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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number 1-11530
TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2033632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303-0200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (248) 258-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, New York Stock Exchange
$0.01 Par Value
8.3% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock,
$0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such report(s)) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
|x| Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of March 25, 1998, the aggregate market value of the 42,100,227 shares of
Common Stock held by non-affiliates of the registrant was $542.0 million,
based upon the closing price ($12 7/8) on the New York Stock Exchange composite
tape on such date. (For this computation, the registrant has excluded the market
value of all shares of its Common Stock reported as beneficially owned by
executive officers and directors of the registrant and certain other
shareholders; such exclusion shall not be deemed to constitute an admission that
any such person is an "affiliate" of the registrant.) As of March 25, 1998,
there were outstanding 50,828,785 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1998 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company" or "TCO") was incorporated in Michigan in
1973 and had its initial public offering ("IPO") in 1992. Upon completion of the
IPO, the Company became the managing general partner of The Taubman Realty Group
Limited Partnership ("TRG"). The Company has a 38.4% partnership interest in TRG
(which has increased from 36.7% at December 31, 1997 because of TRG's redemption
of a partner's interest in January 1998). The Company, through TRG, engages in
the ownership, management, leasing, acquisition, development, and expansion of
regional shopping centers ("Taubman Shopping Centers" or "Centers") and
interests therein. TRG's portfolio, as of December 31, 1997, includes 25 urban
and suburban Taubman Shopping Centers located in 12 states. Two additional
Centers are under construction and are expected to open in November 1998 and
March 1999. Twenty-two of the Centers are "super-regional" centers because they
have more than 800,000 square feet of gross leasable area. TRG also owns certain
regional retail shopping center development projects and more than 99% of The
Taubman Company Limited Partnership (the "Manager"), which manages the Taubman
Shopping Centers and provides other services to TRG and the Company. See the
table on pages 12 and 13 of this report for information regarding the Taubman
Shopping Centers and TRG's interests in them.
The Company is a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to satisfy the
provisions of the Code applicable to REITs, the Company must distribute to its
shareholders at least 95% of its REIT taxable income and meet certain other
requirements. TRG's partnership agreement provides that TRG will distribute, at
a minimum, sufficient amounts to its partners such that the Company's pro rata
share will enable the Company to pay shareholder dividends (including capital
gains dividends that may be required upon TRG's sale of an asset) that will
satisfy the REIT provisions of the Code.
Recent Developments
For a discussion of business developments that occurred in 1997, see the
response to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size
and marketing strategy. Retail shopping centers range from neighborhood centers
of less than 100,000 square feet of GLA to regional and super-regional shopping
centers. Retail shopping centers in excess of 400,000 square feet of GLA are
generally referred to as "regional" shopping centers, while those centers having
in excess of 800,000 square feet of GLA are generally referred to as
"super-regional" shopping centers. In this annual report on Form 10-K, the term
"regional shopping centers" refers to both regional and super-regional shopping
centers. The term "GLA" refers to gross retail space, including anchors and mall
tenant areas, and the term "Mall GLA" refers to gross retail space, excluding
anchors. The term "anchor" refers to a department store or other large retail
store. The term "mall tenants" refers to stores (other than anchors) that are
typically specialty retailers and lease space in shopping centers.
1
Business of the Company
The Company, as managing general partner of TRG, is engaged in the ownership,
management, leasing, acquisition, development and expansion of regional shopping
centers.
The Taubman Shopping Centers:
o are strategically located in major metropolitan areas, many in communities
that are among the most affluent in the country, including New York City,
Chicago, Los Angeles, San Francisco, Denver, Columbus, Detroit, Miami,
Phoenix, and Washington, D.C.;
o range in size between 438,000 and 2.3 million square feet of GLA and between
133,000 and 942,000 square feet of Mall GLA. The smallest Center has
approximately 50 stores, and the largest has approximately 250 stores. Of
the 25 Centers, 22 are super-regional shopping centers;
o have approximately 3,400 stores operated by its mall tenants under
approximately 1,250 trade names;
o have 88 anchors, operating under 17 trade names;
o lease approximately 76% of Mall GLA to national chains, including
subsidiaries or divisions of The Limited (The Limited, Limited Express,
Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and
others), and Woolworth Corporation (Foot Locker, Kinney Shoes, and others);
and
o are among the most productive (measured by mall tenants' average per square
foot sales) in the United States. In 1997, mall tenants in the Taubman
Shopping Centers portfolio had average per square foot sales of $384, which
is substantially greater than the average for all regional shopping centers
owned by public companies.
The most important factor affecting the revenues generated by the Taubman
Shopping Centers is leasing to mall tenants (primarily specialty retailers),
which represents over 90% of revenues. Anchors account for approximately 5% of
revenues because many own their stores and, in general, those that lease their
stores do so at rates substantially lower than those in effect for mall tenants.
TRG's ownership is concentrated in highly productive super-regional shopping
centers. Of its 25 Centers, 19 had annual rent rolls at December 31, 1997 of
over $10 million and 21 had annualized sales per square foot in excess of $300.
The Company believes that this level of productivity in the Taubman Shopping
Centers is indicative of their strong competitive position and is, in
significant part, attributable to TRG's business strategy and philosophy. The
Company believes that large shopping centers (including regional and especially
super-regional shopping centers) are the least susceptible to direct competition
because (among other reasons) anchors and large specialty retail stores do not
find it economically attractive to open additional stores in the immediate
vicinity of an existing location for fear of competing with themselves. In
addition to the advantage of size, the Company believes that the Centers'
success can be attributed in part to their other physical characteristics, such
as design, layout, and amenities.
2
Business Strategy And Philosophy
The Company and TRG believe that the regional shopping center business is not
simply a real estate development business, but rather an operating business in
which a retailing approach to the on-going management and leasing of the Taubman
Shopping Centers is essential. Thus TRG:
o offers a large, diverse selection of retail stores in each Center to give
customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, and thereby increase
achievable rents, by leasing space to a constantly changing mix of tenants;
and
o seeks to anticipate trends in the retailing industry and emphasizes ongoing
introductions of new retail concepts into the Centers. Due in part to this
strategy, a number of successful retail trade names have opened their first
mall stores in the Taubman Shopping Centers. TRG believes that its execution
of this leasing strategy is unique in the industry and is an important
element in building and maintaining customer loyalty and increasing mall
productivity.
The Taubman Shopping Centers compete for retail consumer spending through
diverse, in-depth presentations of predominantly fashion merchandise in an
environment intended to facilitate customer shopping. While some Taubman
Shopping Centers include stores that target high-end, upscale customers, each
Center is individually merchandised in light of the demographics of its
potential customers within convenient driving distance.
TRG's leasing strategy involves assembling a diverse mix of mall tenants in
each of the Taubman Shopping Centers in order to attract customers, thereby
generating higher sales by mall tenants. High sales by mall tenants make the
Taubman Shopping Centers attractive to prospective tenants, thereby increasing
the rental rates that prospective tenants are willing to pay. TRG implements an
active leasing strategy to increase the Taubman Shopping Centers' productivity
and to set minimum rents at higher levels. Elements of this strategy include
terminating leases of under-performing tenants, renegotiating existing leases,
and not leasing space to prospective tenants that (though viable or attractive
in certain ways) would not enhance a Taubman Shopping Center's retail mix.
TRG's strategy is carried out by the Manager, which is more than 99%
beneficially owned by TRG and which has been engaged to provide property
management and leasing services for the Taubman Shopping Centers and to provide
corporate, development, administrative, and acquisition services for TRG and the
Company. The Manager has been a leading developer and manager in the regional
shopping center business for more than 25 years.
Potential For Growth
The Company's principal objective is to enhance shareholder value, and it
conducts all of its operations through TRG to achieve that result. TRG seeks to
maximize the financial results of its dominant assets, while pursuing a growth
strategy that includes the following key elements 1) an active new center
development program, 2) strategic acquisitions, 3) expansion of the Centers, and
4) internal growth.
3
Development of New Centers
- --------------------------
The Company believes that TRG has attractive development opportunities and
intends to continue to pursue an active program of regional shopping center
development. The Company believes that TRG has the expertise, through the
Manager, to develop economically attractive regional shopping centers through
intensive analysis of local retail opportunities. TRG believes that the
development of new centers is the best use of TRG's capital and an area in which
TRG excels. At any time, TRG has numerous potential development projects in
various stages, with the objective of opening, on average, one new center each
year. During 1997, TRG's program of development produced the opening of two
centers. In July, TRG opened The Mall at Tuttle Crossing, a super-regional
shopping center located in Columbus, Ohio. This Center was 95% leased at year
end. In November, TRG opened Arizona Mills, a value super-regional shopping
center located in Tempe, Arizona. The Center opened 90% leased.
Additionally, two centers from TRG's development program are currently under
construction. In 1997, TRG began construction on Great Lakes Crossing, an
enclosed value super-regional mall in Auburn Hills, Michigan, owned by a
partnership in which TRG has an 80% controlling interest. The 1.4 million square
foot Center is scheduled to open in November 1998, at an expected cost of
approximately $210 million. Construction continues on MacArthur Center, a new
Center in Norfolk, Virginia, which is expected to open in March 1999 with 930
thousand square feet of GLA. The three-level Center will initially be anchored
by Nordstrom and Dillard's. The project is a joint venture in which TRG has a
70% controlling interest and is projected to cost approximately $150 million.
TRG's policies with respect to development activities are designed to limit
the risks otherwise associated with development. For instance, TRG entered into
an agreement to lease Memorial City Mall, a center adjacent to one of the most
affluent residential areas in Houston, Texas, while TRG investigates the
redevelopment opportunities of the center (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Capital Spending" for further discussion of the
transaction). Also, TRG generally does not intend to acquire land early in the
development process, but will instead generally acquire options on land or form
partnerships with landholders holding potentially attractive development sites,
typically exercising options only once it is prepared to begin construction. In
addition, TRG does not intend to begin construction until a sufficient number of
anchor stores have agreed to operate in the shopping center, such that TRG is
confident that the projected sales and rents from Mall GLA are sufficient to
earn a return on invested capital in excess of TRG's cost of capital. Having
historically followed these two principles, TRG's experience indicates that less
than 20% of the costs of the development of a regional shopping center will be
incurred prior to the construction period; however, no assurance can be given
that TRG will continue to be able to so minimize pre-construction costs.
While the Company anticipates that TRG will continue to evaluate development
projects using criteria, including financial criteria for rates of return,
similar to those employed in the past, no assurances can be given that the
adherence to these policies will produce comparable results in the future. In
addition, the costs of shopping center development opportunities that are
explored but ultimately abandoned will, to some extent, diminish the overall
return on development projects.
Strategic Acquisitions
- ----------------------
TRG's objective is to acquire existing centers that are compatible with the
quality of TRG's portfolio (or can be redeveloped to that level) and that
satisfy TRG's strategic plans and pricing requirements. In 1997, TRG completed
three acquisitions totaling over $356 million.
In September 1997, TRG acquired Regency Square shopping center, the dominant
fashion center in the greater Richmond, Virginia area, for $123.9 million.
Regency Square has 825,000 square feet of GLA and is anchored by Hecht's,
JCPenney and Sears.
4
In December 1997, TRG acquired The Falls shopping center in Miami for $156
million. Representing TRG's entry into the Florida market, The Falls is an
812,000 square foot Center, anchored by Bloomingdale's and Macy's.
Also in December, TRG completed the $76.3 million acquisition of the
participating leasehold interest in The Mall at Tuttle Crossing. Tuttle Crossing
opened in July as the second of TRG's two properties in the Columbus, Ohio
market.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Acquisitions" and Note 3 to the
Consolidated Financial Statements of TRG for further discussion of these
acquisitions.
The Company and TRG believe that TRG will have additional opportunities to
acquire regional shopping centers, or interests therein, and will have certain
advantages in doing so.
o First, the management expertise of the Manager will enhance the leasing and
operation of newly acquired regional shopping centers. If opportunities
exist to expand, remodel, or re-merchandise the center through new leasing,
the Manager's expertise will assist TRG in making an informed and timely
evaluation of the economic consequences of such activities prior to
acquisition, as well as facilitate implementation of such activities.
o Second, a center can be acquired for any combination of cash or equity
interests in TRG or (subject to certain limitations) the Company, possibly
creating the opportunity for tax-advantaged transactions for the seller,
thereby reducing the price that might otherwise have to be paid in an all
cash transaction or making an opportunity available that would not otherwise
exist. TRG is able to offer partnership interests in itself in exchange for
shopping center interests, allowing sellers to diversify their interests,
attain liquidity not otherwise available, possibly defer taxes that might
otherwise be due if the interests were instead sold for cash, maintain an
investment in the regional shopping center business, and resolve concerns
sellers otherwise may have regarding future management of their properties.
For instance, Biltmore Fashion Park's selling group included private
investors who found it tax efficient to accept TRG partnership units as part
of the consideration when TRG acquired the Center in 1994.
Expansions of the Taubman Shopping Centers
- ------------------------------------------
A key element of growth is the strategic expansion of existing properties to
update and enhance their market positions, by replacing or adding new anchor
stores or increasing mall tenant space. Most of the Taubman Shopping Centers
have been designed to accommodate expansions. Expansion projects can be as
significant as new shopping center construction in terms of scope and cost,
requiring governmental and existing anchor store approvals, design and
engineering activities, including rerouting utilities, providing additional
parking areas or decking, acquiring additional land, and relocating anchors and
mall tenants (all of which must take place with a minimum of disruption to
existing tenants and customers). In 1997, for example, TRG opened a 135,000
square foot expansion at Westfarms in August (followed by a new Nordstrom in
September) and new mall stores totaling 50,000 square feet of Mall GLA at
Biltmore throughout the year. Additionally, construction is in process at Cherry
Creek, where a 132,000 square foot expansion of the Mall GLA will open in the
fall of 1998.
Consolidation of department stores has also strengthened TRG's portfolio, as
retailers continue to be attracted to TRG's dominant and highly productive
locations. A recent department store conversion includes Bloomingdale's at
Beverly Center, which opened in March of 1997.
5
The following table includes information regarding TRG's development,
acquisition, and expansion activities during 1997 and 1996.
Developments:
Completion Date Center Location
--------------- ------ --------
July 1997 Tuttle Crossing Columbus, Ohio
November 1997 Arizona Mills Tempe, Arizona
November 1998 Great Lakes Crossing Auburn Hills, Michigan
March 1999 MacArthur Center Norfolk, Virginia
Acquisitions:
Completion Date Center Location
--------------- ------ --------
June 1996 Paseo Nuevo (1) Santa Barbara, California
July 1996 Fairlane Town Center (2) Dearborn, Michigan
December 1996 La Cumbre Plaza Santa Barbara, California
September 1997 Regency Square Richmond, Virginia
December 1997 Tuttle Leasehold Columbus, Ohio
December 1997 The Falls (3) Miami, Florida
Expansions and Anchor Conversions:
Completion Date Center Location
--------------- ------ --------
June 1996 Biltmore (4) Phoenix, Arizona
August 1996 Fair Oaks (5) Fairfax, Virginia
August 1996 Lakeforest (5) Gaithersburg, Maryland
November 1996 Marley Station (6) Anne Arundel County, Maryland
November 1996 Stoneridge (6) Pleasanton, California
March 1997 Beverly Center (7) Los Angeles, California
August 1997 Westfarms (8) West Hartford, Connecticut
November 1997 Cherry Creek (9) Denver, Colorado
December 1997 Biltmore (10) Phoenix, Arizona
- ------------------
(1) Broadway converted to Macy's immediately prior to TRG's acquisition of
Paseo Nuevo.
(2) Acquired partner's 75% interest in the Center.
(3) Completely redeveloped and expanded in 1996 before TRG's acquisition of The
Falls.
(4) Broadway converted to Macy's.
(5) Woodward & Lothrop converted to Lord & Taylor.
(6) Sears opened new store.
(7) Broadway converted to Bloomingdale's.
(8) 135,000 square foot expansion followed by the opening of a new Nordstrom in
September.
(9) Lord & Taylor opened new and expanded store. Additional 132,000 square foot
expansion of mall tenant space will open in the Fall of 1998.
(10) 50,000 square foot expansion of mall tenant space completed.
6
Internal Growth
- ---------------
The Taubman Shopping Centers are among the most productive in the nation, when
measured by mall tenant's average sales per square foot. Higher sales per square
foot enable mall tenants to remain profitable while paying occupancy costs that
are a greater percentage of total sales. As leases expire at the Centers, TRG
has consistently been able, on a portfolio basis, to lease the available space
to an existing or new tenant at higher rates.
Augmenting this growth, TRG is pursuing a number of new sources of revenue
from the Taubman Shopping Centers. For example, TRG expects increased revenue
from its specialty leasing efforts. In recent years a new industry -- beyond
traditional carts and kiosks -- has evolved, with more and better quality
specialty tenants. TRG has put in place a company-wide program to maximize this
opportunity.
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent, excluding renewals, at Taubman Shopping Centers that have
been owned and open for five years.
Store Store Difference
All Closings Openings Between
Mall During During Opening and
Tenants Year Year Closing Rents
------- ---- ---- -------------
Average Average Average Average
Base Annualized Annualized Annualized
Rent Base Rent Base Rent Base Rent
---- --------- --------- ---------
1997 (1)................... $38.79 $37.62 $41.67 $ 4.05
1996 (1)................... $37.90 $33.39 $42.39 $ 9.00
1995 (1)................... $36.33 $32.96 $41.27 $ 8.31
1994 (2)................... $34.72 $30.46 $41.02 $10.56
1993 (3)................... $32.64 $29.56 $35.86 $ 6.30
(1) Includes 18 centers owned and open prior to January 1, 1991.
(2) Includes 17 centers owned and open prior to January 1, 1990.
(3) Includes 16 centers owned and open prior to January 1, 1989.
Average annualized rent on stores opening in 1997 excludes rent on stores with
greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be
somewhat higher than in 1997. However, this statistic is difficult to predict in
part because TRG's leasing policies and practices may result in early lease
terminations with actual average closing rents which may vary from the average
rent per square foot of scheduled lease expirations. In addition, the opening or
closing of large tenant spaces, which generally pay a lower rent per square
foot, can significantly affect the spread in a given year.
7
Lease Expirations
The following table shows lease expirations based on information available as
of December 31, 1997 for the next ten years for the Taubman Shopping Centers in
operation at that date:
Percent of
Annualized Base Annualized Base Total Leased
Rent Under Rent Under Square Footage
Lease Expiration Number of Leases Leased Area Expiring Leases Expiring Leases Represented by
Year Expiring in Square Footage (in thousands) Per Square Foot Expiring Leases
---- -------- ----------------- -------------- --------------- ---------------
1998 (1) 173 423,828 $ 14,527 $ 34.27 4.5%
1999 281 749,483 27,081 36.13 7.9%
2000 346 845,160 31,682 37.49 8.9%
2001 335 825,406 33,050 40.04 8.7%
2002 376 920,849 36,971 40.15 9.7%
2003 362 1,037,080 41,446 39.96 11.0%
2004 310 996,685 41,044 41.18 10.5%
2005 318 1,029,162 42,362 41.16 10.9%
2006 198 612,522 25,835 42.18 6.5%
2007 258 913,452 35,264 38.61 9.7%
(1) Excludes leases that expire in 1998 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1997.
The Company believes that the information in the table is not necessarily
indicative of what will occur in the future because of several factors, but
principally because TRG's leasing policies and practices create a significant
level of early lease terminations at the Taubman Shopping Centers. For example,
the average remaining term of the leases that were terminated during the period
1992 to 1997 was approximately 1.9 years. The average term of leases signed
during 1997 and 1996 was approximately 7.3 years.
In addition, mall tenants at Taubman Shopping Centers may seek the protection
of the bankruptcy laws, which could result in the termination of such tenants'
leases and thus cause a reduction in the cash flow generated by the Taubman
Shopping Centers. Prior to 1992, such bankruptcies had not affected more than 3%
of leases in the Taubman Shopping Centers in any one calendar year. In 1997,
approximately 1.5% of leases were so affected compared to 2.8% in 1996, 3.2% in
1995, 3.1% in 1994 and 4.0% in 1993. Since 1991, the annual provision for losses
on accounts receivable has been less than 2% of TRG's annual revenues.
Occupancy
Mall tenant average occupancy rates of the Taubman Shopping Centers for the
last five years are as follows:
Year Mall Tenant Average Occupancy
---- -----------------------------
1997 87.6%
1996 87.4%
1995 88.0%
1994 86.6%
1993 86.5%
Historically, average annual occupancy for TRG as a whole has been within a
narrow band. In the last ten years, average annual occupancy has ranged between
86.5% and 88.7%.
Major Tenants
The combined operations of The Limited, Inc. accounted for approximately 12%
of leased Mall GLA as of December 31, 1997 and for approximately 10% of the 1997
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 2.3% of leased Mall GLA and 2.1% of
1997 base rent. No other single retail company accounted for more than 4% of
leased Mall GLA or 1997 base rent.
8
Environmental Matters
All of the Taubman Shopping Centers presently owned by TRG (not including
option interests in the Development Projects or any of the real estate managed
by the Manager but not included in TRG's portfolio) have been subject to
environmental assessments. The Company, TRG, and the Manager are not aware of
any environmental liability relating to the Taubman Shopping Centers or any
other property in which they have or had an interest (whether as an owner or
operator) that the Company believes would have a material adverse effect on the
Company's business, assets, or results of operations. No assurances can be
given, however, that all environmental liabilities have been identified or that
no prior owner, operator, or current occupant has created an environmental
condition not known to the Company, TRG, or the Manager. Moreover, no assurances
can be given that (i) future laws, ordinances, or regulations will not impose
any material environmental liability or that (ii) the current environmental
condition of the Taubman Shopping Centers will not be affected by tenants and
occupants of the Taubman Shopping Centers, by the condition of properties in the
vicinity of the Taubman Shopping Centers (such as the presence of underground
storage tanks), or by third parties unrelated to TRG, the Company, or the
Manager.
With respect to the matters described below, while there can be no assurances,
the Company believes that such matters will not have a material adverse effect
on the Company's business, assets, or results of operations.
Beverly Center is located over an oil field and several abandoned oil wells,
and is adjacent to an active oil production facility that operates numerous oil
and gas wells. In the Los Angeles basin, where Beverly Center is located,
pockets of methane gas may be found in oil fields; however, elevated levels of
methane have not been detected at Beverly Center.
Cherry Creek is situated on land that was used as a landfill prior to 1950.
Because of the past use of the site as a landfill, the site is listed on the
United States Environmental Protection Agency's Comprehensive Environmental
Response, Compensation and Liability Information System list.
In the summer of 1997, geotechnical drilling activities were undertaken in the
former gasoline station area as part of a parking lot expansion at the
southeastern corner of the Cherry Creek site. The geotechnical soil samples were
observed to have petroleum odors and staining. A subsurface environmental
investigation subsequently revealed a limited zone of hydrocarbon contaminated
soils, with no significant impacts to groundwater. Discussions with the Colorado
Department of Labor and Employment, Oil Inspection Section, held in September
1997, resulted in a "passive retardation" remedial approach that relies on
natural processes to degrade the hydrocarbon contamination. A Corrective Action
Plan was submitted in February 1998 that proposes monitoring the soil and
groundwater quarterly for a period of two years. Acceptance of the plan is
anticipated by May 1998. Implementation of the plan poses no constraints to the
current expansion activity.
Paseo Nuevo is located in an area of known groundwater contamination by
tetrachloroethylene ("PCE"). The groundwater under and around the site was
monitored for six years before, during, and after construction of the center. No
on-site sources of PCE were identified during construction. The Regional Water
Quality Control Board has given approval to discontinue the monitoring program
because the PCE levels remained relatively constant over the six-year period and
do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the Taubman
Shopping Centers, primarily in the form of floor tiles, roof coatings and
mastics. The floor tiles, roof coatings and mastics are generally in good
condition. Fire-proofing material containing asbestos is present at some of the
Taubman Shopping Centers in limited concentrations or in limited areas. The
Manager has developed and is implementing an operations and maintenance program
that details operating procedures with respect to ACMs prior to any renovation
and that requires periodic inspection for any change in condition of existing
ACMs.
9
Personnel
The Company has engaged the Manager to provide certain management, accounting,
and other administrative services to the Company. TRG has engaged the Manager to
provide real estate management, acquisition, development, and administrative
services required by (or of) TRG or any of its properties.
As of December 31, 1997, the Manager had 449 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1997:
Number Of Employees
-------------------
Property Management............... 188
Leasing........................... 73
Development....................... 47
Financial Services................ 77
Other ............................ 64
---
Total....................... 449
===
The Manager considers its relations with its employees to be good.
10
Item 2. PROPERTIES
Taubman Shopping Centers
Ownership
The following table sets forth certain information about each of the Taubman
Shopping Centers. The table includes only Centers in operation at December 31,
1997. Excluded from this table are Great Lakes Crossing, which will open in
November 1998, and MacArthur Center, which will open in March 1999. Also
excluded is Memorial City Mall, a development project. Centers are owned in fee
other than: Beverly Center, Cherry Creek, Columbus City Center, La Cumbre Plaza
and Paseo Nuevo, which are held under ground leases expiring between 2028 and
2083 (exclusive of three ten-year renewal options at Columbus City Center), and
a portion of the parking area at Hilltop (the ground lease of which expires in
2073).
Certain of the Centers are partially owned through joint ventures. Generally,
TRG's joint venture partners have ongoing rights with regard to the disposition
of TRG's interest in the joint ventures, as well as the approval of certain
major matters.
