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Taubman Centers 10-K 2009 Documents found in this filing:
TAUBMAN
CENTERS, INC.
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. We caution that although forward-looking statements
reflect our good faith beliefs and best judgment based upon current information,
these statements are qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements,
including those risks, uncertainties, and factors detailed from time to time in
reports filed with the SEC, and in particular those set forth under “Risk
Factors” in this Annual Report on Form 10-K.
The
Company
Taubman
Centers, Inc. (TCO) is a Michigan corporation that operates as a
self-administered and self-managed real estate investment trust (REIT). The
Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a
majority-owned partnership subsidiary of TCO, which owns direct or indirect
interests in all of our real estate properties. In this report, the terms "we",
"us" and "our" refer to TCO, the Operating Partnership, and/or the Operating
Partnership's subsidiaries as the context may require.
We own,
lease, develop, acquire, dispose of, and operate regional and super-regional
shopping centers. Our portfolio as of December 31, 2008 included 23 urban and
suburban shopping centers in ten states. 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). See the table on pages 16 and 17 of this
report for information regarding the centers.
Taubman
Asia, which is the platform for our expansion into the Asia-Pacific region, 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.
Recent
Developments
For a
discussion of business developments that occurred in 2008, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)."
The
Shopping Center Business
There are
several types of retail shopping centers, varying primarily by size and
marketing strategy. Retail shopping centers range from neighborhood centers of
less than 100,000 square feet of GLA to regional and super-regional shopping
centers. Retail shopping centers in excess of 400,000 square feet of GLA are
generally referred to as "regional" shopping centers, while those centers having
in excess of 800,000 square feet of GLA are generally referred to as
"super-regional" shopping centers. In this annual report on Form 10-K, the term
"regional shopping centers" refers to both regional and super-regional shopping
centers. 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.
Business
of the Company
We are
engaged in the ownership, management, leasing, acquisition, disposition,
development, and expansion of regional shopping centers. The
centers:
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 super-regional shopping centers.
Of our 23 centers, 21 had annual rent rolls at December 31, 2008 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 large shopping centers
(including regional and especially super-regional shopping centers) are the
least susceptible to direct competition because (among other reasons) anchors
and large 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. In addition to the advantage of size, we believe that
the centers' success can be attributed in part to their other physical
characteristics, such as design, layout, and amenities.
Business Strategy And
Philosophy
We
believe that the regional shopping center business is not simply a real estate
development business, but rather an operating business in which a retailing
approach to the on-going management and leasing of the centers is essential.
Thus we:
The
centers compete for retail consumer spending through diverse, in-depth
presentations of predominantly fashion merchandise in an environment intended to
facilitate customer shopping. While the majority of our centers include stores
that target high-end, upscale customers, each center is individually
merchandised in light of the demographics of its potential customers within
convenient driving distance. Our
leasing strategy involves assembling a diverse 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 tenants, thereby increasing the rental rates that prospective
tenants are willing to pay. We implement 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 not leasing space to
prospective tenants that (though viable or attractive in certain ways) would not
enhance a center's retail mix.
In 2005,
we began a new leasing strategy to have our tenants pay a fixed charge rather
than pay their share of common area maintenance (CAM) costs, allowing the
retailer greater predictability for a modest premium. From a financial
perspective, our analysis shows the premium will balance our additional risk.
Over time there will be significantly less matching of CAM income with CAM
expenditures, which can vary considerably from period to period. Approximately
32% of leases in our portfolio as of December 31, 2008 have fixed CAM
provisions.
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
primarily has included an active new center development program. However, the
current recession and difficult capital markets have severely impacted certain
of our planned development projects and the potential, in the short term, for
new projects. We have reduced and or eliminated spending on development projects
by slowing down or by putting projects on hold both in the U.S. and Asia.
Consistent with this reduction, in January 2009, we went through the process of
downsizing our organization, reducing our overall workforce by about 40
positions. See “MD&A – Results of Operations – Subsequent Event” for further
information. This primarily impacted the areas that directly or indirectly
support these development initiatives. We believe the company is now right sized
to efficiently pursue targeted growth opportunities in this environment, while
ensuring we have sufficient support within all of our teams to maintain the
strength of our core assets. Although we expect lower revenues and occupancy in
2009, we have a strong balance sheet and no debt maturities until fall 2010. We
do not know when the economic downturn will end, but we believe the regional
mall business will continue to prove its resiliency and its unique value
proposition to the customer. See “MD&A – Results of Operations – Overall
Summary of Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for more details.
Internal
Growth
We expect
that over time the majority of our future growth will come from our existing
core portfolio and business. We have always had a culture of intensively
managing our assets and maximizing the rents from tenants.
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.
