Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company" or "TCO") was incorporated in Michigan in 1973 and had its initial public offering ("IPO") in 1992. Upon completion of the IPO, the Company became the managing general partner of The Taubman Realty Group Limited Partnership ("TRG"). The Company has a 38.4% partnership interest in TRG (which has increased from 36.7% at December 31, 1997 because of TRG's redemption of a partner's interest in January 1998). The Company, through TRG, engages in the ownership, management, leasing, acquisition, development, and expansion of regional shopping centers ("Taubman Shopping Centers" or "Centers") and interests therein. TRG's portfolio, as of December 31, 1997, includes 25 urban and suburban Taubman Shopping Centers located in 12 states. Two additional Centers are under construction and are expected to open in November 1998 and March 1999. Twenty-two of the Centers are "super-regional" centers because they have more than 800,000 square feet of gross leasable area. TRG also owns certain regional retail shopping center development projects and more than 99% of The Taubman Company Limited Partnership (the "Manager"), which manages the Taubman Shopping Centers and provides other services to TRG and the Company. See the table on pages 12 and 13 of this report for information regarding the Taubman Shopping Centers and TRG's interests in them.
The Company is a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Code"). In order to satisfy the provisions of the Code applicable to REITs, the Company must distribute to its shareholders at least 95% of its REIT taxable income and meet certain other requirements. TRG's partnership agreement provides that TRG will distribute, at a minimum, sufficient amounts to its partners such that the Company's pro rata share will enable the Company to pay shareholder dividends (including capital gains dividends that may be required upon TRG's sale of an asset) that will satisfy the REIT provisions of the Code.
Recent Developments
For a discussion of business developments that occurred in 1997, see the response to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size and marketing strategy. Retail shopping centers range from neighborhood centers of less than 100,000 square feet of GLA to regional and super-regional shopping centers. Retail shopping centers in excess of 400,000 square feet of GLA are generally referred to as "regional" shopping centers, while those centers having in excess of 800,000 square feet of GLA are generally referred to as "super-regional" shopping centers. In this annual report on Form 10-K, the term "regional shopping centers" refers to both regional and super-regional shopping centers. The term "GLA" refers to gross retail space, including anchors and mall tenant areas, and the term "Mall GLA" refers to gross retail space, excluding anchors. The term "anchor" refers to a department store or other large retail store. The term "mall tenants" refers to stores (other than anchors) that are typically specialty retailers and lease space in shopping centers.
Business of the Company
The Company, as managing general partner of TRG, is engaged in the ownership, management, leasing, acquisition, development and expansion of regional shopping centers.
The Taubman Shopping Centers:
o are strategically located in major metropolitan areas, many in communities that are among the most affluent in the country, including New York City, Chicago, Los Angeles, San Francisco, Denver, Columbus, Detroit, Miami, Phoenix, and Washington, D.C.;
o range in size between 438,000 and 2.3 million square feet of GLA and between 133,000 and 942,000 square feet of Mall GLA. The smallest Center has approximately 50 stores, and the largest has approximately 250 stores. Of the 25 Centers, 22 are super-regional shopping centers;
o have approximately 3,400 stores operated by its mall tenants under approximately 1,250 trade names;
o have 88 anchors, operating under 17 trade names;
o lease approximately 76% of Mall GLA to national chains, including subsidiaries or divisions of The Limited (The Limited, Limited Express, Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and others), and Woolworth Corporation (Foot Locker, Kinney Shoes, and others); and
o are among the most productive (measured by mall tenants' average per square foot sales) in the United States. In 1997, mall tenants in the Taubman Shopping Centers portfolio had average per square foot sales of $384, which is substantially greater than the average for all regional shopping centers owned by public companies.
The most important factor affecting the revenues generated by the Taubman Shopping Centers is leasing to mall tenants (primarily specialty retailers), which represents over 90% of revenues. Anchors account for approximately 5% of revenues because many own their stores and, in general, those that lease their stores do so at rates substantially lower than those in effect for mall tenants.
TRG's ownership is concentrated in highly productive super-regional shopping centers. Of its 25 Centers, 19 had annual rent rolls at December 31, 1997 of over $10 million and 21 had annualized sales per square foot in excess of $300. The Company believes that this level of productivity in the Taubman Shopping Centers is indicative of their strong competitive position and is, in significant part, attributable to TRG's business strategy and philosophy. The Company believes that large shopping centers (including regional and especially super-regional shopping centers) are the least susceptible to direct competition because (among other reasons) anchors and large specialty retail stores do not find it economically attractive to open additional stores in the immediate vicinity of an existing location for fear of competing with themselves. In addition to the advantage of size, the Company believes that the Centers' success can be attributed in part to their other physical characteristics, such as design, layout, and amenities.
Business Strategy And Philosophy
The Company and TRG believe that the regional shopping center business is not simply a real estate development business, but rather an operating business in which a retailing approach to the on-going management and leasing of the Taubman Shopping Centers is essential. Thus TRG:
o offers a large, diverse selection of retail stores in each Center to give customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, and thereby increase achievable rents, by leasing space to a constantly changing mix of tenants; and
o seeks to anticipate trends in the retailing industry and emphasizes ongoing introductions of new retail concepts into the Centers. Due in part to this strategy, a number of successful retail trade names have opened their first mall stores in the Taubman Shopping Centers. TRG believes that its execution of this leasing strategy is unique in the industry and is an important element in building and maintaining customer loyalty and increasing mall productivity.
The Taubman Shopping Centers compete for retail consumer spending through diverse, in-depth presentations of predominantly fashion merchandise in an environment intended to facilitate customer shopping. While some Taubman Shopping Centers include stores that target high-end, upscale customers, each Center is individually merchandised in light of the demographics of its potential customers within convenient driving distance.
TRG's leasing strategy involves assembling a diverse mix of mall tenants in each of the Taubman Shopping Centers in order to attract customers, thereby generating higher sales by mall tenants. High sales by mall tenants make the Taubman Shopping Centers attractive to prospective tenants, thereby increasing the rental rates that prospective tenants are willing to pay. TRG implements an active leasing strategy to increase the Taubman Shopping Centers' productivity and to set minimum rents at higher levels. Elements of this strategy include terminating leases of under-performing tenants, renegotiating existing leases, and not leasing space to prospective tenants that (though viable or attractive in certain ways) would not enhance a Taubman Shopping Center's retail mix.
TRG's strategy is carried out by the Manager, which is more than 99% beneficially owned by TRG and which has been engaged to provide property management and leasing services for the Taubman Shopping Centers and to provide corporate, development, administrative, and acquisition services for TRG and the Company. The Manager has been a leading developer and manager in the regional shopping center business for more than 25 years.
Potential For Growth
The Company's principal objective is to enhance shareholder value, and it conducts all of its operations through TRG to achieve that result. TRG seeks to maximize the financial results of its dominant assets, while pursuing a growth strategy that includes the following key elements 1) an active new center development program, 2) strategic acquisitions, 3) expansion of the Centers, and 4) internal growth.
Development of New Centers - --------------------------
The Company believes that TRG has attractive development opportunities and intends to continue to pursue an active program of regional shopping center development. The Company believes that TRG has the expertise, through the Manager, to develop economically attractive regional shopping centers through intensive analysis of local retail opportunities. TRG believes that the development of new centers is the best use of TRG's capital and an area in which TRG excels. At any time, TRG has numerous potential development projects in various stages, with the objective of opening, on average, one new center each year. During 1997, TRG's program of development produced the opening of two centers. In July, TRG opened The Mall at Tuttle Crossing, a super-regional shopping center located in Columbus, Ohio. This Center was 95% leased at year end. In November, TRG opened Arizona Mills, a value super-regional shopping center located in Tempe, Arizona. The Center opened 90% leased.
Additionally, two centers from TRG's development program are currently under construction. In 1997, TRG began construction on Great Lakes Crossing, an enclosed value super-regional mall in Auburn Hills, Michigan, owned by a partnership in which TRG has an 80% controlling interest. The 1.4 million square foot Center is scheduled to open in November 1998, at an expected cost of approximately $210 million. Construction continues on MacArthur Center, a new Center in Norfolk, Virginia, which is expected to open in March 1999 with 930 thousand square feet of GLA. The three-level Center will initially be anchored by Nordstrom and Dillard's. The project is a joint venture in which TRG has a 70% controlling interest and is projected to cost approximately $150 million.
TRG's policies with respect to development activities are designed to limit the risks otherwise associated with development. For instance, TRG entered into an agreement to lease Memorial City Mall, a center adjacent to one of the most affluent residential areas in Houston, Texas, while TRG investigates the redevelopment opportunities of the center (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Capital Spending" for further discussion of the transaction). Also, TRG generally does not intend to acquire land early in the development process, but will instead generally acquire options on land or form partnerships with landholders holding potentially attractive development sites, typically exercising options only once it is prepared to begin construction. In addition, TRG does not intend to begin construction until a sufficient number of anchor stores have agreed to operate in the shopping center, such that TRG is confident that the projected sales and rents from Mall GLA are sufficient to earn a return on invested capital in excess of TRG's cost of capital. Having historically followed these two principles, TRG's experience indicates that less than 20% of the costs of the development of a regional shopping center will be incurred prior to the construction period; however, no assurance can be given that TRG will continue to be able to so minimize pre-construction costs.
While the Company anticipates that TRG will continue to evaluate development projects using criteria, including financial criteria for rates of return, similar to those employed in the past, no assurances can be given that the adherence to these policies will produce comparable results in the future. In addition, the costs of shopping center development opportunities that are explored but ultimately abandoned will, to some extent, diminish the overall return on development projects.
Strategic Acquisitions - ----------------------
TRG's objective is to acquire existing centers that are compatible with the quality of TRG's portfolio (or can be redeveloped to that level) and that satisfy TRG's strategic plans and pricing requirements. In 1997, TRG completed three acquisitions totaling over $356 million.
In September 1997, TRG acquired Regency Square shopping center, the dominant fashion center in the greater Richmond, Virginia area, for $123.9 million. Regency Square has 825,000 square feet of GLA and is anchored by Hecht's, JCPenney and Sears.
In December 1997, TRG acquired The Falls shopping center in Miami for $156 million. Representing TRG's entry into the Florida market, The Falls is an 812,000 square foot Center, anchored by Bloomingdale's and Macy's.
Also in December, TRG completed the $76.3 million acquisition of the participating leasehold interest in The Mall at Tuttle Crossing. Tuttle Crossing opened in July as the second of TRG's two properties in the Columbus, Ohio market.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Acquisitions" and Note 3 to the Consolidated Financial Statements of TRG for further discussion of these acquisitions.
The Company and TRG believe that TRG will have additional opportunities to acquire regional shopping centers, or interests therein, and will have certain advantages in doing so.
o First, the management expertise of the Manager will enhance the leasing and operation of newly acquired regional shopping centers. If opportunities exist to expand, remodel, or re-merchandise the center through new leasing, the Manager's expertise will assist TRG in making an informed and timely evaluation of the economic consequences of such activities prior to acquisition, as well as facilitate implementation of such activities.
o Second, a center can be acquired for any combination of cash or equity interests in TRG or (subject to certain limitations) the Company, possibly creating the opportunity for tax-advantaged transactions for the seller, thereby reducing the price that might otherwise have to be paid in an all cash transaction or making an opportunity available that would not otherwise exist. TRG is able to offer partnership interests in itself in exchange for shopping center interests, allowing sellers to diversify their interests, attain liquidity not otherwise available, possibly defer taxes that might otherwise be due if the interests were instead sold for cash, maintain an investment in the regional shopping center business, and resolve concerns sellers otherwise may have regarding future management of their properties. For instance, Biltmore Fashion Park's selling group included private investors who found it tax efficient to accept TRG partnership units as part of the consideration when TRG acquired the Center in 1994.
Expansions of the Taubman Shopping Centers - ------------------------------------------
A key element of growth is the strategic expansion of existing properties to update and enhance their market positions, by replacing or adding new anchor stores or increasing mall tenant space. Most of the Taubman Shopping Centers have been designed to accommodate expansions. Expansion projects can be as significant as new shopping center construction in terms of scope and cost, requiring governmental and existing anchor store approvals, design and engineering activities, including rerouting utilities, providing additional parking areas or decking, acquiring additional land, and relocating anchors and mall tenants (all of which must take place with a minimum of disruption to existing tenants and customers). In 1997, for example, TRG opened a 135,000 square foot expansion at Westfarms in August (followed by a new Nordstrom in September) and new mall stores totaling 50,000 square feet of Mall GLA at Biltmore throughout the year. Additionally, construction is in process at Cherry Creek, where a 132,000 square foot expansion of the Mall GLA will open in the fall of 1998.
Consolidation of department stores has also strengthened TRG's portfolio, as retailers continue to be attracted to TRG's dominant and highly productive locations. A recent department store conversion includes Bloomingdale's at Beverly Center, which opened in March of 1997.
The following table includes information regarding TRG's development, acquisition, and expansion activities during 1997 and 1996.
Developments:
Completion Date Center Location --------------- ------ --------
July 1997 Tuttle Crossing Columbus, Ohio November 1997 Arizona Mills Tempe, Arizona November 1998 Great Lakes Crossing Auburn Hills, Michigan March 1999 MacArthur Center Norfolk, Virginia
Acquisitions:
Completion Date Center Location --------------- ------ --------
June 1996 Paseo Nuevo (1) Santa Barbara, California July 1996 Fairlane Town Center (2) Dearborn, Michigan December 1996 La Cumbre Plaza Santa Barbara, California September 1997 Regency Square Richmond, Virginia December 1997 Tuttle Leasehold Columbus, Ohio December 1997 The Falls (3) Miami, Florida
Expansions and Anchor Conversions:
Completion Date Center Location --------------- ------ --------
June 1996 Biltmore (4) Phoenix, Arizona August 1996 Fair Oaks (5) Fairfax, Virginia August 1996 Lakeforest (5) Gaithersburg, Maryland November 1996 Marley Station (6) Anne Arundel County, Maryland November 1996 Stoneridge (6) Pleasanton, California March 1997 Beverly Center (7) Los Angeles, California August 1997 Westfarms (8) West Hartford, Connecticut November 1997 Cherry Creek (9) Denver, Colorado December 1997 Biltmore (10) Phoenix, Arizona
- ------------------
(1) Broadway converted to Macy's immediately prior to TRG's acquisition of Paseo Nuevo. (2) Acquired partner's 75% interest in the Center. (3) Completely redeveloped and expanded in 1996 before TRG's acquisition of The Falls. (4) Broadway converted to Macy's. (5) Woodward & Lothrop converted to Lord & Taylor. (6) Sears opened new store. (7) Broadway converted to Bloomingdale's. (8) 135,000 square foot expansion followed by the opening of a new Nordstrom in September. (9) Lord & Taylor opened new and expanded store. Additional 132,000 square foot expansion of mall tenant space will open in the Fall of 1998. (10) 50,000 square foot expansion of mall tenant space completed.
Internal Growth - ---------------
The Taubman Shopping Centers are among the most productive in the nation, when measured by mall tenant's average sales per square foot. Higher sales per square foot enable mall tenants to remain profitable while paying occupancy costs that are a greater percentage of total sales. As leases expire at the Centers, TRG has consistently been able, on a portfolio basis, to lease the available space to an existing or new tenant at higher rates.
Augmenting this growth, TRG is pursuing a number of new sources of revenue from the Taubman Shopping Centers. For example, TRG expects increased revenue from its specialty leasing efforts. In recent years a new industry -- beyond traditional carts and kiosks -- has evolved, with more and better quality specialty tenants. TRG has put in place a company-wide program to maximize this opportunity.
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants' expectations of future growth become more optimistic. In periods of slower growth or declining sales, rents on new leases will grow more slowly or will decline for the opposite reason. However, Center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases. The following table contains certain information regarding per square foot base rent, excluding renewals, at Taubman Shopping Centers that have been owned and open for five years.
Store Store Difference All Closings Openings Between Mall During During Opening and Tenants Year Year Closing Rents ------- ---- ---- ------------- Average Average Average Average Base Annualized Annualized Annualized Rent Base Rent Base Rent Base Rent ---- --------- --------- ---------
1997 (1)................... $38.79 $37.62 $41.67 $ 4.05 1996 (1)................... $37.90 $33.39 $42.39 $ 9.00 1995 (1)................... $36.33 $32.96 $41.27 $ 8.31 1994 (2)................... $34.72 $30.46 $41.02 $10.56 1993 (3)................... $32.64 $29.56 $35.86 $ 6.30
(1) Includes 18 centers owned and open prior to January 1, 1991. (2) Includes 17 centers owned and open prior to January 1, 1990. (3) Includes 16 centers owned and open prior to January 1, 1989.
Average annualized rent on stores opening in 1997 excludes rent on stores with greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be somewhat higher than in 1997. However, this statistic is difficult to predict in part because TRG's leasing policies and practices may result in early lease terminations with actual average closing rents which may vary from the average rent per square foot of scheduled lease expirations. In addition, the opening or closing of large tenant spaces, which generally pay a lower rent per square foot, can significantly affect the spread in a given year.
Lease Expirations
The following table shows lease expirations based on information available as of December 31, 1997 for the next ten years for the Taubman Shopping Centers in operation at that date:
The Company believes that the information in the table is not necessarily indicative of what will occur in the future because of several factors, but principally because TRG's leasing policies and practices create a significant level of early lease terminations at the Taubman Shopping Centers. For example, the average remaining term of the leases that were terminated during the period 1992 to 1997 was approximately 1.9 years. The average term of leases signed during 1997 and 1996 was approximately 7.3 years.
In addition, mall tenants at Taubman Shopping Centers may seek the protection of the bankruptcy laws, which could result in the termination of such tenants' leases and thus cause a reduction in the cash flow generated by the Taubman Shopping Centers. Prior to 1992, such bankruptcies had not affected more than 3% of leases in the Taubman Shopping Centers in any one calendar year. In 1997, approximately 1.5% of leases were so affected compared to 2.8% in 1996, 3.2% in 1995, 3.1% in 1994 and 4.0% in 1993. Since 1991, the annual provision for losses on accounts receivable has been less than 2% of TRG's annual revenues.
Occupancy
Mall tenant average occupancy rates of the Taubman Shopping Centers for the last five years are as follows:
Year Mall Tenant Average Occupancy ---- ----------------------------- 1997 87.6% 1996 87.4% 1995 88.0% 1994 86.6% 1993 86.5%
Historically, average annual occupancy for TRG as a whole has been within a narrow band. In the last ten years, average annual occupancy has ranged between 86.5% and 88.7%.
Major Tenants
The combined operations of The Limited, Inc. accounted for approximately 12% of leased Mall GLA as of December 31, 1997 and for approximately 10% of the 1997 base rent. The largest of these, in terms of square footage and rent, is The Limited, which accounted for approximately 2.3% of leased Mall GLA and 2.1% of 1997 base rent. No other single retail company accounted for more than 4% of leased Mall GLA or 1997 base rent.
Environmental Matters
All of the Taubman Shopping Centers presently owned by TRG (not including option interests in the Development Projects or any of the real estate managed by the Manager but not included in TRG's portfolio) have been subject to environmental assessments. The Company, TRG, and the Manager are not aware of any environmental liability relating to the Taubman Shopping Centers or any other property in which they have or had an interest (whether as an owner or operator) that the Company believes would have a material adverse effect on the Company's business, assets, or results of operations. No assurances can be given, however, that all environmental liabilities have been identified or that no prior owner, operator, or current occupant has created an environmental condition not known to the Company, TRG, or the Manager. Moreover, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability or that (ii) the current environmental condition of the Taubman Shopping Centers will not be affected by tenants and occupants of the Taubman Shopping Centers, by the condition of properties in the vicinity of the Taubman Shopping Centers (such as the presence of underground storage tanks), or by third parties unrelated to TRG, the Company, or the Manager.
With respect to the matters described below, while there can be no assurances, the Company believes that such matters will not have a material adverse effect on the Company's business, assets, or results of operations.
Beverly Center is located over an oil field and several abandoned oil wells, and is adjacent to an active oil production facility that operates numerous oil and gas wells. In the Los Angeles basin, where Beverly Center is located, pockets of methane gas may be found in oil fields; however, elevated levels of methane have not been detected at Beverly Center.
