reported as interest expense in TRG's results of operations. In the
aggregate, these costs added 0.39% to the effective rate of interest on TRG's
beneficial interest in debt at March 31, 1997. Included in TRG's beneficial
interest in debt at March 31, 1997 is debt used to fund development and
expansion costs. TRG's beneficial interest in assets on which interest is being
capitalized totaled $186.7 million as of March 31, 1997. TRG's beneficial
interest in capitalized interest was $3.3 million for the three months ended
March 31, 1997.
Beneficial Interest in Debt
------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 3/31/97 Rate Resets 3/31/97
---------- -------- ---- ------ --------
Total beneficial interest
in fixed rate debt 1,113.1(1) 7.55%(2)
Floating rate debt hedged via
interest rate caps:
Through July 1997 19.7(3) 7.10 9.60% Monthly 5.69%
Through January 1998 100.0 6.19(2) 6.50 Monthly 5.69
Through January 1998 65.0 6.19 6.50 Monthly 5.69
Through July 1998 41.5 6.19(2) 8.35 Monthly 5.69
Through October 1998 39.3 6.06 6.00 Three Months 5.81
Through October 2001 25.0 5.89 8.55 Monthly 5.69
Through January 2002 7.7 6.83 9.50 Monthly 5.69
-------
Total beneficial interest
in debt 1,411.3 7.27 (2)
=======
(1) Includes TRG's $100 million floating rate notes due in November 1997, which
were swapped to a fixed rate of 6.15% until maturity. The interest rate on
the refinancing of this debt is hedged via an interest rate cap for the
period November 1997 to December 1998 at a three month LIBOR cap rate of
6.5%.
(2) Denotes weighted average interest rate.
(3) This debt is additionally hedged via an interest rate cap for the period
July 1997 through July 2002 at a one month LIBOR cap rate of 9.95%.
TRG's loan agreements and indenture contain various restrictive covenants,
including limitations on the amount of secured and unsecured debt and minimum
debt service coverage ratios, the latter being the most restrictive. TRG is in
compliance with all of such covenants.
- 22 -
Distributions
A principal factor considered by TRG in deciding upon distributions to
partners is an amount, which TRG defines as Distributable Cash Flow, equal to
EBITDA less TRG's Beneficial Interest Expense and non-real estate depreciation
and amortization. This measure of performance is influenced not only by
operations but also by capital structure. EBITDA is defined as TRG's beneficial
interest in revenues, less operating costs before interest, depreciation and
amortization, meaning TRG's pro rata share of this result for each of the
Managed Businesses, after recording appropriate intercompany eliminations. TRG's
Beneficial Interest Expense is defined as 100% of the interest expense of TRG's
Consolidated Businesses and TRG's pro rata share of the interest expense on the
debt of the Joint Ventures. Funds from Operations is calculated by adding the
Company's beneficial interest in TRG's Distributable Cash Flow to the Company's
other income, less the Company's operating expenses. EBITDA, Distributable Cash
Flow and Funds from Operations do 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 REITs.
The following table summarizes TRG's Distributable Cash Flow and the Company's
Funds from Operations for the three months ended March 31, 1996 and 1997:
Three months ended Three months ended
March 31, 1996 March 31, 1997
------------------------------------- ------------------------------------
TRG TRG
Consolidated Joint Consolidated Joint
Businesses Ventures(1) Total Businesses Ventures(1) Total
------------------------------------- ------------------------------------
(in millions of dollars)
TRG's Net Income (2) 20.9 23.6
Depreciation and amortization (3)(4) 11.1 12.8
TRG's Beneficial Interest Expense (3) 24.3 23.9
----- -----
EBITDA 32.9 23.3 56.2 38.5 21.8 60.3
TRG's Beneficial Interest Expense(3) (17.1) (7.2) (24.3) (17.3) (6.6) (23.9)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 15.4 16.1 31.5 20.7 15.2 35.9
===== ===== ===== ===== ===== =====
The Company's share of Distributable
Cash Flow 11.1 13.2
Other income/expenses, net (0.2) (0.2)
----- -----
Funds from Operations 10.9 13.0
===== =====
(1) Amounts represent TRG's beneficial interest in the operations of its Joint
Ventures.
