Form 10-Q for the quarter ended September 30, 2006
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
WASHINGTON,
D.C. 20549
|
|
|
Form
10-Q
|
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For
the
Quarterly Period Ended: September 30, 2006
|
Commission
File No. 1-11530
|
Taubman
Centers, Inc.
|
(Exact
name
of registrant as specified in its charter)
|
Michigan
|
|
38-2033632
|
(State
or
other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
200
East Long
Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills,
Michigan
|
|
48303-0200
|
(Address
of
principal executive offices)
|
|
(Zip
Code)
|
(248)
258-6800
|
(Registrant's
telephone number, including area
code)
|
Indicate
by
check mark whether the registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|
|
x
Yes o
No
|
|
Indicate
by a
check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of
the
Exchange Act. (Check one):
|
|
Large
Accelerated Filer x Accelerated
Filer o Non-Accelerated
Filer o
|
|
|
Indicate
by a
check mark whether the registrant is a shell company (as defined
in Rule
12b-2 of the Exchange Act).
|
|
o
Yes x
No
|
|
|
As
of October
30, 2006, there were outstanding 52,931,594 shares of the Company's
common
stock, par value $0.01 per share.
|
TAUBMAN
CENTERS, INC.
CONTENTS
PART
I - FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
Consolidated
Balance Sheet - September 30, 2006 and December 31, 2005
|
2
|
|
Consolidated
Statement of Operations and Comprehensive Income - Three Months Ended
September 30, 2006 and 2005
|
3
|
|
Consolidated
Statement of Operations and Comprehensive Income - Nine Months Ended
September 30, 2006 and 2005
|
4
|
|
Consolidated
Statement of Cash Flows - Nine Months Ended September 30, 2006 and
2005
|
5
|
|
Notes
to
Consolidated Financial Statements
|
6
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
Item
4.
|
Controls
and
Procedures
|
36
|
PART
II - OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
37
|
Item
1A.
|
Risk
Factors
|
37
|
Item
6.
|
Exhibits
|
37
|
SIGNATURES
|
38
|
TAUBMAN
CENTERS, INC.
CONSOLIDATED
BALANCE SHEET
(in
thousands, except share data)
|
|
|
September
30
|
|
|
December
31
|
|
|
|
|
2006
|
|
|
2005
|
|
Assets
(Note
1):
|
|
|
|
|
|
|
|
Properties
|
|
$
|
3,341,586
|
|
$
|
3,081,324
|
|
Accumulated depreciation and amortization
|
|
|
(792,844
|
)
|
|
(651,665
|
)
|
|
|
$
|
2,548,742
|
|
$
|
2,429,659
|
|
Investment in Unconsolidated Joint Ventures (Note 4)
|
|
|
79,389
|
|
|
106,117
|
|
Cash
and cash equivalents (Note 5)
|
|
|
18,698
|
|
|
163,577
|
|
Accounts and notes receivable, less allowance for doubtful accounts
of
$9,192
and $5,497 in 2006 and 2005
|
|
|
29,559
|
|
|
41,717
|
|
Accounts and notes receivable from related parties
|
|
|
3,603
|
|
|
2,400
|
|
Deferred charges and other assets (Note 1)
|
|
|
98,583
|
|
|
54,110
|
|
|
|
$
|
2,778,574
|
|
$
|
2,797,580
|
|
Liabilities
(Note 1):
|
|
|
|
|
|
|
|
Notes
payable (Note 5)
|
|
$
|
2,283,355
|
|
$
|
2,089,948
|
|
Accounts payable and accrued liabilities
|
|
|
222,509
|
|
|
235,410
|
|
Dividends and distributions payable
|
|
|
16,115
|
|
|
15,819
|
|
Distributions in excess of investments in and net income of
Unconsolidated
|
|
|
|
|
|
|
|
Joint Ventures (Note 4)
|
|
|
103,764
|
|
|
101,028
|
|
|
|
$
|
2,625,743
|
|
$
|
2,442,205
|
|
Commitments
and contingencies (Notes 3, 5, 7, and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Equity of TRG (Note 1)
|
|
$
|
29,217
|
|
$
|
29,217
|
|
|
|
|
|
|
|
|
|
Partners'
Equity of TRG allocable to minority partners (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners'
Equity:
|
|
|
|
|
|
|
|
Series
A Cumulative Redeemable Preferred Stock, $0.01 par value,
8,000,000 shares authorized, $113 million liquidation preference,
4,520,000
shares issued and outstanding at December 31, 2005. No shares
outstanding
or authorized at September 30, 2006 (Note 6)
|
|
|
|
|
$
|
45
|
|
Series
B Non-Participating Convertible Preferred Stock, $0.001 par and
liquidation value, 40,000,000 shares authorized, 28,208,897 and
29,175,240 shares issued and outstanding at September 30, 2006
and
December 31, 2005
|
|
$
|
28
|
|
|
29
|
|
Series
G Cumulative Redeemable Preferred Stock, 4,000,000 shares
authorized, no par, $100 million liquidation preference, 4,000,000
shares
issued
and outstanding at September 30, 2006 and December 31, 2005
|
|
|
|
|
|
|
|
Series
H Cumulative Redeemable Preferred Stock, 3,480,000 shares
authorized, no par, $87 million liquidation preference, 3,480,000
shares
issued
and outstanding at September 30, 2006 and December 31,
2005
|
|
|
|
|
|
|
|
Common
Stock, $0.01 par value, 250,000,000 shares authorized,
52,836,421
and 51,866,184 shares issued and outstanding at September 30, 2006
and
December 31, 2005
|
|
|
528
|
|
|
519
|
|
Additional paid-in capital
|
|
|
633,983
|
|
|
739,090
|
|
Accumulated other comprehensive income (loss)
|
|
|
(9,780
|
)
|
|
(9,051
|
)
|
Dividends in excess of net income (Note 1)
|
|
|
(501,145
|
)
|
|
(404,474
|
)
|
|
|
$
|
123,614
|
|
$
|
326,158
|
|
|
|
$
|
2,778,574
|
|
$
|
2,797,580
|
|
|
|
|
|
|
|
|
|
See
notes to
consolidated financial statements.
TAUBMAN
CENTERS, INC.
CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in
thousands,
except share data)
|
|
Three
Months
Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
Revenues
(Note 1):
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
76,404
|
|
$
|
63,863
|
|
Percentage rents
|
|
|
2,653
|
|
|
1,319
|
|
Expense recoveries
|
|
|
49,105
|
|
|
39,985
|
|
Revenues from management, leasing, and development
services
|
|
|
2,586
|
|
|
3,390
|
|
Other
|
|
|
8,165
|
|
|
5,602
|
|
|
|
$
|
138,913
|
|
$
|
114,159
|
|
Expenses
(Note 1):
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities
|
|
$
|
37,966
|
|
$
|
32,597
|
|
Other
operating
|
|
|
18,086
|
|
|
13,410
|
|
Management, leasing, and development services
|
|
|
1,188
|
|
|
2,444
|
|
General and administrative
|
|
|
7,122
|
|
|
6,764
|
|
Interest expense (Note 5)
|
|
|
32,314
|
|
|
27,219
|
|
Depreciation and amortization
|
|
|
32,910
|
|
|
31,677
|
|
|
|
$
|
129,586
|
|
$
|
114,111
|
|
Gains
on land
sales and interest income
|
|
$
|
1,152
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
Income
before
equity in income of Unconsolidated Joint Ventures and
minority
and
preferred interests
|
|
$
|
10,479
|
|
|
484
|
|
Equity
in
income of Unconsolidated Joint Ventures (Note 4)
|
|
|
7,082
|
|
|
9,268
|
|
Income
before
minority and preferred interests
|
|
$
|
17,561
|
|
$
|
9,752
|
|
Minority
share of consolidated joint ventures (Note 1)
|
|
|
(3,043
|
)
|
|
40
|
|
Minority
interest in TRG:
|
|
|
|
|
|
|
|
Minority share of income of TRG
|
|
|
(4,158
|
)
|
|
(627
|
)
|
Distributions in excess of minority share of income of TRG (Note
1)
|
|
|
(4,721
|
)
|
|
(8,262
|
)
|
TRG
Series F
preferred distributions
|
|
|
(615
|
)
|
|
(615
|
)
|
Net
income
|
|
$
|
5,024
|
|
$
|
288
|
|
Series
A, G,
and H preferred stock dividends (Note 6)
|
|
|
(3,658
|
)
|
|
(9,318
|
)
|
Net
income
(loss) allocable to common shareowners
|
|
$
|
1,366
|
|
$
|
(9,030
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,024
|
|
$
|
288
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate instruments and
other
|
|
|
(4,946
|
)
|
|
17
|
|
Reclassification adjustment for amounts recognized in net
income
|
|
|
310
|
|
|
368
|
|
Comprehensive
income
|
|
$
|
388
|
|
$
|
673
|
|
|
|
|
|
|
|
|
|
Basic
and
diluted earnings per common share (Note 9) -
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.03
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$
|
0.305
|
|
$
|
0.285
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
52,808,698
|
|
|
50,765,091
|
|
See
notes to
consolidated financial statements.
TAUBMAN
CENTERS, INC.
CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in
thousands,
except share data)
|
|
Nine
Months
Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
Revenues
(Note 1):
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
228,986
|
|
$
|
190,241
|
|
Percentage rents
|
|
|
6,252
|
|
|
3,736
|
|
Expense recoveries
|
|
|
146,150
|
|
|
118,767
|
|
Revenues from management, leasing, and development
services
|
|
|
8,669
|
|
|
8,924
|
|
Other
|
|
|
26,153
|
|
|
21,854
|
|
|
|
$
|
416,210
|
|
$
|
343,522
|
|
Expenses
(Note 1):
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities
|
|
$
|
113,249
|
|
$
|
94,756
|
|
Other
operating
|
|
|
51,157
|
|
|
42,999
|
|
Management, leasing, and development services
|
|
|
4,233
|
|
|
5,764
|
|
General and administrative
|
|
|
21,592
|
|
|
20,509
|
|
Interest expense (Note 5)
|
|
|
98,468
|
|
|
79,251
|
|
Depreciation and amortization
|
|
|
99,614
|
|
|
94,746
|
|
|
|
$
|
388,313
|
|
$
|
338,025
|
|
Gains
on land
sales and interest income
|
|
$
|
9,079
|
|
$
|
5,988
|
|
|
|
|
|
|
|
|
|
Income
before
equity in income of Unconsolidated Joint Ventures and
minority
and
preferred interests
|
|
$
|
36,976
|
|
|
11,485
|
|
Equity
in
income of Unconsolidated Joint Ventures (Note 4)
|
|
|
22,965
|
|
|
27,710
|
|
Income
before
minority and preferred interests
|
|
$
|
59,941
|
|
$
|
39,195
|
|
Minority
share of consolidated joint ventures (Note 1)
|
|
|
(7,175
|
)
|
|
24
|
|
Minority
interest in TRG:
|
|
|
|
|
|
|
|
Minority share of income of TRG
|
|
|
(12,655
|
)
|
|
(8,156
|
)
|
Distributions in excess of minority share of income of TRG (Note
1)
|
|
|
(14,017
|
)
|
|
(18,874
|
)
|
TRG
Series F
preferred distributions
|
|
|
(1,845
|
)
|
|
(1,845
|
)
|
Net
income
|
|
$
|
24,249
|
|
$
|
10,344
|
|
Series
A , G,
H, and I preferred stock dividends (Note 6)
|
|
|
(20,064
|
)
|
|
(21,618
|
)
|
Net
income
(loss) allocable to common shareowners
|
|
$
|
4,185
|
|
$
|
(11,274
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
24,249
|
|
$
|
10,344
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate instruments and
other
|
|
|
(1,813
|
)
|
|
856
|
|
Reclassification adjustment for amounts recognized in net
income
|
|
|
1,084
|
|
|
1,023
|
|
Comprehensive
income
|
|
$
|
23,520
|
|
$
|
12,223
|
|
|
|
|
|
|
|
|
|
Basic
and
diluted earnings per common share (Note 9) -
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.08
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$
|
0.915
|
|
$
|
0.855
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
52,575,448
|
|
|
50,313,815
|
|
See
notes to
consolidated financial statements.
TAUBMAN
CENTERS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in
thousands)
|
|
Nine
Months
Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
Cash
Flows
From Operating Activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
24,249
|
|
$
|
10,344
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Minority and preferred interests
|
|
|
35,692
|
|
|
28,851
|
|
Depreciation and amortization
|
|
|
99,614
|
|
|
94,746
|
|
Provision for losses on accounts receivable
|
|
|
5,679
|
|
|
3,186
|
|
Gains on sales of land
|
|
|
(4,084
|
)
|
|
(4,833
|
)
|
Other
|
|
|
5,126
|
|
|
3,451
|
|
Increase (decrease) in cash attributable to changes in assets and
liabilities:
|
|
|
|
|
|
|
|
Receivables, deferred charges, and other assets
|
|
|
(631
|
)
|
|
(773
|
)
|
Accounts payable and other liabilities
|
|
|
(15,039
|
)
|
|
(11,637
|
)
|
Net
Cash
Provided by Operating Activities
|
|
$
|
150,606
|
|
$
|
123,335
|
|
|
|
|
|
|
|
|
|
Cash
Flows
From Investing Activities:
|
|
|
|
|
|
|
|
Additions to properties
|
|
$
|
(121,019
|
)
|
$
|
(103,521
|
)
|
Net
proceeds from disposition of interest in center (Note 3)
|
|
|
9,000
|
|
|
|
|
Proceeds from sales of land
|
|
|
5,423
|
|
|
6,082
|
|
Contributions to Unconsolidated Joint Ventures
|
|
|
(3,186
|
)
|
|
(29,393
|
)
|
Distributions from Unconsolidated Joint Ventures in excess of
income
|
|
|
45,719
|
|
|
18,314
|
|
Net
Cash Used
In Investing Activities
|
|
$
|
(64,063
|
)
|
$
|
(108,518
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows
From Financing Activities:
|
|
|
|
|
|
|
|
Debt
proceeds
|
|
$
|
545,350
|
|
$
|
272,207
|
|
Debt
payments
|
|
|
(526,621
|
)
|
|
(190,637
|
)
|
Debt
issuance costs
|
|
|
(3,443
|
)
|
|
(914
|
)
|
Contribution from minority interest (Note 3)
|
|
|
9,000
|
|
|
|
|
Issuance of common stock and/or partnership units in connection with
Incentive
Option Plan (Note 7)
|
|
|
|
|
|
6,701
|
|
Issuance of preferred stock (Note 6)
|
|
|
113,000
|
|
|
87,000
|
|
Redemption of preferred stock (Note 6)
|
|
|
(226,000
|
)
|
|
(87,000
|
)
|
Equity
issuance costs
|
|
|
(607
|
)
|
|
(3,158
|
)
|
Distributions to minority and preferred interests (Note 1)
|
|
|
(81,028
|
)
|
|
(28,875
|
)
|
Cash
dividends to preferred shareowners
|
|
|
(15,412
|
)
|
|
(18,503
|
)
|
Cash
dividends to common shareowners
|
|
|
(48,015
|
)
|
|
(42,585
|
)
|
Net
Cash Used
In Financing Activities
|
|
$
|
(233,776
|
)
|
$
|
(5,764
|
)
|
|
|
|
|
|
|
|
|
Net
Increase
(Decrease) In Cash and Cash Equivalents
|
|
$
|
(147,233
|
)
|
$
|
9,053
|
|
|
|
|
|
|
|
|
|
Cash
and Cash
Equivalents at Beginning of Period
|
|
|
163,577
|
|
|
29,081
|
|
|
|
|
|
|
|
|
|
Effect
of
consolidating Cherry Creek Shopping Center (Note 1)
(Cherry Creek Shopping Center's cash balance at beginning of
year)
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash
Equivalents at End of Period
|
|
$
|
18,698
|
|
$
|
38,134
|
|
Non-cash
investing and financing activities
- Consolidated
assets and liabilities increased upon consolidation of the accounts of Cherry
Creek Shopping Center on January 1, 2006 (Note 1).
See
notes to
consolidated financial statements.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 -
Interim Financial Statements
General
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 and super regional retail shopping
centers and interests therein. The Operating Partnership's owned portfolio
as of
September 30, 2006 included 22 shopping centers in ten states. One new center
is
under construction in Michigan.
In
2005, the
Company formed Taubman Asia, which will be the platform for its future expansion
into the Asia-Pacific region. Taubman Asia is headquartered in Hong Kong and
is
seeking opportunities in Asia to augment the Company's existing development
and
acquisition activities.
Consolidation
The
consolidated
financial statements of the Company include all accounts of the Company, the
Operating Partnership, and its consolidated subsidiaries, including The Taubman
Company LLC (the Manager). The Company consolidates the accounts of the owner
of
The Mall at Partridge Creek (Partridge Creek) (Note 3), which qualifies as
a
variable interest entity under FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46R) for which the Operating Partnership is
considered to be the primary beneficiary. All intercompany transactions have
been eliminated.
Investments
in
entities not controlled but over which the Company may exercise significant
influence (Unconsolidated Joint Ventures) are accounted for under the equity
method. The Company has evaluated its investments in the Unconsolidated Joint
Ventures and has concluded that the ventures are not variable interest entities
as defined in FIN 46R. Accordingly, the Company accounts for its interests
in
these ventures under the guidance in Statement of Position 78-9 "Accounting
for
Investments in Real Estate Ventures," (SOP 78-9), as amended by FASB Staff
Position 78-9-1, and Emerging Issues Task Force Issue No. 04-5 "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights" (EITF 04-5). The Company’s partners or other owners in these
Unconsolidated Joint Ventures have substantive participating rights, as
contemplated by paragraphs 16 through 18 of EITF 04-5, including approval rights
over annual operating budgets, capital spending, financing, admission of new
partners/members, or sale of the properties and the Company has concluded that
the equity method of accounting is appropriate for these interests.
