SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 1998
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 August 7, 1998, there were outstanding 52,884,636 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 June 30, 1998 and December 31, 1997.......................2
Statement of Operations for the three months ended June 30, 1998 and 1997.....3
Statement of Operations for the six months ended June 30, 1998 and 1997.......4
Statement of Cash Flows for the six months ended June 30, 1998 and 1997.......5
Notes to Financial Statements.................................................6
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
- --------------------------------------------
Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997.....10
Consolidated Statement of Operations for the three months ended
June 30, 1998 and 1997......................................................11
Consolidated Statement of Operations for the six months ended
June 30, 1998 and 1997......................................................12
Consolidated Statement of Cash Flows for the six months ended
June 30, 1998 and 1997......................................................13
Notes to Consolidated Financial Statements....................................14
- 1 -
TAUBMAN CENTERS, INC.
BALANCE SHEET
(in thousands, except share data)
June 30 December 31
------- -----------
1998 1997
---- ----
Assets:
Investment in TRG (Note 2):
Partnership interest $361,020 $347,859
Series A Preferred Equity interest 200,000 200,000
-------- --------
$561,020 $547,859
Cash and cash equivalents 9,370 8,965
Other assets 99
------- --------
$570,489 $556,824
======== ========
Liabilities:
Accounts payable and accrued liabilities $ 363 $ 277
Dividends payable 12,428 11,929
-------- --------
$ 12,791 $ 12,206
Commitments and Contingencies (Note 3)
Shareowners' Equity (Note 3):
Preferred Stock, $0.01 par value, 50,000,000
shares authorized; 8.3% Series A Cumulative
Redeemable Preferred Stock, $200 million
liquidation preference, 8,000,000 shares
issued and outstanding at June 30, 1998
and December 31, 1997 $ 80 $ 80
Common Stock, $0.01 par value, 250,000,000
shares authorized, 52,884,636 and 50,759,657
issued and outstanding at June 30, 1998 and
December 31, 1997 529 508
Additional paid-in capital 696,738 668,951
Dividends in excess of net income (139,649) (124,921)
-------- --------
$557,698 $544,618
-------- --------
$570,489 $556,824
======== ========
See notes to financial statements.
- 2 -
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Three Months Ended June 30
--------------------------
1998 1997
---- ----
Income:
Net income from investment in TRG (Note 2):
Equity in TRG's net income allocable to
partnership unitholders $ 5,055 $ 6,088
Series A Preferred Equity interest in TRG 4,150
Interest and other 100 78
------- -------
$ 9,305 $ 6,166
------- -------
Operating Expenses:
General and administrative $ 197 $ 190
Management fee 62 62
------- -------
$ 259 $ 252
------- -------
Net income $ 9,046 $ 5,914
Preferred dividends (4,150)
------- -------
Net income available to common shareowners $ 4,896 $ 5,914
======= =======
Basic and diluted net income per common share $ .09 $ .12
======= =======
Cash dividends declared per common share $ .235 $ .23
======= =======
Weighted average number of common
shares outstanding 52,240,765 50,724,665
========== ==========
See notes to financial statements.
- 3 -
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Six Months Ended June 30
------------------------
1998 1997
---- ----
Income:
Income before extraordinary item from investment
in TRG (Note 2):
Equity in TRG's income before extraordinary
item allocable to partnership unitholders $10,342 $12,694
Series A Preferred Equity interest in TRG 8,300
Interest and other 195 151
------- -------
$18,837 $12,845
------- -------
Operating Expenses:
General and administrative $ 400 $ 381
Management fee 125 125
------- -------
$ 525 $ 506
------- -------
Income before extraordinary item $18,312 $12,339
Equity in TRG's extraordinary item (Note 2) (366)
------- -------
Net Income $17,946 $12,339
Preferred dividends (8,300)
------- -------
Net income available to common shareowners $ 9,646 $12,339
======= =======
Basic earnings per common share:
Income before extraordinary item $ .19 $ .24
======= =======
Net income $ .19 $ .24
======= =======
Diluted earnings per common share:
Income before extraordinary item $ .19 $ .24
======= =======
Net income $ .18 $ .24
======= =======
Cash dividends declared per common share $ .47 $ .46
======= =======
Weighted average number of common
shares outstanding 51,512,514 50,722,523
========== ==========
See notes to financial statements.
- 4 -
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30
------------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Income before extraordinary item $ 18,312 $ 12,339
Adjustments to reconcile income before
extraordinary item to net cash provided
by operating activities:
Increase in accounts payable and other
liabilities 86 40
Increase in other assets (99) (77)
-------- --------
Net Cash From Operating Activities $ 18,299 $ 12,302
-------- --------
Cash Flows Provided by Investing Activities:
Purchase of additional interest in TRG $(26,660)
Distributions from TRG in excess of income
before extraordinary item 14,281 $ 10,797
-------- --------
Net Cash Provided By (Used In) Investing Activities $(12,379) $ 10,797
Cash Flows From Financing Activities:
Cash dividends to common shareowners $(23,875) $(23,331)
Cash dividends to preferred shareowners (8,300)
Proceeds from stock issuance 26,660
-------- --------
Net Cash Used in Financing Activities $ (5,515) $(23,331)
-------- --------
Net Increase (Decrease) In Cash $ 405 $ (232)
Cash and Cash Equivalents at Beginning of Period 8,965 9,388
-------- --------
Cash and Cash Equivalents at End of Period $ 9,370 $ 9,156
======== ========
See notes to financial statements.
- 5 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1998
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, 1997. 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 June 30, 1998 and December 31, 1997
consists of a 39.37% and 36.70% managing general partnership interest, as well
as a preferred equity interest. Net income and distributions are allocable first
to the preferred equity interest, and the remaining amounts to the general and
limited TRG partners in accordance with their percentage ownership.
During the six months ended June 30, 1998, the Company's ownership of TRG
increased due to the following transactions. In January 1998, TRG redeemed 6.1
million units of partnership interest from a partner. In April 1998, the Company
sold approximately 2.0 million shares of its common stock at $13.1875 per share,
before deducting the underwriting commission and expenses of the offering, under
the Company's shelf registration statement. The Company used the proceeds to
acquire an additional equity interest in TRG. TRG paid all costs of the
offering. Net proceeds of approximately $25 million were used by TRG for general
partnership purposes. Also, the Company exchanged 0.1 million shares of common
stock for an equal number of TRG partnership units issued in connection with the
exercise of incentive options, pursuant to the Company's Continuing Offer (Note
3).
The Company's average ownership percentage in TRG for the three months ended
June 30, 1998 and 1997 was 39.08% and 36.68%, respectively. The Company's
average ownership percentage in TRG for the six months ended June 30, 1998 and
1997 was 38.69% and 36.68%.
The excess of the Company's cost of its investment in TRG partnership units
over its proportionate share of TRG's accumulated partners' deficit at June 30,
1998 and December 31, 1997 was $521.1 million and $468.4 million, respectively.
The Company's income from its investment in TRG included $4.2 million and $8.3
million for the three and six months ended June 30, 1998, respectively, from its
Series A Preferred Equity interest in TRG. The Company's proportionate share of
TRG's net income available to partnership unitholders for the three months ended
June 30, 1998 and 1997 was $7.4 million and $8.1 million, respectively, reduced
by $2.3 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 available to
partnership unitholders for the six months ended June 30, 1998 and 1997 was
$14.7 million and $16.8 million, respectively, reduced by $4.4 million and $4.1
million, respectively, representing adjustments arising form the Company's
additional basis in TRG's net assets.
During the first quarter of 1998, TRG recognized an extraordinary charge of
$1.0 million relating to the extinguishment of debt by one of its joint
ventures. The Company's share of TRG's extraordinary item was $0.4 million.
- 6 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
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
unconsolidated joint ventures.