Cherry Creek is situated on land that was used as a landfill prior to 1950. Because of the past use of the site as a landfill, the site is listed on the United States Environmental Protection Agency's Comprehensive Environmental Response, Compensation and Liability Information System list.
In the summer of 1997, geotechnical drilling activities were undertaken in the former gasoline station area as part of a parking lot expansion at the southeastern corner of the Cherry Creek site. The geotechnical soil samples were observed to have petroleum odors and staining. A subsurface environmental investigation subsequently revealed a limited zone of hydrocarbon contaminated soils, with no significant impacts to groundwater. Discussions with the Colorado Department of Labor and Employment, Oil Inspection Section, held in September 1997, resulted in a "passive retardation" remedial approach that relies on natural processes to degrade the hydrocarbon contamination. A Corrective Action Plan was submitted in February 1998 that proposes monitoring the soil and groundwater quarterly for a period of two years. Acceptance of the plan is anticipated by May 1998. Implementation of the plan poses no constraints to the current expansion activity.
Paseo Nuevo is located in an area of known groundwater contamination by tetrachloroethylene ("PCE"). The groundwater under and around the site was monitored for six years before, during, and after construction of the center. No on-site sources of PCE were identified during construction. The Regional Water Quality Control Board has given approval to discontinue the monitoring program because the PCE levels remained relatively constant over the six-year period and do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the Taubman Shopping Centers, primarily in the form of floor tiles, roof coatings and mastics. The floor tiles, roof coatings and mastics are generally in good condition. Fire-proofing material containing asbestos is present at some of the Taubman Shopping Centers in limited concentrations or in limited areas. The Manager has developed and is implementing an operations and maintenance program that details operating procedures with respect to ACMs prior to any renovation and that requires periodic inspection for any change in condition of existing ACMs.
Personnel
The Company has engaged the Manager to provide certain management, accounting, and other administrative services to the Company. TRG has engaged the Manager to provide real estate management, acquisition, development, and administrative services required by (or of) TRG or any of its properties.
As of December 31, 1997, the Manager had 449 full-time employees. The following table provides a breakdown of employees by operational areas as of December 31, 1997:
Number Of Employees -------------------
Property Management............... 188 Leasing........................... 73 Development....................... 47 Financial Services................ 77 Other ............................ 64 --- Total....................... 449 ===
The Manager considers its relations with its employees to be good.
Item 2.
Item 2. PROPERTIES
Taubman Shopping Centers
Ownership
The following table sets forth certain information about each of the Taubman Shopping Centers. The table includes only Centers in operation at December 31, 1997. Excluded from this table are Great Lakes Crossing, which will open in November 1998, and MacArthur Center, which will open in March 1999. Also excluded is Memorial City Mall, a development project. Centers are owned in fee other than: Beverly Center, Cherry Creek, Columbus City Center, La Cumbre Plaza and Paseo Nuevo, which are held under ground leases expiring between 2028 and 2083 (exclusive of three ten-year renewal options at Columbus City Center), and a portion of the parking area at Hilltop (the ground lease of which expires in 2073).
Certain of the Centers are partially owned through joint ventures. Generally, TRG's joint venture partners have ongoing rights with regard to the disposition of TRG's interest in the joint ventures, as well as the approval of certain major matters.
Anchors
The following table summarizes certain information regarding the anchors at the Taubman Shopping Centers.
Number of 12/31/97 GLA Name Anchor Stores (in thousands) % of GLA ---- ------------- ------------- --------
Federated Macy's 12 2,156 Lazarus 2 658 Bloomingdale's 3 604 -- ------ Total 17 3,418 13.1%
Sears 15 3,099 11.9%
JCPenney 15 2,710 10.4%
May Company Lord & Taylor 8 1,035 Hecht's 5 749 Filene's 2 379 Filene's Men's Store/ Furniture Gallery 1 80 Foley's 1 178 Robinsons-May 1 150 -- ------ Total 18 2,571 9.9%
Dayton Hudson Hudson's 5 1,040 Marshall Field's 3 686 -- ------ Total 8 1,726 6.6%
Nordstrom 5(1) 877 3.4%
Saks 5 450 1.7%
Jacobson's 2 221 0.8%
Neiman Marcus 2 216 0.8%
Crowley's 1 115 0.4% -- ------ ---- Total 88 15,403 59.1% == ====== ====
(1) An additional Nordstrom store will be added along with Dillard's in connection with the development of MacArthur Center.
Mortgage Debt
The following table sets forth certain information regarding the mortgages encumbering the Taubman Shopping Centers as of December 31, 1997. All mortgage debt in the table below is nonrecourse to TRG, except for debt encumbering Arizona Mills and MacArthur Center. TRG has guaranteed the payment of principal and interest on the mortgage debt of these Centers (the guarantee on the Arizona Mills mortgage is limited to the extent of TRG's 37% ownership interest in the joint venture owning the Center). The loan agreements provide for the reduction of the amounts guaranteed as certain center performance and valuation criteria are met. Biltmore, Hilltop and Stoneridge are also encumbered by assessment bonds totaling approximately $4.8 million, which are not included in the table.
For additional information regarding the Taubman Shopping Centers and their operation, see the responses to Item 1 of this report.
Item 3.
Item 3. LEGAL PROCEEDINGS
Neither the Company, TRG, the Consolidated Businesses, nor any of the joint ventures is presently involved in any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company or TRG or any of their properties. Except for routine litigation involving present or former tenants of Taubman Shopping Centers (generally eviction or collection proceedings), substantially all litigation is covered by TRG's and the joint ventures' liability insurance.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Taubman Centers, Inc. is listed and traded on the New York Stock Exchange (Symbol: TCO). As of March 25, 1998, the 50,828,785 outstanding shares of Common Stock were held by 682 holders of record. The following table presents the dividends declared and range of share prices for each quarter of 1997 and 1996.
Market Quotations ------------------------------ 1997 Quarter Ended High Low Dividends ------------------ ---- --- ---------
March 31 $15 $12 3/8 $0.23
June 30 13 5/8 12 5/8 0.23
September 30 13 11/16 12 1/2 0.23
December 31 13 7/16 11 5/8 0.235
Market Quotations ------------------------------ 1996 Quarter Ended High Low Dividends ------------------ ---- --- ---------
March 31 $10 1/8 $ 9 1/4 $0.22
June 30 11 1/8 9 1/2 0.22
September 30 11 5/8 10 1/4 0.22
December 31 13 1/8 10 5/8 0.23
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and TRG and should be read in conjunction with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------
The following discussion should be read in conjunction with Selected Financial Data, the Financial Statements of Taubman Centers, Inc. and the Notes thereto and the Consolidated Financial Statements of The Taubman Realty Group Limited Partnership and the Notes thereto.
General Background and Performance Measurement
The Company, through its interest in and as managing general partner of TRG, participates in TRG's Managed Businesses. TRG's Managed Businesses consist of: (i) Taubman Shopping Centers that TRG controls by ownership or contractual agreement, development projects for future regional shopping centers (Development Projects) and The Taubman Company Limited Partnership (the Manager), (collectively, the Consolidated Businesses); and (ii) Taubman Shopping Centers partially owned through joint ventures with third parties that are not controlled (Unconsolidated Joint Ventures). The Unconsolidated Joint Ventures are accounted for under the equity method in TRG's Consolidated Financial Statements.
Certain aspects of the performance of the Managed Businesses are best understood by measuring their performance as a whole, without regard to TRG's ownership interest. For example, mall tenant sales and shopping center occupancy trends fit this category and are so analyzed below. In addition, trends in certain items of revenue and expense are often best understood in the same fashion, and the discussions following take this approach when appropriate. When relevant, these items are also discussed separately with regard to the Consolidated Businesses and the Unconsolidated Joint Ventures.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most important determinant of revenues of the Taubman Shopping Centers because mall tenants provide over 90% of these revenues and because mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses (together, total occupancy costs) that mall tenants can afford to pay. However, levels of mall tenant sales can be considerably more volatile in the short run than total occupancy costs.
The Company believes that the ability of tenants to pay occupancy costs and earn profits over long periods of time increases as sales per square foot increase, whether through inflation or real growth in customer spending. Because most mall tenants have certain fixed expenses, the occupancy costs that they can afford to pay and still be profitable are a higher percentage of sales at higher sales per square foot.
The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of mall tenant sales.
1997 1996 1995 ---- ---- ----
Mall tenant sales (in thousands) $3,086,259 $2,827,245 $2,739,393 Sales per square foot 371 365 346 Sales per square foot (excluding theaters and tenants greater than 40,000 square feet) 384 377 364
Minimum rents 10.1% 10.4% 10.4% Percentage rents 0.3 0.3 0.3 Expense recoveries 4.4 4.5 4.4 ---- ---- ---- Mall tenant occupancy costs 14.8% 15.2% 15.1% ==== ==== ====
Mall tenant occupancy costs as a percentage of sales decreased in 1997 primarily due to Centers acquired in 1997 and late 1996 (Results of Operations - -- Acquisitions). These Centers have lower occupancy costs than the portfolio average and consequently provide a source of future revenue growth.
Occupancy
Historically, average annual occupancy for TRG as a whole has been within a narrow band. In the last ten years, average annual occupancy has ranged between 86.5% and 88.7%. Mall tenant average occupancy rates for the last three years are as follows:
Year Mall Tenant Average Occupancy ---- ----------------------------- 1997 87.6% 1996 87.4 1995 88.0
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants' expectations of future growth become more optimistic. In periods of slower growth or declining sales, rents on new leases will grow more slowly or will decline for the opposite reason. However, Center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases. The following table contains certain information regarding per square foot base rent, excluding renewals, at the 18 Taubman Shopping Centers that have been owned and open for five years.
Store Store Difference All Closings Openings Between Mall During During Opening and Tenants Year Year Closing Rents ------- ---- ---- ------------- Average Average Average Average Base Annualized Annualized Annualized Rent Base Rent Base Rent Base Rent ---- --------- --------- ---------
1997 $38.79 $37.62 $41.67 $4.05 1996 $37.90 $33.39 $42.39 $9.00 1995 $36.33 $32.96 $41.27 $8.31
Average annualized rent on stores opening in 1997 excludes rent on stores with greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be somewhat higher than in 1997. However, this statistic is difficult to predict in part because TRG's leasing policies and practices may result in early lease terminations with actual average closing rents which may vary from the average rent per square foot of scheduled lease expirations. In addition, the opening or closing of large tenant spaces, which generally pay a lower rent per square foot, can significantly affect the spread in a given year.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth quarter due to the Christmas season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday and back-to-school events. While minimum rents and recoveries are generally not subject to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in anticipation of the Christmas selling season. Accordingly, revenues and occupancy levels are generally highest in the fourth quarter.
The following table summarizes certain quarterly operating data for TRG's Managed Businesses for 1997:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total 1997 1997 1997 1997 1997 ---------------------------------------------------- (in thousands)
Mall tenant sales $600,709 $629,906 $692,487 $1,163,157 $3,086,259 Revenues 130,677 134,756 137,728 157,192 560,353
Occupancy: Average Occupancy 86.5% 86.8% 87.0% 89.5% 87.6% Ending Occupancy 86.4% 87.1% 87.2% 90.3% 90.3% Leased Space 88.7% 89.5% 90.8% 92.3% 92.3%
Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum rents, percentage rents and expense recoveries) relative to sales are considerably higher in the first three quarters than they are in the fourth quarter. The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of sales for each quarter of 1997:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total 1997 1997 1997 1997 1997 -------------------------------------------------
Minimum rents 12.6% 11.8% 11.3% 7.3% 10.1% Percentage rents 0.2 0.3 0.3 0.2 0.3 Expense recoveries 5.2 5.1 4.7 3.5 4.4 ---- ---- ---- ---- ---- Mall tenant occupancy costs 18.0% 17.2% 16.3% 11.0% 14.8% ==== ==== ==== ==== ====
Results of Operations
Equity Transactions
In October 1997, the Company used the $200 million public offering of eight million shares of 8.3% Series A Cumulative Redeemable Preferred Stock to acquire a Series A Preferred Equity interest in TRG that entitles the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company's Series A Preferred Stock. In addition to the income from the Company's preferred equity interest in TRG, the Company continues to participate in the income allocable to TRG partnership unitholders to the extent of the Company's ownership in TRG, including adjustments arising from the Company's additional basis in TRG's net assets. TRG bore all expenses of the offering, which have been accounted for as a reduction of the proceeds. TRG used the net proceeds to pay down debt under TRG's existing revolving credit and commercial paper facilities, which were used to fund the acquisition of Regency Square in September 1997.
In December 1996, the Company purchased newly issued TRG units of partnership interest with the $75 million proceeds from the Company's December 1996 offering of 5.97 million shares of common stock. TRG bore all expenses of the Company's offering which have been accounted for as a reduction of the proceeds from TRG's issuance of units. TRG used the net proceeds to pay down short term floating rate debt and to acquire La Cumbre Plaza. Also in December 1996, the Company exchanged common shares for TRG units of partnership interest newly issued under TRG's incentive option plan. Additionally in 1996, TRG issued units of partnership interest in connection with the acquisition of the remaining interest in Fairlane Town Center.
Acquisitions
The following discussion of TRG's 1997 acquisitions contains forward-looking statements regarding the impact of these acquisitions on EBITDA (EBITDA is defined and described in Liquidity and Capital Resources -- Distributions). The actual impact may vary based on a variety of factors, including actual occupancy, rents achieved and operating expenses of the Centers. See Note 3 to TRG's consolidated financial statements for further discussion of the acquisitions.
The Falls - ---------
In December 1997, TRG acquired The Falls shopping center for $156 million in cash. The operating results of The Falls have been consolidated in TRG's financial statements from the acquisition date. TRG borrowed under an existing revolving credit facility to fund the acquisition. The acquisition is expected to produce EBITDA of about 8% of the acquisition cost in 1998.
Regency Square - --------------
In September 1997, TRG acquired Regency Square (Regency) shopping center, located in Richmond, Virginia, for $123.9 million in cash. The acquisition was initially funded with borrowings under TRG's revolving credit facilities, which were paid down in October 1997 with the proceeds from TRG's issuance of Series A Preferred Equity. The operating results of Regency have been consolidated in TRG's financial statements from the acquisition date. Regency is expected to add EBITDA of approximately 8% of the acquisition cost in 1998.
La Cumbre Plaza - ---------------
In December 1996, TRG acquired a 100% leasehold interest in La Cumbre Plaza (La Cumbre) located in Santa Barbara, California for $22.25 million in cash. The acquisition was funded with proceeds from an issuance of TRG units of partnership interest. The operating results of La Cumbre have been consolidated in TRG's financial statements from the acquisition date.
Fairlane Town Center - --------------------
In July 1996, TRG completed transactions that resulted in the acquisition of the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture Partner. In connection with the transaction, TRG issued to the former Joint Venture Partner units of partnership interest, exchangeable for approximately 6.1 million shares of the Company's common stock, which had a closing price of $10.75 per share on the day prior to the issuance date. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. TRG used unsecured debt to fund the repayment of the 9.73% mortgage and the prepayment penalty of approximately $1.2 million. The operating results of Fairlane have been consolidated in TRG's financial statements from the acquisition date. Prior to the acquisition date, TRG's interest in Fairlane was accounted for under the equity method as an Unconsolidated Joint Venture. In January 1998, TRG redeemed the former Joint Venture Partner's units of partnership interest for approximately $77.7 million (including costs).
Paseo Nuevo - -----------
In June 1996, TRG acquired a 100% leasehold interest in Paseo Nuevo, located in Santa Barbara, California, for $37 million in cash. TRG borrowed under its existing lines of credit to fund the acquisition. The operating results of Paseo Nuevo have been consolidated in TRG's financial statements from the acquisition date.
New Centers and Expansions
In November 1997, TRG opened Arizona Mills, a 37% owned value super-regional shopping center located in Tempe, Arizona. The Center opened 90% leased.
In July 1997, TRG opened The Mall at Tuttle Crossing, a super-regional shopping center located in Columbus, Ohio. The Center was 95% leased at year end. TRG's ownership interest in The Mall at Tuttle Crossing was subject to a long-term participating lease with Tuttle Crossing Holding Co., a subsidiary of The Limited, Inc. (The Limited) for land and leasehold improvements. In December 1997, TRG purchased The Limited's interests in the lease for $76.3 million in cash and took fee simple title to the underlying land and buildings. The lease had been accounted for as a capital lease with capital lease assets and a capital lease obligation of $55.3 million at the date of the acquisition. The purchase is anticipated to produce a return of approximately 8% of the acquisition cost in 1998.
TRG opened a 135,000 square foot expansion at Westfarms in August 1997. The expansion was approximately 90% leased as of year end. In addition, approximately 50,000 square feet of new mall stores opened at Biltmore in 1997. See also Liquidity and Capital Resources -- Capital Spending for discussions of other planned expansion and development activities.
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall (Memorial City), a 1.4 million square foot shopping center located in Houston, Texas. The lease of this unencumbered property grants TRG the exclusive right to manage, lease and operate the property. TRG has the option to terminate the lease after the third full lease year by paying $2 million to the lessor. TRG is using this option period to evaluate the redevelopment opportunities of the Center. As a development project, Memorial City has been excluded from all operating statistics in this report, and Memorial City's results of operations have been presented as a net line item in the following tabular comparisons of TRG's results of operations. Memorial City is expected to have an immaterial effect on EBITDA and net income during the option period.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Taubman Centers, Inc.
The Company is the managing general partner of TRG and shares in TRG's financial performance to the extent of its ownership percentage, as well as earning an 8.3% return on its preferred equity interest in TRG. The Company's average ownership percentage of TRG was 36.7% for 1997 and 34.5% for 1996. As of December 31, 1997, the Company had 50.8 million shares outstanding, up from 50.7 million at December 31, 1996.
The Company's income from TRG in 1997 consists of $4.1 million from its preferred equity interest in TRG and the Company's $33.5 million proportionate share of TRG's income before extraordinary item. In 1996, the Company's income from TRG consisted of its $29.0 million proportionate share of TRG's income before extraordinary item. The Company's proportionate share of TRG's income before extraordinary item was reduced by $8.2 million in 1997 and $7.6 million in 1996, representing adjustments arising from the Company's additional basis in TRG's net assets. Income before extraordinary item for 1997 was $28.7 million or $0.48 per common share as compared to $20.7 million or $0.47 per common share in 1996.
The Company recognized an extraordinary item of $(0.4) million in 1996, consisting of the Company's share of TRG's extraordinary item related to the extinguishment of debt. Net income for 1996 was $20.3 million or $0.46 per common share. After reduction of $4.1 million in dividends on the Company's Series A Preferred Stock, net income available to common shareowners for 1997 was $24.6 million or $0.48 per common share.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.6% in 1997 versus 87.4% in 1996. Ending occupancy for the Taubman Shopping Centers at December 31, 1997 was 90.3% versus 88.0% at December 31, 1996. Leased space at December 31, 1997 was 92.3% compared to 89.0% at the same date in 1996.
Total sales for Taubman Shopping Center mall tenants increased in 1997 by 9.2% to $3.09 billion from $2.83 billion in 1996. Tenant sales per square foot increased by 1.6% to $371 in 1997 from $365 in 1996. Tenant sales per square foot, excluding theaters and tenants greater than 40,000 square feet, increased by 1.9% to $384 in 1997 from $377 in 1996. Mall tenant sales for Centers that were owned and open for all of 1997 and 1996 (which excludes all Centers acquired in those years, as well as Tuttle Crossing and Arizona Mills) were $2.85 billion, a 1.6% increase over 1996. Sales statistics for the first three quarters of 1997 were negatively affected by new competition near certain Centers. The effect of the competition on sales moderated in the fourth quarter, after the anniversary date of the opening of the competing centers.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
The following table sets forth operating results for TRG's Managed Businesses for 1997 and 1996, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
TRG --Consolidated Businesses - -----------------------------
Total revenues for 1997 were $301.6 million, a $39.7 million or 15.2% increase over 1996. Minimum rents increased $24.1 million, of which $21.4 million was caused by the 1997 and 1996 acquisitions, and the opening of Tuttle Crossing. The results of Fairlane have been consolidated in TRG's results subsequent to the acquisition date in July 1996 (prior to that date Fairlane was accounted for under the equity method as an Unconsolidated Joint Venture). Minimum rents also increased due to the expansion at Biltmore and tenant rollovers. Percentage rent increased primarily due to the acquisitions. The increase in expense recoveries was primarily due to the acquired Centers and Tuttle Crossing. Other revenue increased $1.9 million primarily due to an insurance recovery, a litigation settlement, and an increase in lease cancellation revenue.
