SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 1999
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
- ----------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan
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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 April 30, 1999, there were outstanding 53,164,453 shares of the
Company's common stock, par value $0.01 per share.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following consolidated financial statements of Taubman Centers, Inc. (the
Company) are provided pursuant to the requirements of this item.
Consolidated Balance Sheet as of March 31, 1999 and December 31, 1998....... 2
Consolidated Statement of Operations for the three
months ended March 31, 1999 and 1998...................................... 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998............................................ 4
Notes to Consolidated Financial Statements.................................. 5
-1-
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
March 31 December 31
-------- -----------
1999 1998
---- ----
Assets:
Properties, net $1,367,771 $1,308,642
Investment in Unconsolidated Joint Ventures 101,980 98,350
Cash and cash equivalents 12,527 19,045
Accounts and notes receivable, less allowance
for doubtful accounts of $1,027 and $333 in
1999 and 1998 20,578 20,595
Accounts receivable from related parties 4,279 7,092
Deferred charges and other assets 29,108 27,139
---------- ----------
$1,536,243 $1,480,863
========== ==========
Liabilities:
Unsecured notes payable $ 619,641 $ 531,946
Mortgage notes payable 244,908 243,352
Accounts payable and accrued liabilities 147,199 171,669
Dividends payable 12,737 12,719
---------- ----------
$1,024,485 $ 959,686
Commitments and Contingencies (Note 5)
Minority Interests (Note 1)
Shareowners' Equity:
Series A Cumulative Redeemable Preferred
Stock, $0.01 par value, 50,000,000 shares
authorized, $200 million liquidation
preference, 8,000,000 shares issued and
outstanding at March 31, 1999 and December
31, 1998 $ 80 $ 80
Series B Non-Participating Convertible
Preferred Stock, $0.001 par and liquidation
value, 40,000,000 shares authorized and
31,399,913 shares issued and outstanding at
March 31, 1999 and December 31, 1998 31 28
Common Stock, $0.01 par value, 250,000,000
shares authorized, 53,070,963 and 52,995,904
issued and outstanding at March 31, 1999 and
December 31, 1998 531 530
Additional paid-in capital 698,744 697,965
Dividends in excess of net income (187,628) (177,426)
---------- ----------
$ 511,758 $ 521,177
---------- ----------
$1,536,243 $1,480,863
========== ==========
See notes to consolidated financial statements.
-2-
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share data)
Three Months Ended March 31
---------------------------
1999 1998
---- ----
Income:
Minimum rents $ 33,014 $ 25,353
Percentage rents 985 955
Expense recoveries 17,585 13,645
Revenues from management, leasing and
development services 5,733 1,777
Other 3,114 3,440
Revenues - transferred centers (Note 1) 42,032
-------- --------
$ 60,431 $ 87,202
-------- --------
Operating Expenses:
Recoverable expenses $ 15,469 $ 12,231
Other operating 8,205 5,971
Management, leasing and development services 4,391 1,033
General and administrative 4,728 6,826
Expenses other than interest, depreciation and
amortization - transferred centers (Note 1) 14,100
Interest expense 10,865 22,637
Depreciation and amortization (including $7.2
million in 1998 relating to the transferred
centers) 12,203 15,047
-------- --------
$ 55,861 $ 77,845
-------- --------
Income before equity in income before extraordinary
item of Unconsolidated Joint Ventures,
extraordinary item, and minority interest $ 4,570 $ 9,357
Equity in income before extraordinary item of
Unconsolidated Joint Ventures 9,623 11,730
-------- --------
Income before extraordinary item and minority interest $ 14,193 $ 21,087
Extraordinary item (Note 2) (957)
Minority interest:
Minority share of income (4,538) (11,230)
Distributions in excess of earnings (2,969)
-------- --------
Net income $ 6,686 $ 8,900
Series A preferred dividends (4,150) (4,150)
-------- --------
Net income available to common shareowners $ 2,536 $ 4,750
======== ========
Basic and diluted earnings per common share:
Income before extraordinary item $ .05 $ .10
======== ========
Net income $ .05 $ .09
======== ========
Cash dividends declared per common share $ .24 $ .235
======== ========
Weighted average number of common shares
outstanding 53,016,661 50,773,099
========== ==========
See notes to consolidated financial statements.
-3-
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31
---------------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Income before extraordinary item and
minority interest $ 14,193 $ 21,087
Adjustments to reconcile income before
extraordinary item and minority
interest to net cash provided by operating
activities:
Depreciation and amortization 12,203 15,047
Provision for losses on accounts receivable 623 291
Amortization of deferred financing costs 1,248 710
Other 84 212
Gain on sale of land (475)
Increase (decrease)in cash attributable to
changes in assets and liabilities:
Receivables, deferred charges and other
assets (2,518) 1,920
Accounts payable and other liabilities (9,259) 1,286
-------- --------
Net Cash Provided By Operating Activities $ 16,099 $ 40,553
-------- --------
Cash Flows from Investing Activities:
Additions to properties $(84,853) $(56,367)
Proceeds from sale of land 212
Contributions to Unconsolidated Joint Ventures (7,453) (4,860)
Distributions from Unconsolidated Joint Ventures
in excess of income before extraordinary
item 3,823 47,042
-------- --------
Net Cash Used In Investing Activities $(88,271) $(14,185)
-------- --------
Cash Flows from Financing Activities:
Debt proceeds $ 89,251 $129,941
Debt payments (45,949)
Redemption of partnership units (77,698)
Distributions to minority interest (7,507) (19,469)
Issuance of stock pursuant to Continuing Offer 780 771
Cash dividends to common shareowners (12,720) (11,929)
Cash dividends to Series A preferred shareowners (4,150) (4,150)
------- --------
Net Cash Provided By (Used in) Financing Activities $65,654 $(28,483)
------- --------
Net Decrease In Cash $(6,518) $ (2,115)
Cash and Cash Equivalents at Beginning of Period 19,045 8,965
Effect of consolidating TRG in connection with the
GMPT Exchange (TRG's cash balance at Beginning
of Period) (Note 1) 3,250
-------- --------
Cash and Cash Equivalents at End of Period $ 12,527 $ 10,100
======== ========
Interest on mortgage notes and other loans paid during the three months ended
March 31, 1999 and 1998, net of amounts capitalized of $4,247 and $3,308, was
$10,116 and $9,446, respectively. During the three months ended March 31, 1999,
non-cash additions to properties of $42,186 were recorded, representing accrued
construction costs of new centers and development projects.