New
Centers
We have
finalized the majority of the agreements, subject to certain conditions,
regarding City Creek Center, a mixed-use project in Salt Lake City, Utah and
continue to work toward a 2012 opening. In January 2009, we received an
unfavorable ruling from the Appellate Division of the Supreme Court of the State
of New York (Suffolk County) in relation to our Oyster Bay project in Syosset,
Long Island, New York, which we expect will significantly delay the project. Due
to the current economic and retail environment, in December 2008 we announced
that our University Town Center project in Sarasota, Florida has been put on
hold. Although we continue to believe it should be a very attractive opportunity
longer term, we do not know if or when we will acquire an interest in the land
and move forward with the project. In 2008, we recognized impairment charges
related to the Oyster Bay and Sarasota projects. Although we have reduced our
planned predevelopment activities for 2009, we continue to work on and evaluate
various development possibilities for new centers both in the United States and
Asia.
See “MD&A – Results of Operations – Taubman Asia” regarding information on
the Songdo and Macao projects, “MD&A – Liquidity and Capital Resources –
Capital Spending” regarding additional information on City Creek Center, and
“MD&A – Results of Operations – Impairment Charges” regarding additional
information on the impairment charges related to the Oyster Bay and Sarasota
projects.
We
generally do not intend to acquire land early in the development process.
Instead, we generally acquire options on land or form partnerships with
landowners holding potentially attractive development sites. We typically
exercise the options only once we are prepared to begin construction. The
pre-construction phase for a regional center typically extends over several
years and the time to obtain anchor commitments, zoning and regulatory
approvals, and public financing arrangements can vary significantly from project
to project. In addition, we do not intend to begin construction until a
sufficient number of anchor stores have agreed to operate in the shopping
center, such that we are confident that the projected tenant sales and rents
from Mall GLA are sufficient to earn a return on invested capital in excess of
our cost of capital. Having historically followed these principles, our
experience indicates that, on average, less than 10% of the costs of the
development of a regional shopping center will be incurred prior to the
construction period. However, no assurance can be given that we will continue to
be able to so limit pre-construction costs.
While we
will continue to evaluate 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 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.
Strategic
Acquisitions
Given the
current economic conditions there may be opportunities to acquire existing
centers, or interests in existing centers, from other companies at attractive
prices. 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. We plan to carefully evaluate our future capital needs along with our
strategic plans and pricing requirements.
Expansions
of the Centers
Another
potential element of growth over time is the strategic expansion of existing
properties to update and enhance their market positions, by replacing or adding
new anchor stores or increasing mall tenant space. 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 a minimum of disruption to existing tenants and
customers).
In
September 2007, a 165,000 square foot Nordstrom opened at Twelve Oaks Mall
(Twelve Oaks) along with approximately 97,000 square feet of additional new
store space. In 2008, Macy’s renovated its store and added 60,000 square
feet of store space.
A
lifestyle component addition to Stamford Town Center (Stamford), on the site
once occupied by Filene’s Department store, opened in November 2007. The project
consists of a mix of signature retail and restaurant offerings, creating
significantly greater visibility to the city and much needed pedestrian access
to the center. In addition, we renovated the seventh level in 2007, adding a
450-seat food court and interactive children’s play area. The food court tenants
opened in early 2008.
Construction
was completed on an expansion and renovation of tenant space at Waterside Shops
(Waterside) in 2006. In addition, Nordstrom joined the center as an anchor in
November 2008 and an expansion and full renovation of the current anchor, Saks
Fifth Avenue, was completed in the second half of 2008.
See
“MD&A – Results of Operations – Openings, Expansions and Renovations, and
Acquisitions” for information regarding recent development, acquisition, and
expansion and renovation activities that have been completed.
Third-Party Management,
Leasing, and Development Services
We have
several current and potential projects in the United States and Asia that
contribute or may contribute in the future to our third-party revenue
results.
We have a
management agreement for Woodfield Mall, which is owned by a third-party. This
contract is renewable year-to-year and is cancelable by the owner with
90 days written notice. We also have an agreement for retail leasing and
development and design advisory services for CityCenter, a mixed use urban
development project scheduled to open in late 2009 on the Strip in Las Vegas,
Nevada. The term of this fixed-fee contract is approximately 25 years,
effective June 2005, and is generally cancelable for cause and by the
project owner upon payment to us of a cancellation fee.
We have
also entered into agreements to provide services related to projects in Asia.
See “MD&A – Results of Operations – Taubman Asia” for more information. Also
see “Risk Factors” regarding risks related to our international
activities.
In
addition, we have finalized the majority of agreements, subject to certain
conditions, regarding City Creek Center, a mixed-use project in Salt Lake City,
Utah. Under the agreements, we would provide development, leasing, and
management services and be an investor in this project under a participating
lease structure. The center is expected to open in 2012.
The
actual amounts of revenue in any future period are difficult to predict because
of many factors, including the timing of completion of contractual arrangements
and the actual timing of construction starts and opening dates of the various
projects. In light of the current capital markets, the timing of construction
starts may be delayed until the completion of financing. In addition, the amount
of revenue we recognize is reduced by any ownership interest we may have in a
project. Also, there are various factors that determine the timing of
recognition of revenue. For development, revenue is recognized when the work is
performed. For leasing, it is recognized when the leases are signed or when
stores open, depending on the agreement.
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, as we are experiencing now, rents on new leases will grow more slowly or
will decline for the opposite reason, as tenants' expectations of future growth
become less optimistic.