Specifically, the Company’s 79% investment in Westfarms is through a general
partnership in which the other general partners have approval rights over annual
operating budgets, capital spending, refinancing, or sale of the
property.
With
the issuance
of EITF 04-5 and the amendment of SOP 78-9, the Company began consolidating,
as
of January 1, 2006, the entity that owns Cherry Creek Shopping Center (Cherry
Creek); a 50% owned joint venture, pursuant to the transition methodology
provided in EITF 04-5. The impact to the balance sheet was an increase in assets
of approximately $128 million and liabilities of approximately $180 million,
and
a $52 million reduction of beginning equity representing the cumulative effect
of change in accounting principle. The reduction in beginning equity was the
result of the Company's venture partner's deficit capital account as of December
31, 2005, which was recorded at zero in the consolidated balance sheet as of
January 1, 2006.
Because
the net
equity balance (accumulated distributions from operations in excess of net
income) of the outside partners in certain of the Company’s consolidated joint
ventures is less than zero, the interest of these outside partners is presented
as a zero balance in the consolidated balance sheet as of September 30, 2006
and
December 31, 2005. The income allocated to these noncontrolling partners is
equal to their share of operating distributions as long as the net equity of
the
partners is less than zero.
The
Company
accounts for distributions to minority partners that result from financing
transactions as a debit balance minority interest upon determination that (1)
the distribution was the result of appreciation in the fair value of the
property above the book value, (2) the financing was provided at a loan to
value
ratio commensurate with non-recourse real estate lending, and (3) the excess
of
the property value over the financing provides support for the eventual recovery
of the debit balance minority interest upon sale or disposal of the property.
Debit balance minority interests are considered as part of the carrying value
of
a property, should events or circumstances indicate that the carrying value
may
not be recoverable.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In
May 2006, Cherry
Creek refinanced its debt and distributed the excess proceeds to the partners.
The joint venture partner's $45 million share of the distributed excess proceeds
is classified as minority interest and included in Deferred Charges and Other
Assets in the Company's consolidated balance sheet.
Ownership
In
addition to the
Company’s common stock, there are three classes of preferred stock (Series B, G,
and H) outstanding as of September 30, 2006. Dividends on the 8% Series G and
7.625% Series H preferred stocks are cumulative and are payable in arrears
on or
before the last day of each calendar quarter. The Company owns corresponding
Series G and Series H Preferred Equity interests in the Operating Partnership
that entitle the Company to income and distributions (in the form of guaranteed
payments) in amounts equal to the dividends payable on the Company’s Series G
and Series H Preferred Stock. The remaining shares of 8.3% Series A Cumulative
Redeemable Preferred Stock (Series A Preferred Stock) were redeemed in May
2006
(Note 6).
The
Company also is
obligated to issue to partners in the Operating Partnership other than the
Company, upon subscription, one share of nonparticipating Series B Preferred
Stock. The Series B Preferred Stock entitles its holders to one vote per share
on all matters submitted to the Company’s shareholders and votes together with
the common stock on all matters as a single class. The holders of Series B
Preferred Stock are not entitled to dividends or earnings. Under certain
circumstances, the Series B Preferred Stock is convertible into common stock
at
a ratio of 14,000 shares of Series B Preferred Stock for one share of common
stock.
The
Operating
Partnership
At
September 30,
2006, the Operating Partnership’s equity included three classes of preferred
equity (Series F, G, and H) and the net equity of the partnership unitholders.
Net income and distributions of the Operating Partnership are allocable first
to
the preferred equity interests, and the remaining amounts to the general and
limited partners in the Operating Partnership in accordance with their
percentage ownership. The Series G and Series H Preferred Equity are owned
by
the Company and are eliminated in consolidation. The Series F Preferred Equity
is owned by an institutional investor.
Because
the net
equity of the Operating Partnership unitholders is less than zero, $(297)
million as of September 30, 2006, the interest of the noncontrolling unitholders
is presented as a zero balance in the consolidated balance sheet as of September
30, 2006 and December 31, 2005. The income allocated to the noncontrolling
unitholders is equal to their share of distributions as long as the net equity
of the Operating Partnership is less than zero. The net equity of the Operating
Partnership is less than zero because of accumulated distributions in excess
of
net income and not as a result of operating losses. Distributions to partners
are usually greater than net income because net income includes non-cash charges
for depreciation and amortization.
The
Company's
ownership in the Operating Partnership at September 30, 2006 consisted of a
65%
managing general partnership interest, as well as the Series G and H Preferred
Equity interests. The Company's average ownership percentage in the Operating
Partnership for the nine months ended September 30, 2006 and 2005 was 65% and
62%, respectively. At September 30, 2006, the Operating Partnership had
81,078,527 units of partnership interest outstanding, of which the Company
owned
52,836,421.
Finite
Life
Entities
SFAS
No. 150,
“Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,” establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. At September 30, 2006,
the Company held controlling majority interests in consolidated entities with
specified termination dates in 2080 and 2083. The minority owners' interests
in
these entities are to be settled upon termination by distribution or transfer
of
either cash or specific assets of the underlying entity. The estimated fair
value of these minority interests was approximately $123 million at September
30, 2006, compared to a book value of $(45) million, which is classified as
Deferred Charges and Other Assets in the Company's consolidated balance
sheet.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Modified
Useful
Lives and Income Statement Reclassifications
During
the first
quarter of 2006, the Company modified its estimated useful lives of capital
assets that are recoverable from its tenants. This change in estimate was a
result of the Company's initiative of offering its tenants the option to pay
for
common area maintenance costs through fixed payments versus the historical
practice of a tenant paying an amount equal to its proportionate share of common
area costs. The change in useful lives better aligns the depreciation of common
area assets with the Company's lease portfolio. This change in estimate did
not
have a material effect on the current results of operations but could be
material in future periods. Beginning in 2006, depreciation on these assets,
which was previously included in recoverable expenses, is included in
depreciation and amortization.
Also
during
the
first quarter of 2006,
the Company
began recognizing revenue for marketing and promotion services at the gross
amount billed to tenants, rather than a net amount retained (that is, the amount
billed to the tenants less the related costs incurred). Revenues are now
included in recoveries from tenants and the related expenses in other operating
expense. This presentation change was made as a result of the Company’s recent
offering to tenants of an option to pay fixed amounts for marketing and
promotion of the shopping centers. In evaluating the accounting for marketing
and promotion services, the Company considered that there may no longer be
a
direct relationship between tenant billings and the marketing and promotion
costs incurred, as well as the fact that the Company is the primary obligor
on
the costs incurred. Historically, revenues from marketing and promotion services
have been equal to costs incurred.
In
addition, the
Company now classifies gains on peripheral land sales and interest income
separately in its income statement.
Prior
year revenues
and expenses in the consolidated financial statements and in the combined
financial information in Note 4 have been reclassified as described above to
be
consistent with the 2006 presentation.
Other
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, 2005. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments, except as
noted below) 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.
Dollar
amounts
presented in tables within the notes to the financial statements are stated
in
thousands, except share data or as otherwise noted. Certain reclassifications
have been made to 2005 amounts to conform to current year
classifications.
Note
2 -
Income Taxes
The
Company’s
taxable REIT subsidiaries are subject to corporate level income taxes, which
are
provided for in the Company’s financial statements. The Company's deferred tax
assets and liabilities reflect the impact of temporary differences between
the
amounts of assets and liabilities for financial reporting purposes and the
bases
of such assets and liabilities as measured by tax laws. Deferred tax assets
are
reduced, if necessary, by a valuation allowance to the amount where realization
is more likely than not assured after considering all available evidence. The
Company’s temporary differences primarily relate to deferred compensation and
depreciation. During the three and nine months ended September 30, 2006, the
Company’s federal income tax expense was zero as a result of a net operating
loss incurred from its taxable REIT subsidiaries. As of September 30, 2006,
the
Company had a net deferred tax asset of $3.3 million, after a valuation
allowance of $10.2 million. As of December 31, 2005, the net deferred tax asset
was $3.2 million, after a valuation allowance of $9.6 million.
Note
3 -
Disposition and New Center Development
Disposition
In
December 2005, a
50% owned unconsolidated joint venture sold its interest in Woodland for $177.4
million. The Company's $85.4 million share of proceeds was received in cash
with
the exception of a $9 million 5.40% note receivable, which was repaid in the
first quarter of 2006. The cash proceeds from the sale were used in January
2006
to acquire the land for Partridge Creek, as part of a like-kind exchange
pursuant to Section 1031 of the Internal Revenue Code and the regulations
thereunder ("Section 1031 like-kind exchange"). Additional proceeds were used
in
February 2006 to purchase the land and real property improvements of the Oyster
Bay development, also as part of a Section 1031 like-kind exchange, and to
pay
off the outstanding balance on the loan on the property.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
New
Center
Development
Northlake
Mall
Northlake
Mall
(Northlake), a wholly-owned regional center, opened on September 15, 2005 in
Charlotte, North Carolina.
The
Mall at
Partridge Creek
Partridge
Creek, a
640,000 square foot center, is under construction in Clinton Township, Michigan.
The center will be anchored by Nordstrom, Parisian, and MJR Theatres, and is
scheduled to open in October 2007, with Nordstrom opening in spring 2008. In
May
2006, the Operating Partnership engaged the services of a third-party investor
to acquire certain property associated with the project, in order to facilitate
a Section 1031 like-kind exchange to provide flexibility for disposing of assets
in the future. The third-party investor became the owner of the project and
leases the land from a subsidiary of the Operating Partnership. In turn, the
owner leases the project back to the Operating Partnership.
Funding
for the
project will come from the following sources. The Operating Partnership will
provide approximately 45% of the project funding under a junior subordinated
financing. The owner has provided $9 million in equity. Funding for the
remaining project costs are being provided by the owner’s third-party
construction loan (Note 5). The owner's equity contribution, representing
minority interest, is included within Accounts Payable and Accrued Liabilities
in the Company's consolidated balance sheet.
The
Operating
Partnership is the construction manager for the project and has an option to
purchase the property and assume the ground lease from the owner during the
30-month exchange period ending December 2008. The option, if exercised, will
provide the owner a 12% cumulative return on its equity. In the event the
Operating Partnership does not exercise its right to purchase the property
from
the owner, the owner will have the right to sell all of its interest in the
property, provided that the purchaser shall assume all of the obligations and
be
assigned all of the owner's rights under the ground lease, the operating lease,
and any remaining obligations under the loans.
The
Operating
Partnership has guaranteed the lease payments on the operating lease (excluding
annual supplemental rent equal to 1.67% of the owner's outstanding equity
balance, commencing after the exchange period) as well as completion of the
project. The lease payments are structured to cover debt service, ground rent
payments, and other expenses of the lessor. The Company consolidates the
accounts of the owner. The junior loan and other intercompany transactions
are
eliminated in consolidation.
The
Pier Shops
at Caesars
In
January 2005,
the Company entered into an agreement to invest in The Pier Shops at Caesars
(The Pier), located in Atlantic City, New Jersey, with Gordon Group Holdings
LLC
(Gordon), the developer. Under the agreement, the Company will have a 30%
interest in The Pier which opened in June 2006. The Company's capital
contribution in The Pier will be made in three steps. The initial investment
of
$4 million was made at the closing in January 2005. A second payment equal
to
70% of the Company's projected required total investment (less the initial
$4
million payment) is expected to be made toward the end of this year. The third
and final payment will be made in early 2008 based on the project's actual
2007
net operating income (NOI) and debt levels. The Company's total capital
contribution will be computed at a price based on a seven percent capitalization
rate. Depending on the performance of the project and assuming its share of
debt
to be $39 million, the Company expects its total cash investment to be in the
range of $21 million to $26 million. Including its share of debt, the Company's
total investment would be in the range of $60 million to $65 million. During
construction of the project, Gordon loaned the venture the funding for capital
expenditures in excess of the construction loan financing. Interest on the
loan
is accruable at the short-term applicable federal rate (AFR) under Section
1274(d) of the Internal Revenue Code and will be repaid before any distributions
to the venture partners. The Company's contributions will be used to repay
the
principal portion of the Gordon loan. Consequently, the Company expects that
its
share of distributions and income will initially be less than its residual
30%
interest. The outstanding balance on the $100 million construction facility
at
September 30, 2006 was $84.0 million. This facility bears interest at LIBOR
plus
2.65% and matures in August 2007. The maturity may be extended under two
one-year extension options, assuming certain requirements have been met. A
third-party financing agreement for The Pier is expected to close in the fourth
quarter of 2006, which would be used to pay off the existing loan. The $130
million interest-only facility will mature in ten years. Subject to certain
performance criteria, the facility may be increased to as much as $160 million.
The investment in The Pier is accounted for under the equity
method.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Oyster
Bay
In
October 2006,
the Company announced that it is seeking a final decision in the Supreme Court
of the State of New York (Suffolk County) on the Company’s land use plan to
build a mall in Syosset, Long Island, New York. The Company believes it will
be
successful in this litigation and will ultimately build the mall, which will
be
anchored by Neiman Marcus, Nordstrom, and Barneys New York. However, if the
Company is ultimately unsuccessful it is anticipated that the recovery on this
asset would be significantly less than its current investment. The Company’s
cost in this project as of September 30, 2006 is $122.5 million.
Note
4 -
Investments in Unconsolidated Joint Ventures
The
Company has
investments in joint ventures that own shopping centers. The Operating
Partnership is the managing general partner or managing member of these
Unconsolidated Joint Ventures, except for the ventures that own Arizona Mills,
The Mall at Millenia, Waterside Shops at Pelican Bay (Waterside), and The Pier.
The Company began providing certain management services upon the opening of
The
Pier on June 27, 2006.
Shopping
Center
|
Ownership
as
of
September
30,
2006 and
December
31, 2005
|
Arizona
Mills
|
50%
|
Fair
Oaks
|
50
|
The
Mall at
Millenia
|
50
|
The
Pier
Shops at Caesars
|
(Note
3)
|
Stamford
Town
Center
|
50
|
Sunvalley
(Note 11)
|
50
|
Waterside
Shops at Pelican Bay
|
25
|
Westfarms
|
79
|
The
Company's
carrying value of its Investment in Unconsolidated Joint Ventures differs from
its share of the partnership equity reported in the combined balance sheet
of
the Unconsolidated Joint Ventures due to (i) the Company's cost of its
investment in excess of the historical net book values of the Unconsolidated
Joint Ventures and (ii) the Operating Partnership’s adjustments to the book
basis, including intercompany profits on sales of services that are capitalized
by the Unconsolidated Joint Ventures. The Company's additional basis allocated
to depreciable assets is recognized on a straight-line basis over 40 years.
The
Operating Partnership’s differences in bases are amortized over the useful lives
of the related assets.
In
its consolidated
balance sheet, the Company separately reports its investment in joint ventures
for which accumulated distributions have exceeded investments in and net income
of the joint ventures. The net equity of certain joint ventures is less than
zero because distributions are usually greater than net income, as net income
includes non-cash charges for depreciation and amortization.
Combined
balance
sheet and results of operations information is presented in the following table
for the 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 combined information of the
Unconsolidated Joint Ventures excludes the balances of The Pier (Note 3). The
accounts of Woodland, formerly a 50% Unconsolidated Joint Venture sold in
December 2005, are included in these results through the date of the sale.
Beginning January 1, 2006, the entity that owns Cherry Creek is accounted for
as
a consolidated entity (Note 1). The accounts of Cherry Creek are included in
these results through December 31, 2005. In addition, in 2006 the Company
modified its income statement presentation for depreciation of center
replacement assets, and revenues and expenses related to marketing and promotion
services. As a result, certain reclassifications have been made to prior year
amounts to conform to current year classifications. (See Note 1 - Modified
Useful Lives and Income Statement Reclassifications).
