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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 2002
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
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(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
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(Address of principal executive offices) (Zip Code)
(248) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No .
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As of August 9, 2002, there were outstanding 51,148,135 shares of the Company's common stock, par value
$0.01 per share.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following consolidated financial statements of Taubman Centers, Inc. (the Company) are provided pursuant to
the requirements of this item.
Consolidated Balance Sheet as of June 30, 2002 and December 31, 2001...................................... 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
June 30, 2002 and 2001................................................................................. 3
Consolidated Statement of Operations and Comprehensive Income for the six months ended
June 30, 2002 and 2001................................................................................. 4
Consolidated Statement of Cash Flows for the six months ended June 30, 2002 and 2001 ..................... 5
Notes to Consolidated Financial Statements................................................................ 6
1
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
June 30 December 31
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2002 2001
---- ----
Assets:
Properties $ 2,156,166 $ 2,194,717
Accumulated depreciation and amortization (359,048) (337,567)
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$ 1,797,118 $ 1,857,150
Investment in Unconsolidated Joint Ventures (Note 6) 170,357 148,801
Cash and cash equivalents 72,658 27,789
Accounts and notes receivable, less allowance
for doubtful accounts of $5,729 and $5,345 in
2002 and 2001 28,709 35,734
Accounts and notes receivable from related parties 13,326 20,645
Deferred charges and other assets 42,705 51,320
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$ 2,124,873 $ 2,141,439
============= =============
Liabilities:
Notes payable $ 1,465,530 $ 1,423,241
Accounts payable and accrued liabilities 145,655 181,912
Dividends and distributions payable 19,435 12,937
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$ 1,630,620 $ 1,618,090
Commitments and Contingencies (Note 9)
Preferred Equity of TRG (Note 1) $ 97,275 $ 97,275
Partners' Equity of TRG allocable to minority partners (Note 1)
Shareowners' Equity:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 8,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
June 30, 2002 and December 31, 2001 $ 80 $ 80
Series B Non-Participating Convertible Preferred Stock,
$0.001 par and liquidation value, 40,000,000 shares
authorized and 31,767,066 shares issued and
outstanding at June 30, 2002 and December 31, 2001 32 32
Series C Cumulative Redeemable Preferred Stock,
$0.01 par value, 2,000,000 shares authorized, $75 million
liquidation preference, none issued
Series D Cumulative Redeemable Preferred Stock,
$0.01 par value, 250,000 shares authorized, $25 million
liquidation preference, none issued
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 51,121,140 and 50,734,984 issued and
outstanding at June 30, 2002 and December 31, 2001 511 507
Additional paid-in capital 678,562 673,043
Accumulated other comprehensive income (Note 2) (9,102) (3,119)
Dividends in excess of net income (273,105) (244,469)
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$ 396,978 $ 426,074
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$ 2,124,873 $ 2,141,439
============= =============
See notes to consolidated financial statements.
2
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Three Months Ended June 30
--------------------------
2002 2001
---- ----
Income:
Minimum rents $ 46,739 $ 38,178
Percentage rents 629 881
Expense recoveries 29,621 25,049
Revenues from management, leasing and
development services 5,735 6,086
Other 7,347 9,571
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$ 90,071 $ 79,765
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Operating Expenses:
Recoverable expenses $ 25,905 $ 21,604
Other operating 6,351 9,105
Charge related to technology investments (Note 5) 8,125
Management, leasing and development services 5,151 5,089
General and administrative 5,445 4,862
Interest expense 20,764 14,981
Depreciation and amortization 20,218 14,460
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$ 91,959 $ 70,101
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Income (loss) before equity in income of Unconsolidated
Joint Ventures, discontinued operations, and minority
and preferred interests $ (1,888) $ 9,664
Equity in income of Unconsolidated Joint Ventures (Note 6) 4,740 5,215
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Income before discontinued operations and minority and
preferred interests $ 2,852 $ 14,879
Discontinued operations (Note 3):
Income from operations 979 844
Gain on disposition of interest in center 9,975
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Income before minority and preferred interests $ 13,806 $ 15,723
Minority interest in consolidated joint ventures 435 181
Minority interest in TRG:
TRG income allocable to minority partners (4,997) (4,406)
Distributions in excess of earnings allocable to minority partners (3,148) (3,488)
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
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Net income $ 3,846 $ 5,760
Series A preferred dividends (4,150) (4,150)
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Net income (loss) allocable to common shareowners $ (304) $ 1,610
============= =============
Net income $ 3,846 $ 5,760
Other comprehensive income (loss) (Note 2):
Unrealized gain (loss) on interest rate instruments (6,508) 2,683
Reclassification adjustment for amounts recognized in net income 176 106
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Comprehensive income (loss) $ (2,486) $ 8,549
============= =============
Basic income (loss) per common share (Note 10):
Income (loss) from continuing operations $ (0.11) $ 0.02
============== =============
Net income (loss) $ (0.01) $ 0.03
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Diluted income (loss) per common share (Note 10):
Income (loss) from continuing operations $ (0.11) $ 0.02
============== =============
Net income (loss) $ (0.01) $ 0.03
============== =============
Cash dividends declared per common share $ .255 $ .25
============= =============
Weighted average number of common shares outstanding 51,076,901 50,181,946
============= =============
See notes to consolidated financial statements.
3
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Six Months Ended June 30
------------------------
2002 2001
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Income:
Minimum rents $ 93,489 $ 76,691
Percentage rents 1,694 1,918
Expense recoveries 57,396 48,138
Revenues from management, leasing and
development services 10,863 12,457
Other 13,251 15,507
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$ 176,693 $ 154,756
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Operating Expenses:
Recoverable expenses $ 49,291 $ 41,078
Other operating 16,307 16,100
Charge related to technology investments (Note 5) 8,125
Management, leasing and development services 10,044 9,430
General and administrative 10,365 9,617
Interest expense 41,393 30,180
Depreciation and amortization 40,921 31,037
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$ 176,446 $ 137,442
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Income before equity in income of Unconsolidated
Joint Ventures, discontinued operations, cumulative effect of
change in accounting principle and minority and preferred interests $ 247 $ 17,314
Equity in income before cumulative effect of change in
accounting principle of Unconsolidated Joint Ventures (Note 6) 10,877 10,071
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Income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests $ 11,124 $ 27,385
Discontinued operations (Note 3):
Income from operations 2,723 2,074
Gain on disposition of interests in centers 12,024
Cumulative effect of change in accounting principle (Note 2) (8,404)
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Income before minority and preferred interests $ 25,871 $ 21,055
Minority interest in consolidated joint ventures 646 598
Minority interest in TRG:
TRG income allocable to minority partners (9,537) (4,889)
Distributions in excess of earnings allocable to minority partners (6,768) (11,003)
TRG Series C and D preferred distributions (Note 1) (4,500) (4,500)
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Net income $ 5,712 $ 1,261
Series A preferred dividends (8,300) (8,300)
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Net loss allocable to common shareowners $ (2,588) $ (7,039)
============= =============
Net income $ 5,712 $ 1,261
Other comprehensive income (loss) (Note 2):
Cumulative effect of change in accounting principle (779)
Unrealized gain (loss) on interest rate instruments (6,335) 1,594
Reclassification adjustment for amounts recognized in net income 352 205
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Comprehensive income (loss) $ (271) $ 2,281
============= =============
Basic loss per common share (Note 10):
Loss from continuing operations $ (0.17) $ (0.07)
============= =============
Net loss $ (0.05) $ (0.14)
============= =============
Diluted loss per common share (Note 10):
Loss from continuing operations $ (0.17) $ (0.07)
============= =============
Net loss $ (0.06) $ (0.14)
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Cash dividends declared per common share $ .51 $ .50
============= =============
Weighted average number of common shares outstanding 50,980,530 50,291,596
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See notes to consolidated financial statements.
4
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30
-------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Income before minority and preferred interests $ 25,871 $ 21,055
Adjustments to reconcile income before
minority and preferred interests to net cash
provided by operating activities:
Depreciation and amortization of continuing operations 40,921 31,037
Depreciation and amortization of discontinued operations 461 1,436
Charge related to technology investments 8,125
Provision for losses on accounts receivable 1,768 1,208
Gains on sales of land (4,246) (2,750)
Gain on disposition of interests in centers (12,024)
Cumulative effect of change in accounting principle 8,404
Other 2,026 1,380
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets 2,702 (164)
Accounts payable and other liabilities (9,800) (12,245)
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Net Cash Provided By Operating Activities $ 55,804 $ 49,361
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Cash Flows from Investing Activities:
Additions to properties $ (62,410) $ (112,575)
Proceeds from sales of land 6,070 3,490
Investment in technology businesses (4,090) (2,890)
Net proceeds from dispositions of interests in centers 76,446
Acquisition of interests in Unconsolidated Joint Ventures (45,203)
Contributions to Unconsolidated Joint Ventures (28,679)
Distributions from Unconsolidated Joint Ventures
in excess of income before cumulative effect of change
in accounting principle 20,103 8,182
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Net Cash Used in Investing Activities $ (9,084) $ (132,472)
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Cash Flows from Financing Activities:
Debt proceeds $ 49,065 $ 143,597
Debt payments (6,776) (1,409)
Debt issuance costs (3,210)
Repurchases of common stock (11,159)
Distributions to minority and preferred interests (18,555) (18,142)
Issuance of stock pursuant to Continuing Offer 4,515 8,264
Cash dividends to Series A preferred shareowners (4,150) (4,150)
Cash dividends to common shareowners (25,950) (25,334)
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Net Cash Provided By (Used In) Financing Activities $ (1,851) $ 88,457
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Net Increase in Cash and Cash Equivalents $ 44,869 $ 5,346
Cash and Cash Equivalents at Beginning of Period 27,789 18,842
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Cash and Cash Equivalents at End of Period $ 72,658 $ 24,188
============= =============
See notes to consolidated financial statements.
5
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Statements
Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or REIT, is the managing general
partner of The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG). The Operating
Partnership is an operating subsidiary that engages in the ownership, management, leasing, acquisition,
development, and expansion of regional retail shopping centers and interests therein. The Operating
Partnership's portfolio as of June 30, 2002 included 19 urban and suburban shopping centers in nine states. Two
additional centers are under construction, one in Florida and one in Virginia.
The consolidated financial statements of the Company include all accounts of the Company, the Operating
Partnership and its consolidated subsidiaries, including The Taubman Company LLC (the Manager); all intercompany
balances have been eliminated. Investments in entities not unilaterally controlled by ownership or contractual
obligation (Unconsolidated Joint Ventures) are accounted for under the equity method.
