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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001.
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 .
----- ------
______ 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 25, 2002, the aggregate market value of the 50,607,645 shares of Common Stock held by
non-affiliates of the registrant was $754 million, based upon the closing price $14.90 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 25, 2002, there were outstanding 51,017,431 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held in 2002 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 62% 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, 2001, included
20 urban and suburban Centers located in nine states. Two additional centers are under construction and will open in
October 2002 and September 2003. The Operating Partnership also owns certain regional retail shopping center development
projects and more than 99% of The Taubman Company LLC (the "Manager"), which manages the shopping centers and provides
other services to the Operating Partnership and the Company. See the table on pages 11 and 12 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 90% of its REIT taxable income and meet certain other requirements. The Operating Partnership'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 2001, see 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. Seventeen of the Centers are "super-regional" 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, Miami, Dallas, Tampa, and Washington,
D.C.;
o range in size between 438,000 and 1.6 million square feet of GLA and between 133,000 and 636,000 square feet of
Mall GLA. The smallest Center has approximately 50 stores, and the largest has over 200 stores. Of the 20 Centers,
17 are super-regional shopping centers;
o have approximately 2,800 stores operated by its mall tenants under approximately 1,200 trade names;
o have 60 anchors, operating under 17 trade names;
o lease approximately 78% of Mall GLA to national chains, including subsidiaries or divisions of The Limited (The
Limited, Express, Victoria's Secret, and others), The Gap (The Gap, Gap Kids, Banana Republic, and others), and
Foot Locker, Inc. (Foot Locker, Lady Foot Locker, Champs Sports, and others); and
o are among the most productive (measured by mall tenants' average per square foot sales) in the United States.
In 2001, mall tenants had average per square foot sales of $456, which is significantly 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 20 Centers, 17
had annual rent rolls at December 31, 2001 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 by leasing space to a constantly changing mix of tenants,
thereby increasing achievable rents.
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. In addition, the Company has brought to the Centers "new to the market" retailers. 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
one-to-one marketing program, which connects shoppers and retailers through online websites. Approximately 99% of
the managed centers' tenants participate in the center websites and at the end of 2001, these sites had
approximately 350,000 registered users.
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.
3
The following table includes the new centers that opened in 2001:
Center Opening Date Size (sq. ft.) Anchors
- ------ ------------ -------------- -------
Dolphin Mall March 1, 2001 1.3 million Off 5th Saks, Dave & Busters, Cobb
(Miami, Florida) Theatres, Burlington Coat Factory,
Marshall's, Oshman's Supersports USA,
and more
The Shops at Willow Bend August 3, 2001 1.5 million Neiman Marcus, Lord & Taylor, Foley's,
(Plano, Texas) Dillard's, Saks Fifth Avenue (2004)
International Plaza September 14, 2001 1.25 million Neiman Marcus, Nordstrom, Lord &
(Tampa, Florida) Taylor, Dillard's
The Mall at Wellington Green October 5, 2001 1.3 million Burdines, Dillard's, JCPenney, Lord &
(Wellington, Florida) Taylor, Nordstrom (2003)
Additionally, two new centers are currently under construction; The Mall at Millenia, a 1.2 million square foot
regional shopping center in Orlando, Florida is scheduled to open in October 2002, and Stony Point Fashion Park, a 690
thousand square foot center in Richmond, Virginia, is scheduled to open in September 2003.
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. The pre-construction phase for a regional center typically extends over several years and
the time to obtain anchor commitments, zoning and regulatory approvals, and public financing arrangements can vary
significantly from project to project. 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. Unexpected costs
due to extended zoning and regulatory processes may cause the Company's investment in a project to exceed this historic
experience.
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.
In early 2002, the Company entered into an agreement to acquire a 50% general partnership interest in Sunvalley
Shopping Center in Concord, California. The Manager has managed this center since its development.
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).
The following table includes information regarding recent development, acquisition, and expansion activities.
Developments:
Completion Date Center Location
--------------- ------ --------
November 1998 Great Lakes Crossing Auburn Hills, Michigan
March 1999 MacArthur Center Norfolk, Virginia
March 2001 Dolphin Mall Miami, Florida
August 2001 The Shops at Willow Bend Plano, Texas
September 2001 International Plaza Tampa, Florida
October 2001 The Mall at Wellington Green Wellington, Florida
Acquisitions:
Completion Date Center Location
--------------- ------ --------
December 1999 Great Lakes Crossing - Auburn Hills, Michigan
additional interest (1)
August 2000 Twelve Oaks Mall - Novi, Michigan
additional interest (2)
Expansions and Renovations:
Completion Date Center Location
--------------- ------ --------
August 1998 Cherry Creek (3) Denver, Colorado
November 1998 Woodland (4) Grand Rapids, Michigan
November 1999 Fairlane (5) Dearborn, Michigan
November 1999 Biltmore (6) Phoenix, Arizona
February 2000 - September 2000 Fair Oaks (7) Fairfax, Virginia
May 2000 Fairlane (8) Dearborn, Michigan
December 2000-2001 Beverly Center (4) Los Angeles, California
November 2001 Twelve Oaks Mall (5) Novi, Michigan
November 2001 Woodland (5) Grand Rapids, Michigan
(1) In December 1999, an additional 5% interest in the center was acquired.
(2) In August 2000, the joint venture partner's 50% interest in the center was acquired.
(3) Additional 132,000 square foot expansion of mall tenant space opened in August of 1998.
(4) Mall renovation continued in 2001.
(5) New food court opened.
(6) Macy's expansion completed.
(7) Hecht's opened an expansion in February. Additionally, a JCPenney expansion and newly constructed Macy's opened
in September.
(8) A 21-screen theater opened.
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 existing or new tenants at higher rates.
5
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 created 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 the 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 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 minimum rent at Centers that have been owned
and open for at least two years.
2001 2000 (1) 1999
---- ---- ----
Average minimum rent per square foot:
All mall tenants $40.97 $39.77 $39.58
Stores closing during year $40.76 $40.06 $39.49
Stores opening during year $49.58 $46.21 $48.01
(1) Amounts have been restated to include centers comparable to the 2001 statistic.
Lease Expirations
The following table shows lease expirations based on information available as of December 31, 2001 for the next ten
years for the Centers in operation at that date:
Percent of
Annualized Base Annualized Base Total Leased
Lease Number of Leased Area Rent Under Rent Under Square Footage
Expiration Leases in Expiring Leases Expiring Leases Represented by
Year Expiring Square Footage (in thousands) Per Square Foot (1) Expiring Leases
---- -------- -------------- -------------- --------------- ---------------
2002 (2) 127 348,672 $11,723 $33.62 3.4%
2003 223 709,854 25,234 35.55 7.0
2004 205 518,555 24,044 46.37 5.1
2005 248 630,740 30,297 48.03 6.2
2006 228 597,559 26,451 44.27 5.9
2007 212 689,404 26,893 39.01 6.8
2008 282 954,212 36,371 38.12 9.4
2009 278 902,923 37,761 41.82 8.9
2010 135 456,217 20,199 44.28 4.5
2011 468 1,609,402 63,921 39.72 15.9
(1) A higher percentage of space at value centers is typically rented to major and mall tenants at lower rents than
the portfolio average. Excluding value centers, the annualized base rent under expiring leases is greater by a range
of $2.78 to $12.89 or an average of $6.63 for the periods presented within this table.
(2) Excludes leases that expire in 2002 for which renewal leases or leases with replacement tenants have been
executed as of December 31, 2001.
