Back to GetFilings.com
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, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number 1-11530
TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2033632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303-0200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (248) 258-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, New York Stock Exchange
$0.01 Par Value
8.3% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock,
$0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such report(s)) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of March 23, 1999, the aggregate market value of the 52,691,181 shares of
Common Stock held by non-affiliates of the registrant was $613 million,
based upon the closing price ($11 5/8) 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 23, 1999,
there were outstanding 53,045,285 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1999 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company" or "TCO") was incorporated in Michigan
in 1973 and had its initial public offering ("IPO") in 1992. Upon completion of
the IPO, the Company became the managing general partner of The Taubman Realty
Group Limited Partnership (the "Operating Partnership" or "TRG"). The Company
has a 62.8% partnership interest in the Operating Partnership, through which the
Company conducts all its operations. The Company owns, develops, acquires, and
operates regional shopping centers ("Centers") and interests therein. The
Company's portfolio, as of December 31, 1998, includes 16 urban and suburban
Centers located in seven states. One additional Center opened in March 1999.
Three additional Centers are presently or will soon be under construction and
are expected to open in 2001. Thirteen of the Centers are "super-regional"
centers because they have more than 800,000 square feet of gross leasable area.
The Operating Partnership also owns certain regional retail shopping center
development projects and more than 99% of The Taubman Company Limited
Partnership (the "Manager"), which manages the shopping centers, and provides
other services to the Operating Partnership and the Company. See the table on
pages 12 and 13 of this report for information regarding the Centers.
The Company is a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to satisfy the
provisions of the Code applicable to REITs, the Company must distribute to its
shareholders at least 95% of its REIT taxable income and meet certain other
requirements. The Operating Partnership's agreement provides that the Operating
Partnership will distribute, at a minimum, sufficient amounts to its partners
such that the Company's pro rata share will enable the Company to pay
shareholder dividends (including capital gains dividends that may be required
upon the Operating Partnership's sale of an asset) that will satisfy the REIT
provisions of the Code.
Recent Developments
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned (Briarwood, Columbus City Center, The Falls,
Hilltop, Lakeforest, Marley Station, Meadowood Mall, Stoneridge, and The Mall at
Tuttle Crossing) and one joint venture (Woodfield)) and a share of the Operating
Partnership's debt for all of the partnership units owned by two pension trusts
of General Motors Corporation (GMPT) (the GMPT Exchange). Performance statistics
for periods presented below include these ten centers (the GMPT Centers) through
the completion of the GMPT Exchange, except as noted.
For a discussion of the GMPT Exchange and other business developments that
occurred in 1998, see the response to Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (MD&A).
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size
and marketing strategy. Retail shopping centers range from neighborhood centers
of less than 100,000 square feet of GLA to regional and super-regional shopping
centers. Retail shopping centers in excess of 400,000 square feet of GLA are
generally referred to as "regional" shopping centers, while those centers having
in excess of 800,000 square feet of GLA are generally referred to as
"super-regional" shopping centers. In this annual report on Form 10-K, the term
"regional shopping centers" refers to both regional and super-regional shopping
centers. The term "GLA" refers to gross retail space, including anchors and mall
tenant areas, and the term "Mall GLA" refers to gross retail space, excluding
anchors. The term "anchor" refers to a department store or other large retail
store. The term "mall tenants" refers to stores (other than anchors) that are
typically specialty retailers and lease space in shopping centers.
1
Business of the Company
The Company, as managing general partner of the Operating Partnership, is
engaged in the ownership, management, leasing, acquisition, development and
expansion of regional shopping centers.
The Centers:
o are strategically located in major metropolitan areas, many in communities
that are among the most affluent in the country, including New York City,
Los Angeles, Denver, Detroit, Phoenix, and Washington, D.C.;
o range in size between 437,000 and 1.5 million square feet of GLA and between
132,000 and 598,000 square feet of Mall GLA. The smallest Center has
approximately 50 stores, and the largest has approximately 200 stores. Of
the 16 Centers, 13 are super-regional shopping centers;
o have approximately 2,160 stores operated by its mall tenants under
approximately 790 trade names;
o have 50 anchors, operating under 15 trade names;
o lease approximately 77% 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 Venator Group, Inc. (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 1998, mall tenants had average per
square foot sales of $426, 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 Centers
is leasing to mall tenants (primarily specialty retailers), which represents
approximately 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.
The Company's portfolio is concentrated in highly productive super-regional
shopping centers. Of the 16 Centers, 13 had annual rent rolls at December 31,
1998 of over $10 million and had annualized sales per square foot in excess
of $350. The Company believes that this level of productivity is indicative of
the Centers' strong competitive position and is, in significant part,
attributable to the Company's business strategy and philosophy. The Company
believes that large shopping centers (including regional and especially
super-regional shopping centers) are the least susceptible to direct competition
because (among other reasons) anchors and large specialty retail stores do not
find it economically attractive to open additional stores in the immediate
vicinity of an existing location for fear of competing with themselves. In
addition to the advantage of size, the Company believes that the Centers'
success can be attributed in part to their other physical characteristics, such
as design, layout, and amenities.
2
Business Strategy And Philosophy
The Company believes that the regional shopping center business is not simply
a real estate development business, but rather an operating business in which a
retailing approach to the on-going management and leasing of the Centers is
essential. Thus the Company:
o offers a large, diverse selection of retail stores in each Center to give
customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, 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 Centers. The Company believes that its execution of this
leasing strategy is unique in the industry and is an important element in
building and maintaining customer loyalty and increasing mall productivity.
The Centers compete for retail consumer spending through diverse, in-depth
presentations of predominantly fashion merchandise in an environment intended to
facilitate customer shopping. While some Centers include stores that target
high-end, upscale customers, each Center is individually merchandised in light
of the demographics of its potential customers within convenient driving
distance.
The Company's leasing strategy involves assembling a diverse mix of mall
tenants in each of the Centers in order to attract customers, thereby generating
higher sales by mall tenants. High sales by mall tenants make the Centers
attractive to prospective tenants, thereby increasing the rental rates that
prospective tenants are willing to pay. The Company implements an active leasing
strategy to increase the Centers' productivity and to set minimum rents at
higher levels. Elements of this strategy include terminating leases of
under-performing tenants, renegotiating existing leases, and not leasing space
to prospective tenants that (though viable or attractive in certain ways) would
not enhance a Center's retail mix.
Potential For Growth
The Company's principal objective is to enhance shareholder value. The
Company seeks to maximize the financial results of its assets, while pursuing a
growth strategy that concentrates primarily on an active new center development
program.
Development of New Centers
- --------------------------
The Company is pursuing an active program of regional shopping center
development. The Company believes that it has the expertise to develop
economically attractive regional shopping centers through intensive analysis of
local retail opportunities. The Company believes that the development of new
centers is the best use of its capital and an area in which the Company excels.
At any time, the Company has numerous potential development projects in various
stages.
During November 1998, the Company opened Great Lakes Crossing, an enclosed
value super-regional mall in Auburn Hills, Michigan. In addition, MacArthur
Center, located in Norfolk, Virginia, opened in March 1999.
3
Additionally, three new centers are currently under construction: Tampa
International, an enclosed 1.3 million square foot super-regional mall in Tampa,
Florida; The Shops at Willow Bend, a 1.5 million square foot regional shopping
center in the metropolitan Dallas area; and The Mall at Wellington Green, a 1.3
million square foot regional shopping center located in West Palm Beach County,
Florida. All three of these Centers are expected to open in 2001.
The Company's policies with respect to development activities are designed
to reduce the risks associated with development. For instance, the Company
entered into an agreement to lease Memorial City Mall, a center adjacent to one
of the most affluent residential areas in Houston, Texas, while the Company
investigates the redevelopment opportunities of the center. Also, the Company
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,
the Company does not intend to begin construction until a sufficient number of
anchor stores have agreed to operate in the shopping center, such that the
Company is confident that the projected sales and rents from Mall GLA are
sufficient to earn a return on invested capital in excess of the Company's cost
of capital. Having historically followed these two principles, the Company'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 the Company will continue to be able to
so limit pre-construction costs.
