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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, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number 1-11530
TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2033632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303-0200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (248) 258-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, New York Stock Exchange
$0.01 Par Value
8.3% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock,
$0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such report(s)) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
|x| Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of March 25, 1998, the aggregate market value of the 42,100,227 shares of
Common Stock held by non-affiliates of the registrant was $542.0 million,
based upon the closing price ($12 7/8) 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, 1998,
there were outstanding 50,828,785 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1998 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company" or "TCO") was incorporated in Michigan in
1973 and had its initial public offering ("IPO") in 1992. Upon completion of the
IPO, the Company became the managing general partner of The Taubman Realty Group
Limited Partnership ("TRG"). The Company has a 38.4% partnership interest in TRG
(which has increased from 36.7% at December 31, 1997 because of TRG's redemption
of a partner's interest in January 1998). The Company, through TRG, engages in
the ownership, management, leasing, acquisition, development, and expansion of
regional shopping centers ("Taubman Shopping Centers" or "Centers") and
interests therein. TRG's portfolio, as of December 31, 1997, includes 25 urban
and suburban Taubman Shopping Centers located in 12 states. Two additional
Centers are under construction and are expected to open in November 1998 and
March 1999. Twenty-two of the Centers are "super-regional" centers because they
have more than 800,000 square feet of gross leasable area. TRG also owns certain
regional retail shopping center development projects and more than 99% of The
Taubman Company Limited Partnership (the "Manager"), which manages the Taubman
Shopping Centers and provides other services to TRG and the Company. See the
table on pages 12 and 13 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 1997, 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.
1
Business of the Company
The Company, as managing general partner of TRG, is engaged in the ownership,
management, leasing, acquisition, development and expansion of regional shopping
centers.
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, Denver, Columbus, Detroit, Miami,
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 942,000 square feet of Mall GLA. The smallest Center has
approximately 50 stores, and the largest has approximately 250 stores. Of
the 25 Centers, 22 are super-regional shopping centers;
o have approximately 3,400 stores operated by its mall tenants under
approximately 1,250 trade names;
o have 88 anchors, operating under 17 trade names;
o lease approximately 76% of Mall GLA to national chains, including
subsidiaries or divisions of The Limited (The Limited, Limited Express,
Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and
others), and Woolworth Corporation (Foot Locker, Kinney Shoes, and others);
and
o are among the most productive (measured by mall tenants' average per square
foot sales) in the United States. In 1997, mall tenants in the Taubman
Shopping Centers portfolio had average per square foot sales of $384, which
is substantially greater than the average for all regional shopping centers
owned by public companies.
The most important factor affecting the revenues generated by the 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 highly productive super-regional shopping
centers. Of its 25 Centers, 19 had annual rent rolls at December 31, 1997 of
over $10 million and 21 had annualized 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.
2
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 the Taubman Shopping Centers and to provide
corporate, development, administrative, and acquisition services for TRG and the
Company. The Manager has been a leading developer and manager in the regional
shopping center business for more than 25 years.
Potential For Growth
The Company's principal objective is to enhance shareholder value, and it
conducts all of its operations through TRG to achieve that result. TRG seeks to
maximize the financial results of its dominant assets, while pursuing a growth
strategy that includes the following key elements 1) an active new center
development program, 2) strategic acquisitions, 3) expansion of the Centers, and
4) internal growth.
3
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. TRG believes that the
development of new centers is the best use of TRG's capital and an area in which
TRG excels. At any time, TRG has numerous potential development projects in
various stages, with the objective of opening, on average, one new center each
year. During 1997, TRG's program of development produced the opening of two
centers. In July, TRG opened The Mall at Tuttle Crossing, a super-regional
shopping center located in Columbus, Ohio. This Center was 95% leased at year
end. In November, TRG opened Arizona Mills, a value super-regional shopping
center located in Tempe, Arizona. The Center opened 90% leased.
Additionally, two centers from TRG's development program are currently under
construction. In 1997, TRG began construction on Great Lakes Crossing, an
enclosed value super-regional mall in Auburn Hills, Michigan, owned by a
partnership in which TRG has an 80% controlling interest. The 1.4 million square
foot Center is scheduled to open in November 1998, at an expected cost of
approximately $210 million. Construction continues on MacArthur Center, a new
Center in Norfolk, Virginia, which is expected to open in March 1999 with 930
thousand square feet of GLA. The three-level Center will initially be anchored
by Nordstrom and Dillard's. The project is a joint venture in which TRG has a
70% controlling interest and is projected to cost approximately $150 million.
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.
Strategic Acquisitions
- ----------------------
TRG's objective is to acquire existing centers that are compatible with the
quality of TRG's portfolio (or can be redeveloped to that level) and that
satisfy TRG's strategic plans and pricing requirements. In 1997, TRG completed
three acquisitions totaling over $356 million.
In September 1997, TRG acquired Regency Square shopping center, the dominant
fashion center in the greater Richmond, Virginia area, for $123.9 million.
Regency Square has 825,000 square feet of GLA and is anchored by Hecht's,
JCPenney and Sears.
4
In December 1997, TRG acquired The Falls shopping center in Miami for $156
million. Representing TRG's entry into the Florida market, The Falls is an
812,000 square foot Center, anchored by Bloomingdale's and Macy's.
Also in December, TRG completed the $76.3 million acquisition of the
participating leasehold interest in The Mall at Tuttle Crossing. Tuttle Crossing
opened in July as the second of TRG's two properties in the Columbus, Ohio
market.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Acquisitions" 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.
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.
Expansions of the Taubman Shopping Centers
- ------------------------------------------
A key element of growth is the strategic expansion of existing properties to
update and enhance their market positions, by replacing or adding new anchor
stores or increasing mall tenant space. Most of the 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 1997, for example, TRG opened a 135,000
square foot expansion at Westfarms in August (followed by a new Nordstrom in
September) and new mall stores totaling 50,000 square feet of Mall GLA at
Biltmore throughout the year. Additionally, construction is in process at Cherry
Creek, where 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. A recent department store conversion includes Bloomingdale's at
Beverly Center, which opened in March of 1997.
5
The following table includes information regarding TRG's development,
acquisition, and expansion activities during 1997 and 1996.