6
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 1996 to 2001 was approximately two years. The average term of leases signed during 2001 and 2000 was approximately
eight 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 2001, approximately 4.5% of leases were
so affected compared to 2.3% in 2000. This statistic has ranged from 1.2% to 4.5% since the Company went public in
1992. 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
----------------------------------------------------
2001 (1) 2000 1999 1998 (2) 1997
---- ---- ----- ---- ----
Average Occupancy 84.9% 89.1% 89.0% 89.4% 87.6%
Ending Occupancy 84.0% 90.5% 90.4% 90.2% 90.3%
Leased Space 87.7% 93.8% 92.1% 92.3% 92.3%
(1) Excluding centers opened during 2001, average occupancy, ending occupancy, and leased space were 88.1%, 88.8%,
and 91.8%, respectively.
(2) Excludes centers transferred to General Motors pension trusts.
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 5.7% of Mall GLA as of December 31, 2001 and of 2001 minimum rent. The largest of
these, in terms of square footage and rent, is Express, which accounted for approximately 1.7% of Mall GLA and 1.6% of
2001 minimum rent. No other single retail company accounted for more than 3% of Mall GLA or 4% of 2001 minimum rent.
The following table shows the ten largest tenants and their square footage as of December 31, 2001.
# of Square % of
Tenant Stores Footage Mall GLA
- ------ ------ ------- --------
Limited (The Limited, Express, Victoria's Secret) 73 527,112 5.7%
Gap (Gap, Gap Kids, Banana Republic) 36 258,209 2.8%
Foot Locker, Inc. (Foot Locker, Lady Foot Locker, Champs Sports) 39 193,591 2.1%
Williams-Sonoma (Williams-Sonoma, Pottery Barn, Hold Everything) 25 164,498 1.8%
Abercrombie & Fitch 19 143,648 1.6%
Spiegel (Eddie Bauer) 14 115,929 1.3%
Talbots 17 113,683 1.2%
Forever 21 7 110,078 1.2%
Borders Group (Borders, Waldenbooks) 15 108,694 1.2%
Ann Taylor 17 86,074 0.9%
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, whether because of unavailability of coverage or in excess of policy specifications and insured
limits, including those resulting from wars, acts of terrorism, riots or civil disturbances, or losses from
earthquakes or floods.
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 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
Investments in and Loans to Third Parties
The Company has occasionally made investments in technology industry companies to augment the services the Company can
provide to its tenants, enhance the overall value of its shopping centers, and earn financial returns. The Company also
occasionally extends credit to third parties in connection with the sales of land or other transactions. The Company is
exposed to risk in the event the values of its investments and/or its loans decrease due to overall market conditions,
business failure, and/or other nonperformance by the investees or counterparties.
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 overhead
costs allocated to these contracts would not 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 90% of otherwise taxable income, the Company
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.
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.
There are asbestos containing materials ("ACMs") at some of the older 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
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.
9
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, 2001, the Manager had 451 full-time employees. The following table provides a breakdown of employees
by operational areas as of December 31, 2001:
Number Of Employees
-------------------
Property Management............................... 218
Leasing .......................................... 71
Development....................................... 35
Financial Services................................ 70
Other............................................. 57
--
Total..................................... 451
===
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, 2001. Excluded from this table are The Mall at Millenia, which will open in 2002 and Stony
Point Fashion Park, which will open in 2003. Centers are owned in fee other than Beverly Center, Cherry Creek,
International Plaza, 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.
10
Sq. Ft. of GLA/
Mall GLA Year Opened/ Year Ownership % Leased Space (1) 2001 Rent (2)
Owned Centers Anchors as of 12/31/01 Expanded Acquired as of 12/31/01 as of 12/31/01 (in Thousands)
------------- ------- -------------------- -------------- ----------- ------------------- -------------- --------------
Arizona Mills GameWorks, Harkins Cinemas, 1,227,000/ 1997 37% 97% $24,592
Tempe, AZ JCPenney Outlet, Neiman Marcus- 521,000
(Phoenix Metropolitan Area) Last Call, Off 5th Saks
Beverly Center Bloomingdale's, Macy's 876,000/ 1982 70%(3) 98% $27,897
Los Angeles, CA 568,000
Biltmore Fashion Park Macy's, Saks Fifth Avenue 600,000/ 1963/1992/ 1994 100% 95% $11,481
Phoenix, AZ 293,000 1997/1999
Cherry Creek Foley's, Lord & Taylor, Neiman 1,023,000/ 1990/1998 50% 90% $27,691
Denver, CO Marcus, Saks Fifth Avenue 550,000 (4)
Dolphin Mall Burlington Coat Factory, 1,300,000/
Miami, FL Cobb Theatres, Dave & Busters, 636,000 2001 50% 80% (5)
Oshman's Supersports USA,
Off 5th Saks, Marshalls
Fair Oaks Hecht's, JCPenney, Lord & Taylor, 1,584,000/ 1980/1987/ 50% 90% $21,625
Fairfax, VA Sears, Macy's 568,000 1988/2000
(Washington, DC Metropolitan Area)
Fairlane Town Center Marshall Field's, JCPenney, Lord & 1,494,000/ 1976/1978/ 100% 78% $14,723
Dearborn, MI Taylor, Off 5th Saks, Sears 604,000 1980/2000
(Detroit Metropolitan Area)
Great Lakes Crossing Bass Pro Shops Outdoor World, 1,376,000/ 1998 85% 93% $22,496
Auburn Hills, MI GameWorks, Neiman Marcus- 567,000
(Detroit Metropolitan Area) Last Call, Off 5th Saks, Star Theatres
International Plaza Dillard's, Lord & Taylor, Neiman 1,253,000/ 2001 26% 80% (5)
Tampa, FL Marcus, Nordstrom 611,000
La Cumbre Plaza Robinsons-May, Sears 474,000/ 1967/1989 1996 100%(6) 95% $4,444
Santa Barbara, CA 174,000
MacArthur Center Dillard's, Nordstrom 937,000/ 1999 70% 91% $15,929
Norfolk, VA 523,000
Paseo Nuevo Macy's, Nordstrom 438,000/ 1990 1996 100%(6) 98% $4,890
Santa Barbara, CA 133,000
Regency Square Hecht's (two locations), JCPenney, 826,000/ 1975/1987 1997 100% 95% $10,420
Richmond, VA Sears 239,000
The Mall at Short Hills Bloomingdale's, Macy's, Neiman 1,341,000/ 1980/1994/ 100% 99% $36,358
Short Hills, NJ Marcus, Nordstrom, Saks Fifth Avenue 519,000 1995
Stamford Town Center Filene's, Macy's, Saks Fifth Avenue 861,000/ 1982 50% 91% $16,986
Stamford, CT 368,000
11
Sq. Ft. of GLA/
Mall GLA Year Opened/ Year Ownership % Leased Space (1) 2001 Rent (2)
Owned Centers Anchors as of 12/31/01 Expanded Acquired as of 12/31/01 as of 12/31/01 (in Thousands)
------------- ------- -------------------- ------------- ----------- ----------------- -------------- --------------
Twelve Oaks Mall Marshall Field's, JCPenney, Lord & 1,193,000/ 1977/1978 100% 97% $21,983
Novi, MI Taylor, Sears 455,000
(Detroit Metropolitan Area)
The Mall at Wellington Green Burdines, Dillard's, JCPenney, 1,111,000/ 2001 90% 75% (5)
Wellington, FL Lord & Taylor 419,000 (7)
(Palm Beach County)
Westfarms Filene's, Filene's Men's Store/ 1,295,000/ 1974/1983/1997 79% 96% $25,067
West Hartford, CT Furniture Gallery, JCPenney, Lord & 525,000
Taylor, Nordstrom
The Shops at Willow Bend Dillard's, Foley's, Lord & Taylor, 1,341,000/ 2001 100% 75% (5)
Plano, TX Neiman Marcus 558,000 (8)
(Dallas Metropolitan Area)
Woodland Marshall Field's, JCPenney, Sears 1,080,000/ 1968/1974/ 50% 93% $15,005
Grand Rapids, MI 355,000 1984/1989
----------
Total GLA/Total Mall GLA: 21,630,000/
9,186,000
Average GLA/Average Mall GLA: 1,082,000/
459,000
(1) Leased space comprises both occupied space and space that is leased but not yet occupied. Leased space for value
centers (Arizona Mills, Dolphin Mall, and Great Lakes Crossing) includes anchors.