While the Company will continue to evaluate development projects using
criteria, including financial criteria for rates of return, similar to those
employed in the past, no assurances can be given that the adherence to these
policies will produce comparable results in the future. In addition, the costs
of shopping center development opportunities that are explored but ultimately
abandoned will, to some extent, diminish the overall return on development
projects (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Capital Spending"
for further discussion of the Company's development activities).
Strategic Acquisitions
- ----------------------
The Company's objective is to acquire existing centers only when these are
compatible with the quality of the Company's portfolio (or can be redeveloped to
that level) and that satisfy the Company's strategic plans and pricing
requirements.
4
The Company believes it 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 Company's expertise will assist 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 the Operating Partnership 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. The Operating Partnership 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.
Expansions of the Centers
- -------------------------
Another potential element of growth is the strategic expansion of existing
properties to update and enhance their market positions, by replacing or adding
new anchor stores or increasing mall tenant space. Most of the Centers have been
designed to accommodate expansions. Expansion projects can be as significant as
new shopping center construction in terms of scope and cost, requiring
governmental and existing anchor store approvals, design and engineering
activities, including rerouting utilities, providing additional parking areas or
decking, acquiring additional land, and relocating anchors and mall tenants (all
of which must take place with a minimum of disruption to existing tenants and
customers). In 1998, for example, the Company opened a 132,000 square foot
expansion of the Mall GLA at Cherry Creek and completed a major renovation at
Woodland. In addition, a new Macy's will begin construction in 1999 at Fair
Oaks and is expected to open in 2000.
5
The following table includes information regarding recent development,
acquisition, and expansion activities.
Developments:
Completion Date Center Location
--------------- ------ --------
July 1997 Tuttle Crossing (1) 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
--------------- ------ --------
September 1997 Regency Square Richmond, Virginia
December 1997 Tuttle Leasehold (1) Columbus, Ohio
December 1997 The Falls (1) (2) Miami, Florida
Expansions, Renovations and Anchor Conversions:
Completion Date Center Location
--------------- ------ --------
March 1997 Beverly Center (3) Los Angeles, California
August 1997 Westfarms (4) West Hartford, Connecticut
November 1997-August 1998 Cherry Creek (5) Denver, Colorado
December 1997 Biltmore (6) Phoenix, Arizona
November 1998 Woodland Grand Rapids, Michigan
- ------------------
(1) Centers transferred to GMPT in connection with the GMPT Exchange.
(2) Completely redeveloped and expanded in 1996 before the acquisition of The
Falls.
(3) Broadway converted to Bloomingdale's.
(4) 135,000 square foot expansion followed by the opening of a new Nordstrom in
September.
(5) Lord & Taylor opened a new and expanded store in 1997. Additional 132,000
square foot expansion of mall tenant space opened in August of 1998.
(6) 50,000 square foot expansion of mall tenant space completed.
6
Internal Growth
- ---------------
The Centers are among the most productive in the nation, when measured by mall
tenant's average sales per square foot. Higher sales per square foot enable mall
tenants to remain profitable while paying occupancy costs that are a greater
percentage of total sales. As leases expire at the Centers, the Company has
consistently been able, on a portfolio basis, to lease the available space to an
existing or new tenant at higher rates.
Augmenting this growth, the Company is pursuing a number of new sources of
revenue from the Centers. For example, the Company expects increased revenue
from its specialty leasing efforts. In recent years a new industry -- beyond
traditional carts and kiosks -- has evolved, with more and better quality
specialty tenants. The Company has put in place a company-wide program to
maximize this opportunity.
Rental Rates
As leases have expired in the Centers, the Company has generally been able to
rent the available space, either to the existing tenant or a new tenant, at
rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent at Centers that have been owned and open for five years.
Year Ended December 31
---------------------------------------
1998 (1) 1997 1996 1995 1994
---- ---- ---- ---- ----
Average base rent per square foot:
All mall tenants $41.93 $38.79 $37.90 $36.33 $34.72
Stores closing during year $44.27 $37.62 $33.39 $32.96 $30.46
Stores opening during year $47.92 $41.67 $42.39 $41.27 $41.02
(1) Excludes transferred centers.
7
Lease Expirations
The following table shows lease expirations based on information available
as of December 31, 1998 for the next ten years for the 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
---- -------- ----------------- --------------- --------------- ---------------
1999 (1) 68 188,527 $7,277 $38.60 2.4%
2000 197 456,882 18,310 40.08 5.8%
2001 200 517,671 21,570 41.67 6.5%
2002 260 742,597 26,010 35.03 9.4%
2003 287 905,024 32,533 35.95 11.4%
2004 231 664,076 29,117 43.85 8.4%
2005 226 652,125 29,202 44.78 8.2%
2006 150 447,482 20,081 44.88 5.6%
2007 159 632,667 23,179 36.64 8.0%
2008 188 929,937 29,925 32.18 11.7%
(1)Excludes leases that expire in 1999 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1998.
The Company believes that the information in the table is not necessarily
indicative of what will occur in the future because of several factors, but
principally because its leasing policies and practices create a significant
level of early lease terminations at the Centers. For example, the average
remaining term of the leases that were terminated during the period 1993 to 1998
was approximately 1.8 years. The average term of leases signed during 1998 and
1997 was approximately 7.4 years.
In addition, mall tenants at the Centers may seek the protection of the
bankruptcy laws, which could result in the termination of such tenants' leases
and thus cause a reduction in cash flow. Prior to 1992, such bankruptcies had
not affected more than 3% of leases in the shopping centers in any one calendar
year. In 1998, approximately 1.2% of leases were so affected compared to 1.5% in
1997, 2.8% in 1996, 3.2% in 1995, and 3.1% in 1994. Since 1991, the annual
provision for losses on accounts receivable has been less than 2% of annual
revenues.
Occupancy
Mall tenant average occupancy , ending occupancy, and leased space rates of
the Centers are as follows:
Year Ended December 31
---------------------------------------
1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
Average Occupancy 89.4% 87.6% 87.4% 88.0% 86.6%
Ending Occupancy 90.2% 90.3% 88.0% 89.4% 89.3%
Leased Space 92.3% 92.3% 89.0% 90.6% 90.9%
(1) Excludes transferred centers.
8
Major Tenants
No single retail company represents 10% or more of the Company's revenues. The
combined operations of The Limited, Inc. accounted for approximately 9.4% of
leased Mall GLA as of December 31, 1998 and for approximately 9.1% of the 1998
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 1.8% of leased Mall GLA and 1.7% of
1998 base rent. No other single retail company accounted for more than 4% of
leased Mall GLA or 1998 base rent.
Environmental Matters
All of the Centers presently owned by the Company (not including option
interests in the Development Projects or any of the real estate managed but not
included in the Company's portfolio) have been subject to environmental
assessments. The Company is not aware of any environmental liability relating to
the Centers or any other property in which they have or had an interest (whether
as an owner or operator) that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations. No
assurances can be given, however, that all environmental liabilities have been
identified or that no prior owner, operator, or current occupant has created an
environmental condition not known to the Company. Moreover, no assurances can be
given that (i) future laws, ordinances, or regulations will not impose any
material environmental liability or that (ii) the current environmental
condition of the Centers will not be affected by tenants and occupants of the
Centers, by the condition of properties in the vicinity of the Centers (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company.
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 and accepted in 1998 that provided for monitoring the soil
and groundwater. The monitoring procedures required under this plan have been
completed.
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 Centers,
primarily in the form of floor tiles, roof coatings and mastics. The floor
tiles, roof coatings and mastics are generally in good condition. The Manager
has 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 real estate management,
acquisition, development, and administrative services required by the Company
and its properties.
As of December 31, 1998, the Manager had 432 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1998:
Number Of Employees
-------------------
Property Management............... 194
Leasing........................... 70
Development....................... 53
Financial Services................ 63
Other ............................ 52
-------
Total....................... 432
=======
The Manager considers its relations with its employees to be good.
10
Item 2. PROPERTIES
Ownership
The following table sets forth certain information about each of the Centers.
