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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: September 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 .
------ --------
As of November 11, 2002, there were outstanding 51,419,244 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 September 30, 2002 and December 31, 2001................................. 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
September 30, 2002 and 2001............................................................................ 3
Consolidated Statement of Operations and Comprehensive Income for the nine months ended
September 30, 2002 and 2001............................................................................ 4
Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001 ............... 5
Notes to Consolidated Financial Statements................................................................ 6
1
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
September 30 December 31
------------ -----------
2002 2001
---- ----
Assets:
Properties $ 2,161,916 $ 2,194,717
Accumulated depreciation and amortization (376,439) (337,567)
------------- -------------
$ 1,785,477 $ 1,857,150
Investment in Unconsolidated Joint Ventures (Note 6) 117,137 148,801
Cash and cash equivalents 19,908 27,789
Accounts and notes receivable, less allowance
for doubtful accounts of $6,766 and $5,345 in
2002 and 2001 33,166 35,734
Accounts and notes receivable from related parties 13,061 20,645
Deferred charges and other assets 41,503 51,320
------------- -------------
$ 2,010,252 $ 2,141,439
============= =============
Liabilities:
Notes payable $ 1,367,494 $ 1,423,241
Accounts payable and accrued liabilities 150,390 181,912
Dividends and distributions payable 13,085 12,937
------------- -------------
$ 1,530,969 $ 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
September 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 September 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, 51,314,492 and 50,734,984 issued and
outstanding at September 30, 2002 and December 31, 2001 513 507
Additional paid-in capital 680,691 673,043
Accumulated other comprehensive income (Notes 2 and 5) (14,875) (3,119)
Dividends in excess of net income (284,433) (244,469)
------------- -------------
$ 382,008 $ 426,074
------------- -------------
$ 2,010,252 $ 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 September 30
-------------------------------
2002 2001
---- ----
Income:
Minimum rents $ 48,536 $ 41,348
Percentage rents 275 480
Expense recoveries 31,972 24,050
Revenues from management, leasing and
development services 5,576 6,563
Other 9,798 5,847
------------- -------------
$ 96,157 $ 78,288
------------- -------------
Operating Expenses:
Recoverable expenses $ 28,237 $ 21,391
Other operating 8,090 7,502
Management, leasing and development services 4,594 4,794
General and administrative 4,434 4,906
Interest expense 20,031 17,208
Depreciation and amortization 20,160 16,247
------------- -------------
$ 85,546 $ 72,048
------------- -------------
Income before equity in income of Unconsolidated
Joint Ventures, discontinued operations, and minority
and preferred interests $ 10,611 $ 6,240
Equity in income of Unconsolidated Joint Ventures (Note 6) 5,761 4,788
------------- -------------
Income before discontinued operations and minority and
preferred interests $ 16,372 $ 11,028
Discontinued operations (Note 3) 1,267
------------- -------------
Income before minority and preferred interests $ 16,372 $ 12,295
Minority interest in consolidated joint ventures (34) 644
Minority interest in TRG:
TRG income allocable to minority partners (4,504) (3,229)
Distributions in excess of earnings allocable to minority partners (3,677) (4,664)
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
------------- -------------
Net income $ 5,907 $ 2,796
Series A preferred dividends (4,150) (4,150)
------------- -------------
Net income (loss) allocable to common shareowners $ 1,757 $ (1,354)
============= =============
Net income $ 5,907 $ 2,796
Other comprehensive income (loss) (Notes 2 and 5):
Loss on interest rate instruments (6,307) (3,366)
Unrealized gain on marketable equity securities 264
Reclassification adjustment for amounts recognized in net income 270 106
------------- -------------
Comprehensive income (loss) $ 134 $ (464)
============= =============
Basic income (loss) per common share (Note 10):
Income (loss) from continuing operations $ 0.03 $ (0.04)
============= =============
Net income (loss) $ 0.03 $ (0.03)
============= =============
Diluted income (loss) per common share (Note 10):
Income (loss) from continuing operations $ 0.03 $ (0.04)
============= =============
Net income (loss) $ 0.03 $ (0.03)
============= =============
Cash dividends declared per common share $ .255 $ .25
============= =============
Weighted average number of common shares outstanding 51,194,177 50,987,512
============= =============
See notes to consolidated financial statements.
3
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Nine Months Ended September 30
------------------------------
2002 2001
---- ----
Income:
Minimum rents $ 142,025 $ 118,039
Percentage rents 1,969 2,398
Expense recoveries 89,368 72,233
Revenues from management, leasing and
development services 16,439 19,020
Other 23,049 21,354
------------- -------------
$ 272,850 $ 233,044
------------- -------------
Operating Expenses:
Recoverable expenses $ 77,528 $ 62,469
Other operating 24,397 23,602
Charge related to technology investments (Note 5) 8,125
Management, leasing and development services 14,638 14,224
General and administrative 14,799 14,523
Interest expense 61,424 47,388
Depreciation and amortization 61,081 47,284
------------- -------------
$ 261,992 $ 209,490
------------- -------------
Income before equity in income of Unconsolidated
Joint Ventures, discontinued operations, cumulative effect of
change in accounting principle and minority and preferred interests $ 10,858 $ 23,554
Equity in income before cumulative effect of change in
accounting principle of Unconsolidated Joint Ventures (Note 6) 16,638 14,859
------------- -------------
Income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests $ 27,496 $ 38,413
Discontinued operations (Note 3):
Income from operations 2,723 3,341
Gain on disposition of interests in centers 12,024
Cumulative effect of change in accounting principle (Note 2) (8,404)
------------- -------------
Income before minority and preferred interests $ 42,243 $ 33,350
Minority interest in consolidated joint ventures 612 1,242
Minority interest in TRG:
TRG income allocable to minority partners (14,041) (8,118)
Distributions in excess of earnings allocable to minority partners (10,445) (15,667)
TRG Series C and D preferred distributions (Note 1) (6,750) (6,750)
------------- -------------
Net income $ 11,619 $ 4,057
Series A preferred dividends (12,450) (12,450)
------------- -------------
Net loss allocable to common shareowners $ (831) $ (8,393)
============= =============
Net income $ 11,619 $ 4,057
Other comprehensive income (loss) (Notes 2 and 5):
Cumulative effect of change in accounting principle (779)
Loss on interest rate instruments (12,642) (1,772)
Unrealized gain on marketable equity securities 264
Reclassification adjustment for amounts recognized in net income 622 311
------------- -------------
Comprehensive income (loss) $ (137) $ 1,817
============= =============
Basic loss per common share (Note 10):
Loss from continuing operations $ (0.14) $ (0.11)
============= =============
Net loss $ (0.02) $ (0.17)
============= =============
Diluted loss per common share (Note 10):
Loss from continuing operations $ (0.14) $ (0.11)
============= =============
Net loss $ (0.03) $ (0.17)
============= =============
Cash dividends declared per common share $ .765 $ .75
============= =============
Weighted average number of common shares outstanding 51,052,528 50,526,117
============= =============
See notes to consolidated financial statements.