At June 30, 2002, the Operating Partnership's equity included three classes of preferred equity (Series A, C,
and D) and the net equity of the partnership unitholders. Net income and distributions of the Operating
Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and
limited partners in the Operating Partnership in accordance with their percentage ownership. The Series A
Preferred Equity is owned by the Company and is eliminated in consolidation. The Series C and Series D Preferred
Equity are owned by institutional investors and have a fixed 9% coupon rate, no stated maturity, sinking fund, or
mandatory redemption requirements.
Because the net equity of the partnership unitholders is less than zero, the interest of the noncontrolling
unitholders is presented as a zero balance in the balance sheet as of June 30, 2002 and December 31, 2001. The
income allocated to the noncontrolling unitholders is equal to their share of distributions. The net equity of
the Operating Partnership is less than zero because of accumulated distributions in excess of net income and not
as a result of operating losses. Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization.
The Company's ownership in the Operating Partnership at June 30, 2002 consisted of a 61.8% managing general
partnership interest, as well as the Series A Preferred Equity interest. The Company's average ownership
percentage in the Operating Partnership for the three months ended June 30, 2002 and 2001 was 61.8% and 61.4%,
respectively. During the six months ended June 30, 2002, the Company's ownership in the Operating Partnership
increased to 61.8% due to additional interests acquired in connection with the Continuing Offer (Note 9). At
June 30, 2002, the Operating Partnership had 82,888,206 units of partnership interest outstanding, of which the
Company owned 51,121,140. Included in the total units outstanding are 174,058 units issued in connection with
the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions.
The unaudited interim financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In
the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have been made. The results of interim periods
are not necessarily indicative of the results for a full year.
Certain prior year amounts have been reclassified to conform to 2002 classifications.
6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 - Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to Other Comprehensive
Income (OCI) of $0.8 million. These amounts represented the transition adjustments necessary to mark the
Company's share of interest rate agreements to fair value as of January 1, 2001.
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of net unrealized gains (losses) of $0.8 million and $(0.7) million during the three months ended June 30, 2002
and 2001, and $1.8 million and $(2.5) million during the six months ended June 30, 2002 and 2001, respectively,
due to changes in interest rates and the resulting changes in value of the Company's interest rate agreements.
Of these amounts, the changes in value of the Dolphin swap agreement were approximately $1.0 million and $(0.6)
million during the three months ended June 30, 2002 and 2001, and $2.0 million and $(2.1) million during the six
months ended June 30, 2002 and 2001. The remainders represent the changes in time value of other instruments.
In June 2002, the Company entered into swap agreements designated to hedge the Wellington Green construction
facility. Under the swaps, the LIBOR rate is swapped to a fixed rate of 2.5% from October 2002 through September
2003, 4.35% from October 2003 through September 2004, and 5.25% from October 2004 through April 2005 on a
notional amount of $100 million.
In May 2002, the Company entered into an agreement to swap LIBOR to a fixed rate of 4.125% on a notional
amount of $100 million designated to hedge the Willow Bend construction facility. The term of the agreement is
November 2002 through June 2004.
In March 2002, the Company entered into an agreement to swap LIBOR to a fixed rate of 4.3% on a notional
amount of $100 million designated to hedge the Company's $275 million line of credit. This one-year swap begins
in November 2002.
As of June 30, 2002, the Company has $9.1 million of net derivative losses included in Accumulated OCI as
follows:
Hedged Items OCI Amounts
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(in thousands)
2001 Regency Square financing $ 2,618
Dolphin construction facility 149
$275 million line of credit 1,455
The Shops at Willow Bend construction facility 1,124
Westfarms refinancing 3,756
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$ 9,102
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the swap designated to hedge the $275
million line of credit will be recognized as an adjustment to interest expense over the one-year effective
period of the swap agreement, beginning November 2002. Gains or losses on the swap designated to hedge The Shops
at Willow Bend construction facility will be recognized as adjustments to interest expense over the term of the
swap agreement, November 2002 through June 2004. A realized loss on the derivative used to hedge the refinancing
of the Westfarms loan (Note 12 - Subsequent Events) will be recognized as a reduction of earnings through its July
2012 maturity date. The Company expects that approximately $3.3 million will be reclassified from Accumulated
OCI and recognized as a reduction of earnings during the next twelve months.
7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Acquisitions and Dispositions
In May 2002, the Operating Partnership acquired for $88 million a 50% general partnership interest in
SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in
Concord, California. The $88 million purchase price consists of $28 million of cash and $60 million of existing
debt that encumbers the property. The Company's interest in the secured debt consists of a $55 million primary
note bearing interest at LIBOR plus 0.92% and a $5 million note bearing interest at LIBOR plus 3.0%. The notes
mature in September 2003 and have two one-year extension options. The center is also subject to a ground lease
that expires in 2061. The Manager has managed the property since its development and will continue to do so.
Although the Operating Partnership purchased its interest in Sunvalley from an unrelated third party, the other
50% partner in the property is an entity owned and controlled by Mr. A. Alfred Taubman, the Company's largest
shareholder.
Also in May 2002, the Company purchased an additional interest in Arizona Mills for approximately $14 million
in cash plus the $19 million share of the debt that encumbers the property. The Company has a 50% interest in the
center as of June 30, 2002.
In March 2002, the Company sold its interest in La Cumbre Plaza for $28 million. In May 2002, the Company
sold its interest in Paseo Nuevo for $48 million. The centers were subject to ground leases and were unencumbered
by debt. The centers were purchased in 1996 for a total of $59 million. The Company's $2.0 million and $10.0
million gains on the sale of La Cumbre Plaza and Paseo Nuevo, respectively, differed from the $6.1 million and
$13.4 million gains recognized by the Operating Partnership due to the Company's $4.1 million and $3.4 million
additional bases in La Cumbre Plaza and Paseo Nuevo.
The Company used the net proceeds from the sales of Paseo Nuevo and La Cumbre Plaza to fund the acquisitions
of Sunvalley and Arizona Mills, and, in July 2002, to pay down borrowings under the Company's lines of credit.
Note 4 - Tax Elections
The Company's Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in
the Company's financial statements. The Company's deferred tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a
valuation allowance to the amount where realization is more likely than not assured after considering all
available evidence. The Company's temporary differences primarily relate to deferred compensation and
depreciation. During the six months ended June 30, 2002, the Company's federal income tax expense was zero as a
result of a net operating loss incurred by its Taxable REIT Subsidiaries. As of June 30, 2002, the Company had a
net deferred tax asset of $4.4 million, after a valuation allowance of $7.9 million.
8
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company originally created to
provide internet and network infrastructure to shopping centers and retailers. During the six months ended June
30, 2002 and 2001, the Company recognized its $1.8 million and $0.7 million share of MerchantWired's operating
losses, respectively. In May 2002, the Company invested an additional $4.1 million to satisfy the Company's
guarantees of MerchantWired's obligations as required under a proposed sale of MerchantWired. In June 2002,
since the anticipated sale failed to close, MerchantWired's board of directors voted to cease operations
effective September 2002. As a result, the Company recorded a charge in the second quarter of 2002 to write-off
its remaining $5.8 million balance of its MerchantWired investment.
The Company has an investment in Fashionmall.com, Inc., an e-commerce company originally organized to market,
promote, advertise, and sell fashion apparel and related accessories and products over the internet. In 2001,
Fashionmall.com significantly scaled back its operations in response to decreasing revenues and e-commerce
development opportunities, leading its management to conclude that it should seek alternative uses of its
significant cash resources. In light of such developments, the Company agreed to convert its preferred stock
investment into 824,084 common shares in return for a commitment from Fashionmall's CEO and majority shareholder
that on or before December 31, 2002, Fashionmall will either consummate a transaction resulting in a value to its
stockholders in excess of the value deliverable to the stockholders upon its liquidation, consummate a plan of
liquidation, or consummate any other transaction that is reasonably acceptable to the Company and the majority
shareholder. Based upon the $3.92 trading price of the stock on the day the preferred investment was exchanged
for common shares, the Company recognized a $2.3 million loss on its investment during the second quarter. After
this charge, the Company's investment was $3.2 million at June 30, 2002. The $3.92 trading price reflected the
$3.75 per share dividend declared by Fashionmall.com, which was paid in August 2002. The receipt of this $3.1
million dividend has reduced the Company's investment to $0.1 million. In future periods, the Company will mark
this remaining investment in Fashionmall.com to market value.
9
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in Unconsolidated Joint Ventures. The Operating Partnership is the
managing general partner or managing member in these Unconsolidated Joint Ventures, except for those denoted with
an (*).
Ownership as of
Unconsolidated Joint Venture Shopping Center June 30, 2002
------------------------------ ---------------- ---------------
Arizona Mills, L.L.C. * Arizona Mills 50%
Dolphin Mall Associates Dolphin Mall 50
Limited Partnership
Fairfax Company of Virginia, L.L.C. Fair Oaks 50
Forbes Taubman Orlando, L.L.C. * The Mall at Millenia 50
(under construction)
Rich-Taubman Associates Stamford Town Center 50
SunValley Associates Sunvalley 50
Tampa Westshore Associates International Plaza 26
Limited Partnership
Taubman-Cherry Creek Cherry Creek 50
Limited Partnership
West Farms Associates Westfarms 79
Woodland Woodland 50
In September 2001, International Plaza, a 1.3 million square foot center, opened in Tampa, Florida. As of
June 30, 2002, the Operating Partnership has a preferred investment in International Plaza of $18 million, on
which an annual preferential return of 8.25% will accrue. In addition to the preferred return on its investment,
the Operating Partnership will receive a return of its preferred investment before any available cash will be
utilized for distributions to non-preferred partners.
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida. As
of June 30, 2002, the Operating Partnership has a preferred investment in Dolphin Mall of $26 million. The joint
venture partner in Dolphin Mall has exercised the buy/sell provision in the joint venture's partnership
agreement. The Company responded to the offer indicating its intent to be a purchaser rather than a seller,
although the transaction has significant contingencies, including reaching agreement with the banking group.
Assuming this transaction occurs as anticipated during the third quarter of 2002, it would result in the Company
acquiring the additional interest in Dolphin for approximately the joint venture partner's share of the
partnership debt and other obligations. The Company expects that its total investment in Dolphin Mall, at that
point, will be approximately $268 million.
The Company is currently developing The Mall at Millenia in Orlando, Florida. This 1.2 million square foot
center will open in October 2002.
In May 2002, the Company acquired an additional 13% interest in Arizona Mills and a 50% interest in Sunvalley
(Note 3).
The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the
deficiency in assets reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the
Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures
and (ii) the Operating Partnership's adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to
depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership's differences
in bases are amortized over the useful lives of the related assets.