The table includes only Centers in operation at December 31, 1998. Excluded from
this table are MacArthur Center, which opened in March 1999, and Tampa
International, The Shops at Willow Bend, and the Mall at Wellington Green, all
of which will open in 2001. Also excluded is Memorial City Mall, a development
project. Centers are owned in fee other than Beverly Center, Cherry Creek, La
Cumbre Plaza and Paseo Nuevo, which are held under ground leases expiring
between 2028 and 2083.
Certain of the Centers are partially owned through joint ventures. Generally,
the Operating Partnership's joint venture partners have ongoing rights with
regard to the disposition of the Operating Partnership's interest in the joint
ventures, as well as the approval of certain major matters.
11
Sq. Ft of GLA/ Ownership % Percent of Mall GLA
Mall GLA Year Opened/ Year as of Occupied 1998 Rent (1)
Owned Centers Anchors as of 12/31/98 Expanded Acquired 12/31/98 as of 12/31/98 (in Thousands)
- ------------- ------- --------------- ----------- -------- ------------- ------------------- -------------
Beverly Center Bloomingdale's, Macy's 906,000/ 1982 70%(2) 98% $ 26,001
Los Angeles, CA 598,000
Biltmore Fashion Park Macy's, Saks Fifth 563,000/ 1963/1992/ 1994 100% 97% 11,329
Phoenix, AZ Avenue 324,000 1997
Cherry Creek Foley's, Lord & Taylor, 1,031,000/ 1990/1998 50% 88% 19,456
Denver, CO Neiman Marcus, Saks 558,000 (4)
Fifth Avenue (3)
Fair Oaks Hecht's, JCPenney, Lord 1,406,000/ 1980/1987/ 50% 86% 19,504
Fairfax, VA & Taylor, Sears (5) 590,000 1988
(Washington, D.C.
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,405,000/(6) 1976/1978/ 100% 78% 13,751
Dearborn, MI Lord & Taylor, Saks 515,000 1980
(Detroit Metropolitan Fifth Avenue, Sears
Area)
La Cumbre Plaza Robinsons-May, Sears 479,000/ 1967/1989 1996 100% 94% 4,098
Santa Barbara, CA 179,000
Lakeside Crowley's, Hudson's, 1,469,000/ 1976/1980 50% 87% 17,535
Sterling Heights, MI JCPenney, Lord & Taylor, 508,000
(Detroit Metropolitan Sears
Area)
Paseo Nuevo Macy's, Nordstrom 437,000/ 1990 1996 100% 89% 4,356
Santa Barbara, CA 132,000
Regency Square Hecht's (two locations), 826,000/ 1975/1987 1997 100% 96% 8,954
Richmond, VA JCPenney, Sears 239,000
The Mall at Short Bloomingdale's, Macy's, 1,350,000/ 1980/1994/ 100% 97% 32,179
Hills, Neiman Marcus, Nordstrom,528,000 1995
Short Hills, NJ Saks Fifth Avenue
Stamford Town Center Filene's, Macy's, Saks 873,000/ 1982 50% 90% 16,367
Stamford, CT Fifth Avenue 380,000
Twelve Oaks Mall Hudson's, JCPenney, 1,222,000/ 1977/1980 50% 92% 19,972
Novi, MI Lord & Taylor, Sears 484,000
(Detroit Metropolitan
Area)
12
Percent of Mall
Sq. Ft of GLA/ Ownership % GLA Occupied
Mall GLA Year Opened/ Year as of as of 1998 Rent (1)
Owned Centers Anchors as of 12/31/98 Expanded Acquired 12/31/98 12/31/98 (in Thousands)
------------- -------- -------------- ------------ -------- ----------- --------------- --------------
Westfarms Filene's, Filene's 1,298,000/ 1974/1997 79% 91% $21,920
West Hartford, CT Men's Store/Furniture 528,000
Gallery, JCPenney, Lord
& Taylor, Nordstorm
Woodland Hudson's, JCPenney, 1,093,000/ 1968/1974/ 50% 97% 14,831
Grand Rapids, MI Sears 368,000 1984/1989
Value Centers:
- --------------
Arizona Mills GameWorks, Harkins 1,191,000/ 1997 37% 94% 21,044
Tempe, AZ Cinemas, JCPenney 531,000
(Phoenix Outlet, Neiman Marcus -
Metropolitan Area) Last Call, Off 5th Saks,
Rainforest Cafe
Great Lakes Bass Pro, GameWorks, 1,385,000/(7) 1998 80% 79% 3,544 (1)
Crossing JCPenney Outlet, Neiman 576,000
Auburn Hills, MI Marcus-Last Call, Off ---------
(Detroit 5th Saks, Rainforest
Metropolitan Area) Cafe, Star Theatres
Total GLA/Total Mall GLA: 16,934,000/
7,038,000
Average GLA/Average Mall GLA: 1,058,000/
440,000
- ------------------------
(1) Includes minimum and percentage rent for the year ended December 31,
1998. Excludes rent from certain peripheral properties. For Great Lakes
Crossing, which opened in November, the amounts reflect rents for the
period subsequent to the opening date.
(2) The Company has an option to acquire the remaining 30%. The results of
Beverly Center are consolidated in the Company's financial statements.
(3) Nordstrom will be added as a fifth anchor.
(4) GLA excludes approximately 166,000 square feet for the renovated
buildings on adjacent peripheral land.
(5) A newly constructed Macy's store will open in the fall of 2000.
(6) A 30-screen theater will be added and is anticipated to open in the
spring of 2000.
(7) Includes three additional anchors totaling approximately 296,000 square
feet, which will open in the spring of 1999.
13
Anchors
The following table summarizes certain information regarding the anchors at
the Centers (excluding the value centers)as of December 31, 1998.
Number of 12/31/98 GLA
Name Anchor Stores (in thousands) % of GLA
---- ------------- -------------- --------
May Company
Lord & Taylor 6(1) 760
Hecht's 3 417
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
--- -----
Total 14 1,964 11.6%
Sears 7 1,582 9.3%
JCPenney 7 1,327 7.8%
Federated
Macy's 5 (1) 881
Bloomingdale's 2 379
-- -----
Total 7 1,260 7.5%
Dayton Hudson
Hudson's 4 853 5.0%
Nordstrom 3 (2) 516 3.0%
Saks 5 450 2.7%
Neiman Marcus 2 216 1.3%
Crowley's 1 115 0.7%
Dillard's 0(2) 0
--- ----- ----
Total 50 8,283 57.7%
=== ===== ====
(1) A new Macy's store will open at Fair Oaks in 2000.
(2) An additional Nordstrom store was added along with Dillard's at MacArthur
Center, which opened in March 1999.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Centers as of December 31, 1998. All mortgage debt in the table
below is nonrecourse to the Operating Partnership, except for debt encumbering
Arizona Mills and MacArthur Center. The Operating Partnership has guaranteed the
payment of principal and interest on the mortgage debt of these Centers. The
loan agreements provide for the reduction of the amounts guaranteed as certain
center performance and valuation criteria are met, with the Operating
Partnership's guaranty of the Arizona Mills' principal being $13.1 million at
December 31, 1998. The guarantee on the MacArthur Center mortgage is currently
for 100% of the outstanding balance. Biltmore is also encumbered by assessment
bonds totaling approximately $2.8 million, which are not included in the table.
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/98 Service Maturity on Maturity Prepayment
TCO's Financial Statements Rate (000's) (000's) Date (000's) Date
- -------------------------- ---- ------- ------- ---- ------- ----
Beverly Center 8.36% $146,000 Interest Only 07/15/04 $146,000 30 Days' Notice (1)
MacArthur Center (70%) Floating 94,589(3) Interest Only 10/27/00 94,589 4 Days' Notice (2)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
- --------------------------------
Arizona Mills (37%) Floating(4) 140,984(4) Interest Only 02/01/02 140,984 5 Days' Notice (2)
Cherry Creek (50%) Floating(5) 130,000 Interest Only 08/01/99 130,000 4 Days' Notice (2)
Fair Oaks (50%) 6.60% 140,000 Interest Only 04/01/08 140,000 04/01/00 (1)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days'Notice (1)
Stamford Town Center (50%) 11.69% (6) 54,887 7,207 12/01/17 0 01/01/00 (7)
Twelve Oaks Mall (50%) Floating(8) 49,955 Interest Only 10/15/01 50,000 30 Days'Notice (2)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 60 Days'Notice (1)
Floating(9) 55,000(10) Interest Only 07/01/02 55,000 4 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. No
prepayment penalty is due if prepaid within six months of maturity date.
