Add
TCO to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TCO > SEC Filings for TCO > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
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, including the following: statements regarding future developments
and joint ventures, rents, returns, and earnings; statements regarding the
continuation of trends; and any statements regarding the sufficiency of our cash
balances and cash generated from operating, investing, and financing activities
for our future liquidity and capital resource needs. We caution that although
forward-looking statements reflect our good faith beliefs and best judgment
based upon current information, these statements are qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, because of risks, uncertainties, and factors
including, but not limited, to the ongoing U.S. recession, the existing global
credit and financial crisis and other changes in general economic and real
estate conditions, changes in the interest rate environment and the availability
of financing, and adverse changes in the retail industry. Other risks and
uncertainties are detailed from time to time in reports filed with the 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, which 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, lease, develop, acquire, dispose of, and operate regional and super-regional shopping centers. 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). In September 2008, we acquired the interests of the owner of The Mall at Partridge Creek (Partridge Creek). Prior to the acquisition, we consolidated the accounts of the owner of Partridge Creek, which qualified as a variable interest entity under Financial Accounting Standards Board Interpretation No. 46R "Consolidation of Variable Interest Entities" for which the Operating Partnership was considered to be the primary beneficiary. 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. Also, the operations of the shopping centers are often best understood by measuring their performance as a whole, without regard to our ownership interest. Consequently, in addition to the discussion of the operations of the Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are presented and discussed as a whole.
Current Operating Trends
The real estate industry continues to face very difficult times due to the current recession and tough capital market and retail environment. There continues to be considerable uncertainty as to how severe the current recession may be and how long it may continue. We continue to expect a negative impact on our business in 2009, and we expect that the economy will continue to strain the resources of our tenants and their customers. Retailers are looking at an uncertain 2009, and in this environment, retailer capital spending has significantly decreased. We continue to expect that retailers will want to delay any openings into either 2010 or 2011 whenever possible. In addition, a number of regional and national retailers have announced store closings or filed for bankruptcy. During the three months ended March 31, 2009, 1.1% of our tenants sought the protection of the bankruptcy laws, compared to 0.9% in the comparable period in 2008. It is difficult to predict when the environment will improve.
We are also seeing the impact of the current recession on our tenants' sales, which continued to decrease during the quarter. Our mall tenants reported a 13.5% decrease in sales per square foot in the first quarter of 2009 from the same period in 2008. For the twelve month period ended March 31, 2009, mall tenant sales per square foot decreased by 6.6% to $522 per square foot. Sales were also impacted by a later Easter than in 2008. Tenant sales and sales per square foot information are operating statistics used in measuring the productivity of the portfolio and are based on reports of sales furnished by mall tenants. 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 because mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses (together, total occupancy costs) that mall tenants can afford to pay. However, levels of mall tenant sales can be considerably more volatile in the short run than total occupancy costs, 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.
Sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in sales on our operations are moderated by the relatively minor share of total rents that percentage rents represent of total rents. However, in this environment and depending on actual sales, especially in the fourth quarter, we do expect a significant decrease in this income in 2009.
While sales are critical over the long term, the high quality regional mall business has historically 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. While retailers continue to recognize the need to position themselves for the future, in the current environment, we are finding that negotiations are more difficult.
In the first quarter of 2009, ending occupancy decreased to 88.6% compared to 89.9% in the first quarter of 2008. This decline is largely due to three big box anchor store locations, which are part of national bankruptcies, that closed late in 2008 at our value centers. We continue to anticipate occupancy will decrease in 2009 by approximately 2% as of year end compared with year end 2008. However, the impact on income will be somewhat offset by a higher level of temporary tenant leasing in 2009. See "Seasonality" for occupancy and leased space statistics. Temporary tenants, defined as those with lease terms less than 12 months, are not included in occupancy or leased space statistics. As of March 31, 2009, approximately 2.1% of mall tenant space was occupied by temporary tenants, the highest level we have had in a first quarter since 2005.
Leased space was 90.5% at March 31, 2009, down 2.6% from the comparable period last year. 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. Neither statistic includes temporary tenants. We view occupancy as the more important of the two as it represents those spaces upon which we are collecting rent for permanent tenants. Finally, the spread between leased space and occupied space, about 2% this quarter, is consistent with our history of 2% to 4% 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. In periods of increasing sales, rents on new leases will generally tend to rise. In periods of slower growth or declining sales, as we are experiencing now, rents on new leases will grow more slowly or will decline for the opposite reason, as tenants' expectations of future growth become less optimistic. Rent per square foot information for our Consolidated Businesses and Unconsolidated Joint Ventures follows:
Three Months
Ended March 31
2009 2008
Average rent per square foot:
Consolidated Businesses $ 43.96 $ 43.64
Unconsolidated Joint Ventures 45.08 44.24
Opening base rent per square foot:
Consolidated Businesses $ 42.60 $ 52.54
Unconsolidated Joint Ventures 51.22 59.74
Square feet of GLA opened:
Consolidated Businesses 388,533 306,885
Unconsolidated Joint Ventures 135,792 151,590
Closing base rent per square foot:
Consolidated Businesses $ 38.48 $ 45.68
Unconsolidated Joint Ventures 50.10 46.22
Square feet of GLA closed:
Consolidated Businesses 561,396 403,707
Unconsolidated Joint Ventures 164,864 231,450
Releasing spread per square foot:
Consolidated Businesses $ 4.12 $ 6.86
Unconsolidated Joint Ventures 1.12 13.52
|
Despite the increase in average rent per square foot in the first quarter of 2009, we expect the year to be slightly down. 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.