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
September
30
|
|
December
31
|
|
|
|
2006
|
|
2005
|
|
Assets:
|
|
|
|
|
|
|
|
Properties
|
|
$
|
930,858
|
|
$
|
1,076,743
|
|
Accumulated depreciation and amortization
|
|
|
(313,185
|
)
|
|
(363,394
|
)
|
|
|
$
|
617,673
|
|
$
|
713,349
|
|
Cash
and cash equivalents
|
|
|
32,754
|
|
|
33,498
|
|
Accounts and notes receivable, less allowance for doubtful
accounts of $1,214 and $1,822 in 2006 and 2005
|
|
|
15,634
|
|
|
23,189
|
|
Deferred charges and other assets
|
|
|
20,009
|
|
|
24,458
|
|
|
|
$
|
686,070
|
|
$
|
794,494
|
|
|
|
|
|
|
|
|
|
Liabilities
and accumulated deficiency in assets:
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
983,461
|
|
$
|
999,545
|
|
Accounts payable and other liabilities
|
|
|
36,566
|
|
|
59,322
|
|
TRG's
accumulated deficiency in assets
|
|
|
(178,846
|
)
|
|
(172,554
|
)
|
Unconsolidated Joint Venture Partners' accumulated
deficiency in assets
|
|
|
(155,111
|
)
|
|
(91,819
|
)
|
|
|
$
|
686,070
|
|
$
|
794,494
|
|
|
|
|
|
|
|
|
|
TRG's
accumulated deficiency in assets (above)
|
|
$
|
(178,846
|
)
|
$
|
(172,554
|
)
|
TRG's
investment in The Pier Shops at Caesars
|
|
|
4,849
|
|
|
4,663
|
|
TRG
basis
adjustments, including elimination of intercompany profit
|
|
|
78,606
|
|
|
80,424
|
|
TCO's
additional basis
|
|
|
71,016
|
|
|
92,556
|
|
Net
Investment in Unconsolidated Joint Ventures
|
|
$
|
(24,375
|
)
|
$
|
5,089
|
|
Distributions
in excess of investments in and net income of
Unconsolidated
Joint Ventures
|
|
|
103,764
|
|
|
101,028
|
|
Investment
in
Unconsolidated Joint Ventures
|
|
$
|
79,389
|
|
$
|
106,117
|
|
|
|
Three
Months
Ended September 30
|
|
Nine
Months
Ended September 30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
59,812
|
|
$
|
73,050
|
|
$
|
176,938
|
|
$
|
218,187
|
|
Maintenance,
taxes, utilities, and other operating expenses
|
|
$
|
21,800
|
|
$
|
25,097
|
|
$
|
61,795
|
|
$
|
75,904
|
|
Interest
expense
|
|
|
13,501
|
|
|
16,987
|
|
|
40,096
|
|
|
50,504
|
|
Depreciation
and amortization
|
|
|
10,548
|
|
|
13,308
|
|
|
29,508
|
|
|
37,703
|
|
Total
operating costs
|
|
$
|
45,849
|
|
$
|
55,392
|
|
$
|
131,399
|
|
$
|
164,111
|
|
Net
income
|
|
$
|
13,963
|
|
$
|
17,658
|
|
$
|
45,539
|
|
$
|
54,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
allocable to TRG
|
|
$
|
7,208
|
|
$
|
9,201
|
|
$
|
23,732
|
|
$
|
27,804
|
|
Realized
intercompany profit, net of depreciation on TRG's
basis
adjustments
|
|
|
360
|
|
|
827
|
|
|
691
|
|
|
2,186
|
|
Depreciation
of TCO's additional basis
|
|
|
(486
|
)
|
|
(760
|
)
|
|
(1,458
|
)
|
|
(2,280
|
)
|
Equity
in
income of Unconsolidated Joint Ventures
|
|
$
|
7,082
|
|
$
|
9,268
|
|
$
|
22,965
|
|
$
|
27,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in Unconsolidated Joint Ventures'
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less maintenance, taxes, utilities, and other
operating expenses
|
|
$
|
21,449
|
|
$
|
27,254
|
|
$
|
65,206
|
|
$
|
80,200
|
|
Interest expense
|
|
|
(7,679
|
)
|
|
(9,448
|
)
|
|
(22,852
|
)
|
|
(28,095
|
)
|
Depreciation and amortization
|
|
|
(6,688
|
)
|
|
(8,538
|
)
|
|
(19,389
|
)
|
|
(24,395
|
)
|
Equity
in income of Unconsolidated Joint Ventures
|
|
$
|
7,082
|
|
$
|
9,268
|
|
$
|
22,965
|
|
$
|
27,710
|
|
Note
5 -
Beneficial Interest in Debt and Interest Expense
In
September 2006,
Waterside, an Unconsolidated Joint Venture, closed on a $165 million
non-recourse financing. The interest-only loan has a ten-year term and an
effective interest rate of 5.54%. The Operating Partnership used its $39.5
million share of excess proceeds to pay down its line of credit.
Also
in September
2006, the owner of Partridge Creek closed on an $81 million third-party
construction loan, which has a balance of $12.1 million as of September 30,
2006. The four-year construction facility carries an interest rate of LIBOR
plus
1.15% with no extension options.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In
August 2006, the
Company amended its $350 million revolver. The amendment extended the maturity
date by one year, to February 2009, with a one year extension option. The
interest rate decreased from LIBOR plus 0.80% to LIBOR plus 0.70%. Under the
revised terms, borrowings under the line of credit are primary obligations
of
the entities owning Dolphin Mall (Dolphin), Fairlane Town Center (Fairlane),
and
Twelve Oaks Mall (Twelve Oaks), which are the collateral for the line of credit.
The Company and the entities owning Fairlane and Twelve Oaks are guarantors
under the credit agreement.
Also
in August
2006, the Company used
borrowings
under the amended revolver to refinance the remaining balance of approximately
$140 million on the existing loan on Dolphin when it became prepayable without
penalty. Subsequently, the Company used available cash, proceeds from the
Waterside financing, and borrowings under its other line of credit to reduce
the
balance on the revolver to $25 million as of September 30, 2006.
Additionally
in
August 2006, the Company entered into a forward starting swap for $50 million
to
partially hedge interest rate risk associated with the planned refinancing
of
International Plaza in January 2008. The Company had previously entered into
two
forward starting swaps totaling $100 million in March 2006. The weighted average
forward swap rate for these three swaps is 5.33%, excluding the credit
spread.
In
May 2006, Cherry
Creek closed on a $280 million non-recourse refinancing. The interest-only
loan
has a ten-year term and bears interest at an effective rate of 5.24%. Proceeds
were used to pay off the existing 7.68%, $173 million mortgage on the center,
plus accrued interest and fees. Excess proceeds were distributed to the partners
(Note 1).
In
February 2006,
the Company paid off the $56.2 million third-party loan on Oyster Bay. In
addition, the remaining $144.4 million balance on the loans on The Shops at
Willow Bend was paid off when the loans became prepayable without penalty.
Also
in February
2006, the Company closed on a $215.5 million, 5.41% non-recourse financing
of
Northlake. This interest-only loan has a 10-year term.
Interest
expense
for the three and nine months ended September 30, 2006 includes charges of
$1.0
million and $3.1 million, respectively, in connection with the write-off of
financing costs related to the pay off of the loans on The Shops at Willow
Bend
and the refinancing of the loan on Dolphin.
The
Operating
Partnership's beneficial interest in the debt, capital lease obligations,
capitalized interest, and interest expense of its consolidated subsidiaries
and
its Unconsolidated Joint Ventures is summarized in the following table. The
Operating Partnership's beneficial interest in the Consolidated Subsidiaries
excludes debt and interest related to the minority interests in International
Plaza (49.9%), MacArthur Center (5%), The Mall at Wellington Green (10%), and
Cherry Creek (50%, a consolidated subsidiary as of January 1, 2006).
Unconsolidated Joint Venture amounts exclude The Pier.
|
|
At
100%
|
|
At
Beneficial
Interest
|
|
|
Consolidated
Subsidiaries
|
|
Unconsolidated
Joint
Ventures
|
|
Consolidated
Subsidiaries
|
|
Unconsolidated
Joint
Ventures
|
|
Debt
as
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$
|
2,283,355
|
|
$
|
983,461
|
|
$
|
2,026,405
|
|
$
|
508,457
|
December 31, 2005
|
|
|
2,089,948
|
|
|
999,545
|
|
|
1,972,046
|
|
|
558,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$
|
8,898
|
|
$
|
1,162
|
|
$
|
8,646
|
|
$
|
581
|
December 31, 2005
|
|
|
13,014
|
|
|
1,966
|
|
|
12,510
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2006
|
|
$
|
6,852
|
|
|
|
|
$
|
6,848
|
|
|
|
Nine
months ended September 30, 2005
|
|
|
8,129
|
|
$
|
1
|
|
|
8,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2006
|
|
$
|
98,468
|
|
$
|
40,096
|
|
$
|
88,893
|
|
$
|
22,852
|
Nine
months ended September 30, 2005
|
|
|
79,251
|
|
|
50,504
|
|
|
75,187
|
|
|
28,095
|
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Payments
of
principal and interest on the loans in the following table are guaranteed by
the
Operating Partnership as of September 30, 2006.
Center
|
Loan
balance
as
of
9/30/06
|
TRG's
beneficial
interest
in
loan
balance
as
of
9/30/06
|
Amount
of
loan
balance
guaranteed
by
TRG
as
of
9/30/06
|
%
of
loan
balance
guaranteed
by
TRG
|
%
of
interest
guaranteed
by
TRG
|
|
(in
millions
of dollars)
|
|
|
Dolphin
Mall
|
5.0
|
5.0
|
5.0
|
100%
|
100%
|
Fairlane
Town
Center
|
20.0
|
20.0
|
20.0
|
100%
|
100%
|
The
Mall at
Millenia
|
0.5
|
0.2
|
0.2
|
50%
|
50%
|
Payments
of rents
and certain other sums payable related to Partridge Creek agreements are
guaranteed by the Operating Partnership (Note 3).
In
addition, the
Operating Partnership has guaranteed the payment of $5.1 million related to
the
remaining development costs and certain tenant allowances for Northlake.
The
Company is
required to escrow cash balances for specific uses stipulated by its lenders,
including ground lease payments, taxes, insurance, debt service, capital
improvements, leasing costs, and tenant allowances. The Company’s cash balances
restricted for these uses were $2.0 million and $18.4 million as of September
30, 2006 and December 31, 2005, respectively. Such amounts are included within
cash and cash equivalents in the Company's consolidated balance
sheet.
Certain
loan
agreements contain various restrictive covenants, including minimum net worth
requirements, minimum debt service coverage ratios, a maximum payout ratio
on
distributions, a maximum leverage ratio, a minimum debt yield ratio, and a
minimum fixed charges coverage ratio, the latter being the most restrictive.
The
Operating Partnership is in compliance with all of its covenants. The maximum
payout ratio on distributions covenant limits the payment of distributions
generally to 95% of funds from operations, as defined in the loan agreement
except as required to maintain the Company's tax status, pay preferred
distributions, and for distributions related to the sale of certain
assets.
Note
6 -
Equity Transactions
In
May 2006, the
Company redeemed all of the remaining Series A Preferred Stock at a price of
$25.2709028 per share, which included accrued and unpaid dividends. The Company
previously had $113 million or 4,520,000 shares of its Series A Preferred Stock
outstanding. Emerging Issues Task Force Topic D-42, “The Effect on the
Calculation of Earnings Per Share for the Redemption or Induced Conversion
of
Preferred Stock,” provides that any excess of the fair value of the
consideration transferred to the holders of preferred stock redeemed over the
carrying amount of the preferred stock should be subtracted from net earnings
to
determine net earnings available to common stockholders. As a result of
application of Topic D-42, the Company recognized a charge of $4.0 million
in
the second quarter of 2006, representing the difference between the carrying
value and the redemption price of the Series A Preferred Stock
redeemed.
The
Series A
Preferred Stock was redeemed with the proceeds of a $113 million private
preferred stock issuance, the Series I Cumulative Redeemable Preferred Stock
(Series I Preferred Stock). The Series I Preferred Stock paid dividends at
a
floating rate equal to 3-month LIBOR plus 1.25%, an effective rate of 6.4225%
for the period the shares were outstanding. The Company redeemed the Series
I
Preferred Stock on June 30, 2006, using available cash. The Company recognized
a
charge of $0.6 million at that time, representing the difference between the
carrying value, which includes original issuance costs, and the redemption
price
of the Series I Preferred Stock.
In
July 2005, the
Company issued $87 million of Series H Cumulative Redeemable Preferred Stock
(Series H Preferred Stock). This stock has a fixed 7.625% coupon and no stated
maturity, sinking fund, or mandatory redemption requirements. The Series H
Preferred Stock will be redeemable by the Company at par, $25 per share, plus
accrued dividends, beginning in July 2010. Offering costs of $3.1 million were
incurred in connection with this issuance. The proceeds were used to redeem
$87
million of the Series A Preferred Stock. As a result of application of Topic
D-42, the Company recognized a charge of $3.1 million in the third quarter
of
2005, representing the difference between the carrying value and the redemption
price of the shares of Series A Preferred Stock redeemed.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In
December 2005,
the Company's Board of Directors authorized the purchase of up to $50 million
of
the Company's common stock on the open market. For each share of stock
repurchased, one Operating Partnership unit will be redeemed. As of September
30, 2006, the Company had not purchased any shares or redeemed any units under
this program. Repurchases of common stock will be financed through general
corporate funds and through borrowings under existing lines of
credit.
During
the nine
months ended September 30, 2006 and 2005, 966,343 and 858,956 shares,
respectively, of Series B Preferred Stock were converted to 66 and 55 shares
of
the Company's common stock, respectively, as a result of tenders of units under
the Continuing Offer (defined in Note 8 below). See Note 7 for equity issuances
under share-based compensation plans.
Note
7 -
Share-Based Compensation
The
Company
provides certain share-based compensation through an incentive option plan,
a
long-term incentive plan, and non-employee directors' stock grant and deferred
compensation plans. All of the plans were designed to provide additional
incentive for the achievement of financial goals and offer additional alignment
of the interests of management and/or the directors with those of shareholders.
Additionally, the non-employee directors' plans are intended to provide
incentives for directors to continue to serve on the board and to attract new
directors with outstanding qualifications.
On
January 1, 2006,
the Company adopted Statement No. 123 (Revised) “Share-Based Payment.” As part
of its adoption of the Statement with respect to any grant for which vesting
accelerates upon retirement, the Company has begun recognizing compensation
cost
from the date of the grant through the date the employee first becomes eligible
to retire, if this period is shorter than the stated vesting period of the
grant. In prior periods, the Company recognized compensation cost using the
stated vesting period, regardless of retirement eligibility. As the Company
had
previously applied the fair value recognition provisions of Statement No. 123,
the adoption of Statement No. 123 (Revised) did not have a material effect
on
the Company's results of operations.
The
compensation
cost charged to income for the above-mentioned share-based compensation plans
was $1.1 million and $3.2 million for the three and nine months ended September
30, 2006 and $0.7 million and $1.7 million for the three and nine months ended
September 30, 2005, respectively. Compensation cost capitalized as part of
properties and deferred leasing costs was $0.2 million and $0.6 million for
the
three and nine months ended September 30, 2006 and $0.1 million and $0.3 million
for the three and nine months ended September 30, 2005,
respectively.
The
Company
currently recognizes no tax benefits from the recognition of compensation cost
or tax deductions incurred upon the exercise or vesting of share-based awards.
Any allocations of compensation cost or deduction to the Company’s corporate
taxable REIT subsidiaries from the Company's Manager, which is treated as a
partnership for federal income tax purposes, have resulted in a full valuation
allowance being recorded against its net deferred tax asset associated with
the
temporary differences related to share-based compensation. This is primarily
due
to prior year cumulative tax net operating losses incurred through the quarter
ending September 30, 2006.
Incentive
Options
The
Company’s
incentive option plan (the Option Plan), which is shareholder approved, permits
the grant of options to employees. The Operating Partnership's units issued
in
connection with the Option Plan are exchangeable for new shares of the Company's
common stock under the Continuing Offer (Note 8). Options for 1.1 million
partnership units have been granted and are outstanding at September 30, 2006.
Of the 1.1 million options outstanding, 0.6 million have vesting schedules
with
one-third vesting at each of the third, fifth, and seventh years of the grant
anniversary, if continuous service has been provided and certain conditions
dependent on the Company’s market performance in comparison to its competitors
have been met. Substantially all of the other 0.5 million options outstanding
have vesting schedules with one-third vesting at each of the first, second,
and
third years of the grant anniversary, if continuous service has been provided.
The options have ten-year contractual terms. As of September 30, 2006, options
for 1.1 million Operating Partnership units remain available for grant under
the
Option Plan.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The
Company has
estimated the value of the options issued during the nine months ended September
30, 2006 and 2005 using a Black-Scholes valuation model based on the following
assumptions:
|
2006
|
2005
|
Expected
volatility
|
20.87%-21.14%
|
21.00%
|
Expected
dividend yield
|
3.50%
|
4.00%
|
Expected
terms (in years)
|
7
|
7
|
Risk-free
interest rate
|
4.74%-5.08%
|
3.83%-4.15%
|
Expected
volatility
and dividend yields are based on historical volatility and yields of the
Company’s stock, respectively, as well as other factors. In developing the
assumption of expected term, the Company has considered the vesting and
contractual terms as well as the expected terms of options disclosed by members
of its peer group. The risk-free rates used are based on the U.S. Treasury
yield
curves in effect at the times of grants. For the options for which vesting
is
dependent on the Company's market performance in comparison to its competitors,
the Company used a Monte Carlo simulation to estimate the probability of the
vesting conditions being met. The Company assumes no forfeitures under the
Option Plan due to the small number of participants and low turnover rate.
The
weighted-average grant-date fair value of all options granted, including those
dependent on market performance, during the nine months ended September 30,
2006
and 2005 was $8.11 and $3.81 per option, respectively. There were no options
issued in the third quarter of 2006 or 2005.
A
summary of option
activity under the Option Plan for the nine months ended September 30, 2006
is
presented below:
|
Number
of
Options
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic Value
(in
millions)
|
Outstanding
at January 1, 2006
|
852,139
|
|
$30.13
|
|
|
Granted
|
263,237
|
|
40.37
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
1,115,376
|
|
$32.55
|
8.7
|
$13.2
|
|
|
|
|
|
Fully
vested
options at September 30, 2006
|
100,434
|
|
$31.31
|
8.6
|
$1.3
|
There
were 90,852
options that vested during the nine months ended September 30,
2006.
The
total intrinsic
value of options exercised during the three and nine months ended September
30,
2005 was $9.5 million. Cash received from option exercises under the Option
Plan
for the three and nine months ended September 30, 2005 was $6.7 million. There
were no options exercised during the three and nine months ended September
30,
2006.
As
of September 30,
2006, there were 1.0 million nonvested options outstanding, and $2.9 million
of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 2.4 years.
Under
the Option
Plan, vested unit options can be exercised by tendering mature units with a
market value equal to the exercise price of the unit options. In 2002, Robert
S.
Taubman, the Company’s chief executive officer, exercised options for 3.0
million units by tendering 2.1 million mature units and deferring receipt of
0.9
million units under the unit option deferral election. As the Company declares
distributions, the deferred option units receive their proportionate share
of
the distributions in the form of cash payments. These deferred option units
will
remain in a deferred compensation account until Mr. Taubman's retirement or
ten
years from the date of exercise. Beginning with the ten year anniversary of
the
date of exercise, the deferred partnership units will be paid in ten annual
installments.
