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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996.
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: (810) 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
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, 1997, the aggregate market value of the 42,071,918 shares of
Common Stock held by non-affiliates of the registrant was $568.0 million, based
upon the closing price ($13 1/2) 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, 1997,
there were outstanding 50,720,358 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1997 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company") was incorporated in Michigan in 1973 and
had its initial public offering ("IPO") in 1992. Upon completion of the IPO, the
Company became the managing general partner of The Taubman Realty Group Limited
Partnership ("TRG"), an operating partnership that engages in the ownership,
operation, management, leasing, acquisition, development, redevelopment,
expansion, financing, and refinancing of regional shopping centers. As of
December 31, 1996, the Company holds a 36.68% interest in TRG. TRG owns as its
primary assets interests in regional retail shopping centers (the "Taubman
Shopping Centers" or the "Centers"). TRG also owns development projects for
future regional shopping centers (the "Development Projects") and approximately
99% of The Taubman Company Limited Partnership (the "Manager"), which manages
the Taubman Shopping Centers and provides services to the Company. Certain
Taubman Shopping Centers are partially owned through joint ventures (the "Joint
Ventures"). See the table on pages 13 and 14 of this report for information
regarding the Taubman Shopping Centers and TRG's interests in them.
The Company is a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to satisfy the
provisions of the Code applicable to REITs, the Company must distribute to its
shareholders at least 95% of its REIT taxable income and meet certain other
requirements. TRG's partnership agreement provides that TRG will distribute, at
a minimum, sufficient amounts to its partners such that the Company's pro rata
share will enable the Company to pay shareholder dividends (including capital
gains dividends that may be required upon TRG's sale of an asset) that will
satisfy the REIT provisions of the Code.
Recent Developments
For a discussion of business developments that occurred in 1996, see the
response to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size
and marketing strategy. Retail shopping centers range from neighborhood centers
of less than 100,000 square feet of GLA to regional and super-regional shopping
centers. Retail shopping centers in excess of 400,000 square feet of GLA are
generally referred to as "regional" shopping centers, while those centers having
in excess of 800,000 square feet of GLA are generally referred to as
"super-regional" shopping centers. In this annual report on Form 10-K, the term
"regional shopping centers" refers to both regional and super-regional shopping
centers. The term "GLA" refers to gross retail space, including anchors and mall
tenant areas, and the term "Mall GLA" refers to gross retail space, excluding
anchors. The term "anchor" refers to a department store or other large retail
store. The term "mall tenants" refers to stores (other than anchors) that are
typically specialty retailers and lease space in shopping centers.
Most regional shopping centers compete for consumer retail dollars by offering
fashion merchandise, hard goods, and services, generally in an enclosed, climate
controlled environment with convenient parking. Regional shopping centers have
differing strategies with regard to price levels of the merchants and
merchandise offered, from very high-end presentations, on the one extreme, to a
strategy of leasing exclusively to outlet stores, at the other.
1
Regional shopping centers usually have two or more anchors. Anchors either own
their stores, the land under them, and adjacent parking areas, or they lease the
ground or buildings from shopping center owners for long periods at rates that
are substantially lower than the rents charged to mall tenants. In enclosed
regional shopping centers, anchors are usually located at the ends of enclosed
common area corridors. This layout is intended to maximize pedestrian traffic
for the mall tenant stores. Mall GLA is leased to a wide variety of smaller
stores. In a regional shopping center, substantially all revenues are derived
from Mall GLA.
The anchors and the owner of the shopping center typically enter into an
agreement among themselves, generally referred to as a reciprocal easement
agreement, covering, among other things, operational matters, initial
construction, and future expansions.
Mall tenants usually pay rent comprised of several elements. The first element
is a fixed base, or "minimum", rent, often subject to increases according to a
schedule agreed upon at the time of lease inception. In addition, this base rent
is often supplemented by increases based upon inflation, often tied to changes
in the Consumer Price Index. Finally, tenants generally are required to pay a
percentage of their sales in addition to these other elements of rent, to the
extent sales of the tenant exceed certain negotiated levels.
Both anchors and mall tenants generally contribute funds to pay for upkeep of
common areas, property taxes, advertising, and other expenditures (such as
security, utilities, and cleaning) that are related to the day-to-day operations
of the shopping center.
As lease terms expire, shopping center owners may have the opportunity to
change base rents, to revise lease terms and conditions, to relocate existing
tenants, to reconfigure or expand tenant spaces, and to introduce new retailers
and retail concepts to the shopping center.
The regional shopping center industry in the United States has significant
barriers to entry. In addition, new regional shopping center developments are
inhibited by several factors. Such barriers and inhibiting factors include the
following:
o most major markets are already served by regional retail centers;
o land for suitable sites has become more difficult and more expensive to
assemble;
o due to growing environmental concerns and demands from local governments and
citizen groups, zoning and environmental approvals have become increasingly
time consuming, expensive, and difficult to obtain;
o many of the strong national specialty retailers needed to occupy Mall GLA
are already well represented in existing regional shopping centers; and
o department stores are generally not willing to deal with non-established
developers.
While consumers make purchases through a variety of retail formats, the
Company believes that the Taubman Shopping Centers, and other dominant
regional and super-regional shopping centers, will continue in the future to
be an attractive shopping destination for significant numbers of consumers. By
providing a convenient shopping environment offering access to a broad
selection of retailers, services, and food establishments, these centers have
generated high levels of customer traffic and, as a consequence, high tenant
sales. The ability of tenants to achieve higher sales levels than are
generally achieved at smaller centers or stand-alone locations in turn
supports higher levels of rent than at less productive locations.
2
Business of the Company
The Company, as managing general partner of TRG, is engaged in the ownership,
operation, management, leasing, acquisition, development, redevelopment,
expansion, financing, and refinancing of regional shopping centers and interests
therein.
The Taubman Shopping Centers:
o are strategically located in major metropolitan areas, many in communities
that are among the most affluent in the country, including New York City,
Chicago, Los Angeles, San Francisco, Detroit, Phoenix, and Washington, D.C.;
o range in size between 438,000 and 2.3 million square feet of GLA and between
133,000 and 971,000 square feet of Mall GLA. The smallest Center has
approximately 50 stores, and the largest has approximately 250 stores. Of
the 21 Centers, 18 are super-regional shopping centers;
o have approximately 2,900 stores operated by its mall tenants under
approximately 1,000 trade names;
o have 77 anchors, operating under 18 trade names;
o lease approximately 79% of Mall GLA to national chains, including
subsidiaries or divisions of The Limited (The Limited, Limited Express,
Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and
others), and Woolworth Corporation (Footlocker, Kinney Shoes, and others);
and
o are among the most productive (measured by mall tenants' average per square
foot sales) in the United States. In 1996, mall tenants in the Taubman
Shopping Centers portfolio as of December 31, 1996 had average per square
foot sales of $365, which is substantially greater than the average for all
regional shopping centers.
The most important factor affecting the revenues generated by the Taubman
Shopping Centers is leasing to mall tenants (primarily specialty retailers),
which represents over 90% of revenues. Anchors account for approximately 5% of
revenues because many own their stores and, in general, those that lease their
stores do so at rates substantially lower than those in effect for mall tenants.
TRG's ownership is concentrated in large and highly productive regional
shopping centers. Of its 21 Centers, 15 had annual rent rolls in 1996 of over
$10 million and 17 had sales-per-square-foot in excess of $300. The Company
believes that this level of productivity in the Taubman Shopping Centers is
indicative of their strong competitive position and is, in significant part,
attributable to TRG's business strategy and philosophy. The Company believes
that large shopping centers (including regional and especially super-regional
shopping centers) are the least susceptible to direct competition because (among
other reasons) anchors and large specialty retail stores do not find it
economically attractive to open additional stores in the immediate vicinity of
an existing location for fear of competing with themselves. In addition to the
advantage of size, the Company believes that the Centers' success can be
attributed in part to their other physical characteristics, such as design,
layout, and amenities.
3
Business Strategy And Philosophy
The Company and TRG believe that the regional shopping center business is not
simply a real estate development business, but rather an operating business in
which a retailing approach to the on-going management and leasing of the Taubman
Shopping Centers is essential. Thus TRG:
o offers a large, diverse selection of retail stores in each Center to give
customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, and thereby increase
achievable rents, by leasing space to a constantly changing mix of tenants;
and
o seeks to anticipate trends in the retailing industry and emphasizes ongoing
introductions of new retail concepts into the Centers. Due in part to this
strategy, a number of successful retail trade names have opened their first
mall stores in the Taubman Shopping Centers. TRG believes that its execution
of this leasing strategy is unique in the industry and is an important
element in building and maintaining customer loyalty and increasing mall
productivity.
The Taubman Shopping Centers compete for retail consumer spending through
diverse, in-depth presentations of predominantly fashion merchandise in an
environment intended to facilitate customer shopping. While some Taubman
Shopping Centers include stores that target high-end, upscale customers, each
Center is individually merchandised in light of the demographics of its
potential customers within convenient driving distance.
TRG's leasing strategy involves assembling a diverse mix of mall tenants in
each of the Taubman Shopping Centers in order to attract customers, thereby
generating higher sales by mall tenants. High sales by mall tenants make the
Taubman Shopping Centers attractive to prospective tenants, thereby increasing
the rental rates that prospective tenants are willing to pay. TRG implements an
active leasing strategy to increase the Taubman Shopping Centers' productivity
and to set minimum rents at higher levels. Elements of this strategy include
terminating leases of under-performing tenants, renegotiating existing leases,
and not leasing space to prospective tenants that (though viable or attractive
in certain ways) would not enhance a Taubman Shopping Center's retail mix.
TRG's strategy is carried out by the Manager, which is more than 99%
beneficially owned by TRG and which has been engaged to provide property
management and leasing services for each Taubman Shopping Center (including
wholly and partially owned Centers) and to provide corporate, development,
administrative, and acquisition services for TRG and the Company. The Manager's
predecessor was a leading developer and manager in the regional shopping center
business for more than 25 years.