June 30 December 31
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1998 1997
---- ----
Assets:
Properties $1,709,101 $1,593,350
Accumulated depreciation and amortization 292,466 268,658
---------- ----------
$1,416,635 $1,324,692
Other assets 64,086 72,134
---------- ----------
$1,480,721 $1,396,826
========== ==========
Liabilities:
Unsecured notes payable $1,106,594 $1,008,459
Mortgage notes payable 307,839 275,868
Accounts payable and other liabilities 110,217 106,404
Distributions in excess of net income of
unconsolidated joint ventures 169,714 141,815
---------- ----------
$1,694,364 $1,532,546
Accumulated Deficiency in Assets:
Series A Preferred Equity 192,840 192,840
Partners' Accumulated Deficit (406,483) (328,560)
---------- ----------
$1,480,721 $1,396,826
========== ==========
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $92,065 $73,027 $179,234 $145,924
------- ------- -------- --------
Operating costs other than
interest and depreciation
and amortization $44,860 $ 37,634 $ 84,817 $ 71,888
Interest expense 21,949 17,330 44,586 34,614
Depreciation and amortization 14,207 10,233 28,080 20,336
------- -------- -------- --------
$81,016 $ 65,197 $157,483 $126,838
------- -------- -------- --------
Equity in income before
extraordinary item of
unconsolidated joint ventures 11,928 14,340 24,531 26,668
------- -------- -------- --------
Income before extraordinary item $22,977 $ 22,170 $ 46,282 $ 45,754
Extraordinary item (957)
------- -------- -------- --------
Net income $22,977 $ 22,170 $ 45,325 $ 45,754
Preferred distributions (4,150) (8,300)
------- -------- -------- --------
Net income available to
unitholders $18,827 $ 22,170 $ 37,025 $ 45,754
======= ======== ======== ========
- 7 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
TRG's beneficial interest
in unconsolidated joint
ventures' operations:
Revenues less recoverable and
other operating expenses $25,814 $23,687 $ 51,866 $ 45,316
Interest expense (9,706) (6,640) (18,911) (13,229)
Depreciation and amortization (4,180) (2,707) (8,424) (5,419)
------- ------- -------- --------
Income before extraordinary item $11,928 $14,340 $ 24,531 $ 26,668
======= ======= ======== ========
Note 3 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of
its partnership interest in TRG, the Company entered into an agreement with A.
Alfred Taubman and two employee benefit funds of General Motors Corporation (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 all market risk if the market price at closing is
less than the purchase price and will bear the costs of sale. Any proceeds of
the offering in excess of the purchase price will be for the sole benefit of the
Company. At A. Alfred Taubman's election, his family and 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 June 30, 1998 and December 31, 1997 of $14.25 and
$13.00 per common share, the aggregate value of interests in TRG which may be
tendered under the Cash Tender Agreement was approximately $1,052 million and
$960 million, respectively. The purchase of these interests at June 30, 1998
would have resulted in the Company owning an additional 55% 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). Under the Continuing Offer
agreement, one unit of TRG partnership interest is exchangeable for one share of
the Company's common stock.
- 8 -
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS-- (Continued)
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 each 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 have been 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.
Currently, options for 8.1 million units of partnership interest may be issued
under TRG's incentive option plan for employees of The Taubman Company Limited
Partnership (the Manager), of which options for 6.9 million units are
outstanding. 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 options
outstanding was equal to market value on the date of the grant. Incentive
options generally vest 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 six months ended June 30, 1998, options
for 0.1 million units were exercised at a weighted average price of $11.11 per
unit. There were no grants during the six months ended June 30, 1998. As of June
30, 1998, there were options outstanding for 6.9 million units with a weighted
average exercise price of $11.22 per unit, of which options for 6.1 million
units were vested with a weighted average exercise price of $11.29 per unit.
Note 4 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available
to common shareowners by the average number of common shares outstanding during
each period. For diluted earnings per common share, the Company's ownership
interest in TRG (and therefore earnings) are adjusted assuming the exercise of
all options for units of partnership interest under TRG's incentive option plan
having exercise prices less than the average market value of the units using the
treasury stock method. For the three months ended June 30, 1998 and 1997,
options for 0.2 million and 0.4 million units of partnership interest with
average exercise prices of $13.89 and $13.58, respectively, were excluded from
the computation of diluted earnings per share because the exercise prices were
greater than the average market price for the period calculated. For each of the
six months ended June 30, 1998 and 1997, options for 0.3 million units of
partnership interest with average exercise prices of $13.74 were excluded from
the computation of diluted earnings per share because the exercise prices were
greater than the average market price for the period calculated.
Three Months Six Months
Ended June 30 Ended June 30
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except share data)
Income before extraordinary
item allocable to common
shareowners (Numerator):
Basic income before
extraordinary item $ 4,896 $ 5,914 $ 10,012 $ 12,339
Effect of dilutive options (67) (60) (120) (134)
------- ------- -------- --------
Diluted income before
extraordinary item $ 4,829 $ 5,854 $ 9,892 $ 12,205
======= ======= ======== ========
Shares (Denominator) -
basic and diluted 52,240,765 50,724,665 51,512,514 50,722,523
Per common share -
basic and diluted $ .09 $ .12 $ .19 $ .24
===== ===== ===== =====
- 9 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30 December 31
------- -----------
1998 1997
---- ----
Assets:
Properties $1,709,101 $1,593,350
Accumulated depreciation and amortization 292,466 268,658
---------- ----------
$1,416,635 $1,324,692
Cash and cash equivalents 707 3,250
Accounts and notes receivable, less
allowance for doubtful accounts of
$565 and $414 in 1998 and 1997 13,319 17,803
Accounts receivable from related parties 7,418 7,400
Deferred charges and other assets 42,642 43,681
---------- ----------
$1,480,721 $1,396,826
========== ==========
Liabilities:
Unsecured notes payable $1,106,594 $1,008,459
Mortgage notes payable 307,839 275,868
Accounts payable and other liabilities 110,217 106,404
Distributions in excess of net income of
Unconsolidated Joint Ventures (Note 3) 169,714 141,815
---------- ----------
$1,694,364 $1,532,546
Commitments and Contingencies (Note 5)
Accumulated Deficiency in Assets:
Series A Preferred Equity 192,840 192,840
Partners' Accumulated Deficit (406,483) (328,560)
---------- ----------
(213,643) (135,720)
---------- ----------
$1,480,721 $1,396,826
========== ==========
Allocation of Partners' Accumulated Deficit:
General Partners $ (330,607) $ (254,474)
Limited Partners (75,876) (74,086)
---------- ----------
$ (406,483) $ (328,560)
========== ==========
See notes to financial statements.
- 10 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except units data)
Three Months Ended June 30
--------------------------
1998 1997
---- ----
Revenues:
Minimum rents $ 52,034 $ 42,416
Percentage rents 1,880 1,709
Expense recoveries 29,511 23,480
Other 6,577 3,081
Revenues from management, leasing
and development services 2,063 2,341
-------- --------
$ 92,065 $ 73,027
-------- --------
Operating Costs:
Recoverable expenses $ 25,424 $ 20,293
Other operating 11,061 9,746
Management, leasing and development
services 1,330 1,181
General and administrative 7,045 6,414
Interest expense 21,949 17,330
Depreciation and amortization 14,207 10,233
-------- --------
$ 81,016 $ 65,197
-------- --------
Income before equity in net income of
Unconsolidated Joint Ventures $ 11,049 $ 7,830
Equity in net income of Unconsolidated
Joint Ventures (Note 3) 11,928 14,340
-------- --------
Net income $ 22,977 $ 22,170
Preferred distributions to TCO (4,150)
-------- --------
Net income available to unitholders $ 18,827 $ 22,170
======== ========
Allocation of net income to unitholders:
General Partners $ 15,313 $ 17,169
Limited Partners 3,514 5,001
-------- --------
$ 18,827 $ 22,170
======== ========
Basic and diluted net income per
Unit of Partnership Interest (Note 6) $ .14 $ .16
======== ========
Weighted Average Number of Units of
Partnership Interest Outstanding 133,666,391 138,256,248
=========== ===========
See notes to financial statements.