11
TRG's % Percent of Mall
Sq. Ft of GLA/ Ownership GLA Occupied
Mall GLA Year Opened/ Year as of as of 1997 Rent (1)
Centers Anchors as of 12/31/97 Expanded Acquired 12/31/97 12/31/97 (in Thousands)
- ------- ------- -------------- ----------- -------- ---------- ------------ ---------------
Beverly Center Bloomingdale's, Macy's 908,000/ 1982 70%(2) 92% $ 24,797
Los Angeles, CA 600,000
Biltmore Fashion Park Macy's, Saks Fifth 569,000/ 1963/1992/ 1994 100% 95% 10,071
Phoenix, AZ Avenue 330,000 1997
Briarwood Hudson's, JCPenney, 990,000/ 1973/1980 100% 95% 12,433
Ann Arbor, MI Jacobson's, Sears 369,000
Cherry Creek Foley's, Lord & Taylor, 903,000/ 1990 50% 96% 18,306
Denver, CO Neiman Marcus, Saks 430,000 (3)(4)
Fifth Avenue
Columbus City Center Jacobson's, Lazarus, 1,209,000/ 1989 100% 98% 16,335
Columbus, OH Marshall Field's 415,000
Fair Oaks Hecht's, JCPenney, Lord 1,398,000/ 1980/1987/ 50% 88% 18,409
Fairfax, VA & Taylor, Sears 582,000 1988
(Washington, D.C.
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,484,000/(5) 1976/1978/ 100% 79% 13,632
Dearborn, MI Lord & Taylor, Saks 594,000 1980
(Detroit Metropolitan Fifth Avenue, Sears
Area)
The Falls Bloomingdale's, Macy's 812,000/ 1980/1996 1997 100% 90% 884(1)
Miami, FL 357,000
Hilltop JCPenney, Macy's, Sears 1,096,000/ 1976/1991 100% 85% 5,811
Richmond, CA 367,000
(San Francisco
Metropolitan Area)
La Cumbre Plaza Robinsons-May, Sears 478,000/ 1967/1989 1996 100% 95% 4,042
Santa Barbara, CA 178,000
Lakeforest Hecht's, JCPenney, Lord 1,107,000/ 1978/1992 100% 88% 13,045
Gaithersburg, MD & Taylor, Sears 437,000
(Washington, D.C.
Metropolitan Area)
Lakeside Crowley's, Hudson's, 1,474,000/ 1976/1980 50% 88% 16,398
Sterling Heights, MI JCPenney, Lord & 513,000
(Detroit Metropolitan Taylor, Sears
Area)
- ----------------------------
(1) Includes minimum and percentage rent for the year ended December 31, 1997.
Excludes rent from certain peripheral properties. For Centers opened or
acquired in 1997, the amounts reflect rents for the period subsequent to
the opening or acquisition date. 1997 openings and acquisitions include The
Mall at Tuttle Crossing (July), Regency Square (September), Arizona Mills
(November), and The Falls (December).
(2) TRG has an option to acquire the remaining 30%. The results of Beverly
Center are consolidated in TRG's financial statements.
(3) GLA excludes approximately 166,000 square feet for the renovated buildings
on adjacent peripheral land.
(4) An expansion of the Center of approximately 132,000 square feet of Mall GLA
will open in the fall of 1998.
(5) A 30-screen theater will be added and is anticipated to open by the summer
of 1999.
12
TRG's % Percent of Mall
Sq. Ft of GLA/ Ownership GLA Occupied
Mall GLA Year Opened/ Year as of as of 1997 Rent (1)
Centers Anchors as of 12/31/97 Expanded Acquired 12/31/97 12/31/97 (in Thousands)
- ------- ------- -------------- ----------- -------- ---------- ------------ ---------------
Marley Station Hecht's, JCPenney, 1,088,000/ 1987/1994/ 100% 77% $ 9,447
Anne Arundel County, MD Macy's, Sears 375,000 1996
(Washington, D.C.
Metropolitan Area)
Meadowood Mall JCPenney, Macy's (two 889,000/ 1979/1995 100% 93% 9,666
Reno, NV locations), Sears 312,000
Paseo Nuevo Macy's, Nordstrom 438,000/ 1990 1996 100% 88% 4,193
Santa Barbara, CA 133,000
Regency Square Hecht's (two 825,000/ 1975/1987 1997 100% 100% 2,888(1)
Richmond, VA locations), JCPenney, 238,000
Sears
The Mall at Short Hills Bloomingdale's, 1,372,000/ 1980/1994/ 100% 96% 31,095
Short Hills, NJ Macy's, Neiman Marcus, 550,000 1995
Nordstrom, Saks Fifth
Avenue
Stamford Town Center Filene's, Macy's, 875,000/ 1982 50% 90% 15,678
Stamford, CT Saks Fifth Avenue 382,000
Stoneridge JCPenney, Macy's (two 1,291,000/ 1980/1990/ 100% 92% 15,608
Pleasanton, CA locations), Nordstrom, 449,000 1996
(San Francisco Sears
Metropolitan Area)
The Mall at Tuttle JCPenney, Lazarus, 974,000/ 1997 100% 93% 5,748(1)
Crossing Marshall Field's, 383,000
Columbus, OH Sears
Twelve Oaks Mall Hudson's, JCPenney, 1,224,000/ 1977/1980 50% 95% 18,729
Novi, MI Lord & Taylor, Sears 486,000
(Detroit Metropolitan
Area)
Westfarms Filene's, Filene's 1,298,000/ 1974/1997 79% 83% 17,230
West Hartford, CT Men's Store/Furniture 528,000
Gallery, JCPenney, Lord
& Taylor, Nordstrom
Woodfield JCPenney, Lord & 2,267,000/ 1971/1972/ 50% 89% 35,286
Schaumburg, IL Taylor, Marshall 942,000 1995
(Chicago Metropolitan Field's, Nordstrom,
Area) Sears
Woodland Hudson's, JCPenney, 1,094,000/ 1968/1974/ 50% 96% 13,843
Grand Rapids, MI Sears 369,000 1984/1989
Value Center:
- ------------
Arizona Mills Off 5th Saks, 1,157,000/ 1997 37% 80% 2,611(1)
Tempe, AZ Rainforest Cafe, 531,000
(Phoenix Metropolitan JCPenney Outlet,
Area) Oshman's Supersports ---------
USA, GameWorks,
Harkins Cinemas
Total GLA/Total Mall GLA: 27,220,000/
10,850,000
Average GLA/Average Mall GLA: 1,089,000/
434,000
13
Anchors
The following table summarizes certain information regarding the anchors at
the Taubman Shopping Centers.
Number of 12/31/97 GLA
Name Anchor Stores (in thousands) % of GLA
---- ------------- ------------- --------
Federated
Macy's 12 2,156
Lazarus 2 658
Bloomingdale's 3 604
-- ------
Total 17 3,418 13.1%
Sears 15 3,099 11.9%
JCPenney 15 2,710 10.4%
May Company
Lord & Taylor 8 1,035
Hecht's 5 749
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
-- ------
Total 18 2,571 9.9%
Dayton Hudson
Hudson's 5 1,040
Marshall Field's 3 686
-- ------
Total 8 1,726 6.6%
Nordstrom 5(1) 877 3.4%
Saks 5 450 1.7%
Jacobson's 2 221 0.8%
Neiman Marcus 2 216 0.8%
Crowley's 1 115 0.4%
-- ------ ----
Total 88 15,403 59.1%
== ====== ====
(1) An additional Nordstrom store will be added along with Dillard's in
connection with the development of MacArthur Center.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Taubman Shopping Centers as of December 31, 1997. All mortgage
debt in the table below is nonrecourse to TRG, except for debt encumbering
Arizona Mills and MacArthur Center. TRG has guaranteed the payment of principal
and interest on the mortgage debt of these Centers (the guarantee on the Arizona
Mills mortgage is limited to the extent of TRG's 37% ownership interest in the
joint venture owning the Center). The loan agreements provide for the reduction
of the amounts guaranteed as certain center performance and valuation criteria
are met. Biltmore, Hilltop and Stoneridge are also encumbered by assessment
bonds totaling approximately $4.8 million, which are not included in the table.
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/97 Service Maturity on Maturity Prepayment
TRG's Financial Statements Rate (000's) (000's) Date (000's) Date
- -------------------------- ---- ------- ------- ---- ------- ----
Beverly Center 8.36% $146,000 Interest Only 07/15/04 $146,000 30 Days' Notice(1)
Columbus City Center 7.00% 8,022 $ 725 08/01/19 0 At Any Time(2)
MacArthur Center (70%) Floating 42,241(3) Interest Only 10/27/00 42,241 4 Days' Notice(2)
Stoneridge Floating(4) 74,762 Interest Only (4) 75,000 (4)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
- --------------------------------
Arizona Mills (37%) Floating(5) 121,991(5) Interest Only 02/01/02 121,991 5 Days' Notice(2)
Cherry Creek (50%) Floating(6) 130,000 Interest Only 08/01/98 130,000 4 Days' Notice(2)
Fair Oaks (50%) 9.00% 39,119 4,304 12/01/16 0 12/01/97(7)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days' Notice(1)
Stamford Town Center (50%) 11.69%(8) 55,630 7,207 12/01/17 0 01/01/00(9)
Twelve Oaks Mall (50%) Floating(10) 49,940 Interest Only 10/15/01 50,000 30 Days' Notice(2)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 07/01/98(11)
Floating(12) 51,792(12) Interest Only 07/01/02 51,792 4 Days' Notice(2)
Woodfield (50%) Floating(13) 172,000 Interest Only 10/13/98 172,000 30 Days' Notice(2)
Woodland (50%) 8.20% 66,000 Interest Only 05/15/04 66,000 30 Days' Notice(1)
- ------------------------
(1) Debt may be prepaid with a yield maintenance prepayment penalty.
(2) Prepayment can be made without penalty.
(3) The loan is a construction facility with a maximum availability of $150
million.
(4) Commercial paper facility. The maximum availability under the facility is
$75 million. Commercial paper is generally sold with a 30 day maturity.
(5) The loan is a construction facility with a maximum availability of $145
million. The rate is capped at 9.5% until maturity, plus credit spread,
based on one month LIBOR.
(6) The rate is capped at 6.5% through January 1998 and from February 1998 to
maturity at 7%, plus credit spread, based on one month LIBOR.
(7) The mortgage was prepayable on 12/01/97 (the earliest prepayment date) with
a penalty of 4.5% of outstanding principal. In March 1998, the mortgage was
extinguished with the proceeds of a $140 million, 6.60%, secured financing
maturing 2008. The net proceeds were also used to pay the prepayment
penalty of approximately $1.8 million. In addition, proceeds of $5.6
million were used to close out a treasury lock agreement entered into in
1997, which resulted in an effective rate on the financing of approximately
7%. The remaining proceeds were distributed to the owners.
(8) The lender is entitled to contingent interest equal to 20% of annual
applicable receipts in excess of approximately $9.0 million.
(9) The mortgage has a prepayment penalty of 6%, declining by one-half of 1%
for each year after the earliest prepayment date, reducing to a minimum
penalty of 1%, plus an amount equal to ten times the greater of (i)
contingent interest payable for the year immediately preceding prepayment
or (ii) the average amount of contingent interest for the three years
immediately prior to prepayment.
(10) The rate is capped at 8.55% until maturity, plus credit spread, based on
one month LIBOR.
(11) If the loan is prepaid between 7/1/98 and 1/3/02 there is a yield
maintenance prepayment penalty.
(12) The loan is a construction facility with a maximum availability of $55
million. The rate on the construction facility is capped until maturity at
6.5%, plus credit spread.
(13) The interest rate on $93.5 million was swapped to maturity at an effective
annual rate of 5.4%. The rate on the balance of the financing, which has
been capped at a maximum annual rate, including credit spread, of 6.5% to
maturity, floats at a rate of three month LIBOR plus 0.5%.
For additional information regarding the Taubman Shopping Centers and their
operation, see the responses to Item 1 of this report.
15
Item 3. LEGAL PROCEEDINGS
Neither the Company, TRG, the Consolidated Businesses, nor any of the joint
ventures is presently involved in any material litigation nor, to the Company's
knowledge, is any material litigation threatened against the Company or TRG or
any of their properties. Except for routine litigation involving present or
former tenants of Taubman Shopping Centers (generally eviction or collection
proceedings), substantially all litigation is covered by TRG's and the joint
ventures' liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Taubman Centers, Inc. is listed and traded on the New York
Stock Exchange (Symbol: TCO). As of March 25, 1998, the 50,828,785 outstanding
shares of Common Stock were held by 682 holders of record. The following table
presents the dividends declared and range of share prices for each quarter of
1997 and 1996.
Market Quotations
------------------------------
1997 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $15 $12 3/8 $0.23
June 30 13 5/8 12 5/8 0.23
September 30 13 11/16 12 1/2 0.23
December 31 13 7/16 11 5/8 0.235
Market Quotations
------------------------------
1996 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $10 1/8 $ 9 1/4 $0.22
June 30 11 1/8 9 1/2 0.22
September 30 11 5/8 10 1/4 0.22
December 31 13 1/8 10 5/8 0.23
16
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and TRG
and should be read in conjunction with the financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
Year ended December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
I. TAUBMAN CENTERS, INC. (TCO)
Income before extraordinary items
from investment in TRG:
Equity in TRG's income allocable
to partnership unitholders 25,291 21,368 19,831 17,654 15,904
Series A Preferred Equity interest
in TRG 4,058
Other income/expenses, net (687) (638) (564) (640) (830)
------- ------- ------- ------- -------
Income before extraordinary items 28,662 20,730 19,267 17,014 15,074
Equity in TRG's extraordinary items (444) 5,836 (16,087) (3,400)
------- ------- ------- ------- -------
Net income 28,662 20,286 25,103 927 11,674
Preferred dividends (4,058)
------- ------- ------- ------- -------
Net income available to common
shareowners 24,604 20,286 25,103 927 11,674
======= ======= ======= ======= =======
Income before extraordinary items
per common share (1) 0.48 0.47 0.44 0.38 0.34
Net income per common share (1) 0.48 0.46 0.57 0.02 0.26
Dividends per common share declared 0.925 0.89 0.88 0.88 0.88
Weighted average number of common
shares outstanding 50,737,333 44,444,833 44,249,617 44,589,709 44,589,913
Number of common shares outstanding
at end of period 50,759,657 50,720,358 44,134,913 44,570,913 44,589,913
Ownership percentage of TRG
at end of period 36.70% 36.68% 35.10% 35.10% 35.97%
II. TRG
Revenues 313,426 263,696 228,918 197,134 177,107
Operating Costs 270,402 231,355 207,159 176,194 161,934
Equity in income before
extraordinary items of
Unconsolidated Joint Ventures 52,270 51,753 57,940 51,263 54,153
------- ------- ------- ------- -------
Income before extraordinary items 95,294 84,094 79,699 72,203 69,326
Extraordinary items (2) (1,328) 16,627 (44,731) (9,454)
------- ------- ------- ------- -------
Net income 95,294 82,766 96,326 27,472 59,872
Preferred distributions to TCO (4,058)
------- ------- ------- ------- -------
Net income available to unitholders 91,236 82,766 96,326 27,472 59,872
======= ======= ======= ======= =======
Income before extraordinary items
per unit of partnership interest (1) 0.66 0.65 0.64 0.59 0.57
Net income per unit of partnership
interest (1) 0.66 0.64 0.77 0.22 0.49
Weighted average number of units of
partnership interest
outstanding (3) 138,271,014 128,579,312 125,459,939 122,509,799 122,418,156
Number of units of partnership
interest outstanding
at end of period (3) 138,299,310 138,251,907 125,459,939 125,459,939 122,418,156
Distributions to partnership
unitholders 128,094 119,099 116,225 113,479 110,939
Preferred distributions to TCO 4,058
III. UNCONSOLIDATED JOINT VENTURES
Revenues (4) 258,783 265,336 291,144 268,815 268,563
Operating Costs (4) 166,402 171,063 183,814 174,950 167,846
------- ------- ------- ------- -------
Income before extraordinary items 92,381 94,273 107,330 93,865 100,717
======= ======= ======= ======= =======
TRG's share of income before
extraordinary items 52,270 51,753 57,940 51,263 54,153
======= ======= ======= ======= =======
As of December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
BALANCE SHEET DATA:
I. TAUBMAN CENTERS, INC.
Investment in TRG 547,859 369,131 307,190 322,316 361,568
Total assets 556,824 378,527 315,076 333,316 371,609
II. TRG
Real estate before accumulated
depreciation 1,593,350 1,136,416 926,207 843,960 665,978
Total assets 1,396,826 978,262 804,356 739,811 574,456
Total debt and capital lease
obligation (5) 1,284,327 1,041,254 969,667 872,158 695,517
17
Year Ended December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
SUPPLEMENTAL INFORMATION:
I. TAUBMAN CENTERS, INC.
Funds from Operations (6) 53,137 44,104 40,798 38,989 37,024
II. TRG
EBITDA (6) 255,743 229,811 216,130 186,657 174,714
TRG's Beneficial Interest Expense (6) 102,902 98,192 96,254 74,322 67,407
Distributable Cash Flow (6) 146,701 129,714 117,847 110,257 105,237
Consolidated Coverage Ratio (7) 2.5 2.3 2.2 2.5 2.6
Ratio of Earnings to Fixed Charges
and Preferred Distributions 1.6 1.7 1.7 1.7 1.9
OPERATING DATA:
Mall tenant sales (8) 3,086,259 2,827,245 2,739,393 2,561,555 2,483,342
Sales per square foot (8) 384 377 364 348 338
Number of shopping centers at end
of period 25 21 19 20 19
Ending Mall GLA in thousands of
square feet 10,850 9,250 8,996 9,088 8,823
Average occupancy 87.6% 87.4% 88.0% 86.6% 86.5%
Ending occupancy 90.3% 88.0% 89.4% 89.3% 88.7%
Leased space (9) 92.3% 89.0% 90.6% 90.9% 90.1%
Average base rent per square
foot (10):
All mall tenants $38.79 $37.90 $36.33 $34.72 $32.64
Stores closing during year $37.62 $33.39 $32.96 $30.46 $29.56
Stores opening during year $41.67 $42.39 $41.27 $41.02 $35.86
- --------------------------
(1) TCO's basic and diluted earnings per share amounts are equal, except for
1993, for which diluted income before extraordinary items per share was
0.33. TRG's basic and diluted earnings per unit amounts are equal, except
for 1993, for which diluted income before extraordinary items per unit and
diluted net income per unit were 0.56 and 0.48, respectively.
(2) In 1995, TRG recognized an $18.9 million extraordinary gain related to the
disposition of Bellevue Center and the related extinguishment of debt. Also
included in extraordinary items are extraordinary charges in 1993 through
1996 related to the extinguishment of debt.
(3) Effective September 30, 1997, TRG split its existing units of partnership
interest at a ratio of 1,975.08 to one, establishing a one-for-one
equivalency of TRG's units of partnership interest and TCO's common shares.
The split did not alter the ownership percentage of any of TRG's partners.
Prior years' amounts have been adjusted to reflect the unit split on a
retroactive basis.
(4) Amounts are reported net of intercompany profits.
(5) Includes the Tuttle Crossing capital lease obligation of $39.8 million and
$14.4 million at December 31, 1996 and 1995, respectively, which was
extinguished during 1997. TRG's pro rata share of its Consolidated
Businesses' and Unconsolidated Joint Ventures' debt (excluding capital
lease obligations) was $1.737 billion and $1.398 billion at December 31,
1997 and 1996, respectively.
(6) Funds from Operations, EBITDA, Beneficial Interest Expense, and
Distributable Cash Flow are defined and discussed in MD&A-Liquidity and
Capital Resources-Distributions. Funds from Operations and Distributable
Cash Flow were restated for 1994 and 1993 from the previously reported
amounts to reflect the deduction of non-real estate depreciation and
amortization, as specified in NAREIT's definition of Funds from Operations.
Funds from Operations, EBITDA, and Distributable Cash Flow do not represent
cash flow from operations, as defined by generally accepted accounting
principles, and should not be considered to be an alternative to net income
as a measure of operating performance or to cash flows as a measure of
liquidity.
(7) Defined as EBITDA divided by TRG's Beneficial Interest Expense.
(8) Based on reports of sales furnished by mall tenants.
(9) Leased space comprises both occupied space and space that is leased but not
yet occupied.
(10) Amounts include Centers owned and open for at least five years.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The following discussion should be read in conjunction with Selected Financial
Data, the Financial Statements of Taubman Centers, Inc. and the Notes thereto
and the Consolidated Financial Statements of The Taubman Realty Group Limited
Partnership and the Notes thereto.
General Background and Performance Measurement
The Company, through its interest in and as managing general partner of TRG,
participates in TRG's Managed Businesses. TRG's Managed Businesses consist of:
(i) Taubman Shopping Centers that TRG controls by ownership or contractual
agreement, development projects for future regional shopping centers
(Development Projects) and The Taubman Company Limited Partnership (the
Manager), (collectively, the Consolidated Businesses); and (ii) Taubman Shopping
Centers partially owned through joint ventures with third parties that are not
controlled (Unconsolidated Joint Ventures). The Unconsolidated Joint Ventures
are accounted for under the equity method in TRG's Consolidated Financial
Statements.
Certain aspects of the performance of the Managed Businesses are best
understood by measuring their performance as a whole, without regard to TRG's
ownership interest. For example, mall tenant sales and shopping center occupancy
trends fit this category and are so analyzed below. In addition, trends in
certain items of revenue and expense are often best understood in the same
fashion, and the discussions following take this approach when appropriate. When
relevant, these items are also discussed separately with regard to the
Consolidated Businesses and the Unconsolidated Joint Ventures.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most
important determinant of revenues of the Taubman Shopping Centers because mall
tenants provide over 90% of these revenues and because mall tenant sales
determine the amount of rent, percentage rent, and recoverable expenses
(together, total occupancy costs) that mall tenants can afford to pay. However,
levels of mall tenant sales can be considerably more volatile in the short run
than total occupancy costs.
The Company believes that the ability of tenants to pay occupancy costs and
earn profits over long periods of time increases as sales per square foot
increase, whether through inflation or real growth in customer spending. Because
most mall tenants have certain fixed expenses, the occupancy costs that they can
afford to pay and still be profitable are a higher percentage of sales at higher
sales per square foot.
The following table summarizes occupancy costs, excluding utilities, for mall
tenants as a percentage of mall tenant sales.
1997 1996 1995
---- ---- ----
Mall tenant sales (in thousands) $3,086,259 $2,827,245 $2,739,393
Sales per square foot 371 365 346
Sales per square foot (excluding
theaters and tenants greater
than 40,000 square feet) 384 377 364
Minimum rents 10.1% 10.4% 10.4%
Percentage rents 0.3 0.3 0.3
Expense recoveries 4.4 4.5 4.4
---- ---- ----
Mall tenant occupancy costs 14.8% 15.2% 15.1%
==== ==== ====
19
Mall tenant occupancy costs as a percentage of sales decreased in 1997
primarily due to Centers acquired in 1997 and late 1996 (Results of Operations
- -- Acquisitions). These Centers have lower occupancy costs than the portfolio
average and consequently provide a source of future revenue growth.
Occupancy
Historically, average annual occupancy for TRG as a whole has been within a
narrow band. In the last ten years, average annual occupancy has ranged between
86.5% and 88.7%. Mall tenant average occupancy rates for the last three years
are as follows:
Year Mall Tenant Average Occupancy
---- -----------------------------
1997 87.6%
1996 87.4
1995 88.0
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent, excluding renewals, at the 18 Taubman Shopping Centers
that have been owned and open for five years.
Store Store Difference
All Closings Openings Between
Mall During During Opening and
Tenants Year Year Closing Rents
------- ---- ---- -------------
Average Average Average Average
Base Annualized Annualized Annualized
Rent Base Rent Base Rent Base Rent
---- --------- --------- ---------
1997 $38.79 $37.62 $41.67 $4.05
1996 $37.90 $33.39 $42.39 $9.00
1995 $36.33 $32.96 $41.27 $8.31
Average annualized rent on stores opening in 1997 excludes rent on stores with
greater than 40,000 square feet. TRG anticipates that the spread in 1998 will be
somewhat higher than in 1997. However, this statistic is difficult to predict in
part because TRG's leasing policies and practices may result in early lease
terminations with actual average closing rents which may vary from the average
rent per square foot of scheduled lease expirations. In addition, the opening or
closing of large tenant spaces, which generally pay a lower rent per square
foot, can significantly affect the spread in a given year.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant
sales highest in the fourth quarter due to the Christmas season, and with
lesser, though still significant, sales fluctuations associated with the Easter
holiday and back-to-school events. While minimum rents and recoveries are
generally not subject to seasonal factors, most leases are scheduled to expire
in the first quarter, and the majority of new stores open in the second half of
the year in anticipation of the Christmas selling season. Accordingly, revenues
and occupancy levels are generally highest in the fourth quarter.
20
The following table summarizes certain quarterly operating data for TRG's
Managed Businesses for 1997:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1997 1997 1997 1997 1997
----------------------------------------------------
(in thousands)
Mall tenant sales $600,709 $629,906 $692,487 $1,163,157 $3,086,259
Revenues 130,677 134,756 137,728 157,192 560,353
Occupancy:
Average Occupancy 86.5% 86.8% 87.0% 89.5% 87.6%
Ending Occupancy 86.4% 87.1% 87.2% 90.3% 90.3%
Leased Space 88.7% 89.5% 90.8% 92.3% 92.3%
Because the seasonality of sales contrasts with the generally fixed nature of
minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum
rents, percentage rents and expense recoveries) relative to sales are
considerably higher in the first three quarters than they are in the fourth
quarter. The following table summarizes occupancy costs, excluding utilities,
for mall tenants as a percentage of sales for each quarter of 1997:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
1997 1997 1997 1997 1997
-------------------------------------------------
Minimum rents 12.6% 11.8% 11.3% 7.3% 10.1%
Percentage rents 0.2 0.3 0.3 0.2 0.3
Expense recoveries 5.2 5.1 4.7 3.5 4.4
---- ---- ---- ---- ----
Mall tenant occupancy costs 18.0% 17.2% 16.3% 11.0% 14.8%
==== ==== ==== ==== ====
Results of Operations
Equity Transactions
In October 1997, the Company used the $200 million public offering of eight
million shares of 8.3% Series A Cumulative Redeemable Preferred Stock to acquire
a Series A Preferred Equity interest in TRG that entitles the Company to income
and distributions (in the form of guaranteed payments) in amounts equal to the
dividends payable on the Company's Series A Preferred Stock. In addition to the
income from the Company's preferred equity interest in TRG, the Company
continues to participate in the income allocable to TRG partnership unitholders
to the extent of the Company's ownership in TRG, including adjustments arising
from the Company's additional basis in TRG's net assets. TRG bore all expenses
of the offering, which have been accounted for as a reduction of the proceeds.
