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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 Quarterly Period Ended: September 30, 2003
Commission File No. 1-11530

Taubman Centers, Inc.
(Exact name of registrant as specified in its charter)

        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.

        Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

        As of November 11, 2003, there were outstanding 49,932,834 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.

1

TAUBMAN CENTERS, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except share data)

See notes to consolidated financial statements.

2

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)

See notes to consolidated financial statements.

3

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)

See notes to consolidated financial statements.

4

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

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, 2003 included 21 urban and suburban shopping centers in nine states. Construction on an additional center in North Carolina began in October 2003.

        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 transactions 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, 2003, 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. The Company, beginning in September 2004 and November 2004, can redeem the Series C and Series D Preferred Equity, respectively.

        Because the net equity of the Operating Partnership unitholders is less than zero, the interest of the noncontrolling unitholders is presented as a zero balance in the consolidated balance sheet as of September 30, 2003 and December 31, 2002. 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, 2003 consisted of a 59% 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 nine months ended September 30, 2003 and 2002 was 61% and 62%, respectively. At September 30, 2003, the Operating Partnership had 83,412,357 units of partnership interest outstanding, of which the Company owned 49,363,273. Included in the total units outstanding are 87,028 units issued in connection with the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions, and 2,083,333 non-voting units issued in May 2003 (Note 10).

        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, 2002. 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.

        Dollar amounts presented in tables within the notes to the financial statements are stated in thousands, except share data or as otherwise noted.

        Certain prior year amounts have been reclassified to conform to 2003 classifications.

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TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 2 — Acquisitions and Dispositions

        In August 2003, the Company entered into an agreement to sell its interest in Biltmore Fashion Park to The Macerich Company. The sales price consists of $51 million cash and approximately 811,000 Marcerich partnership units (subject to an agreed upon trading range). The transaction, which is subject to final due diligence and other customary closing conditions, is expected to close before year-end and has been approved by the Board of Directors of both companies.

        In July 2003, the Company acquired an additional 25% interest in MacArthur Center, bringing its ownership in the shopping center to 95%, for $4.9 million in cash and 190,909 partnership units. Although the number of units issued was determined based on a negotiated value of $27.50 per unit, these units were recorded based on the Company’s common share price of $19.48 on the closing date of July 10, 2003. The Company has not yet finalized its allocations of the purchase price to the tangible and identifiable intangible assets and liabilities acquired.

        In March 2003, the Company acquired the 15% minority interest in Great Lakes Crossing for $3.2 million in cash, pursuant to a favorable pricing formula pre-established in the partnership agreement, bringing its ownership in the center to 100%. The Company has not yet finalized its allocations of the purchase price to the tangible and identifiable intangible assets and liabilities acquired.

        In October 2002, the Company acquired Swerdlow Real Estate Group’s (Swerdlow’s) 50% interest in Dolphin Mall, bringing its ownership in the shopping center to 100%. In May 2002, the Company acquired a 50% general partnership interest in SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in Concord, California. Also in May 2002, the Company purchased an additional interest in Arizona Mills, bringing its interest in the center to 50%, and sold its interest in Paseo Nuevo. In March 2002, the Company sold its interest in La Cumbre Plaza.

        Assuming the Great Lakes Crossing, MacArthur Center, and Dolphin Mall acquisitions occurred on January 1, 2002, pro forma results of the Company are as follows:

        Effective January 1, 2002, the Company adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with this statement, the Company has separately presented the results of Biltmore, La Cumbre Plaza, and Paseo Nuevo as discontinued operations in all periods presented.

Note 3 – 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, 2003, the Company’s federal income tax expense was zero as a result of a net operating loss incurred from its Taxable REIT Subsidiaries. As of September 30, 2003, the Company had a net deferred tax asset of $3.9 million, after a valuation allowance of $10.4 million.

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TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 4 — 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 (*).

        As of September 30, 2003, the Operating Partnership has a preferred investment in International Plaza of $14.6 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 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 cost of its investment in excess of the historical net book values of Unconsolidated Joint Ventures, and other 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. The net investment in Unconsolidated Joint Ventures is less than zero because of accumulated distributions in excess of net income and not as a result of operating losses. In addition, as the centers appreciate in value, they can be refinanced for amounts greater than the historical costs of the centers. Proceeds in excess of amounts used to repay the existing debt and related financing costs are generally distributed to the partners.

