TAUBMAN CENTERS INC - FORM 10-Q - May 3, 2016

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2016
Commission File No. 1-11530

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

Michigan
 
38-2033632
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
200 East Long Lake Road, Suite 300, Bloomfield Hills, Michigan
 
48304-2324
(Address of principal executive offices)
 
(Zip code)
 
(248) 258-6800
(Registrant's telephone number, including area code)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x   Accelerated Filer o  Non-Accelerated Filer o   Smaller Reporting Company o
(Do not check if a smaller reporting company)

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

o Yes x No

As of May 2, 2016, there were outstanding 60,344,194 shares of the Company's common stock, par value $0.01 per share.



TAUBMAN CENTERS, INC.
CONTENTS



PART I – FINANCIAL INFORMATION
Item 1.
 
 
Consolidated Balance Sheet – March 31, 2016 and December 31, 2015
 
 
Consolidated Statement of Changes in Equity – Three Months Ended March 31, 2016 and 2015
 
Consolidated Statement of Cash Flows – Three Months Ended March 31, 2016 and 2015
 
Item 2.
Item 3.
Item 4.

PART II – OTHER INFORMATION 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 

1

 
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
 
 
March 31
2016
 
December 31 2015
Assets:
 
 
 
Properties
$
3,783,129

 
$
3,713,215

Accumulated depreciation and amortization
(1,078,497
)
 
(1,052,027
)
 
$
2,704,632

 
$
2,661,188

Investment in Unconsolidated Joint Ventures (Notes 2 and 4)
595,902

 
433,911

Cash and cash equivalents
172,918

 
206,635

Restricted cash (Note 5)
3,527

 
6,447

Accounts and notes receivable, less allowance for doubtful accounts of $5,006 and $2,974 in 2016 and 2015
52,184

 
54,547

Accounts receivable from related parties
2,427

 
2,478

Deferred charges and other assets (Note 1)
197,791

 
181,304

Total Assets
$
3,729,381

 
$
3,546,510

 
 
 
 
Liabilities:
 
 
 
Notes payable, net (Notes 1 and 5)
$
2,843,155

 
$
2,627,088

Accounts payable and accrued liabilities
309,523

 
334,525

Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 4)
468,240

 
464,086

 
$
3,620,918

 
$
3,425,699

Commitments and contingencies (Notes 5, 7, 8, 9, and 10)


 


 
 
 
 
Redeemable noncontrolling interest (Note 7)
$
13,041

 
 
 
 
 
 
Equity:
 

 
 

Taubman Centers, Inc. Shareowners’ Equity:
 

 
 

Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 25,044,939 shares issued and outstanding at both March 31, 2016 and December 31, 2015
$
25

 
$
25

Series J Cumulative Redeemable Preferred Stock, 7,700,000 shares authorized, no par, $192.5 million liquidation preference, 7,700,000 shares issued and outstanding at both March 31, 2016 and December 31, 2015
 
 
 
Series K Cumulative Redeemable Preferred Stock, 6,800,000 shares authorized, no par, $170.0 million liquidation preference, 6,800,000 shares issued and outstanding at both March 31, 2016 and December 31, 2015
 
 
 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 60,342,914 and 60,233,561 shares issued and outstanding at March 31, 2016 and December 31, 2015
603

 
602

Additional paid-in capital
646,964

 
652,146

Accumulated other comprehensive income (loss) (Note 13)
(29,255
)
 
(27,220
)
Dividends in excess of net income
(524,240
)
 
(512,746
)
 
$
94,097

 
$
112,807

Noncontrolling interests (Note 7)
1,325

 
8,004

 
$
95,422

 
$
120,811

Total Liabilities and Equity
$
3,729,381

 
$
3,546,510


See notes to consolidated financial statements.

2


TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
 
Three Months Ended
March 31
 
2016
 
2015
Revenues:
 
 
 
Minimum rents
$
81,977

 
$
74,567

Percentage rents
2,772

 
2,930

Expense recoveries
47,760

 
43,912

Management, leasing, and development services
1,728

 
2,957

Other
5,218

 
4,623

 
$
139,455

 
$
128,989

Expenses:
 
 
 
Maintenance, taxes, utilities, and promotion
$
34,938

 
$
31,633

Other operating
18,708

 
13,218

Management, leasing, and development services
872

 
1,130

General and administrative
11,380

 
11,925

Interest expense
19,128

 
13,525

Depreciation and amortization
29,746

 
24,041

 
$
114,772

 
$
95,472

Nonoperating income, net
1,470

 
1,246

Income before income tax expense and equity in income of Unconsolidated Joint Ventures
$
26,153

 
$
34,763

Income tax expense (Note 3)
(302
)
 
(838
)
Equity in income of Unconsolidated Joint Ventures (Note 4)
18,478

 
17,075

Net income
$
44,329

 
$
51,000

Net income attributable to noncontrolling interests (Note 7)
(13,420
)
 
(15,102
)
Net income attributable to Taubman Centers, Inc.
$
30,909

 
$
35,898

Distributions to participating securities of TRG (Note 9)
(512
)
 
(492
)
Preferred stock dividends
(5,784
)
 
(5,784
)
Net income attributable to Taubman Centers, Inc. common shareowners
$
24,613

 
$
29,622


 
 
 
Net income
$
44,329

 
$
51,000

Other comprehensive income (Note 13):
 
 
 
Unrealized loss on interest rate instruments and other
(11,860
)
 
(9,389
)
Cumulative translation adjustment
5,942

 
(1,917
)
Reclassification adjustment for amounts recognized in net income
3,037

 
2,893


$
(2,881
)
 
$
(8,413
)
Comprehensive income
$
41,448

 
$
42,587

Comprehensive income attributable to noncontrolling interests
(12,575
)
 
(12,690
)
Comprehensive income attributable to Taubman Centers, Inc.
$
28,873

 
$
29,897


 
 
 
Basic earnings per common share (Note 11)
$
0.41

 
$
0.47


 
 
 
Diluted earnings per common share (Note 11)
$
0.41

 
$
0.47


 
 
 
Cash dividends declared per common share
$
0.5950

 
$
0.5650


 
 
 
Weighted average number of common shares outstanding – basic
60,275,004

 
63,039,777


See notes to consolidated financial statements.

3

TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(in thousands, except share data)
 
Taubman Centers, Inc. Shareowners’ Equity
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Dividends in Excess of Net Income
 
Non-Redeemable Noncontrolling Interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance, January 1, 2015
39,617,000

 
$
25

 
63,324,409

 
$
633

 
$
815,961

 
$
(15,068
)
 
$
(483,188
)
 
$
101,580

 
$
419,943

Issuance of stock pursuant to Continuing Offer (Notes 9 and 10)
(72,061
)
 


 
72,065

 
1

 
(1
)
 
 
 
 

 
 
 
—

Repurchase of common stock (Note 6)
 
 
 
 
(1,153,230
)
 
(12
)
 
(84,970
)
 
 
 
 
 
 
 
(84,982
)
Share-based compensation under employee and director benefit plans (Note 9)
 
 
 
 
63,780

 
1

 
2,808

 
 

 
 

 
 

 
2,809

Adjustments of noncontrolling interests (Note 7)
 
 
 
 
 
 
 
 
23,324

 
(55
)
 
 
 
(23,269
)
 
—

Dividends and distributions
 
 
 
 
 
 
 
 
 
 
 
 
(41,460
)
 
(16,429
)
 
(57,889
)
Other


 
 
 
 
 
 
 
3

 
 
 
(99
)
 


 
(96
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
35,898

 
15,102

 
51,000

Other comprehensive income (Note 13):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


Unrealized loss on interest rate instruments and other
 
 
 
 
 
 
 
 
 
 
(6,698
)
 
 
 
(2,691
)
 
(9,389
)
Cumulative translation adjustment
 
 
 
 
 
 
 
 
 
 
(1,367
)
 
 
 
(550
)
 
(1,917
)
Reclassification adjustment for amounts recognized in net income
 
 
 
 
 
 
 
 
 
 
2,064

 
 
 
829

 
2,893

Balance, March 31, 2015
39,544,939

 
$
25

 
62,307,024

 
$
623

 
$
757,125

 
$
(21,124
)
 
$
(488,849
)
 
$
74,572

 
$
322,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
39,544,939

 
$
25

 
60,233,561

 
$
602

 
$
652,146

 
$
(27,220
)
 
$
(512,746
)
 
$
8,004

 
$
120,811

Share-based compensation under employee and director benefit plans (Note 9)
 
 
 
 
109,353

 
1

 
3,993

 
 
 
 
 
 
 
3,994

Taubman Asia President redeemable equity adjustment (Note 7)
 
 
 
 
 
 
 
 
(13,041
)
 
 
 
 
 
 
 
(13,041
)
Adjustments of noncontrolling interests (Note 7)
 
 
 
 
 
 
 
 
3,865

 
1

 


 
(3,866
)
 
—

Dividends and distributions
 
 
 
 
 
 
 
 
 
 
 
 
(42,214
)
 
(15,388
)
 
(57,602
)
Other
 
 
 
 
 
 
 
 
1

 
 
 
(189
)
 
 
 
(188
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
30,909

 
13,420

 
44,329

Other comprehensive income (Note 13):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Unrealized loss on interest rate instruments and other
 
 
 
 
 
 
 
 
 
 
(8,380
)
 
 
 
(3,480
)
 
(11,860
)
Cumulative translation adjustment
 
 
 
 
 
 
 
 
 
 
4,198

 
 
 
1,744

 
5,942

Reclassification adjustment for amounts recognized in net income
 
 
 
 
 
 
 
 
 
 
2,146

 
 
 
891

 
3,037

Balance, March 31, 2016
39,544,939

 
$
25

 
60,342,914

 
$
603

 
$
646,964

 
$
(29,255
)
 
$
(524,240
)
 
$
1,325

 
$
95,422


See notes to consolidated financial statements.

4

TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
 
Three Months Ended March 31
 
2016

2015
Cash Flows From Operating Activities:
 

 
Net income
$
44,329


$
51,000

Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation and amortization
29,746


24,041

Provision for bad debts
2,243


456

Gain on sale of peripheral land
(403
)



Income from Unconsolidated Joint Ventures in excess of distributions



(1,448
)
Other
4,488


517

Decrease in cash attributable to changes in assets and liabilities:
 


 

Receivables, restricted cash, deferred charges, and other assets
(4,803
)

(2,696
)
Accounts payable and accrued liabilities
(12,220
)

(20,385
)
Net Cash Provided By Operating Activities
$
63,380


$
51,485







Cash Flows From Investing Activities:
 


 

Additions to properties
$
(95,185
)

$
(97,414
)
Proceeds from sale of peripheral land
5,415




Cash drawn from (provided to) escrow or deposits related to center construction projects (Note 5)
(4,097
)

7,784

Contributions to Unconsolidated Joint Ventures
(9,479
)

(20,242
)
Contribution for acquisition of Country Club Plaza (Note 2)
(314,245
)
 
 
Distributions from Unconsolidated Joint Ventures in excess of income (Note 2)
168,260




Other
20

 
323

Net Cash Used In Investing Activities
$
(249,311
)

$
(109,549
)






Cash Flows From Financing Activities:
 


 

Proceeds from revolving lines of credit, net
$
142,460




Debt proceeds
74,727

 
$
51,031

Debt payments
(1,505
)
 
(18,645
)
Deposit in connection with anticipated refinancing
(5,500
)
 
 
Repurchase of common stock



(84,982
)
Issuance of common stock and/or partnership units in connection with incentive plans
(316
)

(2,153
)
Distributions to noncontrolling interests
(15,388
)

(16,429
)
Distributions to participating securities of TRG
(512
)

(492
)
Cash dividends to preferred shareowners
(5,784
)

(5,784
)
Cash dividends to common shareowners
(35,918
)

(35,184
)
Other
(50
)

(182
)
Net Cash Provided By (Used In) Financing Activities
$
152,214


$
(112,820
)






Net Decrease In Cash and Cash Equivalents
$
(33,717
)

$
(170,884
)






Cash and Cash Equivalents at Beginning of Period
206,635


276,423







Cash and Cash Equivalents at End of Period
$
172,918


$
105,539


See notes to consolidated financial statements.

5
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Interim Financial Statements

General

Taubman Centers, Inc. (the Company or TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a majority-owned partnership subsidiary of TCO that owns direct or indirect interests in all of the Company’s real estate properties. In this report, the term “Company" refers to TCO, the Operating Partnership, and/or the Operating Partnership's subsidiaries as the context may require. The Company engages in the ownership, management, leasing, acquisition, disposition, development, and expansion of regional and super-regional retail shopping centers and interests therein. The Company’s owned portfolio as of March 31, 2016 included 20 urban and suburban shopping centers operating in 10 states and Puerto Rico.

Taubman Properties Asia LLC and its subsidiaries (Taubman Asia), which is the platform for the Company’s operations and developments in China and South Korea, is headquartered in Hong Kong.

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.

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

Consolidation

The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its consolidated subsidiaries, including The Taubman Company LLC (the Manager) and Taubman Asia. All intercompany transactions have been eliminated. The entities included in these consolidated financial statements are separate legal entities and maintain records and books of account separate from any other entity. However, inclusion of these separate entities in the consolidated financial statements does not mean that the assets and credit of each of these legal entities are available to satisfy the debts or other obligations of any other such legal entity included in the consolidated financial statements.

Investments in entities not controlled but over which the Company may exercise significant influence (Unconsolidated Joint Ventures or UJVs) are accounted for under the equity method. The Company has evaluated its investments in the Unconsolidated Joint Ventures under guidance for determining whether an entity is a variable interest entity and has concluded that the ventures are not variable interest entities. Accordingly, the Company accounts for its interests in these entities under general accounting standards for investments in real estate ventures (including guidance for determining effective control of a limited partnership or similar entity). The Company’s partners or other owners in these Unconsolidated Joint Ventures have substantive participating rights including approval rights over annual operating budgets, capital spending, financing, admission of new partners/members, or sale of the properties and the Company has concluded that the equity method of accounting is appropriate for these interests. Specifically, the Company’s 79% and 50.1% investments in Westfarms and International Plaza, respectively, are through general partnerships in which the other general partners have participating rights over annual operating budgets, capital spending, refinancing, or sale of the property.

In 2016, the Company adopted Accounting Standards Update (ASU) No. 2015-02, “Amendments to the Consolidation Analysis”. This standard amends certain guidance applicable to the consolidation of various legal entities, including variable interest entities (VIE). The Company evaluated the application of the ASU and concluded that no change was required to its accounting or reporting for any of its interests in less than wholly owned joint ventures. However, under the new guidance all of the Company’s consolidated joint ventures, including the Operating Partnership, now meet the definition and criteria as VIEs. The Company or an affiliate of the Company is the primary beneficiary of each VIE.


6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In determining the method of accounting for partially owned joint ventures, the Company evaluates the characteristics of associated entities and determines whether an entity is a VIE, and, if so, determines whether the Company is the primary beneficiary by analyzing whether the Company has both the power to direct the entity's significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity's operations, the entity's financing and capital structure, and contractual relationship and terms, including consideration of governance and decision making rights. The Company consolidates a VIE when it has determined that it is the primary beneficiary.

