10-K 1 tco-123117x10k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________
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)
Registrant's telephone number, including area code:
(248) 258-6800            
    
Securities registered pursuant to Section 12(b) of the Act:
 
 
Name of each exchange
Title of each class
 
on which registered
Common Stock,
 
New York Stock Exchange
$0.01 Par Value
 
 
 
 
 
6.5% Series J Cumulative
 
New York Stock Exchange
Redeemable Preferred Stock,
 
 
No Par Value
 
 
 
 
 
6.25% Series K Cumulative
 
New York Stock Exchange
Redeemable Preferred Stock,
 
 
No Par Value
 
 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes    o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes    x No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes    x No

The aggregate market value of the 58,850,765 shares of Common Stock held by non-affiliates of the registrant as of June 30, 2017 was $3.5 billion, based upon the closing price of $59.55 per share on the New York Stock Exchange composite tape on June 30, 2017. (For this computation, the registrant has excluded the market value of all shares of its Common Stock held by directors of the registrant and certain other shareholders; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.)  As of February 26, 2018, there were outstanding 60,909,479 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders meeting to be held in 2018 are incorporated by reference into Part III.



TAUBMAN CENTERS, INC.
CONTENTS


PART I
PART II
PART III
PART IV


1


PART I

Item 1. BUSINESS.

The following discussion of our business 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. We caution that although forward-looking statements reflect our good faith beliefs and reasonable judgment based upon current information, these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including those risks, uncertainties, and factors detailed from time to time in reports filed with the Securities and Exchange Commission (SEC), and in particular those set forth under "Risk Factors" in this Annual Report on Form 10-K. The forward-looking statements included in this report are made as of the date hereof or the date specified herein. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future.

The Company

Taubman Centers, Inc. (TCO or the Company) is a Michigan corporation (incorporated in 1973) 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, lease, acquire, dispose of, develop, expand, and manage shopping centers and interests therein. Our owned portfolio of operating centers as of December 31, 2017 consisted of 24 urban and suburban shopping centers operating in 11 U.S. states, Puerto Rico, South Korea, and China. 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. See "Item 2. Properties" for information regarding the centers.

Taubman Asia, which is the platform for our operations in China and South Korea, as well as any developments in Asia, is headquartered in Hong Kong.

We operate as a REIT under the Internal Revenue Code of 1986, as amended (the Code). In order to satisfy the provisions of the Code applicable to REITs, we must distribute to our shareowners at least 90% of our REIT taxable income prior to net capital gains and meet certain other requirements. The Operating Partnership's partnership agreement provides that the Operating Partnership will distribute, at a minimum, sufficient amounts to its partners such that our pro rata share will enable us to pay shareowner dividends (including capital gains dividends that may be required upon the Operating Partnership's sale of an asset) that will satisfy the REIT provisions of the Code.

The U.S. Congress recently passed the Tax Cuts and Jobs Act of 2017 that made significant changes to both corporate and individual tax rates and the resulting calculation of taxes, as well as international tax rules for U.S. domestic corporations. As a REIT, this legislation should minimally change the taxes we pay. However, it could impact the way in which our dividends are taxed on the holders of our stock.

We have one reportable segment, which owns, develops, and manages shopping centers. We have aggregated our shopping centers into this one reportable segment, as the shopping centers share similar economic characteristics and other similarities. See "Note 1 - Summary of Significant Accounting Policies" to our consolidated financial statements for more information.

Recent Developments

For a discussion of business developments that occurred in 2017, see "Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)."







2


Business of the Company

We are engaged in the ownership, leasing, acquisition, disposition, development, expansion, and management of shopping centers and interests therein. We owned interests in 24 operating centers as of December 31, 2017. In the following discussion, the term "GLA" refers to gross retail space, including anchors and mall tenant areas, and the term "Mall GLA" refers to gross retail space, excluding anchors. The term "anchor" refers to a department store or other large retail store. The term "mall tenants" refers to stores (other than anchors) that lease space in shopping centers, including temporary tenants and specialty retailers.

As of December 31, 2017, the centers:

are strategically located in major metropolitan areas, many in communities that are among the most affluent in the U.S. or Asia, including Denver, Detroit, Honolulu, Kansas City, Los Angeles, Miami, Nashville, New York City, Orlando, Salt Lake City, San Francisco, San Juan, Sarasota, St. Louis, Tampa, Washington, D.C., Hanam (South Korea), Xi'an (China), and Zhengzhou (China);

range in size between 236,000 and 1.7 million square feet of GLA and between 186,000 and 1.0 million square feet of Mall GLA, with an average of 1.0 million and 0.5 million square feet, respectively. The smallest center has approximately 60 stores, and the largest has over 275 stores with an average of 150 stores per shopping center.

have approximately 3,300 stores operated by their mall tenants under approximately 1,700 trade names;

have 57 anchors, operating under 17 trade names;

lease approximately 90% of Mall GLA to national chains (U.S. centers only), including subsidiaries or divisions of Forever 21 (Forever 21 and XXI Forever), The Gap (Gap, Gap Kids, Baby Gap, Banana Republic, Old Navy, Athleta, and others), H&M, and Limited Brands (Bath & Body Works/White Barn Candle, Pink, Victoria's Secret, and others); and

are among the highest quality centers in the U.S. public regional mall industry as measured by our high portfolio average of mall tenants' sales per square foot. In 2017, our mall tenants at comparable centers reported average sales per square foot of $810.

The most important factor affecting the revenues generated by the centers is leasing to mall tenants (including temporary tenants and specialty retailers), which represents approximately 90% of revenues. Anchors account for less than 10% of revenues because many own their stores and, in general, those that lease their stores do so at rates substantially lower than those in effect for mall tenants.

Our portfolio is concentrated in highly productive shopping centers. Of our 24 owned centers, 21 have annualized rent rolls at December 31, 2017 of over $10 million. We believe that this level of productivity is indicative of the centers' strong competitive positions and is, in significant part, attributable to our business strategy and philosophy. We believe that our high-quality shopping centers are the least susceptible to direct competition because (among other reasons) anchors and specialty retail stores do not find it economically attractive to open additional stores in the immediate vicinity of an existing location for fear of competing with themselves. We also believe that our centers' success can be attributed in part to their other characteristics, such as being well-designed with effective layouts, natural light, good physical condition, strong retail programming, state-of-the-art technology infrastructure, and other amenities. Many of our shopping centers are also strategically located in high-quality markets, with convenient access to customers, including significant tourist traffic.

3


Business Strategy and Philosophy

We believe that the shopping center business is not simply a real estate development business, but rather an operating business in which a retailing approach to the ongoing management and leasing of the centers is essential. Thus we:

offer retailers a location where they can maximize their profitability. We believe leading retailers and emerging concepts choose to showcase their brand in the best markets and highest quality assets;

offer a large, diverse selection of retail stores and dining in each center to give customers a broad selection of consumer goods, food, and entertainment and a variety of price ranges;

endeavor to increase overall mall tenants' sales by leasing space to a constantly changing mix of tenants, thereby increasing rents over time;

seek to anticipate trends in our industry and emphasize ongoing introductions of new concepts into our centers. Due in part to this strategy, a number of successful retail trade names have opened their first mall stores in our centers. In addition, we have brought to the centers "new to the market" retailers and other retailers that previously served customers through online presences. We believe that the execution of this leasing strategy is an important element in building and maintaining customer loyalty and increasing mall productivity; and

provide innovative initiatives, including those that utilize technology and the Internet, to increase revenues, enhance the shopping experience, personalize our relationship with shoppers, build customer loyalty, and increase mall tenant sales, with the following as examples:

we are continuing to invest in other synergistic digital capabilities and are a developer of the "Smart Mall" concept. Of the 24 shopping centers in our portfolio, 20 are considered to be "Smart Malls." This technology includes a new fiber optic network throughout the centers, free shopper Wi-Fi, navigation and directory technology, advanced energy management, high-speed networking options for our tenants, new digital, mobile shopper engagement, and advanced shopper analytics.,

our Taubman website program connects shoppers to each of our individual center brands through the Internet;

we have a robust email program reaching our most loyal customers weekly and our social media sites offer retailers and customers an immediate geo-targeted communication vehicle;

we have pioneered an indoor navigation technology that has the potential to significantly change a shopper's experience and connect them to retailers in new ways. Since its pilot in 2014, we have rolled out the indoor navigation technology at 15 shopping centers in our portfolio;

we have begun installing "smart parking" systems at some of our shopping centers, providing customers real-time information about parking availability, most convenient spots, and directions to their parked cars; and

we were one of the first mall companies to implement a third-party loyalty program that directly and automatically connects shopper credit card activity within the shopping center to rewards earned in order to drive repeat shopper visits.

Our leasing strategy involves assembling a diverse and unique mix of mall tenants in each of the centers in order to attract customers, thereby generating higher sales by mall tenants. High sales by mall tenants make the centers attractive to prospective renewal and new tenants, thereby increasing the rental rates that current and prospective tenants are willing to pay. We have implemented an active leasing strategy to increase the centers' productivity and to set minimum rents at higher levels. Elements of this strategy include renegotiating existing leases and leasing space to prospective tenants that would enhance a center's retail mix.

The shopping centers compete for retail consumer spending through diverse, in-depth presentations of predominantly fashion merchandise in an environment intended to facilitate customer shopping. Many of our centers include stores that target high-end customers, and such stores may also attract other retailers to come to the center. Each center is always individually merchandised in light of the demographics of its potential customers within convenient driving distance. When necessary, we consider rebranding existing shopping centers in order to maximize customer loyalty, maintain and increase mall tenant sales, and achieve greater profitability.

4


Recent Trends in Retail

The U.S. shopping center industry is currently facing a number of challenges. Across the industry, department store sales have weakened and store closures have increased, with mature mall tenants and anchors rationalizing square footage. Mall tenant sales have been in an extended period of flattened growth. While there has been some stabilization of the retail landscape recently, the current retail headwinds have the potential to be prolonged and ultimately may still result in lost rent and increased unscheduled terminations.

The impact of e-commerce on shopping center retail has been steadily increasing. There have been secular changes in shopper behavior affecting how, where, and what consumers shop for. Technology has intervened in the direct relationship between shoppers and the mall by enabling them to research, compare, and purchase products online easily, challenging our unique position as the main shopping portal within a trade area.

While challenging traditional retail in the shorter-term, e-commerce is also making high quality brick-and-mortar assets more valuable, as retailers focus their real estate investments on the strongest assets. Successful retailers understand that a combination of both physical and digital channels best meet their customer needs. Physical locations are an important distribution channel that reduce order fulfillment and customer acquisition costs, while improving website traffic and brand recognition. Physical locations also allow for tenants to most successfully express their full brand statement, creating emotional connections to customers. We strive to position our assets to be desirable platforms for omni-channel retailers, believing technology improves the customer experience and will continue to do so, from the front of the house, logistics, efficiency, pricing, customer acquisition, customer knowledge and service.

Over time we believe high-quality mall portfolios such as ours will continue to gain market share of mall tenant sales and rents. We expect to achieve this because brick-and-mortar remains the heart of omni-channel retailing. Our high-quality portfolio of shopping centers complements retailers' strategies by positioning their brands among high-end, productive retailers in the best markets. We believe the current environment of consolidation of shopping centers will cause high-quality portfolios such as ours to become more valuable, solidifying our position in our current markets, and ultimately leading to greater market share. As an upscale, niche player in our industry, most of our assets have a unique value proposition in their respective markets - nearly 80% of our malls are number one or two in their markets. They remain critical brick-and-mortar locations for retail brands and important destinations for shoppers. This is a strength of our assets that represents a key advantage against our larger competitors in our industry.

Apparel retailers, traditionally a dominant category for malls, have been facing particularly challenging times of late. While it is prudent to continuously adjust the use of space in order to broaden the mall experience, we believe that dramatic reallocation of in-line space to other tenants across the board for the sake of reducing exposure to apparel is neither economically sustainable nor strategically necessary. However, we expect that additional dining, entertainment, grocery, fitness, events and other new uses over time will encourage more shopping destination trips and strengthen our malls as social hubs in their communities.

Throughout the industry, traditional department stores have been experiencing declining sales and market shares. As a result, some department stores have been pursuing strategies of consolidation and/or closure of under-performing locations. Given the overall quality of our real estate, however, many of our department stores have been performing comparatively well. As a result, we do not expect that we will have as many opportunities as others in our industry to reacquire and re-purpose anchor locations, with department stores often being reluctant to exit our malls. However, in the event of anchor closures, we generally expect re-purposing of anchors to add value strategically and be accretive financially.