        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, 2003 and December 31, 2002 include $73 million in both periods related to the acquisition of an interest in Sunvalley. Also included in TRG’s basis adjustments as of September 30, 2003 and December 31, 2002 is $10 million and $11 million, respectively, related to the acquisition of an additional interest in Arizona Mills. These amounts are being depreciated over the 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. The accounts of Dolphin Mall, formerly a 50% Unconsolidated Joint Venture, are included in these results through the date of its acquisition (Note 2).

8

TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 5 – Accounts Receivable from Related Parties

        Accounts receivable from related parties include amounts due from Unconsolidated Joint Ventures or other affiliates of the Company, primarily relating to services performed by the Manager. These receivables include certain amounts due to the Manager related to reimbursement of third-party (non-affiliated) costs. In April 2003, the Operating Partnership, as required by a new law, paid certain state taxes on behalf of its non-officer partners, which will be reimbursed by the partners by the end of 2003. As of September 30, 2003, the balance of this receivable was $0.2 million.

Note 6 – Beneficial Interest in Debt and Interest Expense

        In August 2003, the Company completed a $12.6 million refinancing of the land loan on The Shops at Willow Bend. The loan carries an all-in floating rate of LIBOR plus 1.65% and matures in August 2005. Proceeds were used to pay down working capital debt. Partial payments of principal are required to release land parcels from collateral. Such payments would reduce the scheduled minimum principal payments that are required quarterly beginning in August 2004.

        In June 2003, the Company completed a $150 million refinancing of the $182 million existing construction loan on The Shops at Willow Bend. The loan carries an all-in floating rate of LIBOR plus 2.9% including fees and matures in July 2006, with an option to extend for up to an additional two years. Proceeds were used to pay off the construction financing at the center. The Company also used existing lines of credit to pay down the original loan. Proceeds of $8 million and a letter of credit for $10.25 million were held in escrow for future tenant allowance, leasing, and property tax costs.

        In March 2003, the Company closed on a $210 million ten-year non-recourse refinancing of the $156 million outstanding balance of the existing construction loan on The Mall at Millenia at an all-in rate of 5.5%. Proceeds of $10.5 million were used for tenant allowances. The Company used its $21 million share of distributed proceeds to pay down lines of credit.

        In February 2003, the Company completed a $151 million ten-year fixed-rate non-recourse refinancing of the existing $143 million loan on Great Lakes Crossing at an all-in rate of 5.3%. The Company used its $6.2 million share of excess proceeds to pay down lines of credit.

        Payments of principal and interest on the loans in the following table are guaranteed by the Operating Partnership as of September 30, 2003. Dolphin Mall, Stony Point Fashion Park, and The Mall at Wellington Green loan agreements provide for a reduction of the amounts guaranteed as certain center performance and valuation criteria are met.

        The Operating Partnership’s beneficial interest in the debt, capitalized interest, and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures in its continuing operations 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 MacArthur Center (5% at September 30, 2003, Note 2), The Mall at Wellington Green, and prior to March 2003, Great Lakes Crossing (Note 2). Also excluded from this table is Biltmore Fashion Park, which is classified as discontinued operations.

10

TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 7 – 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 8).

        There were options for 135,293 units exercised during the nine months ended September 30, 2003 at an average exercise price of $12.16 per unit. During the nine months ended September 30, 2002, options for 579,508 units were exercised at a weighted average price of $11.47 per unit. There were no options granted during the nine months ended September 30, 2003 and 2002. As of September 30, 2003, there were options for 1.5 million units outstanding with a weighted average exercise price of $12.10 per unit, all of which were vested.

        Currently, options for 3.7 million Operating Partnership units may be issued under the plan, including options outstanding for 1.5 million units. 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.

        In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has determined that it will apply the prospective method of implementing SFAS No. 148, and apply its expense recognition provisions to all employee awards granted, modified, or settled after January 1, 2003. During the nine months ended September 30, 2003, there would have been no additional compensation expense if the Company applied the fair value method of SFAS No. 148 to its existing options, as all are vested. The effect of applying this method for the nine months ended September 30, 2002 would be immaterial.

11

TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 8 — 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, 2003 of $19.60 per common share, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $484 million. The purchase of these interests at September 30, 2003 would have resulted in the Company owning an additional 30% interest in the Operating Partnership.