(2) Prepayment can be made without penalty.
(3) The loan is a construction facility with a current maximum availability of
$150 million, which is expected to be lowered to $120 million in 1999. The
Company is in the process of finalizing an amendment to this loan agreement.
(4) The loan is a construction facility with a maximum availability of $142
million. The rate is capped at 9.5% until maturity, plus credit spread,
based on one month LIBOR.
(5) The rate is capped to maturity at 7%, plus credit spread, based on one
month LIBOR.
(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 8.55% until maturity, plus credit spread, based on
one month LIBOR.
(9) 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.
For additional information regarding the Centers and their operation, see the
responses to Item 1 of this report. For a discussion of the Company's plans in
1999 to refinance certain debt obligations with secured financing, see MD&A.
15
Item 3. LEGAL PROCEEDINGS
Neither the Company, its subsidiaries, nor any of the joint ventures is
presently involved in any material litigation nor, to the Company's knowledge,
is any material litigation threatened against the Company, its subsidiaries or
any of the properties. Except for routine litigation involving present or former
tenants (generally eviction or collection proceedings), substantially all
litigation is covered by liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Taubman Centers, Inc. is listed and traded on the New
York Stock Exchange (Symbol:TCO). As of March 23, 1999, the
53,045,285 outstanding shares of Common Stock were held by 693 holders of
record.
The following table presents the dividends declared and range of share
prices for each quarter of 1998 and 1997.
Market Quotations
-----------------------------
1998 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $13 11/16 $12 1/8 $0.235
June 30 14 3/8 12 3/4 0.235
September 30 14 3/4 12 1/4 0.235
December 31 14 3/16 12 5/16 0.24
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
16
During the fourth quarter of 1998, the Company offered and sold a total of
31,399,913 shares of Series B Non-Participating Convertible Preferred Stock (the
"Series B Stock") to the partners (other than the Company) in TRG, which is the
Company's subsidiary Operating Partnership, in an offering exempt from
registration under the Securities Act of 1933 (the "Securities Act"). Under the
Company's articles of incorporation, as amended on September 30, 1998, the
Company was required to offer each partner in the Operating Partnership (other
than the Company) the right to subscribe for Series B Stock on the basis of one
share of Series B Stock for each Unit of Partnership Interest in the Operating
Partnership owned by the subscribing partner. The aggregate offering price was
$38,400, which was equal to the Series B Stock's per share liquidation
preference of $0.001 multiplied by the number of shares sold. The Company sold
all of the offered shares. The Company offered and sold all shares directly and
did not pay any commissions or discounts.
Each share of Series B Stock is entitled to one vote. The Series B Stock
and the Company's Common Stock vote as a single class on all matters submitted
to a vote of the Company's shareholders. The Series B Stock is not entitled to
dividends or other distributions, except upon liquidation as indicated above.
The Series B Stock is convertible under certain circumstances into Common
Stock at the ratio of one share of Common Stock for each 14,000 shares of Series
B Stock (with any resulting fractional shares of Common Stock being redeemed for
cash). Generally, a partner desiring to sell (by exchange or otherwise) Units in
the Operating Partnership to the Company must surrender for conversion shares of
Series B Stock equal in number to the Units being sold. In addition, if a
transfer of Series B Stock results in the transferee holding more shares of
Series B Stock than is permitted under the Company's articles of incorporation,
then the shares of Series B Stock in excess of the permitted number will
automatically convert into Common Stock (or will be redeemed for cash, as
indicated above).
The offering of Series B Stock described above was exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act. Under
the Company's articles of incorporation, the Company may issue shares of Series
B Stock only to partners in the Operating Partnership. Offers were limited to
partners in the Operating Partnership, who constitute a limited number of
sophisticated investors (all of whom are "accredited investors," as defined in
Rule 501 under the Securities Act) fully familiar with the business and
operations of the Company, and did not involve any general solicitation or
advertising. Under the Company's articles of incorporation, resales of the
Series B Stock are permitted only if registered (or exempt from registration)
under the Securities Act, and each certificate evidencing Series B Stock carries
a restrictive legend.
17
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this report.
Year Ended December 31
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
Income before extraordinary items
from investment in TRG (1) 29,349 21,368 19,831 17,654
Rents, recoveries and other shopping
center revenues (1) 333,953
Income before extraordinary items 70,403 28,662 20,730 19,267 17,014
Extraordinary items (2) (50,774) (444) 5,836 (16,087)
Minority Interest (1) (6,009)
Net income 13,620 28,662 20,286 25,103 927
Series A preferred dividends (3) (16,600) (4,058)
Net income (loss) available to common
shareowners (2,980) 24,604 20,286 25,103 927
Income before extraordinary items per
common share - diluted (4) 0.32 0.48 0.47 0.44 0.38
Net income (loss) per common share -
diluted (4) (0.06) 0.48 0.46 0.57 0.02
Dividends per common share declared 0.945 0.925 0.89 0.88 0.88
Weighted average number of common
shares outstanding 52,223,399 50,737,333 44,444,833 44,249,617 44,589,709
Number of common shares outstanding
at end of period 52,995,904 50,759,657 50,720,358 44,134,913 44,570,913
Ownership percentage of TRG at end
of period (1) 62.79% 36.70% 36.68% 35.10% 35.10%
BALANCE SHEET DATA (1):
Investment in TRG 547,859 369,131 307,190 322,316
Real estate before accumulated depreciation 1,473,440
Total assets 1,480,863 556,824 378,527 315,076 333,316
Total debt 775,298
SUPPLEMENTAL INFORMATION (5):
Funds from Operations allocable to TCO (6) 61,131 53,137 44,104 40,798 38,989
Mall tenant sales (7) 2,332,726 3,086,259 2,827,245 2,739,393 2,561,555
Sales per square foot (7) 426 384 377 364 348
Number of shopping centers at end of period 16 25 21 19 20
Ending Mall GLA in thousands of square feet 7,038 10,850 9,250 8,996 9,088
Average occupancy 89.4% 87.6% 87.4% 88.0% 86.6%
Ending occupancy 90.2% 90.3% 88.0% 89.4% 89.3%
Leased space (8) 92.3% 92.3% 89.0% 90.6% 90.9%
Average base rent per square foot (9):
All mall tenants $41.93 $38.79 $ 37.90 $ 36.33 $34.72
Stores closing during year $44.27 $37.62 $ 33.39 $ 32.96 $30.46
Stores opening during year $47.92 $41.67 $ 42.39 $ 41.27 $41.02
- --------------------------
(1) On September 30, 1998 the Company obtained a majority and controlling
interest in The Taubman Realty Group Limited Partnership (TRG or the
Operating Partnership) as a result of the GMPT Exchange (see Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) - GMPT Exchange and Related Transactions). As a result of this
transaction, the Company's ownership of the Operating Partnership increased
to 62.8% and the Company began consolidating the Operating Partnership.
For 1998, the interest of the noncontrolling partners of the Operating
Partnership (the Minority Interest) is deducted to arrive at the results
allocable to the Company's shareowners. For years prior to 1998, amounts
reflect the Company's interest in the Operating Partnership under the
equity method.
(2) 1998 extraordinary charges include $49.8 million related to debt
extinguished in anticipation of the GMPT Exchange, primarily consisting of
prepayment premiums. In 1995, the Company recognized its $6.6 million share
of an extraordinary gain related to the disposition of Bellevue Center and
the related extinguishment of debt. Also, included as extraordinary items
in 1994 through 1998 are charges related to the extinguishment of other
debt, primarily consisting of prepayment premiums.
(3) In October 1997, the Company issued 8.3% Series A Preferred Stock on which
dividends are paid quarterly.