See notes to consolidated financial statements.
-4-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 1999
Note 1 - Interim Financial Statements
Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or
REIT, is the managing general partner of The Taubman Realty Group Limited
Partnership (the Operating Partnership or TRG). The Operating Partnership is an
operating subsidiary that engages in the ownership, management, leasing,
acquisition, development, and expansion of regional retail shopping centers and
interests therein. The Operating Partnership's portfolio as of March 31, 1999
includes 17 urban and suburban shopping centers in seven states. Three
additional centers are under construction in Florida and Texas.
On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of a transaction in which the
Operating Partnership transferred interests in 10 shopping centers, together
with $990 million of its debt, for all of the partnership units owned by the
General Motors Pension Trusts (GMPT), representing approximately 37% of the
Operating Partnership's equity (the GMPT Exchange). As a result of the GMPT
Exchange, the Company's general partnership interest in the Operating
Partnership increased to 62.8%.
The consolidated financial statements of the Company include all accounts of
the Company, the Operating Partnership and its consolidated subsidiaries; all
intercompany balances have been eliminated. Investments in entities not
unilaterally controlled by ownership or contractual obligation (Unconsolidated
Joint Ventures) are accounted for under the equity method.
The Company's ownership in the Operating Partnership at March 31, 1999
consisted of a 62.8% managing general partnership interest (53,070,963 of the
84,470,876 units of partnership interest outstanding), 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
partners of the Operating Partnership in accordance with their percentage
ownership. The Company's average ownership percentage in the Operating
Partnership for the three months ended March 31, 1999 and 1998 was 62.8% and
38.3%, respectively.
Because the net equity of the Operating Partnership is less than zero, the
ownership interest of the Operating Partnership's noncontrolling partners (the
Minority Interest) is presented as a zero balance in the balance sheet as of
March 31, 1999 and December 31, 1998, and subsequent to the GMPT Exchange, the
income allocated to the Minority Interest is equal to the Minority Interest's
share of distributions. The Operating Partnership's net equity is less than zero
due to accumulated distributions in excess of net income and not as a result of
operating losses. Distributions to partners are usually greater than net income
because net income includes non-cash charges for depreciation and amortization.
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, 1998. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been made. The results of interim periods are not necessarily
indicative of the results for a full year.
-5-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in various real estate
Unconsolidated Joint Ventures which own regional retail shopping centers. The
Operating Partnership is generally the managing general partner of these
Unconsolidated Joint Ventures. The Operating Partnership's interest in each
Unconsolidated Joint Venture is as follows:
Ownership
as of
Unconsolidated Joint Venture Shopping Center March 31, 1999
---------------------------- --------------- --------------
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
Woodland Woodland 50
The Company's carrying value of its Investment in Unconsolidated Joint
Ventures exceeds its share of the deficiency in assets reported in the combined
balance sheet of the Unconsolidated Joint Ventures due to (i) intercompany
profits on sales of services that are capitalized by the Unconsolidated Joint
Ventures and (ii) the Company's cost of its investment in excess of the
historical net book values of the Unconsolidated Joint Ventures. The Company
reduces its investment in Unconsolidated Joint Ventures to eliminate the
intercompany profits and amortizes such amounts over the useful lives of the
related assets. The Company's additional basis allocated to depreciable assets
is recognized on a straight-line basis over 40 years.
During the three months ended March 31, 1998, an unconsolidated joint
venture incurred an extraordinary charge related to the extinguishment of debt,
primarily consisting of a prepayment premium.
Combined balance sheet and results of operations information are presented
below (in thousands) for all Unconsolidated Joint Ventures, followed by the
Operating Partnership's beneficial interest in the combined information.
Beneficial interest is calculated based on the Operating Partnership's ownership
interest in each of the Unconsolidated Joint Ventures. The accounts of Woodfield
Associates, formerly a 50% Unconsolidated Joint Venture transferred to GMPT
(Note 1), are included in these results for the three months ended March 31,
1998.
-6-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31 December 31
-------- -----------
1999 1998
---- ----
Assets:
Properties, net $ 573,529 $572,149
Other assets 68,885 73,046
--------- --------
$ 642,414 $645,195
========= ========
Liabilities and partners' accumulated
deficiency in assets:
Debt $ 826,124 $ 825,927
Capital lease obligations 4,923 5,187
Other liabilities 35,070 47,622
TRG's accumulated deficiency in assets (98,420) (103,545)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (125,283) (129,996)
--------- ---------
$ 642,414 $ 645,195
========= =========
TRG's accumulated deficiency in assets (above) $ (98,420) $(103,545)
Elimination of intercompany profit (5,159) (4,846)
TCO's additional basis 205,559 206,741
--------- ---------
Investment in Unconsolidated Joint Ventures $ 101,980 $ 98,350
========= =========
Three Months Ended March 31
---------------------------
1999 1998
---- ----
Revenues $ 60,296 $ 72,121
--------- ---------
Recoverable and other operating expenses $ 20,939 $ 24,968
Interest expense 15,291 17,133
Depreciation and amortization 7,260 8,445
--------- ---------
Total operating costs $ 43,490 $ 50,546
--------- ---------
Income before extraordinary item $ 16,806 $ 21,575
Extraordinary item (1,913)
--------- ---------
Net income $ 16,806 $ 19,662
========= =========
Net income allocable to TRG $ 9,539 $ 10,173
Extraordinary item allocable to TRG 957
Realized intercompany profit 1,266 1,473
Depreciation of TCO's additional basis (1,182) (873)
--------- ---------
Equity in income before extraordinary item
of Unconsolidated Joint Ventures $ 9,623 $ 11,730
========= =========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 22,851 $ 26,052
Interest expense (8,244) (9,205)
Depreciation and amortization (4,984) (5,117)
--------- ---------
Income before extraordinary item $ 9,623 $ 11,730
========= =========
-7-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Beneficial Interest in Debt and Interest Expense
The Operating Partnership's beneficial interest in the debt, capital lease
obligations, capitalized interest, and interest expense of its consolidated
subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest excludes the
30% minority interest in the debt outstanding on the MacArthur Center
construction facility.