(2) Includes minimum and percentage rent for the year ended December 31, 2001. Excludes rent from certain peripheral
properties.
(3) The Company has an option to acquire the remaining 30%. The results of Beverly Center are consolidated in the
Company's financial statements.
(4) GLA excludes approximately 166,000 square feet for the renovated buildings on adjacent peripheral land.
(5) Center was open for only a portion of the year.
(6) In early 2002, the Company entered into an agreement to sell its interests in LaCumbre Plaza and Paseo Nuevo. In
addition, the Company entered into an agreement to acquire a 50% general partnership interest in Sunvalley Shopping
Center located in Concord, California (see Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations- Subsequent Events).
(7) GLA excludes Nordstrom and additional mall GLA, which will open in 2003.
(8) GLA excludes Saks Fifth Avenue, which will open in 2004.
12
Anchors
The following table summarizes certain information regarding the anchors at the operating Centers (excluding the
value centers) as of December 31, 2001.
Number of 12/31/01 GLA
Name Anchor Stores (in thousands) % of GLA
---- ------------- -------------- --------
Dillard's 4 947 5.3%
Federated
Macy's 6 1,162
Burdines 1 200
Bloomingdale's 2 379
---- -------
Total 9 1,741 9.8%
JCPenney 7 1,304 7.4%
May Company
Lord & Taylor 8 1,058
Hecht's 3 453
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 2 418
Robinsons-May 1 150
---- ------
Total 17 2,538 14.3%
Neiman Marcus 4 466 2.6%
Nordstrom (1) 5 843 4.8%
Saks
Saks Fifth Avenue (2) 4 359
Off 5th Saks 1 93
---- -------
5 452 2.5%
Sears 6 1,279 7.2%
Target Corporation
Marshall Field's 3 647 3.7%
---- ------- -----
Total 60 10,217 57.6%
==== ======= ====
(1) A Nordstrom will open at The Mall at Wellington Green in 2003.
(2) A Saks will open at The Shops at Willow Bend in 2004.
Mortgage Debt
The following table sets forth certain information regarding the mortgages encumbering the Centers as of December 31,
2001. All mortgage debt in the table below is nonrecourse to the Operating Partnership, except for debt encumbering
Great Lakes Crossing, Dolphin Mall, International Plaza, The Mall at Millenia, The Mall at Wellington Green, and The
Shops at Willow Bend. 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. (See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Covenants and Commitments"). Assessment bonds totaling approximately $2.0
million, which are not included in the table, also encumber Biltmore and Twelve Oaks Mall.
13
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/01 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 Fashion Park 7.68% 79,007 6,906 (2) 07/10/09 71,391 09/14/01 (3)
Great Lakes Crossing (85%) Floating (4) 150,958 Varies (5) 04/01/02 (6) 150,323 2 Days Notice (7)
MacArthur Center (70%) 7.59% 143,588 12,400 (2) 10/01/10 126,884 12/15/02 (3)
Regency Square 6.75% 82,373 6,421 (2) 11/01/11 71,569 04/20/05 (8)
The Mall at Short Hills 6.70% 270,000 Interest Only (9) 04/01/09 245,301 05/02/04 (10)
The Mall at Wellington
Green (90%) Floating (11) 124,344 Interest Only (12) 05/01/04 (13) 124,344 10 Days Notice (7)
The Shops at Willow Bend Floating (14) 186,482 Interest Only (12) 07/01/03 (13) 186,482 10 Days Notice (7)
Other Consolidated Secured Debt
- -------------------------------
TRG Credit Facility Floating (15) 11,955 Interest Only 06/30/02 11,955 At Any Time (7)
TRG Credit Facility Floating (16) 205,000 Interest Only 11/01/04 (6) 205,000 2 Days Notice (7)
Other 13.00% (17) 20,000 Interest Only 11/22/09 20,000 11/22/04 (18)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
- --------------------------------
Arizona Mills (37%) 7.90% 144,737 12,728 (2) 10/05/10 130,419 12/15/02 (3)
Cherry Creek (50%) 7.68% 177,000 Interest Only (19) 08/11/06 171,933 05/19/02 (20)
Dolphin Mall (50%) Floating (21) 164,648 Interest Only (22) 10/06/02 (6) 164,648 3 Days Notice (7)
Fair Oaks (50%) 6.60% 140,000 Interest Only 04/01/08 140,000 30 Days Notice (1)
International Plaza (26%) Floating (23) 171,555 Interest Only 11/10/02 (6) 171,555 3 Days Notice (7)
The Mall at Millenia (50%) Floating (24) 56,545 Interest Only (12) 11/01/03 (13) 56,545 10 Days Notice (7)
Stamford Town Center (50%) Floating (25) 76,000 Interest Only 08/10/02 (26) 76,000 02/11/02 (7)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 60 Days Notice (1)
Westfarms (79%) Floating (27) 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) Amortizing principal based on 30 years.
(3) No defeasance deposit required if paid within three months of maturity date.
(4) The rate is locked to March 2002 at 4.04% including credit spread.
(5) Began amortizing principal on 5/1/01 based on 25 years. Payment will recalculate if loan is extended.
(6) The maturity date may be extended one year.
(7) Prepayment can be made without penalty.
(8) No defeasance deposit required if paid within six months of maturity date.
(9) Interest only until 4/1/02. Thereafter, principal will be amortized based on 30 years. Annual debt service will be $20.9
million.
(10) 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.
(11) The rate is locked to October 2002 at 4.47% including credit spread. $70 million of the debt is capped at 7% and another $70
million is capped at 7.25% plus credit spread of 1.85% until 10/01/2003 based on one-month LIBOR.
(12) Interest only unless maturity date is extended. In the first year of extension, principal will be amortized based on
25 years.
(13) Maturity date may be extended for 2 one-year periods.
(14) The rate is locked to November 2002 at 4.15% including credit spread on $182.4 million. $147.0 million of the debt is capped
at 7.15%, plus credit spread of 1.85%, based on one-month LIBOR. The cap matures 6/09/03.
(15) The facility is a $40 million line of credit and is secured by TRG's interest in Westfarms.
(16) The facility is a $275 million line of credit and is secured by mortgages on Fairlane Town Center and Twelve Oaks Mall.
Floating rate is based on one-month LIBOR plus credit spread of 0.90%. The rate is locked to November 2002 at 3.17%
including credit spread on $75.0 million. In March 2002, the Company swapped the rate on $100 million of the line of credit
to 4.3% for November 2002 through October 2003.
