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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number 1-11530
TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2033632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303-0200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (248) 258-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, New York Stock Exchange
$0.01 Par Value
8.3% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock,
$0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such report(s)) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
X Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
As of March 21, 2000, the aggregate market value of the 52,679,418 shares of
Common Stock held by non-affiliates of the registrant was $603 million, based
upon the closing price ($11 7/16) on the New York Stock Exchange composite tape
on such date. (For this computation, the registrant has excluded the market
value of all shares of its Common Stock reported as beneficially owned by
executive officers and directors of the registrant and certain other
shareholders; such exclusion shall not be deemed to constitute an admission that
any such person is an "affiliate" of the registrant.) As of March 21, 2000,
there were outstanding 53,046,243 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 2000 are incorporated by reference into Part III.
PART I
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 (the "Operating Partnership" or "TRG"). The Company
has a 63% partnership interest in the Operating Partnership, through which the
Company conducts all its operations. The Company owns, develops, acquires, and
operates regional shopping centers ("Centers") and interests therein. The
Company's portfolio, as of December 31, 1999, includes 17 urban and suburban
Centers located in seven states. Four additional Centers are under construction
and are expected to open in 2001. Fourteen of the Centers are "super-regional"
centers because they have more than 800,000 square feet of gross leasable area.
The Operating Partnership also owns certain regional retail shopping center
development projects and more than 99% of The Taubman Company Limited
Partnership (the "Manager"), which manages the shopping centers, and provides
other services to the Operating Partnership and the Company. See the table on
pages 12 and 13 of this report for information regarding the Centers.
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 the Operating
Partnership 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 the Operating Partnership'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 1999, see the
response to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (MD&A).
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.
1
Business of the Company
The Company, as managing general partner of the Operating Partnership, is
engaged in the ownership, management, leasing, acquisition, development and
expansion of regional shopping centers.
The 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,
Los Angeles, Denver, Detroit, Phoenix, and Washington, D.C.;
o range in size between 438,000 and 1.5 million square feet of GLA and
between 133,000 and 594,000 square feet of Mall GLA. The smallest Center
has approximately 50 stores, and the largest has approximately 200 stores.
Of the 17 Centers, 14 are super-regional shopping centers;
o have approximately 2,340 stores operated by its mall tenants under
approximately 990 trade names;
o have 52 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 Venator Group, Inc. (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 1999, mall tenants had average
per square foot sales of $453, 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 Centers
is leasing to mall tenants (primarily specialty retailers), which represents
approximately 90% of revenues. Anchors account for less than 10% 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.
The Company's portfolio is concentrated in highly productive super-regional
shopping centers. Of the 17 Centers, 14 had annual rent rolls at December 31,
1999 of over $10 million. The Company believes that this level of productivity
is indicative of the Centers' strong competitive position and is, in significant
part, attributable to the Company'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.
2
Business Strategy And Philosophy
The Company believes 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 Centers
is essential. Thus the Company:
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.
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 Centers. The Company 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.
o Provides innovative initiatives that utilize technology and the Internet
to heighten the shopping experience for customers, build customer loyalty
and increase tenant sales. One such initiative is the Company's ShopTaubman
on-to-one marketing program, which connects shoppers and retailers through
interactive in-center computer kiosks and on-line web-sites.
The 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 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.
The Company's leasing strategy involves assembling a diverse mix of mall
tenants in each of the Centers in order to attract customers, thereby generating
higher sales by mall tenants. High sales by mall tenants make the Centers
attractive to prospective tenants, thereby increasing the rental rates that
prospective tenants are willing to pay. The Company implements an active leasing
strategy to increase the 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 Center's retail mix.
Potential For Growth
The Company's principal objective is to enhance shareholder value. The
Company seeks to maximize the financial results of its assets, while pursuing a
growth strategy that concentrates primarily on an active new center development
program.
Development of New Centers
The Company is pursuing an active program of regional shopping center
development. The Company believes that it has the expertise to develop
economically attractive regional shopping centers through intensive analysis of
local retail opportunities. The Company believes that the development of new
centers is the best use of its capital and an area in which the Company excels.
At any time, the Company has numerous potential development projects in various
stages.
During March 1999, the Company opened MacArthur Center, an enclosed
super-regional mall in Norfolk, Virginia. Additionally, four new centers are
currently under construction: International Plaza, an enclosed 1.3 million
square foot regional mall in Tampa, Florida; The Shops at Willow Bend, a 1.4
million square foot regional shopping center in the metropolitan Dallas area;
The Mall at Wellington Green, a 1.3 million square foot regional shopping center
located in west Palm Beach County, Florida; and Dolphin Mall, a 1.4 million
square foot value regional center in Miami, Florida. All four of these Centers
are expected to open in 2001.
3
The Company's policies with respect to development activities are designed
to reduce the risks associated with development. For instance, the Company
previously entered into an agreement to lease a center, while the Company
investigated the redevelopment opportunities of the center. Also, the Company
generally does not intend to acquire land early in the development process.
Instead, the Company generally acquires options on land or forms partnerships
with landholders holding potentially attractive development sites. The Company
typically exercises the options only once it is prepared to begin construction.
In addition, the Company does not intend to begin construction until a
sufficient number of anchor stores have agreed to operate in the shopping
center, such that the Company is confident that the projected sales and rents
from Mall GLA are sufficient to earn a return on invested capital in excess of
the Company's cost of capital. Having historically followed these principles,
the Company's experience indicates that less than 10% 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 the Company will
continue to be able to so limit pre-construction costs.
While the Company 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 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Capital Spending"
for further discussion of the Company's development activities).
Strategic Acquisitions
The Company's objective is to acquire existing centers only when they are
compatible with the quality of the Company's portfolio (or can be redeveloped to
that level) and that satisfy the Company's strategic plans and pricing
requirements.
The Company believes it 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 Company's expertise will assist 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 the Operating Partnership 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. The Operating
Partnership 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.
In addition, the Company may make other investments to enhance the value of
its business, for example, in April 1999, the Company made a strategic
investment in fashionmall.com, an online landlord. Visitors to the fashionmall
website find many of the same retailers in Taubman centers, including Sephora,
Gap, Esprit and Banana Republic. Understanding this developing shopping venue
will help the Company identify ways to maximize the opportunities of the
internet. Also, in November 1999, the Company acquired the retail leasing firm
Lord Associates, which will provide additional resources for the leasing of the
four new centers scheduled to open in 2001. Lord Associates has extensive
experience with value and entertainment specialty centers and had worked with
the Company on the leasing of Great Lakes Crossing.
4
Expansions of the Centers
Another potential 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 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). For example, a 21-screen theater will be added at Fairlane, in the
Detroit metropolitan area and is anticipated to open in the spring of 2000. At
Fair Oaks in the Washington, D.C. area, Hecht's expansion will open in the
spring of 2000, and a JCPenney expansion and a newly constructed Macy's store
will open in the fall of 2000.
The following table includes information regarding recent development,
acquisition, and expansion activities.
Developments:
Completion Date Center Location
July 1997 Tuttle Crossing (1) 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
September 1997 Regency Square Richmond, Virginia
December 1997 Tuttle Leasehold (1) Columbus, Ohio
December 1997 The Falls (1) (2) Miami, Florida
December 1999 Great Lakes Crossing - Auburn Hills, Michigan
additional interest (3)
Expansions, Renovations and Anchor Conversions:
Completion Date Center Location
March 1997 Beverly Center (4) Los Angeles, California
August 1997 Westfarms (5) West Hartford, Connecticut
November 1997 -
August 1998 Cherry Creek (6) Denver, Colorado
December 1997 Biltmore (7) Phoenix, Arizona
November 1998 Woodland Grand Rapids, Michigan
September 1999 Lakeside (8) Sterling Heights, Michigan
November 1999 Fairlane (8) Dearborn, Michigan
November 1999 Biltmore (9) Phoenix, Arizona
- ------------------
(1) Centers transferred to GMPT in connection with the GMPT Exchange (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations-GMPT Exchange and Related Transactions).
(2) Completely redeveloped and expanded in 1996 before the acquisition of The
Falls.
(3) In December 1999, an additional 5% interest in the center was acquired.
(4) Broadway converted to Bloomingdale's.
(5) 135,000 square foot expansion followed by the opening of a new Nordstrom in
September 1997.
(6) Lord & Taylor opened a new and expanded store in 1997. Additional 132,000
square foot expansion of mall tenant space opened in August of 1998.
