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, 1997
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan
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(Address of principal executive offices) 48303-0200
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(Zip Code)
(248) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
------- -------
As of November 13, 1997 there were outstanding 50,757,681 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 September 30, 1997...................2
Statement of Operations for the three months ended September 30, 1996 and 1997.3
Statement of Operations for the nine months ended September 30, 1996 and 1997..4
Statement of Cash Flows for the nine months ended September 30, 1996 and 1997..5
Notes to Financial Statements..................................................6
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
- --------------------------------------------
Consolidated Balance Sheet as of December 31, 1996 and September 30, 1997.....10
Consolidated Statement of Operations for the three months ended
September 30, 1996 and 1997.................................................11
Consolidated Statement of Operations for the nine months ended
September 30, 1996 and 1997.................................................12
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1996 and 1997.................................................13
Notes to Consolidated Financial Statements....................................14
- 1 -
TAUBMAN CENTERS, INC.
BALANCE SHEET
(in thousands, except share data)
December 31 September 30
----------- ------------
1996 1997
---- ----
Assets:
Investment in TRG (Notes 2 and 4) $ 369,131 $ 353,404
Cash and cash equivalents 9,388 9,076
Other assets 8 45
--------- ---------
$ 378,527 $ 362,525
========= =========
Liabilities:
Accounts payable and accrued liabilities $ 351 $ 377
Dividends payable 11,666 11,674
--------- ---------
$ 12,017 $ 12,051
Commitments and Contingencies (Note 3)
Shareowners' Equity (Notes 3 and 4):
Common Stock $ 507 $ 508
$0.01 par value, 250,000,000 shares
authorized, 50,720,358 and 50,757,681
issued and outstanding at December 31, 1996
and September 30, 1997
Additional paid-in capital 468,590 469,009
Dividends in excess of net income (102,587) (119,043)
--------- ---------
$ 366,510 $ 350,474
--------- ---------
$ 378,527 $ 362,525
========= =========
See notes to financial statements.
- 2 -
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Three Months Ended September 30
-------------------------------
1996 1997
---- ----
Income:
Equity in TRG's income before
extraordinary item (Note 2) $5,161 $6,408
Interest and other 73 78
------ ------
$5,234 $6,486
------ ------
Operating Expenses:
General and administrative $ 136 $ 210
Management fee 62 62
------ ------
$ 198 $ 272
------ ------
Income before extraordinary item $5,036 $6,214
Equity in TRG's extraordinary item (Note 2) (444)
------ ------
Net Income $4,592 $6,214
====== ======
Earnings per common share:
Income before extraordinary item $ .11 $ .12
Extraordinary item (.01)
------ ------
Net Income $ .10 $ .12
====== ======
Cash dividends declared per common share $ .22 $ .23
====== ======
Weighted average number of common
shares outstanding 44,098,113 50,745,241
========== ==========
See notes to financial statements.
- 3 -
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Nine Months Ended September 30
------------------------------
1996 1997
---- ----
Income:
Equity in TRG's income before
extraordinary item (Note 2) $15,158 $19,102
Interest and other 206 229
------- -------
$15,364 $19,331
------- -------
Operating Expenses:
General and administrative $ 499 $ 591
Management fee 187 187
------- -------
$ 686 $ 778
------- -------
Income before extraordinary item $14,678 $18,553
Equity in TRG's extraordinary item (Note 2) (444)
------- -------
Net Income $14,234 $18,553
======= =======
Earnings per common share:
Income before extraordinary item $ .33 $ .37
Extraordinary item (.01)
------- -------
Net Income $ .32 $ .37
======= =======
Cash dividends declared per common share $ .66 $ .69
======= =======
Weighted average number of common
shares outstanding 44,102,470 50,730,179
========== ==========
See notes to financial statements.
- 4 -
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended September 30
------------------------------
1996 1997
---- ----
Cash Flows From Operating Activities:
Income before extraordinary item $ 14,678 $ 18,553
Adjustments to reconcile income before
extraordinary item to net cash provided
by operating activities:
Increase in accounts payable and
other liabilities 71 26
Increase in other assets (119) (37)
-------- --------
Net Cash Provided By Operating Activities $ 14,630 $ 18,542
-------- --------
Cash Flows Provided by Investing Activities -
Distributions from TRG in excess of income
before extraordinary item $ 15,438 $ 16,147
-------- --------
Cash Flows From Financing Activities:
Cash dividends $(29,113) $(35,001)
Purchases of stock (347)
-------- --------
Net Cash Used in Financing Activities $(29,460) $(35,001)
-------- --------
Net Increase (Decrease) In Cash $ 608 $ (312)
Cash and Cash Equivalents at Beginning of Period 7,886 9,388
-------- --------
Cash and Cash Equivalents at End of Period $ 8,494 $ 9,076
======== ========
See notes to financial statements.
- 5 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
Nine months ended September 30, 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 September 30, 1997
consists of a 36.68% and 36.70%, respectively, managing general partnership
interest. Net income and distributions are allocable to the general and limited
TRG partners in accordance with their percentage ownership. In the first nine
months of 1997, the Company's ownership changed from 36.68% to 36.70% as a
result of the Company's exchange of common shares for TRG units of partnership
interest newly issued in connection with the exercise of incentive options (Note
3). The Company's average ownership percentage in TRG for the three and nine
month periods ended September 30, 1996 was 33.77% and 34.63%, respectively. The
Company's average ownership percentage in TRG for the three and nine month
periods ended September 30, 1997 was 36.69%.
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 September 30, 1997 was $476.3 million and $470.5 million, respectively.
The Company's proportionate share of TRG's income before extraordinary item for
the three months ended September 30, 1996 and 1997 was $7.1 million and $8.5
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. The Company's proportionate share of TRG's income before
extraordinary item for the nine months ended September 30, 1996 and 1997 was
$20.9 million and $25.2 million, respectively, reduced by $5.7 million and $6.1
million, respectively, representing adjustments arising from the Company's
additional basis in TRG's net assets. In the third quarter of 1996, the Company
recognized an extraordinary charge to income related to TRG's prepayment of
debt.
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.
- 6 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31 September 30
----------- ------------
1996 1997
---- ----
Assets:
Properties $1,136,416 $1,379,546
Accumulated depreciation and amortization 234,030 257,893
---------- ----------
$ 902,386 $1,121,653
Other assets 75,876 67,359
---------- ----------
$ 978,262 $1,189,012
========== ==========
Liabilities:
Unsecured notes payable $ 786,705 $ 841,339
Mortgage notes payable 159,703 159,319
Other notes payable 54,997 190,325
Capital lease obligation 39,849 55,320
Accounts payable and other liabilities 86,779 117,132
Distributions in excess of net income of
unconsolidated joint ventures 142,367 144,571
---------- ----------
$1,270,400 $1,508,006
Accumulated deficiency in assets (292,138) (318,994)
---------- ----------
$ 978,262 $1,189,012
========== ==========
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenues $66,317 $ 78,037 $186,305 $223,961
------- -------- -------- --------
Operating costs other than
interest and depreciation
and amortization $30,910 $ 36,763 $ 86,392 $108,651
Interest expense 18,448 19,388 52,714 54,002
Depreciation and amortization 9,367 11,050 26,069 31,386
------- -------- -------- --------
$58,725 $ 67,201 $165,175 $194,039
------- -------- -------- --------
Equity in net income of
unconsolidated joint ventures 13,348 12,205 39,178 38,873
------- -------- -------- --------
Income before extraordinary item $20,940 $ 23,041 $ 60,308 $ 68,795
------- -------- -------- --------
Extraordinary item (1,328) (1,328)
------- -------- -------- --------
Net Income $19,612 $ 23,041 $ 58,980 $ 68,795
======= ======== ======== ========
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
TRG's beneficial interest
in unconsolidated joint
ventures' operations:
Revenues less recoverable and
other operating expenses $23,178 $23,187 $ 68,720 $ 68,503
Interest expense (6,601) (7,491) (20,609) (20,720)
Depreciation and amortization (3,229) (3,491) (8,933) (8,910)
------- -------- -------- --------
Net Income $13,348 $12,205 $ 39,178 $ 38,873
======= ======= ======== ========
- 7 -
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 September 30, 1997 of $12.875
and $12.8125 per common share, the aggregate value of interests in TRG which may
be tendered under the Cash Tender Agreement was approximately $954 million and
$946 million, respectively. Purchase of these interests at September 30, 1997
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).