Unconsolidated Share
Joint of Unconsolidated Consolidated Beneficial
Ventures Joint Ventures Subsidiaries Interest
------------- ----------------- ------------ ----------
Debt as of:
March 31, 1999 $ 826,124 $ 439,207 $ 864,549 $ 1,274,912
December 31, 1998 825,927 439,271 775,298 1,186,192
Capital lease obligations:
March 31, 1999 $ 4,923 $ 2,707 -- $ 2,707
December 31, 1998 5,187 2,858 -- 2,858
Capitalized interest:
Three months ended March
31, 1999 $ 317 $ 158 $ 4,247 $ 4,405
Three months ended March
31, 1998 455 224 3,308 3,243
Interest expense (Net of
capitalized interest):
Three months ended March
31, 1999 $ 15,291 $ 8,244 $ 10,865 $ 18,993
Three months ended March
31, 1998 17,133 9,205 22,637 31,842
Note 4 - Incentive Option Plan
The Operating Partnership has an incentive option plan for employees of the
Manager. Currently, options for 7.9 million units of partnership interest may be
issued under the Operating Partnership's incentive option plan for employees of
The Taubman Company Limited Partnership (the Manager), of which options for 7.7
million units are outstanding. 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 three months ended March 31, 1999 and March 31, 1998, options
for 75,059 units and 69,128 units were exercised at weighted average prices of
$10.38 and $11.14 per unit, respectively. There were 1,000,000 units granted at
$12.25 per unit and 61,890 units cancelled at a weighted average exercise price
of $12.58 per unit during the three months ended March 31, 1999. As of March 31,
1999, there were options outstanding for 7.7 million units with a weighted
average exercise price of $11.35 per unit, of which options for 6.3 million
units were vested with a weighted average exercise price of $11.24 per unit.
-8-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of
its partnership interest in the Operating Partnership, the Company entered into
an agreement with A. Alfred Taubman, who owns an interest in the Operating
Partnership, whereby he has the annual right to tender to the Company units of
partnership interest in the Operating Partnership (provided that the aggregate
value is at least $50 million) and cause the Company to purchase the tendered
interests at a purchase price based on a market valuation of the Company on the
trading date immediately preceding the date of the tender (the 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 partner
will bear all market risk if the market price at closing is less than the
purchase price and will bear the costs of sale. Any proceeds of the offering in
excess of the purchase price will be for the sole benefit of the Company. At A.
Alfred Taubman's election, his family and Robert C. Larson and his family may
participate in tenders.
Based on a market value at March 31, 1999 of $12.25 per common share, the
aggregate value of interests in the Operating Partnership which may be tendered
under the Cash Tender Agreement was approximately $295.6 million. The purchase
of these interests at March 31, 1999 would have resulted in the Company owning
an additional 29% interest in the Operating Partnership.
The Company has made a continuing, irrevocable offer to all present holders
(other than certain excluded holders, including A. Alfred Taubman), assignees of
all present holders, those future holders of partnership interests in the
Operating Partnership as the Company may, in its sole discretion, agree to
include in the continuing offer, and all existing and future optionees under the
Operating Partnership's incentive option plan to exchange shares of common stock
for partnership interests in the Operating Partnership (the Continuing Offer).
Under the Continuing Offer agreement, one unit of partnership interest is
exchangeable for one share of the Company's common stock.
Shares of common stock that were acquired by GMPT 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). 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.
Note 6 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings
available to common shareowners by the average number of common shares
outstanding during each period. For diluted earnings per common share, the
Company's ownership interest in the Operating Partnership (and therefore
earnings) are adjusted assuming the exercise of all options for units of
partnership interest under the Operating Partnership's incentive option plan
having exercise prices less than the average market value of the units using the
treasury stock method. For each of the three months ended March 31, 1999 and
1998, options for 0.4 million units of partnership interest with a weighted
average exercise price of $13.58 per unit 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.
-9-
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Three Months
Ended March 31
--------------------
1999 1998
---- ----
(in thousands, except share data)
Income before extraordinary item allocable
to common shareowners (Numerator):
Net income available to common
shareowners $ 2,536 $ 4,750
Common shareowners' share of extraordinary
item 366
---------- ----------
Basic income before extraordinary item $ 2,536 $ 5,116
Effect of dilutive options (70) (53)
---------- ----------
Diluted income before extraordinary item $ 2,466 $ 5,063
========== ==========
Shares (Denominator) - basic and diluted 53,016,661 50,733,099
========== ==========
Income before extraordinary item per common
share:
Basic and diluted $ 0.05 $ 0.10
========== =========
Note 7 - Subsequent Events
In April 1999, the following subsequent events occurred.
A secured, ten-year financing of $270 million with an all-in rate of
approximately 6.9% on The Mall at Short Hills was completed. The Company used
the proceeds to partially pay down its $340 million bridge loan, which matures
on June 21, 1999.
A three-year $170 million facility, secured by Great Lakes Crossing, was
finalized. The loan agreement provides for an option to extend the maturity date
one year. The loan bears interest at one month LIBOR plus 1.50%. Proceeds from
the loan were used to repay the balance of the existing construction facility.
Payment of principal and interest are guaranteed by the Operating Partnership.