Developments:
Completion Date Center Location
--------------- ------ --------
July 1997 Tuttle Crossing Columbus, Ohio
November 1997 Arizona Mills Tempe, Arizona
November 1998 Great Lakes Crossing Auburn Hills, Michigan
March 1999 MacArthur Center Norfolk, Virginia
Acquisitions:
Completion Date Center Location
--------------- ------ --------
June 1996 Paseo Nuevo (1) Santa Barbara, California
July 1996 Fairlane Town Center (2) Dearborn, Michigan
December 1996 La Cumbre Plaza Santa Barbara, California
September 1997 Regency Square Richmond, Virginia
December 1997 Tuttle Leasehold Columbus, Ohio
December 1997 The Falls (3) Miami, Florida
Expansions and Anchor Conversions:
Completion Date Center Location
--------------- ------ --------
June 1996 Biltmore (4) Phoenix, Arizona
August 1996 Fair Oaks (5) Fairfax, Virginia
August 1996 Lakeforest (5) Gaithersburg, Maryland
November 1996 Marley Station (6) Anne Arundel County, Maryland
November 1996 Stoneridge (6) Pleasanton, California
March 1997 Beverly Center (7) Los Angeles, California
August 1997 Westfarms (8) West Hartford, Connecticut
November 1997 Cherry Creek (9) Denver, Colorado
December 1997 Biltmore (10) Phoenix, Arizona
- ------------------
(1) Broadway converted to Macy's immediately prior to TRG's acquisition of
Paseo Nuevo.
(2) Acquired partner's 75% interest in the Center.
(3) Completely redeveloped and expanded in 1996 before TRG's acquisition of The
Falls.
(4) Broadway converted to Macy's.
(5) Woodward & Lothrop converted to Lord & Taylor.
(6) Sears opened new store.
(7) Broadway converted to Bloomingdale's.
(8) 135,000 square foot expansion followed by the opening of a new Nordstrom in
September.
(9) Lord & Taylor opened new and expanded store. Additional 132,000 square foot
expansion of mall tenant space will open in the Fall of 1998.
(10) 50,000 square foot expansion of mall tenant space completed.
6
Internal Growth
- ---------------
The Taubman Shopping Centers are among the most productive in the nation, when
measured by mall tenant's average sales per square foot. Higher sales per square
foot enable mall tenants to remain profitable while paying occupancy costs that
are a greater percentage of total sales. As leases expire at the Centers, TRG
has consistently been able, on a portfolio basis, to lease the available space
to an existing or new tenant at higher rates.
Augmenting this growth, TRG is pursuing a number of new sources of revenue
from the Taubman Shopping Centers. For example, TRG expects increased revenue
from its specialty leasing efforts. In recent years a new industry -- beyond
traditional carts and kiosks -- has evolved, with more and better quality
specialty tenants. TRG has put in place a company-wide program to maximize this
opportunity.
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
---- --------- --------- ---------
1997 (1)................... $38.79 $37.62 $41.67 $ 4.05
1996 (1)................... $37.90 $33.39 $42.39 $ 9.00
1995 (1)................... $36.33 $32.96 $41.27 $ 8.31
1994 (2)................... $34.72 $30.46 $41.02 $10.56
1993 (3)................... $32.64 $29.56 $35.86 $ 6.30
(1) Includes 18 centers owned and open prior to January 1, 1991.
(2) Includes 17 centers owned and open prior to January 1, 1990.
(3) Includes 16 centers owned and open prior to January 1, 1989.
Average annualized rent on stores opening in 1997 excludes rent on stores with
greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be
somewhat higher than in 1997. However, 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 affect the spread in a given year.
7
Lease Expirations
The following table shows lease expirations based on information available as
of December 31, 1997 for the next ten years for the Taubman Shopping Centers in
operation at that date:
Percent of
Annualized Base Annualized Base Total Leased
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
---- -------- ----------------- -------------- --------------- ---------------
1998 (1) 173 423,828 $ 14,527 $ 34.27 4.5%
1999 281 749,483 27,081 36.13 7.9%
2000 346 845,160 31,682 37.49 8.9%
2001 335 825,406 33,050 40.04 8.7%
2002 376 920,849 36,971 40.15 9.7%
2003 362 1,037,080 41,446 39.96 11.0%
2004 310 996,685 41,044 41.18 10.5%
2005 318 1,029,162 42,362 41.16 10.9%
2006 198 612,522 25,835 42.18 6.5%
2007 258 913,452 35,264 38.61 9.7%
(1) Excludes leases that expire in 1998 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1997.
The Company believes that the information in the table is not necessarily
indicative of what will occur in the future because of several factors, but
principally because 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
1992 to 1997 was approximately 1.9 years. The average term of leases signed
during 1997 and 1996 was approximately 7.3 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 1997,
approximately 1.5% of leases were so affected compared to 2.8% in 1996, 3.2% in
1995, 3.1% in 1994 and 4.0% in 1993. Since 1991, the annual provision for losses
on accounts receivable has been less than 2% of TRG's annual revenues.
Occupancy
Mall tenant average occupancy rates of the Taubman Shopping Centers for the
last five years are as follows:
Year Mall Tenant Average Occupancy
---- -----------------------------
1997 87.6%
1996 87.4%
1995 88.0%
1994 86.6%
1993 86.5%
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 88.7%.
Major Tenants
The combined operations of The Limited, Inc. accounted for approximately 12%
of leased Mall GLA as of December 31, 1997 and for approximately 10% of the 1997
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 2.3% of leased Mall GLA and 2.1% of
1997 base rent. No other single retail company accounted for more than 4% of
leased Mall GLA or 1997 base rent.
8
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.
Beverly Center is located over an oil field and several abandoned oil wells,
and is adjacent to an active oil production facility that operates numerous oil
and gas wells. In the Los Angeles basin, where Beverly Center is located,
pockets of methane gas may be found in oil fields; however, elevated levels of
methane have not been detected at Beverly Center.
Cherry Creek is situated on land that was used as a landfill prior to 1950.
Because of the past use of the site as a landfill, the site is listed on the
United States Environmental Protection Agency's Comprehensive Environmental
Response, Compensation and Liability Information System list.
In the summer of 1997, geotechnical drilling activities were undertaken in the
former gasoline station area as part of a parking lot expansion at the
southeastern corner of the Cherry Creek site. The geotechnical soil samples were
observed to have petroleum odors and staining. A subsurface environmental
investigation subsequently revealed a limited zone of hydrocarbon contaminated
soils, with no significant impacts to groundwater. Discussions with the Colorado
Department of Labor and Employment, Oil Inspection Section, held in September
1997, resulted in a "passive retardation" remedial approach that relies on
natural processes to degrade the hydrocarbon contamination. A Corrective Action
Plan was submitted in February 1998 that proposes monitoring the soil and
groundwater quarterly for a period of two years. Acceptance of the plan is
anticipated by May 1998. Implementation of the plan poses no constraints to the
current expansion activity.