10
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information are presented in the following table (in
thousands) for all Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in
the combined information. TRG's basis adjustments as of June 30, 2002 include $73 million and $11 million related
to the acquisitions of interests in Sunvalley and Arizona Mills (Note 3), respectively, representing the
differences between the acquisition prices and the book values of the ownership interests acquired. These
amounts will be depreciated over the remaining useful lives of the underlying assets. Beneficial interest is
calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.
June 30 December 31
------- -----------
2002 2001
---- ----
Assets:
Properties $ 1,528,235 $ 1,367,082
Accumulated depreciation and amortization (279,064) (220,201)
------------- -------------
$ 1,249,171 $ 1,146,881
Cash and cash equivalents 28,946 30,664
Accounts and notes receivable 15,927 20,302
Deferred charges and other assets 29,505 29,290
------------- -------------
$ 1,323,549 $ 1,227,137
============= =============
Liabilities and partnership equity:
Notes payable $ 1,345,251 $ 1,154,141
Other liabilities 133,872 109,247
TRG's partnership equity (accumulated deficiency in assets) (60,749) 903
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (94,825) (37,154)
------------- -------------
$ 1,323,549 $ 1,227,137
============= =============
TRG's partnership equity (accumulated deficiency in
assets) (above) $ (60,749) $ 903
TRG basis adjustments, including elimination of intercompany
profit 107,339 22,612
TCO's additional basis 123,767 125,286
------------- -------------
Investment in Unconsolidated Joint Ventures $ 170,357 $ 148,801
============= =============
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 69,202 $ 54,375 $ 133,887 $ 108,430
----------- ----------- ----------- -----------
Recoverable and other operating expenses $ 27,754 $ 19,946 $ 50,155 $ 38,406
Interest expense 19,550 17,570 37,732 36,160
Depreciation and amortization 12,990 8,595 26,941 17,727
----------- ----------- ----------- -----------
Total operating costs $ 60,294 $ 46,111 $ 114,828 $ 92,293
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 8,908 $ 8,264 $ 19,059 $ 16,137
Cumulative effect of change in accounting
principle 3,304
----------- ----------- ----------- -----------
Net income $ 8,908 $ 8,264 $ 19,059 $ 12,833
=========== =========== =========== ===========
Net income allocable to TRG $ 5,049 $ 4,496 $ 10,636 $ 6,890
Cumulative effect of change in accounting
principle allocable to TRG 1,612
Realized intercompany profit 450 1,478 1,759 3,087
Depreciation of TCO's additional basis (759) (759) (1,518) (1,518)
----------- ----------- ----------- -----------
Equity in income before cumulative effect of
change in accounting principle of
Unconsolidated Joint Ventures $ 4,740 $ 5,215 $ 10,877 $ 10,071
=========== =========== =========== ===========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 22,193 $ 19,653 $ 46,875 $ 39,705
Interest expense (9,771) (9,243) (18,794) (19,059)
Depreciation and amortization (7,682) (5,195) (17,204) (10,575)
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 4,740 $ 5,215 $ 10,877 $ 10,071
=========== =========== =========== ===========
11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Beneficial Interest in Debt and Interest Expense
In March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing mortgage to
April 2003.
The Operating Partnership's beneficial interest in the debt, capital lease obligations, capitalized interest,
and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest in consolidated subsidiaries excludes debt and
interest relating to the minority interests in Great Lakes Crossing, MacArthur Center, and The Mall at Wellington
Green.
At 100% At Beneficial Interest
------------------------------- ----------------------------------------------
Unconsolidated Unconsolidated
Consolidated Joint Consolidated Joint
Subsidiaries Ventures Subsidiaries Ventures Total
------------- ----------------- -------------- ----------------- -------------
(in thousands of dollars)
Debt as of:
June 30, 2002 1,465,530 1,345,251 1,386,439 673,969 2,060,408
December 31, 2001 1,423,241 1,154,141 1,345,086 562,811 1,907,897
Capital Lease Obligations:
June 30, 2002 256 -- 218 -- 218
December 31, 2001 304 64 259 40 299
Capitalized Interest:
Six months ended June 30, 2002 2,571 2,033 2,516 1,017 3,533
Six months ended June 30, 2001 16,396 9,662 16,300 3,940 20,240
Interest Expense:
Six months ended June 30, 2002 41,393 37,732 38,916 18,794 57,710
Six months ended June 30, 2001 30,180 36,160 27,597 19,059 46,656
Note 8 - Incentive Option Plan
The Operating Partnership has an incentive option plan for employees of the Manager. Incentive options
generally become exercisable to the extent of one-third of the units on each of the third, fourth, and fifth
anniversaries of the date of grant. Options expire ten years from the date of grant. The Operating Partnership's
units issued in connection with the incentive option plan are exchangeable for shares of the Company's common
stock under the Continuing Offer (Note 9). In December 2001, the Company amended the plan to allow vested unit
options to be exercised by tendering mature units with a market value equal to the exercise price of the unit
options.
In December 2001, the Company's chief executive officer executed a unit option deferral election with regard
to options for approximately three million units at an exercise price of $11.14 per unit due to expire in
November 2002. This election will allow him to defer the receipt of the net units he would receive upon exercise.
These deferred option units will remain in a deferred compensation account until Mr. Taubman's retirement or ten
years from the date of exercise. Beginning with the ten year anniversary of the date of exercise, the deferred
partnership units will be released in ten annual installments. In April 2002, Mr. Taubman exercised options for
1.5 million units by tendering 1.1 million mature units and deferring the receipt of 0.4 million units under the
unit option deferral election. As the Company declares distributions, the deferred option units receive their
proportionate share of the distributions in the form of cash payments.
Excluding the options exercised by Mr. Taubman, there were options for 386,156 units exercised during the six
months ended June 30, 2002 at an average exercise price of $11.69 per unit. During the six months ended June 30,
2001, options for 744,454 units were exercised at a weighted average price of $11.10 per unit. There were no
options granted or cancelled during the six months ended June 30, 2002 and 2001. As of June 30, 2002, there were
vested options for 4.1 million units with a weighted average exercise price of $11.48 per unit and outstanding
options (including unvested options) for a total of 4.2 million units with a weighted average exercise price of
$11.44 per unit.
12
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Currently, options for 5.4 million Operating Partnership units may be issued under the plan, 4.2 million of
which have been issued. When the holder of an option elects to pay the exercise price by surrendering
partnership units, only those units issued to the holder in excess of the number of units surrendered are counted
for purposes of determining the remaining number of units available for future grants under the plan.
For any future option grants, the Company intends to recognize compensation expense based on the fair value
method of FAS 123, "Accounting for Stock-Based Compensation".
Note 9 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of its partnership interest in the
Operating Partnership, the Company entered into an agreement (the Cash Tender Agreement) with A. Alfred Taubman,
who owns an interest in the Operating Partnership, whereby he has the annual right to tender to the Company units
of partnership interest in the Operating Partnership (provided that the aggregate value is at least $50 million)
and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the
Company on the trading date immediately preceding the date of the tender. The Company will have the option to
pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's
common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its
stock. The tendering partner will bear all market risk if the market price at closing is less than the purchase
price and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for
the sole benefit of the Company. At A. Alfred Taubman's election, his family and certain others may participate
in tenders.
Based on a market value at June 30, 2002 of $15.25 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $376 million. The
purchase of these interests at June 30, 2002 would have resulted in the Company owning an additional 30% interest
in the Operating Partnership.
The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded
holders, including A. Alfred Taubman), assignees of all present holders, those future holders of partnership
interests in the Operating Partnership as the Company may, in its sole discretion, agree to include in the
continuing offer, and all existing and future optionees under the Operating Partnership's incentive option plan
to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer).
Under the Continuing Offer agreement, one unit of partnership interest is exchangeable for one share of the
Company's common stock.
In April 2001, the Operating Partnership's $10 million investment in Swerdlow Real Estate Group, Inc.
(Swerdlow) was converted into a loan which bore interest at 12% and matured in December 2001. This loan is
currently delinquent. All interest due through the December maturity date was received. The Company has filed a
lawsuit seeking to recover the principal amount and all accrued and unpaid interest under the note due
from Swerdlow. Swerdlow has filed its answer which seeks a recision of the note and the return of
all amounts paid under or in connection with the note, which total approximately $2.5 million paid to the Company
through December 31, 2001. In the event the note was rescinded, the Company's original investment in Swerdlow
would be restored. While the Company believes that it will ultimately prevail in collecting all amounts due and
owing under the note, the lawsuit is in its preliminary stages and no predictions can be made as to the outcome
of the lawsuit.
In addition, the Company is currently involved in certain litigation arising in the ordinary course of
business. Management believes that this litigation will not have a material adverse effect on the Company's
financial statements.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
13
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/02 as of 6/30/02 as of 6/30/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 183.0 91.5 91.5 50% 100%
Great Lakes Crossing 149.7 127.2 149.7 100% 100%
International Plaza 187.1 49.6 93.6 50% (1) 50% (1)
The Mall at Millenia 92.1 46.1 23.0 25% 25%
The Mall at Wellington Green 137.7 123.9 137.7 100% 100%
The Shops at Willow Bend 197.8 197.8 197.8 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent of
25% of the amounts guaranteed.
The Company currently anticipates that a partial prepayment of principal will be necessary to extend the
October 2002 maturity date on the Dolphin Mall construction loan.
The Company has a $0.5 million investment in Constellation Real Technologies LLC (Constellation), a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The
Company has a capital commitment for approximately $0.8 million in funding for Constellation although
any additional contributions would be restricted to a maximum of $0.2 million in 2002 and $0.3 million in 2003.