Effective September 30, 1997, TRG amended its partnership agreement to split
existing units of partnership interest at a ratio of 1975.08 to one. Also
effective September 30, 1997, the Continuing Offer was amended to change the
number of shares exchangeable for a unit of partnership interest. Formerly, the
number was based on a market valuation of the Company on the trading date
immediately preceding the date of exchange. Under the amended agreement, one
unit of TRG partnership interest is exchangeable for one share of the Company's
common stock.
Shares of common stock that were acquired by the GM Trusts and the AT&T Master
Pension Trust 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). 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.
- 8 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Currently, 8.9 million units of partnership interest, after reflecting the
effect of the unit split described above, may be issued under TRG's incentive
option plan for employees of The Taubman Company Limited Partnership (the
Manager) including 7.0 million units of outstanding options. 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.
During the first nine months of 1997, options for 101 thousand units were
issued at an exercise price of $13.14 per unit, options for 37 thousand units
were exercised with a weighted average exercise price of $11.19 per unit, and
options for 22 thousand units were canceled with a weighted average exercise
price of $10.86 per unit. As of September 30, 1997, there were outstanding
options for 7.0 million units with a weighted average exercise price of $11.22.
As of September 30, 1997, options for 4.1 million units were vested with a
weighted average exercise price of $11.35.
Note 4 - Subsequent Event
In October 1997, the Company completed a $200 million public offering of eight
million shares of 8.30% Series A Cumulative Redeemable Preferred Stock. The
Series A Preferred Stock has no stated maturity, sinking fund or mandatory
redemption and is not convertible into any other securities of the Company.
Dividends will accrue from the date of original issuance, October 3, 1997, and
are payable in arrears on or about the last day of each March, June, September,
and December. The first dividend will be paid on December 31, 1997.
The Company used the proceeds to acquire a Series A Preferred Equity interest
in TRG that will entitle the Company to distributions (in the form of guaranteed
payments) in amounts equal to the dividends payable on the Company's Series A
Preferred Stock. The costs of the offering were paid by TRG. TRG used the net
proceeds to pay down short term debt under TRG's existing revolving credit and
commercial paper facilities.
- 9 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31 September 30
----------- ------------
1996 1997
---- ----
Assets:
Properties $1,136,416 $1,379,546
Accumulated depreciation and amortization 234,030 257,893
---------- ----------
$ 902,386 $1,121,653
Cash and cash equivalents 7,912 1,178
Accounts and notes receivable, less allowance
for doubtful accounts of $393 and $464
in 1996 and 1997 20,162 16,091
Accounts receivable from related parties 6,293 7,861
Deferred charges and other assets 41,509 42,229
---------- ----------
$ 978,262 $1,189,012
========== ==========
Liabilities:
Unsecured notes payable $ 786,705 $ 841,339
Mortgage notes payable 159,703 159,319
Other notes payable 54,997 190,325
Capital lease obligation 39,849 55,320
Accounts payable and other liabilities 86,779 117,132
Distributions in excess of net income of
unconsolidated Joint Ventures (Note 4) 142,367 144,571
---------- ----------
$1,270,400 $1,508,006
Commitments and Contingencies (Notes 8 and 9)
Accumulated deficiency in assets (292,138) (318,994)
---------- ----------
$ 978,262 $1,189,012
========== ==========
Allocation of accumulated deficiency in assets:
General Partners $ (226,242) $ (247,064)
Limited Partners (65,896) (71,930)
---------- ----------
$ (292,138) $ (318,994)
========== ==========
See notes to financial statements.
- 10 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except unit data)
Three Months Ended September 30
-------------------------------
1996 1997
---- ----
Revenues:
Minimum rents $38,893 $45,140
Percentage rents 1,319 1,867
Expense recoveries 21,243 24,476
Other 2,816 4,379
Revenues from management, leasing
and development services 2,046 2,175
------- -------
$66,317 $78,037
------- -------
Operating Costs:
Recoverable expenses $18,504 $20,932
Other operating 6,247 7,980
Management, leasing and development
services 1,032 1,264
General and administrative 5,127 6,587
Interest expense 18,448 19,388
Depreciation and amortization 9,367 11,050
------- -------
$58,725 $67,201
------- -------
Income before equity in net income of
unconsolidated Joint Ventures and
extraordinary item $ 7,592 $10,836
Equity in net income of unconsolidated
Joint Ventures (Note 4) 13,348 12,205
------- -------
Income before extraordinary item $20,940 $23,041
------- -------
Extraordinary item (Note 5) (1,328)
------- -------
Net income $19,612 $23,041
======= =======
Allocation of Net Income:
General Partners $15,098 $17,845
Limited Partners 4,514 5,196
------- -------
$19,612 $23,041
======= =======
Earnings per Unit of Partnership Interest (Note 7):
Income before extraordinary item $ .16 $ .17
Extraordinary item (.01)
------- -------
Net Income $ .15 $ .17
======= =======
Weighted Average Number of Units of
Partnership Interest Outstanding (Note 7) 130,377,743 138,277,110
=========== ===========
See notes to financial statements.
- 11 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except unit data)
Nine Months Ended September 30
------------------------------
1996 1997
---- ----
Revenues:
Minimum rents $108,416 $130,406
Percentage rents 3,771 5,030
Expense recoveries 59,503 70,661
Other 8,424 11,384
Revenues from management, leasing
and development services 6,191 6,480
-------- --------
$186,305 $223,961
-------- --------
Operating Costs:
Recoverable expenses $ 49,520 $ 60,223
Other operating 17,841 26,218
Management, leasing and development
services 3,631 3,553
General and administrative 15,400 18,657
Interest expense 52,714 54,002
Depreciation and amortization 26,069 31,386
-------- --------
$165,175 $194,039
-------- --------
Income before equity in net income
of unconsolidated Joint Ventures and
extraordinary item $ 21,130 $ 29,922
Equity in net income of unconsolidated
Joint Ventures (Note 4) 39,178 38,873
-------- --------
Income before extraordinary item $ 60,308 $ 68,795
-------- --------
Extraordinary item (Note 5) (1,328)
-------- --------
Net Income $ 58,980 $ 68,795
======== ========
Allocation of Net Income:
General Partners $ 46,599 $ 53,278
Limited Partners 12,381 15,517
-------- --------
$ 58,980 $ 68,795
======== ========
Earnings per Unit of Partnership Interest (Note 7):
Income before extraordinary item $ .47 $ .50
Extraordinary item (.01)
-------- --------
Net Income $ .46 $ .50
======== ========
Weighted Average Number of Units of
Partnership Interest Outstanding (Note 7) 127,576,781 138,261,847
=========== ===========
See notes to financial statements.