Paseo Nuevo is located in an area of known groundwater contamination by
tetrachloroethylene ("PCE"). The groundwater under and around the site was
monitored for six years before, during, and after construction of the center. No
on-site sources of PCE were identified during construction. The Regional Water
Quality Control Board has given approval to discontinue the monitoring program
because the PCE levels remained relatively constant over the six-year period and
do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the 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.
9
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 real estate management, acquisition, development, and administrative
services required by (or of) TRG or any of its properties.
As of December 31, 1997, the Manager had 449 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1997:
Number Of Employees
-------------------
Property Management............... 188
Leasing........................... 73
Development....................... 47
Financial Services................ 77
Other ............................ 64
---
Total....................... 449
===
The Manager considers its relations with its employees to be good.
10
Item 2. PROPERTIES
Taubman Shopping Centers
Ownership
The following table sets forth certain information about each of the Taubman
Shopping Centers. The table includes only Centers in operation at December 31,
1997. Excluded from this table are Great Lakes Crossing, which will open in
November 1998, and MacArthur Center, which will open in March 1999. 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).
Certain of the Centers are partially owned through joint ventures. Generally,
TRG's 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 certain
major matters.
11
TRG's % Percent of Mall
Sq. Ft of GLA/ Ownership GLA Occupied
Mall GLA Year Opened/ Year as of as of 1997 Rent (1)
Centers Anchors as of 12/31/97 Expanded Acquired 12/31/97 12/31/97 (in Thousands)
- ------- ------- -------------- ----------- -------- ---------- ------------ ---------------
Beverly Center Bloomingdale's, Macy's 908,000/ 1982 70%(2) 92% $ 24,797
Los Angeles, CA 600,000
Biltmore Fashion Park Macy's, Saks Fifth 569,000/ 1963/1992/ 1994 100% 95% 10,071
Phoenix, AZ Avenue 330,000 1997
Briarwood Hudson's, JCPenney, 990,000/ 1973/1980 100% 95% 12,433
Ann Arbor, MI Jacobson's, Sears 369,000
Cherry Creek Foley's, Lord & Taylor, 903,000/ 1990 50% 96% 18,306
Denver, CO Neiman Marcus, Saks 430,000 (3)(4)
Fifth Avenue
Columbus City Center Jacobson's, Lazarus, 1,209,000/ 1989 100% 98% 16,335
Columbus, OH Marshall Field's 415,000
Fair Oaks Hecht's, JCPenney, Lord 1,398,000/ 1980/1987/ 50% 88% 18,409
Fairfax, VA & Taylor, Sears 582,000 1988
(Washington, D.C.
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,484,000/(5) 1976/1978/ 100% 79% 13,632
Dearborn, MI Lord & Taylor, Saks 594,000 1980
(Detroit Metropolitan Fifth Avenue, Sears
Area)
The Falls Bloomingdale's, Macy's 812,000/ 1980/1996 1997 100% 90% 884(1)
Miami, FL 357,000
Hilltop JCPenney, Macy's, Sears 1,096,000/ 1976/1991 100% 85% 5,811
Richmond, CA 367,000
(San Francisco
Metropolitan Area)
La Cumbre Plaza Robinsons-May, Sears 478,000/ 1967/1989 1996 100% 95% 4,042
Santa Barbara, CA 178,000
Lakeforest Hecht's, JCPenney, Lord 1,107,000/ 1978/1992 100% 88% 13,045
Gaithersburg, MD & Taylor, Sears 437,000
(Washington, D.C.
Metropolitan Area)
Lakeside Crowley's, Hudson's, 1,474,000/ 1976/1980 50% 88% 16,398
Sterling Heights, MI JCPenney, Lord & 513,000
(Detroit Metropolitan Taylor, Sears
Area)
- ----------------------------
(1) Includes minimum and percentage rent for the year ended December 31, 1997.
Excludes rent from certain peripheral properties. For Centers opened or
acquired in 1997, the amounts reflect rents for the period subsequent to
the opening or acquisition date. 1997 openings and acquisitions include The
Mall at Tuttle Crossing (July), Regency Square (September), Arizona Mills
(November), and The Falls (December).
(2) TRG has an option to acquire the remaining 30%. The results of Beverly
Center are consolidated in TRG's financial statements.
(3) GLA excludes approximately 166,000 square feet for the renovated buildings
on adjacent peripheral land.
(4) An expansion of the Center of approximately 132,000 square feet of Mall GLA
will open in the fall of 1998.
(5) A 30-screen theater will be added and is anticipated to open by the summer
of 1999.
12
TRG's % Percent of Mall
Sq. Ft of GLA/ Ownership GLA Occupied
Mall GLA Year Opened/ Year as of as of 1997 Rent (1)
Centers Anchors as of 12/31/97 Expanded Acquired 12/31/97 12/31/97 (in Thousands)
- ------- ------- -------------- ----------- -------- ---------- ------------ ---------------
Marley Station Hecht's, JCPenney, 1,088,000/ 1987/1994/ 100% 77% $ 9,447
Anne Arundel County, MD Macy's, Sears 375,000 1996
(Washington, D.C.