Long-Term
Incentive Plan
In
May 2005, the
Company’s shareholders approved the adoption of The Taubman Company 2005
Long-Term Incentive Plan (LTIP). The LTIP allows the Company to make grants
of
restricted stock units (RSU) to employees. An aggregate of 1.2 million shares
of
the Company’s common stock remain available for issuance under the LTIP. There
were RSU for 0.3 million shares outstanding at September 30, 2006. Each RSU
represents the right to receive upon vesting one share of the Company’s common
stock plus a cash payment equal to the aggregate cash dividends that would
have
been paid on such share of common stock from the date of grant of the award
to
the vesting date.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A
summary of
activity under the LTIP is presented below:
|
|
Restricted
Stock Units
|
|
Weighted-Average
Grant
Date
Fair Value
|
|
Outstanding
at January 1, 2006
|
|
|
138,904
|
|
$
|
31.31
|
|
Redeemed
|
|
|
(3,918
|
)
|
|
33.53
|
|
Granted
|
|
|
131,698
|
|
|
40.38
|
|
Forfeited
|
|
|
(2,051
|
)
|
|
31.31
|
|
Outstanding
at September 30, 2006
|
|
|
264,633
|
|
$
|
35.79
|
|
The
total intrinsic
value of RSU redeemed during the nine months ended September 30, 2006 was $0.1
million.
These
RSU vest on
the third year anniversary of the grant if continuous service has been provided
for that period, or upon retirement if earlier. Based on an analysis of
historical employee turnover, the Company has made an annual forfeiture
assumption of 2.4% of grants when recognizing compensation costs relating to
the
RSU.
All
of the RSU
outstanding at September 30, 2006 were nonvested. As of September 30, 2006,
there was $5.8 million of total unrecognized compensation cost related to
nonvested RSU outstanding under the LTIP. This cost is expected to be recognized
over a weighted-average period of 2.1 years.
Non-Employee
Directors’ Stock Grant and Deferred Compensation Plans
In
May 2005, the
Company’s shareholders approved the adoption of the Taubman Centers, Inc.
Non-Employee Directors’ Stock Grant Plan (SGP). The SGP provides for the
quarterly grant to each non-employee director of the Company shares of the
Company’s common stock having a fair market value of $3,750, and determined
based on the fair value of the Company's common stock on the last business
day
of the preceding quarter. The Company has authorized 50,000 shares of the
Company's common stock for issuance under the SGP. As of September 30, 2006,
1,030 shares have been issued under the SGP. Certain directors have elected
to
defer receipt of their shares (see below).
Also
in May 2005,
the Board of Directors of the Company approved the adoption of the Taubman
Centers, Inc. Non-Employee Directors’ Deferred Compensation Plan (DCP). The DCP
allows each non-employee director of the Company the right to defer the receipt
of all or a portion of his or her annual director retainer until the termination
of his or her service on the Company’s Board of Directors and for such deferred
compensation to be denominated in restricted stock units, representing the
right
to receive shares of the Company’s common stock at the end of the deferral
period. The Company has authorized 175,000 shares of common stock for issuance
under the DCP. During the deferral period, when the Company pays cash dividends
on its common stock, the directors’ deferral accounts will be credited with
dividend equivalents on their deferred restricted stock units, payable in
additional restricted stock units based on the then-fair market value of the
Company’s common stock. There were 6,725 restricted stock units outstanding
under the DCP at September 30, 2006.
Other
Employee
Plans
As
of September 30,
2006 and 2005, the Company had fully vested awards outstanding for 77,094 and
89,092 notional shares of stock, respectively, under a previous long-term
performance compensation plan. These awards will be settled in cash based on
a
twenty day average of the market value of the Company's common stock. The cash
payment on these cumulative units remaining has been deferred by employees
until
retirement or termination. The liability for the eventual payout of these awards
is marked to market quarterly based on the twenty day average of the Company's
stock price. During the three months ended September 30, 2006 and 2005,
compensation cost was decreased by $0.4 million and increased by $0.1 million
relating to these awards, respectively. During the nine months ended September
30, 2006 and 2005, compensation cost was increased by $0.6 million and $0.3
million relating to these awards, respectively. The Company paid $0.5 million
of
this deferred liability during the nine months ended September 30, 2006. The
Company paid $6.6 million of this deferred liability during the nine months
ended September 30, 2005.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note
8 -
Commitments and Contingencies
At
the time of the
Company's initial public offering and acquisition of its partnership interest
in
the Operating Partnership, the Company entered into an agreement (the Cash
Tender Agreement) with A. Alfred Taubman, who owns an interest in the Operating
Partnership, whereby he has the annual right to tender to the Company units
of
partnership interest in the Operating Partnership (provided that the aggregate
value is at least $50 million) and cause the Company to purchase the tendered
interests at a purchase price based on a market valuation of the Company on
the
trading date immediately preceding the date of the tender. The Company will
have
the option to pay for these interests from available cash, borrowed funds,
or
from the proceeds of an offering of the Company's common stock. Generally,
the
Company expects to finance these purchases through the sale of new shares of
its
stock. The tendering partner will bear all market risk if the market price
at
closing is less than the purchase price and will bear the costs of sale. Any
proceeds of the offering in excess of the purchase price will be for the sole
benefit of the Company. At A. Alfred Taubman's election, his family and certain
others may participate in tenders.
The
Company
accounts for the Cash Tender Agreement between the Company and Mr. Taubman
as a
freestanding written put option. As the option put price is defined by the
current market price of the Company's stock at the time of tender, the fair
value of the written option defined by the Cash Tender Agreement is considered
to be zero.
Based
on a market
value at September 30, 2006 of $44.42 per common share, the aggregate value
of
interests in the Operating Partnership that may be tendered under the Cash
Tender Agreement was approximately $1.1 billion. The purchase of these interests
at September 30, 2006 would have resulted in the Company owning an additional
31% 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 the Operating Partnership interest
is exchangeable for one share of the Company's common stock.
Neither
the
Company, its subsidiaries, nor any of its joint ventures is presently involved
in any material litigation, nor, to its knowledge, is any material litigation
threatened against the Company, its subsidiaries, or any of the properties.
Except for routine litigation involving present or former tenants (generally
eviction or collection proceedings), substantially all litigation is covered
by
liability insurance.
See
Note 3
regarding the Partridge Creek and The Pier projects, and Note 5 for the
Operating Partnership's guarantees of certain notes payable and other
obligations.
Note
9 -
Earnings Per Share
Basic
earnings per
share amounts are based on the weighted average of common shares outstanding
for
the respective periods. Diluted earnings per share amounts are based on the
weighted average of common shares outstanding plus the dilutive effect of common
stock equivalents. Common stock equivalents include outstanding partnership
units exchangeable for common shares under the Continuing Offer (Note 8),
outstanding options for units of partnership interest under the Operating
Partnership’s incentive option plan (Note 7), RSU under the LTIP and DCP (Note
7), and unissued partnership units under unit option deferral elections. In
computing the potentially dilutive effect of these common stock equivalents,
partnership units are assumed to be exchanged for common shares under the
Continuing Offer, increasing the weighted average number of shares outstanding.
The potentially dilutive effects of partnership units outstanding and/or
issuable under the unit option deferral elections are calculated using the
if-converted method, while the effects of other common stock equivalents are
calculated using the treasury stock method.
TAUBMAN
CENTERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For
the three and
nine months ended September 30, 2006, there were 10.6 million partnership units
outstanding and 0.9 million unissued partnership units under unit option
deferral elections which may be exchanged for common shares of the Company
under
the Continuing Offer (Note 8) excluded from the computation as they were
anti-dilutive. These outstanding units and unissued units could only be dilutive
to earnings per share if the minority interests' ownership share of the
Operating Partnership's income was greater than their share of distributions.
|
|
Three
Months
Ended September 30
|
|
Nine
Months
Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Net
income
(loss) allocable to
common
shareowners (Numerator)
|
|
$
|
1,366
|
|
$
|
(9,030
|
)
|
$
|
4,185
|
|
$
|
(11,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(Denominator) - basic
|
|
|
52,808,698
|
|
|
50,765,091
|
|
|
52,575,448
|
|
|
50,313,815
|
|
Effect
of
dilutive securities
|
|
|
319,859
|
|
|
|
|
|
269,981
|
|
|
|
|
Shares
(Denominator) - diluted
|
|
|
53,128,557
|
|
|
50,765,091
|
|
|
52,845,429
|
|
|
50,313,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.03
|
|
$
|
(0.18
|
)
|
$
|
0.08
|
|
$
|
(0.22
|
)
|
Note
10 -
New Accounting Pronouncements
In
September 2006,
the SEC’s staff issued Staff Accounting Bulletin (SAB) No. 108 “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements.” This Bulletin provides guidance on the consideration
of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The guidance in
this
Bulletin must be applied to financial reports covering the first fiscal year
ending after November 15, 2006. The Company is currently evaluating the guidance
in this Bulletin.
Also
in September
2006, the FASB issued Statement No. 157 “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. This Statement applies to accounting pronouncements that
require or permit fair value measurements, except for share-based payments
transactions under FASB Statement No. 123. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
As Statement No. 157 does not require any new fair value measurements or
remeasurements of previously computed fair values, the Company does not believe
adoption of this Statement will have a material effect on its financial
statements.
In
June 2006, the
FASB issued Interpretation No. 48, “Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109.” This Interpretation defines a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
effect of this Interpretation.
Note
11 -
Subsequent Event
In
October 2006,
Taubman Land Associates LLC, a 50% joint venture owned by the Company and an
affiliate of the Taubman family, acquired for $42.5 million the land on which
Sunvalley is situated. Sunvalley is owned by Sunvalley Associates, a 50% joint
venture with a Taubman family affiliate. The ground rent for the land under
the center was $1.8 million in 2005 under the
participating ground lease, which matures in 2061. Also included in the
transaction was the land under the Sears store, which was paying a nominal
rent
to the seller.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains various “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
represent our expectations or beliefs concerning future events, including the
following: statements regarding future developments and joint ventures, rents
and returns, statements regarding the continuation of trends, and any statements
regarding the sufficiency of our cash balances and cash generated from operating
and financing activities for our future liquidity and capital resource needs.
We
caution that although forward-looking statements reflect our good faith beliefs
and best judgment based upon current information, these statements are qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements, including those risks, uncertainties,
and factors detailed from time to time in reports filed with the SEC, and in
particular those set forth under the headings “General Risks of the Company” and
“Environmental Matters” in our Annual Report on Form 10-K. The following
discussion should be read in conjunction with the accompanying Consolidated
Financial Statements of Taubman Centers, Inc. and the Notes
thereto.
General
Background and Performance Measurement
Taubman
Centers,
Inc. (“we”, “us”, “our” or “TCO”) owns a managing general partner's interest in
The Taubman Realty Group Limited Partnership (the "Operating Partnership" or
"TRG"), through which we conduct all of our operations. The Operating
Partnership owns, develops, acquires, and operates regional and super-regional
shopping centers. The Consolidated Businesses consist of shopping centers that
are controlled by ownership or contractual agreement, development projects
for
future regional shopping centers, variable interest entities for which we are
the primary beneficiary, and The Taubman Company LLC ("Manager"). Shopping
centers owned through joint ventures that are not controlled by us but over
which we have significant influence ("Unconsolidated Joint Ventures") are
accounted for under the equity method.
References
in this
discussion to “beneficial interest” refer to our ownership or pro-rata share of
the item being discussed. Also, the operations of the shopping centers are
often
best understood by measuring their performance as a whole, without regard to
our
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.
The
comparability
of information used in measuring performance is affected by the opening of
Northlake Mall (Northlake) in September 2005 and the sale of our interest in
Woodland in December 2005, as well as the expansion and renovation at Waterside
Shops at Pelican Bay (Waterside). Additional “comparable center” statistics that
exclude Northlake, Waterside, and Woodland are provided to present the
performance of comparable centers in our continuing operations. Comparable
centers are generally defined as centers that were owned and open for the full
periods presented. As of January 1, 2006, we began consolidating the entity
that
owns Cherry Creek Shopping Center (Cherry Creek). The center is included within
our consolidated results and statistics as of that date, while it continues
to
be presented as an Unconsolidated Joint Venture for dates and periods prior
to
January 1, 2006. The Pier Shops at Caesars (The Pier) began opening stores
in
late June 2006, and is accounted for under the equity method. The center is
excluded from our unconsolidated summary information and statistics as of
September 30, 2006 (See “Results of Operations - Openings and
Disposition”).
Current
Operating Trends
Tenant
sales and
sales per square foot information are operating statistics used in measuring
the
productivity of the portfolio and are based on reports of sales furnished by
mall tenants. Our tenant sales statistics have continued to be strong through
the third quarter of 2006, with sales per square foot increasing 7.7% over
the
third quarter of 2005, and 7.2% for the nine months ended September 30, 2006
over the comparable period for 2005. Tenant sales have increased every month
for
three and a half years. Sales directly impact the amount of percentage rents
certain tenants and anchors pay. The effects of increases or declines in sales
on our operations are moderated by the relatively minor share of total rents
(approximately four percent annually in 2005) percentage rents represent.
However, a sustained trend in sales does impact, either negatively or
positively, our ability to lease vacancies and negotiate rents at advantageous
rates. We believe these improving tenant sales will provide us an opportunity
to
increase rents in the future.
In
the third
quarter of 2006, occupancy increased to 89.5% compared to 88.9% in the third
quarter of 2005. We expect to end the year with occupancy of approximately
91%,
which would represent a 1.0% increase over the prior year. See “Seasonality” for
occupancy and leased space statistics. Temporary tenants, defined as those
with
lease terms less than 12 months, are not included in occupancy or leased space
statistics. As of September 30, 2006, approximately 2.0% of space was occupied
by temporary tenants.
As
leases have
expired in the shopping centers, we have generally been able to rent the
available space, either to the existing tenant or a new tenant, at rental rates
that are higher than those of the expired leases. In periods of increasing
sales, such as those we are currently experiencing, 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 may 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. Rent per square foot
information for comparable centers in our consolidated businesses and
unconsolidated joint ventures follows:
|
Three
Months
Ended
September 30
|
|
Nine
Months
Ended
September 30
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Average
rent
per square foot:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
$42.88
|
|
$41.32
|
|
$43.11
|
|
$41.51
|
Unconsolidated
Joint Ventures
|
40.88
|
|
41.92
|
|
41.23
|
|
42.37
|
Opening
base
rent per square foot:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
$41.57
|
|
$40.76
|
|
$43.71
|
|
$43.20
|
Unconsolidated
Joint Ventures
|
46.62
|
|
32.86
|
|
42.32
|
|
44.72
|
Square
feet
of GLA opened:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
220,344
|
|
137,805
|
|
652,414
|
|
507,787
|
Unconsolidated
Joint Ventures
|
43,233
|
|
103,136
|
|
224,682
|
|
366,856
|
Closing
base
rent per square foot:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
$35.22
|
|
$35.99
|
|
$40.04
|
|
$40.92
|
Unconsolidated
Joint Ventures
|
43.37
|
|
36.97
|
|
44.44
|
|
44.05
|
Square
feet
of GLA closed:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
188,294
|
|
117,425
|
|
789,663
|
|
575,736
|
Unconsolidated
Joint Ventures
|
23,724
|
|
69,560
|
|
211,747
|
|
336,516
|
Releasing
spread per square foot:
|
|
|
|
|
|
|
|
Consolidated
Businesses
|
$6.35
|
|
$4.77
|
|
$3.67
|
|
$2.28
|
Unconsolidated
Joint Ventures
|
3.25
|
|
(4.11
|
)
|
(2.12
|
)
|
0.67
|
The
spread between
opening and closing rents may not be indicative of future periods, as this
statistic is not computed on comparable tenant spaces, and can vary
significantly from period to period depending on the total amount, location,
and
average size of tenant space opening and closing in the period. In the nine
months ended September 30, 2006, the releasing spread per square foot of the
Unconsolidated Joint Ventures was impacted by the opening of large tenant spaces
at certain centers.