- 12 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended September 30
------------------------------
1996 1997
---- ----
Cash Flows From Operating Activities:
Income before extraordinary item $ 60,308 $ 68,795
Adjustments to reconcile income before
extraordinary item to net cash provided
by operating activities:
Depreciation and amortization 26,069 31,386
Provision for losses on accounts receivable 998 828
Amortization of deferred financing costs 1,610 1,740
Other 495 468
Gain on sale of land (315) (880)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Receivables, deferred charges and other assets (5,936) (6,129)
Accounts payable and other liabilities 3,505 30,375
--------- ---------
Net Cash Provided By Operating Activities $ 86,734 $ 126,583
--------- ---------
Cash Flows From Investing Activities:
Purchase of interests in Centers $(103,570) $(124,783)
Additions to properties (20,678) (105,947)
Proceeds from sale of land 686 1,795
Contributions to Joint Ventures (3,398) (12,573)
Distributions from Joint Ventures
in excess of net income 8,943 14,777
--------- ---------
Net Cash Used In Investing Activities $(118,017) $(226,731)
--------- ---------
Cash Flows From Financing Activities:
Debt proceeds $ 275,212 $ 243,991
Debt payments (189,667) (54,544)
Extinguishment of debt (Note 5) (35,964)
Debt issuance costs (830) (382)
Issuance of units of partnership interest (Note 8) 65,575 414
Cash distributions (88,113) (96,065)
--------- ---------
Net Cash Provided By Financing Activities $ 26,213 $ 93,414
--------- ---------
Net Decrease In Cash $ (5,070) $ (6,734)
Cash and Cash Equivalents at Beginning of Period 16,836 7,912
--------- ---------
Cash and Cash Equivalents at End of Period $ 11,766 $ 1,178
========= =========
Interest on mortgage notes and other loans paid during the nine months ended
September 30, 1996 and 1997, net of amounts capitalized of $3,602 and $6,798,
was $41,123 and $39,149, respectively.
See notes to financial statements.
- 13 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 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.
Certain 1996 amounts have been reclassified to conform to 1997
classifications.
Note 2 - Acquisition
In September 1997, TRG acquired the Regency Square shopping center, located in
Richmond, Virginia, for $123.9 million. TRG borrowed under its existing
commercial paper facility and an existing revolving credit facility to fund the
purchase price (Note 9). The acquisition is expected to have an immaterial
effect on net income in 1997. The pro forma effect of the acquisition on 1996
net income is also immaterial.
Note 3 - Consolidated Ventures
In the second quarter of 1997, TRG entered into a partnership agreement to
develop, own and operate Great Lakes Crossing, a value super-regional mall
presently under construction in Auburn Hills, Michigan. The accounts of the
partnership are consolidated in these financial statements since TRG, the
managing and sole general partner, has a controlling 80% interest in the
venture. The Center is expected to open in the fall of 1998.
Taubman MacArthur Associates Limited Partnership is developing MacArthur
Center in Norfolk, Virginia. MacArthur Center is expected to open in the spring
of 1999. The accounts of the partnership are consolidated in these financial
statements since TRG, the managing general partner, has a controlling 70%
interest in the venture (Note 9).
- 14 -
TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 4 - Investments in Joint Ventures
Certain Taubman Shopping Centers are partially owned through joint ventures
that are not controlled by TRG (Joint Ventures). TRG is generally 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 September 30, 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
Twelve Oaks Mall Limited
Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodfield Associates Woodfield 50
Woodland Woodland 50
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
Joint Ventures by $7.3 million and $7.4 million at December 31, 1996 and at
September 30, 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 the 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 September 30
----------- ------------
1996 1997
---- ----
Assets:
Properties, net $ 450,469 $ 542,387
Other assets 71,252 55,957
--------- ---------
$ 521,721 $ 598,344
========= =========
Liabilities and partners'
accumulated deficiency in assets:
Debt $ 724,162 $ 821,879
Capital lease obligations 5,000 6,396
Other liabilities 51,686 44,872
TRG accumulated deficiency in assets (135,070) (137,185)
Joint Venture Partners' accumulated
deficiency in assets (124,057) (137,618)
--------- ---------
$ 521,721 $ 598,344
========= =========
TRG accumulated deficiency in assets (above) $(135,070) $(137,185)
Elimination of intercompany profit (7,297) (7,386)
--------- ---------
Distributions in excess of net income
of unconsolidated Joint Ventures $(142,367) $(144,571)
========= =========
- 15 -
TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenues $63,657 $62,541 $202,369 $187,574
------- ------- -------- --------
Recoverable and other
operating expenses $22,793 $22,827 $ 77,722 $ 68,417
Interest expense 12,857 13,588 40,314 38,459
Depreciation and amortization 6,412 6,112 18,308 16,728
------- ------- -------- --------
Total operating costs $42,062 $42,527 $136,344 $123,604
------- ------- -------- --------
Net Income $21,595 $20,014 $ 66,025 $ 63,970
======= ======= ======== ========
Net income attributable to TRG $11,923 $11,234 $ 34,965 $ 35,035
Realized intercompany profit 1,425 971 4,213 3,838
------- ------- -------- --------
Equity in net income
of unconsolidated Joint Ventures $13,348 $12,205 $ 39,178 $ 38,873
======= ======= ======== ========
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
TRG's beneficial interest
in unconsolidated Joint
Ventures' operations:
Revenues less recoverable and
other operating expenses $23,178 $23,187 $ 68,720 $ 68,503
Interest expense (6,601) (7,491) (20,609) (20,720)
Depreciation and amortization (3,229) (3,491) (8,933) (8,910)
------- ------- -------- ---------
Net Income $13,348 $12,205 $ 39,178 $ 38,873
======= ======= ======== =========
Note 5 - Debt
In July 1997, TRG issued $55 million of unsecured 10-year notes under its
medium-term note program at a coupon rate of 7%. The net proceeds were used to
pay down floating rate debt under TRG's revolving credit facilities.
In the third quarter of 1996, TRG recognized a $1.3 million extraordinary
charge to income, related to the extinguishment of the Fairlane Town Center
mortgage, consisting primarily of a prepayment penalty.
- 16 -
TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 6 - Beneficial Interest in Debt and Interest Expense
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
September 30, 1997 821,879 442,353 1,190,983 1,633,336
Capitalized interest:
Nine months ended
September 30, 1996 $ 3,616 $ 2,510 $ 3,602 $ 6,112
Nine months ended
September 30, 1997 6,683 3,851 6,798 10,649
Interest expense
(Net of capitalized interest):
Nine months ended
September 30, 1996 $ 40,314 $ 20,609 $ 52,714 $ 73,323
Nine months ended
September 30, 1997 38,459 20,720 54,002 74,722
Note 7 - Units of Partnership Interest
Effective September 30, 1997, TRG amended its partnership agreement to split
existing units of partnership interest at a ratio of 1975.08 to one. There were
138,297,334 units of partnership interest outstanding as of September 30, 1997.
The split did not alter the ownership percentage of any of TRG's partners. All
per unit amounts have been adjusted to reflect the unit split on a retroactive
basis.