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.
1st 4th 3rd 2nd 1st
Quarter Total Quarter Quarter Quarter Quarter
2009 2008 2008 2008 2008 2008
(in thousands of dollars, except occupancy and leased space data)
Mall tenant sales (1) 941,469 4,654,885 1,342,748 1,112,502 1,116,027 1,083,608
Revenues and gains on
land sales
and other nonoperating
income:
Consolidated Businesses 157,925 676,067 190,855 164,124 161,868 159,220
Unconsolidated Joint
Ventures 66,144 272,496 77,277 67,169 63,657 64,393
Occupancy and leased
space:
Ending occupancy 88.6 % 90.3 % 90.3 % 90.5 % 90.1 % 89.9 %
Average occupancy 88.8 90.3 90.7 90.4 90.0 90.0
Leased space 90.5 91.8 91.8 92.4 92.7 93.1
|
(1) Based on reports of sales furnished by mall tenants.
Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum rents, percentage rents, and expense recoveries) as a percentage of sales are considerably higher in the first three quarters than they are in the fourth quarter.
1st 4th 3rd 2nd 1st
Quarter Total Quarter Quarter Quarter Quarter
2009 2008 2008 2008 2008 2008
Consolidated
Businesses:
Minimum rents 12.1 % 9.6 % 8.8 % 9.9 % 9.9 % 10.2 %
Percentage rents 0.3 0.4 0.6 0.3 0.2 0.3
Expense recoveries 6.0 5.4 5.4 5.4 5.3 5.3
Mall tenant occupancy
costs 18.4 % 15.4 % 14.8 % 15.6 % 15.4 % 15.8 %
Unconsolidated Joint
Ventures:
Minimum rents 10.9 % 8.9 % 7.9 % 9.5 % 9.3 % 9.2 %
Percentage rents 0.3 0.4 0.6 0.4 0.0 0.4
Expense recoveries 4.9 4.6 4.9 4.8 4.4 4.2
Mall tenant occupancy
costs 16.1 % 13.9 % 13.4 % 14.7 % 13.7 % 13.8 %
|
Center Operations
As a result of the current recession, which has negatively impacted our operating statistics as discussed in the previous sections, we expect that net operating income of our centers, excluding lease cancellation income, interest and depreciation and amortization, may decrease from 3.5% to 5% in 2009. Lower tenant sales for our weaker tenants may result in increased early terminations, rent relief, bankruptcies and bad debt, in addition to reduced percentage rent income. Bankruptcies for the quarter were 1.1%, which were slightly higher than last year. We expect that bankruptcies will increase if sales don't soon improve significantly, and bad debt is likely to increase as well.
In addition, due to current economic conditions, we would expect that certain shopping center related revenues that are based on month to month or shorter term contracts, primarily sponsorship and retail marketing units income, may decrease significantly in 2009.
We expect to recover a lower percentage of common area maintenance (CAM) and other fixed costs from our tenants due to decreased occupancy and a negative impact from reduced CAM capital related revenue. The expense relating to CAM capital is included in depreciation.
Results of Operations
In addition to the trends in our operations disclosed in the preceding sections, the following sections discuss certain transactions that affected operations in the three month periods ended March 31, 2009 and 2008, or are expected to impact operations in the future.
Restructuring
In 2009, in response to the decreased level of active projects due to the downturn in the economy, we reduced our workforce by about 40 positions, primarily in areas that directly or indirectly affect our development initiatives in the U.S. and Asia. A restructuring charge of $2.5 million was recorded in the first quarter of 2009, which primarily represents the cost of terminations of personnel.
Oyster Bay
On January 27, 2009, the Appellate Division of the Supreme Court of the State of New York, Second Department, reversed the order in favor of us dated June 9, 2008, compelling the Town Board of the Town of Oyster Bay to issue a special use permit for the construction of The Mall at Oyster Bay. The court also held that the Town Board's request for a supplemental environmental impact statement was proper. We subsequently moved in the Appellate Division for leave to reargue the appeal or, in the alternative, for leave to appeal to the Court of Appeals of the State of New York, which was denied. We plan to move in the Court of Appeals for leave to appeal to that Court. We are expensing costs relating to Oyster Bay until it is probable that we will be able to successfully move forward with a project. We began expensing carrying costs as incurred in the fourth quarter of 2008.