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. Additionally, most percentage
rents are recorded in the fourth quarter. Accordingly, revenues and occupancy
levels are generally highest in the fourth quarter. Gains on sales of peripheral
land and lease cancellation income may vary significantly from quarter to
quarter.
|
3rd
Quarter
2006
|
2nd
Quarter
2006
|
1st
Quarter
2006
|
Total
2005
|
4th
Quarter
2005
|
3rd
Quarter
2005
|
2nd
Quarter
2005
|
1st
Quarter
2005
|
|
(in
thousands
of dollars)
|
Mall
tenant
sales
|
985,224
|
989,275
|
927,139
|
4,124,534
|
1,393,006
|
932,229
|
913,408
|
885,891
|
Revenues
and
gains on land sales
and
interest income:
|
|
|
|
|
|
|
|
|
Consolidated Businesses
|
140,065
|
144,780
|
140,444
|
486,102
|
136,592
|
114,595
|
120,153
|
114,762
|
Unconsolidated Joint Ventures
|
60,008
|
58,554
|
58,576
|
306,239
|
88,052
|
73,050
|
72,554
|
72,583
|
Occupancy:
|
|
|
|
|
|
|
|
|
Ending-comparable
|
89.2%
|
88.7%
|
88.3%
|
90.2%
|
90.2%
|
89.3%
|
88.7%
|
88.5%
|
Average-comparable
|
88.9
|
88.6
|
88.4
|
89.1
|
90.0
|
89.1
|
88.6
|
88.7
|
Ending
|
89.5
|
89.0
|
88.3
|
90.0
|
90.0
|
88.9
|
88.7
|
88.4
|
Average
|
89.2
|
88.7
|
88.4
|
88.9
|
89.7
|
88.9
|
88.5
|
88.6
|
Leased
space:
|
|
|
|
|
|
|
|
|
Comparable
|
92.1%
|
91.6%
|
90.7%
|
91.5%
|
91.5%
|
91.4%
|
91.0%
|
90.5%
|
All centers
|
92.4
|
91.8
|
90.9
|
91.7
|
91.7
|
91.2
|
90.9
|
90.5
|
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.
|
|
3rd
Quarter
2006
|
|
2nd
Quarter
2006
|
|
1st
Quarter
2006
|
|
Total
2005
|
|
4th
Quarter
2005
|
|
3rd
Quarter
2005
|
|
2nd
Quarter
2005
|
|
1st
Quarter
2005
|
|
Consolidated
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
9.9
|
%
|
|
9.9
|
%
|
|
10.5
|
%
|
|
9.3
|
%
|
|
7.2
|
%
|
|
10.3
|
%
|
|
10.4
|
%
|
|
10.8
|
%
|
Percentage rents
|
|
|
0.3
|
|
|
0.1
|
|
|
0.4
|
|
|
0.4
|
|
|
0.7
|
|
|
0.1
|
|
|
0.1
|
|
|
0.3
|
|
Expense recoveries
|
|
|
4.9
|
|
|
5.6
|
|
|
4.8
|
|
|
4.6
|
|
|
3.7
|
|
|
4.9
|
|
|
5.4
|
|
|
4.8
|
|
Mall
tenant occupancy costs
|
|
|
15.1
|
%
|
|
15.6
|
%
|
|
15.7
|
%
|
|
14.3
|
%
|
|
11.6
|
%
|
|
15.3
|
%
|
|
15.9
|
%
|
|
15.9
|
%
|
Unconsolidated
Joint Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
9.2
|
%
|
|
9.1
|
%
|
|
9.7
|
%
|
|
8.9
|
%
|
|
6.6
|
%
|
|
9.6
|
%
|
|
10.0
|
%
|
|
10.2
|
%
|
Percentage rents
|
|
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
0.8
|
|
|
0.2
|
|
|
|
|
|
0.3
|
|
Expense recoveries
|
|
|
4.1
|
|
|
4.1
|
|
|
3.9
|
|
|
4.0
|
|
|
3.6
|
|
|
4.2
|
|
|
4.3
|
|
|
4.0
|
|
Mall
tenant occupancy costs
|
|
|
13.6
|
%
|
|
13.4
|
%
|
|
13.8
|
%
|
|
13.2
|
%
|
|
11.0
|
%
|
|
14.0
|
%
|
|
14.3
|
%
|
|
14.5
|
%
|
New
Center
Development
The
Mall at
Partridge Creek (Partridge Creek), a 640,000 square foot center, is under
construction in Clinton Township, Michigan. The center will be anchored by
Nordstrom, Parisian, and MJR Theatres, and is scheduled to open in October
2007,
with Nordstrom opening in spring 2008. See "Liquidity and Capital Resources
-
The Mall at Partridge Creek Contractual Obligations” and "Planned Capital
Spending" regarding this and other projects.
Results
of
Operations
Openings
and
Disposition
Stores
began
opening at The Pier in late June 2006, in Atlantic City, New Jersey. We expect
nearly 80 of the 100 tenants to be open by year end. The center is expected
to
be fully occupied by late spring 2007. Under our agreement with Gordon Group
Holdings LLC (Gordon), who developed the center, we will have a 30% interest
in
The Pier. The results of operations of The Pier were immaterial in the third
quarter. See “Liquidity and Capital Resources” regarding this
project.
In
December 2005, a
50% owned Unconsolidated Joint Venture sold its interest in Woodland for $177.4
million. Our $85.4 million share of proceeds was received in cash with the
exception of a $9 million 5.40% note receivable, which was repaid in the first
quarter of 2006. The cash proceeds from the sale were used in January 2006
to
acquire the land for Partridge Creek, as part of a like-kind exchange pursuant
to Section 1031 of the Internal Revenue Code and the regulations thereunder
("Section 1031 like-kind exchange"). Additional proceeds were used in February
2006 to purchase the land and real property improvements of the Oyster Bay
development, also as part of a Section 1031 like-kind exchange, and to pay
off
the outstanding balance on the loan on the property.
Northlake,
a
wholly-owned regional center, opened on September 15, 2005 in Charlotte, North
Carolina. The 1.1 million square foot center is anchored by Belk, Dick’s
Sporting Goods, Dillard’s, Macy’s, and AMC Theatres.
Taubman
Asia
In
April 2005, we
formed Taubman Asia, which will be the platform for our future expansion into
the Asia-Pacific region. Taubman Asia is headquartered in Hong Kong and is
seeking projects that leverage our strong retail planning, design, and
operational capabilities.
We
are finalizing
the terms of our engagement to provide development, leasing, and on-going
management services on a fee basis for the 1.2 million square foot super
regional shopping center that will be part of Songdo International City, just
south of Seoul, South Korea. The center is anticipated to begin construction
in
2007 and open in 2009. The services agreement will extend for 10 years after
opening. We have negotiated the opportunity to invest in a portion of the
broader project, which will include not only retail, but also office, hotel,
and
residential uses. We anticipate we will finalize our decision on this investment
in early 2007. In addition, we believe there are many other promising
opportunities in Asia and we are actively exploring them.
Debt
and Equity
Transactions
In
September 2006,
Waterside, an Unconsolidated Joint Venture, closed on a $165 million
non-recourse financing. The interest-only loan has a ten-year term and an
effective interest rate of 5.54%. We used our $39.5 million share of excess
proceeds to pay down our lines of credit.
Also
in September
2006, the owner of Partridge Creek closed on a third-party construction loan.
The $81 million, four-year construction facility, which has a balance of $12.1
million as of September 30, 2006, bears interest at LIBOR plus 1.15%. See
“Liquidity and Capital Resources - The Mall at Partridge Creek Contractual
Obligations” and “Planned Capital Spending” regarding this project.
In
August 2006, we
amended our $350 million revolver, extending the maturity date by one year,
to
February 2009, with a one year extension option. Additionally, the interest
rate
was decreased from LIBOR plus 0.80% to LIBOR plus 0.70%. Under the revised
terms, borrowings under the line of credit are primary obligations of the
entities owning Dolphin Mall (Dolphin), Fairlane Town Center (Fairlane), and
Twelve Oaks Mall (Twelve Oaks), which are the collateral for the line of credit.
TCO and the entities owning Fairlane and Twelve Oaks are guarantors under the
credit agreement.
Also
in August
2006, we used borrowings under the amended revolver to refinance the remaining
balance of approximately $140 million on the existing loan on Dolphin when
it
became prepayable without penalty. Subsequently, we used available cash,
proceeds from the Waterside financing, and borrowings under our other line
of
credit to reduce the balance on the revolver to $25 million as of September
30,
2006.
In
May 2006, we
redeemed the remaining $113 million of 8.3% Series A Cumulative Redeemable
Preferred Stock. We recognized a charge of approximately $4 million in the
second quarter of 2006, representing the difference between the carrying value
and the redemption price of the Series A Preferred Stock redeemed.
The
Series A
Preferred Stock was redeemed with the proceeds of a $113 million private
preferred issuance, the Series I Cumulative Redeemable Preferred Stock (Series
I
Preferred Stock). The Series I Preferred Stock paid dividends at a floating
rate
equal to 3-month LIBOR plus 1.25%, an effective rate of 6.4225% during the
period the stock was outstanding. We redeemed the Series I Preferred Stock
on
June 30, 2006 using available cash. We recognized a charge of $0.6 million
at
that time, representing the difference between the carrying value, which
includes original issuance costs, and the redemption price of the Series I
Preferred Stock.
In
May 2006, Cherry
Creek, a 50% owned consolidated joint venture, closed on a $280 million
non-recourse refinancing. The interest-only loan has a ten-year term and bears
interest at a rate of 5.24%. Proceeds were used to pay off the existing 7.68%,
$173 million mortgage on the center, plus accrued interest and fees. Excess
proceeds were distributed to the partners.
In
February 2006,
we paid off the remaining $144.4 million balance on the loans on The Shops
at
Willow Bend, when the loans became prepayable without penalty. As a result,
we
wrote off the remaining $2.1 million of financing costs related to the
loans.
Also
in February
2006, we closed on a $215.5 million, 5.41% non-recourse financing of Northlake.
This interest-only loan has a 10-year term. In addition, we paid off the $56.2
million third-party loan on Oyster Bay.
In
December 2005,
we closed on a $540 million 5.465% non-recourse refinancing of The Mall at
Short
Hills. This interest-only loan has a ten-year term. Proceeds were used to pay
off the existing 6.7%, $260 million loan on the center, the Northlake
construction loan, and our revolver.
Also
in December
2005, our Board of Directors authorized the purchase of up to $50 million of
our
common stock on the open market. As of September 30, 2006, we had not purchased
any shares or redeemed any units under this program. Repurchases of common
stock
will be financed through general corporate funds and through borrowings under
existing lines of credit.
In
July 2005, we
issued $87 million of 7.625% Series H Cumulative Redeemable Preferred Stock.
Proceeds from the issuance of the Series H Preferred Stock were used to redeem
$87 million of our outstanding $200 million 8.3% Series A Cumulative Redeemable
Preferred Stock. We recognized a charge of $3.1 million at that time,
representing the difference between the carrying value and the redemption price
of the Series A Preferred Stock redeemed.
In
May 2005, we
completed a $200 million non-recourse refinancing of the existing $140 million
loan on The Mall at Wellington Green. The ten-year interest-only loan bears
an
interest rate of 5.44%. We used the excess proceeds to pay down lines of
credit.
See
"Liquidity and
Capital Resources" regarding additional planned debt transactions and capital
spending.
New
Accounting
Pronouncements
In
September 2006,
the SEC’s staff issued Staff Accounting Bulletin (SAB) No. 108 “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements.” This Bulletin provides guidance on the consideration
of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The guidance in
this
Bulletin must be applied to financial reports covering the first fiscal year
ending after November 15, 2006. We are currently evaluating the guidance in
this
Bulletin.
Also
in September
2006, the FASB issued Statement No. 157 “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. This Statement applies to accounting pronouncements that
require or permit fair value measurements, except for share-based payments
transactions under FASB Statement No. 123. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
As Statement No. 157 does not require any new fair value measurements or
remeasurements of previously computed fair values, we do not believe adoption
of
this Statement will have a material effect on our financial
statements.
In
June 2006, the
FASB issued Interpretation No. 48, “Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109.” This Interpretation defines a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the effect of
this Interpretation.
Presentation
of
Operating Results
Income
Allocation
The
following table
contains the operating results of our Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the minority partners in
the
Operating Partnership and preferred interests is deducted to arrive at the
results allocable to our common shareowners. Because the net equity balances
of
the Operating Partnership and the outside partners in certain consolidated
joint
ventures are less than zero, the income allocated to the minority and outside
partners is equal to their share of operating distributions. The net equity
of
these minority and outside partners is less than zero due to accumulated
distributions in excess of net income and not as a result of operating losses.
Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization. Our average
ownership percentage of the Operating Partnership was 65% during the three
and
nine months ended September 30, 2006, and 63% and 62% during the three and
nine
months ended September 30, 2005, respectively.
Under
guidance in
EITF 04-5 "Determining Whether
a General Partner,
or the General Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights"
and Statement of
Position 78-9, "Accounting for Investments in Real Estate Ventures" (SOP 78-9)
as amended by FASB Staff Position 78-9-1 and the corresponding changes and
considerations surrounding control, we began consolidating the entity that
owns
the Cherry Creek as of January 1, 2006. This entity was previously accounted
for
under the equity method in accordance with the provisions of SOP 78-9. As of
January 1, 2006, the impact to the balance sheet was an increase in assets
of
approximately $128 million and liabilities of approximately $180 million, and
a
$52 million reduction of beginning equity representing the cumulative effect
of
change in accounting principle.
The
results of
Cherry Creek are presented within the Consolidated Businesses for periods
beginning January 1, 2006, as a result of our adoption of EITF 04-5. Results
of
Cherry Creek prior to 2006 are included within the Unconsolidated Joint
Ventures.
EBITDA
and Funds
from Operations
The
operating
results in the following table include the supplemental earnings measures of
Beneficial Interest in EBITDA and Funds from Operations (FFO). Beneficial
Interest in EBITDA represents the Company’s share of the earnings before
interest and depreciation and amortization of its consolidated and
unconsolidated businesses. We believe Beneficial Interest in EBITDA provides
a
useful indicator of operating performance, as it is customary in the real estate
and shopping center business to evaluate the performance of properties on a
basis unaffected by capital structure.
The
National
Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income
(loss) (computed in accordance with Generally Accepted Accounting Principles
(GAAP)), excluding gains (or losses) from extraordinary items and sales of
properties, plus real estate related depreciation and after adjustments for
unconsolidated partnerships and joint ventures. We believe that FFO is a useful
supplemental measure of operating performance for REITs. Historical cost
accounting for real estate assets implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values instead
have historically risen or fallen with market conditions, we and most industry
investors and analysts have considered presentations of operating results that
exclude historical cost depreciation to be useful in evaluating the operating
performance of REITs. We primarily use FFO in measuring performance and in
formulating corporate goals and compensation.
Our
presentations
of EBITDA and FFO are not necessarily comparable to the similarly titled
measures of other REITs due to the fact that not all REITs use the same
definitions. These measures should not be considered alternatives to net income
(loss) or as an indicator of our operating performance. Additionally, neither
represents cash flows from operating, investing or financing activities as
defined by GAAP. Reconciliations of Net Income (Loss) Allocable to Common
Shareowners to Funds from Operations and Net Income to Beneficial Interest
in
EBITDA are presented following the Comparison of the Nine Months Ended September
30, 2006 to the Nine Months Ended September 30, 2005. See the following section
regarding certain presentation changes affecting EBITDA and FFO.
Presentation
Changes
As
previously
reported for 2005, because of a change in our business practice to offer our
tenants the option to pay a fixed charge or pay their share of common area
maintenance (CAM) costs and the related change to contractual terms of leases,
we began adding back in the fourth quarter of 2005 all depreciation on CAM
assets to calculate EBITDA and FFO. We have restated previously reported
quarterly amounts in order to be comparable with 2006. Additionally, we have
reclassified depreciation on all CAM expenditures from recoverable expenses
to
depreciation and amortization expense for all periods presented.
Also,
as a result
of this change in our business practice, we modified our estimated useful lives
of CAM assets that are recoverable from tenants as of January 1, 2006. The
change in useful lives better aligns the depreciation of common area assets
with
our lease portfolio. The change in estimate did not have a material effect
on
the current results of operations but could be material in future periods.
The
Operating Partnership's share of depreciation on all capital expenditures was
$3.6 million and $3.8 million for the three months ended September 30, 2006
and
2005, respectively, and $9.4 million and $10.2 million for the nine months
ended
September 30, 2006 and 2005, respectively.
During
2006, we
began recognizing revenue for marketing and promotion services at the gross
amount billed to tenants, rather than a net amount retained (that is, the amount
billed to the tenants less the related costs incurred). Revenues are now
included in recoveries from tenants and the related expenses in other operating
expense. This presentation change was made as a result of our recent offering
to
tenants of an option to pay fixed amounts for marketing and promotion of the
shopping centers. In evaluating the accounting for marketing and promotion
services, we considered that there may no longer be a direct relationship
between tenant billings and the marketing and promotion costs incurred, as
well
as the fact that we are the primary obligor on the costs incurred. Historically,
revenues from marketing and promotion services have been equal to costs
incurred.
In
addition, we now
separately present gains on peripheral land sales and interest income in the
income statement following revenues and expenses.
Prior
year revenues
and expenses in the following table have been reclassified as described above
to
be consistent with the 2006 presentation.