Total operating costs increased $28.8 million, or 12.5%. Recoverable and depreciation and amortization expenses increased primarily due to the acquisitions and Tuttle Crossing. Other operating expenses increased primarily due to the acquisitions and Tuttle Crossing, offset by a decrease in the charge to operations for development pre-construction reserves. General and administrative expense increased by $3.9 million primarily due to increases in compensation (including the continuing phase-in of the long-term compensation plan), recruiter fees and relocation charges, travel, and training. Interest expense increased due to an increase in debt used to finance Tuttle Crossing and capital expenditures at other Consolidated Businesses, partially offset by an increase in capitalized interest. The acquisitions were initially funded with debt which was subsequently paid down with the proceeds from the December 1996 and the October 1997 equity issuances.
Revenues and expenses as presented in the preceding table differ from the amounts shown in TRG's consolidated statement of operations by the amounts representing Memorial City's revenues and expenses, which are presented in the preceding table as a net amount.
Unconsolidated Joint Ventures - -----------------------------
Total revenues for 1997 were $258.8 million, a $6.5 million, or 2.5%, decrease from 1996, representing a $15.0 million decrease caused by the change of Fairlane from an Unconsolidated Joint Venture to a Consolidated Business, offset by increases due to the openings of Arizona Mills and the expansion at Westfarms, in addition to increases at other Centers. The decrease in minimum rents was primarily due to Fairlane, offset by Arizona Mills, Westfarms and increases due to tenant rollovers at other Centers. The decrease in expense recoveries was primarily due to Fairlane, offset by Arizona Mills. Other revenue increased by $1.3 million primarily due to gains on peripheral land sales, offset by a decrease in lease cancellation revenue and interest income.
Total operating costs decreased by $4.7 million, or 2.7%, to $166.4 million for 1997 including a $10.1 million decrease due to Fairlane. Recoverable expenses decreased $5.4 million primarily due to Fairlane, offset by increases due to Arizona Mills. Other operating costs decreased primarily due to Fairlane and a decrease in bad debt expense. Additionally, included in 1996 other operating expense was a nonrecurring $0.5 million payment to an anchor at one of the Centers. Interest expense increased $1.0 million primarily due to an increase in debt used to finance Arizona Mills and the Westfarms expansion, partially offset by a decrease in debt related to Fairlane. Operating costs as presented in the preceding table differ from the amounts shown in the combined, summarized financial statements of the Unconsolidated Joint Ventures (Note 4 to TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, net income of the Unconsolidated Joint Ventures decreased by $1.9 million, or 2.0%, to $92.4 million. TRG's equity in net income of the Unconsolidated Joint Ventures was $52.3 million, a 1.0% increase from 1996.
Net Income - ----------
As a result of the foregoing, TRG's income before extraordinary item increased by $11.2 million, or 13.3%, to $95.3 million for 1997. In 1996, TRG recognized a $(1.3) million extraordinary charge related to the prepayment of Fairlane's debt. After payment of $4.1 million in preferred distributions to the Company, net income available to partnership unitholders for 1997 was $91.2 million, compared to $82.8 million in 1996.
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Taubman Centers, Inc.
The Company's average ownership percentage of TRG was 34.5% for 1996 and 35.1% for 1995. Equity in income of TRG consists of the Company's $29.0 million proportionate share of TRG's income before extraordinary items for 1996 and $28.0 million for 1995. These amounts were reduced by $7.6 million in 1996 and $8.1 million in 1995, representing adjustments arising from the Company's additional basis in TRG's net assets. Equity in income of TRG for 1995 includes a $1.8 million gain related to the disposition of Bellevue Center. Income before extraordinary items for 1996 was $20.7 million or $0.47 per common share as compared to $19.3 million or $0.44 per common share in 1995.
The Company recognized an extraordinary item of $(0.4) million in 1996, consisting of its share of TRG's extraordinary item related to the extinguishment of debt. In 1995, the Company recognized extraordinary items of $5.8 million consisting of its share of TRG's extraordinary items related to the disposition of Bellevue Center and the related extinguishment of Bellevue Center's debt, and other extinguishment of debt. Net income for 1996 was $20.3 million or $0.46 per common share compared to $25.1 million or $0.57 per common share in 1995.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.4% in 1996 versus 88.0% in 1995. Ending occupancy for the Taubman Shopping Centers at December 31, 1996 was 88.0% versus 89.4% at December 31, 1995. Leased space at December 31, 1996 was 89.0% compared to 90.6% at the same date in 1995. Average occupancy for 1996 was somewhat less than the previous year's level but comfortably within TRG's historic range of average annual occupancy.
Total sales for Taubman Shopping Center mall tenants increased in 1996 by 3.2% to $2.83 billion from $2.74 billion in 1995. Tenant sales per square foot increased by 5.2% to $365 in 1996 from $346 in 1995. Sales per square foot in 1995 was $352, excluding Bellevue Center. Mall tenant sales for Centers that were owned and open for all of 1996 and 1995 were $2.81 billion, a 3.9% increase over 1995.
Comparison of Fiscal Year 1996 to Fiscal Year 1995
The following table sets forth operating results for TRG's Managed Businesses for 1996 and 1995, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
TRG --Consolidated Businesses - -----------------------------
Total revenues for 1996 were $261.9 million, a $33.0 million or 14.4% increase from 1995. Minimum rents for 1996 increased $18.8 million, of which $8.7 million was caused by the Fairlane and Paseo Nuevo acquisitions. The results of Fairlane have been consolidated in TRG's results subsequent to the acquisition date (prior to that date Fairlane was accounted for under the equity method as an Unconsolidated Joint Venture). Minimum rent also increased due to the expansions at Short Hills and Meadowood and tenant rollovers. The increase in expense recoveries was also primarily due to the Fairlane and Paseo Nuevo acquisitions and recoveries of increased maintenance costs and property taxes. The increase in other revenues of $3.9 million was primarily due to increases in revenue from management, leasing, and development services, rental fees on exterior advertising signs and gains on sales of peripheral land, partially offset by a decrease in lease cancellation revenue.
Total operating costs increased $22.6 million, or 10.9%, to $229.7 million. The increase in recoverable expenses for 1996 was due to Fairlane and Paseo Nuevo and to increases in maintenance costs and property taxes, including those related to the expansion at Short Hills. Other operating expenses increased due to Fairlane and Paseo Nuevo, and an increase in the charge to operations for development pre-construction reserves. General and administrative expenses increased $2.0 million due primarily to increases in compensation, including costs of the new long-term performance compensation plan and the allocation of internal acquisition costs, travel, and professional fees in 1996, offset by a decrease resulting from a $0.8 million charge in 1995 for severance and termination benefits. Interest expense increased $4.7 million due primarily to an increase in debt levels, including debt used to finance the acquisition of Paseo Nuevo and capital expenditures and the assumption of debt relating to the Fairlane acquisition, and a decrease in capitalized interest, partially offset by decreased interest rates. The increase in depreciation and amortization was due primarily to the acquisitions of Fairlane and Paseo Nuevo and the expansions at Short Hills and Meadowood.
Revenues and expenses as presented in the preceding table differ from the amounts shown in TRG's consolidated income statements by the amounts representing Memorial City's revenues and expenses, which are presented in the preceding table as a net amount.
Unconsolidated Joint Ventures - -----------------------------
Total revenues for 1996 were $265.3 million, a $25.8 million or 8.9% decrease from 1995, primarily representing a $23.8 million decrease caused by the change in Fairlane from an Unconsolidated Joint Venture to a Consolidated Business and by the November 1995 disposition of Bellevue Center (Bellevue). Minimum rent decreases due to Fairlane and Bellevue were offset by increases due to the expansion at Woodfield and tenant rollovers. Expense recoveries decreased primarily due to Fairlane and Bellevue, offset by increases at other Centers. Other income decreased due to a gain on the sale of peripheral land in 1995 and decreased interest income in 1996, offset by an increase in lease cancellation revenue in 1996. In 1995, an ordinary gain of $8.3 million was recognized on the disposition of Bellevue.
Total operating costs decreased by $12.7 million, or 6.9%, to $171.1 million for 1996, representing a $19.9 million decrease due to Fairlane and Bellevue, offset by increases at other Centers. Recoverable expenses decreased $6.4 million due to Fairlane and Bellevue, offset by increases in maintenance costs and property taxes. Other operating costs increased $0.5 million reflecting increases in property management costs, promotion and advertising costs, bad debt expense and a nonrecurring $0.5 million payment to an anchor at one of the Centers, offset by decreases due to Bellevue and Fairlane. Interest expense decreased $5.1 million due to a decrease in debt related to Fairlane and Bellevue and an increase in capitalized interest, partially offset by increases due to an increase in debt used to finance capital expenditures and to higher interest rates on certain debt refinanced in 1995. Operating costs as presented in the preceding table differ from the amounts shown in the combined, summarized financial statements of the Unconsolidated Joint Ventures (Note 4 to TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, income before extraordinary items of the Unconsolidated Joint Ventures was $94.3 million in 1996, a decrease of 12.1% from 1995. TRG's equity in income before extraordinary items of the Unconsolidated Joint Ventures decreased $6.1 million, or 10.5%, to $51.8 million for 1996.
Net Income - ----------
As a result of the foregoing, TRG's income before extraordinary items increased by $4.4 million, or 5.5%, to $84.1 million for 1996. In 1996, TRG recognized a $(1.3) million extraordinary charge related to the prepayment of Fairlane's debt. In 1995, TRG recognized an $18.9 million extraordinary gain related to the disposition of Bellevue and the related extinguishment of Bellevue's debt, and $(2.2) million in extraordinary charges related to the prepayment of debt at TRG and at one of its Unconsolidated Joint Ventures. Net income for 1996 was $82.8 million, compared to $96.3 million in 1995.
Liquidity and Capital Resources
Taubman Centers, Inc.
As of December 31, 1997, the Company had a cash balance of $9.0 million, the source of which was primarily TRG's distributions, and had incurred no indebtedness. As of December 31, 1997, the Company had 50.8 million shares outstanding compared to 50.7 million at December 31, 1996.
On October 3, 1997, the Company issued eight million shares of 8.3% Series A Preferred Stock under its $500 million equity shelf registration statement. Dividends accrue from the date of original issuance and are payable in arrears on or before the last day of each calendar quarter. The Company used the proceeds to acquire a Series A Preferred Equity interest in TRG that entitles the Company to distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company's Series A Preferred Stock.
During 1997 and 1996, the Company received distributions from its partnership interest in TRG of $47.0 million and $41.3 million, respectively. Additionally, the Company received preferred distributions from TRG of $4.1 million in 1997.
The Company pays regular quarterly dividends to its common and preferred shareowners. The Company's ability to pay dividends is affected by several factors, most importantly, the receipt of distributions from TRG. Dividends to its common shareowners are at the discretion of the Board of Directors and depend on the cash available to the Company, its financial condition, capital and other requirements, and such other factors as the Board of Directors deems relevant. Preferred dividends accrue regardless of whether earnings, cash availability, or contractual obligations were to prohibit the current payment of dividends.
On December 11, 1997, the Company declared a quarterly dividend of $0.235 per common share payable January 20, 1998 to shareowners of record on December 31, 1997. The Board of Directors also declared a quarterly dividend of $0.50722 per share on the Company's 8.3% Series A Preferred Stock for the partial quarterly dividend period of October 3, 1997 to December 31, 1997, paid December 31, 1997 to shareowners of record on December 19, 1997.
Common dividends declared totaled $0.925 per common share in 1997, of which $0.324 represented return of capital and $0.601 represented ordinary income, compared to dividends declared in 1996 of $0.89 per common share, of which $0.41 represented return of capital and $0.48 represented ordinary income. The tax status of total 1998 common dividends declared and to be declared, assuming continuation of a $0.235 per common share quarterly dividend, is estimated to be approximately 45% return of capital, and approximately 55% of ordinary income. Preferred dividends declared were $0.50722 per preferred share in 1997, all of which represented ordinary income. The tax status of total 1998 dividends to be paid on Series A Preferred Stock is estimated to be 100% ordinary income. These are forward-looking statements and certain significant factors could cause the actual results to differ materially, including: 1) the amount of dividends declared; 2) changes in the Company's share of anticipated taxable income of TRG due to the actual results of TRG; 3) changes in the number of the Company's outstanding shares; 4) property acquisitions or dispositions; 5) financing transactions, including refinancing of existing debt; and 6) changes in the Internal Revenue Code or its application.
TRG
As of December 31, 1997, TRG had a cash balance of $3.3 million. TRG has available for general partnership purposes an unsecured revolving credit facility of $300 million, which expires in March 2000. Included in the credit facility is a competitive bid option program which allows TRG to hold auctions, among the banks participating in the facility, for short term borrowings of up to $150 million. Borrowings under this facility at December 31, 1997 were $210 million. TRG also has available an unsecured bank line of credit of up to $30 million with borrowings of $10.2 million at December 31, 1997. This line expires in August 1998. TRG also has available a secured commercial paper facility of up to $75 million, with borrowings of $75 million at December 31, 1997. Commercial paper is generally sold with a 30 day maturity. This facility is supported by a line of credit facility, which is renewable quarterly for a twelve month period.
Proceeds from short term borrowings provided $487.3 million of funding for 1997 (including $358.2 million, including transaction costs, for the acquisitions of Regency Square, The Falls and interests in Tuttle Crossing) compared to $121.2 million in 1996 (including $103.6 million for the acquisitions of Paseo Nuevo and an interest in Fairlane Town Center). In November 1997, proceeds from TRG's revolving credit facilities were also used to repay $100 million of floating rate notes. Additionally, proceeds in both 1997 and 1996 were used to fund capital expenditures for the Consolidated Businesses and contributions to Unconsolidated Joint Ventures for construction costs.
In October 1997, TRG used the net proceeds from the issuance of its Series A Preferred Equity to pay down floating rate debt under TRG's existing revolving credit and commercial paper facilities, which were used to fund the acquisition of Regency Square. During 1996, proceeds from the issuance of TRG units of partnership interest were used to pay down short term borrowings of $124.7 million and for the $22.3 million acquisition of La Cumbre.
TRG has a medium-term note program under TRG's $500 million shelf registration statement. During July 1997, TRG issued $55 million of unsecured 10-year notes at a coupon rate of 7%. The net proceeds were used to pay down floating rate debt under TRG's revolving credit facilities. In 1996, TRG used the proceeds from the issuance of $154 million of notes to pay down floating rate debt under TRG's revolving credit facilities as well as to pay off the $34.6 million mortgage on Fairlane and the related prepayment penalty of approximately $1.2 million. Including the issuance in July 1997, TRG has issued a total of $342 million of notes since the program's inception in 1995.
In October 1997, TRG closed on a three year $150 million secured construction facility for MacArthur Center, which is owned by a consolidated 70% owned venture. The loan bears interest at one month LIBOR plus 1.2%. Borrowings under the facility were $42.2 million at December 31, 1997. The payment of the principal and interest is guaranteed by TRG. The loan agreement provides for the reduction of the amount guaranteed as certain center performance and valuation criteria are met.
In November 1997, TRG entered into an unsecured $210 million construction facility maturing in 2001 to finance the construction of Great Lakes Crossing. Under the loan agreement, the maturity date may be extended for one year. The loan bears interest at one month LIBOR plus 0.90%. Borrowings under the facility at December 31, 1997 were $46.9 million.
Scheduled principal payments on installment notes were $838 thousand and $793 thousand in 1997 and 1996, respectively.
At December 31, 1997, TRG's debt and its beneficial interest in the debt of its consolidated and Unconsolidated Joint Ventures totaled $1,737.2 million. As shown in the following table, $79.8 million of this debt was floating rate debt that remained unhedged at December 31, 1997. Interest rates shown do not include amortization of debt issuance costs and interest rate hedging costs. These items are reported as interest expense in TRG's results of operations. In the aggregate, these costs accounted for 0.36% of the effective rate of interest in TRG's beneficial interest in debt at December 31, 1997. Included in TRG's beneficial interest in debt at December 31, 1997 is debt used to fund development and expansion costs. TRG's beneficial interest in assets on which interest is being capitalized totaled $149.0 million as of December 31, 1997. TRG's beneficial interest in capitalized interest was $13.7 million for the year ended December 31, 1997.
TRG's loan and facility agreements and indenture contain various restrictive covenants including limitations on the amount of secured and unsecured debt and minimum debt service coverage ratios, the latter being the most restrictive. TRG is in compliance with all of such covenants.
Subsequent to year end, Fairfax Company of Virginia L.L.C. (successor-in-interest to Fairfax Associates, a 50% owned Unconsolidated Joint Venture) completed a $140 million, 6.60%, secured financing maturing in 2008. The net proceeds were used to extinguish an existing mortgage on Fair Oaks of approximately $39 million and pay a prepayment penalty of approximately $1.8 million. In addition, proceeds of $5.6 million were used to close out a treasury lock agreement entered into in 1997, which resulted in an effective rate on the financing of approximately 7%. The remaining proceeds were distributed to the owners. TRG used its 50% share of the distribution to pay down its revolving credit facilities.
Distributions
A principal factor considered by TRG in deciding upon distributions to partners is an amount, which TRG defines as Distributable Cash Flow, equal to EBITDA less TRG's Beneficial Interest Expense, non-real estate depreciation and amortization, and preferred distributions. This measure of performance is influenced not only by operations but also by capital structure. EBITDA is defined as TRG's beneficial interest in revenues, less operating costs before interest, depreciation and amortization, meaning TRG's pro rata share of this result for each of the Managed Businesses, after recording appropriate intercompany eliminations. TRG's Beneficial Interest Expense is defined as TRG's pro rata share of the interest expense of each of TRG's Managed Businesses. Funds from Operations is calculated by adding the Company's beneficial interest in TRG's Distributable Cash Flow to the Company's other income, less the Company's operating expenses. EBITDA, Distributable Cash Flow and Funds from Operations do not represent cash flows from operations, as defined by generally accepted accounting principles, and should not be considered to be an alternative to net income as an indicator of operating performance or to cash flows from operations as a measure of liquidity. However, the National Association of Real Estate Investment Trusts (NAREIT) suggests that Funds from Operations is a useful supplemental measure of operating performance for REITs.
The following table summarizes TRG's Distributable Cash Flow and the Company's Funds from Operations for the years ended December 31, 1997 and 1996:
For 1997, EBITDA and Distributable Cash Flow were $255.7 million and $146.7 million, compared to $229.8 million and $129.7 million in 1996. In addition to $4.1 million representing preferred distributions to the Company on TRG's Series A Preferred Equity, TRG distributed $128.1 million to its partners in 1997, compared to $119.1 million in 1996. The Company's Funds from Operations for 1997 was $53.1 million, compared to $44.1 million in 1996.
The Partnership Committee of TRG makes an annual determination of appropriate distributions for each year. The determination is based on anticipated Distributable Cash Flow available after preferred distributions to the Company on TRG's Series A Preferred Equity, as well as financing considerations and such other factors as the Partnership Committee considers appropriate. Further, the Partnership Committee has decided that the growth in distributions will be less than the growth in Distributable Cash Flow for the immediate future.
Except under unusual circumstances, TRG's practice is to distribute equal monthly installments of the determined amount of distributions throughout the year. Due to seasonality and the fact that cash available to TRG for distributions may be more or less than net cash provided from operating activities plus distributions from Joint Ventures during the year, TRG may borrow from unused credit facilities (described in Liquidity and Capital Resources -- TRG above) to enable it to distribute the amount decided upon by the TRG Partnership Committee.
Distributions by each Joint Venture may be made only in accordance with the terms of its partnership agreement. TRG, in general, acts as the managing partner and has the right to determine the amount of cash available for distribution from the Joint Venture. In general, the provisions of these agreements require the distribution of all available cash (as defined in each partnership agreement), but most do not allow borrowing to finance distributions without approval of the Joint Venture Partner.