(7) 50,000 square foot expansion of mall tenant space completed
(8) New food courts opened.
(9) Macy's expansion completed.
5
Internal Growth
The 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, the Company
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, the Company is pursuing a number of new sources of
revenue from the Centers. For example, the Company has entered into a 15 year
lease agreement with JCDecaux, the world's largest street furniture and
outdoor advertising company. The agreement will create an in-mall advertising
program in the Company's portfolio of owned properties, creating new
point-of-sale opportunities for retailers and manufacturers as well as
heightening in-mall experience for shoppers. In addition, the Company 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. The Company has put in place a company-wide
program to maximize this opportunity.
Rental Rates
As leases have expired in the Centers, the Company has generally been able
to rent the available space, either to the existing tenant or a new tenant, at
rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent at Centers that have been owned and open for five years.
Year Ended December 31
---------------------------------------------
1999 1998(1) 1997 1996 1995
---- ---- ---- ---- ----
Average base rent per square foot:
All mall tenants $43.58 $41.93 $38.79 $37.90 $36.33
Stores closing during year $41.14 $44.27 $37.62 $33.39 $32.96
Stores opening during year $52.64 $47.92 $41.67 $42.39 $41.27
(1) Excludes centers transferred to GMPT.
6
Lease Expirations
The following table shows lease expirations based on information available
as of December 31, 1999 for the next ten years for the Centers in operation at
that date:
Percent of
Annualized Annualized Total Leased
Base Rent Base Rent Square Footage
Lease Number Leased Area Under Expiring Under Expiring Represented
Expiration of Leases in Square Leases Leases by Expiring
Year Expiring Footage (in thousands) Per Square Foot Leases
---- -------- ------- -------------- --------------- ------
2000 (1) 116 237,438 $ 9,918 $ 41.77 2.8%
2001 193 502,237 20,554 40.92 6.0%
2002 243 693,848 24,769 35.70 8.3%
2003 276 878,877 31,645 36.01 10.5%
2004 243 693,340 29,688 42.82 8.3%
2005 255 682,853 31,895 46.71 8.2%
2006 172 469,931 21,248 45.21 5.6%
2007 209 751,694 28,100 37.38 9.0%
2008 205 899,300 30,789 34.24 10.8%
2009 228 911,602 34,618 37.97 10.9%
(1) Excludes leases that expire in 2000 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1999.
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 its leasing policies and practices create a significant
level of early lease terminations at the Centers. For example, the average
remaining term of the leases that were terminated during the period 1994 to 1999
was approximately 1.9 years. The average term of leases signed during 1999 and
1998 was approximately 7.9 years.
In addition, mall tenants at the 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 cash flow. In 1999, approximately 3.1% of leases
were so affected compared to 1.2% in 1998, 1.5% in 1997, 2.8% in 1996, and 3.2%
in 1995. Since 1991, the annual provision for losses on accounts receivable has
been less than 2% of annual revenues.
Occupancy
Mall tenant average occupancy, ending occupancy, and leased space rates of
the Centers are as follows:
Year Ended December 31
1999 1998 (1) 1997 1996 1995
----- ---- ---- ---- ----
Average Occupancy 89.0% 89.4% 87.6% 87.4% 88.0%
Ending Occupancy 90.4% 90.2% 90.3% 88.0% 89.4%
Leased Space 92.1% 92.3% 92.3% 89.0% 90.6%
(1) Excludes centers transferred to GMPT.
Major Tenants
No single retail company represents 10% or more of the Company's revenues.
The combined operations of The Limited, Inc. accounted for approximately 8.3% of
leased Mall GLA as of December 31, 1999 and for approximately 7.1% of the 1999
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 1.2% of leased Mall GLA and 1.2% of
1999 base rent. No other single retail company accounted for more than 4% of
leased Mall GLA or 1999 base rent.
7
General Risks of the Company
Economic Performance and Value of Shopping Centers Dependent on Many Factors
The economic performance and value of the Company's shopping centers are
dependent on various factors. Additionally, these same factors will influence
the Company's decision whether to go forward on the development of new centers
and may affect the ultimate economic performance and value of projects under
construction (see other risks associated with the development of new centers
under "Business of the Company--Development of New Centers"). Such factors
include:
o changes in the national, regional, and/or local economic climates,
o competition from other shopping centers, discount stores, outlet malls,
discount shopping clubs, direct mail and the Internet in attracting
customers and tenants,
o increases in operating costs,
o the public perception of the safety of customers at the shopping centers,
o environmental or legal liabilities,
o availability and cost of financing, and
o uninsured losses, resulting from wars, riots, or civil disturbances or
losses from earthquakes or floods in excess of policy specifications and
insured limits.
In addition, the value of shopping centers may be adversely affected by:
o changes in government regulations, and
o changes in real estate zoning and tax laws.
Adverse changes in the economic performance and value of shopping centers would
adversely affect the Company's income and cash available to pay dividends.
Third Party Interests in the Centers
Some of the shopping centers which the Company develops and leases are
partially owned by other non-affiliated partners through joint venture
arrangements. As a result, the Company may not be able to control all decisions
regarding those shopping centers and may be required to take actions that are in
the interest of the joint venture partners but not the Company's best interests.
Bankruptcy of Mall Tenants or Joint Venture Partners
The Company could be adversely affected by the bankruptcy of third parties.
The bankruptcy of a mall tenant could result in the termination of its lease
which would lower the amount of cash generated by that mall. In addition, if a
department store operating an anchor at one of our shopping centers were to go
into bankruptcy and cease operating, its closing may lead to reduced customer
traffic and lower mall tenant sales which would, in turn, affect the amount of
rent our tenants pay us. The profitability of shopping centers held in a joint
venture could also be adversely affected by the bankruptcy of one of the joint
venture partners if, because of certain provisions of the bankruptcy laws, the
Company was unable to make important decisions in a timely fashion or became
subject to additional liabilities.
8
Third Party Contracts
The Company provides property management, leasing, development and other
administrative services to centers transferred to GMPT, other third parties and
to certain Taubman affiliates. The contracts under which these services are
provided may be canceled or not renewed or may be renegotiated on terms less
favorable to the Company. Certain costs of providing services under these
contracts would not necessarily be eliminated if the contracts were to be
canceled or not renewed.
Inability to Maintain Status as a REIT
o The Company may not be able to maintain its status as a real estate
investment trust, or REIT, for Federal income tax purposes with the result
that the income distributed to shareholders will not be deductible in
computing taxable income and instead would be subject to tax at regular
corporate rates. Although the Company believes it is organized and operates
in a manner to maintain its REIT qualification, many of the REIT
requirements of the Internal Revenue Code are very complex and have limited
judicial or administrative interpretations. Changes in tax laws or
regulations or new administrative interpretations and court decisions may
also affect the Company's ability to maintain REIT status in the future. If
the Company fails to qualify as a REIT, its income may also be subject to
the alternative minimum tax. If the Company does not maintain its REIT
status in any year, it may be unable to elect to be treated as a REIT for
the next four taxable years. In addition, if the Company fails to meet the
Internal Revenue Code's requirement that it distribute to shareholders at
least 95% of our otherwise taxable income, it will be subject to a
nondeductible 4% excise tax on a portion of its income.
o Although the Company currently intends to maintain its status as a REIT,
future economic, market, legal, tax or other considerations may cause it to
determine that it would be in the Company's and its shareholders' best
interests to revoke its REIT election. As noted above, if the Company
revokes its REIT election, it will not be able to elect REIT status for the
next four taxable years.
9
Environmental Matters
All of the Centers presently owned by the Company (not including option
interests in the Development Projects or any of the real estate managed but not
included in the Company's portfolio) have been subject to environmental
assessments. The Company is not aware of any environmental liability relating to
the 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.
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 Centers will not be affected by
tenants and occupants of the Centers, by the condition of properties in the
vicinity of the Centers (such as the presence of underground storage tanks), or
by third parties unrelated to the Company.
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 and accepted in 1998 that provided for monitoring the soil
and groundwater. The monitoring procedures required under this plan have been
completed.
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 Centers,
primarily in the form of floor tiles, roof coatings and mastics. The floor
tiles, roof coatings and mastics are generally in good condition. 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.
10
Personnel
The Company has engaged the Manager to provide real estate management,
acquisition, development, and administrative services required by the Company
and its properties.
As of December 31, 1999, the Manager had 447 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1999:
Number Of Employees
Property Management............................... 203
Leasing .......................................... 71
Development....................................... 52
Financial Services................................ 70
Other .......................................... 51
--
Total..................................... 447
===
The Manager considers its relations with its employees to be good.