Metropolitan Area)
Meadowood Mall JCPenney, Macy's (two 889,000/ 1979/1995 100% 93% 9,666
Reno, NV locations), Sears 312,000
Paseo Nuevo Macy's, Nordstrom 438,000/ 1990 1996 100% 88% 4,193
Santa Barbara, CA 133,000
Regency Square Hecht's (two 825,000/ 1975/1987 1997 100% 100% 2,888(1)
Richmond, VA locations), JCPenney, 238,000
Sears
The Mall at Short Hills Bloomingdale's, 1,372,000/ 1980/1994/ 100% 96% 31,095
Short Hills, NJ Macy's, Neiman Marcus, 550,000 1995
Nordstrom, Saks Fifth
Avenue
Stamford Town Center Filene's, Macy's, 875,000/ 1982 50% 90% 15,678
Stamford, CT Saks Fifth Avenue 382,000
Stoneridge JCPenney, Macy's (two 1,291,000/ 1980/1990/ 100% 92% 15,608
Pleasanton, CA locations), Nordstrom, 449,000 1996
(San Francisco Sears
Metropolitan Area)
The Mall at Tuttle JCPenney, Lazarus, 974,000/ 1997 100% 93% 5,748(1)
Crossing Marshall Field's, 383,000
Columbus, OH Sears
Twelve Oaks Mall Hudson's, JCPenney, 1,224,000/ 1977/1980 50% 95% 18,729
Novi, MI Lord & Taylor, Sears 486,000
(Detroit Metropolitan
Area)
Westfarms Filene's, Filene's 1,298,000/ 1974/1997 79% 83% 17,230
West Hartford, CT Men's Store/Furniture 528,000
Gallery, JCPenney, Lord
& Taylor, Nordstrom
Woodfield JCPenney, Lord & 2,267,000/ 1971/1972/ 50% 89% 35,286
Schaumburg, IL Taylor, Marshall 942,000 1995
(Chicago Metropolitan Field's, Nordstrom,
Area) Sears
Woodland Hudson's, JCPenney, 1,094,000/ 1968/1974/ 50% 96% 13,843
Grand Rapids, MI Sears 369,000 1984/1989
Value Center:
- ------------
Arizona Mills Off 5th Saks, 1,157,000/ 1997 37% 80% 2,611(1)
Tempe, AZ Rainforest Cafe, 531,000
(Phoenix Metropolitan JCPenney Outlet,
Area) Oshman's Supersports ---------
USA, GameWorks,
Harkins Cinemas
Total GLA/Total Mall GLA: 27,220,000/
10,850,000
Average GLA/Average Mall GLA: 1,089,000/
434,000
13
Anchors
The following table summarizes certain information regarding the anchors at
the Taubman Shopping Centers.
Number of 12/31/97 GLA
Name Anchor Stores (in thousands) % of GLA
---- ------------- ------------- --------
Federated
Macy's 12 2,156
Lazarus 2 658
Bloomingdale's 3 604
-- ------
Total 17 3,418 13.1%
Sears 15 3,099 11.9%
JCPenney 15 2,710 10.4%
May Company
Lord & Taylor 8 1,035
Hecht's 5 749
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
-- ------
Total 18 2,571 9.9%
Dayton Hudson
Hudson's 5 1,040
Marshall Field's 3 686
-- ------
Total 8 1,726 6.6%
Nordstrom 5(1) 877 3.4%
Saks 5 450 1.7%
Jacobson's 2 221 0.8%
Neiman Marcus 2 216 0.8%
Crowley's 1 115 0.4%
-- ------ ----
Total 88 15,403 59.1%
== ====== ====
(1) An additional Nordstrom store will be added along with Dillard's in
connection with the development of MacArthur Center.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Taubman Shopping Centers as of December 31, 1997. All mortgage
debt in the table below is nonrecourse to TRG, except for debt encumbering
Arizona Mills and MacArthur Center. TRG has guaranteed the payment of principal
and interest on the mortgage debt of these Centers (the guarantee on the Arizona
Mills mortgage is limited to the extent of TRG's 37% ownership interest in the
joint venture owning the Center). The loan agreements provide for the reduction
of the amounts guaranteed as certain center performance and valuation criteria
are met. Biltmore, Hilltop and Stoneridge are also encumbered by assessment
bonds totaling approximately $4.8 million, which are not included in the table.
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/97 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% 8,022 $ 725 08/01/19 0 At Any Time(2)
MacArthur Center (70%) Floating 42,241(3) Interest Only 10/27/00 42,241 4 Days' Notice(2)
Stoneridge Floating(4) 74,762 Interest Only (4) 75,000 (4)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
- --------------------------------
Arizona Mills (37%) Floating(5) 121,991(5) Interest Only 02/01/02 121,991 5 Days' Notice(2)
Cherry Creek (50%) Floating(6) 130,000 Interest Only 08/01/98 130,000 4 Days' Notice(2)
Fair Oaks (50%) 9.00% 39,119 4,304 12/01/16 0 12/01/97(7)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days' Notice(1)
Stamford Town Center (50%) 11.69%(8) 55,630 7,207 12/01/17 0 01/01/00(9)
Twelve Oaks Mall (50%) Floating(10) 49,940 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(11)
Floating(12) 51,792(12) Interest Only 07/01/02 51,792 4 Days' Notice(2)
Woodfield (50%) Floating(13) 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) The loan is a construction facility with a maximum availability of $150
million.
(4) Commercial paper facility. The maximum availability under the facility is
$75 million. Commercial paper is generally sold with a 30 day maturity.
(5) The loan is a construction facility with a maximum availability of $145
million. The rate is capped at 9.5% until maturity, plus credit spread,
based on one month LIBOR.
(6) The rate is capped at 6.5% through January 1998 and from February 1998 to
maturity at 7%, plus credit spread, based on one month LIBOR.
(7) The mortgage was prepayable on 12/01/97 (the earliest prepayment date) with
a penalty of 4.5% of outstanding principal. In March 1998, the mortgage was
extinguished with the proceeds of a $140 million, 6.60%, secured financing
maturing 2008. The net proceeds were also used to pay the prepayment
penalty of approximately $1.8 million. In addition, proceeds of $5.6
million were used to close out a treasury lock agreement entered into in
1997, which resulted in an effective rate on the financing of approximately
7%. The remaining proceeds were distributed to the owners.
(8) The lender is entitled to contingent interest equal to 20% of annual
applicable receipts in excess of approximately $9.0 million.
(9) 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.
(10) The rate is capped at 8.55% until maturity, plus credit spread, based on
one month LIBOR.
(11) If the loan is prepaid between 7/1/98 and 1/3/02 there is a yield
maintenance prepayment penalty.
(12) The loan is a construction facility with a maximum availability of $55
million. The rate on the construction facility is capped until maturity at
6.5%, plus credit spread.
(13) 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, 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, 1998, the 50,828,785 outstanding
shares of Common Stock were held by 682 holders of record. The following table
presents the dividends declared and range of share prices for each quarter of
1997 and 1996.