Comparison
of the Three Months Ended September 30, 2006 to the Three Months Ended September
30, 2005
The
following table
sets forth operating results for the three months ended September 30, 2006
and
September 30, 2005, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
|
Three
Months
Ended
September
30,
2006
|
Three
Months
Ended
September
30,
2005
|
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
(in
millions of
dollars)
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
76.4
|
|
|
35.8
|
|
|
63.9
|
|
|
45.4
|
|
Percentage rents
|
|
|
2.7
|
|
|
1.6
|
|
|
1.3
|
|
|
1.1
|
|
Expense recoveries
|
|
|
49.1
|
|
|
20.9
|
|
|
40.0
|
|
|
24.1
|
|
Management, leasing and development services
|
|
|
2.6
|
|
|
|
|
|
3.4
|
|
|
|
|
Other
|
|
|
8.2
|
|
|
1.4
|
|
|
5.6
|
|
|
2.2
|
|
Total
revenues
|
|
|
138.9
|
|
|
59.7
|
|
|
114.2
|
|
|
72.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities
|
|
|
38.0
|
|
|
14.9
|
|
|
32.6
|
|
|
17.3
|
|
Other
operating
|
|
|
18.1
|
|
|
6.4
|
|
|
13.4
|
|
|
6.6
|
|
Management, leasing and development services
|
|
|
1.2
|
|
|
|
|
|
2.4
|
|
|
|
|
General and administrative
|
|
|
7.1
|
|
|
|
|
|
6.8
|
|
|
|
|
Interest expense (2)
|
|
|
32.3
|
|
|
13.5
|
|
|
27.2
|
|
|
17.0
|
|
Depreciation and amortization (3)
(4)
|
|
|
32.9
|
|
|
11.2
|
|
|
31.7
|
|
|
14.0
|
|
Total
expenses
|
|
|
129.6
|
|
|
46.0
|
|
|
114.1
|
|
|
54.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on land
sales and interest income
|
|
|
1.2
|
|
|
0.3
|
|
|
0.4
|
|
|
0.2
|
|
|
|
|
10.5
|
|
|
14.0
|
|
|
0.5
|
|
|
18.2
|
|
Equity
in
income of Unconsolidated Joint Ventures (4)
|
|
|
7.1
|
|
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
minority and preferred interests
|
|
|
17.6
|
|
|
|
|
|
9.8
|
|
|
|
|
Minority
and
preferred interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG
preferred distributions
|
|
|
(0.6
|
)
|
|
|
|
|
(0.6
|
)
|
|
|
|
Minority share of consolidated joint ventures
|
|
|
(3.0
|
)
|
|
|
|
|
0.0
|
|
|
|
|
Minority share of income of TRG
|
|
|
(4.2
|
)
|
|
|
|
|
(0.6
|
)
|
|
|
|
Distributions in excess of minority share of income of
TRG
|
|
|
(4.7
|
)
|
|
|
|
|
(8.3
|
)
|
|
|
|
Net
income
|
|
|
5.0
|
|
|
|
|
|
0.3
|
|
|
|
|
Preferred
dividends (5)
|
|
|
(3.7
|
)
|
|
|
|
|
(9.3
|
)
|
|
|
|
Net
income
(loss) allocable to common shareowners
|
|
|
1.4
|
|
|
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION (6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
- 100%
|
|
|
75.7
|
|
|
38.7
|
|
|
59.4
|
|
|
49.2
|
|
EBITDA
- outside partners' share
|
|
|
(8.2
|
)
|
|
(17.3
|
)
|
|
(3.1
|
)
|
|
(21.9
|
)
|
Beneficial interest in EBITDA
|
|
|
67.5
|
|
|
21.4
|
|
|
56.3
|
|
|
27.3
|
|
Beneficial interest expense
|
|
|
(29.0
|
)
|
|
(7.7
|
)
|
|
(25.8
|
)
|
|
(9.4
|
)
|
Non-real estate depreciation
|
|
|
(0.7
|
)
|
|
|
|
|
(0.5
|
)
|
|
|
|
Preferred dividends and distributions
|
|
|
(4.3
|
)
|
|
|
|
|
(9.9
|
)
|
|
|
|
Funds
from Operations contribution
|
|
|
33.5
|
|
|
13.8
|
|
|
20.0
|
|
|
17.8
|
|
(1) |
With
the
exception of the Supplemental Information, amounts include 100% of
the
Unconsolidated Joint Ventures. Amounts are net of intercompany
transactions. The Unconsolidated Joint Ventures are presented at
100% in
order to allow for measurement of their performance as a whole, without
regard to our ownership interest. In our consolidated financial
statements, we account for investments in the Unconsolidated Joint
Ventures under the equity method.
|
(2) |
Interest
expense for the three months ended September 30, 2006 includes a
$1.0
million charge in the third quarter of 2006 in connection with the
write-off of financing costs related to the refinancing of the loan
on
Dolphin when the loan became prepayable without penalty.
|
(3) |
Included
in
depreciation and amortization of the Consolidated Businesses and
Unconsolidated Joint Ventures (at 100%) are $2.7 million and $2.4
million,
respectively, of depreciation of center replacement assets for
2006, and
$2.6 million and $2.4 million, respectively, for
2005.
|
(4)
|
Amortization
of our additional basis in the Operating Partnership included in
depreciation and amortization was $1.2 million and $1.1 million
in 2006
and 2005, respectively. Also, amortization of our additional basis
included in equity in income of Unconsolidated Joint Ventures was
$0.5
million and $0.8 million in 2006 and 2005,
respectively.
|
(5)
|
Preferred
dividends for the three months ended September 30, 2005 include
a $3.1
million charge recognized in connection with the partial redemption
of the
Series A Preferred Stock.
|
(6)
|
EBITDA
and FFO
for 2005 have been restated from amounts previously reported to
include an
add-back of depreciation of center replacement assets reimbursed
in the
year of acquisition.
|
(7)
|
Certain
reclassifications have been made to prior year information
to conform to
current year classifications. Amounts in this table may not
add due to
rounding.
|
Consolidated
Businesses
Total
revenues for
the quarter ended September 30, 2006 were $138.9 million, a $24.7 million or
21.6% increase over the comparable period in 2005. Minimum rents increased
$12.5
million, primarily due to Cherry Creek, which we began consolidating in 2006
upon our adoption of EITF 04-5, and the September 2005 opening of Northlake.
Minimum rents also increased due to tenant rollovers. Percentage rents increased
due to increasing tenant sales and Cherry Creek. Expense recoveries increased
primarily due to Cherry Creek, Northlake, and increases in recoverable costs
at
certain centers, partially offset due to decreases in property taxes at certain
centers. Management, leasing, and development revenue decreased primarily due
to
a decrease in reimbursements of third party costs, which was partially offset
by
increased revenue related to services from certain contracts. We expect our
management, leasing, and development revenues, net of the related expenses,
to
be approximately $6.0 million in 2006. Other income increased primarily due
to
increases in lease cancellation revenue and Cherry Creek. During the third
quarter of 2006, we recognized our approximately $2.5 million and $0.2 million
share of the Consolidated Businesses’ and Unconsolidated Joint Ventures’ lease
cancellation revenue. For 2006, we are estimating that our share of lease
cancellation revenue will be as high as $12 million.
Total
expenses were
$129.6 million, a $15.5 million or 13.6% increase over the comparable period
in
2005. Maintenance, taxes, and utilities expense increased primarily due to
Cherry Creek, Northlake, and increases in maintenance costs and electricity
expense at certain centers, which were partially offset by decreases in property
taxes at certain centers. Other operating expense increased primarily due to
Cherry Creek, Northlake, bad debt expense, and pre-development costs related
to
domestic and non-U.S. projects. Due to a number of development opportunities
in
both the U.S. and Asia that may require additional spending, pre-development
costs are expected to be as much as $12 million in 2006, net of reimbursements
and related revenues. Pre-development costs were $7.0 million through September
30, 2006. Management, leasing, and development expense decreased primarily
due
to a reduction in reimbursable third party costs. We expect that general and
administrative expense will be approximately $7.0 million for the fourth quarter
of 2006. Interest expense increased due to Cherry Creek, Northlake, the higher
balance on the refinancing of The Mall at Short Hills, and the write-off of
financing costs related to the refinancing of the loan on Dolphin. These
increases were partially offset by reduced rates on refinancings. Depreciation
expense increased primarily due to Cherry Creek and Northlake, partially offset
by decreases due to fully depreciated assets at certain centers and changes
in
depreciable lives of tenant allowances in connection with early terminations
during 2005.
Interest
income
increased due to higher average cash balances and increased interest rates.
There were no land sales in the third quarter of 2006 and 2005. We do not expect
any further peripheral land sales to occur in 2006.
Unconsolidated
Joint Ventures
Total
revenues for
the three months ended September 30, 2006 were $59.7 million, a $13.1 million
or
18.0% decrease from the comparable period in 2005. Minimum rents decreased
by
$9.6 million, primarily due to the consolidation of Cherry Creek in 2006 and
the
sale of Woodland in December 2005, which were partially offset by tenant
rollovers and increases in occupancy. Expense recoveries decreased primarily
due
to Cherry Creek, Woodland, and decreases in property taxes at certain centers,
which were partially offset by increases in other recoverable costs. Other
income decreased primarily due to Cherry Creek.
Total
expenses
decreased by $8.9 million to $46.0 million for the three months ended September
30, 2006. Maintenance, taxes, and utilities expense decreased primarily due
to
Cherry Creek, Woodland and decreases in property taxes at certain centers,
which
were partially offset by increases in maintenance costs and electricity expense
at certain centers. Other operating expense remained relatively flat, with
decreases due to Cherry Creek and Woodland, offset by increases in marketing
and
promotion expenses and bad debt expense. Interest expense decreased primarily
due to Cherry Creek. Depreciation expense decreased due to Cherry Creek and
Woodland.
As
a result of the
foregoing, income of the Unconsolidated Joint Ventures decreased by $4.2 million
to $14.0 million for the three months ended September 30, 2006. Our equity
in
income of the Unconsolidated Joint Ventures was $7.1 million, a $2.2 million
decrease from the comparable period in 2005.
Net
Income
Our
income before
minority and preferred interests increased by $7.8 million to $17.6 million
for
the three months ended September 30, 2006. Minority share of income of
consolidated joint ventures increased due to Cherry Creek (see "Presentation
of
Operating Results - Income Allocation"). Preferred dividends decreased due
to
the redemption of the Series A Preferred Stock. In addition, preferred dividends
in 2005 include a $3.1 million charge related to the partial redemption of
the
Series A Preferred Stock (see “Debt and Equity Transactions”). After allocation
of income to minority and preferred interests, net income (loss) allocable
to
common shareowners for 2006 was $1.4 million compared to $(9.0) million in
the
comparable period in 2005.
Comparison
of the Nine Months Ended September 30, 2006 to the Nine Months Ended September
30, 2005
The
following table
sets forth operating results for the nine months ended September 30, 2006 and
September 30, 2005, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
|
Nine
Months
Ended
September
30,
2006
|
Nine
Months
Ended
September
30,
2005
|
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
CONSOLIDATED
BUSINESSES
|
UNCONSOLIDATED
JOINT
VENTURES
AT
100%(1)
|
(in
millions of
dollars)
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
|
229.0
|
|
|
106.2
|
|
|
190.2
|
|
|
136.6
|
|
Percentage rents
|
|
|
6.3
|
|
|
3.3
|
|
|
3.7
|
|
|
2.8
|
|
Expense recoveries
|
|
|
146.2
|
|
|
59.4
|
|
|
118.8
|
|
|
71.2
|
|
Management, leasing and development services
|
|
|
8.7
|
|
|
|
|
|
8.9
|
|
|
|
|
Other
|
|
|
26.2
|
|
|
7.4
|
|
|
21.9
|
|
|
7.0
|
|
Total
revenues
|
|
|
416.2
|
|
|
176.3
|
|
|
343.5
|
|
|
217.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, taxes, and utilities
|
|
|
113.2
|
|
|
42.5
|
|
|
94.8
|
|
|
51.0
|
|
Other
operating
|
|
|
51.2
|
|
|
17.5
|
|
|
43.0
|
|
|
21.4
|
|
Management, leasing and development services
|
|
|
4.2
|
|
|
|
|
|
5.8
|
|
|
|
|
General and administrative
|
|
|
21.6
|
|
|
|
|
|
20.5
|
|
|
|
|
Interest expense (2)
|
|
|
98.5
|
|
|
40.1
|
|
|
79.3
|
|
|
50.5
|
|
Depreciation and amortization (3)
(4)
|
|
|
99.6
|
|
|
31.6
|
|
|
94.7
|
|
|
39.9
|
|
Total
expenses
|
|
|
388.3
|
|
|
131.8
|
|
|
338.0
|
|
|
162.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on land
sales and interest income
|
|
|
9.1
|
|
|
0.9
|
|
|
6.0
|
|
|
0.5
|
|
|
|
|
37.0
|
|
|
45.4
|
|
|
11.5
|
|
|
55.3
|
|
Equity
in
income of Unconsolidated Joint Ventures (4)
|
|
|
23.0
|
|
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
minority and preferred interests
|
|
|
59.9
|
|
|
|
|
|
39.2
|
|
|
|
|
Minority
and
preferred interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRG
preferred distributions
|
|
|
(1.8
|
)
|
|
|
|
|
(1.8
|
)
|
|
|
|
Minority share of consolidated joint ventures
|
|
|
(7.2
|
)
|
|
|
|
|
0.0
|
|
|
|
|
Minority share of income of TRG
|
|
|
(12.7
|
)
|
|
|
|
|
(8.2
|
)
|
|
|
|
Distributions in excess of minority share of income of
TRG
|
|
|
(14.0
|
)
|
|
|
|
|
(18.9
|
)
|
|
|
|
Net
income
|
|
|
24.2
|
|
|
|
|
|
10.3
|
|
|
|
|
Preferred
dividends (5)
|
|
|
(20.1
|
)
|
|
|
|
|
(21.6
|
)
|
|
|
|
Net
income
(loss) allocable to common shareowners
|
|
|
4.2
|
|
|
|
|
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION (6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
- 100%
|
|
|
235.1
|
|
|
117.1
|
|
|
185.5
|
|
|
145.7
|
|
EBITDA
- outside partners' share
|
|
|
(22.9
|
)
|
|
(51.9
|
)
|
|
(10.4
|
)
|
|
(65.5
|
)
|
Beneficial interest in EBITDA
|
|
|
212.1
|
|
|
65.2
|
|
|
175.1
|
|
|
80.2
|
|
Beneficial interest expense
|
|
|
(88.9
|
)
|
|
(22.9
|
)
|
|
(75.2
|
)
|
|
(28.1
|
)
|
Non-real estate depreciation
|
|
|
(1.9
|
)
|
|
|
|
|
(1.6
|
)
|
|
|
|
Preferred dividends and distributions
|
|
|
(21.9
|
)
|
|
|
|
|
(23.5
|
)
|
|
|
|
Funds
from Operations contribution
|
|
|
99.5
|
|
|
42.4
|
|
|
74.9
|
|
|
52.1
|
|
(1) |
With
the
exception of the Supplemental Information, amounts include 100% of
the
Unconsolidated Joint Ventures. Amounts are net of intercompany
transactions. The Unconsolidated Joint Ventures are presented at
100% in
order to allow for measurement of their performance as a whole, without
regard to our ownership interest. In our consolidated financial
statements, we account for investments in the Unconsolidated Joint
Ventures under the equity method.
|
(2) |
Interest
expense for the nine months ended September 30, 2006 includes charges
of
$3.1 million in connection with the write-off of financing costs
related
to the respective pay off and refinancing of the loans on The Shops
at
Willow Bend and Dolphin when the loans became prepayable without
penalty,
in the first and third quarters of 2006,
respectively.
|
(3) |
Included
in
depreciation and amortization of the Consolidated Businesses and
Unconsolidated Joint Ventures (at 100%) are $7.4 million and $4.5
million,
respectively, of depreciation of center replacement assets for 2006,
and
$7.7 million and $5.4 million, respectively, for
2005.
|
(4) |
Amortization
of the additional basis included in depreciation and amortization
was $3.6
million and $3.2 million in 2006 and 2005, respectively. Also,
amortization of our additional basis in the Operating Partnership
included
in equity in income of Unconsolidated Joint Ventures was $1.5 million
and
$2.3 million in 2006 and 2005,
respectively.
|
(5) |
Preferred
dividends for the nine months ended September 30, 2006 include $4.7
million of charges recognized in connection with the redemption of
the
remaining Series A and Series I Preferred Stock. Preferred dividends
for
the nine months ended September 30, 2005 include a $3.1 million
charge recognized in connection with the partial redemption of the
Series
A Preferred Stock.
|
(6) |
EBITDA
and FFO
for 2005 have been restated from amounts previously reported to include
an
add-back of depreciation of center replacement assets reimbursed
in the
year of acquisition.
|
(7) |
Certain
reclassifications have been made to prior year information to conform
to
current year classifications. Amounts in this table may not add due
to
rounding.
|
Consolidated
Businesses
Total
revenues for
the nine months ended September 30, 2006 were $416.2 million, a $72.7 million
or
21.2% increase over the comparable period in 2005. Minimum rents increased
$38.8
million, primarily due to Cherry Creek, which we began consolidating in 2006
upon our adoption of EITF 04-5, and the September 2005 opening of Northlake.
Minimum rents also increased due to tenant rollovers. Percentage rents increased
due to increasing tenant sales and Cherry Creek. Expense recoveries increased
primarily due to Cherry Creek and Northlake, and increases in recoverable costs.
Management, leasing, and development revenue remained relatively flat, with
decreases primarily due to a reduction in reimbursable third party costs, offset
by increased revenues related to services from certain contracts. Other income
increased primarily due to Cherry Creek, Northlake, and increases in lease
cancellation revenue, which were partially offset by approximately $0.6 million
of non-recurring income during 2005.
Total
expenses were
$388.3 million, a $50.3 million or 14.9% increase over the comparable period
in
2005. Maintenance, taxes, and utilities expense increased primarily due to
Cherry Creek, Northlake, and increases in maintenance costs and electricity
expense at certain centers. Other operating expense increased primarily due
to
Cherry Creek and Northlake, as well as increases in bad debt expense and
professional fees. Management, leasing, and development expense decreased
primarily due to a reduction in reimbursable third party costs. General and
administrative expense increased primarily due to increases in compensation
expenses, which were partially offset by decreased severance costs. Interest
expense increased due to Cherry Creek, Northlake, the higher balance on the
refinancing of The Mall at Short Hills, and increases in floating interest
rates. These increases were partially offset by reduced rates on refinancings.
Interest expense in 2006 also included the write-off of financing costs related
to the respective pay off and refinancing of the loans on The Shops at Willow
Bend and Dolphin. Depreciation expense increased primarily due to Cherry Creek
and Northlake, which were partially offset by a decrease due to changes in
depreciable lives of tenant and anchor allowances in connection with early
terminations during 2005 and fully depreciated assets at certain
centers.
Gains
on land sales
and interest income increased due to higher interest rates and average cash
balances in 2006, which were partially offset by a decrease in gains on
peripheral land sales.
Unconsolidated
Joint Ventures
Total
revenues for
the nine months ended September 30, 2006 were $176.3 million, a $41.4 million
or
19.0% decrease from the comparable period in 2005. Minimum rents decreased
by
$30.4 million, primarily due to the consolidation of Cherry Creek in 2006 and
the sale of Woodland in December 2005, which were partially offset by increases
in occupancy and tenant rollovers. Expense recoveries decreased primarily due
to
Cherry Creek and Woodland, which were partially offset by increased recoverable
costs at certain centers. Other income increased due to increases in lease
cancellation revenue, which were partially offset by Cherry Creek and
Woodland.