4
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended September 30
-------------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Income before minority and preferred interests $ 42,243 $ 33,350
Adjustments to reconcile income before
minority and preferred interests to net cash
provided by operating activities:
Depreciation and amortization of continuing operations 61,081 47,284
Depreciation and amortization of discontinued operations 461 2,136
Charge related to technology investments 8,125
Provision for losses on accounts receivable 3,410 2,386
Gains on sales of land (7,463) (3,604)
Gain on disposition of interests in centers (12,024)
Cumulative effect of change in accounting principle 8,404
Other 1,948 2,674
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets (2,995) (2,551)
Accounts payable and other liabilities (14,592) (6,560)
------------- -------------
Net Cash Provided By Operating Activities $ 80,194 $ 83,519
------------- -------------
Cash Flows from Investing Activities:
Additions to properties $ (71,954) $ (171,534)
Proceeds from sales of land 13,316 7,072
Investment in technology businesses (4,090) (3,265)
Dividend received from technology investment 3,090
Net proceeds from dispositions of interests in centers 76,446
Acquisition of interests in Unconsolidated Joint Ventures (45,203)
Contributions to Unconsolidated Joint Ventures (52,695)
Distributions from Unconsolidated Joint Ventures
in excess of income before cumulative effect of change
in accounting principle 73,523 14,064
------------- -------------
Net Cash Provided By (Used In) Investing Activities $ 45,128 $ (206,358)
------------- -------------
Cash Flows from Financing Activities:
Debt proceeds $ 40,831 $ 231,547
Debt payments (96,578) (20,465)
Debt issuance costs (1,433) (3,284)
Repurchases of common stock (21,278)
Issuance of stock pursuant to Continuing Offer 6,646 12,543
Distributions to minority and preferred interests (31,236) (28,285)
Cash dividends to Series A preferred shareowners (12,450) (8,300)
Cash dividends to common shareowners (38,983) (38,007)
------------- -------------
Net Cash Provided By (Used In) Financing Activities $ (133,203) $ 124,471
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents $ (7,881) $ 1,632
Cash and Cash Equivalents at Beginning of Period 27,789 18,842
------------- -------------
Cash and Cash Equivalents at End of Period $ 19,908 $ 20,474
============= =============
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 owned portfolio as of September 30, 2002 included 19 urban and suburban shopping centers in nine
states. Also, The Mall at Millenia opened in Orlando, Florida in October 2002. An additional center is under
construction 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 September 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 September 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 September 30, 2002 consisted of a 61.9% 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 September 30, 2002 and 2001 was 61.8% in both
periods. During the nine months ended September 30, 2002, the Company's ownership in the Operating Partnership
increased to 61.9% due to additional interests acquired in connection with the Continuing Offer (Note 9). At
September 30, 2002, the Operating Partnership had 83,081,558 units of partnership interest outstanding, of which
the Company owned 51,314,492. 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 $1.0 million and $(1.0) million during the three months ended September 30,
2002 and 2001, and $2.8 million and $(3.5) million during the nine months ended September 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 $(0.9) million during the three months ended September 30, 2002 and 2001, and $3.0 million and $(3.1) million
during the nine months ended September 30, 2002 and 2001. The remainder represents 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 September 30, 2002, the Company had $6.3 million of net realized losses included in Accumulated OCI that
are being recognized as interest expense over the term of the hedged debt, as follows:
Hedged Items OCI Amounts Recognition Period
------------ ----------- ------------------
(in thousands)
Regency Square financing $ 2,548 November 2001 through October 2011
Dolphin Mall construction facility 43 January 2001 through October 2002
Westfarms refinancing 3,662 July 2002 through July 2012
----------
$ 6,253
==========
Additionally, as of September 30, 2002, the Company had $8.9 million of net unrealized losses included in
Accumulated OCI that will be recognized as interest expense over the effective periods of the swap agreements, as
follows:
Hedged Items OCI Amounts Recognition Period
------------ ----------- ------------------
(in thousands)
$275 million line of credit $ 2,481 November 2002 through October 2003
The Shops at Willow Bend
construction facility 3,179 November 2002 through June 2004
The Mall at Wellington Green
construction facility 3,226 October 2002 through April 2005
----------
$ 8,886
==========
The Company expects that approximately $5.8 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 consisted of $28 million of cash and $60 million of existing
debt that encumbered the property. 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 the purchase date.
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 to pay down borrowings under the Company's lines of credit.
In October 2002, the Company acquired the additional 50% interest in Dolphin Mall (Note 12 - Subsequent
Events).
Note 4 - Income Taxes
The Company's Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in
the Company's financial statements. The Company's deferred tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a
valuation allowance to the amount where realization is more likely than not assured after considering all
available evidence. The Company's temporary differences primarily relate to deferred compensation and
depreciation. During the nine months ended September 30, 2002, utilization of a deferred tax asset reduced the
Company's federal income tax expense to zero. As of September 30, 2002, the Company had a net deferred tax asset
of $4.4 million, after a valuation allowance of $8.2 million.
8
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Investments in Technology Businesses
The Company owned an approximately 6.8% interest in MerchantWired, LLC, a service company originally created
to provide internet and network infrastructure to shopping centers and retailers that ceased operations in
September 2002. During the nine months ended September 30, 2002 and 2001, the Company recognized its $1.8
million and $1.6 million share of MerchantWired's operating losses, respectively. During the second quarter of
2002, the Company invested an additional $4.1 million to satisfy the Company's guarantees of MerchantWired's
obligations and recorded a charge 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 converted 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 in Fashionmall 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. During the third quarter
of 2002, the Company received $3.1 million, representing a $3.75 dividend per share paid by Fashionmall.com,
which reduced the Company's investment to $0.1 million. Additionally, the Company recorded an unrealized
holding gain of $0.3 million as a component of other comprehensive income to mark its investment to its $0.4
million market value at September 30, 2002.