(2) Includes TRG's share of a gain on a peripheral land sale of $65 thousand in
the first quarter of 1997. There were no land sales in the first quarter of
1996.
(3) Amounts represent TRG's and TRG's beneficial interest in the Joint Ventures'
extraordinary items, depreciation and amortization, and interest expense.
(4) Includes $0.9 million of amortization of mall tenant allowances in the first
quarter of 1996 and 1997, respectively.
(5) Amounts may not add due to rounding.
For the first quarter of 1997, EBITDA and Distributable Cash Flow were $60.3
million and $35.9 million, compared to $56.2 million and $31.5 million for the
same period in 1996. TRG distributed $32.0 million to its partners in the first
quarter of 1997, compared to $29.1 million in the same period of 1996. The
Company's Funds from Operations for the first quarter of 1997 was $13.0 million,
compared to $10.9 million for the same period in 1996.
- 23 -
The Partnership Committee of TRG makes an annual determination of appropriate
distributions for each year. The determination is based on anticipated
Distributable Cash Flow, as well as financing considerations and such other
factors as the Partnership Committee considers appropriate. Further, the
Partnership Committee has decided that the growth in distributions will be less
than the growth in Distributable Cash Flow for the immediate future.
Except under unusual circumstances, TRG's practice is to distribute equal
monthly installments of the determined amount of distributions throughout the
year. Due to seasonality and the fact that cash available to TRG for
distributions may be more or less than net cash provided from operating
activities plus distributions from Joint Ventures during the year, TRG may
borrow from unused credit facilities (described in Liquidity and Capital
Resources -- TRG above) to enable it to distribute the amount decided upon by
TRG's Partnership Committee.
Distributions by each Joint Venture may be made only in accordance with the
terms of its partnership agreement. TRG acts as the managing partner in each
case and, in general, has the right to determine the amount of cash available
for distribution from the Joint Venture. In general, the provisions of these
agreements require the distribution of all available cash (as defined in each
partnership agreement), but most do not allow borrowing to finance distributions
without approval of the Joint Venture Partner.
As a result, distribution policies of many Joint Ventures will not parallel
those of TRG. While TRG may not, therefore, receive as much in distributions
from each Joint Venture as it intends to distribute with respect to that Joint
Venture, the Company does not believe this will impede TRG's intended
distribution policy because of TRG's overall access to liquid resources,
including borrowing capacity.
Any inability of TRG or its Joint Ventures to secure financing as required to
fund maturing debts, capital expenditures and changes in working capital,
including development activities and expansions, may require the utilization of
cash to satisfy such obligations, thereby possibly reducing distributions to
partners of TRG and funds available to the Company for the payment of dividends.
In addition, if the GM Trusts exercise their rights under the Cash Tender
Agreement (see Liquidity and Capital Resources -- Cash Tender Agreement below),
TRG will be required to pay the GM Trusts $10.9 million and may borrow to
finance such expenditures.
- 24 -
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is
generally recovered from tenants. Assuming no acquisitions, planned capital
spending by the Managed Businesses not recovered from tenants for 1997 is
summarized in the following table:
1997
--------------------------------------------
Consolidated Joint TRG's Share of
Businesses Ventures(1) Joint Ventures(1)
--------------------------------------------
(in millions of dollars)
Development, renovation, and expansion 61.5 (2) 225.1 (3) 120.3
Mall tenant allowances 5.8 3.7 2.2
Pre-construction development and
other 10.7 (4) 1.0 0.6
---- ----- -----
Total 78.0 229.8 123.1
==== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes costs related to leasehold improvements at The Mall at Tuttle
Crossing; excludes capital lease assets.
(3) Includes costs related to expansion projects at Westfarms and Cherry Creek.
Also includes construction costs for MacArthur Center and Arizona Mills.