Total
expenses
decreased by $31.1 million to $131.8 million for the nine months ended September
30, 2006. Maintenance, taxes, and utilities expense decreased primarily due
to
Cherry Creek and Woodland, which were partially offset by increases in
maintenance costs and electricity expense at certain centers. Other operating
expense decreased due to Cherry Creek and Woodland, which were partially offset
by costs related to marketing and promotion services. Interest expense decreased
due to Cherry Creek. Depreciation expense decreased primarily due to Cherry
Creek and Woodland.
As
a result of the
foregoing, income of the Unconsolidated Joint Ventures decreased by $9.9 million
to $45.4 million for the nine months ended September 30, 2006. Our equity in
income of the Unconsolidated Joint Ventures was $23.0 million, a $4.7 million
decrease from the comparable period in 2005.
Net
Income
Our
income before
minority and preferred interests increased by $20.7 million to $59.9 million
for
the nine months ended September 30, 2006. Minority share of income of
consolidated joint ventures increased due to Cherry Creek (see "Presentation
of
Operating Results - Income Allocation"). Preferred dividends decreased due
to
the redemption of the Series A Preferred Stock. In addition, preferred dividends
in 2006 include $4.7 million of charges recognized in connection with the
redemption of the Series A and Series I Preferred Stock. Preferred dividends
in
2005 include a $3.1 million charge related to the partial redemption of the
Series A Preferred Stock (see “Debt and Equity Transactions”). After allocation
of income to minority and preferred interests, net income (loss) allocable
to
common shareowners for 2006 was $4.2 million compared to $(11.3) million in
the
comparable period in 2005.
Reconciliation
of Net Income (Loss) Allocable to Common Shareowners to Funds from
Operations
|
|
Three
Months
Ended
September
30
|
|
Nine
Months
Ended
September
30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(in
millions
of dollars)
|
|
Net
income
(loss) allocable
to
common shareowners
|
|
|
1.4
|
|
|
(9.0
|
)
|
|
4.2
|
|
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less)
depreciation and amortization: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
businesses at 100%
|
|
|
32.9
|
|
|
31.7
|
|
|
99.6
|
|
|
94.7
|
|
Minority
partners in consolidated joint ventures
|
|
|
(3.6
|
)
|
|
(1.8
|
)
|
|
(9.6
|
)
|
|
(6.5
|
)
|
Share
of
unconsolidated joint ventures
|
|
|
6.7
|
|
|
8.5
|
|
|
19.4
|
|
|
24.4
|
|
Non-real
estate depreciation
|
|
|
(0.7
|
)
|
|
(0.5
|
)
|
|
(1.9
|
)
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
minority
interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
share of income of TRG
|
|
|
4.2
|
|
|
0.6
|
|
|
12.7
|
|
|
8.2
|
|
Distributions
in excess of minority share of income
of
TRG
|
|
|
4.7
|
|
|
8.3
|
|
|
14.0
|
|
|
18.9
|
|
Distributions
in excess of minority share of income
of
consolidated
joint ventures
|
|
|
1.7
|
|
|
0.1
|
|
|
3.4
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from
Operations (2)
|
|
|
47.3
|
|
|
37.8
|
|
|
141.8
|
|
|
127.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCO's
average
ownership percentage of TRG
|
|
|
65.1
|
%
|
|
62.6
|
%
|
|
64.8
|
%
|
|
62.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from
Operations allocable to TCO (2)
|
|
|
30.8
|
|
|
23.7
|
|
|
91.9
|
|
|
78.7
|
|
(1) |
Depreciation
includes $2.8 million and $2.5 million of mall tenant allowance
amortization for the three months ended September 30, 2006 and 2005,
respectively, and $7.4 million and $7.6 million for the nine months
ended
September 30, 2006 and 2005, respectively. Depreciation also includes
TRG’s beneficial interest in depreciation of center replacement assets
recoverable from tenants of $3.6 million and $3.8 million for the
three
months ended September 30, 2006 and 2005, respectively, and $9.4
million
and $10.2 million for the nine months ended September 30, 2006 and
2005,
respectively.
|
(2) |
FFO
for the
three and nine months ended September 30, 2005 has been restated
from
previously reported amounts to include the add-back of depreciation
of
center replacement assets reimbursed in the year of acquisition.
|
(3) |
Amounts
in
this table may not recalculate due to
rounding.
|
Reconciliation
of Net Income to Beneficial Interest in EBITDA
|
|
Three
Months
Ended
September
30
|
|
Nine
Months
Ended
September
30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(in
millions
of dollars)
|
|
Net
income
|
|
|
5.0
|
|
|
0.3
|
|
|
24.2
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less)
depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
businesses at 100%
|
|
|
32.9
|
|
|
31.7
|
|
|
99.6
|
|
|
94.7
|
|
Minority
partners in consolidated joint ventures
|
|
|
(3.6
|
)
|
|
(1.8
|
)
|
|
(9.6
|
)
|
|
(6.5
|
)
|
Share
of
unconsolidated joint ventures
|
|
|
6.7
|
|
|
8.5
|
|
|
19.4
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
(less)
preferred interests and interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
distributions
|
|
|
0.6
|
|
|
0.6
|
|
|
1.8
|
|
|
1.8
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
businesses at 100%
|
|
|
32.3
|
|
|
27.2
|
|
|
98.5
|
|
|
79.3
|
|
Minority
partners in consolidated joint ventures
|
|
|
(3.3
|
)
|
|
(1.4
|
)
|
|
(9.6
|
)
|
|
(4.1
|
)
|
Share
of
unconsolidated joint ventures
|
|
|
7.7
|
|
|
9.4
|
|
|
22.9
|
|
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
minority
interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
share of income of TRG
|
|
|
4.2
|
|
|
0.6
|
|
|
12.7
|
|
|
8.2
|
|
Distributions
in excess of minority share of income
of
TRG
|
|
|
4.7
|
|
|
8.3
|
|
|
14.0
|
|
|
18.9
|
|
Distributions
in excess of minority share of income
of
consolidated
joint ventures
|
|
|
1.7
|
|
|
0.1
|
|
|
3.4
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in EBITDA (1)
|
|
|
88.9
|
|
|
83.5
|
|
|
277.3
|
|
|
255.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCO's
average
ownership percentage of TRG
|
|
|
65.1
|
%
|
|
62.6
|
%
|
|
64.8
|
%
|
|
62.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in EBITDA allocable to TCO (1)
|
|
|
57.9
|
|
|
52.3
|
|
|
179.8
|
|
|
158.4
|
|
(1) |
Beneficial
interest in EBITDA for the three and nine months ended September
30, 2005
has been restated from previously reported amounts to include the
add-back
of depreciation of center replacement assets reimbursed in the year
of
acquisition.
|
(2) |
Amounts
in
this table may not recalculate due to
rounding.
|
Liquidity
and Capital Resources
In
the following
discussion, references to beneficial interest represent the Operating
Partnership’s share of the results of its consolidated and unconsolidated
businesses. We do not have, and have not had, any parent company indebtedness;
all debt discussed represents obligations of the Operating Partnership or its
subsidiaries and joint ventures.
Capital
resources
are required to maintain our current operations, fund construction costs on
Partridge Creek and other projects, pay dividends, and fund other planned
capital spending and other commitments and contingencies. We believe that our
net cash provided by operating activities, distributions from our joint
ventures, the unutilized portions of our credit facilities, and our ability
to
access the capital markets assure adequate liquidity to meet current and future
cash requirements and will allow us to conduct our operations in accordance
with
our dividend and financing policies. The following sections contain information
regarding our recent capital transactions and sources and uses of cash;
beneficial interest in debt and sensitivity to interest rate risk; contractual
obligations; covenants, commitments, and contingencies; and historical capital
spending. We then provide information regarding our anticipated future capital
spending.
As
of September 30,
2006, we had a consolidated cash balance of $18.7 million, of which $2.0 million
is restricted to specific uses stipulated by our lenders, including ground
lease
payments, taxes, insurance, debt service, capital improvements, leasing costs,
and tenant allowances. We also have secured lines of credit of $350 million
and
$40 million. As of September 30, 2006 the total amounts borrowed on the $350
million and $40 million lines of credit were $25.0 million and $12.8 million,
respectively. Our $350 million line of credit matures in February 2009 and
has a
one year extension option. The $40 million line of credit matures in February
2008.
Operating
Activities
Our
net cash
provided by operating activities was $150.6 million in 2006, compared to $123.3
million in 2005. In 2006, increases in cash from 2005 related primarily to
increases in rents, lease cancellation revenue, and the opening of Northlake.
See also "Results of Operations" for descriptions of 2006 and 2005
transactions.
Investing
Activities
Net
cash used in
investing activities was $64.1 million in 2006 compared to $108.5 million in
2005. Cash used in investing activities was impacted by the timing of capital
expenditures, with additions to properties in 2006 and 2005 for the construction
of Northlake, Partridge Creek, the expansion and renovation at Twelve Oaks,
our
Oyster Bay project, and other development activities and capital items. A
tabular presentation of 2006 capital spending is shown in “Capital Spending”.
Contributions to Unconsolidated Joint Ventures of $3.2 million in 2006 were
made
primarily to fund the expansion at Waterside (see "Capital Spending - New
Centers") and $29.4 million in 2005 were made primarily for the purchase of
anchor spaces at Stamford Town Center and Cherry Creek, to fund the expansion
at
Waterside, and to fund the initial investment in The Pier.
Sources
of cash
used in funding these investing activities, other than cash flow from operating
activities, included distributions from Unconsolidated Joint Ventures and the
transactions described under Financing Activities. Distributions in excess
of
earnings from Unconsolidated Joint Ventures provided $45.7 million in 2006,
which included $39.5 million of proceeds from the Waterside financing, and
$18.3
million in 2005, which included Cherry Creek and Woodland. Net proceeds from
sales of peripheral land were $5.4 million and $6.1 million in 2006 and 2005,
respectively. The timing of land sales is variable and proceeds from land sales
can vary significantly from period to period. In addition, a $9.0 million note
received in connection with the sale of Woodland was collected during the first
quarter of 2006.
Financing
Activities
Net
cash used in
financing activities was $233.8 million in 2006, compared to $5.8 million in
2005. Proceeds from the issuance of debt, net of payments and issuance costs,
were $15.3 million in 2006, compared to $80.7 million in 2005. The third-party
owner of Partridge Creek contributed $9.0 million in 2006 to fund the project
(see "Contractual Obligations - The Mall at Partridge Creek Contractual
Obligations" regarding the ownership structure of this project). Issuances
of
stock and partnership units related to the exercise of employee options
contributed $6.7 million in 2005. In July 2005, we used the $87 million proceeds
from the issuance of Series H Preferred Stock to redeem a portion of the Series
A Preferred Stock. In May 2006, we used the proceeds from the issuance of the
$113.0 million Series I Preferred Stock to redeem the remaining outstanding
Series A Preferred Stock. The Series I Preferred Stock was then redeemed in
June
2006 using available cash. Equity issuance costs were $0.6 million and $3.2
million in 2006 and 2005, respectively. Total dividends and other distributions
paid were $144.5 million and $90.0 million in 2006 and 2005, respectively.
Distributions to minority interests in 2006 included $45.3 million of excess
proceeds from the refinancing of Cherry Creek.
Beneficial
Interest in Debt
At
September 30,
2006, the Operating Partnership's debt and its beneficial interest in the debt
of its Consolidated and Unconsolidated Joint Ventures totaled $2,534.9 million
with an average interest rate of 5.68% excluding amortization of debt issuance
costs and the effects of interest rate hedging instruments. These costs are
reported as interest expense in the results of operations. Interest expense
for
the nine months ended September 30, 2006 includes $0.5 million of non-cash
amortization relating to acquisitions or 0.02% of the average all-in rate.
Included in beneficial interest in debt is debt used to fund development and
expansion costs. Beneficial interest in construction work in process totaled
$214.4 million as of September 30, 2006, which includes $192.2 million of assets
on which interest is being capitalized. Beneficial interest in capitalized
interest was $6.8 million for the nine months ended September 30, 2006. The
following table presents information about our beneficial interest in debt
as of
September 30, 2006:
|
|
Amount
|
|
Interest
Rate
Including
Spread
|
|
|
|
|
(in
millions
of dollars)
|
|
|
|
|
Fixed
rate
debt
|
|
|
2,483.0
|
|
|
5.66
|
%
|
(1)
|
|
|
|
|
|
|
|
|
|
Floating
rate
debt-
|
|
|
|
|
|
|
|
|
Floating month to month
|
|
|
51.9
|
|
|
6.28
|
%
|
(1) |
|
|
|
|
|
|
|
|
|
Total
beneficial interest in debt
|
|
|
2,534.9
|
|
|
5.68
|
%
|
(1) |
|
|
|
|
|
|
|
|
|
Amortization
of financing costs (2)
|
|
|
|
|
|
0.17
|
%
|
|
Average
all-in rate
|
|
|
|
|
|
5.85
|
%
|
|
(1) |
Represents
weighted average interest rate before amortization of financing
costs.
|
(2) |
Financing
costs include financing fees, interest rate cap premiums, and losses
on
settlement of derivatives used to hedge the refinancing of certain
fixed
rate debt.
|
(3) |
Amounts
in
table may not add due to rounding.
|
In
August 2006, we
entered into a forward starting swap for $50 million to partially hedge interest
rate risk associated with the planned refinancing of International Plaza in
January 2008. We had previously entered into two forward starting swaps totaling
$100 million in March 2006. The weighted average forward swap rate for these
three swaps is 5.33%, excluding the credit spread.
Sensitivity
Analysis
We
have exposure to
interest rate risk on our debt obligations and interest rate instruments. We
use
derivative instruments primarily to manage exposure to interest rate risks
inherent in variable rate debt and refinancings. We routinely use cap, swap,
treasury lock, and rate lock agreements to meet these objectives. Based on
the
Operating Partnership's beneficial interest in floating rate debt in effect
at
September 30, 2006, a one percent increase or decrease in interest rates on
this
floating rate debt would decrease or increase annual earnings (including the
effect of capitalized interest) and cash flows by approximately $0.5 million.
Based on our consolidated debt and interest rates in effect at September 30,
2006, a one percent increase in interest rates would decrease the fair value
of
debt by approximately $128.0 million, while a one percent decrease in interest
rates would increase the fair value of debt by approximately $137.3
million.
Contractual
Obligations
In
conducting our
business, we enter into various contractual obligations, including those for
debt, capital leases for property improvements, operating leases for office
space and land, purchase obligations (primarily for construction), and other
long-term commitments. Disclosure of these items is contained in our Annual
Report on Form 10-K. Updates of the 10-K disclosures for debt obligations and
planned capital spending, which can vary significantly from period to period,
as
of September 30, 2006 are provided in the table below:
|
|
Payments
due
by period
|
|
|
|
Total
|
|
Less
than
1
year
(2006)
|
|
1-3
years
(2007-2008)
|
|
3-5
years
(2009-2010)
|
|
More
than
5
years
(2011+)
|
|
|
|
(in
millions
of dollars)
|
|
Debt
(1)
|
|
|
2,283.4
|
|
|
4.1
|
|
|
218.0
|
|
|
192.5
|
|
|
1,868.7
|
|
Interest
payments
|
|
|
949.3
|
|
|
32.1
|
|
|
246.1
|
|
|
227.6
|
|
|
443.5
|
|
Purchase
obligations -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned capital spending (2)
|
|
|
236.9
|
|
|
58.0
|
|
|
178.9
|
|
|
|
|
|
|
|
(1) |
The
settlement
periods for debt do not consider extension options. Amounts relating
to
interest on floating rate debt are calculated based on the debt balances
and interest rates as of September 30,
2006.
|
(2) |
As
of
September 30, 2006, we were contractually liable for $122.1 million
of
this planned spending. See "Planned Capital Spending" for detail
regarding
planned funding. The Pier is not included in these
amounts.
|
(3) |
Amounts
in
this table may not add due to
rounding.
|
During
the first
quarter of 2006, we exercised options to acquire property and land at Partridge
Creek and Oyster Bay through Section 1031 like-kind exchanges. Our obligations
to third-party accommodators under prior contractual agreements existing at
December 31, 2005 were terminated and all related third-party obligations were
repaid.
The
Mall at
Partridge Creek Contractual Obligations
In
May 2006, we
engaged the services of a third-party investor to acquire certain property
associated with Partridge Creek, in order to facilitate a Section 1031 like-kind
exchange to provide flexibility for disposing of assets in the future. The
third-party investor became the owner of the project and leases the land from
one of our subsidiaries. In turn, the owner leases the project back to us.
Funding
for the
project is expected from the following sources. We will provide approximately
45% of the project funding under a junior subordinated financing. The owner
has
provided $9 million in equity. Funding for the remaining project costs is being
provided by the owner’s third-party construction loan, which has a balance of
$12.1 million as of September 30, 2006 (see “Debt and Equity Transactions”).
We
are the
construction manager for the project and have an option to purchase the property
and assume the ground lease from the owner during the 30-month exchange period
ending December 2008. The option, if exercised, will provide the owner a 12%
cumulative return on its equity. In the event that we do not exercise our right
to purchase the property from the owner, the owner will have the right to sell
all of its interest in the property, provided that the purchaser shall assume
all of the obligations and be assigned all of the owner's rights under the
ground lease, the operating lease, and any remaining obligations under the
loans.
We
have guaranteed
the lease payments on the operating lease (excluding annual supplemental rent
equal to 1.67% of the owner's outstanding equity balance, commencing after
the
exchange period) as well as completion of the project. The lease payments are
structured to cover debt service, ground rent payments, and other expenses
of
the lessor. We consolidate the accounts of the owner and the junior loan and
other intercompany transactions are eliminated in consolidation.
