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TCO > SEC Filings for TCO > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for TAUBMAN CENTERS INC

Form 10-K for TAUBMAN CENTERS INC


26-Feb-2014

Annual Report


Item 7. 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. The following discussion should be read in conjunction with the accompanying consolidated financial statements of Taubman Centers, Inc. and the notes thereto, as well as "Risk Factors" elsewhere in this report.

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. 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. The comparability of information used in measuring performance is affected by the opening of City Creek Center in March 2012 and Taubman Prestige Outlets Chesterfield (Chesterfield) in August 2013. Additional "comparable center" statistics that exclude City Creek Center and Chesterfield are provided to present the performance of comparable centers in our continuing operations. Comparable centers are generally defined as centers that were owned and open for the entire current and preceding period. See "Results of Operations - Development" for background and information on these centers. Comparable center statistics for 2012 have been restated to include comparable centers to 2013. Additionally, as a result of the January 2014 disposition of our interest in Arizona Mills, this center has been excluded from mall tenant sales per square foot, comparable mall tenant sales, and comparable occupancy costs as a percentage of mall tenant sales statistics reported for 2013 and 2012.

Overall Summary of Management's Discussion and Analysis of Financial Condition and Results of Operations

Our primary source of revenue is from the leasing of space in our shopping centers. Generally these leases are long term, with our average lease term of new leases at approximately eight years during 2013 and 2012, excluding temporary leases. Therefore general economic trends most directly impact our tenants' sales and consequently their ability to perform under their existing lease agreements and expand into new locations as well as our ability to find new tenants for our shopping centers and increase rent per square foot.

For the fourth quarter of 2013, tenant sales per square foot increased 1.4% from the corresponding period in the prior year. For all of 2013, tenant sales per square foot were $721, a 1.8% increase from 2012 (see "Mall Tenant Sales and Center Revenues").

Ending occupancy was 92.1% for comparable centers at December 31, 2013, up 0.3% from 2012. We anticipate 2014 year-end occupancy will be about even with 2013. Rent per square foot increased 4.5% in 2013. We expect that average rents per square foot in 2014 will be up in comparison to 2013 by about 4%. The rents we are able to achieve are affected by economic trends and tenants' expectations thereof, as described under "Rental Rates and Occupancy." The spread between rents on openings and closings 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. Mall tenant sales, occupancy levels, and our resulting revenues are seasonal in nature (see "Seasonality").

Our analysis of our financial results begins under "Results of Operations" and we provide information about transactions that affected the periods presented or will affect operations in the future.


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We have been active in developing and expanding our U.S. shopping center portfolio, including the opening of Chesterfield in 2013 and City Creek Center in 2012. We also have two U.S. development projects under construction: The Mall at University Town Center and The Mall of San Juan. We are breaking ground on a redevelopment of International Market Place in Waikiki, Honolulu, Hawaii in early March 2014. (see "Liquidity and Capital Resources - Capital Spending - New Developments").

In January 2014, we sold a total of 49.9% of our interests in the entity that owns International Plaza, which we had 100% ownership of as the result of acquiring a a 49.9% ownership interest in 2012. Also in January 2014, we sold our 50% interest in Arizona Mills and land in Syosset, New York related to our former Oyster Bay project (See "Results of Operations - U.S. Dispositions"). In 2012, we acquired an additional 25% interest in Waterside Shops. In 2011, we completed the purchases of The Mall at Green Hills, The Gardens on El Paseo and El Paseo Village (see "Results of Operations - U.S. Acquisitions").

Dispositions of The Pier Shops at Caesars (The Pier Shops) and Regency Square were completed in November and December of 2011, respectively. Titles to the properties were transferred to the mortgage lenders. As a result, we were relieved of our $207.2 million of debt obligations plus accrued interest associated with the properties. See "Results of Operations - U.S. Dispositions" for further discussion.