As a result, distribution policies of many Joint Ventures will not parallel those of TRG. While TRG may not, therefore, receive as much in distributions from each Joint Venture as it intends to distribute with respect to that Joint Venture, the Company does not believe this will impede TRG's intended distribution policy because of TRG's overall access to liquid resources, including borrowing capacity.
Any inability of TRG or its Joint Ventures to secure financing as required to fund maturing debts, capital expenditures and changes in working capital, including development activities and expansions, may require the utilization of cash to satisfy such obligations, thereby possibly reducing distributions to partners of TRG and funds available to the Company for the payment of dividends.
In addition, if the GM Trusts exercise their rights under the Cash Tender Agreement (see Liquidity and Capital Resources -- Cash Tender Agreement below), TRG will be required to pay the GM Trusts $10.9 million and may borrow to finance such expenditures.
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is generally recovered from tenants. Excluding acquisitions, capital spending by the Managed Businesses not recovered from tenants is summarized in the following table:
---------------------------------------------------- TRG's Share of Unconsolidated Consolidated Businesses Consolidated Joint and Unconsolidated Businesses Ventures(1) Joint Ventures(1)(2) ---------------------------------------------------- (in millions of dollars)
Development, renovation, and expansion: Existing centers 12.1 52.8 46.5 New centers 110.8 134.3 140.7 Pre-construction development activities, net of charge to operations 11.5 11.5 Mall tenant allowances 5.3 4.0 7.5 Corporate office improvements and equipment 2.9 2.9 Other 0.8 0.5 1.1 ----- ----- ----- Total 143.4 191.6 210.2 ===== ===== =====
(1) Costs are net of intercompany profits. (2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80% owned consolidated joint venture) and MacArthur Center (a 70% owned consolidated joint venture).
---------------------------------------------------- TRG's Share of Unconsolidated Consolidated Businesses Consolidated Joint and Unconsolidated Businesses Ventures(1) Joint Ventures(1)(2) ---------------------------------------------------- (in millions of dollars) Development, renovation, and expansion: Existing centers 5.2 40.3 35.7 New centers 14.9 58.4 33.8 Pre-construction development activities, net of charge to operations 4.1 4.1 Mall tenant allowances 4.5 5.2 7.0 Corporate office improvements and equipment 1.5 1.5 Other 2.3 1.4 3.1 ---- ----- ---- Total 32.5 105.3 85.2 ==== ===== ====
(1) Costs are net of intercompany profits. (2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80% owned consolidated joint venture) and MacArthur Center (a 70% owned consolidated joint venture).
In 1997 and 1996, TRG's share of mall tenant allowances per square foot leased during the year, excluding expansion space and new developments, was $8.34 and $9.96, respectively. In addition, TRG's share of its Consolidated Businesses' and Unconsolidated Joint Ventures' capitalized leasing costs, excluding new developments, was $10.9 million, or $10.72 per square foot leased during the year in 1997, and $8.5 million or $10.47 per square foot leased during the year in 1996.
At Cherry Creek, an ongoing expansion includes a newly constructed Lord & Taylor store, which opened in November 1997, and the addition of 132 thousand square feet of mall GLA, which will open in the fall of 1998. The expansion is expected to cost approximately $50 million. TRG has a 50% ownership interest in Cherry Creek.
Great Lakes Crossing, an enclosed value super-regional mall being developed by TRG in Auburn Hills, Michigan, is expected to open in November 1998. The Center will be 1.4 million square feet and its anchors will include Off 5th-Saks Fifth Avenue Outlet, Oshman's Supersports USA, Rainforest Cafe, Jeepers!, and a 25-screen 100,000 square foot Star Theater complex. This Center will be owned by a joint venture in which TRG has a controlling 80% interest and is projected to cost approximately $210 million.
MacArthur Center, a new Center under construction in Norfolk, Virginia, is expected to open in March 1999. The Center is expected to open with 930 thousand square feet and will initially be anchored by Nordstrom and Dillard's. This Center will be owned by a joint venture in which TRG has a 70% controlling interest and is projected to cost approximately $150 million.
In 1996, TRG entered into an agreement to lease Memorial City Mall, a 1.4 million square foot shopping center located in Houston, Texas. Memorial City is anchored by Sears, Foley's, Montgomery Ward and Mervyn's. TRG has the option to terminate the lease after the third full year by paying $2 million to the lessor. TRG is using this option period to evaluate the redevelopment opportunities of the Center. Under the terms of the lease, TRG has agreed to invest a minimum of $3 million during the three year option period. If the redevelopment proceeds, TRG is required to invest an additional $22 million in property expenditures not recoverable from tenants during the first 10 years of the lease term.
Assuming no acquisitions, planned capital spending by the Managed Businesses not recovered from tenants for 1998 is summarized in the following table:
---------------------------------------------------- TRG's Share of Unconsolidated Consolidated Businesses Consolidated Joint and Unconsolidated Businesses Ventures(1) Joint Ventures(1)(2) ---------------------------------------------------- (in millions of dollars) Development, renovation, and expansion 240.9(3) 39.0(4) 208.4 Mall tenant allowances 4.6 9.0 9.6 Pre-construction development and other 22.1 1.4 22.8 ----- ----- ----- Total 267.6 49.4 240.8 ===== ===== =====
(1) Costs are net of intercompany profits. (2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80% owned consolidated joint venture) and MacArthur Center (a 70% owned consolidated joint venture). (3) Includes costs related to MacArthur Center and Great Lakes Crossing. (4) Includes costs related to the expansion project at Cherry Creek.
TRG's share of costs for development projects scheduled to be completed in 1999 is anticipated to be as much as $58 million in 1999. TRG's estimates of 1998 and 1999 capital spending include only projects approved by TRG's Partnership Committee and, consequently, TRG's estimates will change as new projects are approved. Currently, TRG expects to open on average one $175 million to $200 million shopping center each year. TRG's estimates regarding capital expenditures presented above are forward-looking statements and certain significant factors could cause the actual results to differ materially, including but not limited to: 1) actual results of negotiations with anchors, tenants and contractors; 2) changes in the scope and number of projects; 3) cost overruns; 4) timing of expenditures; and 5) actual time to complete projects.
Capital Resources
TRG believes that its net cash provided by operating activities, distributions from the Joint Ventures, the unutilized portion of its credit facilities, and its ability to access the credit markets assure adequate liquidity to conduct its operations in accordance with its distribution and financing policies. TRG's borrowings are not and will not be recourse to the Company without its consent.
Cash Tender Agreement
A. Alfred Taubman and the GM Trusts each have the annual right to tender to the Company units of partnership interest in TRG (provided that the aggregate value is at least $50 million) and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately preceding the date of the tender (the Cash Tender Agreement). The Company will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock. The tendering partners will bear all market risk if the market price at closing is less than the purchase price. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of the Company. At A. Alfred Taubman's election, his family, and Robert C. Larson and his family may participate in tenders. The GM Trusts will be entitled to receive from TRG an amount (not to exceed $10.9 million in the aggregate over the term of the Partnership) equal to 5.5% of the amounts that the Company pays to the GM Trusts under the Cash Tender Agreement.
Based on a market value at December 31, 1997 and 1996 of $13.00 and $12.875 per common share, the aggregate value of interests in TRG that may be tendered under the Cash Tender Agreement was approximately $960 million and $954 million, respectively. Purchase of these interests at December 31, 1997 would have resulted in the Company owning an additional 53% interest in TRG.
The Company is not aware of any present intention of any partner to sell its interest in TRG under the Cash Tender Agreement.
Item 8.
Item 8. FINANCIAL STATEMENTS
The Financial Statements of Taubman Centers, Inc. and The Taubman Realty Group Limited Partnership, and the Independent Auditors' Reports thereon are filed pursuant to this Item 8 and are included in this report at Item 14.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III *
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to the material appearing in the Company's definitive proxy statement for the annual meeting of shareholders to be held in 1998 (the "Proxy Statement") under the captions "Management--Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners and Management -- Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions "Executive Compensation" and "Management -- Compensation of Directors."
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to the table and related footnotes appearing in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management."
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption "Management--Certain Transactions."
------------------------------- * The Compensation Committee Report on Executive Compensation and the Shareholder Return Performance Graph appearing in the Proxy Statement are not incorporated by reference in this Annual Report on Form 10-K or in any other report, registration statement, or prospectus of the Registrant.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) The following financial statements of Taubman Centers, Inc. and the Independent Auditors' Report thereon are filed with this report:
Page ---- TAUBMAN CENTERS, INC. Independent Auditors' Report...................................F-2 Balance Sheet as of December 31, 1997 and 1996 ................F-3 Statement of Operations for the years ended December 31, 1997, 1996 and 1995.............................F-4 Statement of Shareowners' Equity for the years ended December 31, 1997, 1996 and 1995.............................F-5 Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995.............................F-6 Notes to Financial Statements..................................F-7
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Independent Auditors' Report .................................F-15 Consolidated Balance Sheet as of December 31, 1997 and 1996...F-16 Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995............................F-17 Consolidated Statement of Accumulated Deficiency in Assets for the years ended December 31, 1997, 1996 and 1995........F-18 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................F-19 Notes to Consolidated Financial Statements....................F-20
14(a)(2) There are no required Taubman Centers, Inc. financial statement schedules. The following is a list of the financial statement schedules required by Item 14(d).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule II - Valuation and Qualifying Accounts...............F-37 Schedule III - Real Estate and Accumulated Depreciation.......F-38
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Independent Auditors' Report..................................F-41 Combined Balance Sheet as of December 31, 1997 and 1996.......F-42 Combined Statement of Operations for the years ended December 31, 1997, 1996 and 1995............................F-43 Combined Statement of Accumulated Deficiency in Assets for the three years ended December 31, 1997, 1996 and 1995..........F-44 Combined Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................F-45 Notes to Combined Financial Statements........................F-46
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule II - Valuation and Qualifying Accounts...............F-54 Schedule III - Real Estate and Accumulated Depreciation.......F-55
14(a)(3)
3(a) -- By-Laws of Taubman Centers, Inc., as amended (incorporated herein by reference to Exhibit 3 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
3(b) -- Form of Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 4(a) to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
4(a) -- Amended and Restated Indenture dated as of March 4, 1994 between The Taubman Realty Group Limited Partnership and Chemical Bank, as Trustee (incorporated herein by reference to Exhibit 4(a) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 ("1993 Form 10-K")).
4(b) -- Officers' Certificate designating the terms of TRG's 7% Notes due 2003 (incorporated herein by reference to Exhibit 4(d) filed with the 1993 Form 10-K).
4(c) -- Officers' Certificate designating the terms of TRG's 8% Notes due 1999 (incorporated herein by reference to Exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp., La Cienega Associates, the Borrower, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Second Quarter Form 10-Q).
4(e) -- Deed of Trust, with assignment of Rents, Security Agreement and Fixture Filing, dated as of July 22, 1994, from La Cienega Associates, Grantor, to Commonwealth Land Title Company, Trustee, for the benefit of Morgan Guaranty Trust Company of New York, as Trustee, Beneficiary (incorporated herein by reference to Exhibit 4(i) filed with the 1994 Second Quarter Form 10-Q).
4(f) -- TRG's Medium-Term Notes due June 15, 2002 (incorporated herein by reference to Exhibit 4(j) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
4(g) -- Amended and Restated Revolving Loan Agreement dated as of March 5, 1997 (the "Revolving Loan Agreement"), among The Taubman Realty Group Limited Partnership, as Borrower, Union Bank of Switzerland, (New York Branch), as a Bank, the other Banks signatory to the Revolving Loan Agreement, each as a Bank, and Union Bank of Switzerland (New York Branch), as Administrative Agent (incorporated herein by reference to Exhibit 4, filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "1997 First Quarter Form 10-Q")).
4(h) -- Form of Contribution and Acceptance of Preferred Equity, Designation of Series A Preferred Equity, and Establishment of Preferred Rate (incorporated herein by reference to Exhibit 4(d) to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
4(i) -- Construction Loan Agreement among Taubman MacArthur Associates Limited Partnership, as Borrower, and Bayerische Hypotheken - Und Wechsel - Bank, Aktiengesellschaft, New York Branch and The Other Banks and Financial Institutions from time to time Parties hereto, as Lenders and Bayerische Hypotheken - Und Wechsel - Bank Aktiengesellschaft, New York Branch, as Agent, dated as of October 28, 1997.
4(j) -- Loan Agreement dated as of November 25, 1997 among The Taubman Realty Group Limited Partnership, as Borrower, Fleet National Bank, as a Bank, PNC Bank, National Association, as a Bank, the other Banks signatory hereto, each as a Bank, and PNC Bank, National Association, as Administrative Agent.
10(a) -- Form of The Amended and Restated Agreement of Limited Partnership of The Taubman Realty Group Limited Partnership, as amended through September 30, 1997 (incorporated herein by reference to Exhibit 4(c) to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
* 10(b) -- The Taubman Realty Group Limited Partnership 1992 Incentive Option Plan, as Amended and Restated Effective as of September 30, 1997.
10(c) -- Corporate Services Agreement between Taubman Centers, Inc. and The Taubman Company Limited Partnership (the "Manager") (incorporated herein by reference to Exhibit 10(c) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K")).
10(d) -- Registration Rights Agreement among Taubman Centers, Inc., General Motors Hourly-Rate Employes Pension Trust, General Motors Retirement Program for Salaried Employes Trust, and State Street Bank & Trust Company, as trustee of the AT&T Master Pension Trust (incorporated herein by reference to Exhibit 10(e) filed with the 1992 Form 10-K).
10(e) -- Master Services Agreement between The Taubman Realty Group Limited Partnership and the Manager (incorporated herein by reference to Exhibit 10(f) filed with the 1992 Form 10-K).
10(f) -- Cash Tender Agreement among Taubman Centers, Inc., A. Alfred Taubman, acting not individually but as Trustee of The A. Alfred Taubman Restated Revocable Trust, as amended and restated in its entirety by Instrument dated January 10, 1989 (as the same has been and may hereafter be amended from time to time), TRA Partners, and GMPTS Limited Partnership (incorporated herein by reference to Exhibit 10(g) filed with the 1992 Form 10-K).
* 10(g) -- Supplemental Retirement Savings Plan (incorporated herein by reference to Exhibit 10(i) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
* 10(h) -- The Taubman Company Long-Term Performance Compensation Plan (incorporated herein by reference to Exhibit 10(k) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
* 10(i) -- Employment agreement between The Taubman Company Limited Partnership and Lisa A. Payne (incorporated herein by reference to Exhibit 10 filed with the 1997 First Quarter Form 10-Q).
* 10(j) -- Amended and Restated Continuing Offer, dated as of September 30, 1997 (incorporated herein by reference to Exhibit 10 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
12(a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Preferred Stock Dividends.
12(b) -- Statement Re: Computation of TRG's Ratios of Earnings to Fixed Charges and Preferred Distributions.
21 -- Subsidiaries of The Taubman Realty Group Limited Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Purchase and Sale Agreement By and Between One Federal Street Joint Venture and The Taubman Realty Group Limited Partnership, dated July 16, 1997 (Purchase and Sale Agreement) (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 99(a) filed with the Registrant's Current Report on Form 8-K dated September 4, 1997).
99(b) -- First Amendment to Purchase and Sale Agreement, dated August 15, 1997 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 99(b) filed with the Registrant's Current Report on Form 8-K dated September 4, 1997).
99(c) -- Agreement of Purchase and Sale By and Between The Falls Limited L.P. and The Taubman Realty Group Limited Partnership, dated November 5, 1997, as amended by First Amendment to Agreement of Purchase and Sale entered into on November 6, 1997, and Second Amendment to Agreement of Purchase and Sale entered into on November 13, 1997 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request).
- -------------------- * A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
14(b) Current Reports on Form 8-K.
The Company voluntarily filed a current report on Form 8-K dated December 8, 1997 to report a press release announcing TRG's acquisition of The Falls Shopping Center in Miami, Florida and the agreement to purchase The Limited, Inc.'s interest in The Mall at Tuttle Crossing, a Taubman Shopping Center located in Columbus, Ohio.
The Company voluntarily filed a current report on Form 8-K dated December 4, 1997 to report the completion of TRG's acquisition of The Falls. The 8-K included the following financial statements and pro forma information regarding the acquisition of The Falls:
Independent Auditors' Report.
The Falls, Historical Summary of Revenues and Direct Operating Expenses for the Year Ended December 31, 1996.
Taubman Centers, Inc., Pro Forma Condensed Statement of Operations, Year Ended December 31, 1996 and the Nine Months Ended September 30, 1997 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Balance Sheet, September 30, 1997 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Statement of Operations, Year Ended December 31, 1996 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Statement of Operations, Nine Months Ended September 30, 1997 (unaudited).
14(c) The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibit index has been filed with the exhibits.
14(d) The financial statement schedules of The Taubman Realty Group Limited Partnership and the financial statements and the financial statement schedules of the Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership listed at Item 14(a)(2) are filed pursuant to this Item 14(d).
TAUBMAN CENTERS, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners Taubman Centers, Inc.
We have audited the accompanying balance sheets of Taubman Centers, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Taubman Centers, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan February 18, 1998
TAUBMAN CENTERS, INC.
BALANCE SHEET (in thousands, except share data)
December 31 -------------------- 1997 1996 ---- ----
Assets: Investment in TRG (Note 2): Partnership interest $ 347,859 $ 369,131 Series A Preferred Equity interest 200,000 --------- --------- $ 547,859 $ 369,131 Cash and cash equivalents 8,965 9,388 Other assets 8 --------- --------- $ 556,824 $ 378,527 ========= ========= Liabilities: Accounts payable and accrued liabilities $ 277 $ 351 Dividends payable 11,929 11,666 --------- --------- $ 12,206 $ 12,017 Commitments and Contingencies (Note 5)
Shareowners' Equity (Notes 2 and 4): Preferred Stock, $0.01 par value, 50,000,000 shares authorized; 8.3% Series A Cumulative Redeemable Preferred Stock, $200 million liquidation preference, 8,000,000 shares issued and outstanding at December 31, 1997 $ 80 Common Stock, $0.01 par value, 250,000,000 shares authorized, 50,759,657 and 50,720,358 issued and outstanding at December 31, 1997 and 1996 508 $ 507 Additional paid-in capital 668,951 468,590 Dividends in excess of net income (124,921) (102,587) --------- --------- $ 544,618 $ 366,510 --------- --------- $ 556,824 $ 378,527 ========= =========
See notes to financial statements.
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS (in thousands, except share data)
Year Ended December 31 -------------------------------- 1997 1996 1995 ---- ---- ---- Income: Income before extraordinary items from investment in TRG (Note 2): Equity in TRG's income allocable to partnership unitholders $25,291 $21,368 $19,831 Series A Preferred Equity interest in TRG 4,058 Interest and other 322 284 331 ------- ------- ------- $29,671 $21,652 $20,162 ------- ------- -------
Operating Expenses: General and administrative $ 759 $ 672 $ 645 Management fee (Note 3) 250 250 250 ------- ------- ------- $ 1,009 $ 922 $ 895 ------- ------- -------
Income before extraordinary items $28,662 $20,730 $19,267 Equity in TRG's extraordinary items (Note 2) (444) 5,836 ------- ------- ------- Net Income $28,662 $20,286 $25,103
Preferred dividends (Note 4) (4,058) ------- ------- ------- Net income available to common shareowners $24,604 $20,286 $25,103 ======= ======= =======
Basic and diluted earnings per common share (Note 6): Income before extraordinary items $ .48 $ .47 $ .44 Extraordinary items (.01) .13 ------- ------- ------- Net Income $ .48 $ .46 $ .57 ======= ======= =======
Cash dividends declared per common share $ .925 $ .89 $ .88 ======= ======= =======
Weighted average number of common shares outstanding 50,737,333 44,444,833 44,249,617 ========== ========== ==========
See notes to financial statements.
TAUBMAN CENTERS, INC.
STATEMENT OF SHAREOWNERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (in thousands, except share data)
See notes to financial statements.
