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TCO > SEC Filings for TCO > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Quarterly Report

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 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. 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 Taubman Prestige Outlets Chesterfield (Chesterfield) in August 2013 and the disposition of our interest in Arizona Mills in January 2014 ( See "Results of Operations - Dispositions"). Additional "comparable center" statistics that exclude Chesterfield and Arizona Mills 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. Comparable center statistics for 2013 have been restated to include comparable centers to 2014. Subsequent to the sale of a total of 49.9% of our interests in the entity that owns International Plaza, we began accounting for our remaining interest in International Plaza under the equity method of accounting. This affects the comparability of operating results for Consolidated Businesses and Unconsolidated Joint Ventures period over period.

Use of Non-GAAP Measures

We use Net Operating Income (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 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 operating results in "Results of Operations" 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 generally 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.

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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, Beneficial Interest in EBITDA, 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, Beneficial Interest in EBITDA, 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, Net Income to Beneficial Interest in EBITDA, and Net Income to Net Operating Income are presented following the Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013.

Current Operating Trends

Our mall tenants reported a 5.7% decrease in sales per square foot in the first quarter of 2014 from the same period in 2013. For the trailing twelve month period ended March 31, 2014, mall tenant sales were $712 per square foot, a 0.7% decrease from $717 per square foot for the trailing twelve month period ended March 31, 2013.

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.

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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Ending occupancy decreased to 89.6% at March 31, 2014 compared to 90.3% at March 31, 2013 for all centers and was 90.3% at both March 31, 2014 and March 31, 2013 for our comparable centers. We continue to expect ending occupancy for comparable centers to be about even with 2013. Temporary tenants, defined as those with lease terms less than or equal to a year, are not included in occupancy or leased space statistics. As of March 31, 2014, 3.4% of mall tenant space for all centers was occupied by temporary tenants compared to 3.5% as of March 31, 2013. See "Seasonality" for occupancy and leased space statistics.

Leased space was 92.1% at March 31, 2014, and 92.4% at March 31, 2013 for all centers. For our comparable centers, leased space was 92.6% at March 31, 2014, compared to 92.2% at March 31, 2013. 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 more relevant to operating results as it represents those spaces upon which we are currently collecting rent from permanent tenants. Finally, the spread between leased space and occupied space, at 2.5% 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.

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 follows:

                                      Three Months Ended March 31
                                         2014 (1)               2013 (1)
Average rent per square foot:
Consolidated Businesses       $         47.93                  $    47.68
Unconsolidated Joint Ventures           55.81                       50.78
Combined                                50.21                       48.46

(1) Statistics exclude non-comparable centers.

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                                                          Trailing 12 Months Ended March 31 (1) (2)
                                                                 2014                    2013 (3)
Opening base rent per square foot:
Consolidated Businesses                                $           44.33            $           54.46
Unconsolidated Joint Ventures                                      60.34                        64.24
Combined                                                           48.94                        56.80
Square feet of GLA opened:
Consolidated Businesses                                          746,517                      881,044
Unconsolidated Joint Ventures                                    302,192                      276,798
Combined                                                       1,048,709                    1,157,842
Closing base rent per square foot:
Consolidated Businesses                                $           44.42            $           43.36
Unconsolidated Joint Ventures                                      43.47                        55.26
Combined                                                           44.18                        46.49
Square feet of GLA closed:
Consolidated Businesses                                          769,876                      844,749
Unconsolidated Joint Ventures                                    266,960                      301,157
Combined                                                       1,036,836                    1,145,906
Releasing spread per square foot:
Consolidated Businesses                                $           (0.09 )          $           11.10
Unconsolidated Joint Ventures                                      16.87                         8.98
Combined                                                            4.76                        10.31
Releasing spread per square foot growth:
Consolidated Businesses                                             (0.2 )%                      25.6 %
Unconsolidated Joint Ventures                                       38.8  %                      16.3 %
Combined                                                            10.8  %                      22.2 %

(1) Statistics exclude non-comparable centers.