Note 10 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available to common shareowners by the
average number of common shares outstanding during each period. For diluted earnings per common share, the
Company's ownership interest in the Operating Partnership (and therefore earnings) are adjusted assuming the
exercise of all options for units of partnership interest under the Operating Partnership's incentive option plan
having exercise prices less than the average market value of the units using the treasury stock method. Diluted
earnings per share of future periods also reflect the net units deferred under the unit option deferral election
(Note 8). For the three and six months ended June 30, 2001, options for 0.3 million and 1.1 million units of
partnership interest with average exercise prices of $13.56 per unit and $13.00 per unit, respectively, were
excluded from the computations of diluted earnings per unit because the exercise prices were greater than the
average market prices for the periods calculated. There were no options excluded from the computation of diluted
earnings per unit for the three or six months ended June 30, 2002.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except share data)
Income (loss) from continuing operations allocable to
common shareowners (Numerator):
Net income (loss) allocable to common shareowners $ (304) $ 1,610 $ (2,588) $ (7,039)
Common shareowners' share of discontinued operations (5,477) (518) (6,252) (1,274)
Common shareowners' share of cumulative effect
of change in accounting principle 4,924
----------- ----------- ---------- ------------
Basic income (loss) from continuing operations $ (5,781) $ 1,092 $ (8,840) $ (3,389)
Effect of dilutive options (86) (42) (114)
----------- ----------- ---------- ------------
Diluted income (loss) from continuing operations $ (5,781) $ 1,006 $ (8,882) $ (3,503)
=========== =========== ========== ============
Shares (Denominator) - basic and diluted 51,076,901 50,181,946 50,980,530 50,291,596
=========== =========== ========== ============
Income (loss) from continuing operations per common
share - basic and diluted $ (.11) $ .02 $ (.17) $ (.07)
=========== =========== ========== =============
Per share effects of discontinued operations and
cumulative effect of change in accounting principle:
Discontinued operations per common share-basic $ .11 $ .01 $ .12 $ .03
=========== =========== ========== ============
Discontinued operations per common share-diluted $ .10 $ .01 $ .12 $ .02
=========== =========== ========== ============
Cumulative effect of change in accounting
principle per common share - basic and diluted $ (.10)
============
14
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11 - Cash Flow Disclosures and Noncash Investing and Financing Activities
Interest on mortgage notes and other loans paid during the six months ended June 30, 2002 and 2001, net of
amounts capitalized of $2.6 million and $16.4 million, was $38.2 million and $27.9 million, respectively. The
following non-cash investing and financing activities occurred during the six months ended June 30, 2002 and 2001:
Six Months ended June 30
------------------------
2002 2001
---- ----
(in thousands)
Non-cash additions to properties $ 8,473
Partnership units released $ 1,008 878
Non-cash contributions to Unconsolidated Joint Ventures 3,778
Non-cash additions to properties primarily represent accrued construction and tenant allowance costs of new
centers and development projects.
Note 12 - Subsequent Events
In July 2002, the Company closed on a $210 million ten-year mortgage on Westfarms at an all-in rate of 6.4%.
Proceeds were used to pay off the previous $155 million debt on Westfarms. The Operating Partnership used its
$37 million share of distributed excess proceeds to pay down its revolving credit facilities.
In August 2002, Stamford Town Center extended its $76 million loan to August 2004. Also in August, the Company
closed on a $105 million construction loan for Stony Point Fashion Park. This loan bears interest at LIBOR plus
1.85% and has an initial term of three years with two one-year extension options. The Operating Partnership
guarantees 100% of principal and interest on this loan; the amounts guaranteed will be reduced as certain center
performance and valuation criteria are met.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent
the Company's expectations or beliefs concerning future events, including the following: statements regarding
future developments and joint ventures, rents and returns, statements regarding the continuation of trends, and
any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and
financing activities for the Company's future liquidity and capital resource needs. The Company cautions that
although forward-looking statements reflect the Company's good faith beliefs and best judgment based upon current
information, these statements are qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including those risks, uncertainties, and factors
detailed from time to time in reports filed with the SEC, and in particular those set forth under the headings
"General Risks of the Company" and "Environmental Matters" in the Company's Annual Report on Form 10-K. The
following discussion should be read in conjunction with the accompanying Consolidated 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 (the
Operating Partnership or TRG), 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 LLC (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.
During 2001, the Company opened four new shopping centers (Results of Operations - New Center Openings).
During 2002, the Company acquired an interest in Sunvalley and sold its interests in La Cumbre Plaza and Paseo
Nuevo (Results of Operations - Acquisitions and Dispositions). Additional 2002 and 2001 statistics that
exclude the new centers, Sunvalley, La Cumbre Plaza, and Paseo Nuevo are provided to present the performance of
comparable centers in the Company's continuing operations.
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. Additionally, most
percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally
highest in the fourth quarter.
16
The following table summarizes certain quarterly operating data for 2001 and the first and second quarters of
2002.
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2001 2001 2001 2001 2001 2002 2002
------------- -------------- ------------- ------------- -------------- ------------- -------------
thousands)
(in
Mall tenant sales $570,223 $605,945 $617,805 $1,003,894 $2,797,867 $645,317 $669,448
Revenues 132,903 137,964 139,640 169,330 579,837 155,071 159,273
Occupancy:
Average 87.0% 85.5% 84.0% 83.7% 84.9% 83.3% 83.7%
Ending 85.1 85.6 83.0 84.0 84.0 83.3 84.2
Average-comparable (1) 88.2 87.7 87.3 88.3 87.9 87.2 87.4
Ending-comparable (1) 88.5 87.4 87.4 88.6 88.6 86.8 87.9
Leased space:
All centers 90.8 90.0 88.0 87.7 87.7 87.4 87.6
Comparable (1) 92.2 91.6 91.4 91.6 91.6 91.5 91.4
(1) Excludes centers that opened in 2001, La Cumbre Plaza, Paseo Nuevo, and Sunvalley.
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 2001 and the first
and second quarters of 2002:
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2001 2001 2001 2001 2001 2002 2002
------------- ------------ ------------ ------------ ------------ -------------- -----------
Minimum rents 11.2% 10.5% 11.2% 8.3% 10.0% 12.1% 11.9%
Percentage rents 0.3 0.1 0.1 0.4 0.2 0.3 0.0
Expense recoveries 5.0 5.1 4.8 3.6 4.5 5.4 5.7
---- ---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 16.5% 15.7% 16.1% 12.3% 14.7% 17.8% 17.6%
==== ==== ==== ==== ==== ==== ====
Current Operating Trends
In 2001 and into 2002, the regional shopping center industry has been affected by the softening of the
national economic cycle. Economic pressures that affect consumer confidence, job growth, energy costs, and
income gains can affect retail sales growth and impact the Company's ability to lease vacancies and negotiate
rents at advantageous rates. A number of regional and national retailers have announced store closings or filed
for bankruptcy. During the first six months of 2002, 1.1% of the Company's tenants sought the protection of the
bankruptcy laws, compared to 3.4% in the comparable period of 2001. The impact of a soft economy on the Company's
current results of operations can be moderated by lease cancellation income, which tends to increase in
down-cycles of the economy.
In addition to overall economic pressures, the events of September 11 had a negative impact on tenant sales
subsequent to September. Tenant sales per square foot in the second quarter of 2002 decreased by 2.2% compared
to the same period in 2001, an improvement on the 3.8% and 3.9% year-over-year decreases experienced in fourth
quarter 2001 and first quarter 2002, respectively. Negative sales trends directly impact the amount of
percentage rents certain tenants and anchors pay. The effects of declines in sales experienced during 2001 and
2002 on the Company's operations are moderated by the relatively minor share of total rents (approximately three
percent) percentage rents represent. However, if lower levels of sales were to continue, the Company's ability
to lease vacancies and negotiate rents at advantageous rates could be adversely affected.
Occupancy trends showed some improvement in second quarter 2002, in which comparable center average occupancy
declined 0.3% from second quarter 2001, compared to the first quarter 2002 occupancy decline of 1.0%. Based on
the Company's expectations as to the timing of openings and closings of tenants, the Company anticipates
continuing modest improvement in comparable year over year average occupancy through the end of the year.
17
The tragic events of September 11 have also had an impact on the Company's insurance coverage. The Company had
coverage for terrorist acts in its policies that expired in April 2002. However, such coverage was excluded from
its standard property policies at renewal. The Company has obtained a separate policy although with lower limits
than the prior coverage for terrorist acts, see "Liquidity and Capital Resources-Covenants and Commitments".
The Company's premiums, including the cost of a separate terrorist policy, have increased by over 100% for
property coverage and over 25% for liability coverage. These increases will impact the Company's annual common
area maintenance rates paid by the Company's tenants by about 55 cents per square foot. Total occupancy costs
paid by tenants signing leases in the Company's traditional centers are on average about $70 per square foot.
Rental Rates
Annualized average base rent per square foot for all mall tenants at the Company's 14 comparable centers was
$41.96 for the three months ended June 30, 2002, compared to $41.12 for the three months ended June 30, 2001. 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 periods 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, such as the Company is currently
experiencing, rents on new leases will grow more slowly or may 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.
Average base rent per square foot on 259 thousand square feet of tenant space opened in the Company's 14
comparable centers was $43.59 for the three months ended June 30, 2002, compared to average base rent per square
foot of $39.30 on 183 thousand square feet of tenant space that closed during the same period, reflecting a
spread of $4.29 per square foot between the opening and closing average rent. This spread may not be indicative
of future periods, as this statistic can vary significantly from quarter to quarter depending on the total
amount, location, and average size of tenant space opening and closing in the period.
Generally, the annual rent spread between opening and closing stores has been in the Company's historic range
of $5.00 to $10.00 per square foot. This statistic is difficult to predict in part because the Company's leasing
policies and practices may result in early lease terminations with actual average closing rents per square foot
which may vary from the average rent per square foot of scheduled lease expirations.
Results of Operations
New Center Openings
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida.
Dolphin Mall is a 50% owned Unconsolidated Joint Venture and is accounted for under the equity method. As of
June 30, 2002, the Operating Partnership has a preferred investment in Dolphin Mall of $26 million. The joint
venture partner in Dolphin Mall has exercised the buy/sell provision in the joint venture's partnership
agreement. The Company responded to the offer indicating its intent to be a purchaser rather than a seller,
although the transaction has significant contingencies, including reaching agreement with the banking group.
Assuming this transaction occurs as anticipated during the third quarter of 2002, it would result in the Company
acquiring the additional interest in Dolphin for approximately the joint venture partner's share of the
partnership debt and other obligations. The Company expects that its total investment in Dolphin Mall, at that
point, will be approximately $268 million.
Dolphin Mall is subject to annual special tax assessments by a local community development district (CDD) for
certain infrastructure improvements on the property. In the first quarter of 2002, the CDD refinanced its
outstanding bonds to extend the term from 20 years to 30 years and to reduce the interest rate. In addition, the
first annual assessment begins in 2002 rather than in 2001, resulting in a reversal of $2.8 million previously
expensed. The annual assessments will be based on allocations of the cost of the infrastructure between the
properties that benefit. Presently, the total allocation of cost to Dolphin Mall is estimated to be approximately
$65.3 million with a first annual assessment of approximately $3.0 million. A portion of these assessments is
expected to be recovered from tenants.
The Shops at Willow Bend, a wholly owned 1.5 million square foot regional center, opened August 3, 2001 in
Plano, Texas.
18
International Plaza, a 1.25 million square foot regional center, opened September 14, 2001 in Tampa,
Florida. The Company has an approximately 26% ownership interest in the center and accounts for it under the
equity method. The Operating Partnership is entitled to a preferred return on approximately $18 million of
equity contributions as of June 2002, which were used to fund construction costs.
The Mall at Wellington Green, a 1.3 million square foot regional center, opened October 5, 2001 in Wellington,
Florida. The center is owned by a joint venture in which the Operating Partnership has a 90% controlling
interest.