(17) Currently payable at 9%. Deferred interest is due at maturity. The loan is secured by TRG's indirect interest in International
Plaza.
(18) Debt can be prepaid without penalty. 60 days notice required.
(19) Interest only until 7/11/04. Thereafter, principal will be amortized based on 25 years. Annual debt service will be $15.9
million.
(20) Debt may be prepaid with a yield maintenance prepayment penalty. No prepayment penalty is due if redeemed within three months
of maturity date. 30-60 day notice required.
(21) The rate is locked to maturity at 4.53% including credit spread. The rate is capped at 7.0% until maturity, plus credit spread
of 2.00%, based on one-month LIBOR. The rate is also swapped to a rate of 6.14%, plus credit spread, when LIBOR is below 6.7%.
(22) Interest only unless maturity date is extended. During extension period, principal is amortized at $190,000 per month.
(23) The rate is locked to October 2002 at 4.40% including credit spread on $160.4 million. $100 million of the debt is capped at
7.10%, plus credit spread of 1.90%, until maturity based on one-month LIBOR.
(24) The rate is locked to May 2002 at 4.06% including credit spread on $48.3 million. The rate is capped at 8.75%, plus credit
spread of 1.95%, until 12/1/02 based on one-month LIBOR.
(25) The rate is capped at 8.20%, plus credit spread of 0.80%, until maturity based on one-month LIBOR.
(26) Maturity date may be extended twice to no later than 8/10/04.
(27) The rate is locked until maturity at 5.2%, including credit spread.
For additional information regarding the Centers and their operations, see the responses to Item 1 of this report.
14
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 25, 2002, the 51,017,431 outstanding shares of Common Stock were held by 739 holders of record.
The following table presents the dividends declared and range of share prices for each quarter of 2001 and 2000.
Market Quotations
-----------------------------------------
2001 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $ 12.26 $ 10.75 $ 0.25
June 30 14.00 12.02 0.25
September 30 14.13 11.63 0.25
December 31 15.80 12.80 0.255
Market Quotations
-----------------------------------------
2000 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $ 12.63 $ 9.75 $ 0.245
June 30 12.19 10.25 0.245
September 30 11.94 10.56 0.245
December 31 11.63 10.38 0.25
15
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
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
Rents, recoveries, and other shopping center revenues (1) 341,428 305,600 268,692 333,953
Income from investment in TRG (1) 29,349
Income before gain on disposition of interest in center,
extraordinary items, cumulative effect of change in
accounting principle, and minority and preferred interests 55,664 66,487 58,445 70,403 28,662
Gain on disposition of interest in center (2) 85,339
Extraordinary items (3) (9,506) (468) (50,774)
Cumulative effect of change in accounting principle (4) (8,404)
Minority interest (1) (31,673) (30,300) (30,031) (6,009)
TRG preferred distributions (9,000) (9,000) (2,444)
Net income 7,657 103,020 25,502 13,620 28,662
Series A preferred dividends (16,600) (16,600) (16,600) (16,600) (4,058)
Net income (loss) allocable to common shareowners (8,943) 86,420 8,902 (2,980) 24,604
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle per
common share - diluted (0.09) 1.75 0.17 0.32 0.48
Net income (loss) per common share - diluted (0.18) 1.64 0.16 (0.06) 0.48
Dividends per common share declared 1.005 0.985 0.965 0.945 0.925
Weighted average number of common shares outstanding 50,500,058 52,463,598 53,192,364 52,223,399 50,737,333
Number of common shares outstanding at end of period 50,734,984 50,984,397 53,281,643 52,995,904 50,759,657
Ownership percentage of TRG at end of period (1) 62% 62% 63% 63% 37%
BALANCE SHEET DATA (1) :
Real estate before accumulated depreciation 2,194,717 1,959,128 1,572,285 1,473,440
Investment in TRG 547,859
Total assets 2,141,439 1,907,563 1,596,911 1,480,863 556,824
Total debt 1,423,241 1,173,973 886,561 775,298
SUPPLEMENTAL INFORMATION (5) :
Funds from Operations allocable to TCO (6) 73,527 70,419 68,506 61,131 53,137
Mall tenant sales (7) 2,797,867 2,717,195 2,695,645 2,332,726 3,086,259
Sales per square foot (8) 456 466 453 426 384
Number of shopping centers at end of period 20 16 17 16 25
Ending Mall GLA in thousands of square feet 9,186 7,065 7,540 7,038 10,850
Average occupancy 84.9%(9) 89.1% 89.0% 89.4% 87.6%
Ending occupancy 84.0%(9) 90.5% 90.4% 90.2% 90.3%
Leased space (10) 87.7%(9) 93.8% 92.1% 92.3% 92.3%
Average base rent per square foot (8) (11) :
All mall tenants $40.97 $39.77 $39.58
Stores closing during year $40.76 $40.06 $39.49
Stores opening during year $49.58 $46.21 $48.01
(1) In 1998, the Company obtained a majority and controlling interest in The Taubman Realty Group Limited Partnership (TRG or the
Operating Partnership). As a result, the Company began consolidating the Operating Partnership. For 1997, amounts reflect the
Company's interest in the Operating Partnership under the equity method.
(2) In August 2000, the Company completed a transaction to acquire an additional interest in one of its Unconsolidated
Joint Ventures; TRG became the 100% owner of Twelve Oaks Mall and the joint venture partner became the 100% owner of
Lakeside. A gain on the transaction was recognized by the Company representing the excess of the fair value over the net book
basis of the Company's interest in Lakeside (see MD&A - Other Transactions).
(3) Extraordinary items for 1998 through 2000 include charges related to the extinguishment of debt, primarily consisting
of prepayment premiums and the writeoff of deferred financing costs.
(4) In January 2001, the Company adopted Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and its amendments and interpretations. The Company recognized a loss as a transition
adjustment to mark its share of interest rate agreements to fair value as of January 1, 2001.
(5) Operating statistics for 1997 include centers transferred to General Motors pension trusts in exchange for their interests
in TRG.
(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) 2000 statistics have been restated to include MacArthur Center, which opened in March 1999.
(9) 2001 average occupancy, ending occupancy, and leased space for centers owned and open for all of 2001 and 2000 were 88.1%,
88.8%, and 91.8%, respectively.
(10) Leased space comprises both occupied space and space that is leased but not yet occupied.
(11) Amounts include centers owned and operated for two years.
16
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 Management's Discussion and Analysis of Financial Condition and Results of Operations contains various
"forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's
expectations or beliefs concerning future events, including the following: statements regarding future developments and
joint ventures, rents and returns, statements regarding the continuation of trends, and any statements regarding the
sufficiency of the Company's cash balances and cash generated from operating and financing activities for the Company's
future liquidity and capital resource needs. The Company cautions that although forward-looking statements reflect the
Company's good faith beliefs and best judgment based upon current information, these statements are qualified by
important factors that could cause actual results to differ materially from those in the forward-looking statements,
including those risks, uncertainties, and factors detailed from time to time in reports filed with the SEC, and in
particular those set forth under the headings "General Risks of the Company" and "Environmental Matters" in the Company's
Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying Consolidated
Financial Statements of Taubman Centers, Inc. and the Notes thereto.
General Background and Performance Measurement
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 LLC (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.
During 2001, the Company opened four new shopping centers (Results of Operations-New Center Openings). Also, in August
2000, the Company completed a transaction to acquire an additional interest in one of its Unconsolidated Joint Ventures;
the Operating Partnership became the 100% owner of Twelve Oaks Mall and the joint venture partner became the 100% owner
of Lakeside. Additional 2001 and 2000 statistics that exclude the new centers and Lakeside are provided to present the
performance of comparable centers.