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 September 30, 2002
------------------------------ ---------------- --------------------
Arizona Mills, L.L.C. * Arizona Mills 50%
Dolphin Mall Associates Dolphin Mall 50 (Note 12)
Limited Partnership
Fairfax Company of Virginia, L.L.C. Fair Oaks 50
Forbes Taubman Orlando, L.L.C. * The Mall at Millenia 50
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 October 2002, The Mall at Millenia, a 1.2 million square foot center, opened in Orlando, Florida.
In May 2002, the Company acquired an additional 13% interest in Arizona Mills and a 50% interest in Sunvalley
(Note 3).
As of September 30, 2002, the Operating Partnership has a preferred investment in International Plaza of $17
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.
The joint venture partner in Dolphin Mall exercised the buy/sell provision in the joint venture's partnership
agreement, and in October 2002, the Company acquired the joint venture partner's interest (Note 12).
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.
Combined balance sheet and results of operations information are presented in the following table (in
thousands) for the Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in
the combined information. TRG's basis adjustments as of September 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.
10
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30 December 31
------------ -----------
2002 2001
---- ----
Assets:
Properties $ 1,552,094 $ 1,367,082
Accumulated depreciation and amortization (291,120) (220,201)
------------- -------------
$ 1,260,974 $ 1,146,881
Cash and cash equivalents 25,006 30,664
Accounts and notes receivable 13,760 20,302
Deferred charges and other assets 31,785 29,290
------------- -------------
$ 1,331,525 $ 1,227,137
============= =============
Liabilities and partnership equity:
Notes payable $ 1,421,120 $ 1,154,141
Other liabilities 134,345 109,247
TRG's partnership equity (accumulated deficiency in assets) (112,843) 903
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (111,097) (37,154)
------------- -------------
$ 1,331,525 $ 1,227,137
============= =============
TRG's partnership equity (accumulated deficiency in
assets) (above) $ (112,843) $ 903
TRG basis adjustments, including elimination of intercompany
profit 106,971 22,612
TCO's additional basis 123,009 125,286
------------- -------------
Investment in Unconsolidated Joint Ventures $ 117,137 $ 148,801
============= =============
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 74,163 $ 57,455 $ 208,050 $ 165,885
----------- ----------- ----------- -----------
Recoverable and other operating expenses $ 31,113 $ 20,558 $ 81,268 $ 58,964
Interest expense 20,683 18,740 58,415 54,900
Depreciation and amortization 13,603 10,662 40,544 28,389
----------- ----------- ----------- -----------
Total operating costs $ 65,399 $ 49,960 $ 180,227 $ 142,253
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 8,764 $ 7,495 $ 27,823 $ 23,632
Cumulative effect of change in accounting
principle (3,304)
----------- ----------- ----------- -----------
Net income $ 8,764 $ 7,495 $ 27,823 $ 20,328
=========== =========== =========== ===========
Net income allocable to TRG $ 4,449 $ 4,045 $ 15,085 $ 10,935
Cumulative effect of change in accounting
principle allocable to TRG 1,612
Realized intercompany profit 2,071 1,502 3,830 4,589
Depreciation of TCO's additional basis (759) (759) (2,277) (2,277)
----------- ----------- ----------- -----------
Equity in income before cumulative effect of
change in accounting principle of
Unconsolidated Joint Ventures $ 5,761 $ 4,788 $ 16,638 $ 14,859
=========== =========== =========== ===========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 26,595 $ 20,843 $ 73,470 $ 60,549
Interest expense (10,780) (9,713) (29,574) (28,772)
Depreciation and amortization (10,054) (6,342) (27,258) (16,918)
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 5,761 $ 4,788 $ 16,638 $ 14,859
=========== =========== =========== ===========
11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Beneficial Interest in Debt and Interest Expense
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.
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 existing $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 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:
September 30, 2002 1,367,494 1,421,120 1,289,259 727,029 2,016,288
December 31, 2001 1,423,241 1,154,141 1,345,086 562,811 1,907,897
Capital Lease Obligations:
September 30, 2002 231 -- 196 -- 196
December 31, 2001 304 64 259 40 299
Capitalized Interest:
Nine months ended September 30, 2002 4,537 3,202 4,449 1,601 6,050
Nine months ended September 30, 2001 22,234 13,883 21,975 5,634 27,609
Interest Expense:
Nine months ended September 30, 2002 61,424 58,415 57,691 29,574 87,265
Nine months ended September 30, 2001 47,388 54,900 43,594 28,772 72,366
12
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. In September 2002, Mr. Taubman exercised options for 0.7 million units by
tendering 0.5 million mature units and deferring the receipt of 0.2 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 579,508 units exercised during the nine
months ended September 30, 2002 at an average exercise price of $11.47 per unit. During the nine months ended
September 30, 2001, options for 1,128,852 units were exercised at a weighted average price of $11.11 per unit.
There were no options granted during the nine months ended September 30, 2002 and 2001. There were 50,000 units
cancelled during the nine months ended September 30, 2002 and no units cancelled during the nine months ended
September 30, 2001. As of September 30, 2002, there were options for 3.2 million units outstanding with a
weighted average exercise price of $11.54 per unit, all of which were vested.
Currently, options for 5.0 million Operating Partnership units may be issued under the plan, 3.2 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."
13
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 September 30, 2002 of $14.23 per common share, the aggregate value of interests in
the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $351 million.
The purchase of these interests at September 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.
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 September 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 9/30/02 as of 9/30/02 as of 9/30/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall (1) 189.0 94.5 94.5 50% 100%
Great Lakes Crossing 144.4 122.7 144.4 100% 100%
International Plaza 188.0 49.8 94.0 50% (2) 50% (2)
The Mall at Millenia -
construction loan 106.5 53.3 26.6 25% 25%
The Mall at Millenia - term loan 2.1 1.0 1.0 50% 50%
Stony Point Fashion Park 11.1 11.1 11.1 100% 100%
The Mall at Wellington Green 138.1 124.3 138.1 100% 100%
The Shops at Willow Bend 198.7 198.7 198.7 100% 100%
(1) In October 2002, the Company acquired its joint venture partner's 50% interest in Dolphin Mall and the
Operating Partnership's beneficial interest in Dolphin debt increased to the full loan balance, which was
paid down to $165 million. There was no change to the percentages guaranteed by the Operating Partnership.
(2) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent of
25% of the amounts guaranteed.
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.
14
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 nine months ended September 30, 2001, options for 0.2 million and 0.8 million units
of partnership interest with average exercise prices of $13.89 per unit and $13.30 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 nine months ended September 30, 2002.