- 11 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except units data)
Six Months Ended June 30
------------------------
1998 1997
---- ----
Revenues:
Minimum rents $103,839 $ 85,266
Percentage rents 3,211 3,163
Expense recoveries 56,448 46,185
Other 11,834 7,005
Revenues from management, leasing
and development services 3,902 4,305
-------- --------
$179,234 $145,924
-------- --------
Operating Costs:
Recoverable expenses $ 48,422 $ 39,291
Other operating 20,365 18,238
Management, leasing and development
services 2,425 2,289
General and administrative 13,605 12,070
Interest expense 44,586 34,614
Depreciation and amortization 28,080 20,336
-------- --------
$157,483 $126,838
-------- --------
Income before equity in income before
extraordinary item of Unconsolidated
Joint Ventures $ 21,751 $ 19,086
Equity in income before extraordinary item of
Unconsolidated Joint Ventures (Note 3) 24,531 26,668
-------- --------
Income before extraordinary item 46,282 45,754
Extraordinary item (957)
-------- --------
Net Income $ 45,325 $ 45,754
Preferred distributions to TCO (8,300)
-------- --------
Net income available to unitholders $ 37,025 $ 45,754
======== ========
Allocation of net income available
to unitholders:
General Partners $ 30,061 $ 35,434
Limited Partners 6,964 10,320
-------- --------
$ 37,025 $ 45,754
======== ========
Basic earnings per Unit of Partnership
Interest (Note 6):
Income before extraordinary item $ .29 $ .33
======== ========
Net income $ .28 $ .33
======== ========
Diluted earnings per Unit of Partnership
Interest (Note 6):
Income before extraordinary item $ .28 $ .33
======== ========
Net income $ .28 $ .33
======== ========
Weighted Average Number of Units of
Partnership Interest Outstanding 133,140,814 138,254,089
=========== ===========
See notes to financial statements.
- 12 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30
------------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Income before extraordinary item $ 46,282 $ 45,754
Adjustments to reconcile income before
extraordinary item to net cash provided
by operating activities:
Depreciation and amortization 28,080 20,336
Provision for losses on accounts receivable 817 474
Amortization of deferred financing costs 1,422 1,181
Other 415 294
Gain on sale of land (316)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Receivables, deferred charges and other assets (743) (1,033)
Accounts payable and other liabilities 4,813 (1,970)
--------- ---------
Net Cash Provided By Operating Activities $ 81,086 $ 64,720
--------- ---------
Cash Flows From Investing Activities:
Additions to properties $(116,349) $ (58,440)
Proceeds from sale of land 830
Contributions to Unconsolidated Joint Ventures (18,839) (1,975)
Distributions from Unconsolidated Joint Ventures
in excess of income before extraordinary item 45,781 3,491
--------- ---------
Net Cash Used In Investing Activities $ (89,407) $ (56,094)
--------- ---------
Cash Flows From Financing Activities:
Debt proceeds $ 178,594 $ 49,252
Debt payments (49,568) (231)
Redemption of partnership units (77,698)
Issuance of units of partnership interest
(Notes 2 and 5) 26,308 176
Cash distributions to partnership unitholders (63,558) (64,039)
Cash distributions to TCO for Series A
Preferred Equity interest (8,300)
--------- ---------
Net Cash Provided By (Used In) Financing Activities $ 5,778 $ (14,842)
--------- ---------
Net Decrease In Cash $ (2,543) $ (6,216)
Cash and Cash Equivalents at Beginning of Period 3,250 7,912
--------- ---------
Cash and Cash Equivalents at End of Period $ 707 $ 1,696
========= =========
Interest on mortgage notes and other loans paid during the six months ended June
30, 1998 and 1997, net of amounts capitalized of $7,456 and $4,337, was $41,918
and $32,811, respectively.
See notes to financial statements.
- 13 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 1998
Note 1 - Interim Financial Statements
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership,
management, leasing, acquisition, development, and expansion of regional retail
shopping centers (Taubman Shopping Centers) and interests therein. Taubman
Centers, Inc. (TCO) 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, 1997. 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.
Effective September 30, 1997, TRG amended its partnership agreement to split
existing units of partnership interest at a ratio of 1,975.08 to one. The split
did not alter the ownership percentage of any of TRG's partners. All unit and
per unit amounts have been adjusted to reflect the unit split on a retroactive
basis.
Certain prior year amounts have been reclassified to conform to 1998
classifications.
Note 2 - Equity transactions
In January 1998, TRG redeemed a partner's 6.1 million units of partnership
interest for approximately $77.7 million (including costs). The redemption was
funded through the use of an existing revolving credit facility.
In April 1998, TCO sold approximately 2.0 million shares of its common stock
at $13.1875 per share, before deducting the underwriting commission and expenses
of the offering, under TCO's shelf registration statement. TCO used the proceeds
to acquire an additional equity interest in TRG. TRG paid all costs of the
offering. Net proceeds of approximately $25 million were used by TRG for general
partnership purposes.
- 14 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 3 - Investments in Unconsolidated Joint Ventures
Following are TRG's investments in various real estate Unconsolidated Joint
Ventures which own regional retail shopping centers. TRG is generally the
managing general partner of these Unconsolidated Joint Ventures. TRG's interest
in each Unconsolidated Joint Venture is as follows:
TRG's %
Ownership
as of
Unconsolidated Joint Venture Taubman Shopping Center June 30, 1998
---------------------------- ----------------------- -------------
Arizona Mills, L.L.C. Arizona Mills 37%
Fairfax Company of Virginia L.L.C. 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
In March 1998, Fairfax Company of Virginia L.L.C. completed a $140 million,
6.60%, secured financing maturing in 2008. The net proceeds were used to
extinguish an existing mortgage on Fair Oaks of approximately $39 million and
pay a prepayment penalty of approximately $1.8 million. In addition, proceeds of
$5.6 million were used to close out a treasury lock agreement entered into in
1997, which resulted in an effective rate on the financing of approximately 7%.
The remaining proceeds were distributed to the owners. TRG used its 50% share of
the distributions to pay down its revolving credit facilities. TRG recognized an
extraordinary charge of approximately $1.0 million on the extinguishment of the
Fair Oaks mortgage.
TRG reduces its investment in Unconsolidated Joint Ventures to eliminate
intercompany profits on sales of services that are capitalized by the
Unconsolidated Joint Ventures. As a result, the carrying value of TRG's
investment in Unconsolidated Joint Ventures is less than TRG's share of the
deficiency in assets reported in the combined balance sheet of the
Unconsolidated Joint Ventures by approximately $8.1 million at both June 30,
1998 and December 31, 1997. These differences are amortized over the useful
lives of the related assets.
Combined balance sheet and results of operations information are presented
below (in thousands) for all Unconsolidated 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 Unconsolidated Joint
Ventures.