Potential For Growth
TRG's strategy is to increase the amount of cash flow. In addition to
increased cash flow through the growth in mall tenant sales and market rental
rates, TRG believes that its cash flow will increase over time due to expansions
of the Centers, acquisitions, and development of new centers.
4
Expansions of the Taubman Shopping Centers
- ------------------------------------------
Most of the Taubman Shopping Centers have been designed to accommodate
expansions. Expansion projects can be as significant as new shopping center
construction in terms of scope and cost, requiring governmental and existing
anchor store approvals, design and engineering activities, including rerouting
utilities, providing additional parking areas or decking, acquiring additional
land, and relocating anchors and mall tenants (all of which must take place with
a minimum of disruption to existing tenants and customers). In 1996, for
example, Sears became the fourth anchor at Marley Station and the fifth anchor
at Stoneridge. Additionally, construction is in process on expansions of three
of the Taubman Shopping Centers:
o Westfarms -- the addition of approximately 135,000 square feet of Mall GLA
and Nordstrom as an anchor will open in the summer of 1997;
o Biltmore Fashion Park -- over 30,000 square feet of new Mall GLA is
scheduled to open beginning in the spring of 1997; and
o Cherry Creek -- a newly constructed Lord & Taylor will open in the fall of
1997. Additionally, a 132,000 square foot expansion of the Mall GLA will
open in the fall of 1998.
Consolidation of department stores has also strengthened TRG's portfolio, as
retailers continue to be attracted to TRG's dominant and highly productive
locations. Recent department store conversions include Macy's at both Biltmore
Fashion Park and Paseo Nuevo, and Lord & Taylor at both Lakeforest and Fair
Oaks. Also, Bloomingdale's at Beverly Center opened in March of 1997. When these
projects are completed, 13 of TRG's 21 properties will have benefited from
expansions or anchor conversions since 1995.
Acquisitions
- ------------
In 1996, TRG completed three acquisitions totaling over $150 million. TRG has
completed approximately $400 million of acquisitions in the four years since the
Company has been public.
In December 1996, TRG acquired La Cumbre Plaza (La Cumbre), a regional
shopping center located 3.5 miles north of downtown Santa Barbara, California.
The 478,000 square foot open-air Center is anchored by Robinsons-May and Sears.
In June 1996, TRG acquired Paseo Nuevo, a regional shopping center located in
downtown Santa Barbara. The 438,000 square foot open-air Center is anchored by
Macy's and Nordstrom. Together, La Cumbre and Paseo Nuevo dominate an affluent
market that stretches 60 miles along the California coastline.
Additionally, in July 1996, TRG completed transactions that resulted in the
acquisition of the 75% interest in Fairlane Town Center previously held by a
Joint Venture Partner. In connection with the transaction, TRG issued units of
partnership interest to the former Joint Venture Partner.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Acquisitions and Disposition" and Note
3 to the Consolidated Financial Statements of TRG for further discussion of
these acquisitions.
The Company and TRG believe that TRG will have additional opportunities to
acquire regional shopping centers, or interests therein, and will have certain
advantages in doing so.
o First, the management expertise of the Manager will enhance the leasing and
operation of newly acquired regional shopping centers. If opportunities
exist to expand, remodel, or re-merchandise the center through new leasing,
the Manager's expertise will assist TRG in making an informed and timely
evaluation of the economic consequences of such activities prior to
acquisition, as well as facilitate implementation of such activities.
5
o Second, a center can be acquired for any combination of cash or equity
interests in TRG or (subject to certain limitations) the Company, possibly
creating the opportunity for tax-advantaged transactions for the seller,
thereby reducing the price that might otherwise have to be paid in an all
cash transaction or making an opportunity available that would not otherwise
exist. TRG is able to offer partnership interests in itself in exchange for
shopping center interests, allowing sellers to diversify their interests,
attain liquidity not otherwise available, possibly defer taxes that might
otherwise be due if the interests were instead sold for cash, maintain an
investment in the regional shopping center business, and resolve concerns
sellers otherwise may have regarding future management of their properties.
For instance, Biltmore Fashion Park's selling group included private
investors who found it tax efficient to accept TRG partnership units as part
of the consideration when TRG acquired the Center in 1994.
Development of New Centers
- --------------------------
The Company believes that TRG has attractive development opportunities and
intends to continue to pursue an active program of regional shopping center
development. The Company believes that TRG has the expertise, through the
Manager, to develop economically attractive regional shopping centers through
intensive analysis of local retail opportunities, and that its expertise in this
regard is more important than macroeconomic conditions in determining the scope
and number of opportunities available to it.
Development of new Taubman Shopping Centers is expected to be an important
source of growth in revenues and operating income before interest, depreciation
and amortization. In 1996, two projects moved forward from the pre-development
phase. Construction began on Arizona Mills in Tempe, Arizona (20 miles southwest
of downtown Phoenix) with the August 1996 groundbreaking. Arizona Mills, a 1.2
million square foot value-oriented mall, will open in November 1997. The project
is a joint venture in which TRG has a 37% interest. In January 1996,
groundbreaking ceremonies were held for MacArthur Center, a new center being
developed by TRG in Norfolk, Virginia, which is expected to total 1.1 million
square feet. The three-level center, scheduled to open in the spring of 1999,
will initially be anchored by Nordstrom and Virginia's first Dillard's
Department Store. The project is a joint venture in which TRG has a 70%
interest. Construction also continued on The Mall at Tuttle Crossing (northwest
Columbus, Ohio), which will open in July 1997. Sears, JCPenney, Lazarus and
Marshall Field's will anchor this new 980,000 square foot center.
TRG's policies with respect to development activities are designed to limit
the risks otherwise associated with development. For instance, TRG entered into
an agreement to lease Memorial City Mall, a center adjacent to one of the most
affluent residential areas in Houston, Texas, while TRG investigates the
redevelopment opportunities of the center (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Capital Spending" for further discussion of the
transaction). Also, TRG generally does not intend to acquire land early in the
development process, but will instead generally acquire options on land or form
partnerships with landholders holding potentially attractive development sites,
typically exercising options only once it is prepared to begin construction. In
addition, TRG does not intend to begin construction until a sufficient number of
anchor stores have agreed to operate in the shopping center, such that TRG is
confident that the projected sales and rents from Mall GLA are sufficient to
earn a return on invested capital in excess of TRG's cost of capital. Having
historically followed these two principles, TRG's experience indicates that less
than 20% of the costs of the development of a regional shopping center will be
incurred prior to the construction period; however, no assurance can be given
that TRG will continue to be able to so minimize pre-construction costs.
While the Company anticipates that TRG will continue to evaluate development
projects using criteria, including financial criteria for rates of return,
similar to those employed in the past, no assurances can be given that the
adherence to these policies will produce comparable results in the future. In
addition, the costs of shopping center development opportunities that are
explored but ultimately abandoned will, to some extent, diminish the overall
return on development projects.
6
Major Tenants
The combined operations of The Limited, Inc. accounted for approximately 11%
of leased Mall GLA as of December 31, 1996 and for approximately 10% of the 1996
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 2.5% of leased Mall GLA and 1996 base
rent. No other single retail company accounted for more than 4% of leased Mall
GLA or more than 5% of the 1996 base rent.
Lease Expirations
The following table shows lease expirations (based on information available as
of December 31, 1996) for the next ten years for the Taubman Shopping Centers in
operation at that date:
Percent of
Annualized Base Annualized Base Total Leased
Approximate Rent Under Rent Under Square Footage
Lease Expiration Number of Leases Leased Area Expiring Leases Expiring Leases Represented by
Year Expiring in Square Footage (in thousands) Per Square Foot Expiring Leases
---- -------- ----------------- -------------- --------------- ---------------
1997 (1) 136 320,218 $ 10,452 $ 32.64 3.9%
1998 288 608,078 26,263 43.19 7.4%
1999 288 704,553 28,630 40.64 8.6%
2000 370 894,452 34,526 38.60 11.0%
2001 335 851,364 33,472 39.32 10.4%
2002 314 869,814 34,030 39.12 10.7%
2003 306 988,516 37,261 37.69 12.1%
2004 258 899,900 36,476 40.53 11.0%
2005 234 897,336 33,698 37.55 11.0%
2006 117 454,290 17,989 39.60 5.6%
(1) Excludes leases that expire in 1997 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1996.
The Company believes that the information in the table is not indicative of
what will occur in the future because of several factors, but principally
because TRG's leasing policies and practices create a significant level of early
lease terminations at the Taubman Shopping Centers. For example, the average
remaining term of the leases that were terminated during the period 1991 to 1996
was approximately 1.9 years. The average term of leases signed during 1995 and
1996 was approximately 7.4 years.
In addition, mall tenants at Taubman Shopping Centers may seek the protection
of the bankruptcy laws, which could result in the termination of such tenants'
leases and thus cause a reduction in the cash flow generated by the Taubman
Shopping Centers. Prior to 1992, such bankruptcies had not affected more than 3%
of leases in the Taubman Shopping Centers in any one calendar year. In 1996,
approximately 2.8% of leases were so affected compared to 3.2% in 1995, 3.1% in
1994, 4.0% in 1993 and 4.5% in 1992. Since 1991, the annual provision for losses
on accounts receivable has been less than 2% of TRG's annual revenues.
Occupancy
Average Mall GLA occupancy rates of the Taubman Shopping Centers for the last
five years are as follows:
Year Average Mall GLA Occupancy
---- --------------------------
1992 88.1%
1993 86.5%
1994 86.6%
1995 88.0%
1996 87.4%
Historically, average annual occupancy for TRG as a whole has been within a
narrow band. In the last ten years, average annual occupancy has ranged between
86.5% and 88.8%.
7
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of declining sales, rents on
new leases will grow more slowly or will decline for the opposite reason.