The loan agreement provides for a reduction of the interest rate and the amount
guaranteed as certain center performance and valuation criteria are met. In
addition, the Company finalized an amendment to the MacArthur Center
construction facility. The total availability under the facility is $120 million
with interest at one month LIBOR plus 1.35%.
The Company made an investment of $5.8 million in an e-commerce company
that markets and sells fashion apparel, footwear, and beauty products over the
Internet. The Company's investment will become 824,084 convertible preferred
shares of Fashionmall.com, Inc., a 9.9 percent interest in the company, upon
completion of Fashionmall.com, Inc.'s anticipated initial public offering which
is currently in registration. The investment was based on a $7.00 per share
purchase price, and is subject to an upward adjustment to the lower of the
initial public offering price and $9.00 per share. In addition, the Company
received an option, exercisable during the 60-day period commencing one year
after the offering, to purchase an additional 924,898 shares of common stock at
the initial public offering price per share.
-10-
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.
General Background and Performance Measurement
The Company owns a managing general partner's interest in The Taubman Realty
Group Limited Partnership (Operating Partnership), through which the Company
conducts all of its operations. The Operating Partnership owns, develops,
acquires and operates regional shopping centers nationally. The Consolidated
Businesses consist of shopping centers that are controlled by ownership or
contractual agreement, development projects for future regional shopping centers
and The Taubman Company Limited Partnership (the Manager). Shopping centers that
are not controlled and that are owned through joint ventures with third parties
(Unconsolidated Joint Ventures) are accounted for under the equity method.
The operations of the shopping centers are best understood by measuring their
performance as a whole, without regard to the Company's ownership interest.
Consequently, in addition to the discussion of the operations of the
Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are
presented and discussed as a whole.
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine Consolidated Businesses and one Unconsolidated Joint
Venture) and a share of the Operating Partnership's debt for all of the
partnership units owned by two General Motors pension trusts (GMPT) (the GMPT
Exchange - see Results of Operations -- GMPT Exchange and Related Transactions).
Performance statistics presented below exclude these ten centers (transferred
centers). Because the Company's portfolio changed significantly as a result of
the GMPT Exchange, the results of operations of the transferred centers have
been separately classified within the Consolidated Businesses and Unconsolidated
Joint Ventures for purposes of analyzing and understanding the historical
results of the current portfolio.
Since the Company's interest in the Operating Partnership has been its sole
material asset throughout all periods presented, references in the following
discussion to "the Company" include the Operating Partnership, except where
intercompany transactions are discussed or as otherwise noted, even though the
Operating Partnership did not become a consolidated subsidiary until September
30, 1998.
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.
-11-
The following table summarizes certain quarterly operating data for 1998 and
the first quarter of 1999:
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
1998 1998 1998 1998 1998 1999
----------------------------------------------------------------
(in thousands)
Mall tenant sales $467,698 $505,732 $507,098 $852,198 $2,332,726 $533,730
Revenues 98,960 99,993 106,250 126,424 431,627 117,901
Occupancy:
Average Occupancy 88.7% 89.3% 89.5% 90.0% 89.4% 88.5%
Ending Occupancy 88.6% 89.3% 89.6% 90.2% 90.2% 87.5%
Leased Space 91.7% 92.0% 92.4% 92.3% 92.3% 91.3%
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 1998 and the first quarter of
1999:
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
1998 1998 1998 1998 1998 1999
-----------------------------------------------------
Minimum rents 11.6% 10.9% 11.0% 7.2% 9.7% 11.8%
Percentage rents 0.2 0.2 0.3 0.4 0.3 0.2
Expense recoveries 4.5 4.5 4.7 3.4 4.1 4.7
----- ----- ----- ----- ----- -----
Mall tenant occupancy
costs 16.3% 15.6% 16.0% 11.0% 14.1% 16.7%
===== ===== ===== ===== ===== =====
Rental Rates
Average base rent per square foot for all mall tenants at the 10 centers
owned and open for at least five years was $43.09 for the twelve months ended
March 31, 1999, compared to $41.93 for the twelve months ended March 31, 1998.
As leases have expired in the shopping centers, the Company has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In 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.
-12-
Results of Operations
The following represent significant debt and equity transactions, new center
openings and expansions which affect the operating results described under
Comparison of Three Months Ended March 31, 1999 to the Three Months Ended March
31, 1998.
GMPT Exchange and Related Transactions
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned and one Unconsolidated Joint Venture),
together with $990 million of debt, for all of GMPT's partnership units
(approximately 50 million units with a fair value of $675 million), providing
the Company with a majority and controlling interest in the Operating
Partnership. The Operating Partnership continues to manage the centers exchanged
under management agreements with GMPT that expire December 31, 1999. The
management agreements are cancelable with 90 days notice. Certain costs of
providing services under these agreements, including administrative and certain
other fixed costs, would not necessarily be eliminated if the contracts were to
be canceled or not renewed. The actual reduction of costs would be affected by
whether all or a portion of the contracts were canceled or not renewed, timing
of the cancellation or non-renewal, and actual or anticipated changes in the
Operating Partnership's owned or managed portfolio.
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one-month LIBOR plus
1.30% to extinguish $1.1 billion of debt, including substantially all of the
Operating Partnership's public unsecured debt, its outstanding commercial paper,
and borrowings on its existing line of credit.
Concurrently with the GMPT Exchange, the Operating Partnership committed to
a restructuring of its operations. The Company expects to reduce its annual
general and administrative expense to approximately $19 million in 1999. This is
a forward looking statement, and certain significant factors could cause the
actual reductions in general and administrative expense to differ materially,
including but not limited to: 1) actual payroll reductions achieved; 2) actual
results of negotiations; 3) use of outside consultants; and 4) changes in the
Company's owned or managed portfolio.
Openings and Expansions
In March 1999, MacArthur Center, a 70% owned enclosed super-regional mall,
opened in Norfolk, Virginia. In November 1998, Great Lakes Crossing, an 80%
owned enclosed value super-regional mall, opened in Auburn Hills, Michigan. Both
Great Lakes Crossing and MacArthur Center are owned by joint ventures in which
the Operating Partnership has a controlling interest, and consequently the
results of these centers are consolidated in the Company's financial statements.