Item 2. PROPERTIES
Ownership
The following table sets forth certain information about each of the
Centers. The table includes only Centers in operation at December 31, 1999.
Excluded from this table are Tampa International, The Shops at Willow Bend,
Dolphin Mall and the Mall at Wellington Green, all of which will open in 2001.
Centers are owned in fee other than Beverly Center, Cherry Creek, La Cumbre
Plaza, MacArthur Center and Paseo Nuevo, which are held under ground leases
expiring between 2028 and 2083.
Certain of the Centers are partially owned through joint ventures.
Generally, the Operating Partnership's joint venture partners have ongoing
rights with regard to the disposition of the Operating Partnership's interest in
the joint ventures, as well as the approval of certain major matters.
11
Sq. Ft. of GLA/ Year Ownership Percent of Mall
Mall GLA Opened/ Year % as of GLA Occupied 1999 Rent (1)
Owned Centers Anchors as of 12/31/99 Expanded Acquired 12/31/99 as of 12/31/99 (in Thousands)
- ------------- ------- --------------- -------- -------- --------- -------------- ----------------
Beverly Center Bloomingdale's, 902,000/ 1982 70%(2) 95% $ 27,388
Los Angeles, CA Macy's 594,000
Biltmore Fashion Park Macy's, Saks Fifth 620,000/ 1963/1992/ 1994 100% 91% 10,949
Phoenix, AZ Avenue 313,000 1997/1999
Cherry Creek Foley's, Lord & Taylor, 1,035,000/ 1990/1998 50% 94% 22,916
Denver, CO Neiman Marcus, Saks 562,000 (3)
Fifth Avenue
Fair Oaks Hecht's, JCPenney, 1,389,000/ 1980/1987/ 50% 86% 19,590
Fairfax, VA Lord & Taylor, 573,000 1988
(Washington, D.C. Sears (4)
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,400,000/(5) 1976/1978/ 100% 72% 13,417
Dearborn, MI Lord & Taylor, Saks 511,000 1980
(Detroit Metropolitan Fifth Avenue, Sears
Area)
La Cumbre Plaza Robinsons-May, Sears 479,000/ 1967/1989 1996 100% 94% 4,343
Santa Barbara, CA 179,000
Lakeside Hudson's, Hudson's Men's 1,478,000/ 1976/1978 50%(6) 88% 18,497
Sterling Heights, MI and Home, 516,000
(Detroit Metropolitan JCPenney, Lord & Taylor,
Area) Sears
MacArthur Center Dillard's, Nordstrom 945,000/ 1999 70% 88% 11,983
Norfolk, VA 531,000
Paseo Nuevo Macy's, Nordstrom 438,000/ 1990 1996 100% 96% 4,833
Santa Barbara, CA 133,000
Regency Square Hecht's (two locations), 826,000/ 1975/1987 1997 100% 97% 9,310
Richmond, VA JCPenney, Sears 239,000
The Mall at Short Hills Bloomingdale's, Macy's, 1,350,000/ 1980/1994/ 100% 97% 33,260
Short Hills, NJ Neiman Marcus, Nordstrom, 528,000 1995
Saks Fifth Avenue
Stamford Town Center Filene's, Macy's, Saks 868,000/ 1982 50% 88% 16,223
Stamford, CT Fifth Avenue 375,000
Twelve Oaks Mall Hudson's, JCPenney, 1,220,000/ 1977/1978 50%(6) 93% 20,601
Novi, MI Lord & Taylor, Sears 482,000
(Detroit Metropolitan
Area)
12
Sq. Ft. of GLA/ Year Ownership Percent of Mall
Mall GLA Opened/ Year % as of GLA Occupied 1999 Rent (1)
Owned Centers Anchors as of 12/31/99 Expanded Acquired 12/31/99 as of 12/31/99 (in Thousands)
- ------------- ------- --------------- -------- -------- --------- -------------- ----------------
Westfarms Filene's, Filene's 1,295,000/ 1974/1983/ 79% 94% $ 23,503
West Hartford, CT Men's Store/Furniture 525,000 1997
Gallery, JCPenney,
Lord & Taylor,Nordstrom
Woodland Hudson's, JCPenney, 1,095,000/ 1968/1974/ 50% 92% 15,721
Grand Rapids, MI Sears 370,000 1984/1989
Value Centers:
Arizona Mills GameWorks, Harkins 1,193,000/ 1997 37% 94% 22,840
Tempe, AZ Cinemas,JCPenney 533,000
(Phoenix Metropolitan Outlet, Neiman Marcus-
Area) Last Call, Off 5th Saks,
Rainforest Cafe
Great Lakes Crossing Bass Pro, GameWorks, 1,385,000/ 1998 85% 90% 22,556
Auburn Hills, MI JCPenney Outlet, 576,000
(Detroit Metropolitan Neiman Marcus-Last Call, ---------
Area) Off 5th Saks, Rainforest
Cafe, Star Theatres
Total GLA/Total
Mall GLA: 17,918,000/
7,540,000
Average GLA/Average
Mall GLA: 1,054,000/
444,000
- ------------------------
(1) Includes minimum and percentage rent for the year ended December 31, 1999.
Excludes rent from certain peripheral properties. For MacArthur Center,
which opened in March, the amounts reflect rents for the period subsequent
to opening date.
(2) The Company has an option to acquire the remaining 30%. The results of
Beverly Center are consolidated in the Company's financial statements.
(3) GLA excludes approximately 166,000 square feet for the renovated buildings
on adjacent peripheral land.
(4) A newly constructed Macy's store will open in the fall of 2000.
(5) A 21-screen theater will be added and is anticipated to open in the spring
of 2000.
(6) Under terms of an agreement expected to be completed in March 2000, the
Operating Partnership will exchange its 50% interest in Lakeside to obtain
a 100% interest in Twelve Oaks Mall.
13
Anchors
The following table summarizes certain information regarding the anchors at
the operating Centers (excluding the value centers) as of December 31, 1999.
Number of 12/31/99 GLA
Name Anchor Stores (in thousands) % of GLA
--- ------------- -------------- --------
May Company
Lord & Taylor 6 760
Hecht's 3 417
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
---- ------
Total 14 1,964 12.8%
Sears 7 1,582 10.3%
JCPenney 7 1,327 8.6%
Federated
Macy's 5 (1) 947
Bloomingdale's 2 379
---- -------
Total 7 1,326 8.6%
Dayton Hudson
Hudson's 4 853
Hudson's Men's & Home 1 115
---- -------
Total 5 968 6.3%
Nordstrom 4 677 4.4%
Saks 5 452 2.9%
Neiman Marcus 2 216 1.4%
Dillard's 1 254 1.7%
---- ------- -----
Total 52 8,766 57.1%
== ===== ====
(1) A new Macy's store will open at Fair Oaks in 2000.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Centers as of December 31,1999. All mortgage debt in the table
below is nonrecourse to the Operating Partnership, except for debt encumbering
Arizona Mills, Great Lakes Crossing, Dolphin Mall, MacArthur Center, and
International Plaza. The Operating Partnership has guaranteed the payment of
principal and interest on the mortgage debt of these Centers. The loan
agreements provide for the reduction of the amounts guaranteed as certain center
performance and valuation criteria are met. The Operating Partnership's guaranty
of the Arizona Mills' principal is $13.1 million at December 31, 1999. The
guarantees on the Great Lakes Crossing and MacArthur Center mortgages are
currently for 100% of the outstanding balances. The guarantee on the Dolphin
Mall mortgage is currently for 50% of the outstanding balance and 100% of
accrued unpaid interest. The Operating Partnership has guaranteed the payment of
100% of the principal and interest on the International Plaza construction loan.
An investor in the International Plaza project has indemnified the Operating
Partnership to the extent of 25% of the amounts guaranteed on the International
Plaza loan. Assessment bonds totaling approximately $2.5 million, which are not
included in the table, also encumber Biltmore.