However, Center revenues nevertheless increase as older leases roll over or are
terminated early and replaced with new leases negotiated at current rental rates
that are usually higher than the average rates for existing leases. The
following table contains certain information regarding per square foot base
rent, excluding renewals, at Taubman Shopping Centers that have been owned and
open for five years.
Store Store Difference
All Closings Openings Between
Mall During During Opening and
Tenants Year Year Closing Rents
-------- ----------- ----------- ------------
Average Average Average Average
Base Annualized Annualized Annualized
Rent Base Rent Base Rent Base Rent
-------- ----------- ----------- ------------
1992 (1)................... $30.61 $27.91 $38.16 $10.25
1993 (1)................... $32.64 $29.56 $35.86 $ 6.30
1994 (2)................... $34.72 $30.46 $41.02 $10.56
1995 (3)................... $36.33 $32.96 $41.27 $ 8.31
1996 (3)................... $37.90 $33.39 $42.39 $ 9.00
(1) Includes 16 centers owned and open prior to January 1, 1989.
(2) Includes 17 centers owned and open prior to January 1, 1990.
(3) Includes 18 centers owned and open prior to January 1, 1991.
TRG anticipates that the spread between opening and closing rents will narrow
in 1997. This statistic is difficult to predict in part because TRG's leasing
policies and practices may result in early lease terminations with actual
average closing rents which may vary from the average rent per square foot of
scheduled lease expirations. In addition, the opening or closing of large tenant
spaces, which generally pay a lower rent per square foot, can significantly
change the spread in a given year. The spread between opening and closing store
rents narrowed in 1993, principally due to the timing of openings and closings
of certain large tenants.
8
Anchors
The following table summarizes certain information regarding the anchors at
the Taubman Shopping Centers.
Number of 1996 GLA
Name Anchor Stores (Thousands) % of GLA
---- ------------- ----------- --------
Sears 13(1) 2,788 12.0%
Federated
Macy's 11 1,926
Lazarus 1(1) 480
Bloomingdale's 2 379
--- -----
Total 14 2,785 12.0%
JCPenney 13(1) 2,423 10.5%
May Company
Lord & Taylor 8 1,016
Hecht's 3 525
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
--- -----
Total 16 2,328 10.0%
Dayton Hudson
Hudson's 5 1,040
Marshall Field's 2(1) 508
--- -----
Total 7 1,548 6.7%
Nordstrom 4(1) 702 3.0%
Saks 5 450 1.9%
Jacobson's 2 221 1.0%
Neiman Marcus 2 216 0.9%
Crowley's 1 115 0.5%
--- ------ -----
Total 77 13,576 58.6%
=== ====== =====
- ------------------------
(1) One or more additional stores will be added in connection with an expansion
or development of a new Center. See "Business -- Business of the Company --
Potential for Growth -- Expansions of the Taubman Shopping Centers" and " --
Development of New Centers."
9
Although during the past eight years department store companies owning 18
anchors at 11 Centers have filed for bankruptcy, none of the anchors at Taubman
Shopping Centers are now owned by companies in bankruptcy. Of those 18 anchors,
12 are now owned and operated by Federated Department Stores, Inc.
("Federated"). Federated closed the Emporium at Hilltop in 1996. TRG is
considering alternate uses of the anchor space. Two other anchor stores formerly
owned by Woodward & Lothrop Incorporated were acquired by the May Department
Stores Company ("May Company"). After remodeling, these stores, which closed in
November 1995, reopened in 1996 as Lord & Taylor stores (an existing Lord &
Taylor store at one of these Centers has closed, and May Company and TRG are
considering various options for the store). The former sites of two other
anchors, B. Altman and Bonwit Teller, are part of the completed expansion of The
Mall at Short Hills, which added approximately 100,000 square feet of Mall GLA
and three anchors: Nordstrom; Neiman Marcus; and Saks Fifth Avenue. The former
site of another anchor (Sage-Allen at Westfarms) opened as a Filene's Men's
Store/Furniture Gallery in 1995.
Environmental Matters
All of the Taubman Shopping Centers presently owned by TRG (not including
option interests in the Development Projects or any of the real estate managed
by the Manager but not included in TRG's portfolio) have been subject to
environmental assessments. The Company, TRG, and the Manager are not aware of
any environmental liability relating to the Taubman Shopping Centers or any
other property in which they have or had an interest (whether as an owner or
operator) that the Company believes would have a material adverse effect on the
Company's business, assets, or results of operations. No assurances can be
given, however, that all environmental liabilities have been identified or that
no prior owner, operator, or current occupant has created an environmental
condition not known to the Company, TRG, or the Manager. Moreover, no assurances
can be given that (i) future laws, ordinances, or regulations will not impose
any material environmental liability or that (ii) the current environmental
condition of the Taubman Shopping Centers will not be affected by tenants and
occupants of the Taubman Shopping Centers, by the condition of properties in the
vicinity of the Taubman Shopping Centers (such as the presence of underground
storage tanks), or by third parties unrelated to TRG, the Company, or the
Manager.
With respect to the matters described below, while there can be no assurances,
the Company believes that such matters will not have a material adverse effect
on the Company's business, assets, or results of operations.
Hilltop is located in a region in Richmond, California that has been used
extensively to store various petroleum products. Three petroleum storage tanks
were previously located on Hilltop's site. In connection with the construction
of Hilltop, numerous borings and drillings were conducted, and no evidence of
petroleum discharges was identified. In addition, extensive grading and
excavation were performed during such construction, and no material residual
contamination from the storage tanks was noted. The Company is not aware of any
environmental liability associated with the storage tanks that were formerly
located on the Hilltop site.
Beverly Center is located over an oil field and several abandoned oil wells,
and is adjacent to an active oil production facility that operates numerous oil
and gas wells. In the Los Angeles basin, where Beverly Center is located,
pockets of methane gas may be found in oil fields; however, elevated levels of
methane have not been detected at Beverly Center.
10
Cherry Creek is situated on land that was used as a landfill prior to 1950.
Because of the past use of the site as a landfill, the site is listed on the
United States Environmental Protection Agency's ("EPA") Comprehensive
Environmental Response, Compensation and Liability Information System list.
Various soil and groundwater samples have been taken on and near the Cherry
Creek site since 1979. In addition, in 1991 and 1992, as part of a review of all
former landfill sites in the Denver area, including the Cherry Creek site, the
EPA and the Colorado Department of Health completed a series of groundwater,
soil, and surface water tests around the border of the Cherry Creek property.
Although a single sample taken in 1988 found elevated levels of cadmium in the
groundwater at Cherry Creek, and groundwater samples taken in connection with a
former gasoline station on the property indicate elevated levels of benzene, no
other samples taken have indicated any levels of contamination that exceeded
applicable environmental standards. In addition, the results of the samples
taken by the EPA and the Colorado Department of Health indicate no evidence of
contamination.
Paseo Nuevo is located in an area of known groundwater contamination by
tetrachloroethylene ("PCE"). The groundwater under and around the site has been
monitored for six years before, during, and after construction of the center. No
on-site sources of PCE were identified during construction. The Regional Water
Quality Control Board has given approval to discontinue the monitoring program,
because the PCE levels remained relatively constant over the six-year period and
do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the Taubman
Shopping Centers, primarily in the form of floor tiles, roof coatings and
mastics. The floor tiles, roof coatings and mastics are generally in good
condition. Fire-proofing material containing asbestos is present at some of the
Taubman Shopping Centers in limited concentrations or in limited areas. The
Manager has developed and is implementing an operations and maintenance program
that details operating procedures with respect to ACMs prior to any renovation
and that requires periodic inspection for any change in condition of existing
ACMs.
Personnel
The Company has engaged the Manager to provide certain management, accounting,
and other administrative services to the Company. TRG has engaged the Manager to
provide all real estate management, acquisition, development, and administrative
services required by (or of) TRG or any of its properties.
As of December 31, 1996, the Manager had 410 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1996:
Number Of Employees
-------------------
Property Management............... 173
Leasing........................... 63
Development....................... 40
Financial Services................ 72
Other ............................ 62
---
Total....................... 410
===
The Manager considers its relations with its employees to be good.
11
Item 2. PROPERTIES
Taubman Shopping Centers
Ownership
The following table sets forth certain information about each of the Taubman
Shopping Centers. The table is in alphabetical order. The Joint Venture partners
have ongoing rights with regard to the disposition of TRG's interest in the
Joint Ventures, as well as the approval of major matters.
12
Sq. Ft of GLA/ Percent of Mall
Mall GLA Year Opened/ TRG's % Ownership GLA Occupied 1996 Rent (2)
Center (1) Anchors as of 12/31/96 Expanded as of 12/31/96 as of 12/31/96 (in Thousands)
---------- ------- ------------------ ------------ ----------------- --------------- --------------
Beverly Center Bloomingdale's, 903,000/ 1982 70%(4) 91% $24,510
Los Angeles, CA Macy's (3) 595,000
Biltmore Fashion Park Macy's, Saks 518,000/ 1963/1992(6) 100% 97% 9,505
Phoenix, AZ Fifth Avenue 279,000 (5)
Briarwood Hudson's, JCPenney, 990,000/ 1973/1980 100% 94% 12,072
Ann Arbor, MI Jacobson's, Sears 369,000
Cherry Creek Foley's, Lord & Taylor, 884,000/ 1990 50% 97% 18,224
Denver, CO Neiman Marcus, Saks 430,000 (7)(8)
Fifth Avenue
Columbus City Center Jacobson's, Lazarus, 1,210,000/ 1989 100% 96% 16,264
Columbus, OH Marshall Field's 416,000
Fair Oaks Hecht's, JCPenney, 1,378,000/ 1980/1987/ 50%(9) 78% 18,572
Fairfax, VA Lord & Taylor, Sears 562,000 1988
(Washington, D.C.