The Company is entitled to a preferred return on its equity contributions to
these centers. The contributed capital was used to fund construction costs. The
income effect of the cumulative preferred return net of the interest on the
Operating Partnership's associated borrowings was approximately $0.5 million in
the first quarter of 1999 and is expected to total approximately $2 million in
1999. The net effect in 2000 of any recurring preference is expected to be
minimal. At Cherry Creek, a 132,000 square foot expansion opened in stages
throughout the fall of 1998.
-13-
Presentation of Operating Results
In order to facilitate the analysis of the ongoing business for periods prior
to the GMPT Exchange, the following tables contain the combined operating
results of the Company and the Operating Partnership and also present separately
the revenues and expenses, other than interest, depreciation and amortization,
of the transferred centers. The following discussions include analysis of the
Consolidated Businesses and the Unconsolidated Joint Ventures, with the interest
of the noncontrolling partners of the Operating Partnership (the Minority
Interest) deducted to arrive at the results allocable to the Company's
shareowners. Because the Operating Partnership's net equity is less than zero,
for periods subsequent to the GMPT Exchange the income allocated to the Minority
Interest is equal to the Minority Interest's share of distributions. The
Operating Partnership's net equity is less than zero due to accumulated
distributions in excess of net income and not as a result of operating losses.
Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization. The Company's
average ownership percentage of the Operating Partnership was 62.80% for the
1999 period and 38.29% for the 1998 period.
-14-
Comparison of the Three Months Ended March 31, 1999 to the Three Months
Ended March 31, 1998
The following table sets forth operating results for the three months ended
March 31, 1999 and March 31, 1998, showing the results of the Consolidated
Businesses and Unconsolidated Joint Ventures:
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
------------------------------------------ -------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES(1) VENTURES(2) TOTAL BUSINESSES(1) VENTURES(2) TOTAL
------------------------------------------ -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 31.0 38.5 69.6 23.5 35.6 59.0
Percentage rents 1.0 0.5 1.5 0.9 0.7 1.5
Expense recoveries 16.8 19.5 36.4 13.0 17.7 30.6
Management, leasing and
development 5.7 5.7 1.8 1.8
Other 3.0 1.7 4.7 3.2 2.8 6.0
Revenues - transferred centers 42.0 15.5 57.5
---- ---- ----- ---- ---- ----
Total revenues 57.6 60.3 117.9 84.3 72.1 156.4
OPERATING COSTS:
Recoverable expenses 14.4 16.2 30.7 11.3 14.8 26.1
Other operating 6.1 3.2 9.3 4.0 3.0 7.0
Management, leasing and
development 4.4 4.4 1.0 1.0
Expenses other than
interest, depreciation
and amortization
- transferred centers 14.1 5.8 19.9
General and administrative 4.7 4.7 6.8 6.8
Interest expense 10.9 15.4 26.2 22.6 17.2 39.9
Depreciation and amortization 12.1 7.2 19.3 15.0 8.0 23.0
---- ---- ---- ---- ---- -----
Total operating costs 52.6 42.0 94.6 74.8 48.8 123.6
Net results of Memorial City (1) (0.4) (0.4) (0.2) (0.2)
---- ---- ---- ---- ---- -----
4.6 18.3 22.9 9.4 23.3 32.7
==== ==== ==== =====
Equity in income before
extraordinary item of
Unconsolidated Joint Ventures 9.6 11.7
---- ----
Income before extraordinary
item and minority interest 14.2 21.1
Extraordinary item (1.0)
Minority interest (7.5) (11.2)
---- -----
Net income 6.7 8.9
Series A preferred dividends (4.2) (4.2)
---- -----
Net income available to common
shareowners 2.5 4.8
==== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 27.5 22.9 50.4 47.2 26.0 73.3
Beneficial Interest Expense (10.8) (8.2) (19.0) (22.6) (9.2) (31.8)
Non-real estate depreciation (0.6) (0.6) (0.5) (0.5)
Series A preferred dividends (4.2) (4.2) (4.2) (4.2)
---- ---- ----- ----- ---- -----
Funds from Operations
contribution 12.0 14.6 26.6 19.9 16.8 36.8
==== ==== ===== ===== ==== =====
(1) The results of operations of Memorial City are presented net in this table.
The Company 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.
(3) EBITDA represents earnings before interest and depreciation and
amortization. Funds from Operations is defined and discussed in Liquidity and
Capital Resources.
(4) Amounts in the table may not add due to rounding.
(5) Certain 1998 amounts have been reclassified to conform to 1999 classifications.
-15-
Consolidated Businesses
- -----------------------
Total revenues for the three months ended March 31, 1999 were $57.6 million, a
$15.3 million, or 36.2%, increase over the comparable period in 1998, excluding
revenues of the transferred centers. Minimum rents increased $7.5 million of
which $5.9 million was caused by the opening of MacArthur Center and Great Lakes
Crossing. Minimum rents also increased due to tenant rollovers. Expense
recoveries increased primarily due to the new centers. Revenues from management,
leasing, and development services increased primarily due to the management
agreements with GMPT. Other revenue decreased primarily due to a decrease in
lease cancellation revenue, offset by an increase in gains on sales of
peripheral land.