        The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, including A. Alfred Taubman), assignees of all present holders, those future holders of partnership interests in the Operating Partnership as the Company may, in its sole discretion, agree to include in the continuing offer, and all existing and future optionees under the Operating Partnership’s incentive option plan to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer). Under the Continuing Offer agreement, one unit of partnership interest is exchangeable for one share of the Company’s common stock.

        In the fall of 2002, the Company received an unsolicited proposal from Simon Property Group, Inc. (SPG) seeking to acquire control of the Company. The proposal was subsequently revised. Thereafter, a tender offer was commenced by SPG and later joined by a subsidiary of Westfield America Trust (Westfield). The Company’s Board of Directors rejected the proposal and recommended that the Company’s shareholders not tender their shares pursuant to SPG’s and Westfield’s tender offer. SPG filed suit against the Company to enjoin the voting of the Company’s Series B Non-Participating Convertible Preferred Stock based on a variety of legal theories. In October 2003, SPG and Westfield withdrew their tender offer, and the Company and SPG mutually agreed to end the litigation.

        During the nine months ended September 30, 2003, the Company incurred approximately $25.1 million in costs in connection with the unsolicited tender offer and related litigation. The Company expects that recoveries under its Directors and Officers Liability Insurance will offset any expenses incurred during the fourth quarter of 2003.

        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.

         A partial payment on the Dolphin construction loan will be required to be made in December 2003 under the terms of the loan agreement. Although the amount has not yet been determined, the Company presently expects that the payment will be approximately $20 million. The Company also expects that a partial prepayment on the Wellington construction loan may be required at the first extension date in May 2004. The amount of the payment has not been determined, as it is based on leases in place at the time of the extension.

        Refer to Note 6 for the Operating Partnership’s guarantees of certain debt.

12

TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 9 — 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) is 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. There were no options excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2003 and September 30, 2002.

Note 10 – Equity Transactions

        In July 2003, additional partnership units were issued in connection with the acquisition of an additional interest in MacArthur Center (Note 2).

        In May 2003, G.K. Las Vegas Limited Partnership, (Sheldon M. Gordon, along with his affiliates in their prior ownership of The Forum Shops at Caesars (Gordon)) invested $50 million in the Operating Partnership in exchange for 2.08 million partnership units at $24 per unit. These operating partnership units have the same attributes as existing partnership units, except that they do not have voting rights and have very limited resale rights for a specified period of time. An affiliate of Gordon owns the minority interest in Beverly Center.

        In February 2003, the Company’s Board of Directors authorized the expansion of the existing buyback program to repurchase up to an additional $100 million of the Company’s common shares. The Company had $3 million remaining under its existing buyback program. Repurchases of common stock have been financed through general corporate funds, including funds received from the equity investment described above, and through borrowings under existing lines of credit. Through May 1, 2003, the Company repurchased approximately three million shares at an average cost of $17.75, for a total cost of $52.8 million. There have been no additional purchases since May 1, 2003.

13

TAUBMAN CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 11 – Cash Flow Disclosures and Noncash Investing and Financing Activities

        Interest paid on mortgage notes and other loans of the Company’s continuing operations during the nine months ended September 30, 2003 and 2002, net of amounts capitalized of $7.8 million and $4.5 million, was $57.5 million and $52.4 million, respectively. Interest paid on mortgage notes and other loans of discontinued operations during the nine months ended September 30, 2003 and 2002, was $4.5 million in both periods. Partnership units recorded at $3.7 million were issued in connection with the acquisition of the additional interest in MacArthur Center in 2003 (Note 2).

Note 12 – New Accounting Pronouncements

        In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is currently effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company on July 1, 2003. In October 2003, the FASB agreed to defer the application of paragraphs 9 and 10 of FAS 150 regarding mandatorily redeemable non-controlling interests in subsidiaries that would not be liabilities under FAS 150 for the subsidiary. The deferral will be for an indefinite period. The remaining provisions of SFAS 150 had no impact on the Company’s financial statements.

        In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (FIN 46). This Interpretation addresses consolidation by business enterprises of certain variable interest entities and the conditions under which they should be included in consolidated financial statements. FIN 46 is effective for the first interim or annual period ending after December 15, 2003. In the near future, the FASB is expected to release for exposure an interpretation that would modify FIN 46. The Company does not currently believe that FIN 46 will change the entities which the Company currently consolidates in its financial statements.