15
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/99 Service Maturity on Maturity Prepayment
TCO's Financial Statements Rate (000's) (000's) Date (000's) Date
- -------------------------- -------- -------------- ----------- -------- ----------- ----------------
Beverly Center 8.36% $146,000 Interest Only 07/15/04 $146,000 30 Days' Notice (1)
Biltmore 7.68% 80,000 Interest Only (2) 07/10/09 71,391 09/14/01 (3)
Great Lakes Crossing (85%) Floating (4) 170,000 Interest Only (5) 04/01/02 (6) 167,925 2 Days' Notice (7)
MacArthur Center (70%) Floating (8) 115,212 (9) Interest Only 10/27/00 (6) 115,212 4 Days' Notice (7)
Short Hills 6.70% 270,000 Interest Only (10) 04/01/09 245,301 05/01/04 (11)
Other Consolidated Secured Debt
TRG Credit Facility Floating (12) 63,000 Interest Only 09/21/01 63,000 2 Days' Notice (7)
Other 13.00% (13) 20,000 Interest Only 11/22/09 20,000 11/22/04 (14)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
Arizona Mills (37%) Floating (15) 142,214 Interest Only 02/01/02 142,214 5 Days' Notice (7)
Cherry Creek (50%) 7.68% 177,000 Interest Only (16) 08/11/06 171,933 08/02/02 (17)
Dolphin (50%) Floating (18) 22,267 Interest Only 10/06/02 (6) 22,267 3 Days' Notice (7)
Fair Oaks (50%) 6.60% 140,000 Interest Only 04/01/08 140,000 04/01/00 (1)
International Plaza (26%) Floating 0 Interest Only 11/10/02 (6) 0 3 Days' Notice (7)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days' Notice (1)
Stamford Town Center (50%) 11.69% (19) 54,053 (20) 7,207 12/01/17 0 30 Days' Notice (20)
Twelve Oaks Mall (50%) Floating (21) 49,971 Interest Only 10/15/01 50,000 30 Days' Notice (7)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 60 Days' Notice (1)
Westfarms (79%) Floating (22) 55,000 Interest Only 07/01/02 55,000 4 Days' Notice (7)
Woodland (50%) 8.20% 66,000 Interest Only 05/15/04 66,000 30 Days' Notice (1)
- ------------------------
(1) Debt may be prepaid with a yield maintenance prepayment penalty. No
prepayment penalty is due if prepaid within six months of maturity date.
(2) Interest only through 7/10/00.Thereafter, principal will be amortized based
on 30 years. Annual debt service will be $6.9 million.
(3) No defeasance deposit required if paid within three months of maturity
date.
(4) The rate is capped at 6.0% until 9/1/00, plus credit spread, based on
one-month LIBOR.
(5) Interest only until 4/1/01.Thereafter principal will be amortized based on
25 years.
(6) The maturity date may be extended one year. The MacArthur loan may be
extended an additional year.
(7) Prepayment can be made without penalty.
(8) The rate on the Operating Partnership's beneficial interest in the loan is
capped at 6.50% until 10/27/00, plus credit spread, based on one-month
LIBOR.
(9) The loan is a construction facility with a current maximum availability of
$120 million.
(10) Interest only until 4/1/02. Thereafter, principal will be amortized based
on 30 years. Annual debt service will be $20.9 million.
(11) Debt may be prepaid with a prepayment penalty equal to greater of yield
maintenance or 1% of principal prepaid. No prepayment penalty is due if
prepaid within three months of maturity date. 30 days notice required.
(12) The facility is a $200 million line of credit and is secured by mortgages
on Fairlane, LaCumbre, Paseo Nuevo, and Regency Square.
(13) Currently payable at 9%. Deferred interest is due at maturity. The loan is
secured by TRG's indirect interests in International Plaza.
(14) Debt may be prepaid with a yield maintenance prepayment penalty. 60 days
notice required.
(15) The rate is capped at 9.5% until maturity, plus credit spread, based on
one-month LIBOR.
(16) Interest only until 7/11/04. Thereafter, principal will be amortized based
on 25 years. Annual debt service will be $15.9 million.
(17) May prepay with a yield maintenance penalty on the earlier of 8/2/02 or 2
years from securitization. No prepayment penalty is due if redeemed within
three months of maturity date. 30-60 day notice required.
(18) The rate is capped at 7.0% until maturity, plus credit spread, based on
one-month LIBOR. The cap has an embedded swap with a rate of 5.15% when
LIBOR is below 6.0%.
(19) The lender was entitled to contingent interest equal to 20% of annual
applicable receipts in excess of $9.0 million.
(20) Debt was prepaid in January 2000. Property is now encumbered by a $76
million mortgage with a floating rate of one-month LIBOR + 0.80%.
(21) The rate is capped at 8.55% until maturity, plus credit spread, based on
one-month LIBOR.
(22) The rate is capped until maturity at 6.5%, plus credit spread, based on
one-month LIBOR.
For additional information regarding the Centers and their operation, see
the responses to Item 1 of this report.
16
Item 3. LEGAL PROCEEDINGS
Neither the Company, its subsidiaries, 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, its subsidiaries or
any of the properties. Except for routine litigation involving present or former
tenants (generally eviction or collection proceedings), substantially all
litigation is covered by liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
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 21, 2000, the 53,046,243
outstanding shares of Common Stock were held by 715 holders of record.
The following table presents the dividends declared and range of share
prices for each quarter of 1999 and 1998.
Market Quotations
--------------------------------------
1999 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $ 13 7/8 $ 11 5/8 $ 0.24
June 30 14 11 15/16 0.24
September 30 13 11/16 11 3/16 0.24
December 31 11 11/16 10 1/2 0.245
Market Quotations
--------------------------------------
1998 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $ 13 11/16 $ 12 1/8 $ 0.235
June 30 14 3/8 12 3/4 0.235
September 30 14 3/4 12 1/4 0.235
December 31 14 3/16 12 5/16 0.24
17
During the fourth quarter of 1998, the Company offered and sold a total of
31,399,913 shares of Series B Non-Participating Convertible Preferred Stock (the
"Series B Stock") to the partners (other than the Company) in TRG, which is the
Company's subsidiary Operating Partnership, in an offering exempt from
registration under the Securities Act of 1933 (the "Securities Act"). Under the
Company's articles of incorporation, as amended on September 30, 1998, the
Company was required to offer each partner in the Operating Partnership (other
than the Company) the right to subscribe for Series B Stock on the basis of one
share of Series B Stock for each Unit of Partnership Interest in the Operating
Partnership owned by the subscribing partner. The aggregate offering price was
$38,400, which was equal to the Series B Stock's per share liquidation
preference of $0.001 multiplied by the number of shares sold. The Company sold
all of the offered shares. The Company offered and sold all shares directly and
did not pay any commissions or discounts.
In connection with its November 1999 acquisition of Lord Associates, the
Company issued 435,153 shares of Series B Stock as part of the consideration
paid to the owner. These shares will be released over a five-year period (5
shares had been released as of December 31 ,1999). The former owner, presently
an officer of the Company, has granted an irrevocable proxy to a subsidiary of
the Operating Partnership for the unreleased shares, and therefore has no voting
or dispositive power for these shares until release.
Each share of Series B Stock is entitled to one vote. The Series B Stock
and the Company's Common Stock vote as a single class on all matters submitted
to a vote of the Company's shareholders. The Series B Stock is not entitled to
dividends or other distributions, except upon liquidation as indicated above.
The Series B Stock is convertible under certain circumstances into Common
Stock at the ratio of one share of Common Stock for each 14,000 shares of Series
B Stock (with any resulting fractional shares of Common Stock being redeemed for
cash). Generally, a partner desiring to sell (by exchange or otherwise) Units in
the Operating Partnership to the Company must surrender for conversion shares of
Series B Stock equal in number to the Units being sold. In addition, if a
transfer of Series B Stock results in the transferee holding more shares of
Series B Stock than is permitted under the Company's articles of incorporation,
then the shares of Series B Stock in excess of the permitted number will
automatically convert into Common Stock (or will be redeemed for cash, as
indicated above).
The offerings of Series B Stock described above were exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act. Under the Company's articles of incorporation, the Company may issue shares
of Series B Stock only to partners in the Operating Partnership. Offers were
limited to partners in the Operating Partnership, who constitute a limited
number of sophisticated investors (all of whom are "accredited investors," as
defined in Rule 501 under the Securities Act) fully familiar with the business
and operations of the Company, and did not involve any general solicitation or
advertising. Under the Company's articles of incorporation, resales of the
Series B Stock are permitted only if registered (or exempt from registration)
under the Securities Act, and each certificate evidencing Series B Stock carries
a restrictive legend.