The
following tables contain certain information regarding per square foot minimum
rent in our Consolidated Businesses and Unconsolidated Joint Ventures at the
comparable centers (centers that had been owned and open for the current and
preceding year):
The
spread between opening and closing rents may not be indicative of future
periods, as this statistic is not computed on comparable tenant spaces, and can
vary significantly from period to period depending on the total amount,
location, and average size of tenant space opening and closing in the period.
Openings in 2008 and 2007 were generally negotiated in a rising sales
environment. Although the releasing spread per square foot of the Unconsolidated
Joint Ventures in 2007 was adversely impacted by the opening of large tenant
spaces. Rents on stores opening in 2004 were generally negotiated in a
decreasing sales environment.
Lease
Expirations
The
following table shows scheduled lease expirations for mall tenants based on
information available as of December 31, 2008 for the next ten years for all
owned centers in operation at that date:
We
believe that the information in the table is not necessarily indicative of what
will occur in the future because of several factors, but principally because of
early lease terminations at the centers. For example, the average remaining term
of the leases that were terminated during the period 2003 to 2008 was
approximately two years. The average term of leases signed during 2008 and 2007
was approximately seven years.
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 2008, tenants representing 2.5% of leases
filed for bankruptcy during this period compared to 0.5% in 2007. In 2009,
indicators point toward a higher level of bankruptcies due to the current
economic environment. This statistic has ranged from 0.4% to 4.5% since we went
public in 1992. Since 1991, the annual provision for losses on accounts
receivable has been less than 2% of annual revenues.
Occupancy
Occupancy
statistics include value center anchors. The 2008 and 2007 statistics for
comparable centers exclude The Mall at Partridge Creek (Partridge Creek), which
opened in October 2007, and The Pier Shops at Caesars (The Pier Shops) which
began opening in phases in June 2006. Additionally, 2006, 2005, and 2004 also
exclude Waterside, which was renovated and expanded in 2006, Northlake Mall,
which opened in 2005 and Woodland, which was sold in 2005.
Major
Tenants
No single
retail company represents 10% or more of our Mall GLA or revenues. The combined
operations of The Gap, Inc. accounted for less than 4% of Mall GLA as of
December 31, 2008 and less than 4% of 2008 minimum rent. No other single retail
company accounted for more than 3.5% of Mall GLA as of December 31, 2008 or 3%
of 2008 minimum rent.
The
following table shows the ten mall tenants who occupy the most space at
our centers and their square footage as of December 31,
2008:
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. See “Risk Factors” for further
details of our competitive business.
Seasonality
The
regional shopping center industry is seasonal in nature, with mall tenant sales
highest in the fourth quarter due to the Christmas season, and with lesser,
though still significant, sales fluctuations associated with the Easter holiday
and back-to-school period. See “MD&A– Seasonality”
for further discussion.
Environmental
Matters
See “Risk
Factors” regarding discussion of environmental matters.
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
United States. Taubman Asia Management Limited (TAM) provides similar services
for Taubman Asia.
As of
December 31, 2008, the Manager and TAM had 611 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 2008:
In
January 2009, in response to a decreased level of active projects due to the
downturn in the economy, we reduced our workforce by about 40 positions,
primarily in areas that directly or indirectly affect our development
initiatives in the U.S. and Asia. See “MD&A – Results of
Operations –
Subsequent Event” for further information.
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 Securities Exchange
Commission (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.
Item 1A. RISK FACTORS.
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 whether to
go forward on the development of new centers and may affect the ultimate
economic performance and value of projects under construction. Adverse changes
in the economic performance and value of our shopping centers would adversely
affect our income and cash available to pay dividends.
Such
factors include:
In
addition, the value and performance of our shopping centers may be adversely
affected by certain other factors discussed below including the recent global
economic and financial market crisis, the current state of the capital markets,
unscheduled closings or bankruptcies of our tenants, competition, uninsured
losses, and environmental liabilities.
The
recent global economic and financial market crisis has had and may continue to
have a negative effect on our business and operations.
The
recent global economic and financial market crisis has caused, 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, all of which has
had and may continue to have a negative effect on our business, results of
operations, financial condition and liquidity. Many of our tenants have been
affected by the current economic turmoil. We expect that the economy will
continue to strain the resources of our tenants and their customers. The timing
and nature of any recovery in the credit and financial markets remains
uncertain, and there can be no assurance that market conditions will improve in
the near future or that our results will not continue to be adversely affected.
Such conditions make it very difficult to forecast operating results, make
business decisions and identify and address material business risks. The
foregoing conditions may also 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. In 2008, we recognized an impairment charge of
$8.3 million related to our Sarasota project, which was put on hold due to
the current economic and retail environment (see “MD&A – Results of
Operations – Impairment Charges”).
Capital
markets are currently experiencing a period of disruption and instability, which
has had and could continue to have a negative impact on the availability and
cost of capital.