The return for the three traditional centers is expected to be approximately 8% in 2002. The performance of
Dolphin Mall continues to be adversely affected by slower than expected lease up, rental concessions and lower
than expected expense recoveries. The Company expects the 2002 return on Dolphin Mall to be approximately 4.5%
on its investment including the additional interest that the Company anticipates acquiring in the
third quarter of 2002. However, considering the opportunities for growth, the Company anticipates that the returns
on Dolphin Mall will double over the next three to five years. Estimates regarding returns are forward-looking
statements and certain significant factors could cause the actual results to differ materially, including but not
limited to: 1) actual results of negotiations with tenants, 2) timing of tenant openings, and 3) early lease
terminations and bankruptcies.
Acquisitions and Dispositions
In May 2002, the Operating Partnership acquired for $88 million a 50% general partnership interest in
SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in
Concord, California. The $88 million purchase price consisted of $28 million of cash and $60 million of existing
debt that encumbers the property. The Company's interest in the secured debt consisted of a $55 million primary
note bearing interest at LIBOR plus 0.92% and a $5 million note bearing interest at LIBOR plus 3.0%. The notes
mature in September 2003 and have two one-year extension options. The center is also subject to a ground lease
that expires in 2061. The Manager has managed the property since its development and is continuing to do so after
the acquisition. Although the Operating Partnership purchased its interest in Sunvalley from an unrelated third
party, the other 50% partner in the property is an entity owned and controlled by Mr. A. Alfred Taubman, the
Company's largest shareholder.
In May 2002, the Company purchased an additional interest in Arizona Mills for approximately $14 million in
cash plus the $19 million share of the debt that encumbers the property. The Company has a 50% interest in the
center as of June 30, 2002.
In March 2002, the Company sold its interest in La Cumbre Plaza for $28 million. In May 2002, the Company
sold its interest in Paseo Nuevo for $48 million. The centers were subject to ground leases and are unencumbered
by debt. The centers were purchased in 1996 for a total of $59 million. The Company's $2.0 million and $10.0
million gains on the sale of La Cumbre Plaza and Paseo Nuevo, respectively, differed from the $6.1 million and
$13.4 million gains recognized by the Operating Partnership due to the Company's $4.1 million and $3.4 million
additional bases in La Cumbre Plaza and Paseo Nuevo.
The Company used the net proceeds from the sales of Paseo Nuevo and La Cumbre Plaza to fund the acquisitions
of Sunvalley and Arizona Mills, and, in July 2002, to pay down borrowings under the Company's lines of credit.
The Company expects that these transactions will have a slightly accretive effect on Funds from Operations in
2002. This is a forward-looking statement and certain significant factors could cause the actual effect to
differ materially, including the actual operations of the centers.
Note Receivable
In April 2001, the Operating Partnership's $10 million investment in Swerdlow Real Estate Group, Inc.
(Swerdlow) was converted into a loan which bore interest at 12% and matured in December 2001. This loan is
currently delinquent. All interest due through the December maturity date was received. The Company has filed a
lawsuit seeking to recover the principal amount and all accrued and unpaid interest under the note. Swerdlow has
filed its answer which seeks a recision of the note and the return of all amounts paid under or in
connection with the note, which total approximately $2.5 million paid to the Company through December 31, 2001.
In the event the note was rescinded, the Company' original investment in Swerdlow would be restored. While the
Company believes that it will ultimately prevail in collecting all amounts due and owing under the note, the
lawsuit is in its preliminary stages and no predictions can be made as to the outcome of the lawsuit. An
affiliate of Swerdlow is a partner in the Dolphin Mall joint venture.
19
Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company originally created to
provide internet and network infrastructure to shopping centers and retailers. During the six months ended June
30, 2002 and 2001, the Company recognized its $1.8 million and $0.7 million share of MerchantWired's operating
losses, respectively. In May 2002, the Company invested an additional $4.1 million to satisfy the Company's
guarantees of MerchantWired's obligations as required under a proposed sale of MerchantWired. In June 2002,
since the anticipated sale failed to close, MerchantWired's board of directors voted to cease operations
effective September 2002. As a result, the Company recorded a charge in the second quarter of 2002 to write-off
its remaining $5.8 million balance of its MerchantWired investment.
The Company has an investment in Fashionmall.com, Inc., an e-commerce company originally organized to market,
promote, advertise, and sell fashion apparel and related accessories and products over the internet. In 2001,
Fashionmall.com significantly scaled back its operations in response to decreasing revenues and e-commerce
development opportunities, leading its management to conclude that it should seek alternative uses of its
significant cash resources. In light of such developments, the Company agreed to convert its preferred stock
investment into 824,084 common shares in return for a commitment from Fashionmall's CEO and majority shareholder
that on or before December 31, 2002, Fashionmall will either consummate a transaction resulting in a value to its
stockholders in excess of the value deliverable to the stockholders upon its liquidation, consummate a plan of
liquidation, or consummate any other transaction that is reasonably acceptable to the Company and the majority
shareholder. Based upon the $3.92 trading price of the stock on the day the preferred investment was exchanged
for common shares, the Company recognized a $2.3 million loss on its investment during the second quarter. After
this charge, the Company's investment was $3.2 million at June 30, 2002. The $3.92 trading price reflected the
$3.75 per share dividend declared by Fashionmall.com, which was paid in August 2002. The receipt of this $3.1
million dividend has reduced the Company's investment to $0.1 million. In future periods, the Company will mark
this remaining investment in Fashionmall.com to market value.
The Company has a $0.5 million investment in Constellation Real Technologies LLC (Constellation), a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The
Company has also made an additional capital commitment of $0.8 million to Constellation, although any additional
contributions would be restricted to a maximum of $0.2 million in 2002 and $0.3 million in 2003.
Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million.
These amounts represented the transition adjustments necessary to mark the Company's share of interest rate
agreements to fair value as of January 1, 2001.
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of net unrealized gains (losses) of $0.8 million and $(0.7) million during the three months ended June 30, 2002
and 2001, and $1.8 million and $(2.5) million during the six months ended June 30, 2002 and 2001, respectively,
due to changes in interest rates and the resulting changes in value of the Company's interest rate agreements.
Of these amounts, the changes in value of the Dolphin swap agreement were approximately $1.0 million and $(0.6)
million during the three months ended June 30, 2002 and 2001, and $2.0 million and $(2.1) million during the six
months ended June 30, 2002 and 2001. The remainders represent the changes in time value of other instruments.
20
As of June 30, 2002, the Company has $9.1 million of net derivative losses included in Accumulated OCI, as
follows:
Hedged Items OCI Amounts
------------ -----------
(in thousands)
2001 Regency Square financing $ 2,618
Dolphin Mall construction facility 149
$275 million line of credit 1,455
The Shops at Willow Bend construction facility 1,124
Westfarms refinancing 3,756
---------------
$ 9,102
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the swap designated to hedge the $275
million line of credit will be recognized as an adjustment to interest expense over the one-year effective period
of the swap agreement, beginning November 2002. Gains or losses on the swap designated to hedge The Shops at
Willow Bend construction facility will be recognized as adjustments to interest expense over the term of the swap
agreement, November 2002 through June 2004. A realized loss on the derivative used to hedge the refinancing
of the Westfarms loan (Subsequent Event) will be recognized as a reduction of earnings through the loan's July
2012 maturity date. The Company expects that approximately $3.3 million will be reclassified from Accumulated
OCI and recognized as a reduction of earnings during the next twelve months.
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers'
operations. During the three months ended June 30, 2002, revenues (excluding land sales) less operating costs
(operating and recoverable expenses) of those centers owned and open for the entire period increased
approximately two percent in comparison to the same centers' results in the comparable period of 2001. This
growth was primarily due to increases in minimum rent and expense reductions. The Company expects that comparable
center operations will generally increase annually by an average of two to three percent. This is a
forward-looking statement and certain significant factors could cause the actual results to differ materially;
refer to the General Risks of the Company in the Company's annual report on Form 10-K for the year ended December
31, 2001.
Subsequent Event
In July 2002, the Company closed on a $210 million ten-year mortgage on Westfarms at an all-in rate of 6.4%.
Proceeds were used to pay off the previous $155 million debt on Westfarms. The Operating Partnership used its
$37 million share of distributed excess proceeds to pay down its revolving credit facilities.
Presentation of Operating Results
The following tables contain the combined operating results of the Company's Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the minority partners in the Operating Partnership and
preferred interests is deducted to arrive at the results allocable to the Company's common shareowners. Because
the net equity of the Operating Partnership is less than zero, the income allocated to the minority partners is
equal to their share of distributions. The net equity of these minority partners 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. Losses allocable to minority partners in certain consolidated joint ventures are added back to
arrive at the net results of the Company. The Company's average ownership percentage of the Operating Partnership
was approximately 61.8% and 61.7% during the three and six months ended June 30, 2002, respectively, and 61.4%
during the 2001 periods.
21
Comparison of the Three Months Ended June 30, 2002 to the Three Months Ended June 30, 2001
The following table sets forth operating results for the three months ended June 30, 2002 and June 30, 2001,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended June 30, 2002 Three months ended June 30, 2001
-------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 46.7 45.0 91.7 38.2 34.0 72.2
Percentage rents 0.6 (0.1) 0.5 0.9 0.2 1.1
Expense recoveries 29.6 22.3 51.9 25.0 16.5 41.5
Management, leasing and development 5.7 5.7 6.1 6.1
Other 7.3 2.0 9.4 9.6 3.6 13.2
---- ---- ----- ---- ---- -----
Total revenues 90.1 69.2 159.3 79.8 54.4 134.1
OPERATING COSTS:
Recoverable expenses 25.9 20.9 46.8 21.6 16.1 37.7
Other operating 6.4 5.8 12.1 9.1 2.8 11.9
Charge related to technology investments 8.1 8.1
Management, leasing and development 5.2 5.2 5.1 5.1
General and administrative 5.4 5.4 4.9 4.9
Interest expense 20.8 19.6 40.3 15.0 17.6 32.6
Depreciation and amortization (2) 20.2 13.5 33.7 14.5 8.4 22.9
---- ---- ----- ---- ---- -----
Total operating costs 92.0 59.7 151.7 70.1 44.8 114.9
---- ---- ----- ---- ---- -----
(1.9) 9.5 7.6 9.7 9.5 19.2
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (2) 4.7 5.2
--- ---
Income before discontinued operations
and minority and preferred interests 2.9 14.9
Discontinued operations:
Gain on disposition of interest in 10.0
center
EBITDA (3) 1.0 1.6
Depreciation and amortization (0.8)
Minority and preferred interests:
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated
joint ventures 0.4 0.2
Minority share of income of TRG (5.0) (4.4)
Distributions in excess of minority
share of income (3.1) (3.5)
---- ----
Net income 3.8 5.8
Series A preferred dividends (4.2) (4.2)
---- ----
Net income (loss) allocable to common
shareowners (0.3) 1.6
==== ===
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 48.2 42.5 90.7 40.7 35.5 76.3
EBITDA - outside partners' share (2.0) (20.3) (22.3) (2.1) (15.9) (18.0)
---- ---- ----- ---- ---- -----
EBITDA contribution 46.2 22.2 68.4 38.6 19.7 58.3
Beneficial Interest Expense (19.5) (9.8) (29.3) (13.7) (9.2) (23.0)
Non-real estate depreciation (0.7) (0.7) (0.7) (0.7)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ----- ---- ---- -----
Funds from Operations contribution 19.6 12.4 32.0 17.8 10.4 28.2
==== ==== ==== ==== ==== =====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures
and are net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for
measurement of their performance as a whole, without regard to the Company's ownership interest. In its consolidated
financial statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) Amortization of the Company's additional basis in the Operating Partnership was $1.9 million in both 2002 and 2001. Of
this amount, $0.8 million was included in equity in income of Unconsolidated Joint Ventures, while $1.1 million was included
in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of
depreciated operating properties. In 2002, an $8.1 million charge related to technology investments was also excluded.