- 15 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
June 30 December 31
------- -----------
1998 1997
---- ----
Assets:
Properties, net $ 637,422 $ 623,981
Other assets 82,806 84,397
--------- ---------
$ 720,228 $ 708,378
========= =========
Liabilities and partners'
accumulated deficiency in assets:
Debt $ 997,029 $ 875,356
Capital lease obligations 5,787 6,509
Other liabilities 55,930 94,801
TRG accumulated deficiency in assets (161,645) (133,680)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (176,873) (134,608)
--------- ---------
$ 720,228 $ 708,378
========= =========
TRG accumulated deficiency in assets (above) $(161,645) $(133,680)
Elimination of intercompany profit (8,069) (8,135)
--------- ---------
Distributions in excess of net income
of Unconsolidated Joint Ventures $(169,714) $(141,815)
========= =========
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $72,337 $64,452 $144,458 $125,133
------- ------- -------- --------
Recoverable and other
operating expenses $26,279 $23,233 $ 51,247 $ 45,590
Interest expense 18,224 12,505 35,357 24,872
Depreciation and amortization 8,215 5,332 16,660 10,615
------- ------- -------- --------
Total operating costs $52,718 $41,070 $103,264 $ 81,077
------- ------- -------- --------
Income before extraordinary item $19,619 $23,382 $ 41,194 $ 44,056
Extraordinary item (1,913)
------- ------- -------- --------
Net Income $19,619 $23,382 $ 39,281 $ 44,056
======= ======= ======== ========
Net income attributable to TRG $10,308 $12,396 $ 20,481 $ 23,802
Extraordinary item attributable to TRG 957
Realized intercompany profit 1,620 1,944 3,093 2,866
------- ------- -------- --------
Equity in income before extraordinary
item of Unconsolidated Joint Ventures $11,928 $14,340 $ 24,531 $ 26,668
======= ======= ======== ========
- 16 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
TRG's beneficial interest
in Unconsolidated Joint Ventures'
operations:
Revenues less recoverable and
other operating expenses $25,814 $23,687 $ 51,866 $ 45,316
Interest expense (9,706) (6,640) (18,911) (13,229)
Depreciation and amortization (4,180) (2,707) (8,424) (5,419)
------- ------- -------- ---------
Income before extraordinary item $11,928 $14,340 $ 24,531 $ 26,668
======= ======= ======== =========
Note 4 - 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 in the following table. TRG's beneficial interest for 1998 and 1997
excludes the 30% minority interest in the debt outstanding on the MacArthur
Center construction facility.
Unconsolidated TRG's Share of TRG's TRG's
Joint Unconsolidated Consolidated Beneficial
Ventures Joint Ventures Subsidiaries Interest
-------- -------------- ------------ --------
Debt as of:
June 30, 1998 $997,029 $524,949 $1,414,433 $1,917,074
December 31, 1997 875,356 465,556 1,284,327 1,737,211
Capitalized interest:
Six months ended June 30, 1998 $1,130 $ 558 $7,456 $7,345
Six months ended June 30, 1997 4,547 2,830 4,337 7,167
Interest expense
(Net of capitalized interest):
Six months ended June 30, 1998 $35,357 $18,911 $44,586 $63,497
Six months ended June 30, 1997 24,872 13,229 34,614 47,843
Note 5 - Incentive Option Plan
TRG has an incentive option plan for employees of the Manager. Currently,
options for 8.1 million units of partnership interest may be issued under the
plan, of which options for 6.9 million units are outstanding. The exercise price
of all options outstanding was equal to market value on the date of grant.
Incentive options generally vest 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 six months ended June 30,
1998, options for 0.1 million units were exercised at a weighted average price
of $11.11 per unit. There were no grants during the six months ended June 30,
1998. As of June 30, 1998, there were options outstanding for 6.9 million units
with a weighted average exercise price of $11.22 per unit, of which options for
6.1 million units were vested with a weighted average exercise price of $11.29
per unit.
- 17 -
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6 - Earnings Per Unit of Partnership Interest
Basic earnings per unit of partnership interest are based on the average
number of units of partnership interest outstanding during each period. Diluted
earnings per unit of partnership interest are based on the average number of
units of partnership interest outstanding during each period, assuming exercise
of all options for units of partnership interest having exercise prices less
than the average market value of the units using the treasury stock method. For
the three months ended June 30, 1998 and 1997, options for 0.2 million and 0.4
million units of partnership interest with average exercise prices of $13.89 and
$13.58 per unit, respectively, were excluded from the computation of diluted
earnings per unit because the exercise prices were greater than the average
market price for the period calculated. For each of the six months ended June
30, 1998 and 1997, options for 0.3 million units of partnership interest with
average exercise prices of $13.74 were excluded from the computation of diluted
earnings per unit because the exercise prices were greater than the average
market price for the period calculated.
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except share data)
Income before extraordinary item
allocable to unitholders (Numerator) $18,827 $22,170 $37,982 $45,754
======= ======= ======= =======
Partnership units (Denominator):
Basic 133,666,391 138,256,248 133,140,814 138,254,089
Effect of dilutive options 1,228,281 1,027,160 1,093,919 1,112,355
----------- ----------- ----------- -----------
Diluted 134,894,672 139,283,408 134,234,733 139,366,444
=========== =========== =========== ===========
Per unit:
Basic $ .14 $ .16 $ .29 $ .33
===== ===== ===== =====
Diluted $ .14 $ .16 $ .28 $ .33
===== ===== ===== =====
- 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 consist of:
(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 with third parties that are not
controlled (Unconsolidated Joint Ventures). The Unconsolidated 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 consequently, in addition to the discussion of the operations of
the Consolidated Businesses, the operations of the Unconsolidated Joint Ventures
are presented and discussed as a whole.
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 1997 and the first and second quarters of 1998:
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
1997 1997 1997 1997 1997 1998 1998
-----------------------------------------------------------------------
(in thousands)
Mall tenant sales $600,709 $629,906 $692,487 $1,163,157 $3,086,259 $740,104 $796,862
Revenues 130,677 134,756 137,728 157,192 560,353 156,415 $161,598
Occupancy:
Average Occupancy 86.5% 86.8% 87.0% 89.5% 87.6% 88.5% 88.3%
Ending Occupancy 86.4% 87.1% 87.2% 90.3% 90.3% 88.2% 88.4%
Leased Space 88.7% 89.5% 90.8% 92.3% 92.3% 91.3% 91.6%
- 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 1997 and the first and second
quarters of 1998:
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
1997 1997 1997 1997 1997 1998 1998
-------------------------------------------------------------
Minimum rents 12.6% 11.8% 11.3% 7.3% 10.1% 12.0% 11.2%
Percentage rents 0.2 0.3 0.3 0.2 0.3 0.2 0.3
Expense recoveries 5.2 5.1 4.7 3.5 4.4 4.8 4.9
---- ---- ---- ---- ---- ---- ----
Mall tenant
occupancy costs 18.0% 17.2% 16.3% 11.0% 14.8% 17.0% 16.4%
==== ==== ==== ==== ==== ==== ====
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 $39.19 for the twelve months ended June 30,
1998, compared to $38.49 for the twelve months ended June 30, 1997.
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 four and eleven dollars per
square foot during the past five years. TRG anticipates that the spread between
opening and closing rents for the 1998 fiscal year will be around the low end of
TRG's historical range. This statistic is difficult to predict in part because
TRG's leasing policies and practices may result in early lease terminations with
actual average closing rents which may vary from the average rent per square
foot of scheduled lease expirations. In addition, the opening or closing of
large tenant spaces, which generally pay a lower rent per square foot, can
significantly change the spread in a given year.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 1998 to the Three and Six
Months Ended June 30, 1997
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, as well as
earning an 8.3% return on its preferred equity interest in TRG. The Company's
average ownership of TRG was 39.08% and 38.69% for the three and six months
ended June 30, 1998, respectively, and 36.68% for the three and six months ended
June 30, 1997.
- 20 -
Since the first quarter of 1997, the Company's ownership in TRG has changed as
a result of the following transactions. In October 1997, the Company used the
proceeds from its $200 million public offering of eight million shares of 8.3%
Series A Cumulative Redeemable Preferred Stock to acquire a Series A Preferred
Equity interest in TRG that entitles the Company to income and distributions (in
the form of guaranteed payments) in amounts equal to the dividends payable on
the Company's Series A Preferred Stock. In January 1998, TRG redeemed 6.1
million units of partnership interest from a partner, increasing the Company's
ownership of TRG. In April 1998, the Company sold approximately 2.0 million
shares of its common stock at $13.1875 per share, before deducting the
underwriting commission and expenses of the offering. The Company used the
proceeds to acquire an additional equity interest in TRG. TRG paid all costs of
the offering. Also, during 1997 and 1998 the Company exchanged common stock for
TRG units of partnership interest newly issued in connection with the exercise
of incentive options.