Note 8 - Incentive Option Plan
TRG has an incentive option plan for employees of the Manager. Currently, 8.9
million units of partnership interest, as restated for the unit split (described
in Note 7), may be issued under the plan, including 7.0 million units of
outstanding options. 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 nine months of 1997, options for 101 thousand units were
issued at an exercise price of $13.14 per unit, options for 37 thousand units
were exercised with a weighted average exercise price of $11.19 per unit, and
options for 22 thousand units were canceled with a weighted average exercise
price of $10.86 per unit. As of September 30, 1997 there were outstanding
options for 7.0 million units with a weighted average exercise price of $11.22.
As of September 30, 1997, options for 4.1 million units were vested with a
weighted average exercise price of $11.35.
- 17 -
TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 9 - Subsequent Event
In October 1997, TRG's managing general partner, Taubman Centers, Inc. (TCO)
used the $200 million proceeds of its offering of 8.30% Series A Cumulative
Redeemable Preferred Stock (Series A Preferred Stock) to acquire a Series A
Preferred Equity interest in TRG that will entitle TCO to distributions (in the
form of guaranteed payments) in amounts equal to the dividends payable on TCO's
Series A Preferred Stock. TRG bore all expenses of the offering, which will be
accounted for as a reduction of the proceeds from the Series A Preferred Equity.
TRG used the net proceeds to pay down floating rate debt under TRG's existing
revolving credit and commercial paper facilities, which were used to fund the
acquisition of Regency Square in September 1997 (Note 2).
Also in October 1997, TRG closed on a three year $150 million construction
facility for MacArthur Center, which is owned by a consolidated 70% owned
venture. The loan bears interest at one month LIBOR plus 1.2%. The payment of
the principal and interest is guaranteed by TRG. The loan agreement provides for
the reduction of the amount guaranteed as certain center performance and
valuation criteria are met.
- 18 -
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)
Taubman Shopping Centers that TRG controls by ownership or contractual
agreement, 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 that are not controlled (Joint
Ventures). 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 three quarters of 1997:
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
1996 1996 1996 1996 1996 1997 1997 1997
---------------------------------------------------------------------------------
(in thousands)
Mall tenant sales $591,677 $617,821 $627,791 $989,956 $2,827,245 $600,709 $629,906 $692,487
Revenues 129,947 128,753 129,970 138,538 527,208 130,677 134,756 137,728
Occupancy
Average Occupancy 87.8% 87.3% 86.8% 87.6% 87.4% 86.5% 86.8% 87.0%
Ending Occupancy 87.7% 87.3% 86.8% 88.0% 88.0% 86.4% 87.1% 87.2%
Leased Space 89.5% 88.2% 87.6% 89.0% 89.0% 88.7% 89.5% 90.8%
- 19 -
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 three quarters
of 1997:
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
1996 1996 1996 1996 1996 1997 1997 1997
---------------------------------------------------------------------------------
Minimum rents 12.3% 11.7% 11.7% 7.6% 10.4% 12.6% 11.8% 11.3%
Percentage rents 0.3 0.3 0.3 0.3 0.3 0.2 0.3 0.3
Expense recoveries 5.6 5.0 4.6 3.5 4.5 5.2 5.1 4.7
---- ---- ---- ---- ---- ---- ---- ----
Mall tenant occupancy
costs 18.2% 17.0% 16.6% 11.4% 15.2% 18.0% 17.2% 16.3%
==== ==== ==== ==== ==== ==== ==== ====
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 $38.62 for the twelve months ended
September 30, 1997, compared to $37.59 for the twelve months ended September 30,
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 significantly
from the nine dollars per square foot achieved in 1996. Average closing rents in
1997 are expected to be higher than in 1996, and the opening of a certain large
store in the fourth quarter will have a negative effect on average opening
rents.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 1997 to the Three
and Nine Months Ended September 30, 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
average ownership of TRG was 36.69% for both the three and nine months ended
September 30, 1997, and 33.77% and 34.63%, respectively, for the three and nine
month periods ended September 30, 1996. In the fourth quarter of 1996 and the
first nine months of 1997, the Company's ownership interest in TRG increased as
a result of the Company's purchase of newly issued TRG units of partnership
interest with the $75 million proceeds of the Company's equity offering and the
exchange of common shares for TRG units of partnership interest newly issued in
connection with the exercise of incentive options. As of September 30, 1997 the
Company had 50.7 million shares outstanding, up from 44.1 million at September
30, 1996. See TRG - 1997 Transactions and TRG - 1996 Transactions below for
discussion of other transactions relating to the Company's ownership interests
in TRG.
- 20 -
For the three months ended September 30, 1997, equity in income of TRG
consisted of the Company's $8.5 million proportionate share of TRG's income
before extraordinary item, compared to $7.1 million for the same period in 1996.
These amounts were reduced by $1.9 million and $2.0 million for the three months
ended September 30, 1996 and 1997, respectively, representing adjustments
arising from the Company's additional basis in TRG's net assets.
For the nine months ended September 30, 1997, equity in income of TRG
consisted of the Company's $25.2 million proportionate share of TRG's income
before extraordinary item, compared to $20.9 million for the same period in
1996. These amounts were reduced by $6.1 million and $5.7 million for the nine
months ended September 30, 1997 and 1996, respectively, representing adjustments
arising from the Company's additional basis in TRG's net assets.
In the third quarter of 1996, the Company recognized an extraordinary charge
to income related to TRG's prepayment of debt.
Net income for the three months ended September 30, 1997 was $6.2 million, or
$0.12 per share, compared to $4.6 million, or $0.10 per share, for the same
period in 1996. Net income for the nine months ended September 30, 1997 was
$18.6 million, or $0.37 per share, compared to $14.2 million, or $0.32 per
share, for the same period in 1996.
TRG
1997 Transactions
In July 1997, The Mall at Tuttle Crossing (Tuttle Crossing) opened in
Columbus, Ohio. TRG is leasing the land and mall buildings from Tuttle Holding
Co., which owns the land on which the Center is located. Beginning with the
Center's opening, TRG will make annual minimum lease payments of $4.4 million
for ninety years. 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 defined 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. Tuttle Crossing cost
approximately $115 million, including capital lease assets of $55 million.
In September 1997, TRG acquired the Regency Square shopping center, located in
Richmond Virginia, for $123.9 million. TRG borrowed under its existing
commercial paper facility and an existing revolving credit facility to fund the
purchase price. The acquisition is expected to be moderately accretive to
Distributable Cash Flow and Funds from Operations and immaterial to net income
in 1997 (see Liquidity and Capital Resources - Distributions for definitions of
Distributable Cash Flow and Funds from Operations).
In October 1997, the Company used the $200 million proceeds of its offering of
8.3% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock)
to acquire a Series A Preferred Equity interest in TRG that will entitle the
Company to distributions (in the form of guaranteed payments) in amounts equal
to the dividends payable on the Company's Series A Preferred Stock. TRG bore all
expenses of the offering, which will be accounted for as a reduction of the
proceeds from the Series A Preferred Equity. TRG used the net proceeds to pay
down floating rate debt under TRG's existing revolving credit and commercial
paper facilities, which were used to fund the acquisition of Regency Square in
September 1997.
See also Liquidity and Capital Resources - Capital Spending for discussions of
expansions at Westfarms and Biltmore.