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,519,000/ 1976/1978/ 100% 80% 14,738
Dearborn, MI Lord & Taylor, Saks 629,000 1980
(Detroit Fifth Avenue, Sears
Metropolitan Area)
Hilltop JCPenney, Macy's, Sears 1,116,000/ 1976/1991 100% 80% 6,836
Richmond, CA 387,000
(San Francisco
Metropolitan Area)
La Cumbre Plaza Robinsons-May, Sears 478,000/ 1967/1989(6) 100% 98% (6)
Santa Barbara, CA 178,000
Lakeforest Hecht's, JCPenney, 1,109,000/ 1978/1992 100% 84% 13,244
Gaithersburg, MD Lord & Taylor, Sears 439,000
(Washington, D.C.
Metropolitan Area)
- ----------------------------
(1) The table includes only centers in operation at December 31, 1996. Excluded
from this table are The Mall at Tuttle Crossing, which will open in July
1997, and Arizona Mills, which will open in November 1997. Also excluded is
Memorial City Mall, a development project. Centers are owned in fee other
than: Beverly Center, Cherry Creek, Columbus City Center, La Cumbre Plaza
and Paseo Nuevo, which are held under ground leases expiring between 2028
and 2083 (exclusive of three ten-year renewal options at Columbus City
Center), and a portion of the parking area at Hilltop (the ground lease of
which expires in 2073).
(2) Includes minimum and percentage rent for the year ended December 31, 1996.
Excludes rent from certain peripheral properties.
(3) Bloomingdale's, formerly The Broadway, opened in March 1997.
(4) TRG has an option to acquire the remaining 30%. The results of Beverly
Center are consolidated in TRG's financial statements.
(5) Construction is in process to utilize over 30,000 square feet of a former
anchor space for new mall tenants. The stores are expected to open
beginning in the spring of 1997.
(6) Biltmore Fashion Park was acquired in December 1994. La Cumbre Plaza was
acquired in December 1996.
(7) GLA excludes approximately 166,000 square feet for the renovated buildings
on adjacent peripheral land.
(8) A newly constructed Lord & Taylor store will open in the fall of 1997, and
an expansion of the Center of approximately 132,000 square feet of Mall GLA
will open in the fall of 1998.
(9) Includes a nominal interest of substantially less than 1% held by the
Company.
13
Sq. Ft of GLA/ Percent of Mall
Mall GLA Year Opened/ TRG's % Ownership GLA Occupied 1996 Rent (2)
Center (1) Anchors as of 12/31/96 Expanded as of 12/31/96 as of 12/31/96 (in Thousands)
---------- ------- ------------------ ------------ ----------------- --------------- --------------
Lakeside Crowley's, Hudson's, 1,489,000/ 1976/1980 50% 86% $16,422
Sterling Heights, MI JCPenney, Lord & 528,000
(Detroit Taylor, Sears
Metropolitan Area)
Marley Station Hecht's, JCPenney, 1,088,000/ 1987/1994/ 100% 79% 9,780
Anne Arundel County, MD Macy's, Sears 375,000 1996
(Washington, D.C.
Metropolitan Area)
Meadowood Mall JCPenney, Macy's 898,000/ 1979/1995 100% 90% 9,362
Reno, NV (two locations), Sears 321,000
Paseo Nuevo Macy's, Nordstrom 438,000/ 1990(11) 100% 83% 2,246(11)
Santa Barbara, CA 133,000(10)
Stamford Town Center Filene's, Macy's, 875,000/ 1982 50%(12) 90% 16,429
Stamford, CT Saks Fifth Avenue 382,000
Stoneridge JCPenney, Macy's 1,293,000/ 1980/1990/ 100% 90% 14,653
Pleasanton, CA (two locations), 451,000 1996
(San Francisco Nordstrom, Sears
Metropolitan Area)
The Mall at Short Hills Bloomingdale's, Macy's, 1,373,000/ 1980/1994/ 100% 94% 29,770
Short Hills, NJ Neiman Marcus, 551,000 1995
Nordstrom, Saks Fifth
Avenue
Twelve Oaks Mall Hudson's, JCPenney, 1,224,000/ 1977/1980 50% 95% 18,587
Novi, MI Lord & Taylor, Sears 486,000
(Detroit
Metropolitan Area)
Westfarms Filene's, Filene's 992,000/ 1974 79% 86% 15,181
West Hartford, CT Men's Store/Furniture 397,000(13)
Gallery, JCPenney,
Lord & Taylor(13)
Woodfield JCPenney, Lord & Taylor, 2,296,000/ 1971/1972/ 50% 85% 34,274
Schaumburg, IL Marshall Field's, 971,000 1995
(Chicago Nordstrom, Sears
Metropolitan Area)
Woodland Hudson's, JCPenney, 1,096,000/ 1968/1974/ 50% 89% 12,877
Grand Rapids, MI Sears 371,000 1984/1989
---------
Total GLA/Total Mall GLA: 23,167,000/
9,250,000
Average GLA/Average Mall GLA: 1,103,000/
440,000
- ----------------------------
(10) GLA excludes approximately 23,000 square feet of second level commercial
office and performing arts area.
(11) Paseo Nuevo was acquired in June 1996.
(12) Includes a nominal interest of substantially less than 1% held by the
Company.
(13) An expansion of the Center of approximately 135,000 square feet of Mall
GLA and the addition of Nordstrom as an anchor will open in the summer of
1997.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Taubman Shopping Centers as of December 31, 1996. All mortgage
debt in the table below is nonrecourse to TRG. Biltmore, Hilltop and Stoneridge
are also encumbered by assessment bonds totaling approximately $5.5 million,
which are not included in the table.
Weighted Principal
Average Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/96 Service Maturity on Maturity Prepayment
TRG'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)
Columbus City Center 7.00% 8,175 725 08/01/19 0 At Any Time(2)
Stoneridge Floating(3) 44,897(3) Interest Only (3) 45,000 (3)
Centers Owned by Joint
Ventures/TRG's % Ownership
- --------------------------
Cherry Creek (50%) Floating(4) 130,000 Interest Only 08/01/98 130,000 4 Days' Notice(2)
Fair Oaks (50%) 9.00% 39,865 4,304 12/01/16 0 12/01/97(5)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days' Notice(1)
Stamford Town Center (50%) 11.69%(6) 56,291 7,207 12/01/17 0 01/01/00(7)
Twelve Oaks Mall (50%) Floating(8) 49,924 Interest Only 10/15/01 50,000 30 Days' Notice(2)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 07/01/98(9)
Floating(10) 19,729(10) Interest Only 07/01/02 19,729 4 Days' Notice(2)
Woodfield (50%) Floating(11) 172,000 Interest Only 10/13/98 172,000 30 Days' Notice(2)
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.
(2) Prepayment can be made without penalty.
(3) Commercial paper facility. The maximum availability under the facility is
$75 million. Commercial paper is generally sold with a 30 day maturity.
(4) The rate is capped at 7.25% through January 1998 and from February 1998 to
maturity at 9.1% including credit spread, based on one month LIBOR.
(5) The mortgage will be prepayable on 12/01/97 (the earliest prepayment date)
with a penalty of 5% of outstanding principal. This penalty declines by
one-half of 1% each year after the earliest prepayment date, reducing to a
minimum prepayment penalty of 1%.
(6) The lender is entitled to contingent interest equal to 20% of annual
applicable receipts in excess of approximately $9.0 million.
(7) The mortgage has a prepayment penalty of 6%, declining by one-half of 1%
for each year after the earliest prepayment date, reducing to a minimum
penalty of 1%, plus an amount equal to ten times the greater of (i)
contingent interest payable for the year immediately preceding prepayment
or (ii) the average amount of contingent interest for the three years
immediately prior to prepayment.
(8) The rate is capped at 9.0% until maturity, including credit spread, based
on one month LIBOR.
(9) If the loan is prepaid between 7/1/98 and 1/3/02 there is a yield
maintenance prepayment penalty.
(10) The loan is a construction facility with a maximum availability of $55
million. The rate on the construction facility is capped at 9.6% until
July 1997, and thereafter until maturity at 9.95%, plus credit spread.
(11) The interest rate on $93.5 million was swapped to maturity at an effective
annual rate of 5.4%. The rate on the balance of the financing, which has
been capped at a maximum annual rate, including credit spread, of 6.5% to
maturity by an interest rate agreement, floats at a rate of three month
LIBOR plus 0.5%.
For additional information regarding the Taubman Shopping Centers and their
operation, see the responses to Item 1 of this report.
15
Item 3. LEGAL PROCEEDINGS
Neither the Company, TRG, the Consolidated Businesses, nor any of the Joint
Ventures is presently involved in any material litigation nor, to the Company's
knowledge, is any material litigation threatened against the Company or TRG or
any of their properties. Except for routine litigation involving present or
former tenants of Taubman Shopping Centers (generally eviction or collection
proceedings), substantially all litigation is covered by TRG's and the Joint
Ventures' liability insurance.
Item 4. 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, 1997, the 50,720,358 outstanding
shares of Common Stock were held by 580 holders of record. The following table
presents the dividends declared and range of share prices for each quarter of
1995 and 1996.
Market Quotations
----------------------------
1995 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $ 9 7/8 $ 9 1/4 $0.22
June 30 10 3/8 9 1/8 0.22
September 30 10 1/8 9 3/8 0.22
December 31 10 1/8 9 0.22
Market Quotations
----------------------------
1996 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $10 1/8 $ 9 1/4 $0.22
June 30 11 1/8 9 1/2 0.22
September 30 11 5/8 10 1/4 0.22
December 31 13 1/8 10 5/8 0.23
16
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and TRG
and should be read in conjunction with the financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
Year Ended December 31
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
I.TAUBMAN CENTERS, INC.