5


Potential For Growth

Our principal objective is to enhance shareowner value. We seek to maximize the financial results of our core assets, while also pursuing a growth strategy that includes redevelopment of existing centers as well as a new center development program. As our current development pipeline is now largely complete in the U.S., our emphasis will now be on strengthening and growing our core assets, in addition to stabilizing our newest projects and executing our redevelopments. We continue to invest for the future and are creating value in our centers that is intended to lead to sustained growth for our shareowners. Our internally generated funds and distributions from operating centers and other investing activities (including strategic dispositions), augmented by use of our existing revolving lines of credit and unsecured term loans, provide resources to maintain our current operations and assets, pay dividends, and fund a portion of our major capital investments. Generally, our need to access the capital markets is limited to refinancing debt obligations at or near maturity and, funding major capital investments. From time to time, we also may access the equity markets or sell interests in shopping centers to raise additional funds or refinance existing obligations on a strategic basis, including using excess proceeds therefrom.

Internal Growth

As noted in "Business Strategy and Philosophy" above in detail, our core business strategy is to maintain a portfolio of properties that deliver above-market profitable growth by providing targeted retailers with the best opportunity to do business in each market and targeted shoppers with the best local shopping experience for their needs.

We continue to expect that over time a significant portion of our future growth will come from our existing core portfolio and business. We have always had and will continue to have a culture of intensively managing our assets and maximizing the rents from mall tenants as this is a key growth driver going forward.

An element of our internal growth over time is the strategic expansion and redevelopment of existing properties to update and enhance their market positions by adding, replacing, re-tenanting, or otherwise re-merchandising the use of anchor space, increasing mall tenant space, or rebranding centers. Most of the centers have been designed to accommodate expansions. Expansion projects can be as significant as new shopping center construction in terms of scope and cost, requiring governmental and existing anchor store approvals, design and engineering activities, including rerouting utilities, providing additional parking areas or decking, acquiring additional land, and relocating anchors and mall tenants (all of which must take place with minimum disruption to existing tenants and customers).

A comprehensive renovation is underway at Beverly Center and is scheduled to be completed by the 2018 holiday season. Additionally, we have an ongoing redevelopment project at The Mall at Green Hills that will add approximately 170,000 square feet of incremental GLA that we expect to be completed in 2019.

We also look to monetize our common areas through robust specialty leasing and sponsorship programs. About 8% of our 2017 comparable center Net Operating Income (NOI) was generated from such programs. In the past five years, comparable center NOI from leasing and sponsorship programs has ranged from 8% to 11%. Examples found in our centers include destination holiday experiences, customer service programs, sponsored children's play areas, and turnkey attractions. In addition, we monetize our common areas through static and digital media that comes in a variety of formats.

External Growth

We pursue various areas of external growth, including traditional center development in the U.S., new opportunities in Asia, and acquisitions. We opened one new center in 2017 and three new centers in 2016: one in Hawaii, one in South Korea, and two in China. We continue to evaluate various development and acquisition possibilities for additional new centers.

Development of New U.S. Centers

We have developed 14 U.S. properties since 1998, or an average of about one every 18 months. Over the past three years, we have opened two new U.S. centers:

International Market Place opened in Waikiki, Honolulu, Hawaii in August 2016. We have a 93.5% interest in the 0.3 million square foot center, which is subject to a participating ground lease.

The Mall of San Juan opened in San Juan, Puerto Rico in March 2015. We have a 95% ownership interest in the 0.6 million square foot center.


6


Given the over saturation of suburban retail in the U.S., almost no new supply of suburban malls is expected in the foreseeable future. Current trends suggest that any future new supply of malls will likely be limited and in the format of mixed-use or destination projects. We do expect expansions of high-quality malls will continue as lower quality centers atrophy. In the next five years, in addition to the redevelopment of Beverly Center and The Mall at Green Hills expansion, we will pro-actively pursue the re-purposing of anchors where appropriate. We do not anticipate significant new ground-up developments.

While we will continue to evaluate potential future U.S. development projects using criteria, including financial criteria for rates of return, similar to those employed in the past, no assurances can be given that the adherence to these criteria will produce comparable or projected results in the future. In addition, the costs of shopping center development opportunities that are explored but ultimately abandoned will, to some extent, diminish the overall return on development projects taken as a whole. See "MD&A – Liquidity and Capital Resources – Capital Spending" for further discussion of our development activities.

In 2015, we made a decision not to move forward with an enclosed mall that was intended to be part of the Miami Worldcenter mixed-use, urban development in Miami, Florida. As a result of this decision, an impairment charge of $11.8 million was recognized in the fourth quarter of 2015, which represents previously capitalized costs related to the pre-development of the enclosed mall plan.
Miami Worldcenter's master developer, Miami Worldcenter Associates, is pursuing a high street retail plan as a part of their master development of the site. We have agreed with Miami Worldcenter Associates on terms for a co-leasing services agreement with The Forbes Company for the retail portion of the street level project, with an option to purchase the retail component at a favorable price once it opens.

Asia

We are pursuing a development strategy in Asia to:

provide additional growth through exposure to countries that have more rapidly growing gross domestic products (GDPs);

utilize our expertise, including leasing/retailer relationships, design/development expertise, and operational/marketing skills; and

take advantage of a generational opportunity, as the demand for high-quality retail is early to mid-cycle, there is significant deal flow, and it diversifies longer-term growth investment opportunities.

Taubman Asia is responsible for our operations and development in the Asia-Pacific region, focusing on China and South Korea. We have pursued a strategy of seeking strategic partners to jointly develop high quality malls in our areas of focus. Taubman Asia is engaged in projects that leverage our strong retail planning, design, and operational capabilities with our strategic partners being responsible for acquiring and entitling the land and leading construction.

We currently have two joint ventures with Wangfujing Group Co., Ltd (Wangfujing), one of China's largest department store chains. The first joint venture owns an interest in and manages an approximately 1.0 million square foot shopping center, CityOn.Xi'an, which opened in April 2016 and is located at Xi'an Saigao City Plaza, a large-scale mixed-use development in Xi'an, China. We have an effective 50% ownership interest in the center. The second joint venture with Wangfujing owns an interest in and manages an approximately 1.0 million square foot shopping center, CityOn.Zhengzhou, which opened in March 2017 and is located in Zhengzhou, China. We beneficially own a 49% interest in the center.

We also have a joint venture with Shinsegae Group, one of South Korea's largest retailers, that owns and manages an approximately 1.7 million square foot shopping center, Starfield Hanam, in Hanam, South Korea. The center opened in September 2016. We have partnered with a major institution in Asia for a 49% ownership interest in Starfield Hanam. The institutional partner owns 14.7% of the center, bringing our effective ownership to 34.3%.

As part of our Asia strategy, we look to mitigate our operating costs through third-party service contracts when possible. We previously provided leasing and management services for IFC Mall in Yeouido, Seoul, South Korea, although these services ended in 2017 in connection with a change in ownership of the mall. We also currently provide leasing and management 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.


7


We envision that the Asia business will be a smaller but complementary and important part of the overall business. We have built three high-quality shopping centers and a fully integrated development and management platform with strategic, local partners. Our goal is to create a platform that finances itself by bringing in new capital partners, and potentially adding additional operating partners where appropriate, to create a less capital-intensive business that can grow the asset base with improved returns on equity.

We also attempt to manage risks and financial returns for our Asia developments through actively managing and limiting pre-construction costs, ensuring there is adequate anchor and tenant interest in the project prior to construction, and pursuing initial projects that are already fully entitled with partners having appropriate expertise in land acquisition and local regulatory issues. Developments in China and South Korea are subject to income taxes and taxes upon repatriation of earnings that also must be planned for and managed.

See "MD&A - Results of Operations - Taubman Asia" for further details regarding our activities in Asia.

Strategic Acquisitions

We expect attractive opportunities to acquire existing centers, or interests in existing centers, from other companies may be scarce and expensive. However, we continue to look for assets in both the U.S. and Asia where we can add significant value or that would be strategic to the rest of our portfolio. Our objective is to acquire existing centers only when they are compatible with the quality of our portfolio, or can be redeveloped to that level. We also may acquire additional interests in centers currently in our portfolio.

In March 2016, a joint venture we formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG’s beneficial share) in cash, excluding transaction costs. This purchase is consistent with our strategy to own high quality, dominant assets in great markets. See "MD&A - Results of Operations - Acquisition - Country Club Plaza" for additional information regarding the acquisition.
Rental Rates
As leases have expired in the centers, we have generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. Generally, center revenues have increased as older leases rolled over or were terminated early and replaced with new leases negotiated at current rental rates that were usually higher than the average rates for existing leases. In periods of increasing sales, rents on new leases will generally tend to rise. In periods of slower growth or declining sales, rents on new leases will generally grow more slowly or will decline for the opposite reason, as tenants' expectations of future growth become less optimistic. Where appropriate, we are occasionally making decisions as we re-tenant space to use some shorter leases in order to maintain occupancy, merchandising, and preserve cash flow when possible. See "Risk Factors" for further information.

The following table contains certain information regarding average mall tenant minimum rent per square foot of our Consolidated Businesses and Unconsolidated Joint Ventures at the comparable centers (centers that had been owned and open for the current and preceding year, excluding centers impacted by significant redevelopment activity, as well as The Mall of San Juan due to the impact of Hurricane Maria). Comparable center statistics for 2017 and 2016 exclude Beverly Center, CityOn.Xi'an, CityOn.Zhengzhou, Country Club Plaza, International Market Place, The Mall of San Juan, and Starfield Hanam. Average rent per square foot statistics reflect the contractual rental terms of the leases currently in effect and include the impact of rental concessions.
 
2017
 
2016
 
2015
 
2014
 
2013
Average rent per square foot:
 
 
 
 
 
 
 
 
 
Consolidated Businesses
$
64.82

 
$
63.83

 
$
61.37

 
$
59.48

 
$
59.88

Unconsolidated Joint Ventures
58.31

 
58.10

 
57.28

 
58.65

 
52.68

Combined
61.66

 
61.07

 
59.41

 
59.14

 
57.33


See "MD&A – Rental Rates and Occupancy" for information regarding opening and closing rents per square foot for our centers.


8


Lease Expirations

The following table shows scheduled lease expirations for mall tenants based on information available as of December 31, 2017 for the next ten years for all owned centers in operation at that date.

 
 
Tenants 10,000 square feet or less (1)
 
Total (1)(2)
Lease
Expiration
Year
 
Number of
Leases
Expiring
 
Leased Area in
Square Footage
 
Annualized Base
Rent Under
Expiring Leases
Per Square Foot (3)
 
Percent of Total Leased Square Footage Represented by Expiring Leases
 
Number of
Leases
Expiring
 
Leased Area in
Square Footage
 
Annualized Base
Rent Under
Expiring Leases
Per Square Foot (3)
 
Percent of Total Leased Square Footage Represented by Expiring Leases
   2018 (4)
 
220
 
473

 
$
51.75

 
6.2
%
 
233
 
675
 
$
44.26

 
5.2
%
2019
 
458
 
844

 
51.00

 
11.1

 
471
 
1,243
 
42.53

 
9.6

2020
 
328
 
672

 
53.64

 
8.9

 
344
 
952
 
47.80

 
7.3

2021
 
429
 
1,065

 
62.66

 
14.1

 
455
 
1,701
 
48.01

 
13.1

2022
 
370
 
998

 
56.62

 
13.2

 
400
 
1,650
 
45.27

 
12.7

2023
 
247
 
754

 
60.01

 
9.9

 
264
 
1,051
 
52.30

 
8.1

2024
 
214
 
653

 
64.84

 
8.4

 
231
 
892
 
55.86

 
6.9

2025
 
200
 
716

 
65.96

 
9.4

 
221
 
1,134
 
57.37

 
8.7

2026
 
203
 
596

 
74.66

 
7.9

 
226
 
1,133
 
56.75

 
8.7

2027
 
150
 
460

 
72.83

 
6.1

 
163
 
850
 
47.18

 
6.5


(1)
Excludes rents from temporary in-line tenants and centers not open and operating at December 31, 2017.
(2)
In addition to tenants with spaces 10,000 square feet or less, includes tenants with spaces over 10,000 square feet and value and outlet center anchors.  Excludes rents from mall anchors and temporary in-line tenants.
(3)
Weighted average of the annualized contractual rent per square foot as of the end of the reporting period.
(4)
Excludes leases that expire in 2018 for which renewal leases or leases with replacement tenants have been executed as of December 31, 2017.

