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, 2004
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 3, 2004, there were outstanding 49,706,243 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, 2004 and December 31, 2003 | 2 | ||
| Consolidated Statement of Operations and Comprehensive Income for the three months ended | |||
| March 31, 2004 and 2003 | 3 | ||
| Consolidated Statement of Cash Flows for the three months ended March 31, 2004 and 2003 | 4 | ||
| Notes to Consolidated Financial Statements | 5 | ||
1
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE
SHEET
(in thousands, except
share data)
| March 31 2004 |
December 31 2003 | |||||||
| Assets: | ||||||||
| Properties | $ | 2,531,001 | $ | 2,519,922 | ||||
| Accumulated depreciation and amortization | (470,399 | ) | (450,515 | ) | ||||
| $ | 2,060,602 | $ | 2,069,407 | |||||
| Investment in Unconsolidated Joint Ventures (Note 5) | 32,313 | 6,093 | ||||||
| Cash and cash equivalents | 18,294 | 30,403 | ||||||
| Accounts and notes receivable, less allowance for doubtful accounts of | ||||||||
| $7,634 and $7,403 in 2004 and December 31, 2003 | 26,729 | 32,592 | ||||||
| Accounts and notes receivable from related parties | 1,877 | 1,679 | ||||||
| Deferred charges and other assets | 46,839 | 46,796 | ||||||
| $ | 2,186,654 | $ | 2,186,970 | |||||
| Liabilities: | ||||||||
| Notes payable (Note 6) | $ | 1,554,748 | $ | 1,495,777 | ||||
| Accounts payable and accrued liabilities | 201,123 | 258,938 | ||||||
| Dividends and distributions payable | 13,623 | 13,481 | ||||||
| $ | 1,769,494 | $ | 1,768,196 | |||||
| Commitments and Contingencies (Notes 8 and 11) | ||||||||
| 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, 2004 and | ||||||||
| December 31, 2003 | $ | 80 | $ | 80 | ||||
| Series B Non-Participating Convertible Preferred Stock, $0.001 par | ||||||||
| and liquidation value, 40,000,000 shares authorized, 29,785,634 | ||||||||
| and 29,819,738 shares issued and outstanding at March 31, 2004 and | ||||||||
| December 31, 2003 | 30 | 30 | ||||||
| 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, | ||||||||
| 50,456,343 and 49,936,786 shares issued and outstanding at March 31, | ||||||||
| 2004 and December 31, 2003 | 505 | 499 | ||||||
| Additional paid-in capital | 676,371 | 664,362 | ||||||
| Accumulated other comprehensive income (loss) | (16,472 | ) | (12,593 | ) | ||||
| Dividends in excess of net income | (340,629 | ) | (330,879 | ) | ||||
| $ | 319,885 | $ | 321,499 | |||||
| $ | 2,186,654 | $ | 2,186,970 | |||||
See notes to consolidated financial statements.
2
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT
OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except
share data)
| Three Month Ended March 31 | ||||||||
| 2004 | 2003 | |||||||
| Income: | ||||||||
| Minimum rents | $ | 53,637 | $ | 50,099 | ||||
| Percentage rents | 1,033 | 1,154 | ||||||
| Expense recoveries | 31,000 | 30,762 | ||||||
| Revenues from management, leasing, and development services | 4,984 | 4,792 | ||||||
| Other | 10,678 | 10,742 | ||||||
| $ | 101,332 | $ | 97,549 | |||||
| Operating Expenses: | ||||||||
| Recoverable expenses | $ | 27,786 | $ | 27,314 | ||||
| Other operating | 8,152 | 9,348 | ||||||
| Costs related to unsolicited tender offer, net of recoveries (Note 4) | (1,000 | ) | 9,849 | |||||
| Management, leasing, and development services | 4,796 | 4,548 | ||||||
| General and administrative | 6,458 | 5,940 | ||||||
| Interest expense | 22,572 | 20,989 | ||||||
| Depreciation and amortization | 22,959 | 22,316 | ||||||
| $ | 91,723 | $ | 100,304 | |||||
| Income (loss) before equity in income of Unconsolidated Joint Ventures, | ||||||||
| discontinued operations, and minority and preferred interests | $ | 9,609 | $ | (2,755 | ) | |||
| Equity in income of Unconsolidated Joint Ventures (Note 5) | 9,593 | 10,403 | ||||||
| Income before discontinued operations and minority and preferred interests | $ | 19,202 | $ | 7,648 | ||||
| Discontinued operations - income from operations (Note 1) | 240 | |||||||
| Income before minority and preferred interests | $ | 19,202 | $ | 7,888 | ||||