Current Operating Trends
In 2001, the regional shopping center industry has been affected by the softening of the national economic cycle.
Economic pressures that affect consumer confidence, job growth, energy costs, and income gains can affect retail sales
growth and impact the Company's ability to lease vacancies and negotiate rents at advantageous rates. A number of regional
and national retailers have announced store closings or filed for bankruptcy. During 2001, 4.5% of the Company's tenants
sought the protection of the bankruptcy laws, compared to 2.3% in 2000. The impact of a softening economy on the Company's
current results of operations is moderated by lease cancellation income, which tends to increase in down-cycles of the
economy.
In addition to overall economic pressures, the events of September 11 had a negative impact on tenant sales subsequent
to September. Tenant sales per square foot in the fourth quarter of 2001 decreased by 3.8% compared to the same period
in 2000. Although this was an improvement from the 9.8% decrease in sales per square foot in the month of September, the
fourth quarter decrease was significantly greater than the 0.3% decrease in sales per square foot that the Company had
experienced through August 2001. In addition, fourth quarter comparable center average occupancy declined by 1.7% from
the prior year.
17
The tragic events of September 11 will also have an impact on the Company's future insurance coverage. The Company
presently has coverage for terrorist acts in its policies that expire in April 2002. The Company expects that such
coverage will be excluded from its standard property policies at the Company's renewal. Based on preliminary discussions
with its insurance agency, such coverage will be available as a separate policy with lower limits than the present
coverage, see "Liquidity and Capital Resources-Covenants and Commitments".
Given the state of the insurance industry prior to September 11, and the impact of September 11, the Company believes
its premiums, including the cost of a separate terrorist policy, could increase by over 100% for property coverage and
over 25% for liability coverage. These increases would impact the Company's annual common area maintenance rates paid by
the Company's tenants by about 55 cents per square foot. Total occupancy costs paid by tenants signing leases in the
Company's traditional centers are on average about $70 per square foot.
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.
The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of mall tenant
sales.
2001 2000 1999
---- ---- ----
Mall tenant sales (in thousands) $2,797,867 $2,717,195 $2,695,645
Sales per square foot 456 466(1) 453
Minimum rents 10.0% 9.7% 9.7%
Percentage rents 0.2 0.3 0.2
Expense recoveries 4.5 4.4 4.3
--- --- ---
Mall tenant occupancy costs 14.7% 14.4% 14.2%
==== ==== ====
(1) 2000 sales per square foot has been restated to include MacArthur Center, which opened in March 1999.
For the year ended December 31, 2001, for the first time in the Company's history as a public company, sales per square
foot decreased in comparison to the prior year, reflecting the current difficult retail environment as well as the
direct impact of the events of September 11. The negative sales trend directly impacts the amount of percentage rents
certain tenants and anchors pay. The effects of declines in sales experienced during 2001 on the Company's operations
are moderated by the relatively minor share of total rents (approximately three percent) percentage rents represent.
However, if lower levels of sales were to continue, the Company's ability to lease vacancies and negotiate rents at
advantageous rates could be adversely affected.
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, such as the Company is currently experiencing, 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 minimum rent at the shopping centers that have been owned and open for at least two years.
18
2001 2000(1) 1999
---- ---- ----
Average minimum rent per square foot:
All mall tenants $40.97 $39.77 $39.58
Stores closing during year 40.76 40.06 39.49
Stores opening during year 49.58 46.21 48.01
(1) 2000 rent per square foot information has been restated to include MacArthur Center, which opened in March 1999.
Generally, the rent spread between opening and closing stores is in the Company's historic range of $5.00 to $10.00
per square foot. 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.
Occupancy
Historically, annual average occupancy has been within a narrow band. In the last ten years, annual average occupancy
has ranged between 84.9% and 89.4%. Mall tenant average occupancy, ending occupancy, and leased space rates are as
follows:
2001 2000 1999
---- ---- ----
All Centers
-----------
Average occupancy 84.9% 89.1% 89.0%
Ending occupancy 84.0 90.5 90.4
Leased space 87.7 93.8 92.1
Comparable Centers
------------------
Average occupancy 88.1% 89.3%
Ending occupancy 88.8 90.5
Leased space 91.8 93.8
The lower occupancy and leased space in 2001 reflect the opening of the four new centers at occupancy levels lower than
the average of the existing portfolio. A number of unanticipated early lease terminations accounted for the majority of
the decline in comparable center occupancy.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth quarter due
to the Christmas season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday
and back-to-school events. While minimum rents and recoveries are generally not subject to seasonal factors, most leases
are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in
anticipation of the Christmas selling season. Additionally, most percentage rents are recorded in the fourth quarter.
Accordingly, revenues and occupancy levels are generally highest in the fourth quarter.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
2001 2001 2001 2001 2001
---------------------------------------------------------------------------
(in thousands)
Mall tenant sales $570,223 $605,945 $617,805 $1,003,894 $2,797,867
Revenues 132,903 137,964 139,640 169,330 579,837
Occupancy:
Average 87.0% 85.5% 84.0% 83.7% 84.9%
Ending 85.1 85.6 83.0 84.0 84.0
Average-comparable (1) 88.1 87.9 87.6 88.6 88.1
Ending-comparable (1) 88.4 87.7 87.7 88.8 88.8
Leased space:
All centers 90.8 90.0 88.0 87.7 87.7
Comparable (1) 92.4 91.8 91.5 91.8 91.8
(1) Excludes centers that opened in 2001-see Results of Operations-New Center Openings.
19
Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall
tenant occupancy costs (the sum of minimum rents, percentage rents, and expense recoveries) relative to sales are
considerably higher in the first three quarters than they are in the fourth quarter.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
2001 2001 2001 2001 2001
-------------------------------------------------------------------------
Minimum rents 11.2% 10.5% 11.2% 8.3% 10.0%
Percentage rents 0.3 0.1 0.1 0.4 0.2
Expense recoveries 5.0 5.1 4.8 3.6 4.5
--- --- --- --- ---
Mall tenant occupancy costs 16.5% 15.7% 16.1% 12.3% 14.7%
==== ==== ==== ==== ====
Results of Operations
New Center Openings
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida. Dolphin Mall is
a 50% owned Unconsolidated Joint Venture and is accounted for under the equity method. The Operating Partnership will be
entitled to a preferred return on approximately $30 million of equity contributions as of December 2001, which were used
to fund construction costs.
The Shops at Willow Bend, a wholly owned regional center, opened August 3, 2001 in Plano, Texas. The 1.5 million
square foot center is anchored by Neiman Marcus, Saks Fifth Avenue, Lord & Taylor, Foley's, and Dillard's. Saks Fifth
Avenue will open in 2004.
International Plaza, a 1.25 million square foot regional center, opened September 14, 2001 in Tampa, Florida.
International Plaza is anchored by Nordstrom, Lord & Taylor, Dillard's, and Neiman Marcus. The Company has an
approximately 26% ownership interest in the center. However, because the Company provided approximately 53% of the
equity funding for the project, the Company will receive a preferential return. The Company expects to be initially
allocated approximately 33% of the net operating income of the project, with an additional 7% representing return of
capital. The Operating Partnership will be entitled to a preferred return on approximately $19 million of equity
contributions as of December 2001, which were used to fund construction costs.