The
general disruption in the U.S. capital markets has impacted the broader
worldwide financial and credit markets and reduced the availability of debt and
equity capital for the market as a whole. These global conditions could persist
for a prolonged period of time or worsen in the future. Our ability to access
the capital markets may be restricted at a time when we would like, or need, to
access those markets, which could have an impact on our flexibility to react to
changing economic and business conditions. The resulting 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 of equity financing may be materially adversely impacted by these
market conditions.
Credit
market developments may reduce availability under our credit
agreements.
Due to
the current volatile state of the credit markets, there is risk that lenders,
even those with strong balance sheets and sound lending practices, could fail or
refuse to honor their legal commitments and obligations under existing credit
commitments, including but not limited to: extending credit up to the maximum
permitted by a credit facility and/or honoring loan commitments. Twelve banks
participate in our $550 million line of credit and the failure of one bank to
fund a draw on our line does not negate the obligation of the other banks to
fund their pro-rata share. In October 2008 we borrowed $35 million on this
credit facility, which was funded by all participating banks. However, if our
lenders fail to honor their legal commitments under our credit facilities, it
could be difficult in the current environment to replace our credit facilities
on similar terms. Although we believe that our operating cash flow, access to
capital markets, two unencumbered center properties and existing credit
facilities will give us the ability to satisfy our liquidity needs at least
until fall 2010, when our $264 million beneficial share of three loans mature,
the failure of the lenders under our credit facilities may impact our ability to
finance our operating or investing activities.
We
are in a competitive business.
There are
numerous shopping facilities that compete with our properties in attracting
retailers to lease space. In addition, retailers at our properties face
continued competition from discount shopping centers, lifestyle centers, outlet
malls, wholesale and discount shopping clubs, direct mail, telemarketing,
television shopping networks and shopping via the Internet. Competition of this
type could adversely affect our revenues and cash available for distribution to
shareowners.
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 institutional investors. This competition
may impair our ability to make suitable property acquisitions on favorable terms
in the future.
The
bankruptcy or early termination of our tenants and anchors could adversely
affect us.
We could
be adversely affected by the bankruptcy or early termination of tenants and
anchors. The bankruptcy of a mall tenant could result in the termination of its
lease, which would lower the amount of cash generated by that mall. In addition,
if a department store operating as an anchor at one of our shopping centers were
to go into bankruptcy and cease operating, we may experience difficulty and
delay in replacing the anchor. 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 of mall tenants or anchors for reasons other
than bankruptcy could have a similar impact on the operations of our
centers.
The
bankruptcy of our joint venture partners could adversely affect us.
The
profitability of shopping centers held in a joint venture could also 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.
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 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.
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. 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 of the cash proceeds received by TRG from such sale. 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.
We
may acquire or develop new properties, and these activities are subject to
various risks.
We
actively pursue development and acquisition activities as opportunities arise,
and these activities are subject to the following risks:
We are
engaged in development and service activities in Macao and South Korea and are
evaluating other investment opportunities in international markets. These
activities are subject to risks that may reduce our financial return. In
addition to the general risks related to development and acquisition activities
described in the preceding section, our international activities are subject to
unique risks, including:
Although
our international activities are currently limited in their scope, to the extent
that we expand them, 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.
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 lease and other contract claims, that generally are
not insured. If an uninsured loss or a 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 2007,
Congress extended the expiration date of TRIA by seven years to December 31,
2014. 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 our 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.
We
may be subject to liabilities for environmental matters.
All of
the centers presently owned by us (not including option interests in certain
pre-development projects) have been subject to environmental assessments. We are
not aware of any environmental liability relating to the centers or any other
property in which we have or had an interest (whether as an owner or operator)
that we believe would have a material adverse effect on our business, assets, or
results of operations. No assurances can be given, however, that all
environmental liabilities have been identified by us or that no prior owner or
operator, or any occupant of our properties has created an environmental
condition not known to us. Moreover, no assurances can be given that (1) future
laws, ordinances, or regulations will not impose any material environmental
liability or that (2) the current environmental condition of the centers will
not be affected by tenants and occupants of the centers, by the condition of
properties in the vicinity of the centers (such as the presence of underground
storage tanks), or by third parties unrelated to us.
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 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.
For joint
ventures that we do not manage, we do not 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.
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. We may also be subject to the alternative minimum tax
if we fail to maintain our status as a REIT. Any such corporate tax liability
would be substantial 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 Internal Revenue Code of 1986, as amended (the
Code), are very 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 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
facilities 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, foreign, and state corporate income
tax. In this regard, 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. For example, a taxable REIT
subsidiary is limited in its ability to deduct certain interest payments made to
an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some
payments that it receives or on some deductions taken by the taxable REIT
subsidiaries if the economic arrangements between the REIT, the REIT’s tenants,
and the taxable REIT subsidiary are not comparable to similar arrangements
between unrelated parties. Finally, some state and local 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 and localities follow the federal
income tax treatment of REITs. To the extent that we and our affiliates are
required to pay federal, state and local 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.