We believe that the information in the table is not necessarily indicative of what will occur in the future, principally because of early lease terminations at the centers. The average remaining term of the leases that were terminated during the 2012 to 2017 period was less than one year. The average term of leases signed was approximately seven and six years during 2017 and 2016, respectively.

In addition, mall tenants at the centers may seek the protection of the bankruptcy laws, which could result in the termination of such tenants' leases and thus cause a reduction in cash flow. In 2017, tenants representing 3.1% of leases filed for bankruptcy during the year compared to 0.8% in 2016. This statistic has ranged from 0.3% to 3.1% of leases per year over the last five years. The annual provision for losses on accounts receivable represents 1.8% of total revenues in 2017 and has ranged from 0.1% to 1.8% over the last five years. However, many bankruptcies do not ultimately impact our occupancy, historically less than half of bankrupt tenants actually close.

















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Occupancy

Occupancy and leased space statistics include temporary in-line tenants (TILs) and value and outlet center anchors (Arizona Mills, Dolphin Mall, Great Lakes Crossing Outlets, and Taubman Prestige Outlets Chesterfield). The following table shows ending occupancy and leased space for the past five years:
 
2017
 
2016
 
2015
 
2014
 
2013
All Centers:
 
 
 
 
 
 
 
 
 
Ending occupancy
94.8
%
 
93.9
%
 
94.2
%
 
94.1
%
 
95.8
%
Leased space
95.9

 
95.6

 
96.1

 
96.0

 
96.7

 
 
 
 
 
 
 
 
 
 
Comparable Centers:
 
 
 
 
 
 
 
 
 
Ending occupancy
95.0
%
 
94.7
%
 
 
 
 
 
 
Leased space
96.0

 
96.1

 
 
 
 
 
 

Major Tenants

No single retail company represents 5% or more of our Mall GLA or revenues. The combined operations of Forever 21 accounted for about 4% of Mall GLA as of December 31, 2017 and less than 3% of 2017 minimum rent. No other single retail company accounted for more than 4% of Mall GLA as of December 31, 2017 or 4% of 2017 minimum rent.

The following table shows the ten mall tenants who occupy the most Mall GLA at our centers and their square footage as of December 31, 2017:
Tenant
 
# of
Stores
 
Square
Footage
 
% of
Mall GLA
Forever 21 (Forever 21, XXI Forever)
 
17
 
513,277
 
4.3%
The Gap (Gap, Gap Kids, Baby Gap, Banana Republic, Old Navy, Athleta, and others)
 
51
 
441,484
 
3.7
H&M
 
21
 
420,946
 
3.5
Limited Brands (Bath & Body Works/White Barn Candle, Pink, Victoria's Secret, and others)
 
40
 
263,179
 
2.2
Williams-Sonoma (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, and others)
 
29
 
229,690
 
1.9
Urban Outfitters (Anthropologie, Free People, Urban Outfitters)
 
28
 
219,985
 
1.8
Ascena Retail Group (Ann Taylor, Ann Taylor Loft, Justice, and others)
 
42
 
209,757
 
1.7
Abercrombie & Fitch (Abercrombie & Fitch, Hollister, and others)
 
26
 
193,366
 
1.6
Inditex (Zara, Zara Home, Massimo Dutti, Bershka, and others)
 
19
 
180,989
 
1.5
Foot Locker (Foot Locker, Lady Foot Locker, Champs Sports, Foot Action USA, and others)
 
37
 
173,970
 
1.4


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Competition

There are numerous shopping facilities that compete with our properties in attracting retailers to lease space. We compete with other major real estate investors with significant capital for attractive investment opportunities. We also compete with online retailers as they draw sales away from our tenants, which impacts rental rates. See "Risk Factors" for further details of our competitive business.

Seasonality

The shopping center industry in the U.S. 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. See "MD&A – Seasonality" for further discussion.

Environmental Matters

See "Risk Factors" regarding discussion of environmental matters.

Financial Information about Geographic Areas

We have not had material consolidated revenues attributable to foreign countries in the last three years or material consolidated long-lived assets located in a country other than the United States, as our investments in Asia are unconsolidated joint ventures and are accounted for under the equity method.

Personnel

We have engaged the Manager to provide real estate management, acquisition, development, leasing, and administrative services required by us and our properties in the U.S. Taubman Asia Management Limited (TAM) and certain other affiliates provide similar services for third parties in China and South Korea as well as Taubman Asia.

As of December 31, 2017, the Manager, TAM, and certain other affiliates had 468 full-time employees. See "Note 1 - Summary of Significant Accounting Policies - Severance Policies and Restructuring Charge" to our consolidated financial statements for information on our recent restructuring.

Available Information

The Company makes available free of charge through its website at www.taubman.com all reports it electronically files with, or furnishes to, the SEC, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC. These filings are also accessible on the SEC’s website at www.sec.gov.


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Item 1A. RISK FACTORS.

The following factors and other factors discussed in this Annual Report on Form 10-K could cause our actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere in future Securities and Exchange Commission (SEC) reports or statements made by our management from time to time. These factors may have a material adverse effect on our business, financial condition, operating results and cash flows, and should be carefully considered. We may update these factors in our future periodic reports.

The economic performance and value of our shopping centers are dependent on many factors.

The economic performance and value of our shopping centers are dependent on various factors. Additionally, these same factors will influence our decision on whether to go forward on the development of new shopping centers, acquisitions and dispositions, and may also affect the ultimate economic performance and value of projects under construction and acquired shopping centers. Adverse changes in the economic performance and value of our shopping centers would also adversely affect our income and cash available to pay dividends.

Such factors include:

changes in the global, national, regional, and/or local economic and geopolitical climates. Changes such as a global economic and financial market downturn may cause, among other things, a significant tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending, and lower consumer confidence and net worth;

changes in specific local economies, decreases in tourism, and/or other real estate conditions. These changes may have a more significant impact on our financial performance due to the geographic concentration of some of our shopping centers;

changes in mall tenant sales performance of our shopping centers, which over the long term are the single most important determinant of revenues of the shopping centers because mall tenants (including temporary tenants and specialty retailers), provide approximately 90% of these revenues and because mall tenant sales determine the amount of rent, overage rent, and recoverable expenses that mall tenants can afford to pay. In times of stagnant or depressed sales, mall tenants may become less willing to pay traditional levels of rent;

changes in business strategies of anchors and key tenants. Anchors and key tenants may adopt new or modify existing strategies in order to adapt to new challenges and shifts in the economic environment. Such strategies could include improving the overall in-store customer experience and creating a desired destination, which could impact the type of space anchors and key tenants desire in our shopping centers. Beyond changing the existing experience, other strategies could include consolidation, contraction, renegotiation of business arrangements, or closing;

changes in consumer shopping behavior. Certain merchandise categories are experiencing lower growth in traditional shopping malls and technology has significantly impacted consumer spending habits;

availability and cost of financing. While current interest rates continue to be historically low, it is uncertain how long such rates will continue. Many forecasts suggest additional federal funds rate increases may occur during 2018, similar to those recently experienced;

the public perception of the safety, convenience, and attractiveness of our shopping centers;

legal liabilities;

changes in government regulations; and

changes in real estate zoning and tax laws.

These factors may ultimately impact the valuation of certain long-lived or intangible assets that are subject to impairment testing, potentially resulting in impairment charges, which may be material to our financial condition or results of operations. See "MD&A - Application of Critical Accounting Policies and New Accounting Pronouncements - Valuation of Shopping Centers" for additional information regarding impairment testing.


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In addition, the value and performance of our shopping centers may be adversely affected by certain other factors discussed below including the state of the capital markets, expansion in Asia, unscheduled closings or bankruptcies of our anchors and tenants, competition, uninsured losses, the impact of technology on consumer spending, and environmental liabilities.

We are in a competitive business.

There are numerous shopping facilities that compete with our properties in attracting retailers to lease space. Our ability to attract tenants to our shopping centers and lease space is important to our success, and difficulties in doing so can materially impact our shopping centers' performance. The existence of competing shopping centers could have a material adverse impact on our ability to develop or operate shopping centers, lease space to desirable anchors and tenants, and on the level of rents that can be achieved. In addition, retailers at our properties face continued competition from shopping through various means and channels, including via the Internet, lifestyle centers, value and outlet malls, wholesale and discount shopping clubs, and television shopping networks. Competition of this type could adversely affect our revenues and cash available for distribution to shareowners.

As new technologies emerge, the relationship among customers, retailers, and shopping centers are evolving on a rapid basis and we may not be able to adapt to such new technologies and relationships on a timely basis. Our relative size may limit the capital and resources we are willing to allocate to invest in strategic technology to enhance the mall experience, which may make our shopping centers relatively less desirable to anchors, mall tenants, and consumers. Additionally, a small but increasing number of tenants utilize our shopping centers as showrooms or as part of an omni-channel strategy (allowing customers to shop seamlessly through various sales channels). As a result, customers may make purchases through other sales channels during or immediately after visiting our shopping centers, with such sales not being captured currently in our tenant sales figures or monetized in our minimum or overage rents.

We compete with other major real estate investors with significant capital for attractive investment opportunities. These competitors include other REITs, investment banking firms, and private and institutional investors, some of whom have greater financial resources or have different investment criteria than we do. In particular, there is competition to acquire, develop, or redevelop highly productive retail properties. This could become even more severe as competitors gain size and economies of scale as a result of merger and consolidation activity. This competition may impair our ability to acquire, develop, or redevelop suitable properties, and to attract key retailers, on favorable terms in the future.

Our real estate investments are relatively illiquid.

We may be limited in our ability to vary our portfolio in response to changes in economic, market, or other conditions by restrictions on transfer imposed by our partners or lenders. If we were unable to refinance our debt at a shopping center, we may be required to contribute capital to repay debt, fund capital spending, or other cash requirements. In addition, under TRG’s partnership agreement, upon the sale of a center or TRG’s interest in a center, TRG may be required to distribute to its partners all or a portion of the cash proceeds received by TRG from such sale (a special distribution). If TRG made such a distribution, the sale proceeds would not be available to finance TRG’s activities, and the sale of a center may result in a decrease in funds generated by continuing operations and in distributions to TRG’s partners, including us. Further, pursuant to TRG’s partnership agreement, TRG may not dispose or encumber certain of its shopping centers or its interest in such shopping centers without the consent of a majority-in-interest of its partners other than the Company, which is currently held by the Taubman Family (as defined herein).

We may acquire or develop new properties and/or redevelop and expand our existing properties, and these activities are subject to various risks.

We pursue development, redevelopment, expansion, and acquisition activities as opportunities arise, and these activities are subject to the following risks:

the pre-construction phase for a new project often extends over several years, and the time to obtain landowner, anchor, and tenant commitments, zoning and regulatory approvals, and financing can vary significantly from project to project;

we may not be able to obtain the necessary zoning, governmental and other approvals, or anchor or tenant commitments for a project, or we may determine that the expected return on a project is not sufficient; if we abandon our development activities with respect to a particular project, we may incur a loss on our investment;

construction and other project costs may exceed our original estimates because of increases in material and labor costs, delays, nonperformance of services by our contractors, increases in tenant allowances, costs to obtain anchor and tenant commitments, and other reasons;


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we may not be able to obtain financing or to refinance construction loans at desired loan-to-value ratios or at all, which are generally recourse to TRG;

we may be obligated to contribute funding for development, redevelopment, or expansion projects in excess of our ownership requirements if our partners are unable or are not required to fund their ownership share;

equity issuances as a source of funds, directly as consideration for acquisitions or indirectly through capital market transactions, may become less financially favorable as affected by our stock price as well as general market conditions;

occupancy rates and rents, as well as occupancy costs and expenses, at a completed project or an acquired property may not meet our projections at opening or stabilization, and the costs of development activities that we explore but ultimately abandon will, to some extent, diminish the overall return on our completed development projects; and

competitive pressures in our targeted markets may negatively impact our ability to meet our leasing objectives.

Certain of our projects represent the retail portion of larger mixed-use projects. As a result, there may be certain additional risks associated with such projects, including:

increased time to obtain necessary permits and approvals;

increased uncertainty regarding shared infrastructure and common area costs; and

impact on sales and performance of the retail center from delays in opening of other uses and or/the performance of such uses, or the inability to open or finance such other uses.

In addition, economic, market, and other conditions may reduce viable development and acquisition opportunities in the U.S. that meet our unlevered return requirements in the short to intermediate horizon. As a result, we anticipate focusing on strategic repurposing of shopping centers (including potential repurposing of certain anchor stores).

Clauses in leases with certain tenants of our development or redevelopment properties include inducements, such as reduced rent and tenant allowance payments, that can reduce our rents, Funds from Operations (FFO), and/or returns achieved. The leases for a number of the tenants that have opened stores at properties we have developed or redeveloped have reduced rent from co-tenancy clauses that allow those tenants to pay reduced rent until occupancy at the respective property reaches certain thresholds and/or certain named co-tenants open stores at the respective property. Additionally, some tenants may have rent abatement clauses that delay rent commencement for a prolonged period of time after initial occupancy. The effect of these clauses reduces our rents and FFO while they are applicable. We expect to continue to offer co-tenancy and rent abatement clauses in the future to attract tenants to our development and redevelopment properties. As a result, our current and future development and redevelopment properties are more likely to achieve lower returns during their stabilization periods than other projects of this nature historically have, which may adversely impact our investment in such developments, as well as our financial condition and results of operations.

Dispositions may not achieve anticipated results.

We actively maintain a strategy of recycling capital to achieve growth over time. At times this strategy may include strategically disposing of assets to improve the overall performance of our core mall portfolio, measured by: achieving improved portfolio metrics, demographics, and operating statistics, such as higher sales productivity and occupancy rates; accelerating future growth targets in our operating results and FFO; strengthening of our balance sheet; and creating increased net asset value for our shareowners over time. However, we may not achieve some or all of the targeted results we originally anticipated at the time of disposition. If we are not successful at achieving the anticipated results from any disposition, there is potential for a significant adverse impact on our returns and our overall profitability. We may be unable to dispose of one or more shopping centers at desirable cap rates or at all, due to general economic reasons or, in cases of lower productivity malls, the perception of over-capacity of such malls in the U.S.

We hold investments in joint ventures in which we do not control all decisions, and we may have conflicts of interest with our joint venture partners.

Some of our shopping centers and shopping center projects are partially owned by non-affiliated partners through joint venture arrangements. As a result, we do not control all decisions regarding those shopping centers and may be required to take actions that are in the interest of the joint venture partners but not our best interests. Accordingly, we may not be able to favorably resolve any issues that arise with respect to such decisions, or we may have to provide financial or other inducements to our joint venture partners to obtain such resolution.

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For our unconsolidated joint ventures, we do not necessarily control decisions as to the design or operation of internal controls over accounting and financial reporting, including those relating to maintenance of accounting records, authorization of receipts and disbursements, selection and application of accounting policies, reviews of period-end financial reporting, and safeguarding of assets. Therefore, we are exposed to increased risk that such controls may not be designed or operating effectively, which could ultimately affect the accuracy of financial information related to these joint ventures as prepared by our joint venture partners.

Various restrictive provisions and rights govern sales or transfers of interests in our joint ventures. These may work to our disadvantage because, among other things, we may be required to make decisions as to the purchase or sale of interests in our joint ventures at a time that is disadvantageous to us.

In our joint ventures, we may partner with entities with whom we do not have a historical business relationship and therefore there is additional risk in working through operational, financial, and other issues.

Investors are cautioned that deriving our beneficial interest in a joint venture as our ownership interest in individual financial statement items of that joint venture may not accurately depict the legal and economic implications of holding a noncontrolling interest in it.

Our business activities and pursuit of new opportunities in Asia may pose unique risks.

We have offices in Hong Kong, Seoul, Beijing, and Shanghai and we are pursuing and evaluating investment opportunities in various locations across Asia. We have invested in three joint ventures to develop and operate shopping centers in Asia and may invest in other shopping centers in the future. In addition, we provide leasing and management services for third parties. In addition to the general risks described in this report, our international activities are subject to unique risks, including:
adverse effects of changes in exchange rates for foreign currencies and the risks of hedging related thereto;
changes in and/or difficulties in operating in foreign political environments;
difficulties in operating with foreign vendors and joint venture and business partners;
difficulties of complying with a wide variety of foreign laws including laws affecting funding and use of cash, corporate governance, property ownership restrictions, development activities, operations, anti-corruption, taxes, and litigation;
changes in and/or requirements of complying with applicable laws and regulations in the U.S. that affect foreign operations, including the U.S. Foreign Corrupt Practices Act (FCPA);
difficulties in managing international operations, including difficulties that arise from ambiguities in contracts written in foreign languages and difficulties that arise in enforcing such contracts;
differing lending practices, including lower loan-to-value ratios and increased difficulty in obtaining construction loans or timing thereof;
differing employment and labor issues;
economic downturn in foreign countries or geographic regions where we have significant operations, such as in China and South Korea;
economic tensions between governments and changes in international trade and investment policies, especially between the U.S. and China;
obstacles to the repatriation of earnings and cash;
obstacles to various government approval processes and other hurdles in funding our Chinese projects;
lower initial investment returns than those generally experienced in the U.S.;
obstacles to hiring and maintaining appropriately trained staff;
differences in cultures including adapting practices and strategies that have been successful in the U.S. mall business to retail needs and expectations in new markets; and
labor discord, war, terrorism (including incidents targeting us), political instability and natural disasters.

15


In addition, any significant or prolonged deterioration in U.S.-China relations could adversely affect our China business. Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China.

In regards to foreign currency, our projects in China and South Korea require investments and have, and may in the future require debt financing denominated in foreign currencies, with the possibility that such investments will be greater than anticipated depending on changes in exchange rates. These projects could also generate returns on or of capital in foreign currencies that could ultimately be less than anticipated as a result of exchange rates. As part of investing in these projects, we are implementing appropriate risk management policies and practices, including the consideration of hedging of foreign currency risks. However, developing an effective foreign currency risk strategy is complex and may be costly, and no strategy can completely insulate us from risk associated with foreign currency fluctuations. Further, we cannot provide assurance that such policies and practices will be successful and/or that the applicable accounting for foreign currency hedges will be favorable to any particular period's results of operations. Foreign currency hedges could be economically beneficial to us, but could have unfavorable accounting impacts, depending on the qualification of the hedges for hedge accounting treatment.

As we expand our international activities and levels of investment, these risks could increase in significance and adversely affect our financial returns on international projects and services and overall financial condition. We have put in place policies, practices, and systems for mitigating some of these international risks, although we cannot provide assurance that we will be entirely successful in doing so.

We could be subject to liability, penalties and other sanctions and other adverse consequences arising out of non-compliance with the FCPA or foreign anti-corruption laws.

We are subject to the FCPA, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business, and which requires proper record keeping and characterization of payments we make in our reports filed with the SEC. Although we have policies and procedures designed to promote compliance with the FCPA and other anti-corruption laws, we cannot provide assurance that we will continue to be found to be operating in compliance with, or be able to detect violations of, any such laws or regulations. We cannot provide assurance that these policies and procedures will protect us from intentional, reckless or negligent acts committed by our employees, agents, partners, or others acting on our behalf. If our employees, agents, partners, or others acting on our behalf are found to have engaged in such practices, severe penalties and other consequences could be imposed. Those penalties and consequences that may be imposed against us or individuals in appropriate circumstances include, but are not limited to, injunctive relief, disgorgement, significant fines and penalties, and modifications to business practices and compliance programs. In addition, we cannot predict the nature, scope, or effect of future regulatory requirements or investigations to which our international operations might be subject, the manner in which existing laws might be administered or interpreted, or the potential that we may face regulatory sanctions. Any of these violations or remedial measures, if applicable to us, could have a material adverse impact on our business, reputation, results of operations, cash flow, financial condition, liquidity, ability to make distributions to our shareowners, or the value of our investments.

Foreign companies, including some that may compete with us, may not be subject to the FCPA or other anti-corruption laws. Accordingly, such companies may be more likely to engage in activities prohibited by the FCPA or other anti-corruption laws, which could have a significant adverse impact on our returns or our ability to compete for business in such countries.
      
The bankruptcy, early termination, sales performance, or closing of our tenants and anchors could adversely affect us.

We could be adversely affected by the bankruptcy, early termination, sales performance, or closing of tenants and anchors. Certain of our lease agreements include co-tenancy and/or sales-based kick-out provisions which allow a tenant to pay a reduced rent amount and, in certain instances, terminate the lease, if we fail to maintain certain occupancy levels or retain specified named anchors, or if the tenant does not achieve certain specified sales targets. If occupancy or tenant sales do not meet or fall below certain thresholds, rents we are entitled to receive from our retail tenants could be reduced. The bankruptcy of a mall tenant could result in the termination of its lease, which would lower the amount of cash generated by that shopping mall. Replacing mall tenants with better performing, emerging retailers may take longer than our historical experience of re-tenanting due to their lack of infrastructure and limited experience in opening stores as well as the significant competition for such emerging brands. In addition, if a department store operating as an anchor at one of our shopping centers were to cease operating, we may experience difficulty and delay and incur significant expense in replacing the anchor, re-tenanting, or otherwise re-merchandising the use of the anchor space. In addition, the anchor’s closing may lead to reduced customer traffic and lower mall tenant sales. As a result, we may also experience difficulty or delay in leasing spaces in areas adjacent to the vacant anchor space. The early termination or closing of mall tenants or anchors for reasons other than bankruptcy could have a similar impact on the operations of our shopping centers, although in the case of early terminations we may benefit in the short-term from lease cancellation income (See "MD&A – Rental Rates and Occupancy").

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Most recently, certain traditional department stores have experienced challenges including, limited opportunities for new investment/openings, declining sales, and store closures. Department stores' market share is declining, and their ability to drive traffic has substantially decreased. Despite our shopping malls traditionally being driven by department store anchors, in the event of a need for replacement, it may be necessary to consider non-department store anchors. Certain of these non-department store anchors may demand higher allowances than a standard mall tenant due to the nature of the services/products they provide (for example, restaurants or luxury).

Our investments are subject to credit and market risk.

We occasionally extend credit to third parties in connection with the sale of land or other transactions. We also have occasionally made investments in marketable and other equity securities. We are exposed to risk in the event the values of our investments and/or our loans decrease due to overall market conditions, business failure, and/or other nonperformance by the investees or counterparties.

Capital markets may limit our sources of funds for financing activities.

Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets. This could have an impact on our flexibility to react to changing economic and business conditions. A lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds may be materially adversely impacted by such market conditions. Also, our ability to access equity markets as a source of funds may be affected by our stock price as well as general market conditions.

We are obligated to comply with financial and other covenants that could affect our operating activities.

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on our primary unsecured revolving line of credit, $475 million and $300 million unsecured term loans, and the construction facility on International Market Place: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, our primary unsecured revolving line of credit and unsecured term loans have unencumbered pool covenants, which applied to Beverly Center, Dolphin Mall, The Gardens on El Paseo, and Twelve Oaks Mall on a combined basis as of December 31, 2017. These covenants include a minimum number and minimum value of eligible unencumbered assets, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio, and a minimum unencumbered asset occupancy ratio. As of December 31, 2017, the corporate total leverage ratio was the most restrictive covenant. These covenants may restrict our ability to pursue certain business initiatives or certain transactions that might otherwise be advantageous. In addition, failure to meet certain of these financial covenants could cause an event of default under and/or accelerate some or all of such indebtedness which could have a material effect on us.

The Operating Partnership guarantees debt or otherwise provides support for a number of joint venture properties.

Joint venture debt is the liability of the joint venture and the joint venture property is typically encumbered by a mortgage or construction financing. A default by a joint venture under its debt obligations may expose us to liability under a guaranty (see "Note 8 - Notes Payable, Net - Debt Covenants and Guarantees" to our consolidated financial statements for more details on loan guarantees). We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances, or partner loans, although these means of funding are not typically required contractually or otherwise.

Our hedging interest rate protection arrangements may not effectively limit our interest rate risk exposure.

We manage our exposure to interest rate risk through a combination of interest rate protection agreements to effectively fix or cap a portion of our variable rate debt. Our use of interest rate hedging arrangements to manage risk associated with interest rate volatility may expose us to additional risks, including that a counterparty to a hedging arrangement may fail to honor its obligations. We enter into swaps that are exempt from the requirements of central clearing and/or trading on a designated contract market or swap execution facility pursuant to the applicable regulations and rules, and thus there may be more counterparty risk relative to others who do not utilize such exemption. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. We might be subject to additional costs, such as transaction fees or breakage costs, if we terminate these arrangements.


17


Inflation may adversely affect our financial condition and results of operations.

Inflationary price increases could have an adverse effect on consumer spending, which could impact our tenants' sales and, in turn, our tenants' business operations. This could affect the amount of rent these tenants pay, in particular if their leases provide for overage rent or percentage of sales rent, and their ability to pay rent. Also, inflation could cause increases in operating expenses, which could increase occupancy costs for tenants and, to the extent that we are unable to recover operating expenses from tenants, could increase operating expenses for us. In addition, if the rate of inflation exceeds the scheduled rent increases included in our leases, then our profitability and our Net Operating Income would decrease. As of December 31, 2017, approximately 62% of our gross leasable and occupied area included clauses in leases for rent increases based on changes in the Consumer Price Index, although we are attempting to reduce our exposure to such variable rentals as leases are negotiated or renewed.

The occurrence of cyber incidents, a deficiency in our cyber security, or a data breach could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupting data, or stealing confidential information. We rely upon information technology networks and systems, some of which are managed by third-parties, to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Primary risks that could directly result from the occurrence of a cyber incident include, but are not limited to, operational interruption, damage to our tenant relationships, private data exposure (including personally identifiable information, or proprietary and confidential information, of ours and our employees, as well as third parties), and potentially significant response costs. Any such incidents could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, and reduce the benefits of our advanced technologies. We carry cyber liability insurance; however a loss could exceed the limits of the policy. We have implemented processes, procedures and controls to help mitigate these risks, but these measures, our increased awareness of a risk of a cyber incident, and our insurance coverage, do not guarantee that our financial results will not be negatively impacted by such an incident.

Some of our potential losses may not be covered by insurance.

We carry liability, fire, flood, earthquake, extended coverage, and rental loss insurance on each of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, some types of losses, including information technology system failures, punitive damages (in certain states), and lease and other contract claims, which generally are not insured. If an uninsured liability claim or a liability claim in excess of insured limits is made, we may have to make a payment to satisfy such claim. In addition, if an uninsured property loss or a property loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. If this happens, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

In November 2002, Congress passed the "Terrorism Risk Insurance Act of 2002" (TRIA), which required insurance companies to offer terrorism coverage to all existing insured companies for an additional cost. As a result, our property insurance policies are currently provided without a sub-limit for terrorism, eliminating the need for separate terrorism insurance policies.

In January 2015, Congress passed the "Terrorism Risk Insurance Program Authorization Act of 2015", which extended the termination date of the Terrorism Insurance Program established under the TRIA through December 31, 2020. There are specific provisions in our loans that address terrorism insurance. Simply stated, in most loans, we are obligated to maintain terrorism insurance, but there are limits on the amounts we are required to spend to obtain such coverage. If a terrorist event occurs, the cost of terrorism insurance coverage would be likely to increase, which could result in having less coverage than we have currently. Our inability to obtain such coverage, or to do so only at greatly increased costs, may also negatively impact the availability and cost of future financings.









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Some of our properties are at a higher risk for potential natural or other disasters.

A number of our properties are located in areas with a higher risk of natural disasters such as earthquakes, hurricanes, or tsunamis. The occurrence of natural disasters can adversely impact operations, redevelopment, or development at our shopping centers and projects, increase investment costs to repair or replace damaged properties, increase future property insurance costs, and negatively impact the tenant demand for lease space. In addition, many of our properties are located in coastal regions, and would therefore be affected by any future increases in sea levels. If insurance is unavailable to us or is unavailable on acceptable terms, or our insurance is not adequate to cover losses from these events, our financial condition and results of operations could be adversely affected.

During September 2017, Puerto Rico was struck by Hurricane Maria, which significantly impacted local infrastructure, residents, and the prospects for tourism. The Mall of San Juan experienced damage and interruption of operations. We are subject to all of the aforementioned risks of natural disasters in relation to The Mall of San Juan and the impact of Hurricane Maria.
  
While we anticipate that a portion of the adverse impact to the future operations of the mall may be mitigated through business interruption insurance, it may not offset the full extent of revenue losses. In addition, certain losses may not be fully covered by insurance. The timing for the recovery of business in Puerto Rico will depend on successful rebuilding and recovery efforts and in turn the availability of workers and materials, which may be scarce for periods of time. The local economy is highly dependent on tourism and declines could continue to adversely impact the center for an extended period of time. Foot traffic, tenant sales, and profitability of tenant operations have been and may all continue to be affected. Our ability to reach pre-hurricane occupancy and profitability may be impacted by (1) tenants or anchors who, despite contractual requirements, are unable or refuse to reopen, (2) the ability of tenants or anchors to pay current rent obligations in light of the decrease in sales and mall foot traffic, and (3) tenant or anchor rent, operating, and other lease obligations that are dependent on maintaining specified occupancy levels at the mall. If a major tenant or anchor does not reopen, it may adversely impact our ability to re-lease space in the future to desirable tenants or at profitable rates and maintain the overall mall merchandising plan.

We may be subject to liabilities for environmental matters.

We are subject to a variety of local, state, and federal laws concerning the protection of public health and the environment. Such environmental laws may vary according to the location and environmental condition of the site and the present and former uses of the site. Before acquiring a site, we generally engage independent environmental consultants to evaluate land for the potential presence of adverse environmental conditions, and all of the shopping centers that we presently own (not including option interests in certain pre-development projects) have been subject to such environmental assessments. We are not aware of any environmental liability relating to these shopping centers or to any other property that we have owned or operated that would have a reasonable likelihood of resulting in a material adverse effect on our business, assets, or results of operations. No assurances can be given, however, that (1) all environmental liabilities have been identified, (2) no prior owner or operator of our properties, or any occupant of our properties has not created an environmental condition not known to us, (3) future laws, ordinances, or regulations will not impose any material environmental liability, or (4) the current environmental condition of our shopping centers will not be affected by tenants or other occupants of the shopping centers, by the environmental condition of properties in the vicinity of the shopping centers (such as the presence of underground storage tanks), or by third parties unrelated to us. Environmental liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. In addition, the presence of, or failure to remediate, adverse environmental conditions may adversely affect our ability to sell, rent, or collateralize any property.

The bankruptcy or financial difficulties of our joint venture partners could adversely affect us.

The profitability of shopping centers held in a joint venture could be adversely affected by the bankruptcy of one of the joint venture partners if, because of certain provisions of the bankruptcy laws, we were unable to make important decisions in a timely fashion or became subject to additional liabilities. In addition, if our joint venture partners are not able to fund required contributions, it may be necessary for us to contribute equity in excess of our ownership share to fund initial development, capital, and/or operating costs.









19


We may not be able to maintain our status as a REIT.

We may not be able to maintain our status as a REIT for federal income tax purposes with the result that the income distributed to shareowners would not be deductible in computing taxable income and instead would be subject to tax at regular corporate rates. Any such corporate tax liability would be significant and would reduce the amount of cash available for distribution to our shareowners which, in turn, could have a material adverse impact on the value of, or trading price for, our shares. Although we believe we are organized and operate in a manner to maintain our REIT qualification, many of the REIT requirements of the IRS Code are complex and have limited judicial or administrative interpretations. Changes in tax laws or regulations or new administrative interpretations and court decisions may also affect our ability to maintain REIT status in the future. If we do not maintain our REIT status in any year, we may be unable to elect to be treated as a REIT for the next four taxable years.

Although we currently intend to maintain our status as a REIT, future economic, market, legal, tax, or other considerations may cause us to determine that it would be in our and our shareowners’ best interests to revoke our REIT election. If we revoke our REIT election, we will not be able to elect REIT status for the next four taxable years.

We may be subject to taxes even if we qualify as a REIT.

Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state, local, and foreign taxes on our income and property. For example, we will be subject to federal income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Moreover, if we have net income from "prohibited transactions," that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions. The need to avoid prohibited transactions could cause us to forego or defer sales of assets that non-REITs otherwise would have sold or that might otherwise be in our best interest to sell.

In addition, any net taxable income earned directly by our taxable REIT subsidiaries will be subject to federal, state, and local corporate income tax, and to the extent there are foreign operations certain foreign taxes. Several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. To that end, we will be subject to a 100% penalty tax on the amount of any rents, deductions, service income or excess interest if the economic arrangements among us, our tenants, and our taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties.

Also, some state, local, and foreign jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income, because not all states, localities, and foreign jurisdictions follow the federal income tax treatment of REITs. Finally, there may be changes in the federal tax law and laws of states, localities, and foreign jurisdictions that may increase the taxes we pay. To the extent that we and our affiliates are required to pay federal, state, local, and/or foreign taxes, we will have less cash available for distributions to our shareowners.

The lower tax rate on certain dividends from non-REIT 'C' corporations may cause investors to prefer to hold stock in non-REIT 'C' corporations.

The maximum tax rate (including the net investment income tax of 3.8%) on certain corporate dividends received by individuals is 23.8%, which is less than the maximum income tax rate enacted by the Tax Cuts and Jobs Act of 2017 (the 2017 Act) of 37% applicable to ordinary income for taxable years beginning after December 31, 2017. This rate differential continues to substantially reduce the so-called "double taxation" (that is, taxation at both the corporate and shareowner levels) that applies to non-REIT 'C' corporations but does not generally apply to REITs. Dividends from a REIT do not qualify for the favorable tax rate applicable to dividends from non-REIT 'C' corporations unless the dividends are attributable to income that has already been subjected to the corporate income tax, such as income from a prior year that the REIT did not distribute and dividend income received by the REIT from a taxable REIT subsidiary or other fully taxable 'C' corporation. Under the 2017 Act, however, for taxable years beginning after December 31, 2017, ordinary dividends from a REIT are eligible for the 20% deduction as “qualified business income” and thus taxed at a maximum rate of 29.6% plus the 3.8% tax on net investment income. The 20% deduction and the maximum individual rate of 37%, unless extended, are scheduled to expire after 2025. Although REITs, unlike non-REIT 'C' corporations, have the ability to designate certain dividends as capital gain dividends subject to the favorable rates applicable to capital gain, the application of reduced dividend rates to non-REIT 'C' corporation dividends may still cause individual investors to view stock in non-REIT 'C' corporations as more attractive than shares in REITs, which may negatively affect the value of our shares. Future changes to tax laws could potentially adversely affect the taxation of the REIT, its subsidiaries, or its shareowners, possibly having a negative effect on the value of our shares.

20


Certain tax provisions in the 2017 Act may adversely impact us.

The 2017 Act, which is generally effective for taxable years beginning after December 31, 2017, imposes a limit on net interest expense deductions that exceed 30% of adjusted taxable income, which is generally taxable income excluding net interest expense and for taxable years beginning before January 1, 2022, deductions for depreciation and amortization. If our net interest expense is so limited, as a REIT, we may elect out of the new limitation provided we adopt longer recovery periods for depreciation of our property. If the interest expense limitation applies and we do not elect longer depreciation periods, then the limitation on our interest expense deduction will increase our taxable income and require us to make greater distributions to our shareowners to avoid our paying federal income tax and to ensure we meet the distribution requirements for qualification as a REIT. Alternatively, if we do elect out of the limitation in a taxable year, the reduced deprecation would likewise increase our taxable income and require us to make greater distributions to our shareowners to avoid our paying federal income tax and to ensure compliance with the distribution requirements.

Although we believe we are not subject to the newly-enacted one-time tax on the deemed repatriation of foreign income because we have a collective deficit in the earnings and profits of our more than 10%-owned foreign corporations, a redetermination of the earnings and profits could subject us to the deemed repatriation tax and reduce our cash available for distribution to shareowners. The 2017 Act also enacted certain base erosion provisions, which although not applicable to REITs, could impose a 20% non-deductible excise tax on certain amounts paid by our taxable REIT subsidiaries to our foreign affiliates. We do not believe that we currently have payments subject to the excise tax, but because the excise tax applies on an annual basis, there is no assurance that we will not be subject to the excise tax in future years. Under the 2017 Act, as a REIT, we are not entitled to a dividends received deduction for dividends from our foreign subsidiaries. Therefore, to avoid U.S. taxation of our foreign income, we must distribute to our shareowners all foreign dividends received and avail ourselves of the dividends paid deduction.

Our ownership limitations and other provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws generally prohibit the acquisition of more than 8.23% of the value of our capital stock and may hinder any attempt to acquire us.

Various provisions of our Restated Articles of Incorporation (Articles) and Amended and Restated Bylaws (Bylaws) could have the effect of discouraging a third party from accumulating a large block of our stock and making offers to acquire us and of inhibiting a change in control, all of which could adversely affect our shareowners’ ability to receive a premium for their shares in connection with such a transaction. In addition to customary anti-takeover provisions, as detailed below, our Articles contain REIT-specific restrictions on the ownership and transfer of our capital stock which also serve similar anti-takeover purposes.

Under our Articles, in general, no shareowner may own more than 8.23% (the General Ownership Limit) in value of our "Capital Stock" (which term refers to the common stock, preferred stock and Excess Stock, as defined below). Our Board of Directors has the authority to allow a "look through entity" to own up to 9.9% in value of the Capital Stock (Look Through Entity Limit), provided that after application of certain constructive ownership rules under the Code and rules regarding beneficial ownership under the Michigan Business Corporation Act, no individual would constructively or beneficially own more than the General Ownership Limit. A look through entity is any entity other than a qualified trust under Section 401(a) of the Code, certain other tax-exempt entities described in the Articles, or an entity that actually or constructively owns 10% or more of the equity of any tenant from which we or TRG directly or indirectly receives or accrues rent from real property.

The Articles provide that if the transfer of any shares of Capital Stock or a change in our capital structure would cause any person (Purported Transferee) to own Capital Stock in excess of the General Ownership Limit or the Look Through Entity Limit, then the transfer is invalid from the outset, and the shares in excess of the applicable ownership limit automatically acquire the status of "Excess Stock." A Purported Transferee of Excess Stock acquires no rights to shares of Excess Stock. Rather, all rights associated with the ownership of those shares (with the exception of the right to be reimbursed for the original purchase price of those shares) immediately vest in one or more charitable organizations designated from time to time by our Board of Directors (each, a Designated Charity). An agent designated from time to time by the Board of Directors (each, a Designated Agent) will act as attorney-in-fact for the Designated Charity to vote the shares of Excess Stock, take delivery of the certificates evidencing the shares that have become Excess Stock, and receive any distributions paid to the Purported Transferee with respect to those shares. The Designated Agent will sell the Excess Stock, and any increase in value of the Excess Stock between the date it became Excess Stock and the date of sale will inure to the benefit of the Designated Charity. A Purported Transferee must notify us of any transfer resulting in shares converting into Excess Stock, as well as such other information regarding such person’s ownership of Capital Stock we request.





21


These ownership limitations will not be automatically removed even if the REIT requirements are changed so as to no longer contain any ownership limitation or if the ownership limitation is increased because, in addition to preserving our status as a REIT, the effect of such ownership limit is to prevent any person from acquiring control of us. Changes in the ownership limits cannot be made by our Board of Directors and would require an amendment to our Articles. Currently, amendments to our Articles require the affirmative vote of shareowners owning not less than two-thirds of the outstanding Capital Stock entitled to vote.

Robert S. Taubman, William S. Taubman, Gayle Taubman Kalisman, and the A. Alfred Taubman Restated Revocable Trust (Taubman Family) may be deemed under SEC rules of attribution, which includes conversion of options that have vested and shares subject to issuance under an option deferral agreement, to beneficially own approximately 30% of our stock that is entitled to vote on shareowner matters (Voting Stock) as of December 31, 2017. However, the combined Taubman Family ownership of Voting Stock includes 24,128,305 shares of the 24,938,114 shares of Series B Preferred Stock outstanding or 97% of the total outstanding and 1,766,158 shares of the 60,832,918 shares of common stock outstanding or 3% of the total outstanding as of December 31, 2017. The Series B Preferred Stock is convertible into shares of common stock at a ratio of 14,000 shares of Series B Preferred Stock to one share of common stock, and therefore one share of Series B Preferred Stock has a value of 1/14,000ths of the value of one share of common stock. Accordingly, the foregoing ownership of Voting Stock does not violate the ownership limitations set forth in our charter.

The Taubman Family has the power to vote a significant number of the shares of Capital Stock entitled to vote.

Based on information contained in filings made with the SEC, as of December 31, 2017, the Taubman Family has the power to vote approximately 30% of the outstanding shares of our common stock and our Series B Preferred Stock, considered together as a single class, including approximately 97% of our outstanding Series B preferred stock. Our shares of common stock and our Series B Preferred Stock vote together as a single class on all matters generally submitted to a vote of our shareowners, and the holders of the Series B preferred stock have certain rights to nominate up to four individuals for election to our Board of Directors and other class voting rights. Robert S. Taubman serves as our Chairman of the Board, President, and Chief Executive Officer. William S. Taubman serves as our Chief Operating Officer and one of our directors. These individuals occupy the same positions with the Manager. As a result, the Taubman Family may exercise significant influence with respect to the election of our Board of Directors, the outcome of any corporate transaction or other matter submitted to our shareowners for approval, including any merger, consolidation or sale of all or substantially all of our assets; the approval of such matters require the affirmative vote of holders owning not less than two-thirds of the outstanding shares of Capital Stock entitled to vote on such matter (except the election of directors, which is subject to a plurality vote coupled with a majority vote resignation policy). In addition, the Articles impose a limitation on the ownership of our outstanding Capital Stock by any person and such ownership limitation may not be changed without the affirmative vote of holders owning not less than two-thirds of the outstanding shares of Capital Stock entitled to vote on such matter. As a result of the foregoing limitations and the consent provisions of the TRG partnership agreement noted above, it would be difficult, as a practical matter, for there to be a change in control of our Company without the affirmative vote of the Taubman Family.

Our success depends, in part, on our ability to attract and retain talented employees, and the loss of any one of our key personnel could adversely impact our business.

The success of our business depends, in part, on the leadership and performance of our executive management team and key employees, and our ability to attract, retain, and motivate talented employees could significantly impact our future performance. Competition for these individuals is intense, and we cannot assure you that we will retain our executive management team and key employees or that we will be able to attract and retain other highly qualified individuals for these positions in the future. Losing any one or more of these persons could have a material adverse effect on our results of operations, financial condition, and cash flows.

Our cost savings and restructuring initiatives may be disruptive to our workforce and operations and adversely affect our financial results.

In response to the completion of another major development cycle and the current near-term challenges facing the U.S. mall industry, we have undertaken certain restructuring initiatives to reorganize various areas of the organization across all sectors of our business. To the extent such initiatives involve workforce changes, such changes may temporarily reduce workforce productivity, impact employee morale, and affect our ability to attract and retain talented employees, which could be disruptive to our business and adversely affect our results of operations. In addition, we may not achieve or sustain the expected cost savings or other benefits of our restructuring plans, or do so within the expected time frame.


22


The market price of our common stock may fluctuate significantly.

The market price of our common stock may fluctuate significantly in response to many factors, including:

general market and economic conditions;

actual or anticipated variations in our operating results, FFO, cash flows, liquidity or distributions (including special distributions);

changes in our earnings estimates or those of analysts;

publication of research reports about us, the real estate industry generally or the mall industry, and recommendations by financial analysts with respect to us or other REITs;

the amount of our outstanding debt at any time, the amount of our maturing debt in the near and medium term and our ability to refinance such debt and the terms thereof or our plans to incur additional debt in the future;

the ability of our tenants to pay rent to us and meet their other obligations to us under current lease terms and our ability to re-lease space as leases expire;

increases in market interest rates that lead purchasers of our common stock to demand a higher dividend yield;

changes in market valuations of similar companies;

mergers and acquisitions activity in the retail real estate sector;

any securities we may issue or additional debt we incur in the future;

additions or departures of key management personnel;

actions by institutional shareowners;

business disruptions, increased costs or other adverse impacts relating to actual or potential actions by activist shareowners;

adverse impacts relating to court or administrative decisions;

perceived strength of our corporate governance;

perceived risks in connection with our international development strategy;

risks we are taking in relation to, and the public announcement of, proposed acquisitions and dispositions, developments and redevelopments and the consummation thereof, including related capital uses;

speculation in the press or investment community;

continuing high levels of volatility in the capital and credit markets; and

the occurrence of any of the other risk factors included in, or incorporated by reference in, this report.

Many of the factors listed above are beyond our control. These factors may cause the market price of our common stock to decline, regardless of our financial performance and condition and prospects. It is impossible to provide any assurance that the market price of our common stock will not fall in the future, and it may be difficult for holders to resell shares of our common stock at prices they find attractive, or at all.


23


Our shareowners will experience dilution as a result of equity offerings and they may experience further dilution if we issue additional common equity.

We have previously issued common equity, both common shares and TRG Units, which had a dilutive effect on our earnings per diluted share and FFO per diluted share. In addition, we have previously issued additional shares of preferred stock which adversely affected the earnings per share available to our common shareowners. We are not restricted from issuing additional shares of our common equity or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. Any additional future issuances of common equity will reduce the percentage of our common equity owned by investors who do not participate in future issuances. In most circumstances, shareowners will not be entitled to vote on whether or not we issue additional common equity. In addition, depending on the terms and pricing of an additional offering of our common equity and the value of our properties, our shareowners may experience dilution in both the book value and fair value of their interests. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after an offering or the perception that such sales could occur, and this could materially and adversely affect our ability to raise capital through future offerings of equity or equity-related securities.

Our ability to pay dividends on our stock may be limited.

Because we conduct all of our operations through TRG or its subsidiaries, our ability to pay dividends on our stock will depend almost entirely on payments and distributions received on our interests in TRG. Additionally, the terms of some of the debt to which TRG is a party limits its ability to make some types of payments and other distributions to us. This in turn limits our ability to make some types of payments, including payment of dividends on our stock, unless we meet certain financial tests or such payments or dividends are required to maintain our qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay dividends on our stock in one or more periods beyond what is required for REIT purposes.

Our ability to pay dividends is further limited by the requirements of Michigan law.

Our ability to pay dividends on our stock is further limited by the laws of Michigan. Under the Michigan Business Corporation Act, a Michigan corporation may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareowners whose preferential rights are superior to those receiving the distribution. Accordingly, we may not make a distribution on our stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of our preferred stock then outstanding.

We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends on our stock.

Our governing documents do not limit us from incurring additional indebtedness and other liabilities; however, certain loan covenants include certain restrictions regarding future indebtedness. As of December 31, 2017, we had $3.6 billion of consolidated indebtedness outstanding, and our beneficial interest in both our consolidated debt and the debt of our unconsolidated joint ventures was $4.7 billion. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends.

We may change the distribution policy for our common stock in the future.

The decision to declare and pay dividends on our common stock in the future, as well as the timing, amount, and composition of any such future dividends, will be at the sole discretion of our Board of Directors and will depend on our earnings, FFO, liquidity, financial condition, capital requirements, contractual prohibitions, or other limitations under our indebtedness and preferred shares, the annual dividend requirements under the REIT provisions of the Code, state law and such other factors as our Board of Directors deems relevant. Further, we have regularly issued new shares of common equity as compensation to our employees, and we have periodically issued new shares of capital stock pursuant to public offerings or acquisitions. Any future issuances may substantially increase the cash required to pay dividends at current or higher levels. Our actual dividend payable will be determined by our Board of Directors based upon the circumstances at the time of declaration. Although we have regularly paid dividends on a quarterly basis on our common and preferred stock in the past, and since we went public in 1992 we have never reduced our regular common dividend and have increased it 20 times, we do not guarantee we will continue to do so in the future. Any change in our dividend policy could have a material adverse effect on the market price of our common stock.

24


REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

In order for us to qualify to be taxed as a REIT, and assuming that certain other requirements are also satisfied, we generally must distribute at least 90% of REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our shareowners each year. To this point, we have historically distributed at least 100% of our taxable income and thereby avoided income tax altogether. To the extent we satisfy this distribution requirement and qualify for taxation as a REIT, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income and could be subject to a 4% nondeductible excise tax if the actual amount that is distributed to shareowners in a calendar year is less than “the required minimum distribution amount” specified under U.S. federal income tax laws. We intend to make distributions to our shareowners to comply with the REIT requirements of the Internal Revenue Code.

From time to time, we might generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves, or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to access capital on unfavorable terms (the receipt of which cannot be assured), sell assets at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, or make taxable distributions of capital stock or debt securities to make distributions sufficient to pay out enough REIT taxable income to satisfy the REIT distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase costs or reduce our equity. Further, amounts distributed will not be available to fund the growth of our business. Thus, compliance with the REIT requirements may adversely affect our liquidity and our ability to execute our business plan.


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Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

Ownership

The following table sets forth certain information about each of our shopping centers. The table includes only shopping centers in operation at December 31, 2017. Shopping centers are owned in fee other than Beverly Center, Cherry Creek Shopping Center, City Creek Center, International Market Place, and International Plaza, which are held under ground leases expiring between 2042 and 2104. CityOn.Xi'an and CityOn.Zhengzhou use Chinese state-owned land and are subject to a property-use right, expiring in 2051 for both shopping centers.

Certain of the shopping centers are partially owned through joint ventures. Generally, our joint venture partners have ongoing rights with regard to the disposition of our interest in the joint ventures, as well as the approval of certain major matters.

Shopping Center
 
Anchors
 
Sq. Ft of GLA/
Mall GLA as of 12/31/17
 
 
Year
Opened/
Expanded
 
Year
Acquired
 
Ownership
% as of
12/31/17
Consolidated Businesses:
 
 
 
 
 
 
 
 
 
 
 
Beverly Center
 
Bloomingdale’s, Macy’s
 
793,000
 
 
1982
 
 
 
100%
Los Angeles, CA
 
 
 
469,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cherry Creek Shopping Center
 
Macy’s, Neiman Marcus, Nordstrom
 
1,025,000
 
 
1990/1998/
 
 
 
50%
Denver, CO
 
 
 
623,000
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
City Creek Center
 
Macy's, Nordstrom
 
622,000
 
 
2012
 
 
 
100%
Salt Lake City, UT
 
 
 
341,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dolphin Mall
 
Bass Pro Shops Outdoor World,
 
1,429,000
 
 
2001/2007/
 
 
 
100%
Miami, FL
 
Bloomingdale's Outlet, Burlington Coat Factory
 
702,000
 
 
2015
 
 
 
 
 
 
Cobb Theatres, Dave & Buster's,
 
 
 
 
 
 
 
 
 
 
 
Marshalls, Neiman Marcus-Last Call,
 
 
 
 
 
 
 
 
 
 
 
Polo Ralph Lauren Factory Store, Saks Off 5th
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Gardens on El Paseo
 
Saks Fifth Avenue
 
236,000
 
 
1998/2010
 
2011
 
100%
Palm Desert, CA
 
 
 
186,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Great Lakes Crossing Outlets
 
AMC Theatres, Bass Pro Shops Outdoor World,
 
1,355,000
(1)
 
1998
 
 
 
100%
Auburn Hills, MI
 
Burlington Coat Factory, Legoland,
 
533,000
 
 
 
 
 
 
 
(Detroit Metropolitan Area)
 
Lord & Taylor Outlet, Neiman Marcus-Last Call,
 
 
 
 
 
 
 
 
 
 
 
Round 1 Bowling and Amusement,
 
 
 
 
 
 
 
 
 
 
 
Saks Off Fifth, Sea Life
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Mall at Green Hills
 
Dillard's, Macy's, Nordstrom
 
851,000
(2)
 
1955/2011
 
2011
 
100%
Nashville, TN
 
 
 
339,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International Market Place
 
Saks Fifth Avenue
 
343,000
 
 
2016
 
 
 
93.5%
Waikiki, Honolulu, HI
 
 
 
263,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Mall of San Juan
 
Nordstrom, Saks Fifth Avenue
 
626,000
 
 
2015
 
 
 
95%
San Juan, PR
 
 
 
388,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Mall at Short Hills
 
Bloomingdale’s, Macy’s, Neiman Marcus,
 
1,453,000
(3)
 
1980/1994/
 
 
 
100%
Short Hills, NJ
 
Nordstrom
 
546,000
 
 
1995/2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taubman Prestige Outlets Chesterfield
 
Polo Ralph Lauren Factory Store,
 
299,000
 
 
2013
 
 
 
100%
Chesterfield, MO
 
Restoration Hardware Outlet
 
299,000
 
 
 
 
 
 
 
(St. Louis Metropolitan Area)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Oaks Mall
 
JCPenney, Lord & Taylor, Macy's,
 
1,518,000
 
 
1977/1978/
 
 
 
100%
Novi, MI
 
Nordstrom, Sears
 
549,000
 
 
2007/2008
 
 
 
 
(Detroit Metropolitan Area)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total GLA
 
10,550,000
 
 
 
 
 
 
 
 
 
Total Mall GLA
 
5,238,000
 
 
 
 
 
 
 
 
 
TRG% of Total GLA
 
9,984,000
 
 

 
 
 
 
 
 
TRG% of Total Mall GLA
 
4,890,000
 
 
 
 
 
 
 

(1) GLA includes the Neiman Marcus-Last Call store, which in August 2017 elected to terminate its lease. The lease termination became effective January 31, 2018.
(2) GLA does not reflect the incremental GLA to be added in connection with the redevelopment project currently ongoing at the center.
(3) GLA includes the former Saks Fifth Avenue store, which closed in September 2016. This space is currently under redevelopment.

26




Shopping Center
 
Anchors
 
Sq. Ft of GLA/
Mall GLA as of 12/31/17
 
 
Year
Opened/
Expanded
 
Year
Acquired
 
Ownership
% as of
12/31/17
Unconsolidated Joint Ventures:
 
 
 
 
 
 
 
 
 
 
 
CityOn.Xi'an
 
Wangfujing
 
996,000
 
 
2016
 
 
 
50%
Xi'an, China
 
 
 
694,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CityOn.Zhengzhou
 
G-Super, Wangfujing
 
917,000
 
 
2017
 
 
 
49%
Zhengzhou, China
 
 
 
619,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Country Club Plaza
 
 
 
1,001,000
(4)
 
1922/1977/
 
2016
 
50%
Kansas City, MO
 
 
 
781,000
 
 
2000/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Oaks
 
JCPenney, Lord & Taylor,
 
1,559,000
(5)
 
1980/1987/
 
 
 
50%
Fairfax, VA
 
Macy’s (two locations), Sears
 
563,000
 
 
1988/2000
 
 
 
 
(Washington, DC Metropolitan Area)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International Plaza
 
Dillard’s, Life Time Athletic, Neiman Marcus,
 
1,253,000
 
 
2001/2015
 
 
 
50.1%
Tampa, FL
 
Nordstrom
 
617,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Mall at Millenia
 
Bloomingdale’s, Macy’s, Neiman Marcus
 
1,122,000
 
 
2002
 
 
 
50%
Orlando, FL
 
 
 
522,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stamford Town Center
 
Macy’s, Saks Off 5th
 
761,000
 
 
1982/2007
 
 
 
50%
Stamford, CT
 
 
 
438,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Starfield Hanam
 
PK Market, Shinsegae, Traders
 
1,701,000
 
 
2016
 
 
 
34.3%
Hanam, South Korea
 
 
 
971,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sunvalley
 
JCPenney, Macy’s (two locations), Sears
 
1,320,000
 
 
1967/1981
 
2002
 
50%
Concord, CA
 
 
 
481,000
 
 
 
 
 
 
 
(San Francisco Metropolitan Area)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Mall at University Town Center
 
Dillard's, Macy's, Saks Fifth Avenue
 
861,000
 
 
2014
 
 
 
50%
Sarasota, FL
 
 
 
440,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Waterside Shops
 
Nordstrom, Saks Fifth Avenue
 
341,000
 
 
1992/2006/
 
2003
 
50%
Naples, FL
 
 
 
201,000
 
 
2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westfarms
 
JCPenney, Lord & Taylor,
 
1,271,000
 
 
1974/1983/
 
 
 
79%
West Hartford, CT
 
Macy’s (two locations), Nordstrom
 
501,000
 
 
1997
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total GLA
 
13,103,000
 
 
 
 
 
 
 
 
 
Total Mall GLA
 
6,828,000
 
 
 
 
 
 
 
 
 
TRG% of Total GLA
 
6,645,000
 
 
 
 
 
 
 
 
 
TRG% of Total Mall GLA
 
3,401,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Grand Total GLA
 
23,653,000
 
 
 
 
 
 
 
 
 
Grand Total Mall GLA
 
12,066,000
 
 
 
 
 
 
 
 
 
TRG% of Total GLA
 
16,629,000
 
 
 
 
 
 
 
 
 
TRG% of Total Mall GLA
 
8,291,000
 
 
 
 
 
 
 

(4) GLA includes 220,000 square feet of office property.
(5) GLA includes approximately 100,000 square feet of GLA related to the second level of the Sears space which was vacated in the fourth quarter of 2016.



27


Anchors

The following table summarizes certain information regarding the anchors at the operating centers (excluding value and outlet centers) as of December 31, 2017:
Name
 
Number of
Anchor Stores
 
GLA
(in thousands
of square feet)
 
% of GLA
  
Macy’s
 
 
 
 
 
 
 
Bloomingdale’s (1)
 
3
 
641

 
 
 
Macy’s
 
12
 
2,539

 
 
 
Macy’s Men’s Store/Furniture Gallery
 
3
 
489

 
 
 
Total
 
18
 
3,669

 
17.8
%
 
 
 
 
 
 
 
 
 
Nordstrom
 
9
 
1,302

 
6.3
%
 
 
 
 
 
 
 
 
 
Hudson's Bay Company
 
 
 
 
 
 
 
Lord & Taylor (2)
 
3
 
392

 
 
 
Saks Fifth Avenue
 
5
 
375

 
 
 
Saks Off Fifth (3)
 
1
 
78

 
 
 
Total
 
9
 
845

 
4.1
%
 
 
 
 
 
 
 
 
 
JCPenney
 
4
 
745

 
3.6
%
 
 
 
 
 
 
 
 
 
Dillard's
 
3
 
607

(4)
3.0
%
 
 
 
 
 
 
 
 
 
Sears
 
3
 
569

(5)
2.8
%
 
 
 
 
 
 
 
 
 
Wangfujing
 
2
 
565

 
2.7
%
 
 
 
 
 
 
 
 
 
Shinsegae
 
 
 
 
 
 
 
PK Market
 
1
 
63

 
 
 
Shinsegae
 
1
 
485

 
 
 
Total
 
2
 
548

 
2.7
%
 
 
 
 
 
 
 
 
 
Neiman Marcus (6)
 
4
 
402

 
2.0
%
 
 
 
 
 
 
 
 
 
Traders
 
1
 
183

 
0.9
%
 
 
 
 
 
 
 
 
 
Life Time Athletic
 
1
 
56

 
0.3
%
 
 
 
 
 
 
 
 
 
G-Super
 
1
 
36

 
0.2
%
 
 
 
 
 
 
 
 
 
Total
 
57
 
9,527

 
46.3
%
(7)

(1)
Excludes one Bloomingdale's Outlet store at a value center.
(2)
Excludes one Lord & Taylor Outlet store at an outlet center.
(3)
Excludes two Saks Off 5th stores at value and outlet centers.
(4)
GLA reflects the opening of the new Dillard's store at The Mall at Green Hills in March 2017 in connection with the redevelopment project currently ongoing at the center.
(5)
Excludes the GLA related to the second level of the Sears space at Fair Oaks, which was vacated in the fourth quarter of 2016.
(6)
Excludes two Neiman Marcus-Last Call stores at value and outlet centers. The Neiman Marcus-Last Call lease at Great Lakes Crossing Outlets was terminated effective January 31, 2018.
(7)
Percentages may not add due to rounding.



28



Mortgage Debt and Construction Financings

The following table sets forth certain information regarding the mortgages and construction financings encumbering the centers as of December 31, 2017. All mortgage debt and construction financings in the table below are non-recourse to the Operating Partnership except for the TRG $65 million revolving credit facility and the debt encumbering International Market Place. The Operating Partnership has provided limited guarantees regarding the mortgage debt encumbering City Creek Center. In addition, as of December 31, 2017, the entities that own Beverly Center, Dolphin Mall, The Gardens on El Paseo, and Twelve Oaks Mall were guarantors under our $475 million and $300 million unsecured term loans and $1.1 billion primary unsecured revolving line of credit. See "Note 8 - Notes Payable, Net - Debt Covenants and Guarantees" to our consolidated financial statements for more information on loan guarantees. See "Liquidity and Capital Resources - Upcoming Maturities and Financings" for more information on the expected payoff of the $475 million unsecured term loan as well as a new loan on Twelve Oaks Mall.

29


Centers Consolidated in TCO's Financial Statements/ TRG's % Ownership if less than 100%
Maximum Loan Amount (thousands)
Stated Interest Rate as of 12/31/17
12/31/17 Balance (thousands)
Available to Draw (thousands)
Amortization
Annual Debt Service (Principal and Interest) (thousands)
Maturity Date
Number of One-Year Extension Options
Interest Rates
Earliest Prepayment Date
Prepay via Defeasance or Yield Maintenance
Earliest Date Allowed to Prepay without Penalty
Cherry Creek Shopping Center (50%)
 
3.85%
$
550,000

 
 
 Interest only
6/1/2028
 
Fixed Rate
6/1/2018
 Greater of Yield Maintenance or 1% Principal Prepaid
12/1/2027
City Creek Center
 
4.37%
78,704

 
 Amortizing, 30 years
$
5,090

8/1/2023
 
Fixed Rate
At any time
 Greater of Yield Maintenance or 0.5% Principal Prepaid
/Defeasance
5/1/2023
Great Lakes Crossing Outlets
 
3.60%
203,553

 
 Amortizing, 30 years
12,277

1/6/2023
 
Fixed Rate
At any time
 Defeasance
9/6/2022
The Mall at Green Hills
 
2.96%
150,000

 
 
 Interest only
12/1/2018
2
LIBOR + 1.60%. Cap if LIBOR > 2.75% and during extension (1)
At any time
 0.25%-0.50% Principal Prepaid
At any time
International Market Place (93.5%)
$330,890 (2)

3.11%
293,801

$
37,089

 
 Interest only (2)
8/14/2018
2
LIBOR + 1.75%. Rate decreases to LIBOR + 1.60% upon achieving certain performance measures
At any time
 NA
 
The Mall at Short Hills
 
3.48%
1,000,000

 
 
 Interest only
10/1/2027
 
Fixed Rate
At any time
 Greater of Yield Maintenance or 1% Principal Prepaid
4/1/2027
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Consolidated Secured Debt
 
 
 
 
 
 
 
 
 
TRG $65M Revolving Credit Facility
65,000

2.96%
19,655

40,794

 
 Interest only
4/28/2018
 
LIBOR + 1.40%
At any time
 NA
 
U.S. Headquarters
 
3.49
12,000

 
 
 Interest only
3/1/2024
 
LIBOR + 1.40%, swapped to maturity
At any time
 NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Centers Owned by Unconsolidated Joint Ventures/TRG's % Ownership
 
 
 
 
 
 
 
 
 
CityOn.Zhengzhou (49%)
128,200

6.37%
92,537

35,663

Full amortizing beginning 9/21/2017
12,604

12/1/2026
 
130% of the RMB PBOC base lending rate for a loan term > 5 years. Rate resets Jan each year
At any time
 NA
 
Country Club Plaza (50%)
 
3.85%
320,000

 
Amortization begins 5/1/2019, 30 years
 Interest only until 5/1/2019
4/1/2026
 
Fixed Rate
4/1/2021
 Greater of Yield Maintenance or 1% Principal Prepaid
1/2/2026
Fair Oaks (50%)
 
4.10%
260,402

 
 Amortizing, 25 years, assumed 7.5% rate
15,596

7/13/2018
 
LIBOR + 1.70%, swapped until 4/30/2018
At any time
 0.25%-0.50% Principal Prepaid
At any time
International Plaza (50.1%)
 
4.85%
309,477

 
 Amortizing, 30 years
20,580

12/1/2021
 
Fixed Rate
At any time
 Greater of Yield Maintenance or 1% Principal Prepaid
9/2/2021
International Plaza (50.1%)
 
3.58%
165,656

 
 Amortizing, 30 years
8,710

12/1/2021
 
LIBOR + 1.75%, swapped to maturity
At any time
 0.50%-2.00% Principal Prepaid
12/1/2019
The Mall at Millenia (50%)
 
4.00%
350,000

 
 
 Interest only
10/15/2024
 
Fixed Rate
At any time
 Greater of Modified Yield Maintenance or 1% Principal Prepaid
7/17/2024
The Mall at Millenia (50%)
 
3.75%
100,000

 
 
 Interest only
10/15/2024
 
Fixed Rate
At any time
 Greater of Modified Yield Maintenance or 1% Principal Prepaid
7/17/2024
Starfield Hanam (34.3%)
 
3.12%
52,065

 
 
 Interest only
11/8/2020
 
3 month LIBOR + 1.60%, swapped to 9/8/2020
9/8/2020
 NA
9/8/2020
Starfield Hanam (34.3%)
 
2.58%
292,365

(4) 
 
 Interest only
11/25/2020
 
KDB 5 Year Bond Yield + 1.06%
9/8/2020
 0.5%-1.5% Principal Prepaid
9/8/2020
Sunvalley (50%)
 
4.44%
172,769

 
 Amortizing, 30 years
11,471

9/1/2022
 
Fixed Rate
At any time
 Defeasance
6/1/2022
Taubman Land Associates (50%)
 
3.84%
21,677

 
 Amortizing, 30 years
1,349

11/1/2022
 
Fixed Rate
At any time
 Defeasance
6/1/2022
The Mall at University Town Center (50%)
 
3.40%
280,000

 
Amortization begins 12/1/2022, 30 years
 Interest only until 12/1/2022
11/1/2026
 
Fixed Rate
11/1/2019
 Greater of Yield Maintenance or 1% Principal Prepaid
8/3/2026
Waterside Shops (50%)
 
3.86%
165,000

 
(3) 
 Interest only (3)
4/15/2026
 
Fixed Rate
At any time
 Greater of Yield Maintenance or 1% Principal Prepaid
1/15/2026
Westfarms (79%)
 
4.50%
289,048

 
 Amortizing, 30 years
19,457

7/1/2022
 
Fixed Rate
At any time
 Greater of Yield Maintenance or 1% Principal Prepaid
4/2/2022

(1) During the second extension period, the spread over LIBOR is the lender's then current spread and the cap requirement may be waived if 12-month LIBOR is elected.
(2) No draws are allowed after the original maturity date. During extension periods, principal payments are required based on an assumed 6% interest rate and 30 year amortization.
(3) The Waterside Shops loan is interest-only for the term of the loan. However, if net operating income available for debt service as defined in the loan agreement is less than a certain amount for calendar year 2020, the lender may require the loan to amortize based on a 30-year amortization period retroactive to May 2021.
(4) No draws were allowed after December 2016. A letter of credit totaling $53.2 million USD is outstanding on this loan as security for the Starfield Hanam USD loan.


For additional information regarding the shopping centers and their operations, see the responses to Item 1 of this report.

30


Item 3. LEGAL PROCEEDINGS.

On October 17, 2017, Plaza Internacional Puerto Rico LLC (Plaza Internacional), the owner of The Mall of San Juan (the Mall), filed a civil action in the Commonwealth of Puerto Rico Court of First Instance, San Juan Judicial Center, Superior Court, Civil No. SJ2017CV02094 (503), against Saks Fifth Avenue Puerto Rico, Inc. (Saks PR), and Saks Incorporated (Saks Inc.). The lawsuit asks the court to compel Saks PR and Saks Inc. to immediately repair and remediate the Saks Fifth Avenue store (the Store) that was damaged by Hurricane Maria on September 20, 2017, to reopen the Store on the completion of the reconstruction, and to operate the Store in accordance with the Operating Covenant contained in the Construction, Operation and Reciprocal Easement Agreement among Plaza Internacional, Saks PR, and Nordstrom Puerto Rico LLC (Nordstrom PR) made as of April 23, 2013 (the REA). In response, Saks PR and Saks Inc. filed a Counterclaim, alleging that they have no obligation to repair, remediate, reconstruct, or reopen the Store, asserting various alleged breaches of the REA and other operating agreements. Should Saks PR prevail, Nordstrom PR and other Mall tenants may then have the right to terminate their own operating covenants or leases. Plaza Internacional is vigorously prosecuting its claims and defending the Counterclaim. An unfavorable outcome may have a material and adverse effect on our business and our results of operations.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.



31


PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

The common stock of Taubman Centers, Inc. is listed and traded on the New York Stock Exchange (Symbol: TCO). As of February 26, 2018, the 60,909,479 outstanding shares of common stock were held by 388 holders of record. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers, and other financial institutions. The closing price per share of the common stock on the New York Stock Exchange on February 26, 2018 was $61.81.

The following table presents the dividends declared on our common stock and the range of closing share prices of our common stock for each quarter of 2017 and 2016:

 
 
Market Quotations
 
 
2017 Quarter Ended
 
High
 
Low
 
Dividends
March 31
 
$
76.17

 
$
64.08


$
0.625

 
 


 





June 30
 
66.64

 
57.77


0.625

 
 


 





September 30
 
61.90

 
49.14


0.625

 
 


 





December 31
 
65.71

 
46.30


0.625


 
 
Market Quotations
 
 
2016 Quarter Ended
 
High
 
Low
 
Dividends
March 31
 
$
77.24

 
$
66.67

 
$
0.595

 
 
 
 
 
 
 
June 30
 
74.20

 
68.21

 
0.595

 
 
 
 
 
 
 
September 30
 
81.63

 
73.64

 
0.595

 
 
 
 
 
 
 
December 31
 
75.21

 
69.69

 
0.595


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
















32


Shareowner Return Performance Graph
            
The following line graph sets forth the cumulative total returns on a $100 investment in each of our common stock, the MSCI US REIT Index, the FTSE NAREIT Equity Retail Index, the S&P 500 Index, and the S&P 400 MidCap Index for the period December 31, 2012 through December 31, 2017 (assuming in all cases, the reinvestment of dividends):


chart-0de085efad595a4bb4a.jpg



  
 
12/31/2012

12/31/2013

12/31/2014

12/31/2015

12/31/2016

12/31/2017
Taubman Centers Inc.
$
100.00


$
83.50


$
109.12


$
112.98


$
112.45


$
103.74

MSCI US REIT Index
100.00


102.47


133.60


136.97


148.75


156.38

FTSE NAREIT Equity Retail Index
100.00


101.86


129.99


135.92


137.21


130.67

S&P 500 Index
100.00


132.38


150.49


152.57


170.77


208.05

S&P 400 MidCap Index
100.00


133.46


146.45


143.26


172.92


200.98


Note: The stock performance shown on the graph above is not necessarily indicative of future price performance.

33


Equity Purchases

Our Board of Directors previously authorized a share repurchase program under which we were permitted to repurchase up to $450 million of our outstanding common stock. As of December 31, 2017, we cumulatively repurchased 4,247,867 shares of our common stock at an average price of $71.79 per share, for a total of $304.9 million under the authorization. All shares repurchased were cancelled. For each share of our stock repurchased, one of our TRG Units was redeemed. Repurchases of common stock were financed with general corporate funds, including borrowings under existing revolving lines of credit.

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




34


Item 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data and should be read in conjunction with the financial statements and notes thereto and MD&A included in this report.
 
 
Year Ended December 31
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(in thousands, except per share amounts, per square foot amounts, and shares outstanding)
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
 
Rents, recoveries, and other shopping center revenues
 
$
629,165

 
$
612,557

 
$
557,172

 
$
679,129

 
$
767,154

Net income (1)
 
112,757

 
188,151

 
192,557

 
1,278,122

 
189,368

Net income attributable to noncontrolling interests
 
(32,052
)
 
(55,538
)
 
(58,430
)
 
(385,109
)
 
(56,778
)
Distributions to participating securities of TRG
 
(2,300
)
 
(2,117
)
 
(1,969
)
 
(6,018
)
 
(1,749
)
Preferred dividends
 
(23,138
)
 
(23,138
)
 
(23,138
)
 
(23,138
)
 
(20,933
)
Net income attributable to Taubman Centers, Inc. common shareowners
 
55,267

 
107,358

 
109,020

 
863,857

 
109,908

Net income per common share – diluted (1)
 
0.91

 
1.77

 
1.76

 
13.47

 
1.71

Dividends declared per common share (2)
 
2.50

 
2.38

 
2.26

 
2.16

 
2.00

Weighted average number of common shares outstanding – basic
 
60,675,129

 
60,363,416

 
61,389,113

 
63,267,800

 
63,591,523

Weighted average number of common shares outstanding – diluted
 
61,040,495

 
60,829,555

 
62,161,334

 
64,921,064

 
64,575,412

Number of common shares outstanding at end of period
 
60,832,918

 
60,430,613

 
60,233,561

 
63,324,409

 
63,101,614

Ownership percentage of TRG at end of period
 
71
%
 
71
%
 
71
%
 
72
%
 
71
%
 
 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
Real estate before accumulated depreciation
 
4,461,045

 
4,173,954

 
3,713,215

 
3,262,505

 
4,485,090

Total assets
 
4,214,592

 
4,010,912

 
3,546,510

 
3,214,901

 
3,506,222

Total debt, net
 
3,555,228

 
3,255,512

 
2,627,088

 
2,025,505

 
3,058,053

 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL INFORMATION:
 
 
 
 
 
 
 
 
 
 
Funds from Operations attributable to TCO's common shareowners (1)(3)
 
215,786

 
239,963

 
207,084

 
200,356

 
236,662

Mall tenant sales - all centers (4)(5)
 
6,327,787

 
5,773,614

 
5,177,988

 
4,969,462

 
6,180,095

Sales per square foot (4)(6)
 
810

 
792

 
785