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 ------------------------------- 1997 1996 1995 ---- ---- ---- Cash Flows From Operating Activities: Income before extraordinary items $ 28,662 $ 20,730 $ 19,267 Decrease in other assets and accounts payable and accrued liabilities (66) (5) (166) --------- -------- -------- Net Cash Provided By Operating Activities $ 28,596 $ 20,725 $ 19,101 --------- -------- --------
Cash Flows From Investing Activities: Purchase of additional interests in TRG $(200,000) $(74,998) Distributions from TRG in excess of income before extraordinary items 21,714 19,939 $ 20,961 --------- -------- --------- Net Cash Provided By (Used In) Investing Activities $(178,286) $(55,059) $ 20,961 --------- -------- --------
Cash Flows From Financing Activities: Cash dividends to common shareowners $ (46,675) $(38,814) $(39,002) Cash dividends to preferred shareowners (4,058) Proceeds from stock issuances 200,000 74,998 Purchases of stock (348) (4,174) --------- -------- -------- Net Cash Provided By (Used In) Financing Activities $ 149,267 $ 35,836 $(43,176) --------- -------- --------
Net Increase (Decrease) In Cash $ (423) $ 1,502 $ (3,114)
Cash and Cash Equivalents at Beginning of Year 9,388 7,886 11,000 --------- -------- --------
Cash and Cash Equivalents at End of Year $ 8,965 $ 9,388 $ 7,886 ========= ======== ========
See notes to financial statements.
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
General
The Company, a real estate investment trust, or REIT, is the managing general partner of The Taubman Realty Group Limited Partnership (TRG). TRG is an operating partnership that engages in the ownership, management, leasing, acquisition, development, and expansion of regional retail shopping centers (Taubman Shopping Centers) and interests therein. TRG's portfolio, as of December 31, 1997, includes 25 urban and suburban Taubman Shopping Centers in 12 states. Two additional Centers are under construction in Norfolk, Virginia, and Auburn Hills, Michigan. The Company's investment in TRG consists of a general partnership interest and a preferred equity interest (Note 2).
The Company accounts for its investment in TRG under the equity method of accounting. The excess of the Company's cost of its investment in TRG partnership units over its proportionate share of TRG's accumulated partners' deficit has been allocated to the Company's basis in the underlying assets and liabilities of TRG. Depreciation related to amounts allocated to depreciable assets is recognized by the Company on a straight-line basis over 40 years. The excess of the Company's cost of its investment in TRG partnership units over its proportionate share of TRG's accumulated partners' deficit at December 31, 1997 and 1996, was $468.4 million and $476.3 million, respectively.
Income Taxes
Federal income taxes are not provided because the Company operates in such a manner as to qualify as a REIT under the provisions of the Internal Revenue Code, and therefore applicable taxable income is included in the taxable income of its shareowners. As a REIT, the Company must distribute at least 95% of its REIT taxable income to its shareowners and meet certain other requirements.
Dividends per common share declared in 1997 were $0.925, of which $0.324 represented return of capital and $0.601 represented ordinary income. Dividends per common share declared in 1996 were $0.89, of which $0.41 represented return of capital and $0.48 represented ordinary income. Dividends per common share declared in 1995 were $0.88, of which $0.52 represented return of capital and $0.36 represented ordinary income. The tax status of the Company's common dividends in 1997, 1996 and 1995 may not be indicative of future periods. Dividends per preferred share declared in 1997 were $0.50722, all of which represented ordinary income. The difference between net income for financial reporting purposes and taxable income results primarily from differences in depreciation expense.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90 days or less at the date of purchase.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 2 - Investment in TRG
The Company's investment in TRG at December 31, 1997 and 1996 consists of a 36.70% and 36.68%, respectively, managing general partnership interest. Additionally, at December 31, 1997, the Company's investment in TRG includes a preferred equity interest. TRG's net income and distributions are allocable first to the preferred equity interest, and the remaining amounts to the general and limited TRG partners in accordance with their percentage ownership. In January 1998, the Company's ownership of TRG increased to 38.4% due to TRG's redemption of a partner's interest (Note 8).
In October 1997, the Company used the proceeds from a $200 million public offering of eight million shares of 8.3% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) to acquire a Series A Preferred Equity interest in TRG that entitles the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company's Series A Preferred Stock. TRG bore all expenses of the offering. TRG used the net proceeds to pay down short term debt under TRG's existing revolving credit and commercial paper facilities.
The Company's average ownership in TRG for 1997, 1996, and 1995 was 36.7%, 34.5% and 35.1%, respectively, as the result of the following transactions.
In December 1996, the Company purchased newly issued TRG units of partnership interest with the $75 million proceeds from the Company's December 1996 offering of 5.97 million shares of common stock. TRG bore all expenses of the Company's offering. TRG used the net proceeds to pay down short term floating rate debt and to acquire La Cumbre Plaza. Additionally in 1996, TRG issued units of partnership interest in connection with its acquisition of the 75% interest in Fairlane Town Center held by a joint venture partner.
Also in 1997 and 1996, TRG issued units of partnership interest in connection with the exercise of incentive options. The Company exchanged shares of common stock for these newly issued units of TRG partnership interest pursuant to the Company's Continuing Offer (Note 5).
The Company's income from its investment in TRG included $4.1 million for the year ended December 31, 1997 from its Series A Preferred Equity interest in TRG. Additionally, the Company's proportionate share of TRG's income before extraordinary items available to partnership unitholders for the years ended December 31, 1997, 1996, and 1995, was $33.5 million, $29.0 million, and $28.0 million (including the Company's $1.8 million share of the gain related to TRG's disposition of Bellevue Center in 1995), respectively, reduced by $8.2 million, $7.6 million, and $8.1 million, respectively, representing adjustments arising from the Company's additional basis in TRG's net assets.
In 1996 and 1995, TRG recognized extraordinary items relating to the extinguishment of debt. Of the 1995 amount, an $18.9 million gain was recognized related to TRG's disposition of Bellevue Center and the extinguishment of Bellevue Center's debt. Extraordinary charges in 1996 and 1995 consisted primarily of prepayment penalties. The Company's share of TRG's extraordinary items was approximately $(0.4) million and $5.8 million in 1996 and 1995, respectively.
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
TRG's summarized balance sheet and results of operations information (in thousands) are presented below, followed by information about TRG's beneficial interest in the operations of its unconsolidated joint ventures. Beneficial interest is calculated based on TRG's ownership interest in each of the joint ventures.
December 31 ----------------------- 1997 1996 ---- ----
Assets: Properties $1,593,350 $1,136,416 Accumulated depreciation and amortization 268,658 234,030 ---------- ---------- $1,324,692 $ 902,386 Other assets 72,134 75,876 ---------- ---------- $1,396,826 $ 978,262 ========== ========== Liabilities: Unsecured notes payable $1,008,459 $ 796,805 Mortgage notes payable 275,868 204,600 Capital lease obligation 39,849 Accounts payable and other liabilities 106,404 86,779 Distributions in excess of net income of unconsolidated joint ventures 141,815 142,367 ---------- ---------- $1,532,546 $1,270,400 Accumulated Deficiency in Assets: Series A Preferred Equity 192,840 Partners' Accumulated Deficit (328,560) (292,138) ---------- ---------- $1,396,826 $ 978,262 ========== ==========
Year Ended December 31 ------------------------------- 1997 1996 1995 ---- ---- ---- Revenues $313,426 $263,696 $228,918 -------- -------- -------- Operating costs other than interest and depreciation and amortization $152,044 $125,128 $108,908 Interest expense 73,639 70,454 65,858 Depreciation and amortization 44,719 35,773 32,393 -------- -------- -------- $270,402 $231,355 $207,159 -------- -------- -------- Equity in income before extraordinary items of unconsolidated joint ventures (including $5.0 million related to the disposition of Bellevue in 1995) 52,270 51,753 57,940 -------- -------- -------- Income before extraordinary items $ 95,294 $ 84,094 $ 79,699 Extraordinary items (1,328) 16,627 -------- -------- -------- Net income $ 95,294 $ 82,766 $ 96,326 Preferred distributions (4,058) -------- -------- -------- Net income available to unitholders $ 91,236 $ 82,766 $ 96,326 ======== ======== ========
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
Year Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- TRG's beneficial interest in unconsolidated joint ventures' operations: Revenues less recoverable and other operating expenses $ 94,361 $ 91,243 $ 96,120 Ordinary gain on disposition of Bellevue 5,005 Interest expense (29,263) (27,738) (30,396) Depreciation and amortization (12,828) (11,752) (12,789) -------- -------- -------- Income before extraordinary items $ 52,270 $ 51,753 $ 57,940 ======== ======== ========
Note 3 - Corporate Services Agreement
The Taubman Company Limited Partnership (the Manager), which is approximately 99% beneficially owned by TRG, provides various administrative, management, accounting, shareowner relations, and other services to the Company. The Manager is paid an annual fee of $250 thousand under an agreement expiring November 30, 2000. The agreement can be renewed for consecutive three-year terms.
Note 4 - Preferred Stock
The 8.3% Series A Preferred Stock has no stated maturity, sinking fund or mandatory redemption and is not convertible into any other securities of the Company. The Series A Preferred Stock has a liquidation preference of $200 million ($25 per share). Dividends are cumulative and accrue at an annual rate of 8.3% from the date of the original issuance, October 3, 1997, and are payable in arrears on or before the last day of each calendar quarter. The 1997 accrued dividends were paid in 1997. The Series A Preferred Stock can be redeemed by the Company beginning in October 2002 at $25 per share plus any accrued dividends. The redemption price can be paid solely out of the sale of capital stock of the Company.
Note 5 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of its partnership interest in TRG, the Company entered into an agreement with A. Alfred Taubman and the General Motors Hourly-Rate Employes Pension Trust and the General Motors Salaried Employes Pension Trust (the GM Trusts), each of whom indirectly owns an interest in TRG, whereby each has the annual right to tender to the Company units of partnership interest in TRG (provided that the aggregate value is at least $50 million) and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately preceding the date of the tender (the Cash Tender Agreement). The Company will have the option to pay for these interests from available cash, borrowed funds or from the proceeds of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock. The tendering partners will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of the Company. At Mr. A. Alfred Taubman's election, his family and Robert C. Larson and his family may participate in tenders. The GM Trusts will be entitled to receive from TRG an amount (not to exceed $10.9 million in the aggregate over the term of the Partnership) equal to 5.5% of the amounts that the Company pays to the GM Trusts under the Cash Tender Agreement.
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
Based on a market value at December 31, 1997 and 1996 of $13.00 and $12.875, respectively, per common share, the aggregate value of partnership interests in TRG which may be tendered under the Cash Tender Agreement was approximately $960 million and $954 million, respectively, at December 31, 1997 and 1996. The purchase of these interests at December 31, 1997 would have resulted in the Company owning an additional 53% interest in TRG.
Shares of common stock that were acquired by the GM Trusts and the AT&T Master Pension Trust in connection with the IPO may be sold through a registered offering. Pursuant to a registration rights agreement with the Company, the owners of each of these shares have the annual right to cause the Company to register and publicly sell their shares of common stock (provided that the shares have an aggregate value of at least $50 million and subject to certain other restrictions). The annual right is deemed to have been exercised if they initiate or participate in a sale pursuant to the Cash Tender Agreement, as described above. All expenses of such a registration are to be borne by the Company, other than the underwriting discounts or selling commissions, which will be borne by the exercising party.
The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, including A. Alfred Taubman and the GM Trusts), assignees of all present holders, those future holders of partnership interests in TRG as the Company may, in its sole discretion, agree to include in the continuing offer, and all existing and future optionees under TRG's incentive option plan (described below) to exchange shares of common stock for partnership interests in TRG (the Continuing Offer).
Effective September 30, 1997, TRG amended its partnership agreement to split existing units of partnership interest at a ratio of 1,975.08 to one. Also effective September 30, 1997, the Continuing Offer was amended to change the number of shares exchangeable for a unit of partnership interest. Formerly, the number was based on market valuation of the Company on the trading date immediately preceding the date of exchange. Under the amended agreement, one unit of TRG partnership interest is exchangeable for one share of the Company's common stock.
TRG has an incentive option plan for employees of the Manager. Currently, options for 8.2 million units of partnership interest, as restated for the unit split, may be issued under the plan, including options outstanding for 7.0 million units. The exercise price of all options outstanding was equal to market value on the date of the grant. Incentive options generally become exercisable to the extent of one-third of the units on each of the third, fourth, and fifth anniversaries of the date of grant. Options expire ten years from the date of grant.
A summary of the status of the plan as of December 31, 1997, 1996, and 1995, and changes during the years ending on those dates is presented below:
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 6 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available to common shareowners by the average number of common shares outstanding during each period. For diluted earnings per common share, the Company's ownership interest in TRG (and therefore earnings) are adjusted assuming the exercise of all options for units of partnership interest under TRG's incentive option plan having exercise prices less than the average market value of the units using the treasury stock method. For the years ended December 31, 1997, 1996 and 1995, options for 0.4 million, 1.0 million and 7.2 million units of partnership interest with average exercise prices of $13.58, $12.64 and $11.37, respectively, were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price for the period calculated.
Year Ended December 31 ----------------------------------- 1997 1996 1995 ----------------------------------- (in thousands, except share data) Income allocable to common shareowners (Numerator): Basic income before extraordinary items $24,604 $20,730 $19,267 Effect of dilutive options (241) (37) (1) ------- ------- ------- Diluted income before extraordinary items $24,363 $20,693 $19,266 ======= ======= =======
Shares (Denominator) - basic and diluted 50,737,333 44,444,833 44,249,617 ========== ========== ==========
Per common share - basic and diluted $ 0.48 $ 0.47 $0.44 ====== ====== =====
Note 7 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1997 and 1996.
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------- (in thousands, except share data)
Income before extraordinary item from Investment in TRG $ 6,606 $ 6,088 $ 6,408 $10,246 Income before extraordinary item 6,425 5,914 6,214 10,109 Net Income 6,425 5,914 6,214 10,109 Preferred dividends (4,058) Net income available to common shareowners 6,425 5,914 6,214 6,051 Basic and diluted earnings per common share: Income before extraordinary item $ 0.13 $ 0.12 $ 0.12 $ 0.12 Net Income 0.13 0.12 0.12 0.12
TAUBMAN CENTERS, INC. NOTES TO FINANCIAL STATEMENTS - (Continued)
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------- (in thousands, except share data)
Income before extraordinary item from Investment in TRG $ 5,414 $ 4,583 $ 5,161 $ 6,210 Income before extraordinary item 5,244 4,398 5,036 6,052 Net Income 5,244 4,398 4,592 6,052 Basic and diluted earnings per common share: Income before extraordinary item $ 0.12 $ 0.10 $ 0.11 $ 0.13 Net Income 0.12 0.10 0.10 0.13
Note 8 - Subsequent Event
In January 1998, TRG redeemed 6.1 million units of partnership interest from a partner for approximately $77.7 million (including costs), which increased the Company's ownership in TRG to 38.4%. TRG funded the redemption through the use of an existing revolving credit facility.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEPENDENT AUDITORS' REPORT
Partners The Taubman Realty Group Limited Partnership
We have audited the accompanying consolidated balance sheets of The Taubman Realty Group Limited Partnership and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, accumulated deficiency in assets, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Taubman Realty Group Limited Partnership and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan February 18, 1998
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET (in thousands)
December 31 ----------------------- 1997 1996 ---- ----
Assets: Properties (Notes 5 and 8) $1,593,350 $1,136,416 Accumulated depreciation and amortization 268,658 234,030 ---------- ---------- $1,324,692 $ 902,386
Cash and cash equivalents 3,250 7,912 Accounts and notes receivable, less allowance for doubtful accounts of $414 and $393 in 1997 and 1996 17,803 20,162 Accounts receivable from related parties (Note 10) 7,400 6,293 Deferred charges and other assets (Notes 6 and 9) 43,681 41,509 ---------- ---------- $1,396,826 $ 978,262 ========== ==========
Liabilities: Unsecured notes payable (Note 8) $1,008,459 $ 796,805 Mortgage notes payable (Note 8) 275,868 204,600 Capital lease obligation (Note 3) 39,849 Accounts payable and other liabilities (Note 7) 106,404 86,779 Distributions in excess of net income of Unconsolidated Joint Ventures (Note 4) 141,815 142,367 ---------- ---------- $1,532,546 $1,270,400
Commitments and Contingencies (Notes 4, 8, 9, 11, and 14)
Accumulated Deficiency in Assets (Note 2): Series A Preferred Equity 192,840 Partners' Accumulated Deficit (328,560) (292,138) ---------- ---------- (135,720) (292,138) ---------- ---------- $1,396,826 $ 978,262 ========== ==========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except unit data)
Year Ended December 31 ---------------------------------- 1997 1996 1995 ---- ---- ----
Revenues: Minimum rents $181,291 $150,577 $130,418 Percentage rents 7,655 6,073 5,617 Expense recoveries 100,348 85,502 75,293 Other 15,376 13,044 12,227 Revenue from management, leasing and development services (Note 10) 8,756 8,500 5,363 -------- -------- -------- $313,426 $263,696 $228,918 -------- -------- --------
Operating Costs: Recoverable expenses $ 85,750 $ 72,093 $ 62,910 Other operating 35,904 26,518 22,512 Management, leasing and development services 4,675 4,714 3,696 General and administrative 25,715 21,803 19,790 Interest expense 73,639 70,454 65,858 Depreciation and amortization 44,719 35,773 32,393 -------- -------- -------- $270,402 $231,355 $207,159 -------- -------- -------- Income before equity in income of Unconsolidated Joint Ventures and before extraordinary items $ 43,024 $ 32,341 $ 21,759 Equity in income before extraordinary items of Unconsolidated Joint Ventures (including $5,005 in 1995, related to the disposition of Bellevue) (Note 4) 52,270 51,753 57,940 -------- -------- -------- Income before extraordinary items $ 95,294 $ 84,094 $ 79,699 Extraordinary items (Notes 4 and 8) (1,328) 16,627 -------- -------- -------- Net Income $ 95,294 $ 82,766 $ 96,326 Preferred distributions to TCO (Note 2) (4,058) -------- -------- -------- Net income available to unitholders $ 91,236 $ 82,766 $ 96,326 ======== ======== ======== Allocation of net income to unitholders: General Partners $ 70,663 $ 64,804 $ 77,077 Limited Partners 20,573 17,962 19,249 -------- -------- -------- $ 91,236 $ 82,766 $ 96,326 ======== ======== ========
Basic and Diluted Earnings per Unit of Partnership Interest (Note 12): Income before extraordinary items $ .66 $ .65 $ .64 Extraordinary items (.01) .13 -------- -------- -------- Net Income $ .66 $ .64 $ .77 ======== ======== ========
Weighted Average Number of Units of Partnership Interest Outstanding (Notes 2 and 12) 138,271,014 128,579,312 125,459,939 =========== =========== ===========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS Years Ended December 31, 1997, 1996 and 1995 (in thousands)
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 -------------------------------- 1997 1996 1995 ---- ---- ----
Cash Flows From Operating Activities: Income before extraordinary items $ 95,294 $ 84,094 $ 79,699 Adjustments to reconcile income before extraordinary items to net cash provided by operating activities: Depreciation and amortization 44,719 35,773 32,393 Income before extraordinary items in excess of distributions from Unconsolidated Joint Ventures (206) Provision for losses on accounts receivable 1,027 1,295 818 Amortization of deferred financing costs 2,392 2,024 2,250 Other 724 615 3,062 Gains on sales of land (880) (1,041) (818) Increase (decrease) in cash attributable to changes in assets and liabilities: Receivables, deferred charges and other assets (9,162) (8,326) (11,254) Accounts payable and other liabilities 19,603 999 5,501 --------- --------- --------- Net Cash Provided By Operating Activities $ 153,717 $ 115,433 $ 111,445 --------- --------- ---------
Cash Flows From Investing Activities: Purchase of interests in Centers $(358,227) $(125,904) Additions to properties (142,420) (33,806) $ (70,691) Proceeds from sales of land 1,795 1,936 1,966 Contributions to Unconsolidated Joint Ventures (18,822) (14,653) Distributions from Unconsolidated Joint Ventures in excess of income before extraordinary items 18,270 10,921 --------- --------- --------- Net Cash Used In Investing Activities $(499,404) $(161,506) $ (68,725) --------- --------- ---------
Cash Flows From Financing Activities: Debt proceeds $ 630,585 $ 275,212 $ 200,747 Debt payments (347,838) (229,212) (13,689) Early extinguishment of debt (35,964) (105,827) Debt issuance costs (2,846) (830) (1,599) Issuance of units of partnership interest 436 147,042 Issuance of Series A Preferred Equity 192,840 Cash distributions to partnership unitholders (128,094) (119,099) (116,225) Cash distributions to TCO for Series A Preferred Equity interest (4,058) --------- --------- --------- Net Cash Provided By (Used In) Financing Activities $ 341,025 $ 37,149 $ (36,593) --------- --------- ---------
Net Increase (Decrease) In Cash $ (4,662) $ (8,924) $ 6,127
Cash and Cash Equivalents at Beginning of Year 7,912 16,836 10,709 --------- --------- ---------
Cash and Cash Equivalents at End of Year $ 3,250 $ 7,912 $ 16,836 ========= ========= =========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
General
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership, management, leasing, acquisition, development and expansion of regional retail shopping centers (Taubman Shopping Centers) and interests therein. TRG's portfolio, as of December 31, 1997, includes 25 urban and suburban Taubman Shopping Centers in 12 states. Two additional Centers are under construction in Norfolk, Virginia, and Auburn Hills, Michigan. Taubman Centers, Inc. (TCO) is the managing general partner of TRG. GMPTS Limited Partnership (GMPTS), TG Partners Limited Partnership (TG) and Taub-Co Management, Inc. are also general partners.