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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 expectations regarding future income and expenses, 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 can be 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.

        There are a number of items that affect the comparability of information used in measuring performance. During 2003, the Company opened Stony Point Fashion Park (Results of Operations — Recent Openings) and entered into an agreement to sell its interest in Biltmore Fashion Park (Results of Operations — Acquisitions and Dispositions). During 2002, the Company opened The Mall at Millenia (Results of Operations – Recent Openings). Also 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). The Company opened four new shopping centers during 2001, which are currently not at stabilization. Additional 2003 and 2002 statistics that exclude Biltmore, La Cumbre Plaza, The Mall at Millenia, Paseo Nuevo, Stony Point, Sunvalley, and the centers that opened in 2001 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.

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        The following table summarizes certain quarterly operating data for 2002 and the first three quarters of 2003.

        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 2002 and the first three quarters of 2003:

Current Operating Trends

        In 2002 and 2003, the regional shopping center industry has been affected by the softness in the national economy. Economic and geopolitical 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. During the first nine months of 2003, the Company recognized its approximately $10.8 million share of lease cancellation revenue, which exceeded historical averages for entire annual periods; this level of lease cancellation income is not indicative of future periods. The Company expects that its share of total lease cancellation revenue could be as much as $12 million for 2003.

        The Company’s sales statistics have shown improvement over the last six months. Tenant sales per square foot in the third quarter of 2003 increased by 4.1% compared to the same period in 2002. Sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in sales on the Company’s operations are moderated by the relatively minor share of total rents (approximately two percent) percentage rents represent. However, a sustained trend in sales does impact, either negatively or positively, the Company’s ability to lease vacancies and negotiate rents at advantageous rates.

        Occupancy at September 30, 2003 and September 30, 2002 was 85.2% for the total portfolio. For the comparable center portfolio, ending occupancy was 87.1% at September 30, 2003 versus 89.1% at September 30, 2002. Thus, the Company is experiencing increases in occupancy in its noncomparable portfolio, which includes its centers which opened in 2001. Increased income from temporary in-line tenants, which has become an integral part of the Company’s business, is expected to partially offset the impact of lower occupancy in the comparable center portfolio. Temporary tenants, defined as those with leases less than 12 months, are not included in occupancy or leased space statistics. The Company expects to end the year with about three percent of GLA leased to temporary tenants. The Company presently expects that occupancy in 2004 will be consistent with 2003 levels in the first half of the year with improving occupancy in the second half of the year.

        During the first nine months of 2003 and 2002, 1.9% and 1.4%, respectively, of the Company’s tenants sought the protection of the bankruptcy laws.

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Rental Rates

        Annualized average base rent per square foot for all mall tenants at the Company’s 13 comparable centers was $43.12 for the three months ended September 30, 2003, compared to $42.28 for the three months ended September 30, 2002. 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, rents on new leases will grow more slowly or may decline for the opposite reason. However, center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases.

        Average base rent per square foot on 148 thousand square feet of tenant space opened in the Company’s 13 comparable centers was $49.31 for the three months ended September 30, 2003, compared to average base rent per square foot of $43.52 on 188 thousand square feet of tenant space that closed during the same period, reflecting a spread of $5.79 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.

Results of Operations

Acquisitions and Dispositions

        In August 2003, the Company entered into an agreement to sell its interest in Biltmore Fashion Park to The Macerich Company. The sales price consists of $51 million in cash and approximately 811,000 Macerich partnership units (subject to an agreed upon trading range). The transaction, which is subject to final due diligence and other customary closing conditions, is expected to close before year-end and has been approved by the Board of Directors of both companies. The results of Biltmore are being presented as discontinued operations in the Company’s Statement of Operations for all periods presented.

        In July 2003, the Company acquired an additional 25% interest in MacArthur Center, bringing its ownership in the shopping center to 95%, for $4.9 million in cash and 190,909 operating partnership units. Although the number of units issued was determined based on a negotiated value of $27.50 per unit, these units have been recorded based on the Company’s common share price of $19.48 as of the closing date of July 10, 2003. The Company has not yet finalized its allocations of the purchase price to the tangible and identifiable intangible assets and liabilities acquired.