We also describe our growth activities in Asia with updates on our investments in new development projects, including CityOn.Xi'an, CityOn.Zhengzhou, and Hanam Union Square, as well as service agreements for IFC Mall in South Korea and the Studio City retail project in the Cotai region of Macau, China (see "Results of Operations - Taubman Asia"). In 2012, we sold assets of the Taubman TCBL business that was acquired in 2011 (see "Results of Operations - Taubman Asia").

We have certain additional sources of income beyond our rental revenues, recoveries from tenants, and revenue from management, leasing, and development services. We disclose our share of these sources of income under "Results of Operations - Other Income." Expectations about general and administrative and pre-development expenses are discussed under "Results of Operations - Other Expenses."

We have been very active in managing our balance sheet and beneficial interest in debt, completing an unsecured term loan to payoff our loan on Beverly Center, construction financing for The Mall at University Town Center, an increase, extension of, and conversion to unsecured of our primary revolving line of credit, payoff of our loan on Stony Point Fashion Park (Stony Point) in 2014, and financings or refinancings of City Creek Center, The Mall at Green Hills, Great Lakes Crossings Outlets, and other centers as outlined under "Results of Operations - Debt Transactions."

We have similarly been active in the equity markets. During 2013, we repurchased $52.3 million of common stock under a share repurchase program. Also in 2013, we completed a preferred stock offering of $170 million of 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock ) (see "Results of Operations - Other Equity Transactions"). In 2012, we redeemed the Series G and H Cumulative Redeemable Preferred Stock (Series G and H Preferred Stock), completed a preferred stock offering of $192.5 million of 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock), and a common equity offering of 2,875,000 common shares (see "Results of Operations - Other Equity Transactions").

As information useful to understanding our results, we have described the reasons for our use of non-GAAP measures such as Beneficial Interest in EBITDA and Funds from Operations (FFO) under "Results of Operations - Use of Non-GAAP Measures."

With all the preceding information as background, we then provide insight and explanations for variances in our financial results for 2013, 2012, and 2011 under "Comparison of 2013 to 2012" and "Comparison of 2012 to 2011." We then discuss our application of critical accounting policies and then provide reconciliations from net income and net income allocable to common shareowners to our non-GAAP measures.

Our discussion of sources and uses of capital resources under "Liquidity and Capital Resources" begins with a brief overview of our financial position as of December 31, 2013. We then discuss our capital activities and transactions that occurred in 2013. After that, analysis of specific operating, investing, and financing activities is provided in more detail.

Specific analysis of our fixed and floating rates and periods of interest rate risk exposure is provided under "Liquidity and Capital Resources - Beneficial Interest in Debt." Completing our analysis of our exposure to rates are the effects of changes in interest rates on our cash flows and fair values of debt contained under "Liquidity and Capital Resources - Sensitivity Analysis." Also see "Liquidity and Capital Resources - Loan Commitments and Guarantees" for a discussion of compliance with debt covenants.


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In conducting our business, we enter into various contractual obligations, including those for debt, operating leases for land and office space, purchase obligations, and other long-term commitments. Detail of these obligations, including expected settlement periods, is contained under "Liquidity and Capital Resources - Contractual Obligations." Property-level debt represents the largest single class of obligations. Described under "Liquidity and Capital Resources - Loan Commitments and Guarantees" and "Liquidity and Capital Resources - Cash Tender Agreement and Other" are our significant guarantees and commitments.

The Mall at University Town Center, our project in Sarasota, Florida, is scheduled to open in October 2014. We also have development projects including The Mall of San Juan, International Market Place, CityOn.Xi'an, CityOn.Zhengzhou and Hanam Union Square, all of which are expected to open over the next several years. We also provide information on our capital spending in 2013 and 2012, as well as planned capital spending for 2014 and spending scheduled for all new center projects through their anticipated opening dates (see "Liquidity and Capital Resources - Capital Spending").

Dividends and distributions are also significant uses of our capital resources. The factors considered when determining the amount of our dividends, including requirements arising because of our status as a REIT, are described under "Liquidity and Capital Resources - Dividends."

Mall Tenant Sales and Center Revenues

Our mall tenants reported a 1.4% increase in sales per square foot in the fourth quarter of 2013 compared to the corresponding period in the prior year. For all of 2013, our tenant sales increased 1.8% over 2012 to a new record level for our centers of $721 per square foot.