Three Months Nine Months
Ended September 30 Ended September 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 $ 1,757 $ (1,354) $ (831) $ (8,393)
Common shareowners' share of discontinued
operations (782) (6,252) (2,056)
Common shareowners' share of cumulative effect
of change in accounting principle 4,924
----------- ----------- ---------- ------------
Basic income (loss) from continuing operations $ 1,757 $ (2,136) $ (7,083) $ (5,525)
Effect of dilutive options (131) (66) (173) (180)
----------- ----------- ---------- ------------
Diluted income (loss) from continuing operations $ 1,626 $ (2,202) $ (7,256) $ (5,705)
=========== =========== ========== ============
Shares (Denominator) - basic and diluted 51,194,177 50,987,512 51,052,528 50,526,117
=========== =========== ========== ============
Income (loss) from continuing operations per
common share - basic and diluted $ .03 $ (.04) $ (.14) $ (.11)
=========== =========== ========== ============
Per share effects of discontinued operations and
cumulative effect of change in accounting principle:
Discontinued operations per common
share-basic and diluted $ .02 $ .12 $ .04
=========== ========== ============
Cumulative effect of change in accounting
principle per common share - basic and diluted $ (.10)
============
15
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 nine months ended September 30, 2002 and 2001, net
of amounts capitalized of $4.5 million and $22.2 million, was $57.0 million and $43.0 million, respectively. The
following non-cash investing and financing activities occurred during the nine months ended September 30, 2002
and 2001:
Nine Months ended September 30
------------------------------
2002 2001
---- ----
(in thousands)
Non-cash additions to properties $ 32,827
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 October 2002, the Company acquired Swerdlow Real Estate Group's (Swerdlow) 50 percent interest in Dolphin
Mall, bringing its ownership in the shopping center to 100 percent. The $97 million purchase price consisted of
$94.5 million of debt that encumbers the property and $2.3 million of peripheral property. No cash was
exchanged. Concurrently, all lawsuits between the Company and Swerdlow were settled and Swerdlow repaid the $10
million principal balance of a note due the Company that was previously delinquent. Also in October, the Dolphin
Mall construction facility was amended, reducing the maximum availability to $165 million and requiring a
pay-down of $24 million. The amended loan carries a two-year term with one 12-month extension option and bears
interest at 2.25 percent over LIBOR. As of November 2002, the rate on $140 million (decreasing to $120 million
in December 2003) of the facility was swapped to 2.045% plus credit spread, for a total all-in rate of 4.7%.
In November 2002, the International Plaza construction facility was amended to allow for an extension of the
maturity date to January 2003. The Company has exercised this extension option. The Company also has an option
to extend the loan to November 2003.
16
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.
17
The following table summarizes certain quarterly operating data for 2001 and the first three quarters of 2002.
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
2001 2001 2001 2001 2001 2002 2002 2002
----------- ----------- ----------- -------------- ------------- ----------- ----------- -----------
(in thousands)
Mall tenant sales $570,223 $605,945 $617,805 $1,003,894 $2,797,867 $645,317 $669,448 $691,205
Revenues 132,903 137,964 139,640 169,330 579,837 155,071 159,273 170,320
Occupancy:
Ending-comparable (1) 88.5% 87.4% 87.4% 88.6% 88.6% 86.8% 87.9% 89.1%
Average-comparable (1) 88.2 87.7 87.3 88.3 87.9 87.2 87.4 88.5
Ending 85.1 85.6 83.0 84.0 84.0 83.3 84.2 85.2
Average 87.0 85.5 84.0 83.7 84.9 83.3 83.7 84.7
Leased space:
Comparable (1) 92.2 91.6 91.4 91.6 91.6 91.5 91.4 92.2
All centers 90.8 90.0 88.0 87.7 87.7 87.4 87.6 88.5
(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
three quarters of 2002:
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter
2001 2001 2001 2001 2001 2002 2002 2002
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Minimum rents 11.2% 10.5% 11.2% 8.3% 10.0% 12.1% 11.9% 11.9%
Percentage rents 0.3 0.1 0.1 0.4 0.2 0.3 0.0 0.0
Expense recoveries 5.0 5.1 4.8 3.6 4.5 5.4 5.7 6.1
---- ---- ---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 16.5% 15.7% 16.1% 12.3% 14.7% 17.8% 17.6% 18.0%
==== ==== ==== ==== ==== ==== ==== ====
Current Operating Trends
In 2001 and 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. 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. Some operating statistics
affected by the softer economy have recently showed some improvement.
Tenant sales per square foot in the third quarter of 2002 decreased by 1.4% compared to the same period in
2001, an improvement on the 3.9% and 2.2% year-over-year decreases experienced in the first and second quarters
of 2002, respectively. 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 also showed improvement in third quarter 2002, in which comparable center average occupancy
increased 1.2% from third quarter 2001, compared to the second quarter 2002 occupancy decline of 0.3%. 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.
During the first nine months of 2002, 1.4% of the Company's tenants sought the protection of the bankruptcy
laws, compared to 3.9% in the comparable period of 2001.
The tragic events of September 11, 2001 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."
18
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
$42.04 for the three months ended September 30, 2002, compared to $41.44 for the three months ended September 30,
2001, a growth rate of 1.4%. 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 should 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 216 thousand square feet of tenant space opened in the Company's 14
comparable centers was $45.65 for the three months ended September 30, 2002, compared to average base rent per
square foot of $48.24 on 137 thousand square feet of tenant space that closed during the same period, reflecting
a spread of $(2.59) per square foot between the opening and closing average rent. This spread may not be
indicative of future periods, as this statistic is not computed on comparable tenant spaces, and 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. During 2002, the openings included several large spaces, which typically lease
at lower rents. Excluding tenant spaces greater than 10,000 square feet for the nine months ended September 30,
2002, rent per square foot for tenants opening was $47.58, while rent per square foot for tenants closing was
$43.84, a spread of $3.74.
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. In October
2002, the Company acquired the remaining 50% interest in Dolphin Mall (Results of Operations - Subsequent
Events).
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. The total allocation of cost to Dolphin Mall based on current assessments is
approximately $65.1 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.
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 $17 million of
equity contributions as of September 2002, which were used to fund construction costs.
19
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.
While the performance of Dolphin Mall has been adversely affected by slower than expected lease up, rental
concessions and lower than expected expense recoveries, Dolphin's performance is beginning to improve. Vehicle
counts are averaging about 500,000 per month and sales per square foot at the center have grown steadily. Tenant
collections have also increased.