Loan
Commitments and Guarantees
Certain
loan
agreements contain various restrictive covenants, including minimum net worth
requirements, minimum debt service coverage ratios, a maximum payout ratio
on
distributions, a maximum leverage ratio, a minimum debt yield ratio, and a
minimum fixed charges coverage ratio, the latter being the most restrictive.
The
Operating Partnership is in compliance with all of its covenants.
Payments
of
principal and interest on the loans in the following table are guaranteed by
the
Operating Partnership as of September 30, 2006.
Center
|
Loan
balance
as
of
9/30/06
|
TRG's
beneficial
interest
in
loan
balance
as
of
9/30/06
|
Amount
of
loan balance
guaranteed
by
TRG
as
of
9/30/06
|
%
of
loan
balance
guaranteed
by
TRG
|
%
of
interest
guaranteed
by
TRG
|
|
(in
millions
of dollars)
|
|
|
Dolphin
Mall
|
5.0
|
5.0
|
5.0
|
100%
|
100%
|
Fairlane
Town
Center
|
20.0
|
20.0
|
20.0
|
100%
|
100%
|
The
Mall at
Millenia
|
0.5
|
0.2
|
0.2
|
50%
|
50%
|
In
addition, we
have guaranteed certain obligations of Partridge Creek (see “Contractual
Obligations”) and the payment of $5.1 million related to the remaining
development costs and certain tenant allowances for Northlake.
Cash
Tender
Agreement
A.
Alfred Taubman
has the annual right to tender units of partnership interest in the Operating
Partnership (provided that the aggregate value is at least $50 million) and
cause us to purchase the tendered interests at a purchase price based on a
market valuation of TCO on the trading date immediately preceding the date
of
the tender (the Cash Tender Agreement). At A. Alfred Taubman's election, his
family, and certain others may participate in tenders. We will have the option
to pay for these interests from available cash, borrowed funds, or from the
proceeds of an offering of our common stock. Generally, we expect to finance
these purchases through the sale of new shares of our 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
TCO.
We
account for the
Cash Tender Agreement between us and Mr. Taubman as a freestanding written
put
option. As the option put price is defined by the current market price of our
stock at the time of tender, the fair value of the written option defined by
the
Cash Tender Agreement is considered to be zero.
Based
on a market
value at September 30, 2006 of $44.42 per common share, the aggregate value
of
interests in the Operating Partnership that may be tendered under the Cash
Tender Agreement was approximately $1.1 billion. The purchase of these interests
at September 30, 2006 would have resulted in our owning an additional 31%
interest in the Operating Partnership.
Capital
Spending
Capital
spending
for routine maintenance of the shopping centers is generally recovered from
tenants. 2006 capital spending through September 30, 2006 is summarized in
the
following table:
|
|
2006
(1)
|
|
|
|
Consolidated
Businesses
|
|
Beneficial
Interest
in
Consolidated Businesses
|
|
Unconsolidated
Joint Ventures
|
|
Beneficial
Interest in Unconsolidated
Joint
Ventures
|
|
|
|
(in
millions
of dollars)
|
|
New
Development Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-construction development activities (2)
|
|
|
19.4
|
|
|
19.4
|
|
|
|
|
|
|
|
New
centers (3)
|
|
|
21.4
|
|
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renovation projects with incremental GLA and/or
anchor
replacement (4)
|
|
|
31.2
|
|
|
31.1
|
|
|
25.7
|
|
|
7.3
|
|
Renovations with no incremental GLA effect and
other
|
|
|
2.3
|
|
|
2.3
|
|
|
1.9
|
|
|
1.0
|
|
Mall
tenant allowances (5)
|
|
|
8.2
|
|
|
7.9
|
|
|
2.7
|
|
|
1.4
|
|
Asset
replacement costs reimbursable by tenants
|
|
|
8.9
|
|
|
8.3
|
|
|
3.4
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
office improvements and equipment
|
|
|
4.5
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to
properties
|
|
|
95.8
|
|
|
94.9
|
|
|
33.8
|
|
|
11.7
|
|
(1) |
Costs
are net
of intercompany profits and are computed on an accrual basis.
Unconsolidated joint venture amounts exclude costs related to The
Pier.
|
(2) |
Primarily
includes project costs of Oyster
Bay.
|
(3) |
Includes
costs
related to Partridge Creek.
|
(4) |
Includes
costs
related to the renovation of the former Filene's space at Stamford
Town
Center, the expansion at Twelve Oaks, and the expansion and renovation
of
Waterside.
|
(5) |
Excludes
initial lease-up costs.
|
(6) |
Amounts
in
this table may not add due to
rounding.
|
For
the nine months
ended September 30, 2006, in addition to the costs above, we incurred our $3.8
million share of Consolidated Businesses’ and $1.0 million share of
Unconsolidated Joint Ventures’ capitalized leasing costs.
The
following table
presents a reconciliation of the Consolidated Businesses’ capital spending shown
above (on an accrual basis) to additions to properties (on a cash basis) as
presented in our Consolidated Statement of Cash Flows for the nine months ended
September 30, 2006:
|
(in
millions
of dollars)
|
|
|
|
Consolidated
Businesses’ capital spending
|
95.8
|
|
Differences
between cash and accrual basis
|
25.2
|
|
Additions
to
properties
|
121.0
|
|
Planned
Capital
Spending
New
Centers
Partridge
Creek, a
640,000 square foot center, is under construction in Clinton Township, Michigan.
The center will be anchored by Nordstrom, Parisian, and MJR Theatres, and is
scheduled to open in October 2007, with Nordstrom opening in spring 2008. Our
investment in this center will be approximately $155 million and we are
expecting a stabilized return of 9.5%.
In
January 2005, we
entered into an agreement to invest in The Pier, located in Atlantic City,
New
Jersey, with Gordon Group Holdings LLC (Gordon), who developed the center.
Under
the agreement, we will have a 30% interest in The Pier. Our capital contribution
in The Pier will be made in three steps. The initial investment of $4 million
was made at the closing in January 2005. A second payment equal to 70% of our
projected required total investment (less the initial $4 million payment) is
expected to be made toward the end of this year. The third and final payment
will be made in early 2008 based on the project's actual 2007 net operating
income (NOI) and debt levels. Our total capital contribution will be computed
at
a price based on a seven percent capitalization rate. Depending on the
performance of the project and assuming our share of debt to be $39 million,
we
expect our total cash investment to be in the range of $21 million to $26
million. Including our share of debt, our total investment would be in the
range
of $60 million to $65 million. During construction of the project, Gordon loaned
the venture the funding for capital expenditures in excess of the construction
loan financing. Interest on the loan is accruable at the short-term applicable
federal rate (AFR) under Section 1274(d) of the Internal Revenue Code and will
be repaid before any distributions to the venture partners. Our contributions
will be used to repay the principal portion of the loan. Consequently, we expect
that our share of distributions and income will initially be less than our
residual 30% interest. The outstanding balance on the $100 million construction
facility at September 30, 2006 was $84.0 million. This facility bears interest
at LIBOR plus 2.65% and matures in August 2007. The maturity may be extended
under two one-year extension options, assuming certain requirements have been
met. We expect to close on a third-party financing agreement for The Pier in
the
fourth quarter of 2006, which would be used to pay off the existing loan. The
$130 million interest-only facility will mature in ten years. Subject to certain
performance criteria, the facility may be increased to as much as $160
million. The investment in The Pier is accounted for under the equity
method.
We
are negotiating
agreements regarding a mixed-use project called City Creek Center in Salt Lake
City, Utah. Demolition of the existing structures will begin in November 2006
and the project will open in 2011. The retail component of the project will
include approximately 300,000 square feet of tenant GLA and up to three
department stores, including Macy’s and Nordstrom. We have been a consultant
throughout the planning process for this project and will develop, manage,
lease, and own the retail space. We are currently in the final stages of
refining our partnership agreement which will govern our investment in the
retail portion. When complete, we will provide the anticipated costs and
returns.
In
October 2006, we
announced that we are seeking a final decision in the Supreme Court of the
State
of New York (Suffolk County) on our land use plan to build a mall in Syosset,
Long Island, New York. During our recent discussions with the Town of Oyster
Bay
we believed that our offer to settle for a reduced size mall was acceptable
to
the Town. However, without a resolution we have no choice but to continue the
legal process. We believe we will be successful in this litigation and we will
ultimately build the mall. Sixty-five percent of the tenant space in the mall
is
committed, over 50 percent has fully-executed leases, and the mall will be
anchored by Neiman Marcus, Nordstrom, and Barneys New York. Depending on the
timing of the construction and opening of the mall, we anticipate spending
as
much as $500 million on this project. Assuming $500 million of cost we expect
a
minimum return of 7%. We expect success with the litigation, but if we are
ultimately unsuccessful it is anticipated that the recovery on this asset would
be significantly less than our current investment. Our cost in this project
as
of September 30, 2006 was $122.5 million.
Existing
Centers
Construction
has
been completed on an expansion and renovation of tenant space at Waterside
at a
cost of approximately $51 million. We expect a return of approximately 11%
on
our $13 million share of project costs. In addition, Nordstrom will join the
center as an anchor in fall 2008 and an expansion of the current anchor, Saks
Fifth Avenue, will be completed in late 2007 with a full renovation of the
store
expected to be completed by summer 2008.
At
Twelve Oaks,
construction is underway on an addition of a 167,000 square foot Nordstrom.
In
addition, the project includes a 60,000 square foot expansion and renovation
of
Macy’s (previously Marshall Fields), and approximately 97,000 square feet of
additional new store space. A grand opening is planned for September 28, 2007.
We expect a return of approximately 10% on our estimated cost of $63
million.
A
project is
underway on the site once occupied by Filene's department store at Stamford
Town
Center. The project, which is 100% leased, will consist of a mix of signature
retail and restaurant offerings, creating significantly greater visibility
to
the city and much-needed pedestrian access to the center. We expect a 7.5%
to 8%
return on the $51 million project, which is expected to open in November
2007.
The
following table
summarizes planned capital spending for 2006, excluding the capital contribution
related to The Pier (see “Planned Capital Spending - New Centers”), as well as
costs related to the future development in Salt Lake City and projects or
expansions for which budgets have not yet been approved by the Board of
Directors:
|
|
2006
(1)
|
|
|
|
|
Consolidated
|
|
|
Beneficial
Interest in Consolidated Businesses
|
|
|
Unconsolidated
Joint Ventures
|
|
|
Beneficial
Interest in Unconsolidated Joint Ventures
|
|
|
|
(in
millions
of dollars)
|
New
development projects (2)
|
|
|
79.2
|
|
|
79.2
|
|
|
|
|
|
|
|
Existing
centers (3)
|
|
|
69.3
|
|
|
68.8
|
|
|
51.7
|
|
|
19.9
|
|
Corporate
office improvements and equipment
|
|
|
5.3
|
|
|
5.3
|
|
|
|
|
|
|
|
Total
|
|
|
153.8
|
|
|
153.3
|
|
|
51.7
|
|
|
19.9
|
|
(1) |
Costs
are net
of intercompany profits.
|
(2) |
Includes
costs
related to Oyster Bay and Partridge Creek.
|
(3) |
Includes
costs
related to the expansion and renovation of Twelve Oaks, Stamford
Town
Center, and Waterside.
|
(4) |
Amounts
in
this table may not add due to
rounding.
|
Estimates
of future
capital spending include only projects approved by our Board of Directors and,
consequently, estimates will change as new projects are approved. Costs of
potential development projects, including our exploration of development
possibilities in Asia, are expensed until we conclude that it is probable that
the project will reach a successful conclusion.
Disclosures
regarding planned capital spending, including estimates regarding capital
expenditures, occupancy, and returns on new developments 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) timing
and
outcome of litigation and entitlement processes, (3) changes in the scope,
number, and valuation of projects, (4) cost overruns, (5) timing of
expenditures, (6) financing considerations, (7) actual time to complete
projects, (8) changes in economic climate, (9) competition from others
attracting tenants and customers, (10) increases in operating costs, (11) timing
of tenant openings, and (12) early lease terminations and
bankruptcies.
Subsequent
Event
In
October 2006,
Taubman Land Associates LLC, a 50% joint venture owned by us and an affiliate
of
the Taubman family, acquired for $42.5 million the land on which Sunvalley
is
situated. Sunvalley is owned by Sunvalley Associates, a 50% joint venture with
a
Taubman family affiliate. The ground rent for the land under the center was
$1.8
million in 2005 under the
participating ground lease, which matures in 2061. Also included in the
transaction was the land under the Sears store, which was paying a nominal
rent
to the seller.
Dividends
We
pay regular
quarterly dividends to our common and Series G and Series H preferred
shareowners. Dividends to our common shareowners are at the discretion of the
Board of Directors and depend on the cash available to us, our financial
condition, capital and other requirements, and such other factors as the Board
of Directors deems relevant. To qualify as a REIT, we must distribute at least
90% of our REIT taxable income to our shareowners, as well as meet certain
other
requirements. Preferred dividends accrue regardless of whether earnings, cash
availability, or contractual obligations were to prohibit the current payment
of
dividends.
On
September 6,
2006, we declared a quarterly dividend of $0.305 per common share that was
paid
on October 20, 2006 to shareowners of record on September 29, 2006. The Board
of
Directors also declared a quarterly dividend of $0.50 per share on our 8% Series
G Cumulative Redeemable Preferred Stock (Series G Preferred Stock) and a
quarterly dividend of $0.4765625 per share on our 7.625% Series H Cumulative
Redeemable Preferred Stock (Series H Preferred Stock), paid on September 29,
2006 to shareholders of record on September 19, 2006.
The
annual
determination of our common dividends is based on anticipated Funds from
Operations available after preferred dividends, as well as assessments of annual
capital spending, financing considerations, and other appropriate
factors.
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 us for the payment
of dividends.
Additional
Information
The
Company
provides supplemental investor information coincident with its earning
announcements that can be found online at www.taubman.com
under "Investor
Relations."
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.”
Item
4.
Controls
and Procedures
As
of the end of
the period covered by this quarterly report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures. Based upon that evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be disclosed in the
Company’s periodic SEC reports.
There
were no
changes in the Company’s internal control over financial reporting that occurred
during the quarter ended September 30, 2006 that have materially affected,
or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II
OTHER
INFORMATION
Item
1.
Legal
Proceedings
Neither
we, our
subsidiaries, nor any of the joint ventures is presently involved in any
material litigation, nor, to our knowledge, is any material litigation
threatened against us, our subsidiaries, or any of the properties. Except for
routine litigation involving present or former tenants (generally eviction
or
collection proceedings), substantially all litigation is covered by liability
insurance.
Item
1A.
Risk Factors
There
were no
material changes from risk factors as previously disclosed in Part I, Item
1A.
of our 2005 Form 10-K.
Item
6.
Exhibits
4(a)
|
--
|
Amended
and
Restated Secured Revolving Credit Agreement, dated as of August 9,
2006,
by and among Dolphin Mall Associates Limited Partnership, Fairlane
Town
Center LLC and Twelve Oaks Mall, LLC, as Borrowers, Eurohypo AG,
New York
Branch, as Administrative Agent and Lead Arranger, and the various
lenders
and agents on the signature pages thereto (incorporated herein by
reference to Exhibit 4.1 filed with the Registrant’s Current Report on
Form 8-K dated August 9, 2006).
|
4(b)
|
--
|
Guaranty
of
Payment, dated as of August 9, 2006, by and among The Taubman Realty
Group
Limited Partnership, Fairlane Town Center LLC and Twelve Oaks Mall,
LLC
(incorporated herein by reference to Exhibit 4.2 filed with the
Registrant’s Current Report on Form 8-K dated August 9,
2006).
|
4(c)
|
-- |
Amended
and
Restated Mortgage, dated as of August 9, 2006, by and between Fairlane
Town Center LLC and Eurohypo AG, New York Branch, as Administrative
Agent
(incorporated herein by reference to Exhibit 4.3 filed with the
Registrant’s Current Report on Form 8-K dated August 9,
2006).
|
4(d)
|
--
|
Amended
and
Restated Mortgage, dated as of August 9, 2006, by and between Twelve
Oaks
Mall, LLC and Eurohypo AG, New York Branch, as Administrative Agent
(incorporated herein by reference to Exhibit 4.4 filed with the
Registrant’s Current Report on Form 8-K dated August 9,
2006).
|
4(e)
|
-- |
Second
Amended and Restated Mortgage, Assignment of Leases and Rents and
Security
Agreement, dated as of August 9, 2006, by and between Dolphin Mall
Associates Limited Partnership and Eurohypo AG, New York Branch,
as
Administrative Agent (incorporated herein by reference to Exhibit
4.5
filed with the Registrant’s Current Report on Form 8-K dated August 9,
2006).
|
10(a)
|
--
|
Form
of
Change of Control Agreement (incorporated herein by reference to
Exhibit
10.1 filed with the Registrant’s Current Report on Form 8-K dated July 17,
2006).
|
10(b)
|
--
|
Change
of
Control Agreement, dated July 17, 2006, by and among the Company,
Taubman
Realty Group Limited Partnership, and Lisa A. Payne (incorporated
herein
by reference to Exhibit 10.2 filed with the Registrant’s Current Report on
Form 8-K dated July 17, 2006).
|
12
|
--
|
Statement
Re:
Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed
Charges and Preferred Dividends
|
31(a)
|
--
|
Certification
of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31(b)
|
--
|
Certification
of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32(a)
|
--
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32(b)
|
--
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99
|
--
|
Debt
Maturity
Schedule
|
SIGNATURES
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
TAUBMAN
CENTERS, INC.
|
Date:
October
31, 2006
|
By:
/s/
Lisa A.
Payne
|
|
Lisa
A.
Payne
|
|
Vice
Chairman, Chief Financial Officer, and Director (Principal Financial
Officer)
|