The Company’s sole significant asset is its investment in the Operating Partnership and, consequently, substantially all of the Company’s consolidated assets and liabilities are assets and liabilities of the Operating Partnership. All of the Company’s debt (Note 5) is an obligation of the Operating Partnership or its consolidated subsidiaries. Note 5 also provides disclosure of guarantees provided by the Operating Partnership to certain consolidated joint ventures. Note 7 provides additional disclosures of the carrying balance of the noncontrolling interests in its consolidated joint ventures and other information, including a description of certain rights of the noncontrolling owners.

Ownership

In addition to the Company’s common stock, there were three classes of preferred stock outstanding (Series B, J, and K) as of March 31, 2016. Dividends on the 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock) and the 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock) are cumulative and are paid on the last day of each calendar quarter. The Company owns corresponding Series J and Series K Preferred Equity interests in the Operating Partnership that entitle the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company’s Series J and Series K Preferred Stock.

The Company also is obligated to issue to partners in the Operating Partnership other than the Company, upon subscription, one share of nonparticipating Series B Preferred Stock per each Operating Partnership unit. The Series B Preferred Stock entitles its holders to one vote per share on all matters submitted to the Company’s shareowners and votes together with the common stock on all matters as a single class. The holders of Series B Preferred Stock are not entitled to dividends or earnings. The Series B Preferred Stock is convertible into the Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Outstanding voting securities of the Company at March 31, 2016 consisted of 25,044,939 shares of Series B Preferred Stock and 60,342,914 shares of common stock.

The Operating Partnership

At March 31, 2016, the Operating Partnership’s equity included two classes of preferred equity (Series J and K) and the net equity of the partnership unitholders. Net income and distributions of the Operating Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in the Operating Partnership in accordance with their percentage ownership. The Series J and Series K Preferred Equity are owned by the Company and are eliminated in consolidation.

The Company's ownership in the Operating Partnership at March 31, 2016 consisted of a 71% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership for the three months ended March 31, 2016 and 2015 was 71% and 72%, respectively. At March 31, 2016, the Operating Partnership had 85,405,073 partnership units outstanding, of which the Company owned 60,342,914 units.

Change in Accounting Policy - Debt Issuance Costs

In April 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-03, "Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" which changed the presentation of debt issuance costs on the Consolidated Balance Sheet. In connection with the adoption of ASU No. 2015-03 on January 1, 2016, the Company retrospectively reclassified the December 31, 2015 Consolidated Balance Sheet to move $16.9 million of debt issuance costs out of Deferred Charges and Other Assets and into Notes Payable, Net as a direct deduction of the related debt liabilities. Prior to the reclassification, the Company reported $198.2 million and $2.644 billion within Deferred Charges and Other Assets and Notes Payable, respectively, on the Consolidated Balance Sheet as of December 31, 2015. In accordance with ASU No. 2015-15, the Company retained its current methodology for recording and presenting debt issuance costs incurred in connection with its revolving lines of credit and will continue to recognize those costs as Deferred Charges and Other Assets on the Consolidated Balance Sheet.

7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Management’s Responsibility to Evaluate the Company’s Ability to Continue as a Going Concern

In connection with the Company's adoption of ASU No. 2014-15 "Presentation of Financial Statements - Going Concern" on January 1, 2016, when preparing financial statements for each annual and interim reporting period management now has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued. No such conditions or events were identified as of the issuance date of the financial statements contained in this Quarterly Report on Form 10-Q.

Note 2 - Acquisition, Redevelopments, and Developments

Acquisition

Country Club Plaza

In March 2016, a joint venture that the Company formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG's share) in cash, excluding transaction costs. The Company has a 50% ownership interest in the center, which is jointly managed by both companies. The Company's ownership interest in the center is accounted for as an Unconsolidated Joint Venture under the equity method. Also in March 2016, a 10-year, $320 million ($160 million at TRG's share) non-recourse financing was completed for this center.

The joint venture has not yet finalized its determination of the fair value of the tangible and identifiable intangible assets and liabilities acquired. The joint venture is awaiting certain valuation information for assets and liabilities acquired to complete its allocations. The Company expects a final determination of the fair value of the tangible and identifiable intangible assets and liabilities acquired will be made during 2016.

U.S. Redevelopments and Development

Redevelopments

The Company has ongoing redevelopment projects at Beverly Center and The Mall at Green Hills which are expected to be completed in 2018 and 2019, respectively. In total, these two redevelopment projects are expected to cost approximately $700 million. As of March 31, 2016, the Company's total capitalized costs related to these redevelopment projects were $78.5 million.

International Market Place

International Market Place, a 0.3 million square foot center, is under construction in Waikiki, Honolulu, Hawaii. The center will be anchored by Saks Fifth Avenue and is scheduled to open in August 2016. The Company owns a 93.5% interest in the project, which is subject to a participating ground lease. As of March 31, 2016, the Company's capitalized costs for the project were $337.5 million ($316.1 million at TRG's share). The Company is funding all costs of the development.


8
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Asia Development

CityOn.Xi'an

The Company has a joint venture with Wangfujing Group Co., Ltd (Wangfujing), one of China's largest department store chains, which owns and manages an approximately 1.0 million square foot multi-level shopping center, CityOn.Xi'an, located at Xi'an Saigao City Plaza, a large-scale mixed-use development in Xi'an, China. The shopping center opened in April 2016. Also in April 2016, the joint venture effectively acquired the 40% noncontrolling interest in the project for approximately $150 million, increasing the partnership’s interest to 100%. The Company’s share of the purchase price for the additional interest was approximately $75 million. As a result of the acquisition, the Company’s effective ownership in the center is 50%, an increase from the Company’s previous effective 30% share. As of March 31, 2016, the Company's share of total project costs was $129.3 million, as decreased by $2.4 million for the change in exchange rates. This investment is accounted for as an Unconsolidated Joint Venture.

CityOn.Zhengzhou

The Company also has a second joint venture with Wangfujing which owns a majority interest in and will manage an approximately 1.0 million square foot multi-level shopping center, CityOn.Zhengzhou, under construction in Zhengzhou, China. Through this joint venture, the Company beneficially owns a 32% interest in the shopping center, which is scheduled to open in fall 2016. As of March 31, 2016, the Company's share of total project costs was $73.9 million, as decreased by $2.1 million for the change in exchange rates. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

Starfield Hanam (formerly Hanam Union Square)

The Company's joint venture with Shinsegae Group, one of South Korea's largest retailers, is developing an approximately 1.7 million square foot shopping center, Starfield Hanam, under construction in Hanam, South Korea, which is scheduled to open in September 2016. The Company has partnered with a major institution in Asia for a 49% ownership interest in Starfield Hanam. The institutional partner owns 14.7% of the project, bringing the Company's effective ownership to 34.3%. As of March 31, 2016, the Company's share of total project costs was $223.0 million, as decreased by $7.2 million for the change in exchange rates. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

9
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3 - Income Taxes

Income Tax Expense

The Company’s income tax expense (benefit) for the three months ended March 31, 2016 and 2015 consisted of the following:

 
Three Months Ended March 31
 
2016
 
2015
Federal current
$
1,115

 
$
496

Federal deferred
(761
)
 
(85
)
Foreign current
134

 
274

Foreign deferred
(210
)
 
29

State current
127

 
120

State deferred
(103
)
 
4

Total income tax expense
$
302

 
$
838


Deferred Taxes

Deferred tax assets and liabilities as of March 31, 2016 and December 31, 2015 were as follows:
 
2016
 
2015
Deferred tax assets:
 
 
 
Federal
$
1,586

 
$
1,427

Foreign
1,764

 
1,676

State
972

 
944

Total deferred tax assets
$
4,322

 
$
4,047

Valuation allowances
(1,776
)
 
(1,913
)
Net deferred tax assets
$
2,546

 
$
2,134

Deferred tax liabilities:
 
 
 

Federal


 
$
602

Foreign
$
504

 
501

State
1

 
70

Total deferred tax liabilities
$
505

 
$
1,173


The Company believes that it is more likely than not the results of future operations will generate sufficient taxable income to recognize the net deferred tax assets. These future operations are primarily dependent upon the Manager’s profitability, the timing and amounts of gains on peripheral land sales, the profitability of Taubman Asia's operations, and other factors affecting the results of operations of the taxable REIT subsidiaries. The valuation allowances relate to net operating loss carryforwards and tax basis differences where there is uncertainty regarding their realizability.



10
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 4 - Investments in Unconsolidated Joint Ventures

General Information

The Company owns beneficial interests in joint ventures that own shopping centers. The Operating Partnership is the sole direct or indirect managing general partner or managing member of Fair Oaks, International Plaza, Stamford Town Center, Sunvalley, The Mall at University Town Center, and Westfarms. The Operating Partnership also provides certain management, leasing, and/or development services to the other shopping centers noted below.
Shopping Center
 
Ownership as of
March 31, 2016 and
December 31, 2015
CityOn.Xi'an (under construction) (1)
 
Note 2
CityOn.Zhengzhou (under construction)
 
Note 2
Country Club Plaza (2)
 
50/0%
Fair Oaks
 
50
International Plaza
 
50.1
The Mall at Millenia
 
50
Stamford Town Center
 
50
Starfield Hanam (under construction)
 
Note 2
Sunvalley
 
50
The Mall at University Town Center
 
50
Waterside Shops
 
50
Westfarms
 
79

(1)
CityOn.Xi'an opened in April 2016. Also in April 2016, the joint venture effectively acquired the 40% noncontrolling interest in the project. As a result of the acquisition, the Company’s effective ownership is 50%, an increase from the Company’s previous 30% share (Note 2).
(2)
In March 2016, the Company acquired a 50% ownership interest in Country Club Plaza (Note 2).

The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the partnership or members’ equity reported on the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures and (ii) the Operating Partnership’s adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership’s differences in bases are amortized over the useful lives or terms of the related assets and liabilities.

In its Consolidated Balance Sheet, the Company separately reports its investment in Unconsolidated Joint Ventures for which accumulated distributions have exceeded investments in and net income of the Unconsolidated Joint Ventures. The net equity of certain joint ventures is less than zero because distributions are usually greater than net income, as net income includes non-cash charges for depreciation and amortization. In addition, any distributions related to refinancing of the centers further decrease the net equity of the centers.

11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Combined Financial Information

Combined balance sheet and results of operations information is presented in the following table for the Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in the combined operations information. The combined information of the Unconsolidated Joint Ventures as of March 31, 2016 and December 31, 2015 excluded the balances of CityOn.Xi'an, CityOn.Zhengzhou, and Starfield Hanam which were under construction as of March 31, 2016 and December 31, 2015 (Note 2). Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.

 
March 31
2016
 
December 31
2015
Assets:
 
 
 
Properties
$
2,284,385

 
$
1,628,492

Accumulated depreciation and amortization
(600,880
)
 
(589,145
)
 
$
1,683,505

 
$
1,039,347

Cash and cash equivalents
26,384

 
36,047

Accounts and notes receivable, less allowance for doubtful accounts of $1,219 and $1,602 in 2016 and 2015
55,763

 
42,361

Deferred charges and other assets (1)
34,467

 
32,660

 
$
1,800,119

 
$
1,150,415

 
 
 
 
Liabilities and accumulated deficiency in assets:
 

 
 

Notes payable, net (1)(2)
$
2,309,146

 
$
1,994,298

Accounts payable and other liabilities
80,571

 
70,539

TRG's accumulated deficiency in assets
(349,998
)
 
(512,256
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(239,600
)
 
(402,166
)
 
$
1,800,119

 
$
1,150,415

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(349,998
)
 
$
(512,256
)
TRG's investment in properties under construction (Note 2)
305,254

 
296,847

TRG basis adjustments, including elimination of intercompany profit
119,876

 
132,218

TCO's additional basis
52,530

 
53,016

Net investment in Unconsolidated Joint Ventures
$
127,662

 
$
(30,175
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
468,240

 
464,086

Investment in Unconsolidated Joint Ventures
$
595,902

 
$
433,911


(1)
The December 31, 2015 balance has been adjusted in connection with the Company's adoption of ASU No. 2015-03 "Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (Note 1).
(2)
As the balances presented exclude centers under construction, the Notes Payable, Net amounts exclude the construction financings outstanding for Starfield Hanam of $79.2 million ($27.2 million at TRG's share) and $52.9 million ($18.1 million at TRG's share) as of March 31, 2016 and December 31, 2015, respectively, and CityOn.Zhengzhou of $45.0 million ($14.3 million at TRG's share) and $44.7 million ($14.2 million at TRG's share) as of March 31, 2016 and December 31, 2015, respectively, and the related debt issuance costs.

12
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Three Months Ended March 31
 
2016
 
2015
Revenues
$
96,763

 
$
91,914

Maintenance, taxes, utilities, promotion, and other operating expenses
$
28,322

 
$
26,995

Interest expense
21,596

 
21,229

Depreciation and amortization
15,299

 
12,752

Total operating costs
$
65,217

 
$
60,976

Nonoperating income, net
246

 
8

Net income
$
31,792

 
$
30,946

 
 
 
 
Net income attributable to TRG
$
17,459

 
$
17,053

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
1,506

 
508

Depreciation of TCO's additional basis
(487
)
 
(486
)
Equity in income of Unconsolidated Joint Ventures
$
18,478

 
$
17,075

 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
39,341

 
$
36,506

Interest expense
(11,528
)
 
(11,363
)
Depreciation and amortization
(9,335
)
 
(8,068
)
Equity in income of Unconsolidated Joint Ventures
$
18,478

 
$
17,075




13
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5 - Beneficial Interest in Debt and Interest Expense

The Operating Partnership's beneficial interest in the debt, capitalized interest, and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the following table. The Operating Partnership's beneficial interest in the consolidated subsidiaries excludes debt and interest related to the noncontrolling interest in Cherry Creek Shopping Center (50%), International Market Place (6.5%), and The Mall of San Juan (20% prior to April 2015, and subsequently 5%).
 
At 100%
 
At Beneficial Interest
 
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Debt as of:
 
 
 
 
 
 
 
 
March 31, 2016
$
2,843,155

 
$
2,429,149

 
$
2,680,035

 
$
1,282,299

 
December 31, 2015 (1)
2,627,088

 
2,087,552

 
2,468,451

 
1,116,395

 
 
 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2016
$
6,502

(2) 
$
655

(3) 
$
6,486

 
$
655

(3) 
Three Months Ended March 31, 2015
8,672

(2) 
56

 
8,335

 
28

 
 
 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2016
$
19,128

 
$
21,596

 
$
17,176

 
$
11,528

 
Three Months Ended March 31, 2015
13,525

 
21,229

 
11,871

 
11,363

 

(1)
The December 31, 2015 balances have been adjusted in connection with the Company's adoption of ASU No. 2015-03 "Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (Note 1).
(2)
The Company capitalizes interest costs incurred in funding its equity contributions to development projects accounted for as Unconsolidated Joint Ventures. The capitalized interest cost is included in the Company's basis in its investment in Unconsolidated Joint Ventures. Such capitalized interest reduces interest expense on the Company's Consolidated Statement of Operations and Comprehensive Income and in the table above is included within Consolidated Subsidiaries.
(3)
Capitalized interest on the Asia Unconsolidated Joint Venture construction financings is presented at the Company's beneficial interest in both the Unconsolidated Joint Ventures (at 100%) and Unconsolidated Joint Ventures (at Beneficial Interest) columns.