Equity in TRG's income before
extraordinary items (1)(2) 1,762 15,904 17,654 19,831 21,368
Other income/expenses, net 45 (830) (640) (564) (638)
------- ------- ------- ------- -------
Income before extraordinary items 1,807 15,074 17,014 19,267 20,730
Equity in TRG's extraordinary items (3,400) (16,087) 5,836 (444)
------- ------- ------- ------- -------
Net income 1,807 11,674 927 25,103 20,286
======= ======= ======== ======= =======
Income before extraordinary items
per common share (1) 0.04 0.34 0.38 0.44 0.47
Net income per common share (1) 0.04 0.26 0.02 0.57 0.46
Dividends per common share declared
after initial public offering 0.07 0.88 0.88 0.88 0.89
Weighted average number of common
shares outstanding (1) 44,589,913 44,589,913 44,589,709 44,249,617 44,444,833
Number of common shares outstanding
at end of period 44,589,913 44,589,913 44,570,913 44,134,913 50,720,358
Ownership percentage of TRG at end
of period 35.97% 35.97% 35.10% 35.10% 36.68%
II. TRG
Revenues:
Minimum rents 81,829 98,102 111,373 130,418 150,577
Percentage rents 4,712 4,323 3,788 5,617 6,073
Expense recoveries 48,881 60,497 68,075 75,293 85,502
Other 19,458 14,185 13,898 17,590 20,577
------- ------- ------- ------- -------
Total Revenues 154,880 177,107 197,134 228,918 262,729
Operating Costs:
Recoverable and other operating 77,854 91,194 100,809 108,908 124,626
Interest:
GM Loan (3) 81,613
Partner Loans interest income (3) (73,233)
Mortgage notes and other 36,041 45,337 47,732 65,858 70,454
Depreciation and amortization 21,317 25,403 27,653 32,393 35,770
------- ------- ------- ------- -------
Total Operating Costs 143,592 161,934 176,194 207,159 230,850
Equity in income before extraordinary
items of unconsolidated Joint Ventures 51,638 54,153 51,263 57,940 52,215
------- ------- ------- ------- -------
Income before extraordinary items 62,926 69,326 72,203 79,699 84,094
Extraordinary items (4) (9,454) (44,731) 16,627 (1,328)
------- ------- ------- ------- -------
Net Income 62,926 59,872 27,472 96,326 82,766
======= ======= ======= ======= =======
Income before extraordinary items per
unit of partnership interest 1,119 1,164 1,255 1,290
Net income per unit of partnership interest 966 443 1,516 1,270
Weighted average number of units of
partnership interest outstanding 61,981 62,028 63,521 65,109
Number of units of partnership interest
outstanding at end of period 61,981 61,981 63,521 63,521 69,998
Distributions paid to beneficiaries (5) 210,460 110,939 113,479 116,225 119,099
Year Ended December 31
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
III. JOINT VENTURES
Revenues:
Minimum rents 162,148 156,180 157,374 166,244 157,212
Percentage rents 6,806 5,980 4,808 3,629 3,951
Expense recoveries 103,742 99,006 96,711 101,455 95,244
Other (6) 7,645 7,397 9,922 11,474 8,930
Gain on disposition of Bellevue (2)(6) 8,342
------- ------- ------- ------- -------
Total Revenues 280,341 268,563 268,815 291,144 265,337
Operating Costs: (6)
Recoverable and other operating 108,245 99,767 99,161 100,560 94,571
Interest 47,219 43,975 52,278 58,572 53,548
Depreciation and amortization 28,799 24,104 23,511 24,682 22,949
------- ------- ------- ------- -------
Total Operating Costs 184,263 167,846 174,950 183,814 171,068
------- ------- ------- ------- -------
Income before extraordinary items 96,078 100,717 93,865 107,330 94,269
======= ======= ======= ======= =======
TRG share of income before
extraordinary items 51,638 54,153 51,263 57,940 52,215
======= ======= ======= ======= =======
17
As of December 31
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
BALANCE SHEET DATA (AT END OF PERIOD):
I.TAUBMAN CENTERS, INC.
Investment in TRG 388,962 361,568 322,316 307,190 369,131
Total assets 392,758 371,609 333,316 315,076 378,527
II. TRG
Real estate before accumulated
depreciation 485,208 665,978 843,960 926,207 1,126,873
Total assets 412,195 574,456 739,811 804,356 969,283
Total debt and capital
lease obligation (7) 523,830 695,517 872,158 969,667 1,041,254
Year Ended December 31
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
SUPPLEMENTAL INFORMATION:
I.TAUBMAN CENTERS, INC.
Funds from Operations (8) 37,769 39,736 40,798 44,104
II. TRG
Consolidated Businesses' contribution 77,026 85,913 96,325 120,010 138,103
Joint Ventures' contribution 90,491 88,801 90,332 96,120 91,708
------- ------- ------- ------- -------
EBITDA (8) 167,517 174,714 186,657 216,130 229,811
Consolidated Businesses' contribution 44,421 45,337 47,732 65,858 70,454
Joint Ventures' contribution 24,025 22,070 26,590 30,396 27,738
------- ------- ------- ------- -------
TRG's Beneficial Interest Expense(8) 68,446 67,407 74,322 96,254 98,192
Consolidated Businesses' contribution 32,605 40,576 48,593 52,123 65,744
Joint Ventures' contribution 66,466 66,731 63,742 65,724 63,970
------- ------- ------- ------- -------
Distributable Cash Flow (8) 99,071 107,307 112,335 117,847 129,714
Consolidated Coverage Ratio (9) 2.5 2.6 2.5 2.2 2.3
Ratio of Earnings to Fixed Charges (10) 1.4 1.9 1.7 1.7 1.7
OPERATING DATA:
Mall tenant sales (11)(12) 2,434,590 2,483,342 2,561,555 2,739,393 2,827,245
Number of shopping centers at end
of period 19 19 20 19 21
Ending Mall GLA in thousands of
square feet (12) 8,827 8,823 9,088 8,996 9,250
Average occupancy (12) 88.1% 86.5% 86.6% 88.0% 87.4%
Ending occupancy (12) 88.6% 88.7% 89.3% 89.4% 88.0%
Leased space(12)(13) 90.6% 90.1% 90.9% 90.6% 89.0%
Average base rent per square foot: (14)
All mall tenants $ 30.61 $ 32.64 $ 34.72 $ 36.33 $ 37.90
Stores closing during year (15) $ 27.91 $ 29.56 $ 30.46 $ 32.96 $ 33.39
Stores opening during year (15) $ 38.16 $ 35.86 $ 41.02 $ 41.27 $ 42.39
Difference between opening and
closing rents $ 10.25 $ 6.30 $ 10.56 $ 8.31 $ 9.00
- --------------------------
(1) Amounts in 1992 are for the period November 30, 1992 (the closing date of
the Company's initial public offering and its concurrent investment in
TRG) to December 31, 1992.
(2) In 1995, Bellevue Associates, an unconsolidated Joint Venture, recognized
extraordinary and ordinary gains related to the disposition of Bellevue
Center and the extinguishment of debt. TRG's share of the extraordinary
and ordinary gains were $18.9 million and $5.0 million, respectively. The
Company's share of the extraordinary and ordinary gains were $6.6 million
and $1.8 million, respectively. See Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A)--Results of
Operations--Acquisitions and Disposition.
(3) The GM Loan was repaid and the Partner Loans were distributed in November
1992 as part of TRG's reconfiguration.
(Footnotes are continued on the next page)
18
(4) In 1995, TRG recognized an $18.9 million extraordinary gain related to the
disposition of Bellevue Center. Also included in extraordinary items are
extraordinary charges in 1993 through 1996 related to the extinguishment
of debt.
(5) 1992 includes distributions totaling $95 million made to certain partners
in connection with TRG's reconfiguration.
(6) Amounts are reported net of intercompany profits.
(7) Includes a capital lease obligation of $14.4 million and $39.8 million at
December 31, 1995 and 1996, respectively. The sum of 100% of the
Consolidated Businesses' debt and TRG's pro rata share of the debt of its
unconsolidated Joint Ventures was $1.346 billion and $1.398 billion
(excluding capital lease obligations of $14.4 million and $42.3 million at
December 31, 1995 and 1996, respectively) at December 31, 1995 and
December 31, 1996, respectively.
(8) Funds from Operations, EBITDA, Beneficial Interest Expense, and
Distributable Cash Flow are defined and discussed in MD&A--Liquidity and
Capital Resources-Distributions beginning on page 33. Funds from
Operations and Distributable Cash Flow were restated for 1995 from the
previously reported amounts of $41.5 million and $119.9 million,
respectively, to reflect the deduction of non-real estate depreciation and
amortization, as specified in NAREIT's definition of Funds from
Operations. A reconciliation of TRG's net income to Funds from Operations
is presented on page 34. Funds from Operations, EBITDA, and Distributable
Cash Flow do 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.
(9) Defined as EBITDA divided by TRG's Beneficial Interest Expense.
(10) The Ratio of Earnings to Fixed Charges is computed by dividing fixed
charges into income before extraordinary items, adjusted for Consolidated
Businesses' and TRG's pro rata share of the Joint Ventures' amortization
of interest costs previously capitalized and fixed charges other than
capitalized interest. Fixed charges include Consolidated Businesses' and
TRG's pro rata share of the Joint Ventures' interest costs, the estimated
interest component of rent expense, and certain other items.
(11) Based on reports of sales furnished by mall tenants.
(12) Except for 1994 ending Mall GLA, ending occupancy, and leased space,
statistics for 1994 and prior years do not include the effect of Biltmore
Fashion Park, which was acquired December 21, 1994. Statistics include
Bellevue Center through October 1995. Statistics for 1996 include Paseo
Nuevo for the second half of the year. Statistics for 1996, other than
ending Mall GLA, ending occupancy, and leased space, do not include La
Cumbre Plaza, which was acquired December 17, 1996. Statistics do not
include Memorial City Mall, a development project.
(13) Leased space comprises both occupied space and space that is leased but
not yet occupied.