At December 31, 1997, TRG had 138,299,310 units of partnership interest outstanding, of which 107,114,443 units represented general partnership interests. At December 31, 1997, TRG was owned 36.70% by TCO, 36.17% by GMPTS, 20.22% by certain present and former key executives (and certain of their family members) of the predecessor to The Taubman Company Limited Partnership, the Manager (collectively, the Taubman Group), and TG, and 6.91% by certain former joint venture partners and others (Note 16). The members of the Taubman Group (other than Taub-Co Management, Inc.), the former joint venture partners and others are limited partners of TRG. Additionally, TCO owns the Series A Preferred Equity interest in TRG (Note 2).
Income and distributions of TRG are allocated first to the Series A Preferred Equity interest, and the remaining amounts to the general and limited partners of TRG in accordance with their percentage ownership. The financial statements include only those assets, liabilities, and results of operations which relate to the business of TRG. No provision has been made for income taxes since these taxes are the responsibility of the individual partners.
Basis of Presentation
The consolidated financial statements include the accounts of TRG and its consolidated subsidiaries. Investments in entities unilaterally controlled by ownership or contractual agreements are consolidated; investments in entities not unilaterally controlled (Unconsolidated Joint Ventures) are accounted for under the equity method.
The Manager, which is approximately 99% beneficially owned by TRG, provides property management and leasing services for Taubman Shopping Centers and provides corporate, development and acquisition services. Intercompany balances and profits are eliminated in consolidation.
Dollar amounts presented in tables within the notes to the consolidated financial statements are stated in thousands of dollars, except for unit data or as otherwise noted.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under short and intermediate term leases which are accounted for as operating leases. Minimum rents are recognized on an accrual basis as earned, the result of which does not differ materially from a straight-line method. Percentage rents are recognized on an accrual basis as earned. Expense recoveries, which include an administrative fee, are recognized as revenue in the period applicable costs are chargeable to tenants.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on straight-line or double-declining balance bases over the estimated useful lives of the assets, which range from 5 to 50 years. Tenant allowances and deferred leasing costs are amortized on a straight-line basis over the lives of the related leases.
Capitalization
Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest costs are capitalized until construction is substantially complete. Properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amounts of the properties may not be recoverable. Costs of potentially unsuccessful development pre-construction activities are provided for by charges to operations and written off if abandoned.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90 days or less at the date of purchase.
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis over the terms of the agreements to which they relate.
Stock-Based Compensation Plans
Stock-based compensation plans are accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees" and related interpretations, as permitted under FAS 123, "Accounting for Stock-Based Compensation".
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over the terms of the cap agreements. Amounts received under the cap agreements are accounted for on an accrual basis, and recognized as a reduction of interest expense. The differential to be paid or received on swap agreements is accounted for on an accrual basis and recognized as an adjustment to interest expense.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
The carrying value of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value due to the short maturity of these instruments.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of TRG's debt is estimated based on quoted market prices if available, or on the current rates available to TRG for debt of similar terms and maturity and the assumption that debt will be prepaid at the earliest possible date.
The fair value of interest rate hedging instruments is the amount that TRG would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1997 classifications.
Note 2 - Equity Transactions
In October 1997, TCO used the $200 million proceeds of its offering of 8.3% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) to acquire a Series A Preferred Equity interest in TRG that entitles TCO to distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on TCO's Series A Preferred Equity. TRG bore all expenses of the offering, which were accounted for as a reduction of the proceeds from the Series A Preferred Equity. TRG used the net proceeds to pay down floating rate debt under TRG's existing revolving credit and commercial paper facilities, which were used to fund the acquisition of Regency Square in September 1997 (Note 3).
The Series A Preferred Equity has no stated maturity, sinking fund requirement or mandatory redemption. In the event of partnership liquidation, the $200 million Series A Preferred Equity and any unpaid guaranteed payments would be paid prior to any distributions to holders of units of partnership interest.
Effective September 30, 1997, TRG amended its partnership agreement to split existing units of partnership interest at a ratio of 1,975.08 to one. The split did not alter the ownership percentage of any of TRG's partners. All unit and per unit amounts have been adjusted to reflect the unit split on a retroactive basis.
In December 1996, TRG issued units of partnership interest to TCO for the $75 million proceeds from TCO's December 1996 equity offering. TRG bore all expenses of TCO's offering, which have been accounted for as a reduction of the proceeds from TRG's issuance of units. Also in December 1996, TRG issued units of partnership interest in connection with the exercise of incentive options (Note 11). Concurrently under TCO's continuing offer to exchange shares of common stock for certain partnership interests in TRG, TCO exchanged 652 thousand shares of common stock for these newly issued units of TRG partnership interest. TRG used the net proceeds from the issuance of units to pay down short term floating rate debt and to acquire La Cumbre Plaza (Note 3). Additionally in 1996, TRG issued units of partnership interest in connection with the acquisition of the remaining interest in Fairlane Town Center (Note 3), which were subsequently redeemed in January 1998 (Note 16).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Acquisitions
In 1997 and 1996, TRG acquired interests in various shopping centers. These acquisitions were recorded at fair value and the operating results of the Centers have been consolidated in TRG's financial statements from the acquisition dates.
Center Date Acquired Purchase Price -------- --------------- ----------------
The Falls December 1997 $ 156,000 The Mall at Tuttle Crossing December 1997 76,268 Regency Square September 1997 123,880 La Cumbre Plaza December 1996 22,250 Fairlane Town Center July 1996 91,552 Paseo Nuevo June 1996 37,000
In 1997, TRG acquired interests in The Mall at Tuttle Crossing (Tuttle Crossing) from Tuttle Crossing Holding Co., a subsidiary of The Limited, Inc. (The Limited). TRG's ownership interest in Tuttle Crossing was subject to a long-term participating lease with The Limited for land and leasehold improvements. TRG purchased The Limited's interest in the lease and took fee simple title to the underlying land and buildings. The lease had been accounted for as a capital lease with capital lease assets and a capital lease obligation of $55.3 million at the acquisition date. Tuttle Crossing opened in July 1997.
La Cumbre Plaza was purchased subject to four ground leases (three of which are participating). The leases expire in 2028. Paseo Nuevo was purchased subject to two participating ground leases expiring in 2065.
In 1996, TRG completed transactions that resulted in the acquisition of the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture Partner. In connection with the transactions, which resulted in TRG owning 100% of Fairlane, TRG issued to the former Joint Venture Partner units of partnership interest, exchangeable for approximately 6.1 million shares of TCO common stock, which had a closing price of $10.75 per share on the day prior to the issuance date. The units issued represented limited partnership units. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. TRG used unsecured debt to fund the repayment of the 9.73% mortgage and prepayment penalty of $1.2 million. Prior to the acquisition date, TRG's interest in Fairlane was accounted for under the equity method as an Unconsolidated Joint Venture. The units issued to the former Joint Venture Partner were redeemed in January 1998 (Note 16).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma results of TRG's operations, assuming the acquisitions had occurred on January 1, 1996 are as follows:
Pro Forma --------- Year ended December 31 ------------------------ 1997 1996 ---- ----
Revenues $337,823 $308,487 Income before extraordinary item 89,054 80,425 Net income 89,054 79,079
Earnings per unit of partnership interest: Income before extraordinary item $ 0.61 $ 0.61 Net income 0.61 0.60
The pro forma results are not necessarily indicative of what actual results would have been had the acquisitions occurred on January 1, 1996, nor are they necessarily indicative of future results.
Note 4 - Investments in Unconsolidated Joint Ventures
Following are TRG's investments in various real estate Unconsolidated Joint Ventures which own regional retail shopping centers. TRG is generally the managing general partner of these Unconsolidated Joint Ventures. TRG's interest in each Unconsolidated Joint Venture is as follows:
TRG's % Ownership as of Unconsolidated Joint Venture Taubman Shopping Center December 31, 1997 - ---------------------------- ----------------------- ------------------
Arizona Mills, L.L.C. Arizona Mills 37% Fairfax Associates Fair Oaks 50 Lakeside Mall Limited Partnership Lakeside 50 Rich-Taubman Associates Stamford Town Center 50 Taubman-Cherry Creek Limited Partnership Cherry Creek 50 Twelve Oaks Mall Limited Partnership Twelve Oaks Mall 50 West Farms Associates Westfarms 79 Woodfield Associates Woodfield 50 Woodland Woodland 50
Arizona Mills, L.L.C. developed Arizona Mills, a value super-regional mall in Tempe, Arizona, which opened in November 1997. TRG's ownership interest in Arizona Mills, L.L.C. increased in January 1997 to 37% from 35% as a result of Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8 million (the former owner is an affiliate of a partner in TRG).
In January 1997, Arizona Mills, L.L.C. closed on a secured $145 million construction facility maturing in 2002. The loan bears interest at one month LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate of 9.5%, plus credit spread. The payment of the principal and interest is guaranteed by each of the owners of Arizona Mills, L.L.C., to the extent of its ownership percentage. The loan agreement provides for the reduction of the amount guaranteed as certain center performance and valuation criteria are met. Borrowings on the facility at December 31, 1997 were $122 million.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In December 1995, TRG recognized an ordinary gain of $5.0 million on the disposition of Bellevue Center (Bellevue), a 60% owned Unconsolidated Joint Venture, based on the carrying value of TRG's investment in Bellevue. TRG also recognized an extraordinary gain of $18.9 million on the related extinguishment of Bellevue's debt. The carrying value of TRG's investment in Bellevue differed from TRG's 60% share of Bellevue's net deficiency in assets due to the elimination of intercompany profits on sales of services.
TRG reduces its investment in Unconsolidated Joint Ventures to eliminate intercompany profits on sales of services that are capitalized by the Unconsolidated Joint Ventures. As a result, the carrying value of TRG's investment in Unconsolidated Joint Ventures is less than TRG's share of the deficiency in assets reported in the Balance Sheet of the Unconsolidated Joint Ventures of the Taubman Realty Group Limited Partnership by $8.1 million and $7.4 million in 1997 and 1996, respectively. These differences are amortized over the useful lives of the related assets.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information is presented below for all Unconsolidated Joint Ventures, followed by TRG's beneficial interest in the combined information. Beneficial interest is calculated based on TRG's ownership interest in each of the Unconsolidated Joint Ventures.
December 31 --------------------- 1997 1996 ---- ---- Assets: Properties $ 623,981 $ 450,469 Other assets 84,397 71,252 --------- --------- $ 708,378 $ 521,721 ========= ========= Liabilities and partners' accumulated deficiency in assets: Debt $ 875,356 $ 724,162 Capital lease obligations 6,509 5,000 Other liabilities 94,801 51,691 TRG's accumulated deficiency in assets (133,680) (134,986) Unconsolidated Joint Venture Partners' accumulated deficiency in assets (134,608) (124,146) --------- --------- $ 708,378 $ 521,721 ========= =========
TRG's accumulated deficiency in assets (above) $(133,680) $(134,986) Elimination of intercompany profit (8,135) (7,381) --------- --------- Distributions in excess of net income of Unconsolidated Joint Ventures $(141,815) $(142,367) ========= =========
Year Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ----
Revenues $258,635 $265,337 $287,180 -------- -------- -------- Recoverable and other operating expenses $ 94,131 $100,164 $106,859 Interest expense 54,018 52,994 57,857 Depreciation and amortization 24,180 23,837 25,471 -------- -------- -------- Total operating costs $172,329 $176,995 $190,187 -------- -------- -------- Income before extraordinary items $ 86,306 $ 88,342 $ 96,993 Extraordinary items 30,761 -------- -------- -------- Net income $ 86,306 $ 88,342 $127,754 ======== ======== ========
Net income attributable to TRG $ 46,857 $ 47,413 $ 68,498 Extraordinary items attributable to TRG (18,327) Realized intercompany profit 5,413 4,340 7,769 -------- -------- -------- Equity in income before extraordinary items of Unconsolidated Joint Ventures $ 52,270 $ 51,753 $ 57,940 ======== ======== ========
Year Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- TRG's beneficial interest in Unconsolidated Joint Ventures' operations: Revenues less recoverable and other operating expenses $ 94,361 $ 91,243 $ 96,120 Ordinary gain on disposition of Bellevue 5,005 Interest expense (29,263) (27,738) (30,396) Depreciation and amortization (12,828) (11,752) (12,789) -------- -------- -------- Income before extraordinary items $ 52,270 $ 51,753 $ 57,940 ======== ======== ========
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Properties
Properties, including peripheral land and development pre-construction costs, at December 31, 1997 and 1996 are summarized as follows:
1997 1996 ---- ----
Land $ 132,308 $ 65,127 Buildings, improvements and equipment 1,326,731 957,185 Construction in process 94,500 42,429 Assets under capital lease (Notes 3 and 13) 39,849 Peripheral land 6,630 7,414 ---------- ---------- $1,560,169 $1,112,004 Development pre-construction costs (See below) 33,181 24,412 ---------- --------- $1,593,350 $1,136,416 ========== ==========
Depreciation expense for 1997, 1996, and 1995 was $37.6 million, $29.6 million, and $26.6 million. Peripheral land consists primarily of undeveloped land generally adjacent to the Taubman Shopping Centers. Construction in process includes costs related to the construction of new centers, and expansions and other improvements at various existing centers.
TRG actively pursues opportunities for the development of new regional shopping centers. Development pre-construction activities, including market research, site location, environmental work, zoning permits and obtaining of anchor commitments, may take years to accomplish and ultimately may be abandoned. TRG provides a reserve for the cost of such potentially unsuccessful pre-construction activities.
The activity in development pre-construction costs and the related reserve for 1997 and 1996 is summarized as follows:
Costs Reserve Net ----- ------- ---
Balance, January 1, 1996 $35,872 $(10,198) $25,674 Costs incurred 12,556 12,556 Charged to operations (8,501) (8,501) Transfers to construction in process and investments in Unconsolidated Joint Ventures (5,317) (5,317) Costs of projects written off (6,223) 6,223 ------- -------- ------- Balance, December 31, 1996 $36,888 $(12,476) $24,412 Costs incurred 16,988 16,988 Charged to operations (5,454) (5,454) Transfers to construction in process (2,765) (2,765) Costs of projects written off (1,870) 1,870 ------- -------- ------- Balance, December 31, 1997 $49,241 $(16,060) $33,181 ======= ======== =======
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1997 and 1996 are summarized as follows:
1997 1996 ---- ----
Leasing $ 39,480 $ 38,353 Accumulated amortization (20,534) (21,284) -------- -------- $ 18,946 $ 17,069 Prepaid ground rent (Note 9) 6,043 6,122 Deferred financing costs, net 10,486 9,343 Other, net 8,206 8,975 -------- -------- $ 43,681 $ 41,509 ======== ========
Note 7 - Other Liabilities
In November 1992, the General Motors Hourly-Rate Employes Pension Trust and the General Motors Salaried Employes Pension Trust (GM Trusts), which indirectly own interests in TRG, entered into an agreement with TCO (the Cash Tender Agreement) pursuant to which the GM Trusts have certain rights to cause TCO to purchase their interests in TRG. TRG will pay the GM Trusts an amount (not to exceed $10.9 million in the aggregate over the term of the Partnership) equal to 5.5% of the amounts that TCO pays to the GM Trusts under the Cash Tender Agreement.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Debt
Unsecured Notes Payable
Unsecured notes payable at December 31, 1997 and 1996 consists of the following:
1997 1996 ---- ----
7% Notes due 2003 $ 199,719 $ 199,679 8% Notes due 1999 199,969 199,950 Floating Rate Notes due 1997 99,955 Notes payable to banks: Construction facility, maximum borrowing available of $210 million, interest at LIBOR plus 0.90%, maturing December 2001 46,900 Line of credit, maximum borrowing available of $300 million, interest at LIBOR plus 0.90%, maturing March 2000 210,000 Line of credit, maximum borrowing available of $30 million, interest based on a variable bank borrowing rate, 6.75% at December 31, 1997, maturing August 1998 10,175 10,100 Medium-Term Notes: Floating rate notes: Three month LIBOR plus 0.80% due 1998 $ 20,000 $ 20,000 Three month LIBOR plus 0.77% due 1998 14,000 14,000 Three month LIBOR plus 0.90% due 1999 20,000 20,000 Three month LIBOR plus 1.05% due 2001 30,000 30,000 Fixed rate notes: 7.38% Notes due 2000 13,000 13,000 7.31% Notes due 2000 2,000 2,000 7.19% Notes due 2000 5,000 5,000 7.22% Notes due 2001 8,400 8,400 8.00% Notes due 2001 69,981 69,976 7.40% Notes due 2002 5,000 5,000 7.50% Notes due 2002 99,791 99,745 7.00% Notes due 2007 54,524 ---------- --------- Total Medium-Term Notes $ 341,696 $ 287,121 --------- --------- Total Unsecured Notes Payable $1,008,459 $ 796,805 ========== =========
As of December 31, 1997, TRG has available for general partnership purposes an unsecured revolving credit facility of $300 million. Included in the credit facility is a competitive bid option program which allows TRG to hold auctions, among the banks participating in the facility, for short term borrowings of up to $150 million.
TRG has used the proceeds from the $210 million construction facility to make contributions to Taubman Auburn Hills Associates Limited Partnership, a consolidated 80% owned venture, to finance the construction of Great Lakes Crossing. TRG is entitled to preferred distributions on these contributions at a rate of prime plus 1.5%. The preferred distributions will be paid from available cash as defined in the partnership agreement. The maturity date on the construction facility may be extended to December 2002.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TRG has issued $342 million of Medium-Term Notes since the program's inception in 1995 under TRG's $500 million shelf registration statement.
TRG's loan and facility agreements and indenture contain various restrictive covenants including limitations on the amount of secured and unsecured debt and minimum debt service coverage ratios, the latter being the most restrictive. TRG is in compliance with all covenants.
Mortgage Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consists of the following:
Mortgage debt is collateralized by properties with a net book value of $208.7 million as of December 31, 1997. The assessment bonds payable are due in monthly installments with maturities at various dates through 2019, and fixed interest rates between 6.0% and 7.2%.
In October 1997, TRG closed on a three year, $150 million construction facility for MacArthur Center, which is owned by a consolidated 70% owned venture. The loan bears interest at one month LIBOR plus 1.2%. Under the facility agreement the maturity date may be extended for two years. The payment of the principal and interest is guaranteed by TRG. The loan agreement provides for the reduction of the amount guaranteed as certain center performance and valuation criteria are met.
Stoneridge is encumbered by a deed of trust securing a commercial paper facility. The facility is supported by an underlying credit facility of up to $75 million, which is renewable quarterly for a twelve month period. Commercial paper is generally sold with a 30 day maturity.