2016 Maturities

In April 2016, the Company extended the $65.0 million secured secondary revolving credit facility for one year upon maturity. All significant terms of the credit facility remain unchanged as a result of the extension.

In April 2016, the Company repaid the $81.5 million, 6.10% fixed rate loan on The Gardens on El Paseo, which was scheduled to mature in June 2016.

In the second quarter of 2016, the Company expects to complete a refinancing of the loan at Cherry Creek Shopping Center. The existing $280.0 million, 5.24% fixed rate loan is scheduled to mature in June 2016.

Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on the Company’s unsecured primary revolving line of credit, unsecured term loan, and the construction facilities on The Mall at University Town Center, The Mall of San Juan, and International Market Place: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, the Company’s primary revolving line of credit and term loan have unencumbered pool covenants, which currently apply to Beverly Center, Dolphin Mall, and Twelve Oaks Mall on a combined basis. These covenants include a minimum number and minimum value of eligible unencumbered assets, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio, and a minimum unencumbered asset occupancy ratio. As of March 31, 2016, the corporate total leverage ratio was the most restrictive covenant. The Company was in compliance with all of its covenants and loan obligations as of March 31, 2016. The maximum payout ratio covenant limits the payment of distributions generally to 95% of funds from operations, as defined in the loan agreements, except as required to maintain the Company’s tax status, pay preferred distributions, and for distributions related to the sale of certain assets.


14
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In connection with the financing of the construction facility at International Market Place, the Operating Partnership has provided an unconditional guarantee of 50% of the construction loan principal balance and all accrued but unpaid interest during the term of the loan. The Operating Partnership has also provided a guarantee as to the completion of construction of the center. The maximum amount of the construction facility is $330.9 million. The outstanding balance of the International Market Place construction financing facility as of March 31, 2016 was $140.4 million. Accrued but unpaid interest as of March 31, 2016 was $0.3 million. The principal guaranty may be reduced to 25% of the outstanding principal balance upon stabilization and achievement of certain performance measures. The principal guaranty may be released upon achievement of further restrictive performance measures. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the financing of the construction facility at The Mall at University Town Center, which is owned by an Unconsolidated Joint Venture, the Operating Partnership provided an unconditional guarantee of 25% of the construction loan principal balance and 50% of all accrued but unpaid interest during the term of the loan. The maximum amount of the construction facility is $225 million. The outstanding balance of The Mall at University Town Center construction financing facility as of March 31, 2016 was $221.5 million. Accrued but unpaid interest as of March 31, 2016 was $0.4 million. The principal guaranty may be reduced to 12.5% of the outstanding principal balance upon achievement of certain performance measures. Upon stabilization, the unconditional guaranty may be released. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the financing of the construction facility at The Mall of San Juan, the Operating Partnership has provided an unconditional guarantee of the construction loan principal balance and all accrued but unpaid interest during the term of the loan. In addition, the Operating Partnership has provided a guarantee as to the completion of the center. The maximum amount of the construction facility is $320 million. The outstanding balance of The Mall of San Juan construction financing facility as of March 31, 2016 was $284.7 million. Accrued but unpaid interest as of March 31, 2016 was $0.3 million. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the $175 million additional financing at International Plaza, which is owned by an Unconsolidated Joint Venture, the Operating Partnership provided an unconditional and several guarantee of 50.1% of all obligations and liabilities related to an interest rate swap that was required on the debt for the term of the loan. As of March 31, 2016, the interest rate swap was in a liability position of $6.2 million and had unpaid interest of $0.2 million. The Company believes the likelihood of a payment under the guarantee to be remote.

Other

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders and other various agreements. As of March 31, 2016 and December 31, 2015, the Company’s cash balances restricted for these uses were $3.5 million and $6.4 million, respectively.


15
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 - Equity Transactions

In August 2013, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase up to $200 million of its outstanding common stock. In March 2015, the Company's Board of Directors increased the authorization by $250 million, bringing the total authorization to $450 million. The Company may repurchase shares from time to time on the open market or in privately negotiated transactions or otherwise, depending on market prices and other conditions. No shares were repurchased in the first quarter of 2016. As of March 31, 2016, the Company cumulatively repurchased 4,247,867 shares of its common stock at an average price of $71.79 per share, for a total of $304.9 million under the authorization. As of March 31, 2016, $145.1 million remained available under the repurchase program. All shares repurchased have been cancelled. For each share of the Company’s stock repurchased, one of the Company’s Operating Partnership units was redeemed. Repurchases of common stock were financed through general corporate funds, including borrowings under existing revolving lines of credit.

Note 7 - Noncontrolling Interests

Redeemable Noncontrolling Interests

The Company's president of Taubman Asia (the Asia President) has an ownership interest in Taubman Asia, a consolidated subsidiary. As of March 31, 2016, this interest entitled the Asia President to 10% of Taubman Asia's dividends, with 85% of his dividends being withheld as contributions to capital. These withholdings will continue until he contributes and maintains his capital consistent with his percentage ownership interest, including all capital funded by the Operating Partnership for Taubman Asia's operating and investment activities subsequent to the Asia President obtaining his ownership interest. The Operating Partnership has a preferred investment in Taubman Asia to the extent the Asia President has not yet contributed capital commensurate with his ownership interest. This preferred investment accrues an annual preferential return equal to the Operating Partnership's average borrowing rate (with the preferred investment and accrued return together being referred to herein as the preferred interest). In addition, Taubman Asia has the ability to call, and the Asia President has the ability to put, the Asia President’s ownership interest upon specified terminations of the Asia President’s employment, although such put or call right may not be exercised for specified time periods after certain termination events. The redemption price for the ownership interest is 50% (increasing to 100% as early as June 2017) of the fair value of the ownership interest less the amount required to return the Operating Partnership's preferred interest. The Company has determined that the Asia President's ownership interest in Taubman Asia qualifies as an equity award, considering its specific redemption provisions, and accounts for it as a contingently redeemable noncontrolling interest. The Company presents as temporary equity at each balance sheet date an estimate of the redemption value of the ownership interest, taking into account the proportion of the Asia President's services rendered before he is fully vested. As of March 31, 2016, the carrying amount of this redeemable equity was $13.0 million. Any adjustments to the redemption value are recorded through equity. In April 2016, the Company reacquired for $7.2 million half of the Asia President’s ownership interest in Taubman Asia. The Asia President’s remaining 5% interest is puttable beginning in 2019 at the earliest, upon reaching certain specified milestones, and was classified as Redeemable Noncontrolling Interest on the Consolidated Balance Sheet.

The Company owns a 93.5% controlling interest in a joint venture that is redeveloping International Market Place in Waikiki, Honolulu, Hawaii. The 6.5% joint venture partner has no obligation nor the right to contribute capital. The Company is entitled to a preferential return on its capital contributions. The Company has the right to purchase the joint venture partner's interest and the joint venture partner has the right to require the Company to purchase the joint venture partner's interest after the third anniversary of the opening of the center, and annually thereafter. The purchase price of the joint venture partner's interest will be based on fair value. Considering the redemption provisions, the Company accounts for the joint venture partner's interest as a contingently redeemable noncontrolling interest with a carrying value of zero at both March 31, 2016 and December 31, 2015. Any adjustments to the redemption value are recorded through equity.


16
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Equity Balances of Nonredeemable Noncontrolling Interests

The net equity balance of the nonredeemable noncontrolling interests as of March 31, 2016 and December 31, 2015 included the following:
 
2016
 
2015
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(21,719
)
 
$
(23,569
)
Noncontrolling interests in partnership equity of TRG
23,044

 
31,573

 
$
1,325

 
$
8,004


Income Allocable to Noncontrolling Interests

Net income attributable to the noncontrolling interests for the three months ended March 31, 2016 and March 31, 2015 included the following:
 
2016
 
2015
Net income attributable to non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
2,521

 
$
2,591

Noncontrolling share of income of TRG
10,899

 
12,511

 
$
13,420

 
$
15,102


Equity Transactions

The following table presents the effects of changes in Taubman Centers, Inc.’s ownership interest in consolidated subsidiaries on Taubman Centers, Inc.’s equity for the three months ended March 31, 2016 and March 31, 2015:
 
2016
 
2015
Net income attributable to Taubman Centers, Inc. common shareowners
$
24,613

 
$
29,622

Transfers from the noncontrolling interest:
 

 
 

Increase in Taubman Centers, Inc.’s paid-in capital for adjustments of noncontrolling interest (1)
3,865

 
23,324

Net transfers from noncontrolling interests
3,865

 
23,324

Change from net income attributable to Taubman Centers, Inc. and transfers from noncontrolling interests
$
28,478

 
$
52,946


(1)
In 2016 and 2015, adjustments of the noncontrolling interest were made as a result of changes in the Company's ownership of the Operating Partnership in connection with the Company's share-based compensation under employee and director benefit plans (Note 9) and issuances of stock pursuant to the Continuing Offer (Note 10). In 2016, adjustments of the noncontrolling interest were also made in connection with the accounting for the Asia President's redeemable ownership interests. In 2015, adjustments of the noncontrolling interest were also made as a result of share repurchases (Note 6).

Finite Life Entities

Accounting Standards Codification Topic 480, “Distinguishing Liabilities from Equity” establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. At March 31, 2016, the Company held a controlling interest in a consolidated entity with a specified termination date in 2083. The noncontrolling owners' interest in this entity is to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of this noncontrolling interest was approximately $530 million at March 31, 2016, compared to a book value of $(21.7) million that is classified in Noncontrolling Interests on the Company’s Consolidated Balance Sheet. The fair value of the noncontrolling interest was calculated as the noncontrolling interest's ownership shares of the underlying property's fair value. The property's fair value was estimated by considering its in-place net operating income, current market capitalization rate, and mortgage debt outstanding.


17
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8 - Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

The Company uses derivative instruments, such as interest rate swaps and interest rate caps, primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date.

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.

As of March 31, 2016, the Company had the following outstanding derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments and/or the currency exchange rate on the associated debt.
Instrument Type

Ownership

Notional Amount

Swap Rate

Credit Spread on Loan

Total Swapped Rate on Loan

Maturity Date
Consolidated Subsidiaries:

 

 
 
 
 
 
 
 
 
 
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

$
200,000

 
1.64
%
 
1.35
%
(1) 
2.99
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

175,000

 
1.65
%
 
1.35
%
(1) 
3.00
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

100,000

 
1.64
%
 
1.35
%
(1) 
2.99
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
12,000

 
2.09
%
 
1.40
%
 
3.49
%
 
March 2024
Unconsolidated Joint Ventures:

 


 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap (3)

50
%

134,172

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (3)

50
%

134,172

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (4)
 
50.1
%
 
171,392

 
1.83
%
 
1.75
%
 
3.58
%
 
December 2021
Receive variable (LIBOR) USD/pay-fixed Korean Won (KRW) cross-currency interest rate swap (5)
 
34.3
%
 
52,065 USD / 60,500,000 KRW

 
1.52
%
 
1.60
%
 
3.12
%
 
September 2020

(1)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payments accrued and made each month on a debt principal amount equal to the swap notional amount, regardless of the specific debt agreement from which they may flow. The Company is currently using these swaps to manage interest rate risk on the $475 million unsecured term loan. The credit spread on this loan can also vary within a range of 1.35% to 1.90%, depending on the Company's leverage ratio at the measurement date.
(2)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on the U.S. headquarters building.
(3)
The notional amount on each of these swaps is equal to 50% of the outstanding principal balance of the loan on Fair Oaks.
(4)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on International Plaza.
(5)
The notional amount on this swap is equal to the outstanding principal balance of the U.S. dollar construction loan for Starfield Hanam. There is a cross-currency interest rate swap to fix the interest rate on the loan and swap the related principal and interest payments from U.S. dollars to KRW in order to reduce the impact of fluctuations in interest rates and exchange rates on the cash flows of the joint venture. The currency swap exchange rate is 1,162.0.


18
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Cash Flow Hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the unrealized gain or loss on the derivative is reported as a component of Other Comprehensive Income (OCI). The ineffective portion of the change in fair value, if any, is recognized directly in earnings. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed-rate financings or refinancings continue to be included in Accumulated Other Comprehensive Income (AOCI) during the term of the hedged debt transaction.

Amounts reported in AOCI related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in AOCI are recognized as an adjustment to income over the term of the hedged debt transaction. Amounts reported in AOCI related to the cross-currency interest rate swap are recognized as an adjustment to income as transaction gains or losses arising from the remeasurement of foreign currency denominated loans are recognized and as actual interest and principal obligations are repaid.

The Company expects that approximately $8.7 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as a reduction of income in the following 12 months.

The following table presents the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2016 and March 31, 2015. The table includes the amount of gains or losses on outstanding derivative instruments recognized in OCI in cash flow hedging relationships and the location and amount of gains or losses reclassified from AOCI into income resulting from outstanding derivative instruments and settled derivative instruments associated with hedged debt.

During the three months ended March 31, 2016 and March 31, 2015, the Company recognized $0.4 million and $0.2 million, respectively, of hedge ineffectiveness related to the swaps used to hedge the unsecured term loan. The hedge ineffectiveness for both periods was recorded in Nonoperating Income, Net on the Consolidated Statement of Operations and Comprehensive Income.
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Three Months Ended March 31
 
 
 
Three Months Ended March 31
 
2016
 
2015
 
 
 
2016
 
2015
Derivatives in cash flow hedging relationships:
 
 
 
 

 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(5,742
)
 
$
(4,538
)
 
Interest Expense
 
$
(1,517
)
 
$
(1,770
)
Interest rate contracts – UJVs
(2,791
)
 
(1,959
)
 
Equity in Income of UJVs
 
(974
)
 
(1,123
)
Cross-currency interest rate swap – UJV
(290
)
 
 
 
Equity in Income of UJVs
 
(546
)
 
 
Total derivatives in cash flow hedging relationships
$
(8,823
)
 
$
(6,497
)
 
 
 
$
(3,037
)
 
$
(2,893
)





19
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company records all derivative instruments at fair value on the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported on the Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
March 31
2016
 
December 31
2015
Derivatives designated as hedging instruments:
 
 
 
 
 
Liability derivatives:
 
 
 

 
 
Interest rate contracts – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
 
$
(12,263
)
 
$
(6,077
)
Interest rate contracts – UJVs
Investment in UJVs
 
(7,765
)
 
(4,974
)
Cross-currency interest rate swap – UJV
Investment in UJVs
 
(805
)
 
(11
)
Total liabilities designated as hedging instruments
 
 
$
(20,833
)
 
$
(11,062
)

Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on its indebtedness above a certain threshold, then the derivative obligation could also be declared in default. The cross default thresholds vary for each agreement, ranging from $0.1 million of any indebtedness to $50 million of recourse indebtedness on the Company or the Operating Partnership's indebtedness. As of March 31, 2016, the Company is not in default on any indebtedness that would trigger a credit-risk-related default on its current outstanding derivatives.
As of March 31, 2016 and December 31, 2015, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $20.8 million and $11.1 million, respectively. As of March 31, 2016 and December 31, 2015, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 5 regarding guarantees and Note 12 for fair value information on derivatives.