Funds from Operations is defined and discussed in Liquidity and Capital Resources.
(4) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2001 amounts to conform
to 2002 classifications.
22
Consolidated Businesses
Total revenues for the three months ended June 30, 2002 were $90.1 million, a $10.3 million or 12.9% increase
over the comparable period in 2001. Minimum rents increased $8.5 million, of which $7.7 million was due to the
openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due to
tenant rollovers, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily
due to Willow Bend and Wellington Green. Other revenue decreased by $2.3 million from 2001 due to decreases in
lease cancellation revenue and interest income, partially offset by increases in gains on sales of peripheral
land.
Total operating costs were $92.0 million, a $21.9 million or 31.2% increase over the comparable period in
2001. Recoverable expenses increased primarily due to Willow Bend and Wellington Green. Other operating expense
decreased primarily due to a decrease in the charge to operations for costs of pre-development activities, bad
debt, and MerchantWired losses, partially offset by increases due to the new centers. During 2002, the Company
recognized an $8.1 million charge relating to its investments in MerchantWired and Fashionmall.com. Interest
expense increased primarily due to a decrease in capitalized interest upon opening of Willow Bend and Wellington
Green, partially offset by decreases due to changes in rates on floating rate debt. Depreciation expense
increased primarily due to the new centers.
Unconsolidated Joint Ventures
Total revenues for the three months ended June 30, 2002 were $69.2 million, a $14.8 million or 27.2% increase
from the comparable period of 2001. Minimum rents increased $11.0 million, of which $10.2 million was due to the
openings of Dolphin Mall and International Plaza and the acquisition of the interest in Sunvalley. Expense
recoveries increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other revenue decreased
primarily due to a decrease in lease cancellation revenue.
Total operating costs increased by $14.9 million to $59.7 million for the three months ended June 30, 2002.
Recoverable expenses increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other operating
expense increased primarily due to the new centers, including greater levels of bad debt expense at Dolphin
Mall. Interest expense increased due to decreases in capitalized interest upon opening of Dolphin Mall and
International Plaza, partially offset by a decrease in the liability for the Dolphin Mall swap agreement and
changes in rates on floating rate debt. Depreciation expense increased primarily due to the opening of the new
centers, as well as the Sunvalley and Arizona Mills acquisitions.
As a result of the foregoing, income of the Unconsolidated Joint Ventures was consistent between periods. The
Company's equity in income of the Unconsolidated Joint Ventures was $4.7 million, a $0.5 million decrease from
the comparable period in 2001.
Net Income
As a result of the foregoing, the Company's income before discontinued operations and minority and preferred
interests decreased $12.0 million to $2.9 million for the three months ended June 30, 2002. The discontinued
operations of Paseo Nuevo and La Cumbre Plaza include a $10.0 million gain on the disposition of Paseo Nuevo in
2002. After allocation of income to minority and preferred interests, the net income (loss) allocable to common
shareowners for 2002 was $(0.3) million compared to $1.6 million in 2001.
23
Comparison of the Six Months Ended June 30, 2002 to the Six Months Ended June 30, 2001
The following table sets forth operating results for the six months ended June 30, 2002 and June 30, 2001,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Six months ended June 30, 2002 Six months ended June 30, 2001
-------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 93.5 86.5 180.0 76.7 66.8 143.5
Percentage rents 1.7 0.5 2.2 1.9 0.8 2.7
Expense recoveries 57.4 42.9 100.3 48.2 32.8 81.0
Management, leasing and development 10.9 10.9 12.5 12.5
Other 13.3 4.0 17.3 15.5 8.0 23.5
----- ----- ----- ----- ----- -----
Total revenues 176.7 133.9 310.6 154.8 108.4 263.2
OPERATING COSTS:
Recoverable expenses 49.3 36.4 85.7 41.1 29.9 70.9
Other operating 16.3 11.0 27.3 16.1 6.2 22.3
Charge related to technology investments 8.1 8.1
Management, leasing and development 10.0 10.0 9.4 9.4
General and administrative 10.4 10.4 9.6 9.6
Interest expense 41.4 37.8 79.2 30.2 36.2 66.4
Depreciation and amortization (2) 40.9 27.6 68.5 31.0 17.3 48.3
----- ----- ----- ----- ----- -----
Total operating costs 176.4 112.8 289.2 137.4 89.5 226.9
----- ----- ----- ----- ----- -----
0.2 21.1 21.4 17.3 19.0 36.3
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (2) 10.9 10.1
---- ----
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests 11.1 27.4
Discontinued operations:
Gain on dispositions of interests in
centers 12.0
EBITDA (3) 3.2 3.5
Depreciation and amortization (0.5) (1.4)
Cumulative effect of change in
accounting principle (8.4)
Minority and preferred interests:
TRG preferred distributions (4.5) (4.5)
Minority share of consolidated
joint ventures 0.6 0.6
Minority share of income of TRG (9.5) (4.9)
Distributions in excess of minority
share of income (6.8) (11.0)
---- ----
Net income 5.7 1.3
Series A preferred dividends (8.3) (8.3)
---- ----
Net loss allocable to common
shareowners (2.6) (7.0)
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 93.9 86.5 180.3 82.0 72.3 154.4
EBITDA - outside partners' share (4.1) (39.6) (43.7) (4.0) (32.7) (36.7)
----- ----- ----- ----- ----- -----
EBITDA contribution 89.8 46.9 136.6 78.0 39.6 117.7
Beneficial Interest Expense (38.9) (18.8) (57.7) (27.6) (19.1) (46.7)
Non-real estate depreciation (1.4) (1.4) (1.4) (1.4)
Preferred dividends and distributions (12.8) (12.8) (12.8) (12.8)
----- ----- ----- ----- ----- -----
Funds from Operations contribution 36.6 28.1 64.7 36.2 20.6 56.9
===== ===== ===== ===== ===== =====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures and are
net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement
of their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial
statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) Amortization of the Company's additional basis in the Operating Partnership was $3.8 million in both 2002 and 2001.
Of this amount, $1.5 million was included in equity in income of Unconsolidated Joint Ventures, while $2.3 million was
included in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of
depreciated operating properties. In 2002, an $8.1 million charge related to technology investments was also excluded.
Funds from Operations is defined and discussed in Liquidity and Capital Resources.
(4) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2001 amounts to conform
to 2002 classifications.
24
Consolidated Businesses
Total revenues for the six months ended June 30, 2002 were $176.7 million, a $21.9 million or 14.1% increase
over the comparable period in 2001. Minimum rents increased $16.8 million, of which $15.6 million was due to the
openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due to
tenant rollovers, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily
due to Willow Bend and Wellington Green. Management, leasing, and development revenue decreased primarily due to
the timing of leasing transactions and the completion of two short-term contracts. Other revenue decreased due to
decreases in lease cancellation revenue and interest income, partially offset by increases in gains on sales of
peripheral land.
Total operating costs were $176.4 million, a $39.0 million or 28.4% increase over the comparable period in
2001. Recoverable expenses increased primarily due to Willow Bend and Wellington Green. Other operating expense
increased primarily due to the new centers, partially offset by a decrease in the charge to operations for costs
of pre-development activities. During 2002, the Company recognized an $8.1 million charge relating to its
investments in MerchantWired and Fashionmall.com. Interest expense increased primarily due to a decrease in
capitalized interest upon opening of Willow Bend and Wellington Green, partially offset by decreases due to
changes in rates on floating rate debt. Depreciation expense increased primarily due to the new centers.
Unconsolidated Joint Ventures
Total revenues for the six months ended June 30, 2002 were $133.9 million, a $25.5 million or 23.5% increase
from the comparable period of 2001. Minimum rents increased $19.7 million, of which $19.6 million was due to the
openings of Dolphin Mall and International Plaza and the acquisition of the interest in Sunvalley. Expense
recoveries increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other revenue decreased
primarily due to a decrease in lease cancellation revenue.
Total operating costs increased by $23.3 million to $112.8 million for the six months ended June 30, 2002.
Recoverable expenses increased primarily due to the new centers. Recoverable expenses in 2002 included the
reversal of a $2.8 million special assessment tax accrued during 2001. Other operating expense increased
primarily due to the new centers, including greater levels of bad debt expense at Dolphin Mall, partially offset
by decreases in bad debt expense at other centers. Interest expense increased due to decreases in capitalized
interest upon opening of Dolphin Mall and International Plaza, partially offset by a decrease in the liability
for the Dolphin Mall swap agreement and changes in rates on floating rate debt. Depreciation expense increased
primarily due to the new centers.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $2.1 million to $21.1
million. The Company's equity in income of the Unconsolidated Joint Ventures was $10.9 million, a $0.8 million
increase from the comparable period in 2001.
Net Income
As a result of the foregoing, the Company's income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests decreased $16.3 million to $11.1 million for the
six months ended June 30, 2002. The discontinued operations of Paseo Nuevo and La Cumbre Plaza include a $12.0
million gain on the dispositions of La Cumbre Plaza and Paseo Nuevo in 2002. In 2001, a cumulative effect of a
change in accounting principle of $8.4 million was recognized in connection with the Company's adoption of SFAS
133. After allocation of income to minority and preferred interests, the net loss allocable to common
shareowners for 2002 was $(2.6) million compared to $(7.0) million in 2001.