The Company expects the return on Dolphin Mall to be approximately 4.5% in 2002 and approximately 6% in 2003
on its $268 million investment, which includes the additional interest that the Company acquired in October 2002
(Results of Operations - Subsequent Events). However, considering the opportunities for growth, the Company
anticipates that the net operating income of Dolphin Mall will double from 2002 over the next three to five
years.
The performance of The Shops at Willow Bend has been adversely affected by local and national economic
conditions resulting in lower occupancy and sales levels than expected. In addition, Willow Bend faces
significant competition from the large supply of retail space that recently opened in the area. The Company does
not expect significant improvements in the fundamentals of Willow Bend until the local economy strengthens.
As a result of Willow Bend's current operating performance, a paydown of the construction loan will be
required in July 2003, at its first of two, one-year, extension dates. The Company has recently paid down $17
million of this facility, principally to take advantage of the lower interest rates under the Company's line of
credit.
International Plaza and Wellington Green are performing as expected with improving occupancy, leasing
progress, and sales performance.
The return on Willow Bend is anticipated to be 7% in 2002 and 7% or slightly lower in 2003. The return on
Wellington Green is expected to be 7% in 2002 and 9% in 2003, International Plaza's return is expected to be 9%
in 2002 and 10% in 2003. Together, the returns on these three centers is expected to be 7.5% in 2002 and
approximately 8% in 2003.
The timing of the stabilization of the centers will be dependent upon when net new openings occur, which have
proven difficult to predict. Given current leasing rates, the Company expects returns on the three traditional
centers at stabilization to be near 10%. Stabilization is expected to take several 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 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 the purchase date.
20
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 results of Paseo Nuevo and LaCumbre Plaza, including the
gains on their disposition, have been presented as discontinued operations in the Company's Statement of
Operations for all periods presented.
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.
Investments in Technology Businesses
The Company owned an approximately 6.8% interest in MerchantWired, LLC, a service company originally created
to provide internet and network infrastructure to shopping centers and retailers that ceased operations in
September 2002. During the nine months ended September 30, 2002 and 2001, the Company recognized its $1.8
million and $1.6 million share of MerchantWired's operating losses, respectively. During the second quarter of
2002, the Company invested an additional $4.1 million to satisfy the Company's guarantees of MerchantWired's
obligations and recorded a charge 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 converted 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 in Fashionmall 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. During the third quarter of
2002, the Company received $3.1 million, representing a $3.75 dividend per share paid by Fashionmall.com, which
reduced the Company's investment to $0.1 million. Additionally, the Company recorded an unrealized holding
gain of $0.3 million as a component of other comprehensive income to mark its investment to its $0.4 million
market value at September 30, 2002.
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.
21
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 $1.0 million and $(1.0) million during the three months ended September 30,
2002 and 2001, and $2.8 million and $(3.5) million during the nine months ended September 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 $(0.9) million during the three months ended September 30, 2002 and 2001, and $3.0 million and $(3.1) million
during the nine months ended September 30, 2002 and 2001. The remainder represents the changes in time value of
other instruments.
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers'
operations. During the three and nine months ended September 30, 2002, revenues less operating costs (operating
and recoverable expenses) of those centers owned and open for the entire period increased approximately three
percent and two percent, respectively, in comparison to the same centers' results in the comparable periods of
2001. This growth was primarily due to increases in minimum rent. 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 Events
In October 2002, the Company acquired Swerdlow Real Estate Group's (Swerdlow) 50 percent interest in Dolphin
Mall, bringing its ownership in the shopping center to 100 percent. The $97 million purchase price consisted of
$94.5 million of debt that encumbers the property and $2.3 million of peripheral property. No cash was
exchanged. Concurrently, all lawsuits between the Company and Swerdlow were settled and Swerdlow repaid the $10
million principal balance of a note due the Company that was previously delinquent.
Also in October, the Dolphin Mall construction facility was amended, reducing the maximum availability to $165
million and requiring a pay-down of $24 million. The amended loan carries a two-year term with one 12-month
extension option and bears interest at 2.25 percent over LIBOR. As of November 2002, the rate on $140 million
(decreasing to $120 million in December 2003) of the facility was swapped to 2.045% plus credit spread, for a
total all-in rate of 4.7%. The Company anticipates the acquisition will be neutral to 2002 Funds from Operations
and accretive to 2003 Funds from Operations. This is a forward-looking statement and certain significant factors
could cause the actual effect to differ materially, including the actual operations of the center.
Also in October 2002, the Mall at Millenia, a 1.2 million square foot center in which the Operating
Partnership has a 50% interest, opened in Orlando, Florida. The Mall at Millenia is anchored by Bloomingdale's,
Macy's, and Neiman Marcus. The center was 96 percent leased at opening and is expected to be 94% occupied by
December 2002. The center is expected to cost approximately $200 million and achieve an 11% return in 2003. This
is a forward-looking statement 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.
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% during the three and nine months ended September 30, 2002, and 61.8% and 61.5% during the
three and nine months ended September 2001, respectively.
22
Comparison of the Three Months Ended September 30, 2002 to the Three Months Ended September 30, 2001
The following table sets forth operating results for the three months ended September 30, 2002 and September
30, 2001, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended September 30, 2002 Three months ended September 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 100%
VENTURES AT
100%
----------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 48.5 47.2 95.8 41.3 36.5 77.9
Percentage rents 0.3 0.9 1.2 0.5 0.3 0.7
Expense recoveries 32.0 24.6 56.6 24.1 18.2 42.3
Management, leasing and development 5.6 5.6 6.6 6.6
Other 9.8 1.4 11.2 5.8 2.5 8.3
---- ---- ----- ---- ---- -----
Total revenues 96.2 74.2 170.3 78.3 57.5 135.7
OPERATING COSTS:
Recoverable expenses 28.2 22.5 50.7 21.4 16.3 37.7
Other operating 8.1 5.8 13.9 7.5 2.9 10.4
Management, leasing and development 4.6 4.6 4.8 4.8
General and administrative 4.4 4.4 4.9 4.9
Interest expense 20.0 20.7 40.7 17.2 18.7 35.9
Depreciation and amortization (2) 20.2 14.2 34.4 16.2 10.6 26.9
---- ---- ----- ---- ---- -----
Total operating costs 85.5 63.2 148.8 72.0 48.6 120.7
---- ---- ----- ---- ---- -----
10.6 10.9 21.6 6.2 8.8 15.1
==== ===== ==== =====
Equity in income of Unconsolidated
Joint Ventures (2) 5.8 4.8
---- ----
Income before discontinued operations
and minority and preferred interests 16.4 11.0
Discontinued operations:
EBITDA (3) 2.0
Depreciation and amortization (0.7)
Minority and preferred interests:
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated
joint ventures 0.6
Minority share of income of TRG (4.5) (3.2)
Distributions in excess of minority
share of income (3.7) (4.7)
---- ----
Net income 5.9 2.8
Series A preferred dividends (4.2) (4.2)
---- ----
Net income (loss) allocable to common
shareowners 1.8 (1.4)
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 50.8 45.9 96.7 41.7 38.2 79.8
EBITDA - outside partners' share (2.1) (19.3) (21.4) (1.5) (17.3) (18.9)
---- ----- ----- ---- ----- -----
EBITDA contribution 48.7 26.6 75.2 40.1 20.8 61.0
Beneficial Interest Expense (18.8) (10.8) (29.6) (16.0) (9.7) (25.7)
Non-real estate depreciation (0.7) (0.7) (0.6) (0.6)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ---- ---- ---- ----
Funds from Operations contribution 22.8 15.8 38.6 17.1 11.1 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. 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.