| Minority interest in consolidated joint ventures | (178 | ) | (152 | ) | ||||
| Minority interest in TRG: | ||||||||
| TRG income allocable to minority partners | (5,619 | ) | (1,207 | ) | ||||
| Distributions in excess of income allocable to minority partners | (3,224 | ) | (7,260 | ) | ||||
| TRG Series C and D preferred distributions (Note 1) | (2,250 | ) | (2,250 | ) | ||||
| Net income (loss) | $ | 7,931 | $ | (2,981 | ) | |||
| Series A preferred dividends | (4,150 | ) | (4,150 | ) | ||||
| Net income (loss) allocable to common shareowners | $ | 3,781 | $ | (7,131 | ) | |||
| Net income (loss) | $ | 7,931 | $ | (2,981 | ) | |||
| Other comprehensive income (loss): | ||||||||
| Change in fair value of available-for-sale securities | (50 | ) | ||||||
| Realized loss on interest rate instruments | (6,054 | ) | ||||||
| Unrealized gain on interest rate instruments | 1,860 | 1,037 | ||||||
| Reclassification adjustment for amounts recognized in net income | 315 | 164 | ||||||
| Comprehensive income (loss) | $ | 4,052 | $ | (1,830 | ) | |||
| Basic earnings per common share (Note 9): | ||||||||
| Income (loss) from continuing operations | $ | 0.08 | $ | (0.14 | ) | |||
| Net income (loss) | $ | 0.08 | $ | (0.14 | ) | |||
| Diluted earnings per common share (Note 9): | ||||||||
| Income (loss) from continuing operations | $ | 0.07 | $ | (0.14 | ) | |||
| Net income (loss) | $ | 0.07 | $ | (0.14 | ) | |||
| Cash dividends declared per common share | $ | 0.27 | $ | 0.26 | ||||
| Weighted average number of common shares outstanding | 50,196,580 | 52,229,616 | ||||||
See notes to consolidated financial statements.
3
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS
(in thousands)
| Three Month Ended March 31 | ||||||||
| 2004 | 2003 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Income before minority and preferred interests | $ | 19,202 | $ | 7,888 | ||||
| Adjustments to reconcile income before minority and preferred interests | ||||||||
| to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of continuing operations | 22,959 | 22,316 | ||||||
| Depreciation and amortization of discontinued operations | 1,200 | |||||||
| Provision for losses on accounts receivable | 1,083 | 1,369 | ||||||
| Gains on sales of land | (3,155 | ) | (251 | ) | ||||
| Other | 1,205 | 1,137 | ||||||
| Increase (decrease) in cash attributable to changes in assets and liabilities: | ||||||||
| Receivables, deferred charges and other assets | (633 | ) | (1,494 | ) | ||||
| Accounts payable and other liabilities | (32,461 | ) | (16,342 | ) | ||||
| Net Cash Provided by Operating Activities | $ | 8,200 | $ | 15,823 | ||||
| Cash Flows From Investing Activities: | ||||||||
| Additions to properties | $ | (21,729 | ) | $ | (49,126 | ) | ||
| Proceeds from sales of land | 5,445 | 644 | ||||||
| Acquisition of interests in centers (Note 3) | (3,288 | ) | (3,223 | ) | ||||
| Contributions to Unconsolidated Joint Ventures (Note 6) | (33,000 | ) | ||||||
| Distributions from Unconsolidated Joint Ventures in excess of income | 6,922 | 27,609 | ||||||
| Net Cash Used In Investing Activities | $ | (45,650 | ) | $ | (24,096 | ) | ||
| Cash Flows From Financing Activities: | ||||||||
| Debt proceeds | $ | 492,500 | $ | 170,997 | ||||
| Debt payments | (433,529 | ) | (146,267 | ) | ||||
| Debt issuance costs | (2,727 | ) | (603 | ) | ||||
| Settlement of swap agreement (Note 6) | (6,054 | ) | ||||||
| Issuance of common stock pursuant to Continuing Offer (Note 8) | 3,831 | 1,031 | ||||||
| Distributions to minority and preferred interests | (11,093 | ) | (10,717 | ) | ||||
| Cash dividends to Series A preferred shareowners | (4,150 | ) | ||||||
| Cash dividends to common shareowners | (13,437 | ) | (13,574 | ) | ||||
| Net Cash Provided By Financing Activities | $ | 25,341 | $ | 867 | ||||
| Net Decrease In Cash and Cash Equivalents | $ | (12,109 | ) | $ | (7,406 | ) | ||
| Cash and Cash Equivalents at Beginning of Period | 30,403 | 32,470 | ||||||
| Cash and Cash Equivalents at End of Period | $ | 18,294 | $ | 25,064 | ||||
See notes to consolidated financial statements.