- 21 -
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 presentations of TRG's
results of operations for the third quarter and first nine months of 1997
compared to 1996.
Occupancy and Mall Tenant Sales
The average occupancy rate in the Taubman Shopping Centers was 87.0% for the
three months ended September 30, 1997 compared to 86.8% for the comparable
period in 1996. For the nine months ended September 30, 1997 average occupancy
was 86.8% compared to 87.3% for the same period in 1996. The ending occupancy
rate for the Taubman Shopping Centers at September 30, 1997 was 87.2% versus
86.8% at the same date in 1996. Leased space at September 30, 1997 was 90.8%
compared to 87.6% at the same date in 1996.
Total sales for Taubman Shopping Center mall tenants in the three months ended
September 30, 1997 were $692.5 million, a 10.3% increase from $627.8 million in
the third quarter of 1996. Tenant sales increased 4.7% to $1.92 billion for the
nine months ended September 30, 1997 from $1.84 billion for the comparable
period in 1996. Mall tenant sales per square foot increased 3.1% and 1.3%,
respectively, in the three and nine months ended September 30, 1997 over the
compared periods in 1996. Mall tenant sales for Centers owned and open for all
of the first nine months of 1997 and 1996 (which excludes Paseo Nuevo, La
Cumbre, Regency Square and Tuttle Crossing) were $635.3 million and $1.8 billion
in the third quarter and the first nine months of 1997, a 2.8% increase and a
0.5% decrease, respectively, from the comparable periods of 1996. Sales
statistics for the first nine months of 1997 were negatively affected by new
competition near certain centers.
- 22 -
Comparison of the Three Months Ended September 30, 1997 to the Three Months
Ended September 30, 1996
The following table sets forth operating results for TRG's Managed Businesses
for the three months ended September 30, 1996 and September 30, 1997, showing
the results of the Consolidated Businesses and Joint Ventures:
Three Months Ended September 30, 1996 Three Months Ended September 30, 1997
----------------------------------------- ------------------------------------------
TRG TOTAL: TRG TOTAL:
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES VENTURES(1) BUSINESSES BUSINESSES(2) VENTURES(1) BUSINESSES
----------------------------------------- ------------------------------------------
(in millions of dollars) (in millions of dollars)
REVENUES:
Minimum rents 38.9 37.4 76.3 43.2 38.2 81.4
Percentage rents 1.3 0.9 2.2 1.8 0.9 2.6
Expense recoveries 21.2 21.6 42.8 23.8 21.8 45.6
Other 4.9 3.7 8.6 6.5 1.7 8.2
----- ----- ----- ----- ----- -----
Total revenues 66.3 63.7 130.0 75.2 62.5 137.7
OPERATING COSTS:
Recoverable expenses 18.5 18.9 37.4 20.1 18.8 38.9
Other operating 6.2 2.3 8.6 6.0 2.4 8.5
Management, leasing and
development 1.0 1.0 1.3 1.3
General and administrative 5.1 5.1 6.6 6.6
Interest expense 18.4 12.8 31.2 19.4 13.7 33.1
Depreciation and amortization 9.4 6.2 15.6 11.0 6.0 17.0
----- ----- ----- ----- ----- -----
Total operating costs 58.7 40.2 99.0 64.3 41.0 105.3
Net results of Memorial City (2) (0.1) (0.1)
----- ----- ----- ----- ----- -----
7.6 23.4 31.0 10.8 21.5 32.4
===== ===== ===== =====
Equity in net income of Joint Ventures 13.4 12.2
----- -----
Income before extraordinary item 20.9 23.0
Extraordinary item (1.3)
----- -----
NET INCOME 19.6 23.0
===== =====
SUPPLEMENTAL INFORMATION (3)
EBITDA contribution 35.4 23.2 58.6 41.3 23.2 64.5
TRG's Beneficial Interest Expense (18.4) (6.6) (25.0) (19.4) (7.5) (26.9)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
----- ----- ----- ----- ----- -----
Distributable Cash Flow contribution 16.5 16.6 33.1 21.4 15.7 37.1
===== ===== ===== ===== ====== =====
(1) With the exception of the Supplemental Information, amounts represent 100%
of 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.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
- 23 -
TRG --Consolidated Businesses
- -----------------------------
Total revenues for the three months ended September 30, 1997 were $75.2
million, an $8.9 million, or 13.4%, increase over the comparable period in 1996.
Minimum rents increased $4.3 million, of which $3.8 million was caused by Tuttle
Crossing and the Regency Square and La Cumbre acquisitions. Minimum rents also
increased due to tenant rollovers. Expense recoveries increased primarily due to
Tuttle Crossing and the acquired Centers. Other revenue increased primarily due
to an increase in lease cancellation revenue and a gain on the sale of
peripheral property.
Total operating costs increased $5.6 million, or 9.5%, to $64.3 million.
Recoverable and depreciation and amortization expenses increased primarily due
to Tuttle Crossing, Regency Square and La Cumbre. General and administrative
expense increased by $1.5 million primarily due to increases in professional
fees, compensation (including the continuing phase-in of the long-term
compensation plan), and relocation charges. Interest expense increased due to an
increase in debt used to finance Tuttle Crossing, the acquisitions of Regency
Square and La Cumbre, and capital expenditures at other Consolidated Businesses,
partially offset by a decrease in debt paid down with the proceeds from the
December 1996 equity issuance (see TRG - 1996 Transactions) and an increase in
capitalized interest.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated statement of operations 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 September 30, 1997 were $62.5
million, a $1.2 million, or 1.9%, decrease from the comparable period of 1996,
of which $1.3 million was caused by the change of Fairlane from a Joint Venture
to a Consolidated Business offset by increases at other Centers. The increase in
minimum rents was primarily due to the expansion at Westfarms, offset by the
decrease due to Fairlane. Other revenue decreased by $2.0 million primarily due
to a decrease in lease cancellation revenue.
Total operating costs increased by $0.8 million, or 2.0%, to $41.0 million for
the three months ended September 30, 1997. Interest expense increased $0.9
million primarily due to an increase in debt used to finance capital
expenditures, including the Westfarms expansion, partially offset by an increase
in capitalized interest. 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 4 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
$1.9 million, or 8.1%, to $21.5 million. TRG's equity in net income of the Joint
Ventures was $12.2 million, a 9.0% decrease from the comparable period in 1996.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary item increased
$2.1 million, or 10.0%, to $23.0 million for the three months ended September
30, 1997. In the third quarter of 1996, TRG recognized a $1.3 million
extraordinary charge related to the prepayment of Fairlane's debt. Net income
for the third quarter of 1997 was $23.0 million, a 17.3% increase from the
comparable period in 1996.