In September and November 1999, the Operating Partnership offered and sold
a total of $100 million of 9% Cumulative Redeemable Preferred Partnership Equity
to institutional investors, in an offering exempt from registration pursuant to
Section 4(2) of the Securities Act. In connection with this private placement,
the Operating Partnership paid $2.5 million in total commissions to the
placement agent who facilitated both transactions. After 10 years (an in certain
circumstances, earlier), the holders of such preferred partnership equity have
the right to exchange their interests for shares of the Company's newly
authorized Series C and Series D Cumulative Redeemable Preferred Stock. Each
such series of the Company's preferred stock has substantially similar terms as
the preferred partnership equity being exchanged therefor and does not entitle
its holders to vote. No shares of Series C or Series D Cumulative Redeemable
Preferred Stock are currently outstanding.
18
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company 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.
Year Ended December 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
Income before extraordinary items from investment in TRG (1) 29,349 21,368 19,831
Rents, recoveries and other shopping center revenues (1) 268,692 333,953
Income before extraordinary items, minority
and preferred interests 58,445 70,403 28,662 20,730 19,267
Extraordinary items (2) (468) (50,774) (444) 5,836
Minority interest (1) (30,031) (6,009)
TRG preferred distributions (3) (2,444)
Net income 25,502 13,620 28,662 20,286 25,103
Series A preferred dividends (4) (16,600) (16,600) (4,058)
Net income (loss) available to common shareowners 8,902 (2,980) 24,604 20,286 25,103
Income before extraordinary items per
common share - diluted 0.17 0.32 0.48 0.47 0.44
Net income (loss) per common share - diluted 0.16 (0.06) 0.48 0.46 0.57
Dividends per common share declared 0.965 0.945 0.925 0.89 0.88
Weighted average number of common shares outstanding 53,192,364 52,223,399 50,737,333 44,444,833 44,249,617
Number of common shares outstanding at end of period 53,281,643 52,995,904 50,759,657 50,720,358 44,134,913
Ownership percentage of TRG at end of period (1) 63% 63% 37% 37% 35%
BALANCE SHEET DATA (1) :
Investment in TRG 547,859 369,131 307,190
Real estate before accumulated depreciation 1,572,285 1,473,440
Total assets 1,596,911 1,480,863 556,824 378,527 315,076
Total debt 886,561 775,298
SUPPLEMENTAL INFORMATION (5) :
Funds from Operations allocable to TCO (6) 68,506 61,131 53,137 44,104 40,798
Mall tenant sales (7) 2,695,645 2,332,726 3,086,259 2,827,245 2,739,393
Sales per square foot (7) 453 426 384 377 364
Number of shopping centers at end of period 17 16 25 21 19
Ending Mall GLA in thousands of square feet 7,540 7,038 10,850 9,250 8,996
Average occupancy 89.0% 89.4% 87.6% 87.4% 88.0%
Ending occupancy 90.4% 90.2% 90.3% 88.0% 89.4%
Leased space (8) 92.1% 92.3% 92.3% 89.0% 90.6%
Average base rent per square foot (9) :
All mall tenants $43.58 $41.93 $38.79 $ 37.90 $ 36.33
Stores closing during year $41.14 $44.27 $37.62 $ 33.39 $ 32.96
Stores opening during year $52.64 $47.92 $41.67 $ 42.39 $ 41.27
- --------------------------
(1) On September 30, 1998 the Company obtained a majority and controlling
interest in The Taubman Realty Group Limited Partnership (TRG or the
Operating Partnership) as a result of the GMPT Exchange (see Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) - GMPT Exchange and Related Transactions). As a result of this
transaction, the Company's ownership of the Operating Partnership increased
to a majority and the Company began consolidating the Operating
Partnership. For years prior to 1998, amounts reflect the Company's
interest in the Operating Partnership under the equity method.
(2) Extraordinary items for 1995 through 1999 include charges related to the
extinguishment of debt, primarily consisting of prepayment premiums. Also,
in 1995, the Company recognized its $6.6 million share of an extraordinary
gain related to the disposition of Bellevue Center and the related
extinguishment of debt.
(3) In 1999, the Operating Partnership completed $100 million in private
placements of 9% Cumulative Redeemable Preferred Partnership Equity.
(4) In October 1997, the Company issued 8.3% Series A Preferred Stock.
(5) Operating statistics prior to 1998 include centers transferred to GMPT as
part of the GMPT Exchange.
(6) Funds from Operations is defined and discussed in MD&A - Liquidity and
Capital Resources - Funds from Operations. Funds from Operations does not
represent cash flow from operations, as defined by generally accepted
accounting principles, and should not be considered to be an alternative to
net income as a measure of operating performance or to cash flows as a
measure of liquidity.
(7) Based on reports of sales furnished by mall tenants.
(8) Leased space comprises both occupied space and space that is leased but not
yet occupied.
(9) Amounts include centers owned and open for at least five years.
19
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 and the Financial Statements of Taubman Centers, Inc. and the
Notes thereto.
General Background and Performance Measurement
The Company owns a managing general partner's interest in The Taubman
Realty Group Limited Partnership (the Operating Partnership or TRG), through
which the Company conducts all of its operations. The Operating Partnership
owns, develops, acquires, and operates regional shopping centers nationally. The
Consolidated Businesses consist of shopping centers that are controlled by
ownership or contractual agreement, development projects for future regional
shopping centers and The Taubman Company Limited Partnership (the Manager).
Shopping centers that are not controlled and that are owned through joint
ventures with third parties (Unconsolidated Joint Ventures) are accounted for
under the equity method.
The operations of the shopping centers are best understood by measuring
their performance as a whole, without regard to the Company's ownership
interest. Consequently, in addition to the discussion of the operations of the
Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are
presented and discussed as a whole.
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine Consolidated Businesses and one Unconsolidated Joint
Venture) and a share of the Operating Partnership's debt for all of the
partnership units owned by two General Motors pension trusts (GMPT) (the GMPT
Exchange). See Results of Operations -GMPT Exchange and Related Transactions
below. Performance statistics presented below exclude these 10 centers
(transferred centers).
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 shopping centers because mall tenants
provide approximately 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.
20
The following table summarizes occupancy costs, excluding utilities, for
mall tenants as a percentage of mall tenant sales.
1999 1998 1997
---- ---- ----
Mall tenant sales (in thousands) $2,695,645 $2,332,726 $1,965,905
Sales per square foot 453 426 410
Minimum rents 9.7% 9.7% 10.0%
Percentage rents 0.2 0.3 0.3
Expense recoveries 4.3 4.1 4.2
----- ----- -----
Mall tenant occupancy costs 14.2% 14.1% 14.5%
===== ===== =====
Occupancy
Historically, average annual occupancy has been within a narrow band. In
the last ten years, average annual occupancy has ranged between 86.5% and 89.4%.
Mall tenant average occupancy, ending occupancy and leased space rates are as
follows:
1999 1998 1997
---- ---- ----
Mall Tenant Average Occupancy 89.0% 89.4% 88.0%
Ending Occupancy 90.4 90.2 90.7
Leased Space 92.1 92.3 92.7
Rental Rates
As leases have expired in the shopping centers, the Company has generally
been able to rent the available space, either to the existing tenant or a new
tenant, at rental rates that are higher than those of the expired leases. In a
period of increasing sales, rents on new leases will tend to rise as tenants'
expectations of future growth become more optimistic. In periods of slower
growth or declining sales, rents on new leases will grow more slowly or will
decline for the opposite reason. However, Center revenues nevertheless increase
as older leases roll over or are terminated early and replaced with new leases
negotiated at current rental rates that are usually higher than the average
rates for existing leases. The following table contains certain information
regarding per square foot base rent at the shopping centers that have been owned
and open for five years.
1999 1998 1997
---- ---- ----
Average Base Rent per square foot:
All mall tenants $43.58 $41.93 $41.37
Stores closing during the year $41.14 $44.27 $39.07
Stores opening during the year $52.64 $47.92 $41.08
In 1999, average base rent per square foot for stores opening during the
year was somewhat weighted by the leasing of smaller than average spaces at
several of the Company's most productive centers. The Company expects the rent
spread between opening and closing stores in 2000 to be in the Company's
historic range of $5.00 to $10.00 per square foot. However, this statistic is
difficult to predict in part because the Company's leasing policies and
practices may result in early lease terminations with actual average closing
rents per square foot which may vary from the average rent per square foot of
scheduled lease expirations.