Total operating costs were $52.6 million, an $8.1 million, or 13.3%
decrease over the comparable period in 1998, excluding expenses other than
depreciation, amortization and interest of the transferred centers. Recoverable
and depreciation and amortization expenses increased primarily due to Great
Lakes Crossing and MacArthur Center. Costs of management, leasing and
development services increased primarily due to the management agreements with
GMPT. Other operating expense increased due to an increase in the charge to
operations for costs of potentially unsuccessful pre-development activities, bad
debt expense and the new centers. General and administrative expense decreased
$2.1 million primarily due to decreases in payroll, professional fees and
recruiter costs. Interest expense decreased primarily due to the assumption of
debt by GMPT as part of the GMPT Exchange, partially offset by an increase in
debt used to finance Great Lakes Crossing and a decrease in capitalized interest
related to this center.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for the three months ended March 31, 1999 were $60.3 million, a
$3.7 million, or 6.5%, increase from the comparable period of 1998, excluding
revenues of the transferred center. The increase in minimum rents and expense
recoveries was primarily due to the expansion at Cherry Creek and the opening of
Arizona Mills in November 1997. Minimum rents also increased due to tenant
rollovers. Other revenue decreased by $1.1 million primarily due to a decrease
in gains on sales of peripheral land.
Total operating costs decreased by $6.8 million (of which $5.8 million
represented the expenses other than interest, depreciation, and amortization of
the transferred center), to $42.0 million for the three months ended March 31,
1999. Recoverable expenses increased primarily due to the Cherry Creek expansion
and Arizona Mills. Interest expense decreased due to the assumption of debt by
GMPT as part of the GMPT Exchange.
As a result of the foregoing, income before extraordinary item of the
Unconsolidated Joint Ventures decreased by $5.0 million, or 21.5%, to $18.3
million. The Company's equity in income before extraordinary item of the
Unconsolidated Joint Ventures was $9.6 million, a 17.9% decrease from the
comparable period in 1998.
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary item
and minority interest decreased $6.9 million, or 32.7%, to $14.2 million for the
three months ended March 31, 1999. During 1998, an extraordinary charge of $1.0
million was recognized related to the extinguishment of debt. The minority
interest in the Company's results decreased to $7.5 million, from $11.2 million
in 1998, primarily reflecting the Company's increased ownership in the Operating
Partnership due to the GMPT Exchange. After payment of $4.2 million in Series A
preferred dividends, net income available to common shareowners for 1999 was
$2.5 million compared to $4.8 million in 1998.
Investment in Fashionmall.com
- -----------------------------
In April 1999, the Company made an investment of $5.8 million in an
e-commerce company that markets and sells fashion apparel, footwear, and beauty
products over the Internet. The Company's investment will become 824,084
convertible preferred shares of Fashionmall.com, Inc., a 9.9% interest in the
company, upon completion of Fashionmall.com, Inc.'s anticipated initial public
offering which is currently in registration. The investment was based on a $7.00
per share purchase price, and is subject to an upward adjustment to the lower of
the initial public offering price and $9.00 per share. In addition, the Company
received an option, exercisable during the 60-day period commencing one year
after the offering, to purchase an additional 924,898 shares of common stock at
the initial public offering price per share.
-16-
Liquidity and Capital Resources
On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of the GMPT Exchange (See
Results of Operations - GMPT Exchange and Related Transactions above). As of
that date the Company consolidated the accounts of the Operating Partnership in
the Company's financial statements. Prior to that date the Company accounted for
its investment in the Operating Partnership under the equity method. In the
following discussion, references to beneficial interest represent the Operating
Partnership's share of the results of its consolidated and unconsolidated
businesses. The Company does not have and has not had any parent company
indebtness; all debt discussed represents obligations of the Operating
Partnership or its subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities,
distributions from the Joint Ventures, the unutilized portion of its credit
facilities, and its ability to access the capital markets, assures adequate
liquidity to conduct its operations in accordance with its dividend and
financing policies.
As of March 31, 1999, the Company had a consolidated cash balance of $12.5
million. Additionally, the Company has an unsecured $200 million line of credit.
The line had $90 million of borrowings as of March 31, 1999 and expires in
September 2001. The Company also has available an unsecured bank line of credit
of up to $40 million. The line had $13.1 million of borrowings as of March 31,
1999 and expires in August 1999.
Proceeds from borrowings provided funding of $89.3 million for the first three
months of 1999 compared to $129.9 million in the comparable period of 1998
(including $77.7 million for the redemption of 6.1 million units of partnership
interest in January 1998). Additionally, the proceeds were used to fund capital
expenditures for the Consolidated Businesses and contributions to Unconsolidated
Joint Ventures for construction costs.
At March 31, 1999, the Operating Partnership's debt and its beneficial
interest in the debt of its Consolidated and Unconsolidated Joint Ventures
totaled $1,274.9 million. As shown in the following table, $279.6 million of
this debt was floating rate debt that remained unhedged at March 31, 1999.
Interest rates shown do not include amortization of debt issuance costs and
interest rate hedging costs. These items are reported as interest expense in the
results of operations. In the aggregate, these costs added 0.42% to the
effective rate of interest on beneficial interest in debt at March 31, 1999.
Included in beneficial interest in debt is debt used to fund development and
expansion costs. Beneficial interest in assets on which interest is being
capitalized totaled $177.4 million as of March 31, 1999. Beneficial interest in
capitalized interest was $4.4 million for the three months ended March 31, 1999.
Beneficial Interest in Debt
-----------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(in millions Rate at Cap of Rate at
of dollars) 3/31/99 Rate Resets 3/31/99
----------- ------- ---- ------ -------
Total beneficial interest
in fixed rate debt $408.5 8.01%(1)
Floating rate debt
hedged via interest rate caps:
Through May 1999 200.0 6.09 (1) 6.00% Monthly 4.94%
Through July 1999 65.0 5.71 7.00 Monthly 4.94
Through December 1999 200.0 6.09 (1) 7.00 Monthly 4.94
Through October 2001 25.0 5.39 8.55 Monthly 4.94
Through January 2002 53.4 6.23 (1) 9.50 Monthly 4.94
Through July 2002 43.4 6.10 6.50 Monthly 4.94
Other floating rate debt 279.6 6.09 (1)
-----
Total beneficial interest in debt $1,274.9 6.68 (1)
========
1) Denotes weighted average interest rate.
-17-
Certain loan agreements contain various restrictive covenants, including
limitations on net worth, minimum debt service and fixed charges coverage
ratios, a maximum payout ratio on distributions, and a minimum debt yield ratio,
the latter being the most restrictive. The Company is in compliance with all of
such covenants.