The Company's income from TRG for the three months ended June 30, 1998
consisted of $4.2 million from its preferred equity interest in TRG and the
Company's $7.4 million proportionate share of TRG's net income. For the three
months ended June 30, 1997, the Company's income from TRG consisted of its $8.1
million proportionate share of TRG's net income. The Company's proportionate
share of 1998 and 1997 income was reduced by $2.3 million and $2.0 million,
respectively, representing adjustments arising from the Company's additional
basis in TRG's net assets. Net income available to common shareowners for the
three months ended June 30, 1998 was $4.9 million, compared to $5.9 million for
the second quarter of 1997.
The Company's income from TRG for the six months ended June 30, 1998 consisted
of $8.3 million from its preferred equity interest in TRG and the Company's
$14.7 million proportionate share of TRG's income before extraordinary item. For
the six months ended June 30, 1997, the Company's income from TRG consisted of
its $16.8 million proportionate share of TRG's net income. The Company's
proportionate share of 1998 and 1997 income was reduced by $4.4 million and $4.1
million, respectively, representing adjustments arising from the Company's
additional basis in TRG's net assets. During the first quarter of 1998, the
Company recognized an extraordinary item of $0.4 million, consisting of its
share of TRG's extraordinary charge relating to the extinguishment of a joint
venture's mortgage (TRG -- 1998 Transactions). Net income available to common
shareowners for the six months ended June 30, 1998 was $9.6 million, compared to
$12.3 million for the same period in 1997.
TRG
1998 Transactions
In January 1998, TRG redeemed a partner's 6.1 million units of partnership
interest for approximately $77.7 million (including costs). The redemption was
funded through the use of an existing revolving credit facility.
In March 1998, a 50% owned Unconsolidated Joint Venture completed a $140
million, 6.60%, secured financing maturing in 2008. The net proceeds were used
to extinguish an existing mortgage of approximately $39 million and pay a
prepayment penalty of approximately $1.8 million. In addition, proceeds of $5.6
million were used to close out a treasury lock agreement entered into in 1997,
which resulted in an effective rate on the financing of approximately 7%. The
remaining proceeds were distributed to the owners. TRG used its share of the
distribution to pay down its revolving credit facilities.
1997 Transactions
During 1997, TRG completed the following acquisitions: Regency Square in
September, The Falls in December, and the leasehold interest in The Mall at
Tuttle Crossing (Tuttle Crossing), also in December. In addition, TRG opened the
following new centers and expansions: Tuttle Crossing in July, Arizona Mills in
November, Westfarms' expansion in August, and Biltmore's expansion throughout
the last half of the year.
- 21 -
Occupancy and Mall Tenant Sales
The average occupancy rate in the Taubman Shopping Centers was 88.3% for the
three months ended June 30, 1998 compared to 86.8% for the comparable period in
1997. For the six months ended June 30, 1998 average occupancy was 88.4%
compared to 86.7% in the same period in 1997. The increase in average occupancy
was primarily due to increases in occupancy at Centers owned and open prior to
1997. The ending occupancy rate for the Taubman Shopping Centers at June 30,
1998 was 88.4% versus 87.1% at the same date in 1997. Leased space at June 30,
1998 was 91.6% compared to 89.5% at the same date in 1997.
Total sales for Taubman Shopping Center mall tenants in the three months ended
June 30, 1998 were $796.9 million, a 26.5% increase from $629.9 million in the
same period in 1997. Tenant sales increased 24.9% to $1.5 billion for the six
months ended June 30, 1998 from $1.2 billion in the comparable period in 1997.
Mall tenant sales per square foot, excluding Arizona Mills, increased 5.9% and
4.3% for the three and six months ended June 30, 1998 over the same periods in
1997. Mall tenant sales for Centers owned and open for all of the first six
months of 1998 and 1997 were $684.6 million and $1,320.7 million in the second
quarter and first six months of 1998, an 8.7% increase and a 7.3% increase,
respectively, from the same periods in 1997.
- 22 -
Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended
June 30, 1997
The following table sets forth operating results for TRG's Managed Businesses
for the three months ended June 30, 1998 and June 30, 1997, showing the results
of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES(1) VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 50.1 44.7 94.8 40.5 37.0 77.5
Percentage rents 1.8 0.9 2.7 1.6 0.8 2.4
Expense recoveries 28.8 25.3 54.0 22.8 21.3 44.0
Management, leasing and
development 2.1 2.1 2.3 2.3
Other 6.5 1.5 8.0 3.0 5.5 8.5
----- ----- ----- ----- ----- -----
Total revenues 89.3 72.3 161.6 70.2 64.6 134.8
OPERATING COSTS:
Recoverable expenses 24.4 21.0 45.4 19.4 18.2 37.5
Other operating 9.0 3.8 12.9 7.8 3.4 11.2
Management, leasing and
development 1.3 1.3 1.2 1.2
General and administrative 7.0 7.0 6.4 6.4
Interest expense 21.9 18.3 40.2 17.3 12.6 30.0
Depreciation and amortization 14.1 8.0 22.1 10.2 5.1 15.3
----- ----- ----- ----- ----- -----
Total operating costs 77.9 51.0 128.9 62.2 39.4 101.6
Net results of Memorial City (1) (0.3) (0.3) (0.1) (0.1)
----- ----- ----- ----- ----- -----
11.0 21.3 32.3 7.8 25.2 33.1
===== ===== ===== =====
Equity in net income of
Unconsolidated Joint Ventures 11.9 14.3
----- -----
Net income 23.0 22.2
Preferred distributions to TCO (4.2)
----- -----
Net income available to unitholders 18.8 22.2
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 47.2 25.8 73.0 35.4 23.7 59.1
TRG's Beneficial Interest Expense (21.9) (9.7) (31.7) (17.3) (6.6) (24.0)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
Preferred distributions to TCO (4.2) (4.2)
----- ----- ----- ----- ----- -----
Distributable Cash Flow contribution 20.6 16.1 36.7 17.5 17.0 34.6
===== ===== ===== ===== ===== =====
(1) 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.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits. The Unconsolidated Joint Ventures are accounted for under the
equity method in TRG's Consolidated Financial Statements.
(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 1997 amounts have been reclassified to conform to 1998
classifications.
- 23 -
TRG --Consolidated Businesses
- -----------------------------
Total revenues for the three months ended June 30, 1998 were $89.3 million, a
$19.1 million, or 27.2%, increase over the comparable period in 1997. Minimum
rents increased $9.6 million, of which $8.2 million was caused by Tuttle
Crossing and the 1997 acquisitions. Minimum rents also increased due to the
expansion at Biltmore and 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.
Total operating costs increased $15.7 million, or 25.2%, to $77.9 million.
Recoverable, other operating, and depreciation and amortization expenses
increased primarily due to Tuttle Crossing and the acquisitions. Other operating
expense also increased due to professional fees and management expenses,
partially offset by a decrease in the charge to operations for development
pre-construction reserves. Interest expense increased due to an increase in debt
used to finance Tuttle Crossing, the acquisition of The Falls and the redemption
of a partner's interest in TRG, partially offset by a decrease in debt paid down
with the proceeds of the October 1997 and April 1998 equity offerings. In
addition, interest expense increased due to an increase in debt used to fund
capital expenditures, offset by the related 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.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for the three months ended June 30, 1998 were $72.3 million, a
$7.7 million, or 11.9%, increase from the comparable period of 1997. The
increase in minimum rents and expense recoveries was primarily due to Arizona
Mills and the expansion at Westfarms. Minimum rents also increased due to tenant
rollovers. Other revenue decreased by $4.0 million primarily due to decreases in
gains on peripheral land sales and lease cancellation revenue.
Total operating costs increased by $11.6 million, or 29.4%, to $51.0 million
for the three months ended June 30, 1998. Recoverable and depreciation and
amortization expenses increased primarily due to Arizona Mills and Westfarms.
Other operating expense increased primarily due to Arizona Mills. Interest
expense increased primarily due to an increase in debt used to finance Arizona
Mills and the Westfarms expansion, and a decrease in capitalized interest
related to these two projects. 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 3 to TRG's financial
statements) by the amount of intercompany profit.