21
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.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1999 1999 1999 1999 1999
------------------------------------------------------------------------------
(in thousands)
Mall Tenant Sales $533,730 $598,956 $ 610,520 $952,439 $2,695,645
Revenues 117,485 127,669 125,140 139,327 509,621
Occupancy:
Average 88.5% 88.1% 88.9% 90.3% 89.0%
Ending 87.5% 88.0% 89.5% 90.4% 90.4%
Leased Space 91.3% 91.7% 92.8% 92.1% 92.1%
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.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1999 1999 1999 1999 1999
--------------- -------------- --------------- --------------- ---------------
Minimum Rents 11.8% 10.8% 10.7% 7.2% 9.7%
Percentage Rents 0.2 0.1 0.1 0.5 0.2
Expense Recoveries 4.6 4.9 4.5 3.4 4.3
----- ----- ----- ----- -----
Mall Tenant Occupancy Costs 16.6% 15.8% 15.3% 11.1% 14.2%
----- ----- ----- ----- -----
Results of Operations
The following represent significant debt and equity transactions, new
center openings, expansions, and acquisitions which affect the operating results
described under Comparison of 1999 to 1998.
GMPT Exchange and Related Transactions
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned and one Unconsolidated Joint Venture),
together with $990 million of debt, for all of GMPT's partnership units
(approximately 50 million units with a fair value of $675 million, based on the
average stock price of the Company's common shares of $13.50 for the two week
period prior to the closing), providing the Company with a majority and
controlling interest in the Operating Partnership. The Operating Partnership
continues to manage the centers exchanged under management agreements with GMPT.
The management agreements are cancelable with 90 days notice. Certain costs of
providing services under these agreements, including administrative and certain
other fixed costs, would not necessarily be eliminated if the contracts were to
be canceled or not renewed. The actual reduction of costs would be affected by
whether all or a portion of the contracts were canceled or not renewed, timing
of the cancellation or non-renewal, and actual or anticipated changes in the
Operating Partnership's owned or managed portfolio.
In anticipation of the GMPT Exchange, the Operating Partnership used the
$1.2 billion proceeds from two bridge loans to extinguish $1.1 billion of debt
in September 1998. The remaining proceeds were used primarily to pay prepayment
premiums and transaction costs. GMPT's share of debt received in the exchange
included the $902 million balance on the first bridge loan, $86 million
representing 50% of the debt on the Joint Venture owned shopping center, and
$1.6 million of assessment bond obligations. The $340 million balance on the
second bridge loan was refinanced during the first half of 1999.
22
Concurrently with the GMPT Exchange the Operating Partnership, expecting to
reduce its annual general and administrative expense, committed to a
restructuring of its operations and recognized a $10.7 million charge related to
this restructuring. During the fourth quarter of 1998, general and
administrative expense decreased $2.2 million from the comparable period in
1997. During 1999, general and administrative expense decreased $6.5 million
from 1998. Substantially all of the decrease in 1999 expense occurred in the
first three quarters of 1999.
Because the Company's portfolio changed significantly as a result of the
GMPT Exchange, the results of operations of the transferred centers have been
separately classified within the Consolidated Businesses and Unconsolidated
Joint Ventures for purposes of analyzing and understanding the historical
results of the current portfolio.
Since the Company's interest in the Operating Partnership has been its sole
material asset throughout all periods presented, references in the following
discussion to "the Company" include the Operating Partnership, except where
intercompany transactions are discussed or as otherwise noted, even though the
Operating Partnership did not become a consolidated subsidiary until September
30, 1998.
Other Debt and Equity Transactions
In September and November 1999, the Operating Partnership completed private
placements totaling $100 million of 9% Cumulative Redeemable Preferred
Partnership Equity (Series C Preferred Equity and Series D Preferred Equity,
respectively), which were purchased by institutional investors. The net proceeds
were used to pay down lines of credit.
In August 1999, a seven-year secured financing of $177 million with an
all-in rate of 7.8% was completed by the 50% owned Unconsolidated Joint Venture
that owns Cherry Creek. The proceeds were used to repay the existing $130
million mortgage and transaction costs. The remaining net proceeds of
approximately $45.2 million were distributed to the Operating Partnership, which
had contributed all the funding for the 1998 expansion of Cherry Creek. The
Operating Partnership used the distribution to pay down lines of credit.
In June 1999, the Operating Partnership's $200 million line of credit
facility was securitized, with interests in Fairlane, LaCumbre, Paseo Nuevo, and
Regency Square serving as collateral. The rate on the line was decreased to
LIBOR plus 0.90%.
In April 1999, a ten-year financing of $270 million with an all-in rate of
approximately 6.9% secured by The Mall at Short Hills was completed. Also, in
June 1999, a ten-year financing of $80 million with an all-in rate of
approximately 7.8% secured by Biltmore Fashion Park was completed. The net
proceeds of these financings were used to pay off the entire $340 million
balance on the bridge loan.
In April 1999, a three-year $170 million loan secured by Great Lakes
Crossing was finalized, with proceeds used to repay the balance of the existing
construction facility. The loan bears interest at one-month LIBOR plus 1.50%. In
addition, the Company finalized an amendment to the MacArthur Center
construction facility, with total availability under the facility of $120
million at an interest rate of one-month LIBOR plus 1.35%.
In January 1998, the Operating Partnership 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.
23
Openings, Expansions, Acquisitions, and Other
In March 1999, MacArthur Center, a 70% owned enclosed super-regional mall,
opened in Norfolk, Virginia. In November 1998, Great Lakes Crossing, an 85% (an
increase from 80%-see below) owned enclosed value super-regional mall, opened in
Auburn Hills, Michigan. Both Great Lakes Crossing and MacArthur Center are owned
by joint ventures in which the Operating Partnership has a controlling interest,
and consequently the results of these centers are consolidated in the Company's
financial statements. The Operating Partnership is entitled to a preferred
return on its equity contributions to these centers. The contributed capital was
used to fund construction costs. The income effect of the cumulative preferred
return net of the interest on the Operating Partnership's associated borrowings
was approximately $2.0 million for 1999. The net effect in 2000 of any recurring
preference is expected to be minimal. At Cherry Creek, a 132,000 square foot
expansion opened in stages throughout the fall of 1998.
In November 1999, the Operating Partnership acquired Lord Associates, a
retail leasing firm based in Alexandria, Virginia for $2.5 million in cash and
$5 million in partnership units, which are subject to certain contingencies. In
addition, $1.0 million of the purchase price is contingent upon profits achieved
on acquired leasing contracts. Of the cash purchase price, approximately $1.0
million was paid at closing and $1.5 million will be paid over five years.
In 1996, the Operating Partnership entered into an agreement to lease
Memorial City Mall, a 1.4 million square foot shopping center located in
Houston, Texas. The lease was subject to certain provisions that enabled the
Operating Partnership to explore significant redevelopment opportunities and
terminate the lease obligations in the event such redevelopment opportunities
were not deemed to be sufficient. In November 1999, the Operating Partnership
exercised its option to terminate the lease. Under the terms of the lease, the
Operating Partnership will continue to manage the center until May 2000.
In December 1999, the Operating Partnership acquired an additional 5%
interest in Great Lakes Crossing for $1.2 million in cash, increasing the
Operating Partnership's interest in the center to 85%.
Subsequent Events
In January 2000, the Company agreed to exchange property interests with its
current joint venture partner in two Unconsolidated Joint Ventures. Under the
terms of the agreement, expected to be completed in first quarter 2000, the
Operating Partnership will assume 100 percent ownership of Twelve Oaks Mall and
the current joint venture partner will become 100 percent owner of Lakeside.
Both properties will remain subject to the existing mortgages ($50 million and
$88 million at Twelve Oaks and Lakeside, respectively.) The Operating
Partnership will also pay the joint venture partner $30 million in cash. The
Operating Partnership will continue to manage Twelve Oaks, while the joint
venture partner will assume management responsibility of Lakeside at closing.
Upon completion of the transaction, the Company expects to recognize a gain on
the exchange, representing the excess of the fair value over the net book basis
of the Company's interest in Lakeside Mall, adjusted for the $30 million paid
and transaction costs. Aside from this book gain, the Company does not expect
the transaction to have a material effect on the Company's results of
operations.
In January 2000, the 50% owned Unconsolidated Joint Venture that owns
Stamford Town Center completed a $76 million secured financing. The new
financing bears interest at a rate of one-month LIBOR plus 0.8% and matures in
2002 with a two-year extension option. The rate is capped at 8.2% plus credit
spread for the term of the loan. The proceeds were used to repay the $54 million
participating mortgage, the $18.3 million prepayment premium, and accrued
interest and transaction costs.