Note 9 - Share-Based Compensation

The Taubman Company 2008 Omnibus Long-Term Incentive Plan (2008 Omnibus Plan), as amended, which is shareowner approved, provides for the award to directors, officers, employees, and other service providers of the Company of restricted shares, restricted units of limited partnership in the Operating Partnership, options to purchase shares or Operating Partnership units, unrestricted shares or Operating Partnership units, and other awards to acquire up to an aggregate of 8.5 million Company common shares or Operating Partnership units. In addition, non-employee directors have the option to defer their compensation under a deferred compensation plan.

Non-option awards granted after an amendment of the 2008 Omnibus Plan in 2010 are deducted at a ratio of 1.85 Company common shares or Operating Partnership units, while non-option awards granted prior to the amendment are deducted at a ratio of 2.85. Options are deducted on a one-for-one basis. The amount available for future grants is adjusted when the number of contingently issuable shares or units are settled, for grants that are forfeited, and for options that expire without being exercised.

Prior to the adoption of the 2008 Omnibus Plan, the Company provided share-based compensation through an incentive option plan and non-employee directors' stock grant and deferred compensation plans.

Historically the Company has granted Performance Share Units (PSU) and Restricted Share Units (RSU) to executives and other non-executive employees on an annual basis during first quarter of the fiscal year. However, due to an expected modification of their equity award structure, the 2016 PSU and RSU awards due to the Company's executives will not be granted until the second quarter of 2016. The equity awards for non-executive employees were granted in March 2016.

The compensation cost charged to income for the Company’s share-based compensation plans was $3.4 million and $4.1 million for the three months ended March 31, 2016 and 2015, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.8 million for both the three months ended March 31, 2016 and 2015.


20
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company has estimated the grant-date fair values of options, PSU, and RSU using the methods discussed in the separate sections below for each type of grant. Expected volatility and dividend yields are based on historical volatility and yields of the Company’s common stock, respectively, as well as other factors. The risk-free interest rates used are based on the U.S. Treasury yield curves in effect at the times of grants. The Company assumes no forfeitures of options or performance share units due to the small number of participants and low turnover rate.

Options

A summary of option activity for the three months ended March 31, 2016 is presented below:
 
Number of Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Range of Exercise Prices
Outstanding at January 1, 2016
292,543

 
$
46.60

 
1.4
 
$
35.50

-
$
51.15

Exercised
(46,811
)
 
35.63

 
 
 
 
 
 
Outstanding at March 31, 2016
245,732

 
$
48.69

 
1.4
 
$
45.90

-
$
51.15

 
 
 
 
 
 
 
 
 
 
Fully vested options at March 31, 2016
245,732

 
$
48.69

 
1.4
 
 

 
 

No options were granted during the three months ended March 31, 2016.

As of March 31, 2016, all options outstanding were fully vested, and there was no unrecognized compensation cost related to options.

The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding was $5.5 million as of March 31, 2016.

The total intrinsic value of options exercised during the three months ended March 31, 2016 was $1.5 million. No options were exercised in the three months ended March 31, 2015. Cash received from option exercises for the three months ended March 31, 2016 was $1.7 million.

Under both the prior option plan and the 2008 Omnibus Plan, vested unit options can be exercised by tendering mature units with a market value equal to the exercise price of the unit options. In 2002, Robert S. Taubman, the Company’s chief executive officer, exercised options for 3.0 million units by tendering 2.1 million mature units and deferring receipt of 0.9 million units under the unit option deferral election. As the Operating Partnership pays distributions, the deferred option units receive their proportionate share of the distributions in the form of cash payments. Under an amendment executed in January 2011, beginning in December 2017 (unless Mr. Taubman retires earlier), the deferred partnership units will be issued in ten annual installments. The deferred units are accounted for as participating securities of the Operating Partnership.


21
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Performance Share Units

A summary of PSU activity for the three months ended March 31, 2016 is presented below:
 
Number of Performance Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016
255,478

 
$
134.52

Vested
(44,866
)
(1) 
96.61

Forfeited
(33,529
)
 
142.69

Outstanding at March 31, 2016
177,083

 
$
142.59


(1)
Based on the Company's market performance relative to that of a peer group, the actual number of shares of common stock issued upon vesting during the three months ended March 31, 2016 was zero.

The Company's annual grant of PSU is anticipated to be made in the second quarter of 2016.

None of the PSU outstanding at March 31, 2016 were vested. As of March 31, 2016, there was $6.8 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 1.3 years.

Restricted Share Units

In March 2016, RSU were issued under the 2008 Omnibus Plan and represent the right to receive upon vesting one share of the Company's common stock, plus a cash payment equal to the aggregate cash dividends that would have been paid on such shares of common stock from the date of grant of the award to the vesting date. The units vest in March 2019, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. The Company estimated the value of these RSU using the Company’s common stock price at the grant date. The Company’s valuation was a grant-date fair value of $73.95 per RSU.

A summary of RSU activity for the three months ended March 31, 2016 is presented below:
 
Number of Restricted Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016
283,353

 
$
69.93

Vested
(88,469
)
 
71.58

Granted
49,458

 
73.95

Forfeited
(16,282
)
 
69.13

Outstanding at March 31, 2016
228,060

 
$
70.22


None of the RSU outstanding at March 31, 2016 were vested. As of March 31, 2016, there was $8.3 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 2.1 years.


22
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10 - Commitments and Contingencies

Cash Tender

At the time of the Company's initial public offering and acquisition of its partnership interest in the Operating Partnership in 1992, the Company entered into an agreement (as later amended and restated, the Cash Tender Agreement) with A. Alfred Taubman, as trustee of the A. Alfred Taubman Restated Revocable Trust (the Revocable Trust) and TRA Partners (now Taubman Ventures Group LLC or TVG), each of whom owned an interest in the Operating Partnership, whereby each of the revocable trust and TVG has the right to tender to the Company partnership units in the Operating Partnership (provided that the aggregate value is at least $50 million) and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately preceding the date of the tender. TVG is controlled by a majority-in-interest among the Revocable Trust and entities affiliated with the children of A. Alfred Taubman (Robert S. Taubman, William S. Taubman, and Gayle Taubman Kalisman). At the election of the person making a tender, partnership units in the Operating Partnership held by members of A. Alfred Taubman’s family and partnership units held by entities in which his family members hold interests may be included in such a tender. Upon the death of A. Alfred Taubman in April 2015, the successor trustees of the trust (Robert S. Taubman, William S. Taubman and Gayle Taubman Kalisman) act on behalf of the trust.

The Company will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock. The tendering partner will bear all market risk if the market price at closing is less than the purchase price and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of the Company. The Company accounts for the Cash Tender Agreement as a freestanding written put option. As the option put price is defined by the current market price of the Company's stock at the time of tender, the fair value of the written option defined by the Cash Tender Agreement is considered to be zero.

Based on a market value at March 31, 2016 of $71.23 per share for the Company's common stock, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was $1.7 billion. The purchase of these interests at March 31, 2016 would have resulted in the Company owning an additional 28% interest in the Operating Partnership.

Continuing Offer

The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, currently TVG and the Revocable Trust), permitted assignees of all present holders, those future holders of partnership interests in the Operating Partnership as the Company may, in its sole discretion, agree to include in the continuing offer, all existing optionees under the previous option plan, and all existing and future optionees under the 2008 Omnibus Plan to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer). Under the Continuing Offer agreement, one unit of the Operating Partnership interest is exchangeable for one share of the Company's common stock. Upon a tender of Operating Partnership units, the corresponding shares of Series B Preferred Stock, if any, will automatically be converted into the Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Insurance

The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to personal injury claims. We believe the Company's insurance policy terms and conditions and limits are appropriate and adequate given the relative risk of loss and industry practice. However, there are certain types of losses, such as punitive damage awards, that may not be covered by insurance, and not all potential losses are insured against.

Other

See Note 5 for the Operating Partnership's guarantees of certain notes payable, including guarantees relating to Unconsolidated Joint Ventures, Note 7 for contingent features relating to certain joint venture agreements, Note 8 for contingent features relating to derivative instruments, and Note 9 for obligations under existing share-based compensation plans.


23
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 11 - Earnings Per Share

Basic earnings per share amounts are based on the weighted average of common shares outstanding for the respective periods. Diluted earnings per share amounts are based on the weighted average of common shares outstanding plus the dilutive effect of potential common stock. Potential common stock includes outstanding partnership units exchangeable for common shares under the Continuing Offer (Note 10), outstanding options for partnership units, PSU, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued partnership units under a unit option deferral election (Note 9). In computing the potentially dilutive effect of potential common stock, partnership units are assumed to be exchanged for common shares under the Continuing Offer, increasing the weighted average number of shares outstanding. The potentially dilutive effects of partnership units outstanding and/or issuable under the unit option deferral elections are calculated using the if-converted method, while the effects of other potential common stock are calculated using the treasury method. Contingently issuable shares are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. 
 
Three Months Ended March 31
 
2016
 
2015
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
 
 
 
Basic
$
24,613

 
$
29,622

Impact of additional ownership of TRG
66

 
125

Diluted
$
24,679

 
$
29,747

 
 
 
 
Shares (Denominator) – basic
60,275,004

 
63,039,777

Effect of dilutive securities
515,997

 
895,503

Shares (Denominator) – diluted
60,791,001

 
63,935,280

 
 
 
 
Earnings per common share – basic
$
0.41

 
$
0.47

Earnings per common share – diluted
$
0.41

 
$
0.47


The calculation of diluted earnings per share in certain periods excluded certain potential common stock including outstanding partnership units and unissued partnership units under a unit option deferral election, both of which may be exchanged for common shares of the Company under the Continuing Offer. The table below presents the potential common stock excluded from the calculation of diluted earnings per share as they were anti-dilutive in the period presented.

 
Three Months Ended March 31
 
2016
 
2015
Weighted average noncontrolling partnership units outstanding
4,003,975

 
4,149,149

Unissued partnership units under unit option deferral elections
871,262

 
871,262



24
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 12 - Fair Value Disclosures

This note contains required fair value disclosures for assets and liabilities remeasured at fair value on a recurring basis and financial instruments carried at other than fair value, as well as assumptions employed in deriving these fair values.

Recurring Valuations

Derivative Instruments

The fair value of interest rate hedging instruments is the amount that the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s valuations of its derivative instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative, and therefore fall into Level 2 of the fair value hierarchy. The valuations reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including forward curves. The fair values of interest rate hedging instruments also incorporate credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty's nonperformance risk.

Other

The Company's valuation of an insurance deposit utilizes unadjusted quoted prices determined by active markets for the specific securities the Company has invested in, and therefore falls into Level 1 of the fair value hierarchy.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:
 
 
Fair Value Measurements as of March 31, 2016 Using
 
Fair Value Measurements as of
December 31, 2015 Using
Description
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
Insurance deposit
 
$
14,347

 
 

 
$
14,346

 
 

Total assets
 
$
14,347


$
—

 
$
14,346

 
$
—

 
 
 
 
 
 
 
 
 
Derivative interest rate contracts (Note 8)
 
 

 
$
(12,263
)
 
 

 
$
(6,077
)
Total liabilities
 
 

 
$
(12,263
)
 
 

 
$
(6,077
)

The insurance deposit shown above represents an escrow account maintained in connection with a property and casualty insurance arrangement for the Company’s shopping centers, and is classified within Deferred Charges and Other Assets on the Consolidated Balance Sheet. Corresponding deferred revenue relating to amounts billed to tenants for this arrangement has been classified within Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet.

Financial Instruments Carried at Other Than Fair Values

Simon Property Group Limited Partnership Units

At both March 31, 2016 and December 31, 2015, the Company owned 590,124 partnership units in Simon Property Group Limited Partnership. The fair value of the partnership units, which is derived from Simon Property Group's common stock price and therefore falls into Level 2 of the fair value hierarchy, was $122.6 million at March 31, 2016 and $114.7 million at December 31, 2015. The partnership units were classified as Deferred Charges and Other Assets on the Consolidated Balance Sheet and had a book value of $77.7 million at both March 31, 2016 and December 31, 2015.


25
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Notes Payable

The fair value of notes payable is estimated using cash flows discounted at current market rates and therefore falls into Level 2 of the fair value hierarchy. When selecting discount rates for purposes of estimating the fair value of notes payable at March 31, 2016 and December 31, 2015, the Company employed the credit spreads at which the debt was originally issued. For debt refinanced prior to 2010, excluding debt assumed from acquisitions, an additional 1.00% credit spread was added to the discount rate at both March 31, 2016 and December 31, 2015 to attempt to account for current market conditions. This additional spread is an estimate and is not necessarily indicative of what the Company could obtain in the market at the reporting date. The Company does not believe that the use of different interest rate assumptions would have resulted in a materially different fair value of notes payable as of March 31, 2016 or December 31, 2015. To further assist financial statement users, the Company has included with its fair value disclosures an analysis of interest rate sensitivity.

The estimated fair values of notes payable at March 31, 2016 and December 31, 2015 were as follows:
 
2016
 
2015
 
Carrying Value
 
Fair Value
 
Carrying Value (1)
 
Fair Value
Notes payable, net
$
2,843,155

 
$
2,878,870

 
$
2,627,088

 
$
2,609,582


(1)
The December 31, 2015 balance has been adjusted in connection with the Company's adoption of ASU No. 2015-03 "Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (Note 1).

The fair values of the notes payable are dependent on the interest rates used in estimating the values. An overall 1% increase in rates employed in making these estimates would have decreased the fair values of the debt shown above at March 31, 2016 by $108.4 million or 3.8%.

Cash Equivalents and Notes Receivable

The fair value of cash equivalents and notes receivable approximates their carrying value due to their short maturity. The fair value of cash equivalents is derived from quoted market prices and therefore falls into Level 1 of the fair value hierarchy. The fair value of notes receivable is estimated using cash flows discounted at current market rates and therefore falls into Level 2 of the fair value hierarchy.

See Note 8 regarding additional information on derivatives.