        In March 2003, the Company acquired the 15% minority interest in Great Lakes Crossing for $3.2 million in cash, pursuant to a favorable pricing formula pre-established in the partnership agreement, bringing its ownership in the center to 100%. The Company has not yet finalized its allocations of the purchase price to the tangible and identifiable intangible assets and liabilities acquired.

        In October 2002, the Company acquired Swerdlow Real Estate Group’s (Swerdlow’s) 50% interest in Dolphin Mall, bringing its ownership in the shopping center to 100%. The results of Dolphin have been consolidated in the Company’s results subsequent to the acquisition date (prior to that date, Dolphin was accounted for under the equity method as an Unconsolidated Joint Venture). In May 2002, the Company acquired a 50% general partnership interest in SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in Concord, California; Sunvalley is accounted for under the equity method as an unconsolidated joint venture. Also in May 2002, the Company purchased an additional interest in Arizona Mills, bringing its interest in the center to 50%, and sold its interest in Paseo Nuevo. In March 2002, the Company sold its interest in La Cumbre Plaza.

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Debt Transactions

        In August 2003, the Company completed a $12.6 million refinancing of the land loan on The Shops at Willow Bend. The loan carries an all-in floating rate of LIBOR plus 1.65% and matures in August 2005. Proceeds were used to pay down working capital debt. Partial payments of principal are required to release land parcels from collateral. Such payments would reduce the scheduled minimum principal payments that are required quarterly beginning in August 2004.

        In June 2003, the Company completed a $150 million refinancing of the $182 million existing construction loan on The Shops at Willow Bend. The loan carries an all-in floating rate of LIBOR plus 2.9% including fees and matures in July 2006, with an option to extend for up to an additional two years. Proceeds were used to pay off the construction financing at the center. The Company also used existing lines of credit to pay down the original loan. Proceeds of $8 million and a letter of credit for $10.25 million were held in escrow for future tenant allowances, leasing, and property tax costs.

        In March 2003, the Company closed on a $210 million ten-year non-recourse refinancing of the $156 million outstanding balance of the existing construction loan on The Mall at Millenia at an all-in rate of 5.5%. Proceeds of $10.5 million were used for tenant allowances. The Company used its $21 million share of distributed proceeds to pay down lines of credit.

        In February 2003, the Company completed a $151 million ten-year fixed-rate non-recourse refinancing of the existing $143 million loan on Great Lakes Crossing at an all-in rate of 5.3%. The Company used its $6.2 million share of excess proceeds to pay down lines of credit.

        The $146 million loan on Beverly Center will be prepayable without penalty in January 2004. The Company expects that it would be able to refinance the center for approximately $350 million. The proceeds would be used to pay down the existing $146 million, 8.36% loan, related transaction costs, and initially, the Company’s line of credit. Based on current rates, the net impact of the refinancing would be to increase annual interest expense by approximately $3 million until the excess proceeds were reinvested.

Recent Openings

        Stony Point Fashion Park, a wholly-owned regional center, opened September 18, 2003 in Richmond, Virginia. Stony Point Fashion Park was nearly 99 percent leased and committed upon opening. The 690,000 square foot center is anchored by Saks Fifth Avenue, Galyan’s Stores, and Dillard’s.

        The Mall at Millenia, a 1.1 million square foot center in which the Operating Partnership has a 50% interest, opened in October 2002 in Orlando, Florida.

Unsolicited Tender Offer

        In the fall of 2002, the Company received an unsolicited proposal from Simon Property Group, Inc. (SPG) seeking to acquire control of the Company. The proposal was subsequently revised. Thereafter, a tender offer was commenced by SPG and later joined by a subsidiary of Westfield America Trust (Westfield). The Company’s Board of Directors rejected the proposal and recommended that the Company’s shareholders not tender their shares pursuant to SPG’s and Westfield’s tender offer. SPG filed suit against the Company to enjoin the voting of the Company’s Series B Non-participating Convertible Preferred Stock based on a variety of legal theories. In October 2003, SPG and Westfield withdrew their tender offer, and the Company and SPG mutually agreed to end the litigation.

        During the nine months ended September 30, 2003, the Company incurred approximately $25.1 million in costs in connection with the unsolicited tender offer and related litigation. The Company expects that recoveries under its Directors and Officers Liability Insurance will offset any expenses incurred during the fourth quarter of 2003.