(14) 1992 and 1993 amounts include 16 centers owned and open prior to January
1, 1989. 1994 amounts include 17 centers owned and open prior to January
1, 1990. 1995 and 1996 amounts include 18 centers owned and open prior to
January 1, 1991.
(15) Information represents average annualized base rents.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The following discussion should be read in conjunction with Selected Financial
Data, the Financial Statements of Taubman Centers, Inc. and the Notes thereto
and the Consolidated Financial Statements of The Taubman Realty Group Limited
Partnership and the Notes thereto.
General Background and Performance Measurement
The Company, through its interest in and as managing general partner of TRG,
participates in TRG's Managed Businesses. TRG's Managed Businesses include: (i)
wholly owned Taubman Shopping Centers, development projects for future regional
shopping centers (Development Projects) and The Taubman Company Limited
Partnership (the Manager), (collectively, the Consolidated Businesses); and (ii)
Taubman Shopping Centers partially owned through joint ventures (Joint
Ventures).
TRG consolidates the wholly owned Taubman Shopping Centers, the Development
Projects, and the Manager. The Joint Ventures are accounted for under the equity
method in TRG's Consolidated Financial Statements.
Certain aspects of the performance of the Managed Businesses are best
understood by measuring their performance as a whole, without regard to TRG's
ownership interest. For example, mall tenant sales and shopping center occupancy
trends fit this category and are so analyzed below. In addition, trends in
certain items of revenue and expense are often best understood in the same
fashion, and the discussions following take this approach when appropriate. When
relevant, these items are also discussed separately with regard to the
Consolidated Businesses and the Joint Ventures.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most
important determinant of revenues of the Taubman Shopping Centers because mall
tenants provide over 90% of these revenues and because mall tenant sales
determine the amount of rent, percentage rent, and recoverable expenses
(together, total occupancy costs) that mall tenants can afford to pay. However,
levels of mall tenant sales can be considerably more volatile in the short run
than total occupancy costs.
The Company believes that the ability of tenants to pay occupancy costs and
earn profits over long periods of time increases as sales per square foot
increase, whether through inflation or real growth in customer spending. Because
most mall tenants have certain fixed expenses, the occupancy costs that they can
afford to pay and still be profitable are a higher percentage of sales at higher
sales per square foot.
The following table summarizes occupancy costs, excluding utilities, for mall
tenants as a percentage of mall tenant sales.
1994 1995 1996
---- ---- ----
Mall tenant sales (in thousands) $2,561,555 $2,739,393 $2,827,245
Sales per square foot 335 346 (1) 365
Minimum rents 10.2% 10.4% 10.4%
Percentage rents 0.3 0.3 0.3
Expense recoveries 4.3 4.4 4.5
---- ---- ----
Mall tenant occupancy costs 14.8% 15.1% 15.2%
==== ==== ====
(1) Sales per square foot was $352, excluding Bellevue Center.
20
Occupancy
Historically, average annual occupancy for TRG as a whole has been within a
narrow band. In the last ten years, average annual occupancy has ranged between
86.5% and 88.8%.
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent, excluding renewals, at Taubman Shopping Centers that have
been owned and open for five years.
Store Store Difference
All Closings Openings Between
Mall During During Opening and
Tenants Year Year Closing Rents
-------- ----------- ----------- ------------
Average Average Average Average
Base Annualized Annualized Annualized
Rent Base Rent Base Rent Base Rent
-------- ----------- ----------- ------------
1994 (1) $34.72 $30.46 $41.02 $10.56
1995 (2) $36.33 $32.96 $41.27 $ 8.31
1996 (2) $37.90 $33.39 $42.39 $ 9.00
(1) Includes 17 centers owned and open prior to January 1, 1990.
(2) Includes 18 centers owned and open prior to January 1, 1991.
TRG anticipates that the spread between opening and closing rents will narrow
in 1997. This statistic is difficult to predict in part because TRG's leasing
policies and practices may result in early lease terminations with actual
average closing rents which may vary from the average rent per square foot of
scheduled lease expirations. In addition, the opening or closing of large tenant
spaces, which generally pay a lower rent per square foot, can significantly
change the spread in a given year.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant
sales highest in the fourth quarter due to the Christmas season, and with
lesser, though still significant, sales fluctuations associated with the Easter
holiday and back-to-school events. While minimum rents and recoveries are
generally not subject to seasonal factors, most leases are scheduled to expire
in the first quarter, and the majority of new stores open in the second half of
the year in anticipation of the Christmas selling season. Accordingly, revenues
and occupancy levels are generally highest in the fourth quarter.
21
The following table summarizes certain quarterly operating data for TRG's
Managed Businesses for 1996:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1996 1996 1996 1996 1996
--------------------------------------------------
(in thousands)
Mall tenant sales $591,677 $617,821 $627,791 $989,956 $2,827,245
Revenues 129,764 128,497 129,730 138,250 526,241
Occupancy
Average occupancy 87.8% 87.3% 86.8% 87.6% 87.4%
Ending occupancy 87.7% 87.3% 86.8% 88.0% 88.0%
Leased space 89.5% 88.2% 87.6% 89.0% 89.0%
Because the seasonality of sales contrasts with the generally fixed nature of
minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum
rents, percentage rents and expense recoveries) relative to sales are
considerably higher in the first three quarters than they are in the fourth
quarter. The following table summarizes occupancy costs, excluding utilities,
for mall tenants as a percentage of sales for each quarter of 1996:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1996 1996 1996 1996 1996
--------------------------------------------------
Minimum rents 12.3% 11.7% 11.7% 7.6% 10.4%
Percentage rents 0.3 0.3 0.3 0.3 0.3
Expense recoveries 5.6 5.0 4.6 3.5 4.5
---- ---- ---- ---- ----
Mall tenant occupancy costs 18.2% 17.0% 16.6% 11.4% 15.2%
==== ==== ==== ==== ====
Results of Operations
Equity Transactions
In December 1996, the Company purchased 3,048 newly issued TRG units of
partnership interest with the $75 million proceeds from the Company's December
1996 offering of 5.97 million shares of common stock. TRG bore all expenses of
the Company's offering which have been accounted for as a reduction of the
proceeds from TRG's issuance of units. TRG used the net proceeds to pay down
short term floating rate debt and to acquire La Cumbre Plaza (see below). Also
in December 1996, the Company exchanged common shares for TRG units of
partnership interest newly issued under TRG's incentive option plan.
Additionally in 1996, TRG issued 3,096 units of partnership interest in
connection with the acquisition of the remaining interest in Fairlane Town
Center (see below). As a result of these transactions, at December 31, 1996 the
Company had 50.7 million shares of common stock outstanding and TRG had 69,998
units of partnership interest outstanding, of which the Company owned 36.68%.
Acquisitions and Disposition
The following discussion of TRG's acquisitions contains forward-looking
statements regarding the impact of these acquisitions on EBITDA (EBITDA is
defined and described in Liquidity and Capital Resources -- Distributions). The
actual impact may vary based on a variety of factors, including actual
occupancy, rents achieved and operating expenses of the Centers. See Note 3 to
TRG's consolidated financial statements for further discussion of the
acquisitions.
Acquisition of La Cumbre Plaza
- ------------------------------
In December 1996, TRG acquired a 100% leasehold interest in La Cumbre Plaza
(La Cumbre) located in Santa Barbara, California for $22.25 million in cash. The
acquisition was funded with proceeds from an issuance of TRG units of
partnership interest (see Equity Transactions above). The operating results of
La Cumbre have been consolidated in TRG's financial statements from the
acquisition date. The acquisition had an immaterial effect on net income in
1996. The acquisition is expected to add EBITDA in excess of $2.8 million in
1997.
22
Acquisition of Remaining Interest in Fairlane Town Center
- ---------------------------------------------------------
In July 1996, TRG completed transactions that resulted in the acquisition of
the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint
Venture Partner. In connection with the transaction, TRG issued to the former
Joint Venture Partner 3,096 units of partnership interest, exchangeable for
approximately 6.1 million shares of the Company's common stock, which had a
closing price of $10.75 per share on the day prior to the issuance date. TRG
also assumed mortgage debt of approximately $26 million, representing the former
Joint Venture Partner's beneficial interest in the $34.6 million mortgage
encumbering the property. TRG used unsecured debt to fund the repayment of the
9.73% mortgage and the prepayment penalty of approximately $1.2 million. The
operating results of Fairlane have been consolidated in TRG's financial
statements from the acquisition date. Prior to the acquisition date, TRG's
interest in Fairlane was accounted for under the equity method as a Joint
Venture. The acquisition is expected to incrementally add approximately $11
million to EBITDA over the twelve months following the purchase date.
Acquisition of Paseo Nuevo
- --------------------------
In June 1996, TRG acquired a 100% leasehold interest in Paseo Nuevo, located
in Santa Barbara, California, for $37 million in cash. TRG borrowed under its
existing lines of credit to fund the acquisition. The operating results of Paseo
Nuevo have been consolidated in TRG's financial statements from the acquisition
date. The acquisition had an immaterial effect on net income in 1996. The
acquisition is expected to produce EBITDA of over $3.7 million in its first
twelve months following the purchase date.
Disposition of Bellevue Center
- ------------------------------
In December 1995, the bank group holding the $99.5 million nonrecourse
mortgage encumbering Bellevue Center acquired title to the Center through a
nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG
ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60%
owned Joint Venture that owned the Center, as of November 1, 1995. TRG's share
of Bellevue's net loss from operations for 1994 and the ten months ended October
31, 1995, was $1.1 million and $0.7 million, respectively. The Company's share
of the net loss was $0.4 million and $0.3 million, respectively.
In 1995, TRG recognized an extraordinary gain of $18.9 million on the
extinguishment of debt and an ordinary gain of $5.0 million on the disposition
of the Center, which was based on the carrying value of TRG's investment in
Bellevue. The Company's share of these gains was $6.6 million and $1.8 million,
respectively.