Note 13 - Accumulated Other Comprehensive Income

Changes in the balance of each component of AOCI for the three months ended March 31, 2016 were as follows:
 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
January 1, 2016
$
(10,890
)
 
$
(16,330
)
 
$
(27,220
)
 
$
(4,531
)
 
$
5,595

 
$
1,064

Other comprehensive income (loss) before reclassifications
4,198

 
(8,380
)
 
(4,182
)
 
1,744

 
(3,480
)
 
(1,736
)
Amounts reclassified from AOCI
 
 
2,146

 
2,146

 
 
 
891

 
891

Net current period other comprehensive income (loss)
$
4,198

 
$
(6,234
)
 
$
(2,036
)
 
$
1,744

 
$
(2,589
)
 
$
(845
)
Adjustments due to changes in ownership
(6
)
 
7

 
1

 
6

 
(7
)
 
(1
)
March 31, 2016
$
(6,698
)
 
$
(22,557
)
 
$
(29,255
)
 
$
(2,781
)
 
$
2,999

 
$
218



26
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Changes in the balance of each component of AOCI for the three months ended March 31, 2015 were as follows:

 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
January 1, 2015
$
(101
)
 
$
(14,967
)
 
$
(15,068
)
 
$
(41
)
 
$
5,879

 
$
5,838

Other comprehensive income (loss) before reclassifications
(1,367
)
 
(6,698
)
 
(8,065
)
 
(550
)
 
(2,691
)
 
(3,241
)
Amounts reclassified from AOCI

 
2,064

 
2,064

 


 
829

 
829

Net current period other comprehensive income (loss)
$
(1,367
)
 
$
(4,634
)
 
$
(6,001
)
 
$
(550
)
 
$
(1,862
)
 
$
(2,412
)
Adjustments due to changes in ownership

 
(55
)
 
(55
)
 


 
55

 
55

March 31, 2015
$
(1,468
)
 
$
(19,656
)
 
$
(21,124
)
 
$
(591
)
 
$
4,072

 
$
3,481


The following table presents reclassifications out of AOCI for the three months ended March 31, 2016:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations
Losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
1,517

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
974

 
Equity in Income of UJVs
Realized loss on cross-currency interest rate contract - UJV
 
546

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
3,037

 
 

The following table presents reclassifications out of AOCI for the three months ended March 31, 2015:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations
Losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
1,770

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
1,123

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
2,893

 
 


27
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 14 - Cash Flow Disclosures and Non-Cash Investing and Financing Activities

Interest paid for the three months ended March 31, 2016 and 2015, net of amounts capitalized of $6.5 million and $8.7 million, respectively, was $17.3 million and $12.8 million, respectively. Income taxes paid for the three months ended March 31, 2016 and 2015 were $0.5 million and $0.2 million, respectively. Other non-cash additions to properties, which primarily represent accrued construction and tenant allowance costs, were $87.0 million and $44.6 million for the three months ended March 31, 2016 and 2015, respectively.

Note 15 - New Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases", which provides for significant changes to the current lease accounting standard. The primary objectives of this ASU is to address off-balance-sheet financing related to operating leases and to introduce a new lessee model that brings substantially all leases onto the balance sheet. ASU No. 2016-02 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2018. The Company is currently evaluating the application of this ASU and its effect on the Company’s financial position and results of operations.

In January 2016, the FASB issued ASU No. 2016-01,”Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Amongst its changes, this ASU requires an entity to measure equity investments at fair value through net income, except for those that result in consolidation or are accounted for under the equity method of accounting. ASU No. 2016-01 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The Company is currently evaluating the application of this ASU and its effect on the Company’s financial position and results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This standard provides a single comprehensive model to use in accounting for revenue arising from contracts with customers and gains and losses arising from transfers of non-financial assets including sales of property, plant, and equipment, real estate, and intangible assets. ASU No. 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 one year to annual reporting periods beginning after December 15, 2017 for public entities. ASU No. 2015-14 permits public entities to adopt ASU No. 2014-09 early, but not before the original effective date of annual periods beginning after December 15, 2016. ASU No. 2014-09 may be applied either retrospectively or as a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating the application of this ASU and its effect on the Company's financial position and results of operations.







28

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs concerning future events and performance. Actual results may differ materially from those expected because of various risks and uncertainties. The forward-looking statements included in this report are made as of the date hereof. Except as required by law, we assume no obligation to update these forward looking statements, even if new information becomes available in the future. Other risks and uncertainties are detailed from time to time in reports filed with the Securities Exchange Commission (SEC), and in particular those set forth under "Risk Factors" in our most recent Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying consolidated financial statements of Taubman Centers, Inc. and the notes thereto.

General Background and Performance Measurement

Taubman Centers, Inc. (TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a majority-owned partnership subsidiary of TCO that owns direct or indirect interests in all of our real estate properties. In this report, the terms "we", "us", and "our" refer to TCO, the Operating Partnership, and/or the Operating Partnership's subsidiaries as the context may require. We own, manage, lease, acquire, dispose of, develop, and expand regional and super-regional shopping centers and interests therein. The Consolidated Businesses consist of shopping centers and entities that are controlled by ownership or contractual agreements, The Taubman Company LLC (Manager), and Taubman Properties Asia LLC and its subsidiaries (Taubman Asia). Shopping centers owned through joint ventures that are not controlled by us but over which we have significant influence (Unconsolidated Joint Ventures) are accounted for under the equity method.

References in this discussion to “beneficial interest” refer to our ownership or pro-rata share of the item being discussed.

The comparability of information used in measuring performance is affected by the acquisition of Country Club Plaza in March 2016 (See "Results of Operations - Acquisition - Country Club Plaza"), the opening of The Mall of San Juan in March 2015 (See "Results of Operations - U.S. Development"), and the redevelopment of Beverly Center beginning in 2016 (See "Liquidity and Capital Resources - Capital Spending - Planned 2016 Capital Spending"). Additional "comparable center" statistics that exclude the centers noted above are provided to present the performance of comparable centers. Comparable centers are generally defined as centers that were owned and open for the entire current and preceding period presented, excluding centers impacted by significant redevelopment activity. Comparable center statistics for 2015 have been restated to include comparable centers to 2016. This affects the comparability of our operating results period over period. Additionally, The Mall at University Town Center has also been excluded from comparable trailing 12-month statistics reported for 2016 and 2015 as the center was not open for the entire 12 months ended March 31, 2015. Also, the seven centers sold to an affiliate of Starwood Capital Group (Starwood) in October 2014 have been excluded from comparable trailing 12-month statistics reported for 2015 as the centers were not owned at March 31, 2016.





29

Current Operating Trends

Our comparable mall tenants reported a 2.9% decrease in mall tenant sales per square foot in the first quarter of 2016 from the same period in 2015. For the trailing 12-month period ended March 31, 2016, mall tenant sales per square foot were $790, a 0.3% decrease from $792 for the trailing 12-month period ended March 31, 2015.

Over the long term, the level of mall tenant sales is the single most important determinant of revenues of the shopping centers because mall tenants provide approximately 90% of these revenues and mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses, excluding utilities (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, and may be impacted significantly, either positively or negatively, by the success or lack of success of a small number of tenants or even a single tenant.

We believe that the ability of mall tenants to pay occupancy costs and earn profits over long periods of time increases as mall tenant 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 mall tenant sales at higher sales per square foot.

Mall tenant sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in mall tenant sales on our operations are moderated by the relatively minor share of total rents that percentage rents represent.

In negotiating lease renewals, we generally intend to maximize the minimum rentals we achieve. As a result, a tenant will generally pay a higher amount of minimum rent and an initially lower amount of percentage rent upon renewal.

While mall tenant sales are critical over the long term, the high quality regional mall business has been a very stable business model with its diversity of income from thousands of tenants, its staggered lease maturities, and high proportion of fixed rent. However, a sustained trend in sales does impact, either negatively or positively, our ability to lease vacancies and negotiate rents at advantageous rates.

Mall tenant occupancy costs (the sum of minimum rents, percentage rents, and expense recoveries, excluding utilities) as a percentage of sales in our Consolidated Businesses and Unconsolidated Joint Ventures are as follows:
 
Trailing 12-Months Ended March 31 (1)
 
2016
 
2015
Consolidated Businesses:
 
 
 
Minimum rents
9.3
%
 
9.0
%
Percentage rents
0.5

 
0.6

Expense recoveries
4.6

 
4.5

Mall tenant occupancy costs
14.4
%
 
14.0
%
Unconsolidated Joint Ventures:
 
 
 
Minimum rents
8.9
%
 
8.6
%
Percentage rents
0.4

 
0.5

Expense recoveries
4.6

 
4.2

Mall tenant occupancy costs
13.9
%
 
13.2
%
Combined:
 
 
 
Minimum rents
9.1
%
 
8.8
%
Percentage rents
0.5

 
0.5

Expense recoveries
4.6

 
4.3

Mall tenant occupancy costs
14.2
%
 
13.7
%

(1)
Based on reports of sales furnished by mall tenants of all centers reported during that period.
(2)
Amounts in this table may not add due to rounding.




30

Mall tenant ending occupancy and leased space statistics as of March 31, 2016 and 2015 are as follows:
 
2016 (1)
 
2015 (1)
Ending occupancy - all centers
92.5
%
 
89.8
%
Ending occupancy - comparable centers
93.2

 
92.4

Leased space - all centers
95.1

 
93.7

Leased space - comparable centers
95.9

 
95.5


(1) Occupancy and leased space statistics include temporary in-line tenants (TILs) and anchor spaces at value and outlet centers (Dolphin Mall, Great Lakes Crossing Outlets, and Taubman Prestige Outlets Chesterfield).

The difference between leased space and occupancy is that leased space includes spaces where leases have been signed but the tenants are not yet open. The occupancy statistic represents those spaces upon which we are currently collecting rent from mall tenants. The spread between comparable center leased space and occupied space, at 2.7% this quarter, is consistent with our history of 1% to 3% in the first quarter.

As leases have expired in the centers, we have 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. Generally, center revenues have increased as older leases rolled over or were terminated early and replaced with new leases negotiated at current rental rates that were usually higher than the average rates for existing leases. Average rent per square foot statistics reflect the contractual rental terms of the lease currently in effect and include the impact of rental concessions. In periods of increasing sales, rents on new leases will generally tend to rise. In periods of slower growth or declining sales, rents on new leases will grow more slowly or will decline for the opposite reason, as tenants' expectations of future growth become less optimistic.


31

Rent per square foot statistics are computed using contractual rentals per the tenant lease agreements, which reflect any lease modifications, including those for rental concessions. Rent per square foot information for our comparable centers in our Consolidated Businesses and Unconsolidated Joint Ventures are as follows:
 
Three Months Ended March 31
 
2016
 
2015
Average rent per square foot: (1)
 
 
 
Consolidated Businesses
$
63.50

 
$
60.45

Unconsolidated Joint Ventures
57.85

 
57.83

Combined
60.80

 
59.21


(1)
Statistics exclude non-comparable centers.

 
Trailing 12-Months Ended March 31 (1) (2)
 
2016
 
2015
Opening base rent per square foot:
 
 
 
Consolidated Businesses
$
77.50

 
$
62.87

Unconsolidated Joint Ventures
55.78

 
66.52

Combined
68.22

 
64.25

Square feet of GLA opened:
 
 
 
Consolidated Businesses
486,451

 
472,353

Unconsolidated Joint Ventures
362,852

 
286,613

Combined
849,303

 
758,966

Closing base rent per square foot:
 
 
 
Consolidated Businesses
$
59.65

 
$
48.59

Unconsolidated Joint Ventures
46.90

 
49.23

Combined
54.48

 
48.86

Square feet of GLA closed:
 
 
 
Consolidated Businesses
499,917

 
509,794

Unconsolidated Joint Ventures
341,027

 
376,158

Combined
840,944

 
885,952

Releasing spread per square foot:
 
 
 
Consolidated Businesses
$
17.85

 
$
14.28

Unconsolidated Joint Ventures
8.88

 
17.29

Combined
13.74

 
15.39

Releasing spread per square foot growth:
 
 
 
Consolidated Businesses
29.9
%
 
29.4
%
Unconsolidated Joint Ventures
18.9
%
 
35.1
%
Combined
25.2
%
 
31.5
%

(1)
Statistics exclude non-comparable centers.
(2)
Opening and closing statistics exclude spaces greater than or equal to 10,000 square feet.
(2) Opening and closing statistics exclude spaces gr
The spread between opening and closing rents may not be indicative of future periods, as this statistic is not computed on comparable tenant spaces, and can vary significantly from period to period depending on the total amount, location, and average size of tenant space opening and closing in the period.



32

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 period. While minimum rents and recoveries are generally not subject to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in anticipation of the Christmas selling season. Additionally, most percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally highest in the fourth quarter. Gains on sales of peripheral land and lease cancellation income may vary significantly from quarter to quarter.
 
2016
 
2015
 
1st Quarter
 
Total
 
4th Quarter
 
3rd Quarter
 
2nd Quarter
 
1st Quarter
 
(in thousands, except occupancy and leased space data)
Mall tenant sales: (1)
 
 

 
 
 
 
 
 
 
 
Comparable
$
1,096,483

 
$
4,821,329

 
$
1,490,636

 
$
1,112,374

 
$
1,117,744

 
$
1,100,575

All Centers
1,202,268

 
5,177,988

 
1,600,739

 
1,197,976

 
1,203,516

 
1,175,757

Revenues and nonoperating income, net-
 
 


 
 
 
 
 
 
 
 
Consolidated Businesses
$
140,925

 
$
562,428

 
$
157,771

 
$
140,993

 
$
133,429

 
$
130,235

Ending occupancy:
 
 
 
 
 
 
 
 
 
 
 
Comparable
93.2
%
 
95.2
%
 
95.2
%
 
94.0
%
 
93.0
%
 
92.4
%
All Centers
92.5

 
94.2

 
94.2

 
92.2

 
90.6

 
89.8

Leased space:
 
 
 
 
 
 
 
 
 
 
 
Comparable
95.9
%
 
96.9
%
 
96.9
%
 
97.3
%
 
97.0
%
 
95.5
%
All Centers
95.1

 
96.1

 
96.1

 
96.3

 
95.7

 
93.7


(1)Based on reports of sales furnished by mall tenants.



33

Results of Operations

In addition to the results and trends in our operations discussed in the preceding sections, the following sections discuss certain transactions that affected operations during the three month periods ended March 31, 2016 and 2015, or are expected to affect operations in the future.

Acquisition - Country Club Plaza

In March 2016, a joint venture we formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG’s beneficial share) in cash, excluding transaction costs. We have a 50% ownership interest in the center, which is jointly managed by both companies. Our ownership interest in the center is accounted for as an Unconsolidated Joint Venture under the equity method. Also in March 2016, our joint venture completed a 10-year, $320 million ($160 million at TRG’s beneficial share) non-recourse financing on Country Club Plaza. See "Liquidity and Capital Resources - Acquisition" for more information on this financing.
U.S. Development

In March 2015, The Mall of San Juan opened in San Juan, Puerto Rico. The 0.6 million square foot of retail is anchored by the Caribbean's first Nordstrom and Saks Fifth Avenue. In April 2015, we acquired an additional 15% interest in The Mall of San Juan, bringing our ownership in the center to 95%. The additional interest was acquired at cost.

Our U.S. development includes one project, International Market Place, which is currently under construction in Waikiki, Honolulu, Hawaii, and is scheduled to open in August 2016. See "Liquidity and Capital Resources - Capital Spending - New Developments" for more information.

Taubman Asia

We have a joint venture with Wangfujing Group Co., Ltd (Wangfujing), one of China's largest department store chains, which owns an interest in a shopping center, CityOn.Xi'an, located at Xi'an Saigao City Plaza in Xi'an, China, which opened in April 2016. We also have a joint venture with Wangfujing to develop a shopping center, CityOn.Zhengzhou, in Zhengzhou, China, which is scheduled to open in fall 2016. See "Liquidity and Capital Resources - Capital Spending - New Developments" for more information on these developments.

Also, we have invested in a shopping center project, Starfield Hanam (formerly Hanam Union Square), in Hanam, South Korea in which we have formed a joint venture with Shinsegae Group (Shinsegae), one of South Korea's largest retailers. The center is scheduled to open in September 2016. See "Liquidity and Capital Resources - Capital Spending - New Developments" for more information.