24
Presentation of Operating Results
In order to facilitate the analysis of the ongoing business for periods
prior to the GMPT Exchange, the following tables contain the combined operating
results of the Company and the Operating Partnership and also present separately
the revenues and expenses, other than interest, depreciation and amortization,
of the transferred centers. Income allocated to the noncontrolling partners and
preferred interests is deducted to arrive at the results allocable to the
Company's common shareowners. Because the net equity of the Operating
Partnership's unitholders is less than zero, for periods subsequent to the GMPT
Exchange, the income allocated to the noncontrolling partners is equal to their
share of distributions. The net equity of these minority partners is less than
zero due to accumulated distributions in excess of net income and not as a
result of operating losses. Distributions to partners are usually greater than
net income because net income includes non-cash charges for depreciation and
amortization. The Company's average ownership percentage of the Operating
Partnership was 63% for 1999 and 43% for 1998 (including averages of 39% for the
period through the GMPT Exchange and 63% thereafter.)
25
Comparison of 1999 to 1998
The following table sets forth operating results for 1999 and 1998, showing
the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
1999 1998
--------------------------------------------- ----------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES(1) VENTURES(2) TOTAL BUSINESSES(1) VENTURES(2) TOTAL
--------------------------------------------- ----------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 133.9 158.1 292.1 99.8 149.3 249.1
Percentage rents 4.6 3.9 8.6 5.2 3.7 8.9
Expense recoveries 78.9 83.6 162.4 57.9 79.2 137.1
Management, leasing and
development 23.9 23.9 12.3 12.3
Other 16.3 6.4 22.7 17.4 6.8 24.2
Revenues - transferred centers 129.7 47.2 177.0
------- ------- ------- ------- ------- -------
Total revenues 257.6 252.0 509.6 322.3 286.3 608.6
OPERATING COSTS:
Recoverable expenses 69.5 69.4 138.9 51.4 66.0 117.4
Other operating 28.9 13.0 41.9 25.7 11.7 37.4
Management, leasing and
development 17.2 17.2 8.0 8.0
Expenses other than interest,
depreciation and amortization
- transferred centers 44.3 17.7 62.0
General and administrative 18.1 18.1 24.6 24.6
Interest expense 51.3 64.4 115.8 75.8 69.7 145.5
Depreciation and amortization(3) 51.9 29.7 81.6 57.0 31.5 88.5
------- ------- ------- ------- ------- -------
Total operating costs 237.0 176.5 413.5 286.8 196.7 483.5
Net results of Memorial City (1) (1.4) (1.4) (0.8) (0.8)
------- ------- ------- ------- ------- -------
19.2 75.6 94.7 34.7 89.7 124.4
======= ======= ======= =======
Equity in income before
extraordinary items of
Unconsolidated Joint Ventures(3) 39.3 46.4
Restructuring loss (10.7)
------- -------
Income before extraordinary items,
minority and preferred interests 58.4 70.4
Extraordinary items (0.5) (50.8)
TRG preferred distributions (2.4)
Minority share of income (17.6) (4.2)
Distributions in excess of minority
share of income (12.4) (1.8)
------- -------
Net income 25.5 13.6
Series A preferred dividends (16.6) (16.6)
------- -------
Net income (loss) available to
common shareowners 8.9 (3.0)
======= =======
SUPPLEMENTAL INFORMATION(4):
EBITDA contribution 118.6 94.1 212.7 168.3 104.3 272.6
Beneficial Interest Expense (47.6) (34.5) (82.1) (75.8) (37.1) (112.9)
Non-real estate depreciation (2.7) (2.7) (2.3) (2.3)
Preferred dividends and distributions (19.0) (19.0) (16.6) (16.6)
------- ------- ------- ------- ------- -------
Funds from Operations contribution 49.3 59.7 108.9 73.7 67.1 140.8
======= ======= ======= ======= ======= =======
(1) The results of operations of Memorial City are presented net in this table.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(3) Included in 1999 (a) Equity in income before extraordinary item of
Unconsolidated Joint Ventures and (b) Depreciation and amortization are
charges of $4.7 million and $3.8 million, respectively, representing
amortization of the Company's additional basis in the Operating
Partnership.
(4) EBITDA represents earnings before interest and depreciation and
amortization. Funds from Operations is defined and discussed in Liquidity
and Capital Resources.
(5) Amounts in this table may not add due to rounding.
(6) Certain 1998 amounts have been reclassified to conform to 1999
classifications.
26
Consolidated Businesses
Total revenues for the year ended December 31, 1999 were $257.6 million, a
$65.0 million, or 33.7%, increase over the comparable period in 1998, excluding
revenues of the transferred centers. Minimum rents increased $34.1 million of
which $30.6 million was caused by the opening of MacArthur Center and Great
Lakes Crossing. Minimum rents also increased due to tenant rollovers. Expense
recoveries increased primarily due to the new centers. Revenues from management,
leasing, and development services increased primarily due to the management
agreements with GMPT. Other revenue decreased primarily due to a decrease in
gains on sales of peripheral land, partially offset by increases in garage and
trash removal services and lease cancellation fees.
Total operating costs were $237.0 million, a $5.5 million, or 2.3% decrease
from the comparable period in 1998, excluding expenses other than depreciation,
amortization and interest of the transferred centers. Recoverable expenses
increased primarily due to Great Lakes Crossing and MacArthur Center. Other
operating expense increased due to an increase in the charge to operations for
costs of unsuccessful and potentially unsuccessful pre-development activities,
the new centers, and bad debt expense. Costs of management, leasing and
development services increased primarily due to the management agreements with
GMPT. General and administrative expense decreased $6.5 million primarily due to
decreases in payroll costs, travel and professional fees. Interest expense
decreased primarily due to the assumption of debt by GMPT as part of the GMPT
Exchange and debt paid down with the proceeds of the Series C and Series D
Preferred Equity offerings, partially offset by an increase in debt used to
finance Great Lakes Crossing and MacArthur Center and a decrease in capitalized
interest related to these centers. Depreciation and amortization expenses
decreased due to the transferred centers, partially offset by an increase due to
the new centers.
During 1998, a $10.7 million loss on the restructuring was recognized,
which primarily represented the cost of certain involuntary terminations of
personnel.
Unconsolidated Joint Ventures
Total revenues for the year ended December 31, 1999 were $252.0 million, a
$12.9 million, or 5.4%, increase from the comparable period of 1998, excluding
revenues of the transferred center. Minimum rents increased due to the expansion
at Cherry Creek and tenant rollovers. Expense recoveries also increased because
of the Cherry Creek expansion and an increase in property taxes recoverable from
tenants at certain centers.
Total operating costs decreased by $20.2 million (of which $17.7 million
represented the expenses other than interest, depreciation, and amortization of
the transferred center) to $176.5 million for the year ended December 31, 1999.
Recoverable expenses increased primarily due to the Cherry Creek expansion and
an increase in property taxes at certain centers. Other operating expense
increased primarily due to increases in bad debt expense. Interest expense
decreased primarily due to the assumption of debt by GMPT as part of the GMPT
Exchange. Depreciation and amortization decreased due to the transferred center,
offset by an increase due to the Cherry Creek expansion.
Income before extraordinary items of the Unconsolidated Joint Ventures
decreased by $14.1 million, or 15.7%, to $75.6 million. The Company's equity in
income before extraordinary items of the Unconsolidated Joint Ventures was $39.3
million, a 15.3% decrease from the comparable period in 1998.
Net Income
As a result of the foregoing, the Company's income before extraordinary
items, minority and preferred interests decreased $12.0 million, or 17.0%, to
$58.4 million for the year ended December 31, 1999. The Company recognized $0.5
million in extraordinary losses related to the extinguishment of debt during
1999, while an extraordinary charge of $50.8 million for the extinguishment of
debt, primarily related to the GMPT Exchange, was recognized in 1998. The income
of the Operating Partnership allocable to minority partners increased to a total
of $30.0 million, from $6.0 million in 1998, primarily due to the minority
partners' $30.7 million share of the extraordinary charges in 1998.
Distributions of $2.4 million to the Operating Partnership's Series C and Series
D Preferred Equity owners were made in 1999. After payment of $16.6 million in
Series A preferred dividends, net income (loss) available to common shareowners
for 1999 was $8.9 million compared to $(3.0) million in 1998.
27
Comparison of 1998 to 1997
Discussion of significant debt and equity transactions, acquisitions, and
openings occurring in 1998 is included in the Comparison of 1999 to 1998.
Significant 1997 items are described below.