Market Quotations
------------------------------
1997 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $15 $12 3/8 $0.23
June 30 13 5/8 12 5/8 0.23
September 30 13 11/16 12 1/2 0.23
December 31 13 7/16 11 5/8 0.235
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
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
I. TAUBMAN CENTERS, INC. (TCO)
Income before extraordinary items
from investment in TRG:
Equity in TRG's income allocable
to partnership unitholders 25,291 21,368 19,831 17,654 15,904
Series A Preferred Equity interest
in TRG 4,058
Other income/expenses, net (687) (638) (564) (640) (830)
------- ------- ------- ------- -------
Income before extraordinary items 28,662 20,730 19,267 17,014 15,074
Equity in TRG's extraordinary items (444) 5,836 (16,087) (3,400)
------- ------- ------- ------- -------
Net income 28,662 20,286 25,103 927 11,674
Preferred dividends (4,058)
------- ------- ------- ------- -------
Net income available to common
shareowners 24,604 20,286 25,103 927 11,674
======= ======= ======= ======= =======
Income before extraordinary items
per common share (1) 0.48 0.47 0.44 0.38 0.34
Net income per common share (1) 0.48 0.46 0.57 0.02 0.26
Dividends per common share declared 0.925 0.89 0.88 0.88 0.88
Weighted average number of common
shares outstanding 50,737,333 44,444,833 44,249,617 44,589,709 44,589,913
Number of common shares outstanding
at end of period 50,759,657 50,720,358 44,134,913 44,570,913 44,589,913
Ownership percentage of TRG
at end of period 36.70% 36.68% 35.10% 35.10% 35.97%
II. TRG
Revenues 313,426 263,696 228,918 197,134 177,107
Operating Costs 270,402 231,355 207,159 176,194 161,934
Equity in income before
extraordinary items of
Unconsolidated Joint Ventures 52,270 51,753 57,940 51,263 54,153
------- ------- ------- ------- -------
Income before extraordinary items 95,294 84,094 79,699 72,203 69,326
Extraordinary items (2) (1,328) 16,627 (44,731) (9,454)
------- ------- ------- ------- -------
Net income 95,294 82,766 96,326 27,472 59,872
Preferred distributions to TCO (4,058)
------- ------- ------- ------- -------
Net income available to unitholders 91,236 82,766 96,326 27,472 59,872
======= ======= ======= ======= =======
Income before extraordinary items
per unit of partnership interest (1) 0.66 0.65 0.64 0.59 0.57
Net income per unit of partnership
interest (1) 0.66 0.64 0.77 0.22 0.49
Weighted average number of units of
partnership interest
outstanding (3) 138,271,014 128,579,312 125,459,939 122,509,799 122,418,156
Number of units of partnership
interest outstanding
at end of period (3) 138,299,310 138,251,907 125,459,939 125,459,939 122,418,156
Distributions to partnership
unitholders 128,094 119,099 116,225 113,479 110,939
Preferred distributions to TCO 4,058
III. UNCONSOLIDATED JOINT VENTURES
Revenues (4) 258,783 265,336 291,144 268,815 268,563
Operating Costs (4) 166,402 171,063 183,814 174,950 167,846
------- ------- ------- ------- -------
Income before extraordinary items 92,381 94,273 107,330 93,865 100,717
======= ======= ======= ======= =======
TRG's share of income before
extraordinary items 52,270 51,753 57,940 51,263 54,153
======= ======= ======= ======= =======
As of December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
BALANCE SHEET DATA:
I. TAUBMAN CENTERS, INC.
Investment in TRG 547,859 369,131 307,190 322,316 361,568
Total assets 556,824 378,527 315,076 333,316 371,609
II. TRG
Real estate before accumulated
depreciation 1,593,350 1,136,416 926,207 843,960 665,978
Total assets 1,396,826 978,262 804,356 739,811 574,456
Total debt and capital lease
obligation (5) 1,284,327 1,041,254 969,667 872,158 695,517
17
Year Ended December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
SUPPLEMENTAL INFORMATION:
I. TAUBMAN CENTERS, INC.
Funds from Operations (6) 53,137 44,104 40,798 38,989 37,024
II. TRG
EBITDA (6) 255,743 229,811 216,130 186,657 174,714
TRG's Beneficial Interest Expense (6) 102,902 98,192 96,254 74,322 67,407
Distributable Cash Flow (6) 146,701 129,714 117,847 110,257 105,237
Consolidated Coverage Ratio (7) 2.5 2.3 2.2 2.5 2.6
Ratio of Earnings to Fixed Charges
and Preferred Distributions 1.6 1.7 1.7 1.7 1.9
OPERATING DATA:
Mall tenant sales (8) 3,086,259 2,827,245 2,739,393 2,561,555 2,483,342
Sales per square foot (8) 384 377 364 348 338
Number of shopping centers at end
of period 25 21 19 20 19
Ending Mall GLA in thousands of
square feet 10,850 9,250 8,996 9,088 8,823
Average occupancy 87.6% 87.4% 88.0% 86.6% 86.5%
Ending occupancy 90.3% 88.0% 89.4% 89.3% 88.7%
Leased space (9) 92.3% 89.0% 90.6% 90.9% 90.1%
Average base rent per square
foot (10):
All mall tenants $38.79 $37.90 $36.33 $34.72 $32.64
Stores closing during year $37.62 $33.39 $32.96 $30.46 $29.56
Stores opening during year $41.67 $42.39 $41.27 $41.02 $35.86
- --------------------------
(1) TCO's basic and diluted earnings per share amounts are equal, except for
1993, for which diluted income before extraordinary items per share was
0.33. TRG's basic and diluted earnings per unit amounts are equal, except
for 1993, for which diluted income before extraordinary items per unit and
diluted net income per unit were 0.56 and 0.48, respectively.
(2) In 1995, TRG recognized an $18.9 million extraordinary gain related to the
disposition of Bellevue Center and the related extinguishment of debt. Also
included in extraordinary items are extraordinary charges in 1993 through
1996 related to the extinguishment of debt.
(3) Effective September 30, 1997, TRG split its existing units of partnership
interest at a ratio of 1,975.08 to one, establishing a one-for-one
equivalency of TRG's units of partnership interest and TCO's common shares.
The split did not alter the ownership percentage of any of TRG's partners.
Prior years' amounts have been adjusted to reflect the unit split on a
retroactive basis.
(4) Amounts are reported net of intercompany profits.
(5) Includes the Tuttle Crossing capital lease obligation of $39.8 million and
$14.4 million at December 31, 1996 and 1995, respectively, which was
extinguished during 1997. TRG's pro rata share of its Consolidated
Businesses' and Unconsolidated Joint Ventures' debt (excluding capital
lease obligations) was $1.737 billion and $1.398 billion at December 31,
1997 and 1996, respectively.
(6) Funds from Operations, EBITDA, Beneficial Interest Expense, and
Distributable Cash Flow are defined and discussed in MD&A-Liquidity and
Capital Resources-Distributions. Funds from Operations and Distributable
Cash Flow were restated for 1994 and 1993 from the previously reported
amounts to reflect the deduction of non-real estate depreciation and
amortization, as specified in NAREIT's definition of Funds from Operations.
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.
(7) Defined as EBITDA divided by TRG's Beneficial Interest Expense.
(8) Based on reports of sales furnished by mall tenants.