We are providing management and leasing services for the retail portion of Studio City, a cinematically-themed integrated entertainment, retail and gaming resort developed by Melco Crown Entertainment Limited in the Cotai region of Macau, China, which opened in the fourth quarter of 2015. In addition, we provide management and leasing services for IFC Mall in Yeouido, Seoul, South Korea. We have no ownership interests in these centers.

The Shops at Crystals

In April 2016, we were notified that our third party leasing agreement for The Shops at Crystals will be terminated in connection with a change in ownership of the center. As a result, we expect to receive in May 2016 a lump sum payout of approximately $21 million, to be recognized as income in the second quarter.

Debt and Equity Transactions

In April 2016, a 10-year, $165 million non-recourse refinancing was completed at Waterside Shops, a 50% owned Unconsolidated Joint Venture. The loan bears interest at an all-in-rate of 3.89% and is interest-only for the term of the loan. However, if net operating income available for debt service as defined in the loan agreement is less than a certain amount for calendar year 2020, the lender may require the loan to amortize based on a 30-year amortization period retroactive to May 2021. The proceeds from the borrowing were used to repay the existing $165 million, 5.54% stated fixed rate loan which was scheduled to mature in October 2016.

In April 2016, we extended our $65 million secured secondary revolving line of credit for one year upon maturity. All significant terms of the credit facility remain unchanged as a result of the extension.

34

In April 2016, we repaid the $81.5 million, 6.10% stated fixed rate loan on The Gardens on El Paseo, which was scheduled to mature in June 2016.

In October 2015, we repaid the $15.6 million, 4.42% stated fixed rate loan on El Paseo Village, which was scheduled to mature in December 2015.

In September 2015, we completed a 12-year, $1 billion non-recourse refinancing for The Mall at Short Hills. The interest-only loan bears interest at an all-in fixed rate of 3.56%. The proceeds from the borrowing were used to repay the existing $540 million, 5.47% fixed rate loan, which was scheduled to mature in December 2015, and to pay off our revolving lines of credit, with the remaining net proceeds held for general corporate purposes.

In August 2015, we completed a $330.9 million construction facility for International Market Place, a consolidated joint venture. Also, in July 2015, our joint venture closed on a construction facility for Starfield Hanam, an Unconsolidated Joint Venture. See "Liquidity and Capital Resources - Construction Financings" for further details regarding these financings.

In March 2015, a $12 million non-recourse refinancing was completed on our U.S. headquarters building. The loan is interest-only for the entire nine-year term, bears interest at LIBOR plus 1.40%, and is prepayable at any time. The rate on the loan is fixed at 3.49% as a result of an interest rate swap. The proceeds from the new loan and available cash were used to pay off the existing $17.0 million, 5.90% fixed rate loan.

In August 2013, our Board of Directors authorized a share repurchase program under which we may repurchase up to $200 million of our outstanding common stock. In March 2015, our Board of Directors increased the authorization by $250 million, bringing the total authorization to $450 million. We may repurchase shares from time to time on the open market or in privately negotiated transactions or otherwise, depending on market prices and other conditions. No shares were repurchased in the first quarter of 2016. As of March 31, 2016, we cumulatively repurchased 4,247,867 shares of our common stock at an average price of $71.79 per share, for a total of $304.9 million under the authorization. As of March 31, 2016, $145.1 million remained available under the repurchase program. All shares repurchased have been cancelled. For each share of our stock repurchased, one of our Operating Partnership units was redeemed. Repurchases of common stock were financed through general corporate funds, including borrowings under our existing revolving lines of credit.

See "Liquidity and Capital Resources - Upcoming Maturities" for a discussion of our planned refinancings that are expected to be completed in 2016.

Center Operations

For the three months ended March 31, 2016, comparable center NOI excluding lease cancellation income was up 5.8% over the same period in 2015. See “Non-GAAP Measures” for the definition and discussion of NOI and for the reconciliation of Net Income to NOI.

For the three months ended March 31, 2016, we recognized our $1.4 million share of lease cancellation income.

Interest Expense

Interest expense is impacted by the capitalization of interest on the costs of our U.S. and Asia development projects. We capitalize interest on our consolidated project costs and our equity contributions to Unconsolidated Joint Ventures under development using our average consolidated borrowing rate, which does not reflect the specific source of funds for the costs and is generally greater than our incremental borrowing rate. Any excess of the capitalization rate over our incremental borrowing rate positively impacts our results of operations during the construction phase of our development projects. This positive impact will affect our results until the overall level of construction spending decreases. In 2016, we continue to expect a significant increase in interest expense as compared to 2015 primarily due to the opening of four ground-up development projects. Beneficial interest in construction work in progress totaled $821.4 million as of March 31, 2016, which includes $805.9 million of assets on which interest is being capitalized. As these projects open, interest capitalization will generally end and we will begin recognizing interest expense.








35

Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015

The following is a comparison of our results for the three months ended March 31, 2016 and 2015, as disclosed in our Consolidated Statement of Operations and Comprehensive Income.

Total revenues for the three months ended March 31, 2016 were $139.5 million, a $10.5 million or 8.1% increase from the comparable period in 2015. Minimum rents and expense recoveries both increased primarily due to the opening of The Mall of San Juan in March 2015.

In addition to the opening of The Mall of San Juan, the following also impacted total revenues:

•
the increase in minimum rents was further attributable to increases in average rent per square foot and occupancy;

•
the increase in expense recoveries also was due to increases in fixed common area maintenance revenues; and

•
the decrease in revenue from management, leasing, and development services was primarily due to a decrease in fees for Studio City, which opened in October 2015.

Total expenses for the three months ended March 31, 2016 were $114.8 million, a $19.3 million or 20.2% increase from the comparable period in 2015. Maintenance, taxes, utilities, and promotion expense, other operating expense, interest expense, and depreciation and amortization expense all increased primarily due to the opening of The Mall of San Juan in March 2015.

In addition to the opening of The Mall of San Juan, the following also impacted total expenses:

•
the increase in other operating expense was also due to increases in bad debt expense, as well as certain corporate level cost allocations no longer made to unconsolidated centers;

•
the increase in interest expense was further attributable to our refinancing of The Mall at Short Hills with an increased loan balance as well as reduced interest capitalization on our development projects; and

•
the increase in depreciation and amortization expense was further attributable to the completion of our redevelopment projects in 2015.

Equity in Income of the Unconsolidated Joint Ventures for the three months ended March 31, 2016 increased by $1.4 million to $18.5 million from the comparable period in 2015. The increase was primarily attributable to the acquisition of Country Club Plaza in March 2016 and the discontinuation of certain corporate level other operating cost allocations to our Unconsolidated Joint Ventures.

In 2016, the consolidated non-comparable centers contributed total operating revenues of $21.6 million, and incurred operating expenses, excluding interest expense and depreciation and amortization of $10.5 million. In 2015, the consolidated non-comparable centers contributed total operating revenues of $17.2 million, and incurred operating expenses, excluding interest expense and depreciation and amortization, of $6.4 million.

Net Income

Net income was $44.3 million for the three months ended March 31, 2016 compared to $51.0 million for the three months ended March 31, 2015. After allocation of income to noncontrolling, preferred, and participating interests, the net income attributable to Taubman Centers, Inc. common shareowners for the three months ended March 31, 2016 was $24.6 million compared to $29.6 million in the comparable period in 2015.

Funds from Operations (FFO) and FFO per Common Share

Our FFO attributable to partnership unitholders and participating securities of TRG was $73.0 million for the three months ended March 31, 2016 compared to $72.9 million for the three months ended March 31, 2015. FFO per diluted common share was $0.84 for the three months ended March 31, 2016 and $0.81 per common share for the three months ended March 31, 2015. See “Non-GAAP Measures - Use of Non-GAAP Measures” for the definition of FFO and “Non-GAAP Measures - Reconciliation of Non-GAAP Measures” for the reconciliation of Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations.

36

Liquidity and Capital Resources

General

Our internally generated funds and distributions from operating centers and other investing activities, augmented by use of our existing revolving lines of credit, provide resources to maintain our current operations and assets, pay dividends, and fund a portion of our major capital investments. Generally, our need to access the capital markets is limited to refinancing debt obligations at or near maturity and, in certain cases, funding major capital investments. From time to time, we also may access the equity markets or sell interests in operating properties to raise additional funds or refinance existing obligations on a strategic basis, including using excess proceeds therefrom.

Property Encumbrances

We are primarily financed with property-specific secured debt and currently have six unencumbered center properties. The entities that own Beverly Center, Dolphin Mall, and Twelve Oaks Mall are guarantors under our unsecured primary revolving credit facility and unsecured term loan and are unencumbered assets under such facility and term loan. Under the related debt agreements, we are required to have a minimum of three eligible unencumbered assets with a minimum unencumbered asset value. Therefore, while any of the assets may be removed from the unencumbered asset pool and encumbered upon notice to lender, provided that there is no default and the required covenant calculations are met on a pro forma basis, a replacement eligible unencumbered asset would need to be added to the unencumbered asset pool. Besides the three centers previously noted, The Gardens on El Paseo/El Paseo Village, Taubman Prestige Outlets Chesterfield, and Stamford Town Center, a 50% owned Unconsolidated Joint Venture property, are unencumbered.

Cash and Revolving Lines of Credit

As of March 31, 2016, we had a consolidated cash balance of $172.9 million. We also have an unsecured revolving line of credit of $1.1 billion and a secured revolving line of credit of $65 million. The availability under these facilities as of March 31, 2016, after considering outstanding balances and the outstanding letters of credit, was $1.0 billion. Seventeen banks participate in our $1.1 billion revolving line of credit and the failure of one bank to fund a draw on our line does not negate the obligation of the other banks to fund their pro-rata shares. The unsecured line includes an accordion feature that would increase the borrowing capacity to as much as $1.5 billion if fully exercised, subject to obtaining additional lender commitments, customary closing conditions, and covenant compliance for the unencumbered asset pool. As of March 31, 2016, we could not fully utilize the accordion feature unless additional assets were added to our unencumbered asset pool. The $1.1 billion revolving line of credit matures in February 2019, with a one-year extension option. The facility bears interest at a range based on our total leverage ratio. As of March 31, 2016, the leverage ratio resulted in a rate of LIBOR plus 1.25%. Beginning in May 2016, the facility will bear interest at a rate of LIBOR plus 1.30% with a 0.25% facility fee as a result of an increased total leverage ratio.

In April 2016, we extended our $65 million secured secondary revolving line of credit for one year upon maturity. All significant terms of the credit facility remain unchanged as a result of the extension.

Construction Financings

In addition to the revolving lines of credit described above, we have construction facilities outstanding for several centers recently opened or under construction, as described in the following paragraphs.

We have a $225 million construction facility for The Mall at University Town Center, an Unconsolidated Joint Venture. As of March 31, 2016, $3.5 million was available under the construction facility. The construction facility is interest-only during the initial three-year term at LIBOR plus 1.70%, which decreases to LIBOR plus 1.60% upon the achievement of certain performance measures. The facility matures in October 2016 and has four, one-year extension options. During the extension period, debt service payments also include principal payments based on an assumed interest rate of 6.0% and a 30-year amortization. No draws on the facility are permitted after the first extension date.

We have a $320 million construction facility for The Mall of San Juan, a consolidated joint venture. As of March 31, 2016, $35.3 million was available under the construction facility. The facility, which matures in April 2017 and has two, one-year extension options, is interest-only for the entire term and bears interest at LIBOR plus 2.00%, which may decrease to LIBOR plus 1.75% upon achieving certain performance measures. No draws on the facility are permitted after the first extension date.




37

We have a $330.9 million construction facility for International Market Place, a consolidated joint venture. As of March 31, 2016, $190.5 million was available under the construction facility. The facility, which matures in August 2018, has two, one-year extension options, and bears interest at LIBOR plus 1.75%, which may be reduced to LIBOR plus 1.60% upon the achievement of certain performance measures. The loan is interest-only during the initial three-year term and no draws on the loan are permitted after the original maturity date. During the extension period, debt service payments also include principal payments based on an assumed interest rate of 6.0% and a 30-year amortization.

Our joint venture has a non-recourse construction facility for Starfield Hanam. We have an effective 34.3% interest in the Unconsolidated Joint Venture. The financing consists of a five-year, 520 billion Korean Won (KRW) denominated construction facility (approximately $454.2 million U.S. dollars using the March 31, 2016 exchange rate) and a five-year U.S. dollar financing of $52.1 million. The U.S. dollar denominated portion of the financing is secured by an approximately $53.2 million standby letter of credit, which was drawn from the KRW denominated portion of the construction facility, thereby reducing the availability under the KRW denominated construction facility to approximately $401 million U.S. dollars as of March 31, 2016, excluding the amount drawn on the facility. The KRW denominated portion of the financing bears interest at the Korea Development Bank Five-Year Bond Yield plus 1.06% and resets every three months based on the initial drawdown date. The weighted average rate of the amount drawn at March 31, 2016 is 2.81%. The U.S. dollar denominated floating rate facility bears interest at three-month LIBOR plus 1.60%. A cross-currency interest rate swap was executed to fix the interest rate on the U.S. dollar portion of the financing and swap the U.S. dollar denomination from U.S. dollars to KRW. As a result of the swap, the effective interest rate of the U.S. dollar portion of the financing is fixed at 3.12%. As of March 31, 2016, the U.S. dollar denominated portion of the financing was fully drawn, while $27.1 million U.S. dollars (using the March 31, 2016 exchange rate) were drawn on the KRW denominated portion of the facility, bringing the total remaining availability of the facility to approximately $374 million U.S. dollars.

Our joint venture that owns CityOn.Zhengzhou has a construction facility on which we can borrow up to 834 million Chinese Yuan Renminbi (RMB) (approximately $129.3 million U.S. dollars using the March 31, 2016 exchange rate). We have an effective 32% interest in the Unconsolidated Joint Venture. The 11-year financing bears interest at 130% of the RMB People's Bank of China base lending rate for a loan term greater than five years, which resets in January of each year. The rate on the debt outstanding at March 31, 2016 was 6.37%. As of March 31, 2016, approximately $84.3 million U.S. dollars were available under the construction facility using the March 31, 2016 exchange rate.

As a foreign investor, we are subject to various government approval processes and other hurdles in funding the construction of our Chinese projects. These hurdles have required our Xi'an and Zhengzhou ventures to obtain short-term financing, in the form of loans from our joint venture partner or fully cash collateralized bank loans, to meet certain construction funding commitments in local currency. As of March 31, 2016, our share of such loans was approximately $80 million.

Refer to "Note 5 - Beneficial Interest in Debt and Interest Expense" to our consolidated financial statements for further details of our construction financings and related guarantees.

Upcoming Maturities

In April 2016, a 10-year, $165 million non-recourse refinancing was completed at Waterside Shops, a 50% owned Unconsolidated Joint Venture. See "Results of Operations - Debt and Equity Transactions" for more information on this financing.

In April 2016, we repaid the $81.5 million, 6.10% stated fixed rate loan on The Gardens on El Paseo which was scheduled to mature in June 2016.