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 preferred equity interest in the Operating Partnership. The Operating
Partnership used the net proceeds to pay down debt under existing revolving
credit and commercial paper facilities, which were used to fund the acquisition
of Regency Square in September 1997. In September 1997, the Operating
Partnership acquired Regency Square (Regency) shopping center for $123.9 million
in cash. Additionally, in November 1997, the Operating Partnership opened
Arizona Mills, a 37% owned value super-regional shopping center. In December
1997, the Operating Partnership acquired The Falls shopping center for $156
million in cash and the leasehold interest in The Mall at Tuttle Crossing, which
opened in July 1997. These two centers were transferred to GMPT.
A 135,000 square foot expansion opened at Westfarms in August 1997. In
addition, approximately 50,000 square feet of new mall stores opened at Biltmore
in 1997.
The Company's average ownership percentage of the Operating Partnership was
43% for 1998 (including averages of 39% for the period through the GMPT Exchange
and 63% thereafter) and 37% for 1997.
28
Comparison of 1998 to 1997
The following table sets forth operating results for 1998 and 1997, showing
the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
1998 1997
--------------------------------------------- ----------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES(1) VENTURES(2) TOTAL BUSINESSES(1) VENTURES(2) TOTAL
--------------------------------------------- ----------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 99.8 149.3 249.1 86.4 121.1 207.5
Percentage rents 5.2 3.7 8.9 5.0 2.6 7.5
Expense recoveries 57.9 79.2 137.1 51.6 64.4 115.9
Management, leasing and
development 12.3 12.3 8.5 8.5
Other 17.4 6.8 24.2 11.4 8.0 19.4
Revenues - transferred centers 129.7 47.2 177.0 138.9 62.7 201.6
------- ------- ------ ------- ------- -------
Total revenues 322.3 286.3 608.6 301.6 258.8 560.4
OPERATING COSTS:
Recoverable expenses 51.4 66.0 117.4 45.6 53.7 99.2
Other operating 25.7 11.7 37.4 16.8 10.7 27.5
Management, leasing
and development 8.0 8.0 4.4 4.4
Expenses other than interest,
depreciation and amortization
- transferred centers 44.3 17.7 62.0 47.7 23.9 71.5
General and administrative 24.6 24.6 26.7 26.7
Interest expense 75.8 69.7 145.5 73.6 54.5 128.2
Depreciation and amortization 57.0 31.5 88.5 49.2 23.7 72.8
------- ------- ------ ------- ------- -------
Total operating costs 286.8 196.7 483.5 264.0 166.4 430.4
Net results of Memorial City (1) (0.8) (0.8) 0.0 0.0
------- ------- ------ ------- ------- -------
34.7 89.7 124.4 37.6 92.4 130.0
======= ====== ======= =======
Equity in income before
extraordinary item of
Unconsolidated Joint Ventures 46.4 48.8
Restructuring loss (10.7)
------- -------
Income before extraordinary items,
minority and preferred interests 70.4 86.4
Extraordinary items (50.8)
Minority share of income (4.2) (57.8)
Distributions in excess of minority
share of income (1.8) -------
-------
Net income 13.6 28.7
Series A preferred dividends (16.6) (4.1)
------- -------
Net income (loss) available to
common shareowners (3.0) 24.6
======== =======
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 168.3 104.3 272.6 161.4 94.4 255.7
Beneficial Interest Expense (75.8) (37.1) (112.9) (73.6) (29.3) (102.9)
Non-real estate depreciation (2.3) (2.3) (2.1) (2.1)
Preferred dividends and distributions (16.6) (16.6) (4.1) (4.1)
------ ------- ------ ------ ------- ------
Funds from Operations contribution 73.7 67.1 140.8 81.6 65.1 146.7
====== ======= ====== ====== ======= ======
(1) The results of operations of Memorial City are presented net in this table.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(3) EBITDA represents earnings before interest and depreciation and
amortization. Funds from Operations is defined and discussed in Liquidity
and Capital Resources.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1998 and 1997 amounts have been reclassified to conform to 1999
classifications.
29
Consolidated Businesses
Total revenues for 1998 were $322.3 million, a $20.7 million, or 6.9%,
increase over 1997. Minimum rents increased $13.4 million, of which $8.9 million
was due to the opening of Great Lakes Crossing and the acquisition of Regency.
Minimum rents also increased because of the expansion at Biltmore and tenant
rollovers. Expense recoveries increased primarily due to Great Lakes Crossing
and Regency. Revenues from management, leasing and development services
increased primarily due to the new management agreements with GMPT. Other
revenue increased primarily due to an increase in gains on sales of peripheral
land and lease cancellation revenue.
Total operating costs increased $22.8 million, or 8.6%, to $286.8 million.
Recoverable and other operating expenses increased due to Great Lakes Crossing
and Regency. Other operating expense also increased due to professional fees,
management expense and an increase in the charge to operations for costs of
unsuccessful and potentially unsuccessful pre-development activities. General
and administrative expense decreased $2.1 million between periods due to
decreases in payroll and reduced employee relocation and recruiter costs,
partially offset by increases attributable to the phase-in of the long term
compensation plan.
Interest expense increased due to an increase in debt used to finance
Tuttle Crossing, the acquisition of The Falls and the redemption of a partner's
interest in the Operating Partnership, partially offset by a decrease in debt
paid down with the proceeds of the October 1997 and April 1998 equity offerings
and the assumption of debt by GMPT as part of the GMPT Exchange. Depreciation
and amortization expense increased due to Great Lakes Crossing, Tuttle Crossing,
Regency and The Falls, partially offset by the decrease in expense due to the
transferred centers only being included in 1998 through the date of the GMPT
Exchange.
Revenues and expenses other than interest and depreciation for the
transferred centers for 1998 represent operations through the date of the GMPT
Exchange. The resulting decreases from 1997 were partially offset by increases
in revenues and expenses due to the acquisition of The Falls and the opening of
Tuttle Crossing.
During 1998, a $10.7 million loss on the restructuring was recognized,
which primarily represented the cost of certain involuntary terminations of
personnel.
Unconsolidated Joint Ventures
Total revenues for 1998 were $286.3 million, a $27.5 million, or 10.6%,
increase from 1997. The increase in minimum rents and expense recoveries was
primarily due to Arizona Mills and the expansions at Westfarms and Cherry Creek.
Minimum rents also increased due to tenant rollovers. Other revenue decreased by
$1.2 million primarily due to a decrease in gains on peripheral land sales.
Total operating costs increased by $30.3 million, or 18.2%, to $196.7
million for 1998. Recoverable and depreciation and amortization expenses
increased primarily due to Arizona Mills and the expansions. Other operating
expense increased primarily due to Arizona Mills. Interest expense increased
primarily due to an increase in debt used to finance Arizona Mills and the
Westfarms expansion, and a decrease in capitalized interest related to these two
projects.
Revenues and expenses other than interest and depreciation for the
transferred centers for 1998 represent the operations of Woodfield through the
date of the GMPT Exchange, resulting in decreases from the prior year.
As a result of the foregoing, income before extraordinary item of the
Unconsolidated Joint Ventures decreased by $2.7 million, or 2.9%, to $89.7
million. The Company's equity in income before extraordinary item of the
Unconsolidated Joint Ventures was $46.4 million, a 4.9% decrease from the
comparable period in 1997.
30
Net Income
As a result of the foregoing, the Company's income before extraordinary
items, minority and preferred interest decreased to $70.4 million for 1998. The
income allocable to minority partners decreased to $6.0 million, from $57.8
million, reflecting the Company's increased ownership in the Operating
Partnership due to the GMPT Exchange and other equity transactions, as well as
the minority partners' $30.7 million share of the 1998 extraordinary items.
Also, the Company recognized its $20.1 million share of $50.8 million in
extraordinary charges related to the extinguishment of debt, including debt
extinguished in anticipation of the GMPT Exchange, primarily consisting of
prepayment premiums. After payment of $16.6 million in Series A preferred
dividends, net income (loss) available to common shareowners for 1998 was $(3.0)
million compared to $24.6 million for 1997.
31
Liquidity and Capital Resources
In the following discussion, references to beneficial interest represent
the Operating Partnership's share of the results of its consolidated and
unconsolidated businesses. The Company does not have, and has not had, any
parent company indebtedness; all debt discussed represents obligations of the
Operating Partnership or its subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities,
distributions from its joint ventures, the unutilized portion of its credit
facilities, and its ability to access the capital markets, assures adequate<