TRG used the net proceeds to pay down debt under TRG's existing revolving credit
and commercial paper facilities, which were used to fund the acquisition of
Regency Square in September 1997.
In December 1996, the Company purchased newly issued TRG units of partnership
interest with the $75 million proceeds from the Company's December 1996 offering
of 5.97 million shares of common stock. TRG bore all expenses of the Company's
offering which have been accounted for as a reduction of the proceeds from TRG's
issuance of units. TRG used the net proceeds to pay down short term floating
rate debt and to acquire La Cumbre Plaza. Also in December 1996, the Company
exchanged common shares for TRG units of partnership interest newly issued under
TRG's incentive option plan. Additionally in 1996, TRG issued units of
partnership interest in connection with the acquisition of the remaining
interest in Fairlane Town Center.
Acquisitions
The following discussion of TRG's 1997 acquisitions contains forward-looking
statements regarding the impact of these acquisitions on EBITDA (EBITDA is
defined and described in Liquidity and Capital Resources -- Distributions). The
actual impact may vary based on a variety of factors, including actual
occupancy, rents achieved and operating expenses of the Centers. See Note 3 to
TRG's consolidated financial statements for further discussion of the
acquisitions.
21
The Falls
- ---------
In December 1997, TRG acquired The Falls shopping center for $156 million in
cash. The operating results of The Falls have been consolidated in TRG's
financial statements from the acquisition date. TRG borrowed under an existing
revolving credit facility to fund the acquisition. The acquisition is expected
to produce EBITDA of about 8% of the acquisition cost in 1998.
Regency Square
- --------------
In September 1997, TRG acquired Regency Square (Regency) shopping center,
located in Richmond, Virginia, for $123.9 million in cash. The acquisition was
initially funded with borrowings under TRG's revolving credit facilities, which
were paid down in October 1997 with the proceeds from TRG's issuance of Series A
Preferred Equity. The operating results of Regency have been consolidated in
TRG's financial statements from the acquisition date. Regency is expected to add
EBITDA of approximately 8% of the acquisition cost in 1998.
La Cumbre Plaza
- ---------------
In December 1996, TRG acquired a 100% leasehold interest in La Cumbre Plaza
(La Cumbre) located in Santa Barbara, California for $22.25 million in cash. The
acquisition was funded with proceeds from an issuance of TRG units of
partnership interest. The operating results of La Cumbre have been consolidated
in TRG's financial statements from the acquisition date.
Fairlane Town Center
- --------------------
In July 1996, TRG completed transactions that resulted in the acquisition of
the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint
Venture Partner. In connection with the transaction, TRG issued to the former
Joint Venture Partner units of partnership interest, exchangeable for
approximately 6.1 million shares of the Company's common stock, which had a
closing price of $10.75 per share on the day prior to the issuance date. TRG
also assumed mortgage debt of approximately $26 million, representing the former
Joint Venture Partner's beneficial interest in the $34.6 million mortgage
encumbering the property. TRG used unsecured debt to fund the repayment of the
9.73% mortgage and the prepayment penalty of approximately $1.2 million. The
operating results of Fairlane have been consolidated in TRG's financial
statements from the acquisition date. Prior to the acquisition date, TRG's
interest in Fairlane was accounted for under the equity method as an
Unconsolidated Joint Venture. In January 1998, TRG redeemed the former Joint
Venture Partner's units of partnership interest for approximately $77.7 million
(including costs).
Paseo Nuevo
- -----------
In June 1996, TRG acquired a 100% leasehold interest in Paseo Nuevo, located
in Santa Barbara, California, for $37 million in cash. TRG borrowed under its
existing lines of credit to fund the acquisition. The operating results of Paseo
Nuevo have been consolidated in TRG's financial statements from the acquisition
date.
New Centers and Expansions
In November 1997, TRG opened Arizona Mills, a 37% owned value super-regional
shopping center located in Tempe, Arizona. The Center opened 90% leased.
22
In July 1997, TRG opened The Mall at Tuttle Crossing, a super-regional
shopping center located in Columbus, Ohio. The Center was 95% leased at year
end. TRG's ownership interest in The Mall at Tuttle Crossing was subject to a
long-term participating lease with Tuttle Crossing Holding Co., a subsidiary of
The Limited, Inc. (The Limited) for land and leasehold improvements. In December
1997, TRG purchased The Limited's interests in the lease for $76.3 million in
cash and took fee simple title to the underlying land and buildings. The lease
had been accounted for as a capital lease with capital lease assets and a
capital lease obligation of $55.3 million at the date of the acquisition. The
purchase is anticipated to produce a return of approximately 8% of the
acquisition cost in 1998.
TRG opened a 135,000 square foot expansion at Westfarms in August 1997. The
expansion was approximately 90% leased as of year end. In addition,
approximately 50,000 square feet of new mall stores opened at Biltmore in 1997.
See also Liquidity and Capital Resources -- Capital Spending for discussions of
other planned expansion and development activities.
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall
(Memorial City), a 1.4 million square foot shopping center located in Houston,
Texas. The lease of this unencumbered property grants TRG the exclusive right to
manage, lease and operate the property. TRG has the option to terminate the
lease after the third full lease year by paying $2 million to the lessor. TRG is
using this option period to evaluate the redevelopment opportunities of the
Center. As a development project, Memorial City has been excluded from all
operating statistics in this report, and Memorial City's results of operations
have been presented as a net line item in the following tabular comparisons of
TRG's results of operations. Memorial City is expected to have an immaterial
effect on EBITDA and net income during the option period.
23
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Taubman Centers, Inc.
The Company is the managing general partner of TRG and shares in TRG's
financial performance to the extent of its ownership percentage, as well as
earning an 8.3% return on its preferred equity interest in TRG. The Company's
average ownership percentage of TRG was 36.7% for 1997 and 34.5% for 1996. As of
December 31, 1997, the Company had 50.8 million shares outstanding, up from 50.7
million at December 31, 1996.
The Company's income from TRG in 1997 consists of $4.1 million from its
preferred equity interest in TRG and the Company's $33.5 million proportionate
share of TRG's income before extraordinary item. In 1996, the Company's income
from TRG consisted of its $29.0 million proportionate share of TRG's income
before extraordinary item. The Company's proportionate share of TRG's income
before extraordinary item was reduced by $8.2 million in 1997 and $7.6 million
in 1996, representing adjustments arising from the Company's additional basis in
TRG's net assets. Income before extraordinary item for 1997 was $28.7 million or
$0.48 per common share as compared to $20.7 million or $0.47 per common share in
1996.
The Company recognized an extraordinary item of $(0.4) million in 1996,
consisting of the Company's share of TRG's extraordinary item related to the
extinguishment of debt. Net income for 1996 was $20.3 million or $0.46 per
common share. After reduction of $4.1 million in dividends on the Company's
Series A Preferred Stock, net income available to common shareowners for 1997
was $24.6 million or $0.48 per common share.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.6% in 1997 versus
87.4% in 1996. Ending occupancy for the Taubman Shopping Centers at December 31,
1997 was 90.3% versus 88.0% at December 31, 1996. Leased space at December 31,
1997 was 92.3% compared to 89.0% at the same date in 1996.
Total sales for Taubman Shopping Center mall tenants increased in 1997 by 9.2%
to $3.09 billion from $2.83 billion in 1996. Tenant sales per square foot
increased by 1.6% to $371 in 1997 from $365 in 1996. Tenant sales per square
foot, excluding theaters and tenants greater than 40,000 square feet, increased
by 1.9% to $384 in 1997 from $377 in 1996. Mall tenant sales for Centers that
were owned and open for all of 1997 and 1996 (which excludes all Centers
acquired in those years, as well as Tuttle Crossing and Arizona Mills) were
$2.85 billion, a 1.6% increase over 1996. Sales statistics for the first three
quarters of 1997 were negatively affected by new competition near certain
Centers. The effect of the competition on sales moderated in the fourth quarter,
after the anniversary date of the opening of the competing centers.
24
Comparison of Fiscal Year 1997 to Fiscal Year 1996
The following table sets forth operating results for TRG's Managed Businesses
for 1997 and 1996, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
1997 1996
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES(1) VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 173.3 155.9 329.2 149.2 157.2 306.4
Percentage rents 7.2 3.1 10.2 6.0 4.0 9.9
Expense recoveries 97.5 89.7 187.1 85.1 95.2 180.4
Management, leasing and
development 8.8 8.8 8.5 8.5
Other 14.9 10.2 25.0 13.0 8.9 22.0
----- ----- ----- ----- ----- -----
Total revenues 301.6 258.8 560.4 261.9 265.3 527.2
OPERATING COSTS:
Recoverable expenses 82.0 76.4 158.4 71.6 81.8 153.4
Other operating 28.1 11.9 39.9 25.4 12.8 38.2
Management, leasing and
development 4.7 4.7 4.7 4.7
General and administrative 25.7 25.7 21.8 21.8
Interest expense 73.6 54.5 128.2 70.5 53.5 124.0
Depreciation and amortization 44.5 23.7 68.1 35.7 22.9 58.7
----- ----- ----- ----- ----- -----
Total operating costs 258.5 166.4 424.9 229.7 171.1 400.8
Net results of Memorial City (1) 0.0 0.0 0.2 0.2
----- ----- ----- ----- ----- -----
43.0 92.4 135.4 32.3 94.3 126.6
===== ===== ===== =====
Equity in income of Unconsolidated
Joint Ventures 52.3 51.8
----- -----
Income before extraordinary item 95.3 84.1
Extraordinary item (1.3)
----- -----
Net income 95.3 82.8
Preferred distributions to TCO (4.1)
----- -----
Net income available to unitholders 91.2 82.8
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 161.4 94.4 255.7 138.6 91.2 229.8
TRG's Beneficial Interest Expense (73.6) (29.3) (102.9) (70.5) (27.7) (98.2)
Non-real estate depreciation (2.1) (2.1) (1.9) (1.9)
Preferred distributions to TCO (4.1) (4.1)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution 81.6 65.1 146.7 66.2 63.5 129.7
===== ===== ===== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits. The Unconsolidated Joint Ventures are accounted for under the
equity method in TRG's Consolidated Financial Statements.
(3) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources -- Distributions.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
25
TRG --Consolidated Businesses
- -----------------------------
Total revenues for 1997 were $301.6 million, a $39.7 million or 15.2% increase
over 1996. Minimum rents increased $24.1 million, of which $21.4 million was
caused by the 1997 and 1996 acquisitions, and the opening of Tuttle Crossing.
The results of Fairlane have been consolidated in TRG's results subsequent to
the acquisition date in July 1996 (prior to that date Fairlane was accounted for
under the equity method as an Unconsolidated Joint Venture). Minimum rents also
increased due to the expansion at Biltmore and tenant rollovers. Percentage rent
increased primarily due to the acquisitions. The increase in expense recoveries
was primarily due to the acquired Centers and Tuttle Crossing. Other revenue
increased $1.9 million primarily due to an insurance recovery, a litigation
settlement, and an increase in lease cancellation revenue.
Total operating costs increased $28.8 million, or 12.5%. Recoverable and
depreciation and amortization expenses increased primarily due to the
acquisitions and Tuttle Crossing. Other operating expenses increased primarily
due to the acquisitions and Tuttle Crossing, offset by a decrease in the charge
to operations for development pre-construction reserves. General and
administrative expense increased by $3.9 million primarily due to increases in
compensation (including the continuing phase-in of the long-term compensation
plan), recruiter fees and relocation charges, travel, and training. Interest
expense increased due to an increase in debt used to finance Tuttle Crossing and
capital expenditures at other Consolidated Businesses, partially offset by an
increase in capitalized interest. The acquisitions were initially funded with
debt which was subsequently paid down with the proceeds from the December 1996
and the October 1997 equity issuances.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated statement of operations by the amounts
representing Memorial City's revenues and expenses, which are presented in the
preceding table as a net amount.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1997 were $258.8 million, a $6.5 million, or 2.5%, decrease
from 1996, representing a $15.0 million decrease caused by the change of
Fairlane from an Unconsolidated Joint Venture to a Consolidated Business, offset
by increases due to the openings of Arizona Mills and the expansion at
Westfarms, in addition to increases at other Centers. The decrease in minimum
rents was primarily due to Fairlane, offset by Arizona Mills, Westfarms and
increases due to tenant rollovers at other Centers. The decrease in expense
recoveries was primarily due to Fairlane, offset by Arizona Mills. Other revenue
increased by $1.3 million primarily due to gains on peripheral land sales,
offset by a decrease in lease cancellation revenue and interest income.
Total operating costs decreased by $4.7 million, or 2.7%, to $166.4 million
for 1997 including a $10.1 million decrease due to Fairlane. Recoverable
expenses decreased $5.4 million primarily due to Fairlane, offset by increases
due to Arizona Mills. Other operating costs decreased primarily due to Fairlane
and a decrease in bad debt expense. Additionally, included in 1996 other
operating expense was a nonrecurring $0.5 million payment to an anchor at one of
the Centers. Interest expense increased $1.0 million primarily due to an
increase in debt used to finance Arizona Mills and the Westfarms expansion,
partially offset by a decrease in debt related to Fairlane. Operating costs as
presented in the preceding table differ from the amounts shown in the combined,
summarized financial statements of the Unconsolidated Joint Ventures (Note 4 to
TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, net income of the Unconsolidated Joint Ventures
decreased by $1.9 million, or 2.0%, to $92.4 million. TRG's equity in net income
of the Unconsolidated Joint Ventures was $52.3 million, a 1.0% increase from
1996.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary item increased
by $11.2 million, or 13.3%, to $95.3 million for 1997. In 1996, TRG recognized a
$(1.3) million extraordinary charge related to the prepayment of Fairlane's
debt. After payment of $4.1 million in preferred distributions to the Company,
net income available to partnership unitholders for 1997 was $91.2 million,
compared to $82.8 million in 1996.
26
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Taubman Centers, Inc.
The Company's average ownership percentage of TRG was 34.5% for 1996 and 35.1%
for 1995. Equity in income of TRG consists of the Company's $29.0 million
proportionate share of TRG's income before extraordinary items for 1996 and
$28.0 million for 1995. These amounts were reduced by $7.6 million in 1996 and
$8.1 million in 1995, representing adjustments arising from the Company's
additional basis in TRG's net assets. Equity in income of TRG for 1995 includes
a $1.8 million gain related to the disposition of Bellevue Center. Income before
extraordinary items for 1996 was $20.7 million or $0.47 per common share as
compared to $19.3 million or $0.44 per common share in 1995.
The Company recognized an extraordinary item of $(0.4) million in 1996,
consisting of its share of TRG's extraordinary item related to the
extinguishment of debt. In 1995, the Company recognized extraordinary items of
$5.8 million consisting of its share of TRG's extraordinary items related to the
disposition of Bellevue Center and the related extinguishment of Bellevue
Center's debt, and other extinguishment of debt. Net income for 1996 was $20.3
million or $0.46 per common share compared to $25.1 million or $0.57 per common
share in 1995.
TRG
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.4% in 1996 versus
88.0% in 1995. Ending occupancy for the Taubman Shopping Centers at December 31,
1996 was 88.0% versus 89.4% at December 31, 1995. Leased space at December 31,
1996 was 89.0% compared to 90.6% at the same date in 1995. Average occupancy for
1996 was somewhat less than the previous year's level but comfortably within
TRG's historic range of average annual occupancy.
Total sales for Taubman Shopping Center mall tenants increased in 1996 by 3.2%
to $2.83 billion from $2.74 billion in 1995. Tenant sales per square foot
increased by 5.2% to $365 in 1996 from $346 in 1995. Sales per square foot in
1995 was $352, excluding Bellevue Center. Mall tenant sales for Centers that
were owned and open for all of 1996 and 1995 were $2.81 billion, a 3.9% increase
over 1995.
27
Comparison of Fiscal Year 1996 to Fiscal Year 1995
The following table sets forth operating results for TRG's Managed Businesses
for 1996 and 1995, showing the results of the Consolidated Businesses and
Unconsolidated Joint Ventures:
1996 1995
------------------------------------------- -------------------------------------------
TRG UNCONSOLIDATED TOTAL TRG UNCONSOLIDATED TOTAL
CONSOLIDATED JOINT MANAGED CONSOLIDATED JOINT MANAGED
BUSINESSES(1) VENTURES(2) BUSINESSES BUSINESSES VENTURES(2) BUSINESSES
------------------------------------------- -------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 149.2 157.2 306.4 130.4 166.2 296.6
Percentage rents 6.0 4.0 9.9 5.6 3.6 9.2
Expense recoveries 85.1 95.2 180.4 75.3 101.5 176.8
Other 21.5 8.9 30.4 17.6 11.5 29.1
Gain on disposition of Bellevue 8.3 8.3
----- ----- ----- ----- ----- -----
Total revenues 261.9 265.3 527.2 228.9 291.1 520.0
OPERATING COSTS:
Recoverable expenses 71.6 81.8 153.4 62.9 88.2 151.1
Other operating 25.4 12.8 38.2 22.5 12.3 34.8
Management, leasing and
development 4.7 4.7 3.7 3.7
General and administrative 21.8 21.8 19.8 19.8
Interest expense 70.5 53.5 124.0 65.8 58.6 124.4
Depreciation and amortization 35.7 22.9 58.7 32.4 24.7 57.1
----- ----- ----- ----- ----- -----
Total operating costs 229.7 171.1 400.8 207.1 183.8 390.9
Net results of Memorial City (1) 0.2 0.2
----- ----- ----- ----- ----- -----
32.3 94.3 126.6 21.8 107.3 129.1
===== ===== ===== =====
Equity in income before extraordinary
items of Unconsolidated Joint
Ventures (including $5.0 million in
1995 related to the disposition of
Bellevue) 51.8 57.9
----- -----
Income before extraordinary items 84.1 79.7
Extraordinary items (1.3) 16.6
----- -----
Net income 82.8 96.3
===== =====
SUPPLEMENTAL INFORMATION(3):
EBITDA contribution 138.6 91.2 229.8 120.0 96.1 216.1
TRG's Beneficial Interest Expense (70.5) (27.7) (98.2) (65.8) (30.4) (96.2)
Non-real estate depreciation (1.9) (1.9) (2.0) (2.0)
----- ----- ----- ----- ----- -----
Distributable Cash Flow
contribution 66.2 63.5 129.7 52.1 65.7 117.8
===== ===== ===== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
TRG expects that Memorial City's net operating income will approximate the
ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(3) EBITDA, TRG's Beneficial Interest Expense and Distributable Cash Flow are
defined and discussed in Liquidity and Capital Resources -- Distributions.
EBITDA for 1995 does not include the gain related to the disposition of
Bellevue Center.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1996 amounts have been reclassified to conform to 1997
classifications.
28
TRG --Consolidated Businesses
- -----------------------------
Total revenues for 1996 were $261.9 million, a $33.0 million or 14.4% increase
from 1995. Minimum rents for 1996 increased $18.8 million, of which $8.7 million
was caused by the Fairlane and Paseo Nuevo acquisitions. The results of Fairlane
have been consolidated in TRG's results subsequent to the acquisition date
(prior to that date Fairlane was accounted for under the equity method as an
Unconsolidated Joint Venture). Minimum rent also increased due to the expansions
at Short Hills and Meadowood and tenant rollovers. The increase in expense
recoveries was also primarily due to the Fairlane and Paseo Nuevo acquisitions
and recoveries of increased maintenance costs and property taxes. The increase
in other revenues of $3.9 million was primarily due to increases in revenue from
management, leasing, and development services, rental fees on exterior
advertising signs and gains on sales of peripheral land, partially offset by a
decrease in lease cancellation revenue.
Total operating costs increased $22.6 million, or 10.9%, to $229.7 million.
The increase in recoverable expenses for 1996 was due to Fairlane and Paseo
Nuevo and to increases in maintenance costs and property taxes, including those
related to the expansion at Short Hills. Other operating expenses increased due
to Fairlane and Paseo Nuevo, and an increase in the charge to operations for
development pre-construction reserves. General and administrative expenses
increased $2.0 million due primarily to increases in compensation, including
costs of the new long-term performance compensation plan and the allocation of
internal acquisition costs, travel, and professional fees in 1996, offset by a
decrease resulting from a $0.8 million charge in 1995 for severance and
termination benefits. Interest expense increased $4.7 million due primarily to
an increase in debt levels, including debt used to finance the acquisition of
Paseo Nuevo and capital expenditures and the assumption of debt relating to the
Fairlane acquisition, and a decrease in capitalized interest, partially offset
by decreased interest rates. The increase in depreciation and amortization was
due primarily to the acquisitions of Fairlane and Paseo Nuevo and the expansions
at Short Hills and Meadowood.
Revenues and expenses as presented in the preceding table differ from the
amounts shown in TRG's consolidated income statements by the amounts
representing Memorial City's revenues and expenses, which are presented in the
preceding table as a net amount.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1996 were $265.3 million, a $25.8 million or 8.9% decrease
from 1995, primarily representing a $23.8 million decrease caused by the change
in Fairlane from an Unconsolidated Joint Venture to a Consolidated Business and
by the November 1995 disposition of Bellevue Center (Bellevue). Minimum rent
decreases due to Fairlane and Bellevue were offset by increases due to the
expansion at Woodfield and tenant rollovers. Expense recoveries decreased
primarily due to Fairlane and Bellevue, offset by increases at other Centers.
Other income decreased due to a gain on the sale of peripheral land in 1995 and
decreased interest income in 1996, offset by an increase in lease cancellation
revenue in 1996. In 1995, an ordinary gain of $8.3 million was recognized on the
disposition of Bellevue.
Total operating costs decreased by $12.7 million, or 6.9%, to $171.1 million
for 1996, representing a $19.9 million decrease due to Fairlane and Bellevue,
offset by increases at other Centers. Recoverable expenses decreased $6.4
million due to Fairlane and Bellevue, offset by increases in maintenance costs
and property taxes. Other operating costs increased $0.5 million reflecting
increases in property management costs, promotion and advertising costs, bad
debt expense and a nonrecurring $0.5 million payment to an anchor at one of the
Centers, offset by decreases due to Bellevue and Fairlane. Interest expense
decreased $5.1 million due to a decrease in debt related to Fairlane and
Bellevue and an increase in capitalized interest, partially offset by increases
due to an increase in debt used to finance capital expenditures and to higher
interest rates on certain debt refinanced in 1995. Operating costs as presented
in the preceding table differ from the amounts shown in the combined, summarized
financial statements of the Unconsolidated Joint Ventures (Note 4 to TRG's
financial statements) by the amount of intercompany profit.
29
As a result of the foregoing, income before extraordinary items of the
Unconsolidated Joint Ventures was $94.3 million in 1996, a decrease of 12.1%
from 1995. TRG's equity in income before extraordinary items of the
Unconsolidated Joint Ventures decreased $6.1 million, or 10.5%, to $51.8 million
for 1996.
Net Income
- ----------
As a result of the foregoing, TRG's income before extraordinary items
increased by $4.4 million, or 5.5%, to $84.1 million for 1996. In 1996, TRG
recognized a $(1.3) million extraordinary charge related to the prepayment of
Fairlane's debt. In 1995, TRG recognized an $18.9 million extraordinary gain
related to the disposition of Bellevue and the related extinguishment of
Bellevue's debt, and $(2.2) million in extraordinary charges related to the
prepayment of debt at TRG and at one of its Unconsolidated Joint Ventures. Net
income for 1996 was $82.8 million, compared to $96.3 million in 1995.
30
Liquidity and Capital Resources
Taubman Centers, Inc.
As of December 31, 1997, the Company had a cash balance of $9.0 million, the
source of which was primarily TRG's distributions, and had incurred no
indebtedness. As of December 31, 1997, the Company had 50.8 million shares
outstanding compared to 50.7 million at December 31, 1996.
On October 3, 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its $500 million equity shelf registration statement.
Dividends accrue from the date of original issuance and are payable in arrears
on or before the last day of each calendar quarter. The Company used the
proceeds to acquire a Series A Preferred Equity interest in TRG that entitles
the Company to distributions (in the form of guaranteed payments) in amounts
equal to the dividends payable on the Company's Series A Preferred Stock.
During 1997 and 1996, the Company received distributions from its partnership
interest in TRG of $47.0 million and $41.3 million, respectively. Additionally,
the Company received preferred distributions from TRG of $4.1 million in 1997.
The Company pays regular quarterly dividends to its common and preferred
shareowners. The Company's ability to pay dividends is affected by several
factors, most importantly, the receipt of distributions from TRG. Dividends to
its common shareowners are at the discretion of the Board of Directors and
depend on the cash available to the Company, its financial condition, capital
and other requirements, and such other factors as the Board of Directors deems
relevant. Preferred dividends accrue regardless of whether earnings, cash
availability, or contractual obligations were to prohibit the current payment of
dividends.
On December 11, 1997, the Company declared a quarterly dividend of $0.235 per
common share payable January 20, 1998 to shareowners of record on December 31,
1997. The Board of Directors also declared a quarterly dividend of $0.50722 per
share on the Company's 8.3% Series A Preferred Stock for the partial quarterly
dividend period of October 3, 1997 to December 31, 1997, paid December 31, 1997
to shareowners of record on December 19, 1997.
Common dividends declared totaled $0.925 per common share in 1997, of which
$0.324 represented return of capital and $0.601 represented ordinary income,
compared to dividends declared in 1996 of $0.89 per common share, of which $0.41
represented return of capital and $0.48 represented ordinary income. The tax
status of total 1998 common dividends declared and to be declared, assuming
continuation of a $0.235 per common share quarterly dividend, is estimated to be
approximately 45% return of capital, and approximately 55% of ordinary income.