25
Liquidity and Capital Resources
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 or its
subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities, distributions from its joint
ventures, the unutilized portion of its credit facilities, and its ability to access the capital markets assure
adequate liquidity to conduct its operations in accordance with its dividend and financing policies.
As of June 30, 2002, the Company had a consolidated cash balance of $72.7 million. Additionally, the Company
has a secured $275 million line of credit. This line had $230.0 million of borrowings as of June 30, 2002 and
expires in November 2004 with a one-year extension option. The Company also has available a second secured bank
line of credit of up to $40 million. The line had $9.2 million of borrowings as of June 30, 2002 and expires in
August 2002. The Company is currently negotiating to extend the expiration until November 2004.
In March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing loan until
April 2003. In July 2002, the Company completed the refinancing of the Westfarms mortgage (see Results of
Operations - Subsequent Event). In August 2002, Stamford Town Center extended its $76 million loan to August
2004. Also in August, the Company closed on a $105 million construction loan for Stony Point Fashion Park. This
loan bears interest at LIBOR plus 1.85% and has an initial term of three years with two one-year extension
options. The Operating Partnership guarantees 100% of principal and interest on this loan; the amounts guaranteed
will be reduced as certain center performance and valuation criteria are met.
Summary of Investing Activities
Net cash used in investing activities was $9.1 million in 2002 compared to $132.5 million in 2001. Cash used
in investing activities was impacted by the timing of capital expenditures, with additions to properties in 2002
and 2001 for the construction of Stony Point Fashion Park, The Mall at Wellington Green, and The Shops at Willow
Bend as well as other development activities and other capital items. Investments in MerchantWired of $4.1
million and $2.9 million were made in 2002 and 2001, respectively. The Company received net proceeds of $76.4
million from the dispositions of La Cumbre Plaza and Paseo Nuevo and invested $45.2 million in acquiring the
interests in Sunvalley and Arizona Mills in 2002. Net proceeds from sales of peripheral land were $6.1 million,
an increase of $2.6 million from 2001. Contributions to Unconsolidated Joint Ventures of $28.7 million were made
in 2001, primarily representing funding for construction activities at Dolphin Mall. Distributions from
Unconsolidated Joint Ventures in 2002 increased from 2001 primarily due to International Plaza, Dolphin Mall, and
Sunvalley.
Summary of Financing Activities
Net cash used in financing activities was $1.9 million in 2002, compared to $88.5 million of cash provided by
financing activities in 2001. Debt proceeds, net of repayments and issuance costs, provided $42.3 million in
2002 and $139.0 million in 2001. Stock repurchases of $11.2 million were made in connection with the Company's
stock repurchase program in 2001. Issuance of stock pursuant to the Continuing Offer related to the exercise of
employee options contributed $4.5 million in 2002 and $8.3 million in 2001. Total dividends and distributions
paid were $48.7 million and $47.6 million in 2002 and 2001, respectively.
Beneficial Interest in Debt
At June 30, 2002, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $2,060.4 million with an average interest rate of 5.70%,
excluding amortization of debt issuance costs and interest rate hedging costs. Debt issuance costs and interest
rate hedging costs are reported as interest expense in the results of operations. Amortization of debt issuance
costs added 0.37% to TRG's effective interest rate in the second quarter of 2002. 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 $147.4 million as of June 30, 2002. Beneficial interest in capitalized interest was
$1.9 million and $3.5 million for the three and six months ended June 30, 2002, respectively. The following
table presents information about the Company's beneficial interest in debt as of June 30, 2002.
26
Beneficial Interest in Debt
------------------------------------
Amount Interest Rate
(in millions) at 6/30/02
------------- ----------
Total beneficial interest in fixed rate debt $1,041.2 7.51% (1)
Total beneficial interest in floating rate debt 1,019.2 3.85 (1)
-------
Total beneficial interest in debt $2,060.4 5.70 (1)
========
(1) Denotes weighted average interest rate before amortization of financing costs.
As provided for by certain debt agreements, the Company has currently locked in LIBOR rates on certain
floating rate debt. In addition, the Company has entered into swap agreements to hedge certain floating rate
debt in future periods.
Beneficial Interest in Debt
------------------------------------
Amount LIBOR
(in millions) Lock Rate
------------- ---------
Floating rate debt with LIBOR rate locks
as of June 30, 2002:
Through September 2002 $ 178.3 2.594%
Through October 2002 310.8 2.321
Through November 2002 5.0 2.659
Through March 2003 125.7 3.090
---------
Total $ 619.8 2.558
=========
Notional
Amount
(in millions) Swap Rate
------------- ---------
Floating rate debt hedged via forward
swap agreements:
November 2002 through October 2003 $ 100.0 4.298%
November 2002 through June 2004 100.0 4.125
October 2002 through September 2003 100.0 2.500
October 2003 through September 2004 100.0 4.350
October 2004 through April 2005 100.0 5.250
In addition, $537.6 million of the Company's beneficial interest in floating rate debt is covered under
interest rate cap agreements with LIBOR cap rates ranging from 7.0% to 8.75% with terms ending August 2002
through September 2003.
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 floating rate debt in effect at June 30, 2002, excluding
debt fixed under long-term LIBOR rate contracts, a one percent increase or decrease in interest rates on this
floating rate debt would decrease or increase cash flows by approximately $4.9 million and, due to the effect of
capitalized interest, annual earnings by approximately $4.1 million. Based on the Company's consolidated debt
and interest rates in effect at June 30, 2002, a one percent increase in interest rates would decrease the fair
value of debt by approximately $39.9 million, while a one percent decrease in interest rates would increase the
fair value of debt by approximately $42.6 million.
27
Covenants and Commitments
Certain loan agreements contain various restrictive covenants, including minimum net worth requirements,
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 Operating Partnership is in compliance with all of
its covenants.
The Company's secured credit facilities contain customary covenants requiring the maintenance of comprehensive
all-risk insurance on property securing each facility. As a result of exclusions in its insurance policies upon
renewal, the Company purchased a supplemental policy, which has an annual limit of $100 million, for terrorist
acts for its portfolio of centers. No assurances can be given that the coverage under this policy will be
adequate or that mortgagees will not require coverage for individual centers beyond that which is commercially
available at reasonable rates. The Company's inability to obtain such coverage or to do so only at greatly
increased costs may also negatively impact the availability and cost of future financing. In July 2002, the
Company was required to purchase a separate terrorism policy for Westfarms in order to close on its recent
financing.
Certain debt agreements contain performance and valuation criteria that must be met for the loans to be
extended at the full principal amounts; these agreements provide for partial prepayments of debt to facilitate
compliance with extension provisions. The Company currently anticipates that a partial prepayment of principal
will be necessary to extend the October 2002 maturity date on the Dolphin Mall construction loan.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/02 as of 6/30/02 as of 6/30/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 183.0 91.5 91.5 50% 100%
Great Lakes Crossing 149.7 127.2 149.7 100% 100%
International Plaza 187.1 49.6 93.6 50% (1) 50% (1)
The Mall at Millenia 92.1 46.1 23.0 25% 25%
The Mall at Wellington Green 137.7 123.9 137.7 100% 100%
The Shops at Willow Bend 197.8 197.8 197.8 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of 25% of the amounts guaranteed.
Funds from Operations
A principal factor that the Company considers in determining dividends to shareowners is Funds from Operations
(FFO), which is defined as income before extraordinary items, cumulative effect of change in accounting
principle, real estate depreciation and amortization, and the allocation to the minority interest in the
Operating Partnership, less preferred dividends and distributions. Gains on dispositions of depreciated
operating properties are excluded from FFO. In 2002, an $8.1 million charge related to technology investments
was also excluded.
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. Funds from Operations as presented by the Company may not be comparable to
similarly titled measures of other companies.
28
Reconciliation of Income to Funds from Operations
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------- -----------------------------
(in millions of dollars)
Income before discontinued operations
and minority and preferred interests (1) (2) 2.9 14.9
Funds from operations of discontinued operations 1.0 1.6
Depreciation and amortization (3) 20.2 14.5
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 7.7 5.2
Charge related to technology investments 8.1
Non-real estate depreciation (0.7) (0.7)
Minority partners in consolidated joint ventures
share of funds from operations (0.7) (0.9)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 32.0 28.2
==== ====
Funds from Operations allocable to TCO 19.8 17.3
==== ====
(1) Includes gains on peripheral land sales of $2.3 million and $1.5 million for the three months ended June
30, 2002 and June 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.4
million and $0.1 million for the three months ended June 30, 2002 and June 30, 2001, respectively.
(3) Includes $0.8 million and $0.7 million of mall tenant allowance amortization for the three months ended
June 30, 2002 and June 30, 2001, respectively.
(4) Includes $0.6 million of mall tenant allowance amortization for both the three months ended June 30,
2002 and June 30, 2001.
(5) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------------- -----------------------------
(in millions of dollars)
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests (1) (2) 11.1 27.4
Funds from operations of discontinued operations 3.2 3.5
Depreciation and amortization (3) 40.9 31.0
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 17.2 10.6
Charge related to technology investments 8.1
Non-real estate depreciation (1.4) (1.4)
Minority partners in consolidated joint ventures
share of funds from operations (1.6) (1.4)
Preferred dividends and distributions (12.8) (12.8)
----- -----
Funds from Operations - TRG 64.7 56.9
==== ====
Funds from Operations allocable to TCO 39.9 34.9
==== ====
(1) Includes gains on peripheral land sales of $4.2 million and $2.8 million for the six months ended June
30, 2002 and June 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $1.0
million and $0.2 million for the six months ended June 30, 2002 and June 30, 2001, respectively.
(3) Includes $1.5 million and $1.3 million of mall tenant allowance amortization for the six months ended
June 30, 2002 and June 30, 2001, respectively.
(4) Includes $1.1 million and $1.0 million of mall tenant allowance amortization for the six months ended
June 30, 2002 and June 30, 2001, respectively.
(5) Amounts in this table may not add due to rounding.
29
Reconciliation of Funds from Operations to Income
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------ -----------------------
(in millions of dollars)
Funds from Operations-TRG 32.0 28.2
Charge related to technology investments (8.1)
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (20.2) (14.5)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.2 1.1
Depreciation of TCO's additional basis 1.9 1.9
Non-real estate depreciation 0.7 0.7
Share of Unconsolidated Joint Ventures' depreciation and
amortization (7.7) (5.2)
Discontinued operations' funds from operations (1.0) (1.6)
---- ----
Income (loss) from continuing operations allocable to
TRG unitholders (1.3) 10.6
==== ====
TCO's ownership share of income (loss) of TRG (1) (0.8) 6.5
TCO basis differences-
Depreciation of TCO's additional basis (1.9) (1.9)
---- ----
Income (loss) before distributions in excess of earnings
allocable to minority interest - TCO (2.6) 4.5
Distributions in excess of earnings allocable to minority
interest (3.1) (3.5)
---- ----
Income (loss) from continuing operations allocable to TCO
common shareowners (5.8) 1.1
==== ====
(1) TCO's average ownership of TRG was approximately 61.8% and 61.4% during the three months ended June 30,
2002 and 2001.