(9) Leased space comprises both occupied space and space that is leased but not
yet occupied.
(10) Amounts include Centers owned and open for at least five years.
18
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 consist of:
(i) Taubman Shopping Centers that TRG controls by ownership or contractual
agreement, 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 with third parties that are not
controlled (Unconsolidated Joint Ventures). The Unconsolidated 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 Unconsolidated 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.
1997 1996 1995
---- ---- ----
Mall tenant sales (in thousands) $3,086,259 $2,827,245 $2,739,393
Sales per square foot 371 365 346
Sales per square foot (excluding
theaters and tenants greater
than 40,000 square feet) 384 377 364
Minimum rents 10.1% 10.4% 10.4%
Percentage rents 0.3 0.3 0.3
Expense recoveries 4.4 4.5 4.4
---- ---- ----
Mall tenant occupancy costs 14.8% 15.2% 15.1%
==== ==== ====
19
Mall tenant occupancy costs as a percentage of sales decreased in 1997
primarily due to Centers acquired in 1997 and late 1996 (Results of Operations
- -- Acquisitions). These Centers have lower occupancy costs than the portfolio
average and consequently provide a source of future revenue growth.
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 88.7%. Mall tenant average occupancy rates for the last three years
are as follows:
Year Mall Tenant Average Occupancy
---- -----------------------------
1997 87.6%
1996 87.4
1995 88.0
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 the 18 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
---- --------- --------- ---------
1997 $38.79 $37.62 $41.67 $4.05
1996 $37.90 $33.39 $42.39 $9.00
1995 $36.33 $32.96 $41.27 $8.31
Average annualized rent on stores opening in 1997 excludes rent on stores with
greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be
somewhat higher than in 1997. However, 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 affect 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.
20
The following table summarizes certain quarterly operating data for TRG's
Managed Businesses for 1997:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1997 1997 1997 1997 1997
----------------------------------------------------
(in thousands)
Mall tenant sales $600,709 $629,906 $692,487 $1,163,157 $3,086,259
Revenues 130,677 134,756 137,728 157,192 560,353
Occupancy:
Average Occupancy 86.5% 86.8% 87.0% 89.5% 87.6%
Ending Occupancy 86.4% 87.1% 87.2% 90.3% 90.3%
Leased Space 88.7% 89.5% 90.8% 92.3% 92.3%
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 1997:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1997 1997 1997 1997 1997
-------------------------------------------------
Minimum rents 12.6% 11.8% 11.3% 7.3% 10.1%
Percentage rents 0.2 0.3 0.3 0.2 0.3
Expense recoveries 5.2 5.1 4.7 3.5 4.4
---- ---- ---- ---- ----
Mall tenant occupancy costs 18.0% 17.2% 16.3% 11.0% 14.8%
==== ==== ==== ==== ====
Results of Operations
Equity Transactions
In October 1997, the Company used the $200 million public offering of eight
million shares of 8.3% Series A Cumulative Redeemable Preferred Stock to acquire
a Series A Preferred Equity interest in TRG that entitles the Company to income
and distributions (in the form of guaranteed payments) in amounts equal to the
dividends payable on the Company's Series A Preferred Stock. In addition to the
income from the Company's preferred equity interest in TRG, the Company
continues to participate in the income allocable to TRG partnership unitholders
to the extent of the Company's ownership in TRG, including adjustments arising
from the Company's additional basis in TRG's net assets. TRG bore all expenses
of the offering, which have been accounted for as a reduction of the proceeds.
TRG used the net proceeds to pay down debt under TRG's existing revolving credit
and commercial paper facilities, which were used to fund the acquisition of
Regency Square in September 1997.
In December 1996, the Company purchased 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. 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 units of
partnership interest in connection with the acquisition of the remaining
interest in Fairlane Town Center.
Acquisitions
The following discussion of TRG's 1997 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.
21
The Falls
- ---------
In December 1997, TRG acquired The Falls shopping center for $156 million in
cash. The operating results of The Falls have been consolidated in TRG's
financial statements from the acquisition date. TRG borrowed under an existing
revolving credit facility to fund the acquisition. The acquisition is expected
to produce EBITDA of about 8% of the acquisition cost in 1998.
Regency Square
- --------------
In September 1997, TRG acquired Regency Square (Regency) shopping center,
located in Richmond, Virginia, for $123.9 million in cash. The acquisition was
initially funded with borrowings under TRG's revolving credit facilities, which
were paid down in October 1997 with the proceeds from TRG's issuance of Series A
Preferred Equity. The operating results of Regency have been consolidated in
TRG's financial statements from the acquisition date. Regency is expected to add
EBITDA of approximately 8% of the acquisition cost in 1998.
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. The operating results of La Cumbre have been consolidated
in TRG's financial statements from the acquisition date.
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 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 an
Unconsolidated Joint Venture. In January 1998, TRG redeemed the former Joint
Venture Partner's units of partnership interest for approximately $77.7 million
(including costs).
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.
New Centers and Expansions
In November 1997, TRG opened Arizona Mills, a 37% owned value super-regional
shopping center located in Tempe, Arizona. The Center opened 90% leased.
22
In July 1997, TRG opened The Mall at Tuttle Crossing, a super-regional
shopping center located in Columbus, Ohio. The Center was 95% leased at year
end. TRG's ownership interest in The Mall at Tuttle Crossing was subject to a
long-term participating lease with Tuttle Crossing Holding Co., a subsidiary of
The Limited, Inc. (The Limited) for land and leasehold improvements. In December
1997, TRG purchased The Limited's interests in the lease for $76.3 million in
cash and took fee simple title to the underlying land and buildings. The lease
had been accounted for as a capital lease with capital lease assets and a
capital lease obligation of $55.3 million at the date of the acquisition. The
purchase is anticipated to produce a return of approximately 8% of the
acquisition cost in 1998.
TRG opened a 135,000 square foot expansion at Westfarms in August 1997. The
expansion was approximately 90% leased as of year end. In addition,
approximately 50,000 square feet of new mall stores opened at Biltmore in 1997.
See also Liquidity and Capital Resources -- Capital Spending for discussions of
other planned expansion and development activities.
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 is
using 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 comparisons of
TRG's results of operations. Memorial City is expected to have an immaterial
effect on EBITDA and net income during the option period.
23
Comparison of Fiscal Year 1997 to Fiscal Year 1996
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, as well as
earning an 8.3% return on its preferred equity interest in TRG. The Company's
average ownership percentage of TRG was 36.7% for 1997 and 34.5% for 1996. As of
December 31, 1997, the Company had 50.8 million shares outstanding, up from 50.7
million at December 31, 1996.