23
Consolidated Businesses
Total revenues for the three months ended September 30, 2002 were $96.2 million, a $17.9 million or 22.9%
increase over the comparable period in 2001. Minimum rents increased $7.2 million, of which $5.0 million was due
to the openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due
to increased occupancy and tenant rollovers. Expense recoveries increased primarily due to Willow Bend and
Wellington Green. Management, leasing, and development revenue decreased primarily due to the loss of Sunvalley
revenue due to its acquisition and the completion of a short-term contract. Other revenue increased by $4.0
million from 2001 due to increases in gains on sales of peripheral land and lease cancellation revenue.
Total operating costs were $85.5 million, a $13.5 million or 18.8% 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 decreases in MerchantWired losses. Interest
expense increased primarily due to an increase in debt and a decrease in capitalized interest upon the 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 September 30, 2002 were $74.2 million, a $16.7 million or 29.0%
increase from the comparable period of 2001. Minimum rents increased $10.7 million, of which $10.0 million was
due to Dolphin Mall, 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 $14.6 million to $63.2 million for the three months ended September 30,
2002. Recoverable expenses increased primarily due to International Plaza and Sunvalley. Other operating expense
increased primarily due to Dolphin Mall, International Plaza, and Sunvalley and charges to operations for costs
of development activities. Interest expense increased due to the Sunvalley acquisition, increased debt (and
decreased capitalized interest upon opening) of Dolphin Mall and International Plaza, partially offset by a
decrease in the liability for the Dolphin Mall swap agreement recorded under FAS 133 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 acquisition.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $2.1 million to $10.9
million. The Company's equity in income of the Unconsolidated Joint Ventures was $5.8 million, a $1.0 million
increase 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 increased $5.4 million to $16.4 million for the three months ended September 30, 2002. After allocation
of income to minority and preferred interests, the net income (loss) allocable to common shareowners for 2002 was
$1.8 million compared to $(1.4) million in 2001.
24
Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001
The following table sets forth operating results for the nine months ended September 30, 2002 and September
30, 2001, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Nine months ended September 30, 2002 Nine months ended September 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 142.0 133.7 275.7 118.0 103.3 221.4
Percentage rents 2.0 1.4 3.4 2.4 1.1 3.5
Expense recoveries 89.4 67.5 156.8 72.2 51.0 123.3
Management, leasing and development 16.4 16.4 19.0 19.0
Other 23.0 5.4 28.5 21.4 10.5 31.8
----- ----- ----- ----- ----- -----
Total revenues 272.9 208.1 480.9 233.0 165.9 398.9
OPERATING COSTS:
Recoverable expenses 77.5 58.9 136.4 62.5 46.2 108.6
Other operating 24.4 16.8 41.2 23.6 9.1 32.7
Charge related to technology investments 8.1 8.1
Management, leasing and development 14.6 14.6 14.2 14.2
General and administrative 14.8 14.8 14.5 14.5
Interest expense 61.4 58.5 119.9 47.4 54.9 102.3
Depreciation and amortization (2) 61.1 41.8 102.9 47.3 27.9 75.2
----- ----- ----- ----- ----- -----
Total operating costs 262.0 176.0 438.0 209.5 138.1 347.5
----- ----- ----- ----- ----- -----
10.9 32.1 42.9 23.6 27.8 51.3
===== ===== ===== =====
Equity in income of
Unconsolidated Joint 16.6 14.9
---- ----
Ventures (2)
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests 27.5 38.4
Discontinued operations:
Gain on dispositions of interests in
centers 12.0
EBITDA (3) 3.2 5.5
Depreciation and amortization (0.5) (2.1)
Cumulative effect of change in
accounting principle (8.4)
Minority and preferred interests:
TRG preferred distributions (6.8) (6.8)
Minority share of consolidated
joint ventures 0.6 1.2
Minority share of income of TRG (14.0) (8.1)
Distributions in excess of minority
share of income (10.4) (15.7)
----- -----
Net income 11.6 4.1
Series A preferred dividends (12.5) (12.5)
----- -----
Net loss allocable to common
shareowners (0.8) (8.4)
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 144.7 132.3 277.0 123.7 110.5 234.3
EBITDA - outside partners' share (6.3) (58.9) (65.1) (5.5) (50.0) (55.5)
----- ----- ----- ----- ----- -----
EBITDA contribution 138.4 73.5 211.9 118.2 60.5 178.7
Beneficial Interest Expense (57.7) (29.6) (87.3) (43.6) (28.8) (72.4)
Non-real estate depreciation (2.1) (2.1) (2.0) (2.0)
Preferred dividends and distributions (19.2) (19.2) (19.2) (19.2)
----- ----- ----- ----- ----- -----
Funds from Operations contribution 59.4 43.9 103.3 53.3 31.8 85.1
===== ===== ===== ===== ===== =====
(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 $5.6 million and $5.7 million in 2002 and
2001, respectively. Of these amounts, $2.3 million was included in equity in income of Unconsolidated Joint Ventures in both
periods, while $3.3 million and $3.4 million were included in depreciation and amortization in 2002 and 2001, respectively.
(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.
25
Consolidated Businesses
Total revenues for the nine months ended September 30, 2002 were $272.9 million, a $39.9 million or 17.1%
increase over the comparable period in 2001. Minimum rents increased $24.0 million, of which $20.7 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. Expense recoveries increased primarily due to Willow Bend and Wellington Green.
Management, leasing, and development revenue decreased primarily due to the loss of Sunvalley revenue due to its
acquisition, and the completion of a short-term contract. Other revenue increased due to increases in gains on
sales of peripheral land, partially offset by decreases in lease cancellation revenue and interest income.
