TAUBMAN CENTERS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2003
Commission File No. 1-11530

Taubman Centers, Inc.
(Exact name of registrant as specified in its charter)


Michigan		38-2033632

(State or other jurisdiction of		(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 offices)	(Zip Code)

(248) 258-6800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


	Yes X.		No .

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


	Yes X.		No .

As of May 12, 2003, there were outstanding 49,298,965 shares of the Company’s common stock, par value $0.01 per share.

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.

The following consolidated financial statements of Taubman Centers, Inc. (the Company) are provided pursuant to the requirements of this item.


Consolidated Balance Sheet as of March 31, 2003 and December 31, 2002	2
Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2003 and 2002	3
Consolidated Statement of Cash Flows for the three months ended March 31, 2003 and 2002	4
Notes to Consolidated Financial Statements	5

TAUBMAN CENTERS, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except share data)


	March 31 2003		December 31 2002
Assets:
Properties	$ 2,576,222		$ 2,533,530
Accumulated depreciation and amortization	(422,610	)	(404,566	)

	$ 2,153,612		$ 2,128,964
Investment in Unconsolidated Joint Ventures (Note 4)	3,886		31,402
Cash and cash equivalents	24,969		32,502
Accounts and notes receivable, less allowance
for doubtful accounts of $5,938 and $6,002 in
2003 and 2002	32,561		32,416
Accounts and notes receivable from related parties	3,087		3,887
Deferred charges and other assets	40,326		40,536

	$ 2,258,441		$ 2,269,707

Liabilities:
Notes payable	$ 1,568,423		$ 1,543,693
Accounts payable and accrued liabilities	218,246		240,811
Dividends and distributions payable	17,912		13,746

	$ 1,804,581		$ 1,798,250
Commitments and Contingencies (Note 7)

Preferred Equity of TRG (Note 1)	$ 97,275		$ 97,275

Partners’ Equity of TRG allocable to minority partners (Note 1)

Shareowners’ Equity:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 8,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
March 31, 2003 and December 31, 2002	$ 80		$ 80
Series B Non-Participating Convertible Preferred Stock,
$0.001 par and liquidation value, 40,000,000 shares
authorized and 31,784,842 and 31,767,066 shares issued
and outstanding at March 31, 2003 and December 31, 2002	32		32
Series C Cumulative Redeemable Preferred Stock,
$0.01 par value, 2,000,000 shares authorized, $75 million
liquidation preference, none issued
Series D Cumulative Redeemable Preferred Stock,
$0.01 par value, 250,000 shares authorized, $25 million
liquidation preference, none issued
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 52,270,965 and 52,207,756 issued and
outstanding at March 31, 2003 and December 31, 2002	523		522
Additional paid-in capital	692,392		690,387
Accumulated other comprehensive income	(16,334	)	(17,485	)
Dividends in excess of net income	(320,108	)	(299,354	)

	$ 356,585		$ 374,182

	$ 2,258,441		$ 2,269,707

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)


	Three Months Ended March 31
	2003		2002
Income:
Minimum rents	$ 52,843		$ 46,750
Percentage rents	1,186		1,065
Expense recoveries	32,226		27,775
Revenues from management, leasing and
development services	4,792		5,128
Other	11,012		5,904

	$ 102,059		$ 86,622

Operating Expenses:
Recoverable expenses	$ 28,670		$ 23,386
Other operating	9,539		9,956
Costs related to unsolicited tender offer (Note 7)	9,849
Management, leasing and development services	4,548		4,893
General and administrative	5,940		4,920
Interest expense	22,512		20,629
Depreciation and amortization	23,516		20,703

	$ 104,574		$ 84,487

Income (loss) before equity in income of Unconsolidated
Joint Ventures, discontinued operations, and minority
and preferred interests	$ (2,515	)	$ 2,135
Equity in income of Unconsolidated Joint Ventures (Note 4)	10,403		6,137

Income before discontinued operations and minority and
preferred interests	$ 7,888		$ 8,272
Discontinued operations (Note 2):
Income from operations			1,744
Gain on disposition of interest in center			2,049

Income before minority and preferred interests	$ 7,888		$ 12,065
Minority interest in consolidated joint ventures	(152	)	211
Minority interest in TRG:
TRG income allocable to minority partners	(1,207	)	(4,540	)
Distributions in excess of earnings allocable to minority partners	(7,260	)	(3,620	)
TRG Series C and D preferred distributions (Note 1)	(2,250	)	(2,250	)

Net income (loss)	$ (2,981	)	$ 1,866
Series A preferred dividends	(4,150	)	(4,150	)

Net income (loss) allocable to common shareowners	$ (7,131	)	$ (2,284	)


Net income (loss)	$ (2,981	)	$ 1,866
Other comprehensive income (loss):
Change in fair value of available-for-sale securities	(50	)
Unrealized gain on interest rate instruments	1,037		173
Reclassification adjustment for amounts recognized in net income	164		176

Comprehensive income (loss)	$ (1,830	)	$ 2,215


Basic income (loss) per common share (Note 8):
Income (loss) from continuing operations	$ (0.14	)	$ (0.06	)