Whereas
corporate dividends have traditionally been taxed at ordinary income rates, the
maximum tax rate on certain corporate dividends received by individuals through
December 31, 2010, has been reduced from 35% to 15%. This change has reduced
substantially the so-called “double taxation” (that is, taxation at both the
corporate and shareowner levels) that had generally applied to non-REIT “C”
corporations but did not apply to REITs. Generally, dividends from REITs do not
qualify for the dividend tax reduction because REITs generally do not pay
corporate-level tax on income that they distribute currently to shareowners.
REIT dividends are only eligible for the lower capital gains rates in limited
circumstances in which the dividends are attributable to income, such as
dividends from a taxable REIT subsidiary, that has been subject to
corporate-level tax. The application of capital gains rates to non-REIT “C”
corporation dividends could 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.
Our
ownership limitations and other provisions of our articles of incorporation and
bylaws generally prohibit the acquisition of more than 8.23% of the value of our
capital stock and may otherwise hinder any attempt to acquire us.
Various
provisions of our articles of incorporation and 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 of incorporation
contain REIT-specific restrictions on the ownership and transfer of our capital
stock which also serve similar anti-takeover purposes.
Under
our Restated Articles of Incorporation, 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 Internal Revenue 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 an entity (other than a qualified trust under Section 401(a) of the Internal
Revenue Code, certain other tax-exempt entities described in the Articles, or an
entity that owns 10% or more of the equity of any tenant from which we or TRG
receives or accrues rent from real property) whose beneficial owners, rather
than the entity, would be treated as owning the capital stock owned by such
entity. 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 to be treated as 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 (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 the capital
stock we request.
These
ownership limitations will not be automatically removed even if the REIT
requirements are changed so as to no longer contain any ownership concentration
limitation or if the concentration 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 unilateral control of us. Changes in the
ownership limits can not 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 holders owning not less than two-thirds of the outstanding
capital stock entitled to vote.
Although
Mr. A. Alfred Taubman beneficially owns 29% of our stock, which is entitled to
vote on shareowner matters (Voting Stock), most of his Voting Stock consists of
Series B Preferred Stock. 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, Mr. A. Alfred Taubman’s significant ownership of Voting Stock does
not violate the ownership limitations set forth in our charter.
Members
of the Taubman family have the power to vote a significant number of the shares
of our capital stock entitled to vote.
Based on
information contained in filings made with the SEC, as of December 31, 2008, A.
Alfred Taubman and the members of his family have the power to vote
approximately 32% of the outstanding shares of our common stock and our
Series B preferred stock, considered together as a single class, and
approximately 91% 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. Mr. Taubman’s sons, Robert S. Taubman and
William S. Taubman, serve as our Chairman of the Board, President and Chief
Executive Officer, and our Chief Operating Officer, respectively. These
individuals occupy the same positions with the Manager. As a result, Mr. A.
Alfred Taubman and the members of his 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. In addition, because our articles of incorporation 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, Mr. A. Alfred Taubman and the members
of his family, as a practical matter, have the power to prevent a change in
control of our company.
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 dividends
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
dividends 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. As of December 31, 2008, we had approximately
$2.8 billion of consolidated indebtedness outstanding, and our beneficial
interest in both our consolidated debt and the debt of our unconsolidated joint
ventures was $3.0 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
cannot assure that we will be able to pay dividends regularly, although we have
done so in the past.
Our
ability to pay dividends in the future is dependent on our ability to operate
profitably and to generate cash from our operations. Although we have done so in
the past, we cannot guarantee that we will be able to pay dividends on a regular
quarterly basis or at the same level in the future. In addition, we may choose
to pay a portion in stock dividends. Furthermore, any new shares of common stock
issued will increase the cash required to continue to pay cash dividends at
current levels. Any common stock or preferred stock that may in the future be
issued to finance acquisitions, upon exercise of stock options or otherwise,
would have a similar effect.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
Ownership
The
following table sets forth certain information about each of the centers. The
table includes only centers in operation at December 31, 2008. Centers are owned
in fee other than Beverly Center (Beverly), Cherry Creek Shopping Center (Cherry
Creek), International Plaza, MacArthur Center, and The Pier Shops, which are
held under ground leases expiring between 2049 and 2083.
Certain
of the 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.
Anchors
The
following table summarizes certain information regarding the anchors at the
operating centers (excluding the value centers) as of December 31,
2008:
Mortgage
Debt
The
following table sets forth certain information regarding the mortgages
encumbering the centers as of December 31, 2008. All mortgage debt in the table
below is nonrecourse to the Operating Partnership except for debt encumbering
Dolphin Mall (Dolphin), Fairlane Town Center (Fairlane), and Twelve Oaks. The
Operating Partnership has guaranteed the payment of all or a portion of the
principal and interest on the mortgage debt of these centers, all of which are
wholly owned. See "MD&A – Liquidity and Capital Resources – Loan Commitments
and Guarantees" for more information on guarantees and covenants.
For
additional information regarding the centers and their operations, see the
responses to Item 1 of this report.
Item 3. LEGAL PROCEEDINGS.