Preferred dividends declared were $0.50722 per preferred share in 1997, all of
which represented ordinary income. The tax status of total 1998 dividends to be
paid on Series A Preferred Stock is estimated to be 100% ordinary income. These
are forward-looking statements and certain significant factors could cause the
actual results to differ materially, including: 1) the amount of dividends
declared; 2) changes in the Company's share of anticipated taxable income of TRG
due to the actual results of TRG; 3) changes in the number of the Company's
outstanding shares; 4) property acquisitions or dispositions; 5) financing
transactions, including refinancing of existing debt; and 6) changes in the
Internal Revenue Code or its application.
31
TRG
As of December 31, 1997, TRG had a cash balance of $3.3 million. TRG has
available for general partnership purposes an unsecured revolving credit
facility of $300 million, which expires in March 2000. Included in the credit
facility is a competitive bid option program which allows TRG to hold auctions,
among the banks participating in the facility, for short term borrowings of up
to $150 million. Borrowings under this facility at December 31, 1997 were $210
million. TRG also has available an unsecured bank line of credit of up to $30
million with borrowings of $10.2 million at December 31, 1997. This line expires
in August 1998. TRG also has available a secured commercial paper facility of up
to $75 million, with borrowings of $75 million at December 31, 1997. Commercial
paper is generally sold with a 30 day maturity. This facility is supported by a
line of credit facility, which is renewable quarterly for a twelve month period.
Proceeds from short term borrowings provided $487.3 million of funding for
1997 (including $358.2 million, including transaction costs, for the
acquisitions of Regency Square, The Falls and interests in Tuttle Crossing)
compared to $121.2 million in 1996 (including $103.6 million for the
acquisitions of Paseo Nuevo and an interest in Fairlane Town Center). In
November 1997, proceeds from TRG's revolving credit facilities were also used to
repay $100 million of floating rate notes. Additionally, proceeds in both 1997
and 1996 were used to fund capital expenditures for the Consolidated Businesses
and contributions to Unconsolidated Joint Ventures for construction costs.
In October 1997, TRG used the net proceeds from the issuance of its Series A
Preferred Equity to pay down floating rate debt under TRG's existing revolving
credit and commercial paper facilities, which were used to fund the acquisition
of Regency Square. During 1996, proceeds from the issuance of TRG units of
partnership interest were used to pay down short term borrowings of $124.7
million and for the $22.3 million acquisition of La Cumbre.
TRG has a medium-term note program under TRG's $500 million shelf registration
statement. During July 1997, TRG issued $55 million of unsecured 10-year notes
at a coupon rate of 7%. The net proceeds were used to pay down floating rate
debt under TRG's revolving credit facilities. In 1996, TRG used the proceeds
from the issuance of $154 million of notes to pay down floating rate debt under
TRG's revolving credit facilities as well as to pay off the $34.6 million
mortgage on Fairlane and the related prepayment penalty of approximately $1.2
million. Including the issuance in July 1997, TRG has issued a total of $342
million of notes since the program's inception in 1995.
In October 1997, TRG closed on a three year $150 million secured construction
facility for MacArthur Center, which is owned by a consolidated 70% owned
venture. The loan bears interest at one month LIBOR plus 1.2%. Borrowings under
the facility were $42.2 million at December 31, 1997. The payment of the
principal and interest is guaranteed by TRG. The loan agreement provides for the
reduction of the amount guaranteed as certain center performance and valuation
criteria are met.
In November 1997, TRG entered into an unsecured $210 million construction
facility maturing in 2001 to finance the construction of Great Lakes Crossing.
Under the loan agreement, the maturity date may be extended for one year. The
loan bears interest at one month LIBOR plus 0.90%. Borrowings under the facility
at December 31, 1997 were $46.9 million.
Scheduled principal payments on installment notes were $838 thousand and $793
thousand in 1997 and 1996, respectively.
32
At December 31, 1997, TRG's debt and its beneficial interest in the debt of
its consolidated and Unconsolidated Joint Ventures totaled $1,737.2 million. As
shown in the following table, $79.8 million of this debt was floating rate debt
that remained unhedged at December 31, 1997. Interest rates shown do not include
amortization of debt issuance costs and interest rate hedging costs. These items
are reported as interest expense in TRG's results of operations. In the
aggregate, these costs accounted for 0.36% of the effective rate of interest in
TRG's beneficial interest in debt at December 31, 1997. Included in TRG's
beneficial interest in debt at December 31, 1997 is debt used to fund
development and expansion costs. TRG's beneficial interest in assets on which
interest is being capitalized totaled $149.0 million as of December 31, 1997.
TRG's beneficial interest in capitalized interest was $13.7 million for the year
ended December 31, 1997.
Beneficial Interest in Debt
-------------------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 12/31/97 Rate Resets 12/31/97
---------- -------- ---- ------ ---------
Total beneficial interest in
fixed rate debt 1,066.3 7.65%(1)
Floating rate debt hedged via
interest rate caps:
Through January 1998 65.0 6.72 6.50% Monthly 5.72%
Through October 1998 39.3 6.25 6.00 Three Months 5.81
Through December 1998 100.0 6.72(1) 6.50 Three Months 5.81
Through July 1999 65.0 6.72(1) 7.00 Monthly 5.72
Through December 1999 200.0 6.72(1) 9.50(2) Monthly 5.72
Through October 2001 25.0 6.43 8.55 Monthly 5.72
Through January 2002 53.4 7.18(1) 9.50 Monthly 5.72
Through July 2002 43.4 7.67(1) 6.50 Monthly 5.72
Other floating rate debt 79.8 6.72(1)
-------
Total beneficial interest in debt 1,737.2 7.32(1)
=======
(1) Denotes weighted average interest rate.
(2) Rate reduces to 7.0% in December 1998.
TRG's loan and facility agreements and indenture contain various restrictive
covenants including limitations on the amount of secured and unsecured debt and
minimum debt service coverage ratios, the latter being the most restrictive. TRG
is in compliance with all of such covenants.
Subsequent to year end, Fairfax Company of Virginia L.L.C.
(successor-in-interest to Fairfax Associates, a 50% owned Unconsolidated Joint
Venture) completed a $140 million, 6.60%, secured financing maturing in 2008.
The net proceeds were used to extinguish an existing mortgage on Fair Oaks of
approximately $39 million and pay a prepayment penalty of approximately $1.8
million. In addition, proceeds of $5.6 million were used to close out a treasury
lock agreement entered into in 1997, which resulted in an effective rate on the
financing of approximately 7%. The remaining proceeds were distributed to the
owners. TRG used its 50% share of the distribution to pay down its revolving
credit facilities.
33
Distributions
A principal factor considered by TRG in deciding upon distributions to
partners is an amount, which TRG defines as Distributable Cash Flow, equal to
EBITDA less TRG's Beneficial Interest Expense, non-real estate depreciation and
amortization, and preferred distributions. This measure of performance is
influenced not only by operations but also by capital structure. EBITDA is
defined as TRG's beneficial interest in revenues, less operating costs before
interest, depreciation and amortization, meaning TRG's pro rata share of this
result for each of the Managed Businesses, after recording appropriate
intercompany eliminations. TRG's Beneficial Interest Expense is defined as TRG's
pro rata share of the interest expense of each of TRG's Managed Businesses.
Funds from Operations is calculated by adding the Company's beneficial interest
in TRG's Distributable Cash Flow to the Company's other income, less the
Company's operating expenses. EBITDA, Distributable Cash Flow and Funds from
Operations do 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 (NAREIT) suggests that Funds from
Operations is a useful supplemental measure of operating performance for REITs.
The following table summarizes TRG's Distributable Cash Flow and the Company's
Funds from Operations for the years ended December 31, 1997 and 1996:
Year ended Year ended
December 31, 1997 December 31, 1996
-------------------------------------- ---------------------------------------
TRG UNCONSOLIDATED TRG UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES VENTURES(1) TOTAL BUSINESSES VENTURES(1) TOTAL
-------------------------------------- ---------------------------------------
(in millions of dollars)
TRG's Net Income (2)(3) 95.3 82.8
Extraordinary item (3) 1.3
Depreciation and amortization (4) 57.5 47.5
TRG's Beneficial Interest Expense 102.9 98.2
----- -----
EBITDA 161.4 94.4 255.7 138.6 91.2 229.8
TRG's Beneficial Interest Expense (73.6) (29.3) (102.9) (70.5) (27.7) (98.2)
Non-real estate depreciation (2.1) (2.1) (1.9) (1.9)
Preferred distributions to TCO (4.1) (4.1)
----- ----- ----- ----- ----- -----
Distributable Cash Flow 81.6 65.1 146.7 66.2 63.5 129.7
===== ===== ===== ===== ===== =====
TCO's share of Distributable Cash Flow 53.8 44.7
Other income/expenses, net (0.7) (0.6)
----- -----
Funds from Operations 53.1 44.1
===== =====
(1) Amounts represent TRG's beneficial interest in the operations of its
Unconsolidated Joint Ventures.
(2) Includes TRG's share of gains on peripheral land sales of $2.5 million and
$1.0 million in 1997 and 1996, respectively.
(3) Extraordinary charge related to the extinguishment of debt, primarily
consisting of a prepayment penalty.
(4) Includes $3.7 million and $3.3 million of amortization of mall tenant
allowances in 1997 and 1996, respectively.
(5) Amounts may not add due to rounding.
For 1997, EBITDA and Distributable Cash Flow were $255.7 million and $146.7
million, compared to $229.8 million and $129.7 million in 1996. In addition to
$4.1 million representing preferred distributions to the Company on TRG's Series
A Preferred Equity, TRG distributed $128.1 million to its partners in 1997,
compared to $119.1 million in 1996. The Company's Funds from Operations for 1997
was $53.1 million, compared to $44.1 million in 1996.
The Partnership Committee of TRG makes an annual determination of appropriate
distributions for each year. The determination is based on anticipated
Distributable Cash Flow available after preferred distributions to the Company
on TRG's Series A Preferred Equity, as well as financing considerations and such
other factors as the Partnership Committee considers appropriate. Further, the
Partnership Committee has decided that the growth in distributions will be less
than the growth in Distributable Cash Flow for the immediate future.
34
Except under unusual circumstances, TRG's practice is to distribute equal
monthly installments of the determined amount of distributions throughout the
year. Due to seasonality and the fact that cash available to TRG for
distributions may be more or less than net cash provided from operating
activities plus distributions from Joint Ventures during the year, TRG may
borrow from unused credit facilities (described in Liquidity and Capital
Resources -- TRG above) to enable it to distribute the amount decided upon by
the TRG Partnership Committee.
Distributions by each Joint Venture may be made only in accordance with the
terms of its partnership agreement. TRG, in general, acts as the managing
partner and has the right to determine the amount of cash available for
distribution from the Joint Venture. In general, the provisions of these
agreements require the distribution of all available cash (as defined in each
partnership agreement), but most do not allow borrowing to finance distributions
without approval of the Joint Venture Partner.
As a result, distribution policies of many Joint Ventures will not parallel
those of TRG. While TRG may not, therefore, receive as much in distributions
from each Joint Venture as it intends to distribute with respect to that Joint
Venture, the Company does not believe this will impede TRG's intended
distribution policy because of TRG's overall access to liquid resources,
including borrowing capacity.
Any inability of TRG or its Joint Ventures to secure financing as required to
fund maturing debts, capital expenditures and changes in working capital,
including development activities and expansions, may require the utilization of
cash to satisfy such obligations, thereby possibly reducing distributions to
partners of TRG and funds available to the Company for the payment of dividends.
In addition, if the GM Trusts exercise their rights under the Cash Tender
Agreement (see Liquidity and Capital Resources -- Cash Tender Agreement below),
TRG will be required to pay the GM Trusts $10.9 million and may borrow to
finance such expenditures.
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is
generally recovered from tenants. Excluding acquisitions, capital spending by
the Managed Businesses not recovered from tenants is summarized in the following
table:
1997
----------------------------------------------------
TRG's Share of
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures(1) Joint Ventures(1)(2)
----------------------------------------------------
(in millions of dollars)
Development, renovation,
and expansion:
Existing centers 12.1 52.8 46.5
New centers 110.8 134.3 140.7
Pre-construction development
activities, net of charge to
operations 11.5 11.5
Mall tenant allowances 5.3 4.0 7.5
Corporate office improvements
and equipment 2.9 2.9
Other 0.8 0.5 1.1
----- ----- -----
Total 143.4 191.6 210.2
===== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80%
owned consolidated joint venture) and MacArthur Center (a 70% owned
consolidated joint venture).
35
1996
----------------------------------------------------
TRG's Share of
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures(1) Joint Ventures(1)(2)
----------------------------------------------------
(in millions of dollars)
Development, renovation,
and expansion:
Existing centers 5.2 40.3 35.7
New centers 14.9 58.4 33.8
Pre-construction development
activities,
net of charge to operations 4.1 4.1
Mall tenant allowances 4.5 5.2 7.0
Corporate office improvements
and equipment 1.5 1.5
Other 2.3 1.4 3.1
---- ----- ----
Total 32.5 105.3 85.2
==== ===== ====
(1) Costs are net of intercompany profits.
(2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80%
owned consolidated joint venture) and MacArthur Center (a 70% owned
consolidated joint venture).
In 1997 and 1996, TRG's share of mall tenant allowances per square foot leased
during the year, excluding expansion space and new developments, was $8.34 and
$9.96, respectively. In addition, TRG's share of its Consolidated Businesses'
and Unconsolidated Joint Ventures' capitalized leasing costs, excluding new
developments, was $10.9 million, or $10.72 per square foot leased during the
year in 1997, and $8.5 million or $10.47 per square foot leased during the year
in 1996.
At Cherry Creek, an ongoing expansion includes a newly constructed Lord &
Taylor store, which opened in November 1997, and the addition of 132 thousand
square feet of mall GLA, which will open in the fall of 1998. The expansion is
expected to cost approximately $50 million. TRG has a 50% ownership interest in
Cherry Creek.
Great Lakes Crossing, an enclosed value super-regional mall being developed by
TRG in Auburn Hills, Michigan, is expected to open in November 1998. The Center
will be 1.4 million square feet and its anchors will include Off 5th-Saks Fifth
Avenue Outlet, Oshman's Supersports USA, Rainforest Cafe, Jeepers!, and a
25-screen 100,000 square foot Star Theater complex. This Center will be owned by
a joint venture in which TRG has a controlling 80% interest and is projected to
cost approximately $210 million.
MacArthur Center, a new Center under construction in Norfolk, Virginia, is
expected to open in March 1999. The Center is expected to open with 930 thousand
square feet and will initially be anchored by Nordstrom and Dillard's. This
Center will be owned by a joint venture in which TRG has a 70% controlling
interest and is projected to cost approximately $150 million.
In 1996, TRG entered into an agreement to lease Memorial City Mall, a 1.4
million square foot shopping center located in Houston, Texas. Memorial City is
anchored by Sears, Foley's, Montgomery Ward and Mervyn's. TRG has the option to
terminate the lease after the third full year by paying $2 million to the
lessor. TRG is using this option period to evaluate the redevelopment
opportunities of the Center. Under the terms of the lease, TRG has agreed to
invest a minimum of $3 million during the three year option period. If the
redevelopment proceeds, TRG is required to invest an additional $22 million in
property expenditures not recoverable from tenants during the first 10 years of
the lease term.
36
Assuming no acquisitions, planned capital spending by the Managed Businesses
not recovered from tenants for 1998 is summarized in the following table:
1998
----------------------------------------------------
TRG's Share of
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures(1) Joint Ventures(1)(2)
----------------------------------------------------
(in millions of dollars)
Development, renovation, and
expansion 240.9(3) 39.0(4) 208.4
Mall tenant allowances 4.6 9.0 9.6
Pre-construction development
and other 22.1 1.4 22.8
----- ----- -----
Total 267.6 49.4 240.8
===== ===== =====
(1) Costs are net of intercompany profits.
(2) Includes TRG's share of construction costs for Great Lakes Crossing (an 80%
owned consolidated joint venture) and MacArthur Center (a 70% owned
consolidated joint venture).
(3) Includes costs related to MacArthur Center and Great Lakes Crossing.
(4) Includes costs related to the expansion project at Cherry Creek.
TRG's share of costs for development projects scheduled to be completed in
1999 is anticipated to be as much as $58 million in 1999. TRG's estimates of
1998 and 1999 capital spending include only projects approved by TRG's
Partnership Committee and, consequently, TRG's estimates will change as new
projects are approved. Currently, TRG expects to open on average one $175
million to $200 million shopping center each year. TRG's estimates regarding
capital expenditures 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; and 5) actual time to complete projects.
Capital Resources
TRG believes that its net cash provided by operating activities, distributions
from the Joint Ventures, the unutilized portion of its credit facilities, and
its ability to access the credit markets assure adequate liquidity to conduct
its operations in accordance with its distribution and financing policies. TRG's
borrowings are not and will not be recourse to the Company without its consent.
Cash Tender Agreement
A. Alfred Taubman and the GM Trusts each have the annual right to tender to
the Company units of partnership interest in TRG (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). 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 partners
will bear all market risk if the market price at closing is less than the
purchase price. 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 Robert C. Larson and his family may participate in tenders. The
GM Trusts will be entitled to receive from TRG an amount (not to exceed $10.9
million in the aggregate over the term of the Partnership) equal to 5.5% of the
amounts that the Company pays to the GM Trusts under the Cash Tender Agreement.
Based on a market value at December 31, 1997 and 1996 of $13.00 and $12.875
per common share, the aggregate value of interests in TRG that may be tendered
under the Cash Tender Agreement was approximately $960 million and $954 million,
respectively. Purchase of these interests at December 31, 1997 would have
resulted in the Company owning an additional 53% interest in TRG.
The Company is not aware of any present intention of any partner to sell its
interest in TRG under the Cash Tender Agreement.
37
Item 8. FINANCIAL STATEMENTS
The Financial Statements of Taubman Centers, Inc. and The Taubman Realty Group
Limited Partnership, and the Independent Auditors' Reports thereon are filed
pursuant to this Item 8 and are included in this report at Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III *
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to
the material appearing in the Company's definitive proxy statement for the
annual meeting of shareholders to be held in 1998 (the "Proxy Statement") under
the captions "Management--Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners and Management -- Section 16(a)
Beneficial Ownership Reporting Compliance."
Item 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the material appearing in the Proxy Statement under the captions "Executive
Compensation" and "Management -- Compensation of Directors."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the table and related footnotes appearing in the Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to
the material appearing in the Proxy Statement under the caption
"Management--Certain Transactions."
-------------------------------
* The Compensation Committee Report on Executive Compensation and the
Shareholder Return Performance Graph appearing in the Proxy Statement are not
incorporated by reference in this Annual Report on Form 10-K or in any other
report, registration statement, or prospectus of the Registrant.
38
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) The following financial statements of Taubman Centers, Inc. and the
Independent Auditors' Report thereon are filed with this report:
Page
----
TAUBMAN CENTERS, INC.
Independent Auditors' Report...................................F-2
Balance Sheet as of December 31, 1997 and 1996 ................F-3
Statement of Operations for the years ended
December 31, 1997, 1996 and 1995.............................F-4
Statement of Shareowners' Equity for the years ended
December 31, 1997, 1996 and 1995.............................F-5
Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.............................F-6
Notes to Financial Statements..................................F-7
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
Independent Auditors' Report .................................F-15
Consolidated Balance Sheet as of December 31, 1997 and 1996...F-16
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995............................F-17
Consolidated Statement of Accumulated Deficiency in Assets
for the years ended December 31, 1997, 1996 and 1995........F-18
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................F-19
Notes to Consolidated Financial Statements....................F-20
39
14(a)(2) There are no required Taubman Centers, Inc. financial statement
schedules. The following is a list of the financial statement
schedules required by Item 14(d).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
Schedule II - Valuation and Qualifying Accounts...............F-37
Schedule III - Real Estate and Accumulated Depreciation.......F-38
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED
PARTNERSHIP
Independent Auditors' Report..................................F-41
Combined Balance Sheet as of December 31, 1997 and 1996.......F-42
Combined Statement of Operations for the years ended
December 31, 1997, 1996 and 1995............................F-43
Combined Statement of Accumulated Deficiency in Assets for the
three years ended December 31, 1997, 1996 and 1995..........F-44
Combined Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................F-45
Notes to Combined Financial Statements........................F-46
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED
PARTNERSHIP
Schedule II - Valuation and Qualifying Accounts...............F-54
Schedule III - Real Estate and Accumulated Depreciation.......F-55
14(a)(3)
3(a) -- By-Laws of Taubman Centers, Inc., as amended
(incorporated herein by reference to Exhibit 3 filed with
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
3(b) -- Form of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 4(a) to the
Registrant's Post-Effective Amendment No. 1 to Form S-3
Registration Statement No. 333-35433).
4(a) -- Amended and Restated Indenture dated as of March 4,
1994 between The Taubman Realty Group Limited Partnership
and Chemical Bank, as Trustee (incorporated herein by
reference to Exhibit 4(a) filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1993 ("1993 Form 10-K")).
4(b) -- Officers' Certificate designating the terms of TRG's 7%
Notes due 2003 (incorporated herein by reference to
Exhibit 4(d) filed with the 1993 Form 10-K).
4(c) -- Officers' Certificate designating the terms of TRG's 8%
Notes due 1999 (incorporated herein by reference to
Exhibit 4(g) filed with the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994 (the
"1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly
Finance Corp., La Cienega Associates, the Borrower, and
Morgan Guaranty Trust Company of New York, as Trustee
(incorporated herein by reference to Exhibit 4(h) filed
with the 1994 Second Quarter Form 10-Q).
40
4(e) -- Deed of Trust, with assignment of Rents, Security
Agreement and Fixture Filing, dated as of July 22, 1994,
from La Cienega Associates, Grantor, to Commonwealth Land
Title Company, Trustee, for the benefit of Morgan Guaranty
Trust Company of New York, as Trustee, Beneficiary
(incorporated herein by reference to Exhibit 4(i) filed
with the 1994 Second Quarter Form 10-Q).
4(f) -- TRG's Medium-Term Notes due June 15, 2002 (incorporated
herein by reference to Exhibit 4(j) filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995).
4(g) -- Amended and Restated Revolving Loan Agreement dated as of
March 5, 1997 (the "Revolving Loan Agreement"), among The
Taubman Realty Group Limited Partnership, as Borrower,
Union Bank of Switzerland, (New York Branch), as a Bank,
the other Banks signatory to the Revolving Loan Agreement,
each as a Bank, and Union Bank of Switzerland (New York
Branch), as Administrative Agent (incorporated herein by
reference to Exhibit 4, filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (the "1997 First Quarter Form 10-Q")).
4(h) -- Form of Contribution and Acceptance of Preferred
Equity, Designation of Series A Preferred Equity, and
Establishment of Preferred Rate (incorporated herein by
reference to Exhibit 4(d) to the Registrant's
Post-Effective Amendment No. 1 to Form S-3 Registration
Statement No. 333-35433).
4(i) -- Construction Loan Agreement among Taubman MacArthur
Associates Limited Partnership, as Borrower, and
Bayerische Hypotheken - Und Wechsel - Bank,
Aktiengesellschaft, New York Branch and The Other Banks
and Financial Institutions from time to time Parties
hereto, as Lenders and Bayerische Hypotheken - Und Wechsel
- Bank Aktiengesellschaft, New York Branch, as
Agent, dated as of October 28, 1997.
4(j) -- Loan Agreement dated as of November 25, 1997 among The
Taubman Realty Group Limited Partnership, as Borrower,
Fleet National Bank, as a Bank, PNC Bank, National
Association, as a Bank, the other Banks signatory hereto,
each as a Bank, and PNC Bank, National Association, as
Administrative Agent.
10(a) -- Form of The Amended and Restated Agreement of Limited
Partnership of The Taubman Realty Group Limited
Partnership, as amended through September 30, 1997
(incorporated herein by reference to Exhibit 4(c) to the
Registrant's Post-Effective Amendment No. 1 to Form S-3
Registration Statement No. 333-35433).
* 10(b) -- The Taubman Realty Group Limited Partnership 1992
Incentive Option Plan, as Amended and Restated Effective
as of September 30, 1997.
10(c) -- Corporate Services Agreement between Taubman Centers, Inc.
and The Taubman Company Limited Partnership (the
"Manager") (incorporated herein by reference to Exhibit
10(c) filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 (the "1992 Form
10-K")).
10(d) -- Registration Rights Agreement among Taubman Centers, Inc.,
General Motors Hourly-Rate Employes Pension Trust, General
Motors Retirement Program for Salaried Employes Trust, and
State Street Bank & Trust Company, as trustee of the AT&T
Master Pension Trust (incorporated herein by reference to
Exhibit 10(e) filed with the 1992 Form 10-K).
41
10(e) -- Master Services Agreement between The Taubman Realty Group
Limited Partnership and the Manager (incorporated herein
by reference to Exhibit 10(f) filed with the 1992 Form
10-K).
10(f) -- Cash Tender Agreement among Taubman Centers, Inc., A.
Alfred Taubman, acting not individually but as Trustee of
The A. Alfred Taubman Restated Revocable Trust, as amended
and restated in its entirety by Instrument dated January
10, 1989 (as the same has been and may hereafter be
amended from time to time), TRA Partners, and GMPTS
Limited Partnership (incorporated herein by reference to
Exhibit 10(g) filed with the 1992 Form 10-K).
* 10(g) -- Supplemental Retirement Savings Plan (incorporated herein
by reference to Exhibit 10(i) filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994).
* 10(h) -- The Taubman Company Long-Term Performance Compensation
Plan (incorporated herein by reference to Exhibit 10(k)
filed with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
* 10(i) -- Employment agreement between The Taubman Company Limited
Partnership and Lisa A. Payne (incorporated herein by
reference to Exhibit 10 filed with the 1997 First Quarter
Form 10-Q).