(2)             Opening and closing statistics exclude spaces greater than or
                equal to 10,000 square feet.

(3)             2013 statistics were restated to include centers currently owned
                and open for the trailing 12 months ending March 31, 2013.

Average rent per square foot across our portfolio, including comparable centers for both consolidated and unconsolidated properties, was up 3.6% for this quarter. We continue to expect average rent per square foot for the year to be up by about 4% over 2013. 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.

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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.

                                  2014                                         2013
                               1st Quarter       Total      4th Quarter    3rd Quarter    2nd Quarter    1st Quarter
                                              (in thousands, except occupancy and leased space data)
Mall tenant sales (1)          $1,335,294     $6,180,095    $1,913,865     $1,405,246     $1,406,196     $1,454,788
Revenues and other
nonoperating income
Consolidated Businesses           175,881       768,502        211,289        193,482        178,237        185,494
Unconsolidated Joint
Ventures                           77,227       294,714         85,531         71,858         69,766         67,559
Occupancy: (2)
Ending - comparable                  90.3 %        91.8 %         91.8 %         91.0 %         90.6 %         90.3 %
Average - comparable                 90.8          90.9           91.7           90.8           90.5           90.5
Ending - all centers                 89.6          91.7           91.7           90.9           90.7           90.3
Average - all centers                90.2          90.9           91.6           90.8           90.7           90.4
Leased space:
Comparable                           92.6 %        93.3 %         93.3 %         92.8 %         92.3 %         92.2 %
All centers                          92.1          93.1           93.1           92.6           92.6           92.4

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

(2) Arizona Mills is included in "all centers" occupancy and leased space statistics prior to March 31, 2014 and Taubman Prestige Outlets Chesterfield is included in "all centers" occupancy and leased space statistics for periods ending December 31, 2013 and March 31, 2014.

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.

                                  2014                                           2013
                                1st Quarter      Total      4th Quarter     3rd Quarter     2nd Quarter     1st Quarter
Consolidated Businesses: (1)
Minimum rents                        9.6 %         8.3 %         6.9 %           9.0 %           9.0 %           8.8 %
Percentage rents                     0.5           0.6           0.9             0.5             0.1             0.5
Expense recoveries                   4.8           4.3           3.8             4.7             4.6             4.4
Mall tenant occupancy costs         14.9 %        13.2 %        11.6 %          14.2 %          13.7 %          13.7 %
Unconsolidated Joint
Ventures: (1)
Minimum rents                        9.0 %         8.1 %         6.9 %           9.1 %           9.0 %           7.7 %
Percentage rents                     0.4           0.5           0.7             0.5             0.3             0.5
Expense recoveries                   4.2           4.0           3.8             4.5             4.3             3.8
Mall tenant occupancy costs         13.6 %        12.6 %        11.4 %          14.1 %          13.6 %          12.0 %
Combined: (1)
Minimum rents                        9.4 %         8.2 %         6.9 %           9.0 %           9.0 %           8.5 %
Percentage rents                     0.5           0.5           0.8             0.5             0.2             0.5
Expense recoveries                   4.6           4.3           3.9             4.7             4.4             4.2
Mall tenant occupancy costs         14.5 %        13.0 %        11.6 %          14.2 %          13.6 %          13.2 %

(1) Arizona Mills is included in mall tenants occupancy costs as a percentage of sales prior to March 31, 2014 and Taubman Prestige Outlets Chesterfield is included in mall tenants occupancy costs as a percentage of sales for the quarters ending December 31, 2013 and March 31, 2014.

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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 the three month periods ended March 31, 2014 and March 31, 2013, or are expected to affect operations in the future.


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 (excluding transaction costs), which consisted of $337 million of cash and approximately $162 million of beneficial interest in debt. A gain of $367 million (net of tax of $10.2 million) was recognized on the transaction, which represented the excess of the sales price over our book basis in the interests sold. Our book basis in the interests was not impacted by the December 2012 acquisition of an additional interest in the center, which was accounted for as an equity transaction. The disposition decreased our ownership in the center to a noncontrolling 50.1% interest. We now account for our remaining interest in International Plaza under the equity method of accounting.

Also in January 2014, we completed the sale of land in Syosset, New York relating to our former Oyster Bay project, and our 50% interest in Arizona Mills, an Unconsolidated Joint Venture, to Simon Property Group. The consideration, excluding transaction costs, consisted of $60 million of cash and 555,150 partnership units in Simon Property Group Limited Partnership. The number of partnership units issued was determined based on a value of $154.91 per unit. As a result of the sale, we were relieved of our $84 million share of the $167 million mortgage loan outstanding on Arizona Mills at the time of the sale. A gain of $109 million was recognized on the transaction.

As a result of the above transactions, Funds from Operations (FFO) for 2014 will be unfavorably impacted by approximately $11 million ($0.12 per diluted common share). Excluding the gain on the dispositions, the effect of the transactions on net income allocable to common shareholders (EPS) will be neutral due to the offsetting reduction in depreciation expense. The gain on the dispositions described above is excluded from FFO. See "General Background and Performance Measurement - Use of Non-GAAP Measures" for the definition of FFO.

U.S. Development

In August 2013, a new outlet center, Taubman Prestige Outlets Chesterfield, opened in the western St. Louis suburb of Chesterfield, Missouri. In September 2013, we redeemed our outlet joint venture partner's 10% interest in this business, increasing our ownership to 100%.

Our United States development currently includes three projects that are under construction or are expected to start construction later this year: The Mall at University Town Center, which is scheduled to open in October 2014, The Mall of San Juan, and International Market Place (see "Liquidity and Capital Resources - Capital Spending - New Developments"). In addition, we are progressing on our project in Miami, Florida (see "Liquidity and Capital Resources - Capital Spending - New Developments") with construction expected to begin in the fourth quarter of 2014.

Taubman Asia

We have formed a joint venture with Beijing Wangfujing Department Store (Group) Co., Ltd (Wangfujing), one of China's largest department store chains, to build a shopping mall, CityOn.Zhengzhou, in Zhengzhou, China. As of March 31, 2014, we had invested $39.3 million in the project, including cumulative currency translation adjustments (see "Liquidity and Capital Resources - Capital Spending
- New Developments").

We have also formed a joint venture with Wangfujing to own an interest in a shopping center, CityOn.Xi'an, to be located at Xi'an Saigao City Plaza in Xi'an, China. As of March 31, 2014, we had invested $55.5 million in the project, including cumulative currency translation adjustments (see "Liquidity and Capital Resources - Capital Spending - New Developments").

We have invested in a shopping mall project in Hanam, Gyeonggi Province, South Korea (Hanam Union Square) in which we have partnered with Shinsegae Group (Shinsegae), South Korea's largest retailer. As of March 31, 2014, we had invested $99.7 million, including cumulative currency translation adjustments (see "Liquidity and Capital Resources - Capital Spending - New Developments").

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In 2013, we signed an agreement to provide management, leasing, and development 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. We will have no ownership interest in the center.

Debt and Equity Transactions

In April 2014, a $320 million construction facility was completed for The Mall of San Juan (see "Liquidity and Capital Resources").

In March 2014, the maturity date on our $65 million secondary revolving line of credit was extended through April 2016 (see "Liquidity and Capital Resources").

In January 2014, we used funds from the sale of a total of 49.9% of our interests in the entity that owns International Plaza to pay off the $99.5 million loan on Stony Point Fashion Park (Stony Point) that was scheduled to mature in June 2014 (See "Liquidity and Capital Resources"). As a result of the sale of 49.9% of our interests in the entity that owns International Plaza in January 2014, we were relieved of $162 million of our beneficial interest in debt (see "Result of Operations - Dispositions").

In January 2014, we were relieved of our $84 million share of the $167 million mortgage loan outstanding on Arizona Mills at the time of the sale (see "Liquidity and Capital Resources").

In October 2013, a $225 million construction financing was completed for The . . .

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