(2) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------ -----------------------
(in millions of dollars)
Funds from Operations-TRG 64.7 56.9
Charge related to technology investments (8.1)
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (40.9) (31.0)
Minority partners in consolidated joint ventures
share of depreciation and amortization 2.3 2.0
Depreciation of TCO's additional basis 3.8 3.8
Non-real estate depreciation 1.4 1.4
Share of Unconsolidated Joint Ventures' depreciation and
amortization (17.2) (10.6)
Discontinued operations' funds from operations (3.2) (3.5)
---- ----
Income from continuing operations allocable to TRG unitholders 2.7 19.0
==== ====
TCO's ownership share of income of TRG (1) 1.7 11.4
TCO basis differences-
Depreciation of TCO's additional basis (3.8) (3.8)
---- ----
Income (loss) before distributions in excess of earnings
allocable to minority interest - TCO (2.1) 7.6
Distributions in excess of earnings allocable to minority
interest (6.8) (11.0)
---- ----
Loss from continuing operations allocable to TCO common
shareowners (8.8) (3.4)
==== ====
(1) TCO's average ownership of TRG was approximately 61.7% and 61.4% during the six months ended June 30,
2002 and 2001.
(2) Amounts in this table may not add due to rounding.
30
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. To qualify as a REIT, the Company must distribute at least 90% of its REIT taxable
income to its shareowners, as well as meet certain other requirements. Preferred dividends accrue regardless of
whether earnings, cash availability, or contractual obligations were to prohibit the current payment of
dividends. The preferred stock is callable in October 2002. The Company has no present intention to redeem the
preferred equity.
On May 30, 2002, the Company declared a quarterly dividend of $0.255 per common share payable July 22, 2002 to
shareowners of record on July 1, 2002. The Board of Directors also declared a quarterly dividend of $0.51875 per
share on the Company's 8.3% Series A Preferred Stock for the quarterly dividend period ended June 30, 2002, which
was paid on July 1, 2002 to shareowners of record on June 20, 2002.
The Company previously reported its estimate of the tax status of total 2002 common dividends declared and to
be declared, assuming continuation of a $0.255 per common share quarterly dividend, to be approximately 28%
return of capital and 72% of ordinary income. The tax status of total 2002 dividends to be paid on Series A
Preferred Stock was estimated to be 100% ordinary income. The effects on the tax status of dividends of the 2002
acquisitions and dispositions and other transactions are currently being determined. Certain significant factors
could cause 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, 6) changes in interest rates, 7)
amount and nature of development activities, and 8) changes in the tax laws or their 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. Based on current tax laws and earnings projections, the Company expects that the
growth in common dividends will be less than the growth in Funds from Operations for at least three more years.
Any inability of the Operating Partnership or its Joint Ventures to obtain 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.
31
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally recovered from tenants. The
following table summarizes capital spending through June 30, 2002 that is not recovered from tenants. The table
excludes acquisitions of interests in operating centers (see Results of Operations - Acquisitions and
Dispositions).
For the Six Months Ended June 30, 2002
-------------------------------------------------------------------------
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 3.5 (1.4) 2.8
New centers 26.7 (3) 34.7 (4) 44.4
Pre-construction development activities,
net of charge to operations 4.3 4.3
Mall tenant allowances (5) 2.4 2.3 3.4
Corporate office improvements
and equipment 1.4 1.4
Other 0.7 0.1 0.7
---- ---- ----
Total 39.0 35.7 57.0
==== ==== ====
(1) Costs are net of intercompany profits.
(2) Primarily includes the Operating Partnership's share of construction costs for Stony Point Fashion Park
and The Mall at Millenia (a 50% owned unconsolidated joint venture).
(3) Primarily includes costs related to Stony Point Fashion Park.
(4) Primarily includes costs related to The Mall at Millenia.
(5) Excludes tenant allowances for the new centers.
For the six months ended June 30, 2002, in addition to the costs above, the Company incurred its $4.0 million
share of capitalized leasing costs and its $1.4 million share of repair and asset replacement costs that will be
reimbursed by tenants. Also during this period, the Company was reimbursed by tenants for $2.9 million of
capitalizable expenditures of prior periods. The expenditures reimbursable by the tenants and the related
reimbursements are classified as recoverable expenses and expense recoveries, respectively, and both are included
in the Company's Funds from Operations.
The following table summarizes planned capital spending for the entire year of 2002 (including amounts
described in the table above) that is not recovered from tenants. The table excludes acquisitions of interests
in operating centers (see Results of Operations - Acquisitions and Dispositions).
2002
-------------------------------------------------------------------------
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 49.6 (3) 99.3 (4) 99.3
Mall tenant allowances (5) 9.6 16.3 17.4
Pre-construction development and other 8.0 0.3 8.1
---- ----- -----
Total 67.2 115.9 124.8
==== ===== =====
(1) Costs are net of intercompany profits.
(2) Primarily includes the Operating Partnership's share of construction costs for The Mall at Millenia (a
50% owned unconsolidated joint venture) and Stony Point Fashion Park.
(3) Primarily includes costs related to Stony Point Fashion Park.
(4) Primarily includes costs related to The Mall at Millenia.
(5) Excludes tenant allowances for the new centers.
32
The Operating Partnership has entered into a 50%-owned joint venture to develop The Mall at Millenia currently
under construction in Orlando, Florida. This project is expected to cost approximately $200 million and open in
October 2002. The Mall at Millenia will be anchored by Bloomingdale's, Macy's, and Neiman Marcus. Currently
there are fully executed leases on over 80% of the tenant space and leases out for signature on over 15% of the
tenant space. The Company expects the center to be between 75% to 80% occupied at opening, with 90%
occupancy anticipated by the beginning of December 2002. The Company expects to achieve an 11% return of the
project at stabilization, which is anticipated to be in 2003.
Stony Point Fashion Park, a new 690,000 square foot open-air center under construction in Richmond, Virginia,
will be anchored by Dillard's, Saks, and Galyan's. The center, scheduled to open in September 2003, is expected
to cost approximately $115 million. Currently, 30% of the available tenant space has fully executed leases. An
additional 30% of tenant space is committed with leases out for signature and an additional 28% of tenant space
is under negotiation.
The Company's approximately $26 million balance of development pre-construction costs as of June 30, 2002
consists primarily of costs relating to its Oyster Bay project in Syosset, New York. Both Neiman Marcus and Lord
& Taylor have made announcements committing to the project. Although the Company still needs to obtain the
necessary zoning approvals to move forward with the project, the Company is encouraged by the New York State
Supreme Court's recent decision to annul the unfavorable zoning actions of the Oyster Bay Town Board. While the
Company expects continued success with ongoing litigation, the process may not be resolved in the near future. In
addition, if the litigation is unsuccessful, the Company would expect to recover substantially less than its cost
in this project under possible alternative uses for the site.
The Operating Partnership and The Mills Corporation have formed an alliance to develop value super-regional
projects in major metropolitan markets. The amended agreement, which expires in May 2008, calls for the two
companies to jointly develop and own at least four of these centers, each representing approximately $200 million
of capital investment. A number of locations across the nation are targeted for future initiatives.
The Operating Partnership anticipates that its share of costs for development projects scheduled to be
completed in 2003 will be as much as $80 million in 2003. Estimates of future capital spending include only
projects approved by the Company's Board of Directors and, consequently, estimates will change as new projects
are approved. Estimates regarding capital expenditures, occupancy, and returns on new developments presented
above are forward-looking statements and certain significant factors could cause the actual results to differ
materially, including but not limited to: 1) actual results of negotiations with anchors, tenants and
contractors, 2) changes in the scope and number of projects, 3) cost overruns, 4) timing of expenditures, 5)
financing considerations, 6) actual time to complete projects, 7) changes in economic climate, 8) competition
from others attracting tenants and customers, 9) increases in operating costs, 10) timing of tenant openings, and
11) early lease terminations and bankruptcies.
Cash Tender Agreement
A. Alfred Taubman has the annual right to tender to the Company units of partnership interest in the Operating
Partnership (provided that the aggregate value is at least $50 million) and cause the Company to purchase the
tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately
preceding the date of the tender (the Cash Tender Agreement). At A. Alfred Taubman's election, his family and
certain others may participate in tenders. The Company will have the option to pay for these interests from
available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally,
the Company expects to finance these purchases through the sale of new shares of its stock. The tendering
partner will bear all market risk if the market price at closing is less than the purchase price and will bear
the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of
the Company.
Based on a market value at June 30, 2002 of $15.25 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $376 million. The
purchase of these interests at June 30, 2002 would have resulted in the Company owning an additional 30% interest
in the Operating Partnership.
33
PART II
OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in this report at Item 2 under the caption "Liquidity and
Capital Resources - Sensitivity Analysis".
Item 4. Submission of Matters to a Vote of Security Holders
On May 30, 2002, the Company held its annual meeting of shareholders. The matters on which shareholders voted
were: the election of two directors to serve a three year term, and the ratification of the Board's selection of
Deloitte & Touche LLP as the Company's independent auditors for the year ended December 31, 2002. Robert S.
Taubman and Lisa A. Payne were re-elected at the meeting, and the six remaining incumbent directors continued to
hold office after the meeting. The shareholders ratified the selection of the independent auditors. The results
of the voting are shown below:
ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES WITHHELD
Robert S. Taubman 54,792,572 17,460,754
Lisa A. Payne 72,176,216 77,110
In May 2002, Institutional Shareholder Services issued a report recommending shareholders withhold votes from
Robert S. Taubman for standing as an insider on the Nominating Committee of the Company's Board of Directors.
RATIFICATION OF AUDITORS
71,265,573 Votes were cast for ratification;
965,243 Votes were cast against ratification; and
22,510 Votes abstained (including broker non-votes).
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10 (a) -- Amended and Restated Agreement of Partnership of Sunvalley Associates, a
California general partnership.
10 (b) -- First Amendment to the Second Amendment and Restatement of Agreement of Limited
Partnership of the Taubman Realty Group Limited Partnership dated September 30,
1998.
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 (a) -- Debt Maturity Schedule
99 (b) -- Debt Maturity Schedule
b) Current Reports on Form 8-K.
None
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: August 13, 2002 By: /s/ Lisa A. Payne
-------------------------------------
Lisa A. Payne
Executive Vice President,
Chief Financial and Administrative Officer,
and Director
35