- 24 -
Comparison of the Nine Months Ended September 30, 1997 to the Nine Months Ended
September 30, 1996
The following table sets forth operating results for TRG's Managed Businesses
for the nine months ended September 30, 1996 and September 30, 1997, showing the
results of the Consolidated Businesses and Joint Ventures:
Nine Months Ended September 30, 1996 Nine Months Ended September 30, 1997
----------------------------------------- ------------------------------------------
TRG TOTAL: TRG TOTAL:
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES VENTURES(1) BUSINESSES BUSINESSES(2) VENTURES(1) BUSINESSES
----------------------------------------- ------------------------------------------
(in millions of dollars) (in millions of dollars)
REVENUES:
Minimum rents 108.4 119.0 227.4 124.5 112.9 237.3
Percentage rents 3.8 2.5 6.2 4.7 2.0 6.7
Expense recoveries 59.5 73.0 132.5 68.5 64.6 133.0
Other 14.6 7.9 22.5 17.7 8.3 26.1
----- ----- ----- ----- ----- -----
Total revenues 186.3 202.4 388.7 215.3 187.8 403.2
OPERATING COSTS:
Recoverable expenses 49.5 62.9 112.4 57.4 55.3 112.7
Other operating 17.8 10.1 28.0 20.3 8.5 28.8
Management, leasing and
development 3.6 3.6 3.6 3.6
General and administrative 15.4 15.4 18.7 18.7
Interest expense 52.7 40.3 93.0 54.0 38.9 92.9
Depreciation and amortization 26.1 17.6 43.7 31.2 16.3 47.5
----- ----- ----- ----- ----- -----
Total operating costs 165.2 130.9 296.1 185.1 118.9 304.1
Net results of Memorial City (2) (0.3) (0.3)
----- ----- ----- ----- ----- -----
21.1 71.4 92.6 29.9 68.9 98.8
===== ===== ===== =====
Equity in net income of Joint Ventures 39.2 38.9
----- -----
Income before extraordinary item 60.3 68.8
Extraordinary item (1.3)
----- -----
NET INCOME 59.0 68.8
===== =====
SUPPLEMENTAL INFORMATION (3)
EBITDA contribution 99.9 68.7 168.6 115.3 68.5 183.8
TRG's Beneficial Interest Expense (52.7) (20.6) (73.3) (54.0) (20.7) (74.7)
Non-real estate depreciation (1.4) (1.4) (1.6) (1.6)
----- ----- ----- ----- ----- -----
Distributable Cash Flow contribution 45.8 48.1 93.9 59.7 47.8 107.5
===== ===== ===== ===== ===== =====
(1) With the exception of the Supplemental Information, amounts represent 100%
of 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.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
- 25 -
TRG --Consolidated Businesses
- -----------------------------
Total revenues for the nine months ended September 30, 1997 were $215.3
million, a $29.0 million or 15.6% increase over the comparable period in 1996.
Minimum rents increased $16.1 million, of which $14.5 million was caused by the
Fairlane, Paseo Nuevo, La Cumbre and Regency Square acquisitions and Tuttle
Crossing. 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). Minimum rents also
increased due to tenant rollovers. The increase in expense recoveries was
primarily due to the acquired Centers and Tuttle Crossing, offset by decreases
at certain other Centers. Other revenue increased $3.1 million primarily due to
an insurance recovery and a litigation settlement and an increase in gains on
sales of peripheral properties.
Total operating costs increased $19.9 million, or 12.0%, to $185.1 million.
Recoverable, other operating, and depreciation and amortization expenses
increased primarily due to the Fairlane, Paseo Nuevo, and La Cumbre acquisitions
and Tuttle Crossing. General and administrative expense increased by $3.3
million primarily due to increases in compensation (including the continuing
phase-in of the long-term compensation plan), recruiter fees and relocation
charges, travel, and training. Interest expense increased due to an increase in
debt used to finance Tuttle Crossing, the acquisitions of Regency Square and La
Cumbre, and capital expenditures at other Consolidated Businesses, partially
offset by a decrease in debt paid down with the proceeds from the December 1996
equity issuance (see TRG - 1996 Transactions), and an increase in capitalized
interest.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated statement of operations 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 nine months ended September 30, 1997 were $187.8
million, a $14.6 million, or 7.2%, decrease from the comparable period of 1996,
representing a $15.0 million decrease caused by the change of Fairlane from a
Joint Venture to a Consolidated Business, offset by increases at other Centers.
The decrease in minimum rents was primarily due to Fairlane, offset by increases
at other Centers. The decrease in expense recoveries was due to Fairlane and a
decrease in recoverable expenses. Other revenue increased by $0.4 million
primarily due to gains on peripheral land sales, offset by a decrease in
interest income and lease cancellation revenue.
Total operating costs decreased by $12.0 million, or 9.2%, to $118.9 million
for the nine months ended September 30, 1997 including a $10.1 million decrease
due to Fairlane. Recoverable expenses decreased $7.6 million primarily due to
Fairlane and decreases in utilities. Other operating costs decreased primarily
due to Fairlane and a decrease in bad debt expense. Interest expense decreased
$1.4 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 4 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
$2.5 million, or 3.5%, to $68.9 million. TRG's equity in net income of the Joint
Ventures was $38.9 million, a 0.8% decrease from the comparable period in 1996.
- 26 -
Net Income
- ----------
As a result of the foregoing, income before extraordinary item increased by
$8.5 million, or 14.1%, to $68.8 million for the nine months ended September 30,
1997. In the third quarter of 1996, TRG recognized a $1.3 million extraordinary
charge related to the prepayment of Fairlane's debt. Net income for the nine
months ended September 30, 1997 was $68.8 million, a 16.6% increase from the
comparable period in 1996.
- 27 -
Liquidity and Capital Resources
Taubman Centers, Inc.
As of September 30, 1997, the Company had a cash balance of $9.1 million, the
source of which was primarily TRG's distributions, and had incurred no
indebtedness. During the first nine months of 1997 and 1996, the Company
received distributions from TRG of $35.2 million and $30.6 million,
respectively. On September 18, 1997, the Company declared a quarterly dividend
of $0.23 per common share payable October 17, 1997 to shareholders of record
September 30, 1997. As of September 30, 1997, the Company had 50.8 million
common shares outstanding compared to 44.1 million at September 30, 1996.
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 common 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. The Taxpayer Relief Act of 1997 has been considered in arriving
at this estimate. The Company does not believe the new tax provisions will have
any material effect on the tax status of the 1997 common dividends. 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
common 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.
On October 3, 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its $500 million equity shelf registration statement.
Dividends accrue from the date of original issuance and are payable in arrears
on or about the last day of each March, June, September, and December. The first
dividend will be paid on December 31, 1997. The Company used the proceeds to
acquire a Series A Preferred Equity interest in TRG that will entitle the
Company to distributions (in the form of guaranteed payments) in amounts equal
to the dividends payable on the Company's Series A Preferred Stock. The tax
status of total 1997 dividends to be paid on Series A Preferred Stock is
estimated to be 100% ordinary income.
TRG
As of September 30, 1997, TRG had a cash balance of $1.2 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. Borrowings under this facility at September 30, 1997 were $110 million.
TRG also has available an unsecured bank line of credit of up to $30 million
with borrowings of $5.3 million at September 30, 1997. This line expires in
August 1998. TRG also has available a secured commercial paper facility of up to
$75 million, all of which had been issued at September 30, 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 12 month period.
- 28 -
Proceeds from short term borrowings provided $189.5 million of funding for the
first nine months of 1997 (including $123.9 million for the acquisition of
Regency Square in September 1997) compared to $121.3 million in 1996 (including
$103.6 million for the acquisitions of Paseo Nuevo in June 1996 and of interests
in Fairlane Town Center in July 1996). Proceeds in both 1997 and 1996 were also
used to fund capital expenditures for the Consolidated Businesses and
contributions to Joint Ventures for construction costs.