* 10(j) -- Amended and Restated Continuing Offer, dated as of
September 30, 1997 (incorporated herein by reference to
Exhibit 10 filed with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
12(a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio
of Earnings to Preferred Stock Dividends.
12(b) -- Statement Re: Computation of TRG's Ratios of Earnings to
Fixed Charges and Preferred Distributions.
21 -- Subsidiaries of The Taubman Realty Group Limited
Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Purchase and Sale Agreement By and Between One Federal
Street Joint Venture and The Taubman Realty Group Limited
Partnership, dated July 16, 1997 (Purchase and Sale
Agreement) (without exhibits or schedules, which will be
supplementally provided to the Securities and Exchange
Commission upon its request) (incorporated herein by
reference to Exhibit 99(a) filed with the Registrant's
Current Report on Form 8-K dated September 4, 1997).
99(b) -- First Amendment to Purchase and Sale Agreement, dated
August 15, 1997 (without exhibits or schedules, which will
be supplementally provided to the Securities and Exchange
Commission upon its request) (incorporated herein by
reference to Exhibit 99(b) filed with the Registrant's
Current Report on Form 8-K dated September 4, 1997).
42
99(c) -- Agreement of Purchase and Sale By and Between The Falls
Limited L.P. and The Taubman Realty Group Limited
Partnership, dated November 5, 1997, as amended by First
Amendment to Agreement of Purchase and Sale entered into
on November 6, 1997, and Second Amendment to Agreement of
Purchase and Sale entered into on November 13, 1997
(without exhibits or schedules, which will be
supplementally provided to the Securities and Exchange
Commission upon its request).
- --------------------
* A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
43
14(b) Current Reports on Form 8-K.
The Company voluntarily filed a current report on Form 8-K dated December
8, 1997 to report a press release announcing TRG's acquisition of The
Falls Shopping Center in Miami, Florida and the agreement to purchase The
Limited, Inc.'s interest in The Mall at Tuttle Crossing, a Taubman
Shopping Center located in Columbus, Ohio.
The Company voluntarily filed a current report on Form 8-K dated December
4, 1997 to report the completion of TRG's acquisition of The Falls. The
8-K included the following financial statements and pro forma information
regarding the acquisition of The Falls:
Independent Auditors' Report.
The Falls, Historical Summary of Revenues and Direct Operating
Expenses for the Year Ended December 31, 1996.
Taubman Centers, Inc., Pro Forma Condensed Statement of Operations,
Year Ended December 31, 1996 and the Nine Months Ended September 30,
1997 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Balance Sheet, September 30, 1997 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Statement of Operations, Year Ended December 31, 1996
(unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed
Consolidated Statement of Operations, Nine Months Ended September 30,
1997 (unaudited).
14(c) The list of exhibits filed with this report is set forth in response to
Item 14(a)(3). The required exhibit index has been filed with the
exhibits.
14(d) The financial statement schedules of The Taubman Realty Group Limited
Partnership and the financial statements and the financial statement
schedules of the Unconsolidated Joint Ventures of The Taubman Realty Group
Limited Partnership listed at Item 14(a)(2) are filed pursuant to this
Item 14(d).
44
TAUBMAN CENTERS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Taubman Centers, Inc.
We have audited the accompanying balance sheets of Taubman Centers, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareowners' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Taubman Centers, Inc. as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 18, 1998
F-2
TAUBMAN CENTERS, INC.
BALANCE SHEET
(in thousands, except share data)
December 31
--------------------
1997 1996
---- ----
Assets:
Investment in TRG (Note 2):
Partnership interest $ 347,859 $ 369,131
Series A Preferred Equity interest 200,000
--------- ---------
$ 547,859 $ 369,131
Cash and cash equivalents 8,965 9,388
Other assets 8
--------- ---------
$ 556,824 $ 378,527
========= =========
Liabilities:
Accounts payable and accrued liabilities $ 277 $ 351
Dividends payable 11,929 11,666
--------- ---------
$ 12,206 $ 12,017
Commitments and Contingencies (Note 5)
Shareowners' Equity (Notes 2 and 4):
Preferred Stock, $0.01 par value,
50,000,000 shares authorized; 8.3% Series
A Cumulative Redeemable Preferred Stock,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
December 31, 1997 $ 80
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 50,759,657 and 50,720,358 issued
and outstanding at December 31, 1997 and 1996 508 $ 507
Additional paid-in capital 668,951 468,590
Dividends in excess of net income (124,921) (102,587)
--------- ---------
$ 544,618 $ 366,510
--------- ---------
$ 556,824 $ 378,527
========= =========
See notes to financial statements.
F-3
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Year Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
Income:
Income before extraordinary items
from investment in TRG (Note 2):
Equity in TRG's income allocable
to partnership unitholders $25,291 $21,368 $19,831
Series A Preferred Equity interest
in TRG 4,058
Interest and other 322 284 331
------- ------- -------
$29,671 $21,652 $20,162
------- ------- -------
Operating Expenses:
General and administrative $ 759 $ 672 $ 645
Management fee (Note 3) 250 250 250
------- ------- -------
$ 1,009 $ 922 $ 895
------- ------- -------
Income before extraordinary items $28,662 $20,730 $19,267
Equity in TRG's extraordinary
items (Note 2) (444) 5,836
------- ------- -------
Net Income $28,662 $20,286 $25,103
Preferred dividends (Note 4) (4,058)
------- ------- -------
Net income available to common
shareowners $24,604 $20,286 $25,103
======= ======= =======
Basic and diluted earnings per common
share (Note 6):
Income before extraordinary items $ .48 $ .47 $ .44
Extraordinary items (.01) .13
------- ------- -------
Net Income $ .48 $ .46 $ .57
======= ======= =======
Cash dividends declared per common share $ .925 $ .89 $ .88
======= ======= =======
Weighted average number of common
shares outstanding 50,737,333 44,444,833 44,249,617
========== ========== ==========
See notes to financial statements.
F-4
TAUBMAN CENTERS, INC.
STATEMENT OF SHAREOWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(in thousands, except share data)
Series A
Preferred Stock Common Stock Additional Dividends in
------------------ ----------------- Paid-in excess of
Shares Amount Shares Amount Capital Net Income Total
------ ------ ------ ------ -------- ---------- -----
Balance, January 1, 1995 44,570,913 $446 $390,849 $ (68,303) $322,992
Purchases of stock (436,000) (5) (4,169) (4,174)
Cash dividends declared (38,903) (38,903)
Net income 25,103 25,103
---------- ---- -------- --------- --------
Balance, December 31, 1995 44,134,913 $441 $386,680 $ (82,103) $305,018
Proceeds from equity offering
(Note 2) 5,970,000 60 74,938 74,998
Issuance of stock pursuant to
Continuing Offer (Note 5) 652,245 7 7,319 7,326
Purchases of stock (36,800) (1) (347) (348)
Cash dividends declared (40,770) (40,770)
Net income 20,286 20,286
---------- ---- -------- --------- --------
Balance, December 31, 1996 50,720,358 $507 $468,590 $(102,587) $366,510
Proceeds from equity
offering (Note 2) 8,000,000 $80 199,920 200,000
Issuance of stock pursuant
to Continuing Offer (Note 5) 39,299 1 441 442
Cash dividends declared (50,996) (50,996)
Net income 28,662 28,662
--------- --- ---------- ---- -------- --------- --------
Balance, December 31, 1997 8,000,000 $80 50,759,657 $508 $668,951 $(124,921) $544,618
========= === ========== ==== ======== ========= ========
See notes to financial statements.
F-5
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
-------------------------------
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Income before extraordinary items $ 28,662 $ 20,730 $ 19,267
Decrease in other assets and
accounts payable and accrued
liabilities (66) (5) (166)
--------- -------- --------
Net Cash Provided By Operating Activities $ 28,596 $ 20,725 $ 19,101
--------- -------- --------
Cash Flows From Investing Activities:
Purchase of additional interests in TRG $(200,000) $(74,998)
Distributions from TRG in excess of
income before extraordinary items 21,714 19,939 $ 20,961
--------- -------- ---------
Net Cash Provided By (Used In) Investing
Activities $(178,286) $(55,059) $ 20,961
--------- -------- --------
Cash Flows From Financing Activities:
Cash dividends to common shareowners $ (46,675) $(38,814) $(39,002)
Cash dividends to preferred shareowners (4,058)
Proceeds from stock issuances 200,000 74,998
Purchases of stock (348) (4,174)
--------- -------- --------
Net Cash Provided By (Used In) Financing
Activities $ 149,267 $ 35,836 $(43,176)
--------- -------- --------
Net Increase (Decrease) In Cash $ (423) $ 1,502 $ (3,114)
Cash and Cash Equivalents at Beginning
of Year 9,388 7,886 11,000
--------- -------- --------
Cash and Cash Equivalents at End of Year $ 8,965 $ 9,388 $ 7,886
========= ======== ========
See notes to financial statements.
F-6
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
General
The Company, a real estate investment trust, or REIT, is the managing general
partner of The Taubman Realty Group Limited Partnership (TRG). TRG is an
operating partnership that engages in the ownership, management, leasing,
acquisition, development, and expansion of regional retail shopping centers
(Taubman Shopping Centers) and interests therein. TRG's portfolio, as of
December 31, 1997, includes 25 urban and suburban Taubman Shopping Centers in 12
states. Two additional Centers are under construction in Norfolk, Virginia, and
Auburn Hills, Michigan. The Company's investment in TRG consists of a general
partnership interest and a preferred equity interest (Note 2).
The Company accounts for its investment in TRG under the equity method of
accounting. The excess of the Company's cost of its investment in TRG
partnership units over its proportionate share of TRG's accumulated partners'
deficit has been allocated to the Company's basis in the underlying assets and
liabilities of TRG. Depreciation related to amounts allocated to depreciable
assets is recognized by the Company on a straight-line basis over 40 years. The
excess of the Company's cost of its investment in TRG partnership units over its
proportionate share of TRG's accumulated partners' deficit at December 31, 1997
and 1996, was $468.4 million and $476.3 million, respectively.
Income Taxes
Federal income taxes are not provided because the Company operates in such a
manner as to qualify as a REIT under the provisions of the Internal Revenue
Code, and therefore applicable taxable income is included in the taxable income
of its shareowners. As a REIT, the Company must distribute at least 95% of its
REIT taxable income to its shareowners and meet certain other requirements.
Dividends per common share declared in 1997 were $0.925, of which $0.324
represented return of capital and $0.601 represented ordinary income. Dividends
per common share declared in 1996 were $0.89, of which $0.41 represented return
of capital and $0.48 represented ordinary income. Dividends per common share
declared in 1995 were $0.88, of which $0.52 represented return of capital and
$0.36 represented ordinary income. The tax status of the Company's common
dividends in 1997, 1996 and 1995 may not be indicative of future periods.
Dividends per preferred share declared in 1997 were $0.50722, all of which
represented ordinary income. The difference between net income for financial
reporting purposes and taxable income results primarily from differences in
depreciation expense.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90
days or less at the date of purchase.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-7
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 2 - Investment in TRG
The Company's investment in TRG at December 31, 1997 and 1996 consists of a
36.70% and 36.68%, respectively, managing general partnership interest.
Additionally, at December 31, 1997, the Company's investment in TRG includes a
preferred equity interest. TRG's net income and distributions are allocable
first to the preferred equity interest, and the remaining amounts to the general
and limited TRG partners in accordance with their percentage ownership. In
January 1998, the Company's ownership of TRG increased to 38.4% due to TRG's
redemption of a partner's interest (Note 8).
In October 1997, the Company used the proceeds from a $200 million public
offering of eight million shares of 8.3% Series A Cumulative Redeemable
Preferred Stock (Series A Preferred Stock) to acquire a Series A Preferred
Equity interest in TRG that entitles the Company to income and distributions (in
the form of guaranteed payments) in amounts equal to the dividends payable on
the Company's Series A Preferred Stock. TRG bore all expenses of the offering.
TRG used the net proceeds to pay down short term debt under TRG's existing
revolving credit and commercial paper facilities.
The Company's average ownership in TRG for 1997, 1996, and 1995 was 36.7%,
34.5% and 35.1%, respectively, as the result of the following transactions.
In December 1996, the Company purchased newly issued TRG units of partnership
interest with the $75 million proceeds from the Company's December 1996 offering
of 5.97 million shares of common stock. TRG bore all expenses of the Company's
offering. TRG used the net proceeds to pay down short term floating rate debt
and to acquire La Cumbre Plaza. Additionally in 1996, TRG issued units of
partnership interest in connection with its acquisition of the 75% interest in
Fairlane Town Center held by a joint venture partner.
Also in 1997 and 1996, TRG issued units of partnership interest in connection
with the exercise of incentive options. The Company exchanged shares of common
stock for these newly issued units of TRG partnership interest pursuant to the
Company's Continuing Offer (Note 5).
The Company's income from its investment in TRG included $4.1 million for the
year ended December 31, 1997 from its Series A Preferred Equity interest in TRG.
Additionally, the Company's proportionate share of TRG's income before
extraordinary items available to partnership unitholders for the years ended
December 31, 1997, 1996, and 1995, was $33.5 million, $29.0 million, and $28.0
million (including the Company's $1.8 million share of the gain related to TRG's
disposition of Bellevue Center in 1995), respectively, reduced by $8.2 million,
$7.6 million, and $8.1 million, respectively, representing adjustments arising
from the Company's additional basis in TRG's net assets.
In 1996 and 1995, TRG recognized extraordinary items relating to the
extinguishment of debt. Of the 1995 amount, an $18.9 million gain was recognized
related to TRG's disposition of Bellevue Center and the extinguishment of
Bellevue Center's debt. Extraordinary charges in 1996 and 1995 consisted
primarily of prepayment penalties. The Company's share of TRG's extraordinary
items was approximately $(0.4) million and $5.8 million in 1996 and 1995,
respectively.
F-8
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
TRG's summarized balance sheet and results of operations information (in
thousands) are presented below, followed by information about TRG's beneficial
interest in the operations of its unconsolidated joint ventures. Beneficial
interest is calculated based on TRG's ownership interest in each of the joint
ventures.
December 31
-----------------------
1997 1996
---- ----
Assets:
Properties $1,593,350 $1,136,416
Accumulated depreciation and amortization 268,658 234,030
---------- ----------
$1,324,692 $ 902,386
Other assets 72,134 75,876
---------- ----------
$1,396,826 $ 978,262
========== ==========
Liabilities:
Unsecured notes payable $1,008,459 $ 796,805
Mortgage notes payable 275,868 204,600
Capital lease obligation 39,849
Accounts payable and other liabilities 106,404 86,779
Distributions in excess of net income of
unconsolidated joint ventures 141,815 142,367
---------- ----------
$1,532,546 $1,270,400
Accumulated Deficiency in Assets:
Series A Preferred Equity 192,840
Partners' Accumulated Deficit (328,560) (292,138)
---------- ----------
$1,396,826 $ 978,262
========== ==========
Year Ended December 31
-------------------------------
1997 1996 1995
---- ---- ----
Revenues $313,426 $263,696 $228,918
-------- -------- --------
Operating costs other than interest
and depreciation and amortization $152,044 $125,128 $108,908
Interest expense 73,639 70,454 65,858
Depreciation and amortization 44,719 35,773 32,393
-------- -------- --------
$270,402 $231,355 $207,159
-------- -------- --------
Equity in income before extraordinary
items of unconsolidated joint ventures
(including $5.0 million related to the
disposition of Bellevue in 1995) 52,270 51,753 57,940
-------- -------- --------
Income before extraordinary items $ 95,294 $ 84,094 $ 79,699
Extraordinary items (1,328) 16,627
-------- -------- --------
Net income $ 95,294 $ 82,766 $ 96,326
Preferred distributions (4,058)
-------- -------- --------
Net income available to unitholders $ 91,236 $ 82,766 $ 96,326
======== ======== ========
F-9
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
TRG's beneficial interest
in unconsolidated joint ventures'
operations:
Revenues less recoverable and other
operating expenses $ 94,361 $ 91,243 $ 96,120
Ordinary gain on disposition of Bellevue 5,005
Interest expense (29,263) (27,738) (30,396)
Depreciation and amortization (12,828) (11,752) (12,789)
-------- -------- --------
Income before extraordinary items $ 52,270 $ 51,753 $ 57,940
======== ======== ========
Note 3 - Corporate Services Agreement
The Taubman Company Limited Partnership (the Manager), which is approximately
99% beneficially owned by TRG, provides various administrative, management,
accounting, shareowner relations, and other services to the Company. The Manager
is paid an annual fee of $250 thousand under an agreement expiring November 30,
2000. The agreement can be renewed for consecutive three-year terms.
Note 4 - Preferred Stock
The 8.3% Series A Preferred Stock has no stated maturity, sinking fund or
mandatory redemption and is not convertible into any other securities of the
Company. The Series A Preferred Stock has a liquidation preference of $200
million ($25 per share). Dividends are cumulative and accrue at an annual rate
of 8.3% from the date of the original issuance, October 3, 1997, and are payable
in arrears on or before the last day of each calendar quarter. The 1997 accrued
dividends were paid in 1997. The Series A Preferred Stock can be redeemed by the
Company beginning in October 2002 at $25 per share plus any accrued dividends.
The redemption price can be paid solely out of the sale of capital stock of the
Company.
Note 5 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of
its partnership interest in TRG, the Company entered into an agreement with A.
Alfred Taubman and the General Motors Hourly-Rate Employes Pension Trust and the
General Motors Salaried Employes Pension Trust (the GM Trusts), each of whom
indirectly owns an interest in TRG, whereby each has the annual right to tender
to the Company units of partnership interest in TRG (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). 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 partners
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 Mr. A. Alfred
Taubman's election, his family and Robert C. Larson and his family may
participate in tenders. The GM Trusts will be entitled to receive from TRG an
amount (not to exceed $10.9 million in the aggregate over the term of the
Partnership) equal to 5.5% of the amounts that the Company pays to the GM Trusts
under the Cash Tender Agreement.
F-10
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Based on a market value at December 31, 1997 and 1996 of $13.00 and $12.875,
respectively, per common share, the aggregate value of partnership interests in
TRG which may be tendered under the Cash Tender Agreement was approximately $960
million and $954 million, respectively, at December 31, 1997 and 1996. The
purchase of these interests at December 31, 1997 would have resulted in the
Company owning an additional 53% interest in TRG.
Shares of common stock that were acquired by the GM Trusts and the AT&T Master
Pension Trust in connection with the IPO may be sold through a registered
offering. Pursuant to a registration rights agreement with the Company, the
owners of each of these shares have the annual right to cause the Company to
register and publicly sell their shares of common stock (provided that the
shares have an aggregate value of at least $50 million and subject to certain
other restrictions). The annual right is deemed to have been exercised if they
initiate or participate in a sale pursuant to the Cash Tender Agreement, as
described above. All expenses of such a registration are to be borne by the
Company, other than the underwriting discounts or selling commissions, which
will be borne by the exercising party.
The Company has made a continuing, irrevocable offer to all present holders
(other than certain excluded holders, including A. Alfred Taubman and the GM
Trusts), assignees of all present holders, those future holders of partnership
interests in TRG as the Company may, in its sole discretion, agree to include in
the continuing offer, and all existing and future optionees under TRG's
incentive option plan (described below) to exchange shares of common stock for
partnership interests in TRG (the Continuing Offer).
Effective September 30, 1997, TRG amended its partnership agreement to split
existing units of partnership interest at a ratio of 1,975.08 to one. Also
effective September 30, 1997, the Continuing Offer was amended to change the
number of shares exchangeable for a unit of partnership interest. Formerly, the
number was based on market valuation of the Company on the trading date
immediately preceding the date of exchange. Under the amended agreement, one
unit of TRG partnership interest is exchangeable for one share of the Company's
common stock.
TRG has an incentive option plan for employees of the Manager. Currently,
options for 8.2 million units of partnership interest, as restated for the unit
split, may be issued under the plan, including options outstanding for 7.0
million units. The exercise price of all options outstanding was equal to market
value on the date of the grant. 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.
A summary of the status of the plan as of December 31, 1997, 1996, and 1995,
and changes during the years ending on those dates is presented below:
1997 1996 1995
------------------------ ------------------------ ------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Price Exercise Price Exercise Price
Options Units Per Unit Units Per Unit Units Per Unit
--------- ----- -------- ----- -------- ----- --------
Outstanding at
beginning of year 6,983,804 $11.19 8,129,819 $11.18 7,221,282 $11.37
Granted 100,828 13.14 932,238 9.66
Exercised (39,299) 11.25 (652,245) 11.23
Cancelled (21,728) 10.86 (493,770) 11.06 (23,701) 11.41
--------- --------- ---------
Outstanding at
end of year 7,023,605 11.22 6,983,804 11.19 8,129,819 11.18
========= ========= =========
Options vested
at year end 5,530,263 11.29 3,768,452 11.23 2,360,220 11.19
========= ========= =========
F-11
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 6 - 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 TRG (and therefore earnings) are adjusted assuming the exercise of
all options for units of partnership interest under TRG's incentive option plan
having exercise prices less than the average market value of the units using the
treasury stock method. For the years ended December 31, 1997, 1996 and 1995,
options for 0.4 million, 1.0 million and 7.2 million units of partnership
interest with average exercise prices of $13.58, $12.64 and $11.37,
respectively, were excluded from the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
for the period calculated.
Year Ended December 31
-----------------------------------
1997 1996 1995
-----------------------------------
(in thousands, except share data)
Income allocable to common
shareowners (Numerator):
Basic income before
extraordinary items $24,604 $20,730 $19,267
Effect of dilutive options (241) (37) (1)
------- ------- -------
Diluted income before
extraordinary items $24,363 $20,693 $19,266
======= ======= =======
Shares (Denominator) - basic
and diluted 50,737,333 44,444,833 44,249,617
========== ========== ==========
Per common share - basic and
diluted $ 0.48 $ 0.47 $0.44
====== ====== =====
Note 7 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1997 and
1996.
1997
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------
(in thousands, except share data)
Income before extraordinary item
from Investment in TRG $ 6,606 $ 6,088 $ 6,408 $10,246
Income before extraordinary item 6,425 5,914 6,214 10,109
Net Income 6,425 5,914 6,214 10,109
Preferred dividends (4,058)
Net income available to common
shareowners 6,425 5,914 6,214 6,051
Basic and diluted earnings per common
share:
Income before extraordinary item $ 0.13 $ 0.12 $ 0.12 $ 0.12
Net Income 0.13 0.12 0.12 0.12
F-12
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
1996
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------
(in thousands, except share data)
Income before extraordinary item
from Investment in TRG $ 5,414 $ 4,583 $ 5,161 $ 6,210
Income before extraordinary item 5,244 4,398 5,036 6,052
Net Income 5,244 4,398 4,592 6,052
Basic and diluted earnings per common
share:
Income before extraordinary item $ 0.12 $ 0.10 $ 0.11 $ 0.13
Net Income 0.12 0.10 0.10 0.13
Note 8 - Subsequent Event
In January 1998, TRG redeemed 6.1 million units of partnership interest from a
partner for approximately $77.7 million (including costs), which increased the
Company's ownership in TRG to 38.4%. TRG funded the redemption through the use
of an existing revolving credit facility.
F-13
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND FOR
EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
F-14
INDEPENDENT AUDITORS' REPORT
Partners
The Taubman Realty Group Limited Partnership
We have audited the accompanying consolidated balance sheets of The Taubman
Realty Group Limited Partnership and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, accumulated
deficiency in assets, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedules listed in the Index at Item 14. These financial statements and
financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Taubman Realty Group Limited
Partnership and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 18, 1998
F-15
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31
-----------------------
1997 1996
---- ----
Assets:
Properties (Notes 5 and 8) $1,593,350 $1,136,416
Accumulated depreciation and amortization 268,658 234,030
---------- ----------
$1,324,692 $ 902,386
Cash and cash equivalents 3,250 7,912
Accounts and notes receivable, less
allowance for doubtful accounts of $414
and $393 in 1997 and 1996 17,803 20,162
Accounts receivable from related
parties (Note 10) 7,400 6,293
Deferred charges and other assets
(Notes 6 and 9) 43,681 41,509
---------- ----------
$1,396,826 $ 978,262
========== ==========
Liabilities:
Unsecured notes payable (Note 8) $1,008,459 $ 796,805
Mortgage notes payable (Note 8) 275,868 204,600
Capital lease obligation (Note 3) 39,849
Accounts payable and other liabilities (Note 7) 106,404 86,779
Distributions in excess of net income of
Unconsolidated Joint Ventures (Note 4) 141,815 142,367
---------- ----------
$1,532,546 $1,270,400
Commitments and Contingencies (Notes 4, 8,
9, 11, and 14)
Accumulated Deficiency in Assets (Note 2):
Series A Preferred Equity 192,840
Partners' Accumulated Deficit (328,560) (292,138)
---------- ----------
(135,720) (292,138)
---------- ----------
$1,396,826 $ 978,262
========== ==========
See notes to financial statements.