Total operating costs were $262.0 million, a $52.5 million or 25.1% 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 decreases in MerchantWired losses and 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 an
increase in debt and 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 nine months ended September 30, 2002 were $208.1 million, a $42.2 million or 25.4%
increase from the comparable period of 2001. Minimum rents increased $30.4 million, of which $29.6 million was
due to Dolphin Mall, 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 $37.9 million to $176.0 million for the nine months ended September 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 higher levels of bad debt expense at Dolphin Mall, and charges for
costs of development activities. Interest expense increased due to the Sunvalley acquisition, increased debt (and
decreased capitalized interest upon opening) of Dolphin Mall and International Plaza, partially offset by a
decrease in the liability for the Dolphin Mall swap agreement recorded under FAS 133 and changes in rates on
floating rate debt. Depreciation expense increased primarily due to the new centers and Sunvalley.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $4.3 million to $32.1
million. The Company's equity in income of the Unconsolidated Joint Ventures was $16.6 million, a $1.7 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 $10.9 million to $27.5 million for the
nine months ended September 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 $(0.8) million compared to $(8.4) million in 2001.
26
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 September 30, 2002, the Company had a consolidated cash balance of $19.9 million. Additionally, the
Company has a secured $275 million line of credit. This line had $130.0 million of borrowings as of September
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 $5.5 million of borrowings as of September 30,
2002 and expires in 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. 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 provided by investing activities was $45.1 million in 2002 compared to $206.4 million used 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 $3.3 million were made in 2002 and 2001, respectively, while a $3.1 million
dividend was received from Fashionmall.com in 2002. 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 $13.3 million, an increase
of $6.2 million from 2001. Contributions to Unconsolidated Joint Ventures of $52.7 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, Sunvalley, and the
Company's $36.8 million share of excess proceeds from the Westfarms refinancing.
Summary of Financing Activities
Net cash used in financing activities was $133.2 million in 2002, compared to $124.5 million of cash provided
by financing activities in 2001. Repayments of debt, net of proceeds and issuance costs, were $57.2 million in
2002, compared to net borrowings of $207.8 million in 2001. Stock repurchases of $21.3 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 $6.6 million in 2002 and $12.5 million in 2001.
Total dividends and distributions paid were $82.7 million and $74.6 million in 2002 and 2001, respectively.
27
Beneficial Interest in Debt
At September 30, 2002, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $2,016.3 million with an average interest rate of 5.79%,
excluding amortization of debt issuance costs and the effects of interest rate hedging instruments. Debt issuance
costs and interest rate hedging costs are reported as interest expense in the results of operations. Amortization
of debt issuance costs added 0.38% to TRG's effective interest rate in the third 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 $183.7 million as of September 30, 2002. Beneficial interest in
capitalized interest was $2.5 million and $6.1 million for the three and nine months ended September 30, 2002,
respectively. The following table presents information about the Company's beneficial interest in debt as of
September 30, 2002 (amounts may not add due to rounding).
Beneficial Interest in Debt
------------------------------
Amount Interest Rate
(in millions) at 9/30/02
------------- ----------
Total beneficial interest in fixed rate debt $ 1,126.2 7.28% (1)
Total beneficial interest in floating rate debt 890.0 3.91 (1)
----------
Total beneficial interest in debt $ 2,016.3 5.79 (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 September 30, 2002:
Through October 2002 $ 310.8 2.321%
Through November 2002 5.0 2.659
Through March 2003 121.7 3.090
--------
Total $ 437.5 2.539
========
Notional
Amount
(in millions) Swap Rate
------------- ---------
Floating rate debt hedged via forward
swap agreements:
November 2002 through September 2004 $ 140.0 (1) 2.045%
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
(1) Notional amount decreases to $120.0 million in December 2003.
In November 2002, the Company locked in a 10-year rate of under 6% for an anticipated $135 million refinancing
of $120 million debt on the Sunvalley shopping center, which is expected to close in December 2002. Also in
November, the International Plaza construction facility was amended to allow for an extension of the maturity
date to January 2003. The Company has exercised this extension option and expects to complete a five year
refinancing of International Plaza at a rate at or below 5% by the end of 2002.
In addition, as of September 30, 2002, $339.6 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 October 2002 through September 2003.
28
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 September 30, 2002,
excluding debt fixed under long-term LIBOR rate contracts and interest rate swaps, a one percent increase or
decrease in interest rates on this floating rate debt would decrease or increase cash flows by approximately $5.2
million and, due to the effect of capitalized interest, annual earnings by approximately $5.0 million. Based on
the Company's consolidated debt and interest rates in effect at September 30, 2002, a one percent increase in
interest rates would decrease the fair value of debt by approximately $41.6 million, while a one percent decrease
in interest rates would increase the fair value of debt by approximately $44.5 million.
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. The Company's recent
financings have required the purchase of separate terrorism policies.
Certain debt agreements, including all construction facilities, 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. A prepayment of $24 million of principal
was necessary to extend the October 2002 maturity date on the Dolphin Mall construction loan (see Results of
Operations - Subsequent Events). The Company also recently paid down the Willow Bend construction loan by $17
million (Results of Operations - New Center Openings). An additional payment may be required at the first
extension date in July 2003.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of September 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 9/30/02 as of 9/30/02 as of 9/30/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall (1) 189.0 94.5 94.5 50% 100%
Great Lakes Crossing 144.4 122.7 144.4 100% 100%
International Plaza 188.0 49.8 94.0 50% (2) 50% (2)
The Mall at Millenia -
construction loan 106.5 53.3 26.6 25% 25%
The Mall at Millenia - term loan 2.1 1.0 1.0 50% 50%
Stony Point Fashion Park 11.1 11.1 11.1 100% 100%
The Mall at Wellington Green 138.1 124.3 138.1 100% 100%
The Shops at Willow Bend 198.7 198.7 198.7 100% 100%
(1) In October 2002 the Company acquired its joint venture partner's 50% interest in Dolphin Mall and the
Operating Partnership's beneficial interest in Dolphin debt increased to the full loan balance, which was
paid down to $165 million (Results of Operations - Subsequent Events). There was no change to the
percentages guaranteed by the Operating Partnership.
(2) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of 25% of the amounts guaranteed.
29
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 relating to technology investments
incurred during the second quarter 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.