The Mall at Wellington Green, a 1.3 million square foot regional center, opened October 5, 2001 in Wellington, Florida
and is initially anchored by Lord & Taylor, Burdines, Dillard's, and JCPenney. A fifth anchor, Nordstrom, is obligated
under the reciprocal easement agreement to open within 24 months of the opening of the center and is presently expected
to open in 2003. The center is owned by a joint venture in which the Operating Partnership has a 90% controlling
interest.
Although Dolphin Mall opened on schedule, the center encountered significant levels of tenant and landlord-related
issues arising from the construction process, far exceeding those historically experienced by the Company. The difficult
opening resulted in lower than expected occupancy in 2001. In addition, lower than anticipated sales, in part due to the
effect of September 11 on major tourist areas, have caused significant tenant issues resulting in early terminations,
lower recoveries, and higher levels of uncollectible receivables.
In addition, general economic conditions have also affected the performance of Willow Bend and to a lesser extent the
other two new centers. Leased space as of December 31, 2001 at the four new centers was 75 to 80%, lower than the
Company would have previously expected. As a result, the Company presently expects that the return on the four centers
will be under 9% in 2002. Over 100 additional stores remain to be leased at these centers in order to achieve
stabilization. Estimates regarding returns on projects are forward-looking statements and certain significant factors
could cause the actual results to differ materially, including but not limited to: 1) actual results of negotiations with
tenants, 2) timing of tenant openings, and 3) early lease terminations and bankruptcies.
20
Other Transactions
In October 2001, the Operating Partnership committed to a restructuring of its development operations. A restructuring
charge of $2.0 million was recorded primarily representing the cost of certain involuntary terminations of personnel.
Pursuant to the restructuring plan, 17 positions were eliminated within the development department.
In April 2001, the Operating Partnership's $10 million investment in Swerdlow was converted into a loan which bore
interest at 12% and matured in December 2001. This loan is currently delinquent and is accruing interest at 18%. All
interest due through the December maturity date was received. Although the Operating Partnership expects to fully recover
the amount due under this note receivable, the Company is currently in negotiations with Swerdlow regarding the
repayment. An affiliate of Swerdlow is a partner in the Dolphin Mall joint venture.
In August 2000, the Company completed a transaction to acquire an additional ownership in one of its Unconsolidated
Joint Ventures. Under the terms of the agreement, the Operating Partnership became the 100% owner of Twelve Oaks Mall
and the joint venture partner became the 100% owner of Lakeside, subject to the existing mortgage debt. The transaction
resulted in a net payment to the joint venture partner of approximately $25.5 million in cash. The results of Twelve Oaks
have been consolidated in the Company's results subsequent to the acquisition date (prior to that date, Twelve Oaks was
accounted for under the equity method as an Unconsolidated Joint Venture). A gain of $85.3 million on the transaction was
recognized by the Company representing its share of the excess of the fair value over the net book basis of the Company's
interest in Lakeside, adjusted for the $25.5 million paid and transaction costs.
During 2000, the Operating Partnership recognized its $9.5 million share of extraordinary charges relating to the
Arizona Mills and Stamford Town Center refinancings, which consisted of a prepayment premium and the write-off of
deferred financing costs.
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 obligation in the event such
redevelopment opportunities were not deemed to be sufficient. The Operating Partnership terminated its Memorial City
lease on April 30, 2000.
During October and November 2001, the Operating Partnership completed an $82.5 million financing secured by Regency
Square and closed on a new $275 million line of credit. The net proceeds of these financings were used to pay off $150
million outstanding under loans previously secured by Twelve Oaks Mall and the balance under the expiring revolving
credit facility. In May 2001, the Company closed on a $168 million construction loan for The Mall at Wellington Green.
During October 2000, Arizona Mills completed a $146 million secured refinancing of its existing mortgage. Also in
October 2000, MacArthur Center completed a $145 million secured financing, repaying the existing $120 million
construction loan. The remaining net proceeds of approximately $23.9 million were distributed to the Operating
Partnership, which contributed all of the equity funding for the development of the center. In January 2000, Stamford
Town Center completed a $76 million secured refinancing. During 2000, construction facilities for $160 million and $220
million were obtained for The Mall at Millenia and The Shops at Willow Bend, respectively.
Investments in Technology Businesses
During 2001, the Company committed to invest approximately $2 million in Constellation Real Technologies LLC, a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The Company's
investment was $0.5 million at December 31, 2001.
In May 2000, the Company acquired an approximately 6.8% interest in MerchantWired, LLC, a service company providing
internet and network infrastructure to shopping centers and retailers. As of December 31, 2001, the Company had an
investment of approximately $3.6 million in this venture and has guaranteed obligations of approximately $3.8 million.
The principal shareholder of MerchantWired has disclosed that the future profitability of MerchantWired is dependent on
it obtaining outside capital and other management expertise; there is no assurance as to its success in doing so.
During 2001 and 2000, the Company recognized its $2.4 million (including $0.6 million of real estate-related
depreciation) and $0.5 million share of MerchantWired losses, respectively.
21
In April 1999, the Company obtained a $7.4 million preferred investment in fashionmall.com, Inc., an e-commerce
company originally organized to market, promote, advertise, and sell fashion apparel and related accessories and products
over the internet. In 2001, fashionmall.com significantly scaled back its operations and experienced significant
decreases in operating revenues. Fashionmall.com management has disclosed that they have more cash than is needed to
fund current operations and are considering how best to use such cash, including making acquisitions, issuing special
dividends, or finding other options to provide opportunities for liquidity to its shareholders at some time in the
future. While the Company's right to a preference in the event of a liquidation is not disputed, and while there is more
than sufficient cash in fashionmall.com to fund the Company's liquidation preference, the Company has been in settlement
discussions with fashionmall.com's management to return the Company's preferred investment at a discount, in order to
facilitate these potential uses of the cash. There is no assurance that the settlement discussions will achieve a
resolution and/or what their ultimate outcome will be. During 2001, the Company recorded a charge of $1.9 million
relating to its investment in fashionmall.com; the Company's investment was $5.5 million at December 31, 2001.
New Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which establish
accounting and reporting standards for derivative instruments. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as
a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in the Company's earnings as interest expense.
The Company uses derivative instruments primarily to manage exposure to interest rate risks inherent in variable rate
debt and refinancings. The Company routinely uses cap, swap, and treasury lock agreements to meet these objectives. For
interest rate cap instruments designated as cash flow hedges, changes in the time value were excluded from the assessment
of hedge effectiveness. The swap agreement on the Dolphin construction facility does not qualify for hedge accounting
although its use is consistent with the Company's overall risk management objectives. As a result, the Company recognizes
its share of losses and income related to this agreement in earnings as the value of the agreement changes.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4 million as
the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million. These amounts represent
the transition adjustments necessary to mark the Company's share of interest rate agreements to fair value as of January
1, 2001.
In addition to the transition adjustments, the Company recognized a $3.3 million reduction of earnings during the year
ended December 31, 2001, representing unrealized losses due to the decline in interest rates and the resulting decrease
in value of the Company's and its Unconsolidated Joint Ventures' interest rate agreements. Of these amounts,
approximately $2.8 million represents the change in value of the Dolphin swap agreement and the remainder represents the
changes in time value of other instruments.