4
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, 2004 included 21 urban and suburban shopping centers in nine states. Another center is currently under construction in North Carolina.
The consolidated financial statements of the Company include all accounts of the Company, TRG, and its consolidated subsidiaries, including The Taubman Company LLC (the Manager); all intercompany transactions have been eliminated. Investments in entities not controlled but over which the Company has significant influence (Unconsolidated Joint Ventures) are accounted for under the equity method. The Company has evaluated its investments in the Unconsolidated Joint Ventures and has concluded that the ventures are not variable interest entities as defined in FIN 46, as revised. Accordingly, the Company continues to account for its interests in these ventures under the guidance in Statement of Position 78-9 (SOP 78-9). The Company’s partners or other owners in these Unconsolidated Joint Ventures have important rights, as contemplated by paragraphs .09 and .10 of SOP 78-9, including approval rights over annual operating budgets, capital spending, financing, admission of new partners/members, or sale of the properties and the Company has concluded that the equity method of accounting is appropriate for these interests. Specifically, the Company’s 79% investment in Westfarms is through a general partnership in which the other general partners have approval rights over annual operating budgets, capital spending, refinancing, or sale of the property. Under the equity method of accounting, the investments in Joint Ventures are initially recorded at cost, and subsequently increased for additional contributions and allocations of income and reduced for distributions received.
At March 31, 2004, 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. The Company, beginning in September 2004 and November 2004, can redeem the Series C and Series D Preferred Equity, respectively.
Because the net equity of the Operating Partnership unitholders is less than zero, the interest of the noncontrolling unitholders is presented as a zero balance in the consolidated balance sheet as of March 31, 2004 and December 31, 2003. 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, 2004 consisted of a 61% 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, 2004 and 2003 was 61% and 62%, respectively. At March 31, 2004, the Operating Partnership had 82,428,622 units of partnership interest outstanding, of which the Company owned 50,456,343. Included in the total units outstanding are 43,514 units issued in connection with the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions, and 2,083,333 non-voting units issued in May 2003.
Biltmore Fashion Park was sold in December 2003. The Company has separately presented the results of Biltmore Fashion Park as discontinued operations through the date of the sale.
5
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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, 2003. 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.
Certain prior year amounts have been reclassified to conform to 2004 classifications.
Note 2 – Income Taxes
The Company’s Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in the Company’s financial statements. The Company’s deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. The Company’s temporary differences primarily relate to deferred compensation and depreciation. During the three months ended March 31, 2004, 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, 2004, the Company had a net deferred tax asset of $3.4 million, after a valuation allowance of $10.2 million.
Note 3 – Acquisitions
In January 2004, the Company purchased the additional 30% ownership of Beverly Center from Sheldon Gordon and the estate of E. Phillip Lyon. Consideration of approximately $11 million for this interest consisted of $3.3 million in cash and 276,724 of newly issued partnership units valued at $27.50 per unit. The price of the acquisition was determined pursuant to a 1988 option agreement between the Company and a partnership controlled by Mr. Gordon and Mr. Lyon. The Company has carried the $11 million net exercise price as a liability on its balance sheet. The Company already recognized 100% of the financial results of the center in its financial statements.
Note 4 – Unsolicited Tender Offer
During the three months ended March 31, 2004, the Company received $1.0 million in insurance recoveries relating to the unsolicited tender offer and related litigation, which were withdrawn and ended in October 2003. Costs incurred in connection with the unsolicited tender offer were $9.8 million during the three months ended March 31, 2003. Substantially all costs have been paid and no additional insurance recoveries are expected.