30
Reconciliation of Income to Funds from Operations
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
--------------------------- -----------------------
(in millions of dollars)
Income before discontinued operations
and minority and preferred interests (1) (2) 16.4 11.0
Funds from operations of discontinued operations 2.0
Depreciation and amortization (3) 20.2 16.2
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 10.1 6.3
Non-real estate depreciation (0.7) (0.6)
Minority partners in consolidated joint ventures
share of funds from operations (0.9) (0.3)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 38.6 28.2
==== ====
Funds from Operations allocable to TCO 23.9 17.4
==== ====
(1) Includes the Operating Partnership's share of gains on peripheral land sales of $2.9 million and $0.9
million for the three months ended September 30, 2002 and September 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.6
million and $0.2 million for the three months ended September 30, 2002 and September 30, 2001, respectively.
(3) Includes $0.8 million and $0.6 million of mall tenant allowance amortization for the three months ended
September 30, 2002 and September 30, 2001, respectively.
(4) Includes $0.7 million and $0.6 million of mall tenant allowance amortization for the three months ended
September 30, 2002 and September 30, 2001, respectively.
(5) Amounts in this table may not add due to rounding.
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
--------------------------- -----------------------
(in millions of dollars)
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests (1) (2) 27.5 38.4
Funds from operations of discontinued operations 3.2 5.5
Depreciation and amortization (3) 61.1 47.3
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 27.3 16.9
Charge related to technology investments 8.1
Non-real estate depreciation (2.1) (2.0)
Minority partners in consolidated joint ventures
share of funds from operations (2.5) (1.7)
Preferred dividends and distributions (19.2) (19.2)
----- -----
Funds from Operations - TRG 103.3 85.1
===== =====
Funds from Operations allocable to TCO 63.8 52.4
===== =====
(1) Includes the Operating Partnership's share of gains on peripheral land sales of $7.2 million and $3.6
million for the nine months ended September 30, 2002 and September 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $1.6
million and $0.5 million for the nine months ended September 30, 2002 and September 30, 2001, respectively.
(3) Includes $2.3 million and $1.8 million of mall tenant allowance amortization for the nine months ended
September 30, 2002 and September 30, 2001, respectively.
(4) Includes $1.8 million and $1.5 million of mall tenant allowance amortization for the nine months ended
September 30, 2002 and September 30, 2001, respectively.
(5) Amounts in this table may not add due to rounding.
31
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 became callable in October 2002. The Company has no present intention to redeem
the preferred equity.
On September 5, 2002, the Company declared a quarterly dividend of $0.255 per common share payable October 21,
2002 to shareowners of record on September 30, 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
September 30, 2002, which was paid on September 30, 2002 to shareowners of record on September 20, 2002.
The Company's current 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, is approximately 30% return of capital,
50% ordinary income, and 20% capital gain. The tax status of total 2002 dividends to be paid on Series A Preferred
Stock is estimated to be 80% ordinary income and 20% capital gain income. 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.
32
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally recovered from tenants. The
following table summarizes capital spending through September 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 Nine Months Ended September 30, 2002
--------------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)
--------------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 3.6 (1.3) 2.9
New centers 32.1 (2) 52.5 (3) 58.2
Pre-construction development activities,
net of charge to operations 6.9 6.9
Mall tenant allowances (4) 4.2 10.1 9.2
Corporate office improvements
and equipment 1.7 1.7
Other 0.8 0.3 0.9
---- ---- ----
Total 49.3 61.5 79.8
==== ==== ====
(1) Costs are net of intercompany profits.
(2) Primarily includes costs related to Stony Point Fashion Park.
(3) Primarily includes costs related to The Mall at Millenia (a 50% owned unconsolidated joint venture).
(4) Excludes tenant allowances for the centers that opened in 2001.
(5) Amounts in table may not add due to rounding.
For the nine months ended September 30, 2002, in addition to the costs above, the Company incurred its $5.7
million share of capitalized leasing costs and its $3.2 million share of repair and asset replacement costs that
will be reimbursed by tenants. Also during this period, the Company's share of reimbursements by tenants for
capitalizable expenditures of prior periods was $5.6 million. 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 presents a reconciliation of the Consolidated Businesses' capital spending shown above to
cash additions to properties as presented in the Company's Consolidated Statement of Cash Flows for the nine
months ended September 30, 2002.
(in millions)
Consolidated Businesses' capital spending not recovered from tenants $ 49.3
Repair and asset replacement costs reimbursable by tenants 2.6
Repair and asset replacement costs reimbursed by tenants (4.1)
Cash payments for capital spending accrued during 2001 24.2
---------
Additions to properties $ 72.0
=========
33
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)
--------------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion 49.6 (2) 99.3 (3) 99.3
Mall tenant allowances (4) 6.8 12.5 12.8
Pre-construction development and other 8.0 0.3 8.1
---- ----- -----
Total 64.4 112.1 120.2
==== ===== =====
(1) Costs are net of intercompany profits.
(2) Primarily includes costs related to Stony Point Fashion Park.
(3) Primarily includes costs related to The Mall at Millenia (a 50% owned unconsolidated joint venture).
(4) Excludes tenant allowances for the new centers.
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, net of recoveries. Currently 50% of the available tenant space has
executed leases. An additional 30% of tenant space is committed with leases out for signature and all remaining
tenant space is under negotiation.
The Company's approximately $30 million balance of development pre-construction costs as of September 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.
34
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 September 30, 2002 of $14.23 per common share, the aggregate value of interests in
the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $351 million.
The purchase of these interests at September 30, 2002 would have resulted in the Company owning an additional 30%
interest in the Operating Partnership.
Additional Information
The Company provides supplemental investor information coincident with its earning announcements that can be
found online at www.taubman.com under "Investor Relations."
35
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. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material information relating to the Company
required to be disclosed in the Company's periodic SEC reports. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect these internal controls subsequent
to the date the Company carried out its evaluation.
PART II
OTHER INFORMATION
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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) -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99 (c) -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Current Reports on Form 8-K.
On August 13, 2002, the Company filed a report on Form 8-K, which report was amended on August
14, 2002, that reported the filing of the certifications issued by the Company's Chief
Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
36
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: November 12, 2002 By: /s/ Lisa A. Payne
-------------------------------------------
Lisa A. Payne
Executive Vice President,
Chief Financial and Administrative Officer,
and Director
37
CERTIFICATIONS
I, Robert S. Taubman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Taubman Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Robert S. Taubman
-----------------------------------------------------
Robert S. Taubman
Chairman of the Board of Directors, President, and
Chief Executive Officer
38
I, Lisa A. Payne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Taubman Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Lisa A. Payne
-----------------------------------------------------
Lisa A. Payne
Executive Vice President, Chief Financial and
Administrative Officer
39