In April 1999, a secured, ten-year financing of $270 million with an all-in
rate of approximately 6.9% on The Mall at Short Hills was completed. The Company
used the proceeds to partially pay down its $340 million bridge loan which
matures on June 21, 1999. The Company is currently working on securing a
mortgage on Biltmore Fashion Park to refinance the remaining $70 million balance
on the bridge loan.
Also in April 1999, a three-year $170 million facility, secured by Great Lakes
Crossing, was finalized. The loan agreement provides for an option to extend the
maturity date one year. The loan bears interest at one month LIBOR plus 1.50%.
Proceeds from the loan were used to repay the balance of the existing unsecured
construction facility. Payment of principal and interest are guaranteed by the
Operating Partnership. The loan agreement provides for a reduction of the
interest rate and the amount guaranteed as certain center performance and
valuation criteria are met. In addition, the Company finalized an amendment to
the MacArthur Center construction facility. The total availability under the
facility is $120 million with interest at one month LIBOR plus 1.35%.
Sensitivity Analysis
The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Operating Partnership's beneficial
interest in debt and interest rates in effect at March 31, 1999 and considering
the Short Hills financing mentioned above, a one percent increase or decrease in
interest rates would decrease or increase annual earnings and cash flows by
approximately $5.1 million. Based on the Company's consolidated debt and
interest rates in effect at March 31, 1999, as well as the Short Hills
financing, a one percent increase or decrease in interest rates would decrease
or increase the fair value of debt by approximately $25 million.
Funds from Operations
A principal factor that the Company considers in determining dividends to
shareowners is Funds from Operations, which is defined as income before
extraordinary and unusual items, real estate depreciation and amortization, and
the allocation to the minority interest in the Operating Partnership, less
preferred dividends.
Funds from Operations does not represent cash flows from operations, as
defined by generally accepted accounting principles, and should not be
considered to be an alternative to net income as an indicator of operating
performance or to cash flows from operations as a measure of liquidity. However,
the National Association of Real Estate Investment Trusts suggests that Funds
from Operations is a useful supplemental measure of operating performance for
REITs.
-18-
Reconciliation of Net Income to Funds from Operations
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
(in millions of dollars)
Income before extraordinary item
and minority interest (1) 14.2 21.1
Depreciation and Amortization (2) 12.2 15.1
Share of Unconsolidated Joint Ventures'
depreciation and amortization (3) 5.0 5.1
Other income/expenses, net 0.2
Non-real estate depreciation (0.6) (0.5)
Preferred dividends (4.2) (4.2)
---- ----
Funds from Operations 26.6 36.8
==== ====
Funds from Operations allocable to
the Company 16.7 13.9
==== ====
(1) Includes gains on peripheral land sales of $0.5 million and $0.4 million
for the three months ended March 31, 1999 and March 31, 1998, respectively.
(2) Includes $0.5 million and $0.7 million of mall tenant allowance
amortization for the three months ended March 31, 1999 and March 31,
1998, respectively.
(3) Includes $0.3 million of mall tenant allowance amortization for each of
the three month periods ended March 31, 1999 and March 31, 1998.
Dividends
The Company pays regular quarterly dividends to its common and Series A
preferred shareowners. Dividends to its common shareowners are at the discretion
of the Board of Directors and depend on the cash available to the Company, its
financial condition, capital and other requirements, and such other factors as
the Board of Directors deems relevant. Preferred dividends accrue regardless of
whether earnings, cash availability, or contractual obligations were to prohibit
the current payment of dividends.
On March 4, 1999, the Company declared a quarterly dividend of $0.24 per
common share payable April 20, 1999 to shareowners of record on March 31, 1999.
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 March 31, 1999, which was paid on March 31, 1999 to shareowners of record
on March 16, 1999.
The tax status of total 1999 common dividends declared and to be declared,
assuming continuation of a $0.24 per common share quarterly dividend, is
estimated to be approximately 50% return of capital, and approximately 50% of
ordinary income. The tax status of total 1999 dividends to be paid on Series A
Preferred Stock is estimated to be 100% ordinary income. These are
forward-looking statements and certain significant factors could cause the
actual results to differ materially, including: 1) the amount of dividends
declared; 2) changes in the Company's share of anticipated taxable income of the
Operating Partnership due to the actual results of the Operating Partnership; 3)
changes in the number of the Company's outstanding shares; 4) property
acquisitions or dispositions; 5) financing transactions, including refinancing
of existing debt; and 6) changes in the Internal Revenue Code or its
application.
The annual determination of the Company's common dividends is based on
anticipated Funds from Operations available after preferred dividends, as well
as financing considerations and other appropriate factors. Further, the Company
has decided that the growth in common dividends will be less than the growth in
Funds from Operations for the immediate future.
Any inability of the Operating Partnership or its Joint Ventures to 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 the Operating Partnership and funds available to
the Company for the payment of dividends.
-19-
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally
recovered from tenants. The following table summarizes planned capital spending,
which is not recovered from tenants and assuming no acquisitions during 1999:
1999
------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures(1) Joint Ventures(1)(2)
------------------------------------------------------------
(in millions of dollars)
Development, renovation, and
expansion 223.4 (3) 25.4 190.0
Mall tenant allowances 6.1 9.8 11.1
Pre-construction development and
other 21.5 4.0 23.5
----- ----- -----
Total 251.0 39.2 224.6
===== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes the Operating Partnership's share of construction costs for
MacArthur Center (a 70% owned consolidated joint venture), The Mall at
Wellington Green (a 90% owned consolidated joint venture) and International
Plaza (a 50.1% owned consolidated joint venture).
(3) Includes costs related to MacArthur Center, The Shops at Willow Bend, The Mall at
Wellington Green and International Plaza.