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 tenants to pay occupancy costs and earn profits over long periods of time increases as 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 tenant sales at higher sales per square foot.

Tenant sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in tenant sales on our operations are moderated by the relatively minor share of total rents that percentage rents represent. Over the last five years, percentage rent as a share of total rent has ranged from 3% to 7%.

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 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.


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The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of mall tenant sales:

                                                     2013            2012            2011
Mall tenant sales (in thousands) (1)             $ 6,180,095     $ 6,008,265     $ 5,164,916
Sales per square foot                                    721             708             641

Consolidated Businesses:
Minimum rents                                            8.3 %           8.1 %           8.4 %
Percentage rents                                         0.6             0.6             0.5
Expense recoveries                                       4.3             4.1             4.5
Mall tenant occupancy costs as a percentage of
mall tenant sales                                       13.2 %          12.8 %          13.4 %
Unconsolidated Joint Ventures:
Minimum rents                                            8.1 %           7.7 %           7.9 %
Percentage rents                                         0.5             0.5             0.5
Expense recoveries                                       4.0             4.0             3.8
Mall tenant occupancy costs as a percentage of
mall tenant sales                                       12.6 %          12.2 %          12.2 %
Combined:
Minimum rents                                            8.2 %           8.0 %           8.2 %
Percentage rents                                         0.5             0.5             0.5
Expense recoveries                                       4.3             4.2             4.3
Mall tenant occupancy costs as a percentage of
mall tenant sales                                       13.0 %          12.7 %          13.0 %

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

Rental Rates and Occupancy

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. Average rent per square foot in 2014 is expected to be up about 4%. Rent per square foot information for centers in our Consolidated Businesses and Unconsolidated Joint Ventures follows:


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                                                  2013 (1) (2)      2012 (1) (2)      2011 (1) (2)
Average rent per square foot:
Consolidated Businesses                          $       48.45     $       46.86     $       45.53
Unconsolidated Joint Ventures                            48.69             45.44             44.58
Combined                                                 48.52             46.42             45.22
Opening base rent per square foot:
Consolidated Businesses                          $       48.26     $       55.78     $       59.31
Unconsolidated Joint Ventures                            60.47             54.95             45.42
Combined                                                 51.99             55.59             56.20
Square feet of GLA opened:
Consolidated Businesses                                871,518           932,775           989,260
Unconsolidated Joint Ventures                          383,037           278,651           285,919
Combined                                             1,254,555         1,211,426         1,275,179
Closing base rent per square foot:
Consolidated Businesses                          $       44.25     $       45.94     $       49.27
Unconsolidated Joint Ventures                            47.93             50.50             43.98
Combined                                                 45.27             47.07             47.93
Square feet of GLA closed:
Consolidated Businesses                                892,728           916,345         1,013,284
Unconsolidated Joint Ventures                          343,381           301,724           344,799
Combined                                             1,236,109         1,218,069         1,358,083
Releasing spread per square foot:
Consolidated Businesses                          $        4.01     $        9.84     $       10.04
Unconsolidated Joint Ventures                            12.54              4.45              1.44
Combined                                                  6.72              8.52              8.27
Releasing spread per square foot growth:
Consolidated Businesses                                    9.1 %            21.4 %            20.4 %
Unconsolidated Joint Ventures                             26.2 %             8.8 %             3.3 %
Combined                                                  14.8 %            18.1 %            17.3 %

(1) Statistics exclude non-comparable centers.
(2) Opening and closing statistics exclude spaces greater than 10,000 square feet.

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.