6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
Note 5 — Investments in Unconsolidated Joint Ventures
The Company has investments in joint ventures that own shopping centers. The Operating Partnership is the managing general partner or managing member of these Unconsolidated Joint Ventures, except for the ventures that own Arizona Mills, The Mall at Millenia, and Waterside Shops at Pelican Bay.
| Shopping Center | Ownership as of March 31, 2004 |
| Arizona Mills | 50% |
| Fair Oaks | 50 |
| The Mall at Millenia | 50 |
| Stamford Town Center | 50 |
| Sunvalley | 50 |
| International Plaza | 26 |
| Cherry Creek | 50 |
| Waterside Shops at Pelican Bay | 25 |
| Westfarms | 79 |
| Woodland | 50 |
As of March 31, 2004, the Operating Partnership has a preferred investment in International Plaza of $15 million, on which an annual preferential return of 8.25% will accrue. In addition to the preferred return on its investment, the Operating Partnership is entitled to receive the balance 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 partnership equity reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the Company’s cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures and (ii) the Operating Partnership’s adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the Unconsolidated Joint Ventures. The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership’s differences in bases are amortized over the useful lives of the related assets.
Combined balance sheet and results of operations information is presented in the following table for all Unconsolidated Joint Ventures, followed by the Operating Partnership’s beneficial interest in the combined information. The combined information of the Unconsolidated Joint Ventures as of December 31, 2003 excludes the balances of Waterside Shops at Pelican Bay. A 25% interest in this center was acquired in December 2003. TRG’s basis adjustments as of March 31, 2004 include $68 million, $8 million, and $8 million related to the acquisitions of interests in Sunvalley, Arizona Mills, and Waterside, respectively, representing the differences between the acquisition prices and the book values of the ownership interests acquired. 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.
7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| March 31 2004 |
December 31 2003 | |||||||
| Assets: | ||||||||
| Properties | $ | 1,325,520 | $ | 1,250,964 | ||||
| Accumulated depreciation and amortization | (364,322 | ) | (331,321 | ) | ||||
| $ | 961,198 | $ | 919,643 | |||||
| Cash and cash equivalents | 15,480 | 28,448 | ||||||
| Accounts and notes receivable | 21,339 | 16,504 | ||||||
| Deferred charges and other assets | 29,238 | 29,526 | ||||||
| $ | 1,027,255 | $ | 994,121 | |||||
| Liabilities and accumulated deficiency in assets: | ||||||||
| Notes payable | $ | 1,276,955 | $ | 1,345,824 | ||||
| Accounts payable and other liabilities | 53,739 | 61,614 | ||||||
| TRG's accumulated deficiency in assets | (190,458 | ) | (231,456 | ) | ||||
| Unconsolidated Joint Venture Partners' accumulated | ||||||||
| deficiency in assets | (112,981 | ) | (181,861 | ) | ||||
| $ | 1,027,255 | $ | 994,121 | |||||
| TRG's accumulated deficiency in assets (above) | $ | (190,458 | ) | $ | (231,456 | ) | ||
| TRG's investment in Waterside Shops at Pelican Bay | 22,129 | |||||||
| TRG basis adjustments, including elimination of | ||||||||
| intercompany profit | 104,324 | 96,213 | ||||||
| TCO's additional basis | 118,447 | 119,207 | ||||||
| Investment in Unconsolidated Joint Ventures | $ | 32,313 | $ | 6,093 | ||||
| Three Months Ended March 31 | ||||||||
| 2004 | 2003 | |||||||
| Revenues | $ | 80,032 | $ | 79,381 | ||||
| Recoverable and other operating expenses | $ | 28,245 | $ | 27,090 | ||||
| Interest expense | 20,181 | 19,720 | ||||||
| Depreciation and amortization | 12,893 | 13,185 | ||||||
| Total operating costs | $ | 61,319 | $ | 59,995 | ||||
| Net income | $ | 18,713 | $ | 19,386 | ||||
| Net income allocable to TRG | $ | 9,669 | $ | 10,297 | ||||
| Realized intercompany profit and depreciation of TRG's | ||||||||
| additional basis | 684 | 866 | ||||||
| Depreciation of TCO's additional basis | (760 | ) | (760 | ) | ||||
| Equity in income of Unconsolidated Joint Ventures | ||||||||