As of December 31, 2001, the Company has $3.1 million of derivative losses included in Accumulated OCI. Of this amount,
$2.8 million relates to a realized loss on a hedge of the October 2001 Regency Square financing. This loss will be
recognized as additional interest expense over the ten-year term of the debt. The remaining $0.3 million of derivative
losses included in Accumulated OCI at December 31, 2001 relates to a hedge of the Dolphin Mall construction facility that
will be recognized as a reduction of earnings through its 2002 maturity date. The Company expects that approximately
$0.6 million will be reclassified from Accumulated OCI and recognized as a reduction of earnings during the next twelve
months.
In October 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which replaced FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". Statement 144 broadens the reporting of discontinued operations to
include disposals of operating components; each of the Company's investments in an operating center is such a component.
The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December
15, 2001 and generally are to be applied prospectively. The Statement is not expected to have a material effect on the
financial condition or results of operations of the Company; however, if the Company were to dispose of a center, the
center's results of operations would have to be separately disclosed as discontinued operations in the Company's
financial statements.
22
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers' operations.
During 2001, revenues (excluding land sales) less operating costs (operating and recoverable expenses) of those centers
owned and open for the entire period increased approximately two percent in comparison to the same centers' results in
2000. This growth was primarily due to increases in minimum rents, revenue from advertising space arrangements, and
lease cancellation income, partially offset by a decrease in percentage rent and an increase in expenses. The Company
expects that comparable center operations will increase annually by two to three percent. This is a forward-looking
statement and certain significant factors could cause the actual results to differ materially; refer to the General Risks
of the Company in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Other Income
The Company has certain additional sources of income beyond its rental revenues, recoveries from tenants, and revenues
from management, leasing, and development services, as summarized in the following table. The Company expects that the
shopping center-related revenues, such as income from parking garages or sponsorship agreements, will grow at a rate
slightly higher than the rate of inflation. During 2001, gains on peripheral land sales were less than the approximately
$6 million average of the preceding three years; the Company expects that 2002 gains on land sales will return to a
range of $6 million to $7 million. Interest income in 2001 and 2000 exceeded historical averages; the Company expects
that 2002 interest income will range between $2 million and $3 million. Lease cancellation income is dependent on the
overall economy and performance of particular retailers in specific locations and is difficult to predict; 2001 lease
cancellation income significantly exceeded historical averages. Estimates regarding anticipated 2002 other income are
forward-looking statements and certain significant factors could cause the actual results to differ materially, including
but not limited to: 1) actual results of negotiations with tenants, counterparties, and potential purchasers of
peripheral land, and 2) timing of transactions.
2001 2000
---- ----
(Operating Partnership's share in millions of dollars)
Shopping center related revenues 13.8 13.6
Gains on peripheral land sales 4.6 9.1
Lease cancellation revenue 10.3 1.6
Interest income 4.9 4.3
--- ---
33.6 28.6
==== ====
Subsequent Events
In early 2002, the Operating Partnership entered into a definitive purchase and sale agreement to acquire for $88
million a 50% general partnership interest in SunValley Associates, a California general partnership that owns the
Sunvalley Shopping Center located in Concord, California. The $88 million purchase price consists of $28 million of cash
and $60 million of existing debt that encumbers the property. The Company's interest in the secured debt consists of a
$55 million primary note bearing interest at LIBOR plus 0.92% and a $5 million note bearing interest at LIBOR plus 3.0%.
The notes mature in September 2003 and have two one-year extension options. The center is also subject to a ground lease
that expires in 2061. The Manager has managed the property since its development and will continue to do so after the
acquisition. The other 50% partner in the property is an entity owned and controlled by Mr. A. Alfred Taubman, the
Company's largest shareholder and recently retired Chairman of the Board of Directors.
Also in early 2002, the Company entered into agreements to sell its interests in LaCumbre Plaza and Paseo Nuevo,
subject to satisfying closing conditions, for $77 million. The centers are subject to ground leases and are unencumbered
by debt. The centers were purchased in 1996 for $59 million.
These transactions are expected to close during the first half of 2002, and the Company expects to use the net proceeds
from the sale of the two centers to fund the acquisition of Sunvalley and pay down borrowings under the Company's lines
of credit. Assuming the operations of these two centers are included in Funds from Operations for the period owned in
2002, the Company expects that these transactions will have a neutral effect on Funds from Operations in 2002. This is a
forward-looking statement and certain significant factors could cause the actual effect to differ materially, including
but not limited to 1) the occurrence and timing of the transactions, 2) actual operations of the centers, 3) actual use
of proceeds, 4) actual transaction costs, and 5) resolution of closing conditions.
23
Presentation of Operating Results
The following tables contain the combined operating results of the Company's Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the minority partners in the Operating Partnership and preferred
interests is deducted to arrive at the results allocable to the Company's common shareowners. Because the net equity of
the Operating Partnership is less than zero, the income allocated to the minority 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, although distributions were less than net
income during 2000 due to the gain on the disposition of Lakeside described above. Also, losses allocable to minority
partners in certain consolidated joint ventures are added back to arrive at the net results of the Company. The Company's
average ownership percentage of the Operating Partnership was 62% and 63% for 2001 and 2000, respectively. The results
of Twelve Oaks Mall are included in the Consolidated Businesses subsequent to the closing of the transaction, while both
Twelve Oaks Mall and Lakeside are included as Unconsolidated Joint Ventures for previous periods.
24
Comparison of 2001 to 2000
The following table sets forth operating results for 2001 and 2000, showing the results of the Consolidated Businesses
and Unconsolidated Joint Ventures:
2001 2000
---------------------------------------------------- -----------------------------------------------------
TOTAL OF TOTAL OF
CONSOLIDATED CONSOLIDATED
CONSOLIDATED UNCONSOLIDATED BUSINESSES CONSOLIDATED UNCONSOLIDATED BUSINESSES
BUSINESSES JOINT VENTURES AND BUSINESSES (2) JOINT VENTURES AND
AT 100%(1) UNCONSOLIDATED AT 100%(1) UNCONSOLIDATED
JOINT JOINT
VENTURES VENTURES AT
AT 100% 100%
---------------------------------------------------- -----------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 176.2 149.3 325.5 151.9 145.5 297.4
Percentage rents 5.5 3.2 8.7 6.4 3.8 10.1
Expense recoveries 104.5 73.6 178.1 91.3 75.7 166.9
Management, leasing and
development 26.0 26.0 25.0 25.0
Other 29.2 12.3 41.5 27.5 5.7 33.2
---- ---- ---- ----- ----- -----
Total revenues 341.4 238.4 579.8 301.9 230.7 532.6
OPERATING COSTS:
Recoverable expenses 91.2 67.3 158.4 79.7 63.6 143.3
Other operating 36.4 15.1 51.5 30.0 13.4 43.4
Restructuring loss 2.0 2.0
Charge related to technology
investment 1.9 1.9
Management, leasing
and development 19.0 19.0 19.5 19.5
General and administrative 20.1 20.1 19.0 19.0
Interest expense 68.2 75.0 143.1 57.3 65.5 122.8
Depreciation and amortization(3) 68.9 39.3 108.3 56.8 29.5 86.3
---- ---- ---- ----- ----- -----
Total operating costs 307.6 196.7 504.3 262.3 172.0 434.4
Net results of Memorial City (2) (1.6) (1.6)
---- ---- ---- ----- ----- -----
33.8 41.8 75.6 38.0 58.6 96.6
==== ==== ==== ====
Equity in income before
extraordinary items of
Unconsolidated Joint Ventures(3) (4) 21.9 28.5
---- ----
Income before gain on
disposition, extraordinary items,
cumulative effect of change in
accounting principle, and
minority and preferred interests 55.7 66.5
Gain on disposition of interest in center 85.3
Extraordinary items (9.5)
Cumulative effect of change in
accounting principle (8.4)
TRG preferred distributions (9.0) (9.0)
Minority share of consolidated joint
ventures 1.1
Minority share of income of TRG (11.7) (58.5)
Distributions less than (in excess
of) minority share of income (20.0) 28.2
----- -----
Net income 7.7 103.0
Series A preferred dividends (16.6) (16.6)
----- -----
Net income (loss) allocable to
common shareowners (8.9) 86.4
===== =====
SUPPLEMENTAL INFORMATION(5):
EBITDA - 100% 172.8 156.0 328.8 153.1 153.7 306.8
EBITDA - outside partners' share (7.5) (71.6) (79.2) (7.6) (70.8) (78.4)
---- ---- ---- ----- ----- -----
EBITDA contribution 165.3 84.4 249.7 145.6 82.9 228.4
Beneficial interest expense (63.2) (38.7) (101.8) (52.2) (34.9) (87.1)
Non-real estate depreciation (2.7) (2.7) (3.0) (3.0)
Preferred dividends and distributions (25.6) (25.6) (25.6) (25.6)
---- ---- ---- ----- ----- -----
Funds from Operations contribution 73.8 45.7 119.5 64.8 47.9 112.7
==== ==== ===== ===== ==== =====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures. Amounts are
net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of
their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements,
the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) The results of operations of Memorial City are presented net in this table. The Operating Partnership terminated its Memorial
City lease on April 30, 2000.