F-16
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except unit data)
Year Ended December 31
----------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Minimum rents $181,291 $150,577 $130,418
Percentage rents 7,655 6,073 5,617
Expense recoveries 100,348 85,502 75,293
Other 15,376 13,044 12,227
Revenue from management, leasing and
development services (Note 10) 8,756 8,500 5,363
-------- -------- --------
$313,426 $263,696 $228,918
-------- -------- --------
Operating Costs:
Recoverable expenses $ 85,750 $ 72,093 $ 62,910
Other operating 35,904 26,518 22,512
Management, leasing and development
services 4,675 4,714 3,696
General and administrative 25,715 21,803 19,790
Interest expense 73,639 70,454 65,858
Depreciation and amortization 44,719 35,773 32,393
-------- -------- --------
$270,402 $231,355 $207,159
-------- -------- --------
Income before equity in income of
Unconsolidated Joint Ventures and
before extraordinary items $ 43,024 $ 32,341 $ 21,759
Equity in income before extraordinary
items of Unconsolidated Joint
Ventures (including $5,005 in 1995,
related to the disposition of
Bellevue) (Note 4) 52,270 51,753 57,940
-------- -------- --------
Income before extraordinary items $ 95,294 $ 84,094 $ 79,699
Extraordinary items (Notes 4 and 8) (1,328) 16,627
-------- -------- --------
Net Income $ 95,294 $ 82,766 $ 96,326
Preferred distributions to TCO (Note 2) (4,058)
-------- -------- --------
Net income available to unitholders $ 91,236 $ 82,766 $ 96,326
======== ======== ========
Allocation of net income to
unitholders:
General Partners $ 70,663 $ 64,804 $ 77,077
Limited Partners 20,573 17,962 19,249
-------- -------- --------
$ 91,236 $ 82,766 $ 96,326
======== ======== ========
Basic and Diluted Earnings per Unit
of Partnership Interest (Note 12):
Income before extraordinary items $ .66 $ .65 $ .64
Extraordinary items (.01) .13
-------- -------- --------
Net Income $ .66 $ .64 $ .77
======== ======== ========
Weighted Average Number of Units of
Partnership Interest Outstanding
(Notes 2 and 12) 138,271,014 128,579,312 125,459,939
=========== =========== ===========
See notes to financial statements.
F-17
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Partners' Accumulated Deficit
-----------------------------
Series A General Limited
Preferred Equity Partners Partners Total
---------------- ---------- ---------- ---------
Balance, January 1, 1995 $(306,423) $ (76,525) $(382,948)
Distributions (93,000) (23,225) (116,225)
Net income 77,077 19,249 96,326
--------- --------- ---------
Balance, December 31, 1995 $(322,346) $ (80,501) $(402,847)
Change of ownership (Notes 2 and 3) 124,813 22,229 147,042
Distributions (93,513) (25,586) (119,099)
Net income 64,804 17,962 82,766
--------- --------- ---------
Balance, December 31, 1996 $(226,242) $ (65,896) $(292,138)
Issuance of Series A Preferred
Equity (Note 2) $192,840 192,840
Change of ownership (Note 2) 310 126 436
Distributions (4,058) (99,205) (28,889) (132,152)
Net income 4,058 70,663 20,573 95,294
-------- --------- --------- ---------
Balance, December 31, 1997 $192,840 $(254,474) $ (74,086) $(135,720)
======== ========= ========= =========
See notes to financial statements.
F-18
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Income before extraordinary items $ 95,294 $ 84,094 $ 79,699
Adjustments to reconcile income before
extraordinary items to net cash
provided by operating activities:
Depreciation and amortization 44,719 35,773 32,393
Income before extraordinary items in
excess of distributions from
Unconsolidated Joint Ventures (206)
Provision for losses on accounts
receivable 1,027 1,295 818
Amortization of deferred financing
costs 2,392 2,024 2,250
Other 724 615 3,062
Gains on sales of land (880) (1,041) (818)
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Receivables, deferred charges and
other assets (9,162) (8,326) (11,254)
Accounts payable and other liabilities 19,603 999 5,501
--------- --------- ---------
Net Cash Provided By Operating Activities $ 153,717 $ 115,433 $ 111,445
--------- --------- ---------
Cash Flows From Investing Activities:
Purchase of interests in Centers $(358,227) $(125,904)
Additions to properties (142,420) (33,806) $ (70,691)
Proceeds from sales of land 1,795 1,936 1,966
Contributions to Unconsolidated Joint
Ventures (18,822) (14,653)
Distributions from Unconsolidated Joint
Ventures in excess of income before
extraordinary items 18,270 10,921
--------- --------- ---------
Net Cash Used In Investing Activities $(499,404) $(161,506) $ (68,725)
--------- --------- ---------
Cash Flows From Financing Activities:
Debt proceeds $ 630,585 $ 275,212 $ 200,747
Debt payments (347,838) (229,212) (13,689)
Early extinguishment of debt (35,964) (105,827)
Debt issuance costs (2,846) (830) (1,599)
Issuance of units of partnership interest 436 147,042
Issuance of Series A Preferred Equity 192,840
Cash distributions to partnership
unitholders (128,094) (119,099) (116,225)
Cash distributions to TCO for Series A
Preferred Equity interest (4,058)
--------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities $ 341,025 $ 37,149 $ (36,593)
--------- --------- ---------
Net Increase (Decrease) In Cash $ (4,662) $ (8,924) $ 6,127
Cash and Cash Equivalents at Beginning
of Year 7,912 16,836 10,709
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 3,250 $ 7,912 $ 16,836
========= ========= =========
See notes to financial statements.
F-19
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
General
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership,
management, leasing, acquisition, development and expansion of regional retail
shopping centers (Taubman Shopping Centers) and interests therein. TRG's
portfolio, as of December 31, 1997, includes 25 urban and suburban Taubman
Shopping Centers in 12 states. Two additional Centers are under construction in
Norfolk, Virginia, and Auburn Hills, Michigan. Taubman Centers, Inc. (TCO) is
the managing general partner of TRG. GMPTS Limited Partnership (GMPTS), TG
Partners Limited Partnership (TG) and Taub-Co Management, Inc. are also general
partners.
At December 31, 1997, TRG had 138,299,310 units of partnership interest
outstanding, of which 107,114,443 units represented general partnership
interests. At December 31, 1997, TRG was owned 36.70% by TCO, 36.17% by GMPTS,
20.22% by certain present and former key executives (and certain of their family
members) of the predecessor to The Taubman Company Limited Partnership, the
Manager (collectively, the Taubman Group), and TG, and 6.91% by certain former
joint venture partners and others (Note 16). The members of the Taubman Group
(other than Taub-Co Management, Inc.), the former joint venture partners and
others are limited partners of TRG. Additionally, TCO owns the Series A
Preferred Equity interest in TRG (Note 2).
Income and distributions of TRG are allocated first to the Series A Preferred
Equity interest, and the remaining amounts to the general and limited partners
of TRG in accordance with their percentage ownership. The financial statements
include only those assets, liabilities, and results of operations which relate
to the business of TRG. No provision has been made for income taxes since these
taxes are the responsibility of the individual partners.
Basis of Presentation
The consolidated financial statements include the accounts of TRG and its
consolidated subsidiaries. Investments in entities unilaterally controlled by
ownership or contractual agreements are consolidated; investments in entities
not unilaterally controlled (Unconsolidated Joint Ventures) are accounted for
under the equity method.
The Manager, which is approximately 99% beneficially owned by TRG, provides
property management and leasing services for Taubman Shopping Centers and
provides corporate, development and acquisition services. Intercompany balances
and profits are eliminated in consolidation.
Dollar amounts presented in tables within the notes to the consolidated
financial statements are stated in thousands of dollars, except for unit data or
as otherwise noted.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under
short and intermediate term leases which are accounted for as operating leases.
Minimum rents are recognized on an accrual basis as earned, the result of which
does not differ materially from a straight-line method. Percentage rents are
recognized on an accrual basis as earned. Expense recoveries, which include an
administrative fee, are recognized as revenue in the period applicable costs are
chargeable to tenants.
F-20
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on
straight-line or double-declining balance bases over the estimated useful lives
of the assets, which range from 5 to 50 years. Tenant allowances and deferred
leasing costs are amortized on a straight-line basis over the lives of the
related leases.
Capitalization
Costs related to the acquisition, development, construction and improvement of
properties are capitalized. Interest costs are capitalized until construction is
substantially complete. Properties are reviewed for impairment if events or
changes in circumstances indicate that the carrying amounts of the properties
may not be recoverable. Costs of potentially unsuccessful development
pre-construction activities are provided for by charges to operations and
written off if abandoned.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90
days or less at the date of purchase.
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized
over the terms of the related agreements as a component of interest expense.
Direct costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis over the terms of the agreements
to which they relate.
Stock-Based Compensation Plans
Stock-based compensation plans are accounted for under APB Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations, as
permitted under FAS 123, "Accounting for Stock-Based Compensation".
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over
the terms of the cap agreements. Amounts received under the cap agreements are
accounted for on an accrual basis, and recognized as a reduction of interest
expense. The differential to be paid or received on swap agreements is accounted
for on an accrual basis and recognized as an adjustment to interest expense.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments:
The carrying value of cash and cash equivalents, accounts and notes
receivable, and accounts payable approximates fair value due to the short
maturity of these instruments.
F-21
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of TRG's debt is estimated based on quoted market prices if
available, or on the current rates available to TRG for debt of similar
terms and maturity and the assumption that debt will be prepaid at the
earliest possible date.
The fair value of interest rate hedging instruments is the amount that TRG
would receive or pay to terminate the agreement at the reporting date,
taking into account current interest rates.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1997
classifications.
Note 2 - Equity Transactions
In October 1997, TCO used the $200 million proceeds of its offering of 8.3%
Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) to
acquire a Series A Preferred Equity interest in TRG that entitles TCO to
distributions (in the form of guaranteed payments) in amounts equal to the
dividends payable on TCO's Series A Preferred Equity. TRG bore all expenses of
the offering, which were accounted for as a reduction of the proceeds from the
Series A Preferred Equity. TRG used the net proceeds to pay down floating rate
debt under TRG's existing revolving credit and commercial paper facilities,
which were used to fund the acquisition of Regency Square in September 1997
(Note 3).
The Series A Preferred Equity has no stated maturity, sinking fund requirement
or mandatory redemption. In the event of partnership liquidation, the $200
million Series A Preferred Equity and any unpaid guaranteed payments would be
paid prior to any distributions to holders of units of partnership interest.
Effective September 30, 1997, TRG amended its partnership agreement to split
existing units of partnership interest at a ratio of 1,975.08 to one. The split
did not alter the ownership percentage of any of TRG's partners. All unit and
per unit amounts have been adjusted to reflect the unit split on a retroactive
basis.
In December 1996, TRG issued units of partnership interest to TCO for the $75
million proceeds from TCO's December 1996 equity offering. TRG bore all expenses
of TCO's offering, which have been accounted for as a reduction of the proceeds
from TRG's issuance of units. Also in December 1996, TRG issued units of
partnership interest in connection with the exercise of incentive options (Note
11). Concurrently under TCO's continuing offer to exchange shares of common
stock for certain partnership interests in TRG, TCO exchanged 652 thousand
shares of common stock for these newly issued units of TRG partnership interest.
TRG used the net proceeds from the issuance of units to pay down short term
floating rate debt and to acquire La Cumbre Plaza (Note 3). Additionally in
1996, TRG issued units of partnership interest in connection with the
acquisition of the remaining interest in Fairlane Town Center (Note 3), which
were subsequently redeemed in January 1998 (Note 16).
F-22
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Acquisitions
In 1997 and 1996, TRG acquired interests in various shopping centers. These
acquisitions were recorded at fair value and the operating results of the
Centers have been consolidated in TRG's financial statements from the
acquisition dates.
Center Date Acquired Purchase Price
-------- --------------- ----------------
The Falls December 1997 $ 156,000
The Mall at Tuttle Crossing December 1997 76,268
Regency Square September 1997 123,880
La Cumbre Plaza December 1996 22,250
Fairlane Town Center July 1996 91,552
Paseo Nuevo June 1996 37,000
In 1997, TRG acquired interests in The Mall at Tuttle Crossing (Tuttle
Crossing) from Tuttle Crossing Holding Co., a subsidiary of The Limited, Inc.
(The Limited). TRG's ownership interest in Tuttle Crossing was subject to a
long-term participating lease with The Limited for land and leasehold
improvements. TRG purchased The Limited's interest in the lease and took fee
simple title to the underlying land and buildings. The lease had been accounted
for as a capital lease with capital lease assets and a capital lease obligation
of $55.3 million at the acquisition date. Tuttle Crossing opened in July 1997.
La Cumbre Plaza was purchased subject to four ground leases (three of which
are participating). The leases expire in 2028. Paseo Nuevo was purchased subject
to two participating ground leases expiring in 2065.
In 1996, TRG completed transactions that resulted in the acquisition of the
75% interest in Fairlane Town Center (Fairlane) previously held by a Joint
Venture Partner. In connection with the transactions, which resulted in TRG
owning 100% of Fairlane, TRG issued to the former Joint Venture Partner units of
partnership interest, exchangeable for approximately 6.1 million shares of TCO
common stock, which had a closing price of $10.75 per share on the day prior to
the issuance date. The units issued represented limited partnership units. TRG
also assumed mortgage debt of approximately $26 million, representing the former
Joint Venture Partner's beneficial interest in the $34.6 million mortgage
encumbering the property. TRG used unsecured debt to fund the repayment of the
9.73% mortgage and prepayment penalty of $1.2 million. Prior to the acquisition
date, TRG's interest in Fairlane was accounted for under the equity method as an
Unconsolidated Joint Venture. The units issued to the former Joint Venture
Partner were redeemed in January 1998 (Note 16).
F-23
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma results of TRG's operations, assuming the acquisitions had occurred
on January 1, 1996 are as follows:
Pro Forma
---------
Year ended December 31
------------------------
1997 1996
---- ----
Revenues $337,823 $308,487
Income before extraordinary item 89,054 80,425
Net income 89,054 79,079
Earnings per unit of partnership interest:
Income before extraordinary item $ 0.61 $ 0.61
Net income 0.61 0.60
The pro forma results are not necessarily indicative of what actual results
would have been had the acquisitions occurred on January 1, 1996, nor are they
necessarily indicative of future results.
Note 4 - Investments in Unconsolidated Joint Ventures
Following are TRG's investments in various real estate Unconsolidated Joint
Ventures which own regional retail shopping centers. TRG is generally the
managing general partner of these Unconsolidated Joint Ventures. TRG's interest
in each Unconsolidated Joint Venture is as follows:
TRG's %
Ownership
as of
Unconsolidated Joint Venture Taubman Shopping Center December 31, 1997
- ---------------------------- ----------------------- ------------------
Arizona Mills, L.L.C. Arizona Mills 37%
Fairfax Associates Fair Oaks 50
Lakeside Mall Limited Partnership Lakeside 50
Rich-Taubman Associates Stamford Town Center 50
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
Twelve Oaks Mall Limited
Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodfield Associates Woodfield 50
Woodland Woodland 50
Arizona Mills, L.L.C. developed Arizona Mills, a value super-regional mall in
Tempe, Arizona, which opened in November 1997. TRG's ownership interest in
Arizona Mills, L.L.C. increased in January 1997 to 37% from 35% as a result of
Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8
million (the former owner is an affiliate of a partner in TRG).
In January 1997, Arizona Mills, L.L.C. closed on a secured $145 million
construction facility maturing in 2002. The loan bears interest at one month
LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate
of 9.5%, plus credit spread. The payment of the principal and interest is
guaranteed by each of the owners of Arizona Mills, L.L.C., to the extent of its
ownership percentage. The loan agreement provides for the reduction of the
amount guaranteed as certain center performance and valuation criteria are met.
Borrowings on the facility at December 31, 1997 were $122 million.
F-24
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In December 1995, TRG recognized an ordinary gain of $5.0 million on the
disposition of Bellevue Center (Bellevue), a 60% owned Unconsolidated Joint
Venture, based on the carrying value of TRG's investment in Bellevue. TRG also
recognized an extraordinary gain of $18.9 million on the related extinguishment
of Bellevue's debt. The carrying value of TRG's investment in Bellevue differed
from TRG's 60% share of Bellevue's net deficiency in assets due to the
elimination of intercompany profits on sales of services.
TRG reduces its investment in Unconsolidated Joint Ventures to eliminate
intercompany profits on sales of services that are capitalized by the
Unconsolidated Joint Ventures. As a result, the carrying value of TRG's
investment in Unconsolidated Joint Ventures is less than TRG's share of the
deficiency in assets reported in the Balance Sheet of the Unconsolidated Joint
Ventures of the Taubman Realty Group Limited Partnership by $8.1 million and
$7.4 million in 1997 and 1996, respectively. These differences are amortized
over the useful lives of the related assets.
F-25
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information is presented
below for all Unconsolidated Joint Ventures, followed by TRG's beneficial
interest in the combined information. Beneficial interest is calculated based on
TRG's ownership interest in each of the Unconsolidated Joint Ventures.
December 31
---------------------
1997 1996
---- ----
Assets:
Properties $ 623,981 $ 450,469
Other assets 84,397 71,252
--------- ---------
$ 708,378 $ 521,721
========= =========
Liabilities and partners' accumulated
deficiency in assets:
Debt $ 875,356 $ 724,162
Capital lease obligations 6,509 5,000
Other liabilities 94,801 51,691
TRG's accumulated deficiency in assets (133,680) (134,986)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (134,608) (124,146)
--------- ---------
$ 708,378 $ 521,721
========= =========
TRG's accumulated deficiency in assets (above) $(133,680) $(134,986)
Elimination of intercompany profit (8,135) (7,381)
--------- ---------
Distributions in excess of net income
of Unconsolidated Joint Ventures $(141,815) $(142,367)
========= =========
Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
Revenues $258,635 $265,337 $287,180
-------- -------- --------
Recoverable and other operating expenses $ 94,131 $100,164 $106,859
Interest expense 54,018 52,994 57,857
Depreciation and amortization 24,180 23,837 25,471
-------- -------- --------
Total operating costs $172,329 $176,995 $190,187
-------- -------- --------
Income before extraordinary items $ 86,306 $ 88,342 $ 96,993
Extraordinary items 30,761
-------- -------- --------
Net income $ 86,306 $ 88,342 $127,754
======== ======== ========
Net income attributable to TRG $ 46,857 $ 47,413 $ 68,498
Extraordinary items attributable to TRG (18,327)
Realized intercompany profit 5,413 4,340 7,769
-------- -------- --------
Equity in income before extraordinary
items of Unconsolidated Joint Ventures $ 52,270 $ 51,753 $ 57,940
======== ======== ========
Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
TRG's beneficial interest in
Unconsolidated Joint Ventures'
operations:
Revenues less recoverable and other
operating expenses $ 94,361 $ 91,243 $ 96,120
Ordinary gain on disposition of Bellevue 5,005
Interest expense (29,263) (27,738) (30,396)
Depreciation and amortization (12,828) (11,752) (12,789)
-------- -------- --------
Income before extraordinary items $ 52,270 $ 51,753 $ 57,940
======== ======== ========
F-26
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Properties
Properties, including peripheral land and development pre-construction costs,
at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Land $ 132,308 $ 65,127
Buildings, improvements and equipment 1,326,731 957,185
Construction in process 94,500 42,429
Assets under capital lease (Notes 3 and 13) 39,849
Peripheral land 6,630 7,414
---------- ----------
$1,560,169 $1,112,004
Development pre-construction costs
(See below) 33,181 24,412
---------- ---------
$1,593,350 $1,136,416
========== ==========
Depreciation expense for 1997, 1996, and 1995 was $37.6 million, $29.6
million, and $26.6 million. Peripheral land consists primarily of undeveloped
land generally adjacent to the Taubman Shopping Centers. Construction in process
includes costs related to the construction of new centers, and expansions and
other improvements at various existing centers.
TRG actively pursues opportunities for the development of new regional
shopping centers. Development pre-construction activities, including market
research, site location, environmental work, zoning permits and obtaining of
anchor commitments, may take years to accomplish and ultimately may be
abandoned. TRG provides a reserve for the cost of such potentially unsuccessful
pre-construction activities.
The activity in development pre-construction costs and the related reserve for
1997 and 1996 is summarized as follows:
Costs Reserve Net
----- ------- ---
Balance, January 1, 1996 $35,872 $(10,198) $25,674
Costs incurred 12,556 12,556
Charged to operations (8,501) (8,501)
Transfers to construction in process
and investments in Unconsolidated
Joint Ventures (5,317) (5,317)
Costs of projects written off (6,223) 6,223
------- -------- -------
Balance, December 31, 1996 $36,888 $(12,476) $24,412
Costs incurred 16,988 16,988
Charged to operations (5,454) (5,454)
Transfers to construction in process (2,765) (2,765)
Costs of projects written off (1,870) 1,870
------- -------- -------
Balance, December 31, 1997 $49,241 $(16,060) $33,181
======= ======== =======
F-27
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1997 and 1996 are summarized
as follows:
1997 1996
---- ----
Leasing $ 39,480 $ 38,353
Accumulated amortization (20,534) (21,284)
-------- --------
$ 18,946 $ 17,069
Prepaid ground rent (Note 9) 6,043 6,122
Deferred financing costs, net 10,486 9,343
Other, net 8,206 8,975
-------- --------
$ 43,681 $ 41,509
======== ========
Note 7 - Other Liabilities
In November 1992, the General Motors Hourly-Rate Employes Pension Trust and
the General Motors Salaried Employes Pension Trust (GM Trusts), which indirectly
own interests in TRG, entered into an agreement with TCO (the Cash Tender
Agreement) pursuant to which the GM Trusts have certain rights to cause TCO to
purchase their interests in TRG. TRG will pay the GM Trusts an amount (not to
exceed $10.9 million in the aggregate over the term of the Partnership) equal to
5.5% of the amounts that TCO pays to the GM Trusts under the Cash Tender
Agreement.
F-28
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Debt
Unsecured Notes Payable
Unsecured notes payable at December 31, 1997 and 1996 consists of the
following:
1997 1996
---- ----
7% Notes due 2003 $ 199,719 $ 199,679
8% Notes due 1999 199,969 199,950
Floating Rate Notes due 1997 99,955
Notes payable to banks:
Construction facility, maximum borrowing
available of $210 million, interest at
LIBOR plus 0.90%, maturing December 2001 46,900
Line of credit, maximum borrowing
available of $300 million, interest at
LIBOR plus 0.90%, maturing March 2000 210,000
Line of credit, maximum borrowing available
of $30 million, interest based on a
variable bank borrowing rate, 6.75% at
December 31, 1997, maturing August 1998 10,175 10,100
Medium-Term Notes:
Floating rate notes:
Three month LIBOR plus 0.80% due 1998 $ 20,000 $ 20,000
Three month LIBOR plus 0.77% due 1998 14,000 14,000
Three month LIBOR plus 0.90% due 1999 20,000 20,000
Three month LIBOR plus 1.05% due 2001 30,000 30,000
Fixed rate notes:
7.38% Notes due 2000 13,000 13,000
7.31% Notes due 2000 2,000 2,000
7.19% Notes due 2000 5,000 5,000
7.22% Notes due 2001 8,400 8,400
8.00% Notes due 2001 69,981 69,976
7.40% Notes due 2002 5,000 5,000
7.50% Notes due 2002 99,791 99,745
7.00% Notes due 2007 54,524
---------- ---------
Total Medium-Term Notes $ 341,696 $ 287,121
--------- ---------
Total Unsecured Notes Payable $1,008,459 $ 796,805
========== =========
As of December 31, 1997, TRG has available for general partnership purposes an
unsecured revolving credit facility of $300 million. Included in the credit
facility is a competitive bid option program which allows TRG to hold auctions,
among the banks participating in the facility, for short term borrowings of up
to $150 million.
TRG has used the proceeds from the $210 million construction facility to make
contributions to Taubman Auburn Hills Associates Limited Partnership, a
consolidated 80% owned venture, to finance the construction of Great Lakes
Crossing. TRG is entitled to preferred distributions on these contributions at a
rate of prime plus 1.5%. The preferred distributions will be paid from available
cash as defined in the partnership agreement. The maturity date on the
construction facility may be extended to December 2002.
F-29
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TRG has issued $342 million of Medium-Term Notes since the program's inception
in 1995 under TRG's $500 million shelf registration statement.
TRG's loan and facility agreements and indenture contain various restrictive
covenants including limitations on the amount of secured and unsecured debt and
minimum debt service coverage ratios, the latter being the most restrictive. TRG
is in compliance with all covenants.
Mortgage Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consists of the
following:
Balance Due
Center 1997 1996 Interest Rate Maturity Date on Maturity
- ------ ---- ---- ------------- ------------- -----------
Beverly Center $146,000 $146,000 8.36% 07/15/04 $146,000
Columbus City Center 8,022 8,175 7.00% 08/01/19 0
MacArthur Center 42,241 Floating 10/27/00 42,241
Stoneridge 74,762 44,897 Floating 01/20/98 75,000
Assessment bonds
payable 4,843 5,528 Various Various 0
-------- --------
$275,868 $204,600
======== ========
Mortgage debt is collateralized by properties with a net book value of $208.7
million as of December 31, 1997. The assessment bonds payable are due in monthly
installments with maturities at various dates through 2019, and fixed interest
rates between 6.0% and 7.2%.
In October 1997, TRG closed on a three year, $150 million construction
facility for MacArthur Center, which is owned by a consolidated 70% owned
venture. The loan bears interest at one month LIBOR plus 1.2%. Under the
facility agreement the maturity date may be extended for two years. The payment
of the principal and interest is guaranteed by TRG. The loan agreement provides
for the reduction of the amount guaranteed as certain center performance and
valuation criteria are met.
Stoneridge is encumbered by a deed of trust securing a commercial paper
facility. The facility is supported by an underlying credit facility of up to
$75 million, which is renewable quarterly for a twelve month period.
Commercial paper is generally sold with a 30 day maturity.
The following table presents scheduled principal payments on mortgage debt,
excluding commercial paper, as of December 31, 1997.
1998 $ 896
1999 738
2000 42,804
2001 602
2002 643
Thereafter 155,423
F-30
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Expense
Interest paid in 1997, 1996 and 1995, net of amounts capitalized of $9.5
million, $5.7 million and $6.9 million in 1997, 1996 and 1995, approximated
$69.8 million, $69.8 million and $62.2 million.
Extraordinary Items
In 1996, TRG recognized an extraordinary charge to income of $1.3 million
primarily consisting of a prepayment penalty related to the extinguishment of
debt at a wholly owned Center. In 1995, TRG recognized an extraordinary gain of
approximately $18.9 million, related to the extinguishment of debt at Bellevue
(Note 4) and $2.2 million of extraordinary charges, consisting primarily of
prepayment penalties, related to the extinguishment of debt of TRG and an
Unconsolidated Joint Venture.