MacArthur Center, a new center in Norfolk, Virginia, opened in March 1999. The
930,000 square foot center is anchored by Nordstrom and Dillard's. This center
is owned by a joint venture in which the Operating Partnership has a 70%
controlling interest and cost approximately $157 million.
International Plaza, a new 1.3 million square foot center under
construction in Tampa, Florida, will be anchored by Nordstrom, Lord & Taylor,
Dillard's and Neiman Marcus. This center will be owned by a joint venture in
which the Operating Partnership will have a controlling 50.1% interest. In 1999,
the Company held ground-breaking ceremonies for The Shops at Willow Bend, a new
1.5 million square foot center in Plano, Texas. Anchors will be Neiman Marcus,
Saks Fifth Avenue, Lord & Taylor, Foley's and Dillard's. The Mall at Wellington
Green, a 1.3 million square foot center under construction in West Palm Beach
County, Florida, will be anchored by Lord & Taylor, Burdine's, Dillard's and
JCPenney. The center will be owned by a joint venture in which the Operating
Partnership has a 90% controlling interest. All three of these centers are
expected to open in 2001 and will have an aggregate cost to the Operating
Partnership of over $500 million. The Operating Partnership is presently
arranging construction loans for these projects and expects to complete the
financings by the end of 1999.
In 1996, the Operating Partnership 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. In
November 1999, the Operating Partnership has the option to terminate the lease
by paying $2 million to the lessor. The Operating Partnership is using this
option period to evaluate the redevelopment opportunities of the center. Under
the terms of the lease, the Operating Partnership has agreed to invest a minimum
of $3 million during the three-year option period. If the redevelopment
proceeds, the Operating Partnership 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 Operating Partnership and The Mills Corporation have formed an alliance to
develop value super-regional projects in major metropolitan markets. The
ten-year agreement calls for the two companies to jointly develop and own at
least seven of these centers, each representing approximately $200 million of
capital investment. A number of locations across the nation are targeted for
future initiatives.
-20-
The Operating Partnership anticipates that its share of costs for development
projects scheduled to be completed in 2001 will be as much as $185 million in
2000. The Operating Partnership's estimates of 1999 and 2000 capital spending
include only projects approved by the Company's Board of Directors and,
consequently, estimates will change as new projects are approved. Estimates
regarding capital expenditures presented above are forward-looking statements
and certain significant factors could cause the actual results to differ
materially, including but not limited to: 1) actual results of negotiations with
anchors, tenants and contractors; 2) changes in the scope and number of
projects; 3) cost overruns; 4) timing of expenditures; 5) financing
considerations; and 6) actual time to complete projects.
Year 2000 Matters
The approach of the calendar year 2000 (Year 2000) presents issues for many
financial, information, and operational systems that may not properly recognize
the Year 2000. The Company has developed a high-level plan to address the risks
posed by the Year 2000 issue, covering affected application and infrastructure
systems. Affected systems include both informational (such as accounting and
payroll) and operational (such as elevators, security and lighting). The
Company's plan also addresses the effect of Year 2000 on third parties with
which it conducts business, including tenants, vendors, contractors, creditors,
and others. The Company has completed the assessment, inventory, planning and
testing phases of its plan and has determined that the majority of the Company's
internal systems and all of its mission critical systems are already Year 2000
compliant. The Company has requested information and has obtained commitments
from tenants, vendors, suppliers and business partners and is continuing to
develop contingency plans to minimize the impact on the Company in the event
they do not meet their Year 2000 commitments.
The Company performed a full system test during the first quarter of 1999 and
expects to remediate any remaining issues encountered with application and
infrastructure systems through repair and/or replacement in the second quarter.
The estimated costs of addressing this issue are not expected to be material to
1999 operations. The Company will also continue monitoring the progress of
material third parties' responses to the Year 2000 issue. The Company believes
that its most likely exposure will be the failure of third parties in
comprehensively addressing the issue. For example, failure of utility companies
to meet their commitments might result in temporary business interruption at
centers. The Company is continuing to develop contingency plans in response to
such exposure, as appropriate. Failure of third parties with which the Company
conducts business to successfully respond to the Year 2000 issue may have a
material adverse effect on the Company.
Cash Tender Agreement
A. Alfred Taubman has the annual right to tender to the Company units of
partnership interest in the Operating Partnership (provided that the aggregate
value is at least $50 million) and cause the Company to purchase the tendered
interests at a purchase price based on a market valuation of the Company on the
trading date immediately preceding the date of the tender (the Cash Tender
Agreement). At A. Alfred Taubman's election, his family, and Robert C. Larson
and his family may participate in tenders. The Company will have the option to
pay for these interests from available cash, borrowed funds, or from the
proceeds of an offering of the Company's common stock. Generally, the Company
expects to finance these purchases through the sale of new shares of its stock.
The tendering partner will bear all market risk if the market price at closing
is less than the purchase price and will bear the costs of sale. Any proceeds of
the offering in excess of the purchase price will be for the sole benefit of the
Company.
Based on a market value at March 31, 1999 of $12.25 per common share, the
aggregate value of interests in the Operating Partnership that may be tendered
under the Cash Tender Agreement was approximately $296 million. The purchase of
these interests at March 31, 1999 would have resulted in the Company owning an
additional 29% interest in the Operating Partnership.
-21-
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivatives and whether it qualifies for hedge accounting. This statement is
not expected to have a material impact on the Company's consolidated financial
statements. This statement is effective for fiscal years beginning after June
15, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in this report at Item 2
under the caption "Liquidity and Capital Resources - Sensitivity Analysis".
-22-
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10 -- The Taubman Company Long-Term Performance Compensation Plan
(as amended and restated effective January 1, 1999).
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio
of Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
27 -- Financial Data Schedule.
b) Current Reports on Form 8-K.
None
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: May 4, 1999 By: /s/ Lisa A. Payne
-----------------
Lisa A. Payne
Executive Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
-------
10 -- The Taubman Company Long-Term Performance Compensation Plan
(as amended and restated effective January 1, 1999).
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
27 -- Financial Data Schedule.