As a result of the foregoing, net income of the Unconsolidated Joint Ventures
decreased by $3.9 million, or 15.5%, to $21.3 million. TRG's equity in net
income of the Unconsolidated Joint Ventures was $11.9 million, a 16.8% decrease
from the comparable period in 1997.
Net Income
- ----------
As a result of the foregoing, TRG's net income increased $0.8 million, or
3.6%, to $23.0 million for the three months ended June 30, 1998. After payment
of $4.2 million in preferred distributions to the Company, net income available
to partnership unitholders for the second quarter of 1998 was $18.8 million
compared to $22.2 million in 1997.
- 24 -
Comparison of the Six Months Ended June 30, 1998 to the Six Months Ended June
30, 1997
The following table sets forth operating results for TRG's Managed Businesses
for the six months ended June 30, 1998 and June 30, 1997, showing the results of
the Consolidated Businesses and Unconsolidated Joint Ventures:
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES(1) VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 100.0 88.8 188.9 81.3 74.7 156.0
Percentage rents 3.0 1.6 4.6 2.9 1.2 4.1
Expense recoveries 55.0 49.1 104.2 44.7 42.8 87.5
Management, leasing and
development 3.9 3.9 4.3 4.3
Other 11.6 4.9 16.4 6.9 6.7 13.6
----- ----- ----- ----- ----- -----
Total revenues 173.6 144.5 318.0 140.2 125.3 265.5
OPERATING COSTS:
Recoverable expenses 46.5 41.3 87.7 37.4 36.4 73.8
Other operating 16.3 7.1 23.4 14.3 6.1 20.4
Management, leasing and
development 2.4 2.4 2.3 2.3
General and administrative 13.6 13.6 12.1 12.1
Interest expense 44.6 35.5 80.1 34.6 25.2 59.8
Depreciation and amortization 27.9 16.0 43.9 20.2 10.2 30.4
----- ----- ----- ----- ----- -----
Total operating costs 151.3 99.9 251.2 120.8 77.9 198.7
Net results of Memorial City (1) (0.5) (0.5) (0.3) (0.3)
----- ----- ----- ----- ----- -----
21.7 44.6 66.3 19.1 47.3 66.4
===== ===== ===== =====
Equity in income before
extraordinary item of
Unconsolidated Joint Ventures 24.5 26.7
----- -----
Income before extraordinary item 46.3 45.8
Extraordinary item (1.0)
----- -----
Net income 45.3 45.8
Preferred distributions to TCO (8.3)
----- -----
Net income available to unitholders 37.0 45.8
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 94.4 51.9 146.3 74.0 45.3 119.4
TRG's Beneficial Interest Expense (44.6) (18.9) (63.5) (34.6) (13.2) (47.8)
Non-real estate depreciation (1.0) (1.0) (1.1) (1.1)
Preferred distributions to TCO (8.3) (8.3)
----- ----- ----- ----- ----- -----
Distributable Cash Flow contribution 40.5 33.0 73.4 38.4 32.1 70.5
===== ===== ===== ===== ===== =====
(1) 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.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits. The Unconsolidated Joint Ventures are accounted for under the
equity method in TRG's Consolidated Financial Statements.
(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 1997 amounts have been reclassified to conform to 1998
classifications.
- 25 -
TRG --Consolidated Businesses
- -----------------------------
Total revenues for the six months ended June 30, 1998 were $173.6 million, a
$33.4 million, or 23.8%, increase over the comparable period in 1997. Minimum
rents increased $18.7 million, of which $16.4 million was caused by Tuttle
Crossing and the 1997 acquisitions. Minimum rents also increased due to the
expansion at Biltmore and 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.
Total operating costs increased $30.5 million, or 25.2%, to $151.3 million.
Recoverable, other operating, and depreciation and amortization expenses
increased primarily due to Tuttle Crossing and the acquisitions. Other operating
expense also increased due to professional fees and management expense,
partially offset by a decrease in the charge to operations for development
pre-construction reserves. General and administrative expense increased
primarily due to increases in compensation (including the continuing phase-in of
the long-term compensation plan). Interest expense increased due to an increase
in debt used to finance Tuttle Crossing, the acquisition of The Falls and the
redemption of a partner's interest in TRG, partially offset by a decrease in
debt paid down with the proceeds of the October 1997 and April 1998 equity
offerings. In addition, interest expense increased due to an increase in debt
used to fund capital expenditures, offset by the related 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.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for the six months ended June 30, 1998 were $144.5 million, a
$19.2 million, or 15.3%, increase from the comparable period of 1997. The
increase in minimum rents and expense recoveries was primarily due to Arizona
Mills and the expansion at Westfarms. Minimum rents also increased due to tenant
rollovers. Other revenue decreased by $1.8 million primarily due to decreases in
gains on peripheral land sales.
Total operating costs increased by $22.0 million, or 28.2%, to $99.9 million
for the six months ended June 30, 1998. Recoverable and depreciation and
amortization expenses increased primarily due to Arizona Mills and Westfarms.
Other operating expense increased primarily due to Arizona Mills. Interest
expense increased primarily due to an increase in debt used to finance Arizona
Mills and the Westfarms expansion, and a decrease in capitalized interest
related to these two projects. 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 3 to TRG's financial
statements) by the amount of intercompany profit.
As a result of the foregoing, income before extraordinary item of the
Unconsolidated Joint Ventures decreased by $2.7 million, or 5.7%, to $44.6
million. TRG's equity in income before extraordinary item of the Unconsolidated
Joint Ventures was $24.5 million, an 8.2% decrease from the comparable period in
1997.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary item increased
$0.5 million, or 1.1%, to $46.3 million for the six months ended June 30, 1998.
In the first quarter of 1998, TRG recognized a $1.0 million extraordinary charge
related to the prepayment of Fair Oaks' debt. After payment of $8.3 million in
preferred distributions to the Company, net income available to partnership
unitholders for the six months ended June 30, 1998 was $37.0 million compared to
$45.8 million for the comparable period in 1997.
- 26 -
Liquidity and Capital Resources
Taubman Centers, Inc.
As of June 30, 1998, the Company had a cash balance of $9.4 million, the
source of which was primarily TRG's distributions, and had incurred no
indebtedness. As of June 30, 1998, the Company had 52.9 million outstanding
shares of common stock compared to 50.7 million at June 30, 1997.
In October 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its equity shelf registration statement. Dividends are
payable in arrears on or before the last day of each calendar quarter. The
Company used the proceeds to acquire a Series A Preferred Equity interest in TRG
that entitles 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.
In April 1998, the Company sold approximately 2.0 million shares of its common
stock at $13.1875 per share, before deducting the underwriting commission and
expenses of the offering, under the Company's shelf registration statement. The
Company used the proceeds to acquire an additional equity interest in TRG. TRG
paid all costs of the offering. TRG used the net proceeds of approximately $25
million for general partnership purposes.
During the first six months of 1998 and 1997, the Company received
distributions from its partnership interest in TRG of $24.6 million and $23.5
million, respectively. Additionally, the Company received preferred
distributions from TRG of $8.3 million in 1998.
The Company pays regular quarterly dividends to its common and preferred
shareowners. The Company's ability to pay dividends is affected by several
factors, most importantly, the receipt of distributions from TRG. Dividends to
its common shareowners are at the discretion of the Board of Directors and
depend on the cash available to the Company, its financial condition, capital
and other requirements, and such other factors as the Board of Directors deems
relevant. Preferred dividends accrue regardless of whether earnings, cash
availability, or contractual obligations were to prohibit the current payment of
dividends.
On June 3, 1998, the Company declared a quarterly dividend of $0.235 per
common share payable July 20, 1998 to shareowners of record on June 30, 1998.
The Board of Directors also declared a quarterly dividend of $0.51875 per share
on the Company's 8.3% Series A Preferred Stock for the quarterly dividend period
ended June 30, 1998, which was paid on June 30, 1998 to shareowners of record on
June 15, 1998.