The Company's income from TRG in 1997 consists of $4.1 million from its
preferred equity interest in TRG and the Company's $33.5 million proportionate
share of TRG's income before extraordinary item. In 1996, the Company's income
from TRG consisted of its $29.0 million proportionate share of TRG's income
before extraordinary item. The Company's proportionate share of TRG's income
before extraordinary item was reduced by $8.2 million in 1997 and $7.6 million
in 1996, representing adjustments arising from the Company's additional basis in
TRG's net assets. Income before extraordinary item for 1997 was $28.7 million or
$0.48 per common share as compared to $20.7 million or $0.47 per common share in
1996.
The Company recognized an extraordinary item of $(0.4) million in 1996,
consisting of the Company's share of TRG's extraordinary item related to the
extinguishment of debt. Net income for 1996 was $20.3 million or $0.46 per
common share. After reduction of $4.1 million in dividends on the Company's
Series A Preferred Stock, net income available to common shareowners for 1997
was $24.6 million or $0.48 per common share.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.6% in 1997 versus
87.4% in 1996. Ending occupancy for the Taubman Shopping Centers at December 31,
1997 was 90.3% versus 88.0% at December 31, 1996. Leased space at December 31,
1997 was 92.3% compared to 89.0% at the same date in 1996.
Total sales for Taubman Shopping Center mall tenants increased in 1997 by 9.2%
to $3.09 billion from $2.83 billion in 1996. Tenant sales per square foot
increased by 1.6% to $371 in 1997 from $365 in 1996. Tenant sales per square
foot, excluding theaters and tenants greater than 40,000 square feet, increased
by 1.9% to $384 in 1997 from $377 in 1996. Mall tenant sales for Centers that
were owned and open for all of 1997 and 1996 (which excludes all Centers
acquired in those years, as well as Tuttle Crossing and Arizona Mills) were
$2.85 billion, a 1.6% increase over 1996. Sales statistics for the first three
quarters of 1997 were negatively affected by new competition near certain
Centers. The effect of the competition on sales moderated in the fourth quarter,
after the anniversary date of the opening of the competing centers.
24
Comparison of Fiscal Year 1997 to Fiscal Year 1996
The following table sets forth operating results for TRG's Managed Businesses
for 1997 and 1996, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
1997 1996
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES(1) VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 173.3 155.9 329.2 149.2 157.2 306.4
Percentage rents 7.2 3.1 10.2 6.0 4.0 9.9
Expense recoveries 97.5 89.7 187.1 85.1 95.2 180.4
Management, leasing and
development 8.8 8.8 8.5 8.5
Other 14.9 10.2 25.0 13.0 8.9 22.0
----- ----- ----- ----- ----- -----
Total revenues 301.6 258.8 560.4 261.9 265.3 527.2
OPERATING COSTS:
Recoverable expenses 82.0 76.4 158.4 71.6 81.8 153.4
Other operating 28.1 11.9 39.9 25.4 12.8 38.2
Management, leasing and
development 4.7 4.7 4.7 4.7
General and administrative 25.7 25.7 21.8 21.8
Interest expense 73.6 54.5 128.2 70.5 53.5 124.0
Depreciation and amortization 44.5 23.7 68.1 35.7 22.9 58.7
----- ----- ----- ----- ----- -----
Total operating costs 258.5 166.4 424.9 229.7 171.1 400.8
Net results of Memorial City (1) 0.0 0.0 0.2 0.2
----- ----- ----- ----- ----- -----
43.0 92.4 135.4 32.3 94.3 126.6
===== ===== ===== =====
Equity in income of Unconsolidated
Joint Ventures 52.3 51.8
----- -----
Income before extraordinary item 95.3 84.1
Extraordinary item (1.3)
----- -----
Net income 95.3 82.8
Preferred distributions to TCO (4.1)
----- -----
Net income available to unitholders 91.2 82.8
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 161.4 94.4 255.7 138.6 91.2 229.8
TRG's Beneficial Interest Expense (73.6) (29.3) (102.9) (70.5) (27.7) (98.2)
Non-real estate depreciation (2.1) (2.1) (1.9) (1.9)
Preferred distributions to TCO (4.1) (4.1)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution 81.6 65.1 146.7 66.2 63.5 129.7
===== ===== ===== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits. The Unconsolidated Joint Ventures are accounted for under the
equity method in TRG's Consolidated Financial Statements.
(3) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources -- Distributions.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
25
TRG --Consolidated Businesses
- -----------------------------
Total revenues for 1997 were $301.6 million, a $39.7 million or 15.2% increase
over 1996. Minimum rents increased $24.1 million, of which $21.4 million was
caused by the 1997 and 1996 acquisitions, and the opening of Tuttle Crossing.
The results of Fairlane have been consolidated in TRG's results subsequent to
the acquisition date in July 1996 (prior to that date Fairlane was accounted for
under the equity method as an Unconsolidated Joint Venture). Minimum rents also
increased due to the expansion at Biltmore and tenant rollovers. Percentage rent
increased primarily due to the acquisitions. The increase in expense recoveries
was primarily due to the acquired Centers and Tuttle Crossing. Other revenue
increased $1.9 million primarily due to an insurance recovery, a litigation
settlement, and an increase in lease cancellation revenue.
Total operating costs increased $28.8 million, or 12.5%. Recoverable and
depreciation and amortization expenses increased primarily due to the
acquisitions and Tuttle Crossing. Other operating expenses increased primarily
due to the acquisitions and Tuttle Crossing, offset by a decrease in the charge
to operations for development pre-construction reserves. General and
administrative expense increased by $3.9 million primarily due to increases in
compensation (including the continuing phase-in of the long-term compensation
plan), recruiter fees and relocation charges, travel, and training. Interest
expense increased due to an increase in debt used to finance Tuttle Crossing and
capital expenditures at other Consolidated Businesses, partially offset by an
increase in capitalized interest. The acquisitions were initially funded with
debt which was subsequently paid down with the proceeds from the December 1996
and the October 1997 equity issuances.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated statement of operations by the amounts
representing Memorial City's revenues and expenses, which are presented in the
preceding table as a net amount.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1997 were $258.8 million, a $6.5 million, or 2.5%, decrease
from 1996, representing a $15.0 million decrease caused by the change of
Fairlane from an Unconsolidated Joint Venture to a Consolidated Business, offset
by increases due to the openings of Arizona Mills and the expansion at
Westfarms, in addition to increases at other Centers. The decrease in minimum
rents was primarily due to Fairlane, offset by Arizona Mills, Westfarms and
increases due to tenant rollovers at other Centers. The decrease in expense
recoveries was primarily due to Fairlane, offset by Arizona Mills. Other revenue
increased by $1.3 million primarily due to gains on peripheral land sales,
offset by a decrease in lease cancellation revenue and interest income.