TRG has a medium-term note program under TRG's $500 million shelf registration
statement. During July 1997, TRG issued $55 million of unsecured 10-year notes
at a coupon rate of 7%. The net proceeds were used to pay down floating rate
debt under TRG's revolving credit facilities. TRG issued $154 million of notes
in the first nine months of 1996. Including the issuance in July 1997, TRG has
issued a total of $342 million of notes since the program's inception in 1995.
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 guaranteed by each of the
owners of Arizona Mills, L.L.C. to the extent of its respective ownership
percentage. The loan agreement provides for the reduction of the amount
guaranteed as certain center performance and valuation criteria are met.
Borrowings on the facility at September 30, 1997 were $76.5 million. TRG owns a
37% interest in Arizona Mills, L.L.C.
At September 30, 1997, TRG's debt and its beneficial interest in the debt of
its Joint Ventures (excluding $58.9 million of capital lease obligations)
totaled $1,633.3 million. As shown in the following table, $75.3 million of this
debt was floating rate debt that remained unhedged at September 30, 1997. This
debt was paid down in October with the net proceeds of the $200 million
preferred equity issuance. 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
accounted for 0.37% of the effective rate of interest on TRG's beneficial
interest in debt at September 30, 1997. Included in TRG's beneficial interest in
debt at September 30, 1997 is debt used to fund development and expansion costs.
TRG's beneficial interest in assets on which interest is being capitalized
totaled $170.1 million as of September 30, 1997. TRG's beneficial interest in
capitalized interest was $3.5 million and $10.6 million for the three and nine
months ended September 30, 1997, respectively.
- 29 -
Beneficial Interest in Debt
------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 9/30/97 Rate Resets 9/30/97
---------- -------- ---- ------ --------
Total beneficial interest
in fixed rate debt 1,166.9(1) 7.53%(2)
Floating rate debt hedged
via interest rate caps:
Through January 1998 100.0 6.26(2) 6.50 Monthly 5.66%
Through January 1998 65.0(3) 6.41 6.50 Monthly 5.66
Through July 1998 65.0 6.26(2) 8.35 Monthly 5.66
Through October 1998 39.3 6.25 6.00 Three Months 5.78
Through October 2001 25.0 6.11 8.55 Monthly 5.66
Through January 2002 53.4 6.63(2) 9.50 Monthly 5.66
Through July 2002 43.4 6.72(2) 6.50 Monthly 5.66
Other floating rate debt 75.3 6.26(2)
-------
Total beneficial interest
in debt 1,633.3 7.20(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%. The notes were repaid in November 1997 with short term credit
facilities.
(2) Denotes weighted average interest rate.
(3) This debt is additionally hedged via an interest rate cap for the period
February 1998 through July 1999 at a one month LIBOR cap rate of 7%.
In October 1997, the Company used the $200 million proceeds of its offering of
Series A Preferred Stock to acquire a Series A Preferred Equity interest in TRG
that will entitle the Company to distributions (in the form of guaranteed
payments) in amounts equal to the dividends payable on the Company's Series A
Preferred Stock. TRG bore all expenses of the offering, which will be accounted
for as a reduction of the proceeds from the Series A Preferred Equity. TRG used
the net proceeds to pay down floating rate debt under TRG's existing revolving
credit and commercial paper facilities, which were used to fund the acquisition
of Regency Square in September 1997.
Also in October 1997, TRG closed on a three year $150 million construction
facility for MacArthur Center, which is owned by a consolidated 70% owned
venture. The loan bears interest at one month LIBOR plus 1.2%. The payment of
the principal and interest is guaranteed by TRG. The loan agreement provides for
the reduction of the amount guaranteed as certain center performance and
valuation criteria are met.
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.
- 30 -
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 TRG's pro rata share of the interest
expense on the debt of the Managed Businesses. 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
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 September 30, 1996 and 1997:
Three Months Ended September 30, 1996 Three Months Ended September 30, 1997
----------------------------------------- -----------------------------------------
TRG TRG
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES VENTURES(1) TOTAL: BUSINESSES VENTURES(1) TOTAL:
----------------------------------------- -----------------------------------------
(in millions of dollars) (in millions of dollars)
TRG's Net Income(2) 19.6 23.0
Extraordinary Item 1.3
Depreciation and Amortization(3)(4) 12.6 14.5
TRG's Beneficial Interest Expense(3) 25.0 26.9
-- ----- -----
EBITDA 35.4 23.2 58.6 41.3 23.2 64.5
TRG's Beneficial Interest Expense(3) (18.4) (6.6) (25.0) (19.4) (7.5) (26.9)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 16.5 16.6 33.1 21.4 15.7 37.1
===== ===== ===== ===== ===== =====
The Company's share of Distributable
Cash Flow 11.2 13.6
Other income/ expenses, net (0.1) (0.2)
----- -----
Funds from Operations 11.0 13.4
===== =====
(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 $0.6 million for
the three months ended September 30, 1997. There were no land sales in the
three months ended September 30, 1996.
(3) Amounts represent TRG's beneficial interest in depreciation and amortization
and interest expense.
(4) Includes $0.8 million and $1.0 million of mall tenant allowance amortization
in the third quarter of 1996 and 1997, respectively.
(5) Amounts may not add due to rounding.
- 31 -
The following table summarizes TRG's Distributable Cash Flow and the
Company's Funds from Operations for the nine months ended September 30, 1996 and
1997:
Nine Months Ended September 30, 1996 Nine Months Ended September 30, 1997
----------------------------------------- -----------------------------------------
TRG TRG
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES VENTURES(1) TOTAL: BUSINESSES VENTURES(1) TOTAL:
----------------------------------------- -----------------------------------------
(in millions of dollars) (in millions of dollars)
TRG's Net Income(2) 59.0 68.8
Extraordinary Item 1.3
Depreciation and Amortization(3)(4) 35.0 40.3
TRG's Beneficial Interest Expense(3) 73.3 74.7
----- -----
EBITDA 99.9 68.7 168.6 115.3 68.5 183.8
TRG's Beneficial Interest Expense(3) (52.7) (20.6) (73.3) (54.0) (20.7) (74.7)
Non-real estate depreciation (1.4) (1.4) (1.6) (1.6)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 45.8 48.1 93.9 59.7 47.8 107.5
===== ===== ===== ===== ===== =====
The Company's share of Distributable
Cash Flow 32.5 39.4
Other income/ expenses, net (0.5) (0.6)
----- -----
Funds from Operations 32.0 38.9
===== =====
(1) Amounts represent TRG's beneficial interest in the operations of its Joint
Ventures.
(2) Includes TRG's share of gains on peripheral land sales of $0.3 million and
$2.5 million for the nine months ended September 30, 1996 and 1997,
respectively.
(3) Amounts represent TRG's beneficial interest in depreciation and amortization
and interest expense.
(4) Includes $2.4 million and $2.8 million of mall tenant allowance amortization
for the nine months ended September 30, 1996 and 1997, respectively.
(5) Amounts may not add due to rounding.
During the third quarter of 1997, EBITDA and Distributable Cash Flow were
$64.5 million and $37.1 million, compared to $58.6 million and $33.1 million for
the same period in 1996. TRG distributed $32.1 million to its partners in the
third quarter of 1997, compared to $30.0 million in the same period of 1996. The
Company's Funds from Operations for the third quarter of 1997 was $13.4 million,
compared to $11.0 million for the same period in 1996.