Interest Rate Hedging Instruments
TRG enters into interest rate agreements to reduce its exposure to changes in
the cost of its floating rate debt. The derivative agreements generally match
the notional amounts, reset dates and rate bases of the hedged debt to assure
the effectiveness of the derivatives in reducing interest rate risk. As of
December 31, 1997, the following interest rate cap agreements were outstanding:
Frequency
Notional LIBOR of Rate
Amount Cap Rate Resets Term
--------- -------- ------------ -----------------------------------
$100,000 6.5% Three Months November 1997 through December 1998
200,000 9.5% Monthly December 1997 through December 1999
The 9.5% cap rate of the $200 million notional amount cap agreement decreases
to 7.0% beginning in December 1998.
TRG is exposed to credit risk in the event of nonperformance by the
counterparties to its interest rate cap and swap agreements, but has no
off-balance sheet risk of loss. TRG anticipates that its counterparties will
fully perform their obligations under the agreements.
Fair Value of Financial Instruments Related to Debt
The estimated fair values of TRG's financial instruments at December 31, 1997
and 1996 are as follows:
December 31
---------------------------------------------------
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------ ------------------------
Unsecured notes payable $1,008,459 $1,031,983 $ 796,805 $ 804,928
Mortgage notes payable 275,868 286,961 204,600 213,126
Interest rate instruments:
In a receivable position 842 135 964 412
In a payable position (17) (76)
F-31
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Beneficial Interest in Debt and Interest
TRG's beneficial interest in the debt (excluding capital lease obligations),
capitalized interest, and interest expense (net of capitalized interest) of TRG,
its consolidated subsidiaries and its Unconsolidated Joint Ventures (Note 4) is
summarized in the following table. TRG's beneficial interest for 1997 excludes
the 30% minority interest in the debt outstanding on the MacArthur Center
construction facility.
Unconsolidated TRG's Share of TRG's TRG's
Joint Unconsolidated Consolidated Beneficial
Ventures Joint Ventures Subsidiaries Interest
-------- -------------- ------------ --------
Debt as of:
December 31, 1997 $875,356 $ 465,556 $1,284,327 $1,737,211
December 31, 1996 724,162 396,962 1,001,405 1,398,367
Capitalized interest:
1997 $ 9,438 $ 4,371 $ 9,469 $ 13,676
1996 4,790 3,187 5,682 8,869
1995 3,481 1,799 6,852 8,651
Interest expense
(net of capitalized
interest):
1997 $54,018 $29,263 $73,639 $102,902
1996 52,994 27,738 70,454 98,192
1995 57,857 30,396 65,858 96,254
Note 9 - Leases
Operating Leases
Shopping center space is leased to tenants and certain anchors pursuant to
lease agreements. Tenant leases typically provide for guaranteed minimum rent,
percentage rent and other charges to cover certain operating costs. Future
minimum rent under operating leases in effect at December 31, 1997 for operating
centers, assuming no new or renegotiated leases or option extensions on anchor
agreements, is summarized as follows:
1998 $ 205,779
1999 196,423
2000 173,580
2001 157,597
2002 139,594
Thereafter 461,160
Certain Taubman Shopping Centers, as lessees, have ground leases expiring at
various dates through the year 2076. In addition, the Manager leases its office
facilities. Rental payments under ground and office leases were $9.8 million,
$8.0 million and $7.3 million in 1997, 1996 and 1995. Included in these amounts
are related party office rental payments of $3.1 million, $3.0 million and $2.8
million in 1997, 1996 and 1995.
F-32
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a schedule of future minimum rental payments required under
operating leases.
1998 $ 8,677
1999 8,752
2000 8,537
2001 8,259
2002 8,095
Thereafter 189,935
The table above includes $2.9 million, $3.0 million, $2.9 million, $2.6
million, $2.6 million and $6.2 million of related party amounts in 1998, 1999,
2000, 2001, 2002 and thereafter.
Included in deferred charges is approximately $6.0 million representing
lump-sum payments for base rent on two parcels of adjacent land. These costs are
being charged to operations over the 87 and 99 year terms of the leases.
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall,
located in Houston, Texas. The lease of this unencumbered property grants TRG
the exclusive right to manage, lease and operate the property. The annual rent
is initially $7 million. TRG has the option to terminate the lease after the
third full lease year by paying $2 million to the lessor. Accordingly, the lease
will be accounted for as an operating lease during the option period. TRG is
using this option period to evaluate the redevelopment opportunities of the
center.
If TRG does not exercise its option to terminate the lease at the end of the
third full lease year, the lease continues for another 52 years and provides for
increases in rent every ten years based on 75% of the increase in the Consumer
Price Index between 1996 and the then current year. Under the terms of the
lease, TRG has agreed to invest a minimum of $3 million during the three year
option period. If the redevelopment proceeds, TRG is required to invest an
additional $22 million in property expenditures not recoverable from tenants
during the first 10 years of the lease term.
Note 10 - Transactions with Affiliates
The revenue from management, leasing and development services is derived
primarily from transactions with affiliates. Accounts receivable from related
parties includes amounts related to reimbursement of third-party
(non-affiliated) costs.
During 1997, TRG acquired an option from a related party to purchase certain
real estate on which TRG may develop a shopping center. The option agreement
requires option payments of $150 thousand during each of the first five years,
$400 thousand in the sixth year, and $500 thousand in the seventh year. If TRG
exercises the option, the purchase price for the property will be between $5
million and $10 million, depending upon the year of purchase. While the optionor
will have no interest in the shopping center itself, the optionor may, under
certain circumstances, participate in the proceeds from TRG's future sales of
the peripheral land contiguous to the shopping center.
Other related party transactions are described in Notes 4, 9 and 11.
F-33
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11 - The Manager
The Manager, The Taubman Company Limited Partnership, provides property
management, leasing and development services to the Taubman Shopping Centers and
affiliates.
The Manager has a voluntary retirement savings plan established in 1983 and
amended and restated effective January 1, 1994 (the Plan). The Plan is qualified
in accordance with Section 401(k) of the Internal Revenue Code (the Code). The
Manager contributes an amount equal to 2% of the qualified wages of all
qualified employees and matches employee contributions in excess of 2% up to 7%
of qualified wages. In addition, the Manager may make discretionary
contributions within the limits prescribed by the Plan and imposed in the Code.
Costs relating to the Plan were $1.7 million, $1.6 million, and $1.5 million in
the years ended December 31, 1997, 1996 and 1995, respectively.
TRG has an incentive option plan for employees of the Manager. Currently,
options for 8.2 million units of partnership interest, as restated for the unit
split (Note 2), may be issued under the plan, including options outstanding for
7.0 million units. The exercise price of all options outstanding is equal to
market value on the date of the grant. 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.
A summary of the status of the plan as of December 31, 1997, 1996, and 1995,
and changes during the years ending on those dates are presented below:
1997 1996 1995
------------------------ ------------------------ ------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Price Exercise Price Exercise Price
Options Units Per Unit Units Per Unit Units Per Unit
--------- ----- -------- ----- -------- ----- --------
Outstanding at
beginning of year 6,983,804 $11.19 8,129,819 $11.18 7,221,282 $11.37
Granted 100,828 13.14 932,238 9.66
Exercised (39,299) 11.25 (652,245) 11.23
Cancelled (21,728) 10.86 (493,770) 11.06 (23,701) 11.41
--------- --------- ---------
Outstanding at
end of year 7,023,605 11.22 6,983,804 11.19 8,129,819 11.18
========= ========= =========
Options vested
at year end 5,530,263 11.29 3,768,452 11.23 2,360,220 11.19
========= ========= =========
Options outstanding at December 31, 1997 have a remaining weighted-average
contractual life of 5.4 years and range in exercise price from $9.39 to $13.89.
The weighted average fair value per unit of options granted during 1997 and 1995
was $2.33 and $1.37. There were no grants in 1996. TRG used a binomial option
pricing model to determine the grant date fair values of the 1997 and 1995
grants based on the following assumptions: volatility rates of 21% and 22%,
risk-free rates of return of approximately 6.8% and 8%, and dividend yields of
approximately 7% and 9%, respectively.
TRG applies APB Opinion 25 and related Interpretations in accounting for the
plan. The exercise price of all options outstanding granted under the plan was
equal to market value on the date of grant. Accordingly, no compensation expense
has been recognized for the plan. Had compensation cost for the plan been
determined based on the fair value of the options at the grant dates for 1997
and 1995 awards (there were no grants in 1996) consistent with the method of FAS
Statement 123, the pro forma effect on TRG's earnings and earnings per unit of
partnership interest would not have been material.
F-34
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective January 1, 1996, the Manager adopted The Taubman Company Long-Term
Performance Compensation Plan. Annually, eligible employees will be granted
contingent notional TRG units of partnership interest, the ultimate number of
which will be based on the employee's performance. These awards, which will vest
on the third anniversary of the date of grant, will also accrue distribution
equivalents in the form of additional notional units each time TRG makes a
distribution to its partners. Upon vesting, additional notional units may be
granted based on the performance of the employee and the Manager and/or TRG. The
awards will be paid to the employee in cash upon vesting, based on the value of
TRG's units of partnership interest, unless the employee elects to defer payment
as provided in the plan. The cost of this plan was approximately $4.5 million
and $2.0 million for 1997 and 1996, respectively.
Note 12 - Earnings Per Unit of Partnership Interest
Basic earnings per unit of partnership interest are based on the average
number of units of partnership interest outstanding during each period. Diluted
earnings per unit of partnership interest are based on the average number of
units of partnership interest outstanding during each period, assuming exercise
of all options for units of partnership interest having exercise prices less
than the average market value of the units using the treasury stock method. For
the years ended December 31, 1997, 1996 and 1995, options for 0.4 million, 1.0
million and 7.2 million units of partnership interest with average exercise
prices of $13.58, $12.64 and $11.37, respectively, were excluded from the
computation of diluted earnings per unit because the options' exercise prices
were greater than the average market price for the period calculated. In January
1998, TRG redeemed a partner's interest in TRG (Note 16), which will affect the
number of units of partnership interest outstanding in 1998.
Year Ended December 31
------------------------------------------
1997 1996 1995
------------------------------------------
Income before extraordinary
items allocable to
unitholders (Numerator) $ 91,236 $ 84,094 $ 79,699
======== ========= ========
Partnership units (Denominator):
Basic 138,271,014 128,579,312 125,459,939
Effect of dilutive options 1,002,634 160,594 4,148
----------- ----------- -----------
Diluted 139,273,648 128,739,906 125,464,087
=========== =========== ===========
Per unit - basic and diluted $ 0.66 $ 0.65 $ 0.64
====== ====== ======
Note 13 - Supplemental Disclosures of Non-Cash Activities
In connection with the construction of Tuttle Crossing, additions to assets
under capital lease and the capital lease obligation were recognized for $15.5
million, $25.4 million, and $14.4 million in 1997, 1996, and 1995, respectively.
The outstanding capital lease obligation was extinguished in connection with the
1997 acquisition of interests in Tuttle Crossing (Note 3).
Note 14 - Contingencies
TRG 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 TRG's assets or results of operations.
F-35
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1997 and
1996.
1997
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------
(in thousands, except unit data)
Revenues $72,897 $73,027 $78,037 $89,465
Equity in income of Unconsolidated
Joint Ventures 12,328 14,340 12,205 13,397
Income before extraordinary item 23,584 22,170 23,041 26,499
Net Income 23,584 22,170 23,041 26,499
Basic and diluted earnings
per unit of partnership interest:
Income before extraordinary item $0.17 $0.16 $0.17 $0.16
Net Income 0.17 0.16 0.17 0.16
1996
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------
(in thousands, except unit data)
Revenues $59,914 $60,073 $66,318 $77,391
Equity in income of Unconsolidated
Joint Ventures 13,276 12,628 13,432 12,417
Income before extraordinary item 20,868 18,500 20,940 23,786
Net Income 20,868 18,500 19,612 23,786
Basic and diluted earnings
per unit of partnership interest:
Income before extraordinary item $0.17 $0.15 $0.16 $0.18
Net Income 0.17 0.15 0.15 0.18
Note 16 - Subsequent Events
In January 1998, TRG redeemed a partner's 6.1 million units of partnership
interest for approximately $77.7 million (including costs). The redemption was
funded through the use of an existing revolving credit facility.
Subsequent to December 31, 1997, Fairfax Company of Virginia L.L.C.
(successor-in-interest to Fairfax Associates, a 50% owned Unconsolidated Joint
Venture) completed a $140 million, 6.60%, secured financing maturing in 2008.
The net proceeds were used to extinguish an existing mortgage on Fair Oaks of
approximately $39 million and pay a prepayment penalty of approximately $1.8
million. In addition, proceeds of $5.6 million were used to close out a treasury
lock agreement entered into in 1997, which resulted in an effective rate on the
financing of approximately 7%. The remaining proceeds were distributed to the
owners. TRG used its 50% share of the distribution to pay down its revolving
credit facilities.
F-36
Schedule II
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996, and 1995
(in thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
of year expenses accounts Write-offs of year
--------- ---------- ---------- ------------ ---------
Year ended December 31, 1995:
Allowance for doubtful receivables $ 502 818 0 (939) $ 381
======= ===== ==== ====== =======
Development pre-construction reserve $ 8,348 6,814 0 (4,964) $10,198
======= ===== ==== ====== =======
Year ended December 31, 1996:
Allowance for doubtful receivables $ 381 1,295 42(1) (1,325) $ 393
======= ===== ==== ====== =======
Development pre-construction reserve $10,198 8,501 0 (6,223) $12,476
======= ===== ==== ====== =======
Year ended December 31, 1997:
Allowance for doubtful receivables $ 393 1,027 0 (1,006) $ 414
====== ===== ==== ====== =======
Development pre-construction reserve $12,476 5,454 0 (1,870) $16,060
======= ===== ==== ====== =======
(1) Represents the balance of Fairlane's allowance for doubtful receivables as
of the date of TRG's acquisition of additional interests in Fairlane.
Subsequent to the acquisition date, the accounts of Fairlane have been
consolidated in TRG's financial statements.
F-37
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Gross Amount at Which
Initial Cost Carried at Close of Period
to Company Cost ---------------------------------------
------------------- Capitalized Accumulated Total
Buildings and Subsequent Depreciation Cost Net
Land Improvements to Acquisition Land BI&E Total (A/D) of A/D
---- ------------ -------------- ---- ---- ----- ------- ------
Taubman Shopping Centers:
Beverly Center, Los Angeles, CA $ 0 $ 131,187 $ 22,104 $ 0 $ 153,291 $ 153,291 $ 48,058 $ 105,233
Biltmore, Phoenix, AZ 18,000 96,864 8,320 18,000 105,184 123,184 9,390 113,794
Briarwood, Ann Arbor, MI 4,027 47,761 5,964 4,027 53,725 57,752 28,663 29,089
Columbus City Center,
Columbus, OH 0 57,787 278 0 58,065 58,065 15,383 42,682
Fairlane Town Center,
Dearborn, MI 14,067 88,023 771 14,067 88,794 102,861 9,869 92,992
The Falls, Miami, FL 25,479 131,347 0 25,479 131,347 156,826 229 156,597
Hilltop, Richmond, CA 2,522 36,139 7,788 2,522 43,927 46,449 16,740 29,709
La Cumbre Plaza, Santa Barbara, CA 0 23,048 39 0 23,087 23,087 844 22,243
Lakeforest, Gaithersburg, MD 4,047 18,137 7,245 4,047 25,382 29,429 16,107 13,322
Marley Station, Glen Burnie, MD 3,692 45,072 11,118 3,692 56,190 59,882 26,968 32,914
Meadowood Mall, Reno, NV 1,890 14,116 13,734 1,890 27,850 29,740 12,598 17,142
Paseo Nuevo, Santa Barbara, CA 0 35,210 385 0 35,595 35,595 1,832 33,763
Regency Square, Richmond, VA 21,702 103,062 0 21,702 103,062 124,764 980 123,784
The Mall at Short Hills,
Short Hills, NJ 16,000 116,054 120,709 16,000 236,763 252,763 36,729 216,034
Stoneridge, Pleasanton, CA 882 25,265 16,496 882 41,761 42,643 23,644 18,999
The Mall at Tuttle Crossing,
Columbus, OH 20,000 118,078 0 20,000 118,078 138,078 2,629 135,449
Other:
Manager's Office Facilities 0 0 23,505 0 23,505 23,505 17,796 5,709
Peripheral Land 6,630 0 5 6,630 5 6,635 0 6,635
Construction in Process and
Development Pre-construction
Costs 0 122,011 5,670 0 127,681 127,681 0 127,681
Other 0 1,120 0 0 1,120 1,120 199 921
-------- ---------- -------- -------- ---------- ---------- -------- ----------
TOTAL $138,938 $1,210,281 $244,131 $138,938 $1,454,412 $1,593,350 $268,658 $1,324,692
======== ========== ======== ======== ========== ========== ======== ==========
Date of
Completion of
Construction or Depreciable
Encumbrances Acquisition Life
------------ ----------- ----
Taubman Shopping Centers:
Beverly Center, Los Angeles, CA $146,000 1982 40 Years
Biltmore, Phoenix, AZ 2,979 1994 40 Years
Briarwood, Ann Arbor, MI 0 1973 33 Years
Columbus City Center,
Columbus, OH 8,022 1989 31 Years
Fairlane Town Center,
Dearborn, MI 0 1996 40 Years
The Falls, Miami, FL 0 1997 40 Years
Hilltop, Richmond, CA 607 1976 50 Years
La Cumbre Plaza, Santa Barbara, CA 0 1996 40 Years
Lakeforest, Gaithersburg, MD 0 1978 30 Years
Marley Station, Glen Burnie, MD 0 1987 40 Years
Meadowood Mall, Reno, NV 0 1979 40 Years
Paseo Nuevo, Santa Barbara, CA 0 1996 40 Years
Regency Square, Richmond, VA 0 1997 40 Years
The Mall at Short Hills,
Short Hills, NJ 0 1980 40 Years
Stoneridge, Pleasanton, CA 76,019 1980 40 Years
The Mall at Tuttle Crossing,
Columbus, OH 0 1997 50 Years
Other:
Manager's Office Facilities 0
Peripheral Land 0
Construction in Process and
Development Pre-construction
Costs 42,241
Other 0
--------
TOTAL $275,868
========
The changes in total real estate assets for the three years ended December 31,
1997 are as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $1,136,416 $ 926,207 $ 843,960
Acquisitions 358,227 150,522
New development and improvements 142,420 59,237 85,109
Disposals (1) (43,713) (3,808) (2,862)
Transfers In, net (2) 4,258
---------- ---------- ---------
Balance, end of year $1,593,350 $1,136,416 $ 926,207
========== ========== =========
F-38
(Schedule III (cont.))
The changes in accumulated depreciation and amortization for the three years
ended December 31, 1997 are as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $(234,030) $(200,440) $(175,358)
Depreciation for year (37,642) (29,570) (26,574)
Disposals 3,014 1,290 1,492
Transfers In (2) (5,310)
--------- --------- ---------
Balance, end of year $(268,658) $(234,030) $(200,440)
========= ========= =========
(1) 1997 disposal amount includes $39,849 representing the net decrease in
Tuttle Crossing's assets under capital lease.
(2) Primarily represents consolidation in 1996 of TRG's original 25% interest
in Fairlane's assets (costs of acquiring the remaining 75% interest are
included in Acquisitions above), net of transfers of pre-construction costs
to construction in process of an Unconsolidated Joint Venture.
F-39
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
F-40
INDEPENDENT AUDITORS' REPORT
Partners
The Taubman Realty Group Limited Partnership
We have audited the accompanying combined balance sheets of Unconsolidated
Joint Ventures of The Taubman Realty Group Limited Partnership (the
"Partnership") as of December 31, 1997 and 1996, and the related combined
statements of operations, accumulated deficiency in assets, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14. These
financial statements and financial statement schedules are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Unconsolidated Joint Ventures of
The Taubman Realty Group Limited Partnership as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic combined financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 18, 1998
F-41
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
(in thousands)
December 31
-----------------------
1997 1996
---- ----
Assets:
Properties (Notes 2, 4 and 6) $ 829,640 $ 638,960
Accumulated depreciation and amortization 205,659 188,491
--------- ---------
$ 623,981 $ 450,469
Cash and cash equivalents 36,875 25,914
Accounts and notes receivable, less allowance
for doubtful accounts of $314 and $90
in 1997 and 1996 8,531 7,142
Note receivable from Joint Venture Partner
(Note 6) 1,294 1,600
Deferred charges and other assets (Notes 3 and 6) 37,697 36,596
--------- ---------
$ 708,378 $ 521,721
========= =========
Liabilities:
Mortgage notes payable (Note 4) $ 874,472 $ 721,809
Other notes payable (Note 4) 884 2,353
Capital lease obligations (Note 5) 6,509 5,000
Accounts payable and other liabilities 94,801 51,691
--------- ---------
$ 976,666 $ 780,853
Commitments (Note 5)
Accumulated deficiency in assets:
TRG $(133,680) $(134,986)
Joint Venture Partners (134,608) (124,146)
--------- ---------
$(268,288) $(259,132)
--------- ---------
$ 708,378 $ 521,721
========= =========
See notes to financial statements.
F-42
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS
(in thousands)
Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Minimum rents $155,912 $157,212 $166,244
Percentage rents 3,057 3,951 3,629
Expense recoveries 89,653 95,244 101,455
Other 10,013 8,930 11,444
Gain on disposition of Bellevue (Note 1) 4,408
-------- -------- --------
$258,635 $265,337 $287,180
-------- -------- --------
Operating costs:
Recoverable expenses (Note 6) $ 76,493 $ 81,799 $ 88,250
Other operating (Note 6) 17,638 18,365 18,609
Interest expense (Note 4) 54,018 52,994 57,857
Depreciation and amortization 24,180 23,837 25,471
-------- -------- --------
$172,329 $176,995 $190,187
-------- -------- --------
Income before extraordinary items $ 86,306 $ 88,342 $ 96,993
Extraordinary items (Notes 1 and 4) 30,761
-------- -------- --------
Net Income $ 86,306 $ 88,342 $127,754
======== ======== ========
Allocation of net income:
Attributable to TRG $ 46,857 $ 47,413 $ 68,498
Attributable to Joint Venture Partners 39,449 40,929 59,256
-------- -------- --------
$ 86,306 $ 88,342 $127,754
======== ======== ========
See notes to financial statements.
F-43
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS
Years ended December 31, 1997, 1996 and 1995
(in thousands)
Joint Venture
TRG Partners Total
--- -------- -----
Balance, January 1, 1995 $(165,328) $(167,603) $(332,931)
Cash distributions (53,287) (49,413) (102,700)
Net income 68,498 59,256 127,754
--------- --------- ---------
Balance, December 31, 1995 $(150,117) $(157,760) $(307,877)
Cash contributions 14,457 24,958 39,415
Non-cash contributions (Note 1) 4,797 8,050 12,847
Cash distributions (55,146) (51,154) (106,300)
TRG purchase of Fairlane interest
(Note 1) 3,610 10,831 14,441
Net income 47,413 40,929 88,342
--------- --------- ---------
Balance, December 31, 1996 $(134,986) $(124,146) $(259,132)
Cash contributions 18,822 9,800 28,622
Cash distributions (64,373) (59,711) (124,084)
Net income 46,857 39,449 86,306
--------- --------- ---------
Balance, December 31, 1997 $(133,680) $(134,608) $(268,288)
========= ========= =========
See notes to financial statements.
F-44
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Income before extraordinary items $ 86,306 $ 88,342 $ 96,993
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 24,180 23,837 25,471
Provision for losses on accounts
receivable 697 1,303 974
Gains on sales of land (2,748) (1,303)
Gain on disposition of Bellevue (Note 1) (4,408)
Other 3,806 2,922 2,493
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Receivables, deferred
charges and other assets (7,760) (1,821) (10,128)
Accounts payable and other liabilities 43,110 4,841 4,258
--------- --------- ---------
Net Cash Provided By Operating Activities $ 147,591 $ 119,424 $ 114,350
--------- --------- ---------
Cash Flows From Investing Activities:
Additions to properties $(190,188) $ (97,137) $ (48,320)
Restricted cash for expansion 1,309 40,879
Proceeds from sales of land 3,452 1,390
--------- --------- ---------
Net Cash Used In Investing Activities $(186,736) $ (95,828) $ (6,051)
--------- --------- ---------
Cash Flows From Financing Activities:
Debt proceeds $ 158,255 $ 20,529 $ 235,030
Debt payments (8,267) (2,670) (6,665)
Extinguishment of debt (189,705)
Debt issuance costs (4,420) (6,198)
Cash contributions from partners 28,622 39,415
Cash distributions to partners (124,084) (106,300) (102,700)
--------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities $ 50,106 $ (49,026) $ (70,238)
--------- --------- ---------
Net Increase (Decrease) In Cash $ 10,961 $ (25,430) $ 38,061
Cash and Cash Equivalents at Beginning
of Year 25,914 51,344 13,283
--------- --------- --------
Cash and Cash Equivalents at End of Year $ 36,875 $ 25,914 $ 51,344
========= ========= =========
See notes to financial statements.
F-45
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Years Ended December 31, 1997
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership,
management, leasing, acquisition, development and expansion of regional retail
shopping centers (Taubman Shopping Centers) and interests therein. TRG has
engaged the Manager (The Taubman Company Limited Partnership, which is
approximately 99% beneficially owned by TRG) to provide property management and
leasing services for the Taubman Shopping Centers and to provide corporate,
development, and acquisition services. For financial statement reporting
purposes, the accounts of Taubman Shopping Centers owned through joint ventures
with third parties that are not controlled (Unconsolidated Joint Ventures) have
been combined in these financial statements. Generally, net profits and losses
of the Unconsolidated Joint Ventures are allocated to TRG and the outside
partners (Joint Venture Partners) in accordance with their ownership
percentages.