(4) Basic and diluted earnings per share amounts are equal, except for 1998,
for which basic income before extraordinary items per share was $0.33.
(5) Operating statistics for 1998 exclude centers transferred to GMPT as
part of the GMPT Exchange. See MD&A for 1997 operating statistics restated
to exclude the transferred centers.
18
(6) Funds from Operations is defined and discussed in MD&A - Liquidity and
Capital Resources-Funds from Operations. Funds from Operations does not
represent cash flow from operations, as defined by generally accepted
accounting principles, and should not be considered to be an alternative to
net income as a measure of operating performance or to cash flows as a
measure of liquidity.
(7) Based on reports of sales furnished by mall tenants.
(8) Leased space comprises both occupied space and space that is leased but not
yet occupied.
(9) Amounts include centers owned and open for at least five years.
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 and the Financial Statements of Taubman Centers, Inc. and the Notes
thereto.
General Background and Performance Measurement
The Company owns a managing general partner's interest in The Taubman Realty
Group Limited Partnership (Operating Partnership), through which the Company
conducts all of its operations. The Operating Partnership owns, develops,
acquires, and operates regional shopping centers nationally. The Consolidated
Businesses consist of shopping centers that are controlled by ownership or
contractual agreement, development projects for future regional shopping centers
and The Taubman Company Limited Partnership (the Manager). Shopping centers that
are not controlled and that are owned through joint ventures with third parties
(Unconsolidated Joint Ventures) are accounted for under the equity method.
The operations of the shopping centers are best understood by measuring their
performance as a whole, without regard to the Company's ownership interest.
Consequently, in addition to the discussion of the operations of the
Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are
presented and discussed as a whole.
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine Consolidated Businesses (Briarwood, Columbus City Center,
The Falls, Hilltop, Lakeforest, Marley Station, Meadowood Mall, Stoneridge, and
The Mall at Tuttle Crossing) and one Unconsolidated Joint Venture (Woodfield))
and a share of the Operating Partnership's debt for all of the partnership units
owned by General Motors Pension Trusts (GMPT) (the GMPT Exchange - see Results
of Operations -- GMPT Exchange and Related Transactions). Performance statistics
presented below include these ten centers (transferred centers) through the
completion of the GMPT Exchange, except as noted. Because the Company's
portfolio changed significantly as a result of the GMPT Exchange, the results of
operations of the transferred centers have been separately classified within the
Consolidated Businesses and Unconsolidated Joint Ventures for purposes of
analyzing and understanding the historical results of the current portfolio.
Since the Company's interest in the Operating Partnership has been its sole
material asset throughout all periods presented, references in the following
discussion to "the Company" include the Operating Partnership, except where
intercompany transactions are discussed or as otherwise noted, even though the
Operating Partnership did not become a consolidated subsidiary until September
30, 1998.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most important
determinant of revenues of the shopping centers because mall tenants provide
approximately 90% of these revenues and because mall tenant sales determine the
amount of rent, percentage rent, and recoverable expenses (together, total
occupancy costs) that mall tenants can afford to pay. However, levels of mall
tenant sales can be considerably more volatile in the short run than total
occupancy costs.
The Company believes that the ability of tenants to pay occupancy costs and
earn profits over long periods of time increases as sales per square foot
increase, whether through inflation or real growth in customer spending. Because
most mall tenants have certain fixed expenses, the occupancy costs that they can
afford to pay and still be profitable are a higher percentage of sales at higher
sales per square foot.
20
The following table summarizes occupancy costs, excluding utilities, for mall
tenants as a percentage of mall tenant sales.
Current Portfolio Historical Portfolio (1)
--------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Mall tenant sales(in thousands) $2,332,726 $1,965,905 $3,198,966 $3,086,259
Sales per square foot 426 410 408 384
Minimum rents 9.7% 10.0% 10.3% 10.1%
Percentage rents 0.3 0.3 0.3 0.3
Expense recoveries 4.1 4.2 4.5 4.4
--------- ---------- ---------- ----------
Mall tenant occupancy costs 14.1% 14.5% 15.1% 14.8%
========= ========== ========== ==========
(1) Includes transferred centers through the date of the GMPT Exchange.
Occupancy
Historically, average annual occupancy has been within a narrow band. In the
last ten years, average annual occupancy has ranged between 86.5% and 89.4%.
Mall tenant average occupancy, ending occupancy and leased space rates are as
follows:
Current Portfolio Historical Portfolio (1)
----------------- ------------------------
Mall Tenant Average Occupancy
1998 89.4% 89.0%
1997 88.0 87.6
Ending Occupancy
1998 90.2%
1997 90.7
Leased Space
1998 92.3%
1997 92.7
(1) Includes transferred centers through the date of the GMPT Exchange.
Rental Rates
As leases have expired in the shopping centers, the Company has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, 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 at the shopping centers that have been owned and open for
five years.
Current Portfolio
-----------------
1998 1997
---- ----
Average Base Rent per square foot:
All mall tenants $41.93 $41.37
Stores closing during the year $44.27 $39.07
Stores opening during the year $47.92 $41.08
21
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. 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.
22
Results of Operations
The following represent significant debt and equity transactions, new center
openings, acquisitions and expansions which affect the operating results
described under Comparison of Fiscal Year 1998 to Fiscal Year 1997.
GMPT Exchange and Related Transactions
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned and one Unconsolidated Joint Venture),
together with $990 million of debt, for all of GMPT's partnership units
(approximately 50 million units with a fair value of $675 million, based on the
average stock price of the Company's common shares of $13.50 for the two week
period prior to the closing), providing the Company with a majority and
controlling interest in the Operating Partnership. As a result of the GMPT
Exchange, the Company's general partnership interest in the Operating
Partnership increased to 62.8% of the approximately 84.3 million units of
partnership interest outstanding. The Operating Partnership will continue to
manage the centers exchanged under management agreements with GMPT that expire
December 31, 1999. The management agreements are cancelable with 90 days notice.
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one month LIBOR plus
1.30% to extinguish $1.1 billion of debt, including substantially all of the
Operating Partnership's public unsecured debt, its outstanding commercial paper,
and borrowings on its existing line of credit. The remaining proceeds were used
primarily to pay prepayment premiums and transaction costs. An extraordinary
charge of approximately $49.8 million, consisting primarily of prepayment
premiums, was incurred in connection with the extinguishment of the debt. GMPT's
share of debt received in the exchange included the $902 million balance on the
first bridge loan, $86 million representing 50% of the debt on the Joint Venture
owned shopping center, and $1.6 million of assessment bond obligations. (See
Liquidity and Capital Resources below regarding the Operating Partnership's
beneficial interest in debt and its plans to refinance its bridge loan.)
Concurrently with the GMPT Exchange, the Operating Partnership committed to a
restructuring of its operations. A restructuring charge of approximately $10.7
million was incurred, consisting primarily of costs related to involuntary
termination of personnel. The Company expects to reduce its annual consolidated
general and administrative expense to approximately $19 million in 1999. This is
a forward-looking statement, and certain significant factors could cause the
actual reductions in general and administrative expense to differ materially,
including but not limited to: 1) actual payroll reductions achieved; 2) actual
results of negotiations; 3) use of outside consultants; and 4) changes in the
Company's owned or managed portfolio.
Other Debt and Equity Transactions
In January 1998, the Operating Partnership redeemed a partner's 6.1 million
units of partnership interest for approximately $77.7 million (including costs).
The redemption was funded through the use of an existing revolving credit
facility.
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 preferred equity interest in the Operating Partnership. The Operating
Partnership used the net proceeds to pay down debt under existing revolving
credit and commercial paper facilities, which were used to fund the acquisition
of Regency Square in September 1997.
23
Openings, Expansions and Acquisitions
In November 1998, Great Lakes Crossing, an 80% owned enclosed value
super-regional mall, opened in Auburn Hills, Michigan. The center opened 95%
leased. In November 1997, Arizona Mills, a 37% owned enclosed value
super-regional shopping center located in Tempe, Arizona, opened 90% leased.