In
November 2007, three developers of a project called Blue Back Square (“BBS”) in
West Hartford, Connecticut, filed a lawsuit in the Connecticut Superior Court,
Judicial District of Hartford at Hartford (Case No. CV-07-5014613-S) against us,
the Westfarms Unconsolidated Joint Venture, and its partners and its subsidiary,
alleging that the defendants (i) filed or sponsored vexatious legal proceedings
and abused legal process in an attempt to thwart the development of the
competing BBS project, (ii) interfered with contractual relationships with
certain tenants of BBS, and (iii) violated Connecticut fair trade law. The
lawsuit alleges damages in excess of $30 million and seeks double and treble
damages and punitive damages. Also in early November 2007, the Town of West
Hartford and the West Hartford Town Council filed a substantially similar
lawsuit against the same entities in the same court (Case No. CV-07-5014596-S).
The second lawsuit did not specify any particular amount of damages but
similarly requests double and treble damages and punitive damages. The lawsuits
are in their early legal stages and we are vigorously defending both. The
outcome of these lawsuits cannot be predicted with any certainty and management
is currently unable to estimate an amount or range of potential loss that could
result if an unfavorable outcome occurs. While management does not believe that
an adverse outcome in either lawsuit would have a material adverse effect on our
financial condition, there can be no assurance that an adverse outcome would not
have a material effect on our results of operations for any particular
period.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
Not
applicable.
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 23, 2009, the 53,044,236 outstanding
shares of Common Stock were held by 565 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 23, 2009 was
$15.81.
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 2008 and
2007:
The
restrictions on our ability to pay dividends on our Common Stock are set forth
in “Managements Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Dividends.”
Beginning
with the first quarter of 2009, in order to have more flexibility under Section
858 of the Internal Revenue Code (IRC), the declaration and payment dates of our
common dividends will be accelerated so that they coincide with those of the
preferred dividends. The IRC allows a REIT to avoid the income tax consequences
of not meeting its distribution requirement by allocating to the prior year,
dividends paid in the current year, to cover the excess of REIT taxable income
of the prior year over dividends paid in such year. Currently, because of
certain timing limitations imposed by the IRC, only our preferred dividends can
be allocated to a prior year. By changing the declaration and payment dates of
the common dividends to coincide with those of the preferred dividends, we will
have the ability to allocate both common and preferred dividends to a prior year
should the need arise. Since the preferred dividends are required to be paid at
the end of each quarter according to our Articles of Incorporation, the effect
of this change is to accelerate the common distributions of TRG by moving them
from the date that is 20 days after quarter-end to the last day of the
quarter.
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 NAREIT
Equity Retail REIT Index, and the S&P Composite – 500 Stock Index for the
period December 31, 2003 through December 31, 2008 (assuming in all cases, the
reinvestment of dividends):
Note: The
stock performance shown on the graph above is not necessarily indicative of
future price performance.
Equity
Purchases
We did
not purchase any equity securities in the fourth quarter of
2008.
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:
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The
following MD&A contains various “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent our expectations or beliefs concerning future events,
including the following: statements regarding future developments and joint
ventures, rents, returns, and earnings; statements regarding the continuation of
trends; and any statements regarding the sufficiency of our cash balances and
cash generated from operating, investing, and financing activities for our
future liquidity and capital resource needs. We caution that although
forward-looking statements reflect our good faith beliefs and best judgment
based upon current information, these statements are qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, because of risks, uncertainties, and factors
including, but not limited, to the ongoing U.S. recession, the existing global
credit and financial crisis and other changes in general economic and real
estate conditions, changes in the interest rate environment and the availability
of financing, and adverse changes in the retail industry. Other risks and
uncertainties are detailed from time to time in reports filed with the SEC, and
in particular those set forth under “Risk Factors” of this Annual Report on Form
10-K. The following discussion should be read in conjunction with the
accompanying consolidated financial statements of Taubman Centers, Inc. and the
notes thereto.
General
Background and Performance Measurement
Taubman
Centers, Inc. (TCO) is a Michigan corporation that operates as a
self-administered and self-managed real estate investment trust (REIT). The
Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a
majority-owned partnership subsidiary of TCO, which owns direct or indirect
interests in all of our real estate properties. In this report, the terms "we",
"us", and "our" refer to TCO, the Operating Partnership, and/or the Operating
Partnership's subsidiaries as the context may require. We own, lease, develop,
acquire, dispose of, and operate regional and super-regional shopping centers.
The Consolidated Businesses consist of shopping centers and entities that are
controlled by ownership or contractual agreements, The Taubman Company LLC
(Manager), and Taubman Properties Asia LLC and its subsidiaries (Taubman Asia).
In September 2008, we acquired the interests of the owner of Partridge
Creek (see “Note 2 – Acquisitions” to our consolidated financial
statements). Prior to the acquisition, we consolidated the accounts of the owner
of Partridge Creek, which qualified as a variable interest entity under
Financial Accounting Standards Board Interpretation No. 46R “Consolidation
of Variable Interest Entities” for which the Operating Partnership was
considered to be the primary beneficiary. Shopping centers owned through joint
ventures that are not controlled by us but over which we have significant
influence (Unconsolidated Joint Ventures) are accounted for under the equity
method.