Our mortgages on Cherry Creek Shopping Center and The Mall at University Town Center are maturing in June 2016 and October 2016, respectively. In February 2016, we agreed to the basic terms of a new 12-year non-recourse loan for Cherry Creek Shopping Center. The new $550 million loan will be interest only at a fixed rate of 3.85% and is expected to close in May 2016. We expect our share of excess proceeds to be over $130 million. Using the proceeds from the loan, we expect to pay off without penalty the existing $280 million, 5.24% fixed rate loan. Also in 2016, we expect to utilize the initial one-year extension option to extend the construction facility on The Mall at University Town Center.


38

Term Loan

Our $475 million unsecured term loan matures in February 2019. The loan includes an accordion feature that increases the borrowing capacity to as much as $600 million if fully exercised, subject to obtaining additional lender commitments, customary closing conditions, and covenant compliance for the unencumbered asset pool. As of March 31, 2016, we could not fully utilize the accordion feature unless additional assets were added to our unencumbered asset pool. The term loan bears interest at a range based on our total leverage ratio. As of March 31, 2016, the loan leverage ratio resulted in a rate of LIBOR plus 1.35%. Beginning in May 2016, the term loan will bear interest at a rate of LIBOR plus 1.45% as a result of an increased total leverage ratio. The LIBOR rate is swapped until maturity to a fixed rate of 1.65%, which results in an effective interest rate in the range of 3.00% to 3.55%.

Acquisition

In March 2016, a joint venture we formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG’s beneficial share) in cash, excluding transaction costs. Also in March 2016, our joint venture completed a 10-year, $320 million ($160 million at TRG’s beneficial share) non-recourse financing on Country Club Plaza. The payments on the loan, which bears interest at an all-in fixed rate of 3.88%, will be interest only for three years, and then amortizes principal based on 30 years.
Share Repurchase Program

In August 2013, our Board of Directors authorized a share repurchase program under which we may repurchase up to $200 million of our outstanding common stock. In March 2015, our Board of Directors increased the authorization by $250 million, bringing the total authorization to $450 million. We may repurchase shares from time to time on the open market or in privately negotiated transactions or otherwise, depending on market prices and other conditions. Repurchases of common stock are financed through general corporate funds, including borrowings under our existing revolving lines of credit. As of March 31, 2016, $145.1 million remained available under the repurchase program. See "Results of Operations - Debt and Equity Transactions" for more information on our share repurchase program.

Summaries of Capital Activities and Transactions for the Three Months Ended March 31, 2016 and 2015

Operating Activities

Our net cash provided by operating activities was $63.4 million in 2016, compared to $51.5 million in 2015. See also “Results of Operations” for descriptions of 2016 and 2015 transactions affecting operating cash flows.

Investing Activities

Net cash used in investing activities was $249.3 million in 2016, compared to $109.5 million in 2015. Additions to properties in 2016 and 2015 related primarily to the costs of new centers under development as well as capital and tenant improvements at existing centers. A tabular presentation of 2016 and 2015 capital spending is shown in “Capital Spending.” Net cash proceeds from the sale of peripheral land were $5.4 million in 2016. Cash placed in escrow to fund certain construction projects was $4.1 million in 2016. In 2015, $7.8 million of cash in escrow was used to fund a current redevelopment project.

Contributions to Unconsolidated Joint Ventures in 2016 and 2015 of $9.5 million and $20.2 million, respectively, primarily relate to the funding of Taubman Asia project costs. Additionally, in 2016, we contributed $314.2 million to an Unconsolidated Joint Venture in connection with the acquisition of Country Club Plaza. Distributions from Unconsolidated Joint Ventures in excess of income were $168.3 million in 2016, which is primarily attributable to the proceeds from the Country Club Plaza financing.


39

Financing Activities

Net cash provided by financing activities was $152.2 million in 2016 compared to $112.8 million used in financing activities in 2015. In 2016, proceeds from the issuance of debt, net of payments were $215.7 million, generally provided by borrowings on the revolving lines of credit and construction facilities for The Mall of San Juan and International Market Place. In 2015, proceeds from the issuance of debt, net of payments were $32.4 million, generally provided by the construction facility for The Mall of San Juan, partially offset by the pay off of the original loan on the U.S. headquarters building. Also in 2016, a $5.5 million deposit was paid in connection with the expected refinancing of Cherry Creek Shopping Center.

In 2015, $85.0 million was paid to repurchase common stock. No common stock was repurchased in 2016. In 2016, $0.3 million was paid in connection with incentive plans, compared to $2.2 million in 2015. Total dividends and distributions paid were $57.6 million and $57.9 million in 2016 and 2015, respectively.

Beneficial Interest in Debt

At March 31, 2016, the Operating Partnership's debt and its beneficial interest in the debt of its Consolidated Businesses and Unconsolidated Joint Ventures totaled $3,962.3 million, with an average interest rate of 3.49% excluding amortization of debt issuance costs and interest rate hedging costs. These costs are reported as interest expense in the results of operations. Interest expense includes non-cash amortization of premiums relating to acquisitions. On an annualized basis, this amortization of acquisition premiums is equal to 0.06% of the average all-in rate. Beneficial interest in debt includes debt used to fund development and expansion costs. Beneficial interest in construction work in progress totaled $821.4 million as of March 31, 2016, which includes $805.9 million of assets on which interest is being capitalized. The following table presents information about our beneficial interest in debt as of March 31, 2016:
 
Amount
 
Interest Rate Including Spread
 
 
(in millions)
 
 
 
Fixed rate debt
$
2,429.3

 
3.98
%
(1) (2) 
 
 
 
 
 
Floating rate debt swapped to fixed rate:
 
 
 
  
Swap maturing in April 2018
134.2

 
4.10
%
 
Swap maturing in February 2019
475.0

 
3.00
%
 
Swap maturing in September 2020
17.9

 
3.12
%
 
Swap maturing in December 2021
85.9

 
3.58
%
 
Swap maturing in March 2024
12.0

 
3.49
%
 
 
$
724.9

 
3.28
%
(1) 
 
 
 
 
 
Floating month to month
828.6

 
2.23
%
(1) 
Total floating rate debt
$
1,553.5

 
2.72
%
(1) 
 
 
 
 
 
Total beneficial interest in debt
$
3,982.8

 
3.49
%
(1) 
 
 
 
 
 
Total deferred financing costs and purchase accounting premiums, net
$
(20.4
)
 
 
 
 
 
 
 
 
Net beneficial interest in debt
$
3,962.3

 
 
 
 
 
 
 
 
Amortization of deferred financing costs (3)
 

 
0.26
%
 
Average all-in rate
 

 
3.75
%
 

(1)
Represents weighted average interest rate before amortization of deferred financing costs.
(2)
Includes non-cash amortization of premiums related to acquisitions.
(3)
Deferred financing costs include debt issuance costs including amortization of deferred financing costs from revolving lines of credit and other fees not listed above.
(4)
Amounts in table may not add due to rounding.


40

Sensitivity Analysis

We have exposure to interest rate risk on our debt obligations and interest rate instruments. We use derivative instruments primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. We routinely use cap, swap, and treasury lock agreements to meet these objectives. Based on the Operating Partnership's beneficial interest in floating rate debt in effect at March 31, 2016, a one percent increase in interest rates on this floating rate debt would decrease cash flows by approximately $8.3 million, and due to the effect of capitalized interest, decrease annual earnings by approximately $6.5 million. A one percent decrease in interest rates (or to zero percent for LIBOR rates that are below one percent) would increase cash flows by approximately $3.8 million and due to the effect of capitalized interest, increase annual earnings by approximately $3.1 million. Based on our consolidated debt and interest rates in effect at March 31, 2016, a one percent increase in interest rates would decrease the fair value of debt by approximately $108.3 million, while a one percent decrease in interest rates would increase the fair value of debt by approximately $120.0 million.

Loan Commitments and Guarantees

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on our unsecured primary revolving line of credit, unsecured term loan, and the construction facilities on The Mall at University Town Center, The Mall of San Juan, and International Market Place: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, our primary revolving line of credit and term loan have unencumbered pool covenants, which currently apply to Beverly Center, Dolphin Mall, and Twelve Oaks Mall on a combined basis. These covenants include a minimum number and minimum value of eligible unencumbered assets, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio, and a minimum unencumbered asset occupancy ratio. As of March 31, 2016, the corporate total leverage ratio was the most restrictive covenant. We are in compliance with all of our loan covenants and obligations as of March 31, 2016. The maximum payout ratio covenant limits the payment of distributions generally to 95% of funds from operations, as defined in the loan agreements, except as required to maintain our tax status, pay preferred distributions, and for distributions related to the sale of certain assets. See "Note 5 - Beneficial Interest in Debt and Interest Expense" to our consolidated financial statements for more details on loan guarantees.

Cash Tender Agreement

The A. Alfred Taubman Restated Revocable Trust and Taubman Ventures Group LLC have the right to tender partnership units in the Operating Partnership and cause us to purchase the tendered interests at a purchase price based on a market valuation of TCO on the trading date immediately preceding the date of the tender. See “Note 10 – Commitments and Contingencies – Cash Tender” to our consolidated financial statements for more details.

Capital Spending

Acquisition

In March 2016, a joint venture we formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG’s beneficial share) in cash, excluding transaction costs. See "Results of Operations - Acquisition - Country Club Plaza" for additional information regarding the acquisition.
New Developments

International Market Place, a 0.3 million square foot center, in Waikiki, Honolulu, Hawaii, is under construction. We are responsible for management, leasing, and development of the center. The center will be anchored by the only full-line Saks Fifth Avenue in Hawaii, and is scheduled to open in August 2016. We have a 93.5% interest in the project and are funding all construction costs. We had capitalized costs of $337.5 million in the project as of March 31, 2016. We are expecting an after-tax unlevered stabilized return of 7% on our share of the approximately $465 million total project cost. This project is subject to a participating ground lease. The remaining spending on the project is expected to be funded using our $330.9 million construction facility (see "Liquidity and Capital Resources - Construction Financings" above).


41

Our joint venture with Wangfujing owns and manages a shopping center, CityOn.Xi'an, located at Xi'an Saigao City Plaza, a large-scale mixed-use development in Xi'an, China. The center opened in April 2016 and is part of a 5.9 million square foot mixed-use project. We are investing in the retail portion only, which is about 1.0 million square feet with over half of that in mall specialty stores. In April 2016, the joint venture effectively acquired the 40% noncontrolling interest for approximately $150 million, increasing the partnership interest in the project to 100%. Our share of the purchase price for the additional interest was approximately $75 million. As a result of the acquisition, our effective ownership in the center is 50%, an increase from our previous 30% share. As of March 31, 2016, our share of total project costs was $129.3 million, as decreased by $2.4 million for the change in exchange rates. Our total anticipated investment, including capitalized interest, will be approximately $190 million for a 50% equity interest. We are expecting a 6% to 6.5% unlevered return at stabilization.

Our second joint venture with Wangfujing owns a majority interest in and will manage a shopping center to be located in Zhengzhou, China. Currently under construction, the approximately 1.0 million square foot shopping mall, CityOn.Zhengzhou, is scheduled to open in fall 2016. As of March 31, 2016, our share of total project costs was $73.9 million, as decreased by $2.1 million for the change in exchange rates. Our total anticipated investment, including capitalized interest, will be approximately $115 million for a 32% equity interest. We are expecting a 6% to 6.5% unlevered return at stabilization. Remaining spending on the project may be funded using the joint venture's construction facility (see "Liquidity and Capital Resources - Construction Financings" above).

Our joint venture with Shinsegae is developing an approximately 1.7 million square foot shopping center, Starfield Hanam, in Hanam, South Korea. The center is scheduled to open in September 2016. We have partnered with a major institution in Asia for a 49% ownership interest in Starfield Hanam. The institutional partner owns 14.7% of the project, bringing our effective ownership to 34.3%. As of March 31, 2016, our share of total project costs was $223.0 million, as decreased by $7.2 million for the change in exchange rates. Our total anticipated investment, including capitalized interest, will now be about $345 million for our effective 34.3% equity interest in the retail portion of the project. We are now expecting a 7.5% to 8% unlevered return at stabilization. Remaining spending on the project may be funded using the joint venture's construction facility (see "Liquidity and Capital Resources - Construction Financings" above).

Estimates of total project costs through completion in Asia exclude fluctuations in foreign currency exchange rates.

Internally generated funds and excess proceeds from refinancings of maturing debt obligations, as well as borrowings under our revolving lines of credit, would be sufficient to finance the anticipated remaining costs of these projects, but we also expect additional proceeds from our construction loan financings (see "Liquidity and Capital Resources - Construction Financings" above).


42

2016 Capital Spending

Capital spending for routine maintenance of the shopping centers is generally recovered from tenants. Capital spending through March 31, 2016, is summarized in the following table:
 
2016 (1)
 
Consolidated Businesses
 
Beneficial Interest in Consolidated Businesses
 
Unconsolidated Joint Ventures
 
Beneficial Interest in Unconsolidated Joint Ventures
 
(in millions)
New development projects - U.S. (2)
$
62.6

 
$
59.0

 


 


New development projects - Asia (3) (4)
 
 
 
 
$
32.8

 
$
32.8

Existing centers:
 
 
 
 
 
 
 
Projects with incremental GLA or anchor replacement (5)
5.0

 
5.0

 
 
 
 
Projects with no incremental GLA and other (6)
7.0

 
6.6

 
0.8

 
0.4

Mall tenant allowances
1.6

 
1.5

 
1.1

 
0.5

Asset replacement costs recoverable from tenants
0.3

 
0.3

 
0.9

 
0.4

Corporate office improvements, technology, equipment, and other
0.6

 
0.6

 
 
 
 
Total
$
77.1

 
$
73.0

 
$
35.6

 
$
34.2


(1)
Costs are net of intercompany profits and are computed on an accrual basis.
(2)
Includes costs related to The Mall of San Juan and International Market Place.
(3)
Includes costs related to CityOn.Xi'an, CityOn.Zhengzhou, and Starfield Hanam. Asia spending is included at our beneficial interest in both the Unconsolidated Joint Ventures and Beneficial Interest in Unconsolidated Joint Ventures columns.
(4)
Asia balances exclude $6.6 million in net increases of total project costs due to changes in exchange rates during the period.
(5)
Includes costs related to The Mall at Green Hills renovation.
(6)
Includes costs related to the Beverly Center renovation.
(7)
Amounts in this table may not add due to rounding.

For the three months ended March 31, 2016, in addition to the costs above, we incurred our $0.9 million share of Consolidated Businesses’ and $0.9 million share of Unconsolidated Joint Ventures’ capitalized leasing costs.