During the first nine months of 1997, EBITDA and Distributable Cash Flow were
$183.8 million and $107.5 million, compared to $168.6 million and $93.9 million
for the same period in 1996. TRG distributed $96.1 million and $88.1 million to
its partners in the nine month periods ended September 30, 1997 and 1996,
respectively. The Company's Funds from Operations for 1997 was $38.9 million,
compared to $32.0 million for the same period in 1996.
The Partnership Committee of TRG makes an annual determination of appropriate
distributions for each year. The determination is based on anticipated
Distributable Cash Flow available after guaranteed payments to the Company on
TRG's Series A Preferred Equity, 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.
- 32 -
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.
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is
generally recovered from tenants. Excluding acquisitions, planned capital
spending by the Managed Businesses not recovered from tenants for 1997 is
summarized in the following table:
1997
----------------------------------------------------
TRG's Share of
Consolidated Joint Consolidated Businesses
Businesses Ventures(1) and Joint Ventures(1)(2)
----------------------------------------------------
(in millions of dollars)
Development, renovation,
and expansion 137.8(3) 168.8(4) 193.8
Mall tenant allowances 6.5 4.3 8.8
Pre-construction development
and other 12.4(5) 1.0 13.0
----- ----- -----
Total 156.7 174.1 215.3
===== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80%
owned consolidated joint venture) and MacArthur (a 70% owned consolidated
joint venture).
(3) Includes costs related to leasehold improvements at The Mall at Tuttle
Crossing; excludes capital lease assets. Also includes construction costs
for Great Lakes Crossing and MacArthur Center.
(4) Includes costs related to expansion projects at Westfarms and Cherry Creek.
Also includes construction costs for Arizona Mills.
(5) Includes the costs to evaluate the redevelopment of Memorial City and
required property expenditures under the terms of the lease.
An expansion at Westfarms includes approximately 135 thousand square feet of
mall GLA, which opened approximately 85% leased in August 1997, and Nordstrom as
an anchor which opened in September 1997. The expansion cost approximately $100
million. An expansion at Cherry Creek includes a newly constructed Lord & Taylor
store, which opened in November 1997, and the addition of 132 thousand 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.
At Biltmore, approximately 48 thousand square feet of new mall tenant space
located in the building vacated when Saks Fifth Avenue moved to the I. Magnin
site is completely leased and will be fully open in the fall of 1997. The
project is expected to cost approximately $6 million.
The Mall at Tuttle Crossing, a 980 thousand square foot Center in Columbus,
Ohio, opened substantially leased in July 1997. The Center is anchored by
Marshall Field's, Lazarus, JCPenney and Sears and cost approximately $115
million, including capital lease assets of $55 million.
- 33 -
Arizona Mills, an enclosed value super-regional mall in Tempe, Arizona, will
open in November 1997. The 1.2 million square foot value-oriented mall is
expected to open approximately 90% leased and to cost approximately $190
million. TRG has a 37% ownership interest in Arizona Mills.
In May 1997, TRG began construction on Great Lakes Crossing, an enclosed value
super-regional mall in Auburn Hills, Michigan, owned by a partnership in which
TRG has an 80% controlling interest. The 1.7 million square foot Center is
expected to have approximately 1.4 million square feet of GLA and is scheduled
to open in the fall of 1998. The cost of building this Center will approximate
$210 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 open with 930
thousand square feet and will initially be anchored by Nordstrom and Dillard's.
This Center is owned by a joint venture in which TRG has a 70% controlling
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. 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 $190 million in 1998 and $45 million in 1999. TRG generally does not
provide estimates of capital expenditures on individual projects until the total
project cost has been approved and construction is underway or imminent.
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.
- 34 -
TRG's borrowings are not and will not be recourse to the Company without its
consent.
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 September 30, 1997 of $12.875
and $12.8125 per common share, the aggregate value of interests in TRG that may
be tendered under the Cash Tender Agreement was approximately $954 million and
$946 million, respectively. Purchase of these interests at September 30, 1997
would have resulted in the Company owning an additional 53% interest in TRG.
The Company is not aware of any present intention of any partner to sell its
interest in TRG under the Cash Tender Agreement.
- 35 -
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Effective October 3, 1997 (the Closing Date), the Company's Board of
Directors, by an amendment to the Company's articles of incorporation,
designated and established the terms of the Company's 8.30% Series A
Cumulative Redeemable Preferred Stock, par value $0.01 per share (the
Series A Preferred Stock). On the Closing Date, the Company issued in
a registered public offering all of the authorized 8.0 million shares
of the Series A Preferred Stock, each of which has a liquidation
preference of $25.00. The Series A Preferred Stock ranks senior to the
Company's common stock with respect to the payment of dividends and
upon liquidation.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4(a) -- Form of Amended and Restated Articles of
Incorporation (incorporated by reference to Exhibit 4 (a)
to the Registrant's Post - Effective Amendment No. 1 to
Form S-3 Registration Statement No. 333-35433).
4(b) -- Form of The Amended and Restated Agreement of Limited
Partnership of The Taubman Realty Group Limited
Partnership, as amended through September 30, 1997
(incorporated by reference to Exhibit 4 (c) to the
Registrant's Post Effective Amendment No. 1 to Form S-3
Registration Statement No. 333-35433).
10 -- Amended and Restated Continuing Offer, dated as of
September 30, 1997.
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.
The Company voluntarily filed a current report on Form 8-K dated
July 17, 1997 to report that TRG had reached an agreement to acquire
for cash Regency Square shopping center, which is located in Richmond
Virginia.
The Company voluntarily filed a current report on Form 8-K dated
September 4, 1997 (the "8-K"), to report the completion of TRG's
acquisition of Regency Center. The 8-K included the following
financial statements and pro forma information regarding the
acquisition:
Independent Auditors' Report.
Regency Square, Historical Summary of Revenues and Direct Operating
Expenses for the Year Ended December 31, 1996.
- 36 -
Taubman Centers, Inc., Pro Forma Condensed Statement of Operations,
Year Ended December 31, 1996, and the Six Months Ended June 30, 1997
(unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Balance Sheet, June 30, 1997 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Statement of Operations, Year Ended December 31, 1996
(unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Statement of Operations, Six Months Ended June 30, 1997
(unaudited).
The Taubman Realty Group Limited Partnership, Statement of Estimated
Taxable Operating Results of Regency Square and Estimated Cash to be
Made Available by Operations of Regency Square for a Twelve Month
Period Ended June 30, 1997 (unaudited).
On July 10, 1997 the Company voluntarily filed a current report on
Form 8-K/A dated July 19, 1996 relating to the acquisition of
interests in Fairlane Town Center, for the sole purpose of filing
exhibits.
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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, 1997 By: /s/ Lisa A. Payne
---------------------
Lisa A. Payne
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number
- ------
4(a) -- Form of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 4 (a) to the Registrant's Post -
Effective Amendment No. 1 to Form S-3 Registration Statement No.
333-35433).
4(b) -- Form of The Amended and Restated Agreement of Limited Partnership of
The Taubman Realty Group Limited Partnership, as amended through
September 30, 1997 (incorporated by reference to Exhibit 4 (c) to the
Registrant's Post Effective Amendment No. 1 to Form S-3 Registration
Statement No. 333-35433).
10 -- Amended and Restated Continuing Offer, dated as of September 30, 1997.
11 -- Statement Re: Computation of Per Share Earnings.
12 -- Statement Re: Computation of Ratios of Earnings to Fixed Charges.
27 -- Financial Data Schedule.