References
in this discussion to “beneficial interest” refer to our ownership or pro-rata
share of the item being discussed. Also, the operations of the shopping centers
are often best understood by measuring their performance as a whole, without
regard to our ownership interest. Consequently, in addition to the discussion of
the operations of the Consolidated Businesses, the operations of the
Unconsolidated Joint Ventures are presented and discussed as a
whole.
The
comparability of information used in measuring performance is affected by the
opening of Partridge Creek in October 2007 and The Pier Shops, which began
opening in phases in June 2006. In April 2007, we increased our ownership
in The Pier Shops to 77.5% (see “Results of Operations – Openings, Expansions
and Renovations, and Acquisitions”). The Pier Shops’ results of operations are
included within the Consolidated Businesses beginning April 13, 2007
and within the Unconsolidated Joint Ventures prior to the acquisition date. The
2006 results of operations for the Unconsolidated Joint Ventures include results
of The Pier Shops. The Pier Shops was excluded from all operating statistics in
2006. Our investment in The Pier Shops represented an effective 6% interest
prior to the acquisition date, based on relative equity contributions.
Additional “comparable center” statistics that exclude Partridge Creek and The
Pier Shops are provided for 2008 and 2007 to present the performance of
comparable centers in our continuing operations. Comparable centers are
generally defined as centers that were owned and open for two
years.
Overall
Summary of Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Our
primary source of revenue is from the leasing of space in our shopping centers.
Generally these leases are long term, with our average lease term at
approximately seven years, excluding temporary leases. Therefore general
economic trends most directly impact our tenants’ sales and consequently their
ability to perform under their existing lease agreements and expand into new
locations as well as our ability to find new tenants for our shopping
centers.
The real
estate industry is facing very difficult times due to the current recession and
tough retail environment. The global credit and financial crisis has worsened in
the fourth quarter and there is considerable uncertainty as to how severe the
current downturn may be and how long it may continue. We clearly expect a
negative impact on our business in 2009, and we expect that the economy will
continue to strain the resources of our tenants and their customers. Retailers
have had a tough fourth quarter and are looking at an uncertain 2009. In this
environment, retailer capital spending has significantly decreased, and we
expect that retailers will want to delay any openings into either 2010 or 2011
whenever possible. In addition, a number of regional and national retailers have
announced store closings or filed for bankruptcy. During 2008, 2.5% of our
tenants sought the protection of the bankruptcy laws, compared to 0.5% in 2007.
It is difficult to predict when the environment will improve.
We also
saw the impact of the current financial crisis on our tenants’ sales. Our
tenants reported a 13.7% decrease in sales per square foot in the quarter over
the same period in 2007. Annual sales per square foot declined by 2.9% to a
level of $539 per square foot for our comparable centers, which is higher than
the average in 2008 for all regional shopping centers owned by public companies,
and exceeded our 2006 results. See "Mall Tenant Sales and Center
Revenues".
Average
occupancy remained relatively flat during 2008, however, we anticipate occupancy
will decrease by approximately 2% by year end 2009, although it is likely the
impact on income will be somewhat offset by a higher level of temporary tenant
leasing in 2009. For all of 2008, rents showed solid increases compared to the
prior year. In 2009, we expect that average rents per square foot will be
relatively flat in comparison to 2008. The rents we are able to achieve are
affected by economic trends and tenants’ expectations thereof, as described
under “Rental Rates and Occupancy”. The spread between rents on openings and
closings may not be indicative of future periods, as this statistic is not
computed on comparable tenant spaces, and can vary significantly from quarter to
quarter depending on the total amount, location, and average size of tenant
space opening and closing in the period. Mall tenant sales, occupancy levels and
our resulting revenues are seasonal in nature (see “Seasonality").
Our
analysis of our financial results begins under “Results of Operations”. We
describe the most recent center openings under “Results of Operations –
Openings, Expansions and Renovations, and Acquisitions.” In 2007, we acquired an
additional interest in The Pier Shops. We also describe the current status of
our efforts to broaden our growth in Asia (see “Results of Operations – Taubman
Asia”).
We
similarly have been very active in managing our balance sheet, completing
refinancings of Fair Oaks and International Plaza in early 2008, as outlined
under “Results of Operations – Debt Transactions”.
An
unfavorable court decision and the difficult economy drove our decisions to
record impairment charges in the fourth quarter of 2008 of $117.9 million
and $8.3 million related to our Oyster Bay project in the Town of Oyster
Bay, New York (Oyster Bay project or Oyster Bay) and our Sarasota project,
respectively (see “Results of Operations – Impairment Charges”).
We have
certain additional sources of income beyond our rental revenues, recoveries from
tenants, and revenue from management, leasing, and development services. We
disclose our share of these sources of income under “Results of Operations –
Other Income” and provide certain guidance for 2009. Included in other revenue
are lease cancellation income, as well as other sources of revenue derived from
our shopping centers, such as parking garage and sponsorship income. Other
sources of income include interest income, gains on peripheral land sales, and
in 2007, gains related to discontinued hedges.
We then
provide a discussion of our critical accounting policies, and the expected
impact in 2009 of recently issued accounting pronouncements.