At Cherry Creek, a 132,000 square foot expansion opened in stages throughout
the fall of 1998. A 135,000 square foot expansion opened at Westfarms in August
1997. In addition, approximately 50,000 square feet of new mall stores opened at
Biltmore in 1997.
In September 1997, the Operating Partnership acquired Regency Square (Regency)
shopping center, located in Richmond, Virginia, for $123.9 million in cash. The
operating results of Regency have been reflected in the Company's results from
the acquisition date.
In December 1997, the Operating Partnership acquired The Falls shopping center
and the leasehold interest in The Mall at Tuttle Crossing, which opened in July
1997. These two centers were transferred to GMPT.
Memorial City Mall Lease
In November 1996, the Operating Partnership 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 the
Operating Partnership the exclusive right to manage, lease and operate the
property. The Operating Partnership has the option to terminate the lease after
the third full lease year by paying $2 million to the lessor. The Operating
Partnership 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 results of operations. Memorial City is expected to have
an immaterial effect on EBITDA and net income during the option period.
Presentation of Operating Results
In order to facilitate the analysis of the ongoing business for periods prior
to the GMPT Exchange, the following tables contain the combined operating
results of the Company and the Operating Partnership and also present separately
the revenues and expenses, other than interest, depreciation and amortization,
of the transferred centers. The following discussions include analysis of the
Consolidated Businesses and the Unconsolidated Joint Ventures, with the interest
of the noncontrolling partners of the Operating Partnership (the Minority
Interest) deducted to arrive at the results allocable to the Company's
shareowners. Because the Operating Partnership's net equity is less than zero,
for periods subsequent to the GMPT Exchange the income allocated to the Minority
Interest is equal to the Minority Interest's share of distributions. The
Operating Partnership's net equity is less than zero due to accumulated
distributions in excess of net income and not as a result of operating losses.
Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization. The Company's
average ownership percentage of the Operating Partnership was 43.2% for 1998
(including averages of 38.96% for the period through the GMPT Exchange, and
62.77% thereafter) and 36.7% for 1997.
24
Comparison of Fiscal Year 1998 to Fiscal Year 1997
The following table sets forth operating results for 1998 and 1997, showing
the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
1998 1997
--------------------------------- ----------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES(1) VENTURES (2) TOTAL BUSINESSES(1) VENTURES (2) TOTAL
--------------------------------- ----------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 99.8 149.3 249.1 86.4 121.1 207.5
Percentage rents 5.2 3.7 8.9 5.0 2.6 7.5
Expense recoveries 57.9 79.2 137.1 51.6 64.4 115.9
Management, leasing and
development 12.3 12.3 8.5 8.5
Other 17.4 6.8 24.2 11.4 8.0 19.4
Revenues - transferred centers 129.7 47.2 177.0 138.9 62.7 201.6
----- ----- ----- ----- ----- -----
Total revenues 322.3 286.3 608.6 301.6 258.8 560.4
OPERATING COSTS:
Recoverable expenses 51.4 66.0 117.4 45.6 53.7 99.2
Other operating 25.7 11.7 37.4 16.8 10.7 27.5
Management, leasing and
development 8.0 8.0 4.4 4.4
Expenses other than interest,
depreciation and amortization
- transferred centers 44.3 17.7 62.0 47.7 23.9 71.5
General and administrative 24.6 24.6 26.7 26.7
Interest expense 75.8 69.7 145.5 73.6 54.5 128.2
Depreciation and amortization 57.0 31.5 88.5 49.2 23.7 72.8
---- ---- ----- ----- ----- -----
Total operating costs 286.8 196.7 483.5 264.0 166.4 430.4
Net results of Memorial City (1) (0.8) (0.8) 0.0 0.0
---- ----- ----- ----- ----- -----
34.7 89.7 124.4 37.6 92.4 130.0
===== ===== ===== =====
Equity in income before extraordinary item
of Unconsolidated Joint Ventures 46.4 48.8
Restructuring loss (10.7)
----- ----
Income before extraordinary items
and minority interest 70.4 86.4
Extraordinary items (50.8)
Minority interest (6.0) (57.8)
---- -----
Net income 13.6 28.7
Series A preferred dividends (16.6) (4.1)
----- ----
Net income (loss) available to common
shareowners (3.0) 24.6
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 168.3 104.3 272.6 161.4 94.4 255.7
Beneficial Interest Expense (75.8) (37.1) (112.9) (73.6) (29.3) (102.9)
Non-real estate depreciation (2.3) (2.3) (2.1) (2.1)
Preferred dividends (16.6) (16.6) (4.1) (4.1)
----- ------ ------ ----- ----- -----
Funds from Operations contribution 73.7 67.1 140.8 81.6 65.1 146.7
===== ====== ====== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
The Company 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 represents earnings before interest and depreciation and amortization.
Funds from Operations is defined and discussed in Liquidity and Capital
Resources.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1997 amounts have been reclassified to conform to 1998 classifications.
25
Consolidated Businesses
- -----------------------
Total revenues for 1998 were $322.3 million, a $20.7 million, or 6.9%,
increase over 1997. Minimum rents increased $13.4 million, of which $8.9 million
was due to the opening of Great Lakes Crossing and the acquisition of Regency.
Minimum rents also increased because of the expansion at Biltmore and tenant
rollovers. Expense recoveries increased primarily due to Great Lakes Crossing
and Regency. Revenues from management, leasing and development services
increased primarily due to the new management agreements with GMPT. Other
revenue increased primarily due to an increase in gains on sales of peripheral
land and lease cancellation revenue.
Total operating costs increased $22.8 million, or 8.6%, to $286.8 million.
Recoverable and other operating expenses increased due to Great Lakes Crossing
and Regency. Other operating expense also increased due to professional fees,
management expense and an increase in the charge to operations for costs of
potentially unsuccessful pre-development activities. General and administrative
expense decreased $2.1 million between periods due to decreases in payroll and
reduced employee relocation and recruiter costs, partially offset by increases
attributable to the phase-in of the long term compensation plan.
Interest expense increased due to an increase in debt used to finance Tuttle
Crossing, the acquisition of The Falls and the redemption of a partner's
interest in the Operating Partnership, partially offset by a decrease in debt
paid down with the proceeds of the October 1997 and April 1998 equity offerings
and the assumption of debt by GMPT as part of the GMPT Exchange. Depreciation
and amortization expense increased due to Great Lakes Crossing, Tuttle Crossing,
Regency and The Falls, partially offset by the decrease in expense due to the
transferred centers only being included in 1998 through the date of the GMPT
Exchange.
Revenues and expenses other than interest and depreciation for the transferred
centers for 1998 represent operations through the date of the GMPT Exchange. The
resulting decreases from 1997 were partially offset by increases in revenues and
expenses due to the acquisition of The Falls and the opening of Tuttle Crossing.
During 1998, a $10.7 million loss on the restructuring was recognized, which
primarily represented the cost of certain involuntary terminations of personnel.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1998 were $286.3 million, a $27.5 million, or 10.6%,
increase from 1997. The increase in minimum rents and expense recoveries was
primarily due to Arizona Mills and the expansions at Westfarms and Cherry Creek.
Minimum rents also increased due to tenant rollovers. Other revenue decreased by
$1.2 million primarily due to a decrease in gains on peripheral land sales.
Total operating costs increased by $30.3 million, or 18.2%, to $196.7 million
for 1998. Recoverable and depreciation and amortization expenses increased
primarily due to Arizona Mills and the expansions. Other operating expense
increased primarily due to Arizona Mills. Interest expense increased primarily
due to an increase in debt used to finance Arizona Mills and the Westfarms
expansion, and a decrease in capitalized interest related to these two projects.
Revenues and expenses other than interest and depreciation for the transferred
centers for 1998 represent the operations of Woodfield through the date of the
GMPT Exchange, resulting in decreases from the prior year.
As a result of the foregoing, income before extraordinary item of the
Unconsolidated Joint Ventures decreased by $2.7 million, or 2.9%, to $89.7
million. The Company's equity in income before extraordinary item of the
Unconsolidated Joint Ventures was $46.4 million, a 4.9% decrease from the
comparable period in 1997.