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New Accounting Pronouncements

        In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is currently effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. In October 2003, the FASB agreed to defer the application of paragraphs 9 and 10 of FAS 150 to mandatorily redeemable non-controlling interests in subsidiaries that would not be liabilities under FAS 150 for the subsidiary. The deferral will be for an indefinite period. The remaining provisions of SFAS 150 had no impact on the Company’s financial statements.

        In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (FIN 46). This Interpretation addresses consolidation by business enterprises of certain variable interest entities and the conditions under which they should be included in consolidated financial statements. FIN 46 is effective for the first interim or annual period ending after December 15, 2003. In the near future, the FASB is expected to release for exposure an interpretation that would modify FIN 46. The Company does not currently believe that FIN 46 will change the entities that the Company currently consolidates in its financial statements.

Other

        In July 2003, May Company announced that it intends to divest 32 of its 86 Lord & Taylor stores, including four at the Company’s centers. As May Company’s press release outlined, the company has decided to exit certain markets in the south and southwest including Florida, Texas, and Colorado. This impacts Cherry Creek, International Plaza, Wellington Green, and Willow Bend. May had also announced in its press release that it will continue to fulfill its obligations under existing documents to operate each store until satisfactory arrangements can be negotiated to divest each location. The Company is continuing discussions with May and expects that a mutually satisfactory and positive solution for each center will be found.

        In May 2003, G.K. Las Vegas Limited Partnership, (Sheldon M. Gordon, along with his affiliates in their prior ownership of The Forum Shops at Caesars (Gordon)) invested $50 million in the Operating Partnership in exchange for 2.08 million partnership units at $24 per unit. These operating partnership units have the same attributes as existing partnership units, except that they do not have voting rights and have very limited resale rights for a specified period of time. These funds were used to finance the Company’s share repurchase program. An affiliate of Gordon owns the minority interest in Beverly Center.

        In February 2003, the Company’s Board of Directors authorized the expansion of the existing buyback program to repurchase up to an additional $100 million of the Company’s common shares. The Company had $3 million remaining under its existing buyback program. Repurchases of common stock have been financed through general corporate funds, including funds received from the equity investment described above, and through borrowings under existing lines of credit. Through May 1, 2003, the Company repurchased approximately three million shares at an average cost of $17.75, for a total cost of $52.8 million. There have been no additional purchases since May 1, 2003.

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Presentation of Operating Results

        The following tables contain the 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. Amounts allocable to minority partners in certain consolidated joint ventures are added back or deducted to arrive at the net results of the Company. The Company’s average ownership percentage of the Operating Partnership was approximately 59% and 61% during the three and nine months ended September 30, 2003, respectively, and 62% during both the three and nine months ended September 30, 2002.

        The results of Dolphin Mall are presented within the Consolidated Businesses subsequent to its October 2002 acquisition. Prior to that date, they are included within the Unconsolidated Joint Ventures. The results of Biltmore Fashion Park are presented as discontinued operations in 2003 and 2002. The results of La Cumbre Plaza and Paseo Nuevo, including the gains on their disposition in 2002, are presented as discontinued operations in 2002.

        The operating results in the following tables include the supplemental earnings measures of Beneficial Interest in EBITDA and Funds from Operations (FFO). Beneficial Interest in EBITDA represents the Operating Partnership’s share of the earnings before interest and depreciation and amortization, excluding gains on sales of depreciated operating properties of its consolidated and unconsolidated businesses. The Company believes Beneficial Interest in EBITDA provides a useful indicator of operating performance, as it is customary in the real estate and shopping center business to evaluate the performance of properties on a basis unaffected by capital structure.

        The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items and sales of properties, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that FFO is a useful supplemental measure of operating performance for REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, the Company and most industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of REITs. FFO is primarily used by the Company in measuring performance and in formulating corporate goals and compensation. FFO as presented by the Company is not necessarily comparable to the FFO of other REITs due to the fact that not all REITs use the NAREIT definition. FFO should not be considered an alternative to net income as an indicator of the Company’s operating performance. Additionally, FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP.

        Reconciliations of Net Income (Loss) to Funds from Operations and Beneficial Interest in EBITDA are presented following the Comparison of the Nine Months Ended September 30, 2003 to the Nine Months Ended September 30, 2002.

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      Comparison of the Three Months Ended September 30, 2003 to the Three Months Ended September 30, 2002

        The following table sets forth operating results for the three months ended September 30, 2003 and September 30, 2002, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures: