10-Q 1 tco-63012x10q.htm TCO-6.30.12-10Q

 

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: June 30, 2012
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 July 27, 2012, there were outstanding 58,822,814 shares of the Company's common stock, par value $0.01 per share.




TAUBMAN CENTERS, INC.
CONTENTS



1


TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
 
 
June 30
2012
 
December 31 2011
Assets:
 
 
 
Properties
$
4,125,093

 
$
4,020,954

Accumulated depreciation and amortization
(1,330,341
)
 
(1,271,943
)
 
$
2,794,752

 
$
2,749,011

Investment in Unconsolidated Joint Ventures (Note 4)
76,303

 
75,582

Cash and cash equivalents
45,227

 
24,033

Restricted cash (Notes 2 and 5)
4,485

 
295,318

Accounts and notes receivable, less allowance for doubtful accounts of $4,080 and $3,303 in 2012 and 2011
39,964

 
59,990

Accounts receivable from related parties
2,282

 
1,418

Deferred charges and other assets (Note 2)
133,059

 
131,440

Total Assets
$
3,096,072

 
$
3,336,792

 
 
 
 
Liabilities:
 
 
 
Mortgage notes payable (Note 5)
$
2,836,148

 
$
2,864,135

Installment notes (Notes 2 and 5)


 
281,467

Accounts payable and accrued liabilities
248,642

 
255,146

Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 4)
306,599

 
192,257

 
$
3,391,389

 
$
3,593,005

Commitments and contingencies (Notes 2, 5, 6, 7, 8, and 9)


 


 
 
 
 
Redeemable noncontrolling interests (Note 6)
$
82,337

 
$
84,235

 
 
 
 
Equity:
 

 
 

Taubman Centers, Inc. Shareowners’ Equity:
 

 
 

Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 26,413,158 and 26,461,958 shares issued and outstanding at June 30, 2012 and December 31, 2011
$
26

 
$
26

Series G Cumulative Redeemable Preferred Stock, 4,000,000 shares authorized, no par, $100 million liquidation preference, 4,000,000 shares issued and outstanding at June 30, 2012 and December 31, 2011
 

 
 

Series H Cumulative Redeemable Preferred Stock, 3,480,000 shares authorized, no par, $87 million liquidation preference, 3,480,000 shares issued and outstanding at June 30, 2012 and December 31, 2011
 

 
 

Common Stock, $0.01 par value, 250,000,000 shares authorized, 58,812,588 and 58,022,475 shares issued and outstanding at June 30, 2012 and December 31, 2011
588

 
580

Additional paid-in capital
670,662

 
673,923

Accumulated other comprehensive loss
(30,231
)
 
(27,613
)
Dividends in excess of net income
(883,591
)
 
(863,040
)
 
$
(242,546
)
 
$
(216,124
)
Noncontrolling interests (Note 6)
(135,108
)
 
(124,324
)
 
$
(377,654
)
 
$
(340,448
)
Total Liabilities and Equity
$
3,096,072

 
$
3,336,792


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
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Minimum rents
$
98,940

 
$
83,759

 
$
192,684

 
$
166,640

Percentage rents
2,049

 
1,550

 
6,452

 
4,854

Expense recoveries
62,215

 
54,268

 
118,692

 
105,705

Management, leasing, and development services
8,559

 
4,480

 
17,207

 
10,340

Other
7,702

 
5,350

 
13,694

 
11,502

 
$
179,465

 
$
149,407

 
$
348,729

 
$
299,041

Expenses:
 

 
 
 
 
 
 
Maintenance, taxes, utilities, and promotion
$
48,903

 
$
43,848

 
$
90,601

 
$
84,512

Other operating
19,922

 
15,804

 
36,232

 
32,883

Management, leasing, and development services
6,987

 
2,323

 
15,509

 
4,603

General and administrative
10,043

 
8,005

 
18,450

 
15,289

Interest expense
36,676

 
29,691

 
74,203

 
59,465

Depreciation and amortization
36,235

 
34,424

 
72,669

 
66,449

 
$
158,766

 
$
134,095

 
$
307,664

 
$
263,201

Nonoperating income
71

 
656

 
195

 
761

Income from continuing operations before income tax (expense) benefit and equity in income of Unconsolidated Joint Ventures
$
20,770

 
$
15,968

 
$
41,260

 
$
36,601

Income tax (expense) benefit (Note 3)
(492
)
 
5

 
(706
)
 
(205
)
Equity in income of Unconsolidated Joint Ventures (Note 4)
11,170

 
10,886

 
23,071

 
21,032

Income from continuing operations
$
31,448

 
$
26,859

 
$
63,625

 
$
57,428

Discontinued operations (Note 2)


 
(6,569
)
 
 
 
(12,694
)
Net income
$
31,448

 
$
20,290

 
$
63,625

 
$
44,734

Income from continuing operations attributable to noncontrolling interests (Note 6)
(11,013
)
 
(9,938
)
 
(21,598
)
 
(21,549
)
Loss from discontinued operations attributable to noncontrolling interests (Note 6)


 
2,032

 


 
3,954

Net income attributable to Taubman Centers, Inc.
$
20,435

 
$
12,384

 
$
42,027

 
$
27,139

Distributions to participating securities of TRG (Note 8)
(403
)
 
(381
)
 
(806
)
 
(762
)
Preferred stock dividends
(3,659
)
 
(3,659
)
 
(7,317
)
 
(7,317
)
Net income attributable to Taubman Centers, Inc. common shareowners
$
16,373


$
8,344


$
33,904


$
19,060

 
 
 
 
 
 
 
 
Net income
$
31,448

 
$
20,290

 
$
63,625

 
$
44,734

Other comprehensive income:
 

 
 
 
 
 
 
Unrealized loss on interest rate instruments and other
(7,223
)
 
(2,972
)
 
(4,438
)
 
(337
)
Reclassification adjustment for amounts recognized in net income
245

 
410

 
490

 
725

 
$
(6,978
)
 
$
(2,562
)
 
$
(3,948
)
 
$
388

Comprehensive income
$
24,470

 
$
17,728

 
$
59,677

 
$
45,122

Comprehensive income attributable to noncontrolling interests
(8,692
)
 
(7,019
)
 
(20,277
)
 
(17,771
)
Comprehensive income attributable to Taubman Centers, Inc.
$
15,778

 
$
10,709

 
$
39,400

 
$
27,351

 
 
 
 
 
 
 
 
Basic earnings per common share (Note 10):
 
 
 
 
 
 
 
Continuing operations
$
0.28


$
0.23


$
0.58

 
$
0.50

Discontinued operations
 

(0.08
)

 
 
(0.16
)
Total basic earnings per common share
$
0.28


$
0.15


$
0.58


$
0.34

 
 
 
 
 
 
 
 
Diluted earnings per common share (Note 10):
 
 
 
 
 
 
 
Continuing operations
$
0.27


$
0.23


$
0.57

 
$
0.49

Discontinued operations
 

(0.08
)

 
 
(0.15
)
Total diluted earnings per common share
$
0.27


$
0.15


$
0.57


$
0.34

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.4625

 
$
0.4375

 
$
0.9250

 
$
0.8750

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
58,789,737


56,186,216


58,518,442


55,875,329


See notes to consolidated financial statements.

3


TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(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, 2011
33,713,126

 
$
26

 
54,696,054

 
$
547

 
$
589,881

 
$
(14,925
)
 
$
(939,290
)
 
$
(164,150
)
 
$
(527,911
)
Issuance of common stock, net of offering costs
 
 
 
 
2,012,500

 
20

 
111,906

 
 
 
 
 
 
 
111,926

Issuance of stock pursuant to Continuing Offer (Notes 8 and 9)
(1,092,690
)
 
(1
)
 
1,092,766

 
11

 
(10
)
 


 
 

 


 


Share-based compensation under employee and director benefit plans (Note 8)
 

 
 

 
88,210

 
1

 
3,383

 
 

 
 

 
 

 
3,384

Adjustments of noncontrolling interests (Note 6)
 
 
 
 
 
 
 
 
(40,762
)
 
490

 
 
 
40,272

 


Contributions from noncontrolling interests (excludes $292 of contributions from redeemable noncontrolling interests) (Note 6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31,417

 
31,417

Dividend equivalents (Note 8)
 

 
 

 
 

 
 

 
 

 
 

 
(53
)
 
 
 
(53
)
Dividends and distributions
 

 
 

 
 

 
 

 
 

 
 

 
(57,013
)
 
(33,996
)
 
(91,009
)
Net income (excludes $292 of net loss attributable to redeemable noncontrolling interests) (Note 6)
 

 
 

 
 

 
 

 
 

 
 

 
27,139

 
17,887

 
45,026

Other comprehensive income (Note 7):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on interest rate instruments and other
 

 
 

 
 

 
 

 
 

 
(291
)
 
 

 
(46
)
 
(337
)
Reclassification adjustment for amounts recognized in net income
 

 
 

 
 

 
 

 
 

 
503

 
 

 
222

 
725

Balance, June 30, 2011
32,620,436

 
$
25

 
57,889,530

 
$
579

 
$
664,398

 
$
(14,223
)
 
$
(969,217
)
 
$
(108,394
)
 
$
(426,832
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2012
33,941,958

 
$
26

 
58,022,475

 
$
580

 
$
673,923

 
$
(27,613
)
 
$
(863,040
)
 
$
(124,324
)
 
$
(340,448
)
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9)
(46,900
)
 


 
46,902

 


 


 
 
 
 

 
 
 
 

Share-based compensation under employee and director benefit plans (Note 8)
 

 
 

 
743,211

 
8

 
(3,207
)
 
 

 
 

 
 

 
(3,199
)
Tax impact of share-based compensation (Note 3)
 
 
 
 
 
 
 
 
530

 
 
 
 
 
 
 
530

Adjustments of noncontrolling interests (Note 6)
(1,900
)
 
 
 
 
 
 
 
(584
)
 
10

 
 
 
107

 
(467
)
Dividend equivalents (Note 8)
 

 
 

 
 

 
 

 
 

 
 

 
(68
)
 
 

 
(68
)
Dividends and distributions (excludes $1,226 of distributions attributable to redeemable noncontrolling interests) (Note 6)
 

 
 

 
 

 
 

 
 

 
 

 
(62,510
)
 
(32,434
)
 
(94,944
)
Net income (excludes $1,206 of net loss attributable to redeemable noncontrolling interests) (Note 6)
 

 
 

 
 

 
 

 
 

 
 

 
42,027

 
22,804

 
64,831

Other comprehensive income (Note 7):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on interest rate instruments and other (excludes $59 of other comprehensive loss attributable to redeemable noncontrolling interests) (Note 6)
 

 
 

 
 

 
 

 
 

 
(2,966
)
 
 

 
(1,413
)
 
(4,379
)
Reclassification adjustment for amounts recognized in net income
 

 
 

 
 

 
 

 
 

 
338

 
 

 
152

 
490

Balance, June 30, 2012
33,893,158

 
$
26

 
58,812,588

 
$
588

 
$
670,662

 
$
(30,231
)
 
$
(883,591
)
 
$
(135,108
)
 
$
(377,654
)

See notes to consolidated financial statements.

4


TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
 
Six Months Ended
June 30
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
Net income
$
63,625

 
$
44,734

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

 
 

Depreciation and amortization - continuing operations
72,669

 
66,449

Depreciation and amortization - discontinued operations
 
 
3,669

Provision for bad debts
1,445

 
4,147

Gain on sale of land


 
(519
)
Other
6,293

 
6,749

Increase (decrease) in cash attributable to changes in assets and liabilities:
 

 
 

Receivables, restricted cash, deferred charges, and other assets
6,410

 
1,251

Accounts payable and other liabilities
(4,874
)
 
(1,831
)
Net Cash Provided By Operating Activities
$
145,568

 
$
124,649

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Additions to properties
$
(118,582
)
 
$
(37,037
)
Proceeds from sale of land


 
3,728

Repayments of notes receivable
5,329

 
848

Release of restricted cash
289,389

 
 
Contributions to Unconsolidated Joint Ventures
(2,440
)
 
(440
)
Distributions from Unconsolidated Joint Ventures in excess of income
114,340

 
7,638

Net Cash Provided By (Used In) Investing Activities
$
288,036

 
$
(25,263
)
 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Debt payments
$
(24,817
)
 
$
(150,312
)
Repayment of installment notes
(281,467
)
 
 
Debt issuance costs


 
(2,161
)
Issuance of common stock, net of offering costs


 
111,926

Issuance of common stock and/or partnership units in connection with incentive plans
(10,083
)
 
(2,032
)
Distributions to noncontrolling interests
(33,660
)
 
(33,996
)
Distributions to participating securities of TRG
(806
)
 
(762
)
Contributions from noncontrolling interests
231

 
31,709

Cash dividends to preferred shareowners
(7,317
)
 
(7,317
)
Cash dividends to common shareowners
(54,387
)
 
(48,892
)
Other
(104
)
 
(77
)
Net Cash Used In Financing Activities
$
(412,410
)
 
$
(101,914
)
 
 
 
 
Net Increase (Decrease) In Cash and Cash Equivalents
$
21,194

 
$
(2,528
)
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
24,033

 
19,291

 
 
 
 
Cash and Cash Equivalents at End of Period
$
45,227

 
$
16,763


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 June 30, 2012 included 24 urban and suburban shopping centers in 12 states.

Taubman Properties Asia LLC and its subsidiaries (Taubman Asia), which is the platform for the Company’s expansion into 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, 2011. 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. Certain reclassifications have been made to prior year amounts to conform with current year classifications. Income statement amounts for properties disposed of have been reclassified to discontinued operations. In addition, certain income statement related disclosures in the accompanying footnotes exclude amounts that have been reclassified to discontinued operations.

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% investment in Westfarms is through a general partnership in which the other general partners have approval rights over annual operating budgets, capital spending, refinancing, or sale of the property.

Ownership

In addition to the Company’s common stock, there are three classes of preferred stock (Series B, G, and H) outstanding as of June 30, 2012. Dividends on the 8% Series G and 7.625% Series H Preferred Stock are cumulative and are paid on the last day of each calendar quarter. The Company owns corresponding Series G and Series H 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 G and Series H Preferred Stock.


6

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 June 30, 2012 consisted of 26,413,158 shares of Series B Preferred Stock and 58,812,588 shares of common stock.

The Operating Partnership

At June 30, 2012, the Operating Partnership’s equity included two classes of preferred equity (Series G and H) 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 G and Series H Preferred Equity are owned by the Company and are eliminated in consolidation.

The Company's ownership in the Operating Partnership at June 30, 2012 consisted of a 69% managing general partnership interest, as well as the Series G and H Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership was 69% for the six months ended June 30, 2012 and 2011. At June 30, 2012, the Operating Partnership had 85,244,196 partnership units outstanding, of which the Company owned 58,812,588 units.

Note 2 -
Acquisitions, Dispositions, and Development

Acquisitions

The Mall at Green Hills, The Gardens on El Paseo and El Paseo Village

In December 2011, the Company acquired The Mall at Green Hills in Nashville, Tennessee, and The Gardens on El Paseo and El Paseo Village in Palm Desert, California from affiliates of Davis Street Properties, LLC. The consideration for the properties was $560 million, excluding transaction costs. The consideration consisted of the assumption of $206 million of debt, $281.5 million in installment notes, and the issuance of 1.3 million of Operating Partnership units. The 1.3 million Operating Partnership units issued were determined based on a value of $55 per unit, which approximated the fair value due to restrictions on sale of these Operating Partnership units. See Note 6 for features of the Operating Partnership units. The installment notes bore interest at 3.125% and were paid in full in February 2012. As of December 31, 2011, the installment notes were secured by restricted cash funded by borrowings under the Company's line of credit, which was classified within Restricted Cash on the Consolidated Balance Sheet. For each Operating Partnership unit issued, a share of Series B Preferred Stock (Note 9) was also issued.

7

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table summarizes the preliminary allocation of the purchase price to the identifiable assets acquired and liabilities assumed at the dates of acquisition.
 
 
Allocation of purchase price
Properties:
 
 
Land
$
74,200

 
Buildings, improvements, and equipment
468,936

 
Total additions to properties
$
543,136

Deferred charges and other assets:
 
 
In-place leases
29,831

 
Total assets acquired
$
572,967

 
 
 
Accounts payable and accrued liabilities:
 
 
Below market rents
$
(3,377
)
Mortgage notes payable:
 
 
Premium for above market interest rates
(9,590
)
 
Total liabilities acquired
$
(12,967
)
 
Net assets acquired
$
560,000


TCBL

In December 2011, Taubman Asia acquired a 90% controlling interest in a Beijing-based retail real estate consultancy company with more than 200 staff across seven offices in Mainland China. The new company is named Taubman TCBL and the total consideration for the transaction was $23.7 million. Taubman Asia paid approximately $11.5 million in cash and credited the noncontrolling owners with approximately $11.9 million of capital in the newly formed company. The $11.5 million in cash included approximately $10.2 million that was lent in August 2011 by Taubman Asia to the noncontrolling partners. Upon closing, the loan and $0.3 million of accrued interest were converted to capital and the remaining balance was paid in cash. Substantially all of the purchase price was allocated to goodwill in Taubman TCBL.

Purchase Price Allocations

For the preceding acquisitions, the Company has not yet finalized its allocations of the purchase prices to the tangible and identifiable intangible assets and liabilities acquired. The Company is evaluating certain valuation information for assets and liabilities acquired to complete its allocations. A final determination of the required purchase price allocations will be made before the end of 2012.

Dispositions

Discontinued operations in the accompanying Consolidated Statement of Operations and Comprehensive Income consist of the financial results of The Pier Shops at Caesars (The Pier Shops) and Regency Square. Total revenues from discontinued operations were $11.8 million for the six months ended June 30, 2011.

In November 2011, the mortgage lender for The Pier Shops completed the foreclosure on the property and title to the property was transferred to the mortgage lender. The Company was relieved of $135 million of debt obligations plus accrued default interest associated with the property.

In December 2011, the mortgage lender for Regency Square accepted a deed in lieu of foreclosure on the property and title to the property was transferred to the mortgage lender. The Company was relieved of $72.2 million of debt obligations plus accrued default interest associated with the property.

8

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Development

City Creek Center

City Creek Center, a mixed-use project in Salt Lake City, Utah, opened in March 2012. The Company owns the retail space subject to a long-term participating lease. City Creek Reserve, Inc. (CCRI), an affiliate of the LDS Church, is the participating lessor and provided all of the construction financing. The Company owns 100% of the leasehold interest in the retail buildings and property. CCRI has an option to purchase the Company’s interest at fair value at various points in time over the term of the lease. The Company paid $75 million to CCRI for leasehold improvements upon opening of the retail center in March 2012, which is classified within Additions to Properties on the Consolidated Statement of Cash Flows.

Shinsegae

In September 2011, Taubman Asia agreed to partner with Shinsegae Group, South Korea's largest retailer, to build a shopping mall in Hanam, Gyeonggi Province, South Korea. The Company has invested $20.9 million for an interest in the project. The Company has the option to put its interest in the project after the completion of due diligence. The potential return of the investment, including a 7% return on the investment, is secured by a letter of credit from Shinsegae. The $20.9 million payment is classified within Deferred Charges and Other Assets on the Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011.

Note 3 -
Income Taxes

Income Tax Expense

The Company’s income tax expense for the three and six months ended June 30, 2012 and 2011 is as follows:
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
State current
$
22

 
$
186

 
$
65

 
$
428

State deferred
(8
)
 
(197
)
 
(12
)
 
(246
)
Federal current
335

 
18

 
538

 
35

Federal deferred
199

 
(12
)
 
165

 
(12
)
Foreign current
(56
)
 
 
 
(50
)
 
 
Total income tax expense (benefit)
$
492

 
$
(5
)
 
$
706

 
$
205




9

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Deferred Taxes

Deferred tax assets and liabilities as of June 30, 2012 and December 31, 2011 are as follows:
 
2012
 
2011
Deferred tax assets:
 
 
 
Federal
$
3,490

 
$
3,655

Foreign
1,753

 
1,196

State
238

 
232

Total deferred tax assets
$
5,481

 
$
5,083

Valuation allowances
(1,913
)
 
(1,373
)
Net deferred tax assets
$
3,568

 
$
3,710

Deferred tax liabilities:
 

 
 

Federal
$
623

 
$
623

State
117

 
121

Total deferred tax liabilities
$
740

 
$
744


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 land sales, the profitability of the Company’s Asia 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.

During the six months ended June 30, 2012, the Company realized a $0.5 million tax benefit as additional paid-in capital relating to the redemption of certain share-based compensation awards.  This benefit represents the amount of the tax deduction that exceeds the recognized deferred tax asset relating to the awards, which was based on their cumulative book compensation cost. This excess tax deduction is due to changes in the fair value of the Company's shares between the grant date (the measurement date for book purposes) and the exercise date (the measurement date for tax purposes) of the awards.

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 direct or indirect managing general partner or managing member of these Unconsolidated Joint Ventures, except for the ventures that own Arizona Mills, The Mall at Millenia, and Waterside Shops.
Shopping Center
Ownership as of
June 30, 2012 and
December 31, 2011
Arizona Mills
50%
Fair Oaks
50
The Mall at Millenia
50
Stamford Town Center
50
Sunvalley
50
Waterside Shops
25
Westfarms
79

The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the partnership or members’ equity reported in 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 of the related assets.


10

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

The estimated fair value of the Unconsolidated Joint Ventures’ notes payable was $1.3 billion and $1.2 billion at June 30, 2012 and December 31, 2011, respectively. The methodology for determining this fair value is consistent with that used for determining the fair value of consolidated mortgage notes payable (Note 11).

In June 2012, a $320 million non-recourse refinancing was completed on Westfarms. A portion of the proceeds were used to pay off the existing $179 million loan (Note 5).

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. Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.
 
June 30
2012
 
December 31
2011
Assets:
 
 
 
Properties
$
1,109,732

 
$
1,107,314

Accumulated depreciation and amortization
(459,040
)
 
(446,059
)
 
$
650,692

 
$
661,255

Cash and cash equivalents
27,022

 
22,042

Accounts and notes receivable, less allowance for doubtful accounts of $1,488 and $1,422 in 2012 and 2011
15,914

 
24,628

Deferred charges and other assets
26,144

 
21,289

 
$
719,772

 
$
729,214

 
 
 
 
Liabilities and accumulated deficiency in assets:
 

 
 

Mortgage notes payable
$
1,273,666

 
$
1,138,808

Accounts payable and other liabilities
55,639

 
55,737

TRG's accumulated deficiency in assets
(356,265
)
 
(244,758
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(253,268
)
 
(220,573
)
 
$
719,772

 
$
729,214

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(356,265
)
 
$
(244,758
)
TRG basis adjustments, including elimination of intercompany profit
66,141

 
67,282

TCO's additional basis
59,828

 
60,801

Net investment in Unconsolidated Joint Ventures
$
(230,296
)
 
$
(116,675
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
306,599

 
192,257

Investment in Unconsolidated Joint Ventures
$
76,303

 
$
75,582



11

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Revenues
$
66,771

 
$
62,918

 
$
132,081

 
$
126,277

Maintenance, taxes, utilities, promotion, and other operating expenses
$
22,108

 
$
20,769

 
$
42,330

 
$
41,006

Interest expense
15,823

 
13,949

 
31,490

 
29,545

Depreciation and amortization
8,849

 
8,952

 
17,123

 
18,137

Total operating costs
$
46,780

 
$
43,670

 
$
90,943

 
$
88,688

Nonoperating income
(7
)
 
5

 
1

 
10

Net income
$
19,984

 
$
19,253

 
$
41,139

 
$
37,599

 
 
 
 
 
 
 
 
Net income attributable to TRG
$
11,282

 
$
10,825

 
$
23,286

 
$
21,294

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
373

 
546

 
757

 
710

Depreciation of TCO's additional basis
(485
)
 
(485
)
 
(972
)
 
(972
)
Equity in income of Unconsolidated Joint Ventures
$
11,170

 
$
10,886

 
$
23,071

 
$
21,032

 
 
 
 
 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

 
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
24,759

 
$
23,511

 
$
49,865

 
$
47,220

Interest expense
(8,225
)
 
(7,247
)
 
(16,319
)
 
(15,324
)
Depreciation and amortization
(5,364
)
 
(5,378
)
 
(10,475
)
 
(10,864
)
Equity in income of Unconsolidated Joint Ventures
$
11,170

 
$
10,886

 
$
23,071

 
$
21,032


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 interests in Cherry Creek Shopping Center (50%), International Plaza (49.9%), The Mall at Wellington Green (10%), and MacArthur Center (5%).
 
At 100%
 
At Beneficial Interest
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
Debt as of:
 
 
 
 
 
 
 
June 30, 2012
$
2,836,148

 
$
1,273,666

 
$
2,507,423

 
$
688,191

December 31, 2011
3,145,602

 
1,138,808

 
2,816,877

 
580,557

 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

Six Months Ended June 30, 2012
98

 
 

 
96

 
 

Six Months Ended June 30, 2011
373

 
 

 
373

 
 

 
 
 
 
 
 
 
 
Interest expense from continuing operations:
 

 
 

 
 

 
 

Six Months Ended June 30, 2012
74,203

 
31,490

 
65,794

 
16,319

Six Months Ended June 30, 2011
59,465

 
29,545

 
53,823

 
15,324

 
 
 
 
 
 
 
 
Interest expense from discontinued operations(1):
 
 
 
 
 
 
 
Six Months Ended June 30, 2011
11,020

 
 
 
11,020

 
 

(1)
Includes The Pier Shops and Regency Square (Note 2).



12

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including a minimum net worth requirement, a maximum leverage ratio, minimum interest coverage ratios, a minimum debt yield ratio, a maximum payout ratio on distributions, and a minimum fixed charges coverage ratio, the latter being the most restrictive. The Company is in compliance with all covenants and loan obligations as of June 30, 2012. The maximum payout ratio on distributions 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.

Payments of principal and interest on the loans in the following table are guaranteed by the Operating Partnership as of June 30, 2012.
Center
 
Loan Balance
as of 6/30/12
 
TRG's Beneficial Interest in Loan Balance
as of 6/30/12
 
Amount of Loan Balance Guaranteed by TRG
as of 6/30/12
 
% of Loan Balance Guaranteed by TRG
 
% of Interest Guaranteed by TRG
 
 
(in millions)
 
 
 
 
Dolphin Mall
 
$
185.0

 
$
185.0

 
$
185.0

 
100
%
 
100
%
Fairlane Town Center
 
70.0

 
70.0

 
70.0

 
100
%
 
100
%
Twelve Oaks Mall
 

 

 

 
100
%
 
100
%

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders. As of June 30, 2012 and December 31, 2011, the Company’s cash balances restricted for these uses were $4.5 million and $5.9 million, respectively. Restricted cash at December 31, 2011 included cash funded by the Company's line of credit that was used to repay the $281.5 million of installment notes in February 2012 (Note 2).

2012 Financings

In April 2012, the maturity date on the Company's second line of credit was extended through April 2014. The maximum amount available under this facility increased to $65 million and the rate was increased to LIBOR plus 1.40% from LIBOR plus 1.00%.

In June 2012, a 10 year, $320 million non-recourse refinancing was completed on Westfarms, a 79% owned Unconsolidated Joint Venture.  The payments on the loan, which bears interest at an all-in fixed rate of 4.53%, are based on amortizing principal over 30 years.  The existing $179 million, 6.10% fixed rate loan was paid off and the Company's $110 million share of excess proceeds was used to pay down its revolving lines of credit.  In addition, the joint venture partners at Westfarms repaid the balance owed on the $5.1 million note receivable outstanding as of December 31, 2011 related to their share of the litigation charges that were paid in 2009.

Note 6 -
Noncontrolling Interests

Redeemable Noncontrolling Interests

In December 2011, the Company acquired The Mall at Green Hills and The Gardens on El Paseo and El Paseo Village from affiliates of Davis Street Properties, LLC (Note 2). The purchase price consideration included approximately 1.3 million Operating Partnership units determined based on a value of $55 per unit. These partnership units will become eligible to be converted into the Company's common shares in December 2012 pursuant to the Continuing Offer (Note 9). Prior to that date, the holders have the ability to put the units back to the Operating Partnership for cash at the lesser of the current market price of the Company's common shares or $55 per share. Considering the redemption provisions, the Company is accounting for these Operating Partnership units as a redeemable noncontrolling interest until they become subject to the Continuing Offer. The carrying value of these units was $72.6 million at June 30, 2012 and $72.7 million at December 31, 2011. Adjustments to the redemption value are recorded through equity.


13

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In December 2011, Taubman Asia acquired a 90% controlling interest in TCBL (Note 2). As part of the purchase price consideration, $11.9 million of capital in the newly formed company was credited by Taubman Asia to the noncontrolling owners, who also own a 10% residual interest. The noncontrolling ownership interest can be put back to the Company at 50% of the fair value of the ownership interest beginning in December 2016, increasing to 100% in December 2018. Taubman Asia will fund any additional capital required by the business and will receive a preferred return on all capital contributed. The ownership agreements provide for the distribution of preferred returns on capital as well as returns of all such capital prior to the sharing of profits on relative ownership interests. Considering the redemption provisions, the Company accounts for the joint venture partner's interest as a contingently redeemable noncontrolling interest. The carrying value of the interest was $9.8 million at June 30, 2012 and $11.6 million at December 31, 2011. Any adjustments to the redemption value will be recorded through equity.

The Company's president of Taubman Asia (the Asia President) has an ownership interest in Taubman Asia, a consolidated subsidiary. The Asia President is entitled 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 a 10% 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 will have 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 will accrue 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). 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 generally a nominal amount through 2013 and subsequently 50% (increasing to 100% as early as May 2015) 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, with a carrying value of zero at June 30, 2012 and December 31, 2011. Any adjustments to the redemption value are recorded through equity.

The Company owns a 90% controlling interest in a joint venture that is focusing on developing and owning outlet shopping centers. The amount of capital that the 10% joint venture partner is required to contribute is capped. The Company will have a preferred investment to the extent it contributes capital in excess of the amount commensurate with its ownership interest. The Company has the right to purchase the joint venture partner's entire interest and the joint venture partner has the right to require the Company to purchase the joint venture partner's entire interest. Additionally, the parties each have a one-time put and/or call on the joint venture partner’s interest in any stabilized centers, while still maintaining the ongoing joint venture relationship. 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 June 30, 2012 and December 31, 2011. Any adjustments to the redemption value are recorded through equity.

Reconciliation of Redeemable Noncontrolling Interests
 
2012
 
2011
Balance January 1
$
84,235

 
$

Contributions
231

 
292

Allocation of net loss
(1,206
)
 
(292
)
Allocation of other comprehensive loss
(59
)
 


Distributions
(1,226
)
 
 
Redemption of TRG partnership units
(105
)
 
 
Adjustments of redeemable noncontrolling interests
467

 
 
Balance June 30
$
82,337

 
$



14

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Equity Balances of Nonredeemable Noncontrolling Interests

The net equity balance of the noncontrolling interests as of June 30, 2012 and December 31, 2011 includes the following:
 
2012
 
2011
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(104,734
)
 
$
(101,872
)
Noncontrolling interests in partnership equity of TRG
(30,374
)
 
(22,452
)
 
$
(135,108
)
 
$
(124,324
)

Income Allocable to Noncontrolling Interests

Net income attributable to the noncontrolling interests for the three months ended June 30, 2012 and June 30, 2011 includes the following:
 
2012
 
2011
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
3,564

 
$
3,015

Noncontrolling share of income of TRG
7,731

 
4,506

TRG Series F preferred distributions


 
615

 
$
11,295

 
$
8,136

Redeemable noncontrolling interests
(282
)
 
(230
)
 
$
11,013

 
$
7,906


Net income attributable to the noncontrolling interests for the six months ended June 30, 2012 and June 30, 2011 includes the following:
 
2012
 
2011
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
6,758

 
$
6,462

Noncontrolling share of income of TRG
16,046

 
10,195

TRG Series F preferred distributions


 
1,230

 
$
22,804

 
$
17,887

Redeemable noncontrolling interests
(1,206
)
 
(292
)
 
$
21,598

 
$
17,595



15

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Equity Transactions

The following schedule presents the effects of changes in Taubman Centers, Inc.’s ownership interest in consolidated subsidiaries on Taubman Centers, Inc.’s equity for the six months ended June 30, 2012 and June 30, 2011:
 
2012
 
2011
Net income attributable to Taubman Centers, Inc. common shareowners
$
33,904

 
$
19,060

Transfers (to) from the noncontrolling interest –
 

 
 

Decrease in Taubman Centers, Inc.’s paid-in capital for the adjustments of noncontrolling interest (1)
(584
)
 
(40,762
)
Net transfers (to) from noncontrolling interests
(584
)
 
(40,762
)
Change from net income attributable to Taubman Centers, Inc. and transfers (to) from noncontrolling interests
$
33,320

 
$
(21,702
)

(1)
In 2012 and 2011, 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 8), issuances of stock pursuant to the Continuing Offer (Note 9), issuance of common stock in June 2011, and redemptions of certain redeemable Operating Partnership units (Note 2).

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 June 30, 2012, the Company held controlling interests in consolidated entities with specified termination dates in 2081 and 2083. The noncontrolling owners’ interests in these entities are to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of these noncontrolling interests was approximately $208 million at June 30, 2012, compared to a book value of $(101.4) million that is classified in Noncontrolling Interests in the Company’s Consolidated Balance Sheet. The fair values of the noncontrolling interests were calculated as the noncontrolling interests' ownership shares of the underlying properties' fair values. The properties' fair values were estimated by considering their in-place net operating incomes, current market capitalization rates, and mortgage debt outstanding.

Note 7 -
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.


16

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of June 30, 2012, the Company had the following outstanding interest rate derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments 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)
 
95.0
%
 
$
131,000

 
2.64
%
 
2.35
%
 
4.99
%
 
September 2020
Unconsolidated Joint Ventures:
 
 

 
 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap
 
50.0
%
 
30,000

 
5.05
%
 
0.90
%
 
5.95
%
 
November 2012
Receive variable (LIBOR) /pay-fixed swap (2)
 
50.0
%
 
137,500

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (2)
 
50.0
%
 
137,500

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018

(1)
The notional amount of the swap is equal to the outstanding principal balance on the loan, which begins amortizing in September 2012.
(2)
The notional amount on each of these swaps is equal to 50% of the outstanding principal balance on the loan, which begins amortizing in August 2014.

Cash Flow Hedges of Interest Rate Risk

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 (Loss) (AOCI) during the term of the hedged debt transaction.

Amounts reported in AOCI related to currently outstanding 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.

The Company expects that approximately $6.8 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.

As of June 30, 2012, the Company had $0.9 million of net realized losses included in AOCI resulting from settled derivative instruments, which were designated as cash flow hedges that are being recognized as a reduction of income over the term of the hedged debt.


17

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following tables present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and June 30, 2011. The tables include the location and amount of unrealized gains and losses on outstanding derivative instruments in cash flow hedging relationships and the location and amount of realized losses reclassified from AOCI into income resulting from settled derivative instruments associated with hedged debt.

During the three months ended June 30, 2012 and June 30, 2011, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
 
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
June 30
 
 
 
Three Months Ended
June 30
 
2012
 
2011
 
 
 
2012
 
2011
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(4,506
)
 
$
(3,180
)
 
Interest Expense
 
$
(794
)
 
$
(802
)
Interest rate contracts – UJVs
(2,757
)
 
101

 
Equity in Income of UJVs
 
(925
)
 
(180
)
Total derivatives in cash flow hedging relationships
$
(7,263
)
 
$
(3,079
)
 
 
 
$
(1,719
)
 
$
(982
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 

 
 

 
 
 
 

 
 

Interest rate contracts – consolidated subsidiaries
 

 
 

 
Interest Expense
 
$
(151
)
 
$
(315
)
Interest rate contract – UJVs
 

 
 

 
Equity in Income of UJVs
 
(94
)
 
(94
)
Total realized losses on settled cash flow hedges
 

 
 

 
 
 
$
(245
)
 
$
(409
)

During the six months ended June 30, 2012 and June 30, 2011, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
 
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)
 
Six Months Ended
June 30
 
 
 
Six Months Ended
June 30
 
2012
 
2011
 
 
 
2012
 
2011
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(2,774
)
 
$
(1,553
)
 
Interest Expense
 
$
(1,578
)
 
$
(1,872
)
Interest rate contracts – UJVs
(1,909
)
 
1,044

 
Equity in Income of UJVs
 
(1,835
)
 
(1,158
)
Total derivatives in cash flow hedging relationships
$
(4,683
)
 
$
(509
)
 
 
 
$
(3,413
)
 
$
(3,030
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 

 
 

 
 
 
 

 
 

Interest rate contracts – consolidated subsidiaries
 

 
 

 
Interest Expense
 
$
(302
)
 
$
(536
)
Interest rate contract – UJVs
 

 
 

 
Equity in Income of UJVs
 
(188
)
 
(188
)
Total realized losses on settled cash flow hedges
 

 
 

 
 
 
$
(490
)
 
$
(724
)


18

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company records all derivative instruments at fair value in the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported in the Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
June 30
2012
 
December 31
2011
Derivatives designated as hedging instruments:
 
 
 
 
 
Liability derivatives:
 
 
 

 
 

Interest rate contract – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
 
$
(11,818
)
 
$
(9,044
)
Interest rate contracts – UJVs
Investment in UJVs
 
(10,954
)
 
(9,045
)
Total liabilities designated as hedging instruments
 
 
$
(22,772
)
 
$
(18,089
)

Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. As of June 30, 2012, the Company is not in default on any debt obligations that would trigger a credit risk related default on its current outstanding derivatives.

As of June 30, 2012 and December 31, 2011, the fair value of derivative instruments with credit-risk-related contingent features that are in a liability position was $22.8 million and $18.1 million, respectively. As of June 30, 2012 and December 31, 2011, 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 11 for fair value information on derivatives.

Note 8 -
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, other than their meeting fees, 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.

The compensation cost charged to income for the Company’s share-based compensation plans was $3.3 million and $6.2 million for the three and six months ended June 30, 2012, respectively. The compensation cost charged to income for the Company's share-based compensation plans was $2.2 million and $4.6 million for the three and six months ended June 30, 2011, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was approximately $0.3 million and $0.6 million for the three and six months ended June 30, 2012, respectively, and approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2011, respectively.


19

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company estimated the grant-date fair values of options, performance share units, and restricted share units 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 six months ended June 30, 2012 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, 2012
1,321,990

 
$
37.13

 
4.8

 
$
13.83

-
$
55.90

Exercised
(96,408
)
 
31.90

 
 
 
 
 
 
Outstanding at June 30, 2012
1,225,582

 
$
37.55

 
4.4

 
$
13.83

-
$
55.90

 
 
 
 
 
 
 
 
 
 
Fully vested options at June 30, 2012
1,225,582

 
37.55

 
4.4

 
 

 
 

There were 0.2 million options that vested during the six months ended June 30, 2012.

The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding and in-the-money fully vested options was $48.5 million as of June 30, 2012.

The total intrinsic value of options exercised during the six months ended June 30, 2012 was $3.8 million. Cash received from option exercises for the six months ended June 30, 2012 was $3.1 million. No options were exercised during the six months ended June 30, 2011.

As of June 30, 2012, all options outstanding were fully vested, and there was no unrecognized compensation cost related to options.

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.


20

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Performance Share Units

In February 2012, the Company granted Performance Share Units (PSU) under the 2008 Omnibus Plan. Each PSU represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-300% of the PSU based on the Company’s market performance relative to that of a peer group. The vesting date is three years from the grant date, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period. The Company estimated the value of these PSU granted using a Monte Carlo simulation, considering the Company’s common stock price at the grant date less the present value of the expected dividends during the vesting period, historical returns of the Company and the peer group of companies, a risk-free interest rate of 0.43%, and a measurement period of three years. The resulting weighted average grant-date fair value was $106.71 per PSU.

Also in February 2012, the Company granted additional PSU under the 2008 Omnibus Plan that represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-400% of the PSU based on the Company’s market performance relative to that of a peer group. The vesting date is five years from the grant date, if continuous service has been provided, or upon certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period. The Company estimated the value of these PSU granted using a Monte Carlo simulation, considering the Company’s common stock price at the grant date less the present value of the expected dividends during the vesting period, historical returns of the Company and the peer group of companies, a risk-free interest rate of 0.87%, and a measurement period of five years. The resulting weighted average grant-date fair value was $187.73 per PSU.

A summary of PSU activity for the six months ended June 30, 2012 is presented below:
 
Number of Performance Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012
326,151

 
$
38.20

Vested
(196,943
)
(1) 
15.60

Granted (three year vesting)
48,308

 
106.71

Granted (five year vesting)
104,161

 
187.73

Outstanding at June 30, 2012
281,677

 
$
121.04


(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 six months ended June 30, 2012 equaled 240% of the number of PSU awards vested in the table above.

None of the PSU outstanding at June 30, 2012 were vested. As of June 30, 2012, there was $26.4 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 3.9 years.


21

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Restricted Share Units

During 2012, Restricted Share Units (RSU) were issued under the 2008 Omnibus Plan and represent the right to receive upon vesting one share of the Company’s common stock. The units vest in March 2015, if continuous service has been provided through that period, or upon retirement or certain other events if earlier. No dividends accumulate during the vesting period.

The Company estimated the values of the RSU granted in 2012 using the Company’s common stock at the grant dates deducting the present value of expected dividends during the vesting period using a risk-free rate of 0.40% to 0.50%. The result of the Company’s valuations was a weighted average grant-date fair value of $63.46 per RSU granted during 2012.

A summary of RSU activity for the six months ended June 30, 2012 is presented below:
 
Number of Restricted Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012
605,927

 
$
22.06

Vested
(363,373
)
 
9.66

Granted
94,677

 
63.46

Forfeited
(2,196
)
 
43.12

Outstanding at June 30, 2012
335,035

 
$
47.07


None of the RSU outstanding at June 30, 2012 were vested. As of June 30, 2012, there was $8.4 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.

Note 9 -
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 (the Cash Tender Agreement) with A. Alfred Taubman, who owns an interest in the Operating Partnership, whereby he has the annual 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. At A. Alfred Taubman's election, his family may participate in tenders. 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 between the Company and Mr. Taubman 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 June 30, 2012 of $77.16 per common share, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $1.9 billion. The purchase of these interests at June 30, 2012 would have resulted in the Company owning an additional 28% interest in the Operating Partnership.


22

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Continuing Offer

The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, including A. Alfred Taubman), 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). The Operating Partnership units issued in connection with the acquisition of The Mall at Green Hills and The Gardens on El Paseo and El Paseo Village are not eligible to be converted into common shares under the Continuing Offer until December 2012. 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.

Litigation

In April 2009, two restaurant owners, their two restaurants, and their principal filed a lawsuit in United States District Court for the Eastern District of Pennsylvania (Case No. 09-CV-01619) against Atlantic Pier Associates LLC ("APA", the then owner of the leasehold interest in The Pier Shops), the Operating Partnership, Taubman Centers, Inc., the owners of APA and certain affiliates of such owners, three individuals affiliated with, or at one time employed by an affiliate of one of the owners, and, subsequently added the Manager as a defendant. The plaintiffs are alleging the defendants misrepresented and concealed the status of certain tenant leases at The Pier Shops and that such status was relied upon by the plaintiffs in making decisions about their own leases. The plaintiffs are seeking damages exceeding $20 million, rescission of their leases, exemplary or punitive damages, costs and expenses, attorney's fees, return of certain rent, and other relief as the court may determine. The claims against the Operating Partnership, Taubman Centers, Inc., the Manager, other Taubman defendants, and one of the owners were dismissed in July 2011, but, in August 2011, the restaurant owners reinstated the same claims in a state court action that was then removed to the United States District Court for the Eastern District of Pennsylvania (Case No. 11-CV-05676). The defendants are vigorously defending the action. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs. While management does not believe that an adverse outcome in this lawsuit would have a material adverse effect on the Company's financial condition, there can be no assurance that an adverse outcome would not have a material effect on the Company's results of operations for any particular period.

Other

See Note 5 for the Operating Partnership's guarantees of certain notes payable, Note 6 for contingent features relating to certain joint venture agreements, Note 7 for contingent features relating to derivative instruments, and Note 8 for obligations under existing share-based compensation plans.

See Note 6 for the Operating Partnership's contingent obligation to repurchase units issued in connection with the acquisition of centers ending December 2012. Subsequent to that date the units will become eligible to be converted into common shares under the Continuing Offer.

Note 10 -
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 9), 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 8). 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.
 

23

TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of June 30, 2012, there were 4.0 million partnership units outstanding and 0.9 million unissued partnership units under unit option deferral elections exchangeable for common shares of the Company under the Continuing Offer that were excluded from the computation of diluted earnings per share as they were anti-dilutive in all periods presented. Also, there were out-of-the-money options for 0.1 million and 0.2 million shares for the three and six months ended June 30, 2011 that were excluded from the computation of diluted EPS because they were anti-dilutive.

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Net income (loss) attributable to Taubman Centers, Inc. common shareowners (Numerator):
 
 
 
 
 
 
 
Income from continuing operations
$
16,373

 
$
12,881

 
$
33,904

 
$
27,800

Loss from discontinued operations


 
(4,537
)
 


 
(8,740
)
Basic
$
16,373

 
$
8,344

 
$
33,904

 
$
19,060

 
 
 
 
 
 
 
 
Shares (Denominator) – basic
58,789,737

 
56,186,216

 
58,518,442

 
55,875,329

 
 
 
 
 
 
 
 
Earnings per common share from continuing operations
$
0.28

 
$
0.23

 
$
0.58

 
$
0.50

Loss from discontinued operations


 
(0.08
)