(4) Includes costs to explore the possibilities of building an enclosed 1.7
million square foot value super-regional mall in Auburn Hills, Michigan.
The cost of building this Center would approximate $210 million. TRG's
share of the project would be approximately $170 million. Also includes
the costs to evaluate the redevelopment of Memorial City and required
property expenditures under the terms of the lease.
An expansion at Westfarms, which will open in the summer of 1997, will add
approximately 135,000 square feet of mall GLA and Nordstrom as an anchor.
Approximately 75% of this space has been leased or has leases out for
signatures. The expansion is expected to cost approximately $100 million. An
expansion at Cherry Creek will include a newly constructed Lord & Taylor store,
which will open in the fall of 1997, and the addition of 132,000 square feet of
mall GLA, which will open in the fall of 1998. The expansion is expected to cost
approximately $50 million. TRG has a 79% and 50% ownership interest in Westfarms
and Cherry Creek, respectively.
A project is now under construction to add approximately 48,000 square feet of
new mall tenant space in the building vacated when Saks Fifth Avenue moved to
the I. Magnin site at Biltmore. The new stores will open beginning in the spring
of 1997 and will be fully open in the fall of 1997. The project is expected to
cost approximately $8 million.
The Mall at Tuttle Crossing, a 980,000 square foot Center in northwest
Columbus, Ohio, will be anchored by Marshall Field's, Lazarus, JCPenney and
Sears. TRG is leasing the land and mall buildings from Tuttle Holding Co., which
owns the land on which the Center is being built. TRG will make ninety annual
minimum lease payments of $4.4 million beginning when the Center opens in July
1997. Substantially all of each payment in the first ten years of operation will
be recognized as interest expense. TRG will also pay additional rent based on
achieved levels of net operating income, a measure of operating performance
before rent payments, as specified in the agreement (NOI); 100% of the portion
of NOI which is over $11.6 million but less than or equal to $14.4 million, 30%
of the portion of NOI between $14.4 million and $18.3 million, and 50% of the
portion of NOI over $18.3 million. TRG estimates this additional rent, which
will be recognized as other operating expense, will approximate $2 million to $3
million annually beginning in 1999. Substantially all of the Center's mall GLA
has been leased. The Center is expected to cost approximately $115 million,
including capital lease assets of $55 million.
- 25 -
Arizona Mills, an enclosed value super-regional mall in Tempe, Arizona, is
opening in November 1997. TRG has a 37% ownership interest in Arizona Mills. The
leasing of the Center is proceeding on schedule with leases on approximately 68%
of the in-line tenant space signed or out for signature. The 1.2 million square
foot value-oriented mall is expected to cost approximately $180 million.
MacArthur Center, a new Center being developed by TRG in Norfolk, Virginia, is
expected to open in the spring of 1999. The Center is expected to total 1.1
million square feet and will initially be anchored by Nordstrom and Dillard's.
This Center will be owned by a joint venture in which TRG has a 70% interest and
is projected to cost approximately $150 million.
In 1996, TRG entered into an agreement to lease Memorial City Mall, a 1.4
million square foot shopping center located in Houston, Texas. Memorial City is
anchored by Sears, Foley's, Montgomery Ward and Mervyn's. TRG has the option to
terminate the lease after the third full year by paying $2 million to the
lessor. TRG is using this option period to evaluate the redevelopment
opportunities of the Center. Under the terms of the lease, TRG has agreed to
invest a minimum of $3 million during the three year option period. If the
redevelopment proceeds, TRG is required to invest an additional $22 million in
property expenditures not recoverable from tenants during the first 10 years of
the lease term.
TRG's share of costs for development and expansion projects currently under
construction and scheduled to be completed in 1998 and 1999 is anticipated to be
as much as $60 million in 1998 and $19 million in 1999.
TRG's 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 of projects; 3) cost overruns; 4) timing of expenditures; and 5) actual
time to complete projects.