The following table presents scheduled principal payments on mortgage debt, excluding commercial paper, as of December 31, 1997.
1998 $ 896 1999 738 2000 42,804 2001 602 2002 643 Thereafter 155,423
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Expense
Interest paid in 1997, 1996 and 1995, net of amounts capitalized of $9.5 million, $5.7 million and $6.9 million in 1997, 1996 and 1995, approximated $69.8 million, $69.8 million and $62.2 million.
Extraordinary Items
In 1996, TRG recognized an extraordinary charge to income of $1.3 million primarily consisting of a prepayment penalty related to the extinguishment of debt at a wholly owned Center. In 1995, TRG recognized an extraordinary gain of approximately $18.9 million, related to the extinguishment of debt at Bellevue (Note 4) and $2.2 million of extraordinary charges, consisting primarily of prepayment penalties, related to the extinguishment of debt of TRG and an Unconsolidated Joint Venture.
Interest Rate Hedging Instruments
TRG enters into interest rate agreements to reduce its exposure to changes in the cost of its floating rate debt. The derivative agreements generally match the notional amounts, reset dates and rate bases of the hedged debt to assure the effectiveness of the derivatives in reducing interest rate risk. As of December 31, 1997, the following interest rate cap agreements were outstanding:
Frequency Notional LIBOR of Rate Amount Cap Rate Resets Term --------- -------- ------------ -----------------------------------
$100,000 6.5% Three Months November 1997 through December 1998 200,000 9.5% Monthly December 1997 through December 1999
The 9.5% cap rate of the $200 million notional amount cap agreement decreases to 7.0% beginning in December 1998.
TRG is exposed to credit risk in the event of nonperformance by the counterparties to its interest rate cap and swap agreements, but has no off-balance sheet risk of loss. TRG anticipates that its counterparties will fully perform their obligations under the agreements.
Fair Value of Financial Instruments Related to Debt
The estimated fair values of TRG's financial instruments at December 31, 1997 and 1996 are as follows:
December 31 --------------------------------------------------- 1997 1996 ------------------------ ------------------------ Carrying Fair Carrying Fair Value Value Value Value ------------------------ ------------------------
Unsecured notes payable $1,008,459 $1,031,983 $ 796,805 $ 804,928 Mortgage notes payable 275,868 286,961 204,600 213,126 Interest rate instruments: In a receivable position 842 135 964 412 In a payable position (17) (76)
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Beneficial Interest in Debt and Interest
TRG's beneficial interest in the debt (excluding capital lease obligations), capitalized interest, and interest expense (net of capitalized interest) of TRG, its consolidated subsidiaries and its Unconsolidated Joint Ventures (Note 4) is summarized in the following table. TRG's beneficial interest for 1997 excludes the 30% minority interest in the debt outstanding on the MacArthur Center construction facility.
Unconsolidated TRG's Share of TRG's TRG's Joint Unconsolidated Consolidated Beneficial Ventures Joint Ventures Subsidiaries Interest -------- -------------- ------------ -------- Debt as of: December 31, 1997 $875,356 $ 465,556 $1,284,327 $1,737,211 December 31, 1996 724,162 396,962 1,001,405 1,398,367
Capitalized interest: 1997 $ 9,438 $ 4,371 $ 9,469 $ 13,676 1996 4,790 3,187 5,682 8,869 1995 3,481 1,799 6,852 8,651 Interest expense (net of capitalized interest): 1997 $54,018 $29,263 $73,639 $102,902 1996 52,994 27,738 70,454 98,192 1995 57,857 30,396 65,858 96,254
Note 9 - Leases
Operating Leases
Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Tenant leases typically provide for guaranteed minimum rent, percentage rent and other charges to cover certain operating costs. Future minimum rent under operating leases in effect at December 31, 1997 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
1998 $ 205,779 1999 196,423 2000 173,580 2001 157,597 2002 139,594 Thereafter 461,160
Certain Taubman Shopping Centers, as lessees, have ground leases expiring at various dates through the year 2076. In addition, the Manager leases its office facilities. Rental payments under ground and office leases were $9.8 million, $8.0 million and $7.3 million in 1997, 1996 and 1995. Included in these amounts are related party office rental payments of $3.1 million, $3.0 million and $2.8 million in 1997, 1996 and 1995.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a schedule of future minimum rental payments required under operating leases.
1998 $ 8,677 1999 8,752 2000 8,537 2001 8,259 2002 8,095 Thereafter 189,935
The table above includes $2.9 million, $3.0 million, $2.9 million, $2.6 million, $2.6 million and $6.2 million of related party amounts in 1998, 1999, 2000, 2001, 2002 and thereafter.
Included in deferred charges is approximately $6.0 million representing lump-sum payments for base rent on two parcels of adjacent land. These costs are being charged to operations over the 87 and 99 year terms of the leases.
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall, located in Houston, Texas. The lease of this unencumbered property grants TRG the exclusive right to manage, lease and operate the property. The annual rent is initially $7 million. TRG has the option to terminate the lease after the third full lease year by paying $2 million to the lessor. Accordingly, the lease will be accounted for as an operating lease during the option period. TRG is using this option period to evaluate the redevelopment opportunities of the center.
If TRG does not exercise its option to terminate the lease at the end of the third full lease year, the lease continues for another 52 years and provides for increases in rent every ten years based on 75% of the increase in the Consumer Price Index between 1996 and the then current year. Under the terms of the lease, TRG has agreed to invest a minimum of $3 million during the three year option period. If the redevelopment proceeds, TRG is required to invest an additional $22 million in property expenditures not recoverable from tenants during the first 10 years of the lease term.
Note 10 - Transactions with Affiliates
The revenue from management, leasing and development services is derived primarily from transactions with affiliates. Accounts receivable from related parties includes amounts related to reimbursement of third-party (non-affiliated) costs.
During 1997, TRG acquired an option from a related party to purchase certain real estate on which TRG may develop a shopping center. The option agreement requires option payments of $150 thousand during each of the first five years, $400 thousand in the sixth year, and $500 thousand in the seventh year. If TRG exercises the option, the purchase price for the property will be between $5 million and $10 million, depending upon the year of purchase. While the optionor will have no interest in the shopping center itself, the optionor may, under certain circumstances, participate in the proceeds from TRG's future sales of the peripheral land contiguous to the shopping center.
Other related party transactions are described in Notes 4, 9 and 11.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11 - The Manager
The Manager, The Taubman Company Limited Partnership, provides property management, leasing and development services to the Taubman Shopping Centers and affiliates.
The Manager has a voluntary retirement savings plan established in 1983 and amended and restated effective January 1, 1994 (the Plan). The Plan is qualified in accordance with Section 401(k) of the Internal Revenue Code (the Code). The Manager contributes an amount equal to 2% of the qualified wages of all qualified employees and matches employee contributions in excess of 2% up to 7% of qualified wages. In addition, the Manager may make discretionary contributions within the limits prescribed by the Plan and imposed in the Code. Costs relating to the Plan were $1.7 million, $1.6 million, and $1.5 million in the years ended December 31, 1997, 1996 and 1995, respectively.
TRG has an incentive option plan for employees of the Manager. Currently, options for 8.2 million units of partnership interest, as restated for the unit split (Note 2), may be issued under the plan, including options outstanding for 7.0 million units. The exercise price of all options outstanding is equal to market value on the date of the grant. Incentive options generally become exercisable to the extent of one-third of the units on each of the third, fourth, and fifth anniversaries of the date of grant. Options expire ten years from the date of grant.
A summary of the status of the plan as of December 31, 1997, 1996, and 1995, and changes during the years ending on those dates are presented below:
Options outstanding at December 31, 1997 have a remaining weighted-average contractual life of 5.4 years and range in exercise price from $9.39 to $13.89. The weighted average fair value per unit of options granted during 1997 and 1995 was $2.33 and $1.37. There were no grants in 1996. TRG used a binomial option pricing model to determine the grant date fair values of the 1997 and 1995 grants based on the following assumptions: volatility rates of 21% and 22%, risk-free rates of return of approximately 6.8% and 8%, and dividend yields of approximately 7% and 9%, respectively.
TRG applies APB Opinion 25 and related Interpretations in accounting for the plan. The exercise price of all options outstanding granted under the plan was equal to market value on the date of grant. Accordingly, no compensation expense has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates for 1997 and 1995 awards (there were no grants in 1996) consistent with the method of FAS Statement 123, the pro forma effect on TRG's earnings and earnings per unit of partnership interest would not have been material.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective January 1, 1996, the Manager adopted The Taubman Company Long-Term Performance Compensation Plan. Annually, eligible employees will be granted contingent notional TRG units of partnership interest, the ultimate number of which will be based on the employee's performance. These awards, which will vest on the third anniversary of the date of grant, will also accrue distribution equivalents in the form of additional notional units each time TRG makes a distribution to its partners. Upon vesting, additional notional units may be granted based on the performance of the employee and the Manager and/or TRG. The awards will be paid to the employee in cash upon vesting, based on the value of TRG's units of partnership interest, unless the employee elects to defer payment as provided in the plan. The cost of this plan was approximately $4.5 million and $2.0 million for 1997 and 1996, respectively.
Note 12 - Earnings Per Unit of Partnership Interest
Basic earnings per unit of partnership interest are based on the average number of units of partnership interest outstanding during each period. Diluted earnings per unit of partnership interest are based on the average number of units of partnership interest outstanding during each period, assuming exercise of all options for units of partnership interest having exercise prices less than the average market value of the units using the treasury stock method. For the years ended December 31, 1997, 1996 and 1995, options for 0.4 million, 1.0 million and 7.2 million units of partnership interest with average exercise prices of $13.58, $12.64 and $11.37, respectively, were excluded from the computation of diluted earnings per unit because the options' exercise prices were greater than the average market price for the period calculated. In January 1998, TRG redeemed a partner's interest in TRG (Note 16), which will affect the number of units of partnership interest outstanding in 1998.
Year Ended December 31 ------------------------------------------ 1997 1996 1995 ------------------------------------------
Income before extraordinary items allocable to unitholders (Numerator) $ 91,236 $ 84,094 $ 79,699 ======== ========= ========
Partnership units (Denominator): Basic 138,271,014 128,579,312 125,459,939 Effect of dilutive options 1,002,634 160,594 4,148 ----------- ----------- ----------- Diluted 139,273,648 128,739,906 125,464,087 =========== =========== ===========
Per unit - basic and diluted $ 0.66 $ 0.65 $ 0.64 ====== ====== ======
Note 13 - Supplemental Disclosures of Non-Cash Activities
In connection with the construction of Tuttle Crossing, additions to assets under capital lease and the capital lease obligation were recognized for $15.5 million, $25.4 million, and $14.4 million in 1997, 1996, and 1995, respectively. The outstanding capital lease obligation was extinguished in connection with the 1997 acquisition of interests in Tuttle Crossing (Note 3).
Note 14 - Contingencies
TRG is currently involved in certain litigation arising in the ordinary course of business. Management believes that this litigation will not have a material adverse effect on TRG's assets or results of operations.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1997 and 1996.
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------- (in thousands, except unit data)
Revenues $72,897 $73,027 $78,037 $89,465 Equity in income of Unconsolidated Joint Ventures 12,328 14,340 12,205 13,397 Income before extraordinary item 23,584 22,170 23,041 26,499 Net Income 23,584 22,170 23,041 26,499 Basic and diluted earnings per unit of partnership interest: Income before extraordinary item $0.17 $0.16 $0.17 $0.16 Net Income 0.17 0.16 0.17 0.16
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------- (in thousands, except unit data)
Revenues $59,914 $60,073 $66,318 $77,391 Equity in income of Unconsolidated Joint Ventures 13,276 12,628 13,432 12,417 Income before extraordinary item 20,868 18,500 20,940 23,786 Net Income 20,868 18,500 19,612 23,786 Basic and diluted earnings per unit of partnership interest: Income before extraordinary item $0.17 $0.15 $0.16 $0.18 Net Income 0.17 0.15 0.15 0.18
Note 16 - Subsequent Events
In January 1998, TRG redeemed a partner's 6.1 million units of partnership interest for approximately $77.7 million (including costs). The redemption was funded through the use of an existing revolving credit facility.
Subsequent to December 31, 1997, Fairfax Company of Virginia L.L.C. (successor-in-interest to Fairfax Associates, a 50% owned Unconsolidated Joint Venture) completed a $140 million, 6.60%, secured financing maturing in 2008. The net proceeds were used to extinguish an existing mortgage on Fair Oaks of approximately $39 million and pay a prepayment penalty of approximately $1.8 million. In addition, proceeds of $5.6 million were used to close out a treasury lock agreement entered into in 1997, which resulted in an effective rate on the financing of approximately 7%. The remaining proceeds were distributed to the owners. TRG used its 50% share of the distribution to pay down its revolving credit facilities.
Schedule II THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Valuation and Qualifying Accounts For the years ended December 31, 1997, 1996, and 1995 (in thousands)
The changes in total real estate assets for the three years ended December 31, 1997 are as follows:
1997 1996 1995 ---- ---- ----
Balance, beginning of year $1,136,416 $ 926,207 $ 843,960 Acquisitions 358,227 150,522 New development and improvements 142,420 59,237 85,109 Disposals (1) (43,713) (3,808) (2,862) Transfers In, net (2) 4,258 ---------- ---------- --------- Balance, end of year $1,593,350 $1,136,416 $ 926,207 ========== ========== =========
(Schedule III (cont.))
The changes in accumulated depreciation and amortization for the three years ended December 31, 1997 are as follows:
1997 1996 1995 ---- ---- ----
Balance, beginning of year $(234,030) $(200,440) $(175,358) Depreciation for year (37,642) (29,570) (26,574) Disposals 3,014 1,290 1,492 Transfers In (2) (5,310) --------- --------- --------- Balance, end of year $(268,658) $(234,030) $(200,440) ========= ========= =========
(1) 1997 disposal amount includes $39,849 representing the net decrease in Tuttle Crossing's assets under capital lease. (2) Primarily represents consolidation in 1996 of TRG's original 25% interest in Fairlane's assets (costs of acquiring the remaining 75% interest are included in Acquisitions above), net of transfers of pre-construction costs to construction in process of an Unconsolidated Joint Venture.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEPENDENT AUDITORS' REPORT
Partners The Taubman Realty Group Limited Partnership
We have audited the accompanying combined balance sheets of Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership (the "Partnership") as of December 31, 1997 and 1996, and the related combined statements of operations, accumulated deficiency in assets, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic combined financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan February 18, 1998
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED BALANCE SHEET (in thousands)
December 31 ----------------------- 1997 1996 ---- ----
Assets: Properties (Notes 2, 4 and 6) $ 829,640 $ 638,960 Accumulated depreciation and amortization 205,659 188,491 --------- --------- $ 623,981 $ 450,469
Cash and cash equivalents 36,875 25,914 Accounts and notes receivable, less allowance for doubtful accounts of $314 and $90 in 1997 and 1996 8,531 7,142 Note receivable from Joint Venture Partner (Note 6) 1,294 1,600 Deferred charges and other assets (Notes 3 and 6) 37,697 36,596 --------- --------- $ 708,378 $ 521,721 ========= =========
Liabilities: Mortgage notes payable (Note 4) $ 874,472 $ 721,809 Other notes payable (Note 4) 884 2,353 Capital lease obligations (Note 5) 6,509 5,000 Accounts payable and other liabilities 94,801 51,691 --------- --------- $ 976,666 $ 780,853
Commitments (Note 5)
Accumulated deficiency in assets: TRG $(133,680) $(134,986) Joint Venture Partners (134,608) (124,146) --------- --------- $(268,288) $(259,132) --------- --------- $ 708,378 $ 521,721 ========= =========
See notes to financial statements.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS (in thousands)
Year Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- Revenues: Minimum rents $155,912 $157,212 $166,244 Percentage rents 3,057 3,951 3,629 Expense recoveries 89,653 95,244 101,455 Other 10,013 8,930 11,444 Gain on disposition of Bellevue (Note 1) 4,408 -------- -------- -------- $258,635 $265,337 $287,180 -------- -------- --------
Operating costs: Recoverable expenses (Note 6) $ 76,493 $ 81,799 $ 88,250 Other operating (Note 6) 17,638 18,365 18,609 Interest expense (Note 4) 54,018 52,994 57,857 Depreciation and amortization 24,180 23,837 25,471 -------- -------- -------- $172,329 $176,995 $190,187 -------- -------- --------
Income before extraordinary items $ 86,306 $ 88,342 $ 96,993 Extraordinary items (Notes 1 and 4) 30,761 -------- -------- -------- Net Income $ 86,306 $ 88,342 $127,754 ======== ======== ========
Allocation of net income: Attributable to TRG $ 46,857 $ 47,413 $ 68,498 Attributable to Joint Venture Partners 39,449 40,929 59,256 -------- -------- -------- $ 86,306 $ 88,342 $127,754 ======== ======== ========
See notes to financial statements.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS Years ended December 31, 1997, 1996 and 1995 (in thousands)
Joint Venture TRG Partners Total --- -------- -----
Balance, January 1, 1995 $(165,328) $(167,603) $(332,931) Cash distributions (53,287) (49,413) (102,700) Net income 68,498 59,256 127,754 --------- --------- --------- Balance, December 31, 1995 $(150,117) $(157,760) $(307,877) Cash contributions 14,457 24,958 39,415 Non-cash contributions (Note 1) 4,797 8,050 12,847 Cash distributions (55,146) (51,154) (106,300) TRG purchase of Fairlane interest (Note 1) 3,610 10,831 14,441 Net income 47,413 40,929 88,342 --------- --------- --------- Balance, December 31, 1996 $(134,986) $(124,146) $(259,132) Cash contributions 18,822 9,800 28,622 Cash distributions (64,373) (59,711) (124,084) Net income 46,857 39,449 86,306 --------- --------- --------- Balance, December 31, 1997 $(133,680) $(134,608) $(268,288) ========= ========= =========
See notes to financial statements.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 -------------------------------- 1997 1996 1995 ---- ---- ----
Cash Flows From Operating Activities: Income before extraordinary items $ 86,306 $ 88,342 $ 96,993 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,180 23,837 25,471 Provision for losses on accounts receivable 697 1,303 974 Gains on sales of land (2,748) (1,303) Gain on disposition of Bellevue (Note 1) (4,408) Other 3,806 2,922 2,493 Increase (decrease) in cash attributable to changes in assets and liabilities: Receivables, deferred charges and other assets (7,760) (1,821) (10,128) Accounts payable and other liabilities 43,110 4,841 4,258 --------- --------- --------- Net Cash Provided By Operating Activities $ 147,591 $ 119,424 $ 114,350 --------- --------- ---------
Cash Flows From Investing Activities: Additions to properties $(190,188) $ (97,137) $ (48,320) Restricted cash for expansion 1,309 40,879 Proceeds from sales of land 3,452 1,390 --------- --------- --------- Net Cash Used In Investing Activities $(186,736) $ (95,828) $ (6,051) --------- --------- ---------
Cash Flows From Financing Activities: Debt proceeds $ 158,255 $ 20,529 $ 235,030 Debt payments (8,267) (2,670) (6,665) Extinguishment of debt (189,705) Debt issuance costs (4,420) (6,198) Cash contributions from partners 28,622 39,415 Cash distributions to partners (124,084) (106,300) (102,700) --------- --------- --------- Net Cash Provided By (Used In) Financing Activities $ 50,106 $ (49,026) $ (70,238) --------- --------- ---------
Net Increase (Decrease) In Cash $ 10,961 $ (25,430) $ 38,061
Cash and Cash Equivalents at Beginning of Year 25,914 51,344 13,283 --------- --------- --------
Cash and Cash Equivalents at End of Year $ 36,875 $ 25,914 $ 51,344 ========= ========= =========
See notes to financial statements.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership, management, leasing, acquisition, development and expansion of regional retail shopping centers (Taubman Shopping Centers) and interests therein. TRG has engaged the Manager (The Taubman Company Limited Partnership, which is approximately 99% beneficially owned by TRG) to provide property management and leasing services for the Taubman Shopping Centers and to provide corporate, development, and acquisition services. For financial statement reporting purposes, the accounts of Taubman Shopping Centers owned through joint ventures with third parties that are not controlled (Unconsolidated Joint Ventures) have been combined in these financial statements. Generally, net profits and losses of the Unconsolidated Joint Ventures are allocated to TRG and the outside partners (Joint Venture Partners) in accordance with their ownership percentages.