With all
the preceding information as background, we then provide insight and
explanations for variances in our financial results for 2008, 2007, and 2006
under “Comparison of 2008 to 2007” and “Comparison of 2007 to 2006”. As
information useful to understanding our results, we have described the
presentation of our minority interest, the presentation of certain interests in
centers, and the reasons for our use of non-GAAP measures such as Beneficial
Interest in EBITDA and Funds from Operations (FFO) under “Results of Operations
– Presentation of Operating Results”. Reconciliations from net income (loss) and
net income (loss) allocable to common shareowners to these measures follow the
annual comparisons.
Our
discussion of sources and uses of capital resources under “Liquidity and Capital
Resources” begins with a brief overview of current market conditions and our
financial position. We have no maturities on our current debt until fall 2010,
when three loans mature with principal amounts of $338 million at 100% and
$264 million at our beneficial share. We then discuss our capital
activities and transactions that occurred in 2008. Analysis of specific
operating, investing, and financing activities is then provided in more
detail. Specific
analysis of our fixed and floating rates and periods of interest rate risk
exposure is provided under “Liquidity and Capital Resources – Beneficial
Interest in Debt”. Completing our analysis of our exposure to rates are the
effects of changes in interest rates on our cash flows and fair values of debt
contained under “Liquidity and Capital Resources – Sensitivity Analysis”. Also
see “Liquidity and Capital Resources – Loan Commitments and Guarantees” for
discussion of compliance with debt covenants.
In
conducting our business, we enter into various contractual obligations,
including those for debt, capital leases for property improvements, operating
leases for land and office space, purchase obligations, and other long-term
commitments. Detail of these obligations, including expected settlement periods,
is contained under “Liquidity and Capital Resources – Contractual Obligations”.
Property-level debt represents the largest single class of obligations.
Described under “Liquidity and Capital Resources – Loan Commitments and
Guarantees” and “Liquidity and Capital Resources – Cash Tender Agreement” are
our significant guarantees and commitments.
Development
of new malls and renovation and expansion of existing malls has been a
significant use of our capital, as described in “Liquidity and Capital Resources
– Capital Spending” and “Liquidity and Capital Resources – Capital Spending –
Planned Capital Spending”. Spending in the last two years includes construction
of Partridge Creek and The Pier Shops, the expansion and renovation of Twelve
Oaks, the expansion at Stamford, our Oyster Bay project, and other development
activities and capital items. However, with our Sarasota project on hold and the
continued delays on our Oyster Bay and Asia projects, we expect capital spending
in 2009 to consist primarily of tenant allowances and other capital expenditures
on our operating centers.
Dividends
and distributions are also significant uses of our capital resources. The
factors considered when determining the amount of our dividends, including
requirements arising because of our status as a REIT, are described under
“Liquidity and Capital Resources – Dividends”.
Mall
Tenant Sales and Center Revenues
Sales per
square foot growth was positive during the first, second, and third quarters of
2008, at 3.0%, 3.3%, and 0.5%, respectively. Sales began to decline in
September, and the decline steepened during the fourth quarter, with the luxury
and tourism centers experiencing the most negative impact from the slowdown.
During a time of such economic uncertainty, the consumer clearly moderated
spending as the fourth quarter of 2008 progressed, and we reported our first
quarterly decrease in tenant sales in over five years. For 2008 our sales
decreased 2.9% to a level of $539 per square foot. Sales per square foot
decreased by 13.7% in the fourth quarter.
Over the
long term, the level of mall tenant sales is the single most important
determinant of revenues of the shopping centers because mall tenants provide
approximately 90% of these revenues and because mall tenant sales determine the
amount of rent, percentage rent, and recoverable expenses (together, total
occupancy costs) that mall tenants can afford to pay. However, levels of mall
tenant sales can be considerably more volatile in the short run than total
occupancy costs, and may be impacted significantly, either positively or
negatively, by the success or lack of success of a small number of tenants or
even a single tenant.
We
believe that the ability of tenants to pay occupancy costs and earn profits over
long periods of time increases as sales per square foot increase, whether
through inflation or real growth in customer spending. Because most mall tenants
have certain fixed expenses, the occupancy costs that they can afford to pay and
still be profitable are a higher percentage of sales at higher sales per square
foot.
Sales
directly impact the amount of percentage rents certain tenants and anchors pay.
The effects of increases or declines in sales on our operations are moderated by
the relatively minor share of total rents that percentage rents represent of
total rents (approximately 4% in 2008).
While
sales are critical over the long term, the high quality regional mall business
has been a very stable business model with its diversity of income from
thousands of tenants, its staggered lease maturities, and high proportion of
fixed rent. However, a sustained trend in sales does impact, either negatively
or positively, our ability to lease vacancies and negotiate rents at
advantageous rates. In the current environment, we are finding that negotiations
are tougher. While retailers continue to recognize the need to position
themselves for the future, on the other end of the spectrum there is an increase
in bankruptcies (see “Rental Rates and Occupancy”). The
following table summarizes occupancy costs, excluding utilities, for mall
tenants as a percentage of mall tenant sales:
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