Dollar amounts presented in tables within the notes to the combined financial
statements are stated in thousands.
Investments in Unconsolidated Joint Ventures
TRG's interest in each of the Unconsolidated Joint Ventures at December 31,
1997, is as follows:
TRG's %
Unconsolidated Joint Venture Taubman Shopping Center Ownership
- ---------------------------- ----------------------- ---------
Arizona Mills, L.L.C. Arizona Mills 37%
Fairfax Associates Fair Oaks 50
Lakeside Mall Limited Partnership Lakeside 50
Rich-Taubman Associates Stamford Town Center 50
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
Twelve Oaks Mall
Limited Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodfield Associates Woodfield 50
Woodland Woodland 50
Arizona Mills, L.L.C. developed Arizona Mills, a value super-regional mall in
Tempe, Arizona, which opened in November 1997. TRG's ownership interest in
Arizona Mills, L.L.C. increased in January 1997 to 37% from 35% as a result of
Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8
million. The former owner is an affiliate of a partner in TRG. In 1996, Arizona
Mills, L.L.C. purchased for $24.8 million approximately 116 acres of land on
which the Center was constructed from an affiliate of a partner in TRG and of a
former owner in Arizona Mills. Also in 1996, TRG and the other owners of Arizona
Mills contributed non-cash pre-construction costs related to this center
totaling $12.8 million.
F-46
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
In July 1996, TRG completed transactions that resulted in it acquiring the 75%
interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture
Partner. TRG also assumed mortgage debt of approximately $26 million,
representing the former Joint Venture Partner's beneficial interest in the $34.6
million mortgage encumbering the property. The accounts of Fairlane are included
in these combined financial statements until the acquisition date. On the
acquisition date, the book values of Fairlane's assets and liabilities were
approximately $25 million and $39 million, respectively.
In December 1995, the bank group holding the $99.5 million nonrecourse
mortgage encumbering Bellevue Center acquired title to the Center through a
nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG
ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60%
owned Unconsolidated Joint Venture that owned the Center, as of November 1,
1995, and, accordingly, the accounts of Bellevue Associates are not included in
these combined financial statements from that date.
As a result of the foreclosure and debt extinguishment, Bellevue recognized in
1995 an extraordinary gain of approximately $31.4 million, representing the
difference between the carrying value of the debt and the fair value of the
Center, net of related transaction costs, and an ordinary gain of approximately
$4.4 million, representing the excess of the fair value of the Center over its
carrying value. The extinguishment of the debt and write off of the Center's
carrying value represent non-cash transactions.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under
short and intermediate term leases which are accounted for as operating leases.
Minimum rents are recognized on an accrual basis as earned, the result of which
does not differ materially from a straight-line method. Percentage rents are
recognized on an accrual basis as earned. Expense recoveries, which include an
administrative fee, are recognized as revenue in the period applicable costs are
chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on
straight-line or double-declining balance bases over the estimated useful lives
of the assets which range from 3 to 55 years. Tenant allowances and deferred
leasing costs are amortized on a straight-line basis over the lives of the
related leases.
Capitalization
Costs related to the acquisition, development, construction, and improvement
of properties are capitalized. Interest costs are capitalized until construction
is substantially complete. Properties are reviewed for impairment if events or
changes in circumstances indicate that the carrying amounts of the properties
may not be recoverable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90
days or less at the date of purchase.
F-47
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized
over the terms of the related agreements as a component of interest expense.
Direct costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis over the terms of the agreements
to which they relate.
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over
the terms of the cap agreements. Amounts received under the cap agreements are
accounted for on an accrual basis, and recognized as a reduction of interest
expense. The differential to be paid or received on swap agreements is accounted
for on an accrual basis and recognized as an adjustment to interest expense.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments:
The carrying value of cash and cash equivalents, accounts and notes
receivable, and accounts payable approximates fair value due to the short
maturity of these instruments.
The fair value of mortgage notes and other notes payable is estimated based
on quoted market prices if available, or on the current rates available to
the Unconsolidated Joint Ventures for debt of similar terms and maturity
and the assumption that debt will be prepaid at the earliest possible
date.
The fair value of interest rate hedging instruments is the amount the
Unconsolidated Joint Venture would pay or receive to terminate the
agreement at the reporting date, taking into account current interest
rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1997
classifications.
F-48
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 2 - Properties
Properties, at December 31, 1997 and 1996, are summarized as follows:
1997 1996
---- ----
Land $ 45,549 $ 43,477
Buildings, improvements and equipment 753,859 476,283
Construction in process 27,443 115,953
Peripheral land 2,789 3,247
-------- --------
$829,640 $638,960
======== ========
Depreciation expense for 1997, 1996 and 1995 was $18.7 million, $18.0 million
and $18.4 million. Peripheral land primarily consists of undeveloped land
generally adjacent to the Taubman Shopping Centers. Construction in process
includes costs related to expansions and other improvements at various centers.
Assets under capital lease of $6.5 million and $5.0 million at December 31, 1997
and 1996, respectively, are included in the table above in buildings,
improvements and equipment.
Note 3 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1997 and 1996 are summarized
as follows:
1997 1996
---- ----
Leasing $ 41,568 $ 39,924
Accumulated amortization (20,562) (19,298)
-------- --------
$ 21,006 $ 20,626
Deferred financing, net 12,442 11,810
Other, net 4,249 4,160
-------- --------
$ 37,697 $ 36,596
======== ========
F-49
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 4 - Debt
Mortgage Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consists of the
following:
Balance Due
Center 1997 1996 Interest Rate Maturity Date on Maturity
- ------ ---- ---- ------------- ------------- -----------
Arizona Mills $121,991 Floating 02/01/02 $121,991
Cherry Creek 130,000 $130,000 Floating 08/01/98 130,000
Fair Oaks 39,119 39,865 9.00% 12/01/16 0
Lakeside 88,000 88,000 6.47% 12/15/00 88,000
Stamford Town Center 55,630 56,291 11.69% 12/01/17 0
Twelve Oaks Mall 49,940 49,924 Floating 10/15/01 50,000
Westfarms 100,000 100,000 7.85% 07/01/02 100,000
Westfarms 51,792 19,729 Floating 07/01/02 51,792
Woodfield 172,000 172,000 Floating 10/13/98 172,000
Woodland 66,000 66,000 8.20% 05/15/04 66,000
------- --------
$874,472 $721,809
======== ========
The Arizona Mills loan is a construction facility with a maximum availability
of $145 million. The rate is capped at 9.5% until maturity, plus credit spread.
The payment of principal and interest is guaranteed by each of the owners of
Arizona Mills to the extent of its ownership percentage. The loan agreement
provides for the reduction of the amount guaranteed as certain center
performance and valuation criteria are met.
The other Unconsolidated Joint Ventures with floating rate debt have entered
into interest rate agreements to reduce their exposure to increases in interest
rates. The rate on Cherry Creek's loan is capped at 6.5% through January 1998
and from February 1998 to maturity at 7%, plus credit spread, based on one month
LIBOR. The loan can be extended up to an additional three years. The rate on the
Twelve Oaks loan is capped at 8.55% until maturity, plus credit spread, based on
one month LIBOR. The interest rate on $93.5 million of the Woodfield loan was
swapped to maturity at an effective annual rate of 5.4%. The rate on the balance
of the Woodfield financing, which has been capped at a maximum annual rate,
including credit spread, of 6.5% to maturity by an interest rate agreement,
floats at a rate of three month LIBOR plus 0.5%. The Westfarms balance of $51.8
million represents borrowings under a construction facility with a maximum
availability of $55 million. The rate on the construction facility is capped
until maturity at 6.5%, plus credit spread.
The Stamford note also requires payment of additional interest ($1.3 million,
$1.6 million, and $1.4 million in 1997, 1996, and 1995) based on operating
results.
F-50
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Scheduled principal payments on mortgage debt are as follows as of December
31, 1997:
1998 $303,559
1999 1,727
2000 89,914
2001 52,121
2002 276,135
Thereafter 151,016
--------
Total $874,472
========
Other Notes Payable
Other notes payable at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Notes payable to banks, line of credit,
interest generally at prime (8.5% at
December 31, 1997), maximum borrowings
available up to $7.5 million to fund
tenant loans, allowances and buyouts
and working capital. $ 832 $2,293
Other 52 60
----- ------
$ 884 $2,353
===== ======
Interest Expense
Interest paid on mortgages and other notes payable in 1997, 1996 and 1995, net
of amounts capitalized of $9.4 million, $4.8 million, and $3.5 million,
approximated $48.7 million, $49.9 million, and $55.6 million.
Extraordinary Items
In 1995, Bellevue Associates recognized an extraordinary gain of approximately
$31.4 million (Note 1). The extraordinary charge to income totaling $0.6 million
in 1995 primarily represented a prepayment penalty relating to the
extinguishment of mortgage debt.
Interest Rate Hedging Instruments
Certain of the Unconsolidated Joint Ventures have entered into interest rate
swap and cap agreements to reduce their exposure to changes in the cost of
floating rate debt. The terms of the derivative agreements are equivalent to the
notional amounts, reset dates and rate bases of the underlying hedged debt to
assure the effectiveness of the derivatives in reducing interest rate risk.
These Unconsolidated Joint Ventures are exposed to credit risk in the event of
nonperformance by their counterparties to the agreements, but have no
off-balance sheet risk of loss. These Unconsolidated Joint Ventures anticipate
that their counterparties will be able to fully perform their obligations under
the agreements.
In 1997, Fairfax Associates entered into a treasury lock agreement to
effectively fix the rate on its anticipated refinancing of the mortgage on Fair
Oaks. At December 31, 1997, Fairfax Associates would have paid $4.2 million to
close out the agreement (Note 7).
F-51
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Fair Value of Debt Instruments
The estimated fair values of financial instruments at December 31, 1997 and
1996 are as follows:
December 31
---------------------------------------------------
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------ ------------------------
Mortgage notes payable $874,472 $910,250 $721,809 $757,438
Other notes payable 884 884 2,353 2,353
Interest rate instruments:
In a receivable position 4,787 2,164 4,065 3,263
In a payable position (4,241)
Note 5 - Leases
Shopping center space is leased to tenants and certain anchors pursuant to
lease agreements. Tenant leases typically provide for guaranteed minimum rent,
percentage rent and other charges to cover certain operating costs. Future
minimum rent under operating leases in effect at December 31, 1997 for operating
centers, assuming no new or renegotiated leases or option extensions on anchor
agreements, is summarized as follows:
1998 $177,731
1999 171,664
2000 158,214
2001 141,862
2002 124,068
Thereafter 377,803
Minimum rent received from former related parties was $0.9 million in 1995.
There are no related party amounts in the table above.
One Unconsolidated Joint Venture, as lessee, has a ground lease expiring in
2083. Rental payments under the lease were $1.8 million, $1.7 million and $1.7
million in each of 1997, 1996 and 1995. All of the ground lease rental payments
and scheduled future payments represent minimum rental expense payable to its
Joint Venture Partner.
The following is a schedule of future minimum rental payments required under
the lease:
1998 $ 1,984
1999 1,984
2000 1,984
2001 1,984
2002 2,058
Thereafter 656,417
F-52
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Capital Lease Obligations
Certain Unconsolidated Joint Ventures have entered into lease agreements for
property improvements with three to five year terms. As of December 31, 1997,
future minimum lease payments for these capital leases are as follows:
1998 $ 1,976
1999 1,976
2000 1,933
2001 1,803
2002 65
-------
Total minimum lease payments $ 7,753
Less amount representing interest (1,244)
-------
Capital lease obligations $ 6,509
=======
Note 6 - Transactions with Affiliates
Charges from the Manager under various written agreements were as follows for
the years ended December 31:
1997 1996 1995
---- ---- ----
Management and leasing services $17,352 $16,720 $18,668
Security and maintenance services 9,468 11,608 15,468
Development services 4,661 5,410 5,708
------- ------- -------
$31,481 $33,738 $39,844
======= ======= =======
TRG is a one-third owner of an entity providing management, leasing, and
development services to Arizona Mills, L.L.C. Charges from this entity were $9.7
million in 1997.
Westfarms previously loaned $2.4 million to one of its Joint Venture Partners
to purchase a portion of a deceased Joint Venture Partner's interest. The note
bears interest at approximately 7.9% and requires monthly principal payments of
$25 thousand, plus accrued interest, with the final payment due in 2001. The
balance at December 31, 1997 and 1996 was $1.3 million and $1.6 million,
respectively. Interest income related to the loan was approximately $0.1 million
in 1997, 1996, and 1995.
Other related party transactions are described in Notes 1 and 5.
Note 7 - Subsequent Event
Subsequent to December 31, 1997, Fairfax Company of Virginia L.L.C.
(successor-in-interest to Fairfax Associates) completed a $140 million, 6.60%,
secured financing maturing in 2008. The net proceeds were used to extinguish an
existing mortgage on Fair Oaks of approximately $39 million and pay a prepayment
penalty of approximately $1.8 million. In addition, proceeds of $5.6 million
were used to close out a treasury lock agreement entered into in 1997 (Note 4),
which resulted in an effective rate on the financing of approximately 7%. The
remaining proceeds were distributed to the owners.
F-53
Schedule II
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
of year expenses accounts Write-offs of year
------- -------- -------- ---------- -------
Year ended December 31, 1995:
Allowance for doubtful receivables $ 402 974 0 (1,219) $ 157
===== ===== ==== ====== =====
Year ended December 31, 1996:
Allowance for doubtful receivables $ 157 1,303 0 (1,370) $ 90
===== ===== ==== ====== =====
Year ended December 31, 1997:
Allowance for doubtful receivables $ 90 697 0 (473) $ 314
===== ===== ==== ====== =====
F-54
Schedule III
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Gross Amount at Which
Initial Cost Carried at Close of Period
to Company Cost -----------------------------------------
---------------------- Capitalized Accumulated Total
Buildings and Subsequent Depreciation Cost Net
Land Improvements to Acquisition Land BI&E Total (A/D) of A/D
---- ------------- -------------- ---- ---- ----- ----- -----
Taubman Shopping Centers:
Arizona Mills, Tempe, AZ $22,017 $162,406 $ 0 $22,017 $162,406 $184,423 $ 1,371 $183,052
Cherry Creek, Denver, CO 0 103,795 20,457 0 124,252 124,252 34,043 90,209
Fair Oaks, Fairfax, VA 5,167 36,182 10,638 5,167 46,820 51,987 27,736 24,251
Lakeside, Sterling Heights, MI 2,667 21,182 10,110 2,667 31,292 33,959 21,277 12,682
Stamford Town Center,
Stamford, CT 1,977 43,461 11,318 1,977 54,779 56,756 26,950 29,806
Twelve Oaks Mall, Novi, MI 803 28,787 14,786 803 43,573 44,376 23,500 20,876
Westfarms, Farmington, CT 5,287 38,657 111,001 5,287 149,658 154,945 22,418 132,527
Woodfield, Schaumburg, IL 5,264 18,450 94,034 5,264 112,484 117,748 30,552 87,196
Woodland, Grand Rapids, MI 2,367 19,078 9,517 2,367 28,595 30,962 17,812 13,150
Other Properties:
Peripheral land 2,789 0 0 2,789 0 2,789 0 2,789
Construction in Process 0 0 27,443 0 27,443 27,443 0 27,443
------- -------- -------- ------- -------- -------- -------- --------
TOTAL $48,338 $471,998 $309,304 $48,338 $781,302 $829,640 $205,659 $623,981
======= ======== ======== ======= ======== ======== ======== ========
Date of
Completion of Depreciable
Encumbrances Construction Life
------------ -------------- -----------
Taubman Shopping Centers:
Arizona Mills, Tempe, AZ $121,991 1997 50 Years
Cherry Creek, Denver, CO 130,000 1990 40 Years
Fair Oaks, Fairfax, VA 39,119 1980 55 Years
Lakeside, Sterling Heights, MI 88,000 1976 40 Years
Stamford Town Center,
Stamford, CT 55,630 1982 40 Years
Twelve Oaks Mall, Novi, MI 49,940 1977 50 Years
Westfarms, Farmington, CT 151,792 1974 34 Years
Woodfield, Schaumburg, IL 172,000 1971 33 Years
Woodland, Grand Rapids, MI 66,000 1968 33 Years
Other Properties:
Peripheral land 0
Construction in Process 0
--------
TOTAL $874,472
========
The changes in total real estate assets for the three years ended December 31,
1997 are as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $638,960 $570,066 $600,877
Improvements 192,888 110,187(1) 48,320
Disposals (2,208) (4,775) (79,131)(2)
Transfers Out (36,518)(3)
-------- -------- --------
Balance, end of year $829,640 $638,960 $570,066
======== ======== ========
The changes in accumulated depreciation and amortization for the three years
ended December 31, 1997 are as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $(188,491) $(196,263) $(198,103)
Depreciation for year (18,669) (17,976) (18,378)
Disposals 1,501 4,564 20,218(2)
Transfers Out 21,184(3)
--------- --------- ---------
Balance, end of year $(205,659) $(188,491) $(196,263)
========= ========= =========
(1) Includes TRG's transfer to Arizona Mills of TRG's accumulated
pre-construction costs related to this project.
(2) Includes amounts related to the disposition of Bellevue Center. Subsequent
to October 31, 1995, TRG ceased recognition of Bellevue's operations,
consequently, the accounts of Bellevue are no longer included in these
combined financial statements.
(3) Subsequent to TRG's purchase of the Joint Venture Partner's interest, the
accounts of Fairlane are no longer included in these combined financial
statements.
F-55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: March 27, 1998 By: /s/ ROBERT S. TAUBMAN
-------------------------------------
Robert S. Taubman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board March 27, 1998
- ---------------------- --------------
A. Alfred Taubman
* Vice Chairman of the Board March 27, 1998
- ---------------------- --------------
Robert C. Larson
/s/ ROBERT S. TAUBMAN President, Chief Executive March 27, 1998
- ---------------------- Officer, and Director --------------
Robert S. Taubman
/s/ LISA A. PAYNE Chief Financial Officer March 27, 1998
- ---------------------- and Director --------------
Lisa A. Payne
/s/ ESTHER R. BLUM Vice President, Controller and March 27, 1998
- ---------------------- Chief Accounting Officer --------------
Esther R. Blum
* Director March 27, 1998
- ---------------------- --------------
Graham Allison
* Director March 27, 1998
- ---------------------- --------------
Claude M. Ballard
* Director March 27, 1998
- ---------------------- --------------
Allan J. Bloostein
* Director March 27, 1998
- ---------------------- --------------
Jerome A. Chazen
* Director March 27, 1998
- ---------------------- --------------
Thomas E. Dobrowski
* Director March 27, 1998
- ---------------------- --------------
S. Parker Gilbert
* Director March 27, 1998
- ---------------------- --------------
W. Allen Reed
*By: /s/ LISA A. PAYNE
-----------------
Lisa A. Payne, as
Attorney-in-Fact
EXHIBIT INDEX
Exhibit
Number
- ------
3(a) -- By-Laws of Taubman Centers, Inc., as amended (incorporated herein
by reference to Exhibit 3 filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
3(b) -- Form of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 4(a) to the Registrant's
Post-Effective Amendment No. 1 to Form S-3 Registration Statement
No. 333-35433).
4(a) -- Amended and Restated Indenture dated as of March 4, 1994 between
The Taubman Realty Group Limited Partnership and Chemical Bank,
as Trustee (incorporated herein by reference to Exhibit 4(a)
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 ("1993 Form 10-K")).
4(b) -- Officers' Certificate designating the terms of TRG's 7% Notes due
2003 (incorporated herein by reference to Exhibit 4(d) filed with
the 1993 Form 10-K).
4(c) -- Officers' Certificate designating the terms of TRG's 8% Notes due
1999 (incorporated herein by reference to Exhibit 4(g) filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 (the "1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp.,
La Cienega Associates, the Borrower, and Morgan Guaranty Trust
Company of New York, as Trustee (incorporated herein by reference
to Exhibit 4(h) filed with the 1994 Second Quarter Form 10-Q).
4(e) -- Deed of Trust, with assignment of Rents, Security Agreement and
Fixture Filing, dated as of July 22, 1994, from La Cienega
Associates, Grantor, to Commonwealth Land Title Company, Trustee,
for the benefit of Morgan Guaranty Trust Company of New York, as
Trustee, Beneficiary (incorporated herein by reference to Exhibit
4(i) filed with the 1994 Second Quarter Form 10-Q).
4(f) -- TRG's Medium-Term Notes due June 15, 2002 (incorporated herein by
reference to Exhibit 4(j) filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995).
4(g) -- Amended and Restated Revolving Loan Agreement dated as of March
5, 1997 (the "Revolving Loan Agreement"), among The Taubman
Realty Group Limited Partnership, as Borrower, Union Bank of
Switzerland, (New York Branch), as a Bank, the other Banks
signatory to the Revolving Loan Agreement, each as a Bank, and
Union Bank of Switzerland (New York Branch), as Administrative
Agent (incorporated herein by reference to Exhibit 4, filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 (the "1997 First Quarter Form 10-Q")).
4(h) -- Form of Contribution and Acceptance of Preferred Equity,
Designation of Series A Preferred Equity, and Establishment of
Preferred Rate (incorporated herein by reference to Exhibit 4(d)
to the Registrant's Post-Effective Amendment No. 1 to Form S-3
Registration Statement No. 333-35433).
4(i) -- Construction Loan Agreement among Taubman MacArthur Associates
Limited Partnership, as Borrower, and Bayerische Hypotheken - Und
Wechsel - Bank, Aktiengesellschaft, New York Branch and The Other
Banks and Financial Institutions from time to time Parties
hereto, as Lenders and Bayerische Hypotheken - Und Wechsel - Bank
Aktiengesellschaft, New York Branch, as Agent, dated as of
October 28, 1997.
EXHIBIT INDEX
Exhibit
Number
- ------
4(j) -- Loan Agreement dated as of November 25, 1997 among The Taubman
Realty Group Limited Partnership, as Borrower, Fleet National
Bank, as a Bank, PNC Bank, National Association, as a Bank, the
other Banks signatory hereto, each as a Bank, and PNC Bank,
National Association, as Administrative Agent.
10(a) -- Form of The Amended and Restated Agreement of Limited Partnership
of The Taubman Realty Group Limited Partnership, as amended
through September 30, 1997 (incorporated herein by reference to
Exhibit 4(c) to the Registrant's Post -Effective Amendment No. 1
to Form S-3 Registration Statement No. 333-35433).
* 10(b) -- The Taubman Realty Group Limited Partnership 1992 Incentive
Option Plan, as Amended and Restated Effective as of September
30, 1997.
10(c) -- Corporate Services Agreement between Taubman Centers, Inc. and
The Taubman Company Limited Partnership (the "Manager")
(incorporated herein by reference to Exhibit 10(c) filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (the "1992 Form 10-K")).
10(d) -- Registration Rights Agreement among Taubman Centers, Inc.,
General Motors Hourly-Rate Employes Pension Trust, General Motors
Retirement Program for Salaried Employes Trust, and State Street
Bank & Trust Company, as trustee of the AT&T Master Pension Trust
(incorporated herein by reference to Exhibit 10(e) filed with the
1992 Form 10-K).
10(e) -- Master Services Agreement between The Taubman Realty Group
Limited Partnership and the Manager (incorporated herein by
reference to Exhibit 10(f) filed with the 1992 Form 10-K).
10(f) -- Cash Tender Agreement among Taubman Centers, Inc., A. Alfred
Taubman, acting not individually but as Trustee of The A. Alfred
Taubman Restated Revocable Trust, as amended and restated in its
entirety by Instrument dated January 10, 1989 (as the same has
been and may hereafter be amended from time to time), TRA
Partners, and GMPTS Limited Partnership (incorporated herein by
reference to Exhibit 10(g) filed with the 1992 Form 10-K).
* 10(g) -- Supplemental Retirement Savings Plan (incorporated herein by
reference to Exhibit 10(i) filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
* 10(h) -- The Taubman Company Long-Term Performance Compensation Plan
(incorporated herein by reference to Exhibit 10(k) filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
* 10(i) -- Employment agreement between The Taubman Company Limited
Partnership and Lisa A. Payne (incorporated herein by reference
to Exhibit 10 filed with the 1997 First Quarter Form 10-Q).
* 10(j) -- Amended and Restated Continuing Offer, dated as of September 30,
1997 (incorporated herein by reference to Exhibit 10 filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
12(a) -- Statement Re: Computation of Taubman Centers, Inc. Ratio of
Earnings to Preferred Stock Dividends.
12(b) -- Statement Re: Computation of TRG's Ratios of Earnings to Fixed
Charges and Preferred Distributions.
EXHIBIT INDEX
Exhibit
Number
- ------
21 -- Subsidiaries of The Taubman Realty Group Limited Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Purchase and Sale Agreement By and Between One Federal Street
Joint Venture and The Taubman Realty Group Limited Partnership,
dated July 16, 1997 (Purchase and Sale Agreement) (without
exhibits or schedules, which will be supplementally provided to
the Securities and Exchange Commission upon its request)
(incorporated herein by reference to Exhibit 99(a) filed with the
Registrant's Current Report on Form 8-K dated September 4, 1997).
99(b) -- First Amendment to Purchase and Sale Agreement, dated August 15,
1997 (without exhibits or schedules, which will be supplementally
provided to the Securities and Exchange Commission upon its
request) (incorporated herein by reference to Exhibit 99(b) filed
with the Registrant's Current Report on Form 8-K dated September
4, 1997).
99(c) -- Agreement of Purchase and Sale By and Between The Falls Limited
L.P. and The Taubman Realty Group Limited Partnership, dated
November 5, 1997, as amended by First Amendment to Agreement of
Purchase and Sale entered into on November 6, 1997, and Second
Amendment to Agreement of Purchase and Sale entered into on
November 13, 1997 (without exhibits or schedules, which will be
supplementally provided to the Securities and Exchange Commission
upon its request).
- ---------------------
* A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.