Dollar amounts presented in tables within the notes to the combined financial statements are stated in thousands.
Investments in Unconsolidated Joint Ventures
TRG's interest in each of the Unconsolidated Joint Ventures at December 31, 1997, is as follows:
TRG's % Unconsolidated Joint Venture Taubman Shopping Center Ownership - ---------------------------- ----------------------- ---------
Arizona Mills, L.L.C. Arizona Mills 37% Fairfax Associates Fair Oaks 50 Lakeside Mall Limited Partnership Lakeside 50 Rich-Taubman Associates Stamford Town Center 50 Taubman-Cherry Creek Limited Partnership Cherry Creek 50 Twelve Oaks Mall Limited Partnership Twelve Oaks Mall 50 West Farms Associates Westfarms 79 Woodfield Associates Woodfield 50 Woodland Woodland 50
Arizona Mills, L.L.C. developed Arizona Mills, a value super-regional mall in Tempe, Arizona, which opened in November 1997. TRG's ownership interest in Arizona Mills, L.L.C. increased in January 1997 to 37% from 35% as a result of Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8 million. The former owner is an affiliate of a partner in TRG. In 1996, Arizona Mills, L.L.C. purchased for $24.8 million approximately 116 acres of land on which the Center was constructed from an affiliate of a partner in TRG and of a former owner in Arizona Mills. Also in 1996, TRG and the other owners of Arizona Mills contributed non-cash pre-construction costs related to this center totaling $12.8 million.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
In July 1996, TRG completed transactions that resulted in it acquiring the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture Partner. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. The accounts of Fairlane are included in these combined financial statements until the acquisition date. On the acquisition date, the book values of Fairlane's assets and liabilities were approximately $25 million and $39 million, respectively.
In December 1995, the bank group holding the $99.5 million nonrecourse mortgage encumbering Bellevue Center acquired title to the Center through a nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60% owned Unconsolidated Joint Venture that owned the Center, as of November 1, 1995, and, accordingly, the accounts of Bellevue Associates are not included in these combined financial statements from that date.
As a result of the foreclosure and debt extinguishment, Bellevue recognized in 1995 an extraordinary gain of approximately $31.4 million, representing the difference between the carrying value of the debt and the fair value of the Center, net of related transaction costs, and an ordinary gain of approximately $4.4 million, representing the excess of the fair value of the Center over its carrying value. The extinguishment of the debt and write off of the Center's carrying value represent non-cash transactions.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under short and intermediate term leases which are accounted for as operating leases. Minimum rents are recognized on an accrual basis as earned, the result of which does not differ materially from a straight-line method. Percentage rents are recognized on an accrual basis as earned. Expense recoveries, which include an administrative fee, are recognized as revenue in the period applicable costs are chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on straight-line or double-declining balance bases over the estimated useful lives of the assets which range from 3 to 55 years. Tenant allowances and deferred leasing costs are amortized on a straight-line basis over the lives of the related leases.
Capitalization
Costs related to the acquisition, development, construction, and improvement of properties are capitalized. Interest costs are capitalized until construction is substantially complete. Properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amounts of the properties may not be recoverable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90 days or less at the date of purchase.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis over the terms of the agreements to which they relate.
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over the terms of the cap agreements. Amounts received under the cap agreements are accounted for on an accrual basis, and recognized as a reduction of interest expense. The differential to be paid or received on swap agreements is accounted for on an accrual basis and recognized as an adjustment to interest expense.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
The carrying value of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value due to the short maturity of these instruments.
The fair value of mortgage notes and other notes payable is estimated based on quoted market prices if available, or on the current rates available to the Unconsolidated Joint Ventures for debt of similar terms and maturity and the assumption that debt will be prepaid at the earliest possible date.
The fair value of interest rate hedging instruments is the amount the Unconsolidated Joint Venture would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1997 classifications.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 2 - Properties
Properties, at December 31, 1997 and 1996, are summarized as follows:
1997 1996 ---- ----
Land $ 45,549 $ 43,477 Buildings, improvements and equipment 753,859 476,283 Construction in process 27,443 115,953 Peripheral land 2,789 3,247 -------- -------- $829,640 $638,960 ======== ========
Depreciation expense for 1997, 1996 and 1995 was $18.7 million, $18.0 million and $18.4 million. Peripheral land primarily consists of undeveloped land generally adjacent to the Taubman Shopping Centers. Construction in process includes costs related to expansions and other improvements at various centers. Assets under capital lease of $6.5 million and $5.0 million at December 31, 1997 and 1996, respectively, are included in the table above in buildings, improvements and equipment.
Note 3 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1997 and 1996 are summarized as follows:
1997 1996 ---- ----
Leasing $ 41,568 $ 39,924 Accumulated amortization (20,562) (19,298) -------- -------- $ 21,006 $ 20,626 Deferred financing, net 12,442 11,810 Other, net 4,249 4,160 -------- -------- $ 37,697 $ 36,596 ======== ========
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 4 - Debt
Mortgage Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consists of the following:
Balance Due Center 1997 1996 Interest Rate Maturity Date on Maturity - ------ ---- ---- ------------- ------------- -----------
Arizona Mills $121,991 Floating 02/01/02 $121,991 Cherry Creek 130,000 $130,000 Floating 08/01/98 130,000 Fair Oaks 39,119 39,865 9.00% 12/01/16 0 Lakeside 88,000 88,000 6.47% 12/15/00 88,000 Stamford Town Center 55,630 56,291 11.69% 12/01/17 0 Twelve Oaks Mall 49,940 49,924 Floating 10/15/01 50,000 Westfarms 100,000 100,000 7.85% 07/01/02 100,000 Westfarms 51,792 19,729 Floating 07/01/02 51,792 Woodfield 172,000 172,000 Floating 10/13/98 172,000 Woodland 66,000 66,000 8.20% 05/15/04 66,000 ------- -------- $874,472 $721,809 ======== ========
The Arizona Mills loan is a construction facility with a maximum availability of $145 million. The rate is capped at 9.5% until maturity, plus credit spread. The payment of principal and interest is guaranteed by each of the owners of Arizona Mills to the extent of its ownership percentage. The loan agreement provides for the reduction of the amount guaranteed as certain center performance and valuation criteria are met.
The other Unconsolidated Joint Ventures with floating rate debt have entered into interest rate agreements to reduce their exposure to increases in interest rates. The rate on Cherry Creek's loan is capped at 6.5% through January 1998 and from February 1998 to maturity at 7%, plus credit spread, based on one month LIBOR. The loan can be extended up to an additional three years. The rate on the Twelve Oaks loan is capped at 8.55% until maturity, plus credit spread, based on one month LIBOR. The interest rate on $93.5 million of the Woodfield loan was swapped to maturity at an effective annual rate of 5.4%. The rate on the balance of the Woodfield financing, which has been capped at a maximum annual rate, including credit spread, of 6.5% to maturity by an interest rate agreement, floats at a rate of three month LIBOR plus 0.5%. The Westfarms balance of $51.8 million represents borrowings under a construction facility with a maximum availability of $55 million. The rate on the construction facility is capped until maturity at 6.5%, plus credit spread.
The Stamford note also requires payment of additional interest ($1.3 million, $1.6 million, and $1.4 million in 1997, 1996, and 1995) based on operating results.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Scheduled principal payments on mortgage debt are as follows as of December 31, 1997:
1998 $303,559 1999 1,727 2000 89,914 2001 52,121 2002 276,135 Thereafter 151,016 -------- Total $874,472 ========
Other Notes Payable
Other notes payable at December 31, 1997 and 1996 consists of the following:
1997 1996 ---- ---- Notes payable to banks, line of credit, interest generally at prime (8.5% at December 31, 1997), maximum borrowings available up to $7.5 million to fund tenant loans, allowances and buyouts and working capital. $ 832 $2,293 Other 52 60 ----- ------ $ 884 $2,353 ===== ======
Interest Expense
Interest paid on mortgages and other notes payable in 1997, 1996 and 1995, net of amounts capitalized of $9.4 million, $4.8 million, and $3.5 million, approximated $48.7 million, $49.9 million, and $55.6 million.
Extraordinary Items
In 1995, Bellevue Associates recognized an extraordinary gain of approximately $31.4 million (Note 1). The extraordinary charge to income totaling $0.6 million in 1995 primarily represented a prepayment penalty relating to the extinguishment of mortgage debt.
Interest Rate Hedging Instruments
Certain of the Unconsolidated Joint Ventures have entered into interest rate swap and cap agreements to reduce their exposure to changes in the cost of floating rate debt. The terms of the derivative agreements are equivalent to the notional amounts, reset dates and rate bases of the underlying hedged debt to assure the effectiveness of the derivatives in reducing interest rate risk. These Unconsolidated Joint Ventures are exposed to credit risk in the event of nonperformance by their counterparties to the agreements, but have no off-balance sheet risk of loss. These Unconsolidated Joint Ventures anticipate that their counterparties will be able to fully perform their obligations under the agreements.
In 1997, Fairfax Associates entered into a treasury lock agreement to effectively fix the rate on its anticipated refinancing of the mortgage on Fair Oaks. At December 31, 1997, Fairfax Associates would have paid $4.2 million to close out the agreement (Note 7).
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Fair Value of Debt Instruments
The estimated fair values of financial instruments at December 31, 1997 and 1996 are as follows:
December 31 --------------------------------------------------- 1997 1996 ------------------------ ------------------------ Carrying Fair Carrying Fair Value Value Value Value ------------------------ ------------------------
Mortgage notes payable $874,472 $910,250 $721,809 $757,438 Other notes payable 884 884 2,353 2,353 Interest rate instruments: In a receivable position 4,787 2,164 4,065 3,263 In a payable position (4,241)
Note 5 - Leases
Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Tenant leases typically provide for guaranteed minimum rent, percentage rent and other charges to cover certain operating costs. Future minimum rent under operating leases in effect at December 31, 1997 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
1998 $177,731 1999 171,664 2000 158,214 2001 141,862 2002 124,068 Thereafter 377,803
Minimum rent received from former related parties was $0.9 million in 1995. There are no related party amounts in the table above.
One Unconsolidated Joint Venture, as lessee, has a ground lease expiring in 2083. Rental payments under the lease were $1.8 million, $1.7 million and $1.7 million in each of 1997, 1996 and 1995. All of the ground lease rental payments and scheduled future payments represent minimum rental expense payable to its Joint Venture Partner.
The following is a schedule of future minimum rental payments required under the lease:
1998 $ 1,984 1999 1,984 2000 1,984 2001 1,984 2002 2,058 Thereafter 656,417
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Capital Lease Obligations
Certain Unconsolidated Joint Ventures have entered into lease agreements for property improvements with three to five year terms. As of December 31, 1997, future minimum lease payments for these capital leases are as follows:
1998 $ 1,976 1999 1,976 2000 1,933 2001 1,803 2002 65 ------- Total minimum lease payments $ 7,753 Less amount representing interest (1,244) ------- Capital lease obligations $ 6,509 =======
Note 6 - Transactions with Affiliates
Charges from the Manager under various written agreements were as follows for the years ended December 31: 1997 1996 1995 ---- ---- ----
Management and leasing services $17,352 $16,720 $18,668 Security and maintenance services 9,468 11,608 15,468 Development services 4,661 5,410 5,708 ------- ------- ------- $31,481 $33,738 $39,844 ======= ======= =======
TRG is a one-third owner of an entity providing management, leasing, and development services to Arizona Mills, L.L.C. Charges from this entity were $9.7 million in 1997.
Westfarms previously loaned $2.4 million to one of its Joint Venture Partners to purchase a portion of a deceased Joint Venture Partner's interest. The note bears interest at approximately 7.9% and requires monthly principal payments of $25 thousand, plus accrued interest, with the final payment due in 2001. The balance at December 31, 1997 and 1996 was $1.3 million and $1.6 million, respectively. Interest income related to the loan was approximately $0.1 million in 1997, 1996, and 1995.
Other related party transactions are described in Notes 1 and 5.
Note 7 - Subsequent Event
Subsequent to December 31, 1997, Fairfax Company of Virginia L.L.C. (successor-in-interest to Fairfax Associates) completed a $140 million, 6.60%, secured financing maturing in 2008. The net proceeds were used to extinguish an existing mortgage on Fair Oaks of approximately $39 million and pay a prepayment penalty of approximately $1.8 million. In addition, proceeds of $5.6 million were used to close out a treasury lock agreement entered into in 1997 (Note 4), which resulted in an effective rate on the financing of approximately 7%. The remaining proceeds were distributed to the owners.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: March 27, 1998 By: /s/ ROBERT S. TAUBMAN ------------------------------------- Robert S. Taubman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
* Chairman of the Board March 27, 1998 - ---------------------- -------------- A. Alfred Taubman
* Vice Chairman of the Board March 27, 1998 - ---------------------- -------------- Robert C. Larson
/s/ ROBERT S. TAUBMAN President, Chief Executive March 27, 1998 - ---------------------- Officer, and Director -------------- Robert S. Taubman
/s/ LISA A. PAYNE Chief Financial Officer March 27, 1998 - ---------------------- and Director -------------- Lisa A. Payne
/s/ ESTHER R. BLUM Vice President, Controller and March 27, 1998 - ---------------------- Chief Accounting Officer -------------- Esther R. Blum
* Director March 27, 1998 - ---------------------- -------------- Graham Allison
* Director March 27, 1998 - ---------------------- -------------- Claude M. Ballard
* Director March 27, 1998 - ---------------------- -------------- Allan J. Bloostein
* Director March 27, 1998 - ---------------------- -------------- Jerome A. Chazen
* Director March 27, 1998 - ---------------------- -------------- Thomas E. Dobrowski
* Director March 27, 1998 - ---------------------- -------------- S. Parker Gilbert
* Director March 27, 1998 - ---------------------- -------------- W. Allen Reed
*By: /s/ LISA A. PAYNE ----------------- Lisa A. Payne, as Attorney-in-Fact
EXHIBIT INDEX
Exhibit Number - ------
3(a) -- By-Laws of Taubman Centers, Inc., as amended (incorporated herein by reference to Exhibit 3 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
3(b) -- Form of Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 4(a) to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
4(a) -- Amended and Restated Indenture dated as of March 4, 1994 between The Taubman Realty Group Limited Partnership and Chemical Bank, as Trustee (incorporated herein by reference to Exhibit 4(a) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 ("1993 Form 10-K")).
4(b) -- Officers' Certificate designating the terms of TRG's 7% Notes due 2003 (incorporated herein by reference to Exhibit 4(d) filed with the 1993 Form 10-K).
4(c) -- Officers' Certificate designating the terms of TRG's 8% Notes due 1999 (incorporated herein by reference to Exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp., La Cienega Associates, the Borrower, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Second Quarter Form 10-Q).
4(e) -- Deed of Trust, with assignment of Rents, Security Agreement and Fixture Filing, dated as of July 22, 1994, from La Cienega Associates, Grantor, to Commonwealth Land Title Company, Trustee, for the benefit of Morgan Guaranty Trust Company of New York, as Trustee, Beneficiary (incorporated herein by reference to Exhibit 4(i) filed with the 1994 Second Quarter Form 10-Q).
4(f) -- TRG's Medium-Term Notes due June 15, 2002 (incorporated herein by reference to Exhibit 4(j) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
4(g) -- Amended and Restated Revolving Loan Agreement dated as of March 5, 1997 (the "Revolving Loan Agreement"), among The Taubman Realty Group Limited Partnership, as Borrower, Union Bank of Switzerland, (New York Branch), as a Bank, the other Banks signatory to the Revolving Loan Agreement, each as a Bank, and Union Bank of Switzerland (New York Branch), as Administrative Agent (incorporated herein by reference to Exhibit 4, filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "1997 First Quarter Form 10-Q")).
4(h) -- Form of Contribution and Acceptance of Preferred Equity, Designation of Series A Preferred Equity, and Establishment of Preferred Rate (incorporated herein by reference to Exhibit 4(d) to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
4(i) -- Construction Loan Agreement among Taubman MacArthur Associates Limited Partnership, as Borrower, and Bayerische Hypotheken - Und Wechsel - Bank, Aktiengesellschaft, New York Branch and The Other Banks and Financial Institutions from time to time Parties hereto, as Lenders and Bayerische Hypotheken - Und Wechsel - Bank Aktiengesellschaft, New York Branch, as Agent, dated as of October 28, 1997.
EXHIBIT INDEX
Exhibit Number - ------
4(j) -- Loan Agreement dated as of November 25, 1997 among The Taubman Realty Group Limited Partnership, as Borrower, Fleet National Bank, as a Bank, PNC Bank, National Association, as a Bank, the other Banks signatory hereto, each as a Bank, and PNC Bank, National Association, as Administrative Agent.
10(a) -- Form of The Amended and Restated Agreement of Limited Partnership of The Taubman Realty Group Limited Partnership, as amended through September 30, 1997 (incorporated herein by reference to Exhibit 4(c) to the Registrant's Post -Effective Amendment No. 1 to Form S-3 Registration Statement No. 333-35433).
* 10(b) -- The Taubman Realty Group Limited Partnership 1992 Incentive Option Plan, as Amended and Restated Effective as of September 30, 1997.
10(c) -- Corporate Services Agreement between Taubman Centers, Inc. and The Taubman Company Limited Partnership (the "Manager") (incorporated herein by reference to Exhibit 10(c) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K")).
10(d) -- Registration Rights Agreement among Taubman Centers, Inc., General Motors Hourly-Rate Employes Pension Trust, General Motors Retirement Program for Salaried Employes Trust, and State Street Bank & Trust Company, as trustee of the AT&T Master Pension Trust (incorporated herein by reference to Exhibit 10(e) filed with the 1992 Form 10-K).
10(e) -- Master Services Agreement between The Taubman Realty Group Limited Partnership and the Manager (incorporated herein by reference to Exhibit 10(f) filed with the 1992 Form 10-K).
10(f) -- Cash Tender Agreement among Taubman Centers, Inc., A. Alfred Taubman, acting not individually but as Trustee of The A. Alfred Taubman Restated Revocable Trust, as amended and restated in its entirety by Instrument dated January 10, 1989 (as the same has been and may hereafter be amended from time to time), TRA Partners, and GMPTS Limited Partnership (incorporated herein by reference to Exhibit 10(g) filed with the 1992 Form 10-K).
* 10(g) -- Supplemental Retirement Savings Plan (incorporated herein by reference to Exhibit 10(i) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
* 10(h) -- The Taubman Company Long-Term Performance Compensation Plan (incorporated herein by reference to Exhibit 10(k) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
* 10(i) -- Employment agreement between The Taubman Company Limited Partnership and Lisa A. Payne (incorporated herein by reference to Exhibit 10 filed with the 1997 First Quarter Form 10-Q).
* 10(j) -- Amended and Restated Continuing Offer, dated as of September 30, 1997 (incorporated herein by reference to Exhibit 10 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
12(a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Preferred Stock Dividends.
12(b) -- Statement Re: Computation of TRG's Ratios of Earnings to Fixed Charges and Preferred Distributions.
EXHIBIT INDEX
Exhibit Number - ------
21 -- Subsidiaries of The Taubman Realty Group Limited Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Purchase and Sale Agreement By and Between One Federal Street Joint Venture and The Taubman Realty Group Limited Partnership, dated July 16, 1997 (Purchase and Sale Agreement) (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 99(a) filed with the Registrant's Current Report on Form 8-K dated September 4, 1997).
99(b) -- First Amendment to Purchase and Sale Agreement, dated August 15, 1997 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 99(b) filed with the Registrant's Current Report on Form 8-K dated September 4, 1997).
99(c) -- Agreement of Purchase and Sale By and Between The Falls Limited L.P. and The Taubman Realty Group Limited Partnership, dated November 5, 1997, as amended by First Amendment to Agreement of Purchase and Sale entered into on November 6, 1997, and Second Amendment to Agreement of Purchase and Sale entered into on November 13, 1997 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request).
- --------------------- * A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.