Taubman Asia
In 2008, Taubman Asia entered into agreements to acquire a 25% interest in The Mall at Studio City, the retail component of Macao Studio City, a major mixed-use project on the Cotai Strip in Macao, China. In addition, Taubman Asia entered into long-term agreements to perform development, management, and leasing services for the shopping center. Macao is a project that has been clearly impacted by the financial crisis and was put on hold when financing could not be arranged. Excluding the $54 million initial cash payment, which is in escrow, we had capitalized costs of $2.5 million on the Macao project as of March 31, 2009. Offsetting these costs, we received a $2.5 million non-refundable development fee payment in October 2008 from the owner of the Macao project, which was recorded as deferred revenue. In August 2009, our Macao agreements will terminate and our $54 million initial cash payment will be returned to us if the financing for the project is not completed. No interest is being capitalized on this payment. We began expensing costs relating to the project in the third quarter of 2008.
In 2007, we entered into an agreement to provide development services for a 1.1 million square foot retail and entertainment complex in Songdo International Business District (Songdo), Incheon, South Korea. We also finalized an agreement to provide management and leasing services for the retail component and we continue to provide services as the regional mall progresses. The shopping center will be anchored by Lotte Department Store, Tesco Homeplus, and a nine-screen Megabox multiplex. Progress has been made on the mall infrastructure and parking. We will not make a final determination about an investment in this center until full financing is completed.
Presentation of Operating Results
Income Allocation
The following table contains the operating results of our Consolidated Businesses and the Unconsolidated Joint Ventures. On January 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin (ARB) No. 51." Consequently, the noncontrolling interests in the Operating Partnership and certain consolidated joint ventures no longer need to be carried at zero balances in our balance sheet. As a result, the income allocated to these noncontrolling interests is no longer required to be equal, at a minimum, to their share of distributions, which results in a material increase to our net income. Prior to 2009, under the previous accounting for noncontrolling interests, the income allocated to the Operating Partnership noncontrolling unitholders was equal to their share of distributions as long as the net equity of the Operating Partnership was less than zero. Similarly, the income allocated to the noncontrolling partners in consolidated joint ventures with net equity balances less than zero was equal to their share of operating distributions. The net equity balances of the Operating Partnership and certain of the consolidated joint ventures were less than zero because of accumulated distributions in excess of net income and not as a result of operating losses. Distributions to partners were usually greater than net income because net income includes non-cash charges for depreciation and amortization. Our average ownership percentage of the Operating Partnership was 67% during the three months ended March 31, 2009 and 66% during the three months ended March 31, 2008.
Upon our adoption of SFAS No. 160, net income was reclassified to include the amounts attributable to the noncontrolling interests.
Use of Non-GAAP Measures
The operating results in the following table include the supplemental earnings measures of Beneficial Interest in EBITDA and Funds from Operations (FFO). Beneficial Interest in EBITDA represents our share of the earnings before interest, income taxes, and depreciation and amortization of our consolidated and unconsolidated businesses. We believe Beneficial Interest in EBITDA provides a useful indicator of operating performance, as it is customary in the real estate and shopping center business to evaluate the performance of properties on a basis unaffected by capital structure.
The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items and sales of properties, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. 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.
Our presentations of Beneficial Interest in EBITDA and FFO 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, neither represents 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 Beneficial Interest in EBITDA are presented following the Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008.
Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended
March 31, 2008
The following table sets forth operating results for the three months ended
March 31, 2009 and March 31, 2008, showing the results of the Consolidated
Businesses and Unconsolidated Joint Ventures:
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT VENTURES CONSOLIDATED JOINT VENTURES
BUSINESSES AT 100%(1) BUSINESSES AT 100%(1)
(in millions of dollars)
REVENUES:
Minimum rents 87.4 39.0 86.6 38.4
Percentage rents 2.2 1.1 2.6 1.5
Expense recoveries 56.8 23.8 57.5 22.4
Management, leasing, and development
services 3.6 3.7
Other 7.8 2.2 7.1 1.8
Total revenues 157.7 66.1 157.4 64.1
EXPENSES:
Maintenance, taxes, and utilities 44.5 16.0 43.5 15.3
Other operating 15.0 6.4 18.3 6.5
Restructuring charge 2.5
Management, leasing, and development
services 1.9 2.3
General and administrative 6.9 8.3
Interest expense 36.2 16.0 37.0 15.9
Depreciation and amortization (2) 36.3 9.4 35.3 9.6
Total expenses 143.3 47.8 144.7 47.4
Gains on land sales and other
nonoperating income 0.2 0.1 1.8 0.3
14.6 18.3 14.5 17.0
Income tax expense (0.3 ) (0.2 )
Equity in income of Unconsolidated Joint
Ventures (2) 10.2 9.2
Net income 24.5 23.5
Net income attributable to
noncontrolling interests:
Noncontrolling share of income of
consolidated
joint ventures (1.7 ) (1.2 )
Distributions in excess of
noncontrolling share of
income of consolidated joint ventures (2.1 )
TRG Series F preferred distributions (0.6 ) (0.6 )
Noncontrolling share of income of TRG (6.6 ) (5.9 )
Distributions in excess of
noncontrolling share of
income of TRG (5.1 )
Distributions to participating
securities of TRG (0.5 ) (0.4 )
Series G and H preferred stock dividends (3.7 ) (3.7 )
Net income attributable to Taubman
. . .
|
|
|