The following table presents a reconciliation of the Consolidated Businesses’ capital spending shown above (on an accrual basis) to additions to properties (on a cash basis) as presented in our Consolidated Statement of Cash Flows for the three months ended March 31, 2016:
 
(in millions)
Consolidated Businesses’ capital spending
$
77.1

Other differences between cash and accrual basis
18.1

Additions to properties
$
95.2



43

Planned 2016 Capital Spending

The following table summarizes planned capital spending for 2016, including actual spending through March 31, 2016 and anticipated spending for the remainder of the year:

 
2016 (1)
 
Consolidated Businesses
 
Beneficial Interest in Consolidated Businesses
 
Unconsolidated Joint Ventures
 
Beneficial Interest in Unconsolidated Joint Ventures
 
(in millions)
New development projects - U.S. (2)
$
237.6

 
$
224.2

 
 
 


New development projects - Asia (3) (4)
 
 
 
 
$
268.3

 
$
268.3

Existing centers:
 
 
 
 
 
 
 
Projects with incremental GLA or anchor replacement (5)
44.6

 
44.6

 
 
 
 
Projects with no incremental GLA and other (6)
132.3

 
125.1

 
1.1

 
0.6

Mall tenant allowances
11.2

 
9.4

 
5.3

 
3.0

Asset replacement costs recoverable from tenants
15.3

 
14.7

 
14.2

 
7.7

Corporate office improvements, technology, equipment, and other
17.4

 
17.4

 
 
 
 
Total
$
458.4

 
$
435.5

 
$
288.9

 
$
279.5


(1)
Costs are net of intercompany profits and are computed on an accrual basis.
(2)
Includes costs related to The Mall of San Juan and International Market Place.
(3)
Includes costs related to CityOn.Xi'an, CityOn.Zhengzhou, and Starfield Hanam. Asia spending is included at our beneficial interest in both the Unconsolidated Joint Ventures and Beneficial Interest in Unconsolidated Joint Ventures columns.
(4)
Asia costs exclude currency translation adjustments.
(5)
Includes costs related to The Mall at Green Hills renovation.
(6)
Includes costs related to the Beverly Center renovation.
(7)
Amounts in this table may not add due to rounding.

In March 2016, we announced our plans for the comprehensive renovation of Beverly Center. The project will cost approximately $500 million and is scheduled to be completed by the 2018 holiday season. The project will be a renovation of existing GLA and we expect a return of 3% to 4% at stabilization in 2020. The projected return was calculated using the estimated cash flow differential between two scenarios; a full renovation and a non-renovation scenario. As of March 31, 2016, we had capitalized costs of $33.4 million related to this redevelopment project.

We have an ongoing redevelopment project at The Mall at Green Hills that will add approximately 170,000 square feet of incremental GLA that we expect to be completed in 2019. The project will cost approximately $200 million, and we expect a return of 6.5% to 7.5% at stabilization. As of March 31, 2016, we had capitalized costs of $45.1 million related to this redevelopment project.

Disclosures regarding planned capital spending, including estimates regarding timing of openings, capital expenditures, occupancy, and returns on new developments 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) timing and outcome of litigation and entitlement processes, (3) changes in the scope, number, and valuation of projects, (4) cost overruns, (5) timing of expenditures, (6) availability of and cost of financing and other financing considerations, (7) actual time to start construction and complete projects, (8) changes in economic climate, (9) competition from others attracting tenants and customers, (10) increases in operating costs, (11) timing of tenant openings, (12) early lease terminations and bankruptcies, and (13) fluctuations in foreign currency exchange rates. In addition, estimates of capital spending will change as new projects are approved by our Board of Directors.


44

Dividends

We pay regular quarterly dividends to our common and preferred shareowners. Dividends to our common shareowners are at the discretion of the Board of Directors and depend on the cash available to us, our financial condition, capital and other requirements, and such other factors as the Board of Directors deems relevant. To qualify as a REIT, we must distribute at least 90% of our REIT taxable income prior to net capital gains to our shareowners, as well as meet certain other requirements. We must pay these distributions in the taxable year the income is recognized, or in the following taxable year if they are declared during the last three months of the taxable year, payable to shareowners of record on a specified date during such period and paid during January of the following year. Such distributions are treated as paid by us and received by our shareowners on December 31 of the year in which they are declared. In addition, at our election, a distribution for a taxable year may be declared in the following taxable year if it is declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. These distributions qualify as dividends paid for the 90% REIT distribution test for the previous year and are taxable to holders of our capital stock in the year in which paid. Preferred dividends accrue regardless of whether earnings, cash availability, or contractual obligations were to prohibit the current payment of dividends.

The annual determination of our common dividends is based on anticipated FFO available after preferred dividends and our REIT taxable income, as well as assessments of annual capital spending, financing considerations, and other appropriate factors.

Any inability of the Operating Partnership or its Joint Ventures to secure financing as required to fund maturing debts, capital expenditures and changes in working capital, including development activities and expansions, may require the utilization of cash to satisfy such obligations, thereby possibly reducing distributions to partners of the Operating Partnership and funds available to us for the payment of dividends.

On March 3, 2016, we declared a quarterly dividend of $0.595 per common share, $0.40625 per share on our 6.5% Series J Preferred Stock, and $0.390625 per share on our 6.25% Series K Preferred Stock, all of which were paid on March 31, 2016 to shareowners of record on March 15, 2016.
New Accounting Pronouncements

Refer to "Note 15 - New Accounting Pronouncements" in the consolidated financial statements, regarding our ongoing evaluation of ASU No. 2014-09 and ASU No. 2015-14, addressing revenue recognition, ASU No. 2016-02, addressing leases, and ASU No. 2016-01, addressing the measurement of financial assets and financial liabilities.



45

Non-GAAP Measures

Use of Non-GAAP Measures

We use NOI as an alternative measure to evaluate the operating performance of centers, both on individual and stabilized portfolio bases. We define NOI as property-level operating revenues (includes rental income excluding straight-line adjustments of minimum rent) less maintenance, taxes, utilities, promotion, ground rent (including straight-line adjustments), and other property operating expenses. Since NOI excludes general and administrative expenses, pre-development charges, interest income and expense, depreciation and amortization, impairment charges, restructuring charges, and gains from land and property dispositions, it provides a performance measure that, when compared period over period, reflects the revenues and expenses most directly associated with owning and operating rental properties, as well as the impact on their operations from trends in mall tenant sales, occupancy and rental rates, and operating costs. We also use NOI excluding lease cancellation income as an alternative measure because this income may vary significantly from period to period, which can affect comparability and trend analysis. We generally provide separate projections for expected NOI growth and our lease cancellation income.

The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items, sales of properties, and impairment write-downs of depreciable real estate, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is a useful supplemental measure of operating performance for REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, we and most industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of REITs. We primarily use FFO in measuring performance and in formulating corporate goals and compensation.

We may also present adjusted versions of NOI and FFO when used by management to evaluate our operating performance when certain significant items have impacted our results that affect comparability with prior or future periods due to the nature or amounts of these items. In addition to the reasons noted above for each measure, we believe the disclosure of the adjusted items is similarly useful to investors and others to understand management's view on comparability of such measures between periods.

Our presentations of NOI and FFO, and adjusted versions of these measures, if any, are not necessarily comparable to the similarly titled measures of other REITs due to the fact that not all REITs use the same definitions. These measures should not be considered alternatives to net income or as an indicator of our operating performance. Additionally, these measures do not represent cash flows from operating, investing, or financing activities as defined by GAAP. Reconciliations of Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations and Net Income to Net Operating Income are presented in the following section.

Reconciliation of Non-GAAP Measures

The following includes reconciliations of our non-GAAP financial measures: Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations and Net Income to Net Operating Income.


46

Reconciliation of Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations
 
Three Months Ended March 31
 
2016
 
2015
 
Dollars in millions
 
Diluted Shares/ Units
 
Per Share/ Unit
 
Dollars in millions
 
Diluted Shares/ Units
 
Per Share/ Unit
Net income attributable to TCO common shareowners - Basic
$
24.6

 
60,275,004

 
$
0.41

 
$
29.6

 
63,039,777

 
$
0.47

Add impact of share-based compensation
0.1

 
515,997

 
 
 
0.1

 
895,503

 
 
Net income attributable to TCO common shareowners - Diluted
$
24.7

 
60,791,001

 
$
0.41

 
$
29.7

 
63,935,280

 
$
0.47

Add depreciation of TCO's additional basis
1.6

 
 
 
0.03

 
1.6

 
 
 
0.03

Add (less) TCO's additional income tax expense (benefit)
—

 
 
 
—

 
0.2

 
 
 
—

Net income attributable to TCO common shareowners, excluding step-up depreciation and additional income tax expense (benefit)
$
26.3

 
60,791,001

 
$
0.43

 
$
31.5

 
63,935,280

 
$
0.49

Add:
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling share of income of TRG
10.9

 
25,062,159

 
 
 
12.5

 
25,104,110

 
 
Distributions to participating securities of TRG
0.5

 
871,262

 
 
 
0.5

 
871,262

 
 
Net income attributable to partnership unitholders and participating securities of TRG
$
37.7

 
86,724,422

 
$
0.43

 
$
44.5

 
89,910,652

 
$
0.50

Add (less) depreciation and amortization (1):
 
 
 
 
 
 
 
 
 
 
 
Consolidated businesses at 100%
29.7

 
 
 
0.34

 
24.0

 
 
 
0.27

Depreciation of TCO’s additional basis
(1.6
)
 
 
 
(0.02
)
 
(1.6
)
 
 
 
(0.02
)
Noncontrolling partners in consolidated joint ventures
(1.4
)
 
 
 
(0.02
)
 
(1.1
)
 
 
 
(0.01
)
Share of Unconsolidated Joint Ventures
9.3

 
 
 
0.11

 
8.1

 
 
 
0.09

Non-real estate depreciation
(0.6
)
 
 
 
(0.01
)
 
(0.9
)
 
 
 
(0.01
)
Less impact of share-based compensation
(0.1
)
 
 
 
—

 
(0.1
)
 
 
 
—

Funds from Operations attributable to partnership unitholders and participating securities of TRG
$
73.0

 
86,724,422

 
$
0.84

 
$
72.9

 
89,910,652

 
$
0.81

TCO's average ownership percentage of TRG - basic
70.6
%
 
 
 
 
 
71.5
%
 
 
 
 
Funds from Operations attributable to TCO's common shareowners, excluding additional income tax benefit (expense)
$
51.6

 
 
 
$
0.84

 
$
52.1

 
 
 
$
0.81

Add (less) TCO's additional income tax benefit (expense)
—

 
 
 
—

 
(0.2
)
 
 
 
—

Funds from Operations attributable to TCO's common shareowners
$
51.6

 
 
 
$
0.84

 
$
52.0

 
 
 
$
0.81


(1)
Depreciation includes $3.5 million and $3.2 million of mall tenant allowance amortization for the three months ended March 31, 2016 and 2015, respectively.
(2)
Amounts in this table may not recalculate due to rounding.


47

Reconciliation of Net Income to Net Operating Income

 
Three Months Ended March 31
 
 
(in millions)
 
 
2016
 
2015
 
Net income
$
44.3

 
$
51.0

 
 
 
 
 
 
Add (less) depreciation and amortization:
 
 
 
 
Consolidated businesses at 100%
29.7

 
24.0

 
Noncontrolling partners in consolidated joint ventures
(1.4
)
 
(1.1
)
 
Share of Unconsolidated Joint Ventures
9.3

 
8.1

 
 
 
 
 
 
Add (less) interest expense and income tax expense:
 
 
 
 
Interest expense:
 
 
 
 
Consolidated businesses at 100%
19.1

 
13.5

 
Noncontrolling partners in consolidated joint ventures
(2.0
)
 
(1.7
)
 
Share of Unconsolidated Joint Ventures
11.5

 
11.4

 
Income tax expense
0.3

 
0.8

 
 
 
 
 
 
Less noncontrolling share of income of consolidated joint ventures
(2.5
)
 
(2.6
)
 
 
 
 
 
 
Add EBITDA attributable to outside partners:
 
 
 
 
EBITDA attributable to noncontrolling partners in consolidated joint ventures
5.9

 
5.3

 
EBITDA attributable to outside partners in Unconsolidated Joint Ventures
30.9

 
28.5

 
 
 
 
 
 
EBITDA at 100%
$
145.3

 
$
137.3

 
 
 
 
 
 
Add (less) items excluded from shopping center Net Operating Income:
 
 
 
 
General and administrative expenses
11.4

 
11.9

 
Management, leasing, and development services, net
(0.9
)
 
(1.8
)
 
Straight-line of rents
(1.1
)
 
(0.7
)
 
Gain on sale of peripheral land
(0.4
)
 


 
Dividend income
(0.9
)
 
(0.8
)
 
Interest income
(0.5
)
 
(0.7
)
 
Other nonoperating expense
0.1

 
0.2

 
Non-center specific operating expenses and other
10.0

 
8.6

(1) 
Net Operating Income at 100% - all centers
$
163.0

 
$
154.0

 
Less Net Operating Income of non-comparable centers (2)
(13.9
)
 
(10.9
)
 
Net Operating Income at 100% - comparable centers
$
149.1

 
$
143.1

 
Lease cancellation income
(2.0
)
 
(3.9
)
 
Net Operating Income at 100% excluding lease cancellation income (3)
$
147.1

 
$
139.1

 

(1)
In 2016, we stopped allocating certain corporate-level operating expenses to the centers to better reflect the performance of the centers without regard to corporate infrastructure. These expenses, which were previously recognized in other operating expenses of the centers, are now recognized in non-center specific other operating expenses. The 2015 comparable amount of other operating expenses allocated to the centers was $4.2 million at 100%.
(2)
Includes Beverly Center, Country Club Plaza, and The Mall of San Juan.
(3) See "Non-GAAP Measures - Use of Non-GAAP Measures" above for a discussion of the use and utility of Net Operating Income excluding lease cancellation income as a performance measure.
(4) Amounts in this table may not add due to rounding.


48

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in this report at Item 2 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Sensitivity Analysis.”

Item 4.
Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2016, our disclosure controls and procedures were effective to ensure the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods prescribed by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


49

PART II
OTHER INFORMATION

Item 1.
Legal Proceedings

There was no material outstanding litigation as of March 31, 2016.

Item 1 A.
Risk Factors

There were no material changes in our risk factors previously disclosed in Part I, Item 1A. of our Form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In August 2013, our Board of Directors authorized a share repurchase program under which we may repurchase up to $200 million of our outstanding common stock. In March 2015, our Board of Directors increased the authorization by $250 million, bringing the total authorization to $450 million. We may repurchase shares from time to time on the open market or in privately negotiated transactions or otherwise, depending on market prices and other conditions. No shares were repurchased in the first quarter of 2016. As of March 31, 2016, we cumulatively repurchased 4,247,867 shares of our common stock at an average price of $71.79 per share for a total of $304.9 million under the authorization. As of March 31, 2016, $145.1 million remained available under the repurchase program. All shares repurchased have been cancelled. For each share of our stock repurchased, one of our Operating Partnership units was redeemed. Repurchases of common stock were financed through general corporate funds, including borrowings under our existing revolving lines of credit.

The restrictions on our ability to pay dividends on our common stock are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Dividends".

50

Item 6. Exhibits
 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
Period Ending
 
Exhibit
 
Filing Date
 
Filed Herewith
12
 
Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
 
 
 
 
 
 
 
 
 
X
31.1
 
Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
31.2
 
Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
99
 
Debt Maturity Schedule
 
 
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X

51

SIGNATURES

Pursuant to the requirements of the Securities Exchange 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:
May 3, 2016
By: /s/ Simon J. Leopold                                                                  
 
 
Simon J. Leopold
 
 
Chief Financial Officer (Principal Financial Officer)

52

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