Total operating costs decreased by $4.7 million, or 2.7%, to $166.4 million
for 1997 including a $10.1 million decrease due to Fairlane. Recoverable
expenses decreased $5.4 million primarily due to Fairlane, offset by increases
due to Arizona Mills. Other operating costs decreased primarily due to Fairlane
and a decrease in bad debt expense. Additionally, included in 1996 other
operating expense was a nonrecurring $0.5 million payment to an anchor at one of
the Centers. Interest expense increased $1.0 million primarily due to an
increase in debt used to finance Arizona Mills and the Westfarms expansion,
partially offset by a decrease in debt related to Fairlane. 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, net income of the Unconsolidated Joint Ventures
decreased by $1.9 million, or 2.0%, to $92.4 million. TRG's equity in net income
of the Unconsolidated Joint Ventures was $52.3 million, a 1.0% increase from
1996.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary item increased
by $11.2 million, or 13.3%, to $95.3 million for 1997. In 1996, TRG recognized a
$(1.3) million extraordinary charge related to the prepayment of Fairlane's
debt. After payment of $4.1 million in preferred distributions to the Company,
net income available to partnership unitholders for 1997 was $91.2 million,
compared to $82.8 million in 1996.
26
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Taubman Centers, Inc.
The Company's average ownership percentage of TRG was 34.5% for 1996 and 35.1%
for 1995. Equity in income of TRG consists of the Company's $29.0 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. Income before
extraordinary items for 1996 was $20.7 million or $0.47 per common share as
compared to $19.3 million or $0.44 per common 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 and the related extinguishment of Bellevue
Center's debt, and other extinguishment of debt. Net income for 1996 was $20.3
million or $0.46 per common share compared to $25.1 million or $0.57 per common
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.
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 Center. Mall tenant sales for Centers that
were owned and open for all of 1996 and 1995 were $2.81 billion, a 3.9% increase
over 1995.
27
Comparison of Fiscal Year 1996 to Fiscal Year 1995
The following table sets forth operating results for TRG's Managed Businesses
for 1996 and 1995, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
1996 1995
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 149.2 157.2 306.4 130.4 166.2 296.6
Percentage rents 6.0 4.0 9.9 5.6 3.6 9.2
Expense recoveries 85.1 95.2 180.4 75.3 101.5 176.8
Other 21.5 8.9 30.4 17.6 11.5 29.1
Gain on disposition of Bellevue 8.3 8.3
----- ----- ----- ----- ----- -----
Total revenues 261.9 265.3 527.2 228.9 291.1 520.0
OPERATING COSTS:
Recoverable expenses 71.6 81.8 153.4 62.9 88.2 151.1
Other operating 25.4 12.8 38.2 22.5 12.3 34.8
Management, leasing and
development 4.7 4.7 3.7 3.7
General and administrative 21.8 21.8 19.8 19.8
Interest expense 70.5 53.5 124.0 65.8 58.6 124.4
Depreciation and amortization 35.7 22.9 58.7 32.4 24.7 57.1
----- ----- ----- ----- ----- -----
Total operating costs 229.7 171.1 400.8 207.1 183.8 390.9
Net results of Memorial City (1) 0.2 0.2
----- ----- ----- ----- ----- -----
32.3 94.3 126.6 21.8 107.3 129.1
===== ===== ===== =====
Equity in income before extraordinary
items of Unconsolidated Joint
Ventures (including $5.0 million in
1995 related to the disposition of
Bellevue) 51.8 57.9
----- -----
Income before extraordinary items 84.1 79.7
Extraordinary items (1.3) 16.6
----- -----
Net income 82.8 96.3
===== =====
SUPPLEMENTAL INFORMATION(3):
EBITDA contribution 138.6 91.2 229.8 120.0 96.1 216.1
TRG's Beneficial Interest Expense (70.5) (27.7) (98.2) (65.8) (30.4) (96.2)
Non-real estate depreciation (1.9) (1.9) (2.0) (2.0)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution 66.2 63.5 129.7 52.1 65.7 117.8
===== ===== ===== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(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) Amounts in this table may not add due to rounding.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
28
TRG --Consolidated Businesses
- -----------------------------
Total revenues for 1996 were $261.9 million, a $33.0 million or 14.4% 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 an
Unconsolidated 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 $3.9 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 $22.6 million, or 10.9%, to $229.7 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.
Unconsolidated 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 an Unconsolidated Joint Venture to a Consolidated Business and
by the November 1995 disposition of Bellevue Center (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. In 1995, an ordinary gain of $8.3 million was recognized on the
disposition of Bellevue.
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.
29
As a result of the foregoing, income before extraordinary items of the
Unconsolidated 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
Unconsolidated Joint Ventures decreased $6.1 million, or 10.5%, to $51.8 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 the related extinguishment of
Bellevue's debt, and $(2.2) million in extraordinary charges related to the
prepayment of debt at TRG and at one of its Unconsolidated Joint Ventures. Net
income for 1996 was $82.8 million, compared to $96.3 million in 1995.
30
Liquidity and Capital Resources
Taubman Centers, Inc.
As of December 31, 1997, the Company had a cash balance of $9.0 million, the
source of which was primarily TRG's distributions, and had incurred no
indebtedness. As of December 31, 1997, the Company had 50.8 million shares
outstanding compared to 50.7 million at December 31, 1996.
On October 3, 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its $500 million equity shelf registration statement.
Dividends accrue from the date of original issuance and are payable in arrears
on or before the last day of each calendar quarter. The Company used the
proceeds to acquire a Series A Preferred Equity interest in TRG that entitles
the Company to distributions (in the form of guaranteed payments) in amounts
equal to the dividends payable on the Company's Series A Preferred Stock.
During 1997 and 1996, the Company received distributions from its partnership
interest in TRG of $47.0 million and $41.3 million, respectively. Additionally,
the Company received preferred distributions from TRG of $4.1 million in 1997.
The Company pays regular quarterly dividends to its common and preferred
shareowners. The Company's ability to pay dividends is affected by several
factors, most importantly, the receipt of distributions from TRG. Dividends to
its common shareowners are at the discretion of the Board of Directors and
depend on the cash available to the Company, its finan