Mall tenant ending occupancy, average occupancy, and leased space rates are as follows:

                                        2013     2012     2011
Ending occupancy - all centers         91.7 %   91.8 %   90.7 %
Ending occupancy - comparable centers  92.1     91.8
Average occupancy - all centers        90.9     90.3     88.8
Average occupancy - comparable centers 91.1     90.4
Leased space - all centers             93.1     93.4     92.4
Leased space - comparable centers      93.6     93.3


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We expect 2014 year-end occupancy will be about even with 2013. Temporary tenant leasing continues to be strong and ended the year at about 4.2% for comparable centers compared to 5% in 2012 and 4.9% in 2011. Temporary tenants, defined as those with lease terms less than or equal to a year, are not included in occupancy or leased space statistics. Tenant bankruptcy filings as a percentage of the total number of tenant leases was 0.3% in 2013, compared to 0.7% in 2012, and 1.5% in 2011.

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.

                                                                2013
                                Total        4th quarter     3rd quarter     2nd quarter     1st quarter
                                       (in thousands, except occupancy and leased space data)
Mall tenant sales (1)       $ 6,180,095     $ 1,913,865     $ 1,405,246     $ 1,406,196     $ 1,454,788
Revenues and nonoperating
income (expense):
Consolidated Businesses         768,502         211,289         193,482         178,237         185,494
Unconsolidated Joint
Ventures                        294,714          85,531          71,858          69,766          67,559
Occupancy:
Ending - comparable                92.1 %          92.1 %          91.3 %          90.6 %          90.2 %
Average - comparable               91.1            92.0            91.1            90.6            90.4
Ending - all centers               91.7            91.7            90.9            90.7            90.3
Average - all centers              90.9            91.6            90.8            90.7            90.4
Leased Space:
Comparable                         93.6 %          93.6 %          93.1 %          92.5 %          92.3 %
All centers                        93.1            93.1            92.6            92.6            92.4

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


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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, excluding utilities) as a percentage of sales are considerably higher in the first three quarters than they are in the fourth quarter.

                                                                  2013
                                 Total       4th quarter     3rd quarter     2nd quarter     1st quarter
Consolidated Businesses:
Minimum rents                       8.3 %         6.9 %           9.0 %           9.0 %           8.8 %
Percentage rents                    0.6           0.9             0.5             0.1             0.5
Expense recoveries                  4.3           3.8             4.7             4.6             4.4
Mall tenant occupancy costs        13.2 %        11.6 %          14.2 %          13.7 %          13.7 %
Unconsolidated Joint Ventures:
Minimum rents                       8.1 %         6.9 %           9.1 %           9.0 %           7.7 %
Percentage rents                    0.5           0.7             0.5             0.3             0.5
Expense recoveries                  4.0           3.8             4.5             4.3             3.8
Mall tenant occupancy costs        12.6 %        11.4 %          14.1 %          13.6 %          12.0 %
Combined:
Minimum rents                       8.2 %         6.9 %           9.0 %           9.0 %           8.5 %
Percentage rents                    0.5           0.8             0.5             0.2             0.5
Expense recoveries                  4.3           3.9             4.7             4.4             4.2
Mall tenant occupancy costs        13.0 %        11.6 %          14.2 %          13.6 %          13.2 %


Table of Contents

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 in 2013, 2012, and 2011, or are expected to affect operations in the future.

U.S. Development

In August 2013, a new outlet center, Taubman Prestige Outlets Chesterfield, opened in the western St. Louis suburb of Chesterfield. In September 2013, we redeemed our outlet joint venture partner's 10% interest in this business, increasing our ownership to 100%. City Creek Center, a mixed-use project in Salt Lake City, Utah, opened in March 2012.

Our United States development currently includes two projects that are under construction: The Mall at University Town Center, which is scheduled to open in October 2014, and The Mall of San Juan (see "Liquidity and Capital Resources - Capital Spending - New Developments"). In addition, we are progressing on projects in Waikiki, Honolulu, Hawaii and Miami, Florida (see "Liquidity and Capital Resources - Capital Spending - New Developments"), with construction expected to begin on both in 2014.

U.S. Dispositions

In January 2014, we sold a total of 49.9% of our interests in the entity that owns International Plaza, including certain governance rights, for $499 million, which consisted of $337 million of cash and approximately $162 million of beneficial interest in debt. A gain in excess of $350 million will be recognized in the first quarter of 2014. The gain on the transaction will represent the . . .

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