The tax status of total 1998 dividends declared and to be declared on the
Company's Common Stock, assuming continuation of a $0.235 per common share
quarterly dividend, is estimated to be approximately 45% return of capital and
approximately 55% of ordinary income. The tax status of total 1998 dividends to
be paid on Series A Preferred Stock is estimated to be 100% ordinary income.
These are forward-looking statements and certain significant factors could cause
the actual results to differ materially, including: 1) the amount of dividends
declared; 2) changes in the Company's share of anticipated taxable income of TRG
due to the actual results of TRG; 3) changes in the number of the Company's
outstanding shares; 4) property acquisitions or dispositions; 5) financing
transactions, including refinancing of existing debt; and 6) changes in the
Internal Revenue Code or its application.
- 27 -
TRG
As of June 30, 1998, TRG had a cash balance of $0.7 million. TRG has available
for general partnership purposes an unsecured revolving credit facility of $300
million, which expires in March 2000. Borrowings under this facility at June 30,
1998 were $261.2 million. TRG also has available an unsecured bank line of
credit of up to $30 million with borrowings of $14.0 million at June 30, 1998.
The availability under the line was increased to $40 million in July 1998. The
line expires in August 1999. TRG also has available a secured commercial paper
facility of up to $75 million, with borrowings of $75 million at June 30, 1998.
Commercial paper is generally sold with a 30 day maturity. This facility is
supported by a line of credit facility, which is renewable quarterly for a
twelve month period.
Proceeds from short term borrowings and equity issuances of $204.9 million
provided funding for the first six months of 1998 (including $77.7 million for
the redemption of 6.1 million units of partnership interest in January 1998)
compared to $49.4 million in the comparable period of 1997. Additionally, the
proceeds were used to fund capital expenditures for the Consolidated Businesses
and contributions to Unconsolidated Joint Ventures for construction costs.
TRG has issued a total of $342 million of notes since the inception of TRG's
medium-term note program in 1995 under TRG's $500 million shelf registration
statement. TRG did not issue any medium-term notes in the first half of either
1998 or 1997.
In March 1998, a 50% owned Unconsolidated Joint Venture completed a $140
million, 6.60% secured financing maturing in 2008. The net proceeds were used to
extinguish an existing mortgage of approximately $39 million and pay a
prepayment penalty of approximately $1.8 million. In addition, proceeds of $5.6
million were used to close out a treasury lock agreement entered into in 1997,
which resulted in a effective rate on the financing of approximately 7%. The
remaining proceeds were distributed to the owners. TRG used its 50% share of the
distribution to pay down its revolving credit facilities.
At June 30, 1998, TRG's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $1,917.1 million. As
shown in the following table, $273.7 million of this debt was floating rate debt
that remained unhedged at June 30, 1998. Interest rates shown do not include
amortization of debt issuance costs and interest rate hedging costs. These items
are reported as interest expense in TRG's results of operations. In the
aggregate, these costs added 0.35% to the effective rate of interest on TRG's
beneficial interest in debt at June 30, 1998. Included in TRG's beneficial
interest in debt is debt used to fund development and expansion costs. TRG's
beneficial interest in assets on which interest is being capitalized totaled
$249.4 million as of June 30, 1998. TRG's beneficial interest in capitalized
interest was $4.1 million and $7.3 million for the three and six months ended
June 30, 1998, respectively.
- 28 -
Beneficial Interest in Debt
----------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 6/30/98 Rate Resets 6/30/98
---------- ------- ---- ------ -------
Total beneficial interest
in fixed rate debt 1,117.3 7.59%(1)
Floating rate debt hedged
via interest rate caps:
Through October 1998 39.3 6.16 6.00% Three Months 5.72%
Through December 1998 100.0 6.45(1) 6.50 Three Months 5.72
Through July 1999 65.0 6.40 7.00 Monthly 5.66
Through December 1999 200.0 6.45(1) 9.50(2) Monthly 5.66
Through October 2001 25.0 6.11 8.55 Monthly 5.66
Through January 2002 53.4 6.94(1) 9.50 Monthly 5.66
Through July 2002 43.4 6.92 6.50 Monthly 5.66
Other floating rate debt 273.7 6.45(1)
-------
Total beneficial interest
in debt 1,917.1 7.12(1)
=======
(1) Denotes weighted average interest rate.
(2) Rate reduces to 7.0% in December 1998.
In July 1998, TRG closed on an unsecured credit facility of $100 million,
which will expire in January 1999. Loans obtained under this facility will bear
interest at one month LIBOR plus 0.90%. Proceeds will be used for general
partnership purposes.
TRG's loan and facility 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.
Distributions
A principal factor that TRG considers in determining distributions to partners
is TRG's Distributable Cash Flow, which is defined as EBITDA less TRG's
Beneficial Interest Expense, non-real estate depreciation and amortization, and
preferred distributions. Capital structure, in addition to operations,
influences this measure of performance. TRG defines EBITDA as TRG's beneficial
interest in (or pro rata share of) the revenues, less operating costs before
interest, depreciation and amortization of the Managed Businesses. The Company
calculates its Funds from Operations by adding the Company's beneficial interest
in TRG's Distributable Cash Flow to the Company's other income, less the
Company's operating expenses. EBITDA, Distributable Cash Flow and Funds from
Operations do not represent cash flows from operations, as defined by generally
accepted accounting principles, and should not be considered to be an
alternative to net income as an indicator of operating performance or to cash
flows from operations as a measure of liquidity. However, the National
Association of Real Estate Investment Trusts (NAREIT) suggests that Funds from
Operations is a useful supplemental measure of operating performance for REITs.
- 29 -
The following table summarizes TRG's Distributable Cash Flow and the Company's
Funds from Operations for the three months ended June 30, 1998 and 1997:
Three months ended Three months ended
June 30, 1998 June 30, 1997
----------------------------------------- ----------------------------------------
TRG Unconsolidated TRG Unconsolidated
Consolidated Joint Consolidated Joint
Businesses Ventures(1) Total Businesses Ventures(1) Total
----------------------------------------- ----------------------------------------
(in millions of dollars)
TRG's Net Income(2) 23.0 22.2
Depreciation and Amortization(3) 18.4 12.9
TRG's Beneficial Interest Expense 31.7 24.0
----- -----
EBITDA 47.2 25.8 73.0 35.4 23.7 59.1
TRG's Beneficial Interest Expense (21.9) (9.7) (31.7) (17.3) (6.6) (24.0)
Non-real estate depreciation (0.5) (0.5) (0.5) (0.5)
Preferred distributions to TCO (4.2) (4.2)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 20.6 16.1 36.7 17.5 17.0 34.6
===== ===== ===== ===== ===== =====
The Company's share of
Distributable Cash Flow 14.3 12.7
Other income/ expenses, net (0.2) (0.2)
----- -----
Funds from Operations 14.2 12.5
===== =====
(1) Amounts represent TRG's beneficial interest in the operations of its
Unconsolidated Joint Ventures.
(2) Includes TRG's share of gains on peripheral land sales of $1.8 million for
the three months ended June 30, 1997. There were no land sales during the
three months ended June 30, 1998.
(3) Includes $1.1 million and $0.9 million of mall tenant allowance
amortization in the second quarter of 1998 and 1997, respectively.
(4) Amounts may not add due to rounding.
The following table summarizes TRG's Distributable Cash Flow and the Company's
Funds from Operations for the six months ended June 30, 1998 and 1997:
Six months ended Six months ended
June 30, 1998 June 30, 1997
----------------------------------------- ----------------------------------------
TRG Unconsolidated TRG Unconsolidated
Consolidated Joint Consolidated Joint
Businesses Ventures(1) Total Businesses Ventures(1) Total
----------------------------------------- ----------------------------------------
(in millions of dollars)
TRG's Net Income(2) 45.3 45.8
Extraordinary item(3) 1.0
Depreciation and Amortization(4) 36.5 25.8
TRG's Beneficial Interest Expense 63.5 47.8
----- -----
EBITDA 94.4 51.9 146.3 74.0 45.3 119.4
TRG's Beneficial Interest Expense (44.6) (18.9) (63.5) (34.6) (13.2) (47.8)
Non-real estate depreciation (1.0) (1.0) (1.1) (1.1)
Preferred distributions to TCO (8.3) (8.3)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 40.5 33.0 73.4 38.4 32.1 70.5
===== ===== ===== ===== ===== =====
The Company's share of
Distributable Cash Flow 28.4 25.8
Other income/ expenses, net (0.3) (0.4)
----- -----
Funds from Operations 28.1 25.5
===== =====
(1) Amounts represent TRG's beneficial interest in the operations of its
Unconsolidated Joint Ventures.