Bellevue's operations, which included the effect of the below current market
mortgage interest rate of 5.91%, contributed in 1994 and the ten months ended
October 31, 1995, $1.4 million and $1.1 million, respectively, to Distributable
Cash Flow and for these same periods, $0.5 million and $0.4 million,
respectively, to Funds from Operations (Distributable Cash Flow and Funds from
Operations are defined and discussed in Liquidity and Capital Resources --
Distributions).
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall
(Memorial City), a 1.4 million square foot shopping center located in Houston,
Texas. The lease of this unencumbered property grants TRG the exclusive right to
manage, lease and operate the property. TRG has the option to terminate the
lease after the third full lease year by paying $2 million to the lessor. TRG
will use this option period to evaluate the redevelopment opportunities of the
Center. As a development project, Memorial City has been excluded from all
operating statistics in this report, and Memorial City's results of operations
have been presented as a net line item in the following tabular comparison of
TRG's 1996 results of operations to the prior year. Memorial City is expected to
have an immaterial effect on EBITDA and net income during the option period.
23
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Taubman Centers, Inc.
The Company is the managing general partner of TRG and shares in TRG's
financial performance to the extent of its ownership percentage. During 1996,
the Company's ownership of TRG changed as a result of several transactions (see
Equity Transactions above). The Company's average ownership percentage of TRG
was 34.5% for 1996 and 35.1% for 1995. The Company's ownership in TRG as of
December 31, 1996 was 36.68%. As of December 31, 1996, the Company had 50.7
million shares outstanding, up from 44.1 million at December 31, 1995.
Equity in income of TRG consists of the Company's $29.1 million proportionate
share of TRG's income before extraordinary items for 1996 and $28.0 million for
1995. These amounts were reduced by $7.6 million in 1996 and $8.1 million in
1995, representing adjustments arising from the Company's additional basis in
TRG's net assets. Equity in income of TRG for 1995 includes a $1.8 million gain
related to the disposition of Bellevue Center (see Acquisitions and Disposition
above). Income before extraordinary items for 1996 was $20.7 million or $0.47
per share as compared to $19.3 million or $0.44 per share in 1995.
The Company recognized an extraordinary item of $(0.4) million in 1996,
consisting of its share of TRG's extraordinary item related to the
extinguishment of debt. In 1995, the Company recognized extraordinary items of
$5.8 million consisting of its share of TRG's extraordinary items related to the
disposition of Bellevue Center (see Acquisitions and Disposition above) and
other extinguishment of debt. Net income for 1996 was $20.3 million or $0.46 per
share compared to $25.1 million or $0.57 per share in 1995.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.4% in 1996 versus
88.0% in 1995. Ending occupancy for the Taubman Shopping Centers at December 31,
1996 was 88.0% versus 89.4% at December 31, 1995. Leased space at December 31,
1996 was 89.0% compared to 90.6% at the same date in 1995. Average occupancy for
1996 was somewhat less than the previous year's level but comfortably within
TRG's historic range of average annual occupancy. TRG expects that it will not
achieve year over year increases in average occupancy before the fourth quarter
of 1997.
Total sales for Taubman Shopping Center mall tenants increased in 1996 by 3.2%
to $2.83 billion from $2.74 billion in 1995. Tenant sales per square foot
increased by 5.2% to $365 in 1996 from $346 in 1995. Sales per square foot in
1995 was $352, excluding Bellevue. Mall tenant sales for Centers that were owned
and open for all of 1996 and 1995 (which excludes Paseo Nuevo and Bellevue) were
$2.81 billion, a 3.9% increase over 1995. Sales statistics for the fourth
quarter of 1996 were negatively affected by new competition near certain
Centers. TRG expects that the effect of the competition on sales will moderate
after the anniversary date of the opening of the competing centers.
Occupancy and mall tenant sales statistics for 1996, other than ending
occupancy and leased space, do not include La Cumbre.
24
Comparison of Fiscal Year 1996 to Fiscal Year 1995
The following table sets forth operating results for TRG's Managed Businesses
for 1995 and 1996, showing the results of the Consolidated Businesses and Joint
Ventures:
1995 1996
----------------------------------------- -----------------------------------------
TRG TOTAL: TRG TOTAL:
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES VENTURES(1) BUSINESSES BUSINESSES(2) VENTURES(1) BUSINESSES
----------------------------------------- -----------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 130.4 166.2 296.6 149.2 157.2 306.4
Percentage rents 5.6 3.6 9.2 6.0 4.0 9.9
Expense recoveries 75.3 101.5 176.8 85.1 95.2 180.4
Other 17.6 11.5 29.1 20.6 8.9 29.5
Gain on disposition of Bellevue 8.3 8.3
----- ----- ----- ----- ----- -----
Total revenues 228.9 291.1 520.0 260.9 265.3 526.2
OPERATING COSTS:
Recoverable expenses 62.9 88.2 151.1 71.6 81.8 153.4
Other operating 22.5 12.3 34.8 25.4 12.8 38.2
Management, leasing and
development 3.7 3.7 4.2 4.2
General and administrative 19.8 19.8 21.8 21.8
Interest expense 65.8 58.6 124.4 70.5 53.5 124.0
Depreciation and amortization 32.4 24.7 57.1 35.7 22.9 58.7
----- ----- ----- ----- ----- -----
Total operating costs 207.1 183.8 390.9 229.2 171.1 400.3
Net results of Memorial City(2) 0.2 0.2
----- ----- ----- ----- ----- -----
21.8 107.3 129.1 31.9 94.3 126.2
===== ===== ===== =====
Equity in income before extraordinary
items of Joint Ventures (including
$5.0 million in 1995 related to the
disposition of Bellevue) 57.9 52.2
----- -----
Income before extraordinary items 79.7 84.1
Extraordinary items 16.6 (1.3)
----- -----
NET INCOME 96.3 82.8
===== =====
SUPPLEMENTAL INFORMATION(3)
EBITDA contribution 120.0 96.1 216.1 138.1 91.7 229.8
TRG's Beneficial Interest Expense (65.8) (30.4) (96.2) (70.5) (27.7) (98.2)
Non-real estate depreciation (2.0) (2.0) (1.9) (1.9)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution(4) 52.1 65.7 117.8 65.7 64.0 129.7
===== ===== ===== ===== ===== =====
(1) With the exception of the Supplemental Information, amounts represent 100%
of the Joint Ventures. Amounts are net of intercompany profits.
(2) The results of operations of Memorial City are presented net in this table.
Memorial City's partial year results are not indicative of future results.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future. (See Results
of Operations -- Memorial City Mall Lease above).
(3) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources -- Distributions.
EBITDA for 1995 does not include the gain related to the disposition of
Bellevue Center.
(4) Distributable Cash Flow contribution for 1995 has been restated to reflect
NAREIT's clarified definition of Funds from Operations (see Liquidity and
Capital Resources -- Distributions).
(5) Amounts in this table may not add due to rounding.
25
TRG --Consolidated Businesses
- -----------------------------
Total revenues for 1996 were $260.9 million, a $32.0 million or 14.0% increase
from 1995. Minimum rents for 1996 increased $18.8 million, of which $8.7 million
was caused by the Fairlane and Paseo Nuevo acquisitions. The results of Fairlane
have been consolidated in TRG's results subsequent to the acquisition date
(prior to that date Fairlane was accounted for under the equity method as a
Joint Venture). Minimum rent also increased due to the expansions at Short Hills
and Meadowood and tenant rollovers. The increase in expense recoveries was also
primarily due to the Fairlane and Paseo Nuevo acquisitions and recoveries of
increased maintenance costs and property taxes. The increase in other revenues
of $3.0 million was primarily due to increases in revenue from management,
leasing, and development services, rental fees on exterior advertising signs and
gains on sales of peripheral land, partially offset by a decrease in lease
cancellation revenue.
Total operating costs increased $22.1 million, or 10.7%, to $229.2 million.
The increase in recoverable expenses for 1996 was due to Fairlane and Paseo
Nuevo and to increases in maintenance costs and property taxes, including those
related to the expansion at Short Hills. Other operating expenses increased due
to Fairlane and Paseo Nuevo, and an increase in the charge to operations for
development pre-construction reserves. General and administrative expenses
increased $2.0 million due primarily to increases in compensation, including
costs of the new long-term performance compensation plan and the allocation of
internal acquisition costs, travel, and professional fees in 1996, offset by a
decrease resulting from a $0.8 million charge in 1995 for severance and
termination benefits. Interest expense increased $4.7 million due primarily to
an increase in debt levels, including debt used to finance the acquisition of
Paseo Nuevo and capital expenditures and the assumption of debt relating to the
Fairlane acquisition, and a decrease in capitalized interest, partially offset
by decreased interest rates. The increase in depreciation and amortization was
due primarily to the acquisitions of Fairlane and Paseo Nuevo and the expansions
at Short Hills and Meadowood.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated income statements by the amounts
representing Memorial City's revenues and expenses, which are presented in the
preceding table as a net amount.
Joint Ventures
- --------------
Total revenues for 1996 were $265.3 million, a $25.8 million or 8.9% decrease
from 1995, primarily representing a $23.8 million decrease caused by the change
in Fairlane from a Joint Venture to a Consolidated Business and by the November
1995 disposition of Bellevue. Minimum rent decreases due to Fairlane and
Bellevue were offset by increases due to the expansion at Woodfield and tenant
rollovers. Expense recoveries decreased primarily due to Fairlane and Bellevue,
offset by increases at other Centers. Other income decreased due to a gain on
the sale of peripheral land in 1995 and decreased interest income in 1996,
offset by an increase in lease cancellation revenue in 1996.