Net income (loss)	$ (0.14	)	$ (0.04	)


Diluted income (loss) per common share (Note 8):
Income (loss) from continuing operations	$ (0.14	)	$ (0.06	)

Net income (loss)	$ (0.14	)	$ (0.05	)


Cash dividends declared per common share	$ .26		$ .255


Weighted average number of common shares outstanding	52,229,616		50,883,089

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)


	Three Months Ended March 31
	2003		2002
Cash Flows from Operating Activities:
Income before minority and preferred interests	$ 7,888		$ 12,065
Adjustments to reconcile income before
minority and preferred interests to net cash
provided by operating activities:
Depreciation and amortization of continuing operations	23,516		20,703
Depreciation and amortization of discontinued operations			467
Provision for losses on accounts receivable	1,369		1,239
Gains on sales of land	(251	)	(1,957	)
Gain on disposition of interest in center			(2,049	)
Other	1,137		1,026
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets	(1,621	)	6,029
Accounts payable and other liabilities	(16,342	)	(16,424	)

Net Cash Provided By Operating Activities	$ 15,696		$ 21,099


Cash Flows from Investing Activities:
Additions to properties	$(49,126	)	$(45,496	)
Proceeds from sales of land	644		2,833
Net proceeds from disposition of interest in center			28,210
Acquisition of interest in center	(3,223	)
Distributions from Unconsolidated Joint Ventures	27,609		4,045

Net Cash Used In Investing Activities	$(24,096	)	$(10,408	)


Cash Flows from Financing Activities:
Debt proceeds	$ 170,997		$ 18,108
Debt payments	(146,267	)	(18,152	)
Debt issuance costs	(603	)
Distributions to minority and preferred interests	(10,717	)	(8,160	)
Issuance of stock pursuant to Continuing Offer	1,031		3,315
Cash dividends to common shareowners	(13,574	)	(12,970	)

Net Cash Provided By (Used In) Financing Activities	$ 867		$(17,859	)


Net Decrease in Cash and Cash Equivalents	$ (7,533	)	$(7,168	)

Cash and Cash Equivalents at Beginning of Period	32,502		27,789


Cash and Cash Equivalents at End of Period	$ 24,969		$ 20,621

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Interim Financial Statements

Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or REIT, is the managing general partner of The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG). The Operating Partnership is an operating subsidiary that engages in the ownership, management, leasing, acquisition, development, and expansion of regional retail shopping centers and interests therein. The Operating Partnership’s owned portfolio as of March 31, 2003 included 20 urban and suburban shopping centers in nine states. Another center is currently under construction in Virginia, while an additional center in North Carolina is scheduled to begin construction in 2003.

The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership and its consolidated subsidiaries, including The Taubman Company LLC (the Manager); all intercompany balances have been eliminated. Investments in entities not unilaterally controlled by ownership or contractual obligation (Unconsolidated Joint Ventures) are accounted for under the equity method.

At March 31, 2003, the Operating Partnership’s equity included three classes of preferred equity (Series A, C, and D) and the net equity of the partnership unitholders. Net income and distributions of the Operating Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in the Operating Partnership in accordance with their percentage ownership. The Series A Preferred Equity is owned by the Company and is eliminated in consolidation. The Series C and Series D Preferred Equity are owned by institutional investors and have a fixed 9% coupon rate, no stated maturity, sinking fund, or mandatory redemption requirements.

Because the net equity of the partnership unitholders is less than zero, the interest of the noncontrolling unitholders is presented as a zero balance in the balance sheet as of March 31, 2003 and December 31, 2002. The income allocated to the noncontrolling unitholders is equal to their share of distributions. The net equity of the Operating Partnership is less than zero because of accumulated distributions in excess of net income and not as a result of operating losses. Distributions to partners are usually greater than net income because net income includes non-cash charges for depreciation and amortization.

The Company’s ownership in the Operating Partnership at March 31, 2003 consisted of a 62% managing general partnership interest, as well as the Series A Preferred Equity interest. The Company’s average ownership percentage in the Operating Partnership for the three months ended March 31, 2003 and 2002 was 62% in both periods. At March 31, 2003, the Operating Partnership had 84,055,807 units of partnership interest outstanding, of which the Company owned 52,270,965. Included in the total units outstanding are 87,028 units issued in connection with the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions.

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.

Dollar amounts presented in tables within the notes to the financial statements are stated in thousands, except share data or as otherwise noted.

Note 2 — Acquisitions and Dispositions

In March 2003, the Company acquired the 15% minority interest in Great Lakes Crossing for $3.2 million in cash, pursuant to a favorable pricing formula established in the partnership agreement, bringing its ownership in the center to 100%. In October 2002, the Company acquired Swerdlow Real Estate Group’s (Swerdlow’s) 50% interest in Dolphin Mall, bringing its ownership in the shopping center to 100%. In May 2002, the Company acquired a 50% general partnership interest in SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in Concord, California. Also in May 2002, the Company purchased an additional interest in Arizona Mills, bringing its interest in the center to 50%, and sold its interest in Paseo Nuevo. In March 2002, the Company sold its interest in La Cumbre Plaza.