26
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary items
and Minority Interest decreased to $70.4 million for 1998. The Minority Interest
in the Company's results decreased to $6.0 million, from $57.8 million,
reflecting the Company's increased ownership in the Operating Partnership due to
the GMPT Exchange and other equity transactions, as well as the Minority
Interest's $30.7 million share of the 1998 extraordinary items.
Also, the Company recognized its $20.1 million share of $50.8 million in
extraordinary charges related to the extinguishment of debt, including debt
extinguished in anticipation of the GMPT Exchange, primarily consisting of
prepayment premiums. After payment of $16.6 million in Series A preferred
dividends, net income (loss) available to common shareowners for 1998 was $(3.0)
million compared to $24.6 million for 1997.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Discussion of significant debt and equity transactions, acquisitions, and
openings occurring in 1997 is included in the Comparison of Fiscal Year 1998 to
Fiscal Year 1997. Significant 1996 items are described below.
In December 1996, the Company acquired an additional interest in the Operating
Partnership with the proceeds from the Company's December 1996 offering of
common stock. The Operating Partnership used the net proceeds to pay down short
term floating rate debt and to acquire La Cumbre Plaza. Additionally in 1996,
the Operating Partnership issued units of partnership interest in connection
with the acquisition of the 75% remaining interest in Fairlane Town Center.
These units were redeemed by the Operating Partnership in January 1998. Prior to
the acquisition date, the Company's interest in Fairlane (through the Operating
Partnership) was accounted for under the equity method as an Unconsolidated
Joint Venture. Additionally, in June 1996, the Operating Partnership acquired a
100% leasehold interest in Paseo Nuevo, located in Santa Barbara, California,
for $37 million in cash.
The Company's average ownership percentage of the Operating Partnership was
36.7% for 1997 and 34.5% for 1996.
27
Comparison of Fiscal Year 1997 to Fiscal Year 1996
The following table sets forth operating results showing the results of the
Consolidated Businesses and Unconsolidated Joint Ventures:
1997 1996
--------------------------------- -----------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES (1) VENTURES (2) TOTAL BUSINESSES (1) VENTURES (2) TOTAL
--------------------------------- -----------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 86.4 121.1 207.5 69.4 123.4 192.8
Percentage rents 5.0 2.6 7.5 3.5 3.5 6.9
Expense recoveries 51.6 64.4 115.9 41.4 69.0 110.4
Management, leasing and
development 8.5 8.5 8.5 8.5
Other 11.4 8.0 19.4 9.2 7.6 16.8
Revenues - transferred centers 138.9 62.7 201.6 130.1 61.8 191.9
----- ----- ----- ----- ----- -----
Total revenues 301.6 258.8 560.4 262.2 265.3 527.5
OPERATING COSTS:
Recoverable expenses 45.6 53.7 99.2 36.0 58.3 94.3
Other operating 16.8 10.7 27.5 14.8 11.3 26.1
Management, leasing and
development 4.4 4.4 4.7 4.7
Expenses other than interest,
depreciation and amortization
- transferred centers 47.7 23.9 71.5 46.2 25.1 71.2
General and administrative 26.7 26.7 22.7 22.7
Interest expense 73.6 54.5 128.2 70.5 53.5 124.0
Depreciation and amortization 49.2 23.7 72.8 40.1 22.9 63.0
----- ----- ----- ----- ----- -----
Total operating costs 264.0 166.4 430.4 235.0 171.1 406.0
Net results of Memorial City (1) 0.0 0.0 0.2 0.2
----- ----- ----- ----- ----- -----
37.6 92.4 130.0 27.3 94.3 121.6
===== ===== ===== =====
Equity in income before extraordinary
item of Unconsolidated Joint
Ventures 48.8 48.6
---- ----
Income before extraordinary item and
minority interest 86.4 76.0
Extraordinary item (1.3)
Minority Interest (57.8) (54.3)
----- -----
Net income 28.7 20.3
Series A preferred dividends (4.1)
---- -----
Net income available to common
shareowners 24.6 20.3
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 161.4 94.4 255.7 138.6 91.2 229.8
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 dividends (4.1) (4.1)
----- ----- ----- ----- ----- -----
Funds from Operations 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.
The Company 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 represents earnings before interest and depreciation and amortization.
Funds from Operations is defined and discussed in Liquidity and Capital
Resources.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1997 and 1996 amounts have been reclassified to conform to 1998
classifications.
28
Consolidated Businesses
- -----------------------
Total revenues for 1997 were $301.6 million, a $39.4 million or 15.0% increase
over 1996. Minimum rents increased $17.0 million, of which $15.1 million was
caused by the 1997 and 1996 acquisitions. The results of Fairlane have been
consolidated in the Operating Partnership'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
and expense recoveries increased primarily due to the acquisitions. Other
revenue increased $2.2 million primarily due to an insurance recovery, a
litigation settlement, and an increase in lease cancellation revenue. The
transferred centers' total revenues increased primarily due to the opening of
Tuttle Crossing.
Total operating costs increased $29.0 million, or 12.3%. Recoverable and
depreciation and amortization expenses increased primarily due to the
acquisitions. Other operating expenses increased primarily due to the
acquisitions, offset by a decrease in the charge to operations for costs of
potentially unsuccessful pre-development activities. General and administrative
expense increased by $4.0 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.
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 $0.4 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 $4.6 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 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. The Company's equity in
net income of the Unconsolidated Joint Ventures was $48.8 million, a 0.4%
increase from 1996.
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary item
and minority interest increased by $10.4 million, or 13.7%, to $86.4 million for
1997. In 1996, the Company recognized a $1.3 million extraordinary charge
related to the prepayment of Fairlane's debt. After payment of $4.1 million in
Series A preferred dividends, net income available to common shareowners for
1997 was $24.6 million, compared to $20.3 million in 1996.
29
Liquidity and Capital Resources
On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of the GMPT Exchange (see
Results of Operations -- GMPT Exchange and Related Transactions above).
Consequently, the Company has consolidated the accounts of the Operating
Partnership in the Company's financial statements for the year ended December
31,1998. For prior periods, the Company accounted for its investment in the
Operating Partnership under the equity method. In the following discussion,
references to beneficial interest represent the Operating Partnership's share of
the results of its consolidated and unconsolidated businesses. The Company does
not have, and has not had, any parent company indebtedness; all debt discussed
represents obligations of the Operating Partnership.
The Company believes that its net cash provided by operating activities,
distributions from the Joint Ventures, the unutilized portion of its credit
facilities, and its ability to access the credit markets, assure adequate
liquidity to conduct its operations in accordance with its dividend and
financing policies.
As of December 31, 1998, the Company had a consolidated cash balance of $19.0
million. Additionally, the Company has a $200 million line of credit. The line
had no borrowings as of December 31, 1998 and expires in September 2001. The
Company also has available an unsecured bank line of credit of up to $40
million. The line had $15.5 million of borrowings as of December 31, 1998 and
expires in August 1999.
Equity Transactions
In April 1998, the Company sold approximately two million shares of its common
stock at $13.1875 per share, before deducting the underwriting commission and
expenses of the offering, under the Company's shelf registration statement. The
Company used the proceeds to acquire an additional equity interest in the
Operating Partnership. The Operating Partnership paid all costs of the offering.
The Operating Partnership used the net proceeds of approximately $25 million for
general partnership purposes.
In October 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its equity shelf registration statement. Dividends are
payable in arrears on or before the last day of each calendar quarter. The
Company used the $200 million proceeds to acquire a Series A Preferred Equity
interest in the Operating Partnership 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. The Operating Partnership used the
net proceeds to pay down floating rate debt.
Debt
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one-month LIBOR plus
1.30% to extinguish approximately $1.1 billion of debt, including substantially
all of the Operating Partnership's public unsecured debt, its outstanding
commercial paper, and borrowings on its existing lines of credit. The remaining
proceeds were used primarily to pay prepayment premiums and transaction costs.