(3) Amortization of the Company's additional basis in the Operating Partnership included in equity in income of Unconsolidated
Joint Ventures was $3.0 million and $3.8 million in 2001 and 2000, respectively. Also, amortization of the additional basis
included in depreciation and amortization was $4.6 million and $4.2 million in 2001 and 2000, respectively.
(4) Equity in income before extraordinary items of Unconsolidated Joint Ventures excludes the cumulative effect of the change in
accounting principle incurred in connection with the Company's adoption of SFAS 133. The Company's share of the Unconsolidated
Joint Ventures' cumulative effect was approximately $1.6 million.
(5) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of depreciated
operating properties. In 2001, the $1.9 million charge related to a technology investment was also excluded. Funds from
Operations is defined and discussed in Liquidity and Capital Resources.
(6) Amounts in this table may not add due to rounding.
25
Consolidated Businesses
Total revenues for the year ended December 31, 2001 were $341.4 million, a $39.5 million or 13.1% increase over 2000.
Minimum rents increased $24.3 million of which $23.1 million was due to the openings of The Shops at Willow Bend and The
Mall at Wellington Green, as well as the inclusion of Twelve Oaks Mall. Minimum rents also increased due to tenant
rollovers and new sources of rental income, including temporary tenants and advertising space arrangements, offsetting
decreases in rent caused by lower occupancy. Percentage rents decreased due to decreases in tenant sales. Expense
recoveries increased primarily due to Willow Bend, Wellington Green, and Twelve Oaks. Management, leasing, and
development revenues increased primarily due to leasing commissions, including those relating to two short-term leasing
contracts. Other revenue increased primarily due to an increase in lease cancellation revenue and interest income,
partially offset by a decrease in gains on sales of peripheral land.
Total operating costs were $307.6 million, a $45.3 million or 17.3% increase from 2000. Recoverable expenses increased
primarily due to Willow Bend, Wellington Green, and Twelve Oaks. Other operating expense increased due to Willow Bend,
Wellington Green, and Twelve Oaks, as well as increases in bad debt expense, marketing expense, professional fees
relating to process improvement projects, and losses relating to the investment in MerchantWired, partially offset by a
decrease in the charge to operations for costs of pre-development activities. During 2001, a $2.0 million restructuring
loss was recognized, which primarily represented the cost of certain involuntary terminations of personnel; substantially
all restructuring costs had been paid by year-end. The Company also recognized a $1.9 million charge relating to its
investment in fashionmall.com, Inc. General and administrative expense increased primarily due to increases in payroll
costs. Interest expense increased primarily due to debt assumed and incurred relating to Twelve Oaks and a decrease in
capitalized interest upon opening of the new centers, offset by decreases due to declines in interest rates.
Depreciation expense increased primarily due to Willow Bend, Wellington Green, and Twelve Oaks.
Unconsolidated Joint Ventures
Total revenues for the year ended December 31, 2001 were $238.4 million, a $7.7 million or 3.3% increase from the
comparable period of 2000. Minimum rents increased primarily due to tenant rollovers and new sources of rental income,
including temporary tenants and advertising space arrangements, which offset decreases in rent caused by lower
occupancy. Increases in minimum rent due to Dolphin Mall and International Plaza were offset by Twelve Oaks and
Lakeside. Expense recoveries decreased primarily due to Twelve Oaks and Lakeside, partially offset by Dolphin Mall and
International Plaza. Other revenue increased primarily due to an increase in lease cancellation revenue.
Total operating costs increased by $24.7 million to $196.7 million for the year ended December 31, 2001. Recoverable
expenses and depreciation expense increased primarily due to Dolphin Mall and International Plaza, partially offset by
Twelve Oaks and Lakeside. Other operating expense increased primarily due to the openings of Dolphin Mall and
International Plaza, including greater levels of bad debt expense at Dolphin Mall, partially offset by Twelve Oaks and
Lakeside. Interest expense increased due to a decrease in capitalized interest upon opening of Dolphin Mall and
International Plaza and changes in the value of Dolphin Mall's swap agreement, partially offset by decreases due to
Twelve Oaks and Lakeside and declines in interest rates.
As a result of the foregoing, income before extraordinary items and cumulative effect of change in accounting principle
of the Unconsolidated Joint Ventures decreased by $16.8 million, or 28.7%, to $41.8 million. The Company's equity in
income before extraordinary items and cumulative effect of change in accounting principle of the Unconsolidated Joint
Ventures was $21.9 million, a 23.2% decrease from 2000.
Net Income
As a result of the foregoing, the Company's income before gain on disposition of interest in center, extraordinary
items, cumulative effect of change in accounting principle, and minority and preferred interests decreased $10.8 million,
or 16.2%, to $55.7 million for the year ended December 31, 2001. During 2001, a cumulative effect of a change in
accounting principle of $8.4 million was recognized in connection with the Company's adoption of SFAS 133. During 2000,
the Company recognized an $85.3 million gain on the disposition of its interest in Lakeside, and an extraordinary charge
of $9.5 million related to the extinguishment of debt. After allocation of income to minority and preferred interests,
net income (loss) allocable to common shareowners for 2001 was $(8.9) million compared to $86.4 million in 2000.
26
Comparison of 2000 to 1999
Discussion of significant transactions and openings occurring in 2000 precedes the Comparison of 2001 to 2000.
Significant 1999 items are described below.
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%.
In November 1999, the Operating Partnership acquired Lord Associates, a retail leasing firm, for $2.5 million in cash
and $5 million in partnership units, which are subject to certain contingencies. In addition, $1.0 million of this
purchase price is contingent upon profits achieved on acquired leasing contracts.
In March 1999, MacArthur Center, a 70% owned enclosed super-regional mall, opened in Norfolk, Virginia. MacArthur
Center is owned by a joint venture in which the Operating Partnership has a controlling interest, and consequently the
results of this center are consolidated in the Company's financial statements.
In September and November 1999, the Operating Partnership completed private placements of its Series C and Ser