Capital Resources
TRG believes that its net cash provided by operating activities, together with
distributions from the Joint Ventures, the unutilized portion of its credit
facilities and its ability to generate cash from the issuance of medium-term
notes under TRG's shelf registration statement, other securities offerings or
mortgage financings, assure adequate liquidity to conduct its operations in
accordance with its distribution and financing policies.
The financing of TRG is intended to maintain an investment grade credit rating
for TRG and (i) minimize, to the extent practical, secured indebtedness
encumbering TRG's wholly owned properties, (ii) mitigate TRG's exposure to
increases in floating interest rates, (iii) assure that the amount of debt
maturing in any future year will not pose a significant refinancing risk, (iv)
provide for additional capital and liquidity resources, and (v) maintain average
maturities for TRG's debt obligations of between five and ten years. TRG's
intent to continue to minimize secured indebtedness is dependent on actions
taken by credit rating agencies and market conditions.
TRG expects to finance its capital requirements, including development,
expansions and working capital, with available cash, borrowings under its lines
of credit and cash from future securities offerings under its medium-term note
program, other securities offerings, or mortgage financings. TRG's acquisition
activities are discretionary in nature, and will only be undertaken by TRG after
arranging adequate financing on terms that are consistent with TRG's financing
policies. TRG's Joint Ventures expect to finance development and expansion
spending with secured debt to the extent it is available.
TRG's borrowings are not and will not be recourse to the Company without its
consent.
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Cash Tender Agreement
A. Alfred Taubman and the GM Trusts each have the annual right to tender to
the Company units of partnership interest in TRG (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). 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 partners
will bear all market risk if the market price at closing is less than the
purchase price. 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 Robert C. Larson and his family may participate in tenders. The
GM Trusts will be entitled to receive from TRG an amount (not to exceed $10.9
million in the aggregate over the term of the Partnership) equal to 5.5% of the
amounts that the Company pays to the GM Trusts under the Cash Tender Agreement.
Based on a market value at December 31, 1996 and March 31, 1997 of $12.875 and
$13.00 per common share, the aggregate value of interests in TRG that may be
tendered under the Cash Tender Agreement was approximately $954 million and $963
million, respectively. Purchase of these interests at March 31, 1997 would have
resulted in the Company owning an additional 53% interest in TRG.
Although certain partners in TRG have pledged, and other partners may pledge,
their units of partnership interest, the Company is not aware of any present
intention of any partner to sell its interest in TRG.
- 27 -
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4 -- Amended and Restated Revolving Loan Agreement dated as of
March 5, 1997 (the "Revolving Loan Agreement"), among The
Taubman Realty Group Limited Partnership, as Borrower, Union
Bank of Switzerland, (New York Branch), as a Bank, the other
Banks signatory to the Revolving Loan Agreement, each as a
Bank, and Union Bank of Switzerland (New York Branch), as
Administrative Agent.
10 -- Employment Agreement between The Taubman Company Limited
Partnership and Lisa A. Payne.
11 -- Statement Re: Computation of Per Share Earnings.
12 -- Statement Re: Computation of Ratios of Earnings to Fixed
Charges.
27 -- Financial Data Schedule.
b) Current Reports on Form 8-K.
None
- 28 -
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: May 12, 1997 By: /s/ Lisa A. Payne
----------------------------
Lisa A. Payne
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
-------
4 -- Amended and Restated Revolving Loan Agreement dated as of
March 5, 1997 (the "Revolving Loan Agreement"), among The
Taubman Realty Group Limited Partnership, as Borrower, Union
Bank of Switzerland, (New York Branch), as a Bank, the other
Banks signatory to the Revolving Loan Agreement, each as a
Bank, and Union Bank of Switzerland (New York Branch), as
Administrative Agent.
10 -- Employment Agreement between The Taubman Company Limited
Partnership and Lisa A. Payne.
11 -- Statement Re: Computation of Per Share Earnings.
12 -- Statement Re: Computation of Ratios of Earnings to Fixed
Charges.
27 -- Financial Data Schedule.