Effective January 1, 2002, the Company adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with this statement, the Company has separately presented the results of Paseo Nuevo and La Cumbre Plaza as discontinued operations in 2002.

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 3 – Income Taxes

The Company’s Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in the Company’s financial statements. The Company’s deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. The Company’s temporary differences primarily relate to deferred compensation and depreciation. During the three months ended March 31, 2003 the Company’s federal income tax expense was zero as a result of a net operating loss incurred from its Taxable REIT Subsidiaries. As of March 31, 2003, the Company had a net deferred tax asset of $3.9 million, after a valuation allowance of $9.5 million.

Note 4 — Investments in Unconsolidated Joint Ventures

Following are the Company’s investments in Unconsolidated Joint Ventures. The Operating Partnership is the managing general partner or managing member in these Unconsolidated Joint Ventures, except for those denoted with an (*).


Unconsolidated Joint Venture	Shopping Center	Ownership as of March 31, 2003
Arizona Mills, L.L.C. *	Arizona Mills	50%
Fairfax Company of Virginia, L.L.C	Fair Oaks	50
Forbes Taubman Orlando, L.L.C. *	The Mall at Millenia	50
Rich-Taubman Associates	Stamford Town Center	50
SunValley Associates	Sunvalley	50
Tampa Westshore Associates	International Plaza	26
Limited Partnership
Taubman-Cherry Creek	Cherry Creek	50
Limited Partnership
West Farms Associates	Westfarms	79
Woodland	Woodland	50

In October 2002, The Mall at Millenia, a 1.1 million square foot center, opened in Orlando, Florida.

As of March 31, 2003, the Operating Partnership has a preferred investment in International Plaza of $16 million, on which an annual preferential return of 8.25% will accrue. In addition to the preferred return on its investment, the Operating Partnership will receive a return of its preferred investment before any available cash will be utilized for distributions to non-preferred partners.

The Company’s carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the deficiency in assets reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the Company’s cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures and (ii) the Operating Partnership’s cost of its investment in excess of the historical net book values of Unconsolidated Joint Ventures, and other adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the Unconsolidated Joint Ventures. The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership’s differences in bases are amortized over the useful lives of the related assets.

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Combined balance sheet and results of operations information are presented in the following table (in thousands) for the Unconsolidated Joint Ventures, followed by the Operating Partnership’s beneficial interest in the combined information. TRG’s basis adjustments as of March 31, 2003 and December 31, 2002 include $73 million in both periods related to the acquisition of interest in Sunvalley. Also included in TRG’s basis adjustments as of March 31, 2003 and December 31, 2002 is $10 million and $11 million, respectively, related to the acquisition of interest in Arizona Mills. These amounts are being depreciated over the remaining useful lives of the underlying assets. Beneficial interest is calculated based on the Operating Partnership’s ownership interest in each of the Unconsolidated Joint Ventures. The accounts of Dolphin Mall, formerly a 50% Unconsolidated Joint Venture, are included in these results through the date of its acquisition (Note 2).


	March 31 2003		December 31 2002
Assets:
Properties	$ 1,249,209		$ 1,248,335
Accumulated depreciation and amortization	(298,153	)	(287,670	)

	$ 951,056		$ 960,665
Cash and cash equivalents	29,485		37,576
Accounts and notes receivable	18,461		16,487
Deferred charges and other assets	40,001		31,668

	$ 1,039,003		$ 1,046,396

Liabilities and accumulated deficiency in assets:
Notes payable	$ 1,353,035		$ 1,289,739
Other liabilities	70,895		91,596
TRG’s accumulated deficiency in assets	(216,328	)	(191,152	)
Unconsolidated Joint Venture Partners’
accumulated deficiency in assets	(168,599	)	(143,787	)

	$ 1,039,003		$ 1,046,396


TRG’s accumulated deficiency in assets (above)	$ (216,328	)	$ (191,152	)
TRG basis adjustments, including elimination of intercompany
profit	98,727		100,307
TCO’s additional basis	121,487		122,247

Investment in Unconsolidated Joint Ventures	$ 3,886		$ 31,402


	Three Months Ended March 31
	2003		2002

Revenues	$ 79,381		$ 64,685

Recoverable and other operating expenses	$ 27,090		$ 22,401
Interest expense	19,720		18,182
Depreciation and amortization	13,185		13,951

Total operating costs	$ 59,995		$ 54,534

Net income	$ 19,386		$ 10,151


Net income allocable to TRG	$ 10,297		$ 5,587
Realized intercompany profit and depreciation of TRG’s additional basis	866		1,309
Depreciation of TCO’s additional basis	(760	)	(759	)

Equity in income of Unconsolidated Joint Ventures	$ 10,403		$ 6,137


Beneficial interest in Unconsolidated Joint Ventures’ operations:
Revenues less recoverable and other operating expenses	$ 29,308		$ 24,682
Interest expense	(10,340	)	(9,023	)
Depreciation and amortization	(8,565	)	(9,522	)