(2) Includes TRG's share of gains on peripheral land sales of $0.4 million and
$1.9 million for the six months ended June 30, 1998 and 1997, respectively.
(3) Extraordinary charge related to the extinguishment of debt, primarily
consisting of a prepayment penalty.
(4) Includes $2.2 million and $1.8 million of mall tenant allowance
amortization for the six months ended June 30, 1998 and 1997, respectively.
(5) Amounts may not add due to rounding.
- 30 -
For the second quarter of 1998, EBITDA and Distributable Cash Flow were $73.0
million and $36.7 million, compared to $59.1 million and $34.6 million for the
same period in 1997. In addition to $4.2 million representing preferred
distributions to the Company on TRG's Series A Preferred Equity, TRG distributed
$31.9 million to its partners in the second quarter of 1998, compared to $32.0
million in the same period of 1997. The Company's Funds from Operations for the
second quarter of 1998 was $14.2 million, compared to $12.5 million for the same
period in 1997.
During the first half of 1998, EBITDA and Distributable Cash Flow were $146.3
million and $73.4 million, compared to $119.4 million and $70.5 million for the
same period in 1997. In addition to $8.3 million in preferred distributions to
the Company, TRG distributed $63.6 million and $64.0 million to its partners in
the six month periods ended June 30, 1998 and 1997, respectively. The Company's
Funds from Operations for 1998 was $28.1 million, compared to $25.5 million for
the same period in 1997.
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 preferred distributions to the Company
on TRG's Series A Preferred Equity, as well as financing considerations and such
other factors as the Partnership Committee deems 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.
Each Joint Venture may make distributions only in accordance with the terms of
its partnership agreement. TRG, in general, acts as the managing partner and 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.
- 31 -
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is
generally recovered from tenants. The following table summarizes planned capital
spending by the Managed Businesses, which is not recovered from tenants and
assuming no acquisitions during 1998:
1998
------------------------------------------------------------
TRG's Share of
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures(1) Joint Ventures(1)(2)
------------------------------------------------------------
(in millions of dollars)
Development, renovation,
and expansion 240.9(3) 39.0(4) 208.4
Mall tenant allowances 4.6 9.0 9.6
Pre-construction development
and other 22.1 1.4 22.8
----- ---- -----
Total 267.6 49.4 240.8
===== ==== =====
(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 Center (a 70% owned
consolidated joint venture).
(3) Includes costs related to MacArthur Center and Great Lakes Crossing.
(4) Includes costs related to the expansion project at Cherry Creek.
At Cherry Creek, an ongoing expansion 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 stages beginning in August and
continuing throughout the fall of 1998. The expansion is expected to cost
approximately $50 million. TRG has a 50% ownership interest in Cherry Creek.
Great Lakes Crossing, an enclosed value super-regional mall being developed by
TRG in Auburn Hills, Michigan, will open in November 1998. The Center will be
1.4 million square feet and its 17 anchors will include Bass Pro Shops Outdoor
World, Neiman Marcus Last Call Clearance Center, Off 5th-Saks Fifth Avenue
Outlet, JCPenney Outlet Store, Oshman's Supersports USA, Rainforest Cafe, and a
25-screen 100,000 square foot Star Theatre megaplex. This Center is presently
owned by a joint venture in which TRG has a controlling 80% interest and is
projected to cost approximately $210 million.
MacArthur Center, a new Center under construction in Norfolk, Virginia, is
expected to open in March 1999. The Center is expected to open with 930 thousand
square feet and will initially be anchored by Nordstrom and Dillard's. This
Center will be owned by a joint venture in which TRG has a 70% 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. Memorial City is
anchored by Sears, Foley's, Montgomery Ward and Mervyn's. TRG has the option to
terminate the lease after the third full year by paying $2 million to the
lessor. TRG is using this option period to evaluate the redevelopment
opportunities of the Center. Under the terms of the lease, TRG has agreed to
invest a minimum of $3 million during the three year option period. If the
redevelopment proceeds, TRG is required to invest an additional $22 million in
property expenditures not recoverable from tenants during the first 10 years of
the lease term.
The Company and The Mills Corporation have formed an alliance to develop value
super-regional projects in major metropolitan markets. The ten-year agreement
calls for the two companies to jointly develop and own at least seven of these
centers, each representing approximately $200 million of capital investment. The
initial scope of the arrangement will include joint ventures in projects
currently under development by the Company in Detroit (Great Lakes Crossing) and
Mills in Houston as well as proposed projects in Philadelphia and Boston. A
number of other locations across the nation are targeted for future initiatives.
- 32 -
TRG anticipates that its share of costs for development projects scheduled to
be completed in 1999 will be as much as $58 million in 1999. TRG's estimates of
1998 and 1999 capital spending include only projects approved by TRG's
Partnership Committee and, consequently, TRG's estimates will change as new
projects are approved. Currently, TRG expects to open on average one $175
million to $200 million shopping center each year. 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 and number of projects; 3) cost
overruns; 4) timing of expenditures; 5) financing considerations; and 6) actual
time to complete projects.
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 and will bear the costs of sale. Any proceeds of the offering in
excess of the purchase price will be for the sole benefit of the Company. At A.
Alfred Taubman's election, his family, and 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 June 30, 1998 and December 31, 1997 of $14.25 and
$13.00 per common share, the aggregate value of interests in TRG that may be
tendered under the Cash Tender Agreement was approximately $1,052 million and
$960 million, respectively. The purchase of these interests at June 30, 1998
would have resulted in the Company owning an additional 55% interest in TRG.
The Company is not aware of any present intention of any partner to exercise
its rights under the Cash Tender Agreement.
Capital Resources
TRG believes that its net cash provided by operating activities, distributions
from the Joint Ventures, the unutilized portion of its credit facilities, and
its ability to access the credit markets, assure adequate liquidity to conduct
its operations in accordance with its distribution and financing policies. TRG's
borrowings are not and will not be recourse to the Company without its consent.
- 33 -
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 14, 1998, the Company held its annual meeting of
shareholders. The matters on which shareholders voted were: the
election of three directors to serve a three year term and the
ratification of the Board's selection of Deloitte & Touche LLP as the
Company's independent auditors for the year ended December 31, 1998.
Allan J. Bloostein, Jerome A. Chazen and S. Parker Gilbert were
re-elected at the meeting, and the eight remaining incumbent directors
continued to hold office after the meeting. The shareholders ratified
the selection of the independent auditors. The results of the voting
are shown below:
ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES WITHHELD
Allan J. Bloostein 44,235,145 42,371
Jerome A. Chazen 44,240,263 37,253
S. Parker Gilbert 44,247,689 29,827
RATIFICATION OF AUDITORS
44,239,106 Votes were cast for ratification;
11,439 Votes were cast against ratification; and
26,971 Votes abstained (including broker non-votes).
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
12 (a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio
of Earnings to Preferred Stock Dividends.
12 (b) -- Statement Re: Computation of TRG's Ratios of Earnings
to Fixed Charges and Preferred Distributions.
27 -- Financial Data Schedule.
b) Current Reports on Form 8-K.
None
- 34 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: August 10, 1998 By: /s/ Lisa A. Payne
----------------------------
Lisa A. Payne
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
------
12 (a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio of
Earnings to Preferred Stock Dividends.
12 (b) -- Statement Re: Computation of TRG's Ratios of Earnings to
Fixed Charges and Preferred Distributions.
27 -- Financial Data Schedule.