The balance of the first bridge loan of $902 million was assumed by GMPT at
the time of the GMPT Exchange. The second loan had a balance of $340 million at
December 31, 1998 and expires in June 1999. The Company expects to refinance the
balance on the bridge loan prior to the expiration date (see below).
Proceeds from other borrowings in 1998 were used for the $77.7 million
redemption of 6.1 million units of partnership interest in January 1998, and to
fund capital expenditures for the Consolidated Businesses and contributions to
Unconsolidated Joint Ventures for construction costs.
30
At December 31, 1998, the Operating Partnership's debt and its beneficial
interest in the debt of its Consolidated and Unconsolidated Joint Ventures
totaled $1,186.2 million. As shown in the following table, $190.8 million of
this debt was floating rate debt that remained unhedged at December 31, 1998.
Interest rates shown do not include amortization of debt issuance costs and
interest rate hedging costs. These items are reported as interest expense in the
results of operations. In the aggregate, these costs added 0.47% to the
effective rate of interest on beneficial interest in debt at December 31, 1998.
Included in beneficial interest in debt is debt used to fund development and
expansion costs. Beneficial interest in assets on which interest is being
capitalized totaled $223.8 million as of December 31, 1998. Beneficial interest
in capitalized interest was $17.6 million for the year ended December 31, 1998.
Beneficial Interest in Debt
-----------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 12/31/98 Rate Resets 12/31/98
------------ -------- ---- ------ --------
Total beneficial interest in fixed rate debt 408.6 8.01%(1)
Floating rate debt hedged via interest rate caps:
Through May 1999 200.0 6.71 (1) 6.00 Monthly 5.06
Through July 1999 65.0 6.37 7.00 Monthly 5.06
Through December 1999 200.0 6.71 (1) 7.00 Monthly 5.06
Through October 2001 25.0 5.99 8.55 Monthly 5.06
Through January 2002 53.4 6.86 (1) 9.50 Monthly 5.06
Through July 2002 43.4 6.95 6.50 Monthly 5.06
Other floating rate debt 190.8 6.71 (1)
-----
Total beneficial interest in debt 1,186.2 7.14 (1)
=======
(1)Denotes weighted average interest rate.
Certain loan agreements contain various restrictive covenants including
limitations on net worth, minimum debt service and fixed charges coverage
ratios, a maximum payout ratio on distributions, and a minimum debt yield ratio,
the latter being the most restrictive. The Company is in compliance with all of
such covenants.
In February 1999, an application was completed for a secured, ten-year $270
million financing with an all-in rate of approximately 6.9% on The Mall at Short
Hills. The financing is expected to close by the end of the first quarter of
1999 and the proceeds will be used to pay down the bridge loan, which matures on
June 21, 1999. The bridge loan has a balance of $340 million and the Company is
working on refinancing the remaining balance. The Company expects to obtain a
secured financing on an additional center. In addition, there will be
availability under existing lines of credit to repay the remaining balance if
the additional financing is delayed past the end of the second quarter.
Sensitivity Analysis
The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Operating Partnership's beneficial
interest in debt and interest rates in effect at December 31, 1998, a one
percent increase in interest rates would decrease earnings and cash flows by
approximately $5.2 million. A one percent decrease in interest rates would
increase earnings and cash flows by approximately $6.0 million. Based on the
Company's consolidated debt and interest rates in effect at December 31, 1998, a
one percent increase or decrease in interest rates would decrease or increase
the fair value of debt by approximately $7 million.
31
Funds from Operations
A principal factor that the Company considers in determining dividends to
shareowners is Funds from Operations, which is defined as income before
extraordinary and unusual items, real estate depreciation and amortization, and
the allocation to the minority interest in the Operating Partnership, less
preferred dividends.
Funds from Operations does not represent cash flows from operations, as
defined by generally accepted accounting principles, and should not be
considered to be an alternative to net income as an indicator of operating
performance or to cash flows from operations as a measure of liquidity. However,
the National Association of Real Estate Investment Trusts suggests that Funds
from Operations is a useful supplemental measure of operating performance for
REITs.
Reconciliation of Net Income to Funds from Operations
Year Ended
December 31, 1998
------------------------
(in millions of dollars)
Income before extraordinary items and
minority interest (1) 70.4
Restructuring charge 10.7
Depreciation and Amortization (2) 57.4
Share of Unconsolidated Joint Ventures'
depreciation and amortization (3) 20.7
Other income/expenses, net 0.5
Non-real estate depreciation (2.3)
Preferred dividends (16.6)
-----
Funds from Operations 140.8
=====
Funds from Operations allocable to the Company 61.1
=====
(1) Includes gains on peripheral land sales of $6.0 million for the year ended
December 31, 1998.
(2) Includes $2.7 million of mall tenant allowance
amortization.
(3) Includes $1.3 million of mall tenant allowance amortization.
Dividends
The Company pays regular quarterly dividends to its common and Series A
preferred shareowners. Dividends to its common shareowners are at the discretion
of the Board of Directors and depend on the cash available to the Company, its
financial condition, capital and other requirements, and such other factors as
the Board of Directors deems relevant. Preferred dividends on the Series A Stock
accrue regardless of whether earnings, cash availability, or contractual
obligations were to prohibit the current payment of dividends.
On December 10, 1998, the Company declared a quarterly dividend of $0.24 per
common share payable January 20, 1999 to shareowners of record on December 31,
1998. The Board of Directors also declared a quarterly dividend of $0.51875 per
share on the Company's 8.3% Series A Preferred Stock, paid December 31, 1998 to
shareowners of record on December 21, 1998.
32
Common dividends declared totaled $0.945 per common share in 1998, of which
$0.854 represented return of capital and $0.091 represented ordinary income,
compared to dividends declared in 1997 of $0.925 per common share, of which
$0.324 represented return of capital and $0.601 represented ordinary income. The
tax status of total 1999 common dividends declared and to be declared, assuming
continuation of a $0.24 per common share quarterly dividend, is estimated to be
approximately 50% return of capital, and approximately 50% of ordinary income.
Series A preferred dividends declared were $2.075 and $0.50722 per preferred
share in 1998 and 1997, respectively, all of which represented ordinary income.
The tax status of total 1999 dividends to be paid on Series A Preferred Stock is
estimated to be 100% ordinary income. These are forward-looking statements and
certain significant factors could cause the actual results to differ materially,
including: 1) the amount of dividends declared; 2) changes in the Company's
share of anticipated taxable income of the Operating Partnership due to the
actual results of the Operating Partnership; 3) changes in the number of the
Company's outstanding shares; 4) property acquisitions or dispositions; 5)
financing transactions, including refinancing of existing debt; and 6) changes
in the Internal Revenue Code or its application.
The annual determination of the Company's common dividends is based on
anticipated Funds from Operations available after preferred dividends, as well
as financing considerations and other appropriate factors. Further, the Company
has decided that the growth in common dividends will be less than the growth in
Funds from Operations for the immediate future.
Any inability of the Operating Partnership or its Joint Ventures to secure
financing as required to fund maturing debts, capital expenditures and changes
in working capital, including development activities and expansions, may require
the utilization of cash to satisfy such obligations, thereby possibly reducing
distributions to partners of the Operating Partnership and funds available to
the Company for the payment of dividends.
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally
recovered from tenants. Capital spending not recovered from tenants is
summarized in the following tables:
1998
---------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
---------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 27.0 34.5 43.9
New centers 279.3 4.5 214.6
Pre-construction development activities,
net of charge to operations 33.1 33.1
Mall tenant allowances 8.2 7.4 12.3
Corporate office improvements and 3.4 3.4
equipment
Other 0.3 2.2 1.3
----- ----- -----
Total 351.3 48.6 308.6
===== ===== =====
(1)Costs are net of intercompany profits.
(2)Includes the Operating Partnership's share of construction costs for Great
Lakes Crossing (an 80% owned consolidated joint venture), MacArthur Center (a
70% owned consolidated joint venture), The Mall at Wellington Green (a 90%
owned consolidated joint venture), and International Plaza (a 50.1% owned
consolidated joint venture).
33
1997
---------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
---------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 12.1 52.8 46.5
New centers 110.8 134.3 140.7
Pre-construction developm