Total operating costs decreased by $12.7 million, or 6.9%, to $171.1 million
for 1996, representing a $19.9 million decrease due to Fairlane and Bellevue,
offset by increases at other Centers. Recoverable expenses decreased $6.4
million due to Fairlane and Bellevue, offset by increases in maintenance costs
and property taxes. Other operating costs increased $0.5 million reflecting
increases in property management costs, promotion and advertising costs, bad
debt expense and a nonrecurring $0.5 million payment to an anchor at one of the
Centers, offset by decreases due to Bellevue and Fairlane. Interest expense
decreased $5.1 million due to a decrease in debt related to Fairlane and
Bellevue and an increase in capitalized interest, partially offset by increases
due to an increase in debt used to finance capital expenditures and to higher
interest rates on certain debt refinanced in 1995. Operating costs as presented
in the preceding table differ from the amounts shown in the combined, summarized
financial statements of the unconsolidated Joint Ventures (Note 4 to TRG's
financial statements) by the amount of intercompany profit.
26
As a result of the foregoing, income before extraordinary items of the Joint
Ventures was $94.3 million in 1996, a decrease of 12.1% from 1995. TRG's equity
in income before extraordinary items of the Joint Ventures decreased $5.7
million, or 9.8%, to $52.2 million for 1996.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary items
increased by $4.4 million, or 5.5%, to $84.1 million for 1996. In 1996, TRG
recognized a $(1.3) million extraordinary charge related to the prepayment of
Fairlane's debt. In 1995, TRG recognized an $18.9 million extraordinary gain
related to the disposition of Bellevue and $(2.2) million in extraordinary
charges related to the prepayment of debt at TRG and at one of its Joint
Ventures. Net income for 1996 was $82.8 million, compared to $96.3 million in
1995.
Comparison of Fiscal Year 1995 to Fiscal Year 1994
Taubman Centers, Inc.
The acquisition of Biltmore Fashion Park (Biltmore) in December 1994, resulted
in the Company's ownership percentage of TRG changing from 35.97% to 35.10% (see
TRG -- Consolidated Businesses below).
Equity in income of TRG consists of the Company's $28.0 million proportionate
share of TRG's income before extraordinary items for 1995 and $26.0 million for
1994. These amounts were reduced by $8.1 million in 1995 and $8.3 million in
1994, representing adjustments arising from the Company's additional basis in
TRG's net assets. Equity in income of TRG for 1995 includes a $1.8 million gain
related to the disposition of Bellevue. Income before extraordinary items for
1995 was $19.3 million or $0.44 per share as compared to $17.0 million or $0.38
per share in 1994.
The Company recognized extraordinary items of $5.8 million in 1995, consisting
of its share of TRG's extraordinary items related to the disposition of Bellevue
and other extinguishment of debt. In 1994, the Company recognized extraordinary
charges of $(16.1) million, representing the Company's share of TRG's
extraordinary charges related to the extinguishment of debt. Net income for 1995
was $25.1 million or $0.57 per share compared to $927 thousand or $0.02 per
share in 1994.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 88.0% in 1995 versus
86.6% in 1994. Ending occupancy for the Taubman Shopping Centers at December 31,
1995 was 89.4% versus 89.3% at December 31, 1994. Leased space at December 31,
1995 was 90.6% compared to 90.9% at the same date in 1994.
Occupancy rates increased in part due to a change in the method of calculating
occupancy statistics to be consistent with International Council of Shopping
Centers guidelines. The change increased reported average occupancy for the year
by approximately one percent. The acquisition of Biltmore also contributed to
the increases.
Total sales for Taubman Shopping Centers mall tenants increased in 1995 by
6.9% to $2.74 billion from $2.56 billion in 1994. Tenant sales per square foot
increased by 3.3% to $346 in 1995 from $335 in 1994. Tenant sales per square
foot reached $352 in 1995, excluding Bellevue. Mall tenant sales for Centers
that were owned and open for all of 1995 and 1994 (which excludes Bellevue and
Biltmore) were $2.61 billion, a 4.0% increase over 1994.
27
Comparison of Fiscal Year 1995 to Fiscal Year 1994
The following table sets forth operating results for TRG's Managed Businesses
for 1994 and 1995, showing the results of the Consolidated Businesses and Joint
Ventures:
1994 1995
----------------------------------------- -----------------------------------------
TRG TOTAL: TRG TOTAL:
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES VENTURES(1) BUSINESSES BUSINESSES VENTURES(1) BUSINESSES
----------------------------------------- -----------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 111.3 157.4 268.7 130.4 166.2 296.6
Percentage rents 3.8 4.8 8.6 5.6 3.6 9.2
Expense recoveries 68.1 96.7 164.8 75.3 101.5 176.8
Other 13.9 9.9 23.8 17.6 11.5 29.1
Gain on disposition of Bellevue 8.3 8.3
----- ----- ----- ----- ----- -----
Total revenues 197.1 268.8 465.9 228.9 291.1 520.0
OPERATING COSTS:
Recoverable expenses 58.4 83.5 141.9 62.9 88.2 151.1
Other operating 21.0 15.6 36.6 22.5 12.3 34.8
Management, leasing and
development 3.5 3.5 3.7 3.7
General and administrative 17.9 17.9 19.8 19.8
Interest expense 47.7 52.3 100.0 65.8 58.6 124.4
Depreciation and amortization 27.7 23.5 51.2 32.4 24.7 57.1
----- ----- ----- ----- ----- -----
Total operating costs 176.2 174.9 351.1 207.1 183.8 390.9
20.9 93.9 114.8 21.8 107.3 129.1
===== ===== ===== =====
Equity in income before extraordinary
items of Joint Ventures (including
$5.0 million in 1995 related to the
disposition of Bellevue) 51.3 57.9
----- -----
Income before extraordinary items 72.2 79.7
Extraordinary items (44.7) 16.6
----- -----
NET INCOME 27.5 96.3
===== =====
SUPPLEMENTAL INFORMATION(2)
EBITDA contribution 96.3 90.3 186.6 120.0 96.1 216.1
TRG's Beneficial Interest Expense (47.7) (26.6) (74.3) (65.8) (30.4) (96.2)
Non-real estate depreciation (2.0) (2.0)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution(3) 48.6 63.7 112.3 52.1 65.7 117.8
===== ===== ===== ===== ===== =====
(1) With the exception of the Supplemental Information, amounts represent 100%
of the Joint Ventures. Amounts are net of intercompany profits.
(2) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources -- Distributions.
EBITDA for 1995 does not include the gain related to the disposition of
Bellevue Center.
(3) Distributable Cash Flow contribution for 1995 has been restated to reflect
NAREIT's clarified definition of Funds from Operations (see Liquidity and
Capital Resources -- Distributions).
(4) Amounts in this table may not add due to rounding.
28
TRG --Consolidated Businesses
- -----------------------------
In December 1994, TRG acquired Biltmore, a regional shopping center located in
Phoenix, Arizona, for $81.5 million in cash and 1,540 TRG units of partnership
interest (exchangeable for approximately three million shares of the Company's
common stock). TRG borrowed $81.5 million to fund the cash portion of the
purchase price. The operating results of Biltmore have been consolidated in
TRG's financial statements from the acquisition date. The acquisition had an
immaterial effect on net income in 1994 and 1995.
Total revenues for 1995 were $228.9 million, a $31.8 million or 16.1% increase
from 1994, of which $13.7 million was due to Biltmore. Minimum rents for 1995
increased $19.1 million, of which $7.8 million was due to Biltmore.
Additionally, minimum rents increased because of tenant rollovers and the
expansion at Short Hills. The increase in percentage rent was due primarily to
Biltmore. The increase in expense recoveries was caused by higher recoverable
expenses and Biltmore. Other income increased primarily due to lease
cancellation income, interest income, and insurance recoveries.
Total operating costs increased by $30.9 million or 17.5%, to $207.1 million
for 1995, of which $4.7 million was due to Biltmore's operating expenses,
excluding interest and depreciation and amortization. The $4.5 million increase
in recoverable expenses for 1995 was primarily due to Biltmore and increases in
property taxes and maintenance costs. General and administrative expenses
increased by $1.9 million, primarily due to a $0.8 million charge for severance
and termination benefits and increases in professional fees and office rent.
Interest expense for 1995 increased by $18.1 million primarily due to an
increase in debt levels, including debt used to finance the acquisition of
Biltmore and capital expenditures, and to increases in interest rates.
Depreciation and amortization also increased, primarily due to the acquisition
of Biltmore and the expansion at Short Hills.
Joint Ventures
- --------------
Total revenues for 1995 were $291.1 million, a $22.3 million or 8.3% increase
from 1994, of which $8.3 million was due to a gain on the disposition of
Bellevue. The increase in minimum rents was caused by tenant rollovers and the
expansions at Woodfield and Cherry Creek, offset by an approximately $1.4
million decrease due to Bellevue. The increase in expense recoveries was due to
the increase in recoverable expenses. Other income increased primarily due to
lease cancellation income and interest income. The $8.3 million gain related to
the disposition of Bellevue represents the difference between the fair value and
the carrying value of the Center (net of accumulated intercompany profit). As a
result, this amount differs from the amount included in revenues in the
combined, summarized financial statements of the unconsolidated Joint Ventures
(Note 4 to TRG's financial statements).
Total operating costs increased by $8.9 million, or 5.1%, to $183.8 million
for 1995. Recoverable expenses increased $4.7 million, primarily due to
increases in property taxes and maintenance costs. Interest expense increased
$6.3 million, primarily due to increased debt levels and interest rates.
Operating costs as presented in the preceding table differ from the amounts
shown in the combined, summarized financial statements of the unconsolidated
Joint Ventures (Note 4 to TRG's financial statements) by the amount of
intercompany profit.
As a result of the foregoing, income before extraordinary items of the Joint
Ventures was $107.3 million in 1995, an increase of 14.3% from 1994. TRG's
equity in income before extraordinary items of the Joint Ventures was $57.9
million in 1995, an increase of 12.9% from 1994.
29
Net Income
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As a result of the foregoing, TRG's income before extraordinary items for 1995
increased by $7.5 million